Inspection Charges - whether forming part of Transaction value

Confusion still prevails with the manufacturers & Buyers about the inclusion of “Inspection Charges” in the assessable value. In this Article an attempt has been made to clarify on various issues in line with the decided case laws.
At the outset, a brief reference is made to the relevant provisions of the Central Excise Act, 1944 regarding valuation of excisable goods, for the purpose of charging excise duty.
Sec 4 of the Central Excise Act, 1944 dealing with valuation of excisable goods for purpose of charging of duty of excise provides that:
Where under this Act, the duty of excise is chargeable on any excisable goods with reference to their value, then, on each removal of the goods, such value shall –
a. in case where the goods are sold by the assessee, for delivery at the time and place of the removal, the assessee and the buyer of the goods are not related and the price is the sole consideration for the sale, be the transaction value;

b. in any other case, including the case where the goods are not sold, be the value determined in such manner as may be prescribed.

Sec 4(3)(d) of the Central Excise Act, 1944 states that:
“transaction value” means the price actually paid or payable for the goods, when sold, and includes in addition to the amount charged as price, any amount that the buyer is liable to pay to, or on behalf of the assessee, by reason of, or in connection with the sale, whether payable at the time of the sale or at any other time, including, but not limited to, any amount charged for, or to make provision for, advertising or publicity, marketing and selling organization expenses, storage, outward handling, servicing, warranty, commission or any other matter, but does not include the amount of duty of excise, sales tax and other taxes, if any, actually paid or actually payable on such goods.
In this context a question that normally arises is, whether the amount payable towards “inspection charges” are to be included in the assessable value and whether it comes within the scope of the definition of “transaction value”
The includibility or non-includibility of “inspection charges” in the assessable value can be determined in different situation as follows:-
i. 3rd party inspection at the instance of the buyers:

Where 3rd party inspection is carried out at the instance of the buyers and the buyers meet the expenses for the same. Merely because the manufacturers initially paid the amount to the inspection agency, it will not be a part of the transaction value as the amount is being reimbursed to the manufacturer by the buyer, as held by the Tribunal in the case of M/s. A.Infrastructure Ltd-2003(160) E.L.T.549 (Tr-Delhi)

Pre-delivery inspection charges are not includible in the assessable value of the goods (Refer Circular No. 681/72/2002-CX dated 10.12.2002).

Cost of additional testing concluded at the customer’s request and borne by the customer is not includible in the assessable value of the goods as held by the Tribunal in Bhaskar Ispat Pvt. Ltd -2004(167) ELT.189(Tri-LB), New Delhi.

ii. Inspection charges borne by the supplier:

If a manufacturer sets up a quality control unit to check the quality of the product or maintain a particular standard or comply with a particular standard like the ISS, the inspection or quality control charges from part of the overhead costs and thus becomes part of the manufacturing cost. The inspection charges should therefore be included while determining the assessable value of the goods.
(vide Circular No. 3/88-CX-1 dated 16.02.1988- From F.No. 6/3/85-CX-1)

iii. Inspection charges paid to outside Agency:

Relevant portion of the Minutes of 19th East Zone Tariff cum General Conference, 1985 is reproduced herewith:

“The Conference observed that the inspection charges were not included in the assessable value on the ground that the manufacturing firm was an independent manufacturer manufacturing the products with its own plants and machines and labour. The firm could not be said to have manufactured the goods on behalf of railways although the raw materials were supplied to them free of cost and the goods were manufactured as per the specifications of the railways. In this connection the Supreme Court judgment in the case of M/s. Cibatul was also referred to which would support the interpretation that railways could not be regarded as a manufacturer in this case and charges such as inspection charges paid to an outside agency may not, therefore, be includible in the assessable value. Once railways are not treated as a manufacturer the fabricator would then have to be considered as a manufacturer and since the benefit of payment of inspection charges does not go to them, the Conference felt that such charges should not be included in the assessable value”. (F. No. 6/3/85-CX.1, dated 13-1-1986)

iv. Determining factor:

In the case of Advance Steel Tubes Ltd, 2004 (174) E.L.T. 275 (Sett. Comm.), the Revenue has relied on the meaning given to the phrase “transaction value” under Clause (d) under sub-section (3) of Section 4 of the Act. However, the Bench finds that so long as the amount charged towards inspection charges do not accrue to the assessee, the same cannot be included in the assessable value.

Conclusion:
On the basis of the above decided cases, it is crystal clear that so long as the amount charged towards inspection charges do not accrue to the assessee, the same cannot form part of the transaction value and hence is not assessable to duty.