VALUATION OF THE PHYSICIAN SAMPLE WHEN PRODUCT IS MRP BASED AND MANUFACTURING IS CONTRACT AND JOB WORK BASIS.
Law cannot be interpreted broadly. It has to interpret case to case basis. It is very much clear that if the product is being manufactured for ultimate consumer and covered under provision of Legal Metrology Act and Rules, valuation of the goods shall be Under Section 4A of the Central Excise Act. But if the same product is being manufactured as a physician sample and removed for the free distribution, valuation shall not be under Section 4A of the Central Excise Act, 1944, as it is not meant for retail sale.
The valuation of the physician sample shall be under Section 4 (1) (b) of the Central Excise Act, 1944. Section 4 (1) (b) reads as under:
Section 4. Valuation of excisable goods for purpose of charging of duty of excise.- (1) 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) ……………………….
(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.
From perusal of the aforesaid section it is clear that the valuation of the physician sample shall be under Section 4 (1) (b) of the Central Excise Act, 1944, as the goods are not being sold. It is for the free distribution and without consideration.
The valuation of physician sample under Section 4 (1) (b) means valuation under Rule 4 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 on pro-rata basis (subject to adjustment for size & pack etc.). This averment has been clarified by the board vide Circular No. 915/5/2010-CX., dated 19-2-2010 and judgment of Hon’ble Apex Court in the matter of Madley Pharmaceuticals Pvt Ltd., Vs. CCE, Daman 2011 (263) ELT 641 (SC). The relevant Portion of the Circular Dated 19.02.2010 is as under:
“Attention of field formations is invited to Board’s Circular No. 813/10/2005-CX., dated 25-4-2005 issued from F.No. 6/39/2000- CX1 [2005 (183) E.L.T. T3] wherein it was clarified that in the case of free samples, the value should be determined under Rule 4 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000.
2. A Larger Bench of CESTAT in the case of Blue Cross Laboratories v. CCE, Mumbai – 2006 (202) E.L.T. 152 (T.-LB), has also held that physician samples are to be assessed under Rule 4 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000. Further, the aforesaid circular of 2005 has also been upheld by the Hon’ble High Court of Mumbai in the case of Indian Drugs Manufacturer’s Association v. UOI, reported at 2008 (222) E.L.T. 0022 (Bom.).
3. Subsequently, CESTAT in its majority decision in the case of M/s. Cadila Pharmaceuticals Ltd. v. Commissioner of Central Excise Ahmedabad-II, reported at 2008 (232) E.L.T. 0245 (Tri.-LB), has held that even after the pharmaceutical products have been notified for MRP assessment under Section 4A of the Central Excise Act, the assessment of free physician samples of these products, is appropriately required to be done under Rule 4 of the valuation rules by taking into consideration the deemed value under Section 4A(1) notwithstanding the non availability of normal price under Section 4(1)(a) of the Act, ibid. Accordingly, the value for payment of excise duty for physician sample would be the value determined under Section 4A for the similar goods (subject to adjustment for size & pack etc.)
The aforesaid case is the general case when the physician sample is manufactured and removed by the manufacturer for free distribution.
But if the physician sample is being manufactured by contract manufacturer or job worker and sold with consideration which is to be distributed free by the principal-manufacturer. What shall be the valuation, whether valuation shall be under Section 4 of the Central Excise Act, 1944 or under Rule 4 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000. For this we have to once again examine the Section 4 of the Central Excise Act, 1944. Section 4 of the Central Excise Act, 1944 reads as under:
Section 4. Valuation of excisable goods for purpose of charging of duty of excise.- (1) 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 a 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) ……………………………………..
Form the perusal of the aforesaid section it is clear that when the goods are sold by the assessee, and buyer of the goods are not related and the price is the sole consideration for the sale, be the transaction value. In this case physician sample is being sold by the contract manufacture or job worker to the principal manufacture and who is going to supply it free. So, in this case transaction value is available under Section 4(1) (a) of the Central Excise Act, 1944. Being so, the valuation of the goods shall be made under Section 4 (1) (a) of the Central Excise Act, 1944 not under Rule 4 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000.
The law is also very well settled in this regard, recently the Hon’ble Tribunal in the matter of Gelnova Laboratories (I) Pvt. Ltd. Vs CCE, Belapur 2014 (300) E.L.T. 437 (Tri. – Mumbai), has held as under :
“7. From the above, it is clear that requirement of displaying the retail price is only for the goods intended for sale. Since, physician samples are not intended for sale, requirement to indicate the retail sale price does not exist, in the law.
8. We also note that this Tribunal has been taking a view that physician samples manufactured on principal to principal basis are required to be assessed under Section 4(1)(a) of the Central Excise Act as is evident from the various case laws quoted by ld. counsel for the appellant”.
The Hon’ble Tribunal in the matter of Parnax Lab Pvt. Ltd. Vs Commissioner of Central Excise, Vapi, 2012 (278) E.L.T. 95 (Tri. – Ahmd.) has held as under:
“7. As regards the physician samples manufactured by the appellant for other principals and sold the same to them under contractual obligations, it is seen that the said contracts have not been challenged by the Revenue in the proceedings initiated by the show cause notice. It is also noticed that the transaction value which has been declared by the appellant while clearing the goods from their factory premises has not been rejected. It is also not in dispute that the appellant has been discharging the duty liability on the said physician samples as per the invoices raised from his factory and cleared to the principal manufacturer who in turn distributes the very same to the medical profession. On this back ground, we find that the judgment of this Bench in the case of Sidmak Laboratories (India) Ltd. is squarely on the point. The issue involved in that case was the first appellate authority has held that the samples cleared from the factory premises of the assessee therein were not being cleared for free distribution but are being sold at factory gate and the whole sale price is available at the factory gate. It is also seen that in that case there was no dispute about the factual position that the samples were being sold, this bench held that the value of the sample should be in terms of Section 4. Aggrieved by such an order, the Revenue preferred Civil Appeal before the Apex Court in appeal No. D/1456/09. The said appeal was dismissed by Apex Court [2011 (270) E.L.T. A90 (S.C.)] by recording as under:
………………………….
8. It can be said that the ratio laid down by the Bench for the case of M/s. Sidmak Laboratories (I) Ltd. is upheld by the Apex Court hence we are of the considered view that the demand of the duty liability on the physician samples sold by the appellant to the principals, the assessable value as ascertained by the assessee and the duty liability discharged is correct and there is no reason for recalculating the assessable value based upon the value arrived at on pro rata basis of sales pack”.
In the aforesaid discussion, it is clear that in the aforesaid both cases valuations shall be different. The valuation shall be as under:
a) In first case, if the product is MRP based and physician sample is manufactured and removed for free destruction by the manufacture. The valuation of the goods shall be under Rule 4 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 as goods are not being sold and transaction value is not available in this case.
b) In second case, if the product is MRP based and physician sample is manufactured by contract manufacturer or job worker for principal manufacturer and who is going to distribute it free. The valuation shall be Under Section 4 (1) (a) of the Central Excise Act, 1944, as in this case goods are being sold and transaction value is available.
In my view when the physician sample is manufactured on the contract and job work basis. The valuation of the goods shall be under Section 4 (1) (a) of the Central Excise Act, 1944 not under Rule 4 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000.
