Valuation of physician sample, or for that matter any product manufactured for free distribution rather than for sale have always been a contentious issue. This paper is an attempt to examine the issues so as to explain some of the confusing points.
It is clear that if a 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 the product is not meant for retail sale. In such situation valuation is required to be done under Section 4 of the Act.
The problem arises as valuation under Section 4(1)(a) requires transaction value which is not available in case of physician samples as such samples are not being sold. In absence of transaction value appropriate to the requirement of Section 4(1)(a), the valuation is required to be done under Section 4(1)(b) of the act and Rules made there under, i.e. Valuation Rules.
The valuation of physician sample under Section 4 (1)(b) means valuation under Rule 4 of the Central Excise (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 reads 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.).”
Thus the physician sample which ought not be valued as per Section 4A, is required to be valued under Rule 4 of the Valuation Rules, read with Section 4(1)(b) of the Act and appropriate value is deemed value under Section 4A of the Act.
The aforesaid position of law is correct general case when the physician sample is manufactured and removed by the manufacturer for free distribution. However there can be another situation when the same physician sample is manufactured by some job worker/contract manufacturer and being sold/cleared to the principal manufacturer.
If the physician sample is being manufactured by contract manufacturer or job worker, liability to pay Central Excise duty is that of contract manufacturer. The contract manufacturer is selling those samples to the principal manufacturer. It is irrelevant to the contract manufacturer that whether the principal manufacturer (buyer) is distributing this product is for free or whatever purposes. The manufacturer is selling these products to the principal and transaction value under Section 4(1)(a) is available.
Form a bare perusal of Section 4 of the Central Excise Act, it is clear that when the goods are sold by the assesse (contract manufacturer), and buyer (principal manufacturer) of the goods are not related and the price is the sole consideration for the sale, value shall 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 (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 (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.
Thus when the physician sample is manufactured on contract or job work basis, 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.