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Excise billing for related parties

Tharun (sd) (95 Points)

08 July 2013

Hi all,

When a product is billed to related party,

1.We have to take 110% of cost of production as assesable value.

2.Compute ED on it.

3.Now my doubt is during billing should the invoice show Actual Cost of production +ED or 110% of Cost of production +ED

Thanks in advance.

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14 Replies

Ayyswariya RG (Knowledge Seeker) (3711 Points)
Replied 08 July 2013

There are 2 aspects in this case (Rule 9 of the Central excise valuation)

1> Where there is a sale of goods made to the related party, then the assessable value shall be the price at which the sale has been made to an unrelated person. (Excise duty is paid on the assessable value thereon)
2> Where there goods are consumed captively, the assessable value is 110% of the cost of production

In case of captive consumption, there is no removal of goods that takes place. Excise duty is levied only when the goods are removed from the factory/premises after manufacture. As all the goods need to be valued, the rule of valuing at 110% for own consumption has been established.
The question of excise duty payment is applicable only in the 1st aspect.

In your case, if you had made a proper sale to the related buyer, then the first aspect is applicable.

1 Like

Tharun (sd) (95 Points)
Replied 08 July 2013

Dear Aishwarya,

Thanks a lot.

We are billing goods for captive consumption. There is removal of goods from factory. My doubt is as follows.

Say Cost of Production is Rs.100, Now for Valuation it has to be 110% meaning it is Rs.110. Now 12.36% ED is computed on it. So My ED Value is Rs.13.6.

Now Should the invoice show a value of Rs.100+13.6=Rs.113.6 or Rs.110+13.6=Rs.123.6.

Thanks a lot.

Ayyswariya RG (Knowledge Seeker) (3711 Points)
Replied 08 July 2013

Hi,

The assessable value is 110% of the Cost of production.
ED is paid on the assessable value.

First instance of what you said.

Thanks.

1 Like

Tharun (sd) (95 Points)
Replied 08 July 2013

So it means i Should not bill my assesable value. Rather I should bill my cost of production + ED on assesable value.

I know it sounds stupid but still I'm forced to ask this.

Can there be profit margin in related party transactions?

(when something is billed at Cost production the question of profit should not arise but...)

Ayyswariya RG (Knowledge Seeker) (3711 Points)
Replied 08 July 2013

Nope. You are charging ED on assessable value ie Cost of pdn *110% (as stated by you as an example it is Rs.110. Now 12.36% ED is computed on it. So My ED Value is Rs.13.6.)

Transactions are to be made at arm's lenght prices as under Accounting Standard 18, the disclosure of the party details with transactions and amount need to be disclosed. Thus related party is a sensitive area.

1 Like

Tharun (sd) (95 Points)
Replied 08 July 2013

Thanks a lot Ayyswariya. This meant a lot to me. Finally Just one word My Invoice should reflect 113.6(100+13.6) as the total invoice value right? Just to avoid any misunderstandings.

R.G.Ayyswariya

Read more at: /forum/excise-billing-for-related-parties-255652.asp

Ayyswariya RG (Knowledge Seeker) (3711 Points)
Replied 08 July 2013

Hi,

The value of goods sold should be Rs 110.

Excise duty on the sold goods should be Rs 13.60.

Thus it is Rs 123.60.

By following Rule 9, the cenvat credit on ED paid can also be availed.

Tharun (sd) (95 Points)
Replied 08 July 2013

Dear Ayyswariya,

Then does it mean I will get 110 rupee from my related party?

If so, then COP is Rs.100.

Then can I call the balance Rs.10 as profit?.

Pardon me for repetitive questions. Your kindess and patience are appreciated.

Thanks in advance.

Tharun (sd) (95 Points)
Replied 08 July 2013

I dont have issues in computation of ED or getting credit for it.

I wanted to know what should be the amount that I need to get from my related party.

because if I get Rs.110 then doesnt it mean im getting 10% profit from this sale when my COP is Rs.100.

Ayyswariya RG (Knowledge Seeker) (3711 Points)
Replied 08 July 2013

Let me put it in points

1. Any input or capital goods if consued captively with in the factory of production is not liable for Excise duty,provided the final product is dutiable and duty is paid. [Notification No.67/95-C.E dated 16.3.1995]

2. Related party Sale - Assessable value is the cost of production on which ED is to be paid. Say. COP is Rs 100 . ED on Rs 100 need to be paid.

3. Related party captive consumption - Assessable value is COP * 110%. Say, COP is 100. AV is Rs 110 and ED to be paid on Rs 110.

4. Captive consumption means consumption of goods manufactured by one devision and consumed by another devision(s) of the same organisation or related undertaking for manufacturing another Product(s).

5. If it is the case of captive consumption, there is no question of sale and profit margin , as the goods are being used in the factory for further production.

6. If a proper sale is being made to your related party, then it is NOT captive consumption and the rule of 110% is not applicable.

Kindly analyse you fall under which aspect.

Thanks.