Excise Duty on Free Samples

The purpose of this article is to explain in brief provisions of Excise law on free samples.

Industries need to provide samples for various requirements.

1. Trade samples to potential customers for sales development
2. Sales to quality control / Research & Development for testing & product development purposes
3. Samples for display at exhibitions, fairs etc
4. Samples for placing quotations etc
5. Samples to various Government authorities for various purposes under different legislations

The following are the relevant legislations concerning free samples removal and payment of excise duty

1. Central Excise Act, 1944 – section 4(1)(b)
2. Central Excise Rules, 2002 – section 8, section 11
3. Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 – Rule 4, Rule 8 & Rule 11
4. Circular No. 813/10/2005 CX dated 25.4.2005
5. Circular no. 915/5/2010-CX dated 19.02.2010

Question No.1 – Are free samples subject to excise duty

The simple answer is yes. In a recent judgement

Citation Medley Pharmaceuticals Ltd. v. CCE, (2011) 2 SCC 601

Supreme Court has held that “EXCISE DUTY IS PAYABLE EVEN IN CASE OF FREE SUPPLY OF GOODS, AS SALE IS NOT A NECESSARY CONDITION FOR CHARGING DUTY”

Question No.2 – How to pay duty for free samples

We have follow procedures laid down under Rule 11 of Central Excise Rules, 2002 and prepare invoice accordingly (similar to finished goods movement). Excise duty has to be deposited as laid down under Rule 8 of Central Excise Rules 2002

Question No.3 – Is it necessary to pay duty for all the samples mentioned above (5 categories as above)

Yes. We have to pay duty on all samples including samples given to Quality Control & R&D, as excise duty is charged on manufacture and not on sales.

Question No.4 – On what value should we pay excise duty

Here reference should be made to Rule 4 of Central Excise Valuation (Determination of Price of Excisable Goods) Rules 2000. This has been confirmed by the department through 2 circulars :

1. Circular No. 813/10/2005 CX dated 25.4.2005 (for section 4 valuation)
2. Circular no. 915/5/2010-CX dated 19.02.2010 (for section 4A valuation – MRP based valuation)

Rule 4 is reproduced here – “value of the excisable goods shall be based on the value of such goods sold by the assesse for delivery at any other time nearest to the time of removal of goods under assessment, subject, if necessary, to such adjustment….”

If we are unable to get the value under Rule 4, and If there is no other price then recourse should be made to Rule 8 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules 2000 which provides valuation at Cost Price + 10%

Summary

All samples suffer excise duty please pay duty on the relevant value to avoid disputes

Section 192A of Companies Act, 1956 – Passing of resolution by Postal Ballot

A Company is a perpetual entity owned by its members, who have delegated the powers of running the company to the Board of Directors. Members in turn exercise their ownership rights through various meetings AGM / EGM, which provide directions / authorizations to the Board of Directors.

But at times members (read shareholders) participation especially the non-promoter, non-institutional category read “Individual Investors” especially the “Small Individual Investors” is quite low and they do not exercise their rights as members but remain as passive members due to varied reasons like paucity of time or purchase of shares just for capital appreciation or due to locational disadvantages.

In order to bring about high level of participation of all members in critical decisions of the companies “The Companies (passing of the resolution by Postal Ballot) Rules, 2001” was formed, this has been superseded by “The Companies (passing of the resolution by Postal Ballot) Rules, 2011” from 30th May 2011.

The above rule mandates that certain business should be passed only through a Postal Ballot sent to all members. The following is the brief procedure:

1. Company has to send a notice to all members either through

      a. Registered Post Acknowledgement due or

      b. any other secured mode provided by Department of posts or

     c. through “E-mail” – provided the company has email addresses of all members

2. An advertisement in English and the Vernacular language newspaper of the state in which the company is registered stating that the notice has been dispatched

3. The notice should mention the date by which the postal ballot should reach the company beyond which it is not valid

4. Procedure for Postal Ballot should be clearly explained in the notice. In case of Electronic Voting the process should be explained as provided by the Electronic voting providing agency. At the moment the following are the 2 agencies authorized vide Ministry of Corporate Affairs Circular No.21/2011 dated 2.5.2011

     a. National Securities Depository Limited – NSDL

     b. Central Depository Services (India) Limited – CDSL

5. A scrutinizer is appointed to conduct the postal ballot

6. The scrutinizer being an independent person conduct the postal ballot and provide a report to the Board of Directors

The following are the salient features of Postal Ballot

1. All members will get a voting sheet at the convenience of their location and they can vote from wherever they are

2. Shareholders cannot appoint Proxies

3. Higher level of member participation in critical issues

4. Cost of conducting meetings is reduced

A company has an option to carry out as many businesses in postal ballot, however the following are mandatory to be conducted only through postal ballot

1. Alteration in the Object Clause of Memorandum;

2. Alteration of Articles of Associations in relation to insertion of provisions defining private company;

3. Buy-back of own shares by the company under sub-section (1) of section 77A;

4. Issue of shares with differential voting rights as to voting or dividend or other wise under sub-clause (ii) of clause (a) of section 86;

5. Change in place of Registered Office out side local limits of any city, town or village as specified in sub-section (2) of section 146;

6. Sale of whole or substantially the whole of undertaking of a company as specified under sub-clause (a) of sub-section (1) of section 293;

7. Giving loans or extending guarantee or providing security in excess of the limit prescribed under sub-section (1) of section 372A;

8. Election of a director under proviso to sub-section (1) of section 252 of the Act;

9. Variation in the rights attached to a class of shares or debentures or other securities as specified under section 106.

Having seen the legal provisions as above it is pertinent to discuss whether the objective of this postal ballot has been achieved. I was reading a research article which can be reached through http://www.lawyersclubindia.com/articles/Impact-of-Postal-Ballot-Mechanism-in-Improving-Shareholders--1381.asp which states that on an average around 5% of the shareholders participate in the postal ballot process however these 5% represent atleast 60% of the shareholding. This again brings to the fore that the “Small Individual Investors” for whom this postal ballot will be beneficial and for whose benefit this has been brought in are not utilizing the same for varied reasons. It is high time they realize their responsibilities and participate in the company affairs so that Corporate Governance issues in companies and upheld. Small investors should raise their voice in running the company affairs and should actively participate rather than leaving it to the Directors and majority shareholders.

Shareholder activism is one which will ensure that corporates uphold higher level of Corporate Governance and legal compliance, you may recall shareholders activism was the prime reason why Satyam scandal got broken inspite of the Board giving the nod for buyout of Matyas. This active participation will also help small investors to grow their investment value. Keeping away from corporate affairs will prove detrimental to value growth.

ATTENTION SMALL INVESTORS PLEASE PARTICPATE AND GROW.

Major Tax Proposals in Union Budget 2011

1. Personal income tax exemption limit increased from Rs.1.6 lacs to Rs.1.8 lacs
2. For senior citizens from 60 years upto 80 years exemption upto Rs.2.5 lacs
3. For senior citizens beyond 80 years exemption upto Rs.5 lacs
4. Surcharge on Corporate income tax reduced to 5% from 7.5%
5. MAT - Minimum Alternate Tax increased from 18% to 18.5% of book profits
6. Dividend Distribution Tax u/s 115o will be reduced because of reduction in surcharge to 5% from 7.5%
7. No change in Excise Duty Rates
8. No change in Service Tax Rates
9. CST to remian at 2% - no roadmap provided for reducing / scrapping of this 2%
10. Rates of customs duties retained
11. 15% tax on foreign company dividend

Union Budget 2011

This year budget promised / set road map for 4 major legislations.

1. Direct tax code - to be implemented from April 2012
2. GST - Draft bill to be prepared. Constitutional Amendments to be placed in Parliment during this budget session
3. New Companis bill to be introduced in this session of Parliment
4. Standards of Weights and Measures Act to be replaced with Legal Metrology Act

 This is positive development albeit with its own delays. All the four are landmark legislations and will significantly impact the way corporates carry on their business.

Cancellation of Registration

Question

one of the my client (proprietor) had already cancelled their service tax no. (after payment of all dues) , however he had collected some payment in relation to service already provided , now quetion is that under which no. he should require to make payment of service tax .

Answer

Rule 4(7) of the Service tax rules, 1994 states that every assessee should surrender his certificate once he ceases to provide taxable services.

Rule 4(8) states that the Superintendent of Central Excise should ensure that all dues to the Central Government are paid before surrendering of the certificate.

In your specific case Rule 4(8) seem to have been violated. I would advise that you make a letter to the Superintendent of Central Excise stating the reasons for non payment and subsequent collections and then pay the relevant service tax.

Failure to Pay interest

Question

if we don't pay the interest u/s.75 of service on late payment of service tax than what sort of actions department may take

Answer

Under section 87 on the Finance Act, 1994 provisions for recover of any amount due to Central Government is listed. The following is the recovery mode.

1. Deduct the amount from any refund with Central Excise Department
2. Direct any debtor of the company to pay the department instead of the company
3. Distrain any movable or immovable property
4. Collector of the district maybe directed to collect the amount as if it were an arrear of land revenue

Service Tax Registration

Question

I hv a firm registered in Sultanpur, Uttar Pradesh as contractor in a production company.
now, i got a contract by other production company for the same job in Madhya Pradesh.
Can I use same Service Tax Registration no. for other State or i'll apply for the new.

Answer

Section 69 of the Finance Act 1994 read with Rule 4 of Service Tax Rules, 1994 provides for registration of persons liable to pay service tax.

Rule 4(2) & 4(3) of Service Tax Rule, 1994, stipulates that even though services are rendered from various offices / locations but if billing is done from one location (centralised billing), then one registration is adequate.

In your case you are going to bill only from one location, have office in one location but provide service in various places. My view is that it is adequate to have one service tax registration.
Maybe as a precaution you can apply to the Commissioner of Central Excise under Rule 4(3) and get it approved by writing.