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