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Recently one assessee asked a question from the legal aid section of the Excise Law Times [2004 (170) ELT A51] wherein he asked that whether insurance charges collected by the assessee in excess of the actual insurance charges paid by the assessee is includible in assessable value under Section 4 of the Central Excise Act? I was surprised with the answer given and couldn’t reconcile myself with the position taken by the Excise Law Times. With humbleness, this author holds as different view than what was stated in the ELT and this paper is a humble attempt to correct the error, which may have occurred inadvertently.

 ISSUE:

Many a times the manufacturer of goods (Central Excise assessee) provides other services to the buyer and charges an amount for those services provided. The services may be like transportation of goods to the buyer premises, transit insurance of the goods, interest charges for the credit given to the buyer, Installation of the goods in the buyer’s premises etc. It may happen that cost incurred by the manufacturer assessee in providing these services is much less than what is charged by the manufacturer assessee for these services. The question is whether excess charges collected by the manufacturer assessee should be included in assessable value of the goods under Section 4 of the Act?

Under Section 4 of the Central Excise Act, 1944, the Central Excise duty has to be paid on the transaction value of the goods. Transaction value means the price actually paid or payable for the goods, at the time and place of removal. Thus when any amount is paid for transportation or insurance or interest for credit or for any other services, these are payments not for the goods but for the services provided by the manufacturer and hence these charges are not to be included in the assessable value under section 4 of the Act. Even when the amount paid is in excess to the cost incurred by the manufacturer supplier, the excess amount is profit earned by the manufacturer in course of providing these services. These profits are not in connection with the sale of goods but in connection with the services provided and hence this profit earned in not includible in the assessable value of the goods.

In Indian Oxygen Ltd. V/s Collector of Central Excise [1988 (36) ELT 723 (SC)] the Hon’ble Supreme Court held that duty of Excise is a tax on manufacturer, and not a tax on the profits made by a dealer on transportation and hence these profits earned are not includible in the assessable value. In Baroda Electric Meters Ltd. V/s Collector of Central Excise [1997 (94) ELT 13 (SC)], the Supreme Court affirmed this judgment and held that excess freight amount collected by the manufacturer is not includible in the assessable value of the goods.

In Empire Ind. Ltd. V/s collector of Central Excise [1997 (95) ELT 653], the Tribunal held that profit earned in a post-clearance activity, which has nothing to do with activity of manufacture is not includible in the assessable value of the goods. In this particular case the tribunal concluded that excess transportation charges collected over actual cost incurred is not includible in the assessable value. The tribunal, in this case, also held that interest charges collected for delayed payment by the buyer is not includible in the assessable value. In Sri Kaliswari Fire Work V/s Collector of Central Excise [1998 (98) ELT 93], the question of excess insurance charges come before the Tribunal, where in it held that excess insurance charges collected over actual incurred by the manufacturer is not includible in the assessable value.

In S.R. Jhunjhunwala V/s Collector of Central Excise [1999 (114) ELT 890], the Tribunal clarified the position of law and held that,

“ It is also found that the collector has held that only deduction of actual amounts of transportation costs and insurance charges are deductible under section 4 of the Act. However, this view is no more good law and stands settled against the department by the Supreme Court judgment reported in 1997 (94) ELT 13, Baroda Electric Meters V/s Collector cited and relied upon by the learned consultants. Though the judgment dealt with excess realisation of transport cost over actual, the same principle is applicable to the insurance charges also, as they have already been held to be non includible in the Supreme Court judgment Union of India V/s Bombay Tyre International 1983 (14) ELT 1896. The Supreme Court held that duty of Excise is on manufacture and not a tax on profit made on transportation. Therefore we hold that the amount received by the appellant in excess of actual transportation charges incurred by them in not includible in the assessable value.”

The Tribunal is following this position of law consistently and reaffirmed this view in many cases like Gomati Engineering Works V/s CCE [1998 (27) RLT 849], in Farm Fresh Foods Pvt. Ltd. V/s CCE [1998 (113) ELT 441] and in numerous other cases. In recent times also the Tribunal declared the same position of law in Transpect Industries Ltd. V/s Collector of Central Excise [2003 (162) ELT 1095], wherein the tribunal held that excess freight and insurance charges are not includible in the assessable value. In Appollo Tyre Ltd. Ltd. V/s CCE [2003 (160) ELT 836], the tribunal reiterated that duties of excise being leviable on manufacture only and such amounts being profits made on transportation is not includable in the assessable value. In Majestic Auto V/s Commissioner of Central Excise [2004 (166) ELT 172], the tribunal held that freight collected in excess of the actually freight charges incurred is not includible in the assessable value. Thus the law is well settled on this point and it is being consistently followed by the Hon’ble Tribunal.

On the basis of the ratio of these judgments, it can be argued that expenses incurred by the manufacturer and charged from the buyer, including any profit earned on there activities are not includible in the assessable value. It may be noted that the activity must be a post manufacturing and post clearance activity. Further the charges must be genuine and it mustn’t depress the assessable value.

It may be mentioned that the assessee must show these charges separately from the price of the goods. When these charges are shown separately or billed separately, the onus is on the department to establish that these transactions are not genuine or artificially depressing the prices. On the point of onus of proof the Tribunal held in CCE V/s Majestic Auto Ltd. [2002 (146) ELT 327] wherein it held,

“ In the present case, we are concerned with the determination of value under Section 4 of the Act as it was pointed out by both the sides. It is settled position of law that duty of excise is a tax on the manufacturer and not a tax on the profit made by a dealer on transportation. The department has not shown any evidence to show that the excess freight was nothing but part of the value of the goods and accordingly the differential amount was not includible in the assessable value.”

Thus it is clear that the onus is on the department to establish that excess charges are nothing but part of assessable value. However, when these charges are not shown separately, the onus in on the assessee to establish that these are permissible deduction under Section 4 of the Central Excise Act. In view of these, it is suggested that a separate bill should be raised for any other services provided by the manufacture assessee to the buyer of the goods.

One of the most needed industries in the USA economy is the trucking and transportation industries.  Just about every product that contributes to the economy is transported on a truck at some point in it’s journey to the point of sale.  Many small trucking companies have been struggling with the cost of fuel increasing and margins getting very tight.  Freight Brokers and direct shipping companies have demanded longer payment terms putting a cash flow crunch on the haulers.  Freight bill factoring has provided a solution by converting the freight bills to cash as soon as the product can be confirmed delivered in good standing.

When a trucking company has cash flow issues and can reduce the time waiting for cash from 40 days to 1 day drivers can get paid quicker and trucks can be fueled up without waiting for funds to be paid by the freight brokers and direct customers.  This quicker turning cash can also allow for growth and adding additional drivers and trucks.  The cost of freight factoring can range from 5% for one truck operations to as low as 1% for transportation companies with more than 50 units.  Some factoring companies specialize in trucking and offer services such as 24 hour customer credit checking so you can check the credit quality of a load and any time of day.  This can be a great tool for a small trucking company with limited resources.

Another nice feature is having the ability to submit your freight bills and invoices from the road.  If your a small operation you cannot afford to be overnighting shipping documents on every load you deliver so you can get the bills factored.  Several of the more advanced freight factoring companies now offer funding via fax, scanned emailed documents, or electronic programs.  Depending on the needs of your trucking company you may or may not need to use truck factoring long term.  That is why it’s very important to only sign a factoring agreement that fits your projected needs, especially with the term length.  The contract terms can range from 1 month to 12 months depending on what factoring companies your evaluating.

If you have customers with reasonable credit you should not have any issues getting approved for freight bill factoring.  It makes good sense to go with the highest advance rate you can find along with the lowest rate structure.  Often a tiered rate over time will work out better than a flat rate so do not go with a flat rate until giving it a good look with your business model.  The bottom line is cash flow help is available for just about any trucking company that could use immediate cash rather then waiting 30 or more days for payment by using a financial tool called factoring.

In an ideal world, you would get paid as soon as your completed work. However, the reality is we aren’t always paid immediately for the goods or services that we render. Unfortunately for trucking companies, that can be difficult. There are expenses such as insurance, tags, or salaries that require cash and if you aren’t paid in cash right away, it can be a big hassle for your business and jeopardize your progress. One of the solutions that is used to assist trucking companies in staying productive is called freight bill factoring. Freight bill factoring pays cash to trucking companies in advance in exchange for their invoices. That can provide peace of mind for companies because it means that the stability and progress of their company doesn’t depend on the timeliness of their clients’ payments. After all, when a client is billed, even if they are extremely responsive and pay quickly, there is still a lag between the completion on the job and the payment. An accounts receivable account can increase cash flow while reducing the headache of credit or collections problems. In essence, a company acts as something of a financial mediator between your clients and your company. They front money to your company and allow you to focus on developing your company as opposed to tracking down debtors. The factoring company takes care of that aspect of your business. Additionally, if a factoring company factors an invoice on a “non-recourse” basis, the ‘Factor’ takes the credit risk of the customer, protecting the client from credit loss. When an invoice is factored “with recourse,” it means that the client is responsible for payment if the customer does not pay. From that standpoint, utilizing truck factoring reduces a credit risk to your company. With the difficulty of obtaining credit, not only can loans be risky, it is also increasingly difficult to get the funding that are so vital to your business. Using a truck factoring company also is good for employee morale because it ensures that they receive regular pay, as opposed to being paid whenever the money from their jobs comes in. Many factoring companies can send money within 24 hours of receiving invoice. Factoring companies also don’t leave you in limbo, wondering whether or not your accounts are reconciled. Instead, they offer a 24 hour online client center so you can see current aging, cash applications, and anything else you might want to know about your factored accounts online, at any time that you need to see. Bay View Funding has been strongly committed to providing businesses with convenient invoice factoring to solve their cash flow challenges. They have served thousands of successful companies, spanning a wide range of industries, who have entrusted them with their invoice financing needs. Their accounts receivable factoring service has helped manufacturing, distribution and service companies, including freight transporters, grow and prosper. When it comes to freight bill factoring, Bay View Funding has the experience and resources to help your business grow.