Complex Trade Practices

The important trade practices are explained below:

• Bank Charges: When there is inter state trade, the seller may insist, on a
  • Bank guarantee: or
  • Inland Letter of credit

  Thus bank charges are incurred.  Whether it forms part of transactions value is a debatable issue.  Since they are related to sale but not connected with it, they cannot be included is one opinion which assesses and consultants hold.  Without bank guarantee etc sale cannot be effected hence it is an essential ingredient of sale and therefore is to be included, is the other opinion held by the excise department.

  Facts of the transaction:

  • Bank Guarantee etc, are made by buyers
  • Bank Guarantee is necessary to prove the credit worthiness and ensure prompt payment.

  Thus it is like ‘insurance’.  One is ensured about payment either from the buyer or from the bank.  Though it is in relation to sale it is not in connected with it. It is financial in nature and not operational i.e. in no way connected with the operations of the organizations since, it does not facilitate or improve it.  If this is to be included, then bad debts shall have to be excluded.  Therefore, it need not be included.

• Interest on delayed payment:

  Interest is also purely financial in nature and though it is related to the sale it is not connected with it.  However, it is not similar to bank charges in one respect.  It is not separately ascertainable unless reported by the assessee or his buyer.  Therefore, in protection of revenue, it is to be included unless the assessee

  • distinguishes interest/over due charges from the price actually payable
  • The arrangement/agreement pertaining to the interest shall be made in writing.
  • And the assessee demonstrates to the satisfaction of the central excise officer that interest is in no way covered by/ excluded by the price actually payable.
• Dharmada:

  In North India there is a trade customs to receive money from buyer for charitable purposes.  They call such payments as “dharmada”.  Dharmada is in no way connected or related to the sale.  It is connected to charity and is related to the business connection.  Therefore it does not form part of assessable value.  Rules as to interest payments apply to Dharmada too.

• Commission/ Brokerage:

  Commission/ Brokerage are paid to effect the sale and hence are to be included.  This may be apparently similar to Bank Guarantee.  The difference here is regarding purpose of payment.  Bank guarantee or letter of credit is to secure the payment but commission/ brokerage is to secure the very sale itself.  Hence it is not similar to BG/L.C.