1999 (8) TMI 920 - SC - Central Excise

In determining the cost of an excisable product covered by the Modvat scheme under Section 4(1)(b) of the Act read with Rule 6 of the Valuation Rules the excise duty paid on raw material also covered by the Modvat scheme is not to be included.

Summary

Issues Involved:
1. Determination of assessable value of intermediate product under the Modvat scheme.
2. Inclusion of excise duty paid on raw material in the cost of the intermediate product.
3. Interpretation of Section 4 of the Central Excises and Salt Act, 1944, and the Central Excise (Valuation) Rules, 1975.
4. Applicability of the Modvat scheme to the cost determination of excisable products.
5. Relevance of accounting standards and commercial practices in determining the cost of production.

Issue-wise Detailed Analysis:

1. Determination of assessable value of intermediate product under the Modvat scheme:
The primary question in these appeals is whether the assessable value of an intermediate product, for excise duty purposes, should include the full price paid for the raw material or the price less the excise duty for which the manufacturer is entitled to credit under the Modvat scheme. The Tribunal had ruled in favor of the manufacturers, stating that the excise duty paid on the raw material should not be included in the cost since the manufacturer gets credit for it.

2. Inclusion of excise duty paid on raw material in the cost of the intermediate product:
The Revenue contended that the cost of the raw material should include the excise duty paid on it, as this duty is part of the price paid by the manufacturer to the seller. The manufacturers argued that the cost should exclude the excise duty since they receive credit for it under the Modvat scheme, which reduces their actual cost.

3. Interpretation of Section 4 of the Central Excises and Salt Act, 1944, and the Central Excise (Valuation) Rules, 1975:
Section 4 of the Act deals with the valuation of excisable goods based on their price. The Explanation to Section 4(4)(d)(ii) states that the value of excisable goods does not include the amount of excise duty payable on them. The Revenue's argument hinged on this Explanation, suggesting that the credit under the Modvat scheme should not reduce the price paid for the raw material. However, the Court found that this Explanation did not support the Revenue's case, as it did not pertain to the Modvat scheme directly.

4. Applicability of the Modvat scheme to the cost determination of excisable products:
The Modvat scheme allows manufacturers to take credit for the excise duty paid on inputs, which can be used to offset the excise duty on final products. The Court noted that the credit is available to the manufacturer immediately upon making the requisite declaration and obtaining an acknowledgment. This credit is indefeasible and can be used at any time, reducing the actual cost of the raw material.

5. Relevance of accounting standards and commercial practices in determining the cost of production:
The Court referred to the "Guidance Note on accounting treatment for Modvat" issued by the Institute of Chartered Accountants of India, which supports the view that the cost of inputs should be net of the specified duty on inputs. The Court emphasized that the cost should be reckoned as it would be by a man of commerce, who would consider the real cost of the raw material to be the price paid minus the excise duty credit received.

Conclusion:
The Supreme Court concluded that for determining the cost of an excisable product under Section 4(1)(b) of the Act read with Rule 6 of the Valuation Rules, the excise duty paid on raw material under the Modvat scheme should not be included in the cost. The appeals were dismissed, and any refunds were to be made subject to the law. No order as to costs was made.