2011 (3) TMI 1306 - AT - Central Excise

Demand - differential duty - Whether amount received in the form of Technical know how will be included in the assessable value - Rule 6 of the Valuation Rules - Held that - Agreement allowed the noticee to continue to use technical know-how for manufacture of the preparations under similar contracts for third parties - in the absence of a computation mechanism, cost of technical know-how could not be included in the value of the impugned preparations for determining the duty liability - Decided in favor of the assessee.

Issues Involved:
1. Demand of differential duty and penalty under Section 11AC of the Central Excise Act, 1944.
2. Inclusion of technical know-how value in the assessable value of goods.
3. Invocation of the extended period of limitation.
4. Validity of the transaction value adopted for duty payment.

Issue-wise Detailed Analysis:

1. Demand of Differential Duty and Penalty:
M/s. Group Pharmaceuticals (GP) appealed against the demand of differential duty amounting to Rs. 3,29,95,748/- along with applicable interest and an equal amount of penalty imposed under Section 11AC of the Central Excise Act, 1944. The demand was based on the allegation that GP had short-paid duty by not including the value attributable to technical know-how in the assessable value of the goods cleared to M/s. Dr. Reddy's Laboratories Ltd. (DRL).

2. Inclusion of Technical Know-how Value:
The Commissioner held that technical know-how was a vital resource necessary for manufacturing the preparations and its cost should be included in the assessable value under Rule 6 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000. The assessee argued that it retained the right to use the technical know-how even after transferring it to DRL and that the consideration for technical know-how should not be included in the value of the goods. The Tribunal noted that technical know-how could be deployed to produce any quantity of the preparation over a short time, making it unreliable to determine its value in respect of any specific preparation cleared. Therefore, Rule 6 could not be validly applied to determine the differential duty.

3. Invocation of Extended Period of Limitation:
The Commissioner invoked the extended period of limitation, alleging that the assessee had willfully suppressed the sale of technical know-how from the department. The assessee countered that it had declared the revised prices of the goods to the department in time and had no intent to evade duty. The Tribunal found that the assessee had indeed informed the department about the revised prices immediately after executing the manufacturing agreement, which negated the allegation of suppression.

4. Validity of Transaction Value:
The Tribunal observed that the differential duty was computed by comparing the assessable value of goods cleared before and after entering into the manufacturing agreement with DRL. The Tribunal found no legal basis for this comparison, as the assessee was allowed to use the same technical know-how for manufacturing goods for third parties as well. The Tribunal also noted the absence of a computation mechanism to determine the value attributable to technical know-how, which rendered the demand unsustainable. The Tribunal relied on previous decisions, including the case of CCE, Bangalore-III v. M/s. Wintac Ltd., where it was held that in the absence of a computation mechanism, the cost of technical know-how could not be included in the assessable value.

Conclusion:
The Tribunal set aside the impugned order, finding that the demand and penalty were not consistent with legal provisions. The appeal filed by M/s. Group Pharmaceuticals was allowed, and the order was pronounced in open court on 29-3-2011.

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