2017 (3) TMI 996 - AT - Central Excise

Valuation - royalty - whether royalty charges towards supply of design, drawing and technical know how by FIPL to AVTEC in the manufacture of power units by AVTEC is to be included in assessable value or not? - Held that - Power unit is one of crucial and important main components of the motor vehicles. The same has to be made as per the exact design, specification and technical requirement suitable for use in the motor vehicles - In terms of the agreement dated 1.8.2006 between AVTEC and FIPL, it is very clear that the power units are to be made in accordance with the specifications, engineering drawings and other technical information provided by FIPL to AVTEC. It is clearly mentioned that FIPL shall provide free of charge of necessary drawings, design, process sheets, equality check sheets and other technical support required for manufacturing and supplying power units by AVTEC. The value of such design, drawing and technical know-how, should form part of the assessable value of power units manufactured and cleared by AVTEC to FIPL - However, the quantification has to be done on factual and rational basis. Extended period of limitation - Held that - AVTEC are not in the picture with reference to royalty payment for the whole vehicle by FIPL to FORD, USA in terms of the agreement between these two parties. In such situation, it is not correct to allege that AVTEC intentionally suppressed or mis- represented any facts relating to additional considerations to be added in the value of power units - extended period not invocable - penalties also set aside. Appeal disposed off - decided partly in favor of appellant-assessee.

Summary

Issues Involved:
1. Inclusion of royalty charges in the assessable value of power units.
2. Short levy of excise duty.
3. Validity of demand covering the extended period.
4. Imposition of penalties under Section 11 AC of the Central Excise Act, 1944, and Rule 26 of the Central Excise Rules, 2002.

Issue-wise Detailed Analysis:

1. Inclusion of Royalty Charges in the Assessable Value of Power Units:
The primary issue in dispute is whether the royalty charges towards supply of design, drawing, and technical know-how by FIPL to AVTEC should be included in the assessable value of power units. The Revenue contended that the money value of these items, received free of cost by AVTEC from FIPL, must be included in the assessable value. The Tribunal noted that the royalty charges paid by FIPL to foreign collaborators pertain to the whole motor vehicle, and power units are crucial components that must be manufactured as per specific designs and technical requirements provided by FIPL. The Tribunal concluded that the value of such design, drawing, and technical know-how should form part of the assessable value of power units. However, the quantification of this value, as adopted in the impugned order, was not legally sustainable. The Tribunal directed that the quantification should be done on a factual and rational basis, using the same methodology as followed by FIPL for paying royalty to their foreign collaborators.

2. Short Levy of Excise Duty:
The appellant argued that there was no short levy of excise duty as the goods manufactured on a job work basis by AVTEC for FIPL could have been cleared without payment of duty under Rule 4 (5)(a) of the Cenvat Credit Rules, 2004. The Tribunal noted that the appellants had chosen not to follow the procedure under Rule 4 of the Cenvat Credit Rules, 2004, and therefore, the argument that they need not have paid duty at all was not admissible.

3. Validity of Demand Covering the Extended Period:
The demand for the extended period was contested by the appellant, who argued that there was no case for mis-declaration or suppression of facts. The Tribunal agreed, noting that both parties were availing of the cenvat credit scheme, and any differential duty payable would be available as a credit for FIPL. The Tribunal found that the question of alleging fraud or mis-representation to invoke the demand for the extended period was not tenable. The Tribunal also noted that AVTEC was not involved in the royalty payment agreement between FIPL and FORD, USA, and therefore, it was incorrect to allege that AVTEC intentionally suppressed or misrepresented any facts. Consequently, the demand for the extended period was not sustainable.

4. Imposition of Penalties:
The Tribunal found that no malafide or fraudulent intent could be attributed to the appellants, considering the facts and circumstances of the case. Penalties under Section 11 AC and Rule 26 are imposable only when there is a mala fide intent to evade duty or dealing with knowledge of the offending nature of the goods. The Tribunal concluded that these ingredients were missing in the present case. Therefore, the penalties imposed on AVTEC and FIPL were set aside. The Tribunal relied on the decisions in Motherson Sumi Systems Ltd. and CCE Vs. Textile Corporation Marathwada Pvt. Ltd. to support its conclusion.

Conclusion:
The Tribunal held that the value of technical know-how, drawing, and design provided by FIPL to AVTEC for the manufacture of power units needs to be added to the assessable value for central excise duty purposes. The quantification should be done by the Original Authority based on the Tribunal's observations. The differential duty arising from such addition should be restricted to the normal period of demand only. Demands beyond the normal period and penalties imposed on the appellants were set aside. The appeals were disposed of accordingly.