2018 (1) TMI 721 - AT - Central Excise

Valuation - removal of goods on transfer of right to use - It appeared that appellant had sold some servers directly to the cinema theatres / halls under normal transaction value and in respect of remaining servers the appellant had raised stock transfer invoices - whether the impugned clearances are to be treated as stock-transfer meriting valuation under Rule 8 of the Valuation Rules or otherwise, whether they require to be construed as sale as per Rule 4 of the Valuation Rules? - Held that - there is definitely transfer of possession of the impugned goods from the appellant to their customers partly by cash (refundable and non-refundable deposits) and partly by other valuable considerations (right to collect advertisement charges from sponsors of advertisements and receipt of pay per showamount for the QUBE products at the theatre premises. The contours of the transaction between the appellant and their customers in respect of the impugned servers therefore satisfy the definition for sale under Section 2(h) of the Central Excise Act, 1944. This being so, the valuation of such sale of the sold goods for the purposes of levy of Central Excise duty will have to be within the parameters of Section 4 of the Act read with Central Excise Valuation Rules, 2000. Notwithstanding the clearances being shown as stock-transfer to Head office, this was only a routing on paper only, however in actuality the impugned servers were delivered in the same condition as they were removed, to the theatre owners. Possibly, appellant had followed such a tedious billing route for accounting reasons. Nonetheless, for discharge of Central Excise duty, the removals will in no way be recognizable as stock transfer and will necessarily take on the colour of saleattracting the manner of valuation as laid down in Rule 4 of the Valuation Rules Penalty - Held that - From all accounts, the issue boils down to mis-interpretation of the valuation provisions by the appellant - penalty not attracted. Appeal allowed in part.

Issues Involved:
1. Determination of the assessable value of stock-transferred servers.
2. Applicability of Rule 8 versus Rule 4 of the Central Excise Valuation Rules, 2000.
3. Whether the transactions constituted a 'sale' under Section 2(h) of the Central Excise Act, 1944.
4. Justification for the demand of differential duty liability.
5. Imposition of penalty under Section 11AC of the Central Excise Act.

Detailed Analysis:

1. Determination of the Assessable Value of Stock-Transferred Servers:
The appellants, M/s. Real Image Media Technologies Pvt. Ltd., are manufacturers of servers known as QUBE XP D and QUBE XP E. They adopted the cost construction method based on CAS-4 value under Rule 8 of the Central Excise Valuation Rules, 2000, for stock-transferred servers. The department contended that this method was inappropriate as the servers were not used for captive consumption but were part of a package let on lease to customers.

2. Applicability of Rule 8 versus Rule 4 of the Central Excise Valuation Rules, 2000:
The core issue was whether the clearances should be treated as stock-transfer meriting valuation under Rule 8 or as a sale under Rule 4. The department argued that Rule 8 applies only when goods are used for consumption by the assessee in the production of other articles. Since the servers were leased and not consumed captively, Rule 4, which bases value on the nearest transaction value, was deemed applicable.

3. Whether the Transactions Constituted a 'Sale' under Section 2(h) of the Central Excise Act, 1944:
The Tribunal examined the lease agreements and concluded that there was a transfer of possession of the goods for valuable consideration, satisfying the definition of 'sale' under Section 2(h). The agreements included non-refundable deposits, advertisement charges, and pay-per-show amounts, indicating a sale rather than a mere transfer of the right to use.

4. Justification for the Demand of Differential Duty Liability:
The Tribunal upheld the department's view that the valuation should be based on Rule 4. The servers were not used in further production or manufacture, and the stock transfer was a paper transaction with actual delivery to customers. Therefore, the differential duty liability of ?18,57,892/- was justified.

5. Imposition of Penalty under Section 11AC of the Central Excise Act:
The Tribunal found that the appellants had not clandestinely removed goods without paying duty. They had followed a practice they believed was correct and had paid the differential duty under protest before the show cause notice was issued. The issue was a misinterpretation of valuation provisions rather than an intent to evade duty. Consequently, the imposition of an equal penalty under Section 11AC was set aside.

Conclusion:
The appeal was partly allowed. The Tribunal upheld the demand for differential duty based on Rule 4 of the Valuation Rules but set aside the equal penalty imposed under Section 11AC, recognizing the appellants' bona fide belief and lack of intent to evade duty.

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