2018 (7) TMI 420 - AT - Central Excise

Valuation - job-worker or not? - appellant entered into agreement with M/s.Honeywell Electrical Devices and Systems India Ltd. on manufacture on contract basis - Department took the view that Sujhan had simply been acting as job worker for Honeywell; that the entire manufacturing activities were controller by Honeywell as principal manufacturer; that Honeywell fixed ordinary sale price of the impugned goods; Hence value adopted for payment of duty by Sujhan is not the sole consideration for sale as per Section 4 (1) (a) of the Central Excise Act, 1944 - whether the activities of M/s.Sujhan Instruments are to be treated as those of a job worker on behalf of M/s.Honeywell i.e. job worker to principal ? Held that - A perusal of the SCN No. 104/2009 dt. 23.10.2009 reveals that department is inclined to treat Sujhan as a job worker of Honeywell primarily on the grounds that supplies of raw materials that required to be approved by the latter, quality control exercised by Honeywell, 99% of the finished goods are sold to the latter and that Honeywell s brand name and MRP stickers are used on the packing. The Rule 10A has been inserted in the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, w.e.f. 1.4.2007. As per this rule, the value at which principal manufacturer sells his goods will be the basis for determining the transaction value for payment of Central Excise duty by the job worker - Sujhan does not appear to qualify to be a job worker for the purpose of Rule 10A ibid. The inputs or goods are not supplied free by Honeywell, or other persons authorized by Honeywell. Just because the goods manufactured or produced by Sujhan are purchased by Honeywell on contract that should detract from acceptance of the transaction between Sujhan and Honeywell to be one of principal to principal basis. The arrangement between Sujhan and Honeywell, in our view, is on the lines of contract manufacturing as distinguished from job worker . The contract manufacturers are not supplied with the raw material from principal manufacturers, like job workers , butthey are required to purchase them from the market, very often from vendors who are approved by the principal manufacturer for quality point of view - there is no reason on account of invoice value between Sujhan and Honeywell should not be treated as the transaction value under Section 4 (1) (a) of the Central Excise Act, 1944. We draw sustenance from the ratio of the Tribunal s decision in Coromandal Paints 2010 (9) TMI 315 - CESTAT, BANGALORE , where it was held that by merely indicating vendors of raw materials or by giving advance for procuring raw material or even installing equipment given by SIPL would not render Coromandal as a job worker. Appeal allowed.

Summary

Issues Involved:
1. Whether Sujhan Instruments should be treated as a 'job worker' for Honeywell or as an independent manufacturer.
2. Applicability of Section 4 (1) (a) of the Central Excise Act, 1944, versus Rule 10A of the Central Excise Valuation Rules, 2000.
3. Determination of the correct valuation method for excise duty purposes.
4. Validity of the penalties imposed on Sujhan and Honeywell.

Detailed Analysis:

1. Relationship Between Sujhan Instruments and Honeywell:
The primary issue is whether Sujhan Instruments (Sujhan) acts as a 'job worker' for Honeywell or operates on a 'principal to principal' basis. The department argued that Sujhan was a job worker for Honeywell due to factors like Honeywell's control over raw materials, quality control, and branding. However, the tribunal found that Sujhan did not qualify as a job worker under Rule 10A of the Central Excise Valuation Rules, 2000, because:
- Sujhan purchased raw materials at a price, not supplied free by Honeywell.
- Sujhan discharged Central Excise duty on the assessable value indicated in invoices to Honeywell.
- The relationship was more akin to 'contract manufacturing' rather than job work.

2. Applicability of Section 4 (1) (a) vs. Rule 10A:
The tribunal addressed the contention that the adjudicating authority should have first examined the issue under Section 4 (1) (a) of the Central Excise Act, 1944, before considering Rule 10A. The tribunal disagreed, noting that the Show Cause Notices (SCNs) alleged that Sujhan fell outside the scope of Section 4 (1) (a) and thus invoked Rule 10A. The tribunal concluded that Sujhan's transactions with Honeywell met the criteria for 'transaction value' under Section 4 (1) (a), as there was no evidence of additional value components or financial flowbacks beyond the invoice value.

3. Valuation Method for Excise Duty:
The tribunal examined whether the value at which Honeywell sold the goods should be the basis for excise duty valuation under Rule 10A. It concluded that Sujhan's transactions with Honeywell were on a 'principal to principal' basis, and thus, the invoice value between Sujhan and Honeywell should be treated as the 'transaction value' under Section 4 (1) (a). The tribunal referenced the Coromandal Paints Ltd. case, which supported the view that specifying vendors or providing advances for raw materials does not render a manufacturer a job worker.

4. Penalties Imposed:
The tribunal set aside the penalties imposed on Sujhan and Honeywell, finding no merit in the department's appeals. The orders from the Commissioner (Appeals) that favored Sujhan were upheld, and the tribunal dismissed the department's appeals.

Judgment:
- The appeals by Sujhan and Honeywell were allowed with consequential benefits as per law.
- The orders of the Commissioner (Appeals) favoring Sujhan were upheld.
- The department's appeals were dismissed.

Conclusion:
The tribunal concluded that Sujhan's relationship with Honeywell was on a 'principal to principal' basis, and the valuation for excise duty should be based on the transaction value under Section 4 (1) (a) of the Central Excise Act, 1944. The penalties imposed were set aside, and the department's appeals were dismissed.