2008 (5) TMI 5 - SC - Central Excise

Valuation manufacturing of engineering machines as per the drawings, patterns, jigs, fixtures and tools etc. - whether the amount received by the manufacturer towards charges for designs, drawings, tooling, jigs and fixtures etc. could have been loaded on the value of the machine Held that, before adding the value of the drawings etc, it must be established that the consideration had a nexus with the negotiated price If revenue fails to prove nexus value shall not be included.

Summary

Issues:
1. Whether duty on additional consideration received for the preparation of designs, drawings, patterns, etc., should be levied under Central Excise Rules.
2. Whether the amount received for designs, drawings, etc., could have been loaded on the value of the machines subsequently made and delivered.
3. Whether the Tribunal was correct in setting aside the order of the Commissioner of Central Excise.

Analysis:

1. The appeal was against the decision of the Customs Excise and Gold (Control) Appellate Tribunal, which set aside the order confirming duty demand and penalty imposed by the Commissioner of Central Excise. The respondent, a company manufacturing machine tools, received an additional consideration of Rs.43 lakhs for designs, drawings, etc., and the duty of Rs.7,41,750 was demanded on this amount.

2. The agreement between the respondent and another party stipulated that the machines would be manufactured as per approved specifications, prototype drawings, and patterns. The price of the machines was to be stipulated in orders placed by the other party. The respondent was paid Rs.43 lakhs for this agreement, which was accounted as other income.

3. The Tribunal allowed the appeal, questioning whether the amount received for designs could be loaded onto the value of the machines. The terms of the agreement indicated a comprehensive contract for design, drawing, manufacture, supply of machines, and payment of excise duty. The agreement could not be read in parts, and the consideration had to be linked to the negotiated price of the assessable goods.

4. The Tribunal found that the Commissioner did not establish a nexus between the consideration for designs and the price of the machines. Each clearance was based on a separate contract, and the order lacked reasons to invoke certain provisions. The Tribunal held that the order of the Commissioner did not provide sufficient grounds to impose penalties or demand duty on the entire additional consideration.

5. The Supreme Court upheld the Tribunal's decision, stating that the order lacked merit and deserved dismissal. The Court found that the Tribunal did not commit any error in setting aside the Commissioner's order. The appeal was dismissed with no orders as to costs.

In conclusion, the Supreme Court's judgment clarified the need for a nexus between consideration for designs and the price of manufactured goods, emphasizing the importance of proper assessment based on separate contracts for each clearance. The Court upheld the Tribunal's decision, highlighting the lack of grounds to impose penalties or demand duty on the entire additional consideration received.