2021 (10) TMI 381 - AT - Central Excise

Valuation - inclusion of amortised cost of patterns in respect of clearances to M/s.BEML - contravention of Rules 4, 6 and 8 of Central Excise (No.2) Rules, 2001 - whether the cost of patterns supplied by M/s.BEML are required to be amortised on all the castings cleared by the appellant even though the cost was amortised on the number of castings initially ordered by the customer? HELD THAT - The appellants manufacture 10 castings. They clear these 10 castings by amortising the value of the pattern of ₹ 100 equally on these 10 castings say ₹ 10 rupees on each casting. The value of the pattern i.e. ₹ 100 stands covered by 10 castings. However, because of the subsequent orders of the customer, the appellant manufactures 5 more castings. As the value of the pattern has already been amortised on 10 castings, nothing remains to be amortised while clearing the additional 5 castings which were manufactured using the same pattern. Therefore, the 5 castings were cleared without amortization. It would not make any material difference if the said hundred rupees was amortised for 10 pieces or 15 pieces. What is important is to see whether or not the cost of the pattern has been amortised and has suffered Central Excise duty or otherwise. It is not the case of the department that the cost of the pattern was not amortised in the initial number of castings supplied as per certification by BEML. It is also not the case of the department that they have received some other patterns for the manufacture of castings additionally to the initial order and certificate by the customer i.e. M/s. BEML. The appellants have amortised the full value of patterns supplied to them by their client. It is neither legal nor proper to ask the appellants to continue the amortisation while clearing the additional castings using the same patterns whose value has been already amortised. It is not the case of the department that the appellants have received new set of patterns whose value remains to be amortised. It is also not the case of the department that the appellants received any additional consideration for the same patterns. Under the circumstances, it cannot be said that the appellants have evaded duty by not amortising the patterns received by them. The demand confirmed cannot be upheld to be legal and proper. When the demand becomes not sustainable, interest and penalty etc. confirmed cannot be sustained - Appeal allowed - decided in favor of appellant.

Issues Involved:
1. Inclusion of amortized cost of patterns in the valuation of castings.
2. Invocation of the extended period for demand under proviso to Section 11A.
3. Relevance of the Larger Bench decision in Mutual Industries Vs CCE Mumbai.
4. Applicability of CBEC Circular No.170/4/96-CX dated 23.01.1996.
5. Tribunal's adherence to the High Court's directive for a speaking order.

Issue-wise Detailed Analysis:

1. Inclusion of Amortized Cost of Patterns:
The appellants, M/s. Lakshmi Machine Works Ltd., received patterns from M/s. Bharat Earth Movers Ltd. (BEML) for manufacturing and supplying castings. The appellants initially amortized the entire cost of the patterns over the first set of castings (25, 75, and 75 pieces). For subsequent orders, they did not include the amortized cost of the patterns, as the entire cost was already accounted for. The department contended that this omission contravened Rules 4, 6, and 8 of the Central Excise (No.2) Rules, 2001, and issued a show cause notice, which was confirmed by the lower authority and upheld by the appellate authority. The Tribunal initially upheld this decision but was directed by the High Court to re-examine the issue with a speaking order.

2. Invocation of Extended Period:
The appellants argued that the invocation of the extended period under proviso to Section 11A was unjustified, as the issue arose from a CERA objection and was contested by the department. They cited the Tribunal's decision in Star Glass Works Vs CCE Mumbai, which was upheld by the Supreme Court, stating that there was no suppression of facts or intent to evade duty. The Tribunal agreed, noting that the department had all necessary information and failed to act within the standard period.

3. Relevance of Larger Bench Decision in Mutual Industries Vs CCE Mumbai:
The appellants contended that the reliance on the Larger Bench decision in Mutual Industries was incorrect, as it was based on the old Central Excise Valuation Rules, 1975. They argued that the new rules, which emphasize transaction value, should apply. The Tribunal noted that the Mutual Industries case involved different circumstances and was not directly applicable.

4. Applicability of CBEC Circular No.170/4/96-CX:
The appellants cited CBEC Circular No.170/4/96-CX, which clarified that the proportionate cost of patterns should be included in the assessable value of castings. They argued that they had complied with this requirement for the initial set of castings. The Tribunal agreed, noting that the cost of the patterns was fully amortized initially, and no additional consideration was received for subsequent orders.

5. Tribunal's Adherence to High Court's Directive:
The High Court directed the Tribunal to provide a detailed order addressing whether additional excise duty was payable. The Tribunal found that the cost of the patterns was fully amortized initially and that no further amortization was required for subsequent orders. The Tribunal concluded that the appellants had not evaded duty and that the demand, interest, and penalties were unsustainable.

Conclusion:
The Tribunal allowed the appeal, finding that the appellants had correctly amortized the cost of the patterns and that no additional duty was payable for subsequent orders. The invocation of the extended period was deemed unjustified, and the reliance on the Mutual Industries decision was found to be inappropriate. The Tribunal's decision was in line with the CBEC circular and the High Court's directive for a detailed, speaking order. The appeal was allowed with consequential relief as per law.

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