2025 (1) TMI 1372 - AT - Central Excise

Valuation - Demand of differential central excise duty - inclusion of the notional cost of drawings and designs supplied free of cost by Maruti Suzuki India Pvt Ltd. in the assessable value of parts and components of motor vehicles manufactured by the appellant and cleared to Maruti Suzuki India Limited - HELD THAT - The issue raised in the case of Denso India Pvt Ltd. 2024 (3) TMI 686 - CESTAT NEW DELHI was whether the notional cost of specifications in the form of drawings and designs supplied free of cost by Maruti to the potential vendors should be included in the assessable value of the parts or components manufactured by the vendors and cleared to Maruti for their motor vehicles. To appreciate the said issue the Principal Bench considered the provisions of section 4 of the Central Excise Act 1944 and Rule 6 of the Valuation Rules and observed that anything which is supplied by the buyers to the manufacture before even identifying the potential seller/ manufacturer cannot be treated as additional consideration for sale. It was therefore held that something can be treated as an additional consideration for sale of goods only when there exists a contract of sale or an agreement to sale between two parties and in terms thereof the buyer pays something over and above the price agreed - The Tribunal therefore concluded that the drawing and designs supplied by MSIL at the time of identification and short listing of potential vendors for supply of parts and components the provisions of section 4 1(b) of the Act read with Rule 6 of the Valuation Rules could not have been invoked as no consideration was received by the vendors from MSIL. It is also pertinent to take note of the fact that the Principal Bench had noted the distinction between mere specification and detailed engineering drawing as considered in the earlier decision in Mangalore Refinery Petrochemicals Ltd. Vs. CC Mangalore 2012 (9) TMI 712 - CESTAT BANGALORE where the Tribunal has held that there is a distinction between mere specifications and detailed engineering drawing. It is only the latter which is covered under rule 9(1)(b)(iv) of the Customs Valuation (Determination of Price of Imported Goods) Rules 1988 (which is now rule 10(1)(b)(iv) of the 2007 Customs Valuation Rules). Conclusion - The notional cost of MSIL s specifications should not be included in the assessable value of the final products manufactured by the appellant. The impugned order is set aside - Appeal allowed.

Summary

The core issue in this legal judgment revolves around whether the notional cost of specifications, in the form of drawings and designs supplied free of cost by Maruti Suzuki India Pvt. Ltd. (MSIL), should be included in the assessable value of the parts and components manufactured by the appellant and cleared to MSIL. This involves the interpretation of Rule 6 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000, read with Rule 11, and the application of Section 4 of the Central Excise Act, 1944.

The relevant legal framework includes Section 4 of the Central Excise Act, 1944, which deals with the valuation of excisable goods for the purpose of charging duty of excise, and Rule 6 of the Central Excise Valuation Rules, which provides guidance on determining the assessable value of goods. The Tribunal also referenced previous decisions, notably the case of Commissioner of Central Excise Jamshedpur vs. Tata Motors and Denso India Pvt. Ltd. vs. Additional Director General (Adjudication), which addressed similar issues regarding the inclusion of specification costs in the assessable value.

The Tribunal's interpretation emphasized that for something to be considered an additional consideration for the sale of goods, there must be a contract or agreement between the buyer and the manufacturer where the buyer pays something over and above the agreed price. The Tribunal concluded that the specifications provided by MSIL were not additional considerations because they were shared with potential vendors before any contract of sale was established. The Tribunal found that the specifications were merely requirements for the parts and components to be manufactured and did not constitute detailed engineering drawings necessary for production.

In the Denso India case, the Tribunal held that specifications provided by MSIL were not includable in the assessable value because they were supplied before the identification of potential vendors and did not involve any additional payment by MSIL to the appellant. The Tribunal noted that the specifications were shared as part of the Request for Quotation process, which allowed potential vendors to understand MSIL's requirements and provide price quotations. The Tribunal emphasized that the specifications were not detailed drawings necessary for production but rather general requirements or layouts.

The Tribunal addressed competing arguments by differentiating between mere specifications and detailed engineering drawings. It referenced the Mangalore Refinery & Petrochemicals Ltd. case, which distinguished between general specifications, considered as "buyers' assist," and detailed engineering designs, which could affect the assessable value. The Tribunal concluded that the specifications provided by MSIL were akin to general specifications and not detailed engineering designs, thus not affecting the assessable value under Rule 6 of the Valuation Rules.

The Tribunal's significant holdings include the reaffirmation that notional costs of specifications provided by a buyer before the establishment of a sale contract do not constitute additional consideration under Section 4 of the Central Excise Act. The Tribunal clarified that Rule 6 of the Valuation Rules is intended to cover expenses incurred by a buyer on behalf of a manufacturer, which relieve the manufacturer from incurring such expenses. In this case, the specifications were not considered as such expenses.

The Tribunal concluded by setting aside the impugned order and allowing the appeal, thereby determining that the notional cost of MSIL's specifications should not be included in the assessable value of the final products manufactured by the appellant. The Tribunal's decision reflects a consistent application of the legal principles established in previous cases, emphasizing the distinction between general specifications and detailed engineering drawings in the context of excise duty valuation.