2025 (2) TMI 210 - AT - Central Excise

Calculation of Central Excise Duty - inclusion of cost of specifications provided by the manufacturer in the assessable value of the final products manufactured by the appellant and cleared to the manufacturer - 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. In other words anything which is supplied by the buyer to the manufacturer even before identifying the potential manufacturer can never be treated as an additional consideration for sale. 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. The specifications in the nature of design/drawings provided by MSIL were merely layout or dimensions of the desired parts and components as they have to be necessarily manufactured as per the requisite dimensions so that they can be fitted in the vehicle manufactured by the Maruti. Conclusion - The notional cost of specifications provided by MSIL is not includable in the assessable value of the final products. Appeal allowed.

Summary

The issues presented in this legal judgment primarily revolve around the inclusion of the notional cost of specifications provided by Maruti Suzuki India Pvt. Ltd. (MSIL) in the assessable value of parts and components manufactured by the appellant and cleared to MSIL. The core legal question is whether the cost of these specifications, provided free of cost by MSIL, should be included in the assessable value for the purpose of calculating central excise duty.

The relevant legal framework includes Section 4 of the Central Excise Act, 1944, and Rule 6 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000. The court also considered precedents such as the Tribunal's decision in Commissioner of Central Excise Jamshedpur vs. Tata Motors and the recent decision in Denso India Pvt Ltd. and Others vs. Additional Director General (Adjudication).

The court's interpretation and reasoning focused on whether the specifications provided by MSIL could be considered as an additional consideration for the sale of goods. The Tribunal noted that something can only be treated as an additional consideration if there exists a contract of sale or an agreement to sell between two parties, and the buyer pays something over and above the agreed price. In this case, the specifications were provided before the identification of the potential manufacturer, and no additional consideration was paid by MSIL to the appellant over the agreed price.

Key evidence and findings include the process through which MSIL shares specifications with potential vendors via a Request for Quotation (RFQ). These specifications are requirements in terms of dimensions and measurements, allowing vendors to provide price quotations. The appellant's in-house engineering team prepared detailed drawings and designs based on these specifications, with technical support from an overseas group company. The development cost for these drawings and designs was included in the assessable value of the final products.

The court applied the law to the facts by examining the nature of the specifications provided by MSIL. It was determined that these specifications were not detailed engineering drawings necessary for manufacturing but rather general requirements. The Tribunal emphasized that only those drawings and designs which a manufacturer would have prepared for use in manufacturing, but were instead provided by the buyer, could be considered under Rule 6 of the Valuation Rules.

Competing arguments were addressed by distinguishing between mere specifications and detailed engineering drawings. The Tribunal referred to the decision in Mangalore Refinery & Petrochemicals Ltd. vs. CC, Mangalore, which highlighted that specifications are in the nature of "buyers' assist" and do not form part of the value of goods in the hands of the supplier.

Significant holdings of the court include the conclusion that the notional cost of specifications provided by MSIL is not includable in the assessable value of the final products. The Tribunal reiterated that specifications provided before identifying the potential manufacturer cannot be treated as additional consideration. The court also noted that the purpose of Rule 6 is to levy excise duty on expenses incurred by a buyer on behalf of the seller-manufacturer, which was not applicable in this case.

The core principles established include the interpretation of additional consideration under Section 4 of the Central Excise Act and the application of Rule 6 of the Valuation Rules. The Tribunal's final determination was to set aside the impugned order and allow the appeals, concluding that the specifications provided by MSIL were not includable in the assessable value for excise duty purposes.