Case of Nirma Ltd on valuation of Excisable goods- a study of recent judgment of the Supreme Court and related judgment of Tribunal passed ten year ago.

[CA DEV KUMAR KOTHARI]

Judgments under direct study in this article:

C.C.E., Vadodara-I Versus M/s. Nirma Ltd. & Ors. 2015 (11) TMI 605 - SUPREME COURT Civil Appeal No(s). 3621/2007  Dated - 09 October 2015 read with:

NIRMA LTD. Versus COMMISSIONER OF CENTRAL EXCISE, VADODARA-I 2005 (8) TMI 337 - CESTAT, MUMBAI  Order No. - A/1650-1653/2005-WZB/C-III Dated - 26 August 2005.

Relevant important provisions considered:

Rule 8 and Rule 9  of the Valuation Rules, 2000

Section 4(1)(a) , 4(1)(b) , 11A  of The central Excise Act. {specific- Proviso to Section 11A(1)}.

Rule 6(b)(i) , Rule 6(b)(ii) of the Valuation Rules, 1975

Circular dated 13-2-2003 read with Cost Accounting Standards -4.

Board costing formula communicated vide Order No. 692/8/2003-C.X., dt. 13-2-2003

 F. No. 258/92/96-C.X., dt. 30-10-1996

Rule 173C

The Cost Audit (Report) Rules, 1996 issued under Section 233 of the Companies Act, 1956 Accounting Standard-2 (AS-2, for short)  issued by The Institute of Chartered Accountants of India.

Judgmetns considered:

M/s. Calcutta Chromotype Ltd. v. CC, Calcutta - 1998 (3) TMI 138 - SUPREME COURT OF INDIA

K.T. Doctor v. CIT - 1980 (1) TMI 64 - GUJARAT High Court, the Gujarat High Court has already held that doctrine of lifting of corporate veil cannot apply to trust.

National Aluminium Co. Ltd. v. CCE - Final Order Nos. 312-327/2005 - NB (A), dated 4-3-2005 [2005 (3) TMI 186 - CESTAT, NEW DELHI]

Hindustan Polymers v. CCE - 1989 (8) TMI 77 - SUPREME COURT OF INDIA

HBL Aircrafts Batteries v. CCE - 2004 (5) TMI 71 - SUPREME COURT OF INDIA

Union Carbide v. CCE - 2003 (9) TMI 89 - SUPREME COURT OF INDIA.

Raymonds Ltd. v. CCE - 2001 (3) TMI 128 - CEGAT, COURT NO. IV, NEW DELHI

ITC Ltd. v. CCE - 2004 (7) TMI 193 - CESTAT, BANGALORE

Valuation of goods:

Valuation of goods - determination of cost of production is to be made  as per Cost Accounting Standard 4 .

The Tribunal has kept in mind the Costing Accounting Standard – 4 (CAS-4) which has been adopted by the Department itself.[per author-  departmental instructions / circular exists in this regard which are binding on authorities.]

On that basis, it has come to the conclusion that the three elements of cost  namely interest expenditure, depreciation and profit margin which were sought to be included by the Department could not be the factors which would be taken into consideration for arriving at the cost of production.

After going through the reasons given by the Tribunal in support of the conclusions, The honourable Supreme Court found no error in order of Tribunal and appeal of revenue was dismissed hence  decided against Revenue and in favour of manufacturer.

Costs of appeal not considered:

There is no mention about cost of appeal. The Supreme Court as well as the Tribunal has not passed any order as to cost. Author feels that in give case considerable costs should be imposed on Revenue for filing un-necessary appeal.

In this case the revenue has intended to impose penalties not only on manufacturer but also on its Managing Director and General Managers of Factories.

When penalties on executives can be intended and / or imposed then there should also be provision to impose penalty on erring officers of revenue who issues un-necessary show cause notices, orders demand, and also indulge in un-necessary litigation on matters which are in favour of tax payer as per policy adopted by revenue.

The judgment of the Supreme Court and Tribunal are reproduced below with highlights for easy understanding and analysis of important aspects:

 

2015 (11) TMI 605 - SUPREME COURT

C.C.E., Vadodara-I Versus M/s. Nirma Ltd. & Ors.

Civil Appeal No(s). 3621/2007

Dated - 09 October 2015

Judgment / Order

Mr. A.K. Sikri And Mr. Rohinton Fali Nariman, JJ

For the Petitioner : Mr. K. Radhakrishnan, Sr. Adv., Mr. Rupesh Kumar, Adv., Mrs. Aruna Gupta, Adv., Mr. Jitin Singhal, Adv., Mr. Pratik, Adv. And Mr. B. Krishna Prasad,Adv.

For the Respondent : Mr. V. Sridharan, Sr. Adv., Mr. M. P. Devanath,Adv., Ms. L. Charanaya, Adv., Mr. Hemant Bajaj, Adv., Mr. T.D. Satish, Adv., Mr. Anandh K., Adv. And Mr. Aditya Bhattacharya, Adv.

ORDER

The issue involved in the present appeal relates to the alleged under valuation of Linear Alkyl Benzene (LAB) which is manufactured and cleared by the respondent – assessee herein to its sister units located in different places and is also used captively in the same factory where the said LAB is manufactured. It is not in dispute that this is the intermediary product which is used for the manufacture of Nirma Detergent products. It is also not in dispute that the respondent – assessee has been paying excise duty on this product. The only issue is about the valuation that was to be arrived at for the purposes of payment of excise duty on this product. We may also mention that the parties are ad idem that the costing of LAB is to be done as per Rule 8 of the Valuation Rules, 2000 which prescribes cost method.

The appellant-Department had issued five show-cause notices to the respondent herein for different periods alleging therein that the costing as done by the respondent – assessee was not in accordance with the method of costing and it resulted in under valuation and thus lesser payment of duty. The differential duty was, thus, demanded.

The respondent herein, on going through the formula of costing as suggested by the Department, objected to the inclusion of the items of costing which are as follows:

	1997-98 (Rs./MT)	1998-1999 (Rs./MT)	1999-2000(Rs./MT)
Cost of production as per show cause notice (1)	51755.00	51799.00	51799.00
Less: Profit Margin (2)	8554.00	7883.00	7883.00
Less: Interest (3)	6943.00	9570.00	9570.00
(4)=(1)-(2)-(3)	36258.00	34346.00	34346.00
(-) Depreciation costs not includible	402.67	546.08	546.08
(-) Catalyst cost not Includible (6)	333.18	365.34	365.34
(-) Catalyst cost not includible	190.50	1190.50	1190.50
(=) Interest Expenditure	0.00	623.38	623.38
(9)=(4)=(5)-(6)-(7)+(8)	35522.15	34057.96	34057.96
(+) Profit Margin @ 10% (10)	3552.22	34005.80	34005.80
Cost of production as per submissions (11) = (9) + (10)	37764.81	36154.20	36154.20
Value at which duty has been paid (12)	37700.00	37700.00	45000.00 (upto December) (1999)
			46500 (From January 2000)

The demand was confirmed after considering the reply that was filed by the respondent. The order of the adjudicating authority was challenged by the respondent before the CESTAT. The CESTAT vide its impugned judgment dated 16.06.2005 partly allowed the appeal filed by the respondent. In so far as the first show-cause notice is concerned, it has arrived at a finding that the aforesaid three elements of cost which were sought to be included by the Department while arriving at the cost of production could not be included. It is also found that the first show-cause notice was barred by limitation in respect of other four show-cause notices after arriving at the findings, as mentioned above. In respect of first show-cause notice which applies to these notices as well, there is a demand on the limited aspect for calculation of the cost.

Mr. K. Radhakrishnan, learned senior counsel appearing for the Department made various submissions questioning the correctness of the view taken by the Tribunal. He further argued that once there was a demand in respect of four show-cause notices, such a demand should have gone into the issue de novo. We are unable to agree with the aforesaid submissions of Mr. Radhakrishnan.

The impugned order of the Tribunal shall reflect that the Tribunal has kept in mind the Costing Accounting Standard – 4 (CAS-4) as adopted by the Department itself. On that basis, it has come to the conclusion that the three aforesaid elements of cost which were sought to be included by the Department could not be the factors which would be taken into consideration for arriving at the cost of production. After going through the reasons given by the Tribunal in support of the aforesaid conclusions, we find no error therein.

The appeal is accordingly dismissed.

In view of the above, the appeals are dismissed.

 

 

2005 (8) TMI 337 - CESTAT, MUMBAI

Other Citation: 2006 (200) E.L.T. 213 (Tri. - Mumbai)

NIRMA LTD. Versus COMMISSIONER OF CENTRAL EXCISE, VADODARA-I

E/389-392/2004

Order No. - A/1650-1653/2005-WZB/C-III

Dated - 26 August 2005

Valuation (Central Excise) - Captively consumed goods

Judgment / Order

S/Shri S.S. Sekhon, Member (T) and T. Anjaneyulu, Member (J)

 

[Order per : S.S. Sekhon, Member (T)]. - On the issue of valuation of Linear Alkyl Benzene (LAB) cleared by the Alindra factory to other factories at Mandali, Trikampura. Pithampur, Chhatral and Kanpur where LAB is used in the manufacture of detergent powder and detergent cake following Show cause notices were issued to the appellants :

S.No.	SCN dated	Period	Differential duty demand (Rs.)
1	25-2-2000	December 1997 to January 2000	23,25.59,177
2	17-1-2001	February 2000 to August 2000	5,21.35,821
3	11-9-2001	September 2000 to October 2000	85,15,995
4	7-12-2001	November 2000 to March 2001	2,55,66,530
5	3-5-2002	April 2001 to November 2001	5,88,39,727
TOTAL			37,76,17,250

 

1.2 During the period covered by first show cause notice i.e., December, 1997 to January, 2000, about 61% of the LAB production was stock transferred from Alindra plant to other plants located at Trikampura, Pithampur, Chhatral and Kanpur. About 27.5% of the production was sold to M/s. Kisan Industries (for short, KI), a division of Kisan Discretionary Family Trust (for short, KDFT). About 2.5% of the production was sold to IPCL. About 2% of the production was captively consumed at Alindra plant in the manufacture of detergent powder and cakes. About 0.5% of the production was sold to other independent buyers such as Pioneer Detergents (for short, PD) and Chemicals & Solvents India (for short, C&SI). Balance 6.5% of the production was exported is the portion submitted by the appellant.

1.3 LAB manufactured at Alindra was transferred to other factories on payment of duty on the price at which LAB was being sold to KI & others. Accordingly the assessable value of LAB per MT on which excise duty was paid by the appellants during the period December, 1997 to January, 2000 was as :

Period	Rs.
December 1997 to March 1999	37,700
April 1999 to December 1999	45,000
January 2000	46.500

 

1.4.1. The first notice dt 25-2-2000 (hereinafter referred to as main notice) is on grounds alleged as under :

(a)        KI is not an independent buyer. Other buyers such as PD and C&SI are also not independent buyers. Therefore, assessable value under Section 4(1)(a) is not available and hence Section 4(1)(b) would be applicable.

(b)        Prices of R1L/IPCL/TNPL, competitor manufactures of LAB, is not relevant since Rule 6(b)(i) of the Valuation Rules, 1975 is not applicable. The age of the plant, cost of the raw materials, depreciation, overheads, selling and marketing expenses, sales tax/income tax exemption etc. pertaining to RIL. IPCL and TNPL are different when compared with the appellants Alindra plant. It is difficult to make adjustments for these factors. Therefore assessable value cannot be calculated under Rule 6(b)(i). Hence, Rule 6(b)(ii) alone would be applicable.

(c)        Correct catalyst cost, interest and profit margin have to be added to the cost of production already computed by the appellants to arrive at the correct assessable value under Rule 6(b)(ii).

1.4.2. Accordingly, value under Rule 6(b)(ii) was worked out for the year 1997-98 and 1998-99. The value so computed for the year 1998-99 was adopted as the value for the year 1999-2000 (up to January, 2000). On such a basis, differential duty has been demanded for the period December, 1997 to January, 2000, for all the clearances made by the appellants including sales made to KI and two other buyers on the values as :

for the Period	Rs.
December, 1997 to March, 1998	51,755
April, 1998 to January, 2000	51,799

 

1.5 The other four notices are as :

Period	Valuation based on which LAB was stock transferred to other factories	Basis of demand by the notices
February 2000 to August 2000	Pre July 2000 :   Price at which LAB was being sold to KI. Post July 2000 : 115% of cost of production in terms of Rule 8 of Valuation Rules, 2000 reproduced below : "Where the excisable goods are not sold by the assessee but are used for consumption by him or on his behalf in the production or manufacture of other articles, the value shall be one hundred and fifteen percent of the cost of production or manufacture of such goods."	Cost of production for the year 1999-2000 as calculated by the show cause notice dated 25-2-2000 plus profit margin of 22.38% (profit margin for the company as a whole for the financial year 1999-2000).
September 2000 & October 2000	The appellants discharged duty on LAB on assessable value equal to ₹ 48,000 per MT being the last sale price of LAB to KI.	115% of Cost of production as submitted by the appellants except for the interest element. This show cause notice adopted the interest element from the show cause notice dated 25-2-2000.
November 2000 to March 2001	The appellants discharged duty on LAB on assessable value equal to ₹ 48,000 per MT being the last sale price of LAB to KI.	Rule 8 of the Valuation Rules, 2000 is not applicable for captive consumption and therefore value has to be determined under Rule 4 read with Rule 11 of the Valuation Rules, 2000. Since the appellants had sold LAB to IPCL at ₹ 54,250 per MT, this value should be the assessable value for LAB captively consumed.
April 2001 to November 2001	115% of cost of production in terms of Rule 8 of Valuation Rules, 2000.	Rule 8 of the Valuation Rules, 2000 is not applicable for captive consumption and therefore value has to be determined under Rule 4 read with Rule 11 of the Valuation Rules, 2000. Since the appellants had sold LAB at die maximum assessable value of ₹ 54,350 per MT, this value should be the assessable value for LAB captively consumed.

 

1.6 All these notices were broadly contested on :

(a)        Reasons given in show cause notice to treat KI (i.e., KDFT) as not an independent buyer were incorrect.

(b)        KDFT is an independent entity having its own investments in plant & machinery, workers, finance arrangements, know-how etc. Therefore, KI (i.e. KDFT) is an independent buyer.

(c)        Similarly, PD and C&SI are also independent buyers.

(d)        In K.T. Doctor v. CIT - 1980 (124) ITR 501 (Guj), the Gujarat High Court has already held that doctrine of lifting of corporate veil cannot apply to trust. Hence, veil of KDFT cannot be lifted.

(e)        Landed cost of LAB manufactured by any of the three manufacturers, namely, RIL/IPCL/TNPL to any one customer including Nirma is always the same. Hence, age of the plant, depreciation of the plant, etc. and other similar reasons given in the show cause notice do not influence the price of comparable goods, namely, LAB manufactured by RIL/IPCL/TNPL. Hence, Rule 6(b)(i) is very much applicable.

(f)         If reasons given in the show cause notice to ignore the price of the comparable goods are accepted, then Rule 6(b)(i) would be rendered redundant and otiose.

(g)        If the price of comparable goods under Rule 6(b)(i) is taken as the basis and adjustment for difference in quantity level is given, no demand survives.

(h)        Cost of production has been erroneously computed in the show cause notice and following changes, among others, are needed:

(i)         while computing the cost of catalyst consumed for producing LAB, gross purchase cost should itself not be taken. Gross purchase cost of catalyst should be reduced by realizable value on sale of spent catalyst,

(ii)        Depreciation on catalyst should be excluded from the total depreciation furnished by the company to avoid double counting of cost of catalyst.

(iii)       Interest included in the cost of production of LAB by the show cause notice is exaggerated and excessive and in fact exceeds total interest of the company as a whole itself.

(iv)       Total interest expenditure of the company as per audited profit and loss account as a whole should be reduced by interest income as per said audited profit and loss account. Net interest expenditure alone should be allocated on gross block basis, a method suggested in the show cause notice itself.

(v)        Interest, per se, is not includible in the cost of production, as per Circular dated 13-2-2003 read with CAS-4.

(vi)       Profit margin of LAB has taken by show cause notice based overall profit of the company as a whole which relates to diverse final products like soap, detergents, soda ash, HAB, etc. and is hence irrelevant for computing profit of LAB. Profit margin @ 10% is reasonable for valuation of industrial intermediate like LAB.

(vii)      If above adjustments are done to cost of production as calculated by the show cause notice, then no demand practically survives.

(i)         Since, much more duty has already been paid through PLA by the recipient factories, no demand can lie under Section 11A.

(j)         Since Modvat credit is available to the appellants own factories, proviso to Section 11A is inapplicable and hence entire demand is time-barred.

(k)        Reference to seized documents indicating higher cost of production is irrelevant since even show cause notice has not computed cost of production on the basis of these seized documents.

1.7.1. The Commissioner, vide the order impugned, after arriving at a finding that Section 4(1)(a) will not apply in this case and also that sales to KI were not to be treated as sale to an independent buyer and that KI would be more appropriate to be called a 'Related Person', and thereafter distinguishing the judgments cited before him, & relying on decision of M/s. Calcutta Chromotype Ltd. v. CC, Calcutta - 1998 (99) E.L.T. 202 (S.C.) concluded KI as a facade of Patel family & they supplying the packaging material being manufactured by them and finding that LAB sales make to subsidiaries benefited the appellants as they could purchase detergent back from them, rejected the pleas made & concluded the under-valuation. Confirmed the demands as made in the main notice.

1.7.2. Thereafter for the four other notices it was found that application of the Board costing formula communicated vide Order No. 692/8/2003-C.X., dt. 13-2-2003 would be called for, read with F.No. 258/92/96-C.X., dt. 30-10-1996 and confirmed the duties as demanded in these periodic notices.

1.7.3. Penalties on appellant assessee, Executive-Directors, General Managers were arrived.

1.7.4. Hence this appeals.

2.1.1. After hearing both sides and considering the contentions raised by them & as detailed in the memo of appeal, it is found :-

(a)       On the cost of production calculated by the show cause notice is wrong and inflated due to incorrect (a) catalyst cost, (b) interest and (c) profit margin.

(i)         The notice dated 25-2-2000 calculates the cost of production of LAB by relying on the cost of production given by the appellants to the investigators i.e. DGAE. The show cause notice accepts all other elements of cost and disputes only following three elements of costs while calculating the cost of production of LAB :

(a)        Catalyst;

(b)        Interest; and

(c)        Profit margin

As regards Catalyst : It is on record that the appellants had imported catalysts under the EPCG Scheme. The appellants accounted the catalysts as fixed asset in their books and provided the statutory rate of depreciation under the Companies Act, 1956. While computing the cost of production of LAB on per MT basis, the appellants amortised the cost of catalyst over its estimated useful life on an ad hoc basis for the purpose of making management decisions is the submissions of the ld. Advocate for the appellants while Revenue, vide notice dated 25-2-2000, included an estimated cost of catalyst while calculating the cost of production of LAB.

(i)         The first charge of a catalyst is in the form of permanent investment and to be treated as fixed asset. Since first charge of catalyst is in the nature of fixed asset, the appellants charge depreciation on it, at the rates prescribed under Companies Act, 1956. This accounting policy cannot be found fault with as it is in line with generally accepted accounting principles. The statutory auditors have also not objected for such an accounting treatment. Alternatively, if the appellants, as per the following submissions, have dealt with amortisation of catalyst by including the cost of catalyst in the cost of production of LAB by :

(a)        The depreciation figure which includes depreciation on catalyst has to be reduced to avoid duplication of cost.

(b)        The amortised cost of catalyst should be reduced by the realized value of the catalyst. In other words, only the net cost of catalyst should be amortised and not the gross cost of catalyst.

(c)        The actual foreign exchange ratio and actual consumption should be taken into consideration.

These submissions at (a), (b) and (c) above are further explained as depreciation provided on such catalyst have been included by the appellants in the total depreciation calculated for the plant as a whole. In the calculation done by the department, the total depreciation has been included in the cost of production of LAB. The show cause notice, therefore, would duplicate the cost of catalyst by separately including the amortised cost of catalyst in the cost of production of LAB while total depreciation would include depreciation of catalyst also. Hence, depreciation on catalyst would need to be excluded from the total depreciation calculated for the plant as a whole. Depreciation on catalyst is as follows :

Year	Depreciation on catalyst included in total depreciation (in Rs.)	Production of LAB (in MT)	Pro rata depreciation on catalyst (Rs./MT)
(1)	(2)	(3)	(4) = (2)/(3)
1997-1998	51,60,164.15	12,815	402.67
1998-1999	3,21,81,139.00	58,931	546.08
1999-2000			546.08

 

 (ii)       The department has issued another show cause notice No. DGCEI/WZU/205/30-149/01, dated 29-10-2001, where it has been alleged that the appellants have sold the precious metal recovered from the spent catalyst. This show cause notice has been adjudicated and appeal filed against the Order-in-Original has been allowed by this Tribunal. The realization of ₹ 500.14 lacs from the sale of precious metal recovered from the spent catalyst and the balance spent catalyst remaining unsold as on date is submitted would fetch further ₹ 81.39 lacs. Therefore, total realisation from sale of precious metal recovered from spent catalyst covered by the present show cause notice, would be ₹ 500.14 lacs + ₹ 81.39 lacs = ₹ 581.53 lacs. Since they had purchased catalyst for the first time in the month of July, 1997. The next purchase of catalyst was only in the month of November, 2000, which is subsequent to the period covered by the present show cause notice. Hence, the above realisation figures would be entirely against the catalyst which have been used for the period in the question. The appellants submit that while computing the cost of catalyst one has to reduce the amount realized from the sale of precious metal recovered from spent catalyst and thereafter such reduced/net cost of catalyst only should be amortized over the life of the catalyst and included in the cost of production of LAB. Total catalyst cost is ₹ 3400 lacs and the realization against this amounts to ₹ 581.53 lacs. Therefore, realisation is 17.10% of the total cost. Therefore, the cost of catalyst worked out on per MT basis in the show cause notice should be reduced by 17.10% to arrive at correct cost of catalyst. Therefore, Column (4) of the table below should be reduced from the cost of production of LAB :

 

Year	Catalyst cost as per show cause notice (in Rs./MT)	Percantage of realization	Value realized by sale of precious metal recovered from spent catalyst (Rs./MT)
(1)	(2)	(3)	(4)=(2)*(3)
1997-1998	1948	17.10%	333.18
1998-1999	2136	17.10%	365.34
1999-2000			365.34

 

(iii)       We would agree with these submissions as they are supported by CAS-4, whose relevant paras reproduced below :

"4.1 Cost of Production : Cost of production shall consist of Material Consumed, Direct Wages and Salaries, Direct Expenses, Works Overheads, Quality Control cost. Research and Development Cost, Packing cost, Administrative Overheads relating to production.

To arrive at cost of production of goods dispatched for captive consumption, adjustment for Stock of work-in-Process, finished goods, recoveries for sales of scrap, wastage etc shall be made."

"5.12 Treatment of Scrap and Waste

The production process may generate scrap or waste. Realized or realizable value of scrap or waste shall be credited to the cost of production."

The worksheet annexed at the end of CAS-4 reduces, in Sr. No. 12, cost of production by "Credit for Recoveries/Scrap/By-Products/ Misc income".

The appellants also relied upon solutions to costing problems provided in a book by Mr. Bhar to support the above view. We find nothing contrary to rebut the same.

(iv)       The show cause notice has relied upon cost sheets referred to in the statements of Mr. Gunasekhar and Mr. Joshipura, for arriving at the catalyst cost. It is submitted that both the cost sheets were made on ad hoc basis and were based on provisional figures. These sheets referred to in Mr. Joshipura's statement, were said to be prepared based on the assumption that the foreign exchange rate on the date of import would be 1 US $ = ₹ 42.50. However, the actual foreign exchange rate at the time of import was much lower at ₹ 36.01 and ₹ 35.95. Actual cost of Pacol catalyst and Detal catalyst are worked out as under :

           

Pacol Catalyst
						Qty. in Kgs.		CIF as per B/E (Rs.)	Rate per Kg (Rs.)
				1		2		3	4=(3/2)
			1	DEH-7		8220		40304257.42	4903.19
			2	DEH-7		9180		43885090.71	4780.51
				Total		17400		84189348.13	4838.47
Detal Catalyst
					Qty. in Kgs.		CIF as per B/E		Rate per Kg (Rs.)
		1			2		3		4=(3/2)
1		DA-11			97278.9 (214500 lbs converted in Kgs)		204985727.99		2107.20

 

Further, these sheets also assumed consumption ratio of 0.13 Kg of Pacol catalyst and 0.2590 Kg of Detal catalyst for manufacturing 1 MT of LAB. However, actual figures now available show that the consumption ratio considered in the cost sheet is on the higher side. The actual consumption ratio is 0.0623 Kg of Pacol catalyst and 0.1845 Kg of Detal catalyst for manufacturing 1MT of LAB.

Based on above, the revised and actual cost of catalyst is worked out as under :

	Cost per Kg (Rs.)	Consumption ratio as per Affidavit	Cost of Catalyst (Rs.)	As per SCN (Rs.)	Excess cost (Rs)
1	2	3	4=2*3	5	6=5-4
Pacol catalyst	4838.47	0.0623	301.44	846.91	545.47
Detal catalyst	2107.20	0.1845	388.78	1033.81	645.03
		Total	690.22	1880.72	1190.50

 

(vi)      The impugned Order-in-Original has rejected the submissions made in para on following grounds :

(i)         Shri Joshipura and Shri Kalpesh Patel are responsible persons of the appellants and therefore the department had no reason to believe that the cost supplied by them are not correct.

(ii)        Any manufacturer would definitely know the cost so that he can determine the selling price of their product. We find no reason to uphold these findings in the impugned order. Shri Joshipura and Shri Kalpesh Patel are no doubt responsible employees of the appellants-company, but that will not lead the department seeking to reassess the goods, to ignore crucial points based on principles of Casting for (sic) assessment of goods. The department while reassessing the goods cannot accept computation of cost, at any period of time, as a truth and demand duty. All relevant factors have to be taken into account while reassessing the goods. The department cannot simply ignore material contentions.

(vii)      We find, the impugned Order-in-Original has taken a too narrow view of the concept of cost. Costs are prepared under various basis at various points of time for various purposes. Valuation under Central Excise law is concerned with actual costs and not estimated costs. The employees of the appellant had submitted costs of catalyst, which was estimated by them at an earlier point of time based on certain assumptions. Such estimated cost will not be available for calculating cost of production under Rule 6(b)(ii). Hence the correct cost of catalyst which has been ignored by the impugned Order-in-Original now submitted and as per CAS-4 has to be reckoned. In view of the above, the contentions arrived in the impugned Order-in-Original are baseless. The impugned Order-in-Original has not otherwise rebutted the above calculations, they have to be reckoned.

(b)        On interest case and method adopted by the department in the show cause notice dated 25-2-2000.

(i)         It is submitted that the divisional Balance Sheet prepared for LAB division showed that credit balance in favour of head office as ₹ 340.27 crores on 31-1-1998, ₹ 381.05 crores on 31-3-1998 and ₹ 382.42 crores on 31-3-1999. Thus, on 31-1-1998, in the books of LAB division, Head Office was shown as a creditor for ₹ 340.27 crores being total capital cost of the LAB plant. As per statutory accounting principles, interest incurred up to the date of commencement of commercial production forms part of the capital cost of the LAB project. Accordingly, credit balance was calculated on daily basis and prevailing rate of interest was applied and an interest amount was calculated as ₹ 26.40 crores. Out of the total interest expenditure of ₹ 42.62 crores incurred for the company as a whole for the year 1997-98, ₹ 26.40 crores was considered as interest to LAB project up to commencement of commercial production. Hence, the total capital cost of LAB project is ₹ 340.27 crores + ₹ 26.40 crores = ₹ 366.67 crores. This interest of ₹ 26.40 crores was deducted from total interest of the year 1997-98 of ₹ 42.62 crores for the company as a whole. In the books of LAB division, credit balance in favour of Head Office was shown as ₹ 340.27 crores as on 31-1-98. Therefore, out of ₹ 381.05 crores and ₹ 382.42 crores shown as payable by LAB division to other divisions as on 31-3-1998 and 31-3-1999 respectively, ₹ 366.67 crores is towards for the capital cost of LAB plant.

(ii)        The method adopted by the show cause notice dated 25-2-2000 to calculate interest for the year 1998-99 is demonstrated :

		Rs.
(1)	Amount owed by LAB division to Head Office on 1-4-1998	3,81,04,65,256
(2)	Amount owed by LAB division to Head Office on 31-3-1999	3,82,42,60,439
(3)=[(1)+(2)1/2	Average of the above two figures	3,81,73,62,847
(4)	Interest @ 14.79% for the year 1998-99 on (3) above.	56,45,87,987
(5)	Clearance of LAB for the year 1998-99 = 58,995.253 MT
(6)=(4)/(5)	Interest cost per MT of LAB	9,570

 

This basis has been adopted for the period December, 1997 to March, 1998 and year 1999-2000.

(iii)       Interest per se is not includible in the cost of production, as per CAS-4 as interest expenditure is purely a finance cost. It has got nothing to do with manufacture of goods. Therefore, it is not includible in the cost of production. This principle is shown to be recognised by the Central Government. The Cost Audit (Report) Rules, 1996 issued under Section 233 of the Companies Act, 1956 require the cost audit information to be given in a particular 'form'. The 'form' is prescribed under Rule 4 read with Rule 2(c) of the Cost Audit (Record) Rules, 1996 for a particular industry. The cost audit reports are statutorily required to be submitted in the form prescribed to Central Government. In the forms so prescribed, cost of production does not include interest expenditure. In fact, interest charges appears after cost of production without any exception whatsoever. The Institute of Chartered Accountants of India has issued Accounting Standard-2 (AS-2, for short) for the purpose of valuation of inventory. The AS-2 is mandatory in nature and it is to be compulsorily followed by those governed by it. This is in turn based on International Accounting Standards prescribed by an International Body. Paras 5, 6 and 12 of AS-2 is extracted below :

            "MEASUREMENT OF INVENTORIES

            5.         Inventories should be valued at the lower of cost and net realisable value."

            "COST OF INVENTORIES

            6.         The cost of inventories should comprise of all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition."

            "12.      Interest and other borrowing costs are usually considered as not relating to bringing the inventories to the present location and condition and are, therefore, usually not included in the cost of inventories."

            These submission as made have been reiterated and confirmed by CBEC circular dated 13-2-2003 read with Cost Accounting Standard 4 (CAS-4. for short) issued by ICWAI relating to valuation of goods captively consumed. Para 3 of the circular dated 13-2-2003 clarifies that cost of production of goods captively consumed will henceforth be done strictly in accordance with CAS-4. Relevant para of CAS-4 is extracted below :

            "5.16    Interest and financial charges

            Interest and financial charges being a financial charge shall not be considered to be a part of cost of production"

These Circular dated 13-2-2003 clarified that cost of production shall henceforth be done strictly in accordance with CAS-4. This Circular is clarificatory in nature and hence retrospective in the sense that all pending proceedings shall also be covered by it. This Tribunal in National Aluminium Co. Ltd. v. CCE - Final Order Nos. 312-327/2005 - NB (A), dated 4-3-2005 [2005 (184) E.L.T. 183 (T)] held that Circular dated 13-2-2003 will apply for all pending proceedings. In view of the above, the contention of the impugned Order-in-Original that Circular dated 13-2-2003 is not applicable for past period is incorrect and liable to be rejected. The Tribunal in ITC Ltd. v. CCE - 2004 (175) E.L.T. 860 (T) has held that interest per se is not includible in the cost of production. Therefore we find no ground to uphold the interest costs.

(c)        Amount of interest calculated in the show cause notice for LAB division alone far exceeds the total interest incurred for the company as a whole. This shows that interest as calculated by show cause notice is ex facie incorrect. It is found that show cause notice dated 25-2-2000 has included a very exaggerated and notional figure as interest attributable to LAB alone. Interest expenditure calculated by show cause notice for LAB division for the year 1998-99 amounts to ₹ 56.45 crores (see page 53 of the show cause notice). On the other hand, interest expenditure for the company as a whole for the year 1998-99 amounts to ₹ 30.43 crores only (refer page 37, schedule 17 of the Annual report for 1998-99 enclosed as Annexure-41 to the appeal memo). This absurdity has resulted because the entire method adopted in the show cause notice for calculating interest is incorrect & therefore cannot be upheld.

Since the cost and interest taken for the year 1999-2000 (up to January, 2000) in the show cause notice is the same as that of year 1998-99, the submission made above equally applies for the year 1999-2000 also. The above position equally applies for the period December, 1997 to March, 1998 also.

(d)        Interest per MT as per show cause notice is ₹ 6,943/- quantity for which cleared is raised to 18,163.470 per MT. This works out interest for LAB plant for four months itself is ₹ 12.61 crores, while interest for the company as a whole for the whole year itself is only ₹ 8.37 crores as per page 41, Schedule 17 of the audited profit and loss account. This exhibits the absurdity of the calculations basis.

(e)        On the plea that interest computed by show cause notice is purely a notional figure - under Section 4, no such notional addition is possible. It is to be found that the inter-divisional balance is in the nature of contra entries. When these inter-divisional balances are merged, the contra entries cancel each other. In other words, amount owed by LAB division to other divisions of the company does not mean that the amount is owed by the Company as a whole. The finance needed for setting up LAB plant was given by Head Office. This can be and is out of past reserves/internal accruals/equity capital. There is no material at all in the show cause notice that any interest cost was actually incurred by the company. Revenue cannot take notional interest figure in calculating the cost of production of LAB. The Supreme Court has held in following judgments that there is no place for notional addition in Section 4 of the Central Excise Act, 1944.

(a)        Hindustan Polymers v. CCE - 1989 (43) E.L.T. 165 (S.C.)

(b)        HBL Aircrafts Batteries v. CCE - 2004 (167) E.L.T. 483 (S.C.)

(c)        Union Carbide v. CCE - 2003 (158) E.L.T. 15 (S.C.).

            It is found that submissions made with respect to interest have not at all been considered by the impugned Order-in-Original. Hence the order is liable to be set aside in its entirety.

(f)         On Profit the show cause notice dated 25-2-2000 has calculated profit margin of 19.8% for the year 1997-98 and 17.95% for the year 1998-99 and 1999-2000 based on figures pertaining for the company as a whole taken for additional profit and loss account of the company.

(i)         The appellants submit that the LAB is an intermediate product whereas the profit margin of 19.8% for the year 1997-98 and 17.95% for the years 1998-99 and 1999-2000 relate to the company as a whole which sells diverse final products such as detergent powder, detergent cakes, toilet soap, AOS, Acid Slurry, soda ash etc. Therefore, the profit margin adopted by the department cannot be applied to the intermediate goods such as LAB as an industrial chemical and a commodity. It is bought and sold in bulk. Its chemical composition is well defined and its standards are fixed. Whereas, on the other hand, detergent powder and cakes are branded products sold in retail to the ultimate consumer. Therefore, adopting profit margin of branded consumer product like detergents as the profit margin of an industrial chemical like LAB is illogical.

(ii)        It is found that the Larger Bench of Tribunal in Raymonds Ltd. v. CCE - 2001 (129) E.L.T. 327 (T-LB) held that profit or loss made by the manufacturer from other activities are of no relevance while determining the assessable value for captively consumed goods. In other words, the Larger Bench has held that profit margin of 19.8% for the year 1997-98 and 17.95% for the years 1998-99 and 1999-2000 is incorrect. The department itself in catena of cases has taken 10% as a reasonable profit margin for the intermediate goods and which was upheld by the Tribunal/High Court as well :

Therefore, the appellants submission of profit margin of 10% is reasonable in the circumstances. In fact, the burden is on the department to first establish that LAB division is a profit making operation/unit. Without establishing this, no profit margin at all can be added by the department.

(iii)       Submissions made by the appellant, with respect to profit margin have not at all been considered by the impugned Order-in-Original. In view of the above it is liable to be set aside in its entirety.

2.1.2 It is submitted that revised cost of production if arrived as per the above working -

	1997-1998	1998-1999	1999-2000
	(Rs./MT)	(Rs./MT)	(Rs./MT)
Cost of production as per show cause notice  (1)	51755.00	51799.00	51799.00
Less: Profit Margin (2)	8554.00	7883.00	7883.00
Less: Interest (3)	6943.00	9570.00	9570.00
(4) = (1)-(2)-(3)	36258.00	34346.00	34346.00
(-) Depreciation cost not includible (5)	402.67	546.08	546.08
(-) Catalyst cost not includible (6)	333.18	365.34	365.34
(-) Catalyst cost not includible (7)	1190.50	1190.50	1190.50
(+) Interest expenditure (8)	0.00	623.38	623.38
(9) = (4)-(5)-(6)-(7)+ (8)	35522.15	34057.96	34057.96
(+) Profit Margin @ 10% (10)	3552.22	3405.80	3405.80
Cost of production as per submissions (11) = (9) + (10)	37764.81	36154.20	36154.20
Value at which duty has been paid (12)	37700.00	37700.00	45000.00 (up to December 1999)
			46500.00 (From January 2000)

 

Which would shows that the revised cost of production for the year 1997-98 is merely 0.17% higher than the value at which LAB was transferred by the LAB division. For the year 1998-99 and 1999-2000, the cost of production is less than the value at which LAB has been transferred. In fact, for the year 1998-99 and 1999-2000, the appellants have paid duty at higher assessable value. All these figures as quoted above, were presented before the Commissioner also. The Commissioner has not rebutted them at all. Hence the figures require no verification. The impugned Order-in-Original is liable to be set aside on the grounds of non-consideration of relevant submissions made in defence by the noticee.

2.2.1. As the LAB recipient factories had paid much more duty in PLA than now being demanded by the show cause notice dated 25-2-2000. In such situations, there cannot be any intention to evade payment of duty, more so when it is considered to be a related person or same person sales by Revenue. Ingredients of proviso to Section 11A therefore can not be attracted. Hence demand beyond one year period of limitation is barred.

2.2.2. The cost of production submitted to the department on 25-9-1998 showed operating cost of LAB as ₹ 33,990.95 (vide Para 7.2 of the show cause notice). It was specifically mentioned that the cost is operating cost and not cost of production. The break-up of cost of production was given headwise. None of expenditure included in this cost sheet is found to be incorrect by the show cause notice. In fact, they compare favourably with corresponding figures given in the show cause notice. A look at the cost sheet would have made it abundantly clear that interest expenditure, depreciation and profit margin were not included. The Range obviously noted the same but found nothing incorrect in it. If DGAE has different understanding of cost of production, that cannot be a ground for invoking proviso to Section 11A against the appellants.

2.2.3. The appellants had also filed price declaration in terms of Rule 173C wherein it was stated that sale price to Kissan Industries is being adopted as the basis for valuing LAB stock transferred.

2.2.4. In view of the above, there appears to be a change in the basis of assessment by the department. Hence invoking larger period is incorrectly invoked a change of basis of assessment cannot be a reason to invoke the proviso to Section 11A(1).

2.3 W.e.f. 1-7-2000, the concept of transaction value under Section 4 of the Central Excise Act, 1944 and Valuation Rules, 2000 were introduced. As per Section 4, Transaction Value is to be ascertained for each removal. Rule 8 of these Valuation Rules, 2000, is reproduced below :

"Where the excisable goods are not sold by the assessee but are used for consumption by him or on his behalf in the production or manufacture of other articles, the value shall be one hundred and fifteen percent of the cost of production or manufacture of such goods."

As per CBEC Circular dated 1-7-2002, goods cleared to sister unit or other unit of the same company, valuation has to be done as per proviso to Rule 9 of the Valuation Rules, 2000. Rule 9 is extracted below :

"When the assessee so arranges that the excisable goods are not sold by an assessee except to or through a person who is related in the manner specified in either of sub-clauses (ii), (iii) or (iv) of Clause (b) of sub-section (3) of Section 4 of the Act, the value of the goods shall be normal transaction value at which such goods are sold by the related person at the time of removal, to buyers (not being related person); or where such goods are not sold to buyers, to buyers (being related person), who sells such goods in retail :

Provided that in a case where the related person does not sell the goods, but uses or consumes such goods in the production or manufacture of articles, the value shall be determined in the manner specified in Rule 8."

In view of the above, LAB cleared to other factories of the appellants should be valued as provided under Rule 8 i.e., 115% of the cost of production of LAB. The appellants had repeatedly submitted to the Excise Department that 115% of cost of production amounts to ₹ 39,150/- per MT being the value on which LAB was cleared to other factories of the appellants. The impugned Order-in-Original holding to the contrary is liable to be set aside on this ground.

2.4.1. For the last two notices, the Commissioner has applied Rule 4 read with Rule 11 of the Valuation Rules, 2000. This stand is directly contrary to the stand taken for the earlier notices. Demands for the period November, 2000 to November, 2001 has been confirmed under Rule 4 read with Rule 11 of the Valuation Rules, 2000. It is submitted that even of the case of the department is assumed to be correct that KI is related person, still clearances of LAB to KI and other factories of the appellants is to be governed by Rule 8 and Rule 9 of the Valuation Rules, 2000. Rule 8 and Rule 9 are more specific provisions relating to valuation of LAB captively consumed, then Rule 4 read with Rule 11. It is settled law where specific provisions are made, general provisions are excluded. Besides, CBEC Circular dated 1-7-2002 makes it amply clear that clearances to KI and other factories should be done under Rule 8 i.e., 115% of cost of production. The impugned Order-in-Original which has failed to consider this legal position therefore the entire basis of the demand determined is unsustainable. The impugned Order-in-Original does not give any reasons as to why Rule 8 and Rule 9 as also CBEC circular dated 1-7-2002 are not applicable.

2.4.2. In fact, the show cause notice dated 11-9-2001 by demanding differential duty under Rule 8 and Rule 9 has impliedly confirmed that Rule 8 read with Rule 9 alone is applicable for clearances of LAB to KI and other factories of the appellants. The impugned Order-in-Original has also confirmed demand of differential duty raised by show cause notice dated 11-9-2001. In other words, on one hand the impugned Order-in-Original has demanded differential duty under Rule 8 and Rule 9 for the period September, 2000 to October, 2000 and on other hand for subsequent period, the impugned Order-in-Original held that Rule 8 and Rule 9 is not applicable. Revenue cannot be allowed shifting stands.

2.4.3. In view of the above, the impugned demands vide Orders-in- Original is liable to be set aside in its entirety.

2.5 In view of above, no penalty and interest is called for and the same is to be set aside.

3.1.1 The appeals are therefore to be allowed by ordering remand for redetermination of demands only on four show cause notice dated 17-1-2001, 11-9-2001, 7-12-2001, 3-5-2002 as per Valuation Rule 8 of the Valuation Rules, 2000 keeping the findings hereinabove in mind.

3.1.2 The main Show Cause Notice, which is found to be barred by limitation and proceedings initiated thereunder and penalties and other liabilities arrived are to be set aside. Appeal of Directors and Executives allowed in full along with assessee's appeal in this case.

3.1.3 Appeal disposed of accordingly.

(Pronounced in Court on 25-8-2005)