2017 (3) TMI 606 - AT - Central Excise

Valuation - whether in the valuation of such goods on basis of CAS-4 certificate, bonus/gratuity needs to be included while determining the value or not? - Held that - in terms of CAS-4 royalty of the nature of the technical knowhow is includible in the assessable value, but royalty in the nature of brand or IPR value is not includible - consideration paid in the agreement though termed as royalty, is actually Technical knowhow fee. The same is charged on the sale price of the final product. It actually is consideration for technical knowhow. Thus in terms of CAS-1 as well as CAS-4 same is includible in the assessable value. There are some product which do not qualify as product in terms of the agreement, whether the addition if any of this royalty can be made in respect of product defined under agreement? - Held that - Chips manufactured by the appellant are not covered by the definition of the product and thus royalty paid, if any, cannot be added for the purpose of arriving at assessable value of the chips in terms of CAS-4. The royalty charges paid in respect of technical knowhow would be includible in the cost, irrespective of the fact that the same are paid at the time of sale. The measure of the royalty on the basis of sale price is just a convenient mechanism to measure the royalty payable on account of transfer of technical knowhow. Penalty u/s 11 AC - Held that - CAS 1 which was relevant for the said period clearly prescribed that royalty is paid in respect of technical know how is includible in the assessable value. I find that in the identical circumstances in case of Otis Elevator Co(I) Ltd(supra), 2012 (11) TMI 358 - CESTAT, MUMBAI , the Tribunal has upheld the penalty u/s 11AC. The appeal is partly allowed to the extent that revision of assessable value by inclusion of royalty in respect of product not covered by agreement is set aside - The matter is remitted to the Original adjudicating authority for re-quantification of the demand separately in each appeal - appeal allowed by way of remand.

Summary

Issues Involved:
1. Inclusion of bonus and gratuity in the valuation of goods as per CAS-4.
2. Imposition of penalty under Section 11AC.
3. Inclusion of royalty in the valuation of goods as per CAS-4.
4. Differentiation of royalty types and their inclusion in the assessable value.
5. Applicability of revenue neutrality.
6. Penalty under Rule 25.

Issue-wise Detailed Analysis:

1. Inclusion of Bonus and Gratuity in Valuation:
The primary issue in Appeal No. E/1450/06 was whether bonus and gratuity should be included in the valuation of goods transferred between the appellant's plants based on CAS-4 certification. The lower authorities confirmed the demand for the period from July 2000 to March 2002 and imposed a penalty under Section 11AC. The appellant did not contest the inclusion of bonus and gratuity but challenged the penalty, arguing that CAS-4 was introduced in 2003 and they paid the differential duty with interest immediately after its introduction. They believed, in good faith, that bonus and gratuity were not to be included in the valuation prior to CAS-4.

2. Imposition of Penalty under Section 11AC:
The Tribunal referenced the Hon'ble Apex Court's decision in Commissioner of C. Ex., Ahmedabad Versus Asarwa Mills, which clarified that for the period before October 1996, the inclusion of costs like bonus and gratuity in the valuation was not explicitly required. Therefore, the Tribunal set aside the demand beyond the normal period of limitation and the penalty under Section 11AC, partially allowing the appeal.

3. Inclusion of Royalty in Valuation:
In Appeals No. E/1513/06 and E/1611/06, the issue was whether royalty should be included in the valuation as per CAS-4. The adjudicating authority confirmed the demand and imposed penalties for the period from July 2000 to March 2002. For the period from April 2002 to March 2003, the demand was confirmed with interest, but no penalty was imposed under Rule 26. The appellant argued that royalty charges should not be included in the assessable value computed under CAS-4, relying on the Tribunal's decision in Glaxo Smithkline Cons. Healthcare Ltd.

4. Differentiation of Royalty Types:
The Tribunal examined CAS-1 and CAS-4 guidelines, which differentiate between royalties related to product technical know-how and those related to brand or IPR value. The agreement between the appellant and AIF indicated that the royalty was for technical know-how, although calculated on the sale price. The Tribunal concluded that such royalties should be included in the assessable value under CAS-4, except for products not covered by the agreement, such as chips.

5. Applicability of Revenue Neutrality:
The appellant cited the Glaxo Smithkline Cons. Healthcare Ltd. decision, arguing revenue neutrality. However, the Tribunal noted that revenue neutrality is a factual determination and cannot be assumed without evidence. The appellant needed to establish that 100% of the recipient plant's products were cleared on payment of duty with available Cenvat credit. Thus, the Tribunal did not apply the Glaxo Smithkline decision to this case.

6. Penalty under Rule 25:
For Appeal No. E/1611/06, the appellant argued against the penalty under Rule 25, claiming no intention to evade duty and a bona fide belief that royalty was not includible in the cost. The Tribunal found that CAS-1 clearly prescribed the inclusion of royalties for technical know-how in the assessable value. The Tribunal upheld the penalty under Section 11AC, referencing the Otis Elevator Co(I) Ltd decision, where the extended period was invoked, and penalties were imposed due to non-disclosure of royalty payments to the department.

Conclusion:
The Tribunal partially allowed the appeals, setting aside the inclusion of royalty for products not covered by the agreement and remitting the matter to the original adjudicating authority for re-quantification of the demand. Penalties were to be revised accordingly after re-quantification. The appeals were disposed of in these terms.