2005 (8) TMI 337 - AT - Central Excise

Validity Of Show cause notice issued - Valuation (Central Excise) of Linear Alkyl Benzene (LAB) - Captively consumed goods - manufacture of detergent powder and detergent cake - demand duty - penalty and interest - non-consideration of relevant submissions made in defence by the notice - HELD THAT - 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. The cost of production submitted to the department on 25-9-1998 showed operating cost of LAB as Rs. 33,990.95. 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. Thus, 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). 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. 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. Revenue cannot be allowed shifting stands. Thus, the impugned demands vide Orders-in- Original is liable to be set aside in its entirety. Hence, no penalty and interest is called for and the same is to be set aside. 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. Appeal disposed of accordingly.

Issues Involved:
1. Valuation of Linear Alkyl Benzene (LAB) cleared by the Alindra factory.
2. Determination of assessable value under Section 4(1)(a) and Section 4(1)(b) of the Central Excise Act, 1944.
3. Application of Rule 6(b)(i) and Rule 6(b)(ii) of the Valuation Rules, 1975.
4. Inclusion of catalyst cost, interest, and profit margin in the cost of production.
5. Applicability of Rule 8 and Rule 9 of the Valuation Rules, 2000.
6. Time-bar and applicability of proviso to Section 11A.
7. Penalties on the appellant assessee and its executives.

Detailed Analysis:

1. Valuation of LAB Cleared by Alindra Factory:
The appellants cleared LAB from the Alindra factory to other factories and independent buyers. The valuation issue arose due to differential duty demands for various periods, ranging from December 1997 to November 2001. The appellants argued that the assessable value was based on the price at which LAB was sold to Kisan Industries (KI) and others.

2. Determination of Assessable Value:
The first show cause notice (SCN) dated 25-2-2000 alleged that KI and other buyers were not independent, invoking Section 4(1)(b) for valuation. The Commissioner concluded that sales to KI were not to an independent buyer, treating KI as a 'Related Person' and confirming the under-valuation.

3. Application of Rule 6(b)(i) and Rule 6(b)(ii):
The SCN argued that Rule 6(b)(i) was not applicable due to differences in factors like plant age, raw material costs, and depreciation. Hence, Rule 6(b)(ii) was applied for valuation, which included additional costs like catalyst cost, interest, and profit margin.

4. Inclusion of Catalyst Cost, Interest, and Profit Margin:
The appellants contested the inclusion of catalyst cost, interest, and profit margin in the cost of production. They argued that:
- Catalyst cost should be reduced by the realizable value from spent catalysts.
- Interest should not be included in the cost of production as per CAS-4 and CBEC Circular dated 13-2-2003.
- Profit margin should be reasonable and specific to LAB, not based on the overall company's profit margin.

5. Applicability of Rule 8 and Rule 9 of the Valuation Rules, 2000:
For periods post-July 2000, the appellants argued for valuation under Rule 8 (115% of the cost of production) and Rule 9 for related person transactions. The Commissioner applied Rule 4 read with Rule 11 for some periods, which was contested by the appellants.

6. Time-Bar and Applicability of Proviso to Section 11A:
The appellants argued that the demand was time-barred as there was no intention to evade duty, and the proviso to Section 11A was inapplicable. They highlighted that much more duty was paid through PLA by the recipient factories, and the change in the basis of assessment by the department could not invoke the proviso to Section 11A.

7. Penalties on the Appellant Assessee and Its Executives:
Penalties were imposed on the appellant assessee and its executives, which were contested on the grounds of incorrect valuation and lack of intention to evade duty.

Conclusion:
The Tribunal found merit in the appellants' arguments regarding the incorrect calculation of cost of production, inclusion of interest, and profit margin. The main SCN was found to be barred by limitation, and the proceedings initiated thereunder, along with penalties and other liabilities, were set aside. The appeals were allowed, and the case was remanded for redetermination of demands for the four SCNs dated 17-1-2001, 11-9-2001, 7-12-2001, and 3-5-2002 as per Valuation Rule 8 of the Valuation Rules, 2000.

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