1999 (8) TMI 920 - SC - Central Excise

Excise duty on raw materials excluded from assessable value when Modvat credit available to manufacturers

COLLECTOR OF CENTRAL EXCISE, PUNE Versus DAI ICHI KARKARIA LTD.

COLLECTOR OF CENTRAL EXCISE, PUNE Versus DAI ICHI KARKARIA LTD. - 1999 (112) E.L.T. 353 (SC), [1999] 156 CTR 172, 1999 AIR 3234, 1999 (1) Suppl. SCR 360, ... The core legal question considered is whether, in determining the assessable value of an intermediate excisable product under the Central Excises and Salt Act, 1944, the cost of raw materials used in its manufacture should include the excise duty paid on those raw materials when the manufacturer is entitled to credit for such duty under the Modvat scheme. Specifically, the issue is whether the cost of raw material for valuation purposes is the price paid inclusive of excise duty (as contended by the Revenue) or the price less the excise duty credit available under the Modvat scheme (as contended by the manufacturers).The Court examined the provisions of Section 4 of the Central Excises and Salt Act, 1944, which governs valuation of excisable goods for charging excise duty. Section 4(1)(b) allows valuation based on cost of production when normal price is not ascertainable. The Act defines 'value' and explicitly excludes excise duty payable on the goods from the value. The Explanation to Section 4(4)(d)(ii) clarifies that the amount of excise duty payable on excisable goods does not form part of the value for excise purposes. However, this Explanation excludes notifications or orders granting exemption equal to the excise duty paid on raw materials, which is not the case here.The Court analyzed the Modvat scheme rules (Rules 57A to 57J of the Central Excise Rules) which provide a credit mechanism allowing manufacturers to set off excise duty paid on inputs against excise duty payable on final products. The scheme requires manufacturers to file declarations and maintain registers to claim credit. The credit once validly taken is indefeasible and may be utilized at any time against excise duty payable on excisable products. The credit does not automatically reduce the assessable value under Section 4 but reduces the effective excise duty liability.The Revenue argued that the excise duty paid on raw materials should be included in the cost of production of the intermediate product because the duty is legally and factually paid and the Modvat credit is only a set-off against excise duty on the final product, not a reduction in cost. The credit is a contingent asset, a book entry, which matures only upon payment of excise duty on the final product. Thus, the cost of raw materials should include excise duty paid.The manufacturers contended that since they get credit for the excise duty paid on raw materials, the effective cost to them is the price paid less the excise duty credit. Including the excise duty in cost would amount to double taxation. The Modvat credit effectively reduces the cost burden of raw materials and should be reflected in valuation.The Court referred to authoritative accounting principles and the Guidance Note issued by the Institute of Chartered Accountants of India on accounting treatment for Modvat credit. The Note states two alternative treatments: either record input cost net of excise duty and separately account for Modvat credit receivable, or record input cost inclusive of excise duty and adjust cost when credit is utilized. Both approaches recognize that Modvat credit reduces the effective cost of inputs.In applying commercial realism and accepted accountancy principles, the Court held that a man of commerce would regard the real cost of raw materials as the price paid less the excise duty credit available under Modvat. The excise duty paid on raw materials, which is recoverable as credit, should not be included in the cost of production for valuation under Section 4(1)(b) and Rule 6 of the Valuation Rules.The Court distinguished prior judgments cited by the Revenue as not dealing with the Modvat scheme or the relevant provisions of Section 4(4)(d)(ii). It also noted that the Tribunal's earlier decision, which held that Modvat credit reduces the cost of final product to the extent of the credit but does not affect assessable value, was not relied upon by the manufacturers' counsel and was unclear. The Court's own analysis favored the manufacturers' position.Regarding competing arguments, the Court acknowledged the Revenue's position that excise duty is legally paid and Modvat credit is only a set-off, but rejected the notion that this should be treated as part of cost for valuation. The Court emphasized that the credit is indefeasible once validly taken and effectively reduces the cost burden. The Revenue's inconsistent prior stands were noted but did not affect the legal analysis.In conclusion, the Court held that in determining the cost of an excisable intermediate product under Section 4(1)(b) of the Act and Rule 6 of the Valuation Rules, the excise duty paid on raw materials covered by the Modvat scheme should be excluded from the cost. The assessable value should be computed on the price paid less the excise duty credit available under Modvat. The appeals by the Revenue were dismissed.Significant holdings include the following verbatim excerpt capturing the core legal reasoning:'We think that such realism must inform the meaning that the Courts give to words of a commercial nature, like cost, which are not defined in the statutes which use them. A man of commerce would, in our view, look at the matter thus: 'I paid Rs. 100/- to the seller of the raw material as the price thereof. The seller of the raw material had paid Rs. 10/- as the excise duty thereon. Consequent upon purchasing the raw material and by virtue of the Modvat scheme, I have become entitled to the credit of Rs. 10/- with the excise authorities and can utilise this credit when I pay excise duty on my finished product. The real cost of the raw material (exclusive of freight, insurance and the like) to me is, therefore Rs. 90/-. In reckoning the cost of the final product I would include Rs. 90/- on this account.' This, in real terms, is the cost of the raw material (exclusive of freight, insurance and the like) and it is this, in our view, which should properly be included in computing the cost of the excisable product.'Core principles established include:The valuation of excisable goods under Section 4 and the Valuation Rules must accord with commercial reality and accepted accountancy principles.The excise duty paid on raw materials used in manufacture, when creditable under the Modvat scheme, is not to be included in the cost of production for valuation of intermediate excisable products.The Modvat credit once validly taken is indefeasible and reduces the effective cost of inputs.The value of excisable goods excludes excise duty payable on such goods, and the Modvat scheme does not alter this principle but provides a credit mechanism reducing excise duty incidence.The final determination on the issue is that the cost of raw materials for valuation of intermediate excisable products under the Central Excises and Salt Act, 1944, read with the Valuation Rules, excludes the excise duty paid on such raw materials to the extent of credit available under the Modvat scheme. The appeals of the Revenue were dismissed accordingly.