Revenue-neutral sister-unit clearances defeated extended limitation and invalidated cost-based valuation applied on an improper margin basis.

Clearances of intermediate goods to sister units were examined on a cost-construction basis, with the Tribunal noting that the transaction was revenue neutral because duty paid by the manufacturing unit would have been available as Modvat credit to the receiving units. That revenue neutrality, together with filed and acknowledged price declarations, negatived any motive to evade duty and barred use of the extended limitation period. The Tribunal also held that the CBEC valuation circular was not correctly applied, because the profit margin had been computed on an improper basis instead of being linked to the previous year's margin on the relevant year's cost. The demand was therefore not sustainable on merits or limitation, and the penalty and interest failed.

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Issues: Whether the assessable value of intermediate goods cleared to sister units was correctly determined on cost construction basis, and whether the demand, penalty and interest were sustainable in view of revenue neutrality and limitation.

Analysis: The clearances were to sister units of the same company and the duty paid by the manufacturing unit would have been available as Modvat credit to the receiving units, making the transaction revenue neutral. In such a situation, absence of motive to evade duty and absence of wilful suppression negatived invocation of the extended period. The assessee had filed price declarations under Rule 173C and the department had acknowledged them. The Tribunal also found that the Commissioner had not correctly applied the CBEC circular governing cost-based valuation, since the profit margin had been worked out on an improper basis instead of being linked to the previous year's margin applied to the relevant year's cost. Departmental authorities were bound by the circular.

Conclusion: The demand was not sustainable either on merits or on limitation. The penalty and interest also could not survive.

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