2012 (11) TMI 358 - AT - Central Excise

Royalty charges impact lift manufacturing cost valuation, penalties imposed.

OTIS ELEVATOR CO. (I) LTD. Versus COMMISSIONER OF C. EX., MUMBAI-V

The Tribunal held that royalty charges paid by the appellant to their parent company should be included in the assessable value of components used in ... Extended period of limitation – royalty payment to parent company – valuation – manufacture of Lifts and Elevators and Parts thereof – alleged that they had entered into works contract with the customers for erection and installation of lifts and elevator - there was no assessable value available for the final products sold to the customers in respect of components manufactured factory and cleared for captive consumption at site - Since the components/parts manufactured by the appellants are being used captively the value thereof is required to be determined under the Valuation Rules and the value is being determined on the basis of costing basis after adding the profit element in the cost - while determining the cost of production the royalty charges are required to be limited upto the manufacturing stage only and the other activities like sales, erection and service are not to be taken into account while computing the cost of production of the components used captively - appellant has not declared to the department that they were paying royalty charges to their parent company - extended period has rightly been invoked by the adjudicating authority and consequently the penalty is rightly imposed under Section 11AC of the Act - matter remanded back to Commissioner for de novo adjudication - Appeal is disposed of by way of remand Issues:Inclusion of royalty charges in the assessable value of components used in manufacturing lifts and elevators for captive consumption.Analysis:The appeal involved a dispute regarding the inclusion of royalty charges paid by the appellant to their parent company in the assessable value of components used in the manufacturing of lifts and elevators. The appellant contended that the royalty should not be included as it was paid on the works contract value, not on the parts subject to duty. They argued that including royalty would reduce the profit already added to the cost of production. The appellant cited various case laws and circulars to support their position, emphasizing that there were no guidelines to include royalty in assessable value. The Revenue representative, however, argued that royalty should be part of the cost of production, as it was an expense incurred by the appellant. The dispute arose from the technical assistance agreement between the appellant and the parent company, where royalty was based on the net works billing price of the products.The Tribunal analyzed the technical assistance agreement and found that the appellant paid royalty for engineering, technical, and patent assistance related to manufacturing, sales, installation, and service of lifts and elevators. Considering the Valuation Rules and CAS4 principles, the Tribunal held that royalty charges should be added to the cost of production of the goods. However, the Tribunal clarified that royalty should only be added up to the manufacturing stage, not for other activities like sales and service. The Tribunal also noted that the appellant did not disclose the payment of royalty to the department, leading to the rightful invocation of the extended period and imposition of penalty under Section 11AC of the Act.In conclusion, the Tribunal remanded the matter back to the Commissioner for reassessment of the assessable value, directing the inclusion of royalty charges up to the manufacturing stage only. The Commissioner was tasked with quantifying the duty, penalty, and interest amounts accordingly. The appeal was disposed of by way of remand, providing the appellants with an opportunity for a fresh adjudication.