2014 (7) TMI 696 - AT - Central Excise

Tribunal Rules in Favor of Taxpayer on Duty Dispute, Refers Cost Calculation Issue to Larger Bench

M/s ITC LTD Versus COMMISSIONER OF CENTRAL EXCISE, CHENNAI - I

The Tribunal set aside the demand of duty, interest, and penalty for Issues 1 and 3. Issue 2, regarding the calculation of the cost of production, was ... Valuation of goods - Captive consumption - Matter referred to larger bench with following questions of law:- Whether, in the case of inter-unit transfer of goods for captive consumption, the entire value (i.e. 115%/110% of the cost of production) OR the actual cost of production (i.e. 100% of cost) excluding notional loading (i.e. 15%/10%) of the goods manufactured by the one unit, would be the cost of raw material of the another unit (who used the goods in the manufacture of another article) for the purpose of determining value under Rule 8 of Valuation Rules and CAS-4 issued by ICWAI, for transferring the goods to their other unit for further use. Whether the decision of Chennai Bench in the case of CCE Vs. Eveready Industries Ltd. - [2011 (4) TMI 141 - CESTAT, CHENNAI] OR the decision of Mumbai Bench in the case of Tata Iron and Steel Co. Ltd. Vs. CCE had enunciated the correct position of law on the above issue. Issues Involved:1. Whether the IDSC/ICNC debit note raised by Bhadrachalam Unit should be considered as a component of the cost of raw materials for the appellant.2. Whether the entire value (i.e., 115% / 110%) of paper and paperboard on which duty was paid by the Bhadrachalam Unit should be taken into account while arriving at the cost of raw material or 100% cost of production excluding notional loading of 15% / 10% should be considered as cost of raw material.3. Whether the unabsorbed overheads due to idle capacity should be included in the cost of production.4. Whether the demand is barred by limitation and if the proviso to Section 11A(1) of the Central Excise Act, 1944 can be invoked along with interest and penalty, and whether it is a case of revenue neutrality.Issue-wise Detailed Analysis:Issue No.1: IDSC/ICNC Debit Note as a Component of Cost of Raw MaterialThe adjudicating authority observed that the amounts charged in the IDSC/ICNC debit notes represent the difference between the market price of the product adopted for sale to third parties and the value charged in the invoice raised for such transfer between different factories of the group. It was stated that this is issued to evaluate the operational efficiencies of their various units/divisions. The value mentioned in IDSC/ICNC debit notes, coupled with the value indicated in the stock transfer invoice determined under Rule 8 by the Bhadrachalam Unit in respect of the goods transferred to the appellant unit, represents the actual price of the goods transferred. Thus, the value of IDSC/ICNC debit notes issued by Bhadrachalam Unit to the appellant unit shall have to be considered as a component of the cost of raw materials at the hands of the appellant. However, the Tribunal found that CAS-4 developed by ICWAI, supported by CBEC, clearly provides that while determining the value of excisable goods for captive consumption, the actual cost of production at the factory alone is to be considered. AS-17 issued by ICAI is required for preparing consolidated financial statements of the enterprise, which is different from the actual cost of production of Unit/Divisions. The Hon'ble Supreme Court in Union Carbide India Ltd. Vs. Union of India held that cost of production means the actual cost of production together with notional profit which would have been earned if the goods had been sold. Thus, the Tribunal held that there is no reason to consider the amount of IDSC/ICNC debit notes as the actual cost of raw material, and it cannot be added to the cost of raw material at the hands of the appellant for captive consumption under Rule 8 of Valuation Rules.Issue No. 2: Entire Value (115% / 110%) vs. 100% Cost of ProductionThe Tribunal noted that Rule 8 of the Valuation Rules makes a distinction between 'value' and 'cost.' The main contention was that the words 'value shall be 110% of the cost of production' would clearly show that the cost of production is 100%, and therefore the appellant rightly considered the cost of production excluding notional loading of 10% of the invoice value issued by the Bhadrachalam Unit as the cost of raw material in their hands. The Tribunal observed that there are conflicting decisions on this issue. The Mumbai Bench of the Tribunal in Tata Iron and Steel Co. Ltd. Vs. CCE, Thane - III took a different view, stating that the value of the goods cleared for captive consumption shall be 115/110% of the cost of production of such goods. However, the Chennai Bench in CCE Vs. Eveready Industries (I) Ltd. held that the cost of production should be considered excluding notional loading. The Tribunal decided that this matter should be referred to a Larger Bench to resolve the conflicting views.Issue No. 3: Unabsorbed Overheads Due to Idle CapacityThe show-cause notice alleged that the appellant had not proved that the idle capacity had arisen due to abnormal reasons as mentioned in CAS-4. It was further alleged that non-absorption of certain overheads as claimed by the appellant should not be excluded from the cost of production and should form part of the cost of the goods. The adjudicating authority observed that the appellant claimed that these abnormal costs were due to a lack of orders, which they could not demonstrate or substantiate. The Tribunal found that 'abnormal and non-recurring cost' arising due to unusual or unexpected occurrences, such as lack of orders, should not form part of the cost of production. The Tribunal held that the 'abnormal idle capacity' would cover external factors, including lack of orders, and therefore, the unabsorbed overheads referable to abnormal idle capacity for lack of orders should not form part of the cost of production.Issue No. 4: Limitation, Revenue Neutrality, and PenaltySince the Tribunal found no merit in Issue Nos. 1 and 3 in favor of Revenue and decided to refer Issue No. 2 to a Larger Bench, there was no requirement to discuss the issue of limitation and penalty.Conclusion:The Tribunal set aside the demand of duty along with interest and penalty in respect of Issue Nos. 1 and 3. Regarding Issue No. 2, the Tribunal decided that it should be referred to a Larger Bench to resolve the conflicting views of the two coordinated Benches of the Tribunal on the same issue. The Tribunal directed the Registry to place the matter before the Hon'ble President for consideration of constituting a Larger Bench.