2015 (5) TMI 101 - SC - Central Excise

SC rules different valuation needed for captive consumption versus third-party sales under Rule 6(b)(ii)

SC ruled on valuation of Tyre Cord Yarn and Tyre Cord Fabric for captive consumption versus third-party sales. Court held goods cleared for captive ... Extended period of limitation - Valuation of Tyre Cord Yarn (TCY) and Tyre Cord Fabric (TCB) - captive consumption - difference between the goods which were cleared at the factory gate to be sold to the third parties and removed for captive consumption by the appellant itself - held that:- the two kinds of goods were not comparable with each other and therefore, the goods which were removed for captive consumption to be used by Tarapur Factory were to be valued under Rule 6(b)(ii) of the Rules and the price declaration given by the appellant applying Rule 6(b)(i) of the said rules was erroneous. We also find that the appellant had even admitted some variations in the two types of goods in its reply to the show cause notices itself. In these circumstances, insofar as the opinion of the authorities with regard to different nature of the goods is concerned, that does not call for any interference by this court. Imposition of penalty - Held that:- It is stated at the cost of repetition that when the entire exercise was revenue neutral, the appellant could not have achieved any purpose to evade the duty. - Therefore, it was not permissible for the respondent to invoke the proviso to Section 11A(1) of the Act and apply the extended period of limitation. In view thereof, we confirm the demand insofar as it pertains to show cause notice dated 25.02.2000. However, as far as show cause notice dated 03.03.2001 is concerned, the demand from February, 1996 till February, 2000 would be beyond limitation and that part of the demand is hereby set aside. Once we have found that there was no mala fide intention on the part of the appellant, we set aside the penalty as well. - Decided partly in favour of assessee. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Court were:(a) Whether the valuation of Tyre Cord Yarn (TCY) removed for captive consumption to another factory should be determined under Rule 6(b)(i) or Rule 6(b)(ii) of the Central Excise Valuation Rules, 1975, given the differences between goods sold at the factory gate and those transferred for captive consumption.(b) Whether the appellant's price declaration under Section 4(1) of the Central Excise Act, 1944, using the price applicable to goods sold at the factory gate, was legally valid for goods removed for captive consumption.(c) Whether the extended period of limitation under the proviso to Section 11A(1) of the Central Excise Act could be invoked by the Revenue to demand differential duty for periods beyond the standard limitation period.(d) Whether there was mala fide intention or evasion of duty on the part of the appellant in filing the price declarations under Rule 6(b)(i) instead of Rule 6(b)(ii).(e) Whether penalties imposed on the appellant were justified in light of the findings on valuation and limitation.2. ISSUE-WISE DETAILED ANALYSISIssue (a) and (b): Valuation of goods removed for captive consumption and validity of price declaration under Rule 6(b)(i) vs. Rule 6(b)(ii)Relevant legal framework and precedents: The valuation of excisable goods under the Central Excise Act, 1944, is regulated by Section 4 and the Central Excise Valuation Rules, 1975. Rule 6(b)(i) allows valuation based on the price at which goods are sold at the factory gate to third parties if the goods removed for captive consumption are identical or comparable. Rule 6(b)(ii) applies when goods removed for captive consumption are not identical or comparable, requiring valuation based on cost plus a reasonable profit.Court's interpretation and reasoning: The Court noted that the authorities below, including the Commissioner and the CESTAT, had recorded findings of fact that the two types of goods-those sold at the factory gate and those removed for captive consumption-were not comparable. This was supported by the appellant's own admission of variations between the goods. Consequently, the valuation under Rule 6(b)(i) was held to be incorrect and Rule 6(b)(ii) was applicable for goods removed for captive consumption.Key evidence and findings: The cost accountant's report was pivotal, opining the goods differed in nature. The appellant's admission in replies to show cause notices further corroborated the difference. The appellant's use of identical raw materials and processes was noted but did not override the factual distinction between the goods.Application of law to facts: Given the factual distinction, Rule 6(b)(ii) was the correct legal provision for valuation of goods removed for captive consumption. The price declaration under Rule 6(b)(i) was therefore erroneous.Treatment of competing arguments: The appellant argued that since raw materials and processes were identical and goods fell under the same tariff sub-heading, the goods were comparable. However, the Court emphasized that factual differences in the goods' nature were decisive, outweighing the appellant's technical arguments.Conclusion: The Court upheld the findings that the goods removed for captive consumption were not comparable to those sold at the factory gate and must be valued under Rule 6(b)(ii).Issue (c): Invocation of extended period of limitation under proviso to Section 11A(1) of the ActRelevant legal framework: Section 11A(1) of the Central Excise Act allows the Revenue to demand duty beyond the normal limitation period if the duty has been evaded or not paid due to fraud or collusion or any willful misstatement or suppression of facts. The extended period can be invoked only in such cases.Court's interpretation and reasoning: The Court examined whether the extended period could be invoked against the appellant for the period from February 1996 to June 2000. It was found that there was no mala fide intention or evasion of duty by the appellant. The appellant had filed price declarations in good faith and had complied with the department's directions once the discrepancy was pointed out.Key evidence and findings: The appellant's repeated filing of price lists accepted by the department, use of identical raw materials, and immediate compliance with higher valuation after the show cause notices were issued were significant factors. The entire exercise was held to be revenue neutral as the appellant was entitled to credit for the differential duty.Application of law to facts: Since there was no mala fide intention or fraud, the extended period of limitation under Section 11A(1) could not be invoked by the Revenue for the period prior to February 2000. The demand for differential duty for the earlier period was therefore barred by limitation.Treatment of competing arguments: The Revenue contended that the differences in goods and the appellant's letter confirming this indicated intention to evade duty. The Court rejected this contention, holding that factual differences did not equate to mala fide intent, especially in light of the appellant's compliance and the revenue-neutral nature of the transactions.Conclusion: The extended period of limitation was not applicable, and the demand for differential duty prior to February 2000 was set aside.Issue (d): Mala fide intention or evasion of duty by the appellantRelevant legal principles: To invoke extended limitation and penalties, Revenue must establish mala fide intention, fraud, or willful suppression of facts by the assessee.Court's interpretation and reasoning: The Court found no evidence of mala fide intention. The appellant's belief in the comparability of goods was reasonable, supported by identical raw materials and processes, and acceptance of price lists by the department. The appellant's prompt compliance after show cause notices further negated any intention to evade duty.Key findings: The Court emphasized that the entire exercise was revenue neutral since the appellant was entitled to credit for any additional duty paid. Therefore, there was no motive or benefit in evading duty.Application of law to facts: Absence of mala fide intention precluded invocation of extended limitation and penalties.Treatment of competing arguments: The Revenue's reliance on the appellant's letter acknowledging differences was insufficient to establish mala fide intent.Conclusion: No mala fide intention was found; hence, penalties were not justified.Issue (e): Justification of penalties imposed on the appellantRelevant legal framework: Penalties under the Central Excise Act are contingent upon willful evasion or suppression of facts.Court's reasoning and conclusion: Since no mala fide intention or evasion was established, the penalties imposed were set aside. The Court held that the appellant's conduct did not warrant penal consequences.3. SIGNIFICANT HOLDINGS'We find that the appellant had even admitted some variations in the two types of goods in its reply to the show cause notices itself. In these circumstances, insofar as the opinion of the authorities with regard to different nature of the goods is concerned, that does not call for any interference by this court.''It is stated at the cost of repetition that when the entire exercise was revenue neutral, the appellant could not have achieved any purpose to evade the duty.''Therefore, it was not permissible for the respondent to invoke the proviso to Section 11A(1) of the Act and apply the extended period of limitation.''Once we have found that there was no mala fide intention on the part of the appellant, we set aside the penalty as well.'Core principles established include:- The valuation of goods removed for captive consumption must be based on their comparability with goods sold at the factory gate; factual differences necessitate valuation under Rule 6(b)(ii).- Acceptance of price declarations by the department and bona fide belief in their correctness can negate mala fide intention even if valuation is later found incorrect.- Extended limitation under Section 11A(1) cannot be invoked without proof of mala fide intent, fraud, or willful suppression.- Penalties require demonstration of willful evasion or suppression; mere errors or differences in valuation without mala fide intent do not justify penalties.Final determinations:- The demand for differential duty under the first show cause notice (covering August 1999 to January 2000) was confirmed.- The demand relating to the period from February 1996 to February 2000 under the second show cause notice was barred by limitation and set aside.- Penalties imposed on the appellant were quashed due to absence of mala fide intention.