2017 (12) TMI 1077 - AT - Central Excise

Tribunal overturns demands on R&D and profit sharing, citing lack of grounds in show cause notice. &DExpenditures

The Tribunal allowed all appeals by setting aside the confirmation of demands related to R&D expenditures and profit sharing, along with penalties ... Inclusion of R&D expenditure in assessable value - application of Rule 8 of Central Excise Valuation Rules, 2000 (cost of manufacture basis / captive consumption) - assessable value determined by normal sale price / transaction value - inclusion of profit sharing from resale in assessable value - personal penalty under Rule 26 of Central Excise Rules, 2002Inclusion of R&D expenditure in assessable value - application of Rule 8 of Central Excise Valuation Rules, 2000 (cost of manufacture basis / captive consumption) - assessable value determined by normal sale price / transaction value - Addition of amounts paid by the manufacturer for technical know how (R&D expenditure) to the assessable value under Rule 8 and demand based thereon. - HELD THAT: - The Tribunal found the show cause notice sought to add two amounts paid by the appellant for purchase of know how to assessable value. Section 4 requires assessable value to be based on normal sale price or transaction value received by the manufacturer. Rule 8, which proceeds on a cost of manufacture basis, is a precondition applicable where goods are not sold but consumed captively. The show cause notice did not establish that the goods were not sold or were cleared on stock transfer without sale, and therefore did not justify invocation of Rule 8. The payments were expenditures by the appellant for obtaining know how and were not shown to be consideration received on sale of goods. Accordingly the demand premised on including those R&D payments in assessable value was held to be misconceived and unsustainable.Demand based on inclusion of the R&D payments in assessable value under Rule 8 set aside.Inclusion of profit sharing from resale in assessable value - assessable value determined by normal sale price / transaction value - Addition to assessable value of amounts alleged to be received by the manufacturer as 40% profit sharing under the supply agreement with the buyer. - HELD THAT: - The Tribunal examined the show cause notice and found it did not establish that the profit sharing clause in the agreement related to goods manufactured and cleared by the appellant. The appellants contended, and the record did not contradict, that the clause concerned traded goods rather than goods manufactured by the appellant. Absent any finding or pleading establishing nexus between the profit sharing and the clearance of manufactured goods as consideration, the proposed addition to assessable value could not be sustained. Consequently the demand premised on including the alleged profit sharing in assessable value was held to be misconceived.Demand based on alleged profit sharing added to assessable value set aside.Personal penalty under Rule 26 of Central Excise Rules, 2002 - Sustainability of penalties, including equal penalty and personal penalties imposed on directors under Rule 26, in light of the setting aside of the demands. - HELD THAT: - The Tribunal held that because the demands themselves were unsustainable and misconceived, the question of imposing penalties did not arise. Personal penalties under Rule 26 were imposed by the original authority despite the lack of a valid demand; given the reversal of the demands, the equal and personal penalties could not stand. The appellants' challenge to the imposition of personal penalties was accepted on this basis.All penalties, including equal penalty and personal penalties under Rule 26, set aside.Final Conclusion: All appeals allowed: the demands premised on inclusion of R&D payments and alleged profit sharing in assessable value were set aside, and the consequential equal and personal penalties were quashed. Issues involved: Allegations of including R&D expenditures in assessable value under Rule 8 of Central Excise Valuation Rules, 2000, and demand of Central Excise duty. Allegations of profit sharing under a supply agreement and its impact on assessable value. Imposition of personal penalty under Rule 26 without a proposal for confiscation of goods.Analysis:1. R&D Expenditures in Assessable Value:The appellants faced allegations regarding R&D expenditures paid to entities, with a proposal to include these expenses in the assessable value under Rule 8 of Central Excise Valuation Rules, 2000. The show cause notice demanded a specific amount under Section 11A of the Central Excise Act, 1944. The Tribunal found the show cause notice ill-conceived as it failed to establish that the goods were not sold but consumed captively, a pre-condition for invoking Rule 8. The Tribunal concluded that the demands related to R&D expenditures were not sustainable, and the show cause notice was misconceived in this regard.2. Profit Sharing under Supply Agreement:Another issue raised was the profit sharing arrangement under a supply agreement, with allegations that this additional consideration should be added to the assessable value for Central Excise duty. The Tribunal noted that the clause of profit sharing was not related to the goods manufactured by the appellant but to goods traded by them. As the show cause notice did not establish a connection between profit sharing and manufactured goods, the Tribunal deemed the demand in this regard as misconceived and unsustainable.3. Imposition of Personal Penalty:Regarding the imposition of personal penalties under Rule 26 without a proposal for confiscation of goods, the appellants argued that such penalties were applicable only when dealing with goods liable for confiscation. The Tribunal agreed with this argument, finding that the personal penalties imposed on the appellants were not sustainable in the absence of a proposal for confiscation of goods.In conclusion, the Tribunal allowed all appeals by setting aside the confirmation of demands related to R&D expenditures and profit sharing, along with penalties imposed. The Tribunal found the show cause notice lacking in establishing the grounds for the demands raised, leading to the decisions in favor of the appellants.This detailed analysis of the legal judgment provides insights into the issues raised, arguments presented, and the Tribunal's findings and decisions on each aspect of the case.