2018 (11) TMI 1136 - AT - Central Excise

Tribunal upholds Commissioner's valuation order for vehicle prototypes under Central Excise Rules.

Commissioner of GST & Central Excise Chennai Versus M/s. Mahindra & Mahindra Ltd.

The Tribunal dismissed the department's appeal, upholding the Commissioner's order regarding the valuation of prototypes of motor vehicles under Central ... Valuation - prototypes - Department contends that the valuation under Section 4(1)(b) r/w Rule 11 and Rule 8 should be applied - Held that:- At no stretch of imagination, the assessable value of similar model vehicle can be ₹ 71,14,198/-. It is to be noted that under Rule 126 of Central Motor Vehicle Rules, 1989, a prototype of every motor vehicle shall be subject to testing by designated Government Departments or Research Associations or Testing Institutes to ascertain the compliance of provisions of the Act and Rules. The said Act itself uses the word ‘prototypes’. Only after certification by such authorities can the manufacturer of motor vehicles manufacture and market the motor vehicles. The similar model vehicles which are commercially manufactured can be said to be copies of the prototypes. It cannot be then said that these prototypes are consumed in further manufacture of motor vehicles. Thus Rule 8 of Central Excise Valuation Rules 2000 will not apply to such a situation. Appeal dismissed - decided against Revenue. ISSUES PRESENTED AND CONSIDERED 1. Whether prototype motor vehicles removed to another unit on a returnable basis for testing are excisable and marketable (issue conceded by absence of appellant's appeal by respondent). 2. Whether valuation of prototype motor vehicles must be determined under Section 4(1)(b) read with Rule 11 and Rule 8 of the Central Excise Valuation Rules, 2000 (i.e., 110% of cost of production under CAS-4) or under Rule 4 (transaction value of identical/similar goods sold subsequently). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Excisability and marketability of prototypes (limited treatment) Legal framework: Excisability and marketability are foundational to applicability of central excise; marketability was raised but not contested by respondent in the appeal. Precedent Treatment: Not contested before The Court; therefore earlier departmental contentions on excisability were not pressed for adjudication. Interpretation and reasoning: The Court notes absence of challenge by respondents to the adjudicator's finding on marketability/excisability; consequently, the factual/legal determination that prototypes are marketable/excisable stands unchallenged and requires no further examination. Ratio vs. Obiter: Ratio - lack of cross-appeal by respondent renders excisability finding final for purposes of this appeal; no further ratio established beyond finality of that procedural posture. Conclusions: The Court confines its consideration to valuation alone; excisability/marketability is treated as settled in the record. Issue 2 - Appropriate valuation rule for prototype motor vehicles: Rule 4 v. Section 4(1)(b) read with Rule 11 & Rule 8 Legal framework: Valuation options under the Central Excise Valuation Rules, 2000 are: Rule 4 (value based on transaction value of identical/similar goods sold subsequently), and alternatively valuation under Section 4(1)(b) read with Rule 11 and Rule 8 when no sale of the goods occurs (often resulting in 110% of cost of production under CAS-4). Precedent Treatment (followed/distinguished/overruled): The adjudicating authority relied on an internal Order-in-Original and on judicial authority concerning valuation of physician samples and on a Tribunal decision about captively consumed IC engines. The department sought to distinguish those authorities and to treat prototype use as akin to captive consumption, invoking Rule 8. The Court considered the internal orders accepted by the department in earlier related proceedings and found no reason to depart from them. Interpretation and reasoning: The Court analyzed the nature and purpose of prototypes under Motor Vehicle regulatory scheme (Central Motor Vehicle Rules, 1989, Rule 126), observing that prototypes are subject to statutory testing by designated authorities and serve as models for subsequent commercial production. Prototypes are not shown to be consumed in the manufacture of other vehicles but rather serve as the final product that is certified and then copied in commercial production. Given that commercially manufactured vehicles are copies of prototypes, the Court reasoned prototypes are distinct from goods consumed captively or used up in manufacture; they are closer in character to marketable goods that will have a subsequent sale price. The Court found implausible the assessable value asserted by the department as CAS-4 cost leading to an anomalously high figure and accepted the adjudicator's conclusion that Rule 4 valuation based on the future sale price of similar model vehicles is appropriate. Further, the Court took into account that the department had previously accepted earlier orders in the appellant's own case (Order-in-Original and Order-in-Appeal) that applied Rule 4 on similar facts; that administrative acceptance influenced the Court's conclusion that it would not insist on application of Rule 11/Rule 8 in the present proceedings. Ratio vs. Obiter: Ratio - where prototypes are cleared for statutory testing and are not shown to be consumed in further manufacture, valuation under Rule 4 on the basis of transaction value of identical/similar goods sold subsequently is appropriate; Rule 8 (110% of cost under CAS-4) is not applicable in such circumstances. Obiter - comments distinguishing valuation authorities dealing with physician samples or captively consumed inputs (not prototypes) and noting the administrative weight of prior departmental acceptance of alternate orders. Conclusions: The Court upheld the adjudicating authority's application of Rule 4 for valuation of prototypes and affirmed the rejection of valuation under Section 4(1)(b) read with Rule 11 and Rule 8. Having found no grounds to interfere, the Court dismissed the department's appeal and sustained the impugned order increasing assessable value under Rule 4 and waiving the contested penalties as determined by the Commissioner.