2023 (11) TMI 160 - AT - Central Excise

Revenue cannot include scrap value from job-work in assessable value when raw material costs already accounted for it

CESTAT Mumbai-AT allowed the appeal challenging recovery of Central Excise Duty, interest and penalty. The Revenue sought to include scrap value arising ... Recovery of Central Excise Duty alongwith interest and penalty - including value of ‘scrap’ arising from ‘job-work’ in the assessable value as additional consideration from the principal for undertaking such work - HELD THAT:- Though the value adopted for discharge of duties in clearances effected by the assessee in GENERAL ENGINEERING WORKS VERSUS COMMR. OF C. EX., JAIPUR [2005 (3) TMI 16 - SUPREME COURT] is not incorporated therein, it would appear from the illustrative computation of the decision that ‘cost of raw materials’ was in dispute therein and not of conversion charges not reflecting the true consideration; hence the corollary of establishing that it was depressed. There is no finding of such nature in the impugned order, in the appeal of jurisdictional Commissioner of Central Excise before the first appellate authority or in the show cause notice. Therefore, reliance placed in the impugned order on the said decision is not appropriate; the outcome therein is, thus, jeopardized. Here too, it is not in dispute that the landed cost of raw materials is not doubted and that the impugned ‘scrap’ has been generated from such raw material. That value, having been included once, is not required to added once again for assessment to duty. The impugned order set aside - appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the value of scrap retained and sold by a job-worker constitutes additional consideration and must be included in the assessable value of finished goods cleared by the principal where the contract provides that the principal will receive only a portion (e.g., 90%) of processed material supplied by the principal. 2. Whether precedents holding that sale value of scrap is part of transaction value (e.g., General Engineering Works and Lloyd Steel) apply where (a) duty on final product is discharged by the principal manufacturer and (b) there is no finding of depression of conversion charges. 3. Whether Rule 4(5)(a) of the Cenvat Credit Rules and the valuation principles (including the transaction value concept and contingencies under the Valuation Rules) preclude treating scrap value as additional consideration when the landed cost of raw material and conversion charges have been accounted for in the duty-paid clearance by the principal. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Inclusion of scrap value as additional consideration in assessable value Legal framework: Assessable value principles under the Central Excise Act and Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 (transaction value concept and contingencies); statutory provisions authorising recovery/interest/penalty where duty is short-paid (sections invoked in the order relate to recovery and penalties). Precedent treatment: Lower authority applied the rule in General Engineering Works (and Lloyd Steel) to treat sale proceeds of scrap retained by the job-worker as additional consideration forming part of transaction/assessable value. Interpretation and reasoning: The Tribunal examines whether the sale value of scrap constitutes an undeclared element of consideration when (i) the landed cost of raw material and conversion charges have been included in the value on which duty was discharged by the principal, and (ii) there is no finding that conversion charges were depressed to mask consideration. Where the principal has cleared the final product on payment of duty that reflects the cost of raw material (including loss/waste attributable to production), adding the scrap value again results in double-counting the same element of cost. The Tribunal notes that precedents which permitted addition of scrap value did so in contexts where the transaction evidenced depressed conversion charges or where the job-worker, not the principal, discharged the duty liability, thereby rendering the processed goods final in the hands of the job-worker. Ratio vs. Obiter: Ratio - scrap value cannot be added to assessable value where (a) the landed cost of raw materials and conversion charges were included in the value on which duty was discharged by the principal, and (b) there is no finding of depressed conversion charges or other indicia showing concealed consideration. Obiter - general statements about scrap being consideration in different factual matrices where duty liability rests on the job-worker. Conclusion: The impugned inclusion of scrap value in assessable value is not sustainable on the facts; where duty was discharged on the landed cost of raw material and conversion charges by the principal, there is no warrant to add the sale proceeds of scrap as additional consideration absent evidence of depressed conversion charges. Issue 2 - Applicability and scope of General Engineering Works, Lloyd Steel and International Auto decisions Legal framework: Judicial interpretation of transaction value when processors/job-workers are involved; interplay with Cenvat Credit Rules (Rule 4(5)(a)) governing treatment of inputs/intermediate products and availability of credit to principal manufacturers. Precedent treatment: The impugned order relied on General Engineering Works and Lloyd Steel to support adding scrap proceeds to assessable value. The Tribunal contrasts those authorities with International Auto Ltd., which held that when the principal clears the final product after availing/using Cenvat credit (and duty on intermediate products does not give rise to net additional duty), non-inclusion of certain input costs at intermediate stages is not consequential. Interpretation and reasoning: The Tribunal distinguishes General Engineering Works/Lloyd Steel where the factual matrix involved depressed conversion charges or duty discharging by the job-worker, from the present case where the principal discharged duty based on the landed raw material cost and conversion charges. The Tribunal accepts that General Engineering Works is applicable only where there is evidence showing concurrent depression of conversion charge or an arrangement that renders the sale proceeds of scrap a separate undeclared consideration for the principal's acquisition. In the absence of such a finding, reliance on General Engineering Works/Lloyd Steel is misplaced. The Tribunal also invokes the reasoning in International Auto to the effect that if the principal manufacturer clears the final product on payment of appropriate duty and can take Cenvat credit of duty paid on intermediate products, non-inclusion of cost of certain inputs at intermediate stages does not mandate addition to assessable value of the final product. Ratio vs. Obiter: Ratio - precedents that add scrap value apply to factual matrices where conversion charges are shown to be depressed or the job-worker alone bears duty liability; they do not automatically extend to cases where the principal has paid duty on a value that already incorporates the cost of raw material (including wastage) and conversion. Obiter - expansive application of those precedents without factual foundation. Conclusion: The earlier authorities relied upon by the revenue were inapposite on the facts; International Auto and subsequent Tribunal authority (as considered) support the proposition that, in the present factual context, scrap value should not be added to assessable value. Issue 3 - Requirement to demonstrate depression of conversion charges or concurrent undervaluation Legal framework: Transaction value analysis requires identification of all elements of price actually paid or payable; when government alleges concealed consideration, there must be positive findings showing depressed declared price or excluded components. Precedent treatment: The General Engineering Works decision's illustrative computation shows the addition of scrap proceeds where the processor's conversion charges and the cost of raw material were computed such that scrap proceeds formed part of the price. However, the Tribunal notes that that case concerned dispute over cost of raw material rather than absence of conversion charges reflecting true consideration. Interpretation and reasoning: The Tribunal emphasizes that the burden of establishing that the conversion charge was depressed or that transaction value understated lies on the revenue. The impugned order, the appeal before the first appellate authority, and the show cause notice contained no finding or material demonstrating such depression. Absent that factual basis, invoking a precedent that depends on such a factual finding is inappropriate; the revenue cannot simply assume that scrap proceeds constitute undeclared additional consideration. Ratio vs. Obiter: Ratio - revenue must establish undervaluation/depression of conversion charges or equivalent facts before adding scrap sale proceeds to assessable value. Obiter - hypothetical applications of valuation principles without evidentiary support. Conclusion: Because there is no finding or material establishing concurrent depression of conversion charges or undervaluation, the legal and evidentiary preconditions for adding scrap value to assessable value are not satisfied. Overall Conclusion and Disposition The Tribunal holds that, on the admitted facts that duty was discharged by the principal on the landed cost of raw material and conversion charges, and in the absence of any finding that conversion charges were depressed, the sale value of scrap retained by the job-worker cannot be treated as additional consideration to be added to the assessable value of the finished goods. The impugned order adding scrap value is therefore set aside and the appeal is allowed.