2025 (5) TMI 1753 - AT - Central Excise

Rule 8 demand overturned for mixed captive and commercial production lacking proper CAS-4 valuation

CESTAT Chandigarh allowed the appeal challenging demand duty under Rule 8 of Central Excise Valuation Rules. The appellant manufactured goods partly for ... Demand duty under rule 8 of the Valuation Rules - goods partly consumed within the factory of production and partly transferred to the sister unit - principle of revenue neutrality - violation of Section 11A (11) of Central Excise Act, 1944 - HELD THAT:- A perusal of the provisions of Rule 8 as above, gives clear understanding that the said Rule covers only cases where the assessee clears entire production for captive consumption and there are no clearances outside the factory. In the instant case, the fact that the appellant clears partly for home consumption and partly to their sister concern at Agartala, is not denied. Therefore, we find that the case of the appellant is not covered by the un-amended Rule 8 till 22-11-2013. We fail to understand as to what prevented the department from obtaining a valid CAS-4, if need be, by getting the accounts of the appellant audited by a Cost Accountant. That not being done, it has to be concluded that the value adopted by the revenue, without any scientific ascertainment logically explained, cannot be relied upon. We are of the considered opinion that Show cause Notice is the foundation of the edifice of any case. It is required to build all the arguments and reasoning that the department wishes to use in its favour be mentioned in the Show Cause Notice. Show Cause Notice stands on the premises on which it is built. No supplementing at the stage of adjudication and appeal is permissible. Thus, we find that the invocation of Rule 8 of Central Excise Valuation (Determination of Price of Excisable goods) Rules, 2000 is incorrect for the period before 22-11-2013. Though, the said Rule is applicable for the period after 22-11-2013, the valuation arrived at the 110% of price at which the appellant cleared the goods to their sister concern, in place of cost of production arrived on the basis of CAS-4 as contemplated in the Rule, during the entire period, is not acceptable. Therefore, we are of the considered opinion that the Rule 8 is not applicable for certain part of the impugned period i.e. up to 22-11-2013 and unscientific and extra-legal method of calculation for the entire period vitiated the proceedings. We find that impugned orders passed in such a manner cannot be sustained. For this reason, we find that all the case laws cited by the learned AR are not applicable to the facts of the case and therefore, cannot be relied upon. As we find that the appellants succeed squarely on merits, we find it not necessary to go into the other legal submissions on revenue neutrality, delayed adjudication etc. However, we find that as the demand is not sustained, there is no scope for affirming the penalties imposed. In view of our discussion and findings, as above, we allow the appeal, with consequential relief, if any, as per law. The core legal questions considered by the Tribunal in this appeal are:(i) Whether the invocation of Rule 8 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 was correct in the facts and circumstances of the case;(ii) If Rule 8 was correctly invoked, whether its provisions were properly applied by the revenue authorities;(iii) Whether the principle of revenue neutrality applies to the demand of duty raised;(iv) Whether the impugned original order was passed in violation of Section 11A(11) of the Central Excise Act, 1944, particularly regarding limitation periods;(v) Whether the penalties imposed on the appellant are justified.Regarding the first two issues concerning Rule 8, the Tribunal examined the legal framework and precedents governing valuation of excisable goods used for captive consumption or transferred to sister units. Rule 8 of the Central Excise Valuation Rules, 2000, prior to amendment on 22nd November 2013, stipulated that where excisable goods are not sold but used for consumption by the assessee in manufacture of other articles, their value shall be 110% of the cost of production or manufacture. Post amendment, Rule 8 was expanded to cover cases where whole or part of excisable goods are not sold but used for consumption by the assessee or on his behalf.The Tribunal relied heavily on the precedent set by the CESTAT Kolkata in Indian Oil Corporation Limited v. Commissioner of Central Excise, which held that Rule 8 applies only where the entire production is captively consumed and no clearances are made outside the factory. In cases where goods are partly consumed captively and partly cleared to sister units, Rule 8 does not apply. Instead, the residual Rule 11 (Best Judgement Method) is applicable for valuation, as none of the other valuation rules from Rule 4 to 10A cover such mixed scenarios. The Tribunal noted that the Show Cause Notice (SCN) in the instant case did not invoke Rule 11, and the department's reliance solely on Rule 8 was therefore misplaced.The Tribunal further analyzed the department's approach to valuation. The revenue authorities had taken the price at which the appellant cleared goods to its sister unit as the 'cost of production' and then applied 110% to arrive at the assessable value under Rule 8. The appellant had submitted Chartered Accountant certificates certifying that the value was 110% of the cost of production. However, the department rejected these certificates on the ground that they were not prepared in the CAS-4 format prescribed by the Institute of Cost Accountants of India (ICWAI), and further contended that the certificate should be from a Cost and Works Accountant rather than a Chartered Accountant.The Tribunal found this reasoning untenable. It observed that the department failed to actually determine the cost of production as per CAS-4 standards and instead presumed the cost of production to be the value at which the goods were cleared to the sister unit. The Tribunal emphasized that it is the department's burden to prove the cost of production and that the absence of a valid CAS-4 cost data was not a sufficient basis to reject the appellant's valuation certificate. The Tribunal criticized the department for not taking steps such as auditing the appellant's accounts through a Cost Accountant to ascertain the correct cost of production. This failure rendered the department's valuation method unscientific and extra-legal.On the applicability of Rule 8 for the period before 22nd November 2013, the Tribunal held that the Rule was not applicable as it covered only cases of full captive consumption, whereas the appellant partly cleared goods to a sister unit. For the period after 22nd November 2013, even though Rule 8 was amended to include partial consumption or clearance for captive use, the valuation method adopted by the department was flawed due to the reasons stated above. Hence, the invocation and application of Rule 8 were incorrect for the entire impugned period.The Tribunal also underscored the principle that a Show Cause Notice is the foundation of the department's case and that the department cannot invoke a valuation method (such as Rule 11) at the adjudication or appeal stage if it was not mentioned in the SCN. The Tribunal cited the Supreme Court's ruling in Brindavan Beverages, which emphasized that vague or unintelligible allegations in the SCN deprive the noticee of a proper opportunity to defend.Regarding the principle of revenue neutrality, the appellant contended that the sister unit in Agartala was availing area-based exemption under Notification 8/2004-CE and was eligible to take Cenvat credit on inputs, including the perfumery compound supplied by the appellant. This position was upheld by the Tripura High Court in a related case of the appellant. Therefore, the appellant argued that any short payment of duty on the intermediate product supplied to the sister unit was revenue neutral as the exemption on finished goods did not amount to exempted goods for Cenvat credit purposes. The revenue disputed the applicability of revenue neutrality, relying on precedents such as India Yamaha Motors and others, but the Tribunal found it unnecessary to delve deeply into this issue since the demand itself was not sustainable on merits.On the issue of limitation under Section 11A(11) of the Central Excise Act, the appellant argued that multiple show cause notices spanning over a decade were adjudicated by a single order in 2017, violating statutory time limits. The appellant relied on judgments from the Delhi High Court holding that adjudication beyond prescribed limitation periods is impermissible. The revenue did not specifically rebut this contention in detail, and the Tribunal did not find it necessary to decide this issue in view of the appellant's success on the merits.Finally, on the question of penalties, the Tribunal held that since the demand for duty was not sustained, there was no basis to uphold penalties. Moreover, penalties cannot be imposed in cases involving interpretation of law where no specific clause under Rule 25 was invoked in the SCN or orders.The significant holdings of the Tribunal include the following verbatim excerpts and core principles:'We find that Valuation is to be done as per Rule 8 of the Valuation Rules when the entire goods are captively consumed and there is no other method of sales involved... Since none of the Valuation Rules from Rule 4 to 10A covers the above said situation, the Appellant stated that they have adopted Rule 11 Best Judgement Method... We find that the method of valuation adopted by the Appellant under Rule 11 of the Valuation Rules is the appropriate method in this case because the situation of part sale to related person and part captive consumption is not covered by any of the other Rules in the Valuation Rules 2000.''The invocation of Rule 8 of Central Excise Valuation (Determination of Price of Excisable goods) Rules, 2000 is incorrect for the period before 22-11-2013... Even if Rule 8 is applicable for the period after 22-11-2013, the valuation arrived at 110% of price at which the appellant cleared the goods to their sister concern, in place of cost of production arrived on the basis of CAS-4 as contemplated in the Rule, during the entire period, is not acceptable.''Without ascertaining the cost of production, they allege that the CA Certificate submitted by the appellants does not give value in CAS -4 and hence not reliable... We fail to understand as to what prevented the department from obtaining a valid CAS-4, if need be, by getting the accounts of the appellant audited by a Cost Accountant. That not being done, it has to be concluded that the value adopted by the revenue, without any scientific ascertainment logically explained, cannot be relied upon.''The Show Cause Notice is the foundation of the edifice of any case... No supplementing at the stage of adjudication and appeal is permissible.'In conclusion, the Tribunal allowed the appeal, quashed the demand of duty and penalties, and held that the valuation method adopted by the revenue was legally unsustainable. The Tribunal did not find it necessary to decide other issues such as revenue neutrality and limitation due to the appellant's success on the primary issues.