2025 (6) TMI 1351 - AT - Central Excise

Department's differential duty demand on demonstration goods ruled time-barred under extended limitation due to disclosed valuation methodology

M/s. Kennametal India Ltd. Versus Commissioner of Central Excise and Service Tax Large Taxpayer Unit, Banashankari

The Tribunal ruled that the Department's demand for differential duty on goods cleared for demonstration purposes was time-barred under extended ... Method of valuation - valuation of goods for duty purposes should be determined under Rule 4 or Rule 8 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 - recovery of differential duty with interest and penalty - HELD THAT:- In the appellant’s own case for the earlier period from May 2006 to September 2010 involving similar facts, this Tribunal held that 'We find that initially the view of the department was that the clearance of samples free from the factory leviable to duty and the value should be determined adopting Rule 8 of Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000. Later, the same was reconsidered and it was clarified that the proper rule for determination of value of free samples cleared from the factory would be Rule 4 of Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000.' In view of the above findings in the appellant’s own case for the earlier period, the present appeals are partly allowed to the extent of confirming demand for the normal period with interest and setting aside penalty. Appeals are partly allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the valuation of excisable goods cleared as samples/trial and demonstration units is governed by Rule 4 or Rule 8 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000, insofar as the proper rule for determination of assessable value is concerned. 2. Whether invocation of the extended period of limitation for recovery of differential duty is justified where the department contends incorrect application of valuation rules but the assessee did not conceal facts or act with intent to evade duty. 3. Whether penalty under the excise law is imposable where demand is held to be time-barred beyond the normal period and there is no evidence of suppression or misdeclaration with intent to evade duty. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Proper Valuation Rule for Samples/Demonstration Clearances (Rule 4 v. Rule 8) Legal framework: Determination of assessable value for excisable goods is governed by the Valuation Rules, specifically Rule 4 and Rule 8 of the Central Excise Valuation Rules, 2000, which prescribe different bases for valuation depending on the transaction and circumstances of clearance. Precedent treatment: High Court decisions have held that free physician samples should be valued under Rule 4. Tribunals and benches have expressed differing views at various times on whether Rule 8 or Rule 4 applies to samples/demonstration clearances. Interpretation and reasoning: The Tribunal notes the existence of divergent views across adjudicatory fora regarding applicability of Rule 4 versus Rule 8 to samples and demonstration clearances. Where courts and tribunals have not uniformly settled the interpretative question, the issue remains one of pure law and interpretation rather than an instance of deliberate misstatement by the assessee. The factual posture here (clearance for trial/demonstration at customer premises) aligns with the contexts addressed by Rule 4 as adopted in High Court rulings; however, the appellants in the present proceedings did not contest the substantive correctness on merits and instead challenged limitation. Ratio v. Obiter: The Tribunal's discussion on the unsettled nature of the law and the appropriate rule is ratio insofar as it underpins the limitation analysis; the Tribunal does not, in this order, definitively overrule any contrary view but treats the difference of judicial opinion as relevant to the limitation question. Conclusions: The valuation issue is recognized as one involving unsettled legal interpretation where authorities have applied Rule 4; this unsettled state bears on whether extended limitation may be invoked (see Issue 2). Issue 2 - Invocation of Extended Period of Limitation Where Law Was Unsettled and No Suppression Legal framework: The extended period of limitation for recovery of duty is available where there is misdeclaration or suppression of facts with intent to evade duty; normal limitation applies absent such culpable concealment. The burden for invoking extended limitation rests on the department to establish suppression/misdeclaration with intent. Precedent treatment: Where legal position is unsettled and reasonable minds/benches have taken differing views on interpretation of valuation rules, extended limitation has been held unsustainable unless there is evidence of deliberate concealment or fraud. Interpretation and reasoning: The Tribunal observes that the department initially accepted the assessee's practice of valuing samples under Rule 8 but later altered its view to contend Rule 4 applied. Given divergent tribunal decisions and High Court rulings, the legal principle was not settled at the relevant time. Importantly, the assessee had, by prior communication (in 2001), informed the department of the methodology being adopted for sample clearances (application of Rule 8 and adoption of 110% of cost). That disclosure undermines any finding of suppression or intent to evade duty. In these circumstances, invoking the extended period is inappropriate because the essential condition for extended limitation - suppression or misdeclaration with intention to evade - is not satisfied. Ratio v. Obiter: The conclusion that extended limitation cannot be invoked in the absence of suppression where the law was unsettled and the assessee had disclosed the methodology is ratio with respect to limitation questions; it is applied to limit recovery to the normal period. Conclusions: Departmental demand must be confined to the normal period of limitation; invocation of extended period is not sustainable where the law was unsettled and there is no proven suppression or intent to evade duty, particularly where the assessee had previously communicated its valuation methodology to the department. Issue 3 - Imposability of Penalty Where Demand Is Limited to Normal Period and No Suppression Legal framework: Penalty provisions require culpability such as suppression, misdeclaration, or deliberate evasion of duty. Where the legal basis for a demand is a pure question of law and the assessee has not acted with intent to evade, penalty is typically not attracted. Precedent treatment: Authorities have refrained from imposing penalties where liability arises from bona fide differences of opinion or unsettled questions of law and where the assessee had made appropriate disclosures. Interpretation and reasoning: Given the Tribunal's finding that the department's change of view occurred against a backdrop of unsettled law and that the assessee had disclosed its method of valuation to the department earlier, there is no evidence of suppression or fraudulent intent. The penal provision, therefore, cannot be justly invoked where only a differential demand limited by normal limitation survives; imposition of penalty would be disproportionate absent culpable conduct. Ratio v. Obiter: The Tribunal's holding that penalty is not imposable under these facts is ratio as it follows from the limitation and non-suppression findings and directly affects the operative relief granted. Conclusions: Penalty is not imposable in the circumstances where the demand is confined to the normal period and there is no suppression or intent to evade; penalty contested in the appeals is set aside. Operational Conclusion (Interconnected Issues) Because the valuation issue involved unsettled questions of law and the assessee had earlier disclosed its valuation methodology to the department, there was no suppression or intent to evade; accordingly, recovery is restricted to the normal period of limitation with interest, and penalty is not leviable. These conclusions are interdependent: the unsettled legal position and disclosure preclude extended limitation and negate penal consequences.