2025 (11) TMI 1335 - AT - Central Excise

Transfer price can't replace actual cost for Rule 8 CAS-4 valuation in aluminium undervaluation dispute, appeal dismissed

The Commissioner, C.G.S.T. and Central Excise Howrah Commissionerate, Kolkata Versus M/s. Hindalco Industries Limited

CESTAT Kolkata dismissed Revenue's appeal concerning alleged undervaluation of aluminium rolled products cleared to sister units. The dispute was whether ... Method of Valuation - Short payment of Central Excise duty - undervaluation of assessable value of the goods supplied to their sister units by wrongful application of CAS-4 method to arrive at the value of the finished product - Manufacture and clearance of Rolled products of Aluminium viz. corrugated and plain sheet of various thickness, both alloy and non-alloy - wilful suppression of facts. Whether the cost of production as per CAS-4 adopted by the respondent (value the goods cleared to other units of the respondent under Rule 8) has to be arrived at on the basis of actual costs of inputs, fabrication, etc., or on the basis of ‘notional transfer price’ adopted by the respondent for its internal profitability assessment of units? HELD THAT:- The ‘transfer price’ adopted in the internal accounting cannot be a basis for computing the cost of production since such transfer price adopted in the financial records has no relation to the cost of production and is only a notional price linked to prices prevailing at the London Metal Exchange. It is to be noted in this context that the transfer price adopted is solely for the purpose of management information to arrive at the profitability of the units and to comply with the Accounting Standards. This has also been clarified by the Cost Auditor as well as the Statutory Auditor of the respondent by way of certificates - the finding of the ld. lower appellate authority that the transfer price recorded in the books of accounts of the units should not be adopted as cost of raw material for the purpose of CAS-4 certificate to be correct inasmuch as such price is only a notional value for internal accounting purposes and such notional value is neither recorded nor its impact is captured in the financial statements of the respondent. Further, as has been rightly pointed out by the counsel representing the respondents, the instant issue is no longer res integra. This Tribunal, in the respondent’s own case in Hindalco Industries Ltd. v. Commissioner of C.Ex. & Cus., Kolkata [2023 (8) TMI 1676 - CESTAT KOLKATA] has already examined an identical issue, observing that 'we hold that the differential valuation method adopted by the Department is against this Circular which mandates that the valuation in such cases must be on the basis of the CAS-4 certificate issued by the Cost Accountant only. It is a well settled position of law that Circulars issued by Revenue are binding on the Department. Hence, we observe that in compliance with the Circular No. 692/8/2003-Cx, the Appellant has correctly valued the cost of production in accordance with the CAS-4 certificate issued by the Cost Accountant.' There are no infirmity in the impugned order dated 05.06.2018 passed by the ld. lower appellate authority. Accordingly, the Revenue’s appeal deserves no merits - appeal of Revenue dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether the notional inter-unit 'transfer price' recorded in internal accounting (linked to London Metal Exchange prices) can be adopted as cost of raw materials for computing cost of production under CAS-4 and thereby as assessable value under Rule 8 of the Valuation Rules for captively consumed goods. 2. Whether CAS-4 cost of production must be computed on actual landed cost, fabrication and manufacturing expenses (excluding notional inter-unit profits), and whether the Department can substitute a notional transfer price in place of CAS-4 certified costs. 3. Whether demands based on differential valuation using notional transfer prices are sustainable where CAS-4 certificates (or subsequent CAS-4 adjustments) show actual costs that either match or exceed provisional assessments, and the consequential viability of interest and penalty where demand is revenue-neutral between units. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Admissibility of Notional Transfer Price as Cost for CAS-4/Rule 8 Valuation Legal framework: Valuation for captively consumed goods is governed by Rule 8 of the Valuation Rules read with the requirement of cost computation in CAS-4 certificates issued by Cost Accountants; Central Excise Rules require proper self-assessment and disclosure. Precedent treatment: The Tribunal followed earlier decisions holding that notional inter-unit debit/credit (transfer prices) used for internal accounting and management information cannot be treated as actual cost for CAS-4 purposes (citing precedents where debit notes reflecting notional profit were excluded from CAS-4 computation). Interpretation and reasoning: The Tribunal accepted that transfer prices were purely internal/notional, linked to LME and used for managerial profitability analysis and accounting consolidation. Transfer prices are eliminated on consolidation and do not represent actual landed input costs or fabrication expenses. CAS-4 value, by contrast, is based on actual incurred costs certified by Cost and Statutory Auditors. Therefore, adopting transfer price would import a notional element not captured in financial statements or actual cash flows. Ratio vs. Obiter: Ratio - Transfer price not admissible as component of CAS-4 cost under Rule 8; CAS-4 must reflect actual costs. Obiter - Observations on accounting consolidation and auditors' certifications as corroboration of the notional nature of transfer price. Conclusion: Notional inter-unit transfer prices cannot be adopted as cost of raw materials for CAS-4 or Rule 8 valuation; CAS-4 certified actual costs govern assessable value for captively consumed goods. Issue 2 - Department's Power to Substitute Valuation Method Contrary to CAS-4 Legal framework: Circular guidance and established practice require CAS-4 certificate as the method for calculating cost of production for captively consumed products; valuation rules mandate adherence to CAS-4 for such cases. Precedent treatment: The Tribunal relied on its prior rulings and an administrative circular that CAS-4 is the sole method for cost of production of captively consumed goods, and on tribunal authorities that disallow departmental deviation from CAS-4 without corroborative proof that CAS-4 is wrong. Interpretation and reasoning: The Department's attempt to adopt a differential valuation method based on notional prices was contrary to the binding Circular and tribunal precedent. Where CAS-4 is certificate-based and unrefuted by corroborative evidence demonstrating its inaccuracy, the Department cannot supplant CAS-4 figures with notional internal prices. The Tribunal emphasized that without evidence that the CAS-4 certificate is incorrect, departmental revaluation is impermissible. Ratio vs. Obiter: Ratio - Department cannot disregard CAS-4 certificate and impose valuation based on notional transfer prices absent proof that CAS-4 is erroneous. Obiter - Discussion on the binding nature of departmental Circulars and weight to be given to Cost Accountant certification. Conclusion: Departmental revaluation using internal transfer prices is impermissible when CAS-4 certification provides actual cost-based valuation and there is no evidence to invalidate CAS-4. Issue 3 - Revenue Neutrality, Interest and Penalty where Differential Duty Affects Inter-Unit Transfers Legal framework: Principles of assessable value, availability of credit under excise law, and conditions for levy of interest and penalty under relevant Central Excise provisions. Precedent treatment: The Tribunal followed prior findings that where differential duty confirmed would be available as credit to other units of the assessee, the demand is revenue-neutral and therefore unsustainable; consequential interest and penalty are not maintainable where the principal demand fails. Interpretation and reasoning: Since inter-unit transfers result in offset on consolidation, any differential duty claimed by Department from one unit would effectively be recoverable as credit by another unit of the same corporate group, rendering the demand revenue-neutral. Where the foundational demand is not sustainable (because CAS-4 based valuation stands), interest and penalty based on such demand cannot be validly imposed. Ratio vs. Obiter: Ratio - When a confirmed differential duty is revenue-neutral across related units, the demand (and thus interest/penalty) is not sustainable. Obiter - Remarks on appropriate treatment of consolidated accounts and elimination of inter-unit entries for assessing net revenue impact. Conclusion: Demands based on notional revaluation that are revenue-neutral across units are unsustainable; interest and penalty based on such demands do not arise. Cross-references and Final Determination Cross-reference: The Tribunal explicitly relied on an earlier, identical decision of the same Tribunal examining the same factual matrix and legal questions, adopting the same reasoning that CAS-4 governs valuation and that notional transfer prices are not includible. Conclusive holding: The Tribunal upheld the lower appellate authority's decision to reject departmental demands predicated on notional transfer prices, affirmed that CAS-4 certified actual costs determine assessable value for captively consumed goods, and held that differential demands (and attendant interest/penalty) based on notional internal prices are unsustainable.