TaxTMI 
TaxTMI 
TaxTMI 
2023 (1) TMI 590
X X X X Extracts X X X X
X X X X Extracts X X X X
....ct, 1944. 1.3 A show cause notice was issued by revenue alleging that ITC and LHL have interest directly or indirectly in the business of each other and therefore, the two are related in terms of Section 4(3)(b) of the Central Excise Act, 1944 and therefore, the assessable value should be governed by Rule 9 of Central Excise Valuation (Determination of Price of Excisable goods) Rules, 2000. Consequently, demand of central excise duty was raised against LHL and notice for imposing penalty was issued to both the LHL and ITC. The said demand was confirmed by Order-In-Original dated 10.08.2010 holding that LHL and ITC were related in terms of Section 4(3)(b)(iv) of the Central Excise Act, 1944. The penalty was also imposed on both LHL and ITC. The matter was challenged by both the parties before tribunal and tribunal vide order no. A/100002-100003/2014 dated 01.01.2014 set aside the order and remanded the matter back to the original adjudicating authority with following observations :- 11. In view of the above facts though mutuality of interest is not established but it has been correctly held by the adjudicating authority that the judgment of Hon'ble Supreme Court in the case o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of Rule 11 of the Valuation Rule 2000. Needless to say that appellants should be given an opportunity to present their case in de-novo proceedings, before taking a final view on the issue. The Commissioner in the remand proceeding again confirmed the demand of central excise duty amounting to Rs.2,48,06,064/- along with interest under Section 11AB of the Central Excise Act, 1944, penalty under Section 11AC of the Central Excise Act read with Rule 25(1) of Central Excise Rules, 2002 was also imposed on LHL and a penalty of Rs.60 lacs was imposed on ITC under Rule 26(1) of Central Excise Rules, 2002. Aggrieved by the said order, the LHL and ITC are in appeal before this tribunal. Revenue is also in appeal against the said order. 02. Learned Counsel for LHL and ITC argued that the matter was remanded by tribunal with specific directions to do valuation under Rule 11 of CV Rules. Rule 11 of CV Rules reads as under:- Rule11. If the value of any excisable goods cannot be determined under the foregoing rules, the value shall be determined using reasonable means consistent with the principles and general provisions of these rules and sub-section (1) of section 4 of the Act. He argued ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s, etc. The Central Excise duty paid by Leamak will be reimbursed at actual after receipt of a debit note by ITC. * The raw materials / packing materials required for use will be in accordance with specifications given by ITC who would give list of approved suppliers. * If there is a delay in supply, ITC is entitled for the discount of 0.50 Paise / kg. on the agreed price. * Leamak will arrange for the moulds for the manufacture of confectionary. * Leamak shall deliver the confectionary to ITC ex-factory and deliver the same to the transporter nominated by ITC. * ITC shall have the right at all times to inspect the premises of Leamak including during the preparation, production, packaging of the confectionary without any notice. * The relationship between Leamak and ITC under the agreement is on a principal to principal basis. Except for certain minor changes relating to the price of the product per kg. the basic features of the agreements were the same. 2.3 He pointed out that In terms of Annexure 2 to the Agreement dated 1.9.2005 the manufacturing charges were paid at Rs.12/- per kg. till 31.10.2005 and thereafter the manufacturing charges were at Rs.13.50 / per kg ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t payment of Rs.25,88,257/- by ITC towards 50% of the cost of moulds, this amount was paid by ITC during the year 2002-2003 and the said moulds were exclusively used in the manufacture of confectionary. This transaction took place much before the impugned period, viz., 2005-2007 and as such has no bearing to the present case. In a five member bench decision in the case of Mutual Industries Ltd., vs. CCE 2000 (117) ELT 578 (T-LB) it was held that if advance was received against moulds and dies, notional interest on such advance is not includable in A.V. However, the cost of moulds and dies should be amortized and included in the A.V. During 2003-04, the agreement was Buy-Sell model and the transaction value has been arrived at as mentioned in Annexure 2 to the agreement. However, duty was being discharged on the value of Rs.13.50 per Kg. 2.8 He further argued that interest free advance of Rs.49,00,000/- was given by ITC to Leamak in the year 2003 and 2005 (October 2003; Rs.30,00,000/- and August 2005; Rs.19,00,000/-) towards working capital needs with an understanding that the said advance will be recovered by ITC from the manufacturing charges payable to Leamak. He submits that th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed by Leamak during the period 1.9.2005 to 31.3.2006 is Rs.13.50 per kg. The Cost Accountant appointed by the Department in his Special Audit Report vide Paras 6.1.2. and 6.1.2.1 observed as follows: "Details of product-wise consumption of items of inputs provided by Leamak by M/s. Shome & Banerjee, Cost Accountants have tallied, except for free goods provided by Leamak (sic) for packing the same in the product packs during the course of manufacture, with the certificates". 2.12 He further argued that the following cost elements are not includible in the assessable value : * Cost of production which was not included by Leamak * Outward freight from Leamak to ITC * Marketing spends by ITC * Fixed cost of ITC He argued that as far as outward freight from Leamak to ITC is concerned the confectionary is handed over to the transporters nominated by the ITC at factory gate at Leamak. The Hon'ble Supreme Court in the case of Escorts JCB Limited vs. CCE - 2002 (146) ELT 31 (SC) have held that if the sale of goods had taken place at the factory gate and therefore, the place of removal was not the premises of the buyer. In view of the provision of Section 23 and Section 39 of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....larified that "Administrative Overheads in relation to Marketing, Projects Management, Corporate Office or any other expense not related to manufacturing activities shall be excluded from the manufacturing cost". Further, the IC&WA, New Delhi in their clarificatory letter No. Tech/05/2007 dated 11.5.2007 addressed to CC, Ahmedabad in response to a letter No.MP/PI-V/Ing-20/0506 Pt-1/2451 dated 9.4.2007 stated that "Marketing spends and fixed cost of ITC is not includable in the assessable value of the impugned goods cleared by Leamak to ITC". 2.15 He argued that the differential duty demanded in this case covers the period Sept 2005 to March 2007. In this case a Show Cause Notice was issued on 8.7.2009. In respect of four SCNS issued to Leamak on 2.6.2004, 7.12.2004, 3.6.2005 and 14.10.2005, the Department was fully aware of the Manufacturing Agreements between the Appellants and ITC and in the said SCNS, the valuation of the confectionary manufactured and cleared by the Appellants was never disputed by the Department. Therefore the demand is barred by Limitation. 2.16 He pointed out that in the instant case, viz., ITC, the Appellants, were not made as Respondents during the Denov....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... in the determination or the declaration of the assessable value by Leamak. The Tribunal have given only specific directions regarding the re-determination of the assessable value under Rule 11 of the CVR, 2000 and it was not an open remand to the effect that "All issues are kept open." 2.19 He pointed out that the order of the adjudicating authority is not proper in terms of directions of the tribunal. He pointed out that the tribunal has specifically directed that the assessment needs to be done in terms of Rule 11 of CV Rules. He argued that for arriving at the assessable value in the instant case in normal course the recourse has to be taken to Rules 4 to 10 of the CV Rules whenever it is not possible to determine the value under Section 4(1)(a). He argued that it is not in dispute that the goods have not been sold to the factory gate and therefore Rule 4,5,6 and Rule 8 of the CV Rules cannot be applied. 03. Learned AR argued that the impugned order is not correct in so far as it hold that even Rule 7 of the Valuations Rules cannot be applied to the instant case. He argued that Rule 7 is the appropriate rule which should be applied in terms of Rule 11 of the CV Rules. He poin....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mined using reasonable parameters consistent with the express provisions of the Rules and sub-section (1) of Section 4 of the Act. However, the rule itself does not contain any formula and therefore, cannot be applied independently de hors the provisions of Rules 4 to 10 and Section 4(1) of the Act." 3.2 He argued that while tribunal has directed invocation of Rule 11 of the CV Rules, the said rule should have been applied read with Rule 7 of the CV Rules as the said rule is the closest approximation to the nature of the transaction. He also relied on the decision of the tribunal in the case of ALUPEX INDIA PVT. LTD.- 2009 (247) ELT 253 (T) wherein, the tribunal observed as follows:- "The words "using reasonable means consistent with the principles and general provisions of these rules" occurring in Rule 11 clearly indicate the relevance of the provisions of Rule 8. Indeed the provisions and the principle involved are the guiding factors for determining the assessable value of the goods under Rule 11. The underlying object of the rules is to arrive at a value which would be closest to the transaction value of the goods, had the goods been sold in the circumstances mentioned in S....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... and above the cost of production and operating cost to include their profit. 3.4 He argued that in view of the peculiar circumstances, the adjudicating authority should have determined the assessable value of the goods manufactured by the assessee on the basis of the value of such goods sold by the principal manufacturer at the same time from the "place of removal‟ i.e. depot. 04. Countering the above assertions of the learned AR, the learned counsel for LHL and ITC argued that the LHL has its own land, building, plant and machinery and full fledged factory. He argued that apart from manufacturing sugar confectionary for ITC, LHL is also manufacturing Lozenges and supplying the same to pharmaceuticals companies. He argued that LHL were contract manufacturing for ITC Ltd. on principal to principal basis under the brand name of ITC and the goods were cleared to authorized/nominated transporters of ITC at the factory gate only, after determining the value in terms of Section 4 and paying duty thereon. 4.1 He further argued that after delivery of goods at their factory gate to transporter of ITC, LHL neither had ownership/possession/control or any nexus with the said goods ma....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e dismissed on this count itself. 05. We have considered the rival submissions. We find that the issue involved in the instant case is the valuation of the goods manufactured by LHL on behalf of ITC wherein, the ITC has provided certain inputs, machineries and funds to LHL. The matter was remanded by tribunal with the following observations :- 11. In view of the above facts though mutuality of interest is not established but it has been correctly held by the adjudicating authority that the judgment of Hon'ble Supreme Court in the case of M/s Ujagar Prints (Supra) cannot be made applicable to the present proceedings because the present case is clearly distinguishable from the facts and the principles laid down by Apex Court for valuation of the goods in case of manufacture of goods on job work basis. In the case of M/s Ujagar Prints only one of the several materials i.e., grey fabrics was supplied to the job worker whereas in the present case all the raw materials and packing materials were supplied by ITC. Various gift articles were also supplied by ITC for packaging, the machinery worth more than Rs.7 crores required for manufacturing of confectionery was supplied by ITC on....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... provisions of these rules and sub-section (1) of section 4 of the Act. 5.1 No one has challenged the earlier order of the tribunal and therefore, the directions given in the earlier order of the tribunal become final and binding on both the parties. In this background the following issues are settled:- (i) The LHL and ITC are not related parties. (ii) Rule 1 to 10 of the CV Rules did not fit directly in the facts of the situation. (iii) The assessment has to be done in terms of Rule 11. (iv) The said decision of the apex court in the case of M/s Ujagar Prints cannot be applied to the instant case. As in the instant case not only certain inputs but also machinery and funds to some extent were supplied by the principal manufacturer namely ITC. 5.2 The larger bench of tribunal in the case of Cadila Pharmaceuticals Ltd.- 2008 (232) ELT 245 (Tri.-LB) has held as follows:- "23. As mentioned above, Rules 4 to 11 of the Valuation Rules contain provisions as to the manner of determination of values. However, learned advocate for the appellant and learned SDR for the Revenue fairly agreed that none of the rules - from Rule 4 to Rule 10 (Rule 10A was inserted later in 2007) - cov....
X X X X Extracts X X X X
X X X X Extracts X X X X
....xcisable goods under assessment, as may appear reasonable. [RULE 5.Where any excisable goods are sold in the circumstances specified in clause (a) of sub-section (1) of section 4 of the Act except the circumstances in which the excisable goods are sold for delivery at a place other than the place of removal, then the value of such excisable goods shall be deemed to be the transaction value, excluding the cost of transportation from the place of removal upto the place of delivery of such excisable goods. Explanation 1. - "Cost of transportation" includes - (i) the actual cost of transportation; and (ii) in case where freight is averaged, the cost of transportation calculated in accordance with generally accepted principles of costing. Explanation 2. - For removal of doubts, it is clarified that the cost of transportation from the factory to the place of removal, where the factory is not the place of removal, shall not be excluded for the purposes of determining the value of the excisable goods.] RULE 6.Where the excisable goods are sold in the circumstances specified in clause (a) of sub section (1) of section 4 of the Act except the circumstance where the price is....
X X X X Extracts X X X X
X X X X Extracts X X X X
....No notional interest on the advance received by X is includible in the transaction value. Illustration 2. - A, an assessee, manufactures and supplies certain goods as per design and specification furnished by B at a price of Rs. 10 lakhs A takes 50% of the price as advance against these goods and there is no sale of such goods to any other buyer. There is no evidence available with the Central Excise Officer that the notional interest on such advance has resulted in lowering of the prices. Thus, no notional interest on the advance received shall be added to the transaction value.] RULE 7.Where the excisable goods are not sold by the assessee at the time and place of removal but are transferred to a depot, premises of a consignment agent or any other place or premises (hereinafter referred to as "such other place") from where the excisable goods are to be sold after their clearance from the place of removal and where the assessee and the buyer of the said goods are not related and the price is the sole consideration for the sale, the value shall be the normal transaction value of such goods sold from such other place at or about the same time and, where such goods are not sold....
X X X X Extracts X X X X
X X X X Extracts X X X X
....excise valuation rules. The impugned order takes a view that all those elements of expenditure which would have been incurred by ITC had they manufactured the product at their own are required to be included in the assessable value of the goods. The impugned order further argues that since the goods are not sold by LHL but are sold only by ITC at their godown, all the cost till the goods reach the godown are includable in the assessable value. On the aforesaid logic, the impugned order comes to the following calculation of differential duty: Cost of production not included by Leamak 17269155 O/w freight from Leamak to ITC 49503710 Marketing spends by ITC 168721542 Fixed Costs of ITC 68286233 Total differential value 303780640 Differential duty 24302451 E.Cess @2% 17564 SHE Cess @ 1% (for March 07) 24806064 5.4 It is seen that the data from the chart has been picked from the letter dated 18.03.2015 by ITC- Bangalore which reads as under:- 1.The information is provided without prejudice to the reply and the written submissions made at the time of personal hearing by our contract manufacturing unit M/s Leamak Healthcare Pvt.Ltd. 2.It is to bring to your ki....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... are generally incurred for the 'Candyman' and 'Mint-O' brands. Total marketing spends have been apportioned on the total sales volume to arrive at the per/Kg cost. 3. Fixed Costs represents salaries, administration expenses, etc. Total fixed costs have been apportioned on the total sales volume to arrive at the per/Kg cost. 4. Marketing Spends/Fixed Costs are incurred by us centrally for the confectionery business as a whole and cost/Kg has been apportioned for the quantity manufactured/cleared at the respective contract manufacturing locations. 5. From the above data provided by M/s ITC it is evident Government has suffered loss of duty by not including the freight charges from the factory to godown, the marketing expenses and the fixed costs which form part of assessable value in normal course of manufacturing business. Both the assessee and ITC had suppressed these cost elements and benefitted by this unholy practice. Because ITC has basically acted as Trader and got the goods manufactured from assessee, I feel that its profit margin needs to be excluded while arriving at the assessable value. Thus, in my opinion, except for the duty of Excise, including c....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... She has also stated that the appellants are only hired labourers of their principals and duty should be paid on the intrinsic value of the goods. The Commissioner's finding that the appellant is a hired labourer has not much basis. The agreement between the appellants and GIL/MCL indicate the transaction value. The advertisement charges incurred by the buyer on behalf of the seller can be included but in the present case the goods bore the brand name of GIL/MCL. Therefore, we cannot come to the conclusion that GIL/MCL incurred the advertisement charges on behalf of the appellant. The definition of transaction value is reproduced herein below :- "Transaction value" means the price actually paid or payable for the goods, when sold, and include in addition to the amount charged as price, any amount that the buyer is liable to pay to, or on behalf of, the assessee, by reason of, or in connection with the sale, whether payable at the time of the sale or at any other time, including, but not limited to, any amount charged for, or to make provision for, advertising or publicity, marketing and selling organization expenses, storage, outward handling, servicing, warranty, commission or....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... trade and have not influenced the assessable value in any manner. The said advances made by ITC were to be paid by Leamak. It has been argued that the advances were made in October-2003 and August- 2005. It has been argued that the period of dispute in the instant case is September, 2005 to March, 2007 thus, it is obvious that a large part of the advances were paid back by the appellants before the dispute period. It has been argued that the average conversion charges received by Leamak to ITC are approximately Rs.70 lacs per month. In this background of advance of Rs.49 lacs could hardly be said to have influenced the price. We find significant force in the argument that these advances received much prior to the dispute period could not have possibly influenced the price not only for the reason of the period of receipt of these advances but also the quantum of advances which appear to be in the ordinary course of trade considering the level of transactions between LHL & ITC. 5.10 The LHL and ITC have contended that the payment made towards 50% of the cost of moulds was made in the year 2003-04 i.e. prior to dispute period of 2005-06. He pointed out that during the period 2003-04....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... factory and supplied as spares along with machinery cannot be added to the value of the machinery manufactured and sold by the appellants, for the purpose of assessing the machinery to duty. 3.There is merit in the contention of the appellant that the price of the bindis in question has no relation to the assessable value of the Soaps manufactured on contract basis. That price remains fixed under the contract. The additional packing of bindis have no connection to the price of soap. Therefore, there was no requirement for the addition of the price of bindis to the price of the soap to arrive at the assessable value of soap. The contrary determination made in the impugned order is not sustainable. Accordingly, the appeal is allowed, with consequential relief, if any, to the appellants. The said decision has been approved by Hon‟ble Apex court as reported in 2004 (163) ELT A119. Thus the value of free gifts cannot be included in the value. 5.12 The ITC has deputed certain employees by Leamak. The role of the employees was coordination of dispatches of material to various godowns, supervision of quality of raw material, packing material and finished goods. The appellant ha....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nded that the amount of Rs.1,72,69,155/- which as been sought to be included in the assessable value is the value which the appellant have already included in the assessable value, fresh inclusion of the said in the assessable value amount to double taxation. The cost of production not included by Leamak has already suffered excise duty and the appellants have not contested the same. The contention of the appellant is that the duty has been sought to be recovered twice on this value. From the letter of the appellant dated 18.03.2015 reproduced above, it appears to be factually correct however this needs to be verified. 06. It is seen that revenue has filed appeal seeking assessment under Rule 7 of the CV Rules. It is seen that the order of tribunal dated 01.01.2014 has clearly laid down that assessment has to be done in terms of Rule 11 of the CV Rules. The revenue has not challenged the said order and therefore, the said order has become final. In this background, the assertion of the revenue that assessment needs to be done in terms of Rule 7 of the CV Rules cannot be accepted. The appeal of revenue is therefore dismissed. 07. We also come to our conclusion that no excise duty ....