2021-TIOL-294-CESTAT-DEL-LB

Krishna Food Products Vs Addl.CCGST & CE

CX - The first appellant M/s Krishna Food Products is a contract manufacturing unit engaged in manufacturing biscuits for its principal M/s Parle Biscuits Private Limited (the second appellant) - The main ground of the adjudicating authority for confirming the demand is that as per Rule 2(m) read with Rule 7 of CENVAT Credit Rules, 2004 only an office of the manufacturer can issue invoice in the capacity of input service distributor to its own manufacturing unit, whereas in the present case, the First Appellant was not the manufacturing unit of the Second Appellant, hence the credit availed by First Appellant on the strength of ISD invoice issued by the Second Appellant is incorrect – Division Bench observed that the Revenue has no objection to availment of CENVAT credit on inputs used in the manufacture of biscuits even when the ownership of input is of M/s Parle ; that applying the same analogy, CENVAT credit on input service even though received by principal manufacturer but the same is undisputedly related to goods manufactured by M/s Krishna for its marketing, therefore, credit should be allowed; that issuing the ISD invoice is only procedural formality to keep the accounting of input credit correct and straight – however, since view of this bench is in conflict with the view taken by a coordinate bench of CESTAT in case of Sunbell Alloys Company of India Ltd. [ 2014-TIOL-38-CESTAT-MUM ], matter is referred to Larger Bench.

Held:

+ What is important to notice is that rule 7 of the CENVAT Rules allows distribution of credit to its manufacturing units. It does not use the words its “own” manufacturing units. It can, therefore, safely be presumed that the term “its manufacturing units” should include a contract manufacturer, who manufactures in accordance with the provisions of the Registration Exemption Notification. [para 26]

+ In the present case, it is clear from the letter of authorization given by Parle and accepted by the appellant that the appellant manufactured biscuits for and on behalf of Parle as a job worker. Parle was also required to send raw materials and packing materials. The appellant was required to process and carry out inspection of various depots as per the directions given by Parle . In fact, the raw materials and the finished goods were to remain the property of Parle . There can be no doubt that the appellant had effectively stepped into the shoes of Parle . The factual position in the present case and in  Sunbell Alloys  is, therefore, entirely different. [para 29]

+ It is, therefore, not possible to accept the contention of the Department that principal and the contract manufacturer being separate legal entities, the contract manufacturer, even when operating under the Registration Exemption Notification, cannot be termed as a manufacturing unit of the principal. [para 31]

+ A reading of the aforesaid press release [dated 12.08.2004 issued by the Press Information Bureau, Government of India Ministry of Finance, relating to the draft CENVAT credit rules] shows that the intention behind the framing of the Credit Rules was to allow credit of taxes paid on all services, which form part of the assessable value. Thus, advertisement, market research, sales promotion and marketing, of which credit has been distributed by  Parle to the appellant and which services have also been specifically referred to in the press release, should be allowed. [para 33]

+ According to the Department, Parle , which has its own manufacturing units and also operates through contract manufacturers, can distribute credits to its own units but cannot distribute credits to contract manufacturers who manufacture the goods for and on behalf of Parle though they operate on identical basis as the units of Parle . The interpretation put by the Department clearly seeks to dilute the spirit behind the CENVAT Rules and the Registration Exemption Notification. The whole purpose of CENVAT credit is to capture all costs so as to evade the cascading effect of duties and taxes.  [para 34]

+ A narrow and a literal interpretation of the phase its manufacturing units should, therefore, be avoided, more particularly when the Registration Exemption Notification provides for authorisation for manufacture of goods on behalf of the principal manufacturer. There appears to be no good reason as to why CENVAT credits should not be allowed to be distributed to a job worker in the facts and circumstances of the present case. [para 35]

+ In the present case the appellant is paying duty on the sale price fixed by the principal, which includes all costs including sales promotions and marketing. CENVAT is a beneficial scheme with the stated purpose of allowing CENVAT credit of all taxes paid on inputs and services so as to avoid cascading effect of taxes and duties.  [para 37, 41]

+ Thus, even in terms of the provisions of rule 2(m) and rule 7 of the CENVAT Rules, as they stood prior to 01.04.2016, the appellant could distribute CENVAT credit in respect of the service tax paid on inputs services to its manufacturing units, including a job workers.  [para 42]

+ Such being the position, we also find substance that the amended provisions of rule 2(m) and rule 7 of the CENVAT Rules, after the 01.04.2016, merely seek to rectify   the lacuna in the unamended rules and, therefore, would have effect from the inception of the rules.  [para 43]

+ The answer to the first issue referred to by the Division Bench would, therefore, be that Parle was justified in distributing credits on input services attributable to the final product on a pro-rata basis proportionate to the turnover of each unit between the manufacturing plants of Parle and its contract manufacturing units, including the appellant, under rule 7(d) of the CENVAT Rules.  [para 44]

+ In view of the answer to the first issue in favour of the appellant, it would not be necessary to answer the second issue referred by the Division Bench. [para 45]

+ Matter be placed before the Division Bench for disposal of the appeal.

- Reference answered: DELHI CESTAT

2021-TIOL-293-CESTAT-MUM-LB

Jet Airways India Ltd Vs CC

Cus - Appellants are engaged in the business of air transportation services on domestic and international sectors - Generally fuelling of aircraft with Aviation Turbine Fuel (ATF) is done at the airport from where the aircraft starts its journey - (For e.g. when the aircraft is flying from, say Delhi, aircraft is filled with ATF which is consumed during the course of such flight outside India. Similarly, ATF filled at the Foreign airport is to be consumed on the return journey to India.) - After return of aircraft from a foreign sector, the same aircraft may get deployed on domestic sector - In such case, Custom duty is required to be paid on the remnant ATF in the Aircraft at the time of its conversion from international sector to domestic sector -Appellants were paying the duty on such remnant ATF after determining its quantity and value as per the guidelines prescribed by Air Cargo Complex, Mumbai Air Customs viz. Commissioner Instruction No 06/2006 – However, while determining the value they were not adding any amounts towards freight and insurance as required in terms of Rule 10(2) of the Customs Valuation Rules - A SCN was issued to assessee demanding differential duty of Rs.8,70,64,405/- and the same was confirmed along with interest and equivalent penalty was imposed –In appeal, the Division Bench of the CESTAT observed that the said instruction is neither the statement of law or a circular issued by the Board clarifying the position in law; thatthesale price of IOC (adopted by assessee) can never be inclusive of international freight insurance as these expenses are never incurred by IOC in making such sales at Indian Airports; that even going by the instruction of the Commissioner, sale price of IOC, will have to be further loaded with the freight and insurance charges to determine the CIF value of imported goods; that in terms of Rule 10(2) of Customs Valuation Rules, 2007 which is parimateria with the erstwhile Rule 9(2) of CVR, 1988, value has to be added towards insurance freight and landing charges; that the Bench is not in agreement with the submissionsof assessee that actual charges towards the freight are ascertainable as zero;that the impugned order of Commissioner cannot be faulted with;however in view of the contrary view taken in cases of   Interglobe Aviation Limited -    2017-TIOL-3169-CESTAT-DEL   and   Jet Airways (India ) Ltd, Interglobe Aviation, Spicejet Ltd -   2019-TIOL-421-CESTAT-MAD,   the matter is referred to the President for constitution of Larger bench.

Held:

+ Prayer of the Department that the hearing before the Larger Bench should be adjourned because the Civil Appeal against the decision of the Tribunal [M/s. Air India Limited vs. CC, New Delhi] is pending in the Supreme Court is not justified – LB decision in Standard Chartered Bank vs. CST, Mumbai-l 2015-TIOL-1713-CESTAT-DEL-LB relied upon. [para 24]

+ The contention of the Department is that in view of the provisions of rule 10 (2) of the 2007 Rules, the cost of transport of the remnant ATF have to be added to the IOCL price, on which customs duties were discharged by the appellant, and since in the case of import of remnant ATF, the cost of transport cannot be ascertained, the proviso to rule 10(2) should be applied, according to which such cost shall be 20% of FOB value of the goods. [para 32]

+ A perusal of section 14(1) of the Customs Act shows that the value of the imported goods shall be the transaction value of such goods. This transaction value has been explained to mean the price actually ‘paid' or ‘payable' for the goods when sold for export to India for delivery at the time and place of importation. The first proviso to section 14(1) provides for inclusion, in addition to the aforesaid price, any amount ‘paid' or ‘payable' for cost and services, including among others, cost of transportation to the place of importation to the extent and in the manner specified in the Rules.
35. Rule 10(2) of the 2007 Rules, also provides for inclusion of the cost of transportation of the imported goods to the place of importation, but where the cost of transportation is not ascertainable, this rule provides such cost shall be 20% of the FOB value of the goods. This would mean that if no amount is ‘paid' or ‘payable' for transportation of goods, the cost of transportation would be considered as ‘nil' and it cannot be urged that the cost of transport in such a situation is not ascertainable. It is only when some cost of transportation is actually incurred, but it is not ascertainable that the cost of transportation should be taken to be 20% of the FOB value of the goods. [para 34]

+ It is not possible to accept the contention of the learned Authorized Representative of the Department that because of the use of word ‘payable' in section 14(1) of the Customs Act, cost of 20 % of the FOB value of the goods has to be included. [para 36]

+ The words ‘paid' or ‘payable' have been interpreted in various decisions of the Supreme Court. In Eicher Tractors [ 2002-TIOL-06-SC-CUS ] , the Supreme Court pointed out, in the context of the unamended section 14(1) of the Customs Act and the predecessor of the 2007 Rules - namely Customs, Valuation (Determination of Price of Imported Goods), 1988 Rulesthat ‘payable' must be read as referring to ‘the particular transaction' and ‘payability' in respect of the transaction envisages a situation where payment of price may be deferred. [para 37]

+ It is, therefore, clear that an amount should actually be agreed to be paid and a liability created is for such payment, irrespective of actual payment. The use of the word ‘paid' or ‘payable' means that it would cover those cases also where actual payment of the agreed amount for cost and services is deferred to be paid on a subsequent date. [para 40]

+ Even under rule 10(2) of the 2007 Rules, the cost of transport incurred in respect of the imported goods is required to be added to the value of imported goods only if the same has been incurred and does not already form part of the value of the goods that are imported. The first proviso to rule 10(2) of the 2007 Rules contemplates of a situation where the cost of transportation is not ascertainable and it is only in such a situation that 20% of the FOB value of imported goods can be added. [para 41]

+ It, therefore, follows that where transportation of goods is involved and cost is actually incurred or is liable to be incurred for such transportation, such cost has to be added to the transaction value, but where there is no transportation of goods nor there is any liability to incur the cost of such transport, the first proviso to section 14(1) of the Customs Act and rule 10(2) of the 2007 Rules would not be attracted. [para 42]

+ It is not in dispute that the appellant has discharged the duty liability on the price of remnant ATF for more than a decade treating it to be imported goods taking into consideration the prevalent IOCL price. The question that arises for consideration in this appeal is whether the ATF which is filled in the fuel tank of an aircraft is actually being transported through an aircraft. The answer clearly is that the airlines are not transporting ATF for delivery to India. ATF which is filled in the fuel tank of the aircraft is actually required to fly the aircraft and is a consumable for the airlines. It cannot, in such circumstances, be urged that ATF is being transported through the aircraft. A different situation would, however, arise if an oil company specifically imports ATF in large containers/tanker as ‘goods' or as cargo, for the purpose of selling the same to airlines. There can be no doubt that in such a situation the cost of transportation for import of ATF would have to be included in the transaction value for the purpose of determining the customs duty liability. [para 48]

+ It also needs to be remembered that any excess ATF is on account of emergency/regulatory requirements namely, Civil Aviation Requirement dated July 8, 2011. An aircraft has necessarily to carry sufficient amount of usable fuel to complete the planned flight safety. [para 49]

+ Thus, if there is no transportation of remnant ATF, the notional cost of freight cannot be included in the value of remnant ATF. [para 50]

+ The first proviso to section 14(1) of the Customs Act stipulates that only an amount ‘paid' or ‘payable' for the cost of transportation is to be added to the transaction value. In other words, there must be a liability on the importer to pay an amount towards the cost of transportation. This means that if no such a liability is created, there would be no necessity to add any cost of transportation to the value of the imported goods. Rule 10(2) of the 2007 Rules has to be read in the light of the provisions of section 14(1) of the Customs Act and when so read it clearly transpires that only an amount that is actually ‘paid' or ‘payable' towards the cost of transportation can be added to the transaction value and if no amount is ‘paid' or ‘payable' there would arise no occasion to add anything to the transaction value towards transport. [para 52]

+ Section 14 contemplates a situation wherein a liability is created on the importer to pay an amount towards the cost of transportation. However, when no such liability is created in the first instance, the question of adding any cost of transportation to the transaction value of the imported goods does not arise. Therefore, in order to avoid rendering rule 10(2) of the 2017 Rules ultra vires section 14(1), it must be interpreted in such a way that only an amount which is actually ‘paid' or ‘payable' towards the cost of transportation alone can be included in the transaction value of the imported goods. However, when no such amount is paid or payable at all, the question of adding the cost of transportation, to the value of the goods imported into India does not arise. [para 60]

+ It is, therefore, clear that if no cost of transportation is incurred/suffered by the airlines, no amount as "cost"is payable towards transportation of the remnant ATF. [para 64]

+ The Division Bench did not properly appreciate the decision rendered by the Supreme Court in Wipro. The Supreme Court made it clear that all the cost of services have to be included only on actual basis and only when such cost is not ascertainable that the proviso would get attracted. Transaction value, as noted above, contemplated under section 14(1) of the Customs Act means the price actually ‘paid' or ‘payable' for the goods when sold for export to India for delivery at the time and place of importation. ‘Payable' merely envisages a situation where the payment is deferred. What has to be seen, therefore, is whether the ATF which is filled in the fuel tank of an aircraft is actually transported through the aircraft. It is only when transportation of goods is involved and cost is incurred or is liable to be incurred for such transportation, that such cost can be added to the transaction value. [para71]

+ In the instant case, it has been found as a fact that neither the ATF is transported nor any cost is incurred. The notional value of transportation under the proviso to rule 10(2) of the 2007 Rules cannot, therefore, be added to the transaction value. The transaction value has to be determined strictly in accordance with section 14(1) of the Customs Act and rule 10(2) of the 2007 Rules. [para 73]

+ In any view of the matter, the inclusion of the cost of insurance or the cost of transport is dependent on the provision of section 14(1) of the Customs Act and rule 10(2) of the 2007 Rules and not on any practice followed by the Customs Authorities/Airlines. [para 78]

+ As to whether any transport charges have to be added is an issue to be examined in every case and in the present case it has been found as a fact that neither remnant ATF fuel is transported by the appellant nor any cost has been incurred by the appellant. [para 80]

+ The proviso to rule 10(2) of the 2007 Rules uses the phrase ‘cost of transportation is not ascertainable'. The dictionary meaning of "ascertain" is to discover a fact or make sure. Can it be said that if no cost is incurred at all, it should be treated as ‘nil' or it should be treated as ‘not ascertainable' and, therefore, 20% of FOB value should be added. [para 82]

+ According to the Division Bench referring the matter, since the appellant is carrying remnant fuel as extra baggage in the aircraft, the freight charges should be equal to the extra baggage charges. This observation was made by the Division Bench to repel the contention of the appellant that the actual charges towards the freight are ascertainable as ‘nil', in the facts of the present case. It appears that the Division Bench wanted to add what is called in accounting parlance ‘imputed costs' i.e. cost which are not paid but are derived as if they have been paid. [para 83, 84]

+ There is no provision either in section 14(1) of the Customs Act or the 2007 Rules to add ‘imputed costs' of transportation when actually no costs is incurred by the airlines for carrying its own fuel. [para 85]

+ When a passenger comes to India and brings goods as baggage in excess of duty free allowance, the passenger is required to pay duty as applicable upon the value of goods so brought. The cost of the goods is ascertained either from the invoice value or from the price list of the manufacturer. However, no cost of transportation is added as the passenger himself carries it. In such a situation it cannot be urged that the cost of transportation is ‘not ascertainable' and, therefore, 20% of FOB value has to be added to the value of goods as cost of transportation. [para 85]

+ So long as the Instructions do not run counter to any of the provisions of the Customs Act or the 2007 Rules and are not in conflict with any decision of a Court, they have to be followed by the Officers. [para 86]

+ The inevitable conclusion that follows is that the Division Bench of the Tribunal in InterGlobe Aviation [ 2017-TIOL-3169-CESTAT-DEL ] laid down the correct law. The said decision of the Tribunal in InterGlobeAviation was subsequently followed by the Division Benches of the Tribunal in National Aviation Company of India, Air India Limited and Jet Airways. [para 87]

Conclusion:

"No amount towards alleged transportation cost is required to be included in the value of remnant ATF under rule 10(2) of the 2007 Rules for determining the transaction value under section 14(1) of the Customs Act."

-Reference answered :MUMBAI CESTAT