By TIOL News Service

MUMBAI, MAY 09, 2013: THE appellants are engaged in the manufacture of wire rods falling under Chapter sub-heading 72142090 of CETA, 1985. The appellants received inputs, i.e. billets, from their Jamshedpur unit on payment of duty on the value determined 115%/110% of cost of production in terms of Rule 8 of the Central Excise Valuation Rules, 2000. The duty paid on the billets was taken as credit by the appellants. The appellants manufactured wire rods and stock transferred the same to their Borivali unit on payment of duty. However, on scrutiny of records by the department, it was observed that the appellants while computing the cost of production of wire rods only took into consideration the cost of production of the billets instead of 115%/110% of the cost of production of the billets, which resulted in short payment of duty.

Demand notices were issued and the same were confirmed along with imposition of equivalent penalty and also fine. The total duty involved is around Rs.8.61 crores and the fine is Rs.1.50 Crores.

The appellant is before the CESTAT against the orders passed by the CCE, Thane-II. The matter was heard on three occasions in the month of January, 2013 and the order was passed recently.

The appellant submitted that the contention of the department is absurd by giving the following illustration -

"…if the appellants have 10 factories situated at different locations and one factory is manufacturing goods which are intermediate goods for the other factory, the cost of production of goods manufactured at first factory is Rs.100/- and the first factory would pay the duty on Rs.110/- (110% of cost of production). The second factory received the goods from first factory and used in the manufacture of goods. The processing cost of second factory is Rs.40/-. In this situation if cost of raw material is taken as 110, then the cost of production of goods manufactured at second factory would be 150 (110 + 40) and the assessable value would be Rs.165/-. The second unit has cleared the goods to third unit for further manufacture. The third unit manufactures the goods and processing cost of third unit is Rs.100/-. The third unit clears the goods to fourth unit. In this situation if cost of raw material is taken as 165, then the cost of production of goods manufactured at third factory would be Rs.291.5 i.e. [{(150 x 110%) + 100} x 110%]. This method of determination of the value of the intermediate goods would make the value of the final product much greater than the actual sale price of the goods."

They also relied on the CBEC Circulars dated 30.06.2000 & 13.02.2003 and submitted that the cost of production for the purpose of Rule 8 is to be determined based on CAS-4 issued by ICWAI, vide which it is clearly stated that the cost of material consumed shall be the cost of material, duties and taxes, freight inwards, insurance and other expenses directly attributable to procurement; that 110% of the cost of production of billets is the value of billets for the purpose of payment of excise and not the cost of billets of Tarapur unit.

Reliance is also placed inter alia on the decisions in Union Carbide vs. CCE - (2003-TIOL-62-SC-CX), Hindustan Polymers vs. CCE - (2002-TIOL-287-SC-CX-LB), Orissa Cement Ltd. vs. State of Orissa & CCE vs. Special Steel Ltd. - (2010-TIOL-1176-CESTAT-MUM). The plea of time bar was also taken by contending that the demand is a purely interpretational issue.

The Revenue representative inter alia submitted -

"5.6 …once the value is arrived at by the unit in respect of goods to be transferred to another unit, there is no scope for receiving unit to make any adjustment in the value specially when they are taking CENVAT credit. The value shown in the invoices issued by Jamshedpur unit for transferring the goods for further processing at Tarapur unit represents transaction value. The claim that 15%/10% would not be included in the cost of material is not acceptable and CAS-4 does not stipulate that this method will be applied only once. So long as the goods are captively consumed in different units of the same company, this rule has to be applied."

The Bench in a detailed order negated the submissions made by the appellant and also distinguished the case laws relied upon.

On the "absurdity"pointed out by the appellant, the Bench observed -

"6.4 As regards the hypothetical question raised by the appellants that in case the appellants have 10 factory situated at different location, then the value of the intermediate goods determined in the manner adopted by the department would be much greater than the actual sale price of the goods and the same would give the said meaning to Rule 8. It is pertinent that there cannot be real answer to hypothetical question, especially when the provisions of law are clear and real facts are available for arriving at the value in case of captive consumption and law cannot be held to be absurd by merely taking shelter of hypothetical situation. Further, it is well settled principle in law that court cannot read anything into the statutory provisions which is plain and ambiguous."

On the issue per se, the Bench held -

"6.2 As already discussed above, the value of goods cleared for captive consumption would be 115/110% of the cost of production or manufacture of such goods and as per the Board circular dated 13.2.2003, the cost of production of captively consumed goods will have to be construed strictly in accordance with CAS-4. The relevant portion of CAS-4 is reproduced hereunder:-

"5.1 Material consumed

Material consumed shall include materials directly identified for production of goods such as:

(a) indigenous materials

(b) imported materials

(c) bought out items

(d) self manufactured items

(e) process materials and other items

Cost of material consumed shall consist of cost of material, duties and taxes, freight inwards, insurance, and other expenditure directly attributable to procurement. Trade discount, rebates and other similar items will be deducted for determining the cost of materials. Cenvat credit, credit for counter availing customs duty, sales tax set off, VAT, duty drawback and other similar duties subsequently recovered/recoverable by the enterprise shall also be deducted”.

Thus cost at Tarapur unit as per Rule 8 would be 115%/110% of the cost or production of billets and not the cost of raw materials consumed for the manufacture of billets."

The Bench concluded thus -

"7. As already discussed supra, while taking CENVAT credit on the duty paid on billets, the appellants recognize the cost as 115%/110% of the cost of production which is nothing but a conscious and positive act on the part of the appellant. Similarly, short payment of duty by under valuation of wire rods is equally a conscious and positive act of suppression of facts on the part of the appellant as also discussed supra. In these circumstances, raising a hypothetical question and taking shelter of revenue neutrality does not come to the appellant's rescue. Therefore, we find that the impugned orders sustainable and we do not find any reason to interfere with the orders which are upheld in toto and the appeals are dismissed."

In passing: There is more to come.

(See 2013-TIOL-707-CESTAT-MUM)