By TIOL News Service

MUMBAI, JAN 16, 2014: THE appellants are manufacturers of cosmetics and toilet preparations such as hair dyes, shampoo, conditioners, etc. falling under Chapter 33 of the Central Excise Tariff. The cosmetic products are called 'catalogue products'. For promoting the catalogue products, articles similar to the catalogue products are issued free-of-cost along with the catalogue products and the same are called 'promotional products'. In most of the cases the promotional products is out of pack i.e. the catalogue products and the promotional products were not issued in the same pack i.e., for example, with catalogue product of 400ml shampoo, the appellants offered promotional pack of 90 ml. of conditioner. The package of shampoo bears a declaration that "Free - 90 ml conditioner with this pack”. The package of conditioner would bear a declaration such as "Free Pack"and "Free: Not for Retail Sale."

The appellant was determining the assessable value of the promotional products under Rule 8 of the Valuation Rules, 2000 by taking into account its cost of production plus 10% notional profit. This method of valuation was followed in pursuance to the Board's circular NO. 643/34/2002-CX dated 01/07/2002. This circular was superseded vide Circular No. 813/10/2005-CX dated 25/04/2005 wherein it was clarified that in the case of free samples, the valuation should be determined under Rule 4 of the Valuation Rules, 2000. However, the appellant continued to determine the assessable value of the out-of-pack promotional products as per Board's Circular dated 01/07/2002.

The DGCEI issued three SCNs demanding differential duty as given below:

And the CCE, Pune-I confirmed the demands and imposed penalties and interest. Goods valued at Rs.19,31,521/- seized during investigation were allowed to be redeemed on payment of a fine of Rs.5 lakhs.

The appellant is before the CESTAT.

It is inter alia submitted that the promotional pack and the trade pack constitute a combination package by virtue of cross-declaration on both of them; the assessable unit for the purpose of valuation is the combination pack consisting of a trade pack and promotional pack and the assessable units are not trade pack and promotional packs separately; the appellant has discharged duty on the MRP affixed on the trade pack, which is the MRP of the combination pack and, therefore, discharge of duty on the MRP of the trade pack would constitute discharge of duty on the combination pack.

Reliance is placed on the decisions in Millenium Appliances India Ltd. Vs. Commissioner of Central Excise 2008-TIOL-975-CESTAT-BANG, Anglo French Drugs 2007-TIOL-2114-CESTAT-BANG , Geoffery Manners 2006-TIOL-1271-CESTAT-MUM, Vinayak Mosquito Coil Manufacturing Co. 2004-TIOL-827-CESTAT-BANG; RashtriyaIspat Nigam Ltd. 2004-TIOL-823-CESTAT-BANG ; Procter & Gamble India Ltd. 2005-TIOL-151-SC-CX and ICI India Ltd. 2004-TIOL-424-CESTAT-MUM in support of their stand.

The Special Consultant for the Revenue justified the order of the adjudicating authority by inter alia citing the following decisions Indian Drug Manufacturer's Association 2006-TIOL-292-HC-MUM-CX, Blue Cross laboratories Ltd. 2006-TIOL-1142-CESTAT-MUM-LB, Cadila Pharmaceuticals Ltd. 2008-TIOL-1668-CESTAT-AHM-LB. On the point of limitation advanced by the appellant, the Special Consultant justified the same by mentioning that the appellant was aware of the instructions issued on 25/04/2005 more so since a copy of the same was recovered from the appellant's premises.

The Bench adverted to the definition of 'Combination Package' defined in rule 2(c) of the PCR, 1977 and observed -

"5.2 …to constitute a combination package it should be a package containing dissimilar commodities. In the present case, it is an undisputed fact that the trade packs and the promotional packs are packed separately and they are not packed in a single package. They are also dispatched to the dealers and the retailers separately. Therefore, it is difficult to accept the contention of the appellant that they constitute a combination package. The very conduct of the appellant in not packing them together and discharging excise duty separately on both of them, i.e., under Section 4A of the Central Excise Act in respect of the trade pack and under Rule 8 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 in respect of promotional pack clearly shows that the appellant themselves did not treat them as a combination package. It is also on record that only w.e.f. April, 2009 the appellant introduced "combination packages"thereby saving excise duty on promotional packs. Earlier the regular trade packs were distributed separately making the promotional packs liable to Central Excise duty. In view of the above admitted position, as evident in the written submissions filed by the appellant before the adjudicating authority as also before us, the argument of the appellant that the trade packs and the promotional packs should be treated as a combination pack fails and is rejected accordingly.

5.3 The next question is whether the promotional pack is liable to excise duty and if so, under what provision of law value of the promotional pack has to be computed. The promotional pack is also a cosmetic product classifiable under Chapter 33 of the Central Excise Tariff and there is no dispute in this regard. Merely because the same is supplied free-of-cost, it does not obliterate the liability to pay excise duty of the promotional pack. It is a well settled position in law that excise duty is on manufacture and not on sale of the goods. Therefore, irrespective of the fact whether the goods are sold or otherwise dispose of, liability to excise duty is attracted, the moment the goods are manufactured. Therefore, notwithstanding the fact that the promotional packs are given free, they are liable to excise duty.

5.4 The next question is what should be the value on which excise duty liability has to be discharged on the promotional packs. Inasmuch as the goods are not sold but are given free, resort has to be made to Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 to determine the value of the promotional packs for the purpose of excise levy. As regards the rule applicable in respect of the goods sold, the decision of the hon'ble Bombay High Court in Indian Drugs Manufacturer's Association's case (supra) clearly lays down the legal position…."

And concluded that it is crystal clear that in respect of goods distributed free-of-cost, the value has to be determined in terms of Rule 4 read with Rule 11 and Rule 8 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 has no application whatsoever.

The Bench also adverted to the decisions in Blue Cross Laboratories Ltd., Indian Drug Manufacturer's Association, M/s. Kennametal India Ltd., Bangalore and Cadila Pharmaceuticals Ltd. andconcluded that it is Rule 4 of the Valuation Rules read with Rule 11 which would apply as far as the promotional packs which are distributed free-of-cost are concerned and which position was made clear by the Board Circular dated 25/04/2005.

In the matter of invocation of the extended period of limitation, the Bench observed that from the investigation and the statements recorded of the officials concerned that the Board's Circular dated 25/04/2005 was in the knowledge of the top officials of the appellant's firm yet they chose to not follow the same. Further, in the ER1 returns and the invoices issued, there is no mention about free supply of any promotional products along with the trade pack at all and therefore, the contention of the appellant that the department was aware of the practice followed by them and they had declared this information to the department is completely incorrect. So also, though the company's advocate Mr. Karl Shroff had also advised that duty liability has to be discharged in terms of Board's Circular dated 25/04/2005 the appellant did not choose to follow the same and hence the alibi of bona fide belief fails flat on its face, the Bench held. In fine, the imposition of penalty under Section 11AC was upheld.

As far as imposition of redemption fine is concerned, the Bench noted that the seized goods were released on execution of bond/bank guarantee and, therefore, the argument of the appellant that the goods are not available for confiscation if totally incorrect. Inasmuch the decision to confiscate the goods and impose fine in lieu thereof is correct in law as held by the apex Court in the case of Weston Components vs. Commissioner 2002-TIOL-176-SC-CUS, the Bench observed.

Holding that there is no merit in the appeal, the same was dismissed.

In passing : Hope issuance of notification 16/2013-CE(NT) dated 31/12/2013, prescribing tariff value under section 3(2) of the CEA , 1944 in respect of goods falling under tariff heading 3304 (beauty or make-up preparations and preparations for the care of the skin, etc.) of the Central Excise Tariff and in respect of which the provisions of section 4A of the Central Excise Act, 1944 do not apply, does not have anything to do with this case?  

(See 2014-TIOL-78-CESTAT-MUM)