By TIOL News Service

MUMBAI, APR 30, 2015: THE challenge is that Rule 10Aof CE Valuation Rules, 2000 is ultra vires being beyond the legislative competence of the Parliament. The other challenge is that this Rule travels beyond sections 3 and 4 read with section 37 of the Central Excise Act, 1944. The same also violates the mandate of Article 14 and 19 (1)(g) of the Constitution of India. As a consequence of the above, the petitioners are seeking to quash and set aside a Circular 902/22/2009-CX . dated 20th October, 2009 of the Central Board of Excise and Customs and the final order dated 30th November, 2012 of the Customs, Excise and Service Tax Appellate Tribunal - 2013-TIOL-166-CESTAT-MUM.

The petitioners are engaged in the activity of building body on the motor vehicle chassis supplied by various chassis manufacturers such as M/s. Tata Motors Limited, M/s. Ashok Leyland Limited etc. at their various factories located across the country. The case of the petitioners is that M/s. Tata Motors Limited manufacture the chassis, fit it with the engines for motor vehicles and supply them to the petitioners for building body on the same. M/s. Tata Motors Limited clears this chassis on payment of excise duty under heading 87.06 of the Schedule to the CETA, 1985. The petitioners avail CENVAT credit of duty paid on such chassis and on various raw materials and undertake body building work. Thereafter, the said body is fitted on to the chassis and it is either used as vehicle for transportation of goods or passengers. The factory, plant and machinery and labour for carrying out this activity belongs to the petitioners and neither M/s. Tata Motors Limited are a shareholder of the petitioner-company nor vice-versa. The claim is that these transactions between them are on principal to principal basis. The petitioners are not agents of M/s. Tata Motors Limited.

The petitioners contend that since chassis is supplied free of cost by M/s. Tata Motors Limited to them, they add the cost of chassis to the sale consideration to arrive at assessable value for the purpose of payment of duty of complete vehicle.

Post 1st April, 2007, according to the respondents, the assessable value of the complete vehicle cleared by the petitioners on which they were liable to pay excise duty should be based on the price at which M/s. Tata Motors Limited sold the vehicle to their buyers. This insistence of the respondents came in the light of introduction of Rule 10A in the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000, with effect from 1st April 2007.

It is in the above background these writ petitions have been filed.

Elaborate arguments were made by both sides.

The High Court has passed a lengthy order sprinkled with extracts from various apex court decisions delivered over the ages, amongst others, on the subject of valuation under section 4 of the CEA, 1944 and while negating the arguments made by the petitioners observed -

+ Valuation of excisable goods for purposes of charging any duty of excise on each removal thereof shall be the value in cases covered by clause (b) of sub-section (1) of section 4, the manner of determination whereof as maybe prescribed.

+ It is in pursuance of this provision that The Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000, have been framed.

+ A very careful perusal of this Rule 10Awhich has been inserted with effect from 1st April, 2007, by Notification No.9 of 2007 dated 1st March,2007, reveals that the said Rule deals with cases of excisable goods produced or manufactured by a job-worker. The second requirement for applicability of Rule 10A is the job-worker manufacturing or producing excisable goods on behalf of a person (referred to as the principal manufacturer).

+ The Legislature clarifies that the valuation has to be done by taking into consideration the value of excisable goods and that would be the transaction value of the goods sold by the principal manufacturer. We do not think that a combined reading of these three clauses of Rule 10 together with the proviso and explanation thereto would denote that the Legislature has travelled much beyond the charging section. Even if the explanation is perused it would denote as to how this rule is enacted to deal with cases of job-workers who are engaged in the manufacture or production of the goods on behalf of a principal manufacturer from the inputs or goods supplied by the said principal manufacturer or by any other person authorised by him.

+ We have referred to each rule falling in Chapter II of the Valuation Rules, 2000, together with the definition of the term "normal transaction value" and "value" for the purpose of emphasizing that in all cases, it is the price and that is apparent from Rules 4, 5, 6 and 7. It is further clear from a reading of Rules 8, 9 and 10 as to how everywhere the words "normal transaction value" have been appearing.

+ It is clear that all cases which were, therefore, covered in the preceding rules did not apparently cover the job-worker. That is why Rule 10A has been introduced / inserted.

+ The object and purpose of introducing or inserting it is apparent if one peruses the proviso and explanation to Rule 10A. The proviso clarifies that the cost of transport, if any, from the premises wherefrom the goods are sold to the place of delivery shall not be included in the value of the excisable goods. The explanation denotes as to how the term "job-worker" has to be understood and throughout this rule by the Legislature. If the job-worker means a person engaged in the manufacture or production of goods on behalf of the principal manufacturer from any inputs or goods supplied by the said principal manufacturer or by any person authorised by him, then, it is clear that the job-work or the effort which has been taken by the job-worker for and on behalf of the principal manufacturer enables the principal manufacturer to sell the completed product or finished goods.

+ For the purpose of computation or calculation of the duty liability of the parties like the petitioners there is nothing erroneous if the Legislature takes into consideration and account the price at which the principal manufacturer sells the product or goods to the buyer. That is nothing but a measure of the tax. In other words, that is how the tax has to be computed and measured.

+ Such a provision does not alter or change the character or nature of the duty or tax. The tax or duty remains a tax or duty on production or manufacture of goods. Insofar as its measure is concerned, the Legislature thought it fit and in its wisdom to quantify the duty liability of parties like the petitioners on the price which the finished product or goods command in the market. That would be the true measure of the tax according to the Legislature.

+ We do not see how and merely because the Legislature devises a mode which reflects full commercial value that Rule 10A falls foul of the mandate of Articles 14 and 19(1)(g) of the Constitution of India or travels beyond sections 3 and 4 of the parent Act. There is no restriction on the fundamental right to carry on the business of manufacture of goods. Once we understand the nature of the levy and then read all the relevant provisions of the Act together and harmoniously with the rules, we do not think that there is anything unconstitutional, invalid or illegal about Rule 10A.

+ It would be also clear from a reading of Rule 11 and the preceding rules that a combined or conjoint reading of these rules would enable us to conclude that it is only in cases covered by Rule 10A clauses (i) and (ii) that the value of the excisable goods is measured or computed at the transaction value of the goods sold by the principal manufacturer.

+ In cases which are not covered by clause (i) or clause (ii) of Rule 10A, all the provisions of the foregoing rules viz. rules earlier to Rule 10A wherever applicable shall mutatis mutandis apply for determination of the value of excisable goods. Therefore, Rule 10A is a rule enabling determination of the value of excisable goods and hence cannot be read as a stand-alone or isolated provision.

+ It would have to be read together and harmoniously with other rules so also sections 3 and 4 of the Central Excise Act, 1944. So read, there is neither any merit in the challenge to the validity and legality nor is it necessary to read the Rule down or restrict its application as prayed for by the petitioners before us.

+ It is not disputed before us that the rule which is termed as invalid and ultra vires the parent Act is incorporated and inserted in the Central Excise Valuation (Determination of Price of Excisable Goods) Amendment Rules, 2007.

+ We do not find that while valuing excisable goods for purposes of charging the duty of excise in the case of job-worker by taking into consideration the transaction value of the goods sold by the principal manufacturer, the rule in any way travels beyond the Act or alters the character or nature of the tax or duty.

+ We have always to bear in mind the principle that the measure adopted could not be identified with the nature of the tax. We follow and apply equally the principle that any standard which maintains a nexus with the essential character of the levy can be regarded as a valid basis for assessing the measure of the levy.

+ We have, therefore, no hesitation in rejecting … argument that measure provided by Rule 10A is beyond the subject since it ceases to have nexus with the essential character of levy. We have established sufficiently in the foregoing paragraphs the nexus that Rule 10A has with the essential character of levy.

+ We are also not in agreement with ….submission that Rule 10A contravenes section 2(f) read with section 3(1) of the Central Excise Act, 1944. It may be that the transactions between the principal manufacturer and the buyer of goods is taken as the measure but that does not in any manner contravene section 2(f). The term "manufacture" is defined in section 2(f) and we have already noted as to how that definition is worded and has been interpreted. Once the levy is on production or manufacture in India on all excisable goods, then, we do not see how this conclusion can be inferred.

Each of the writ petitions was, therefore, dismissed.

Nevertheless, the High Court observed that there is no justification to sustain the penalties on either the Company or any of its Directors or Officers as there was a pure legal challenge which ultimately was not sustained by the Court.

(See 2015-TIOL-1099-HC-MUM-CX)