By TIOL News Service

NEW DELHI, MAR 23, 2017: THE first appellant is engaged in the manufacture of auto parts like engine, transmission, assembly of engine and transmission (power units) liable to central excise duty. They are manufacturing these items on job work basis for the second appellant, M/s.Ford India Pvt. Ltd. (FIPL). The manufacture is undertaken using the raw materials supplied free of cost by FIPL as well as certain in-house materials. FIPL procured these materials from both the indigenous as well as foreign market. They paid duty on such items, availed credit and supplied the same to appellant on payment of duty.

On receipt of these duty paid but free cost materials, appellant availed credit and utilized the same when the final product-power units, were cleared to FIPL. The duty so paid on power units is again availed as CENVATcredit by FIPL.

The assessable value of power units manufactured and cleared by appellant to FIPL is subject matter of dispute in the present appeals.

The value for excise purpose, of power units, included the price of power units, value of free of cost components, as declared by FIPL, entry tax on free of cost components and amortised cost of tools supplied by FIPL. The point of dispute in the present appeal is relating to inclusion of royalty charges in the value of power units manufactured and cleared by appellant to FIPL.

Revenue contended that the money value of drawing, technical know-how and assistance, received free of cost by appellant from FIPL, is required to be included in the assessable value of power units .

Accordingly, a differential duty of Rs.4.81crores was computed by adding 5% in the value of such power units on the ground that FIPL is paying 5% as Royalty Charges to foreign collaborators for supplying technical know-how for the manufacture and sale of complete vehicles by FIPL.

The demand was confirmed along with equivalent penalty. A penalty of Rs.50 lakhs was also imposed on FIPL u/r 26 of CER, 2002.

The appellant was directed to make a pre-deposit of Rs.20 lakhs by the Tribunal. See 2013-TIOL-1892-CESTAT-DEL .

The appeal was heard recently. The appellant submitted that the royalty payable on the final product manufactured by FIPL (Motor Vehicle) cannot be added to the AV of the auto parts manufactured by them; that 5% loading is arbitrary; that no duty was required to be paid if the appellant had followed rule 4(5)(a) of CCR, 2004; the demand is hit by limitationas there is no suppression of facts; that they were not having knowledge of the details of royalty agreement between FIPL and foreign companies; that the whole exercise is revenue neutral.

The AR justified the demand. Reliance is placed on the appellant's own case decided vide Final Order dated 29.09.2016 wherein the supplier was GMI (who had paid royalty to ISUZU).

The CESTAT observed –

Merits:

++ It is apparent that royalty charges paid by FIPL to foreign collaborators is with reference to the whole motor vehicles. Power unit is one of crucial and important main components of the motor vehicles. The same has to be made as per the exact design, specification and technical requirement suitable for use in the motor vehicles. In terms of the agreement dated 1.8.2006 between AVTEC and FIPL, it is very clear that the power units are to be made in accordance with the specifications, engineering drawings and other technical information provided by FIPL to AVTEC. It is clearly mentioned (in para 7.2. of the agreement) that FIPL shall provide free of charge of necessary drawings, design, process sheets, equality check sheets and other technical support required for manufacturing and supplying power units by AVTEC. Here, we note that the design supply by FIPL (drawing, design and technical know how) cannot be considered as simple information of arithmetic dimensions. These are proprietary information obtained by FIPL from foreign collaborators and are provided to AVTEC in terms of an agreement. These are not general specifications of a free-floating design available in market. As such, we find that the value of such design, drawing and technical know-how, should form part of the assessable value of power units manufactured and cleared by AVTEC to FIPL .

Adverting to the decision of the Tribunal dated 29.09.2016, the Bench viewed that the quantification of value, as adopted in the impugned order, is not legally sustainable .

Inasmuch as the Bench observed –

++ We find such summary calculation is not legally sustainable. While we uphold, on merit, the proposal made by the Revenue for adding the value attributable to the engineering, drawing, design, technical know how supplied by FIPL to AVTEC in the value of the power units cleared by AVTEC, the quantification has to be done on factual and rational basis. We note that the appellants also strongly contended that the same methodology as followed by FIPL for payment of royalty to their foreign collaborators can be adopted for arriving at the notional value attributable to such technical know-how, drawing, etc. provided by FIPL to AVTEC. We are in agreement with the said proposal as the same will be both rational and reasonable. The quantification of royalty as 5% of net ex factory sale price subject to certain exclusions has been agreed upon between FIPL and FORD Motor Company, USA. In this connection, we refer to the Article 10.1 of the agreement dated 19.08.1996. We find applying the ratio of the said calculation, the additional value towards design and drawing in respect of the power units manufactured and cleared by AVTEC also can be arrived at.

Limitation:

++ We note that both the parties are availing cenvat credit scheme in respect of the inputs received by them. In case of increased value due to addition of design and drawing consideration in the value of power tech, the differential duty payable is available as a credit for FIPL. The power units are exclusively made only in terms of the agreement for FIPL. In such situation, we find that the question of alleging fraud, mis-representation in order to invoke demand for extended period is not tenable. We also note that AVTEC are not in the picture with reference to royalty payment for the whole vehicle by FIPL to FORD, USA in terms of the agreement between these two parties. In such situation, it is not correct to allege that AVTEC intentionally suppressed or mis-represented any facts relating to additional considerations to be added in the value of power units . On these reasons also, we find the demand of extended period is not invokable against AVTEC.

Penalty:

++ No malafide or fraudulent intent can be attributed to the appellants considering the facts and circumstances of the case, as narrated above. Penalties under Section 11 AC as well as under Rule 26 are imposable only when there is mala fide intent in order to evade duty or dealing with knowledge of offending nature of the said goods.

The appeals were disposed of.

(See 2017-TIOL-958-CESTAT-DEL)