By TIOL News Service

MUMBAI, JULY 26, 2017: IT was noticed that the appellant (a manufacturer of MV parts) had received modification charges towards modification of dies/tools (which were received free of cost from their customer viz. M/s. Volkswagen India P. Ltd. for manufacturing parts of motor vehicles).

Such charges were shown as "Technical Support Service" and appellants issued 'service invoice' and paid service tax on the same.

During the period from 2009-10 to September 2014, the appellants received an amount of Rs.22,38,52,560/- and showed the same under head Sale of service in their Profit & Loss A/C.

The jurisdictional authorities took the view that the die modification charges has to be amortised in the value of the motor vehicle parts manufactured by the appellants in same manner as the cost of dies is amortised.

Accordingly, a demand of differential CE duty of Rs.1,03,96,549/- was issued and confirmed along with equal penalty and interest.

The appellant is before the CESTAT and submits that the activity of modification of dies is an independent activity of service provided by the appellants to Volkswagen India for which they have collected the service charges and discharged appropriate service tax; that this activity of modification is not related to the manufacture of the excisable goods of the appellants and hence the charges are not addable in the AV inasmuch as the amortised cost of the dies is already included in the value of the excisable goods manufactured out of such dies. Reliance is placed on the apex court decision in Mysore Kirloskar Ltd. - 2008-TIOL-99-SC-CX. The appellant also took the plea of the demand being hit by limitation as the books of account were regularly audited by the department. It is also submitted that the entire exercise is revenue neutral as Volkswagen India would be entitled to CENVAT credit of the differential duty paid, reliance on Pepsi Foods 2010-TIOL-109-SC-CX-LB .

The AR justified the demand citing rule 6 of the Valuation Rules, 2000 and the case law of Lear Automotive India Pvt. Ltd. - 2012-TIOL-1210-CESTAT-MUM. As for invoking the extended period of limitation, the AR submitted that the appellant had never disclosed that they are collecting the die modification charges. So also, the balance sheet only mentioned that it is the sale of service; that since charges of suppression are invokable, revenue neutrality cannot come to the aid of the appellant as CENVAT credit in such instances is not admissible.

The Bench observed –

"8. … The said modified die/tools were used in the manufacture of parts of motor vehicle which was subsequently sold to Volkswagen India. The amortization cost of unmodified die/tools has already been included in the value of the parts of motor vehicle manufactured by the appellants. As regards the cost of modification, in our view it is nothing but addition of the cost in the value of overall die/tools which is used for the manufacture…"

After extracting Rule 6 of the Valuation Rules, 2000, the CESTAT further noted –

"…From the above rule, it can be seen that the amortization cost of die/tools/moulds has to be included in the assessable value of the excisable goods manufactured out of such tools/die/mould supplied free of cost by the customer even though it does not make any difference whether the appellants have carried out the modification. Even if the modification is carried out by someone else, the value of modification will enhance the value of the tools/dies. When such modified tools/dies used by the manufacturer the said enhanced value shall be considered for taking the cost of the tools/dies used by the manufacturer the said enhanced value shall be considered for taking the cost of the tools/dies for purpose of amortization. Therefore, whether it is the original cost of the die or enhanced cost due to addition of modification charges it is one and the same and the cost of the die should be taken as the original cost of the die plus modification charges. That is the total cost of the die which is to be amortised. Accordingly, we are of the view that he amortization cost of modification charges of the dies has to be included in the assessable value of the goods manufactured with the help of such die/tools. Hence we hold that amortization of modification charges of die is required to be included in the assessable value…."

Agreeing with the submissions made by the AR and negating the claims of the appellant that the extended period cannot be invoked and that the exercise is revenue neutral, the impugned order was upheld and the appeal was dismissed.

In passing : ST & CE - Mutually exclusive!

(See 2017-TIOL-2598-CESTAT-MUM)