Custom, Excise & Service Tax Tribunal
M/S. Larsen & Toubro Ltd vs Cce, Chennai on 12 June, 2014
IN THE CUSTOMS, EXCISE & SERVICE TAX
APPELLATE TRIBUNAL
SOUTH ZONAL BENCH, CHENNAI
E/463/2003
(Arising out of Order-in-Original No. 14/2003 dated 28.3.2003 passed by the Commissioner of Central Excise, Chennai III)
For approval and signature:
Honble Shri P.K. Das, Judicial Member
Honble Shri R. Periasami, Technical Member
1. Whether Press Reporters may be allowed to see the Order for Publication as per Rule 27 of the CESTAT (Procedure) Rules, 1982?
2. Whether it should be released under Rule 27 of the CESTAT (Procedure) Rules, 1982 for publication in any authoritative report or not?
3. Whether the Members wish to see the fair copy of the Order?
4. Whether order is to be circulated to the Departmental authorities?
M/s. Larsen & Toubro Ltd. Appellant
Vs.
CCE, Chennai Respondent
Appearance Shri R. Raghavan, Advocate, for the Appellant Shri M. Rammohan Rao, DC (AR) for the Respondent CORAM Honble Shri P.K. Das, Judicial Member Honble Shri R. Periasami, Technical Member Date of Hearing: 12.06.2014 Date of Decision: 12.06.2014 Final Order No. 40635/2014 Per P.K. Das The relevant facts of the case, in brief, are that M/s. Mahindra and Mahindra Industries Ltd. (in short, M/s. Mahindra) and M/s. Hyundai Motors India Ltd. (in short, M/s. Hyundai) entered into an agreement with M/s. Durr GMBH, Germany (in short, Durr, Germany), separately for supply, design (drawing), supervision, erection, installation and commissioning of Paint Finishing System (PFS) in their work site at Maraimalai Nagar and Sriperumbudur respectively.
1.1 M/s. Durr, Germany, engaged their Indian representative M/s. Durr India Pvt. Ltd. (in short, Durr India) to identify the local suppliers for supply of components, fabrication items, installation, erection and commissioning of PFS as per drawing and design of Durr, Germany, at the work site of M/s. Mahindra and M/s. Hyundai and other services. M/s. Durr India identified the appellants herein for the performance of the job.
1.2 The appellants are engaged in the manufacture of fabrication of heavy engineering items viz. iron and steel structures, part of cement plant machineries, ESP components etc. classifiable under Chapter 73 and 84 of the Schedule to the Central Excise Tariff Act, 1985.
1.3 The appellants entered into a contract with M/s. Mahindra and M/s. Hyundai for fabrication work and assistance in erection, installation and commissioning of the plant at their premises. The appellants executed the contracts on job work basis and paid the duty on cost of raw materials and conversion charges as per the decision of the Honble Supreme Court in the case of Ujagar Paints Vs. Union of India 1998 (38) ELT 585 (SC). The fabrication job would be done as per the drawings of the M/s. Durr, Germany, which were supplied free of cost. So, the appellant had not included the consideration of the drawings in their assessable value.
1.4 A show-cause notice dated 23.7.2002 was issued by the Commissioner of Central Excise, Chennai II Commissionerate proposing to re-determine the value of parts of fabricating paint finishing system manufactured by the appellant and cleared to M/s. Mahindra during the period from 15.11.1997 to 21.1.1999 and to M/s. Hyundai during the period 25.7.1997 to 21.1.1999 under Section 4 of the Central Excise Act, 1944 read with Rule 5 of the Central Excise (Valuation) Rules, 1975 along with interest and penalty. It has also proposed demand of differential duty of Rs.22,71,774/- and Rs.4,04,356/- on account of re-determination of assessable value in respect of M/s. Mahindra and M/s. Hyundai respectively along with interest and penalty. It has been alleged that the appellants are liable to pay differential central excise duty arising due to non-inclusion of pre-engineering drawing and design charges in the assessable value of the parts of paint finishing system manufactured by them. The appellants submitted reply to show-cause notice and also appeared in the personal hearing before the adjudicating authority.
1.5 By the impugned order, Commissioner of Central Excise confirmed the demand of duty of Rs.26,76,130/- along with interest and also imposed penalty of Rs. 5,00,000/- on the appellant under Rule 173Q(1)(a) of the erstwhile Central Excise Rules, 1944.
2. The learned counsel on behalf of the appellant contested the demand of duty along with interest and penalty on merit as well as limitation. The learned counsel argued the matter at length and also submitted written submission along with case laws. The main contentions of the learned counsel are as under:-
(a) The appellant had not received any money for drawing and design supplied for manufacture of the excisable goods and therefore there is no question of addition of any amount towards drawing and design charges to the price of storage tanks, boxes, steel structures etc. in determining the value of the goods.
(b) The amount of Rs.34,41,000/- (drawing charges) was not received by them and the drawing was received free of cost.
(c) Show-cause notice proposed to invoke Rule 5 of old Valuation Rules, to add the drawing charges. In the present case, there is no material available of additional consideration flowing directly or indirectly from the buyer to the assessee and therefore Rule 5 of Valuation Rules cannot be invoked.
(d) Without prejudice, the addition of value of engineering, development, art work, design work etc. necessary for the production of the goods has been incorporated under Rule 6 of the new Central Excise Valuation Rules, 2000.
(e) Unless the consideration has been paid for design and drawing to the manufacture, who has manufactured and supplied excisable goods with the help of such drawings, there is no scope to include cost of such drawings and designs in the assessable value. He relied upon the following decisions:-
(a) CCE Vs. Luna Agro Industries Pvt. Ltd. 2009 (242) ELT 130
(b) CCE Vs. Maharashtra Scooter Ltd. 2009 (246) ELT 209
(f) Without prejudice, the appellant disputed the quantification of the demand. There is no basis or method adopted by the Department to propose the demand in the show-cause notice.
(g) The entire demand is barred by limitation. There is no suppression of fact with intent to evade payment of duty. The quotation of the appellant and the purchase order had categorically mentioned that the design and drawing would be supplied free of cost. The appellant placed these documents to the Central Excise officers. It is submitted that if the appellant paid duty on this value, M/s. Mahindra and M/s. Hyundai would avail CENVAT credit. Thus, there is no gain on the part of the appellant.
(h) It is a case of interpretation of provision of Valuation Rules. In the case of other contractor, M/s. Arpick Engineering Pvt. Ltd. Chennai, the Additional Commissioner, Chennai II vide Order No. 65/2002 dated 31.10.2002 dropped demand, holding that Rule 5 of Valuation Rules would not apply in the job work.
(i) The applicant paid the duty following the decision of the Honble Supreme Court in the case of Ujagar Prints (supra) and the Boards Circular No.251/85/96-CX dated 14.10.1996. There is no indication that the design and drawing charges would be included in the cost of raw materials.
3. On the other hand, the learned AR for Revenue reiterates the findings of the adjudicating authority. He placed copy of the purchase order and other documents of M/s. Mahindra to Durr, Germany, to establish that they have paid design and drawing charges. M/s. Durr, India, supplied drawing and designs of different types to the appellant for manufacture of the excisable goods. He further submits M/s. Durr India collected the drawing and design charges from M/s. Mahindra and M/s. Hyundai and paid to M/s. Durr, Germany, after deducting their commission. He further submits that the design and drawing charges would be included with the cost of raw material to arrive at assessable value. The representative of the appellant-company and the other companies had given the figures in their statements and the adjudicating authority quantified the demand of duty as per the statement of the representative of the companies. He submits that the appellant had not disclosed the documents to the Central Excise officers. The learned AR relied upon the following decisions:-
(a) Swil Ltd. Vs. CCE 2001 (128) ELT 510
(b) Mahalakshmi Glass Works Ltd. Vs. CCE 1998 (99) ELT 696
(c) Garlick Engineering Vs. CCE 1998 (102) ELT 26
(d) Elecon Engineering Co. Ltd. Vs. CCE 2000 (124) ELT 762
(e) Macawber Beekay Ltd. Vs. CCE 2008 (229) ELT 404
4. After hearing both sides and on perusal of the records, we find that the main contention of the appellant is that the appellant undertook job work and paid duty on cost of raw materials and conversion charges as per the decision of the Honble Supreme Court in the case of Ujagar Prints Ltd. (supra). It is contended that the appellant had not received the money for drawing and design used in the manufacture of excisable goods and therefore the value of the drawing and design would not be included in the assessable value. It is seen from Purchase Order and Invoice of M/s. Mahindra to M/s.Durr, Germany, that M/s. Mahindra will pay lump sum amount for pre-engineering services. The learned AR also placed documents that both the companies paid for pre-engineering service. We find from the record that M/s. Durr India paid Rs.31,41,000/- to Durr, Germany, for the design and drawing charges supplied by them for manufacture of indigenous components. There is no dispute in the fact that the entire design and drawing for the above order were given by M/s. Durr India. Shri K. Lakshmanan, Senior Engineer, of the appellant-company in his statement dated 20.8.1998 stated that all fabrication drawing and assembly drawings were provided by M/s. Durr India through M/s. Mahindra and M/s. Hyundai. It is, however, stated that the items fabricated and supplied to both the companies could not have been fabricated without the design and drawings provided by M/s. Durr India. The appellant had not paid any amount to M/s. Durr India towards design and drawing. As per purchase order of the companies, all the design and drawing will be provided by M/s. Durr India.
5. Rule 5 of the old Valuation Rules, 1975 provides that the amount of value of the additional consideration flowing directly or indirectly from the buyer to the assessee would be included in the assessable value. Rule 6 of new Valuation Rules, 2000 provides addition of design and drawing charges. The adjudicating authority observed as under:-
I am unable to agree with the plea of L&T that they undertook to manufacture and supply the goods on job work basis and, therefore, the engineering and drawing charges borne by the buyers need not be included in the assessable value of the goods for payment of duty. I observe that in the case of Pawan Biscuits Co. (Pvt.) Ltd. Vs. CCE, Patna 2000 (120) ELT 24 (SC), it was observed by the Honble Supreme Court that it is necessary to include the processors expenses, costs and charges plus profit, but it is not necessary to include the traders profit who gets the fabrics processed, because those would be post-manufacturing profits. In the present case, processors expenses & costs shall essentially include the engineering cost and cost of drawing because without Engineering & Drawing the parts of Paint Finishing System could not have been manufactured by L&T; also, if the engineering and drawing were not supplied by MFIL and HMIL on free of cost, L&T would be left with no option except to procure such engineering and drawing; certainly L&T would have incurred the expenses for the same and, those expenses should have undoubtedly been taken into consideration for determining the assessable value for payment of duty.
The decision in the above case was delivered by the Honble Supreme Court following the ratio of the decision in Ujagar Prints etc. Vs. UOI and other 1988 (38) ELT 535 (SC) and 1989 (39) ELT 493 (SC) which were also relied on by L&T. In Ujagar Prints etc. 1989 (39) ELT 493 (SC) while disposing the CMP 32937 of 1988 filed by the Revenue, the Honble Supreme Court has given an illustration as follows:-
If the value of grey cloth in the hands of the processor is Rs.20/- and the value of the job work done is Rs.5/- and the manufacturing profit and expenses for the process be Rs.5/-, then in such a case the value would be Rs.30/-, being the value of the grey cloth plus the value of the job work done plus manufacturing profit and expenses. This would be the correct assessable value.
In the Ujjagar Prints case, the question of inclusion of drawing charges etc. in the value had not come up before the Honble Supreme Court. The only material supplied there was grey cloth and hence value of grey cloth was held to be includable. In the present case, the things supplied include drawings, design and engineering and by applying the ratio of the judgment the cost of engineering and drawing and design supplied free is includable in addition to the cost of raw material whether supplied free of cost or otherwise. In our considered view, without going into fiction of Rule 5 of old Valuation Rules and considering the decision of M/s. Ujagar Prints (supra), in the present case, the design and drawing supplied by M/s. Durr India in relation to the contract of both the companies would be considered as materials supplied by both the companies and therefore the value of the design and drawing charges would be included into the assessable value of goods in question. So, the drawing and design charges would be added with cost of raw material. So, we do not find any force in the submission of the learned Advocate on merit.
6. The Tribunal in the case of Swill Ltd. (supra), held as under:-
The appellants have also strongly contended that the normal assessable value in terms of Section 4(1)(a), being available, the same should be adopted and there was no justification for invoking the provisions of Rule 5 of the Central Excise Valuation Rules, 1975. We find that the similar contention was also raised before the Larger Bench which finds dealing in Para 7 of the said order. While rejecting the contention raised on behalf of the appellants in that case, the Tribunal has observed that when the price of the finished goods has been fixed between appellants and the customer and the moulds have to be supplied free of charge by the customer, it cannot be said that the price so fixed is the sole consideration for the sale of the finished products, if the mould was not supplied by the customer, the product could not have been manufactured. As such, the Larger Bench has held that the price of the finished goods fixed in the contract between the parties can safely be taken as not the sole consideration for the sale of the finished product, the other consideration being value attributable to the use of the mould. Similarly, in the instant case, we find that the contract between the appellants and the customer was for consideration of Lead Annealing Bath, though the drawings were to be supplied free of cost by their customer. As such, it cannot be said that the ingredient of Section 4(1)(a), which required the price to be the sole consideration for the sale were available. The appellants, admittedly could not have manufactured the product in question without having the designs and drawing before them. As such, as held by the Larger Bench, it cannot be held in the circumstances that the price was the sole consideration so as to adhere to the provisions of Section 4(1)(a) and not to invoke Rule 5 of Central Excise Valuation Rules, 1975. Accordingly, no merits are found in the said contentions of the appellants also.
7. In the case of Macawber Beekay Ltd. (supra), the Tribunal held as under:-
We have gone through copies of various supply orders produced by the appellant. As per the exclusion clause civil engineering work and erection of equipment is not part of the supply order or contract. Hence the contention of the appellant is that the drawing and design are in respect of the lay out of the equipment at site has no merit. As per the scope of the supply order/contract the equipment and components are to be supplied as per the design and drawing which are part of the supply order. In these circumstances, we find no infirmity in the impugned order, the appeal is dismissed.
8. The learned counsel relied upon the decision of the Tribunal in the case of Luna Agro Industries Pvt. Ltd. (supra), wherein the Tribunal observed that if the customers voluntarily supplied the required drawings/designs etc., the price of the goods is the normal price negotiated in the gross of wholesale trade. In the case of Indian Sugar & General Engg. Corpn. (supra), the Tribunal allowed the appeal filed by the assessee. In that case, the Tribunal observed that nowhere in the impugned order shows whether the design and drawing are related to the reactor only. In the case of Maharashtra Scooter Ltd. (supra), the Tribunal rejected the appeal filed by the Revenue. It has been observed that the price is agreed and contracted between the assessee and their customer. The assessees have not recovered anything over and above the price contracted. There is no allegation in the show-cause notice regarding flow back of any additional consideration from the customer to the assessee.
9. It is seen that in all the above cases, as relied upon by the learned counsel, there is no flow back of additional consideration. In the present case, there is evidence available with M/s. Durr India that they have paid the consideration to the foreign company for drawing and design which has been collected from both the companies. So, the cost of drawing and design used in the manufacture of excisable goods of the said companies would be included in the assessable value. Hence, we do not find any force in the submission of the learned counsel on merit.
10. However, we find force in the submission of the learned counsel that the demand is barred by limitation. It is seen from the record that the design and drawing were supplied to the appellant free of cost. The adjudicating authority observed that the appellant is a reputed and established manufacturer with sufficient knowledge and experience in matters relating to valuation of excisable goods for the purpose of payment of central excise duty. It is seen that in the case of other contractor, the demand was dropped. It is a case of interpretation of provisions of Valuation Rules with the decision of Honble Supreme Court in the case of Ujjagar Prints (supra) and other decisions. There is no material available that the appellant suppressed the facts with intent to evade payment of duty. The appellant contended that there is no intention to evade payment of duty insofar as, if the appellant would pay the duty, the other companies would avail the CENVAT credit. Taking into account of overall facts and circumstances of the case, we are of the view that the extended period of limitation cannot be invoked in the present case.
11. In view of the above discussion, we hold that the demand of duty for extended period is not sustainable and penalty also. Accordingly, we set aside the impugned order on limitation.
(Operative portion of the order was pronounced
in open court on 12.6.2014)
(R. PERIASAMI) (P.K. DAS)
Technical Member Judicial Member
Rex
2