Customs, Excise and Gold Tribunal - Bangalore
Mysore Kirloskar Ltd. vs Commissioner Of Central Excise, ... on 25 January, 2002
Equivalent citations: 2002(80)ECC621, 1990ECR209(TRI.-BANGALORE), 2002(141)ELT423(TRI-BANG)
JUDGMENT
S.S. Sekhon, Member (T).
1. The appellants (hereinafter referred to as MKL) are registered manufacturers of machinery and parts thereof and also carryout business of manufacture of machine tools and its accessories, high grade castings, pollution control equipments and other incidental and ancillary equipment and owns and operates a main machine manufacturing factory at Harihar. They accepted order to develop, fully engineering machine set ups and manufacture the said machines as per the drawings, patterns, jigs, fixtures and tools, etc. which they would develop on separate orders to be negotiated and placed on a principal to principal basis. This agreement dated 10-5-91 was entered into with ITC. The agreement related the preparation of drawings, patterns, jigs, fixtures and tooling necessary for manufacture of certain machines, which ITC requires and would place orders separately, once they approve the designs. This agreement stipulated the supply of a prototype machine by ITC to MKL to develop such drawings, patterns, jigs, fixtures and tools and it specifies that such items will be prepared by MKL, yet they would remain the property of ITC and shall be handed over to ITC on termination of this agreement dated 10-5-91 or earlier once the same are approved by ITC. The agreement specifically provided that the orders placed on MKL, from time to time for the manufacture of such machines, they were to be in writing, at negotiated prices for subsequent machines for this agreement they were paid Rs. 43 lakhs, which has been accounted as "OTHER INCOME" in the accounts and balance sheet of MKL.
2. In this appeal, we are concerned with the question of whether the amount of Rs. 43 lacs received by MKL towards such charges for drawing designs, tooling, jigs and fixtures, etc., as per the agreement dated 10-5-91, could be loaded on to the value of the machines, made and delivered subsequently as per separate written orders, and cleared on basis of such separate orders on gate passes :- G.P.I No. 1087/4-12-92, G.P.I No. 1088/4-12-92, G.P.I No. 0867/22-10-93 and G.P.I No. 0387/10-5-93.
3. On this issue the Commissioner vide his impugned order finds as follows :
"10. Part III at Page 4 of the Contract dated 10-5-91 in respect of manufacture of the machines, clearly states as follows :-
a. The Company shall place upon MKL orders from time to time for manufacturing the machines and all such orders shall be in writing.
b. MKL shall manufacture the machines strictly in accordance with the specifications, the prototype and the drawings and patterns prepared by it and approved by the company in writing in terms of this agreement; as detailed in Schedule B hereto.
c. In order to ensure that MKL manufactures the machines strictly in accordance with the specifications, the prototype and drawings and patterns approved by the company in writing, the Company's representatives will have the liberty of examining the machines manufactured by MKL during the process of manufacturing of such machines and also after the manufacture of the machines is completed, before or after the delivery of machines by MKL to the company."
Part IV at Page 6 is for the price of the machines and states :
"The price of the machines will be stipulated by the company in the orders placed upon MKL. All such prices shall be arrived at after prior negotiation between the parties hereto."
Part VIII at Page 7 is for excise duty and states :-
"The company shall reimburse the MKL the amount or amounts of excise duty paid by MKL on the manufacture of the Machines in terms of this agreement".
11. As per the terms extracted from the contract above it is clear that the agreement in consideration is not merely for the preparation of the design and drawing but a total contract for design, drawing, manufacture of prototype, supply of the machines and payment of excise duty etc. The contract cannot be read in isolation in parts i.e. to say design and drawing separately and supply of machinery separately. It is not in dispute that the amount of Rs. 43 lakhs collected is in respect of the design and drawings of the machinery for packing, wrapping and parceling in respect of cigarettes. It is also not in dispute that these are the types of machines supplied under the invoices referred to in the show cause notice. It is not the contention of M/s. MKL that the machines are not in accordance with the design and drawings prepared as per the contract. It appears that the contention of the part is that there is no specific quantity schedule, price for specific machines and hence there is no nexus. This argument is without any force. It is immaterial whether the quantity and the price is mentioned in the contract itself or specified later as per the terms of contract. Hence the nexus between the amount of Rs. 43 lakhs received in respect of design and drawings and the machines supplied stands proved and the amount has to be treated as additional consideration for supply of the machines under consideration. Hence the differential duty on the amount liable to be paid by M/s. MKL. The reliance of M/s. MKL on the judgment of the CEGAT in the case of M/s. IAEC Brokers Pvt. Ltd. is misplaced and as against the same is in favour of the department in respect of drawings, designing and technical specification. The contention of M/s. MKL that there is no contract for the manufacture of machinery in the agreement dated 10-5-91 is not correct as held by me above. In the following judgments of the CEGAT it has been clearly held that costs towards drawing, design and technical specifications of the machinery were clearly elements of machinery costs :-
1987 (28) E.L.T. 458 - CCE, Bangalore v. Intercon Engineers Pvt. Ltd., Bangalore (Para 3);
1988 (33) E.L.T. 787 (T) - CCE, Bangalore v. Sunray Computers Pvt. Ltd. [Para 3 and Para 5(1)] 1991 (52) E.L.T. 602 (T) - TIL Ltd. v. CCE
12. M/s. MKL have argued during the Personal Hearing and in their further submission that the demand cannot be confirmed for the clearances of first few machines and has to be spread over entire span of the period during which the machines will be supplied. This proposition is not acceptable as the same is neither proper nor practicable for the following reasons:-
The entire amount of Rs. 43 lakhs has already been realized by M/s. MKL and as such the show cause notice covers entire amount for demand of duty. Now the demand cannot be confirmed covering a partial amount. Further the order to be passed cannot be kept open for the assessee to pay as and when the machines are manufactured and cleared in the coming years at their convenience as there is no provision in the Central Excises and Salt Act, 1944 for the same. Assuming but not admitting that the amount received has to be distributed over the total machines to be supplied, as the party has already collected the entire amount and the same would be in the nature of advance and interest charges on the same would be liable to be included in the assessable value if the demand is to be paid at a later date.
13. As regards limitation aspect the arguments of M/s. MKL are not tenable. M/s. MKL have clearly suppressed the facts of collection of Rs. 43 lakhs towards design and development charges. They have not informed the department about the contract (agreement) at any time. Their claim that it is a bona fide omission is not acceptable inasmuch as the agreement dated 10-5-91 clearly specified the terms of Excise duty as Part VIII with respect to the manufacture of the machines in terms of the said agreement."
And he confirms the demand of duty of Rs. 7,41,750/- under proviso to Section 11A and imposed a penalty of Rs. 75,000/- under Rule 173Q.
4. We have heard both sides and considered the material and find :-
(a) It is well settled position, that drawing and designing charges including cost of tooling, jigs, fixtures, etc., owned by ITC and later supplied to MKL have to be added to the assessable value, of the machines manufactured, based on by use of such drawing, designs, jigs, fixtures, tooling etc. However, before adding the value of any such consideration it has to be established that the considerations had a nexus with the negotiated price of the assessable goods under clearance i.e. machines in this case on the respective Gate Passes on separate orders. Thereafter the amortized money value of such considerations has to be added on each clearance separately. The decisions in the case of 1994 (70) E.L.T. 247 (T), 1998 (99) EX.T. 481 (S.C.) and 1995 (79) E.L.T. 275 lead us to conclude that such charges should be amortized and thereafter, the money value loaded on to each clearance, separately. It has however to be proved beyond doubt, that there was a nexus and such nexus was to the supply of such drawing, tooling, jigs and fixtures etc., now property of the buyer i.e. ITC placing orders for the machines with the negotiated price on MKL. The Commissioner's approach of demanding duty on the entire Rs. 43 lakhs without establishing that the amortized money value for each machines as per subsequent orders cleared without covering to a specific finding that such prices in these individual orders depressed, because of supply of these goods, can therefore not be upheld as it is not as per law.
(b) The agreements, i.e. the written orders for the supply of four machines as per the gate passes in this case were not relied upon in the original proceedings nor were they produced before us by Revenue or by the appellants. Therefore it cannot be determined whether the prices in those subsequent orders/agreements, were influenced or otherwise. Each clearance is an assessment based on a separate contracts. A contract price would normally be the value for assessable goods. The Basic Excise Manual of Departmental Instructions on Excisable Manufactured products in Para 71A stipulates :
"Further, an assessee may fix different prices depending, upon the quantity to be sold, the period of delivery, other normal commercial considerations and if the goods are freely available for purpose to any one at these prices, each of such prices may be taken as the price at which the goods are 'ordinarily sold'. But the goods are sold at a price which is different from the prices so fixed by the assessee he should be required to justify that the price at which the goods are actually sold is not exceptional and the price at which the goods are ordinarily sold...."
Applying these instructions along with the instructions issued on Proforma II price lists approved by Board (F. No. 202/34/85 Ex 6, dt. 3-10-1985 Cir 34/85) to accept even ORAL CONTRACTS, we find no case for the Revenue, to reject out right the price to the supply of the said goods on "Purchase Order". In absence of reliance in subsequent sale/order contracts or question the same or determining the 'money value' of the additional consideration Gatepass wise i.e. on each assessment separately as required by instructions and Rule 5 of the Central Excise (Valuation) Rules, 1975 which was imperative on part of the Commissioner to have done. The Commissioner not caused any finding, that no further machines could be manufactured by the use of goods supplied to ITC vide agreement dt. 10-5-91, He could have only thereafter considered loading it. The loading of the entire amount of Rs. 43 lakhs, without such a finding and recover duty on it, is not as per the Valuation Rules.
(c) There are no allegations in the show cause notice that how the agreements entered into, for the supply of each machine, was incorrect/misdeclared. There is a bland statement, in the show cause notice that "the collection of the developing charges have not been made known to the Central Excise department in any manner and thereby M/s. MKL have suppressed the said fact". Therefore no adequate reasons to invoke the proviso under Section 11A(1) on such vague allegations as made in the show cause notice are fore found. Similarly, there is no sufficient cause, for the visit of penalty under Rule 173Q of the Central Excise Rules. Material to invoke the proviso clause of Section 11A(1) and the penal Rule 173Q has to be not only relevant but also adequate and justified, since grave consequences repelt from these charges. Such charges cannot be established on bland statements.
5. In view of our findings, in Paras 1, 2, 3 and 4, the order is set aside and appeal is allowed.