Customs, Excise and Gold Tribunal - Delhi
M/S. Raymonds Ltd. & Sh. Premal ... vs Cce, Aurangabad on 28 March, 2001
Equivalent citations: 2001(129)ELT327(TRI-DEL)
ORDER
C.N.B. Nair
1. These appeals have come before us upon reference by the West Regional Bench of this Tribunal. The issue involved is the valuation (for levy of Central Excise duty) of goods manufactured by an assessee and consumed by him in further manufacture. After nothing the different decisions which had been rendered by the Tribunal on the issue, the Bench has observed as under:
"3. We thus find that in spite of the existence of a number of judgements on this aspect, there is no specific ratio arising out of them.
4. The main issue is the language of the subject rule, It makes for projection of an eventuality which is bound never to arise.
5. In this situation we deem it proper to refer this issue to the Hon'ble President of the CEGAT with the request that it be placed before the larger bench for disposal and decision. As an interim order we waive pre-deposit of the duty confirmed and the penalties imposed".
2. We have heard learned Counsel representing the appellants M/s Raymonds Limited and Premal Ichhaporia and the learned DR.
3. Specific provisions relating to valuation of captively consumed goods are contained in Rule 6(b) of Central Excise Valuation Rules. We read the provision to facilitate a proper understanding of the issue.
"6(b) Where the excisable goods are not sold by the assessee but are used or consumed by him or on his behalf in the production or manufacture of other articles, the value shall be based".
(i) On the value of the comparable goods produced or manufactured by the assessee or by any other assessee; provided that in determining the value under this sub-clause, the proper officer shall make such adjustments as appear to him reasonable, taking into consideration all relevant factors and in particular, the difference, if any, in the material characteristics of the goods to be assessed and of the comparable goods;
(ii) If the value cannot be determined under sub-clause (i), on the cost of production or manufacture including profits, if any, which the assessee would have normally earned on the sale of such goods".
Rule 6(b) contains two methods of valuation in regard to captively consumed goods. The first [6(b)(i)] is to adopt the value of "comparable goods". If that method cannot be adopted, the value is to be determined [6(b)(ii)] "on the cost of production or manufacture, including the profit, if any, which the assessee would have normally earned on the sale of such goods". The issue placed before us concerns valuation of goods according to second method.
4. The appellant M/s Raymonds Limited is multi product company engaged in the manufacture of fabrics, cement etc. The show cause notice was issued on the basis that the appellant had included in the cost of production statement only the overall profit made by them from the manufacture of all items, while for the purpose of valuation of woven fabrics in question, only the profit if any, which the assessee would have normally earned on the sale of the woven fabric was required to be included. With regard to the goods to be taken into account while determining the assessable value of captively consumed item, both sides are agreed that only the profit relating to the goods under assessment is to be taken into account and not the profit resulting from the manufacture of other goods. Both sides have also submitted that the computation of profit itself is a matter to be determined according to generally accepted principles of costing. The DR in this context has referred to text book provisions dealing with INTER-PROCESS PROFIT & TRANSFER PRICE and has stated that no decision is required to be rendered by the Tribunal on the method of computation of profit, as accounting profession has well established standards on the subject.
5. With regard to the Division Bench's observation that the provision under Rule relating to addition of profit "makes for a projection of an eventuality which is bound never to arise", the learned Counsel for the appellants and DR have submitted that manufacturers make routine profit loss projections in relation to various products manufactured by them, irrespective of whether those goods are sold or not. This is necessary for a manufacturer to assess whether captive production of goods is economical or not. Therefore, allocating profit or loss in the production of captively consumed goods presents, no insurmountable problem to manufacturers. The provision relating to inclusion of "profit, if any" as provided in the rule is capable of being implemented without much difficulty. Both sides also agreed that the profit required to be added in determining the assessable value of captively consumed goods is the gross profit (and not net profit) which would be earned by the assessee. They have submitted that this position remains settled by the decision of the Tribunal in the case of West Coast Paper Mills Ltd. Vs. CCE 1996 (81) ELT 403.
6. Section 4 of Central Excise Act, 1944 alongwith Central Excise Valuation Rules, 1975 contain the provisions for the valuation of excisable goods. Sub-Section (a) of Section 4(1) relates to valuation of goods which are sold. It stipulates that value of such goods for the purpose of charging of duty of excise shall be deemed to be the normal price that is to say the price at which such goods are ordinarily sold by the assessee. Thus, in the case of goods which are sold, value for the purpose of charging duty of excise is the normal sale price of such goods. Sub-Section 4(1)(b) relates to cases where "such goods are not sold or for any other reason". This Sub-section provides that the value shall be "the nearest ascertainable equivalent thereof "(Sale price) determined in such manner as may be prescribed". The Valuation Rules 1975 have been issued persuant to the provision contained in this Sub-section. Provisions in the Valuation Rules are therefore in aid ascertaining the "nearest equivalent" of the sale price of such goods. It is clear from these provision that the value to be determined is the value of such goods. The term "such goods" appearing in Section 4 and the Central Excise Valuation Rules relate to the goods under assessment and the goods of the same type, style, quality and class. This is also clear from the provision in Rule 6(b)(i) which provides for determining the value of captively consumed goods based on the value of comparable goods. That rule makes it clear that the value may be the value of comparable goods produced by the assessee himself or by any other assessee. The rule also stipulates that "such adjustment as appear reasonable" shall be made if there is any difference in the material characteristic of the goods to be assessed and the comparable goods. The provision in 6(b)(ii) for determination of assessable value based on cost of production is not anyway different from this principle that the value should be the nearest ascertainable equivalent of the normal sale price of such goods, because the provisions under Section 4 of Central Excise Act and Valuation Rules have a common Yardstick i.e.the normal sale price of such goods or the nearest ascertainable equivalent thereof. It is clear from this that the profit relevant for determination of assessable value of goods is the profit relating to the manufacture and sale of good under assessment and not any other goods. The assessment is to be on the normal sale price of such goods and in its absence, the nearest equivalent thereto. Therefore, there could be no scope for any doubt that the "profit, if any" required to be included while determining the assessable value of captively consumed goods (based on the cost of production) is the profit that would have normally been earned by the assessee on the sale of goods under assessment. The profit/loss flowing from the manufacture of other (than the goods under assessment) goods or from other (trading etc) activities of the assessee are of no relevance for determining the assessable value of captively consumed goods.
7. The "profit, if any", to be taken into account while determining value under Rule 6(b)(ii) is the profit that the assessee "would have normally earned on the sale of such goods". It is clear from the words of the Rule that the profit is not the actual profit earned but profit that the assessee would have earned. A manufacturer earns his profit normally from the sale of the goods manufactured by him. In the case of captively consumed goods, since there is no sale, profit is not actually earned. The profit relatable to the captively consumed goods is transferred to and remains included in the profit earned on the sale of the final product into which the captively consumed goods merged. Therefore, the profit if any, in the manufacture of captively consumed goods has to be a projected profit. Both the sides have submitted before us that projection of profit the manufacture of captively consumed goods is generally done by the industry and there are generally accepted principles governing such costing. Therefore, what is required to be done while determining the assessable value of captively consumed goods based on the cost of production method is to include the projected profit in the manufacture of those (captively consumed) goods. That the eventuality of taking profit from captively consume goods is bound to never arise makes no difference to the determination or assessable value.
8. As already discussed, assessable value is the normal sale price or the nearest ascertainable equivalent thereto of the goods under assessment. The sale price of a manufacturer includes the total profit, earned by him. From this profit he has to defray taxes etc before arriving at the net profit. It is, therefore, clear from the provisions of Section 4 and the valuation Rules that the manufacturing profit relevant for valuation of excisable goods is the gross profit and not the net profit.
9. In view of what has been stated above, we answer that reference in the following terms:-
(1)In determining the assessable value of captively consumed goods under Rule 6(b)(ii) of the Central Excise Rules, the profit to be taken into account is the profit that the assessee would have normally earned on the sale of the goods under assessment i.e. the captively consumed goods.
(ii)Profit or loss made by the manufacturer from other activities, be they manufacture of other goods or trading in other goods, are of no relevance while determining the assessable value for captively consumed goods.
(iii)Profit, if any, is a projected profit, and the projection of profit should be done in accordance with the generally accepted principles of costing of manufactured goods. That the eventuality of taking profit from the manufacture of captively consumed goods does not arise, is of no relevance to determination of assessable value after making required addition towards the element of profit.
(iv) The profit to be included in the assessment of captively consumed goods is the gross profit and not net profit.
10. Having answered the reference as above, now we take up the appeals for consideration. The facts of the case are that M/s Raymonds Ltd. are a multi-product Co. engaged in the manufacture of several goods like fabrics & cement. These activities are carried out from different factories. The factory with which the present appeal is concerned is the unit at Jalgaon which manufactures Yarn and fabrics.The fabrics manufactured at Jalgaon are not sold. Instead, are transferred to other units for processing. The issue involved is the valuation of the fabrics so cleared from Jalgaon unit for further processing to their own other units. Since the goods were being captively consumed, they filed a Price List effective from 11.3.98 in respect of the fabrics manufactured at the Jalgaon unit. The value of the goods was determined based on the cost of production method and addition of 3.34% was also made towards profit. The duty paid in the Jalgaon unit was claimed by the appellant as modvat credit in the other units as the fabrics manufactured in the Jalgaon unit was an input in the manufacture of final product in the other units. Show cause notice dated 1.1.99 was issued proposing to increase the element towards profit from the original 30.68%, which was found to be the gross profit for the textile division for 1998-99. This was done on the basis that the profit originally added by the appellant was the overall profit of the appellant form the manufacture of products, while for the purpose of valuation of fabrics, only the profit of the fabrics division was required to be included. The impugned adjudication order held that instead of the profit of 3.34% originally added, an addition of 10% towards profit should be made. Consequently duty demand of over Rs. 97 lakhs was confirmed. Penalty of an equal amount was also imposed. Interest was also demanded from the appellant. The order also imposed a penalty of Rs. 50,000/- on Shri Premal Ichhaporia, Dy. Manager (Costing) of Raymonds Ltd. under Rule 209A of Central Excise Rules 1944. The present appeals are by the assessee as well as Shri Premal Ichhaporia.
11. The learned Counsel for the appellants submitted that the entire proceedings are the result of a misunderstanding that the profit of 3.34% originally added was the overall profit of the appellant from all their activities including non textile manufacturing activities. The learned Counsel submitted that the cost production worked out by the appellant included only the cost and profit of the textile division and excluded non-textile activities. Therefore, the proceedings have been conducted on a wrong basis. The learned Counsel for the appellant also submitted that the price list submitted by the appellant and the assessment carried out were in conformity with the instruction of the Central Board of Excise & customs, on the question of valuation of captively consumed goods. He has relied on letter dated 30th October, 1996 of the Board which instructed that the profit margin of the previous year is to be added towards the normal profit earned by an assessee. Since the appellant had added profit from the textile division for the previous Year in the price list, the learned Counsel submitted that there was no error in the original assessment. The learned Counsel also submitted that there was no loss or gain to the assessee or the department from the duty originally paid inasmuch as whatever duty was paid at the Jalgaon unit was taken as modvat credit in the other unit of the assessee. The learned Counsel also submitted that the proposed inclusion of 30.6% and reassessment of the goods also is not the correct method of determining the assessable value of the goods, inasmuch as the valuation done was based on the overall cost of production of the appellant from his several textile units, while valuation contemplated under Rule 6(b)(ii) is the cost of production of the captively consumed goods at the factory of their production. The wage and other costs in the Jalgaon unit and the profit earned from the production of fabrics at the Jalgaon unit alone were liable to be taken into account while the assessment originally carried out and ordered in the impugned order take into account the cost of production for the textile division which include other factories and the profit from the entire textile division. The learned Counsel submitted that if reassessment of the goods is made correctly (taking into account cost of production at the Jalgaon unit and the profit) the appellant assessee would be eligible for refund and would not be liable for any further payment. He submitted that reassessment would be of no consequence to either side inasmuch as readjustment of credit taken at the other units of the assessee would flow from further payment of duty or refund of duty. The learned Counsel also submitted that duty demand, atleast for part of the period, would also be time barred as this is not case involving any suppression of facts which would permit the Revenue to invoke the extended period as available under proviso to Section 11A(1) of the Central Excise Act. The appellants had declared full facts in their price declaration. Therefore, the revenue could not have resorted to the proviso to Section 11A and issued a demand for extended period.
12. The learned DR has submitted that reassessment would be justified in the present case inasmuch as value of the fabrics produced at the Jalgaon factory was required to be determined based on the cost of production at that factory and not cost of production in all the textile units of the appellant. He also submitted that position regarding refund or short buy would emerge only after reassessment is made taking into account the correct assessable value.
13. It is clear from the record of the case as well as the submissions made before us that the appellants' declaration of price was based on the cost of production and profit of their textile division and that they did not take into account the cost and profit from cement and other divisions while filing the price list in question. The profit declared and included by the appellant in the price list was the profit earned in the previous year from the textile division. The inclusion of profit made in the previous year was in conformity with the instruction on the subject contained in the Circular letter F.N.6/28/94-CX-I dated 30th October, 1996 of the Central Board of Excise & Customs. The Circular binds the revenue authorities. They can not demand duty in excess of the duty assessed in accordance with the method of assessment stipulated in the circular. Therefore, the demand made in the adjudication order, cannot be sustained. The penalties imposed are consequent to the duty demand. As the duty demand is not sustainable, penalties can not independently survive. They are also required to be set aside. Accordingly, we set aside the impugned order and allow the appeals, with consequential relief, if any.