Custom, Excise & Service Tax Tribunal
Fiat India Automobiles Pvt Ltd vs Commisioner ,Central Excise And ... on 18 October, 2022
CUSTOMS, EXCISE & SERVICE TAX APPELLATE
TRIBUNAL, MUMBAI
REGIONAL BENCH
Excise Appeal No. 86337 of 2016
(Arising out of Order-in-Original No. PUN-EXCUS-004-COM-16/15-16 dated
11.03.2016 passed by the Commissioner of Central Excise, Pune-IV)
M/s. Fiat India Automobiles Pvt. Ltd. Appellant
Plot No. B-19, MIDC, Ranjangaon Indl. Area,
Tal: Shirur, Dist. Pune 412 220.
Vs.
Commissioner of Central Excise, Pune-IV Respondent
41/A, ICE House, Sassoon Road, Opp. Wadia College, Pune 411 001.
Appearance:
Shri V. Sridharan, Senior Advocate with Shri Rajesh Ostwal, Advocate, for the Appellant Shri C. Dhanasekaran, Special Counsel, for the Respondent CORAM:
HON'BLE MR. SANJIV SRIVASTAVA, MEMBER (TECHNICAL) HON'BLE DR. SUVENDU KUMAR PATI, MEMBER (JUDICIAL) Date of Hearing: 18.10.2022 Date of Decision: 18.10.2022 FINAL ORDER NO. A/86149/2022 PER: SANJIV SRIVASTAVA This appeal is directed against order in original No PUN- EXCUS-004-COM-16/15-16 dated 11.03.2016 of Commissioner Central Excise Pune-IV. By the impugned order, following has been held:
"ORDER
45. In view of the discussions, as above:
(a) Extended period of limitation as provided under Section 11A (4) )/ (proviso to Sec 11A(1)] of Central Excise Act, 1944 has been rightly invoked in SCN issued under F.No V(84,87)15 49/Adj/Commsr/2014-15/116 dated 8th April 2015 for the period from March 2010 to March 2014 and Section 11A(1) of the Central Excise Act 1944 in SCN under F.No V(84,87)15 04/Adj/Commr/2015-16/160 dated 5th May 2015 for the period from April 2014 to 10.07.2014, for the reasons mentioned above, and for determining and demanding Central Excise duty
2 E/86337/2016 not paid on the finished excisable goods, by FIAT for the period within and beyond one year from the relevant date.
I further hold that:
(b) The Assessee has been continuously been paying Central Excise duty on assessable value which was below the Manufacturing cost + profits in the case of Palio and Punto car models from entire period from March-10 to July-14 as well as some other models like Fire 1.4 (2019-10), SDE90 PC (2010-
11), Linea, Manza, Vista, SDE95 (2013-14). The differential value as computed in the two SCN's are liable to be included in the assessable value.
Accordingly I hold that M/s Fiat India Automobiles limited having their factory and registered office at Plot No. B-19, M.I.D.C. Industrial Area, Ranjangaon, Taluka-Shirur, District Pune - 412220 mentioned in the Show cause notices as hereinabove discussed are liable as follows:
(a) Central Excise duty amounting to Rs. 53,74,57,207/-(Rupees Fifty Three Crore Seventy Four Lakh Fifty Seven Thousand Two Hundred Seven only) on the differential value as shown in Annexure-A to the Show Cause Notice F.No V[84,87)15-
49/Adj/Commsr/2014-15/116 dated 8th April 2015 for the period March 2010 to March 2014, and Rs 44,95,523/- (Rupees Forty Four Lakh Ninety Five Thousand Five Hundred Twenty Three only) on differential value for the period 01.04.2014 to 10.07.2014 against Show Cause Notice F.NO V(84,87)15- 04/Adj/Commsr/2015-16/160 dated 05th May 2015 which is liable to be demanded and recovered from them under Section 11A (4)/ (proviso to Sec 11A(1)} /Section 11A(1) of the Central Excise Act 1944 is determined under Section 11A(10) (erstwhile Section 11A) ibid and confirmed. I accordingly order for its recovery.
(b) I confirm and order recovery of Interest on the amount of Central Excise duty confirmed at (a) above, under Section 11AA/11AB (as applicable during the relevant period) of the Central Excise Act 1944.
{c) Penalty is liable to be imposed on them under Section 11 AC of the Central Excise Act, 1944 and / or Rule 25 of the Central Excise Rules, 2002. Accordingly l impose penalty of Rs 3 E/86337/2016 54,19,52,730/- (Rupees Fifty Four Crore Nineteen Lakh Fifty Two Thousand Seven Hundred Thirty only) on Fiat India Automobiles Limited under the said provisions.
46. This order is passed without prejudice to any action as may be initiated against the said noticee or any other person concerned with the case hereinabove mentioned under any other provisions of Central Excise Act, 1944 or the Rules framed thereunder or under any other law for the time being in force in India."
2.1 Appellant is engaged in the manufacture of excisable goods viz. cars and PWT engines & their spare parts falling under Chapter 87 and 84 respectively of the first schedule of Central Excise Tariff Act, 1985 (hereinafter referred to as "CETA"). The noticee is alleged to have adopted valuation of excisable goods manufactured by them lower than the cost of production and profit of the goods. The said valuation adopted by the noticee has been claimed by Revenue to be not conforming to the provisions of Section 4(1) (a) of the Central Excise Act, 1944.
2.2 Accordingly, audit was carried out by the designated auditors who submitted their Audit Report on 18.06.2014 to the appointing authority. Summary of major audit objections from the Working Papers are as follows:
S.No List of Revenue Noticee Agreement, Auditor's objections implications Yes/No, if no, conclusions (if any) reason for with reason disagreement 1 Cost of Car No Even though production Impact- the duty was The noticee is of the in few Rs.17.71 duly paid by opinion that the COP cases crores the noticee on was higher as were the basis of PWT compared to the higher transaction Impact Rs Selling price only in than the value in all 4.11 crores the initial start up assessable these cases, phase. i.e. 2008-09.
Total value the cost of Impact- In case of Palio Refer production Rs.21.82 there has been Annexure certified by the crores. instance of it being 1 & 2. Company and in negative territory 4 E/86337/2016 as same has been verified by us phased out from for the product Dec, 2011. referred in Annexure 1 & As evident 2 were higher subsequently all the than the regular products are transaction having selling price value, it being higher compared to in the initial COP.
period of
operation.
2.3 Revenue observed that the Cost Auditor in Annexure -1 and Annexure -2 of his report has only compared COP with the assessable value adopted by the noticee and has hence has shown negative duty impact only where such Assessable Value of the noticee was lower than the COP. The Cost Auditor should have compared the assessable value adopted by the noticee with manufacturing cost plus profit for calculating the duty impact.
2.4 From the details submitted by the Auditors, revenue observed that the assessable value adopted by the noticee of the goods manufactured and cleared by them was lower than the cost of production of the goods including profit. Therefore, the said transaction value/price so declared by them could not be termed as the transaction value/price for the purpose of quantification of the assessable value under Section 4(1)(a) of the Act. Thus it was observed that the cost of production plus profit of Palio 1.1, Palio 1.3, Palio 1.6, Punto 1.2, Punto 1.3, Punto 1.4, Manza 1.4, Linea 1.4, Manza 1.3 and Vista 1.4 model of Cars manufactured by appellant was much higher than the price at which the said goods were being sold by them through their distributors/dealers/associated companies to the ultimate consumers. Also, the cost of production & profit of car engines such as Fire 1.4 8V PWT, Fire 1.2 8V PVT, SDE 90 PS & SDE 75 PS is higher than the price at which the goods were sold or captively consumed by them.
2.5 Thus pricing mechanism adopted by the appellant prima- facie, indicated the presence of extra commercial considerations and the adoption such value as transaction value/ assessable 5 E/86337/2016 value cannot be justified within the meaning of Section 4 (1) (a) of the Act. Therefore in terms of Section 4(1)(b) of the Act, value of any excisable goods was proposed to be determined in accordance with Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 (hereinafter referred to as Valuation Rules).
2.6 Therefore revenue was of view that appellant has short paid the Central Excise duty of Rs. 53, 74, 57, 207/- by reason of mis-statement and suppression of facts and have contravened the provision of Section 4(1) of the Central Excise Act 1944, read with Rule 4, 6, 8, 11 & 12 of the Central Excise Rules 2002 with intention to evade payment of duty.
2.5 Thus Appellant were called upon to show cause vide notice dated 08.04.2015 as to why the valuation of the goods should not be re-determined in terms of Rule 11 of the Valuation Rules, 2002 under Section 4(1)(b) of Central Excise Act, 1944;
(i) The short payment of Central Excise duty amounting to Rs. 53, 74, 57, 207 (Fifty Three Crores Seventy Four Lakhs Fifty Seven Thousand Two Hundred & Seven Only) , should not be demanded and recovered from them under the provisions of Section 11A(4)/proviso to Section 11(A)( 1)of the Central Excise Act, 1944, for the period from March' 10 to March 14.
(ii) The interest should not be demanded and recovered
from them under the provisions of Section
11AA/11AB of the Central Excise Act, 1944 on the amount of Central Excise duty not paid/short paid by them; and
(iii) Penalty should not be imposed under the provisions of Section 11AC of the Central Excise Act, 1944 read with Rule 25 of Central Excise Rules, 2002.
2.6 Another show cause notice dt. 5.5.2015 (read with addendum dt.3.3.2016) on same issue demanding duty amount Rs. 44,95,523/-(Forty four Lakhs Ninety Five thousand Five hundred twenty three Only) for the period 1.04.2014 to 10.07.2014. The said show cause notice also proposes to recover 6 E/86337/2016 interest under Section 11AA of Central Excise Act,1944 and penalty under Rule25 of Central Excise Rules, 2002.
2.7 These show cause notices were adjudicated as per the impugned order referred in para 1, above. Aggrieved by the impugned order appellants have filed this appeal.
3.1 W have heard Shri V Sridharan, Senior Advocate along with Shri Rajesh Ostwal, Advocate for the appellant and Shri C Dhanasekaran, Special Counsel for the revenue.
3.2 Arguing for the appellant learned counsel submits:
Entire proceeding was initiated on the basis of Supreme Court's judgment in Fiat India, which is not applicable to facts of the present case. After the judgment of Supreme Court in CCE Vs. Fiat India Pvt. Ltd. - 2012 (283) ELT 161 (S.C.), a Special Auditor was appointed under Section 14A. The Special Auditor opined that in case of Palio model and Punto Petrol 1.4 model, cost of production was higher than the assessable value / transaction value.
The appellant was in the process of phasing out Palio model. Since the model was being phased out, losses were incurred. Phasing out of a model was an exceptional circumstance in which the cost could be higher than transaction value for limited period of time. This was also contemplated in the judgment of Supreme Court in Fiat India and also Circular dated 15.1.2014 issued by the Board.
Therefore selling Palio model below cost of production cannot be a ground to mechanically apply Supreme Court's judgment in Fiat India.
For the entire period in dispute, demand relating to Palio model was only Rs.37 lakhs (approx.) whereas huge demand amounting to Rs.53 crores (approx.) was confirmed by considering Palio model as the basis. This clearly shows perverse approach adopted by the Revenue without application of mind.
The appellant sold one variant of Punto namely, Punto Petrol 1.4 model below the cost of production because the appellant had to sell all variants of Punto to compete in the market. However, all other models of Punto were making 7 E/86337/2016 profit and overall, Punto cars were undisputedly making profits. As per report submitted by the Special Auditor, Punto Petrol 1.4 model incurred loss only in the year 2010-
11. Therefore, one variant of Punto & that too for one year only, cannot be the basis to apply judgment of Supreme Court.
Board's Circular dated 15.1.2014 clarified that decision of Fiat India cannot be applied in each and every case. Hence, considering facts of the present case wherein most models / products were sold above the cost of production, Supreme Court's decision in Fiat India's case was not at all applicable.
The judgment in Fiat India was rendered where goods were sold at manufacturing loss of more than 50% having gross under-recovery of even material costs, there were continuous losses for a period of 5 years and there was expressed intent of selling at loss to penetrate the market. The appellant never intended to sell its products at exceptionally lower prices to penetrate the market. The appellant had always conducted its business in prudent manner as evident from its decision to discontinue loss- making Palio model. The appellant undertook all reasonable efforts to increase their sales volume and profits. Therefore, decision of Fiat India is not at all applicable.
The Revenue did not issue show cause notices based on the report submitted by the Special Auditor. Some further working was done in which the department considered expenses pertaining to Selling & Distribution, Advertisement & Sales Promotion, Logistic, Warranty and then added notional profit of 10% to arrive at cost of production. Such cost was compared with the assessable values for different models and wherever assessable values were found to be lower, demand was raised in respect of those models/products in annexure to show cause notices.
Revenue conveniently ignored all other models/products which were undoubtedly earning profits. There was no uniformity and consistency in as much as demand was not 8 E/86337/2016 raised in respect of all the models manufactured by the appellants.
The appellant submits that cost of production must be determined in accordance with CAS-4. Even the Circular dated 15.1.2014 stated so. As per CAS-4, Selling & Distribution, Advertisement & Sales Promotion, Logistic, Warranty expenses can never be included to arrive at cost of production. By no stretch of imagination, overheads for the entire year could be added only to specific models. Such inflated cost of production was not capable of being compared with the assessable values adopted by the appellant. Therefore, approach adopted by the department was perverse.
Sole reason for restricting the demand upto the date of 10.7.2014 was insertion of proviso to Rule 6 of the Valuation Rules with effect from 10.7.2014. The proviso to Rule 6 is clarificatory and it reiterates the position prevailing earlier. Therefore, there cannot be demand for period prior to 10.7.2014 also.
With effect from 14.5.2003, following explanation was inserted to Section 4(1):
"Explanation. -- For the removal of doubts, it is hereby declared that the price-cum duty of the excisable goods sold by the assessee shall be the price actually paid to him for the goods sold and the money value of the additional consideration, if any, flowing directly or indirectly from the buyer to the assessee in connection with the sale of such goods, and such price-cum-duty, excluding sales tax and other taxes, if any, actually paid, shall be deemed to include the duty payable on such goods."
The aforesaid explanation clarified that only the money value of additional consideration flowing from the buyer to the seller is includible in the assessable value. Thus what is includible in the transaction value is only the money value of additional consideration, if any.
Board's Circular dated 15.1.2014 admitted that in Fiat India's case, there was no additional consideration of money value flowing directly or indirectly from the buyer to the seller. Fiat judgment involved a period from 9 E/86337/2016 27.5.1996 to 4.3.2001 and the Supreme Court had no occasion to consider the impact of the aforesaid explanation inserted with effect from 14.5.2003. Therefore, decision in Fiat India's case cannot have any application for the period post 2003.
Appellant correctly followed the provisions of Rule 10(a) read with Rule 9 of the Valuation Rules in respect of products manufactured and sold to TML and FGAIPL. The price at which the goods have been sold by TML / FGAIPL to unrelated person (dealer) alone is relevant for determining the assessable value as per Section 4(1)(b) of the Act.
TML holds 50% of the shareholding in the appellant and therefore, the appellant and TML are interconnected undertakings under the same management. Further, FGAIPL is a 100% subsidiary of FGA and FGA also holds 50% shareholding of the appellant. Therefore, the appellant and FGAIPL are also inter-connected undertakings under the same management. Therefore, the Appellant and TML / FGAIPL are related to each other. These facts are not in dispute. Thus, the appellant is required to determine the assessable value of the goods under Valuation Rules prescribed under Section 4(1)(b) of the Act.
In view of Rule 10(a), where the parties are interconnected undertakings and are also related with each other in view of sub clause (ii) / (iii) / (iv) Section 4(3)(b) of the Act, the value shall be determined under the provisions of Rule 9 of the Valuation Rules, 2000. Therefore, the appellant had correctly followed the provisions of Rule 10(a) read with Rule 9 of the Valuation Rules by discharging excise duty on NDP, which is the highest price of cars charged to independent customers. Hence, there cannot be any duty demand on goods sold to TML / FGAIPL.
The appellant was regularly filing monthly excise returns. All relevant facts were within knowledge of the department at all times. Further, Board's Circular dated 15.1.2014 clarified that extended period should not be invoked where investigation was initiated basis Supreme Court's 10 E/86337/2016 judgment. As there is no suppression of facts with intent to evade payment of duty in the present case, except for last month, entire demand in the first show cause notice is barred by limitation. As there was no case to demand differential duty from the appellant on merits, imposition of penalty is incorrect.
Since the entire demand is not sustainable on the various grounds raised supra, demand of interest also is incorrect.
3.3 Arguing for the revenue learned Special Counsel, while reiterating the findings recorded in the impugned order, submits:-
Appellant is engaged in manufacturing cars power trains and spares. The issue, in this case, is that Fiat evaded payment of central excise duty by resorting to undervaluation in some of the car models. the transaction value on which duty was paid by Fiat on some of the car models was less than the cost of production (manufacturing cost and profit) .this issue was raised as a consequence of the Supreme Court judgment in the case of Fiat India Private Limited [2012 (283)E LT 161(S.C)] Appellant is a 100% subsidiary of Fiat Group Automobiles, Italy. This fact was not denied by Fiat. It was accepted by the Fiat before issuance of the Show Cause Notice that it was under the same management that of Fiat India in terms of their letter dated 25.03.2015.
Appellant continuously incurred losses on Punto and Palio variants. They were paying central excise duty on transaction value which was below the cost of production in the case of Palio and Punto car models for the period from March 2010 to July 2014 as well as some other models like Fire 1.4 (2019 to 2010), SDE90 PC(2010 - 11) Linea, Manza, Vista, SDE95(2013-14).
In the case of Palio cars, the email of the CEO of the company dated December 2011 states that Palio cars will not be sold from 2012 onwards, this does not justify the transaction value being below the cost of manufacturing + profit from 2008 to 22 December 2011 i.e for the period prior to the decision taken by the company to stop selling Palio cars, in fact, after December 2011 there was no sale 11 E/86337/2016 of Palio cars from the financial year 2012-13 to July 2014, implying that all the Palio cars were sold below the cost of manufacturing cost + profit prior to the decision to phase out the cars.
In the case of Punto models, the price was kept lower to compete with identical cars in the same segment. For cases other than Palio and Punto car no defence has been put forth indicating the reason for transaction value being below manufacturing cost + profits.
Profitability in 2012-13 was achieved by writing off losses of Rs 300 crores. The 300 crore loss has resulted in the erosion of the capital of the company.
Adjudicating authority elaborately relied upon The Hon'ble Supreme Court judgment reported in 2012(283)E.LT 161 (SC).
CBEC circular dated 15 1 2014 was taken care of well in advance by Revenue by getting their accounts audited by a certified cost accountant and the demand was judiciously confirmed by applying the provisions of Rule 11 of Valuation Rules.
The Adjudicating authority rightly invoked the extended period and imposed a penalty under section 11AC of the Central Excise Act 1944 read with Rule 25 of the Central Excise Rule 2002 along with appropriate interest.
4.1 We have considered the impugned order along with the submissions made in appeal and during the course of arguments. 4.2 By the impugned order, Commissioner has held as follows for confirming the demand made:
"A. The assessee has submitted that the allegation made in the SCN that they are a sister unit to Fiat India Pvt Ltd under the same management, is erroneous and misplaced.
I have earlier discussed in detail about the incorporation of FIAT and how it started as a 100% subsidiary of FGA. The JV agreements with FGA and TML to manufacture and sell Fiat Brand Cars has also been discussed. The similarity between the assessee and Fiat India Ltd is not lost because both these entities manufactured Fiat Brand Cars as per agreements with Fiat Group Automobiles, S.p.A., Italy (FGA). Further I find that the assessee themselves have admitted in written reply Ref 12 E/86337/2016 FIAL: Cost Audit/NRR-II 2014-15 dated 25.03.2015 that Fiat India Pvt Ltd, Mumbai and Fiat India Automobile Ltd are under the same management. I hence find that the statement in Para 12 of the SCN dated 08.04.15, that the assessee is a sister unit of Fiat India Pvt Ltd under the same management, is based on facts as well as written information submitted by the assessee themselves.
B. The assessee has submitted that the decision in the case of Fiat India was rendered in extra ordinary circumstances and is not applicable to every company that incurs loss in its business.
In this context they have further stated that (i) They have prudently performed their business activities unlike Fiat India where Supreme Court has held that Fiat India was not a prudent businessman. In every case where product is sold at loss, it is not open for the excise authorities to deem such loss as extra commercial consideration. During the initial start-up phase and while phasing out Palio model cars, transaction value was less than cost of production in Palio cars. In the pricing of Punto petrol models, transaction value was lower than cost of production for competition in the market. The Company is in profit and there was no capital erosion at operating level. Hence as per Board Circular dated 15.01.14, the Fiat judgment cannot be made applicable to them. Board Circulars are binding on the Department as confirmed in legal decisions in the case of Ranadey Micronutrients, UCO Bank, Dhiren Chemical Industries and Ambuja Cement. In light of the amendment carried out in Section 4 of the Central Excise Act, 1944the money value of additional consideration has to flow from buyer to seller and if the money value of the consideration cannot be ascertained, the same cannot be included in the assessable value. Hence the decision in FIAT case would not be applicable for the period post 2003.
I have perused the submissions, Board Circular, case laws and relevant Sections cited by the assessee.
The assessee has stated that in the initial start-up phase, the various parts required in manufacturing of the cars were not manufactured/ procured indigenously but were imported. Hence 13 E/86337/2016 the cost of production increased and they suffered losses; however once the issue was resolved and they started manufacturing procuring the various parts indigenously, the cost of production reduced and from 2009-10 onwards, the transaction value adopted by them is higher in all cases except for Palio cars. They have further also stated that since they were in the process of phasing out the Palio models, sale of the same below the cost of production cannot be ground for invoking the judgment of the Supreme Court in the case of FIAT.
In the case of Punto Petrol models, the assessee has stated that the principle reason for selling the cars below the cost of production, was the prevailing competition in the market. Being a prudent business entity, they decided the sale price in accordance with the price trends of its competitors. They have suffered losses in the case of Punto Petrol model but have earned profit as well in various other instances. The detailed calculation provided by the assessee to show their profitability is as follows:
(Rs Crores) Period Revenue PBT Finance Cost EBIT 2009-10 2764 -289 301 12 2010-11 3430 -227 296 69 2011-12 3355 -87 327 240 2012-13 3510 291 359 650 2013-14 3707 238 202 440 The assessee has thus tried to prove that they are a prudent business entity unlike Fiat India Pvt Ltd, Mumbai which was not a prudent business entity and continuously incurred losses on account of business practices.
I find that the assessee manufactures Tata Motor Brand Cars, FIAT Brand Cars, Power trains and spares.
In the case of Tata Motors Cars, the pricing mechanism has been determined/ fixed by Tata Motors Limited in terms of the Vehicle Supply Agreement. The transfer price is the full industrial cost + 14 E/86337/2016 markup - STI adjustments. The markup is the financial return that FIAL gets for every car/ powertrain manufactured by them for Tata motors and FGAIPL.
On perusing the J agreement and other documents, I find that Fiat India Automobile Limited has reserved a part of their manufacturing capabilities of Cars (Tata branded or FIAT branded) and Power trains exclusively for use of Tata Motors Limited and FGAIPL. It is thus obligatory for TML and FGAIPL to buy a fixed minimum number of Cars/Power trains from FIAT every year. In case there is a shortfall, then it is obligatory on the part of TMV/FGAIPL to pay cost of unabsorbed fixed overheads for the reserved capacity of TMY/FGAIPL (1.e difference between reserved/committed volumes to the actual takeoff during the year). For this purpose, Take or Pay mechanism related to Cars and Power trains has been specified in the agreement. Thus it is obligatory on the part of TML and FGAIPL to either utilize in full the fixed capacity reserved for it by FIAL or the cost related to the unutilized portion is recovered as cost of Car/Power train actually cleared.
From the above it is clearly evident that a substantial portion of FIAL's income is on account of mark-up charges of Tata/FIAT Brand Cars and TOP charges. The question of incurring business loss on these counts does not arise.
However I also find that in the case of FIAT brand cars, the assessee has continuously incurred losses on the Punto and Palio variants. The fact they have sold these cars at price below the cost of production for the entire period covered in these SCN's indicates that they could never have made a profit from these cars. Even though the assessee has tried to project that they are a profit making business entity, I have found discrepancies in the facts submitted by the assessee which I will discuss later.
The assessee has claimed that they could bring down the cost of production due to indigenization in all models except Palio cars. I find that the assessee manufactures three variants of Fiat Brand Cars i.e Linea, Palio and Punto. These cars belong to different segments. An analysis of the cost of production of these cars over the years with intention to determine the increase/decrease 15 E/86337/2016 in cost of production in a year over the previous year, shows the following result:
COP COP % inc COP % inc COP % COP % inc
2008- 2009- over 2010- over 2011- inc 2012- over
09 10 prev 11 py 12 over 13 PY
yr PY
Palio 1.1 326503 453068 38.76 493817 8.99 541711 9.71 NA NA
Palio 1.3 429301 558890 30.19 560941 0.37 615155 9.66 NA NA
Palio 1.6 373614 517950 38.63 577679 11.53 617637 6.92 NA NA
Punto1.2 NA 300852 NA 321467 6.85 332018 3.28 393668 18.57
Punto1.3 NA 399703 NA 399327 -0.09 409794 2.62 454302 10.86
Punto1.4 NA 379161 NA 388456 2.45 397723 2.39 424752 6.8
Linea1.3 603945 446813 -26.02 431631 -3.4 455164 5.45 515117 13.17
Linea 1. 568628 418850 -26.34 420796 0.46 451448 7.28 440962 -2.32
I find that the ratio at which the cost of production of Palio cars has increased over the years is much higher than the ratio for the other Fiat Car models manufactured by the assessee. With no evidence of any plan to stop production and selling of Palio brand cars from 2008 onwards itself being on record, the above analysis clearly implies that in the case of Palio models, the assessee failed to bring down the cost of production and hence resorted to selling the cars below the cost of production to penetrate the segment.
I further find that the assessee has submitted a copy of email dated 15-Dec-2011 which is written by Rajeev Kapoor, President and CEO, FIAL and is addressed to various people, who I assume are key persons in the Company. The email states that "As there is no plan to sell Polio next year, we have to take a call on closing down the plant. I need a confirmation from Commercial that no more Palio would be sold...". I find that on the one hand the CEO has stated that there is no plan to sell Palio in 2012, but simultaneously also wants confirmation from Commercial that no more Palio would be sold. This indicates that there was no finality to the decision of not selling Palio from 2012 onwards. Even assuming otherwise, that the call was taken by the company management in December-11 to stop selling Palio Cars from 2012 onwards, the impact on prices should have been from 16 E/86337/2016 2012 onwards where the Company could have justified selling Palio cars at lower price in order to clear the inventory, post the decision to stop selling Palio cars from 2012 onwards.
CBEC Circular No. 979/03/2014-Cx dated 15.01.2014 inter alia states "2.1 Further, in paragraph 50, the Hon'ble Supreme Court has cited two instances where a manufacturer may sell goods at a price lower than the cost of manufacture and profit and yet the declared value con be considered as normal price. These instances are when the company wants to switch over its business or where a manufacturer has goods which could not be sold within a reasonable time. The Hon'ble Court has further held that these examples ore not exhaustive. Therefore, mere sale of goods below the manufacturing cost and profit cannot be taken as the sole basis for rejecting the transaction value."
One of the circumstances where a business entity would try to sell/ clear manufactured inventory is when they have decided to stop/phase-out a product. They would then try to clear the inventory of the product, perhaps by towering prices in cases where the product is non-moving. But this will happen only after the business entity has taken a decision to stop/phase-out a product. The same logic will also apply to the case at hand. FIAL took a decision in Dec-2011 to stop selling Palio cars from 2012 onwards. Hence the company may have sold the Palio cars at price below the cost of production post the decision of Dec-11 i.e. from 2012 onwards, in order to clear the inventory of Palio cars. However I find that in 2012, 2013 and 2014, there was no sale of Palio Cars. This clearly implies that FIAL has sold the entire inventory of Palio Cars before the decision to stop the sale of the cars. Therefore I find that the decision taken in December 2011 cannot justify the selling of Palio cars below the cost of production in 2008-09, 2009-10, 2010-11 and 2011-12. The email of Dec-11 submitted by the noticee clearly states that Palio cars will not be sold from 2012 onwards and this does not justify the selling Palio cars below the cost of production + profit for the earlier years i.e. from 2008 to Dec-2011.
| also find that in the case of Punto cars, the assessee have themselves admitted that the principal reason for selling the cars below the cost of production, was the prevailing competition in the market and being a prudent business entity, they decided 17 E/86337/2016 the sale price in accordance with the price trends of its competitors. This implies that it was a planned strategy to sell the cars below the cost of production in order to compete with similar cars in the segment, with a view to gain market share.
I now come to the profitability table (shown above) which the assessee has submitted to prove that they are a prudent business entity. I find that the assessee has added finance cost to the PBT in order to arrive at EBIT. Profit before tax (PBT) is a profitability measure that looks at a company's profits before the company has to pay corporate income tax. This measure deducts all expenses from revenue including interest expenses and operating expenses, but it leaves out the payment of tax. Hence finance cost should be deducted before arriving at PBT. In the instant case, I find that, instead, it has been added to PBT to arrive at EBIT.
I further find that in financial year 2012-13, post the organizational restructuring, wherein Fiat separated the manufacturing company from the marketing company, they wrote off losses of about Rs 300 crore in Fiat India and therefore the company posted a profit of Rs 269 crore in the six months ending March of 2013.
The relevant extract from the Notes forming part of financial statements for 2012-13 is as follows:
As on 30th Sept 2012 (Rs in million) Note 3
iii) Statement of profit and loss (Deficit) Opening Balance (11,272.75) Less: Capital Reduction (refer note 31) 3000.00 Add: Profit/Loss for the period (646.61) Closing Balance (8919.36) Note 31: In the previous period ending September 30, 2012, the shareholders of the company at the extra-ordinary general meeting held on 23 July 2012, passed a resolution pursuant to the provisions of Section 100 to 105 read with Section 78 and other applicable provisions of the Company Act 1956 for the
18 E/86337/2016 reduction of the paid up equity share capital of the company by adjusting the debit balance in the statement of profit and loss (representing accumulated book loss) to the extent of Rs 3000.00 million by way of reduction of paid up capital of Rs 1247.68 million............"
A reading of the above indicates that in order to show profitability, the company has resorted to write-off of loss Rs 300 cr which resulted in corrosion of the equity capital. While it is not the mandate of this office to challenge the legality of the accounting principles adopted by the assessee, 1 find that the assessee cannot use this principle in the context of the present case in order to show that they are a prudent business entity with profits, unlike Fiat India Ltd, Mumbai which was continuously in losses.
It is clearly visible that but for these accounting adjustments and write-off of losses, the assessee was also continuously running into losses.
Hence I see a clear similarity to the case of Fiat India Pvt Ltd, Mumbai, where the Hon'ble Supreme Court has observed that "That the price is not the normal price, is established from the following three circumstances which the assessees themselves have admitted; that the price of the cars was not based on the manufacturing cost and manufacturing profit, but hove fixed at a lower price to penetrate the market; though the normal price for their cars is higher, they are selling the cars at a lower price to compete with the other manufacturers of similar cars. This is certainly a factor in depressing the sale price to an artificial level; and, lastly, the full commercial cost of manufacturing and selling the cars was not reflected in the lower price. Therefore, merely because the assessee has not sold the cars to the related person and the element of flow bock directly from the buyer to the seller is not the allegation in the show cause notices issued, the price at which the assessees had sold its goods to the whole sole trader cannot be accepted as 'normal price for the sale of cars."
CBEC Circular No. 979/3/2014-CX., dated 15-1-2014 inter-alia states:
"Transaction Value below manufacturing cost and profit
19 E/86337/2016
2. The first issue is whether the declared transaction value can be rejected in all cases where the transaction value is lower than the manufacturing cost and profit. The Hon'ble Supreme Court has not ruled that transaction value can be rejected in all cases where the declared value is lower than the manufacturing cost and profit. At paragraph 66 in the FIAT judgment the Hon'ble Court has declined to hold its earlier judgment in case of Collector of Central Excise, New Delhi v. Guru Nanak Refrigeration Corpn (2003 (153) E.L.T. 249 (5.C.}] per-incuriam, distinguishing it on the basis of the facts of the case, though the transaction value in case of M/s. Guru Nanak Refrigeration Coron was less than the manufacturing cost and profit. The Hon'ble Supreme Court has cautioned against drawing general conclusions and inferences quoting the truism stated by Lord Halsbury that "a case is only on authority for what it actually decides and not for what may seem to follow logically from 2.1 Further, in paragraph 50, the Hon'ble Supreme Court has cited two instances where a manufacturer may sell goods at a price lower than the cost of manufacture and profit and yet the declared value can be considered as normal price. These instances are when the company wants to switch over its business or where o manufacturer has goods which could not be sold within a reasonable time. The Hon'ble Court has further held that these examples ore not exhaustive. Therefore, mere sale of goods below the manufacturing cost and profit cannot be taken as the sole basis for rejecting the transaction value.
Verification of payment of duty
3. The second issue is regarding the procedure to be adopted by the field officers to identify cases where the ratio of the judgment would apply. It may be noted that, under the self- assessment procedure, there is a legal obligation on the assessee to correctly assess and pay the duty in terms of the Central Excise Act, 1944 read with the Valuation Rules, 2000. Verification of this aspect may be conducted by the Central Excise officer during the audit of units. Aspects such as the percentage of loss at which sale has taken place, the period for which such loss making price has prevailed, reasons for sale at such lass making price, whether such soles are contrary to the standard and accepted business practices, and whether such sole 20 E/86337/2016 is leading to erosion of capital of the company, may be looked into. In addition, due care may be taken at the level of the Commissioner to see whether the case at hand is similar to the facts and circumstances of the FIAT case."
From my findings, discussed earlier, it is clearly established that a. The Assessee has been continuously been paying Central Excise duty on transaction value which was below the cost of production in the case of Palio and Punto car models from entire period from March-10 to July-14 as well as some other models like Fire 1.4 (2019-10), SDE90 PC (2010-11), Linea, Manza, Vista, SDE95 (2013-14). b. In the case of Palio cars, the email of the CEO of the Company dated Dec-11 states that Palio cars will not be sold from 2012 onwards This does not justify transaction value being below the cost of manufacturing + profit from 2008 to Dec-11 i.e for the period prior to the decision taken by the company to stop selling Palio cars. In fact after Dec-11, there was no sale of Palio cars from FY 2012- 13 to July 2014, clearly implying that all the Palio cars were sold below the cost of manufacturing cost + profits prior to the decision to phase out the cars.
c. In the case of Punto models, the price was kept lower to compete with identical cars in the same segment. d. For cases other than Palio and Punto brand of cars, no defense has been put forth indicating reasons for transaction value being below manufacturing cost + profits.
e. Profitability in 2012-13 was achieved by writing-off losses of Rs 300 cm f. The Rs 300 cr loss has resulted in erosion of Capital of the Company.
I thus find that the issue at hand is identical to the case of Fiat India, Mumbai and due care has been taken by the Department to conduct verification in terms of CBEC Circular dated 15.01.2014. The company is actually in loss and there has been erosion of capital. Hence the SCN is not contrary to the terms of the CBEC Circular and the case laws cited by the noticee in this regard are not applicable to the present case at hand 21 E/86337/2016 I now come to the part where the noticee has stated that in light of the amendment carried out in Section 4 of the Central Excise Act, 1944 (Explanation dated 14.05.2003), the decision of the Fiats case would not be applicable post 2003. I find this defence unacceptable. Contrary to what the noticee claims, I find that the explanation in Section 4 was inserted in 2003, which is much before the Supreme Court's decision in the case of Fiat India in 2012.
The explanation in Section 4 is as follows:
Explanation: For the removal of doubt, it is hereby declared that the price-cum-duty of the excisable goods sold by the assessee shall be the price actually paid to him for the goods sold and the money value of additional consideration, if any, flowing directly or indirectly from the buyer to the assessee in connection with the sole of such goods and such price-cum-duty, excluding sales tax and other taxes, if any, actually paid, shall be deemed to include the duty payable on such goods.
The noticee has stated that money value of additional consideration has to flow from buyer to seller and if the money value of any additional consideration is not ascertainable the same cannot be include in the assessable value.
I find the Hon'ble Supreme Court in the case of Commissioner of Central Excise Vs Fiat India Private Limited - 2012 (283) E.LT. 161 (S.C.) has settled the issue of whether transaction value can be rejected in circumstances there the buyer and seller are not related and there is no flow of consideration from buyer to seller.
The relevant portion of the order is reproduced below:
43. What can be construed from the plain reading of Section 4 of the Act and the interpretation that is given by this Court on the expression 'normal value' is, where excise duty is chargeable on any excisable goods with reference to value, such value shall be deemed to be the price at which such goods are ordinarily sold by the assessee to a buyer in the course of wholesale trade for delivery at the time and place of removal and where the assessee and the buyer have no interest directly or indirectly in the business of each other and the price is the sole consideration for the sale. Normal price, therefore, is the amount paid by the buyer for the purchase of goods. In the present case, it is the
22 E/86337/2016 stand of the revenue that loss making price cannot be the 'normal price' and that too when it is spread over for nearly five years and the consideration being only to penetrate the market and compete with other manufacturers who are manufacturing more or less similar cars and selling at a lower price. The existence of extra commercial consideration while fixing the price would not be the 'normal price' as observed by this Court in Xerographic Ltd.'s case (supra). If price is the sole consideration for the sale of goods and if there is no other consideration except the price for the sale of goods, then only provisions of Section 4(1)(a) of the Act can be applied. In fact, in Metal Box's case (supra) this Court has stated that under sub-section (1)(a) of Section 4 of the Act, the 'normal price' would be the price which must be the sole consideration for the sale of goods and there cannot be any other consideration except the price for the sale of goods and it is only under such situation Sub Section (1)(a) of Section 4 would come into play. In the show cause notices issued, the Revenue doubts the normal price of the wholesale trade of the assessees. They specifically allege, which is not disputed by the assessees, that the 'loss making price' continuously for a period of more than five years while selling more than 29000 cars, cannot be the normal price. It is true that in notices issued, the Revenue does not allege that the buyer is a related person, nor do they allege element of flow back directly from the buyer to the seller, but certainly, they allege that the price was not the sole consideration and the circumstance that no prudent businessman would continuously suffer huge loss only to penetrate the market and compete with other manufacturer of more or less similar cars. A prudent businessman or woman and in the present case, a company is expected to act with discretion to seek reasonable income, preserve capital and, in general, avoid speculative investments. This court in the case of Union of India v. Hindalco Industries - 2003 (153) E.L.T. 481, has observed that, if there is anything to suggest to doubt the normal price of the wholesale trade, then recourse to clause (b) of sub-section (1) of Section 4 of the Act could be made'. That the price is not the normal price, is established from the following three circumstances which the assessees themselves have admitted; that the price of the cars 23 E/86337/2016 was not based on the manufacturing cost and manufacturing profit, but have fixed at a lower price to penetrate the market; though the normal price for their cars is higher, they are selling the cars at a lower price to compete with the other manufacturers of similar cars. This is certainly a factor in depressing the sale price to an artificial level; and, lastly, the full commercial cost of manufacturing and selling the cars was not reflected in the lower price. Therefore, merely because the assessee has not sold the cars to the related person and the element of flow back directly from the buyer to the seller is not the allegation in the show cause notices issued, the price at which the assessees had sold its goods to the whole sale trader cannot be accepted as 'normal price for the sale of cars. [Emphasis provided] I have already discussed earlier on how the noticee has deliberately sold cars below the cost of production and how profitability was sought to be shown by writing off of losses while eroding the capital of the company, as is evident from the financial records submitted by the noticee. Therefore the contention of the noticee that money value of additional consideration has to flow from buyer to seller is rejected. In the present case, the money value of consideration is ascertainable and has been determined /computed on the basis of Cost Audit Report. Hence the noticees' contention that if the money value of any additional consideration is not ascertainable the same cannot be included in the assessable value, is rejected.
C. The assessee has submitted that the term 'consideration' in Section 4(1) is nothing but monetary consideration. The findings that the price is not the sole consideration as the loss attributable to cars constitutes extra commercial consideration is incorrect and not sustainable. They have further sought to explain the meaning of the term 'consideration' as per the Indian Contract Act and cited decisions in the case of Dass Gopal Krishnan Vs State of Punjab & Ors (1967) 3 SCR 557; CCE Vs Mazgaon Dock Ltd - 2005 (187) ELT 3 (SC) and CCE V$ Bisleri International Pvt Ltd - 2005 (186) ELT 257 (SC).
I find that the Hon'ble Supreme Court in the case of Commissioner of Central Excise Vs Fiat India Private Limited -
24 E/86337/2016 2012 (283) E.L.T. 161 (S.C.) has dealt at length on the term 'consideration'. The relevant portion of the order is reproduced below:
53. Now what requires to be considered is what is the meaning of the expression 'sole consideration'. Consideration means something which is of value in the eyes of law, moving from the plaintiff, either of benefit to the plaintiff or of detriment to the defendant. In other words, it may consist either in some right, interest, profit or benefit accruing to the one party, or some forbearance, detriment, toss or responsibility, given, suffered or undertaken by the other, as observed in the case of Currie v.
Misa, (1875) LR 10 Ex. 153.
54. Webster's Third New International Dictionary (unabridged) defines, consideration thus : "Something that is legally regarded as the equivalent or return given or suffered by one for the act or promise of another."
55. In volume 17 of Corpus Juris Secundum (p.420-421 and
425) the import of consideration' has been described thus :
"Various definitions of the meaning of consideration are to be found in the text-books and judicial opinions. A sufficient one, as stated in Corpus juris and which has been quoted and cited with approval is "o benefit to the party promising or a loss or detriment to the party to whom the promise is made..... At common law every contract not under seal requires a consideration to support it, that is, as shown in the definition above, some benefit to the promisor, or some detriment to the promisee."
56. In Salmond on Jurisprudence, the word 'consideration' has been explained in the following words.
"A consideration in its widest sense is the reason, motive or inducement, by which a man is moved to bind himself by an agreement. It is for nothing that he consents to impose on obligation upon himself, or to abandon or transfer a right. It is in consideration of such and such a fact that he agrees to bear new burdens or to forego the benefits which the law already allows him."
57. The gist of the term 'consideration' and its legal significance has been clearly summed up in Section 2(d) of the Indian 25 E/86337/2016 Contract Act which defines 'consideration' thus : "When, at the desire of the promisor, the promisee or any other person has done or obtained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration to the promise."
58. From a conspectus of decisions and dictionary meaning, the inescapable conclusion that follows is that 'consideration' means a reasonable equivalent or other valuable benefit passed on by the promisor to the promisee or by the transferor to the transferee. Similarly, when the word 'consideration' is qualified by the word 'sole', it makes consideration stronger so as to make it sufficient and valuable having regard to the facts, circumstances and necessities of the case.
A reading of the above clearly implies that consideration need not be only monetary consideration flowing only from buyer to seller. It is any valuable benefit derived by seller. In the instant case, the value is in terms of market share gained by the noticee which was achieved by considerably deflating the price at which the cars were cleared.
The value of this consideration has been quantified in money terms by way of the Cost Audit Report.
The case of Dass Gopal Krishnan Vs State of Punjab & Ors (1967) 3 SCR 557 referred by noticee dealt with the East Punjab General Sales Tax Act, 1948 (46 of 1948 and whether the term "valuable consideration" was in conflict with the Sale of Goods Act, 1930 and Central Sales Tax Act, 1956. The order discussed the term 'purchase as meaning acquisition of goods for sale for cash or deferred payment or other valuable consideration. Sale and purchase are different perspectives of same transaction and the price is defined in the sale of Goods Act as "money consideration" and the expression 'cash', 'deferred payment' and 'other valuable consideration' are consistently used as monetary consideration. I find that this case was also referred to in the Fiat India Pvt Ltd case. After due deliberations, the Supreme Court observed "58. From a conspectus of decisions and dictionary meaning, the inescapable conclusion that follows is that 'consideration' means a reasonable equivalent or other valuable benefit passed on by 26 E/86337/2016 the promisor to the promisee or by the transferor to the transferee. Similarly, when the word 'consideration' is qualified by the word 'sale', it makes consideration stronger so as to make it sufficient and valuable having regard to the facts, circumstances and necessities of the case.
59. To attract Section 4(1)(a) of the Act what is required is to determine the 'normal price of an excisable article which price will be the price of which it is ordinarily sold to a buyer in the course of wholesale trade. It is for the Excise authorities to show that the price charged to such selling agent or distributor is a concessional or specially low price or a price charged to show favour or gain in return extra-commercial advantage. If it is show that the price charged to such a sole selling agent or distributor is lower than the real value of the goods which will mean the manufacturing cost plus manufacturing profit, the Excise authorities con refuse to accept that price."
As regards the case law of CCE Vs Mazgaon Dock Ltd - 2005 (187) ELT 3 (SC) referred by the noticee, the gist of judgment is as follows: Valuation (Central Excise) - Additional consideration - Subsidy of 20% from Government cannot be said to be additional consideration as it is not received from buyer either directly or indirectly - Hence, not includible in price of goods for purpose of excise - Section 4 of Central Excise Act, 1944 read with Rule 5 of Central Excise (Valuation) Rules, 1975. (para 7]Valuation (Central Excise) - Additional consideration - Subsidy of 10% received from buyer, is additional consideration, includible in assessable value - Fact that it is received under a policy of Government, not hold otherwise - Section 4 of Central Excise Act, 1944 read with Rule 5 of Central Excise (Valuation) Rules, 1975. (para 7] This case cited by the noticee in their defense is not relevant to the present case as it dealt with the issue of subsidy as additional consideration. The present case does not deal with any subsidy. It deals with selling cars below the manufacturing cost + profits.
As for the CCE Vs Bisleri International Pvt Ltd - 2005 (186) ELT 257 (SC) case, I find that the same has been commented upon by the Hon'ble Supreme Court in the Fiat case, the relevant portion of which is as follows:
27 E/86337/2016
66. in our considered view, either the decision of Guru Nanak's case (supra) or the decision in Bisleri's case (supra) would assist the assessee in any manner whatsoever. We say so for the reason, that, in Guru Nanak's case, the department had accepted the price declared by the assessee and the narration of the facts both by the Tribunal and this Court would reveal that it was one time transaction and lastly, this Court itself has specifically observed that the view that they have taken, is primarily based on the facts and circumstances of the case. In the instant cases, the department never accepted the declared value. It is for this reason, provisional assessments were completed instead of accepting declared price by the assessee under Rule 9B of the Rules inter alia holding that during the enquiry, the assessees had admitted that they did not have any basis to arrive at the assessable value but they are selling their goods at loss price' only to penetrate the market. Secondly, as we have already noticed that for nearly five years the assessee was selling its cars in the wholesale trade for a loss price' and therefore, the conditions envisaged under Section 4(1)(a) of the Act, namely; the normal price, ordinarily sold and sole consideration are not satisfied. We further hold that the decision in Bisleri's case (supra) will also not assist the assessees for the reason that the issue that came up for consideration is entirely different from the legal issue raised in these civil appeals. Before we conclude on this issue, we intend to refer to the often quoted truism of Lord Halsbury that a case is only an authority for what it actually decides and not for what may seem to follow logically from it. We may also note the view expressed by this court in the case of Sushil Suri v. Central Bureau of Investigation & Anr.
(2011) 5 SCC 708, wherein this Court has observed, "Each case depends on its own facts and a close similarity between one case and another is not enough because either o single significant detail may alter the entire aspect. In deciding such cases, one should avoid the temptation to decide cases (as said by Cardozo) by matching the colour of one case against the colour of another. To decide, therefore, on which side of the line a case falls, the brood resemblance to another case is not at all decisive." We do not intend to overload this judgment by referring to other decisions on this well settled legal principle 28 E/86337/2016 In view of the above, the submission of the noticee is rejected.
D. The assessee has submitted that when the excisable goods are sold, 'cost of production' or any other method is impermissible. They have placed reliance on the case UOI Vs Bombay Tyre International Ltd-1983 (14) ELT 1896 (SC) where in it was held that Section 4 determines the value on the basis of the price charged or chargeable by the particular assessee and also further stated that the decision in the case of Bombay Tyres has been followed in the case of GOI Vs Madras Rubber Factory - 1995 (77) ELT 433 (5C) and UOI Vs Century Manufacturing Company- 1992 (60) ELT 3 (SC).
I disagree with the submissions made by the assessee. As per Section 4 the assessable value will be the price at which are ordinarily sold if the buyer and seller are not related and the price is the sole consideration of the sale. It has been proved without reasonable doubt, that in the present case, the goods were sold at price below the cost of manufacturing + profits, with intention to gain market share. The Hon'ble Supreme Court in the Fiat case has opined that:
59. To attract Section 4(1)(a) of the Act what is required is to determine the 'normal price' of on excisable article which price will be the price at which it is ordinarily sold to a buyer in the course of wholesale trade. It is for the Excise authorities to show that the price charged to such selling agent or distributor is a concessional or specially low price or a price charged to show favour or gain in return extra-commercial advantage. If it is shown that the price charged to such a sole selling agent or distributor is lower than the real value of the goods which will mean the manufacturing cost plus manufacturing profit, the Excise authorities con refuse to accept that price.
From my earlier findings is Paras A, B and C above, it is now clearly established that the provisions of Section 4(1)(b) of the Central Excise Act, 1944 are applicable in this case. I thus find that in such circumstances, the Valuation Rules apply and the cost of production method or any other method is permissible for determination of correct assessable value for computing the duties of excise.
29 E/86337/2016 As for the Bombay Tyre International Ltd case cited by the assessee, I find that the same has been commented upon by the Supreme Court in the Fiat case. The relevant para of the order is as follows:
62. Reference to the Citations : Shri Bhattacharya, learned ASG, submits that in view of the decision of this court in Bombay Tyre International case (supra), the nominal price of the goods, even if it is sold for a loss price, for the purpose of assessable value under Section 4 of the Act, at least the manufacturing cost and manufacturing profit should be taken into consideration. In view of this decision, the learned counsel goes to the extent of saying the judgments relied upon by the opposite side on the decision of this Court in Guru Nanak Refrigeration (supra) and Bisleri International (supra) should be treated as per-incurium. We cannot agree. In Bombay Tyre's case, the Issue before the Court was whether the value of an article for the purpose of excise duty had to be determined by reference exclusively to the manufacturing cost and manufacturing profit of the manufacturer or should be represented by the wholesale price charged by the manufacturer which would include post-manufacturing expenses and post-manufacturing profits arising between the completion of manufacturing process and the point of sale by the manufacturer. It is relevant to notice at this stage, in the Bombay Tyre's case, this Court considered the scope of Section 4 before its amendment and after the new Section 4 was substituted with effect from 1-10-1975. This Court in the said case, after detailed consideration of rival contentions and after referring to several precedents of this Court has concluded that the levy of excise duty was on the manufacture or production of goods, the stage of collection need not in point of time synchronise with the completion of the manufacturing process while the levy had the status of a constitutional concept, the point of collection was located where the statute declared it would be. The Court further went on to observe when enacting the measure to serve as a standard for assessing the levy, legislature need not contour it along lines which spell out the character of the levy itself. From this stand point, it is not possible to accept the contention that because the levy of excise is a levy on goods manufactured or produced, the value of the
30 E/86337/2016 excisable article must be limited to the manufacturing cost plus the manufacturing profit. The Court further was of the opinion, that a broad-based standard of reference may be adopted for the purpose of determining the measure of levy. Any standard which maintains a manner with the essential character of levy could be regarded as a valid basis for assessing the measure of levy. This Court in this decision also distinguished the view expressed in A.K. Roy & Anr. v, Voltas Ltd., 1977 (1) E.L.T. (177) (S.C.), wherein this court had held that the value for the purpose of Section 4 would include only the manufacturing cost plus manufacturing profit and exclude post-manufacturing cost plus manufacturing profit but exclude post-manufacturing cost and profit arising from post-manufacturing operation by observing that this Court in the aforesaid decision intended to say was that entire cost of the article plus profit minus trade discount would represent the assessable value and in that decision there was no issue on the question of including the post manufacturing cost and post-manufacturing profits. In conclusion, insofar as amended Section 4 of the Act, the Court has observed that the assessable value will be the price at which the goods are ordinarily sold by the assessee to the buyer in the course of wholesale trade at the factory gate. However, firstly, the buyer should not be a related person and the price should be sole consideration for the same. This proposition is subject to Section 4(1)(a). Secondly, if the price of the excisable goods cannot be ascertained either because the goods are not sold or for any other reason, the value will have to be determined as per the Central Excise Valuation Rules[Emphasis provided) Thus I find that in the Fiat India Pvt Ltd case, the Supreme Court has deliberated at length on its own decision in the case of Bombay Tyres, and ruled that if it is shown that the price charged to such a sole selling agent or distributor is lower than the real value of the goods which will mean the manufacturing cost plus manufacturing profit, the Excise authorities can refuse to accept that price. Even though the decision in the case of Bombay Tyres has been followed in the case of GOI Vs Madras Rubber Factory - 1995 (77) ELT 433 (SC) and VOI Vs Century Manufacturing Company- 1992 (60) ELT 3 (SC), I find that in light of the Supreme Courts observation as above, the 31 E/86337/2016 contention of the noticee cannot be accepted. I have already deliberated earlier on how the provisions of Section 4(1)(b) read with the Valuation Rules, apply to the present case.
In view of my earlier findings, and the findings above, I find no merit in the submission of the assessee.
E. The assessee has stated that the computation of differential duty is bad in law and is liable to be re- quantified. They have further stated that
(i) The demand needs to be quantified only on cost of production and not cost of production + cost of sale. They have relied on the case laws of CCE Pune Vs Cadbury India Ltd - 2006 (200) ELT 353 (SC);
Hindustan Lever Ltd Vs CCE Bhopal - 2013(291) ELT 268 (Tri.Del); Nirma Ltd Vs CCE, Vadodara-1- 2006 (200) ELT 213 (Tri Mumbai) and General Motors India Pvt Ltd Vs CCE, Pune-010 NO PUN-EXCUS-004- COM-033-034-14-15 dt 29.12.14
(ii) CAS-4 will be applicable as per CBEC Circular dated 15.01.14.
(iii) Rule 11 of the Valuation does not stipulate addition of 10% to cost of production and hence 10% cannot be added without invoking Rule 8. Even if rule 8 is invoked, there is no need to add 10% as notional profit and expenses do not form part of production where there is no sale.
(iv) They are carrying out transaction as per Vehicle Supply Agreement.
(v) Resorting to valuation under Rule 11 is arbitrary and needs to be struck down. In support they have cited decisions in the case of Brij Bhushan Lal Parduman Kumar Vs CIT, AIR 1979 SC 209; Raghubar Mandal Harihar Mandal vs The State of Bihar, AIR 1957 SC 810; State of Orissa Vs Maharaja Shri B P Singh Deo, 1970 (76) ITR 690 (SC) and TAL Manufacturing Solutions Ltd Vs CCE, Pune-l (Order No A/579/07/C- 1/EB dated 22.08.07).
(vi) They are submitting revised calculation as per their interpretation.
32 E/86337/2016 Before going into the above submissions, I think it is necessary to revisit the relevant rules of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000.
Rule 3 : The value of any excisable goods shall, for the purposes of clause (b) of sub-section (1) of section 4 of the Act, be determined in accordance with these rules.
Rule 8: Where the excisable goods are not sold by the assessee but are used for consumption by him or on his behalf in the production or manufacture of other articles, the value shall be one hundred and ten per cent of the cost of production or manufacture of such goods.
Rule 11 : 1f the value of any excisable goods cannot be determined under the foregoing rules, the value shall be determined using reasonable means consistent with the principles and general provisions of these rules and sub-section (1) of section 4 of the Act.
The question before me is whether Rule 8 or Rule 11 of the Valuation Rules should be applied in this case.
Rule 8 applies in cases where goods are not sold but captively consumed. The words 'Captive Consumption' refer to goods produced or manufactured in a factory and used within the factory in the manufacture of other goods. Similarly when good manufactured by one division/plant are transferred to and consumed by another division/plant, of the same organization or related undertaking for manufacturing another product(s), such goods are also said to be captively consumed.
However, in those cases where the goods are not captively consumed but sold, as in the present case, and where the provisions of Section 4(1)(b) of the Central Excise Act, 1944 apply, I find that valuation will have to be done as per the provisions of Rule 11, since no other Valuation Rules apply.
The case laws cited by the noticee are all related to valuation of goods captively consumed.
Cadbury India Ltd - 2006 (200) ELT 353 (SC): Valuation (Central Excise) - cost of production of captively consumed goods to be determined strictly in accordance with CAS-4 33 E/86337/2016 Hindustan Lever Ltd Vs CCE Bhopal - 2013(291) ELT 268 (Tri.Del): Valuation (Central Excise) - cost of production - Determination of Clearances of bulk Surf Excel Powder and clearances of sulphonic acid by appellant unit to its sister concern - Cost of production to be determined under CAS-4 Nirma Ltd Vs CCE, Vadodara-l - 2006 (200) ELT 213 (Tri Mumbai): Valuation (Central Excise) - Captively consumed goods
- Linear Alkyl Benzene (LAB) cleared to other factories of appellants to be valued under Rule 8 of Central Excise (Valuation) Rules, 2000 i.e. at 115% of the cost of production of LAB. Valuation (Central Excise) - Captively consumed goods - Related person sole alleged - Rules 8 and 9 of Central Excise (Valuation) Rules, 2000 being more specific relating to valuation of captively consumed goods than Rule 4 ibid read with Rule 11 ibid As already discussed earlier, the goods in the present case are not captively consumed, but sold. Rule 8 of the Valuation Rules, 2000 do not apply to the present case. Hence the above referred cases by the noticee are not relevant to the present case, From my discussions above, I find that resorting to valuation under Rule 11 by the Department is not arbitrary but is based on the logic and rationale of the prevalent provisions of the statute.
In the earlier 1975 Valuation Rules, Rule 7 which provides for the best judgment assessment, gives an indication that the assessing authority while quantifying the assessable value under the said Rules, may take the assistance of the methods provided under Rules 4, 5 or 6 of the Valuation Rules. In the present case, 1 find that the provisions of Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 apply. These Rules are different from the 1975 Valuation Rules. The case laws cited by the noticee basically relate to "best judgment assessment"
Brij Bhushan Lal Parduman Kumar Vs CIT, AIR 1979 SC 209:
HELD: The law relating to 'best judgment assessment is same both in the case of income tax assessment and the sales tax assessment. The authority making a best judgment assessment must make an honest and fair estimate of the income of the assessee and though arbitrariness cannot be avoided in such 34 E/86337/2016 estimate the same must not be capricious, but should have a reasonable nexus to the available material and the circumstances of the case.
Raghubar Mandal Harihar Mandal vs The State of Bihar, AIR 1997 SC 810: Sales Tax-Assessee's accounts rejected as unreliable-Assessment made on guess without reference to evidence or material State of Orissa Vs Maharaja Shri B P Singh Deo, 1970 (76) ITR 690 (SC): The Agricultural Income Tax Tribunal gave no reasons in its order for affirming the decision of the Assistant Collector. It appears to have been of the view that once the assessing authorities reject the material placed before them as being unreliable those authorities con proceed to levy whatever tax they may levy. It failed to bear in mind the scope of the power of the assessing authorities to levy assessment on the basis of best judgment.
I find that these case laws are not relevant to the present case because, as already discussed earlier, I find that Rule 11 of the Valuation Rules has been correctly applied to the present case. I have already discussed how Rule 8 of the Valuation Rules does not apply and even by the best judgment method, Rule 11 applies. In order to arrive at the correct quantification of duty, the Department has correctly taken assistance of the report of the 'Cost Accountant' to ascertain the correct price that requires to be adopted during the relevant period.
Further, in order to further determine the correct method of valuation, it is necessary to revisit the term "Transaction value"
Section 4(3)(d) of the Central Excise Act, 1944, defines "transaction value" as follows:
*4. Valuation of excisable goods for purposes of charging of duty of excise. - (1) & (2) * * (3) For the purposes of this section, - (a) to (cc) (d) "transaction value" means the price actually paid or payable for the goods, when sold, and includes in addition to the amount charged as price, any amount that the buyer is liable to pay to, or on behalf of, the assessee, by reason of, or in connection with the sale, whether payable at the time of the sale or at any other time, 35 E/86337/2016 including, but not limited to, any amount charged for, or to make provision for, advertising or publicity, marketing and selling organization expenses, storage, outward handling, servicing, warranty, commission or any other matter; but does not include the amount of duty of excise, sales tax and other taxes, if any, actually paid or actually payable on such goods."
[Emphasis supplied] In the present case, I find that the goods have been sold by the assessee and duty has been paid on transaction value which is below the manufacturing cost + profits. When goods are sold, the only way to compute the correct transaction value is as per the principle laid down in the definition of transaction value.
The CBEC Circular dated 15.01.2014 only states that calculations of manufacturing cost may be carried out using CAS-4 standards. In the present case, I find that since the goods have been sold, and there is no issue related to goods captively consumed, it is necessary to determine the transaction value as per the provisions of Section 4(3)(d) of the Central Excise Act, 1944, In find that the Cost Auditor has done the valuation as per AS-2, which is certified by cost auditor in the Cost Audit report. As per the Indian Accounting Standards, AS-2 deals with accounting of inventories. The primary issue in accounting of inventories is the determination of the value at which inventories are carried in the financial statements until the related revenues are recognized. This Standard deals with the determination of such value, including the ascertainment of cost of inventories and any write- down thereof to net realizable value.
The scope of the Cost Auditor work was to determine the total stock of finished goods lying and determine the cost of sales vis- à-vis assessable value for various models.
I find that the Cost Auditor has only determined the value as per AS-2. But in order to determine the transaction value as per Section 4(3)(d), other factors like advertising and publicity, marketing and selling expenses, warranty expenses, storage, outward handling expenses etc along with profit has to be included.
36 E/86337/2016 Even otherwise, in the course of normal business, any prudent business entity will factor in all these expenses and profits percentage before determining the sale price of the goods.
I further find that even though the assessee is manufacturing Tata Brand Cars, Power trains etc, the full cost of advertising and sale promotion expenses etc has been taken from the financials while working out differential duty. I see no incongruity in this. The assessee has a vehicle supply agreement with Tata Motors and so they will not incur any advertising and sale promotion expenses on Power trains and Tata Motor car brands. Hence these expenses are purely for Fiat brand cars.
1, hence, find that the valuation method adopted in the SCN for determining the differential duty, is as per law and correct.
I further hold that for determining the margin of profit, the Vehicle Supply Agreement which is a private document between the assessee, TML and FGAIPL cannot be taken as a base as the same is a private document and the conditions therein are not binding on the Department.
On perusing the revised calculations submitted by the assessee which are based on their own interpretation, I find that the same to be without any logic inasmuch as they have not taken into account the correct assessable value which should have been computed as per Section 4(3)(d). I also find that they have sought to project, as excess duty paid, those cases where transaction value is higher than manufacturing cost and offset the same against the cases of short-payment i.e cases where the transaction value is less than the manufacturing cost. The Central Excise law does not provide for such adjustments. Hence the calculations submitted by the assessee are rejected and the case laws cited by them hold no relevance to issue at hand."
4.3 From the impugned order at "E" commissioner has recorded that appellant have challenged the quantification of demand. While adjudicating the case he has not even referred to any quantification done in the show cause notice. As per annexure A to the Show Cause Notice 08.04.2015 where the demand has been quantified we find not only serious clerical and mathematical errors have are noticed but it is also noticed that there is no justification of addition of certain expenses. The 37 E/86337/2016 relevant columns from the Annexure A to the show cause notice are reproduced below:
Additions to Total with Assessable
COP for notional profit Value adopted
selling etc of 10%
Year/ Month Description Qty Cleared Total COP expenses
1 2 3 4 5 6 7
Punto 1.4 75 2,84,37,075 2,71,08,075
Fire 1.4 4 3,91,408 3,15,840
Punto 1.2 339 10,19,88,828 10,49,45,925
Mar-10
Punto 1.3 514 13,54,99,317 21,45,99,626
Manza 1.2 1050 34,67,60,400 37,74,71,850
Total 1982 61,30,77,028 751616667 1501163065 72,44,41,316
Palio 1.1 31 1,53,08,327 52,13,642
Palio 1.3 150 8,41,41,150 3,70,08,600
Palio 1.6 147 8,49,18,813 2,59,47,999
Punto 1.4 708 27,50,26,848 27,36,56,868
2010-11
Punto 1.3 2544 81,78,12,048 87,36,47,760
Punto 1.2 8642 345,09,83,934 374,31,95,880
SDE 90 PS 12 16,19,865 17,54,292
Total 12234 472,98,10,985 671410000 5941343084 496,04,25,041
Palio 1.1 3 16,25,133 518700
Palio 1.3 32 19684960 7941760
Palio 1.6 32 19764384 5437728
Punto 1.2 545 180949810 191866160
2011-12 Punto 1.2 15 4980270 5280720
Punto 1.3 10815 4431922110 4677087345
Punto 1.3 144 59010336 62274672
Punto 1.4 175 69601525 70256200
Total 11761 478,75,38,528 159,42,40,000 701,99,56,381 502,06,63,285
Punto 1.2 201 79127268
2012-13
Total 201 7,91,27,268 78,04,90,000 94,55,78,994.8 8,68,82,250
Linea 1.4 698 40,39,08,868 42,81,89,496
Manza 1.3 635 243064665 266651105
Punto 1.2 123 50390271 53962560
Punto 1.2 310 126999870 135771630
Punto 1.3 1666 776415936 824095230
2013-14 Punto 1.3 6145 2863791220 3008075820
Punto 1.4 4 1912312 2008920
Punto 1.4 48 22369728 24299088
Vista 1.4 416 153016032 162937632
SDE 95 PS 174 44171466 45261750
Total 10219 468,60,40,368 80030000 5242677405 495,12,53,231
From the above table it is evident that during the year the additions sought to be made has got no relationship with the Model being cleared but has been added on the basis of the figures available in the balance sheet. The breakup of these expenses as available from the annexure to show cause notice is as follows:
38 E/86337/2016
Year/Mo Selling Advertiseme Warranty Logistics Total
nth nt
Mar 825916 751616667
2010 52291667 681275000 9790833 7
2010-11 0 465900000 205510000 0 671410000
2011-12 159424000
647570000 693470000 253200000 0 0
2012-13 269160000 511330000 0 0 780490000
2013-14 64210000 220000 15600000 0 80030000
Absurdity of the additions sought to be made is evident from the table. For the year 2012-13, it seems that appellant had cleared 201 Punto 1.2 cars incurring the Selling expense of Rs 26,91,60,000/- and the advertisement expenses of Rs 51,13,30,000/-, against total cost of production as per the annexure of Rs 7,91,27,268/- additional expenses sought to be added to the comes to Rs 78,04,90,000/-. And the excise duty is sought to be demanded on the value of Rs 94,55,78,995/- thereby making the differential duty as Rs 11,60,95,800/- for the said year in respect of this model. Similar discrepancies can be pointed for each year. A note on the annexure to Show cause notice reads "The expenses shown in column 5,6,7 & 8 are taken from the Company's balance Sheet." The figures shown in the balance sheet of the company would be relating to entire activities of the company and not of some model which revenue have sought to pick and make the show cause notice absurdly. Even the production an clearance figures have not been taken correctly for amortizing these expenses rationally. The production/ clearance figure do not tally with the figures as indicated in the cost auditor reports.
4.4 As per the cost auditor report the figure for Clearance during the period of show cause notice are as follows:
S No Model Qty Value COP Difference
2009-10 (March 2010)
1 Indica 1405 752 271691 212967 58724
39 E/86337/2016
2 Linea 1.3 727 540946 446813 94133
3 Manza 1.3 2514 421943 366880 55063
4 Manza 1.4 1188 359497 330248 29249
5 Punto 1.2 339 309575 300852 8723
6 Punto 1.3 514 417509 399703 17806
7 Punto 1.4 75 361441 379161 -17720
Total 6109
2010-11
1 Indica 1405 8703 282901 221223 61678
2 Linea 1.3 5373 557791 431631 126160
3 Linea 1.4 3613 516261 420796 95465
4 Manza 1.3 30398 432496 351264 81232
5 Manza 1.4 8115 372134 302476 69658
6 Palio 1.1 31 168182 493817 -325635
7 Palio 1.3 150 246724 560941 -314217
8 Palio 1.6 147 176517 577679 -401162
9 Punto 1.2 2544 343415 321467 21948
10 Punto 1.3 8642 433140 399327 33813
11 Punto 1.4 708 386521 388456 -1935
Total 68424
12 SDE 75 PS 28725 142431 122474 19957
13 SDE 90 PS 12 146191 134988 11203
14 Fire 1.2 8V 3302 94570 74817 19753
15 Fire 1.4 8V 2362 98111 82706 15405
16 Fire 1.4 16V 1812 143421 90925 52496
40 E/86337/2016
36213
2011-12
1 Indica 1405 14722 304762 235736 69026
2 Indica 1405 746 304762 235736 69026
3 Linea 1.3 3556 572716 455164 117552
4 Linea 1.3 104 572716 455164 117552
5 Linea 1.4 673 546136 451448 94688
6 Linea 1.4 3 546136 451448 94688
7 Manza 1.3 18892 457930 360609 97321
8 Manza 1.3 389 457930 360609 97321
9 Manza 1.4 710 414339 329536 84803
10 Manza 1.4 108 414339 329536 84803
11 Palio 1.1 3 172900 541711 -368811
12 Palio 1.3 32 246160 615155 -368995
13 Palio 1.6 32 169929 617837 -447908
14 Punto 1.2 545 352048 332018 20030
15 Punto 1.2 15 352048 332018 20030
16 Punto 1.3 10815 432463 409794 22669
17 Punto 1.3 144 432463 409794 22669
18 Punto 1.4 175 401464 397723 3741
Total 51664
19 SDE 75 PS 37959 144804 117238 27566
20 SDE 75 PS 146584 117238 29346
21 SDE 90 PS 20 148991 128000 20991
22 Fire 1.2 8V 231 214907 66114 148793
41 E/86337/2016
23 Fire 1.2 8V 13 214907 66114 148793
24 Fire 1.4 8V 862 129967 75413 54554
25 Fire 1.4 16V 360 143950 85344 58606
26 SDE 75 PS MSIL 12545 121493 92794 28699
27 SDE 75 PS MSIL 5216 121493 92794 28699
Total 19247
2012-13
1 Indica 1405 14585 318076 249494 68582
2 Linea 1.3 1372 602421 515117 87304
3 Linea 1.4 158 538675 440962 97713
4 Manza 1.3 6615 489595 344272 145323
5 Manza 1.4 259 415412 321516 93896
6 Punto 1.2 201 432250 393668 38582
7 Punto 1.3 5286 509924 454302 55622
8 Punto 1.4 10 496473 424752 71721
9 Vista 1.3 13577 406745 346375 60370
10 Vista 1.4 5532 332750 296466 36284
Total 47597
11 SDE 75 PS 11533 157436 109901 47535
12 SDE 90 PS 2469 143569 122797 20772
13 Fire 1.2 8V 289 96306 68244 28062
14 Fire 1.4 8V 1933 95464 76725 18739
15 Fire 1.4 16V 850 116861 87099 29762
16 SDE 75 PS MSIL 10257 123323 96906 26417
17 SDE 75 PS PREM 556 151436 81234 70202
42 E/86337/2016
Total 27887
4.5 Commissioner has in the impugned order rejected the report of the Cost Auditor stating that the said report has been made as per AS-2, which is a standard for Valuation of Inventory, and has sought to make addition of these expenses along with the notional profit of 10% to determine the cost of production. In 2003 CBEC has issued the circular stating as follows:
"The Institute of Cost & Works Accountants of India [ICWAI] has since developed the Cost Accounting Standards, CAS 2, 3 and 4, on capacity determination, overheads & cost of production for captive consumption, respectively, which were released by the Chairman , CBEC on 23.1.2003.
It is, therefore, clarified that cost of production of captively consumed goods will henceforth be done strictly in accordance with CAS-4. Copies of CAS-4 may be obtained from the local Chapter of ICWAI."
4.6 In the 2014, Board again issued the Circular No 979/03/2014-CX, dated 15.01.2014 stating as follows:
"3.1 Calculations of manufacturing cost may be carried out using CAS-4 standards . Information submitted by the manufacturer ,duly certified by a Chartered or Cost Accountant should normally be accepted . Only where a decision to investigate a case has been taken at the level of the Commissioner and it is considered necessary in the interest of investigation, steps such as ordering Cost Audit of the Unit or summoning of the Costing data should be undertaken."
4.7 interestingly in violation of all the directions given by the Board, this case has proceeded without even any reference to the CAS-4. As per CAS-4, Cost of Production: Cost of production shall consist of Material Consumed, Direct Wages and Salaries, Direct Expenses, Works Overheads, Quality Control cost, Research and Development Cost, Packing cost, Administrative Overheads relating to production.
Further as per this standard treatment of abnormal expenses have to be dealt in following manner:
43 E/86337/2016
"5.17 Abnormal and non-recurring cost: Abnormal and non-recurring cost arising due to unusual or unexpected occurrence of events, such as heavy break down of plants, accident, market condition restricting sales below normal level, abnormal idle capacity, abnormal process loss, abnormal scrap and wastage, payments like VRS, retrenchment compensation, lay-off wages etc. The abnormal cost shall not form the part of cost of production."
In case of Cadbury India [2006 (200) E.L.T. 353 (S.C.)] Hon'ble Supreme Court has held as follows:
"10.According to settled principles of accountancy only the elements that have actually gone into the manufacture/production of these intermediates i.e. sum total of the direct labor cost, direct material cost, direct cost of manufacture and the factory overheads of the factory producing such intermediate products are included in the cost of production. The Appellant produced along with the reply to the Show Cause Notice the following authoritative texts: Wheldon's Cost Accounting and Costing Methods, Cost Accounting methods by B.K. Bhar, Principles of Cost Accounting by N.K. Prasad, Glossary of Management Accounting Terms by ICWAI.
13. The cost accounting principles laid down by ICWAI have been recognized by the Central Board of Excise and Customs vide Circular No. 692/8/2003-CX., dated 13-2-2003. The circular requires the department to determine the cost of production of captively consumed goods strictly in accordance with CAS-4.
14. The Tribunal in the case of BMF Beltings Ltd. v. CCE : 2005 (184) E.L.T. 158 (Tri. - Bang.) for the period 1995 to 2000 has directed the department to apply CAS-4 for the determination of the cost of production of the captively consumed goods. In ITC v. CCE - 2005 (190) E.L.T. 119 the Tribunal held that the department has to calculate the cost of production in terms of CAS-4. Other decisions of the Tribunal, wherein it has directed that CAS-4 be applied for determination of the cost of production, are Teja Engineering v. CCE - 2006 (193) E.L.T. 100 (Tri- Chennai), Ashima Denims v. CCE - 2005 (191) E.L.T. 318 (Tri-Mumbai), and Arti Industries v. CCE - 2005 (186) E.L.T. 208 44 E/86337/2016 (Tri-Chennai). This is therefore a consistent view taken by the Tribunal. The department has not filed any appeal in these cases and accepted the legal position. Apart from this, in the light of several decisions of this Court, the Department is also bound by the said circular No. 692/8/2003-CX., dated 13-2-2003 issued by the CBEC. As such it cannot now take a contrary stand."
4.8 However we take the note of the cost of production determined by the Cost Auditors appointed by the Commissioner in terms of Section 14 A of the Central excise Act, 1944. Though we agree that the report records that has determined the Cost as per AS-II, nevertheless it is opinion of the experts in the matter and has been sought by the revenue themselves in terms of the Circular of 2014 issued by the revenue. In the said Circular referring to the decision of the FIAT India, Board has categorically clarified stating as follows:
"2. The first issue is whether the declared transaction value can be rejected in all cases where the transaction value is lower than the manufacturing cost and profit . The Hon'ble Supreme Court has not ruled that transaction value can be rejected in all cases where the declared value is lower than the manufacturing cost and profit . At paragraph 66 in the FIAT judgment , the Hon'ble Court has declined to hold its earlier judgment in case of Collector of Central Excise , New Delhi Vs Guru Nanak Refrigeration Corpn [ 2003(153) ELT 249 (SC) ] per-in curiam , distinguishing it on the basis of the facts of the case , though the transaction value in case of M/s Guru Nanak Refrigeration Corpn was less than the manufacturing cost and profit . The Hon'ble Supreme Court has cautioned against drawing general conclusions and inferences quoting the truism stated by Lord Halsbury that " a case is only an authority for what it actually decides and not for what may seem to follow logically from it.
"2.1 Further , in paragraph 50, the Hon'ble Supreme Court has cited two instances where a manufacturer may sell goods at a price lower than the cost of manufacture and profit and yet the declared value can be considered as normal price . These instances are when the company wants to switch over its business or where a manufacturer has goods which could not be sold within a reasonable time . The Hon'ble Court has further held that these examples are not exhaustive . Therefore , mere 45 E/86337/2016 sale of goods below the manufacturing cost and profit cannot be taken as the sole basis for rejecting the transaction value."
From the perusal of the report of the cost auditors it is evident that there are few instances wherein the goods specially "Palio" model cars were being cleared on transaction value which was lower than the cost of production. It was clarified by the appellant that the said model was being phased out. Commissioner has rejected the said argument, ignoring the factual report contained in the cost auditor report there is no sale of the said car during the Financial 2012-13, and thereafter. Commissioner has done interesting analysis in the impugned order, which is reproduced below to state that there was no intention to phase out the Palio At cost of repetition I am reproducing the same.
COP COP % inc COP % inc COP % COP % inc
2008- 2009- over 2010- over 2011- inc 2012- over
09 10 prev 11 py 12 over 13 PY
yr PY
Palio 1.1 326503 453068 38.76 493817 8.99 541711 9.71 NA NA
Palio 1.3 429301 558890 30.19 560941 0.37 615155 9.66 NA NA
Palio 1.6 373614 517950 38.63 577679 11.53 617637 6.92 NA NA
Punto1.2 NA 300852 NA 321467 6.85 332018 3.28 393668 18.57
Punto1.3 NA 399703 NA 399327 -0.09 409794 2.62 454302 10.86
Punto1.4 NA 379161 NA 388456 2.45 397723 2.39 424752 6.8
Linea1.3 603945 446813 -26.02 431631 -3.4 455164 5.45 515117 13.17
Linea 1. 568628 418850 -26.34 420796 0.46 451448 7.28 440962 -2.32
I find that the ratio at which the cost of production of Palio cars has increased over the years is much higher than the ratio for the other Fiat Car models manufactured by the assessee. With no evidence of any plan to stop production and selling of Palio brand cars from 2008 onwards itself being on record, the above analysis clearly implies that in the case of Palio models, the assessee failed to bring down the cost of production and hence resorted to selling the cars below the cost of production to penetrate the segment.
However while making the said analysis Commissioner has failed to take the note of the fact the total of Palio cars produced.
46 E/86337/2016
2008-09 2009-10 2010-11 2011-12
COP Number COP Number COP Number COP Number
Palio 326503 821 453068 141 493817 31 541711 3
1.1
Palio 429301 2589 558890 184 560941 150 615155 32
1.3
Palio 373614 1189 517950 17 577679 147 617637 32
1.6
Total 4599 342 328 67
From the table as above which has been culled out from the same report of cost auditor from which Commissioner has taken the COP for his analysis, when production and clearance show such sharp decline, rejection of the submission to this effect that this was being phased out cannot be justified. That being so if the in terms of observations made by the Hon'ble Supreme Court in the case of FIAT India in para 50 and referred by the Board in above circular the transaction value below the cost of production can be justified.
4.9 Now from the reading of the decision of the Hon'ble Supreme Court in the case of FIAT India, it is quite evident that Hon'ble Supreme Court has sought comparison of the manufacturing cost + manufacturing profit with the normal price/ transaction value. The judgment is not an authority to add notional profit of 10% to the cost of production for making such comparison. Even Central Excise Valuation Rules do not provide so. From the days of Bombay Tyre International the concept of manufacturing profit has been there and it is profit that needs to be determined by applying the test of reasonability, while analyzing the account books of the appellant. No such exercise to determine reasonable profit has been done. Addition of 10% notional profit is contrary to the finding recorded by the commissioner himself stating that the appellant was a loss making entity. Commissioner has stated "The assessee has thus tried to prove that they are a prudent business entity unlike Fiat India Pvt Ltd, Mumbai which was not a prudent business entity and continuously incurred losses on account of business practices." Though we do not agree with the above statement of the Commissioner in the impugned order, but we only observe 47 E/86337/2016 that that being so reasonable manufacturing profit was to be determined for addition to the manufacturing cost. In para 50 & 51, Hon'ble Apex Court has in the case FIAT has observed:
"50. In the context of Section 4(1)(a) of the Act, the word 'ordinarily' does not mean majority of the sales; what it means is that price should not be exceptional. In our considered opinion, the word 'ordinarily', by no stretch of imagination, can include extra-ordinary or unusual. In the instant cases, as we have already noticed, the assessees sell their cars in the market continuously for a period of five years at a loss price and claims that it had to do only to compete with the other manufacturers of cars and also to penetrate the market. If such sales are taken as sales made in the ordinary course, it would be anathema for the expression 'ordinarily sold'. There could be instances where a manufacturer may sell his goods at a price less than the cost of manufacturing and manufacturing profit, when the company wants to switch over its business for any other manufacturing activity, it could also be where the manufacturer has goods which could not be sold within a reasonable time. These instances are not exhaustive but only illustrative. In the instant cases, since the price charged for the sale of cars is exceptional, we cannot accept the submission of the learned counsel to give a meaning which does not fit into the meaning of the expression 'ordinarily sold'. In other words, in the transaction under consideration, the goods are sold below the manufacturing cost and manufacturing profit. Therefore, in our view, such sales may be disregarded as not being done in the ordinary course of sale or trade. In our view, for the purpose of Section 4(1)(a) all that has to be seen is: does the sale price at the factory gate represent the wholesale cash price. If the price charged to the purchaser at the factory gate is fair and reasonable and has been arrived at only on purely commercial basis, then that should represent the wholesale cash price under Section 4(1)(a) of the Act. This is the price which has been charged by the manufacturer from the wholesale purchaser or sole distributor. What has to be seen is that the sale made at arms length and in the usual course of business, if it is not made at arms length or in the usual course of business, then that will not be real value of the goods. The
48 E/86337/2016 value to be adopted for the purpose of assessment to duty is not the price at which the manufacturer actually sells the goods at his sale depots or the price at which goods are sold by the dealers to the customers, but a fictional price contemplated by the section. This Court in Raj Kumar Knitting Mills case (supra), while construing the said expression, has held that the word 'ordinarily sold' do not refer to contract between the supplier and the importer, but, the prevailing price in the market on the date of importation and exportation. Excise duty is leviable on the value of goods as manufactured. That takes into account manufacturing cost and manufacturing profit.
51. Excise is a tax on the production and manufacture of goods and Section 4 of the Act provides for arriving at the real value of such goods. When there is fair and reasonable price stipulated between the manufacturer and the wholesale dealer in respect of the goods purely on commercial basis that should necessarily reflect a dealing in the usual course of business, and it is not possible to characterise it as not arising out of agreement made at arms length. In contrast, if there is an extra-ordinary or unusual price, specially low price, charged because of extra- commercial considerations, the price charged could not be taken to be fair and reasonable, arrived at on purely commercial basis, as to be counted as the wholesale cash price for levying excise duty under Section 4(1)(a) of the Act."
From the table in para 4.4, which is based on the cost auditor report we do not find that the transaction value at which most of the models of the cars have been sold to the independent buyers, have been suppressed much below the cost of production as determined by the cost auditor. Hence even going by this decision we do not find any merits in any of the observations made in the impugned order for rejection of the transaction value. In respect of any models for which the demand has been made.
4.10 In the year 2014, Rule 6 of Central Excise Valuation Rules, 2000 was amended by insertion of the following proviso:
Provided that where price is not the sole consideration for sale of such excisable goods and they are sold by the assessee at a price less than manufacturing cost and profit, and no additional 49 E/86337/2016 consideration is flowing directly or indirectly from the buyer to such assessee, the value of such goods shall be deemed to be the transaction value.
From the perusal of the above two amendments it is quite obvious that for transaction value, should be accepted in all other cases of sale of goods, except when the additional consideration as per the rule 6, is flowing directly or indirectly form the buyer to seller for the sale of the goods. It is also seen that proviso has been placed under Rule 6 of the Central Excise valuation Rules. The reason being that Supreme court has in case of FIAT held that assessee by selling the goods below the manufacturing cost plus profit has received additional consideration in the form of market penetration. However how to quantify the market penetration to add to the transaction value needs to be defined.
4.11 In the present case it is not even the case of revenue that any additional consideration over the price charged for the actual sale of goods was received by the appellant from the buyer of goods in any manner directly or indirectly. That being so, we have no hesitation in holding that the transaction value is to be accepted for determination of the duty liability in respect of the goods cleared by the appellant, and the amendment made in the rule 6 in 2014 is only clarifying. Further in case of T & T Metals Pvt Ltd. [2021 (376) E.L.T. 545 (Tri. - Kolkata)] Kolkata Bench held as follows:
"7.3 We further find that the appellant's case is squarely covered by the ratio laid down by the Apex Court in the case of Guru Nanak Refrigeration (Supra) wherein also, in identical facts and circumstances, the Department proposed to reject the transaction value for the reason that cost of manufacture was found to be higher than the price at which goods were eventually sold. The Apex Court taking note of the fact that when there was no additional consideration and the goods were cleared to independent buyers, upheld the valuation adopted by the assessee under Section 4(1)(a). The relevant portion of the decision is reproduced below :
"4. ..........The show cause notice was issued to the assessee on the ground that the cost of production of the goods was more 50 E/86337/2016 than the cost of wholesale price, so why the differential duty on the basis of costs of production of the goods should not be recovered from it. The reasoning in the show cause notice was adopted by the Assistant Collector in confirming demand as well as by the Collector in rejecting the appeal. But the Tribunal set aside the order of the Collector and allowed the appeal by the order impugned in the appeal before us by the Revenue.
5. A perusal of the show cause notice shows that it does not contain an allegation that the wholesale price to the buyers was for consideration other than the one at which it purported to be sold or that it was not at arms length. There is also no allegation that there was any flowback of the money from the buyer to the assessee. In the absence of these factors it cannot be contended that normal price was not ascertainable. There is no valid reason to doubt the genuineness of the sale price. It can therefore safely be concluded that the goods were sold at the normal price within the meaning of Section 4(1)(a) of the Act. In our view, the Tribunal is right in accepting the wholesale price as the correct price following the judgment of the Court in Union of India & Ors. v. Bombay Tyres International Ltd. etc. [1983 (14) E.L.T. 1896]. We hold that clause (b) of sub-section (1) of Section (4) of the Act would not be attracted to determine the nearest ascertainable equivalent of the normal in price of the goods for assessment of excise duty in the facts of this case. We do not find any illegality in the order of the Tribunal in setting aside the order of the Collector. The appeal is therefore dismissed. No costs."
The aforesaid decision in Guru Nanak Refrigeration has not been held to be per incurium by the Apex Court as also noted in the aforesaid Board Circular and hence, has a binding precedence as on date and the same is applicable to the facts of the instant case. In view thereof, we do not find any reason to reject the transaction value adopted by the appellant in the absence of extra commercial consideration and thus, the demand in the instant case cannot be sustained."
4.12 Since we do not find any merits in the grounds for confirmation of demand against the appellant we are not taking the other issues of limitation, demand of interest and imposition of penalty for discussion.
51 E/86337/2016 5.1 Appeal is allowed setting aside the impugned order.
(Order pronounced in the open court) (Sanjiv Srivastava) Member (Technical) (Dr. Suvendu Kumar Pati) Member (Judicial) tvu