Custom, Excise & Service Tax Tribunal
Otis Elevator Company (India) Ltd vs Commissioner Of Central Excise, ... on 2 February, 2012
IN THE CUSTOMS, EXCISE AND SERVICE TAX APPELLATE TRIBUNAL WEST ZONAL BENCH AT MUMBAI COURT NO. Appeal No.E/1082/2004-Mum. (Arising out of Order-in-Original No. 35/Commr/V/2003 dated 27/11/2003 passed by the Commissioner of Central Excise, MumbaiV. ) For approval and signature: Honble Mr. S.S. Kang, Vice President Honble Mr. Sahab Singh, Member (Technical) ============================================================
1. Whether Press Reporters may be allowed to see :
the Order for publication as per Rule 27 of the
CESTAT (Procedure) Rules, 1982?
2. Whether it should be released under Rule 27 of the :
CESTAT (Procedure) Rules, 1982 for publication
in any authoritative report or not?
3. Whether Their Lordships wish to see the fair copy :
of the Order?
4. Whether Order is to be circulated to the Departmental :
authorities?
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Otis Elevator Company (India) Ltd.
:
Appellant
VS
Commissioner of Central Excise, Mumbai-V
:
Respondent
Appearance
Shri Manish Panda, Advocate for Appellant
Shri A.K. Prabhakar, Superintendent (A.R) for respondent
CORAM:
Mr. S.S. Kang, Vice President
Mr. Sahab Singh, Member (Technical)
Date of hearing : 02/02/20012
Date of Pronouncement :
ORDER NO.
Per : Sahab Singh
This is an appeal filed by M/s. Otis Elevator Company (India) Ltd. (hereinafter referred to as appellants) against the order-in-original No. 35/Commr.V/2003 dated 27.11.2003 passed by Commissioner of Central Excise, Mumbai-V.
2. The brief facts of the case are that appellants are engaged in the manufacture of Lifts and Elevators and Parts thereof falling under Chapter Heading No. 8428 and 8431 of the First Schedule to the Central Excise Tariff Act, 1985 and they were availing the MODVAT/CENVAT Credit facility under the provisions of Rule 57A/57B of the Central Excise Rules, 1944 read with Rule 3 of the CENVAT Credit Rules, 2002. During the course of audit for the period 26th July 2000 to 17th August 2000, it was observed that they had entered into works contract with the customers for erection and installation of lifts and elevator and the contract cost included various components like designing, manufacturing, erection etc. It was observed that there was no assessable value available for the final products sold to the customers in respect of components manufactured at Kandivali factory and cleared for captive consumption at site. It was observed that while arriving the assessable value of those components on costing basis, they have not included the amount of Royalty paid to the parent company in the assessable value of said product, cleared for captive consumption. Accordingly, show-cause notice was issued to 7th January 2003 demanding duty amounting to Rs.24,36,098/- for the period April, 1997 to June,2000. It was also proposed to charging of interest and imposition of penalty under Section 11AC and under Rule 173Q of the Central Excise Rules. The case was adjudicated by the Commissioner vide the impugned order under which the duty amount demanded in the show-cause notice was confirmed and the equal amount of penalty of Rs.24,36,098/- was imposed on the appellant under Section 11AC of the Central Excise Act, and the interest was demanded under Section 11AB of the Central Excise Act. Since the amount of duty was already paid by the appellants the same was appropriated by the Commissioner in the impugned order. The appellant filed this appeal against the impugned order before this Tribunal.
3. The learned Advocate appearing for the appellant submits that Board Circular dt. 30th October 1996 referred in the impugned order does not offer any guidance on the issue. He referred to the Circular dt.13th February 2003 which clarifies that royalty paid on product to be assessed can be included while determining the cost of production of the product. He therefore, emphasisd that the royalty can only be included in the cost of production of product on which the royalty is paid.
4. He contended that since the royalty in the present case is paid on the value of works contract of the elevator and no royalty paid on parts and components which are subject matter of the demand, demanding the duty on the royalty by the department is not as per law. He further submitted that the royalty is paid by them on the basis of total sale price received by the appellant with regard to works contract. Royalty is also paid for technical assistance received by the appellant in connection with sales, installation and servicing. Therefore there is no reason for demanding of duty on entire royalty amount under the Central Excise Law.
5. The learned Advocate further submitted that appellants have added notional profit at the rate of 10% to the cost of manufacture. If the royalty amount is to be included in the cost of production then obviously the profit amount will stand reduced by the same quantum. Therefore, the amount which is already added as notional profit to the cost of production also includes the royalty paid by the appellant to the parent company. Therefore, the impugned order confirming the demand by addition of royalty is liable to be quashed. He further argued that there were no instructions/guidelines or circular to include the royalty paid on final products in the assessable value of parts and components used in the manufacture of final product and the issue is purely a matter of interpretation and it is a settled law that when the issue relates to the interpretation, the longer period of limitation and imposition of penalty cannot be invoked. He submitted various case laws in support of his contention that the royalty amount paid by them to the parent company is not be included in the assessable value. He also submitted the following Boards Circulars in support of the claim:-
1] Board Circular No. 4/89-CX.1 dated 6.4.1989 In the circular it was clarified that if manufacturer is receiving the royalty charges from the customers besides the price of the goods these royalty charges are to be included in the assessable value. He submitted that this circular is not applicable to them as they are not receiving charges but they are paying royalty charges to the parent company.
2] Board Circular No. 258/92/96-CX dated 30.10.1996 This circular is regarding the valuation of the goods captively consumed.
3] Board Circular No. 354/81/2000-TRU dated 30.6.2000 This circular was issued when the new Valuation Rules came into w.e.f. 1st July 2000. He submitted that assessable value of the captively consumed goods under new Rules will be taken at the rate of 115% of the cost of manufacture of goods.
4] Board Circular No. 692/8/2003-CX., dated 13.2.2003 In this circular it was clarified that cost of production of captively consumed goods will henceforth be done strictly in accordance with CAS-4. He also submitted the copy of cost accountant standard on cost of production of goods issued for captive consumption. Under Heading of Direct Expenses, it is mentioned that the direct expenses included the royalty based on production. He therefore submitted that the royalty amount should not be included in the assessable value and there is no case for invocation of extended period of limitation and imposition of penalty on them.
6. The learned authorized representative appearing for the Revenue reiterated the finding of the Commissioner and submitted that the royalty amount which is paid by them to their parent company will be expenses incurred by them first therefore, it should definitely form the part of the cost of production of the parts/ components of the goods. He submitted that the appellants have never declared to the department that they were paying the royalty charges to their parent company, therefore larger period has rightly been invoked by the adjudicating authority and therefore the penalty is also imposable on them. He submitted that it is on account of audit, short levy was deducted by the audit officers and on basis of which the show-cause notice was issued to the appellant. He therefore requested for dismissal of appeal.
7. After hearing both the sides, we find that the issue involved in the present case is regarding inclusion of the royalty charges paid by them to their parent company for getting technical assistance in the manufacture, sale, installation and service of the lifts in the assessable value of the parts/components of the lift, which are being assessed on the costing basis. The components manufactured by them in their Kandivali Unit are being cleared for captive consumption at site and the assessable value thereof is being computed on the basis of cost of production plus profit by the appellant.
8. While going through the technical assistance agreement it is stated in the agreement as under:
AND WHEREAS Otis-India has applied to the Reserve Bank of India for approval of the technical collaboration with Otis for the manufacture, sales, installation and service of the Product and has been granted a Registration for the collaboration vide No. FT 96 BYR0288 vide their letter No.EC.CO.FTTT.696/12.52.00/0-52/95-96 dated 21 May 1996.
Under Clause THIRD (a) it is stated as under;_
In payment for the services to be performed by Otis pursuant to this Agreement, Otis-India agrees to pay to Otis a sum equal to the total of three and half (3.5%), subject to India taxes, on the net works billing price of the products, less the landed cost of imported components used in the manufacture of the products.
From the agreement between the Otis India and the parent company it is found that the appellant are getting the engineering, technical and patent assistance in connection with the manufacture, sales, installation and service of Otis elevator and they are supposed to pay 3.5% as subject to the Indian taxes, on the net works billing price of the products less the landed cost of imported components used in the manufacture of final products.
9. Since the components/parts manufactured by the appellants are being used captively the value thereof is required to be determined under the Valuation Rules and the value is being determined on the basis of costing basis after adding the profit element in the cost. After issuance of the circular in 2003 that costing is to be done as per the CAS4. It is quite clear that the amount of the royalty charges will be covered under the direct expenses and will required to be added to the cost of the product under assessment. Since under the disputed period the goods were being assessed on the basis of costing principles, there is no reason not to include the royalty charges to the cost of the product prior to issuance of the circular also. Since the cost of the product is being arrived for the purpose of determination of assessable value the same principles as mentioned in CAS4 are applicable for the past period also. Therefore, we hold that the royalty charges are required to be added to the cost of production of goods in question.
10. We also find that the royalty is being paid by the appellant on account of manufacture, sales, installation and service of the product at the rate of 3.5% of net works billing price. We find that while determining the cost of production the royalty charges are required to be limited upto the manufacturing stage only and the other activities like sales, erection and service are not to be taken into account while computing the cost of production of the components used captively. We therefore agree with the submission of the appellant that 3.5% of the entire bill price is not to be added in the cost of production of the components and 3.5% upto the manufacturing stage only required to be added to the cost of the components.
11. We also find that appellant has not declared to the department that they were paying royalty charges to their parent company. Therefore their argument that extended period is not invocable and penalty is not imposable cannot be accepted as this fact was detected by the department during the course of audit and immediately on detection they accepted the fact and paid the duty. Therefore, we hold that the extended period has rightly been invoked by the adjudicating authority and consequently the penalty is rightly imposed under Section 11AC of the Act.
12. In view of the above, we remand the matter back to the Commissioner for de novo adjudication after affording opportunity of hearing to the appellants for determination of the assessable value after adding the royalty charges payable by the appellant upto the manufacturing stage only. Thereafter duty, penalty and interest amounts are to be quantified by the Commissioner.
13. Appeal is disposed of by way of remand.
(Pronounced in court on ..) (S.S. Kang) Vice President (Sahab Singh) Member (Technical) Sm ??
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