Customs, Excise and Gold Tribunal - Delhi
Window Glass Ltd. vs Collector Of Central Excise on 31 October, 1988
Equivalent citations: 1989(20)ECR420(TRI.-DELHI), 1989(39)ELT641(TRI-DEL)
ORDER K.L. Rekhi, Member (T)
1. The common dispute in these three appeals is on determination of the assessable values of the goods manufactured by the appellants, for the charge of Central Excise duty.
2. The appellants manufactured figured and wired glass in the form of glass sheets. The subject of determination of assessable values of their goods has been a matter of controversy almost ever since the inception of their factory in 1964. The factory of the appellants is situated at Bansberia, a mofussil place in the district of Hooghly in West Bengal. This place is about 45 Kms. away from Calcutta city. Calcutta is the nearest wholesale market for the appellants' goods. The present Section 4 of the Central Excises and Salt Act, 1944, which deals with the question of valuation of the excisable goods, came into force w.e.f. 1.10.1975. The appellants followed rather an unusual method of billing their customers. They issued two invoices for each sale, one called the original invoice for that portion of the value which they claimed as the price of the goods themselves and the other called the supplementary invoice for the extra charges on account of special packing, laffa (jam-packing) charges, forwarding charges, cost of transport, breakage risk and miscellaneous charges. In the price-lists, which the appellants filed before the department for approval, they indicated the various heads of the extra charges but not the amounts charged for them. The dispute whether the charges for the extras were in-cludible in the assessable values of the goods or not, relating to the period from 1.10.1975 to July, 1979 went up to the Calcutta High Court in a writ petition filed by the appellants. By the time the Hon'ble High Court delivered its Judgment on the writ petition on 10.7.1985 [1988 (37) ELT 544 (Cal.)], the Judgment of the Hon'ble Supreme Court in the case of Bombay Tyres International and Others -1983 ELT 1896 (SC) had become available. The appellants had contended before the High Court that they realised the extra charges only from their outstation buyers and not from their local Calcutta buyers. The Hon'ble High Court held that in principle the extra charges were excludible if they were realised only from outstation buyers. The Hon'ble High Court directed the Assistant Collector to investigate the assertion of the facts made by the appellants and thereafter passed a fresh order in accordance with law as laid down by the Hon'ble Supreme Court. We were told by the appellants during the hearing that no appeal had been filed by the department against the High Court Judgment dated 10.7.1985.
3. A similar dispute is now before us but it relates to the later period from 1.4.1979 to 31.3.1983. Logically, the basis of valuation as directed by the Hon'ble High Court for the earlier period should, with necessary adjustments, hold good for the later period as well. But we are told that there has so far been no verification of the facts and quantification of the amounts of the deductible items by the Assistant Collector for the earlier period. It appears that while the matter was still under inquiry by the department, the authorities received some information that the appellants were indulging in under valuation of their goods. Acting on the information, the Anti-Evasion staff of the department resumed the relevant records and documents of the appellants for scrutiny. After investigations, the authorities served three show cause notices dated 6.11.1984, 10.12.1984 and 4.3.1985 on the appellants. The show cause notices charged the appellants "with giving false declarations, wilful mis-statement and suppression of facts of normal price". We re-produce below certain material allegations from the show cause notice dated 6.11.1984 :
"(a) Principal Raw Material costs are higher than the total assessable value plus the export value in a particular year (which is inclusive of the supplementary invoice charged claimed for deduction home consumption sale). This is so in spite of the fact that in that particular year profit was declared.
(b) Basic price of glass as declared by the assessee to Central Excise Department has remained more or less constant over a period of at least 5/6 years, though their total recovery on glass sales has increased considerably, the raw material price of glass as well as labour charges and overhead expenditures have increased and market price of glass has also increased considerably during the same period.
(c) The Company has been giving a most un-realistic picture of the market showing Basic Glass Value to be much less than the incidental charges like, packing, handling and transporting, etc. The former being shown as around 60% to 70% only of the latter.
Taking into account the Rule 5 and Rule 7 of valuation rules as discussed above, the Audited Accounts of the Company for the year 1980-81 and 1981-82 were studied and the total cost of sales of goods were arrived at as per annexure A and B after necessary adjustment and deduction made from expenditure side of the Audited Accounts.
Since the Company has another product manufactured by them apart from glass viz. Packing Box - necessary apportionment on expenditure on that side was made on the basis of cost accountancy principle (wage apportionable principle) as well as deduction on the basis of actual expenditure figures on account of packing box section submitted by the party.
Net assessable value (arrived at on the basis of Audited Accounts of the Company) and differential duty payable on the glass manufactured and cleared for Home consumption after deduction the export clearance from the total assessable goods as arrived at from the total cost of the goods sold plus profit as per Audited Accounts is as follows: -1980-81 - as per statement annexed (A and B)."
On adjudication, the Collector held the charges as proved. He concluded that the appellants had highly inflated the costs of the extra items billed in the supplementary invoice so much so that the extras cost 100-150% of the value of the goods themselves, that the appellants did so to camouflage the true assessable value of the goods, that while the appellants had declared the items of extras in their price-lists, they had not declared the amounts which they were going to bill for these extras and that the department came to know of the inflated amounts of extras only on resuming and checking their supplementary invoices later. As indicated in the show cause notices, the Collector determined the assessable value of the goods on the basis of the information available in the published balance-sheet and audited accounts of the appellants. In doing so, the Collector adopted the rule of Best Judgment Assessment as provided for in Rule 7 of the Central Excise Valuation Rules, 1975. The Collector demanded differential central excise duty of Rs. 1,88,84,508.57. Further, the Collector held the appellants guilty of making false and mis-leading declarations and imposed on them the penalty of Rs. 50 lakhs. He also ordered confiscation of the plant and machinery of the appellants but gave an option for their release on payment of a fine of Rs. 1 lakh. The appellants are now in appeal before us against this order.
4. We have heard both sides and have carefully considered their submissions and the record. The appellants made a couple of preliminary points. Their first plea is that of limitation under Section 11A of the Central Excises and Salt Act, 1944. Their point is that correspondence with the department and litigation in the High Court on the question of valuation had been going on since 1964 and as such the department was well aware of the facts; in the circumstances, only the normal time limit of six months for issue of show cause notice applied and not the extended time limit of 5 years which was applicable to cases of fraud, suppression of facts, wilful mis-statement etc. As per the normal time limit, all the three duty demands were time-barred. We do not agree with the appellants. They appear to be loosing sight of the fact that the assessments had been made provisionally under Rule 9B of the Central Excise Rules, 1944 at their own request and on the strength of the provisional duty bond executed by them. The assessments continued to be made on provisional basis till as late as 2/9.1.1986. The appellants admitted before us during the hearing that the price-lists filed by them had not so far been finally approved. As per Rule 9B, the assessments made on provisional basis have to be finalised eventually and adjustments of duty made. Under Section 11A of the Act, the limitation starts running only from the date of adjustment of duty after finalisation of the provisional assessments. The demands issued as per the show cause notices on 6.11.1984, 10.12.1984 and 4.3.1985 were, therefore, not time-barred, even if the normal time limit of six months were to be applied.
5. The second preliminary objection of the appellants is on the ground of violation of principles of natural justice. We do find some substance in this objection. The facts are that the three show cause notices and the annexures attached therewith did not contain break-up of the calculations. The appellants went on asking for the details so that they could challenge the department's calculations. They were granted a personal hearing by the Collector on 18.10.1985. They argued their ease in part and asked for certain clarifications. They expressed their desire to make further submissions on receipt of the clarifications. On 6.11.1985, they submitted a written note of the submissions already made and asked for a further hearing. The Collector did not grant this further hearing and he proceeded to decide the matter. There has, therefore, been a denial of full opportunity of personal hearing. Normally, this ground alone should be sufficient for us to remand the matter to the Collector for a fresh decision. But since the merits of the case were also argued before us by both sides and on consideration thereof we feel that some guidelines ought to be laid down for observance by the Collector lest there again be an erroneous view taken on certain points resulting in prolonged litigation unduly, we discuss these aspects in the succeeding paragraphs.
6. As the learned representative of the department ably summed it up, on merits the matter involves two broad issues:
(1) which of the items of extras should be held to be excludible for determining the assessable value of the goods; and (2) what should be the correct amount of the excludible items.
7. We shall briefly deal with both these issues. Taking the first issue, the extra item accounting for bulk of the supplementary invoice is the cost of special packing. The appellants declared in the price lists that their ordinary/frame packing cost about 20 paise per sq. mtr. of the goods and that the cost of such packing was already included in the price declared. They further declared that they used special packing at the request of the buyer for avoiding breakage of the goods in transit. The special packing used was wooden crate or wooden box. The Collector found that overwhelming majority of sales of the appellants were in special packing, that in some rare cases, the sales to Calcutta buyers were in ordinary packing and that in remaining cases even the Calcutta buyers received the goods in special packing. The Collector held that the special packing was the normal mode of delivery for the appellants' goods, that such packing was necessiated by the fragile nature of the glass-sheets and that in the circumstances the cost of special packing could not be excluded from the assessable value. We find that in arriving at his calculation, the Collector has fallen in error on two counts, first he relied on the minority Judgment of the Hon'ble Supreme Court in the case of Godfrey Phillips (India) Limited [1985 (22) ELT 306 (SC)] and ignored the majority Judgment therein. Second, he went by the simple arithmatic of majority sales versus minority sales. This is wrong. The correct position regarding packing charges has been enunciated by the Hon'ble Supreme Court in their Judgments in Bombay Tyres International Limited and Godfrey Phillips (India) Limited cases aforesaid and further in their Judgment in the case of M/s. MRF Limited -1987 (27) ELT 553 (SC). In regard to special packing, the criterion to Judge is whether it is essential for delivery of the goods in wholesale at the factory gate. Secondly, it is not the relative figures of percentages of deliveries in ordinary packing and special packing which determine the issue but the question of principle whether the special packing is necessitated only by the consideration of safety of the goods during long distance transport or it is essential for wholesale deliveries effected even at the factory gate. We have to remember in the present case that the factory of the appellants was situated in a village and their nearest wholesale market at Calcutta was also 45 Kms. away. The local demand being limited, there could not be very large number of local deliveries at the factory gate. Their nearest big wholesale market was at Calcutta which itself was 45 Kms. away from their factory. The appellants explained to us that, some of their Calcutta customers who wanted to sell their goods locally at Calcutta preferred to purchase the goods in ordinary packing while some others who proposed to re-sell the goods to outstation buyers in original packing preferred to purchase the goods in special packing. The department admits that the appellants did clear some consignments for delivery at Calcutta in ordinary packing. The number of such consignments may be small but yet they do establish the principle that the goods could be delivered in wholesale at the factory gate in ordinary packing. The ordinary packing consisted of frame packing with straw cushioning and paper inter-leaving between the glass-sheets. Such ordinary packing is quite adequate for wholesale deliveries at the factory gate and at the market situated very close to the factory. In some other cases of glass-sheets also which have come for decision before us, we have held the ordinary/frame packing adequate for wholesale deliveries at the factory gate. Following the principle of essentiality, as laid down by the Hon'ble Supreme Court, we hold that the cost of special packing was, in principle, excludiable in the case of the present appellants also.
8. 'Laffa' charges incurred for jam-packing of the railway wagons/lorries are incurred obviously in those cases only where the goods have to be delivered to a sufficiently long distance. No jam-packing would be required for deliveries at the factory gate. Laffa charges are, therefore, excludible in principle.
9. Loading charges incurred within the factory gate have to be included in the assessable value. But further loading and un-loading charges, if any, incurred by the appellants for giving delivery of the goods beyond the factory gate, are, in principle, not in-cludible. [1988 (36) ELT723 (SC) Indian Oxygen Limited v. Collector of Central Excise].
10. It is now well settled, vide the Supreme Court Judgment in the case of Bombay Tyres International Limited aforesaid, that the cost of transport, including the cost of transit insurance for the goods, is not to be included in the assessable value.
11. We were told during the hearing that breakage insurance for the glass-sheets duirng transit was resorted to in addition to the normal transit insurance of the goods. In principle, such breakage insurance would be on par with transit insurance and hence excludible.
12. The nature of 'miscellaneous charges', which is the last items of the extras, is not clear. However, if such charges were incurred for some service performed in relation to the goods after their removal from the factory gate, such cost would not, in principle, be includible. But if such charges were essential even for giving delivery of the goods at the factory gate, they have to be included, vide the settled principle in Supreme Court Judgments in the cases of Bombay Tyres International Limited and MRF Limited aforesaid.
13. As already stated in paragraph 7 above, the elements of cost which are, in principle, excludible, have to be excluded, if actually incurred, irrespective of the fact that the assessee had not realised such cost just from a few local customers and was realising it from the very vast majority of his other customers. If the sales at the factory gate and to customers situated near-by are genuine, they have to be accepted as the basis for normal price irrespective of the percentages of ex-factory/local sales versus out-station sales. The Collector's view to the contrary is not correct.
14. The more vexed question, however, is determination of the cost of ex-cludible elements. We do get an impression, prima facie, that the appellants have indulged in certain fast practices in this regard. Otherwise, there is no reason why the sum total of the declared assessable values plus export values in a particular year should be less than even the cost of the principal raw materials required for manufacture of the goods and why the cost of the extra elements claimed for deduction from the assessable value should be as high as to come around 100-150% of the value of the goods themselves. It is not as if the appellants had been selling their goods at a loss. They made profits throughout during the material period. They claimed that their profit came mainly from exports. It is however, the finding of the Collector that the export values declared by the appellants in the statutory export documents (form AR4-As etc.) were very low. No doubt, the appellants received certain incentives on exports. But even so, such incentives alone could not turn very low price realisations from exports and home sales into a picture of net profit. The Collector has concluded that what the appellants lost on account of low declared assessable values, was more than made good by inflating the cost of extra items which were billed in a supplementary invoice and which was not disclosed to the department on their own. Probably, the Collector is not wide off the mark in his conclusion. While the cost of transport and special packing for the goods may be excludible, it does not mean that an assessee can ignore the actual costs and walk away with any inflated or fancy amounts in the name of cost of transport and special packing. Regarding transit insurance, the authorities found on inquiry from the insurance company that usually there was no transit risk insurance for glass-ware but if any customer requested for it, the same was accepted and the insurance premium usually charged for it varied from 6% to 10%. However, it was noticed by the authorities that the appellants had charged in the supplementary invoices a fixed sum which worked out to 10-30% as transit risk. Again, the insurance company told the authorities that it was not responsible for breakage in transit. The appellants had, however, charged their customers for breakage risk in the supplementary invoices. But they failed to produce any evidence before the Collector that they had actually incurred such expenses towards breakage risk insurance during transit of the goods. During the hearing, the appellants vaguely stated that they themselves bore the breakage risk and charged the customers in some cases. We asked them to tell us whether the appellants were authorised to undertake insurance business. There was no answer from the appellants. Lastly, we find from the impugned order of the Collector that the appellants collected sales-tax from their customers on that component of the price which was represented by the supplementary invoice but when it came to the central excise duty, they neither treated it as a part of the price of the goods nor even disclosed to the department the amounts fixed by them for each item included in the supplementary invoice.
15. The obvious answer to the situation faced by the authorities would have been to order a realistic costing of the excludible items. Cost accountancy has got well settled principles for determining the true cost of any business activity. If the authorities did not trust the appellants' cost accountant, they could appoint their own. It should hardly be an insurmountable job to determine the cost of a wooden crate or box which is a simple carpentry product. Similarly, the cost of pieces of wood etc. required for jam-packing and the wages of loaders would be known factors from documents. Transport charges could be computed from the lorry receipts and the railway receipts. The receipts of the insurance company would be available for transit insurance charges, wherever incurred, whether for the usual transit insurance or with the added breakage risk insurance. Any other charges, such as miscellaneous charges, if excludible in principle, would also have to be corroborated. In sum, the cost of the excludible elements should be as close to the actuals as possible, including the reasonable over-heads for manufacturing wooden boxes/crates. This would be a direct method of determining the cost of deductible elements. Any extra amounts realised from the customers in the name of such elements would be a part of the price of the goods and it ought to be inlcuded in the assessable values of the goods. We wish to make it clear that marketing of his goods is an essential part of the business activity of a manufacturer. No businessman would manufacture the goods just for the sake of keeping them; he has to sell them also. That is where his profit comes from. Thus, when the manufacturer performs some services in the course of giving delivery of his goods to his wholesale customers, he is performing an essential function of his main business activity and not any ancillary or allied activity.
16. The Collector has, however, not followed the direct method of costing for the excludable items. Suspecting the bona fides of the appellants, he took resort to an indirect method of costing via the balance-sheets and audited sales accounts of the appellants. We do not say that the indirect method is illegal or bad. Resort could certainly be had to it if the direct method is not feasible. In the case before us, however, there is no evidence that the direct method was tried and given up because of some difficulties. The appellants stated before us that for the material period of the present appeals no one asked them to give the costing for the excludible items. We are of the view that in the first instance the straight-forward and direct method of quantification of costs, which is easily verifiable by the officers of the department with the actual receipts of expenditure and account books should be preferred. The appellants were willing for it and stated that, given about three months time, they would be able to furnish the quantification of costs, as certified by a Chartered Accountant/Cost Accountant. The Collector could have the said quantification checked by his officers or by another Chartered Accountant/Cost Accountant appointed by him and thereafter the matter could be finalised in another three months or so. We agree that this would be the right approach to follow.
17. After the quantification of costs is done, the assessable values should be re-determined by adding up the amounts of the original and the supplementary invoices and deducting therefrom the approved cost of excludible elements. The amount of the assessable values originally declared by the appellants should be compared with the revised assessable values. The percentage of under-valuation, if any, should be worked out for each year of the material period. Since the Central Excise Officer is required to indicate the approved assessable values for each variety of the goods included in the price list, the declared assessable value of each variety could be escalated by the percentage of under-valuation, if any found, and the revised assessable values determined and approved. The differential duty, if any, payable by the appellants would have to be worked out afresh on the basis of the revised assessable values. It is evident that the differential duty, if any, payable by the appellants would have to come out of the total price already realised by them from their customers. Determination of the assessable value should, therefore, be done in the manner laid down by the Hon'ble Supreme Court in their Judgment in the case of MRF Limited -1987 (27) ELT 553 (SC) aforesaid. Whether the facts warrant imposition of any fine and penalty and, if so, how much would depend upon the outcome of re-determination of the values.
18. Since the impugned order-in-original has been passed by the Collector, it would be appropriate if he is directed to do the fresh determination. He could certainly take the assistance of his officers and, if necessary, of a Chartered Accountant or Cost Accountant appointed by the department. But he should not delegate the work of quantification to the Assistant Collector.
19. Incidentally, we wish to record it here that both sides, after concluding their respective arguments, also asked for a remand only so that the deductible elements and their true cost could be determined in clear terms and in specific amounts.
20. In the result, we set aside the impugned order and remand the matter to the Collector for a fresh adjudication. The appellants should, within four months from the date of receipt of this order, furnish to the Collector, a statement of quantification of costs signed by them and certified by a Cost Accountant in respect of those elements which we have held to be deductible in principle. After necessary scrutiny and a due hearing to the appellants, the Collector should re-determine the assessable values and the differential duty due, if any, afresh within six months from the date of receipt of the quantification from the appellants. The Collector would be at liberty to adjudge confiscation, fine and penalty if so warranted by his findings.
21. The three appeals are disposed of by way of remand in these terms.