Custom, Excise & Service Tax Tribunal
The Commissioner Of Central Excise, ... vs The Paper Products Ltd on 22 April, 2009
IN THE CUSTOMS, EXCISE AND SERVICE TAX APPELLATE TRIBUNAL
WEST ZONAL BENCH AT MUMBAI
COURT NO.II
APPEAL NO.E/1431/03
(Arising out of Order-in- Appeal No. RJB/M.III/24 - 40/2003 dtd. 18.2.2003 passed by the Commissioner of Central Excise(Appeals), Mumbai.III
For approval and signature:
Honble Mr.A.K.Srivastava, Member(Technical)
And
Honble Mr. Ashok Jindal, Member(Judicial)
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1. Whether Press Reporters may be allowed to see : No
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 : Yes
CESTAT (Procedure) Rules, 1982 for publication
in any authoritative report or not?
3. Whether Their Lordships wish to see the fair copy : seen
of the Order?
4. Whether Order is to be circulated to the Departmental : Yes
authorities?
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The Commissioner of Central Excise, Mumbai.III
Appellants
VS
The Paper Products Ltd.
Respondents
Appearance
Shri N.A.Sayyad, JDR for Appellants
Shri Piyush Sangoi, C.A. for the respondents
CORAM:
Mr.A.K.Srivastava, Member(Technical)
And
Mr.Ashok Jindal, Member(Judicial)
Date of hearing: 22/04/09
Date of decision : 22/04/09
ORDER NO.
Per : A.K.Srivastava
This is an appeal filed by the Revenue.
2. Heard both the sides and perused the records.
3. The issue involved in the instant case is whether the notional interest accruable on the advances taken from the customers is to be added to the assessable value of the goods.
4. The respondents are engaged in manufacture of tailor made goods falling under Chapter 84 of the Schedule to the Central Excise Tariff Act, 1985.
5. As is the practice in the industry manufacturing tailor made goods, the respondents obtain advance payments from some of their customers as a security against their orders based on their risk perception in the transaction.
6. The notices involved in the present case, were adjudicated against the respondents by the Dy.Commissioner, Central Excise, vide Order-in-Original dated 19.9.2002. On appeal, the Order-in-Original has been set aside by the Commissioner(Appeals) vide Order-in-Appeal dated 28.02.2003. The Commissioner (Appeals) has held that it is not established that advances taken as security deposit have depressed the sale price. He further held that nexus, if any, between the advances taken and prices charged, is not established. Now the Revenue is in appeal against that part of the order of Commissioner(Appeals), which relates to the period 01.07.2000 onwards.
7. The Revenues appeal is based on following grounds:
i. That the advances obviated need for borrowals from other sources averting payment of interest resulting in pecuniary advantage to the respondents.
ii. That the notional interest accruable on the advances, is an additional consideration flowing from the buyer to the respondents.
iii. That by very definition, the additional consideration is includible in the Transaction Value. No nexus between the advance and the price of the goods is required to be established.
iv. That advance is taken from all the customers. There is no class of customers otherwise. Hence it is not possible to compare the prices and to examine the existence or non-existence of the nexus.
v That the case laws rendered on the valuation law existing prior to 01.07.2000 cannot be applied to the removals made after the introduction of new law.
8. We have examined the position. We find that the Revenue seems to suggest that by very definition, the transaction value includes the notional interest accruable on advances. This is not correct and is not borne from the definition.
8.1. It is also contradictory to the Revenues claim that the interest is an additional consideration. If it is additional consideration, it is not part of the transaction value. If it is part of the transaction value, then there would be no occasion to apply the Central Excise Valuation Rules. Explanation 2 to Rule 6 of the Central Excise Valuation Rules, 2000 makes it amply clear that the notional interest may become additional consideration if it has effect of lowering the price. Therefore, the interest is not part of the Transaction Value.
8.2 The definition of transaction value reads as under:
transaction value means the price actually paid or payable for the goods, when sold, and includes . any amount that the buyer is liable to pay to or on behalf of the assessee; by reasons of, or in connection with the sale.
8.3. The balance part of the definition, illustratively clarifies that amounts paid against certain heads of expenses would be includible.
8.4. As per the definition, apart from the price, other amounts are includible in transaction value, only if they satisfy the following conditions, viz.
a. It is an amount that the buyer is liable to pay to the assessee; or b. It is an amount that the buyer is liable to pay ( to someone) on behalf of the assessee; and c. The payment is by reasons of sale or in connection with the sale.
8.5. The notional interest is not such an amount. It is not an amount paid by the buyer to the respondents. Neither is it an amount paid by the buyer to someone on behalf of the respondents. What is paid by the buyer in connection with the sale is the amount of advance and not the interest thereon.
8.6. The interest is not a payment received by reasons of sale or in connection with the sale.
9. Initially, when Section 4 was proposed in the Finance Bill, 2000, the definition of Transaction Value included -
- the amounts charged for, or to make provision for Financing.
These words were subsequently deleted. This is an unambiguous indication that the legislature did not intend to include Financing Charges in the assessable value.
9.1. Thus, where the buyer paid financing charges to or on behalf of the assessee, such charges were earlier contemplated to be included in the assessable value, but the proposal was dropped before passing of the Bill. This is a clear indication of the intention of the legislature.
9.2. Thus, even if one agrees to the contention that the advances amounted to financing the manufacturer, the notional interest would be nothing but charges for financing, and would not be includible in the transaction value.
10. The notional interest is not part of the price of the goods. It is not a consideration received in return of the sale. What is received in return of the sale is the amount of advance, but not the interest accruable thereon.
11. The Rule 6 of the Central Excise Valuation Rules, 2000 requires that if there is any additional consideration, the value shall be the Transaction Value plus Money Value of the additional consideration. Explanation to the Rule clarifies that in the situations where the buyer supplies something free ( or at reduced cost), the value of such supplies would be treated as additional consideration.
11.1. Financially speaking, giving advances or supplying materials/components/parts/packing materials etc. are similar. If the advances obviate borrowings then free receipt of materials, too obviates borrowings. In both the situations, it can be argued that the manufacturer averts payment of interest to the bank that he would otherwise have to pay on borrowings equal to the amount of advance/value of material received free.
11.2. Yet, the explanation to the Rule 6, confines itself to adding value of the materials supplied free by the buyer. It does not extend to including interest notionally saved by the manufacturer on such value.
11.3. Hence, it is clear that the Rule itself acknowledges the fact that the interest is not an additional consideration.
12. Whether a manufacturer receives material or money, it has the similar effect of obviating borrowals.
12.1. In various circulars and trade notices issued from time to time, the Revenue has clarified that wherever any material is supplied free to the manufacturer, its landed cost at the manufacturers gate is to be included in the assessable value. Never has Revenue sought to include the interest on these materials to be includible in the assessable value.
12.2. For example, in case of patterns supplied free by the customer for manufacture of castings, the Board clarified that :
..proportionate cost of pattern has to be included in the assessable value of the castings . (CBEC circular 170/4/96-CX. dated 23.01.1996) 12.3. It is notable that the pattern would remain with the manufacturer for a long period and if the same were to be manufactured/or purchased by the casting manufacturer, he would have to spend money. Thus (similar to the case of receipt of advances), supply of the patterns too would obviate need for borrowal. But the Revenue did not require addition of the notional interest.
12.4. The Revenue has continued to hold the same view ever after 01.07.2000 as is evident from the CBEC Cir.619/10/2002, dated 19.02.2002,. Para 6 of the circular states that in case the music company (customer) has also supplied to the job worker, free of cost, inlay cards, jackets, jewel box or any other material/input, their cost should also be added to job charges. There is no mention of the interest on value of these items.
12.5. Similar is the case for other components of the cost. Even where cost construction method was adopted [ Rule 6 (b)(ii) of Central Excise Values Rules 1975], it was only the landed cost of various items, and not the interest thereon, which was to be added to the assessable value.
12.6. Thus, the proposals to include interest on advances, in the assessable value is inconsistent with the Departments view as regards adding value of additional consideration.
13. The explanation 2 inserted vide notification 11/2003-CE (N.T.) dated 01.03.2003 in the Rule 6 of Central Excise Valuation Rules, 2000 has put the controversy at rest. The explanation says that the notional interest on advances shall not be added to the value unless the Central Excise Officer has evidence to the effect that the advance received has influenced the fixation of the price of the goods by way of charging a lesser price from or by offering a special discount to the buyer who has made the advance deposit.
13.1. Thus, the explanation has clarified that the nexus between advance and the price of the goods has to be established. It has also clarified that the burden to establish the nexus lies on the shoulders of the Revenue and cannot be shifted to the assessee.
13.2. Explanation 2 does not propound a new law but is a mere explanation of the existing law. It has merely clarified the meaning of additional consideration in the context of Rule 6. The Rule was always required to be interpreted in the same manner. What was implicit has now been made explicit.
14. The Honble Supreme Court in the case of CCE, Mumbai.III vs. ISPL Industries Ltd. reported in 2003(154) E.L.T. 3 (SC) in para 11 has observed as under:
It is clear that the mere fact of making an interest free advance by a buyer to the manufacturer, by itself will not be a sufficient ground to reload the assessable value with notional interest. It would be necessary for the revenue to show that such advance has influenced in the lowering of the price and that it is not depicting the normal price of the goods. There may be different reasons for taking advances, as indicated above in the earlier part of this judgment. Learned Counsel for the appellant submits that all that revenue has to show is that interest free advance has been made by the buyer to the manufacturer which would lead to a presumption that it is to the advantage of the manufacturer having influenced the fixation of price as well. We, however, fail to appreciate the submission made on behalf of the revenue for drawing a presumption that fixation of price is influenced by such an advance. In this connection, we may refer to the Boards circular of 1998 quoted earlier, clause (iii) of which clearly provides that if there is no difference in the selling price for both categories of the wholesale buyers and there is also no proof that on account of advance deposits taken from some buyers, the price charged from all buyers has been reduced, then element of notional interest on advance deposits, cannot be added. Obviously, where there are two prices, one for those who have made the advance and the other who have not, it would require no further proof of the lower price having been influenced by the interest free advance made by the buyer. But otherwise, it would require proof and the proof for the purposes of holding that interest free advance has influenced the price would obviously be provided by the revenue. There is no scope for any such presumption as canvassed on behalf of the appellant. We find the same position to be continued in the later amendment in the Rules of 2003 referred to above. As in illustration 2, it talks of evidence to show that interest free advance has resulted in lowering of the prices. The departmental circulars and the amendments in the Rules at the relevant time and subsequently too, do not envisage of any presumption to be drawn by mere fact of interest free advance by the buyer to the manufacturer. It requires proof and evidence to show that fixation of price has been influenced on the lower side by such a transaction of interest free advance.
15. We also note that the Tribunal had occasion to examine the issue of demand of duty on the amount of notional interest accruable on the advances taken by the assesses from their customers for the post 1.7.2000 period in the case of the appeals filed by the Commissioner of Central Excise, Mumbai.III against 14 respondents. The Tribunal, vide Order No.A/636 to 651/08/C.II/EB dated 16.7.2008, relying upon the Honble Supreme Court Judgment in the case of ISPL Industries Ltd.(supra) held that the evidence as to fixation of price has been influenced by the advances taken, has to be brought on record by the Revenue. In the absence of such evidence, the appeals filed by the Commissioner of Central Excise, Mumbai III were dismissed.
16. The reliance placed by the learned JDR on the Tribunal decision in the case of C.CE, Mumbai III vs Uni Abex Alloy Products Ltd. (Order No.A/696/08/C.II/EB dated 4.8.2008) in which it was held that the notional interest accrued on the advances taken is to be included in the assessable value is misplaced because in this case the respondents have themselves admitted that a lower price has been arrived at by keeping in consideration the interest derivable from the advances. It was, therefore, held that no further proof is required from the Department and the duty has been correctly demanded on the element of notional interest accrued which resulted in the lowering of the price. Whereas in the case before us, no such admission has been made by the respondents. On the other hand, they have argued that there is no nexus between the advances taken and the prices charged. We also do not find any evidence to suggest that the interest free advance has influenced the price and the price lower than the normal price has been charged by the respondents.
17. The learned JDR referred to the Tribunals Order in the case of Hero Honda Motors Ltd. vs Commissioner reported in 2006(205) ELT 1050 (Tri-Del.) in which it was held that deposit of Rs. 500/- per motorcycle taken by the assessee from the customers at the time of booking of motorcycle and interest earned thereon was not includible in the assessable value as the Cost Accountant had certified that such deposit was used for working of company and not necessarily for working capital. The price was market driven and the advances could not have figured in pricing equation. He pointed out that a Civil Appeal has been filed by the Revenue against the said order of the Tribunal before the Supreme Court and the same has been admitted by the Supreme Court as reported in 2007(217)ELT A111(SC). It does not require any elaboration that unless the Order of the Tribunal is set aside/vacated or modified or stayed by the Supreme Court, the same prevails. Merely because the appeal has been admitted by the Supreme Court, it does not imply that the Tribunals Order ceases to have effect. It only shows that the issue has not attained finality in that case.
18. In the light of the foregoing discussions, we hold that the impugned order passed by the Commissioner(Appeals) is sustainable. The appeal filed by the Revenue is devoid of any merits and is accordingly dismissed.
(Pronounced in court) Ashok Jindal Member(Judicial) A.K.Srivastava Member(Technical) pv 9