2018 (12) TMI 2020 - AT - Central Excise

Liability of assessee to pay the differential duty under Rule 4 of the Valuation Rules as has been ascertained in the impugned adjudication order which was never proposed in the Show Cause Notice - violation of principle that the SCN is the foundation of the demand - HELD THAT - Hon ble Supreme Court in Hindustan Polymers Co. Ltd 1996 (12) TMI 84 - SUPREME COURT has made a specific observation in para 6 of the said order that the Tribunal in the desire to do complete justice should not have passed the order which proceeded upon a basis that is altogether different from that of the demand proposed to the appellant. In the facts of the said case the Show Cause Notice proposed duty under the erstwhile residuary Tariff Item 68. The Tribunal while accepting the submissions of the assessee arrived at the conclusion that the goods were not classifiable under Tariff Item 68 but under Tariff 15A and accordingly ordered for payment of duty for normal period of limitation. The Apex Court accordingly held in the said case that having come to the conclusion against the Revenue the appropriate order for the Tribunal to have passed was to set aside the demand and leave it open to the Revenue to proceed against the assessee as permissible under the law. In the very issue pertaining to valuation of excisable goods the Hon ble Supreme Court in CCE vs. Ballarpur Industries 2007 (8) TMI 10 - SUPREME COURT while setting aside the first Show Cause Notice which was barred by limitation categorically observed in para 21 of its order that since Rule 7 of the Valuation Rules was not invoked in the second and third Show Cause Notices impugned therein demand could not sustain for the reason that the Show Cause Notice is the foundation in the matter of levy and recovery of duty interest and penalty and if Rule 7 was not at all invoked in the Show Cause Notice it would not be open to the Commissioner to invoke the said Rule. In the instant case the Ld. Commissioner while confirming the duty demand chose to invoke Rule 4 of the Valuation Rules which was never proposed in the Show Cause Notice dated 18.12.2008 - No whisper or murmur was made in the whole Show Cause Notice regarding the applicability of Rule 4 in the given case of the assessee. The case of the department surrounds to a narrow encompass that the demand stands legally payable under Rule 4 if not under Rule 8 of the Valuation Rules. Be that so as it may in view of the legal principles settled by the Apex Court in the matter of levy of central excise duty when the very provisions of Rule 4 was not referred to in the Show Cause Notice the demand confirmed by invoking the said Rule 4 cannot sustain and has to be rightly set aside in the interest of justice. Conclusion - The demand confirmed under Rule 4 is set aside as it was not proposed in the SCN violating the principle that the SCN is the foundation of the demand. Demand set aside - appeal allowed.

Summary

The core legal questions considered by the Tribunal in this appeal are:

1. Whether the demand of central excise duty confirmed under Rule 4 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 ("Valuation Rules") can be sustained when the Show Cause Notice (SCN) had proposed demand only under Rule 8 of the Valuation Rules.

2. Whether the invocation of Rule 4 in the adjudication order, without prior mention in the SCN, violates settled legal principles regarding the scope of adjudication and the foundation of demand.

3. Whether the demand under Rule 8 of the Valuation Rules was sustainable in view of the Larger Bench decision in Ispat Industries Ltd., which was available to the Department at the time of issuance of the SCN.

4. Whether the penalty imposed under Section 11AC of the Central Excise Act, 1944 is justified, especially considering the availability of CENVAT credit and the nature of the duty demand.

Issue-wise Detailed Analysis

1. Legality of Confirming Demand Under Rule 4 When SCN Was Issued Only Under Rule 8

Relevant Legal Framework and Precedents: The Valuation Rules provide different methods for determining the assessable value of excisable goods. Rule 8 prescribes valuation based on cost of production plus a certain percentage, whereas Rule 4 prescribes valuation based on the transaction value of identical or similar goods sold to unrelated buyers at or around the time of removal. The Supreme Court has consistently held that the Show Cause Notice is the foundation of the demand and the adjudicating authority cannot travel beyond the scope of the SCN. Key precedents include Hindustan Polymers Co. Ltd. vs. Commissioner of Central Excise, Gas Authority of India Ltd., Brindavan Beverages (P) Ltd., and Ballarpur Industries Ltd., where it was held that the demand confirmed must be strictly within the allegations and provisions invoked in the SCN.

Court's Interpretation and Reasoning: The Tribunal noted that the SCN dated 18.12.2008 strictly invoked Rule 8 of the Valuation Rules based on the cost audit report alleging undervaluation. There was no mention or proposal to invoke Rule 4. The adjudicating authority, however, confirmed the duty demand by applying Rule 4, a provision not referred to in the SCN. The Tribunal emphasized that this is impermissible as it changes the very basis of the demand without giving the assessee an opportunity to respond to the new allegation.

Application of Law to Facts: The Tribunal found that the Department's attempt to rely on Rule 4 after rejecting Rule 8 was a new stand that was not part of the SCN and hence beyond the scope of adjudication. This was contrary to the settled legal position that the adjudication must be confined to the grounds specified in the SCN.

Treatment of Competing Arguments: The Department argued that since Rule 8 was not applicable, Rule 4 must be applied as per the Larger Bench decision in Ispat Industries Ltd. The Tribunal acknowledged this legal position but held that the Department cannot invoke Rule 4 for the first time in the adjudication order without prior notice in the SCN.

Conclusion: The demand confirmed under Rule 4 was set aside as it was not proposed in the SCN, violating the principle that the SCN is the foundation of the demand.

2. Sustainability of Demand Under Rule 8 in Light of the Larger Bench Decision

Relevant Legal Framework and Precedents: The Larger Bench of the Tribunal in Ispat Industries Ltd. held that when transaction value of goods sold to unrelated buyers is available, Rule 8 cannot be invoked for valuation. This decision was accepted by the Revenue and attained finality.

Court's Interpretation and Reasoning: The Tribunal observed that the Department's initial demand was based on Rule 8, but the Larger Bench ruling was binding and available at the time of issuance of the SCN. Therefore, the demand under Rule 8 was not sustainable.

Application of Law to Facts: Since the assessee had sold goods to unrelated buyers and paid duty accordingly, Rule 8 valuation was not applicable. The Department's acceptance of the Larger Bench ruling in the adjudication was appropriate but did not justify switching to Rule 4 without notice.

Treatment of Competing Arguments: The assessee relied on the Larger Bench decision to contend that the demand under Rule 8 was invalid. The Department did not dispute the binding nature of this ruling but sought to sustain the demand under Rule 4 instead.

Conclusion: The Tribunal held that the demand under Rule 8 was rightly dropped as per the Larger Bench decision.

3. Justification of Penalty Imposed Under Section 11AC

Relevant Legal Framework: Section 11AC of the Central Excise Act provides for penalty for suppression of facts or misstatement. The law requires that penalty be imposed only if there is willful suppression or evasion.

Court's Interpretation and Reasoning: The Tribunal noted that since the duty demand itself was set aside, and the assessee had paid duty on the basis of sales to unrelated buyers, with availability of CENVAT credit, the situation was revenue neutral. Therefore, imposition of penalty was not justified.

Application of Law to Facts: The Tribunal found no evidence of suppression or misstatement warranting penalty. The penalty imposed on the basis of a demand that was not sustainable was accordingly set aside.

Treatment of Competing Arguments: The Department contended that penalty was justified on grounds of suppression. The Tribunal rejected this, emphasizing the revenue neutrality and absence of suppression.

Conclusion: Penalty was quashed along with the demand and interest.

Significant Holdings

"The Tribunal, in the desire to do complete justice, should not have passed the order which proceeded upon a basis that is altogether different from that of the demand proposed to the appellant."

"The Show Cause Notice is the foundation of a demand under Central Excise Act and in case the adjudication order proceeds in the line contrary to the Show Cause Notice, the same deserves to be quashed."

"When the very provisions of Rule 4 was not referred to in the Show Cause Notice, the demand confirmed by invoking the said Rule 4 cannot sustain and has to be rightly set aside in the interest of justice."

"Since Rule 8 of the Valuation Rules was not applicable in view of the Larger Bench decision, the demand under Rule 8 was rightly dropped."

"Imposition of penalty under Section 11AC is not justified where the duty demand itself is not sustainable and the situation is revenue neutral due to availability of CENVAT credit."

Final determinations:

- The demand of central excise duty confirmed under Rule 4 of the Valuation Rules was set aside as it was not proposed in the SCN.

- The demand under Rule 8 was rightly dropped in view of the Larger Bench decision.

- The penalty and interest imposed along with the demand were quashed.