2025 (5) TMI 152 - AT - Central Excise

Valuation of waste and scrap generated during the process of manufacture of final products a part of which is captively consumed within the factory while rest is sold to independent buyers at the factory gate - HELD THAT - This Tribunal considering the very same issue in the appellant s own case for the previous period 2024 (6) TMI 1460 - CESTAT AHMEDABAD held that as per the Ispat Industries decision 2006 (9) TMI 181 - SUPREME COURT for the purpose of captive consumption the value of transaction made through the outside buyer should be taken as assessable value. In this case also though the show cause notices allege that the scrap sold to independent buyers was not of the same quality as was used by them captively in the manufacture of PP granules but there is no evidence to support as to on what basis both the qualities are presumed to be different. In absence of any supportive evidence demands raised by the department for earlier periods were set aside by the Tribunal. Therefore the issue is no longer res-integra. As regard department s reliance on the decision of Cadbury India Ltd 2006 (8) TMI 2 - SUPREME COURT it is found that the facts are entirely different. In Cadbury India case goods were 100% consumed captively and no portion of it was sold to independent buyers whereas in the instant case there exists sale price at which goods are sold to independent buyer(s) at the factory gate. Conclusion - The valuation of captively consumed waste and scrap should be based on the sale price to independent buyers and not on the cost construction method under Rule 8. The Revenue s demand based on Rule 8 valuation is unsustainable. Appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in the judgment are:

(a) What is the correct method for valuation of waste and scrap generated during the manufacture of BOPP films, which is partly captively consumed in the factory and partly sold to independent buyers?

(b) Whether the valuation of captively consumed waste and scrap should be based on the sale price to independent buyers (transaction value under Section 4(1)(a) of the Central Excise Act) or on the Cost of Production (CAS-4) under Rule 8 of the Central Excise Valuation Rules, 2000 (Cost Construction Method)?

(c) Whether the Revenue's demand for differential duty based on valuation under Rule 8 is sustainable in light of the appellant's contention and relevant judicial precedents.

(d) Whether the extended period of limitation for demand of differential duty is invocable in the facts of the case.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) & (b): Correct Valuation Method for Captively Consumed Waste and Scrap

Relevant legal framework and precedents: The valuation of excisable goods is governed primarily by Section 4 of the Central Excise Act, 1944, and the Central Excise Valuation Rules, 2000. Section 4(1)(a) provides for transaction value as the primary basis for valuation, while Section 4(1)(b) and Rule 8 provide a residual method based on cost of production when transaction value is not available.

Rule 8 states: "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."

Key precedents relied upon include the Apex Court decision in CCE Jaipur Vs. Scan Synthetics Ltd., which held that when independent factory sale price is available, it should be the basis for valuation of captively consumed goods. Other relevant precedents include Ispat Industries Ltd Vs. CCE, Raigad (Larger Bench), Avon Tubes Ltd Vs. CCE, Ludhiana, and the Tribunal's own prior decisions.

Court's interpretation and reasoning: The Tribunal examined whether Rule 8 applies when part of the production is sold to independent buyers and part is captively consumed. It held that Rule 8 applies only where the entire production is captively consumed and no sale to independent buyers occurs. This interpretation is supported by the plain language of Rule 8, which refers to goods "not sold" but used for consumption.

The Tribunal further reasoned that when sale price to independent buyers is available at the factory gate, it represents the transaction value under Section 4(1)(a) and should be preferred over the cost-based valuation under Rule 8. This sequential application of valuation rules avoids confusion and aligns with the parent statute's objective.

The Tribunal also rejected the Revenue's contention that the quality of waste and scrap captively consumed is better than that sold to independent buyers, noting the absence of any evidence or investigation to substantiate this claim. It observed that the waste and scrap arise from the same manufacturing process and there is no basis to treat them as different categories.

Key evidence and findings: The appellant demonstrated that the sale price to independent buyers was available and used it for valuation. The Revenue's demand was based on applying CAS-4 cost construction method, assuming the captively consumed scrap was of superior quality. However, no evidence was presented to prove this difference in quality. The Tribunal reviewed invoices and descriptions of scrap and found no distinction in nature or quality between scrap sold and scrap captively consumed.

Application of law to facts: Applying the principle from Ispat Industries Ltd. (Larger Bench), the Tribunal held that the value of transaction with independent buyers should be the assessable value for captively consumed goods. Rule 8 was held inapplicable because the goods were not entirely captively consumed. The transaction value method under Section 4(1)(a) thus governs valuation in this case.

Treatment of competing arguments: The appellant relied on the availability of independent sale price and judicial precedents favoring transaction value. The Revenue relied on the cost construction method under Rule 8 and the Cadbury India Ltd. decision, which was distinguished on facts because in Cadbury, the goods were 100% captively consumed with no independent sales. The Tribunal found the appellant's arguments and precedents more persuasive and factually applicable.

Conclusions: The Tribunal concluded that the valuation of captively consumed waste and scrap should be based on the sale price to independent buyers and not on the cost construction method under Rule 8. The Revenue's demand based on Rule 8 valuation was unsustainable.

Issue (c): Sustainability of Revenue's Demand for Differential Duty

Relevant legal framework and precedents: The demand was raised under Section 11A(1) of the Central Excise Act, 1944, with interest under Sections 11AB/11AA and penalty under Rule 25(1) of the Central Excise Rules, 2002. The valuation principles discussed above directly impact the legitimacy of the demand.

Court's interpretation and reasoning: Since the valuation method adopted by the appellant (transaction value) was upheld, the differential duty demand based on cost construction method valuation was invalid. The Tribunal also noted that the issue was known to the department, and the appellant had been discharging duty accordingly, negating any intention to evade duty.

Key evidence and findings: The Tribunal found no evidence of evasion or concealment. The appellant's method of valuation was consistent with legal principles and prior judicial rulings, including the Tribunal's own earlier decisions.

Application of law to facts: The demand for differential duty was quashed as unsustainable due to incorrect valuation basis by the Revenue.

Treatment of competing arguments: The Revenue's reliance on CAS-4 valuation and the Cadbury India Ltd. decision was rejected due to factual dissimilarity and absence of evidence.

Conclusions: The demand for differential duty was set aside.

Issue (d): Invocability of Extended Period of Limitation

Relevant legal framework: The extended period of limitation under the Central Excise Act is invocable only in cases of fraud, suppression, or willful misstatement.

Court's interpretation and reasoning: The Tribunal found that the appellant had disclosed the facts of sale and captive consumption to the department and had no intention to evade duty. The valuation issue was a question of law, which was later clarified by the Larger Bench decision in Ispat Industries Ltd.

Key evidence and findings: The appellant's compliance and disclosure negated any fraudulent intent.

Application of law to facts: Since there was no fraud or suppression, the extended period of limitation was not applicable.

Conclusions: The demand for the extended period was not maintainable.

3. SIGNIFICANT HOLDINGS

"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 8 of the Central Excise Valuation Rules, 2000).

"Rule 8 of the Valuation Rules will not apply in a case where some part of the production is cleared to independent buyers."

"The provisions of Rule 4 are in any case to be preferred over the provisions of Rule 8 not only for the reason that they occur first in the sequential order of the Valuation Rules but also for the reason that in a case where both the rules are applicable, the application of Rule 4 will lead to a determination of a value which will be more consistent and in accordance with the parent statutory provisions of Section 4 of the Central Excise Act, 1944."

"In the absence of any evidence to show that the waste and scrap sold to independent buyers is different in quality from that captively consumed, the transaction value to independent buyers should be adopted for valuation."

"The extended period of limitation is not invocable in the absence of any intention to evade payment of duty."

"When independent factory sale price is available, that should be the basis for determining the value of the same excisable goods captively consumed."

Final determinations:

- The valuation of captively consumed waste and scrap must be based on the transaction value, i.e., the sale price to independent buyers, where such sale price exists.

- Rule 8 of the Central Excise Valuation Rules, 2000, applying the cost construction method, is applicable only when there is no sale to independent buyers.

- The Revenue's demand for differential duty based on valuation under Rule 8 is set aside.

- The extended period of limitation is not applicable as there is no evidence of fraud or suppression.

- The appeals are allowed, and the impugned orders are set aside.