2025 (5) TMI 1990 - AT - Central Excise

Determination of the appropriate rate of value addition for the purpose of claiming exemption under N/N. 33/1999-CE dated 08.07.1999 as amended by N/N. 18/2008-CE dated 27.03.2008 - rejection of appellant s claim for a higher rate of value addition certified by the statutory auditors - HELD THAT - As per para 5.1.9 of CAS-6. the freight subsidy received by the appellant is not includable to arrive at the total freight which is to be added for arriving at the cost of material - the freight subsidy received by the appellant are not includable to arrive at the freight cost. Thus the statutory auditor has rightly arrived at the freight cost while determining at the special rate. The next element in dispute is the cost of abnormal waste that has arisen during the course of initial process of manufacturing. The appellant submitted that during the course of initial manufacturing because of some fault in the machines excess waste has occured. This was rectified later and the wastage became normal in the subsequent years. The appellant submitted that as per para 5.4 of CAS-6 such abnormal waste cost is not includable in the cost of material - the Ld. Commissioner Central Excise Guwahati has recalculated the value addition at his own without following the Statutory Auditor s Certificate and Cost Accountant s Certificate and re-calculated the value addition at 36.81% and rejected the application of for special rate of value addition vide the impugned Order dated 26.05.2010. Conclusion - On examination of the two main ground on which the value addition has been reduced by the Ld. Commissioner it is found that the method adopted by the Ld. Commissioner is not inconsonance with the principles of accounting standards. Accordingly there are no merit in the finding of the Ld. Commissioner in re calculating the value addition as 36.81%. As there is no ground for rejecting value addition arrived by the appellant on the basis of the Certificate issued by the Statutory Auditor the appellant is eligible for the value addition of 82.29% as claimed by them on the basis of the Statutory Auditor s certificate and other supporting documents. Appeal allowed.

Summary

The core legal questions considered in this appeal concern the determination of the appropriate rate of value addition for the purpose of claiming exemption under Notification No. 33/1999-CE, dated 08.07.1999, as amended by Notification No. 18/2008-CE, dated 27.03.2008. Specifically, the issues are:

(i) Whether the Commissioner of Central Excise was justified in rejecting the appellant's claim for a higher rate of value addition (82.29%) certified by the statutory auditors and instead recalculating it at 36.81%;

(ii) Whether the Commissioner had the authority to independently recalculate the value addition despite the statutory auditor's certificate submitted by the appellant;

(iii) The proper accounting treatment of freight subsidy received from the government and abnormal waste costs in calculating the value addition;

(iv) The applicability and interpretation of the provisions of Notification No. 33/1999-CE and its amendment regarding the fixation of special rate of value addition;

(v) The legal principles governing the construction of exemption notifications and the scope of authority of the adjudicating officer in verifying claims for exemption.

Issue-wise Detailed Analysis

1. Authority of the Commissioner to Recalculate Value Addition

The relevant legal framework is Notification No. 33/1999-CE as amended by Notification No. 18/2008-CE, which provides that a new paragraph 2A allows an industrial undertaking to claim refund of duty based on actual value addition certified by statutory auditors from the preceding financial year's audited balance sheet. The notification mandates that the Commissioner of Central Excise shall approve the value addition after verification of submitted documents.

The appellant contended that the Commissioner is bound to accept the statutory auditor's certificate and is not authorized to recalculate the value addition independently. The appellant relied on the proviso to paragraph 2.1(1) of the notification which states that the Commissioner "shall consider the rate of value addition as certified by the statutory auditors." The appellant argued that the Commissioner exceeded his jurisdiction by recalculating the value addition at 36.81%, contrary to the certificate stating 82.29%.

The respondent's representative countered that the statutory auditor's certificate is only an estimate based on the audited balance sheet and the Commissioner is empowered to make or cause inquiries and fix the special rate after verification. The Commissioner's role is not merely ministerial but involves scrutiny to prevent incorrect claims.

The Court interpreted the notification as empowering the Commissioner to verify the claim and fix the special rate after inquiry, not to accept the auditor's certificate blindly. The Court noted that the certificate is an estimate and the Commissioner can verify the calculations and supporting documents before fixation.

However, the Court found that the Commissioner's recalculation was inconsistent with established accounting principles and standards, and that the Commissioner had not properly considered the statutory auditor's certificate and supporting evidence.

2. Treatment of Freight Subsidy in Calculation of Value Addition

The appellant excluded the freight subsidy received from the government when calculating the cost of freight and raw materials, contending that under Cost Accounting Standard (CAS) 6, paragraph 5.1.9, subsidies/grants/incentives received with respect to materials should be deducted from the cost of materials. The appellant argued that including the freight subsidy in the cost of raw materials inflated the cost and artificially reduced the value addition.

The Commissioner included the freight subsidy in the cost of freight, leading to a higher cost base and lower value addition. The Court examined CAS-6, para 5.1.9, which states: "Subsidy/Grant/Incentive and any such payment received/receivable with respect to any material shall be reduced from cost for ascertainment of the cost of the object to which such amounts are related."

The Court held that the freight subsidy should not be included in the cost of freight or raw materials and that the statutory auditor's treatment excluding the subsidy was correct. The Commissioner erred in including the subsidy, which led to an incorrect calculation of value addition.

3. Treatment of Abnormal Waste in Calculation of Value Addition

The appellant submitted that abnormal waste arose due to initial machine faults during the manufacturing process and that such abnormal waste costs should not be included in the material cost. The appellant relied on CAS-6, para 5.4, which provides that material cost of abnormal scrap/defectives should not be included in material cost but treated as a loss after crediting realizable value.

The Commissioner included the cost of abnormal waste in the cost of raw materials, thereby reducing the value addition. The Court examined the relevant CAS provision and agreed with the appellant that abnormal waste costs should be excluded from material costs.

The Court concluded that the Commissioner's inclusion of abnormal waste costs was contrary to accounting standards and led to an erroneous reduction in value addition.

4. Application of Accounting Standards and Principles

The appellant argued that the Commissioner's recalculation was not in conformity with Accounting Standards and Cost Accounting Standards prescribed by the Accounting Standard Board of India. The appellant contended that the Commissioner's interpretation and recalculation were arbitrary and not sustainable in law.

The Court agreed that the Commissioner's approach was inconsistent with the prescribed accounting standards, particularly CAS-6, and that the statutory auditor's certificate was prepared in accordance with these standards. The Court emphasized that the exemption notification must be construed liberally to promote industrial growth and development, citing relevant Supreme Court precedents on liberal construction of taxing statutes granting incentives.

The Court held that the Commissioner's rejection of the auditor-certified value addition without valid grounds was legally untenable.

5. Overall Conclusion on the Value Addition Rate

After detailed comparison of the appellant's and Commissioner's calculations, the Court identified two main discrepancies: inclusion of freight subsidy and inclusion of abnormal waste costs by the Commissioner. Both inclusions were contrary to accounting standards and principles.

The Court held that there was no valid ground to reject the value addition of 82.29% certified by the statutory auditor and supported by the cost accountant and financial statements. The Commissioner's recalculated value addition of 36.81% was flawed and not sustainable.

Significant Holdings

"As per para 5.1.9 of CAS-6, the freight subsidy received by the appellant is not includable to arrive at the total freight which is to be added for arriving at the cost of material."

"Material Cost of abnormal scrap /defectives should not be included in material cost but treated as loss after giving credit to the realizable value of such scrap / defectives."

"The Commissioner shall consider the rate of value addition as certified by the statutory auditors but cannot re-calculate it on his own without valid grounds."

"A provision in a taxing statute granting incentive for promoting growth and development should be construed liberally, and restrictions should be construed so as to advance the objective of the provision and not to frustrate it."

"The method adopted by the Commissioner in recalculating the value addition is not in consonance with principles of accounting standards and hence not sustainable."

"The appellant is eligible for the value addition of 82.29% as claimed on the basis of the statutory auditor's certificate and supporting documents."

The Court set aside the impugned order of the Commissioner rejecting the higher rate of value addition and allowed the appeal with consequential relief.