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2025 (7) TMI 796 - AT - Central ExciseDetermination of assessable value - goods cleared to their sister units and also to third party buyers - applicants have failed to produce necessary evidence of sale of goods to independent buyers - applicability of Rule 8 of the Central Excise Valuation (Determination Of Price Of Excisable Goods) Rules 2000 - Debit Note of Rs.10, 06, 290 found at the time of search on which the demand of Rs.1, 20, 755 has been confirmed - Time limitation. Determination of assessable value - goods cleared to their sister units and also to third party buyers - HELD THAT - The issue is quite simple but for some reason or the other the matter has not be resolved making the appellant make several trips to the Tribunal. A careful reading of the Rule 8 and the decision of the Larger Bench in Ispat Industries Ltd Vs CCE Raigad 2007 (2) TMI 5 - CESTAT MUMBAI-LB would clarify that when the assessee clears a part of their total production to third parties the Value to be adopted in respect of sister / related units would be the transaction value and not the costing plus the profit margin as given under Rule 8. However if the entire production is cleared only to only the sister / related units then the value has to be adopted as per CAS 4 Costing 10 /15% of the goods. When the clearances are made to their sister concerns the same are referred to as Tr to SID-II or transer to HRM which show them to be mere transfers and not sales. Therefore based on these documents it can be seen that they are also clearing the goods to third un-related parties as is being claimed by them. Therefore the decision of the Larger Bench would be applicable to the present case wherein the appellant is not required to follow Costing 10 /15% as Assessable value. On this ground itself the appeal succeeds. In respect of the Debit Note of Rs.10, 06, 290 found at the time of search on which the demand of Rs.1, 20, 755 has been confirmed - HELD THAT - In the absence of the corroborative evidence to the effect that the appellant has received the amount on account of this Debit Note mere reliance on the statement of the Director about the Debit Note is not legally sustainable as has been held in the cited case law. Therefore the confirmed demand of Rs.1, 02, 755 on this account is set aside. Time limitation - HELD THAT - It is found that for the period 2002 to 2005 the Show Cause Notice has been issued on 2.1.2007. It is not the case of the Dept. that the appellants have not been filing their statutory Returns like ER 1, wherein the value adopted by them would be reflected for the clearances made. Thus there cannot be a case of suppression on their part. Further the appellant has always been maintaining that since they are having third party independent clearances they are not required to adopted costing plus 10 /15 percent procedure under Rule 8 of the Valuation Rules 2000. The confirmed demand even on account of time bar - appeal allowed.
The core legal questions considered in this judgment revolve around the proper valuation of excisable goods cleared to sister units, the applicability of Rule 8 of the Central Excise Valuation Rules, 2000, the principle of revenue neutrality in such intra-group transfers, and the invocation of extended period of limitation in duty demand cases. Specifically, the issues include:
1. Whether Rule 8 of the Valuation Rules, prescribing valuation at 110% of cost of production for goods not sold but captively consumed, applies when the assessee clears part of the goods to unrelated third parties and part to sister units. 2. Whether the assessable value adopted by the appellant for clearances to sister units is correct, particularly when the appellant has also made sales to independent buyers. 3. The legal effect of excise duty paid by the appellant being available as CENVAT credit to the sister units, and whether this results in a revenue neutral situation precluding further demand of differential duty. 4. Whether the extended period of limitation can be invoked in cases where the demand arises from alleged undervaluation in a revenue neutral scenario. 5. The evidentiary value and legal consequences of a debit note found during search proceedings, which formed part of the demand for additional duty. 6. The applicability of limitation principles and whether the demand is barred by time. Issue-wise detailed analysis: 1. Applicability of Rule 8 of the Valuation Rules in cases of partial clearance to third parties and sister units The relevant legal framework is Rule 8 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000, which 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." The issue hinges on whether this rule applies when the assessee clears some goods to unrelated buyers and some to sister units. The Court referred extensively to the Larger Bench decision in the case of Ispat Industries Ltd. v. CCE Raigad, which clarified that Rule 8 applies only where the entire production of a particular commodity is captively consumed. The judgment emphasized the plain language of Rule 8, noting the phrase "where the excisable goods are not sold" implies exclusivity in captive consumption. If some goods are sold to unrelated buyers, Rule 4 of the Valuation Rules, which prefers transaction value, applies to sister unit clearances as well. The Court also relied on the jurisdictional High Court decision in Indian Drug Manufacturers Association v. Union of India, which held that Rule 8 applies exclusively to cases where goods are cleared solely for captive consumption. Applying this framework to the facts, the Court examined the appellant's sales ledger and found clear evidence of clearances to various unrelated third parties alongside transfers to sister units. The entries for sister units were marked as transfers, not sales, while unrelated party clearances were genuine sales. Thus, the Court held that Rule 8 valuation was not applicable for the goods cleared to sister units, and the transaction value method under Rule 4 should be used. 2. Correctness of assessable value adopted by the appellant and revenue neutrality The appellant adopted a valuation based on transaction value for third-party sales and cost plus 10-15% for sister unit transfers. The Revenue challenged the valuation, demanding differential duty. The Court noted the undisputed fact that the excise duty paid by the appellant on clearances to sister units was fully available as CENVAT credit to those units. This leads to a revenue neutral situation because the duty paid by one unit is credited to the other, resulting in no net loss to the exchequer. The Court cited multiple precedents supporting this principle of revenue neutrality, including decisions of this Tribunal and the Supreme Court such as:
The Court emphasized that where the duty paid by the appellant is available as CENVAT credit to the sister unit, the demand for differential duty is unsustainable because the entire transaction is revenue neutral. The Court also noted that the appellant's valuation was supported by CAS-4 certificates prepared by cost accountants, further reinforcing the correctness of the valuation adopted. 3. Invocation of extended period of limitation in revenue neutral cases The Revenue invoked the extended period of limitation, alleging suppression of facts by the appellant. The appellant contended that extended limitation is not invocable in revenue neutral cases as there is no intention to evade duty. The Court analyzed relevant case law, including:
The Court noted that in all these cases, the extended period was held not to apply where the duty paid was available as credit to the sister unit, and no mala fide intention to evade duty was established. The Court further observed that the appellant had been filing statutory returns regularly, and the Department had access to relevant data, negating any suppression. Accordingly, the Court held that the extended period of limitation was not invocable in the present case. 4. Evidentiary value of the debit note found during search and related demand During search, a debit note for Rs. 10,06,290/- was found, on which additional duty of Rs. 1,20,755/- was demanded. The appellant submitted that the debit note was a draft or rough copy prepared by a newly joined assistant and lacked essential particulars such as buyer details, invoice references, or realization evidence. The Court examined the evidence and found no corroborative proof that the amount in the debit note was actually realized. The Department had not recorded statements from persons engaged in manufacture or buyers to establish clandestine removal. The Court relied on the decision in Varun Dyes & Chemicals Pvt. Ltd. v. Commissioner of Central Excise, Surat-II, where the Tribunal held that a director's statement accepting clearance without duty can raise suspicion but is not conclusive proof of removal without corroborative evidence. Accordingly, the Court set aside the demand relating to the debit note. 5. Limitation and time bar The show cause notice was issued in January 2007 for the period 2002 to 2005. The appellant argued that since statutory returns reflecting the value adopted were regularly filed, and no suppression was present, the demand was barred by limitation. The Court referred to Supreme Court authority in Nirlon Ltd. v. CCE Mumbai, which held that absence of mala fide intention and revenue neutrality negate invocation of extended limitation. The Court found no justification for extended limitation and set aside the demand on this ground as well. Conclusions and significant holdings: The Court held that Rule 8 of the Valuation Rules applies only when the entire production of excisable goods is captively consumed and not sold to third parties. Where part of the production is sold to unrelated buyers, the transaction value under Rule 4 governs valuation for sister unit clearances. It was established that the appellant had made clearances to independent third parties, and thus the valuation adopted was correct. The Court reaffirmed the principle of revenue neutrality: when excise duty paid by one unit is fully available as CENVAT credit to the sister unit, no additional duty demand is sustainable. The Court stated, preserving the legal reasoning, that: "When the duty paid by the parent unit is eligible as CENVAT Credit to the receiving unit, the entire proceeding becomes revenue neutral." On the extended period of limitation, the Court held that it is not invocable in revenue neutral cases absent evidence of intention to evade duty. Regarding the debit note found during search, the Court held that mere existence of a draft or uncorroborated document without evidence of realization does not sustain a demand. Finally, the Court set aside the confirmed demand on merits and limitation grounds, allowing the appeal with consequential relief.
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