TMI Blog2005 (8) TMI 337X X X X Extracts X X X X X X X X Extracts X X X X ..... cost of production was given headwise. None of expenditure included in this cost sheet is found to be incorrect by the show cause notice. In fact, they compare favourably with corresponding figures given in the show cause notice. A look at the cost sheet would have made it abundantly clear that interest expenditure, depreciation and profit margin were not included. The Range obviously noted the same but found nothing incorrect in it. If DGAE has different understanding of cost of production, that cannot be a ground for invoking proviso to Section 11A against the appellants. Thus, there appears to be a change in the basis of assessment by the department. Hence invoking larger period is incorrectly invoked a change of basis of assessment cannot be a reason to invoke the proviso to Section 11A(1). For the last two notices, the Commissioner has applied Rule 4 read with Rule 11 of the Valuation Rules, 2000. This stand is directly contrary to the stand taken for the earlier notices. Demands for the period November, 2000 to November, 2001 has been confirmed under Rule 4 read with Rule 11 of the Valuation Rules, 2000. It is submitted that even of the case of the department is assumed to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 01 September 2000 to October 2000 85,15,995 4 7-12-2001 November 2000 to March 2001 2,55,66,530 5 3-5-2002 April 2001 to November 2001 5,88,39,727 TOTAL 37,76,17,250 1.2 During the period covered by first show cause notice i.e., December, 1997 to January, 2000, about 61% of the LAB production was stock transferred from Alindra plant to other plants located at Trikampura, Pithampur, Chhatral and Kanpur. About 27.5% of the production was sold to M/s. Kisan Industries (for short, KI), a division of Kisan Discretionary Family Trust (for short, KDFT). About 2.5% of the production was sold to IPCL. About 2% of the production was captively consumed at Alindra plant in the manufacture of detergent powder and cakes. About 0.5% of the production was sold to other independent buyers such as Pioneer Detergents (for short, PD) and Chemicals Solvents India (for short, C SI). Balance 6.5% of the production was exported is the portion submitted by the appellant. 1.3 LAB manufactured at Alindra was transferred to other factories on payment of duty on the price at which LAB was being sold to KI others. Accordingly the assessable value of LAB per MT on which excise duty was paid by the appellants dur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lated by the show cause notice dated 25-2-2000 plus profit margin of 22.38% (profit margin for the company as a whole for the financial year 1999-2000). September 2000 October 2000 The appellants discharged duty on LAB on assessable value equal to Rs. 48,000 per MT being the last sale price of LAB to KI. 115% of Cost of production as submitted by the appellants except for the interest element. This show cause notice adopted the interest element from the show cause notice dated 25-2-2000. November 2000 to March 2001 The appellants discharged duty on LAB on assessable value equal to Rs. 48,000 per MT being the last sale price of LAB to KI. Rule 8 of the Valuation Rules, 2000 is not applicable for captive consumption and therefore value has to be determined under Rule 4 read with Rule 11 of the Valuation Rules, 2000. Since the appellants had sold LAB to IPCL at Rs. 54,250 per MT, this value should be the assessable value for LAB captively consumed. April 2001 to November 2001 115% of cost of production in terms of Rule 8 of Valuation Rules, 2000. Rule 8 of the Valuation Rules, 2000 is not applicable for captive consumption and therefore value has to be determined under Rule 4 read wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted on gross block basis, a method suggested in the show cause notice itself. (v) Interest, per se, is not includible in the cost of production, as per Circular dated 13-2-2003 read with CAS-4. (vi) Profit margin of LAB has taken by show cause notice based overall profit of the company as a whole which relates to diverse final products like soap, detergents, soda ash, HAB, etc. and is hence irrelevant for computing profit of LAB. Profit margin @ 10% is reasonable for valuation of industrial intermediate like LAB. (vii) If above adjustments are done to cost of production as calculated by the show cause notice, then no demand practically survives. (i) Since, much more duty has already been paid through PLA by the recipient factories, no demand can lie under Section 11A. (j) Since Modvat credit is available to the appellants own factories, proviso to Section 11A is inapplicable and hence entire demand is time-barred. (k) Reference to seized documents indicating higher cost of production is irrelevant since even show cause notice has not computed cost of production on the basis of these seized documents. 1.7.1. The Commissioner, vide the order impugned, after arriving at a finding that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st of production of LAB. (i) The first charge of a catalyst is in the form of permanent investment and to be treated as fixed asset. Since first charge of catalyst is in the nature of fixed asset, the appellants charge depreciation on it, at the rates prescribed under Companies Act, 1956. This accounting policy cannot be found fault with as it is in line with generally accepted accounting principles. The statutory auditors have also not objected for such an accounting treatment. Alternatively, if the appellants, as per the following submissions, have dealt with amortisation of catalyst by including the cost of catalyst in the cost of production of LAB by : (a) The depreciation figure which includes depreciation on catalyst has to be reduced to avoid duplication of cost. (b) The amortised cost of catalyst should be reduced by the realized value of the catalyst. In other words, only the net cost of catalyst should be amortised and not the gross cost of catalyst. (c) The actual foreign exchange ratio and actual consumption should be taken into consideration. These submissions at (a), (b) and (c) above are further explained as depreciation provided on such catalyst have been included b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal cost. Therefore, the cost of catalyst worked out on per MT basis in the show cause notice should be reduced by 17.10% to arrive at correct cost of catalyst. Therefore, Column (4) of the table below should be reduced from the cost of production of LAB : Year Catalyst cost as per show cause notice (in Rs./MT) Percentage of realization Value realized by sale of precious metal recovered from spent catalyst (Rs./MT) (1) (2) (3) (4)=(2)*(3) 1997-1998 1948 17.10% 333.18 1998-1999 2136 17.10% 365.34 1999-2000 365.34 (iii) We would agree with these submissions as they are supported by CAS-4, whose relevant paras reproduced below : 4.1 Cost of Production : Cost of production shall consist of Material Consumed, Direct Wages and Salaries, Direct Expenses, Works Overheads, Quality Control cost. Research and Development Cost, Packing cost, Administrative Overheads relating to production. To arrive at cost of production of goods dispatched for captive consumption, adjustment for Stock of work-in-Process, finished goods, recoveries for sales of scrap, wastage etc shall be made. 5.12 Treatment of Scrap and Waste The production process may generate scrap or waste. Realized or realizable value of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at he can determine the selling price of their product. We find no reason to uphold these findings in the impugned order. Shri Joshipura and Shri Kalpesh Patel are no doubt responsible employees of the appellants-company, but that will not lead the department seeking to reassess the goods, to ignore crucial points based on principles of Casting for (sic) assessment of goods. The department while reassessing the goods cannot accept computation of cost, at any period of time, as a truth and demand duty. All relevant factors have to be taken into account while reassessing the goods. The department cannot simply ignore material contentions. (vii) We find, the impugned Order-in-Original has taken a too narrow view of the concept of cost. Costs are prepared under various basis at various points of time for various purposes. Valuation under Central Excise law is concerned with actual costs and not estimated costs. The employees of the appellant had submitted costs of catalyst, which was estimated by them at an earlier point of time based on certain assumptions. Such estimated cost will not be available for calculating cost of production under Rule 6(b)(ii). Hence the correct cost of catal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5) Interest cost per MT of LAB 9,570 This basis has been adopted for the period December, 1997 to March, 1998 and year 1999-2000. (iii) Interest per se is not includible in the cost of production, as per CAS-4 as interest expenditure is purely a finance cost. It has got nothing to do with manufacture of goods. Therefore, it is not includible in the cost of production. This principle is shown to be recognised by the Central Government. The Cost Audit (Report) Rules, 1996 issued under Section 233 of the Companies Act, 1956 require the cost audit information to be given in a particular 'form'. The 'form' is prescribed under Rule 4 read with Rule 2(c) of the Cost Audit (Record) Rules, 1996 for a particular industry. The cost audit reports are statutorily required to be submitted in the form prescribed to Central Government. In the forms so prescribed, cost of production does not include interest expenditure. In fact, interest charges appears after cost of production without any exception whatsoever. The Institute of Chartered Accountants of India has issued Accounting Standard-2 (AS-2, for short) for the purpose of valuation of inventory. The AS-2 is mandatory in nature ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se notice dated 25-2-2000 has included a very exaggerated and notional figure as interest attributable to LAB alone. Interest expenditure calculated by show cause notice for LAB division for the year 1998-99 amounts to Rs. 56.45 crores (see page 53 of the show cause notice). On the other hand, interest expenditure for the company as a whole for the year 1998-99 amounts to Rs. 30.43 crores only (refer page 37, schedule 17 of the Annual report for 1998-99 enclosed as Annexure-41 to the appeal memo). This absurdity has resulted because the entire method adopted in the show cause notice for calculating interest is incorrect therefore cannot be upheld. Since the cost and interest taken for the year 1999-2000 (up to January, 2000) in the show cause notice is the same as that of year 1998-99, the submission made above equally applies for the year 1999-2000 also. The above position equally applies for the period December, 1997 to March, 1998 also. (d) Interest per MT as per show cause notice is Rs. 6,943/- quantity for which cleared is raised to 18,163.470 per MT. This works out interest for LAB plant for four months itself is Rs. 12.61 crores, while interest for the company as a whole for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re branded products sold in retail to the ultimate consumer. Therefore, adopting profit margin of branded consumer product like detergents as the profit margin of an industrial chemical like LAB is illogical. (ii) It is found that the Larger Bench of Tribunal in Raymonds Ltd. v. CCE - 2001 (129) E.L.T. 327 (T-LB) held that profit or loss made by the manufacturer from other activities are of no relevance while determining the assessable value for captively consumed goods. In other words, the Larger Bench has held that profit margin of 19.8% for the year 1997-98 and 17.95% for the years 1998-99 and 1999-2000 is incorrect. The department itself in catena of cases has taken 10% as a reasonable profit margin for the intermediate goods and which was upheld by the Tribunal/High Court as well : Therefore, the appellants submission of profit margin of 10% is reasonable in the circumstances. In fact, the burden is on the department to first establish that LAB division is a profit making operation/unit. Without establishing this, no profit margin at all can be added by the department. (iii) Submissions made by the appellant, with respect to profit margin have not at all been considered by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on was given headwise. None of expenditure included in this cost sheet is found to be incorrect by the show cause notice. In fact, they compare favourably with corresponding figures given in the show cause notice. A look at the cost sheet would have made it abundantly clear that interest expenditure, depreciation and profit margin were not included. The Range obviously noted the same but found nothing incorrect in it. If DGAE has different understanding of cost of production, that cannot be a ground for invoking proviso to Section 11A against the appellants. 2.2.3. The appellants had also filed price declaration in terms of Rule 173C wherein it was stated that sale price to Kissan Industries is being adopted as the basis for valuing LAB stock transferred. 2.2.4. In view of the above, there appears to be a change in the basis of assessment by the department. Hence invoking larger period is incorrectly invoked a change of basis of assessment cannot be a reason to invoke the proviso to Section 11A(1). 2.3 W.e.f. 1-7-2000, the concept of transaction value under Section 4 of the Central Excise Act, 1944 and Valuation Rules, 2000 were introduced. As per Section 4, Transaction Value is to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions relating to valuation of LAB captively consumed, then Rule 4 read with Rule 11. It is settled law where specific provisions are made, general provisions are excluded. Besides, CBEC Circular dated 1-7-2002 makes it amply clear that clearances to KI and other factories should be done under Rule 8 i.e., 115% of cost of production. The impugned Order-in-Original which has failed to consider this legal position therefore the entire basis of the demand determined is unsustainable. The impugned Order-in-Original does not give any reasons as to why Rule 8 and Rule 9 as also CBEC circular dated 1-7-2002 are not applicable. 2.4.2. In fact, the show cause notice dated 11-9-2001 by demanding differential duty under Rule 8 and Rule 9 has impliedly confirmed that Rule 8 read with Rule 9 alone is applicable for clearances of LAB to KI and other factories of the appellants. The impugned Order-in-Original has also confirmed demand of differential duty raised by show cause notice dated 11-9-2001. In other words, on one hand the impugned Order-in-Original has demanded differential duty under Rule 8 and Rule 9 for the period September, 2000 to October, 2000 and on other hand for subsequent peri ..... X X X X Extracts X X X X X X X X Extracts X X X X
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