TMI Blog2010 (2) TMI 524X X X X Extracts X X X X X X X X Extracts X X X X ..... red to as 'revenue') and Other by Commissioner of Central Excise, Bangalore-III, Commissionerate (hereinafter referred to as 'revenue') filed against Karnataka Soaps Detergents Ltd. (hereinafter referred to as 'assessee, Bangalore Unit') is under challenge. 2. The facts in nutshell common to both the appeals are as follows : The assessee, Bangalore Unit is manufacturer of Soaps, Detergents, Perfumery compounds, Sandalwood oil and is registered under the Central Excise, Act ('as Act') and availed the benefit of Cenvat credit on inputs used in the manufacture of said goods. The assessee is having its units at Mysore and Bangalore. The assessee at Mysore Unit manufactures sandalwood oil classifiable under chapter heading 33.01 of the Central Excise Tariff Act, 1985 (hereinafter referred to as 'CETA, 1985'). The manufactured sandalwood oil at Mysore Unit is also transferred to their Bangalore Unit for manufacture of soaps and other items (excisable goods) apart from selling to others at Mysore. The internal audit wing of the Department of Central Excise conducted inspection of the financial records of the Respondent unit for the period from March, 2001 to August, 2003. It was fou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Central Excise Rules, 2002 read with rule 8 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 (hereinafter referred to as 'Valuation Rules') and while doing so, it appeared they have intentionally adopted lower costs of production, and thus discharged duty on the lower assessable value, viz., continued to adopt value determined in 2000-01 though the actual market value had increased from time to time and differential cost was being realised through book adjustment each year by way of journal entries in the books of account which resulted in short payment of duty of excise. Hence, a show-cause notice came to be issued by the Commissioner of the Central Excise, Mysore, calling upon the assessee to show cause as to why :— (a) Central Excise duty of Rs. 2,52,45,268 should not be demanded from them under proviso to section 11A(1) of the Central Excise Act, 1944 and the amount of Rs. 2,52,45,268 already paid by them, vide TR6 Challans, should not be appropriated under the provisions of section 11A(1) of the Central Excise Act, 1944; (b) Interest at appropriate rate, as prescribed by the Government from time to time, on the duty amount of Rs. 2,52,45 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ores Fifty Two Lakhs Twenty Seven Thousand and Seventy Four only) wrongly availed by them on the basis of supplementary invoices (as detailed in the annexure) issued by KSDL, Mysore, along with interest leviable thereon should not be demanded from them under the provisions of rule 12 of 2002 Rules read with section 11A/11AB of the Central Excise Act, 1944. (ii) Penalty should not be imposed on them under rule 13 of the 2002 Rules read with section 11AC of the said Act. 8. On receiving the reply to the show-cause notice, matter came to be adjudicated and the demand made in the show-cause notice was confirmed and the Cenvat credit availed by assessee was ordered to be recovered amounting to Rs. 2,52,27,074 together with interest by its order dated 25-2-2005 (Annexure-C). 9. The Tribunal on considering both the appeals accepted the argument of the assessee insofar as the demand made by the Commissioner of Central Excise, Bangalore and set aside the Order-in-Original No. dated 25-2-2005 passed by Commissioner of Central Excise, Bangalore. However, Tribunal confirmed the Order-in-Original of the Commissioner of Central Excise, Mysore dated 10-12-2004. CEA 11/2006 is by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts and circumstances, was right in upholding the order of the lower authority invoking the longer period of limitation under section 11A(1) of the Central Excise Act, 1944 when the law on this issue has been settled by numerous decisions of the Supreme Court? 4. Whether the Tribunal was right in passing the impugned order by ignoring the law as settled on this issue by various decisions of the Hon'ble Supreme Court? 12. We have heard Sri G. Shivadas, learned counsel appearing for the assessee and Sri Raghavendra, learned counsel appearing on behalf of Sri N.R. Bhaskar (standing counsel) for the revenue. RE : CEA 11/2006 13. As rightly pointed out by the learned counsel for the revenue and as observed by us in preceding paragraph No. 10, this appeal is filed only against finding in para 9 of CESTAT order which raises only question for our consideration in this appeal viz., regarding invoking of extended period of Limitation i.e., question No. 3 formulated in CEA No. 11/2006 and accordingly substantial question of law No. 3 formulated hereinabove is considered and answered by us. It is contended by Sri Shivadas, learned counsel for assessee that assessee is a State Govern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmada Chematur Pharmaceuticals Ltd. 2005 (179) ELT 276 (SC). 9. CCE v. Jamshedpur Beverages 2007 (214) ELT 321 (SC). 10. Bharat Electronics Ltd. v. CCE 2004 (165) ELT 485 (SC). 11. Continental Foundation Jt. Venture v. CCE 2007 (216) ELT 177 (SC). 12. Tamil Nadu Housing Board v. CCE 1994 (74) ELT 9 (SC). 14. Per contra, Sri. Raghavendra, learned Advocate appearing on behalf of Sri. N.R. Bhasker, would contend under section 4(1)(a) prescribes the assessable value would be "transaction value" in respect of each transaction provided the buyer and the seller being not connected. He contends that section 4(1)(b) mandates that assessable value shall be determined as per Valuation Rules in respect of other transaction including the goods, which are not sold. He contends that Valuation Rules, 2000 have been introduced along with new section 4(1)(b) i.e., transaction value and the appropriate rule being rule 8, which is applicable which mandates that excisable goods on stock transfer basis for home consumption, the value shall be 115 per cent of the cost of production or manufacture of such goods and this having not been followed by suppression has resulted in invoking e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterference. RE : CEA NO. 23/2005 16. In support of his grounds urged in Appeal No. 23/2005 it is contended by learned counsel for appellant revenue, that Tribunal was not justified in allowing the appeal of the assessee by its order dated 1-6-2005 passed in Appeal No. 277/2005 (Final Order No. 856/2005) since rule 7(1)(b) of Cenvat Credit Rules 2002 does not allow the assessee to claim Cenvat credit since there is prohibition to avail the Cenvat credit particularly when the Tribunal by its order has confirmed the suppression of facts by the assessee and also confirmed the action of the department of invoking of longer period of limitation, as such the prohibition under rule 7(1)(b) is itself inapplicable to the facts of the case and contends that the duty paid by the Mysore Unit cannot be taken by the Bangalore Unit under any other provision of Cenvat Credit Rules, 2002. It is further contended that assessee had collected the unpaid excise amount by way of increased MRP Maximum Retail Price on the rate of soaps from the consumers and having added the price in the sandalwood oil in the MRP and having collected the same from the consumers the evasion of the duty by Mysore Unit h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or payment of appropriate duty under section 4A of the Central Excise Act, 1944 on the basis of Maximum Retail Price (MRP) less permissible deductions. Provisions of Law (Section and Rules) 19. In order to appreciate the rival contentions raised by the learned counsel for the parties and for determining the substantial questions of law framed in these two appeals, it would be necessary to extract the relevant provisions of the Central Excise Act, Central Excise Valuation (Determination of Price of Excisable Goods) Valuation Rules, 2000, Cenvat Credit Rules, 2002 i.e., section 4(1)(a), 4(1)(b), rule 8 of Valuation Rules, 2000 and rule 7(1)(b) of Cenvat Credit Rules, 2002 respectively and they read as under : "Section 4(1)(b) of the Central Excise Act, 1944— 4. Valuation of excisable goods for purposes of charging of duty of excise.— (1) Where under this Act, the duty of excise is chargeable on any excisable goods with reference to their value, then, on each removal of the goods, such value shall— (a) in a case where the goods are sold by the assessee, for delivery at the time and place of the removal, the assessee and the buyer of the goods are not related and the price is t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cent. Of the duty specified in the notice or the duty so accepted by such person within thirty days of the receipt of the notice. (2) The Central Excise Officer shall, after considering the representation, if any, made by the person on whom notice is served under sub-section (1), determine the amount of duty of excise due from such person (not being in excess of the amount specified in the notice) and thereupon such person shall pay the amount so determined : Provided that if such person has paid the duty in full together with, interest and penalty under sub-section (1A), the proceedings in respect of such person and other persons to whom notice is served under sub-section (1) shall, without prejudice to the provisions of sections 9, 9A and 9AA Appellate Authority, be deemed to be conclusive as to the matters stated therein : Provided further that, if such person has paid duty in part, interest and penalty under sub-section (1A), the proceedings in respect of such person and other persons to whom notice is served under sub-section (1) shall, without prejudice to the provisions of sections 9, 9A and 9AA Appellate Authority, be deemed to be conclusive as to the matters stated therein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made thereunder with intent to evade payment of duty. Explanation 2.—For the removal of doubts, it is hereby declared that the interest under section 11AB shall be payable on the amount paid by the person under this sub-section and also on the amount of short-payment of duty, if any, as may be determined by the Central Excise Officer, but for this sub-section. (2C) The provisions of sub-section (2B) shall not apply to any case where the duty had become payable or ought to have been paid before the date on which the Finance Bill, 2001 receives the assent of the President. (3) For the purposes of this section— (i) "refund" includes rebate of duty of excise on excisable goods exported out of India or on excisable materials used in the manufacture of goods which are exported out of India; (ii) "relevant date" means,— (a) in the case of excisable goods on which duty of excise has not been levied or paid or has been short-levied or short-paid— (A) where under the rules made under this Act a periodical return, showing particulars of the duty paid on the excisable goods removed during the period to which the said return relates, is to be filed by a manufacturer or a producer or a licen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the Act or of the Customs Act, 1962 or the rules made thereunder with intent to evade payment of duty." Findings CEA. 11/2006 20. The issue viz., the substantial questions of law raised in CEA. 11/2006 is taken up first since the issue regarding invoking the longer period of limitation has been raised in the said appeal. The said question reads as under : "Whether the Tribunal in the above facts and circumstances, was right in upholding the order of the lower authority invoking the longer period of limitation under section 11A(1) of the Central Excise Act, 1944, when the law on this issue has been settled on the numerous decisions of the Supreme Court?" 21. The decisions of the Hon'ble Supreme Court relied upon by the learned counsel for the assessee are as follows— 1. Continental Foundation Jt. Venture's case (supra); 2. Bharat Electronics Ltd.'s case (supra); 3. Tamil Nadu Housing Board's case (supra); 4. Narmada Chematur Pharmaceuticals Ltd.'s case (supra); 5. Union of India v. Rajasthan Spg. Wvg. Mills 2003 (153) ELT 3 (SC); (sic) 6. Mahindra Mahindra Ltd.'s case (supra); 7. Mahindra Mahindra Ltd.'s case (supra). 22. The learned counsel appearing for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e traced to the provisions of Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000. As extracted herein- above rule 8 states that 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 115 per cent of the cost of production or manufacture of such goods. The methodology for determining the cost of production in respect of such captively consumed goods are governed by the guidelines prescribed under the different Board Circulars. 25. During the year 2000-01 the assessee-Mysore Unit had undertaken to pay duty on sandalwood oil as and when removed from their factory by adopting the method of determination on the basis of cost production as per rule 8 of Central Excise Evaluation Rules, 2000. The assessee-Mysore Unit during the course of audit and investigation by the department obtained the cost accountant certificates in accordance with the Board's Circular dated 13-2-2003 bearing No. 692/8/2003/CX. In respect of cost of production of sandalwood oil in each year from 2001-02 to 2003-04 (up to November, 2003) and accordingly calcul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 30-10-1996 F. No. 6/28/94-CX. 1 GOVERNMENT OF INDIA MINISTRY OF FINANCE DEPARTMENT OF REVENUE CENTRAL BOARD OF EXCISE AND CUSTOMS, NEW DELHI Subject : Assessable Value in the case of Goods captively consumed - Addition of Profit - Reg. I am directed to refer to instructions contained in Board's letter F. No. 6/64/80-CX.1, dated 6-12-1980, Circular F. No. 6/72/85-CX.1, dated 11-3-1986 and Issue A' of section 37B order No. 24/14/93, dated 31-12-1993 regarding the method to be followed for determining assessable value of goods captively consumed. The Board in its order dated 31-12-1993 issued under section 37B has clarified that for the purpose of assessment of goods captively consumed, value should be arrived at by adding previous year's gross profit, if any, of the assessee as per their audited balance sheets. 2. Subsequently, a doubt has been raised as to which profit whether "Gross Profit" (i.e., profit before depreciation taxation) or "Profit before tax" or any other profit has to be taken into consideration for determination of assessable value of the goods captively consumed. Another doubt has also been raised whether the present method of determining profit margin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt of companies. Profit before tax is arrived at after providing for interest and depreciation. Therefore, cost of production of the captively consumed goods will also include applicable interest, depreciation etc. 2. As regard the methodology of determining percentage of profit with reference to sale of the previous year and applying it is to the cost of production of the present year (which presently in vogue), the existing methodology may continue. 3. It is clarified that profit before tax should be related to the net-sales (total sales minus Excise Duty). Further, profit percentage so computed should be adjusted for its application on the cost of production of the relevant year as under :— (i) Let net sales (excluding Excise Duty) = Rs. 100 (ii) Profit before tax at the rate of 20 per cent on sales in previous year = 20 (iii) Therefore, cost of production (Sales-profit) = 80 (iv) Thus profit before tax as percentage of cost of production = 20/80 × 100 or 25% Thus profit before tax which is 20 per cent on sale = 25 per cent on cost of production. In the same way for any other percentage on net sales, the corresponding percentage on cost can be worked ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or comparable goods have been manufactured and sold by the same assessee, the assessable value of captively consumed goods shall be taken at 115 per cent as the cost of manufacture of goods. 28. In the instant case the assessee first adopted assessable value at Rs. 6,589 per kg. during the year 2000-01 for captive clearance of sandalwood oil to their Bangalore Unit while the actual rate was much more. Though assessee had cleared by way of sale of sandalwood oil to third parties at a much higher rate they had not increased cost of production of sandalwood oil so cleared to Bangalore Unit, despite the cost of production having gone up which assessee was aware and the fact of increase in cost had not been brought to the notice of department which it ought to have. Though cost of procurement of sandalwood had increased in 2001-02 itself which in effect increased the final cost of production of sandalwood oil. Thus, the assessee did not adopt the method i.e., actual cost of production for clearance to Bangalore Unit by taking into account the value of sandalwood oil, since, it adopted different value for sale to independent buyers at Mysore itself. Rule 6 of Central Excise Rules pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmitting a cost sheet on 18-8-2000 there was revision in the value nor the assessee disclosed the increase in the value to the department nor the differential duty was paid. However, when it was detected by the officers the same came to be paid. These statements have remained uncontraverted. 32. Yet another factor to be noticed by us is that assessee raised journal vouchers at Mysore Unit for the difference in stock transfer price and price element/new valuation as was evident from the vouchers which fact is not disputed. Though both Mysore Unit and Bangalore Unit were aware about this depicting of difference in values, the assessee did not bring it to the notice of the department and on facts it was found by the authorities that the assessee had subscribed to a wrong declaration in the returns filed at regular intervals. In this regard the proposition of law laid down by their Lordship's in the case of Madras Petro Chem Ltd. v. CCE 1999 (108) ELT 611 (SC) is required to be extracted which reads as under : "The proposition of law as laid down is not in dispute. We find in the present case as aforesaid, a clear finding was recorded that the petitioner was aware and was oblig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t analysis when there was escalation in the price of sandalwood oil. Hence, the said judgments are inapplicable to the facts of the present case. "(c) Continental Foundation.—An incorrect statement cannot be equated with a wilful mis-statement for invoking extended period of limitation." In para 10 of the said judgment it has been held as follows— "When revenue invokes the extended period of limitation under section 11A, the burden is cast upon it to prove suppression of fact. An incorrect statement cannot be equated with a wilful mis-statement. The latter implies making of an incorrect statement with the knowledge that the statement was not correct." As observed by us hereinabove in the instant case the assessee being under as removal procedure was aware about the applicability of section 4(1)(b) of the Act and also the Valuation Rules. It having adopted the cost construction method and being fully aware of the determination of the cost analysis did not chose to sell the same for a higher rate to other customers and in respect of stock transfer raised journal vouchers as found in the balance sheet, which amounted to suppression and wilful mis-statement. Hence, the said jud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... holding prohibition under rule 7(1)(b) will not be applicable to the facts of the case. Per contra Sri Shivadas would vehemently contend that department/revenue cannot deprive the assessee of taking Cenvat credit of the additional duty paid. When admittedly there is no sale and it was only a stock transfer and hence assessee would not be hit by exclusion clause under rule 7(1)(b). In order to consider this rival contention rule 7(1)(b) is required to be extracted. It reads as under :— "Rule 7. Documents and Accounts.—(1) The Cenvat Credit shall be taken by the manufacturer on the basis of any of the following documents namely :— (c) ** ** ** (d) A supplementary invoice, issued by a manufacturer or importer of inputs or capital goods in terms of the provision of Central Excise Rules, 2002 from his factory or from his depot or from the premises of the consignment agent of the said manufacturer or importer or from any other premises from where the goods are sold by or on behalf of the said manufacturer or importer, in case additional amount of excise duties or additional duty of customs leviable under section 3 of the Customs Tariff Act, has been paid, except where the additi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the circumstances, there was no revenue loss to the exchequer at all. This fact has been recorded by both the Adjudicating authorities. Whatever duty is paid at Mysore on sandalwood oil, the same is taken as CENVAT credit at Bangalore. The duty on the finished products namely, toilet soaps is discharged under section 4A on the basis of MRP. Since the value of soap takes into account the escalated cost of the sandalwood oil there cannot be any short payment of duty on the toilet soaps at Bangalore. In effect, the Government did not suffer any loss." 38. Learned counsel for the revenue has contended that Tribunal had relied upon the Judgment of Nagpur Tribunal in the case of Ballarpur Industries Ltd. v. CCE (sic) Nagpur which has been overruled by Hon'ble Supreme Court in CCE v. Ballarpur Industries Ltd. 2007 (215) ELT 489 (SC) and contends the finding of Tribunal is to be reversed. In Ballarpur Industries Ltd.'s case (supra) the Hon'ble Supreme Court held as follows :— "Applying the above tests to the facts of the present case, we hold that the Department was not entitled to invoke the extended period of limitation vide the first show-cause notice dated 21-5-1999. However, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the value of the exempted goods". Our interpretation stands supported by the Instructions issued by the Central Board of Excise and Customs based on the Circular No. B-42/1/96-TRU, dated 27-9-1996. This is where section 4 and the Valuation Rules, 1975 come into play. In the light of the above discussion, the adjudicating authority was required to adjudicate upon applicability of Rule 6(b)(i) and rule 6(b)(ii). However, it has been held by the adjudicating authority that rule 6(b)(i) is not applicable, hence, in our view the only issue which remains to be decided is whether all the requisite elements of costing like wages, profits etc. have been taken into account by the assessee herein as required under rule 6(b)(ii). 16. In the case of Union of India v. Bombay Tyre International Ltd. AIR 1984 SC 420 this Court had drawn a distinction between the nature of levy and the measure/yardstick on which the tax (duty) is determined." 39. In the said case the issue that came up for consideration was with regard to valuation of the goods itself whereas in the instant case the issue is with regard to entitlement of CENVAT credit on the additional duty paid. The revenue is attempting to pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , dated the 25th March, 1986, and received by the manufacturer for use in, or in relation to, the manufacture of final products, on or after the first day of March, 2002. Explanation.—For the removal of doubts it is clarified that the manufacturer of the final products shall be allowed CENVAT credit of additional duty leviable under section 3 of the Customs Tariff Act on goods failing under heading 98.01 of the First Schedule to the Customs Tariff Act. (2) Notwithstanding anything contained in sub-rule (1), the manufacturer or producer or final products shall be allowed to take CENVAT credit of the duty paid on inputs lying in stock or in process or inputs contained in the final products lying in stock on the date on which any goods cease to be exempted goods or any goods become excisable. (3) The CENVAT credit may be utilized for payment of— (a) any duty of excise on any final product; or (b) an amount equal to CENVAT credit taken on inputs if such inputs are removed as such or after being partially processed; or (c) an amount equal to the CENVAT credit taken on capital goods if such capital goods are removed as such; or (d) an amount under sub-rule (2) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ............ (c) ............ (5) The amount paid under sub-rule (4) shall be eligible as CENVAT credit as if it was a duty paid by the person who removed such goods under sub-rule (4). (6) Notwithstanding anything contained in sub-rule (1),— (a) Cenvat credit in respect of inputs or capital goods produced or manufactured,— (i) by a hundred per cent export-oriented undertaking........assessable value. (ii) ............. Explanation.—Where the provisions of any other rule or notification provide for grant of partial or full exemption on condition of non-availability of credit of duty paid on any input or capital goods, the provisions of such other rule or notification shall prevail over the provisions of these rules." 40. We are of the considered opinion that rule 7 is illustrative in nature and it cannot place any fetters on rule 3. The additional duty has been paid under reassessment or on being detected by the department and such duty paid is available as Credit under rule 3 of CENVAT Credit Rules to the assessee and it cannot be allowed to be whittled down by rule 7(1)(b). Thus, principles enunciated in Ballarpur Industries would be inapplicable to the facts ..... 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