TMI Blog2014 (7) TMI 696X X X X Extracts X X X X X X X X Extracts X X X X ..... he Appellant : Mr J P Khaitan, Sr. Adv. and Ms L Maithili, Adv. For the Respondent : Mr N Rajagopalan, Special Counsel JUDGEMENT Per: P K Das: The relevant facts of the case, in brief, are that the appellant M/s. ITC Ltd. (Packing and Printing Division) is one of the Units/Divisions of M/s. ITC Ltd., engaged in the manufacture of packaging materials. The main raw material in the manufacture of packaging material is paper and paper board, which they received from their other unit, known as ITC Ltd., Badrachalam Paper and Paper Board Unit, Andhra Pradesh (hereinafter referred to as Badrachalam Unit'). The Badrachalam Unit was merged with ITC Ltd. with effect from 1.4.2001. The Badrachalam Unit supplied the paper and paper board to the appellant for captive consumption on payment of excise duty on the value as determined under Rule 8 of Central Excise (Determination of Price of Excisable Goods) Rules, 2000 (hereinafter referred to as Valuation Rules') and following the procedure of CAS-4 standards devised by the Institute of Cost and Works Accountant of India (ICWAI) as per CBEC Circular No. 692/8/2003-CX dated 13.2.2003. 1.1 The appellant also cleared ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of goods and shall consist of cost of material, duties and taxes, freight inwards, insurance and other expenditure directly attributable to procurement. (b) Bhadrachalam Unit issued IDSC/ICNC debit notes which is notional not entailing any actual cash outlay. (c) The system of exchanging debit/credit notes between the different units / divisions of the appellant company enables it to comply with the Accounting Standard - 17 (AS 17) issued by the Institute of Chartered Accountants of India, which requires segment reporting with reference to the business segments of an enterprise. (d) Para 53 of AS 17 indicates that inter-segment transfers should be measured on the basis that the enterprise actually used to price those transfers and not for inter unit transfer. (e) A proceeding was initiated against Bhadrachalam Unit proposing to pay duty on the value of IDSC/ICNC debit notes under Rule 8 of the Valuation Rules. The Commissioner of Central Excise, Hyderabad - III Commissionerate adjudicated the matter and held that inter unit transfer did not involve any sale or any monetary transaction and the Bhadrachalam Unit would pay duty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ady Industries Ltd. (supra). It is submitted that in the case of Tata Iron Steel Ltd., the decision of Eveready Industries Ltd. (supra) was not placed before the Bench. It is contended that the Larger Bench of the Tribunal in Eicher Motors Ltd. Vs. CCE - 2008 (228) ELT 43 (Tri. - LB) in the context of valuation of goods manufactured by the job worker had discussed Rule 8 Valuation Rules. A close reading of the Larger Bench decision of the Tribunal would help the case of the appellant insofar as, it clearly notes the distinction between the cost and value . 2.2 As regards non-inclusion of certain unabsorbed overheads referable to idle capacity of machine in the cost of production, the learned Senior Advocate drew the attention of the Bench clause 5.17 Abnormal and non-recurring cost' of CAS-4, and other clauses of CAS-2, Cost. Accounting Standard on Capacity Determination . He submits that in the show-cause notice, it has been alleged that keeping the machine idle for want of job for lack of order was not a reason for excluding the overheads referable thereto from the cost of production as per CAS-4. It is submitted that on reading of the various clauses of CAS-2 read ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 14.5.2003 for the year 2001-02, where the concept of IDSC was explained. (h) Regarding the non-inclusion of unabsorbed overheads referable idle capacity due to lack of work/orders, it is submitted that the independent practicing Cost Accountant as well as Central Excise officers were in full agreement and therefore there cannot be any motive or intent to evade payment of duty. (i) It is a case of revenue neutrality. The appellant transferred the packaging material mainly to cigarette factories and a small quantity of packaging material was transferred to other units (not manufacturing cigarettes). So, if the appellant unit pays the duty, the other unit will take up CENVAT credit. The applicant relied upon the decision of the Tribunal in the case of Super Forgings and Steel Ltd. Vs. CCE - 2007 (208) ELT 153 and the civil appeal against it was dismissed by the Hon'ble Supreme Court as reported in 2007 (212) ELT A151 (SC). He also relied upon the decision of the Larger Bench in the case of Jay Yuhshin Ltd. Vs. CCE - 2000 (119) ELT 718 (Tri. LB) in support of revenue neutrality. 3. The learned Special Counsel on behalf of Revenue submits that the debit notes issu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10% or 115% which is totally contradictory and misconceived. He submits that the Larger Bench of the Tribunal in the case of Eicher Motors Ltd. Vs. CCE - 2008 (228) 43 (Tri. - LB) had decided this issue in favour of the Revenue and there is no need to look into the case of Eveready Industries Ltd. (supra) passed by Division Bench of the Tribunal as relied upon by the learned Senior Advocate. It is observed that the value is statutorily fixed at 110% / 115% of the cost of manufacture and the same has to be adopted. He also relied upon the decision of the Division Bench of the Tribunal in the case of Tata Iron and Steel Co. Ltd. Vs. CCE, Thane - E/290, 1229/08, and CCE, Aurangabad Vs. PSC Coal Factory - 2013 (287) ELT 380. 3.2 Regarding the non-inclusion of unabsorbed overheads and cost of stock, the learned Special Counsel submits that the normal capacity is defined in paragraph 4.4 of CAS - 2. It is stated that normal capacity is practical capacity minus the loss of productive capacity due to external factors. The plea of the appellant of lack of orders is not relevant since more than 90% of their production is captively consumed by their other divisions. It is also contended ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of duty on the value determined under Rule 8 of the Valuation Rules and used in the manufacture of packaging material, which was transferred to their other units namely, cigarette factories for captive consumption on payment of duty on the value determined under Rule 8 of the Valuation Rules and partly sold to various customer. By the impugned order, the adjudicating authority mainly decided four issues that the appellant transferred the packaging material to their other units namely cigarette factory on payment of duty under Rule 8 of Valuation Rules as per CAS-4 standards, but, while arriving at cost of production under Rule 8, firstly, they had failed to take into consideration of the value of IDSC/ICNC debit notes raised by Bhadrachalam Unit in cost of raw material. Secondly, the entire value (i.e. 115% / 110%) of invoice of Bhadrachalam Unit was to be taken into account of cost of raw material instead of 100% cost of production of Bhadrachalam Unit excluding notional loading of 15% / 10% as claimed by the appellant. Thirdly, the non-absorption of certain overheads have not been included in the cost of production. Fourthly, the extended period of limitation under proviso to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r capacity determination, overheads and cost of production for captive consumption. It is clarified that cost of production of captively consumed goods will be done strictly in accordance with CAS-4, and assessable value of the goods used for captive consumption will be based on the cost of production. The words cost of production are defined in clause 4.1 of CAS-4. The relevant portion of CAS - 4 are reproduced below:- 4. Definitions 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 the cost of production of goods dispatched for captive consumption, adjustment for Stock of Work-in-Progress, finished goods, recoveries for sale of scrap, wastage, etc. shall be made. 4.2 Captive Consumption: Captive consumption means the consumption of goods manufactured by one division or unit and consumed by another division or unit of the same organization or related undertaking for manufacturing another product(s). **** **** **** ***** **** ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... more informed judgments about the enterprise as a whole Many enterprises provide groups of products and services or operate in geographical areas that are subject to differing rates of profitability, opportunities for growth, future prospects and risks. Information about different types of products and services of an enterprise and its operations in different geographical areas - often called segment information - is relevant to assessing the risks and returns of a diversified or multi-locational enterprise but may not be determinable from the aggregated data. Therefore, reporting of segment information is widely regarded as necessary for meeting the needs of users of financial statements. 5.4. It is seen that CAS-4 developed by ICWAI, supported by CBEC, clearly provides while determining the value of excisable goods for captive consumption, the actual cost of production at the factory alone is to be considered. On the other hand, AS17 issued by ICAI, is required for preparing consolidated financial statement of the enterprise, which is different from actual cost of production of Unit / Divisions. The Hon'ble Supreme Court in the case of Union Carbide India Ltd. Vs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pra) clarified that CAS-4 should be strictly followed to determine assessable value for captive consumption. IDSC/ICNC debit notes was raised by Bhadrachalam Unit in compliance of AS-17 for segment reporting for different purpose as sated above, which is of notional nature. Thus, there is no reason to consider the amount of IDSC/ICNC debit notes as actual cost of raw material and it cannot be added in the cost of raw material at the hands of the appellant for captive consumption under Rule 8 of Valuation Rules. 5.5 The another aspect of this issue is that the value charged in the invoice of Bhadrachalam Unit, determined under Rule 8 of Valuation Rules as per CAS-4, which was accepted by the Department. It is seen from the record that a show-cause notice dated 2.1.2004 was issued by the Commissioner of Central Excise, Hyderabad - III Commissionerate to Bhadrachalam Unit and proposed demand of duty alleging that they were realizing additional amounts at various rates under the guise of Inter Divisional Service Charge (IDSC) by raising debit notes. It is alleged that the debit notes are clearly speaking of additional value / price of the transferred goods other than the transfer pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as cost of raw material. 6.1 The main contention of the learned Senior Advocate is that the words value and cost in Rule 8 of the Valuation Rules make a distinction that value would be arrived by adding notional loading 15% / 10% to the cost of production. It is stated that the words in Rule 8 value shall be 110% of cost of production would clearly show that the cost of production is 100% and therefore the appellant rightly considered cost of production excluding notional loading of 10% of the invoice value issued by the Bhadrachalam Unit as cost of raw material in their hands. He relied upon the decision of the Tribunal on this issue in the case of CCE, Chennai Vs. Eveready Industries (I) Ltd. - 2011 (274) ELT 564. The relevant portion of the said rule is reproduced below:- In terms of Rule 8 of Central Excise Valuation Rules, 2000, in such circumstances the value is to be determined based on cost of production + 15% notional margin. In terms of Government of India, Department of Revenue Circular No. 692/8/2003-CX., dated 13th February, 2003, the cost of production for the purpose of arriving at the assessable value of goods captively consumed is to be com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dated 30.6.2000 which states that addition of 10%/15% in the cost of production of the goods for the purpose of determining assessable value under Rule 8 is towards notional profit of the stock transferring of goods. They also contended that in terms of the Board's circular dated 13.2.2003, the cost of production for the purpose of Rule 8 is to be determined based on CAS-4 issued by ICWAI. The appellants also placed reliance on the Hon'ble Supreme Court in the case of Union Carbide vs. CCE (supra) and contended that the issue involved before the Hon'ble Supreme Court was related to Rule 6(b)(ii) of the Valuation Rule, 1975 which is similar to Rule 8 of the Central Excise Valuation Rules, 2000. Undisputedly, the period involved in this case is subsequent to year 2003 and is covered under the Valuation Rules, 2000. Rule 8 of the Valuation Rules, 2000 provides as under:- 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. From the above it is c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ason that the goods are no more to be consumed for manufacture of some other goods. They are ready-for-sale goods. There being no separate specific rule regarding the valuation of goods cleared or returned by the job worker to the principal, it would follow that the residuary provision contained in Rule 11 will have to be applied. In the case of Eicher Motors Ltd. (supra), bodies of bus or truck were fabricated or mounted by the job worker on the chassis supplied by the principal. It is important to note that after completing the job by job worker, the motor vehicle was returned to the principal for sale and there is no captive consumption by the principal. In this situation, the Larger Bench held that the value of chassis for the purpose of arriving at the assessable value of the complete motor vehicle shall be the assessable value of the chassis worked out by Eicher Motors under Rule 8 of Valuation Rules and not its actual cost. 6.4 We find that the facts of the case in the present appeal, inter-unit transfer for captive consumption as defined in clause 4.2 of CAS-4 (reproduced in para 5.2 above), the consumption of goods manufactured by one unit and consumed by another un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall not form part of cost of production. (b) The relevant portion of CAS-2 4.8 Abnormal idle capacity is the difference between practical capacity and normal capacity or actual capacity utilization whichever is higher. 4.3 Practical or Achievable capacity is the maximum productive capacity of a plant reduced by the predictable and unavoidable factors of interruption pertaining to internal causes. Thus, practical capacity is the installed capacity minus the inevitable interruptions due to time lost for preventive maintenance, repairs, set ups, normal delays, weekly off-days and holidays etc. Practical capacity does not consider the external factors causing reduction in production e.g. lack of order. 6. Determination of Practical / Achievable capacity 6.1 Practical capacity or achievable capacity should be determined after adjustment of the following with the installed capacity. (i) Available production hours taking into consideration holidays, normal shut downs and normal idle time (ii) Normal time loss in batch change over, break downs of machines, repairs etc. (iii) Loss in efficiency due to ageing of the machines/e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ternal factors which includes lack of orders. So abnormal and non-recurring cost arising due to unusual or unexpected occurrence for keeping the machines idle for want of job/order would required to be considered for arriving at the cost of production. 7.4 The allegation in the show-cause notice proceeded on the basis that the abnormal idle capacity would not include lack of orders as claimed by the appellant. We have already held that the abnormal idle capacity would cover external factors including lack of orders. So the finding of the adjudicating authority that the that the appellant have not proved the idle capacity as arising due to any abnormal reason is not sustainable. Accordingly, the unabsorbed overheads referable to abnormal idle capacity for lack of order shall not form part of the cost of production and the demand of duty is not sustainable. 8. Issue No.4: - Whether the demand is barred by limitation and the proviso to Section 11A(1) of the Central Excise Act, 1944 can be invoked along with interest and penalty and the submission that it is a case of revenue neutrality:- 8.1 We have already observed above that we do not find any merit on Issue Nos. 1 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... standards developed by Institute of Cost and Works Accountants will apply. So it is recognized that where goods are not sold and are consumed in further production by the same legal entity then duty need be paid on value arrived at based on such costing principle and not the price that the goods can fetch in the market. AS-17 developed by another body that is Institute of Chartered Accountants of India is for accounting profitability of each segment of an enterprise based on the market price of the goods produced by the segment. After recognising that cost of production will be the basis for paying excise duty in a situation where goods are consumed by another Division of the same legal entity, there is no scope to adopt market related prices used for assessing performance of each division. So I have no difficulty in agreeing with my Ld. Brother on the first issue. 13. Issue-II Whether the cost of raw material adopted by assesse should be just cost or 115%/110% of Cost. Rule 8 of Valuation Rules makes use of two words value and cost . When the same rule uses two words both the words cannot have same meaning. Further Rule 2 (c) defines value to be value referred to in secti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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