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2016 (4) TMI 280 - CESTAT CHENNAI

2016 (4) TMI 280 - CESTAT CHENNAI - 2016 (333) E.L.T. 287 (Tri. - LB) - Inter-unit transfer of goods for captive consumption - Valuation - whether the cost of production of the goods - the packaging material that is manufactured by the Chennai unit of the appellant should be computed at 115%/110% of the cost of production/manufacture of the raw material procured from its Bhadrachalam Unit or at the actual cost of such raw material since there was only a stock transfer and not a sale of these goo .....

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he clauses, in particular clause 5.1 of CAS -4 deal with excisable value of captively consumed goods. The CAS -4 sets out standards for computation of captively consumed goods. Loading of a percentage of the cost of production (mandated by Rule 8 of the Valuation Rules) is clearly not a requirement of CAS -4. The cost of production must therefore be computed strictly and invariably only under CAS -4.

On the aforesaid analyses, we are compelled to the conclusion that in determining the .....

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ion Rules and for remittance of excise duty by the Bhadrachalam unit. This loading would not constitute the procurement cost of the raw material manufactured by the Bhadrachalam unit, for the Chennai unit, which used these goods for manufacture of the packaging material.

In the case of Inter-unit transfer of goods for captive consumption, the actual cost of production (100% of the cost of production), of the raw material procured from the Bhadrachalam unit of the appellant [excluding .....

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of production at the Chennai unit;

In view of the conclusions recorded we hold that the decision of the Chennai Division Bench of CESTAT in the Final Order dt. 11.5.2010 in Revenue's appeal in Eveready Industries and the subsequent decision of the same Regional Bench in the judgment reported in [2011 (4) TMI 141 - CESTAT, CHENNAI ] represent the correct position in law, the decision of the Mumbai Division Bench in Tata Iron and Steel Co, Ltd, Vs CCE Thane-II (2013 (8) TMI 461 - CESTAT .....

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37 /2004 dt. 11.2.2014 passed in Excise Appeal No.388 /2012 preferred by M/ s.I.T.C Ltd. referred the following issue for resolution by a Larger Bench. The reference was occasioned on account of a conflict in decisions of the Chennai Bench in CCE Vs Eveready Industries Ltd. 2011 (274) ELT 564 and of the Mumbai Bench in Tata Iron and Steel Co. Ltd. Vs CCE 2013-TIOL-770 . The issue referred for resolution is: (i) Whether, in the case of inter-unit transfer of goods for captive consumption, the ent .....

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on of Chennai Bench in the case of CCE Vs Eveready Industries Ltd. - 2011 (274) ELT 564 (OR) the decision of Mumbai Bench in the case of Tata Iron and Steel Co. Ltd. Vs CCE - 2013-TIOL-770 (It should be : Editor) had enunciated the correct position of law on the above issue. 2. The appellant is M/ s.I.T.C Ltd. (Packing and Printing Division), Chennai, a unit of M/ s.I.T.C . Ltd. The appellant is engaged in the manufacture of packaging material, The substantive raw material for manufacture of the .....

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cise duty was remitted on the value of the goods (raw material), under Rule 8 of the Central Excise (Determination of Price of Excisable Goods) Rules, 2000 [the Valuation Rules], 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. 2.3 Appellant clears its goods i.e. packaging material to its other units namely cigarette factories on remittance of excise duty on the value of .....

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ged that the appellant had contravened provisions of Rule 8 of the Valuation Rules by failing to compute the correct cost of production of goods cleared by it to its other units during the period 2001-02 to 2003-04; and that the appellant undervalued the cost of raw material (paper and paper board) procured from its Bhadrachalam unit. Another allegation was regarding certain unabsorbed overheads not having been included in the cost of production. 2.6 By the adjudication order dt 29.3.2012 (impug .....

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ench had framed four issues for consideration: (a) Whether while arriving at the cost of production under Rule 3 of the Valuation Rules, the appellant failed to take into consideration the value of IDSC / ICNC debit notes raised by Bhadrachalam unit towards cost of the raw material; (b) Whether the entire value (115% or 110%) of the cost of production of the supplied raw material, incurred by the Bhadrachalam unit must be taken into account for arriving at the cost of raw material of the appella .....

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tion. 2.8 On issues (a) and (c), the learned Division Bench held in favour of the appellant/assessee On issue (a), the order concluded that the value of IDSC / ICNC debit notes is merely notional in nature and cannot be considered as cost of the raw material for the purpose of determining the value under Rule 8 of the Valuation Rules for captive consumption. On issue (c), it held that the finding of the adjudicating authority (that the appellant failed to establish that the idle capacity had ari .....

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ves any issue of revenue-neutrality, there was neither any analysis of this issue nor any finding recorded by the division Bench, perhaps since issue (b) stood referred for resolution by the Larger Bench. 2.9 Heard the learned senior counsel representing the appellant and the Special Counsel for the Revenue. Ld. Senior Counsel for appellant submits that the inter-unit transfer of paper and paper board from Bhadrachalam unit to Chennai unit is covered under Section 4 (1) (b) of C.E Act. He drew o .....

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of the Valuation Rules by determining the cost of production as per CAS -4 formula and paid duty ® 115%/110%. He submits that as per the circular, the cost of production is to be determined as per CAS -4. He drew our attention to CAS -4 issued by ICWAI , particularly paras 4.1, 5.1, 5.14 and para-6 and Appendix-I and CAS -1 (para 4.1). He further submits that as per the CAS -4 read with Board's circular and Rule 8, they have correctly determined the cost of production of the packaging ma .....

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to Unit -II by way of issuing debit notes solely for accounting purposes. He relied on the following decisions:- (1) Final Order No. 542/2010 dt. 11.5.2010 (unreported) in the case of CCE Vs Eveready Industries India Ltd. (2) CCE Chennai Vs Eveready Industries (I) Ltd. - 2011 (274) ELT 564 (Tri-Chennai) (3) CCE Pune Vs Dai Ichi Karkaria Ltd . - 1999(112) ELT 353 (SC) (4) Union Carbide India Ltd, Vs CCE Calcutta 2003 (158) ELT 15 (SC) 2.10 Shri Raghavan Ramabadran , Advocate representing the Bar .....

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nt Corporation Ltd, Vs CSV -(pages 131 to 133) (2) Challapalli Sugars Ltd. And Others Vs CIT - 2002-TIOL-593-SC-IT (3) Hindustan Polymers Vs CCE - 1989 (43) ELT 165 (SC) (4) Eicher Motors Ltd. VS CCE - 2008 (228) ELT 43 (Tri.- LB ) He submitted that cost is distinguished from the value. The word specifically used both in Rule 8 of the Valuation Rules as well as in CAS -4 is "cost" and not "value". The notional amount of 15 % / 10% is added for the purpose of remitting excise .....

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er the invoice price i.e. 115% / 110%. He also concluded that payments were made by the appellant to Bhadrachalam unit by way of issuing debit notes and the amount is remitted at 115%/110%. He drew our attention to CAS -4 guidelines at para 3.2 and to CAS -1 (para 4.2) and submitted that the cost of production of paper is the purchase price. Therefore, the procurement cost is 115%/110% and this amount is the cost of production of raw material procured and not 100% as claimed by the appellant. He .....

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wo standards, one for the purpose of taking cenvat credit and for payment to Bhadrachalam unit by way of debit note where they have accounted the amount as per the price shown in the invoice (115% /110%) and another for determining the cost of production of raw material i.e. paper and the paper board as per Appendix-I in CAS -4, the appellant has chosen only the actual cost of production (100%) determined at Bhadrachalam unit without loading the notional amount (15% or 10%). He also contended th .....

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fully considered the submissions and have perused the records. 4.1. Reference of the singular issue for resolution by the Larger Bench is occasioned (as per the order of reference) due to the conflict between two Division Bench decisions of the Tribunal. We shall deal with these conflicting rationes during the course of analyses of the issue referred for our consideration. 4.2. On the admitted factual scenario, raw material such as paper and paper board manufactured by assessee's Bhadrachala .....

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manufacture of Chennai unit's packaging material amounts to "captive consumption" is not in dispute. The issue is therefore regarding the interpretation of Rule 8 of the Valuation Rules. 4.3 Section 4 of the Act sets out principles of valuation of excisable goods for the purpose of charging duty of excise. Section 4 of the Act, to the extent relevant and material, reads as under:- (1) Where under this Act, the duty of excise is chargeable on any excisable goods with reference to t .....

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to the Chennai unit does not amount to a sale, since both units are under the same assessee/corporate entity - M/ s.ITC Ltd., Section 4 (1) (a) has no application. Clause (b) of the said provision enacts that the value in such circumstances shall be determined in such manner as may be prescribed. The relevant prescription is set out in the Valuation Rules, 2000 (relevant for the period under dispute). Rule 2(c) of these rules defines "value" as meaning the value referred to in Section .....

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Rule 8 Where the excisable goods are not sold by the assesses but are used for consumption by him or on his behalf in the production or manufacture of other articles, live value shall be one hundred and ten per cent (one hundred and fifteen percent, upto 04.08.2003 of the cost of production or manufacture of such goods. 5. Board Circular No.692 /08/2003-CX dated: 13.2.2003 issued clarification on the valuation of goods captively consumed. This clarification noticed that ICWAI , subsequent to it .....

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l for the purposes of our primary analysis of the scope of Rule 8 of the Valuation Rules and in the context of the Board circular (supra), suffice it to note that CAS -4 was developed to bring about uniformity in principles and methods used for determining the cost of production of excisable goods used for captive consumption and the standards and the disclosure requirements set out therein facilitate better transparency in the valuation of excisable goods used for captive consumption. Paragraph .....

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for manufacturing other products. Para 5.1 defines "material consumed" to include (d) "self-manufactured items". The Explanation under paragraph 5.1 states that cost of material consumed shall consist inter alia, the cost of material. Deductions authorized while computing the cost of material consumed is also set out, particulars of which are not necessary for the purposes of our analysis herein. 7. The clear intendment underlying indication of the method of computing value o .....

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ying captively consumed goods. Chapter III of CAS -4 in which the paragraph 5.1 occurs sets out principles for determination of cost of production for captive consumption and indicates that the consumed material shall included a range of materials as indicated in para 5.1 including "self-manufactured items". The principles for valuation of self-manufactured items is also distinctly specified in Chapter III. We set out this principle:- Self manufactured Items: These will include any goo .....

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per CAS -4 8. Since Bhadrachalam unit of ITC Ltd. was not selling raw material but was captively consuming these goods at its Chennai unit. Section 4 (1) (b) of the Act and Rule 8 of the Valuation Rules becomes applicable, as already considered. In view of mandate of Rule 8, Bhadrachalam unit was remitting excise duty at the time of clearance of such raw material, at 115% / 110% of the cost of production of such raw material. Until 4.8.2003, Rule 8 required value of such goods to be reckoned as .....

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re was only a stock transfer and not a sale of these goods by the Bhadrachalam Unit to the Chennai unit. 9.1 The answer to the issue turns upon interpretation of Rule 8, in particular on the expression "cost of production of manufacture of such goods", in the said Rule. 10. On facts, invoices were raised by Bhadrachalam unit reflecting the total cost of raw materials stock transferred to the Chennai unit at 115%/110% of the cost of production of the Bhadrachalam unit i.e. at value on w .....

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aterial to third parties. This was again for compliance with AS-17 standards. Revenue's endeavour to compute the cost of the raw material on the basis of the IDSC / ICNC values was negated by this Tribunal in its ruling on issue No.(a) and for the reasons recorded therefor in the order dated 11.2.2014. 11. It is pertinent to consider that Rule 8 of the Valuation Rules stipulates that in the case of captive consumption the value shall be determined at the rate of 110% of the cost of productio .....

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st of production of such items shall be considered as the material cost for the subsequent product, after considering inward freight, octroi etc. It also stipulates that intermediate products/goods transferred by other unit of same manufacturer shall be based on cost of production as per CAS -4. Therefore the inference is compelling that what is envisaged under the CAS -4 for self-manufactured items is only the material cost and not the notional amount which is not incurred by the appellant. 13. .....

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ub-rule. Had actual cost not been a factor to be taken into consideration for determining the value of the excisable goods, the sub-rule could have merely stated that the value would be determined on the price which the excisable commodity would fetch had it been sold. 7. In this case, the appellant had already purchased or otherwise procured the inputs for manufacturing the sheets (the excisable goods in question) and had included the cost of the entire amount of granules which went into the pr .....

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y being the difference between the notional cost of production and the actual cost By taking, into consideration the notional cost of the granules which went into deduction of the excisable goods, namely polystyrene sheets, the Assistant Collector confirmed the demand. The Collector allowed the appeal of the assessee. The order of the Collector was sought to be reviewed under Section 36(2) of the Act the review was ultimately disposed of by the impugned order of the Tribunal. The reasoning of th .....

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of excise duty under Section 4(1)(b) of the Act raw with Rule 6 of the Valuation Rules should be reckoned as if it is reckoned by a man of commerce and that such realism must inform the meaning that the courts give to words of a commercial nature, like 'costs' which are not defined in this statute, In our view, this should have been taken into account in deciding the show cause notice issued to the appellant. The decision of the Tribunal is accordingly set aside. 14. The apex Court in th .....

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rectly or indirectly by Government or by any public or local authority, and any allowance in respect of any depreciation carried forward under clause (b) of the proviso to clause (vi) of sub-section (2) shall be deemed to be depreciation 'actually allowed'." It has not been disputed that so far as the question before us is concerned the legal position for determining the actual cost for the purpose of development rebate is the same as for the purpose of depreciation. It would appear .....

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ion of the plant and machinery can be considered to be part of the actual cost of the assets to the assessee. So far as the interest after the commencement of production in respect of capital borrowed for the purposes of business is concerned, the same can be deducted under clause (iii) of sub-section (2) of section 10 of the Act. In finding the answer to the question mentioned above, we have to bear in mind that it arises in the context of profits or gains of business and the permissible deduct .....

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of Simon's Taxes, third edition, vol. B, is not synonymous with de "price". Other items of expenditure, such for instance as freight or warehouse charges or insurance, must in certain cases be added to the price." The ratio laid down in Union Carbide (supra) for the purpose of computing the cost production under Rule 6 of the Valuation Rules is squarely applicable to the present case as well, for determination of cost of production under Rule 8, where the goods are not sold b .....

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ready Industries Vs CCE vide Final Order No.542 /2010 dt 11.5.2010, the subsequent Chennai DB decision in the case of the same assessee dt. 19.4.2011 reported in [2011 (274) ELT 564 ( Tri.- Chennai.). It appears neither Revenue nor the and assessee had brought these ruling of co-ordinate Benches to the knowledge of the Mumbai Bench. Had these decisions been brought to the knowledge of the Mumbai Bench, the Mumbai Bench would have taken an appropriate decision, either to follow the decisions rend .....

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luded that in captive consumption circumstances the value of goods procured from another unit of the same assessee captively consumed in the second unit and in circumstances where goods manufactured by the second unit are also supplied to a third unit of the same entity for captive consumption at such unit are to be valued for the purpose of remittance of excise duty (on goods manufactured by the second unit) by computing the value of captively consumed raw material at its actual cost of product .....

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on of goods in the second unit. 17. The facts in the TISCO Ltd . ruling of the Mumbai Bench require to be noticed. TISCO's Mumbai unit was engaged in the manufacture of wire rods. This unit received billets from its Jhamshedpur unit on remittance of excise duty on a value determined at 115%/110% on the cost of production of billets, in terms of Rule 8 of the Valuation Rules. The duty paid by the Jhamshedpur unit on billets was taken credit by the Mumbai unit. The Mumbai unit manufactured wir .....

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rovisions of Rule 8 of the Valuation Rules recorded the following analyses for concluding that the dutiable value of the billets should be considered as the cost at which these goods were procured by the Mumbai unit and that such cost of the raw material entered the cost of production at Mumbai unit. The Tribunal observed (in para 6.1): From the above it is clear that the value of the goods cleared for captive consumption shall be 115/110% of the cost of production of such goods. The Rule does n .....

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y, which the assessee would have normally earned on the sale of such goods." Rule 6(b)(ii) envisages inclusion of notional profit which is not relevant to this case which is covered under Rule 8 of the Valuation Rules, 2000 and the provisions of Rule 6(b)(ii) are not similar to the provisions of Rule 8 of the Valuation Rules as claimed by the appellants. Similarly, the Tribunal's decision in the case of Rajasthan Spinning & Weaving Mills v. CCE (supra) cited by the appellants, relat .....

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he Tribunal provided the following reasoning: 6.2 As already discussed above, the value of goods cleared for captive consumption would be 115/110% of the cost of production or manufacture of such goods and as per the Board circular dated 13-2-2003, the cost of production of captively consumed goods will have to be construed strictly in accordance with CAS -4. The relevant portion of CAS -4 is reproduced hereunder:- "5.1 Material consumed Material consumed shall include materials directly id .....

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duty, sales tax set off, VAT, duty drawback and other similar duties subsequently recovered/recoverable by the enterprise shall also be deducted". Thus cost at Tarapur unit as per Rule 8 would be 115%/110% of the cost of production of billets and not the cost of raw material consumed for the manufacture of billets. As is clear from the analyses recorded in para 6.1 of the TISCO ruling, the learned Division Bench fell into a clear analytical error. After extracting Rule 8 of the Valuation R .....

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ates that the rule does not envisage notional profit of 15/10%. Rule 8 applies and does require loading of 15/10% on the cost of production of wire rods by the Mumbai unit since these goods are supplied to the TISCO's Borivelli unit for captive consumption thereat. The third sentence in the extracted sub paragraph of para 6.1 records conclusions without explaining the rationale therefor. This sentence reads "therefore, the cost of billets at Tarapur unit would be 115%/110% of the cost o .....

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xtually not on legitimate inferences from the context of Rule 8 does it follow that the value (for remittance of excise duty) on wire rods is mandated to be 110% (or 115%, as the case may be) of "value" of production or manufacture of such goods. The loading of the specified percentage for the remittance of excise duty is not on the excisable value of the raw material but on the cost of the raw material which goes into the cost of manufacture of wire rods by the second (Mumbai) unit fo .....

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quot; is a conclusion that builds upon on the fallacy of ratiocination set out in para 6.1 ( analysed supra). Since the conclusion recorded in para 6.1 that "cost of billets at Tarapur unit would be 115/110% of the cost of production of billets", is not preceded by any analyses, let alone a considered analysis either of provisions of Rule 8 of the Valuation Rules or of the context and content of CAS -4, such conclusion cannot commend Itself to acceptance, as a precedent. As pointed out .....

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asonable". 18. Since Rule 8 mandates loading of specified percentage (15% or 10% as the case may be) on the cost of production of goods cleared to another unit for captive consumption in the later unit for computing excise duty payable by the first unit, the cost of production (in the present case, packaging material manufactured by the Chennai unit) must only be considered in terms of CAS -4 as mandated by Board's circular dt. 13.2.2003. None of the clauses, in particular clause 5.1 of .....

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cost of paper and paper board (the raw material procured from the Bhadrachalam unit of the appellant for captive consumption at the Chennai unit) must be taken as the actual cost of production determined in terms of CAS -4 and as set out in Appendix-I of the said standard; and would not include loading of the notional amount, of 15%/10% to the cost of production of the raw material, which loading is solely pursuant to mandate of Rule 8 of the Valuation Rules and for remittance of excise duty by .....

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