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M/s ITC Ltd. Versus Commissioner of Central Excise, Chennai

2016 (4) TMI 280 - CESTAT CHENNAI

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 goods by the Bhadrachalam Unit to the Chennai unit? - Held that:- Since Rul .....

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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 cost of production of packaging material, the cost of paper and paper b .....

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is 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 the national loading under Rule 8 - 15%/10%] is the cost of raw material .....

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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 MUMBAI ) does not represent correct view regarding application of Rule .....

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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 entire value (i.e. 115% / 110% of the cost of production) OR the actual cos .....

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1 (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 appellant's goods is paper and paper board. This raw material is pr .....

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ule 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 such goods determined in terms of Rule 8 of the Valuation Rules. 2.4 By .....

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tion 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 (impugned in the appeal), the authority confirmed duty demand of ₹ 17,10 .....

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g 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 appellant (or) whether the cost of appellant's production of such raw mater .....

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ur 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 arisen due to any abnormal reason), is not sustainable and consequently rul .....

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his 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 our attention to the definition of "sale" and "purchase&qu .....

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-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 material for the Chennai unit and taken the cost of paper and paper board .....

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s. 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 as intervener submitted his written submissions, a paper book of citati .....

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d. 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 duty under Rule 8. This amount is however not incurred by the assesse to .....

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ere 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 also drew our attention to the guidelines issued by ICWAI at page 64 (p .....

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t 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 that Rules should be interpreted in a homogenous manner and that not adopt .....

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rence 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 Bhadrachalam unit is stock transferred to the assessee's Chennai unit and this .....

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aptive 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 their value, then, on each removal of the goods, such value shall- (a) in .....

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er 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 4 of the Act. Chapter II of the Valuation Rules sets out principle for .....

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sed 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 its previous circular dt. 30.6.2000, had developed Cost Accounting Standar .....

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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 3.2 of CAS -4 provides that the cost of production will include various .....

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ed" 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 of the material consumed as elucidated in para 5.1 is for the purpose of .....

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aph 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 goods manufactured with raw material, indigenous or imported bought out mat .....

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terial 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 115% of the cost of production and since 5.8.2003 at 110% of such cost f .....

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chalam 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 which excise duty was remitted. To comply with AS-17 Standards, the Chenn .....

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ards. 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 production or manufacture of such goods. The Board's circular dt. 13.2.2003 s .....

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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. In this regard, the guidance provided by the decision of the Hon'bl .....

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n 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 production of the sheets. Excise duty presumably was also levied on that b .....

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ctual 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 the Tribunal was that the scrap of the sheets had some value which would b .....

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aluation 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 the case of Challapalli Sugars Vs Commissioner of Income Tax (supra) has a .....

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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 from the above that while considering the question of deduction on acco .....

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l 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 deductions on account of depreciation and development rebate relating to the m .....

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"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 but are captively consumed by the appellant. The ratio of the apex Court& .....

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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 rendered by Chennai Bench in Eveready Industries or to refer the issue to a .....

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red 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 production in the first unit and not at the value of such goods reckoned for re .....

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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 wire rods and stock transferred these to its Borivelli unit on remittance o .....

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es 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 not envisage notional profit of 15/10%. Therefore, the cost of billets at .....

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ds." 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, relates to Rule 6(b)(ii). Similarly, the Hon'ble Supreme Court's deci .....

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bove, 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 identified for production of goods such as: (a) indigenous materials (b) i .....

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bsequently 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 Rules, the learned Division Bench observes that the value of goods cleare .....

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pplies 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 of production of billets". This conclusion does not follow either fr .....

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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 for stock transfer to the third ( Borivelli ) unit of the same entity. Thi .....

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et 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 by the apex Court in Union of India Vs M.L . Capoor - AIR 1974 SC 87 &q .....

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e (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 CAS -4 deal with excisable value of captively consumed goods. The CAS - .....

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achalam 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 the Bhadrachalam unit. This loading would not constitute the procuremen .....

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