SC upholds plea of revenue neutrality in case of captive consumption to set aside invocation of extended period

We are sharing with you an important judgment of the Hon’ble Supreme Court, in the case of Nirlon Ltd. Vs. Commissioner of Central Excise, Mumbai [(2015) 58 taxmann.com 28 (SC)] on the following issue:

Issue:

Whether extended period can be invoked when entire exercise is revenue neutral i.e. credit of duty paid on captive consumption is available to assessee itself?

Facts:

Nirlon Ltd. (the Appellant) was engaged in the manufacturer of Tyre Cord Yarn (TCY) and Tyre Cord Fabric (TCB) falling under Chapter 54 and Chapter 59 of the First Schedule to the Central Excise Tariff Act, 1985 respectively, at its Goregaon factory. The products so manufactured were sold by the Appellant at the factory gate as well as removed for captive consumption to its another factory at Tarapur for utilising in manufacturing of final products. The Appellant paid duty on captive consumption of TCY taking value as that of ex-factory sales and price declaration for the same were filed with the Department.

After examination, it was found that there was a difference between the goods which were cleared at the factory gate to be sold to the third parties and the goods removed for captive consumption by the Appellant for its Tarapur factory. Accordingly, the Ld. Commissioner appointed a Cost Accountant for verification and in his Report, it is was submitted that the two goods are different from each other and therefore, price declaration which was filed by the Appellant in terms of Section 4(2) of the Central Excise Act, 1944 (the Excise Act) read with Rule 6(b)(i) of the erstwhile Central Excise Valuation Rules, 1975 (the Excise Rules) was incorrect.

Accordingly, the Department issued two Show Cause Notices to the Appellant demanding differential duty under Rule 6(b)(ii) of the Excise Rules along with penalties by invoking extended period of limitation. On appeal being filed to the Hon’ble CESTAT, the matter was decided against the Appellant.

Being aggrieved, the Appellant preferred an appeal before the Hon’ble Supreme Court.

Held:

The Hon’ble Apex Court held that even though the goods were found to be different, payment of duty taking comparative value was done with bona fide belief. When entire exercise was revenue neutral (i.e. credit of duty paid on captive consumption was available to the Appellant itself), the Appellant could not have achieved any purpose to evade duty. Hence, extended period of limitation and consequent demand was set aside.

However, the Hon’ble Supreme Court upheld demand for the period not barred by limitation by holding that the goods which were removed for captive consumption to be used by Tarapur Factory were to be valued under Rule 6(b)(ii) of the Excise Rules and the price declaration given by the Appellant applying Rule 6(b)(i) of the said Rules was erroneous.