Imposition of penalty without opportunity of being heard cannot be sustained

C.C.E.-Ahmedabad-ii Vs Leamak Healthcare P Ltd (CESTAT Ahmedabad)

CESTAT Ahmedabad held that imposition of penalty without granting an opportunity of being heard is against the principles of natural justice and accordingly cannot be sustained.

Facts-

M/s. Leamak Healthcare P Ltd. (LHL) are engaged in the manufacture of confectionary items on behalf of M/s. ITC Ltd. on job work basis. As per the agreement entered between LHL and ITC, the packing material has been supplied by ITC and the goods manufactured by the LHL were handed over to ITC at factory gate. The LHL was paying Central excise duty on the value arrived at on the basis of raw material cost plus packing material cost plus conversion cost. Prior to June, 2005 the LHL was discharging duty on MRP basis under Section 4A of the Central Excise Act, 1944.

A show cause notice was issued by revenue alleging that ITC and LHL have interest directly or indirectly in the business of each other and therefore, the two are related in terms of Section 4(3)(b) of the Central Excise Act, 1944 and therefore, the assessable value should be governed by Rule 9 of Central Excise Valuation (Determination of Price of Excisable goods) Rules, 2000.

Consequently, demand of central excise duty was raised against LHL and notice for imposing penalty was issued to both the LHL and ITC. The said demand was confirmed by OIO holding that LHL and ITC were related in terms of Section 4(3)(b)(iv) of the Central Excise Act, 1944. The penalty was also imposed on both LHL and ITC. Being aggrieved, the present appeal is filed.

Conclusion-

Held that no excise duty needs to be paid on the outward freight from Leamak to ITC, Marketing spends by ITC and fixed costs of ITC relating to activities of ITC other than provision of moulds at concessional cost.

Finally, the impugned order is set aside in so far as it seeks to include outward freight from Leamak to ITC godown and marketing spends for charging excise duty. The impugned order is also set aside in so far as it seeks to include the fixed cost of ITC in total to the assessable value.

Held that the order passed in the instant case is imposing penalty on M/s. ITC Ltd is without following the principles of natural justice and on that count as well the impugned order cannot be sustained. We find merit in the argument of M/s. ITC Ltd. that when the impugned order imposed penalty on the appellant, they should have been granted an opportunity of defend themselves.

FULL TEXT OF THE CESTAT AHMEDABAD ORDER

These appeals have been filed by M/s. Leamak Healthcare P Ltd and M/s. ITC Ltd.

1.2 M/s. Leamak Healthcare P Ltd. (LHL) are engaged in the manufacture of confectionary items on behalf of M/s. ITC Ltd. on job work basis. As per the agreement entered between LHL and ITC, the packing material has been supplied by ITC and the goods manufactured by the LHL were handed over to ITC at factory gate. The LHL was paying Central excise duty on the value arrived at on the basis of raw material cost plus packing material cost plus conversion cost. Prior to June, 2005 the LHL was discharging duty on MRP basis under Section 4A of the Central Excise Act, 1944.

1.3 A show cause notice was issued by revenue alleging that ITC and LHL have interest directly or indirectly in the business of each other and therefore, the two are related in terms of Section 4(3)(b) of the Central Excise Act, 1944 and therefore, the assessable value should be governed by Rule 9 of Central Excise Valuation (Determination of Price of Excisable goods) Rules, 2000. Consequently, demand of central excise duty was raised against LHL and notice for imposing penalty was issued to both the LHL and ITC. The said demand was confirmed by Order-In-Original dated 10.08.2010 holding that LHL and ITC were related in terms of Section 4(3)(b)(iv) of the Central Excise Act, 1944. The penalty was also imposed on both LHL and ITC. The matter was challenged by both the parties before tribunal and tribunal vide order no. A/100002-100003/2014 dated 01.01.2014 set aside the order and remanded the matter back to the original adjudicating authority with following observations :-

11. In view of the above facts though mutuality of interest is not established but it has been correctly held by the adjudicating authority that the judgment of Hon’ble Supreme Court in the case of M/s Ujagar Prints (Supra) cannot be made applicable to the present proceedings because the present case is clearly distinguishable from the facts and the principles laid down by Apex Court for valuation of the goods in case of manufacture of goods on job work basis. In the case of M/s Ujagar Prints only one of the several materials i.e., grey fabrics was supplied to the job worker whereas in the present case all the raw materials and packing materials were supplied by ITC. Various gift articles were also supplied by ITC for packaging, the machinery worth more than Rs.7 crores required for manufacturing of confectionery was supplied by ITC on rent of Rs. 12,000/- per annum in the present proceedings whereas the machinery belonged to M/s Ujagar Prints in the case before Apex Court. In the case of M/s Ujagar Prints the job worker was at liberty to manufacture goods for any client on job work and was not restricted to a particular client as is the case in the present proceedings. As already held the revenue is not able to establish that there is mutuality of interest in view of the monetary gain and flow back to both the appellant and M/s ITC. One way interest has been held by various pronouncements as not the conclusive proof of two individuals being related. In the present proceedings before us appellant will be interested in getting work from M/s ITC as he is getting more financial gains from M/s ITC but it is not coming out anywhere in the case records as to have M/s ITC has financially gained from the appellant in the transactions. There is a clause in the agreement that M/s ITC at any time can get the work entrusted to the appellant, done from others. Therefore the provisions of Rule 9 cannot be pressed into service in the present proceedings. However, at the same time, for reasons recorded above in the present case valuation of confectionary manufactured by M/s Leamak can not be resorted to as per the principles laid down by Apex Court’s decision in the case of M/s Ujagar Prints (supra). In this case the valuation of goods is required to be decided by the adjudicating authority under the provisions of Rule 11 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules 2000 applicable at the relevant time. We accordingly remand the case back to the adjudicating authority to determine the value of the goods as per the provisions of Rule 11 of the Valuation Rule 2000. Needless to say that appellants should be given an opportunity to present their case in de-novo proceedings, before taking a final view on the issue.

The Commissioner in the remand proceeding again confirmed the demand of central excise duty amounting to Rs.2,48,06,064/- along with interest under Section 11AB of the Central Excise Act, 1944, penalty under Section 11AC of the Central Excise Act read with Rule 25(1) of Central Excise Rules, 2002 was also imposed on LHL and a penalty of Rs.60 lacs was imposed on ITC under Rule 26(1) of Central Excise Rules, 2002. Aggrieved by the said order, the LHL and ITC are in appeal before this tribunal. Revenue is also in appeal against the said order.

2. Learned Counsel for LHL and ITC argued that the matter was remanded by tribunal with specific directions to do valuation under Rule 11 of CV Rules. Rule 11 of CV Rules reads as under:-

Rule11. If the value of any excisable goods cannot be determined under the foregoing rules, the value shall be determined using reasonable means consistent with the principles and general provisions of these rules and sub-section (1) of section 4 of the Act.

He argued that the said direction of the tribunal has not been followed by the lower authorities. He argued that Rule 11 of CV Rules clearly lays down that the value is required to be determined using reasonable means however, the manner of determination should be consistent with the principles and general provisions of the valuation rules. He argued that the goods manufactured by LHL are not sold by them therefore, value cannot be determined under Rule 4 to 8 of the Valuation Rules. He further argued that the tribunal has already held that LHL and ITC are not related and therefore, the transaction cannot be done under Rule 9 also. He argued that Rule 10 deals with sales through interconnected undertaking and therefore, since LHL and ITC are not interconnected undertaking Rule 10 can also not be invoked.

2.1 Learned counsel argued that the following are the factors identified which have influenced the assessable value of the goods supplied by LEAMAK to ITC Ltd.

(i) Providing of machinery by ITC valued at Rs.7.38 Crores approximately, to Leamak

(ii) Employees of ITC deployed at Leamak.

(iii) Payment of Rs.25,88,257/- received from ITC towards 50% of the cost of moulds.

(iv) Interest free advance of Rs.49,00,000/- given by ITC to Leamak.

(v) Supply of free gifts by ITC worth Rs.1.5 Crores.

Learned counsel argued that the ITC provided machinery valued at Rs.7.38 approximately to Leamak under Machine Hiring Agreement dated 13.12.2004 at an annual hire charges of Rs.12,000/-P.A. which was periodically renewed up to 01.04.2009 with certain changes in the schedules made from time to time which involved additions of certain assets and also range of products to be manufactured. The most important aspect of this agreement was that Leamak shall deliver the confectionary to ITC ex-factory and deliver the same to the transporter nominated by ITC.

2.2 Learned counsel further argued that the agreement dated 13.12.2004 was amended from time to time and the last agreement was 01.04.2009. The common features of all the agreements entered into on 13.12.2004, 20.05.2005, 01.07.2007, 11.12.2008 and 01.04.2009 are as follows:-

• Leamak shall manufacture confectionary as per weight and specification as given in the P.O. placed by ITC and the know-how given by ITC.
• The price of the finished products will be indicated in Annexure 2 inclusive of sales tax, other taxes, duties, etc. The Central Excise duty paid by Leamak will be reimbursed at actual after receipt of a debit note by ITC.
• The raw materials / packing materials required for use will be in accordance with specifications given by ITC who would give list of approved suppliers.
• If there is a delay in supply, ITC is entitled for the discount of 0.50 Paise / kg. on the agreed price.
• Leamak will arrange for the moulds for the manufacture of confectionary.
• Leamak shall deliver the confectionary to ITC ex-factory and deliver the same to the transporter nominated by ITC.
• ITC shall have the right at all times to inspect the premises of Leamak including during the preparation, production, packaging of the confectionary without any notice.
• The relationship between Leamak and ITC under the agreement is on a principal to principal basis.

Except for certain minor changes relating to the price of the product per kg. the basic features of the agreements were the same.

2.3 He pointed out that In terms of Annexure 2 to the Agreement dated 1.9.2005 the manufacturing charges were paid at Rs.12/- per kg. till 31.10.2005 and thereafter the manufacturing charges were at Rs.13.50 / per kg for first 412 MTs of confectionary manufactured and supplied in a month and Rs.9/- per kg. for the quantity over and above 412 MT in the month after installation of machinery provided by ITC in June 2006.

2.4 He argued that irrespective of the dual rates of manufacturing charges, 13.50 / per kg. was only taken for arriving at the assessable value for discharging C.E. Duty. To put it differently, the dual rate had no bearing on the assessable value for discharging C.E. Duty and this is an admitted fact in the SCN and the Special Audit Report given by the Cost Accountant.

2.5 He pointed out that as far as ITC is concerned, the investment of Rs.7.38 Crore approx. on the machinery installed at Leamak will be recouped over a period of time in the form of depreciation under the IT Act and also in the form of reduction in the price if the production is more than 412 MT. The hire charges of Rs.12,000/- P.A is only incidental since an agreement without some consideration is not legally enforceable. He argued that Leamak is discharging duty at the assessable value of Rs. 13.50 irrespective of the price at which the goods are dispatched to ITC. He argued that it is settled law that the cost of moulds / dies / machinery supplied by the buyer is not includable in the A.V. However, the value of such capital goods is required to be amortized and factored in the A.V. In this regard, he relied on the following judgments:-

• Eastern Bakeries P. Ltd v CCE -2013(293) ELT 593(T);
• CCE Bangalore v. CAMPCO-2006(199) ELT 630 (T-Bang);
• Denso Kirloskar v CCE Bangalore-2005 (190) ELT 204 (T-Bang)]

2.6 He further pointed out that employees of ITC have been at Leamak for quality validation of raw materials / packing materials which are directly received at Leamak’s premises from the suppliers. The salaries of these employees are paid by ITC and no costs on this account are borne by Leamak. This is in terms of the agreements entered into between Leamak and ITC. He argued that if the buyer has deputed staff to ensure quality control that cannot be a ground for holding that the price of the assessee at which the goods are cleared with the buyer is not the normal price. He relied on the following judgments:-

• JJ Confectionery P. Ltd. v CCE-2007(210) ELT 196(T-Bang);
• OCP India P.Ltd.-2003(156)ELT 378 (T-Kol);
• CIMMCO Ltd. v CCE 1994(74)ELT 687 (T)

2.7 He argued that payment of Rs.25,88,257/- by ITC towards 50% of the

cost of moulds, this amount was paid by ITC during the year 2002-2003 and the said moulds were exclusively used in the manufacture of confectionary. This transaction took place much before the impugned period, viz., 2005-2007 and as such has no bearing to the present case. In a five member bench decision in the case of Mutual Industries Ltd., vs. CCE 2000 (117) ELT 578 (T-LB) it was held that if advance was received against moulds and dies, notional interest on such advance is not includable in A.V. However, the cost of moulds and dies should be amortized and included in the A.V. During 2003-04, the agreement was Buy-Sell model and the transaction value has been arrived at as mentioned in Annexure 2 to the agreement. However, duty was being discharged on the value of Rs.13.50 per Kg.

2.8 He further argued that interest free advance of Rs.49,00,000/- was given by ITC to Leamak in the year 2003 and 2005 (October 2003; Rs.30,00,000/- and August 2005; Rs.19,00,000/-) towards working capital needs with an understanding that the said advance will be recovered by ITC from the manufacturing charges payable to Leamak. He submits that this transaction took place before the impugned period, viz., 1.9.2005 to March 2007. It may be pertinent to note that the said amount of Rs. 49,00,000/- is less than the monthly average conversion charges of Rs. 70,00,000/-approx. received by Leamak from ITC. No evidence was placed on record to show that notional interest on such advance has resulted in lowering of price. The Hon’ble Supreme Court in the case of CC vs. Rural Engineering Co., – 2005 (184) ELT 132 (SC) (3 member bench), laid down the ratio and this decision was followed in the case of Mohan Aluminum vs CCE – 2007 (216) ELT 562 (Tri.) [42-43] in which it was held that the E.D. has to allow the extent of benefit obtained by the assessee on the interest free loan obtained by him and to that extent only, the price should be loaded for the purpose of determining A.V.

2.9 He pointed out that the amount of Rs. 25,88,257/- received towards the cost of 50% of the moulds and the amount of Rs.49,00,000/- received towards working capital requirement was prior to the material period involved in the present case. Even otherwise, the said amounts were received from ITC have no bearing on the transaction value of the confectionary declared for the purpose of discharging duty and the said transaction value. It is settled law that if the advance taken has no nexus with the price of the goods and if the advance taken has not influenced the price of the goods, then the interest on the same is not includible in the Assessable Value. He relied on the following judgments:-

• CCE v Rural Engineering co. Ltd – 2005(184) ELT 132(SC);
• Mohan Aluminum vs CCE – 2007 (216) ELT 562 (Tri.)]

2.10 He further pointed out that they supply free gifts by ITC worth Rs.1.5 Crore to be cleared along with goods manufactured by LHL. It is now settled law that giving of free gifts as an incentive for sales promotion and packed with the finished goods for free supply to buyers is not includible to arrive at the assessable value in this connection. In this regard he placed reliance on the following judgments:-

• Oswal Fats & Oils v CCE – 2003(156) ELT 112 (T-Del)]
• Pace marketing Specialties Ltd v. CCE Meerut – 2003(153) ELT 621 (T-Del)

2.11 He argued that Cost certificates were issued by M/s. Shome and Banerjee, Cost Accountants, Kolkata. The cost certificates indicate the conversion cost of the impugned goods manufactured by Leamak during the period 1.9.2005 to 31.3.2006 is Rs.13.50 per kg. The Cost Accountant appointed by the Department in his Special Audit Report vide Paras 6.1.2. and 6.1.2.1 observed as follows:

“Details of product-wise consumption of items of inputs provided by Leamak by M/s. Shome & Banerjee, Cost Accountants have tallied, except for free goods provided by Leamak (sic) for packing the same in the product packs during the course of manufacture, with the certificates”.

2.12 He further argued that the following cost elements are not includible in the assessable value :

• Cost of production which was not included by Leamak
• Outward freight from Leamak to ITC
• Marketing spends by ITC
• Fixed cost of ITC

He argued that as far as outward freight from Leamak to ITC is concerned the confectionary is handed over to the transporters nominated by the ITC at factory gate at Leamak. The Hon’ble Supreme Court in the case of Escorts JCB Limited vs. CCE – 2002 (146) ELT 31 (SC) have held that if the sale of goods had taken place at the factory gate and therefore, the place of removal was not the premises of the buyer. In view of the provision of Section 23 and Section 39 of the Sale of Goods Act, 1930, it was found that the goods to be treated as delivered to the buyer and property and possession of the goods passed on to the buyer when the goods were handed over to the transporter. In such a case, element of freight and transit insurance were not be included in the normal value of the goods. Similar decisions were given by the Tribunal in other cases. Reference is also invited to the following decisions:

• CCE v. Accurate Meters-2009 (235) ELT 581 (SC):
• CCE Service Tax Delhi v Quick heal Technologies Ltd – Civil appeal No. 5167 of 2022 dated 5.8.2022]

2.13 He further pointed out that with regard to Marketing Spends by ITC, the expenditure is in the nature of Post Clearance Charges and were incurred by ITC for the purposes of popularizing the brand name of the impugned products, viz., Candyman and Mint-o. The expenditure relating to marketing spends (marketing costs) were not incurred by Leamak but were incurred solely by ITC Ltd. In the light of the judicial decisions, marketing costs incurred by the buyers are not to be included in the assessable value of the job worker and the Learned Commissioner has grossly erred in including the said marketing spends, while re-determining the assessable value, particularly since Leamak have no legal enforcement rights on ITC for incurring the marketing spends by ITC. The Tribunal in the case of Kenwell Pvt., Ltd., vs CCE 2005 (189) ELT 457 (Tri.) inter alia answered the issue and held that:

“Whether advertisement and publicity charges, borne by the dealers/buyers are to be excluded from the assessable value?

However, where the brand name/copyright owner gets his goods manufactured from outside (on job work or otherwise), the expenditure incurred by the brand name/copyright owner on advertisement and publicity charges, in respect of the said goods, will not be added to the assessable value, as such expenditure is not incurred on behalf of the manufacturer (assessee).”

The above decision was upheld and maintained by the Hon’ble Supreme Court as reported 2006 (197) ELT A192 (SC). This position was also clarified in CBEC vide Circular F.No.354/81/2000-TRI dated 30.6.2002 [2000 (119) ELT T22]

2.14 He further pointed out that the Institute of Cost And Works Accountants of India in CAS 22 “Cost Accounting Standard” on manufacturing cost published by the Institute in Para 4.2. clarified that “Administrative Overheads in relation to Marketing, Projects Management, Corporate Office or any other expense not related to manufacturing activities shall be excluded from the manufacturing cost”. Further, the IC&WA, New Delhi in their clarificatory letter No. Tech/05/2007 dated 11.5.2007 addressed to CC, Ahmedabad in response to a letter No.MP/PI-V/Ing-20/0506 Pt-1/2451 dated 9.4.2007 stated that “Marketing spends and fixed cost of ITC is not includable in the assessable value of the impugned goods cleared by Leamak to ITC”.

2.15 He argued that the differential duty demanded in this case covers the period Sept 2005 to March 2007. In this case a Show Cause Notice was issued on 8.7.2009. In respect of four SCNS issued to Leamak on 2.6.2004, 7.12.2004, 3.6.2005 and 14.10.2005, the Department was fully aware of the Manufacturing Agreements between the Appellants and ITC and in the said SCNS, the valuation of the confectionary manufactured and cleared by the Appellants was never disputed by the Department. Therefore the demand is barred by Limitation.

2.16 He pointed out that in the instant case, viz., ITC, the Appellants, were not made as Respondents during the Denovo Proceedings and no notice was issued to them to appear for Personal Hearing. P.H notices were issued only to Leamak and not to ITC. Copies of the PH Notices issued to Leamak and fixing the dates of hearings on 21.8.2014; 10.9.2014; 26.9.2014; 29.9.2014 & 10.3.2015 are being submitted to the Hon’ble Tribunal to substantiate their submission. The Superintendent of Central Excise, AR-V, Ahmedabad, vide Letter No. AR-V/Parikh/R Goods/2014, addressed to Leamak requested them to provide MRP of various goods on which demand was raised in the SCN. It was also mentioned in the said letter that the said information has also been requested telephonically from Leamak. In addition, the Learned Commissioner, vide letter F. No. 30/15-23/OA/2014 dated. 11.2.2015 addressed to ITC Ltd., Food Division, Bangalore requested for details of the cost elements incurred by ITC and the profit margin included in the sale price to their customers’ / dealers’ which was over and above the cost on which Central Excise duty was paid by Leamak. In response, ITC, vide their letter dated 18.3.2015 submitted the data requested for by the Learned Commissioner giving details of Ex-factory Cost at Leamak; Outward Freight from Leamak to ITC Godowns; Marketing Spends; Fixed Costs; Profit Margin and ITC’s Net Selling Price. Copies of the said letters are collectively enclosed to the Appeal Memorandum.

2.17 He argued that it can be seen from the said correspondence that ITC were never made Respondents in the Denovo Proceedings, nor they were given an opportunity of Personal Hearing before the impugned order dated. 31.3.2015 was passed by the Learned Commissioner in terms of which a penalty of Rs. 60,00,000/- was imposed on them. To put it differently the impugned order imposing a penalty of Rs. 60,00,000/- on ITC, was passed in gross violation of Principles of Natural Justice and on this count itself the impugned order is liable to be quashed.

2.18 He further submit that the Final Order No. A / 1000210003/ 2014 dated 1.1.2014 of the Tribunal was passed with specific directions to the Learned Commissioner to determine the Assessable Value in terms of Rule 11 of CVR, 2000. Further, the Tribunal have given a clear finding that ITC and Leamak are not related persons and there was no mutuality of interest. The Tribunal have not made any adverse observations against the Appellants (ITC), in the determination or the declaration of the assessable value by Leamak. The Tribunal have given only specific directions regarding the re­determination of the assessable value under Rule 11 of the CVR, 2000 and it was not an open remand to the effect that “All issues are kept open.”

2.19 He pointed out that the order of the adjudicating authority is not proper in terms of directions of the tribunal. He pointed out that the tribunal has specifically directed that the assessment needs to be done in terms of Rule 11 of CV Rules. He argued that for arriving at the assessable value in the instant case in normal course the recourse has to be taken to Rules 4 to 10 of the CV Rules whenever it is not possible to determine the value under Section 4(1)(a). He argued that it is not in dispute that the goods have not been sold to the factory gate and therefore Rule 4,5,6 and Rule 8 of the CV Rules cannot be applied.

3. Learned AR argued that the impugned order is not correct in so far as it hold that even Rule 7 of the Valuations Rules cannot be applied to the instant case. He argued that Rule 7 is the appropriate rule which should be applied in terms of Rule 11 of the CV Rules. He pointed out that Rule 7 provides the most closest approximation to the transaction between LHL and ITC. He pointed out that Rule 7 clearly provides that when goods are not sold by the assessee but are transferred to depot/premises of consignment or any other place or premises from where the excisable goods are to be sold after their clearance from the ^„place of removal‟ and the assessee and the buyer are not related, the normal transaction value shall be value of such goods sold from such other place at or about the same time, where such goods are not sold at or about the same time, at the time nearest to the time or removal of goods under assessment. He argued that in these circumstances Rule 7 is the most closely applicable rule to the said transaction.

3.1 He argued that the larger bench decision of the tribunal in the case of Cadila Pharmaceuticals Ltd.- 2008 (232) ELT 245 (Tri.-LB) held that Rule 11 of the CV Rules being a residuary provision and not containing any specific formula for determination of value is not applicable independently without considering other rules. The relevant para is reproduced below:-

“23. As mentioned above, Rules 4 to 11 of the Valuation Rules contain provisions as to the manner of determination of values. However, learned advocate for the appellant and learned SDR for the Revenue fairly agreed that none of the rules – from Rule 4 to Rule 10 (Rule 10A was inserted later in 2007) – covers the case of free supply of goods by manufacturers and, therefore, aid has to be taken of the residuary rule i.e.; Rule 11 of the Valuation Rules. Rule 11 lays down:

“If the value of any excisable goods cannot be determined by the foregoing rules, the value shall be determined using reasonable means consistent with the principles and general provisions of these rules and sub-section (1) of section 4 of the Act.”

On a plain reading, it would appear that where the value of any excisable goods cannot be determined under the preceding Rules i.e rules 4 to 11 which are the substantive rules laying down the manner or formula for determination of value, that is, if none of the substantive rule is per se applicable, the value is to be determined as per the principles and general provisions of the Rules as well as Section 4(1) of the Act. In other words, when no particular rule or rules can be strictly applied per se, the value shall be determined using reasonable parameters consistent with the express provisions of the Rules and sub­section (1) of Section 4 of the Act. However, the rule itself does not contain any formula and therefore, cannot be applied independently de hors the provisions of Rules 4 to 10 and Section 4(1) of the Act.”

3.2 He argued that while tribunal has directed invocation of Rule 11 of the CV Rules, the said rule should have been applied read with Rule 7 of the CV Rules as the said rule is the closest approximation to the nature of the transaction. He also relied on the decision of the tribunal in the case of ALUPEX INDIA PVT. LTD.- 2009 (247) ELT 253 (T) wherein, the tribunal observed as follows:-

“The words “using reasonable means consistent with the principles and general provisions of these rules” occurring in Rule 11 clearly indicate the relevance of the provisions of Rule 8. Indeed the provisions and the principle involved are the guiding factors for determining the assessable value of the goods under Rule 11. The underlying object of the rules is to arrive at a value which would be closest to the transaction value of the goods, had the goods been sold in the circumstances mentioned in Section 4(1)(a) of the Central Excise Act, 1944.”

He also relied on the decision of tribunal in the case of EICHER MOTORS

LTD.- 2008 (228) ELT 43 (Tri.-LB) wherein, the following has been observed:-

“26. As a matter of fact, the Valuation Rules did not contain any specific provision to deal with the valuation of goods returned by job worker to the principal until March, 2007 when Rule 10A was inserted. It was for this reason, absence of any specific provision regarding valuation of goods cleared by job worker to the principal, that the question as to valuation remained in contention until the law finally came to be settled in Ujagar Prints-III. However, in fairness to the appellant, we do not wish to forclose the issue giving reference to Ujagar Print-Ill alone. We may make brief comments on the interpretation of Rule 11 which was subject of lengthy discussion at the time of hearing of these appeals. But before we do that, we may again clarify that while Rule 8 is generally applicable to non-sale transactions, it cannot be applied at the stage of clearance of the goods by the job workers to the principal for the reason that at that stage there is no further consumption of the goods as a raw material either by himself or on his behalf for production of some other goods. But it does not mean that the basic principle governing the determination of value under Rule 8 is to be given a go-bye. The words “using reasonable means consistent with the principles and general provisions of these rules” occurring in Rule 11 clearly indicate the relevance of the provisions of Rule 8. Indeed, the provisions and the principle involved are the guiding factors for determining the assessable value of the goods under Rule 11.”

He argued that Rule 4 to 10 provide the guiding principle for valuation for direction implementation however in case these rules cannot be directly applied for in terms of Rule 11. The said rules can be applied with minor modifications.

3.3 He further submits that the impugned order holds that ITC is equivalent to a trader however since, the entire manufacturing and production was at the behest of ITC and under total control of ITC. The ITC should be treated as principal manufacturer and not as a mere trader. He argued that the goods being manufactured and sold in the market by ITC and not given for any job work, ITC would have quoted higher price over and above the cost of production and operating cost to include their profit.

3.4 He argued that in view of the peculiar circumstances, the adjudicating authority should have determined the assessable value of the goods manufactured by the assessee on the basis of the value of such goods sold by the principal manufacturer at the same time from the ^„place of removal‟ i.e. depot.

4. Countering the above assertions of the learned AR, the learned counsel for LHL and ITC argued that the LHL has its own land, building, plant and machinery and full fledged factory. He argued that apart from manufacturing sugar confectionary for ITC, LHL is also manufacturing Lozenges and supplying the same to pharmaceuticals companies. He argued that LHL were contract manufacturing for ITC Ltd. on principal to principal basis under the brand name of ITC and the goods were cleared to authorized/nominated transporters of ITC at the factory gate only, after determining the value in terms of Section 4 and paying duty thereon.

4.1 He further argued that after delivery of goods at their factory gate to transporter of ITC, LHL neither had ownership/possession/control or any nexus with the said goods manufactured by them.

4.2 Learned counsel pointed out that sale is defined under Section 2(h) of Central Excise Act to mean “any transfer of the possession of goods by one person to another in the ordinary course of trade or business for cash or defined payment or valuable consideration.” Therefore, when possession of goods is transferred from LHL to ITC after manufacturing, the transaction of sale of goods is complete. He argued that when goods are “sold” to the Authorised/Nominated transporter ^„ITC‟ at factory gate the ownership and possession of the manufactured goods is transferred from LHL to ITC at factory gate. He argued that place of removal in the instant case would therefore be the factory gate where the goods are cleared to ITC.

4.3 He argued that in terms of the above position, the duty payable would be the value of goods at the factory gate and not at any other place. He argued that the assertion of revenue that the goods manufactured by LHL were not sold at the factory gate and were sold by ITC at their depot and therefore, all those elements of expenditure incurred by ITC till goods reached their godown are includable in the assessable value is contrary to the law. He relied on the following decision to assert that when goods are delivered to the buyer at the factory gate then cost such as outward freight, market spent by the buyer and the fix cost of the buyer are not includable in the assessable value.

• ASSOCIATED STRIPS- 2002 (143) ELT 131 (T-Del.)
• ESCORTS JCB LTD.- 2002 (146) ELT 31 (S.C.)
• QUICK HEAL TECHNOLOGIES LIMITED- CIVIL APPEAL NO. 5167 OF 2022
• 20^TH CENTURY FINANCE CORPN. LTD. & …v STATE OF MAHARASHTRA on 9 MAY, 2000
• DETERMINATION OF PLACE OF REMOVAL- CIRCULAR NO.988/12/2014-CX dated 20.10.2014
• EXTRACTS FROM CS-22, “Cost Accounting Standard on Marketing Cost.”

4.2 He further argued that when revenue seeks assessment under Rule 7 of the CV Rules then revenue is questioning the correctness of remand of the tribunal. He further argued that the tribunal had specifically held that none of the rules except Rule 11 is applicable to the current transaction. Learned counsel further argued that the show cause notice issued by revenue on 08.07.2009 invoked Rule 9 of the CV Rules however, the appeal filed by the revenue now seeks to invoke Rule 7 of the CV Rules. He argued that the appeal of the revenue should be dismissed on this count itself.

5. We have considered the rival submissions. We find that the issue involved in the instant case is the valuation of the goods manufactured by LHL on behalf of ITC wherein, the ITC has provided certain inputs, machineries and funds to LHL. The matter was remanded by tribunal with the following observations :-

11. In view of the above facts though mutuality of interest is not established but it has been correctly held by the adjudicating authority that the judgment of Hon’ble Supreme Court in the case of M/s Ujagar Prints (Supra) cannot be made applicable to the present proceedings because the present case is clearly distinguishable from the facts and the principles laid down by Apex Court for valuation of the goods in case of manufacture of goods on job work basis. In the case of M/s Ujagar Prints only one of the several materials i.e., grey fabrics was supplied to the job worker whereas in the present case all the raw materials and packing materials were supplied by ITC. Various gift articles were also supplied by ITC for packaging, the machinery worth more than Rs.7 crores required for manufacturing of confectionery was supplied by ITC on rent of Rs. 12,000/- per annum in the present proceedings whereas the machinery belonged to M/s Ujagar Prints in the case before Apex Court. In the case of M/s Ujagar Prints the job worker was at liberty to manufacture goods for any client on job work and was not restricted to a particular client as is the case in the present proceedings. As already held the revenue is not able to establish that there is mutuality of interest in view of the monetary gain and flow back to both the appellant and M/s ITC. One way interest has been held by various pronouncements as not the conclusive proof of two individuals being related. In the present proceedings before us appellant will be interested in getting work from M/s ITC as he is getting more financial gains from M/s ITC but it is not coming out anywhere in the case records as to have M/s ITC has financially gained from the appellant in the transactions. There is a clause in the agreement that M/s ITC at any time can get the work entrusted to the appellant, done from others. Therefore the provisions of Rule 9 cannot be pressed into service in the present proceedings. However, at the same time, for reasons recorded above in the present case valuation of confectionary manufactured by M/s Leamak can not be resorted to as per the principles laid down by Apex Court’s decision in the case of M/s Ujagar Prints (supra). In this case the valuation of goods is required to be decided by the adjudicating authority under the provisions of Rule 11 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules 2000 applicable at the relevant time. We accordingly remand the case back to the adjudicating authority to determine the value of the goods as per the provisions of Rule 11 of the Valuation Rule 2000. Needless to say that appellants should be given an opportunity to present their case in de-novo proceedings, before taking a final view on the issue.

The original proceedings started on the line that M/s. LHL and ITC are related persons however, the said assertion was not supported by the earlier decision of the tribunal and the tribunal directed the assessment invoking Rule 11 of the CV Rules which reads as follows:-

Rule11. If the value of any excisable goods cannot be determined under the foregoing rules, the value shall be determined using reasonable means consistent with the principles and general provisions of these rules and sub-section (1) of section 4 of the Act.

5.1 No one has challenged the earlier order of the tribunal and therefore, the directions given in the earlier order of the tribunal become final and binding on both the parties. In this background the following issues are settled:-

(i) The LHL and ITC are not related parties.

(ii) Rule 1 to 10 of the CV Rules did not fit directly in the facts of the situation.

(iii) The assessment has to be done in terms of Rule 11.

(iv) The said decision of the apex court in the case of M/s Ujagar Prints cannot be applied to the instant case. As in the instant case not only certain inputs but also machinery and funds to some extent were supplied by the principal manufacturer namely ITC.

5.2 The larger bench of tribunal in the case of Cadila Pharmaceuticals Ltd.-

2008 (232) ELT 245 (Tri.-LB) has held as follows:-

“23. As mentioned above, Rules 4 to 11 of the Valuation Rules contain provisions as to the manner of determination of values. However, learned advocate for the appellant and learned SDR for the Revenue fairly agreed that none of the rules – from Rule 4 to Rule 10 (Rule 10A was inserted later in 2007) – covers the case of free supply of goods by manufacturers and, therefore, aid has to be taken of the residuary rule i.e.; Rule 11 of the Valuation Rules. Rule 11 lays down:

“If the value of any excisable goods cannot be determined by the foregoing rules, the value shall be determined using reasonable means consistent with the principles and general provisions of these rules and sub-section (1) of section 4 of the Act.”

On a plain reading, it would appear that where the value of any excisable goods cannot be determined under the preceding Rules i.e rules 4 to 11 which are the substantive rules laying down the manner or formula for determination of value, that is, if none of the substantive rule is per se applicable, the value is to be determined as per the principles and general provisions of the Rules as well as Section 4(1) of the Act. In other words, when no particular rule or rules can be strictly applied per se, the value shall be determined using reasonable parameters consistent with the express provisions of the Rules and sub­section (1) of Section 4 of the Act. However, the rule itself does not contain any formula and therefore, cannot be applied independently de hors the provisions of Rules 4 to 10 and Section 4(1) of the Act.”

It is seen that the larger bench of tribunal in the case of Cadila Pharmaceuticals Ltd (supra) has observed that while invoking Rule 11, we cannot lose sight of Section 4(1)(a) and Rule 4 to 10 of the CV Rules. Section 4(1)(a) of the Central Excise Act reads as follows:

SECTION [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 the sole consideration for the sale, be the transaction value;

Rule 4 to 10 of the CV Rules reads as follows:-

RULE4. The value of the excisable goods shall be based on the value of such goods sold by the assessee for delivery at any other time nearest to the time of the removal of goods under assessment, subject, if necessary, to such adjustment on account of the difference in the dates of delivery of such goods and of the excisable goods under assessment, as may appear reasonable.

[RULE5.Where any excisable goods are sold in the circumstances specified in clause (a) of sub-section (1) of section 4 of the Act except the circumstances in which the excisable goods are sold for delivery at a place other than the place of removal, then the value of such excisable goods shall be deemed to be the transaction value, excluding the cost of transportation from the place of removal upto the place of delivery of such excisable goods.

Explanation 1. – “Cost of transportation” includes –

(i) the actual cost of transportation; and

(ii) in case where freight is averaged, the cost of transportation calculated in accordance with generally accepted principles of costing.

Explanation 2. – For removal of doubts, it is clarified that the cost of transportation from the factory to the place of removal, where the factory is not the place of removal, shall not be excluded for the purposes of determining the value of the excisable goods.]

RULE 6.Where the excisable goods are sold in the circumstances specified in clause (a) of sub section (1) of section 4 of the Act except the circumstance where the price is not the sole consideration for sale, the value of such goods shall be deemed to be the aggregate of such transaction value and the amount of money value of any additional consideration flowing directly or indirectly from the buyer to the assessee.

[Provided that where price is not the sole consideration for sale of such excisable goods and they are sold by the assessee at a price less than manufacturing cost and profit, and no additional consideration is flowing directly or indirectly from the buyer to such assessee, the value of such goods shall be deemed to be the transaction value.]

[Explanation 1] – For removal of doubts, it is hereby clarified that the value, apportioned as appropriate, of the following goods and services, whether supplied directly or indirectly by the buyer free of charge or at reduced cost for use in connection with the production and sale of such goods, to the extent that such value has not been included in the price actually paid or payable, shall be treated to be the amount of money value of additional consideration flowing directly or indirectly from the buyer to the assessee in relation to sale of the goods being valued and aggregated accordingly, namely : –

(i) value of materials, components, parts and similar items relatable to such goods;

(ii) value of tools, dies, moulds , drawings, blue prints, technical maps and charts and similar items used in the production of such goods;

(iii) value of material consumed, including packaging materials, in the production of such goods;

(iv) value of engineering, development, art work, design work and plans and sketches undertaken elsewhere than in the factory of production and necessary for the production of such goods.

[Explanation 2. – Where an assessee receives any advance payment from the buyer against delivery of any excisable goods, no notional interest on such advance shall be added to the value unless the Central Excise Officer has evidence to the effect that the advance received has influenced the fixation of the price of the goods by way of charging a lesser price from or by offering a special discount to the buyer who has made the advance deposit.

Illustration 1. – X, an assessee, sells his goods to Y against full advance payment at Rs. 100 per piece. However, X also sells such goods to Z without any advance payment at the same price of Rs. 100 per piece. No notional interest on the advance received by X is includible in the transaction value.

Illustration 2. – A, an assessee, manufactures and supplies certain goods as per design and specification furnished by B at a price of Rs. 10 lakhs A takes 50% of the price as advance against these goods and there is no sale of such goods to any other buyer. There is no evidence available with the Central Excise Officer that the notional interest on such advance has resulted in lowering of the prices. Thus, no notional interest on the advance received shall be added to the transaction value.]

RULE 7.Where the excisable goods are not sold by the assessee at the time and place of removal but are transferred to a depot, premises of a consignment agent or any other place or premises (hereinafter referred to as “such other place”) from where the excisable goods are to be sold after their clearance from the place of removal and where the assessee and the buyer of the said goods are not related and the price is the sole consideration for the sale, the value shall be the normal transaction value of such goods sold from such other place at or about the same time and, where such goods are not sold at or about the same time, at the time nearest to the time of removal of goods under assessment.

RULE 8.[Where whole or part of 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 of such goods that are consumed shall be one hundred and ten per cent of the cost of production or manufacture of such goods.]

RULE 9. [Where whole or part of the excisable go ods are sold by the assessee to or through a person who is related in the manner specified in any of the sub-clauses (ii), (iii) or (iv) of clause (b) of sub­section (3) of section 4 of the Act, the value of such goods shall be the normal transaction value] at which these are sold by the related person at the time of removal, to buyers (not being related person); or where such goods are not sold to such buyers, to buyers (being related person), who sells such goods in retail :

Provided that in a case where the related person does not sell the goods but uses or consumes such goods in the production or manufacture of articles, the value shall be determined in the manner specified in rule 8.

RULE 10. [Where whole or part of the excisable goods are sold by the assessee to or through an inter-connected undertaking, the value of such goods shall be determined in the following manner, namely :-]

(a) If the undertakings are so connected that they are also related in terms of sub-clause (ii) or (iii) or (iv) of clause (b) of sub-section (3) of section 4 of the Act or the buyer is a holding company or subsidiary company of the assessee, then the value shall be determined in the manner prescribed in rule 9.

Explanation. – In this clause “holding company” and “subsidiary company” shall have the same meanings as in the Companies Act, 1956 (1 of 1956).

(b) in any other case, the value shall be determined as if they are not related persons for the purpose of sub-section (1) of section 4.

5.3 From the impugned order, it is seen that the impugned order rules out direct applicability of Rule 4 to 10 on various grounds as they did not specifically cover the current transaction. The impugned order also rules out the applicability of the new Rule 10(A) of Valuation Rules which was introduced with effect from 01.04.2007 on the ground that at the material time the said rule was not part of the central excise valuation rules. The impugned order takes a view that all those elements of expenditure which would have been incurred by ITC had they manufactured the product at their own are required to be included in the assessable value of the goods. The impugned order further argues that since the goods are not sold by LHL but are sold only by ITC at their godown, all the cost till the goods reach the godown are includable in the assessable value. On the aforesaid logic, the impugned order comes to the following calculation of differential duty:

Cost of production not included by Leamak	17269155
O/w freight from Leamak to ITC	49503710
Marketing spends by ITC	168721542
Fixed Costs of ITC	68286233
Total differential value	303780640
Differential duty	24302451
E.Cess @2%	17564
SHE Cess @ 1% (for March 07)	24806064

5.4 It is seen that the data from the chart has been picked from the letter dated 18.03.2015 by ITC- Bangalore which reads as under:-

1. The information is provided without prejudice to the reply and the written submissions made at the time of personal hearing by our contract manufacturing unit M/s Leamak Healthcare Pvt.Ltd.

2. It is to bring to your kind attention that the Hon’ble CESTAT in its remand directions, has held that Leamak and ITC are not related to each other and therefore, selling price of ITC cannot be the basis for determination of differential Excise duty.

3. Further from the remand directions of Hon’ble CESTAT, it is evident that the dispute is strictly restricted only to the extent of production and dispatch of confectionery using machinery provided by us to M/s Leamak Healthcare Pvt.Ltd.

4. At the time of personal hearing, we have been given to understand that our contract manufacturer M/s Leamak Healthcare Pvt.Ltd. had made detailed submissions to your good self that the price at which Excise Duty has been discharged by them for period September 2005 to March 2007 includes all elements of cost on which Excise Duty is required to be paid.

5. Under these circumstances, we would like to place on record that, in our humble opinion, information sought vide your letter No.F.No. V.30/15-23/OA/2014 dated 11.02.2015 is beyond the scope of the remand directions of the Hon’ble CESTAT.

6. Without prejudice to the above, please find hereunder the details as sought by you in Letter No. F.No. V.30/15-23/OA/2014 dated 11.02.2015

Particulars	Quantity Dispatch (kg)	Value (Rs)	Rate/Kg (Rs)
Assessable Value on which Excise Duty Paid by Leamak Excise Duty paid by Leamak E Cess Paid by Leamak Differential Excise Duty paid by Leamak Differential Cess paid by Leamak Cost of Production on which diff. ED paid	9900742	597576140   4780609 988667 1381532       30113 17269155
		665051699	67.17
Outward Freight from Leamak to ITC Godowns Marketing spends Fixed costs Profit Margin ITC Net Selling Price		49503710 168721542 68286233 99537162	5.00 17.04 6.90 10.05
		1051100346	106.16

Note

1. Outward Freight/Kg represents the average cost of transportation incurred by us to transport finished goods from our various contract manufacturing locations to our warehouses situated across India.

2. Marketing Spends represents the amounts incurred by us towards advertisements in print media/cable/television/cinema/internet, market research expenses, point of sale materials such as posters/danglers/display boards etc., consumer contact expenses, sampling expenses, outdoor visuals, etc. These expenses are generally incurred for the ‘Candyman’ and ‘Mint-O’ brands. Total marketing spends have been apportioned on the total sales volume to arrive at the per/Kg cost.

3. Fixed Costs represents salaries, administration expenses, etc. Total fixed costs have been apportioned on the total sales volume to arrive at the per/Kg cost.

4. Marketing Spends/Fixed Costs are incurred by us centrally for the confectionery business as a whole and cost/Kg has been apportioned for the quantity manufactured/cleared at the respective contract manufacturing locations.

5. From the above data provided by M/s ITC it is evident Government has suffered loss of duty by not including the freight charges from the factory to godown, the marketing expenses and the fixed costs which form part of assessable value in normal course of manufacturing business. Both the assessee and ITC had suppressed these cost elements and benefitted by this unholy practice. Because ITC has basically acted as Trader and got the goods manufactured from assessee, I feel that its profit margin needs to be excluded while arriving at the assessable value. Thus, in my opinion, except for the duty of Excise, including cess, and the profit margin all other cost elements are includible in the assessable value.

5.5 From the above, it is seen that the appellants have paid the differential excise duty on the value of Rs.17269155/- the appeal memorandum does not make it apparent if the appellant are contesting inclusion of this amount in the assessable value or not. It is apparent that the appellants have already paid and discharged duty on this value. The impugned order includes this value once again for confirmation of duty and imposition of penalty. It is also not clear as to what this amount represents and how this value has been arrived at.

5.6 The appellants have pointed out Section 2(h) of the Central Excise Act to assert that the goods are sold at the factory gate. Section 2(h) reads as follows:-

SECTION 2. Definitions. — In this Act, unless there is anything repugnant in the subject or context, – (h) “sale” and “purchase”, with their grammatical variations and cognate expressions, mean any transfer of the possession of goods by one person to another in the ordinary course of trade or business for cash or deferred payment or other valuable consideration;

It is seen that sale for the purpose of central excise act means transfer of the possessions of the goods by one person to another. In the instant case, it is not in dispute that the goods are handed over by LHL to the transporter designated by ITC at the factory gate. In these circumstances any expenses incurred after clearance from the factory cannot form part of the assessable value in terms of Section 4(1)(a).

5.7 It is seen that the impugned order adopts deductive method to arrive at the assessable value at the factory gate. From the net selling price of ITC, it allows deduction of profit margin of ITC Ltd. and includes all other costs incurred in the assessable value (including the duty and taxes paid by the appellant). The following inclusions have been challenged by LHL and ITC.

(a) Outward freight from LHL to ITC godown.

(b) Market spent.

(c) Fixed cost.

The LHL and ITC relied on the decision of Kenwell Pvt., Ltd., vs CCE 2005 (189) ELT 457 (Tri.). In the said decision following has been observed :-

5.We have gone through the records of the case carefully. The adjudicating authority has stated that prior to 1-7-2000 the appellants were discharging duty on the sales price of M/s. GIL and M/s. MCL. She has also stated that the appellants are only hired labourers of their principals and duty should be paid on the intrinsic value of the goods. The Commissioner’s finding that the appellant is a hired labourer has not much basis. The agreement between the appellants and GIL/MCL indicate the transaction value. The advertisement charges incurred by the buyer on behalf of the seller can be included but in the present case the goods bore the brand name of GIL/MCL. Therefore, we cannot come to the conclusion that GIL/MCL incurred the advertisement charges on behalf of the appellant. The definition of transaction value is reproduced herein below :-

“Transaction value” means the price actually paid or payable for the goods, when sold, and include in addition to the amount charged as price, any amount that the buyer is liable to pay to, or on behalf of, the assessee, by reason of, or in connection with the sale, whether payable at the time of the sale or at any other time, including, but not limited to, any amount charged for, or to make provision for, advertising or publicity, marketing and selling organization expenses, storage, outward handling, servicing, warranty, commission or any other matter; but does not include the amount of duty of excise, sales tax and other taxes, if not, actually paid or actually payable on such goods. :”

GIL spent some amount on advertisement of its own brand of goods. The department held that the appellants who manufacture the goods as per specification in the contract should pay duty on these charges. Moreover, the issue is clarified in the Board clarification mentioned (supra). We are reproducing the said clarification below :-

Whether advertisement and publicity charges, borne by the dealers/buyers are to be excluded from the assessable value?

However, where the brand name/copyright owner gets his goods manufactured from outside (on jobwork or otherwise), the expenditure incurred by the brand name/copyright owner on advertisement and publicity charges, in respect of the said goods, will not be added to the assessable value, as such expenditure is not incurred on behalf of the manufacturer (assessee)”.

5. In view of the above, the OIO cannot be sustained. Hence we allow the appeal with consequential relief.

The aforesaid decision also been maintained by Hon‟ble Apex Court as reported in 2006 (197) ELT A192. In this background, we find that in the facts of the case the inclusion of marketing costs in the assessable value is beyond the scope of Section 4(1)(a). In this circumstances, when such costs are incurred by the buyer after clearance from factory the same cannot be included in the assessable value.

5.8 The impugned order includes in the assessable value fixed cost by ITC. We find that no breakdown of the fixed cost has been given by ITC. It is not in dispute that ITC has supplied certain machineries to LHL and ITC has also extended certain amount as advances to the LHL. The fixed cost of ITC in general cannot be added to the assessable value for the reason that these costs are incurred beyond the place of removal namely the factory gate. In the instant case the goods are sold at factory gate (possession handed over in terms of Section 2(h) of Central Excise Act).

5.9 The cost which are not incurred by ITC within the factory premises only in respect of free supply of machinery and interest free loan that could have influenced the assessable value. The LHL and ITC have also argued that the interest free advances of Rs. 49 lacs given by ITC to Leamak are in the ordinary course of trade and have not influenced the assessable value in any manner. The said advances made by ITC were to be paid by Leamak. It has been argued that the advances were made in October-2003 and August-2005. It has been argued that the period of dispute in the instant case is September, 2005 to March, 2007 thus, it is obvious that a large part of the advances were paid back by the appellants before the dispute period. It has been argued that the average conversion charges received by Leamak to ITC are approximately Rs.70 lacs per month. In this background of advance of Rs.49 lacs could hardly be said to have influenced the price. We find significant force in the argument that these advances received much prior to the dispute period could not have possibly influenced the price not only for the reason of the period of receipt of these advances but also the quantum of advances which appear to be in the ordinary course of trade considering the level of transactions between LHL & ITC.

5.10 The LHL and ITC have contended that the payment made towards 50% of the cost of moulds was made in the year 2003-04 i.e. prior to dispute period of 2005-06. He pointed out that during the period 2003-04, the agreement of manufacture dated 24.01.2003 was on ^„Buy-sell‟ model. The said transaction of 50% of cost of mould was part of the agreement dated 24.01.2003. Since the said agreement was more than two years before the disputed period, there is no link shown by revenue between the said cost of mould by the appellant and the goods cleared during the disputed period. However, the cost of moulds needs to be apportioned on the value of clearances from the period 24.01.2003 to the time the said mould were used to manufacture goods for ITC.

5.11 It is also noticed that the ITC has supplied gifts valued at Rs.1.5 Crores which are to be backed with the products manufactured by LHL is free gifts to be supplied to the customers. The LHL and ITC have relied on the decision of tribunal in the case of Oswal Fats & Oils v CCE – 2003(156) ELT 112 (T-Del). In the said decision following has been observed:-

2. It is the submission of the appellants that free supply of bindis to buyers of soaps by M/s. Hindustan Lever Limited has no relation to the appellant’s activity of manufacture of soaps and the sale of those soaps to M/s. Hindustan Lever Ltd. Learned Counsel representing the appellant has stressed that bindis have no place in the manufacture of soaps. Nor does the cost of the bindis form part of the cost of the soap. He pointed out that manufacture of soaps and supply of bindis were under entirely different contracts and one did not have any dependence on the other. Bindis were also merely packed in the cartons along with soaps as directed by M/s. Hindustan Lever Ltd. The learned Counsel also pointed out that the decision of the Apex Court in the case of Bombay Tyre International and the Tribunal in the case of Hindustan Cocoa Products Ltd. have no application to the present case inasmuch as no deduction is claimed from the price of soap towards the cost of freely supplied bindis. Instead, assessments of soap are made at the full value of the soap in terms of the contract. The learned Counsel for the appellant pointed out that the decision of this Tribunal in the case of Schenck Jenson & Nicholson Ltd. v. CCE, Jamshedpur, [2002 (149) E.L.T. 401] = 2002 (48) RLT 449 (CEGAT – Kol.) is applicable in the present case in favour of the appellant. The learned Counsel explained that in that case the Tribunal has held that the value of boughtout items brought into the factory and supplied as spares along with machinery cannot be added to the value of the machinery manufactured and sold by the appellants, for the purpose of assessing the machinery to duty.

3. There is merit in the contention of the appellant that the price of the bindis in question has no relation to the assessable value of the Soaps manufactured on contract basis. That price remains fixed under the contract. The additional packing of bindis have no connection to the price of soap. Therefore, there was no requirement for the addition of the price of bindis to the price of the soap to arrive at the assessable value of soap. The contrary determination made in the impugned order is not sustainable. Accordingly, the appeal is allowed, with consequential relief, if any, to the appellants.

The said decision has been approved by Hon‟ble Apex court as reported in 2004 (163) ELT A119. Thus the value of free gifts cannot be included in the value.

5.12 The ITC has deputed certain employees by Leamak. The role of the employees was coordination of dispatches of material to various godowns, supervision of quality of raw material, packing material and finished goods. The appellant have relied on the following decision to assert that the value of the employees deputed for the purpose of quality control cannot be included in the assessable value.

• JJ Confectinery P Ltd.- 2007 (210) ELT 196

In the case of OCP INDIA PVT. LTD.- 2003 (156) ELT 378, tribunal has observed as follows:-

9. We have considered the submissions made from both the sides. The dispute revolves around the addition of Rs. 23.50 per sleeper as testing charges which the appellant company never collected from the railways. The railways employees were doing the inspection themselves before taking the delivery and in fact no expenses were being incurred on such testing inasmuch as the same was being done by the paid employees of the railways. We do not find any justification for addition of the testing charges on notional basis in the assessable value of the final product. The appellants have strongly contended that sleepers were in fully manufactured condition and were duly entered in RG-1 register before the same were tested by the employees of the railways. As such it was the finished sleepers which were being inspected by the purchaser for his own satisfaction. As rightly contended by the ld. Adv., such inspection for which no expenses were either being incurred or were being paid to the appellant, cannot be held to be pre-manufacture inspection charges. There is no justification for addition of notional testing charges in the assessable value of the goods when there is no dispute that what the appellant was receiving from the railways was only the contract price entered into between the two on which duty was being paid by them. The Tribunal, as noted above has in a number of cases held that even the inspection charges paid by the railways to RITES are not includible in the assessable value of the goods supplied to the railways. In the instant case we find that even the above situation is not available inasmuch as no charges are being paid to the appellants. As such we are of the view that addition of notional inspection charges in the assessable value of the sleepers is not to be upheld. We order accordingly.

In view of the above, we find that the staff deputed not for the purpose of manufacturing the goods but only for the purpose of inspection and supervision and quality control cannot be part of the assessable value of the goods.

5.13 M/s. LHL and ITC have contended that the amount of Rs.1,72,69,155/-which as been sought to be included in the assessable value is the value which the appellant have already included in the assessable value, fresh inclusion of the said in the assessable value amount to double taxation. The cost of production not included by Leamak has already suffered excise duty and the appellants have not contested the same. The contention of the appellant is that the duty has been sought to be recovered twice on this value. From the letter of the appellant dated 18.03.2015 reproduced above, it appears to be factually correct however this needs to be verified.

6. It is seen that revenue has filed appeal seeking assessment under Rule 7 of the CV Rules. It is seen that the order of tribunal dated 01.01.2014 has clearly laid down that assessment has to be done in terms of Rule 11 of the CV Rules. The revenue has not challenged the said order and therefore, the said order has become final. In this background, the assertion of the revenue that assessment needs to be done in terms of Rule 7 of the CV Rules cannot be accepted. The appeal of revenue is therefore dismissed.

7. We also come to our conclusion that no excise duty needs to be paid on the outward freight from Leamak to ITC, Marketing spends by ITC and fixed costs of ITC relating to activities of ITC other than provision of moulds at concessional cost.

7.1 Finally the impugned order is set aside in so far as it seeks to include outward freight from Leamak to ITC godown and marketing spends for charging excise duty. The impugned order is also set aside in so far as it seeks to include the fixed cost of ITC in total to the assessable value. The cost of ITC in so far as it relates to provision of mould on discounted rate to the appellant needs to be apportioned to the value of goods depending on the actual period of use of the said mould and the total production. The fact regarding payment of duty under the head “Cost of production not included by Leamak” in the table appearing in para 5.3 above needs to be ascertained. If duty has already been paid, duty may not be demanded again.

8. It has been argued on behalf of ITC that in the remand proceedings they were not made party, no notice of hearing was issued to appellant M/s. ITC Ltd. and no personal hearing was granted. It has been argued that the order passed in the instant case is imposing penalty on M/s. ITC Ltd is without following the principles of natural justice and on that count as well the impugned order cannot be sustained. We find merit in the argument of M/s. ITC Ltd. that when the impugned order imposed penalty on the appellant, they should have been granted an opportunity of defend themselves.

9. With above observation, the impugned order is set aside and matter is remanded to the Commissioner for fresh adjudication.