Buyer-Funded Tool Cost Must Be Amortised; Extended Period Rejected: CESTAT Chennai

Sankar Sealing Systems Pvt. Ltd. Vs Commissioner of GST & Central Excise (CESTAT Chennai)

Summary: CESTAT Chennai held that the cost of tools such as jigs, fixtures, molds and dies, which were paid for by buyer-customers and used by the appellant for manufacturing components for those buyers, was required to be included in the cost of production and amortised for payment of Central Excise duty on the final products under Rule 6 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000.

The appellant, a manufacturer of aluminium and rubber gaskets, had manufactured tools for customers, collected their cost through excise invoices and retained the tools in its factory for manufacturing gaskets. The department alleged that the tool value was neither included in the cost of production nor amortised, resulting in a duty demand of Rs.7,85,993/- with interest and equal penalty.

The appellant contended that duty had already been paid on the tools, that another levy would amount to double taxation, that Notification No.67/95-CE dated 16.03.1995 exempted tools captively used in manufacture and that the extended period under Section 11A(1) was unavailable. The Tribunal followed its decision in M/s Best Cast IT Ltd, which had considered Commissioner of Central Excise, Mumbai I Vs Mega Rubber Technologies Pvt Ltd and the Larger Bench decision in Mutual Industries Ltd Vs Commissioner of Central Excise, Mumbai. It held that whether the tools were manufactured in the appellant’s own factory or outsourced did not alter the valuation principle where their cost was borne by the buyer.

The Tribunal rejected the double-taxation argument because duty on the tools and duty on gaskets concerned two separate sets of excisable goods. However, following Ashok Iron Works, it accepted that Notification No.67/95-CE was available to jigs, fixtures, patterns and tooling captively used in the factory irrespective of ownership; consequently, the excise-duty element on the tools was to be excluded while reworking their amortised value. For “development NVH project charges”, the Tribunal held that the monetary value of services paid for by the buyer and used in developing the buyer’s tools also formed part of the total value to be amortised in the final product.

On limitation, CESTAT held that mere failure or negligence in adopting the correct valuation and paying the correct duty, particularly on a complex issue, did not establish suppression with intent to evade duty. In the absence of any positive intention to evade duty or a finding to that effect, invocation of the extended period was unsustainable and the demand for the larger period failed.

The matter was remanded to the Original Authority solely for re-quantification of the duty demand for the normal period, after excluding the duty exemption eligible on the tools. The authority was directed to follow principles of natural justice, give the appellant reasonable opportunity to present its case and complete the process within ninety days of receipt of the order.

Cases Discussed

• M/s Best Cast IT Ltd Vs Commissioner of GST & Central Excise
• Commissioner of Central Excise, Mumbai I Vs Mega Rubber Technologies Pvt Ltd [2016 (343) ELT 384 (Tri- Mum)]
• Mutual Industries Ltd Vs Commissioner of Central Excise, Mumbai [2002-TIOL-CESTAT- DEL-LB]
• Ashok Iron Works Vs. CCE (2004) 168 ELT 198

FULL TEXT OF THE CESTAT CHENNAI ORDER

The above appeal is against Order in Appeal No. 76/2013 (M-IV) dated 22.02.2013 passed by the Commissioner of Central Excise (Appeals), Chennai (impugned order).

2. Brief facts are that the appellant is a manufacturer of Aluminum Gasket and Rubber Gaskets falling under Chapter Heading 7616000 and 40169340 of the Central Excise Tariff Act 1985. During the period from December 2007 to November 2009, the appellant had manufactured gaskets for their customers by using tools viz., jigs and fixtures, molds and dies paid for by their customers, i.e. tools supplied free of charge by the buyer. The tools were manufactured by the 2 E/41286/2013 appellant and used for production of gasket for the buyers against purchase orders. The appellant had collected the cost of tools from the buyer-customers by raising excise invoices but the value of the same were neither included in the cost of production nor amortized for payment of duty on the final products manufactured by using such tools. After due process of law the learned Adjudicating Authority confirmed the demand for duty in terms of Rule 6 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 (CVR 2000)read with the proviso to Section 11A(1) of the Central Excise Act 1944, (C. Ex. Act) along with interest and equal penalty under Section 11AC of the C. Ex. Act, as shown in the Table below. TABLE

Aggrieved by the order of the Additional Commissioner, the appellant filed an appeal before the Commissioner (Appeals), who vide the impugned order has confirmed the demand, leading to the appellant filing the present appeal before us.

3. The learned counsel Ms. P. Saravana Selvi, appeared on behalf of the appellant during the oral hearing. Learned AR Shri N. Satyanarayanan, appeared for the department.

3.1 The learned counsel for the appellant stated that the tools manufactured by the appellant were not cleared outside to the Customer’s premises but were retained by the appellant in their factory for further manufacture of excisable goods cleared on payment of duty. The appellant is eligible for the benefit of Notification No.67/95–CE dated 16.03.1995. The tools were manufactured within the factory and the same had been used in relation to manufacture of final products. As per Central Excise (Valuation) Rules, 2000, the cost of the Tools has to be amortized and proportionate value has to be added in the transaction value. The appellant had paid duty on the amortized cost and raised Central Excise invoice showing full cost of the tools and had discharged duty on the said amortized value on one time basis. The appropriate duty will have to be discharged only at the time of clearance to Tools. Demanding excise duty again amounts to double taxation which is not correct. The extended time is available only in a situation where in any duty was demanded because of fraud, collusion, willful misstatement, suppression etc. with an intention to evade payment of Duty. The Show Cause Notice issued was hence time barred in terms of Section 11A(1) of Central Excise Act 1944. She has relied on the following judgments which was felt to be in their favour on this issue;

•  The Appellant places reliance on the following decisions: –

-Natraj Ceramics and Chemicals Ltd. [2004] 2004 taxmann.com 1737 (Mumbai – CESTAT)

 – CCE Vs. Bunty Foods [2008] 2008 taxmann.com 675 (Bombay)

– Sakthi Sugars Vs. CCE (2008) 230 ELT 676

– CCE Vs. Sakthi Sugars (SC)

– Ashok Iron Works Vs. CCE (2004) 168 ELT 198

– DCM Engineering Works Vs CCE (2010) 251 ELT 91

– Elcon Clipsal India Vs CCE (2002) 146 ELT 360

– Mutual Industries Limited & Jay CEE Auto Fab (P) Limited

She prayed that the appeal may be allowed.

3.2 The learned AR has reiterated the points given in the impugned order. He referred to a similar matter clarified in Boards Circular No. 170/4/96-CX, dated 23/1/96 issued from file No. 6/14/94-CX.I wherein it was stated that the proportionate cost of pattern has to be included in the assessable value of the casting in cases when such patterns are being supplied by the buyers of the casting or are got prepared / manufactured by the job worker at the cost of the buyer. He has also taken us through this Tribunal’s Final order No.40389/2023 dated 31/05/2023, in the case of M/s Best Cast IT Ltd Vs Commissioner of GST & Central Excise, (where one of us was a Member of the Bench) and stated that since an identical issue was decided by the said order in favour of Revenue, the appeal may be rejected.

4. The issue relating to invoice 1, 2, 3 and 4 as to whether the cost of tools supplied by the buyer free of charge back to the appellant, should be included as an amortised cost, when the said tools are used in the appellants factory for manufacture of components for the said buyers, in terms of Rule 6 of CVR 2000 or not, has been examined by 5 E/41286/2013 this Tribunal in M/s Best Cast IT Ltd (supra) after considering the judgements of Commissioner of Central Excise, Mumbai I Vs Mega Rubber Technologies Pvt Ltd [2016 (343) ELT 384 (Tri- Mum)] and the Larger Bench decision in Mutual Industries Ltd Vs Commissioner of Central Excise, Mumbai [2002-TIOL-CESTAT- DEL-LB]. The relevant para of the order is reproduced below;

“7.4 The appellant has referred to the Hon’ble Mumbai Tribunal’s judgment in the case of Mega Rubber Technologies (supra), where in it was held that when Central Excise duty is paid on moulds at one time or recovered by amortizing the cost of goods produces it is the same. Whereas Revenue has relied on the Larger Bench judgment passed in the case of Mutual Industries Ltd. (supra), wherein the Hon’ble Tribunal held that additional value of the moulds must necessarily go in assessing the duty payable on the finished product under excise law. We find that although the larger bench decision of the Hon’ble Mumbai in Mutual Industries Ltd. was brought to the notice of the Hon’ble Tribunal in the case of Mega Rubbers, the same was not discussed in the order. We find that the larger Bench of the Hon’ble Tribunal has addressed the issue comprehensively. The relevant portion is extracted below:-

“7. Section 4 of the Central Excises and Salt Act, 1944 provides for finding out the value of excisable goods for purposes of charging of duty of excise. As per Section 4(1)(a) the value for charging of duty of excise should be the normal price, if the price is the sole consideration for the sale. Further, Rule 5 of Central Excise (Valuation) Rules, 1975 stipulates that where the price is not the sole consideration, the value of the goods shall be based on the aggregate of such price and the amount of the money value of any additional consideration flowing directly or indirectly from the buyer to the assessee. In the instant case, the price of the finished goods has been fixed between the appellant and the customer. Can one say that the price so fixed is the sole consideration for the sale of the finished product when the mould was supplied by the customer. Without the mould supplied by the customer, which is having substantial value, the product could not have been manufactured. So it is crystal clear that the price of the finished goods was fixed by the appellant and the customer taking into consideration the supply of the mould by the customer. In other words, had the mould not been supplied by the customer, appellant could not have agreed to the price of the finished goods at the price as is evidenced by the contract entered into between them. So, the price of the finished goods fixed in the contract between the parties can safely be taken as not the sole consideration for the sale of the finished product. The other consideration is the value attributable to the use of the mould. In this view of the matter, we are not in a position to agree with the conclusions arrived at by West Zonal Bench, Mumbai in the three decisions referred to 6 E/41286/2013 earlier. With respect we approve the decision rendered by this Tribunal in Flex Industries Ltd. case (supra).”

The fact whether the tools were manufactured in the appellants factory or was outsourced by the appellant from another company would not change the legal position as per CVR 2000 so long as they were paid for by the buyer-customer. The tools manufactured and used for production of components at the cost of the buyer and against purchase orders, needs to be included in the cost of production and amortized for payment of duty on the final products manufactured by the appellant using such tools.

5. Double taxation with reference to central excise duties on goods means levying central excise taxes twice on the very same excisable product, which is not the case here. In this case the appellant pays central excise duty first on the tools, viz., jigs and fixtures, molds and dies which are capital goods as defined in CENVAT Credit Rules, 2004 manufactured by them for the buyers. Subsequently duty is paid on the final products (gaskets), manufactured by using the capital goods. Both are two separate set of excisable goods. Had they purchased the tools from the market its price would have automatically entered the price of the final product sold by them. Hence the question of double taxation does not arise.

6. The appellant has stated that they are eligible for the benefit of Notification No.67/95 – CE dated 16.03.1995 for the tools captively manufactured for the buyer and used in their factory for the manufacture of final products for the buyer. A Co-ordinate Bench of this Tribunal in Ashok Iron Works (supra) has held at para 6 that the benefit of Notification No.67/95 – CE was available to jigs, fixtures, 7 E/41286/2013 patterns and tooling irrespective of the ownership of these goods. We concur with the same. The excise duty element would hence not form a part of the amortised value of the tools and it needs to be re-worked out suitably. However, we note that the eligibility for exemption from payment of duty for the tools does not detract from amortising the cost of the tool charged to the buyer, less the duty element.

7. As regards invoices at Sl no 5 and 6 the charge is that the appellant has collected certain payments towards ‘development NVH project charges’. However, the amount collected towards rendering the services were neither included in the cost of production nor amortised for the payment of duty on the final products manufactured using the services. The appellant stated that the invoice for development charges are service activities provided along with tool manufacturing within the factory of the premises of the appellant. Excise invoice were raised by mistakes since it was a standard format, therefore, the service provided falls out of the ambit of excise duty since service tax is discharged. We find that the issue again is not whether tax has been discharged, but whether the value of goods or services which has been paid for by the buyer and used for development of the buyers tools that has been further used by the appellant for the manufacture of the final product for the said buyer has been amortised. Amortisation is understood as an accounting method for spreading out the costs of an asset over the expected period the said asset will provide value. Amortizing the value of tools viz., jigs and fixtures, molds and dies will include amortizing its total monetary value (i.e. both of the tools manufactured and services rendered to the buyer for the manufacture of the tools). The cost incurred by the buyer in such cases

8 E/41286/2013 would have to form part of the amortised cost of the final product (less the duty exemption eligible on the tools). The issue of double taxation is not a valid argument as has been discussed above. 7.1 The final issue is whether the extended time limit could have been invoked in this case. We find that the requirement of law is that mere failure or negligence in adopting the correct value and making the correct payment of duty cannot be considered as suppression of fact with intention to evade payment of duty, especially when the issue was complex. Something more is required to show that there was a positive intention to evade payment of duty. We do not find any such reason or finding in the impugned order. We hence do not find grounds to invoke the extended period and the demand for the larger period must fail.

8. The appellant has cited certain judgments, listed above, to support their stand that;

(a) The tools are eligible for exemption as per Notification No.67/95 – CE dated 16.03.1995, and;

(b) The extended time cannot be invoked. Since we have agreed to both the issues, we do not feel it necessary to discuss the judgments cited.

9. Having regard to the discussions we remand the matter back to the Original Authority for re-quantification of the duty demand for the normal period as stated above. The lower authority shall follow the principles of natural justice and afford a reasonable and time-bound opportunity to the appellant to state their case both orally and in writing if they so wish, before issuing a speaking order in the matter. The appellant should also co-operate with the adjudicating authority in

9 E/41286/2013 completing the process expeditiously and in any case within ninety days of receipt of this order. The impugned order stands modified on the said terms, and the appeal is disposed of accordingly. The appellant is eligible for consequential relief, if any, as per law.

(Pronounced in open court on 25.06.2024)