K.S.S. Abhishek Safety Systems Pvt. Ltd. Vs Principal Additional Director General ( CESTAT Delhi)
Summary: The CESTAT considered two appeals arising from Order-in-Original No. 70-92-CE/2023 dated 29 March 2023 concerning the inclusion of the notional cost of drawings, designs and specifications supplied free of charge by Maruti Suzuki India Limited (MSIL) to its component vendors. The vendors used the specifications to develop their own drawings, dies and moulds for manufacturing vehicle components. The Department proposed to include notional drawing costs in the assessable value under Rule 6 of the Central Excise Valuation Rules, 2000, basing the computation on running and lump-sum royalty paid by MSIL to Suzuki Motor Corporation, Japan. Although the adjudicating authority dropped the running-royalty demand, it confirmed a demand of Rs.21,19,762/- in one appeal by treating lump-sum royalty as attributable to the specifications.
The Tribunal followed the decision in Denso India Pvt. Ltd. Vs Additional Director General (Adjudication), Final Order Nos. 55140-55337/2024 dated 12 March 2024, which held that specifications provided at the request-for-quotation stage did not constitute additional consideration for the sale of vendor-manufactured components. The royalty paid by MSIL related to licensed information and trademarks for vehicles and parts rather than the purchase of specific component drawings. Finding the precedent directly applicable, the Tribunal set aside the impugned order and allowed both appeals, pronounced on 10 April 2024.
Cases Discussed:
- Denso India Pvt. Ltd. Vs Additional Director General (Adjudication), Final Order Nos. 55140-55337/2024 dated 12.03.2024 (CESTAT Delhi) – Followed.
FULL TEXT OF THE CESTAT DELHI ORDER
1. The appellants have assailed the order-in-original no.70-92- CE/2023 dated 29.03.2023, whereby the duty was partly confirmed and partly dropped. Since both these appeals arise out of the same impugned order, they are being disposed of together.
Appeal No.E/55230 of 2023
2. The appellant is engaged in the manufacture of motor vehicle parts for M/s. Maruti Suzuki India Ltd.(‘MSIL’), who are manufacturer of passenger cars. ‘MSIL’ is a subsidiary company of M/s. Suzuki Motors Corporation (‘SMC’), Japan and had entered into royalty agreements with ‘SMC’ for production, sales, distribution and marketing of their products. Under the licensed agreement, MSIL is making royalty payments to SMC as lump sum royalty and running royalty for the right to use licensed information and licensed trade mark pertaining to vehicles. For manufacture of parts/components, MSIL provided drawings/designs/specifications in the form of papersheet as well as CAD/CAM without charging anything from their vendors. Based on the said drawings, designs and specifications provided by MSIL, the appellant was developing or getting developed die/moulds/designs. These dies and moulds are used to manufacture specific part and cost of dies/moulds, which were mortised determining the assessable value. The cost of these designs/drawings/specifications were not included by the appellant while determining the assessable value of the parts/components manufactured and cleared by them as they were supplied free of cost by MSIL. The appellant was the Original Equipment Manufacturer (OEM). The Department was of the view that the notional cost of specifications in the form of drawings and designs supplied by the MSIL to the appellant free of cost should be added in the assessable value of the final products in terms of Rule 6 of the Central Excise Valuation Rules, 2000. The duty demand was quantified on the two grounds:-
“I. By taking a percentage of the amount of running royalty paid by Maruti to Suzuki Motor Corporation, Japan, and
I. Lump-sum royalty paid by Maruti to Suzuki Motor Corporation, Japan as the notional cost of the specifications in the form of drawings and design, provided by Maruti.”
3. Show cause notice dated 15.05.2019 was issued to the appellant for the period 2014-2015 to 2017-2018 under Section 11 A(4) of the Central Excise Act, 1944 (‘Act’) whereby demand of excise duty along with penalty and interest was raised.
4. The Adjudicating Authority by the impugned order decided 23 show cause notices (including the two show cause notices involved in the two appeals here), whereby the duty demand relating to running royalty was dropped, however, the amount of lump sum royalty was held to be includible in the assessable value as notional cost of specifications provided by MSIL. Consequently, demand of Rs.21,19,762/- was confirmed against the appellant. Being aggrieved, the present appeal has been filed before this Tribunal.
Appeal No.E/50008/2014
5. The present appeal also arises from the same order-in-original and the facts of the present case are also identical as the appellant is Original Equipment Manufacturer for MSIL, Haryana and MSIL, Gujarat. The appellant is engaged in the manufacture of Graphics, Stickers, Name Plates and Black Out Tape. MSIL is providing drawings and designs, technical know-how in the form of paper sheet as well as CAD/CAM without charging any amount from their vendors. Based on the said drawings, designs, specifications provided by MSIL, the appellant developed the drawings and designs themselves in the factory premises for manufacturing the required products. MSIL is purchasing the goods manufactured by the vendors strictly as per these drawings provided by MSIL. The Director of the appellant company, Shri Manmohan in his statement recorded on 21.12.2018, inter alia stated that only hard copy of drawing was received by them from MSIL along with request for quotation. No CAD drawing was provided by MSIL. They make their own drawings/artwork and get approved from MSIL which is used for production of the excisable goods. Show cause notice dated 6.03.2019 was issued to the appellant for the period February 2014 to June 2017 which was adjudicated by the impugned order and common order was passed in respect of all the show cause notices. Hence the present appeal has been filed by M/s Monochem Graphics Pvt. Ltd.
6. We have heard the learned counsels for the appellant in both the appeals and also the learned Authorised Representative and have perused the records of the case. We find that the issue involved is whether the notional cost of specifications/drawings and designs supplied free of cost by MSIL is includible in the assessable value of parts or components of motor vehicles manufactured by the appellant and on that basis, the demand towards the differential amount of central excise duty is sustainable.
7. Learned counsel for the appellant has placed on record the Final Order Nos.55140-55337/2024 dated 12.03.2024 in the case of Denso India Pvt. Ltd. Vs. Additional Director General (Adjudication), Directorate General of GST Intelligence, New Delhi, whereby the Principal Bench decided almost 200 appeals on the identical issue after considering at length the provisions of Section 4 of the Act and Rule 6 of the Valuation Rules, 2000 and allowed the appeals filed by the assessee. The relevant paras of the judgement are as under:-
“35. What is important to note is that the appellant had to prepare detailed drawings and designs for which it received technical support from its present company Denso Corporation. License Agreements were entered into between the appellant and Denso Corporation for grant of a non-exclusive right to the appellant to manufacture, use and sell the licensed articles. In terms of the License Agreements, the appellant paid running royalty to Denso Japan at the rate of 3 % of the net sales of the licensed articles and the appellant paid service tax on this amount. If the specifications and designs supplied by the Maruti were sufficient for the manufacture of parts and components, there would have been no necessity for the appellant to seek technical support for manufacture in the form of detailed designs and specifications and pay a huge royalty. The manufacture of the spare parts and components by the appellant was, therefore, not possible from the specification and designs supplied by Maruti. The manufacture of the parts and components was possible only from the detailed drawings prepared by the appellant.
36. Even if Maruti had to spend some amount for getting these drawings by making payment of royalty to Suzuki Maruti Corporation, Japan, the position would not change as this cannot be said to form an additional consideration for sale of parts or components. It also needs to be noted that these specification drawings provided by Maruti to the potential vendors cannot be said to be used in the production of the components or necessary for the production of the components in terms of rule 6 of the 2000 Valuation Rules. Thus, clauses (ii) or (iv) to Explanation (1) of rule 6 of the 2007 Valuation Rules cannot be invoked in the facts and circumstances of the present case.
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42. In the present case, Maruti provided specifications of the parts or components to be fitted in the motor vehicles manufactured by Maruti to the potential vendors. The parts or components have necessarily to be manufactured as per the requisite dimensions of the parts or components so that they can be fitted in the vehicles manufactured by Maruti. It is for this reason that Maruti shared the requirements at the ‘Request for Quotation’ stage. The detailed drawings and designs were prepared by the Research and Development Division of the appellant with the help of technical support received from Denso, Japan. Maruti does not have the necessary technology to manufacture the products. As such, the technology has been patented by the parent company of the appellant, namely Denso, Japan for which the appellant has also been paying running royalty amount for receipt of technical support. The appellant has also included the cost incurred towards preparation of detailed drawings and designs in the assessable value of the final products.
43. To appreciate this issue, reference can also be made to the specifications provided by Maruti to the potential vendors for ‘generator assembly’ for manufacture of alternators. It bears the endorsement ‘THIS IS A DESIGN SPECIFICATIONS DRAWING’. It is also mentioned that ‘this drawing specifies the conditions that Suzuki requires from suppliers on shape, dimensions, functions, qualities etc., part(s)/assembly’ and ‘suppliers shall be responsible for designing the part(s)/assembly to meet Suzuki’s requirements shown in the drawing without infringing upon any third party’s intellectual property rights and submit the drawing.
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50. The inevitable conclusion, therefore, that follows from the aforesaid discussion is that the notional cost of drawings and designs supplied free of cost by Maruti to the vendors cannot be included in the assessable value of the parts and components manufactured by vendors and cleared to Maruti for the purpose of payment of central excise duty.”
8. We are of the considered view that the decision in Denso India Pvt. Ltd. (supra) squarely applies to the facts of the present case. MSIL is making vehicles of several models in its factories. For manufacturing these vehicles, MSIL is required to purchase various OE components from several vendors. The components for any vehicle have to be made as per the OEM requirement only. The vehicle components are not general stand-alone items which can be manufactured as per any design/drawing /specification, but have to be made as per OE specifications. Only then the same can be fitted to the vehicle except for proprietary items like nuts, bolts etc. Once the vendor is finalized, selected and price is agreed, the vendor starts manufacturing the component according to the drawings/designs/specifications given to him by MSIL. MSIL is not selling drawings/designs/specifications to the component vendor, i.e. the Appellant, and is thus, not charging any amount for the same. A License Agreement was entered into between MSIL and SMC with respect to manufacturing different models. As per the License agreement entered into between MSIL and SMC, the royalty paid by MSIL to SMC is not for the purchase of any drawing/design from SMC, but it is a consideration for the non-exclusive right to use the Licensed Information and Licensed Trademarks for the engineering designs, development, manufacture, testing etc. of products and parts. The royalty payment is made for the non-exclusive right to use the Licensed Information and Licensed Trademarks pertaining to whole vehicle or its parts and not for/any specific component or mould or die to be used in the vehicle or its parts.
9. In view of the judicial pronouncement, the impugned order needs to be set aside. Both the appeals are accordingly allowed.
[Order pronounced in open court on 10th April, 2024]
