Transfer of goods from one unit to another is valued at actual cost of production excluding notional loading

ITC Limited Vs Commissioner of GST & Central Excise (CESTAT Chennai)

CESTAT Chennai held that in case of Inter-unit transfer of goods for captive consumption, the actual cost of production (100% of the cost of production), of the raw material procured from the Bhadrachalam unit of the appellant [excluding the notional loading under Rule 8 – 15% / 10%] is the cost of raw material in the hands of the Chennai unit

Facts- The point for consideration before the Commissioner is whether or not the value of paper received from Bhadrachalam Unit is 115%/ 110% of cost of production or just 100% in the hands of appellants.

Conclusion- We find that the legal issues dealt with in the impugned order have already been decided by this Tribunal, for the earlier period, in Final Order No 40094/2023 28/02/2023. Wherein, it was held that in the case of Inter-unit transfer of goods for captive consumption, the actual cost of production (100% of the cost of production), of the raw material procured from the Bhadrachalam unit of the appellant [excluding the notional loading under Rule 8 – 15% / 10%] is the cost of raw material in the hands of the Chennai unit, for determining the cost of production of packaging material manufactured by the Chennai unit. The percentage of loading on such cost of production, mandated by provisions of Rule 8 for remittance of excise duty by the Bhadrachalam unit cannot not however be considered as comprised in the cost of the raw material consumed for manufacture of packaging material and thus constituting the cost of production at the Chennai unit.

Held that it has not been brought to our notice that the said Final Order, which pertains to the past period, has been either varied, modified or set aside as of date. Hence, we find no reason to deviate from the same for demands pertaining to the subsequent period.

FULL TEXT OF THE CESTAT CHENNAI ORDER

These appeals are filed by M/s. ITC Ltd. against Order-in-Appeal No. 183, 184 and 185/2016 (CXA-I) dated 20.9.2016 passed by the Commissioner of Central Excise (Appeals – I), Chennai.

2. The impugned order deals with three Orders-in-Original pertaining to the appellant as detailed below.

3. The points for consideration before the Commissioner (Appeals) in the above orders, which are also the points for determination listed in the appeal, are as under:-

(i) Whether or not the IDSC debit notes would form part of the cost of paper and paper board received from their Bhadrachalam Unit?

(ii) Whether or not the value of paper received from Bhadrachalam unit is 115%/110% of cost of production or just 100% in the hands of the appellant?

(iii) Whether or not the unabsorbed overheads due to idle capacity of machine be loaded to the cost of production and the cost of closing stock?

The impugned order also decides the issue relating to the adjustment of excess duty paid against duty short paid on finalization of provisional assessment against the appellant. They are however not pressing for a decision on this issue, as the matter on merits is in their favour and they want this point to be left open for a decision in an appropriate case.

4. The learned counsel Ms. L. Maithili appeared for the appellant and stated that the appellant, at its Packing and Printing Unit at Thiruvottiyur, Chennai (Chennai Unit) manufactures packaging materials. These packaging materials are made out of paper and paper board manufactured at the appellant’s paper unit at Bhadrachalam. The packaging materials manufactured at the Chennai Unit are, inter alia, supplied to other manufacturing units of the appellant including its cigarette factories, for use in packaging of products/goods manufactured at such manufacturing units.

5. The demand for differential duty arose out of a dispute as regards valuation of the packaging materials manufactured in the Chennai Unit of the appellant and substantially transferred to its cigarette factories, where the same were used for the manufacture of cigarettes, and also to the appellant’s units engaged in other business which used the same in the manufacture of their respective goods like food, agarbathi, clothes, etc.

6. The three issues on which the demand for differential duty was confirmed by the orders of the Deputy Commissioner have since been decided in the appellant’s favour by the Tribunal Vide Final Order No. 40094/2023 dated 28.2.2023 in respect of the period 2001 – 2003 – 04 involving identical facts. She drew our attention to the interim order dated 11.2.2014 and subsequent interim order dated 12.2.2016. The Commissioner (Appeals) accepted that all the three issues on merits stood covered by the orders of this Tribunal for the prior period. However, he decided issues (i) and (ii) against the appellant because on issue (i) the Revenue had already preferred an appeal before the Hon’ble Supreme Court and on issue (ii) an appeal was being filed by the Revenue before the Hon’ble Supreme Court. Issue (iii) was decided in the appellant’s favour since the order of this Tribunal on the issue appeared to have become final.

7. The learned AR Ms. K. Komathi appeared for the Revenue and has reiterated the findings in the impugned order.

8. Heard both sides. We find that the legal issues dealt with in the impugned order have already been decided by this Tribunal, for the earlier period, as pointed out by learned counsel for the appellant. The relevant portion of the order Final Order No 40094/2023 28/02/2023 is as follows:-

“The above appeal was listed for hearing on 05.11.2013. The Tribunal vide Interim Order No. 37/2014 dated 11.02.2014 had decided the Issues No. 1 and 3 therein and had set aside the demand of duty along with interest and penalty in respect of these issues.

“Issue No. 1:- Whether the IDSC/ICNC debit note raised by Bhadrachalam Unit have to be considered as a component of cost of raw materials of the appellant.

…

Issue No. 3:- Whether the unabsorbed overheads due to idle capacity have to be included in the cost of production”

2. With regard to Issue No. 2, the Tribunal referred the matter to the Larger Bench. Issue No. 4 was as to whether the demand was barred by limitation; the Tribunal at paragraph 8.1 of its order had observed that as the Issues No. 1 and 3 were decided on merits and the Issue No. 2 having been referred to the Larger Bench, there was no requirement to discuss the issue of limitation and penalty.

3. The Issue No. 2, which was referred to the Larger Bench, reads as under:-

“(i) Whether, in the case of inter-unit transfer of goods for captive consumption, the entire value (i.e. 115% / 110% of the cost of production) OR the actual cost of production (i.e. 100% of cost) excluding notional loading (i.e. 15% / 10%) of the goods manufactured by the one unit, would be the cost of raw material of the another unit (who used the goods in the manufacture of another article) for the purpose of determining value under Rule 8 of Valuation Rules and CAS-4 issued by ICWAI, for transferring the goods to their other unit for further use.

(ii) Whether the decision of Chennai Bench in the case of C.C.E. v. Eveready Industries Ltd. – 2011 (274) E.L.T. 564 (OR) the decision of Mumbai Bench in the case of Tata Iron and Steel Co. Ltd. v. C.C.E. – 2013-TIOL-770 had enunciated the correct position of law on the above issue.”

4. The Larger Bench vide Interim Order No. 18/2016 dated 12.02.2016 answered the above reference, holding that the decision of the Chennai Bench of the CESTAT rendered in Final Order No. 542/2010 dated 11.05.2010 in the Revenue’s appeal against M/s. Eveready Industries Ltd. and the subsequent decision of the same Regional Bench as reported in 2011 (274) E.L.T. 564 represent the correct position in law. The findings of the Larger Bench are reproduced as under:-

“20. In the light of our foregoing analyses, discussion and reasons, we answer the reference as under:

(a) In the case of Inter-unit transfer of goods for captive consumption, the actual cost of production (100% of the cost of production), of the raw material procured from the Bhadrachalam unit of the appellant [excluding the notional loading under Rule 8 – 15% / 10%] is the cost of raw materia l in the hands of the Chennai unit, for determining the cost of production of packaging material manufactured by the Chennai unit. The percentage of loading on such cost of production, mandated by provisions of Rule 8 for remittance of excise duty by the Bhadrachalam unit cannot not however be considered as comprised in the cost of the raw material consumed for manufacture of packaging material and thus constituting the cost o f production at the Chennai unit;

(b) In view of the conclusions recorded in (a) above, we hold that the decision of the Chennai Division Bench of CESTAT in the Final Order dt. 11.5.2010 in Revenue’s appeal in Eveready Industries and the subsequent decision of the same Regional Bench in the judgment reported in 2011 (274) ELT 564 represent the correct position in law. The decision of the Mumbai Division Bench in Tata Iron and Steel Co. Ltd. v. C.C.E., Thane-II – 2013- TIOL-707 = 2014 (300) ELT 571 (Tri. – Mumbai) does not represent correct view regarding application of Rule 8 of the Valuation Rules and the same is overruled.”

5. The matter was remitted by the Larger Bench for disposing of the matter in accordance with the conclusions arrived at by the Larger Bench.

6. Applying the dictum laid by the Larger Bench in its Interim Order No. 18/2016 dated 12.02.2016, we hold that the demand, interest and penalties in respect of Issue No. 2, which is extracted at paragraph 3 hereinabove, cannot sustain and requires to be set aside, which we hereby do. Issues No. 1, 2 and 3 are therefore answered in favour of the assessee. We direct that the Interim Order No. 37/2014 dated 11.02.2014, passed by the Tribunal in the appeal, be read as part of this Final Order. ”

9. We find that all the issues listed above have been discussed and disposed of vide Final Order dated 28.2.2023 referred supra. ‘Issue No1’ of the Tribunal’s Interim Order No. 37/2014 dated 11.02.2014, cited above, (which is to be read as a part of the Final Order dated 28.02.2023) relates to point (i) at para 3 above and similarly ‘Issue No 3’ of the said Interim Order relates to point (iii) above. Point no (ii) at para 3 above which relates to Issue 2, was decided by Final Order No 40094/2023 dated 28/02/2023 itself. All the Issues i.e. No. 1, 2 and 3 dealt with in the Final Order were answered in favour of the assessee. It has not been brought to our notice that the said Final Order, which pertains to the past period, has been either varied, modified or set aside as of date. Hence, we find no reason to deviate from the same for demands pertaining to the subsequent period.

10. Considering the above, the issues at Sl. No. (i), (ii) and (iii) listed at para 3 of this order are answered in favour of the appellant. The impugned order is set aside and the appeals are allowed with consequential relief, if any, as per law.

(Pronounced in open court on 16.3.2023)