Rule 8 is applicable only if the entire clearances are captively consumed and not when part of the clearances are made to independent buyers.

Case:- M/s ULTRATECH CEMENT PVT LTD Vs COMMISSIONER OF CENTRAL EXCISE, BHAVNAGAR

Citation:- 2013-TIOL-1218-CESTAT-AHM

Brief facts:-The relevant facts that arise for consideration are that the appellant herein is a manufacturer of cement and are holding Central Excise registration and are discharging Central Excise duty on the cement cleared by them. The Revenue authorities felt that the clearances affected by the appellant to their own Ready Mix Concrete units (hereinafter referred to as RMC) and to their other units, the appellant had under-valued the clearances by resorting to valuation under Rule 8 read with Rule 9 of Valuation Rules, 2000. After investigation and recording of various statements, the authorities issued the Show Cause Notice demanding differential Central Excise duty along with interest and imposition of penalty. Subsequent to such Show Cause Notice issued by DGCEI, various Show Cause Notices were issued by the Additional Commissioner and Commissioner for the demand of differential duty. The adjudicating authority, in Appeal No. E/626/2011, has disposed the Show Cause Notices. The adjudicating authority has considered the replies made during the personal hearing. After considering all the submissions made, the adjudicating authority, vide Order-in-Original No.1 to 4/BVR/Commissioner/2011, dt.22.03.2011, confirmed the demand in respect of 4 Show Cause Notices and in respect of others as detailed below along with interest and imposed equivalent amount of penalty.

i) Appeal No. E/1284/2011:

Show cause notice No. V/15-89/Dem/HQ/2010-11, dt.03.05.2011

Period involved: April 2010 to September 2010.

Confirmed vide Order-in-Original No. 39/BVR/Commissioner/2011, dt.21.09.2011.

Differential Duty: Rs.1,29,65,096/-, interest and equivalent amount of penalty.

ii) Appeal No. E/195/2012:

Show cause notice No. V/15-18/Dem/HQ/2011-12, dt. 01.11.2011

Period involved: October 2010 to February 2011.

Confirmed vide Order-in-Original No.3/BVR/Commissioner/2012, dt.01.02.2012.

Differential Duty: Rs. 1,33,67,203/-, interest and equivalent amount of penalty.

Appellant contention:- Ld. Sr. Advocate appearing on behalf of the appellant submits:-

The clearances of cement to the appellant to own unit are for the purpose of consumption of cement in manufacture of RMC. It is his submission that the legal position as to rate of duty specified in Sr.No.1(c) of Notification No. 2/2006-CE, dt.01.03.2006 is alone applicable to the cement cleared by the appellant for captive consumption. It is his submission that the rate of duty stipulated in respect of goods mentioned under Sr.No.1(c) of the notification is a percentage of advalerom of Rs.400, or Rs.230 whichever is higher. It is his submission that for the purpose of determining amount of duty payable at the percentage of ad-valerom, and to compare it with specific rate of duty of Rs.400 per MT, appellant determined the value of the goods cleared to their own factory for captive consumption as per the provisions of Section 4 of Central Excise Act, 1944 and arrived at the value based upon the cost of production of the cement manufactured, on the premise that there is no sale between their own units. It is his submission that the appellants were of the view that the value of excisable goods in this case, which is captively consumed, is not a sale and hence Rule 8 was applied. It is his submission that the appellant's belief was also strengthened by Board's circular No.354/81/2000-Tru, dt.30.06.2000, wherein the same is clarified. He would also submit that CBE&C vide circular dt.01.07,2000 at Sr.No.5 specifically stated that the goods which are captively consumed could be valued as per Rule 8 of the Valuation Rules and hence there was no error on their part.

It is his submission that Section 4 of Central Excise Act, 1944 as it stood from 01.07.2000 read with Valuation Rules, 2000 contemplates determination of value for each removal of goods which would indicate that the transaction value should be arrived at in respect of finished goods which are sold. It is his submission that in Circular dt. 30.06.2000, CBE&C has clarified the relevance of transaction value, the clearance effected by the appellant to their sister units will not fall under the category of transaction value. It is his submission that if the clearances made to their own unit for captive consumption would not fail under the category of transaction value, then the value needs to be arrived at as per the provisions of Valuation Rules, 2000 i.e. applying Rule 8 of the said Rules.

It is his submission that Circular dt.30.06.2000 and 01.07.2002 of CBE&C are binding on the authorities under the Act and the contrary stand of the Department, which is the basis to confirm the demand of duty, is un-sustainable in law. It is his submission that the Hon'ble Apex Court, in number of judgments, has held that the Departmental officials are bound by CBE&C circular and some of the judgments, he relied upon are:-

a) CCE Vs Cadbury India Ltd 2006 (200) ELT 353 (SC) = (2006-TIOL-88-SC-CX)

b) CCE Vs Jayant Dalal Pvt. Ltd. 1996 (88) ELT 638 (SC) = (2002-TIOL-412-SC-CX)

c) Paper Products Ltd Vs CCE 1999 (112) ELT 765 (SC) = (2002-TIOL-84-SC-CX).

It is his further submission that the dispute in the present case is regarding applicability of provisions of Rule 8 of Valuation Rules as to whether would apply to the case where part of the manufactured goods are sold to independent buyers and part of which is cleared to assessee's own unit for captive consumption and the basis of the Show Cause Notices which have been confirmed by the impugned order, is contrary to the circular of CBE&C and hence not sustainable in law.

It is his submission that the adjudicating authority has relied upon the decision of Hon'ble High Court of Mumbai in the case of Indian Drugs Manufacturers' Association - 2008 (222) ELT 22 (Bom.) = (2006-TIOL-292-HC-MUM-CX) and the decision of the Larger Bench of the Tribunal in the case of Ispat Industries Ltd - 2007 (209) ELT 185 (Tri-LB) = (2007-TIOL-245-CESTAT-MUM-LB), but the said decisions are solely in-applicable to the present case as the Hon'ble High Court in the case of
Indian Drugs Manufacturers' Association was considering the issue as to whether the assessable value of the physician's samples of medicines has to be determined ,as per Rule 8 or Rule 4 of Valuation Rules and held that physician's samples of medicines are for use and not for consumption in the production or manufacture of other articles. It is his submission that hence the said judgment of Hon'ble High Court is distinguishable on facts. It is his submission that the decision of the Larger Bench of the Tribunal in the case of Ispat Industries Ltd is also not applicable in the present case as therein the Larger Bench was answering a question as to "whether the assessable value in respect of goods which are transferred to another plant of the same assessee, is required to be determined as per Rule 4 of Central Excise Valuation Rules, 2000 or as per Rule 8 of said Rules in a case where same goods are sold to independent buyers." It is his submission that the Larger Bench's view is not sustainable as the transaction value concept was not considered by the Larger Bench, the Indian Cost and Works Association of India has propounded CAS-4 certificate for the valuation of goods for captive consumption, based on cost construction method and none of the rules of circular issued by Board mentioned that Rule 8 is to be restrictively applied only to those situations where there is exclusive captive consumption. It is his submission that if view of the Larger Bench is to be followed, the intention behind introduction of transaction value and specific rule to deal with the valuation of captively consumed goods shall be rendered futile.

It is his submission that the impugned order is also disputing the cost of production considered by the appellant was incorrect as prior to 01.03.2008, the appellant have themselves shown the value of transfer to their own unit at a higher amount and reduced the same after 01.03.2008, is totally incorrect and prior to 01.03.2008, the rate of duty specified for the cement was specific rate and the value declared is only for the purpose of indicating the same to insurance companies for insurance purposes. It is his submission that the cost of production of cement captively consumed has to be determined in terms of cost accounting standards (CAS-4) developed by ICWAI.

It is also his submission that the confirmation of differential duty in the Show Cause Notice dt.9.11.2009 is without jurisdiction as the appellants have cleared the cement to their Navi Mumbai Cement Unit, Mangalore Cement Unit and Ready Mix Concrete Unit, while the proposal in the Show Cause Notice, the impugned order has confirmed the differential duty on the quantity of cement cleared by NMCU to the appellant's own RMC units either in loose or in packed condition. It is his submission that NMCU receives the duty paid cement from the appellant and take the credit of the duty paid on the entire quantity of cement and subsequently utilizes the said cement into packing them in smaller packs of 50 kgs. It is his submission that this activity is amounting to manufacture in terms of Section 2(f) of Central Excise Act, 1944 and accordingly NMCU is discharging appropriate duty. It is his submission that since NMCU availed CENVAT Credit of the duty paid by the appellant, whether the appellants were using the same for captive consumption or not, is not within the jurisdiction of the current Commissioner, as the cement cleared from NMCU was either in loose form or in packed form to their own RMC units and hence demand of duty on such cement cannot be adjudicated by the CCE Bhavnagar.

It is his submission that the demand is barred by limitation for the period beyond one year in respect of Show Cause Notice dt.09.11.2009 as there was no willful suppression or mis-statement with intention to evade payment of duty. For this proposition, he would draw our attention to the various monthly returns filed by them wherein they have indicated the clearance of cement for captive consumption.

Revenue contention:- Ld. D.R., on the other hand, would submit that there is no dispute that the appellant has valued the product cleared by him for captive consumption under the provisions of Rule 8 of valuation Rules, 2000. It is his submission that very same final product i.e. cement is cleared by the appellant in the same form i.e. in bulk form to independent buyers also. It is his submission the judgment of Larger Bench is squarely on the issue and there cannot be any doubt that the appellant is liable to discharge the differential duty. He would also submit that the claim made by the appellant regarding the demand of duty on the clearances made from NMCU is also baseless as the adjudicating authority has specifically stated that the demand is in respect of differential duty on the cement cleared from the appellant's factory. It is his submission that the extended period was correctly invoked as the appellant has changed the basis for valuation from 01.03.2008 without informing the same to the Department.

Reasoning of judgment:-The issue involved in this case is regarding whether there is under-valuation of the goods i.e. cement cleared by the appellant to their unit i.e. NMCU, MCU and RMC units. It is undisputed that the appellant cleared cement in bulk form to their units and also to independent buyers. The value adopted for independent buyers is transaction value while the value adopted to clearances made to their units is based upon the cost of production as per the provisions of Rule 8 of Valuation Rules, 2000.

Another issue to be decided is whether the adjudicating authority in this case is correct in confirming the differential duty on the cement cleared by NMCU to RMC units as his jurisdiction is only on the appellant whose factory is situated in Bhavnagar Commissionerate and also an issue of whether the Show Cause Notice dt.09.11.2009 which invoked the extended period of limitation is applicable for period beyond one year or not.

On perusal of the records, we find that there is no dispute as to the fact that the appellant had cleared the bulk cement to their units by discharging duty liability based upon the value worked out by them as per Rule 8 of Central Excise Valuation Rules, 2000 as they were under the impression that the clearances made to their units will fall under the category of Rule 8 of Valuation Rules, 2000. We find that there is no dispute that the appellant is clearing the very same product i.e. bulk cement to independent buyers at rate which is considered as a transaction value. An identical question was raised before Larger Bench in the case of Ispat Industries Ltd (supra). On perusal of the said judgment, we find that in that case, it was also undisputed that the assessees therein were transferring part of its production (20%) of HR coils to its unit at Taloja, Kamothi and Kamleshwar and the balance production was being sold to independent buyers. It was also not disputed that the value on which duty has been discharged by them at the time of clearance of goods to their units was the same, on which the duty was discharged by them in respect of clearances to independent third parties. In that case, the Revenue disputed the valuation on the ground that the cost of production of the said goods manufactured by the assessee needs to be applied. The Larger Bench, after considering the submissions made, was specifically considering the issue from the point of Rule 8 of the Valuation Rules and had recorded the following.

"5. We have considered the rival submissions and are of the view that the assessee is correct in contending that provisions of Rule 8 would apply only in a case where its entire production of a particular commodity is captively consumed. This is evident on a plain reading of Rule 8 of the valuation rules, which reads as under-

"Where 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 shall be one hundred and ten
per cent of the cost of production or manufacture of such goods"

(emphasis supplied).

If the intention was not to restrict the applicability of Rule 8 to cases where the entire production was being captively consumed, the Rule would have simply stated "where excisable goods are consumed by an assessee himself or on his behalf in the manufacture of other articles" instead of preceding the above expression with the words "where the excisable goods are not sold". This view is also supported by the judgment of the jurisdictional High Court in the case of Indian Drug Manufacturers Association v. Union of India, wherein the Court held that Rule 8 applies in a situation where goods are not sold but are cleared 'exclusively' to be used in consumption or for manufacture of other articles. We also agree with the contention of the assessee that Rule 8 will apply only in two situations, (a) where the goods are consumed by him in the same factory (captive consumption) or (b) where such goods, are transferred to another factory for consumption in the manufacture of other articles on behalf of the assessee. In this case, it is not the case of the revenue that the goods were transferred to other units for manufacture of other articles on behalf of the assessee/appellant, i.e. the Dolvi Unit. We agree with the assessee's contention that the expression 'assessee', wherever it appears in the Central Excise Rules, applies to a particular factory, which is why different units belonging to one company are separately registered and separately assessed to duty. Since the assessee in the present case is the Dolvi plant and it is not the revenue's case that the other three units of the company to whom HR coils were transferred were undertaking further manufacturing operations on behalf of the Dolvi Unit, the provisions of Rule 8 will not apply. therefore, hold that Rule 8 is inapplicable in the instant case.

It was also noted that in the present case the application of Rule 4 is being disputed by the Revenue not on the ground that the said rule is inapplicable to the present case but on the ground that a more specific provision in Rule 8 is available to enable determination of the assessable value. As discussed above, the provisions of Rule 8, in our view, are not applicable to the present case and therefore the value determined by the assessee under Rule 4 deserves acceptance.

7. they also agreed with the submission of the assessee that even if both the rules, i.e. Rule 4 and Rule 8, were applicable, it would only be logical to read and apply the various rules in the Central Excise Valuation Rules in a sequential manner. Though the Central Excise Valuation Rules, 2000 do not specifically prescribe such sequential application of various rules, the same, in our view, is the only reasonable way to read these rules. Any other interpretation would only lead to confusion and chaos. Since the applicability of Rule 4 is not really in dispute, there was no need to look further and regardless of the applicability or otherwise of Rule8, the assessable value should have been determined in terms of Rule 4 of the Valuation Rules.

The conclusion that was drawn in the present case would lead to determination of a value will not only be reasonable but also consistent with the provisions of Section 4 of the Central Excise Act. We would, at this stage, draw support from the judgment of the Supreme Court in the assessee's own case, as reported in 2006 (202) E.L.T. 561 = (2006-TIOL-127-SC-CUS), wherein the Court applied "The Gunapradhan Principle" in interpreting the Customs Valuation Rules. keping in mind the following observations of the Court in coming to our above conclusion:
"26. In our opinion if there are two possible interpretations of a rule, one which subserves the object of a provision in the parent statute and the other which does not, we have to adopt the former, because adopting the latter will make the rule ultra vires the Act.

27..................

36. in our opinion, the Gunapradhan principle is fully applicable to the, interpretation of Rule 9(2). Rule 9(2) is subservient to Section 14. We must, therefore, interpret it in such a way as to make it in accordance with the main object that is contained in Section 14 of the Customs Act. It may be that in isolation Rule 9(2) conveys some other meaning, but when it is read along with Section 14 of the Act, it must be given a meaning which is in accordance with the object of Section14. The object of Section 14 is 'primary' whereas the conditions in Rule9 (2) are the 'accessories'. The 'accessory' must, therefore, serve the 'primary'."

In view of what we have observed above, we answer the reference in the following terms :

(a) the provisions of Rule 8 of the Valuation Rules will not apply in a case where some part of the production is cleared to independent buyers;

(b) the provisions of Rule 4 are in any case to be preferred over the provisions of Rule 8 not only for the reason that they occur first in the sequential order of the Valuation Rules but also for the reason that in a case where both the rules are applicable, the application of Rule 4 will lead to a determination of a value which will be more consistent and in accordance with the parent statutory provisions of Section 4 of the Central Excise Act, 1944."

It can be seen from the above reproduced portion of the judgment that Larger Bench has specifically come to the conclusion that provisions of Rule 8 of Valuation Rules will not apply in a case where some part of the production is cleared to independent buyers. As is already recorded, in the present case, there is a sale of bulk cement to independent buyers at a value which is higher than the value arrived at by the appellant for discharge of duty liability of the cement cleared by them to their own units. On merit, the judgment of the Larger Bench will apply and the value adopted by the appellant for the clearances to independent buyers should be considered for arriving at the value of the duty liability to be discharged by them for removal/clearance of bulk cement to their own units like NMCU, MCU, and RMC.

There is strong force in the contentions raised by the ld. Counsel that the Show Cause Notice dt.09.11.2009 has demanded the duty liability for the period March 2008 to May 2009 is hit by limitation at least for the period of one year prior to the date of issuance of Show Cause Notice. On perusal of the records, the appellant has been filing monthly returns to the lower authorities from March 2008 onwards. The lower authorities have not raised any, query on this issue. The appellants had every reason to believe that the board's circular would be applicable to them and hence sought to value of the goods based upon the cost of production and as per provisions of Rule 8 of Central Excise Valuation Rules. Accordingly, it was held that the demand of duty prior to the period of one year from the date of issuance of Show Cause Notice dt.09.11.2009 is hit by limitation and that portion of demand is liable to be set aside and we do so. All other show cause notices being within limitation, our findings on merits would apply.

As regards the claim made by the appellant that the differential duty has been demanded from them by CCE, Bhavnagar as an adjudicating authority for the clearances made by them from NMCU, MCU and RMC units, seems to have merit. The appellants have claimed before the authorities that the bulk cement cleared by them to their NMCU units was repacked by the NMCU unit after taking the CENVAT Credit and has discharged the duty liability on the cement which has been packed and cleared by NMCU unit on the premise that such repacking would amount to manufacture. If that be so, the differential duty confirmed by the adjudicating authority on the clearances made from NMCU to various other RMC units of the appellant either after repacking or as such, seems to by beyond jurisdiction. At this juncture, they said that any differential duty demanded and confirmed by CCE Bhavnagar as an adjudicating authority on clearances which has taken place at NMCU premises seems to be without jurisdiction. The adjudicating authority has not given any reasoning to this proposition and only has summarily confirmed the differential duty as if these clearances are made from the appellant's unit situated within Bhavnagar Commissionerate, these findings are very sketchy. Suffice it to say that this proposition of the appellant seems to have force, since there are no findings, we direct the adjudicating authority to re-quantify the demand after considering the calculations of clearances made from NCMU unit of appellant.

That is to say, it was held against the appellant on merits i.e. the valuation of Bulk cement needs to be valued on the basis of sale value to independent buyers, but differential duty cannot include the clearances effected by NCMU unit of the appellant, after repacking or sale as such of Bulk cement received from the appellant; as NCMU unit is doing so, after availing CENVAT Credit as such Bulk cement, as NCMU unit is not situated in the Bhavnagar Commissionerate. To that extent, impugned orders are set aside and matters remanded for requantification/recalculation of differential duty.

Since there is a need to do re-calculation/re-quantification of differential duty, it was held that the penalties proposed to be imposed on the appellant under the provisions of Rule 25 of Central Excise Rules, 2002 also needs to be reconsidered. For this limited purpose, we remand the matters back to the adjudicating authority, while holding that on merit, the appellant has no case, but has made out a case on limitation at least in respect of Show Cause Notice dt.09.11.2009, and has made out a case on jurisdiction for the clearances made from NCMU unit, after receipt of bulk cement from appellant's unit.

Demand:-Appeal was partly allowed on limitation.

Comment:-The analogy of this case is that the provisions of the Rule 8 of the Valuation Rules are applicable only when all the clearances are captively consumed and the said Rule cannot be applied when part of the clearances are also made to independent parties.

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