Whether amortization of cost of moulds on basis of their life expectancy and number of parts likely to be manufactured proper?

PJ/Case Law/2013-14/1984

Case:-MACHINO PLASTICES LTD. VERSUS COMMISSIONER OF C.EX., DELHI-III

Citation:-2013(296) E.L.T. 356 (Tri.-Del.)

Brief Facts:-The appellants are manufacturers of motor vehicle parts bumpers for Maruti Udyog Ltd. The moulds/dies for manufacture of bumpers were supplied by M/s. Maruti Udyog Ltd. for which the appellant were to make payment to M/s. Maruti Udyog Ltd. of the excise duty paid on the moulds/dies immediately on receipt of moulds/dies and the value portion of the moulds/dies was to be paid in installments along with 15% interest. The dispute in this case is in respect of front bumper and Rear Bumper of Zen Classic model of the cars. There is no dispute that the appellant determined amortized cost of the moulds and dies based on total value of the moulds/dies, their life expectancy and number of parts likely to be manufactured during the life of the moulds/dies. On this basis, the appellant arrived at amortization cost of Rs. 787.92 per piece in respect of front bumper and Rs. 610.71 per piece in respect of rear bumper. There is no dispute that this amortized cost of the moulds/dies for the bumpers was included in the value on which the duty was paid. But appellant supplied the front and Rear Bumpers of Zen Classic to Maruti Udyog Ltd. from 1999 to Sept, 2002 only. By that time duty had been paid on amortized cost of Rs. 6.2 crores of the total cost of Rs. 10 crores. After Sept, 2002, Maruti Udyog Ltd. stopped purchasing the bumpers for Zen Classic as they had stopped the manufacture of this model and the balance amount payable by the appellant to Maruti Udyog Ltd. in respect of moulds/dies was waived and written off. The Department, however, is of the view that instead of amortizing the cost of moulds/dies of bumpers over their normal life expectancy period, the amortization should be done over period during which these moulds/dies were actually used i.e. during period from 1999 to Sept, 2002 and on this basis amortization cost must be re-determined and included in the assessable value. On this basis the Department alleged that there is short payment of duty and accordingly a show cause notice was issued for demand of allegedly short paid duty of Rs. 13,86,474/- along with interest and also for imposition of penalty. The show cause notice also sought recovery of Cenvat credit of Rs. 1,59,22,068/- in respect of written off value of the moulds/dies.
The show cause notice was adjudicated by Commissioner vide order-in-original dated 29-8-2008 by which duty demand of Rs. 1,38,60,474/- was confirmed against the appellant along with interest and penalty of equal amount was imposed on them under Section 11AC of Central Excise Act, 1944. However, the Cenvat Credit of Rs. 1,59,22,066/- was dropped.

Appellant Contentions:-Ld. counsel for the appellant, pleaded that there is no dispute that the appellant had included the amortized cost on moulds/dies in the assessable value on which the excise duty has been paid, that amortized cost had been determined on the basis of life expectancy of the moulds/dies and number of parts which could be manufactured during the life expectancy of the moulds/dies, that the Department seeks to revise the amortized cost and demand differential duty on the basis that the amortized cost should be determined on the basis of the actual period of use and the parts actually manufactured during the period of use and not the parts which can be manufactured during the total life expectancy of the moulds/dies that this view of the Department is totally incorrect and contrary to Board's Circular No. 170/4/96-CX, dated 23-1-1996 that in terms of Circular dated 23-1-1996 only proportionate cost of patterns is to be included in the assessable value of the castings even in car where such patterns are being supplied by the buyers of the casting or are get prepared or manufactured by the job worker at the cost of buyer, that in the Circular it has been clearly stated that in cases where there is difficulty in apportioning the cost of patterns, apportionment can be made depending on the expected life and capability of the pattern and the quantity of castings that can be manufactured from it and thus working the cost to be apportioned per unit, that same view has been taken by the Tribunal in the case of South East Electronic Components Pvt. Ltd. v. CCE, Meerut reported in 2003 (160) E.L.T. 389 (Tri. Del.) and also in the case of Flex Industries Ltd. v. CCE, Meerut reported in 1997 (91) E.L.T. 120 (Tri.), that in view of this there is no justification for the Department's stand that the amortization cost of moulds/dies is to be determined on the basis of the actual period of use of and the number of parts manufactured during that period and not on the basis of parts which can be manufactured during total life expectancy of the moulds/dies and that in view of this, the impugned order is not sustainable.

Respondent Contentions:-Ld. Departmental Representative, defended the impugned order by reiterating the findings of the Commissioner in it and pleaded that when moulds/dies were used only up to Sept, 2002, for determining the amortization cost, only the number of parts manufactured with the use of moulds/dies up to Sept.'2002 only is to be considered. He therefore pleaded that there is no infirmity in the impugned order.

Reasoning of Judgment:-We have considered the submissions from both the sides and perused the records. There is no dispute that the appellant have paid duty on the value which included the amortization cost of the moulds/dies and that the amortization cost has been determined on the basis of the total cost of the moulds/dies and the total number of parts which could be manufactured by using the moulds/dies during their total life expectancy. We find that in terms of the Board's Circular No. 170 /4/96-CX, dated 23-1-1996, the amortization cost of patterns which are used for making castings is to be determined on the basis of their expected life and capability of the patterns and the quantity of castings that can be manufactured from them and thus working the cost to be apportioned per unit. Same view has been taken by the Tribunal in the case of South East Electronic Components Pvt. Ltd.(Supra). We also find that the Tribunal judgment in the case of Flex Industries Ltd. c. CCE, Meerut (Supra) has been uphold by a five member Bench of the Tribunal in case of Mutual Industries Ltd. v. Collector of Central Excise, Mumbai, reported in 2000 (117) E.L.T. 578 (Tri.). In view of the settled legal position on this issue, there is absolutely no justification for the Department’s stand in this case.
In view of the above discussion, the impugned order is not sustainable. The same is set aside. The appeal is allowed.

Decision:-Appeal is allowed.

Comment:-The substance of this case is that the cost of moulds can be amortized and included in the assessable value of the goods on the basis of their expected life and number of parts likely to be manufactured by it and it is not necessary to amortize such cost on the basis of actual parts manufactured by the moulds.

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PJ/Case Law/2013-14/1984

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