Whether valuation Rule 8 applicable even if part of goods sold to independent buyers?

Case:- SUPREME PETROCHEM LTD. VERSUS COMMISSIONER OF CENTRAL EXCISE, RAIGAD

Citation:- 2014(306) E.L.T. 638 (TRI.-MUMBAI)

Brief Facts:- There are nine appeals filed by the appellant, M/s. Supreme Petrochem Ltd. The details of these appeals, the orders appealed against, the period of demands, the duty demands confirmed and the penalties imposed are given in the table below :

Sr. No.	Period	SCN dated	O-I-O dated	O-in-A dated	Demand (Rs.)	Penalty (Rs.)	Appeal No.
(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)
1.1	1-4-2001 to 31-10-2005	4-4-2006	No. 09- 10/MS/(09- 10)/commr/RGD/07-9 dated 9-5-2007	-----	1,92,63,411/-	1,92,63,411/-	E/1087/07
1.2	1-11-2005 to 30-6-2006	28-11-2006	No. 09- 10/MS/(09- 10)/commr/RGD/07-9 dated 9-5-2007	-----	11,33,434/-	11,33,434/-	E/1087/07
2.1	1-7-2006 to 31-12-2006	6-7-2007	Raigad/ADC/05 to 06/08-2009 dated 29-8-2008	YDB/152/RGD/2009 dated 12-11-2009	14,82,048/-	5,00,000/-	E/185/10
2.2	1-1-2007 to 30-6-2007	18-1-2008	Raigad/ADC/05 to 06/08-2009 dated 29-8-2008	YDB/152/RGD/2009 dated 12-11-2009	9,53,640/-		E/185/10
3.	1-7-2007 to 31-12-2007 .	6-8-2008	Raigad/ADC/30/2008-09 dated 11-3-2009	YDB/162. RGD/2010 dated 23-3-2010	17,57,140/-	1,00,000/-	E/1105/10
4.	1-1-2008 to 30-9-2008	6-2-2009 & 5-8-2009	Raigad/ADC/20-21/2008-09 dated 31-12-2009	YDB/397/RGD/2010 dated 16-7-2010	32,93,615/-	20,00,000/-	E/1699/10
5.	1-10-2008 to 30-6-2009	4-11-2009	Raigad/ADC/04/10-11 dated 15-6-2010	YDB/158/RGD/2011 dated 22-2-2011	14,27,301/-	5,00,000/-	E/856/11
6.	1-7-2009 to 31-3-2010	19-7-2010 & 16-12-2010	Raigad/ADC/96-97/10-11 dated 14-3-2011	BC/112/RGD/2012-13 dated 25-6-2012	15,05,944/-	3,00,000/-	E/1460/12
7.	1-4-2010 to 30-9-2010	21-4-2011	Raigad/ADC/100/11-12 dated 5-12-2011	US/461/RGD/2012 dated 3-8-2012	14,03,998/-	3,50,000/-	E/l615/12
8.	1-10-2010 to 31-3-2011	31-10-2011	Raigad/ADC/20 9/11-12 dated 9-3-2012	US/712/RGD/2012 dated 29-10-2012	7,01,872/-	1,75,000/-	E/85584/13
9	July, 2002 to January, 2006	6-3-2007	32/SLM/ (32)-Commr /Rgd/07-08 dated 5-12-2007	----	1,13,59,261/-	1,13,59,261/-	E/225/08
				TOTAL	4,42,81,664/-	3,56,81,106/-

In all these appeals a common issue is involved; therefore, they are being taken up together for consideration and disposal. The appellant, M/s. Supreme Petrochem Ltd., is a manufacturer of various grades of Polystyrene. Scrutiny of the records maintained by the appellant revealed that the appellant had cleared the said goods to their own sister concerns situated at Daman, Pondichery, Noida, etc. and the sister concerns are related persons as defined in Section 4(3)(c) of the Central Excise Act, 1944. The department was, therefore, of the view that the transaction prices on which the appellant has discharged the duty liability cannot be taken as assessable value and the assessable value needs to be re-determined in terms of Section 4(1)(b) of the Act read with Rules 8 and 9 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000. The said rules provide for determination of value on the basis of cost of production and the assessable value as per the said Rule is 115%/110% of the cost of production. On this basis, based on the cost of production furnished by the appellant, the assessable values were reworked and duty demands were raised vide show cause notices mentioned above. These show cause notices were adjudicated by orders mentioned above and the demands were confirmed. However, in the first order relating to the period 1-4-2001 to 30-6-2006, the adjudicating authority vide order dated 9-5-2007 came to the conclusion that inasmuch as the goods have not been sold exclusively to the related persons but have been sold to others as well, Rule 8 will not apply and the appropriate Rule for determination of value would be Rule 4 of the Central Excise Valuation Rules, by taking into account the value of such goods sold and delivered at the time nearest to the time and place of removal of the goods in question. Accordingly, on the basis of value of such goods sold to independent buyers, the adjudicating authority re-determined the value and confirmed the duty demands. However, in the subsequent orders, these were also not done and the duty demands were confirmed based on the cost of production plus 10%/15%. Aggrieved of the same, the appellant is before the Tribunal.

Appellant Contentions:-The learned Counsel for the appellant submits that the entire exercise started pursuant to Hon’ble Supreme Court’s decision in the case of CCE, Bhubaneshwar-II v. IFGL Refractories Ltd. - 2005 (186) E.L.T 529 (S.C.) wherein the Hon’ble Apex Court was considering a situation where the goods were sold by the manufacturers to certain buyers who were having advance licences. The buyers of the goods surrendered their advance licences in favour of the manufacturers/suppliers. The question before the Hon’ble Apex Court was whether the transaction price could be accepted or the consideration by way of surrender of licences should be quantified in monetary terms and treated as an additional consideration for the sale of goods. The Hon’ble Apex Court held that the surrender of the advance licences in favour of the manufacturers/suppliers is an additional consideration that needs to be added to the transaction price to arrive at the assessable value and duty should be discharged accordingly. Prior to the Supreme Court’s decision, as per the decision of the Tribunal in the same case, such additional consideration was not required to be added. In view of the above position, the show cause notices issued subsequent to the Supreme Court’s decision invoking the extended period of time cannot be sustained in law, inasmuch as the appellant was under the bona fide impression that such additional consideration will not form part of the assessable value in terms of the provisions of Section 4 of the Act read with the Central Excise Valuation Rules, 2000. Only after the Supreme Court’s decision, the legal position became clear and settled. Accordingly, it is submitted that the duty demands confirmed invoking extended period of time cannot be sustained in law. The learned Counsel further submits that in the present case, all the supplies made to the sister concern were not against surrender of advance licences. Further, the supply to sister concerns accounted for only about 5% of the total sales effected by the appellant. Even in respect of the sales to the sister concerns only 75% of the sales were against the surrender of advance licences and the balance 25% supplies were not against surrender of any advance licences. In these situations, the question of invoking Rule 8 or Rule 9 of the Central Excise Valuation Rules, 2000 for determination of assessable value as proposed in the show cause notice would not arise at all. The learned Counsel further submits that in the order dated 9-5-2007, the learned adjudicating authority has considered this issue and came to the conclusion that Rule 8 will not apply. Thereafter, he proceeded to determine the assessable value under Rule 4 wherein the prices of similar goods sold by the appellant to independent buyers were taken as the basis and accordingly, the adjudicating authority reworked the duty demand. However, the appellants were not put to notice nor were they given any opportunity to make submissions in respect of revised ground taken by the adjudicating authority for determination of assessable value under Rule 4. It is also their contention that even while making the computation, the adjudicating authority has committed certain errors while choosing the prices under Rule 4. If the adjudicating authority had taken the prices at which the prices were sold to independent buyers prior to the removal of the goods in question, it could be seen that the prices declared by the appellant in respect of supplies made to their sister concerns would be higher than those declared in respect of sales made to independent buyers and therefore, bulk of the demands would go away. It is also contended that while making the comparison, the adjudicating authority has made an error by taking the prices of different grades of polystyrene which were not the supplies made to sister concern. Accordingly, it is contended that the matter has to go back to the adjudicating authority for reconsideration afresh and if an opportunity is given, the appellant would be able to submit documentary evidences showing that the prices adopted by them in respect of supplies made to sister concerns were in fact higher than those charged for supplies made to independent buyers. It is also submitted that inasmuch as there is no suppression on the part of the appellant, the question of imposition of penalty also would not arise.

Respondent Contentions:-The learned Additional Commissioner (AR) appearing for the Revenue on the other hand reiterates the findings of the adjudicating authority and submits that the adjudicating authority has been very fair in adopting the price charged for supplies made to independent buyers as the basis for determination of duty demand. However, he has no objection if the case is remanded back to the adjudicating authority to rectify any error which might have crept in while re-computing/re-determining the duty demands.

Reasoning of Judgment:-CESTAT have carefully considered the submissions made by both the sides.
CESTAT observe that Rule 8 of the Valuation Rules, which has been invoked in the show cause notice for determination of value is not the appropriate rule, especially when the supplies made to the sister concerns formed only a small portion of total supplies effected by the appellant manufacturer. In Ispat Industries Ltd. - 2007 (209) E.L.T. 185 (Tri.-L.B.), a question arose before the Tribunal whether the assessable value in respect of goods which were transferred to another plant of the same assessee is required to be determined as per Rule 4 of the Valuation Rules, 2000 or as per the Rule 8 of the said Rules, in a case where the same goods were also sold to independent buyers. The Larger Bench held that Rule 8 would apply only in a case where the entire production of a particular commodity is captively consumed.Similarly, the Hon’ble High Court of Bombay in the case of Indian Drug Manufacturers Association - 2008 (222) E.L.T 22 (Bom.) held that Rule 8 would apply in a situation where the goods are not sold but are exclusively used in consumption for manufacture of other articles. Both the above decisions lay down that in such cases, the value has to be determined under Rule 4 of the Valuation Rules wherein the value of similar goods sold to independent buyers are available and that should form the basis for determination of value in respect of goods sold to sister concerns for captive consumption. Therefore, following these decisions, we hold that valuation in the instant case has to be done in terms of Rule 4 of the Central Excise Valuation Rules, 2000 and not under Rule 8 as proposed in the show cause notice.
As per the said Rule 4, “the value of the excisable goods shall be based on the value of such goods sold by the assessee for delivery at any other time nearest to the time of the removal of goods under assessment, subject, if necessary, to such adjustment on account of the difference in the dates of delivery of such goods and of the excisable goods under assessment, as may appear reasonable”. Therefore, the value of such goods sold by the appellant to the independent buyers at the nearest point of time to the goods under clearance should be the basis for re-determination of value. It is immaterial whether such value is prior to the removal of the impugned goods or after removal of the impugned goods. Only condition is that it should be nearest to the time of the removal of the goods for which duty is being demanded. Further, if such value needs adjustment for any reason (say) if the grade/quality is different or the quantum of sale is different, adjustments will have to be made from the value of such goods to determine the assessable value of the goods under clearance. If more than one price to independent buyer is available, the lowest of such price should be taken as the basis. Inasmuch as the appellant was not put to notice about the basis for determination and the same was done only as part of the impugned order (by way of annexure, it would be appropriate to remand the case back to the adjudicating authority for fresh consideration for putting the appellant to notice with regard to the basis adopted for determination of assessable value under Rule 4 of the Central Excise Valuation Rules, 2000. The appellants are also at liberty to submit evidences by way of invoices for the supplies made to independent buyers which are nearest in time to removal of goods supplied to various sister concerns. They are also at liberty to submit reasons for any adjustment, if required to be made, on account of difference in the quality or the grade of the goods supplied, quantity of the goods supplied or other relevant reasons which may have an impact on the price of the goods. Inasmuch as the entire show cause notice has been issued consequent to the decision of the Hon’ble Apex Court decision in the case of IFGL Refractories case(cited supra), the question of invoking the extended period of time would not arise. The ratio of this Tribunal’s decision in the case of KDL Biotech Ltd. - 2013 (288) E.L.T. 81 (T) would apply to the facts of the present case also. Consequently, the question of imposition of penalty under Section 11AC also would not arise.
Thus, the appeals are allowed by way of remand. Needless to say that the appellant should be heard before passing the de novo order.

Decision:-Appeal allowed by way of remand.

Comment:-The gist of this case is that Rule 8 of the Valuation Rule would apply only in a case where the entire production of a particular commodity is captively consumed as pronounced by Larger Bench of the Tribunal in the case of Ispat industries. However, as of now, the law has been amended and ratio of the above cited decision has been undone with the consequence that every transaction is to be valued individually. Therefore, even if the entire production is not captively consumed, Valuation Rule 8 would apply for valuing the goods captively consumed by the assessee.

Prepared by: Hushen Ganodwala

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