Whether Valuation Rule 8 applicable even when goods are sold to related party at the price sold to independent buyers ?

PJ/Case law/2013-14/1868

Case:-GANGOTRI ELECTROCASTINGS LTD. VERSUS COMMISSIONER OF C. EX. & S.T., PATNA

Citation:- 2013(293) E.L.T. 395 (Tri.-Kolkata)

Brief Facts:-These two appeals are filed against the Order-in-Original No. 01/MP/AYUKT/2008, dated 31-3-2008 by M/s. Gangotri Electro castings Ltd. (hereinafter referred to GEL) in Appeal E/A/349/2008 and M/s. Gangotri Iron and Steel Company Ltd. (hereinafter referred to GISCO) in Appeal No. E/A/350/2008.
Briefly stated the facts of the case are that the appellant, M/s. GEL are engaged in the manufacture of MS ingots falling under Chapter Sub-Heading 7206 10 90 (7204.90) of the First Schedule to Central Excise Tariff Act, 1985. The said manufactured goods were cleared to their related Company, M/s. GISCO for captive consumption in the manufacture of MS Bars. A Show Cause Notice was issued to M/s. GEL alleging short payment of duty due to undervaluation of goods cleared to their related company viz. M/s. GISCO. It is alleged that the clearance to related company was a removal of goods for consumption by them. Therefore, the assessable value ought to have been determined under Section 4(1)(b) of the Central Excise Act, 1944 read with Rule 9 read with Rule 8 of the Valuation Rules, 2000 that is, @ 115% or 110%, as the case may be, of the cost of production or manufacture of such goods. Consequently, differential duty amounting to Rs. 1,79,95,066/- for the period from 2002-03 to 2006-07 was demanded from M/s. GEL, besides proposing penalty under the provisions of the Central Excise Act and Rules framed thereunder, and also penalty against M/s. GISCO was proposed under Rule 26 of the Central Excise Rules, 2002. On adjudication, learned Commissioner has confirmed the duty of Rs. 1,79,95,066/- against M/s. GEL and imposed equivalent penalty on them under Section 11AC of the Central Excise Act, 1944 and also penalty of Rs. 1,00,000/- under Rule 25 of the Central Excise Rules, 2002. Also, he has imposed penalty of Rs. 1,00,000/- on M/s. GISCO. Hence these appeals.

Appellant Contentions:-The Appellants has not pressed the issue of ‘related person’, as alleged in the Show Cause Notice and confirmed by the Commissioner. He has submitted that even if both these appellants are related to each other, the goods transferred from M/s. GEL to M/s. GISCO for consumption by the latter, are liable to be assessed on the basis of comparable prices of similar goods sold to independent buyers. He has submitted that in the present case, M/s. GEL manufactured MS Ingots which were sold by them to independent customers and a part of the manufactured goods were also cleared to M/s. GISCO. He has submitted that the price at which the goods were sold to the independent customers and the price at which the goods were cleared to M/s. GISCO, were almost same in majority cases and sometimes higher and they had never cleared the goods to M/s. GISCO at a price lower than the selling price at which such goods were sold to the outside independent customers. He has submitted that the principle of law governing determination of value of goods cleared for captive consumption to a related unit or to own unit, when similar goods are also sold to independent buyers, is no more res integra and the issue has been settled by the Hon’ble Larger Bench of the Tribunal in the case of Ispat Industries Ltd. v. CCE, Raigad reported 2007 (209)E.L.T. 185 (Tri.-LB). He has submitted that the said principle had also been followed by the Tribunal in subsequent cases namely -
(a)   2009 (237)E.L.T. 319 (Tri.-Kol.) - SPS Steels Rolling Mills Ltd. v. CCE, Bolpur;
(b)   2008 (222)E.L.T. 84 (Tri.) - Lloyds Metals Engineers Ltd. v. CCE, Nagpur;
(c)   2010 (251)E.L.T. 571 (Tri.-Kol.) - SAIL v. CCE & Customs, BBSR-II.

Respondent Contentions:-Per contra, learned AR (Commissioner) reiterated the findings of the Adjudicating Authority. He has submitted that under the transaction value regime, the assessable value of the goods are determined on the basis of each transaction, as laid down under the amended Section 4 of the Central Excise Act brought into effect from 1-7-2000. It is his submission that the quantity of goods that were not sold but cleared for captive consumption or to related buyer for consumption, ought to have been determined, in absence of a transaction value, under Section 4(1)(b) of the Central Excise Act read with Rule 9 read with Rule 8 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000. He has further submitted that in the present case, since the goods are cleared for consumption to the related, unit the same are assessable under Rule 9 read with Rule 8 of the Valuation Rules, 2000 as rightly held by the learned Commissioner in the impugned Order.

Reasoning of Judgment:-Heard both sides and perused the records. Question of valuation of goods cleared for home consumption when similar goods sold to the independent buyers, had been referred to the Larger Bench in the case of Ispat Industries Ltd. (supra). Precisely, the issue referred to the Larger Bench was - “whether the assessable value in respect of the plant which are transferred to another plant of the same assessee is required to be determined as per Rule 4 of the Central Excise (Valuation) Rules, 2000 (as claimed by the appellant), or as per Rule 8 of the said rules (as claimed by the Revenue), in a case where the same goods are also sold to independent buyers?” After detailed discussion of case laws on the subject, the question was answered by the Larger Bench at para 9 of the Order, which reads as follows :-
“9. 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.”
We find that in the present case, there is a categorical claim of the appellant that the price at which the MS ingots were cleared by M/s. GEL to M/s. GISCO at the relevant time, were also sold to independent buyers. Hence, following the ratio laid down by the Larger Bench in the case of Ispat Industries Ltd. (supra), the assessable value of the goods cleared by M/s. GEL to M/s. GISCO ought to have been determined on the basis of sales to independent customers as per Rule 4 of the Valuation Rules, 2000 and not under the provisions of Rule 9 read with Rule 8 of the Valuation Rules, as held by the Adjudicating Authority in the impugned Order. We find that the learned Commissioner has neither examined the claim of the appellant nor recorded any finding that during the relevant period, the price at which MS Ingots were sold to independent customers were adopted for clearance of similar goods to their related company, M/s. GISCO for consumption. Hence, the said facts need verification. Consequently, the impugned Order passed by the Commissioner is set aside and the cases are remanded to the Adjudicating Authority for the limited purpose of verification of the said facts. Needless to mention that the appellants be given a fair opportunity to present their case.

Decision:-Appeals are allowed by way of remand.

Comment:-The gist of this case is that valuation of goods cleared to related party that are used by the related party as captive consumption for the manufacture of final products is not governed by the provisions of Rule 8 of the Valuation Rules if the said goods are also sold to independent buyers and the price at which these are sold to independent buyers is taken for clearances made to the related party.

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