C.C.E.-Ahmedabad-ii VERSUS Leamak Healthcare P Ltd

Excise Appeal No.11686 of 2015

(Arising out of OIO-AHM-EXCUS-002-COMMR-24-14-15 dated 30/03/2015 passed by

Commissioner of Central Excise-AHMEDABAD-II)

 

C.C.E.-Ahmedabad-ii

VERSUS

Leamak Healthcare P Ltd

WITH

Excise Appeal No.11176 of 2015

(Arising out of OIO-AHM-EXCUS-002-COMMR-24-14-15 dated 30/03/2015 passed by

Commissioner of Central Excise-AHMEDABAD)

Leamak Healthcare P Ltd ……..Appellant

VERSUS

C.C.-Ahmedabad

AND

Excise Appeal No.11178 of 2015

(Arising out of OIO-AHM-EXCUS-002-COMMR-24-14-15 dated 30/03/2015 passed by

Commissioner of Central Excise-AHMEDABAD)

Itc Ltd

VERSUS

C.C.-Ahmedabad

 

APPEARANCE:

Shri B.V. Kumar, Advocate & Shri PP Jadeja, Consultant for the Assessee

Shri Ghanasyam Soni, Joint Commissioner (AR) for the Revenue

CORAM: HON’BLE MEMBER (JUDICIAL), MR. RAMESH NAIR

HON’BLE MEMBER (TECHNICAL), MR. RAJU

Final Order No. A/ 10030-10032 /2023

DATE OF HEARING: 28.09.2022

DATE OF DECISION: 10.01.2023

RAJU

These appeals have been filed by M/s. Leamak Healthcare P Ltd and

M/s. ITC Ltd.

1.2 M/s. Leamak Healthcare P Ltd. (LHL) are engaged in the manufacture

of confectionary items on behalf of M/s. ITC Ltd. on job work basis. As per

the agreement entered between LHL and ITC, the packing material has been

supplied by ITC and the goods manufactured by the LHL were handed over

to ITC at factory gate. The LHL was paying Central excise duty on the value

arrived at on the basis of raw material cost plus packing material cost plus

conversion cost. Prior to June, 2005 the LHL was discharging duty on MRP

basis under Section 4A of the Central Excise Act, 1944.

1.3 A show cause notice was issued by revenue alleging that ITC and LHL

have interest directly or indirectly in the business of each other and

therefore, the two are related in terms of Section 4(3)(b) of the Central

Excise Act, 1944 and therefore, the assessable value should be governed by

Rule 9 of Central Excise Valuation (Determination of Price of Excisable

goods) Rules, 2000. Consequently, demand of central excise duty was raised

against LHL and notice for imposing penalty was issued to both the LHL and

ITC. The said demand was confirmed by Order-In-Original dated 10.08.2010

holding that LHL and ITC were related in terms of Section 4(3)(b)(iv) of the

Central Excise Act, 1944. The penalty was also imposed on both LHL and

ITC. The matter was challenged by both the parties before tribunal and

tribunal vide order no. A/100002-100003/2014 dated 01.01.2014 set aside

the order and remanded the matter back to the original adjudicating

authority with following observations :-

11. In view of the above facts though mutuality of interest is not

established but it has been correctly held by the adjudicating authority

that the judgment of Hon’ble Supreme Court in the case of M/s Ujagar

Prints (Supra) cannot be made applicable to the present proceedings

because the present case is clearly distinguishable from the facts and the

principles laid down by Apex Court for valuation of the goods in case of

manufacture of goods on job work basis. In the case of M/s Ujagar Prints

only one of the several materials i.e., grey fabrics was supplied to the job

worker whereas in the present case all the raw materials and packing

materials were supplied by ITC. Various gift articles were also supplied

by ITC for packaging, the machinery worth more than Rs.7 crores

required for manufacturing of confectionery was supplied by ITC on rent

of Rs. 12,000/- per annum in the present proceedings whereas the

machinery belonged to M/s Ujagar Prints in the case before Apex Court.

In the case of M/s Ujagar Prints the job worker was at liberty to

manufacture goods for any client on job work and was not restricted to a

particular client as is the case in the present proceedings. As already held

the revenue is not able to establish that there is mutuality of interest in

view of the monetary gain and flow back to both the appellant and M/s

ITC. One way interest has been held by various pronouncements as not

the conclusive proof of two individuals being related. In the present

proceedings before us appellant will be interested in getting work from

M/s ITC as he is getting more financial gains from M/s ITC but it is not

coming out anywhere in the case records as to have M/s ITC has

financially gained from the appellant in the transactions. There is a

clause in the agreement that M/s ITC at any time can get the work

entrusted to the appellant, done from others. Therefore the provisions of

Rule 9 cannot be pressed into service in the present proceedings.

However, at the same time, for reasons recorded above in the present

case valuation of confectionary manufactured by M/s Leamak can not be

resorted to as per the principles laid down by Apex Court’s decision in the

case of M/s Ujagar Prints (supra). In this case the valuation of goods is

required to be decided by the adjudicating authority under the provisions

of Rule 11 of the Central Excise Valuation (Determination of Price of

Excisable Goods) Rules 2000 applicable at the relevant time. We

accordingly remand the case back to the adjudicating authority to

determine the value of the goods as per the provisions of Rule 11 of the

Valuation Rule 2000. Needless to say that appellants should be given an

opportunity to present their case in de-novo proceedings, before taking a

final view on the issue.

The Commissioner in the remand proceeding again confirmed the demand of

central excise duty amounting to Rs.2,48,06,064/- along with interest under

Section 11AB of the Central Excise Act, 1944, penalty under Section 11AC of

the Central Excise Act read with Rule 25(1) of Central Excise Rules, 2002

was also imposed on LHL and a penalty of Rs.60 lacs was imposed on ITC

under Rule 26(1) of Central Excise Rules, 2002. Aggrieved by the said order,

the LHL and ITC are in appeal before this tribunal. Revenue is also in appeal

against the said order.

2. Learned Counsel for LHL and ITC argued that the matter was

remanded by tribunal with specific directions to do valuation under Rule 11

of CV Rules. Rule 11 of CV Rules reads as under:-

Rule11. If the value of any excisable goods cannot be determined under

the foregoing rules, the value shall be determined using reasonable

means consistent with the principles and general provisions of these

rules and sub-section (1) of section 4 of the Act.

He argued that the said direction of the tribunal has not been followed by

the lower authorities. He argued that Rule 11 of CV Rules clearly lays down

that the value is required to be determined using reasonable means

however, the manner of determination should be consistent with the

principles and general provisions of the valuation rules. He argued that the

goods manufactured by LHL are not sold by them therefore, value cannot be

determined under Rule 4 to 8 of the Valuation Rules. He further argued that

the tribunal has already held that LHL and ITC are not related and therefore,

the transaction cannot be done under Rule 9 also. He argued that Rule 10

deals with sales through interconnected undertaking and therefore, since

LHL and ITC are not interconnected undertaking Rule 10 can also not be

invoked.

2.1 Learned counsel argued that the following are the factors identified

which have influenced the assessable value of the goods supplied by

LEAMAK to ITC Ltd.

(i)

Providing of machinery by ITC valued at Rs.7.38 Crores

approximately, to Leamak

(ii)

Employees of ITC deployed at Leamak.

(iii)

Payment of Rs.25,88,257/- received from ITC towards 50% of

the cost of moulds.

(iv)

Interest free advance of Rs.49,00,000/- given by ITC to Leamak.

(v)

Supply of free gifts by ITC worth Rs.1.5 Crores.

Learned counsel argued that the ITC provided machinery valued at Rs.7.38

approximately to Leamak under Machine Hiring Agreement dated

13.12.2004 at an annual hire charges of Rs.12,000/-P.A. which was

periodically renewed up to 01.04.2009 with certain changes in the schedules

made from time to time which involved additions of certain assets and also

range of products to be manufactured. The most important aspect of this

agreement was that Leamak shall deliver the confectionary to ITC ex-factory

and deliver the same to the transporter nominated by ITC.

2.2 Learned counsel further argued that the agreement dated 13.12.2004

was amended from time to time and the last agreement was 01.04.2009.

The common features of all the agreements entered into on 13.12.2004,

20.05.2005, 01.07.2007, 11.12.2008 and 01.04.2009 are as follows:-

 Leamak shall manufacture confectionary as per weight and

specification as given in the P.O. placed by ITC and the know-how

given by ITC.

 The price of the finished products will be indicated in Annexure 2

inclusive of sales tax, other taxes, duties, etc. The Central Excise duty

paid by Leamak will be reimbursed at actual after receipt of a debit

note by ITC.

 The raw materials / packing materials required for use will be in

accordance with specifications given by ITC who would give list of

approved suppliers.

 If there is a delay in supply, ITC is entitled for the discount of 0.50

Paise / kg. on the agreed price.

 Leamak will arrange for the moulds for the manufacture of

confectionary.

 Leamak shall deliver the confectionary to ITC ex-factory and deliver

the same to the transporter nominated by ITC.

 ITC shall have the right at all times to inspect the premises of Leamak

including during the preparation, production, packaging of the

confectionary without any notice.

 The relationship between Leamak and ITC under the agreement is on a

principal to principal basis.

Except for certain minor changes relating to the price of the product per kg.

the basic features of the agreements were the same.

2.3 He pointed out that In terms of Annexure 2 to the Agreement dated

1.9.2005 the manufacturing charges were paid at Rs.12/- per kg. till

31.10.2005 and thereafter the manufacturing charges were at Rs.13.50 /

per kg for first 412 MTs of confectionary manufactured and supplied in a

month and Rs.9/- per kg. for the quantity over and above 412 MT in the

month after installation of machinery provided by ITC in June 2006.

2.4 He argued that irrespective of the dual rates of manufacturing

charges, 13.50 / per kg. was only taken for arriving at the assessable value

for discharging C.E. Duty. To put it differently, the dual rate had no bearing

on the assessable value for discharging C.E. Duty and this is an admitted

fact in the SCN and the Special Audit Report given by the Cost Accountant.

2.5 He pointed out that as far as ITC is concerned, the investment of

Rs.7.38 Crore approx. on the machinery installed at Leamak will be recouped

over a period of time in the form of depreciation under the IT Act and also in

the form of reduction in the price if the production is more than 412 MT. The

hire charges of Rs.12,000/- P.A is only incidental since an agreement

without some consideration is not legally enforceable. He argued that

Leamak is discharging duty at the assessable value of Rs. 13.50 irrespective

of the price at which the goods are dispatched to ITC. He argued that it is

settled law that the cost of moulds / dies / machinery supplied by the buyer

is not includable in the A.V. However, the value of such capital goods is

required to be amortized and factored in the A.V. In this regard, he relied

on the following judgments:-

 Eastern Bakeries P. Ltd v CCE -2013(293) ELT 593(T);

 CCE Bangalore v. CAMPCO-2006(199) ELT 630 (T-Bang);

 Denso Kirloskar v CCE Bangalore-2005 (190) ELT 204 (T-Bang)]

2.6 He further pointed out that employees of ITC have been at Leamak for

quality validation of raw materials / packing materials which are directly

received at Leamak’s premises from the suppliers. The salaries of these

employees are paid by ITC and no costs on this account are borne by

Leamak. This is in terms of the agreements entered into between Leamak

and ITC. He argued that if the buyer has deputed staff to ensure quality

control that cannot be a ground for holding that the price of the assessee at

which the goods are cleared with the buyer is not the normal price. He relied

on the following judgments:-

 JJ Confectionery P. Ltd. v CCE-2007(210) ELT 196(T-Bang);

 OCP India P.Ltd.-2003(156)ELT 378 (T-Kol);

 CIMMCO Ltd. v CCE 1994(74)ELT 687 (T)

2.7 He argued that payment of Rs.25,88,257/- by ITC towards 50% of the

cost of moulds, this amount was paid by ITC during the year 2002-2003

and the said moulds were exclusively used in the manufacture of

confectionary. This transaction took place much before the impugned period,

viz., 2005-2007 and as such has no bearing to the present case. In a five

member bench decision in the case of Mutual Industries Ltd., vs. CCE 2000

(117) ELT 578 (T-LB) it was held that if advance was received against

moulds and dies, notional interest on such advance is not includable in A.V.

However, the cost of moulds and dies should be amortized and included in

the A.V. During 2003-04, the agreement was Buy-Sell model and the

transaction value has been arrived at as mentioned in Annexure 2 to the

agreement. However, duty was being discharged on the value of Rs.13.50

per Kg.

2.8 He further argued that interest free advance of Rs.49,00,000/- was

given by ITC to Leamak in the year 2003 and 2005 (October 2003;

Rs.30,00,000/- and August 2005; Rs.19,00,000/-) towards working capital

needs with an understanding that the said advance will be recovered by ITC

from the manufacturing charges payable to Leamak. He submits that this

transaction took place before the impugned period, viz., 1.9.2005 to March

2007. It may be pertinent to note that the said amount of Rs. 49,00,000/- is

less than the monthly average conversion charges of Rs. 70,00,000/-

approx. received by Leamak from ITC. No evidence was placed on record to

show that notional interest on such advance has resulted in lowering of

price. The Hon’ble Supreme Court in the case of CC vs. Rural Engineering

Co., – 2005 (184) ELT 132 (SC) (3 member bench), laid down the ratio and

this decision was followed in the case of Mohan Aluminum vs CCE – 2007

(216) ELT 562 (Tri.) [42-43] in which it was held that the E.D. has to allow

the extent of benefit obtained by the assessee on the interest free loan

obtained by him and to that extent only, the price should be loaded for the

purpose of determining A.V.

2.9 He pointed out that the amount of Rs. 25,88,257/- received towards

the cost of 50% of the moulds and the amount of Rs.49,00,000/- received

towards working capital requirement was prior to the material period

involved in the present case. Even otherwise, the said amounts were

received from ITC have no bearing on the transaction value of the

confectionary declared for the purpose of discharging duty and the said

transaction value. It is settled law that if the advance taken has no nexus

with the price of the goods and if the advance taken has not influenced the

price of the goods, then the interest on the same is not includible in the

Assessable Value. He relied on the following judgments:-

 CCE v Rural Engineering co. Ltd – 2005(184) ELT 132(SC);

 Mohan Aluminum vs CCE – 2007 (216) ELT 562 (Tri.)]

2.10 He further pointed out that they supply free gifts by ITC worth Rs.1.5

Crore to be cleared along with goods manufactured by LHL. It is now settled

law that giving of free gifts as an incentive for sales promotion and packed

with the finished goods for free supply to buyers is not includible to arrive at

the assessable value in this connection. In this regard he placed reliance on

the following judgments:-

 Oswal Fats & Oils v CCE – 2003(156) ELT 112 (T-Del)]

 Pace marketing Specialties Ltd v. CCE Meerut – 2003(153) ELT 621 (T

Del)

2.11 He argued that Cost certificates were issued by M/s. Shome and

Banerjee, Cost Accountants, Kolkata. The cost certificates indicate the

conversion cost of the impugned goods manufactured by Leamak during the

period 1.9.2005 to 31.3.2006 is Rs.13.50 per kg. The Cost Accountant

appointed by the Department in his Special Audit Report vide Paras 6.1.2.

and 6.1.2.1 observed as follows:

“Details of product-wise consumption of items of inputs provided by

Leamak by M/s. Shome & Banerjee, Cost Accountants have tallied,

except for free goods provided by Leamak (sic) for packing the same in

the product packs during the course of manufacture, with the

certificates”.

2.12 He further argued that the following cost elements are not includible

in the assessable value :

 Cost of production which was not included by Leamak

 Outward freight from Leamak to ITC

 Marketing spends by ITC

 Fixed cost of ITC

He argued that as far as outward freight from Leamak to ITC is concerned

the confectionary is handed over to the transporters nominated by the ITC

at factory gate at Leamak. The Hon’ble Supreme Court in the case of Escorts

JCB Limited vs. CCE – 2002 (146) ELT 31 (SC) have held that if the sale of

goods had taken place at the factory gate and therefore, the place of

removal was not the premises of the buyer. In view of the provision of

Section 23 and Section 39 of the Sale of Goods Act, 1930, it was found that

the goods to be treated as delivered to the buyer and property and

possession of the goods passed on to the buyer when the goods were

handed over to the transporter. In such a case, element of freight and

transit insurance were not be included in the normal value of the goods.

Similar decisions were given by the Tribunal in other cases. Reference is also

invited to the following decisions:

 CCE v. Accurate Meters-2009 (235) ELT 581 (SC):

 CCE Service Tax Delhi v Quick heal Technologies Ltd – Civil appeal No.

5167 of 2022 dated 5.8.2022]

2.13 He further pointed out that with regard to Marketing Spends by ITC,

the expenditure is in the nature of Post Clearance Charges and were incurred

by ITC for the purposes of popularizing the brand name of the impugned

products, viz., Candyman and Mint-o. The expenditure relating to marketing

spends (marketing costs) were not incurred by Leamak but were incurred

solely by ITC Ltd. In the light of the judicial decisions, marketing costs

incurred by the buyers are not to be included in the assessable value of the

job worker and the Learned Commissioner has grossly erred in including the

said marketing spends, while re-determining the assessable value,

particularly since Leamak have no legal enforcement rights on ITC for

incurring the marketing spends by ITC. The Tribunal in the case of Kenwell

Pvt., Ltd., vs CCE 2005 (189) ELT 457 (Tri.) inter alia answered the issue

and held that:

“Whether advertisement and publicity charges, borne by the

dealers/buyers are to be excluded from the assessable value?

However, where the brand name/copyright owner gets his goods

manufactured from outside (on job work or otherwise), the expenditure

incurred by the brand name/copyright owner on advertisement and

publicity charges, in respect of the said goods, will not be added to the

assessable value, as such expenditure is not incurred on behalf of the

manufacturer (assessee).”

The above decision was upheld and maintained by the Hon’ble Supreme

Court as reported 2006 (197) ELT A192 (SC). This position was also clarified

in CBEC vide Circular F.No.354/81/2000-TRI dated 30.6.2002 [2000 (119)

ELT T22]

2.14 He further pointed out that the Institute of Cost And Works

Accountants of India in CAS 22 “Cost Accounting Standard” on

manufacturing cost published by the Institute in Para 4.2. clarified that

“Administrative Overheads in relation to Marketing, Projects Management,

Corporate Office or any other expense not related to manufacturing activities

shall be excluded from the manufacturing cost”. Further, the IC&WA, New

Delhi in their clarificatory letter No. Tech/05/2007 dated 11.5.2007

addressed to CC, Ahmedabad in response to a letter No.MP/PI-V/Ing-

20/0506 Pt-1/2451 dated 9.4.2007 stated that “Marketing spends and fixed

cost of ITC is not includable in the assessable value of the impugned goods

cleared by Leamak to ITC”.

2.15 He argued that the differential duty demanded in this case covers the

period Sept 2005 to March 2007. In this case a Show Cause Notice was

issued on 8.7.2009. In respect of four SCNS issued to Leamak on 2.6.2004,

7.12.2004, 3.6.2005 and 14.10.2005, the Department was fully aware of the

Manufacturing Agreements between the Appellants and ITC and in the said

SCNS, the valuation of the confectionary manufactured and cleared by the

Appellants was never disputed by the Department. Therefore the demand is

barred by Limitation.

2.16 He pointed out that in the instant case, viz., ITC, the Appellants, were

not made as Respondents during the Denovo Proceedings and no notice was

issued to them to appear for Personal Hearing. P.H notices were issued only

to Leamak and not to ITC. Copies of the PH Notices issued to Leamak and

fixing the dates of hearings on 21.8.2014; 10.9.2014; 26.9.2014; 29.9.2014

& 10.3.2015 are being submitted to the Hon’ble Tribunal to substantiate

their submission. The Superintendent of Central Excise, AR-V, Ahmedabad,

vide Letter No. AR-V/Parikh/R Goods/2014, addressed to Leamak requested

them to provide MRP of various goods on which demand was raised in the

SCN. It was also mentioned in the said letter that the said information has

also been requested telephonically from Leamak. In addition, the Learned

Commissioner, vide letter F. No. 30/15-23/OA/2014 dated. 11.2.2015

addressed to ITC Ltd., Food Division, Bangalore requested for details of the

cost elements incurred by ITC and the profit margin included in the sale

price to their customers’ / dealers’ which was over and above the cost on

which Central Excise duty was paid by Leamak. In response, ITC, vide their

letter dated 18.3.2015 submitted the data requested for by the Learned

Commissioner giving details of Ex-factory Cost at Leamak; Outward Freight

from Leamak to ITC Godowns; Marketing Spends; Fixed Costs; Profit Margin

and ITC’s Net Selling Price. Copies of the said letters are collectively

enclosed to the Appeal Memorandum.

2.17 He argued that it can be seen from the said correspondence that ITC

were never made Respondents in the Denovo Proceedings, nor they were

given an opportunity of Personal Hearing before the impugned order dated.

31.3.2015 was passed by the Learned Commissioner in terms of which a

penalty of Rs. 60,00,000/- was imposed on them. To put it differently the 

impugned order imposing a penalty of Rs. 60,00,000/- on ITC, was passed

in gross violation of Principles of Natural Justice and on this count itself the

impugned order is liable to be quashed.

2.18 He further submit that the Final Order No. A / 1000210003/ 2014

dated 1.1.2014 of the Tribunal was passed with specific directions to the

Learned Commissioner to determine the Assessable Value in terms of Rule

11 of CVR, 2000. Further, the Tribunal have given a clear finding that ITC

and Leamak are not related persons and there was no mutuality of interest.

The Tribunal have not made any adverse observations against the Appellants

(ITC), in the determination or the declaration of the assessable value by

Leamak. The Tribunal have given only specific directions regarding the re

determination of the assessable value under Rule 11 of the CVR, 2000 and it

was not an open remand to the effect that “All issues are kept open.”

2.19 He pointed out that the order of the adjudicating authority is not

proper in terms of directions of the tribunal. He pointed out that the tribunal

has specifically directed that the assessment needs to be done in terms of

Rule 11 of CV Rules. He argued that for arriving at the assessable value in

the instant case in normal course the recourse has to be taken to Rules 4 to

10 of the CV Rules whenever it is not possible to determine the value under

Section 4(1)(a). He argued that it is not in dispute that the goods have not

been sold to the factory gate and therefore Rule 4,5,6 and Rule 8 of the CV

Rules cannot be applied.

3. Learned AR argued that the impugned order is not correct in so far as

it hold that even Rule 7 of the Valuations Rules cannot be applied to the

instant case. He argued that Rule 7 is the appropriate rule which should be

applied in terms of Rule 11 of the CV Rules. He pointed out that Rule 7

provides the most closest approximation to the transaction between LHL and

ITC. He pointed out that Rule 7 clearly provides that when goods are not

sold by the assessee but are transferred to depot/premises of consignment

or any other place or premises from where the excisable goods are to be

sold after their clearance from the „place of removal‟ and the assessee and

the buyer are not related, the normal transaction value shall be value of

such goods sold from such other place at or about the same time, where

such goods are not sold at or about the same time, at the time nearest to

the time or removal of goods under assessment. He argued that in these

circumstances Rule 7 is the most closely applicable rule to the said

transaction.

3.1 He argued that the larger bench decision of the tribunal in the case of

Cadila Pharmaceuticals Ltd.- 2008 (232) ELT 245 (Tri.-LB) held that Rule 11

of the CV Rules being a residuary provision and not containing any specific

formula for determination of value is not applicable independently without

considering other rules. The relevant para is reproduced below:-

“23. As mentioned above, Rules 4 to 11 of the Valuation Rules contain

provisions as to the manner of determination of values. However,

learned advocate for the appellant and learned SDR for the Revenue

fairly agreed that none of the rules – from Rule 4 to Rule 10 (Rule 10A

was inserted later in 2007) – covers the case of free supply of goods by

manufacturers and, therefore, aid has to be taken of the residuary rule

i.e.; Rule 11 of the Valuation Rules. Rule 11 lays down:

“If the value of any excisable goods cannot be determined by the

foregoing rules, the value shall be determined using reasonable means

consistent with the principles and general provisions of these rules and

sub-section (1) of section 4 of the Act.”

On a plain reading, it would appear that where the value of any

excisable goods cannot be determined under the preceding Rules i.e

rules 4 to 11 which are the substantive rules laying down the manner or

formula for determination of value, that is, if none of the substantive

rule is per se applicable, the value is to be determined as per the

principles and general provisions of the Rules as well as Section 4(1) of

the Act. In other words, when no particular rule or rules can be strictly

applied per se, the value shall be determined using reasonable

parameters consistent with the express provisions of the Rules and sub

section (1) of Section 4 of the Act. However, the rule itself does not

contain any formula and therefore, cannot be applied independently de

hors the provisions of Rules 4 to 10 and Section 4(1) of the Act.”

3.2 He argued that while tribunal has directed invocation of Rule 11 of the

CV Rules, the said rule should have been applied read with Rule 7 of the CV

Rules as the said rule is the closest approximation to the nature of the

transaction. He also relied on the decision of the tribunal in the case of

ALUPEX INDIA PVT. LTD.- 2009 (247) ELT 253 (T) wherein, the tribunal

observed as follows:-

“The words “using reasonable means consistent with the principles and

general provisions of these rules” occurring in Rule 11 clearly indicate

the relevance of the provisions of Rule 8. Indeed the provisions and the

principle involved are the guiding factors for determining the assessable

value of the goods under Rule 11. The underlying object of the rules is

to arrive at a value which would be closest to the transaction value of

the goods, had the goods been sold in the circumstances mentioned in

Section 4(1)(a) of the Central Excise Act, 1944.”

He also relied on the decision of tribunal in the case of EICHER MOTORS

LTD.- 2008 (228) ELT 43 (Tri.-LB) wherein, the following has been

observed:-

“26. As a matter of fact, the Valuation Rules did not contain any specific

provision to deal with the valuation of goods returned by job worker to

the principal until March, 2007 when Rule 10A was inserted. It was for

this reason, absence of any specific provision regarding valuation of

goods cleared by job worker to the principal, that the question as to

valuation remained in contention until the law finally came to be settled

in Ujagar Prints-III. However, in fairness to the appellant, we do not

wish to forclose the issue giving reference to Ujagar Print-Ill alone. We

may make brief comments on the interpretation of Rule 11 which was

subject of lengthy discussion at the time of hearing of these appeals.

But before we do that, we may again clarify that while Rule 8 is

generally applicable to non-sale transactions, it cannot be applied at the

stage of clearance of the goods by the job workers to the principal for

the reason that at that stage there is no further consumption of the

goods as a raw material either by himself or on his behalf for production

of some other goods. But it does not mean that the basic principle

governing the determination of value under Rule 8 is to be given a go

bye. The words “using reasonable means consistent with the principles

and general provisions of these rules” occurring in Rule 11 clearly

indicate the relevance of the provisions of Rule 8. Indeed, the provisions

and the principle involved are the guiding factors for determining the

assessable value of the goods under Rule 11.”

He argued that Rule 4 to 10 provide the guiding principle for valuation for

direction implementation however in case these rules cannot be directly

applied for in terms of Rule 11. The said rules can be applied with minor

modifications.

3.3 He further submits that the impugned order holds that ITC is

equivalent to a trader however since, the entire manufacturing and

production was at the behest of ITC and under total control of ITC. The ITC

should be treated as principal manufacturer and not as a mere trader. He

argued that the goods being manufactured and sold in the market by ITC

and not given for any job work, ITC would have quoted higher price over

and above the cost of production and operating cost to include their profit.

3.4 He argued that in view of the peculiar circumstances, the adjudicating

authority should have determined the assessable value of the goods

manufactured by the assessee on the basis of the value of such goods sold

by the principal manufacturer at the same time from the „place of removal‟

i.e. depot.

4. Countering the above assertions of the learned AR, the learned counsel

for LHL and ITC argued that the LHL has its own land, building, plant and

machinery and full fledged factory. He argued that apart from manufacturing

sugar confectionary for ITC, LHL is also manufacturing Lozenges and

supplying the same to pharmaceuticals companies. He argued that LHL were

contract manufacturing for ITC Ltd. on principal to principal basis under the

brand name of ITC and the goods were cleared to authorized/nominated

transporters of ITC at the factory gate only, after determining the value in

terms of Section 4 and paying duty thereon.

4.1 He further argued that after delivery of goods at their factory gate to

transporter of ITC, LHL neither had ownership/possession/control or any

nexus with the said goods manufactured by them.

4.2 Learned counsel pointed out that sale is defined under Section 2(h) of

Central Excise Act to mean “any transfer of the possession of goods by one

person to another in the ordinary course of trade or business for cash or

defined payment or valuable consideration.” Therefore, when possession of

goods is transferred from LHL to ITC after manufacturing, the transaction of

sale of goods is complete. He argued that when goods are “sold” to the

Authorised/Nominated transporter „ITC‟ at factory gate the ownership and

possession of the manufactured goods is transferred from LHL to ITC at

factory gate. He argued that place of removal in the instant case would

therefore be the factory gate where the goods are cleared to ITC.

4.3 He argued that in terms of the above position, the duty payable would

be the value of goods at the factory gate and not at any other place. He

argued that the assertion of revenue that the goods manufactured by LHL

were not sold at the factory gate and were sold by ITC at their depot and

therefore, all those elements of expenditure incurred by ITC till goods

reached their godown are includable in the assessable value is contrary to

the law. He relied on the following decision to assert that when goods are

delivered to the buyer at the factory gate then cost such as outward freight,

market spent by the buyer and the fix cost of the buyer are not includable in

the assessable value.

 ASSOCIATED STRIPS- 2002 (143) ELT 131 (T-Del.)

 ESCORTS JCB LTD.- 2002 (146) ELT 31 (S.C.)

 QUICK HEAL TECHNOLOGIES LIMITED- CIVIL APPEAL NO. 5167

OF 2022

 20TH CENTURY FINANCE CORPN. LTD. & …v STATE OF

MAHARASHTRA on 9 MAY, 2000

 DETERMINATION OF PLACE OF REMOVAL-

CIRCULAR

NO.988/12/2014-CX dated 20.10.2014

 EXTRACTS FROM CAS-22, “Cost Accounting Standard on

Marketing Cost.”

4.2 He further argued that when revenue seeks assessment under Rule 7

of the CV Rules then revenue is questioning the correctness of remand of the

tribunal. He further argued that the tribunal had specifically held that none

of the rules except Rule 11 is applicable to the current transaction. Learned

counsel further argued that the show cause notice issued by revenue on

08.07.2009 invoked Rule 9 of the CV Rules however, the appeal filed by the

revenue now seeks to invoke Rule 7 of the CV Rules. He argued that the

appeal of the revenue should be dismissed on this count itself.

5. We have considered the rival submissions. We find that the issue

involved in the instant case is the valuation of the goods manufactured by

LHL on behalf of ITC wherein, the ITC has provided certain inputs,

machineries and funds to LHL. The matter was remanded by tribunal with

the following observations :-

11. In view of the above facts though mutuality of interest is not

established but it has been correctly held by the adjudicating authority

that the judgment of Hon’ble Supreme Court in the case of M/s Ujagar

Prints (Supra) cannot be made applicable to the present proceedings

because the present case is clearly distinguishable from the facts and the

principles laid down by Apex Court for valuation of the goods in case of

manufacture of goods on job work basis. In the case of M/s Ujagar Prints

only one of the several materials i.e., grey fabrics was supplied to the job

worker whereas in the present case all the raw materials and packing

materials were supplied by ITC. Various gift articles were also supplied by

ITC for packaging, the machinery worth more than Rs.7 crores required

for manufacturing of confectionery was supplied by ITC on rent of Rs.

12,000/- per annum in the present proceedings whereas the machinery

belonged to M/s Ujagar Prints in the case before Apex Court. In the case

of M/s Ujagar Prints the job worker was at liberty to manufacture goods

for any client on job work and was not restricted to a particular client as is

the case in the present proceedings. As already held the revenue is not

able to establish that there is mutuality of interest in view of the

monetary gain and flow back to both the appellant and M/s ITC. One way

interest has been held by various pronouncements as not the conclusive

proof of two individuals being related. In the present proceedings before

us appellant will be interested in getting work from M/s ITC as he is

getting more financial gains from M/s ITC but it is not coming out

anywhere in the case records as to have M/s ITC has financially gained

from the appellant in the transactions. There is a clause in the agreement

that M/s ITC at any time can get the work entrusted to the appellant,

done from others. Therefore the provisions of Rule 9 cannot be pressed

into service in the present proceedings. However, at the same time, for

reasons recorded above in the present case valuation of confectionary

manufactured by M/s Leamak can not be resorted to as per the principles

laid down by Apex Court’s decision in the case of M/s Ujagar Prints

(supra). In this case the valuation of goods is required to be decided by

the adjudicating authority under the provisions of Rule 11 of the Central

Excise Valuation (Determination of Price of Excisable Goods) Rules 2000

applicable at the relevant time. We accordingly remand the case back to

the adjudicating authority to determine the value of the goods as per the

provisions of Rule 11 of the Valuation Rule 2000. Needless to say that

appellants should be given an opportunity to present their case in de-novo

proceedings, before taking a final view on the issue.

The original proceedings started on the line that M/s. LHL and ITC are

related persons however, the said assertion was not supported by the earlier

decision of the tribunal and the tribunal directed the assessment invoking

Rule 11 of the CV Rules which reads as follows:-

Rule11. If the value of any excisable goods cannot be determined under

the foregoing rules, the value shall be determined using reasonable

means consistent with the principles and general provisions of these rules

and sub-section (1) of section 4 of the Act.

5.1 No one has challenged the earlier order of the tribunal and therefore,

the directions given in the earlier order of the tribunal become final and

binding on both the parties. In this background the following issues are

settled:-

(i)

The LHL and ITC are not related parties.

(ii)

Rule 1 to 10 of the CV Rules did not fit directly in the facts of the

situation.

(iii)

The assessment has to be done in terms of Rule 11.

(iv)

The said decision of the apex court in the case of M/s Ujagar

Prints cannot be applied to the instant case. As in the instant

case not only certain inputs but also machinery and funds to

some extent were supplied by the principal manufacturer namely

ITC.

5.2 The larger bench of tribunal in the case of Cadila Pharmaceuticals Ltd.-

2008 (232) ELT 245 (Tri.-LB) has held as follows:-

“23. As mentioned above, Rules 4 to 11 of the Valuation Rules contain

provisions as to the manner of determination of values. However,

learned advocate for the appellant and learned SDR for the Revenue

fairly agreed that none of the rules – from Rule 4 to Rule 10 (Rule 10A

was inserted later in 2007) – covers the case of free supply of goods by

manufacturers and, therefore, aid has to be taken of the residuary rule

i.e.; Rule 11 of the Valuation Rules. Rule 11 lays down:

“If the value of any excisable goods cannot be determined by the

foregoing rules, the value shall be determined using reasonable means

consistent with the principles and general provisions of these rules and

sub-section (1) of section 4 of the Act.”

On a plain reading, it would appear that where the value of any

excisable goods cannot be determined under the preceding Rules i.e

rules 4 to 11 which are the substantive rules laying down the manner or

formula for determination of value, that is, if none of the substantive

rule is per se applicable, the value is to be determined as per the

principles and general provisions of the Rules as well as Section 4(1) of

the Act. In other words, when no particular rule or rules can be strictly

applied per se, the value shall be determined using reasonable

parameters consistent with the express provisions of the Rules and sub

section (1) of Section 4 of the Act. However, the rule itself does not

contain any formula and therefore, cannot be applied independently de

hors the provisions of Rules 4 to 10 and Section 4(1) of the Act.”

It is seen that the larger bench of tribunal in the case of Cadila

Pharmaceuticals Ltd (supra) has observed that while invoking Rule 11, we

cannot lose sight of Section 4(1)(a) and Rule 4 to 10 of the CV Rules.

Section 4(1)(a) of the Central Excise Act reads as follows:

SECTION [4. Valuation of excisable goods for purposes of

charging of duty of excise. — (1) Where under this Act, the duty of

excise is chargeable on any excisable goods with reference to their

value, then, on each removal of the goods, such value shall –

(a) in a case where the goods are sold by the assessee, for delivery at

the time and place of the removal, the assessee and the buyer of the

goods are not related and the price is the sole consideration for the sale,

be the transaction value;

Rule 4 to 10 of the CV Rules reads as follows:-

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.

[RULE 5.Where any excisable goods are sold in the circumstances

specified in clause (a) of sub-section (1) of section 4 of the Act except

the circumstances in which the excisable goods are sold for delivery at a

place other than the place of removal, then the value of such excisable

goods shall be deemed to be the transaction value, excluding the cost of

transportation from the place of removal upto the place of delivery of

such excisable goods.

Explanation 1. – “Cost of transportation” includes –

(i) the actual cost of transportation; and

(ii) in case where freight is averaged, the cost of transportation

calculated in accordance with generally accepted principles of costing.

Explanation 2. – For removal of doubts, it is clarified that the cost of

transportation from the factory to the place of removal, where the

factory is not the place of removal, shall not be excluded for the

purposes of determining the value of the excisable goods.]

RULE 6.Where the excisable goods are sold in the circumstances

specified in clause (a) of sub section (1) of section 4 of the Act except

the circumstance where the price is not the sole consideration for sale,

the value of such goods shall be deemed to be the aggregate of such

transaction value and the amount of money value of any additional

consideration flowing directly or indirectly from the buyer to the

assessee.

[Provided that where price is not the sole consideration for sale of such

excisable goods and they are sold by the assessee at a price less than

manufacturing cost and profit, and no additional consideration is flowing

directly or indirectly from the buyer to such assessee, the value of such

goods shall be deemed to be the transaction value.]

[Explanation 1] – For removal of doubts, it is hereby clarified that the

value, apportioned as appropriate, of the following goods and services,

whether supplied directly or indirectly by the buyer free of charge or at

reduced cost for use in connection with the production and sale of such

goods, to the extent that such value has not been included in the price

actually paid or payable, shall be treated to be the amount of money

value of additional consideration flowing directly or indirectly from the

buyer to the assessee in relation to sale of the goods being valued and

aggregated accordingly, namely : –

(i) value of materials, components, parts and similar items relatable

to such goods;

(ii) value of tools, dies, moulds, drawings, blue prints, technical

maps and charts and similar items used in the production of such goods;

(iii) value of material consumed, including packaging materials, in the

production of such goods;

(iv) value of engineering, development, art work, design work and

plans and sketches undertaken elsewhere than in the factory of

production and necessary for the production of such goods.

[Explanation 2. – Where an assessee receives any advance payment

from the buyer against delivery of any excisable goods, no notional

interest on such advance shall be added to the value unless the Central

Excise Officer has evidence to the effect that the advance received has

influenced the fixation of the price of the goods by way of charging a

lesser price from or by offering a special discount to the buyer who has

made the advance deposit.

Illustration 1. – X, an assessee, sells his goods to Y against full advance

payment at Rs. 100 per piece. However, X also sells such goods to Z

without any advance payment at the same price of Rs. 100 per piece.

No notional interest on the advance received by X is includible in the

transaction value.

Illustration 2. – A, an assessee, manufactures and supplies certain goods

as per design and specification furnished by B at a price of Rs. 10 lakhs

A takes 50% of the price as advance against these goods and there is

no sale of such goods to any other buyer. There is no evidence available

with the Central Excise Officer that the notional interest on such

advance has resulted in lowering of the prices. Thus, no notional interest

on the advance received shall be added to the transaction value.]

RULE 7.Where the excisable goods are not sold by the assessee at the

time and place of removal but are transferred to a depot, premises of a

consignment agent or any other place or premises (hereinafter referred

to as “such other place”) from where the excisable goods are to be sold

after their clearance from the place of removal and where the assessee

and the buyer of the said goods are not related and the price is the

sole consideration for the sale, the value shall be the normal

transaction value of such goods sold from such other place at or about

the same time and, where such goods are not sold at or about the

same time, at the time nearest to the time of removal of goods under

assessment.

RULE 8.[Where whole or part of 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 of such goods

that are consumed shall be one hundred and ten per cent of the cost of

production or manufacture of such goods.]

RULE 9.[Where whole or part of the excisable go ods are sold by

the assessee to or through a person who is related in the manner

specified in any of the sub-clauses (ii), (iii) or (iv) of clause (b) of sub

section (3) of section 4 of the Act, the value of such goods shall be the

normal transaction value] at which these are sold by the related person

at the time of removal, to buyers (not being related person); or where

such goods are not sold to such buyers, to buyers (being related

person), who sells such goods in retail :

Provided that in a case where the related person does not sell the

goods but uses or consumes such goods in the production or

manufacture of articles, the value shall be determined in the manner

specified in rule 8.

RULE 10.[Where whole or part of the excisable goods are sold by

the assessee to or through an inter-connected undertaking, the value of

such goods shall be determined in the following manner, namely :-]

(a) If the undertakings are so connected that they are also related in

terms of sub-clause (ii) or (iii) or (iv) of clause (b) of sub-section (3) of

section 4 of the Act or the buyer is a holding company or subsidiary

company of the assessee, then the value shall be determined in the

manner prescribed in rule 9.

Explanation. – In this clause “holding company” and “subsidiary

company” shall have the same meanings as in the Companies Act, 1956

(1 of 1956).

(b) in any other case, the value shall be determined as if they are not

related persons for the purpose of sub-section (1) of section 4.

5.3 From the impugned order, it is seen that the impugned order rules out

direct applicability of Rule 4 to 10 on various grounds as they did not

specifically cover the current transaction. The impugned order also rules out

the applicability of the new Rule 10(A) of Valuation Rules which was

introduced with effect from 01.04.2007 on the ground that at the material

time the said rule was not part of the central excise valuation rules. The

impugned order takes a view that all those elements of expenditure which

would have been incurred by ITC had they manufactured the product at their

own are required to be included in the assessable value of the goods. The

impugned order further argues that since the goods are not sold by LHL but

are sold only by ITC at their godown, all the cost till the goods reach the

godown are includable in the assessable value. On the aforesaid logic, the

impugned order comes to the following calculation of differential duty:

5.4 It is seen that the data from the chart has been picked from the letter

dated 18.03.2015 by ITC- Bangalore which reads as under:-

1.The information is provided without prejudice to the reply and the written

submissions made at the time of personal hearing by our contract

manufacturing unit M/s Leamak Healthcare Pvt.Ltd.

2.It is to bring to your kind attention that the Hon’ble CESTAT in its remand

directions, has held that Leamak and ITC are not related to each other and

therefore, selling price of ITC cannot be the basis for determination of

differential Excise duty.

3. Further from the remand directions of Hon’ble CESTAT, it is evident that

the dispute is strictly restricted only to the extent of production and dispatch

of confectionery using machinery provided by us to M/s Leamak Healthcare

Pvt.Ltd.

4. At the time of personal hearing, we have been given to understand that

our contract manufacturer M/s Leamak Healthcare Pvt.Ltd. had made

detailed submissions to your good self that the price at which Excise Duty

has been discharged by them for period September 2005 to March 2007

includes all elements of cost on which Excise Duty is required to be paid.

5. Under these circumstances, we would like to place on record that, in our

humble opinion, information sought vide your letter No.F.No. V.30/15-

23/OA/2014 dated 11.02.2015 is beyond the scope of the remand directions

of the Hon’ble CESTAT.

6. Without prejudice to the above, please find hereunder the details as

sought by you in Letter No. F.No. V.30/15-23/OA/2014 dated 11.02.2015

1. Outward Freight/Kg represents the average cost of transportation incurred

by us to transport finished goods from our various contract manufacturing

locations to our warehouses situated across India.

2. Marketing Spends represents the amounts incurred by us towards

advertisements in print media/cable/television/cinema/internet, market

research expenses, point of sale materials such as posters/danglers/display

boards etc., consumer contact expenses, sampling expenses, outdoor visuals,

etc. These expenses are generally incurred for the ‘Candyman’ and ‘Mint-O’

brands. Total marketing spends have been apportioned on the total sales

volume to arrive at the per/Kg cost.

3. Fixed Costs represents salaries, administration expenses, etc. Total fixed

costs have been apportioned on the total sales volume to arrive at the per/Kg

cost.

4. Marketing Spends/Fixed Costs are incurred by us centrally for the

confectionery business as a whole and cost/Kg has been apportioned for the

quantity manufactured/cleared at the respective contract manufacturing

locations.

5. From the above data provided by M/s ITC it is evident Government has

suffered loss of duty by not including the freight charges from the factory to

godown, the marketing expenses and the fixed costs which form part of

assessable value in normal course of manufacturing business. Both the

assessee and ITC had suppressed these cost elements and benefitted by this

unholy practice. Because ITC has basically acted as Trader and got the goods

manufactured from assessee, I feel that its profit margin needs to be

excluded while arriving at the assessable value. Thus, in my opinion, except

for the duty of Excise, including cess, and the profit margin all other cost

elements are includible in the assessable value.

5.5 From the above, it is seen that the appellants have paid the differential

excise duty on the value of Rs.17269155/- the appeal memorandum does

not make it apparent if the appellant are contesting inclusion of this amount

in the assessable value or not. It is apparent that the appellants have

already paid and discharged duty on this value. The impugned order includes

this value once again for confirmation of duty and imposition of penalty. It is

also not clear as to what this amount represents and how this value has

been arrived at.

5.6 The appellants have pointed out Section 2(h) of the Central Excise Act

to assert that the goods are sold at the factory gate. Section 2(h) reads as

follows:-

SECTION 2. Definitions. — In this Act, unless there is anything

repugnant in the subject or context, –

(h) “sale” and “purchase”, with their grammatical variations and

cognate expressions, mean any transfer of the possession of goods by

one person to another in the ordinary course of trade or business for

cash or deferred payment or other valuable consideration;

It is seen that sale for the purpose of central excise act means transfer of

the possessions of the goods by one person to another. In the instant case,

it is not in dispute that the goods are handed over by LHL to the transporter

designated by ITC at the factory gate. In these circumstances any expenses

incurred after clearance from the factory cannot form part of the assessable

value in terms of Section 4(1)(a).

5.7 It is seen that the impugned order adopts deductive method to arrive

at the assessable value at the factory gate. From the net selling price of ITC,

it allows deduction of profit margin of ITC Ltd. and includes all other costs

incurred in the assessable value (including the duty and taxes paid by the

appellant). The following inclusions have been challenged by LHL and ITC.

(a)

Outward freight from LHL to ITC godown.

(b)

Market spent.

(c)

Fixed cost.

The LHL and ITC relied on the decision of Kenwell Pvt., Ltd., vs CCE 2005

(189) ELT 457 (Tri.). In the said decision following has been observed :-

5.We have gone through the records of the case carefully. The

adjudicating authority has stated that prior to 1-7-2000 the appellants

were discharging duty on the sales price of M/s. GIL and M/s. MCL. She

has also stated that the appellants are only hired labourers of their

principals and duty should be paid on the intrinsic value of the goods.

The Commissioner’s finding that the appellant is a hired labourer has not

much basis. The agreement between the appellants and GIL/MCL indicate

the transaction value. The advertisement charges incurred by the buyer

on behalf of the seller can be included but in the present case the goods

bore the brand name of GIL/MCL. Therefore, we cannot come to the

conclusion that GIL/MCL incurred the advertisement charges on behalf of

the appellant. The definition of transaction value is reproduced herein

below :-

“Transaction value” means the price actually paid or payable for the

goods, when sold, and include in addition to the amount charged as

price, any amount that the buyer is liable to pay to, or on behalf of, the

assessee, by reason of, or in connection with the sale, whether payable

at the time of the sale or at any other time, including, but not limited to,

any amount charged for, or to make provision for, advertising or

publicity, marketing and selling organization expenses, storage, outward

handling, servicing, warranty, commission or any other matter; but does

not include the amount of duty of excise, sales tax and other taxes, if

not, actually paid or actually payable on such goods. :”

GIL spent some amount on advertisement of its own brand of goods. The

department held that the appellants who manufacture the goods as per

specification in the contract should pay duty on these charges. Moreover,

the issue is clarified in the Board clarification mentioned (supra). We are

reproducing the said clarification below :-

Whether advertisement and publicity charges, borne by the

dealers/buyers are to be excluded from the assessable value?

However, where the brand name/copyright owner gets his goods

manufactured from outside (on jobwork or otherwise), the expenditure

incurred by the brand name/copyright owner on advertisement and

publicity charges, in respect of the said goods, will not be added to the

assessable value, as such expenditure is not incurred on behalf of the

manufacturer (assessee)”.

5.In view of the above, the OIO cannot be sustained. Hence we allow the

appeal with consequential relief.

The aforesaid decision also been maintained by Hon‟ble Apex Court as

reported in 2006 (197) ELT A192. In this background, we find that in the

facts of the case the inclusion of marketing costs in the assessable value is

beyond the scope of Section 4(1)(a). In this circumstances, when such costs

are incurred by the buyer after clearance from factory the same cannot be

included in the assessable value.

5.8 The impugned order includes in the assessable value fixed cost by ITC.

We find that no breakdown of the fixed cost has been given by ITC. It is not

in dispute that ITC has supplied certain machineries to LHL and ITC has also

extended certain amount as advances to the LHL. The fixed cost of ITC in

general cannot be added to the assessable value for the reason that these

costs are incurred beyond the place of removal namely the factory gate. In

the instant case the goods are sold at factory gate (possession handed over

in terms of Section 2(h) of Central Excise Act). 

5.9 The cost which are not incurred by ITC within the factory premises

only in respect of free supply of machinery and interest free loan that could

have influenced the assessable value. The LHL and ITC have also argued

that the interest free advances of Rs. 49 lacs given by ITC to Leamak are in

the ordinary course of trade and have not influenced the assessable value in

any manner. The said advances made by ITC were to be paid by Leamak. It

has been argued that the advances were made in October-2003 and August-

2005. It has been argued that the period of dispute in the instant case is

September, 2005 to March, 2007 thus, it is obvious that a large part of the

advances were paid back by the appellants before the dispute period. It has

been argued that the average conversion charges received by Leamak to ITC

are approximately Rs.70 lacs per month. In this background of advance of

Rs.49 lacs could hardly be said to have influenced the price. We find

significant force in the argument that these advances received much prior to

the dispute period could not have possibly influenced the price not only for

the reason of the period of receipt of these advances but also the quantum

of advances which appear to be in the ordinary course of trade considering

the level of transactions between LHL & ITC.

5.10 The LHL and ITC have contended that the payment made towards 50%

of the cost of moulds was made in the year 2003-04 i.e. prior to dispute

period of 2005-06. He pointed out that during the period 2003-04, the

agreement of manufacture dated 24.01.2003 was on „Buy-sell‟ model. The

said transaction of 50% of cost of mould was part of the agreement dated

24.01.2003. Since the said agreement was more than two years before the

disputed period, there is no link shown by revenue between the said cost of

mould by the appellant and the goods cleared during the disputed period.

However, the cost of moulds needs to be apportioned on the value of

clearances from the period 24.01.2003 to the time the said mould were used

to manufacture goods for ITC.

5.11 It is also noticed that the ITC has supplied gifts valued at Rs.1.5

Crores which are to be backed with the products manufactured by LHL is

free gifts to be supplied to the customers. The LHL and ITC have relied on

the decision of tribunal in the case of Oswal Fats & Oils v CCE – 2003(156)

ELT 112 (T-Del). In the said decision following has been observed:-

2.It is the submission of the appellants that free supply of bindis to

buyers of soaps by M/s. Hindustan Lever Limited has no relation to the

appellant’s activity of manufacture of soaps and the sale of those soaps

to M/s. Hindustan Lever Ltd. Learned Counsel representing the appellant

has stressed that bindis have no place in the manufacture of soaps. Nor

does the cost of the bindis form part of the cost of the soap. He pointed

out that manufacture of soaps and supply of bindis were under entirely

different contracts and one did not have any dependence on the other.

Bindis were also merely packed in the cartons along with soaps as

directed by M/s. Hindustan Lever Ltd. The learned Counsel also pointed

out that the decision of the Apex Court in the case of Bombay Tyre

International and the Tribunal in the case of Hindustan Cocoa Products

Ltd. have no application to the present case inasmuch as no deduction is

claimed from the price of soap towards the cost of freely supplied bindis.

Instead, assessments of soap are made at the full value of the soap in

terms of the contract. The learned Counsel for the appellant pointed out

that the decision of this Tribunal in the case of Schenck Jenson &

Nicholson Ltd. v. CCE, Jamshedpur, [2002 (149) E.L.T. 401] = 2002 (48)

RLT 449 (CEGAT – Kol.) is applicable in the present case in favour of the

appellant. The learned Counsel explained that in that case the Tribunal

has held that the value of boughtout items brought into the factory and

supplied as spares along with machinery cannot be added to the value of

the machinery manufactured and sold by the appellants, for the purpose

of assessing the machinery to duty.

3.There is merit in the contention of the appellant that the price of the

bindis in question has no relation to the assessable value of the Soaps

manufactured on contract basis. That price remains fixed under the

contract. The additional packing of bindis have no connection to the price

of soap. Therefore, there was no requirement for the addition of the price

of bindis to the price of the soap to arrive at the assessable value of

soap. The contrary determination made in the impugned order is not

sustainable. Accordingly, the appeal is allowed, with consequential relief,

if any, to the appellants.

The said decision has been approved by Hon‟ble Apex court as reported in

2004 (163) ELT A119. Thus the value of free gifts cannot be included in the

value.

5.12 The ITC has deputed certain employees by Leamak. The role of the

employees was coordination of dispatches of material to various godowns,

supervision of quality of raw material, packing material and finished goods.

The appellant have relied on the following decision to assert that the value of

the employees deputed for the purpose of quality control cannot be included

in the assessable value.

 JJ Confectinery P Ltd.- 2007 (210) ELT 196

In the case of OCP INDIA PVT. LTD.- 2003 (156) ELT 378, tribunal has

observed as follows:-

9.We have considered the submissions made from both the sides. The

dispute revolves around the addition of Rs. 23.50 per sleeper as testing

charges which the appellant company never collected from the railways.

The railways employees were doing the inspection themselves before

taking the delivery and in fact no expenses were being incurred on such

testing inasmuch as the same was being done by the paid employees of

the railways. We do not find any justification for addition of the testing

charges on notional basis in the assessable value of the final product. The

appellants have strongly contended that sleepers were in fully

manufactured condition and were duly entered in RG-1 register before the

same were tested by the employees of the railways. As such it was the

finished sleepers which were being inspected by the purchaser for his own

satisfaction. As rightly contended by the ld. Adv., such inspection for

which no expenses were either being incurred or were being paid to the

appellant, cannot be held to be pre-manufacture inspection charges.

There is no justification for addition of notional testing charges in the

assessable value of the goods when there is no dispute that what the

appellant was receiving from the railways was only the contract price

entered into between the two on which duty was being paid by them. The

Tribunal, as noted above has in a number of cases held that even the

inspection charges paid by the railways to RITES are not includible in the

assessable value of the goods supplied to the railways. In the instant case

we find that even the above situation is not available inasmuch as no

charges are being paid to the appellants. As such we are of the view that

addition of notional inspection charges in the assessable value of the

sleepers is not to be upheld. We order accordingly.

In view of the above, we find that the staff deputed not for the purpose of

manufacturing the goods but only for the purpose of inspection and

supervision and quality control cannot be part of the assessable value of the

goods.

5.13 M/s. LHL and ITC have contended that the amount of Rs.1,72,69,155/-

which as been sought to be included in the assessable value is the value

which the appellant have already included in the assessable value, fresh

inclusion of the said in the assessable value amount to double taxation. The

cost of production not included by Leamak has already suffered excise duty

and the appellants have not contested the same. The contention of the

appellant is that the duty has been sought to be recovered twice on this

value. From the letter of the appellant dated 18.03.2015 reproduced above,

it appears to be factually correct however this needs to be verified.

6. It is seen that revenue has filed appeal seeking assessment under Rule

7 of the CV Rules. It is seen that the order of tribunal dated 01.01.2014 has

clearly laid down that assessment has to be done in terms of Rule 11 of the

CV Rules. The revenue has not challenged the said order and therefore, the

said order has become final. In this background, the assertion of the

revenue that assessment needs to be done in terms of Rule 7 of the CV

Rules cannot be accepted. The appeal of revenue is therefore dismissed.

7. We also come to our conclusion that no excise duty needs to be paid

on the outward freight from Leamak to ITC, Marketing spends by ITC and

fixed costs of ITC relating to activities of ITC other than provision of moulds

at concessional cost.

7.1 Finally the impugned order is set aside in so far as it seeks to include

outward freight from Leamak to ITC godown and marketing spends for

charging excise duty. The impugned order is also set aside in so far as it

seeks to include the fixed cost of ITC in total to the assessable value. The

cost of ITC in so far as it relates to provision of mould on discounted rate to

the appellant needs to be apportioned to the value of goods depending on

the actual period of use of the said mould and the total production. The fact

regarding payment of duty under the head “Cost of production not included

by Leamak” in the table appearing in para 5.3 above needs to be

ascertained. If duty has already been paid, duty may not be demanded

again.

8. It has been argued on behalf of ITC that in the remand proceedings

they were not made party, no notice of hearing was issued to appellant M/s.

ITC Ltd. and no personal hearing was granted. It has been argued that the

order passed in the instant case is imposing penalty on M/s. ITC Ltd is

without following the principles of natural justice and on that count as well

the impugned order cannot be sustained. We find merit in the argument of

M/s. ITC Ltd. that when the impugned order imposed penalty on the

appellant, they should have been granted an opportunity of defend

themselves.

9. With above observation, the impugned order is set aside and matter is

remanded to the Commissioner for fresh adjudication.

(Pronounced in the open court on 10.01.2023 )

(RAMESH NAIR)

MEMBER (JUDICIAL)

(RAJU)

MEMBER (TECHNICAL)