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Friday, December 18, 2015

The “settled law” spoken of would refer to a CBEC circular No.268/85-CX.8 dated 29.9.1994 which deals with valuation of goods manufactured by units working under the 100% EOU scheme. The said circular refers to Rule 8 of the Customs Valuation Rules and not the Central Excise Valuation Rules. The four factors laid down in the said circular have relevance only qua goods that are cleared in the DTA and how their valuation is to be arrived at. We have already seen that the manner of valuation of such goods would not be relevant for the simple reason that what has to be determined in the facts of the present case is the valuation of the duty of excise leviable under Section 3 of the Central Excise Act on like goods produced or manufactured in India by undertakings other than 100% EOUs. The application of this circular and consequently any FOB export price would be wholly irrelevant for the purpose of this case and as has been held above, is only for arriving at the duty of excise leviable under Section 3(1) Proviso (ii) of the Central Excise Act. On the facts of the present case, it is clear that the said duty of excise arrived at based on Section 3(1) Proviso (ii) is more than the duty determinable for like goods produced or manufactured in India in other than 100% EOUs. Since the notification exempts anything that is in excess of what is determined as excise duty on such like goods, and considering that for the entire period under question the duty arrived at under Section 3(1) proviso (ii) is in excess of the duty arrived at on like goods manufactured in India by non 100% EOUs, it is clear that the whole basis of the show cause notice is indeed flawed. Further, the show cause notice is based on one solitary circumstance – the fact that goods captively consumed by the two sister units of the unit in question are not “sold”. We are afraid this approach flies in the face of the language of the notification dated 1.3.1997. The test to be applied under the said notification is whether the goods in question are “allowed to be sold” in India. The aforesaid expression is obviously different from the expression “sold” and does not require any actual sale for the notification to be attracted. In fact revenue’s case is also that even though the said notification is attracted, yet because there is no sale somehow the FOB export price of like goods alone is to be looked at. If this were to be so, not only would the object of the notification not be sub-served but even its plain language would be violated. It is clear that the said notification has been framed by the Central Government, in its wisdom, to levy only what is levied by way of excise duty on similar goods manufactured in India, on goods produced and sold by 100% EOUs in the domestic tariff area if they are produced from indigenous raw materials. If the revenue were right, logically they ought to have contended that the notification does not apply, in which event the test laid down under Section 3(1) proviso (ii) would then apply. This not being the case, we are of the view that the Tribunal’s judgment is correct and requires no interference. The appeal is, accordingly, dismissed.

                                 REPORTABLE

                        IN THE SUPREME COURT OF INDIA

                        CIVIL APPELLATE JURISDICTION

                         CIVIL APPEAL NO.951 of 2008


COMMISSIONER OF CENTRAL EXCISE    …APPELLANT

                             VERSUS

M/S NESTLE INDIA LIMITED                …RESPONDENT




                           J  U  D  G  M  E  N  T



R.F. Nariman, J.



The respondent herein is a 100% EOU engaged in the  manufacture  of  instant
tea falling under Chapter 2101.20 of schedule to the Central  Excise  Tariff
Act, 1985.  The present   appeal  is  concerned  with  clearances  of  their
product to two sister units on payment of  duty  in  terms  of  Notification
No.8/97 - CE dated 1.3.1997 and Notification No.23/2003 CE dated  31.3.2003.
 The first notification would cover the period 1.11.2000  to  30.3.2003  and
the second notification would  cover  the  period  31.3.2003  to  31.5.2005.
Inasmuch as the instant tea was manufactured wholly out  of  indigenous  raw
materials, the notifications aforesaid applied and whatever  was  in  excess
of what is chargeable by way of excise duty on the said tea is exempted.  It
is not in dispute that the said notifications applied in the  facts  of  the
instant case.



A show cause notice dated 23.9.2005 was issued  by  the  Department  stating
that ordinarily Rule 8 of the Central  Excise  Valuation  (Determination  of
Price of Excisable Goods) Rules, 2000 would apply and  that  the  tea  being
captively consumed and not sold should be valued at  115%  of  the  cost  of
production or manufacture of such goods.  However,  the  show  cause  notice
then goes on to say that as the said tea is transferred only to  two  sister
concerns and no sale is  involved,  the  assessable  value  of  instant  tea
removed to the respondent’s own units would be determined on  the  basis  of
the export price of similar goods and not 115% of the cost of production.



The order in original dated 31.5.2006 passed by the Additional  Commissioner
upheld the show cause notice and confirmed the duty  amount,  interest,  and
penalty as follows:-

                                   “ORDER

 I confirm the duty amount of  Rs.  42,86,079/-  (Rupees  Forty  two  lakhs,
eighty six thousand and seventy  nine  only)  (Centvat:  Rs.42,62,545/-  and
Education Cess Rs.23,534/-) under Section 11A  (1)  of  the  Central  Excise
Act, 1944.

I demand appropriate interest on the above amount  confirmed  under  Section
11AB(1) of the Central Excise Act, 1944.

I impose a penalty of Rs.42,86,079/- (Rupees Forty  two  lakhs,  eighty  six
thousand and seventy nine only) under Section 11A (1) of the Central  Excise
Act, 1944.

As I have imposed penalty on them under Section 11AC of Central Excise  Act,
1944, I do not  impose  a  separate  penalty  under  Rule  173Q  or  209  of
erstwhile Central Excise Rules 1944 and Rule 25 of erstwhile Central  Excise
(No2) Rules, 2001 read with Section 38A of  Central  Excise  Act,  1944  and
Rule 25 of Central Excise Rules, 2002.”



4.    The appeal by the assessee  was  also  dismissed  by  an  order  dated
26.9.2006 passed by the Commissioner  (Appeals)  upholding  the  show  cause
notice and stating that Section 3 (1) Proviso (ii)  of  the  Central  Excise
Act would apply to the facts of the case and that  being  so,  it  is  clear
that the basis for valuation had to  be  on  the  FOB  value  of  export  of
similar goods and not on the basis of cost of production  under  Rule  8  of
the Central Excise Rules.

5.    By the  impugned  judgment  dated  16.5.2007,  CESTAT  set  aside  the
judgment  of  the  Commissioner  (Appeals)  by  reasoning  that  since   the
exemption notifications would apply and since  what  has  to  be  determined
under the said notifications is excise duty  payable  in  India,  such  duty
could only be arrived at by applying Rule 8 in cases of captive  consumption
and that therefore the basis of the show cause notice and the  decisions  by
the original and appellate authorities was incorrect.   It  accordingly  set
aside the order of the Commissioner (Appeals).

6.    Shri A.K. Sanghi, argued before us that since the case was covered  by
Section 3 (1) Proviso (ii) of the Central Excise Act, the Customs Act  alone
was to be looked at and if the Customs Act was so looked at, the test as  to
value of goods would be the test of similar goods of a like value  that  are
exported.   Hence,  according  to  him,  the  original  authority  and   the
appellate authority were correct  in  applying  the  said  Section  and  the
Tribunal was wrong in ignoring  the  said  Section  and  applying  exemption
notifications to the facts of the case instead.



7.    Ms. L. Charnaya, learned counsel appearing on behalf of  the  assessee
on the other hand, supported the decision of the tribunal and read to us  in
some detail not only  the  Central  Excise  Valuation  Rules  but  also  the
notifications aforementioned.  It is her case that  the  show  cause  notice
itself was flawed in that the basis of the said  notice  is  that  since  no
sale had taken place on the facts of the present  case,  the  FOB  value  of
export of similar goods has to  be  taken  into  account.   She  laid  great
stress on the fact that in the  notification  dated  1.3.1997  the  language
used is not “sold” but “allowed to be sold” and that if this  were  kept  in
mind it is clear that  the  very  basis  of  the  show  cause  notice  being
incorrect would lead to incorrect orders that were passed  by  the  original
and first appellate authority.



8.    Having heard learned counsel for the parties we think it is  necessary
to first extract the relevant statutory  provisions  and  the  notifications
insofar as they have a bearing on the facts of the present case.



9.    Section 3(1) proviso as it stood at the  relevant  time  is  extracted
hereinbelow:-



“SECTION 3.  Duties specified in First Schedule and the Second  Schedule  to
the Central Excise Tariff Act, 1985 to be levied.



Provided that the duties of excise which shall be levied  and  collected  on
any excisable goods which are produced or manufactured, -

 In a free trade zone or a special economic zone and brought  to  any  other
place in India; or

By a hundred per cent export-oriented undertaking and brought to  any  other
place in India,

shall be an amount equal to the aggregate of the  duties  of  customs  which
would be leviable under the Customs Act, 1962 (52 of 1962) or any other  law
for the time being in force, on like goods produced or manufactured  outside
India if imported into India, and where  the  said  duties  of  customs  are
chargeable by reference to their value; the value of  such  excisable  goods
shall, notwithstanding anything contained in any  other  provision  of  this
Act, be determined in accordance with the provisions  of  the  Customs  Act,
1963 (52 of 1962) and the Customs Tariff Act, 1975 (51 of 1975).”



10.   Section 5A being the Section under which the two notifications in  the
present case were issued is also of some relevance and reads as follows:-

“SECTION 5A.     Power to grant exemption from duty of excise. -

(1)   If the Central Government is satisfied that it  is  necessary  in  the
public interest so to do, it may, by notification in  the  Official  Gazette
exempt generally either absolutely or subject  to  such  conditions  (to  be
fulfilled before or after removal) as may be specified in the  notification,
excisable goods of any specified description from the whole or any  part  of
the duty of excise leviable thereon :

      Provided that, unless specifically provided in such  notification,  no
exemption therein shall apply to  excisable  goods  which  are  produced  or
manufactured-

In a free trade zone or a special economic zone and  brought  to  any  other
place in India; or

By a hundred per cent export-oriented undertakings and brought to any  place
in India.”



11.   Rule 8 of the Central Excise Rules, 2000 as it stood at  the  relevant
time reads as follows:-

“RULE 8.    Where the excisable goods are not sold by the assessee  but  are
used for  consumption  by  him  or  on  his  behalf  in  the  production  or
manufacture of other articles, the value shall be one  hundred  and  fifteen
per cent of the cost of production or manufacture of such goods.”



12.   Inasmuch as a great deal turns on the two notifications  that  we  are
concerned with on the facts of the present case, it is  necessary  to  quote
in full the first of the two notifications.



“Notification:  8/97-CE dated 01-Mar-1997

Exemption to finished products, rejects and waste or  scrap  produced  in  a
100% EOU or FTZ In exercise of the powers conferred by  sub-section  (1)  of
section 5A of the  Central  Excise  Act,  1944  (1  of  1944),  the  Central
Government, being satisfied that it is necessary in the public  interest  so
to do, hereby exempts the finished products,  rejects  and  waste  or  scrap
specified in the Schedule to the Central  Excise  Tariff  Act,  1985  (5  of
1986) and produced or manufactured, in a hundred  per  cent  export-oriented
undertaking or a free trade zone wholly from the raw materials  produced  or
manufactured in India, and  allowed  to  be  sold  in  India  under  and  in
accordance with the provisions of paragraphs 102 and 114 of the  Export  and
Import Policy 1 April 1992 – 31 March 1997, from so  much  of  the  duty  of
excise leviable thereon under section 3 of the Central Excise Act,  1944  (1
of 1944), as is in excess of an amount equal to the duty of excise  leviable
under the said section 3 of the Central Excise Act, on like goods,  produced
or manufactured in India other than in a hundred  per  cent  export-oriented
undertaking or a free trade zone, if sold in India.”



13.   To similar effect for the subsequent period is the notification  No.23
of 2003 dated 31.3.2003.





14.   The first thing to be noticed is  that  Section  5A  under  which  the
exemption notifications are issued states in the proviso that  no  exemption
shall apply to excisable goods which are produced or manufactured by a  100%
Export Oriented Undertaking  and  brought  to  any  place  in  India  unless
specifically provided in such exemption notification.  When we turn  to  the
notification dated 1.3.1997, we find that there is  specific  provision  for
exemption of certain goods produced in a 100% EOU wholly from raw  materials
produced or manufactured in India.  It is not disputed by the  revenue  that
the instant tea manufactured by the respondent  would  be  covered  being  a
finished product specified in the schedule  to  the  Central  Excise  Tariff
Act.  Further, the notification goes on to state that the  said  tea  should
be “allowed to be sold” in India  in  accordance  with  the  relevant   EXIM
policy.  It further goes on to state that the exemption from payment of  the
duty of excise that is leviable  thereunder  under  Section  3  is  what  is
payable in  excess of an amount equal to the  duty  of  excise  leviable  on
like goods produced or manufactured in  India  produced  in  an  undertaking
other than in a 100% Export Oriented Undertaking, if sold in India.





15.   It is clear that the object of the notification is that so far as  the
product in question is concerned, so long as it is manufactured  by  a  100%
EOU out of wholly indigenous raw materials and so long as it is  allowed  to
be sold in India, the duty payable should only be the duty  of  excise  that
is payable on like goods manufactured or  produced  and  sold  in  India  by
undertakings which are not 100% EOUs.





16.   There is no doubt whatsoever that the duty of  excise  leviable  under
Section 3 would be on the basis of the  value  of  like  goods  produced  or
manufactured  outside  India  as  determinable  in   accordance   with   the
provisions of the Customs Act,  1962  and  the  Customs  Tariff  act,  1975.
However, the notification states that duty  calculated  on  the  said  basis
would only be payable to the extent of like goods manufactured in  India  by
persons other than 100% EOUs.  This being the case, it is clear that in  the
absence of actual sales in the wholesale market, when  goods  are  captively
consumed and not sold, Rule 8 of the Central Excise Rules would have  to  be
followed to determine what would be the amount equal to the duty  of  excise
leviable on like goods.  This being so, it is  clear  that  learned  counsel
for the assessee is right in her contention  that  the  basis  of  the  show
cause notice is itself flawed. The show cause notice in  the  present  case,
as has been  noticed  above,  refers  to  Rule  8  of  the   Central  Excise
Valuation (Determination of Price of Excisable Goods) Rules, 2000, but  then
goes on to state that:



“It is settled law that the value shall be determined keeping  in  view  the
following factors:

sale price of goods under assessment

sale price of other consignments of identical/ similar goods

export price of identical/similar goods

nature of sale transactions etc.”







The “settled law” spoken of would refer to a  CBEC  circular  No.268/85-CX.8
dated 29.9.1994 which deals with valuation of goods  manufactured  by  units
working under the 100% EOU scheme.  The said circular refers to  Rule  8  of
the Customs Valuation Rules and not  the  Central  Excise  Valuation  Rules.
The four factors laid down in the said  circular  have  relevance  only  qua
goods that are cleared in the DTA and how their valuation is to  be  arrived
at.  We have already seen that the manner of valuation of such  goods  would
not be relevant for the simple reason that what has to be determined in  the
facts of the present case is the valuation of the duty  of  excise  leviable
under Section 3 of  the  Central  Excise  Act  on  like  goods  produced  or
manufactured  in  India  by  undertakings  other  than   100%   EOUs.    The
application of this circular and consequently any FOB export price would  be
wholly irrelevant for the purpose of this case and as has been  held  above,
is only for arriving at the duty  of  excise  leviable  under  Section  3(1)
Proviso (ii) of the Central Excise Act.  On the facts of the  present  case,
it is clear that the said duty of excise arrived at based  on  Section  3(1)
Proviso (ii) is more than the duty determinable for like goods  produced  or
manufactured in India in other  than  100%  EOUs.   Since  the  notification
exempts anything that is in excess of what is determined as excise  duty  on
such like goods, and considering that for the entire period  under  question
the duty arrived at under Section 3(1) proviso (ii)  is  in  excess  of  the
duty arrived at on like goods manufactured in India by non 100% EOUs, it  is
clear that the whole basis of  the  show  cause  notice  is  indeed  flawed.
Further, the show cause notice is based on one solitary circumstance  –  the
fact that goods captively consumed by the two sister units of  the  unit  in
question are not “sold”.  We are afraid this approach flies in the  face  of
the language of the notification dated 1.3.1997.  The  test  to  be  applied
under the said notification is whether the goods in  question  are  “allowed
to be sold” in India. The aforesaid expression is obviously  different  from
the expression  “sold”  and  does  not  require  any  actual  sale  for  the
notification to be attracted.  In fact revenue’s  case  is  also  that  even
though the said notification is attracted, yet  because  there  is  no  sale
somehow the FOB export price of like goods alone is  to  be  looked  at.  If
this were to be so, not only would the object of  the  notification  not  be
sub-served but even its plain language would be violated.  It is clear  that
the said notification has been framed by  the  Central  Government,  in  its
wisdom, to levy only what is levied by way of excise duty on  similar  goods
manufactured in India, on goods produced  and  sold  by  100%  EOUs  in  the
domestic tariff area if they are produced from indigenous raw materials.  If
the revenue were right, logically they ought  to  have  contended  that  the
notification does not apply,  in  which  event  the  test  laid  down  under
Section 3(1) proviso (ii) would then apply.  This not  being  the  case,  we
are of the view that the Tribunal’s judgment  is  correct  and  requires  no
interference.  The appeal is, accordingly, dismissed.





                                        ……………………J.

                                        (A.K. Sikri)





                                        ……………………J.

New Delhi;                              (R.F. Nariman)

November 24, 2015.



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