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Friday, May 13, 2016

The Tribunal being the last forum of appreciation of facts has held that transfer of iron ore pellets by IIL to IMIL was not a sale of goods but was only a transfer of raw materials procured under the Tripartite Agreement between the two of them and the supplier of the said pellets.-circular makes it clear that a distinction is made between inputs on which credit has been taken which are removed on sale, and those which are removed on transfer. If removed on sale, “transaction value” on the application of Section 4(1)(a) of the valuation rules is to be looked at. However, where the goods are entirely transferred to a sister unit, it is reasonable to adopt the value shown in the invoice on the basis of which Cenvat Credit was taken by the assessee i.e. the invoice of the supplier of the pellets to the assessee.=it is a case of transfer and not sale of pellets, no infirmity can be found with the Tribunal’s judgment, which only follows the circular dated 1.7.2001. In addition, the Tribunal was also correct in holding that post manufacturing expenses cannot be loaded on to the amount equal to the duty of excise leviable on such goods as this amount would, then, cease to be an amount equal to the duty of excise but would be something more. On both these counts therefore, we find that the Tribunal is justified in its finding on law, which is based on its finding of fact that the present is a case of transfer and not sale. This being the case, it is unnecessary to consider any of the other submissions made by the learned counsel including the point of limitation. The appeals are, accordingly, dismissed.

                                 REPORTABLE




                        IN THE SUPREME COURT OF INDIA

                        CIVIL APPELLATE JURISDICTION

                        CIVIL APPEAL NO. 2562 OF 2008





      COMMISSIONER OF CENTRAL EXCISE,
      RAIGAD                                                ....APPELLANT




                                   VERSUS


      M/S. ISPAT METALLICS INDUSTRIES
      LTD. & ORS.                              ….RESPONDENTS


                                    WITH


                        CIVIL APPEAL NO.8557 OF 2015




                              J U D G M E N T



R.F. Nariman, J.

1.    Two appeals have been filed from a common  decision  of  CESTAT  dated
11.10.2005, whereby the Tribunal has upset the order  of  the  Commissioner,
confirming various duty demands, penalty and interest.

2.    The brief facts necessary in order to appreciate  the  controversy  at
hand, taken from C.A. No.2562 of 2008, are as follows.



3.    M/s. Ispat Industries Limited (hereinafter referred to as  the  “IIL”)
is engaged in the manufacture of HR coils, sheets, plates, etc.,  which  are
cleared on payment of duty of excise.  In the manufacture of such goods,  it
avails credit on inputs such as iron ore pellets.  Adjacent  to  its  plant,
another  group  company,  namely,  M/s.  Ispat  Metallics  Industries   Ltd.
(hereinafter referred to as the “IMIL”) also has  a  factory  in  which  pig
iron and molten metal are  manufactured.  The  principal  raw  material  for
manufacture for both these companies is iron ore pellets.  The said  pellets
were purchased from Mandovi Pellets and Essar  Steel  Limited.   These  were
carried to the factory of IIL.  Credit was availed by IIL of the  duty  paid
on the entire quantity so procured.  As and  when  required  by  the  sister
company IMIL, pellets were transferred through a conveyor from  IIL’s  plant
to IMIL’s premises under cover of an invoice  and  on  reversing  an  amount
equal to the Cenvat credit availed on inputs that were so  transferred.   In
addition to  such  invoices,  IIL  also  raised  debit  notes  on  IMIL  for
recovering actual expenditure incurred by it in relation  to  the  procuring
of such iron ore pellets, such as bank commission, interest, etc.



4.    The aforesaid two companies  were  issued  show  cause  notices  dated
29.9.2003 and  14.10.2003  respectively.   It  was  alleged  that  iron  ore
pellets were sold by IIL to IMIL and that the amounts recovered  by  IIL  in
the  form  of  debit  notes  towards  bank  charges,  interest,  etc.   were
includible in the assessable value of such inputs that  were  cleared.   The
notice alleged that the reversal of credit equal to the amount paid  to  the
supplier which was being followed by IIL was not in compliance with law.



5.    The learned Commissioner upheld the show cause  notices  stating  that
the transaction between IIL and IMIL was  one  of  sale  and  not  transfer.
Since the goods were reassessed to duty in terms of  Rule  57AB(1C)  of  the
Central Excise Rules, 1944 and Rule 3(4) of the Cenvat Credit  Rules,  2001,
the assessable value in terms of Section 4(1)(a) of the Central  Excise  Act
i.e., the transaction value at the time of  clearance  plus  any  additional
consideration paid by the buyer at  a  later  stage  is  to  be  added  and,
therefore, the amounts mentioned in the debit note from  IIL  to  IMIL  were
also  includible  in   the   assessable   duty   valuation   as   additional
consideration.  The extended period for limitation  was  also  found  to  be
available on the facts of the present case.



6.    The Tribunal reversed the aforesaid decision on the  ground  that  the
transfer of iron ore pellets by IIL to IMIL was not a sale of goods but  was
transfer of raw materials,  jointly  procured,  under  a  joint  procurement
policy which was followed by the  two  sister  companies  and  this  becomes
clear on a reading of the tripartite agreement between the supplier  of  the
pellets, IIL, and IMIL.  This being so,  the  Tribunal  applied  a  circular
dated 1.7.2002 by which, where no sale is involved but only  a  transfer  by
one sister unit to another, the value shown in the invoice on the  basis  of
which Cenvat credit was taken by the assessee would be  the  value  for  the
purpose of Rule 57AB and Rule 3(4). It  was  further  held  that  additional
consideration could not be added inasmuch as the amount  spoken  of  in  the
Rule 57AB and Rule 3(4) is an amount equal to the duty of  excise  which  is
leviable on such goods.  Post manufacturing expenses cannot possibly  amount
to a duty of excise leviable on such goods and therefore  all  amounts  paid
under the debit notes between IIL and IMIL could not be added to  the  value
of those goods. Further, the invoice value of the supplier alone was  to  be
taken  into  account  and,  consequently,  the  judgment  of   the   learned
Commissioner was set aside, not only on  merits,  but  also  on  limitation,
following the judgments of the Tribunal itself and of this Court.



7.    Shri Radhakrishnan has read to us in detail  the  show  cause  notices
and the Commissioner’s judgment dated 24.12.2004, which is  strongly  relied
upon by him in support of his case.  It is his case that  a  proper  reading
of the relevant rules would make it clear  that  what  has  to  be  seen  is
transaction value under Section 4(1)(a) of the Central Excise  Act  and  not
invoice value of the supplier of the  iron  ore  pellets.   This  being  so,
according to him, the learned Commissioner is right  in  his  reasoning  and
the Tribunal’s judgment should be reversed.







8.    Shri V.  Lakshmikumaran,  the  learned  counsel,  on  the  other  hand
supported the decision of the Tribunal and argued that on a reading  of  the
Rules the rate applicable to such goods would be as on the date  of  removal
but value would necessarily be that determined for such goods under  Section
4 or 4A of the Central Excise Act which would be the invoice  value  of  the
iron ore pellets cleared by  the  supplier  of  those  pellets.   He  relied
strongly on the circular dated 1.7.2002, which was also relied upon  by  the
Tribunal, and further went on to argue that  there  was  no  suppression  of
facts in this case and, hence, the extended period of limitation  could  not
possibly have been applied to the facts of this case.



9.    Having heard the learned counsel for the parties, it is  important  to
first set out the relevant rules.   Rule  57AB(1C)  of  the  Central  Excise
Rules, 1944 and Rule 3(4) of the Cenvat Credit Rules, 2001 as they  read  at
the relevant time, read as follows:-



           “57(1C)     When inputs or capital goods, on  which  credit  has
           been  taken,  are  removed  as  such  from  the   factory,   the
           manufacturer of the final products shall pay an amount equal  to
           the duty of excise which is leviable on such goods at  the  rate
           applicable to such goods on the date of such removal and on  the
           value determined for such goods under  Section  4  of  the  said
           Central Excise Act, and such removal shall  be  made  under  the
           cover of an invoice referred to in rule 52A.”

           Rule 3(4)   When inputs or capital goods, on which CENVAT credit
           has been taken, are  removed  as  such  from  the  factory,  the
           manufacturer of the final products shall pay an amount equal  to
           the duty of excise which is leviable on such goods at  the  rate
           applicable to such goods on the date of such removal and on  the
           value determined for such goods under Section 4 or Section 4A of
           the Act, as the case may be, and  such  removal  shall  be  made
           under the cover of an invoice referred to in rule 7.”







10.   The Tribunal being the last forum of appreciation of  facts  has  held
that transfer of iron ore pellets by IIL to IMIL was not  a  sale  of  goods
but was only a transfer of  raw  materials  procured  under  the  Tripartite
Agreement between the two of them and the  supplier  of  the  said  pellets.
This is a pure finding of fact and Shri Radhakrishnan has not been  able  to
dislodge this finding of fact. This being the case, the application  of  the
circular of 1.7.2002 becomes important.  Paragraph 14 of the  said  circular
reads as under:-



|14. |How will valuation|Where inputs or capital goods, on |
|    |be done when      |which credit has been taken, are  |
|    |inputs or capital |removed as such on sale, there    |
|    |goods, on which   |should be no problem in           |
|    |CENVAT credit has |ascertaining the transaction value|
|    |been taken are    |by application of sec.4(1)(a) or  |
|    |removed as such   |the Valuation Rules.  [Provided   |
|    |from the factory, |tariff values have not been fixed |
|    |under the         |for the inputs or they are not    |
|    |erstwhile sub rule|assessed under Section 4A on the  |
|    |(1C) of rule 57AB |basis of MRP ]                    |
|    |of the Central    |There may be cases where the      |
|    |Excise Rules,     |inputs or capital goods are       |
|    |1944, or under    |removed as such to a sister unit  |
|    |rule 3(4) of the  |of the assessee or to another     |
|    |Cenvat Credit     |factory of the same company and   |
|    |Rules, 2001 or    |where no sale is involved. It may |
|    |2002 ?            |be noticed that sub rule (1C) of  |
|    |                  |Rule 57AB of the erstwhile Central|
|    |                  |Excise Rules, 1944 and Rule 3(4)  |
|    |                  |of the Cenvat Credit Rules 2001   |
|    |                  |(now 2002, talk of determination  |
|    |                  |of value for “such goods” and not |
|    |                  |the “said goods”. Thus, if the    |
|    |                  |assessee partly sells the inputs  |
|    |                  |to independent buyers and partly  |
|    |                  |transfers to its sister units, the|
|    |                  |transaction value of “such goods” |
|    |                  |would be available in the form of |
|    |                  |the transaction value of inputs   |
|    |                  |sold to an unrelated buyer (if the|
|    |                  |sale price to the unrelated buyer |
|    |                  |varies over a period of time, the |
|    |                  |value nearest to the time of      |
|    |                  |removal should be adopted).       |
|    |                  |Problems will, however, arise     |
|    |                  |where the assessee does not sell  |
|    |                  |the inputs/ capital goods to any  |
|    |                  |independent buyer and the only    |
|    |                  |removal of such input/ capital    |
|    |                  |goods, outside the factory, is in |
|    |                  |the nature of transfer to a sister|
|    |                  |unit. In such a case proviso to   |
|    |                  |rule 9 will apply and provisions  |
|    |                  |of rule 8 of the valuation rules  |
|    |                  |would have to be invoked. However,|
|    |                  |this would require determination  |
|    |                  |of the ‘cost of production or     |
|    |                  |manufacture’, which would not be  |
|    |                  |possible since the said inputs/   |
|    |                  |capital goods have been received  |
|    |                  |by the assessee from outside and  |
|    |                  |have not been produced or         |
|    |                  |manufactured in his factory.      |
|    |                  |Recourse will, therefore, have to |
|    |                  |be taken to the residuary rule 11 |
|    |                  |of the valuation rules and the    |
|    |                  |value determined using reasonable |
|    |                  |means consistent with the         |
|    |                  |principles and general provisions |
|    |                  |of the valuation rules and        |
|    |                  |sub-section (1) of sec. 4 of the  |
|    |                  |Act. In that case it would be     |
|    |                  |reasonable to adopt the value     |
|    |                  |shown in the invoice on the basis |
|    |                  |of which CENVAT credit was taken  |
|    |                  |by the assessee in the first      |
|    |                  |place. In respect of capital goods|
|    |                  |adequate depreciation may be given|
|    |                  |as per the rates fixed in letter F|
|    |                  |No. 495/16/93-Cus.VI dated        |
|    |                  |26.5.93, issued on the Customs    |
|    |                  |side.                             |




11.   A reading of this circular makes it clear that a distinction  is  made
between inputs on which credit has been taken which  are  removed  on  sale,
and those which are removed on transfer.  If removed on  sale,  “transaction
value” on the application of Section 4(1)(a) of the valuation  rules  is  to
be looked at.  However, where  the  goods  are  entirely  transferred  to  a
sister unit, it is reasonable to adopt the value shown  in  the  invoice  on
the basis of which Cenvat Credit was taken by the assessee i.e. the  invoice
of the supplier of the pellets to the assessee.



12.   As it is clear that the present is a case of transfer and not sale  of
pellets, no infirmity can be found with the Tribunal’s judgment, which  only
follows the circular dated 1.7.2001.  In addition,  the  Tribunal  was  also
correct in holding that post manufacturing expenses cannot be loaded  on  to
the amount equal to the duty of  excise  leviable  on  such  goods  as  this
amount would, then, cease to be an amount equal to the duty  of  excise  but
would be something more.  On both these counts therefore, we find  that  the
Tribunal is justified in its finding on law, which is based on  its  finding
of fact that the present is a case of transfer and not sale. This being  the
case, it is unnecessary to consider any of the  other  submissions  made  by
the learned counsel including the point of  limitation.   The  appeals  are,
accordingly, dismissed.





                                        ……………………J.

                                        (A.K. Sikri)





                                        ……………………J.

                                        (R.F. Nariman)

New Delhi;

May 6, 2016



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