By TIOL News Service

NEW DELHI, APR 23, 2015: THE assessee is engaged in the manufacturing of yarn and fabrics. The yarn was captively consumed in the manufacture of fabrics. The assessee was paying the duty on the yarn at the spindle stage on the basis of cost of construction arrived at under Rule 6(b)(ii) of the Central Excise (Valuation) Rules, 1975. The Department contends that the assessee had not declared the correct value of the captively consumed yarn during the years 1994-95, 1995-96 and 1996-97 as the value declared was much lower than the value arrived at on the basis of Cost Audit Report furnished by their cost accountants. It was further observed that the assessee had not included the value of administrative overheads, bonus, gratuity, interest, conversion charges and depreciation charges in the assessable value of the yarn.

Show cause Notices were served upon the assessee in the year 1999 demanding differential duty along with interest and were adjudicated upon by the Commissioner of Central Excise, Ahmedabad, who confirmed the demands and also imposed the penalty on the assessee. It was held that all the administrative and other overheads along with wraping, winding, beaming, sizing and dyeing charges were includible in the assessable value. The Commissioner further confirmed the invocation of the extended period of limitation only in respect of the administrative and overhead expenses.

CESTAT vide its common order dated 13.02.2004 allowed the appeals of the assessee on the ground that the larger period of limitation was not invocable against the assessee and accordingly set aside the demands of duty on them. It was also held that the cost accountants were the experts authorized by the law to do the costing of production of the goods and their duly certified statements/ reports relating to such costing were legally authentic enough to be acted upon by their clients and any error found in such certificates would not be a valid ground for any authority to proceed against the clients criminally or quasi-criminally.

The only issue before the Supreme Court is extended period of limitation.

The period involved is April, 1994 to September, 1996 whereas Show Cause Notices =were issued sometime in the year 1999 which was much beyond the period of six months stipulated in Section 11A of the Central Excise Act. The Department took the plea that the extended period of limitation contained in the proviso to sub-section (1) of Section 11A would be applicable because of the reason that there was intentional misstatement or declarations by the assessees in order to evade taxes. The CESTAT has found it otherwise.

Two things which are highlighted by the CESTAT, while accepting the arguments of the assessee-assessees are: -

(1) The declaration which was filed with the Excise Department in the prescribed form and prepared by the cost accountants was keeping in view of the provisions of Rule 173C of Central Excise Rules and as per the said form, the aforesaid cost, viz., cost of labour, bonus, etc., were to be included.

(2) There was some misunderstanding about the inclusion of these costs for the purposes of attracting excise duty, not only with the assessees but within the Department as well. Therefore, error if any was clearly bona fide and not with the object of evading excise duty.

Supreme Court found that the assessees are correct in their submissions and the CESTAT has rightly accepted their case.

Supreme Court observed,

Earlier there was some ambiguity and it was not clear as to whether cost of labour, bonus, etc., is to be included while arriving at the cost of captive consumption of this item. This was clarified only vide circular dated 30.10.1996 issued by the Central Board of Excise and Customs, New Delhi on the subject of 'Assessable Value in the case of Goods captively consumed - Addition of Profits -Reg.'

In para 3 thereof while issuing the clarification as to how the Gross Profit, i.e., profit before depreciation and taxation or 'Profit before tax' or any other profit has to be arrived at, it is also clarified that for the purposes of calculation of value of goods captively consumed under Rule 6(b)(ii) of Central Excise (Valuation) Rules, 1975, certain steps are to be taken.

The clarification pertains to calculation of value of goods captively consumed under Rule 6(b)(ii). It is this Rule which is undoubtedly applicable in the present case. Thus, for the first time, only in October, 1996, it was clarified that the cost of material, labour cost and overheads including administrative cost, advertising expenses, depreciation, interest, etc., would be included in the cost of production.

The period with which we are concerned is prior to October, 1996, i.e., April, 1994 to September, 1996. It, therefore, cannot be said that the assessee-companies made intentional misdeclaration with the purpose to avoid payment of correct excise duty.

Supreme Court found that the CESTAT was right in holding that extended period of limitation would not be applicable in the present case.

Revenue appeals stand dismissed.

(See 2015-TIOL-82-SC-CX)