[Order per : K.K. Bhatia, Member (T)]. - The appellants M/s. Hindustan Development Corporation Limited manufacture Railway Points and Crossing falling under chapter sub-heading No. 7302.90. They were issued a show cause notice dated 4-8-93 by the Collector of Central Excise, Calcutta in which it was alleged that they received free supply of rails from the Indian Railways on payment of duty and were availing the Modvat credit at the rate of Rs. 190/- per MT on the entire quantity of rails received by them. As per the contract entered into by the party with the Railways, the latter would only pay fabrication charges and excise duty payable on the end products. The company, however, for payment of duty on the end products took into account the material value used in the manufacture of the finished goods and fabrication charges together. It is alleged that the said company did not add to the assessable value so much of the credit of the Central Excise duty availed of on the rails supplied by the Indian Railways for fixing the fabrication charge of the said goods which was not passed on to the Railways resulting in under valuation. It is further alleged that the appellants sold waste and scrap generated in the fabrication in the market. As per the contract, the company was entitled to retain the said waste and scrap. It is alleged that the company also did not add to the assessable value of the said goods, the money value of the scrap generated out of such rails supplied by the Indian Railways which they sold in the market; that consequently such price became additional consideration resulting in short levy of the Central Excise duty amounting to Rs. 31,50,950/- on the value of Rs. 1,95,19,040/- during the period from 1-7-88 to 30-6-93. It is alleged that the company suppressed the elements of contract viz. (i) the fabrication contract was based on the free of supply of rails by the purchaser FOR contractor’s works, (ii) the free of cost rails were supplied in quality equal to the net requirement for the fabrication of switches and crossings ordered plus wastage of 5%, (iii) scrap and wastage will be on non-returnable basis, and (iv) the invoice price at which the duty was paid, represented only constructed price based on the raw material cost and fabrication cost. The appellants were therefore called upon to show cause why the amount of Modvat credit availed on the free supply of rails retained by them and the sale proceeds of the waste and scrap generated out of rails being additional consideration flowing to them should not be added to the assessable value in terms of Rule 5 of the Central Excise (Valuation) Rules, 1975 read with Section 4(1)(b) of the Central Excise Act, 1944 and why the Central Excise duty amounting to Rs. 31,50,950/- during the period from July, 1988 to June, 1993 shall not be demanded from them under Rule 9(2) read with Proviso to Section 11A(1) of the Act .

They were further called upon to show cause why a penalty should not be imposed on them under Rule 173Q(1) and why their land, building, plant, machinery, etc. should no be confiscated under Rule 173Q(2).

2. After considering the reply of the party, the Commissioner of Central Excise, Calcutta-1 vide his order dated 3-10-2000 confirmed on them the Central Excise duty of the aforesaid amount under Rule 9(2) read with Section 11A(1). He further imposed a penalty of Rs. 3.5 lakhs on them under Rule 173Q and also demanded the interest on the confirmed amount of duty under Section 11AB.

3. This is an appeal against the impugned order of the Commissioner. We have heard Shri S.K. Bagaria and Shri Partha Banerjee, Advocates for the appellants and Shri A.K. Chattopadhyay. JDR for the respondents. In this case, a differential duty of Rs. 31,50,950/- has been fastened on to the appellants by invoking the extended period of demand on the ground that they had not included the element of the Modvat credit availed on the rails supplied to them free of cost by the Indian Railways in the assessable value of the points and crossing manufactured out of such rails. The other objection raised by the department that is the party did not include the money value of the waste and scrap retained and sold in the market in the assessable value of the end products manufactured by them. It is however accepted that the assessable value of the end products included the value of the rails supplied free of cost to the appellants by the Railways. As regards the inclusion of element of Modvat credit of the Central Excise duty availed on the raw material is concerned, this proposition is fully covered in favour of the appellants by the ratio of the Supreme Court in CCE, Pune v. Dai Ichi Karkaria Limited - (S.C.). The Hon’ble Supreme Court in this judgment has observed as follows :-

“24. We think it is appropriate that the cost of the excisable product for the purposes of assessment of excise duty under Section 4(1)(b) of the Act read with Rule 6 of the Rules should be reckoned as it would be reckoned by a man of commerce. We think that such realism must inform the meaning that the Courts give to words of a commercial nature, like cost, which are not defined in the statutes, which use them. A man of commerce would, in our view, look at the matter thus : “I paid Rs. 100/- to the seller of the raw material as the price thereof. The seller of the raw material had paid Rs. 10/- as the excise duty thereon. Consequent upon purchasing the raw material and by virtue of the Modvat Scheme, I have become entitled to the credit of Rs. 10/- with the excise authorities and can utilize this credit when I pay excise duty on my finished product. The real cost of the raw material (exclusive of freight, insurance and the like) to me is, therefore, Rs. 90/-. In reckoning the cost of the final product I would include Rs. 90/- on this account.” This in real terms, is the cost of the raw material (exclusive of freight, insurance and the like) and it is this our view, which should properly be included in computing the cost of the excisable product.

25.  The view we take about the cost of the raw material is borne out but the Guidance Note of the Indian Institute of Chartered Accountants, and there can be no doubt that this institute is an authoritative body in the matter of laying down accountancy standards.

26.  To answer the question involved in these appeals, in determining the cost of an excisable product covered by the Modvat Scheme under Section 4(1)(b) of the Act read with Rule 6 of the Valuation Rules the excise duty paid on raw material also covered by the Modvat Scheme is not to be included.”

4. The above judgment was cited before the adjudicating authority. He has, however, distinguished its ratio with the facts of the present case. In his decision, he has observed as follows :

“The matter decided, in Dai Ichi Karkaria case discussed above, the Hon’ble Supreme Court, while adopting the commercial approach, the focus was on manufacturer, who purchases his own raw material. It was held that since the manufacturer pays for the new material, he is entitled and supposed to set off the duty incidence while calculating the landed cost of the raw material. This action does not lead to any additional consideration for sale of his final product because the amount of credit legally available to him under Modvat Scheme is nothing but his own money which he paid as C.E. duty while purchasing the input. In such a case, if it is seen that the manufacturer has taken total value of raw material to ascertain his assessable value, without setting it off by the modvated duty element, there will be no reason to question the valuation - rather in such case the manufacturer can contend that he has scaled up the value by not arriving at net landed cost of raw material. But the situation is not similar to a manufacturer who gets the raw material as free supply and also avails Modvat credit of the amount of duty paid on such raw material purchased actually by his buyer who supplied the raw material free of charge. The focus in such a case being totally different from the commercial viewpoint, the decision of the Hon’ble Supreme Court in the said Dai Ichi karkaria case would not be applicable.

In fact, in the present case since the noticee reportedly considered the total value of free supply of material, which is inclusive of C.E. duty, one may misinterpret the Hon’ble Supreme Court’s observation cited above in the Dai Ichi Karkaria case to hold that since a manufacture can rightfully deduct the amount of duty element to arrive at the landed cost, the job worker will also be correctly arriving at the assessable value by not deducting the duty element from the raw material value. But viewing from the commercial angle, as should be done in order to follow the Hon’ble Supreme Court’s observation, here the manufacturer is gaining the total amount of credit, as he did not have to pay anything towards it. This amount, undoubtedly was gained as an additional consideration by him as a result of the activity of manufacture. Commercially, amount equivalent to the credit would have been borne by him from his own account while paying the total duty on final product and in the commercial world, the policy not being that of charity the amount would have been borne by the buyer in some way or the other. I therefore find that the amount of Modvat credit earned by the notice, without first paying the duty from his own account while procuring the raw material, is nothing but an additional consideration, which is part of the intrinsic value of the impugned goods.”

5. On careful consideration of the above findings, we do not see any warrant to distinguish between two situations viz. where the manufacturer buys his own raw material or where the raw material is supplied to his factory by his principal. The proposition for consideration in both the cases is - what would be the assessable value under the rules in cases where the goods are not sold. This is properly framed by the Apex Court in Para 19 of their above judgment as follow :-

“19. With this in mind, we must now determine whether the excise duty paid on the raw material should form part of the cost of the excisable product for the purposes of Section 4(1)(b) of the Act read with Rule 6 of the Valuation Rules?”

6. In our view the facts obtaining in both the cases are identical. Therefore respectfully following the ratio of the above judgment of the Suprme Court, we hold that the element of the Modvat credit of duty availed on the rails by the appellants in the facts and circumstances of the case is not includible in the assessable value of points and crossing for the purpose of payment of duty.

7. The next issue for consideration in the present appeal is whether or not the sale proceeds of scrap arising out of free supply of rails is liable to be included in the assessable value of points and crossings. The department has relied on the decision of the Tribunal in the case of Jay Engineering Works Limited v. CCE - (T) in which it is held that where the manufacturer had retained the scrap generated out of raw material supplied by the customer and sold the same and the sale proceeds were retained by them, that sale proceeds would clearly have bearing on the job work charges which were realized by the job worker and is an additional consideration in respect of the job work done by them and that the same therefore have to be reckoned towards assessable value. The appellants have been however contending that this benefit is retainable and is retained by them as per the contract; that they were including in the assessable value of its final products the value of the entire gross quantity of rails including the quantity which became scrap, thus - it is argued - in any event, the value of the quantity becoming scrap was already included in the assessable value of the quantity becoming scrap and there could be no scope for any further inclusion. We have considered these submissions. It is observed that the allegation in the show cause notice is that the Indian Railways allowed to the appellants 5% of the rails as non-returnable scrap; that 5% of the value of the rails allowed to be retained by the appellants is included in the value of the rails since the free cost of rails were supplied in quantity equal to the net requirement for the fabrication of switches and crossings ordered plus wastage of 5%. We therefore find force in the contention of the appellants that they were including in the value of the its final product the value of the entire gross quantity of the rails including the quantity which became scrap; that in any event, the value of the quantity becoming scrap was already included in the assessable value and there could be no scope for any further inclusion in terms of the principle laid down by the Supreme Court. There is further evidence on record that the scrap sold by the appellants in the market was also subjected to duty at the appropriate rate.

8. In view of the above analysis, the appeal succeeds on both the points. The appellants have also contended on time bar of demand. Since, however, we are allowing the appeal on merits, there does not seems to be any need to go into the time bar aspect of the case.

9. The appeal is thus allowed by setting aside the impugned order passed by the Commissioner.