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Mahindra Ugine Steel Co. Ltd. v. Commissioner Of C. Ex., Pune
Factual and Procedural Background
The assessees manufactured motor vehicle parts (Chapter Heading 87.08 of the CETA, 1985) on a job-work basis using raw material supplied by M/s. Mahindra & Mahindra. During manufacture they retained scrap generated and sold it; the proceeds (scrap credit) were deducted from the assessable value of parts. The Department took the view that the scrap credit should be included in the assessable value and issued a show cause notice dated 3-3-2000 proposing recovery of central excise duty of Rs. 1,90,70,826/- and Rs. 21,304/- (rust preventive oil), interest under Section 11AB of the Central Excise Act and Rule 57-I(3) of the Central Excise Rules, penalties under Section 11AC read with Rule 57-I(4) and Rule 173Q, confiscation of plant/ machinery/land/building, and penal action under Rule 209A against two officers of the assessee-company. The show-cause invoked an extended period on the ground of suppression for the period 1996-97 to 1999-2000 (up to 31-10-1999).
The Commissioner of Central Excise confirmed the demand and penalties. Four appeals followed: the manufacturer and its officers challenged the Commissioner’s order; the Revenue challenged the Commissioner’s quantum of penalty. The Tribunal initially set aside the duty demand and penalty relating to scrap-value inclusion, but the Supreme Court remitted the matter to the Tribunal for rehearing in view of a Cost Auditor report and directed consideration of all connected issues. The matter proceeded to fresh hearing before the bench issuing this order (Vice-President: Jyoti Balasundaram).
Legal Issues Presented
- Whether value of scrap retained by the assessee is required to be included in the assessable value of motor vehicle parts manufactured on job-work basis for M/s. Mahindra & Mahindra.
- Whether the demand is barred by limitation (i.e., whether the extended period of limitation is invokable).
Arguments of the Parties
Assessee (manufacturer and company officers) — Principal contentions
- Counsel for the assessee relied on paragraph 5.12 of Cost Accounting Standard No. 4, which states that realised or realisable value of scrap or waste shall be credited to the cost of production, contending that scrap value need not be included in assessable value of the job-worked parts.
- The assessee argued that the cost of raw material they adopted already represented the value of the entire gross quantity of raw materials (including the portion which became scrap), and therefore scrap credit should not be separately includible.
- The assessee contended bona fide belief in the correctness of their valuation (based on the Tribunal decision in Hindustan Engineering & Industries Ltd.), and further argued that in some instances they had taken higher raw material cost in their books than the actual cost to their supplier, Mahindra & Mahindra, implying no suppression.
Revenue (Department) — Principal contentions
- The Department held that proceeds of scrap are additional consideration relating to job work charges and therefore must be included in the assessable value of the parts; on that basis it issued the show cause notice and assessed duty and penalties.
- The Department invoked the extended period of limitation on the ground of suppression, pointing to the assessee's failure to file price declarations under Rule 173C and failure to inform the excise authorities that they were performing job work for Mahindra & Mahindra, along with invoices prepared to appear as sales to independent industrial customers.
- The Revenue sought imposition of penalties (including enhancement), arguing concealment and intention to evade duty.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Jay Engineering Works Ltd v. CCE (Supreme Court) | Sale proceeds of scrap generated from raw material supplied by customer for job-work form additional consideration and are includible in assessable value. | The court treated Jay Engineering as decisive authority that sale proceeds of scrap affect job work charges and must be included in assessable value; this formed a primary basis for answering Issue No. 1 in the affirmative. |
| Hindustan Engineering & Industries Ltd. v. CCE, Calcutta-I (Tribunal) | Held that sale proceeds of scrap are not includible because gross quantity (including scrap) was already included in assessable value. | The court noted this contrary Tribunal decision but observed it was subsequently reversed by the Supreme Court in General Engineering Works; thus Hindustan Engineering's view was not followed. |
| General Engineering Works v. CCE, Jaipur (Supreme Court), judgment dated 10-3-2005 | Clarified that scrap value must be included when conversion/job-work charges get reduced because scrap exists as a separate commodity; raw material and conversion charges are distinct elements. | The court relied on this Supreme Court pronouncement to reject the assessee's contention that scrap was already accounted for in gross raw material cost and to hold scrap credit includible in assessable value. |
| CCE, Nagpur v. Lloyds Steels Industries Ltd., Civil Appeal No. 2752 of 2004 (Supreme Court) | Held that excise paid on scrap does not affect valuation of primary manufactured goods on job-work; scrap is a separate commodity whose sale price determines its value. | The court cited this decision as supporting the proposition that scrap proceeds are to be treated separately and do not result in double counting of raw material value, reinforcing the view to include scrap credit in assessable value. |
| Dharampal Satyapal v. CCE, New Delhi (Supreme Court) | Plea of bona fide belief is not acceptable in cases of clandestine manufacture without payment of duty; extended period may be available where suppression or clandestine conduct is established. | The court applied Dharampal Satyapal to reject the assessee's bona fide-belief defense and to hold that the extended period of limitation was invokable because of suppression/concealment indicators. |
| State of Uttar Pradesh v. CCE, Allahabad (Tribunal) | Nondisclosure of information about manufacture and removal of excisable goods from a workshop amounts to suppression. | Relied upon to support the conclusion that failure to intimate job work and related disclosures constituted suppression enabling extended limitation. |
| Sonodyne Televisions Co. P. Ltd. v. CCE, Calcutta (Tribunal) | Non-disclosure (e.g., omission in price lists) amounted to suppression. | Used as an example to support the proposition that non-disclosure of material information (here, regarding invoices/pricing and job work status) can constitute suppression for limitation purposes. |
| IFB Industries Ltd. v. CCE, Goa (Tribunal) | Extended period available when assessee did not place certain invoices before excise authorities; revenue-neutrality (Modvat availability) is not a sufficient defense to deny suppression. | The court used this precedent to reject the assessee's argument that higher invoice values or Modvat credit to the customer remove the element of suppression; thus extended period could be invoked. |
Court's Reasoning and Analysis
The court proceeded in two stages corresponding to the two issues framed.
1. Valuation (Issue No. 1): The bench examined the Cost Auditor's report and the assessee's reliance on Cost Accounting Standard No. 4 (para 5.12) which treats realised/realisable scrap value as a credit to cost of production. However, the court treated the legal question of valuation as governed by binding Supreme Court authorities. It identified Jay Engineering Works Ltd (as upheld by the Supreme Court) as establishing that sale proceeds of scrap generated out of raw material supplied by customers are additional consideration affecting job-work charges and must be included in assessable value. The bench noted that a contrary Tribunal view (Hindustan Engineering) was reversed by the Supreme Court in General Engineering Works v. CCE, Jaipur (10-3-2005), which emphasized that raw material and conversion charges are separate elements and where conversion/job-work charges are shown to be reduced because of scrap, scrap value must be included. The court also relied on the Lloyds Steels decision to reinforce the proposition that scrap is a distinct commodity and its sale proceeds do not amount to double-counting of raw material value. On this basis, the court concluded that scrap credit is includible in assessable value and answered Issue No. 1 in the affirmative.
2. Limitation (Issue No. 2): For the limitation issue the court considered the factual conduct of the assessee as presented: failure to file price declarations under Rule 173C, failure to inform the excise department that they were doing job work for Mahindra & Mahindra, and preparation of invoices resembling sales to independent industrial customers thereby showing lower invoice prices and suppressing correct assessable value. The court held that during the disputed period the law (per Jay Engineering as upheld by the Supreme Court) was against the assessee, so the plea of bona fide belief was untenable. The court concluded that the assessee's conduct exhibited intention to evade payment of duty and constituted suppression, making the extended period of limitation available to the Department. The bench relied on the Supreme Court's decision in Dharampal Satyapal and the cited Tribunal authorities (State of U.P., Sonodyne, IFB) to support its conclusion that non-disclosure/nondisclosure of relevant documents and invoices amounted to suppression and justified invoking extended limitation. Issue No. 2 was therefore answered in the negative (i.e., the demand is not barred by limitation).
The court therefore applied binding Supreme Court precedent on valuation and applied the established tests for suppression and extended limitation to the assessee's factual conduct to reach its conclusions.
Holding and Implications
Holding (core ruling): Duty demand upheld — scrap credit is includible in assessable value and the extended period of limitation is available to the Department.
Direct consequences for the parties:
- The central excise duty demand (as challenged) is upheld.
- The demand of Rs. 21,304/- on rust preventive oil is upheld (the assessees did not dispute this amount).
- The penalty on the company is reduced by the court to Rs. 50,00,000/- (Rupees fifty lakhs only).
- Penalties imposed on the Vice President (Finance) and Senior Manager (Accounts) are set aside because the court found the provisions of Rule 209A were not attracted as no goods were held liable to confiscation.
- Appeal outcomes: the manufacturer's appeal was partly allowed (penalty reduced); the officers' appeals were allowed in full; the Revenue's appeal for enhancement of penalty was rejected. The appeals were disposed of accordingly.
Broader implications: The decision follows existing Supreme Court authorities on valuation of job-work goods and the treatment of scrap proceeds; the order addresses the parties' rights and liabilities in the present case and applies settled precedent to hold the duty and extended limitation available. The opinion does not announce a new principle of law beyond applying the cited precedents; its practical effect is confined to the relief and liabilities determined for the parties before the court.
Pronounced in Court on 23-1-2007.
[Order per : Jyoti Balasundaram, Vice-President]. - The assessees herein who are engaged in the manufacture of motor vehicle parts falling under Chapter Heading 87.08 of the Schedule to the CETA, 1985, manufactured motor vehicle parts on job work basis out of raw material supplied by M/s. Mahindra & Mahindra and retained scrap generated during the course of manufacture, and sold the scrap. The cost of scrap (scrap credit) was reduced from the assessable value of motor vehicle parts supplied to Mahindra & Mahindra. The price of the parts was worked out as raw material cost + conversion charges + packing + tools amortisation cost less value of scrap generated. The department was of the view that scrap credit value was includible in the assessable value of such motor vehicle parts and that the assessees had undervalued the parts to the extent of scrap credit value. On this basis, show cause notice dated 3-3-2000 was issued inter alia proposing recovery of central excise duty of Rs. 1,90,70,826/- and Rs. 21,304/- on rust preventive oil, together with interest under Section 11AB of the Central Excise Act and Rule 57-I(3) of the Central Excise Rules, proposing imposition of penalty under Section 11AC read with Rule 57-I(4) and Rule 173Q, and proposing confiscation of plant, machinery, land, building etc. used in connection with manufacture of motor vehicle parts. The notice also proposed penal action under Rule 209A on Vice President (Finance) and Senior Manager (Accounts) of the assessee-company. The notice invoked the extended period of limitation on the ground of suppression - the show cause notice covered the period from 1996-97 to 1999-2000 (up to 31-10-1999). The notice was adjudicated by the Commissioner of Central Excise who confirmed the demand raised in the notice together with interest, and imposed penalties of Rs. 1,82,54,355/- on the company, Rs. 35,000/- on its Vice President and Rs. 25,000/- upon its Senior Manager. The order was challenged by the manufacturer and its officers. The Revenue also challenged the Commissioner’s order on quantum of penalty (the department was of the view that the Commissioner should have imposed penalty equal to the duty as determined). All four appeals were disposed of by the Tribunal vide order No. C-I/2005 to 2008/WZB/2003 [ (T)] dated 2-9-2003, setting aside the duty demand and penalty in relation to inclusion of value of scrap in the assessable value of motor vehicle parts, while rejecting the department’s appeal - the assessee did not press appeals filed on the issues of non-inclusion of the modification charges, processing cost on motor vehicle parts and reversal of Modvat credit availed on inputs taken out of the factory, for the reason that the amounts were very small and had been promptly paid. The Tribunal’s order was challenged by the Revenue before the Apex Court which, vide its order dated 25-1-2006 in Civil Appeal Nos. 10223-10226 of 2003 [ (S.C.), remitted the matter to the Tribunal for rehearing with reference to the report of the Cost Auditor appointed by the Supreme Court during the course of hearing the appeal on 9-3-2005, in view of the various aspects relating to costing involved as highlighted by the Cost Accountant in his report. The apex court also directed the Tribunal to consider all other connected issues involved in the matter. This is how the appeals have come up for fresh hearing before us.
2. The twin issues for determination are — (1) Whether value of scrap retained by the assessee is required to be included in the assessable value of motor vehicle parts manufactured on job work basis for M/s. Mahindra & Mahindra; (2) Whether the demand is barred by limitation. (The demand on rust preventive oil is not challenged).
3. We have heard both sides.
4. Finding on issue No. 1
We have gone through the report of the Cost Auditor who has considered various principles of costing as contained in various books on costing and cost accounting. The learned counsel highlights paragraph 5.12 of the Cost Accounting Standard No. 4, which states that the production process may generate scrap or waste and realised or realisable value of scrap or waste shall be credited to the cost of production, to contend that the scrap value is not required to be included in the assessable value of motor vehicle parts manufactured by them. The Cost Auditor has worked out differential duty by comparing revised assessable value calculated on the basis of records available with the assessable value provided by Mahindra & Mahindra in their purchase order. However, the valuation issue stands squarely decided by the Apex Court in the case of Jay Engineering Works Ltd v. CCE, (S.C.) upholding the Tribunal’s order reported in holding that sale proceeds of scrap generated out of raw material supplied by customers for manufacture of goods on job work basis clearly have a bearing on job work charges realised and form additional consideration in respect of job work done, and thus includible in the assessable value. Although the Tribunal subsequently took a different view in the case of Hindustan Engineering & Industries Ltd. v. CCE, Calcutta-I, by holding that sale proceeds of scrap are not includible in assessable value as the value of entire gross quantity of items manufactured on job work basis, including the quantity which became scrap, was already included in the assessable value, distinguishing the Tribunal’s order in Jay Engineering Works Ltd. cited supra, this decision of the Tribunal stands reversed by the Apex Court judgment dated 10-3-2005 in Civil Appeal Nos. 3852-3855/1999 (General Engineering Works v. CCE, Jaipur). The Supreme Court has held as under :-
“It must be remembered that the element of raw material is a separate element from the element of conversion charges. The value of the entire raw material used has to be taken into consideration. The element of profit/conversion charges has to be added to the element of value of raw material used. The element of job work charges being separate element from the value of raw material, if it is shown that the job work charges/conversion charges get reduced then the value of scrap has got to be included in the value of the conversion charges.”
The same view was taken in the case of CCE, Nagpur v. Lloyds Steels Industries Ltd., Civil Appeal No. 2752 of 2004 - by the judgment of the Apex Court of the same date. The Court has held that even if excise is paid on scrap it would have no bearing on the working out of the value of points and crossings manufactured on job work basis as what is left is scrap/waste which is known and being sold as such, and in such a case the value is determined on the price realised. The Court has held that there is no double calculation of the value of raw material as a second commodity (viz. scrap) has come into existence and therefore excise paid on scrap has no relevance in working out the value of the first commodity, i.e. points and crossings. The learned counsel submits that even on application of the above judgments in their case, scrap credit cannot be included in the assessable value of motor vehicle parts as what was adopted by them as cost of raw material was the value of the entire gross quantity of raw materials including the quantity which became scrap. However, this submission is not tenable in the light of the General Engineering Works judgment cited supra, wherein the Court has held that in working out the value of points and crossings manufactured on job work basis, the entire quantity of 105 kgs. of raw material required for manufacture of 100 kgs. of points and crossings will have to be taken into account.
Following the ratio of the Supreme Court’s judgment cited supra, we answer issue No. 1 in the affirmative.
5. Finding on issue No. 2
During the period in dispute, the law stood settled against the assessees by Tribunal’s order in Jay Engineering Works Ltd. as upheld by the Apex Court. Therefore, even though the subsequent decision in Hindustan Engineering & Industries Ltd. was to the contrary, the assessees’ argument that they were under a bona fide belief that sale proceeds of scrap are not includible in the assessable value when the scrap is not returned, has no leg to stand on. The assessees did not file price declarations as required under Rule 173C of the Central Excise Rules, 1944 and also did not intimate the excise department that they were doing job work for Mahindra & Mahindra and they had prepared invoices for goods as sale to independent industrial customers and shown those prices as invoice prices and suppressed the correct assessable value. The intention to evade payment of duty is clearly brought out by the above conduct. In these circumstances, we have no hesitation in holding that the extended period of limitation is available to the department in this case, in the light of the judgment of the Hon’ble Supreme Court in Dharampal Satyapal v. CCE, New Delhi, (S.C.) holding that the plea of bona fide belief was not acceptable in a case of clandestine manufacture without payment of duty and that the right to claim Modvat credit was different from defence of bona fides, and the Tribunal’s orders in the case of State of Uttar Pradesh v. CCE, Allahabad, holding that nondisclosure of information about manufacture and removal of excisable goods from a workshop amounts to suppression of vital information, Sonodyne Televisions Co. P. Ltd. v. CCE, Calcutta, holding that non-disclosure in price lists of charges for comprehensive maintenance service amounted to suppression, and IFB Industries Ltd. v. CCE, Goa, holding that the extended period is available when the assessee did not place invoices showing lower value in case of transfer to sister unit, before the central excise authorities, and that the plea of revenue neutrality on account of availability of Modvat credit to sister unit itself cannot be a ground to hold that there was no suppression. The further contention of the respondents that since in some cases they were taking higher cost price of raw material received than the actual cost to their suppliers/principals, i.e. M/s. Mahindra & Mahindra, they cannot be held guilty of suppression so as to invoke the extended period, is also not tenable for the reason that they are concerned with their conversion charges and profit and their payment of excess duty, due to decrease in price of raw material in the hands of their suppliers does not result in any loss either to the respondents or to their customers (Mahindra & Mahindra) who were availing corresponding higher Cenvat credit. Issue No. 2 is thus answered in the negative.
6. In the result, we uphold the duty demand. However, having regard to the totality of the facts and circumstances of the case, we reduce the penalty on the company to Rs. 50,00,000/- (Rupees fifty lakhs only). The demand of Rs. 21,304/- on rust preventive oil is upheld as the assessees do not dispute the liability to pay this amount. Penalty on the officers of the company is set aside as the provisions of Rule 209A of the Central Excise Rules under which penalty has been imposed, are not attracted against them, for the reason that no goods have been held to be liable to confiscation.
7. In the result, appeal No. E/3439/01 of the manufacturer is partly allowed by reduction in penalty, appeal Nos. E/3440 & 3441/01 of the company’s officers are allowed in toto and the appeal of the Revenue for enhancement of penalty is rejected.
8. The appeals are disposed of in the above terms.
(Pronounced in Court on 23-1-2007)
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