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Srf Ltd. v. Commissioner Of C. Ex., Chennai-I
Factual and Procedural Background
M/s. SRF Ltd. (SRF) manufactured dipped nylon tyre cord fabrics (DNTCF) and cleared those goods to M/s. Goodyear (Goodyear) on payment of duty for the period 1-10-1996 to 31-3-1999. SRF did not include the cost of dipping chemicals in the assessable value of DNTCF even though those dipping chemicals were supplied free of cost by Goodyear. SRF had taken Modvat credit of the duty paid on those chemicals.
The Commissioner held that SRF had suppressed receipt of duty-paid dipping chemicals free of cost, had availed credit of the duty, and had excluded the cost of chemicals from the value of the DNTCF with intent to evade duty. The Commissioner further held that the dipping process amounted to manufacture of excisable goods falling under Chapter sub-heading 59.02 of the CETA Schedule and, invoking the proviso to Section 11A(1), demanded differential duty of Rs. 77,37,560/-, imposed an equal amount as penalty under Section 11AC, and also demanded interest on the duty. The impugned order is Order No. 67/05 dated 27-12-2005.
The impugned order followed a remand by the CESTAT (Final Order No. 300/05 - NB(A), dated 15-2-2005) directing the Commissioner to re-examine exigibility and classification in the light of an Apex Court decision in the case of MRF Ltd. and to pass a fresh decision on points relating to extended period and quantification of demand.
Legal Issues Presented
- Whether the correct valuation of DNTCF cleared to Goodyear should include the cost of dipping chemicals supplied free of cost by Goodyear (i.e., whether those free supplies must be included in assessable value for duty).
- Whether the goods were exigible to duty, and whether the process of dipping amounted to manufacture of excisable goods falling under Chapter sub-heading 59.02 (classification and exigibility).
- Whether the demand for differential duty, interest and penalty (under Section 11AC) was sustainable in the facts of the case.
Arguments of the Parties
Appellant's (SRF) Arguments
- The crucial issue is valuation: whether cost of free dipping chemicals supplied by Goodyear must be included in assessable value of DNTCF. SRF contended it should not be included.
- SRF’s counsel relied on the Apex Court decision in International Auto Ltd. v. C.C.E. to show that under the Modvat scheme the manufacturer of the final product is entitled to utilize credit of duty paid on inputs and intermediate products; therefore the ratio applies to SRF’s case and the impugned order is incorrect.
- Counsel further relied on the fact that the Tribunal decision in Jay Yuhshin Ltd. (Tri.-Del.) was set aside by the Apex Court when tagged with the International Auto appeal, arguing that the result in Jay Yuhshin supports allowing the present appeal.
- SRF pointed out that they had begun including the value of free supplies from Goodyear from 1-4-1999 (as a matter of record/adjustment), and asked that if valuation issue resolved in their favor, other issues need not be pressed.
Respondent's (Revenue / SDR) Arguments
- The learned SDR sought to distinguish International Auto Ltd. on facts, arguing that SRF had availed Modvat credit of the free supply materials whereas in International Auto the intermediate manufacturer had not taken input-duty credit in respect of the free inputs supplied.
- The SDR defended the impugned order (i.e., the demand, penalty and classification decided by the Commissioner).
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| International Auto Ltd. v. C.C.E. (Apex Court) | The Modvat scheme principle that the Modvat of the final product must include the cost of inputs and that the manufacturer of the final product is entitled to adjust credit on inputs supplied and credit of duty paid by the intermediate purchaser on intermediate products (Rule 57F(2)(b) discussion). | The court held that although the facts are not identical, the ratio is applicable: the Modvat operation for the manufacturer of the final product renders valuation dispute of the intermediate product of no consequence; the impugned order was found inconsistent with this ratio and accordingly not sustainable insofar as it demanded duty, interest and penalty for the valuation issue. |
| Jay Yuhshin Ltd. v. C.C.E. (Tri.-Del.) and Civil Appeal to Apex Court | The Tribunal had applied the view that intermediate manufacturer should include value of free supplies in valuation of intermediate products and had upheld demand and penalty; this decision was later set aside by the Apex Court when considered alongside International Auto. | The court observed that facts in Jay Yuhshin are similar to the present case (noting differences in movement under Rule 57F(4)). Because the Apex Court set aside demand and penalty in Jay Yuhshin, the present court applied that result and found the demand, interest and penalty in the impugned order unsustainable and vacated them. |
| MRF Ltd. (Apex Court) — referred in remand | The remand by the Tribunal instructed the Commissioner to examine exigibility and classification in the light of the decision in MRF Ltd. | The opinion records that the Commissioner was to examine exigibility and classification in the light of MRF Ltd. but the provided text does not state the principle from MRF Ltd. or how that decision was applied substantively in the present opinion beyond the remand instruction. |
Court's Reasoning and Analysis
The court reviewed the record and submissions. It acknowledged factual differences between the present case and International Auto (notably that SRF had availed Modvat credit for the free supplies and that movement of inputs in this case was not under Rule 57F(4)), but concluded that the ratio in International Auto still applied. The court summarized the International Auto holding that when both supplier of intermediate product and manufacturer of the final product operate under the Modvat Scheme, the availability and utilization of credit by the manufacturer of the final product make inclusion of the cost of free-supplied inputs in the value of the intermediate product unnecessary.
The court reasoned that even though SRF had taken credit and had excluded the cost of dipping chemicals from the value of NDTCF, Goodyear (the final manufacturer) could have availed credit of the duty paid on the intermediate products and inputs. Therefore, including the cost in the intermediate product’s value or allowing the final manufacturer to utilize credit was revenue-neutral — the Modvat scheme's operation at the level of the final manufacturer neutralized any revenue consequence of SRF’s valuation treatment. On this basis the valuation dispute was rendered “of no consequence” to revenue.
The court also considered Jay Yuhshin, noting its factual similarity (except for movement under Rule 57F(4)), and observed that the Apex Court had set aside the demand and penalty in the Jay Yuhshin matter. Given that precedent and the applicability of International Auto’s ratio, the court concluded that the demand of duty, interest and penalty in the impugned order were not sustainable.
The court explicitly stated that the impugned order was inconsistent with the ratio of the Apex Court decision relied upon and therefore vacated the demand, interest and penalty related to the valuation issue. The remainder of the impugned order that was not challenged was affirmed.
Holding and Implications
Holding: The appeal was allowed in part. The court vacated the demand of differential duty, the interest and the penalty insofar as they related to the valuation issue (i.e., exclusion of the cost of free-supplied dipping chemicals). The remainder of the impugned order (the portions not challenged) was affirmed.
Direct consequences for the parties:
- The demand for differential duty of Rs. 77,37,560/-, the equal penalty under Section 11AC, and the interest demanded in the impugned order (to the extent they derive from the valuation exclusion of the cost of free-supplied dipping chemicals) were vacated.
- The appellant agreed (as recorded) that they shall not claim refund of any duty already paid on this account.
- Parts of the impugned order not challenged in the appeal remain effective and are affirmed.
Broader implications: The opinion grounds its decision on the ratio of the Apex Court in International Auto and the result in the Jay Yuhshin matter as applied to the Modvat scheme. The opinion treats the valuation dispute as revenue-neutral when the manufacturer of the final product can utilize input and intermediate-product credit. The text does not expressly state that the court intended to lay down a new precedent beyond applying these authorities; it limits its outcome to the facts and to the application of existing Apex Court ratio.
Operative portion pronounced in open Court on 18-2-2007 (as recorded in the provided opinion).
[Order per : P. Karthikeyan, Member (T) (Oral)]. - M/s. SRF Ltd. (SRF), manufactured dipped nylon tyre cord fabrics (DNTCF) and cleared on sale to M/s. Goodyear (Goodyear) on payment of duty during the period from 1-10-1996 to 31-3-99. In computing the assessable value for payment of duty they had not included the cost of dipping chemicals they had received free of cost from Goodyear. SRF had taken Modvat credit of duty paid on these chemicals. In the impugned order, Commissioner has confirmed the allegation that SRF had suppressed the fact of receipt of duty paid dipping chemicals free of cost, availment of the duty paid as credit and excluding the cost of chemicals from the value of dipped nylon tyre cord fabrics with intention to evade payment of duty; that the process of dipping of tyre cord fabrics in chemical solution amounted to manufacture of excisable goods; that the goods fell under Chapter sub-heading 59.02 of the CETA Schedule and that the differential duty was accordingly demandable in terms of proviso to Section 11 A(l). He decided the duty so liable to be paid by the appellants as Rs. 77,37,560/- and imposed equal amount of penalty under Section 11AC. He also demanded interest on the above duty amount. This appeal is against the above Order No. 67/05, dated 27-12-2005.
2. The impugned order has been passed following the remand order of the CESTAT vide Final Order No. 300/05 - NB(A), dated 15-2-2005 directing the Commissioner to examine the exigibility and classification of the impugned goods in the light of the decision of the Apex Court in the case of MRF Ltd. reported in (S.C.) and to pass a fresh decision on the other points relating to extended period and quantification of demand.
3. In the appeal before us the appellants have contested the exigibility of the goods, demand of duty, the penalty and the classification decided in the impugned order. When the appeal was taken up, the learned Counsel for the appellants pointed out that the crucial issue involved in the appeal is the correct valuation of DNTCF cleared to Goodyear using the dipping chemicals supplied free of cost by them. Inasmuch as duty had already been paid on the value of the impugned goods sans the cost of free supplies, the present demand was attributable to the cost of dipping chemicals. If the same was not includible in the value for payment of duty, other issues did not survive and they did not press them. They had started including value of free supplies from Goodyear from 1-4-99. We consider the appeal as modified accordingly, and take up this issue for consideration.
4. The learned Counsel has cited the decision of the Apex Court in International Auto Ltd. v. C.C.E., (S.C.) wherein the Apex Court had observed that ‘according to the Modvat scheme, it was the Modvat of such final product which would have to include the cost of the inputs and in respect of which Modvat credit could be taken at the time of clearance of the final product’. Manufacturer of the final product would be entitled not only to adjust credit on the inputs supplied by it to the intermediate purchaser under Rule 57F(2)(b), but also to the credit of duty paid by the intermediate purchaser, on the intermediate products.
5. The learned Counsel argued before us that the ratio of the above decision squarely applied to their case, and the impugned order was incorrect. He also submitted that the decision of the Tribunal in Jay Yuhshin Ltd. v. C.C.E., (Tri.-Del.) had considered a similar situation where the manufacturer of intermediate products (M/s. Jay Yuhshin Ltd.) operating under Rule 57F(4)(i) & (ii) [equivalent to Rule 57F(2)(b) discussed in the International Auto Ltd. case supra] had not included cost of components received free of cost from the manufacturer of final products, M/s. Maruti Udyog Ltd. (MUL) in the value of the intermediate product manufactured and cleared to MUL. It was argued before the Tribunal that the full duty had not been paid owing to their bona fide belief about the liability and since the differential duty involved had been paid subsequently, no penalty was imposable on the appellants. However, the Tribunal upheld the finding of suppression and sustained the penalty imposed on the appellants though the quantum was reduced. The learned Counsel submitted that the said order of the Tribunal had also been tagged along with the Civil Appeal filed by the International Auto Ltd. and that the Apex Court had set aside the decision of the Tribunal in Jay Yuhshin case. The Apex Court set aside the demand and vacated the penalty imposed on the petitioner in the Civil Appeal M/s. Jay Yuhshin Ltd. v. C.C.E., Delhi. The learned Counsel submitted that in view of the decision of the Apex Court the appeal deserved to be allowed.
6. The learned SDR endeavored to distinguish the instant case on facts from the International Auto Ltd case on the ground that SRF had availed Modvat credit of free supply materials whereas in the International Auto Ltd. case they had not taken input duty credit in respect of the inputs they had received free of cost from Telco. She defended the impugned order.
7. We have carefully considered the case records and the submissions by both the sides. We find that though the facts of the case before us are slightly different as pointed out by the learned SDR, the ratio of the decision of the Apex Court in the International Auto Ltd. case is applicable to the instant case. The Apex Court had made it clear that when supplier of intermediate product and the manufacturer of final product operated under Modvat Scheme, availment of credit on inputs by the manufacturer of intermediate products who received free supply of inputs/components parts was immaterial and that the manufacturer of the final product was eligible to utilize the credit of duty paid on inputs received as well as the intermediate product received under Rule 57F(2)(b) [replaced by Rule 57F(4)] for clearance of final product used. In the circumstances, we find that the impugned order is inconsistent with the ratio of above decision of the Apex Court (supra).
8. In the International Auto case, Telco had supplied components free of cost to International Auto Ltd. for manufacture and supply of floor plate assemblies. International Auto Ltd. had not taken credit and had not included the cost of free supplies in the value of the intermediary product. The Apex Court held that when the manufacturer supplied inputs free of cost under Rule 57F(2)(b) to the manufacturer of intermediate product who did not take credit of the duty, it was not necessary to include cost of such materials in the value of the intermediate product as the manufacturer of the final product Telco was eligible for the credit of duty paid on all inputs and the intermediate products for clearance of the final product excavators. In the instant case, SRF had received duty paid dipping chemicals on payment of duty and had taken credit. They had not included the cost of the dipping chemicals in the value of NDTCF cleared to Good year. The movement of the inputs was not under Rule 57F(4). The facts of the instant case are not identical to those of International Auto Ltd. to that extent. However even if SRF had paid duty on the correct value of the NDTCF, Goodyear could have availed credit of the same and it would have made no impact on the revenue that will accrue. Therefore, the impugned order is occasioned by the appellant’s failure to follow a revenue neutral exercise. Operation of the Modvat scheme on the manufacturer of final product had rendered the valuation dispute of the intermediate product in question of no consequence.
9. In the case of Jay Yuhshin Ltd. v. C.C.E., New Delhi reported in (Tri-Del.), MUL had supplied certain components free of cost under Rule 57F(4)(i) & (ii) to M/s. Jay Yuhshin Ltd. to manufacture intermediate products needed in the manufacture of cars. Jay Yuhshin did not include the value of free supplies for valuation of the intermediate products supplied to MUL. Jay Yuhshin had also taken credit of duty paid on the free supplies. The Tribunal decided that Jay Yuhshin should pay duty on the value of intermediate goods including the value of free supplies and upheld the demand and penalty. Following the above decision Delhi Bench of this Tribunal had passed the order in Jay Yuhshin Ltd. v. C.C.E., New Delhi reported as (Tri-Del) affirming the demand and penalty (though reduced the quantum). At the time of hearing of Jay Yuhshin’s appeal before the Tribunal, the DR had stated that the intermediate manufacturer would use the credit attributable to such free supplies for clearing other products (implying that it was not intended under the scheme). While disposing the Civil Appeal filed by Jay Yuhshin against this order the Apex Court had set aside both the demand and the penalty.
10. The facts of the above case are identical to those of the case on hand except that the goods had not moved to SRF under documents prescribed in Rule 57F(4). The free supply of dipping chemicals indicate the arrangement between Goodyear and SRF which ensured the supply to Goodyear of NDTCF manufactured with the free supplies. Movement of goods under Rule 57F(4)(i) & (ii) on payment of duty had served only this purpose in the case discussed in Jay Yuhshin Ltd. v. C.C.E., New Delhi reported as (Tri-Del.). They had started including value of free supplies from Goodyear from 1-4-1999. In the light of the ratio of the Apex Court’s decision cited by the ld. Counsel for the (appellants, we find that in the facts of this case, the demand of duty, interest and penalty in the impugned order are not sustainable. We vacate the orders to that effect. The impugned order is otherwise; affirmed as not challenged. The appeal is allowed on the above terms. The appellant shall not claim refund of the duty already paid on this account as undertaken by the Counsel on instructions.
(Operative portion pronounced in the open Court on 18-2-2007)
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