- 1 - IN THE HIGH COURT OF KARNATAKA AT BANGALORE DATED THIS THE 4 TH DAY OF MARCH 2013 BEFORE THE HON BLE MR.JUSTICE RAM MOHAN REDDY WRIT PETITION NO. 45584 OF 2012 (T-TAR) BETWEEN: M/S. KENNAMETAL INDIA LIMITED 8/9 TH MILE, TUMKUR ROAD BANGALORE 560073 (REP. BY ALAGAM BHATTA M.R. ASSISTANT MANAGER EXCISE) PETITIONER (BY SRI. K.S.RAVISHANKAR, ADV.) AND: 1. THE UNION OF INDIA (REP. BY THE COMMISSIONER OF CENTRAL EXCISE, CUSTOMS & SERVICE TAX LARGE TAXPAYERS UNIT [LTU]) JSS TOWERS, 100 FEET RING ROAD BANASHANKARI III STAGE BANGALORE 560085 2. THE SECRETARY CENTRAL BOARD OF EXCISE AND CUSTOMS MINISTRY OF FINANCE, DEPARTMENT OF REVENUE NORTH BLOCK NEW DELHI 110001 3. THE ADDITIONAL COMMISSIONER OF CENTRAL EXCISE, CUSTOMS & SERVICE TAX LARGE TAXPAYERS UNIT [LTU]) JSS TOWERS, 100 FEET RING ROAD BANASHANKARI III STAGE BANGALORE 560085... RESPONDENTS (BY SMT. C.GEETHA, ADV. FOR SRI. N.R.BHASKAR, CGSC)
- 2 - THIS WRIT PETITION IS FILED PRAYING TO QUASH/ ANNUL/SET ASIDE THE IMPUGNED CIRCULAR DT. 25/4/2005 ISSUED BY THE CENTRAL BOARD OF EXCISE & CUSTOMS, GOVERNMENT OF INDIA, MINISTRY OF FINANCE VIDE ANNEX.B AS EX-FACIE ILLEGAL AND CONTRARY TO THE PROVISIONS OF SEC.4 OF THE CENTRAL EXCISE ACT, 1944 R/W THE VALUATION RULES AND HOLD THAT THE PETITIONER IS ENTITLED TO FOLLOW THE CLARIFIATION ISSUED BY THE BOARD VIDE CIRCULAR DT. 1/7/2002 VIDE ANNEX.A; AND ETC. THIS W.P. IS COMING ON FOR PRL.HEARING B GROUP THIS DAY, THE COURT MADE THE FOLLOWING: O R D E R Petitioner, a company engaged in the manufacture of Tungsten Carbide Tools, Tips and Inserts, Machine Tool accessories and Special Purpose Machines falling under the provisions of Central Excise Tariff Act, 1985, is a holder of a Central Excise Registration Certificate. 2. Petitioner s states that the internal audit of the department, having audited the books of accounts, observed, (i) that the petitioner was clearing excisable goods manufactured by it for customers trial and demonstration purpose as free issues; (ii) its sales engineers located in different parts of the country having made requisitions for the product for trial, the petitioner had cleared the same from the factory to the
- 3 - said sales engineer under the cover of an invoice on which it is mentioned free issues not meant for sale ; (iii) petitioner on clearing these goods meant for trial and demonstration adopted value at 110% of the cost of production in terms of Rule 8 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000, for short Valuation Rules, and in terms of the clarification in the Board s circular No. 643/34/2002.CX dt. 1/7/2002 Annex.A; (iv) that the said excisable goods cleared for trial and demonstration by the assessee are not consumed by them or on their behalf in the production or manufacture of other excisable goods as required under Rule 8 of the Valuation Rules, for adopting the value as prescribed under the said Rule; (v) the valuation of the said excisable goods cleared for trial and demonstration is to be determined under Rule 4 of the Valuation Rules ; (vi) that petitioner had occasioned short payment of cenvat duty for the period from May 2006 to September 2010 totalling to Rs.41,35,113/-; (vii) that petitioner on clearing excisable goods for trial and demonstration did
- 4 - not show them separately in Form E.R.-1 under Rule 12 of the Central Excise Rules 2002 r/w Rule 9(7) of the Cenvat Credit Rules 2004; (viii) the clearance of such excisable goods for trial and demonstration was identified during the scrutiny of the balance sheet of the company where the cenvat duty paid on such free issues were reflected as an expense to the company; (ix) such transactions came to the notice of the department only due to the above verification by the internal audit; (x) that the petitioner suppressed the information by not mentioning the same in Form E.R.-1 returns so as to adopt a lesser value and thereby evade payment of cenvat duty and; (xi) that it was only after much persuasion that the petitioner furnished requisite information called for by the department to quantify the short payment of duty, on 15/4/2011. 3. It appears that the circular Annex.A was superceded by another circular No. 813/10/2005.CX dt. 25/4/2005 Annex.B clarifying that the value of samples is to be determined under Rule 4 of the Valuation Rules.
- 5-4. The Additional Commissioner, Large Tax Payers Unit (LTU), Bangalore, in the premise of the aforesaid observations opined, prima facie, that the petitioner contravened Sec.4(b) of the Central Excise Act, 1944, r/w Rule. 4 of the Valuation Rules, and failed to correctly determine the value of the excisable goods manufactured by them when cleared for trial and demonstration and failed to adopt the correct value, hence failure to discharge appropriate cenvat duty. Petitioner was issued with a notice dt. 3/6/2011 Annex.C to show-cause as to why (a) the value of the excisable goods cleared by them for the trial and demonstration should not be determined in terms of Rule 4 of the Valuation Rules ; (b) differential cenvat duty of Rs.41,35,113/- for the period from May 2006 to September 2010 should not be demanded under the proviso to Sec.11A(i) of the Central Excise Act, 1944, as detailed in the annexure to the show-cause notice; (c) interest on cenvat duty of Rs.41,35,113/- should not be demanded and recovered under Sec.11AB of the Central Excise Act, 1944 and; (d) penalty should not be imposed
- 6 - under Sec.11AC of the Central Excise Act, 1944, for having failed to discharge the appropriate cenvat duty. In addition, petitioner was called upon to furnish all evidence upon which it intends to rely in support of its defense. 5. According to the petitioner, though the 3 rd respondent was informed of filing W.P.25765 & 35911-35965/11 challenging the validity of the circular Annex.B, as also the show-cause notice Annex.C, nevertheless without awaiting the outcome, passed the order dt. 28/6/2012 Annex.D determining the assessable value of the excisable goods cleared by the assessee for trial and demonstration, during the period from May 2006 to September 2010, in terms of Rule 4 of the Valuation Rules made a demand for (i) Rs.41,35,113/- towards differential cenvat duty on differential assessable value of Rs.3,62,75,929/- for the period from May 2006 to September 2010 under Sec.11A(i) of the Central Excise Act, 1944; (ii) interest on cenvat duty of Rs.41,35,113/- to be recovered under
- 7 - Sec.11AB and; (iii) penalty of Rs.41,35,113/- under Sec.11AC. 6. Petitioner states that leave to withdraw W.P.25765 & 35911-35965/11, was permitted by order dt. 19/7/2012 dismissing the petitions with liberty to file a fresh petition challenging the circular, show-cause notice and the order - Annex.D. Hence this petition. 7. Petition is opposed by filing statement of objections, interalia, not denying the facts narrated supra. However at paragraph 4, it is stated that on a consideration of various aspects of compliance and points of doubt raised, the Central Board of Excise & Customs opined that Rule 4 of the Valuation Rules, was akin to Rule 7 r/w Rule 6(1)(b) of earlier Valuation Rules 1975, hence, the amendment to circular Annex.A to say that free samples would be appropriately valued in terms of Rule 4 of the Valuation Rules. According to the respondents, Item No. 13 in the circular Annex.A stating that except Rule 8, all other Rules cover contingencies where sale is involved in some
- 8 - form or the other, was not logical; that Rule 8 of the Valuation Rules is relevant only when the goods are captively consumed; Rule 4 of the Valuation Rules applies to goods not sold and the value of such goods sold at any other time is available, while such goods could also be other goods of the same class and that such goods manufactured by the petitioner may be cleared at different times in different consignments and such goods of each lot or consignment will be such goods. 8. In addition, it is asserted that the question of valuation of samples under Rule 4 was answered in the affirmative in the decision of the Bombay High Court in the case of INDIAN DRUGS MANUFACTURER S ASSOCIATION VS. UNION OF INDIA 1 whereunder the circular Annex.B was upheld. 9. It is next contended that petitioner having not exhausted the statutory remedy of an appeal under 1 2008(222) ELT 22 (BOM)
- 9 - Sec.35 of the Central Excise Act, 1944, writ petition is not maintainable. 10. According to the respondents, circular Annex.B is not opposed to, but is in consonance with Sec.4(1)(b) of the Central Excise Act, 1944 and that the clarification to the query at item No.13 is an aid in the understanding of the meaning and provision of law, binding both the petitioner as well as the department. The allegation that the clarification in circular Annex.B suffers from bareness and baldness, is denied, on the premise that the preamble to the circular makes a mention of the references seeking further clarification on some of the clarifications in circular Annex.A. It is further stated that item No.13 in circular Annex.A though not paramateria with the clarification in Annex.B, nevertheless have the same effect when the assessable value of goods which are not sold and do not attract the provisions of Sec.4(1)(a) of the Act ought to be determined under Rule 4 of Valuation Rules. In addition it is stated that the clarification in Annex.B against item No.13, does neither transgress nor override
- 10 - Sec.4 of the Central Excise Act, 1944, but is in furtherance of the earlier circular Annex.A and that clarification by the Board is in the interest of ensuring compliance with the provisions of law in right earnest. 11. The main argument of the learned Counsel for the petitioner is that Tungsten Carbide Tools, Tips and Inserts for trial and demonstration cleared from the petitioner s factory to its engineers, on request, at different locations, since not sold, its valuation is arrived at by the method applicable to tools that are not sold. It is further submitted that this is the practice in vogue for many decades and accepted by the revenue as a valid method of valuation, as applicable to goods used for captive consumption. According to the learned Counsel, the circular Annex.B seeks to value the trial and demonstration Carbide Tools, Tips and Inserts cleared for trial and demonstration, by applying Rule 4 as applicable to goods sold, while Rule 8 is applicable to goods that are not sold, and therefore clarification over item No.13 in Annex.B, calls for interference. Sequentially, it is submitted that the show-cause notice
- 11 - Annex.C and the order-annex.d of the assessing authority are unsustainable. 12. Per contra, learned counsel for the Revenue reiterates the averments in the statement of objections and seeks to sustain the order, showcause notice and the circular impugned, as being well-merited, fully justified and not calling for interference. 13. Having heard the learned Counsel for the parties, perused the pleadings and statutory provisions, including, the clarifications Annex.A & B, the point for consideration is: What is the method of valuation to be followed in respect of Tungsten Carbide Tools, Tips and Inserts cleared by the petitioner to its engineers, on request for trial and demonstration? 14. Sec.4 of the Central Excise Act, 1944, for short Act, prior to its substitution, effective from 1/7/2000, valuation of excisable goods was based on deemed value, in other words normal price, at which the goods were ordinarily sold for delivery at the time and place of removal to a buyer who was not a related
- 12 - person and price was the sole consideration. Where the normal price of the goods was not ascertainable, in case of such goods not sold, then under Sec.4(1)(b), the valuation was to be determined in the manner prescribed. That prescription in the Central Excise (Valuation) Rules 1975, more appropriately Rules 4, 6 & 7, reads thus: Rule 4: The value of the excisable goods shall be based on the value of such goods sold by the assessee for delivery at any other time nearest to the time of the removal of goods under assessment, subject, if necessary, to such adjustment on account of the difference in the dates of delivery of such goods and of the excisable goods under assessment, as may appear reasonable to the proper officer. Rule 6: If the value of the excisable goods under assessment cannot be determined under rule 4 or rule 5, and (a) Where such goods are sold by the assessee in retail, the value shall be based on the retail price of such goods reduced by such amount as is necessary and reasonable in the opinion of the proper officer to arrive at the price at which the assessee would have sold such goods in the course of wholesale trade to a person other than a related person. (b) Where the excisable goods are not sold by the assessee but are used or consumed by him or on his behalf in the production or manjufacture of other articles, the value shall be based
- 13 - (i) On the value of the comparable goods produced or manufactured by the assessee or by any other assessee : Provided that in determining the value under this sub-clause, the proper officer shall make such adjustments as appear to him reasonable, taking into consideration all relavant factors and, in particular, the difference, if any, in the material characteristics of the goods to be assessed and of the comparable goods; (ii) if the value cannot be determined under sub-clause (i), on the cost of production or manufacture including profits, if any, which the assessee would have normally earned on the sale of such goods; (c) Where the assessee so arranges that the excisable goods are generally not sold by him in the course of wholesale trade except to or through a related person and the value cannot be determined under clause (iii) of the proviso to clause (a) of sub-section (1) of Section 4 of the Act, the value of the goods so sold shall be determined (i) in a case where the assessee sells the goods to a related person who sells such goods in retail, in the manner specified in clause (a) of this rule; (ii) in a case where a related person sells the goods in the course of wholesale trade to buyers, other than dealers and related persons, and the class to which such buyers belong is known at the time of removal, on the basis of the price at which the goods are ordinarily sold by the related person to such class of buyers.
- 14 - Rule 7: If the value of excisable goods can not be determined under the foregoing rules, the proper officer shall determine the value of such goods according to the best of his judgment, and for this purpose he may have regard, among other things, to any one or more of then methods provided for in the foregoing rules. 15. The Act was amended with effect from 1/7/2000, for short Amendment Act, whereunder Sec.4(1)(a) was substituted, doing away with the old system of deemed valuation and introducing a new concept of valuing of excisable goods based upon transaction value. Sec.4(1) of the Amendment Act runs thus: Sec. 4 Valuation of excisable goods for purposes of charging of duty of excise (1) Where under this Act, the duty of excise is chargeable on any excisable goods with reference to their value, then, on each removal of the goods, such value shall (a) in a case where the goods are sold by the assessee, for delivery at the time and place of the removal, the assessee and the buyer of the goods are not related and the price is the sole consideration for the sale, be the transaction value; (b) in any other case, including the case where the goods are not sold, be the value determined in such manner as may be prescribed. Explanation: For the removal of doubts, it is hereby declared that the price-cum-duty of the
- 15 - excisable goods sold by the assessee shall be the price actually paid to him for the goods sold and the money value of the additional consideration, if any, flowing directly or indirectly from the buyer to the assessee in connection with the sale of such goods, and such price-cum-duty, excluding sales tax and other taxes, if any, actually paid, shall be deemed to include the duty payable on such goods. Suffice it to extract Sec.4(3)(d) defining what a transaction value is, which reads thus: transaction value means the price actually paid or payable for the goods, when sold, and includes in addition to the amount charged as price, any amount that the buyer is liable to pay to, or on behalf of, the assessee, by reason of, or in connection with the sale, whether payable at the time of the sale or at any other time, including, but not limited to, any amount charged for, or to make provision for, advertising or publicity, marketing and selling organization expenses, storage, outward handling, servicing, warranty, commission or any other matter; but does not include the amount of duty of excise, sales tax and other taxes, if any, actually paid or actually payable on such goods. 16. The absence of specificity in the Valuation Rules over samples issued under the nomenclature trial and demonstration, the Board by circular Annex.A, directed valuation of such goods in terms of Rule 11 r/w Rule 8 of the Valuation Rules which reads thus:
- 16 - Point of doubt: How will valuation of samples be done which are distributed free, as part of marketing strategy, or as gifts or donations: Clarification: Since the goods are not sold section 4(1)(a) will not apply and recourse will have to be taken to the Valuation Rules. No specific rule covers such a contingency. Except rule 8 all the other rules cover continencies where sale is involved in some form or the other. Therefore, the residuary rule 11 will have to be adopted along with the spirit of rule 8. In other words, the assessable value would be 115% of the cost of production or manufacture of the goods. 17. The Central Government promulgated Valuation Rules, in the matter of valuation of goods covered under Sec.4(1)(b) of the Amendment Act. Rules 4, 8 & 11 reads thus: Rule 4: The value of the excisable goods shall be based on the value of such goods sold by the assessee for delivery at any other time nearest to the time of the removal of goods under assessment, subject, if necessary, to such adjustment on account of the difference in the dates of delivery of such goods and of the excisable goods under assessment, as may appear reasonable. Rule 8: Where the excisable goods are not sold by the assessee but are used for consumption by him or on his behalf in the production or manufacture of other articles, the value shall be one hundred and ten
- 17 - percent of the cost of production or manufacture of such goods. Rule 11: If the value of any excisable goods cannot be determined under the foregoing rules, the value shall be determined using reasonable means consistent with the principles and general provisions of these rules and sub-section (1) of section 4 of the Act. 18. The circular Annex.A in so far as it relates to item No.13 was superceded by circular Annex.B with a further clarification over such goods in relation to goods not sold, opining, that their value should be determined under Rule 4 instead of Rule 8 of the Valuation Rules and reads thus: Point of doubt: How will valuation of samples be done which are distributed free, as part of marketing strategy, or as gifts or donations: Clarification: In case of free samples, the value should be determined under Rule 4 of Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000. 19. As noticed supra, prior to 1/7/2000 trial and demonstration samples were valued on the basis of deemed value ie., normal value at which the goods were sold for delivery at the time and place of removal. With
- 18 - effect from 1/7/2000, Sec.4(1)(a) of the Act was substituted by the Amendment Act, whereunder, valuation of excisable goods is on transaction value. Sec.4(1)(a) of the Amendment Act provides that where excise duty is chargeable on any excisable goods with reference to the value, then, instead of goods sold and delivered by the assessee at the time and place of removal, the transaction value at each such removal shall be the value for computing the excise duty, subject to the price consideration and, the buyer is not related to the assessee. In all other cases, the valuation of excisable goods is to be determined under Sec.4(1)(b) of the Amendment Act r/w Valuation Rules. 20. The Carbide tools, tips and inserts cleared for trial and demonstration, admittedly, are not sold and delivered at the time and place of removal or at any time thereafterwards and therefore its valuation has to be determined under Sec.4(1)(b) of the Amended Act r/w the Valuation Rules. Under Rule 4 of the Valuation Rules, the value of excisable goods under Rule 4 of the Valuation Rules is on the value of such goods sold by
- 19 - the assessee for delivery at any other time nearest to the time of removal of goods under assessment. Rules 5, 6, 7, 9 & 10 prescribe the methodology of valuation of goods sold and delivered at a place other than the place of removal, or where price is not the sole consideration for sale, or where the excisable goods are sold after their clearance from the place of removal, or where the goods are sold through a related person, or sold through an interconnected undertaking. Rule 8 provides for the method of valuation of goods not sold, but are cleared for use for consumption in the production and manufacture of other articles. Rule 11 provides that if the value of any excisable goods cannot be determined under the Rules, then the value shall be determined by using reasonable means consistent with the principles and general provisions of the Valuation Rules and Sec.4(1) of the Act. 21. Even according to the learned Counsel for the parties, Rules 5, 6, 7, 9 & 10 are inapplicable to goods cleared for trial and demonstration, thus leaving without doubt to ascertain which of the Rules 4, 8 & 11
- 20 - are applicable to such goods? A bare perusal of Rule 8 what implies is that goods cleared for trial and demonstration, cannot be valued there under since they are not cleared for use for consumption in the production or manufacture of other articles by the assessee. Admittedly since the carbide tools, tips and inserts are cleared as and when engineers of the petitioner-company make a request for trial and demonstration purpose, at different locations in the country and not cleared for consumption in the production or manufacture of other articles, the method of valuation under Rule 8 is inapplicable to such goods. 22. Viewed thus, what remains is the applicability of Rules 4 and 11 to goods cleared for trial and demonstration. A bare reading of Rule 4, what can be deciphered is that, it is, a general rule for valuation of excisable goods not sold and delivered at the time and place of removal to be based on the value of such goods sold and delivered at any other time nearest to the time and removal of the goods under assessment. There can be no more doubt that the words such goods in Rule 4
- 21 - means, goods which are similar or identical to and have same quality or character to the goods sold and delivered. Meaning thereby, valuation by taking the value of such goods sold and delivered at the time nearest to the time and place of removal of the goods in question. Therefore Rule 4 applies to carbide tools, tips and inserts cleared for trial and demonstration, since, not cleared for sale and delivery at the time and place of removal and such goods are goods similar or identical to goods cleared trial and demonstration, as are sold and delivered at the time and place of removal. It is needless to state that goods cleared for trial and demonstration have to be strictly identical to the goods that are cleared for sale, since the edifice of trial and demonstration goods having the same physical properties, is in the direction of establishing them to be identical to those sold. Therefore goods cleared for trial and demonstration are liable to be valued under Rule 4 on the basis of the value of such goods sold and delivered at any other time nearest to the time and place or removal of such goods.
- 22-23. One cannot loose sight of the words if necessary in Rule 4 which implies on adjustments in the matter of valuation, due to difference in the dates of delivery of such goods. 24. The submission of the learned Counsel for the petitioner that Rule 4 of the Valuation Rules has no application and the clarification in Annex.B is wholly inconsistent with the Valuation Rules, more appropriately Rule 8, in the circumstances is but a specious plea. 25. In almost similar though not identical circumstances, the High Court of Judicator at Bombay in Indian Drugs Manufacturers Association s (1) supra, in the facts obtaining therein relating to free samples issued to physicians, having considered, Rules 4, 8 & 11 of the Valuation Rules, held, that valuation of such physician samples falls within Rule 4 of the Valuation Rules and not Rule 8. 26. There is yet another facet ie., failure of the petitioner to explain the reasons for not filing Form
- 23 - E.R.-1 under Rule 12 of the Central Excise Rules 2002 r/w Rule 9(7) of the Cenvat Credit Rules, 2004, in respect of goods cleared for trial and demonstration,as also in its balance sheet, the cenvat duty, paid, accounted as an expense to the company, was it to adopt a lesser value to effect payment of cenvat duty? These call for an explanation if any, to be examined by the Appellate Authority before whom, it is said, an appeal is pending. Without dwelling into the merit or demerit of the said allegations, and leaving them open, the appellate authority is directed to extend a reasonable opportunity of hearing to the petitioner in the appeal over such allegations, and pass orders in accordance with law. This petition, without merit, is rejected. Sd/- JUDGE Rd/-