Inter Unit Transfer of goods among three units - Larger Bench holds cost of material at Second unit does not include notional profit of 15%/10%

CHENNAI: THE appellant's unit manufactures paper which is transferred to another unit on payment of Central Excise duty by adopting valuation under Rule 8. Thus, the paper is cleared as per CAS 4 by including 10% notional profit. The Second unit makes packing material with this paper and clears

to its third units for using it in the manufacture of cigarettes. The second unit also follows CAS 4 for paying duty on the packing material under Rule 8. Now, the dispute is whether the second unit should take the cost of raw material, i.e., paper as Rs 100 or Rs 110/-. The issue was referred to the Larger Bench in view of conflicting decisions in case of CCE Vs Eveready Industries India Ltd - 2011-TIOL-1115-CESTAT-MAD ( Rs 100) and Mumbai Bench in Tata Iron and Steel Co. Ltd. Vs CCE 2013-TIOL-707-CESTAT-MUM. (Rs 110)

The Larger Bench held that the ratio of Eveready Industries is the correct position of law by holding that:

+ In the case of self-manufactured items, CAS -4 clearly stipulates that the cost of production of such items shall be considered as the material cost for the subsequent product, after considering inward freight, octroi etc. It also stipulates that intermediate products/goods transferred by other unit of same manufacturer shall be based on cost of production as per CAS -4. Therefore the inference is compelling that what is envisaged under the CAS -4 for self-manufactured items is only the material cost and not the notional amount which is not incurred by the appellant.

+ In view of the precedent decisions of Supreme Court on "actual cost" and "cost of production", it is held TISCO decision rendered by the Mumbai Bench has not correctly appreciated the issue. Though the above Tribunal's decision was rendered on 22.3.2013, the Mumbai Bench was not sensitized to the Chennai Division Bench's unreported decision in Eveready Industries Vs CCE vide Final Order No.542 /2010 dt 11.5.2010 = 2010-TIOL-1168-CESTAT-MAD, the subsequent Chennai DB decision in the case of the same assessee dt. 19.4.2011 2011-TIOL-1115-CESTAT-MAD. It appears neither Revenue nor the and assessee had brought these ruling of co-ordinate Benches to the knowledge of the Mumbai Bench.

+ There is a fallacy in the reasoning in TISCO judgement. In para 6.2, the conclusion " as already discussed above the value of goods cleared for captive consumption would be 115%/110% of the cost of production or manufacture of such goods and as per the Board's circular dt. 13.2.2003, the cost of production of captively consumed goods will have to be construed strictly in accordance with CAS -4 " is a conclusion that builds upon on the fallacy of ratiocination set out in para 6.1. Since the conclusion recorded in para 6.1 that "cost of billets at Tarapur unit would be 115/110% of the cost of production of billets", is not preceded by any analyses, let alone a considered analysis either of provisions of Rule 8 of the Valuation Rules or of the context and content of CAS -4, such conclusion cannot commend Itself to acceptance, as a precedent. As pointed out by the apex Court in Union of India Vs M.L.Capoor - AIR 1974 SC 87 "reasons are the links between the materials on which certain conclusions are based and the actual conclusions. They disclose how the mind is applied to the subject matter for a decision, whether it is purely administrative or quasi-judicial They should reveal a rational nexus between the facts considered and the conclusions reached. Only in this way can opinions or decisions recorded be shown to be manifestly just and reasonable".

+ Since Rule 8 mandates loading of specified percentage (15% or 10% as the case may be) on the cost of production of goods cleared to another unit for captive consumption in the later unit for computing excise duty payable by the first unit, the cost of production (in the present case, packaging material manufactured by the Chennai unit) must only be considered in terms of CAS-4 as mandated by Board's circular dt. 13.2.2003. None of the clauses, in particular clause 5.1 of CAS -4 deal with excisable value of captively consumed goods. The CAS-4 sets out standards for computation of captively consumed goods. Loading of a percentage of the cost of production (mandated by Rule 8 of the Valuation Rules) is clearly not a requirement of CAS-4. The cost of production must therefore be computed strictly and invariably only under CAS -4.

Accordingly, the Larger Bench answered the reference by holding that the decision of Chennai Bench in Eveready Industries case is the correct position in law.