2004 (97) ECC 427 (Tri)

CUSTOMS, EXCISE & SERVICE TAX APPELLATE TRIBUNAL

South Zonal Bench : Bangalore

Dr. S.L. Peeran, Member (J) and Shri K.C. Mamgain, Member (T)

Pharmasia Ltd.

Versus

Commissioner of Central Excise, Hyderabad

Appeal No. E/708/2002

[Arising out of Order-in-Original No. 18/2002 dtd. 26.2.2002 passed by the Commissioner of Central Excise, Hyderabad]

Final Order No. 1235/2004, dt. 16.7.2004, Certified on 20.7.2004

Valuation (C. Excise)

Other work overhead -- C.A. Certificates -- These certificates were not including total manufacturing `overheads'. According to the costing principle only cost audit report shows these `other work overheads' for products manufactured by the assessee. From the certificates of CA, it is clear that they had not included these in the manufacturing expenses. Therefore, adding these expenses is correct -- Sec. 4 of CEA.

Demand (C. Excise)

Limitation -- Assessee from 95-96 onwards was not including total manufacturing `overheads' charges either in the certificate of Chartered Accountants or in the differential duty which were paid by them subsequent to the finalization of cost audit report of P & G. Not disclosing this fact to the department amounts to suppression of the fact with an intention to evade duty. Extended period for recovery of duty is applicable under Sec.11A of CEA.

PRESENT :

Smt. L. Maithili, Adv. for the appellant.

Shri L. Narasimha Murthy, SDR for the respondent.

Cases Cited :

1. CCE, Hyderabad v. Pharmsia Ltd., 1996 (13) RLT 1 (T)..................................... [Para 3]

2. CCE Pune v. Shri Warana Sahakari Dudh Utpadak Prakriya Sangh Ltd., 2001 (131) ELT 676 (T) [Para 4]

3. Dr. Writers Food Products Ltd. v. Commissioner of Central Excise Bombay, 1998 (78) ECR 430 [Para 3]

4. Mysore Rolling Mills v. CCE, Belgaum, 1987 (11) ECC 421 (SC)........................ [Para 4]

5. Pawan Biscuits Co v. CCE, Patna, 2000 (70) ECC 653 (SC).............................. [Para 3]

6. Ujagar Prints case 1989 (21) ECC 11 (SC)........................................... [Paras 2, 3 & 4]

Per : K.C. Mamgain

This appeal is filed against Order. No 18/02 dated 26.2.2002 passed by Commissioner of Central Excise Hyderabad I Commissionerate.

2. The facts in brief are that the appellants are manufacturers of Vicks Ultra Clearasil and mediker for M/s Procter & Gamble Hygiene & Health Care Ltd., (hereinafter referred to as P&G) on job work basis. As per agreement P&G supplies all the raw-material and packing materials to the appellants and the appellants collected conversion charges towards the processing of the materials. Price declaration filed by them in terms of Section 4(1)(b) of Central Excise Act read with Rule 6 (b) (ii) of Central Excise Valuation Rules, 1975 is adopted for valuation. At the end of each accounting year on finalization of cost sheet for each of the products by P&G the appellants are adopting the revised prices as calculated from cost sheets and are discharging duty liability. On scrutiny of cost sheet it was noticed that the appellants are not taking into consideration the "other works overhead" element in arriving at the assessable value though it forms part of the costing element of `conversion cost' shown in the costing report. The manufacturing overhead is nothing but indirect cost incurred for operating production division of a factory. It includes ordinary costs incurred from the stage of procurement of raw materials till the completion of the finished products. Cost audit report procured by job work project reflects expenses on different elements of costing. On enquiry it was found that P&G provided manufacturing technology in the form of manuals and also engaged certain technical persons from their offices to monitor day to day production activities and quality control standards. One person from P&G office continuously monitors products. P&G pays conversion charges which includes manufacturing profit of appellants. The appellants have entered into agreement with P&G on 1.12.94 and the agreement contains the details of processing charges, yield, loss ratio, quality control, specification of raw-materials, packing materials and finished goods and instructions for manufacturing operation of products. Technical assistance monitoring of operation and assets like die set, equipment etc. provided by P&G. The appellants have claimed that they are paying the duty on the basis of the price arrived at as per judgment of Supreme Court in the case of Ujagar Prints and after completion of accounting year they revise the assessable value basing on cost audit report prepared by P&G. They have paid differential duties upto the accounting year 97-98. They had not received, the cost audit report for 98-99, 99-2000. On scrutiny of the documents it was found that as per agreement dated 1.12.94, P&G provide all manufacturing technology die sets and equipments, V.T. terminal, modem, UPS, printer etc. and monitored the production operations, maintenance of control documents. Therefore, it appeared that the equipments supplied by P&G for utilizing in manufacture of their products form parts of the cost elements under the head `other works overhead' of cost audit report. The appellants are incurring certain additional cost towards the manufacturing of the products such as insurance premium on raw-materials, packing material and on finished goods handling charges and they are also collecting additional amounts towards telephone charges and all these expenses over and above the processing charges which form part of to `other works over head'. Shri K. Ganesan Finance Officer of P&G submitted a file "P&G CA certificates" which contain the costing sheet and details pertaining to manufacturing and operation expenses and these details are for each of the product manufactured by the appellants. MOE have manufacturing and operational expenses as apportioned and reflected in the cost audit report. Therefore, it appeared that the cost in respect of manufacturing overheads as apportioned in the cost audit report is liable for inclusion in the cost of production and in the assessable value of the goods. All the expenses incurred towards manufacturing of products are to be included in manufacturing cost in terms of Supreme Court Judgment in the case of Ujagar Prints v. UOI. Therefore, the expenses termed as "manufacturing overhead" and in the present case termed as `other works overheads' in the cost audit report should be taken into consideration for arriving at correct assessable value. It was found that the appellants had not taken into consideration, the "other works overheads" of the cost audit report for arriving at the assessable value from the costing reports for the years 96-97 to 2000-01 and after taking this into account they have short paid the duty of Rs. 45,50,625.56. Therefore, show-cause notice was issued to them demanding this differential duty on `other works over-heads' which is required to be added in the assessable value as per the cost audit report of M/s P&G. The Commissioner under the impugned order held that the appellants have not made any specific submission with regard to non-inclusion of other overhead cost mentioned in the costing report in the assessable value of the goods manufactured. Since these costs relate to the raw-materials, packing materials and finished goods these form part of cost of production. He confirmed differential duty of Rs. 28,15,489 under Section 11A and observed that amount of Rs. 8,37,847, Rs. 94,682 and Rs. 8,02,608 were already paid by the appellants towards the differential duty on account of costs variations and confirmed the same. He imposed a penalty of Rs. 27,45,561 on the appellants under Section 11 AC of Central Excise Act and demanded interest on duty amount of Rs. 28,15,489. He also imposed a penalty of Rs. 2,00,000 on the appellants under Rule 173Q of Central Excise Rules.

3. Smt. L. Maithili learned advocate appearing for the appellants pleaded that the appellants are paying duty as per the decision of the Supreme Court in the case of Ujagar Prints v. UOI. Now the department is asking them to include the cost of `other works overheads' from the cost audit report of M/s P&G in the assessable value, which is not proper. She stated that the appellants were already paying the differential duty every year after the receipt of the cost accounting audit reports of P&G by arriving at the cost of materials and on that basis they were paying the differential duty. The CA were giving their certificate and that was the basis for payment of the duty. Now the claim of the department that according to costing principles the manufacturing overheads include the `other work overheads' as reported in the cost audit report of P&G to be included in the assessable value is not a proper proposition. The Supreme Court in the case of Diichi Karkaria had observed that the cost of excisable product for purposes of assessment of Central Excise duty under Section 4 (1) (b) of the Act read with Rule 6 of Valuation Rules should be reckoned as if it is reckoned by a man of commerce and for such realism the meaning that the Court gives to words of a commercial natures, like costs which are not defined in the statutes. These would have been taken into consideration in deciding the show-cause notice issued to the appellants. She said since the Chartered Accountant has given the certificates on the basis of which the assessment was done and the certificate shows the raw-material costs, packing material cost and conversion charges payable to the appellant towards manufacturing cost/expenses and profit, no other charges can be added. She relied on the decisions of the Tribunal in the case Dr Writers Food Products Ltd. v. Commissioner of Central Excise, Bombay, 1998 (78) ECR 430 and stated that their case is covered by this decision. She also relied on the decision of the Supreme Court in the case of Pawan Biscuits Co Pvt. Ltd. v. CCE Patna, 2000 (70) ECC 653 (SC) : 2000 (120) ELT 24 (SC) and CCE, Hyderabad v. Pharmsia Ltd., 1996 (13) RLT 1 (T). She also pleaded that the Commissioner has applied proviso to Section 11 A for demanding duty and imposition of penalty under Section 11AC. She stated that the appellant had received a copy of cost audit report for the year 98-99 and 99-2000 on 21.6.2000 only. By taking average cost of raw-material, packing materials from the cost audit report for the aforesaid period the appellants have calculated differential duty for the period from 98-99 to 2000-2001 and accordingly, paid the differential duty of Rs. 8,02,608 and intimated the department under their letter dated 5.1.2002. Earlier the appellant had themselves calculated the differential duty of Rs. 7,32,492 for the years 95-96 to 97-98 on the basis of average cost of raw-material/packing material and paid the differential duty on 21.3.99. The appellants pleaded that they had incurred certain additional expenses like handling charges, testing charges and insurance charges in connection with manufacture of said goods. They paid the additional expenses incurred by them and paid excise duty of Rs. 94,681 on 26.7.2000. Thus, they have paid total differential duty of Rs. 17,36,881. The appellants had filed particulars of declarations for the products manufacture by them under the loan licensee arrangement alongwith cost data duly supported by certificate of CA. The prices arrived at the time of filing the said price declaration were based on cost of raw-material, packing material prevailing at relevant time. At the end of accounting year of P&G and on the basis of cost audit report of P&G the appellants on their own worked out the revised cost of the products by adopting the average cost of raw-material/packing material and calculated differential duty from 95-96 to 97-98 and paid the same. On the allegation that the appellants had the cost audit report of P&G for the year 98-99 and 99-2000 she pleaded that the appellants vide their letter 15.6.2001 asked for the said reports from P&G and representative of P&G personally delivered the copies of the cost audit report to the appellants factory on 21.6.2001 which were taken by the officers of anti-evasion wing of the department as they were present in the office at that time. Shri Bhaskar Rao was not aware about this position and therefore in his statement on 22.6.2001, stated only the position which was known to him. Thus, there was no suppression of fact or malafide intention. Therefore, Section 11 AC and 11AB are not applicable. Penalty under Rule 173 Q is also not imposable on the appellants as they have not acted dishonestly and contumaciously with deliberate and malafide intention of violating law.

4. Shri L. Narasimha Murthy, learned SDR appearing for the revenue pleaded that the show-cause notice issued to the appellants gives the details very specifically for non-inclusion of `other works overhead' which should form part of the manufacturing cost of the appellants. He stated that P&G were participating in manufacturing activity of the product by the appellant as they were imparting manufacturing technology in the form of manuals control documents/records and instructions concerning methods formal standards etc., and were monitoring the manufacturing operation through their technicians and from their Balanagar office providing assets like punches dies equipment etc., and also incurring additional costs such as insurance premium on raw-materials, packing materials, finished goods, telephone charges. All these expenses/costs have gone towards the manufacturing of products which in terms of Supreme Court decision in the case of Ujagar Prints case 1989 (21) ECC 11 (SC) : 1989 (39) ELT 493 (SC) forms manufacturing expenses in accordance with costing principles. Such expenses are termed as manufacturing overhead and in the present case reflected as `other works over head' in cost audit report which needs to be taken into consideration for arriving at the correct assessable value of products of P&G manufactured by the appellants. He relied on the decision of the Tribunal in support of his contention in the following cases:

(i) CCE Pune v. Shri Warana Sahakari Dudh Utpadak Prakriya Sangh Ltd., 2001 (131) ELT 676 (T) wherein it was held that part of salaries paid to persons and posted at the premises of job worker for supervising receipt and use of raw-material rent for the accommodation and expenses includible in assessable value at the hands of job worker. Such expenses form cost of such material. Expenses for raw-material, cost of maintaining godown for storing raw material for supplying to job worker includible in assessable value of goods by job worker as it goes in to the cost of raw material.

(ii) M/s Mysore Rolling Mills Pvt. Ltd. v. CCE, Belgaum, 1987 (11) ECC 421 (SC) : 1987 (28) ELT 50 (SC) wherein it was held that handling charges for obtaining material by job worker on behalf of customer includible in assessable value, being the manufacturing cost.

He therefore pleaded that the Commissioner has correctly taken the `other works over-heads' from the cost audit report of P&G as the expenses which are to be included in the manufacturing cost of the product for P&G by the appellants. Since the personnel of appellants were supervising the manufacturing activity and the quality control was also being done and dies and other equipment were supplied free of cost and M/s P&G in their cost audit report had shown this "other work overhead" separately for these products, therefore these are correctly includible in the manufacturing cost of the appellant. Therefore, the order of the Commissioner is correct in law. Regarding application of extended period he reiterated the stand taken by the Commissioner.

5. We have carefully considered the submissions made by both sides. The department has found that in the manufacturing expenses, the appellants are not including the value of "other work overheads." This fact was admitted by Shri N. Sudhakar Rao in his statement dated 3.4.2001 and Y.N. Bhaskar Rao in his statement dated 22.6.2001. Manufacturing cost of the product includes all the expenses right from handling of the raw-materials till the clearance of the finished goods from the factory. All the expenses incurred for this activity will be included in the manufacturing cost. Therefore, the "other work overhead" which are shown in the cost audit report of P&G for each product manufactured by the appellants under the head "other work overhead" have to be included in the assessable value. The appellant has already accepted and paid duty on the insurance charges for raw-materials and packing materials and the Commissioner has already taken note of this by reducing the demand confirmed. The other charges which form part of the cost of manufacture and shown in `other works overhead' have to be included in the assessable value and the duty has been correctly confirmed by the Commissioner. The value of `other work overhead' in the cost audit report has been worked out by the accounting personnel only. Therefore, the plea of the appellant that since they have produced the CA's certificate, the department cannot include it is not correct. The C.A. Certificates were for the current value of material and over and above the value certified by C.A. Certificate, the appellants were themselves paying duty after taking average cost of the whole year. These certificates were not including total manufacturing `overheads'. According to the costing principle only cost audit report shows these `other work overheads' for products manufactured by the appellants. From the certificate of CA, it is clear that they had not included these in the manufacturing expenses. Therefore, we do not find any infirmity in the order of the Commissioner by adding these expenses in the assessable value. Regarding application of time bar, we find that the appellant from 95-96 onwards were not including these charges either in the certificate of Chartered Accountants or in the differential duty which were paid by them subsequent to the finalization of cost audit report of P&G.

This non-inclusion of the expenses in the manufacturing cost not disclosing this fact to the department amounts to suppression of the fact with an intention to evade duty. The Commissioner has clearly given a finding that the element of other work overhead was not made known to the department and same was not included in the assessable value of the goods and the differential duty was not paid at the end of each accounting year. Hence, the assessee has suppressed the facts and contravened the provisions of Central Excise Act and rules made hereunder with intend to evade payment of duty. We find that this finding of the Commissioner is correct and extended period for recovery of duty under Section 11 A is applicable of CEA. We find that the Commissioner has already taken into consideration the differential duties which were paid by the appellants voluntarily and he has accordingly not imposed penalty under Section 11 AC for these amounts. We find that since penalty has already been imposed on the appellants under Section 11 AC, there is no need of imposing another penalty under Rule 173 Q. Accordingly we uphold the order of the Commissioner except setting aside the penalty of Rs. 2 lakhs imposed under Rule 173 Q of the Central Excise Rules.

………………………