ORDER
C.N.B. Nair, Member (T)
1. These two appeals are directed against the same order. The first appellant M/s. Rajasthan Spinning & Weaving Mills Ltd. is a manufacturer. The second appellant is the Vice President (Finance) of the first appellant. Accordingly, both the appeals were heard together and are disposed of under this common order.
2. There is a duty demand of over Rs. 1.5 crores and an equal amount of penalty against the first appellant. Upon the second appellant, there is a penalty of Rs. 1 Lakh under Rule 26 of Central Excise Rules, 2002. The duty demand is for the period 1-4-98 to 31-12-2001 and has been raised under the extended period [Proviso to Section 11A of the Central Excise Act] which is applicable to cases involving suppression of facts. The issue raised is the valuation of yarn manufactured and captively consumed by the appellant manufacturer. The valuation was being made in terms of Rule 6(b)(ii) of Central Excise Valuation Rules. This Rule provides for the valuation of the goods based on their cost of production.
3. The issue under dispute is as to what should be taken as the cost of electricity captively generated by the appellant in their power division and used in the manufacture of yarn. During the period in question, the appellant included the cost of electricity consumed in the manufacture of yarn on actual basis. The costing of the yarn was done and duty paid by adding the actual cost of power generation as an element in the costing of yarn. The present proceedings have held that cost of electricity should have been taken as the price at which power was transferred by the power division to the yarn division. It is also alleged that the billed cost was suppressed from the Revenue authorities in order to evade duty.
4. The contention of the appellant is that the method of costing adopted in the adjudication order is contrary to settled law. It is being pointed out that the Apex Court has held in the case of Union Carbide India Ltd. v. Commissioner of Central Excise, Calcutta [2003 (158) E.L.T. 15 (S.C.)] that cost of production is to be worked out based on the actual cost. It is being pointed out that the same view was taken by the Tribunal in the case of CCE, Calicut v. Steel Complex Ltd. [2004 (176) E.L.T. 494 (T) = 2004 (61) RLT 526].
5. As against the above, the learned SDR has submitted that the transfer price from one division to another could be a more appropriate method of arriving at the cost of electricity since that represented the market cost (sale price of the Electricity Board). More so, since the yarn manufacturing division is billed at this rate by the power generation division. The learned SDR has also relied on the decisions of the Apex Court in the cases of Ashok Leyland Ltd. v. Collector of Central Excise, Madras [2002 (146) E.L.T. 503 (S.C.)] & Tata Iron & Steel Co. Ltd. v. Collector of Central Excise, Jamshedpur [2002 (146) E.L.T. 3 (S.C.)] in support of this contention.
6. The issue raised is the interpretation and implementation of Rule 6(b)(ii) of the Central Excise Valuation Rules. After considering this Provision in detail, the Apex Court held as under in the case of Union Carbide India Ltd. (supra) :-
“4. According to the appellant the cost of production referred to in that sub-rule must mean the actual cost of production together with the national profits which would have been earned if the excisable goods had been sold.
5. The Revenue Authorities, on the other hand, contend that the value of the excisable goods must be decided on the basis of the national sale of the very same goods without taking into consideration what cost was actually incurred by the assessee in producing the goods.
6. We are of the opinion that some meaning must be given to the phrase ‘cost of production’ in the said sub-rule. Had actual cost not been a factor to be taken into consideration for determining the value of the excisable goods, the sub-rule could have merely stated that the value would be determined on the price which the excisable commodity would fetch had it been sold.”
In our view, the above dictum settles the issue in favour of the assessees. With regard to the submission of the learned SDR, we are of the view that billing between various divisions of the same manufacturer may not be reliable indicator of real price. As a rule, transfer pricing requires close scrutiny. The case law relied upon is also not appropriate to the facts of the present case. The Ashok Ley-land case (supra) related to valuation under Rule 6(b)(i)(based on value of comparable goods) and not valuation under Rule 6(b)(ii) (cost of production). The decision in the case of Tata Iron and Steel (supra) related to a case where additional amounts were being collected compulsorily over and above the price for use by the manufacturers in other activities. Thus, these judgements have no application to the present case.
7. The present case also cannot attract Proviso to Section HA. The appellant was taking the electricity cost based on the actual cost of generating power. There is no allegation that the actual costs were stated falsely so as to suppress the cost of electricity and to evade Central Excise duty. The appellant has also an explanation that the transfer pricing of electricity between two divisions was according to norms permitted under Income-tax Act and thus was not mala fide. In these facts and circumstances the demand is clearly time barred. Since the demand itself is not sustainable, penalties imposed including on the second appellant, are not warranted or sustainable.
8. In the view we have taken above, the appeals succeed and are allowed, after setting aside the impugned order, with consequential relief, if any, to the appellant.