ORDER
Jeet Ram Kait, Member (T)
1. By this appeal M/s. Southern Structural Ltd., hereinafter referred to as the appellants, challenge the Order-in-Original No. 27/2000, dated 29-12-2000 passed by the Commissioner of Central Excise/ Chennai-II by which he has confirmed a duly demand of Rs. 61,44,084 towards interest on advances under the proviso to Section 11A of the Central Excise Act, 1944, (the Act for short). He has also confirmed a duty demand of Rs. 7560/- towards inspection charges under the proviso to Section 11A of the Act, besides confirming a duty demand of Rs. 2,82,155/- on the escalated price of wagons under Section 11A of the Act. A penalty of Rs. 20,00,000/- under Rule 173Q of the Central Excise Rules, 1944 (the Rules for short) and a further penalty of Rs. 34,18,250/- under Section 11AC of the Act for the various contravention alleged.
2. The appellants are an Undertaking wholly owned by the Government of Tamil Nadu. They are engaged in the manufacture inter alia of Railway wagons falling under Chapter Headings 8605.50 and 8428.00 of the CETA, 1985. It was found on verification of their accounts that the appellants have entered into a contract with the Southern Railways for the manufacture and supply of 106 wagons of BTPGLN wagons vide contract No. 94/PS/PF & EC/954/3, dated 1-12-94 for an amount of Rs. 16,10,90,974/- which is inclusive of cost of steel at Rs. 6,65/833 per wagon. The cost of each wagon including the cost of steel worked out to Rs. 15,29,724 (6,55,833 + 8,63,891). The Railways have given free supply of raw materials worth Rs. 7 lakhs per wagon. The appellants have paid Central Excise duty @ 15% ad valorem and have cleared 21 wagons to their customer till 16-7-1998. It was also noticed that the appellants have adjusted value mentioned in the invoices against 50% of the advance amount received from their customers. They have also collected an amount of Rs. 2400/- per wagon by way of inspection charges. This amount was not included in the assessable value. The total amount of advance received by the appellant was to the tune of Rs. 10,29,80,192/-. They have also raised bill for an escalation price for 19 wagons and the amount on this account was Rs. 18,81,036/- for which the duty involved was Rs. 2,82,155/- which amount has not been debited by the appellants.
3. Statement was recorded from Shri K.S. Ramamurthy, General Manager on 29-7-98 wherein he has stated inter alia that duty on the escalation price was paid by them subsequently on 24-7-98 and that the advance amount of Rs. 10.29 crores received from the Railways were used in payment of their official expenditure. He has also stated that inspection charges collected from the Railways were towards reimbursement charges paid to PDIL who is an inspection agency as per the direction of the Railway Board and it was a necessary test for marketing the wagons. According to the department, the appellants have suppressed the value in the invoice of the appellants with a view to enjoying the benefit of duty involved on differential value. Proceedings were therefore initiated against the appellants by issue of show cause notice No. 98/98, dated 28-9-98 on the following charges :
(a) that they have undervalued the cost of wagons and conveyor parts cleared to Railways and NLC to the extent of interest accrued on advances received from them and thus contravened Section 4 of the Act. (b) Under valued the cost of wagon to the extent of inspection charges collected and hence contravened Section 4 of the Act read with Rules 173Q, 9(1), 173F and 173G of the Rules. (c) Not paid duty on the escalation charges collected from the Railways thereby contravened Section 4 read with Rules 173C, 9(1), 173F and 173GG, and the proceedings culminated in the order-in-original demanding duty and imposing penalty as noted above against which the appellants have come in appeal on the following grounds: (a) The goods in question viz BPTGLN wagons were tailor made for use in the Railways and cannot be put to any other use and in such circumstances it is normal for the manufacturer to take advance to protect their interest against the buyer reneging on the contract. In support of their plea they relied upon the decision of the Tribunal in the case of CCE, Mumbai v. Netel Chromatographs reported in 1998 (100) E.L.T. 111 wherein it was held that the price was a contracted price between the buyer and the seller and that has no relevance to the advance taken. (b) It is not for the Revenue to see as to how the advance received has been used and what is to be seen is whether because of the advance taken, there was any lowering of the price and 50% of the price taken as advance cannot be taken to be abnormally high. (c) The appellants are an undertaking wholly owned by the Govt. of Tamil Nadu and the buyer is the Indian Railways and hence there cannot be any motive to depress the price. (d) Longer period of limitation cannot be invoked in this case in view of the decisions in the case of Tamil Nadu Housing Board [1994 (74) E.L.T. 0009 (S.C.) = 1994 (55) ECR 7 (S.C.)] and various other decisions such as CCE v. Chemphar Drugs [1989 (40) E.L.T. 276 (S.C.)], Padmini Products v. CCE, Bangalore [1989 (43) E.L.T. 195 (S.C) = 1989 (25) ECR 289 (S.C.)] and in the case of Pushpam Pharmaceuticals v. CCE, Bombay reported in 1995 (78) E.L.T. 401 (S.C.). (e) The testing charges paid to the IDPL cannot be included in the assessable value for the reason that the inspection fee was paid by the appellants to PDL, the inspecting agency, as per the directions of the Railway Board. The appellants did not accrue any benefit on this account. In support of their plea they cited various case laws, one such decision is in the case of Larsen & Toubro v. CCE reported in 1998 (101) E.L.T. 668. (f) The duty on the escalated price has been paid by the appellants as per the norm in the industry since the Commissioner has accepted that as per the commercial practice a pre-audit commercial invoice dated 4-6-98 for the escalated price was raised by the appellants for the purpose of verification by the Railways which was followed by issue of invoice under Rule 52A. Therefore, fraudulent intent cannot be attributed against the appellants. (g) Penalties under Rule 173Q and under Section 11 AC cannot be imposed when there was no evasion of duty by the appellant and penalty cannot be imposed merely because it is lawful to do so. There has to be some element of mens rea on the part of the appellants before penalty can be imposed. In any case penalty is very harsh and excessive.
4. Shri P.C. Anand, Chartered Accountant appeared for the appellants and argued the matter on the above lines and further submitted that the activity of the appellants were well within the knowledge of the department and there was no case for invocation of the longer period of limitation. There was a contract between the parties and both are Governmental agencies and no mala fide can be attributed against the appellants. He also submitted that the fact that advances have been received cannot lead to a conclusion that there was nexus between the advances and the price agreed upon. He submitted that the department has not proved the charges against the appellants, and he sought for setting aside the impugned order.
5. Shri A. Jayachandran, learned DR appearing for the department on the other hand referred to the detailed finding arrived at by the Commissioner from page No. 10 onwards of the impugned order (page 29 of the paper book) and submitted that the learned Commissioner has passed a well reasoned order. He particularly invited our attention to his finding as to how the advances received influenced the price decision. He submitted that the appellants have not shown that the interest on the advances was not adjusted against the price. He has submitted that the interest on advances received are includible in the assessable value. He also referred to the conclusion arrived at by the Commissioner in regard to retention of the duty paid goods, collection of inspection charges and invocation of longer period of limitation. He submitted that in view of the well reasoned order passed by the Commissioner, the appeal should be dismissed.
6. We have carefully considered the submissions made before us by both the sides and gone through the case records including the contract as amended vide Govt. of India, Ministry of Railway, New Delhi letter dated 8-3-1996 which is available on page No. 82 of the paper book. We find that the contract sets out various conditions including liability of payment of excise duty, and Sales Tax, etc. According to the terms of the Contract, Central Excise duty and Sales tax statutorily leviable shall be reimbursed by the purchaser, viz., Railways on production of documentary evidence. This contract was not made known to the department. We find that the period involved in this case is 1995-96 to 1998-99 and the show cause notice invoking the longer period of limitation was issued on 28-9-98. We find that the issues that arise for consideration are:
(a) whether the interest on advances received from the Railways and NLC for execution of contract for supply of wagons and erection of conveyors is liable to be included in the assessable value and demandable in terms of the proviso to Section 11A of the Act. (b) Whether inspection charges collected by the appellants from the Railways @ Rs. 2400/- per wagon is liable to be included in the assessable value in terms of the proviso to Section 11A of the CE Act, 1944. (c) Whether the appellants had fraudulent intention in nonpayment of differential duty on the Escalation Bill No. 20/98-99, dated 4-6-98 for Rs. 18,81,036/- raised by the appellants and the amount subsequently can be appropriated towards this liability. (d) Whether the appellants having contravened the provisions of Rules 173C, 9(1), 53, 173G and 173H have rendered themselves liable for penalty under Rule 173Q and also under Section 11AC of the Act.
7. Now we proceed to give our finding in respect of each charge as mentioned above, the first being interest received on the advance received from the Railways. We find that a statement has been given by the General Manager Shri K.S. Ramamurthy that the advance amount were used as payment of their official expenditure and that they have deposited Rs. 10.29 crores received as advance into the Bank where they were having loan limit. The allegation of the department is that there is a logical conclusion that advance amounts were used towards repayment of loan availed and they have saved the interest otherwise payable. Therefore, the interest on advance received is includible in the assessable value. In the case before us we find that the appellants have received advance from the Railways and the amount has been utilized by them towards payment of their official expendi-ture/working capital. We find that the Hon’ble Supreme Court in the case of Metal box India v. CCE, Madras reported in 1995 (75) E.L.T. 449 (S.C) has held that “it has to be appreciated that if Ponds had not advanced these amounts, the appellant would have been required to borrow these funds from the Bankers, etc., for purchasing raw materials and that the interest payable would then have entered the cost of manufacture and consequently the sale price of the goods……..”. In the present case, it is an admitted fact that the appellants have received huge amount of advance from their Customer and they have utilized the same for their working capital and repayment of loan. In the present case before us, it is on record that the appellants have adjusted the value mentioned in the invoice against 50% of the advance amount received from the Railways. Therefore it can be logically concluded that they have saved huge amount by way of interest. Therefore, we are of the considered opinion that the interest on advance is includible in the assessable value and longer period of limitation in term of the proviso to Section 11A(1) has been correctly invoked in this case as the appellants have held back information with regard to the contract entered into by them with the Railways. Coming to the second charge that the appellants have collected inspection charges from the Railways, we find that this issue is covered by the decision of the Tribunal in the case of Hindustan Gas & Industries Ltd. reported in 2001 (133) E.L.T. 481 wherein it was held that as far as the appellant is concerned, it recovers, in every case, the charges for inspection from its buyers, the railways or the sleeper manufacturers. The costs incurred for such testing would therefore form part of their value. However, in this case, we find that clause 9.0 of the Contract says that Director General RDSO, Lucknow or his nominee will be the inspecting Authority……. The cost of test at Government expenses will be to contractor’s account. Therefore, the amount received by the appellants in this regard will be includible in the assessable value and longer period of limitation is invocable and we confirm the impugned order in this regard.
So far as invocation of the larger period of limitation is concerned, we find that the Larger Bench of the Tribunal comprising of 5 Members in the case of Nizam Sugar Factory v. Collector – 1999 (114) E.L.T. 429 (T-LB) reported on page No. 1521 of CEGAT’s Larger Bench decision on Excise and Customs by R.K. Jain, Centax Publications Pvt. Ltd. has clearly held that in the case of suppression, etc., show cause notice may be issued within five years from the relevant date. Therefore we are of the considered opinion that longer period of limitation for demand of duty has been rightly invoked in this appeal.
So far as the third charge i.e. whether the appellants had fraudulent intention in non-payment of differential duty on the Escalation Bill No. 20/98-99 for Rs. 18,81,036 raised by the appellants with the Railways, we find that the Commissioner has observed that as per the commercial practice a pre-audit commercial invoice dated 4-6-98 for escalated price was raised by the appellants for verification by Railways, after which Rule 52A invoice was raised dated 24-7-98 when excise duty was paid through PLA and that duty on price escalation was paid even before the receipt of monies from the Railways and therefore, there was no ground to attribute fraudulent intent on this score. The duty on the escalated price is however liable to be paid and the amount of Rs. 2,82,155/- paid by the appellants is appropriated against this liability. We uphold the finding of the Commissioner in this regard.
Coming to the last charge i.e. imposition of penalty for various contraventions alleged against the appellants, we find that the Commissioner has imposed penalty of Rs. 20,00,000/- on the appellants under Rule 173Q of the CE Rules which is harsh and excessive and needs to be reduced in the facts and circumstances of this case more particularly because the appellants are a State Govt. Undertaking and the buyer is the Indian Railways and they have supplied the goods in accordance with a contract though the appellants had not brought to the notice of the department the existence of a contract. Therefore, we are inclined to think that interests of justice would be served if the penalty is reduced to Rs. 1,20,000/- (Rupees One lakh twenty thousand) and we order accordingly. As regards penalty under Section 11AC is concerned, in view of the fact that the appellants happen to be a Govt. of Tamil Nadu Undertaking and the Buyer of the goods was Indian Railways as well as N.L.C. which is a Govt. of India Undertaking, we feel that there is a need for reduction in the quantum of penalty. We also find that the Tribunal in the case of Escorts JCB Ltd. v. CCE, New Delhi reported in 2000 (118) E.L.T. 650 had reduced penalty imposed under Section 11AC from Rs. 30,63,751/- to Rs. 10,00,000/-. While doing so, the Tribunal held that the limit of penalty equal to duty under Section 11AC is the maximum limit and it is not mandatory that in all cases such maximum should be imposed as penalty and authority is having discretion to impose lower penalty. Therefore, we are inclined to think that interests of justice would be, met if the penalty in the present case under Section 11AC is reduced from Rs. 34,18,250/- to Rs. 11,50,000/- (Rupees Eleven lakhs and fifty thousand) and we order accordingly.
8. Except for the above modification in regard to reduction in the quantum of penalties, the appeal is otherwise dismissed.
Sd/-
(Jeet Ram Kait)
Member (T)
S.L. Peeran, Member (J)
9. I have carefully gone through the proposed order drafted by learned brother and have also carefully considered the submissions, the grounds of appeal as well as the order passed by Learned Commissioner (Appeals) in the matter.
10. The main ground of attack raised in this appeal is that there is no nexus between the advances received by the appellants from the Railways and the price which has been fixed under the contract. It is their submission that advances were paid after the price was fixed. Therefore, the advance has not depressed the value. In this regard, the following citations were relied :-
(i) CCE v. Chemical Valves Pvt. Ltd. - 1999 (113) E.L.T. 574 (ii) CCE v. Susha Founders & Engineers - 2000 (121) E.L.T. 546
wherein it has been held that advances should relieve the manufacturer from resorting to commercial borrowing and should have a direct nexus to the pricing of the goods. Further reliance was also placed on the Apex Court judgment rendered in the case of VST Industries Ltd., 1998 (97) E.L.T. 395 which has clearly held that the deposit or advance ought to depress the price of the goods, then and only then the notional interest on such advances would be includible in the assessable value. Further, reliance was also made in the CBEC Circular No. 404/37/98, dated 22-6-98 which considers the judgment of the Supreme Court in the case of V.S.T. Industries Ltd. and specifies that the department has to establish that advance in question had a nexus with the sale price of the excisable goods. Further, reliance have been made on the following judgments :-
(1) Mukund Ltd. v. CCE – 1999 (113) E.L.T. 316
(2) CCE v. Chemical Valves Pvt. Ltd. – 1999 (113) E.L.T. 574
(3) Western India Ceramics Pvt. Ltd. v. CCE – 2001 (130) E.L.T. 714
(4) Mc.Nally Bharat Engg. Co. Ltd. v. CCE – 2001 (132) E.L.T. 353
(5) CCE v. Rattan Hammers – 2000 (36) RLT 492
(6) CCE v. Lakshmi Engg. 2000 (37) RLT 270
11. With regard to inspection charges, the appellants contend that Railway Board nowhere specifies that the cost of addition of third party inspection would have to be paid by the wagon manufacturer. They stated that any third party inspection carried out at the instance of the buyer in addition to the normal inspection of the assessee is not includibile to the assessable value as per the erstwhile Section 4 of the Act. In this regard the following
judgments have been relied by the appellants :
(a) LOT v. CCE - 1998 (101) E.L.T. 668 (T) (b) CCE v. Shama Engine Valves Ltd. - 2000 (119) E.L.T. 508 (T) (c) CCE v. Simco Engg. Ltd, - 1997 (92) E.L.T. 699 (T).
12. With regard to invocation of larger period, they contended that department had full knowledge of the advances as there was an earlier Or-der-in-Original No. 71/96, dated 15-10-97 passed by the AC wherein he had held that advance received by the appellants from various customers including NLC and Railways had no nexus with the contract value as the contracts had been scrutinized by the department and matter has been dropped.
13. Ld. SDR relied on the findings given by the Commissioner and reiterated the same.
14. On a careful consideration of the submissions, I find merit in the submission of the appellants on all the points raised. In order to include interest element, the burden is on the Revenue to show that advances received had direct nexus on the price inasmuch as that the price had been depressed. In the present case, the contract has been entered into much earlier to the receipt of advances and the contractual price have prevailed throughout. Therefore, the ratio of VST Industries case (supra) that deposit or advance ought to depress the price of the goods in order to include notional interest on such advances in the assessable value, is required to be taken into consideration and to hold that in the present case, the department has failed to show that advances received has a nexus with the fixed prices and the prices were depressed. In the absence of any such proof and that contract having been signed much earlier to advances paid and there was no depression in the price, therefore, the appellant succeeds on this ground and the order impugned is required to be set aside on this plea alone.
15. I take into consideration other judgments cited which are noted supra on the very issue which has followed the ratio of VST Industries case.
16. With regard to inspection charges, a specific plea has been made that inspection charges are required to be paid by the wagon manufacturer and that any third party inspection carried out at the instances of the buyer in addition to the normal inspection of the assessee is not includible in the assessable value in terms of erstwhile Section 4 of the Act. In this regard, the three citations have been relied which are noted above.
17. I have gone through these judgments which are squarely applicable to the facts of this case. Respectfully following the same, I hold that the inspection charges are required to be added in the assessable value.
18. The department had full knowledge of the price and the advances received by the appellants. By Order-in-Original No. 71/96, dated 15-10-96 the AC had noted about the advances received by them and also held, that advance had no nexus with the contract and dropped the proceedings. Therefore, it cannot be said that there was suppression of facts requiring the invocation of larger period. The Nizam Sugar case is not applicable to the case as the ratio does not touch upon the aspect pertaining to the information already available with the department to allege suppression of facts. The same is distinguished. Appellant succeeds even on the ground of time
bar. Thus the appeal is allowed in the above terms.
Sd/-
(S.L. Peeran)
Member (J)
POINTS OF DIFFERENCE
19. In view of difference of opinion between the Members, the following question is referred to Third Member for determining the same as under :-
“Whether the appeal is required to be rejected in terms of the findings recorded by learned Member (T) Shri Jeet Ram Kait by ordering that the penalty imposed under Rule 173Q is required to be reduced to Rs. 1,20,000/- and penalty imposed under Section 11AC is required to be reduced to Rs. 11,50,000/-”
OR
“The appeal is required to be allowed both on merits and on time bar in the light of judgments noted by Member (Judicial) Shri S.L. Peeran in his order/”
Sd/- Sd/- (Jeet Ram Kait) (S.L. Peeran) Member (T) Member (J)
20. [Order per : C.N.B. Nair, Member (T)]. – The duty demand on the BTPGLN wagons in the present case is on account of the appellant receiving certain advances from Indian Railways, who are the buyers of the wagons. Part of the demand is also on account of the finding that the inspection charges attributable to inspection by a third party (Project and Development India Ltd.) is required to be included in the assessable value.
21. Appellant resists the duty demand on merits as well as on the ground of time bar.
22. I have heard both sides and perused the records and orders of my ld. Brothers. The appellants have been undertaking manufacture of railway wagons for several years against specific contracts from Railways. The payment of advance is common factor in all contracts. In fact, they have been taking similar advances from their other purchasers also. Similarly, Railways give advances to other wagon manufacturers also. Enhancement of the assessable value of the wagons has been ordered under the impugned order, so as to bring the notational interest ground on the advances within the assessable value. This issue had come up before the jurisdiction of the Asst. Collector of C. Ex. and that Asst. Commissioner had passed Order No. 71/96, dt. 15-10-96 holding that no addition is required to be made to the contract price on account of the advances. It is the submission of the appellant that material facts were known to both sides and in such a case it was not permissible, as has been done in the impugned order, to make duty demand by invoking the extended period permitted under the proviso to Section 11A of the CE Act. This submission was made before the adjudicating authority also and it is observed that the authority rejected the submission stating that scrutiny of the Asst. Collector’s order showed that only information available to the Asst. Commissioner was that advances were taken from the Railways and NLC and that it was a rather cryptic order. There is nothing to indicate that the exact terms and conditions relevant to the advances were made known to the Revenue.
23. The nature of the order decision cannot be a ground to held that facts were wilfully suppressed by the assessee with the intention to evade payment of duty. After the issue had been the subject matter of adjudication, it cannot be validly stated that the assessee suppressed the facts.
24. Accordingly, I am in agreement with the view taken by the ld. M(J) that facts of this case do not justify recourse to proviso to Section 11A of the CE Act. The demand is already time barred.
25. On the second issue of inclusion of cost of third party inspection, the legal position is quite clear that such costs are to be included [2001 (133) E.L.T. 481, 1998 (101) E.L.T. 668], etc.
26. In view of what has been stated above, I am of the opinion that the appeal is required to be allowed.
MAJORITY ORDER
27. In terms of the majority order, the impugned order is set aside and the appeal is allowed both on merits as well as on time bar as held in the majority order.
Sd/- Sd/-
(Jeet Ram Kait) (S.L. Peeran)
Member (T) Member (J)
Dated : 16-7-2002 Dated : 16-7-2002
