ORDER
K.S. Venkataramani, Member (T)
1. The appellant company manufacture Titanium Substrate insoluble anodes (hereinafter called as TSI anodes) using the knowhow supplied by the National Research Development Corporation (hereinafter called as NRDC) a Government of India Undertaking.
2. Under an agreement dated 18.3.1976 entered into between the appellant company the said NRDC, the appellant company was to collect royalty from the manufacturers of caustic soda who used the TSI anodes to manufacture caustic soda. Accordingly, the appellant company had in its contract for manufacture and supply of TSI anodes incorporated clauses whereby the buyers would pay the appellant company recurring royalty calculated prorata to the quantum of caustic soda manufactured by them and the royalty so collected was passed on to NRDC after deducting administrative charges.
3. A notice dated 18.11.1985 was issued by the Superintendent of Central Excise to the Appellant Company directing them to show cause as to why the Royalty so collected by the Appellant Company on behalf of NRDC from its customers should not be included in arriving at the total assessable value of the anodes for the purpose of determining Excise duty payable by the appellant company.
4. The Collector of Central Excise by his order dated 20.5.1988 confirmed the earlier demand by the Superintendent of Central Excise of Rs. 6,55,398.00 and has hence directed the appellant company to pay excise duty on the royalty so collected from the manufacturers of caustic soda.
5. Learned Counsel, Shri R. Shashidharan for the appellants submitted that the demand was time-barred because the Department had knowledge about the royalty being collected by the appellants from the customers and hence they cannot be charged with suppression of facts from the Department for invoking the longer period under Section 11A for demanding duty. Learned Counsel referred in this connection to their letter to the jurisdictional Superintendent dated 25.3.1983 giving particulars of purchase orders for anodes containing the terms of payment which includes royalty. These particulars were furnished following visit of the officers to their factory and scrutiny of records. Learned Counsel, further, drew attention to the show cause notice dated 26.9.1984 issued to the appellants on a question relating “to valuation. The Department had scrutinised invoices of sales to Hukumchand Jute Mills for whom goods were sold inclusive of royalty charges. It was also urged that the appellants had furnished details of royalty amounts received by their letters dated 16.8.1984 and 27.8.1984 in response to Department’s query dated 25.4.1984. Learned Counsel urged that at the material time both the assessee and the Department were under the impression that royalty received was not includible in the assessable value, and that matter was apparently taken up only on the CER Audit raising an objection. In these circumstances, pleaded the Learned Counsel, the appellants case is covered by ratio of Supreme Court, decision in the case of Tamil Nadu Housing Board v. Collector of Central Excise 1994 (55) ECR 7 wherein the Supreme Court had held that the Department can invoke longer period under Section 11A Central Excises & Salt Act, 1944 only on establishing suppression of facts alongwith proof of intentional evasion of duty. Continuing his submissions, the learned Counsel urged that the royalty amount cannot be added to the assessable value of TSI anodes manufactured by them. The amount of royalty collected by them is as per their contract with the caustic soda manufacturers who use the anodes supplied by the appellants and the amount of royalty is dependent on the capacity and actual output of their customer caustic soda manufacturers. The appellants, in turn, are under contractual obligation to make over the amount so received to the National Research and Development Corporation (NRDC). The learned Counsel contended that payment of royalty is not linked to the manufacture and sale of anodes, as duty liability on the anodes is discharged by the appellants at the time of clearance on the basis of the price agreed upon between the appellants and the customers. The amount is thus a post removal element of value according to the appellants, and hence not to be included in the assessable value.
6. Learned SDR, Shri B.K. Singh, contended that the law as laid down by the Supreme Court in the case of Union of India v. Bombay Tyre International 1983 ECR 1627D (SC) : ECR C 663 (SC) is that all the elements of cost which go to make up the inherent value of the goods at the time of delivery at the factory gate would constitute assessable value. In the present case the licence deed between NRDC and the appellants shows that the appellants had been granted the use of the invention in the manufacture of anodes on payment of royalty which is invariably collected by the appellants from all their customers and the liability to pay royalty is also known at the time of clearance. The learned SDR urged that the royalty amount is linked to the manufacture of anodes by the appellants and the payment on that account by their customers is an additional consideration flowing from the purchases to the manufacturer. Therefore, it has to be added to the assessable value, for which learned SDR relied upon Tribunal’s decision in the case of Collector of Central Excise v. Metal Box . Reference was also made to the comprehensive reasoning on this aspect in the impugned order of the Collector. On the question of limitation, learned SDR contended that the correspondence relating to their letter of 25.3.1983 to the Superintendent was in a different context of valuation in respect of copper rods and not directly on the issue of royalty. The appellants had opted for invoice value assessment and hence it was incumbent on them to disclose the collection of royalty in their invoice. Having not done so, the Department was justified in demanding duty by invoking the longer period under Section 11A, contended the learned SDR, citing the Madras High Court Judgment in the case of Limenaph Chemicals v. Union of India.
7. The submissions made by both the sides, have been carefully considered. On the question whether payment of royalty by the appellants to the NRDC is to be included in the assessable value of anodes manufactured by the appellants, it is seen that the deed of licence granted by NRDC to the appellants has to be considered. It appears, therefrom, that the Central Electro-Chemical Research Institute, Karaikkudi has developed a process for the manufacture of titanium substrate insoluble anodes (TSIA) which is patented as an invention the full rights of which have been assigned to NRDC. The NRDC has agreed by the terms of the licence deed to grant such invention to the appellants for the purpose of using the invention and process to manufacture and sell articles made in accordance with the invention. The licence lays down the consideration for using the invention by the appellants for manufacturing TSIA and as to how such consideration shall be worked out and paid. From this it is clear that the royalty paid is for the right to use the patented invention in the manufacture of TSIA which is the activity the appellants are engaged in. The royalty paid has a direct nexus to TSIA manufactured by the appellants. Hence, the Collector has rightly concluded by his detailed reasoning in the impugned order that this royalty element must necessarily form part of the cost of TSIA produced by the appellants and not for the manufacture of caustic soda by the customers of the appellants. The collection of the amount from the caustic soda manufactured by the appellants is an index of the measure of royalty to be paid by the appellants to NRDC and has been worked out in terms of the deed licence which laid down that the consideration for the use of the invention shall be worked out in the manner contained therein. Therefore, the findings of the Collector in this regard are well-founded and are, accordingly, sustained.
8. Taking up the next question whether the duty demanded can be extended beyond six months under Section 11A Central Excises & Salt Act proviso, the appellants have clearly, made out a case against it. This is for the following reasons. In April, 1984, the jurisdictional Superintendent in a letter dated 25.4.1984 had asked for the details, inter alia, of their sales, service charges and miscellaneous receipts. In their replies dated 16.8.1984 and 27.8.1984, the appellants had informed that misc. receipts consisted, inter alia of royalty received and had also indicated the amount so received, during 1.1.1980 to 31.12.1980 and 1.1.1982 to 30.6.1982. Further, by their earlier letter dated 25.3.1983, the appellants had furnished to the Department in pursuance of the Departmental Officers visit to their factory and verification of their records, copies of purchase orders, inter alia, of Gwalior Rayon Silk Mfg. (Wvg.) and of Hukum Chand Jute Mills. These purchase orders contain terms of payment including royalty. The purchaser is to pay royalty at the specified rate per tonne of caustic soda produced from cells equipped with TSIA supplied by appellants. It is also agreed that if royalty is not payable by appellants to NRDC or if it is reduced, the appellants will stop charging royalty or may do it at the reduced rate. In such a situation, it cannot reasonably be held that the appellants had knowingly withheld the information from the Department with intention of evading payment of duty. It is well-settled that in such circumstances, the Department is not justified in invoking the longer period-see the Supreme Court decision in the case of Tamil Nadu Housing Board v. Collector of Central Excise 1994 (55) ECR 7 cited before us by the learned Counsel. It is, therefore, held that the demand in this case is to be limited to six months under Section 11A Central Excises & Salt Act, 1944.
9. The appeal is disposed of in the above terms.