CESTAT: ‘Overhead Charges’ cannot be Calculated based on Variable Items like Raw Materials for Charging Duty of Excise

CESTAT: ‘Overhead Charges’ cannot be Calculated based on Variable Items like Raw Materials for Charging Duty of Excise

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Kolkata by its division member bench comprising of P.K. Choudhary (Judicial Member) and K. Anpazhakan (Technical Member) observed that the cost of raw material varies depending upon the raw material used and hence a variable item like ‘raw material’ cannot be the basis for working out the ‘overhead charges’ for charging duty of excise.

The bench was hearing an appeal filed in the matter M/s. Bata India Limited vs. Commissioner of Central Excise, Kolkata-V.

In the present case, the appellant claimed to manufacture and remove footwear components for use within the factory and in their own factories at other places as well as for use by their job workers for manufacture of complete footwear.

The Appellants did not make proper determination of assessable value of the said goods in terms of Section 4 of the Central Excise Act, 1944 read with Central Excise (Valuation) Rules, 1975 for the period of April’1996 to August’ 1998. They determined the assessable value of footwear components on the basis of cost at the rate of 6 per cent to 10 per cent of the prime cost which is much lower than that of prime cost at 51 per cent towards captive consumption in their own factory.

The element of profit margin was considered between 0.02 per cent to 0.9 per cent instead of at the rate of 2.9 per cent for 1997-98. The administrative overhead and advertising expenses and interest were totally ignored. Thus, they undervalued the footwear components cleared for consumption in other units and in the factories of job workers.

A Show Cause notice was issued to the appellant proposing to recover Central Excise Duty amounting to Rs.14,91,576 along with penalty under Section 11AC and interest under Section 11AB of the Central Excise Act, 1944 invoking extended period of limitation in terms of proviso to Section 11A Central Excise Act, 1944.

The Appellant submitted that there were various methods of costing principles and they relied on Labor Cost basis for determining the value of such overheads in their factory. The departmental calculation was not tenable on the ground that this calculation is not based on any system.

Accordingly, they argued that the demand made in the Notice was not tenable. They also raised the issue of invocation of extended period as Central Excise returns were regularly filed by them, as well as audit teams were regularly visited their factory.

The Notice was adjudicated by the Adjudicating Authority, who held that there was no ground to uphold the demand and dropped the demand along with interest and penalty.

On Appeal, the Commissioner (Appeals) remanded the matter back to the Adjudicating authority.

The Appellant filed the Order-in-Appeal passed by the Ld. Commissioner (Appeals) before the CESTAT, on the ground that the Adjudicating Authority had dropped the demand on merit as well as on Limitation, in the Order dated 28 January, 2009. The Department preferred an appeal against the O-i-O under Section 35 E (4) only on merits and dropping of the demand on the ground of Limitation by the adjudicating authority in the O-i-O had not been appealed by the department.

The remand order by Commissioner (Appeals) had appeared to accept the Department’s case, in principle. Hence, they requested to set aside the O-i-A dated 25 February 2010.

The Revenue was also in Appeal before the CESTAT against the Order-in-Appeal against the remanding the matter to the Ld. Adjudicating Authority for re-adjudication.

The CESTAT noted that the Ld. Adjudicating authority had observed that there was no ground for invocation of provisions to Section 11A of the Central Excise Act, 1944. Thus, it noted that the demand was dropped by the Ld. Adjudicating authority on merits as well as on the ground of limitation.

The Appellant contented before the CESTAT that the department had raised the demand to recover central excise duty in the show cause notice on the ground of non-inclusion of overhead charges in the costing of the goods cleared for consumption.

The department was of the view that the Appellant had not made proper determination of assessable value of the said goods in terms of Section 4 of the Central Excise Act, 1944 read with Central Excise (Valuation) Rules, 1975.

The CESTAT was of the considered view that there was no under-valuation in the costing of the product adopted by the Appellant, as a variable item like ‘raw material’ cannot be the basis for working out the ‘overhead charges’ and that the Appellant arrived at the ‘overhead charges’ as a percentage of ‘wages’, which appeared to be a more appropriate method than adopting raw material cost, to arrive at the ‘overhead charges.’

Hence, the bench observed, “we find that the Appellant has already paid duty on the basis of the cost arrived at based on the method cited above. Thus, we find that there is no under-valuation in the costing of the product adopted by the Appellant. Accordingly, we hold that the demand does not survive. As the demand is not sustainable, the demand of interest and penalty also not sustainable.”

Next with respect to the issue raised by Appellant that the demand was not sustainable on the ground of Limitation, the CESTAT accepted the argument of the Appellant, that the invocation of extended period is not sustainable in this case as they were regularly filing Central Excise returns and disclosed all the information to the Department in the Returns.

“As they have not suppressed any information from the Department, the demand made in the Notice by invoking extended period under proviso to Section 11A is not sustainable,” the bench observed.

Accordingly, the CESTAT set aside the Order-in-Appeal dated 25 February, 2010, passed by the Commissioner (Appeals) and allowed the Appeal filed by the Appellant. The Appeal filed by the Department was rejected.