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REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.951 of 2008

COMMISSIONER OF CENTRAL EXCISE …APPELLANT

VERSUS

M/S NESTLE INDIA LIMITED …RESPONDENT

J  U  D  G  M  E  N  T

R.F. Nariman, J.

1. The respondent herein is a 100% EOU engaged in the  

manufacture  of  instant  tea  falling  under  Chapter  2101.20  of  

schedule to the Central Excise Tariff Act, 1985.  The present  

appeal  is  concerned  with  clearances  of  their  product  to  two  

sister units on payment of duty in terms of Notification No.8/97 -  

CE  dated  1.3.1997  and  Notification  No.23/2003  CE  dated  

31.3.2003.   The  first  notification  would  cover  the  period  

1.11.2000 to 30.3.2003 and the second notification would cover  

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the period 31.3.2003 to 31.5.2005.  Inasmuch as the instant tea  

was manufactured wholly out of indigenous raw materials, the  

notifications aforesaid applied and whatever was in excess of  

what is chargeable by way of excise duty on the said tea is  

exempted. It is not in dispute that the said notifications applied  

in the facts of the instant case.  

2. A show cause notice dated 23.9.2005 was issued by the  

Department stating that ordinarily Rule 8 of the Central Excise  

Valuation (Determination of Price of Excisable Goods) Rules,  

2000 would apply and that the tea being captively consumed  

and not sold should be valued at 115% of the cost of production  

or  manufacture  of  such  goods.   However,  the  show  cause  

notice then goes on to say that as the said tea is transferred  

only  to  two  sister  concerns  and  no  sale  is  involved,  the  

assessable value of  instant  tea removed to the respondent’s  

own units would be determined on the basis of the export price  

of similar goods and not 115% of the cost of production.  

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3. The  order  in  original  dated  31.5.2006  passed  by  the  

Additional  Commissioner  upheld  the  show cause  notice  and  

confirmed the duty amount, interest, and penalty as follows:-

“ORDER

(1)  I confirm the duty amount of Rs. 42,86,079/-  (Rupees Forty two lakhs, eighty six thousand and  seventy  nine  only)  (Centvat:  Rs.42,62,545/-  and  Education Cess Rs.23,534/-) under Section 11A (1)  of the Central Excise Act, 1944.

(2) I  demand appropriate  interest  on  the  above  amount  confirmed  under  Section  11AB(1)  of  the  Central Excise Act, 1944.

(3) I impose a penalty of Rs.42,86,079/- (Rupees  Forty  two lakhs,  eighty  six  thousand and seventy  nine  only)  under  Section  11A  (1)  of  the  Central  Excise Act, 1944.

(4) As  I  have  imposed  penalty  on  them  under  Section 11AC of Central Excise Act, 1944, I do not  impose a separate penalty under Rule 173Q or 209  of erstwhile Central Excise Rules 1944 and Rule 25  of erstwhile Central Excise (No2) Rules, 2001 read  with Section 38A of Central Excise Act, 1944 and  Rule 25 of Central Excise Rules, 2002.”

4. The appeal by the assessee was also dismissed by an  

order dated 26.9.2006 passed by the Commissioner (Appeals)  

upholding the show cause notice and stating that Section 3 (1)  

Proviso (ii) of the Central Excise Act would apply to the facts of  

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the case and that being so, it is clear that the basis for valuation  

had to be on the FOB value of export of similar goods and not  

on the basis of cost of production under Rule 8 of the Central  

Excise Rules.  

5. By the impugned judgment dated 16.5.2007, CESTAT set  

aside  the  judgment  of  the  Commissioner  (Appeals)  by  

reasoning that  since  the exemption  notifications  would  apply  

and  since  what  has  to  be  determined  under  the  said  

notifications is  excise duty payable in  India,  such duty could  

only  be  arrived  at  by  applying  Rule  8  in  cases  of  captive  

consumption and that  therefore the basis of  the show cause  

notice  and  the  decisions  by  the  original  and  appellate  

authorities was incorrect.  It accordingly set aside the order of  

the Commissioner (Appeals).  

6. Shri  A.K. Sanghi,  argued before us that since the case  

was covered by Section 3 (1) Proviso (ii) of the Central Excise  

Act,  the  Customs Act  alone  was to  be  looked at  and  if  the  

Customs Act was so looked at, the test as to value of goods  

would  be  the  test  of  similar  goods  of  a  like  value  that  are  

exported.  Hence, according to him, the original authority and  4

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the appellate authority were correct in applying the said Section  

and the Tribunal was wrong in ignoring the said Section and  

applying  exemption  notifications  to  the  facts  of  the  case  

instead.  

7. Ms. L. Charnaya, learned counsel appearing on behalf of  

the assessee on the other hand, supported the decision of the  

tribunal  and  read  to  us  in  some  detail  not  only  the  Central  

Excise  Valuation  Rules  but  also  the  notifications  

aforementioned.  It is her case that the show cause notice itself  

was flawed in that the basis of the said notice is that since no  

sale had taken place on the facts of the present case, the FOB  

value of export of similar goods has to be taken into account.  

She laid great stress on the fact that in the notification dated  

1.3.1997 the language used is  not  “sold”  but  “allowed to be  

sold” and that if this were kept in mind it is clear that the very  

basis of the show cause notice being incorrect would lead to  

incorrect  orders  that  were  passed  by  the  original  and  first  

appellate authority.  

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8. Having heard learned counsel for the parties we think it is  

necessary to first extract the relevant statutory provisions and  

the notifications insofar as they have a bearing on the facts of  

the present case.  

9. Section 3(1)  proviso as it  stood at  the relevant  time is  

extracted hereinbelow:-

“SECTION 3.  Duties specified in First Schedule  and the Second Schedule to the Central Excise  Tariff Act, 1985 to be levied.

Provided that  the duties  of  excise which shall  be  levied and collected on any excisable goods which  are produced or manufactured, -  

(i)  In a free trade zone or a special economic  zone and brought to any other place in India; or

(ii) By  a  hundred  per  cent  export-oriented  undertaking and brought to any other place in India,

shall  be an amount equal to the aggregate of the  duties of customs which would be leviable under the  Customs Act, 1962 (52 of 1962) or any other law for  the time being in force, on like goods produced or  manufactured  outside  India  if  imported  into  India,  and  where  the  said  duties  of  customs  are  chargeable by reference to their value; the value of  such  excisable  goods  shall,  notwithstanding  

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anything contained in any other provision of this Act,  be determined in accordance with the provisions of  the  Customs  Act,  1963  (52  of  1962)  and  the  Customs Tariff Act, 1975 (51 of 1975).”

10. Section  5A  being  the  Section  under  which  the  two  

notifications in the present case were issued is also of some  

relevance and reads as follows:-

“SECTION 5A. Power to grant exemption from  duty of excise. -  

(1) If the Central Government is satisfied that it is  necessary in the public interest so to do, it may, by  notification in the Official Gazette exempt generally  either absolutely or subject to such conditions (to be  fulfilled before or after removal) as may be specified  in the notification, excisable goods of any specified  description from the whole or any part of the duty of  excise leviable thereon :

Provided that,  unless specifically provided in  such notification, no exemption therein shall  apply  to  excisable  goods  which  are  produced  or  manufactured-

(i) In  a  free  trade  zone or  a  special  economic  zone and brought to any other place in India; or

(ii) By  a  hundred  per  cent  export-oriented  undertakings and brought to any place in India.”

11. Rule 8 of the Central Excise Rules, 2000 as it stood at the  

relevant time reads as follows:-

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“RULE 8. Where the excisable goods are not sold  by the assessee but are used for consumption by  him  or  on  his  behalf  in  the  production  or  manufacture of other articles, the value shall be one  hundred  and  fifteen  per  cent  of  the  cost  of  production or manufacture of such goods.”

12. Inasmuch as a great deal turns on the two notifications  

that we are concerned with on the facts of the present case, it is  

necessary to quote in full the first of the two notifications.  

“Notification:  8/97-CE dated 01-Mar-1997

Exemption to finished products, rejects and waste  or  scrap  produced  in  a  100%  EOU  or  FTZ  In  exercise of the powers conferred by sub-section (1)  of section 5A of the Central Excise Act, 1944 (1 of  1944), the Central Government, being satisfied that  it is necessary in the public interest so to do, hereby  exempts the finished products, rejects and waste or  scrap  specified  in  the  Schedule  to  the  Central  Excise Tariff Act, 1985 (5 of 1986) and produced or  manufactured, in a hundred per cent export-oriented  undertaking or a free trade zone wholly from the raw  materials  produced or  manufactured in  India,  and  allowed to be sold in India under and in accordance  with the provisions of paragraphs 102 and 114 of  the  Export  and  Import  Policy  1  April  1992  –  31  March 1997,  from so much of  the duty  of  excise  leviable  thereon  under  section  3  of  the  Central  Excise Act, 1944 (1 of 1944), as is in excess of an  amount equal to the duty of excise leviable under  the said section 3 of the Central Excise Act, on like  goods,  produced  or  manufactured  in  India  other  

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than  in  a  hundred  per  cent  export-oriented  undertaking or a free trade zone, if sold in India.”

13. To  similar  effect  for  the  subsequent  period  is  the  

notification No.23 of 2003 dated 31.3.2003.

14. The  first  thing  to  be  noticed  is  that  Section  5A  under  

which  the  exemption  notifications  are  issued  states  in  the  

proviso that no exemption shall apply to excisable goods which  

are  produced  or  manufactured  by  a  100%  Export  Oriented  

Undertaking  and  brought  to  any  place  in  India  unless  

specifically provided in such exemption notification.  When we  

turn  to  the  notification  dated  1.3.1997,  we  find  that  there  is  

specific provision for exemption of certain goods produced in a  

100%  EOU  wholly  from  raw  materials  produced  or  

manufactured in India.  It is not disputed by the revenue that the  

instant tea manufactured by the respondent would be covered  

being a finished product specified in the schedule to the Central  

Excise Tariff Act.  Further, the notification goes on to state that  

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the  said  tea  should  be  “allowed  to  be  sold”  in  India  in  

accordance with the relevant  EXIM policy.  It further goes on to  

state that the exemption from payment of the duty of excise that  

is  leviable  thereunder  under  Section 3 is  what  is  payable  in  

excess of an amount equal to the duty of excise leviable on like  

goods  produced  or  manufactured  in  India  produced  in  an  

undertaking other than in a 100% Export Oriented Undertaking,  

if sold in India.

15. It is clear that the object of the notification is that so far as  

the  product  in  question  is  concerned,  so  long  as  it  is  

manufactured by a 100% EOU out  of  wholly indigenous raw  

materials and so long as it is allowed to be sold in India, the  

duty payable should only be the duty of excise that is payable  

on like goods manufactured or produced and sold in India by  

undertakings which are not 100% EOUs.

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16. There  is  no  doubt  whatsoever  that  the  duty  of  excise  

leviable under Section 3 would be on the basis of the value of  

like  goods  produced  or  manufactured  outside  India  as  

determinable in accordance with the provisions of the Customs  

Act,  1962  and  the  Customs Tariff  act,  1975.   However,  the  

notification states that duty calculated on the said basis would  

only be payable to the extent  of  like goods manufactured in  

India by persons other than 100% EOUs.  This being the case,  

it is clear that in the absence of actual sales in the wholesale  

market, when goods are captively consumed and not sold, Rule  

8  of  the Central  Excise Rules would have to  be followed to  

determine  what  would  be  the  amount  equal  to  the  duty  of  

excise leviable on like goods.  This being so,  it  is  clear that  

learned counsel for the assessee is right in her contention that  

the basis of the show cause notice is itself flawed. The show  

cause notice in the present case, as has been noticed above,  

refers to Rule 8 of the  Central Excise Valuation (Determination  

of Price of Excisable Goods) Rules, 2000, but then goes on to  

state that:

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“It is settled law that the value shall be determined  keeping in view the following factors:

a. sale price of goods under assessment  

b. sale  price  of  other  consignments  of  identical/  similar goods

c. export price of identical/similar goods

d. nature of sale transactions etc.”

The  “settled  law”  spoken of  would  refer  to  a  CBEC circular  

No.268/85-CX.8 dated 29.9.1994 which deals with valuation of  

goods  manufactured  by  units  working  under  the  100% EOU  

scheme.   The said  circular  refers  to  Rule  8 of  the Customs  

Valuation Rules and not  the Central  Excise Valuation Rules.  

The four factors laid down in the said circular have relevance  

only  qua  goods  that  are  cleared  in  the  DTA and  how  their  

valuation is to be arrived at.  We have already seen that the  

manner of valuation of such goods would not be relevant for the  

simple reason that what has to be determined in the facts of the  

present  case  is  the  valuation  of  the  duty  of  excise  leviable  

under  Section  3  of  the  Central  Excise  Act  on  like  goods  

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produced or manufactured in India by undertakings other than  

100% EOUs.  The application of this circular and consequently  

any FOB export price would be wholly irrelevant for the purpose  

of this case and as has been held above, is only for arriving at  

the duty of excise leviable under Section 3(1) Proviso (ii) of the  

Central Excise Act.  On the facts of the present case, it is clear  

that the said duty of excise arrived at based on Section 3(1)  

Proviso (ii)  is more than the duty determinable for like goods  

produced or manufactured in India in other than 100% EOUs.  

Since the notification exempts anything that is in excess of what  

is  determined  as  excise  duty  on  such  like  goods,  and  

considering that for the entire period under question the duty  

arrived at under Section 3(1) proviso (ii) is in excess of the duty  

arrived at on like goods manufactured in India by non 100%  

EOUs, it is clear that the whole basis of the show cause notice  

is indeed flawed.  Further, the show cause notice is based on  

one  solitary  circumstance  –  the  fact  that  goods  captively  

consumed by the two sister units of the unit in question are not  

“sold”.   We are  afraid  this  approach  flies  in  the  face  of  the  

language  of  the  notification  dated  1.3.1997.  The  test  to  be  

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applied  under  the  said  notification  is  whether  the  goods  in  

question  are  “allowed  to  be  sold”  in  India.  The  aforesaid  

expression is obviously different from the expression “sold” and  

does  not  require  any  actual  sale  for  the  notification  to  be  

attracted.  In fact revenue’s case is also that even though the  

said  notification  is  attracted,  yet  because  there  is  no  sale  

somehow the FOB export  price of  like goods alone is  to  be  

looked at. If this were to be so, not only would the object of the  

notification not be sub-served but even its plain language would  

be violated.  It is clear that the said notification has been framed  

by the Central Government, in its wisdom, to levy only what is  

levied by way of excise duty on similar goods manufactured in  

India,  on  goods  produced  and  sold  by  100%  EOUs  in  the  

domestic tariff area if they are produced from indigenous raw  

materials. If the revenue were right, logically they ought to have  

contended that the notification does not apply, in which event  

the test  laid down under Section 3(1) proviso (ii)  would then  

apply.  This not being the case, we are of the view that the  

Tribunal’s  judgment  is  correct  and  requires  no  interference.  

The appeal is, accordingly, dismissed.  

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……………………J.

(A.K. Sikri)

……………………J.

New Delhi; (R.F. Nariman)

November 24, 2015.  

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