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REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 2562 OF 2008

COMMISSIONER OF CENTRAL EXCISE, RAIGAD                  ....APPELLANT  

VERSUS

M/S. ISPAT METALLICS INDUSTRIES LTD. & ORS.        ….RESPONDENTS

WITH

CIVIL APPEAL NO.8557 OF 2015

J U D G M E N T  

R.F. Nariman, J.

1. Two appeals have been filed from a common decision of  

CESTAT dated 11.10.2005, whereby the Tribunal has upset the  

order of the Commissioner, confirming various duty demands,  

penalty and interest.   

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2. The  brief  facts  necessary  in  order  to  appreciate  the  

controversy at hand, taken from C.A. No.2562 of 2008, are as  

follows.

3. M/s.  Ispat  Industries  Limited (hereinafter  referred  to  as  

the “IIL”) is engaged in the manufacture of HR coils,  sheets,  

plates, etc., which are cleared on payment of duty of excise.  In  

the manufacture of such goods, it avails credit on inputs such  

as  iron  ore  pellets.   Adjacent  to  its  plant,  another  group  

company,  namely,  M/s.  Ispat  Metallics  Industries  Ltd.  

(hereinafter referred to as the “IMIL”) also has a factory in which  

pig iron and molten metal are manufactured. The principal raw  

material for manufacture for both these companies is iron ore  

pellets.  The said pellets were purchased from Mandovi Pellets  

and Essar Steel Limited.  These were carried to the factory of  

IIL.  Credit  was availed by IIL of the duty paid on the entire  

quantity  so  procured.   As  and  when  required  by  the  sister  

company  IMIL,  pellets  were  transferred  through  a  conveyor  

from IIL’s plant to IMIL’s premises under cover of an invoice  

and on reversing an amount equal to the Cenvat credit availed  

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on inputs that were so transferred.  In addition to such invoices,  

IIL  also  raised  debit  notes  on  IMIL  for  recovering  actual  

expenditure incurred by it  in relation to the procuring of such  

iron ore pellets, such as bank commission, interest, etc.   

4. The aforesaid two companies were issued show cause  

notices dated 29.9.2003 and 14.10.2003 respectively.  It  was  

alleged that iron ore pellets were sold by IIL to IMIL and that the  

amounts recovered by IIL in the form of debit  notes towards  

bank charges, interest, etc. were includible in the assessable  

value of such inputs that were cleared.  The notice alleged that  

the reversal of credit equal to the amount paid to the supplier  

which was being followed by IIL was not in compliance with law.  

5. The  learned  Commissioner  upheld  the  show  cause  

notices stating that the transaction between IIL and IMIL was  

one of sale and not transfer.  Since the goods were reassessed  

to duty in terms of Rule 57AB(1C) of the Central Excise Rules,  

1944  and  Rule  3(4)  of  the  Cenvat  Credit  Rules,  2001,  the  

assessable  value  in  terms  of  Section  4(1)(a)  of  the  Central  

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Excise Act i.e., the transaction value at the time of clearance  

plus any additional consideration paid by the buyer at a later  

stage is to be added and, therefore, the amounts mentioned in  

the  debit  note  from  IIL  to  IMIL  were  also  includible  in  the  

assessable  duty  valuation  as  additional  consideration.   The  

extended period for limitation was also found to be available on  

the facts of the present case.  

6. The  Tribunal  reversed  the  aforesaid  decision  on  the  

ground that the transfer of iron ore pellets by IIL to IMIL was not  

a  sale  of  goods  but  was  transfer  of  raw  materials,  jointly  

procured, under a joint procurement policy which was followed  

by  the  two  sister  companies  and  this  becomes  clear  on  a  

reading of the tripartite agreement between the supplier of the  

pellets,  IIL,  and IMIL.   This being so,  the Tribunal  applied a  

circular dated 1.7.2002 by which, where no sale is involved but  

only a transfer by one sister unit to another, the value shown in  

the invoice on the basis of which Cenvat credit was taken by  

the assessee would be the value for the purpose of Rule 57AB  

and Rule 3(4). It was further held that additional consideration  

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could not be added inasmuch as the amount spoken of in the  

Rule 57AB and Rule 3(4) is an amount equal to the duty of  

excise which is leviable on such goods.  Post  manufacturing  

expenses cannot possibly amount to a duty of excise leviable  

on such goods and therefore all amounts paid under the debit  

notes between IIL and IMIL could not be added to the value of  

those goods. Further, the invoice value of  the supplier alone  

was to be taken into account and, consequently, the judgment  

of the learned Commissioner was set aside, not only on merits,  

but also on limitation, following the judgments of the Tribunal  

itself and of this Court.  

7. Shri  Radhakrishnan  has  read  to  us  in  detail  the  show  

cause  notices  and  the  Commissioner’s  judgment  dated  

24.12.2004, which is strongly relied upon by him in support of  

his case.  It is his case that a proper reading of the relevant  

rules  would  make  it  clear  that  what  has  to  be  seen  is  

transaction value under Section 4(1)(a) of the Central Excise  

Act and not invoice value of the supplier of the iron ore pellets.  

This being so, according to him, the learned Commissioner is  

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right  in his reasoning and the Tribunal’s judgment should be  

reversed.  

8. Shri  V.  Lakshmikumaran,  the  learned  counsel,  on  the  

other hand supported the decision of the Tribunal and argued  

that on a reading of the Rules the rate applicable to such goods  

would be as on the date of removal but value would necessarily  

be that determined for such goods under Section 4 or 4A of the  

Central Excise Act which would be the invoice value of the iron  

ore pellets cleared by the supplier of those pellets.  He relied  

strongly on the circular dated 1.7.2002, which was also relied  

upon by the Tribunal, and further went on to argue that there  

was  no  suppression  of  facts  in  this  case  and,  hence,  the  

extended  period  of  limitation  could  not  possibly  have  been  

applied to the facts of this case.  

9. Having  heard  the  learned  counsel  for  the  parties,  it  is  

important to first set out the relevant rules.  Rule 57AB(1C) of  

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the Central  Excise Rules,  1944 and Rule 3(4) of  the Cenvat  

Credit Rules, 2001 as they read at the relevant time, read as  

follows:-

“57(1C) When inputs or capital goods, on which  credit has been taken, are removed as such from  the factory, the manufacturer of  the final products  shall  pay  an  amount  equal  to  the  duty  of  excise  which  is  leviable  on  such  goods  at  the  rate  applicable  to  such  goods  on  the  date  of  such  removal  and  on  the  value  determined  for  such  goods under Section 4 of the said Central Excise  Act,  and  such  removal  shall  be  made  under  the  cover of an invoice referred to in rule 52A.”

Rule 3(4) When inputs or capital goods, on which  CENVAT  credit  has  been  taken,  are  removed  as  such from the factory, the manufacturer of the final  products shall pay an amount equal to the duty of  excise which is leviable on such goods at the rate  applicable  to  such  goods  on  the  date  of  such  removal  and  on  the  value  determined  for  such  goods under Section 4 or Section 4A of the Act, as  the case may be, and such removal shall be made  under the cover of an invoice referred to in rule 7.”

10. The Tribunal being the last forum of appreciation of facts  

has held that transfer of iron ore pellets by IIL to IMIL was not a  

sale of goods but was only a transfer of raw materials procured  

under the Tripartite Agreement between the two of them and  

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the supplier of the said pellets.  This is a pure finding of fact and  

Shri Radhakrishnan has not been able to dislodge this finding  

of fact. This being the case, the application of the circular of  

1.7.2002 becomes important.  Paragraph 14 of the said circular  

reads as under:-

14. How  will  valuation  be  done  when  inputs  or  capital  goods,  on  which  CENVAT credit has  been  taken  are  removed  as  such  from  the  factory,  under the erstwhile  sub  rule  (1C)  of  rule  57AB  of  the  Central  Excise  Rules,  1944,  or  under  rule  3(4)  of  the  Cenvat  Credit  Rules,  2001  or  2002 ?

Where  inputs  or  capital  goods,  on  which  credit  has  been  taken,  are  removed as such on sale, there should  be  no  problem  in  ascertaining  the  transaction  value  by  application  of  sec.4(1)(a)  or  the  Valuation  Rules.  [Provided  tariff  values  have  not  been  fixed  for  the  inputs  or  they  are  not  assessed  under  Section  4A  on  the  basis of MRP ] There may be cases where the inputs  or capital goods are removed as such  to  a sister  unit  of  the assessee or  to  another factory of  the same company  and where no sale is involved. It  may  be noticed that  sub rule (1C) of  Rule  57AB of  the  erstwhile  Central  Excise  Rules,  1944  and  Rule  3(4)  of  the  Cenvat Credit Rules 2001 (now 2002,  talk of determination of value for “such  goods” and not the “said goods”. Thus,  if the assessee partly sells the inputs to  independent  buyers  and  partly  transfers  to  its  sister  units,  the  transaction  value  of  “such  goods”  would be available in  the form of  the  transaction value of  inputs sold to  an  unrelated buyer (if the sale price to the  unrelated buyer varies over a period of  time, the value nearest to the time of  

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removal should be adopted). Problems  will,  however,  arise  where  the assessee does not sell the inputs/  capital goods to any independent buyer  and  the  only  removal  of  such  input/  capital goods, outside the factory, is in  the nature of transfer to a sister unit. In  such a case proviso to rule 9 will apply  and provisions of rule 8 of the valuation  rules  would  have  to  be  invoked.  However,  this  would  require  determination of the ‘cost of production  or  manufacture’,  which  would  not  be  possible since the said inputs/  capital  goods  have  been  received  by  the  assessee  from  outside  and  have  not  been produced or manufactured in his  factory.  Recourse will,  therefore, have  to be taken to the residuary rule 11 of  the  valuation  rules  and  the  value  determined  using  reasonable  means  consistent  with  the  principles  and  general  provisions  of  the  valuation  rules and sub-section (1) of sec. 4 of  the  Act.  In  that  case  it  would  be  reasonable to adopt the value shown in  the  invoice  on  the  basis  of  which  CENVAT  credit  was  taken  by  the  assessee in the first place. In respect  of capital goods adequate depreciation  may be given as per the rates fixed in  letter  F  No.  495/16/93-Cus.VI  dated  26.5.93, issued on the Customs side.

11. A reading of this circular makes it clear that a distinction is  

made between inputs on which credit has been taken which are  

removed on sale, and those which are removed on transfer.  If  

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removed  on  sale,  “transaction  value”  on  the  application  of  

Section  4(1)(a)  of  the  valuation  rules  is  to  be  looked  at.  

However, where the goods are entirely transferred to a sister  

unit, it is reasonable to adopt the value shown in the invoice on  

the basis of which Cenvat Credit was taken by the assessee i.e.  

the invoice of the supplier of the pellets to the assessee.  

12. As it is clear that the present is a case of transfer and not  

sale  of  pellets,  no  infirmity  can be found with  the Tribunal’s  

judgment,  which only follows the circular  dated 1.7.2001.  In  

addition,  the  Tribunal  was  also  correct  in  holding  that  post  

manufacturing expenses cannot  be loaded on to the amount  

equal  to  the  duty  of  excise  leviable  on  such  goods  as  this  

amount would, then, cease to be an amount equal to the duty of  

excise but would be something more.  On both these counts  

therefore, we find that the Tribunal is justified in its finding on  

law, which is based on its finding of fact that the present is a  

case  of  transfer  and  not  sale.  This  being  the  case,  it  is  

unnecessary to consider any of the other submissions made by  

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the  learned  counsel  including  the  point  of  limitation.   The  

appeals are, accordingly, dismissed.  

……………………J.

(A.K. Sikri)  

……………………J.

(R.F. Nariman)  

New Delhi;

May 6, 2016

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