Commissioner of Central Excise,Belgaum
Vs. M/S. Mysore Kirloskar Ltd., Karnataka [2008] INSC 871 (9 May 2008)
CIVIL APPELLATE JURISDICTION CIVIL
APPEAL NO. 6468 OF 2002 Commissioner of Central Excise, Belgaum ......
Appellant Versus Mysore Kirloskar Ltd., Karnataka ... Respondent
J.M. PANCHAL, J.
The instant appeal is directed
against decision dated January 25, 2002 rendered by the Customs Excise and Gold
(Control) Appellate Tribunal, South Zonal Bench at Banglore, in Appeal No.
E/744/95 whereby the order dated September 8, 1995 passed by the Commissioner
of Central Excise, Belgaum, confirming the demand of duty of Rs.7,41,750/- and
imposing penalty of Rs.75, 000/- on the additional amount of consideration of
Rs.43,00,000/- 2 received by the respondent for the preparation of designs,
drawings, patterns, jigs, etc. is set aside.
2. The respondent, a company
incorporated under the provisions of the Companies Act, 1956
was manufacturing machine tools, their accessories, high grade castings,
pollution control equipments and other incidental and ancillary equipments. It
owned and operated a main machine manufacturing factory at Harihar. It used to
accept orders to manufacture engineering machines as per the drawings,
patterns, jigs, fixtures and tools etc. developed by it. The respondent entered
into such an agreement dated May 10, 1991 with ITC for manufacturing the
machines. The agreement stipulated that the machines would be manufactured as per
the specifications, prototype drawings and patterns prepared by it and approved
by ITC. As per the agreement, the price of the machines was to be stipulated by
ITC in orders to be placed upon the respondent company. For the agreement in
question, the respondent was paid a sum of 3 Rs.43 lakhs. The said sum was
accounted as other income in the accounts and balance sheet of the respondent.
3. The Commissioner of Central
Excise, Belgaum, issued a notice calling upon the respondent to show cause as
to why duty of Rs.7,41,750/- on the additional amount of consideration of Rs.43
lakhs received by the respondent for the supply of machinery items be not
levied under Rule 6(2) of the Central Excise Rules, 1944. The respondent gave
reply to the said notice. However, the Commissioner of Central Excise, Belgaum,
vide Order-In-Original No. 23/95 dated September 8, 1995 confirmed the entire
duty demanded and also imposed penalty of Rs.75,000/- upon the respondent under
Rule 173Q of the Central Excise Rules.
4. Feeling aggrieved, the
respondent filed an Appeal No. E/744/95 before the Customs Excise & Gold
(Control) Appellate Tribunal, South Zonal Bench at Bangalore (`'the Tribunal''
for short). The Tribunal allowed the appeal by Judgment dated January 25, 2002
giving rise to the instant appeal.
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5. This Court has heard the
learned counsel for the parties at length and in great detail. This Court has
also considered the documents forming part of the instant appeal.
6. The question which arises for
consideration in the instant appeal is whether the amount of Rs.43 lakhs
received by the respondent towards charges for designs, drawings, tooling, jigs
and fixtures etc. as per t he agreement dated May 10, 1991 could have been
loaded on the value of the machine made and delivered subsequently as per t he
separate written orders.
7. In order to resolve this
controversy, it would be relevant to notice certain clauses of agreement dated
May 10, 1991:- "a. The company shall place upon MKL orders from time to
time for manufacturing the machines and all such orders shall be in writing.
b. MKL shall manufacture the
machines strictly in accordance with the specifications, the prototype and the
drawings and patterns prepared by it and approved by the company in writing in
terms of this agreement as detailed in Schedule B hereto.
5 c. In order to ensure that MKL
manufactures the machines strictly in accordance with the specifications, the
prototype and drawings and partners approved by the company in writing, the
Company's representatives will have the liberty of examining the machines
manufactured by MKL during the process of manufacturing of such machines and
also after the manufacture of the machines is completed, before or after the
delivery of machines by MKL to the company."
Part IV at Page 6 is for the price
of the machines and states:
"The price of the machines
will be stipulated by the company in the orders placed upon MKL. All such
prices shall be arrived at after prior negotiation between the parties
hereto.'' Part VIII at Page 7 is for excise duty and states:- "The company
shall reimburse the MKL the amount or amounts of excise duty paid by MKL on the
manufacture of the Machines in terms of this agreement.''
8. A bare reading of the terms of
the agreement extracted above makes it very clear that the agreement was not
merely for the preparation of design and drawings, but a total contract for
design, drawing, manufacture of prototype, 6 supply of the machines and payment
of excise duty, etc. The contract could not have been read in isolation in
parts, that is to say that the respondent had separately agreed to supply
designs drawings etc. and also separately agreed to supply machinery.
9. It is true that the charges for
drawings, designs etc.
have to be added to the assessable
value of the machines manufactured, based on use of such drawings, designs,
jigs, fixtures, tooling etc. However, before adding the value of the drawings
etc, it has to be established that the consideration had a nexus with the
negotiated price of the assessable goods under clearance, i.e. machines in the
instant case. Without establishing any such nexus, the Commissioner of the
Central Excise could not have demanded the duty on the additional amount of
consideration of Rs.43 lakhs. The agreements, i.e.
the written orders, for the supply
of four machines as per the gate passes in this case were not considered/relied
upon in the original proceedings. Therefore, it could not be determined whether
the prices of drawings, tooling etc. were 7 part and parcel of the agreement
for supply of machine. It is well to remember that each clearance is an
assessment based on a separate contract and a contract price would normally be
the value for assessable goods. The order passed by the Commissioner does not
indicate that no machines were subsequently manufactured by the respondent
after using drawings, designs, jigs, fixtures, tooling etc. supplied by the
ITC. Therefore, loading of the entire amount of Rs. 43 lakhs without such a
finding and recovery of duty thereon was not permissible at all. The order of
the Commissioner does not indicate adequate reasons to invoke proviso to
Section 11A(1).
On the basis of vague allegations
made in the show cause notice neither the proviso to Section 11A(1) could have
been invoked nor penalty could have been imposed upon the respondent under Rule
173Q of the Central Excise Rules. On the facts and in the circumstances of the
case, this Court is of the opinion that the Tribunal did not commit any error
in setting aside the order passed by the Commissioner and the instant appeal
which lacks merits, deserves dismissal.
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10. For the foregoing reasons, the
appeal fails and is dismissed. There shall be no orders as to costs.
.............................J.
(ASHOK BHAN) .............................J.
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