The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Chandigarh Bench, has set aside a Central Excise demand of ₹23,58,248 holding that the notional cost of specification drawings and designs supplied free of cost by an automobile manufacturer during the tender/vendor-selection stage cannot be included in the assessable value of components manufactured by the vendor.

The Bench of S. S. Garg, Member (Judicial), and P. Anjani Kumar, Member (Technical) has observed that the notional cost of drawings and designs supplied free of cost by MSIL to vendors could not be included in the assessable value of the automobile parts and components manufactured by NTN NEI and cleared to MSIL.

The appellant/assessee is engaged in manufacturing automobile parts falling under Chapter 87 of the Central Excise Tariff Act, 1985. The company manufactures components as an Original Equipment Manufacturer (OEM) supplying them to Maruti Suzuki India Ltd.

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During the investigation, the Directorate General of GST Intelligence (DGGI) alleged that MSIL had supplied drawings and designs to the appellant free of cost. According to the Department, the value attributable to such drawings and designs was required to be included in the assessable value of the finished automobile components under Rule 6 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000.

The Department further contended that MSIL paid royalty to Suzuki Motor Corporation, Japan, for use of intellectual property rights and that such royalty had an indirect connection with the drawings and designs supplied to vendors. It therefore sought to load a proportionate amount of the royalty into the assessable value of the components manufactured by NTN NEI.

A Show Cause Notice dated December 20, 2019 was issued to the company. The adjudicating authority ultimately confirmed a Central Excise duty demand of ₹23,58,248, along with applicable interest and an equal penalty, while dropping the remaining demand of ₹6,66,80,956.

The appellant argued that the drawings and specifications supplied by MSIL were merely indicative specifications provided during the vendor-selection and tender process.

According to the appellant, these specifications were supplied to prospective vendors free of cost so that they could understand MSIL’s technical requirements, determine whether they were capable of supplying the required components and quote their prices.

The appellant maintained that these drawings were not detailed manufacturing drawings used directly for producing the automobile components. They did not represent additional consideration flowing from the buyer to the manufacturer and had no separately attributable monetary value that could be added to the transaction value.

The appellant also disputed the inclusion of royalty paid by MSIL to Suzuki Motor Corporation. It submitted that the royalty related to MSIL’s use of intellectual property rights concerning the manufacture, marketing and sale of motor vehicles and had no nexus with the manufacture or clearance of components by NTN NEI.

Importantly, NTN NEI was neither a party to the royalty arrangements nor did it receive any benefit, right or technical know-how under those agreements. Therefore, the royalty could not be treated as additional consideration flowing directly or indirectly to the appellant.

The Revenue supported the adjudication order and maintained that the value of the drawings, designs and royalty-related expenditure was liable to be included in the assessable value under Rule 6 of the 2000 Valuation Rules.

The central question before the Tribunal was therefore whether the cost of drawings and designs supplied by MSIL, and the royalty paid by MSIL to Suzuki Motor Corporation, could constitute additional consideration for the goods manufactured by NTN NEI and consequently be added to their assessable value.

The Tribunal noted that the issue was no longer res integra and had already been considered by the Principal Bench in Denso India Private Limited v. Additional Director General (Adjudication).

In Denso India, the Tribunal had examined whether the notional cost of specification drawings and designs supplied free of cost by Maruti to automobile-component vendors could be included in the assessable value.

The Tribunal observed that Rule 6 operates where there is additional consideration flowing directly or indirectly from the buyer to the manufacturer. It emphasized that material supplied by a buyer before the manufacturer is even identified as the supplier cannot ordinarily be treated as additional consideration for the subsequent sale.

The Tribunal examined Rule 6 of the Central Excise Valuation Rules, particularly Explanation 1, which covers specified goods and services supplied directly or indirectly by the buyer free of charge or at reduced cost for use in connection with the production and sale of the goods.

These include materials, components, tools, dies, moulds, drawings, blueprints, technical maps and charts, as well as engineering, development, artwork, design work, plans and sketches undertaken outside the factory and necessary for production.

According to the Tribunal’s analysis, the rule contemplates more than a mere connection between the material supplied and the ultimate product. The relevant goods or services must be supplied by the buyer, free of charge or at reduced cost, for use in connection with production, and their value must not already have been included in the price actually paid or payable.

The Tribunal stressed that the purpose of Rule 6 is to capture expenses incurred by the buyer on behalf of the manufacturer which effectively relieve the manufacturer of costs that it would otherwise have incurred in producing the goods.

A significant aspect of the ruling is the distinction between basic specification drawings and detailed manufacturing drawings.

The Tribunal noted that drawings supplied during the tender stage may merely communicate the buyer’s requirements, such as dimensions, layout, shape and functional specifications. Such information enables prospective vendors to understand what the buyer wants and submit bids.

This is materially different from detailed engineering drawings that contain the information necessary for the actual manufacture of the component.

The Tribunal, relying on the Denso ruling, observed that specifications supplied to potential vendors during the tender process are essentially information concerning the buyer’s requirements and do not automatically constitute an “assist” used in manufacturing.

The facts in the present case demonstrated that MSIL’s specifications did not themselves provide sufficient information for manufacturing the final components.

The Tribunal noted that detailed drawings and designs were prepared by the appellant. In the case of the alternator assembly, for instance, the detailed drawings prepared by the appellant contained information regarding 23 sub-components that were not even referred to in the specification drawings supplied by MSIL.

The Letter of Intent issued by MSIL also indicated that the appellant was selected for the design, manufacture, testing and supply of the components.

Thus, the responsibility for converting MSIL’s basic requirements into detailed manufacturing designs rested with the appellant.

This factual distinction proved decisive.

The Department had sought to connect the royalty paid by MSIL to Suzuki Motor Corporation with the free-of-cost drawings supplied to vendors.

The Tribunal, however, found that even if MSIL had incurred expenditure in obtaining the drawings or related intellectual property, that expenditure could not automatically be treated as additional consideration for the sale of components to NTN NEI.

The Tribunal relied upon the reasoning in Denso India that the fact that a buyer may have incurred some expenditure in obtaining specifications does not by itself establish that the expenditure constitutes additional consideration flowing to the component manufacturer.

The Tribunal also referred to principles developed under customs valuation law concerning “assists”.

It noted the distinction between engineering work that is actually necessary for production and information merely supplied to communicate the buyer’s requirements.

Where a drawing merely specifies the dimensions or characteristics of the product ordered, it is in the nature of a buyer’s assist rather than an expense from which the manufacturer is relieved.

The Tribunal relied on earlier decisions distinguishing basic engineering information from detailed engineering drawings and held that a remote connection between the supplied specifications and the final manufacturing process is insufficient for valuation purposes.

The Tribunal further noted that the gap between basic engineering drawings and detailed manufacturing drawings can be substantial. A drawing merely indicating layout, relative size or specifications may not contain the detailed inputs required to manufacture the final product.

The department relied upon decisions involving drawings supplied free of cost by motor vehicle manufacturers to component manufacturers.

The Tribunal distinguished those decisions because they concerned situations where drawings were supplied after the sale agreement had been executed and were actually used by manufacturers to produce the components.

In the present matter, by contrast, the specifications were supplied during the tender process, before the appellant was selected as the vendor. Further, the appellant itself prepared the detailed drawings and designs used for manufacturing.

The Tribunal therefore found that the Revenue could not rely upon those decisions to justify inclusion of the disputed amounts in the present case.

The Department also relied upon the Supreme Court’s decision in Moriroku.

CESTAT held that the decision did not assist the Revenue because Moriroku concerned the provisions of the Uttar Pradesh VAT Act and the treatment of amortization cost of tooling in the sale price of automobile components.

The present dispute, however, concerned the valuation of goods under the Central Excise Act and the specific question of whether tender-stage specification drawings could be treated as additional consideration under Rule 6.

After examining the facts and applicable legal principles, the Chandigarh Bench concluded that the ratio laid down in Denso India squarely applied to the present case.

Consequently, the impugned adjudication order was set aside and the appeal was allowed with consequential relief as permissible under law.

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