The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), New Delhi, has held that only the amortised value of tools, moulds and dies used in manufacturing automobile components can be included in the assessable value of the finished goods, rather than the entire sale value of such tools and dies.
The bench of Dr. Rachna Gupta (Officiating President) and P.V. Subba Rao (Technical Member) remanded the matter to the adjudicating authority to recalculate the central excise duty demand by spreading the cost of the tools and dies over the goods manufactured using them.
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The Bench observed that tools and dies are used repeatedly for manufacturing finished goods. Consequently, their total cost cannot be added to the assessable value of the finished goods in one instance.
“The cost of the tool or die has to be spread over all the goods manufactured using it,” the Tribunal observed while explaining the principle of amortisation.
The appellant manufactures automobile parts and accessories that are supplied to original equipment manufacturers. Tools and dies are required for producing these components.
In certain cases, the customers supplied the tools and dies to the appellant free of cost. In those transactions, the appellant included their amortised value as additional consideration in the assessable value of the automobile components manufactured and sold to the customers.
In other cases, however, the appellant either manufactured or procured the tools and dies and raised separate invoices upon its customers for their cost. Although the tools and dies continued to be used within the appellant’s factory for manufacturing automobile components, neither their full value nor their amortised value was included in the assessable value of the finished goods.
An audit of the appellant’s records for the period from November 2015 to March 2017 detected this difference in valuation practice. A show-cause notice was subsequently issued proposing a central excise duty demand on the entire cost of the tools, moulds and dies recovered from the buyers under Rule 6 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000.
The original adjudicating authority confirmed the proposed enhancement in value and the corresponding duty demand. The Commissioner (Appeals) upheld the findings on merits, while remanding the matter for the limited purpose of verifying the appellant’s contention concerning the removal of certain goods after reversal of proportionate credit.
Before the Tribunal, the appellant argued that the authorities had incorrectly demanded central excise duty on the complete sale value of the tools and dies. It contended that Rule 6 permitted the inclusion of only their amortised value in the assessable value of the finished products.
The appellant further claimed that the tools and dies were used captively within the factory and were consequently exempt from central excise duty under Notification No. 67/95-CE.
It also challenged the invocation of the extended limitation period, asserting that it was operating under a bona fide belief that the value of the tools and dies was not required to be included in the assessable value of the finished products.
The Revenue defended the appellate order and maintained that the value of the tools and dies was correctly includible under Rule 6 of the Valuation Rules.
The Tribunal agreed that automobile components could not be manufactured without the relevant tools and dies and that their value must, therefore, form part of the assessable value of the finished goods. It clarified, however, that tools and dies are not consumed in producing a single component but are used repeatedly over a period of time.
The Tribunal explained that amortisation is the accounting method through which the total value of a tool or die is divided across the anticipated number of finished goods manufactured with its help. The corresponding proportionate amount is then added to the value of each finished product.
It noted that the appellant had already followed this method when customers supplied tools and dies free of cost. Accordingly, the necessary amortisation calculation could also be undertaken where the appellant manufactured or procured the tools and dies and separately recovered their cost from customers.
Accepting the appellant’s principal valuation argument, the Tribunal held that the lower authorities were not justified in demanding excise duty by adding the entire sale value of the tools and dies to the assessable value of the finished goods.
However, the Tribunal rejected the appellant’s claim for captive-consumption exemption under Notification No. 67/95-CE.
It observed that the exemption applies where goods are not sold but are used within the factory for further manufacture, as their cost is automatically absorbed into the value of the finished products. In the present case, the appellant had sold the tools and dies to its customers under separate invoices before using them within its factory.
The Tribunal held that such tools and dies were effectively no different from tools procured by the customers themselves and supplied to the manufacturer for use. Therefore, the benefit of the captive-consumption exemption was unavailable.
The Bench also upheld the invocation of the extended limitation period. It rejected the claim that the appellant had acted under a bona fide belief, noting that it had already included the amortised value of customer-supplied tools and dies in other transactions.
According to the Tribunal, this established that the appellant was fully aware that the amortised value of tools and dies had to be included in the assessable value of the finished products.
The matter was consequently remanded to the original authority with directions to recompute the duty demand under Rule 6 by considering only the amortised value of the tools and dies attributable to the finished goods cleared during the relevant period. The interest and penalty were also directed to be recalculated in accordance with the revised duty liability.
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