The Chennai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that the entire amount received as a tooling advance from a buyer cannot automatically be treated as part of the assessable value of manufactured goods and ruled that only the proportionate or amortised tooling cost attributable to the goods manufactured with the aid of those tools is includible in their assessable value.
The Bench of Ajayan T.V. (Judicial Member) and Vasa Seshagiri Rao (Technical Member) has observed that a Cost Accountant’s certificate is not an inflexible or mandatory requirement for establishing the amortised value of tools when the assessee has produced other reliable documentary evidence supporting its calculations.
The Tribunal consequently set aside the order passed by the Commissioner (Appeals) and restored the adjudicating authority’s decision dropping a Central Excise duty demand of ₹17,12,144, along with interest and penalty.
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The appeal was filed by the assessee against an order passed by the Commissioner (Appeals-II), Central Tax and Central Excise, Chennai. The appellate authority had remanded the matter for fresh determination of the assessable value of tooling advances amounting to ₹1,42,03,000 received from Mahindra & Mahindra Ltd. during the financial years 2011-12 to 2015-16.
The Department had issued a show cause notice dated December 14, 2015, proposing to recover Central Excise duty of ₹17,12,144, along with applicable interest and a penalty under Section 11AC of the Central Excise Act, 1944. According to the Department, the tooling advances represented additional consideration received from the buyer and were therefore required to be included in the assessable value.
The assessee maintained that the entire advance could not be added to the assessable value upon receipt. It argued that the cost of the tools was required to be spread, or amortised, over the finished goods manufactured with those tools. The company stated that it had followed this method and had included the proportionate tooling cost in the assessable value of the finished products.
The original adjudicating authority accepted the assessee’s amortisation methodology and dropped the proceedings through an order dated March 10, 2017. The Department challenged that decision before the Commissioner (Appeals), contending that only ₹15,892, along with interest, had been paid towards the amortisation cost. It also questioned the certificate relied upon by the assessee because it had been issued by a Chartered Accountant rather than a Cost Accountant.
The Commissioner (Appeals), relying principally on CBEC Circular No. 170/4/96-CX dated January 23, 1996, remanded the case for fresh determination of the amortised tooling value. Lear Automotive then approached the CESTAT against the remand order.
Before the Tribunal, the company submitted that tooling advances by themselves were not liable to be included in the assessable value. Only the proportionate value of the tools used in manufacturing the finished goods could be added. It claimed that the duty payable on the amortised tooling cost had already been discharged.
The assessee supported its position with tool manufacturers’ invoices, tooling records, production documents, finished-goods invoices, supplementary invoices and proof of payment of duty and interest. It argued that the applicable circular did not require a Cost Accountant’s certificate in every tooling valuation case.
The Revenue, on the other hand, contended that the company had received ₹1.42 crore as tooling advances but had not paid duty on the entire amount. It maintained that the valuation methodology prescribed by the circular had not been properly followed and that the necessary certification should have been obtained from a Cost Accountant.
Examining Rule 6 of the Central Excise Valuation Rules, 2000, the Tribunal noted that the money value of additional consideration flowing directly or indirectly from the buyer is includible in the assessable value. However, Explanation 1 to Rule 6 specifically refers to the value, “apportioned as appropriate”, of tools, dies, moulds, drawings, blueprints and engineering, development and design work used in connection with the production and sale of excisable goods.
The Tribunal observed that the statutory framework does not contemplate loading the entire value of a tool onto a single clearance. What is required is the determination of the portion of the tooling cost attributable to the goods under valuation.
Referring to the decision in Flex Industries Ltd. v. Commissioner of Central Excise, Meerut, the Bench noted that the entire cost of custom-made cylinders used for manufacturing printed pouches could not be loaded into the value of the goods cleared during a particular period. The cost had to be apportioned by considering the expected life and manufacturing capacity of the cylinders and the quantity of finished goods produced.
The Tribunal also referred to the Larger Bench ruling in Mutual Industries Ltd. v. Collector of Central Excise. While that decision recognised that the value of moulds supplied by a buyer and used for manufacturing finished goods constitutes additional consideration, it proceeded on the basis that only the proportionate value attributable to the use of those moulds was includible.
Accordingly, the Bench held that although tooling costs have valuation consequences, the entire tooling advance cannot be treated as assessable value merely because the amount was received from the buyer.
The Tribunal further examined Circular No. 170/4/96-CX, which deals with patterns supplied by buyers or prepared at their cost. It observed that the circular itself proceeds on the principle of proportionate valuation by considering the expected life and capability of a pattern and the quantity of castings manufactured with it.
The circular states that a Cost Accountant’s certificate “may” be accepted. The Commissioner (Appeals), however, had treated such certification as a mandatory requirement.
Rejecting this interpretation, the Tribunal held that the circular does not convert the suggested certificate into a statutory precondition for establishing the assessable value, particularly when other reliable documentary evidence is available. It also noted that the circular specifically concerns patterns used in casting operations and cannot be treated as prescribing an inflexible evidentiary requirement for every form of automobile tooling.
The Bench found that the assessee’s tooling records identified the actual procurement and manufacture of tools through specialised vendors. These records contained descriptions and values of individual tools. Production documents connected the tools with the manufacture of automobile components and seats, while payment records corroborated the receipt of tooling-related amounts.
The record also contained a supplementary challan-cum-tax invoice dated dated November 2, 2015, referring to the “tool amortization cost as per annexure”, together with the corresponding assessable value and duty.
The Chartered Accountant’s certificate furnished by the company set out the value of the tools, their expected production capacity or useful life, the amortisation attributable to each seat, the quantities cleared and the duty payable. In one category, the certificate recorded 19 tooling items valued at ₹34.50 lakh and an amortisation of ₹34.50 per seat. In another category, it recorded 55 tooling items valued at ₹85.25 lakh and an amortisation of ₹85.25 per seat.
The Tribunal held that the certificate could not be rejected merely because it had been issued by a Chartered Accountant instead of a Cost Accountant. It was supported by underlying invoices, tooling records, production documents, a supplementary invoice and evidence of payment.
Significantly, the Commissioner (Appeals) had not identified any particular error in the value of the tools, their expected life, the production quantities or the amortisation calculations. The Tribunal observed that a matter could not be remanded merely to obtain another professional certificate when the existing evidence had not been shown to be unreliable.
The Bench also distinguished an earlier decision involving Lear Automotive’s Nashik unit. It noted that the earlier case arose from materially different facts, particularly concerning the disclosure of the tooling arrangement and the failure to amortise the tooling cost.
In the present case, the record contained evidence of the tooling activities, their cost, the method of amortisation and the payment of duty on the amortised amount. The earlier ruling, therefore, could not justify treating the entire advance as assessable value.
The Tribunal further found that the Department had not identified any specific deficiency in the company’s amortisation method. No particular tool value, expected useful life, production quantity or amortisation rate was shown to be incorrect. The Revenue had also failed to identify any specific clearance on which the appropriate amortised tooling cost remained unpaid.
Consequently, the Tribunal ruled that the tooling advance of ₹1,42,03,000 could not be treated as assessable value merely because it had been received from the buyer.
On limitation, the Tribunal noted that the show cause notice had invoked the extended period under Section 11A(4) of the Central Excise Act on the allegation that the company had suppressed the receipt of tooling advances.
However, the Department had raised an audit objection concerning the tooling advances on October 23, 2013. The assessee responded on October 24, 2013, and again on November 26, 2013, explaining that tooling development was in progress and that the proportionate tooling cost would be amortised and included in the value of the seats once the final cost was determined.
The Tribunal found that the Department was therefore aware of the tooling advances and the company’s proposed valuation methodology well before the show cause notice was issued in December 2015.
The dispute was essentially over the correct valuation methodology—whether the entire tooling advance should be included immediately or whether the cost should be apportioned over the finished goods. The Tribunal held that a disagreement over valuation, without evidence of deliberate concealment or an intention to evade duty, was insufficient to invoke the extended limitation period.
The Bench concluded that the Department had failed to establish wilful suppression, misstatement or deliberate withholding of material information with an intention to evade duty. The extended period under Section 11A(4) was consequently unavailable.
It also held that the circumstances did not justify a penalty under Section 11AC. The assessee had disclosed the tooling advances during audit, adopted a bona fide valuation method and subsequently paid duty and interest on the amortised tooling cost. There was no material showing deliberate suppression or an intention to evade payment.
Allowing the appeal, the Tribunal set aside the January 31, 2018 order of the Commissioner (Appeals) and restored the March 10, 2017 order of the adjudicating authority dropping the proceedings.
As a result, the proposed duty demand of ₹17,12,144, together with applicable interest and penalty under Section 11AC of the Central Excise Act, did not survive.
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