PHARMASIA LTD. Vs. COMMISSIONER OF CENTRAL EXCISE, HYDERABAD

JUDGEMENT

(1.) THIS appeal is filed against Order No. 18/2002, dated 26 -2 -2002 passed by Commissioner of Central Excise, Hyderabad -I, Commissionerate.

(2.) THE facts in brief are that the appellants are manufacturers of Vicks Ultra Clearasil and mediker for M/s. Procter and Gamble Hygiene and Health Care Ltd., (hereinafter referred to as P&G) on job work basis. As per agreement P&G supplies all the raw -material and packing materials to the appellants and the appellants collected conversion charges towards the processing of the materials. Price declaration filed by them in terms of Section 4(1)(b) of Central Excise Act read with Rule 6(b)(ii) of Central Excise Valuation Rules, 1975 is adopted for valuation. At the end of each accounting year on finalization of cost sheet for each of the products by P&G the appellants are adopting the revised prices as calculated from cost sheets and are discharging duty liability. On scrutiny of cost sheet it was noticed that the appellants are not taking into consideration the other works overhead element in arriving at the assessable value though it forms part of the costing element of conversion cost shown in the costing report. The manufacturing over head is nothing but indirect cost incurred for operating production division of a factory. It includes ordinary costs incurred from the stage of procurement of raw materials till the completion of the finished products. Cost audit report procured by job work project reflects expenses on different elements of costing. On enquiry it was found that P&G provided manufacturing technology in the form of manuals and also engaged certain technical persons from their offices to monitor day -to -day production activities and quality control standards. One person from P&G office continuously monitors products. P&G pays conversion charges which includes manufacturing profit of appellants. The appellants have entered into agreement with P&G on 1 -12 -94 and the agreement contains the details of processing charges, yield, loss ratio, quality control, specification of raw -materials, packing materials and finished goods and instructions for manufacturing operation of products. Technical assistance monitoring of operation and assets like die set, equipment etc. provided by P&G. The appellants have claimed that they are paying the duty on the basis of the price arrived at as per judgment of Supreme Court in the case of Ujagar Prints and after completion of accounting year they revise the assessable value basing on cost audit report prepared by P&G. They have paid differential duties up to the accounting year 97 -98. They had not received, the cost audit report for 98 -99, 99 -2000. On scrutiny of the documents it was found that as per agreement dated 1 -12 -94, P&G provide all manufacturing technology die sets and equipments, V.T. terminal, modem, UPS, printer, etc. and monitored the production operations, maintenance of control documents. Therefore, it appeared that the equipments supplied by P&G for utilizing in manufacture of their products form parts of the cost elements under the head other works overhead of cost audit report. The appellants are incurring certain additional cost towards the manufacturing of the products such as insurance premium on raw -materials, packing material and on finished goods handling charges and they are also collecting additional amounts towards telephone charges and all these expenses over and above the processing charges which form part of to other works over head. Shri K. Ganesan Finance Officer of P&G submitted a file P&G CA certificates which contain the costing sheet and details pertaining to manufacturing and operation expenses and these details are for each of the product manufactured by the appellants. MOE have manufacturing and operational expenses as apportioned and reflected in the cost audit report. Therefore it appeared that the cost in respect of manufacturing overheads as apportioned in the cost audit report is liable for inclusion in the cost of production and in the assessable value of the goods. All the expenses incurred towards manufacturing of products are to be included in cost in terms of Supreme Court judgment in the case of Ujagar Prints v. UOI. Therefore, the expenses termed as manufacturing overhead and in the present case termed as other works overheads in the cost audit report should be taken into consideration for arriving at correct assessable value. It was found that the appellants had not taken into consideration, the other works overheads of the cost audit report for arriving at the assessable value from the costing reports for the years 96 -97 to 2000 -01 and after taking this into account they have short paid the duty of Rs. 45,50,625.56. Therefore show cause notice was issued to them demanding this differential duty on other works overheads which is required to be added in the assessable value as per the cost audit report of M/s. P&G. The Commissioner under the impugned order held that the appellants have not made any specific submission with regard to non -inclusion of other overhead cost mentioned in the costing report in the assessable value of the goods manufactured. Since these costs relate to the raw -materials, packing materials and finished goods these form part of cost of production. He confirmed differential duty of Rs. 28,15,489/ - under Section 11A and observed that amount of Rs. 8,37,847/ - Rs. 94,682/ - and Rs. 8,02,608/ - were already paid by the appellants towards the differential duty on account of cost variations and confirmed the same. He imposed a penalty of Rs 27,45,561/ - on the appellants under Section 11AC of Central Excise Act and demanded interest on duty amount of Rs. 28,15,489/ -. He also imposed a penalty of Rs. 2,00,000/ - on the appellants under Rule 173Q of Central Excise Rules.

(3.) SMT . L. Maithili, learned Advocate appearing for the appellants pleaded that the appellants are paying duty as per the decision of the Supreme Court in the case of Ujagar Prints v. UOI. Now the department is asking them to include the cost of other works overheads from the cost audit report of M/s. P&G in the assessable value, which is not proper. She stated that the appellants were already paying the differential duty every year after the receipt of the cost accounting audit reports of P&G by arriving at the cost of materials and on that basis they were paying the differential duty. The CA were giving their certificate and that was the basis for payment of the duty. Now the claim of the department that according to costing principles the manufacturing overheads include the other work overheads as reported in the cost audit report of P&G to be included in the assessable value is not a proper proposition. The Supreme Court in the case of Dai Ichi Karkaria had observed that the cost of excisable product for purposes of assessment of Central Excise duty under Section 4(1)(b) of the Act read with Rule 6 of Valuation Rules should be reckoned as if it is reckoned by a man of commerce and for such realism the meaning that the court gives to words of a commercial natures, like costs which are not defined in the statutes. These should have been taken into consideration in deciding the show cause notice issued to the appellants. She said since the Chartered Accountant has given the certificates on the basis of which the assessment was done and the certificate shows the raw -material costs, packing material cost and conversion charges payable to the appellant towards manufacturing cost/expenses and profit, no other charges can be added. She relied on the decisions of the Tribunal in the case Dr. Writers Food Products Ltd., v. Commissioner of Central Excise, Bombay - 1998 (78) ECR 430 and stated that their case is covered by this decision. She also relied on the decision of the Supreme Court in the case of Pawan Biscuits Co. Pvt. Ltd. v. CCE, Patna reported in 2000 (120) E.L.T. 24 (S.C.), CCE, Hyderabad v. Pharmsia Ltd. - 1996 (13) RLT 1 (T). She also pleaded that the Commissioner has applied proviso to Section 11A for demanding duty and imposition of penalty under Section 11AC. She stated that the appellant had received a copy of cost audit report for the year 98 -99 and 99 -2000 on 21 -6 -2000 only. By taking average cost of raw -material, packing materials from the cost audit report for the aforesaid period the appellants have calculated differential duty for the period from 98 -99, to 2000 -01 and accordingly, paid the differential duty of Rs. 8,02,608/ - and intimated the department under their letter dated 5 -1 -2002. Earlier the appellant had themselves calculated the differential duty of Rs. 7,32,492/ - for the years 95 -96 to 97 -98 on the basis of average cost of raw -material/packing material and paid the differential duty on 21 -3 -99. The appellants pleaded that they had incurred certain additional expenses like handling charges, testing charges and insurance charges in connection with manufacture of said goods. They paid the additional expenses incurred by them and paid excise duty of Rs. 94,681/ - on 26 -7 -2000. Thus, they have paid total differential duty of Rs. 17,36,881/ -. The appellants had filed particulars of declarations for the products manufactured by them under the loan licensee arrangement along with cost data duly supported by certificate of CA. The prices arrived at the time of filing the said price declaration were based on cost of raw -material, packing material prevailing at relevant time. At the end of accounting year of P&G and on the basis of cost audit report of P&G the appellants on their own worked out the revised cost of the products by adopting the average cost of raw -material/packing material and calculated differential duty from 95 -96 to 97 -98 and paid the same. On the allegation that the appellants had the cost audit report of P&G for the year 98 -99 and 99 -2000 she pleaded that the appellants vide letter 15 -6 -2001 asked for the said reports from P&G and representative of P&G personally delivered the copies of the cost audit report to the appellants factory on 21 -6 -2001 which were taken by the officers of anti -evasion wing of the department as they were present in the office at that time. Shri Bhaskar Rao was not aware about this position and therefore in his statement on 22 -6 -01, stated only the position which was known to him. Thus there was no suppression of fact or mala fide intention. Therefore, Section 11AC and 11AB are not applicable. Penalty under Rule 173Q is also not imposable on the appellants as they have not acted dishonestly and contumaciously with deliberate and mala fide intention of violating law. Shri L. Narasimha Murthy, learned SDR appearing for the Revenue pleaded that the show cause notice issued to the appellants gives the details very specifically for non -inclusion of other works overhead which should form part of the manufacturing cost of the appellants. He stated that P&G were participating in manufacturing activity of the product by the appellant as they were imparting manufacturing technology in the form of manuals control documents/ records and instructions concerning methods formal standards etc., and were monitoring the manufacturing operation through their technicians and from their Balanagar office providing assets like punches dies equipment etc., and also incurring additional costs such as insurance premium on raw -materials, packing materials, finished goods, telephone charges. All these expenses/costs have gone towards the manufacturing of products which in terms of Supreme Court decision in the case of Ujagar Prints case [1989 (39) E.L.T. 493 (S.C.)] forms manufacturing expenses in accordance with costing principles. Such expenses are termed as manufacturing overhead and in the present case reflected as other works over head in cost audit report which needs to be taken into consideration for arriving at the correct assessable value of products of P&G manufactured by the appellants. He relied on the decision of the Tribunal in support of his contention in the following cases -