Holding

Rule 57CC applies to stock transfers and mandates a presumptive payment of 8% of the value of exempted goods when sub‑rule (9) is not complied, rendering the first show‑cause notice time‑barred and remitting the remaining notices for further determination.

Summary

The appellant, Commissioner of Central Excise, challenged the assessment of duty on pulp transferred by the respondent, Mis. Ballarpur Industries Ltd., to its sister unit for captive use in making paper, an exempted final product. The assessee had claimed MODVAT credit on inputs and paid duty on the cost price of pulp, whereas the revenue argued that duty should be calculated on the sale price, invoking Rule 57CC of the Central Excise Rules. The Tribunal held that Rule 57CC did not apply because there was no sale, only a stock transfer. The Supreme Court held that Rule 57CC applies to stock transfers where the manufacturer does not maintain separate accounts under sub‑rule (9), requiring a presumptive payment of 8% of the value of the exempted goods. The Court also struck down the first show‑cause notice as time‑barred, remitted the second and third notices for consideration of Valuation Rules 6(b)(i) and 6(b)(ii), and ruled that Rule 7 of the Valuation Rules could not be invoked as it was not mentioned in the notices. The appeal was partly allowed.

Issues considered

Whether Rule 57CC of the Central Excise Rules, 1944 applies in cases of stock transfer of inputs to a sister unit for manufacture of exempted final products.
Whether the revenue can invoke the extended period of limitation in the first show‑cause notice.
Whether Rule 7 of the Central Excise (Valuation) Rules, 1975 can be applied when not expressly mentioned in the show‑cause notice.
Which valuation rule (6(b)(i) or 6(b)(ii)) governs the price basis for reversal of MODVAT credit in the present facts.

Legislation cited

Central Excise Act, 1944s. 11A, s. 35(1)(b), s. 4(1)
Central Excise Rules, 1944s. Rule 57A, s. Rule 57CC
Central Excise Tariff Act, 1985s. Chapter 48, s. Chapters 47
Central Excise (Valuation) Rules, 1975s. Rule 6(b), s. Rule 7

Subjects

MODVATpresumptive dutyRule 57CCstock transfershow‑cause noticeextended limitationvaluation rulesexcise dutycaptive consumptionexempted goods

Judgment

A COMMISSIONER OF CENTRAL EXCISE, NAGPUR
v.
MIS. BALLARPUR INDUSTRJES LTD.

AUGUST 30, 2007

B [S.H. KAPADIA AND B. SUDERSHANREDDY,JJ.I

Central Excise Act, 1944; s.4/Cent~al Excise Rules, 1944; rr. 7, 57A
and 57CC/Central Excise Tariff Act, 1985; Chapters 47 and 48/Central
Excise (Valuation) Rules, 1975; r. 6(b) and Circular No.B-4211196---TRU
C dated 27.9.1996 issued by CBEC:

Evasion of excise duty-Assessee. manufacturing pulp and paper-No
excise duty chargeable-Availing of MODVAT credit on pulp-Assessee
transferring part of stock of pulp as inputs to its sister units for captive
D consumption in manufacturing ofpaper-Payment ofduty @ 8% ofcost price
instead of sale price by the assessee-Show-cause Notices-Revenue raising
demand of differential amount of duty computing excise duty @ 8% on. sale
price chargeable on reversal of MODVAT credit-Challenge to-Tribunal
held that there was no sale ofpulp by the assessee-On appeal, Held: Show
cause notice constitute foundation in cases of alleged evasion of the excise
E duty-Rule 57CC applies where manufacturer engaged in manufacturing of
the goods exempted from payment of duty and credit on the inputs used in
manufacturing of such goods was taken by the assessee-Assessee required
to pay a presumptive amount equal to sale price of the exempted final
product-It brings into applicability of Section 4 of the Act and Valuation -t
F Rules framed thereunder-Tribunal erred in holding that R.57CC not
applicable as it involves stock transfer and not a sale-Hence, matter remitted
to Revenue to decide the question of applicability of Rules 6(b)(i) and
6{b)(ii) of the Valuation Rules in accordance with law.

Show-cause Notices-Invoking of extended period of limitation-Held:
G Revenue not entitled to invoke extended period of limitation in respect offirst
show-cause Notice which was time-barred-However, second and third show-
cause Notices remitted to Revenue to decide about applicability of r.6(b) and
(ii)-Since r. 7 of the Rules not mentioned in show-cause Notices, it is not
open to Revenue to invoke the said rule.

650
H
I
f--
COMMROFCENlRALEXCISEv. BALI.ARPURINDUS.LlD. 651

Words and Phrases: A
'Normal price'-Meaning of in the context of Section 4(1) of the Central
Excise Act, 1944.

'Presumptive sum' and 'deemed price' -Meaning of in the context of
Rule 57CC of the Central Excise Rules, 1944. B
The issue which arose for determination in this appeal was that in the
absence of sale of the goods manufactured by the assessee, part of which was
being transferred to its sister unit for captive consumption in manufacturing
the final product, which is exempted from payment of excise duty, MODYAT
credit on input was availed by the assessee, however on reversal of. credit, C
duty was paid on the cost price instead of the sale price. Under the
circumstances, whether rule 57CC of the Central Excise Rules, 1944 would
have any application or not, is the question.

Partly aUowing the appeal, the Court
D
HELD:l.1. Value is the function of price. In every case in which there
is an allegation of evasion, a show cause notice constitutes the foundation on
which the demand made by the Revenue could stand or fall Rule 57CC of the
Central Excise Rules deals with adjustment of credit on inputs used in the
manufacture of exempted final products. It applies in cases where a E
manufacturer is engaged in the manufacture of any final product which is
chargeable to duty as well as any other final product which is exempted from
payment of duty or chargeable to nil rate of duty and the manufacturer takes
credit of the specified duty on any inputs, which is used in manufacture of
both the above categories of final products. In such a case, the manufacturer
is required to pay a presumptive amount equal to eight per cent of the price F
of the exempted final product charged by the manufacturer for the sale of
such goods at the time of their clearance from the factory.
[Para 8) (656-A, B, q

1.2. The object of the rule 57CC(l) was to recover a presumptive sum
upon removal of exempted goods from a manufacturer who also manufactured G
dutiable goods, but using common input for both dutiable as well as duty
-i.. exempted goods and who took MOD VAT credit on such common inputs. Rule
57CC sought, therefore, to recover a presumptive sum equal to eight per cent
of the price of exempted goods at the time of their removal where the
manufacturer did not undertake maintenance of inventory/accounts of the H
652 SUPREME COURT REPORTS [2007] 9 S.C.R.
A clearance of exempted final products. Even sub-rule (7) of rule 57CC was based
on "deemed price" if read with rule 57CC(l). Sub-rule (7) read with sub-rule
(1) prevented an assessee from contending that he was not liab,le to pay the
presumptive sum of eight per cent of the price of exempted goods on the ground
that the said exempted goods were wholly manufactured out of inputs on which
no credit of duty had been taken under rule 57 A. The amount requir-"ed to be
B paid at the time of removal of exempted goods under rule 57CC(l) had to be
done in the same manner as was the case with any other excisable goods as
the rate of duty stood determined at the rate of eight per cent in the rule itself.
(Para 13] (66~E-H)

C 1.3. There was an alternative provided under sub-rule (9) which reli_eved
the manufacturer of the liability to pay eight per cent of the price of exempted
goods at the time of removal of such goods. Under sub-rule (9), the ~sses-s~e
was required to maintain a separate account and an inventory and that he was
not entitled to take credit on the inputs meant for use in exempted final
product If such accounts and inventory were maintained, there was no need
D to pay a presumptive amount equal to eight per cent of the price of exempted
goods at the time of their removal form the factory. The said amount of 8 per ;..
cent of the value of the goods at the time of clearance is the measure and it
brings in also the applicability of section 4 of the 1944 Act and the Valuation
Rules 1975 framed thereunder. (Paras 13 and 14) (661-A-D)

E 2.1. Reading rule 57CC(t) with rule 57CC(8), it is found that.entire
rule is based on "deemed price" and "recovery of presumptive amount" and,
therefore, the words "price charged at the time of sale" must be read as "eight
per cent of the value of the exempted goods". This interpretation stands
supported by the Instructions issued by the Central Board of Excise and
F Customs based on the circular No. B-42/1196-TRU dated 27.9.1996. This is
where Section 4 and the Valuation Rules, 1975 come into play.
(Para 15] (661-H; 662-A-BJ

2.2. Under Section 4(l)(a) of the Act, normal price was the basis of the
assessable value. It was the price at which goods were ordinarily sold by the
G assessee to the buyer in the course of wholesale trade. Under Section 4(l)(b)
it was provided that ifthe price was not ascertainable for the reason that such
goods were not sold or for any other reason, the nearest equivalent thereof
had to be determined in terms oftlie Valuation Rules, 1975. Therefore, rule
57CC has to be read in the context of Section 4(1) of the 1944 Act, as it stood
at the relevant time. Section 4(1)(a) equated "value" to the "normal price"
H
I
+-
COMMR.OFCENIRALEXOSEv.BALI.ARPURINDUS.LID. 653

). which in turn referred to goods being ordinarily sold in the course of wholesale A
trade. [Para 15) (661-E, F)

3.1. Rule S7CC is a provision which seeks to recover presumptive
amount at the rate of eight per cent of the price of exempted final product at
the time of removal for sale. In the circumstances, the Tribunal erred in
holding that Rule S7CC is not applicable to the present case as it involves B
stock transfer and not a sale. If the view of the Tribunal is to be accepted,
then nei~her Section 4 of the 1944 Act nor the Valuation Rules, 1975 framed
thereunder could apply. If the nature of the presumptive sum is kept in mind
then there will be no conflict between the view expressed by this Court and
the view expressed by the Central Board of Excise and Customs vide
Instructions based on circular No. B-42/1/96-TRU; dated 27.9.1996. The above C
principles concerning rule 57CC is enunciated on account of the total
confusion both in the industry as well as in the Department of Revenue.
(Para 17) (662-D, E, F)

Union ofIndia and Ors. v. Bombay Tyre International Ltd., AIR (1984)
SC 420 17, referred to. D
3.2. Revenue was not entitled to invoke the extended period of limitation
vide the first show cause notice dated 21.5.99. However, the second and third
show cause notices dated 30.9.1999 for the period April, 1999 to June, 1999
and 18.11.1999 for the period July, 1999 to September, 1999 respectively are
within time. Therefore, only the first show cause notice dated 21.5.1999 was E
struck down; second and third show cause notices are remitted to the
Commissioner of Central Excise, who will decide the question of applicability
of rule 6(b)(i) and rule 6(b)(ii) of the Valuation Rules 1975 in accordance
with law. However, the impugned jmlgment of the Tribunal which has held tb&t
r.57CC of the 1944 Rules is not applicable to this case as there was no "sale", F
is set aside. In cases where the manufacturer does not comply with r.57CC(9),
he shall debit the presumptive sum equal to eight per cent of the value of the
exempted goods at ~be time of clearance from the factory gate. This rule would
apply to stock transfers also. [Paras 19 and 20) (663-B-D)

Mis. Continental Foundation Joint Venture Sholding v. CCE, G
Chandigarh-I (Civil Appeal No. 313912002 etc.) decided by Supreme Court
on 29.8.2007, relied on.

3.3. It is clarified that Rule 7 of the Valuation Rules 1975 will not be
invoked and applied to the facts of this case as it has not been mentioned in
H
654 SUPREME COURT REPORTS [2007) 9 S.C.R.

A the second and the third show cause notices. It is well settled that the show
cause notice is the foundation in the matter of levy and recovery of duty, penalty
and interest. If there is no invocation of Rule 7 of the Valuation Rules 1975
in the show cause notice, it would not be open to the Commissioner to invoke
the said rule. (Para 21) (663-G)

B CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1373 of2002.

From the final Order No. Cil/1921/WZB/2001 dated 20.7.2001 of the
Customs Excise and Gold (Contort) Appellate Tribunal, West Zonal Bench at
Mumbai in Appeal No. E/1758/2000-Mum.

C R.G. Padia, Binu Tamta and B. Krishna Prasad for the Appellant.

Indu Malhotra, Shashi M. Kapila, Sunita Ojha and Vikas Mehta for the
Respondent.

The Judgment of the Court was delivered by
D KAPADIA, J. I. This civil appeal is filed by the Department under
Section 35L{b) of the Central Excise Act, 1944 against the judgment dated >-
20.7.2001 delivered by the Customs, Excise and Gold (Control) Appellate
Tribunal ("CEGAT") in Appeal No. E/1758/2000.

E 2. The issue which arises in this civil appeal is as to whether in the
absence of any "sale", rule 57CC of the Central Excise Rules, 1944 would have
any application or not. The contention of the assessee is that in the case of
"stock transfer" there is no "sale" and, therefore, rule 57CC was not applicable.
This contention has been accepted by the Tribunal, hence this civil appeal.

F 3. The assessee is engaged in manufacture of paper falling under Chapter
48 of the Central Excise Tariff. The assessee is availing the benefit of MODYAT
Scheme under Rule 57A of the Central Excise Rules, 1944 (for short, "1944
Rules"). The assessee is also manufacturing pulp falling under Chapter 47 of
the Central Excise Tariff, which is chargeable to nil rate ofduty. The said pulp
is captively consumed for the manufacture of paper. According to the assessee,
G a small portion of the pulp is sent to the sister unit of the assessee at Asthi.
According to the assessee, there was no sale of pulp as alleged by the
Department. According to the assessee, a small quantity of pulp manufactured
by the assessee was stock transferred to its sister unit at Asthi.

4. In this civil appeal, we are concerned with the period September, 1996
H
COMMR.OFCEN1RALEXCISEv.BAILARPUR1NDUS.L1D.[KAPADIA,J.] 655

to March, 1999. During this period, the assessee had transferred approximately A
41000 MT of pulp to its sister unit and had paid duty at the rate of eight per
cent of the cost price declared by them.

5. Three show cause notices were issued by the Department dated
21.5.1999, 30.9.1999 and 18.11.1999 in which it was alleged that if comparable
prices obtained by the sister units are taken into consideration then the total B
duty payable at the rate of eight per cent would work out to Rs. 4.58 lacs
(approx.) whereas the assessee had paid duty of Rs. 2.67 lacs {approx.).
Therefore, it was alleged that the assessee had evaded payment of duty to
the tune of Rs. 1.90 lacs (approx.) and accordingly they were also liable to
pay penalty under Rule 57-1(4) read with Rule l 73C of the 1944 Rules.

6. Vide reply dated 25.6.t 999, the assessee contended that there was no
c
sale of pulp, that it was the case of stock transfer of pulp which was consumed
as raw-material in the manufacture of paper by the sister unit of the assessee.
According to the assessee, a major portion of the pulp manufactured by it
was consumed by the assessee and a very small percentage was stock
transferred to the sister unit, which consumed the transferred pulp in the D
manufacture of paper. According to the assessee, in their reply to show cause
notices, price declarations were filed for clearance of pulp to their sister unit
at Asthi by way of stock transfer and, therefore, they adopted the rate of 8
per cent of the cost price for purposes of reversal of credit on inputs on which
credit was taken. In this connection, the assessee applied rule 6(b)(ii) of the
Central Excise (Valuation) Rules, 1975 (for short, "Valuation Rules 1975"). E
According to the Department, the assessee should have taken into account
8 per cent of the selling price of pulp sold by the assessee's sister units in
other states for reversal of MODYAT credit on inputs on which credit was
taken by applying rule 6(b)(i) of the Valuation Rules 1975. If rule 6(b)(i) was
to apply then considering the sale price of pulp cleared in other states, the F
duty amount payable by the assessee herein, worked out to Rs.4,57,56,812/
- whereas assessee had paid an amount of Rs.2,67 ,32,851.

7. At this stage, it may be clarified that, in this case, three show cause
notices were issued; the first was dated 21.5.1999, which related to the period
September, 1996 to March, 1999, second show cause notice waS dated 30.9.1999,
which related to the period April, 1999 to June, 1999, and the third show cause G
notice was dated 18.11.1999, ~hich related to the period July, 1999 to September,
1999. This difference is required to be kept in mind because under the first
show cause notice dated 21.5.1999, the Department has invoked the extended
period of limitation, whereas the second and the third show cause notices
dated 30.9.1999 and 18.11.1999 were for the periods April, 1999 to June, 1999 H
656 SUPREME COURT REPORTS [2007] 9 S.C.R

A and July, 1999 to September, 1999 respectively, which were within limitation.
8. Value is the function of price. In every case in which there is an
allegation of evasion, a show cause notice constitutes the foundation on
which the demand made by the Department could stand or fall. Rule 57CC
deals with adjustment of credit on inputs used in the manufacture of exempted
B final products. It applies in cases where a manufacturer is engaged in the
manufacture of any final product which is chargeable·to duty as well as any
other final product which is exempted from payment of duty or chargeable
to nil rate of duty and the manufacturer takes credit of the specified duty on
any inputs, which is used in manufacture of both the above categorie~ of
final products. In such a case, the manufacturer is required to pay a
C presumptiv~ amount equal to eight per cent of the price ofthe ei:c:empted final
product charged by the manufacturer for the sale of such goods ·at the time
of their clearance from the factory.

9. For the purpose of deciding this matter, we quote hereinbelow sub-
rules (1), (7), (8) and (9) of rule 57CC of the Central Excise Rules, 1944:
D
"Rule 57CC. Adjustment of credit on inputs used in exempted final
products or maintenance of separate inventory and accounts of
inputs by the manufacturer.- (1) Where a manufacturer is engaged in
the manufacture of any final product which is chargeable to duty as
well as in any other final product which is exempt from the whole of
E the duty of excise leviable there on or is chargeable to nil rate of duty
and the manufacturer takes credit_ of the -specified duty on any
inputs (other than inputs used as fuel) which is used or ordinarily
used in or in relation to the manufacture of both the aforesaid
categories. of final products, whether directly or indirectly and .~hether
contained in the said final products or not, the manufacturer. shall,
F unless the provisions of sub-rule (9) are complied with, pay an amount
equal to eight per cent of the price (excluding sales tax and other
taxes, if any, payable on such goods) of the second category of final
products charged by the manufacturer for the sale of such goods at
the time of their clearance from the factory.

G xxx xxx xxx
(7) The provisions of sub-rule (1) shall apply even if the inputs on
which credit has been taken are not actually used or contained in any
particular clearance of final products.

H (8) If any goods are not sold. by the manufacturer at the factory gate
COMMROFCENlRALEXCISEv.BALLARPURINDUS.LID.[KAPADIA,J.] 657

but are sold from a depot or from the premises of a consignment agent A
or from any other premises, the price (excluding sales tax and other
taxes, if any, payable) at which such goods are ordinarily sold by the
manufacturer from such depot or from the premises of a consignment
agent or from any other premises shall be deemed to be the price for
the purpose of sub-rule (I).
B
(9) In respect of inputs (other than inputs used as fuel) which are
used in or in relation to the manufacture of any goods, which are
exempt from the whole of the duty of excise leviable thereon or
chargeable to nil rate of duty, the manufacturer shall maintain separate
inventory and accounts of the receipt and use of inputs for the C
aforesaid purpose and shall not take credit of the specified duty paid
on such inputs." (emphasis supplied)

10. For the sake of convenience, we also quote hereinbelow Section 4(1)
and (2) of the Central Excise Act, 1944 (for short, "1944 Act") as it stood at
the relevant time: ·
D
"Section 4. Valuation of excisable goods for purposes of charging
of duty of excise. - ( 1) Where under this Act, the duty of excise is
chargeable on any excisable goods with reference to value, such
value, shall, subject to the other provisions of this section, be deemed
to be - E
(a) the normal price thereof, that is to say, the price at which such
goods are ordinarily sold by the assessee to a buyer in the
course of wholesale trade for delivery at the time and place of
removal where the buyer is not a related person and the price is
the sole consideration for the sale :
F
Provided that -

(i) where, in accordance with the normal practice of the
wholesale trade in such goods, such goods are sold by the
assessee at different prices to different classes of buyers G
(not being related persons) each such price shall, subject to
the existence of the other circumstances specified in clause
(a), be deemed to be the normal price of such goods in
relation to each such class of buyers;

H
658 SUPREME COURT REPORTS (2007) 9 S.C.R.

A (la) Where the price at which such goods are ordinarily sold by
the assessee is different for different places of removal, each
such price shall, subject to the existence of other
circumstances specified in clause (a), be deemed to be the
normal priee of such goods in relation to each such place of
removal.
B
(it) where such goods are sold by the assessee in the course of
wholesale trade for delivery at the time and place of removal
at a price fixed under any law for the time being in force or
at a price, being the maximum, fixed under any such law,
then, notwithstanding anything contained in clause (iii) of
c this proviso, the price or the maximum price, as the case may
be, so fixed, shall, in relation to the goods so sold, be
deemed to be the normal price thereof;

(1it) where the assessee so arranges that the goods are generally
not sold by him in the course of wholesale trade except to
D
or through a related person, the normal price of the goods
sold by the assessee to or through such related person shall ~.

be deemed to be the price at which they are ordinarily sold
by the related person in the course of wholesale trade at the
time of removal, to dealers (not being refated persons) or
E where such goods are not sold to such dealers, to dealers
(being related persons), who sell sue~ goods in retail;

(b) where the normal price of such goods is not ascertainable for
the reason, that such goods are· not sold or for any other
reason, the nearest ascertainable equivalent thereof
F determined in such· manner. as may be prescribed.

(2) Where, in relation to any excisable goods the price thereof for
delivery at the place of removal is not known and the value
thereof is determined with reference to the price for delivery at
a place other than the place of removal, the cost of transportation
G from the place of removal to the place of delivery shall be excluded
from such price."

11. We also quote hereinbelow Instructions issued by the Central Board
of Excise and Customs based on Circular No. B-42/1/96-TRU; dated 27 .9.1996
(1996 (88) ELT TS):
H
COMMROFCEN1RALEXCISEv. BALLARPURINDUS.LTD.[KAPADIA,J.] 659
"Modvat - Reversal of credit for inputs used in the manufacture of A_
exempted product

Kind attention is invited to the provisions of Rule 57CC of the
Central Excise Rules for reversal of Modvat credit in respect of
inputs used in the manufacture of exempted goods or goods
chargeable to 'nil' rate of excise duty. The provision has been B
made that where a manufacture uses inputs which are common
to both dutiable goods as well as exempted goods, the
manufacturer is required to debit the amount equal to 8% of the
value of the exempted goods when they are cleared from the
factory.
c
2. In some cases, the exempted goods cleared by one manufacturer
are used as inputs by another manufacturer. The manufacture of
exempted goods indicates the amount of Modvat credit reversed
on the invoices issued by him for such exempted goods. In this
context, some doubts have been raised whether the amount of
Modvat credit so reversed is available as Modvat credit to the D
J. user of such exempted goods when he uses them as inputs in his
factory.
3. In this context, it is clarified that the amount reversed is not by
way ofpayment ofexcise duty. Accordingly, the amount ofModvat
credit reversed and shown in the invoice by the manufacturer of - E
exempted goods cannot be taken as credit by the user of exempted
goods."

(emphasis supplied)

12. Rule 57CC was placed on statute book by Notification No. 14/96-CE F
dated 23.7.1996. It was issued under Section 37 of the 1944 Act. Sub-rule (I)
refers to a manufacturer who manufactures excisable goods which are
chargeable to duty as well as goods which are exempt or which are chargeable
to nil rate of duty. If the said manufacturer takes credit on inputs, as in the
present case, which he ordinarily uses in the manufacture of both exempt as G
well as dutiable final products, he was required to comply with the conditions
mentioned in sub-rule (9). Otherwise, upon removal of final product, which
was exempt from payment of duty, he was required to pay a presumptive
amount equal to 8 per cent of the price charged by him on the exempted final
products at the time of clearance. Sub-rule (2) provided that presumptive
660 SUPREME COURT REPORTS c2007]'9· s:c.R
A amount of 8 per cent was payable either by debit in RG 23A Part II register
or by debit in PLA. Sub-rule (8) provided that ifthe exempted goods wefe not
sold at the factory gate, the price at which such goods were sold at the
manufacturer's depot or from the premises of the consignment agent or aity •
other premises, shall be deemed to be the pri~ for the purpose of sti~rule
B (1). Therefore, sub-rule (8) was also based on the concept of "deemed price".
Sub-rule (9) provided that in respect of common inputs, the manufacturer shall
maintain separate inventory and accounts of the use of inputs used in the
manufacture of exempted products and shall not take credit of duty on such
specified inputs. As stated above, if the manufacturer opts not to maintain
separate accounts under sub-rule (9) then upon removal of final product
C which is exempt from payment of duty, he would be required to pay a notional
sum equal to 8 per cent Of the price· charged by him on the exempted final
products at the time of clearance. Lastly, sub-rule (7) provided that sub-rule
(1) would be attracted even if inputs on which credit has been taken, are not
actually used. However, the said sub-rule (7) must be read with the phrase
"which goods are ordinarily used in the manufacture of exempted final products
D and dutiable final products" mentioned in sub-rule (1). If read together, it
becomes evident that in order to apply sub-rule (7), the Department had to
establish that common inputs were ordinarily used for both the categories of
final products.

E 13. The object of the rule 57CC( I) was to recover a presumptive sum
upon removal of exempted goods from a manufacturer who also manufactured
dutiable goods, but using common input for both dutiable as well as duty
exempted goods and who took MOD VAT credit on such common inputs. Rule
57CC sought, therefore, to recover a presumptive sum equal to eight per cent
of the price of exempted goods at the time of their removal where the
F manufacturer did not undertake maintenance of inventory/accounts of the
clearance of exempted final products. Even sub-rule (7) of rule 57CC was
based on "deemed price" ifread with rule 57CC(l). Sub-rule (7) read with sub-
rule (l) prevented an assessee from contending that he was not liable to pay
the presumptive sum of eight per cent of the price of exempted goods on the
ground that the said exempted goods were wholly manufactured out of inputs
G. on which no credit of duty had been taken under rule 57A. The amount
required to be paid at the time of removal of exempted goods under rule
57CC(I) had to be done in the same manner as was the case with any other
excisable goods as the rate of duty stood determined at the rate of eight per
cent in the rule itself. The said presumptive amount was required to be paid
H
' COMMROFCENlRALEXCISEv.BAUARPURINDUS. LTD.[KAPADIA,J.) 661

by debiting in PLA register or by payment in cash. As stated above, there A
was an alternative provided under sub-rule (9) which relieved the manufacturer
of the liability to pay eight per cent of the price of exempted goods at the
time of removal of such goods. Under sub-rule (9), the assessee was required
to maintain a separate account and an inventory and that he was not entitled
to take credit on the inputs meant for use in exempted final product. If such B
accounts and inventory were maintained, there was no need to pay a
presumptive amount equal to eight per cent of the price of exempted goods
at the time of their removal.

14. In our view, rule 57CC, therefore, required payment of a presumptive
amount of eight per cent of the price of the exempted goods, net of sales tax C
and other taxes: This rule was self contained provision indicating the basis
on which price had to be detennined. The rule, however, has not called the
said amount of eight per cent as duty of excise. As indicated in the above
circular, quoted above, the manufacturer who did not maintain account or
inventory was required to debit the amount equal to 8 per cent of the value
of exempted goods at the time of removal of goods from the factory. In our 0
view, the said amount of 8 per cent of the value of the goods at the time of
clearance is the measure and it brings in also the applicability of section 4
of the 1944 Act and the Valuation Rules 1975 framed thereunder.

15. Under Section 4(l)(a) nonnal price was the basis of the assessable
value. It was the price at which goods were ordinarily sold by the assessee E
to the buyer in the course of wholesale trade. Under Section 4{l)(b) it was
provided that if the price was not ascertainable for the reason that such
goods were not sold or for any other reason, the nearest equivalent thereof
had to be detennined in tenns of the Valuation Rules, 1975. Therefore, rule
57CC has to be read in the context of Section 4( I) of the 1944 Act, as it stood F
at the relevant time. Section 4(1 )(a) equated "value" to the "nonnal price"
which in tum referred to goods being ordinarily sold in the course of wholesale
trade. In other words, nonnal price, which in tum referred to goods being
ordinarily sold in the course of wholesale trade at the time of removal,
constituted the basis of the assessable value. Rule 57CC( I) proceeds on the
basis that the manufacturer has taken credit of the specified duty on "common G
inputs" which needs to be reversed at eight per cent (i.e. the manufacturer
needs to debit an amount equal to eight per cent of the price of the exempted
final product charged for the sale of such goods. This amount is a presumptive
sum calculated at eight per cent of the price charged. The rate of eight per
cent is the measure to calculate the presumptive sum. Further, reading rule H
662 SUPREME COURT REPORTS [2007] 9 S.C.R.

A 57CC(l) with rule 57CC(8) one finds that entire rule is based on "deemed
price" and "recovery of presumptive amount" and, therefore, in our view, the
words "price charged at the time of sale" must be read as "eight per cerit of
the value of the exempted goods". Our interpretation stands supported by the
Instructions issued by the Central Board of Excise and Customs based on the
B circular No. B-42/1196-TRU dated 27.9.1996. This is where section 4 and the
Valuation Rules, 1975 come into play. In the light of the above discussion, the
adjudicating authority was required to adjudicate upon applicability of rule
6(b)(i) and rule 6(bXii). However, it has been held by the adjudicating authority
that rule 6(b)(i) is not applicable, hence, in our view the only issue which
remains to be decided is whether all the requisite elements of costing like
C wages, profits etc. have been taken into account by the assessee herein as
required under rule 6(b )(ii).

16. In the case of Union of India and Ors. v. Bombay Tyre International
Ltd, AIR (1984) SC 420 this Court had drawn a distinction between the nature
of levy and the mea~ure/yardstick on which the tax (duty) is detennined.
D
17. In the circumstances, rule 57CC is a provision which seeks to _,
recover presumptive amount at the rate of eight per cent of the price of
exempted final product at the time of removal for sale. In the circumstances,
the Tribunal erred in holding that Rule 57CC is not applicable to the present
case as it involves stock transfer and not a sale. If the view of the Tribunal
E is to be accepted, then neither Section 4 of the 1944 Act nor the Valuation
Rules, 1975 framed thereunder could apply. If the nature of the presumptive
sum is kept in mind then there will be no conflict between our view and the
view expressed by the Central Board of Excise and Customs vide Instructions
based on circular No. B-42/1/96-TRU; dated 27.9.1996. We have enunciated f
F the above principles concerning rule 57CC on account of the total confusion
both in the industry as well as in the Department.

18. In the case of Mis Continental Foundation Joint Venture Sholding
v. CCE, Chandigarh-I (Civil Appeal No. 3139/2002 etc.) a show cause notice
under Section 11 A of the 1944 Act was issued to the assessee invoking
G extended period of limitation on the grounds of suppression, fraud and
collusion. The Division Bench of this Court, to which one of us, Kapadia, J.,
was the member, held that where yarious circulars, instructions/directions
stoo.d issued at different points of time and where there was no clarity in the
views expressed by the authorities, extended period of limitation cannot be
H .invoked. It was held that the word "suppression" in Section l lA of the 1944
COMMROFCENTRALEXCISEv.BALLARPURINDUS.LID.[KAPADIA,J.] 663

>- Act is accompanied by the words "fraud" or "collusion" and, therefore, the A
word "suppression" should be construed strictly. That, mere omission to give
correct information did not constitute suppression unless that omission was
made willfully in order to evade duty. That, suppression would mean failure
to disclose full and true- information with the intent to evade payment of duty.
When the facts are known to both the parties, omission by one party would
not constitute suppression. That, an incorrect statement cannot be equated B
with a willful mis-statement. The latter implies making of an incorrect statement •
with the knowledge that the statement made was not correct.

19. Applying the above tests to the facts of the present case, we hold
that the Department was not entitled to invoke the extended period of limitation C
vide the first show cause notice dated 21.5.99. However, the second and third
show cause notices dated 30.9.1999 for the period April, 1999 to June, 1999
and 18.11.1999 for the period July, 1999 to September, 1999 respectively are
within time. Therefore, we strike down only the first show cause notice dated
21.5.1999. However, we hereby set aside the impugned judgment of the Tribunal
which has held that rule 57CC of the 1944 Rules is not applicable to this case D
as there was no "sale". In cases where the manufacturer does not comply with
rule 57CC(9), he shall debit the presumptive sum equal to eight per cent of
the value of the exempted goods at the time of clearance from the factory gate.
This rule would apply to stock transfers also.

20. In the light of our aforestated interpretation of rule 57CC of the 1944 E
Rules, we set aside the impugned judgment of the CEGAT and remit the
aforesaid second and third show cause notices to the Commissioner of Central
Excise, who will decide the question of applicability of rule 6(b)(i) and rule
6(b)(ii) of the Valuation Rules 1975 in accordance with law.

21. Before concluding, we may mention that, in the present case, the
F
second and the third show cause notices are alone remitted. The first show
cause notice dated 21.5.1999 is set aside as time barred. However, it is made
clear that Rule 7 of the Valuation Rules 1975 will not be invoked and applied
to the facts of this case as it has not been mentioned in the second and the
third show cause notices. It is well settled that the show cause notice is the G
foundation in the matter of levy and recovery of duty, penalty and interest.
If there is no invocation of Rule 7 of the Valuation Rules 1975 in the show
cause notice, it would not be open to the Commissioner to invoke the said
rule.

H
664 SUPREME COURT REPORTS • [2007) 9 S.C.R.
A 22. Accordingly, the civil appeal filed by the Department is partly allowed
and the second and the third show cause notices dated 30.9.1999 and 18.I 1.1999
respectively are remitted to the Commissioner for detennination in accordance
with the principles laid down hereiriabove: The civil appeal filed by the
Department stands partly allowed with no order as to costs.

B S.K.S. Appeal partly allowed.

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