Holding

The transfer of iron ore pellets between the sister units is not a sale; valuation must be based on the supplier’s invoice on which CENVAT credit was taken, and post‑manufacturing expenses cannot be added to the duty value.

Summary

Mis. Ispat Industries Ltd (IIL) and its sister concern Mis. Ispat Metallics Industries Ltd (IMIL) jointly procured iron ore pellets under a tripartite agreement with the supplier. IIL availed CENVAT credit on the entire quantity and later transferred the pellets to IMIL, reversing the credit and issuing debit notes for bank charges and other expenses. The Revenue Department issued show‑cause notices treating the transfer as a sale and contending that the debit‑note amounts were additional consideration, thereby increasing the assessable value under Section 4(1)(a) of the Central Excise Act. The Commissioner upheld this view, but the CESTAT reversed the decision, holding that the movement was a transfer, not a sale, and that valuation should be based on the supplier’s invoice on which CENVAT credit was taken, per the circular dated 1 July 2001/2002. The Supreme Court affirmed the Tribunal’s findings, stating that the transfer is a factual determination, the circular applies, and post‑manufacturing expenses cannot be added to the duty value. Consequently, the appeals were dismissed.

Issues considered

Whether the movement of iron ore pellets from IIL to its sister unit IMIL constitutes a sale or a transfer for excise valuation purposes.
Which valuation basis applies – the transaction value under Section 4(1)(a) of the Central Excise Act or the supplier’s invoice value on which CENVAT credit was taken.
Whether post‑manufacturing expenses reflected in debit notes can be treated as additional consideration in the assessable value.
Applicability of the circular dated 1 July 2001/2002 in determining the value of inputs transferred to a sister unit.
Whether the limitation period for assessment is attracted.

Legislation cited

Subjects

CENVAT credittransfer vs saleexcise valuationsister unitsiron ore pelletsadditional considerationCircular 1 July 2001Rule 57ABRule 3(4)Central Excise

Judgment

[2016) 3 S.C.R. 766.

A COMMISSIONER OF CENTRAL EXCISE, RAIGAD
v.
MIS. !SPAT METALLICS INDUSTRIES LTD. & ORS.
(Civil Appeal No. 2562 of2008)
B MAY 06, 2016
[A.K. SIKRI AND ROHINTON FALi NARIMAN, JJ.)
Central Excise Rules, 1944 - r.57AB (JC) - CENVAT Credit
Rules, 2001 - r. 3 (4) - Procurement of iron ore pellets (raw 111ateria/)
iointly by the assessee-manufacturer and its sister company under
a joint procurement policy - Credit was availed by the priiicipal
company of the duty paid on the entire quantity so procured - Later
as and when required by the sister company, the pellets were
transferred to .it by the principal company on reversing an amount
equal to the CENVAT credit availed on inputs that were so transferred
D - In addition the principal company alsQ raised debit notes OJI the
sister co111pany for recovering actual expenditure incurred by it in
relation to the procuring of such iron ore pellets such as bank
charges, interest etc.- Reven.ue issued show cause notice to both
the companies stating that the amounts mentioned in the debit note
from principa.l company to sister company were also includible in
E
the assessable duty valuation as additional consideration because
the transaction between the two companies rl'as one. of sale and not
transfer - The show cause notice upheld by the Co111111issiV-ner -
The Tribunal reversed the order of Commissioner holding that the
transfer of the raw material by principal co111pany to its sister
- F company was not a sale - On appeal, held: The transaction in ..the
present case is a tramfer and not sale - As per circular dated
1. 7.2001, in case of transfe1; the value to be adopted is the value
._ shown in the invoice on the basis of which CENVAT credit was taken
by the assessee i.e. invoice of the supplier of the pellets to t_he
assessee. - Post manufacturing expenses also cannot be loaded on
G
to the amount equal to the duty of excise leviable on.such goods -
Central Excise Act, 1944 - s. 4{1)(a) - Circular dated 1. 7.2002.
Dismissing the appeals, the Court

H
766
COMMISSIONER OF CENTRAL EXCISE, RAIGAD v. MIS., 767 •'
ISPAT METALLICS INDUSTRIES LTD ..

HELD: 1. The Tribunal being the last pri11cipal ·rorum of A
appreciation of facts has held that transfer of iron ore pellets by
the principal company to its sister concern was not a sale of goods
but was only a transfer of raw materials procured under the
Tripartite Agreement between the two of them and the supplier
of the said pellets. This is a pure finding of fact and the Revenue
B
has not been able .to dislodge thi~· finding of fact. No infirmity can
be found with the Tribunal's judgment, which· only follows the
cir'cular dated 1.7.2001. The circular makes it clear that a
distinction is made between inputs on which credit has been taken
which are removed on sale, and those which. are removed on
transfer. If removed on sale, "transaction value" on the application c
of Section 4(l)(a) is to be looked at. However, where the goods
are entirely transferred to a sister unit, it is reasonable to adopt
the value shown in the invoice on the basis of which Cenvat Credit
was taken by the assessee i.e. the invoice of the supplier of the
pellets to the assessee. [Paras 10, 11 and 12] [770-G-H; 772-A-
D
C)
2. The Tri'bunal was also correct in holding that post
manufacturing expenses cannot be loaded on to the amount equal
to the duty of excise leviable on such goods as this amount would,
then, cease to be an amount equat to the dufy of e~cise but would .
·be something more.~-Thus, the Tribunal is justified i11 its finding .E
o~ tnw, whicli is based on its fif!ding of fact that the present is a
case of transfer and not sale. [Para"l2) [772-D)
.CJVILAPPELLATEJURISDI<;:TlON: Civil Appeal No. 2562 of \'
2008. . .
F
From the Judgment and Order ctated 11. I 0.2005 in Appeal Nos. E/
1462, 1093, 1509/05 of the Customs, Excise & Service Tax Appellate
Tribunal, West Zonal Branch at Mumbai ·
WITH
C.A. Ncr:8557/2015.
K. Radhakrishna, Sr. Adv., Ms. Nisha Bagchi, Ms. Pooja Sharma,
B. Krishna Prasad, Advs. for the Appellant.

V. Lakshmi Kumaran, Hemant Bajaj; Aditya Bhattacharya, Anandh
K., Ms. L. Charnaya, M.P. Devanath, Advs. for the Resporide!Jts: H

,/'
768 SUPREME COURT REPORTS [2016] 3 S.C.R.

A The Judgment of the Court was delivered by

R.F. NARIMAN, J. I. Two appeals have been filed from a
common decision of CESTAT dated 11.10.2005, whereby the Tribunal
has upset the order of the Commissioner, confirming various duty demands,
B penalty and interest.

2. The brief facts necessary in order to appreciate the controversy
at hand, taken from C.A. No.2562 of2008, are as follows.
3. Mis. !spat Industries Limited (hereinafter referred to as the
"llL") is engaged in the manufacture of HR coils, sheets, plates, etc.,
c which are cleared on payment of duty of excise. In the manufacture of
such goods, it avails credit on inputs such as iron ore pellets. Adjacent to
its plant, another group company, namely, M/s. Ispat Metallics Industries
Ltd. (hereinafter referred to as the "IMIL") also has a factory in which
pig iron and molten metal are manufactured. The principal raw material
D for manufacture for both these companies is iron ore pellets. The said
pellets were purchased from Mandovi Pellets and Essar Steel Limited.
These were carried to the factory of IIL. Credit was availed by llL of
the duty paid on the entire quantity so procured. As and when required
by the sister company !Ml L, pellets were transferred through a conveyor
from llL's plant to IMIL's premises under cover of an invoice and on
E reversing an amount equal to the Cenvat credit availed on inputs that
were so transferred. In addition to such invoices, llL also raised debit
notes on !MIL for recovering actual expenditure incurred by it in relation
to the procuring of such iron ore pellets, such as bank commission,
interest, etc.
F 4. The aforesaid two companies were issued show cause notices
dated 29.9.2003 and 14.10.2003 respectively. It was alleged that iron
ore pellets were sold by llL to IMIL and that the amounts recovered by
llL in the form 'of debit notes towards bank charges, interest, etc. were
includible in the assessable value of such inputs that were cleared. The
G notice alleged that the reversal of credit equal to the amount paid to the
supplier which was being followed by llL was not in '<ompliance with
law.
5. The learned Commissioner upheld the show cause notices stating
that the transaction between llL and !MIL was one of sale and not
transfer. Since the goods were reassessed to duty in terms of Rule
H
COMMISSIONER OF CENTRAL EXCISE, RAIGAD v. M/S. 769
!SPAT METALLICS INDUSTRIES LTD. [R.F. NARIMAN, J.]

57AB(l C) of the Central Excise Rules, 1944 and Rule 3(4) oftheCenvat A
Credit Rules, 200 I, the assessable value in terms of Section 4( I)(a) of
the Central Excise Act i.e., the transaction value at the time of clearance
plus any additional consideration paid by the buyer at a later stage is to
· be added and, therefore, the amounts mentioned in the debit note from
llL to !MIL were also includible in the assessable duty valuation as
B
additional consideration. The extended period for limitation was also
found to be available on the facts of the present case.
6. The Tribunal reversed the aforesaid decision on the ground that
the transfer of iron ore pellets by IIL to !MIL was not a sale of goods but
was transfer ofraw materials, jointly procured, under a joint procurement
policy which was followed by the two sister companies and this becomes c
clear on a reading of the tripartite agreement between the supplier of
the pellets, HL, and !MIL. This being so, the Tribunal applied a circular
dated 1.7.2002 by which, where no sale is involved but only a transfer
by one sister unit to another, the value shown in the invoice on the basis
of which Cenvat credit was taken by the assessee would be the value D
for the purpose of Rule 57 AB and Rule 3( 4). It was further held that
additional consideration could not be added inasmuch as the amount
spoken of in the Rule 57 AB and Rule 3(4) is an amount equal to the duty
of excise which is leviable on such goods. Post manufacturing expenses
cannot possibly amount to a duty of excise leviable on such goods and
therefore all amounts paid under the debit notes between llL and !MIL E
could not be added to the value of those goods. Further, the invoice
value of the supplier alone was to be taken into account and, consequently,
the judgment of the learned Commissioner was set aside, not only on
merits, but also on limitation, following the judgments of the Tribunal
itself and of this Court. F
7. Shri Radhakrishnan has read to us in detail the show cause
notices and the Commissioner's judgment dated 24.12.2004, which is
strongly relied upon by him in support of his case. It is his case that a
proper reading of the relevant rules would make it clear that what has to
be seen is transaction value under Section 4(1 )(a) of the Central Excise G
Act and not invoice value of the supplier of the iron ore pellets. This
being so, according to him, the learned Commissioner is right in his
reasoning and the Tribunal's judgment should be reversed.
8. Shri V. Lakshm ikumaran, the learned counsel, on the other hand
supported the decision of the Tribunal and argued that on a reading of H
770 SUPREME COURT REPORTS [2016] 3 S.C.R.

A the Rules the rate applicable to such goods would be as on the date of
removal but value would necessarily be that determined for such goods
under Section 4 or 4A of the Central Excise Act which would be the
invoice value of the iron ore pellets cleared by the supplier of those
pellets. He relied strongly on the circular dated 1.7.2002, which was
dso relied upon by the Tribunal, and further went on to argue that there
B
was no suppres_sion otfacts in this case and, hence, the extended period
of limitation could not possibly have been applied to the facts of this
case.
9. Having heard the learned counsel for the parties, it is important
to first set out the relevant rules. Rule 57 AB(I C) of the Central Excise
c Rules, 1944 and Rule 3(4) of the CenvatCredit Rules, 2001 as they read
at the relevant time, read as follows:-
"57( 1C) When inputs or capital goods, on which credit has been
taken, are removed as s11ch from the factory, the manufacturer of
the final products shall pay an amount equal to the duty of excise
D which is leviable on such goods at the rate applicable to such
goods on the date of such removal and on the value determined
for such goods under Section 4 of the said Central Excise Act,
and such removal shall be made under the cover of'an invoice
referred to in rule 52A."
E Rule 3(4) When inputs or capital goods, on which CENVAT credit
has been taken, are removed as such from the factory, the
manufacturer of the final products shall pay an amount equal to
the duty of excise which is leviable on such goods at the rate ·
applicable to such goods on the date of such removal and on the
F value determined for such goods under Section 4 or Section 4A of
the Act, as the case may be, and such removal shall be made
· under the cover of an invoice referred to in rule 7."
10. The Tribunal being the last forum of appreciation of facts has
held that transfer of iron ore pellets by IIL to IMIL was not a sale of
G goods but was only a transfer of raw materials procured -under the
Tripartite Agreement between the two of them and the supplier of the
said pellets. This is a pure finding of fact and Shri Radha~rishnan has
not been able to dislodge this finding of fact. This being the case, the
application .of the circular of 1. 7.2002 becomes_ important. Paragraph
14 of the· said circular reads as under:-
·H
COMMISSIONER OF CENTRAL EXCISE, RAIGAD v. MIS. 771
ISPAT METALLICS INDUSTRIES LTD. [R.F. NARIMAN, J.)

14. How will valuation be Where inputs or capital goods, on which credit A
done when inputs or has been taken, are removed as such on sale,
capital goods, on there should be no problem in ascertaining the
which CENVAT credit transaction value by application of sec.4(1 )(a)
has been taken are or the Valuation Rules. [Provided tariff values
removed as such from have no.t been fixed for the inputs or they are
the factory, under the not assessed under Seetion 4A on the basis of
erstwhile sub rule (IC) MRP] B
of rule 57AB of the There may be cases where the inputs or capital
Central Excise Rules, goods are removed as such to a sister unit of
1944, or under rule the assessee or to another factory of the same
3( 4) of the Cenvat company and where no sale is involved. It may
Credit Rules, 2001 or be noticed that sub rule (IC) of Ruic 57AB of
2002 7 the erstwhile Central Excise Rules, 1944 and
Rule 3(4) of the Cenvat Credit Rules 2001 c
(now 2002, talk of determination of value for
"such goods" and not the "said goods". Thus,
if the assessce partly sells the inputs to
independent buyers and partly transfers to its
sister units, the transaction value of "such '
goods" would be available in the fonn of 'the
transaction value of inputs sold to an unrelated D
buyer (if the sale price to the unrei'ated buyer
varies over a period of time, the value nearest
to the time of removal should be adopted).
Problems will, however, ·arise wlwre the·
. assessee does not sell the inputs/ capital goods
to any independent buyer and the only removal
of such input/ capital goods, outside the E
factory. is in the nature of transfer to a- sister
unit. In such a case proviso to rule 9 will apply
and provisions of mle 8 of the valuation rules
would have ·to be invoked. However, this
would require determination of the 'cost of
production or manufacture', which would not
be possible since the said inputs/ capital goods F
have been received -by the assessee from
outside and have not been produced or
manufactured in his factoty. Recourse will,
. therefore:, have to be taken to the residuary rule
11 of the valuation rules· and the value
determined using reasonable means consistent
with the principles and general provisions of G
the valuation rules and sub-section (ll ofsec.4
of the Act. In that case it would be reasonable
to adopt the value shown in the invoice on the
basis of which CENVAT credit was take1i by
the assessec in the first place. In respect of
capital goods adequate depreciation may be
given as per the rates fixed in letter F No.
H
772 SUPREME COURT REPORTS [2016) 3 S.C.R.

A I I .A reading of this circular makes it clear that a distinction is
made between inputs on which credit has been taken which are re-
moved on sale, and those which are removed on transfer. If removed
on sale, "transaction value" on the application of Section 4(1 )(a) of the
valuation rules is to be looked at. However, where the goods are en-
tirely transferred to a sister unit, it is reasonable to adopt the value shown
B
in the invoice on the basis of which Cenvat Credit was taken by the
assessee i.e. the invoice of the supplier of the pellets to the assessee.
12. As it is clear that the present is a case of transfer and not sale
of pellets, no infirmity can be found with the Tribunal's judgment, which
only follows the circular dated 1.7.2001. In addition, the Tribunal was
c also correct in holding that post manufacturing expenses cannot be loaded
on to the amount equal to the duty of excise leviable on such goods as
this amount would, then, cease to be an amount equal to the duty of
excise but would be something more. On both these counts therefore,
we find that the Tribunal is justified in its finding on law, which is based
D on its finding of fact that the present is a case of transfer and not sale.
This being the case, it is unnecessary to consider any of the other sub-
missions made by the learned counsel including the point of limitation.
The appeals are, accordingly, dismissed.
Kalpana K. Tripathy Appeals dismissed.
E