M/S. UTC FIRE AND SECURITY INDIA LTD.versusCOMMISSIONER OF CENTRAL EXCISE, BELAPUR

                    [2015] 4 S.C.R. 399


       M/S. UTC FIRE AND SECURITY INDIA LTD.                    A

                             v.

  COMMISSIONER OF CENTRAL EXCISE, BELAPUR

          (Civil Appeal Nos. 4977-4978 of 2004)                 B

                      APRIL 10, 2015

          [A.K. SIKRI AND R. F. NARIMAN, JJ.)

     Central Excise Act, 1944: s.4(1)(a),(b) - Valuation of     C
certain goods used captively by the appellant in the turnkey
contracts - Manufacture of smoke detectors and parts
thereof and sold by assessee in two distinct streams; in
loose condition and as part of turnkey projects - In the        D
instant matters, work contract for turnkey project undertaken
by assessee for setting up of fire fighting system in the
building wherein smoke detectors and parts used - Basis
of valuation of smoke detectors and parts thereof - Held:
The case is not covered u/s.4(1)(a) and is covered u/           E
s.4(1)(b) - In view thereof, it is 1975 Rules which is
applicable - r.4 would be applicable only in those cases
where value of "such goods" which are sold by assessee for
delivery at any other time nearest to the time of the
removal of the goods under the assessment appears to be         F
reasonable to the concerned officer - Here, goods cannot
be treated as same or would fall within the description "such
goods" as sold to the other buyers in loose form when they
are used captively by appellant in turnkey projects - r. 7
which deals with 'best judgment assessment' is applicable       G
- Central Excise (valuation) Rules, 1975 - r. 7.

    Allowing the appeals, the court

                            399                                 H
400         SUPREME COURT REPORTS                [2015] 4 S.C.R.

A          HELD: It is not a case where Section 4(1) (a) of
      the Act is applicable. That is the common case of the
      parties. As per Section 4(1)(a) of the Act, normal prices
      of the goods, viz., the prices at which such goods are
      ordinarily sold by the Assessee to a buyer, is to be
 B    taken into consideration, subject, of course, to the
      condition that the buyer is not a related person and the
      price is the sole consideration for the sale. In this case,
      even the Assistant Commissioner in his final order,
      accepted that the case was covered by Section 4(1)(b)
C     of the Act meaning thereby, he accepted the position
      that normal price of the goods in question was not
      ascertainable. It is only in such a situation that Section
      4(1)(b) of the Act gets attracted. This provision further
              I

      mentions that in such an eventuality, where the normal
0
      price of the goods is not ascertainable for the reasons
      given in the said provision, the criteria to ascertain the
      price mentioned is the "nearest ascertainable
      equivalent thereof'. This is to be determined in such
 E    manner as may b~ prescribed. Manner is prescribed in
      the Valuation Rules, 1975. Rule 4 would be applicable
      only in those cases where value of "such goods"
      which are sold by the assessee for delivery at any
      other time nearest to the time of the removal of the
 F    goods under the assessment, appears to be
      reasonable to the concerned officer. Here, the goods
      cannot be treated as same or would fall within the
      description "such goods" as sold to the other buyers
      in loose form when they are used captively by the
G     appellant in the turnkey projects. The only mistake
      which is committed by the Commissioner is to refer to
      Rule 6(b) inasmuch as in the present case, the goods
      are not consumed by the appellant/assessee itself but
      used in the turnkey projects/contracts meant for the
 H    third party. Thus, it was Rule 7 which should have
 UTC FIRE AND SECURITY INDIA LTD. v. COMMNR. OF 401
           CENTRAL EXCISE, BELAPUR

been referred to by the Commissioner (Appeals) as A
none of the proceeding rules would apply. To put it
C'therwise, it is the case of 'best judgment assessment'.
However, that is the exercise otherwise undertaken by
the Commissioner (Appeals) in accepting the costing of
the goods which was placed by the assessee/appellant B
before the assessing officer and it was taken into
consideration by the Commissioner (Appeals).
[Paras12, 13] [403-E,F; 408-F-H; 409-A-C]
   CIVIL APPELLATE JURISDICTION: Civil Appeal Nos.           C
4977-4978 of 2004
     From the Judgment and Order No. C-A/148/WZB/04-C-
ll and M/76/WZB/04-C-ll dated 05.05.2004 of the Customs
Excise and Service Tax Appellate Tribunal, West Regional D
Bench at Mumbai in Appeal No. E/2727/98 and E/C0-230/
~8.

   Somnath Shukla, Alok Yadav, Praveen Kumar for the
Appellant.
                                                             E
      K. Radhakrishnan, Shweta Garg, Rupesh Kumar, B.
Krishna Prasad for the Respondent.

      The Judgment of the Court was delivered by
     A. K. SIKRI, J. 1. The instant appeals are filed against F
the final judgment and order dated 05.05.2004 passed by
the Customs, Excise and Service Tax Appellate Tribunal
(hereinafter referred to as 'CESTAT'), whereby the appeal of
the Revenue against the order of the Commissioner
(Appeals) was allowed. The dispute pertains to the valuation G
of certain goods used captively by the appellant in the
turnkey contracts, in the following circumstances.

    2. The appellant, inter alia, manufactures smoke
detectors and parts thereof. These goods are sold in two     H
402         SUPREME COURT REPORTS                  [2015] 4 S.C.R.


A     distinct streams as under: -

           (a) sales in loose condition; and

           (b) sales as part of turnkey projects where         no
           separate values are recovered for the sale        of
 B
           these goods but the price of the goods forms part
           of an overall consideration mentioned for such turnkey
           contracts.

        3. Insofar as the turnkey projects are concerned, the
 C appellant takes the works contracts which are awarded by
   certain buyers for setting up of the fire fighting system in the
   buildings. In executing these turnkey projects to set up the fire
   fighting system, the aforesaid smoke detectors and parts
   thereof are also used. It is the valuation of these smoke
 D
   detectors and parts thereof for the purpose of payment of
   excise duty which is bone of contention.

       4. The Assessing Officer had issued six Show Cause
  Notices dated 29.09.1995, 28.03.1996, 03.06.1996,
E 02.09.1996, 03.03.1997, 17.7.1997. It was alleged in these
  Show Cause Notices that since the aforesaid smoke
  detectors and parts thereof are captively used by the
  appellant, insofar as the turnkey contracts are concerned, for
F the purpose of their valuation, the price at which the same
  smoke detectors and parts thereof are sold by the assessee
  in loose condition will be treated as price and the excise duty
  shall be paid accordingly. The perusal of these Show Cause
  Notices further demonstrates that in order to apply the
G aforesaid principle, the assessing officer mentioned that this
  was as per Section 4(1)(a) of the Central Excise Tariff Act
  (hereinafter referred to as 'Act' for short).

      5. The appellant submitted his reply. At that stage, the
 H appellant even filed his written submissions before the
 UTC FIRE AND SECURITY INDIA LTD. v. COMMNR. OF 403
    CENTRAL EXCISE, BELAPUR [A. K. SIKRI, J.]

assessing officer. The case pleaded by the appellant was            A
that the matter would not be covered under Section 4(1)(a)
and was covered under Section 4(1)(b). He further submitted
that in view thereof, it is the Central Excise (Valuation) Rules,
1975 (hereinafter referred to as 'Valuation Rules, 1975')
which were to be applied in the given case. According to            B
him, none other Rule than Rule 7 which deals with 'best
judgment assessment', should be made applicable.

     6. After hearing the appellant, the Assessing Officer
passed the orders and applied Rule 4 of the aforesaid C
Valuation Rules, 1975. On the application of this Rule, he
took the value of the goods in question at the same rate at
which the appellant has been supplying smoke detectors and
parts thereof in loose condition.
                                                                D
     7. The appellant preferred the appeal against the order
of the Assessing Authority before the Commissioner
(Appeals). The Commissioner (Appeal) decided the said
appeal in favour of the appellant by examining all the aspects
in detail. In his opinion, it was not a case where the E
provisions of Section 4(1 ){a) will be applied. He also
recorded his finding that even Rule 4 of the Valuation Rules,
1975, had no application. Thereafter, he referred to Rule
6(b) and came to the conclusion that it is this Rule that shall
be applicable.                                                  F

     8. We may point out at this stage that the appellant had
submitted cost analysis of the aforesaid inputs which are
captively used for the turnkey projects and added a margin
of 10 per cent thereupon as its profits. This cost analysis G
submitted by the appellant was duly certified by the
Chartered Accountant even before the dispute had arisen. It
is also relevant to mention here that the margin of profit
otherwise charged by the appellant in respect of entire
turnkey project was restricted to 4 to 5 per cent. The H
404         SUPREME COURT REPORTS                   [2015] 4 S.C.R.


A
                                                  .
      Commissioner, therefore, accepted the cost so arrived at
      and held that it is that cost which would be treated as
      value for the purpose of excise duty. Para 11 of the order
      of the Commissioner which deals with this aspect in detail is
      reproduced hereunder: -
 B
             "The appellants have worked out the details of
           costing in respect of the said items under
           dispute duly certified by Chartered Accountants even
           prior to the period of dispute. These prices are also
 c         inclusive of margin of 10%, whereas appellants
           claim is that the margin of profit in
           respect of the entirely turnkey projects is restricted from
           4% to 5%. However, this question is not entirely
           relevant to the issue. The only relevance is in
 D         respect of the question whether the prices
           determined on costing method for the individual
           disputed parts as prescribed under Rule 6(b) of the
           Valuation Rules, can accepted under the law in
           cases of turnkey projects. I, accept the merits in the
 E         claim of the appellants that the class of buyers,
           sought to be compared by the Assistant
           Commissioner, are two different classes. Also, that
           there is no determination of a single normal price
           in respect of disputed parts, also supplied for
 F
           commissioning to turnkey projects at site.Therefore,
           the only legal acceptable method under the present
           facts would be to resort to the provisions of the
           Central Excise Valuation Rules prescribed under
 G         Section 4(1)(b) of the Act. While it can be accepted
           that the subject goods supplied to individual buyer
           under an invoice, and those sent for commissioning of
           turnkey projects without any support invoice for this
           parts, are comparable goods, this fact would only
 H         have been utilised for determination of assessable
 UTC FIRE AND SECURITY INDIA LTD. v. COMMNR. OF 405
    CENTRAL EXCISE, BELAPUR [A. K. SIKRI, J.]

     value in requirement of Rule 6(b)(1) of the Valuation         A
     Rules. However, there is no liberty to the authorities
     under this Rule to charge duties on the highest
     value as supplied to individual buyers, but the law
     required that necessary adjustment in prices shall
     be made taking into the facts for adjustment for              B
     price in under relevant existing factors. In the
     present case, the requirement for adjustment would
     be difficult as these are two different class of
     buyers, and therefore two different consideration shall
     prevail in establishment of the prices. Therefore, a          C
     better and more acceptable method would be to
     resort to the costing method under Rule 6(b)(ii) of the
     Central Excise Rules.                       ,
     In the present case, the appellants have also earlier         D
     informed to the Department the costing in respect of
     the subject disputed items in their letter dated
     11.03.1994, supported by certificate from Chartered
     Accountant. This rejects around 10% margin of profit,
     from other costing details. I find that the details claimed   E
     to be reported to the Central Excise authorities has not
     been in specific term acknowledged in the impugned
     order, which reflects only the rejection of the appellants
     claim for pricing on costing under Section 4(1)(b) of the
     Act. Therefore, is the same is filed with the authorities,    F
     along with the costing certificate by the Chartered
     Accountant, the same should not be accepted as the
     basis for regulation of the assessable value for the
     disputed goods supplied under turnkey projects."
                                                                   G
    9. The Customs, Excise and Service Tax Appellate
Tribunal (hereinafter referred to as 'CESTAT') while setting
aside the aforesaid order held that as the case is covered
by Section 4(1)(b) of the Excise Act, 1944, it is the Valuation
Rules 1975 which would be applicable. However, according           H
406       SUPREME COURT REPORTS                [2015] 4 S.C.R.


A to the CESTAT, it is Rule 4 which is applicable in the
  present case. The order of the CESTAT reveals that while
  holding so, no reasons were given in a short one page order.
  The aforesaid aspect is dealt with, in one paragraph, i.e.,
  paragraph (c), which is as under: -
B
        "Applying the Rules, it is found Rule 4
        stipulates that 'value' shall be based on value fill
        goods sold with adjustments. The respondents are
        contesting that identical goods are not sold. They
C       have not produced any evidence to substantiate
        the same. The lower authority has fixed the value
        under rule 4 and no reasons are brought out,
        before us in this appeal to set aside that fixation. The
        valuation arrived at as rule 4 is upheld along
D       with consequential duty demands."

       10. The only observations which is made in the
  aforesaid paragraph is that the contention of appellant
  herein that the goods sold in the loose form are not the same
E or identical goods which are used in the turnkey projects, is
  brushed aside with the observations that the appellant-
  assessee had not been able to produce any evidence to
  substantiate this. Apart from making this remark, there is no
  other discussion in the impugned order. It appears that the
F CESTAT did not even care to read the order of the
  Commissioner where this aspect was considered in great
  detail while coming to the conclusion that Rule 4 would not
  be applicable in the instant case. This can be discerned from
  the following passage contained in the order of the
G Commissioner (Appeals):

         "Accordingly, it is claimed that the Assistant
         Commissioner has erred in seeking to apply the price
         for loose sales of items to individual buyers, and the
H
UTC FIRE AND SECURITY INDIA LTD. v. COMM.NR OF 407
   CENTRAL EXCISE, BELAPUR [A. K. SIKRI, J.]

   highest this respect the only method by each of                A
   the assessable value in respect of the limited
   dutiable items, supplied along with a large number of
   other bought-out items, can be the costing method.
   The costing in respect of each of these individual
   items have been already determined by the                      B
   appellants and informed to the Department in their
   letter dated 11.03.94. It is their claim that the same
   costing is also considered by the appellants while
   determining the total costing of the turnkey project.          C
   Shri P.R. Sahoy, Director of the appellants firm,
   stated that the normal margin of profit for turnkey
   projects is around 4 to 5%, after taxation. However, in
   several contracts, because of subsequent need to
   supply a larger number of items then usually
                                                                  0
   required in the commissioning of the project
   effectively, the appellants some time also do not
   earn any profit at all. In any case, the margin of profit
   reflected for each of the individual dutiable items on the
   basis o( costing stated to the Department in their             E
   letter dated 11.3.94, a consistent profit at the rate of
    10% has been shown. According to the representative,
   this higher margin of profit was accepted for by the
   appellants after receiving direction from the
    Department that the normal acceptation for profit             F
   on costing basis will be 10%. It is therefore their
   claim that the said price for individual dutiable
    items, worked out by the appellants and informed
   to the Department, should be the basis for
   chargebility to duty in respect of turnkey project supply,     G
   as the appellants have also worked out their costing of
   the project by taking their price and also that this is a
    differentclass of buyer. Even in case where the
    appellants have entered into· contract for erection of fire
                                                                  H
408       SUPREME COURT REPORTS                    [2015] 4 S.C.R.


A        protection system at site under a consolidated price,
         but with a stipulation that the progressive payment
         shall be received on the break-up price, it is their
         claim that the break-up price (for obtaining progressive
         payments) are not indicative of the correct price
 B       for the items but is only a loose estimation made
         for obtaining periodic payments during erection
         period. It is therefore that even if the contract stipulated
         this break up price for realization of payments, these
         shall only be for relevant for realization of progressive
c        payment from the contracting positing, and shall not be
         construed for any other purpose."

       11. What emerges from the aforesaid iscussion is that
  though in the Show Cause Notice the Assistant
D Commissioner had mentioned the applicability of Section
  4(1)(a) of the Act, even he abandoned that course of action
  while passing the order. In the final order passed by him, he
  accepted that the case was covered by Section 4(1)(b) of
  the Act and therefore, applied the Valuation Rules, 1975.
E Further, as per him, it is the Rule 4 which was applicable. On
  the other hand, as per the Commissioner (Appeals), Rule 4
  was not applicable and he invoked Rule 6 of the Valuation
  Rules, 1975.

F      12. Thus, one thing is clear. It is not a case where
  Section 4(1)(a) of the Act is applicable. That is the common
  case of the parties. As per Section 4(1)(a) of the Act, normal
  prices of the goods, viz., the prices at which such goods are
  ordinarily sold by the Assessee to a buyer, is to be
G taken into consideration, subject, of course, to the condition
  that the buye~ is not a related person and the price is the
  sole consideration for the sale. In this case, as mentioned
  above, even the Assistant Commissioner in his final order,
H accepted that the case was covered by Section 4(1)(b) of
 UTC FIRE AND SECURITY INDIA LTD. v. COMM.NR OF 409
    CENTRAL EXCISE, BELAPUR [A. K. SIKRI, J.]

the Act meaning thereby, he accepted the position that A
normal price of the goods in question was not ascertainable.
It is only in such a situation that Section 4( 1)(b) of the Act
gets attracted. This provision further mentions that in such an
eventuality, where the normal price of the goods is not
ascertainable for the reasons given in the said provision, the B
criteria to ascertain the price mentioned is the "nearest
ascertainable equivalent thereof'. This is to be determined in
such manner as may be prescribed. Manner is prescribed in
the Valuation Rules, 1975. Therefore, we have to consider as
to which Rules of the Central Excise (Valuation) Rules, 1975 C
is applicable. Since there is a dispute between the
applicability of Rule 4 and Rule 6, we will like to reproduce
these two Rules along with Rule 3 and Rule 7 as well in
order to present the complete picture.
                                                                D

     "RULE 3. The value of any excisable goods shall,
     for the purposes of clause (b) of sub-section (1) of
     Section 4 of the Act, be determined by the proper
     officer in accordance with these rules.              E

     RULE 4. The value of the excisable goods shall be
     based on the value of such goods sold by the
     assessee for delivery at any other time nearest to the
     time of the removal of goods under assessment, F
     subject, if necessary, to such adjustment on
     account of the different in the dates of delivery of
     such goods and of the excisable goods under
     assessment, as may appear reasonable to the proper
     officer.                                               G

     RULE 6. If the value of the excisable goods
     under assessment cannot be determined under rule 4
     or rule 5, and -
                                                               H
410   SUPREME COURT REPORTS                    [2015] 4 S.C.R.


A     (a) where such goods are sold by the assessee
      in retail, the value shall be based on the retail price of
      such goods reduced by such amount as is necessary
      and reasonable in the opinion of the proper officer to
      arrive at the price at which the assessee would have
 B    sold such goods in the course of wholesale trade to a
      person other than a related person:

      Provided that in determining the amount of
      reduction, due regard shall be had to the
c     nature of the excisable goods, the trade practice in
      that commodity and other relevant factors;

      (b) where the excisable goods are not sold by the
      assessee but are used or consumed by him or
D     on his behalf in the production or manufacture of
      other articles, the value shall be based - comparable
      goods (i) on the value of the produced or manufactured
      by the assessee or by any other assessee:

E     Provided that in determining the value under this
      sub-clause, the proper officer shall make such
      adjustments as appear to him reasonable, taking
      into consideration all relevant factors and, in particular,
      the difference, if any, in the material characteristics of
F     the goods to be assessed and of the comparable
      goods;

      (ii) if the value cannot be determined under sub-clause
      (i), on the cost of production or manufacture including
G     profits, if any, which the assessee would have
      normally earned on the sale of such goods;

      (c) where the assessee so arranges that the excisable
      goods are generally not sold by him in the course of
      wholesale trade except to or through a related person
H
 UTC FIRE AND SECURITY INDIA LTD. v. COMM.NR OF 411
    CENTRAL EXCISE, BELAPUR [A. K. SIKRI, J.]

     and the value cannot be determined under clause            A

     (iii) of the proviso to clause (a) of sub-section (1) of
     Section 4 of the Act, the value of the goods so sold
     shall be determined - sells the
                                                                8
     (i) in a case where the assessee goods to a related
     person who sells such goods in retail, in the manner
     specified in clause (a) of this rule;

     (ii) in a case where a related person does not sell the
     goods but uses or consumes such goods in the               C
     production or manufacture of other articles, in the
     manner specified in clause (b) of this rule;

     (iii) in a case where a related person sells the goods
     in the course of wholesale trade to buyers, other than     D
     dealers and related persons, and the class to which
     such buyers belong is known at the time ofremoval, on
     the basis of the price at which the goods are ordinarily
     sold by the related person to such class of buyers.
                                                                E

     RULE 7. If the value of excisable goods cannot be
     determined under the foregoing rules, the proper officer
     shall determine the value of such goods according to
     the best of his judgment, and for this purpose he may      F
     have regard, among other things, to any one or more
     of the methods provided for in the foregoing rules."

     13. Rule 4 would be applicable only in those cases
where value of "such goods" which are sold by the assessee G
for delivery at any other time nearest to the time of the
removal of the goods under the assessment, appears to be
reasonable to the concerned officer. Here, as already noted
above. from the detailed discussion in the order of
                                                            H
412          SUPREME COURT REPORTS                [2015] 4 S.C.R.


A Commissioner (Appeals), the goods cannot be treated as
  same or would fall within the description "such goods" as
  sold to the other buyers in loose form when they are used
  captively by the appellant in the turnkey projects. We find that
  the only mistake which is committed by the Commissioner is
B to refer to Rule 6(b) inasmuch as in the present case, the
  goods are not consumed by the appellant/ assessee itself
  but used in the turnkey projects/ contracts meant for the third
  party. Thus, it was Rule 7 which should have been referred
  to by the Commissioner (Appeals) as none of the preceding
C rules would apply. To put it otherwise, it is the case of 'best
  judgment assessment'. However, we find that, that is the
  exercise otherwise undertaken by ttie Commissioner
  (Appeals) in accepting the costing of the goods which was
  placed by the assessee I appellant before the assessing
0
  officer and it was taken into consideration by the
  Commissioner (Appeals). We have already reproduced para
  11 of the said order.
           14. The offshoot of the aforesaid discussion would be to
E     set aside the order of the CESTAT and restore the order of
      the Commissioner (Appeals) with the modification that the
      same result is arrived at as concluded by the Commissioner
      (Appeals) with reference to Rule 7 of the Valuation Rules,
F     1975, instead of Rule 6. The appeals are, accordingly,
      allowed with no orders as to costs.


      Devika Gujral                                 Appeals allowed.