CCE vs Mysore Kirloskar Ltd.

Commissioner of Central Excise, Belgaum ...... Appellant

Versus

Mysore Kirloskar Ltd., Karnataka ... Respondent

JUDGMENT

J.M. PANCHAL, J.

The instant appeal is directed against decision

dated January 25, 2002 rendered by the Customs Excise and

Gold (Control) Appellate Tribunal, South Zonal Bench at

Banglore, in Appeal No. E/744/95 whereby the order dated

September 8, 1995 passed by the Commissioner of Central

Excise, Belgaum, confirming the demand of duty of

Rs.7,41,750/- and imposing penalty of Rs.75, 000/- on the

additional amount of consideration of Rs.43,00,000/- 2 received by the respondent for the preparation of designs,

drawings, patterns, jigs, etc. is set aside.

2. The respondent, a company incorporated under the

provisions of the Companies Act, 1956 was manufacturing

machine tools, their accessories, high grade castings,

pollution control equipments and other incidental and

ancillary equipments. It owned and operated a main machine

manufacturing factory at Harihar. It used to accept orders to

manufacture engineering machines as per the drawings,

patterns, jigs, fixtures and tools etc. developed by it. The

respondent entered into such an agreement dated May 10,

1991 with ITC for manufacturing the machines. The

agreement stipulated that the machines would be

manufactured as per the specifications, prototype drawings

and patterns prepared by it and approved by ITC. As per the

agreement, the price of the machines was to be stipulated by

ITC in orders to be placed upon the respondent company. For

the agreement in question, the respondent was paid a sum of 3 Rs.43 lakhs. The said sum was accounted as other income in

the accounts and balance sheet of the respondent.

3. The Commissioner of Central Excise, Belgaum,

issued a notice calling upon the respondent to show cause as

to why duty of Rs.7,41,750/- on the additional amount of

consideration of Rs.43 lakhs received by the respondent for

the supply of machinery items be not levied under Rule 6(2) of

the Central Excise Rules, 1944. The respondent gave reply to

the said notice. However, the Commissioner of Central Excise,

Belgaum, vide Order-In-Original No. 23/95 dated September

8, 1995 confirmed the entire duty demanded and also

imposed penalty of Rs.75,000/- upon the respondent under

Rule 173Q of the Central Excise Rules.

4. Feeling aggrieved, the respondent filed an Appeal

No. E/744/95 before the Customs Excise & Gold (Control)

Appellate Tribunal, South Zonal Bench at Bangalore (`'the

Tribunal'' for short). The Tribunal allowed the appeal by

Judgment dated January 25, 2002 giving rise to the instant

appeal.

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5. This Court has heard the learned counsel for the

parties at length and in great detail. This Court has also

considered the documents forming part of the instant appeal.

6. The question which arises for consideration in the

instant appeal is whether the amount of Rs.43 lakhs received

by the respondent towards charges for designs, drawings,

tooling, jigs and fixtures etc. as per t he agreement dated May

10, 1991 could have been loaded on the value of the machine

made and delivered subsequently as per t he separate written

orders.

7. In order to resolve this controversy, it would be

relevant to notice certain clauses of agreement dated May 10,

1991:-

"a. The company shall place upon MKL orders from time to time for manufacturing the machines and all such orders shall be in writing.

b. MKL shall manufacture the machines strictly in accordance with the specifications, the prototype and the drawings and patterns prepared by it and approved by the company in writing in terms of this agreement as detailed in Schedule B hereto.

5 c. In order to ensure that MKL manufactures the machines strictly in accordance with the specifications, the prototype and drawings and partners approved by the company in writing, the Company's representatives will have the liberty of examining the machines manufactured by MKL during the process of manufacturing of such machines and also after the manufacture of the machines is completed, before or after the delivery of machines by MKL to the company."

Part IV at Page 6 is for the price of the machines and states:

"The price of the machines will be stipulated by the company in the orders placed upon MKL. All such prices shall be arrived at after prior negotiation between the parties hereto.''

Part VIII at Page 7 is for excise duty and states:-

"The company shall reimburse the MKL the amount or amounts of excise duty paid by MKL on the manufacture of the Machines in terms of this agreement.''

8. A bare reading of the terms of the agreement

extracted above makes it very clear that the agreement was

not merely for the preparation of design and drawings, but a

total contract for design, drawing, manufacture of prototype, 6 supply of the machines and payment of excise duty, etc. The

contract could not have been read in isolation in parts, that is

to say that the respondent had separately agreed to supply

designs drawings etc. and also separately agreed to supply

machinery.

9. It is true that the charges for drawings, designs etc.

have to be added to the assessable value of the machines

manufactured, based on use of such drawings, designs, jigs,

fixtures, tooling etc. However, before adding the value of the

drawings etc, it has to be established that the consideration

had a nexus with the negotiated price of the assessable goods

under clearance, i.e. machines in the instant case. Without

establishing any such nexus, the Commissioner of the Central

Excise could not have demanded the duty on the additional

amount of consideration of Rs.43 lakhs. The agreements, i.e.

the written orders, for the supply of four machines as per the

gate passes in this case were not considered/relied upon in

the original proceedings. Therefore, it could not be

determined whether the prices of drawings, tooling etc. were 7 part and parcel of the agreement for supply of machine. It is

well to remember that each clearance is an assessment based

on a separate contract and a contract price would normally be

the value for assessable goods. The order passed by the

Commissioner does not indicate that no machines were

subsequently manufactured by the respondent after using

drawings, designs, jigs, fixtures, tooling etc. supplied by the

ITC. Therefore, loading of the entire amount of Rs. 43 lakhs

without such a finding and recovery of duty thereon was not

permissible at all. The order of the Commissioner does not

indicate adequate reasons to invoke proviso to Section 11A(1).

On the basis of vague allegations made in the show cause

notice neither the proviso to Section 11A(1) could have been

invoked nor penalty could have been imposed upon the

respondent under Rule 173Q of the Central Excise Rules. On

the facts and in the circumstances of the case, this Court is of

the opinion that the Tribunal did not commit any error in

setting aside the order passed by the Commissioner and the

instant appeal which lacks merits, deserves dismissal. 8

10. For the foregoing reasons, the appeal fails and is

dismissed. There shall be no orders as to costs.

.............................J. (ASHOK BHAN)

.............................J. (J.M. PANCHAL)

New Delhi May 09, 2008