Free Supply Of Drawings Alone No Ground To Add Their Value To Cabin's Assessable Value: CESTAT Chennai

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Chennai has held that drawings and designs supplied free of cost by customers cannot be added to the assessable value of motor cabins merely because they were supplied free of cost.

A bench of Judicial Member Ajayan T.V. and Technical Member Vasa Seshagiri Rao observed:

“A free supply does not of itself displace the sole consideration condition. It displaces that condition only if it satisfies the conditions stated in Explanation 1 and in any one of its clauses, and whether it does is precisely the enquiry which was never undertaken.”

The ruling came in an appeal by Fritzmeier Motherson Cabin Engineering Pvt. Ltd., which manufactures motor vehicle cabins and cabin parts. Its customers supplied cabin designs and drawings, along with certain inputs, free of cost.

The company added the value of the free-supplied inputs to the transaction value but did not amortise the value of the drawings. The department alleged that the drawings also had to be included under Rule 6 of the Central Excise Valuation Rules.

A demand of ₹22,49,164 was raised for October 2010 to March 2015, along with interest and an equivalent penalty under Section 11AC of the Central Excise Act.

Rule 6 deals with cases where the price is not the sole consideration for the sale. It requires certain additional consideration supplied by the buyer to be added to the transaction value. Explanation 1 includes drawings used in production and engineering or design work necessary for production.

The tribunal held that the Revenue could not assume that these requirements were met simply because the drawings were supplied free of cost. It had to establish that the drawings were supplied for use in connection with production and sale and were actually used in production or were necessary for it.

The department had not examined what the drawings contained. There was no finding on whether they were manufacturing drawings from which the cabins were produced or merely specifications setting out the customer's requirements regarding shape, dimensions, fitment, and function.

“There is no finding that they were supplied for use in connection with production, and none on whether their worth was already absorbed in the negotiated price,” the tribunal observed.

The tribunal also rejected the method used to calculate the demand.

The department had sought details from customers on the value of the drawings. Mahindra & Mahindra responded that the value of the cabin drawings and their amortisation cost were difficult to ascertain. It said the development cost of motor vehicle parts had not been identified, but suggested that the total development cost for tractors, which worked out to 0.98%, could be considered.

The department then applied the 0.98% figure to the value of cabins supplied to all customers.

The tribunal found that the figure was merely a suggestion by one customer, related to tractor development rather than cabin drawings, and was applied to the value of cabins instead of the drawings.

“A buyer's suggestion as to how its vendor's duty liability may conveniently be computed proves the money value of nothing,” the tribunal ruled.

The show-cause notice also did not identify the valuation rule used to arrive at 0.98%. The tribunal held that Rule 11, the residual valuation provision, required the value to be determined using reasonable means consistent with the valuation rules and Section 4. It was not a licence to adopt an unsupported figure.

The tribunal also rejected the remand ordered by the Commissioner (Appeals), holding that the Revenue could not use remand proceedings to gather evidence missing from the show-cause notice and formulate a fresh valuation case.

On limitation, the tribunal held that the extended five-year period was unavailable. The company had regularly filed returns and was periodically audited, while the department's own case was that the issue emerged during an audit of its records.

It found no positive act of concealment, withholding of documents, or misdeclaration.

“Mere failure to declare is not wilful suppression, and where the facts are known to both sides an omission by one to do what it might have done does not become suppression,” the tribunal observed.

The tribunal also held that Section 11AC, which rests on the same ingredients as the extended limitation provision, could not be invoked.

It set aside the orders confirming the ₹22,49,164 duty demand for October 2010 to March 2015, along with interest and equivalent penalty, and allowed the appeal with consequential reliefs in law, if any.

For Appellant: Advocate Senguttuvan

For Respondent: G. Krupa, Authorised Representative