1. The facts of the case are that M/s. Real Image Media Technologies Pvt. Ltd., the appellants herein, are manufacturers of Servers falling under the category of Automatic Data Processing (ADP) machine These servers are commercially known as QUBE XP D servers and QUBE XP E servers. It appeared that appellant had sold some servers directly to the cinema theatres/halls under normal transaction value and in respect of remaining servers the appellant had raised stock transfer invoices. In some cases, in the name of their Head office from where they were dispatched and in other cases invoices though addressed to Head office but servers were shipped to the customers directly. To determine the assessable value of stock-transferred servers, appellant adopted cost construction method based on CAS-4 value as envisaged under Rule 8 of the Central Excise Valuation Rules, 2000 for the purpose of payment of Central Excise duty. Department took the view that the procedure followed by the appellant was not in order for the following reasons:
(1) Discharge of excise duty based on 110% of cost of production under Rule 8 of the Valuation Rules arises only when excisable goods are not sold by the assessee but are used for consumption by him or on his behalf in the production or manufacture of other articles.
(2) The stock transferred servers were neither consumed captively nor used on their behalf in the production or manufacture of other articles.
(3) The servers cleared on stock transfer basis form part of a package let on lease by the appellant to customers based on lease agreement, for deferred payment/consideration.
(4) Hence the removals of the said servers is nothing but sale.
Accordingly, show cause notice dt. 12.
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10.2009 was issued to appellant, inter alia proposing demand of alleged short paid Central Excise duty of Rs. 18,57,892/- for the period 3/2008 to 3/2009 with interest thereon and imposition of penalty. In adjudication, the Commissioner vide impugned order dt. 20.09.2010 confirmed the proposals for duty demand with interest and also imposed equal penalty under Section 11AC of the Act. Hence this appeal.
2. On 29.11.2017 when the matter came up for hearing, on behalf of the appellant, Ld. Advocate Shri C. Saravanan made various submissions which can be broadly summarised as under:-
(i) Any removal from the factory directly to the concerned client/customer itself constitutes a separate class of sale within the meaning of Section 2(h) of the Central Excise Act, 1944 and is to be independently valued and assessed. Rule 4 does not mean that the transaction value as defined in Section 4(3)(d) of the Central Excise Act, 1944 should be the basis of valuation.
(ii) Rule 4 will not apply for removal of servers from the factory for transfer of right to use. As they were not sale within the meaning of Section 2(h) of the Central Excise Act, 1944, value under Rule 8 read with Rule 11 will apply as such removal are akin to captive consumption, there being no price and ownership being retained by the Appellant. Expression value of such goods in Rule 4 does not mean only the transaction value albeit the price of the goods adopted for our regular sale merely because it may a fetch higher duty to the department.
(iii) Rule 4 of the valuation Rules will apply only on the same specie or category of sale. Therefore, value adopted for regular sale cannot be the basis of value for removal of goods on transfer of right to use.
(iv) If transfer of right to use of servers amounts to 'sale' within the meaning of Section 2(h) of the Central Excise Act, 1944, then the valuation ought to have been resolved under Rule 7 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 and not under Rule 4 of the aforesaid Rules.
(v) Stock transfer of the goods from the factory to the depot cannot come within the definition of sale in Section 2(h) of the Central Excise Act, 1944 as it contemplates:
1. Transfer of possession;
2. Between two persons;
3. in the ordinary course of trade or business;
4. for cash or deferred payment or for other valuation consideration
(vi) Rule 4 will apply only when sale for delivery takes place after removal from the factory and where there is otherwise no break in chain of event. Rule 8 was adopted applying Rule 11 as it was akin to the value of stock transferred servers removed to cinema halls and auditoriums under transfer of right to use basis.
(vii) Sometimes there is a direct removal from the factory to the client's premises for "transfer of right to use" or "deemed sale". Under 'deemed sale" clients like the theatre owners and corporate bodies, procure servers for use in their theatres/office, auditorium for screening movies/documentaries in digital format and enter into agreement. However, the assessee continues to be an owner of the server whereas there is a transfer of possession for right to use.
(viii) Appellant entertained a bona fide belief that the clearances were akin to captive consumption. There is no question of mis-statement or suppression of facts. There was no intention of evading payment of duty appellants were under bona fide belief that servers stock-transferred for right to use are to be valued under Rule 8 of the Valuation Rules as there is no sale for price at the time of removal.
3. On the other hand, on behalf of the department, Ld. A.R. Shri K. Veerabhadra Reddy supports the impugned order. He further submitted that goods are stock-transferred by appellant to their Head office but are not further consumed in the manufacture of any further production nor do they undergo any process. Thus there is no captive consumption of the impugned goods. It is emerged that there is transfer of the possession of the goods by the appellant to their customers for deferred payment and other valuation considerations like non-refundable deposit, advertisement charges from sponsors of advisement etc. Hence goods dispatched in the guise of stock transfer to customers are to be construed as sale only. Hence the demand of differential duty liability is fully justified.
4. Heard both sides and have gone through facts.
5. The impugned goods are in the nature of servers used by cinema theatres/halls where digital cinema equipments are installed, for playback of feature film/commercial advertisements in digital format. What is not disputed is that around 10% of such servers were sold directly to cinema theatres under transaction values on which there is no controversy. Dispute has emerged only in respect of servers which have been shown as stock transfer to the Head office of the appellants from where they were dispatched to the customers and in some cases, servers were shown as stock-transferred to Head office but sent directly to the customers.
6. The core issue that comes up for decision is whether the impugned clearances are to be treated as stock-transfer meriting valuation under Rule 8 of the Valuation Rules or otherwise, whether they require to be construed as sale as per Rule 4 of the Valuation Rules.
7. Ld. Advocate has been at pains to emphasize that there is no sale for price at the time of removal and that the servers are only stock transferred for right to use. Appellant also argued that there is no justification for department's contention to adopt the transaction value nearest to the time of removal of the servers under assessment. It has also been contended that any removal from the factory directly to the concerned client/customers itself constitutes a separate class of sale within the meaning of Section 2(h) of the Central Excise Act, 1944.
8.1 For better understanding the issue at hand, it would be useful to reproduce the relevant definitions and legal provisions concerning valuation under the Central Excise Act. For the purpose of Central Excise, sale is defined in Rule 2(h) of the Act as follows:
(h) "sale" and "purchase", with their grammatical variations and cognate expressions, mean any transfer of the possession of goods by one person to another in the ordinary course of trade or business for cash or deferred payment or other valuable consideration;
The Rules 4, 8 and 11 of the Central Excise Valuation Rules, 2000 read as follows:
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, subject, if necessary, to such adjustment on account of the difference in the dates of delivery of such goods and of the excisable goods under assessment, as may appear reasonable.
Rule 8. Where the excisable goods are not sold by the assessee but are used for consumption by him or on his behalf in the production or manufacture of other articles, the value shall be one hundred and ten percent of the cost of production or manufacture of such goods.
Rule 11. If the value of any excisable goods cannot be determined under the foregoing rules, the value shall be determined using reasonable means consistent with the principles and general provisions of these rules and sub-section (1) of section 4 of the Act.
8.2 The details of the lease agreement entered into by the appellant with their customers, have been summarized in para 11.5 of the impugned order which is also worthy of reproduction:
"11.5 The assessee entered into an lease Agreement with the Customer for a maximum period of 8 years after obtaining advances (both refundable and non refundable) from them. The salient features of the lease Agreement are as follow:
(i) the theatre owner shall pay a Non refundable right to use fee of Rs. 1 lakh per theatre and provide/vest the assessee with the exclusive right of screening of film shorts and slides including advertisements at the theatre for a total maximum period of 8 years (in come case the lease period may vary);
(ii) the assessee shall have exclusive rights for screening advertisements including slides, film shorts and advertising commercials in the theatre and this right conferred on the assessee supersedes any other rights which the theatre owner may have granted to any third party; and also take steps to forthwith terminate the contract for on-screen advertising rights the theatre owner entered with any third party prior to signing of this LOU;
(iii) the theatre owner permits the assessee to exclusively screen the advertisements/commercials through the OCP/Projector, for 20 minutes per show per theatre, before start of each show and from the announcement of the interval of each show;
(iv) the theatre owner agreed to grant the assessee the right to utilize not more than 100 sq.ft of space in the theatre or other mutually agreed space within the theatre premises to facilitate off screen promotional activity to be carried out by the assessee or their agents;
(v) after completion of the period of the agreement, the theatre owner shall have the option to purchase the projector and Anarmorphic Lens by paying an amount of Rs. 1000/- plus taxes prevailing, towards consideration for transfer/sale; continuing the advertisement rights vests with the assessee; and upon complying the above two conditions, the QCP (Servers) and V-Sat will continue with the theatre but continue to be the property of the assessee unless otherwise agreed to between the parties;
(vi) the theatre owner shall ensure play back of QUBE logo/trade mark with the words in English This Theatre is equipped with, and the feature film is being screened through Qube Digital Cinema Player and a translation thereof in the regional language, at the beginning of the show.
Beside the above conditions, the theatre owner also pays to the assessee, charges for screening per show, called Pay Per Show.
8.3 As also noted by the adjudicating authority in the same para 11.5 of the impugned order appellant had been collecting (a) Refundable/non-refundable deposit of Rs. One lakh; (b) Advertisement charges from the sponsors of advertisement and (c) "Pay per show' amount apart from free Advertisement space for QUBE products at the theatre premises.
8.4 From a combined reading of the above discussions, legal provisions and facts on record, we are of the considered opinion that there is definitely transfer of possession of the impugned goods from the appellant to their customers partly by cash (refundable and non-refundable deposits) and partly by other valuable considerations (right to collect advertisement charges from sponsors of advertisements and receipt of pay per show amount for the QUBE products at the theatre premises. The contours of the transaction between the appellant and their customers in respect of the impugned servers therefore satisfy the definition for sale under Section 2(h) of the Central Excise Act, 1944. This being so, the valuation of such sale of the sold goods for the purposes of levy of Central Excise duty will have to be within the parameters of Section 4 of the Act read with Central Excise Valuation Rules, 2000.
8.5 The adjudicating authority has concluded that the value of goods in question is governed by Rule 4 of the Valuation Rules namely "the value of such goods sold by the assessee for delivery at any other time nearest to the time of removal of goods under assessment subject to adjustments as may appear reasonable". Hence adjudicating authority has held that in respect of the impugned stock-transferred servers, appellants should have determined the assessable value on the basis of Rule 4 ibid and adopted the value available at the nearest point of time of removals of servers on stock transfer basis. We are unable to find any infirmity with such a conclusion. It is not the case the impugned servers were not sold by appellant but were used for consumption by them or on their behalf in the production or manufacture of other articles. In such a scenario, adoption of assessable value based on 110% of cost of production would certainly have been in order. However, it is nobody's case that the servers stock-transferred to the Head office underwent further production or manufacture. On the other hand, notwithstanding the clearances being shown as stock-transfer to Head office, this was only a routing on paper only, however in actuality the impugned servers were delivered in the same condition as they were removed, to the theatre owners. Possibly, appellant had followed such a tedious billing route for accounting reasons. Nonetheless, for discharge of Central Excise duty, the removals will in no way be recognizable as stock transfer and will necessarily take on the colour of sale attracting the manner of valuation as laid down in Rule 4 of the Valuation Rules.
9. During the arguments Ld. Advocate has made a contention that since the goods are not sold, Section 4(1)(a) will not apply; that except Rule 8 all other Rules cover contingencies where sale is involved in some form or the other; therefore residuary Rule 11 will have to be adopted along with spirit of Rule 8; that in other words, assessable value should be worked out accordingly. Towards this end, had drawn our attention to clarification at para 13 issued by the CBEC vide circular dt. 1.7.2002, on Points of Doubt under the New Valuation Provisions, in respect of valuation of samples. However, the said clarification concerns a situation where no sale was involved, but in the instant case, there is very much a sale for the purposes of the Central Excise Act.
10. In the circumstances, we do not find any merit in the arguments and contentions of the appellant against the decision of the adjudicating authority concerning method of valuation of impugned goods, demanding differential duty liability of Rs. 1,18,57,892/- with interest thereon and also appropriating the amount of Rs. 1,18,57,892/- and Rs. 10,16,278/- paid by the appellant during investigation towards duty and interest liability respectively, hence we do not interfere with that part of the impugned order.
11. However, coming to the matter of penalty, it is not the case that appellants were had removed the goods clandestinely without discharge of any amount of Central Excise duty whatsoever. The Annexure-II to the SCN concedes that appellant had discharged duty liability on stock transfer price, however, as the valuation was required to be worked out on transaction value basis as per Rule 4 of the Valuation Rules, the impugned differential duty liability has emerged. Even before the issue of SCN, in response to certain queries raised by Range Superintendent, appellant in their letter dt. 23.01.2009 had justified the practice followed by them and have even in the course of adjudication they had maintained that there is no suppression of facts as there is no transfer of ownership of servers and that value thereof is capitalized in the books as proof of ownership of these assets. It is also noticed that even before issue of SCN they had paid up the differential duty liability, albeit under protest. From all accounts, the issue boils down to mis-interpretation of the valuation provisions by the appellant. Taking all these factors into account, we hold that ingredients for imposition of equal penalty under Section 11AC are not attracted. Hence the imposition of equal penalty under that Section by the adjudicating authority cannot be sustained and is therefore set aside.
Appeal is partly allowed in the above terms.
(Pronounced in court on 12.01.2018