Holding

The lease agreement was genuine, RSWML is the real manufacturer and may invoke the cost method under Rule 6(b)(ii), and the valuation methods must converge, rendering the Department's appeals meritless.

Summary

Rajasthan Spinning and Weaving Mills Ltd. (RSWML) set up a process house for fabric processing and later leased it to other firms. The Central Excise Department alleged that the lease was a sham intended to shift valuation from the comparable‑goods method to the cost method and demanded differential duty. The Customs, Excise & Gold (Control) Appellate Tribunal held the lease genuine and allowed RSWML to use the cost method under Rule 6(b)(ii). On appeal, the Supreme Court examined whether RSWML was the real manufacturer, the validity of the lease, and the appropriate valuation method, emphasizing that different valuation methods must converge to a common assessable value. The Court affirmed the Tribunal’s view that the lease was genuine, RSWML could invoke the cost method, and there was no merit in the Department’s appeals, dismissing them.

Issues considered

Whether RSWML is the real manufacturer and the lease arrangement is a sham.
Whether the Department can invoke best‑judgment assessment under Rule 7 of the Central Excise (Valuation) Rules, 1975.
Whether valuation should be on the comparable‑goods basis and if any undervaluation exists.
Whether value addition between unsorted (semi‑finished) and sorted goods warrants an abatement.
Whether the Tribunal's findings on the lease and valuation can be interfered with.

Legislation cited

Central Excise Act, 1944s. Section 4(1)(a)
Central Excise (Valuation) Rules, 1975s. Rule 6(b)(i), s. Rule 6(b)(ii), s. Rule 7

Subjects

central excisevaluationcost methodcomparable goods methodlease agreementshambest judgment assessmentvalue additionconvergencedifferential duty

Judgment

A

COMMISSIONER OF CENTRAL EXCISE, JAIPUR
v.
MIS. RAJASTHAN SPG. & WVG. MILLS LTD., ETC. ETC.
~ i
B
NOVEMBER 28, 2007

[S.H. KAPADIA AND B. SUDERSHAN REDDY, JJ.)

Central Excise (Valuation) Rules, 1975: c
rr.6(b)(ij, (iij and 7-Assessable value-Computation of-Textile
manufactured at weaving Unit-Processed at process house on job
~
work basis-Unsorted goods received from processing house-
/
Manufacturer then carrying out work ofsorting and thereafter goods D
cleared through Depot-Revenue claiming differential duty on the
ground that agreement oflease for processing was a sham in order to
change the basis of valuation/assessment offabric processed, from
"comparable goods basis/method" to "cost method"-Tribunal
holding the lease agreement as genuine and manufacturer right in E
invoking cost method under r. 6(b)(ii)-Held: Value of sorted goods
cleared at the Depot would be different from value ofunsorted goods
(semi-finished goods) cleared at factory gate-Thus there was "value
addition" and taking this into account, proportionate actual realization
on sale of graded fabrics would be more than what is calculated by F
Revenue-Different methods have to converge to a common
valuation-The aspect ofconvergence is significant-It is not possible
to accept wide variation in the result-Revenue may apply different

.,. methods of valuation, but it has to ultimately ascertain by applying
rule of convergence the estimated ad valorem value which would
constitute the basis of assessable value-There is no reason to interfere
G

with judgment of Tribunal.

703 H
704 SUPREME COURT REPORTS [2007] 12 S.C.R.

A Ujagar Prints & Ors. v. Union of India & Ors., (1989] 3 SCC
531, referred to.

CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 735-
744 of2002.
B \ ;
From the final Order No. 134-43/2001-A dated 4.4.2001 of the
Customs, Excise & Gold (Control) Appellate Tribunal, New Delhi in
Appeal No.E/489-498/2000-A.

wrrn
c C.A. Nos. 8671-8672/2002 and 2624/2003.

R.G. Padia, T.V. Ratnam, B.K. Prasad and Lalit Srivastava for the
Appellant.

D Lakshmi Kumaran, Alok Yadav, V. Balachandran, Rajesh Kumar
and M.P. Devnath, for the Respondents. '

The following Order of the Court was delivered

ORDER
E
1. This batch of civil appeals filed by the Department is directed
against the judgment and order dated 4th April, 2001 passed by CEGAT,
New Delhi in appeal No.E/489-498/2000-A.

2. The main issue which arose for determination before the tribunal
F
was whether Rajasthan Spinning and Weaving Mills Ltd. (RSWML) was
the real manufacturer who carried out textile processing from its process
house at Mordi and if so whether the Department was right in invoking
best judgment assessment in terms ofRule 7 of Central Excise (Valuation)
G Rules, 1975 (1975 Rules for short).

3. RSWML are the manufacturers of yarn and fabric. It had set up
a process house at Mordi in 1994-95. The process house was set up for
processing their fabric. The woven fabrics manufactured at their weaving
unit was processed on job work basis by Mordi processing house. This
H
i
/
COMMISSIONEROF CENTRAL EXCISE, JAIPUR v. M/S. 705
RAJASTHAN SPG. & WVG. MILLS LTD., ETC. ETC.
was with effect from 29th March, 1995. On 16th June, 1995 the said A
process house was let out by RSWML to Bhilwara Spinners Limited
(BSL). Later on the lease agreement between RSWML and BSL stood
terminated and the process house was leased out to Purvi Fabrics &
Textures (PFTL).
~ B
>
4. The above arrangement was doubted by the Department.
Therefore, the Department issued show cause notice dated 22nd
September, 1998 claiming differential duty from RSWML for the period
from 16th June, 1995 to February 20, 1996 principally on the ground
that the real manufacturer was RSWML and that the above arrangement c
of lease was a sham as it was arrived at to change the basis of valuation/
assessment of fabrics processed from "comparable goods basis/method"
to "cost method".
_, 5. On factual analysis the tribunal came to the conclusion that the
D
I lease agreement referred to above was genuine and, therefore, RSWML
was right in invoking the cost method under Rule 6(b)(ii) of the said 1975
Rules. According to the tribunal the present case stood covered by the
judgment ofthis Court in the case of Ujagar Prints & Ors. v. Union of
India & Ors., [1989] 3 SCC 531. E
6. At the outset we may point out that the question of valuation was
not examined by the tribunal. Even if we are to proceed on the assumption
that the tribunal had erred, we are still not inclined to interfere in this matter
__, for the reasons given hereinafter mentioned. We are, therefore, proceeding
F
on the basis that RSWML is the real manufacturer and that the lease was
a sham.

7. The question which would still arise, whether even if one is required
to proceed on the basis of"comparable goods method" is there a case
of undervaluation. Is the matter revenue neutral? In this connection, we G
.,.._. may point out that the "comparable goods method" is contemplated by
Rule 6(b)(i) whereas the "cost method" is contemplated by Rule 6(b)(ii).
In this case even if we are to proceed under Rule 6(b)(i), as contended
by the Department, we find from the facts that RSWML used to receive
H
706 SUPREME COURT REPORTS [2007] 12 S.C.R.

A unsorted fabrics from its process house, RSWML thereafter used to carry
out the work of sorting and thereafter the goods were cleared through
their Depot. Under Section 4(1)(a) of the Central Excise Act as it stood
at the relevant time, in case of valuation falling under Section 4(1), the
normal price constituted the basis of assessable value. We quote
B hereinbelow Section 4(1 )(a):

"4. Valuation of excisable goods for purposes of charging of
duty of excise.-(1) Where under this Act, the duty of excise is
chargeable.on any excisable goods with reference to value, such
c value, shall, subject to the other provisions of this section, be
deemed to be -

(a) the normal price thereof, that is to say, the price at which such
goods are ordinarily sold by the assessee to a buyer in the course
of wholesale trade for delivery at the time and place ofremoval,
D
where the buyer is not a related person and the price is the sole
consideration for the sale :"

8. In the present case we are proceeding on the basis that ex-factory
price was ascertainable. Even then, the underlined words indicate that if
E
sale price of sorted goods at the Depot of RSWML is to be taken into
account the value of such goods (sorted goods) cleared at the depot
would be different from the value of unsorted goods (semi-finished goods)
cleared at the factory gate. According to the Department ex-factory price
F was required to be taken into account. However, the Department has lost
sight of the fact that there was dissimilarity of the goods cleared at the
factory gate, being unsorted goods, on the one hand and the goods cleared
at the Sales Depot ofRSWML being sorted goods. If this difference is
kept in mind then there was what is called as "value addition". That value
G addition has not been taken into account by the Department. For that value
addition abatement was claimed by the assessee. There is no discussion
on this aspect of the case in the order passed by the Commissioner. In
that connection we quote hereinbelow a complete table submitted by
RSWML before the Commissioner which reads as under:
H
COMMISSIONER OF CENTRAL EXCISE, JAIPUR v. MIS. 707
RAJAS THAN SPG. & WVG. MILLS LTD., ETC. ETC.
"Even ifthe value is detennined on comparable goods basis, A
there would be no differential duty liability at all. This is evident
from the following:
Qty (mtrs) Value(Rs.)
Assessable value as per 52A Invoices 17004521 105,53,29,128
from process house for the period B
16.6.95 to 20.2.98
Add: excise duty paid 16,20,17,071
Total cum duty value 17004521 121,73,46,199
Add 40% towards value addition 48,69,38,480 c
between lump and graded fabric
Expected sale price of processed 17004521 170,42,84,679
fabrics - graded
Proportionate actual realization on 17004521 167,35,65,236"
j
sale of graded fabrics as per D
commercial invoices
9. If one analysis the above table it is clear that if one has to work
out the. assessable value on "comparable goods method" under Rule
6(b)(i), there has been, according to the assessee, value addition between
lump fabric and graded fabric. If that value addition is taken into account E
then· the proportionate actual realization on sale of graded fabrics
would come to Rs.167,35,65,236crores which is the value which is more
than what is calculated by the Department. In other words the assessee
claimed 40% abatement. The Commissioner has given discounts but not
abatement. The two concepts are different. The concept of abatement F
arises on account of the condition of the goods cleared at the factory gate
which is materially different from the condition of the goods cleared from
the Sales Depot.
10. This matter was adjourned by this Court on 31st October, 2007. G
Adequate time was given to the Commissioner to ascertain whether
RSWML was entitled to abatement of 40% on account of value addition.
This has not been done. Moreover, as stated above, the question of
abatement was raised before the Commissioner by the assessee. That
question was never decided. In the circumstances, we see no reason to H
708 SUPREME COURT REPORTS [2007] 12 S.C.R.

A interfere with the impugned judgment of the tribunal.
11. Before concluding, we may state that valuation is not an exact
science. Some amount of guess work exists in valuation. Therefore,
different methods are prescribed by Valuation Rules. These rules are
prescribed in order to find out the actual realization which reali:t.ation
B constitutes the basis of assessable value. At the same time one must keep
in mind that different methods prescribed have to converge to a common
valuation. For example, as stated above, Rule 6(b )(i) prescribes
"comparable goods method", Rule 6(b)(ii) prescribes "cost method" and
Rule 7 which contemplates best judgment assessment states that the
C Assessing Officer is free to apply any of the methods prescribed by Rules
1to6of1975 Rules. We would like to, therefore, emphasize the aspect
of convergence. It is not possible to accept wide variation in the result.
The Department may apply different methods of valuation, but it has to
ultimately ascertain by applying rule of convergence the estimated ad ~
D valorem value which would constitute the basis of assessable value.
12. For aforestated reasons, we see no merit in these civil appeals
filed by the Department and the same are accordingly dismissed with no
order as to costs.
E RP. Appeals dismissed.