Judgment:
1. E/A. No. 2781 and 2784/87-A have been filed by the Collector of Central Excise, Patna against two manufacturers namely M/s. Sumitan Electro Powers (P) Ltd. (SEP) and M/s. Suman Industrial Corporation (SIC) respectively. SIC has filed appeal E/A. No. 2796/87-A. The Assistant Collector had passed two separate orders against the two manufacturers. Their appeals were consolidated by the Collector (Appeals) who set aside the orders passed by the Assistant Collector and remanded the case to him by a common order. The common order is challenged by the SIC as also by the department against both the manufacturers.
2. The manufacturers in these cases used aluminium rod as raw material for the manufacture of an intermediate product, bare aluminium strip, which in turn is used in the manufacture of final product, namely, insulated strip, which is cleared on payment of duty. The impugned orders related to approval of four price lists filed by the SIC and three price lists filed by the SEP in regard to the intermediate product. The value was shown under 6(b) (ii) of the Central Excise (Valuation) Rules, 1975 as equal to the cost of production alleging that since there has been consistent losses, profit element was not to be added. The Asstt. Collector who was not prepared to approve the prices so declared, issued show cause notices and after hearing the parties, passed separate orders working out the cost of production and proposing to add 10% of the cost of production as profit. The Collector (Appeals) set aside these orders and remanded the case for fresh enquiry and decision. In doing so he observed that if a unit was consistently incurring losses, profit element could not be added in arriving at the price during the relevant period and if there losses in the earlier years but profit was earned in the year concerned, profit element had to be added. He also clarified that the profit element, if any, to be added would be the gross profit before "Tax. SIC is aggrieved by the direction regarding the addition of gross profit before tax while the department is aggrieved with the direction that in the case of any unit consistently incurring losses profit element was not to be added.
3. SEP is absent in spite of notice of hearing. We have heard the departmental representative and the counsel for SIC and perused the papers. There is no dispute that valuation is required to be made in these cases under Rule 6(b)(ii) of the Rules. The formula prescribed in the Rule is that value shall be based on the cost of production or manufacture and profits, if any, which the assessee would have normally obtained on the sale of such goods. Sub-clause (ii) is to be invoked if the value cannot be determined under sub-clause (i). The value under sub-clause (ii) would be determined on the basis of value of comparable goods produced or manufactured by the assessee or by any other assessee, making reasonable adjustment taking into consideration all relevant factors. Sub-clause (ii) would be invoked only where value of comparable goods produced by the manufacturer or assessee or any other assessee cannot be ascertained. It is, therefore, clear that sub-clause (ii) would apply to a case where product comparable to the intermediate product is not sent to the market. The requirement of sub-clause (ii) is to determine the profit, if any, which the assessee would have normally earned on the sale of such goods if the assessee were to sell such goods. The normal profit which may be earned on notional sales will have to be ascertained. The clause does not contemplate inclusion of profit irrespective of the facts and circumstances of each case and irrespective of the element relating profit and loss in the establishment where such intermediate product is produced. The words "if any" succeeding the words "profits" and the use of the words "normally earned" would make it clear that profit is to be added only in those cases where profit would be normally expected to be earned.
That would depend upon the nature of the product and the extent of market, if any. If the particular unit was consistently incurring loss over a period, the question of including profit would not arise but where consistently loss-incurring unit has broken even and started earning profit, the question of including profit would certainly arise.
In this view we are unable to find any error in the direction of the Collector (Appeals) that profit is not to be added if the unit is consistently incurring losses but where in earlier years losses had been incurred but in the relevant year profit has been earned, profit is to be included.
4. The next controversy relates to the direction that profit, if any, is to be added is the gross profit before tax. Learned counsel appearing for SIC tried to explain the scope of expression "gross profit" and "net profit" and he expressed his apprehension that in the garb of adding gross profit the element of over- 4. head expenses including salaries would be added twice. He explained his apprehension by illustrating a case where the overhead element has been added in arriving at the cost of manufacture and to such cost of manufacture is added the gross profit and since the gross profit is arrived at before deducting the overhead element, the assessable value would include the overhead element twice over. We agree that under no circumstances overhead element or any other element should be added twice in the assessable value. We find from the Annexure to the show cause notice that the overhead element has already been included in the cost of production. In such a. case gross profit arrived at before deducting overhead cost element cannot be added to the cost of production. In such a case the gross profit less overhead element alone can be added. If on the other hand, the cost of production arrived at does not include the overhead element, gross profit element before deducting the overhead element can be added to the cost of production.
This, in our opinion, is the correct legal position. The direction given in regard to addition of gross profit is modified, as indicated above.
5. The last submission by the learned counsel is with reference to the direction given by the Collector (Appeals) that gross profit to be added to the cost of production should be before tax. We are of the opinion that the matter has not been properly adverted to or considered by the Collector (Appeal) and the question requires a serious consideration at the hands of the assessing authority. We therefore, direct that in case the gross profit element is ultimately found required to be added, the question whether profit to be added is before tax or after tax shall be decided by the adjudicating authority with due opportunity to the assessee to put forward their case.
6. In the result, the impugned order passed by the Collector (Appeals) is modified, as indicated above. Appeals E/2781 & 2784/87-A are dismissed. Appeal No. E/2796/87-A is allowed in part, as indicated above.