Case: Commissioner Of Central Excise,Belgaum Vs. M/S. Mysore Kirloskar Ltd.,Karnataka

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 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, videNo. 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 BangaloreTribunal for short). The Tribunal allowed the appeal by Judgment dated January 25, 2002 giving rise to the instant appeal.

Court's reasoning:
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, 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 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.