Per C.N.B. Nair :

The appellants are manufacturers of carpets. In addition to selling carpets at ex-factory prices to dealers, the appellants also sell carpets at contract prices. Such contract prices are in respect of bulk consumers like East India Hotels Ltd., Godrej, ITDC and others. The price list in respect of such contracts is approved in part-II proforma and the appellants pay duty on such contract prices.

2. The Revenue authorities observed that the contract prices were much lower than the ex-factory dealer price. It was also observed that the appellant had agreements with their bulk consumers for laying and fixing the carpets. They, therefore, undertook investigation into the correctness of the assessable value adopted for the carpets. The Revenue authorities also noticed that the appellants were carrying out conversion of duty paid carpets (outside the factory premises) into rugs for use in Maruti cars. Further, they were also cutting and stitching duty paid, running length carpets in to smaller carpets in their depots. Show cause notice was issued demanding duty on an enhanced value as well as on the processes carried out after clearances of the goods from the factory. The adjudication proceedings so started culminated in the confirmation of the demands under the impugned order. It has been held that the contract prices for carpets were too low and that these prices were deliberately lowered so as to evade duty, and laying and fixing charges were deliberately kept higher to compensate for the lower prices charged on the carpets. The order also demands duty on the rugs for use in car as well as on the shaping charges.

3. The appellants' submission is that contract prices are acceptable for valuation under Central Excise law and that laying and fixing charges have no relevance to the price of the carpets and therefore they cannot be taken into account for the purpose of fixing the assessable value of carpets. They have also submitted that the cost of laying and fixing varied depending upon the various items of the work involved and no portion of the price of the carpet has been added to the laying and fixing charges. They also point out that during adjudication proceedings, with the help of detailed cost accountants, it had been shown that the entire amount remain attributable to laying and fixing activity. The accounts of the appellants were audited by the Cost Accounting authorities of the Central Excise Collectorate and they had come to the conclusion that of the Rs. 2.6 Crs. collected as laying and fixing charges, Rs. 1.66 crore had actually been spent on such activities. Accordingly, the demand of duty is on the remaining amount. Thus, there is no dispute that the appellants had carried out laying and fixing activities and that they have incurred bulk of the amount realised on those activities themselves. The difference between the amount claimed by the appellant and admitted by the Cost Accountant authorities of the Central Excise department is also on account of difference in the methods of computations of costs and not on account of part of the amount not being relatable to laying and fixing or any other reason. The excise authorities have disallowed wastage of material and have not made any provision for profit. With regard to demand of duty on conversion of carpets into rugs for cars, it has been submitted that converting running length carpets into smaller carpets does not involve manufacture. On shaping charges, the appellants have contended that this activity also does not amount to manufacturing, and therefore, there is no justification to demand any duty. They also maintain that as these activities were carried out outside the factory, they could also not be treated as incidental to manufacture and therefore liable to be included in the assessable value. They have also pointed out that the demand of duty on conversion of carpets to rugs for automobile is contrary to the clarification of the departme