Customs, Excise and Gold Tribunal - Delhi
Kwality Ice Cream Co. vs Commissioner Of C. Ex. on 3 April, 2002
Equivalent citations: 2002(82)ECC555, 2002ECR541(TRI.-DELHI), 2002(145)ELT584(TRI-DEL)
ORDER
K.K. Usha, J. (President)
1. These appeals at the instance of the assessee arise out of two orders of Commissioner (Appeals) Nos. 265-269/CE/CHD/01, dated 31-5-2001 and Nos. 253-255/01, dated 28-5-2001. Commissioner (Appeals) has disposed of 5 appeals arising out of Orders-in-Original Nos. 454-463/CE/AC/98, dated 14-7-98, 538/AC/98, dated 10-8-98, 629/AC/98, dated 4-9-98, 639/AC/98, dated 16-9-98 and 743/AC/98, dated 6-11-98. The appellate order dated 28-5-2001 is against three Orders-in-Original Nos. 65/CE/D/AC/Ldh/1/99, dated 10-9-99, 66/CE/D/AC/Ldh/1/99, dated 10-9-99 and 100/CE/D/AC/Ldh/1/99, dated 25-10-99.
2. The common issue arising in these appeals is whether appellant Kwality Ice Cream Co. and Brooke Bond Lipton India Ltd. (hereinafter referred to as BBLIL) are to be treated as related persons in the matter of computing assessable value of ice cream manufactured by the appellant and whether duty should be demanded from the appellant on the basis of price at which BBLIL sold the said product from its depot. The contention raised by the appellant that the transaction between them and BBLIL was on principal to principal basis and that the price is the sole consideration for the sale of the goods was not accepted by the departmental authorities. The demand under ten show cause notices dated 28-8-95, 25-10-95, 31-1-96, 30-4-96, 2-9-96, 3-1-97, 21-4-97, 1-8-97, 20-10-97 and 6-1-98 covering the period from February, 1995 to November, 1997 was confirmed by the Assistant Commissioner by Order-in-Original dated 14-7-98. A penalty of Rs. 20 lakhs was also imposed. The demand under the show cause notices dated 17-4-98, 5-6-98, 15-7-98 and 30-9-98 for the period December, 1997 to August, 1998 was confirmed by orders dated 10-8-98, 4-9-98, 16-9-98 and 6-11-98. A penalty to the extent of Rs. 20,000/- under order dated 10-8-98 and an amount of Rs. 1,50,000/- each under the other three orders were imposed. Demand under show cause notices dated 25-11-98 and 10-5-99 for the period September, 1998 to February, 1999 were confirmed by orders dated 10-9-99. Penalty at the rate of Rs. 1,00,000/- and Rs. 75,000/- were also imposed. The demand under show cause notice dated 9-3-99 for the period November to December, 1998 was confirmed by order dated 25-10-99 and penalty to the extent of Rs. 50,000/- was imposed.
3. In the show cause notice several points were raised on the basis of the terms of the agreement to allege that the appellant and BBLIL are related persons. Some clauses of the agreement are reproduced below :
"6 (i) - Kwality Ice Cream (K-north) agrees to exclusively source and produce products for BBLIL."
(i) (a) - "The products will be manufactured and produced by K (north) in accordance with the specifications, particulars of which are set out in Appendix-2" of the Agreement which inter alia provides that reasons for change in raw material will be intimated by the party to BBLIL and approved list of suppliers of material will be intimated by BLIL and K (north) From the above it was observed that BBLIL is 'related person' as they are having interest directly or indirectly in the business of the assessee. It is also alleged that BBLIL is owner of the goods for making further sale to wholesale dealers.
4. The Assistant Commissioner while confirming the above finding placed reliance on certain other points also. Commissioner (Appeals) took the view that the terms and conditions of the agreement between the appellant and BBLIL/HLL do not leave any scope to indicate that the appellant has any independence to run their unit. Starting from the procurement/purchase of raw material to the manufacture of the final product, all the activities of the appellant are fully controlled by BBLIL/HLL. The nature and type of machinery to be put into use is as per the directions of BBLIL/HLL. The manufacturer does not have any liberty to market its goods. The price of goods is determined by BBLIL/HLL and any cost found extra is pruned/cut down by BBLIL/HLL. Even the margin of profit is determined by BBLIL/HLL. There is a mutuality of interest between the appellant and the buyer inasmuch as the buyer has given an interest free deposit of Rs. 50 lakhs to the appellant besides payment of non-competition fee of Rs. 7.50 crores. Therefore, transactions between the appellant and the buyer are not on principal to principal basis. Interest accrued on the interest free deposit with the appellant read with other terms and conditions of the agreement is clearly an extra commercial consideration. The above finding is challenged in this appeal on different grounds.
5. It is contended by the appellant that the Revenue has in the impugned order wrongly held that the price of the product was determined by BBLIL/HLL and the appellant has no say in the matter. On the other hand as per terms of the sourcing agreement dated 14-10-94 entered between the parties there are definite terms as to pricing. Clause 9 provides that with regard to BBLIL's obligation to sourcing the product from the existing factory/manufacturing facility of (K-North) as per Appendix I, the price per litre of such sourced production will be as per the formula given in Appendix 4 to the agreement. It is on the basis of this agreed formula which is part of the sourcing agreement, the price is fixed. There is also a provision for pricing after upgradation of the existing factories/manufacturing facilities or at the new factories/manufacturing location. The pricing has to be on the basis of the formula set out in Appendix 5 attached to the sourcing agreement. Therefore, according to the appellant there is no merit in the allegation that the prices of the product are determined by one sided process at the instance of BBLIL.
6. Yet another point raised in the show cause notice and found favour with the authorities below for holding against the appellant is that Kwality Ice Cream (K-north) has agreed to exclusively source and produce products of BBLIL. Appellant contends that if one goes through the conditions of sourcing agreement it can be seen that while the appellant has agreed to exclusively source and produce the product of BBLIL there is an undertaking on the part of BBLIL also entrusting the appellant to source their requirement of dairy product excluding the quantity produced in its existing Nasik Plant for non-dairy fat products only. Therefore the exclusive nature of the transaction is binding on both sides.
7. Appellant further submits that there is no merit in the allegation that it will be compelled to shut down its unit and move to another location if so ordered by BBLIL/HLL. On the other hand, Clause 6(ii) would show that under certain circumstances it is open to BBLIL to call upon the appellant to discontinue or close down their factories or manufacturing facilities. However, if the appellant is not ready and willing to accept the option of closure of the existing factory or relocation the appellant shall intimate BBLIL its decision and BBLIL will then be at liberty to entrust such sourcing to any other party of its choice or undertake to set up its own facilities. Under such circumstances BBLIL will be discharged of its obligation to the appellant in respect of exclusive sourcing and minimum guarantee volumes.
8. Appellant further points out that there is no merit in the allegation made on the basis of Clause 6(iii) which refers to investment for upgradation, modification in existing factory by the appellant as per requirement of BBLIL since on such upgradation, as per agreed formula, the pricing also will be advantageous to the appellant.
9. We find merit in the contention raised by the appellant regarding allegations made on the method of pricing and regarding sub-clauses of Clause 6 of the sourcing agreement. The provisions contained under Clause 9 read with Appendices 4 and 5 would clearly show that the price is not being fixed by one sided decision taken by BBLIL. Price is being fixed on the basis of the formula agreed between the parties. Sub-clause (iii) of Clause 6 provides that pending commencement of production by JVC, appellant shall make necessary investments for upgradation, modification or alteration in the existing factory/manufacturing facility as per requirement of BBLIL subject to necessary statutory approval and pending such investments appellant shall not be responsible for any deficiency that such investment is intended to rectify. On the appellant making such investment for upgradation or modification the pricing agreed upon is on a formula which took into consideration the investment made by the appellant for upgradation, modification etc. Therefore in terms of Clause 6(iii) the pricing would not lead to the conclusion that the transaction was not one between principal to principal. So also the appellant is fully justified in contending that the exclusive nature of sourcing is applicable to both the appellant as well as BBLIL and there is no undue advantage provided in favour of BBLIL as per this clause. So also we cannot find any merit in the contention of the Revenue that the appellant is totally under the control of BBLIL/HLL as it has to shut down its unit or even move away to some other location against its will. Sub-clause (ii) of Clause 6 reads as under :
"(ii) K(north) undertaking at their own cost (including any asset write off and employee separation cost) save and except and to the extent provided for in 6(i)(c) above to carry out closure of the existing factories/manufacturing facilities as per list being Appendix I hereto, upon BBLIL, calling upon K(North) to discontinue to close down such factories or manufacturing facilities on the premises that these manufacturing facilities are not required as per logistic and other commercial considerations under the sourcing plan and further undertaking to make the required investments in the JVC for relocation to a new factory/manufacturing facility with such capacity, specifications, etc. as BBLIL will intimate provided, however, if K(North) is not ready and willing to exercise such an option of closure of an existing factory or relocation to a new factory, K(North) shall intimate to BBLIL its decision not to exercise such option in writing BBLIL will then be at liberty to entrust such sourcing to any other party of its choice or undertake to set up its own facilities and BBLIL will be discharged of its obligations to K(North) in respect of exclusive sourcing and minimum guaranteed volumes."
A reading of the above would clearly show that an option is given to the appellant to accept the suggestion of BBLIL to discontinue or close down its manufacturing facilities as are not required due to commercial consideration under the sourcing plan and further undertaking to make the required investments in JVC for relocation to a new factory/manufacturing facility. If the appellant is not willing to exercise such an option it can intimate BBLIL about its view. There is nothing to show that BBLIL can compel the appellant to close down the factory or remove it from the location. The only effect of appellant not accepting the option is that BBLIL will be relieved of that obligation under this sourcing agreement. We find nothing wrong in the party to provide for certain conditions on which the terms of agreement can be brought to an end.
10. Now we come to Clauses 6(1)(a) and 6(viii) of the sourcing agreement on the basis of which the Revenue alleges that the appellant has to run its unit at the dictate of BBLIL/HLL. 6(i)(a) provides that the product will be manufactured by the appellant in accordance with the specifications set out in Appendix 2 of the agreement that the appellant will purchase and use edible and packaging material only from suppliers approved by BBLIL and that reasons for change in the raw material will be intimated by the appellant to BBLIL. Clause 6(viii) provides that every batch of production must pass through the laboratory test which will be processed by the representatives of BBLIL. In case of any defect/rejection the said quantity will be destroyed under the supervision of BBLIL. These conditions are only appropriate for ensuring quality of a sensitive product like Ice Cream. We do not find any reason to hold that these conditions are unreasonable restrictions on the appellant running its unit.
11. Now we come to two other important allegations on the basis of which the Commissioner (Appeals) has found that there was mutuality of interest between the parties and that the transactions, if any, was not on principal to principal basis. Clause 6(i)(c) of the sourcing agreement provides that BBLIL would make an interest free deposit of Rs. 2.75 crores to the units of K (North). As far as the appellant is concerned, its share comes to only Rs. 50 lakhs. This is intended towards due performance of the sourcing agreement pending formation of JVC. It is also provided that this amount will be liable to be forfeited on termination of sourcing from the appellant and will include compensation for any asset write-off or employee separation costs incurred or to be incurred in future by the appellant.
12. Learned Counsel for the appellant further pointed out that payment in respect of the goods supplied by the appellant is not received immediately and therefore the sale price contained an element of interest on receivable. A reference to Clause 9(a)(iv) of the Sourcing Agreement would show that the appellant had to submit monthly invoices to BBLIL and within seven days of the receipt of such invoices, BBLIL shall make payment in full and final settlement of such invoices. This would show that the amount due to the appellant as price of the ice cream manufactured for M/s. BBLIL will be tied up for more than one month before payment is received. Apart from the above, since the appellants are manufacturing goods exclusively and according to the specification of BBLIL, in packing material carrying their brand name, it is always facing the risk of the goods being rejected by BBLIL for reasons other than quality. We find that the contention raised by the appellant that the deposit is taken in commercial expediency and as trade practice required in the circumstances of the case is only to be accepted. No material is placed before us to show that the appellant has lowered the price for the product on account of the above deposit.
13. Next contention to be considered is the one relating to the allegation that the appellant has accepted an amount of Rs. 7.50 crores towards payment of non-competition fee. The appellant is fully justified in contending that the above finding is factually wrong. On going through the non-competition agreement entered into between the parties it is seen that the amount paid to the appellant is only Rs. 0.50 crores. Rs. 7.50 crores was paid to all the units of K(North) together. We are not able to agree with the view taken by the Commissioner (Appeals) that the price is affected due to payment of the above amount to the appellant as a consideration of non-competition in the market with BBLIL as per terms of the sourcing agreement.
14. In the light of the above fact, we will examine whether the finding in the impugned order that there is a mutuality of interest between the appellant and the buyer is justified. This Tribunal had occasion to consider similar terms in an agreement between the manufacturer and buyer in LVT Products Ltd. v. CCE, Belgaum -1997 (93) E.L.T. 134. In the above case dispute arose regarding assessable value of the biscuits manufactured by the appellant with the brand name 'Horlicks' and sold to M/s. HMM Ltd. in terms of an agreement entered into between the parties. The assessing authority took the view that the appellant was manufacturing biscuits on behalf of M/s. HMM Ltd. and relied on the following features of the agreement:
(a) HMM Ltd. was supplying one of the main raw materials, namely, Horlicks malted milk food to the appellant;
(b) HMM Ltd. had interest in the activities of the appellant at various stages like the place for storing raw materials, quality control, requirement in regard to the ingredients of the biscuits, control over the plant and machinery;
(c) Packing materials to be used by the appellant were to be strictly according to the specifications of HMM Ltd. and approved by them; and
(d) HMM Ltd. was entitled to depute their staff for inspection of the goods manufactured by the appellant.
The Tribunal took the view that the above circumstances do not spell out a case of manufacturing activity being carried out by the appellant on behalf of HMM Ltd. It was further held that HMM Ltd. having agreed to purchase 500 MTs of biscuits with 'Horlicks' brand name would be naturally concerned with ensuring quality control and the provisions of the agreement had only such an end in view. According to us in the present case also, the terms and conditions of the agreement can lead us only to a similar conclusion. We are also of the view that the Revenue has failed to prove in this case that the appellant and BBLIL are 'related persons'. After referring to its own earlier decisions the Supreme Court in Union of India v. Playzvorld Electronics Pvt. Ltd. -1989 (41) E.L.T. 368 reiterated its view that merely because the goods are produced with customers' brand name and entire production is sold to the customer it will not lead to a conclusion that the sale was to a related person. The above decision was followed by the Bombay High Court in Ceam Electronics Pvt. Ltd. v. Union of India -1991 (51) E.L.T. 309.
15. Learned Departmental Representative sought to place reliance on three decisions to support the finding of the Commissioner. One of the decision is Television factory, Solana v. CCE, Chandigarh - 1986 (26) E.L.T. 317. On going through the above decision we find that the view taken therein is directly against the decision of the Supreme Court referred above. The next decision is Pious Pharmaceuticals Pvt. Ltd. v. CCE, Mumbai-III - 2000 (126) E.L.T. 875. It is seen that the conclusion in the above decision was arrived at relying on the decision of the Tribunal in Pawan Biscuits Co. (Pvt.) Ltd. v. CCE -1991 (53) E.L.T. 595. It is relevant to note that the decision of this Tribunal in Pawan Biscuit Co. (Pvt.) Ltd. was reversed by the Supreme Court in Pawan Biscuits Co. (Pvt.) Ltd. v. CCE, Patna - 2000 (120) E.L.T. 24 (S.C.). Pious Pharmaceuticals Pvt. Ltd. was decided much earlier on 18-2-1997, whereas the decision of the Supreme Court in Pawan Biscuits came on 20-7-2000. Therefore, Revenue cannot place any reliance on Pious Pharmaceuticals in the present case.
16. The third decision relied on by the Revenue is Narendra Industries v. CCE, Rajkot - 2001 (132) E.L.T. 141. In this case the facts are entirely different. 100% of the production of the appellants was supplied to M/s. L.M.S. Marketing Pvt. Ltd. The Directors of both the appellant as well as the buyer-were common, office of both the companies was situated at the same place and the appellant was under the management of the buyer company which looked after the sales promotion activities in respect of the product manufactured by the appellant and also incurred expenses towards advertisement, sales promotion, etc. Interest free advance was being given to the appellant against supply of goods and there was substantial financial transaction between the two. It was in this background the Tribunal came to the conclusion that they are related persons. In the present case the terms of the agreement would not justify a similar conclusion. Therefore, this decision is also of no help to the Revenue.
17. In the light of above discussion we hold that the appellant and M/s. BBLIL are not related persons, the transaction between them is one of principal to principal, price was the sole consideration for the sale of the goods and assessable value cannot be computed on the basis of the price at which BBLIL sold the product from its depot.
18. In the result the impugned orders are set aside and the appeals stand allowed.