Custom, Excise & Service Tax Tribunal
Mallya Fine Chem Private Ltd vs Commissioner Of Central Tax, Bangalore ... on 10 September, 2024
E/26321/2013; E/26315, 26317,28432,28433/2013;
E/20707,20708,20766,20767/2014; E/20473/2015;
E/20457,20458,20463, 20464/2016; E/21783 to 21790/2017;
E/20255,20315/2019; E/20673/2022; E/20730/2022
E/26322,28423, 28431/2013; E/20474/2015
CUSTOMS, EXCISE & SERVICE TAX APPELLATE
TRIBUNAL
BANGALORE
REGIONAL BENCH - COURT NO. 1
Central Excise Appeal No. 26321 of 2013
(Arising out of Order-in-Original No. 02/2013 dated 11.01.2013
passed by the Commissioner of Central Excise, Bangalore.)
M/s. Mallya Fine-Chem Pvt. Ltd.
No.C-331-331, Appellant(s)
7th Main, 2nd Stage,
Peenya Industrial Estate,
Bangalore - 560 058.
VERSUS
Commissioner of Central
Excise,
Bangalore II Commissionerate,
C.R.Building,
Queen's Road,
Respondent(s)
Bangalore - 560 001.
With
(1). Central Excise Appeal No. 26322 of 2013 (Shri. B.
Harish Mallya, Director, M/s. Mallya Fine-Chem Pvt.
Ltd.)
(Arising out of Order-in-Original No. 02/2013 dated
11.01.2013 passed by the Commissioner of Central Excise,
Bangalore.)
(2). Central Excise Appeal No. 28431 of 2013 (M/s.
Mallya Fine-Chem Pvt. Ltd.)
(Arising out of Order-in-Original No. 16/2013 dated
12.09.2013 passed by the Commissioner of Central Excise,
Bangalore II Commissionerate, Bangalore.)
(3). Central Excise Appeal No. 28423 of 2013 (Shri. B.
Harish Mallya, Director, M/s. Mallya Fine-Chem Pvt.
Ltd.)
(Arising out of Order-in-Original No. 16/2013 dated
12.09.2013 passed by the Commissioner of Central Excise,
Bangalore.)
(4). Central Excise Appeal No. 20707 of 2014 (M/s.
Mallya Fine-Chem Pvt. Ltd.)
(Arising out of Order-in-Original No. 24/2013 dated
29.11.2013 passed by the Commissioner of Central Excise,
Bangalore II Commissionerate, Bangalore.)
(5). Central Excise Appeal No. 20708 of 2014 (Shri. B.
Harish Mallya, Director, M/s. Mallya Fine-Chem Pvt.
Ltd.)
(Arising out of Order-in-Original No. 24/2013 dated
29.11.2013 passed by the Commissioner of Central Excise,
Bangalore.)
Page 1 of 59
E/26321/2013; E/26315, 26317,28432,28433/2013;
E/20707,20708,20766,20767/2014; E/20473/2015;
E/20457,20458,20463, 20464/2016; E/21783 to 21790/2017;
E/20255,20315/2019; E/20673/2022; E/20730/2022
E/26322,28423, 28431/2013; E/20474/2015
(6). Central Excise Appeal No. 20474 of 2015 (M/s. Mallya
Fine-Chem Pvt. Ltd.)
(Arising out of Order-in-Original No. 23/2014 dated
05.12.2014 passed by the Commissioner of Central Excise,
Bangalore II Commissionerate, Bangalore.)
(7). Central Excise Appeal No. 20464 of 2016 (M/s. Mallya
Fine-Chem Pvt. Ltd.)
(Arising out of Order-in-Original No. 23/2015 dated
30.12.2015 passed by the Commissioner of Central Excise,
Bengaluru II Commissionerate, Bangalore.)
(8). Central Excise Appeal No. 21787 of 2017 (M/s. Mallya
Fine-Chem Pvt. Ltd.)
(Arising out of Order-in-Appeal No. 281-288/2017 CT dated
03.10.2017 passed by the Commissioner of Central Tax
(Appeals-II), Bangalore.)
(9). Central Excise Appeal No. 26315 of 2013 (Shri.
Chandy C. Thambi, Director (Legal), M/s.
International Flavours & Fragrances India Pvt. Ltd.)
(Arising out of Order-in-Original No. 02/2013 dated
11.01.2013 passed by the Commissioner of Central Excise,
Bangalore II Commissionerate, Bangalore.)
(10). Central Excise Appeal No. 26317 of 2013 (M/s.
International Flavours & Fragrances India Pvt. Ltd.)
(Arising out of Order-in-Original No. 02/2013 dated
11.01.2013 passed by the Commissioner of Central Excise,
Bangalore II Commissionerate, Bangalore.)
(11). Central Excise Appeal No. 28432 of 2013 (M/s.
International Flavours & Fragrances India Pvt. Ltd.)
(Arising out of Order-in-Original No. 16/2013 dated
12.09.2013 passed by the Commissioner of Central Excise,
Bangalore II Commissionerate, Bangalore.)
(12). Central Excise Appeal No. 28433 of 2013 (M/s. Shri
Chandy C Thambi, Director (Legal), M/s.
International Flavours & Fragrances India Pvt. Ltd.)
(Arising out of Order-in-Original No. 16/2013 dated
12.09.2013 passed by the Commissioner of Central Excise,
Bangalore II Commissionerate, Bangalore.)
(13). Central Excise Appeal No. 20766 of 2014 (M/s.
International Flavours & Fragrances India Private
Limited)
(Arising out of Order-in-Original No. 24/2013 dated
29.11.2013 passed by the Commissioner of Central Excise,
Bangalore II Commissionerate, Bangalore.)
(14). Central Excise Appeal No. 20767 of 2014 (Shri.
Chandy C. Thambi, Director (Legal), M/s.
International Flavours & Fragrances India Private
Limited)
(Arising out of Order-in-Original No. 24/2013 dated
29.11.2013 passed by the Commissioner of Central Excise,
Bangalore.)
(15). Central Excise Appeal No. 20473 of 2015 (M/s.
International Flavours & Fragrances India Private
Limited)
(Arising out of Order-in-Original No. 23/2014 dated
05.12.2014 passed by the Commissioner of Central Excise,
Page 2 of 59
E/26321/2013; E/26315, 26317,28432,28433/2013;
E/20707,20708,20766,20767/2014; E/20473/2015;
E/20457,20458,20463, 20464/2016; E/21783 to 21790/2017;
E/20255,20315/2019; E/20673/2022; E/20730/2022
E/26322,28423, 28431/2013; E/20474/2015
Bangalore II Commissionerate, Bangalore.)
(16). Central Excise Appeal No. 20457 of 2016 (M/s.
International Flavours & Fragrances India Private
Limited)
(Arising out of Order-in-Original No. 23/2015 dated
30.12.2015 passed by the Commissioner of Central Excise,
Bengaluru II Commissionerate, Bangalore.)
(17). Central Excise Appeal No. 21783 of 2017 (M/s.
International Flavours & Fragrances India Private
Limited)
(Arising out of Order-in-Appeal No. 281-288/2017 CT dated
03.10.2017 passed by the Commissioner of Central Tax
(Appeals-II), Bangalore.)
(18). Central Excise Appeal No. 21788 of 2017 (M/s.
Mallya Fine-Chem Pvt. Ltd.)
(Arising out of Order-in-Appeal No. 281-288/2017 CT dated
03.10.2017 passed by the Commissioner of Central Tax
(Appeals-II), Bangalore.)
(19). Central Excise Appeal No. 20463 of 2016 (M/s.
Mallya Fine-Chem Pvt. Ltd.)
(Arising out of Order-in-Original No. 24/2015 dated
30.12.2015 passed by the Commissioner of Central Excise,
Bengaluru II Commissionerate, Bangalore.)
(20). Central Excise Appeal No. 21789 of 2017 (M/s.
Mallya Fine-Chem Pvt. Ltd.)
(Arising out of Order-in-Appeal No. 281-288/2017 CT dated
03.10.2017 passed by the Commissioner of Central Tax
(Appeals-II), Bangalore.)
(21). Central Excise Appeal No. 21790 of 2017 (M/s.
Mallya Fine-Chem Pvt. Ltd.)
(Arising out of Order-in-Appeal No. 281-288/2017 CT dated
03.10.2017 passed by the Commissioner of Central Tax
(Appeals-II), Bangalore.)
(22). Central Excise Appeal No. 20315 of 2019 (M/s.
Mallya Fine-Chem Pvt. Ltd.)
(Arising out of Order-in-Original No. 02/2018-19-COM-BNW
dated 30.11.2018 passed by the Commissioner of Central
Tax, Goods and Service Tax Commissionerate, Bengaluru.)
(23). Central Excise Appeal No. 20673 of 2022 (M/s.
Mallya Fine Chem Pvt. Ltd.)
(Arising out of Order-in-Appeal No. 23&24/2021-22 CT dated
21.07.2022 passed by the Commissioner of Central Tax
(Appeals-II), Bangalore.)
(24). Central Excise Appeal No. 21784 of 2017 (M/s.
International Flavours & Fragrances India Private
Limited)
(Arising out of Order-in-Appeal No. 281-288/2017 CT dated
03.10.2017 passed by the Commissioner of Central Tax
(Appeals-II), Bangalore.)
(25). Central Excise Appeal No. 20458 of 2016 (M/s.
International Flavours and Fragrances India Private
Limited)
(Arising out of Order-in-Original No. 24/2015 dated
30.12.2015 passed by the Commissioner of Central Excise,
Bengaluru II Commissionerate, Bangalore.)
(26). Central Excise Appeal No. 21785 of 2017 (M/s.
Page 3 of 59
E/26321/2013; E/26315, 26317,28432,28433/2013;
E/20707,20708,20766,20767/2014; E/20473/2015;
E/20457,20458,20463, 20464/2016; E/21783 to 21790/2017;
E/20255,20315/2019; E/20673/2022; E/20730/2022
E/26322,28423, 28431/2013; E/20474/2015
International Flavours & Fragrances India Private
Limited)
(Arising out of Order-in-Appeal No. 281-288/2017 CT dated
03.10.2017 passed by the Commissioner of Central Tax
(Appeals-II), Bangalore.)
(27). Central Excise Appeal No. 21786 of 2017 (M/s.
International Flavours & Fragrances India Private
Limited)
(Arising out of Order-in-Appeal No. 281-288/2017 CT dated
03.10.2017 passed by the Commissioner of Central Tax
(Appeals-II), Bangalore.)
(28). Central Excise Appeal No. 20255 of 2019 (M/s.
International Flavours & Fragrances India Private
Limited)
(Arising out of Order-in-Original No. 02/2018-19-COM-BNW
dated 30.11.2018 passed by the Commissioner of Central
Tax, Goods and Service Tax Commissionerate, Bengaluru.)
(29). Central Excise Appeal No. 20730 of 2022 (M/s.
International Flavours & Fragrances India Private
Limited)
(Arising out of Order-in-Appeal No. 23&24/2021-22 CT dated
21.07.2022 passed by the Commissioner of Central Tax
(Appeals-II), Bangalore.)
APPEARANCE:
Mr. Ravi Raghavan, Advocate with Mr. Md. Ibrahim and
Mr. Tushar Sharma, Advocates for the Appellants
Mr. PRV Ramanan, Special Counsel (AR) for the Respondent
CORAM: HON'BLE DR. D.M. MISRA, MEMBER (JUDICIAL)
HON'BLE MRS R BHAGYA DEVI, MEMBER
(TECHNICAL)
Final Order No. 20829-20854, 20855-20858 /2024
DATE OF HEARING: 12.03.2024
DATE OF DECISION: 10.09.2024
PER : DR. D.M. MISRA
These appeals are filed challenging the respective
impugned orders passed by the Commissioner of Central Excise,
Bangalore/Commissioner of Central Excise(Appeals), Bangalore/
Commissioner of Central Tax (Appeals), Bangalore. The details
of appeals are as under:-
Page 4 of 59
E/26321/2013; E/26315, 26317,28432,28433/2013;
E/20707,20708,20766,20767/2014; E/20473/2015;
E/20457,20458,20463, 20464/2016; E/21783 to 21790/2017;
E/20255,20315/2019; E/20673/2022; E/20730/2022
E/26322,28423, 28431/2013; E/20474/2015
SL. Appeal Nos. Appellants Appeal Period of OIO Nos. Duty Penalty
No. Nos. Dispute /OIA No. & demanded imposed
Date
1 E/26321/2013 Mallya Fine E/26321/2 Rs. Rs.
Chem Pvt 013 26th May, OIO No. 13,57,16,120/ 13,57,16,120/
Ltd-Unit-I 2007 02/2013 - -
to dated
2 E/26322/2013 Shri. Harish E/26322/2 31st October, 11.01.2013 - Rs.
B Mallya, 013 2011 25,00,000/-
Director
3 E/28431/2013 Mallya Fine E/28431/2 Rs. Rs.
Chem Pvt 013 November 3,94,98,558/- 3,94,98,558/-
Ltd-Unit-I 2011 to OIO No.
August 2012 16/2013
4 E/28423/2013 Shri. Harish E/28423/2 dated - Rs. 5,00,000/-
B Mallya, 013 12.09.2013
Director
5 E/20707/2014 Mallya Fine E/20707/2 Rs. Rs.
Chem Pvt 014 September OIO No. 3,85,50,559/- 75,00,000/-
Ltd-Unit-I 2012 to 24/2013
April dated
6 E/20708/2014 Shri. Harish E/20708/2 2013 29.11.2013 - Rs. 5,00,000/-
B Mallya, 014
Director
7 E/20474/2015 Mallya Fine E/20474/2 May 2013 OIO No. Rs. Rs.
Chem Pvt 015 to 23/2014 3,25,67,572/- 75,00,000/-
Ltd-Unit-I March 2014 dated
05.12.2014
8 E/20464/2016 Mallya Fine E/20464/2 April 2014 OIO No. Rs. Rs.
Chem Pvt 016 to 23/2015 2,67,46,486/- 67,00,000/-
Ltd-Unit-I March 2015 dated
30.12.2015
9 E/21787/2017 Mallya Fine E/21787/2 April 2015 OIA No. 281- Rs. Rs. 7,18,740/-
Chem Pvt 017 to 288/2017 CT 71,81,397/-
Ltd-Unit-I September dated
2015 03.10.2017
10 E/26315/2013 Shri. Chandy E/26315/2 26th May, - Rs.
C Thambi 013 2007 20,00,000/-
to OIO No.
11 E/26317/2013 International E/26317/2 31st October, 02/2013 - Rs.
Flavours and 013 2011 dated 20,00,000/-
Fragrances 11.01.2013
Ltd.
12 E/28432/2013 International E/28432/2 - Rs. 4,00,000/-
Flavours and 013 November OIO No.
Fragrances 2011 to 16/2013
Ltd. August dated
13 E/28433/2013 Shri. Chandy E/28433/2 2012 12.09.2013 - Rs. 4,00,000/-
C Thambi 013
14 E/20766/2014 International E/20766/2 - Rs. 5,00,000/-
Flavours and 014 September OIO No.
Fragrances 2012 to 24/2013
Ltd. April 2013 dated
15 E/20767/2014 Shri. Chandy E/20767/2 29.11.2013 - Rs. 5,00,000/-
C Thambi 014
16 E/20473/2015 International E/20473/2 May 2013 to OIO No. - Rs. 5,00,000/-
Flavours and 015 March 2014 23/2014
Fragrances dated
Ltd. 05.12.2014
17 E/20457/2016 International E/20457/2 April 2014 OIO No. - Rs. 5,00,000/-
Flavours and 016 to March 23/2015
Fragrances 2015 dated
Ltd. 30.12.2015
18 E/21783/2017 International E/21783/2 April 2015 OIA No. 281 - Rs. 3,59,370/-
Flavours and 017 to - 288/2017
Fragrances September CT dated
Ltd. 2015 03.10.2017
19 E/21788/2017 Mallya Fine E/21788/2 September OIA No. 281 Rs. Rs.
Chem Pvt 017 2013 to - 288/2017 49,66,172/- 49,66,172/-
Ltd-Unit-II February, CT dated and and
2014 and 03.10.2017 Rs. Rs.10,00,000/
March, 2014 23,61,262/- -
to
September,
2014 Total
Rs.73,27,434/
Page 5 of 59
E/26321/2013; E/26315, 26317,28432,28433/2013;
E/20707,20708,20766,20767/2014; E/20473/2015;
E/20457,20458,20463, 20464/2016; E/21783 to 21790/2017;
E/20255,20315/2019; E/20673/2022; E/20730/2022
E/26322,28423, 28431/2013; E/20474/2015
- Rs.
59,66,172/-
20 E/20463/2016 Mallya Fine E/20463/2 October OIO No. Rs. Rs.
Chem Pvt 016 2014 to 24/2015 60,00,573/- 15,00,000/-
Ltd-Unit-II March 2015 dated
30.12.2015
21 E/21789/2017 Mallya Fine E/21789/2 April 2015 OIA No. 281 Rs. Rs. 8,00,000/-
Chem Pvt 017 to - 288/2017 84,42,288/-
Ltd-Unit-II September CT dated
2015 03.10.2017
22 E/21790/2017 Mallya Fine E/21790/2 October OIA No. 281 Rs. Rs. 7,84,180/-
Chem Pvt 017 2015 to May - 288/2017 78,41,798/-
Ltd-Unit-II 2016 CT dated
03.10.2017
23 E/20315/2019 Mallya Fine E/20315/2 June 2016 to OIO No. Rs. Rs.
Chem Pvt 019 March 2017 02/2018-19- 3,34,10,033/- 33,41,003/-
Ltd-Unit-II COM-BNW
dated
30.11.2018
24 E/20673/2022 Mallya Fine E/20673/2 April 2017 OIA No. Rs. Rs.
Chem Pvt 022 to 23&24/2021- 1,07,67,905/- 1,07,67,905/-
Ltd-Unit-II June 2017 22 CT dated
21.07.2022
25 E/21784/2017 International E/21784/2 September, OIA No. 281 - Rs. 2,00,000/-
Flavours and 017 2013 to - 288/2017
Fragrances February, CT dated
Ltd. 2014 and 03.10.2017
March, 2014
to
September,
2014
26 E/20458/2016 International E/20458/2 October OIO No. - Rs. 2,00,000/-
Flavours and 016 2014 to 24/2015
Fragrances March 2015 dated
Ltd. 30.12.2015
27 E/21785/2017 International E/21785/2 April 2015 OIA No. 281 - Rs. 4,00,000/-
Flavours and 017 to - 288/2017
Fragrances September dated
Ltd. 2015 03.10.2017
28 E/21786/2017 International E/21786/2 October OIA No. 281 - Rs. 3,92,090/-
Flavours and 017 2015 to May - 288/2017
Fragrances 2016 CT dated
Ltd. 03.10.2017
29 E/20255/2019 International E/20255/2 June 2016 to OIO No. - Rs.
Flavours and 019 March 2017 02/2018-19- 16,70,502/-
Fragrances COM-BNW
Ltd. dated
30.11.2018
30 E/20730/2022 International E/20730/2 April 2017 OIA No. - Rs.
Flavours and 022 to June 7017 23&24/2021- 53,83,953/-
Fragrances 22 CT dated
Ltd. 21.07.2022
2. Briefly stated the facts of the case are that the appellant
M/s. Mallya Fine-Chem Pvt. Ltd. (MFCPL, for short) are engaged
in the manufacturing of food colour preparations (FCP in short)
falling under Chapter sub-heading 32041981 of Central Excise
Tariff Act, 1985. During the course of audit of the records of
MFCPL, it was found that MFCPL have been manufacturing FCP
on job work basis for M/s International Flavours & Fragrances
India Pvt Ltd (IFFL for short). The raw materials and packing
Page 6 of 59
E/26321/2013; E/26315, 26317,28432,28433/2013;
E/20707,20708,20766,20767/2014; E/20473/2015;
E/20457,20458,20463, 20464/2016; E/21783 to 21790/2017;
E/20255,20315/2019; E/20673/2022; E/20730/2022
E/26322,28423, 28431/2013; E/20474/2015
materials were supplied by IFFL to MFCPL upto 25.05.2007 in
accordance with an agreement dated 07.01.2004 entered
between IFFL and MFCPL. The assessable value of the goods
were determined applying cost construction method by taking
into account the cost of raw materials and packing materials
supplied free of cost by IFFL and adding job working charges /
conversion charges in terms of Rule 11 of Central Excise
Valuation (Determination of Price of Excisable goods) Rules,
2000 (CEVR, 2000, for short) following the principles laid down
by the Hon'ble Supreme Court in the case of Ujagar Prints Vs.
UOI [1989(39) ELT 493 (SC)]. The said method of assessment
was followed upto the period 31.03.2007. On introduction of
Rule 10A into CEVR, 2000 w.e.f. 01.04.2007, the assessable
value was computed by MFCPL on the basis of sale price of FCPs
by IFFL to its customers for clearances effected during
01.04.2007 to 25.05.2007. W.e.f. 26.05.2007, MFCPL has
changed the methodology of arriving at the assessable value
claiming that the transaction between them and IFFL on
termination of agreement dated 07.01.2004 and entering into a
new agreement on 18.05.2007, is on principal-to-principal basis
as MFCPL had purchased the raw materials and packing
materials on their own account to manufacture FCP and
outrightly sell them to IFFL. Alleging that the said arrangement
between MFCPL and IFFL under the new agreement is only for
the purpose of overcoming the principles of valuation prescribed
under Rule 10A and since the transaction between MFCPL and
Page 7 of 59
E/26321/2013; E/26315, 26317,28432,28433/2013;
E/20707,20708,20766,20767/2014; E/20473/2015;
E/20457,20458,20463, 20464/2016; E/21783 to 21790/2017;
E/20255,20315/2019; E/20673/2022; E/20730/2022
E/26322,28423, 28431/2013; E/20474/2015
IFFL did not change and continued to be transaction between
principal and job-worker, determination of assessable under the
new agreement dated 18.05.2007 was proposed to be under
Rule 11 of CEVR, 2000 read with Section 4(1)(b) of CEA, 1944.
Consequently, show-cause notice was issued on 20.04.2012
proposing recovery of differential duty of Rs.13,57,16,120/-
short-paid along with interest and penalty for the period from
26.05.2007 to 31.10.2011. Similar show-cause notices were
issued subsequently periodically demanding duty with interest
and proposal for penalty for the period from 01.11.2011 to
30.6.2017. On adjudication, all the demands have been
confirmed with interest and penalty; also personal penalty on
other appellants including on IFFL have been imposed under Rule
26 of the Central Excise Rules, 2002. Hence the present
appeals.
3. The Ld. Advocate for the Appellant has submitted that the
Show Cause Notices had proposed to re-determine the
assessable value based on the sale price of the FCP in the hands
of IFFL in terms of Rule 11 of the CEVR and did not specify as to
under which rule of the CEVR, the demand was proposed to be
made and quantified. The show cause notices categorically
referred to the provisions of Rule 10A clearly indicating the
treatment of the transaction as one of job work and in the order
proposal to indirectly invoke Rule 9 read with Rule 11 to demand
differential duty on the basis of the sale price of FCP in the hands
of IFFL is bad in law. There was no allegation whatsoever in the
show cause notices to treat the appellants MFCPLL and IFFL as
related persons hence, consciously, the show cause notice did
Page 8 of 59
E/26321/2013; E/26315, 26317,28432,28433/2013;
E/20707,20708,20766,20767/2014; E/20473/2015;
E/20457,20458,20463, 20464/2016; E/21783 to 21790/2017;
E/20255,20315/2019; E/20673/2022; E/20730/2022
E/26322,28423, 28431/2013; E/20474/2015
not invoke the provisions of Rule 9 of the CEVR, 2000. However,
in the impugned Order, the Ld. Commissioner has held that the
assessable value of FCP should be re-determined based on the
sale price of the said goods adopted by IFFL in terms of Section
4(1)(b) of the CEA read with Rule 11 read with Rule 9 of the
CEVR.
3.1 It is further submitted that the notices did not allege that
MFCPL and IFFL are related persons. If show cause notices have
alleged that the Appellant and IFFL were related persons, then
there was no requirement of invoking the provisions of rule 11 of
CEVR, 2000. In such a situation, the department could have
directly invoked the provisions of Rule 9 of CEVR, 2000. The fact
that the show cause notices did not directly invoke Rule 9 also
clearly supports the contention of the Appellant that the demand
has been made beyond the case made out in the show cause
notices. Therefore, the impugned orders confirming the demand
on the basis of the finding that the Appellant and IFFL are
related persons invoking Rule 9 is ex-facie perverse and clearly
shows that the impugned orders have travelled beyond the
allegations in the show cause notices. Reliance placed on the
following decisions of Hon'ble Supreme Court : (i)CCE, Mumbai
vs. Toyo Engineering India Pvt. Ltd., - 2006 (201) E.L.T.
513 (S.C.);(ii)Hindustan Polymers Co. Ltd. v. Collector of
C. Ex., Guntur - 1999 (106) ELT 12 (SC)
3.2 It is submitted that there should certainty in taxation. That
in the present case, the Department has cited several provisions
of valuation in the Show Cause Notices and has ultimately
invoked Rule 11 of the CEVR, 2000, without indicating the rule
particularly applicable to the case. Reliance is placed on the
following decisions:(i)CIT vs B.C. Srinivas Setty - (1981) 2
SCC 460(ii) Govind Saran Ganga Saran vs Commissioner
of Sales Tax & Ors. - MANU/SC/0317/1985
Page 9 of 59
E/26321/2013; E/26315, 26317,28432,28433/2013;
E/20707,20708,20766,20767/2014; E/20473/2015;
E/20457,20458,20463, 20464/2016; E/21783 to 21790/2017;
E/20255,20315/2019; E/20673/2022; E/20730/2022
E/26322,28423, 28431/2013; E/20474/2015
3.4 It is submitted that the provisions of Section 4(1)(a) of the
CEA would be applicable if the following conditions are
cumulatively satisfied.
(a) There is a sale of excisable goods;
(b) The sale is for delivery at the time and place of
removal;
(c) The assessee and the buyer are not related; and
(d) Price is the sole consideration for sale.
If any of the above conditions are not satisfied, then the
provisions of Section 4(1) (a) cannot be applied and the value
has to be determined in terms of Section 4(1)(b) of the CEA.
Reliance is placed on the Circular dated 08.08.1975 and
Circular dated 30.06.2000.
3.5 It is submitted that Rule 11 of CEVR is applied when 'if the
value of any excisable goods cannot be determined under the
valuation rules i.e., Rule 4 to Rule 10A, the value shall be
determined using reasonable means consistent with principles
and general provisions of valuation rules and section 4 (1) of
CEA'. That Rule 9 ibid will apply only where the goods are not
sold except to or through related persons. Further, under Rule 9
of the CEVR, the valuation has to be done on the basis of the
sale price of the buyer only when the two entities are related
within the meaning of sub-clause (ii), (iii) & (iv) of clause (b) of
sub-section (3) of Section 4 of the CEA.
3.6. It is submitted that in the present case, the Appellant is
buying all the requisite inputs on their own and selling the goods
on outright sale basis to IFFL, at mutually agreed rates, the
assessable value for the purpose of payment of Central Excise
Duty is correctly determined based on the Transaction Value in
terms of Section 4(1)(a) of the CEA. It is precisely for this
reason that the Ld. Commissioner in the impugned order has
Page 10 of 59
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E/20707,20708,20766,20767/2014; E/20473/2015;
E/20457,20458,20463, 20464/2016; E/21783 to 21790/2017;
E/20255,20315/2019; E/20673/2022; E/20730/2022
E/26322,28423, 28431/2013; E/20474/2015
categorically held that the provisions of rule 10A are not
applicable. It is further submitted that if the case of department
is that the price of the impugned goods was not the sole
consideration, then recourse should have been made to Rule 6 of
the CEVR, to include the price and money value of the any
additional consideration flowing directly or indirectly from the
IFFL to the Appellant. It is further submitted that merely
because the price is not the sole consideration cannot be a
ground to hold the seller and the buyer as related persons and
consequently Rule 9 of CEVR, 2000 is not applicable.
3.7. The impugned orders have confirmed the demands mainly
on the ground that the Appellants have an intricate business
relationship with IFFL and both of them have an interest in the
business of each other and one influences the other. Hence, the
impugned order holds that Appellants and IFFL are to be treated
as related persons in terms of Section 4(3)(b)(iv) of the CEA.
The Appellants submit that M/s IFFL is a private limited company
and the Appellants are a private limited Company and none of
the Directors of Appellants' company is a Director in IFFL, nor
has any Director in IFFL have any interest in the firm of the
Appellants. There is also no common share holding between the
companies or any of the individuals. Consequently, the extent of
interest as far as the transaction relating to manufacture and
sale by the Appellants to IFFL is purely commercial and this does
not ipso facto render the Appellants interested in the business of
IFFL. Reliance is placed on the decision of the Hon'ble Apex
Court in the case of Union of India & Others vs. Atic
Industries, - 1984 (17) ELT 323 (SC).CCE, Chandigarh vs.
Kwality Ice Cream Co - 2010 (260) E.L.T. 327 (S.C.)CCE.,
Aurangabad vs. Goodyear South Asia Tyres Pvt. Ltd. -
2015 (322) ELT 389 (SC)
3.8. It is further submitted that no mutuality of interest can be
alleged only on the basis of a major portion of goods being
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E/20707,20708,20766,20767/2014; E/20473/2015;
E/20457,20458,20463, 20464/2016; E/21783 to 21790/2017;
E/20255,20315/2019; E/20673/2022; E/20730/2022
E/26322,28423, 28431/2013; E/20474/2015
cleared to one particular entity. Even in case all the goods
produced by one entity were being cleared to a particular entity,
the same is also insufficient evidence to prove mutuality of
interest. In support, they referred to the judgment in the cases:
Eastern Bakeries Pvt Ltd v. CCE, Kolkata-VII - 2013 (293)
ELT 593 (Tri.-Kolkata)TTK Health Care Ltd vs. CCE, Guntur
- 2007 (207) E.L.T. 453 (Tri. - Bang.)
3.9. It is further submitted that the burden of proof regarding
the mutuality of interest or the Appellant being related parties is
on the department. Whereas the Department has not
corroborated the said allegation and has merely held the same
on the basis of clearance of all the manufactured goods to IFFL
and selective reading of the agreements executed between the
Appellant and IFFL. It is submitted that if the case of the
department in the SCNs was of that the Appellant and IFFL are
related parties then the department could have determine the
value of impugned goods at the sale price of the buyer even in
the absence of Rule 10A for the period upto 31.03.2007 when
the Appellants were operating as a job worker of IFFL. The
above submission is supported by the decision of Hon'ble Apex
Court in the case of CCE, Indore v. S. Kumars Ltd - 2005
(190) ELT 145 (SC).
3.10. It is submitted that since the Appellants and IFFL are not
related as required in clauses (ii), (iii) and (iv) of section 4(3)(b)
of the Central Excise Act, 1944, and more particularly since
there is no mutuality of interest in the business of each other,
the Appellants and IFFL cannot be considered as related persons
as held in the impugned order. It is therefore, submitted that
impugned demand on the basis of sale price of IFFL cannot be
sustained and hence, the same is liable to be set aside.
3.11. It is submitted that all the three cases cited by the Ld.
Special Counsel are not applicable to the facts of the present
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E/20707,20708,20766,20767/2014; E/20473/2015;
E/20457,20458,20463, 20464/2016; E/21783 to 21790/2017;
E/20255,20315/2019; E/20673/2022; E/20730/2022
E/26322,28423, 28431/2013; E/20474/2015
case since the factual and legal situation is completely different
in the above said decisions. In the case of Nutri Foods
(supra), the Hon'ble Tribunal after noting the facts that the
manufacturer therein was not allowed to fix the price of the
goods cleared by them until there has been joint determination
of the price and even for that purpose, they were liable to
provide all the information pertaining to the product, as may be
required, for determining the price and that the supply/cost of
packing material was not considered at the time of fixing the
price held that the prices stipulated in the agreement and the
manner of the determination cannot be considered to be normal
as there was extra commercial considerations have entered in
the determination of the price. Similarly in the case of
Brindavan Alloys Ltd and Killic Slotted Angles Limited
(supra), there was an additional consideration accruing to the
appellants in the form of free publicity and sales promotion of
their goods for which the sole selling agents had to foot the bill
and the price was not the sole consideration for sale of goods.
Whereas in the present case, the price of the goods cleared by
the Appellants is mutually agreed upon (i.e., after taking into
account the cost of raw materials, packing materials,
manufacturing overheads etc. along with a reasonable profit
margin of 2.5%-3%). The value so adopted satisfied all the
requirements of section 4 of the CEA and the Appellants are not
required to provide any additional information pertaining to the
goods to the recipient and it is pertinent to note that there has
been no allegations that the Appellants are receiving any
additional consideration from the buyer and that the Ld.
Commissioner in the impugned order at Para 22.6 (Page no.107)
has specifically held that there is no evidence of flow back to the
Appellants from IFFL.
3.12. It is submitted that the demand for the period June, 2007
to October, 2011 in respect of the 1st show cause notice dated
20.04.2012 is barred by limitation. It is submitted that the
Page 13 of 59
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E/20457,20458,20463, 20464/2016; E/21783 to 21790/2017;
E/20255,20315/2019; E/20673/2022; E/20730/2022
E/26322,28423, 28431/2013; E/20474/2015
Appellant has intimated the transaction details to the central
excise department in writing as early as 2007 itself vide letter
dated 08.06.2007 wherein the Appellant had mentioned the
relevant facts and transaction and enclosing the copy of the
Agreement dated 18.05.2007 and the price list of the products.
They had also enclosed the correspondences with the
Superintendent Technical, Commissionerate II, Bangalore
wherein written clarification was obtained for the associate
concern of the Appellant, namely, M/s Global Food Specialties,
Bangalore, which was also a manufacturer-supplier of IFFL. The
clarification was sought as to the applicability of Rule 10A for the
transaction with IFFL for FCPs. However, in reply to the said
letter dated 08.06.2007, no clarification came from the
Department as to the applicability of Rule 10A in the case of
transaction of Appellant with IFFL. The Department also did not
object to the proposed manner of determination of assessable
value with effect from 01.06.2007 which is based on the
Appellant's selling price to IFFL. Still, the Appellant submits that
the transaction of the Appellant duly stands disclosed to the
Department and so suppression with intention to evade payment
of duty cannot be alleged against the Appellant.
4. Ld. Special counsel for the Revenue has submitted that the
core issue for consideration in the present Appeals is, whether
the respondent was correct in holding that the FCPs cleared by
MFCPL to IFFL, during the period of dispute, were to be assessed
to duty at the selling prices of IFFL or at prices agreed upon
between MFCPL and IFFL in terms of the 2007 Agreement. A
comparison of the assessable values adopted by MFCPL for some
of the FCPs, for different periods with the selling prices of IFFL
and at prices agreed upon between MFCPL and IFFL in terms of
the 2007 Agreement was 187% to 274%.
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E/20707,20708,20766,20767/2014; E/20473/2015;
E/20457,20458,20463, 20464/2016; E/21783 to 21790/2017;
E/20255,20315/2019; E/20673/2022; E/20730/2022
E/26322,28423, 28431/2013; E/20474/2015
4.1. Rebutting the argument of the Appellant that the
impugned Order has travelled beyond the SCN, it is submitted:
(a) Para 14(i)(b) of the SCN makes it abundantly
clear that the assessable values of the subject goods were
sought to be determined in terms of Rule 11 of CEVR,2000
based on general principles of valuation enunciated in the
rules foregoing to Rule 11 ibid and section 4(1) of
CEA,1944; In para 13 (vi) also it is stated clearly that
assessable values were sought to be worked out in terms
of Rule 11 (c) The fact that the re-determined assessable
values are based on the sale prices of IFFL is also evident
from the worksheet appended to the SCN. Significantly
enough, in terms of the principle underlying the
determination of assessable values, both under Rule 9 and
Rule 10A, is the adoption of the sale prices when the goods
enter the stream of trade for the first time.; the SCN has,
after a detailed discussion, alleged that there was no true
sale transaction between MFCPL and IFFL under the two
Agreements. MFCPL's prices to IFFL were not the intrinsic
value or arms-length prices of the impugned products and
the terms of the 2007 Agreement revealed an intricate
business relationship between MFCPL and IFFL. Further, it
is stated that even after 1/6/2007, the relationship
between the two were not on principal to principal basis.
4.2. Further reiterating the finding of the Ld. Commissioner and
replying to the argument that section 4 (1)(a) would be
applicable to the facts of the present case, the learned AR has
submitted that:
➢ The Ld. Commissioner in Paras 22.1 to 22.3 of the
impugned Order discussed at length the factors, including
the restrictions placed on MFCPL by IFFL in the 2007
Agreement, leading to the conclusion that the transactions
between MFCPL and IFFL were not true sale transactions
and were not in the ordinary course of business in terms of
definition of 'sale or purchase' in section 2 (h) of the Act.
➢ Further, it is observed that MFCPL had sold all the FCPs
manufactured by them only to IFFL, that MFCPL did not
operate in an uninfluenced market environment, that
several restrictions have been put on MFCPL, that
customers are notified to contact IFFL for consumer
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E/20707,20708,20766,20767/2014; E/20473/2015;
E/20457,20458,20463, 20464/2016; E/21783 to 21790/2017;
E/20255,20315/2019; E/20673/2022; E/20730/2022
E/26322,28423, 28431/2013; E/20474/2015
complaints, demonstrate that the goods were made for
and on behalf of IFFL by MFCPL.
➢ Relying on the judgment rendered in the case of Pilky
Footwear Company (P) Ltd. vs CCE [1980 (6) ELT 338
(Bom)], affirmed by the Apex Court, the adjudicating
authority has observed that the transactions between
MFCPL and IFFL were not on principal-to-principal basis.
4.3. Referring to the observations of the constitutional Bench
of 5 judges of the Hon'ble SC in the case of CCE, Indore vs.
Grasim Industries Ltd. [2018 (360) ELT 769 (SC)] it is
submitted that the Court in the said case considered the
question whether the concept of transaction value makes a
material departure from the deemed normal price concept of the
erstwhile Section 4(1) (a) of the Act and concluded that there
was no discernible difference in the statutory concept of
'transaction value' and the judicially evolved meaning of 'normal
price'. The implication of the observations is that, said
transaction value would be, the price charged for a
manufactured article at the stage when the article enters into
the stream of trade and such price in respect of a transaction
must necessarily be at arm's length. Further, inclusions and
additions that enrich the value of the article till its clearance are
permissible additions to the price that can be taken into account
to determine 'value'.
4.4. Further referring to judgment of the Hon'ble SC in the
case of CCE, Indore vs. S.Kumar's Ltd. [2005 (190) ELT 145
(SC)] it is submitted that the implication of the observations is
that, the assessable value of a manufactured article, as per the
erstwhile Section 4(1)(a)- held to be not different from
"transaction value' as per new section 4(1)(a)- would be, the
wholesale price charged for a manufactured article at the stage
when the article is sold in the open, wholesale market i.e., when
it enters into the stream of trade for the first time and such price
in respect of a transaction must necessarily be at arm's length.
Page 16 of 59
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E/20707,20708,20766,20767/2014; E/20473/2015;
E/20457,20458,20463, 20464/2016; E/21783 to 21790/2017;
E/20255,20315/2019; E/20673/2022; E/20730/2022
E/26322,28423, 28431/2013; E/20474/2015
Further, it was held that the assessable value should be the
intrinsic value of the goods, when the same are sold for the first
time in the wholesale market.
4.5. The learned AR for the Revenue further submitted the
following:
➢ In the instant case, purportedly, the first sale of FCPs by
MFCPL is to IFFL. However, this does not constitute the
wholesale market for the products and FCPs do not, at this
stage, enter the stream of trade. They are sold in the
wholesale market for the first time only at the hands of
IFFL. The arrangement under the two Agreements clearly
point to the fact that MFCPL had no freedom of action.
Even specifications and quality requirements of raw
materials and packing materials etc., were specified by
IFFL. This virtually left MFCPL with no option to source the
materials from vendors other than the ones from whom
IFFL purchased and supplied free to MFCPL.
➢ In terms of Clause 7.1 of the Agreement the prices of the
final products i.e., the FCPs were fixed as per Appendix 2.
These prices are undoubtedly based on the then extant
prices of raw materials etc., mandated in Appendix 3,
wherein it reads: 'Appendix 3 of the Agreement shall be as
follows' and the Table below shows the basic price of the
'Raw materials and containers, pouches etc.,'. As per
Clause 7.5 [Page 137] prices of FCPs would be reviewed if
there is any decrease or increase of more than 2% in the
prices of raw materials etc. Thus, MFCPL is bound to keep
IFFL apprised of change in the prices of the said items.
Further, MFCPL cannot realise a higher profit or a better
price, by buying raw materials at a lower price. This is a
wholly untenable position and clearly the transactions
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E/20707,20708,20766,20767/2014; E/20473/2015;
E/20457,20458,20463, 20464/2016; E/21783 to 21790/2017;
E/20255,20315/2019; E/20673/2022; E/20730/2022
E/26322,28423, 28431/2013; E/20474/2015
between MFCPL and IFFL are not true sale transactions and
are not in the ordinary course of business in terms of
definition of 'sale or purchase' in section 2 (h) of the Act.
Further, reliance is place on the findings of the Tribunal in
the Case of Nutri Foods vs. CCE, [1993(67) ELT 344
(Tri.)]
4.6. It is submitted that:
➢ When the goods leave the factory of MFCPL they already
bear the trademark, logo, label and brand name viz.,
'Bush' of IFFL. Further, the MRP as determined by IFFL is
indicated on the products. But, the 'intrinsic value' of the
FCPs including the brand value of IFFL is, however, realised
only when IFFL puts the products in the whole sale market.
All the value additions and inclusions which enrich the
value of the FCPs to facilitate such sale in the wholesale
market are reflected only in the prices charged by IFFL and
not by MFCPL to IFFL. For their own products, i.e. other
than FCPs, the aforesaid value additions are reflected in
the prices of MFCPL as the products enter the stream of
trade at their own hands. Hence, the sale prices charged
by MFCPL to IFFL are not the same as the normal price or
the transaction value of the impugned FCPs.
➢ In sum, the prices of FCPs charged by MFCPL to IFFL
cannot be taken as the transaction values of such
products going by the rationale of the Hon'ble SC in the
cases of Grasim Industries Ltd.(supra) and that of
Ujagar prints (II) as explained in the judgment rendered
in the case of S.Kumars Ltd,(supra).
➢ The judgments of the Hon'ble SC in the cases of Kwality
Ice Cream Co., Good Year South Asia Tyres "P' Ltd.,
Eastern Bakeries Pvt. Ltd. and TTK Health Care Ltd
Page 18 of 59
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E/20707,20708,20766,20767/2014; E/20473/2015;
E/20457,20458,20463, 20464/2016; E/21783 to 21790/2017;
E/20255,20315/2019; E/20673/2022; E/20730/2022
E/26322,28423, 28431/2013; E/20474/2015
cited by the Advocate for appellant is not applicable as
Clause 7 of the 2007 Agreement discussed above clearly
makes the facts distinguishable from the aforesaid cases.
Further, the said judgments were rendered prior to the
judgment in the case of Grasim Industries Ltd.(supra).
➢ MCF purchases the raw materials etc., from independent
vendors on payment of VAT/CST and sells at FCPs to IFFL
at agreed prices. The restrictions on disposal of FCPs
cannot be ground for doubting the bona fide relationship
between MFCPL and IFFL; both have been incorrectly held
to be 'related persons' in terms of section 4(3)(b)(iv).
➢ As per the statement of Shri B.Harish, Director of MFCPL
from inception in 1981, MFCPL has been doing business
with IFFL since April 1984. This is indicative of the long-
standing relationship between them, which continues till
date as far as FCPs are concerned. While IFFL ensured that
international specifications and quality standards were
maintained with reference to their products and at values
equal to cost of materials plus a profit of 2 to 3%, MFCPL
too derived significant benefits from doing business with
IFFL. The entire production of FCPs produced by MFCPL
was lifted by IFFL; this meant that there was no fear of
underutilization of production capacity set up for this
purpose. MFCPL did not have to incur marketing and
selling organization expenses, including advertisement and
publicity expenses. MFCPL did not have to undertake
transport of finished goods and bear transit insurance.
Thus, several elements of expenses held as includible in
the assessable value, according to the Apex Court
judgment of Bombay Tyre International [ 1983 (14)
ELT 1896 (SC)-], were borne by IFFL.
➢ Both 2004 and 2007 Agreements (clause 11), between
MFCPL and IFFL, state that the agreements are on
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E/20457,20458,20463, 20464/2016; E/21783 to 21790/2017;
E/20255,20315/2019; E/20673/2022; E/20730/2022
E/26322,28423, 28431/2013; E/20474/2015
'principal to principal' basis though for the period prior to
1/4/2007, and till 25/5/2007, both MFCPL and IFFL have
regarded the relationship to be between a principal and a
job worker i.e., between a principal and his agent acting
on his behalf. This is clearly a contradictory position taken
by both. As per clause 2.1 of the 2004 Agreement, it has
been stated that IFFL would supply the raw materials, etc.,
having regard to the use of the products inter alia in food
and pharmaceutical products by legislations requiring strict
adherence to special and specific standards. But even after
the introduction of Rule 10A w.e.f. 1/4/2007 and till
25/5/2007 free supplies from IFFL continued. From
26/5/2007 onwards, the same concern does not find
expression in the new agreement. This shows that the
arrangement of MFCPL procuring the said materials was
only a colourable device to get out of the operation of Rule
10A.
➢ Clause 2.1 of the 2007 Agreement states that the
specifications and quality would be prescribed by IFFL and
MFCPL had to purchase the materials in accordance with
the same. The sourcing of materials, however, remained
the same pre and post 26/5/2007. Given these facts, the
claim that the transaction between MFCPL and IFFL was on
'principal to principal' basis because of the provision that
MFCPL would acquire the materials on their own-instead of
free supplies by IFFL- has no legs to stand. The
transactions between MFCPL and IFFL cannot, therefore,
be regarded as on 'principal to principal' basis. In true
terms, IFFL is the principal and MFCPL has manufactured
the FCPs on behalf of IFFL.
➢ As per Clause 5.1 of both the Agreements, MFCPL could
not sell or otherwise deal in trademarks, copyrights and
designs similar to that of IFFL. This means MFCPL has to
obtain the approval/clearance of IFFL of even the design
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E/20457,20458,20463, 20464/2016; E/21783 to 21790/2017;
E/20255,20315/2019; E/20673/2022; E/20730/2022
E/26322,28423, 28431/2013; E/20474/2015
on the product, and the packing material for their own
brands and products. They are also not permitted to deal
in or even trade in products bearing marks or designs
similar to that of IFFL and IFFL would decide the issue of
similarity.
➢ The aforesaid facts and the pricing clauses discussed in
Para 4(d) (ix) above, clearly demonstrate that the
transactions between MFCPL and IFFL were not on
principal to principal basis and at arms-length. MFCPL and
IFFL mutually benefited from the transactions between
them.
➢ The learned Commissioner has not invoked the provisions
of Rule 9 of CEVR, 2000. If it was so, he would have
determined the assessable values in terms of the said
Rule. He has invoked the provisions of Rule 11 in the
instant case since he found that the value of the impugned
goods could not be determined under the foregoing Rules.
This was also the proposal in the SCN. Rule 11 merely
prescribes that the determination of assessable value in
such an event should be made using 'reasonable means'.
Such 'means' should be consistent with the principles and
general provisions of CEVR, 2000 and Section 4(1) of the
Act. The expression 'means' would connote only the
method of determination of value not the circumstances to
which it would apply. Thus, what is done while invoking
Rule 11, in the given circumstances, is to apply the
method which is closest and most consistent with the
methods specified in the Rules. In the present context,
given the terms of the two Agreements, the Ld.
Commissioner has found ample justification for
determination of assessable value consistent with the
method prescribed under Rule 9 of the Rules ibid. Besides,
as stated earlier, the common principle underlying the
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E/20457,20458,20463, 20464/2016; E/21783 to 21790/2017;
E/20255,20315/2019; E/20673/2022; E/20730/2022
E/26322,28423, 28431/2013; E/20474/2015
determination of assessable values, both under Rule 9 and
Rule 10A, is the adoption of the sale prices when the goods
enter the stream of trade for the first time. In the instant
case, it would mean the prices charged by IFFL to
independent buyers. It has also been held that the
assessable values would have to be determined under Rule
11 thereof applying the principles of Rule 9. The purport of
this finding is that the principles of valuation would only
refer to adoption of the selling prices of IFFL as assessable
values. Significantly enough, entire production of FCPs by
MFCPL is sold only to/ through IFFL, a situation specified in
Rule 9. According to this Rule, the assessable value is to
be determined based on the selling prices of the sole
buyer. Thus, the determination of assessable values in the
instant case is consistent with the principles of valuation
adopted in the said Rule.
➢ The invoking of the extended period of limitation is
relevant only in respect of the first SCN dated 20/4/2012
and it is held that the clarification issued by the
department to their associate M/s Global Food would not
come to the help of MFCPL and IFFL in explaining the
deliberate default on the part of MFCPL to gain undue duty
advantage. Clearly, MFCPL had not presented the true and
full facts before the Department. These findings in the
impugned orders are reiterated.
➢ Considering the deliberate default on the part of MFCPL
and IFFL, invoking of extended period of limitation and
imposition of penalties on the two companies and the
captioned individual appellants are fully justified.
5. Heard both sides at length and perused the records.
6. The issues for determination are whether:
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E/20255,20315/2019; E/20673/2022; E/20730/2022
E/26322,28423, 28431/2013; E/20474/2015
(i) the assessable value of FCP manufactured by MFCPL
and cleared to IFFL during the period 26.05.2007 to
30.06.2017 be determined on the Transaction value
at which MFCPL sold the FCP to IFFL under
agreement dated 18.5.2007 or the assessable value
be determined based on the sale price in the hands
of IFFL in terms of Rule 11 of the Central Excise
(Determination of price of excisable goods) Rules,
2000;
(ii) extended period of limitation is applicable (appeal
No.E/26321/2013); and
(iii) penalty is imposable on IFFL and other appellants
under Rule 26 of CER, 2002.
7. Undisputed facts of the case are that MFCPL, under
an agreement dated 07.01.2004 which was valid upto
25.05.2007, manufactured FCP on job work basis for IFFL and
discharged duty upto 31.03.2007 computing the assessable
value taking into consideration the cost of raw materials and
packing materials supplied free by IFFL + job work / conversion
charges which included profit of MFCPL, following the principle
laid down by the Hon'ble Supreme Court in Ujagar Prints' case
read with Rule 11 of the CEVR, 2000. After insertion of Rule 10A
to the CEVR, 2000 in the year 2007, under the same agreement
for the period from 01.04.2007 to 25.05.2007, they determined
the assessable value as per Rule 10A(i) of the CEVR, 2000.
Later, they entered into a new agreement on 18.05.2007
whereunder it is stipulated that the raw materials and packing
materials, instead of being supplied by IFFL, would be procured
by MFCPL and the transaction will be on principal-to-principal
basis; consequently, they determined assessable value of the
FCP cleared to IFFL w.e.f. 26.05.2007 on the transaction value
under the said agreement as per Section 4(1)(a) of the CEA,
1944. The Revenue raised objection to such method of
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E/20255,20315/2019; E/20673/2022; E/20730/2022
E/26322,28423, 28431/2013; E/20474/2015
determination of assessable value; after rejecting the transaction
value between MFCPL and IFFL, demanded differential duty by
computing the assessable value under Section 4(1)(b) of the
CEA, 1944 read with Rule 11 of the CEVR, 2000 on the sale price
of IFFL.
8. The learned Commissioner in the impugned order
analysing the agreement dated 18.05.2007 which has been
renewed periodically and has in force during the entire period in
question observed that the stringent conditions of the agreement
viz. the appellant MFCPL should not sell the product FCP to
anybody-else other than IFFL; since the goods are property of
IFFL bearing its brand name thereby prevented from putting up
of FCP in the open market; therefore they were not in a position
to ascertain the price of the FCP in the ordinary course of
business or trade hence the transaction value cannot be
adopted. It is held that the transaction between MFCPL and IFFL
does not satisfy the meaning of 'sale' and 'purchase' as defined
under Section 2(h) of the CEA, 1944. It has been observed that
the phrase "ordinary course of trade or business" denotes a
situation arising in the open market where seller puts up goods
for sale to make the goods fetch the best explored price in the
market and the buyer successfully offers a best price to possess
the goods from the seller. Further, she has observed that the
price charged by MFCPL to IFFL for supply of FCP is not based on
true transaction value but influenced by factors holding under
business with IFFL because of dominating and dictating position
of IFFL in the whole arrangement. Consequently, she has held
that MFCPL and IFFL have interest in each other's business and
one influences the other and consequently MFCPL and IFFL to be
treated as related persons in terms of Section 4(3)(b)(iv) of the
CEA, 1944. Thus, the transaction value adopted in terms of
Section 4(1)(a) is liable to be rejected and the value of the FCP
be determined by taking recourse to Section 4(1)(b) read with
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E/20707,20708,20766,20767/2014; E/20473/2015;
E/20457,20458,20463, 20464/2016; E/21783 to 21790/2017;
E/20255,20315/2019; E/20673/2022; E/20730/2022
E/26322,28423, 28431/2013; E/20474/2015
Rule 11 of CEVR, 2000. Further, she has held that Rule 4 to
Rule 10A of CEVR are not directly applicable to the transactions
between MFCPL and the IFFL and accordingly Rule 11 of CEVR,
2000 is the appropriate rule for determination of assessable
value of the FCP cleared to IFFL. Further, she has held that
principles of Rule 9 are more appropriate in the instant case and
provide strength to Rule 11 of CEVR, 2000. The learned
Commissioner has categorically held that Rule 10A of the CEVR,
2000 cannot be made applicable since none of the raw
materials/packing materials have been supplied free by IFFL to
MFCPL. Referring to the principles laid down under Rule 9, the
learned Commissioner held that since MFCPL and IFFL have
interest in each other's business and one influence the other,
then MFCPL and IFFL should be considered as 'related persons' in
terms of Section 4(3)(b)(iv) of CEA; hence the price at which the
goods are sold to IFFL to be considered in determining the
assessable value.
9. Assailing the said findings, the learned advocate has raised
a preliminary objection submitting that the learned
Commissioner has travelled beyond the allegations levelled in
the show-cause notice, in applying Rule 9 read with Rule 11 of
CEVR, 2000; the show-cause notice categorically refers the
provisions of Rule 10A indicating the transaction as one of the
job work. There was no allegation whatsoever in the show-
cause notice to treat MFCPL and IFFL as related persons; hence
the show-cause notice did not invoke provisions of Rule 9 of the
CEVR, 2000. It was his contention that if the show-cause notice
alleged that they were related persons, then there was no
requirement of invoking provisions of Rule 11 of CEVR and the
Department could have directly invoked provisions of Rule 9 of
CEVR; therefore the finding of the Commissioner bad in law.
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E/20457,20458,20463, 20464/2016; E/21783 to 21790/2017;
E/20255,20315/2019; E/20673/2022; E/20730/2022
E/26322,28423, 28431/2013; E/20474/2015
10. On the issue of determination of assessable value of FCP
sold by MFCPL to IFFL, whether the transaction value be adopted
applying Section 4(1)(a) of CEA, 1944 or the price at which the
FCP sold by IFFL in the market by applying the Section 4(1)(b)
of CEA, 1944 read with Rule 11 of CEVR be applicable, the claim
of MFCPL is that by an agreement dated 18.05.2007, the
appellant-MFCPL procured the raw material and packing
material, converted the same into finished goods and after
affixing the brand name, logo of IFFL and MRP, cleared/sold the
same to IFFL at agreed price. The entire transaction is on
principal-to-principal basis and at arm's length. Merely because
the entire goods manufactured and sold to IFFL under an
agreement cannot make the transaction not at arm's length and
the agreed price of sale by MFCPL was not the true transaction
value of the goods. The learned advocate for the appellant has
submitted that the conditions mentioned under Section 4(1)(a)
namely there is sale of excisable goods; the sale is for delivery
at the time and place of removal; the assesse and the buyer are
not related and the price is the sole consideration for sale have
been complied with in the present case; therefore resorting to
Section 4(1)(b) of CEA read with Rule 11 of the CEVR is not
warranted. It is pleaded that Rule 11 is applicable only when the
value of excisable goods cannot be determined by applying Rule
4 to Rule 10; then it should be determined by using reasonable
means consistent with principles and general provisions of
valuation Rules; Rule 9 of CEVR, 2000 is attracted only when
two entities are related within the meaning of sub-clause (ii),
(iii) and (iv) of clause (b) of sub-section (3) of Section 4 of the
CEA, 1944. In the present case, it is argued that the MFCPL is
buying all required inputs on their own and after converting the
same into finished goods, sells the same outright basis price to
IFFL at a mutual agreed price; hence the assessable value has
been correctly determined applying Section 4(1)(a) of CEA and
for these reasons the Commissioner has held in the impugned
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E/20457,20458,20463, 20464/2016; E/21783 to 21790/2017;
E/20255,20315/2019; E/20673/2022; E/20730/2022
E/26322,28423, 28431/2013; E/20474/2015
order that provisions of Rule 10A of CEVR, 2000 are not
applicable. He has further submitted that in the event the
Department is of the opinion that the agreed price is not the sole
consideration, then recourse should be to Rule 6 of the CEVR,
2000. Further, it is pleaded that there is no mutuality of interest
as wrongly held in the impugned order holding that the appellant
have an intricate business relationship with IFFL and both of
them had interest in each other and one influences the other.
He has submitted that the IFFL is a private limited company and
none of the Directors of MFCPL is director in IFFL nor any
Director of IFFL has any interest in MFCPL; also no common
share holding between the companies or any of the individuals.
The interest between MFCPL and IFFL is purely on commercial in
nature.
11. On the other hand, the learned Special Counsel for the
Revenue has argued that in the judgment of the Constitution
Bench of 5 Judges of the Hon'ble Supreme Court in Grasim
Industries Ltd.'s case (supra) analysed the concept of
'transaction value' under the new section 4(1)(a) w.e.f
01.7.2000 and held that it makes no material departure from the
deemed normal price concept of the erstwhile Section 4(1)(a) of
the CEA and there is no discernible difference in the statutory
concept of 'transaction value' and the judicially evolved meaning
of 'normal price'; thus, the price charged for a manufactured
article at the stage when the article enters into the stream of
trade in order to determine the value/transaction value for
computation of the quantum of excise duty payable does not
come into conflict with the essential character or nature of the
levy and such price charged in respect of a transaction which
must necessarily be at arm's length. Further, the inclusions and
additions of element of expenses that enrich the value of the
article till its clearance are permissible value additions to the
price that can be taken into account to determine the value. He
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E/20255,20315/2019; E/20673/2022; E/20730/2022
E/26322,28423, 28431/2013; E/20474/2015
has submitted that in the present case, purportedly, the first
sale of FCPs by MFCPL is to IFFL does not constitute the
wholesale market for the products and the FCPs do not at this
stage enter the stream of trade ; they are sold in the wholesale
market for the first time only at the hands of IFFL. Further he
has submitted that the arrangement under the two agreements
clearly point out to the fact that MFCPL has no freedom of
action; even specifications and quality requirements of raw
materials and packing materials etc. were specified by IFFL. This
virtually left MFCPL with no option to purchase materials from
vendors other than the ones from whom IFFL purchased;
therefore the transaction value between MFCPL and IFFL is not
true transaction and is not an ordinary course of business and
trade prescribed under Section 2(h) of CEA, 1944. Further he
has submitted that when FCPs leave the factory of the MFCPL,
they bear the trademark, logo, label and brand name viz. 'BUSH'
of IFFL; packing and outer carton bear the identity of IFFL and
its brand name, MRP as determined was indicated on the
product; but the intrinsic value of FCPs including the brand value
of IFFL is realized only when the products put in the wholesale
market. All the value additions and inclusions which enrich the
value of the FCPs to facilitate such sale in the wholesale market
are reflected in the prices of IFFL and not in the price of MFCPL
to IFFL. Further he has submitted that home products of IFFL
i.e. other than FCPs, the value additions are reflected in the
prices of MFCPL as the products enter the stream of trade at
their own hands; hence the price charged by MFCPL to IFFL is
not the same or the transaction value of the impugned products.
12. Before analyzing the rival contention about applicability of
provisions of Section 4(1)(a) or Section 4(1)(b) to the
transactions between MFCPL and IFFL, it would be relevant to
make a comparative analysis of the development of the
provisions of valuation of manufactured excisable goods
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E/20457,20458,20463, 20464/2016; E/21783 to 21790/2017;
E/20255,20315/2019; E/20673/2022; E/20730/2022
E/26322,28423, 28431/2013; E/20474/2015
chargeable ad valorem rate of the duty prescribed under Section
4 of CEA, 1944.
13. Section 4 as was in force till 30/09/1975 is under:-
"4. Determination of value for the purposes of duty. -
Where under this Act, any article is chargeable with duty at a
rate dependent on the value of the article, such value be
deemed to be -
(a) the whole sale cash price for which an article of the like
kind and quality is sold or is capable of being sold at the time of
the removal of the article chargeable with duty from the factory
or any other premises of manufacture or production for delivery
at the place of manufacture or production, or if a wholesale
market does not exist for such article at such place, at the
nearest place where such market exists, or
(b) where such price is not ascertainable, the price at which an
article of the like kind and quality sold or is capable of being
sold by the manufacturer or producer, or his agent, at the time
of the removal of the article chargeable with duty from such
factory or other premises for delivery at the place of
manufacture or production or if such article is not sold or is not
capable of being sold at such place, at any other place nearest
thereto.
Explanation. -- In determining the price of any article under this
section no abatement or deduction shall be allowed except in
respect of trade discount or amount of duty payable at the time
of the removal of the article chargeable with duty from the
factory or other premises aforesaid."
The amended Section 4, w.e.f. 01.10.1975 reads as follows:-
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 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 of
removal, where the buyer is not a related person and the price
is the sole consideration for the sale :
Provided that -
(i) where in accordance with the normal practice of the
wholesale trade in such goods, such goods are sold by the
assessee at different price to different classes of buyers
(not being related persons) each such price, shall, subject
to the existence of the other circumstances specified in
clause (a), be deemed to be the normal price of such
goods in relation to each such class of buyers;
(ii) where such goods are sold by the assessee in the
course of wholesale trade for delivery at the time and
place of removal at a price fixed under any law for the
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E/26322,28423, 28431/2013; E/20474/2015
time being in force, or at a price, being the maximum
fixed under any such law, then, notwithstanding anything
contained in clause (iii) of this proviso the price or the
maximum price, as the case may be, so fixed shall, in
relation to the goods so sold, be deemed to be the normal
price thereof;
(iii) where the assessee so arranges that the goods are
generally not sold by him in the course of wholesale trade
except to or through a related person, the normal price of
the goods sold by the assessee to or through such related
person shall be deemed to be the price at which they are
ordinarily sold by the related person in the course of
wholesale trade at the time of removal, to dealers (not
being related persons) or where such goods are not sold
to such dealers, to dealers (being related persons) who
sell such goods in retail;
(b) where the normal price of such goods is not ascertainable
for the reason that such goods are not sold or for any other
reason, the nearest ascertainable equivalent thereof determined
in such manner as may be prescribed.
(2) Where, in relation to any excisable goods the price thereof for
delivery at the place of removal is not known and the value thereof is
determined with reference to the price for delivery at a place other
than the place of removal, the cost of transportation from the place of
removal to the place of delivery shall be excluded from such price.
(3) The provisions of this section shall not apply in respect of any
excisable goods for which a tariff value has been fixed under sub-
section (2) of Section 3.
(4) For the purposes of this section -
(a) "assessee" means the person who is liable to pay the duty of
excise under this Act and includes his agent;
(b) "place of removal" means -
(i) a factory or any other place or premises of production or
manufacture of the excisable goods; or
(ii) a warehouse or any other place or premises wherein the excisable
goods have been permitted to be deposited without payment of duty,
from where such goods are removed;
(c) "related person" means a person who is so associated with the
assessee that they have interest, directly or indirectly, in the business
of each other and includes a holding company, a subsidiary company,
a relative and a distributor of the assessee, and any sub-distributor of
such distributor.
Explanation. - In this case "holding company", "a subsidiary company"
and "relative" have the same meanings as in the Companies Act,
1956;
(d) "value", in relation to any excisable goods, -
(i) where the goods are delivered at the time of removal in a packed
condition, includes the cost of such packing except the cost of the
packing which is of a durable nature and is returnable by the buyer to
the assessee.
Explanation. - In this sub-clause "packing" means the wrapper,
container, bobbin, pirn, spool, reel or warp beam or any other thing in
which or on which the excisable goods are wrapped, contained or
wound;
(ii) does not include the amount of the duty of excise, sales tax and
other taxes, in any, payable on such goods and, subject to such rules
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E/26322,28423, 28431/2013; E/20474/2015
as may be made, the trade discount (such discount not being
refundable on any account whatsoever) allowed in accordance with the
normal practice of the wholesale trade at the time of removal in
respect of such goods sold or contracted for sale;
(e) "wholesale trade" means sales to dealers, industrial consumers,
Government, local authorities and other buyers, who or which
purchase their requirements otherwise than in retail."
W.e.f. 01.07.2000, Section 4 reads as follows:-
'4.(1) Where under this Act, the duty of excise is chargeable on
any excisable goods with reference to their value, then, on each
removal of the goods, such value shall -
a. in a case where the goods are sold by the assessee, for
delivery at the time and place of the removal, the assessee and
the buyer of the goods are not related and the price is the sole
consideration for the sale, be the transaction value;
b. in any other case, including the case where the goods are
not sold, be the value determined in such manner as may be
prescribed.
(2) The provisions of this section shall not apply in respect of any
excisable goods for which a tariff value has been fixed under sub-
section (2) of Section 3.
(3) For the purpose of this section, -
a. "assessee' means the person who is liable to pay the duty
of excise under this Act and includes his agent;
b. persons shall be deemed to be "related" if -
i. they are inter-connected undertakings;
ii. they are relatives;
iii. amongst them the buyer is a relative and a distributor of
the assessee, or a sub-distributor of such distributor; or
iv. they are so associated that they have interest, directly or
indirectly, in the business of each other.
Explanation. - In this clause -
i. "inter-connected undertakings" shall have the meaning
assigned to it in Clause (g) of Section 2 of the Monopolies and
Restrictive Trade Practices Act, 1969; and
ii. "relative" shall have the meaning assigned to it in Clause
(41) of Section 2 of the Companies Act, 1956;
(c ) "place of removal" means -
i. a factory or any other place or premises of production or
manufacture of the excisable goods;
ii. a warehouse or any other place or premises wherein the
excisable goods have been permitted to be deposited without
payment of duty.
from where such goods are removed :
(d) "transaction value" means the price actually paid or payable
for the goods, when sold, and includes in addition to the amount
charged as price, any amount that the buyer is liable to pay to, or on
behalf of, the assessee, by reason of, or in connection with the sale,
whether payable at the time of the sale or at any other time, including,
but not limited to, any amount charged for, or to make provision for,
advertising or publicity, marketing and selling organization expenses,
storage, outward handling, servicing, warranty, commission or any
other matter; but does not include the amount of duty of excise, sales
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E/26322,28423, 28431/2013; E/20474/2015
tax and other taxes, if any, actually paid or actually payable on such
goods'.
14. Prior to 01.10.1975 the deemed value of the goods was
the 'wholesale cash price' of the goods at the time and place of
removal of the goods from the factory or at any other place of
manufacture or production for delivery less abatement on
account of trade discount and the amount of duty payable at the
time of removal of goods. The said provision recognized only one
wholesale cash price for determination of the deemed value of
the goods, which made applicable to quantity of goods
manufactured and cleared till the same is revised.
15. To overcome the difficulties of determination of value when
the goods sold at more than one wholesale cash price, in normal
course of trade, the provision was amended w.e.f. 01.10.1975
with the following objectives and reasons:-
"(2) Reasons for revision of the valuation provisions. Valuation
under the old section 4 presented certain practical difficulties,
some of which got highlighted in the judgment of the Supreme
Court in A.K. Roy and Another v. Voltas Limited-a case where a
manufacturer was selling a small percentage of his production
through a distributor and the rest directly to the consumers
from his branch office at a much higher price. The court held
that the sale to the distributor constituted transaction in the
wholesale market and therefore the entire production should be
assessed under clause (a) of that section, i.e., on the basis of
the price charged to the distributor. The new section 4 is
designed to overcome the various difficulties experienced in
valuation of excisable goods for purposes of excise duty. It
provides as far as practicable for assessment of duty on
excisable goods on the basis of the normal price, 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 of removal, where the buyer is not related
person and the price is the sole consideration for the sale.
Further, it makes specific provisions with respect to certain
situations which were not provided for earlier and which are
frequently encountered in the sphere of valuation. It also
contains enabling powers for Central Government to frame rules
for situations where value cannot be determined in the manner
laid down in clause (a) of sub-section (1) of the new section 4.
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E/20255,20315/2019; E/20673/2022; E/20730/2022
E/26322,28423, 28431/2013; E/20474/2015
16. Under the new provision, the concept of one 'wholesale
cash price' in wholesale market have been replaced with
'Normal price' 'ordinarily sold' in 'wholesale trade' under the
scope of Section 4(1)(a); the three provisos enacted under the
said section laying down the circumstances under which more
than one normal price could be considered for determination of
assessable value of the manufactured goods sold from the place
of manufacture; accordingly seven different pricelists have been
prescribed under the said amended provision and Central Excise
Valuation Rules,1975 had been framed to determine the value,
when normal price cannot be ascertained under section 4(1)(a)
and resort to be made to Section 4(1)(b) of CEA,1944.
Elaborate provisions have been made defining the meaning of
'related person', 'value' etc. In other words, a major change
that was brought was in the scope of wholesale cash price i.e.
"Normal price" which could be more than one, in turn, more than
one assessable value, depending on the circumstances;
statutorily prescribed under the said three provisos, a departure
from the earlier method of determination of one assessable
value, applicable to entire quantity of goods manufactured and
cleared from the place of manufacture/factory. As mentioned in
the objectives and reasons, it is also designed to overcome the
situations encountered in A.K.Roy & another Vs. Voltas Ltd.
[1977(1) ELT (J177) (S.C)] judgment, where a small percentage
of manufactured goods was sold from the factory to the
distributors at a price and major portion of the sale was made
directly to consumers at a higher price. It is observed as:
"18. There can be no doubt that the 'wholesale cash price' has
to be ascertained only on the basis of transactions at arms
length. If there is a special or favoured buyers to whom a
specially low price is charged because of extra commercial
considerations, e. g. because he is relative of the manufacturer,
the price charged for those salts would not be the 'wholesale
cash price' for levying excise under s. 4 (a) of the Act. A sole
distributor might or might not be a favoured buyer according as
terms of the agreement with him are fair and reasonable and
were arrived at on purely commercial basis. Once wholesale
dealings at arms length are established, the determination of
the wholesale cash price for the purpose of s. 4 (a) of the Act
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E/26322,28423, 28431/2013; E/20474/2015
may not depend upon the number of such wholesale dealings.
The fact that the appellant sold 90 to 95 of the articles
manufactured to consumer direct would not make the price of
the wholesale sales of the rest of the articles and the less the
'wholesale cash price' for the purpose of s. 4 (a) even if these
sales were made pursuant to agreement stipulating for certain
commercial advantages, provided the agreements were entered
into at arms length and in the ordinary course of business."
17. The following observation of the Hon'ble Supreme Court at
para 20 in Voltas' judgment resulted into filing petitions before
the Supreme Court, interpreting the scope of Section 3 and
amended Section 4 of CEA, 1944, in advancing the argument,
whether post manufacturing expenses incurred after removal of
the goods to the Depots, be included in determining the
assessable value of the goods sold from the depots where the
levy/nature of excise duty is on the event of 'manufacture' of
goods. The relevant observation is:
"20. Excise is a tax on the production and manufacture of
goods `see Union of India v. Delhi Cloth and General Mills (AIR
1963 SC 791) section 4 of the Act therefore provides that the
real value should be found after deducting the selling cost and
selling profits and that the real value can include only the
manufacturing cost and the manufacturing profit. The section
makes it clear that excise is levied only on the amount
representing the manufacturing cost plus the manufacturing
profit and excludes post-manufacturing cost and the profit
arising from post manufacturing operation, namely selling
profits? The Section postulates that the wholesale price should
be taken on the basis of cash payment thus eliminating the
interest involved in wholesale price which gives credit to the
wholesale buyer for a period of time and that the price has to be
fixed for delivery at the factory gate thereby eliminating freight,
octroi and other charges involved in the transport of the articles.
As already stated it is not necessary for attracting the operation
of s. 4 (a) that there should be a large number of wholesale
sales. The quantum of goods sold by a manufacturer on
wholesale basis is entirely irrelevant. There are facts that such
sales may be few or scanty does not alter the true position".
18. Their Lordships in Bombay Tyre International's case
rejected the said line of argument interpreting the scope of
Section 3 and Section 4 of the CEA, 1944 and observed as
below:-
13. We move on now to a different dimension, to the
conceptual consideration of the measure of the tax. Section 3 of
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the Central Excises and Salt Act provides for the levy of the duty
of excise. It creates the charge, and defines the nature of the
charge. That it is a levy on excisable goods, produced or
manufactured in India, is mentioned in terms in the section
itself. Section 4 of the Act provides the measure by reference to
which the charge is to be levied. The duty of excise is
chargeable with reference to the value of the excisable goods,
and the value is defined in express terms by that section. It has
long been recognised that the measure employed for assessing
a tax must not be confused with the nature of the tax. In Ralla
Ram v. The Province of East Punjab - (1948) F.C.R. 207, the
Federal Court held that a tax on buildings under Section 3 of the
Punjab Urban Immovable Property Tax Act, 1940 measured by a
percentage of the annual value of such buildings remained a tax
on buildings under that Act even though the measure of annual
value of a building was also adopted as a standard for
determining income from property under the Income-tax Act. It
was pointed out that although the same standard was adopted
as a measure for the two levies, the levies remained separate
and distinct imposts by virtue of their nature. In other words,
the measure adopted could not be identified with the nature of
the tax. The distinction was observed by a Special Bench of the
Patna High Court in Atma Ram Budhia v. State of Bihar - AIR
1952 Patna 359, where a tax on passengers and goods assessed
as a rate on the fares and freights payable by the owners of the
motor vehicles. Atma Ram Budhia (supra) was referred to with
approval by this Court in M/s. Sainik Motors, Jodhpur and
Others v. The State of Rajasthan - (1962) 1 S.C.R. 517. This
Court in that case repelled the contention that the levy was a
tax upon income and not upon passengers and goods. It pointed
out that "though the measure of the tax is furnished by the
fares and freights it does not cease to be a tax on passengers
and goods". The point was considered by this Court again in
D.C. Gouse and Co. etc. v. State of Kerala & Anr. etc. - (1980) 1
S.C.R. 804, where reference was made to the measure adopted
for the purpose of the levy of tax on buildings under the Kerala
Building Tax Act. The Court examined the different modes
available to the Legislature for measuring the levy, and upheld
the action of the Legislature in linking the levy with the annual
value of the building and prescribing a uniform formula for
determining its capital value and for calculating the tax. In the
course of its judgment, the Court cited with approval a passage
from Seervai's Constitutional Law of India - Second Edition, Vol.
2 at page 1258.
"Another principle for reconciling apparently conflicting tax
entries follows from the fact that a tax has two elements : the
person, thing or activity on which the tax is imposed, and the
amount of the tax. The amount may be measured in many
ways; but decided cases establish a clear distinction between
the subject-matter of a tax and the standard by which the
amount of tax is measured. These two elements are described
as the subject of a tax and the measure of a tax."
It is, therefore, clear that the levy of a tax is defined by its
nature, while the measure of the tax may be assessed by its
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own standard. It is true that the standard adopted as the
measure of the levy may indicate the nature of the tax but it
does not necessarily determine it. The relationship was aptly
expressed by the Privy Council : In Re. A Reference under the
Government of Ireland Act, 1920 and Section 3 of the Finance
Act (Northern Ireland), 1934 - L.R. 1936 A.C. 352, when it said
:-
"........It is the essential characteristic of the particular tax
charged that is to be regarded, and the nature of the
machinery-often complicated-by which the tax is to be assessed
is not of assistance, except in so far as it may throw light on the
general character of the tax."
The case was referred to by a Constitution Bench of this Court in
R.R. Engineering Co. v. Zila Parishad Bareilly & Anr. - (1980) 3
S.C.R. 1, where the relationship was succinetly described thus :-
"It may be, and is often so, that the tax on circumstances and
property is levied on the basis of income which the assessee
receives from his profession, trade, calling or property. That is,
however, not conclusive on the nature of the tax. It is only as a
matter of convenience that income is adopted as a yardstick or
measure for assessing the tax. As pointed out In Re : A
Reference under Govt. of Ireland Act (supra), the measure of
the tax is not a true test of the nature of the tax. Therefore,
while determining the nature of a tax, though the standard on
which the tax is levied my be a relevant consideration, it is not a
conclusive consideration."
The principle was reaffirmed by this Court in The Hingir-Rampur
Coal Co. Ltd. and Others v. The State of Orissa and Others -
(1961) 2 S.C.R. 537, where the form in which the levy was
imposed was held to be an impermissible test for defining in
itself the character of the levy. It was observed :-
"...... the mere fact that the levy imposed by the impugned Act
had adopted the method of determining the rate of the levy by
reference to the minerals produced by the mines would not by
itself make the levy a duty of excise. The method thus adopted
may be relevant in considering the character of the impost but
its effect must be weighed along with and in the light of the
other relevant circumstances."
It is apparent, therefore, that when enacting a measure
to serve as a standard for assessing the levy the
Legislature need not contour it along lines which spell out
the character of the levy itself. Viewed from this
standpoint, it is not possible to accept the contention that
because the levy of excise is a levy on goods
manufactured or produced the value of an excisable
article must be limited to the manufacturing cost plus the
manufacturing profit. We are of opinion that a broader
based standard of reference may be adopted for the
purpose of determining the measure of the levy. Any
standard which maintains a nexus with the essential
character of the levy can be regarded as a valid basis for
assessing the measure of the levy. In our opinion, the
original Section 4 and the new Section 4 of the Central
Excises and Salt Act satisfy this test.(emphasis supplied)
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14. Section 4 envisages a method of collecting tax at the point
of the first sale effected by the manufacturer. Under the old
Section 4(a), the value of the excisable article was deemed to
be the wholesale cash price for which an article of the like kind
and quality was sold, or was capable of being sold, at the time
of the removal of the article chargeable with duty from the
factory or any other premises of manufacture or production for
delivery at the place of manufacture or production, or if a
wholesale market did not exist for such article at such place,
then delivery was envisaged at the nearest place where such
market existed. Section 4(b) declared that where such price was
not ascertainable, the value would be deemed to be the price at
which an article of the like kind and quality was sold or was
capable of being sold by the manufacturer or producer, or his
agent, at the time of the removal of the article chargeable with
duty from such factory or other premises for delivery at the
place of manufacture or production, and if such article was not
sold or was not capable of being sold at such place, at any other
place nearest thereto. Then there was an Explanation which
declared that no abatement or deduction would be allowed
except in respect of trade discount and the duty payable at the
time of the removal of the article from the factory. The
wholesale price was envisaged as a cash price in order to make
it a uniform standard, because it was then a price freed from
the burden of an increase on account of credit or other
advantage allowed to a buyer, a factor which may vary from
transaction to transaction and from buyer to buyer. The
essential distinction between clause (a) and clause (b) of
Section 4 appears to lie in this, that clause (a) is invoked when
the wholesale cash price is ascertainable and clause (b) when
the wholesale cash price cannot be ascertained.
15. As we have said, it was open to the Legislature to specify
the measure for assessing the levy. The Legislature has done
so. In both the old Section 4 and the new Section 4, the price
charged by the manufacturer on a sale by him represents the
measure. Price and sale are related concepts, and price has a
definite connotation. The "value" of the excisable article has to
be computed with reference to the price charged by the
manufacturer, the computation being made in accordance with
the terms of Section 4.
16. A contention was raised for some of the assessees, that
the measure was to be found by reading Section 3 with Section
4, thus drawing the ingredients of Section 3 into the exercise.
We are unable to agree. We are concerned with Section 3(1),
and we find nothing there which clothes the provision with a
dual character, a charging provision as well as a provision
defining the measure of the charge.
19. Laying down the principle of determination of 'value' when
various expenses are incurred after manufacture of the goods
but in placing the same in the market for sale, their Lordships
observed as:
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"49. We shall now examine the claim. It is apparent that for
purposes of determining the "value", broadly speaking both the
old Section 4(a) and the new Section 4(1)(a) speak of the price
for sale in the course of wholesale trade of an article for delivery
at the time and place of removal, namely, the factory gate.
Where the price contemplated under the old Section 4(a) or
under the new Section 4(1)(a) is not ascertainable, the price is
determined under the old Section 4(b) or the new Section
4(1)(b). Now, the price of an article is related to its value (using
this term in a general sense), and into that value how poured
several component, including those which have enriched its
value and given to the article is marketability in the trade.
Therefore, the expenses incurred on account of the several
factors which have contributed to its value upto the date of sale,
which apparently would be the date of delivery, are liable to be
included. Consequently, where the sale is effected at the factory
gate, expenses incurred by the assessee upto the date of
delivery on account of storage charges, outward handling
charges, interest on inventories (stocks carried by the
manufacturer after clearance), charges for other services after
delivery to the buyer, namely after-sales service and marketing
and selling organisation expenses including advertisement
expenses cannot be deducted. It will be noted that
advertisement expenses, marketing and selling organisation
expenses and after-sales service promote the marketability of
the article and enter into its value in the trade. Where the sale
in the course of wholesale trade is effected by the assessee
through its sales organisation at a place or places outside the
factory gate, the expenses incurred by the assessee upto the
date of delivery under the aforesaid heads cannot, on the same
grounds, be deducted. But the assessee will be entitled to a
deduction on account of the cost of transportation of the
excisable article from the factory gate to the place or places
where it is sold. The cost of transportation will include the cost
of insurance on the freight for transportation of the goods from
the factory gate to the place or places of delivery.
20. A plain reading of the aforesaid observation of the Hon'ble
Supreme Court, it is clear that all expenses that enriches the
value till the time of its sale be part of the assessable value for
the purpose of levy of excise duty. This principle has been
endorsed subsequently in all cases including GOI Vs. Madras
Rubber Factory Ltd case [1995(77) ELT 433 (SC)] .
21. In Acer India Ltd.'s case, the Hon'ble Supreme Court
was confronted with a question whether in the value of
computer, chargeable to excise duty, would also include the
value of the 'operational software' which is specifically exempted
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from excise duty when both are supplied together. While
interpreting the meaning of expression "by reason of sale or in
connection with sale" contained in the amended Section 4 of
CEA, 1944, effective from 01.07.2000, their Lordships analysing
the classification of computer hardware and software observed
that the value of operational software cannot be added to the
value of computer hardware. It is held as follows:-
"80. In other words, computers and softwares are different
and distinct goods under the said Act having been classified
differently and in that view of the matter, no central excise duty
would be leviable upon determination of the value thereof by
taking the total value of the computer and software. So far as,
the valuation of goods in terms of 'transaction value' thereof, as
defined in Section 4(3)(d) of the Act is concerned, suffice it to
say that the said provision would be subject to the charging
provisions contained in Section 3 of the Act as also Sub-Section
(1) of Section 4. The expressions "by reason of sale" or "in
connection with the sale" contained in the definition of
'transaction value' refer to such goods which is excisable to
excise duty and not the one which is not so excisable. Section 3
of the Act being the charging section, the definition of
'transaction value' must be read in the text and context thereof
and not de'hors the same. The legal text contained in Chapter
84, as explained in Chapter Note 6, clearly states that a
software, even if contained in a hardware, does not lose its
character as such. When an exemption has been granted from
levy of any excise duty on software whether it is operating
software or application software in terms of heading 85.24, no
excise duty can be levied thereupon indirectly as it was
impermissible to levy a tax indirectly. In that view of the matter
the decision in PSI Data Systems (supra) must be held to have
correctly been rendered."
22. The principle laid down in the said case has been doubted
by the Division Bench of the Supreme Court in the case of CCE
Vs. Grasim Industries case apparently being in conflict with
the ratio laid down in Bombay Tyre International's case. The
facts in Grasim Industries' case was that whether collection of
certain amounts from customers under different heads viz.
packing charges, wear and tear charges, facility charges, service
charges, delivery and collection charges, rental charges, repair
and testing charges be includable for the purpose of computing
the assessable value. Their Lordships referred the matter in that
context raising the following questions for determination:-
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"1. Whether Section 4 of the Central Excise Act, 1944 (as
substituted with effect from 1-7-2000) and the definition of
"transaction value" in clause (d) of sub-section (3) of
Section 4 are subject to Section 3 of the Act?
2. Whether Sections 3 and 4 of the Central Excise Act,
despite being interlinked, operate in different fields and
what is their real scope and ambit?
3. Whether the concept of "transaction value" makes any
material departure from the deemed normal price concept
of the erstwhile Section 4(l)(a) of the Act?"
23. The reference has been examined by the five Member
Constitution Bench of the Hon'ble Supreme court and reiterating
the principle laid down in Bombay Tyre International Ltd.'s
case, observed as follows:-
"20. We find no room whatsoever for any disagreement with
the above view taken by this court in Bombay Tyre International
Ltd. (supra). It is a view consistent with what was held by the
Federal Court and the Privy Council in Central Provinces and
Berar (supra) Boddu Paidanna (supra) and Province of Madras
(supra) and the decisions that followed thereafter including the
decision in Voltas Limited (supra) and Atic Industries Limited v.
H.H. Dewa. Asstt. Collector of Central Excise and ors - (1975) 1
SCC 499 = 1978 (2) E.L.T. (J444) (S.C.) the true purport of
which was explained in Bombay Tyre International Ltd. (supra).
Both the above opinions were clarified to mean that neither of
them lay down any proposition to the effect that the excise duty
can be levied only on the manufacturing cost plus the
manufacturing profit only.
21. At this stage, the amendment to Section 3 by substitution
of the words "a duty of excise on all excisable goods" by the
words "a duty of excise to be called the Central Value Added Tax
(CENVAT) on all excisable goods" is conspicuous. The
amendment of Section 3 to the Act not only incorporates the
essentials of a changed concept of charging of tax on additions
to the value of goods and services at each stage of production
but also engrafts in the statute what was judicially held to be
permissible additions to the manufacturing cost and
manufacturing profit in Bombay Tyre International Ltd. (supra).
This fundamental change by introduction of the concept
underlying value-added taxation in the provisions of Section 3
really find reflection in the definition of 'transaction value' as
defined by Section 4(3)(d) of the Act besides incorporating what
was explicitly held to be permissible in Bombay Tyre
International Ltd. (supra). Section 4(3)(d), thus, defines
'transaction value' by specifically including all value additions
made to the manufactured article prior to its clearance, as
permissible additions to be price charged for purpose of the
levy.
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24. While explaining the observation made in Acer India
Ltd.'s case and its limitation in application to the meaning of
transaction value in the context of valuation and software when
supplied with hardware, their Lordships observed as follows:-
"22. This would bring us to a consideration of the decision of
this Court in Acer India Ltd. (supra). The details need not detain
us. Softwares which were duty free items and could be
transacted as softwares came to be combined with the computer
hardware which was a dutiable item for purposes of clearance.
The Revenue sought to take into account the value of the
computer software for the purposes of determination of
'transaction value' with regard to the computer. This Court
negatived the stand of the Revenue taking the view that when
software as a separate item was not dutiable its inclusion in the
hard-disk of the computer cannot alter the duty liability of the
software so as to permit the addition of the price/value of the
software for the purpose of levy of duty. It is in the above
context that the decision of this Court in Acer India Ltd. (supra)
has to be understood. The observations made in paragraph 84
thereof to the effect that 'transaction value' defined in Section
4(3)(d) of the Act would be subject to the charging provisions
contained in Section 3 of the Act will have viewed in the context
of a situation where an addition of the value of a non-dutiable
item was sought to be made to the value of a dutiable item for
the purpose of determination of the transaction value of the
composite item. This is the limited context in which the
subservience of Section 4(3)(d) to Section 3 of the Act was
expressed and has to be understood. If so understood, we do
not see how the views expressed in paragraph 84 of Acer India
Ltd. (supra) can be read to be in conflict with the decision of
Bombay Tyre International Ltd. (supra).
25. Finally answering the question whether there is a
difference between the method of valuation under Section 4
prior to 01.07.2000, their Lordships observed as under:-
23. Accordingly, we answer the reference by holding that the
measure of the levy contemplated in Section 4 of the Act will
not be controlled by the nature of the levy. So long a reasonable
nexus is discernible between the measure and the nature of the
levy both Section 3 and 4 would operate in their respective
fields as indicated above. The view expressed in Bombay Tyre
International Ltd. (supra) is the correct exposition of the law in
this regard. Further, we hold that "transaction value" as defined
in Section 4(3)(d) brought into force by the Amendment Act,
2000, statutorily engrafts the additions to the 'normal price'
under the old Section 4 as held to be permissible in Bombay
Tyre International Ltd. (supra) besides giving effect to the
changed description of the levy of excise introduced in Section 3
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of the Act by the Amendment of 2000. In fact, we are of the
view that there is no discernible difference in the statutory
concept of 'transaction value' and the judicially evolved meaning
of 'normal price'.
26. Analysis of the judgment of the Constitution Bench of the
Supreme Court in Grasim Industries Ltd. case, in the context
of the present case, we do not find substance in the argument of
the Revenue that the Transaction Value of the goods under an
agreement be discarded and the price at which the goods that
would have been fetched had it been sold in the market be
taken into consideration for determination of assessable value of
the goods in dispute, for the reason that there is no difference in
the concept of Normal price and the transaction value as held in
the above judgment. On the contrary, neither the concept of
'Normal Price', nor the scope of 'transaction value' envisaged a
price that would be fetched on the sale of goods in a wholesale
market be the criterion for determination of assessable value.
The said approach of the Revenue was rejected by the Hon'ble
Supreme Court wayback in Voltas' case. Their Lordships
observed as:
"9. Even if it is assumed that the latter part of s. 4(a)
proceeds on the assumption that the former part will apply only
if there is a wholesale market at the place of manufacture for
articles of a like kind and quality, the question is what exactly is
the concept of wholesale market in the context. A wholesale
market does not always mean that there should be an actual
place where articles are sold and bought on a wholesale basis.
These words can also mean that potentiality of the articles being
sold on a wholesale basis. So, even if there was no market in
the physical sense of the term at or near the place of
manufacture where the articles of a like kind and quality are or
could be sold, that would in any way affect the existence of
market in the proper sense of the term provided the articles
themselves could be sold wholesale to traders, even though the
articles are sold to them on the basis of agreements which
confer certain commercial advantages upon them. In other
words, the sales to the wholesale dealers did not cease to be
wholesale sales merely because the wholesale dealers had
entered into agreement with the responded under which certain
commercial benefits were conferred upon them is consideration
of their undertaking to do service to the articles sold, or because
of the fact that no other person could purchase the articles
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wholesale from the respondent. We also think that the
application of clause (a) of s. 4 of the Act does not depend upon
any hypothesis to the effect that at the time and place of sale,
any further articles of like kind and quality have been sold. If
there is an actual price for the goods themselves at the time
and the place of sale and if that is a "wholesale cash price", the
clause is not inapplicable for want of sale of other goods of a
like kind and quality."
27. Their Lordships have categorically held that merely
because a sale is made under an agreement which contained
certain commercial benefits conferred under the said agreement,
the sale could still to be considered as a wholesale sale and the
actual price for the goods themselves at the time and place of
sale to be considered as wholesale cash price. This observation
has led to prescribing different Normal price, and sale of goods
under contracts/agreements categorized under 'class of buyers'
under the amended Section 4 effective from 01.10.1975 and
Part-II of the price lists prescribed under Rule 173C of erstwhile
Central Excise Rules,1944, for determination of assessable value
as 'class of buyers'
28. Further, from the aforesaid analysis, it is also clear that
the issue before the Hon'ble Supreme Court in Bombay Tyre
International Ltd.'s case as well as in Grasim Industries
Ltd.'s case, relate to question of inclusion of certain post-
manufacturing expenses which were argued as unrelated to the
activity of manufacturing and incurred subsequent to the event
of manufacturing and/or removal of the goods from the place of
its manufacture, hence cannot form part of the assessable
value. Negating the said argument in Bombay Tyre
International Ltd.'s case as well as by Constitution Bench in
Grasim Industries Ltd.'s case, it has been held that all
expenses that enrich the value would form part of the assessable
value for computation of duty under Section 4(1)(a) under the
Normal price era as well as under the 'transaction value regime
introduced w.e.f. 01.07.2000. The basis of argument for
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deduction of such post-manufacturing expenses has always been
centered around Section 3 and Section 4 of Central Excise
Act,1944 dealing with levy and measure of duty, respectively. In
that context, the Hon'ble Supreme Court time and again
reiterated the principle that Section 3 and Section 4 operate in
different spheres and there has been no material change with
the amendments to Section 4 brought into effect in 1975 or in
2000, introducing the concept of transaction value in place of
normal price.
29. Also, we find fallacy in the argument of the Revenue that if
the expenses that are considered by the Hon'ble Supreme Court
in Bombay Tyre International's case for inclusion in the
value, if not present, in a transaction value under an agreement,
the same should be rejected and the 'value' be determined
under section 4 (1)(b) of CEA,1944 read with CEVR, 2000. In
other words, it cannot be interpreted and construed to say that if
these expenses even though not incurred by an assessee, who
sells product under an agreement, where price is the sole
consideration and the relationship between the seller and buyer
does not fall under the scope of the definition of 'related person',
the transaction price between the buyer and seller be rejected
and the price at which the buyer sells the goods in the market be
considered for the purpose of assessable value under Section
4(1)(b) of CEA, 1944 read with the CEVR, 2000.
30. Now, coming to the facts of the present case, MFCPL, by
the agreement dated 18.05.2007 with IFFL, agreed to sell the
FCPs at a price mutually agreed price. The said agreement is as
below:
Page 44 of 59
E/26321/2013; E/26315, 26317,28432,28433/2013;
E/20707,20708,20766,20767/2014; E/20473/2015;
E/20457,20458,20463, 20464/2016; E/21783 to 21790/2017;
E/20255,20315/2019; E/20673/2022; E/20730/2022
E/26322,28423, 28431/2013; E/20474/2015
Page 45 of 59
E/26321/2013; E/26315, 26317,28432,28433/2013;
E/20707,20708,20766,20767/2014; E/20473/2015;
E/20457,20458,20463, 20464/2016; E/21783 to 21790/2017;
E/20255,20315/2019; E/20673/2022; E/20730/2022
E/26322,28423, 28431/2013; E/20474/2015
Page 46 of 59
E/26321/2013; E/26315, 26317,28432,28433/2013;
E/20707,20708,20766,20767/2014; E/20473/2015;
E/20457,20458,20463, 20464/2016; E/21783 to 21790/2017;
E/20255,20315/2019; E/20673/2022; E/20730/2022
E/26322,28423, 28431/2013; E/20474/2015
Page 47 of 59
E/26321/2013; E/26315, 26317,28432,28433/2013;
E/20707,20708,20766,20767/2014; E/20473/2015;
E/20457,20458,20463, 20464/2016; E/21783 to 21790/2017;
E/20255,20315/2019; E/20673/2022; E/20730/2022
E/26322,28423, 28431/2013; E/20474/2015
Page 48 of 59
E/26321/2013; E/26315, 26317,28432,28433/2013;
E/20707,20708,20766,20767/2014; E/20473/2015;
E/20457,20458,20463, 20464/2016; E/21783 to 21790/2017;
E/20255,20315/2019; E/20673/2022; E/20730/2022
E/26322,28423, 28431/2013; E/20474/2015
Page 49 of 59
E/26321/2013; E/26315, 26317,28432,28433/2013;
E/20707,20708,20766,20767/2014; E/20473/2015;
E/20457,20458,20463, 20464/2016; E/21783 to 21790/2017;
E/20255,20315/2019; E/20673/2022; E/20730/2022
E/26322,28423, 28431/2013; E/20474/2015
Page 50 of 59
E/26321/2013; E/26315, 26317,28432,28433/2013;
E/20707,20708,20766,20767/2014; E/20473/2015;
E/20457,20458,20463, 20464/2016; E/21783 to 21790/2017;
E/20255,20315/2019; E/20673/2022; E/20730/2022
E/26322,28423, 28431/2013; E/20474/2015
31. We do not find any unusual condition in the aforesaid
agreement dated 18.05.2007 which would lead to an inference
that it is not on principal to principal basis but that of a Principal
and an agent. In an usual course of business transaction both
seller and buyer come together, negotiate the price and if
acceptable, translate their conditions to a written contract and
later executes the contract, in its letter and spirit. Therefore,
existence of a mutual agreement in the sale and purchase of
Page 51 of 59
E/26321/2013; E/26315, 26317,28432,28433/2013;
E/20707,20708,20766,20767/2014; E/20473/2015;
E/20457,20458,20463, 20464/2016; E/21783 to 21790/2017;
E/20255,20315/2019; E/20673/2022; E/20730/2022
E/26322,28423, 28431/2013; E/20474/2015
goods cannot be considered that the agreed price is a tainted
one since the goods are not sold in force wholesale market. If
such an interpretation is adopted, all the tailor made goods will
fail the test of transaction value as the goods would not be
purchased by any one else except the person who ordered for
such goods.
32. In the above agreement, under Clause 1 it is stipulated
that MFCPL shall manufacture and supply the product according
to formulations, specifications and quality furnished by IFFL from
time to time and the quantity of the products to be supplied shall
be determined by mutual agreement in writing. Clause 2
stipulates that all the raw materials and packing materials would
be purchased in accordance with specifications and quality by
IFFL and MFCPL and shall maintain necessary record of analytical
data of raw materials. Clause 3 of the said agreement stipulates
that MFCPL shall test samples of all products supplied to IFFL
and ensure it is conformed to the specifications prescribed by
IFFL. In Clause 4.3, it is stipulated that MFCPL shall not sell the
products whether packed or otherwise which has been rejected
the IFFL, bearing the company's trademark, copyright and / or
design. However, MFCPL may sell the products to third party
with the prior consent of IFFL. Under Clause 7, it is stipulated
that IFFL shall pay MFCPL the prices listed in Appendix 2 for the
product duly packed and supplied on outright sale basis and the
price is exclusive of excise duty and sales / VAT and other costs,
charges, taxes duties etc. Central Excise duty and Sales /VAT as
applicable shall be paid by MFCPL and charged to IFFL. It is
mentioned at Clause 11 that the agreement will be on principal
to principal basis and does not bar parties from entering into
similar agreements with any other persons. Under Clause 12, it
is further mentioned that either part can terminate the contract
without assigning any reason after giving 3 months prior notice
in writing to other part. This agreement has been interpreted by
Page 52 of 59
E/26321/2013; E/26315, 26317,28432,28433/2013;
E/20707,20708,20766,20767/2014; E/20473/2015;
E/20457,20458,20463, 20464/2016; E/21783 to 21790/2017;
E/20255,20315/2019; E/20673/2022; E/20730/2022
E/26322,28423, 28431/2013; E/20474/2015
the Revenue being an agreement influenced by the purchaser on
the seller whereby MFCPL could not sell the products to others
and the right to sell the rejected goods also not vested with
MFCPL. The Commissioner in the impugned Order concluded
that the stringent conditions of the agreement indicates that
MFCPL was prevented from putting up FCP in the ordinary course
of business or trade which is of critical importance to ascertain
whether sale is not in ordinary course of trade or business in the
light of definition of 'sale and 'purchase' under section 2(h) of
CEA,1944; hence the price cannot be considered to be at arm's
length. In our opinion, the meaning of 'sale' and 'purchase' as
prescribed under section 2(h) has been provided a very narrow
and pedantic meaning in the context of determination of
assessable value under section 4 of CEA,1944 which has been
amended from time to time to encompass more than one
wholesale transaction based on the circumstances and
commercial expediency. The Hon'ble Supreme Court in the case
of CCE, Nagpur Vs. Universal Ferro & Allied Chemicals Ltd.
[2020(372) ELT SC (14)] held that a liberal meaning of the
definition of 'sale' and 'purchase' be given in the context of
Central Excise Act,1944 observed as:
"18. We shall first deal with the submission of Shri K.
Radhakrishnan, Learned Senior Counsel appearing for the
Revenue, to the effect that since in the transaction between
UFAC and TISCO there is no transfer of property in goods, the
same cannot be termed as 'sale' and therefore would not be
covered under paragraph 9.9(b) of the EXIM Policy. Shri
Radhakrishnan, in that respect, would rely on the provisions of
the Sale of Goods Act, 1930.
19. We do not find any merit in the submission of Shri
Radhakrishnan in this regard. It will be relevant to note that
clause (h) of Section 2 of the Central Excise Act, 1944
specifically defines the terms 'sale' and 'purchase'. Section 2(h)
of the Act reads thus :
"2(h) "sale" and "purchase", with their grammatical variations
and cognate expressions, mean any transfer of the possession
of goods by one person to another in the ordinary course of
trade or business for cash or deferred payment or other
valuable consideration;"
....................................................................................
Page 53 of 59
E/26321/2013; E/26315, 26317,28432,28433/2013; E/20707,20708,20766,20767/2014; E/20473/2015; E/20457,20458,20463, 20464/2016; E/21783 to 21790/2017;
E/20255,20315/2019; E/20673/2022; E/20730/2022 E/26322,28423, 28431/2013; E/20474/2015
23. It is also equally well-settled that the first principle of interpretation of plain and literal interpretation has to be adhered to. We are therefore of the considered view, that the narrower scope of the term 'sale' as found in the Sale of Goods Act, 1930 cannot be applied in the present case. The term 'sale' and 'purchase' under the Central Excise Act, 1944, if construed literally, it would give a wider scope and also include transfer of possession for valuable consideration under the definition of the term"
33. The Ld. Commissioner observed that the price at which MFCPL sells the products to IFFL is ultimately sold by IFFL to wholesale dealers at a price ranging from 1.89 to 2.74 times of their purchase price; the photographs of labels affixed on FCP filled containers demonstrate to the general public that FCP is manufactured and packed by MFCPL for IFFL as all indications or relationship such as brand, logo, trade mark, design etc.; also the customers were notified to contact IFFL for consumer complaints, which clearly showed that the products were made for and on behalf of IFFL by MFCPL. Consequently, she has concluded that the intricate business relationship between IFFL and MFCPL reflects interest in each other's business and one influences the other and hence there is existence of mutuality of business interest between MFCPL and IFFL and accordingly the sale by MFCPL to IFFL is not a true sale. Consequently, MFCPL and IFFL are to be treated as related persons in terms of Section 4(3)(b)(iv) of CEA, 1944.
34. We do not find merit in the reasoning of the Commissioner and also the argument advanced by the Revenue during the course of hearing that the conditions stipulated mutually by MFCPL and IFFL indicate that the agreement is not entered into free market business scenario. It is a settled principle of law that selling the entire manufactured goods to IFFL under a commercial contract after packing and affixing the brand name of IFFL as per the conditions of the contract would not make MFCPL a related person of IFFL nor it could be construed that Page 54 of 59 E/26321/2013; E/26315, 26317,28432,28433/2013; E/20707,20708,20766,20767/2014; E/20473/2015; E/20457,20458,20463, 20464/2016; E/21783 to 21790/2017;
E/20255,20315/2019; E/20673/2022; E/20730/2022 E/26322,28423, 28431/2013; E/20474/2015 there is mutuality of business beyond the precinct of commercial relation other than that of buyer and seller. This principle has been laid down by the Tribunal in Eastern Bakeries Pvt. Ltd's case & TTK Health care Ltd.'s case(supra). In this premises, rejection of the agreement considering the MFPCL and IFFL not on principal to principal, in absence of any evidence to show that the relationship between appellant MFCPL and IFFL is tainted with extra commercial relationship like free flow of finance, control through share holding, etc. influence the price mutually agreed alleging that price is not the commercial price and hence the price at which the goods sold by IFFL be relevant for determination of value is not sustainable.
35. In the show cause Notice, it is alleged comparing both the Agreements dated 07.1.2004 and 18.5.2007 that the conditions continued to be more or less the same and hence the relation between MFPCL and IFFL continued to be Principal and Job worker; however, the learned Commissioner in her finding held that Rule 10A of the CEVR, 2000 is not applicable to the present case and confirmed the differential demand of duty short paid adopting the sale price of IFFL resorting to Rule 11 read with Rule 9 considering the relationship between MFCPL and IFFL as that of 'related person'. In our view, the said approach of the adjudicating authority cannot be sustained as there is no evidence brought on record to establish mutuality of relation or satisfaction of any of the ingredients of the definition of related person under Section 4 (3)(b) of the CEA, 1944. Also, the present proceeding has been initiated after insertion of Rule 10A of CEVR and there has been no allegation under earlier Agreement dated 07.1.2004 that the transaction between MFPCL and IFFL was influenced by their relationship as defined under Section 4(3)(b)(iv) of CEA,1944, hence the price at which FCP supplied by MFPCL to IFFL to be ignored and the assessment of FCP be made at the price at which IFFL sold the Page 55 of 59 E/26321/2013; E/26315, 26317,28432,28433/2013; E/20707,20708,20766,20767/2014; E/20473/2015; E/20457,20458,20463, 20464/2016; E/21783 to 21790/2017;
E/20255,20315/2019; E/20673/2022; E/20730/2022 E/26322,28423, 28431/2013; E/20474/2015 goods in the market be adopted. Therefore, in absence of any additional evidence indicating the transaction between MFPCL and IFFL under the agreement 18.5.2007 fall within the definition of 'related person', rejecting the 'Transaction Value between MFPCL and IFFL is contrary to the settled principles of valuation of goods; hence cannot be sustained.
36. The judgments heavily relied upon by the learned Special Counsel viz. Nutri Foods and S.Kumar's case, are in a different set of facts and circumstances and hence cannot not be made applicable to the facts of the case in hand.
37. In Nutri Food's case there are three parties involved, namely, M/s Anand Food, a partnership firm engaged in manufacturing various food colours, soup powder, etc. M/s Nutri Foods engaged in packing the products manufactured in bulk by Anand foods, M/s All seasons Foods Limited, a public company is the purchaser of the products, owner of the brand name "All seasons" used on the products. M/s Anand foods gave an authorization to Nutri Foods to manufacture(packing in unit containers) the products on their behalf and to comply with the procedural formalities under the Central Excise and Salt Act and the rules made their under in respect of the goods manufactured on their behalf and also to furnish information relating to the price at which they would sell the goods to M/s All Season Foods Ltd. in order to enable determination of value of the goods under Section 4 of the said Act. The authorization was given in accordance with Notification No.305/77 dated 5.11.1977. Consequently, Nutri foods filed pricelist declaring the price of the goods at which it would be sold by Anand foods to M/s All Seasons. The Asst. Commissioner rejected the pricelist observing that the price of the product had not been declared correctly taking into consideration the agreement entered into between M/s Anand Foods and M/s All seasons. He has observed that the Page 56 of 59 E/26321/2013; E/26315, 26317,28432,28433/2013; E/20707,20708,20766,20767/2014; E/20473/2015; E/20457,20458,20463, 20464/2016; E/21783 to 21790/2017;
E/20255,20315/2019; E/20673/2022; E/20730/2022 E/26322,28423, 28431/2013; E/20474/2015 selling price of the goods was determined jointly and also All seasons shall be responsible for payment of freight charges, insurance etc., for the transportation of bulk products from the factory of Anand foods located at Nashik to Bombay i.e. to the factory of Nutri foods for re-packing; it is concluded that the dealing between Anand Food and All seasons are not principal to principal basis and the price at which All seasons sells the product be relevant for determination of value of the goods. The Tribunal after analysing the facts and the agreements between Anand Foods and All Seasons, endorsing the view of the lower authorities that in the agreements, there was no mention that the goods manufactured by Anand Foods would be sent for the purpose of packing to Nutri Foods at Bombay, whereas actually by a letter dated 05.10.1988 from Anand Foods to Nutri Foods, certain arrangements have been formalised which indicated that Anand Foods were to supply finished products in bulk quantities along with all packing materials such as PET bottles, labels, cartons, shrink sleeves, caps, gum tapes, glue and Nutri Foods is liable to get the bottles filled, capped, shrink sleeved, gum taped, batch coded, labelled and cartooned. The loading and unloading of all raw materials and finished products from the truck to the factory premises were to be borne by the Nutri Foods. In these circumstances the Tribunal came to the conclusion that in this arrangement, the freight charges, packing charges etc. being not included in the declared price; therefore rejected the price charged by Nutri Foods to Anand Foods as normal price and directed to reassess the value after making necessary deductions from the price and remanded the matter to the lower authorities. No such circumstances in the present case exist and hence, the said judgment is not applicable.
38. In S. Kumars Ltd.'s case, the merchant manufacturers who had supplied grey fabrics for processing to the respondent No.1, were firms and companies having common management Page 57 of 59 E/26321/2013; E/26315, 26317,28432,28433/2013; E/20707,20708,20766,20767/2014; E/20473/2015; E/20457,20458,20463, 20464/2016; E/21783 to 21790/2017;
E/20255,20315/2019; E/20673/2022; E/20730/2022 E/26322,28423, 28431/2013; E/20474/2015 and control under S. Kumars group of companies(also respondents), were selling grey fabrics to the respondent no 1 who after processing the fabrics sold the processed fabrics to other respondents belonging to the same group company which were later sold to independent dealers. In the said circumstances, their Lordships observed that the judgment of Ujagar Prints' case would not apply to Respondent No 1 the processor, who is not an independent entity and as in that case, the merchant manufacturers and the purchasing traders were merely extensions of the processor; the processor is not a mere processor but also a merchant manufacturer who purchases/ manufacturers the raw materials, processes it and sells it himself in the wholesale market. In such a situation, the profit is not of a processor but of a merchant manufacturer and a trader. Their Lordships held that even the judgments delivered in the case of Ujagar Prints case and Empire Industries case would not be applicable to case where the dealings are not at arm's length. In the present case, the appellants have been assessed to duty by determining assessable value following the principle laid down in Ujagar Prints case prior to 01.04.2007, without any allegation of extra commercial relationship between MFCPL and IFFL. Also, both MFCPL and IFFL do not belong to the same Management. Therefore, the said judgment is also not applicable to the present case.
39. In view of the above, the transaction value entered between MFCPL and IFFL be accepted for assessment of FCPs cleared to IFFL and not the value computed under Rule 11 read with Rule 9 of CEVR, 2000, as held in the impugned Order; consequently, the demand of duty confirmed as short paid calculated on the differential value at which appellant MFCPL sold products to IFFL and the price at which IFFL sold the products to customers, during the period in question, cannot be sustained.Page 58 of 59
E/26321/2013; E/26315, 26317,28432,28433/2013; E/20707,20708,20766,20767/2014; E/20473/2015; E/20457,20458,20463, 20464/2016; E/21783 to 21790/2017;
E/20255,20315/2019; E/20673/2022; E/20730/2022 E/26322,28423, 28431/2013; E/20474/2015
40. As the first issue is decided on merit in favour of the appellant MFCPL, other preliminary objections and issues of imposition of penalty, applicability of extended period of limitation in the Appeal No.E/26321/2013, penalty under Rule 26 of Central Excise Rules, 2002 in other Appeals become academic; hence are not delved into .
41. In the result, the impugned orders are set aside and the appeals are allowed with consequential relief, if any, as per law.
(Order pronounced in Open Court on 10.09.2024) (D.M. MISRA) MEMBER (JUDICIAL) (R BHAGYA DEVI) MEMBER (TECHNICAL) Raja...Page 59 of 59