Custom, Excise & Service Tax Tribunal
M/S. Heinz India Private Ltd vs Cce, Delhi Iv on 28 May, 2015
CUSTOMS, EXCISE & SERVICE TAX APPELLATE TRIBUNAL,
WEST BLOCK NO.II, R.K. PURAM, NEW DELHI-110066.
BENCH-DB
COURT-III
Excise Appeal No.E/5262/2004-EX[DB],
Excise Appeal No.E/5261/2004-EX[DB],
[Arising out of Order-in-Original No.26 to 28/RH/Adj./2004 dated 31.08.2004 passed by the Commissioner of Central Excise (Appeals), Faridabad]
For approval and signature:
HONBLE MR. RAKESH KUMAR, MEMBER (TECHNICAL)
HONBLE MR. S.K. MOHANTY, MEMBER (JUDICIAL)
1. Whether Press reporters may be allowed to see the
order for publication as per Rule 27 of the CESTAT
(Procedure) Rules, 1982?
2. Whether it should be released under Rule 27 of the
CESTAT (Procedure) Rules, 1982 for publication in
any authoritative report or not?
3. Whether Their Lordships wish to see the fair copy
of the Order?
4. Whether Order is to be circulated to the Departmental
authorities?
_________________________________________________
M/s.Food & Health Care Specialities
M/s. Heinz India Private Ltd. Appellants
Vs.
CCE, Delhi IV Respondent
Present for the Appellant : Shri B.L.Narasimhan, Advocate
& Shri Rahul Tangri, CA
Present for the Respondent: Shri. Govind Dixit, DR
Coram:HONBLE MR. RAKESH KUMAR, MEMBER (TECHNICAL)
HONBLE MR.S.K. MOHANTY, MEMBER (JUDICIAL)
Date of Hearing: 8/5/2015, 11/5/2015, 12/5/2015 & 13/05/2015
Date of Decision: 28/05/2015
Final ORDER NO. 51908-51909/2015
PER: RAKESH KUMAR
1. The facts leading to filing of these appeals are, in brief, as under:-
1.1 M/s.Food Health Care Specialities, Plot No.135, Sector-24, Faridabad (hereinafter referred to as FHS) are engaged in blending and packing of various food products including Glucon D and Complan. The period of dispute in the present case is from 01.10.2000 to 28.02.2002. During this period FHS in terms of their agreement with M/s. Heinz India Pvt. Ltd., Aligarh (hereinafter referred to as Heinz) were blending and packing Glucon D and Complan on job work basis for Heinz out of the raw material as well as packing material supplied by them. The main features of the agreement between FHS and Heinz are as under:
(a) FHS had agreed to blend, pack and deliver the Heinz product Glucon-D and Complan in accordance with statutory requirement and standards and specifications of Heinz.
(b) Heinz was to provide knowhow for the purpose of activity of blending and packing to be undertaken by FHS and FHS shall keep the knowhow of blending and packing of the products of Heinz strictly confidential.
(c) The product shall be delivered after packing to Heinz or at the destination directed by Heinz for which FHS would receive a mutually agreed upon charges.
(d) FHS were blending and packing the products for Heinz out of raw-material and packing material supplied by Heinz and FHS were to ensure that the manufacturing and handling loss does not exceed 1.5% and FHS shall disclose all the necessary information, data, workings, cost and other expenses of their activity which is necessary for determination of the mutually agreed upon job charges.
(e) The Delivery schedule shall be prescribed by Heinz which shall be honoured by FHS.
(f) Heinz can reject the product not confirming to the quality standards and specifications of FHS and destroy the said products and recover the total expenses thereof from FHS.
(g) FHS shall not have any right, title or interest etc. in trade mark appearing on the packing material of the product.
(h) Heinz may at any time enter upon and inspect FHS factory premises to examine and supervise the process or method of blending and packing of the product and Heinz may also get the products quality tested in its quality control Department.
(i) FHS is to comply with the entire requirement under Food laws, taxation laws, labour and safety laws pertaining to its business and FHS shall indemnify Heinz if any liability under this statute is incurred by Heinz on account of these by FHS.
(j) The agreement between FHS and Heinz shall not be one of the agency and FHS and Heinz shall deal on principal to principal basis and FHS shall not do any act even to induce others to believe that it is an agent of Heinz.
1.2 The dispute in the present case is only in respect of valuation of Glucon-D as the other product Complan being blended and packed by FHS was notified under section 4A of the Central Excise Act and its value was being determined as per the provisions of section 4 A. During the period of dispute, FHS were clearing the blended and packed Glucon D to Heinz on payment of duty on the value determined in terms of the Apex Court judgment in the case of Ujagar Prints and others vs. Union of India reported in 1989 (39) ELT 493 (SC), that is, on the basis of cost of raw-material received plus job charges plus the profit margin of FHS.
1.3 Sometime in October, 2000, the Department initiated enquiry and also analyzed the terms of the agreement between FHS and Heinz to ascertain as to whether the same are on principal to principal basis or not. The enquiry was initiated, as with effect from October, 2000, the assessable value of the Glucon - D manufactured and cleared by FHS to Heinz had been reduced, as compared to the assessable value during the earlier period. Here it may be mentioned that during the period prior to 01.10.2000, FHS in respect of the clearances of of Glucon - D by them to Heinz were paying duty on the sale price of the product by Heinz from their depots, but w.e.f. 01.10.2000, FHS had started paying duty on the value determined in accordance with the Apex Courts judgment in the case of Ujagar Prints (supra). The Department after enquiry and on going through the terms of the agreement was of the view that the transactions between FHS and Heinz are not on principal to principal basis. It is on this basis that the department was of the view that the assessable value of the glucon-D cleared by FHS to Heinz would be the sale price of the product by Heinz from their depots. It is on this basis that the following three show cause notice were issued for demand of the differential duty along with interest and also for imposition of penalty:-
Sl.No. S.C.N. No. & date Amt. involved Period of demand Issue involved 1 CE-20/R-VI/F&HCS/2001 dated 19.10.2001 18,55,924/-
1.10.2000 to 31.12.2000 Evasion of duty by undervalue-ing their finished product
2.
CE-20/R-VI/F&HCS/SCN/2001/100 dated 11.01.2002 5,13,37,619/-
1.1.2001 to 30.06.2001 Evasion of duty by undervalue-ing their finished product 3 CE-20/R-VI/F&HCS/SCN/2002/3264 dated 17.07.2002 4,02,95,824/-
1.7.2001 to 28.02.2002 Evasion of duty by undervalue-ing their finished product 1.4. The above three show cause notices were adjudicated by the Commissioner by a common Order-in-Original No. 26, 27 & 28/RH/Adj/2004 dated 31.08.2004 by which the Commissioner held that the transactions between FHS and Heinz are not on principal to principal basis, as FHS in terms of their agreement with Heinz were bound hand and foot during the period of dispute, and they had very limited freedom of action and, therefore, the assessable value of the goods cleared by FHS would be the price at which the goods were sold by Heinz from their depot. Accordingly, he confirmed the above three duty demands totalling Rs. 9,34,89,367/- alongwith interest thereon under section 11 AB. Beside this, the Commissioner also imposed penalty of Rs.1.5 Crores on FHS under Rule 173 Q (1) of the Central Excise Rules 1944/Rule 25 (1) of Central Excise Rules, 2001 and also penalty of same amount on Heinz under Rule 173 Q (1) of Central Excise Rules 1944 read with Rule 25 (1) of Central Excise Rules, 2001 and also another penalty of Rs.2.00 Crores on the under Rule 209 A of the Central Excise Rules, 1844/ Rule 26 of the Central Excise Rules 2001.
1.5. Against this order of the Commissioner these appeals have been filed.
1.6. The above appeals were earlier decided by the Tribunal vide order dated 12.01.2005 by which the Commissioners order was set aside and the appeals were allowed.
1.7. Against the above order dated 12.01.2005 of the Tribunal, the Revenue filed an appeal to Supreme Court under section 35 L (b) of Central Excise Act, 1944. The Revenues appeals were disposed of by the Apex Court vide order dated 13.02.2012 reported in 2012 (277) ELT 3 (SC) by which the Apex Court remanded the matter to the Tribunal for denovo decision observing that if the transaction between job worker and principal manufacturer are not at arms length and the two are related person, the formula prescribed in the Apex Courts judgment in the case of Ujagar Prints (supra) would not apply and that in such a case, the Apex Courts judgement in case of Commissioner vs. S.Kumars reported in 2005 (190) ELT 145 (SC) would apply and the price at which the goods were sold by Heinz would be the assessable value-, that the Tribunal did not address this aspect of the matter, as it did not consider whether the assessee and Heinz are related person and it based its decision solely on the observation made by the adjudicating authority that the status of the assessee was not better than that of a hired Labour. In this regard, the para 11, 12 & 13 of the Apex Court judgment dated 13/02/2012 are reproduced below:-
11.?It is manifest from the above that the only distinctive feature of S. Kumars in comparison with Ujagar Prints (II) and (III) is the emphasis on the factum of relationship between the parties viz., the processor and the merchant- manufacturers/traders, in the former. In short, S. Kumars holds that if the processor-assessee is not at arms length with the merchant-manufacturer and is a related person, the formula prescribed in Ujagar Prints (III) would not apply and assessable value for the purpose of levy of excise duty will have to be determined in terms of the ratio of S. Kumar i.e. in accordance with the procedure contemplated in Section 4(1)(b) of the Act read with the relevant valuation Rules. We deferentially concur with the ratio of S. Kumars.
12.?In the present case, as aforesaid, neither did the Tribunal address this aspect of the matter, nor did it consider whether the Assessee and Heinz are related persons. It based its decision solely on the observation made by the Adjudicating Authority that the status of the Assessee was not better than that of a hired labour. We are, therefore, of the opinion that in the light of the above discussion, it would be necessary for the Tribunal to examine in depth the agreement between the Assessee and Heinz as also any other additional material, the parties may like to adduce and determine the question whether or not both of them are related persons.
13.?Resultantly, the appeals are allowed and the matter is remanded back to the Tribunal for the purpose of determining the nature of relationship between the Assessee and Heinz. If it is found that they are not related persons, then the present decision of the Tribunal will stand affirmed. However, if the Tribunal finds that the Assessee and Heinz are related, it shall remit the matter to the Adjudicating Authority for fresh determination of the assessable value of the goods in question in accordance with law. However, having regard to the facts and circumstances of the case, there will be no order as to costs.
1.8. Thus, the Apex Court remanded this matter to the Tribunal for examining (a) as to whether the nature of relationship between FHS and Heinz is such that the transactions between them cannot to be at to be end arms length and FHS and Heinz are related persons; and
(b) If the Tribunal finds that FHS and Heinz are related persons, it shall remit the matter to the adjudicating authority for fresh determination of the assessable value of the goods in question in accordance with law.
2. Accordingly, the matter was heard on 08.05.2015, 11.05.2015, 12.05.2015 & 13.05.2015.
3. Shri B.L. Narasimhan, Advocate, the ld. Counsel for the appellant, pleaded that the agreement between FHS and Heinz is on principal to principal basis only and hence, they are not related persons, that for this reason, the judgment of Apex Court in the case of S.Kumars reported in 2005 (190) ELT 145 (SC) would not be applicable, that the real test of relationship laid down by various judgments is existence of all pervasive managerial and financial control over the job-worker, which is not there in the present case and for this reason the two parties are not related; that merely providing of production schedule by Heinz to FHS does not vitiate the independence of FHS, that clause 7 and 12 of the agreement providing that FHS shall limit the manufacturing / handling loss to 1.5% and the finished product which are not found as per the specifications of Heinz shall be rejected and the expenses shall be debited against the amount payable to FHS are not at all interlinked and each has its own commercial relevance in an arms length transaction; that providing access to Heinz by FHS to their factory premises as well as to their records for inspection does not create any relationship of principal and agent between them, that there is no financial flow back from FHS to Heinz and there is no financial control of Heinz over FHS, that clause 22 of the agreement between FHS & Heinz itself provides that this agreement shall not be one of agency and that FHS and Heinz deal on principal to principal basis and FHS shall not do anything even to induce others to believe that they are an agent of Heinz, that this clause of the agreement itself is a proof that the transactions between FHS and Heinz on principal to principal basis and FHS cannot be treated as an agent or hired labour of Heinz, that from the very first clause of the agreement, it is clear that the factory of FHS was set up by them with their own investment in land, plant and machinery, that FHS apart from the job charges, do not receive any other monetary benefit, directly or indirectly, from Heinz, that firstly the manufacturing operations of FHS were not under full and continuous control of Heinz and Heinz only had access to the factory of FHS for inspection and also excess to their records, that this would not make the transactions between the two as those of master and servant and that in this regard he relies upon the judgment of the Supreme Court in the case of CCE vs. Cosme Remedies Pvt. Ltd. reported in 2015 (318) ELT 545 (para 17 and 21); that the Tribunal in the case of Smithcline Beecham Asia Ltd. Vs.CCE, Vishakhapatnam reported in 2004 (168) ELT 40 (Tri. Bang.) has held that when the job worker has set up his factory with his own finance and functions independently, the job worker and the principal manufacturer cannot be treated as related persons and the value of the goods manufactured by the job worker shall be determined in accordance with Apex Courts judgment in the case of Ujagar Paints Ltd. (Supra) and this judgment of the Tribunal has been affirmed by the Apex Court vide order dated 17th April 2015; that the Tribunal in the case of Glenmark Pharmaceutical Ltd. reported in 2008 (224) ELT 267 (Tri. Mum.) has held that merely giving manufacturing instructions, manufacturing program and specifications of the goods to be manufactured does not mean that the goods were being manufactured under the supervision and control of the raw-material supplier (principal manufacturer) unless there is evidence to show that the factory premises of the job-worker had been hired by the principal manufacturer shift-wise or otherwise, the staff had been completely lent by the job-worker to the principal manufacturer / raw-material supplier and their salaries were paid by the principal manufacturer/raw-material supplier and the staff were accountable to him only and not to the job worker; that none of these features are present in the present case; and that the Apex Court in para 21 of its judgment in the case of Cosme Remedies Ltd. Vs. CCE reported in 2015 E.L.T. (318) ELT 545 (SC) has held that when the agreement between the job worker and principal manufacturer itself mentions that the relationship between the parties is that of principal to principal and not that of principal and agent, the transaction between the two have to be treated as principal to principal and that in the present case, there is not even a single condition or clause in the agreement from which it can be inferred that the transactions between FHS and Heinz were not on principal to principal basis. Shri Narasimhan also cited the judgment of Tribunal in the case of Makson Health Care Pvt. Ltd. Vs. CCE, Bhopal reported in 2007 (218) ELT 286 (Tri. Del.) wherein the Tribunal held that when the appellant (job-worker) were manufacturing goods for the raw-material supplier (PGIL) using their own machinery, capital investment, labour, licence and other facilities out of the raw-material/ packing material and manufacturing technology required for manufacture supplied by PGIL and the appellant were entitled to receive processing charges from PGIL for manufacture of the goods and had to take written permission of PGIL for manufacture for any other persons, of any other product similar to the products of PGIL, the relationship between them has still to be treated principal to principal when the agreement between them contained a clause that nothing contained in the agreement shall constitute Agency, partnership, joint venture or any other relationship, fiduciary or otherwise, between the parties. Shri Narasimhan pleaded that the ratio of this judgment of the Tribunal is also squarely applicable to the facts of this case, as in the present case also, there is a specific clause 22 in the agreement between the FHS and Heinz according to which the agreement shall not be one of the agency, that the FHS and Heinz deal on principal to principal basis and FHS shall not do any act even to induce others to believe that it is an agent of Heinz Shri Narasimhan also pleaded that in terms of para 13 of the Apex Courts order remanding this matter to Tribunal, the Tribunal is required to determine the relationship between the assessee (FHS) and Heinz and give a finding whether they are related persons or otherwise. In terms of definition of related person, as given in section 4(3)(b) as it existed during the period of dispute, the two could be treated as related person only if there was mutuality of interest, direct or indirect, in the business of each other. He emphasized that there is nothing in the agreement between FHS and Heinz from which it can be concluded that there was mutuality of interest in each others business. Beside this, he also pointed out that there is no cross-holding of shares, that is, shareholding of FHS in Heinz and share- holding of Heinz in FHS. He, therefore, pleaded that even on the basis of the definition related person as given in section 4(3) (b) of Central Excise Act 1944 , the FHS & Heinz cannot be termed as related person and therefore, the Apex Court judgment in the case of S.Kumars (supra) would not be applicable.
4. Shri Govind Dixit, the ld. Departmental Representative, defending the impugned order by reiterating the findings of the Commissioner made the following submissions.
(1). In para 2 of the Apex Courts judgment remanding this matter to the Tribunal, the salient facts of the dispute between the Department and the Assessee have been noted. As per the agreement dated 01.03.2000 between FHS and Heinz effective from the same date for blending and packing of Glucon - D for Heinz, Heinz was to supply raw-material, packing material and technical know-how to FSH for blending and packing of the product. In accordance with the terms of the agreement, during the period from 01.03.2000 to 30th September, 2000, FHS paid excise duty on the basis of the wholesale price of the product when sold at depot of Heinz. This clearly demonstrates that FHS was the agent of Heinz and relationship between FHS and Heinz was not of principal to principal but was of principal and agent. Subsequently, the assessee (FHS) filed price declaration whereby the assessable value of the product was lowered to include only the aggregate cost of raw-material, packing material and their job charges and the duty for the period from 01.10.2000 to 28.02.2002 was paid on the lower value. In terms of clause 20, FHS was to ensure payment of all taxes duties and levies payable in connection with the blending and packing of said product by them for Heinz in accordance with this agreement. It is in accordance with this clause in the agreement that during the period from 01.03.2000 to 30.09.2000 FHS were paying duty on the goods cleared by them to Heinz on the sale price of Heinz from their depot. There was no justification for them to start paying duty w.e.f. 01.10.2000 on the aggregate of the cost of raw-material, packing material and job charges when the above clause in the agreement indicates their relationship to be other than on principal to principal basis.
(2) Clause 7, 8, 9, 12, 13, 15, 16, 17 & 23 (iv) of the agreement indicate excessive control exercised by Heinz upon the assessee. The use of the term such as instructions, directions, Supervision, blending and packing schedule from Heinz, restriction of losses by FHS to not more than 1.5% of the production, disclosure of all the information, data, working, cost and other expenses to Heinz, access at all times to Heinz to the factory premises of FHS and the records being maintained by them alongwith a right to inspect them and make copy thereof are highly restrictive clauses which substantially curtail the independence of FHS.
(3). The agreement also uses the terms like examination, inspection, testing, advice, recommendation, communication of standards all of which are general in nature and do not restrict the independence of the manufacture (FHS) who is doing the job work for Heinz However, the conditions regarding issue of instructions & directions by Heinz to FHS, supervision of production by Heinz, the determining of production schedule of FHS by Heinz and access to all the data of FHS by Heinz are the conditions which restrict and substantially curtail the independence of FHS and the transactions between them cannot be said to be on principal to principal basis.
(4) In terms of clause (d) of the preamble to the agreement, Heinz has agreed to allow FHS to blend and pack Glucon D and such other product as may be intimated to it by Heinz from time to time and for the purpose, has agreed to disclose and communicate to FHS the know-how necessary for blending and packing of the same as per the terms and conditions in the agreement. Accordingly, Heinz has provided the necessary know-how to FHS for which FHS has not paid any charges. This is a financial benefit for FHS. This shows that the transaction between them are not on principal to principal basis, as no amount has been charged by Heinz from FHS for providing them the necessary technical know-how.
(5). According to clause 7 of the agreement FHS shall be allowed manufacturing/ handling loss of not more than 1.5%. In terms of clause 12 of the agreement, Heinz shall not be bound to accept such quantities of the products which do not conform to its standards and specifications as prescribed and given by Heinz in that behalf from time to time, and in such a situation, Heinz shall be entitled to destroy such stock and debit FHS total expenses of such nonconforming product. These conditions imposed on FHS given unfair advantage to Heinz and, therefore, the transactions between them cannot be said to be on principal to principal basis.
(6) Shri.Dixit pleaded that in terms clause 8 of the agreement Heinz will from time to time provide a schedule for blending and packing of the said product for such quantities as it may require at the agreed rate and for the delivery of the packed stock within the time specified. In terms of clause 9 of the agreement, Heinz shall be entitled without being obliged to do so to give FHS instructions, advice and recommendations in respect of the blending and packing of the said product from time to time and FHS shall conform to the said instructions, advice and recommendations given by Heinz at all the times during the continuous of the agreement. Shri. Dixit pleaded that these clauses in the agreement by their restrictive language restrict the freedom of operation of FHS.
(7). Shri Dixit pointed out to clause 13 and 15 of the agreement. According to clause 13, FHS shall pack the said products in packages and containers bearing the trade-mark Heinz and in accordance with the directions and specifications in that behalf given or prescribed by Heinz from time to time. In terms of clause 15, during the continuance of the agreement, the authorized agent or representative of Heinz shall be entitled to enter into the factory of FHS for inspection and examine and supervise the process and the method of blending and packing of the said product and also the storage and use of the bulk material and other materials used or intended to be used. The FHS are bound to extend cooperation to Heinz during such inspection and supervision and shall comply with the directions given by Heinz from time to time. Shri Dixit pleaded that these two clauses also restrict the freedom of operation of FHS. Shri Dixit pointed out to para 16, 17 and 23 (4) of the agreement and pleaded that these clauses of the agreement also considerably reduce the freedom of operation of the FHS. Shri Dixit citing the Apex Courts judgment in the case Union of India & Others Vs. Atic Industries Ltd reported in 1984 (17) ELT 323 (SC) pleaded that interest between two persons in the business of each other can be direct or indirect and pleaded that various clauses of the agreement between FHS & Heinz, as discussed above point to direct as well as indirect interest between FHS and Heinz in the business of each other and hence the two have to be treated as related persons.
(8). Shri Dixit cited the judgment of Honble Bombay High Court in the case of Pilky Foot Wear Co. Pvt. Ltd. vs. Union of India and others reported in 1980 (6) ELT 338 (Bom.) which has been affirmed by the Apex Court vide judgment reported in 2000 (120) ELT 289 (SC). In the case of Pilky Footwear Co. Pvt. Ltd., the assessee as job worker of Bata Shoe Co., in terms of their agreement with Bata Shoe Co. were to manufacture the shoes and the agreement between the Pilky Footwear Co. Pvt. Ltd. and principal manufacturer (Bata Shoe Co.) provided for not only the advice, assistance and technical know-how and supervision of its unit by the principal manufacturer but also provided for necessary working capital by the way of interest free advances for operation of the plant and other working expenses being provided by Bata Shoe Co. to M/s. Pilky Footwear with the stipulations to sell the whole stock to Bata Shoe Co. with the brandname of the company. The Bombay High Court in this case held that the petitioner Pilky Footwear Co. Pvt. Ltd. and the principal manufacturer Bata Shoe Co. would have to be treated as related person. This judgment of the Bombay High Court has been affirmed by the Apex Court and has not been reversed. Shri Dixit pleaded that the ratio of this judgment of the Apex Court is squarely applicable to the facts of this case as in this case also entire production of Glucon D by FHS was being cleared to Heinz and FHS were to manufacture blend and pack Glucon D by using the technical knowhow provided by Heinz and as per their instructions, advice and assistance and also under their supervision.
(9) Shri. Dixit also cited the judgments of the Apex Court in the case of CCE, New Delhi vs. Modi Alkalies and Chemcials Ltd. reported in 2004 (171) ELT 155 (SC), Supreme Washers (P) Ltd. vs. CCE, Pune reported in 2003 (151) ELT 14 (SC) and Calcutta Chromotype Ltd. vs. CCE, Calcutta reported in 1998 (99) ELT 202 (SC) and pleaded that applying the ratio of these judgments to the facts of this case, FHS and Heinz would have to be treated as related persons and, accordingly, for valuation of the products manufactured by FHS, the judgment of Apex Court in the case of CCE, Indore vs. S.Kumar Ltd. reported in 2005 (190) ELT 145 (SC) would be applicable.
(10) Shri Dixit, accordingly, pleaded that there is no infirmity in the impugned order.
5. Shri B.L. Narasimhan, Advocate, the ld. Counsel for the appellant in rejoinder, made the following submissions:-
(1). With regard to the judgment of the Apex Court in the case of Pilky Footwear Co. Pvt. Ltd. vs. Union of India (supra) cited by the ld. D.R., Shri Narasimhan pleaded that in that case in terms of the job work agreement between Pilky Footwear Co. Pvt. Ltd. and Bata Shoe Co. the working capital by the way of interest from advances for operation of the plant and other working expenses of M/s. Pilky Footwear was to be provided by Bata Shoe Co. to Pilky Footwear Co. Pvt. Ltd. with the stipulation that the Pilky Footwear Co. Pvt. Ltd. will sell the whole stock with the brand-name of Bata Shoe Co. and beside this, there was also condition that Pilky Footwear Co. Pvt. Ltd. were also barred from enlarging their production capacity. Besides this, interest free advance had been given to Pilky Footwear Co. Pvt. Ltd. for procurement of machinery. He pleaded that it is mainly because of these facts that the Bombay High Court held that transactions between Pilky Footwear Co. Pvt. Ltd. and Bata Shoe Co. are not on principal to principal basis and it is this judgment which has been affirmed by the Apex Court. Sh. Narasimhan pleaded that in the present case apart from the job charges, no other monetory consideration, direct or indirect, in the form of any interest free advances etc. has been received by FHS from Heinz. He, therefore, pleaded that the Apex Courts judgment in the case of Pilky Footwear Co. Pvt. Ltd. is not applicable to the facts of this case.
(2). In the case of Modi Alkalies and Chemicals Ltd. (Supra) and Calcutta Chromotype Ltd. (supra) cited by the ld. DR, the units availing of SSI exemption had been set up at the behest of some common Directors who had all the pervasive, financial and managerial control. In the present case, there is no such allegation. Also there is neither allegation nor evidence that Heinz had all pervasive, financial and managerial control over FHS. Though the agreement between FHS and Heinz provides for providing of technical knowhow by Heinz to FHS, no such knowhow has been received by FHS from Heinz. Though this plea has been specifically made before the Commissioner but absolutely no finding has been given by him on this aspect.
6. We have considered the submissions from both the sides and perused the records. FHS in terms of their job work agreement with Heinz, blend and pack, the Glucon D & Complan received in bulk from Heinz, on job work basis as per the specifications and quality control requirements of Heinz. FHS in addition to the Glucon D & Complan powder in bulk also received the packing material from Heinz. The main features of the agreement between FHS & Heinz are as under:-
* FHS agrees to blend, pack and deliver to Heinz the product in accordance with the statutory requirements of standards and specifications of Heinz and Heinz is to provide knowhow for the purpose of activity of blending and packing to be undertaken by FHS. The knowhow of blending and packing of the product of Heinz if any, provided by Heinz to FHS shall be kept by FHS strictly confidential.
* FHS shall deliver the product after blending and packing to Heinz at the destination directed by Heinz for which FHS would receive mutually agreed upon charges. The manufacture/ handling loss of only 1.5% would be allowed to FHS.
* Heinz can reject the product not confirming to its quality standards, specifications and instructions and, destroy the said products and recover the total expense thereof from FHS.
* FHS shall disclose all the necessary information data, working cost and other expenses relating to their activity to enable Heinz to determine the job charges by mutual agreement.
* Delivery schedule as prescribed by Heinz shall be honored by FHS.
* Heinz may, at any time, enter upon and inspect the factory of FHS to examine and supervise the process or method of blending and packing of the products and Heinz may also get the products tested for quality control in their own quality control department.
* The agreement between FHS & Heinz shall not be one of agency FHS and Heinz deal on principal to principal basis and FHS shall not do any act or even induce others to believe that it is an agency of Heinz.
* FHS shall store on behalf of Heinz in the manner prescribed, sufficient quantities of materials to be blended and packing material as may be necessary and it would be the responsibility of FHS that there is no damage to the goods stored in their premises which belong to FHS and if there is any damage or loss of the raw material/ packing incurred to Heinz, the same shall be compensated by FHS.
* Heinz will, from time to time, prescribe a schedule for blending and packing of the said product for such quantities as it may require at the agreed rate and delivery of the packed stocks within the time specified.
6.1 The dispute in the present case is about assessable value of the Glucon D blended and packed by FHS in terms of the above agreement for Heinz. The period of dispute is from October 2000 to February 2002. During the period prior to October 2000 i.e. from March 2000 to September 2000, FHS had paid duty in respect of the goods cleared to Heinz on the sale price of Heinz from their depots. However, w.e.f. 1.10.2000 FHS started paying duty on the value determined in accordance with the Apex Courts judgment in the case of Ujagar Prints & Ors. Vs UOI (supra) i.e. aggregate of the cost of raw material and packing material received by FHS from Heinz plus FHSs job charges plus their profit. The Departments contention is that the transactions between FHS & Heinz are not on principal to principal basis and hence, in view of the Apex Courts judgment in the case of UOI vs. S. Kumars (supra), the assessable value would be the price at which the goods were sold by Heinz to its independent buyers. In this regard, in accordance with the Apex Courts judgment dated 13.02.2012, remanding this matter to the Tribunal, the only question which is to be examined is as to whether the relationship between FHS and Heinz is on principal to principal basis or otherwise, or in other words whether the two are to be treated as related persons. If the FHS and Heinz are to be treated as related persons within the meaning of this term as defined in section 4(3)(b) of the Central Excise Act, 1944, the assessable value of the goods manufactured and cleared by FHS to Heinz would be the sale price at which the same were sold by Heinz from their depots. In this regard, the Departments contention is that in view of the terms of the agreement between FHS and Heinz as mentioned above, the two have to be treated as related persons. According to the Commissioners findings on this point in para 33 of the impugned order, in view of the terms of agreement between FHS and Heinz, the FHS were bound, hand and foot during the period of agreement and that they had none of the latitude that an independent manufacturer would have inasmuch as there had very limited freedom of action and hence, FHS have to be treated as an extension of Heinz or hired labour of Heinz.
7. In terms of section 4(3)(b) an assessee and its customer shall be deemed to be related for the purpose of this section if * They are interconnected undertakings;
* They are relatives * Among them the buyer is a relative and distributor of the assessee or a sub distributor of such distributor or;
* They are so associated that they have interest directly or indirectly in the business of each other.
7.1. In terms of explanation to section 4(3)(b), the term relative shall have meaning assigned to is in sub-section 41 of section 2 of the Companies Act, 1956 and the term interconnected undertakings shall have the meaning assigned to it in clause (g) of section 2 of Monopoly and Restricted Trade Practices Act, 1969. It is not the case of either side that FHS & Heinz are interconnected undertakings or are relatives or that the buyer Heinz is a relative and distributor of the Assessee or sub-distributor of such distributor. The case of the Department is that FHS and Heinz are so associated that they have interest directly or indirectly in the business of each other and that the terms of the agreement between FHS and Heinz clearly indicate to the existence of direct as well as indirect interest in each others business.
8. In our view, the expression. interest directly or indirectly used in clause (iv) of section 4(3)(b) would refer to the financial interest only. Thus two persons A and B would be treated as related persons only if from the nature of transactions between them it is clear that it is not the intention of the transactions between them that that the sale of goods and/ or services between them is at fully commercial price, but the intention is to ensure flow of funds from one person to another person or in other words, ensure financial benefit to one person at the cost of the other. Similarly it may so happen that the both A and B are controlled financially and managerially by the same person or same group of persons and the benefit is flowing to that person or group of persons. In another situation, when on lifting the corporate veil of some entities say A,B,C and D, which may be partnership firms, proprietorship firms, private limited companies or public limited companies, it is found that the same have been artificially created by a person to avoid tax and it is that person who has all pervasive financial and management control over these entities, the same would have to be treated as related persons. The real test of a related person transaction tainted by interest directly or indirectly in the business of each other is that the purpose of the transaction is not the sale of goods/ services by the seller to the buyer at fully commercially providing price but something else, like seller wanting to reduce his tax liability etc. The question as to whether FHS and Heinz are related persons has to be decided from the above criteria.
8.1 Though, the terms of the agreement, Heinz would provide technical knowhow to FHS for blending and packing of the products, the plea of the appellant is that no such technical knowhow has been provided. The Departments contention is that providing of technical knowhow has benefitted the FHS and reduced the cost of manufacture for them. However, the appellants plea is that they have not received any technical knowhow from Heinz and as such there is no finding of the Commissioner on this point. Without going into the question whether FHS had received and technical knowhow from Heinz or not we are of the view that even if, FHS had received technical knowhow from Heinz for blending and packing of Glucon D, since FHS is only a job worker manufacturing the goods for Heinz as per their standards and specifications, providing of technical knowhow by Heinz to FHS would not benefit FHS in any manner, unless FHS were free to use the technial knowhow provided by Heinz to manufacture the goods on their own account and for their other customers. But there is neither any such allegation, no any evidence.
8.2 The other conditions of the agreement that FHS will do the blending and packing of Glucon D and Complan for Heinz as per their specifications and quality standards, and that manufacturing schedule of FHS shall be as per the instructions of Heinz or that Heinz shall have access to the factory of FHS to inspect their operations, cannot be said to be the conditions which will make FHS and Heinz related persons or FHS as a hired labour of Heinz. Similarly the condition that the FHS will be allowed manufacturing/ handling loss of not more than 1.5%, and that the goods which are not found to be as per the specifications and quality standards of Heinz shall be destroyed by Heinz and the cost of the same would be recovered from FHS are the conditions to avoid unnecessary waste and ensure the desired quality of the products and these clauses of the agreement also cannot be said to be the conditions which curtail the financial freedom of FHS to transact with Heinz and make then a pure hired labour and extension of FHS.
8.3 In the present case FHS had invested in their own plant and machinery and were manufacturing food products for other persons also. There is no allegation that Heinz had made any investment in plant and machinery of FHS for manufacture of their products. In the case of M/s Pilky Footwear Company (P) Ltd. vs UOI (surpa) cited by the LD. DR, M/s Pilki Footwear Company (P) Ltd. were manufacturing shoes for Bata Shoe Company in terms of their agreement with them and the agreement provided for not only advice, assistance and technical knowhow from Bata Show Company to M/s Pilky Footwear and the supervision of the unit of M/s Pilky Footwear Company (P) Ltd. by Bata Shoe Co., but also provided for Bata Shoe Company providing the necessary working capital by the way of interest free advances to M/s Pilky for the operation of their plant and other working expenses with the stipulation that M/s Pilky shall sell the whole stock with the brand name of Bata Shoe Company and it is in these circumstances that Honble Bombay High Court held that Pilky Footwear Company and Bata Shoe Company would have to be treated as related persons and it is this judgment which was subsequently upheld by the Apex Court. In the present case no interest free advance has been received by FHS from Heinz and other than the job charges no other consideration has been received. Therefore, the Apex Court judgment in the case of Pilky Footwear Company (P) Ltd. (supra) would not be applicable to the facts of this case.
8.4 The Ld. DR has cited the judgment of the Apex Court in the case of CCE New Delhi vs Modi Alkalies & Chemicals Ltd.(supra). The point of dispute in this case was as to whether the clearances of Modi Alkalies & Chemicals Ltd. were to be clubbed with the clearances of Mahabaleshwar Gas & Chemicals (P) Ltd., Shri Chamunda Gas & Chemicals (P) Ltd. & Nipon Gas & Chemicals (P) Ltd. for the purpose of determining their eligibility for SSI exemption and the Apex Court held that since Modi Alkalies & Chemicals Ltd. had all pervasive managerial and financial control over the other three units, their clearances would have to be clubbed. In the present case there is neither any allegation nor any evidence to prove that Heinz had all pervasive financial and managerial control over FHS and therefore the judgment of Apex Court in case of Modi Alkalies & Chemicals Ltd. (supra).
8.5 In case of Supreme Washers (P) Ltd. vs CCE Pune cited by the LD. DR, a similar issue relating to the clubbing of clearances for the purpose of determining the eligibility of SSI exemption was involved which is not a case here and therefore, Apex Court judgment in the case of Supreme Washers (P) Ltd. vs CCE Pune is also not applicable to the facts of this case.
8.6 As regards, the Apex Courts judgment in the case of Calcutta Chromotype Ltd. vs. CCE, Calcutta Cited by Ld. DR, the Apex Court in that case held that the merely because the transaction in between two or more companies, it does not lead to an inescapable conclusion that both are unrelated and the court can always lift the corporate veil of the companies to see whether or not any colourable device has been deployed to get evade the tax. In other words, the principle laid down in this judgment is that the court can lift the corporate veil to ascertain as to whether two or more companies are actually being controlled financially and managerially by the same persons or group of persons and are in fact one entity. In the present case from the terms of agreement between FHS & Heinz, we do not find any clause from which it can be concluded that Heinz had all pervasive, managerial and financial control over FHS. There is a clause in the agreement between FHS and Heinz under which FHS are required to disclose to Heinz all the necessary information, data working cost and other expenses and the costing necessary for determination of the job charges to be mutually agreed upon. In our view, this clause cannot be interpreted to infer that it gave Heinz an all pervasive, managerial and financial control over FHS, more so when, the costing data and information provided by FHS to Heinz was to be used for determination of the job charges by mutual agreement and thus, this is not the case where the job charges of FHS were to be unilaterally decided by Heinz. Similarly, the clause in the agreement which restricts the manufacturing/ handling loss by FHS to not more than 1.5% and which provides that in case the quality of goods manufactured is not found to be as per the specifications and quality standards of Heinz, the same shall not be accepted by them, shall be destroyed and their cost shall be recovered by Heinz from FHS, also cannot be interpreted as the clause which would give an unfair advantage to Heinz over FHS as a principal manufacturer getting his goods manufactured through a job worker out of raw material, packing etc., supplies him can always insist on minimum wastage of his raw material and the goods being as per his quality standards.
8.7 To sum up, the conditions in the job work agreement which require the job-worker to,-
(a) Manufacture the goods out of the raw material and packing material and technology, if any, supplied/ provided by the principal manufacturer (owner of the goods manufactured) as per the quality control standards and specifications of the principal manufacturer, with principal manufacturer having right to inspect the manufacturing process;
(b) Manufacture the goods as per the production schedule provided by the principal manufacturer and ensure their delivery in time;
(c) Manufacture the goods in such a manner out of raw material/ packing material provided by the principal manufacture so as to minimize the waste with provision for recovery of loss from job worker if waste exceeds certain specified limit;
(d) Providing access to principal manufacture to his factory and his records including records of expenses incurred in job-work to enable determination of job charges by mutual agreement are not the conditions while curtail the financial independence of the job worker but are the condition which are necessary for the principal manufacturer to ensure that the goods got manufactured by the job worker are as per his quality standards and specifications and there is minimum waste of raw material and packaging material by the job worker. These conditions are compatible with arms length transactions as freedom of operation to a job worker also not mean freedom to waste the raw material suppliers (Principal Manufacturer) material, or manufacture sub standard goods and not sticking to the delivery schedule of the principal manufacturer.
9. Apex Court in a recent judgment in case of CCE Goa vs Cosme Pharma Laboratory Ltd. reported in 2015-TIOL-35 SC-Cx has held that the loan licensee who has been issued the necessary license by the drug controller to manufacture certain medicaments but does not have the factory and the other infrastructure to manufacture the same and for this reason, he gets the medicaments manufactured through another manufacturer out of raw material supplied by him and as per his specification and under his supervision and control, would not be treated as the manufacturer and it is the job worker in whose premises the goods were manufactured by using his (job workers) labour and machinery, who would have to be treated as a manufacturer. The Apex Court in this judgment also held that simply because the job worker had to adhere to the quality control specifications with regard to the quality prescribed by the loan licensee (Cosme pharma Laboratories), it would not mean that the Loan Licensee is the manufacturer. More over in the present case in accordance with the clause 22 of the agreement, the agreement between FHS & Heinz shall not be one of agency FHS and Heinz deal on principal to principal basis and FHS shall not do any act or even induce other to belief that they are an agent of Heinz. In our view this clause in the agreement is also a clear evidence showing that the transactions between FHS and Heinz were on principal to principal basis and FHS could not be treated as an agent of Heinz. We find that in the above mentioned case of CCE Goa vs Cosme Pharma Laboratories (supra), in the agreement between M/s Cosme and their job worker, there was a clause that relationship between the parties is to be on principal to principal and not that of principal to agent and from this clause also the Apex Court concluded that it is clear that the job worker were not manufacturing drugs as agents of the respondent or on behalf of the respondent but were carrying out the manufacturing activity independently and, therefore, they were independent manufacturers of drugs as per the provision of Central Excise Act, 1944. In our view the ratio of this judgment of the Apex Court is squarely applicable to the facts of this case.
10. Tribunal in the case of M/s Smith Kline BeeChem Asia Ltd. vs CCE Vishakhapatnam reported in 2004 (168) ELT 40 Tri Bang. examined the question as to when the job worker can be treated as hired labour of the principal manufacturer. The Tribunal in this case in para 11 of the judgment, relying upon the Apex Courts judgment in the case of Britania Buiscuit Company vs CCE Madras reported in 1997 (89) ELT 22 SC, CCE Vadodara vs MM Khambhatwala reported in 1996 (84) ELT 161 and CCE Bangalore vs Motor Industries Company Ltd. reported in 1999 (111) ELT A-195-SC has held that hired labour is the one who has no role to play except to receive his wages as per the contract, the contract is of an employer and employee and where his services can be terminated or reinstated at any point of time, and that when a person who is doing job work, has established the manufacturing facility with his own finance and functions independently with the profit and loss being to his account, he cannot be considered as a hired labour but has to be treated only as an independent job worker. In the present case, FHS had set up their factory with their own finance and they employed their own labour and they were manufacturing products not only for Heinz, but were manufacturing different food products for other persons also and as such were functioning independently with the profit or loss being to their account. From this criteria also, FHS cannot be treated as a hired labour of Heinz.
11. In the case of M/s Max & Health Care (P) Ltd. vs CCE Bhopal reported in 2007 (218) ELT 286 the appellant was manufacturing Vicks cough drops for Proctal & Gamble India Ltd. (PGIL) out of raw material, packing material & technical knowhow provided by Proctal & Gamble India Ltd. (PGIL) and were also manufacturing similar goods on job work basis on the same terms for Dabur India Ltd and Cadbury & Nestle India Ltd. In this case also the Tribunal held that just because goods were being manufactured by M/s Max & Health Care (P) Ltd. of using the technical knowhow provided by their customers, they cannot be treated as a hired labour of their customers.
12. The Tribunal in the case of Glenmark Pharmaceuticals Ltd. Vs CCE Nasik reported in 2008 (224) ELT 267 on the question as to whether the loan licensee who has been issued licence by the drug controller to manufacture certain pharmaceutical product but does not has his own manufacturing infrastructure and who gets his goods manufactured through a job worker by out of the raw material supplied to him and under his supervision can be considered as manufacturer has held that the Loan Licensee can be treated as a manufacturer only when he has hired the entire factory of the job worker for some specified time period or has hired the factory of the job worker shift wise and gets the goods manufactured out of his own raw material under his direct supervision, and only in such situation he is to be treated as a manufacturer independent of the factory owner and that the loan licensee merely exercising supervision on the action of the job worker and giving instructions to him regarding manufacturing does not mean that the loan licensee was fully controlling the activities of the job workers. In the present case Heinz have not hired the manufacturing premises of FHS either the whole factory or on shift basis and therefore, in terms of this judgment of the Tribunal also Heinz cannot be treated as a manufacturer.
13. In any case, as discussed above a job worker and the principal manufacturer can be treated as related persons only when the terms of the job work are such that the job worker is not free to charge the job charges as per the market rate and the job charges are dictated by the principal manufacturer or that the terms of the agreement give unfair advantage to the principal manufacturer over the job worker which would indicate existence of extra commercial consideration and financial interest in the business of each other. On going through the terms of the agreement between the FHS & Heinz we do not find any such clause in the agreement.
14. In view of the above discussion, we hold that FHS & Heinz cannot be treated as related persons and accordingly the assessable value of the goods manufactured by FHS would have to be determined in accordance with the Apex Courts Judgment in the case of Ujagar Prints and Ors. vs UOI i.e. aggregate the cost of the raw material, job charges and job workers profit and not the price at which the goods were being sold by Heinz form their depots and as such the judgments in the case of S. Kumars vs CCE would not be applicable to the facts of this case. The impugned order is, therefore, set aside and the appeals are allowed.
(Dictated and pronounced in the open Court)
(S.K. MOHANTY) (RAKESH KUMAR)
MEMBER(JUDICIAL) MEMBER(TECHNICAL)
Anita & Neha
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