Custom, Excise & Service Tax Tribunal
Beva Silicones Pvt Ltd vs Cce Chennai-Ii on 13 February, 2025
CUSTOMS, EXCISE AND SERVICE TAX APPELLATE TRIBUNAL
CHENNAI
REGIONAL BENCH - COURT No. I
Excise Appeal No. 40761 of 2017
(Arising out of Order-in-Appeal No. 523/2016(CXA-II) dated 30.12.2016 passed by
Commissioner of Central Excise (Appeals-II), No. 26/1, Uthamar Gandhi Salai,
Nungambakkam, Chennai - 600 034)
M/s. Beva Silicones Pvt. Ltd. ...Appellant
No. 367, SIDCO Industrial Estate,
Ambattur Industrial Estate,
Chennai - 600 098.
Versus
Commissioner of GST and Central Excise ...Respondent
Chennai II Commissionerate, No. 26/1, Mahatma Gandhi Road, Nungambakkam, Chennai - 600 034.
APPEARANCE:
For the Appellant : Shri J. Shankar Raman, Advocate For the Respondent : Smt. O.M. Reena, Authorised Representative CORAM:
HON'BLE MR. VASA SESHAGIRI RAO, MEMBER (TECHNICAL) HON'BLE MR. AJAYAN T.V., MEMBER (JUDICIAL) FINAL ORDER No. 40206 / 2025 DATE OF HEARING : 16.12.2024 DATE OF DECISION : 13.02.2025 Order :- Per Mr. VASA SESHAGIRI RAO Excise Appeal No. E/40761/2017 has been filed by M/s. Beva Silicones Pvt. Ltd. (hereinafter referred to as 'Appellant') assailing the Order-
in-Appeal No. 523/2016 dated 30.12.2016 passed by the Commissioner of Central Excise (Appeals-II), Chennai confirming demand of differential duty as proposed in the Show Cause Notice No. 20/2015 dated 01.05.2015 2 setting aside the Order-in-Original No. 47/2016 dated 20.07.2016 which had dropped further proceedings initiated in the Show Cause Notice.
2. Facts briefly stated are that, the Appellant who is engaged in the manufacture of Textile Auxillary Chemicals and Textile Enzyme were effecting clearances to their distributors Viz. M/s. Harris and Menuk and to other buyers. During verification by the Audit, it was revealed that the Directors of the Appellant who together held 99% shares, were both siblings being the sons of the partners of the said Distributors and hence related persons in terms of Sub-section 4(3)(b) of Central Excise Act,1944 (Act). Therefore, the Department was of the view that such clearances to related persons were to be assessed under Rule 9 of Central Excise Valuation (Determination of Price of Excisable Goods) Rule, 2000 (CEVR) instead of the transaction value in terms of Section 4(1) of the Act read with Rule of CEVR, thereby resulting in short payment of duty. A Show Cause Notice dated 01.05.2015 was issued to the Appellant, seeking to demand differential duty & cess of Rs.49,92,825/- during the period from April 2010 to October 2014 along with applicable interest, besides proposing to impose penalty under Section 11AC of the ACT ibid and to appropriate the amount of Rs.49,92,825/- already paid by the Appellant before issuance of Show Cause Notice. The Adjudicating Authority has dropped further proceedings by holding that the transaction between the Appellant and Distributor could not be considered as a related party transaction. Being aggrieved, the Department preferred an appeal before the Appellate Authority who vide the impugned order set aside the Order-in-Original and allowed the Department's appeal. Hence, the present appeal was filed by the Appellant before this forum.
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3. The contentions of the Appellant are summarised as follows: -
i. It was submitted that the impugned order disregarded the findings in CCE, Ahmedabad Vs. Xenographic Ltd. [2010 (257) ELT 11 (SC)] which laid down the criteria required for resorting to any other valuation method other than transaction value- Mutuality of interest, relationship, price charged was lower because of extra commercial considerations.
ii. It was submitted that the impugned order failed to examine whether the Appellant had attempted to arrange its affairs in terms of the proviso to Section 4(1) as was done in CCE, Hyderabad Vs. Detergents India Pvt. Ltd. & Another [2015 (318) ELT 559 (SC)] iii. It was pointed out that the impugned order had made no effort to establish mutuality and failed to appreciate that mutuality requires explicit evidence as was applied in Union of India & Ors. Vs. ATC Industries Ltd. [1984 (17) ELT 323 SC] and iv. It was submitted that the impugned order was contrary to the precedent on the issue which established the interpretation of the term "relatives" as applicable only to natural persons and erroneously contradicted the point of law affirmed by the Hon'ble Supreme Court in Union of India Vs Hind Lamp Ltd. [1989 (43) ELT 161 (SC)] wherein the Court had held that the term relative applied only to natural persons and not artificial persons. It was pointed out that the impugned order had mistakenly concluded that the applicability of the above decision was confined only to public companies whereas in fact, the decision referred to all artificial persons without distinguishing between types of artificial persons.4
v. It was contended that the impugned order without adequate examination determined that the corporate veil of a body corporate may be torn at will whereas it was only resorted to in the event of a colourable transaction or an attempt to evade payment of tax and cannot be applied to a case where no mala fides have been proven. In this regard, it was pointed out that the impugned order had erroneously interpreted the Apex Court's decision in J Foundation [2015 (324) ELT 422 (SC)] to conclude the lifting of corporate veil without considering the shareholding in question, unexplained variations in selling price and their implication on duty payable.
vi. It was pointed out that the impugned order disregarded the directives of the Supreme Court in Union of India Vs. Atic Industries wherein it was held that even if same person holds 50% of shareholding in two companies and controls them, does not lead to the conclusion that two companies were related.
vii. Reliance was also placed on the ratio of the following judgements: -
(a) Reliance Industrial Product [2012 (276) ELT 107 (Tri.-Mumbai)]
(b) Mineral Wool Manufacturing (India) Pvt. Ltd. Vs. CCE, Patna [1999 (109) ELT 228 (Tri.)]
(c) Cooper Pharma Vs. CCE, New Delhi [2004 (174) ELT 143 (Tri.-
Del.)]
(d) CCE, Chennai Vs. B.K.Office Needs Pvt. Ltd. [2015 (318) ELT 288 (Tri.-Che.)]
(e) Alembic Glass Industries Ltd. Vs. CCE [2002 (143) ELT 244 (SC)]
(f) Dhanesh Textiles Indus Pvt. Ltd. Vs. CCE, Mumbai [2005 (191) ELT 0498 (Tri.-Bom.)]
4. The Ld. Counsel Shri J. Shankar Raman representing the Appellant have reiterated the averments in the Grounds of Appeal and further submitted that in view of the settled position of law cited therein, the appellant company has nothing do with relationship that its shareholders 5 have with partners of the distributor and prayed for dismissal of the impugned order.
5. The Ld. Authorised Representative Smt. O.M. Reena, representing the Department affirmed the findings in the impugned order and submitted that the Appellant had resorted to undervaluation of its goods by selling through related persons. It was pointed out that the Appellant had contravened the provisions of the ACT and CEVR with an intent to evade payment of higher duty and hence the demand confirmed is sustainable. Hence it was prayed for dismissal of the appeal filed by the Appellant.
6. We have carefully considered the submissions made by both the sides and perused the records.
7. The issue which arise for consideration in this appeal is whether the Appellant is related to their Distributor in terms of Section 4(3)(b) of the Act and if so, whether the demand in terms of Rule 9 of CEVR is sustainable?
8. We find that the Appellant is engaged in the manufacture of Textile Chemicals and Textile Enzymes which were sold to M/s. Harris and Menuk, its distributor and also to other buyers and duty was being discharged on the clearances. Consequent to an audit objection, a Show Cause Notice was issued to the Appellant demanding differential duty on the ground that the two directors of the Appellant company were related to the partners of their Distributor viz., M/s. Harris & Menuk. The notice sought to 6 demand differential duty applying Section 4(3)(b) of the Central Excise Act, 1944 read with Rule 9 of Central Excise Valuation Rules, 2000 invoking the extended period. But the appellant assailed the allegations contained in the notice and contended that the buyer cannot be treated as a related person merely because the Directors of the appellant company and partners of the Distributor are related. Reliance was placed on various decisions of the Tribunal to contend that such an attempt to demand differential duty is contrary to the law. The Original Authority dropped the proceedings by holding that though the shareholders of the company and the partners of the Distributor firm are relatives, the buyer and seller of goods in this case cannot be considered as relatives as they are impersonal bodies and hence not fit into the definition of the term "relative" as mentioned in Section 4 of the ACT. It was also held that nowhere in the Show Cause Notice there is an allegation that the buyer and seller are so associated that they have interest in the business of each other and in the absence of transfer of funds between the buyer and the seller it is difficult to come to a conclusion that the above parties are related. Pursuant to an appeal filed by the Department, the Commissioner (Appeals) allowed the Department's appeal by relying upon the Apex Court's decision in M/s. Hind Lamps and J Foundation cited supra to hold that flow back or mutuality of interest need not be established as the intent appears to evade payment of duty. We also find that the amount of Rs.49,92,825/- demanded towards differential duty was already paid by the Appellant before the issuance of Show Cause Notice without protest.
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9. We find that the Ld. Counsel has placed reliance on various judgements and so it is essential to examine these cases as to their applicability to the facts of this appeal.
9.1 In the case of Dhanesh Textiles Indus Pvt. Ltd. Vs. CCE, Mumbai [2005 (191) ELT 0498 (Tri.-Bom.)], it was held as follows: -
"4. ----------Applying the above definitions, in order to hold that Dhanesh Textile Industries Pvt. Ltd. has a proprietary interest in the partnership firms, the limited company itself must have exclusive title to the aforesaid partnership firms. The appellant company does not own the partnership firms, nor is there sufficient evidence on record to establish that the company controls the partnership firms. There is no finding of financial flow back. Therefore, the appellant company cannot be held to have proprietary interest in either of the 2 partnership firms only for the reason that one of its Directors viz. Sukhdev Narang is also a partner in the two partnership firms and also looks after the business of Dhanesh Industries (partnership firm). The company is a legal entity in itself and is distinct from its Directors, unlike in a partnership firm which consists only of its partner. --------The Mahadevia family holds 60% of the shares of the appellant company and it has no interest whatsoever in Dhanesh Industries (partnership firm). Therefore, merely because Mr. Sukhdev Narang is Director in the appellant company as well as a partner in Dhanesh Industries, it cannot be held that the appellant company has a proprietary interest in Dhanesh Industries.
5. In the case of CCE, New Delhi v. Modi Alkalies & Chemicals Ltd. [2004 (171) E.L.T. 155 (S.C.)], the Apex Court has held that pervasive financial and management control are prima facie indicators of interdependence. In the present case, material on record is not conclusive of financial and management control by Mr. Sukhdev Narang over the partnership firms. In the case of Alembic Glass Industries Ltd. v. CCE & Customs [2002 (143) E.L.T. 244 (S.C.)] it has been held that shareholders of a public limited company do not, by reason only of their shareholding, have an interest in the business of the company and that equally, the fact that two public limited companies have common Directors does not mean that the one company has an interest in the business of the other. The Apex Court distinguished its earlier order in Calcutta Chromotype Limited v. Collector [1998 (99) E.L.T. 202 (S.C.)] holding that "the principle that a company under the Companies Act, 1956 is a separate entity and that therefore, where the manufacturer and the buyer are two separate companies, they cannot than anything more be related persons within the meaning of clause (c) of sub-section (4) of Section 4 of the Act is not of universal application.8
6. In the light of the above, we hold that Dhanesh Textile Industries Pvt. Ltd. does not have any proprietary interest in Dhanesh Industries"
9.2 In Cooper Pharma Vs. CCE, New Delhi [2004 (174) ELT 143 (Tri.-Del.)], the Tribunal held as follows: -
"There is a duty demand of about Rs. 5 lakhs and penalty of Rs. 1.5 lakhs. ...... ..... .... ...... ....... It is pointed out that the appellant- manufacturer is a partnership and the goods in question were being sold to a private limited company viz. M/s. Dynamic Lab. Pvt. Ltd. ......... .... ....
2. We have perused the records and considered the submissions made by both sides. In the present case the purchaser of the goods is a limited company. There is no evidence brought on record that an artificial legal arrangement had been created in order to evade duty. The only reason for treating the appellant and the limited company as 'related persons' is that they are having interest in the business of each other since share-holders/Directors of the limited company were blood relations of the manufacturing partnership. It is well settled that a limited company is a juridical person separate from its share-holders and Directors. Such a juridical person cannot be treated as a related person. There is also no allegation or finding that the limited company was a device to evade Central Excise duty. In these circumstances, we are of the view that the appellant's case is covered by the decision of this Tribunal in the case of CCE, Belgaum v. Akay Cosmetics (P) Ltd. and the Apex Court's decision in the case of Alembic Glass Industries Ltd. Consequentially, we hold that the duty demand which has been confirmed by treating the manufacturer and the buyer as related persons is not sustainable. It is set aside. The duty amount of Rs. 55,767/- which has not been contested is confirmed. Since most of the duty demand is on account of treating the parties as related persons, which finding has not been accepted, we are of the opinion that penalty will not be justified. Accordingly it is set aside."
9.3 In the case of Mineral Wool Manufacturing (India) Pvt. Ltd. Vs. CCE, Patna [1999 (109) ELT 228 (Tri.)], the Tribunal has held as follows: -
"4. We have considered the submissions. We have perused the record. We find that the adjudicating authority had after conceding in his order, two factual positions - the separate legal entity of the appellant company and the two partnership firms and the price of the appellants for the subject goods not being 9 very low - had held that these firms are related persons vis-a-vis the appellant company and invoked proviso (iii) to Section 4(1)(a) and ordered assessment of duty on the basis of the selling price of the partnership firm, M/s. Minsulate. Support for this finding has been sought by the learned Senior Departmental Representative on the basis of a Supreme Court judgment and a Tribunal decision. In the former case the Supreme Court had noted that there was identity of interest between the two partnership firms. Under the partnership agreement, the partners were to share the profits but not liable for losses. It was held that the two firms could not be said to be at arm's length or independent parties and that the prices at which the goods were sold by the manufacturing firm to their Chief Distributor firm could not be taken to be their real value. This judgment was noted and followed by the Tribunal in the case of Rakesh Bulb Industries. There were two partnership firms in that case, one being the manufacturer and the other the buyer. The partners of one were partners of the other firm which also had an additional partner in the person of their mother. The Tribunal held that the manufacturer and buyer were therefore one and the same and that it cannot be imagined that there is no financial interest in themselves or that the mother had no financial interest in her sons' business consisting of both manufacturing and buying. No additional evidence would be required to establish that the manufacturer would strive hard to promote the business of the buyer and vice versa as they would be doing it all for themselves. Examining the present case in the light of these decisions, we find that in this case the manufacturer (appellants) are a Private Limited Company and the buyer is a partnership firm, the partners being the sons of two of the Directors of the Appellant company. The Private Limited Company does not consist of only the Directors. It has a distinct identity. There is no indication that the partners of Minsulate India had any special arrangement of being eligible for the profits only and not liable for the losses as was the arrangement in the Mohanlal Bhavsar case decided by the Supreme Court. The Additional Collector had also conceded in his order that the company and the firms were independent legal entities. He had remarked that it cannot however be taken for granted that such separate legal entities do not fall in the category of related person within the meaning of Section 4(4)(c). Though, in the facts of the two cases cited by Shri Malik, decisions were taken in favour of Revenue, the facts of the present case are different as already discussed earlier. Another material factor is that, as pointed out by the learned Counsel, Shri Gopal Prasad, other manufacturers of slagwool had charged the same or lower prices from their customers. The Additional Collector has observed that this is not relevant as it was not the department's case that the appellant's price was very low. Actually that was the department's stand as seen from paragraph 1.1 of the impugned order-in-original. It has been stated therein that the appellant had disposed standard superfine quality of slagwool at a concessional rate of Rs. 1450 per M.T. to the sister concerns who in turn sold the same to other independent buyers at a much higher rate of Rs. 1900 - to Rs. 2100 - per M.T. Though this is the department's basis for the allegation of evasion of duty, the Additional Collector had 10 observed that it is not the department's case that their price was very low. Apart from the submission made by the appellants that other manufacturers had sold similar goods at same or lower prices, it was also stated by the appellants' counsel that the higher price was because of the addition of the duty element of 15% in the selling price of Minsulate India. If the same is taken into account as also the probable or reasonable wholesaler's margin of profit, the selling price of Minsulate India is not excessive. Accordingly the McDowell case had no application here. In the circumstances, we hold that the Additional Collector was not justified in treating M/s. Minsulate India as a related person of the appellant company and treating the selling price of the former as the basis for assessment of duty at the hands of the latter. Though the appeal is thus allowed on merits, the plea against the application of the longer period of limitation is also acceptable. The appellants had filed price list in the appropriate form applicable in respect of sales through a related person. As has come out in the arguments before us which has also been referred to in this order earlier, the Assistant Collector had held that it was "superfluous". In the circumstances of the case, the element of suppression or wilful mis-statement etc. cannot be said to be involved. The appeal succeeds on the plea of limitation also."
9.4 In Reliance Industrial Product Vs. CCE, Thane [2012 (276) ELT 107 (Tri.-Mumbai)] it was held as follows: -
"7. In the Hind Lamp's case (referred supra) the Hon'ble High Court of Allahabad held that the concept of "relative" has no application to the present case because the five customer companies are not natural persons but impersonal bodies. The said decision was challenged by the Revenue before the Apex Court and the Apex Court affirmed and upheld the findings of the Hon'ble Allahabad High Court. Similarly in the case of Kwality Ice Cream Company's case referred to supra, the Hon'ble Apex Court held that to be held as related persons, each of the parties involved should have direct or indirect interest in the business of each other and certain interdependence and reciprocity beyond relationship are required to consider whether the parties are related persons. In CCE, Ahmedabad v. Xerographic Ltd., case referred to supra, the Hon'ble Apex Court reiterated the well settled principle and laid down the three conditions that are required to be satisfied before it can be inferred that there exists a relationship. The three conditions are namely, (i) there should be mutuality of interest, (ii) alleged related person should be related to the assessee as per Section 4(4)(e) even in the Act and (iii) importantly the price charged from the related person was not the normal price but a price lower than the normal price and because of extra commercial consideration, the price charged was less than the normal value. In ITC Ltd., case (referred to supra) this Tribunal held that merely because the buyer and the seller are related, it cannot be allowed that price 11 at which the buyer further sells the goods shall be taken as the assessable value. It is important to see that whether the relationship influenced the price of the goods sold to the buyer. The said decision was also given in the context of the new valuation rules. In the case under consideration, we find that the parties involved are a partnership firm and a public limited company. Merely because some of the partners in the partnership firm and some of the Directors of the public limited company are relatives, it cannot be alleged that the partnership firm and the public limited company are related, because relationship as defined in the Companies Act read with Central Excise Act applies to natural persons and not to impersonal bodies like corporations. Therefore, the proposition in the show- cause notice and the findings of the impugned order that merely because some of the partners of the partnership firm and some of the Directors of the public limited company are relatives the firm and the company are related, has no legal basis whatsoever, especially in the light of the judgment of the Hon'ble Apex Court in the case of Hind Lamps Ltd. The said legal position was affirmed by the Hon'ble Apex Court in the case of Jay Engineering Works Ltd., referred to supra wherein it was held that concept of "relative" has no application to impersonal bodies.
8. The department has also alleged that the party has changed their business practice i.e., prior to 1-4-2005 they were a manufacturer themselves and subsequently they became job workers and, therefore, this change in business practice is a deliberate attempt to escape or to evade payment of duty. There is no law we find that prohibits or proscribes a firm or a company from changing its business practice. Whether somebody should remain a manufacturer or a job worker are determined by economic factors. It is also a practice, which is observed widely now in India, that many well known brand owners of consumer products who were manufacturing the products on their own earlier have resorted to getting goods manufactured on job work basis and no longer manufactures the goods themselves. Contract manufacturing is an economic reality, which is dictated by economic and market conditions and, therefore, there is no substance in the allegation that merely because the partnership firm, who is the appellant in this case, has changed its business practice, should be deemed to be related to the public limited company on whose behalf it is undertaking job work. We further observe that the department has not made any attempt whatsoever to show that the price at which the duty liability has been discharged by the appellant job worker has been in any way influenced because of any "relationship" between the appellant firm and the buyer public limited company. In the absence of any such credible evidence available on record, it is difficult to support the proposition that the price at which buyer has sold the goods should be the basis for charging of excise duty in the instant case.
9. Considering all the aspects as discussed above, we are of the considered view that the findings of the ld. Commissioner in the impugned order has no legal basis whatsoever and therefore the 12 demand of duty made in the impugned order has to be set aside. Consequential demand for recovery of interest and imposition of penalty on the appellants firm as also on Shri Satish J. Aggarwal, partner of the appellant firm are also set aside."
9.5 On a similar issue, in CCE, Ahmedabad Vs. Xerographic Ltd. [2010 (257) ELT 11 (SC)], the Apex Court held as follows: -
"8. Since the finding that M/s. Murphy (India) Limited and M/s. Mecotronics (P) Limited are "related persons" to the respondent within the meaning of Section 4(4)(c) of the Act has not been challenged before us, the same has become final. The department failed to show the existence of any extra commercial consideration in fixing the normal price between the respondents and the distributors-aforementioned two companies. Contention raised by the respondent that its sale to the distributors were on retail basis has also not been refuted by the department. Counsel for the appellant has also failed to show that the price at which the goods were sold to the "related persons" was not the normal price at which the goods were being sold through any other distributor or dealer or was less than the market price at which it was being sold in the market or that there was any extra commercial consideration in fixing the normal value. The finding recorded by the Tribunal is a pure finding of fact which docs not call for interference.
9. In the light of the above discussion, we do not find any merit in this appeal and dismiss the same with no order as to costs"
10. Whereas we find that the impugned order dated 30.12.2016 has placed reliance on the ratio of the following judgements which are also required to be examined.
10.1 In the case of CCE Vs. J Foundation [2015 (324) ELT 422 (SC)], the Hon'ble Supreme Court held as follows: -
"12. The ingredients which are to be satisfied to show that the two persons are related persons, have already been laid down in catena of judgments of this Court. However, we need not take stock of these judgments as this very Bench in a recent decision in the case of 'Commissioner of Central Excise, Hyderabad v. Detergents India Limited [2015 (318) E.L.T. 559 (S.C.)] took note of the existing case law and formulated the test in the following manner :
"12. When we come to the definition of "related person" the legislature has used a well-known technique. It first employs the expression "means"13
and states that persons who are associated with the assessee so that they have a direct or indirect interest in the business of each other would get covered. The definition then goes on to use the expression "and includes"
thereby indicating that the legislature intends to extend the definition to also include various persons that would not otherwise have so been included. These include a holding company, a subsidiary company, a relative and a distributor of the assessee and any sub-distributor of such distributor. The necessity for including holding and subsidiary companies as defined under the Companies Act, 1956 is to lift the corporate veil in order to get to the economic realities of the transaction."
13. In the present case, what emerges from the record is that as far as M/s. Haldyn is concerned, it is owned by the Shetty group and the Mehta group who subscribe 52 per cent and 48 per cent shares respectively in the said company. On the other hand, M/s. Travin, one of the purchasers, is wholly owned by the Shetty group and other three firms are wholly owned by Mehta group. Thus, from the aforesaid, it is argued by Mr. Jaideep Gupta, learned senior counsel appearing for the Revenue, that since M/s. Haldyn on the one hand and the four purchasers on the other hand belong to same group(s), the mutuality test automatically stands satisfied. In support of this submission, he has relied upon the judgment of this Court in 'Collector of Central Excise, Ahmedabad v. ITEC (P) Ltd., Bombay' [(2002) 7 SCC 473 = 2002 (145) E.L.T. 280 (S.C.)] and has particularly referred to para 9 thereof which makes the following reading : -
"9. We may now turn to the findings recorded by the Customs, Excise and Gold (Control) Appellate Tribunal. It was found that the respondent and M/s. International were having common Directors and that they were relatives of one another; a further finding was also noted that both the Companies were family concerns and were beneficiaries of their ventures and that the benefits of both the concerns are shared by members of one and the same family. From these findings, it is difficult to resist the conclusion that the respondent and M/s. International have a direct interest, in the business of each other and that the mutuality of interest between the two is apparent. We may point out here that the Tribunal's observation, quoted above, that no evidence regarding mutuality of interest has been brought on record, is inconsistent with the acceptance of the finding of the adjudicating authority, referred to above. Once those findings are accepted, the conclusion that there is mutuality of interest between the two concerns is inevitable. In this view of the matter, we set aside the finding of the Tribunal that the respondent and M/s. International are not related persons."
14. We are of the opinion that the aforesaid judgment squarely applies to the facts of the present case as it holds that where the two companies/firms etc., belong to the same group then the test of mutuality is established and satisfied. In a sense, the Court has torn the corporate veil thereby pointing out that such family concerns would be beneficiaries in the affairs of each other."
1410.2 In the case of Food & Health Care Specialities Vs CCE, Delhi-IV [2015 (328) ELT 92 (Tri.-Del.)] it was held as follows: -
"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....."
11. The Ld. Advocate Shri J. Shankaraman has heavily relied on the decision rendered by the Bombay Tribunal in the case of Dhanesh Textile Indus. Pvt. Ltd. Vs. CCE, Mumbai [2005 (191) ELT 498 (Tri.-Mum.)]. In the above case one of the Directors by name Mr. Sukhdev Narang is the director in M/s. Dhanesh Textile Industries Pvt. Ltd. and also a partner in two partnership firms. One Mahadevia family holds 60% of the shares of the appellant company. It was held by the Tribunal that though Mr. Sukhdev Narang is the Director in the Company as well as a partner in M/s. Dhanesh Industries it cannot be concluded that the appellant company has financial interest in M/s. Dhanesh Indus. which is a partnership firm. The company did not have any 15 proprietary interest in the partnership firms and does not controls them. There was no evidence of any flowback. Applying the ratio of the decision of Hon'ble Apex Court in the case of CCE, New Delhi v. Modi Alkalies & Chemicals Ltd. [2004 (171) E.L.T. 155 (S.C.)], it was held that pervasive financial and management control are prima facie indicators of interdependence and material on record on examination found to be not conclusive of financial and management control by Mr. Sukhdev Narang over the partnership firms. In the case of Reliance Industrial Product [2012 (276) ELT 107 (Tri.-Mumbai)], the partners involved are five companies and it was held therein that the concept of 'relative' has no application as the companies are not 'natural person' but impersonal bodies. Whereas in the present appeal, the manufacturer seller is a private limited company, but the buyer of the goods is the distributor which is a partnership firm which cannot be called as a impersonal body. The liability of the partners is unlimited, joint and several. Further, in the case of CCE, Ahmedabad Vs. Xerographic Ltd. [2010 (257) ELT 11 (SC)], the price at which the goods were sold to the related persons was compared to the normal price and the prices at which these were sold to other distributors and the market prices and arrived at a conclusion that there was no evidence found for any extra consideration paid for fixing the normal price. Thus, the ratio of the decisions relied upon by the Ld. Counsel for the Appellant do not have a direct bearing on this case and could not support their cause as facts obtaining in this appeal are distinguishable.
12. However, the facts in the present appeal are entirely different as the private limited company is owned and run by both the sons of its Distributor which is a partnership firm consisting of the parents of the two brothers who own the appellant company. Whether there is a relationship or 16 not has to be examined considering the total facts of each dispute and is not correct to generalize the same.
13. We find that in terms of Section 4(3)(b) an assessee and its distributor / 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.
In terms of explanation to Section 4(3)(b), the term 'relative' shall have the meaning assigned to it in sub-section (41) of Section 2 of the Companies Act, 1956.
"As per Clause (41) of Section 2 of Companies Act, 1956, relative means, with reference to any person, any one who is related to such person in any of the ways specified in section 6, and no others:
As per Section 6 of Companies Act, 1956, a person shall be deemed to be a relative of other if, and only if
(a) they are members of a Hindu Undivided family: or
(b) they are husband and wife: or
(c) the one is related to the other in the manner indicated in Schedule IA Schedule IA:
1.Father 2. Mother (including step mother) 3. Sons (including step sons) 4. (sons wife etc.)"
14. In the present case, we find that the Appellant is a Private Limited Company with 2 directors, who are siblings, holding together 99% shares of the 17 company. The Appellant is reportedly effecting most of the clearances to M/s. Harris and Menuk, their main Distributor in which the parents of the 2 directors of the Appellant Company are the Partners. The Appellant and the distributor are related and therefore fall within the ambit of Section 4(3)(b). In terms of Section 4(3)(b) of the Central Excise Act, 1944, it is obvious that both the appellant company and the distributor partnership firm are relatives, and they are so associated with each other, they have interest directly or indirectly in the business of each other. Audit verification has revealed that the price adopted to the distributor was much less than the price adopted at which these goods were sold to ultimate Customers. The pricing pattern itself reveals the mutuality of interest as the Appellant was benefited by reduced tax outflow and benefit to the distributor company was by way of reduction in cost of purchase and payment resulting in the distributor seeking increased supply of goods from the appellant, thus resulting in mutual benefit. By lifting the corporate veil of the Appellant, the economic realities of the underlying transactions are clearly discernible. We find that the impugned order has relied on the Hon'ble Supreme Court's decision in the case of Commissioner of Central Excise Vs. J. Foundation wherein it was held that when two companies / firms belong to the same group, then the test of mutuality gets established and by lifting the corporate veil which reveals that such family concerns would be the beneficiaries in the affairs of each other. In the case of CCE, New Delhi v. Modi Alkalies & Chemicals Ltd. [2004 (171) E.L.T. 155 (S.C.)], the Apex Court has held that pervasive financial and management control are prima facie indicators of interdependence. On close examination of the facts in this appeal, it is very clear that the manufacturer and the distributor are one and the same being parents (Distributor Firm) and their sons (Manufacturing Company). The manufacturing company and buyer partnership firm were one and the same and it cannot be imagined that there was no financial interest in themselves or 18 the parents had no financial interest in their sons' business, thus no additional evidence would be required to establish that the manufacturing company would strive hard to promote the interest of the parents distributor firm and vice versa as all these would be done for the benefit of themselves. The Ld. Counsel has argued that there was no mutuality of interest examined and proved by the Department. However, it has to be observed that the Appellant in their reply to Show Cause Notice or in the Grounds of Appeal have never contested the fact that there did exist a different and depressed price for the sales made by the appellant to their parent's distributorship firm and further they have not disputed the differential duty arising out of such undervalued sales which stood paid up. Such payment of short paid duty according to the price difference as suo motu assessed and computed by them itself evidences the differential pricing and the extent of duty evasion. It is reasonable to infer that there is mutuality of interest as serving of financial interest by the parents in the running of the appellant company or the sons in the distributing buyer. This business arrangement clearly establishes that the appellant manufacturer had made all efforts to promote the business of the distributor and vice versa as all this is an arrangement of convenience done for the financial interest of themselves as a family.
15. We therefore concur with the Appellate Authority's finding that "in this case the Appellant (M/s. Beva Silicones) is a body corporate and the distributor (M/s. Harris & Menuk) is a partnership firm, of the same group, in which family members who are "relatives" as per the definition of Companies Act, 1956; are either directors (Sons) in the body corporate, or partners (Father & Mother) in the partnership firm. Thus they are very much covered under the definition of related persons as explained under Section 4(3)(b) of the Central Excise Act, 1944 as being family members they are in a position to 19 exercise control directly / indirectly over the corporate company (Appellant) and the firm (distributor firm)." This fact also came to light only during verification by internal audit. At no point in time has the appellant disclosed to the Department that their distributor is a partnership firm of their parents. The very fact that when confronted by the audit, the appellant has acceded to the existence of this arrangement designed with intent to evade duty, is borne out from their contemporaneous action in admittance of not only preparing the worksheet of such short payment of duty upto August, 2014, but also thereafter paying the entire differential duty suo moto without any protest in five monthly installments from November, 2014 to March, 2015 as is borne out from Para 6 of the Show Cause Notice read with the audit para enclosed with Letter dated 13.11.2014 of the Superintendent IV D Range. Further, the annexure of yearly duty liability titled "Beva Silicone Worksheet" enclosed to the SCN, duly attested by the Range Superintendent bears the endorsement that from November, 2014 the appellant is paying tax on the goods sold to related person (i.e. M/s. Harris and Menuk) at their customer's end price. Thus it remains an admitted fact from the appellant's own contemporaneous action during the period that they have accepted their liability to pay the differential duty and have thus discharged the same without a murmur of protest.
16. Once the relationship is established as above, the valuation of the goods to be adopted should be in terms of Rule 9 of Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 which reads as follows: -
"Rule 9.- [Where whole or part of the excisable goods are sold by the assessee to or through a person who is related in the manner specified in any of the sub-clauses (ii), (iii) or (iv) of clause (b) of sub-section (3) of section 4 of the Act, the value of such goods shall be the normal transaction value] at which these are sold by the related person at the 20 time of removal, to buyers (not being related person); or where such goods are not sold to such buyers, to buyers (being related person), who sells such goods in retail:
Provided that in a case where the related person does not sell the goods but uses or consumes such goods in the production or manufacture of articles, the value shall be determined in the manner specified in rule 8."
17. The transaction value on which the duty is required to be paid is the value of the goods at which the distributor has sold the goods. The Appellant Company and the distributor firm are related persons and the clearances have to be valued in terms of Rule 9 of Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 as above. As such, we do not find any reasons to interfere with the impugned Order-in-Appeal No. 523/2016(CXA-II) dated 30.12.2016.
18. We notice that the appellant has paid the duty without protest over five months from November 2014 to March 2015. The said payments made, included the differential duty calculated by the appellant till August 2014 and communicated to the Audit, as well as the differential duty for the months of September 2014 & October 2014. The annexure attested by the Superintendent referred to supra along with Para 6 of the SCN evidences such payment. The annexure, also has indicated that since November 2014 the appellant is discharging duty at the price at which the related person (distributor) sell to customer. Thus, evidently the duty incidence has been passed on to the end customer. It is only after six months from commencement of differential duty payment by appellant, and a month after payment of the final installment of differential duty due upto October 2014 in March 2014, that in May 2014, the SCN came to be issued. We hold that the appellant is liable to pay interest on the differential duty suo moto paid by the 21 appellant. Since the duty paid without protest to the exchequer is already merged with the consolidated fund of India, any exercise in appropriation is a mere superfluity.
19. The issue that remains for our consideration is the proposal for penalty under Section 11AC in the SCN. We find that while the Ld. Commissioner (Appeals) has set aside the impugned Original-in-Original of the Adjudicating Authority, he has not rendered any finding or discussed about the penalty proposed. The Department too has not filed any cross objection against the non-imposition of penalty. It is a settled principle in law that the appellant cannot be put in an worse off position upon the appellant's preferring of the appeal. Thus, the benefit of non-filing of cross objections should enure to the appellant. We refrain from remanding the matter to decide on penalty in such peculiar facts and circumstances, in order to give quietus to this litigation that is already nearly a decade old. Having found the appeal lacking in merits, the appeal is rejected.
(Order pronounced in open court on 13.02.2025)
Sd/- Sd/-
(AJAYAN T.V.) (VASA SESHAGIRI RAO)
MEMBER (JUDICIAL) MEMBER (TECHNICAL)
MK