Customs, Excise and Gold Tribunal - Tamil Nadu
Poornalaya Electricals vs Commissioner Of C. Ex. on 22 May, 1997
Equivalent citations: 1999(107)ELT660(TRI-CHENNAI)
ORDER T.P. Nambiar, Member (J)
1. This appeal is directed against the orders passed by the Additional Collector S.L. No. 59/90, dated 31-12-1990. In terms of that order he confirmed the duty demanded in show cause notice to the extent of Rs. 3,96,268.46 and imposed a penalty of Rs. 4,000/- on appellant.
The brief facts of the case are that on 9-11-1989, the officers of the Central Excise, Preventive group, Headquarters Office, Coimbatore made a surprise visit to the appellants factory, M/s. Poornalaya Electricals, L-4 No. 5/87, No. 4, Veerapandi Road, Press Colony, Coimbatore and the local branch office of M/s. Prompt India, Cochin, at Door No. 163, Balaji Nagar, Avarampalayam Road, Coimbatore and also at Door No. 398, Pankaja Mill Road, Coimbatore-45.
2. During their visit, it was found that M/s. Poornalaya Electricals were manufacturing 'V Guard' voltage stabilizers in their factory at the above address under an agreement with M/s. Prompt India, Cochin, the owner of the brand name 'V Guard' and have sold the entire production to M/s. Prompt India. The goods in question have been despatched to their branch sales office at Coimbatore-45 earlier functioning at 398, Pankaja Mill Road, Coimbatore-45 and at present at Door No. 163, Balaji Nagar, Avarampalayam Road, Coimbatore-44. Since M/s. Prompt India, Cochin is only a trader in voltage stabilizers and Electronic Clocks and hence not eligible for the SSI exemption under Notification No. 175/86-C.E. as amended, M/s. Poornalaya Electricals even though a SSI unit, had paid the duty at the full effective rate of 15% adv. on the 'V Guard' voltage stabilizers without availing the SSI exemption. M/s. Poornalaya Electricals have manufactured and cleared the following varieties/models of 'V Guard' voltage stabilizers, viz. (1) 300 VA Deluxe (2) 500 VA (3) 300 VA Extra Booster (4) 1 KVA (5) 3 KVA (6) 4 KVA (7) 5 KVA. It was found during the scrutiny of the records that the actual price fetched by the 'V Guard' Voltage stabilizers in question when sold to wholesale dealers by M/s. Prompt India was much more than the prices adopted by the actual manufacturer M/s. Poornalaya Electricals, for payment of duty. Hence on reasonable belief that proper duty was not paid on the above 'V Guard' voltage stabilizers by M/s. Poornalaya Electricals by resorting to undervaluation the connected records were seized under mahazar dated 9-11-1989 in the presence of the Managing Partner Shri Vijayakumar and another Partner Ms. Rajeswari for further scrutiny and action. During the visit, it was also found that two of the employees of M/s. Prompt India, Cochin by name Shri C.X. James and Smt. Thilakavathi were working in the factory as quality controllers.
3. Shri. Vijayakumar, Managing Partner of M/s. Poornalaya Electricals, in his statement dated 9-11-1989, deposed that he and his two sisters by name Smt. R. Rajeswari, W/o D. Vijayakumar, 30, GKS Nagar, Coimbatore-39, Smt. R. Gokila, W/o A.T. Devarajan, Pattampillai Veedu, Pettai, (Post), Trivandrum and his mother Smt. R. Subadra, W/o Shri Rajagopal, Door No. 95, Press Colony, Coimbatore-19. Here also partners of the factory, M/s. Pornalalaya Electricals. He added that he was looking after the complete management of the factory while his sister Smt. R. Rajeswari was looking after the production of the 'V Guard' voltage stabilizers and the other two were only sleeping partners. He has stated further that under an agreement with M/s. Prompt India, Cochin, they were manufacturing 'V Guard' voltage stabilizers since 3-10-1987 for M/s. Prompt India, L.F.C. Road, Kaloor, Cochin-17, and supplying the same to the them. For this purpose he had hired the factory premises at D.No. 324, Veerapandi Road, Press Colony Post, on a monthly rent of Rs. 500/-and a deposit of Rs. 1,000/- from his father Mr. N. Rajagopal. He had also handed over a true copy of the lease deed entered into by him with his father in this regard. Mr. R. Vijayakumar, stated that the total cost of machinery installed in his factory was only about Rs. 35,000/-. He claimed that the raw materials viz., Lamination, Copper Wire, Capacitor and printed circuit boards etc., for the manufacture of 'V Guard' voltage stabilizers were purchased as per the specification and the quality prescribed by M/s. Prompt India, Cochin only from the dealers specified by them. Some of the dealers were within the state and others were outside the State. He was not allowed to buy from any other dealer. He also stated that he was getting the following items of raw materials/components viz., guarantee card, Sl. No. sticker, monogram, monogram belt etc., from M/s. Prompt India, Cochin, at the prices fixed by them. The leaflets supplied by them were given free and were not charged for by them. Mr. Vijayakumar further stated in his statement that the technical know-how pattern, model, design and circuit diagram etc., were also given to them free of cost by M/s. Prompt India, Cochin. He added that M/s. Prompt India have been taking the responsibility for the entire sales arrangement, all kinds of advertisements, after sales services and the 7 years guarantee for the goods. M/s. Proornalaya Electricals had no responsibility in this regard. According to the agreement he should sell the entire production of 'V Guard' Voltage stabilizers only to M/s. Prompt India at the prices accepted by them and he cannot sell them to any one else or at any price other than the price accepted by M/s. Prompt India. He added that he was manufacturing the 'V Guard' Voltage stabilizers only for M/s. Prompt India and was not manufacturing any other branded voltage stabilizers in his factory. M/s. Prompt India, Cochin have employed two of their employees by name Mr. C.X. James and Mrs. Thilagavathi in his factory to supervise the manufacture of the 'V Guard' Voltage Stabilizers at the time of production itself and to test the quality and ensure quality control for the goods. They were testing each and every 'V Guard' voltage stabilizer manufacturing in his factory and approved the same after necessary quality control tests. Only after this is cleared the goods to M/s. Prompt India after payment of duty. He added that he was filing the price lists for approval of the assessable values of 'V Guard' voltage stabilizers taking into consideration the cost of raw materials, making charge and profit margin.
4. Mrs. R. Rajeswari, another partner of the factory, in her statement stated that she was one of the partners of M/s. Poornalaya Electricals manufacturing 'V Guard' voltage stabilizers for M/s. Prompt India, Cochin. She added that her brother R. Vijayakumar was the Managing Partner of the factory and he looked after the purchase of raw materials, sale of 'V Guard' voltage stabilizers, accounts and office maintenance and that she was supervising the manufacture of the 'V Guard' voltage stabilizers in the factory. She was only aware that 'V Guard' branded voltage stabilizers were manufactured in their factory according to the quality prescribed by M/s. Prompt India and sold to M/s. Prompt India, and that she did not know anything about the purchase of the raw. materials/components or about the sales or price of the 'V Guard' voltage stabilizers. She further stated that her brother Mr. R. Vijayakumar would be able to give full details. She also stated that there were about 10 workers working in her factory and that the daily average production was about 35 Nos. of voltage stabilizers.
5. Mrs. Thilagavathi W/o Shri Soundararajan, holding a Diploma in Electrical Engineering, who was appointed by M/s. Prompt India, Cochin and employed to work in M/s. Poornalaya Electricals as Quality Controller, stated in her statement on 9-11-1989 that she was appointed by M/s. Prompt India, Cochin as Quality Controller and was working in M/s. Poornalaya from 21-12-1987. M/s. Prompt India was paying her monthly salary and allowances for the work she was doing in M/s. Poornalaya Electricals as Quality Controller. She was drawing a monthly salary of Rs. 1100/- from the branch office of M/s. Prompt India, Cochin at Coimbatore as per the direction of M/s. Prompt India, Cochin. Her duty at M/s. Poornalaya Electricals was to test all the 'V Guard' voltage stabilizers manufactured in the factory with the specification and quality prescribed by M/s. Prompt India and approve them. In the same manner, she had to test the raw materials/components purchased by M/s. Poornalaya Electricals for the manufacture of 'V Guard' voltage stabilizers to see that they conform to the specifications and quality prescribed by M/s. Prompt India. Whenever she found any raw materials/components below the quality standard prescribed by M/s. Prompt India she rejected the same. Similarly, she had to test and approve each and every 'V Guard' voltage stabilizer manufactured in the factory and reject the ones which did not conform to the quality prescribed by M/s. Prompt India, Cochin. She added that she was not connected with M/s. Poornalaya Electricals in any other way and that she was not in receipt of any remuneration or gift from M/s. Poornalaya Electricals. She further stated that her name was not found in the attendance Register of M/s. Poornalaya Electricals; and that her hours of work in the said factory were from 8.30 A.M. to 5 P.M. She also submitted two records viz., Quality Controller's file and the production entry note book maintained by her in the factory.
6. Mrs. Thilagavathi, in her further statement given on 23-11-1989 stated that she had been working as the Quality Controller in M/s. Poornalaya Electricals since 21-12-1987, as an employee of M/s. Prompt India. She further deposed that her job in the factory was to test the raw materials/components and also the finished 'V Guard' voltage stabilizers to see whether they satisfied the quality prescribed by M/s. Prompt India. She used to pass those which came upto specifications prescribed by M/s. Prompt India and reject those not upto the standard. She further stated that the drawings, instructions etc., found in the quality controller's file submitted by her already on 9-11-1989 were all sent to her from M/s. Prompt India, Cochin in connection with the exercise of the quality control for the products. The list of complaints mentioned in the said file were the defects noticed on 'V Guard' voltage stabilizers received by M/s. Prompt India for repairs. She added that whenever there was any change in the components or model of the 'V Guard' voltage stabilizers M/s. Prompt India, Cochin intimated the same by letter or drawing which also was filed by her in the file. Regarding the quality controller's production entry book already submitted by her, she stated that she had entered the particulars of 'V Guard' voltage stabilizers passed out by her after the quality control test from 1-4-1989 onwards and that she had not maintained this register prior to this date. She also stated that she had written this register whenever she had time and hence it was not complete. Apart from the file and this register she has not maintained any other record in this regard.
7. Mr. C.X. James, S/o Shri Xavior, another Quality Controller in this factory has given a statement on 9-11-1989 stated that he was working as Assistant Quality Controller at M/s. Prompt India, Cochin since 1-1-1989. He got a salary of Rs. 950/- including allowances per month. He was doing repairs of 'V Guard' voltage stabilizers at the Head Office of M/s. Prompt India, Cochin. He added that often he was being deputed by the Head Office of M/s. Prompt India to do quality control checks in M/s. Poornalaya Electricals 3 or 4 days a week. The stabilizers which were approved in the quality control tests alone were packed and sent for sales. He added that he signed on the guarantee card as proof of approval. He had also to test the quality of raw materials, components used in the manufacture of 'V Guard' voltage stabilizers. He further stated that another employee of M/s. Prompt India, by name Mrs. Thilagavathi was also working at M/s. Poornalaya Electricals as a quality controller. For the quality control test or for any other work done by him at Poornalaya Electricals he was not getting any remuneration from them and that he was not connected with M/s. Poornalaya Electricals in any way.
8. In his further statement given on 30-11-1989, Mr. R. Vijayakumar, Partner of M/s. Poornalaya Electricals, Coimbatore deposed that he was manufacturing 'V Guard' voltage stabilizers in his factory from October, 1987 onwards and had obtained Central Excise licence No. 5/87 for the same and was paying duty on the same. He added that he was manufacturing and selling the entire production of 'V Guard' voltage stabilizers to M/s. Prompt India, Cochin under an agreement entered into with them on 3rd October, 1987. He also stated that the machinery, tools, testing equipments etc., required for the manufacture of 'V Guard' voltage stabilizers in his factory were all purchased by him out of his own funds and that M/s. Prompt India had not given any advance or financial help in this regard. He added that M/s. Prompt India, Cochin had not given him any advance or working capital. The various varieties/models of 'V Guard' voltage stabilizers manufactured in his factory were 300 V.A. Delux, 500 V.A. 300 V.A. extra booster 1 KVA, 3KVA, 4KVA and 5 KVA. He added that the raw materials/components required for the manufacture of the above 'V Guard' voltage stabilizers were purchased only from the specified suppliers nominated by M/s. Prompt India who also prescribed the required quality. He also stated that the payments for the same were made by him by D.D. or cheque and that M/s. Prompt India did not make any payments, for the same. He further stated that the value for the finished 'V Guard' voltage stabilizers had been determined by him taking into account the raw material cost, making charges and net profit etc. He did not have any calculation sheet for the same. He said that he was filing the price list in Part-II after M/s. Prompt India accepted the price quoted by him. He was clearing the goods to the Branch Office of M/s. Prompt India, Cochin at Coimbatore on payment of duty adopting these values. He added that he did not know at what price the said 'V Guard' voltage stabilizers were sold by M/s. Prompt India and that he did not sell these goods to any other person. In reply to the query regarding undervaluation of the above 'V Guard' voltage stabilizers which had been sold at very high prices by M/s. Prompt India, he stated that he did not know that these 'V Guard' voltage stabilizers were capable of being sold at very high prices. Because of cheap labour, low rent as well as low profit margin and also because of the complete technical know-how, pattern, model, design, circuit diagram etc., required for the manufacture of the 'V Guard' Voltage stabilizers were given free by M/s. Prompt India and also because the complete expenses in relation to marketing, advertisement charges, after sales service, responsibility for 7 years guarantee etc., were being undertaken by M/s. Prompt India and since he was not paying any goodwill for their brand name 'V Guard' owned by M/s. Prompt India, his values were low. He added that he did not submit any contract or copy of contract along with the Part II price list submitted by him to the Department for approval of the price list since he had not entered into any such contract regarding the prices or the quantity to be sold at a particular price. He had enclosed only the copies of letters of M/s. Prompt India which refer to a discussion regarding the price and their acceptance along with the Part II price list for approval. He added that he had already submitted the file containing such price lists. He further stated that he had paid the duty as per the prices quoted in the gate passes and had received the same amount after issue of invoices. He stated that he had not issued any credit note or debit note to them. He further stated that the 'V Guard' voltage stabilizers and the raw materials components that go into the manufacture of the same were subject to the quality test by Mrs. Thilagavathi and Mr. C.X. James employed by M/s. Prompt India as Quality Controllers in his factory. He further stated that M/s. Prompt India had instructed him to purchase the P.C. Board from M/s. Microwave Products (India) Limited, Saibaba Colony, Coimbatore at Rs. 5.40 per piece as per the terms and conditions specified in their letter to M/s. Micro Wave Products (India) Limited, with copy to him. However, he had not yet placed orders for the same. He added that he did not know that M/s. Prompt India would be selling the 'V Guard' voltage stabilizers which were manufactured in his factory and cleared on payment of duty at such high prices. If he had known it earlier he would have also paid the duty at the price at which the same were sold by M/s. Prompt India. He also stated that since he had manufactured and sold the entire production of 'V Guard' voltage stabilizers to M/s. Prompt India under the agreement, he would collect the duty involved on the difference in prices between the real prices and the prices adopted by him for payment of duty from M/s. Prompt India, and pay to the Department. He had also sought to be excused for the offence of removing the said 'V Guard' voltage stabilizers on payment of duty at reduced prices.
9. Mr. Vijayakumar had sent a letter dated 1-12-1989 addressed to the Collector of Central Excise, Coimbatore wherein he stated that the last ten (10) lines on Page 9 and the first thirteen (13) lines on page 10 of the statement written by him in his own hand on 30-11-1989 were written by him as per the dictates and compulsions of the Central Excise Officers. He also stated that the said statement was recorded when he was under utter confusion.
10. Mr. Vijayakumar also sent another letter dated 4-12-1989 addressed to the Collector of Central Excise, Coimbatore wherein he retracted the above mentioned portion of this statement dated 30-11-1989 as already mentioned by him in his letter dated 1-12-1989. While he had not retracted the statement given by him on 9-11-1989, he had stated that the portion of his statement given by him in his own hand on 30-11-1989 was given under compulsion, threat and coercoin.
11. It was found during the investigation that the price at which the 'V Guard' voltage stabilizers were sold by M/s. Prompt India who buy the entire production of the factory were much higher than the prices adopted by M/s. Poornalaya Electricals for payment of Central Excise duty. Thus prices very much lower than the normal prices of these goods were adopted by M/s. Poornalaya Electricals for payment of duty resulting in under valuation of 'V Guard' voltage stabilizers by M/s. Poornalaya Electricals. and consequent evasion of Central Excise duty.
12. M/s. Poornalaya Electricals have filed the price list under Part-II for approval of the Department, while filing the price list they have enclosed only a copy of letter from M/s. Prompt India, Cochin, which referred to some discussions they already had. It did not however contain any record of the nature of discussions held to arrive at the prices quoted nor do they contain a copy of any regular contract or agreement for sale with the terms and conditions of sale, if any, between the parties. The basis adopted for computing the assessable value sought for approval was also not furnished. In all cases only a copy of the letter of M/s. Prompt India, Cochin, addressed to M/s. Poornalaya Electricals, Coimbatore, which referred to a discussion they had with the manufacturer and gave the price at which the goods in question have to be cleared after filing necessary price list in Part II for approval of the Department had been enclosed and filed with the Department. Apart from this there was no mention of the prices quoted by the manufacturer or of the buyer or details of the negotiations they had if any. Apparently the discussions never took place and in every case actually the prices as fixed by M/s. Prompt India, Cochin in their letter have been taken as the contracted prices and assessable value determined accordingly for payment of duty. Thus, the assessable values were dictated by the buyer and not worked out independently by the actual manufacturer based on relevant factors.
13. In view of the above as it appeared from the above facts that it was a clear case of under valuation due to the suppression of the real value of 'V Guard' stabilizers manufactured by M/s. Poornalaya Electricals, Coimbatore a show cause notice was issued on 19-3-1990 asking M/s. Poornalaya Electricals, Coimbatore as why :-
(i) a Central Excise duty amounting to Rs. 4,74,985.91 should not be demanded from them under Rule 9(2);
(ii) a penalty should not be imposed on them under Rules 9(2) and 193-O of Central Excise Rules, 1944 for violation of Rules 9(1) 173C, 173F and 173G of Central Excise Rules, 1944.
There after a reply was filed and after personal hearing the impugned order is passed.
14. The learned Advocate appearing for the appellants contended before us that the findings of the adjudicating authority that M/s. Prompt India is a related person of the appellant is not based on any reliable evidence. It was contended that the agreement between the appellant and M/s. Prompt India does not establish the same. He also pointed out that there are small scale units in Kerala which also carry out business with M/s. Prompt India, Cochin under the terms and conditions which are identical to those prevailing in between the appellants and M/s. Prompt India. He further pointed out that the buyer should not only be a relative but also a distributor of the appellant unless both these conditions are fulfilled under Section 4(4)(c) the appellant and M/s. Prompt India cannot be termed as related persons. He contended that the appellants are manufacturers and M/s. Prompt India are purchasers from the appellants and they are not the distributor of the appellants' company. Hence he pointed out that the conclusion in the impugned order that they are related persons is not established as there is no mutuality of interest between the appellants and M/s. Prompt India. He further pointed out that merely because the goods were manufactured with the customers' brand name and the entire production was sold to the customer and the advertising expenses are also borne by the buyers and without any written agreement between the parties in this regard it was held in several decisions that such circumstances are not sufficient to hold that these two firms are related persons. He pointed out that in regard to the terms of the agreement the manufacturers sell the stabilizers to the brand name owner on principal to principal basis and the concept of related persons will not arise in the facts and circumstances of the case. In this connection he relied on the following decisions :-
(i) 1984 (17) E.L.T. 323 (S.C.) in the case of U.O.I. and Ors. v. Atic Industries Ltd.
(ii) 1986 (26) E.L.T. 881 (S.C.) in the case of Sidhosons & Am. v. U.O.I. and Ors. etc.
(iii) 1987 (28) E.L.T. 445 (Tribunal) in the case of APTE Amalgamation Pvt. Ltd. v. Collector of Central Excise, Bombay.
(iv) 1989 (41) E.L.T. 368 (S.C.) in the case of U.O.I, v. Playworld Electronics Pvt Ltd.
(v) 1991 (51) E.L.T. 309 (Bom.) in the case of Ceam Electronics Pvt. Ltd. v. U.O.I.
(vi) 1992 (60) E.L.T. 574 (Tribunal) in the case of Agro Foods Punjab Ltd. v. C.C.E.
15. The learned JDR on the other hand pointed out that to manufacture the products in question procurement of raw materials, technical know-how, testing the quality of the finished product and after sales services etc. are required. He in this connection pointed out that in the instant case though the raw materials were supplied by the appellants the manufactured products were tested by the quality controllers employed by M/s Prompt India, Cochin. He further pointed out that this fact is evidenced from the statements given by Smt. Thilagavathi and Shri James. It was further pointed out that though the appellants purchased the raw materials for the manufacture of voltage stabilizers they are not free for purchasing the raw materials from any manufacturer whom they like but the raw materials should be purchased as per the instructions of M/s. Prompt India. Therefore he contended that this establishes the relation between the appellant and M/s. Prompt India. Shri S. Madhusoodhanan also admitted that M/s. Prompt India had instructed the appellants to supply required raw materials to various manufacturers of 'V Guard' voltage stabilizers. Hence he has stated that the appellants are influenced by M/s. Prompt India in the manufacturing activities. He further reiterated the reasonings mentioned in Para 31 of the impugned order wherein these aspects are discussed by the adjudicating authority. Accordingly he stated that the appellants and M/s. Prompt India are related persons and the appellants having suppressed this fact the Department is entitled to invoke the extended period of limitation in this regard. Therefore he stated that there is no merit in the appeal.
15(a). We have considered the submissions of both the sides. In order to appreciate the contentions of both the sides we hereby reproduce para 31 of the impugned order which reads as follows :-
"31. The Department has clearly established the fact that both M/s. Poornalaya Electricals and M/s. Prompt India have mutuality of interest in view of the following facts:
(i) The agreement for manufacture of voltage stabilizers entered into between M/s. Prompt India, Cochin and M/s. Poornalaya Electricals provides for not only an assistance, technical know-how and the supervision of the manufacturing with the brand name of the 'V Guard' stabilizers but also M/s. Prompt India undertook the entire marketing and responsibility for all advertisement and after sales services, etc., for the goods manufactured by M/s. Poornalaya Electricals, Coimbatore.
(ii) The price at which the goods have been sold by M/s. Poornalaya Electricals to M/s. Prompt India are influenced by extra commercial considerations. The invoice price adopted by M/s. Poornalaya Electricals to determine Central Excise duty was much lesser than the rate at which M/s. Prompt India charged to their dealers. M/s. Prompt India undertake the responsibility of after sales service and guarantee for 7 years period for the 'V Guard' stabilizers manufactured by M/s. Poornalaya Electricals, Coimbatore. The guarantee card is signed by the quality controller employed by M/s. Prompt India in M/s. Poornalaya Electricals, Coimbatore. In the normal course of trade no manufacturer would allow an employee of another concern to conduct the test of the quality and sign the guarantee card for the products manufactured by them. Besides, both the quality controllers employed by M/s. Prompt India to work in the factory of M/s. Poornalaya Electricals, were not paid by M/s. Poornalaya Electricals, but by M/s. Prompt India.
(iii) The entire production had been sold to M/s. Prompt India, Cochin, at a rate fixed by them. But M/s. Prompt India when they fixed the price to their dealers increased the price with a big margin stating that increase in Central Excise duty, increase in raw materials price, increase in the cost of production etc. are the reasons to fixing such a price to each items marketed by M/s. Prompt India. The evidences relied in this regard are the price lists of M/s. Prompt India dated 1-10-1987, 10-10-1988 and 1-4-1989.
(iv) M/s. Prompt India, Cochin had supplied free of cost technical know-how, design circuit, diagram, model, etc., and also the leaflets to M/s. Poornalaya Electricals, Coimbatore.
From the above facts it is very well established by the Department that M/s. Prompt India has direct and indirect interest in the business transaction with M/s. Poornalaya Electricals, Coimbatore. Therefore, it is clear from the transactions that M/s. Poornalaya Electricals and M/s. Prompt India, Cochin are related persons and as such the case laws quoted by the assessee in this regard are not relevant. The price at which M/s. Prompt India sold the stabilizers to various dealers should be taken as assessable value."
Therefore it is seen that just on the above said 4 facts enumerated in the above order the adjudicating officer held that the appellants and M/s. Prompt India are related persons. Further at para 29 of the impugned order he observed as follows:
"29. It is stated by the assessee that they employed their own men and materials and investment was made from their own funds for the manufacture of voltage stabilizers. To manufacture an excisable product, the above requirements are not enough. Procurement of raw materials, technical know-how, testing the quality of finished product and after sales service etc. are required to manufacture an excisable product. In the instant case though the men and materials were supplied by M/s. Poornalaya Electricals, Coimbatore, the manufacturing products were tested by the quality controllers employed by M/s. Prompt India, Cochin. This fact is clearly evidenced from the statements given by Smt. Thilagavathy and Shri C.X. James both dated 9-11-1989. Though M/s. Poornalaya Electricals, Coimbatore purchased the raw materials for the manufacture of voltage stabilizers, they are not free from purchasing the raw materials from any manufacturers whom they like. The raw materials should be purchased as per the instructions given by M/s. Prompt India. This fact is clearly established by the Department from the statements recorded from Shri R. Vijayakumar, one of the partners of the M/s. Poornalaya Electricals. Besides, the statement given by Shri S. Madhusoodhanan, Works Manager of M/s. Micro Wave Products, Coimbatore on 23-11-1989 with reference to purchase of raw materials is a corroborative evidence in this regard. Shri S. Madhusoodhanan, had admitted that M/s. Prompt India had instructed them to supply the required raw materials to various manufacturers of 'V Guard' voltage stabilizers. From this, it is clear that M/s. Poornalaya Electricals are influenced by M/s. Prompt India, Cochin, in their manufacturing activities."
16. The point that arises for our determination is whether these facts are sufficient to prove that the appellants and M/s. Prompt India are related persons. In this connection the learned Advocate relied on the decision of the Hon'ble Supreme Court reported in 1984 (17) E.L.T. 323. In that particular decision the Hon'ble Supreme Court held as follows :-
"What the first part of the definition requires is that the person who is sought to be branded as a "related person" must be a person who is so associated with the assessee that they have interest, directly or indirectly, in the business of each other. It is not enough that the assessee has an interest, direct or indirect, in the business of the person alleged to be a related person nor is it enough that the person alleged to be a related person has an interest, direct or indirect, in the business of the assessee. It is essential to attract the applicability of the first part of the definition that the assessee and the person alleged to be a related person must have interest, direct or indirect, in the business of each other. Each of them must have a direct or indirect interest in the business of the other. The equality and degree of interest which each has in the business of the other may be different; the interest of one in the business of the other may be direct, while the interest of the latter in the business of the former may be indirect. That would not make any difference, so long as each has got some interest, direct or indirect, in the business of the other. Now, in the present case, Atul Products Ltd. has undoubtedly interest in the business of the assessee, since Atul Products Ltd. holds 50 per cent of the share capital of the assessee and has interest as share holder in the business carried on by the assessee. But it is not possible to shy that the assessee has any interest in the business of Atul Products Ltd. There are two points of view from which the relationship between the assessee and Atul Products Ltd. may be considered. First, it may be noted that Atul Products Ltd. is a shareholder of the assessee to the extent of 50 per cent of the share capital. But we fail to see how it can be said that a Limited Company has any interest, direct or indirect, in the business carried on by one of its shareholders even though the shareholding of-such shareholder may be 50 per cent."
It is therefore seen that in order to prove that these are related persons the Department should prove that the appellants and M/s. Prompt India have interest direct or indirect in the business of each other. Therefore each of them must have a direct or indirect interest in the business of the other even though the quality and degree of interest which each has in the business of the other may be different. The interest of one in the business of the other may be direct while the interest of the latter in the business of the former may be indirect. In the present case the only fact available are M/s. Prompt India is providing technical know-how and the appellants manufacture the goods with the brand name of M/s. Prompt India and M/s. Prompt India undertook to advertise and after sales services. It only goes to show that M/s. Prompt India is testing the goods to their satisfaction and the appellants manufacture the goods for M/s. Prompt India. M/s. Prompt India is only a purchaser from the appellants and while purchasing the goods they ensure that the quality of the goods do not suffer. The mere fact that M/s. Prompt India sold the goods at higher price than the purchase price from the appellants and the other circumstances including that the entire production has been sold by the appellants to M/s. Prompt India is not enough to show that these two firms have got interest in the affairs of each other.
17. In this connection the learned Advocate also relied on the decision of the Hon'ble Supreme Court reported in 1986 (26) E.L.T. 881 wherein at page 882 it was held as follows :-
"The enhancement in the value of the goods by reason of the application of the brand name is because of the argumentation attributable to the value of the goodwill of the brand name which does not belong to the manufacturers and which added market value does not accrue to the petitioner company or go into its coffers. It accrues to the buyers to whom the brand name belongs and to whom to fruits of the goodwill belong. Excise duty is payable on the market value fetched by the goods, in the wholesale market at the factory gate manufactured by the manufacturers. It cannot be assessed on the basis of the market value obtained by the buyers who also add to the value of the manufactured goods the value of their own property in the goodwill of the 'brand name' - The Petitioners are therefore right and the respondents wrong. This point is covered by earlier decisions of this Court, namely, (1) Union of India v. Cibatul Ltd. -1985 (22) E.L.T. 302, (2) Joint Secretary to the Government of India v. Food Specialities Ltd. - 1985 (22) E.L.T. 324; and (3) Civil Appeal No. 1496 of 1977 disposed of by a Bench of three Judges of this Court by its judgment dated 3rd April, 1986. The petition must therefore be allowed."
It is thus seen that applying the above principles it can be stated that M/s. Prompt India sells the goods by adding the value of their own property in the goodwill of the brand name and also adding the value of their technical advice given to the appellants in this behalf. It is in this view of the matter that the value had been increased by them while selling the goods which they have purchased from the appellants. Hence that cannot be stated to be a consideration to hold that these are related persons.
18. The learned Advocate also relied on the decision of the Tribunal reported in 1987 (28) E.L.T. 445 wherein at pages 448 and 449 the Tribunal held as follows :-
"(g) in 1983 (14) E.L.T. 1896 - Union of India v. Bombay Tyre International Ltd. as well, it was decided "Accordingly, we hold that pursuant to the old S.4(a), the value of an excisable article for the purpose of excise levy should be taken to be the price at which the excisable article is sold by the assessee to a buyer at arm's length in the course of wholesale trade at the time and place of removal" (Paragraph 25 of the report);
(h) mere manufacture according to the buyer's specifications or under his supervision or to his brand name does not militate against an arm's length sale. Thus in 1985 (22) E.L.T. 302 Union of India v. Cibatul Ltd. and 1985 (22) E.L.T. 324 Joint Secretary to Government of India v. Food Specialities Ltd., it was held that
(i) manufacture of goods to a specification constituting the buyer's standard,
(ii) tests by the buyers and supply only on approval,
(iii) affixture of the trade mark of the buyer to those supplied after approval, do not militate against an arm's length sale. The manufacturer "owns the plant and machinery, the raw materials and the labour and manufactures the goods and under the agreements, affixes the trade marks on the goods". The manufacturer produces the goods on his own account and sells the goods with the trade marks affixed on them to the buyer. These are decisions under the old Section 4, seeing that the agreements construed as well as the relevant periods were prior to the amendment thereof;
(i) in the Tribunal as well [E-Appeal No. 80/82-A Collector of Central Excise v. Mis/air Home Products] we had occasion to hold, following the aforesaid decision, that, merely on account of an agreement providing for such or similar conditions, the manufacturer and the buyer do not become "related persons" as defined in the amended Section 4."
Applying the above principles to the above cited case it is seen that mere manufacture according to the buyers specifications are under the supervision of the owners of the brand name who is not against the arms' length sale. There is nothing to show that the transaction between the appellants and M/s. Prompt India is not on principal to principal basis. Hence merely because M/s. Prompt India is supplying the technical know-how and the appellant is using their brand name and the whole production is sold to the appellants it cannot be stated that they are related persons. The appellants produces the goods on their own account and sells the goods with the brand name marks affixed on them to the buyer.
19. Reliance was also placed on the decision of the Hon'ble Supreme Court reported in 1989 (41) E.L.T. 368 wherein at paras 9 and 10 the Hon'ble Supreme Court held as follows :-
"9. Similarly in the instant case, it appears that the brand name "Bush" was affixed to the goods produced by the respondent. In Sidhosons and Ors. v. Union of India and Ors. - 1987 (1) SCC 25, it was held that the excise duty was payable on the market value fetched by the goods, in the wholesale market at the factory gate manufactured by the manufacturers, i.e., the price charged by the manufacturers to the buyer under the agreement. It could not be assessed on the basis of the market value obtained by the buyers who also add to the value of the manufactured goods the value of their own property in the goodwill of the 'brand name'.
10. In view of the facts that have emerged in his case, the High Court came to the conclusion that the market value of the goods of the respondent herein was the price charged from M/s. Bush India Ltd. and not the market value at which price M/s. Bush India Ltd. sold to its whole-sellers for the purpose of payment of excise duty. The High Court, therefore, quashed the Show Cause Notice and the Demand Notice."
It is thus seen that M/s. Prompt India is selling the goods at a higher rate in view of the fact that they are adding the value of their own propriety in the goodwill of the brand name. Therefore this cannot be a factor to hold that they are related persons.
20. Reliance was also placed on the decision of the Bombay High Court reported in 1991 (51) E.L.T. 309 wherein at Para 2 their Lordships held as follows :-
"2. Shri Shroff, learned Counsel appearing on behalf of the petitioners, submitted that the order of the Assistant Collector cannot be sustained in view of the decision of the Supreme Court reported in 1989 (41) E.L.T. 368 (Union of India v. Play World Electronics Pvt. Ltd.) The submission of the learned Counsel is correct and deserves acceptances. It is not in dispute that M/s. Peico Electronics had placed order for supply 3000 pieces of two band portable transistors with the petitioners and the price fixed for each piece was Rs. 125/- plus taxes as applicable. The Assistant Collector felt that as the sale was not effected at the factory gate but the transistors are supplied to M/s. Pieco Electronics for onward sale to their dealers, the price at which the sets were supplied by the petitioners cannot be considered as normal price of the goods at the factory gate. The Assistant Collector felt that the normal price should be one at which the transistors were sold by M/s. Pieco Electronics in the course of wholesale trade. The conclusion of the Assistant Collector cannot be sustained. It is obvious that the petitioners manufactured the goods chargeable to excise duty and sold it to M/s. Pieco Electornics at the fixed price. Merely because the entire manufacture is sold to M/s. Pieco Electronics is cannot lead to the conclusion that the sale by the petitioners is to a related person as contemplated under Section 4(4)(c) of the Act. The expression "related person" means person who is so associated with the assessee that they have interest, directly or-indirectly in the business of each other. It is impossible to suggest that the petitioners have interest directly or indirectly in the business of M/s. Pieco Electronics or vice versa. The issue has been considered exhaustively by the Supreme Court and it is obvious that the order of the Assistant Collector cannot be sustained."
Applying the above principles to the facts of this case it can never be said that the appellants have any interest directly or indirectly in the business of M/s. Prompt India or vice-versa. The reason is that the appellant manufactures the goods on their own account and the purchasers M/s. Prompt India purchases the same by ensuring the quality of the goods produced and they sell it at higher price by including their goodwill value in the Brand name. There is absolutely nothing to show that the appellant has any interest in the business of M/s. Prompt India and M/s. Prompt India has got any interest in the appellants' business.
21. Reliance was also placed on the decision reported in 1992 (60) 574 wherein at Para 5 it is held as follows :-
"5. We have carefully considered the pleas advanced on both sides. Dealing with the second contention of the learned Advocate for the appellants that agreement between the appellants and M/s. Voltas is a normal commercial agreement and therefore, purchase of goods by the said M/s. Voltas from the appellants is on principal to principal basis, we are inclined to agree with her after going through the various clauses of the agreement. The long period of agreement, exclusiveness in marketing of the products in favour of the said M/s. Voltas Ltd., affixation of the brand name of the customer of Voltas on the products, the manner of placing of order in Clause (6) of the agreement, affixation of prices by mutual agreement between the appellants and the Voltas, the responsibility of advertising and promotion of the products on the said customers M/s. Voltas Ltd. and the overriding commission of 10 per cent in respect of the sales to other persons made directly by the appellants to the Voltas, keeping Voltas harmless and indemnified against any claims from third parry regarding standard and quality of the products do not detract from the nature of the agreement as being one on principal to principal basis between the two parties, namely the appellants and M/s. Voltas. These clauses in our view do not make the transactions between the appellants and their customer M/s. Voltas Ltd. as being on direction of the customer. By virtue of the said agreement the transaction between the two parties does not cease to be one as on arm's length. Paras 6 and 7 relied upon by the learned Advocate in Cibatul's case, mentioned supra, are quite apt in the facts and circumstances of this case."
Applying the above principles to the facts of this case it is seen that the recital in the agreement as well as the fact that the whole production is sold to M/s. Prompt India and that they have furnished the technical know-how do not make the transaction between the appellants and M/s. Prompt India as that of a related person. By virtue of the said agreement and transaction between the two parties does not cease to be one at arm's length. There is also nothing to show that there is any mutuality of interest between these two firms. In the above circumstances we are of the view that the finding of the adjudicating authority that M/s. Prompt India is related person of the appellants is not based on any reliable evidence. We observe that M/s. Prompt India was extending help to the appellants by way of identifying the sources of supply of raw materials, negotiations for price for the same and also by supplying drawings and technical specifications for manufacture of goods. In addition they have also put their Quality Control Engineers to do the check and supervision which is directly relatable to manufacture of goods. As it is the price for sale has been stated to be fixed between the appellants and M/s. Prompt India based on negotiations done orally. The basis adopted for price fixation for goods in question has not been revealed. What emerges from the above is that the price charged cannot be considered as sole consideration for sale of goods. In that view of the matter the price as declared for assessment purposes cannot be accepted and the assessable value is to be fixed under the Valuation Rules provided under 4(A)(B) (sic) of Central Excises and Salt Act. We therefore in the circumstances for this limited purpose remand the matter to the learned original authority for de novo adjudication and decision after affording the appellants an opportunity of hearing in the light of the above.