Customs, Excise and Gold Tribunal - Mumbai
Rammaica (India) Ltd. vs Commissioner Of Central Excise on 26 July, 2005
ORDER Moheb Ali M., Member (T)
1. M/s. Rammaica (India) Limited is a manufacturer of decorative laminates. Bulk of the sales of the said goods are made through three dealers:
1. M/s. Maharashtra Laminates Pvt. Ltd. (MLPL) - Sales in Mumbai region only.
2. M/s. Hanuman Laminates Pvt. Ltd. (HLPL) - main marketing arm.
3. M/s. Ram Laminates (I) Pvt. Ltd. (RLPL), Pune - Sales in Maharashtra.
2. It is the contention of the Revenue that these marketing outfits are related to the manufacturing concern. The appellant company seemed to have adopted a modus operandi by which it was selling 'A' grade laminated sheets as 'C' or 'D' grade to the first named marketing company who in turn sold them as 'A' grade sheets to its dealers. Further, it is also alleged that the appellant was under stating the value of sheets laminated while selling them to the related buyers (Marketing companies) thereby evading duty.
3. M/s. RMIL is a Limited company. Its Chairman is one Mr. Ramabatar Jhunjhunwala. It has three directors, two of them his relatives and one an outsider. It has a network of branches at Mumbai, Calcutta, Delhi, Bangalore, Madras etc. Goods manufactured by the appellant are first transported to various branches; the latter then sell them to the branches of marketing company, M/s. HLPL. The appellant sells his goods directly to M/s. HLPL who in turn sells them to various dealers in Mumbai. Similarly, the marketing outfit at Pune, M/s. RLPL, who gets the goods directly from the manufacturer sells them in whole of Maharashtra and upcountry. All the three marketing companies have Directors who are related to the Chairman of the appellant company as brought out in Para 4(f) of the impugned order.
4. The appellant manufacture 4 types of decorated laminated sheets, A, B, C & D. The gradation reports maintained by them indicate the grade. Whereas in A, B, C grades, the design Number etc. is noted on the said reports, for 'D' grade, no such design number is given. Thus all gradation reports which have no design numbers pertained to production of 'D' grade. This grade is exclusively sold to one dealer by name, Jayesh Traders, Kalyan.
5. Scrutiny of production reports and records of clearance, RG-1 entries during the period 1992 to 1995 revealed that the production of 'D' grade is less than its clearance thereby leading to the conclusion that the appellant has been clearing other grades in the form of 'D' grade.
6. During the same period one of the marketing companies, M/s. MLPL received all the four grades from the manufacturer but its records of do not indicate that 'C & 'D' grade sheets were further sold to anyone except to a few parties whose names and addresses were vague and unverifiable. This indicates that M/s. MLPL was actually receiving high-grade sheets.
7. The Officers conducted a stock taking at the premises of MLPL from 10.1.96 to 13.1.96. Shortage of finished goods and excess in some brands were found as detailed in the Panchnama drawn.
8. Statements of various persons were recorded which indicated that the appellant (Rammaica) was removing goods of a higher grade in the garb of lower ones. In addition, it was also revealed that the Chairman of the manufacturing unit was instructing his Technical Manager who is in-charge of gradation to deliberately down grade 'A' into 'C' or 'D' in order to evade payment of appropriate duty. It was also revealed that the Chairman of RMIL was instructing the staff employed at MLPL to change the original stickers on the sheets from 'C' to 'A', and also 'D' to 'A' when the goods were received in MLPL's godown. The marketing outfit at Pune HLPL was also receiving such wrongly graded sheets. But the sale of 'D' grade of HLPL is marginal and it is to such parties whose addresses cannot be traced. Para 8 to 11 of the impugned order gives the facts, as they came out during investigations.
9. The next allegation is that the price at which the goods are sold to the marketing company is even otherwise under stated and therefore not acceptable. Shri Raj Lunkar who is one of the Directors of MLPL and HLPL stated in his statement that the difference between purchase price and selling price in the case of Rammaica brand is Rs. 150/- to Rs. 200/- and in the case of Ramopol, it is Rs. 90 to Rs. 150/- during the years 1992-1995. He also stated that the selling price of laminated sheets is decided by Shri Balram Jhunjhunwala one of the Directors of the manufacturing unit. The Chairman of the manufacturing company has complete managerial control - whom to hire whom to terminate etc. over the marketing units. Several instances have been brought out to show how the Chairman of the manufacturing company can make his employee a Director of the marketing unit. The Department thus alleges that M/s. RMIL and MLPL, HLPL and RLPL are related persons. M/s. RMIL during the relevant time had exercised all pervasive managerial control, price control etc. over the marketing amounts. It is also brought out that the marketing companies spent huge amounts on advertisement to promote the products of RMIL. This indicates according to the Department that the manufacturing company and the marketing companies have interest in each others business. The Department then seeks to adopt the price at which the marketing companies have sold the products, obtained from RMIL, to their dealers as the assessable value. On this count a demand for Rs. 4,07,97,278.36 was made. The Department seeks to confiscate the excess goods found during the course of stock taking at the premises of MLPL (the marketing company). Penalties are proposed on the RMIL, MLPL, HLPL and RLPL, its Directors, its employees involved in down grading the products with an intention to evade duty.
10. In the impugned order the Commissioner confirmed the demand indicated in the show cause notice. He discussed the evidence at length in support of the Department's contention that the manufacture and the marketing companies are related persons. He concluded that the relationship has affected the price at which the goods are sold by the assessee. He therefore upheld the contention of the Department that the price at which the goods are sold by the marketing companies should be the basis for assessment.
11. In regard to the allegation that 'A' grade sheets were mis-graded into C or D by the employees of RMIL on the directions of its Chairman in order to evade duty, the Commissioner held that the statements of various persons involved in the manufacturing unit, the statement of the godown in-charge of the marketing unit, the fact that Nil or negligible sales of C & D grades were made by the marketing units etc. clearly establish that RMIL was mis-branding their goods (from A to C or D) thus undervaluing the goods sold to the marketing units.
12. The Commissioner confiscated the excess goods found during the stock taking conducted by the Officers at MLPL under Section 173Q(b)(b) & (d) and under 226 and imposed various penalties on the firms/persons mentioned in the impugned order.
13. Heard both sides.
14. On behalf of the appellants, it was argued that invocation of larger period of limitation which issuing the show cause notice is not warranted, as the Department was aware in 1988 (the period involved is 1991-1995 December) itself as to the relationship between the manufacturing unit and the marketing units; that the contention that the buyer and the seller are related is misplaced; that the fact that there are common Directors that the shareholding pattern is not determinative; that marketing companies or the main manufacturer has spend money on advertising does not help the Department to establish relationship; that the allegation that the goods manufactured by the appellant company (RMIL) was mis-graded is not supported by any evidence except the statements of employees; that RMIL sells its goods to outstation buyers independently and so the allegation that RMIL sells all its goods through related persons is not correct; that the price at which goods are sold to other independent buyers should at best be the price to be taken as assessable value; that the Commissioner ought not to have imposed penalties on the employees and Directors and that in any case the goods found in excess at MLPL should not have been confiscated.
15. The appellants relied on the following case law (a) Pepsico India Holdings (P) Ltd. 2004 (163) E.L.T. 478 wherein the Tribunal referring to the decision of the Hon'ble Supreme Court in the case of Collector v. Indian Oxygen Limited held that when part goods are sold to unrelated buyers and part to related buyers, Special Provisions under Proviso 3 and Section 4(1)(a) of Central Excise Act prior to amendment of the Section in 1.7.2000 is not applicable, goods not being sold exclusively through related buyers (b) Philips India Limited 1997 (91) E.L.T. 540 (S.C.) wherein the Hon'ble Supreme Court held that the excise authorities have to keep in mind the legitimate business dealings; while attempting to arrive at the assessable value of excisable goods. The Court was concerned with whether or not the advertising expenses incurred by the Distributor should be added to the assessable value of the goods in that case. The Appellant also cited several other decisions of the Courts/Tribunals in support of their argument that the manufacturing unit and the marketing units cannot be said to be related to each other.
16. The ld. DR, Shri Saxena took us through the show cause notice and the impugned order to demonstrate how the evidence supports the Revenue's contention that RMIL during the period in question has been deliberately misbranding 'A' grade into 'C or D' to suppress the real value of the goods. He further argued that the various acts of Commission and omission on the part of the appellant company constitutes suppression of facts and that larger period of limitation is invocable in the appellants' case.
17. The ld. SDR argued that twin tests of managerial control and financial inter-dependence to establish that the seller and the buyer are related are satisfied in this case. He took us through the constitution of the companies involved (common Directors etc.), financial inter-dependence (Advertisement expenses being incurred by one of them for the benefit of all), managerial control exercised by the Chairman and other Directors over each other company etc.
18. The ld. SDR argued that the RG-1 Account clearly points out that RMIL has not been manufacturing C or D grade as much quantity as the sales figures indicate. This fact clearly brings home the charge that the manufacture has been mis-branding the goods after manufacture and clearing them at a value applicable to C or D grade sheets. He further pointed out that the MLPL and RMIL have been selling negligible quantities of C & D grades from their premises which only shows that they have not been receiving as much quantity of C & D grades as indicated in their books. He then submitted that the Commissioner rightly rejected the price at which the goods are sold to related buyers. He filed a comparative chart indicating the price at which the same goods are sold to unrelated buyers vis-a-vis the related buyer. For instance Rammaica 1.5 mm grade 'A' was sold at a price of Rs. 442/- to an unrelated buyer in Delhi whereas the same was sold to the marketing units at Rs. 326/-. There are other instances as well. He relied on the decision of the Hon'ble Supreme Court in the case of SACI Allied Products v. Commissioner in support of his contention that the sale price to independent buyers should be adopted for the purpose of assessment and not the price at which goods are sold to related buyers.
19. We have considered the rival contentions. From the evidence gathered and the records of the case, we hold that RMIL (the manufacturer) and MLPL, RMPL, HLPL (the marketing companies) are related to each other. The transactions between them come under related party transaction. Having said that we observe that RMIL (Manufacturer) also sells his goods to other buyers also who are not related. It is not a case where the manufacturer has so arranged his sales that the entire goods produced by him are sold through a related person. In such a case the price at which such goods are sold to other independent buyers by the related person becomes the assessable value. The Id. SDR pointed out instances where the manufacturer sold his goods at a higher price to unrelated buyers. It is this price that has to be adopted (the price at which the same goods are sold to other unrelated buyers) and not the price at which the related buyer has sold to his dealers in accordance with Section 4(1)(a)(3) of Central Excise Act. This is what the Hon'ble Supreme Court has laid down in SACI Allied Products cited supra. The Commissioner therefore erred in adopting the price at which the marketing units sold the goods an assessable value even when the manufacturer sells a part of his goods to unrelated buyers.
20. The show cause notice has brought out instances where 'A' grade laminated sheets were mis-declared as 'C' or 'D' grade sheets. The duty sought to be evaded was indicated in Annexure C1 and C2 to the show cause notice. We hold that the Department was able to establish both by documentary evidence in the form of RG-1 Entries and the statements of various persons involved in the manufacturing of various products in the appellant's factory that the appellant had been, during the period in question, mis-declaring the goods. The records maintained at MHPL and RMPL also corroborate the fact that the manufacturer with the connivance of the marketing units had been clearing 'A' grade sheets in the garb of 'C' or 'D'. Duty is demandable on the quantities so mis-declared as indicated in Annexure C1 & C2 to the show cause notice. We accordingly, confirm this demand. The demand itself has to be worked out on the basis of prices at which 'A' grade goods are sold to independent buyers. The Department is in possession of this information as brought out by the ld. DR during the course of hearing.
21. We set aside the confiscation of goods covered by Commissioner. These goods were found in excess of the stock reflected in the books of MLPL, the marketing company. The logic of applying various Central Excise Rules to a marketing unit who is not a manufacturer is not understood.
22. In view of the fact that the demand has to be worked out again on the mis-declared goods (A grade being declared as C & D). Penalties on RMIL, MLPL and Shri Balram Jhunjhunwala have to be also re-determined. We hold that penalties are imposable on them for their role in mis-declaring the grades and the further disposal of the mis-graded sheets. The Commissioner may redetermine the penalties accordingly.
23. Penalties on RMPL & HMPL are not imposable as the records suggest that they have not received the mis-branded goods and have had no role to play in the disposal of mis-branded goods.
24. The Commissioner also imposed penalties on various employees. Their role is restricted to following the instruction of their employer/Superiors. We see no reason to sustain any penalties on them. We therefore, set aside the penalties imposed on other appellants except the ones mentioned above.
25. In fine we hold:
1. RMIL and the marketing units are related persons.
2. Assessable value cannot be determined under Section 4(1)(a)(3) of the Central Excise Act as the same goods are sold to unrelated buyers as well. Commissioner's finding that the price at which the related parties sold the goods to other independent buyers has to be adopted for assessment is set aside.
3. The finding of the Commissioner that 'A' grade sheets were mis-declared as 'C' & 'D' thereby evading appropriate duty leviable on them is upheld. Duty involved be calculated at the price at which 'A' grade sheets are sold to unrelated buyers. The duty leviable be re-determined.
4. Penalties on RMPL, MHPL and Balram Jhunjhunwala be decided after computing the correct duty as stated in (3) above.
5. Penalties on others set aside.
6. Confiscation of goods set aside.
26.The appeals are disposed off thus.