Customs, Excise and Gold Tribunal - Bangalore
K.V. Rao, Suresh Dorbala, Vice ... vs The Commissioner Of Central Excise And ... on 3 October, 2007
Equivalent citations: 2008(222)ELT267(TRI-BANG)
ORDER T.K. Jayaraman, Member (T)
1. All these four appeals have been filed against Order-in-Original No. 39/2005-06 (RP) dated 21.4.2006 passed by the Commissioner of Customs and Central Excise, Visakhapatnam-I Commissionerate.
2. The main appellant is Hy-Grade Pellets Ltd. (HGPL). They are engaged in the manufacture of iron ore pellets. HGPL was incorporated in the year 2000 and was formerly known as Essar Minerals Ltd. It was under the management of Essar Steel Ltd. (ESL), Hazira who were holding Central Excise Registration No. 9/94. ESL made an exit and HGPL took over the management and operation of the unit in 2000. HGPL were registered under a new Registration No. 7/2000. HGPL manufacture the pellets on their own account as well as on job work basis for other parties. As far as the present appeals are concerned, the issue is in respect of valuation of the pellets cleared through ESL on job work basis. The appellants HGPL received free of cost iron ore from ESL and they converted the same into pellets and cleared them. While clearing the iron pellets, they paid duty under Rule 8 of Valuation Rules, 2000 on the cost construction basis. They actually paid duty on 115% of the cost of production. In all their declarations filed before the department, HGPL had stated that they are clearing the pellets after conversion of the iron ore through ESL who is a related company and therefore, they adopted the method of valuation under Rule 8 on cost construction method. However, the department proceeded against them on the ground that they ought to have followed the valuation of the goods on job work basis in terms of the decision of the Hon'ble Apex Court in the case of Ujagar Prints Ltd. case 1989(39) ELT 493 (SC). This is actually the dispute in a net shell. Proceedings were initiated by issue of show cause notice. Proceedings culminated in the adjudication order. In terms of the Adjudication order, the Commissioner demanded duty of Rs. 20,62,94,836/- along with Education Cess of Rs. 39,72,613/- under proviso to Section 11A(1) of Central Excise Act, 1944. He imposed penalty equal to the duty confirmed under Section 11AC of the Central Excise Act, 1944. Interest under Section 11AB was also imposed. He imposed a penalty of Rs. 5/- Lakh on Shri K.V. Rao, Managing Director of HGPL, Visakhapatnam under Rule 209A of Central Excise Rules, 1944 and Rule 26 of Central Excise Rules, 2001 and Central Excise Rules 2002. He imposed a penalty of Rs. 2,50,000/- on Shri Suresh Dorbala, Vice President for HGPL, Visakhapatnam under Rule 209A of Central Excise Rules, 1944 and Rule 26 of the Central Excise Rules, 2001 and 2002. Further he imposed a penalty of Rs. 5/- Lakh on M/s. Essar Steel Ltd. under Rule 209A of the Central Excise Rules 1944 and Rule 26 of the Central Excise Rules, 2001 and 2002.
3. The appellants are highly aggrieved over the impugned order. Hence, they have come before this Tribunal for relief.
4. Shri M. Chandrasekharan, learned Sr. Counsel and Shri N.K. Jain, learned Counsel appeared on behalf of the appellants. Ms. Sudha Koka, learned SDR for the Revenue.
5. We heard both sides. The learned Sr. Counsel invited our attention to two orders passed by the Assistant Commissioner on finalization of provisional assessments for clearances affected to ESL from 1997-98 to 2002-2003. In fact there are actually two orders passed by the Assistant Commissioner on the finalization of provisional assessment of the clearances. These assessments pertain to the clearances of the iron ore pellets manufactured on job work basis by the appellant HGPL and cleared to ESL. The learned Counsel took us through those orders and informed the Bench that in these transactions no sale was involved. The Assistant Commissioner passed two orders for the finalization of provisional assessment. One order is up to June 2000 before the enactment of the new Section 4 and the other after the enactment of the new Section 4. In the first order of finalization, the Assistant Commissioner adopted the price of the pellets cleared by the appellant for other independent buyers. In respect of the second part, the assessable value was finalized at 115% of the cost of production as envisaged in Rule 8 of the Valuation Rules. It was also pointed out that there were certain agreements known as Cost Conversion Agreements. In terms of these agreements, ESL paid job work charges for the appellant HGPL. However, while clearing the goods, the value adopted was 115% of the cost of production and the cost of production was arrived at as per CAS-4 prescribed in Board's circular. The assessments were finalized on the above basis and these orders have not been reviewed by the department.
5.1 Even though the assessments upto 31.3.2004 were finalized in terms of the Assistant Commissioner's order the department issued Show Cause Notice dated 9.8.2005 for the period from July 2000 to June 2005 alleging that:
• The goods manufactured by HGPL on job work or conversion basis and supplied to ESL could not be assessed under Rule 8 of the Valuation Rules as the same were not manufactured by HGPL as its own goods or in its own account.
• According to the department, the appellant HGPL should have adopted the valuation in terms of the Apex Court's decision in Ujagar Prints case.
• It was also contended by the department that as per the conversion agreement entered into between HGPL and ESL, they were described as seller and buyer respectively. Therefore, in no case, it could be a case of consumption by or on behalf of the HGPL.
• The case of the department is that HGPL had incorrectly declared that the goods were cleared to a related person. The department held that even though the appellant HGPL was initially a subsidiary of ESL, later there was another development as further equity was raised by the appellant, as a result of which M/s. Stemcor Minerals Ltd. Mauritius came to hold 51% of the nominal share capital while the remaining 49% share capital was held by ESL. It was stated that the appellant company HGPL was no longer a subsidiary to ESL and in that sense it is wrong to hold that ESL and HGPL are related. Therefore, the valuation adopted was not correct.
This was the contention of the Revenue and Revenue proceeded against the appellants invoking the longer period and proposing penalty under Section 11AC.
5.2 The learned Counsel at the outset pointed out that there is no justification for invocation of the longer period. He contended that in terms of the Central Excise Act read with Monopolies and Restrictive Trade Practices Act 1969, ESL is an interconnected undertaking as far as the appellant is concerned and an interconnected undertaking is actually a related person in terms of Section 4 of the Central Excise and Salt Act. Once it is held that ESL is a related person, then the valuation method adopted by them is correct in terms: of Rule 8. It was emphasized that the Hon'ble Apex Court in the case of CCE, Indore v. S. Kumar's Ltd. have held that the valuation method in terms of Ujagar Prints case would not be applicable for related person. So he relied on this decision to hold that the method adopted by them for valuation was correct. Further, he said that even though M/s. Stemcor Minerals Ltd. held 51% of the shares, they partly paid only Rs. 5/- of the face value of Rs. 8/-, whereas the shares held by ESL were fully paid at. Consequently, majority voting rights in the company were held by the ESL. In view of the above development, ESL can be said to control the appellant company. In view of these things, the appellant company and ESL are interrelated and once they are interrelated companies, they would be related within the meaning of Section 4 of the Central Excise Act. Therefore, he emphasized that the valuation method adopted by them was actually correct and there is no justification for demand of duty and its confirmation and also imposition of penalty.
5.3 He also brought to out notice that there is no justification for invoking the longer period. The period involved in the dispute is the same as the period involved in the finalization of the provisional assessment. At the time of provisional assessment, all the information was made available to the department and there was no suppression of facts. Moreover, the order of the Assistant Commissioner has been accepted by the department and not reviewed. It was also brought to our notice that in all the invoices in which the clearances have been made the appellants have indicated the conversion agreement. Therefore, there is no suppression of facts. Since there is no suppression of facts, longer period cannot be invoked. They also pointed out that there is actually no evidence to show that they had an intention to evade Central Excise Duty. Moreover, it was pointed out that if the valuation method adopted by the department is taken into account, for certain periods, they had paid excess duty. It was further urged that the entire exercise is revenue neutral because whatever duty is paid by them will be taken as modvat by ESL.
5.4 The learned departmental representative vehemently argued that the appellants had actually suppressed the information regarding the conversion agreement entered into between ESL and them. In the conversion agreement, the appellant is described as seller and the ESL is described as buyer. This clearly indicates that these two entities are not related at all. It was also pointed out that the appellants were clearing iron pellets to other independent buyers as well as to some other units on job work basis. The method adopted by them for valuation in these cases is on the basis of the Ujagar Prints decision. Therefore, the appellants were very much knowing that the valuation method to be adopted cannot be under Rule 8. The case of the department is that the appellant had full knowledge of the valuation method. The departmental representative emphasized the point that the appellants had suppressed the fact that they and ESL were independent units and they have misrepresented to the department that they are related. Once it is held that they are not related, they ought to have adopted the valuation in terms of Ujagar Prints case. Since there is suppression of facts it was urged that the longer period is invocable. She requested the bench for confirmation of the order.
5.5 On a very careful consideration of the entire issue, we find that for the major portion of the disputed period, the assessment was already finalized by the Assistant Commissioner. Moreover, in the invoices there is mention of the conversion agreement. It cannot be said that the appellants had suppressed the facts, as the fact of conversion agreement is clearly mentioned in the invoice and while finalizing the provisional assessment, the concerned officers ought to have noticed that and made further enquiries. Moreover, in the profiles submitted to the department, the fact of conversion has also been mentioned. In these circumstances, longer period with an intention to evade duty cannot be accepted. Moreover, there are periods in which the appellants have paid higher duty and if the valuation method adopted by the department is taken, then they would be entitled for refund of amount for certain periods and again whatever duty is paid by the appellant would be taken as modvat by ESL. In these circumstances, there is no justification to invoke longer period as the entire exercise is revenue neutral and the intention to evade duty cannot be proved. Hence, the longer period cannot be invoked.
5.6 As far as the merits of the case is concerned, the appellants have clearly shown that in view of the fact that ESL owns 49% of the share on which the full face value of Rs. 10/- for each share has been paid and also due to the fact that the other company M/s. Stemcor Minerals Ltd. paid only 5% of the face value of Rs. 10/- per share. Even, though M/s. Stemcor Minerals Ltd. held 51% of the nominal share capital, the majority voting rights vested only with ESL. In this sense, ESL controlled during the appellant company during the relevant period. Therefore, there is considerable force in the contention that the appellants and ESL were related companies. Moreover, in the Supreme Court judgment rendered in the case of S. Kumar's Ltd. cited by the appellant, it is stated that the Ujagar Prints decision on valuation cannot be made applicable to the related companies. In that sense, the valuation method adopted by the appellant for clearances of iron pellets on job work basis to ESL is correct. Hence, there is no justification for demand of duty and imposition of higher penalty. Hence, we allow these appeals with consequential relief.
(Pronounced in open Court on 3 Oct 2007)