Custom, Excise & Service Tax Tribunal
Skoda Auto Volkswagen India Private ... vs Pune on 27 August, 2020
1
Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017
ST/86543, 86545/2018, ST/86595, 86596/2019
CUSTOMS, EXCISE & SERVICE TAX APPELLATE
TRIBUNAL, MUMBAI
REGIONAL BENCH - COURT NO. I
Excise Appeal No. 86245 & 86251 of 2016
(Arising out of Order-in-Original No. PUN-EXCUS-002-PR.COMMR-16
to 19/2015-16 dated 29.02.2016 passed by the Principal
Commissioner of Central Excise, Pune-II)
M/s Skoda Auto Volkswagen India Pvt. Ltd. .... Appellant
E--1, MIDC, Phase 3, Village Nigoje, Kharab Wadi,
Pune, Maharashtra - 410501
Versus
Principal Commissioner of Central .... Respondent
Excise, Pune -II
ICE House, 41/A, Sassoon Road,
Opp. Wadia College, Pune - 411001
Appearance:
Shri V.S. Nankani, Sr. Advocate with Shri Shankey Agarwal, Shri
Shreyash Shah, and Shri Prithviraj Chowdhuri, Advocates for the
Appellants
Shri K.M. Mondal, Special Consultant, Authorized Representative for
the Respondent
WITH
Excise Appeal No. 86519 & 86542 of 2017
(Arising out of Order-in-Original No. PUN-EXCUS-002-COMMR-036
/2016-17dated 24.03.2017 passed by the Principal Commissioner of
Central Excise, Pune-II)
M/s Skoda Auto Volkswagen India Pvt. Ltd. .... Appellant
E--1, MIDC, Phase 3, Village Nigoje, Kharab Wadi,
Pune, Maharashtra - 410501
Versus
Commissioner of Central Excise, Pune-II .... Respondent
ICE House, 41/A, Sassoon Road,
Opp. Wadia College, Pune - 411001
AND
Excise Appeal No. 86543 & 86545 of 2018
(Arising out of Order-in-Original No. PUN-EXCUS-001-COMMR-013
/2017-18 dated 22.12.2017 passed by the Principal Commissioner of
Central Excise, Pune-I)
M/s Skoda Auto Volkswagen India Pvt. Ltd. .... Appellant
E--1, MIDC, Phase 3, Village Nigoje, Kharab Wadi,
2
Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017
ST/86543, 86545/2018, ST/86595, 86596/2019
Pune, Maharashtra - 410501
Versus
Commissioner of Central Excise, Pune-II .... Respondent
ICE House, 41/A, Sassoon Road,
Opp. Wadia College, Pune - 411001
AND
Excise Appeal No. 86595 & 86596 of 2019
(Arising out of Order-in-Original No. PUN-EXCUS-001-COMMR-026
/2018-19 dated 12.03.2019 passed by the Principal Commissioner of
Central Excise, Pune-I)
M/s Skoda Auto Volkswagen India Pvt. Ltd. .... Appellant
E--1, MIDC, Phase 3, Village Nigoje, Kharab Wadi,
Pune, Maharashtra - 410501
Versus
Commissioner of Central Excise, Pune-II .... Respondent
ICE House, 41/A, Sassoon Road,
Opp. Wadia College, Pune - 411001
Appearance:
Shri V.S. Nankani, Sr. Advocate with Shri Shankey Agarwal, Shri
Shreyash Shah, and Shri Prithviraj Chowdhuri, Advocates for the
Appellants
Shri K.M. Mondal, Special Consultant, Authorized Representative for
the Respondent
CORAM:
HON'BLE DR. D.M. MISRA, MEMBER (JUDICIAL)
HON'BLE MR. SANJIV SRIVASTAVA, MEMBER (TECHNICAL)
FINAL ORDER NO. A/85711-85718 / 2020
Date of Hearing: 17.12.2019
Date of Decision: 27.08.2020
Per: Sanjiv Srivastava
These appeals have been filed by M/s. Volkswagen India
Pvt. Ltd., Mumbai (Appellant) and M/s. Volkswagen Group Sales
India Pvt. Ltd., Mumbai (M/s. VWGSIPL). The appeals under
consideration are detailed in table below.
3
Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017
ST/86543, 86545/2018, ST/86595, 86596/2019
Appeal No 0rder In Original No & Duty Demand Penalty
Date 'Rs 'Rs
E/86245/2016 PUN-EXCUS-002-PR. 323,65,87,666 323,65,87,666
COMMR-16 TO 19/15-16 Dt.
E/86251/2016 29.02.2016 ---- 50,00,00,000
E/86542/2017 PUN-EXCUS-002-COMMR- 37,22,68,312 37,22,68,312
036/16-17 Dt. 24.03.2017
E/86519/2017 ---- 10,00,000
E/86545/2018 PUN-EXCUS-001-COMMR- 102,92,06,051 102,92,06,051
013/17-18 Dt. 22.12.2017
E/86543/2018 ---- 15,00,000
E/86596/2019 PUN-EXCUS-001-COMMR- 138,10,27,324 138,10,27,324
026/2018-19 Dt. 12.03.2019
E/86595/2019 ---- 15,00,000
Total 601,90,89,353
1.2 Since issues involved in all these appeals are common we
will be referring to Order in Original No PUN-EXCUS-002-
PR.COMMR-16 TO 19/15-16 dated 20.02.2016 passed by the
Commissioner Central Excise Pune in appeal No E/86245/2016.
By the impugned order, Commissioner has held as follows:
"127. Accordingly I pass the following order:
ORDER
i. M/s. VWIPL i.e. Noticee No. 1 and M/s. VWGSIPL i.e. Noticee No.2 are related persons as defined under Section 4(3)(b) of the Central Excise Act, 1944, as they are interconnected undertakings under clause (A) and are also having interest directly and indirectly in the business of each other under clause (iv) of the said Section, ii. The value of VW Brand Cars (Polo and Vento Variants) shall be determined in terms of Section 4(1) (b) of the Central Excise Act, 1944 read with Rule 10(a), Rule 9 and Rule 11 of the Valuation Rules.
iii. I determine and confirm revised demand of Central Excise duty amounting to Rs. 323,65,87,666/- (Rs. Three Hundred Twenty Three Crores Sixty Five Lakhs 4 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 Eighty Seven Thousand Six Hundred Sixty Six only) (including NCCD, Automobile Cess, Education Cess and Secondary & Higher Education Cess), being the duty short paid by them on the vehicles (Polo and Vento Variants) for the period from January 2010 to December 2014, and order the recovery of the same from M/s. VWIPL, under Section 11 A (2)/11A(10) of the Central Excise Act, 1944, as the case may be.
iv. I confirm the demand of Interest and order recovery of the same at applicable rates from M/s. VWIPL, on the duty amounts confirmed above at Sr. No. (iii), under Section 11AA (erstwhile Section 11AB) of Central Excise Act, 1944, as the case may be.
v. I impose penalty of Rs.323,65,87,666/- (Rs. Three Hundred Twenty Three Crores Sixty Five Lakhs Eighty Seven Thousand Six Hundred Sixty Six only) upon M/s. VWIPL under Section 11AC/11AC(1)(c) of the Central Excise Act, 1944, as the case may be, for their tax delinquency during the period from January 2010 to December 2014.
vi. However, I give an option to the assessee i.e. M/s. VWIPL, under Section 11AC(1)(e) of the Central Excise Act, 1944, to pay penalty equivalent to 25% of the total demand of Central Excise duty as determined and confirmed at Sr. No. (iii) above (attributable to the period from January 2010 to December 2014), provided the assessee i.e. M/s. VWIPL pays the entire amount of Central Excise duty as determined/confirmed above in Sr. No. (iii) above, along with interest payable thereon as ordered in Sr. No. (iv) above, as well as, the 25% penalty, within 30 days of the date of the communication of the order.
vii. I hold that the impugned goods i.e. Cars (Polo and Vento Variants) cleared by the assessee/M/s. VWIPL in contravention of the provisions of Central Excise Act, 1944 and the Rules made there under, during the period from January 2010 to December 2014, are liable for 5 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 confiscation, as discussed above. However, as the said Motor Cars are not readily available physically for confiscation, I do not order confiscation of the same and also refrain from imposing penalty proposed under Rule 25 of Central Excise Rules 2002 in view of imposition of penalty under provisions of Section 11 AC of the Central Excise Act, 1944.
viii. I impose a penalty of Rs. 50,00,00,000/- (Rupees Fifty Crores Only) on M/s. Volkswagen Group Sales India Pvt. Ltd., Mumbai (M/s. VWGSIPL) under the provisions of Rule 26 (1) of the Central Excise Rules, 2002.
128. This order is issued without prejudice to any other action that may be taken against the assessee or anybody else under the provisions of the Central Excise Act, 1944 and / or the Rules made there under and / or any other law for the time being in force."
2.1 On the basis of intelligence gathered that the appellants were undervaluing the "Polo" and "Vento" models of their car and thus short paying the duty due on these models, investigations were undertaken by the officer of Director General Central Excise Intelligence. During the course of investigations huge volumes of documents recovered from and provided by the Appellant were examined and statements of various functionaries with the appellant companies recorded.
2.2 On the basis of investigations carried out in respect of the clearances made during the period January 2010 to March 2014, three separate show cause notices all dated 06.02.2015 as detailed below were issued by the Additional Director General Central Excise Intelligence. One Show Cause Notice dated 06.05.2015 as consequential demand for the subsequent period has also been issued.
2.3 Show Cause Notice No. DGCEI/ MZU/ I&IS 'C'/ 30- 14/13 dated 06.02.2005 alleges the evasion of duty to the extent of Rs. 402.87 Cr. by failing to determine the correct value of the excisable goods manufactured and cleared by M/s. VWIPL 6 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 to M/s. VWGSIPL, during the period from January, 2010 to December, 2014, in contravention of Rule 11 read with Rule 10(a) of Valuation Rules, 2000 read with Section 4(1)(b) of the Central Excise Act, 1944, though they were aware that they are Inter-connected Undertakings having mutuality of interest and squarely covered under the provisions of Rule 10(a) of Valuation Rules, 2000.
2.4 Subsequently three more show cause notices as in table below were issued to the appellants on the same ground as the Show Cause Notice referred in para 2.3.
Show Cause Period Duty Demand
Notice (Amount in Rs)
01.02.2016 January 2015-June 2015 37,22,68,312
04.08.2017 July 2015-March 2016 102,92,06,051
01.05.2018 April 2016-March 2017 138,10,27,324
2.5 Show Cause Notice No. DGCEI/MZU/I&IS 'A'/30- 17/15 dated 06-02-2015 alleges the evasion of duty to the extent of Rs. 277.01 Cr. by failing to determine the correct value of the excisable goods manufactured and cleared by M/s. VWIPL to M/s. VWGSIPL during the period from January, 2010 to March, 2014, in contravention of Rule 11 Valuation Rules, 2000 read with Section 4(1)(b) of the Central Excise Act, 1944, is based on the issue of sale of Polo and Vento variants of Cars, at loss i.e. below cost of production plus profit margin, by M/s. VWIPL during period from January 2010 to March 2014, and alleges undervaluation based on the ratio of the Hon'ble Supreme Court judgement in the case of Fiat India Ltd.
2.6 Show Cause Notice No. DGCEI/MZU/I&IS 'A'/30- 18/15 dated 06-02-2015 alleges the evasion of duty to the extent of Rs. 183.28 Cr. by failing to determine correct value of the excisable goods manufactured and cleared by M/s. VWIPL to M/s. VWGSIPL during the period from January, 2010 to March, 7 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 2014, in contravention of Rule 11 of Valuation Rules, 2000 read with Section 4 (1) of the Central Excise Act, 1944, as they did not include / consider the extra commercial consideration received, in the assessable value of said goods for the payment of Central Excise duties / Cesses.
2.7 On the basis of allegations made in respective show cause notices in para 2.3, 2.5 & 2.6, each show cause notice separately:
➢ proposes for the recovery of duty so evaded in terms of provisions of erstwhile Section 11 A(1) / Section 11 A (4) of Central Excise Act, 1944 along with interest thereon under Section 11 AB / Section 11 AA of Central Excise Act, 1944 (as applicable during the demand period).
➢ proposes for imposition of Penalty on M/s. VWIPL u/s 11 AC of Central Excise Act, 1944 and also on M/s. VWGSIPL under provisions of Rule 26 (1) of CER.
➢ proposes for confiscation of goods removed in contravention of provisions of Central Excise Act, 1944, under Rule 25 of CER and also Penalty under Rule 25 (1) of CER read with Section 11 AC of Central Excise Act, 1944.
2.7 Show Cause Notice No. 11/CKN-I/CKN-R-
III/COMMR/ 2015 dated 06.05.2015 for demand of duty of Rs. 38,38,55,306/- pertaining to the period from 01.04.2014 to 06.08.2014, which is a subsequent demand to Show Cause Notice F.NO. DGCEI/MZU/I&IS /15 for demand of duty of Rs. 277.01 Crores for the period from January 2010 to March 2014. The Show Cause Notice proposes to recover duty so evaded in terms of provisions of erstwhile Section 11 A(1) (a) of Central Excise Act, 1944 along with interest thereon under Section 11 AA of Central Excise Act, 1944. The Show Cause Notice also proposes for imposition of penalty on M/s. VWIPL under Section 11 AC (1) (b) of Central Excise Act, 1944 and also on M/s. VWGSIPL under provisions of Rule 26 (1) of CER. The Show Cause Notice further proposes for the confiscation of goods 8 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 removed in contravention of provisions of Central Excise Act, 1944, under Rule 25 of CER and also penalty under Rule 25 (1) of CER read with Section 11 AC of Central Excise Act, 1944.
2.8 Four show cause notices as per para 2.3, 2.5, 2.6 & 2.7 were considered simultaneously by the Commissioner. After considering the replies filed and submissions made during the Personal Hearing, Commissioner adjudicated all the four show cause notice as per the impugned order, referred in para 1.2 supra. Remaining three show cause notices as in para 2.4 were adjudicated as per orders referred in table in para 1.1 above. Thus demands of duty as indicated in the table below have been made along with interests and penalties.
Order Date Duty Confirmed Penalty
VWIPL VWGSIPL
29.02.2016 323,65,87,666 323,65,87,666 50,00,00,000
24.03.2017 37,22,68,312 3,72,26,831 10,00,000
22.12.2017 102,92,06,051 10,29,20,605 15,00,000
12.03.2019 138,10,27,324 13,81,02,732 15,00,000
Total 601,90,89,353 444,11,23,280 50,40,00,000
2.9 Commissioner has in impugned order summarized her
findings as follows:
"126. I now summarize my findings herein below, on the basis of discussion made above in respect of all the three SCNs dated 06.02.2015 and also SCN dated 06.05.2015, under reference:
i. The entire allegations made in the four SCNs are correct.
The said SCNs stand on merits as well as on limitation.
ii. M/s. VWIPL and M/s. VWGSIPL are related persons as defined under Section 4(3)(b) of the Central Excise Act, 1944 as they are interconnected undertakings under clause (A) and also had interest directly and indirectly in the business of each other under clause (iv) of the said Section.9
Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 iii. The value of VW Brand Cars (Polo and Vento Variants) shall be determined in terms of Section 4(1) (b) of the Central Excise Act, 1944 read with Rule 10(a), Rule 9 and Rule 11 of the Valuation Rules.
iv. I revise the demand of Central Excise duty of Rs.
402,87,28,268/- to Rs. 323,65,87,666/- in respect of SCN F.No. DGCEI/MZU/I&IS 'C'/30 14/13/455 dated 06.02.2015, as explained in Para 87.2 above.
v. I revise the demand of Central Excise duty of Rs. 277.01 Crores to Rs. 106,01,33,547/- in respect of SCN F.No. DGCEI/MZU/I&IS 'A'/30-17/463 dated 06.02.2015, as explained in Para 108 above.
vi. I revise the demand of Central Excise duty of Rs.
38,38,55,306/- to Rs. 13,04,85,264/- in respect of SCN No. 11/CKN-I/CKN-R III/COMMR/2015 dated 06.05.2015, as explained in Para 108 above.
vii. There is no change in the demand raised of Rs. 183.28 Crores in respect of SCN F.No. DGCEI/MZU/I & IS 'A'/30- 18/15/471 dated 06.02.2015, as explained in Para 115 above.
viii. Further, as mentioned in the SCN Fine. DGCEI/MZU/I&IS 'C'/30 14/13/455 dated 06.02.2015, the total demand of Central Excise duty recoverable from M/s. VWIPL in respect of all the issues covered under all the SCNs under discussion is Rs. 402,87,28,268/which is revised and confirmed to Rs.323,65,87,666/-, being the duty short paid by them on the vehicles (Polo and Vento Variants) for the period from January 2010 to December 2014, under the provisions of Section 11A(1)/11A(4) of the Central Excise Act, 1944, as the case may be, as discussed and explained in Para 121 above.
ix. Interest at applicable rate(s) on the aforesaid demand confirmed above is - recoverable from M/s. VWIPL, under the provisions of Section 11AB/Section 11AA of the Central Excise Act, 1944, as the case may be.
10Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 x. Penalty under Section 11AC/11AC (1) (c) of the Central Excise Act, 1944 is imposable upon M/s. VWIPL, as discussed in Para 123 above.
xi. The impugned goods i.e. Cars (Polo and Vento Variants) cleared by the assessee/M/s. VWIPL in contravention of the provisions of Central Excise Act, 1944 and the Rules made there under, during the period from January 2010 to December 2014, are held liable for confiscation, as discussed above. However, as the said Motor Cars are not readily available physically for confiscation, I do not order confiscation of the same and also refrain from imposing penalty proposed under Rule 25 of Central Excise Rules 2002 in view of imposition of penalty under provisions of Section 11 AC of the Central Excise Act, 1944. The same has been discussed and explained at Para 124 above.
xii. The Noticee No. 2 i.e. M/s. Volkswagen Group Sales India Pvt. Ltd., Mumbai (M/s. VWGSIPL) are liable to be penalized under Rule 26(1) of the Central Excise Rules, 2002, as discussed in Para 125 above."
2.10 Aggrieved by the impugned order Appellants have preferred these appeals before us challenging the demand of duty and penalties imposed.
3.1 We have heard Shri V S Nankani, Senior Advocate for the Appellants and Shri K M Mondal, Special Counsel for the respondent revenue.
3.2 Arguing for the Appellants learned Senior Advocate submitted as follows:
➢ Under Section 35B of the Act, the Appeal lies against an "order" passed by the Respondent Commissioner. Hence, no appeal lies against the "findings". As Commissioner has limited the demand based on the Related Party rule, i.e. the show cause notice at para 2.3, the findings recorded in respect of other two show cause notices dated 06.02.2015 are irrelevant.11
Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 ➢ The short point involved in the present case is whether the Appellant and VWGSIPL are Related Persons within the meaning of Section 4(3) (b) of the Act and therefore, consequently, whether the value is to be determined under Rule 10(a) or 10(b) of the Valuation Rules. Further, the following ancillary issues must be determined in case the demand is confirmed against the Appellant:
○ Whether the department may take a stand in the present proceedings which is contrary to their stand before CAG?
○ Whether a substantial part of the demand is barred by limitation, considering the department was specifically informed about the related party transactions by the Appellant through various correspondences?
○ Whether the present case is a fit case for imposition of penalty under Section 11AC of the Central Excise Act, 1944?
○ Whether the demand is required to be re-quantified by granting cum-duty benefit to the Appellant, as the demand has been calculated in the Impugned Order on the basis of final sale price to dealers which already includes excise duty and cesses ➢ Volkswagen AG is a company incorporated in Germany and is engaged in manufacture, sale and distribution of various Volkswagen Branded Vehicles across the globe. Volkswagen Group Sales India Private Limited ("VWGSIPL") was incorporated in 2007 as a National Sales Company (NSC) for Volkswagen Group in India and is a fully owned subsidiary of Volkswagen AG. Thus, since 2007, the import, trading and brand promotion for Volkswagen branded Cars in India was carried out by VWGSIPL and has since developed a distribution network and specializes in sale, marketing, distribution and after sale support services. Importantly, this company was 12 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 incorporated much prior to manufacturing of VW branded cars in India (i.e. in 2010). Further, VWGSIPL also has similar arrangements for import, sale and marketing of cars with other domestic and international group companies including Audi, Skoda and Porsche etc. ➢ Due to increased imports and potential of Indian market, Volkswagen AG decided to start manufacturing Volkswagen Branded automobiles in India. For this purpose, the Appellant Company was incorporated, which started the commercial production of VW Branded vehicles in January 2010. To utilize the spare capacity, the Appellant is also engaged in contract manufacturing (on cost plus basis) of vehicles for Skoda Auto India Pvt. Limited (Skoda India).
➢ While the Appellant and VWGSIPL are subsidiaries of Volkswagen AG; however both companies are engaged in different spheres of business activity and their business is completely different and totally independent from each other.
➢ The Appellant entered into Service and Distribution Agreement dated March 9, 2009 with VWGSIPL, whereby VWGSIPL orders the cars from the Appellant and distributes them to their dealers. Monthly production volume and retail sale price of the cars are decided mutually by the Appellant and VWGSIPL, considering a number of factors including manufacturing cost and market forecast.
➢ The transaction between the parties is on arm's length basis, wherein the distributor is entitled for a pre-agreed mark-up on vehicles. After sale of cars, VWGSIPL is responsible for sale, marketing as well as after sales support to the Customers. The profit margin on such cars given to VWGSIPL is only in the range of 5.5%-6% (commensurate to similar dealers/distributors).
➢ Like any other independent distributor, VWGSIPL is entitled for its distribution margin. Accordingly, the sale 13 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 price between Appellant and VWGSIPL is arrived at by Retail Minus method i.e. Retail Sale Price - VWGSIPL's (Dealer) margin = Sale Price. Excise Duty is discharged such sale price arrived at retail sale price.
➢ Transaction value rejected on account of relationship between the parties. Department alleged that there is a mutuality of interest between the parties, which has influenced the sale price. Rejecting the transaction value three Show Cause Notices dated 06.02.2015 proposed to determine the assessable value and demand of duty by following three distinct routes.
➢ The demand has been calculated simply on the differential between VWGSIPL's sale price to dealers and VWIPL's sale price to VWGSIPL. This has led to incorrect demand as VWGSIPL's sale price already includes excise duty and cesses (which is more than margin of VWGSIPL).
➢ "Materials" and/or "evidence" and/or "factors" relied to allege "mutuality of interest" against them are-
○ an email dated January 28, 2010 written on behalf of VWAG to VWGSIPL and the Appellant regarding sale price of Polo cars when launched in India';
○ Planning Rounds held annually, which are discussions held between VWAG, the Appellant and VWGSIPL for planning production and sale for the next year based on market research and/or analysis and/or projection including analysis of the competition, ○ Statements of Mr. Puneet Sabharwal, Mr. Rabenstein, (Head Finance Controller, VWGSIPL) and Mr. Peter Pajunk (Head Central Control, of the Appellant) ○ Marketing Assistance Agreement dated 18th May, 2007 between VWAG and VWGSIPL;
○ Finance Assistance Agreement dated 7th July, 2008 between VWAG and VWGSIPL 14 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 ○ Disbursing Agent Agreement dated 16th July, 2008 between the Appellant and VWAG;
○ Purchase Function Service Agreement dated 15th October, 2008 between the Appellant and VWGSIPL;
○ Supply Agreement dated 14th March, 2011 (effective January, 2010) between VWAG and the Appellant;
○ Service and Distribution Agreement dated 9th March, 2009 between the Appellant and VWGSIPL;
○ License Agreement dated 14th March, 2011 between VWAG and the Appellant.
○ Reimbursement of part of the marketing and sales promotion expenditure by VWAG and VWGSIPL;
○ Project Tiger Report;
➢ The Retail Minus model is based purely on commercial consideration. It is based on determining the sale price considering the market forces and demand and supply and keeping the competition in mind. These factors are independent of the relationship between the parties. These are external factors and the relationship does not at all influence the determination of the price based on this method. Hence, the Retail Minus model cannot be the basis for rejecting the transaction value.
➢ The Planning Rounds are also based on commercial consideration. Based on assessment of the market, business decision such as utilization of production capacity, maintaining an inventory of raw materials, components and other inputs, ensuring minimum time lag between the manufacture and sale to have minimum inventory of finished stocks etc. ➢ It is only on the basis of the above model employed for determination of the sale price between them and VWGSIPL that they were able to make some operating profits during the years of demand in the impugned order.15
Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 ➢ During the relevant period, the market share of the Appellant has declined, whereas the average assessable value has increased.
➢ The losses are suffered by the Appellant not due the deliberate predatory pricing, but due to lesser than expected sales volume. Fewer sales have led to the higher overheads per vehicle.
➢ As a matter of fact, the Appellant has made profits during Financial Years 2013-14 of INR 420.7 Cr. It is also submitted that if the Financial Assistance given by Volkswagen AG is taken into consideration, the Appellant has made profits in the Financial Year 2011-12 and 2012- 13 also.
➢ The department has further placed reliance on two pyramidical charts to submit that prices were deliberately reduced to enhance the market share. It is submitted that the said chart merely indicates to the market research as to the accessible market share for VW branded vehicles and nowhere indicates that the prices have been influenced by the relationship between the parties.
➢ As regards Agreements, all of the agreements show that the relationship between the parties was at an arm's length. The Supply Agreement shows that the price of imported goods was to be determined having regard to the market forces. Significantly, the import price has been accepted as the true and correct assessable value under Section 14 of the Customs Act, 1962. The Appellant, as the manufacturer, is not a party to the marketing and financial agreements between VWAG and VWGSIPL. The business of both VWAG and VWGSIPL is bigger and independent of the Appellant's business, which is limited to only manufacture of Polo and Vento. None of the agreements show that the selling price of Appellant was influenced by the relationship between the interconnected undertakings.
➢ There is no flow back from VWGSIPL to the Appellant. The 16 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 financial assistance rendered by VWAG in the two years 2011-12 and 2012-13 has also not influenced the price. In any case, VWAG is not the buyer of the goods manufactured in India by the Appellant, and therefore, financial assistance by the parent company to the Appellant, which could otherwise have been in the form of equity, also, does not constitute an "additional consideration" under Section 4 to justify rejection of the transaction value.
➢ Expenditure incurred by the marketing company cannot be added to the assessable value of the goods under Section 4 as held in a catena of decisions including ○ Phillips India Ltd. [1997 (91) E.LT.540 (S.C.)] ○ TVS Motors Co. Ltd. [2016 (331) E.L.T.3 (S.C.)] ○ Godrej Consumer Products Ltd. [2014 (308) E.L.T. 61 (Tri. - Mumbai)] ➢ The Impugned Order has adopted an incorrect factor i.e. sale below cost of production to establish mutuality of interest. Assuming without admitting that the goods are sold below cost of production, sale below cost of production is not a criterion for a test of mutuality of interest. It is well settled legal position that to show mutuality of interest, it is incumbent and mandatory to show that the seller and the buyer of excisable goods have interest in the business of each other, directly or indirectly.
➢ The mere fact that both the seller and the buyer have a common parent does not establish interest, direct or indirect, in the business of each other. The businesses of the seller and the buyer are distinct. The control by the common parent also establishes only a one-way interest, and not a two-way interest, necessary to establish mutuality. Reliance is placed on following decisions ○ Attic Industries Ltd, [1984 (17) ELT 323 (SC)] ○ Calcutta Chromotype Ltd [1998 (99) ELT 202 (SC)] 17 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 ○ Alembic Glass [2002 (143) ELT 244 (SC)] ○ Kaira Co-op Milk Producers, [2002 (146) ELT 502 (SC)] ➢ Rule 10 of the Valuation Rules specifically deals with interconnected undertakings, whereas Rule 9 deals with relationship covered by three other sub-clauses of clause
(b) of sub-section (3) of Section 4 of the Act. Consequently, in relation to interconnected undertakings, Rule 10 alone is relevant and applicable, it being a specific rule, which would prevail over Rule 9 which deals with relationships other than that of an interconnected undertaking. Any other interpretation shall render Rule 10 wholly redundant and otiose, as well as result in rewriting Rule 9 to apply to interconnected undertakings covered by sub-clause (i) of clause (b) of sub-section (3) of Section 4 of the Act, barring Rule 10, there is no other rule in Valuation Rules dealing with interconnected undertakings, and therefore, it will amount to adding words into Rule 9 which is not permissible.
➢ Rule 10(a) is divided into two parts. The first part deals with an interconnected undertaking, which is also related in terms of sub-clause (ii) or (iii) or (iv) of clause (b) of sub-section (3) of Section 4 of the Act. The second part deals with a case where the buyer is a holding or subsidiary company of the Assessee. Admittedly, the second part does not apply in the present case, since VWGSIPL is neither a holding company, nor a subsidiary company of the Appellant (Assessee).
➢ In the first part of Rule 10(a), the key word is the word 'also'. The presence of the word 'also' in Rule 10(a) shows that mere inter-connection, as defined in Section 4(3) (b) of the Act, is not sufficient. Thus, having a common parent company, or being part of the same group or same management, or both buyer and the seller being controlled by a common third company by itself cannot be a ground to reject the transaction value, and apply Rule 9 through 18 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 Rule 10(a). Consequently, Rule 10(a) mandates that notwithstanding control of the buyer and the seller by a common person (Appellant Company) does not dispense with number of the buyer and seller having interest, directly or indirectly, in the business of each other. It also more importantly means that something more and different needs to be proved to establish mutuality of interest over and above the factors which constitute or result in interconnection. If the same factors which constitute or result in interconnection, are also applied to determine interest in the business of each other, the word 'also' in Rule 10(a) will lose its significance and become meaningless. It is therefore, submitted that the factors or grounds which establish interconnection, and the factors or grounds which show interest, directly or indirectly in the business of each other cannot be the same, and have to by necessary implications, and true and correct construction, be different. In applying the aforesaid test laid down in Rule 10(a), therefore, as far as interest in the business of each other is concerned, the same has to be limited in its examination to the relationship between the buyer and the seller alone and not, the buyer, seller and a third person (including a parent company, which has already been factored in for the purpose of ascertaining interconnection, and therefore, once again would not be relevant for establishing the second condition required to be satisfied in Rule 10(a) of interest in the business of each other.
➢ This interpretation of Rule 10, and its non-applicability to the present case, is also supported by Report of the Comptroller and Accountant General of India ("CAG") presented before the Parliament on 19th December, 2014. In that report, the issue of sale of cars by the Appellant to VWGSIPL has also been discussed. The said report also reveals that the Ministry of Finance has opined that though the Appellant and VWGSIPL are inter-connected Undertakings; however they are not covered under Rule 10 of the Valuation Rules.
19Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 ➢ If the above settled principles are applied to the present case, the following position emerges, which clearly indicates that both companies are independent and dealing on arm's length basis:
○ As submitted earlier, the Appellant and VWGSIPL do not have mutuality of interest merely due to the reason that both of them have a common holding company as held by the Supreme Court in Attic Industries (supra). That fact merely proves that Appellant and VWGSIPL are inter-connected undertakings. In terms of Rule 10(b) of the Valuation Rules, the transaction value cannot be rejected if the companies are merely related as "interconnected undertakings".
○ There is no cross-shareholding between the Appellant and VWGSIPL.
○ There is no common management person in Appellant and VWGSIPL. The commercial decisions of both the companies are taken by the distinct board of directors of respective companies. Each company enjoys autonomy in relation to its operations and carries business in a way that furthers its own commercial interests.
○ There is no profit sharing between the Appellant and VWGSIPL.
○ There is no flow back of any financial interest between the Appellant and VWGSIPL.
○ The main business objectives of the two companies are different. The 2 entities are separate profit centers. While VWIPL is focusing on manufacturing vehicles, VWGSIPL is engaged in trading and sales promotion of vehicles.
○ Appellant and VWGSIPL are not interested in the business of each other. The sale price of cars is 20 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 mutually agreed between the VWIPL and VWGSIPL.
○ Entire production of the VWIPL is not sold through VWGSIPL. VWIPL also undertaking contract manufacturing activity for independent parties like Skoda and also has significant export business. Similarly, the portfolio of VWGSIPL is also not limited to vehicles manufactured by Appellant alone and is managing multiple brands including Audi, Lamborghini, Porsche etc, some of which are not even produced in India. It is conveniently ignored that VWGSIPL was trading the cars of well-known brands well before the establishment of the Appellant.
○ VWGSIPL performs the role of an independent distributor, which takes care of various important activities relating to vehicle business like servicing, accessories etc. Accordingly, the VWGSIPL is entitled for its' margin. VWGSIPL's Distribution margins are as per industry norms and it commensurate with the cost and risks assumed by VWGSIPL, which any independent distributor would have been entitled to for distribution of Appellant's vehicles ○ The arrangement between the Appellant and VWGSIPL was not unique and similar arrangements exist in other parts of the world as well for e.g. China, Spain, and UK etc. Further, various automobile and other manufacturing companies follow the same model of appointing marketing or a sole selling agent.
➢ Appellant's case is squarely covered by the judgment passed by the Hon'ble Supreme Court in CCE, Aurangabad v. Goodyear South Asia Tyres, 2015 (322) E.L.T. 389 (S.C.) ('Goodyear judgment). Further reliance is placed on the following decisions:
○ Detergents India, [2015 (318) E.LT, 559 (S.C.)] 21 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 ○ Onida Saka Ltd. [2016 (331) E.L.T. 496 (Tri.-Del)] ○ Alembic Glass Industries Ltd v CCE, 2002 (143) ELT 244 (SC) ○ Biostar Pharmaceuticals Ltd. v. State of Maharashtra, 2017 (351) E.L.T. 193 (Bom) ○ Ralliwolf Ltd [1992 (59) ELT 220 (Bom)] ○ Hind Lamps Ltd., [1989 (43) ELT 161 (SC)] ➢ Extended Period of limitation is not invokable in the present case, as entire facts were completely in the knowledge of the department throughout. In view of the referred specific correspondences, it is submitted that extended period cannot be invoked for the period subsequent to this date. [Syncom Formulation, (2004 (172) ELT 77 (T), Bell Granito, 2006 (198) ELT 161 (SC), Ugam Chand Bhandari 2004 (167) ELT 491 (SC), Pioneer Scientific Glass, 2006 (197) ELT 308 (SC), Damnet Chemicals, 2007 (216) ELT3 (SC), Anand Nishikawa 2005 (188) ELT 149 (SC), Neyveli Lignite Corp. 2007 (209) ELT 310 (T), Bentex Industries, 2004 (173) ELT A079 (SC)] ➢ Extended period cannot be invoked in case of bona fide belief on part of the assessee, as in the present case. [NRC Ltd 2007 (5) STR 308 (T), Uniworth Textiles Ltd. 2013 (288) ELT 161 (SC), Larson & Toubro Ltd. 2007 (211) ELT 513 (SC)] ➢ Judgments relied upon by Departmental Representative are not applicable.
➢ The department has demanded duty at the price at which the goods are sold by VWGSIPL to dealers. For arriving at the differential duty, the department has simply calculated the duty on the difference between VWGSIPL's sale price and VWIPL's sale price. However, the department has failed to recognise that VWGSIPL's sale price to dealer includes the excise duty and cesses charged at the time of sale by VWIPL. It is humbly submitted that the said excise 22 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 duty and cesses are significant and even more than margins earned by VWGSIPL. Thus, even if the submissions of the department are correct, the excise duty and cesses must be excluded for the purpose of calculating the excise duty. [Sri Chakra Tyres, 1999 (108) ELT 361. affirmed by the Supreme Court vide Order reported in 2002 (142) ELT A279 (SC), Maruti Udyog Limited, 2002 (49) RLT 1 (SC)] 3.3 Arguing for the revenue learned Special Counsel, supported the impugned order and submitted as follows:
➢ VWIPL manufactures contractual vehicles of VW brand, namely Polo and Vento variants with the parts and components imported from VWAG, Germany, as per the Supply Agreement dtd. 14/3/2011 between VWAG and VWIPL and sells such vehicles exclusively to VWGSIPL.
➢ The holding company of VWIPL and VWGSIPL is V.W. International Finance N.V. which is a subsidiary of the ultimate holding company, VWAG. Thus VWAG Germany is the ultimate holding company of VWIPL & VWGSIPL ➢ Majority of the share capital in VWIPL and VWGSIPL is held by V.W. International Finance N.V. In VWIPL, VW International Finance N.V. holds 22.53% of authorised shares and in VWGSIPL 99.99%. Remaining 501,625,161 paid up shares in VWIPL and an entire lot of Preference Shares in both the companies are held by VWAG.
➢ Under the Licensing Agreement dtd. 14/3/2011 VWIPL is entitled to use the know-how and patents relating to manufacture and sale of the contractual products. In terms of the said Licensing Agreement, it has been specifically mentioned that "the licensee shall not have the right to enter contracts on the manufacturing, assembly or sale of any contract products, local parts, replacement parts or accessory parts, without the prior consent of the Licenser." ( Para 5} ➢ Being group companies of Volkswagen Group, 23 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 VWIPL and VWGSIPL are inter-connected undertakings and hence in terms of Section 4(3) (b)
(i) of the Central Excise Act, 1944, they are deemed to be "related persons".
➢ As per the Service and Distribution Agreement dtd. 9/3/2009 between VWIPL and VWGSIPL, ○ VWGSIPL shall buy the entire production of VW Vehicles from VWIPL at the prices agreed upon between them.
○ The prices are determined in terms of the Planning Rounds held in Germany between three parties' viz., VW AG (ultimate holding Company), VWIPL (manufacturer) and VWGSIPL (marketing Company).
○ The Planning Round mechanism is mentioned in Schedule-I of the Service & Distribution Agreement dated 09.3.2009 between VWIPL & VWGSIPL.
○ VWGSIPL & VWIPL shall prepare the Planning Rounds (PR) for the supplies/deliveries of Contractual vehicles for the period of next five years each year. This PR shall be completed in line with the scheduled dates for the VW Group ➢ As per the Marketing Assistance Agreement dated 18/5/2007 between VWAG and VWGSIPL, ○ VWGSIPL undertakes promotion, advertising and marketing activities on its own behalf which are intended to promote its sales of VW products in India.
○ VWAG will bear the portion of costs of advertising and promotional activities relating to brand building campaigns as mutually agreed upon between the parties.
○ Other marketing and promotional expenses in connection with sales activities will be incurred and borne by VWGSIPL.
24Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 ○ VWGSIPL incurs the expenses on account of advertisement or publicity, sales promotional activities, etc. Portion of these expenses is borne by VWAG as evidenced by the Debit Notes (Pg. Nos. 1527, 1529, 1581 & 1592 of Vol. V) raised by VWGSIPL on VWAG from time to time.
➢ Based on the above facts and the investigation conducted, proceedings were initiated by issue of various Show Cause Notices/ Statements of Demands ➢ The show cause notices have demanded differential duty from the assessee, VWIPL based on the sale price of VWGSIPL (related person of VWIPL) by invoking Section 4(1)(b) of the Central Excise Act, 1944 read with Rule 10(a) and read with Rule 9 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 ➢ .As VWIPL sells its entire production of finished excisable goods, namely Polo and Vento variants of cars exclusively to VWGSIPL (marketing company). VWIPL and VWGSIPL being interconnected undertakings are related persons in terms of section 4 (3) (b) (i) of the Act. Therefore, the sales price at which VWGSIPL has sold the goods to the dealers should be the correct assessable value (transaction value) for purposes of charging duty of excise.
➢ It is contended on behalf of VWIPL that it is not enough that VWIPL & VWGSIPL are inter connected undertakings and hence they are related persons, it is also necessary to satisfy the ingredients of Rule 10(a) of the Rules, i.e. they are also related in terms of section 4(3) (b) (iv) of the Act.
➢ From the scheme of Section 4 (3) (b), all the four clauses
(i), (ii), (iii) & (iv) are mutually exclusive. However, when clause (i) is read with Rule 10 (a), it is seen that there is an apparent conflict. In that situation the substantive provisions of the Act shall prevail over the subordinate legislation as held by the Hon'ble Apex Court in the case of ITW Signode India Ltd. Vs. C.C.E. - 2003 (158) 403 25 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 (S.C.).
➢ VWIPL & VWGSIPL are related persons not only in terms of clause (i), but also in terms of clause (iv). Even though the two companies do not hold shares in each other, VWIPL depends totally on VWGSIPL for the marketing of its cars. Similarly, marketing activities of VWGSIPL largely depend on the manufacture and supply of cars by VWIPL. Therefore, both the companies have interest, directly or indirectly in the business of each other.
➢ as per the Service and Distribution Agreement, VWGSIPL shall buy the entire production of VW vehicles from VWIPL at the agreed upon prices between them. In reality, price of the vehicles to be sold in Indian market is determined by VWAG in Germany and the same is communicated to VWIPL and VWGSIPL as is evidenced by e-mail dtd. 28/1/2010 along with work sheet for Polo Hatch Back from VWAG to VWGSIPL and copy to VWIPL and Others. This work sheet shows that the price of the vehicles (i.e. the transaction value) has been determined on Retails Minus Basis. Based on this price, the vehicles would be purchased by VWGSIPL from VWIPL. Such price cannot, be accepted as the true transaction value.
➢ The definition of transaction value clearly provides that expenses on account of advertising or publicity, marketing and selling organization expenses, etc. are normally to be borne by the manufacturer and if the buyer is made to bear the same, such expenses shall be included in the price to arrive at the assessable value. In the present case, admittedly such expenses are borne by the Marketing Company, VWGSIPL. Therefore, these expenses have to be included in the assessable value of the goods.
➢ It may be noted that by not including the expenses on account of advertising or publicity, marketing and selling organization expenses, etc., VWIPL is selling the contractual vehicles at a reduced price to VWGSPL and thereby evading duty. Thus, both VWIPL and VWGSIPL stand benefitted.
26Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 VWIPL is saving Central Excise duty by selling the entire production to VWGSIPL who is undertaking the sales promotion activities of the contractual vehicles, while VWGSIPL is getting the entire production from VWIPL at a reduced price. Therefore, both VWIPL and VWGSIPL have direct interest in the business of each other. Consequently, they are also "related persons' in terms of Section 4(3) (b)
(iv) of the Central Excise Act, 1944. Hence the sale price of VWGSIPL (Marketing Company) has been correctly taken as the transaction value in terms of Section 4(1) (b) of the Central Excise Act, 1944 read with Rules 10(a) and 9 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000.
➢ In similar facts of case in case of Bilag Industries Pvt. Ltd.
[2010 (259) ELT 611 (T)], CESTAT has held two subsidiaries of M/s AgrEVO SA namely M/s Bilag Industries and Aventis Crop Science (India) Ltd., to be related and held that price at which Aventis sold to final customers to be the assessable value. (Para 14 to 18 of the decision) ➢ Reliance is also placed on following decisions ○ Narendra Machine Works (P) Ltd. [2001 (128) ELT 118 (T)] ○ Narendra Industries [2001 (132) ELT 141 (T)] ○ Dharnendra Indus. Ltd. [2004 (164) ELT 435 (T)] ○ "J' Foundation - [2015 (324) ELT 422 (S.C.)] ○ Flash Laboratories Ltd. [2003 (151) ELT 241 (S.C.)] ➢ In case of Goodyear South Asia Tyres Private Limited [2015 (322) ELT 389 (S.C.)] relied upon by counsel for appellants,-
○ holding that the expression "interest in the business of each other" is a two-way traffic.
○ judgment relies upon its earlier judgments in the case of Attic Industries Limited - 1984 (17) ELT 323 27 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 (S.C.) and Detergents India Limited - 2015 (318) ELT 559 (S.C.).
○ Factually this case is clearly distinguishable. In this case, more than 70% of the sales were to the third parties at a lesser rate than sold to Goodyear. In the case in hand, entire sales were to the marketing company at a reduced price. This apart, both the manufacturing company and the marketing company were group companies, thus establishing interest in the business of each other.
➢ It is contended on behalf of the appellant that the extended period of limitation in the SCN dated 06.02.2015 is not invokable for the reason that there was no suppression of any fact after 2011. The method of valuation was known to the Department. as early as in 2011. In that connection, the Learned Senior Counsel for the Appellants referred to various correspondences exchanged between the Department and the Appellants. In particular, he referred to the Department letter dated 26.09.2011 (pg. No.1131, Vol. IV), letter dated 16/24th March 2011 (pg No.1138, Vol. IV), letter dtd. 28.11.2011 (pg No.1146, Vol. IV), letter dtd.09.07.2013 (Pg. No.1150, Vol. IV), and letter dtd. 14.11.2013 (pg.No.1152, Vol. IV) and contended that the demand subsequent to 26.09.2011 is not sustainable because by that date the method of valuation of motor cars was already known to the Department. These contention are not acceptable for the reasons as follows:
○ In the present case, it is not correct to say that there was no suppression of any fact and that the method of valuation was known to the Department.
○ It is only during the investigation that the Department. found that the valuation of the cars was being determined by the holding Company in Germany (i.e. VWAG) and the same was being communicated to the marketing company and the 28 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 manufacturing company.
○ Email dated 28th January 2010 along with the worksheet, showing the valuation of the cars was found during the course of investigation. The email showed that the value of the cars was done on the basis of retail minus method. This email dated 28/1/2010 may be seen at pg. No. 513 in Volume II.
○ Letter dated 28.02.2013 (pg No.2441, Vol. VIII) from VWAG to VWIPL, communicating financial assistance of INR 6600 Million to recoup its losses and improve its financial position was recovered during the investigation ○ Similarly, letter dtd. 21.12.2011 (pg.No.2439, Volume VIII) addressed to VWIPL from VWAG, communicating waiver of trade receivables of EUROS 120.012 Million (INR 864 Crore) was recovered during the investigation, ○ Documents recovered during the investigation have revealed as to how the pricing has been undertaken keeping in view of retail sale, market penetration and overall attempt to reduce duty burden. It was a pricing policy decision of VW AG to position Polo & Vento in lower price segments. The said document shows that based on market research of Polo Hatchback in comparison with the cars having similar/like features, prices of Polo at the time of introduction in the Indian market should be in the range of more than Rs.4,50,000/-. However VW was of the view that a price range of more than Rs.
4,50,000/- for Polo will give them access to only 21% of the market segment. Hence it was planned that Polo cars featuring in the higher segment should be positioned in the price range of Rs.3.50 lakhs to Rs.4.50 lakhs i.e. in the next lower segment. The said document shows that after price reduction of Polo VW 250, the accessible segment 29 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 would be enlarged from 21% to 56%.
○ The marketing company was bearing expenditure on advertising, marketing support, sales promotion, and tactical support of Polo & Vento cars of the manufacturing company. Debit Notes raised by a marketing company on VWAG pertaining to expenditures were recovered during the investigation.
○ Price Determination basing on Planning rounds:
The Schedule 1 to the Service & Distribution Agreement dated 9.3.09 stipulates that VWGSIPL & VWIPL shall prepare the Planning Rounds for the supplies/deliveries of the contractual vehicles. Further VW AG in its Supply Agreement with VWIPL dated 14.3.11, while stating that the entire sale of VW brand cars would be to VWGSIPL, also stipulated that there would be a Planning Round between VW AG & VWIPL for supply and delivery of contractual parts for production. The agreements and documents pertaining to planning rounds between VW AG, VWIPL & VWGSIPL recovered during the investigation reveal that the entire process of arriving at prices of Polo & Vento is mutually agreed. The PR for the supplies of contractual parts and deliveries of contractual vehicles for the period of next five years were completed in line with the scheduled date of VW Group. But for the extensive investigation conducted by the then DGCEI, the aforementioned documents would not have come to the hands of the Department. Therefore, it cannot be contended that the demand subsequent to September 2011 cannot be sustained.
○ It may not be out of place to mention that the demand has to be raised (whether for the normal period or for the extended period) from the relevant date. The relevant date has been specified in Section 11A of the Central Excise Act, 1944. The date of knowledge is not one of the relevant dates.
30Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 Even assuming that the Department. had the knowledge of their activities, that knowledge will not obliterate the suppression of facts on the part of the Appellant as held by the Hon'ble High Court of Gujarat in Commissioner of Central Excise, Surat-1 versus Neminath Fabrics Pvt. Ltd., reported in 2010 (256) E.L.T. 369 (Guj.). In the same way, the Hon'ble Rajasthan High Court in the case of Vodafone Digilink Ltd., vs. CCE, Jaipur-II reported in 2013 (29) STR 229 (Raj.) has also held that the suppression of fact will not vanish with the passage of time to issue show cause notice and contravention of law gets no immunity from penal consequences.
○ It is important to note that in the Self-Assessment regime, it is the sole responsibility of Assessee- Appellant to make correct disclosures in the Excise Returns (ER1). In the present case, there was no disclosure about the method of valuation adopted. Therefore, the extended period of limitation invoked in the SCN dated 06.02.2015 which has been confirmed by the Commissioner in the impugned order is required to be upheld.
○ Penalty on VWGSIPL under Rule 26(1) of the Central Excise Rules, 2002: The allegation against VWGSIPL is that they had aided and abetted VWIPL to suppress the material facts regarding the true transactions between them and VWIPL and thereby helped them (VWIPL) in gross under valuation of excisable goods. In the impugned orders, the Commissioner has recorded detailed findings to the effect that VWIPL and VWGSIPL were working under the final authority of their holding company, VWAG, Germany. All policy decisions in matters of pricing and selling of the excisable goods were taken by VWAG and communicated to them for implementation. Therefore, they (VWGSIPL) were 31 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 fully aware of under-valuation and short payment of Central Excise duty. They had acquired possession of the said excisable goods and concerned themselves in transporting, removing, depositing, keeping, selling or purchasing of the said excisable goods knowing fully well that the same were liable to confiscation under the provisions of the Central Excise Act, 1944 and the Central Excise Rules, 2002. Therefore, the Commissioner has correctly imposed penalty on them under Rule 26(1) of the said Rules. Reliance is placed on the judgment of the Hon'ble Gujarat High Court in the case of Sanjay Vimalbhai Deora V/s. CESTAT - 2014 (306) ELT 533 (Guj) holding that penalty has been rightly imposed for contravention of the statutory provisions.
○ In the grounds of appeal, one of the contentions raised is that penalty under Rule 26 can be imposed only on the natural person and not on the firm or company. This ground has no merit. It has been held by the Hon'ble Apex Court in the case of Agarwal Trading Corporation & Ors - 1983 (13) ELT 1467 (S.C.) that a firm or a company is a legal person and hence penalty can be imposed on it.
○ During the last day of hearing, a grievance was made on behalf of the Appellants that the Learned Commissioner has not considered the Appellants' submission regarding cum-duty benefit. This grievance is not genuine. The Learned Commissioner has considered this submission in paras 87.1 to 87.3 in the impugned Order.
Further, the Appellants' stand is contradictory and inconsistent. In their reply to the Show Cause Notice, vide para H.3 (Pg. No.754 of Vol.III), the Appellants have stated that the proposed duty demand, if calculated correctly, comes to INR 323,65,87,666/- and not INR 402,87,28,269/-, as mentioned in the SCN. Again in para H.6 (Pg.
32Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 No.755 of Vol.III), it has been stated that total duty demand after cum-duty benefit comes to INR 267,06,98,402/-. However during the hearing, a chart was tendered before the Hon'ble Bench showing actual differential duty on cum-duty calculation comes to INR 245,14,70,975/- (vide Sl.No.1 of the Chart) for the period from January 2010 to December 2014. From this, it would appear that the Appellants themselves are not clear about their stand. Therefore the duty confirmed is required to be upheld.
4.1 We have considered the impugned order along with the submissions made in Appeal and during the course of arguments on appeal and in the written submissions filed.
4.2 Whether the Commissioner could have considered and adjudicated four different Show Cause Notices in respect of the same transactions for the same period proposing to demand duty by invoking different routes to the valuation of Goods Cleared.
Interestingly in this case three show cause notices have been issued by the Additional Director General Central Excise Intelligence on 06.02.2015 demanding the duty for the period January 2010 to March 2014, on the same clearances by determining the value of clearances in three different manners. Commissioner has noted the fact about issuance of three different show cause notices in respect of same clearance during the same period and has observed in her order as follow:
"66.1 At the very outset, I place on record that this is an unusual proceeding, in that three of the four Show Cause Notices have been issued by DGCEI in respect of the sale of Polo and Vento Variant Cars manufactured by the noticee during the period from January 2010 to December 2014, and each deals with a different issue regarding valuation of the cars for the purposes of the Central Excise law and rules made thereunder, and as a consequence thereof, the demands raised and the period covered are overlapping. DGCEI has, admittedly, incorporated 33 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 this peculiarity into the SCNs themselves, and since there cannot be three separate valuation methods adopted for the same cars, they have proposed that all the three SCNs may be decided together by the adjudicating authority.
A. ......This SCN (SCN No. DGCEI/MZU/I&IS 'C'/30-14/13 dated 06-02-2015) can be said to be the over-arching notice, in that it also touches upon the other two valuation issues for which SCNs have been issued separately by the investigating agency as well, namely, (a) the issue of reimbursement of expenses by M/s. VWAG to M/s. VWGSIPL and the fact that majority of share capital is held by Volkswagen International Finance N.V. and (b) the sale of vehicles at loss i.e. below cost of production and consequent financial assistance received by M/s. VWIPL from M/s. VWAG to further the point of mutuality of interest.
66.3 M/s. VWIPL, I find, has contested this overlapping of issues, demand, and different Valuation Rules invoked under the three SCNs for valuation of the very same cars (Polo and Vento Variants) for the very same period. They have contended that the SCNs under reference are arbitrary and conflicting and with overlapping demands; that the department have raised different yardsticks to demand duty on the same transactions, and that, based on the ratio of a number of court decisions, there is a strong case for setting aside the SCNs on this ground alone.
66.4 In this regard, I have seen from the SCNs and replies thereto that there are number of complexities involved in the arrangements and transactions adopted by the assessee and their group companies among themselves, which are unearthed after extensive investigation by the officers of DGCEI i.e. the arrangement of sale of entire production of VW brand cars through fellow subsidiary company, M/s VWGSIPL, who also bears the marketing and product promotional expenses; conditional waiver of license fees by parent holding company; financial assistance by the parent holding company to both the fellow subsidiary companies; waiver of payment against supply of raw materials by the holding company; the process of fixing the sale price of cars, where the manufacturer does not have 34 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 any say; the sale of cars at below cost price etc. It is needless to mention that there are different provisions / Valuation rules applicable for different kind of transactions like Section 4 (1)(a) of the Act, if the sale is to unrelated person on principle to principle basis and the price is the sole consideration for the sale, Section 4 (1)(b) of the Act read with Rule 9 of Valuation Rules, if the sale is to related person, Rule 6 of Valuation Rules, if any money or other consideration is involved against the sale, Rule 10 of Valuation Rules, if sale is through inter-connected undertakings and Rule 11 of Valuation Rules, if the value cannot be determined under Rules 4 to 10, using reasonable means consistent with principles and general provisions of the Valuation Rules i.e. best judgment. Considering the fact that all these types of intricacies have effect on the valuation of cars, the application of best judgment under Rule 11 of the Valuation Rules, using the principles of the relevant Rules, appears to be appropriate for assessment of the goods. Precisely that is what has been done in the subject three different SCNs, wherein the provisions relevant to different situations has been invoked, as detailed in each SCN, with a proposal to decide the three SCNs together, which is proper and reasonable. Therefore, I do not find any force in the arguments of the assessee in this regard and the case laws referred by the assessee in support of their said argument, are also of not much help to them in view of the intricate transactions adopted by them, having bearing on the valuation of the cars involved in this case.
66.5 Having assessed the matter, and keeping both view points of the investigating agency and the noticees before me, I find that in all fairness, DGCEI have themselves conceded the fact of overlapping demands and have proposed combined adjudication of all the three SCNs. Further, I also observe that the SCNs have been issued on the basis of detailed investigations, complying with the principles of natural justice to the parties involved, and their say has also been covered in the SCNs. Therefore, I find that it is only logical and proper to first go through each SCN and examine its sustainability on merits and limitation. Only then can the aspect of overlapping of issues, time and demand can be 35 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 addressed judiciously. It would be a travesty of the entire process to summarily dismiss the demands only on this count. Further, I also find that it would be appropriate to decide the fourth SCN dated 06.05.2015 along with the three SCN's dated 06-02-2015, being related to the same category of vehicles and issues.
67. As explained above, I therefore find that it would be more appropriate to adjudge the issue involved in all these SCNs i.e. valuation of cars with reference to Central Excise duty liability under best judgment assessment as laid down in Rule 11 of the Valuation Rules, traversing through each SCN, discussing the allegations in the SCN and replies thereto with reference to relevant Valuation Rules invoked, SCN wise.
119. After my detailed discussion in respect of each of the SCNs under discussion, I find that the issues are inter-linked and pertain to clearance of same vehicles i.e. Polo and Vento Variant Cars of VW brand during the material period. Further, I also find that M/s. VWIPL in their reply to each SCN have contended that different yardsticks have been adopted by the department to demand excise duty on the same transaction. On a thorough examination, it emerges that issues are interlinked and require that the proper valuation method to be adopted in each of the issues involved as each pertains to different set of situations. Actually the proposal of investigation agency to adjudicate all these SCNs together is logical and correct as explained in the beginning. Further, it will be relevant to point out here that each of the SCNs have been discussed in detail by me, and it is found that the SCNs stands on merits as well as on limitation, and point towards non-declaration of the correct assessable value on various counts. Hence, M/s. VWIPL's stand of overlapping of issues and adoption of different yardsticks for same transaction is mis-construed, and is more a ploy to deviate the proceedings from original subject i.e. merits of the case. It is relevant to note that the sustainability of any case depends on its merits. Hence, the decisions quoted by M/s. VWIPL are of no help for them in this regard.36
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121. Now coming to next important issue of overlapping of demand. I find that at the end of each SCN, the investigating agency has clearly mentioned that there is an overlapping of demand. Therefore, it will be reasonable and apt to examine the aspect of overlapping of demand, before I confirm the demand of Central Excise duty to be recovered from M/s. VWIPL for the aforesaid contravention on their part during the material period.
121.1 In this regard, the observations of the investigating agency in their Show Cause Notice F.No. DGCEI/MZU/I&IS'C'/30- 14/13/455 dated 06-02-2015, for demand of duty of Rs. 402,87,28,268/- covering the period from July 2010 to December 2014 (which is corrected and revised to Rs. 323,65,87,666/-, as discussed above), clearly observed at Para 49.1 of the SCN that the duty component of Rs. 277.01 Crores (which is corrected and revised to Rs. 106,01,33,547/-, as discussed in Para 77 above), is taken care of while computing the total duty demand in the said SCN.
121.2 Further in the same SCN, at Para 26.9, the investigating agency who had issued all the SCNs in reference, has observed that "Duty implication on the financial assistance which otherwise could have been a part of the selling price of WWIPL to VWGSIPL is amounting to Rs. 183.28 Cr. The total duty liability demanded includes the above duty component." .
121.3 In view of the above, it is clear the total duty confirmed of Rs. 323,65,87,666/- in respect of SCN F. No. DGCEI/MZU/I&IS'C'/30-14/13/455 dated 06-02-2015, covering the period from July 2010 to December 2014, includes the other duty demands confirmed above in respect of remaining other two SCNs for Rs. 106,01,33,547/- pertaining to the period from January 2010 to March 2014 in respect of SCN F.No. DGCEI/MZU/I&IS "A"/30-17/15/460 dated 06-02-2015 and for Rs. 183.28 Cr pertaining to the period from January 2010 to March 2014 in respect of SCN F.No. DGCEI/MZU/I&IS 'A'/30- 18/15/468 dated 06-02-2015."
We cannot agree with the method adopted by the Commissioner while dealing with the three Show Cause Notice dated 37 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 06.02.2015. Commissioner could not have determined three different methods for valuation of the same goods simultaneously. Commissioner while adjudicating has to be judicious enough to determine what is the correct approach to determine the value of the goods cleared. Accordingly he/ she have to determine the value and duty payable. In our view in such a case only one of the three show cause notices which as per the understanding of adjudicator are logical and legally sustainable should have been adjudicated and the other two summarily dismissed. We also find that the same has been stated as per Board's instructions F. No. 18/18/65-CX.IV dated 29 April 1965, in following words:
"Adjudicating officers should guard against passing two formal adjudication orders on the same case. The legal position in this respect is that, where a matter has already been adjudicated by the competent authority and another order of adjudication is passed relating to the same transaction subsequently, the second order is a nullity. The authority who undertakes the enquiry resulting in the second adjudication acts without jurisdiction. The second order being a nullity, it should be taken as not to exist at all. When the fact of such an order having been passed is brought to light, the records should be corrected, the order deleted from the record and the party affected informed accordingly."
Thus at the time of hearing of the matter we had accepted the preliminary objection raised by the Appellant's counsel and directed him to make submissions only in respect of the Show Cause Notice which has been adjudicated leading to confirmation of demand against the appellants.
4.3 Legal Provisions for consideration of issue on merits-
The relevant legal provisions from Central Excise Act, 1944 and Central Excise Valuation (Determination of Price of Excisable Goods), 2000, which are under consideration are reproduced below Section 4 of the Central Excise Act,1944 read as under 38
Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 (1) Where under this Act, the duty of excise is chargeable on any excisable goods with reference to their value, then, on each removal of the goods, such value shall -
a. in a case where the goods are sold by the assessee, for delivery at the time and place of the removal, the assessee and the buyer of the goods are not related and the price is the sole consideration for the sale, be the transaction value;
b. in any other case, including the case where the goods are not sold, be the value determined in such manner as may be prescribed.
Explanation. - For the removal of doubts, it is hereby declared that the price-cum-duty of the excisable goods sold by the assessee shall be the price actually paid to him for the goods sold and the money value of the additional consideration, if any, flowing directly or indirectly from the buyer to the assessee in connection with the sale of such goods, and such price-cum- duty, excluding sales tax and other taxes, if any, actually paid, u shall be deemed to include the duty payable on such goods.
(3) For the purpose of this section, -
a. "assessee" means the person who is liable to pay the duty of excise under this Act and includes his agent;
b. persons shall be deemed to be "related" if
i. they are inter-connected undertakings;
ii. they are relatives;
iii. amongst them the buyer is a relative and a distributor of the assessee, or a sub-distributor of such distributor; or iv. they are so associated that they have interest, directly or indirectly, in the business of each other. c. Explanation. -- In this clause -
i. "inter-connected undertakings" shall have the meaning assigned to it in clause (g) of section 2 of the Monopolies and Restrictive Trade Practices Act, 1969 (54 of 1969); and ii. "relative" shall have the meaning assigned to it in 39 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 clause (41) of section 2 of the Companies Act, 1956 (1 of 1956); (c)........................; (cc) ....................;
d. "transaction value" means the price actually paid or payable for the goods, when sold, and includes in addition to the amount charged as price, any amount that the buyer is liable to pay to, or on behalf of, the assessee, by reason of, or in connection with the sale, whether payable at the time of the sale or at any other time, including, but not limited to, any amount charged for, or to make provision for, advertising or publicity, marketing and selling organization expenses, storage, outward handling, servicing, warranty, commission or any other matter; but does not include the amount of duty of excise, sales tax and other taxes, if any, actually paid or actually payable on such goods.
Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 Rule 6 'Where the excisable goods are sold in the circumstances specified in clause (a) of sub section (1) of section 4 of the Act, except the circumstance where the price is not the sole consideration for sale, the value of such goods shall be deemed to be the aggregate of such transaction value and the amount of money value of any additional consideration flowing. directly or indirectly from the buyer to the assessee.
Explanation 1........
Explanation 2..........
Rule 9 -
'When the assessee so arranges that the excisable goods are not sold by an assessee except to or through a person who is related in the manner specified in either of sub-clauses (ii), (iii) or (iv) of clause (b) of sub-section (3) of section 4 of the Act, the value of 40 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 the goods shall be the normal transaction value at which these are sold by the related person at the 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.' Rule 10 -
"When the assessee so arranges that the excisable goods are not sold by him except to or through an inter-connected undertaking, the value of goods shall be determined in the following manner, namely:
(a) If the undertakings are so connected that they are also related in terms of sub-clause (ii) or (iii) or (iv) of clause (b) of sub-section (3) of section 4 of the Act or the buyer is a holding company or subsidiary company of the assessee, then the value shall be determined in the manner prescribed in rule 9.
Explanation. - In this clause "holding company" and "subsidiary company" shall have the same meanings as in the Companies Act, 1956 (1 of 1956).
(b) in any other case, the value shall be determined as if they are not related persons for the purpose of sub-section (1) of section 4.' Rule 11 -
'If the value of any excisable goods cannot be determined under the foregoing rules, the value shall be determined using reasonable means consistent with the principles and general provisions of these rules and sub-section (1) of section 4 of the Act.' 4.5 Meaning of Transaction Value and Value under Section 4 (1) (a) 41 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 Interpreting Section 4, Hon'ble Supreme Court has in case of FIAT India [2012 (283) ELT 161 (SC)]after noting all the decisions rendered in past has observed as under:
"26. Section 4 of the Act lays down the valuation of excisable goods chargeable to duty of excise. The duty of excise is with reference to value and such value shall be subject to other provisions of Section 4, that is the normal price at which such goods are ordinarily sold by the assessee to a buyer in the course of wholesale trade for delivery at the time and place of removal where the buyer is not a related person and the price is the sole consideration for the sale. To determine the value, the legislature has created a legal fiction to equate the value of the goods to the price which is actually obtained by the assessee, when such goods are sold in the market, or the nearest equivalent thereof. In other words, the legal fiction so created by Section 4 makes excise duty leviable on the actual market value of the goods or the nearest equivalent thereof. In Bangaru Laxman v. State (through CBI) and Anr.- (2012) 1 SCC 500, this Court relying on J.K. Cotton Spinning and Weaving Mills Ltd. v. U.O.I, (1987) Supp. (1) SCC 350, observed that a deeming provision creates a legal fiction and something that is in fact not true or in existence, shall be considered to be true or in existence. Therefore, though the price at which the assessee sells the excisable goods to a buyer or the nearest ascertainable price may not reflect the actual value of the goods, for the purpose of valuation of excise duty, by the deeming fiction created in Section 4(1), such selling price or nearest ascertainable price in the market, as the case may be, is considered to be the value of goods.
27. It is well settled that whenever the legislature uses certain terms or expressions of well-known legal significance or connotations, the courts must interpret them as used or understood in the popular sense if they are not defined under the Act or the Rules framed thereunder. Popular sense means "that sense which people conversant with the subject matter, with which the statute is dealing, would attribute to it."42
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28. The normal rule of interpretation is that the words used by the legislature are generally a safe guide to its intention. Lord Reid in Westminster Bank Ltd. v. Zang [(1966) A.C. 182] observed that 'no principle of interpretation of statutes is more firmly settled than the rule that the court must deduce the intention of Parliament from the words used in the Act." Applying such a rule, this Court observed in S. Narayanaswami v. G. Pannerselvam & Ors. (1973) 1 SCR 172 that 'Where the statute's meaning is clear and explicit, words cannot be interpolated.'
29. Section 4 of the Act, as we have already noticed, speaks of valuation of excisable goods, with reference to their value. The `value' subject to other stipulation in Section 4 is deemed to be the `normal price' at which the goods are 'ordinarily' sold to the buyer in the course of 'wholesale trade' where the buyer is not `related person' and the `price' is the `sole consideration' for the sale. Against this background, for the purpose of this case, we have now to consider the meaning of the words 'value', 'normal price', 'ordinarily sold' and 'sole consideration', as used in Section 4(1) (a) of the Act.
30. The `value' in relation to excisable commodity means normal price or the price at which the goods are ordinarily sold by the assessee to a buyer in the course of wholesale trade at the time and place of removal where the buyer is not a related person and price is the sole consideration for sale. Stated another way, the Central Excise duty is payable on the basis of the value. The assessable value is arrived on the basis of Section 4 of the Act and the Central Excise Valuation Rules.
31. Section 4(1) (a) deems the `normal price' of the assessee for selling the excisable goods to buyers to be the value of the goods for purpose of levy of excise duty. The expression 'normal price' is not defined under the Act. In "Advanced Law Lexicon"
by P. Ramanatha Aiyar, it is defined as the price which would have been payable by an ordinary customer of the goods. This Court while construing the meaning of the aforesaid expression in Ashok Leyland Ltd. v. Collector of Central Excise, Madras (2002) 10 SCC 344 has stated "Generally speaking the 43 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 expression 'normal price' occurring in Section 4(1)(a) and (b) means the price at which goods are sold to the public. Where the sale to public is through dealers, the 'normal price' would be the 'sale price' to the dealer.
32. In Commissioner of Central Excise, Ahemedabad v. Xerographic Ltd. (2006) 9 SCC 556, this Court has explained the concept of normal price. That was in the context of transaction between the related persons. It was observed "that the existence of any extra commercial consideration while fixing a price would not amount to normal price."
33. In Burn Standard Co. Ltd. & Anr. v. Union of India (1991) 3 SCC 467, it is stated, "Section 3 of the Act provides for levy of the duty of excise. It is a levy on goods produced or manufactured in India. Section 4 of the Act lays down the measure by reference to which the duty of excise is to be assessed. The duty of excise is linked and chargeable with reference to the value of the excisable goods and the value is further defined in express terms by the said section. In every case the fundamental criterion for computing the value of an excisable article is the normal price at which the excisable article or an article of the like kind and quality is sold or is capable of being sold by the manufacturer."
34. In Tata Iron and Steel Co. Ltd. v. Collector of Central Excise, Jamshedpur (2002) 8 SCC 338, it is held that "it is true to be seen that under the said Act excise duty is chargeable on the value of the goods. The value is the normal price i.e. the price at which such goods are ordinarily sold by the assessee to a buyer, where the buyer is not a related person and the price is the sole consideration for sale."
35. In Union of India and others v. Bombay Tyre International Ltd & Ors.. (1984) 1 SCC 467, it is held that "it is true, we think, that the new Section 4(1) contains inherently within it the power to determine the true value of the excisable article, after taking into account any concession shown to a special or favoured buyer because of extra-commercial considerations, in order that the price be ascertained only on the basis that it is a transaction 44 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 at arm's length. That requirement is emphasized by the provision in the new Section 4(l)(a) that the price should be the sole consideration for the sale. In every such case, it will be for the Revenue to determine on the evidence before it whether the transaction is one where extra-commercial considerations have entered and, if so, what should be the price to be taken as the value of the excisable article for the purpose of excise duty."
36. In Metal Box India Ltd. v. CCE (1995) 2 SCC 90, this Court held:
"10. ... It has been laid down by Section 4(1)(a) that normal price would be price which must be the sole consideration for the sale of goods and there could not be other consideration except the price for the sale of the goods and only under such a situation sub-section (l)(a) would come into play."
37. In Calcutta Chromotype Ltd. v. CCE, (1998) 3 SCC 681, it is held:
14. ... Law is specific that when duty of excise is chargeable on the goods with reference to its value then the normal price on which the goods are sold shall be deemed to be the value provided (1) the buyer is not a related person and (2) the price is the sole consideration. It is a deeming provision and the two conditions have to be satisfied for the case to fall under clause
(a) of Section 4(1) keeping in view as to who is the related person within the meaning of clause (c) of Section 4(4) of the Act. Again if the price is not the sole consideration, then again clause (a) of Section 4(1) will not be applicable to arrive at the value of the excisable goods for the purpose of levy of duty of excise."
38. In Commissioner of Central Excise v. Ballarpur Industries Ltd., (2007) 8 SCC 89, it is observed:
"19. Under Section 4(1)(a) normal price was the basis of the assessable value. It was the price at which goods were ordinarily sold by the assessee to the buyer in the course of wholesale trade. Under Section 4(1)(b) it was provided that if the price was not ascertainable for the reason that such goods were not sold or 45 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 for any other reason, the nearest equivalent thereof had to be determined in terms of the Valuation Rules, 1975. Therefore, Rule 57-CC has to be read in the context of Section 4(1) of the 1944 Act, as it stood at the relevant time. Section 4(1)(a) equated "value" to the "normal price" which in turn referred to goods being ordinarily sold in the course of wholesale trade. In other words, normal price, which in turn referred to goods being ordinarily sold in the course of wholesale trade at the time of removal, constituted the basis of the assessable value."
39. In Siddhartha Tubes Ltd. v. CCE, (2005) 13 SCC 564, at page 567, it is held:
"5......The essential basis of valuation under Section 4 of the Act is the wholesale cash price charged by the appellant. Normal price under Section 4(1)(a) constituted a measure for levy of excise duty. In the present case, we are concerned with assessment and not with classification. Duty under Section 4 was not leviable on the "conceptual value" but on the normal price charged or chargeable by the assessee. (See Union of India v. Bombay Tyre International Ltd.)"
40. In CCE v. Bisleri International (P) Ltd., (2005) 6 SCC 58, at page 61, it is held:
"10. At the outset, it may be mentioned that under Section 4(1)(a), "value" in relation to any excisable goods is a function of the price. In other words, "value" is derived from the normal price at the factory gate charged to an unrelated person on wholesale basis and at the time and place of removal.
11. It is for the Department to examine the entire evidence on record in order to determine whether the transaction is one prompted by extra- commercial considerations. It is well settled that under Section 4 of the said Act, as it stood at the material time, price is adopted as a measure or a yardstick for assessing the tax. The said measure or yardstick is not conclusive of the nature of the tax. Under Section 4, price and sale are related concepts. The "value" of the excisable article has to be computed with reference to the price charged by the manufacturer, the 46 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 computation being made in accordance with Section 4. In every case, it will be for the Revenue to determine on evidence whether the transaction is one where extra-commercial considerations have entered and, if so, what should be the price to be taken into account as the value of the excisable article for the purpose of excise duty. These principles have been laid down in the judgment of this Court in the case of Union of India v. Bombay Tyre International Ltd."
41. In Ashok Leyland Ltd. v. Collector of Central Excise, Madras, (2002) 10 SCC 344, at page 348, it is held:
"10. In our view, the provisions of the Act are very clear. Excise duty is payable on removal of goods. As there may be no sale at the time of removal, Section 4 of the Act lays down how the value has to be determined for the purposes of charging of excise duty. The main provision is Section 4(l)(a) which provides that the value would be the normal price thereof, that is, the price at which the goods are ordinarily sold by the assessee to a buyer in the course of a wholesale trade. Section 4(4)(e) clarifies that a sale to a dealer would be deemed to be wholesale trade. Therefore, the normal price would be the price at which the goods are sold in the market in the wholesale trade. Generally speaking, the normal price is the one at which goods are sold to the public. Here the sale to the public is through the dealers. So the normal price is the sale price to the dealer. The proviso, which has been relied upon by learned counsel, does not make any exception to this normal rule. All that the proviso provides is that if an assessee sells goods at different prices to different classes of buyers, then in respect of each such class of buyers, the normal price would be the price at which the goods are sold to that class. The proviso does not mean or provide that merely because the assessee sells at different prices to different classes of buyers, the price of that commodity becomes an unascertainable price. The price of that commodity will remain the normal price at which those goods are ordinarily sold by the assessee to the public, in other words, the price at which they are sold in the market."47
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42. In Procter & Gamble Hygiene & Health Care Ltd. v. Commissioner of Central Excise, Bhopal, (2006) 1 SCC 267, it is held :
"9. This case relates to valuation. At the outset, we would like to clarify certain concepts under the excise law. The levy of excise duty is on the "manufacture" of goods. The excisable event is the manufacture. The levy is on the manufacture. The measure or the yardstick for computing the levy is the "normal price"
under Section 4(l)(a) of the Act. The concept of "excisability" is different from the concept of "valuation". In the present case, as stated above, we are concerned with valuation and not with excisability. In the present case, there is no dispute that AMS came under Sub-Heading 3402.90 of the Tariff. There is no dispute in the present case that AMS was dutiable under Section 3 of the Act. In Union of India v. Bombay Tyre International Ltd., this Court observed that the measure of levy did not conclusively determine the nature of the levy. It was held that the fundamental criterion for computing the value of an excisable article was the price at which the excisable article was sold or was capable of being sold by the manufacturer. It was further held that the price of an article was related to its value and in that value, we have several components, including those components which enhance the commercial value of the article and which give to the article its marketability in the trade. Therefore, the expenses incurred on such factors inter alia have to be included in the assessable value of the article up to the date of the sale, which was the date of delivery."
43. What can be construed from the plain reading of Section 4 of the Act and the interpretation that is given by this Court on the expression `normal value' is, where excise duty is chargeable on any excisable goods with reference to value, such value shall be deemed to be the price at which such goods are ordinarily sold by the assessee to a buyer in the course of wholesale trade for delivery at the time and place of removal and where the assessee and the buyer have no interest directly or indirectly in the business of each other and the price is the sole consideration for the sale. Normal price, therefore, is the amount paid by the 48 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 buyer for the purchase of goods. In the present case, it is the stand of the revenue that 'loss making price' cannot be the 'normal price' and that too when it is spread over for nearly five years and the consideration being only to penetrate the market and compete with other manufacturers who are manufacturing more or less similar cars and selling at a lower price. The existence of extra commercial consideration while fixing the price would not be the 'normal price' as observed by this Court in Xerographic Ltd.'s case (supra). If price is the sole consideration for the sale of goods and if there is no other consideration except the price for the sale of goods, then only provisions of Section 4 (1)(a) of the Act can be applied. In fact, in Metal Box's case (supra) this Court has stated that under sub- Section (1)
(a) of Section 4 of the Act, the 'normal price' would be the price which must be the sole consideration for the sale of goods and there cannot be any other consideration except the price for the sale of goods and it is only under such situation Sub-Section (1)
(a) of Section 4 would come into play. In the show cause notices issued, the Revenue doubts the normal price of the wholesale trade of the assessees. They specifically allege, which is not disputed by the assessees, that the `loss making price' continuously for a period of more than five years while selling more than 29000 cars, cannot be the normal price. It is true that in notices issued, the Revenue does not allege that the buyer is a related person, nor do they allege element of flow back directly from the buyer to the seller, but certainly, they allege that the price was not the sole consideration and the circumstance that no prudent businessman would continuously suffer huge loss only to penetrate the market and compete with other manufacturer of more or less similar cars. A prudent businessman or woman and in the present case, a company is expected to act with discretion to seek reasonable income, preserve capital and, in general, avoid speculative investments. This court in the case of Union of India v. Hindalco Industries 2003 (153) ELT 481, has observed that, `if there is anything to suggest to doubt the normal price of the wholesale trade, then recourse to clause (b) of sub-section(1) of Section 4 of the Act 49 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 could be made'. That the price is not the normal price, is established from the following three circumstances which the assessees themselves have admitted; that the price of the cars was not based on the manufacturing cost and manufacturing profit, but have fixed at a lower price to penetrate the market; though the normal price for their cars is higher, they are selling the cars at a lower price to compete with the other manufacturers of similar cars. This is certainly a factor in depressing the sale price to an artificial level; and, lastly, the full commercial cost of manufacturing and selling the cars was not reflected in the lower price. Therefore, merely because the assessee has not sold the cars to the related person and the element of flow back directly from the buyer to the seller is not the allegation in the show cause notices issued, the price at which the assessees had sold its goods to the whole sale trader cannot be accepted as 'normal price' for the sale of cars.
44. We now deal with the second limb of the argument of Shri Bhattacharya, learned ASG that the loss price at which the goods are sold by the assessee clearly indicates or reflects that these goods are not "ordinarily sold" in terms of Section 4 (1) (a) of the Act. He submits that admittedly assessees are selling their goods at 100% loss continuously for five years i.e. from the year 1996 to 2001 and therefore, the transactions of the assessees cannot fit into description of expression 'ordinarily sold'. While countering this argument, Shri Joseph Vellapally would submit that the selling price at which the goods are sold in the ordinary course of business by the assessee to all the buyers is the same or uniform without any exception. He would, therefore, contend that the goods are ordinarily sold in terms of Section 4 (1) (a) of the Act. While adopting the submission of Shri Vellapally, Shri Lakshmi Kumaran would further contend, relying on Ship Breaker's case (supra) that this Court while explaining the meaning of the expression 'ordinarily sold', occurring in Section 14 of the Customs Act, 1962 which is in pari materia with Section 4 of the Act, would mean the sale where the goods are sold to un- related persons and price is the sole consideration. He would also contend that Section 4 of the Act was amended 50 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 with effect from 1stApril, 2000, to incorporate 'transaction value' as an 'assessable value' instead of 'normal price' and the expression 'ordinarily' was omitted. Therefore, the new Section is applicable to the transactions which took place for the period from July 2000 to June 2001. He would submit by relying on the decision of this Court in Elgi Equipment Pvt. Ltd.'s case (supra), that the word 'ordinarily sold' would mean the normal practice or the practice followed by majority of persons in the wholesale trade in the concerned goods. He would submit that in the present cases, the assessees are better placed as the entire sale is at the same price or rate, so the condition of the expression 'ordinarily sold' is being satisfied.
45. The expression 'ordinarily sold' is again not defined under the Act, but came up for consideration before this Court while construing the said expression under the Customs Act. This Court in Eicher Tractors Ltd., Haryana v. Commissioner of Customs, Mumbai (2001) 1 SCC 315 has held:
"6. Under the Act customs duty is chargeable on goods. According to Section 14(1) of the Act, the assessment of duty is to be made on the value of the goods. The value may be fixed by the Central Government under Section 14(2). Where the value is not so fixed, the value has to be determined under Section 14(1). The value, according to Section 14(1), shall be deemed to be the price at which such or like goods are ordinarily sold, or offered for sale, for delivery at the time and place of importation
- in the course of international trade. The word "ordinarily"
necessarily implies the exclusion of "extraordinary" or "special" circumstances. This is clarified by the last phrase in Section 14 which describes an "ordinary" sale as one "where the seller and the buyer have no interest in the business of each other and the price is the sole consideration for the sale ....". Subject to these three conditions laid down in Section 14(1) of time, place and absence of special circumstances, the price of imported goods is to be determined under Section 14(1-A) in accordance with the Rules framed in this behalf."
46. In Ispat Industries Ltd. v. Commissioner of Customs, 51 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 Mumbai, (2006) 12 SCC 583, it is held:
"14. From a perusal of the above provisions (quoted above), it is evident that the most important provision for the purpose of valuation of the goods for the purpose of assessment is Section 14 of the Customs Act, 1962. Section 14(1), has already been quoted above, and a perusal of the same shows that the value to be determined is a deemed value and not necessarily the actual value of the goods. Thus, Section 14(1) creates a legal fiction. Section 14(1) states that the value of the imported goods shall be the deemed price at which such or like goods are ordinarily sold, or offered for sale, for delivery at the time and place of importation in the course of international trade. The word "ordinarily" in Section 14(1) is of great importance. In Section 14(1) we are not to see the actual value of the goods, but the value at which such goods or like goods are ordinarily sold or offered for sale for delivery at the time of import. Similarly, the words "in the course of international trade" are also of great importance. We have to see the value of the goods not for each specific transaction, but the ordinary value which it would have in the course of international trade at the time of its import."
47. In Varsha Plastics Private Limited & Anr. v. Union of India & Ors., (2009) 3 SCC 365, at page37l, it is observed:
"19. Section 14(1) of the Act prescribes a method for determination of the value of the goods. It is a deeming provision. By legal fiction incorporated in this section, the value of the imported goods is the deemed price at which such or like goods are ordinarily sold or offered for sale for delivery at the time and place of importation in the course of international trade.
20. The word "ordinarily" in Section 14(1) is a word of significance. The ordinary meaning of the word "ordinarily" in Section 14(1) is "non- exceptional" or "usual". It does not mean "universally". In the context of Section 14(1) for the purpose of "valuation" of goods, however, by use of the word "ordinarily"
the indication is that the ordinary value of the goods is what it would have been in the course of international trade at the time 52 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 of import. Section 14(1), thus, provides that the value has to be assessed on the basis of price attached to such or like goods ordinarily sold or offered for sale in the ordinary course of events in international trade at the time and place of transportation."
48. In Rajkumar Knitting Mills (P) Ltd. v. Collector of Customs, Bombay (1998) 3 SCC 163, at page 165, it is held:
"7. ... The words "ordinarily sold or offered for sale" do not refer to the contract between the supplier and the importer, but to the prevailing price in the market on the date of importation or exportation."
49. In Ashok Leyland Ltd. v. Collector of Central Excise, Madras, (2002) 10 SCC 344, at page 348, it is held :
"The price of that commodity will remain the normal price at which those goods are ordinarily sold by the assessee to the public, in other words, the price at which they are sold in the market."
50. In the context of Section 4(1)(a) of the Act, the word 'ordinarily' does not mean majority of the sales; what it means is that price should not be exceptional. In our considered opinion, the word 'ordinarily', by no stretch of imagination, can include extra-ordinary or unusual. In the instant cases, as we have already noticed, the assessees sell their cars in the market continuously for a period of five years at a loss price and claims that it had to do only to compete with the other manufacturers of cars and also to penetrate the market. If such sales are taken as sales made in the ordinary course, it would be anathema for the expression 'ordinarily sold'. There could be instances where a manufacturer may sell his goods at a price less than the cost of manufacturing and manufacturing profit, when the company wants to switch over its business for any other manufacturing activity, it could also be where the manufacturer has goods which could not be sold within a reasonable time. These instances are not exhaustive but only illustrative. In the instant cases, since the price charged for the sale of cars is exceptional, we cannot accept the submission of the learned counsel to give a 53 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 meaning which does not fit into the meaning of the expression 'ordinarily sold'. In other words, in the transaction under consideration, the goods are sold below the manufacturing cost and manufacturing profit. Therefore, in our view, such sales may be disregarded as not being done in the ordinary course of sale or trade. In our view, for the purpose of Section 4(1) (a) all that has to be seen is: does the sale price at the factory gate represent the wholesale cash price. If the price charged to the purchaser at the factory gate is fair and reasonable and has been arrived at only on purely commercial basis, then that should represent the wholesale cash price under Section 4(1)(a) of the Act. This is the price which has been charged by the manufacturer from the wholesale purchaser or sole distributor. What has to be seen is that the sale made at arm's length and in the usual course of business, if it is not made at arm's length or in the usual course of business, then that will not be real value of the goods. The value to be adopted for the purpose of assessment to duty is not the price at which the manufacturer actually sells the goods at his sale depots or the price at which goods are sold by the dealers to the customers, but a fictional price contemplated by the section. This Court in Ram Kumar Knitting Mills case (supra), while construing the said expression, has held that the word `ordinarily sold' do not refer to contract between the supplier and the importer, but, the prevailing price in the market on the date of importation and exportation. Excise duty is leviable on the value of goods as manufactured. That takes into account manufacturing cost and manufacturing profit.
51. Excise is a tax on the production and manufacture of goods and Section 4 of the Act provides for arriving at the real value of such goods. When there is fair and reasonable price stipulated between the manufacturer and the wholesale dealer in respect of the goods purely on commercial basis that should necessarily reflect a dealing in the usual course of business, and it is not possible to characterize it as not arising out of agreement made at arm's length. In contrast, if there is an extra-ordinary or unusual price, specially low price, charged because of extra- commercial considerations, the price charged could not be taken 54 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 to be fair and reasonable, arrived at on purely commercial basis, as to be counted as the wholesale cash price for levying excise duty under Section 4(1)(a) of the Act.
52. The next submission of Shri Bhattacharya, learned ASG, is that the price at which the cars sold by the assessees is not the sole consideration as envisaged under Section 4(1)(a) of the Act. He would contend that admittedly there exists a consideration other than the price, that is, to penetrate the market. He would also submit that the lower price would enable the assessee to generate higher turnover and this higher turnover is monetary consideration for the assessee received directly from various buyers. In other words, he would submit, the intention to penetrate the market is intertwined with receiving a higher monetary turnover. Therefore, the price is not the sole consideration. However, it is contended by learned senior counsel Shri Vellapally that the reason for the assessees for selling their cars at a lower price than the manufacturing cost was because the assessees had no foothold in the Indian market and, therefore, had to sell at a lower price than the manufacturing cost and profit in order to compete in the market. He would submit that the intention of the assessees to penetrate the market cannot be treated as extra commercial consideration as it does not flow from the buyer to the seller. Therefore, there is no additional consideration flowing from buyer to seller and whole transaction is bona fide.
53. Now what requires to be considered is what is the meaning of the expression `sole consideration'. Consideration means something which is of value in the eyes of law, moving from the plaintiff, either of benefit to the plaintiff or of detriment to the defendant. In other words, it may consist either in some right, interest, profit or benefit accruing to the one party, or some forbearance, detriment, loss or responsibility, given, suffered or undertaken by the other, as observed in the case of Currie v. Misa (1875) LR 10 Ex. 153.
54. Webster's Third New International Dictionary (unabridged) defines, consideration thus:
55Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 "Something that is legally regarded as the equivalent or return given or suffered by one for the act or promise of another."
55. In volume 17 of Corpus Juris Secundum (p.420-421 and
425) the import of 'consideration' has been described thus:
"Various definitions of the meaning of consideration are to be found in the text-books and judicial opinions. A sufficient one, as stated in Corpus Juris and which has been quoted and cited with approval is "a benefit to the party promising or a loss or detriment to the party to whom the promise is made.....
At common law every contract not under seal requires a consideration to support it, that is, as shown in the definition above, some benefit to the promisor, or some detriment to the promisee."
56. In Salmond on Jurisprudence, the word 'consideration' has been explained in the following words.
"A consideration in its widest sense is the reason, motive or inducement, by which a man is moved to bind himself by an agreement. It is for nothing that he consents to impose an obligation upon himself, or to abandon or transfer a right. It is in consideration of such and such a fact that he agrees to bear new burdens or to forego the benefits which the law already allows him."
57. The gist of the term 'consideration' and its legal significance has been clearly summed up in Section 2(d) of the Indian Contract Act which defines 'consideration' thus:
"When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration to the promise."
58. From a conspectus of decisions and dictionary meaning, the inescapable conclusion that follows is that 'consideration' means a reasonable equivalent or other valuable benefit passed on by the promisor to the promisee or by the transferor to the 56 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 transferee. Similarly, when the word 'consideration' is qualified by the word 'sole', it makes consideration stronger so as to make it sufficient and valuable having regard to the facts, circumstances and necessities of the case.
59. To attract Section 4(1)(a) of the Act what is required is to determine the 'normal price' of an excisable article which price will be the price at which it is ordinarily sold to a buyer in the course of wholesale trade. It is for the Excise authorities to show that the price charged to such selling agent or distributor is a concessional or specially low price or a price charged to show favour or gain in return extra- commercial advantage. If it is shown that the price charged to such a sole selling agent or distributor is lower than the real value of the goods which will mean the manufacturing cost plus manufacturing profit, the Excise authorities can refuse to accept that price.
60. Since under new Section 4(1)(a) the price should be the sole consideration for the sale, it will be open for the Revenue to determine on the basis of evidence whether a particular transaction is one where extra- commercial consideration has entered and, if so, what should be the price to be taken as the value of the excisable article for the purpose of excise duty and that is what exactly has been done in the instant cases and after analyzing the evidence on record it is found that extra- commercial consideration had entered into while fixing the price of the sale of the cars to the customers. When the price is not the sole consideration and there are some additional considerations either in the form of cash, kind, services or in any other way, then according to Rule 5 of the 1975 Valuation Rules, the equivalent value of that additional consideration should be added to the price shown by the assessee. The important requirement under Section 4(1)(a) is that the price must be the sole and only consideration for the sale. If the sale is influenced by considerations other than the price, then, Section 4(1)(a) will not apply. In the instant case, the main reason for the assessees to sell their cars at a lower price than the manufacturing cost and profit is to penetrate the market and this will constitute extra commercial consideration and not the sole consideration.
57Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 As we have already noticed, the duty of excise is chargeable on the goods with reference to its value then the normal price on which the goods are sold shall be deemed to be the value, provided: (1) the buyer is not a related person and (2) the price is the sole consideration. These twin conditions have to be satisfied for the case to fall under Section 4(1)(a) of the Act. We have demonstrated in the instant cases, the price is not the sole consideration when the assessees sold their cars in the wholesale trade. Therefore, the assessing authority was justified in invoking clause(b) of Section 4(1) to arrive at the value of the exercisable goods for the purpose of levy of duty of excise, since the proper price could not be ascertained. Since, Section 4(1)(b) of the Act applies, the valuation requires to be done on the basis of the 1975 Valuation Rules.
61. After amendment of Section 4 :- Section 4 lays down that the valuation of excisable goods chargeable to duty of excises on ad-valorem would be based upon the concept of transaction value for levy of duty. `Transaction value' means the price actually paid or payable for the goods, when sold, and includes any amount that the buyer is liable to pay to the assessee in connection with the sale, whether payable at the time of sale or at any other time, including any amount charged for, or to make provisions for advertising or publicity, marketing and selling, and storage etc., but does not include duty of excise, sales tax, or any other taxes, if any, actually paid or payable on such goods. Therefore, each removal is a different transaction and duty is charged on the value of each transaction. The new Section 4, therefore, accepts different transaction values which may be charged by the assessee to different customers for assessment purposes where one of the three requirements, namely; (a) where the goods are sold for delivery at the time and place of delivery; (b) the assessee and buyers are not related; and (c) price is the sole consideration for sale, is not satisfied, then the transaction value shall not be the assessable value and value in such case has to be arrived at, under the Central Excise Valuation (Determination of Price of Excisable Goods) Rules 2000 ('the Rules 2000' for short) which is also made effective from 1st 58 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 July, 2000. Since the price is not the sole consideration for the period even after 1st July, 2000, in our view, the assessing authority was justified in invoking provisions of the Rules 2000."
4.6 In case of Grasim Industries Ltd [Order dated 11th May 2018 in Civil Appeal No 3159 of 2004] a Five Member Bench of Hon'ble Supreme Court has considered the issue of changes made in the Section 4 of the Central Excise Act, 1944 and various other issues referred to it. The relevant excerpts from the said decision are reproduced below:
3. Perceiving a conflict between the two decisions of this court in Union of India and Ors. v. Bombay Tyre International Ltd. and Ors. [(1984) 1 SCC 467] and Commissioner of Central Excise, Pondicherry v. Acer India Ltd.[(2004) 8 SCC 173], a two judge Bench of this Court by order dated 30th July, 2009 [(2009) 14 SCC 596] referred the following questions for an answer by a larger bench:
1. "Whether Section 4 of the Central Excise Act, 1944 (as substituted with effect from 1-7-2000) and the definition of "transaction value" in clause (d) of subsection (3) of Section 4 are subject to Section 3 of the Act?
2. Whether Sections 3 and 4 of the Central Excise Act, despite being interlinked, operate in different fields and what is their real scope and ambit?
3. Whether the concept of "transaction value" makes any material departure from the deemed normal price concept of the erstwhile Section 4(1)(a) of the Act?"
23. Accordingly, we answer the reference by holding that the measure of the levy contemplated in Section 4 of the Act will not be controlled by the nature of the levy. So long a reasonable nexus is discernible between the measure and the nature of the levy both Section 3 and 4 would operate in their respective fields as indicated above. The view expressed in Bombay Tyre International Ltd.(supra) is the correct exposition of the law in this regard. Further, we hold that "transaction value" as defined in Section 4(3)(d) brought into force by the Amendment Act, 2000, statutorily engrafts the additions to the 'normal price' 59 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 under the old Section 4 as held to be permissible in Bombay Tyre International Ltd. (supra) besides giving effect to the changed description of the levy of excise introduced in Section 3 of the Act by the Amendment of 2000. Infect, we are of the view that there is no discernible difference in the statutory concept of 'transaction value' and the judicially evolved meaning of 'normal price'.
4.7 Appellants have contended that the value determined by them for payment of duty is the transaction value determined purely on commercial considerations at arm's length. However we find that the documents and evidences suggests that both M/s VWIPL (Appellant) and M/s VWGSIPL do not independently determine the value at which the M/s VWIPL would transfer the cars to M/s VWGSIPL . The transfer value claimed to be the true transaction value is determined by the Planning Round, every year which is headed by M/s VWAG, Germany. This fact was also admitted by Mr Peter Pajunk, Head Central Controlling of M/s VWIPL in his statement dated 02.02.2015, wherein he stated "I state that we sell the cars on the prices finalized and confirmed in Planning Rounds which we get from VW AG. But I do not know the reasons for the same."During the course of investigations certain documents such as e-mail from M/s VWAG Germany were recovered determining the transfer price of Polo Model of car. This e-mail clearly suggests that the price was determined by M/s VWAG, Germany and dictated to its two Indian Subsidiaries. The fact about the existence of this e-mail dated 28.01.2010 along with all its contents have been admitted by Shri Sabharwal in his statement dated 19.01.2015. The scanned copy of e-mail is reproduced below:60
Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 61 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 4.8 Mutuality of Interest and Related Person Appellants for the reason of the fact that both VWIPL and VWGSIPL are subsidiary companies of M/s Volkswagen AG, Germany are interconnected undertaking do not dispute that they are covered by the definition of related person as per Section 4 (3) (i) of the Central Excise Act, 1944. Following are the undisputed facts as accepted by the appellant (page 4 of 62 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 written submissions filed by the Appellant Counsel):
i. M/s. Volkswagen AG, Germany ("VWAG") is 100% shareholder (holding company/parent) of both the Appellant and VWGSIPL;
ii. By virtue of the Appellant and VWGSIPL being subsidiaries of VWAG, the Appellant and VWGSIPL are interconnected undertakings as defined in Section 4(3)(b)(i) read with Explanation thereto defining interconnected "undertakings";
iii. The Appellant does not hold share in VWGSIPL (buyer), and likewise, VWGSIPL does not hold any share in the Appellant;
iv. The Appellant and VWGSIPL are governed by independent Board of Directors;
v. The Appellant manufactures Polo and Vento Cars, which are sold in India only to VWGSIPL;
vi. The Appellant also manufactures to other cars, viz., Rapid and Fabia which at the relevant time, pre-merger, were sold to the then existing Skoda Auto India Pvt. Ltd.;
vii. There is no dispute with regard to the price at which the Appellant sold the two cars Rapid and Fabia to Skoda Auto India Pvt. Ltd.;
viii. VWGSIPL is a marketing company, which distributed and sold not only Polo and Vento, but also other brands (various models of Audi, Skoda, Lamorghini and Porche) of the Volkswagen Group, some of which were imported as completely built cars by VWGSIPL and also purchased from other manufacturers such as erstwhile Skoda Auto India cars like Jetta, Passat, Audi A6, Audi A8 etc., which had nothing to do with the Appellant;
ix. VWGSIPL conducted market research, and promoted and marketed Volkswagen brand of cars and its business extended to various other brands of Volkswagen Group, 63 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 over and beyond Polo and Vento manufactured by the Appellant x. VWGSIPL received reimbursement of part of the marketing and sales promotion expenses of the Volkswagen brand from VWAG, for all the brands marketed in India, including Polo and Vento;
xi. That the margin given to VWGSIPL for sale to dealers, during the relevant period was in the range of 5.5% -6% only.
4.9 In view of above admission, appellants submit that the value in their case cannot be determined under Section 4 (1) (a) of the Central Excise Act, 1944, and thus has to be determined in the manner as prescribed, as per Section 4 (1) (b), ibid. For that purpose, they refer to Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000. For the reason that they are related person, being interconnected undertakings, rule 9 of the said Rules will not be applicable to them and in their case the assessable value needs to be determined in terms of Rule 10, ibid. They submit that from the wordings of the rule 10 (a) it is quite evident, that for the said rule to be applicable, they should apart from being interconnected undertakings should also be related as per any of the three sub clauses (ii), (iii) or (iv) of Section 4(3)(b) of the Central Excise Act, 1944. Sub clauses (ii) and (iii) are not applicable in their case, the only remaining clause that needs to be examined then is whether they and M/s VWGSIPL are so related that they can be said to have interest directly or indirectly in business of each other. Relying on the various decisions they argue that there is no mutuality of interest in business of each other, and hence the value in their case needs to be determined as per Rule 10 (b), ibid, as per which the value shall be the transaction value as per section 4(1)(a). They have accordingly at the time of clearance of the motor vehicles, determined the value under Section 4 (1) (a), by adopting the retail minus model, and paid the duty accordingly.
4.10 In the case under consideration, undisputedly, Appellant 64 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 and VWGSIPL are subsidiaries of M/s VWAG, Germany. Appellant is engaged in the manufacture and production of the cars of models Polo and Vento, as per the designs and specifications of M/s VWAG, Germany, and sell them in the territory of India to only and only M/s VWGSIPL, a marketing subsidiary of M/s VWAG. Any operating loss suffered by the appellant i.e. VWIPL is made good by the M/s VWAG, Germany. As per the submissions made by the appellant counsel at the time of hearing and in written submissions we note that appellant was suffering losses that were made good by M/s VWAG Germany. The data as made available by the appellant counsel in his written submissions at page 7 & 8 shows as follows:-
2010-11 2011-12 2012-13 2013-14 2014-15
Installed Normal Capacity 2,00,000 2,00,000 2,00,000 2,00,000
Nos
Total Production 62,025 1,07,515 94,131 99,583
Capacity Utilization (%) 41 54 47 50
Market Share (%) 1.37 3.11 2.42 2.37 1.68
Assessable Value - Polo 3,82,168 3,51,975 4,23,880 4,37,813 4,59,985
Assessable Value - Vento 5,16,879 5,53,292 5,69,143 5,61,998 5,77,118
Unabsorbed Overheads 510.4 426.5 582.91 608.45
INR
Unabsorbed Overheads 64.92 39.96 46.84 50.58
%
Profit after Tax 'Rs 332.2* 76.7* 420.7
Crores
*The Profits shown are after taking into account the Financial Assistance Received from M/s VWAG Germany, otherwise there was loss.
4.11 In para 73.2 of impugned order various agreements between the M/s VWIPL, M/s VWGSIPL & M/s VWAG, Germany has been discussed and following observed:
"73.1 To ascertain the true nature of the relationship between the parties, I find it appropriate to examine and discuss the arrangement of transactions and agreements between the group companies, Memorandum of Association under Companies 65 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 Act, 1956 and other documents / information ascertained during the investigation which is as under:
73.2 I find that there exists a Memorandum of Association and Articles of Association of VWGSIPL dated. 07.03.2007 under the Companies Act, 1956, and Memorandum of Association under Companies Act in respect of VWIPL. I also find that various agreements have been made between M/s. VWAG, M/s. VWIPL and M/s. VWGSIPL for their transactions and functioning with reference to production, marketing and sale of subject contractual cars which are enlisted below:
i. Marketing Assistance Agreement dated 18.05.2007 between M/s. VWAG and M/s. VWGSIPL.
ii. Financial Assistance Agreement dated 07.07.2008 between M/s. VWAG and M/s. VWGSIPL.
iii. Disbursing Agent Agreement dated 16.07.2008 (w.e.f 15.04.2007) between M/s. VWIPL and M/s. VWAG.
iv. Purchase Function Service Agreement dated 15.10.2008 between M/s. VWIPL and M/.s VWGSIPL.
v. Supply Agreement dated 14.03.2011 (w.e.f January-2010) between M/s. VWAG and M/s. VWIPL.
vi. Service and Distribution Agreement dated 09.03.2009 between M/s. VWIPL and M/s. VWGSIPL.
vii. Licensing Agreement dated 14.03.2011 between M/s.
VWIPL and M/s. VWAG.
viii. Service Level Agreement dated 01.10.2009 between M/s.
VWIPL and M/s. VWGSIPL.
73.3 From these documents, I find that:
(i) As per the Memorandum of Association, M/s VWIPL was established for the manufacture of automobiles and undertake various sales promotion & marketing activities for sale of automobiles manufactured by them. The objective listed out for marketing is either to establish its own shops, agencies or marketing organizations or to appoint, selling or buying agents or distributors or both (whether individuals, firms or bodies corporate) in any place in or outside India.
(ii) As per the Memorandum of Association and Articles of 66 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 Association of VWGSIPL dated. 07.03.2007 under the Companies Act, 1956, M/s VWGSIPL does brand building support, advertisement, tactical support, dealers target based incentives for VW brand cars manufactured by M/s VWIPL.
(iii) From the aforementioned agreements, it is clear that M/s VWIPL have appointed M/s VWGSIPL as their sole selling agent (SSA) and the cars so manufactured by M/s VWIPL are exclusively sold through the said SSA;
(iv) As per two agreements made between M/s VWAG and M/s VWGSIPL viz., i) Financial Assistance Agreement - 07.07.2008 and ii) Marketing Assistance Agreement - 18.05.07, the reimbursements are made to the latter by former against the marketing and promotional expenses incurred by M/s VWGSIPL in connection with brand building campaigns of Vw brand in India towards a portion of the cost of advertising and promotional activities relating to sales of VW products in India.
(v) Further, Service & Distribution Agreement dated 09.03.2009 between VWIPL & VWGSIPL relates to terms of the agreement for sale of vehicles and parts and components of vehicles of VW brands (contractual vehicles) to be assembled and / or manufactured by M/s VWIPL. The service and distribution agreement clearly specified that M/s VWIPL shall sell the vehicles of VW brands to dealers only through M/s VWGSIPL.
Article 1.1 states that M/S VWGSIPL shall order from time to time during the duration of this agreement contractual vehicles (i.e. Polo and Vento Variant of Cars) from M/s VWIPL. Further M/s VWGSIPL shall buy the entire production of VW vehicles from M/s VWIPL. As per Service & Distribution Agreement between VWIPL & VWGSIPL dated 09.03.2009, VWGSIPL shall order from time to time VW vehicles manufactured by VWIPL and would buy entire lot of vehicles. The terms of sale of vehicles by M/s VWIPL to M/S VWGSIPL are governed by service and distribution agreement dated 09.03.2009 and pricing terms are provided under Clause 3 of Schedule 1 of this agreement. According to it, the price for contractual vehicles at which it will be purchased by VWGSIPL from VWIPL would be agreed upon by 67 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 both the parties.
(vi) from the aforementioned agreements, it comes out that M/s VWIPL have appointed M/s VWGSIPL as their sole selling agent (SSA) and the cars so manufactured by M/s VWIPL are exclusively sold through the said SSA; that reimbursements are made as per two agreements made between M/s VWAG and M/s VWGSIPL viz. i) Financial Assistance Agreement - 07.07.2008 and ii) Marketing Assistance Agreement - 18.05.2007.
(vii) Further, Service & Distribution Agreement dated 09.03.2009 between VWIPL & VWGSIPL relates to terms of the agreement for sale of vehicles and parts and components of vehicles of VW brands (contractual vehicles) to be assembled and / or manufactured by M/s VWIPL. The service and distribution agreement clearly specified that M/s VWIPL shall sell the vehicles of VW brands to dealers only through M/s VWGSIPL. Article 1.1 states that M/s VWGSIPL shall order from time to time during the duration of this agreement contractual vehicles (i.e. Polo and Vento Variant of Cars) from M/s VWIPL. Further M/s VWGSIPL shall buy the entire production of VW vehicles from M/S VWIPL. The terms of sale of vehicles by M/s VWIPL to M/s VWGSIPL are governed by service and distribution agreement dated 09.03.2009 and pricing terms are provided under Clause 3 of Schedule 1 of this agreement. According to it, the price for contractual vehicles at which it will be purchased by VWGSIPL from VWIPL would be agreed upon by both the parties.
(viii) Supply Agreement dated 14.03.2011 (w.e.f. January 2010) between VW AG. & VWIPL shows that the said agreement between M/s VWIPL and M/s VW AG is for an unlimited period and it specifically relates to VW250 (Polo-HB) and VW251 NB (Polo- NB/Vento); that VWIPL has know how in manufacture of automobiles and would import parts for manufacture & sale of VW brand of contractual vehicles i.e., VW 250 (POLO HB) VB- 251 NB (POLO NB); that VWIPL, as directed/agreed/instructed by VWAG to sell the entire products manufactured to VWGSIPL; that VWAG will assign the vehicle identification numbers on vehicles manufactured by VWIPL; that VWAG had made VWIPL 68 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 agreed that contractual cars would be in accordance with the quality standards of VWAG and only VWAG is entitled to decide SOP, and operation assembly of new vehicles except in exceptional cases. The said Agreement provides inter-alia for a "PPA", defining it as "Production Planning Committee - working group which works under the leadership of VWAG in collaboration with VW INDIA and representatives of production, sales, finance, product management, procurement and personnel from Parties. The responsibility of the PPA is to decide the production schedule, capacity adjustments, capacity releases and to define restrictions." This agreement clearly shows that entire production, sale and all related functions of Polo & Vento are fully controlled by VW AG and VWIPL has to follow the same for manufacture and sale thereof. As per Service & Distribution Agreement dated 16.07.2008 and supply agreement dated 14.03.2011 with VW AG, VWIPL agreed to manufacture VW brand (POLO, Vento) cars (contractual vehicles as per contract/ agreement). VWIPL would import parts from VWAG for this purpose. Since VWAG already had an agreement with VWGSIPL which would trade VW brand cars in India, it made VWIPL agree to sell all cars to VWGSIPL so that the latter would distribute them in the territory of India, through a dealer's network. M/s VWIPL sells the goods to VWGSIPL following a valuation of goods under Section 4(1) (a) of the Act. VWGSIPL then clears/ sells the goods to dealers at a different price higher than the sale value of VWIPL.
73.4 It was also stated in the SCN that the VW brand cars manufactured by VWIPL are kept in an earmarked premises within their plant after sale to VWGSIPL. The sale of fully manufactured vehicles to VWGSIPL is after CP.8 (Check Point 8), a defined area of control. CP.8 is discussed in the Service & Distribution Agreement between VWIPL & VWGSIPL. Once the cars are sent after CP.8, the invoices are issued by VWIPL in the name of VWGSIPL; that thereafter, an invoice by VWGSIPL is generated in the premises of VWIPL for sale to dealer and VWGSIPL acknowledges the receipt of the car under Deliver Acknowledgement Note. This position was not refuted by the 69 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 assessee. This indicates a commonality of interest in marketing the cars of VW brand and the distinction in functionality between VWIPL & VWGSIPL has been created artificially, only with the intention to reduce the sale price of VWIPL, which has bearing on the amount of Central Excise Duty.
73.5 So far as the above facts/agreements are concerned, I find that the holding company, M/s. VWAG has a very deciding role in entire business structure in respect of manufacture and sale of contractual vehicles (Polo and Vento Variants of cars). It clearly emerges that M/s. VWAG has got an interest in the business of its subsidiary companies, M/s. VWIPL and M/s. VWGSIPL. I also find that these agreements are more of the nature of arrangements of routing the sale of the VW cars manufactured by M/s. VWIPL through M/s. VWGSIPL only. The reason for my said observations is based on the fact that VWAG has entered into an agreement with VWIPL for manufacturing cars and VWGSIPL is the sole distributor of VW vehicles in India, as per independent agreements between VWAG & VWIPL and VWIPL & VWGSIPL. In such a scenario, VWGSIPL would automatically buy all the VW cars manufactured by VWIPL.
74.1 I further find that, M/s. VWGSIPL has raised debit notes on M/s. VWAG for reimbursement of the expenses towards marketing, brand building and other sales related activities of Volkswagen cars manufactured by M/s. VWIPL, as per the Marketing Assistance Agreement and Financial Assistance Agreement, between M/s. VWGSIPL and M/s. VWAG. The said fact has been acknowledged by Company officials in their statements records under Section 14 of the Central Excise Act, 1944 during investigation. The same are reproduced herein below:
i. Shri Date, company official of VWGSIPL deposed in his statement dated 19.06.2013 that debit notes relates to reimbursement of expenses towards marketing, brand building and other sales related activities of cars manufactured by M/s VWIPL.
ii. Shri Puneet Sabharwal, CGM of VWIPL & Authorised 70 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 Signatory of VWGSIPL deposed in his statement dated 19.01.2015 that all expenses towards marketing, advertising and sales promotion of contractual vehicles are incurred by VWGSIPL, though there is no agreement between VWIPL & VWGSIPL. On being asked, Sri Sabharwal deposed that VWIPL is not incurring any expenses towards advertising, marketing and sales promotion of Polo & Vento, as VWIPL is entrusted by VWAG only to manufacture contractual vehicles.
iii. In his Statement dated 02.02.2015, Mr. Michael Rabenstein, Heat Financial Controlling of VWGSIPL stated that factory support means overall support by VWAG to VWGSIPL against sale of Polo & Vento; that they have VWAG as global manufacturer with production facilities like VWIPL in India. He stated that factory support & manufacturer support means support from VWAG towards manufacture and sale of Polo & Vento cars.
74.2 From the above, it clearly emerges that M/s. VWAG has borne part of the expenditure on account of advertisement etc. incurred by VWGSIPL. M/s. VWAG also arranged that all the VW brand cars manufactured by M/s. VWIPL are sold through M/s. VWGSIPL. Since VWAG's sole aim is to sell cars in India, both the subsidiaries help and work in unison to achieve the objective of sale of VW brand cars. This shows a mutuality of interest in the business of each other viz, between VWIPL & VWGSIPL and vice versa, which is nothing but the sole aim of selling the VW brand cars in Indian market. When both VWIPL and VWGSIPL, the fellow subsidiaries of VWAG has got the objective of materializing the sale of VW brand cars in Indian market by way of VWIPL manufacturing them and VWGSIPL distributing them, the mutuality of interest in the business of each other is quite apparent.
75.1 One more aspect that leads to mutuality of interest, is the procedure or system adopted in pricing of the subject contractual cars. I have gone through the allegations made in the SCN on the aspect of pricing and assessee's contention in this regard. In this regard, I find from the Schedule 1 of the 71 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 Service and Distribution Agreement dated 09.03.2009 (between M/s. VWGSIPL and M/s. VWIPL), wherein it is stipulated that M/s. VWGSIPL & M/s. VWIPL shall prepare the Planning Rounds for the supplies/deliveries of the contractual vehicles. Further M/s. VWAG in its Supply Agreement with VWIPL dated 14.03.2011 while stating that the entire sale of VW brand cars would be through VWGSIPL., also stipulated that there would be a Planning Round between VWAG & VWIPL for supply and delivery of contractual parts for production. I find it worth mentioning here that the provision of planning round, as mentioned in the Service and Distribution Agreement dated 09.03.2009 is very peculiar in the manner in which it provides a deciding role to M/s. VWAG in the agreement that is actually between M/s. VWIPL and M/s. VWGSIPL. It is already explained above that M/s. VWAG has a controlling and deciding role in production and pricing of contractual vehicles (Polo and Vento Variants). Further, if all the agreements and other documents related to production and price planning are read together it shows that entire arrangements have been designed in such way that whole business structure from production to sale and pricing of the vehicles remains in control of M/s. VWAG and both the parties to these agreements, viz. VWIPL and VWGSIPL do not have any say in this matter.
75.2 Further, I also find that the price fixed for each car is arrived on the basis of "Retail Minus" model. This fact has been acknowledged by Shri Puneet Sabharwal, Chief General Manager
- Indirect Taxation of M/s VWIPL & M/s VWGSIPL, in his statement dated 19.01.2015, recorded under Section 14 of the Central Excise Act, 1944, wherein he has stated that they arrived at the retail price at which Polo & Vento would be sold to the customers by VWGSIPL, after doing competitor analysis, dealer's price. The prices of VWGSIPL/National Sales Company (NSC) were arrived at after doing backward calculation from which they arrived at the ex-factory price and then the assessable value of VWIPL. Further, on being asked, Shri Sabharwal admitted that VWGSIPL does the market research/analysis of the competition on the basis of which they 72 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 decide the price point at which Polo/Vento should enter the market."
4.12 All the above facts as recorded in impugned order on the basis of the various agreements clearly point to one fact that the issue for consideration is not one of relationship between the buyer and seller simplicitor, because the two Indian subsidiaries are mere puppets in the hand of M/s VWAG, Germany who is authority to determine and take decisions in relation to production and sale of the vehicles of Volkswagen Brand namely Polo and Vento in Indian territory. In fact German unit by rendering financial assistance to both the Indian subsidiaries make them financially viable for their operation. In none of the cases relied upon by the Appellants during the course of arguments on appeal have such an arrangement been considered. In our opinion, in the present case if corporate veil is pierced then we find that the entire operations of manufacture and sale of these vehicle was throughout on account of M/s VWAG, Germany. In the impugned order Commissioner has distinguished the order relied upon by the appellants stating as follows:
"80.1 As regards M/s. VWIPL's contention that M/s. VWAG role does not indicate any mutuality of interest between the companies, I find that as already brought in my discussions above that all the agreements between M/s. VWAG, M/s. VWGSIPL and M/s. VWIPL have been arranged in this manner so that M/s. VWAG has an absolute control over manufacturing, production, sale and pricing pattern of the vehicles to maximize the benefit of the Volkswagen Group by avoiding Central Excise duty in the sale routed through M/s. VWGSIPL. The Planning Round itself shows that the entire price structure is artificially designed by adopting retail minus' model, as also the Service and Distribution Agreement dated 09.03.2009, which was executed between M/s. VWIPL and M/s. VWGSIPL, but M/s. VWAG has arranged and kept the deciding role to itself only. The detailed investigation of DGCEI has also revealed the amplitude of the role of M/s. VWAG in the entire set up and pricing policy. The entire set up and arrangement of transactions among these 73 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 companies, as summarized below, gives a clear picture of mutuality of interest in the business of each other:
i. VWAG is parent holding company and VWIPL and VWGSIPL are fellow subsidiary companies of VWAG. ii. VWAG had the major shareholding in both the fellow subsidiary companies iii. VWAG provided technical and licensing support to VWIPL for manufacture of subject cars as per contract. However, no license fee is payable by VWIPL if result (profit) is Zero or less than Zero.
iv. VWIPL was set up for manufacture and marketing of cars and VWAG supplied the raw material / components for manufacture of subject cars.
v. However, the marketing of subject cars i.e. Polo and Vento variants of VW Brand Cars was assigned to VWGSIPL which was set up for distribution and marketing of VW Brand cars.
vi. It was arranged that VWGSIPL was assigned the job of Sole Selling Agent (SSA) of VWIPL was to be sold to VWGSIPL, who further sold to the their dealers for further sale in retail market as per agreements at the instance of VWAG. In fact, practically the VW brand cars manufactured by VWIPL are kept in earmarked premises within their plant after sale to VWGSIPL and thereafter, an invoice by VWGSIPL is generated in the premises of VWIPL for sale to dealer and VWGSIPL acknowledges the receipt of the car under Deliver Acknowledgement Note.
vii. VWGSIPL had to bear marketing and promotional expenses for subject cars and a portion of such expenses were reimbursed by VWAG.
viii. VWAG also extended financial assistance to VWIPL against the losses incurred by VWIPL or infused the money through share holding to increase net worth of VWIPL. ix. VWAG also waived the payments against raw material / components supplied to VWIPL on certain occasions. x. VWAG had a controlling role in production planning of subject cars and also in pricing pattern.74
Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 xi. The marketing and product promotional expenses are put in the segment of VWGSIPL instead of in the segment of VWIPL which reduced the duty component leading to lower prices of subject cars and make them more competitive in retail market.
xii. VWAG had a decisive role in fixation of prices at every segment level, in Retail minus method. In other words, the price of subject cars were not fixed as per globally accepted principles i.e. cost. constructive method. xiii. The most important aspect of the agreements is that the all these companies had a common goal of evading the legitimate taxes due to the Govt. Exchequer, by artificially lowering the prices at the stage of payment of taxes and inflating the prices subsequently at the marketing level, in order to garner maximum profit on the sale of subject cars.
xiv. All these facts clearly establishes that any benefit from subject cars, directly or indirectly, benefits all of them, which undoubtedly shows the existence of mutuality of interest in the business of each other i.e. between VWIPL and VWGSIPL.
80.2 As it emerges from the above discussions, the ultimate aim and objective of VW AG is to sell VW brand cars in Indian market & both its subsidiaries have played an effective role in accepting the price structure as dictated in the Planning Rounds and working in connivance to enable the parent company in achieving its goal in the business. Therefore it is apparent that both the subsidiaries i.e. VWIPL & VWGSIPL have got an interest in the business of each other as they have a common interest in selling VW cars in India, by way of VWIPL manufacturing them and VWGSIPL distributing them. Hence, in view of overall scenario discussed above, it is very much clear that M/s. VWIPL and M/s. VWGSIPL are so associated that they have Interest, directly or indirectly, in the business of each other. Therefore, it is established beyond doubt that M/s. VWIPL and M/s. VWGSIPL are also related in terms clause (i) and (iv) of Section 4(3)(b) of the Central Excise Act, 1944, 75 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 80.3 In view of the above, I find that entire arrangement was designed in such manner by M/s. VWAG, through their subsidiaries M/s. VWGSIPL and M/s. VWIPL, so as to avoid payment of excise duty by undervaluing the VW Cars (Polo and Vento Variants) by not loading advertisement, sales promotion and marketing expenses incurred by M/s. VWGSIPL. Further, methodology of pricing the vehicles also shows the prices have been artificially lowered for sale of vehicles from M/s. VWIPL to M/s. VWGSIPL and the noticees have tried to veil their modus operandi under the name of genuine commercial consideration.
In view of the entire discussions above, the transactions of noticees cannot be said to be based upon genuine commercial consideration, in the facts and circumstances of the case. Therefore, the sale of the contractual vehicle (VW brand of cars - Polo & Vento) by M/s. VWIPL to M/s. VWGSIPL, is not at arm's length and not on principal to principal basis. Therefore, the price at which the goods are sold is not the sole consideration for sale.
81.1 Now coming to M/s. VWIPL's contention that all advertisement, sales promotion and marketing expenses are not attributable to sales of Volkswagen Cars. In this regard, I find that the issue involved in this case pertains to valuation of Volkswagen Cars (Polo and Vento Variants). Further, as discussed supra, the entire production of contractual vehicles - Polo & Vento are sold to VWGSIPL by VWIPL and complete marketing support in the form of sales promotion, brand awareness / brand building, tactical support, advertising and allied activities for sales of said contractual vehicles is carried out by VWGSIPL. There are agreements (Marketing Assistance Agreement and Financial Assistance Agreement) between VW AG & holding company with VWGSIPL for this purpose. Further the company officials in their Statements recorded under Section 14 of the Central Excise Act, 1944 have accepted the facts that M/s. VWGSIPL is reimbursed for expenses towards marketing, brand building and other sales related activities of cars manufactured by M/s. VWIPL. The same has been discussed herein above.
81.2 In this context, it has been discussed earlier that there is a 76 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 system of Planning Round for determination of price of cars to be sold by VWIPL to VWGSIPL, who sells to and dealers to ultimate customers. The prices fixed for each car is arrived on the basis of "Retail Minus" model. Such price planning is given to all the subsidiaries and accordingly the sale and purchase is affected. Individually any subsidiary has got a little say over the pricing as the whole pricing structure is driven by the price at which the cars will be sold in the market. While fixing of price for VWIPL for the cars to be sold by it to VWGSIPL, the expenditure on account of several heads including promotional expenses were kept out of assessable value for computation of duty as a portion of promotional expenses were borne by VW AG who has got an interest in the sale of the cars in the market.
81.3 As established above, in the instant case, price at which contractual vehicles were sold by VWIPL to VWGSIPL was not the sole consideration for sale as expenses on account of sales promotion and advertising were borne by M/s VWGSIPL, portion of which was reimbursed by VW AG. As per the legal position, transaction value shall include the receipts/recoveries or charges, incurred or provided for in connection with the manufacturing, marketing, selling of the excisable goods viz. (a) Advertising or publicity; (b) Marketing and selling organization expenses; (c) Storage; (d) Outward handling; (e) Servicing, warranty; Commission or (g) any other matter.
81.4 The above list is not exhaustive and whatever elements which enrich the value of the goods before their marketing are includible in "value" as per provisions of Section 4. On perusal of the retail minus price structure, VWGSIPL in addition to sales promotion, also includes certain components like transport cost, handling charges, warranty, NSC net margin, while arriving the price at which the goods are to be sold to the dealers.
81.5 Sale price to the dealers by VWGSIPL has been arrived by deciding at what price the goods to be sold to the dealers keeping in view of what should be the dealer's margin and what should be the retail price. Similarly the expenditures/elements on account of the components like advertisement/ Sales 77 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 promotion, warranty, warehousing/ handling charges were/ are kept with VWGSIPL, which otherwise should have been a part of the value of sale of the goods by manufacturer. It is needless to say that such arrangement leads to reduction in assessable value and corresponding central excise duty component which is charged on ad valorem basis, in order to keep the prices of the cars low and thereby penetrate Indian market which is the common aim and interest of all the group companies in this case.
81.6 It is fact that an intermediary subsidiary company has been created in the name of VWGSIPL/NSC and VWIPL had agreed to sell entire goods to VWGSIPL, who does all the promotional activities as per agreement with VW AG, though VWIPL are the manufacturers of the cars. In an ideal situation, it is the responsibility of manufacturer to undertake promotion of its manufactured products. But here the scenario is different. As VWAG is the brand owner, it has created/formulated a system in such a way that one subsidiary (VWIPL) would manufacture the car and the other subsidiary would buy the entire lot from manufacturer and then sell in the market through dealers. The subsidiary i.e. VWGSIPL would undertake sales promotion and being ultimate brand owner, VW AG would bear a part of the expenses incurred by VWGSIPL. These marketing and promotional expenses were not included while arriving the price of sale from VWIPL. But such components are liable to be included in the value in terms of transaction value as defined under Section 4 (3) (d) of the Act. Hence, such an arrangement was mainly to evade the central excise duty, by manipulating and suppressing correct commercial values on these transactions. As such, it is a deliberate move with the sole objective of reducing the sale value of cars and thereby evading the duty, to keep the car prices at low in the market.
81.7 Since the brand owners are VWAG and have got interest in selling the cars, all the expenses like promotional expenses incurred which ultimately enriched the prospects of sale of the excisable goods should be a part of the assessable value for the purpose of levy of Central Excise duty. The logic will not be 78 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 defeated, even if such expenses are incurred by a subsidiary company VWGSIPL as the ultimate aim is to effectively sell the manufactured products (cars). If seen from a proper perspective, it may be appreciated that the amount reimbursed by VW AG for brand building is for the benefit of VWIPL who is the manufacturer of cars. Further such a creation of subsidiary separately for manufacturing (VWIPL). & distribution (V entrusting VWGSIPL the sale promotion work, ultimately limiting the sale price for excise purpose from VWIPL to VWGSIPL is an artificial way of determination of price. As established above that the sale to VWGSIPL is not at arm's length and not on principal to principal basis as both the fellow subsidiaries are having the common aim to manufacture and distribute the VW AG brand (VW) cars in India. In the instant case, price at which contractual vehicles were sold by VWIPL to VWGSIPL was not the sole consideration for sale as expenses on account of sales promotion and advertising were borne by M/s VWGSIPL, portion of which was reimbursed by VW AG.
81.8 In this regard, the definition of transaction value, as prescribed under Section 4 (3)(d) of the Central Excise Act, 1944, comprehends as to what are the components Which should not be ignored while computing the assessable value:
(d) "transaction value" ........
81.9 Hence, it is clear from the above that the price at which M/s. VWIPL are selling the vehicles to M/s. VWGSIPL, cannot be accepted as transaction value and the same is not sole consideration and the transaction is not at arm's length. Therefore, the value at which M/s. VWIPL have paid the Central Excise duty for sale to M/s. VWGSIPL, cannot be treated as true and proper transaction value, as it does not include the expenses incurred by M/s. VWGSIPL relating to sale of subject contractual VW Cars (Polo and Vento Variants) manufactured by M/s. VWIPL. Thus all the above expenses incurred by VWGSIPL for promotion of VW brand cars should form a part of assessable value. Accordingly, I find that the method of arriving at the transaction value, as adopted by M/s. VWIPL, is not correct.
79Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 82.1 Now coming to the examination of valuation method adopted by M/s. VWIPL, I find that M/s. VWIPL in their reply have claimed that the transaction value adopted by them is as per mandate of Central Excise Act as well as Valuation Rules, M/s VWIPL sells its entire production viz., contractual vehicles of VW brand - Polo & Vento cars to M/s VWGSIPL. However, M/s. VWIPL has paid duty under section 4(1) (a) of the Central Excise Act, 1944, to which they have resorted to in reverse method:
first they claim themselves as related being interconnected undertakings, and came out of the purview of Section 4(1) (a) of the Act; and then followed Section 4(1)(b) of the Act read with Rule 10 & 9 of the Valuation Rules; but as they claimed having no mutuality of interest in the business of each other, they treated themselves as unrelated and reverted to Section 4(1)(a) via Rule 10(b) of the Valuation Rules.
82.2 In this regard, I find that M/s. VWIPL, for the purpose of Central Excise duty, the practice of presenting themselves and M/s. VWGSIPL as independent parties having no interest in the business of each other. They have tried to legalize their transactions, by covering the same under Section 4(1)(a) of the Central Excise Act, 1944, read with Rule 10(b) of the Valuation Rules, 2000. However, it is clearly brought out in my findings above, that M/s. VWIPL and M/s. VWGSIPL are related under the provisions of Section 4(3)(b) of the Central Excise Act, 1944 being the inter-connected undertakings, which is an undisputed fact and also they are so associated that they have interest directly or indirectly in the business of each other, as provided under clause (iv) of Section 4(3)(b)(i) of the Central Excise Act, 1944. Further, it is also established that price is not the sole consideration and transaction between M/s. VWIPL and M/s.
VWGSIPL is not at arm's length. The entire set up has been designed or arranged in such a manner that M/s. VWIPL has to pay lesser excise duty on such artificially reduced value for sale of all the contractual vehicles (Polo and Vento Variants) to M/s. VWGSIPL, who in turn sells the said vehicles at higher value by adding various expenses incurred by them in relation to the marketing and sale of the vehicles, which are reimbursed by 80 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 M/s. VWAG. Now, I find it reasonable and apt to examine the method of valuation, as per the statutory provisions, laid down in the Act.
82.3. As per Section 4 (1) (a) of the Act, "in a case where the goods are sold by the assessee, for delivery at the time and place of the removal, the assessee and the buyer of the goods are not related and the price is the sole consideration for the sale, be the transaction value. Since M/s VWIPL and M/s VWGSIPL are related persons, in terms of the provisions of Section 4(3)(b) of the Act and also the price is not the sole consideration for sale, provisions of Section 4(1)(a) are not applicable and therefore, provisions of Section 4(1)(b) will apply. These provide for valuation to be determined in such manner as may be prescribed i.e. as per Valuation Rules.
82.4 Now, Rule 9 and 10 of the Valuation Rules specifically cover cases where assessee so arranges that the excisable goods are not sold by the assessee except to or through related person. It is an admitted fact that M/s VWIPL sell their entire production of finished excisable goods viz., Polo & Vento of VW brand of Cars to M/S VWGSIPL (a related person).
82.4.1 Rule 10 of the Valuation Rule states, ........
82.4.2 Rule 9 of the Valuation Rules, 2000, reads, "....".
82.5 From the above, it is clear that only if the undertakings are also related in terms of either of sub-clause (ii) or (iii) or (iv) of clause (b) of sub-section (3) of section 4 of the Act, then only value shall be determined in the manner prescribed in rule 9 i.e. the value for the purpose of levy of duty shall be the normal transaction value at which these are sold by the related person at the time of removal, to buyers (not being related person).
82.6 In this case, as explained above, M/s. VWIPL to M/s. VWGSIPL are so associated that they have interest, directly or indirectly, in the business of each other in these transactions and therefore these undertakings are also related in terms of the sub-clause (iv) of clause (b) of sub-section (3) of section 4 of the Act (they) in as much as M/s. VWIPL and M/s. VWGSIPL has 81 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 got mutual interest in the business of each other both directly and indirectly. Though, this ground of mutuality of interest alone is sufficient for attracting the provisions of Rule 9 of the Valuation Rules, since the concept of inter-connected undertakings is put forth in the SCN and the reply thereto, I hold that in terms of provisions of Rule 10 (a) of the Valuation Rules, the provisions of Rule 9 of the Valuation Rules are also required to be applied for valuation of subject goods i.e. the price at which the related person i.e. M/s. VWGSIPL sells the goods to the dealers is to be treated as the value for the purpose of levy of Central Excise duty.
83.1 Now coming to decisions quoted by M/s. VWIPL in favour of their submission in respect of related party issue. M/s. VWIPL have mainly relied upon the decisions of UOI v Attic Industries Ltd, 1984 (17) ELT 323 (SC) and CCE, Aurangabad Vs Goodyear South Asia Tyres Put. Ltd., 2005 (322) ELT 389 (SC). Further, M/s. VWIPL have also contended that the decision of Hon'ble Supreme Court in the matter of Flash Laboratories, 2003 (151) E.L.T. 241 (S.C.), is not applicable in this case. In this regard, I find that in the Flash Laboratories case, Hon'ble Supreme Court has discussed the decision of Attic Industries and Bombay Tyre International and held that "Relationship between the appellant and PBL, though indirect, they have mutuality of interest in the business of each other - Appellant and PBL to be treated as related person..." Further, it is also observed that in the case of Flash Laboratories, both Flash Laboratories and Parle Biscuits Limited are subsidiary companies of M/s Parle Products Limited and 40% of the products of Flash Laboratories are sold to Parle Biscuits Ltd. In the instant case, both M/s. VWIPL & M/s. VWGSIPL are subsidiaries of M/s. VWAG who is the holding company and 100% of the products manufactured by M/s. VWIPL are sold through M/s. VWGSIPL only. In view of the above, the decision of Hon'ble Supreme Court in Flash Laboratories is squarely applicable in this case.
83.2 Now coming to the other decision viz. CCE, Aurangabad Vs Goodyear South Asia Tyres Put. Ltd., 2015 (322) ELT 389 (SC), which is heavily relied upon by M/s. VWIPL. On going through 82 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 the said decision, I find that the original company was RPG CEAT which was subsequently taken over by M/s. Goodyear. Also, 70% of their production was cleared to third parties i.e. unrelated parties, and that too at rates lesser than that sold to Goodyear. In the said judgement, Hon'ble Supreme Court has also relied upon its own decision in the case of 'Commissioner of Central Excise, Hyderabad v. M/s. Detergents India Limited and Another' [2015 (318) E.L.T. 559 (S.C.)] wherein it was held:
"We are of the view that the "arrangement" spoken of in the proviso must be something by which the assessee and the related person "arrange" that the goods are sold at something by which the assessee and the related person "arrange" that the goods are sold as something below the normal price, so that tax is either avoided or evaded by such arrangement. Secondly, the expression "generally" also shows that such goods must predominantly be sold by the assessee to or through the related person - in mathematical terms, sales that are to or through a related person must consist of at least 50% of the goods that are manufactured and sold. The expression "to or through a related person" again goes back to the "arrangement" and is another way of saying that such sale can be effected directly to or indirectly through such related person. It is only when all three considerations are cumulatively met that proviso (iii) can be said to be attracted."
On the basis of the said decision, the Hon'ble Supreme Court in the case of M/s. Goodyear (supra) has held that the assessee and its owners are not related.
83.3 On comparing the facts and circumstances of this case, I find that the ratio of Hon'ble Supreme Court decision in the case of M/s. Goodyear is not applicable in this case as the facts are entirely different. Here, in the instant case, it is established the transaction have been arranged in such a manner that all the contractual vehicles (Polo and Vento Variants) are sold only through M/s. VWGSIPL and the prices were artificially reduced by adopting 'Retail Minus model' and other fundings. The goods were cleared by the manufacturer, M/s VWIPL at much lesser 83 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 rates to M/s. VWGSIPL, than that cleared by M/s. VWGSIPL to their dealers. Further, the issue involved in this case is only is respect of VW cars (Polo and Vento Variants) manufactured by Y/s. VWIPL and sold exclusively to M/s. VWGSIPL for further sale. Moreover, the agreements contract between them specifies that the entire produce of VW brand cars by the assessee is to be sold to M/s. VWGSIPL. Hence, there is 100% sale of these vehicles to M/s. VWGSIPL by M/s. VWIPL. Though, it is irrelevant in the light of above established fact of mutuality of interest between related parties, even if the assessee's contention that they are also engaged in the production and selling of "Skoda cars", is considered for argument sake, the production and sale of 'Skoda Cars' is on different parameters and contracts, and the domestic sale of Polo and Vento variants to M/S. VWGSIPL is more than 78% percent of the total sale of cars (including Skoda cars) by M/s. VWIPL during the period from FY 2009-10 to FY 2013-14. This fact is based on the data provided by M/s. VWIPL in Para 'G.4' of their reply. The total number of vehicles including 'Skoda Cars' sold during the period from FY 2009-10 to FY 2013- 14 - is 370129 whereas total Polo and Vento Variants of VW Cars sold to M/s. VWGSIPL is 290139. Hence, percentage of Polo and Vento Variants Cars sold exclusively to M/s. VWGSIPL is 78.38%. In the FY 2014-15, as submitted by M/s. VWIPL at 'Para G.7 of their reply to the SCN, that 65% of the total production was sold through VWGSIPL.
83.4 In this regard, I rely upon the ratio of related party's criterion, decided by Hon'ble Supreme Court in the case of M/s. Detergents India Limited and Another [2015 (4) SCALE 631 = 2015 (318) E.L.T. 559 (S.C.)], as the sale through M/s. VWGSIPL is more than 50% of the overall production by M/s. VWIPL during the material period and also it is already proved that the transactions in this case have been arranged to sale the Vw cars (Polo and Vento Variants) only through M/s. VWGSIPL by M/s. VWIPL, to evade payment of Central Excise duty by not loading certain promotional / other expenses incurred and benefits /assistance extended by parent company, in the value of cars manufactured by M/s. VWIPL.
84Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 83.5 Further, I also observe from the decisions given by different courts on related party and mutuality of interest, are based on the facts and circumstances prevailed in each case. Hence, each case is required to be examined on its own merits. When we come to the definition of "related person" the legislature has used a well-known technique, It first employs the expression "means" 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 necessity for arriving at the aspect of mutuality of interest is to lift the corporate veil in order to get to the economic realities of the transaction. In the present case, what emerges from the record is that as far as M/s. VWIPL & M/S VWGSIPL are concerned, their ultimate parent company is M/s VWAG who has an abiding interest in the entire business spheres of both the fellow subsidiaries. Further, the set-up of these three companies being two fellow subsidiaries of one parent holding company' and entire arrangement of production, marketing and selling strategies, through various agreements coupled with various concessions and benefits extended to subsidiary companies by parent holding company, in respect of marketing of subject contractual cars manufactured by assessee, clearly speaks volumes of mutuality of interest among themselves, as all are working together in the interest of promotion of sale of subject cars and any benefit at any point directly or indirectly benefits all of them.
83.6 The discussion above is bound to lead to the conclusion that M/s VWIPL & M/s VWGSIPL have an interest, in the business of each other and that the mutuality of interest between the two is apparent and they are related persons." The two companies viz., M/s. VWIPL & M/s. VWGSIPL belong to the same group then the test of mutuality is established and satisfied. In a sense, the corporate veil has been lifted thereby pointing out that M/s. VWAG, M/s. VWIPL & M/s, VWGSIPL would be beneficiaries in the event of any benefit in the subject transactions. So far as the price manipulation is concerned, i.e., sale of the goods by M/s. VWIPL to M/s VWGSIPL at a depressed price, the same has been 85 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 established on record on the basis of plethora of evidence tendered and which has been discussed in detail in my above discussions. Hence, it is established that valuation under Section 4(1) (a) is not applicable in the case of the sale of goods (Polo & Vento variants of cars) by M/s. VWIPL to VWGSIPL. Therefore, the value of the goods has to be determined under Section 4(1)
(b) of the Act read with the valuation Rules. To strengthen my findings, in this regard, I would like to rely upon the recent judgment of Hon'ble Supreme Court in the case of CCE, Mumbai- V Vs 'J' Foundation, reported in 2015 (324) ELT 422 (SC), wherein the Hon'ble Supreme Court followed the decision in the case of M/s. Detergents India, supra, in respect of interpretation of related person and held that the test of mutuality of interest established and satisfied as buyer and seller belong to same Group of Companies - Corporate veil torn by pointing out that such family concerns beneficiaries in affairs of each other - Tribunal order holding buyer and seller as non-related, erroneous and set aside - Section 4 of Central Excise Act, 1944."
4.13 In our view such tri-partite arrangements would not have been envisaged by the law makers at the time of drafting of the rules. However as the business complexities multiply, the business models undergo change and it is the bounden duty of the courts and tribunal to unearth and determine the real transaction, which should be taxed. Hon'ble Justice O Chinnapa Reddy has in case of McDowell & Company Ltd., [1985 SCC (3) 230] observed as follows:
"We think that time has come for us to depart from the Westminister principle as emphatically as the British Courts have done and to dissociate ourselves from the observations of Shah, J. and similar observations made elsewhere. The evil consequences of tax avoidance are manifold. First there is substantial loss of much needed public revenue, particularly in a welfare state like ours. Next there is the serious disturbance caused to the economy of the country by the piling up of mountains of blackmoney, directly causing inflation. Then there is "the large hidden loss" to the community (as pointed out by Master Sheatcraft in 18 Modern Law Review 209) by some of the 86 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 best brains in the country being involved in the perpetual war waged between the tax-avoider and his expert team of advisers, lawyers and accountants on one side and the tax-gatherer and his perhaps not so skilful, advisers on the other side. Then again there is the 'sense of injustice and inequality which tax avoidance arouses in the breasts of those who are unwilling or unable to profit by it'. Last but not the least is the ethics (to be precise, the lack of it) of transferring the burden of tax liability to the shoulders of the guideless good citizens from those of the 'artful dodgers'. It may, indeed, be difficult for lesser mortals to attain the state of mind of Mr. Justice Holmes, who said, "Taxes are what we pay for civilized society. I like to pay taxes. With them I buy civilization." But, surely, it is high time for the judiciary in India too to part its ways from the principle of Westminister and the alluring logic of tax avoidance. We now live In a welfare state whose financial needs, if backed by the law, have to be respected and met. We must recognize that there is behind taxation laws as much moral sanction as behind any other welfare legislation and it is a pretence to say that avoidance of taxation is not unethical and that It stands on no less moral plane than honest payment of taxation. In our view, the proper way to construe a taking statute, while considering a device to avoid tax, is not to ask whether the provisions should be construed literally, or liberally, nor whether the transaction is not unreal and not prohibited by the statute, but whether the transaction is a device to avoid tax, and whether the transaction is such that the judicial process may accord its approval to it. A hint of this approach is to be found in the judgment of Desai, J. in Wood Polymer Ltd. v. Bengal Hotels Limited(1) where the learned judge refused to accord sanction to the amalgamation of companies as it would lead to avoidance of tax.
It is neither fair nor desirable to expect the legislature to intervene and take care of every device and scheme to avoid taxation. It is upto the Court to take stock to determine the nature of the new and sophisticated legal devices to avoid tax and consider whether the situation created by the devices could be related to the existing legislation with the aid of 'emerging' 87 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 techniques of interpretation as was done in Ramsay, Burma Oil and Dawson, to expose the devices."
4.14 Impact of the CAG report of 2014, on determination of Value of Polo and Vento Models of Cars cleared by the Appellant.
Appellants have also relied upon the CAG report to argue that the Ministry of Finance has itself admitted the view that though VWIPL and VWGSIPL are interconnected but the clearance made from VWIPL to VWGSIPL are not covered by Rule 10, as they are not holding and subsidiary company. We examined the concerned report of CAG and the submissions made by the appellants in accordance with the binding judicial precedences.
In the Performance Audit Report 33 of 2014, of the CAG, on page 22 after examining the facts and law on the provisions of law on the issue, in the present case, stated as follows:
"Further, rule 9 envisages that where excisable goods are sold by an assessee only to or through a person who is related in the manner specified in either of sub-clauses (ii), (iii) or (iv) of clause (b) of sub-section (3) of Section 4 of the Act, the value of the goods shall be the normal transaction value at which these are sold by the related person at the time of removal to buyers (not being related person).
In this case, we observed that the seller and buyer are inter- connected undertakings.They could also be seen to fulfil subͲclause (iv) of Section 4 (3) viz. they are so associated that they have interest, directly or indirectly, in the business of each other.Even though the two companies do not hold shares in each other, VIPL depends totally on VGSIPL for the marketing of its cars. So too, VGSIPL's marketing activities would be dependent to a significant extent, on the cars manufactured and supplied to it by VIPL (its other sources are its other Group division companies SAIPL, Audi India and Porsche India). Hence, there is a mutuality of interest and hence, the value is to be determined by applying rule 9 above.88
Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 Therefore, the value for goods realised by M/s VGSIPL on sale to its customers would be the value for the purpose of assessable value of M/s VIPL.We observed from M/s VGSIPL's balance sheets for 2011-12 and 2012-13 that disclosure of related party transactions indicated purchase of goods manufactured by M/s VIPL. Comparing the figures relating to purchase of traded motorcars by VGSIPL vis-a-vis the value considered for the ER-1 returns, we saw that there was a difference of Rs 647.71 crore which would be attributable to amounts such as warranty charges, VGSIPL margin etc.Since M/s VIPL and M/s VGSIPL are related companies, the above charges are to be included in calculating the assessable value for clearances made by M/s VIPL. Non-inclusion of the same resulted in short levy of duty of C 182.71 crore."
Thus we find that the conclusions which had been arrived at by the CAG in their audit report are identical to what we have arrived at. However after having concluded so audit has referred to the reply submitted by the Ministry on the said audit objection stating as follows:
"The Ministry replied (October 2014) that though M/s VIPL and M/s VGSIPL are interconnected undertakings, clearances by M/s VIPL would not be covered under rule 10 as M/s VIPL and M/s VGSIPL do not have a holding and subsidiary relationship. Further, DGCEI, Pune Regional Unit is already undertaking investigations in respect of the undervaluation of transaction value of vehicles manufactured by M/s VIPL in relation to sales to M/s VGSIPL, hence CERA observations are being included in the scope of DGCEI's investigations."
Appellants have submitted that it is also the view of the Ministry that in this case the transactions between VWIPL and VWGSIPL, are not covered by rule 10 as they are not the holding and subsidiary company. Hence the valuation could not be done in terms of Rule 9 by taking the sale price of the VWGSIPL, as the basis for determination of assessable value. We are not in position to accept the submissions made by the appellants, for the reason that in its reply the Ministry has not outrightly 89 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 rejected the contentions of the audit but have clearly referred to the investigations in the case of under-valuation under process. The points made by the audit have been made the part of that investigation. The opinion of the Ministry referred in the Audit Reports is not conclusive and also is not the statement of law. It is also not a binding judicial precedent. Hon'ble Supreme Court has in case of Doypack Systems Pvt Ltd [1988 (36) ELT 201 (SC)] "Internal aids of construction are definitions, exceptions, explanations, fictions, deeming provisions, headings, marginal notes, preamble, provisos, punctuations, saving clauses, non- obstante clauses etc. The notings in the files of various officials do not fall in the category of internal aids for consideration. Dictionaries, earlier acts, history of legislation, Parliamentary history, parliamentary proceedings, state of law as it existed when the Act was passed, the mischief sought to be suppressed and the remedy sought to be advanced by the Act are external aids. Documents which have been required to be produced do not, in our view fall within the category of external aids as indicated. ...........
Francis Bennion in "Statutory Interpretation 1984 Edition page 526 para 238 states that Hansard reports, and other reports of parliamentary proceedings on the Bill which became the Act in question, are of obvious relevance to its meaning. They are often of doubtful reliability however. (emphasis supplied) The documents in question which are sought for do not relate to the enacting history or any past enactment or the present enactment. The notings made in various Departments at various levels by the officers namely, the Under Secretary, Deputy Secretary, Joint Secretary; Secretary etc., whatever their view might be, is not the view of the Cabinet. The ultimate decision is taken by the Cabinet. So the notings cannot and are not guides as to what decision the Cabinet took. .........
It has to be reiterated that the object of interpretation of a statute is to discover the intention of the Parliament as expressed in the Act. The dominant purpose in construing a 90 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 statute is to ascertain the intention of the legislature as expressed in the statute, considering it as a whole and in its context. That intention, and therefore the meaning of the statute, is primarily to be sought in the words used in the statute itself, which must, if they are plain and unambiguous, be applied as they stand. In the present case, the words used represent the real intention of the Parliament as we have found not only from the clear words used ....... See in this connection the observations of Halsbury's Laws of England, 4th Edition, Volume 44, paragraph 856 at page 522 and the cases noted therein.
.........
Contemporanea Expositio, is a well-settled principle or doctrine which applies only to the construction of ambiguous language in old statutes. Reliance may be placed in this connection on Maxwell 13th Ed. page 269. It is not applicable to modern statutes. Reference may be made to G.P. Singh, Principles of Statutory Interpretation, 3rd Edn. pages 238 and 239. As noted in Maxwell on The Interpretation of Statutes, 12th Edition at page 269 that the leading modern case on contemporanea expositio is the case of Campbell College, Belfast v. Commissioner of Valuation for Northern Ireland, [1964] 1 W.L.R. 912 in which House of Lords has made it clear that the doctrine is to be applied only to the construction of ambiguous language in the very old statutes. It is therefore well to remember what Lord Watson said in Clyde Navigation Trustees v. Laird, [1983] 8 A.C. 658 that contemporanea expositio could have no application to a modern Act. We, therefore, reject the attempt on the part of the petitioners to lead us to this forbidden track by referring to various extraneous matters which we have indicated before. Furthermore those external aids sought before us do not support the petitioners' approach to this question at all."
Further Hon'ble Supreme Court has in case of WIPRO Ltd. [2015 (319) ELT 177 (SC)] clearly laid down as follows:
"32) We find that the High Court, instead of examining the matter from the aforesaid angle, has simply gone by the powers of the rule making authority to make Rules. No doubt, rule 91 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 making authority has the power to make Rules but such power has to be exercised by making the rules which are consistent with the scheme of the Act and not repugnant to the main provisions of the statute itself. Such a provision would be valid and 1% F.O.B. value in determining handling charges etc. could be justified only in those cases where actual cost is not ascertainable. The High Court missed the point that Garden Silk Mills Ltd. case was decided by this Court in the scenario where actual cost was not ascertainable. That is why we remark that first amendment to the proviso to sub-rule (2) of Rule 9 which was incorporated vide notification dated 19.12.1989 would be justified. However, the impugned provision clearly fails the test."
Finally CAG has in its report has expressed the opinion stating as follows:
"Audit opinion is that the undertakings are not only interͲconnected but also satisfy the requirement of 'mutuality of interest in each other's business' under subͲclause (iv) of Section 4(3)(b)."
Hence we do not find any merits in the submissions made by the appellant by referring this report of CAG. Earlier in the order we have extensively quoted the Hon'ble Apex Court in case of M/s FIAT India, as laying down essentially as to what constitutes the normal sale price/ transaction value etc. If we examine the value that appellant claim to be Section 4(1)(a) value, do not stand to the test laid down by Hon'ble Apex Court in that decision. In the case of Grasim Industries(supra) as noted earlier a five member bench of the Hon'ble Supreme Court, answered the question referred to it, stating that principles of determination of normal value and judicial exposition in respect of "normal value" applies to "transaction value." Thus in our view the value that qualifies to be a value under Section 4(1)(a) can be value which is on account of sale at arm's length, and not any value that is determined for transfer/ clearance of goods. In absence of any value under Section 4(1)(a), the only route available for determination of the value will be under Sec.4(1)(b) through Rule 11 of valuation rules and the value shall be determined 92 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 using reasonable means consistent with the principles and general provisions of these rules and sub-section (1) of section 4 of the Act. By application of Rule 11, in case of related person transactions the value needs to be determined by application of Rule 9 of the Central Excise Valuation (determination of Price of Excisable Goods) Rules, 2000. Thus in absence of Section 4(1)(a) value satisfying the criteria laid down by the Apex Court in case of M/s FIAT Industries the value is finally determined in terms of Rule 9 only, on the basis of sale price of M/s VWGSIPL to the dealers.
4.15 Benefit of Cum Duty Price Appellants have contended that the sale price of M/s VWGSIPL to the dealers is inclusive of excise duty and cesses hence should be treated as cum duty price. They have relied upon the decision of larger bench of tribunal in case of Sri Chakra Tyres which has been upheld by the Apex Court and also the decision of Apex Court in case of M/s Maruti. Interestingly in the impugned order the benefit of cum duty price has been decided stating as follows:
"87.1 As regards M/s. VWIPL's contentions on calculation of duty demand, I find that they have challenged the calculation of duty demand on the following grounds:
i. In the Annexure A to the SCN, the total sale price figures (adjusted net of excise duty) at which vehicles are sold by M/s. VWGSIPL is shown as 41,08,52,00,000/- in place of actual figures as 33,12,80,81,960/-. Accordingly, M/s. VWIPL have claimed that the correct duty demand will come out to be Rs. 323,65,87,666/- in place of Rs. 402,87,28,269/- as demanded in the subject SCN. ii. Cum-duty-benefit.
iii. Discounts offered by M/s. VWGSIPL ought to be reduced from the assessable value on which excise duty is demanded in the SCN.
iv. Cenvat Credit on services availed by M/s. VWGSIPL must be allowed to the noticee.93
Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 87.2 On going through the submissions of M/s. VWIPL on the issue of calculation of demand, I find that the assessee have pointed out certain discrepancies in sales price (adjusted net of excise duty) of M/s. VWGSIPL for FY 2012-13, and stated that the correct sale price (adjusted net of excise duty ) is Rs.
33,12,80,81,960/-, and not Rs. 41,08,52,00,000/- as shown in SCN and that, accordingly, the correct demand should be Rs. 81,87,59,397/-, and not Rs. 161,09,00,000/- for the Financial Year 2012-13, as mentioned in the SCN and also that the proposed demand if calculated correctly for the relevant period of SCN comes to Rs.323,65,87,666/- and not Rs.402,87,28,269 as mentioned in the SCN. On referring this issue to DGCEI, who have issued the subject SCN, for verification and comments, they have reported vide their letter F. No. DGCEI/MZU/I&IS 'C'/30-14/2014 dated 20-01-2016 that the correct sale price (adjusted net of excise duty) for FY 2012-13 is Rs. 33,12,80,81,960/-. They have also stated that the demand for that period is Rs. 81,87,59,397/- and the proposed demand therefore for all the relevant period works out to Rs.323,65,87,666/-. Considering the DGCEI's said report, I find that the assessee's request on this ground is genuine and accordingly I correct and revise the demand of the subject SCN to Rs. 323,65,87,666/ 87.3 As regards other grounds, these are based more on presumptions rather than on facts or law. Had M/s. VWIPL followed the genuine and correct method of Valuation, they would have got its benefits also if permissible by law. I therefore decline to consider their request for reducing the duty demand on these grounds. "Hence, the revised/ corrected demand in respect of subject SCN is considered to be Rs. 323,65,87,666/- for the purpose of order."
From the above it is quite evident that the Commissioner has in the impugned order not even examined the issue at all. We are in full agreement with this submission of the Appellant that the benefit of cum duty price will be admissible to them if it can be shown that the price which is taken for computation of assessable value and duty demand is inclusive of excise duty 94 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 and cesses. Since the Commissioner has not even examined this aspect, the matters need to be remanded back to the Commissioner for re-determining the value of clearances after allowing the benefit of cum duty price. Thus the demand for duty needs to be recomputed after allowing the benefit of cum duty price from the sale price to dealers.
4.16 Extended Period of Limitation Appellants have contended that the matter in respect of valuation of Polo and Vento model of cars was in constant correspondence between them and the department. This issue was also considered during the audit by Central Excise Revenue Audit and also was made part of the CAG Report of 2014 laid before the Parliament. Revenue contends that during investigations undertaken by DGCEI, certain new evidences such as "Project Tiger Report" and email dated 28.01.2010 were recovered which were never before them in inquiries made. Commissioner has in the impugned order recorded following for invoking extended period of limitation:-
"91.4 The price of VW brand cars at which it would be sold to M/s. VWGSIPL shall be "agreed upon between M/s. VWIPL & M/s. VWGSIPL. But since M/s. VWIPL has got an obligation to sell all its manufactured products to M/s. VWGSIPL upon agreement/instruction of VWAG, it has got little to say on price as M/s. VWGSIPL would ultimately finalize the price of which it is to be purchased from M/s. VWIPL at the behest of a planning Round consisting of members of all the three group companies. This is because, M/s. VWAG determines the price of the cars in the Indian market and thus would determine the price at which it is to be purchased from VWIPL. Thus, practically the aspect of price determination is controlled by VWAG deviating from written terms of agreements.
91.5 M/s. VWAG intends to sell VW cars in India. It has a subsidiary VWIPL to manufacture cars and another subsidiary VWGSIPL to distribute the same. Since M/s VWAG has an interest to penetrate Indian market, the price at which the cars are to be sold is planned by M/s. VWAG. M/s. VWAG has borne 95 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 part of the expenditure on account of advertisement etc. incurred by M/s. VWGSIPL. M/s. VWAG arranged that all VW brand cars manufactured by VWIPL are sold to VWGSIPL. Since M/s. VWAG's sole aim is to sell cars in India, both the subsidiaries help and work in unison to achieve the objective of sale of VW brand cars. Both M/s. VWIPL and M/s. VWGSIPL, the fellow subsidiaries of VWAG have got the objective of materializing sale of VW brand cars in Indian market. As per articles of Memorandum of Association of VWIPL, it is incorporated for manufacture and marketing of cars. But, by the arrangement of M/s. VWIPL manufacturing it and M/s: VWGSIPL distributing it, and by putting marketing and promotion expenses of those cars out of the segment/account of VWIPL, I find that the sale value of the cars from VWIPL to VWGSIPL are artificially fixed lower so as to pay lesser duty than due, as detailed below, in contravention of provisions of Central Excise Law.
91.6 A (retail minus' method has been decided to arrive at price at different level, i.e., price at which goods is sold in retail, price at which M/s. VWGSIPL will sell to dealers and price at which M/s. VWGSIPL will buy cars from VWIPL. Since M/s. VWGSIPL has been assigned the job of advertising etc. , the cost incurred on that has been kept out of the price fixed for sale by VWIPL. Similarly, other components like warranty, warehousing charges etc. were kept out. The whole objective was to keep the sale price at M/S VWIPL at minimum so that Central Excise duty component would be less. Thus, the price arrived at is an artificial price which does not reflect all components of price. Both the subsidiaries helped the holding company in limiting the price at VWIPL level, so that less amount of Central Excise duty will be paid. This is a deliberate attempt on the part of M/s. VWIPL agreeing to such a lower price for charging duty which is amounting to intent to evade payment of duty. Further, M/s. VWIPL & M/s. VWGSIPL had a common goal to manufacture & sell VW Brand cars with an ultimate aim to fulfill the objective of M/s. VWAG. They agreed to a price at which M/s. VWIPL would sell the goods in order to suit their business interest. In spite of such a clear cut business interest as brought out from various 96 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 agreements, M/s. VWIPL has always been contending that they did not have mutuality of interest so as to avoid the legitimate duty component. M/s. VWIPL was privy to internal correspondence from M/s. VWAG, Germany wherein decision to limit the price has been conveyed which has an ultimate aim to reduce Central Excise duty component. Further, M/s. VWIPL received loss compensation in the form of financial assistances from M/s. VWAG who had an ultimate interest in the sale of cars in India. In other words, the proverbial corporate veil has been put up by the group companies by way of agreements over the procedure practically adopted to artificially reduce the assessable value of the cars, so as to avoid payment of legitimate Central Excise duty and then compensate the resultant loss by other ways. This deliberately conceptualized set up/arrangement for depressing the price of cars artificially, was unearthed by detailed investigations by DGCEI officials. The department came to know about this peculiar methodology of undervaluation with intention to evade payment of duty by M/s. VWIPL in connivance with M/s. VWGSIPL and overall control of M/s. VWAG, only after the said detailed investigations by DGCEI officials. It is therefore clearly proved with evidence that there is suppression of facts with intent to evade duty.
91.7 It is also seen that a deliberate/ conscious decision was taken to create an intermediary subsidiary M/s. VWGSIPL to make less payment of duty. In case of their Skoda project, a confidential paper, which was unearthed during the investigation, has shown the deliberation of payment less duty by creating a distributing subsidiary for the goods manufacturing another subsidiary (Project Tiger') as done in the case of VWIPL and VWGSIPL. In that project, it was estimated that there would be a gain on account of it to the extent of 16.93 Million Euros, Same methodology was followed in the instant case as entire product of VWIPL was sold to VWGSIPL at a lesser price while price for dealers from VWGSIPL was kept at a higher side. This clearly shows that the arrangement of sale or marketing VWIPL manufactured cars through VWGSIPL only has been a deliberate attempt to evade payment of duty. Actually, the Tiger Report is 97 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 one of the evidences which disclosed the actual face of M/s. VWIPL and its group and the mention of keeping such planning under wraps to avoid detailed scrutiny / investigation by the department/DGCEI. Though the assessee's argument in this regard is that they have not implemented the Project Tiger', it clearly unravels the complexity of the transactions planned and the intention of payment of lesser duty than legitimately due, lying behind such plan, which was already adopted in the instant case. Therefore, I find that the extended period is rightly invoked here in this case.
91.8 As regards the assessee's plea that the audit was done by the department, it is needless to say that the EA 2000 is done on selective points from the available record. Here, I find that this conceptualized deliberate set up/arrangement for depressing the price of cars artificially, with intention to evade payment of duty was unearthed after extensive investigation by DGCEI officials. Had the DGCEI officials have not detected this unique way of undervaluing the goods by lowering the price artificially through a systematic planning by M/s. VWIPL and its group, M/s. VWIPL would have continued this modus operandi for evasion of duty by distorting the relevant provisions as explained above.
91.9 In view of the above, I find that the contentions of M/s. VWIPL on invoking the provisions of extended period of limitation are not tenable. Further, I find that in this era of self-assessment tax regime, the assessee is expected to take utmost care while assessing and removing the goods manufactured by them. In spite of the responsibility cast upon them to do so by the law, the assessee i.e. M/s. VWIPL have wrongly assessed/undervalued the goods manufactured by them and sold the goods through M/s. VWGSIPL exclusively by not paying correct Central Excise duty thereon by deliberately excluding certain expenses incurred by M/s. VWGSIPL in relation to sale of cars, in the assessable value. I also find that M/s. VWIPL, being part of a well organized MNC of international repute, with the best of legal assistance at their disposal to understand the nuances of different national tax structures, ought to have been well aware about the relevant provisions of Section 4 of the 98 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 Central Excise Act and the Central Excise Valuation Rules. Therefore, I find that this is a clear-cut case of mis-declaration, and suppression of facts from the department with intent to evade duty, and that therefore the department is well within its right to invoke larger period for demanding the differential Central Excise duty in respect of such clearances made during the period from January 2010 to December-2014 in terms of the provisions of proviso to Section 11A(1) / Section 11A(4) of the Act, as the case may be, and I so do hold. In this regard, I place reliance upon the decision of the Hon'ble CESTAT in the case of - M/s. Bombay Dyeing & Mfg. Co. Pvt. Ltd. Vs. CCE, Mumbai - 1999 (113) ELT 331 (Tri.) - wherein it is held that where the assessee is in such knowledge and where the department have no knowledge of the situation, the department can allege suppression of facts.............."
91.10 Therefore, considering the facts and circumstances of the case as discussed above, I find that the various decisions quoted by M/s. VWIPL will not come to their rescue in this regard. Accordingly, I find that the provisions for demand in respect of extended period in terms of proviso to sub-section (1) of Section 11A/ Section 11 (A) (4) of the Central Excise Act, 1944 (as applicable during the period of demand) have been rightly invoked in the present case for demanding the amount of Central Excise duty short-paid by them on sale of vehicles (Polo and Vento Variants) during the period from January 2010 to December 2014."
In our view impugned order has completely mis-directed while determining the issue of limitation. There can be no dispute about the fact that the issue of valuation of Polo and Vento Variants of the Cars manufactured and cleared by the Appellant was always in the knowledge of the department and was subject matter of correspondence and discussions. It was also taken up in the audit conducted by Central Excise Revenue Audit and is part of the CAG Report of 2014, tabled in Parliament. When the entire issue was under discussion and inquiry, and revenue entertained the view about the correctness of the methodology of valuation adopted as is evident from the CAG Report of 2014.
99Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 Change in opinion or insufficiency of enquiries earlier made by the department cannot be said to be amongst the grounds enumerated in section 11A (4) for invoking the extended period of limitation. In case of Pushpam Pharmaceuticals [1995 (78) ELT 401 SC] Hon'ble Supreme Court has clearly stated as follows:
"4. Section 11A empowers the Department to re-open proceedings if the levy has been short-levied or not levied within six months from the relevant date. But the proviso carves out an exception and permits the authority to exercise this power within five years from the relevant date in the circumstances mentioned in the proviso, one of it being suppression of facts. The meaning of the word both in law and even otherwise is well known. In normal understanding it is not different that what is explained in various dictionaries unless of course the context in which it has been used indicates otherwise. A perusal of the proviso indicates that it has been used in company of such strong words as fraud, collusion or wilful default. In fact it is the mildest expression used in the proviso. Yet the surroundings in which it has been used it has to be construed strictly. It does not mean any omission. The act must be deliberate. In taxation, it can have only one meaning that the correct information was not disclosed deliberately to escape from payment of duty. Where facts are known to both the parties the omission by one to do what he might have done and not that he must have done, does not render it suppression."
Hence we hold that extended period of limitation as provided by Section 11A (4) will not be available for making the demand of duty in the circumstances of this case.
4.17 Demand for Interest Since the demand of tax has been upheld the demand for interest will follow. It is now settled law that interest under Section 11AA, is for delay in the payment of tax from the date when it was due. Since appellants have failed to determine the correct assessable value and pay the correct amount of duty by the due date interest demanded cannot be faulted. In view of 100 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 the decisions as follows:-
i. P V Vikhe Patil SSK [2007 (215) ELT 23 (Bom)] ii. Kanhai Ram Thakedar [2005 (185) ELT 3 (SC)] iii. TCP Limited [2006 (1) STR 134 (T-Ahd)] iv. Pepsi Cola Marketing Co [2007 (8) STR 246 (T-Ahd)] v. Ballarpur Industries Limited [2007 (5) STR 197 (T-Mum)] 4.18 Penalty under Section 11AC of the Central Excise Act, 1944.
Penalty under Section 11AC has been imposed by the Commissioner for the reason that she has held the essential ingredients to invoke extended periods of limitation exists in the present case. She relied upon the decision of Apex Court in case of Dharamendra Textiles for holding that the penalty under Section 11AC is justified. However we do not agree with the findings of the Commissioner that there was suppression with intention to evade payment of Central Excise duty, hence we did not find any merits in the invocation of extended period of limitation. Hon'ble Supreme Court has in case of Rajasthan Spinning and Weaving mills [2009 (238) ELT 3 (SC)] clarified its order in case of Dharamendra Textiles stating as follows:
"18. One cannot fail to notice that both the proviso to sub section 1 of section 11A and section 11AC use the same expressions: "....by reasons of fraud, collusion or any wilful mis- statement or suppression of facts, or contravention of any of the provisions of this Act or of the rules made thereunder with intent to evade payment of duty,...". In other words the conditions that would extend the normal period of one year to five years would also attract the imposition of penalty. It, therefore, follows that if the notice under section 11A (1) states that the escaped duty was the result of any conscious and deliberate wrong doing and in the order passed under section 11A (2) there is a legally tenable finding to that effect then the provision of section 11AC would also get attracted. The converse of this, equally true, is that in the absence of such an allegation in the notice the period for which the escaped duty may be reclaimed would be confined to one year and in the absence of such a finding in the order 101 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 passed under section 11A (2) there would be no application of the penalty provision in section 11AC of the Act. On behalf of the assessees it was also submitted that sections 11A and 11AC not only operate in different fields but the two provisions are also separated by time. The penalty provision of section 11AC would come into play only after an order is passed under section 11A (2) with the finding that the escaped duty was the result of deception by the assessee by adopting a means as indicated in section 11AC.
19. From the aforesaid discussion it is clear that penalty under section 11AC, as the word suggests, is punishment for an act of deliberate deception by the assessee with the intent to evade duty by adopting any of the means mentioned in the section.
20. At this stage, we need to examine the recent decision of this Court in Dharamendra Textile (supra). In almost every case relating to penalty, the decision is referred to on behalf of the Revenue as if it laid down that in every case of non-payment or short payment of duty the penalty clause would automatically get attracted and the authority had no discretion in the matter.
One of us (Aftab Alam, J) was a party to the decision in Dharamendra Textile and we see no reason to understand or read that decision in that manner. In Dharamendra Textile the court framed the issues before it, in paragraph 2 of the decision, as follows:
"2. A Division Bench of this Court has referred the controversy involved in these appeals to a larger Bench doubting the correctness of the view expressed in Dilip N. Shroff vs. Joint Commissioner of Income Tax, Mumbai & Anr. [2007 (8) SCALE 304]. The question which arises for determination in all these appeals is whether Section 11AC of the Central Excise Act, 1944 (in short the `Act') inserted by Finance Act, 1996 with the intention of imposing mandatory penalty on persons who evaded payment of tax should be read to contain mensrea as an essential ingredient and whether there is a scope for levying penalty below the prescribed minimum. Before the Division 102 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 Bench, stand of the revenue was that said section should be read as penalty for statutory offence and the authority imposing penalty has no discretion in the matter of imposition of penalty and the adjudicating authority in such cases was duty bound to impose penalty equal to the duties so determined. The assessee on the other hand referred to Section 271(1) (c) of the Income Tax Act, 1961 (in short the `IT Act') taking the stand that Section 11AC of the Act is identically worded and in a given case it was open to the assessing officer not to impose any penalty. The Division Bench made reference to Rule 96ZQ and Rule 96ZO of the Central Excise Rules, 1944 (in short the `Rules') and a decision of this Court in Chairman, SEBI vs. Shriram Mutual Fund & Anr. [2006(5) SCC 361] and was of the view that the basic scheme for imposition of penalty under section 271(1) (c) of IT Act, Section 11AC of the Act and Rule 96ZQ (5) of the Rules is common. According to the Division Bench the correct position in law was laid down in Chairman, SEBI's case (supra) and not in Dilip Shroff's case (supra). Therefore, the matter was referred to a larger Bench."
After referring to a number of decisions on interpretation and construction of statutory provisions, in paragraphs 26 and 27 of the decision, the court observed and held as follows:
"26. In Union Budget of 1996-97, Section 11AC of the Act was introduced. It has made the position clear that there is no scope for any discretion. In para 136 of the Union Budget reference has been made to the provision stating that the levy of penalty is a mandatory penalty. In the Notes on Clauses also the similar indication has been given.
"27. Above being the position, the plea that the Rules 96ZQ and 96ZO have a concept of discretion inbuilt cannot be sustained. Dilip Shroff's case (supra) was not correctly decided but Chairman, SEBI's case (supra) has analysed the legal position in the correct perspectives. The reference is answered.........".
21. From the above, we fail to see how the decision in Dharamendra Textile can be said to hold that section 11AC would apply to every case of non-payment or short 103 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 payment of duty regardless of the conditions expressly mentioned in the section for its application.
22. There is another very strong reason for holding that Dharamendra Textile could not have interpreted section 11AC in the manner as suggested because in that case that was not even the stand of the revenue. In paragraph 5 of the decision the court noted the submission made on behalf of the revenue as follows:
"5. Mr. Chandrashekharan, Additional Solicitor General submitted that in Rules 96ZQ and 96ZO there is no reference to any mensrea as in section 11AC where mensrea is prescribed statutorily. This is clear from the extended period of limitation permissible under Section 11A of the Act. It is in essence submitted that the penalty is for statutory offence. It is pointed out that the proviso to Section 11A deals with the time for initiation of action. Section 11AC is only a mechanism for computation and the quantum of penalty. It is stated that the consequences of fraud etc. relate to the extended period of limitation and the onus is on the revenue to establish that the extended period of limitation is applicable. Once that hurdle is crossed by the revenue, the assessee is exposed to penalty and the quantum of penalty is fixed. It is pointed out that even if in some statues mensrea is specifically provided for, so is the limit or imposition of penalty that is the maximum fixed or the quantum has to be between two limits fixed. In the cases at hand, there is no variable and, therefore, no discretion. It is pointed out that prior to insertion of Section 11AC, Rule 173Q was in vogue in which no mensrea was provided for. It only stated "which he knows or has reason to believe". The said clause referred to wilful action. According to learned counsel what was inferentially provided in some respects in Rule 173Q, now stands explicitly provided in Section 11AC. Where the outer limit of penalty is fixed and the statute provides that it should not exceed a particular limit, that itself indicates scope for discretion but that is not the case here."
23. The decision in Dharamendra Textile must, therefore, be 104 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 understood to mean that though the application of section 11AC would depend upon the existence or otherwise of the conditions expressly stated in the section, once the section is applicable in a case the concerned authority would have no discretion in quantifying the amount and penalty must be imposed equal to the duty determined under sub-section (2) of section 11A. That is what Dharamendra Textile decides."
Thus in our view the penalty imposed under Section 11AC is liable to be set aside the moment it is held that extended period of limitation cannot be invoked for making the demand.
4.19 Penalty under Rule 26 of Central Excise Rules, 2002 Commissioner has imposed penalty under Rule 26 of Central Excise Rules, 2002 relying on the decision of the Hon'ble Apex Court in case of Gujarat Travancore Agency [1989 (42) ELT 350 (SC)], wherein Hon'ble Court has held as follows:
"4. ..........In most cases of criminal liability, the intention of the Legislature is that the penalty should serve as a deterrent. The creation of an offence by Statute proceeds on the assumption that society suffers injury by and the act or omission of the defaulter and that a deterrent must be imposed to discourage the repetition of the offence. In the case of a proceeding under Section 271(1)(a), however, it seems that the intention of the legislature is to emphasise the fact of loss of Revenue and to provide a remedy for such loss, although no doubt an element of coercion is present in the penalty. In this connection the terms in which the penalty falls to be measured is significant. Unless there is something in the language of the statute indicating the need to establish the element of mensrea it is generally sufficient to prove that a default in complying with the statute has occurred. In our opinion, there is nothing in Section 271(1)
(a) which requires that mensrea must be proved before penalty can be levied under that provision. We are supported by the statement in Corpus Juris Secundum Volume 85, page 580, Paragraph 1023:
"A penalty imposed for a tax delinquency is a civil obligation, remedial and coercive in its nature, and is far different from the 105 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 penalty for a crime or a fine or forfeiture provided as punishment for the violation of criminal or penal laws."
In case of Hindustan Steels [1969 SCC (2) 627] Hon'ble Supreme Court has held as follows:
"An order imposing penalty for failure to carry out a statutory obligation is the result of a quasi criminal proceedings and penalty will not ordinarily be imposed unless the party obliged, either acted deliberately in defiance of law was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation. Penalty will not also be imposed merely because it is lawful to do so. Whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances. Even if a minimum penalty is prescribed, the authority competent to impose the penalty will be justified in refusing to impose penalty, when there is a technical or venial breach of provisions of the Act or which the breach flows from a bona fide belief that the offender is not liable to act in the manner prescribed by the statute."
Since we find that the issue involved in the matter is of interpretation of legal provisions and number of contractual agreements and documents. On the merits till the time investigations were undertaken by Director General of Central Excise Intelligence, revenue authorities also held the view akin to held by the Appellants. When revenue authorities also held the same view as the appellant then how can appellants alone be held guilty of contumacious conduct for imposition of penalty. In our view in such case involving complex issues in relation to interpretation of statutory provisions, where revenue also entertained the same view as appellants the penalties imposed under Rule 26 of Central Excise Rules, 2002 cannot be justified and are set aside, following the decision of Apex Court in case of Hindustan Steel (supra).
5.1 In view of the discussions as above we summarize our findings as follows: However we make it clear that this is only summarization of our finding recorded earlier, in case of any 106 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 doubt or confusion, the discussion in relevant para of the order needs to be looked into.
➢ The Appellant and M/s VWGSIPL are related to each other in terms of Section 4 (3) (b) as interconnected units, being the subsidiary of M/s. Volkswagen AG, Germany;
➢ The value of the goods cleared by the appellant to M/s VWGSIPL, on the basis of a notional price determined by M/s Volkswagen AG, Germany is not an price at arms length to be admitted as transaction value in terms of Section 4(1)(a) of the Central Excise Act, 1944;
➢ The value of the goods cleared by the appellants to M/s VWGSIPL, is to be determined in terms of Rule 9 read with Rule 10 and 11 of the Central Excise Valuation (Determination of the Price of Excisable Goods), 2000;
➢ Thus value of goods cleared by the appellants to M/s VWGSIPL, is to be determined on the basis of sale price of M/s VWGSIPL to independent dealers, by treating the sale price as cum duty price;
➢ Since all the facts were from very beginning in the knowledge of the department and were actively being corresponded between the department and Appellant and also were subject matter of Central Excise Revenue Audit and CAG Report submitted to parliament extended period of limitation as provided by Section 11 A (4) of Central Excise Act, 1944 cannot be invoked. Hence the demand of duty has to be restricted within the normal period of limitation as per Section 11 A (1), ibid.
➢ Since extended period of limitation is not invokable, penalties imposed under Section 11AC are set aside.
➢ Since the issue is purely of interpretation, and sufficient evidence is available on record to show that Appellant and M/s VWGSIPL entertained a bonafide belief in the matter, the penalties imposed under Rule 26 of Central Excise Rules, 2002 are set aside.
➢ The matter is remanded back to the adjudicating authority, for redetermination of the assessable value after allowing the benefit of cum duty price on the sale 107 Appeal No. ST/86245, 86251/2016, ST/86519, 86542/2017 ST/86543, 86545/2018, ST/86595, 86596/2019 price of M/s VWGSIPL to independent dealers and demand of duty within the normal period of limitation as per Section 11 A (1) of the Central Excise Act, 1944;
➢ Commissioner should as far as possible re-determine the duty demand within six months of the receipt of this order, after affording the opportunity of hearing to Appellant.
➢ Interest at the applicable rate is payable under Section 11AA of Central Excise Act, 1944.
5.2 The appeals filed by Appellant namely M/s VWIPL, are partially allowed and the matter remanded back to the Commissioner for redetermination of the quantum of duty payable as per the observations summarized in para 5.1 above.
5.3 The appeals filed by M/s VWGSIPL are allowed setting aside the penalties imposed under Rule 26 of the Central Excise Rules, 2002 (Pronounced in court on 27.08.2020) (Dr. D.M. Misra) Member (Judicial) (Sanjiv Srivastava) Member (Technical) Sinha