Customs, Excise and Gold Tribunal - Tamil Nadu
Sai Mirra Innopharm Pvt. Ltd. (Smipl), ... vs Commissioner Of Central Excise on 31 October, 2006
Equivalent citations: 2007(115)ECC211, 2007ECR211(TRI.-CHENNAI), 2007(215)ELT561(TRI-CHENNAI)
ORDER P. Karthikeyan, Member (T)
1. In this batch of appeals, there are nine appeals arising out of five impugned orders. The facts in all the appeals are common except that the period involved are different and that in the case of Order in Original No. 1,9/2005, the appellants (SMIPL) were engaged as job workers for M/s American Remedies Ltd. (ARL) for manufacture of P or P medicines for which ARL had supplied the raw materials. Appeal Nos. E/29 to 31/06 are accompanied by Stay applications also. The details of the impugned orders, the period involved, duty demanded and penalty imposed are tabulated hereunder. Dispute covers the period of six years from 2000 to 2005.
Order in Original & date Appellant & Appeal No. Period of dispute Dutydemanded (Rs) Penalty imposed (Rs) 17/2003 dt 30.4.2003 passed by CCE Chennai-II SMIPL. E/629/03 15.4.2000-3/2002 8,53,59,043/-Under Section 11A(2)of CEA 1944.
8,53,59043/-(11AC)
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DRLE/627/03
-
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5,00,00,000/-Under Rule 209A of CER 1944 /Rule 26 of CE (No. 2) Rules, 2001
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VS Raaman E/628/03
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-
50,00,000/-u/r 209A of CER 1944/Rule 26 of CER (No. 2) Rules,2001.
5/2004 dt 26.5.2004 passed by CCE, Chennai-IV SMPPL E/1134/04 15.4.2000 -31.3.2002 4,11,52,235/-Under Section 11A(2) of CEA, 1944 4,11,52,235/-(11AC)
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DRLE/1133/04
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40,00,000/- Under Rule 209A of CER 1944/Rule 26 of CER (No.2) 2001.
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VS RaamanE/1135/04
-
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25,00,000/-Under Rule 209A of CER 1944/Rule 26 of CER (No. 2)2001.
19/2005 dt. 17.10.2005 passed by CCE, Che-II E/31/06 M/s SMIPL June 2004-7.1.2005 2,69,27,235/-Under Section 11A(2) of CEA, 1944 27,00,000/-u/r 25 of CER, 2002 21 & 22/2005 dt 18.9.2005 passed by CCE, Che-II SMIPLE/29/06 & E/30/06 Sept 2003 -7.1.2005 1,88,67,586/-Under Section 11A(2) of CEA, 1944 19,00,000/- Under Rule 25 of CER, 2002 Note: Apart from demand of duty and imposition of penalty, interest under Section 11AB has also been ordered.
2. The facts have been Extensively dealt with in Order in Original No. 17/2003. Other orders follow the same reasoning as in this order . Therefore, for the purpose of deciding these cases, we have mainly taken into consideration the facts and findings in the said Order in Original and after granting waiver of predeposit of the amount involved,(where applicable) these appeals were heard together and orders reserved.
3. The assessable value of various P or P Medicines and other medicines manufactured by M/s. American Remedies Limited (ARL) and Soft Caps Private Limited (SCPL) prior to 15.4.2000 and the respective assessable value of the same medicines manufactured and cleared from 15.4.2000 by M/s Sai Mirra Innopharm Pvt Ltd. (SMIPL) and M/s Sai Mirra Pharmaceutical Pvt Ltd. (SMPPL) showed vast difference ranging from 25% to 85% downwards as shown in the following table.
No. Name of the product/Pack Assessablevalue of SMIPL/SMPPL(In Rs.) AssessableValue of ARL/SCPL Prior to15.4.2000 (in Rs.) DifferenceinAssessablevaluebetween Dand C (in Rs.) Percentage of difference between Dand C (in %) A B C D E F 1 Becozinc10x30s 102.60 177.02 74.42 42.04
2. Eryspans10x10s 161.40 287.58 126.18 43.08
3. Gris OD 37510x30s 393.70 531.72 138.02 25.95
4. Mucolite6x50s 58.19 230.97 172.78 74.80
5. Natcal 100010x30s 94.90 229.03 134.13 58.56
6. Niap10x10s.
21.90 76.97 55.07 71.54
7. Optisulin10x30s 81.70 248.20 166.50 67.08
8. Relent 20 x10s 79.80 311.74 231.94 74.40
9. Disfree 5x30s 72.60 189.28 116.68 61.64
10. Spontrel10x10s.
54.80 174.72 119.92 68.63
11. Libidol 15 x10s 56.25 216.33 160.68 74.55
12. Regulipid5x30s 122.95 766.16 643.21 84.35
13. Synocare15x10x 251.10 535.48 284.38 53.10
14. Roxymucolite10x10s 205.80 604.55 398.75 65.95
15. Psoricaps5x30s 51.50 279.42 227.92 81.56
16. Cefalong DS10X10s 303.80 704.48 400.68 56.87
17. Bio-E 40010x30s 495.90 1107.31 611.41 55.21
18. Mega-3 5 x30s 158.40 323.61 165.21 51.05
19. Biochrome 5x30s 265.70 567.93 302.23 53.21
20. Antoxid10x30s 202.20 630.00 427.80 67.90
21. Antoxid HC5x30s 269.70 620.46 350.76 56.53
22. Natoxid 5x30s 109.90 276.83 166.93 60.30
23. Antoxid CC5x30s 259.00 472.50 213.50 45.18 The figures under Col. "D" included freight and ATOT, which was 0.48%, claimed as abatement by ARL prior 14.4.2000.
This drastic depression in the assessable value of the same excisable goods overnight triggered investigation into the transactions between SMIPL & ARL/DRL and their history.
4. M/s Sai Mirra Innopharm (P) Ltd was a private limited Company, incorporated in or around March 2000. Their factory at Ambattur started functioning on 14.4.2000, when two Directors, Shri V.S. Raaman and his brother V.R. Ravikumar started M/s. Sai Mirra Pharmaceuticals Pvt. Ltd. (SMPPL) with two factories at Keelkattalai for manufacture of P or P medicines. American Remedies Limited (ARL), a limited Company had been engaged in the manufacture of P or P medicines and Avurvedic medicines at No. 288, SIDCO Industrial Estate, Ambattur and also marketted their products. They had manufacturing facility also at Alathur where they manufactured bulk drugs. ARL had four Directors S/Shri V.S. Raaman, S.R. Ramaswamy Iyer, G.K. Ramani, and R.K. Ramanathan besides the non executive Director Shri K.S. Ramanathan. The four Directors and their family members had held 45% of the total shares of ARL.
5. Dr. Reddy's Laboratories Ltd. (DRL) based at Hyderabad entered into a Share Purchase Agreement on 25.11.1999 with the four Directors of American. Remedies Ltd for purchase of shares of ARL at the rate of Rs. 1757- per share. The Directors of ARL had represented also their family members in the transaction. DRL made a letter of offer the public on 1.12.1999 and purchased shares from the market; thus accumulating their holding of ARL shares to nearly 84%. Thus DRL had become the holding Company or ARL. After taking control of ARL, DRL desired to sell the manufacturing facility of ARL, retaining its marketing activities through the net work of stockists.
6. M/s. Soft Caps Pvt. Ltd. (SCPL) had two units at Keelkattalai and manufactured P or P medicines marketed through ARL. The subscribed capital of SCPL of Rs. 4,00,500/- comprising -4005 shares of Rs. 100/- each were held by 10 share holders. These share holders were close relatives of the erstwhile four Directors of ARL. ARL entered into a "Share Purchase Agreement" dated 25.2.2000 to buy all the shares of SCPL for a consideration of Rs. 27.45 crore's. Thus SCPL had become a wholly owned (100%) subsidiary of DRL through ARL. After taking over SCPL, DRL decided to hive off all the manufacturing facility at Keelkattalai while retaining the marketing function.
7. Shri V.S. Raaman negotiated with ARL management and agreed to purchase factories at Ambattur from ARL and Keelkattalai from SCPL along with the Land & Building and Plant & Machinery on condition that ARL/DRL would give SMIPL/SMPPL continuous orders for manufacturing their products and no retrenchment of workers would be insisted upon. Thereupon ARL/SCPL entered into a Manufacturing Agreement with SMIPL/SMPPL on 14.4.2000 for manufacture of the products as per the conditions in the Manufacturing Agreement to sell all the goods to ARL/SCPL at a price described as "Transfer Price". They had also entered into a "Trade Mark Assignment Agreement" on 14.4.2000 which enabled SMIPL/SMPPL to use the brand names belonging to ARL/DRL.
8. ARL had sold the Land & Building and Plant & Machinery at Ambattur industrial Estate to SMIPL for a consideration of Rs. 3.94 crores. It was seen from the Books of Account of ARL that the written down value of Plant & Machinery itself had worked out to Rs. 2.49 crores and the Land & Building had been valued at Rs. 2.31 crores by a Chartered Engineer and the value had been certified by the competent authority of Income tax Department. SMIPL had entered into an Agreement with ARL for purchase of the property situated at No. 288, SIDCO Industrial Estate, Ambattur for a value of Rs. 2.31 crores. Out of a total Rs. 3.94 crores, the value of Land & Building had been worked out at Rs. 2.31 crores and the balance amount related: to factory buildings at No. 426-427, SIDCO, Industrial Estate, Ambattur near the factory at No. 288, SIDCO, Industrial Estate, Ambattur which had been valued at Rs. 78 lakhs, Rs. 7.50 lakhs the value of vehicles and the remaning Rs. 76 lakhs being the cost of Plant & Machinery sold by ARL, Ambattur to SMPIL. The Plant & Machinery and other items available in the factory whose written down value was Rs. 2.49 crores as on 31.3.2000 were sold for Rs. 76 lakhs by ARL. Thus ARL's Ambattur facility was sold as such to SMIPL.
9. Though these items had been sold on 30.6.2000, ARL had allowed SMIPL to use the facility at No. 288, 289, SIDCO Industrial Estate, Ambattur from 15.4.2000 to manufacture medicines. Thus SMIPL used the facility without incurring any expenses towards the same, for a period of two and a half months. SMIPL had been allowed to pay outstanding of Rs. 1.08 crores after payment of 1.20 crores, without any interest. The amount outstanding on 31.12.01 was Rs. 98 lakhs (since settled fully).
10. SMIPL were allowed to retain the same and other assets for manufacture of excisable goods cleared to ARL. While ARL used to pay duty and market their products across the country through their Agents (who sold to their stockists on payment of duty), after 14.4.2000, the assessable value of the goods fell by between 25% to 85%.
11. Detailed investigations into the various Agreements revealed that 45% of the shares of ARL held by the four Directors Shri V.S. Raaman and others had been purchased by DRL; DRL had agreed to pay a sum of Rs two crores to each of these four persons within 15 days of entering into an Agreement in exchange for their not competing with DRL in any business carried on by DRL or by ARL in the past. The Directors of erstwhile ARL transferred exclusive rights, title, and interest in the Trade Mark, brand name, logos, symbols, and copyrights owned by them to DRL along with Intellectual Property Rights free from encumbrance. As per the Non-Compete Agreement dated 13.12.1999, each of the four Directors undertook to ensure that ARL could continue their business without disruption for a period of 18 months. Each of the Directors had undertaken not to create, market, support or compete with any of the products till then created, marketed, or supported by ARL. Similar obligation was also undertaken in respect of Intellectual Property Rights of ARL. The Directors would not part with any confidential information in their possession pertaining to the business of ARL during 18 months from the date of Agreement. 90% of the shares in both SMIPL and SMPPL were seen to be owned by Shri V.S. Raaman and his wife. Shri V.S. Raaman contributed his knowledge and expertise for the manufacture of goods by SMIPL/SMPPL.
12. DRL had acquired 84% shares in ARL as per the press release of DRL dated 6.3.2000. ARL had recorded sales of Rs. 73.50 crores for the three quarters ending December 1999. ARL had a strong prescription base of more than one lakh specialized doctors. With the amalgamation of ARL with DRL, DRL expected its sales to go up to Rs 350 crores in the financial year 1999-2000.
13. All the ten shareholders of SCPL were one Director and relatives of other three Directors of erstwhile ARL. Six main brands of DRL accounting for 60% of their total sales had been purchased from ARL and SCPL. The book value of one share of SCPL as on 31.3.2000 was Rs. 9,500/-. These were sold at the rate of Rs. 68,539/- per share. SCPL used to manufacture three of the main brands, since acquired by DRL. By this transaction the brand names established and the goodwill cultivated among a huge clientele were transferred to DRL.
14. Shri V.S. Raaman floated SMPPL immediately on takeover of SCPL by ARL and purchased the Land & Building and Plant & Machinery of SCPL, the subsidiary of ARL. The Department tentatively concluded that ARL had financially accommodated SMIPL by allowing them use of their manufacturing facility free of cost for two and a half months and by selling Plant & Machinery and other assets to SMIPL for Rs. 76 lakhs incurring a loss of Rs. 1.73 crores in order to obtain medicines manufactured by SMIPL at a value (called Transfer Price in the agreement) much lower than the corresponding value ARL had adopted earlier for payment of duty. Thus ARL/DRL and SMIPL appeared to have benefited each other by the arrangement evolved.
15. The Department analyzed the manufacturing agreement and found the following salient features.
(1) ARL would share the know-how with SMIPL to manufacture the impugned products.
(2) SMIPL would manufacture the goods as per the ARL's specification, using inputs procured from vendors approved by ARL.
(3) SMIPL would not disclose the know-how to any person.
(4) Bill of material and valuation would be reviewed on quarterly basis by ARL.
(5) "Transfer Price" meant cost of raw materials, packing materials and conversion cost including profit of SMIPL . The goods manufactured would be sold exclusively to ARL at the transfer prices mutually agreed on principal to principal basis.
(6) ARL would offer sample from each batch before its release for despatch.
(7) Packing materials and art work would be approved by ARL before use.
(8) SMIPL would affix the Trade Mark as per the Trade Mark Licence Agreement dated 14.4.2000.
(9) SMIPL acknowledged that ARL had exclusive title and right to the Trade Mark, patents, design, or know-how.
(10)On termination of the Agreement right to use the Brand Name would continue with ARL.
(11) ARL had the right to inspect and test the products in SMIPL Laboratory to ensure standards and specifications prescribed:
(12) ARL had access to the premises of SMIPL and to their books/records.
(13) SMIPL would not manufacture similar product or in generic form for domestic market or for export.
(14) The agreement was for a period of ten yea Rs.
(15) On termination of agreement SMIPL would return to ARL the know-how received along with all documents and drawings.
(16) Schedule 'A' of the agreement showed the list of products to be manufactured by SMIPL and the "Transfer Price" working as cost of raw materials, the packing materials and, manufacturer's conversion charges and profits, at the rate of 6% on NRV (excluding excise duty)
16. The "Trade Mark Assignment Agreement" dated 14.4.2000 between ARL and SMIPL embracing the listed products emphasized the status of ARL as the owner of the Trade Mark and SMIPL as the user. As per the agreement ARL always retained the right to use the Trade Mark or permit its use by any other person. SMIPL would use the Trade Mark on products manufactured in accordance with the specifications and standards communicated or approved by DRL from time to time. SMIPL was not liable to pay any royalty or other remuneration to ARL. The agreement remained in force for one year. This agreement was renewed for a further period of one year on its expiration by 13.4.2001.
17. It appeared to the Department that the "Transfer Price" was a manipulated price depressing the genuine value of the goods sold to ARL. The value of the brand name/image of the goods was not taken into account in fixing the "Transfer price". It appeared that DRL had paid a premium price for ARL's shares as the products of erstwhile ARL/SCPL had a reputation in the market. The "Transfer Price" included only cost of raw material, packing material and the conversion charges (at the rate of 6% of sale price to stockists by ARL/DRL also called Net Realisable Value). The transfer price did not include the intrinsic value of the products. It appeared that ARL/DRL and SMIPL/SMPPL by entering into the manufacturing agreement and Trade Mark Assignment Agreement had managed to depress the assessable value and thus paid lesser amount of duty than due as both of them stood to benefit by the arrangement.
18. Accordingly a show cause notice No. 47/2002 dated 27.06.02 was issued by the Additional Director General of Central Excise Intelligence proposing to recover a differential duty of Rs. 6,78,99,566/- from SMIPL, this amount being the difference between the transfer price and the price for sale by ARL/DRL to their stockists of P or P medicines and Ayurvedic medicines cleared by SMIPL during the period 15.04.2000 to June 2001. It was also proposed to impose penalty on SMIPL, ARL/DRL and Shri V.S. Raaman under various provisions of the Act and Rules. It was also proposed to demand interest due on the duty short paid. The proposals were contested by SMIPL and other noticees. SMIPL claimed that the transactions were at arms length and there was no mutuality of interest between SMIPL/SMPPL and ARL/DRL. The prices were determined in the normal course of business, they stated. As per the reply, the transfer price was consistent with the ratio of the decision of Hon'ble Supreme Court in the case of Ujagar Prints. The Department had placed no evidence to show flow back of money directly or indirectly from the buyer to the manufacturer. They had not committed any fraud nor violated any statutory provisions and no penalty was imposable on them. The demand was time barred. Interest was also not recoverable as there was no evasion of duty or short payment by the reason and fraud, collusion, willful misstatement or suppression of facts. During the hearing and in their reply to the Show Cause Notice they endeavored to establish that transactions were at arms length and the proposals in the Show Cause Notice were not tenable.
19. In the adjudication order, the Commissioner observed that mutuality of interest between SMIPL/SMPPL and DRL/ARL had been alleged on the following grounds:
"1. INTEREST IN FAVOUR OF SMIPL/SMPPL
(a) Shri V.S. Raaman, Chairman and Managing Director of Sai Mirra Group of Companies and three other directors (close relatives of Shri V.S. Raaman) of ARL had received a non-compete fee of Rs. 2 crores each from DRL/AR.
(b) Shri V.S. Raaman along with his family members received Rs. 10.73 crores from DRL towards-sale of 6,13,564 shares of ARL at a premimum price.
(c) Smt. Vijayalakshmi Raaman, wife of Shri V.S. Raaman and a major share holder in SMIPL/SMPPL received Rs. 68,539/- per share and totalling to Rs. 6.43 crores from ARL (then controlled by DRL) for selling her shares in SCPL (major beneficiary)
(d) SMIPL benefited by purchasing the fixed assets of ARL, Ambattur at a relatively low value.
(e) The amount outstanding against the purchase of Land and buildings and plant and machinery of ARL by SMIPL was to be paid in twelve quarterly equal instalments without any interest.
(f) SMIPL/SMPPL were benefited by the free use of plant and machinery, land and buildings of ARL without any binding, lease or rentals, from 15.4.2000 to 30.6.2000.
(g) SMIPL did not have any responsibility regarding raw materia procurement, negotiation of procurement quality raw materials, marketing and distribution' of finished products etc.
(g) The entire production with the brands of DRL/ARL was lifted from the factory of SMPIL by DRL/ARL.
(i) Excise July was required to be paid only on reduced assessable value because of transfer price.
(k) Technical know-how for manufacture of goods was supplied free of cost as otherwise SMIPL would have incurred huge amount for acquiring/developing technical know-how.
II. INTEREST IN FAVOUR OF DRL/ARL
(a) Liability on account of excise duty Was reduced substantially on account of very low value of goods purchased from SMIPL, while their own sale price remained the same, thereby DRL/ARL benefited from the higher profit margin.
(b) DRL/ARL were not required to invest in production of goods, labour management etc. and were required only to market the products with their own brand name.
(C) The prices of raw materials/packing material reimbursed to SMIPL only at the actuals, thereby saving substantial cost oh the finished goods.
(d) Sale price of SMIPL determined by DRL/ARL, wherein the transfer price agreed did not contain the critical elements of cost relating to the technical know-how, formula, brand name, quality control checks, contributing to the marketability of the products.
(e) DRL/ARL set the conversion charges of SMIPL, fixed at 6% of Net Realizable Value (NRV) (excluding discount and excise duty) which was highly favourable to DRL/ARL.
(f) Deduction of excise duty for arriving at Net Realisable Value was calculated from cum-duty price to stockists after discount and the consequential benefits went to ARL/DRL.
(g) DRL/ARL held absolute control over SMIPL as all the products manufactured by SMIPL were to be sold only to ARL/DRL.
(h) Any increase in the price of finished goods of SMIPL were to be approved by ARL/DRL.
(i) No competition from any of the erstwhile Directors of ARL as they had been paid non-compete fees.
(j) DRL/ARL reaped huge profits as the finished goods price remained at artificially low and the products sold in the market continued to retain the original sale price.
20. While adjudicating the allegations in the Show Cause Notice the Commissioner found that DRL was not interested in acquiring manufacturing facility of ARL/SCPL. This showed that DRL . acquired the property of ARL/SCPL with the. object of promoting their business with the help of the established brand name and marketing network of stockists of ARL/SCPL. She found that with the object of promoting its business opportunities and Shri V.S. Raaman, DRL sold its property (ARL/DRL) to Shri V.S. Raaman and his relatives; Shri Raaman, who in turn had co-operated in their design floated two manufacturing units SMIPL & SMPPL. Shri V.S. Raaman was employed as he was qualified for his role as manufacturer of the impugned goods by virtue of his expertise and he was appropriately compensated. In the view of the adjudicating authority the manufacturing activities came to be entrusted with Shri V.S. Raaman as an outcome of advance planning. She did not believe that ARL had been bogged down with problems created by labour as argued by ARL. She found that DRL had purchased 23,63,538 shares from the four Directors of ARL representing also their family members for a total value of Rs. 41.36 crores at the rate of Rs. 175/- In this transaction Shri Raaman and his family members holding 6,13,564 shares along with his wife earned Rs. 10.73 crores . As the market price of the share was Rs. 155/- at the time of purchase by DRL, DRL paid premium of Rs. 20/- per share to the shareholders. Similarly DRL acquired all equity shares of SCPL at a price of Rs. 27.45 crores. This purchase was at the rate of Rs. 68,539/- per share when its book value (as on 31.3.2000) was Rs. 9,500/- Beneficiaries in this transaction were mainly M Rs. V.S. Raaman who received Rs. 6.43 crores and relatives of three Directors apart from one of the Directors of ARL, Shri R.K. Ramanathan.
21. As regards the sale of Plant & Machinery of ARL/SCPL DRL had claimed that they were more than 15 years old and out dated and not maintained for quite sometime and the total consideration for the sale of Land & Building and Plant and Machinery belonging to ARL at Rs. 394.78 lakh was at market value and was approved by the Income Tax Department. The Commissioner found that out of the total amount of Rs. 3.94 crore, the value of land & building had been worked out at Rs. 2.31 crores, Rs. 78 lakhs for the factory building at No. 426-427, SIDCO Industrial Estate, Ambattur, Rs. 7.50 lakhs the value of vehicles and remaining Rs. 76 lakhs the cost of Plant & Machinery of ARL. Therefore it was evident that the Plant & Machniery of ARL was valued at Rs. 2.49 crores as on 31.3.2000 but the same was sold to SMIPL for a meager value of Rs. 76 lakhs. There was no dispute that the value of Plant and Machinery after depreciation at the time of their sale was Rs. 2.49 crores as per their Books of Account and Annual Balance Sheet. Therefore the Commissioner found that SMIPL gained substantial benefit in the purchase of Plant & Machinery and other assets of ARL. As regards DRL letting SMIPL/SMPPL to use the facilities of ARL/SCPL on receipt of 50% of the price as advance and collecting balance in installment without charging interest, the Commissioner found the transaction to be not in the normal course but one which accommodated Shri V.S. Raaman financially whereby SMIPL/SMPPL gained substantial material benefits from ARL/DRL. SMIPL utilised the facilities of ARL from 15.4.2000 to 30.6.2000 without paying any lease rental, which again, was unusual. As the Memorandum of Agreement was executed on 30.6.2000, SMIPL received a largesse extended by ARL by allowing it use the facilities between 15.4.2000 to 30.6.2000. By paying Rs. two crores each to the four Directors, DRL ensured commitment of Shri V.S. Raaman not to compete with the business of ARL but was found to promote the business of ARL which had also substantially enriched by Shri V.S. Raaman and other three Directors. DRL took over SCPL paying Rs. 68,539/- per share when its book value was Rs. 9,500/-. M Rs. V.S. Raaman received Rs. 6.43 crores from ARL in this transaction. As 60% of the sales of DRL were accounted for by six of their brands, three of which belonged to SCPL (as per DRL's price release dated 6.3.2000), DRL obtained substantial advantage to increase its business by the take over of SCPL while Shri V.S. Raaman received huge remuneration on sale of his wife's shares in SCPL and was able to continue his business activities of production and sale of medicines.
22. Pursuant to the Agreement . between ARL/SCPL and SMIPL/SMPPL the assessable value of the various products manufactured and cleared by ARL nosedived by 20% to 85% thereby ARL/DRL gaining substantially owing to the adoption of "Transfer Price" as assessable value which was much lower than the market price at which finished products were ultimately sold.
23. "Transfer Price" was determined based on the actual cost of raw materials and packing materials, including conversion cost and manufacturer's profit calculated at 6% of Net Realizable Value of ARL/DRL. The NRV was the sale price of DRL excluding excise duty (which was not paid) thereby increasing the profit of DRL at the expense of SMIPL. From 14.4.2000, SMIPL/SMPPL were responsible for production of impugned goods and deployment of labour. However, ARL/DRL enjoyed assured supply of goods and exercised supervisory control on production, deployment of machinery, quality, specification etc. They were freed from investment on Land & Building and Plant & Machinery and from the hassles of managing labour. And, they got the impugned goods at a very cheap price. The "Transfer Price" formula indicated that the highly valued brand was ignored in determining the same. The intrinsic value and the marketability of established brands were not taken into consideration in determining the "Transfer Price".
24. As regards the justification of the "Transfer Price" being at arms length advanced by the noticees, the Commissioner found that SMIPL being an independent manufacturer was not working on job work basis and the Ujagar Prints formula adopted for determining the assessable value was inapplicable. What was evident was that SMIPL as a manufacturer was not independent to determine the price of raw materials or finished products but was bound by the terms of the Agreement which required it to part with the manufactured goods on receipt of actual cost of raw materials, packing materials, and conversion charges. This arrangement benefited only DRL/ARL. The adjudicating authority accepted the argument of the noticees that in view of the various case law, brand value of the buyer was not liable to be included in the price of the goods for the purpose of levy. However, she observed that DRL had valued the brand of ARL and SCPL at Rs. 55,73,82,000/- and Rs. 26,02,75,000/- respectively and quantified the goodwill respectively at Rs. 42,75,54,000/-and Rs. 11,74,78,000/- Therefore, DRL had admitted that the brands of ARL and SCPL had value and they had the benefit from the usage of the brand name of ARL and SCPL without paying any compensation in the form of royalty. There was a clear advantage to ARL/DRL on account of the market value of the brandnames belonging to ARL/SCPL, at the same time they were able to procure the branded goods manufactured by SMIPL at exceptionally low prices. The adjudicating authority further found that the manufacturer of the impugned goods had been provided with the essential technical know-how free of cost by the buyer. It was settled law that the. value of technical know-how was required to form part of the assessable value of any excisable goods, since without the technical know-how, no product could be manufactured. Therefore, Transfer Price" determined under the agreement had explicitly favoured the buyer. The formula of "Transfer Price" was such that if the sale price of ARL for any product came down then conversion charges of SMIPL would automatically come down whereby DRL/ARL while holding leverage over SMIPL had adopted a methodology for payment of conversion charges and profit of the manufacturer which was highly profitable to DRL.
25. The Manufacturing Agreement between ARL/SMIPL showed that SMIPL would undertake manufacture of medicines exclusively for ARL using the know-how supplied by them and strictly in accordance with the specification supplied by ARL. They would source raw materials from vendors approved by ARL/DRL. The know-how was exclusive property of ARL/SMIPL. SMIPL would not disclose it to any other person; ARL would review bill of material and valuation on quarterly basis and the source of supply (vendors) would not be changed without consent of ARL. The "Transfer Price" was cost of raw material and, conversion cost and profit, at the rate of 6% of NRV. SMIPL had to obtain approval of sample by ARL before releasing any batch. ARL would approve packing materials, and art work of packing. The agreement recognized that ARL had exclusive title and interest in trade mark, patent and designs and, know-how vested solely and exclusively with ARL. ARL had access at all times to the manufacturing premises of SMIPL and their Books and Records.
SMIPL would not undertake manufacture directly or indirectly of any products similar or sounding similar with label or in generic form for domestic market or for export market.
26. Similarly "Trade Mark Assignment Agreement" laid down that ARL would be proprietor of the Trade Mark which could not be used on the impugned goods manufactured in accordance with the technical data, formulae, specifications, directions and quality control which would be communicated or approved by ARL from time to time. SMIPL would use the Trade Mark on labels, packaging materials, etc. after approval in writing by ARL.
27. These Agreements showed that ARL held absolute control over SMIPL in the matter of procurement of raw material, prices payable on account of raw materials purchased, specification of goods to be manufactured, packing materials to be used, schedule of production and supply and the price of the finished goods manufactured by them. ARL had absolute control over SMIPL in various other activities relevant to manufacture and supply of pharmaceutical products. In other words, it was clearly established that SMIPL had no independence to decide or control or to act in any matter concerning the manufacture and supply of goods to ARL/DRL. This control over SMIPL, extended better opportunities to ARL/DRL to enhance their business interest. ARL/DRL would alone benefit from the expertise of these Directors who would not support creation or manufacture of products which would create competition in respect of the goods manufactured for ARL/DRL for a period of eighteen months.
28. The Non Compete Agreement ensured that DRL would exclusively benefit from the knowledge and experience gathered by the four Directors in the manufacture and marketing of medicines. The four Directors of ARL would get Rs two crores each in exchange.
29. From the various agreements and the transactions discussed, the adjudicating authority concluded that there was mutuality of interest between DRL/ARL on the one hand and Shri V.S. Raaman as CMD of SMIPL/SMPPL on the other hand. Receipt of non-compete fee, premium sale price received for shares in ARL held by Shri V.S. Raaman and his family members and premium sale price received by Mrs. Raaman for her shares in SCPL showed that Shri V.S. Raaman received substantial benefit. He received non-compete fee of Rs two crores. Moreover, SMIPL was able to purchase Plant & Machinery of ARL below their book value which was a substantially low price. SMIPL enjoyed free usage of Land, Building, Plant and Machinery of ARL without having to pay any lease rental during the period from 15.4.2000 to 30.6.2000. It was also found that SMIPL had not paid any interest on 50% of the purchase price of the assets of ARL paid after 30.6.2000 in 12 quarterly instalments. More importantly their association with DRL/ARL had assured them continued business and enhanced profit.
30. As regards DRL/ARL, the "Transfer Price" agreed upon did not represent wholesale price or transaction value of the goods. "Transfer Price" had clearly provided a very favourable price distribution in favour of the buyers. SMIPL had no freedom whatsoever to determine price of the goods they had manufactured. It was obvious that relationship of the two corporate entities DRL/ARL and SMIPL/SMPPL was born out of mutually beneficial business agreement which helped to reduce their duty liability. The absence of the element of money value of technical know-how supplied by the buyer for production of the impugned goods clearly showed that the sale price was not at arms length or normal transaction value as defined under Section 4 of the Central Excise Act, 1944. This also helped DRL/ARL to reduce their duty liability. DRL/ARL did not pay any royalty attributable to the goodwill of the brand name of ARL/SCPL. DRL had acknowledged the huge value of the brand of ARL/SCPL in their press release dated 6.3.2000. The adjudicating authority concluded that it had been clearly established that DRL/ARL and SMIPL/SMPPL were related persons, in the sense that they had substantial mutual interest in each other's business. She observed that the case law cited by the noticee dealt with the cases involving facts not identical to the issue on hand. Therefore, they were not relevant to the subject case. While accepting that there was no flow back of money from the buyers to the manufacturer, it was observed that the various agreements and transactions had revealed that DRL/ARL and SMIPL/SMPPL were interested in the business of each other and both the parties benefited by these transactions. Accordingly the Commissioner confirmed the proposal to demand the duty proposed in the SCN from the manufacturer.
31. In view of the fraudulent conduct, suppressing various factors involving also the contrived "Transfer Price" from which the intrinsic value of technical know-how, development of art work of the packing materials, etc. were excluded and various agreements and transactions clearly showed the intention of the parties to evade payment of duty. Therefore, invocation of extended period was justified. She also found that the proposals to penalise SMIPL, Shri V.S. Raaman, ARL and DRL were justified. It was also found that interest was liable to be paid on the duty demanded. Accordingly she passed the impugned order confirming demand of differential duty of Rs 8,53,59,0437- (Rupees eight crores fifty three lakhs fifty nine thousand and forty three only) from SMIPL, under Section 11A (2) of Central Excise Act, 1944, imposing equal amount of penalty on them under Section 11AC of Central Excise Act, 1944, demanding interest due under Section 11AB, on the duty demanded, imposing penalty of Rs 5 lakhs on DRL under 209A of Central Excise Rules 1944/ Rule 26 of Central Excise Rules (No.2) 2001, imposing a penalty of Rs. two crores on ARL under Rule 209 A of Central Excise Rules 1944/ Rule 26 of Central Excise Rules (No.2) 2001 and imposing a penalty of Rupees fifty lakhs on Shri V.S. Raaman, Chairman and Managing Director of M/s. Sai Mirra Group of Companies under Rule 209 A of Central Excise Rules 1994/ Rule 26 of Central Excise (No.2) Rules, 2001.
32. A similar SCN No. 64/2002 dated 16.08.02 with identical allegations was issued by the Additional Director General of Central Excise Intelligence proposing to recover a differential duty of Rs. 4,11,52,235/- from SMPPL, being the difference between the duty due on the transfer price and the price for sale by ARL/DRL to their stockists of P or P medicines and Ayurvedic medicines cleared by SMPPL during the period 15.04.2000 to June 2001. It was proposed to impose penalty on SMPPL, ARL/DRL and Shri V.S. Raaman under various provisions of the Act and Rules. It was also proposed to demand interest due on the duty short paid. The proposals were contested by SMPPL and other notices on the same lines as in the case of the Adjudication Order No. 17/2003 whereby SCN dated 47/62 dated 27.06.02 was adjudicated . The proposals were confirmed in the Order in Original No. 5/2004 dated 26.5.2004 passed by the Commissioner of Central Excise, Chennai IV as shown in the table on page 3 of this order.
33. SMIPL and SMPPL filed similar appeals with identical grounds against the impugned orders demanding duty and interest from them and imposing penalty on the company and Shri. V.S. Raaman. Shri. V.S. Raaman also filed appeals against penalty imposed on him. Details of appeal filed are discussed below.
34. SMIPL was a Pvt Ltd. Company manufacturing P or P medicines, also as loan licensee and manufactured medicines on contract. They were incorporated in March 2000. They applied for registration on 14.4.2000. They purchased ARL land, buildings, plant and machinery with the knowledge of department and informed the department on 25.5.2000 that ARL had authorised them to manufacture impugned medicines and submitted photo copy of manufacturing agreement on 12.5.2000 entered into on 14.4.2000.They had informed the Supdt on 25.5.2000 that they had no marketing set up and goods would be sold to ARL. They had informed that they manufactured medicines for DRL on contract. They had filed, Manufacturing Agreement with DRL on 7.6.2000 with Range Officer. They submitted memorandum of association and share holding pattern to Dy Commissioner on 17.6.2000 They did not know share holding pattern of DRL and ARL and had made no payment towards technical know how imparted. Also no amount was payable for brand names assigned to them. The department raised queries on 10.7.2000 and filed copies of invoices raised by ARL for scrutiny by Range staff. Further clarifications were submitted on 17.7.2000. Invoicing and price patterns of ARL were submitted. More details were furnished on 4.8.2000. Show Cause Notice No. 47/2002 was served on the appellant invoking larger period. But relevant information used to be furnished to the Department earlier. Snow Cause Notice had sought to revise assessable value for clearances between 15.4.2000 to 31.3.2002 treating ARL/DRL as related person of the appellant. Penalties were proposed under Rule 9, 52A, 173C and 173F. Penalty was proposed under Section 11AC, and interest under Section 11AB. A demand for Rs. 6,78,99,566/-was proposed. They had denied allegations of relationship with DRL. DRL had purchased shares of (sic) Company was constituted on 6.3.2000. Appellant had offered to purchase 15 year old buildings, land, plant and machinery of ARI. Plant, fixed assets and other assets would he sold at book value of ARL as on 31.3.2000 . IT clearance had been obtained under Section 269 UL(1) of the IT Act, 1961 for the transaction. ARL & SMIPL had entered into a memorandum of agreement of sale on 30.6.2000 for sale of land and building of ARL. They were sold to them at current market value approved by IT department. Other fixed assets were purchased at book value less depreciation. They had convened EGM on 2.6.2000, filed Form No. 23 with Registrar of Companies on 27.6.2000 and signed memorandum of agreement of sale on 30.0.2000 Plant was handed over to them on 14.4.2000 as they had paid more than 50% upfront. Directors of appellant were not on board of ARL/DRL; there was no share holding between each other and no mutuality of interest. Affixation of trade mark on goods manufactured on contract was a common practice prevalent in India. Buyer would exploit the good will and reputation of brand. No royalty was collected from the appellant. The buyer and owner of brand name ensured quality and integrity of the brand/product and for that purpose controlled quality. There was no flow back of money from ARL/DRL to appellant. The impugned goods were sold at transaction value. There was no suppression of facts. The appellant had not existed before incorporation in March 2000 and therefore, transactions entered into by DRL with share holders of ARL had nothing to do with the appellant. After incorporation the business belonged to the institution and not to any individual. Allegation that ARI /SCPL was acquired by DRL with the purpose of promoting the business interests of DRL/ARL and the appellant was devoid of merits. The appellant was a company and Shri V.S. Raaman was not the Company. The ratio of Kwality Ice Cream Co. v. CCE squarely applied to the present case. The allegation of relationship had its basis in the low price charged from DRL compared to the price of ARL prior to take over. To be related, two persons should have interest direct or indirect in the business of each other. There was no such interest on either side. The allegation that plant and machinery was sold at meager value was not correct and without any documentary evidence. No evidence was shown that the fixed assets and other assets sold to the appellants would have fetched a higher value. There was no rule that appellants should pay book value for such assets. This had no relevance in determining assessable value. Central Excise was not concerned with this aspect. If there was evidence that some additional amount was received, that alone should have formed additional consideration. Appellant was allowed to use the premises of ARL from 14.4.2000 to 30.6.2000 as it had paid Rs 1.97 crores as advance. Formalities related to Companies Act, convening of EGM, after giving notice and filing of Form No. 23 with Registrar of Companies on 20.6.2000 delayed signing of sale agreement which was made on 30.6.2000. Appellant had made profit on sale of goods manufactured by it. Appellant paid duty on cost of raw materials + packing materials + 6% on the net realizable value of the goods of ARL/DRL for sale to their stockists. ARL/DRL exprcised quality control over the products which carried their brand names as various regulations required. that quality was maintained. Goods not conforming to quality standards were returned by DRL and goods covered by invoice No. 268 dated 21.7.2000 was destroyed by the appellant and Rs 35,42,395/- paid to DRL. This showed that both were principal manufacture Rs. Manufacturer and brand name owner were liable for punishment under Drugs and Cosmetics Act, if medicines were sold with poor quality. As per the ratio of Sidhosons v. UOI it was decided that buyer could test the goods before his brand was affixed Excise duty was to be levied on the value fetched by sale of these goods to the buyer by the manufacturer. This was not to include the value of brands, the assessable value being the whole-sale price at the factory gate of the manufacturer. That the buyer who ordered goods to be produced on contract could test the goods under manufacture to ensure quality and in such a situation, the seller could not be said to be manufacturer was the ratio of UOI v. Cibatul Ltd. . The situation was similar in the appellant's case. In Jt. Secretary to Govt. of India v. Food Specialities Ltd. the Supreme Court decided that that the price at which the manufacturer sold goods in the course of whole sale trade to Nestle was the assessable value and the value of trade mark was not required to be added to determine the value for levy of duty. The demand had been made on the basis that transactions between manufacturer and the buyer were not at arms length and the prices were emaciated due to the relationship between the buyer and the manufacturer. The association between the two had been ascertained not on the basis of any direct or indirect flow back of funds from the buyer to the seller. As the basis of the demand was mutuality of interest between ARL/DRL and the appellants and as the same had not been established the impugned order deserved to be set aside.
35. M/s. DRL filed appeals against the orders. They stated that major pharmaceuticals such as Ranbaxy Laboratories, had approached ARL for a possible take over (news item in "Business Line" submitted as proof). The share price of ARL was ranging between Rs. 153.25 and Rs. 167.40 in October and November 1999. Therefore the purchase of ARL was based on the prevalent price of its shares in the stock market and in accordance with SEBI guidelines. It was a transparent transaction. SCPL was purchased at Rs. 27.45 crores and the shares held by Shri V.S. Raaman's family were only 26.24%. DRL merged with ARL in March/April 2000. ARL was taken over owing to its large customer base and the brand strength of their products as well as the large net work of stockists. The factory of ARL was fifteen years old and was bogged down by Union problems. Therefore, DRL was not interested in ARL as a manufacturing facility. They had retrenched labourers of ARL at their Hyderabad unit and considered the same in respect of the Chennai unit. However, owing to the opposition by the labour Union this was not possible and DRL decided to hive off the manufacturing facilities of ARL. It was in those circumstances, Shri V.S. Raaman had approached them to purchase the manufacturing facilities of ARL at the book value on the condition that he was given sufficient benefit to cover its operating expenses and merger. They were agreeable to the proposal. Accordingly ARL's facility was sold to SMIPL/SMPPL at book value as on 31.3.2000. Since the sale of assets involved the sale of real estate also DRL obtained clearance from the Income Tax authorities in respect of the transfer of factory, Land & Building of ARL at Ambattur and transfer of Land and Buildings of SCPL at Keelkattalai, Chennai. As per the agreement between ARL/SMIPL, Land & Buildings and other assets were to be sold to SMIPL for over Rs. 396.82 lakhs. Similarly SCPL and SMPPL entered into an Agreement of Sale on 30.6.2000 for the sale of Land & Buildings belonging to SCPL for a total consideration of Rs. 275.77 lakhs. The Land & Building were sold at the current market value approved by the Income Tax authorities. Fixed and other assets were sold at the book value after allowing depreciation. They denied the allegations in the Show Cause Notice No. 47/2002 dated 28.6.2002. They submitted that they had acquired ARL mainly for its customer base, net work, logistics etc. The allegation that they were related persons of SMIPL/SMPPL was denied. They did not have any share holding in SMIPL/SMPPL and vice versa. The factory of SCPL was also fifteen years old and was outdated. They intended to concentrate on their core competency and decided to dispose the plants of ARL/SCPL. Shri V.S. Raaman had offered to buy the two plants through his Company and to pay 50% upfront and balance 50% in instalments. The entire proceeds were paid in three yea Rs. DRL considered the amount in excess of land value as surplus, so allowed instalment payment. Rent was not collected between 14.4.2000 to 30.6.2000 since 50% was collected in advance and DRL did not pay interest till 30.6.2000 when the property was transferred. This was Owing to time taken in completing formalities in compliance of Companies Act and Income Tax Act. There was no mutuality of interest between SMIPL/SMPPL and DRL. There were no common Directors in SMIPL/SMPPL and DRL.
36. SMIPL/SMPPL manufactured pharmaceutical products as per appellants' (DRL's) specifications. The goods were affixed with DHL's brand name and sold to it. The assessable value for excise duty was arrived at by including the cost of raw materials, packing materials, conversion charges and profit margin of SMIPL/SMPPL. SMIPL/SMPPL were contract manufacture Rs. They submitted that even if the entities were related, the assessable value had to be determined in terms of principles laid down by the apex Court in the case of Ujagar Prints. Moreover they had proceeded in compliance with the advice of a Senior Advocate they had consulted. Therefore, no penalty was imposable under Rule 209A of the Centra] Excise Rules and Rule 26 of the Central Excise Rules, 2001. The impugned order did not contain a finding that the goods in question were liable for confiscation. Therefore, penalty under Rule 209A was not imposable. SMIPL had filed necessary declaration under Rule 173C and the Department had not initiated any investigation into the price declared .In Sidhosons and Anr. v. UOI and Ors. the apex Court ruled that the assessable value of the electrical goods manufactured by the petitioner should be valued at the price at which the goods were sold to the buyers, Bajaj Electricals, under contract and not on the price at which Bajaj Electricals sold the goods in the market. In CCE v. Naga Detergents Pvt. Ltd. the petitioner manufactured detergent cakes according to the formulation, specifications and quality furnished by M/s. Tata Oil Company Limited under an Agreement. In the above decision the Tribunal held that, petitioner's price to TOMCO was the assessable value to be adopted and not TOMCO's sale price. SMIPL was a contract manufacturer manufacturing goods under its own brand name and selling it in the market. They were not a dummy. There was no reciprocatory shareholding or flow of funds between SMIPL and DRL. There was no basis to hold the two entities as related persons. ARL's shares were bought at negotiated price of Rs. 175/-and all shareholders received the above amount and the same was not restricted to Directors of ARL alone. The price was close to the existing marketing price. The above transactions were prior to incorporation of SMIPL/SMPPL and operationalising Manufacturing Agreement. DRL was outsourcing its production with many job workers/contract manufacturers in Hyderabad and elsewhere in the country. There was, thus, no design on the part of DRL or SMIPL/SMPPL to defraud the Government. As regards the non compete fee the same was not paid to Shri V.S. Raaman only but also to other erstwhile Directors of ARL. DRL had no dealings with the other Directors. Payments made by DRL to Shri V.S. Raaman or other shareholders of ARL or Directors of ARL on some day before the incorporation of SMIPL had no relevance to the case on hand. Nothing prevented DRL from entering into Manufacturing Agreement with erstwhile ARL/SCPL to outsource their products. Therefore, the whole basis on which the order had been built on had to crumble down.
37. The "Transfer Price" computed on the basis of conversion cost and manufacturer's profit basing on Net Realizable Value was fair and reasonable. Conversion cost and profit considered for fixing transfer price was much higher than the one specified in Drug Price Control Order for such manufacturing activities. SMIPL had made cash profit out of the business and Department had failed to establish that the normal transaction value agreed between the parties was not fair and reasonable.
38. At the time of hearing, learned Sr. Advocate for the appellants reiterated the written submissions made and made the following further submissions supported by case law:
(a) Sidhosons and Anr. etc. etc. v. UOI and Ors. etc. He excerpted the following ratio of the above decision. Learned Sr. Advocate argued that in the light of the above judgement the brand value was not includible in the assessable value of the goods manufactured by the appellants that is SMIPL/SMPPL.
The enhancement in the value of the goods by reason of the application of the brand name is because of the augmentation attributable to the value of the goodwill of the brand name which does not belong to the manufacturers and which added market value does not accrue to the petitioner company or go into its coffers. It accrues to the buyers to whom the brand name belongs and to whom the fruits of the goodwill belong. Excise duty is payable on the market value fetched by the goods, in the wholesale market at the factory gate manufactured by the manufacture Rs.
(b) Renowned Auto Products Mfrs Ltd. v. CCE, Chennai The various reasons advanced by the Adjudicating Authority in the impugned Order to hold that, there was mutuality of interest between the two companies were not sufficient to hold the same. It was settled law that a buyer would not become a related person merely because all the goods were sold to a particular person unless the price charged to them was based on extra commercial consideration. It was further submitted that no attempt was successfully made to establish that the appellants had charged a low price from ARL/DRL. The department had failed to prove that the appellants and ARL/DRL were related persons and therefore the price charged by the appellants from ARL/DRL was not acceptable for assessment and cited the following ratio of the above judgement.
....Firstly, there should be mutuality of interest, secondly the price charged should not be the normal price but lower to the normal price and extra commercial considerations for reducing the normal price and lastly the person producing the commodity should be related to the assessee. In case all the three conditions are not satisfied, then price cannot be stated to be the one coming under Section 4(1)(a) of the Act."
(c) Lakme Ltd. v. CCE, Mumbai -II .
Learned Sr. Advocate submitted that it was entirely legal if the assessee adopted any legal measures to reduce their tax burden. In the instant case, the assessable value included the raw material cost, conversion cost and the profit of the manufacturer. What was not included was the brand value and the expenditure involved in maintaining the marketing set up. This arrangement cannot be faulted on the ground of attempt to evade excise duty. He relied the following observations of the Tribunal in the cited decision:
It cannot be anybody's case that if the goods manufactured by the appellant were sold to a marketing company in which it had no shares or interest, the expenses incurred by the latter in marketing the product would form part of the assessable value of the goods. It cannot be said that such a step is evasion or avoidance punishable by law. Unless it can be demonstrated that the object of setting up a new company was exclusively primarily or even predominantly for the purpose of reducing tax liability to the extent of hiving of the expenses on advertisement, publicity to another entity, such a step cannot be held to be a colourable device."
(d) Raliwolf Ltd. v. UOI .
Learned Sr. Advocate cited the above judgement of the Bombay High Court. He submitted that the impugned order failed the following test laid down by the Hon'ble High Court for invoking the proviso relating to adoption of price of related person as the assessable value.
that Section 4(4)(c) is a defining section of the expression "related person" and the said section must be read and seen in the context of third proviso to Section 4(l)(a). If one, therefore, reads the entire section, it is clear that three conditions are required to be satisfied before invoking the third proviso:
Firstly, there should be mutuality of interest.
Secondly, the price charged should not be normal price but the price lower to the normal price, and that extra-commercial considerations have reduced the normal price.
Thirdly, the alleged related person should be related to the assessee as defined in Section 4(4)(c) of the said Act. It is only if the above three conditions are satisfied, then alone it can be said that the third proviso to Section 4(l)(a) is applicable.
(e) Rallis India Ltd v. CCE, Bombay In support of the argument that paying non-compete fee and exercising quality control could not be held as reasons not to accept the price as normal price, Learned Sr. Advocate cited the following from the cited case law.
Firstly, there should be mutuality of interest, secondly the price charged should not be the normal price but lower to the normal price and extra commercial considerations for reducing the normal price and lastly the person producing the commodity should be related to the assessee. In case all the three conditions are not satisfied, then price cannot be stated to be the one coming under Section 4(1)(a) of the Act."
(f) Proctor & Gamble v. CCE, Bhopal In the above case, facts were that Proctor & Gamble India Ltd.(PGIL) had received Rs. 12.8 crores from Proctor & Gamble Home Products Ltd (PGHP) as non-compete fee. PGIL sold the entire production of aerial detergent powder to PGHP. It was held that payment of non-compete fee and licence fee could not be a consideration to depart from normal price. So also the fact that entire sale of goods was made to PGHP. The fact that PGHP had control or quality control could not be a ground to hold that price was not a normal price. The finding of related person was also not sustainable as shareholders of public limited company did not, by reason of their shareholding have interest in business of company.
(h) Agri More Ltd. v. CCE, Valsad 2004 (64) RLT (762) The following head notes of the citation were cited:
Appellant entered into supply agreement with M/s Cyanamide Agro Ltd, for supply of entire quantity manufactured to Cyanamide and non-compete agreement for which Cynanamide undertook to pay Rs 36.75 crores oh account of which appellant received Rs 20 crores - there is no material to show that price was affected due to payment of non-compete consideration hence not to be added to the assessable value -appeal allowed.
(i) Amstrin Pharmaceutical v. 2006 (195) ELT 127 (Tri. Del) The following extract of the caselaw was cited for consideration.
In the present case, both the manufacturer and buyer are limited Companies. The sale price of the manufacturer is as agreed with the buyer. There is nothing on record to show that the sale price is a favoured price or that it does not include all elements of cost of production. It is well settled that a fully commercial price rightly constitutes assessable value, even if entire goods are sold to one party. That the buyer supplies the raw materials, is also of no relevance, inasmuch as, in such a case of job work, assessable value is to be determined by adding the job charges to cost of material supplied by the buyer. It is not the Revenue's case here in that the sale price as agreed between the parties does not include the full value of the materials going into production or the cost of production or manufacturing profit.
The following case law was cited wherein the Hon'ble Apex Court had referred with approval the observations of the said Court in the Atic Industries case:
(i) Union of India v. Playworld Electronics Pvt Ltd. - Civil Appeal No. 1491 (NN) of 1988, decided on 2-5-1989.
"(i) Union of India v. Atic Industries Ltd. .
"The quality and degree of interest which each has in the business of the other may be different; the interest of one in the business of the other may be direct while the interest of the latter in the business of the former may be indirect. That would not make any difference so long as each has got some interest, direct or indirect in the business of the other."
'In that case, the respondent, Cibatul Ltd. entered into two agreements with Ciba Geigy of India Ltd. for manufacturing resins by the seller. The joint manufacturing programme indicated that the resins were to be manufactured in accordance with the restrictions and specifications constituting the buyer's standard and supplied at prices to be agreed upon from time to time. The buyer was entitled to test a sample of each batch of the goods and after its approval the goods were to be released for sale to the buyer. The products were to bear certain trade-marks being the property of the foreign Company - Ciba Geigy of Basle. Tripartite agreements were also executed between the buyer, the seller and the foreign company, recognising the buyer as the registered or licensed user of the trade-marks, authorising the seller to affix the trademarks on the products manufactured "as an agent for and on behalf of the buyer and not of his own account" and the right of the buyer being reserved to revoke the authority given to the seller to affix the trademarks. The respondent in that case filed declaration for the purposes of levy of excise under the said Act showing the wholesale prices of different classes of goods sold by it during the period May, 1972 to May, 1975. The declaration included the wholesale prices of the different resins manufactured under the two aforesaid agreements. The Assistant Collector of Customs revised those prices upwards on the basis that the wholesale price should be the price for which the buyer sold the product in the market.' On appeal, this Court held that the High Court was right in concluding that the wholesale price of the goods manufactured by the seller was the wholesale price at which it sold those goods to the buyer, and it was hot the wholesale price at which the buyer sold those goods to others.
(j) Union of India v. Citabul Ltd.
"For this purpose, the buyer was entitled to test a sample of each batch of the manufactured product and it was only on approval by him that the product was released for sale by the seller to the buyer. It was apparent that the seller could not be said to manufacture the goods in those facts, it was held, on behalf of the buyer. It was further found that it was clear from the record that the trade-marks of the buyer were to be affixed on those goods only which were found to conform to the specifications or standard stipulated by the buyer. All goods not approved by the buyer could not bear those trade-marks and were disposed of by the sellers without the advantage of those trademarks."
(k) Jt. Secretary, GOI and O Rs. v. Food Specialities Ltd. .
'Dismissing the appeal, it was held that the value of Nestle's trade marks could not be added to the wholesale price charged by the respondent to Nestle's for the purpose of computing the value of the goods manufactured by the respondent in the assessment to excise duty."
'It could not be assessed on the basis of the market value obtained by the buyers who also add to the value of the manufactured goods the value of their own property in the goodwill of the 'brand name'.
He reiterated the written submissions made on behalf of all the appellants.
39. Learned Sr. Advocate for the department argued that various case law on the subject had dealt with situations where relationship between two companies being subsidiary-company and the holding-company or had shareholding in each other otherwise; where two companies had common directors; cases where manufacturer supplied the entire goods to one party; where the buyer dictated specifications and controlled manufacturing activities, etc. were considered and the fact as to whether they were related for the purpose of Central Excise law was decided. In the instant case the totality of the various circumstances such as several transactions that preceded setting up of the appellant-units had to be examined when it would be obvious that certain persons such as Shri V.S. Raaman and his wife received vast benefits from ARL/DRL from the sale of shares in the company ARL, SCPL and the purchase of assets of ARL/SCPL after they had become property of DRL. It would be seen that drastic fall in the assessable value of the medicines manufactured by SMIPL/SMPPL from 15.4.2000 onwards from the prices that ruled up to 14.4.2000 was not accidental but a reciprocatory gesture to ARL/DRL by SMIPL/SMPPL, 90% of the shares of which were owned by Shri V.S. Raaman, CMD and his wife. He also relied on the observations of the Supreme Court in Atic Industries Ltd. where the Court had made observation that the "quality and degree of interest which each has in the business of the other may be different; the interest of one in the business of the other may be direct while the interest of the latter in the business of the former may be indirect, that would not make any difference so long as each has got some interest, direct or indirect in the business of the other". To highlight and support his points that the buyer and the seller companies in the instant case were related he relied on the following case laws:
(a) Flash Laboratories Ltd. v. CCE New Delhi wherein it was held by their Lordships that in this case the appellant was a subsidiary company of Parle Products Ltd. Parle Products had also another subsidiary company. 60% of the products manufactured by the appellant were sold to Parle Products Ltd. and 40% products were sold to Parle Biscuits Ltd. the department had decided that the appellant and Parle Biscuits were related persons within the meaning of Section 4(4)(c) of the Act. The apex Court had held that:
...The facts and circumstances of the case show that there is mutuality of interest between the three companies as sixty per cent of the products of the appellant are sold to Mess Rs. Parle Products Limited and the remaining forty per cent of the total product of toothpaste is being sold to Mess Rs. Parle Biscuits Limited. Moreover, Mess Rs. Parle Products Limited are incurring the expenses for sales promotion and advertisement for the sale of the appellant's product, namely, "Prudent toothpaste.
II. (b) Calcutta Chromotype Ltd. v. CCE In the said case the Apex Court had observed as follows:
According to recent decisions, there is no bar on the authorities to lift the veil of a company, whether a manufacturer or a buyer, to see it was not wearing that mask of not being treated as related person when, in fact, both, the manufacturer and the buyer, are the same persons - Once it is found that persons behind the manufacturer and the buyer are same, it is apparent that buyer is associated with the manufacturer, and then regard being had to the common course of natural events, human conduct and public and private business it can be presumed that they have interest, directly or indirectly, in the business of each other (refer Section 114 of Evidence Act) - As to when the veil should be lifted will depend upon facts and circumstances of each case.
(c) Powertech International v. CCE, Mumbai-II wherein it was held as under:
In the above case, the Tribunal had decided that there was no universal rule that separate entities under the Companies Act of manufacturer and buyer could not be related within the meaning of Section 4 of the Central Excise Act.
40. Shri M. Chandrasekaran further submitted that the history of transactions involving Shri V.S. Raaman, other Directors of ARL, his family members and shareholders of SCPL would show that they were blood relations or family members. ARL's shares were purchased at Rs. 175/- when its book value was Rs. 33/- and market value around Rs. 155/- Directors of ARL got huge non-compete fee of Rs. two crores each. On purchase of SCPL on 25.2.2000 with its factories at Keelkattalai, DRL sold the manufacturing facility of SCPL. Shri V.S. Raaman and his wife owned 90% shares of SMIPL . Directors of SMIPL were S/Shri V.S. Raaman and his brother Shri. V.S. Ravikumar. From 14.4.2000 agreement between SMIPL and ARL came into force. Ninety percent shares of SMPPL were owned by Shri. V.S. Raman and his wife. They owned two factories at Keekattalai. SMIPL/SMPPL were formed around February 2000. Though the non-compete agreement was signed, SMIPL/SMPPL started manufacture of ARL/SCPL medicines from 14.4.2000 and though they had bought factories of ARL and SCPL only on 30.6.2000. Same men, materials and machinery were used. As on 31.1.2001, Rs. 98 lakhs were still to be paid by SMIPL. The issue involved was whether SMIPL/SMPPL and ARL/SCPL were mutually interested in the business of each other. The prices of medicines sold were, lower by about 25% to 85% after 15.4.2000 compared to ARL's and SCPL's prices earlier All goods of SMIPL/SMPPL were sold only to ARL/DRL as per the agreement between ARL/SMIPL at a transfer price. The transfer price was much lower than the price at which the products were sold by ARL to their buyers before and after 14.4.2000. Sales were of ARL/SCPL brand manufactured by SMIPL/SMPPL. All these brands had a value in the market. ARL prices to stockists remained the same before and after 15.4.2000. Transfer price was determined by DRL.
41. He further submitted that SMIPL/SMPPL were not job workers. Prices were fixed by ARL/DRL. Medicines manufactured by SMIPL/SMPPL were to be sold only to ARL. Non-compete agreement executed for 18 months for which Rs two crores each were paid to all the Directors of ARL including Shri V.S. Raaman. DRL/ARL had assured supply of goods whose production was subject to supervision at various stages by ARL/DRL at the price fixed by ARL/DRL without any investment in plant and machinery; these were sold later with huge margin. ARL/DRL got the goods at a price which did not include the price of technical know-how given by ARL to SMIPL/SMPPL. He also submitted that SMIPL/SMPPL could use ARL's trade mark without payment of royalty and any other charges . As per Annual Report of ARL, their Trade Mark was valued at Rs. 55.73 crores and goodwill at Rs. 42.75 crores. Despite Shri V.S. Raaman receiving non-compete fee he had floated SMIPL on or around February 2000 and manufactured same items and DRL acquiesced in it. It shows concerted action on the part of DRL and SMIPL. DRL had earlier acquired all the shares of ARL on 25.11.1999. Plant and machinery valued at Rs. 2.49 crores in ARL's Balance Sheet and Books of Account were purchased by SMIPL for Rs. 76 crores.
42. He added that interest could be direct or indirect as per the ratio of Atic Industries case. Extra commercial considerations had influenced fixing of transfer price. ARL/SCPL shares were purchased both from Shri V.S. Raaman and his wife at exorbitant prices i.e. several times the book value. SMIPL used the Land & Building and Plant and Machinery of ARL without having to pay any lease/rental between 15.4.2000 to 30.6.2000. Balance purchase price was payable only in 12 quarterly instalments and no interest was payable. Therefore, the price declared by SMIPL was not an arms length price and was therefore based on several other considerations which affected the price. He concluded that the transfer price was price for sale to related person and had to the basis for determining the correct assessable value.
43. We have carefully studied the records of the case and considered the detailed submissions made by the parties. The common issue involved in these appeals is whether appellants SMIPL/SMPPL and ARL/DRL are to be treated as related persons in the matter of computing assessable value of medicines manufactured by the appellants and whether duty should be demanded from the appellants on the basis of the sale price of ARL/DRL to its stockists. It has been endeavoured in the impugned orders to establish mutuality of interest between the buyer and manufacturer companies. In the order an effort has also been made to unmask the corporate facade of the manufacturer companies and to identify the actual persons behind the corporate veil who had benefited by past transactions between the buyer and the manufacturer. It was concluded that they were related and differential duty demands proposed with reference to buyer's sale price were confirmed. The transactions justifying the logic followed in the order of the Commissioner are set out in the ensuing paragraphs.
44. Following transactions, according to the adjudicating authority had cast an obligation on the manufacturer to sell the impugned goods at lower prices to the buyer. The shares of ARL once owned by Shri V.S Raaman and the three other Directors and their family members had been sold to DRL at a price rate of Rs 175/- when its book value was Rs 337-. S/Shri V.S. Raaman and the three other Directors were paid a non-compete fee of Rs two crores each by DRL. The shares of SCPL owned by Mrs. & Mr. Raaman and their relatives were sold at the rate of Rs 68,539- as against its book value of Rs 9500/-. The total sale price was Rs 27.43 crores of which Mrs. Vijayalakshmiraaman alone received Rs 6.43 crores. The land, buildings, plant and machinery of ARL(DRL) were sold at a much lower price than the market value to SMIPL and SMPPL. The fixed and other assets of ARL were sold at a price of Rs 76 lakhs as against the book value of Rs 2.31 crores whereby DRL incurred a loss of Rs 1.73 crores. SMIPL was allowed use of plant and machinery of ARL without paying any charges to DRL during 15.4.2000 30.6.2000. SMIPL was allowed to pay 50% of the consideration for the assets of ARL in 12 quarterly instalments without charging interest. Technical know-how for manufacture of branded medicines by SMIPL/SMPPL was provided by the buyer free of cost. The buyer did not collect royalty from the manufacturer using its brand name.
45. The buyer of the impugned goods was found to have received undue benefits as follows. Overnight on 15.4.2000 the assessable value of the various products manufactured by SMIPL/SMPPL fell by between 25% to 85%. This reduction was with intent to evade payment of duty and to financially favour the buyer. A transfer price was mutually agreed for the sale of medicines manufactured as per the specifications supplied by DRL in the manufacturing agreement. Its formula, raw material cost + cost of packing + (conversion cost and profit) @ 6% of the Net Realizable Value did not represent the real value of the goods sold. The value did not include intangible elements constituting the intrinsic value of the goods manufactured such as technical know how. Even though SMIPL/SMPPL was a manufacturer who produced the impugned goods with its own raw materials, it charged only a very low conversion cost like an ordinary job worker producing goods with materials supplied by the principal. DRL exercised strict control over production and the schedule of production. SMIPL did not have independence even to choose vendors from whom to source its raw material. DRL negotiated with select vendors and communicated the list of vendors and their prices to the manufacturer for purchase of raw materials by SMIPL. These indicated that SMIPL was solely dependent for its operations on DRL who apparently also decided the price. DRL was benefited by the low value charged by SMIPL/SMPPL which was based on a formula in favour of DRL.
46. We do not find the decision of the Commissioner based on sound reasoning based on facts. An important finding in the impugned order is that DRL had purchased shares of ARL at an unduly high rate of Rs. 175/- per share when its book value was Rs. 33/- . We find that when the shares of ARL were sold, the manufacturer companies SMIPL & SMPPL were not in existence. Therefore, it cannot be said that SMIPL/SMPPL benefited by sale of shares of ARL to DRL. The department's case however, appears to be that Mrs. & Mr. Raaman owned major chunks of the shares of the manufacturing companies and these firms (SMIPL/SMPPL) benefited by the transaction as M Rs. & Mr. Raaman had gained in the sale of ARL shares. Book value and the market value of listed shares are usually different and in the case of successfully running companies, the market price of the shares is much higher than the book value of the shares. The market value depends on the performance of the company and expectations of the investing public. The claim of the assessee that the shares were being sold in the market at around Rs 166/- in 11/99 has not been disputed. Moreover Shri Raaman and his associates and relatives had held only around 45% of the total shares, out of which he and his wife had held only less than 27% of the total shares. Further, DRL had acquired another 39% of ARL shares, thus enhancing their holding to 84%, purchasing these shares @ Rs 175/- after making a letter of offer to the public as per SEBI guide lines. It is obvious that the shares were purchased at fair value and not at a price to favour DRL as found by the Commissioner. Moreover in paragraph 89.10 of the Order in Original No. 17/2003, the adjudicating authority had made the observation that ARL had been assessed by DRL to have the brand value and goodwill respectively at Rs 55,73,82,000/- and Rs 42,75,54,000/-.
47. As regards the SGPL shares, Mr. Raaman and his wife held only 26.24% of the total shares. All the share holders received the same price as Mrs. Vijayalakshmiraaman. The value of SCPL shares had to be considerably higher than the book value of Rs 9500/-. In paragraph 89.10 of the Order in Original No. 17/2003, the adjudicating authority had observed that SCPL had been assessed by DRL to have the brand value and goodwill respectively of Rs 26,02,75,000/- and Rs 11,74,78,000/-. Therefore, the Commissioner's finding that the shares had been purchased at unduly high value to transfer funds indirectly to Mrs. & Mr. Raaman lacks basis. Therefore, this argument does not support the decision arrived at.
48. As regards the sale of land and building of ARL, the same were sold after the IT authorities had issued a certificate of appropriateness of price under Section 269 UL(1) of the IT Act, 1961. Therefore, that price cannot be assailed as being not fair value. As regards the other assets we observe that it is not an uncommon practice to sell old assets at book value less depreciation. The department has not shown that the IT department had not accepted the consideration as fair value of the fixed assets and had initiated proceedings for recovering any tax in relation to this transaction. Therefore, the price of Rs 76 lakhs paid to DRL for the fixed assets of ARL as against the book value of Rs 2.31 crores appearing in the accounts of ARL as on 31.3.2000 cannot be taken as not representing their market price. In this regard Commissioner has also not given detailed findings to justify her decision with reference to the manner of accounting of depreciation in ARL's accounts or in any other manner. Therefore, this ground is also devoid of any merits.
49. Paying non-compete fee is a normal practice when firms producing branded/patented products are taken over. In this case, Shri Raaman got Rs two crores like other three Directors who did not continue any business association with DRL subsequently. Therefore there was no need to pay a high non-compete fee to all the Directors if the same was unrealistic and was intended as a device to transfer funds to Shri Raaman. Moreover, there is no evidence to show that Rs. two crores is an unreasonably high non compete fee in the instant case. In similar transactions, in the case of Agrimore Ltd. v. CCE 2004 (64) RLT 762 (CESTAT-Del.) Cyanamide Agro Ltd. had received Rs 20 crores from Cyanamide as non-compete fee out of an agreed Rs. 36.75 crores. This was found to be no ground to decide that the sale price was depressed. Therefore, payment of non-compete fee of Rs. two crores does not justify a finding against Shri Raaman or the manufacturers in support, of the decision taken. In any case, Shri Raaman was only one of the share holders of SMIPL/SMPPL and not the manufacturer Company.
50. Another aspect considered was that lower amount was charged by the appellants as conversion cost. This argument has been successfully countered by the appellants by producing copies of Notifications issued under Drug Price Control Order (DPCO) wherein lower conversion charges were fixed for similar work as undertaken by the appellants. Therefore, this ground relied upon to decide that extra commercial consideration had entered in fixing the transfer price is not substantiated.
51. As regards the control exercised by DRL, it is seen that the provisions relating to manufacture and sale of P or P medicines require that medicines are of prescribed standard. Therefore, it is imperative that the owner of the brands ensures that the medicines bearing his brands are not of dubious quality which will invite punishment to both the manufacturer and the brand owner. It is also natural that the brand owner advises the manufacturer to purchase raw materials from a vendor who produces raw materials of dependable quality. As the assessable value and the buyer's price are dependent on prices of raw material and packing material there was nothing extra commercial in DRL suggesting suitable vendors to source raw material including packing material to be procured by SMIPL/SMPPL.
52. The sale price of the impugned goods has been decided in each case as "transfer price" which is the price of raw materials + (conversion cost + profit) @ 6% of Net Realizable Value. The transfer price is based on a formula mutually agreed upon. The conversion cost adopted was shown to have been reasonable with reference to Notifications issued under Drugs Price Control Order by the appellants. Therefore, the allegation of the department that the assessable value was unilaterally decided by the buyer is not correct.
53. As regards the technical know-how, the appellants (DRL) have claimed that they had not imparted any technical know- how as the goods manufactured were standard drugs. This claim does not appear to be correct. However, from the impugned order, it is not clear if the appellants manufactured medicines of pharmacopoeial formulations affixing their brands or they were of exclusive and secret formula developed by ARL/SCPL. From the contract, it appears that the manufacturer had to keep information on the formula of the medicines confidential for its exclusive use. Therefore, the value appropriate to this intangible ingredient was not included in the assessable value. However, there is no proposal in the Show Cause Notice to enhance the assessable value on this basis. The demand is solely on the basis that DRL and SMIPL/SMPPL are related persons.
54. Another argument adopted by the Commissioner is that the appellants were allowed to use the manufacturing facility of ARL/DRL without payment of lease or rental during 15.4.2000 to 30.6.2000. The appellants' answer to this allegation is that the appellants had paid 50% of the total consideration in advance and there was no favour shown by ARL/DRL in allowing the use of these properties when ARL/DRL had already received 50% consideration and was not paying any interest on it. The appellants' argument has to be accepted.
55. Yet another related point relied on as a ground by the Commissioner is that the appellants were allowed facility of payment of remaining 50% consideration in 12 quarterly instalments without charging any interest. This facility allowed as part of a negotiated agreement does not lead to an inference that any favour was done by either party in the transaction.
56. We are of the considered view that various case law cited by the learned Sr. Advocate for the Department does not advance the case of the department. Facts of all the three judgments cited by the learned Sr. Advocate are not similar to the facts of the case on hand in important respects and are therefore not applicable . On the other hand, the case law cited by the learned Sr. Counsel for the appellants substantiate their claims. For the sake of brevity we are not repeating those arguments we have reproduced and agree with. Where we differ, the disagreement is expressly indicated in the order.
57. We find that the Department has not conclusively established that the manufacturer-companies and the buyer company are related persons in terms of Section 4(4)(c) of the Act to attract proviso (iii) to Section 4(1)(a) in determining the assessable value. The department has found the transactions of sale of assets of ARL/SCPL (after they had become subsidiaries of DRL) were tainted and extended financial accommodation to Shri V.S. Raaman, who along with his brother set up SMIPL and SMPPL immediately after entering into a non-compete agreement in contravention of its terms in which DRL had acquiesced . We do not find anything wrong in parties to an agreement changing the terms of the agreement immediately after entering into the agreement by mutual consent. It is seen that shares of ARL were not sold at unduly high price. 45% of the shares were sold by the four Directors and their families whereas the remaining 39% were purchased from public following the guidelines of SEBI at the same price paid to the Directors of ARL including Shri V.S. Raaman. In selling shares of SCPL it was not just M Rs. V. S. Raaman who received the premium share price but also the other shareholders. It is not established by the department how the sale price in either case was not fair value. Also the transactions in immovable properties of ARL and SCPL were transparent and with the approval of the competent authority in the IT Department. The Department has not been able to show that the transfer price decided by mutual agreement was lower than the normal price. The conversion cost paid to SMIPL/SMPPL was shown by the appellant to be higher than conversion charges fixed under Drugs Price Control Order. As already discussed, we do not find that the control exercised by ARL/DRL over the manufacturer of medicines sold to it carrying the buyer's brand names was an abnormal thing.
58. The appellant-companies are independent entities . There is no share holding in the appellant-companies of ARL/DRL or vice-versa. There is no flow back of funds to compensate for the low price, as perceived by the department, charged by the appellants. The department has attempted to establish a relationship in terms of Section 4(4)(c) between the buyer and the seller of the impugned goods by researching the circumstances of the transactions entered into between the two entities in the past. It has not been successfully shown that these transactions were not at armslength. As a matter of fact certain transactions such as sale of ARL shares and sale of SCPL shares took place prior to incorporation and coming into existence of SMIPL/SMPPL. Therefore, the department's case fails in the face of the evidence marshalled by the appellants. The department has failed to establish that either party had direct or indirect interest in the business of the other party.
59. We find the ratio of Kwality Ice cream Co. v. CCE, Chandigarh case applies to the instant case in view of the similarity of the facts of that case to the facts of the case on hand.
60. Facts of the case in Kwality Icecream Co. v. CCE, Chandigarh (supra) were that M/s Brooke Bond Lipton India Ltd.
(BBLIL) had entered into an agreement with Kwality Ice Cream Ltd to exclusively source and produce products for BBLIL. BBLIL would intimate the specifications and also the list of suppliers from whom Kwality Ice Cream (K-north) would source the raw materials. The department had decided that Kwality Ice Cream and BBLIL were related persons having mutual interest in the business of each other. Certain other facts such as Kwality Ice Cream was required to make an interest free deposit of Rs 50 lakhs besides payment of a non compete fee of Rs 7.5 crores were also taken into account to decide the relationship. Also the terms and conditions of the agreement between the appellant and BBLIL/HLL had not left any scope to indicate that the appellant had any independence to run their unit. Starting from the procurement/purchase of raw material to the manufacture of the final product, all the activities of the appellant were fully controlled by BBLIL/HLL. The price of goods was determined by BBLIL/HLL and any cost found extra was pruned/cut down by BBLIL/HLL. Even the margin of profit was determined by BBLIL/HLL. The appellant was required to offer samples of its product to BBLIL for inspection and approval by them. Based on these tentative findings the allegation was made that there was mutuality of interest between the appellant and the buyer. Therefore, transactions between the appellant and the buyer were found to be not on principal to principal basis. Value for the impugned product was fixed as per a formula in an agreement taking into account also the investments K-North would make to improve the facilities.
61. The Tribunal decided that it was only natural that a person who got a sensitive product like ice cream manufactured on contract basis insisted on its quality and required the manufacturer to produce samples for its inspection as and when it wanted. On going through the non-competition agreement entered into between the parties it was found that the amount paid to the appellant was only Rs. 0.50 crores. The tribunal disagreed with the view taken by the Commissioner (Appeals) that the price was affected due to payment of the above amount to the appellant as a consideration of noncompetition in the market with BBLIL as per terms of the sourcing agreement. It was decided that arrangements involved were not adequate to hold that the appellants and BBLIL were related persons and that the negotiated price mutually agreed continued to be the correct assessable value.
62. As per Section 4(4)(c) of the Central Excise Act, 1944, 'related person' is defined as follows:
related person" means a person who is associated with the assessee that they have interest, directly or indirectly, in the business of each other and includes a holding company, a subsidiary company, a relative and a distributor of the assessee, and any sub-distributor of such distributor.
We have found that SMIPL/SMPPL and ARL/DRL are not related persons as defined in the above said Section 4(4)c.
63. Proviso (iii) to Section 4(1)(a) reads as follows:
Where the assessee so arranges that the goods are generally not sold by him in the course of wholesale trade except to or through a related person, the normal price of the goods sold by the assessee to or through such related person shall be deemed to be the price at which they are ordinarily sold by the related person in the course of wholesale trade at the time of removal, to dealers (not being related persons) or where such goods are not sold to such dealers, to dealers (being related persons) who sell such goods in retail.
64. The Hon'ble Bombay High Court laid down the following tests to determine whether proviso (iii) to Section 4(1)(a) is attracted in a transaction in excisable goods by a manufacturer in the case of Raliwolf India Ltd v. UOI .
Firstly, there should be mutuality of interest.
Secondly, the price charged should not be normal price but the price lower to the normal price, and that extra-commercial considerations have reduced the normal price.
Thirdly, the alleged related person should be related to the assessee as defined in Section 4(4)(c) of the said Act. It is only if the above three conditions are satisfied, then alone it can be said that the third proviso to Section 4(l)(a) is applicable.
65. We observe that the department has not succeeded in establishing the existence of the above features about the value adopted by SMIPL/SMPPL or the relationship between SMIPL/SMPPL and ARL/DRL .
66. From the records, it is seen that the jurisdictional range staff and divisional staff had been in correspondence with the appellants since the impugned transactions in properties on the assessable value which shows that larger period cannot be invoked to demand differential duty if at all payable. However, we are not rendering a finding on this aspect as we find the demand not sustainable on merits.
67. The orders cover demand for a period before and after 1.7.2000, when Section 4 of the Central Excise Act was replaced with new provisions. But the provisions governing definition of "related person" were not disturbed during the material period. Therefore, the entire demand deserves to be set side and the appeals deserve to be allowed. Accordingly we allow the appeals.
(Pronounced in the Open Court on 31/10/2006)