Custom, Excise & Service Tax Tribunal
M/S Y.M. Krishna S.S.K. Ltd vs Cce, Pune-Ii on 15 January, 2014
IN THE CUSTOMS, EXCISE & SERVICE TAX APPELLATE TRIBUNAL WEST ZONAL BENCH AT MUMBAI COURT NO. I Appeal No. ST/40/09 (Arising out of Order-in-Original No. 2/ST/2008, dated 27.11.2008 passed by the Commissioner of Central Excise, Pune-II). For approval and signature: Honble Shri P.R. Chandrasekharan, Member (Technical) Honble Shri Anil Choudhary, Member (Judicial) ======================================================
1. Whether Press Reporters may be allowed to see : No the Order for publication as per Rule 27 of the CESTAT (Procedure) Rules, 1982? 2. Whether it should be released under Rule 27 of the : Yes CESTAT (Procedure) Rules, 1982 for publication in any authoritative report or not? 3. Whether their Lordships wish to see the fair copy : Seen of the order? 4. Whether order is to be circulated to the Departmental : Yes authorities? ====================================================== M/s Y.M. Krishna S.S.K. Ltd. Appellant Vs. CCE, Pune-II Respondent Appearance: Shri V.B. Gaikwad, Advocate for Appellant Shri Rakesh Goyal, Addl. Commissioner (A.R.) for Respondent CORAM: SHRI P.R. CHANDRASEKHARAN, MEMBER (TECHNICAL) SHRI ANIL CHOUDHARY, MEMBER (JUDICIAL) Date of Hearing: 15.01.2014 Date of Decision: 15.01.2014 ORDER NO. Per: Anil Choudhary:
M/s Y.M. Krishna Sahakari Sakhar Karkhana Ltd. (hereinafter referred to as Appellants), Rethare Bk., Post-Shivnagar, Tal-Karad, Dist.-Satara having Central Excise Registration No. AAAAKO946L XM-001 are engaged in the manufacture of sugar and molasses, and also having their Distillery Division operational since 1976.
2. The brief facts are that in the distillary, among other products like foreign liquor, etc., the Appellants are also manufacturing country liquor under their own brand name Pahili Dhar which is approved by the State Excise Authority. The appellant had entered into selling agency agreement dated 10.04.2002 with M/s Talreja Trade (HUF), Karad for a period of five years up to 31.03.2007 with intention to obtain higher returns on their investments in their country liquor plant by increasing the sale of country liquor of Pahili Dhar brand. The copy of the said agreement, is annexed in paper book. The said agreement was replaced by another selling agency agreement dated 01.01.2006 which is valid for a period of five years i.e. up to 31.12.2011. The copy of the said agreement is annexed in paper-book. As per the said agreements, the packing material, essence, etc. (required for manufacture/packing of the country liquor bearing Pahili Dhar brand of the Appellants) was to be supplied by M/s Talreja Trade (HUF) and M/s Talreja Trade (HUF) was supposed to collect the sale proceeds from the customers (to whom the country liquor of Pahili Dhar brand is sold by the Appellants (as suggested by him) and after deducting the price of the packing material, essence, etc. (supplied by him to the Appellants) from the said sale proceeds, the remaining sale proceeds were to be handed over by him to the Appellants. Accordingly, during the period 2004 to 2007 the Appellants manufactured country liquor of Pahili Dhar brand (out of their own raw material/packing material) and have sold the said branded country liquor though its agent as follows:-
Period/Financial Year Sales Value 2004-2005 18,69,08,277/-
2005-06 24,11,71,191/-
2006-07 33,65,94,996/-
M/s Talreja Trade (HUF) collected the above said sale proceeds from the respective customers of the appellant. From the gross sale proceeds the appellant have received the amount towards manufacturing cost + taxes & duties + agreed profit margin and the agent have retained the balance as per the agreed formula.
3. The sale of the country liquor of Pahili Dhar brand to the customers suggested by M/s. Talreja Trade (HUF) is done under the cover of the invoices of the Appellants issued in favour of the respective customers. Appellant have annexed some of the invoices issued for sale of country liquor, in the paper book. The sales tax charged/collected in the said invoices is regularly paid to the Sales Tax department from time to time by the Appellants and the sales tax returns are also filed with Sales Tax department from time to time and the assessment of the said returns is also done. The copy of the sales tax returns (along with challans), which are assessed by the Sales Tax department for Financial Year 2004-05 to 2006-07, are filed in paper book.
4. That Revenue issued show-cause notice dated 21.05.2011 for the period 10.09.2004 to 31.02.2007 (invoking extended period) asking to show cause as to why Service Tax amounting to Rs. 12,66,140/- towards Business Auxiliary Services and Rs. 38,39,187/- towards Intellectual property service should not be demanded & recovered from it, in terms of the agreement stated above between the appellant and M/s Talreja Trade (HUF) along with interest and penalty. The show-cause notice alleges that the appellant have undertaken manufacture of country liquor from spirit on job work basis for M/s Talreja Trade. This activity falls under the category Business Auxiliary Services. Further, the appellant have allowed M/s Talreja Trade to use its brand name Pahili Dhar for marketing country liquor and this activity falls under the category intellectual property services.
5. The appellant filed reply to the show-cause notice contesting the proposed demands mainly on the ground that there is only a selling agency agreement between it and M/s Talreja Trade. Vide the impugned order the proposed demand towards Business Auxiliary Services was dropped but the demand of Rs. 38,39,187/- under the category of Intellectual Property Service was confirmed along with equal amount of penalty under Section 78 and under Section 76 @ Rs. 200/- per day. Finding was recorded that M/s Talreja Trade pays, the minimum guaranteed margin for sale of 50,000 bottles to the appellant. As per statement of Chief Accountant of the appellant this amount is royalty for the use of brand name. During the personal hearing the appellant had submitted that the brand name Pahili Dhar as well as right to use the same remains entirely with it. Further the agreement clearly mentions that M/s Talreja Trade will not be entitled to the use of the brand name in any way. But the adjudicating authority referring to the agreement observed that only ownership of the brand name will rest with the appellant and M/s Talreja Trade is only utilizing the brand name for selling the country liquor and paying royalty to the appellant. Further as the appellant stated it had no knowledge of its liability of the service tax for IPR service under the given facts, hence it was concluded that the appellant had suppressed the material facts with a view to evade tax. Accordingly invocation of extended period was upheld. Being aggrieved the appellant have file appeal before this Tribunal.
6.1 The appellants, in their defense, have pleaded that if the agreements and the documents on record are read together harmoniously, one will realise that what they have received is the selling price of the country liquor, Pahili Dhar brand, which they have sold to various customers suggested by M/s Talreja Trade (HUF) and hence it is wrong to conclude that any part of the said price is the royalty received from M/s Talreja Trade (HUF) for allowing them to use the brand name Pahili Dhar (owned by the appellants) to sell the country liquor in the market. Also that the extended period of limitation is not available to the department in this case and hence the demand is not sustainable on merits as well as on the point of limitation.
6.2 The appellants first of all submit that nowhere in the statement dated 30.11.2006 of Shri H.I. Talreja [proprietor of M/s Talreja Trade (HUF)], has admitted that the minimum guaranteed margin (i.e. Rs. 18 per case) is nothing but royalty to be paid to the Appellants for using the brand name owned by the appellants for selling country liquor in the market.
6.3 Further, nowhere in the agreements dated 10.04.2002/01.01.2006 there is any mention of the word royalty. Plain reading of the said agreements will reveal that the said agreements are to appoint M/s Talreja Trade (HUF) as the sole selling agent of the appellants for country liquor and are not the agreements for allowing M/s Talreja Trade (HUF) to use the appellants brand name. Most importantly, in the said agreements, it is specifically provided that the brand names will be the exclusive property of the appellants and M/s Talreja Trade (HUF) will have no claim, right, title or interest in the said brand names. Thus, it is clear that the learned Commissioner of Central Excise, Pune-II had arrived at the above said conclusion merely because the Chief Accountant of the appellant has stated that the amount of Rs. 18 per case is royalty to be received from M/s Talreja Trade (HUF) for using its brand name Pahili Dhar (owned by the appellants) for marketing and sales of country liquor.
6.4 The appellants further submits that it is only possible to hold that the appellants allowed M/s Talreja Trade (HUF) to use the brand name Pahili Dhar (owned by the appellants) to sell the country liquor only if the country liquor would have been owned/manufactured by M/s Talreja Trade (HUF). However, it is not the case of the department, in fact in para 26 of show-cause cum demand notice itself it is clearly admitted that the country liquor (in respect of which the brand name Pahili Dhar is used) is manufactured and owned by the appellants.
6.5 The appellants manufactured country liquor out of their own raw material/packing material under their own brand name and have sold the said branded country liquor to various customers suggested by M/s Talreja Trade (HUF) and have received the sale proceeds through M/s Talreja Trade (HUF). M/s Talreja Trade (HUF), before handing over the sale proceeds, has only deducted the price of packing material, etc. sold by him to the appellants and have handed over the remaining sale proceeds to the appellants.
6.6 The appellants submit that on harmonious reading of the agreements and the documents on record will reveal that the appellants are manufacturing their branded country liquor (out of their own raw material/packing material) and because of the agreements with M/s Talreja Trade (HUF), they are bound to sell the entire country liquor to the customers suggested by M/s Talreja Trade (HUF). Hence to safeguard their interest, they have decided on the minimum profit which they must get in the transaction, which is being wrongly treated as royalty for allowing M/s Talreja Trade (HUF) for alleged use of the brand name of the appellants to sell the country liquor.
6.7 Thus, the transaction is purely of sale of the goods through an agent and not a transaction of allowing another to use intellectual property. Merely because the part of the amount received for the said sale transaction is described as royalty in the letter written to the department and in the statement of the Chief Accountant, the same cant be held as royalty received for allowing M/s Talreja Trade (HUF) for alleged use of the appellants brand name. The above said stand of the appellants is squarely supported by the statement of the proprietor of M/s Talreja Trade (HUF) which is totally ignored by the learned Commissioner while passing the impugned order, rendering the findings perverse.
6.8 That any person who wants to manufacture and sell country liquor under a particular brand name, has to get the CL-1 licence from the State Excise authority. The person is bound to get the brand name (under which he wants to sale the country liquor to be manufactured by him) approved from the State Excise authority and without such permission of the Sate Excise authority, the owner of the said brand name can not allow the other person to use the said brand name for country liquor. If the State Excise authority finds that a brand name owner has allowed other person to use the brand name without obtaining permission from the State Excise authority, the State Excise department can confiscate the liquor and also can prosecute both the brand owner as well as the brand user.
6.9 Thus in view of the facts & in law the appellants submit that the demand is not sustainable on merits as well as part of the said demand is also not sustainable on the point of limitation. As the demand is not sustainable, the penalties imposed under Section 76 & 78 are also not sustainable. For the same reason, recovery of interest ordered under Section 75 also is not sustainable.
7. The learned A.R. relies on the findings in the impugned order and prays for confirmation.
8.1 We have considered the rival contentions and perused the documents on record.
8.2 For the packing material and essence supplied by M/s Talreja Trade to appellant, proper sale invoices have been issued charging Sales Tax/VAT as applicable. Appellant have also directly purchased packing material and essence from others.
8.3 For sale of country liquor by appellant, proper sale invoices have been issued. In the said sale invoices the name of M/s Talreja Trade (HUF) is shown as selling agent.
8.4 The sale of country liquor have been declared in the returns filed with the Sales Tax Department by the appellant.
8.5 A query was raised by Revenue vide letter dated 07.04.2006 to appellant for (i) if it was engaged in manufacture of liquor on job basis or under its own brand name & (ii) if manufacturing under own brand name, it any Commission Agent/C & F Agent have been appointed. In its reply dated 28.04.2006 the appellant said that they have selling agent and enclosed copy of the agreement.
8.6 Copy of licence issued by the State Excise Authority as well approval of labels (to be affixed on bottles) by it, have been filed in the paper book, which shows the appellant is the manufacturer of country liquor under brand name Pahili Dhar. There is not mention of M/s Talreja Trade (HUF) on the approved labels.
8.7 In this statement dated 30.11.2006 before Superintendent Mr. Haresh Talreja have stated:-
i) That they have a Sole Selling Agents agreement dated 10.04.2002 with the appellant.
ii) M/s Talreja Trade books order for sale and goods are directly sold/dispatched to the buyers.
iii) As sole selling agents, under the agreement they collect all payments for sales of country liquor. Thy also supply by way of sale (billable basis) packing materials, essence, etc. to the appellant.
iv) As per agreement, from the gross sales proceeds collected they pay the appellant an amount which is as per the formula; taxes + raw material cost + processing charge + profit margin/royalty @ Rs. 18 per case. The balance of sales proceeds is retained by M/s Talreja Trade towards packing materials + labor payments made on behalf of appellant + margin.
v) The arrangement is on Principal to Principal basis. M/s Talreja Trade, for granting sole-selling right have guaranteed a minimum return per month to the appellant, being @ Rs. 18 per case for 50,000 cases or Rs. 9,00,000/- per month.
vi) Further, stated that this arrangement is not a job work. The payment formula takes care of increase/decrease in cost & taxes and at the same time assures constant profit per case to the appellant.
vii) M/s Talreja Trade is not responsible for making payment for unsold stock or loss in storage by appellant.
viii) In response to query for repayable interest free deposit made with appellant by M/s Talreja Trade to facilitate, acquisition of Automatic belt conveyor and storage tanks it was stated that the same is in the business interest of both the parties and is on business like terms.
8.8 That on perusing the agreements dated 10.04.2002 and 01.01.2006, it is noticed that the agreements are more or less pari materia. The obligations of the parties are as under:-
A) Of Y.M.K. (manufacturer/appellant)
(i) Responsible for arranging raw materials like country liquor.
(ii) Purchase essences and use as per directions of agent.
(iii) Fix selling price of country liquor in consultation with M/s Talreja Trade.
(iv) To deliver the finished goods to M/s Talreja Trade or its nominees after ensuing compliance with State Excise Law.
B) Of M/s Talreja Trade (Agent)
(i) Responsible to purchase or sell entire country liquor produced by appellant.
(ii) To collect sale proceeds.
(iii) Ensure timely deposit of duties and taxes.
(iv) Responsible for compliance of statutory regulations under Bombay Prohibition Act and Maharashtra Country Liquor Rules.
(v) To keep interest free Security Deposit of Rs. 10 lakhs with appellant and also deposit a duly signed cheque for Rs. 25 lakhs.
(vi) To direct appellant on matters of production and bottling of C.L.
(vii) To assist appellant in procuring raw materials for ensuring constant production.
(viii) To supply packing materials including bottles on cost basis to appellant.
(ix) To supply labor for production of liquor as well as handling of raw material and finished goods at own cost and comply with labor laws.
(x) To pay process charges, as stipulated, per case of liquor.
(xi) To monitor quality of production.
(xii) The account between the parties to be settled as follows:-
No. Particulars Y.M.K. (Appellant) to be re-imbursed as under:
a) For rectified spirit consumed in production of country liquor supplied by Krishna. At the average of the prevailing price realised by Krishna for domestic sales during the relevant month to be reviewed after each fortnight.
b) For essences purchased and used.
At actual cost to Krishna.
c) For corrugated boxes procured and supplied.
At cost plus 5% margin for initial 50,000 boxes and 10% margin thereafter.
d) For water and electricity consumed by the country liquor unit, licence fees, excise supervision charges, sample analysis fees and administrative charges pertaining to country liquor activity incurred by Krishna and collectively called process charges. On the basis of -
a) For minimum 60,000 cases per month at the rate of Rs. 6.26
b) For 60,000 to 75,000 cases i.e. for 15,000 cases additional sale Rs. 5.45
c) For 75,000 to 1,00,000 cases i.e. for additional 25,000 cases sale Rs. 4.00. (Or revised amount on revision of water and electricity charges) per case.
e) For transport fee, administrative fee, any tax, duty, cess or fee chargeable under any law for the time being in force for the production, storage and sale of country liquor. At actual cost to Krishna
f) Transport fee For the time being, Krishna has obtained a stay order from the High Court at Mumbai, against transport fees on rectified spirit and the Agent has agreed to deposit the amount equivalent to transport fee on rectified spirit consumed during the month or provide a Bank Guarantee on concurrent amount on a mutually acceptable Bank with effect from completion of the present investment made for fully automatic machinery by the Agent. The deposit will stay with Krishna till the decision of the case or will be adjusted against investment payback of vacuum distillation column.
g)
a) Towards guaranteed minimum margin of Rs.18/-. Per case for 60,000 cases (earlier 50,000 cases) per month.
b) For 60,000 to 75,000 cases i.e. for 15,000 cases additional sale Rs. 17.00 per case.
c) For 75,000 to 1,00,000 cases i.e. for additional 25,000 cases sale Rs. 16.00 per case.
d) The rates of premium country liquor brands to be decided after discussions. (to be evaluated on regular basis with K.S.S.K. and Agent by mutually agreement.) Amount is subject to annual review and revision.
h) Cost incurred by the Agent for supplying any raw materials or executing any of its responsibilities under this Agreement, including in promotional schemes for marketing country liquor. This shall in no way change or affect the aforesaid payments to Krishna.
i) Responsibility and liabilities, if any, arising from losses in excess of those allowable in production of spirit and country liquor and shortages in production process, breakages in supplies. This shall be exclusively borne by the Agent.
j) In the event, the Agent fails to sell 60,000 minimum cases of country liquor.
The Agent is liable to pay to Krishna Rs. 10.80 lakhs (Rupees Ten lakhs eighty thousand only) towards the guaranteed minimum margin which has been assured by the Agent to Krishna. This minimum guaranteed amount is subject to annual review and revision.
In terms of this Agreement, the settlement of accounts between the Agent and Krishna shall be made in the manner as provided for hereunder. The Agent shall pay Krishna by demand draft or bankers pay order in favour of Krishna Sahakari Sakhar Karkhana Ltd. payable at State Bank of India, Treasury Branch,. Karad, in settlement of accounts as under:
For rectified spirit, the Agent shall be required to pay before issue of the spirit by Krishna Distillery.
(a) For essences, corrugated boxes and process charges, the Agent shall within 10 days of the end of each month, pay the amount to which it pertains to the concerned Parties.
(b) For any tax, duty, cess, fee or charges, the Agent shall pay on the same day of presentation of debit note with supporting documents. However, sales tax on the sale of country liquor during the month, shall be paid by the 10th of the next month.
(c) For guaranteed minimum margin of Rs. 14,55,600/- of minimum 60,000 cases per month. The agent shall pay within 10 days of the end of each month, in addition to power charges.
(d) Any other payment shall be made by the Agent within 10 days of the demand raised by Krishna.
Failure of the Agent to pay any one of the aforesaid sums on the dates stated above, shall attract levy of interest at the prevailing interest rate of Satara District Central Co-operative Bank Ltd.
8.9 Few other clauses of the agreement, relevant are as follows:-
14. The brands under which country liquor is presently being produced and shall be produced in future by Krishna will remain the exclusive property and trade mark of Krishna and the Agent shall have no claim, right, title or interest in the brand names or essences used by Krishna in producing the said country liquor. Notwithstanding anything to the contrary in Clause 2, the Agent shall not be unilaterally entitled to demand changes in the brands and essences without the concurrence of Krishna.
16. The Agent shall execute an Indemnity Bond indemnifying Krishna from all acts of commission or omission for any liability that may arise because of such acts or failure to perform such acts, including all civil and criminal liabilities that may fasten on Krishna.
17. Continued defaults of the Agent to pay its dues on the due dates shall entitle Krishna to recover the same from the deposit of Rs. 10.00 lakhs and thereafter so long as the deposit has not been re-instead, Krishna shall be entitled to stop deliveries of further goods.
18. If in any situation Agent is unable to lift all the produced country liquor per month, manufactured by Krishna as dictated by production and lifting at the end of each month. Krishna reserves the right to sell the excess cases to other Country Liquor licencees in such manner so as not to hinder sale established by the Agent.
19. Failure of Krishna to meet its obligations under this Agreement for supply of rectified spirit, essences, water, electricity to provide godown and storage facility stated hereinabove will entitle the Agent to a pro-rata reduction in payment of the guaranteed minimum margin for such period so long as the failure continues. The responsibility of machinery maintenance and procurement of spare parts lies with the Agent. However, Krishna shall assist the agent for immediate procurement of spare parts.
26. This Agreement is a contract between two Principals and shall not be construed to be a Partnership or joint venture arrangement.
9. Thus, on appreciation of the clauses of agreement with the evidence on record, it is evident that no Intellectual Property Service have been given by the appellant. The arrangement/agreement between the appellant and M/s Talreja Trade are for ensuring maximum production and sale of C.L. so as to maximise profits for both the parties. The minimum guarantee of profit per month given or assured by the agent to the appellant have been misunderstood as Royalty which is not the fact. The ground of limitation is also allowed in favour of the appellant.
10. Thus, the appeal is allowed with consequential relief, if any. The impugned order is set aside.
(Operative part of order pronounced in open Court) (P.R. Chandrasekharan) (Anil Choudhary) Member (Technical) Member (Judicial) Sp 15