Customs, Excise and Gold Tribunal - Delhi
Kerala Electric Lamp Works Ltd. And Anr. vs Collector Of Central Excise And Anr. on 26 November, 1987
Equivalent citations: 1988ECR331(TRI.-DELHI), 1988(33)ELT771(TRI-DEL)
ORDER K.L. Rekhi, Member (T)
1. The main controversy in these appeals is whether M/s. Crompton Greaves Ltd. (hereinafter referred to as 'Cromp-ton') were a "related person" of M/s. Kerala Electric Lamp Works Ltd. (hereinafter referred to as 'assessee') within the meaning of Section 4(4)(c) of the Central Excises and Salt Act, 1944. There are certain other subsidiary issues also. But since the issues are common and inter-connected and related to the same assessee, they were argued together before us. This combined order will dispose of all the 15 aforesaid appeals, 14 of the department and one of the assessee.
2. The essential facts are that the assessee manufacture electric bulbs, flourescent tubes and MV lamps. The dispute before us is regarding valuation of their goods for the purpose of assessment of central excise duty. The period of dispute is from 18-3-1978 onwards. Daring this period, Crompton were the principal distributor of the assessee. They lifted around 80% of the assessee's production. As per agreement between the two parties, Crompton kept Rs. 15 lakhs with the assessee as a security deposit. During the period from 18-3-1978 to 13-8-1978, the assessee was manufacturing two types of goods -
(1) Crompton branded goods which were sold only to Crompton; and (2) Toshiba branded goods which the assessee sold to others through its own marketing organisation.
Crompton never purchased any Toshiba branded goods. During 1975-78 disputes arose between Crompton and the assessee. Crompton stopped purchasing goods from the assessee. The assessee suffered heavy losses. There was litigation between the two parties and ultimately the dispute was referred for arbitration where it is now pending. because of the losses, the assessee became a sick unit. Public financial institutions, ICICI & IDBI, stepped in and at their instance the assessee company under-went a major re-structuring. Crompton acquired 10% shares of the assessee company. Thereafter, from March, 1978 Crompton re-started bulk purchases of the goods manufactured by the assessee at mutually agreed prices. With effect from 14-8-1978, four Directors nominated by Crompton were appointed on the Board of Directors of the assessee Company; no Managing Director was appointed but instead 2 employees of Crompton took over as the Chief Executive and Works Manager, respectively, of the assessee company. From the same date, i.e., 14-8-1978, the assessee wound up its own marketing organisation and started manufacturing only Crompton branded goods which were sold to Crompton at prices fixed in consultation with public financial institutions. On 25-3-1982, Crompton's control over the assessee company became full when Crompton acquired the share holding of the Toshiba Company of Japan in the assessee company. Crompton now became the holding company of the assessee unit. Crompton now held about 56% shares in the assessee company.
3. In the background of the above facts, the Collector (Appeals) has held and ordered as follows :-
(1) Till 24-3-1982, i.e., prior to 25-3-1982, Crompton was not a related person of the assessee. The Assistant Collector should re-determine the assessable values under Section 4(1)(a) but refund payable to the assessee should be restricted to six months period only, refund for the earlier period being time barred under Section 11(B) as the assessments were provisional only for the disputed issue of post-manufacturing expenses and not for the disputed point of related person.
(2) From 25-3-1982, Crompton, in their capacity as the holding company of the assessee unit, were a related person of the assessee.
(3) The Asstt. Collector should go into the question of abatements admissible from Crompton's re-sale price from 25-3-1982 onwards after hearing the assessee.
The assessee informed us that no orders in remand had been passed by the Assistant Collector in pursuance of the above directives of the Collector (Appeals).
4. The department's prayers in their 14 appeals as now pressed for before us are :
(1) Even for the earlier period, i.e. from 18-3-1978 to 24-3-1982, Crompton should be held as a related person of the assessee.
(2) Alternatively, it should be held that the assessee's sale price to Crompton was not the sole consideration for the sale and hence it required to be loaded so as to make it a fully commercial price under Rule 5 of the Central Excise (Valuation) Rules, 1975.
5. The assessee's prayers in their one appeal as now pressed before us are as under :-
(1) For the earlier period, i.e., upto 24-3-1982, the finding of the Collector that Crompton was not a related person of the assessee should be upheld. But since the provisional -assessments, for whatever reason provisional, were provisional for all purposes, the time bar of six months for consequential refunds applied by the Collector (appeals) should be removed; in other words, consequential refunds, upon re-determination of assessable values by the Assistant Collector under Section 4(1)(a), should accrue to them right from 18-3-1978.
(2) As per the directive contained in the judgment dated 5-8-1987 of the High Court of Kerala on the assessee's O.P. Nos. 4433 & 7561 of 1982, the Tribunal should clarify that equalised octroi is admissible for deduction from the sale price.
(3) For the period from 25-3.-1982 onwards, the assessee accepts the position that Crompton was its related person.
The assessee stated before us that upto 24-3-1982, their sale prices to Crompton were ex-factory and so the question of deducting any freight or equalised freight and octroi did not arise. The question of deducting equalised freight or octroi was relevant only from 25-3-1982 onwards and that question was open before the Assistant Collector along with other abatements.
6. The learned representative of the department submitted four grounds on which, he contended, Crompton should be declared a related person of the assessee even prior to 25-3-1982 :-
(1) Crompton held 10% shares of the assessee company.
(2) Crompton had deposited Rs. 15 lakhs towards security with the assessee.
(3) Out of the 11 Directors on the Board of Directors of the assessee company, 4 were of Crompton, only 2 of the former management of the assessee company, 3 of the financial institutions and remaining 2 of Toshiba Company of Japan (the foreign collaborator). The 4 Directors of Crompton were really the persons who ran the show in the assessee company.
(4) Two officers of Crompton occupied the key posts of the Chief Executive and the Works Manager in the assessee company. In the absence of any Managing Director in the assessee company, the Chief Executive and the Works Manager were the top functionaries in the assessee company. Even though employed in the assessee company, these two nominees of Crompton continued to receive their salaries from Crompton only.
In short, argued the learned representative of the Department, Crompton controlled the working of the assessee company. True. But Section 4(4)(c) of the Act requires something more than one party controlling the working of the other. The section requires "interest, directly or indirectly, in the business of each other." This means a two-way business interest or mutuality of interest as held by the Hon'ble Supreme Court in their judgment in Union of India and Ors. v. Atic Industries Limited [1984 (17) ELT 323 (SC)]. According to this judgment, it is not enough that the assessee has an interest directly or indirectly in the business of the person alleged to be a related person nor is it enough that the person alleged to be a related person has any interest directly or indirectly in the business of the assessee. It is essential to attract the applicability of the first part of the definition that the assessee and the person alleged to be a related person must have interest direct or indirect in the business of each other. We put this judgment to the learned representative of the department and asked him to show as. to what interest the assessee had in Crompton's business. The learned representative of the department stated that from 14-8-1978 onwards, the assessee manufactured only Crompton branded goods all of which were sold to Crompton only; the assessee was entirely dependent on Crompton's marketing net work and expertise and all advertisement and sale promotion expenses were met by Crompton which caused a lot of savings to the assessee in not having to maintain its own marketing net work and publicity drive. This, according to the learned representative of the department, was the assessee's interest in Crompton's business. He added that this argument advanced by him was a new one which had not been considered by the Supreme Court in the ATIC case aforesaid and, therefore, the Tribunal need not feel bound by the ATIC case judgment.
7. On careful consideration, we find no force in the new plea of the learned representative of the department. The case before us is of manufacture and sale of branded goods where the brand name belonged not to the manufacturer but to the customer. It is in the very nature of customer branded goods that the manufacturer will sell the entire production bearing that brand name to the owner of the brand name only. For doing so, the manufacturer does not require any marketing organisation. The fact that the assessee had no marketing organisation of its own after 14-8-1978 cannot, therefore, be held against the assessee. Further, once the manufacturer of the customer branded goods has handed over the goods to that customer and realised his commercial price for the goods, his interest in the goods is over. Thereafter, it is the interest of the customer, the owner of the brand name, to promote his brand and to market the goods under that brand. The situation would be different if the brand name were to belong to the manufacturer and someone else were to be spending money on promoting, that brand on behalf of the manufacturer. Here it is not so. Here the manufacturer does not partake of the profit or loss of the customer. We are informed by the assessee that Crompton were getting their branded lamps manufactured from other units also. It is natural that all the manufacturing units, including the assessee, would, for their own enlightened self-interest, wish well of their customer's business. But that is true practically of every buyer and seller relationship since the buyer's prosperity means more business for the seller. But that does not mean that t,he seller has thereby acquired an interest in the business of the buyer. Interest in the business of each other, as contemplated in Section 4(4)(c), is something more definite and tangible interest in the assessee's business. Even before 25-3-1982, by holding 10% shares of the assessee company, by having its active Directors on the assessee's Board of Directors and appointing its own paid Chief Executive and Works Manager in the assessee company, Cromp-ton had interest in the business of the assessee. But the assessee had no such interest in Crompton's business. Since one-sided business interest is not enough for the purposes of first part of Section 4(4)(c) and mutuality of business interest was required which was not there in the present case, we agree with the Collector (Appeals) that Crompton were not a related person of the assessee prior to 25-3-1982.
8. It was not the department's case before us that Crompton could be treated as a related person of the assessee under the second part of Section 4(4)(c) i.e., as a relative and a distributor.
9. The learned representative of the department then pleaded that when, from 14-8-1978, Crompton virtually controlled the assessee unit, Crompton became the real manufacturer of the lamps and the assessee company became only a dummy of Crompton. At this, the assessee was quick to point out that though there was an allegation to this effect in the show cause notice, the adjudicating Assistant Collector himself did not pursue it. Consequently, there is no finding of fact on record that the assessee produced the goods on Crompton's account or that property in the assessee's raw-materials, machinery and finished goods vested in Crompton or that the assessee company was only a facade created to under-value the goods. In fact, the assessee company had existed for 10 years or more before Crompton acquired 10% shares in it and appointed its 4 Directors, Chief Executive and Works Manager. In the circumstances, it is not possible to re-surrect the show cause notice allegation which the Assistant Collector himself had dropped during adjudication. The assessee stated that prices of their goods sold to Crompton had been determined in consultation with the financial institutions and the fact that the assessee company, which had been incurring losses prior to 14-8-1978, started making profits thereafter showed that the prices had been fixed on commercial principles. 3ust because the goods bore Crompton brand name and the entire production was sold to Crompton would not lead to the conclusion that Crompton was the manufacturer of the lamps and not the assessee company, vide 1985 (22) ELT 302 (SC) -Union of India v. Cibatul Limited.
10. The learned representative of the department then put forth his alternate plea that the price charged by the assessee from Cromptor was not the sole consideration for sale. For this, he mentioned the following three elements as constituting additional consideration :-
(1) Crompton had deposited Rs. 15 lakhs as security with the assessee;
(2) Marketing, publicity and sales promotion expenses were borne by Crompton; as per paragraph 49 of the Supreme Court judgment in the case of M/s. Bombay Tyres International Ltd. [1983 (14) ELT 1896 (SC)], expenses on these heads could not be deducted from the assessable value.
(3) The Chief Executive and Works Manager, though working in the assessee company, were paid for by Crompton.
11. The assessee stated that the security deposit of Rs. 15 lakhs had been kept by Crompton with it in pursuance of the old agreement of 1967 and 1974 whereby Cromption had undertaken to lift 80% or more of the assessee's production. This deposit was not a free gift or interest free loan to the assessee. The assessee had to pay a heavy interest for it to Crompton - 3% to 5% more than the normal bank interest rate. The assessee admitted that when disputes started between them and Crompton, the assessee stopped paying interest to Crompton. This was for the reason that the assessee had put forth claims for much bigger amounts against Crompton. These claims and counter claims, after a bout of litigation, were now pending in arbitration. Regarding marketing and sales promotion, it was natural for Crompton to spend money on it since it was Crompton's brand name that had to be promoted and not the assessee's. The assessee had its fixed customer and did not need to spend on marketing or publicity. Since the situation was different in the present case, paragraph 49 of the Supreme Court judgment in Bombay Tyres International Limited case did not apply. Regarding salaries of the Chief Executive and the Works Manager of the assessee company being paid by the Crompton, the assessee had no submission to make.
12. On careful consideration, we agree with the assessee that the first two elements - the security deposit and Crompton spending on marketing and sales promotion of its branded goods - did not amount to any extra consideration accruing from Crompton to the assessee. But the third element - the salaries of the Chief Executive and the Works Manager -did. These salaries have to enter the manufacturing cost of the goods and since they were paid separately by the customer, these have to be added to the assessable value of the goods under Rule 5 of the Central Excise (Valuation) Rules, 1975.
13. The only other point that needs to be looked into for the period prior to 25-3-1982 is the question of time bar. It was the common ground of both parties before us that the assessments were provisional under Rule 9B of the Central Excise Rules, 1944. The department's point is that they were provisional only for the disputed issue of post-manufacturing expenses and not for the disputed issue of related person and hence the assessments on the count of related person should be considered as final and the consequential refund time barred for the period earlier than six months. In support of this argument, the learned representative of the department cited the Madras High Court judgment in the case of Chinai Bottling Company [1986 (24) ELT 3 (Madras)]. It was held in this judgment that payment could be considered under protest only for the ground of protest and not for any other ground. The learned representative of the department stated that since the object of protest as well as provisional assessment was the same - to avoid the bar of limitation -the ratio of the Madras High Court judgment' on protest should hold good for provisional assessment as well. The assessee replied that the analogy sought to be drawn by the learned representative of the department between protest and provisional assessment was not correct inasmuch as while Rule 233 B(1) required the grounds of protest to be specified, there was no such requirement in Rule 9B or in B13 bond. The assessee cited the rulings at 1978 (2) ELT 3 416 (SC) National Tobacco Company, 1983 (12) ELT 216 (Bombay) - D.N. Kohli v. Krishna Silicate Glass Works and 1986 (25) ELT 821 (Tribunal) Siemens (India) Ltd. Thane and Ors. v. Collector of Central Excise - and asserted that the Tribunal had been taking the consisting view that provisional assessments, for whatever reason provisional, were provisional for all purposes. We agree with the assessee. Section 11B of the Act, relating to refunds, specifically provides that -
"in a case where duty of excise is paid provisionally under this Act or the rules made thereunder, the date of adjustment of duty after the final assessment thereof".
The above provision makes no distinction based on the reason for the provisional assessment. Consequently, it is not possible to hold that the assessments were provisional for one ground of dispute but were final for the other ground. Provisional assessments have to be treated as provisional for all purposes. Since the assessments in the present case are still provisional, pending resolution of the dispute on the question of related person, we hold that consequential refund accuring to the assessee for the period prior to 25-3-1982 will not be hit by the time bar of Section 11B.
14. For the period from 25-3-1982 onwards, the only point which we are required to clarify, in pursuance of the Kerala High Court order dated 5-8-1987 on the assessee's writ petition, relates to deduction of equalised octroi. The learned representative of the department stated very fairly that he had no objection in principle to equalise octroi being deducted from the assessable value. He pointed out that in the order-in-original, the Assistant Collector had declined to exclude equalised octroi not on the ground of principle but because the assessee had failed to produce the evidence of payment of octroi before him. We agree with the learned representative of the department. We order that subject to verification of the amounts by the Assistant Collector, equalised octroi should be excluded from the assessable value.
15. To sum up, our orders are that ;
(1) Prior to 25-3-1982, Crompton was not a related person of the assessee but the department would be entitled to add the amounts of salaries of the Chief Executive and the Works Manager of the assessee towards the assessee's price realisation from Crompton on pro-rata basis.
(2) Consequential refund on re-determination of the assessable value by the Assistant Collector will accrue to the assessee without the time bar of six months; and (3) From 25-3-1982 equalised octroi will be excluded while determining the assessable value of the goods.
The 15 appeals are disposed of in the above terms.