Custom, Excise & Service Tax Tribunal
) Kwality Fun Foods & Restaurant P.Ltd vs Commissioner Of Central Excise on 31 January, 2012
IN THE CUSTOMS, EXCISE AND SERVICE TAX APPELLATE TRIBUNAL
SOUTH ZONAL BENCH AT CHENNAI
Appeal Nos. E/8/2002, E/10/2002 & E/12/2002
[Arising out of Order-in-Original No.37/2001/CBE II Dvn./Commr. dated 28.9.2001 passed by the Commissioner Customs & Central Excise, Coimbatore]
For approval and signature:
Honble Dr. CHITTARANJAN SATAPATHY, Technical Member
Honble Mr. D.N.PANDA, Judicial Member
1) Kwality Fun Foods & Restaurant P.Ltd
2) Kwality Ice Creams (Madras) Pvt.Ltd.
3) Hindustan Lever Ltd.
Appellant/s
Versus
Commissioner of Central Excise
Coimbatore
Respondent/s
Appearance :
Shri Ravinder Narain, Advocate Smt. L.Maithili, Advocate Sri C.Saravanan, Advocate Sri Ajay Aggarwal, Advocate For the Appellant/s Shri Parmod Kumar, SDR For the Respondents For the Respondents CORAM:
Honble Dr. Chittaranjan Satapathy, Technical Member Honble Mr. D.N.Panda, Judicial Member Date of hearing : 31.1.2012 Date of decision : 31.1.2012 Final Order Nos. 197-199/12 dt. 31.1.2012 Per D.N.Panda All the three appeals came up for fresh consideration pursuant to the directions of the Apex Court in Civil Appeal Nos.3494-3496 of 2004 filed by Revenue. While remanding the matter, Apex Court observed as under :-
The Tribunal without even adverting to the basic facts and without making any independent analysis of the agreement between the parties but only relying on the earlier decision in Kwality Ice Cream Co. Vs. Commissioner of Central Excise, Chandigarh 2002 (145) ELT 584 (T) allowed the appeal filed by the assessee. It is no doubt true that the Tribunal has copiously referred to the findings in the said Judgment but without saying anything as to how those findings are applicable to the facts at hand. The Tribunal disposed of the appeal with the observation that the findings in the earlier case are clearly applicable to the facts of the present case. It is needless to restate that the question whether they are related persons within the meaning of Section 4 94) 9e) of the Act is to be considered with reference to the facts in each case. The Tribunal failed to advert even to the basic facts and disposed of the appeals in a summary manner interfering with the order passed by the authority. We find it difficult to sustain the order passed by the Tribunal.
2. M/s.Kwality Ice Creams (Madras) Pvt. Ltd. (in short, KIMPL) was promoted by one Shri Rajiv Khanna and his family members in 1980 (Ref. Para 33.1 of OIO) and such concern was manufacturing ice cream till November 1995 with brand name Kwality which was developed by Shri Rajiv khanna. 76% of controlling interest in KIMPL was offered for sale on 9.12.94 (Ref. Para 12 of OIO). Sale of the manufacturing unit of KIMPL situated at Kuruchi Industrial Estate, Coimbatore was made with effect from 1.11.1995 in terms of an agreement dated 28.10.95 to M/s. Kwality Fun Foods & Restaurant Pvt. Ltd. (in short, KFRL), a corporate entity controlled by Rajiv Khanna. Delivery of the physical transfer over the assets took place on 15.11.95.(Ref. Para 17 and 33.1 of OIO).
3. KRFL entered into a sourcing agreement with Brooke Bond Lipton India Ltd. (in short, BBLIL) on 30.10.95 for production and manufacturing arrangement of ice cream under the brand name Kwality Walls for the latter. Upon execution of sourcing agreement, HLL supplied certain machines to KFRL and having right over the brand Kwality was requiring manufacturer of ice cream to use raw material according to quality standard agreement at the cost of the latter.
4. In terms of agreement dated 30.12.94 marketing and distribution of the ice creams manufactured by KIMPL was assigned to BBLIL (Ref. Para 13 of OIO) and on same date another agreement was entered into between KIMPL and Digital Securities Pvt. Ltd. which was a sister concern of BBLIL (Ref. para 14 of OIO) for transferring the title and ownership of trade name Kwality to the latter for a consideration of Rs.2 crores. On 31.12.94, Digital Securities entered into an agreement with BBLIL to enable the latter to be the sole user of the brand name Kwality for Tamil Nadu, Kerala and Pondicherry (ref. Para 15 of OIO).
5. On 1.3.95, agreement between KIMPL and BBLIL required Rajiv Khanna to manufacture Ice cream as per the quality standard prescribed by BBLIL under the supervision of the latter. (para 16 of OIO). BBLIL was taken over later by Hindustan Lever ltd.(in short, HLL). (para 19 of OIO).
6. Aforesaid background revealed that KIMPL as a brand owner of the ice cream Kwality was manufacturing ice cream till Nov95 and thereafter manufacture of the same was done by KFRL from Dec95 onwards till Feb99 (the period under adjudication).
7. Adjudication was made in respect of all the three parties i.e. KIMPL, KFRL and HLL on the allegation that price was not sole consideration in respect of clearance of ice cream by KIMPL to BBIL and by KFRL to BBIL for part of the period and to HLL thereafter. For the period from 1.4.95 to Nov95 duty demand of Rs.1,14,469/- was made on KIMPL followed by penalty of Rs.1 lakh under Rule 173Q of Central Excise Rules, 1944 issuing show cause notice dated 9.5.96. KRFL was adjudicated in two spells. First spell relates to the period Dec95 to Feb99 proposed by SCN dt. 3.7.2000 raising duty demand of Rs.21,22,455/- in respect of clearance made to BBLIL (later known as HLL) and subsequent period comprising 1.2.2000 to 31.12.2000 raising duty demand of Rs.10,70,652/- was proposed to be adjudicated by SCN dt. 1.3.2001 in respect of clearance made to HLL. Thus aggregate duty demand against KRFL for the above two periods was Rs.31,93,107 (Rs.21,22,455 + Rs.10,70,652). For these two periods, KFRL faced penalty under Rule 173Q and Section 11AC read with Rule 173Q of Central Excise Rules, 1944. Penalty for the first period was Rs.20,99,780/- while the second period visited with penalty of Rs.29,83,129/-. HLL also faced penalty of Rs.5 lakhs under rule 209A of CER 1944 in the adjudication.
8. Subject matter of allegations against KIMPL was that BBLIL was sole buyer of its products in terms of agreement between them and price was not sole consideration. So also market existed only in the hands of BBLIL. Assessable value was therefore intended to be determined with consequence of law.
9. HLL was issued SCN making allegation that entire product manufactured by KFRL was sold to HLL (formerly called BBLIL). There was no wholesale buyers of the ice cream manufactured by KFRL except HLL was sole buyer.
10. Similarly, the SCN issued to KFRL made delegation that during different periods ice cream manufactured and cleared by it to BBLIL (later known as HLL) was cleared adopting assessable value not at arms length and there was absence of principal to principal relation. Therefore, re-determination of assessable value was proposed alleging that price was not sole consideration of the deal between the parties and there were following other considerations which disturbed assessable value:
(1) Certain machinery namely Mixvat incubator, Autoclave, Oven and Centrifuge installed in M/s.KFRL were received from M/s.HLL as stock transfer, (2) M/s.HLL has extended huge sum of money for upgradation of the factory and for the raw material purchased by M/s.KFRL (3) From the period from Feb2000 to Dec2000 the entire quantity manufactured by M/s.KFRL was cleared to M/s.HLL to the value of Rs.88,62,226/- which was sold by M/s.HLL for a value of Rs.1,55,53,802/-. (4) Monthly production plan in respect of various varieties of ice creams to be manufactured and instructions regarding of the working of the factory were given by M/s.HLL to M/s.KFRL. (5) The rate at which the ice creams should be cleared were also instructed from M/s.HLL to M/s.KFRL In view of the above the price could not be considered as sole consideration and transactions between them are not on principal to principal basis as well as the whole sale market exists only in the hand of M/s.HLL who has managerial control and control over the products, and hence the differential duty become demandable from them.
11. Since factual scenario in all the three appeals was same, all these appeals were heard analogous.
12. Ld. adjudicating authority framed the issue in para 38 of the impugned order to decide as to whether the value adopted by KIMPL and KFRL was the normal price in terms of Section 4 (1) (a) of Central Excise Act, 1944 or not. Considering various averments and the arguments made by the parties during different periods, he held that BBLIL and HLL controlled the affairs of KIMPL and KFRL; advances were given by HLL to KFRL; BBLIL and HLL had controlling interest over KIMPL and KFRL (Ref. Paras 67, 59 and 55 of OIO) and came to the conclusion in para 67 of OIO that there was more than one reason on record to hold that the value declared by M/s.KIMPL and KFRL for the purpose of levy of duty of excise was not normal price in terms of Section4(1) (a) of Central Excise Act, 1944 and clearance value was depressed for which assessable value was re-determinable for levy of differential duty. The Authority also held that HLL was depressing the assessable value for which penalty should be levied on that concern also.
12. Learned Sr. Counsel, Shri Ravinder Narain appearing on behalf of KFRL submitted that notice was earlier issued on 9.5.96 proposing demand. But on adjudication that was dropped without appeal by Revenue. Thereafter, SCN dt. 3.7.2007 and 1.3.2001 were issued for the period Dec95 to Feb99 and for the period 1.2.2000 and 31.12.2000 respectively. That resulted in demand and the same is subject matter of impugned order under appeal pursuant to remand of the matter from apex court against appeal of Revenue by order dt. 9.11.2010. The demand in the present appeal is on the self same issue and dispute was resolved by OIO dt. 5.9.96 against SCN dt. 9.5.96 earlier. It was submitted that SCNs dt. 31.1.2002 and 23.9.2002 for subsequent period issued resulted in dropping of the demand by OIO dt. 19.3.2004 and reached to finality by OIA dt. 5.7.2005 without further appeal by Revenue.
13. Further submission of the appellant was that on identical facts and situation the matter of valuation of assessable value was under scrutiny before apex court in the case of CCE Chandigarh Vs Kwality Ice Cream Co. (2010) 13 SCC 722. Explaining the term related person in para 10 and other paras of the judgment, at page 731 of reported judgment, in para 20, apex court held that what is important is that each of the parties involved should have an interest, whether direct or indirect in the business of each other. Examining the clauses of agreement between Kwality Ice Cream and BBLIL/HLL Honble court was of the view that price was fixed on the basis of formula agreed between the parties. Para 21 of the judgement expressing such view reads as under ;
21. It is based on these clauses, the departmental authorities took the view that the terms and conditions of the agreement between the respondent and BBLIL/HLL have mutuality of interest and therefore, the transactions between them are not on a principal to principal basis. The Tribunal upon meticulous analysis of the terms and conditions of the agreement found that the price was being fixed on the basis of the formula agreed between the parties. Reliance was placed on sub-clause (iii) of Clause 6 which provides that pending commencement of production by JVC, M/s. Kwality Ice Cream shall make necessary investments for upgradation, modification or alteration in the existing factory/manufacturing facilities as per required by BBLIL subject to necessary approvals and pending such investments M/s. Kwality Ice Cream shall not be responsible for any deficiency. On M/s. Kwality Ice Cream making such investment for upgradation or modification, the pricing agreed upon is on a formula which has taken into consideration the investments made by M/s. Kwality Ice Cream for upgradation, modification. The Tribunal rightly arrived at the conclusion that pricing in terms of clause (6)(iii) would not lead to the conclusion that the transaction was not one between principal to principal.
14. Noticing that Kwality Ice Cream was not under control of BBLIL/HLL as it was not under any obligation to shut down its unit or even move to some other location against its will and it also was the option of Kwality Ice cream to discontinue or close down the manufacturing facility and there was nothing to show that BBLIL/HLL can compel Kwality Ice Cream to close down the factory or move it from its current location, apex court held in para-24 of its judgement as under :
24.?What is of importance is certain interdependence and reciprocity beyond the relationship of either a distributor or manufacturer so as to consider as to whether the parties are related persons. On the facts it is noticed, essentially the relationship between M/s. Kwality Ice Cream and BBLIL/HLL is one sided and the facts do not suggest that each one of them have interest direct or indirect, in the business of each other. The concept of mutual interest was explained in Supreme Washers P Ltd. Vs CCE - (2003) 1 SCC 142 as under :-
.... having common stock of raw material and semi finished goods, having common use of machinery between the three units, having common marketing arrangements and free flow of finance between the three units cumulatively indicates interdependence of the three units with each other as also inter-relationship, cumulatively establishes the appellants inter relationships and interdependence with each other.....
On the aforesaid considerations, Honble Court held that the connection between Kwality Ice Cream and BBLIL/HLL was of principal to principal and price was the sole consideration for the sale of goods. Accordingly, assessable value was not computable on the basis of price at which BBLIL sold the product from its depot. Revenues appeal was dismissed accordingly.
15. Placing agreement dt. 30.10.95 learned Sr. Counsel brought out that KFRL as a manufacturer procured its raw material and packing materials of agreed description at its own cost. This was to maintain quality standard agreed between the parties in terms of para-2 of the agreement and principal to principal was relation of the parties. Sale price of the goods at the factory gate was determined by the parties mutually following the pricing formula laid out by them in terms of the agreement. All these features are similar to the features before North Zonal of the Tribunal in the case reported in (2010) 13 SCC 722. Therefore, when parties acted in terms of the sourcing agreement as principal without being controlled by BBLIL and without any flow back, entire allegation in the SCN and findings as well as observation in the adjudication order fail.
16. It was also submitted by ld. Sr. Counsel that department failed to prove the manner how depression of the assessable value was done and sales were not made in normal course of trade. It was not brought out by SCN as to how appellant was influenced by BBLIL to carry out its manufacturing activities and fix sale price. Purchase of raw material was only done from agreed source to maintain quality and standard of finished goods. Fixation of sale price was done in terms of agreed conditions and that was not found faulty. Therefore, adjudication needs to be set aside.
17. Ld. Counsel appearing on behalf of KIMPL adopting arguments of ld. Sr. Counsel in KFRL submitted that when authorities dropped earlier proceeding for the period 16.11.95 to 13.3.96 in the case of KFRL in terms of OIO dt. 5.9.96, and that reached finality without any appeal by Revenue, there is no case for Revenue since facts and circumstance remain unchanged. Accordingly, KIMPL should neither be penalized nor any duty is demandable from it.
18. Ld. Counsel appearing on behalf of HLL submitted that when there is no duty leviable and no prejudice was caused to Revenue, penalty is not imposable under Rule 209A of Central Excise Rules, 1944.
19. Ld. Representative appearing on behalf of Revenue submitted that agreement relied upon by BBLIL/HLL and KFRL prove controlling interest held by BBLIL / HLL which influenced assessable value of the goods manufactured by KFRL and KIMPL. Financial advances were given to these appellants and BBLIL / HLL participated in various decisions. Learned Adjudicating authority has brought out the manner how control was exercised by BBLIL / HLL over KIMPL and KFRL. Thus price was not sole consideration. Other considerations influenced the assessable value. Loss of Revenue was caused by undervaluation of goods. Adjudication was done properly basing on evidence for which that is sustainable.
20. Heard both sides and perused records. Periods involved and quantum of demand raised in the adjudication remained undisputed by either party. While Revenue has grievance of understatement of assessable value for different periods involved in the adjudication, Appellants deny the same.
21. The adjudication having arisen out of similar allegation against KIMPL and KFRL and on similar facts, the facts and circumstance and evidence in both cases also being common, entire batch of appeals are dealt by this common order.
22. KFRL and BBLIL operated under a sourcing agreement dt. 30.10.95 (came into force from 10.11.95 till 31.12.96). In terms of para 2 & 3 of the agreement, relation between the parties was as under :-.
2. The MANUFACTURER shall procure all their raw materials and packing materials of every description at their own costs. All such materials will, however, be purchased by the MANUFACTURER as per the quality standards specified by the PURCHASER as quality of the end products is also the essence of this Sourcing Agreement. The PURCHASER may for this purpose recommend to the MANUFACTURER the well known suppliers of raw/packing materials in order to ensure consistency and high quality of the end products.
3. The said products manufactured by the MANUFACTURER under this Agreement shall be sold and supplied to the PURCHASER on principal-to-principal basis and the PURCHASER shall pay to the Manufacturer for the sale of the said products based on the quantities duly delivered at the factory gate the sale price mutually agreed between the parties from time to time which shall cover and include all the costs of raw material puts, packaging materials, manufacturing costs and MANUFACTURERs profit margin etc. Such rates of sale price are subject to the pricing formula norms agreed in principle by both the parties in relation to the production and revision of rates, so computed shall be mutually agreed upon and communicated from time to time in writing.
23. In terms of para 4 of the aforesaid agreement, the quality standard was ensured to be maintained by KFRL under supervision of BBLIL. In terms of Para 8, it was agreed between the parties that in case of failure of KFRL to supply the agreed quantity, BBLIL was at liberty to buy that from outside at the cost of KFRL. The sole licensee and user of trade mark was BBLIL (later on taken over by HLL). Because entire product manufactured by KIMPL and KFRL were taken by BBLIL/HLL and certain machineries were supplied by HLL to KFRL (Ref. Para 20 of OIO), it was held by Revenue that assessable value of the goods was depressed because BBLIL/HLL had managerial control over KFRL and price was not sole consideration and parties were related persons. When pricing formula was agreed by the parties, how depression to the assessable value was made was failed to be justified by Revenue. No objective analysis of cost data, no comparison of price of competitors goods was done. Neither adjudication order nor arguments of Revenue brought out any evidence of flow back. Managerial control was mere allegation without evidence to show how assessable value was depressed. No nexus was established between the decisions and pricing. No evidence surfaced to prove that the buyer of goods influenced sales price.
24. It was not brought on record to prove that KFRL and BBLIL/HLL were also related persons while the term related person dealt with by Section 4 (4) of Central Excise Act means a person who should be associated with an assessee and have interest, directly or indirectly including a holding company, a subsidiary company, a relative and a distributor of the assessee and any sub-distributor of such distributor. Such relation between appellants and BBLIL and HLL could not be established by Revenue. KIMPL and KFRL were totally different from BBLIL and HLL and had no interest to cause loss to Revenue existed. There was no material brought out on record to appreciate that both the parties were any way related to each other having their common interest directly or indirectly except pure business relationship brought out by sourcing agreement. SCNs did not lift the corporate veil to find out any mysterious arrangement between the parties to cause subterfuge to Revenue. Related person does not mean mere holding of shares by a company. Obligations of parties were well defined by sourcing agreement and that also separated both entities with their defined individual objects. No evidence came to record to prove that Revenue was prejudiced and there were no cogent reasons or evidence depressing the assessable value.
25. It may be stated that interest of one party in the business of the other may be direct but interest of the latter in the business of the former may be indirect. But, there should be interest of pecuniary in nature with intent to depress the assessable value. Merely because ice cream was manufactured using brand name acquired by HLL and entire product was sold to BILIL/HLL, that did not make them related person. In absence of comparative assessable value, Revenue merely issued SCNs making allegation that price was not sole consideration of appellants products. Persons behind manufacturer and the buyer were not proved to be one and the same through corporate shells. HLL was concerned with KFRL in commercial terms and KFRL having facility of manufacture, such facility was availed by HLL to get its branded goods manufactured by the former. That does not make them related persons. If the manufacturer or buyer are one and the same person behind curtain in that circumstance, holding them related person applying section 4 of Central Excise Act, 1944 may be possible. But merely holding of controlling interest does not ipso facto influence assessable value for which no re-determination thereof is called for. Price was sole consideration in the case in hand and there was no flow back established by Revenue through any evidence. Nothing came to record to establish that HLL had monopoly over KFRL. Because quality of goods need to be maintained, making advance for procurement of raw material does not alter sale price when cost of manufacture was computable taking cost of raw materials, inputs, packing materials, manufacturing costs and manufactures profit margin into consideration which remained undisturbed by no contrary evidence led by Revenue. Manufacturer and buyer had their separate commercial interest without being related to each other. Merely bringing machineries for upgradation does not make parties related persons when object of each other is different. Trade practice many a times call for advance payments to meet requirement of trade. That also does not make them inter-dependent to depress the assessable value.
26. When record establishes as above, adjudication fails. Accordingly, all the three appeals are allowed, setting aside the adjudication order.
(Reasons of decision and the decision was pronounced in open court on 31.1.2012) (D.N. PANDA) (Dr. CHITTARANJAN SATAPATHY) JUDICIAL MEMBER TECHNICAL MEMBER gs 15 1