Customs, Excise and Gold Tribunal - Mumbai
Cosepa Fiscal Industries Ltd., ... vs Commissioner Of Central Excise, ... on 7 November, 2001
Equivalent citations: 2002(149)ELT421(TRI-MUMBAI)
JUDGMENT
G.N. Srinivasan, Member (Judicial)
1. These five appeals have been filed against the decision of the Commissioner of Excise and Customs, Aurangabad whereunder he has confirmed the duty of Central Excise of Rs. 3,00,03,287/-. By the said order he has also ordered as follows:
Amount Sections/Rule Party's name Penalty Rs. 2,54,82,569/- 11AC Cosepa Penalty Rs. 10,00,000/- 173Q Cosepa Interest On Rs. 2,54,82,569/- 11AB Cosepa Penalty Rs. 10,00,000/- 209A Standard Batteries Penalty Rs. 5,00,000/- 209A Sandarangani Penalty Rs. 5,00,000/- 209A Guzdar Penalty Rs. 5,00,000/- 209A Shenoy
2. The appellant Standard Batteries was manufacturing at a particular point of time HARD RUBBER BATTERIES. It was felt that due to commercial reasons, the appellants stopped producing the same. In 1984, if floated a subsidiary company called Nachiketa Investment Pvt Ltd. Standard Batteries had entered into a lease agreement with MIDC for a 10 acre plot at Ahmednagar. On 17.9.1993 the appellants Standard Batteries surrendered their Ahmednagar plot to MIDC and requested MIDC to allot the same plot of land to their subsidiary company Nachiketa Investment Pvt Ltd (supra). MIDC allotted the said land to Nachiketa as per the request of the appellants Standard Batteries Ltd. it was thought at that time that Nachiketa would set up a factory at the plot of land referred to above for production of the above said type of batteries.
3. On 2.12.1993 the name of Nachiketa Investment Pvt Ltd was changed to Cosepa Fiscal Industries Ltd appellants assessees before us (appeal 3179). On 15.3.1994 appellants Standard Batteries sold two shares in the assessee company to Guzdar an employee of Standard Batteries and G. Natarajan, an employee of Williamson Magor Group of Companies. The factory at Ahmednagar owned by the assessee started producing HARD RUBBER BATTERIES. The appellants assessees entered into a memorandum of understanding dated 30.10.1995 with another appellants the Standard Batteries Ltd for the manufacture of what is known as MICRO PROCESSED RUBBER SEPARATORS and HARD RUBBER CONTAINERS for use in lead-acid storage batteries in accordance with the technical information, know-how and the manufacturing process and techniques owned/supplied by the Standard Batteries. The appellants Standard Batteries agreed to sale to the assessees its existing plant and machinery, which was situated at Vakola at a price of Rs 160.00 lakhs in terms of independent valuation report. The said Rs 160.00 lakhs consisted of equity shares of 750,000 shares of Rs. 10/- each. The balance of Rs. 85.00 lakhs was to be treated as an unsecured loan from the appellants Standard Batteries to the Appellant manufacturer Cosepa Fiscal Industries Ltd. The unsecured loan, it was understood by and between the parties, to be adjusted against the sale of batteries to be manufactured by Cosepa Fiscal Industries Ltd to Standard Batteries. The cost of dismantling and transportation etc was to be born by the assessee. It was also agreed that royalty would be paid by the assessee to Standard Batteries. The prices at which Standard Batteries Ltd who produced the said HARD RUBBER BATTERIES were to be mutually agreed upon between the parties. Standard Batteries was entitled to not less than two Directors in the Board of Directors of the assessees. The day to day operation of the assessee was to be managed by the Mr. Shashi, President Cosepa Fiscal Industries ltd and such other persons as the Board of Directors may decide. By 31.3.1997 it transpires that the loan of Rs. 85.00 lakhs was wiped off by the assessees. The assessees started manufacturing the goods sometime in October 1985 after duly complying with the provisions of the Central Excise Act and the Rules like filing of classification list, price declaration, RT12 returns etc. The management of the assessee was being carried on under the direction of its President Mr Sahay, former Managing Director of M/s Wilson Engineering Industries Pvt Ltd, its Company Secretary Mr A Viswabaran, a former employee of M/s Mutual Industries Ltd and Deputy Manger - Personnel Mr Vikram Mhaske, a former employee of M/s Kinetic Engineering Ltd.
4. Sometime in January 1996, Superintendent (Preventive) visited the assessee and requested for a copy of Memorandum of Understanding entered into between the appellants the assessee and Standard Batteries, which was submitted on 16.2.1996. The details of prices at which the assessee sold to the Standard Batteries were given to the Excise Department on 6.3.1996. On 26.12.1996 details of invoices since the commencement of manufacture were given. In January 1997, the department was given a copy of the first balance sheet. A Show Cause Notice dated 10.12.1998 was issued by the Commissioner of Customs and Central Excise, Aurangabad charging the appellants. The assessee inter alia that they sold all excisable goods manufactured by them only to the Standard Batteries and that the assessee and the Standard Batteries were so associated with each other that they were related persons within the meaning of Section 4 of the Central Excise Act for the reason indicated in Annexure A to the Show Cause Notice and the Notice further indicated that the price charged by the assessee on their invoices to the Standard Batteries was not the normal price as per the provisions of the Central Excise Act, but the price at which the goods have been sold by the Standard Batteries to their independent wholesale buyers from their depots should taken as the normal price as contemplated under the third proviso of Section 4(1)(a) of the Central Excise Act, 1944. The Notice also stated that the assessee Cosepa Fiscal Industries Ltd and the other Notice i.e. the appellant before us had deliberately, knowingly and intentionally suppressed the material facts regarding the relationship between the assessee with the appellants the Standard Batteries from knowledge of the department with an intention to evade correct payment of duty of excise. The show Cause Notice also charges the appellants assessee the acts of omission and commissioner on the assessee's part which led to the contravention of the provisions of Rule 173Q of the Central Excise Rules read with Section 4 of the Act. It also charged the appellants the assessee of contravention of various other rules. Replies were filed by all the appellants. The matter was heard by the adjudicating authority. After hearing the appellants, the adjudicating authority confirmed the Show Cause Notice demanding duty and imposed penalties, interest etc as mentioned in the earlier part of the order. Hence these appeals.
5. Shri D.B. Shroff alongwith Shri F.D. Sorabjee, Advocates appeared for the appellants. Shri Karnail Singh, S.D.R. appeared for the respondent.
6. Shri Shroff stated that the agreement between the appellants assessee Cosepa Fiscal Industries Ltd and the appellants the Standard Batteries Ltd was that the latter ceased to produce the HARD RUBBER BATTERIES would purchase the goods manufactured by Cosepa Fiscal Industries ltd assessee at a price mutually agreed upon. The agreement did not indicate any favour shown by Cosepa Fiscal Industries Ltd in the matter of sale of batteries in favour of Standard Batteries. He invited our attention to Clause 10 of the agreement that the price to be charged by Cosepa Fiscal Industries Ltd in for the product and for the hard rubber batteries will be agreed between the parties on annual contract basis. The prices shall be ex factory Ahmednagar. he also took us through the various clauses of the agreement to show that the agreement between the appellants Cosepa Fiscal Industries ltd and the appellants Standard Batteries was of normal commercial nature. The agreement does not by any stretch of imagination show that both the companies have interest in each other's business so as to come within the mischief of Clause (iii) of Section 4(4) of the Act it was stressed. The argument of Shri Shroff is that as early as 1996 the memorandum of understanding which is entered into between Cosepa Fiscal Industries Ltd. and the Standard Batteries Ltd were given the price list and RT12 Returns have been given and there cannot be by any stretch of imagination of warranting attraction of the suppression as mentioned in Section 11A of the Central Excise Act. He further stated that the plant and machinery which Cosepa Fiscal Industries Ltd. purchased from Standard Batteries have been purchased at normal commercial consideration. There cannot be any favouritism shown in either inflating the price or deflating it. There cannot be extra commercial consideration for the sale of the goods to be produced in the form of transfer of plant. He took us through the various provisions of the agreement to negative the claims made by the department. He therefore states that the conclusion arrived at by the adjudicating authority in the impugned order is without any basis. He further cited several case laws to show as to how there was no mutuality of interest in each others business by both appellants Cosepa Fiscal Industries Ltd. and Standard Batteries so as to nagate the claim made by the department that the price at which the goods were sold by Cosepa Fiscal Industries Ltd. assessee to the Standard Batteries was not the favoured one. In effect, he discounted the theory propounded by the department that the provisions of Section 8(1)(a)(iii) has been attracted.
7. As against this the learned S.D.R. would argue that the conduct of the parties namely Standard Batteries and the appellants Cosepa Fiscal Industries Ltd. would clearly show that both had interest in each other's business. He invited our attention to the events that has taken place in 1984 and 1996. he stated that when Nachiketa was floated Standard Batteries had an idea to float Cosepa Fiscal Industries Ltd. to produce these goods at a reduced price and give the price in the form of its plant as well as loan. This is what he stresses. He invited our attention to paragraph 64 of the impugned order to betters his argument. He discounted the case laws cited by the learned counsel due to peculiar features and facts of the instant case.
8. We have considered the rival submissions. It is useful to refer to paragraphs 55, 61 and 64 of the impugned order. The facts mentioned above would clearly show that Standard Batteries which was manufactured hard rubber batteries changed its business features by floating a new company called Nachiketa with two Directors and sought to obtain the land leased to Standard Batteries and the land transferred to Nachiketa after obtaining the permission from MIDC. This by itself, to our mind, will not show that one has interest in the other's business. The third proviso to Section 4(1)(a) of the Act provides that where the assessee states that the goods are generally not sold by him in the course of the wholesale trade except to or through the 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 whole sale trade at the time of removal, to dealers not being related persons or where such person such goods are not sold to such dealers. The fact remains that the goods manufactured by Cosepa Fiscal Industries Ltd. were purchased entirely by Standard Batteries. Will that circumstances force us to come to the conclusion that for the purpose of levy of Excise duty it will come within the third proviso to Sub-clause (a) of Sub-section (1) of Section 4 of the Act? The basis of the third proviso supra is that the sale must be to a related person. Here in this case has it happened?
9. That takes us to the question as to whether who is a related person in this case?. The term "related persons" has been defined in Section 4 (4) (c) of the Act, as a person who is so associated with the assessee that they have interest, directly or indirectly, in the business of each other and includes holding company, a subsidiary company, a relative and a distributor of the assessee and any sub distributor of such distributor. Here it is not the case that the Standard Batteries Ltd. is a relative and a distributor nor a sub distributor of Cosepa Fiscal Industries Ltd. "It is not the case that one company is the holding company of the other or that one company is a subsidiary company of the other. Therefore, the question that has to be seen is whether the two companies have interest directly or indirectly in the business of each other. In other words there must be mutuality of interest. One of the allegations is that Standard Batteries got a plot of land transferred from the MIDC to the assessee. Can this circumstance be treated as interest in the business of each other? The lessor in the present case is the MIDC. This circumstance therefore cannot lead to the conclusion that there is mutuality of interest. It is alleged that Standard Batteries has two directors on the Board of the assessee company and holds 30 percent of the assessee's shareholding. This circumstance also cannot lead to the conclusion that Standard Batteries and the assessee have interest in the business of each other as the assessee has no Director on the Board of Standard Batteries and has no shareholding in Standard Batteries." Unless mutuality is shown, we do not think we can say that both companies are related person or they have interest in each other in terms of aforesaid proviso to Section 4 (1)(a) of the Act. Shri Shroff stated in unequivocal terms that the Standard Batteries Ltd. has interest in the affairs of the assessee. That may be so, but it does not mean Cosepa Fiscal Industries Ltd. has any interest in the business of the Standard Batteries Ltd. As stated earlier, no evidence has been adduced by the department about the shareholding of the assessee in the Standard Batteries Ltd. The department did not adduce any evidence regarding interest of the assessee in the latter company.
10. In this connection, it is useful to refer to the observation of the Supreme Court in Union of India v. Atic Industries Pvt. Ltd. 1984 (17) ELT 323, wherein in paragraph 5 the Court has held as follows:
"What the first part of the definition requires is that the person who is sought to be branded as a "related person" must be a person who is so associated with the assessee that they have interest, directly or indirectly, in the business of each other. It is not enough that the assessee has an interest, direct or indirect, 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 an interest, direct or indirect, 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. Each of them must have a direct or indirect in the business of the other. The equality 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, or direct, or indirect, in the business of the other. Now, in the present case, Atul Products Limited has undoubtedly interest in the business of the assessee, since Atul Products Limited holds 50 per cent of the share capital of the assessee and has interest as share holder in the business carried on by the assessee. But it is not possible to say that the assessee has any interest in the business of Atul Products limited. There are two points of view from which the relationship between the assessee and Atul Products Limited may be considered. First, it may be noted that Atul Products Limited is a shareholder of the assessee to the extent of 50 per cent of the share capital. But we fail to see how it can be said that a limited company has any interest, direct or indirect, in the business carried on by one of its shareholders, even though the shareholding of such shareholder may be 50 per cent. Secondly, Atul Products Limited is a wholesale buyer of the dyes manufactured by the assessee but even then since the transactions between them are as principal to principal, it is difficult to appreciate how the assessee could be said by virtue of that circumstance to have any interest, direct or indirect, in the business of Atul Products Limited. Atul Products Limited buys dyes form the assessee in wholesale on principal to principal basis and then sells such dyes in the market. The assessee is not concerned whether Atul Products Limited sells or does not sell the dyes purchased by it from the assessee nor is it concerned whether Atul Products Limited sells such dyes at a profit or at a loss. It is impossible to contend that the assessee has any direct or indirect interest in the business of a wholesale dealer who purchases dyes from it on principal to principal basis."
(Emphasis supplied)
11. This decision and the facts disclosed before us clearly show that since Cosepa Fiscal Industries Ltd. - the assessee does not have any interest in the Standard Batteries Ltd and hence, it will not come within the meaning of the term "related person" as indicated in the third proviso to Section 4 (1) (a) of the Act. Once this is the conclusion, then in our view, application of the said proviso is ruled out. Then the entire basis of the Show Cause Notice goes. No doubt, several case laws have been cited by the learned counsel but in our view it is not necessary to refer to each one of them as we have decided on the facts of the case on the plain reading of the third proviso to Section 4 (1) (a) of the Act and also on the observation of the Supreme Court extracted above.
12. In view of this, we allow the appeals and set aside the impugned order.