Customs, Excise and Gold Tribunal - Tamil Nadu
Simpson And Co. Ltd. vs Cce on 24 July, 2006
Equivalent citations: 2006(112)ECC369, 2006ECR369(TRI.-CHENNAI)
ORDER P. Karthikeyan, Member (T)
1. This appeal by M/s Simpson & Co, Ltd is against the Order No. 25/99 dt. 24.12.99, passed by the Commissioner of Central Excise (Adjudication), Chennai. As per the order, the Commissioner demanded differential duty of Rs. 58,81,393/- from the appellants and imposed a penalty of Rs. 300000/- on them for violation of various statutory provisions.
2. M/s Simpson & Co, Ltd (hereinafter referred also as assessee, appellant or Simpson) are manufacturers of mainly diesel engines suitable for use in tractors, with manufacturing units at Sembium and Anna Salai at Chennai and at Kumbakonam. The impugned order concerns the units at Chennai. Following the investigation conducted by the Directorate General of Anti Evasion, ADG, Anti Evasion, Chennai, issued a Show Cause Notice alleging that the assessee was holding company and a 'related person' of M/s Tractors And Farm Equipments Ltd, Chennai (henceforth referred as TAFE) who sourced all its requirement of OE engines for tractors from Simpson and that the value adopted by the assessee for payment of duty on clearances of OE engines and Trade Engines (for spare market) to TAFE had not reflected the correct assessable value (value, henceforth) for the purposes of Section 4 of the Central Excise Act, 1944 ( Act). It was proposed to redetermine the value of OE engines under Section 4(1)(a)(iii) of the Act invoking Central Excise Valuation Rules, 1975, and particularly Rules 6(c)(ii) and 6(b)(ii). As regards replacement engines sold by TAFE, it was proposed to adopt the sale price of TAFE to their buyers as basis of value. The impugned clearances had been made during August 1998 to January 1999 and the proposed demand was for Rs. 2,02,37,753/-.
3. The Show Cause Notice had cited the following allegations to arrive at the tentative finding that Simpson and TAFE had interest in the business of each other and they were related:
(a) TAFE was a subsidiary of Simpson
(b) Simpson had stood Guarantee for credit facilities offered by Banks to TAFE
(c) Shri A. Shivasailam, who was the Chairman of Simpson was also Chairman of TAFE
(d) TAFE granted price increase requests by Simpson and it was approved by their Chairman.
4. The assessee vehemently opposed each of the allegations citing case law and insisted that the assessments already made did not require to be disturbed. In adjudication, the adjudicating authority found that the goods involved had been sold to assessee's sister concern and the price did not appear to be the sole consideration for sale. Simpson held 76% of TAFE's shares, could control the composition of TAFE's Board of Directors and could control more than half the voting power of TAFE. The assessee had cited several cases wherein one or two firms/companies owned all or majority of the shares of the assessee company or vice versa and bought most or all of the assessee's products and wherein it was decided by Courts and Tribunal that those facts alone had not established that they were related persons. For two units to be 'related persons', it was essential that there was mutuality of interest in each other's business. The following case law had been cited:
(1) British Health Products India Ltd. v. CCE 1999 (34) RLT 244 (2) UOI v. ATIC Industries Ltd. .
(3) Ashok Leyland v. UOI (4) Ralliwolf Ltd. v. UOI (5) ITC Ltd. v. CCE 1999 (32) RLT 440 (6) Leecon Chemicals (P) Ltd. v. CCE
5. The Commissioner observed that the ratio of Ralliwolf Ltd v. UOI (Bom) was not final as it was a remand order. Though mutuality of interest was essential to treat a holding company and subsidiary company to be related, the facts of the subject case were different from that of Ralliwolf Ltd v. UOI supra . In terms of Hind Lamps v. UOI 1977-1- ELT-J -1 the transactions between a holding company and a subsidiary company were to be treated as between related persons under Section 4(4)(c) of the Act. He decided that the issue whether in the factual setting as in the subject case, mutuality of interest between the two entities was essential to treat them as related had not been settled. He found that TAFE was a subsidiary of Simpson and the two were dependent on each other and promoted each other's business. The Commissioner decided Simpson and TAFE to be related persons for the purpose of the Act for the reasons proposed in the Show Cause Notice. In addition, it was found that Simpson had filed price lists indicating TAFE as a company related to it. He decided that it was "the generality of the whole situation wherein the behaviour and approach of both the companies towards each other would determine whether the two companies are interdependent to each other".
6. Though the Show Cause Notice had proposed to revise the assessable of OE engines sold to TAFE in terms of Rule 6(b)(ii) of Central Excise Valuation Rules, 1975 read with Rule 6(c) ibid for demand, the Commissioner found that the assessee had already included 20% of the cost of production of OE engines cleared to TAFE to determine value whereas in the corresponding previous financial year (1997-98) TAFE had made a profit of only 16.47% and that the notice had erroneously proposed to add 16.47% of the price for sale of the OE engines to the above price to ascertain value. Accordingly he dropped the proposal to demand the duty on OE engines. He found that the assessee had explained in. para 13 of their written submissions dated 02.09.99 that they had sold Trade Engines in the market which were similar to those sold as OE engines to TAFE. The details of such engines were as follows:
ENGINES SOLD TO TAFE ENGINES SOLD TO OUTSIDERS Sl. No. Engine No. Rate to DDR* Rate to MDU* Engine No. Rate Remarks
1.
P3TA 1233 41295 40159 2428 44100 With fittings
2. S324TA 2406 46071 44804 2413 49050 No fittings
3. S325TA 1225 48156 46832 2337 53100 With fittings
4. S324 TA27173078, 30803097, 3114 46071 44804 2413 49050 No fittings
5. S3253090, 3091,3115 48156 46832 2337 53100 With fittings
6. S325123 48564 47228 2337 53100 With fittings DDR : Doddaballapur MDU : Madurai Engines listed at Sl No. 2 and 4 (Trade Engine No. 2413) were without fittings and were therefore found to be engines identical and comparable to OE engines sold to TAFE. According to the assessee, prices of such comparable goods could be basis for determination of value of engines sold as OE to TAFE in terms of Rule 6(b)(i) of Central Excise Valuation Rules, 1975. The Commissioner therefore determined the assessable value of OE engines sold to TAFE, as below:
Trade Engine OE Engine Difference in Price Price Number1(a) Price 1(b) Number2(a) DUR2(b) MDU2(c) DOR3(a) MDU3(b) 2413 48160 (after deducting the cost of special) packing) S-324TA2406 46071 44804 2089 3356 2717,3078,3080, 3097,311 No. of Engines sold To T Differential Value Total Differential Value Differential Duty payable DDR MDU DDR MDU 4(a) 4(b) 5(a) 5(b) (6) (7) 4811 10484 1,00,50,179 3,51,84,304 4,52,34,483 58,80,483 Further it was found that TAFE had sold engine received under invoice No. SDM 1407, dt 12.10.98 at a value higher by Rs. 7000.22 to an unrelated buyer in the replacement market whereby a differential duty of Rs. 910/- was found short collected. Proposal to demand duty on 11 other such engines was dropped as barred by limitation.
7. Accordingly, the Commissioner demanded an amount of Rs. 58,80,483/- as in the above table and Rs. 910/-under Section 11(A)(1) of the Act. He also imposed a penalty of Rs. 300000/- on M/s Simpson & Co. Ltd; Chennai under Rules 9(2), 173Q and 226 of Central Excise Rules 1944.
8. In their appeal against the impugned order it was submitted that Simpson's relationship to TAFE had been known to the Department. They had argued before the original authority that if the Tribunal's decision in British Health Products India Ltd had been considered, the adjudicating authority could not have given a finding that there was mutuality of business interest between Simpson and TAFE. In the order, though the Commissioner accepted that value of Trade Engines could not be adopted as value of OE Engines, he adopted value of Trade Engines as value of OE Engines cleared to TAFE. The Commissioner had made errors in quantifying the demand by adopting prices of several types of Trade Engines which were not comparable to engines supplied to TAFE as OE. The Commissioner had rejected their application for rectification of the mistakes in the order. While agreeing with the appellant that holding company, subsidiary company relationship under the Companies Act did not result in both being related persons under Section 4(4)(c) of the Act, he had decided that controlling interest was enough to hold the companies to be having mutuality of interest in the business ignoring the ratio of Atic Industries case. He ignored the decision in Ralliwolf Limited v. UOI of the Bombay High Court saying that the judgment was a remand order. Therefore he failed to appreciate the ratio of the judgment. The Commissioner had erred in not following CEVR 6(b) (ii) to determine the value when he had found that there was no price of comparable goods available for the OE Engines for the same class of buyers and it was not consistent with the ratio of Ashok Leyland v. CCE 35 (RLT) 748. They submitted that the Commissioner should have decided the value based on cost of raw material plus conversion cost plus profit. The adjudicating authority erred in adopting Trade Engine value for determining the value of OE Engine.
9. They submitted that the Commissioner made mistakes in computation of differential duty liability not considering that turnover tax was available as abatement only in respect of removals on sale basis from their factory at Chennai to TAFE, Sembium and not for removals to Doddaballapur, Bangalore. Had these errors not been committed duty demand would have been only of Rs. 25,61,991/- When goods were being sold to unrelated buyers, assessment of such goods when sold by related person did not need to be different, they submitted. As regards penalty it was submitted that the same was not called for as the Tribunal in Engines Companies 113 ELT 440 case had held that if credit was available at the consignee's end penalty was not leviable.
10. The Commissioner adopted the price for sale of two engines by Simpson which was 4.34% higher than the price TAFE was charged per engine by Simpson, for enhancing duty liability of more than 10,000 engines cleared to TAFE. Once the commercial consideration in the matter of pricing with reference to quantity was considered, the higher price was justified and the lower price was not on account of any extra commercial consideration. This position was upheld in Metal Box India Ltd v. CCE . It was incorrect for the Commissioner to have resorted to CEVR 6(b) (i) which had been given up in the Show Cause Notice. The Commissioner had erred in applying the sale price of list No. 2413 of price of list to all OE engines when it may have had relevance only to list No. 2406.
11. Learned Sr Advocate for the appellants Shri. V. Lakshmikumaran argued that in a case of identical facts, relating to the appellants' Kumbakonam factory, the concerned Commissioner had dropped the proceedings and therefore, in view of the decision in Jayaswals Neco Ltd v. CCE, Nagpur reported in 2006 (193) ELT 142 (SC), res judicata would apply and the Commissioner's order was not sustainable being totally different from the decision taken by the Commissioner of Central Excise, Trichy involving identical facts relating to the same assessee. The learned Sr. Advocate for the appellants argued that the order containing a different finding of the Commissioner, Trichy that Simpson and TAFE were not related had been accepted by the CBEC and therefore, a different position could not be canvassed by the department.
12. The learned SDR, Smt. R. Bhagyadevi argued that both the adjudication orders had been passed almost simultaneously by the two Commissioners. Therefore, in passing the subject order, the adjudicating authority was not bound by that ratio nor res judicata applied. The review and acceptance by CBEC of the order of Commissioner took place much after passing of the subject order. Therefore the principle of res judicata did not apply in passing the subject order. The SDR cited the decision of the Hon'ble Supreme Court in the case of CCE, Raipur v. Hira Cement in support. She submitted that the subject case came up for consideration before the competent Tribunal for the first time. It had the discretion to decide judicially the issues involved and was not shackled by any views of the CBEC on a decision involving the same assessee by another adjudicating authority.
13. She also cited the following observation of the Hon'ble Supreme Court in the case , cited with approval, in the case of CCE v. Hira Cement .
Non-filing of an appeal, in any event, would not be a ground for refusing to consider a matter on its own merits. (See State of Maharashtra v. Digambar.) In State of Bihar v. Ramdeo Yadav wherein this Court noticed Debdas Kumar by holding:
4. Shri B.B. Singh the learned Counsel for the appellants, contended that though an appeal against the earlier order of the High Court has not been filed, since larger public interest is involved in the interpretation given by the High Court following its earlier judgment, the matter requires consideration by this Court. We find force in this contention. In the similar circumstances, this Court in State of Maharashtra v. Digambar and in State of W.B. v. Debdas Kumar had held that though an appeal was not filed against an earlier order. When public interest is involved in interpretation of law, the Court is entitled to go into the question.
Therefore, when public interest was involved in interpretation of law, the Tribunal was entitled to go into the question, she argued.
In the judgment cited by the SDR, the Hon'ble Supreme Court ruled that "once Revenue accepted the judgment, it could not raise the said question once again". This was not the situation before the Commissioner, Chennai when he took up the subject case for adjudication. Therefore, it is obvious that decision of the Commissioner was not hit by res judicata.
14. Learned SDR cited the decision of Supreme Court in Ashok Leyland Ltd v. CCE, Madras and argued that in view of its ratio the value of engines sold in the replacement market could be adopted as value of goods cleared to TAFE. She supported the reasoning of the Commissioner in the order and argued that the same needed to be sustained.
15. We have given careful consideration to the facts of the case and the rival submissions. As regards the argument regarding applicability of res judicata, we fully agree with the views of the learned SDR in view of the case law cited by her. The proceedings in this case were initiated proposing to re-determine the assessable value of engines manufactured by Simpson and cleared to TAFE for consumption or sale. The Show Cause Notice proposed to revise the value following the provisions of Rule 6(b) (ii) of the Central Excise (Valuation) Rules, 1975 for the goods consumed in manufacturing tractors by TAFE found to be related to the assessee. "Related Person" occurring in Section 4(4)(c) of the Act, is defined as under:
Related person means a person who is so 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
16. Courts and the Tribunal have explained the true sense of the expression "Related Person" in a large number of decisions. Where a subsidiary company and the holding Company are involved, it has been laid down by the Bombay High Court in CCE&C Mumbai III v. Ralliwolf Ltd. that Section 4(4)(c) is not attracted merely because an assessee and its buyer have a subsidiary company holding company relationship. The High Court held:
Reading the section as a whole, it is clear that merely because a company is the subsidiary of holding company, ipso facto, it cannot attract Section 4(4)(c). It must be further established that each has interest in the business of the other. It must be further established that the transaction in question is not based on principal to principal and that extra-commercial considerations have lowered the normal price. It is only then the third proviso to Section 4(1)(a) is attracted.
17. In the case of Union of India v. Atic Industries Ltd the Hon'ble Apex Court observed as follows:
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 interest in the business of each other. 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.
18. In UOI and Ors. v. Atic Industries Ltd. the assesses's two buyers had held majority of the assessee's share capital and purchased the entire goods produced by the assessee, Atic Industries Ltd. One of the buyers Atul Products Limited held 50% of the share capital. 20% pf the shares were held by the other buyer (since 13rh March, 1978). It was decided by the apex Court that for treating the customer as a related person first part of the definition of 'related person' in Section 4(4)(c) of the Act required that such person should be so associated with the assessee that they have interest directly or indirectly in the business of each other. If the transactions were as between principal to principal and the price charged was the sole consideration and no extra commercial consideration entered in the determination of such a price, the customer could not be held to be a related person merely because he held 50% of the shares in the manufacturing company. In the instant case, apart from Simpson holding 76% of the shares of TAFE, no evidence of extra commercial consideration entering in the determination of the sale price has been found by the Department. In this case, it is possible that Simpson has interest in the prospects of TAFE as its major shareholder; but there is no reason to expect TAFE to be interested in promoting the business of Simpson. In view of this decision Simpson and TAFE cannot be held to be related persons for the purpose of Section 4.
19. In British Health Products India Limited and Ors. v. CCE 1999 (34) RLT 244 (Cegat) the Tribunal considered the transactions between BHPL and Dabur India Limited against the allegation of their being related persons as decided by Revenue. DIL purchased all the products of BHPL. DIL and its six nominee companies had acquired 60% of the paid up capital of BHPL. DIL stood as guarantor for loans taken by BHPL. DIL extended unsecured loan to BHPL and wrote off outstanding interest of Rs. 9.7 lakhs due from BHPL. Marketing and Distribution Agreement between BHPL and DIL provided flat margins of 25% for sales to DIL irrespective of the fact that BHPL sold some medicines below cost. It was in this background that the allegation of the two entities being related persons was raised. It was decided that in the absence of mutuality of interest between the two entities being proved, Dabur holding 23.89% of the share capital in BHPL did not establish extra commercial relationship between BHPL and DIL.
20. In Rallis India Ltd. v. CCE, Bombay, the dispute involved the two firms Rallis India Ltd and Rallis Machines Limited, RML was a subsidiary of RIL and had sold their entire products to RIL. RIL held 90% of the share in RML. The adjudicating authority had found the two firms to be related persons. He had not found that the price at which the entire produce was sold was not a commercially acceptable value. He found relationship only on the ground of the assessee being a subsidiary company of RIL. The Tribunal held that this one ingredient by itself could not be a justifiable ground to reject the price of the assessee.
21. In CCE & C v. Ralliwolf Ltd 'the' facts were that Rallis India Ltd held 60% of the share capital of Ralliwolf Ltd. The fact of RIL being interested in the affairs of RWL was observed to be established. However, it was decided by the Tribunal that the Department had not been able to show that RWL was interested in the business of RIL. The stock holding pattern could not result in RWL being interested in the business of RIL. An agreement between RIL and RWL did not indicate any flow back of money to RWL. It followed therefrom that the assessable value was the value at which RWL sold the goods to RIL.
22. The case law cited in the preceding paragraphs shows that the Hon'ble Supreme Court, High Court and the Tribunals have dilated at length the expression "related person" and the ingredients of a situation in which two persons could be considered as related persons. These decisions make it abundantly clear that unless it is shown that the assessee and any other entity (entities) enter into a tie-up with the object of deriving mutual benefit, which also entail clearing the goods manufactured by the assessee at a value below the normal value, the assessee and the other entity (entities) cannot be brought under the definition of "related person" in terms of Section 4(4)(c) of the Act. In the face of these decisions, in our view, it cannot be held that Simpson and TAFE are related persons.
23. Pleas were also made in defence in case they were treated as related persons. It was argued that the Commissioner had relied on the sale price of two engines by TAFE at a price which was 4.34% in excess of the value adopted by Simpson for sale of more than 10000 similar engines and therefore, the sale or price was not significant to support revision of the assessable value. This contention of the learned Counsel carries considerable force. It was further argued that having consciously opted for Rule 6(b)(ii) of the CEVR 75 in the show cause notice, abandoning the same in adjudication proceedings was incorrect on the part of the adjudicating authority as held in various judicial authorities. However, it is seen that the adjudicating authority opted for Rule 6(b) (i) as suggested by the appellants in the adjudication proceedings before the Commissioner in writing. It is seen from the statement of General Manager, Marketing of TAFE dated 22.01.96 before the Assistant Director, DGAE, Madras Zonal Unit that in 1994-95, total number of OE engines cleared to TAFE were 18000 and same type of replacement engines cleared were 10 and that same would be the case of clearances to replacement market. It is not indicated by the assessee or the adjudicating authority as to what is the total number of the engines cleared during the period covered by the notice, though the OE engines cleared is shown in the Show Cause Notice to be above 21000. It can be inferred that the figure would be insignificant compared to number of OE engines. Sale price of these engines were adopted as basis to ascertain the value of OE engines in the proceedings.
24. The claim regarding errors in quantification cannot be accepted as the appellants had been afforded sufficient opportunity to present their case before the Commissioner and the appellants alone had suggested adoption of Rule 6(b)(i) in their written submissions dated 2.9.99. The case records do not indicate number of engines sold to un-related buyers comparable to OE engines, though assessee had alleged that the figure adopted in adjudication was wrong and submitted the same to be two. However the same being two or more does not make any difference as OE engines cleared to TAFE are above 10,000 and trade engines cleared less than 12 in the material period, as we have decided that TAFE and Simpson are not related persons.
25. As regards the allegation that the assessee used a format for price declaration applicable to related persons, they have defended the same saying that those price lists were filed for stock transfer to depots. Commissioner had found that these covered clearance of 12 trade engines to TAFE. We feel that this declaration has to be ignored as an error on the part of the assessee in view of our finding as regards the relationship between the two parties.
26. In the instant case, apart from the fact that TAFE is a subsidiary company of Simpson holding 76% of the shares of TAFE, there is no allegation that there is any managerial interdependence between Simpson and TAFE in the administration of both companies. There is no finding of flow-back between the two companies though Simpson holds 76% of shares of TAFE. TAFE does not have any shares of Simpson. Simpson maybe interested in promoting the business of TAFE, Simpson being its major share holder; but the same cannot be said about TAFE. There is absolutely no evidence of TAFE having any interest in the business of Simpson. That TAFE sources its requirement of engines from Simpson, does not in any way establish that TAFE is interested in the business of Simpson. A person has interest in the business of the assessee would appear to imply that he has such an interest that would give him a right to expect to share in the assessee's profits. It is not shown that TAFE has such an interest in the business of Simpson. Therefore, the findings of the lower authority that the two companies have interest in the business of each other is not established.
27. Even though it is debatable whether, the adjudicating authority could have resorted to Valuation Rule 6(b)(i) in the absence of such a proposal in the show cause notice, the demand has been made by ascertaining the value invoking Rule 6(b)(i) of the CEVR, 1975. Once it is decided that the two entities are not related, the method of valuation of the impugned goods adopted is academic. However, while attempting to ascertain the value of some of the goods, in terms of Rule 6(b)(ii), the adjudicating authority found that Simpson had included a reasonable profit margin of 20% of the cost in computing the value of all the engines cleared to TAFE/whereas TAFE made only a profit of 16.47% in the same period of 1997-98. On the same finding the Commissioner had dropped the proceedings to revise the value of most goods cleared to TAFE. It is obvious that the assessee did not try to lower the value of goods sold to TAFE below the normal price, which is likely when an assessee clears goods to a related person as per. Therefore, the impugned order passed on the basis that the appellant and TAFE are related is vacated and the appeal of Simpson & Co Ltd is allowed.
(Pronounced in the open Court on 24.7.2006)