Customs, Excise and Gold Tribunal - Delhi
Prafful Industries Ltd. vs Commissioner Of Central Excise on 6 April, 2000
Equivalent citations: 2000(72)ECC495, 2000(118)ELT97(TRI-DEL)
ORDER
K. Sreedharan, J. (President)
1. These appeals have come up before us in Larger Bench on account of reference made by a bench consisting of two Members. The question to be dealt with in these appeals is whether relationship between the trader and the job worker will take the case of the assessee, job worker, out of the purview of the decision rendered by Their Lordships in Ujagar Prints v. Union of India 1988 (38) E.L.T. 535 as clarified by Their Lordships in 1989 (39) E.L.T. 493.
2. Short facts necessary for understanding the issue raised in these appeals are as follows :
Appellant in E/1880/99-A, namely, Prafful Industries Ltd. are engaged in the processing of fabrics falling under Chapter 54 of the Central Excise Tariff. The grey fabrics are supplied to Prafful by several parties including concerns named Ganga Ram Synthetics Ltd., Prafful Overseas Pvt. Ltd. and Prafful Exports. According to the Department, the assessee Prafful Industries Ltd. and three suppliers of grey fabrics, namely, Ganga Ram Synthetics Ltd., Prafful Overseas Pvt. Ltd. and Prafful Exports are managed by the members of the same family, have common office at Surat and are having financial transactions between them making all of them related persons. Assessee had been paying duty on the processed fabrics which were cleared in Lump/Taka form on payment of duty on the basis of manufacturing cost plus manufacturing profit and the cost of grey fabrics as held by the Hon'ble Supreme Court in Ujagar Prints case. Surat Commissionerate issued circular, dated 30-5-1994 by which job worker was to pay duty on the landed cost of raw material plus job charges and their profit. It was stated therein that the selling price of the trader was not to form part of the assessable value. Prafful was paying excise duty strictly in terms of this trade notice. On the allegation that there is mutual interest between the assessee, Prafful Industries Ltd. and the trader Ganga Ram Synthetics Ltd., show cause notice was issued demanding a sum of Rs. 2,69,62,215.77 as differential duty on account of under-valuation of the goods cleared by the assessee on account of mutual interest.
3. Show cause notice was challenged by the assessee contending that they do job work not only for Ganga Ram Synthetics Ltd., Prafful Overseas Pvt. Ltd. and Prafful Exports but also for almost 200 other traders; that the charges recovered from all of them are the same and that Ganga Ram Synthetics Ltd. also got fabrics processed from other processors like the assessee and the rate which those job workers were charging was the same as that charged by the assessee. It was also contended that the price at which Ganga Ram Synthetics Ltd. sold the goods to dealers cannot be the basis for finding out the assessable value of the goods cleared by Prafful Industries Ltd. The fabrics on which job work was done were further printed and worked upon by Ganga Ram Synthetics Ltd. On these counts the action proposed in the show cause notice was disputed. On the question of relationship between the four concerns, namely, the assessee, Ganga Ram Synthetics Ltd., Prafful Overseas Ltd. and Prafful Exports, it was contended that it has to be established by the Department that the price charged from the related persons is a favoured price. In the absence of such favour being shown to the alleged related persons, the duty paid on the value of the processed goods must be taken to be the correct duty payable by the assessee.
4. The Adjudicating Authority overruled the contentions raised by the assessee against the show cause notice and held that the principle stated by Their Lordships of the Supreme Court in Ujagar Prints case cannot apply to the facts on hand because of the relationship between the assessee and Ganga Ram Synthetics Ltd. In this view he confirmed the demand made in the show cause notice. He also ordered payment of interest on the said amount in terms of Section 11AB of the Act. He also imposed a penalty of like amount on Prafful Industries Ltd. under Rule 173Q(1) of the Central Excise Rules read with Section 11AC of the Central Excise Act. The land, building, plant and machinery belonging to the assessee were confiscated under Rule 173Q(2) with option to redeem it on payment of Rs. 20 Lacs. Personal penalty of Rs. 15 Lacs was imposed on Shri Deoki Nandan Aggarwal. Penalty of Rs. 7 Lacs each on Shri Jai Narain Aggarwal, Shri Srinarain Aggarwal and Shri Shiv Narain Aggarwal was also imposed under Rule 209A of the Central Excise Rules. A penalty of Rs. 20 Lacs was imposed on Ganga Ram Synthetics Ltd. under Rule 209A. These actions are under challenge.
5. On the facts of this case, it is highly necessary to properly understand the scope and ambit of the clarificatory order passed by Their Lordships of the Supreme Court in Ujagar Prints v. Union of India reported in 1989 (39) E.L.T. 493 (S.C.). We consider it advantageous to read that order in its entirety.
"In respect of the civil miscellaneous petition for clarification of this Court's judgment dated 4th November, 1988, it is made clear that the assessable value of the processed fabric would be the value of the grey-cloth in the hands of the processor plus the value of the job work done plus manufacturing profit and manufacturing expenses whatever these may be, which will either be included in the price at the factory gate or deemed to be the price at the factory gate for the processed fabric. The factory gate here means the 'deemed' factory gate as if the processed fabric was sold by the processor. In order to explain the position it is made clear by the following illustration : if the value of the grey-cloth in the hands of the processor is Rs. 20/- and the value of the job work done is Rs. 5/- and the manufacturing profit and expenses for the processing be Rs. 5/-, then in such a case the value would be Rs. 30/-, being the value of the grey-cloth plus the value of the job work done plus manufacturing profit and expenses. That would be the correct assessable value.
2. If the trader, who entrusts cotton or man-made fabric to the processor for processing on job work basis, would give a declaration to the processor as to what would be the price at which he would be selling the processed goods in the market, that would be taken by the Excise authorities as the assessable value of the processed fabric and excise duty would be charged to the processor on that basis provided that the declaration as to the price at which he would be selling the processed goods in the market, would include only the price or deemed price at which the processed fabric would leave the processor's factory plus his profit. Rule 174 of the Central Excise Rules, 1944 enjoins that when goods owned by one person are manufactured by another the information is required relating to the price at which the said manufacturer is selling the said goods and the person so authorised agrees to discharge all the liabilities under the said Act and the rules made thereunder. The price at which he is selling the goods must be the value of the grey-cloth or fabric plus the value of the job work done plus the manufacturing profit and the manufacturing expenses but not any other subsequent profit or expenses. It is necessary to include the processor's expenses, costs and charges plus profit, but it is not necessary to include the trader's profits who gets the fabrics processed, ecause those would be post-manufacturing profits."
From this decision it is clear that the assessable value of the processed fabric would be the value of the grey cloth in the hands of the processor plus the manufacturing expenses incurred by the job worker and his profit, job worker will be deemed to sell the fabric on which he carries on work to the trader who supplied the grey-cloth, job worker is deemed to be the manufacturer and the sale price will be deemed to be the value of the grey-cloth plus manufacturing expenses and the manufacturer's profit. Their Lordships further went on to state that the trader who gives the grey fabric for job work should give a declaration as to what would be the price at which he would be selling the processed goods. On the basis of that declaration excise authorities are to fix the assessable value of the processed fabric and duty should be levied from the job worker. The declaration as to the price given by the trader should include only the price at which the processed fabric would leave the job workers premises together with the job workers profit. This declaration to be filed by the trader; according to Their Lordships, is the one which will conform to the provisions contained in Rule 174 of the Central Excise Rules. Their Lordships further made it clear that the price at which the job worker is selling the goods must be the value of the grey-cloth plus value of the job work done together with the manufacturing profit and manufacturing expenses. No other amount spent on the fabric towards expenses by trader or subsequent profit earned by the trader can be the value of the goods for the purpose of assessment. It was also clarified that the expenditure incurred by the trader subsequent to the movement of the goods from the premises of the job worker and trader's profit cannot form part of the assessable value because they are post manufacturing expenses and profits, as the case may be.
6. In a case where trader gives grey fabric/man-made fabric to job worker for processing the following situations arise, job worker becomes manufacturer. Excise duty is payable by manufacturer. The job worker who becomes manufacturer should pay the duty in accordance with the principles stated by Their Lordships of the Supreme Court. Assessable value of the finished product is the value of grey fabrics/man-made fabric plus manufacturing cost and the job worker's profit. Movement of the processed fabrics from the premises of the job worker back to the trader will be deemed to be sale by job worker to the trader. It is only because of the deemed sale at the time and place of removal, namely, at the deemed factory gate of the job worker, duty under excise law becomes payable. Even though the job worker is not the owner of the fabric he is saddled with the liability to pay duty reckoning the value of the fabric as well. In such a situation, the job worker is deemed to be the manufacturer, his processing is deemed to be the manufacturing process and the removal of the goods from his deemed factory back to the trader is again deemed to be a sale.
7. In the instant case, the Department proceeds on the basis that Prafful Industries Ltd. and Ganga Ram Synthetics Ltd., job worker and the trader respectively, are related persons. Consequently they want to assess Prafful Industries Ltd. on the basis of sale price of processed goods realised by Ganga Ram Synthetics Ltd. from wholesale dealers. Ganga Ram Synthetics realises their profit when they effect sale to wholesale dealers. Similarly they recovered additional expenditure incurred by them also from wholesale traders. Their Lordships of the Supreme Court in the judgment referred to earlier specifically stated that the trader's profit and his expenditure should not form part of assessable value of the finished product because they are post manufacturing profits and expenses. In view of this pronouncement by the Supreme Court, we are of the opinion that the price realised by Ganga Ram Synthetics, the trader, cannot be the assessable value of the processed goods. This is so because the Department has no case that Prafful Industries are not job workers and that Ganga Ram Synthetics are not the traders.
8. Since Prafful Industries are only job workers, they are not to be treated as owner of the goods selling them to or through related persons, namely, Ganga Ram Synthetics. Only in a case where the assessee who is the owner of the goods manufactured by him sells in the course of wholesale trade to or through a related person, the price at which the goods are sold by the related person in the course of wholesale trade can become the basis for assessment to excise duty. In the case of job worker, by fiction he is made the manufacturer and removal of goods by him back to the trader as sale and duty payable reckoning the value of goods as well. Such a deemed sale by the job worker to the trader under no circumstance can come under Section 4(1)(a)(iii) of the Central Excise Act.
9. Prafful Industries, the assessee before us, carries out job work for independent traders as well. They have got 200 other traders who get their grey fabrics processed by the assessee. Records available in this case show that the assessee realised same charges from other independent traders for the work carried out on the same type of cloth supplied by Ganga Ram Synthetics. Records in the case further show that Ganga Ram Synthetics were getting their fabrics processed by other job workers as well. Rate paid by Ganga Ram Synthetics to such job workers were also at same rates as was realised by the assessee in this case. This shows that the job work carried out by the assessee of the goods belonging to Ganga Ram Synthetics, the trader, was not at all influenced by any relationship between them. Charges realised by the assessee were in no manner suppressed. There was no flow back from Ganga Ram Synthetics to the assessee.
10. In N.P. Textile Mills v. C.C.E., Bombay 1996 (88) E.L.T. 493, the facts are as follows:
Three partnership firms, NPTM, SMTM and SSM supplied grey fabrics to job worker NVS for processing. After getting the processed goods these partnership firms got the goods sold through a related person, JWTM. JWTM was a Private Limited Company and the other three are partnership firms. Partners of those firms were close relatives and 80% of share of JWTM were owned by them. In that case the trader had no connection whatsoever with the job worker or processor. Department had no case that the processor was a person related to the trader or that the transactions between them are not on principal to principal basis or not at arms length. Nor was there any case that the processing charges had been deliberately depressed to any extent. So, the decision in that case has no application to the facts on hand. Here the relationship alleged is between the job worker and the trader but there is nothing on record to show that processing charges realised by the job worker was deliberately depressed to any extent. Charges realised for the processing of the grey fabrics were at the rates realised from the remaining 200 odd dealers.
11. The facts in Bee Pee Coating Ltd. v. C.C.E., Vadodara - 1999 (35) RLT 429 have no connection whatsoever with the facts on hand. The facts in that case show that the job worker was only a dummy of the trader. When the job worker had no independent existence other than that of the trader, the principle of law stated in Ujagar Prints cannot have any application. Bench rightly took the view that the principle as stated in Ujagar Prints has no application here.
12. In Final Order No. 1660 to 1673/99-A [2000 (117) E.L.T. 439 (T)] in the appeals filed by S. Kumars Ltd. and Ors. v. Collector of Central Excise, Indore, where the facts are virtually identical, a Bench of two Members (President and Shri C.N.B. Nair, Member Technical) took the view that the decision in Ujagar Prints has no impact on excise duty payable by job worker even where trader is related in a situation where the charges realised by the job worker is not depressed or suppressed on account of relationship. That view is unassailable. Prafful Industries, job worker in this case is not a dummy of the trader. It has its own establishment and machinery. As per the records the cost of machinery owned by the assessee is worth nearly Rs. 3.5 Crores. The relationship has, in no manner, depressed the manufacturing charges.
13. Department has no case that Ganga Ram Synthetics, the trader, did not furnish all the details required by Rule 173 of the Central Excise Rules, 1944 which is made mention of by Their Lordships in the second paragraph of the judgment in Ujagar Prints case. On the facts and on the basis of records now available in the case, we have no hesitation in holding that the job work undertaken by the assessee on the fabrics supplied by Ganga Ram Synthetics was at arms length in accordance with commercial practice in the trade. Relationship even if there is, has not at all, gone to depress the cost of manufacture undertaken by the assessee. The price realised by Ganga Ram Synthetics taking into consideration their marketing cost and profit, which are certainly post manufacturing expenses can never be added to the assessable value for imposing duty under Excise Act. In these circumstances we are compelled to take the view that the entire exercise initiated by the Department by issuing show cause notice was ill-conceived. The assessee is not liable for any differential duty.
14. There was a search conducted of the premises of the assessee on 30/31-1-1997. It was alleged that excess unaccounted grey/semi-finished/finished man-made fabrics and shortages were noticed. The excess fabrics were seized. A separate show cause notice was issued on the above basis demanding a sum of Rs. 4,38,235. By a separate order the adjudicating authority confirmed this demand but on appeal the appellate authority by his order, dated 18-2-2000 decided the issue in favour of Prafful Industries and vacated the order.
15. In view of what has been stated above the order impugned in these appeals, namely, Order-in-Original No. 11 of 1999, dated 31-3-99 is set aside in its entirety. The demand of duty made therein, penalty imposed therein under Rule 173Q read with Section 11AC, confiscation of the property with permission to redeem on payment of Rs. 20 lakhs and personal penalties imposed on the individual appellants and penalty imposed on Ganga Ram Synthetics, the trader, are set aside.
16. Along with these appeals appellants moved petitions praying for staying the operation of the impugned order and to waive the condition of pre-deposit as provided by Section 35F of the Act. By order, dated 20-8-1999 this Tribunal directed Prafful Industries Ltd. to deposit a sum of Rs. 20 lakhs. On deposit of that amount, recovery of the balance amount covered by the order impugned was stayed. Prafful Industries Ltd. complied with that order and deposited Rs. 20 lakhs. Since we set aside the order impugned in these appeals in its entirety, Prafful Industries Ltd. are entitled to get refund of that amount of Rs. 20 lakhs. We direct the respondent to refund the deposited amount of Rs. 20 lakhs as expeditiously as possible, at any rate within three months from the date of receipt of a copy of this Final Order.
17 Appeals are allowed in the manner indicated above.