Customs, Excise and Gold Tribunal - Mumbai
Fmc India Ltd. vs Commissioner Of Central Excise on 5 August, 2005
Equivalent citations: 2006(193)ELT57(TRI-MUMBAI)
ORDER S.S. Sekhon, Member (T)
1. The basic dispute involved in the instant appeals is valuation of pesticides i.e. Marshal 25EC & Bestox 10E manufactured by the appellants, Rallis India Ltd. (in short Rallis) on job work basis on account of FMC India Pvt. Ltd. (in short FMC) in terms of Master Processing Agreement (in short MPA) dated 15-1-2001.
1.2 Rallis has valued the goods manufactured under job work on the basis of cost of raw material, provided free of cost by FMC, plus the processing charges under MPA in terms of Residual Rule 11 read with Rule 6 of the Valuation Rules, 2000 read with the principles laid down by the Apex Court in the case of Ujagar Prints etc. v. UOI & clarifactory judgment reported in 1989 (39) E.L.T. 493 (S.C.) and Pawan Biscuits Co. (Pvt.) Ltd. v. Commissioner of Central Excise as well as circular bearing no. 619/10/2002-CX., dated 19-2-2002 reported in 2002 (140) E.L.T. 28-30.
1.3 In the appeals (E/2053/2004 to E/2055/2004 & E/2052/2004 to 2058/2004). Revenue has sought to value the goods, in terms of Rule 7 of the Central Excise Valuation Rules, 2000, i.e. the price at which such goods are sold by Rallis, on account of FMC, from their depots as consignment stockists of FMC under the consignment Agency Agreement (in short CAA) dated 8-12-2000.
1.4 In the appeals E/724/2005 & E/725/2005 for the same goods, for the same period, a divergent stand has been taken by the Revenue, wherein Revenue after having taken cognizance of the fact that Rallis was manufacturing the impugned goods, under job work arrangement of FMC has accepted the valuation on the basis of cost of material + job charges as laid down by the Apex Court in the Ujagar Prints & Pawan Biscuits (supra) however, the only dispute-that has been raised is that the commission received by Rallis under the CAA should be included in the said assessable value of the goods for the purpose of payment of excise duty.
1.5 The demands in Appeal Nos. E/2053/2004 to E/2055/2004 (FMC India Pvt. Ltd.) & E/2056/2004 to E/2058/2004 (Rallis India Ltd.) have been confirmed vide consolidated order passed by the Commissioner of Central Excise, Nagpur (CCE) for the period July, 2001 to February, 2003, by Show Cause Notices issued by Deputy Commissioner of Central Excise, Amravati.
(i) 566, dated 8-8-2002 - period July, 2001 to March, 2002 - Demand -Rs. 73,88,088/-.
(ii) 2992, dated 2-5-2003 - period April, 2002 to December, 2002 - Demand - Rs. 69,21,452/-.
(iii) 7502, dated 16-9-2003 - period January, 2003 to February, 2003 -Demand - Rs. 11,99,224/-.
The 1st SCN is different from the 2nd & 3rd SCN. In the 1st SCN, the only allegation was that since the goods have been sold from the depots of Rallis, though on account of FMC, Rule 7 should apply. However in the 2nd & the 3rd SCN, the job work arrangement itself has been treated as sham & then Rule 7 has been applied.
and Duty demanded in the show cause notices & confirmed Rs. 1,55,08,764 in the impugned order-in-original under Section 11A of the Central Excise Act, 1944 on Rallis & Penalty imposed of Rs. 1,55,08,764/- under Section 11AC of the Act on Rallis and Rs. 20,00,000/- under Rule 25 of the Central Excise Rules, 2001/2002 on Rallis and Rs. 25,00,000/- under Rule 26 of the Central Excise Rules 2001/2002 on FMC with interest levied on Rallis.
1.6 The demand arising out of Appeal Nos. E/724/2005 & E/725/2005 (Rallis India Ltd.), the Show Cause Notices (SCNs) had been adjudicated by the jurisdictional Deputy Commissioner of Central Excise (in short 'DCCE') wherein he confirmed the inclusion of the commission in the assessable value and confirmed the demand. An appeal has been filed by the appellant (Rallis) before the Commissioner (Appeals), Nagpur against the said order of the DCCE. The said appeal has since been disposed off by the Commissioner (Appeals) vide Order in Appeal No. SVS/27 to 28/NGP-A/2004, dated 15-12-2004 by way of remand to the DCCE for fresh adjudication. The captioned appeals have been filed in CESTAT, Mumbai against the said Order-in-Appeal, which is before this Bench. The details are summarized as under :
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S.No. Particulars of the show Period Duty (Rs.) Penalty (Rs.)
cause notice issued by
DCCE, Amravati
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1. No. V (38) 3-13/2002/D/ July, 2001 to 591622 500000 3684 dated 7-8-2002 Oct., 2001 2 No. V (38) 3-35/2002/D/ Nov. 2001 to 1520771 1500000 5371 dated 29-11-2002 July, 2002
3. No. V(38) 3-20/2003/D/ Aug. 2002 to 1395735 1350000 4299-4300 dated 19-6-2003 Feb., 2003
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3508128 3350000
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2.1 After hearing both sides & considering the material, it is found -
(a) (i) Commissioner's (in short CCE) finding no. 1 - Rallis & FMC were working in a joint venture till 25-9-2001. In the impugned order at the CCE held that both Rallis & FMC were working in a joint venture till 25-9-2001 is on that Rallis & FMC were working in a joint venture till 25-9-2001 is a factually incorrect statement inasmuch as the joint venture ended on 8-3-2001 and only the final approval for change of name was received from the Registrar of Companies on 25-9-2001.
(ii) The sequence of events which form a part of the relied upon documents in the SCN clearly indicate that the joint venture actually ended on 8-3-2001 with the finalization of all share transfer procedures. The approval for change of name was received from the Registrar of Companies on 25-9-2001. Thus the basis of the CCE, that the joint venture was in existence till 25-9-2001 cannot be held to be factually correct. Further relying upon the chronological sequence of events leading to the formation of FMC, Rallis India Pvt. Ltd. (FRIL being the joint venture company) and FMC, it is apparent that Rallis and FMC are separate legal entities with no common shareholding brought on record as within the two companies, with no common directors. Both companies are managed by independent Board of Directors. There is also no dispute on FMC and Rallis to be independent entities and having no mutuality of interest in the business of each other. There is also no allegation, or any evidence placed, to show that there is any flow-back of sale proceeds or portion thereof from FMC to Rallis, other than as explicitly agreed, in the MPA & CAA.
(b) Considering CCE's finding - That there has been substantial reduction in assessable value during the period of the SCN & Para 43 of the order, it appears, the CCE has reproduced a chart drawing comparison of the assessable value of the impugned goods between the period prior to February, 2001 up to July, 2001 and from August 2001, showing a downward trend. On this comparison, the CCE has later in Para 51 arrived at a finding that the arrangements of job work was prima facie made for avoidance of legitimate payment of excise duty. It is found -
(i) The MPA & CAA executed between Rallis and FMC are valid lawful arrangements between two independent entities and have been executed on principal to principal basis, at arms length. In terms of the MPA, the CCE in the impugned order has not referred to or disputed any clauses of the agreement to allege otherwise. FMC provides Rallis at its factory at Akola raw materials as well as packaging materials for manufacture of final product on job work basis. For the said processing, at the Akola factory Rallis is entitled to receiving processing charges in terms of the agreement, which include the profit margin of Rallis.
In terms of the CAA, in order to utilize the existing & established marketing network of Rallis all over the country, FMC appoints Rallis as their non-exclusive consignment agent for sale of FMC products; consideration is commission based on the volume of sale on all India basis. Rallis is also paying service tax as a 'Consignment Agent', on the commission received in terms of this agreement. The scope of this CAA is not restricted to products manufactured at Akola factory only, but it as well covers other products also. Further in terms of the CAA Rallis has no right, title, interest on the products consigned to its depots and the sale proceeds of FMC products. Such proceeds would have to be remitted to FMC within specified time. The relevant clauses of the CAA clearly indicate that the CAA has been entered into on a principal to principal basis and at arms length on pure commercial terms & conditions. In respect of the CAA also, the CE in the impugned order has not referred to or disputed any clauses to allege otherwise.
(ii) The Appellants have submitted, the comparative scenario before and after MAA & CAA as under :
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Rallis - Akola factory manu- Rallis-Akola factory manufac- facturing on own account & turing on job work basis on ac- the goods sold from various count of FMC & the said FMC depots of Rallis on own ac- goods sold from various depots count (before the impugned of FMC (during the impugned show cause notice period) show case notice period)
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Import of technicals (principal Import of technicals (principal
raw material) by Rallis from raw materials) by FMC from
FMC Corporation USA as well FMC Corporation, USA as well
as procurement of other raw as procurement of other raw
materials & packing materials materials and packing materials
by Rallis on own account for materials and packing materials
by FMC & sending the same free of cost to the Akola factory
its Akola factory. of Rallis for conversion on job
work basis.
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Manufacture of formulations Manufacture of formulations at at Akola factory by Rallis on Akola factory by Rallis on job own account work basis on account of FMC
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Manufactured goods trans- Goods after manufacture on job ferred from Akola factory to work basis at the Akola factory depots located all over the of Rallis delivered to FMC's country for sale on own ac- C&F agent at factory gate. count.
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Assessable value under excise Assessable value under excise =
= depot selling price as per landed cost of raw materials
Rule 7 plus processing charges as per
Ujagar Prints (supra)
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FMC's C&F agent on its instruc-
tions, transfers goods (being Marshall 25EC only, Bestox 10E sold directly) to Rallis being the consignment agents of FMC at their depots located all over the country for effecting sale of FMC products through such depots in consideration for commission charges
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Sales promotion & market Sales promotion & market de- development done by Rallis & velopment done by FMC & ex- expenses thereon incurred & penses thereon incurred & borne by Rallis borne by FMC
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Primary & secondary freight Primary & secondary freight borne by Rallis borne by FMC
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Sales proceeds realization & Sales proceeds remitted by Ral-
retained by Rallis and accord- lis to FMC after deducting
ingly sales turnover recorded commission & such sales pro-
in the books of Rallis. ceeds retained by FMC & ac-
cordingly sales turnover re-
corded in the books of FMC
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(iii) On perusal of the summary as above find force in the plea of Valuation adopted by Rallis prior to entering into job work arrangement with FMC is of no relevance in determination of valuation under job work. The thrust of the CCE's contention that prior to the impugned period, Rallis has been paying higher duty, but during the impugned period, there was substantial reduction in the duty payment of Rallis. The CCE does not appreciate fundamental difference in the actual operations of Rallis, when it was manufacturing & selling on own account prior to the impugned period and was paying duty on the basis of its selling price from the depot vis-a-vis the operations during the show cause notice period.
(c) The CCE has also not appreciated -
(i) that during the show cause notice (impugned) period, the job work was conducted on account of FMC by the Akola factory of Rallis in consideration for processing charges and the said factory being an assessee under central excise, applicable excise duty was being paid by it as is applicable in the hands of a job worker in terms of the principles laid down by the Apex Court in the case of Ujagar Prints & Pawan Biscuits (supra), and
(ii) that the sale of such FMC products was done through the country wide dealer network by Rallis in an entirely different capacity i.e. as a consignment agent in consideration for commission on which even service tax was being discharged by Rallis.
(iii) the CCE has further failed to appreciate that the MPA and the CAA entered into between Kallis & FMC were based on sound & rational commercial considerations and the reduction in assessable value for the purpose of central excise was only incidental in terms of the law of the land. The CCE failed to realize that neither the valuation provisions contained in Central Excise nor any other law requires a manufacturer (assessee) to always keep the value of goods manufactured by him at par at all times. He further erred when he failed to realize that value of the goods for levy of excise duty would be governed by the settled positions of law provided in the relevant provisions and not on the basis of history of the value of the impugned goods. Thus the CCE was wholly unjustified in coming to erroneous conclusions based on the contention that because during the period prior to the impugned period, Rallis had declared higher prices of goods, the subsequent reduction in the assessable value of the goods when Rallis was operating under job work was not in accordance with law.
(d) It is settled principle of law that valuation of goods manufactured on job work basis is to be done on the basis of landed cost of raw materials plus processing charges, which includes job workers profit relying upon -
(i) Apex Court in Ujagar Prints etc., etc. v. UOI & clarificatory judgment reported in 1989 (39) E.L.T. 493 (S.C.) & Apex Court's decision in Pawan Biscuits Co. (P) Ltd. v. Commissioner of Central Excise, & C.B.E. & C. has vide circular bearing no. 619/10/2002-CX., dated 19-2-2002 reported in 2002 (140) E.L.T. T28-30, clarified that even the new Section 4 based on transaction value, effective from 1-7-2000, valuation for goods manufactured on job work is to be done based on the decisions of the Apex Court in Ujagar Prints & Pawan Biscuits (supra), we cannot uphold the efforts clearance in this case to depart from the Ujagar Prints formula for valuation, in the facts of this case.
(e) CCE's finding no. 3 - since goods were sold through the depot of Rallis, the valuation should have to be done as per Rule 7 of the Valuation Rules, 2000 is_____at & based on the fact ______that the goods have been ultimately sold from the depot/C&F agent of Rallis, the CCE has held that the value of the goods should be done in terms of Rule 7 of the Valuation Rules, 2000 (in short 'Valuation Rules') thereafter it has been held that appropriate duty has not been discharged by Rallis. Thus, according to the CCE, simply because the goods have been sold through the depot of Rallis, the value should be the price at which the goods are sold therefrom proceeded on the premises that since Rallis was receiving commission for the activities undertaken in terms of the CAA, their responsibility did not cease after the goods left the factory of Rallis. Based on the aforesaid, he has again held that the valuations would have to be done in terms of Rule 7 of the Valuation Rules. These findings cannot be upheld as -
(i) Rule 7 has no application in cases where the assessee is not the owner of the goods, hence CCE's findings that valuation of the product in the instant case should be done in terms of Rule 7 of Valuation Rules not tenable. Valuation under Rule 7 can be taken recourse to only when an assessee who is the owner of the goods manufactured by him on his own account instead of selling the goods from his factory gate, sells the goods from his depots or premises of a consignment agent. The said principle has been held by the Larger Bench in the case of Prafful Industries Ltd. v. Commissioner of Central Excise, Mumbai . Though Rallis manufactured the goods as a job worker, it does not own the goods and hence Rule 7 cannot be made applicable to Rallis. The title & property in the goods always vests with FMC. Application of Rule 7 in the said cases of job work would tantamount to taxing trader's (FMC) profit and trader's (FMC's) expenses towards publicity, advertisement, freight expenses etc., which cannot be done in terms of settled legal principles. Hence the valuation under Rule 7 of the Valuation Rules is not warranted in case of job work.
(f) The CCE has observed in the order that -
(i) in the instant the job work arrangement does not end with return of processed goods to the principal, which is an ideal case, and
(ii) in the impugned period, the job work arrangement has re-suited in substantial decrease in prices, the said arrangement is a colourable device to evade payment of duty.
The CCE has relied upon the cases of H. Guru Instruments (North India) Pvt. Ltd. v. CCE , Play-world Int'l Pvt. Ltd. v. UOI & Calcutta Chromotype Ltd. v. CCE to lift the corporate veil & hold that colourable devices cannot be a part of tax planning. These observations cannot be upheld as -
(iii) it is an admitted fact that the arrangements for the manufacture of goods is under job work under a specific job work agreement.
(iv) Moreover besides the job work operations conducted on account of FMC, at the Akola factory, Rallis was continuing to manufacture its other products on own account as usual. It was only that Marshall & Bestox were FMC brands and FMC Group wanted to have a direct presence in India, again due to strategic business considerations, the agreements were entered into & executed in respect of the said limited products of FMC.
(g) The aspect of colourable device has been discussed in detail by the Apex Court in a recent decision in the case of Union of India and Anr. v. Azadi Bachao Andolan and Anr. (2003) 263 ITR 706 (SC), wherein the Apex Court has differed from the views taken in McDowell and Co. Ltd. v. CTO , which has been relied upon in the decisions cited by the CCE in the impugned order, as aforesaid. We find in the facts of this case to have any reason to agree with the CCE on this account.
(h) The case laws relied by the CCE are distinguishable & not applicable in the instant case as -
(i) H. Guru Instruments (North India) Pvt. Ltd. v. CCE (T) In the case of H. Guru (supra), the Tribunal has observed as a fact that the appellant-company and the founder company at Calcutta were one and the same and the appellant-company had been set up by the founder company merely for the purpose of evading Central Excise Duty. Further it was also observed as a fact that large part of the appellants total realization through sales was flowing to the founder company.
In the instant case, it is not in dispute that Rallis & FMC are separate & independent companies and that the transactions entered into between them are on a principal to principal basis and at arms length. It is also not in dispute that there is no flowback from FMC to Rallis or vice versa and the only consideration received by Rallis from FMC is as per the MPA i.e. processing charges & CAA i.e. commission on sale. It is not also in dispute that the joint venture had ended much before the actual commencement of operations under the MPA & CAA and that reduction in duty under MPA is as per the law of the land. Hence the case of H. Guru (supra) is clearly distinguishable on facts & not applicable in the instant case.
(ii) UOI v. Playworld Electronics Pvt. Ltd.
In the captioned case, the facts were that the respondent company used to sell their entire production to M/s. Bush India Ltd., in the brand name of Bush. The dispute was raised by the jurisdictional excise authorities that the goods should be valued at the price at which M/s. Bush India sell the goods on the ground that the respondent & M/s. Bush India were related persons & that M/s. Bush India was a favoured buyer. The Hon'ble High Court, on the basis of facts on records, held that the valuation had been correctly done by the respondents i.e. the price at which the goods were sold by the respondents to M/s. Bush India. The Apex Court upheld the order of the High Court but at the same time observed that though the real transaction appeared to be suspicious, since the proper facts as to real intent of the transactions was not found out by the lower authorities, the High Court was not left with any other option.
In the instant case, as it is observed from the facts on records and chronological flow of events, all transactions have been entered into on a principal to principal basis and at arms length. It is also established that there was a fundamental difference in the actual operation of Rallis when it was manufacturing & selling on own account prior to the impugned period and was paying duty on the basis of its selling price from the depot vis-a-vis the operations during the show cause notice period. Further all transactions were based on sound & rational commercial considerations and the reduction in assessable value for the purpose of central excise was only incidental in terms of the law of the land. In view of the established and undoubted facts, the decision in the case of Playworld (supra) is not applicable in the instant case.
(iii) Calcutta Chromotype Ltd. v. CCE In the captioned case, the Apex Court has held that as to when the veil should be lifted would depend upon the facts and circumstances of the case, to see whether or not the person behind the manufacturer and buyer is the same.
In the instant case, it is an admitted fact that Rallis & FMC are two independent companies, who have transacted at an arms length and there is no dispute that Rallis & FMC are related persons. Hence reliance of the aforesaid case by the CCE is devoid of any merits.
(iv) There has been no contravention of Rules 4 & 6 of the Rules by Rallis. Rule 4 deals with payment of proper duty at the time of removal & Rule 6 with self assessment of duty. It is submitted that proper excise duty has been discharged by Rallis in terms of settled principles laid down by the Apex Court on the goods manufactured by it and hence there is no violation of Rule 4 as well as Rule 6.
(i) Penalty be imposed on Rallis cannot be upheld since it had all along acted lawfully with full disclosure to the Department. There is no evidence on record of deliberate violation of the provisions of the statute by Rallis. Reliance placed by the appellant on the decision of the Apex Court in the case of Pratibha Processors v. UOI is fully justified.
(j) Penalty under Section 11AC and interest under Section 11AB of the Central Excise Act, 1944 not imposable on Rallis in the view of findings herein.
(i) Penalty under Rule 25 cannot be imposed on Rallis inasmuch as Rallis has not indulged in any of the contraventions mentioned in Rule 25 and has paid duty on the basis of the principle laid down by the Apex Court in the case of Ujagar Prints & Pawan Biscuits (supra) and further confirmed by the Board vide its Circular dated 19-2-2002.
(j) Simultaneous penalty under Section 11 AC and under Rule 25 is not imposable on Rallis following the decisions -
(i) National Fertilizers Ltd. v. CCE Indore Avdel (I) Pvt. Ltd. v. CCE Mumbai
(ii) Orders of Board vide M.F. (D.R.) No. B40/20/96-TRU, dated 28-9-96 reported in 1996 (87) E.L.T. T27-T28, wherein it is clarified in Para 8 that:
Notification No. 33/96-C.E. (N.T.) dated 28th September 1996 amends Rule 173Q of the Central Excise Rules, 1944, so as to exclude its operation in respect of that part of the offence for which specific penalty is provided in the new Section 11AC of the Central Excise Act, 1944.
(k) Penalty under Rule 26 is not imposable on FMC.
(i) In the instant case, FMC has not contravened any of the provisions of the Central Excise Law. All the agreements between both the companies were on principal to principal basis. The transactions between the companies were at arms length and on indirect consideration was either paid or received among each other. It has been conclusively shown that Rallis and FMC are two separate legal entities and there is no common shareholding within the two companies, no common directors & no interest in the business of each other. Both the companies are managed by independent boards of directors and none of the directors are common. The MPA executed between Rallis & FMC was valid and lawful arrangements between two independent entities and has been executed on principal to principal basis and at arms length and the CAA entered into by FMC with Rallis for using Rallis's wide marketing network to sell their products in consideration for consignment commission was also on principal to principal basis and at arms length.
(ii) Moreover FMC as a bonafide assessee, had explained the entire operations contemplated under processing agreement and even furnished a copies of document. Reliance by the appellants on.
Bindu S. Mehta v. CCE, Rajkot (T) S.R. Jhunjhunwala v. CCE, Mumbai-II (T) Akhtarali Hasanali Tobaccowala v. CCE (T) Applied Electronics Ltd. v. CCE Bombay-Ill - (T) is well founded to set aside the penalty.
2.2 In the Appeals No. E/724/2005 & E/725/2005 (Rallis India Ltd.) Revenue on the basis of the aforesaid facts, have taken a complete divergent view that valuation of the subject goods should be done on the basis of Ujagar Prints (supra), however commission received under CAA should be added for the purposes of computation of assessable value. In view of what has been held/found hereinbefore, valuation of the subject goods has to be strictly done in terms of the law laid down in the case of Ujagar Prints (supra) & the Boards acceptance of the same. The commission earned by Rallis for its selling efforts under the CAA therefore has no nexus with the manufacture of goods at or by Akola factory of Rallis on job work basis. Hence the same cannot be added for the purposes of computing assessable value. Further the said commission charges are selling expenses in the hands of the trader (i.e. FMC) which cannot form a part of the valuation of goods manufactured on job work basis in terms of the principles laid down by Ujagar Prints (supra) as well as other judicial pronouncements as submitted hereinbefore therefore we find no merits to uphold these appeals.
3.1 In view of the findings the appeals of M/s. Rallis & FMC are allowed & appeals of Revenue are to be rejected.
3.2 Ordered accordingly.
3.3 Appeals disposed in above terms.
(Pronounced in Court on 5-8-2005)