2005 (8) TMI 472 - AT - Central Excise

Valuation - Related person - Commission of job worker - Job work - Goods sold at depot of job workers - Job work arrangement

Issues Involved:
- Valuation of pesticides manufactured on job work basis.
- Applicability of Rule 7 of the Central Excise Valuation Rules, 2000.
- Inclusion of commission in the assessable value.
- Legitimacy of job work arrangement and allegations of it being a sham.
- Penalty imposition under Section 11AC and Rule 25 of the Central Excise Rules, 2001/2002.
- Applicability of judicial precedents and circulars in valuation disputes.
- Simultaneous penalty under Section 11AC and Rule 25.
- Penalty under Rule 26 on FMC.

Detailed Analysis:

1. Valuation of Pesticides on Job Work Basis:
The core dispute revolves around the valuation of pesticides (Marshal 25EC & Bestox 10E) manufactured by Rallis India Ltd. on a job work basis for FMC India Pvt. Ltd. under a Master Processing Agreement (MPA). Rallis valued the goods based on the cost of raw materials provided free of cost by FMC plus processing charges, following the principles laid down by the Apex Court in Ujagar Prints and Pawan Biscuits, and as clarified by the CBEC circular dated 19-2-2002.

2. Applicability of Rule 7 of the Central Excise Valuation Rules, 2000:
The Revenue contended that the valuation should be based on Rule 7, i.e., the price at which the goods are sold by Rallis from their depots as consignment stockists of FMC. However, the tribunal found that Rule 7 is not applicable since Rallis was not the owner of the goods. The goods were owned by FMC, and Rallis was merely a job worker. Therefore, the valuation should follow the principles established in Ujagar Prints, which mandates valuation based on the landed cost of raw materials plus processing charges.

3. Inclusion of Commission in the Assessable Value:
In separate appeals, the Revenue argued that the commission received by Rallis under the Consignment Agency Agreement (CAA) should be included in the assessable value. The tribunal rejected this argument, stating that the commission pertains to selling expenses and does not relate to the manufacturing process. Hence, it should not be included in the assessable value.

4. Legitimacy of Job Work Arrangement:
The Revenue alleged that the job work arrangement was a sham to evade duty, citing substantial reduction in duty payments during the impugned period. The tribunal dismissed this allegation, emphasizing that the agreements were based on sound commercial considerations, and the reduction in assessable value was incidental and lawful. The tribunal also noted that the operations of Rallis during the impugned period were fundamentally different from its operations prior to the period.

5. Penalty Imposition under Section 11AC and Rule 25:
The tribunal found no justification for the penalties imposed on Rallis under Section 11AC and Rule 25. It was noted that Rallis had acted lawfully with full disclosure to the Department, and there was no evidence of deliberate violation of statutory provisions. The tribunal cited the decision in Pratibha Processors v. UOI to support its conclusion.

6. Applicability of Judicial Precedents and Circulars:
The tribunal relied on the Apex Court's decisions in Ujagar Prints and Pawan Biscuits, and the CBEC circular dated 19-2-2002, which clarified that valuation for goods manufactured on job work should follow the principles laid down in these judgments. The tribunal rejected the Revenue's attempts to depart from these established principles.

7. Simultaneous Penalty under Section 11AC and Rule 25:
The tribunal noted that simultaneous penalties under Section 11AC and Rule 25 are not permissible, citing decisions in National Fertilizers Ltd. v. CCE and Avdel (I) Pvt. Ltd. v. CCE. The tribunal also referred to a Board order clarifying that Rule 173Q should exclude its operation where specific penalties are provided under Section 11AC.

8. Penalty under Rule 26 on FMC:
The tribunal found no basis for imposing a penalty on FMC under Rule 26. It was established that FMC had not contravened any provisions of the Central Excise Law, and all transactions between Rallis and FMC were on a principal-to-principal basis and at arm's length. The tribunal cited several decisions to support its conclusion that the penalty on FMC was unwarranted.

Conclusion:
The appeals of Rallis and FMC were allowed, and the appeals of the Revenue were rejected. The tribunal ordered that the valuation of the goods should follow the principles laid down in Ujagar Prints, and the commission received by Rallis should not be included in the assessable value. The penalties imposed on Rallis and FMC were set aside.

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