2006 (8) TMI 85 - AT - Central Excise

Valuation(Central Excise) Revenue alleged that manufacturing agreement between 3 Siri Lab and TTKHL is not on principal-to-principal basis and accordinglypenalty and duty demanded Authority find that allegation not correct, so penalty and duty not sustainable

Issues Involved:
1. Whether the agreement between Siri Labs/Siri and TTKHL is on a principal-to-principal basis.
2. Whether Siri Labs/Siri are liable to discharge duty based on the sale price of TTKHL.
3. Whether penalties are liable to be imposed on the noticees.

Detailed Analysis:

1. Principal-to-Principal Basis Agreement:
The Commissioner examined whether the agreement between Siri Labs/Siri and TTKHL was on a principal-to-principal basis. The Commissioner observed that the product "Woodward Celebrated Gripe Water" was not independently manufactured by Siri Labs/Siri and required technical know-how from TTKHL. The Commissioner concluded that the agreements were not purely commercial, as TTKHL had significant control over the manufacturing process, including the use of technical know-how and brand name. The Commissioner relied on the Bombay High Court's decision in Pilky Footwear Co. Pvt. Ltd., which emphasized the cumulative effect of various circumstances, including technical know-how and supervisory control, to determine if an agreement was at arm's length. The Commissioner held that the agreements between Siri Labs/Siri and TTKHL were not on a principal-to-principal basis and that there was mutuality of interest.

2. Duty Liability Based on TTKHL's Sale Price:
The Commissioner held that Siri Labs/Siri were liable to discharge duty based on the sale price of TTKHL. The Commissioner rejected the transaction value adopted by Siri Labs/Siri, stating that the price was influenced by the relationship between the parties. The Commissioner invoked Rule 9 of the Central Excise (Valuation) Rules, 2000, to determine the assessable value based on the sale price of TTKHL to unrelated buyers. The Commissioner confirmed the demand for duty as proposed in the show cause notices.

3. Imposition of Penalties:
The Commissioner imposed penalties under Section 11AC, Rule 25 of the Central Excise Rules 2001, and Rule 209A of the Central Excise Rules 1944. The Commissioner justified the invocation of the extended period for demand on the grounds of suppression of facts by the appellants. The Commissioner relied on the Supreme Court's decision in M.K. Kotecha v. CCE, Aurangabad, to support the imposition of penalties.

Tribunal's Findings:
The Tribunal examined the agreements and concluded that the appellants were the manufacturers of the impugned goods and sold them to TTKHL at mutually agreed prices. The Tribunal found that the agreements were based on commercial considerations and did not indicate a related person relationship as per Section 4 of the Central Excise Act. The Tribunal noted that the appellants had their own production and were not captive producers for TTKHL. The Tribunal held that the price at which the goods were sold to TTKHL should be considered the transaction value for duty purposes. The Tribunal also found that the Commissioner had not provided sufficient justification for invoking the extended period for demand and that there was no suppression of facts by the appellants. Consequently, the Tribunal set aside the impugned order, quashed the demand for differential duty, and annulled the penalties imposed.

Conclusion:
The Tribunal allowed the appeals, setting aside the Commissioner's order and ruling that the agreements between Siri Labs/Siri and TTKHL were on a principal-to-principal basis. The Tribunal determined that the transaction value should be based on the price agreed upon between Siri Labs/Siri and TTKHL and that there was no mutuality of interest warranting the rejection of the transaction value. The Tribunal also found no grounds for invoking the extended period for demand or for imposing penalties.

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