2006 (10) TMI 66 - AT - Central Excise

Valuation -Related person - When department fails to prove any one of the following condition the allegation of under valuation is not sustainable (i) mutuality of interest (ii) price is lower to the normal price and (iii) buyer and seller are related person

Issues Involved:
1. Mutuality of interest between the buyer (DRL/ARL) and manufacturer (SMIPL/SMPPL).
2. Validity of the "Transfer Price" as the assessable value.
3. Allegation of undervaluation and evasion of excise duty.
4. Legitimacy of the penalties and interest imposed.

Detailed Analysis:

1. Mutuality of Interest Between Buyer and Manufacturer:

The primary issue was whether SMIPL/SMPPL and DRL/ARL were related persons under Section 4(4)(c) of the Central Excise Act, 1944. The adjudicating authority claimed mutual interest based on several grounds, including the sale of shares at a premium, non-compete fees, and the sale of assets at undervalued prices. However, the Tribunal found that the transactions were at arm's length and not influenced by extra-commercial considerations. It was noted that the shares were sold at market value, approved by SEBI guidelines, and the non-compete fee was a common practice in business takeovers. The Tribunal concluded that the Department failed to establish mutuality of interest, as there was no direct or indirect interest in each other's business.

2. Validity of the "Transfer Price" as the Assessable Value:

The "Transfer Price" was determined based on the cost of raw materials, packing materials, and conversion cost including profit at 6% of Net Realizable Value (NRV). The Department argued that this price was manipulated to depress the genuine value of the goods. However, the Tribunal found that the conversion cost was reasonable and consistent with the Drugs Price Control Order. The Tribunal also noted that the control exercised by DRL over the manufacturing process was to ensure quality, which was a standard practice in the industry. Therefore, the "Transfer Price" was deemed to be fair and reasonable.

3. Allegation of Undervaluation and Evasion of Excise Duty:

The Department alleged that the drastic reduction in the assessable value of the medicines indicated an intent to evade duty. However, the Tribunal found that the reduction in prices was justified and not influenced by any mutual interest or extra-commercial considerations. The Tribunal also noted that the Department failed to prove that the transactions were not at arm's length or that the prices were influenced by any flow-back of money.

4. Legitimacy of the Penalties and Interest Imposed:

The penalties and interest were imposed based on the alleged undervaluation and mutual interest. However, since the Tribunal found that the transactions were at arm's length and the "Transfer Price" was valid, the basis for imposing penalties and interest was not sustainable. The Tribunal observed that the Department had not conclusively established any fraudulent conduct or suppression of facts by the appellants.

Conclusion:

The Tribunal allowed the appeals, setting aside the demands for differential duty, penalties, and interest. It concluded that the Department failed to establish that SMIPL/SMPPL and DRL/ARL were related persons or that the "Transfer Price" was manipulated to evade duty. The transactions were found to be at arm's length, and the assessable value was deemed fair and reasonable.

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