2007 (7) TMI 68 - AT - Central Excise

Valuation(Central Excise) Alleged that appellants were carrying out a circular transaction for the purpose of evasion of excise duty and accordingly demand the duty short levied as well as impose penalties on them Held that allegation was not correct and set aside

Summary

Issues:
Allegation of circular transactions for duty evasion based on under-valuation of goods.

Analysis:
The case involved an appeal where the first appellant, a yarn manufacturer, sold yarn to the second appellant, which was then converted into multi-folded yarn and sold back to the first appellant. The impugned order alleged that this circular transaction was for the evasion of excise duty, resulting in a duty evasion of approximately Rs. 1.7 crores. Penalties were imposed on both appellants based on the findings. The second appellant was also considered an accessory for tax evasion due to the relationship between some of its shareholders and the directors of the first appellant.

The appellants contested the findings, arguing that the first appellant sold only a small portion of its yarn to the second appellant and there was no evidence of under-valuation in these transactions. They emphasized that the sale prices to the second appellant were not lower than those to other parties, making the allegation of under-valuation baseless. Additionally, they pointed out that most of the multi-folded yarn was sold to parties other than the first appellant, further undermining the allegation of evasion through circular transactions.

Moreover, the appellants highlighted that during a significant period, multi-folded yarn was exempt from duty, negating any potential gains from alleged undervalued transactions. They also argued that both manufacturing units were separate legal entities, and the tax authorities could not deny their distinct identities.

The tribunal found that the allegation of under-valuation was not viable as the first appellant sold only a part of its produce to the second appellant, with no evidence of lower sale prices compared to other parties. The majority of the second appellant's produce was sold to other parties without any indication of higher prices. Therefore, the finding of undervalued circular transactions and duty evasion did not align with the case facts. Additionally, the allegation of circular transactions for duty evasion was deemed invalid as multi-folded yarn was exempt from excise duty for most of the period in question.

Consequently, the appeals were allowed, and any consequential relief was granted to the appellants, as the tribunal did not find the allegations of under-valuation and circular transactions for duty evasion substantiated.