2013 (5) TMI 322 - AT - Central Excise

Valuation dispute Related person - Mutual Interest in the business of each other - Interconnected undertaking - Determination of assessable value of the excisable goods manufactured and sold by the appellants to their sole buyer, M/s BIL, during the period from Jan 2000 to Dec.2007. - Held that - The true meaning and scope Mutual Interest in the business of each other has been explained by the Hon ble Supreme Court in Atic Industries case(1984 (6) TMI 51 - SUPREME COURT OF INDIA), under the old Section 4, which has been followed subsequently in almost every cases and has been adopted as the litmus test, to ascertain in a given circumstances, whether the buyer is a related person of the manufacturer-seller of the excisable goods. On an apparent analysis of the sale agreement, and after going through the provisions of section 4 of the Act, it is clear that the appellant have agreed to the sale the goods and the buyer M/s BIL agreed to purchase the same to specification of quality, quantity and packing as required by the buyer. The manufactured goods were to be subjected to inspection and approval by the buyer prior to the delivery - It is also specifically stipulated that the transaction under the said agreement were not based on and do not create any relationship between the parties otherwise than as the one between two independent principals and mutually exclusive in their interests and trading activities and having absolutely no dependence on each other in respect of whatsoever either as agent or related person etc. As far as loan is concerned the same was taken as a short term accommodation Loan and interest @8% p.a was paid to M/s BIL, against the lower rate interest around 4% to 5% p.a charged by SIDBI as the said Loan was converted into Foreign Currency Term Loans. Hence, such short term loan had no influence on the commercial relation between the Appellant and M/s BIL. Packing & wrapping machines from M/s BIL - held that - supply of packing machines, on bailment, the cost of which is around 10 lakhs and approximately 5% of the total investment in plant & machinery of the Appellant, and used only for the purpose of packing of finished goods, cannot lead to an inference that the appellant had manufactured the cakes only out of the machinery supplied by their sole buyer, M/s BIL or there is a substantial investment in plant & machinery by the buyer. The ld. Commissioner has observed in the impugned order that supply of such machine, was an additional consideration, from the buyer to the Appellant. In such circumstances, the amortized cost of such machines, at best could be loaded to the assessable value of the finished goods, if not included in the cost of the finished goods, but supply of such machines on bailment, cannot make the buyer, M/s BIL, a related person of the appellant. Unit is independent or not - additional consideration - held that - the total amount involved against all these letters/debit notes, as claimed by the Appellant and not disputed by the Revenue, was a meager amount of ₹ 4.98 lakhs in comparison to the total turnover of the appellants i.e. ₹ 4.00 to 5.00 Crores, and thus it would be incorrect to conclude that on reimbursement of such expenditure M/s BIL had exercised control over the day to management of the Appellant and that too for the entire disputed period and accordingly satisfy the definition of related person. Sharing of accrual of sales tax benefit - held that - even though allegation of sharing of the sales tax benefits were made on the basis of the letter of the Appellant dt.29.11.2000, no evidence had been referred to in the impugned Order in support of the same, hence, the said charge is unacceptable. What is of importance is certain interdependence and reciprocity beyond the relationship of either a distributor or manufacturer so as to consider as to whether the parties are related persons. On the facts it is noticed, essentially the relationship between M/s. Kwality Ice Cream and BBLIL/HLL is one sided and the facts do not suggest that each one of them have interest direct or indirect, in the business of each other. In view of above, we are of the opinion that the Appellant and M/s BIL are not related person and accordingly, the normal sale price or the transaction value, as the case may be, (as applicable during the period January 2000 to Dec.2007,) at which the manufactured goods had been sold by Appellant to M/s BIL, be the basis for determination of value under the old/amended Section 4(1)(a) of CEA,1944. Since, on merit the issue is decided in favour of the Appellant.

Summary

Issues Involved:
1. Determination of assessable value of excisable goods.
2. Allegation of related person status between the appellant and M/s BIL.
3. Financial transactions and their impact on the commercial relationship.
4. Supply and maintenance of machinery under bailment.
5. Administrative control and correspondence between the appellant and M/s BIL.
6. Allegation of sharing sales tax benefits.
7. Application of legal precedents and principles.

Issue-wise Detailed Analysis:

1. Determination of Assessable Value of Excisable Goods:
The primary issue was whether the assessable value of goods sold by the appellant to M/s BIL should be based on the price at which the appellant sold the goods to M/s BIL or the price at which M/s BIL sold the goods to its customers. The department contended that M/s BIL was a related person under Section 4 of the Central Excise Act, 1944, and thus the value should be based on M/s BIL's sale price. The appellant argued that the transactions were on a principal-to-principal basis, and the price at which goods were sold to M/s BIL should be the assessable value.

2. Allegation of Related Person Status:
The department alleged that M/s BIL was a related person due to mutual interest in each other's business. This was based on financial transactions, supply of machinery, and administrative control. The appellant refuted this, stating that they and M/s BIL were independent entities with no common directors, shareholding, or employees, and their transactions were purely commercial.

3. Financial Transactions:
The department argued that loans and advances from M/s BIL to the appellant indicated mutual interest. The appellant explained that the financial transactions were normal business practices. The loan of Rs. 50 lakhs was a short-term accommodation due to delayed disbursement from SIDBI, and advances were against future deliveries, common in business practices.

4. Supply and Maintenance of Machinery:
The department alleged that the supply of packing and wrapping machines on bailment indicated mutual interest. The appellant clarified that the machines were supplied to ensure hygienic packing of branded cakes and that the cost of these machines was minimal compared to their total investment. The maintenance costs were reimbursed by M/s BIL as per the bailment agreement.

5. Administrative Control:
The department pointed to various letters from the appellant to M/s BIL seeking approval for administrative decisions as evidence of control. The appellant argued that these letters were to inform M/s BIL about additional expenditures affecting cost price and were part of normal business communication. The letters were not replied to by M/s BIL and were written in the initial period of operation.

6. Allegation of Sharing Sales Tax Benefits:
The department alleged that the appellant shared sales tax benefits with M/s BIL. The appellant denied this, explaining that the letter in question was about recalculating conversion charges based on sales tax benefits, not sharing them.

7. Application of Legal Precedents:
The tribunal referred to the Supreme Court's decision in Atic Industries and other cases, emphasizing that mutual interest must be two-sided to qualify as related persons. The tribunal found that the department failed to establish mutual interest, as the appellant had no interest in M/s BIL's business. The tribunal also noted that the department did not investigate M/s BIL's role or verify the letters from the appellant.

Conclusion:
The tribunal concluded that M/s BIL was not a related person to the appellant. The assessable value should be based on the price at which the appellant sold the goods to M/s BIL. The tribunal set aside the impugned orders and allowed the appeals with consequential relief as per law. The issue of limitation was not considered as the decision on merit was in favor of the appellant.