2018 (1) TMI 1428 - AT - Central Excise

Valuation - 100% subsidiary - applicability of cost construction method - goods manufactured on loan licensee basis - whether the respondent herein, 100% subsidiary, of holding company Biological E Ltd., during the period 1-4-2003 to 7-1-2005, as undervalued the goods manufactured on loan licensee basis by declaring the assessee value based upon cost construction method is correct and otherwise? Held that - The adjudicating authority, in this case, has recorded factual findings after deliberating on all the allegations made in the Show Cause Notice and on the evidence produced by the respondent before him - it was held by him that as a 100% holding company BE is certainly interested in the business of BMPL but all the same time, I hold that based on evidence placed by the Department it cannot be concluded that both have mutuality of interest. Revenue has not controverted these factual findings with any evidence which may have been unearthed during the investigation or in show cause notice, we find that the Ld. Counsel of Respondent was correct in putting forth a proposition that the job workers/loan licensee are to held as manufacturer - In the absense of any contrary decision that suppliers of raw materials should be considered as manufacturers during the period in question, we find no merits in the appeal of revenue. Appeal dismissed - decided against Revenue.

Summary

Issues Involved:
1. Whether the respondent, a 100% subsidiary of Biological E Ltd., undervalued the goods manufactured on a loan license basis.
2. Applicability of the cost construction method for valuation of goods.
3. Relationship and mutual interest between the respondent and Biological E Ltd.
4. Whether the respondent or Biological E Ltd. should be considered the manufacturer for excise duty purposes.
5. Legitimacy of financial and managerial control by Biological E Ltd. over the respondent.
6. Validity of the Show Cause Notice and proceedings.

Issue-wise Detailed Analysis:

1. Undervaluation of Goods:
The primary issue is whether the respondent, a 100% subsidiary of Biological E Ltd., undervalued the goods manufactured on a loan license basis by declaring the assessable value based on the cost construction method. The Department alleged that the cost construction method was inapplicable because the respondent was a subsidiary of Biological E Ltd., and duty should be based on the sale value of the products sold by Biological E Ltd.

2. Applicability of Cost Construction Method:
The adjudicating authority concluded that the cost construction method was appropriate. The respondent argued that they were job workers and manufacturers entitled to discharge liability based on the cost of materials and job work charges, as established in previous case law (Beacon Neypric Ltd.). The Department's contention was that the valuation should be based on the sale price of Biological E Ltd. due to their relationship.

3. Relationship and Mutual Interest:
The Department argued that the respondent and Biological E Ltd. were interconnected undertakings with mutual interests, citing common directors, shared staff, financial transactions, and managerial control. However, the adjudicating authority found that these factors did not undermine the respondent's independent legal status. The authority noted that financial and managerial arrangements between the two companies were normal business practices and did not indicate mutual interest that would affect excise duty liability.

4. Manufacturer for Excise Duty Purposes:
The adjudicating authority held that under Central Excise Law and established case law (Ujagar Prints, Pawan Biscuits), the job worker (respondent) is considered the manufacturer for excise duty purposes, not the raw material supplier (Biological E Ltd.). The respondent had its own manufacturing facilities, was registered with various government departments, and was recognized as an independent legal entity.

5. Financial and Managerial Control:
The Department highlighted several aspects of financial and managerial control by Biological E Ltd., such as shared directors, financial transactions, and managerial oversight. However, the adjudicating authority determined that these did not constitute control that would affect the respondent's independent status. The financial transactions, including loans and delayed payments, were deemed normal business practices between two legal entities.

6. Validity of Show Cause Notice and Proceedings:
The respondent contended that the Show Cause Notice was void because it was not issued to Biological E Ltd., the alleged principal manufacturer. The adjudicating authority agreed, citing case law (K.R. Balachandran, Dawn Fire Works, Poly Resins) that non-issuance of a notice to the principal manufacturer vitiates the proceedings. Consequently, the proceedings were deemed invalid on this ground.

Conclusion:
The adjudicating authority's detailed factual findings were not contested by the Department with any substantial evidence. The authority concluded that the respondent, as a job worker, was the manufacturer for excise duty purposes, and the cost construction method for valuation was appropriate. The financial and managerial arrangements did not undermine the respondent's independent legal status. The Show Cause Notice was invalid due to procedural lapses. Therefore, the appeal by the revenue was rejected, and the impugned order was upheld as correct and legal.