2018 (7) TMI 171 - AT - Central Excise

Valuation - related party transaction - interdependence of different companies involved - lifting of corporate veil - time limitation - Whether the appellants are related to M/s. Concept Sales and other distributors so as to fall under the mischief of related person in terms of Section 4 of Central Excise Act, 1944? - Held that - All these firms were making payments to M/s ABC Communications which was also a firm of the appellants - None of the so called sales meetings were attended by any of the persons of Gautham Traders, Vysya Sales Corporation, Concept International, Matha Agencies. Only Shri George Varghese attended the same - None of the proprietors of the said distribution firms had invested any capital nor they received share of the profits; They did not have any control of day to day activities of the firms; the persons have lent their names only and had no say in the affairs of the firms. In instant case, mutuality of interest is established by the investigation and has been brought out by the learned Commissioner in his Order-in-Original. The corporate veil has been lifted satisfactorily. It has been established that the Directors of the appellants were managing various distributors of M/s. Concept Sales either by themselves or through their employees. None of the distributing firms were functioning independently and were for all practical purposes controlled and managed by Shri George Varghese of the appellants - there is interdependence between the appellants, M/s. Concept Sales and other distributing firms. As discussed above, there have been number of financial transactions shown in the name of different companies which are in favour of the Directors of the appellants. Therefore, under these circumstances, it has to be held that leave about mutuality of interest, all the companies were one and the same managed by Shri George Varghese; corporate entities are created as a fa ade. The conclusions drawn, on the mutuality of interest of different firms involved; rejection of the transaction value claimed by the appellants and valuation arrived in show-cause notice and affirmed by the learned Commissioner, not once but twice, need to be given credence and requires to be held up. Whether the issue is barred by limitation? - Held that - An earlier show- cause notice was issued by the Superintendent only on the ground that the price at which appellants have sold the aerated bottles to M/s. Concept Sales was less than the cost of production. Consequent to the investigation by DGEI, facts of interconnectedness, interdependence nature of the units and inexplicable financial transactions between different companies have come to light. Therefore, it cannot be said that the department had the knowledge of these aspects at the time of issuance of the first show-cause notice - SCN is not time barred. Whether the department was correct in including the clearances of soda of McDowell brand by the appellants? - Held that - The value of clearances of McDowell which is also falling under same chapter 22 had been taken into account for computing the aggregate value of first clearances of ₹ 20 lakhs; since the appellants had crossed the limit of ₹ 20 lakhs on 11.1.1993 itself, for the chapter 22 the clearances made subsequent to that date were taken for calculation of duty payable. - the department has given due allowance to the clearances in each of the years as per the prevalent notification and as such the contentions of appellants are unsubstantiated. Whether the discounts claimed by the appellants are eligible to be allowed? - Held that - The principle has been fairly set right by various judicial pronouncements that the discounts which are known at the time of clearance and are passed on can be allowed - The learned Commissioner held that the quantity discount based on free supply shown in the invoices of M/s. Gowtham Traders cannot be extended to the appellants. Penalties - Held that - Only one of the Directors of the appellants i.e. Shri George Varghese had a prominent and dominating role in managing the affairs of different companies. Therefore, penalty on him and the other director cannot be equal - Having held that the other noticees had hardly any role in the day to day affairs of the firms, levying penalty on them appears to be harsh - As the issue has been under litigation over two decades now, we find that there is a need to revise the penalties downwards. Appeal disposed off.

Issues Involved:
1. Valuation of clearances to M/s. Concept Sales under Section 4 of the Central Excise and Salt Act, 1944.
2. Limitation period for issuing the show-cause notice.
3. Inclusion of clearances of McDowell brand soda in the exemption limit.
4. Eligibility of discounts claimed by the appellants.

Detailed Analysis:

1. Valuation of Clearances:
The appellants, M/s. Elingical Foods and Beverages (P) Limited, were alleged to have sold their products to M/s. Concept Sales at prices lower than the cost of production, with further sales by Concept Sales at significantly higher prices. The investigation revealed that M/s. Concept Sales and other distributors were not independent entities but were controlled by the appellants, with financial transactions indicating a flow-back of funds. The Commissioner concluded that these firms were dummy units created to facilitate undervaluation, thus rejecting the transaction value claimed by the appellants. The Tribunal upheld the Commissioner’s findings, establishing mutuality of interest and interdependence among the entities, thus justifying the lifting of the corporate veil.

2. Limitation Period:
The appellants contended that the second show-cause notice issued by the Commissioner was barred by limitation. However, the Tribunal found that the second notice was based on new facts uncovered during the investigation by DGEI, which were not known at the time of the first notice. Therefore, the subsequent notice was not time-barred, as it was issued in a different context and based on new evidence.

3. Inclusion of McDowell Brand Soda Clearances:
The appellants argued that the clearances of McDowell brand soda should not be included in computing the exemption limit. The Tribunal found that the Commissioner had correctly included these clearances under Notification No. 175/86, which allows full exemption for the first clearances of ?20 lakhs if the goods fall under the same chapter. Since the appellants crossed this limit on 11.1.1993, the subsequent clearances were rightly considered for duty calculation. The Tribunal upheld the Commissioner’s findings and the departmental representative’s reliance on relevant case law.

4. Eligibility of Discounts:
The appellants claimed various discounts which were not accepted by the department. The Tribunal noted that discounts must be known at the time of clearance and actually passed on to be eligible. The Commissioner had found that only a few sample invoices were produced to support the discount claims, and thus, the discounts could not be extended to the entire clearance. The Tribunal upheld the Commissioner’s decision, emphasizing that full evidence is required to substantiate such claims.

Penalties:
The original adjudicating authority had imposed penalties on different entities, which were revised upward by the Commissioner. The Tribunal found that only Shri George Varghese had a significant role in managing the affairs of the companies, and thus, penalties on other directors were deemed harsh. The Tribunal reduced the penalty on the main appellant from ?20 lakhs to ?5 lakhs and the redemption fine from ?10 lakhs to ?2 lakhs. The personal penalty of ?5 lakhs on Shri George Varghese was upheld, while penalties on other individuals were set aside.

Conclusion:
The Tribunal confirmed the duty demand of ?78,05,867/- and revised the penalties as mentioned above, concluding that the interdependence and mutuality of interest among the entities justified the rejection of the transaction value and the findings of the Commissioner.

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