2020 (9) TMI 383 - AT - Central Excise

Valuation - undervaluation - Polo and Vento models of their car - related party transaction - interconnected undertakings - Mutuality of Interest - Section 4(3)(b) of the Central Excise Act, 1944 - four SCN for same transactions and same period - Impact of the CAG report of 2014 on determination of value - benefit of cum-duty price - extended period of limitation - change of opinion - demand of interest - various penalties. Whether the Commissioner could have considered and adjudicated four different Show Cause Notices in respect of the same transactions for the same period proposing to demand duty by invoking different routes to the valuation of Goods Cleared? - HELD THAT - We cannot agree with the method adopted by the Commissioner while dealing with the three Show Cause Notice dated 06.02.2015. Commissioner could not have determined three different methods for valuation of the same goods simultaneously. Commissioner while adjudicating has to be judicious enough to determine what is the correct approach to determine the value of the goods cleared. Accordingly he/ she have to determine the value and duty payable - in such a case only one of the three show cause notices which as per the understanding of adjudicator are logical and legally sustainable should have been adjudicated and the other two summarily dismissed. Appellants have contended that the value determined by them for payment of duty is the transaction value determined purely on commercial considerations at arm s length. However we find that the documents and evidences suggests that both M/s VWIPL (Appellant) and M/s VWGSIPL do not independently determine the value at which the M/s VWIPL would transfer the cars to M/s VWGSIPL . The transfer value claimed to be the true transaction value is determined by the Planning Round, every year which is headed by M/s VWAG, Germany. Mutuality of Interest and Related Person - HELD THAT - Undisputedly, Appellant and VWGSIPL are subsidiaries of M/s VWAG, Germany. Appellant is engaged in the manufacture and production of the cars of models Polo and Vento, as per the designs and specifications of M/s VWAG, Germany, and sell them in the territory of India to only and only M/s VWGSIPL, a marketing subsidiary of M/s VWAG. Any operating loss suffered by the appellant i.e. VWIPL is made good by the M/s VWAG, Germany. As per the submissions made by the appellant counsel at the time of hearing and in written submissions we note that appellant was suffering losses that were made good by M/s VWAG Germany. All the facts as recorded in impugned order on the basis of the various agreements clearly point to one fact that the issue for consideration is not one of relationship between the buyer and seller simplicitor, because the two Indian subsidiaries are mere puppets in the hand of M/s VWAG, Germany who is authority to determine and take decisions in relation to production and sale of the vehicles of Volkswagen Brand namely Polo and Vento in Indian territory. In fact German unit by rendering financial assistance to both the Indian subsidiaries make them financially viable for their operation. In none of the cases relied upon by the Appellants during the course of arguments on appeal have such an arrangement been considered. In our opinion, in the present case if corporate veil is pierced then we find that the entire operations of manufacture and sale of these vehicle was throughout on account of M/s VWAG, Germany. Impact of the CAG report of 2014, on determination of Value of Polo and Vento Models of Cars cleared by the Appellant - HELD THAT - Appellants have submitted that it is also the view of the Ministry that in this case the transactions between VWIPL and VWGSIPL, are not covered by rule 10 as they are not the holding and subsidiary company. Hence the valuation could not be done in terms of Rule 9 by taking the sale price of the VWGSIPL, as the basis for determination of assessable value. We are not in position to accept the submissions made by the appellants, for the reason that in its reply the Ministry has not outrightly rejected the contentions of the audit but have clearly referred to the investigations in the case of under-valuation under process. The points made by the audit have been made the part of that investigation. The opinion of the Ministry referred in the Audit Reports is not conclusive and also is not the statement of law. It is also not a binding judicial precedent. The value that qualifies to be a value under Section 4(1)(a) can be value which is on account of sale at arm s length, and not any value that is determined for transfer/ clearance of goods. In absence of any value under Section 4(1)(a), the only route available for determination of the value will be under Sec.4(1)(b) through Rule 11 of valuation rules and the value shall be determined using reasonable means consistent with the principles and general provisions of these rules and sub-section (1) of section 4 of the Act. By application of Rule 11, in case of related person transactions the value needs to be determined by application of Rule 9 of the Central Excise Valuation (determination of Price of Excisable Goods) Rules, 2000. Thus in absence of Section 4(1)(a) value satisfying the criteria laid down by the Apex Court in case of M/s FIAT Industries the value is finally determined in terms of Rule 9 only, on the basis of sale price of M/s VWGSIPL to the dealers. Benefit of Cum Duty Price - HELD THAT - The Commissioner has in the impugned order not even examined the issue at all. We are in full agreement with this submission of the Appellant that the benefit of cum duty price will be admissible to them if it can be shown that the price which is taken for computation of assessable value and duty demand is inclusive of excise duty and cesses. Since the Commissioner has not even examined this aspect, the matters need to be remanded back to the Commissioner for re-determining the value of clearances after allowing the benefit of cum duty price - Thus the demand for duty needs to be recomputed after allowing the benefit of cum duty price from the sale price to dealers. Extended period of Limitation - Change of opinion - HELD THAT - The impugned order has completely mis-directed while determining the issue of limitation. There can be no dispute about the fact that the issue of valuation of Polo and Vento Variants of the Cars manufactured and cleared by the Appellant was always in the knowledge of the department and was subject matter of correspondence and discussions. It was also taken up in the audit conducted by Central Excise Revenue Audit and is part of the CAG Report of 2014, tabled in Parliament. When the entire issue was under discussion and inquiry, and revenue entertained the view about the correctness of the methodology of valuation adopted as is evident from the CAG Report of 2014. Change in opinion or insufficiency of enquiries earlier made by the department cannot be said to be amongst the grounds enumerated in section 11A (4) for invoking the extended period of limitation - extended period of limitation as provided by Section 11A (4) will not be available for making the demand of duty in the circumstances of this case. Demand of Interest - HELD THAT - Since the demand of tax has been upheld the demand for interest will follow. It is now settled law that interest under Section 11AA, is for delay in the payment of tax from the date when it was due. Since appellants have failed to determine the correct assessable value and pay the correct amount of duty by the due date interest demanded cannot be faulted. Penalty under Section 11AC of the Central Excise Act, 1944 - HELD THAT - We do not agree with the findings of the Commissioner that there was suppression with intention to evade payment of Central Excise duty, hence we did not find any merits in the invocation of extended period of limitation - the penalty imposed under Section 11AC is liable to be set aside the moment it is held that extended period of limitation cannot be invoked for making the demand. Penalty under Rule 26 of Central Excise Rules, 2002 - HELD THAT - Since we find that the issue involved in the matter is of interpretation of legal provisions and number of contractual agreements and documents. On the merits till the time investigations were undertaken by Director General of Central Excise Intelligence, revenue authorities also held the view akin to held by the Appellants. When revenue authorities also held the same view as the appellant then how can appellants alone be held guilty of contumacious conduct for imposition of penalty - in such case involving complex issues in relation to interpretation of statutory provisions, where revenue also entertained the same view as appellants the penalties imposed under Rule 26 of Central Excise Rules, 2002 cannot be justified and are set aside. The appeals filed by Appellant namely M/s VWIPL, are partially allowed and the matter remanded back to the Commissioner for redetermination of the quantum of duty payable.

Summary

Issues involved:
1. Relationship between M/s. VWIPL and M/s. VWGSIPL.
2. Determination of the value of VW Brand Cars.
3. Demand of Central Excise duty and interest.
4. Imposition of penalties.
5. Invocation of the extended period of limitation.
6. Benefit of cum-duty price.

Issue-wise detailed analysis:

1. Relationship between M/s. VWIPL and M/s. VWGSIPL:
The Commissioner held that M/s. VWIPL and M/s. VWGSIPL are "related persons" as defined under Section 4(3)(b) of the Central Excise Act, 1944. They are interconnected undertakings and have mutual interest in each other's business. The Planning Rounds and various agreements between the companies, controlled by M/s. VWAG, Germany, indicate that the price and production decisions were not independently made by M/s. VWIPL and M/s. VWGSIPL but were dictated by M/s. VWAG. This relationship influenced the sale price, making it non-arm's length.

2. Determination of the value of VW Brand Cars:
The value of VW Brand Cars (Polo and Vento Variants) should be determined under Section 4(1)(b) of the Central Excise Act, 1944, read with Rule 10(a), Rule 9, and Rule 11 of the Valuation Rules. The Commissioner found that the transaction value declared by M/s. VWIPL was not the sole consideration for the sale, as expenses for advertising, marketing, and sales promotion incurred by M/s. VWGSIPL were not included in the assessable value. The value should be based on the sale price of M/s. VWGSIPL to independent dealers, treating it as cum-duty price.

3. Demand of Central Excise duty and interest:
The revised demand of Central Excise duty was confirmed at ?323,65,87,666/- for the period from January 2010 to December 2014. Interest on the duty amounts confirmed is recoverable from M/s. VWIPL under Section 11AA of the Central Excise Act, 1944. The Commissioner noted that the price at which the cars were sold to M/s. VWGSIPL was artificially lowered to evade duty, and the correct value should include all additional considerations.

4. Imposition of penalties:
Penalties were imposed on M/s. VWIPL under Section 11AC of the Central Excise Act, 1944, and on M/s. VWGSIPL under Rule 26(1) of the Central Excise Rules, 2002. The Commissioner found that the transactions were arranged to evade duty by lowering the assessable value. However, the Tribunal set aside the penalties, finding that the issue involved complex interpretations of legal provisions and that there was no deliberate intent to evade duty.

5. Invocation of the extended period of limitation:
The Commissioner invoked the extended period of limitation under Section 11A(4) of the Central Excise Act, 1944, citing suppression of facts with intent to evade duty. The Tribunal disagreed, noting that the issue of valuation was under continuous correspondence and audit, and the department was aware of the facts. Therefore, the extended period was not justified, and the demand was restricted to the normal period of limitation under Section 11A(1).

6. Benefit of cum-duty price:
The Tribunal agreed with the appellants that the sale price of M/s. VWGSIPL to dealers should be treated as cum-duty price. The Commissioner was directed to re-determine the assessable value after allowing the benefit of cum-duty price and to re-compute the duty demand accordingly.

Conclusion:
The Tribunal partially allowed the appeals, remanding the matter back to the Commissioner for re-determination of the assessable value and duty demand within the normal period of limitation. Penalties imposed on M/s. VWGSIPL were set aside, and the Commissioner was instructed to re-determine the duty demand within six months, considering the benefit of cum-duty price. Interest on the duty amount was upheld.