2022 (2) TMI 953 - AT - Central Excise

Imposition of personal penalty on two Directors - valuation of goods manufactured by the Appellant bearing the brand name of the buyer - additional consideration under Rule 6 of the Valuation Rules - burden to prove - allegation based on statement from the Key Managerial Personnel (KMP) of the Appellant Company confirming the receipt of the product specifications/formulations free of cost from the buyer - demand also based on the ground of factum of the buyer having incurred expenses on building brand name and R D as forthcoming from the financial statements of the buyer for the period 2003-04 to 2006-07 - suppression of material facts regarding receipt of the specifications/formulations etc. free of cost from the buyer - extended period of limitation - HELD THAT - The burden of proving under valuation of goods in the hands of the Appellant manufacturer was upon the revenue and the same had to be discharged through cogent evidences. The learned Commissioner has sought to discharge the said burden by merely relying upon extracts of statements of the KMPs of the Appellant manufacturer confirming receipt of specifications, formulations and brand name from the buyer. We find that these statements were just a reiteration of the understanding between the Appellant and the buyer, as per the said agreement. Moreover, the statements of Binita Agarwal, Manager Accounts and RanjitNath, Accounts Assistant relied upon by the revenue also confirms that the raw material and packaging material required for manufacture of the final products were directly procured by the Appellant; the art work and design work on the packaging material was only approved by the buyer but the cost thereof was incurred by the Appellant; the transaction was on a principal-toprincipal basis and the price charged was the sole consideration for sale - the submission of the Appellant that revenue could not have done a pick and choose from the statement of the same very person, instead of accepting or rejecting the statement in totality, appears plausible. There is also no allegation or evidence of any flow back or extra-commercial consideration from the buyer to the Appellant aside of the negotiated price so as to discard the transaction value. In any event, excise is a levy on manufacture and it is found that it is not the case of the revenue that the buyer is the manufacturer of the said final products, so as to justify levy of excise duty on the value addition in the hands of the buyer. Rule 6 of the Valuation Rules only provides for inclusion of money value of the additional consideration flowing directly or indirectly from the buyer to the manufacturer and does not authorize recovery of excise duty with reference to the buyer s selling price. There is considerable force in the submissions of the Appellant that levy of excise duty with reference to the buyer s selling price is permissible only in terms of Rule 9 of the Valuation Rules, for which essential pre-requisite is that the Appellant manufacturer and the brand name owner should be related, which is not at all an allegation in this proceeding. Extended period of limitation - HELD THAT - The Ld. Commissioner has rejected the plea of revenue neutrality on a superfluous ground. It is well settled by the decision of the Hon ble Supreme Court in the case of NIRLON LTD. VERSUS COMMISSIONER OF CENTRAL EXCISE, MUMBAI 2015 (5) TMI 101 - SUPREME COURT that when the entire exercises was revenue neutral vis- -vis the Appellant himself, no intention to evade could be attributed on the part of the Appellant. It is also found that the copy of the agreement dated 3 December 1999 was shared with the jurisdictional authorities on 6 April 2000 itself and the records of the Appellant were also audited from time to time besides the refunds being sanctioned to the Appellant on a month-on-month basis. Therefore, the allegation of suppression so as to invoke the extended period does not hold ground. Since the main appeal is allowed the other connected appeals filed by the Directors of the Appellant Company against the imposition of personal penalty are also allowed - Appeal allowed - decided in favor of appellant.

Issues Involved:
1. Valuation of goods manufactured based on buyer-provided specifications and bearing the buyer's brand name.
2. Whether the provision of specifications/formulations and brand name constitutes additional consideration under Rule 6 of the Central Excise Valuation Rules.
3. Applicability of Rule 9 of the Valuation Rules.
4. Revenue neutrality and limitation for the demand of differential duty.
5. Imposition of personal penalties on the Directors of the Appellant Company.

Detailed Analysis:

1. Valuation of Goods Manufactured Based on Buyer-Provided Specifications and Brand Name:
The primary issue revolves around whether the transaction value between the Appellant Company and the buyer should be considered the sole consideration for excise duty purposes. The Appellant argued that the provision of specifications/formulations and brand name by the buyer does not constitute additional consideration, as these were mere conditions of the contract. The Tribunal found that the agreement dated 3 December 1999 was for the manufacture and sale of products on a principal-to-principal basis, with the Appellant bearing the cost of raw materials and packaging, and the buyer approving the design and artwork.

2. Provision of Specifications/Formulations and Brand Name as Additional Consideration:
The revenue alleged that the specifications/formulations provided by the buyer free of cost constituted additional consideration under Rule 6 of the Valuation Rules. However, the Tribunal noted that the provision of such specifications is a common feature in contract manufacturing and does not necessarily imply additional consideration. The Tribunal also highlighted that the statements from the Appellant's Key Managerial Personnel (KMP) confirmed that all costs were borne by the Appellant, and there was no flowback of consideration from the buyer.

3. Applicability of Rule 9 of the Valuation Rules:
The Tribunal emphasized that Rule 6 of the Valuation Rules does not authorize recovery of excise duty based on the buyer’s selling price unless the manufacturer and the buyer are related, which was not the case here. The Tribunal referenced authoritative pronouncements and a CBEC Circular clarifying that advertisement and publicity charges borne by the buyer are not to be included in the assessable value.

4. Revenue Neutrality and Limitation:
The Tribunal agreed with the Appellant's contention that the demand for differential duty was unsustainable due to revenue neutrality. The Appellant was entitled to a full refund of the excise duty paid under Notification No. 32/1999, and the records were regularly audited. The Tribunal cited the Supreme Court's decision in Nirlon Limited, which held that revenue neutrality negates any intention to evade duty. Therefore, the extended period of limitation invoked by the revenue was not justified.

5. Imposition of Personal Penalties on the Directors:
Given that the main appeal was allowed both on merits and limitation, the Tribunal also allowed the appeals filed by the Directors against the imposition of personal penalties. The Tribunal found no justification for the penalties under Rule 26 of the Central Excise Rules.

Conclusion:
The Tribunal allowed all three appeals, concluding that the provision of specifications/formulations and brand name by the buyer did not constitute additional consideration under Rule 6. The demand for differential duty was unsustainable due to revenue neutrality, and the imposition of personal penalties on the Directors was unjustified. The decision was pronounced in the open court on 22 February 2022.

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