2022 (8) TMI 1250 - AT - Central Excise

Valuation of goods - related party transaction - value of the goods cleared by the appellants to the related firm should have been determined in the manner specified in Rule 8 and in terms of Rule 9 of Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 or not - HELD THAT - The mere fact that buying and selling undertakings / body corporate are interconnected will not affect the applicability of Section 4 as far as the valuation for the purpose of excise duty is concerned. It shall still be the transaction value. Value other than transaction value, in terms of Rule 9 and proviso thereof (Rule 8), shall be ascertained case where an interconnected undertakings are also related in the manner specified in either of the sub clauses (ii) (iii) or (iv) of Clause (b) of sub section (3) of section 4 of Central Excise Act, 1944, as already mentioned above. In the present case, the department has alleged the buyers of appellant to be the related persons of appellant to appreciate the said allegation but in the light of above discussion it is also observed that the word related is held to have same meaning as is assigned to it in clause 41 of Section 2 of Companies Act, 1956 - From the very definition of related , it becomes clear that the definition is applicable to persons as individuals and not to the companies or Undertakings or body corporates. Companies are the separate legal entity as defined from its owner / members / share holders of/ Directors of companies are simultaneously the body corporates. The only case of the department rests on two counts (i) the appellant has shown three of said companies as its Associated and Joint ventures in their balance sheet; and (ii) The directors of appellants are the directors in either of the three undertakings - In the present case, it is observed that the Department has not produced any evidence of proving the mutuality of interest of three other companies with the appellant. There is no evidence that M/s. Mahendra Strips Pvt Ltd. Raipur, M/s. Super Ispat (Raipur) Pvt Ltd., and M/s. Animesh Iron, Raipur along with the appellant are so associated that they have interest directly /indirectly in the business of each other. There is no evidence to show any financial flow back as the sale of impugned companies appeared to be where, some business transaction on principal to principal basis. There is no evidence produced by the department to falsify the said fact. The department has failed to produce on record either by explaining or by production of material evidence as to how the appellant and three of companies could be termed s related or amongst them the buyer when related and distribution of the appellant or the sub distribution of distributor or that of the appellant and the buyer are so associated. They have interest directly or indirectly in the business of each other as provided in the statute for the applicability of the Rule 9 of Valuation Rules. The excise duty on the sale of M S ingots / sponge iron by the appellant to the three other companies is not to be arrived at by considering the transaction value, in terms of Rule 9 of the Central Excise Rules as mere mention in balance sheets about the buyer to be the Associated or Joint Ventures will not be sufficient to prove that the buyers fall in either of (ii)(iii) or (iv) sub clause of section 4 (3) (b) of Central Excise Act, 1944. The question of confirmation of demand as proposed by the impugned Show Cause notice does not arise. The order under challenge is held to have passed based upon wrong interpretation arrived at by the Adjudicating Authority. Appeal allowed - decided in favor of appellant.

Issues Involved:
1. Whether the appellant and its buyers are "related persons" under Section 4 of the Central Excise Act, 1944.
2. Applicability of Rule 8 and Rule 9 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000.
3. Determination of excise duty liability based on transaction value versus 110% of the cost of production.

Detailed Analysis:

1. Related Persons under Section 4 of the Central Excise Act, 1944:
The primary issue is whether the appellant and its buyers are "related persons" as defined under Section 4(3)(b) of the Central Excise Act, 1944. The appellant argued that all companies involved are legally separate entities, filing their taxes separately, and there is no financial flow back between them. The mere fact that directors are common does not suffice to establish that the companies are related. The Tribunal referenced the decision in M/s. Khyati Ispat Private Limited, which clarified that being inter-connected undertakings alone does not make them related unless they meet additional criteria under clauses (ii), (iii), or (iv) of Section 4(3)(b). The Tribunal found no evidence of mutual interest or financial flow back, thus concluding that the appellant and the buyers are not related persons under the specified clauses.

2. Applicability of Rule 8 and Rule 9 of the Valuation Rules:
The department contended that the appellant should have calculated the excise duty based on 110% of the cost of production under Rule 8, as the goods were sold to related parties for further manufacture. However, the Tribunal noted that Rule 9 applies only when the buyer and seller are related under clauses (ii), (iii), or (iv) of Section 4(3)(b). Since the buyers were not found to be related under these clauses, Rule 9 and consequently Rule 8 could not be applied. The Tribunal emphasized that the mere mention in the balance sheet of the buyers as "Associated and Joint Ventures" does not suffice to classify them as related persons.

3. Determination of Excise Duty Liability:
The Tribunal held that excise duty should be calculated based on the transaction value, not 110% of the cost of production, as the buyers were not related persons. The Tribunal referred to the decision in Commissioner of Central Excise, Mumbai V vs. J Foundation, which stated that mutual interest must be established to apply Rule 9. The department failed to provide evidence of mutual interest or financial flow back. Previous decisions, including one in the appellant's own case, supported that the companies involved were not related. The Tribunal concluded that the demand for excise duty based on Rule 9 was incorrect and set aside the order under challenge.

Conclusion:
The Tribunal set aside the order under challenge, holding that the excise duty on the sale of MS ingots and sponge iron should be based on the transaction value. The appeal was allowed, and the demand for excise duty based on Rule 9 was dismissed.

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