2005 (4) TMI 58 - SC - Central Excise

If the selling price of M/s. Nemaru a related person as defined in Section 4(4)(c) of the Central Excise Act, 1944 (for short the 1944 Act ) was considered as the basis of the assessable value in terms of proviso (iii) to Section 4(1)(a) for the goods manufactured and cleared by M/s. Akay Cosmetics Pvt. Ltd. (assessee herein), then was the claim for deduction from the assessable value in respect of cost of secondary packing (special packing), freight, handling charges, insurance, octroi, turnover tax and cost of bought-out items admissible under Section 4(4)(d) of the 1944 Act? Held that - The demand for differential duty for the period 1/88 to 8/88 without issue of show cause notice under Section 11A was unsustainable. Absence of show cause notice was not disputed. In the circumstances, the Tribunal was right in setting aside the demand for differential duty amounting to ₹ 1,59,606.22 for the said period. Consequently, demand made for the said period under any of the seven items is set aside. To sum up, we hold, that, deduction for expenses incurred on account of special packing, turnover tax, octroi and bought-out items was admissible for the period 9/88 to 3/91, subject to the assessee submitting proof of incurring actual expenses in respect of the above items before the Commissioner (Appeals). That, the department was right in disallowing deduction for expenses on account of freight, insurance and handling charges for the period 9/88 to 3/91. We also do not see any reason to interfere with the impugned order of the Tribunal remanding the matter to the Commissioner (Appeals) to decide afresh the question of related person during the period 4/91 to 3/93, in view of the changed circumstances indicated hereinabove. The appeals filed by the department are partly allowed

Issues Involved:
1. Assessable value determination based on related person's selling price.
2. Deduction claims for secondary packing, freight, handling charges, insurance, octroi, turnover tax, and bought-out items.
3. Validity of demand for differential duty without a show cause notice.
4. Remand for re-examination of related person status post organizational changes.

Detailed Analysis:

1. Assessable Value Determination Based on Related Person's Selling Price:
The key issue was whether the assessable value for goods manufactured by the assessee should be based on the selling price of M/s. Nemaru, a related person under Section 4(4)(c) of the Central Excise Act, 1944. The Supreme Court affirmed that M/s. Nemaru was a related person, and thus, the price at which M/s. Nemaru sold the product should be used as the basis for assessable value under proviso (iii) to Section 4(1)(a).

2. Deduction Claims for Various Expenses:
- Secondary Packing: The Tribunal allowed deduction for special packing costs as these were incurred by M/s. Nemaru after the goods were cleared from the assessee's factory. The Supreme Court upheld this, stating that the cost of secondary packing was not includible in the assessable value since it was done by M/s. Nemaru and not at the factory gate of the assessee.
- Freight, Insurance, and Handling Charges: The Supreme Court disallowed deductions for these expenses, asserting that deductions must be strictly construed and are confined to costs up to the factory gate. The Court emphasized that allowing such deductions would defeat the purpose of the third proviso to Section 4(1)(a), which aims to prevent undervaluation when sales are made to related persons.
- Octroi and Turnover Tax: The Tribunal's decision to allow deductions for octroi and turnover tax was upheld, subject to the assessee providing proof of actual payment. The Court referenced previous judgments affirming that sales tax and other local taxes are deductible from the sale price to determine the assessable value.
- Bought-out Items (Measuring Cups and Hand-gloves): The Tribunal found these items non-essential for the product's marketability and allowed deductions. The Supreme Court agreed, noting that these items were not necessary for the product's use and thus their cost was not includible in the assessable value. However, the assessee must provide evidence of the purchase and supply of these items during the relevant period.

3. Validity of Demand for Differential Duty Without a Show Cause Notice:
The Supreme Court upheld the Tribunal's decision that the demand for differential duty for the period 1/88 to 8/88 was unsustainable due to the absence of a show cause notice under Section 11A. The Court reiterated the necessity of issuing a prior show cause notice for any demand on grounds of short-levy or non-levy, as established in previous judgments.

4. Remand for Re-examination of Related Person Status Post Organizational Changes:
The Tribunal remanded the matter to the Commissioner (Appeals) to re-examine the demand for differential duty for the period 4/91 to 3/93, considering the organizational changes in M/s. Nemaru. The Supreme Court found no reason to interfere with this decision, acknowledging the need to reassess the related person status in light of the new agreement and organizational changes.

Conclusion:
The Supreme Court partly allowed the appeals filed by the department, affirming the Tribunal's decisions on several deductions while disallowing others. The matter was remanded for further examination of specific deductions and related person status for the period post-1/4/1991. The decision emphasized the strict interpretation of deduction provisions and the necessity of adhering to procedural requirements for duty demands.

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