2006 (8) TMI 180 - SC - Central Excise

Excise is a tax on the production and manufacture of goods. Section 4 of the Act therefore provides that the real value should be found after deducting the selling cost and selling profit and that the real value can include only the manufacturing cost and the manufacturing profit. The section makes it clear that excise is levied only on the amount representing the manufacturing cost plus the manufacturing profit and excludes post-manufacturing cost and the profit, arising from post-manufacturing operation, namely selling profit. The section postulates that the wholesale price should be taken on the basis of cash payment thus eliminating the interest involved in wholesale price which gives credit to the wholesale buyer for a period of time and that the price has to be fixed for delivery at the factory gate thereby eliminating freight, octroi and other charges involved in the transport of the articles. As already stated it is not necessary for attracting the operation of Section 4(a) that there should be a large number of wholesale sales. The quantum of goods sold by a manufacturer on wholesale basis is entirely irrelevant. The mere fact that such sales may be few or scanty does not alter the true position. That being so, there is no scope for making any addition as done the Central Excise Authorities and upheld by CEGAT. In view of the above-said findings it is not necessary to consider the question whether the extended period of limitation applied. The appeals deserve to be allowed which we direct by setting aside the impugned orders of CEGAT.

Issues Involved:
1. Inclusion of advertisement and sales promotion expenses in the assessable value.
2. Existence of a special relationship between the appellant and M/s. Darshak Ltd.
3. Applicability of the extended period of limitation under Section 11A of the Central Excise Act, 1944.
4. Validity of the penalty imposed under Rule 173Q(1) of the Central Excise Rules, 1944.
5. Rectification of errors in the CEGAT's order.

Issue-Wise Detailed Analysis:

1. Inclusion of Advertisement and Sales Promotion Expenses in the Assessable Value:
The core issue was whether the expenses incurred by M/s. Darshak Ltd. on advertisement and sales promotion should be included in the assessable value of the goods manufactured by the appellant under Rule 5 of the Central Excise (Valuation) Rules, 1975. The Revenue argued that the appellant had gradually shifted these expenses to M/s. Darshak Ltd., who was purchasing about 98% of its products. The CEGAT upheld the Revenue's view, stating that these expenses formed additional consideration and should be included in the assessable value. However, the Supreme Court found that there was no enforceable legal right or tacit understanding requiring M/s. Darshak Ltd. to incur these expenses. The Court emphasized that the transactions were on a principal-to-principal basis and that legitimate business considerations should be taken into account, referencing previous judgments such as Union of India v. Bombay Tyre International Ltd. and Philips India Ltd. v. Collector of Central Excise, Pune.

2. Existence of a Special Relationship Between the Appellant and M/s. Darshak Ltd.:
The appellant contended that there was no special relationship between it and M/s. Darshak Ltd., and that the latter was not a favored buyer. The CEGAT initially noted that the relationship was irrelevant since the expenses were additional considerations. The Supreme Court, however, highlighted that the transactions were at arm's length and on a principal-to-principal basis, referencing A.K. Roy and Anr. v. Voltas Limited. The Court concluded that there was no material evidence to support the Revenue's claim of a special relationship or tacit understanding.

3. Applicability of the Extended Period of Limitation Under Section 11A of the Central Excise Act, 1944:
The Revenue invoked the extended period of limitation under Section 11A, alleging suppression of facts by the appellant. The CEGAT upheld this view, citing the appellant's 'No' response to question No. 19 in the price list questionnaire. However, the Supreme Court found no material evidence of suppression with the intent to evade duty, as the transactions were transparent and the appellant had submitted relevant documents, including balance sheets.

4. Validity of the Penalty Imposed Under Rule 173Q(1) of the Central Excise Rules, 1944:
The CEGAT reduced the penalty from Rs. 10 lakhs to Rs. 2 lakhs but upheld its imposition. The Supreme Court, however, found no justification for the penalty, given the absence of evidence for suppression or a special relationship between the appellant and M/s. Darshak Ltd. The Court set aside the penalty, emphasizing that the transactions were conducted transparently and in the ordinary course of business.

5. Rectification of Errors in the CEGAT's Order:
The appellant filed an application for rectification of errors, arguing that the CEGAT had not considered various judgments and that there was no suppression of facts. The CEGAT dismissed the application, supporting the Revenue's stance. The Supreme Court, however, found merit in the appellant's arguments, noting that the CEGAT had overlooked significant legal precedents and factual evidence. The Court allowed the appeal, setting aside the CEGAT's orders and emphasizing the need for a thorough and fair consideration of all relevant factors.

Conclusion:
The Supreme Court allowed the appeals, setting aside the impugned orders of the CEGAT. The Court found no basis for including the advertisement and sales promotion expenses in the assessable value, no evidence of a special relationship or suppression of facts, and no justification for the penalty imposed. The transactions were deemed to be at arm's length and on a principal-to-principal basis, conducted transparently and in the ordinary course of business.

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