2010 (12) TMI 15 - SC - Central Excise

Valuation - Sale through related parties - normal value - penalty for short payment - Section 4 and 11AC - of CEA, 1944 and The Revenue contends that an obvious corollary to this is that the freight charges so arising between the factory gate of the assessee and the place of removal at the depot of the related person should constitute the value of the goods for the purposes of computation of excise duty. It further contends that since, the place of removal is not the assessee s factory gate but rather the depot of the related person, the price is known, only at the price at which goods are sold to whole sellers by the related person. - Held that - contention of the respondent (manufacturer) that it is justified in claiming exclusion of freight charges arising between the factory gate of the respondent to the depot of the related person, cannot be sustained - order of tribunal reversed - decided in favor of revenue. Regarding penalty u/s 11AC - It is well settled that when the statutes create an offence and an ingredient of the offence is a deliberate attempt to evade duty either by fraud or misrepresentation, the statute requires mens rea as a necessary constituent of such an offence. But when factually no fraud or suppression or mis- statement is alleged by the revenue against the respondent in the show cause notice the imposition of penalty under Section 11 AC is wholly impermissible.

Issues Involved:
1. Determination of the place of removal for excisable goods.
2. Inclusion of freight charges in the assessable value.
3. Applicability of Section 4(1)(a)(iii) of the Central Excise Act.
4. Imposition of penalty under Section 11 AC of the Central Excise Act.

Issue-wise Detailed Analysis:

1. Determination of the place of removal for excisable goods:
The primary issue was whether the place of removal for the goods should be the factory gate of the respondent or the depot of the related person, M/s. Frito-Lay India. The Tribunal held that the place of removal was the factory gate of the respondent, stating, "The place of removal, therefore, continues to be the assessee's factory." The Revenue contended that the place of removal should be the depot of the related person from where the goods are sold to wholesalers.

2. Inclusion of freight charges in the assessable value:
The Tribunal had excluded the freight charges from the factory gate to the depot of the related person in the assessable value. The Revenue argued that these charges should be included, as the place of removal was the depot of the related person. The Supreme Court concluded that Section 4(2) was not applicable, and the freight charges should not be excluded, stating, "Section 4 (2) is not applicable. This Court, therefore, affirms the order-in-original but with a rider."

3. Applicability of Section 4(1)(a)(iii) of the Central Excise Act:
The Court examined the transaction under Section 4(1)(a)(iii) of the Act, which applies when goods are sold to a related person. The Court referred to the decision in Commissioner of Central Excise, Belgaum v. Akay Cosmetics (P) Ltd., emphasizing that the price charged to the related person is presumed to be understated to evade taxation. The Court stated, "The implication of the manufacturer, the assessee and the buyer being related to each other was that the price charged to the related person was presumed to be understated."

4. Imposition of penalty under Section 11 AC of the Central Excise Act:
The original order imposed a penalty equal to the duty amount under Section 11 AC. The Court highlighted that 'mens rea' or criminal intent is a necessary constituent for imposing such a penalty. The Court found no evidence of fraud, misstatement, or suppression by the respondent and quashed the penalty, stating, "But when factually no fraud or suppression or mis-statement is alleged by the revenue against the respondent in the show cause notice the imposition of penalty under Section 11 AC is wholly impermissible."

Conclusion:
The Supreme Court upheld the original order but quashed the penalty imposed under Section 11 AC due to the absence of 'mens rea.' The appeals filed by the Revenue were allowed to the extent indicated, with no costs awarded.

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