1996 (9) TMI 277 - AT - Central Excise

Summary

Issues Involved:

1. Related persons and transactions at arm's length.
2. Assessable value of goods cleared by the processor.
3. Deductions from the assessable value.
4. Liability of seized goods to confiscation, enforcement of bonds, and penalty.

Detailed Analysis:

Issue 1: Related persons and transactions at arm's length

The appellants contended that the concept of "related person" as defined in Section 4(4)(c) of the Act cannot be invoked in the case of the three suppliers and JWTM since the former are partnership firms and the latter is a Company with a purely juristic personality. The court found that the three suppliers and JWTM are indeed "related persons" because they have a significant interest in each other's business. The suppliers and JWTM are controlled by close relatives, and the prices declared by the suppliers were deliberately depressed to evade duty. Therefore, the transactions between the suppliers and JWTM were not at arm's length, and the prices declared by the suppliers cannot be taken as the assessable value. The prices at which JWTM sells the fabrics to wholesalers should be considered the real prices.

Issue 2: Assessable value of goods cleared by the processor

The appellants argued that the assessable value of the finished fabrics removed by the processor should be based on the sum total of the cost of grey fabric, the cost of processing, and the processor's profit, relying on the Ujagar Prints case. The court held that the assessable value should indeed be the sum total of the cost of the grey fabric received by the processor, the value of the job work, the processing expenses of the processor, and the processor's profit. The suppliers' declared or real price cannot be the basis of valuation if it includes post-manufacturing expenses and profits. The assessable value must exclude the expenses incurred by the supplier after receipt of the processed fabric and the profits earned from the sale of the processed fabric.

Issue 3: Deductions from the assessable value

The court addressed the deductions claimed by the appellants:

- Cash discount: The court found that the Collector's finding of a 2-1/2% cash discount was contrary to the decision of the High Court of Bombay, which held that cash discounts should be allowed if they are known to the parties prior to the removal of goods, irrespective of whether each customer availed of the discount.
- Incentive bonus: The court held that incentive bonuses should be allowed if they are part of the trade pattern and offered to all buyers.
- Expenses of JWTM: The court found that expenses incurred by JWTM for cutting, packing, etc., are post-manufacturing expenses and should be deducted from JWTM's price if that price is the basis for assessment.
- Loss caused by cutting: The court did not agree that any deduction is allowable on account of loss caused by cutting, as there was no material evidence to support the extent of the loss claimed by the appellants.

Issue 4: Liability of seized goods to confiscation, enforcement of bonds, and penalty

The court found that the seized goods cannot be regarded as liable to confiscation, and the appellants cannot be held guilty of any act deserving of the imposition of a penalty. This conclusion was based on the finding that the assessable value should be the sum total of the cost of grey fabrics, value of job work done, processing expenses, and processor's profit, and not the prices of JWTM.

Conclusion:

The impugned order was set aside, and the appeals were allowed. The court found that the assessable value should be based on the sum total of the cost of grey fabric, the cost of processing, and the processor's profit, and not the prices declared by the suppliers or the prices at which JWTM sold the fabrics. The court also allowed deductions for cash discounts, incentive bonuses, and post-manufacturing expenses incurred by JWTM. The seized goods were not liable to confiscation, and no penalties were imposed on the appellants.