1996 (8) TMI 289 - AT - Central Excise

Issues Involved:
1. Misinterpretation of the agreement regarding advertisement expenses.
2. Determination of related person status.
3. Application of limitation period for the show cause notice.
4. Inclusion of advertisement expenses in the assessable value.

Detailed Analysis:

1. Misinterpretation of the Agreement Regarding Advertisement Expenses:

The appellants, a partnership firm engaged in manufacturing ice cream, entered into an agreement with a distributor company in March 1990. The Central Excise department added advertisement expenses incurred by the distributor to the value of the ice cream cleared by the appellants, leading to the present appeal. The appellants argued that the Commissioner misinterpreted the agreement, which allowed the distributor to incur expenses for promoting its proprietary interest in the goods. The Commissioner wrongly held that the agreement enjoined the distributors to incur such expenses. The appellants contended that the advertisement expenses incurred by the buyer/distributor after purchasing the ice cream should not be added to the assessable value. They cited several decisions supporting their stance, including:

- Standard Electrical Appliances v. Superintendent of Central Excise (1986)
- Brakes India Ltd. v. Assistant Collector (1988)
- Union of India v. Mahindra and Mahindra (1989)
- General Industrial Control (P) Ltd. v. CCE (1991)

The Tribunal found that the Commissioner misunderstood the agreement and the appellants' reply to the show cause notice. The agreement stated that the distributor was at liberty to incur expenses for promoting its proprietary interest, which did not imply an obligation. The Tribunal concluded that the advertisement expenses incurred by the buyer were extraneous considerations and not part of the assessable value.

2. Determination of Related Person Status:

The Commissioner held that the distributor company was a related person of the appellant firm because some of the partners of the firm were relatives of the directors of the distributor company. The Tribunal disagreed, stating that a company has a separate identity distinct from its directors or shareholders. The agreement provisions did not support the finding of mutual interest. The Tribunal referred to the Supreme Court judgment in the Bombay Tyre International Ltd. case, which required the distributor to be a relative within the meaning of the Companies Act, 1966, to be considered a related person. The Tribunal concluded that the distributor company could not be treated as a related person, as the statutory provisions were not met.

3. Application of Limitation Period for the Show Cause Notice:

The appellants argued that the show cause notice was barred by limitation. The Commissioner applied the longer period of limitation, holding that there was suppression because the agreement with the distributor company was not disclosed. The appellants contended that there was no suppression of necessary facts, as the non-disclosure of the agreement did not constitute suppression. The Tribunal agreed with the appellants, stating that the non-disclosure of the agreement was not legally required and did not amount to suppression.

4. Inclusion of Advertisement Expenses in the Assessable Value:

The Commissioner added the advertisement expenses incurred by the distributor to the assessable value of the ice cream. The Tribunal found that the Commissioner relied on decisions where the agreements specifically required the distributors to incur advertisement expenses, which was not the case here. The Tribunal cited the Standard Electric Appliances case, where the High Court of Madras held that advertising by a wholesaler to attract customers did not imply that the advertisement was for the manufacturer. The Tribunal concluded that the advertisement expenses incurred by the distributor were not to be included in the assessable value.

Conclusion:

The Tribunal set aside the impugned order, allowing the appeal on merits and on the ground of limitation. The advertisement expenses incurred by the distributor were not to be added to the assessable value, and the distributor company was not a related person of the appellant firm.

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