SHOW CAUSE NOTICE IS TO PINPOINT THE EXACT QUANTUM OF DUTY LIABILITY

[Mr. M. GOVINDARAJAN]

Section 11A of Central Excise Act, 1944 ('Act' for short) deals with the recovery of duties not levied or not paid or short levied or short paid or erroneously refunded. It provides when any duty of excise has not been levied or paid or has been short levied or short paid or erroneously refunded, whether or not such non levy or non payment, short levy or short payment or erroneous refund, as the case may be, was on the basis of any approval, acceptance or assessment relating to the rate of duty on or valuation of excisable goods under any other provisions of this  Act or the rules made there under, a Central Excise Officer may, within one year from the relevant date, service notice on the person chargeable with the duty which has not been levied or paid or which has been short levied or short paid or to whom the refund has erroneously been made, requiring him to show cause why he should not pay the amount specified in the notice.

There are many requirements to be included in the show cause notice. It is fundamental that a show cause notice is required to be extremely exact in making specific and cogent allegations, in pinpointing and producing cogent evidence, in support thereof, and finally in setting out the exact calculations of duty together with the evidence to support such calculations, when it proposes recovery thereof from the assessee.

The above has been confirmed by Mumbai tribunal in 'Aviat Health Care Private Limited V. Commissioner of Customs & Central Excise, Belapur' - (2009 -TMI - 33774 - CESTAT, MUMBAI). In this case /the appellants were manufacturing and selling certain medicines to one M/s USV Limited, Mumbai and one M/s Lifeon Pediatrics Ltd. According to the appellants the sales were at an arm's length and on principal-to-principal basis. Once they sold the said goods to their buyers, they were not concerned with any further expenditure, which may have been incurred by the said buyers in selling the said medicaments. The Revenue alleged that the expenses such as storage, outward handling, distribution, marketing and other expenses, which would form part of the intrinsic value of the said products had been incurred by the said buyers and that these expenses would have otherwise formed part of the assessable value, had the appellants directly engaged themselves in the marketing of the said product. The Revenue further alleged that there was a wide difference between the price claimed as assessable value and the wholesale price at which they were sold by the buyers in wholesale and that the appellants had suppressed the above facts from the department, namely that their buyers had incurred further expenses for the distribution, marketing etc., for these products. The Revenue, invoking the provisions of Section 11A(1) of the Act issued a show cause notice and confirmed the duty as claimed in the show cause notice along with interest and also imposed penalty of equivalent amount. Aggrieved on this order the appellant filed the present appeal.

The tribunal noted the following:

* The basic case of the Revenue is that the appellants' buyers have incurred expenses on account of several heads such as storage, outward handling, distribution, marketing and other expenses. The specific heads of expenditure have not been particularized in the show cause notice. The tribunal held that it was incumbent upon the Revenue to specify the expenditure incurred by the appellants under each specific head, pointing out the amount of differential duty payable in respect of each such head with cogent evidence that such expenditure has, in fact, been incurred by the said buyers on behalf of the appellants. It is for the Revenue to establish that the statutory definition provided to the term 'transaction value' and provisions of Rule 6 of the Central Excise (Determination of Price of Excisable Goods) Valuation Rules, 2000 are applicable to the facts of the appellants' case by producing evidence in this behalf, which has not been done;

* The Commissioner, in his findings, has held that the transactions between the appellants and the buyers were governed by the provisions of Section 4(1)(a) of the Central Excise Act, 1944 and that these were on principal to principal basis. In that event if the said buyers were to incur any expenditure whatsoever after purchasing the said medicaments from the appellants on their own account, to further their own sales, it cannot be held that these expenses had been incurred on behalf of the appellants. It is trite law that it is for the Revenue to substantiate its allegations and not for the assessee to prove to the contrary;

 * The Revenue has assumed that the entire difference between the Maximum Retail Price at which the goods were sold and the selling price of the appellants represented only the expenditure incurred by the appellants. It is common knowledge that the MRP comprehends several downstream sale elements such as wholesalers' margins, the margins of the said purchases, as also the elements of local taxes, freight etc., all of which will form part of the MRP.  Therefore, it is not correct to assume that the entire difference between the appellants' sale price to their buyers and the MRP represented only the expenditure incurred by the said buyers;

* The Commissioner has observed that instead of collecting the elements of impugned expenditure directly from their buyers, a novel modus operandi has been generated so that the buyer would incur such expenditure instead of paying that quantum of value to the appellants in order that the excise duty need not be paid on that expenditure. These observations of the Commissioner lack substance once he has held that the transactions between the buyers and the appellants are on principal to principal basis;

* The Commissioner has further observed that though it is customary to pin point an exact quantum of duty liability in the show cause notice yet he does not think that it would be great short coming of the notice so long as the ways and means of working of the differential value is evident from the notice itself, that is to say, the transaction value has been arrived at by deducting elements of duties and taxes from the MRP. The tribunal is not inclined to agree with these observations of the Commissioner.   It is indeed a great shortcoming not to pin point the exact quantum of duty liability in the show cause notice.

* The tribunal held that it is fundamental that a show cause notice is required to be extremely exact in making specific and cogent allegations, in pinpointing and producing cogent evidence, in support thereof, and finally in setting out the exact calculations of duty together with the evidence to support such calculations, when it proposes recovery from the assessee.