2014 (2) TMI 499 - AT - Central Excise

Valuation of goods - Related parties - Application of Rule 10 read with Rule 8 of the Central Excise Valuation Rules, 2000 on the basis of 110% of the cost of production - Held that - Show cause notice treats the respondent and M/s P.S. Steel Tubes (P) Ltd. as related persons only on the basis that they are interconnected undertakings in terms of its definition of this term as given in Section 2 (41) of the Companies Act and the show cause notices, nowhere discusses as to how the conditions prescribed in Rule 10 of the Central Excise Valuation Rules, 2000 are satisfied, that is either the buyer is holding company or subsidiary company of the assessee or the two are so connected that they are also related in terms of Clause (ii), (iii) or (iv) of Clause (b) of sub-Section (3) of Section 4 of the Act. There is absolutely neither any allegation, nor any evidence to show that the respondent and M/s P.S. Steel Tubes (P) Ltd. have interest in the business of each other. Neither M/s P.S. Steel Tubes (P) Ltd. is holding company or subsidiary company of the respondent nor there is any evidence to prove that the respondent are so connected with M/s P.S. Steel Tubes (P) Ltd. that they are also related in terms of Clause (ii), (iii) or (iv) of Section 4 (3) (b). In view of this, the respondent and M/s P.S. Steel Tubes (P) Ltd. cannot be treated as related persons and, as such, there is no infirmity in the impugned order - Decided against Revenue.

Summary

Issues:
Interpretation of the term "related persons" under Section 4 (3) (b) of the Central Excise Act in the context of interconnected undertakings as defined in Section 2 (41) of the Companies Act.

Analysis:
The case involved the manufacture of re-rolled products of Iron and Steel strips chargeable to Central Excise duty under Chapter 72. The respondent's records revealed that over 50% of their clearances were to another company, M/s P.S. Steel Tubes (P) Ltd., during a specific period. The department contended that the two companies were interconnected undertakings and, therefore, related persons under Section 4 (3) (b) of the Central Excise Act. Consequently, the department sought to determine the assessable value of goods based on 110% of the cost of production, leading to the issuance of show cause notices for differential duty, interest, and penalties.

Upon adjudication, the Additional Commissioner confirmed the duty demands and imposed penalties on the respondent. However, on appeal, the Commissioner (Appeals) set aside the order, ruling that the two companies could not be treated as related persons under Rule 10 of the Central Excise Valuation Rules unless specific conditions were met. The Revenue then filed an appeal challenging the Commissioner's decision.

During the appellate proceedings, the Departmental Representative argued that the companies should be considered related due to the partners of the respondent also being directors in M/s P.S. Steel Tubes (P) Ltd., indicating interconnectedness and mutual interest. In contrast, the respondent's counsel contended that the companies did not satisfy the conditions outlined in Rule 10 for being treated as related persons.

The Tribunal analyzed the submissions and records, emphasizing that the mere fact of being interconnected undertakings was insufficient to establish related person status. It was crucial to demonstrate a connection under Clause (ii), (iii), or (iv) of Section 4 (3) (b) or that the buyer was a holding or subsidiary company. In this case, as neither company was a holding or subsidiary company of the other, nor was there evidence of mutual interest, the Tribunal upheld the Commissioner's decision. Consequently, the Revenue's appeal was dismissed.

In conclusion, the judgment clarified the interpretation of the term "related persons" in the context of interconnected undertakings, highlighting the necessity to meet specific criteria outlined in the Central Excise Valuation Rules for such classification.