2017 (12) TMI 164 - AT - Central Excise

Valuation - related party transaction - the appellant is clearing excisable goods to independent buyers as well as to relater person and the price charged by the appellant from their related person were comparatively low, as compared to the price charged from independent buyers - it was alleged that the appellant has undervalued the goods cleared to their related person - in case where the goods are sold to independent buyers as well as to related person, in that case, how the assessable value of the goods cleared to related buyers is to be arrived? - Held that - there is no dispute that there is no specific provisions for valuation of the goods cleared to independent buyers as well as to related person to arrive at the assessable value for the goods cleared to the related person. Therefore, Rule 11 is applicable to the facts of the case which has not been disputed by both sides. As per Rule 11, valuation of excisable goods, is to be using reasonable means consistent with the principles of and general provisions of these rules and sub-section (1) of Section 4 of the Act. As per section 4 (1(a) of the Act which is applicable for the goods sold to independent buyers. Therefore, section 4(1) (a) is not applicable to the facts of the case and correct provision of section 4(1) (b) is applicable which states that in other cases i.e. which include sale made to independent buyers as well as to related person. In that circumstance, the value is to be determined as per Rule 11 of the Valuation Rules. CBEC vide Circular No.643/34/2002-CX. Dated 01.07.2002 has clarified that Rule 9 would apply only if the entire production is sold to related person. However, part of production is sold to related person and part of production is sold to non-related person, Rule 9 as such may not apply for valuing goods sold to related person. Still the value cannot be determined under Section 4(1)(a), as that section does not apply to sales to related person. Therefore, circular provides that such sales to related person would be assessed under Rule 11 read with Rule 9. The correct valuation is required to be arrived under Rule 11 read with Rule 9 of the Valuation Rules which has not been alleged in the show cause notice. Contrary to that in the show cause notice, the valuation is sought to be arrived under Rule 11 read with Section 4(1) (a) of the Act and Rule 4 of the Valuation Rules which is not applicable to the facts of case. The SCN is defective - impugned order not sustainable - appeal allowed - decided in favor of appellant.

Summary

Issues Involved:
1. Applicability of valuation rules for goods sold to related persons and independent buyers.
2. Correct provision for valuation in mixed sales scenarios.
3. Applicability of Rule 11 read with Rule 9 or Rule 4 of the Central Excise Valuation Rules, 2000.
4. Legality of the show cause notice based on incorrect provisions.
5. Application of the extended period of limitation.

Detailed Analysis:

1. Applicability of Valuation Rules for Goods Sold to Related Persons and Independent Buyers:
The primary issue in the case was determining the correct method for valuing excisable goods sold to both independent buyers and related persons. The appellant was found to be selling goods at lower prices to related persons compared to independent buyers, leading to allegations of undervaluation.

2. Correct Provision for Valuation in Mixed Sales Scenarios:
Section 4 of the Central Excise Act, 1944, and the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000, were central to the case. Section 4(1)(a) applies when sales are made to independent buyers, while Section 4(1)(b) applies otherwise, including sales to related persons. Rule 9 and Rule 10 of the Valuation Rules apply when sales are exclusively to related persons. However, in mixed sales scenarios, Rule 11 must be applied, which directs using reasonable means consistent with the principles of the rules and Section 4(1) of the Act.

3. Applicability of Rule 11 Read with Rule 9 or Rule 4 of the Central Excise Valuation Rules, 2000:
The appellant argued that Rule 11 should be applied along with Rule 9 or 10, not Rule 4, as invoked in the show cause notice. Rule 4 is meant for cases where goods are not sold at the time of removal, such as free samples or warranty replacements. The CBEC Circular No. 643/34/2002-CX clarified that in mixed sales scenarios, Rule 11 read with Rule 9 or 10 should be applied, not Rule 4.

4. Legality of the Show Cause Notice Based on Incorrect Provisions:
The appellant contended that the show cause notice was legally unsustainable as it invoked incorrect provisions. The adjudicating authority had relied on the decision in Aquamall Water Solutions Ltd., but the facts of that case were different. In Aquamall, all goods were stock-transferred to depots and then sold to related persons, unlike the present case where sales were made to both independent buyers and related persons.

5. Application of the Extended Period of Limitation:
The appellant argued against the extended period of limitation, stating that mere allegations of suppression of facts without intent to evade duty were insufficient. The Tribunal agreed, noting that the issue was one of interpretation of rules rather than deliberate evasion.

Conclusion:
The Tribunal concluded that the correct valuation method was Rule 11 read with Rule 9, not Rule 11 read with Section 4(1)(a) and Rule 4. The show cause notice was found defective for invoking incorrect provisions, rendering the impugned order unsustainable. Consequently, the appeal was allowed with consequential relief.

Judgment:
The appeal was allowed, and the impugned order was set aside. The correct valuation method was determined to be Rule 11 read with Rule 9 of the Valuation Rules, and the show cause notice was deemed defective for applying incorrect provisions. The judgment emphasized the importance of applying the correct rules in mixed sales scenarios and clarified the legal interpretation of relevant provisions.