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TMI Blog2003 (3) TMI 597X X X X Extracts X X X X X X X X Extracts X X X X ..... since the issues involved are the same and the Collector relying on his finding as impugned in appeal No. E/2955/98, has passed the subsequent orders. 2. Brief facts in appeal No. E/2955/98 are, proceedings of undervaluation of sales made to related person were initiated against this Public Sector Undertaking (hereinafter referred to as M/s. ECIL) by the issue of Show Cause Notice, after conducting enquiries, when the Superintendent on a visit found that: - (a) M/s. ECIL were clearing X-Ray Baggage Inspection Systems (XBIS) valued at Rs. 25 lakhs to Rs. 26 lakhs during the period September, 1994 to February, 1995 to different customers on payment of appropriate duty had sold 16 nos. of such systems to a joint venture company viz., M/s. ECIL Rapiscan, Hyderabad during February, 1995 to March, 1995 at assessable values ranging from Rs. 12 lakhs to Rs. 13 lakhs per system, while the joint venture company in turn had sold the same to various customers at higher prices. (b) The Superintendent during his enquiries observed that joint venture agreement was entered into on 4-1-94 in order to organize a limited liability joint venture company to manufacture, assemble, test, market, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se duty of Rs. 15,89,048/- on the sixteen XBIS sold by M/s. ECIL, Hyderabad to M/s. ECIL Rapiscan Security Products Ltd. Since M/s. ECIL, Hyderabad have undervalued the goods sold to M/s ECIL Rapiscan which resulted in short payment of Central Excise duty." and duty demands were made under Rule 9(1) of the Central Excise Rules and penalty under Rule 173Q was proposed. 3. The Commissioner after granting the personal hearings and considering the records especially Memorandum of Understanding dtd. 13-8-93 and the Joint Venture Agreement dtd. 4-1-94, interim agreement dtd. 13-1-99 and Memorandum of Understanding dtd. 20-11-94 was convinced to conclude that :- "(i) ECIL and ECIL Rapiscan are two independent legal entities and the transaction between both of them is at arms length and on principal to principal basis. It is no doubt true that the OSI and the ECIL are stock holders of the ECIL Rapiscan and the percentage of stock holding is 51% and 49% respectively. Quite obviously, the profit sharing is in proportion to the stock-holding percentage. I find that the business transaction between the ECIL and the ECIL Rapiscan is on principal to principal basis and there is no m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion, the price at which ECIL supplied the XIBS to their customers during September, 1994 and January, 1995 shall be considered as a 'retail price'. However, during the period February - March, 1995, the impugned goods were sold only to the ECIL Rapiscan who in turn sold them to the same customers. The price at which the goods were sold to ECIL Rapiscan ranged between Rs. 12 lakhs to Rs. 13 lakhs. Although the ECIL sold the goods to only one wholesale dealer, i.e. ECIL Rapiscan, such a price can be considered as a 'wholesale price in view of the ratio contained in decision of the Hon'ble Appellate Tribunal in Modi Xerox Ltd. v. CCE [1989 (40) E.L.T. 481 (Trib.)]. Therefore, assessment of excise duty has to be done only with reference to such wholesale price. Since there was no wholesaler during the period September, 1994 to January, 1995, it was perfectly in order to charge duty on the sale price effected to the actual users. But, when the impugned goods were sold to a wholesale dealer, the price charged to such a wholesale dealer is relevant and not the retail price at which the goods were sold in the past. (iv) The price variation between the said two periods appear to be ju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 1/97, dt. 4-8-97 dropped the demand, holding that : · The joint venture company is a separate legal entity dealing with ECIL at arms length and on principal to principal basis (para 10.2 of his order). · There was no mutuality of interest between ECIL and the joint venture company (para 10.3). · The joint venture company was a wholesale buyer (para 10.4) · Prior to the formation of the joint venture company, the sale was to actual users and it was "perfectly in order to charge duty on the sale price effected to actual users"; but thereafter it must be done only with reference to wholesale price (para 10.4, end). · The variation of price before and after the joint venture agreement came about because the earlier price was a retail price, while the later one was a wholesale price. · ECIL is a Government company, and it is "too much" to make "wild allegations" against them that they formed the joint venture with a view to depress the assessable value of the goods and that they thereby evaded payment of duty (para 10.5). The appeal filed by the Department is on the following grounds:- (i) ECIL and ECIL Rapiscan do not have independent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r situation where the formation of a joint venture company had led to fall in prices, the Tribunal had held that the joint venture company was a "vehicle of convenience and a front to justify the reduction in price." [paras 23, 33-36 of Godrej and Boyce Manufacturing Co. Ltd. v. CCE, Mumbai-II, reported in 2002 (148) E.L.T. 161] Further, in the case of Flash Laboratories v. CCE, New Delhi reported in 2003 (151) E.L.T. 241 (S.C.), the Supreme Court came to a finding of mutuality of interest based on shareholding patterns and marketing arrangements, in para 7 of their order. The objections of the respondent to the departmental appeal, as summarized on the last page of their written submissions (para 12) are dealt with as under : (Harichand K. Khanna v. CCE, Surat) is reported at 2003 (150) E.L.T. 1323 (Trib. - LB). Further, the Board has informed in another case that it is their practice to retain the signed copy in the Board's office and send the attested copy to the Commissioner concerned. 12.2 Merits are discussed above. The issues are within the scope of the Board's authorisation. 12.3 The Board's review order has not travelled beyond the scope of the show cause no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ission by the adjudicator to the effect that "……..even manufacturing profit of Rs. 71.5 lakhs were transferred to the joint stock company as per the memorandum. This point has been admitted in the order of the Commissioner..…." as urged in this ground is found by us. On a question from the Bench, the ld. DR pointed out to para 7(h) of the order where the submissions made on behalf of M/s. ECIL have been recorded as: - "7(h) The agreement is clearly understood, and duly approved. The two share holders have an equity participation of 51% to 49% to form an independent company wherein ECIL and Opto Sensors Inc. were merely equity holders and not related to ECIL. The Superintendent was also ignorant of the fact that as per the memorandum of understanding ECIL had transferred the profits of the systems sold during August, 1994 to February, 1995 amounting to Rs. 71.5 lakhs to the joint venture company." This recording of the submissions of the appellant and the ld .DR's references drawn also to Cost Analysis Sheets for transfer price for X-Ray Baggage Inspection System as Annexures to MOU dt. 1-4-94 (signed on 20-11-94) do not and cannot constitute to an adm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y concluded that they are wholesale buyers. Legally this concept of whole sale buying in case of XBIS is a legal fiction created in order to show lower values for the purposes of excise. The show cause notice has charged that from February '95 onwards (i.e. up to March '95) that 16 machines (XBIS) had been sold to ECIL Rapiscan at assessable value of around Rs.12 to Rs.13 lakhs. The ECIL could only reply that prices are at earlier point of time when sales were made to consumers. ECIL Rapiscan was not a buyer. Thus indirectly they have accepted the show cause notice allegation and could not satisfactorily defend themselves." The point taken herein viz., "ECIL Rapiscan was not a buyer" is a plea made in direct conflict with the position taken by Revenue in the show cause notice and this ground itself to the effect that "….machines (XBIS) had been sold to ECIL Rapiscan" i.e. the joint venture company. If it is the case of Revenue, as made out now in this ground in appeal, that joint venture company was not a wholesale buyer, but was only a marketing organisation which was procuring purchase orders from different buyers, then, that would be making out a new case in appeal, whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the normal bank rate of interest i.e. about 25 to 30%. However, under no circumstances can we accept that (i) the margin of profit would be 100% or more of the manufacturing cost, (ii) there will be no manufacturing profit." The finding of the Commissioner is that sales to buyers e.g Air India etc., earlier, were in retail and to the joint venture company in wholesale and such retail prices cannot be compared with wholesale prices. These findings of the impermissible comparison, between wholesale and retail price is not challenged. The ground taken as regard margin of profits not being 100% or any other percentage e.g. 25 to 30% are conjectures and surmises. No material was relied upon in the show cause notice or and the grounds now, to conclude or determine 'a margin of profit' for these products. The respondents on this hand, in their submissions, have made the following submissions on this point of margins of profits, in following terms: - "10. The profit margin [ground numbers (ii) & (iii) of the impugned ld. Revenue appeal herein] which the ld. Revenue had erroneously canvassed in the impugned appeal is highly contrary to mixed question of law and facts. Since the ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r operational costs and taxes and duties which ECRL has to bear. This ground alone is sufficient to prove that the ld. Revenue's impugned proceedings are highly contrary to the mixed questions of both law and facts and all the submissions herein were submitted without prejudice independent buyer and were/are at arm's length basis as set out earlier. Further and without prejudice to the above submissions it is submitted that, the comparison between assessable value of ECIL and the purchase order price of ECRL leads to fallacious conclusions as to the turnovers for the entire impugned period both in terms of quantum of sale and the price comparisons and the ratios inasmuch one to one comparison cannot be achieved. In addition and without prejudice to all the foregoing submissions, only with a view to highlight the extreme revenue bias that had entered the said ld. Revenue's impugned proceedings, it is submitted that the differential duty was worked out on the purchase order price of ECRL while not even construing it as an all inclusive price. All these grounds clearly go to establish the fact that the Hon'ble Board had not fulfilled the demands of Sec. 35E of the Act in so far as it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which ECIL was selling the goods there were no independent sales to any other customers after Feb., 95 and similar machines supplied to independent customers up to Feb, 95 (with the help of know-how firm Rapiscan UK was around Rs. 25 to 26 lakhs). It is evident that the price was drastically reduced due to free technical know-how provided by ECIL Rapiscan for these machines which were sold only to ECIL Rapiscan who then sold to independent customers at prices which were comparable to prices at which earlier similar systems (XBIS) was sold directly by ECIL using paid technical know-how for the machines. As the machines with specialized features could not be manufactured without technical know-how which was the property of M/s. Rapiscan, the difference in prices before and after Feb. 95 can be largely attributed to cost of this know-how which ECIL did not change to ECIL Rapiscan. The price changed by ECIL to ECIL Rapiscan thus could not be taken to be the time intrinsic value of the XBIS sold to ECIL Rapiscan. In fact as the machines entered into the marketing stream only after these were disposed off by ECIL Rapiscan, the sale price of the later could rightly form the basis of valu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... E., Act by virtue of the inclusive nature of the definition roping in the transactions between Holding and Subsidiary companies and not otherwise within the realm of Proviso (iii) to Sec. 4(1)(a). Because, ECIL - Rapiscan joint venture arrangement is one which is not in the nature of a Holding company and Subsidiary company on one hand and on the other hand, the joint venture emerged out of a strict Techno-Commercial supremacy and need. Therefore, the joint venture and the supply contracts have been evolved in the ordinary course of business where yet times skim the cream policies might prevail as between seller and buyer if the Hon'ble Board at best desires to view the margins as the lone basis for its purported proceedings u/s 35E due to the inherent strength of the seller and the dire necessity of the buyer who have to consider bilateral advantages in all such commercial or Trade negotiations. The above aspects are the genuine business exigencies which are distinct from the onus that is cast upon the Hon'ble Board while purporting to order u/s 35E(1) - wherein the law empowers the Board only to satisfy legality or propriety in the orders of the subordinate officers - to prove t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and it is this situation that alone would attract or invoke provisions of Sec. 4(1)(a) Proviso (iii) as was dealt with supra while such Holding and Subsidiary company relationship does not exist in the impugned order. 1.4 The ld. Commissioner had considered elaborate submissions made by ECIL on various legal and factual aspects concerning the impugned issue and passed a reasoned order-in-original holding that: (a) the prices charged by ECIL were unfettered prices; (b) the transactions are at arm's length and on principal to principal basis; (c) the prices and mark-ups are the resultant effects of Techno-Commercial considerations and the emergent negotiating strengths underlying therein; and (d) the 'related person' definition does not encompass the impugned transactions or dealings etc. whereas the Hon'ble Board had passed sub silentio on all such vital aspects and choses to rely on frivolous and untenable grounds which were thoroughly controverted in the impugned proceedings on record whereby the Hon'ble Board grossily erred in invoking the vires u/s 35E and did not discharge the onus heavily cast u/s 35E on the Hon'ble Board as to what impropriety occurred or for what ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the ld. DR, we find that the DR is making a claim that the cost of technical know-how supplied by Rapiscan was not part of the price. This argument is in direct conflict with the written submissions in ground taken in appeal and thus cannot be allowed. (f) The ld. DR has relied upon the Supreme Court decisions in the case of Godrej and Boyce Manufacturing Co. Ltd. [2002 (148) E.L.T. 161] to consider the plea of "joint venture company was a vehicle of convenience and a front to justify the reduction in price" and in this case also ECIL the assessee, a Public Sector Undertaking, wholly owned by Government of India, should be viewed in the same light as far as joint venture company, 'ECIL-Rapiscan' is concerned and the reduction in prices for sales effected by this Public Sector Unit under Department of Atomic Energy to a joint venture company should be questioned. While the adjudicator has considered the reasons for variations in the price charged during September, 1994 and January, 1995 and February-March, 1995 and thereafter concluded in paragraph (iv) of his finding "the retail sale quite obviously is inclusive of all the expenses incurred in connection with marketing of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ggest. He says that he has referred to it because of this sentence therein: "The principle that a company under the Companies Act, 1956 is a separate entity and, therefore, where the manufacturer and the buyer are two separate companies, they cannot, than (sic) anything more, be 'related persons' within the meaning of clause (c) of sub-section (4) of Section 4 of the Act is not the universal application." We have difficulty, for the reasons already stated, in accepting as correct this sentence. It appears to have been so stated in relation to and in the context of facts of that case. Therefore, the ld. Judges, it should be added, remanded the matter for further inquiry into the facts." Therefore, we find no reasons to upset the finding arrived at by the adjudicator by looking behind and into the alleged reasons, for shift in sale patterns as pleaded by Revenue. (g) No merit is found in the cross-objection of the Respondents as regards the point taken of the order of the Board not having been signed, in view of Larger Bench decision in Harichand K. Khanna [2002 (150) E.L.T. 1323]. (h) There is no force in the cross-objections as regards bar of limitation in the case E/2966/98 as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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