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TMI Blog2013 (5) TMI 322X X X X Extracts X X X X X X X X Extracts X X X X ..... the sale the goods and the buyer M/s BIL agreed to purchase the same to specification of quality, quantity and packing as required by the buyer. The manufactured goods were to be subjected to inspection and approval by the buyer prior to the delivery - It is also specifically stipulated that the transaction under the said agreement were not based on and do not create any relationship between the parties otherwise than as the one between two independent principals and mutually exclusive in their interests and trading activities and having absolutely no dependence on each other in respect of whatsoever either as agent or related person etc. As far as loan is concerned the same was taken as a short term accommodation Loan and interest @8% p.a was paid to M/s BIL, against the lower rate interest around 4% to 5% p.a charged by SIDBI as the said Loan was converted into Foreign Currency Term Loans. Hence, such short term loan had no influence on the commercial relation between the Appellant and M/s BIL. Packing 4.98 lakhs in comparison to the total turnover of the appellants i.e. 4.00 to 5.00 Crores, and thus it would be incorrect to conclude that on reimbursement of such expenditure M/s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... discharged excise duty on the price at which the manufactured goods were sold to M/s BIL. 2.1 Their factory was audited by the Central Excise department during April, 2002 to May, 2002. Later, on 19.4.2004, searches were conducted at various premises of the appellant. On completion of investigation, a show-cause-cum-demand notice was issued on 16.3.2005 invoking extended period of limitation alleging short payment of Central Excise duty of ₹ 3,87,58,852/- for the period from January, 2000 to July, 2004 on account of under valuation of manufactured goods sold to M/s BIL. Thereafter, another show-cause notice was issued on 29th August, 2005, on the same ground, alleging short payment of duty of ₹ 1,15,05,702/-for the period August, 2004 to May, 2005. These Notices were adjudicated by the Ld. Commissioner vide Order no. 03/Commissioner/Kol-VII/ADJN/2006-07 dated 31.7.2006 confirming the total duty mentioned as above and imposed penalty of ₹ 5,00,29,570/- on the Appellant. 2.2 Thereafter, five periodical show-cause notices were issued to the Appellant from time to time for the period from June, 2005 to December, 2007 alleging short payment of duty of ₹ 2,51,9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s HMPL proceeded further to execute the said project and the name of the company was changed from M/s HMPL to M/s BIL. 3.2 The ld. Sr. Advocate submitted that the appellants and M/s BIL are separate legal entities and have separate existence, having distinct identity in the eyes of law and also in fact. M/s BIL is a Public Limited, whose shares are listed and the Appellant are a private Limited company having two Directors, namely, Mr. Shyam Modi & Mr Vikash Aggarwal. From the list of shareholders of the Appellant Company as mentioned in the Annexure to the written submission, it could be seen that there is no shareholding of M/s BIL in the appellant company, nor the appellant company has got any shareholding in M/s BIL. Also, neither any of the Directors nor employees are common in both the Companies. 3.3 The ld. Sr. Advocate further submitted that by an agreement executed between the appellants and M/s BIL on 10.12.1999, on purely commercial terms, the appellant was obliged to manufacture Britania branded cakes as per specification of M/s BIL and sell the same to M/s BIL at mutually agreed price. The Appellant were procuring various raw materials, manufacturing the cakes in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all ensure quality of Goods required by the BUYER. (m)All information of whatever nature supplied or furnished by the BUYER to the SELLER, shall be held strictly confidential and shall not be used or disclosed by the SELLER at any time to anyone either during the tenure of this Agreement or at any time thereafter under any circumstances save and except for the purpose of and to the extent necessary to enable the SELLER to perform its obligations under this Agreement and to satisfy any statutory requirements. The SELLER further assures that it shall not make use of specifications etc. furnished by the BUYER for the benefit of other parties or for itself. (n)The SELLER shall be responsible for compliance of all the provisions of the Prevention of Food Adulteration Act, 1954. Essential Commodities Act, 1955, Standards of Weights and Measures Act.1976 and the rules made there under, the standards and requirements of the Bureau of Indian Standards and such other enactments including Commercial Taxes, Labour legislations and other Factory laws applicable presently and in future to the SELLER in respect of the business transacted and the activities envisaged in this Agreement and the SE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to appreciate that like the Appellant, M/s BIL had been purchasing goods from other manufactures/job workers on similar term and conditions. 3.6 The ld. Sr. Advocate responding to the allegation that they had received Loan of ₹ 50.00 Lakhs from M/s BIL prior to the agreement dt. 10.12.1999, submitted that the entire dealing was on pure commercial terms. He has submitted that even though the SIDBI in principle had sanctioned a loan of ₹ 140.00 lakhs, due to delay in its disbursement, the appellant approached M/s BIL for an accommodation loan of ₹ 50.00 lakhs for short period and on the understanding that the said loan would be repaid as soon as the appellant received full amount of loan from SIDBI, M/s BIL had agreed and advanced the said amount on 22.07.99. The said amount was repaid to M/s BIL on 15.09.99. 3.7 Further, rebutting the allegation that the appellants had received the said loan at a nominal rate of interest, the ld. Sr. Advocate submitted that initially the interest rate fixed by SIDBI was at 15.5%, subsequently, the said loan was converted into Foreign Currency Terms Loans with reduced rate of interest of 4%;whereas, they had paid interest @ 8%, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere interpreted by the authorities in an incorrect manner alleging that the appellants and M/s BIL are related persons. Explaining the substance and purpose of these letters, the Ld. Advocate submitted that the letter dated 11.02.2000 of Creative Concepts, was in relation to the repairing of packing machines received by them on bailment from M/s BIL; the letter dated 20.02.2001 written by the Director of the appellant to M/s BIL regarding loss of cake slabs due to problem of wrapping machine and seeking compensation from M/s BIL was to appraise M/s BIL about the said loss and the compensation was never granted to them by M/s BIL ; the letter dated 16.07.2001, seeking approval from M/s BIL for appointment of engineers, clerks etc., was written with an intention to keep the buyer M/s BIL informed about the financial burden that would be incurred by them towards such extra appointment; the letter dated 29.11.2000 relates to sales tax deferred payment benefits available to the appellants, it was misinterpreted by the department as sharing of sales tax benefits and the Department could not produce any concrete evidence in support of the aforesaid allegation of sharing of sales tax benef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the contrary, were justified their stand that these transactions between the appellants and M/s BIL were always between two independent parties. Further, he has submitted that pursuant to such correspondences, whenever they have received any additional consideration from M/s BIL, they discharged the differential duty, and it was within the knowledge of the Department. 3.13 The ld. Advocate further submitted that there is nothing on record and also it is a fact that none of these correspondences had actually been approved by M/s BIL nor they had addressed any replies to the appellants letter showing that these letters had no impact on the transaction nor from these letters, it could be said that there was mutuality of interest in the business of each other. He has submitted that the implication of all these letters involve a total expenditure of ₹ 4.5 lakhs and negligible in comparison to their gross sales turnover. Besides, all these correspondences were in the initial days of the operation of the company i.e. between 2000 to 2002, which has no relevance to the subsequent period, hence, on the basis of these letters, it could not be alleged that the transactions between ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and relationship. In response to the spot memos, the appellants submitted a detailed reply on 09.06.2002, wherein the appellants had furnished all the relevant information sought by the Department. Thus, the Department had full knowledge of the activities undertaken by the appellants and hence, the allegation of suppression, mis-declaration of facts etc. in order to invoke longer period of limitation is not sustainable. In support, he has relied upon the decisions of the Honble Supreme Court in Commr. of Central Excise, Tamil Nadu Vs. Southern Structurals Ltd. : 2008 (229) ELT 487 (SC) and Larsen & Toubro Ltd. Vs. Commr. of Central Excise, Pune II : 2007 (211) ELT 513 (SC). 3.17 Further he has submitted that they have declared all the relevant information as required under Rule 173C (3A) in the prescribed proforma and against Item III Clause) (iii), the appellants answered the information in positive. Hence, the demand is barred by limitation. 3.18 The ld. Sr. Advocate further submitted that the mutuality of interest contemplated in the definition of related person prescribed under Section 4 of CEA, 1944 is not on account of the normal business practice, but it is required to sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xv) Sarita Steel & Industries Ltd. Vs. CCE 2011 (272) ELT 572(Tri.-Bang.); (xvi) Rad-MRO Manufacturing (P) Ltd. Vs CCE 2010 (258) ELT 235(Tri.-Bang.); (xvii)SV Sugar Mills Ltd. Vs. CCE 2009 (240) ELT 690 (Tri. Chennai); (xviii) CCE, Bom-I Vs. Indian Oil Corp Ltd.:1988 (35) ELT 652 (Tribunal); (xix) Automotive Axles Ltd. Vs CCE, Bag. 2002 (142) ELT 706 (Tri.-Bang.); (xx) CCE, Bangalore-III Vs Campco 2006(199) ELT 630 (Tri-Bang.); (xxi) TTK Healthcare Ltd. Vs. CCE, Gurtur:2007 (207) ELT 453 (Tri.-Bang.); (xxii) CCE, Bangalore Vs Electronics Calculators & Computer Co. 2008 (224) ELT 559 (Tri. Chennai) 4. Per contra, the ld. Spl. A.R, Mr. A. K. Raha, for the Revenue, has submitted that the allegations made at Para 6 of the show-cause notice was to indicate that the dealings between the appellants and M/s BIL, were that of interconnected undertaking in the sense, it reflected mutuality of interest, in each others business, which affected the transaction value of the goods, during the material period. The ld. A.R., contended that Clause (d) of the definition of interconnected undertaking has been fulfilled in the present case. He has further submitted that the appellant in their ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce expenses, the bailer shall have to repay the bailee, the necessary expenses incurred by him for the purpose of the bailment. He has submitted that the appellant has raised debit note No.003/2000-01 dated 26.09.2000 on M/s BIL being the maintenance/repairing cost incurred on the slice machines & packing machines procured through the aforesaid bailment agreement. Thus, the stipulation in the bailment agreement had been contrary to the facts, as the necessary repairs, even though responsibility of the bailee, was debited to the account of bailer. 4.2 The Ld. A.R. further contended that the letter dated 3rd January, 2001 addressed to M/s BIL, refers to a series of decisions on the issue of pond filling & other land development activities, whereby the appellants earlier had placed note requesting necessary sanctions for capital investment. The plea of the ld. A.R. is that in the said letter, it is also mentioned for arranging sanction of ₹ 20.00 lakhs and disbursement of ₹ 17.00 lakhs out of ₹ 20.00 lakhs for airland system and 1200 sq.ft addition storage space enclosing therewith financial statement. Further referring to another letter dated 28.04.2001 addressed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vt. Ltd. Vs. Commissioner of Central Excise, Hyderabad II reported in 2005 (184) ELT 263 (Tri.-Bang.), the Ld. A.R. submitted that the Department need not prove its case by establishing each link in the circumstantial evidence and the standard of proof required in the Departmental proceeding is preponderance of probability and not to prove the case beyond reasonable doubt. 4.5 The ld. Spl. A.R has further submitted that all these facts and correspondences were unearthed after search of the Appellants premises and hence the show-cause notice dated 16.03.2005, is not barred by limitation. 5. Heard both sides and perused the records. After conclusion of hearing, both sides have been directed to file written submission summarizing their arguments. The appellants have filed the same, but the respondents did not, inspite of reminder from the Registry. 5.1 The issue involved in the present case is, determination of assessable value of the excisable goods manufactured and sold by the appellants to their sole buyer, M/s BIL, during the period from Jan 2000 to Dec.2007. 5.2 It is the case of the Department that M/s BIL being a related person of the Appellant, within the meaning of relat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee that they have interest, directly or indirectly, in the business of each other and includes a holding company, a subsidiary company, a relative and a distributor of the assessee, and any sub-distributor of such distributor. Explanation- In this clause holding company, a subsidiary company and relative have the same meanings as in the Companies Act, 1956; (d)….. (e).... 5.4 The said Section 4 has been amended w.e.f 01.07.2000 and the relevant provisions of amended Section 4, reads as under: SECTION 4. Valuation of excisable goods for purposes of charging of duty of excise. - (1) Where under this Act, the duty of excise is chargeable on any excisable goods with reference to their value, then, on each removal of the goods, such value shall - (a) in a case where the goods are sold by the assessee, for delivery at the time and place of the removal, the assessee and the buyer of the goods are not related and the price is the sole consideration for the sale, be the transaction value; (b) in any other case, including the case where the goods are not sold, be the value determined in such manner as may be prescribed. Explanation.-For the removal of doubts, it is hereby de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... son (other parameters for determination of assessable value, were not in dispute), accordingly, the assessable of the goods be determined under proviso (iii) to Section 4(1)(a) of CEA,1944. 5.6 The meaning of related person referred to under the old section 4 had been defined under clause (c) of Sub-Section (4) of Section 4 of the said Act. The meaning of the related person comprised of two parts, the first part prescribed that to come under the scope of related person, one has to be so associated with the assessee that they have interest directly or indirectly in the business of each other. The second part is not relevant in the present context as there was no allegation that the Appellant and M/s BIL were holding & subsidiary company. 5.7 In the amended Section 4, effective from 01.07.2000, transaction value, instead of normal sale price, has been prescribed as the basis for determination of assessable of goods chargeable to ad valorem rate of duty. It is prescribed that on each removal of the goods, the value shall be the transaction value, where the goods are sold by the assessee, for delivery, at the time and place of removal, and the assessee and the buyer are not related p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as an interest direct or indirect, in the business of the person alleged to be a related person nor is it enough that the person alleged to be a related person has an interest, direct or indirect, in the business of the assessee. It is essential to attract the applicability of the first part of the definition that the assessee and the person alleged to be a related person must have interest, direct or indirect, in the business of each other. Each of them must have a direct or indirect interest in the business of the other. The equality and degree of interest which each has in the business of the other may be different; the interest of one in the business of the other may be direct, while the interest of the latter in the business of the former may be indirect. That would not make any difference, so long as each has got some interest, direct or indirect, in the business of the other. 5.11. Undisputedly, the appellants had commenced production of excisable goods from January 2000 and the entire production had been sold only to one buyer i.e. M/s BIL, after affixing the brand name of M/s BIL on the said goods. The sale had been effected under an agreement dated 10th December, 1999 be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loans from their sole buyer M/s BIL at a rate substantially lower than the existing market rate of interest. (ii) On various occasions the assessee have raised debit notes on M/s BIL for realization of amounts over and above the Invoice price. Such Debit notes were for repair & replacement of slicer machines, purchase of ink-roll for printing, repair & maintenance in general, replacement expenses, Xerox and other expenses, compressor installation, ozonizer pipe installation, U.V. lights & others, cost incurred on packing machines, telephone bill, trial run of cakes and other etc. (iii) M/s BIL have supplied machineries free of cost to the assessee, which have been installed in the said factory premises of the said assessee and have been utilized for production of cakes. (iv) The assessee have asked for financial and administrative approval from M/s BIL for purchase of office furniture, raising of expenditure ceiling and increase in man power in their factory. (v) Loss in production suffered by the assessee for problem in wrapping machine has been sought to be recovered from M/s BIL. (vi) Sales Tax benefit of the assessee has been shared by both of them viz. the assessee and M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... future delivery, is a normal trade practice which were taken for short periods on liquidity problem and the deposits were taken as precaution to safeguard their interest against huge investment on raw materials, as the Britania branded cakes could not be sold to anyone else, except M/s BIL, as per the agreement dt.10.12.1999. All these dealings were in the initial period of operation between 2000 to 2002, and discontinued later after the company could manage its financial affairs efficiently. 5.18. Before assessing the impact of these financial dealings on the relation of the Appellant and M/s BIL, it is necessary to look at the background of the Appellant. It is not in dispute that the Appellant was earlier known as M/s Hari Mercantile Pvt. Ltd., and executed the project independently after obtaining necessary permissions from various authorities. For necessary capital, they approached SIDBI for Loan and ₹ 140 Lakhs was sanctioned in principle in April/May 1999. Also, they entered into an MOU with M/s BIL in June 1999 for manufacture and supply of cakes to M/s BIL. Owing to delay in disbursement of the sanctioned Loan from SIDBI, they approached M/s BIL for a short term acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es and deposits were received by the appellants in the initial days of operation i.e. in the year 2000-01 & 2001-02 and thus there is force in the argument of the ld. Sr. Advocate for the appellants that since they were new in the business of manufacturing of branded cakes, they were not fully conversant with management of inventory of finished goods and consequently flow of funds. In such situations, the possible sources for funding was banks or the sole buyer for advance payments against deliveries. We do not see any extra-commercial relations or considerations in these dealings as taking advances and deposits from buyers against future deliveries, is a normal business practice. 5.20. The next vital allegation is that the appellants under two bailment agreements had received packing & wrapping machines from M/s BIL, on which neither rent was paid nor the said machines were maintained by the appellants. But, for maintenance, debit notes viz. on repair & replacement of parts of the packing machines, purchase of ink-roll for printing, repair & maintenance in general, replacement expenses etc. were raised from time to time to by the appellants and reimbursed by M/s BIL. The contenti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ispute on the supply of machines on bailment basis by M/s BIL to the appellants. The entire investment on plant & machinery for manufacturing of cakes, had been made by the Appellant on their own, as is evident from their audited Balance Sheet for the respective years. In our view, supply of packing machines, on bailment, the cost of which is around 10 lakhs and approximately 5% of the total investment in plant & machinery of the Appellant, and used only for the purpose of packing of finished goods, cannot lead to an inference that the appellant had manufactured the cakes only out of the machinery supplied by their sole buyer, M/s BIL or there is a substantial investment in plant & machinery by the buyer. The ld. Commissioner has observed in the impugned order that supply of such machine, was an additional consideration, from the buyer to the Appellant. In such circumstances, the amortized cost of such machines, at best could be loaded to the assessable value of the finished goods, if not included in the cost of the finished goods, but supply of such machines on bailment, cannot make the buyer, M/s BIL, a related person of the appellant. 5.21 The next allegation of the Department ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ideration from M/s BIL to Appellant would make the transaction not on principal to principal basis, but between two related parties. We do not find merit in the later reasoning of the Ld Commissioner and persuade ourselves to accept his conclusion that such additional consideration following from M/s BIL to the appellants, would come under scope of the definition of related person. Besides, the total amount involved against all these letters/debit notes, as claimed by the Appellant and not disputed by the Revenue, was a meager amount of ₹ 4.98 lakhs in comparison to the total turnover of the appellants i.e. ₹ 4.00 to 5.00 Crores, and thus it would be incorrect to conclude that on reimbursement of such expenditure M/s BIL had exercised control over the day to management of the Appellant and that too for the entire disputed period and accordingly satisfy the definition of related person. 5.23. Regarding the allegation of accrual of sales tax benefit to the appellants and its sharing with M/s BIL, the Ld Adv. for the Appellant submitted that in their letter addressed to M/s BIL dated 29.11.2000, there is no whisper on sharing of the sales tax benefit. In the said letter, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quirement is that both sides should have interest directly or indirectly in the business of each other to make them related person; of course, the degree of interest, need not be equal, and may be different. In other words, there should be a free flow of interest, in both the directions, concerning the business of each other, whether directly or indirectly, to designate them as related person. 5.27. Even though the learned Sr. Advocate for the Appellant has referred to a number of cases, on the issue, we find that the facts and Circumstances, in Kwality Ice Cream's case(supra), are more or less comparable to the present one. In that case, Kwality Ice Cream Co. by an agreement, sold the entire production to M/s BBLIL and it was alleged that the transaction between Kwality Ice Cream Co. and M/s BBLIL was not on principal to principal basis and M/s BBLIL was a related person of M/s Kwality Ice Cream Co. It was alleged that Kwality Ice Cream Co. has no autonomy to run its unit. Starting from the procurement/purchase of raw materials to the manufacture of final product, all the activities of Kwality Ice Cream Co. were fully controlled by M/s BBLIL. The nature and type of machinery to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the letters addressed by the appellants to M/s BIL, on the basis of which the department alleged that M/s BIL had exercised control over the Appellant including the fixation of sale price unilaterally, we find that it is an one side affair, and not both ways. Even assuming that, the Ld. Commissioner interpreting these letters concluded that M/s BIL had interest in the business of the appellant, but we find that the Department has miserably failed to establish through cogent evidences, that the appellant had also an interest in the business of M/s BIL. The ld. Commissioner in his impugned order has held that all these letters addressed to M/s BIL for approval, indicate that M/s BIL must have unilaterally fixed the prices of sale of goods to M/s BIL and this control is being exercised by M/s BIL to keep the manufacturing expenses of the appellants low so that their own sale price can remain unaltered, and thus, had direct interest in the business of the appellants. But, we find, there is not an iota of evidence on record by which it could remotely be alleged that the appellants had any interest in the business of selling of manufactured Britannia branded cakes by M/s BIL. To our di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntz and determine the assessable value on the basis, whether they are related person or otherwise. Hence, the said judgment is not relevant to the present case. 5.30 We also agree with the ld.Sr. Advocate for the appellant that the other decisions cited by the ld.Spl.A.R., namely, Gulabchand Silk Mills case, Debi Dass Garg's case, & D. Bhoormull's case (supra), relate to clandestine removal/smuggling of goods, hence, facts of these cases cannot be comparable to the facts of the present case. Accordingly, the principle of law laid down therein, cannot to be made applicable to the facts in issue. Besides, the said principle may be appropriate in circumstances referred to in the said decisions, and the department may not be required to establish the case with mathematical precision, or establish the case without providing all the links, where the case is established on circumstantial evidences, but, in our opinion, such plea cannot be appropriate and acceptable in the present case, when the allegation is of undervaluation of manufactured goods, on account of existence of mutual interest between the manufacturer-seller and buyer, where no investigation was carried out at the buyers e ..... X X X X Extracts X X X X X X X X Extracts X X X X
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