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TMI Blog2014 (9) TMI 29X X X X Extracts X X X X X X X X Extracts X X X X ..... ebate to be given in cash. The revisionary authority discarded these prices on the ground that the price charged by the inventor cannot be a basis for comparison and that the substantially lower price charged by Sun Pharmaceuticals in India is a better comparison. It was further held that the substantial mark-up in the transaction between Dr. Reddy’s and its Jersey subsidiary implied some distortion in the transaction value. Thus, the best judgment method was used with a cost plus 10% mark up as the correct value. This reasoning is unacceptable. Under Rule 18- which contemplates return of the excise duty paid in cases of exported goods,- the market price must necessarily refer to the market where the goods are sold, - in this case, the United States market. The goods in question are neither meant for, nor did they ever enter, the Indian market. In the present case, approximately ₹ 411 crores was received in India in foreign exchange from the sale of these drugs. On this basis, excise duty was paid and later recovered. At no point did Dr. Reddy’s receive a net benefit from the transaction. If the Revenue’s argument is to be accepted, a higher price is accepted by it a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to a total of approximately ₹ 411 crores through foreign exchange, which was received in India. According to that valuation, Dr. Reddy s paid excise duty at the applicable rate of about 5% of ₹ 21,18,36,11 on the 20 mg tablets, and ₹ 64,66,041 on the 5 and 10 mg tablets. A rebate application was then made since excise duty on exported products is nil under Rule 18 of the Central Excise Rules, 2002 ( 2002 Rules ). The rebate claimed was granted. 3. Proceedings were later initiated before the Commissioner (Appeals) for partial recovery of the rebate, after the Commissioner exercised powers of review under Section 35E(2) of the Act and passed orders for the filing of an appeal. In these proceedings, the Appellate Commissioner held by orders dated 20.3.2012 and 28.8.2012 that the refund granted was in excess of the market price of the products exported. Relying on Notification No. 19/2004-CE (NT), dated 6.9.2004 ( Notification 19/2004 ), which states that the rebate cannot be in excess of the total market price of the exported goods at the time of export, the rebate amount was thus reduced to ₹ 8,91,295 and ₹ 23,491 based on an independent val ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at though Zyprexa (branded product of Olanzapine 20mg) is available for $15, the Generic product is available for US$ 0.69. Therefore, the export price of US$7 quoted by M/s. Dr. Reddy s Laboratories Ltd., for its generic product appears to be abnormally high. Thus, prima facie, the DRL resorted to overvaluation of goods and this appears to be with an intention of encash the Cenvat credit by way of rebate. Similarly, the generic prices for tablets of lower dosage were also found to be lower than that quoted by Dr. Reddy s. Third, it was observed that as per the Notification 19/2004 the market value cannot exceed the amount of rebate claimed. Here, it was noted that the branded Olanzapine 20 mg produced by Sun Pharmaceuticals was sold for ₹ 104.50 for 10 tablets in the Indian market. On the basis of this value, the market value of 1,31,01,840 20 mg tablets exported by Dr. Reddy s works out to ₹ 13,69,14,228, which was considered by the Commissioner, rather than the value provided by Dr. Reddy s. Fourth, on the issue of hidden costs, which were claimed by Dr. Reddy s in its cost calculations, it was observed that this matter was covered by Section 233B of the Comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice of Excisable Goods) Rules, 2000. In this manner, the valuation was reached on the basis of cost plus a ten percent markup. This exercise resulted in the cost production value coming to ₹ 16148102, with a 10% markup returning the value ₹ 17762815. Based on this, the rebate claims of ₹ 8,91,295 and ₹ 23,4911 respectively in respect of Olanzapine 20 mg tablets and Olanzapine 10 mg and 5 mg tablets were held admissible as against the rebate earlier allowed of ₹ 21,18,36,117 and ₹ 64,66,0411 by order dated 30.9.2011 and 13.01.2012 respectively and balance amounts of ₹ 21,02,12,794 and ₹ 64,66,041 were directed to be recovered. Dr. Reddy s preferred an appeal to the CESTAT, which is currently pending. 8. Learned senior counsel, Mr. Ganesh, appearing for Dr. Reddy s argued that the reconsideration of valuation for the purposes of granting the rebate is erroneous. It is argued that Dr. Reddy s received an exclusive right to manufacture and sell the Olanzapine drug in the United States (along with the inventor) for a limited period of 180 days. The price in that window period was higher than the price after the expiry of the patent, an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... available in the Indian market or on the basis of a best value judgment. It is argued in support of the approach of the revisionary authority that since the declared value far exceeded the cost, it was reasonable to conclude that the transaction value between Dr. Reddy s and the Jersey subsidiary, two related parties, could not be taken at face value. In such case, other means of valuation that were ignored by the sanctioning authority were rightly taken into consideration and detailed reasons recorded for the findings returned. It was argued therefore, that there is no perversity in the decision of the revisionary authority that merits the interference of this Court. 12. The admitted facts are as follows: Dr. Reddy s was granted permission by the United States authorities to manufacture and import to its territory the Olanzapine drug for a window period of 180 days before the expiry of the patent. A copy of this permission is placed on record. For the purposes of working out this permission, Dr. Reddy s sold these drugs to its Jersey subsidiary, which was to ultimately sell those drugs. The sale with which this court is concerned is from Dr. Reddy s to its foreign subsidiar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount of rebate of duty claimed. Thus, to ensure that an exporter does not receive a net benefit from the rebate of the duty, a ceiling on the rebate is placed in terms of the market price at which the exporter actually sells the goods. In this case, the two Orders-in- Original, dated 30.9.2011 and 13.1.2012, granted the rebate on the following grounds: 10. On examination of the rebate claim, it is noticed that the assessee have cleared the said goods for export vide ARE-I: No.748/2,011-12 dated 1.27.6.2011 to their overseas subsidiary company at a value of ₹ 1,13,95,OOO/- per one lakh Nos. of '0 Ianzapine-20mg USP' Tablets as against the cost incurred by them for manufacture of One lakh Nos. 'Olanzapine-20mg USP' of ₹ 1,28,267/-. The reasons put forth by the assessee for such huge margin in price on the export goods, being that they get 180 days, of exclusivity period to market this particular product, for which reason the price is high during this period as DRL will be treated as only other player other than innovator, M/s. Eli Lilly, in the market and that once the exclusivity period is over, the price is likely to come down when other sellers en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the rebate to be given in cash. The details of ARE.1, the Values, the net F.O.B values, rebate sanctioned in cash and credit allowable as CENVAT Credit are reflected In the table annexed to this order. 15. Independent of the difference between the sanctioning authority in the order-in-original and the appellate authority subsequently on the applicability of the 2007 Rule to cases arising under Section 11B of the Central Excise Act- read with Rule 18 of the 2002 Rules, the appellate/revisionary authority relied on condition (e) of Notification 19/2004 to deny the rebate as earlier granted (as the revisionary order notes: market price of the similar/identical goods at the time of exportation is found to be less than the amount of rebate of duty claimed ). Indeed, this resolution is necessary to activate condition (e). In this case, Dr. Reddy s had stated that no similar goods are marketed in the Indian market, and a comparison of similar goods sold in the United States would show that the transaction value was not overstated. In support of that stance, the following prices of Eli Lilly (the inventor) and Prasco Labs (its assign) were provided, which have not been disputed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... btedly there may be cases where the valuation ought to be considered more closely if the transaction is between related parties, this case does not present any difficulty. The generic price of $0.69 relied upon by the revisionary authority is the price prevailing in the United States market after the expiry of the 180 day window period. The exports however were made during that window period, when the patent was manufactured by only 3 bodies (Eli Lily, Prasco Labs and Dr. Reddy s) and the prevailing price was higher. Condition (e) itself notes that the relevant time is at the time of exportation , and the comparison of generics who did not exist in the market at the time of export violates that condition. Similarly, the price that allegedly prevailed in India ₹ 104.50 for 10 tablets is again irrelevant, since that refers to the domestic market. Thus, the market must be correctly chosen, both geographically and temporally. In this case, the United States market during the 180 day window period has prevailing prices between $19.22 (Prasco Lab s lowest price) and $33.38 (Eli Lily highest price), which are both clearly above the price of $7 at which the sale was made be ..... X X X X Extracts X X X X X X X X Extracts X X X X
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