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TMI Blog2013 (11) TMI 1549X X X X Extracts X X X X X X X X Extracts X X X X ..... 996, 100% shares of MDS were purchased by Legrand group companies and the ownership and control of the company underwent changes. 2.2 Based on intelligence that M/s. Legrand and M/s. DIPL were related persons, Directorate General of Central Excise Intelligence, Pune conducted investigation and undertook searches on 30-9-2003 of the factory and office premises of M/s. Legrand at Jalgaon, Sinnar and Mumbai and recovered incriminating documents. M/s. DIPL was also investigated. Mrs. U.D. Morarji, Chairman and Managing Director of DIPL in her statement, dated 25-11-2004 confirmed that she was Chairman and Managing Director of M/s. MDS earlier and the said company was taken over by M/s. Legrand in 1996. At that time, there was an agreement, dated 29-3-1996 entered into between M/s. Legrand group and M/s. MDS to regularise the share transfer arrangement, as per which M/s. DIPL continues to be the only manufacturing company engaged in the manufacture of distribution boards for M/s. Legrand. The distribution boards manufactured by M/s. DIPL were entirely sold to M/s. Legrand after affixing with labels indicating M/s. Legrand as the marketeer as these products were mainly designed for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... L a minimum assured business for a period of 3 years from the date of share purchase agreement. Despite the clause of the agreement having expired after three years, M/s. Legrand continued its business by lifting 100% of its requirement of distribution boards from M/s. DIPL. He also confirmed that M/s. Legrand had been designing and developing the distribution boards manufactured by M/s. DIPL and they provided technical assistances to M/s. DIPL by way of supervision of M/s. DIPL's operations by M/s. Legrand employees and on the products manufactured by M/s. DIPL, labels with the description "manufactured by DIPL, marketed by Legrand" were affixed. 2.5 After examining the relevant records, including share purchase agreement, it appeared that M/s. Legrand and M/s. DIPL are related persons within the meaning of Section 4(3)(b)(iv) of the Central Excise Act, 1944 read with Section 2(g) of MRTP Act, 1969 and therefore, the transaction between them cannot be said to be on principal-to-principal basis, especially considering that the sale price of the distribution boards from M/s. DIPL to M/s. Legrand was less than even its cost of production. After completion of investigation, a sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1944. It is also his contention that the adjudicating authority failed to appreciate that two companies were closely associated in the business of each other, which is clearly reflected in the share purchase agreement, dated 29-3-1996 by and between the Morarji group and the Legrand group of companies. Though the agreement was valid for a period of three years, but it continued even thereafter for about ten years. Clause 4.5 of the agreement clearly states that both the parties agree to act in a manner which will ensure that the business transactions between MDS and M/s. DIPL, a Morarji group company will be conducted in accordance and the manner described in Annexure 'C' to the agreement, which read as follows :- "TRANSACTIONS BETWEEN MDS AND DIPAREENA 1. EEI shall conduct the business of the Company in such a manner that the Company will treat Dipareena Investment Private Limited (Dipareena) as a first preferred sub-contractor on competitive terms and will guarantee Dipareena a minimum assured value of business equivalent to the present value of business transacted between Dipareena and the Company during the financial year ended March 31, 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsider the possibility of integrating this activity and employing the 14 persons concerned. Besides, if MDS does not substitute itself to Dipareena as lessor of its premises at Jalgoan, it will, upon 12 months notice from Dipareena, transfer the equipment owned by MDS to another location. (b) Manufacture of "super fuse" miniature circuit breakers under ABB licence- whose production is entirely sold to MDS As soon as legally possible, but not later than February 27, 2000, the Morarji Group agrees that it shall conduct the affairs of Dipareena in such a manner and cast their votes in such a manner so that Dipareena shall transfer to the Company all R&D, design activities, licensing agreement and intellectual property rights related "super fuse" miniature circuit breakers and for which it will not charge separate fees. It will also sell at the depreciated historic cost, its specific moulds, dies and equipment related to the above products to the Company. At the time the transfer takes place, MDS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .................. (ii) .................. (iii) .................. (a) ............ (b) ............ (c) if the bodies corporate are under the same management, or (d) if one body corporate exercises control over the other body corporate in any other manner; (iv) .................. (a) ............ (b) ............ (v) .................. (vi) .................. (vii) .................. Explanation I - For the purposes of this Act, [two bodies corporate,] shall be deemed to be under the same management, - (i) .................. (ii) If the managing director or manager of one such body corporate is the managing director or manager of the other, or..................." 3.3 Since in the present case Mrs. U.D. Morarji was the Chairperson and Managing Director of DIPL and also the Chairperson of Legrand, both the companies can be said to be un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the price at which the buyer has sold the goods should be taken as the value for determination of assessable value under Section 4 of the Central Excise Act. 3.4 Inasmuch as the respondent has never disclosed these activities to the department or the existence of the share purchase agreement, they have suppressed the facts with an intent to evade payment of Central Excise duty and, therefore, the extended period of time has been rightly invoked. Inasmuch as the respondent has suppressed the facts, penalty under the provisions of Section 11AC on the respondent-firm as also penalty on Mrs. U.D. Morarji, Shri A.P. Subedar, Authorised Signatory and Shri Jean Charles Tharud under Rule 209A of the erstwhile Central Excise Rules, 1944 and Rule 26 of the Central Excise Rules, 2002 are imposable. Accordingly, it is prayed that the impugned order be set aside and the Revenue's appeals be allowed. 4. The learned counsel for the respondents on the other hand submits that the impugned order is correct in law. It is his contention that in the absence of existence of any extra-commercial consideration resulting in artificial lowering of price, the mere fact of sale of entire producti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the Chairperson of M/s. Legrand without a casting vote but she was not the Managing Director in M/s. Legrand while she was the Chairperson and Managing Director of DIPL. Inasmuch as the Revenue has not established any mutuality of interest between the two legal entities, it cannot be held that they can be considered as a related persons as defined in Section 4(3)(b) of the Central Excise Act, 1944. As regards the contention that the appellant sold the products below its cost of production and the Hon'ble Apex Court's decision in Fiat India's case, cited supra, would apply, it is submitted that in Fiat India's case, the Revenue had issued specific show cause notices demanding excise duty on cost plus profit basis where the company was selling at a loss price. In the present case, it is not the case of the Revenue to demand excise duty on cost plus profit basis and, therefore, the ratio of the Fiat India decision would not apply. It is his contention that the sale of entire production to one buyer and the buyer dictating the price or buyer carrying out designs does not make the buyer and seller related. DIPL and Legrand are neither inter-connected undertakings nor related. There is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oth the companies under the same management is satisfied. 5.2 As regards clause (d), it stipulates that if one body corporate has control over the other body corporate in any other manner, both are inter-connected. In the present case, it is seen from the records that M/s. Legrand purchased the entire quantity produced by M/s. DIPL of the distribution boards and M/s. DIPL is not free to manufacture and sell these products to anybody else. It is also seen that the designs and drawings for the manufacture of the distribution boards are owned and supplied by M/s. Legrand to M/s. DIPL. Further, M/s. Legrand are undertaking all the R&D activities required for the manufacture of the distribution boards by M/s. DIPL. It is also a fact on record that M/s. Legrand had been deputing their staff to M/s. DIPL for supervision of the manufacturing activities undertaken by the latter. The price at which the distribution boards are sold by M/s. DIPL is exclusively determined by M/s. Legrand. It is also agreed between the two parties that in case M/s. DIPL decides to sell the firm, first preference has to be given to M/s. Legrand for purchase of 100% of its shares. In view of these above fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee, or a sub-distributor of such distributor; or (iv) they are so associated that they have interest, directly or indirectly, in the business of each other. As per the new Section 4, if two persons are inter-connected undertakings, they would be deemed to be related persons. In the instant case, M/s. Legrand and M/s. DIPL are inter-connected as per sub-clauses (c), (d) and (g) of Section 2 of the MRTP Act. Therefore, the decisions relied upon by the respondent in the case of Kanchan Industries; Playworld Electronics Pvt. Ltd.; Sanghi Organization; Alembic Glass and Kaira Dist. Co-Op. Milk Producers Union (supra) would not help them as all of them dealt with a situation in respect of Section 4 as it stood prior to 1-7-2000. In view of the amended definition of related person, so as to include inter-connected undertakings within the purview of related person, these decisions have no relevance. Since in the present case, the two persons, namely, M/s. Legrand and M/s. DIPL are inter-connected and M/s. Legrand exercises control over M/s. DIPL as discussed above, which fact is clearly brought out from the admissions made in the statements of Mrs. U.D. Morarji, Mr. A.P. Subedar and M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e selling agent or distributor is lower than the real value of the goods which will mean the manufacturing cost plus manufacturing profit, the Excise authorities can refuse to accept that price. 60. Since under new Section 4(1)(a) the price should be the sole consideration for the sale, it will be open for the Revenue to determine on the basis of evidence whether a particular transaction is one where extra-commercial consideration has entered and, if so, what should be the price to be taken as the value of the excisable article for the purpose of excise duty and that is what exactly has been done in the instant cases and after analysing the evidence on record it is found that extra-commercial consideration had entered into while fixing the price of the sale of the cars to the customers. When the price is not the sole consideration and there are some additional considerations either in the form of cash, kind, services or in any other way, then according to Rule 5 of the 1975 Valuation Rules, the equivalent value of that additional consideration should be added to the price shown by the assessee. The important requirement under Section 4(1)(a) is that the price must be the sol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the sole consideration for sale, is not satisfied, then the transaction value shall not be the assessable value and value in such case has to be arrived at, under the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 ('the Rules 2000' for short) which is also made effective from 1st July, 2000. Since the price is not the sole consideration for the period even after 1st July, 2000, in our view, the assessing authority was justified in invoking provisions of the Rules 2000." 5.6 In the case before us, we have clearly held that M/s. DIPL and M/s. Legrand are related as they are inter-connected undertakings and hence related as defined in law. Further, since DIPL has been selling its products to Legrand at a price lower than its manufacturing cost, the sale price cannot be held to be the sole consideration for sale. Therefore, the Central Excise Valuation Rules, 2000, would come into play. Since both DIPL and Legrand are inter-connected undertakings, Rule 10 of Central Excise (Valuation) Rules, 2000 would be relevant. Rule 10 of the said Rules reads as follows :- "When the assessee so arranges that the excisable goods are not sold by him except to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, the provisions of Rule 6 of the Central Excise Valuation Rules would come into play and the ratio of the decision of the Hon'ble Apex Court in the Fiat India case (supra) would squarely apply. Rule 6 provides for inclusion of money value of additional consideration flowing directly or indirectly from the buyer to the assessee and the following elements of cost have to be added to the sale value, namely :- (i) value of materials, components, parts and similar items relatable to such goods; (ii) value of tools, dies, moulds, drawings, blue prints, technical maps and charts and similar items used in the production of such goods; (iii) value of material consumed, including packaging materials, in the production of such goods; (iv) value of engineering, development, art work, design work and plans and sketches undertaken elsewhere than in the factory of production and necessary for the production of such goods. Thus the money value of goods and services, whether supplied directly or indirectly by the buyer free of charge or at reduced cost for use in connection with the production and sale of such goods, to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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