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TMI Blog2015 (10) TMI 2402X X X X Extracts X X X X X X X X Extracts X X X X ..... ds were being cleared from the respondent s premises was linked to the price at which the processed goods were to be sold back to the respondents. This is clear from the statements recorded and from the terms of the contract. In the circumstances it cannot be said that the price negotiated between the respondent and the processors was price determined on an arm s length. The price of spent goods was directly linked to the price of the processed goods received back from the Processor. There may or may not have been a written contract between the parties to the contract but there was a clear understanding. Therefore in addition to the sale by the respondents to the processor not being an international transaction, it was also not at arm s length. - The Commissioner has failed to appreciate that the transaction in case of a DTA sale is a local transaction price whereas in case of clearance of an EOU unit the assessable value should be the price in the course of International trade. Having arrived at the conclusion that the domestic transaction value is to be accepted as the assessable value, due consideration has not been given to the arguments regarding alternate method of valuati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n September 2005 M/s USV converted a part of their unit into our hundred percent EOU. Prior to this conversion they were using the job work facility available under Central Excise law. After conversion they applied for job work permission under EOU scheme. The said permission was granted some time in 2006. There were also periods in subsequent years when their job work permission under EOU scheme was not available and hence they were unable to clear the goods for reprocessing without payment of duty under job work scheme. During these periods, when they did not have the permission under job work they cleared the goods on payment of duty. 2.2 Prior to September 2005 M/s USV had entered into an agreement with M/s Sulakhi about the terms of the transaction. The said contract dated 2 September 2003 contained following notable clauses 2. Duration: 2.1 This Agreement shall come into effect from the 1st day of May 2003. Subject to the provisions of clause 13 hereof, this agreement shall remain in force for a period of 10 (ten) years from the effective date and may be renewed thereafter by the parties hereto for such further periods and on such terms and conditions as may be mu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he said Processed Product is quantity confirming to the technical information including the specifications provided by the company. In case the recovery is less than the agreed percentage of 63%, the processor shall be liable to reimburse to the company the value of such short delivery of the said processed product calculated at ₹ 25 per Kg or the then prevailing market rate of the said Processed Product whichever is higher. 5. Processing: 5.6 In the event of the said Processed Product giving a yield which is less than the yield specified, then and in such an event, without prejudice to any other right and remedy that the Company may have, the Processor shall be liable to make good the shortfall in the yield in such manner that may be directed by the Company from time to time. In such an event the company will adjust the value of such shortfall in the product to be calculated at its prevailing price, from any amount due and or payable to the processor and the company will have charge on all (tangible/intangible) belonging to the Processor against all amounts due from the processor. 8. Processing charges: 8.1 The Company shall pay to the Processor, the proc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hall not absolve or relieve the processor from any liability, which the company may have incurred under or by virtue of this agreement. The termination or sooner determination of this agreement for whatever reason shall be without prejudice to any claims or rights of the action accrued prior to such termination or determination to the company against the processor. 2.3 There was however, no such agreement recovered in respect of M/s Sahastra and M/s Sangadeep. The new EOU unit continued to make clearances of spent material for reprocessing to the aforesaid units. Since for certain periods there was no job work permission available under EOU scheme the spent material had to be cleared on payment of duty. M/s USV started clearance of spent material at following assessable value: Spent DMF ₹ 5 per KG Spent DMF and IPV mix ₹ 7.5 per KG The reprocessed material was brought back by M/s USV at following cum duty rates DMF ₹ 26 per KG IPV ₹ 35 per KG The spent material consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s sought to be changed by resorting to residual rule 8 of CVR 1988 or rule 9 of CVR 2007. To arrive at the assessable value of the goods the notice attempts to calculate backwards from the assessable value of the prime material imported at the material time. To arrive at the assessable value of the spent material by employing residual method of calculation was made of the spent material required and the processing costs paid to the processors. 2.7 The Commissioner dropped the proceedings under the show cause notice. The Commissioner observed that there are 4 issues which need to be decided and listed them as follows: Thus, the questions to be decided is: (i) Whether the spent IPA+DMF mixture and spent DMF are excisable goods and attract central excise duty. If so, whether the exemption under Notification No.23/2003 is available to the noticee. ii) Whether the assessable value determined by the noticee is correct or it is required to be determined as proposed in the notices. iii) Whether the extended period invoked for demanding duty is justifiable; and iv) Whether penalty is imposable as proposed under various clauses in the notices 2.8 On the first ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is claimed that since the respondents have supervised the activities and the processors premises and because the sale and purchase of goods are interlinked and dependent on each other, the sale price is not free and independent and therefore the respondents have not correctly determined the value per Customs valuation rules of 1988 or 2007. 3. On the basis of above, it was prayed that the order in original be set aside. 4. Learned AR argued that Commissioner has confused if the transaction between the respondents and the processor is that of a job work or that of sale. He argued that as per loan licensee agreement para 4.1 to 4.5 of the said agreement (reproduced in part in para 2.2 above) it is clear that the transaction between the respondent and the processor is that of a job worker and not sale. 4.1 It was also argued that the said agreement was reached between the parties before the said unit was converted to an EOU unit. It was argued that the processing charges remain the same. In this regard he brought our attention to parts of Para 5,8,9 and 11.2 to 11.5 of the agreement (reproduced in para 2.2.above). 4.2 Learned AR brought our attention to the various state ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. (EOU) or reprocessed DMF manufactured out of the said Crude DMF to any other party other than M/s.USV Ltd. (EOU) Q.22 Why have you paid excise duty on supply of Crude/Spent DMF to M/s.Sulaki Chemicals Pvt. Ltd. and M/s.Sahastra Chemicals during the period from September 20005 to March 2006 and September 2006 though the said Spent/Crude DMF is sent to M/s.Sulaki Chemicals Pvt. Ltd. and M/s.Sahastra Chemicals on job work basis? A. We have paid excise duty on supply of Crude/Spent DMF to M/s.Sulaki Chemicals Pvt. Ltd. and M/s.Sahastra Chemicals during the period from September 2005 to March 2006 and September 2006 though the said Spent/Crude DMF is sent to M/s.Sulaki Chemicals Pvt. Ltd. and M/s.Sahastra Chemicals on job work basis because after conversion of M/s.USV Ltd. into 100 per cent export oriented unit from 01/09/2005 we did not have job work/sub-contracting permission, as required, from Central Excise Department. Q.No.26 Is it true that technical personal of M/s.USV Ltd. regularly visit the job workers premises viz., M/.Sulaki Chemicals Pvt. Ltd. and M/s.Sahastra Chemicals to supervise quality control and to check stock position of Crude/Spent and re-proc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etermined in accordance with the provisions of Customs Act, 1962 and Customs Tariff Act, 1975 as the same is being dealt with by Commercial Department of the factory housed in Mumbai Office. I have to consult this matter with my superior officers of Commercial Department viz. Shri DA Pandit, General Manager (Commercial) and Shri Vijay Dhanawade, Purchase Department Head. I will reply you on this after making discussions withboth the above named officers as I do not know the fact. Q.No.6 Is it true that prior to conversion of M-3 Plant into EOU you have supplied Crude DMF to M/s.Sulaki Chemicals Pvt. Ltd., and M/s.Sahastra Chemicals on job work basis for reprocessing of DMF by way of distillation considering the price of Crude/Spent DMF @ ₹ 21/- per Kg? A. Yes; it is true. Q.No.9 Is it true that while 100% of Crude/Spent DMF sent to M/s.Sulaki Chemicals Pvt. Ltd. and M/s.Sahastra Chemicals is returned back by them after reprocessing to M/s.USV Ltd. at Lote, the price charged by them (M/s.Sulaki and M/s.Sahastra) is ₹ 22/- to ₹ 24/- per kg? A. Yes; it is true. Q.No.15 Can you explain as to why the sale transaction was carried out by issue o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was sent for job work outside the factory of USV the price was ₹ 21/- per kg. however, when the same material viz., Spent/Crude DMF is sold on invoice during the period from September 2005 to November 2006, the price is shown as ₹ 5/-per kg. Please explain for the sudden steep variation in the price. A. I would like to state due to mistake the price of re-processed material was being shown on job work challans prior to 01/09/2005 for many years as ₹ 21/- per kg. If one goes through the current cost construction of the same material being sent on the job work basis, it can be seen that the price of reprocessed DMF comes to around ₹ 21/- per kg. considering the price of Spent/Crude DMF as ₹ 5/- per kg. and job charges as ₹ 8.70 per kg. and yield of pure DMF as 63%. Q.No.4 Please state as to whether have you obtained Cost Certificate from the competent authority for determination of assessable value of Spent/Crude DMF and IPA+DMF Mixture removed out of factory USV-EOU during the period from September 2005 to November 2006. A. In view of my reply to Question No.2 above, there was no need to obtain Cost Certificate from competent auth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent IPA+DMF Mixture? A. We do not have any contract with M/s.USV Ltd. (DTA unit EOU) Q.No.6 What is your relationship with M/s.Nayomi Chemisol, Mumbai? A. M/s.Nayomi Chemisol is our sister concern and a partnership firm. I am one of the partners in M/s.Nayomi Chemisol. The other two partners in the firm are my brother Shri Vaibhav Atul Shah and aunt Mrs.Sangeetha S Shah. Q.No.7 Do you know what M/s.Nayomi Chemisol does with the processed/purified/distilled IPA and DMF sold by you to them? A. As replied above, processed/purified/distilled IPA and DMF sold by M/s.Sangdeep Acid Chem Pvt. Ltd. to M/s.Nayomi Chemisol is further sold back to M/s.USV Ltd. (DTA Unit EOU) Q.No.10 Whether do the officials of M/s.USV Ltd. visit your factory for verification of stocks as well as supervision of process and quality control of purification/distillation process of Spent/Crude IPA+DMF Mixture? A. No. Q.No.11 Who does determine the price for Spent/Crude IPA+DMF Mixture purchased from M/s.USV Ltd. (DTA unit EOU)? A. M/s.Sangdeep Acid Chem Pvt. Ltd. determine the price for Spent/Crude IPA+DMF Mixture purchased from M/s.USV Ltd. (DTA unit EOU) based ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. but considering the quality of the spent material received from M/s.USV Ltd., the rate quoted for re-purchase of pure IPA and pure DMF, we sell this material back to M/s.USV Ltd. So, if there is any restriction of any kind that is of quality and rate of the material purchased and sold back to M/s.USV Ltd. Q.No.20 Do you agree that purity of the processed/distilled/purified IPA and DMF is the same with that of other pure IPA and pure DMF sold by original manufacturers in the market? A. Yes; I do agree. 4.5 Learned AR brought our attention to the decision of Tribunal in case of Morarjee Brembana Ltd Vs. CCE, Nagpur - 2003 (154) ELT 500 (Tri-Mumbai), wherein it has been held that for clearance from an EOU sale price charged to a customer in India cannot be held to be a price in the course of International Trade. 4.6 The said decision of Tribunal has been upheld in the Supreme Court in the case of CCE, Nagpur Vs. Morarjee Brembana Ltd., reported in 2015 (318) ELT 600. In the said decision the Hon Supreme Court has held as follows: 9. Mr. Radhakrishnan has, however questioned the aforesaid view of the Tribunal and argued that since the respondent is hundred p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y held that the sale price charged to customer in India of the goods under assessment cannot be considered as a price in the course of International trade. To this extent we do not find fault with the view taken by the Tribunal. 12. As pointed out above, if Rule 4 is not applicable, the valuation of the goods has to be arrived at by applying Rules 5 and 8 in sequential order. It is here, as noted above, the Tribunal fell in error as applicability of Rules 5 and 6 depended on certain factual aspects which had to be gone into. The Tribunal has made certain observations on facts but without any material before it. 4.7 On the basis of the above evidence and citations, the learned AR vehemently argued that there is a strong evidence to prove that the purchase and sale prices between the respondents and the processors are interlinked and dependent on each other and should be rejected as a normal sale price. 4.8 On the issue of revenue neutrality, the learned AR, argued that this principle is not applicable to current situation as the respondents and the processors are two different entities. In this regard he pointed out to the decision of five member bench of Tribunal in ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce may be had to the judgment of the Apex Court in the case of Usha Rectifier Corporation (I) Ltd. (supra), whereunder the Apex Court has held that where the assessee had not disclosed the fact of manufacturing of the goods to the department and the knowledge of manufacture came to be acquired by the department only subsequently and in view of non-disclosure of such information by the assessee and suppression of relevant facts would rightly result in invocation of extended period of limitation. (Reference paragraph no. 12). 36. Similarly in the case of Commissioner of Central Excise, Visakhapatnam v. Mehta Company (supra), the Apex Court has explained that where the excisable goods are removed without payment of proper duty of excise, it is explicit that there was an intention on the part of the assessee to evade the payment of duty. (Reference paragraph no. 22). 37. The Division Bench of the Gujarat High Court in the case of Commissioner of Central Excise v. Neminath Fabrics Pvt. Ltd. (supra) has explained that proviso to Section 11 comes into play only when suppression etc. is established or stands admitted. (Reference paragraph no. 18). 38. So far as the judgme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : 6. As regards the question of limitation, we find that the SCN dt. 3-4-02, 20-9-02, 13-3-03 and 11-9-03 are within normal limitation period. It is only the first show cause notice dt. 28-3-01 in respect of period from 1-9-2000 to March 01 which has been issued by invoking the extended period which in our view would be available to the Department, as the details of the respondents contract with the buyers were never disclosed to the Department. In the said decision it has been held that where the contract between the respondents and the buyer s has not been disclosed to the Department extended period can be invoked. 5. Learned Counsel for the respondent asserted that the material being cleared is spent material, that is to say, it is a waste material and hence no central excise duty can be levied on this material. In support of his claim he cited Tribunal or decision in case of Aurobindo Pharma Ltd. (2006 (200) ELT 236) wherein it has been held that the spent solvent cannot be considered as goods and therefore no central excise duty can be charged on the same. He also pointed out that the said decision of Tribunal has been approved by the Honble Supreme Court (2011 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to substantiate the allegation in support of invoking extended period following allegations have been made: i) The respondents have not declared their arrangements regarding reciprocal and conditional sale and purchase of goods to the Department. The Department was not made aware of the fact that hundred percent of the material by the processor has to be supplied back to the respondents. ii) They have not declared the purity of the material sent by them to the processors iii) They have not informed the Department that they are supervising quality control and the premises of the processor iv) The respondents have not declared that processors are doing job work for them and have 2 sell back the reprocessed material to the respondents leading to missed declaration of Price in order avoid payment of excise duty. 5.8 He asserted that there is no requirement for declaration of the purity of materials cleared or their arrangement with the processors. He asserted that when there is no requirement of any declaration no allegation of misdeclaration or suppression can be made. He asserted that Commissioner has also in an order (para 23) observed that the activity of res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... behalf by Development Commissioner, or the Board of Approval or the Inter Ministerial Standing Committee, as the case may be, on payment of appropriate duty of excise leviable thereon under Section 3 of the Central Excise Act, 1944 (1 of 1944) or where such finished goods (including by products, rejects, waste and scrap) or, services are cleared to the warehouse appointed or registered under notification of the Government of India in the Ministry of Finance (Department of Revenue) No.26/98-Central Excise (NT) dated the 15th July 1998 or No.46/2001-Central Excise (N) dated the 26th June 2001 or cleared to the warehouse authorised to carry out manufacturing process or other operation under Section 65 of the Customs Act, 1962 (52 of 1962) and under the Manufacture and other operations in warehouse regulation, or cleared to the holders of certificate from Apparel Export Promotion Council and Council for Leather Export for duty free imports as referred to in clause (e) of the paragraph 6.9 of the (Foreign Trade Policy) without payment of duty: Provided that where such finished goods (including rejects, waste, scrap remnant and by products), if imported are leviable to nil rate of d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tended period can be invoked in the second notice. 6.3 on the issue of revenue neutrality the learned AR pointed out that the law limits the availability of CENVAT credit of duty paid by an EOU. He pointed out that rule 3 (7) of CENVAT credit rules restricts the availability of credit of duty paid by an EOU as follows 3(7) Notwithstanding anything contained in sub-rule (1) and sub-rule (4), - (a) CENVAT credit in respect of inputs or capital goods produced or manufactured, by a hundred per cent. export-oriented undertaking or by a unit in an Electronic Hardware Technology Park or in a Software Technology Park other than a unit which pays excise duty levied under section 3 of the Excise Act read with serial numbers 3, 5, 6 and 7 of Notification No. 23/2003-Central Excise, dated the 31st March, 2003 [G.S.R. 266(E), dated the 31st March, 2003] and used in the manufacture of the final products or in providing an output service, in any other place in India, in case the unit pays excise duty under section 3 of the Excise Act read with serial number 2 of the Notification No. 23/2003-Central Excise, dated the 31st March, 2003 [G.S.R. 266(E), dated the 31st March, 2003], shall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red as the price in the course of international trade. The appellants contention that the FOB price for the export of goods of similar nature varies from country to country also has considerable force. It is well known that the manufacturer is able to realize higher amount for sales made to developed countries like America, UK, France etc. and the same amount cannot be realized for identical goods when the exports are made to underdeveloped countries like Bangladesh, Malaysia, Similarly the value under Rules 5 6 cannot be determined in view of the peculiar nature of the product. The value of the fabric not only depend upon the quality of yarn, count of yarn, but also on the design of fabric, colour etc. Therefore it is very difficult to establish the similarity of the imported fabrics and the fabrics manufactured by the appellants Rule 7 is meant for computing the value when the imported goods are sold in India. As per the provisions of the said rule form the sales price certain expenses and profit is required to be deducted. Further the duty and taxes payable by any importer in normal course of importation is required to be deducted. It is already observed in the above para ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut it cannot be the basis to arrive at the assessable value. Thus any reliance on local sale price is totally misplaced. To that extent the order of the Commissioner needs to be set aside. 7.2 The next issue to be decided is if there was a contract between the respondent and the processors. During investigations of contract between one party and the respondents was recovered. In terms of the contract with M/s Sulakhi Limited it is clear that it is valid for 10 years from 1 may 2003 as per clause 2.1 and 11.2 of the agreement. It prescribes in paragraph 4 that the material supplied by the respondents to the processor would be the property of the respondent, proper records of the raw materials will be made and reported to the respondents by the processes. It described in paragraph 4 and 5 that the product will be of a particular specification, failing which the processor has to pay damages. The agreement also fixes the processing charges for the job. There was however, no such agreement recovered in respect of M/s Sahastra and M/s Sangadeep. During the examination of various employees of the respondent and one of the processors following has emerged. 7.2.1 As per statement of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d a part of our unit as EOU and they were required to remove Spent/Crude DMF for reprocessing to M/s.Sulaki Chemicals and M/s.Sahastra Chemicals. They have been doing this for last few years on job work basis without payment of duty; however, on conversion into EOU, they were not able to remove such Spent/Crude DMF without specific job work permission from C.Ex. Deptt. Since they could not stop removal of spent/Crude DMF for reprocessing, they had no alternative but to remove such material for reprocessing making sale purchse transactions. At this point of time we invited quotations from M/s.Sulaki Chemicals as well as M/s Sahastra Chemicals and based on the quotes, they froze the sales price at ₹ 5/- per kg. of Spent DMF. Subsequently, the job workers placed Pos for purchase of such Spent/Crude DMF @ ₹ 5/- per kg. So, as per PO placed by these two units, they have cleared Spent/Crude DMF @ ₹ 5/- per kg. The same is the case in case of determination of assessable value of IPA+DMF Mixture removed by them. He also clarified that due to mistake the price of re-processed material was being shown on job work challans prior to 01/09/2005 for many years as ₹ 21/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de IPA+DMF Mixture. There is no written or unwritten restriction from M/s.USV Ltd. but considering the quality of the spent material received from M/s.USV Ltd., the rate quoted for re-purchase of pure IPA and pure DMF, they sell this material back to M/s.USV Ltd. So, if there is any restriction of any kind that is of quality and rate of the material purchased and sold back to M/s.USV Ltd. He further clarified that purity of the processed/distilled/purified IPA and DMF is the same with that of other pure IPA and pure DMF sold by original manufacturers in the market. 7.3 None of these statements have been retracted. From these statements it is apparent that the price at which spent goods were being cleared from the respondents premises was linked to the price at which the processed goods were to be sold back to the respondents. This is clear from the statements recorded and from the terms of the contract. In the circumstances it cannot be said that the price negotiated between the respondent and the processors was price determined on an arms length. The price of spent goods was directly linked to the price of the processed goods received back from the Processor. There may or may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egarding the method adopted in the show cause notice which have not been answered in the order of Commissioner as he has accepted the domestic sale price as the assessable value. 8 The Commissioner in his findings on the issue of limitation has relied on the revenue neutrality. The learned AR brought to our attention that the processor and the respondents are two different legal entities. He cited the decision of the larger bench of the Tribunal in case of Jay Yushin2000(119)ELT 718, where in paragraph 13 (c), it has been held that With particular reference to MODVAT scheme (which has occasioned this reference) it has to be shown that the revenue neutral situation comes about in relation to the credit available assessee himself and not the buyer of the assessee s goods 8.1 Moreover he rightly pointed out that the Cenvat credit rules limit the amount of credit available in respect of duty paid by EOU and therefore credit of entire duty is not available to the processor and hence it is not the revenue neutral situation. From the above it is clear that it is not a case of revenue neutral situation and Commissioners observation regarding with any neutrality is misplaced. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eunder with an intent to evade the demand of duty as would be covered by Clauses IV and V of Section 11A(1) of the Act, 1944. Therefore, the invocation of the extended period of limitation in the facts of the present case is fully justified. 35. Reference may be had to the judgment of the Apex Court in the case of Usha Rectifier Corporation (I) Ltd. (supra), whereunder the Apex Court has held that where the assessee had not disclosed the fact of manufacturing of the goods to the department and the knowledge of manufacture came to be acquired by the department only subsequently and in view of non-disclosure of such information by the assessee and suppression of relevant facts would rightly result in invocation of extended period of limitation. (Reference paragraph no. 12). We find that in this case too the responsibility of arriving at correct assessable value is of the respondents. The respondents have claimed that they had no responsibility to declare the arrangements or the contract between them and the processors. In this case too the facts were discovered during investigations. These facts had a bearing on the determination of the assessable value. Under the circumstan ..... X X X X Extracts X X X X X X X X Extracts X X X X
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