ORDER
Jyoti Balasundaram, Member (J)
1. The above appeals arise out of the order of the Commissioner of Central Excise, Kanpur confirming the duty “demand of Rs. 1,24,74019.76 P. against M/s Plus Cosmetics Pvt. Ltd. (hereinafter referred to as PCPL) on the basis that the price at which M/s Corona Cosmetics and Chemicals Ltd. (hereinafter referred to as CCCL) sold detergent cakes and detergent powder supplied to them by PCPL, to independent buyers in the course of wholesale trade is the normal price of PCPL, treating CCCL as a favoured buyer of PCPL, imposing a penalty of Rs. 10 lakhs on PCPL and penalty of Rs. 5 lakhs on CCCL, penalty of Rs. 2 lakhs on Shri P.A. Kharwadkar, Managing Director of PCPL, and a penalty of Rs. 50,000/- on Smt. P.P. Kharwadkar, Director of PCPL. The period of demand is July 1989 to January 1995.
2. The facts of the case are that PCPL is engaged in the manufacture of ‘Plus’ brand detergent cake and powder while CCCL is engaged in the manufacture of ‘Plus’ brand detergent cake only. CCCL was paying duty at full rate while PCPL was paying duty on full rate on ‘Plus’ brand detergent cake at a concessional rate of duty in terms of Notification No. 175/86 as amended on ‘Plus’ brand detergent powder on the basis that CCCL is the brand name owner of Plus detergent cake while PCPL is the owner of Plus brand detergent powder and is a small scale industrial unit registered with the Directorate of Industries.
3. Investigations conducted by the Department revealed that PCPL was the brand name owner of Plus detergent cake and powder, and that if the production and clearance figure of both the items are added together, PCPL had crossed the ceiling limit of Rs. 200 lakhs stipulated under Notification 175/86 and was therefore, not entitled to avail of the benefit of concessional rate of duty available therein. It also appeared that PCPL sold the entire quantity of detergent cake and from December 1975 to May 1992, the total quantity of detergent powder manufactured by them and supplied to CCCL and in turn, CCCL used to sell the same to independent buyers at higher prices. After May 1992, PCPL started marketing Plus detergent powder by themselves. The Department further found from the scrutiny of the records that Mr. and Mrs. Kharwadkar were the promotee directors of both the companies i.e. PCPL and CCCL and that CCCL had given an unsecured loan of Rs. 3 lakhs free of interest to PCPL and that CCCL was making payments to suppliers on behalf of PCPL; that CCCL sold a very large quantity of acid slurry (raw material for manufacture of final product) during the year 1992-93 from which it was gathered that CCCL is not an independent buyer but a favoured buyer of PCPL and therefore, the price at which PCPL sold goods to them cannot be treated as the sole consideration. It appeared that the price at which CCCL sold goods to independent buyers in the course of wholesale trade was the normal price of the goods in the question, as per the provisions of Section 4 of the Central Excise Act, 1944 and duty was required to be levied and collected from PCPL at the assessable value of CCCL. The Department was also of the view that PCPL had wrongly availed of the concessional rate of duty under Notification 175/86 on detergent powder on the basis that the brand name of the detergent cake also belonged to PCPL and therefore, clubbing the clearance of detergent cake and detergent powder, the ceiling limit prescribed under the notification would be exceeded. In view of the above, show cause notice was issued to PCPL proposing recovery of differential duty and imposition of penalty and notices were also issued to CCCL, Shri P.A. Kharwadkar and Smt P.P. Kharwadkar proposing imposition of penalty. The notices were adjudicated by the Commissioner of Central Excise, Kanpur who extended the benefit of Notification 175/86, accepting the contention of PCPL that the brand Plus detergent cake belonged to CCCL and hence clearances of Plus detergent cake were not required to be clubbed with the clearances of Plus detergent powder manufactured by PCPL as per Para 7 of Notification 175/86. However, he held that CCCL was a favoured buyer of PCPL and that therefore, the price at which CCCL sold the goods to independent buyers was to be adopted, as the price for the goods manufactured by PCPL and sold to CCCL. He accordingly confirmed the duty demand on this score and imposed penalties as indicated in the opening paragraph of this order. Hence these appeals.
4. We have heard Shri M. Chandrasekharan, learned Senior Counsel who mainly contends that none of the factors based on which the Revenue has held that CCCL is a favoured buyer of PCPL are sufficient, either individually, or cumulatively to support such conclusion and Shri K. Srivastava, learned DR who in addition to reiterating the findings of the Adjudicating authority, relies upon the Tribunal’s decision in the case of Pratibha Chemicals Final order 1367-71/98-A, dated 9-10-1998 1999 (106) E.L.T. 119 (Tribunal) wherein the Tribunal has upheld the charge of CCCL being a favoured buyer of Pratibha Chemicals on identical grounds, and upon the decision of the Hon’ble Supreme Court in the case of Calcutta Chromotype Ltd. v. Collector reported in – 1998 (25) RLT 866 (S.C.).
5. We have considered the rival submissions and perused the records. The facts based on which CCCL has been held to be a favoured buyer of PCPL are as follows:
(a) Mrs. and Mr. P.A. Kharwadkar were the Promoter Directors of CCCL and PCPL.
(b) Both the above promoters and their HUF have given unsecured loans to PCPL.
(c) PCPL have further taken unsecured loans from the group companies controlled by the said promoters. The detailed modus operandi in regard to Corona Investment Pvt. Ltd. is discussed in Para 7(a) to the notice.
(d) CCCL who are the sole buyers of PCPL have provided Rs. 3,00,000/- as unsecured loan free of interest to PCPL as part of working capital.
(e) CCCL provided acid slurry (almost full requirement of PCPL) valued at Rs. 2,62,37,348/- and Rs. 3,02,50,013/- in the year 1991-92 and 1992-93 respectively to PCPL. No payments were made by PCPL on bill to bill basis for acid slurry but these were adjusted against the sales of detergent powder and cake to CCCL. This arrangement helped PCPL in reducing its interest bearing borrowings thus lowering its production cost. The benefit flowed to CCCL who are the exclusive customers.
(f) CCCL made payments to the suppliers of PCPL on their behalf from time to time for which they raised debit notes on PCPL. This also helped PCPL in reducing its interest bearing borrowing from other sources.
(g) For meeting day to day requirements, as discussed herein above, CCCL provided cash to PCPL.
(h) Advertisement and sales promotion activities were carried out for Plus branded excisable goods by CCCL. As the brand name was owned by PCPL, such expenses should have been incurred by PCPL and were includible in the assessable value for the purpose of levying excise duties under Section 4 of the Central Excise Act, 1944 thus the arrangement devised helped CCCL in promoting sales.
(i) Research and development work for Plus detergent powder was done in the lab. of CCCL.
(j) CCCL used the brand name ‘Plus’ for detergent cake owned by PCPL but did not pay any royalty to them.
FINDINGS:
Factor (a): We find that in respect of (a), the adjudicating authority has held that commonness of Directors does not establish the relationship of favoured buyer and therefore, he has accepted that factor (a) is not relevant for the purpose of holding that CCCL is a favoured buyer of PCPL. Further, it is a fact that Shri P.A. Kharwadkar resigned as Director of Plus Cosmetics within two months of his appointment (He was appointed Director of PCPL on 25-11-1987 and resigned on 21-1-1988) while Mrs. P.P. Kharwadkar resigned as Director of CCCL on 1-1-1992 (She was appointed Director on 25-1-1984).
Factors (b, c & d): It has been held by the Adjudicating authority that the giving of unsecured loans of Rs. 3 lakhs free of interest by CCCL to PCPL and giving of unsecured loan by Shri & Smt. P.A. Kharwadkar HUF and also interest free loan to PCPL by Carona Investments (which is also controlled by Kharwadkar family) is a financial arrangement evidencing pecuniary interest in the business of each other. We however, hold that giving of interest free loan by CCCL or its group of companies to PCPL does not make them related persons unless they are independently shown to be having interest in the business of each other, following the ratio of the Tribunal’s order in the case of International Computer India Manufacturing Company Ltd. v. Collector of Central Excise 1989 (41) E.L.T. 287.
Factor (e): The appellants claim that CCCL were not the only suppliers of acid slurry to PCPL and that other manufacturers of acid slurry were supplying the same to PCPL and similarly CCCL was supplying acid slurry to other customers also. This factual position has not been denied by the Revenue. The price at which CCCL sold acid slurry to PCPL was the normal wholesale price approved for wholesale trade. It is an established practice between any two companies who sell and purchase each other’s goods in the normal course of business that they maintained a running account of debit and credit at both ends and in the present case, PCPL did not make any payments on bill to bill basis for acid slurry supplied by CCCL but adjusted the payments against payments for sale of detergent cake to CCCL. Such adjustment does not by itself result in financial flow back to CCCL who are the exclusive customers for detergent cakes arid powder manufactured by PCPL.
The appellants claim before the adjudicating authority that no fortuitous payment was made to PCPL by CCCL has not been rebutted. Under these circumstances, we hold that purchase of acid slurry from CCCL and payment adjustment between CCCL and PCPL are not sufficient for holding that one is a favoured buyer of the other.
Factors (f) & (g): Payment by CCCL to PCPL’s suppliers for which CCCL raised, debit notes on PCPL and which were subsequently cleared by PCPL also is not a pointer to CCCL being a favoured buyer of PCPL, although this arrangement might have helped PCPL in reducing its interest borrowings from other sources.
Factor (h): The Adjudicating authority has accepted the appellants contention that the brand name ‘Plus’ belongs to CCCL (Internal page 22 of the impugned order). It therefore, remains to be seen whether the incurring of advertisements and sale promotion charges by the brand name owner would lead to the conclusion that CCCL is a favoured buyer of PCPL by helping PCPL to lower the cost of finished product. We find that it has been held by the Bombay High Court in the case of Chetan B. Thandani v. Union of India reported in 1987 (30) E.L.T. 287 (Bom.) that the mere fact that the goods manufactured bear the trade mark of the customer who purchases the entire production and all the advertisement expenses are incurred by the brand name owner, would not lead to the conclusion that the dealing between the two is not at arms length. In the case of Brakes India Ltd., Madras v. Assistant Collector of Central Excise, Madras 1988 (33) E.L.T. 654 (Mad.), the Hon’ble Madras High Court has held that payment of sales promotion expenses would not make a wholesaler a related person, and as long as the transaction is at a commercial price, it is that price which must be treated as the wholesale cash price. The ratio of these two judgments is squarely applicable in the present case and applying such ratio, we hold that the incurring of all sales promotion and advertisement expenses by CCCL does not make it a favoured buyer or related person of PCPL.
Factor (i): No finding has been recorded on this point.
Factor (j) : This point has been dropped by accepting the appellants contention that CCCL was the holder of the brand name ‘Plus’.
6. The Adjudicating authority has also relied upon the fact that an application for getting registration under the Copy Right Act 1957 was signed by Shri P.A. Kharwadkar as Managing Director of PCPL and that the Deputy Registrar of Copy Rights has addressed a communication to Shri P.A. Kharwadkar as Managing Director of PCPL, even when he was not the Managing Director of the Company, to conclude that this could only happen because Shri P.A. Kharwadkar was looking after the day to day affairs of PCPL and exercising overall control over its activities. We however, accept the appellants submission that this was due to a mistake and no significance can be attached to this.
7. None of the above factors either independently or cumulatively are sufficient to hold that transactions between CCCL and PCPL are not at arms length, or that the dealings were not based on normal commercial consideration, and that therefore, hold that the price at which PCPL sold detergent powder and cake to CCCL is to be treated as the normal price under Section 4(1)(a) of the Central Excise Act, 1944. The decision of the Tribunal in the case of Pawan Biscuits Co. 1991 (53) E.L.T. 595 relied upon by the adjudicating authority to hold that the assessable value of the goods sold by PCPL will be at the same price at which it is being sold from CCCL depots is distinguishable in as much as in Pawan Biscuits case, the Tribunal held that in the manufacture of biscuits by the appellants, Britannia Industries Ltd. who supplied the raw material exercised control, direction and supervision over Pawan Biscuits Company while in the present case, there is no such control, direction and supervision by CCCL over PCPL and therefore, the Tribunal’s judgment in the case of Collector of Central Excise v. Naga Detergent Ltd.. reported in 1995 (77) E.L.T. 100 wherein the Tribunal held that Tata Oil Mills Co. (TOMCO) who entered into an agreement with the respondents for manufacture and supply of detergent cakes under the brand name ‘Super 501’ was to be regarded as a wholesale dealer and the assessable value of the goods cleared by the respondents was to be determined under Section 4(i)(a) and not under Section 4(i)(b), would be squarely applicable. The Tribunal’s order in the case of Naga Detergent has been upheld by the Hon’ble Supreme Court, as seen from the report in 1996 (86) E.L.T. A-217.
8. Let us now deal with the decision of the Tribunal in the case of Pratibha Chemicals which has been relied upon by the learned DR. In this case after analysing the various factors cumulatively, the Tribunal came to the conclusion that both Pratibha Chemicals and CCCL are related persons within the meaning of Section 4(4)(c) of the Central Excise Act, 1944. The ratio of the above order can be made applicable to the proceedings at hand if the factors in the present proceedings are identical to those of Pratibha Chemicals. But we find that these factors are not identical. The factor of mutual share holding in the business of each other by M/s. Pratibha Chemicals and CCCL is conspicuously absent in the present case. We agree with the contention of the learned Senior Counsel that mutual share holding in the business of each other was itself sufficient for the Tribunal to come to the conclusion that Pratibha Chemicals and CCCL were related persons in terms of Section 4(4)(c) of the Act, as held by the Tribunal in the case of Alembic Glass Ltd. 1994 (73) E.L.T 579 and Escorts Tractors Ltd. 1998 (25) RLT 678. We note that while arguing the appeal of M/s Pratibha Chemicals the learned DR had specifically relied upon the judgment of M/s Alembic Glass Industry (supra) in support of his contention that holding of shares of one company by another and holding of shares of the latter company by the former, and common Chairman, and three Directors of both the Companies implied that both the companies were managed by the same management and one was the related person of the other. In Para 8 of the order of the Pratibha Chemicals case, the Tribunal has held that the fact that two companies had themselves shares in each other, places the matter in a different perspective. After noting this legal position and viewed in the context of commonness of Directors and promoter Directors and the part played by Shri Kharwadkar in instructing the UPFC about making direct payments to suppliers of equipment to PCPL, the Tribunal has held that share holding of the two companies is significant. In the present case, the vital link of mutual share holding in the business of each other by the two companies is absent and therefore, we hold that the ratio of the Pratibha Chemicals, order is not on all fours with the facts of the present case but is distinguishable as indicated above.
9. In the other case relied upon by the learned DR viz the judgment of Supreme Court in the case of Calcutta Chromotype, we find that the Tribunal had observed that there was an identity of interest between the appellants therein i.e. M/s Calcutta Chromotype and M/s Ganga Saran Pvt Ltd, its sole distributor, but the Assistant Collector had not considered the break up of shares of each member of the family of the manufacturer and distributor. The Tribunal had therefore, remanded the case to the Assistant Collector to look into the aspect of break up of shares of each member of the family and held that if the test of identity is satisfied, the Assistant Collector should confirm the order of demand. On appeal to the Hon’ble Apex Court by M/s Calcutta Chromotype, the Court, while reiterating the principle that lifting or piercing the corporate veil can be pressed in services in appropriate cases, did not entirely agree with the Tribunal’s findings in page 15 of its order. The Supreme Court agreed with the findings of the Tribunal to the extent, that they addressed themselves to the basic question as to share holding of both the assessee and the buyer as they found that the Managing Director of both the companies was the same and one more Director was common. It was also found that the shares of both the companies were held by members .of the ‘Sharma family’ but that was quite a vague expression and therefore, the Supreme Court held that the Tribunal was partly correct in directing the Assistant Collector to ascertain the break up of the shares of each member of the family in the two companies but; finally the Supreme Court allowed the appeal on the ground that for subsequent years, the Central Excise authorities had not treated Ganga Saran & Sons, the sole distributor, as a related person as well as the reason that the matter pertained to the year 1978 and therefore, no purpose would be served by enquiry into the share holding of the assessee and its sole distributor, as directed by the-Tribunal.
10. From the above, it is clear that the entire case proceeded on the basis that the shares of M/s. Calcutta Chromotype and its sole distributor were held by the members of the Sharma family i.e. persons who were related to each other and both the companies were having common Managing Director and further the appellant therein was selling goods with the brand name of its distributor namely M/s. Ganga Saran & Sons Pvt Ltd. The present case does not proceed on that basis. Although there was an allegation in the show cause notice that Mrs. & Mr. P.A. Kharwadkar were promoter directors, the same has not been relied on as one of the reasons for holding that there is a mutuality of interest between CCCL and PCPL. There was an allegation in the show cause notice that both the companies were having common directors and the entire sale was made by PCPL to CCCL. This factor has been held by the adjudicating authority as to be not sufficient for holding the two companies to be related persons within the meaning of Section 4(4)(c) of the Central Excise Act, 1944. There is neither any allegation in the show cause notice nor any finding in the impugned order that shares of both the companies were held by any individual or one family at was the position in the Calcutta Chromotype case. We therefore, hold that the Supreme court decision in the Calcutta Chromotype case is distinguishable and the ratio thereof would not apply in the facts of the present case.
11. In the light of the above discussion, we hold that the relationship between CCCL and PCPL was on a principal to principal basis and that the two companies are not related persons within the meaning of Section 4 of the Central Excise Act, 1944 and that CCCL is not a favoured buyer of PCPL and therefore, price at which PCPL sold goods to CCCL was the normal price in terms of Section 4. We therefore, set aside the duty demand as unsustainable. The penalty imposed on the appellants is also set aside in view of our findings on merits. We are not recording any finding on the appellants’ plea that the demand is barred by limitation, since we have held herein above that the transactions between the two companies were at arms length. In the result, we set aside the impugned order and allow the appeals.