ORDER
S.S. Sekhon, Member (T)
1. The appellant admittedly is a subsidiary company of M/s. Eureka Forbes Ltd., (hereinafter referred to as EFL) are inter alia engaged in the manufacture of water filter cum purifier with accessories of various models as also water cooler-cum-purifier. They entirely stock transfer the goods manufactured to their own depots situated in various states. From the depots the goods are sold to EFL and also to independent buyers.
2. Prior to 1.7.2000 since the department considered the Appellant by virtue of it being a subsidiary company of EFL and to be a related person of the Appellant, the Appellants were clearing the goods on an assessable value that was determined based on the retail price of EFL and after deducting the retailer’s margin and other admissible deductions.
3. After the amendment to Section 4 of the Central Excise Act 1944 w.e.f. 1.7.2000, the Appellants started clearing the goods based on the sale price at which the goods were sold to EFL.
4. Two show-cause notices dated 26.7.2001 and 22.11.2001 were issued to the appellants demanding differential duty duty of Rs. 1,87,41,973/- and Rs. 3,90,445/- respectively and proposing a penalty. The show-cause notices were based on identical grounds as follows:
Whereas it appears that M/s. APIC have contravened the provisions of Section 4 of Central Excise Act, 1944 read with Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 (herein referred as Valuation Rules 2000) and the erstwhile Rules 9(1), 173C, 173F and 173G of Central Excise Rules 1944 now Rules 4 and 8 of the Central Excise Rules (No. 2 of 2001) inasmuch as they have sold their goods to or through their related person namely M/s. Eureka Forbes Ltd., but failed to declare and adopt appropriate price at which these goods were sold by M/s. Eureka forbes Ltd., for the purpose of payment of duty resulting in under valuation of goods. Therefore it appears that the differential duty short paid is not only recoverable from them under Section 11A of Central Excise Act, 1944 but they also have rendered themselves liable for penalty under the Act and the Rules made there under valued the goods in contravention of the provisions of the Central Excise Act, 1944.
Now therefore M/s. APIC, Bangalore are required to Show Cause to the Commissioner of Central Excise, Bangalore 1 Commissionerate, C.R. Building, Queens Road, Bangalore as to:
1. Why it should not be held that the duty ought to be paid on the price at which their related person namely M/s. Eureka Forbes Ltd., sells the goods – Minus Taxes if any and Excise duty paid or payable on the goods determined in terms of Rule 11 of Valuation Rules, 2000 using means consistent with the principles and provisions of Rules 9 and 10(a) of Valuation Rules 2000.
5. The Appellants filed a detailed reply dated 24.10.2001 and an additional written submissions dated 14.2.2002 resisting the contention of the department. The Appellants contended that since the relationship had not influenced the price the valuation is to be based on Section 4(1)(a) only. Alternatively, the Appellants had submitted that if Rule 4 and Rule 7 of the Valuation Rules, 2000 is applied and the price at which the goods have been sold to the dealers is taken as the basis the assessable value would work out to be the one on which duty was paid by the Appellants.
6. The Commissioner vide his impugned Order-in-original confirmed the duty demand of Rs. 1,25,57,134/- and imposed penalty of Rs. 10,00,000/- after considering the case law cited. Hence this appeal.
7. The appellants have submitted.
A. 1 The first submission is that the new Section 4 of the Central Excise Act, the criteria that the relationship should influence the price is also present.
A.2 The very enactment of Rules 10(a) and 10(b) of the Valuation Rules, 2000 and the specific stipulation in Rule 10(a) that even between interconnected undertakings the two parties have to be related to each other in the manner prescribed in Section 4(3)(b) indicates that this condition continues to be very much available. This is also evident from the circular dated 30.6.2000 issued by the Central Board of Excise & Customs (paras 24 & 25 of he Circular)
A. 3 The enactment of Rule 10 of the Valuation Rules is a statutory recognition of the principles laid down in the following decisions.
a) UOI v. Kantilal Chunilal and Ors.
b) Cosmos (India) Rubber Works Pvt. Ltd. v. UOI
c) Hingorani Air Products v. CCE, Baroda
d) Dawn Apparels Ltd. v. UOI
e) Zerographers Ltd. v. CCE, Allahabad
f) Samtel Electron Devices Ltd. v. CCE
g) Samcor Glass Ltd. v. CCE, Jaipur
h) Beacon Neyrpic Ltd. v. CCE Madras 2001 (44) RLT 659
A. 4 In the instant case it is an accepted fact that sales are made both to related as well as unrelated parties. The difference in price on the goods sold to EFL and the unrelated buyers is about 30-32%; that during the period 2000-01 EFL had made a profit before tax of about 5.75% and the corresponding profit of the Appellants is about 6.08%.
A. 5 This would clearly indicate that the relationship between the Appellants and EFL has not influenced the price and therefore the transaction value should be accepted for the sales made to EFL.
A. 6 the other ground of the Commissioner to hold that the relationship had influenced the price is the difference between the prices. It is submitted that a mere difference in price that too of 30% which is in the nature of a discount cannot be considered as a vast difference so as to influence the price.
A. 7 It is submitted that in this case, the assessable value is sought to be determined under rule 11 under the best judgment assessment and while doing so the Commissioner ought to judge the correctness of the value and determine the same de hors the relationship.
A. 8 In the case of Metal Box India Ltd v. CCE, , the Supreme Court has held that where a bulk buyer lifts about 90% of the goods then he is to be treated as a favoured buyer and is eligible for a special trade discount. The Apex Court further held that bulk buyer and a small buyer fall in two different classes of buyers and that the bulk buyer was eligible for a discount of 50% which was not includable in the assessable value.
Alternative submissions made are….
B. 1 The impugned order has accepted that Rules 9 and 10 are not applicable in the instant case and the value cannot be determined in the manner indicated in the show cause notice (para 33.1 Page 19 of the order). The order has applied the provisions of Rules 4 read with Rule 7 of the Valuation Rules 2000 to consider the price at which the goods have been sold by the Appellants to the independent dealers for the purpose of determination of the assessable value. In doing so the Commissioner has considered various options like the sale price to independent dealers, compared it with the MRP of similar goods and has concluded that his sale price to the independent dealer should be the basis. After having done so, he has merely abated the taxes to arrive at the transaction value.
B. 2 The Commissioner ought to have while determining the assessable value based on Rule 11 considered the commercial levels of both the class of buyers. This is a factor that needs to be considered while determining his assessable value. Reliance in this regard is placed on the following decisions.
i) New Holland Tractors (India) Pvt. Ltd. v. CC
ii) CCE v. Ashok Leyland Ltd.
and on Penal action not sustainable they have submitted….
C. 1 The Commissioner has accepted the fact that the demand for duty has arisen only on account of interpretation of the Valuation Rules. The Commissioner has also observed that this is not a case of clandestine removal, willful evasion of duty, fraud or collision with intent to evade duty and that all the information about the transactions was within the knowledge of the department. The Commissioner has also accepted that penalty is not leviable unless there is clandestine removal or intent or attempt to evade or avoid payment of duty. Under these circumstances the action of the Commissioner in imposing penalty under Rule 173Q is unsustainable.
8. The learned SDR for the Revenue while reiterating the orders of the Commissioner took us specifically through the findings as arrived at in paras 21 to 31 of the impugned order and submitted that the Commissioner has very carefully considered and analysed the scope of the provisions of the new Valuation Rules and which principle of Valuation rules, he is applying when he is arriving at the “Best Judgment Assessment” under the provisions of the Rule 11 of the Valuation Rules. She took us through the various decisions and the considerations as to why the Commissioner has not relied upon the case laws cited. And thereafter it was submitted that the Commissioner has very categorically come to a conclusion that in the light of the provisions of Valuation Rule 4, read with. Valuation Rules and the principles thereunder the valuation is to be determined in this case under Rule 11 Para 33.2 of the impugned Order, extracted herein below was stressed upon….
33.2 In the light of long line of decisions, it is established in view of foregoing discussion that value in respect of sale to related person will be price at which such goods were sold to the independent buyer provided the said price is a normal transaction value not influenced in any way satisfying the ingredients of transaction value. Therefore, I conclude that provisions of Rule 4 of the Valuation Rules, 2000 read with Rule 7 ibid is applicable to arrive at the normal transaction value in relation to the sale to the related person based on the price of such goods sold by the assessee to an independent buyer at any other time nearest to the time of removal of the goods under assessment, and if necessary subject to adjustment on account of difference in the date of delivery of such goods and of excisable goods under assessment reasonably. Further, the quantum of the sale to the independent buyer is not relevant to decide the applicability of the Rule 4 and further the non-existence of the word “generally” in the Rule 9 as it existed in old Rule 6, make it clear that it is not necessary that there should be continuous sale and even the stray sale are enough. The only criteria remains in the applicability of the Rule 4 is that the price charged from the independent buyer should be the normal transaction value satisfying all the ingredients of Section 4 of the Central Excise Act, 1944. In this regard the assessee submitted that wholesale price to independent buyer should be adopted and being independent price in this connection they have submitted the particulars in Annexure and re-quantification of the duty. Therefore, now I proceed to deal with the said aspect of this issue.
The learned DR thereafter pointed out that in para 34 to 37 the Commissioner has considered what should be reasonable deductions and thereafter in para 38 which she read in extensio which is reproduced below, the Commissioner has quantified the demands considering the levy on certain models which were sold by the related persons to dealers and not in retail and relied upon by the appellants own calculations to quantify duty amounts of Rs. 1,23,04,147 and Rs. 2,52,987/- which are within and less than the demands proposed in the show-cause notices. Para 38 is as under:
38. In view of above decision, the demand of duty is to be requantified based on the price of such goods sold by the assessee to the independent customer. In this regard, assessee have submitted that while quantifying the duty in the first SCN, the department has considered the clearance of two goods namely Water Cooler cum Purifier and Water Purifier PG 600 for the month of December 2000 to February 2001 in the first SCN (SCN is restricted for the period from July to November 2000) as well as in the second SCN. Correcting the said mistake the assessee have submitted the re-computation of the duty in Annexure 2 and Annexure-3 and arrived at the transaction value from the price charged from the independent buyer with the abatement of 10.5% of Sales tax on average basis. To certify the average Sales Tax due to different rates of Sales Tax in different States, a certificate was submitted from the Chartered Accountant who certified that the average Sales Tax of 10.65% whereas the abatement claimed by the assessee was only 10.5%. The said average Sales Tax was also accepted by the Assistant Commissioner in the adjudication Order No. 83/98 dated 15.9.1998 and was also considered while demanding the duty in the present SCN. From the verification of the above quantification, a duty of Rs. 1,23,04,147/- in respect of the first SCN for the period from July to November 2000 and Rs. 2,52,987/- in respect of the second SCN from December 2000 to August 2001 for all the clearances from the factory is arrived at and liable to be paid by the assesset n terms of provisions of Section 11A of Central Excise Act 1944.
Thereafter the learned DR supported the findings of the Commissioner that the appellants were ‘negligent’ in conduct consequently low amounts of duties than that were required to be discharged were made. Penalty under Rule 173Q has therefore been correctly arrived at by the learned Adjudicator. In view of this she supported the order and pleaded that the appeal should be rejected.
9. We have considered the submissions and find:
a) The fact that the appellants are selling the goods to related person is not in dispute. It is also not in dispute that a substantial amount of the sale is to the related persons M/s. EFL. However sales to independent customers is also not denied and accepted in the notice itself. In this case, M/s. EFL are further selling the goods. However there is no sale of the goods at the factory gate. The goods in question, i.e. ‘Water Filter cum Purifier’ and ‘Water Cooler cum Purifier’ the different brands known as Aqua Guard Classic, 4Aqua Guard Royale, Aqua Guard Nova, forbes 3-in-1, Water Purifier PG 600 and Water Cooler-cum-purifier. There is no sale of above goods at appellants factory gate and all the goods were stock transferred to their depot situated in various states. From depots, the goods are sold to M/s. EFL, as well as to the independent customers. M/s. EFL, further sell the goods, namely Forbes 3-in-1, Water Purifier PG 600 and Water Cooler-cum-Purifier to wholesale independent dealers who sell the goods on ward in retail or otherwise. The other brand goods namely Aqua Guard Classic, Aqua Guard Royale and Aqua guard Nova are sold by M/s. EFL directly to the customer as per their net work marketing on door to door basis at a retail price. Therefore, from the above sale pattern, the sale of the goods by the assessee can be summed up in the following manner.
i) No sale at the factory gate but all the goods are stock transferred to their depots.
ii) From depots, the sale made of all the goods of M/s. EFL as well as to the independent distributors.
iii) M/s. EFL in their onward journey sell the goods namely Water Purifier PG 600, Water Cooler-Cum-Purifier and Forbes 3 in 1 to independent distributors.
iv) In respect of other three goods namely Aqua Gaurd Classic, Aqua Guard Royale and Aqua Guard Nova, M/s. EFL, did not sell the goods in wholesale but on retail basis directly to the customer.
b) From the above admitted undisputed issues and sale pattern of the assessee, the case, before us; is one of the valuation of the goods sold to the related persons with regard to the applicability of the Valuation Rules; following issues as advanced by the assessee in their defence.
i) The sale price to the related person is acceptable because the price was the sole consideration and not influenced by any relationship and therefore price charged form related person is a normal transaction value.
ii) Suitability and applicability of the provisions of Rule 4 and 7 of Valuation Rules’ 2000 as against Rule 9 ibid as alleged in the show cause notice.
iii) The wholesale price to the independent distributor of such goods is to be considered to arrive at the transaction value for related person.
iv) Penalty is not imposable in the facts and circumstances of the case.
c) Vide para 38 of the impugned order, which has been extracted (supra), it is apparent that in the impugned order clearances of two goods, namely water coolers cum purifier and water purifier PG 600 clearances which are resold to independent buyers in wholesale by the related person are not taken into consideration in the demands determined. This is in compliance with the provisions of Section 4 of the Central Excise Act, 1944 and the Valuation Rules, 2000. The demands are restricted, by resorting to Rule 11 read with the principles of Rules 4 & 7 of Valuation Rules 2000 only to determine the values and thereafter the duty liability therein on such goods which are sold by the appellants to M/s. EFL, which are in turn sold by them in retail, as found herein above. The question therefore is valuation and determination of duty on such goods which are not sold at the factory gate and by the related person in wholesale.
d) The Central Excise (Valuation Rules) 1975 provided for such a condition in Rule 6(c)(i), which reads as follows:
in a case where the assessee sell the goods to a related person who sells such goods in retail, in the manner specified in Clause (a) of this rule;
The rules now applicable in this case, namely Central Excise Valuation (Determination of price of Excisable Goods) Rules 2000 particularly Rule 9 and 10 thereof do not cover this situation, as covered in erstwhile Valuation Rule 6c(i).The proviso to the substituted Section 4(1) of Central Excise Act 1944 also does not provide for such a situation. Therefore valuation in such a situation has to be resorted for under the provisions of Rule 11 which reads as follows:
Rule 11. If the value of any excisable goods cannot be determined under the foregoing rules, the value shall be determined using reasonable means consistent with the principles and general provisions of these rules and Sub-section (1) of Section 4 of the Act
This rule has to be read with principles enunciated in Rules 1 to 10. The Commissioner has found that Rule 9 would not be applicable in the facts of this case. Principles of Rule 4 read with Rule 7 could be applied since the values as mentioned in Rule 4 i.e. value of goods sold by the assessee for delivery at any time which applies to valuation of goods sold to an independent buyer is available in this case and since goods are not sold at the factory gate in this case but are transferred to a depot, he has also taken the principles of Rule 7 of the new rules under consideration.
e) From a perusal of the grounds submitted by the learned advocate for the appellants, it is apparent that there is no basic grievance in determining the assessable value as arrived at. They are only contesting, in the submissions made before us that the, that the ‘commercial levels of both class of buyers have not been taken into consideration by the Commissioner’ and rely upon the case-laws to support that such consideration was required. A careful consideration of the submissions and the findings of the Commissioner, especially in paragraph 34 of the impugned order, it appears that the Commissioner concluded in para 34.1 that there is no contest as regards the price charged by the assessees from a independent customer to be not a normal transaction value. However, he proceeds to verify the genuineness of such prices and thereafter, concluded that the price satisfy the ingredients of the transaction value as per Section 4 introduced and applicable in this case. Thereafter in the subsequent paras 34.3 to 37 he has discussed why and what abatements were necessary and concluded that the deductions arrived at by him, as recorded in para 38 extracted (supra), were to be granted. In this view of the matter and the fact that the commercial level consideration and evidences thereto has not been adduced by the appellant before the Commissioner and or before us, we are not in a position to grant any further deductions from those arrived at by the Commissioner. Valuation under Rule 11 applicable is the “Best Judgment Assessment” of the value. It has to be based on certain logic and principles as contained in the Valuation Rules and Section 4. There is no doubt in our mind that the logic and the principles as contained in the valuation Rules and Section 4 have not been applied in this case. In absence of any material to grant further deductions if any on basis of ‘commercial level of transactions’, the benefit of the same cannot flow to the appellants. The appellants cannot be absence of any material evidence which they are required to produce claim such a determination on best on different ‘commercial levels’ they have to produce evidence; merely by making a statement and contest. A ‘Best Judgment Assessment’ is not permissible or available to them.
In this view of the matter we find no infirmity in or grounds made to assail the assessment made by the learned Commissioner in determining the valuations and the consequential demands of duties. In view of our findings arrived at by us we find no merits in the alternative plea recorded as A-I to A-8 of the appellants including the plea of non-cibsuderatuib if same level’ in grounds B. 1 and B. 2.
f) As regards submissions on penalty it is found that the Commissioner in para 43 of the Order has come to a conclusion that
This is not a case of clandestine removal, willful evasion of the duty, fraud, or collusion with intent to evade the duty….
and since the transactions were within the knowledge of the department, the mandatory interest under Section 11AB has not been demanded on the ground that there is no fraud, collusion or willful misstatement or suppression of fact or contravention of any of the provisions of the Act or the Rules made there under. In view of this, were cannot uphold the assessee liable for a penalty on the ground that “negligence though not mala fide, on the part of the assessee has been established which red to contravention of the provisions of the Central Excise Act and the Rules made there-under and further substantial amount of Central Excise duty was avoided on account of the misinterpretation by the assessee. Therefore, I concluded that the assessee is liable to a penalty under erstwhile Rule 173Q of Central Excise Rules, 1944” as arrived by the Commissioner to cause a visit of penalty and the above findings of the adjudicator are in conflict with the findings as arrived at, as regards the liability for mandatory’ interest under Section 11AB of the Central Excise Act. A perusal of paras 34, 44 and 45 of the Order exhibits this conflict in findings. These paras are the grounds on which such a large penalty has been arrived at. We cannot therefore uphold the penalty of Rs. 10 lakhs imposed on the grounds as arrived at by the learned Commissioner.
10. In view of our findings, the appeal is disposed of in the above terms.
Pronounced in open Court in 10.1.2003.