ORDER
T.K. Jayaraman, Member (T)
1. These appeals have been filed against the OIO No. 1/2005 dated 11.01.2005 passed by the Commissioner of Central Excise & Customs Belgaum.
2. The main appellant is M/s. Jindal Praxair Oxygen Company Limited., (known as JPOCL), Toranagallu. They manufacture gaseous and liquid Oxygen, Nitrogen and Argon which are excisable. M/s. JPOCL is a joint venture of M/s. Jindal Vijayanagar Steel Limited (known as JVSL), Toranagallu and M/s. Praxair Pacific Limited (known as PPL), Mauritius. The holding of PPL is 76% and that of JVSL is 24% in the joint venture. The unit was formed in 1995 and it commenced its production w.e.f. August, 1998. M/s. JPOCL is clearing about 95% of its production to M/s. JVSL. The remaining 5% is cleared to M/s. Praxair India Pvt. Ltd. a fully owned and 100% subsidiary of M/s. PPL. Revenue conducted certain investigations into the affairs of the appellant unit and came to the conclusion that they were indulging in under valuation of their final products. Show Cause Notice dated 1.08.2000 was issued for demand of duty to the tune of Rs. 14,63,51,143/- in the following manner:
i)
Differential duty as a result of
revision of gas prices during the period from 06/99 to 2/2000 (Annexure-I
&II)
Rs. 5,22,47,703.00
ii)
On account of receipt of additional
consideration in the form of power free of cost/at concessional rate etc.
during 5/99 to 2/2000 (Annexure-III & IIIA)
Rs. 8,64,68,553.00
iii)
On account of receipt of additional
consideration in the form of MTOP during the period from 10/99 to 2/2000
(Annexure-IV)
Rs. 76,34,887.00
Total:
Rs.
14,63,51,143.00
The extended period under proviso to Section 11A was invoked in the Show Cause Notice. After considering the submissions of the appellants, the then Adjudicating Authority passed an Order-in-Original No. 3/2001 dated 27.02.2001. The gist of the above order is given below:
(i) Confirmation of duty of Rs. 14,63,51,143/-
(ii) Appropriation of Rs. 3,04,71,194/- already paid by the appellants under ‘protest’ under Rule 233B of CE Rules, 1944.
(iii) Penalty of Rs. 14,63,51,143/- under Section 11AC.
(iv) Demand of interest under Section 11AB on the duty confirmed.
(v) Penalty of Rs. 1,00,00,000/- on M/s. JPOCL under Rule 173Q(1).
(vi) Penalty under Rule 209A on the following persons:
a) Rs. 1,00,00,000/- on Shri Sajjan Jindal, Chairman, M/s. JPOCL.
b) Rs. 50,00,000/- on Shri Inderjeet Mookerjee, Non-Executive Director, M/s. JPOCL.
c) Rs. 25,00,000/- on Shri Raaj Kumar, Managing Director, M/s. JPOCL.
d) Rs. 25,00,000/- on Shri V.S. Kumar, General Manager (Finance), and Company Secretary, M/s. JPOCL.
Aggrieved by the above order, the appellants approached the CEGAT. The GEGAT passed the Final Order No. 1421 to 1425/2002 dated 08.11.2002 remanding the case for de novo adjudication. Both the Members passed separate orders. The observations of the CEGAT in brief are as follows:
The under valuation as alleged in the Show Cause Notice is under the following heads:
(i) Price re-computation based upon: a) Project cost escalation and
(b) power cost escalation
(ii) Valuation of power supplied at KEB rate
(iii) Duty on MTOP payments
The following documents were relied on by the Revenue to allege under valuation.
(i) Memorandum of Understanding dated 27.01.1995, between Praxair Pacific Inc. USA and JVSL;
(ii) Pipeline Supply Agreement (PISA) dated 08.12.1995 between JVSL and JPOCL with the following amendments:
(a) First amendment to PISA dt. 15.01.1997 and
(b) Second amendment to PISA dt. 01.07.1999.
(iii) Product Supply Agreement (PRSA) dt. 1.6.96 with the following amendments:
(a) Supplementary Product Supply Agreement dt. 22.05.1998 and
(b) Second amendment to PRSA dt. 01.07.1999.
As per Article 8.1 of PISA, the base prices of the relevant products were as mentioned below:
i) For all
Gaseous Oxygen and Gaseous Nitrogen upto the maximum instantaneous production
rate as defined in Article 2.1:
Rs.
1.22/Nm3
ii) For
all Liquid Oxygen and Liquid Nitrogen:
Rs. 2.30/
Nm3
iii) For
all Gaseous Argon and Liquid Argon:
Rs.
30.0/Nm3
Article 8.3 of PISA provided for revision of prices of Gaseous Oxygen and Liquid Nitrogen on account of project cost variation.
Article 8.6 of PISA envisages revision of prices of Liquid and Gaseous products (Oxygen and Nitrogen) for the variation on account of the following factors:
(i) Cost of power
(ii) Wholesale price index and
(iii) Exchange rate (currency factor)
Therefore, in the normal circumstances with increase in project cost or power cost or other factors, the sale price should have been revised. Investigations revealed that even though the actual cost of project was 283.12 crores as on 1.7.1999, the appellants have considered only Rs. 227.32 crores as Project Cost resulting in lowering of gas price calculations. Revenue contended that Article 8.3 of PISA provides that cost price will increase by Rs. 0.01/Nm3 for each increase of Rs. 2.4 crores in the Project cost. The Project Cost increased to Rs. 283.12 crores w.e.f. Juy, 1999. However, the appellant and the buyer JVSL came to an understanding that project cost would be treated as 227.32 crores. In the Final Order Shri G.A. Brahma Deva, the Hon’ble Member (Judicial) observed as follows:
7. When the parties to a contract agree to substitute a new contract for it, the original contract is discharged and need not be performed. It is necessary for the application of this principle that the original contract must be subsisting and unbroken. When once they enter into a new contract with varied terms and conditions, which is called novation, automatically old contracts disappears and new contract emerges in its place. In the instant case, Clause was amended with reference to the determination of price and both the parties mutually agreed that project cost of Rs. 227.32 crores fixed for, applying price escalation formula. As long as contract is valid, it is only for the parties to enforce their rights and obligations under the respective contract.
Further, Shri Brahma Deva made the following observations on the above issue:
We are in total agreement with the arguments advanced on behalf of the parties that in ignoring the second amendment negotiated in good faith by the parties and in purporting to recompute the gas prices based upon the provisions of the original PISA as interpreted by the Commissioner and what he considered to be an increased project cost of the plant is erroneous. In the view we have taken, issue requires to be re-examined by the adjudicating authority to examine whether any additional consideration has been flown from the contract or otherwise during the disputed period apart from the fixed price as per contract and additional consideration, if any, same has to be added proportionately to the price in determining the assessable value.
In respect of the second issue, Shri Brahma Deva made the following observations while remanding the issue to the Adjudicating Authority.
11. As regards adopting notional KEB power rate as against actual cost of KEB, it was argued on behalf of the parties that there is a blatant error in determining the duty since the correct rate of power has not been taken into consideration while determining the duty liability. There is a gross error in taking the power cost escalation from Rs. 2.40 to Rs. 4.35/ unit and Rs. 8.02/ unit – KEB rate for industrial consumption as against Rs. 3.05 and Rs. 2.65/ unit reimbursed to JVSL by the appellants. It was also submitted that KEB itself has accepted the power from JVSL at Rs. 2.60/ unit with the approval of Government of Karnataka.
As regards the treatment of MTOP as additional consideration, the appellants argued vehemently citing various case-laws that they cannot be considered as additional consideration. This issue was also remanded to the Original authority for examination. The appellants contended that substantial portion of the demand was barred by time. In para 15 of his order, Shri Brahma Deva, has made the following observation:
15. It was also argued on behalf of the appellants that substantial portion of the demand was barred by time. Since we are remanding the matter to the concerned adjudicating authority, all the issues including limitation can be looked into by the adjudicating authority and to pass an appropriate order in accordance with law on providing an opportunity to the party. Thus these appeals are allowed by way of remand.
Consequent to CEGAT’s above mentioned order, the Adjudicating Authority passed the impugned order dated 11.01.2005. The gist of the impugned order is as follows:
(i) Demand of duty to the tune of Rs. 12,62,13,125/- in the following manner:
a. Facility charges
Rs. 5,22,47,703
b. MTOP charges
Rs. 76,34,887
c. Electricity charges
Rs. 6,63,30,535 (As per para 20)
Total
Rs. 12,62,13,125/-
(ii) Appropriation of the amount of Rs. 3,04,71,194/- which has been already paid.
(iii) Penalty of Rs. 12,62,13,125/- on M/s. JPOCL under Section 11AC.
(iv) Interest under Section 11AB on the duty confirmed.
(v) Penalty of Rs. 50,00,000/- on M/s. JPOCL under Rule 173Q(1).
(vi) Penalty under Rule 209Aon the following persons:
a. Shri Sajjan Jindal, Chairman, JPOCL – Rs. 25,00,000/-
b. Shri Inderjeet Mookerjee , Non-Executive Director – Rs. 10,00,000/-
c. Shri Raaj Kumar, Managing Director – Rs. 5,00,000/-
d. Shri V.S. Kumar General Manager (Finance) and Company Secretary – Rs. 5,00,000/-
The appellants strongly challenge the findings in the impugned order.
3. S/Shri Naganand, the learned Sr. Advocate, LP. Asthana, Muralidhar, learned Advocates, appeared on behalf of the appellants and Shri Bipin Kumar Verma, the learned JDR for the Revenue.
4. The learned Advocates urged the following points:
(i) The Commissioner has not applied his mind to the specific directions given by the CEGAT.
(ii) A substantial portion of the demand is hit by limitation. Though the CEGAT had specifically remanded the matter for examination of limitation also, the Commissioner failed to apply his mind and has made a cursory finding to the effect that he agrees with the findings in this regard of his predecessor.
(iii) The duty demand of Rs. 5,22,47,703/- in the first order was specifically set aside by CEGAT. In the impugned order, the Commissioner has made the very same demand, but on an entirely different and patently erroneous basis. The only findings in para 17 of the impugned order in which the Commissioner has found that two items viz. cost recovery charges received by the appellants during the period from July to September, 1999 and the facility fees received by them during the Show Cause Notice period are dutiable. He has however, erred in assuming that the duty liability in respect of these two items is Rs. 5,22,47,703/-. This is wrong. As per para 16(x) of the impugned order, the total cost recovery charges were admittedly Rs. 7.264 crores, the duty liability on which amounts to only Rs. 1,16,22,400/-, which itself was part of the admitted duty paid by the appellant vide PLA debit entry No. 1222 dt. 27.03.2000 referred to in the said paragraph. Likewise, as per para 16 of the impugned order, the full duty on the aggregate amount of facility fees received by the appellant for the entire Show Cause Notice period was only Rs. 41,38,667/-, which was also paid by the appellant on various dates in December, 1999 and January to March, 2000. The aggregate duty on both counts was thus only Rs. 1,57,61,067/-, all of which was admittedly been paid long before the issue of the Show Cause Notice. The basis for demand of duty amounting to Rs. 5,22,47,703/- is patently erroneous and is liable to be set aside.
(iv) In any event, the question of demanding duty on the cost recovery charges aforesaid does not arise under this item since the same duty on the cost recovery charges also forms part of the demand under the next item relating to power charges, as can be seen from column 5 of Annexure-IIIB attached to the impugned order, leading to patent duplication of amounts.
(v) As regards the differential duty of Rs. 6,63,30,535/- consequent to re-computation of power cost of the power received by the appellant from JTPCL and for which reimbursements were made by it to JVSL, the Commissioner’s order is arbitrary and does not disclose any proper basis and is only to be set aside on this ground alone. The power rate of Rs. 3.05 per unit adopted by the appellant for the period 1.7.1999 to 5.1.2000 and Rs. 2.65 per unit adopted thereafter could not be doubted as representing a proper value for the power received by the appellant. The Commissioner has ignored completely the fact that KEB itself was purchasing power from JTPCL at a rate of Rs. 2.60 per unit, pursuant to formal Orders and Notifications issued by the Government of Karnataka, which is even lower than the rate at which reimbursements were being made by the appellant to JVSL. This fact alone is sufficient to accept the power rate adopted by the appellant as an arm’s length rate which correctly reflected the power cost. The cost of power taken into account by the appellant for fixing the assessable value of its goods was the same as that actually incurred by JVSL, based on correct weighted average cost for power sourced by JTPCL. Therefore, there was no question of any additional consideration flowing from JVSL (the purchaser of the subject goods) to the appellant (the seller). In the first order, the Commissioner adopted a notional KEB rate for valuation of all the power received by the appellant from JTPCL (including for the infirm power generated by JTPCL itself). However, in the present order, the Commissioner valued the power based on a weighted average applying the KEB rates only to power sourced by JTPCL from KEB during periods of short generations. For the infirm power generated by JTPCL itself, prior to declaration of commercial power generation, the Commissioner appears to have applied the power rate worked out from JTPCL balance sheet as applicable after commencement of commercial power generation. This approach of the Commissioner is erroneous and unsustainable.
(vi) As regards the demand of Rs. 76,34,887/- on account of MTOP payments made by JVSL to the appellant, it was submitted that MTOP amount is totally extraneous for determining the assessable value of the products actually supplied to JVSL. The MTOP payments are provided to compensate the assessee when the buyer fails to purchase the minimum quantity assured. This is because, in such circumstances, the assessee is not able to operate the plant at optimum level. The MTOP payment is in the nature of the commitment charge for product not lifted and cannot be treated as the price of the product actually lifted, as held by the Tribunal in many cases. The following case-laws were relied on:
a. Bhartia Cutler Hammer Ltd. v. CCE, New Delhi
b. CCE, Jamshedpur v. Bhagwati Oxygen Ltd.
c. CCE, Chennai v. Hawk Engines
d. CCE v. Ram Decorative & Industries Ltd 1998 (77) ECR 403 (T)
e. Inox Air Products Ltd. v. CCE, Nagpur & Mumbai-I
f. Spring Fresh Drinks v CCE
(vii) Under Section 4 of the CE Act during the relevant period, the price to be taken was the normal price at which the goods would, in the normal course, be supplied between two independent parties. There is no finding that the appellant and JVSL are related to each other, or that the transaction between then are not on a principal to principal basis or are not at arm’s length. The question of additional consideration does not arise because the so called payments or notional payments had no bearing on either the cost or the price of the goods supplied by the appellant. The Courts and Tribunals have held that only those payment (actual or notional) can be added which have a direct impact on the price of the goods to be assessed and the burden of proving such direct impact lies on the Revenue. In the present case, the Revenue has not discharged this burden and, therefore, the entire additional duty demands are based on extraneous and irrelevant considerations and is, therefore, not sustainable.
(viii) A huge penalty of Rs. 12,62,13,125/- under Section 11AC and Rs. 50,00,000/- under Rule 173Q have been imposed without any findings at all to justify the imposition. There is not even a mention in the findings made by the Commissioner in the impugned order, which are to be found only in paragraphs 17 to 20 of the issue of imposition of penalty on the appellants under any provisions of law, let alone, any discussion of the factual and legal basis for any such imposition or of the numerous decisions relied on by the appellant. The levy of penalty on the appellant company as well as on the Directors and Officers is wholly illegal and unsustainable. There was no mens rea at all. The provisions of Section 11AC of the Act are not applicable because it is not a case of short levy in the first place, and in any case, no fraud, collusion, willful misstatement or suppression of facts or contravention of the Act or Rules has been committed by the appellant with any intent to evade duty payment. Penalty under Rule 173Q cannot be sustained because the appellants have not removed any excisable goods in contravention of any provisions of the Central Excise Act or Rules with intent to evade payment of duty. The order assumes without any basis that the 2nd amendment to PISA and the computation of product price was with a view to evade duty, although this was a contractual amendment based on negotiations of the contracting parties and fully recorded in a formal contract amendment, which was consistent with the original intent of the parties. This position had earlier been upheld by the Tribunal, a fact that has been completely ignored by the Commissioner, thus vitiating his order.
(ix) The Directors are sought to be penalized on the basis of decisions taken in Board Meetings attended by them. The proposition that any Director can be so penalized for approving the project cost of a plant as of completion of its construction or any contract amendments or price re-negotiations at Board meetings is preposterous and misplaced and all the more so, since the CEGAT has held with respect to the order of the Commissioner’s predecessor that the appellant and its Board were fully entitled to proceed as aforesaid.
(x) The two employees sought to be penalized were not even on the rolls of the company at the original stage or when the decisions in question were made.
(xi) The allegation that M/s. Sajjan Jindal, Indrajit Mookerjee, Raaj Kumar and V.S. Kumar were instrumental in any suppression of facts or misstatements or were involved in any transportation, removing, concealing or dealing with any goods which they had reason to believe were liable to confiscation is incorrect and is not supported by any evidence on record. Therefore, the levy of huge penalty on these persons cannot be justified.
(xii) In the absence of any finding that any particular goods are liable to confiscation, no penalty could be imposed on any individual under Rule 209A of the Central Excise Rules.
5. The learned JDR reiterated the departmental view.
6. We have gone through the records of the case carefully. The impugned order contains 34 pages. The findings of the Commissioner including his order occupy only 3 pages. In our view, the findings appear to be cursory. Though the CEGAT, in the Final Order, has directed the original authority to examine limitation, in view of the appellant’s contention that substantial portion of the demand is barred by limitation, the Adjudicating Authority, in the impugned order, has not at all discussed the same. Paras 12 to 16 of the findings are only re-statement of the facts already mentioned upto page 30 of the order. Therefore, the actual findings are just limited to four paragraphs from 17 to 20. We are in agreement with the appellant that the Commissioner has not taken care to adhere to the directions of the Tribunal in the de novo order. The appellant and M/s. JVSL had entered into a Contract for the supply of the gas manufactured by the appellant. There is an agreement with regard to the price and as per the Agreement, the price is liable to be changed when the project cost increases. It has also been mentioned that cost price will increase by Rs. 0.01/cubic NM for each increase of Rs. 2.4 crores in the Project cost. However, there were two amendments to the original contract and as per the second amendment, it was mutually agreed that the revised project cost for Gas price calculation with respect to the Production Facility would be Rs. 227.32 crores. We have to understand that this is a contract between two parties. They have mutually agreed to base their gas price calculation on a project cost of Rs. 227.32 crores. This is as per the second amendment to the original Agreement. An Agreement between two parties can always be revised. This has been elaborately discussed in the CEGAT’s order by Shri Brahma Deva. When there is a revision or amendment of a contract, the obligation under the original contract is extinguished. This is called novation. The concept of novation is explained in the following manner in Black’s Law Dictionary.
Novation: Substitution of a new contract, debt, or obligation for an existing one, between the same or different parties. The substitution by mutual agreement or one debtor for another or of one creditor for another, whereby the old debt is extinguished. The requisites of a novation are a previous valid obligation, an agreement of all the parties to a new contract, the extinguishments of the old obligation, and the validity of the new one.
A novation substitutes a new party and discharges one of the original parties to a contract by agreement of all three parties. A new contract is created with the same terms as the original one but only the parties are changed.
6.1 The learned Advocates pointed out that the Commissioner has demanded Rs. 5,22,47,703/- on the cost recovery charges inclusive of facility charges. Our attention was drawn to para 16(x) on pg. 18 and pg. 25 of the OIO wherein it is on record that the appellant had already discharged the duty liability on cost recovery charges and facility charges. In these circumstances, the demand of Rs. 5,22,47,703/- on account of cost recovery charges and facility charges appears to be erroneous. The Commissioner’s observation in para 17 is as follows:
Thus, I find that the assessee has adopted a lower project cost as compared to the actual project cost for gas price calculation. According to the provisions of the Articles of PISA, M/s. JVSL have an unconditional obligation for payment of certain amount on a prorata basis. The said amount is termed as facility charges and the same are payable with reference to the production facility of M/s. JPOCL.
The above observations show not only non-application of mind but also disregard to the observations of the Tribunal with regard to the contract between the parties. The Revenue cannot rigidly stick to the original contract ignoring the two amendments. This has been made amply clear in the order of the CEGAT. Hence, demand of Rs. 5,22,47,703/- is not sustainable. It is on record that the appellant had already paid the duty on cost recovery charges and facility charges much before the issue of Show Cause Notice.
6.2 As regards the MTOP charges, the Commissioner simply makes a statement that it is an additional consideration. The appellants have produced a number of case-laws to show that the MTOP charges cannot be added to the assessable value treating them as additional consideration. These case laws are very relevant for the present case. The Commissioner, in the impugned order, has not at all discussed the case-laws cited by the appellants.
(i) The CEGAT, in the case of CCE v. Bhagwati Oxygen Ltd (cited supra), has clearly held that compensations were payable when goods were not supplied cannot be included in the assessable value of earlier supplies. The MTOP charges are paid by the JVSL to the appellant when they fail to take the minimum quantity assured by them. It does not stand to common sense that these charges form an additional consideration especially when no goods are supplied. The additional consideration is always in relation to the goods supplied.
(ii) The CEGAT, in the case of CCE v. Hawk Engines (cited supra), has held that the compensation for non-performance paid to the assessee by the principals has no relationship with the assessable value or price of goods manufactured by assessee and, therefore, the same is not includible in the assessable value.
(iii) In the case of CCE, Bombay v. Ram Decorative & Industries Ltd. (cited supra), it has been held that assessable value cannot include commitment charges since these charges are in the nature of liquidated damages for breach of contract.
There are similar decisions of the Tribunal to support the above view. Therefore, we do not find any reason for inclusion of MTOP charges in the assessable value, as they cannot be considered as additional consideration for the goods supplied by the appellants to JVSL. Hence, the demand of Rs. 76,34,887/- is set aside.
6.3 A demand of Rs. 6,63,30,535/- has been made on the ground that the payment made by the appellants to JVSL for the power received by them from JTPCL does not represent the real cost and, therefore, the difference between the real cost and what has been paid by the appellants represents additional consideration. The CEGAT has actually remanded the matter to the Commissioner to examine the issue in the light of all the evidences produced by the appellant. The appellant has shown that the price paid by them to JVSL is in fact much higher than the price charged by KEB. The appellant has actually shown through documents that they had adopted the rate of Rs. 3.05 per unit for the period from 1.7.1999 to 5.1.2000 and Rs. 2.65 per unit thereafter. However, the KEB itself purchased power from JTPCL at the rate of Rs. 2.60 per unit pursuant to formal Orders and Notifications issued by the Government of Karnataka. This is definitely sufficient to accept that the power rate adopted by the appellant reflects the power cost. The Commissioner has not at all examined these documents and has adopted some weighted average cost of power as indicated in Annexure III below para 19 of his findings. In our view, there is no case for demanding duty by taking a higher value for power when KEB itself was purchasing at a lower value from JTPCL. Therefore, the demand of Rs. 6,63,30,535/- is not sustainable.
6.4. From the above, it is seen that the entire demand of Rs. 12,62,13,125/- on account of (a) Facility charges, (b) MTOP Charges and (c) Electricity charges is not sustainable. Hence, the demand is set aside. The consequence of such a decision is that the penalty under 11AC is also not sustainable and the same is set aside. Hence, interest under 11AB, penalty on M/s. JPOCL under Rule 173Q(1) and the penalties under Rule 209A on (a) Shri Sajjan Jindal, Chairman, JPOCL (b) Shri Indarjit Mookerjee, Non-Executive Director (c) Shri Raaj Kumar, Managing Director and (d) Shri V.S. Kumar General Manager (Finance) and Company Secretary are not sustainable.
6.5. In fine we allow all these appeals and set aside the OIO.
(Operative portion of this Order was pronounced in open court on conclusion of hearing)