ORDER
S.S. Shekhon, Member (T)
1. The facts of the case are:
(a) The Appellants inter alia manufacture soap under various brand names including the brand name “Cinthol Ultimate”. They sell their product to their customers, who are its wholesale dealers. They also sell their products to the buyers other than the wholesale dealers, such as Marico Industries Limited, Geoffery Manners Limited, Godrej Hi-Care Limited, Balsara Hygiene Products Limited etc., who in turn give the products of them as complimentary to their buyers for promotion of their own products. They have sold their products to such industrial buyers at the contract price varying from Rs. 3.00 to Rs. 5.00 per cake of soap of 50 grams The assessable value declared in the said price declaration was accepted by the department except in the case Marico Industries Limited and Godrej Hi-Care Limited. The order Passed by the Respondent in the case of Marico Industries Limited was set aside by this Tribunal.
(b) the present appeal relates to the goods sold to Godrej Hi-Care Limited. The assessment of the Appellants from the period 1976 are provisional to the knowledge of the department. As seen from copy of RT 12 return for the months of January – March 1998 enclosed.
(c) Prior to July, 1997, the said Godrej Hi-Care Limited, who is, inter alia, engaged in the manufacture of Mosquito repellant mats under the brand name of “GoodKnight”, was a subsidiary of the Appellants. The said Godrej Hi-Care Limited ceased to be a subsidiary of the Appellants with effect from July 7, 1997. They were desirous of giving the said ‘Cinthol Ultimate’ of 50 grams as complimentary along with their product “GoodKnight”. They accordingly placed orders for supply of ‘Cinthol Ultimate’ with a declaration on the wrapper “Cinthol Ultimate Free with GoodKnight 30 Mats”.
(d) The Appellants filed a Price Declaration under Rule 173C of the Rules.
(e) The Department was of the view that the said M/s Godrej Hi-Care Limited is related to the Appellants by reason of it being a subsidiary of the Appellants. By a letter dated 14.01.1998, the Appellants were, inter alia, called upon to clarify as to why there was a reduction in assessable value to the extent of 63% approximately while comparing the Annexure-III of the soap “Cinthol Ultimate Free with GoodKnight 30 Mats” 50 Gms. with “Cinthol Ultimate 50 Gms.” meant for home consumption, although the composition of both the toilet soaps are the same.
(f) The Appellants, by their letter dated 12th March, 1998 replied to the said letter dated 14th January, 1998. Ignoring the explanation, by a show cause-cum-notice dated 3rd June, 1998, the Appellants were called upon to show cause to the Commissioner of Central Excise, Mumbai-II Commissionerate, as to why –
(i) Central Excise duty amounting to Rs. 76,53,108/- leviable on the said goods, being the differential duty short paid due to under valuation of the said goods, should not be demanded and recovered from them under the proviso to Sub-section (1) of Section 11A of the Central Excise Act, 1944 read with Rule 9(2) of Central Excise Rules, 1944;
(ii) Penalty equal to the duty demanded above should not be imposed on them under Section 11AC of the Central Excise Act, 1944;
(iii) Interest @ 20% per annum should not be demanded from them on delayed payment of duty under Section 11AB of the Central Excise Act 1944 and
(iv) Plant, machinery or materials or things should not be confiscated under the provisions of the Rule 173Q(b)(i)(ii) of the Central Excise Rules, 1944.
(g) Since the Appellants and the said Godrej Hi-Care Limited, a subsidiary of the Appellant, are related in term of Section 4(4)(c) of the Act. It was further alleged in the said show cause notice that the Appellants have under-valued the said Cinthol Ultimate and cleared to Messrs. Godrej Hi-Care Limited, a subsidiary and sole distributor of the Appellants’ products, during the period January 1998 to March, 1998, with an intention to evade payment of duty. It was further alleged that the Appellants have failed to submit C.A. Certificate so as to factually explain the reduction in the price at which the goods are sold to Godrej Hi-Care Ltd. It was further alleged that the Appellants have failed to prove that the sale value of the said goods to Godrej Hi-Care Limited has all attributes of transaction value as required by Section 4(1)(a) of the Act and such price is “normal price” in the course of wholesale trade. It was further alleged that since the normal price for sale of identical goods to other buyers is available, the Department is bound to accept such price as normal price in the course of wholesale trade in terms of Section 4(1)(a) of the Act. It was further alleged that the purchase order for sale of the products at a reduced assessable value is only for Godrej Hi-Care Limited which establishes the nexus between the seller and the buyers, which is the subsidiary company of the Appellants and that the Appellants and the Godrej Hi-care Limited have mutuality of interest in each others business and they have some advantage, commitment, influence, investment, portion, right, share or stake which is commonly shared or interchangeably reciprocated between them as they are affiliated, allied or grouped in a particular bond. It was further alleged that the value of the said goods shown in the purchase order is a special price and not normal price. The show cause notice sought to take the price of 1332.24 as the assessable value by taking the highest price at which the said goods were sold to the wholesale dealers.
(h) An Order-in-Original No. 98/2001 dated 27th November, 2001, the Commissioner of Central Excise, Mumbai-II, confirmed the demand of Rs. 76,53,108/- under Section 11A of the Act, imposed a penalty of equal amount, ordered interest to be recovered on the delayed payment of duty under Section 11AB of the Act and ordered confiscation of the land, building, plant, machinery of the Appellants under Rule 173Q(b)(i)(ii) of the Rules with an option to redeem the same on a fine of Rs. 2,00,000/-. By the said order the Commissioner of Central Excise held that the Appellants willfully and intentionally declared lower value of the goods in price declaration filed in Annexure-III and cleared the said goods at a lower value to the extent of Rs. 4,25,17,264.92 with the sole intention to evade Central Excise Duty to the tune of Rs. 76,53,108/-.
2. After hearing both sides, and considering the materials on record, it is found:
(a) mutuality of interest between an assessee and a buyer would be the “acid test” to apply the fiction of “related person” to a transaction. In Atic Industries case the Gujarat High Court had held that the concept of related person was unconstitutional and consequently had cancelled the demands of the excise authorities. The Supreme Court, on appeal by the Union, overruled this judgment on the issue of constitutionality of the definition, but affirmed the view of the High Court as to absence of mutuality of interest and thereby quashed the demands. The Supreme Court on this aspect of mutuality in Atic Industries’ case 1984 (17) ELT 323 (SC) held as follows:
“For treating the customer as a related person, the first part of the definition of ‘related person’ as given in Section 4 (4) (c) requires that the person who is sought to be branded as a ‘related person’ must be a person who is so associated with the assessee that they have interest directly or indirectly in the business of each other. Thus, it is not enough that the assessee has an interest directly or indirectly in the business of the person alleged to be a related person nor is it enough that the person alleged to be a related person has any interest directly or indirectly in the business of the assessee. It is essential to attract the applicability of the first part of the definition that the assessee and the person alleged to be a related person must have interest directly or indirectly in the business of each other. The equality and degree of interest which each has in the business of the other may be different; the interest of one in the business of the other may be direct while the interest of the latter in the former may be indirect, but that would not make any difference so long as each has got some interest direct or indirect in the business of the other … In the absence of mutuality of interest in the business of each other, the customer company holding shares in the manufacturing company cannot be treated to be a related person.”
(b) However, recently the two member bench of the Supreme Court in the case of Flash Laboratories Ltd v. CCE 2003 (151) ELT 241 (SC) has but in the context of earlier Section (4), held that indirect relationship between two companies, would also be sufficient to establish mutuality. In this case, the question that arose was in respect of valuation of toothpaste, manufactured by that Appellant. The same was being sold to their holding company (PPL) which was a subsidiary of PBL. The Department contended that that PPL and PBL were related persons of the Appellant and were purchasing goods at lower prices and were in turn selling them at higher prices, and that the Appellant ought to have paid duty at the higher prices on the basis of relation person sales. The adjudicator confirmed the proposals of the Department, in adjudication, and the Appellant Tribunal also did so. On appeal to the Supreme Court, it was held that having regard to the decision in Atic Industries case (supra), and the plain meaning of the definition of relation person, the Appellant was the subsidiary of PPL and PBL was also a subsidiary of PPL, and therefore the relationship between the Appellant and PBL, though indirect there was mutuality of interest in the business of each other.” “With utmost respect to the Apex Court, the above decision is contrary to the accepted principles of mutuality of interest laid down by the earlier rulings of the Supreme Court. The Court had categorically held and ruled earlier that “traffic of interest” or two-way interest between the manufacturer and the buyer is what is as known “mutuality.” One sided interest is no interest at all. Merely because there was a sixty percent holding of shares or whatever other percentage of holding, that could not ipso facto mean that there was mutuality, unless the other ingredient of reciprocity of interest on the part of the subsidiary company in its holding company or between buyer and seller company was also present and are established. In the case of Collector v. Maruti Udyog Limited, 1989 (24) ECC 349 (SC), the Supreme Court, in the context of the Customs Act, held that mere holding of shares by the collaborator in the Indian company was not sufficient to establish mutuality, even though lumpsum and royalty payments were being made by the respondent to the collaborator. As long as negotiated prices were the basis of the transaction, the value should be determined on the basis of such prices. The Court in para 4 while abstracting and affirming the decision of the Tribunal that one sided interest was not enough (relying on Atic Industries supra) dismissed the departmental appeals. Another case in the context of the Customs Act, 1962, was decided by the Supreme Court in Fisher Rosemount (I) Ltd 2001 (134) ELT 321 (SC) wherein the Supreme Court has held that mere holding of forty percent of the shares by a collaborator in the Respondent company and supply of technical database for manufacture of goods in India by them, from whom the Respondent had imported the goods, was insufficient to establish mutuality of interest or that they were related persons. The Apex Court referred to the decisions in Atic Industries supra, as also that in Maruti Udyog, and dismissed the appeal of the department. In the case of Union of India v. Kaira District Co-operative Milk Producers Union Ltd 2002 (146) ELT 502 (S.C), the Supreme Court dismissed the appeal and saw no reason to interfere with the High Court’s view held that the buyer and the respondent in that case were not related persons relying upon the judgment in Atic Industries supra. The Supreme Court held that there must be direct or indirect interest in the business of each other between the buyer and manufacturer. There that being absent, and in the instant case, merely the buyer purchases milk from the Respondent, would not be sufficient in law to call both of them related person. It was observed in para 4 of the judgment that if there is a shareholder, then the shareholder may have an interest in the company, but merely because some products were being sold to the shareholder by the company, that would not make them related persons. The tenor and ratio of the judgments when scrutinised would eventually lead to an inference that the decision of the Apex Court in Flash Laboratories supra would apply to the facts of that case. The decision in the case of Flash Laboratories was on 20.12.2003, while the decision in the case of Alembic Glass Industries Ltd v. CCE 2002 (143) ELT 244 (S.C.) was decided on 11.4.2002 by a full Bench of the Apex Court wherein in para 8 thereof they have observed as follows:
“At this stage of the judgment, learned Counsel for the Revenue draws our attention to the judgment, of a Bench of two learned Judges of this Court, in Calcutta Chromotype Limited v. Collector of Central Excise, Calcutta (99 E.L.T. 202). It does not appear to us that the judgment carries the case of the Revenue any further, nor does learned Counsel so suggest. He says that ho has referred to it because of this sentence therein : “The principle that a company under the Companies Act, 1956 is a separate entity and, therefore where the manufacturer and the buyer are two separate companies, they cannot, than (sic) anything more, be ‘related persons’ within the meaning of Clause (c) of Sub-section (4) of Section 4 of the Act is not the universal application.” We have difficulty, for the reasons already stated, in accepting as correct this sentence. It appears to have been so stated in relation to and in the context of facts of that case. Therefore, the learned Judges, it should be added, remanded the matter for further inquiry into the facts.”
Therefore, the Flash Laboratories case cited by the learned S.D.R will not help the Revenue to establish the mutuality of interest as arrived at in the impugned order.
(c) Once mutuality cannot be established in this case, the rejection of the price to an unindented buyer cannot be rejected, especially when the purchase is not for resale but captive use of complementary gift. The buyers of the two categories i.e. one purchasing for resale and the other to grant complimentary gift cannot be in the same class of buyers. The sales are to be held of being at arms length.
(d) The Supreme Court in the case of CCE v. Guru Nanak Refrigeration Corporation 2003 (153) ELT 249 and Union of India v. Hindalco Industries 2003 (153) ELT 481 upheld the rulings when no related person concepts or sales not being in normal course being found. Therefore once the sales are to another company at arms length, the insistence on manufacturing cost certification is not called for.
(e) No decision contrary to the Tribunal’s decision in Godrej Soaps Ltd 1999 (111) ELT 374 for sales effected to M/s Merico Industries on same basis decided in favour of the very said appellants in same facts has been shown, following the same, the demands, confiscation and penalties cannot be upheld and the order is required to be set aside.
3. Appeal allowed after setting aside the order.
Pronounced in Court on 22.4.2004.