ORDER
P.G. Chacko, Member (J)
1. E/1280/04 and E/402/05 are by M/s. Tamil Nadu Petroproducts Limited, hereinafter referred to as the as-sessee. The remaining appeal is by the Revenue. The dispute in these appeals relates to valuation of a product, called “Epichlorohydrin” (ECH) which was manufactured by the assessee and supplied to M/s. Petro Araldite Private Limited (PAPL for short). PAPL was originally promoted as a Joint Venture Company by the assessee (Public Limited Company) and M/s. Ciba-Geigy Limited (Switzerland) along with M/s. Ciba India Private Ltd. and registered as a Private Limited Company in India under the Companies Act in terms of a Joint Venture Agreement dated 9-12-1996 entered into between the three Companies. That was a joint venture to manufacture basic liquid resins in India by PAPL with the technical know-how to be supplied by the Swiss Company and the basic raw material (ECH) to be supplied by the assessee. The assessee held 24% share of equity in the Joint Venture Company and the rest was held by CIBA. The assessee was the lone manufacturer of ECH in India. According to the Supply Agreement dated 22-1-1998 entered into between the assessee and M/s. PAPL, the entire raw material (ECH) required by the latter had to be supplied by the former. Certain other agreements such as Plant Technology Transfer Agreement, Process Technology Transfer Agreement and Service Agreement were also entered into between the parties. Upon all the agreements having been carried into effect, 86% of the assessee’s ECH production was supplied to M/s. PAPL at a price agreed to between them. The remaining 14% was supplied to other buyers in India at prices higher than the price charged to M/s. PAPL. While so, there came to be a constitutional change in the JV Company. CIBA walked out and M/s. Vantico Performance Polymers Private Limited (USA) substituted them. However, the essential terms and conditions of the various agreements remained unaltered. It is said that, till August 2001, the assessee was paying duty on ECH cleared to M/s. PAPL by treating the transaction value of the goods as its assessable value under Section 4(1)(a) of the Central Excise Act and that this was not objected to by the Department. But such valuation of the goods cleared to M/s. PAPL from September 2001 was questioned by the Department through a spate of show-cause notices, wherein the Department held that the assessee and M/s. PAPL were related persons in terms of Section 4(3)(b) (iv) of the Central Excise Act and accordingly took the view that the value of ECH sold to M/s. PAPL had to be determined for the purpose of assessment of duty in terms of Section 4(1)(b) of the Act read with Rules 8, 9 and 10 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000. These show cause notices raised differential demands of duty on the assessee for the relevant periods by adopting 115% (up to 4-8-2003) or 110% (from 5-8-2003) of the cost of ECH production as the assessable value of the goods supplied to M/s. PAPL during such periods. These notices also demanded interest on duty under Section 11AB of the Act apart from proposing penalties under the relevant Central Excise Rules. The demands of duty and other proposals so raised by the Department were contested by the assessee.
2. In adjudication of two show cause notices covering a total period of September 2001 to May 2002, the Deputy Commissioner of Central Excise confirmed a total demand of duty of Rs. 1,26,52,483/- against the assessee and imposed a penalty of Rs. 10,000/- on them. This order of adjudication was set aside by the Commissioner of Central Excise (Appeals), Chennai, in Order-in-Appeal No. 76/2004 dated 19-3-2004. The present appeal of the Revenue is against this order of the appellate Commissioner. Two other show cause notices covering a total period of June, 2002 to December, 2003 were adjudicated upon by the Commissioner of Central Excise, Chennai as per Order-in-Original Nos. 8 & 9/04 dated 13-7-2004 confirming a total demand of duty of Rs. 2,05,52,963/- against the assessee and imposing on them a penalty of Rs. 20 lakhs. The assessee’s appeal No. E/1280/04 is against this order of the Commissioner. The remaining show cause notice was for the period January to December, 2004 and the same was adjudicated upon by the Commissioner confirming demand of duty of Rs. 1,40,12,749/- (along with demand of Education Cess of Rs. 1,56,856/-) against the assessee and imposing on them a penalty of Rs. 30 lakhs. This order (Order-in-Original No. 44/05 dated 30-4-2005) of the Commissioner is under challenge in the assessee’s appeal No. E/402/05.
3. The adjudicating Commissioner found that there was mutuality of interest between the assessee and M/s. PAPL and hence they were ‘related’ in terms of Section 4(3)(b)(iv) of the Central Excise Act. Ld. Commissioner relied on a legal opinion tendered by Additional Legal Advisor to the Government of India, Ministry of Law, Branch Secretariat, Chennai and also took the view that the Apex Court’s judgement in U.O.I, v. Atic Industries Ltd. and the Tribunal’s decisions cited by the assessee were not applicable to the facts of the case. In the result, ld. Commissioner upheld the Department’s stand that the assessable value of ECH sold by the assessee to M/s. PAPL should be determined in terms of Section 4(1)(b) of the Act read with Rules 8,9 and 10 of the Valuation Rules, 2000. On the other hand, the appellate Commissioner did not find any mutuality of interest between the assessee and M/s. PAPL. He ruled out Section 4(3)(b) relationship between them, after referring to the transactions between them as well as a certificate issued by the assessee’s Chartered Accountant. According to the appellate Commissioner, the ratio of the Supreme Court’s judgment in Atic Industries case (supra) and the other decisions cited by the assessee are applicable to the facts of the case. Accordingly, he has ordered valuation of the subject goods on the basis of its transaction value under Section 4(1)(a) of the Central Excise Act.
4. Heard both sides and considered their submissions. The assessee’s submissions as put forth by their Counsel can be summarized as under :
Theirs is the only plant in India manufacturing ECH. As the cost of production of ECH in India was high, the resin manufacturers in India were importing ECH. The price of imported ECH steadily decreased over the years and ultimately stood at US $ 933 per MT in 2001-2002. The domestic cost of production of ECH was Rs. 1,39,281/- in 2001-2002 and Rs. 86,597/- in 2002-03. In this scenario, the assessee fixed their domestic sale price of ECH. The price contracted between the assessee and M/s. PAPL was, reasonably, based on international market price. The contracted price was the sole consideration for sale of ECH to M/s. PAPL and no extra amount was paid at the time of transaction nor payable at any subsequent stage. There was no mutuality of interest between the assessee and M/s. PAPL and the transaction between them was at arm’s length. Hence any relation between them in terms of Section 4(3)(1)(iv) of the Central Excise Act was to be ruled out. The assessee sold a major part of their production of ECH to M/s. PAPL by giving them a quantity discount. As this discount was not allowed to other domestic buyers, the prices charged from them happened to be higher than the price charged from PAPL. As the sale of goods to M/s. PAPL had taken place at arm’s length, the sale price charged from them would not cease to be ‘transaction value’ for the purpose of Section 4(1)(a) of the Act by mere reason of the fact that it happened to be lower than the cost of production. [In this connection, the assessee has relied on the Tribunal’s decision in the case of CCE v. Polychem Ltd. as well as the decision in Guru Nanak Refrigeration Corpn. v. CCE, New Delhi affirmed by the Supreme Court in CCE, New Delhi v. Guru Nanak Refrigeration Corporation 2003 (153) E.L.T. 249 (S.C.). The payment of US $ 13,500,002 (Rs. 63,02,48,000/-) by M/s. Ciba India (P) Ltd. (Mumbai) to the assessee as part of the package in which CIBA went out of the Joint Venture in favour of Vantico was not to be treated as monetary flowback to the assessee inasmuch as the said amount was only the compensation received by the assessee for premature termination of contract by CIBA. This amount was shown as capital receipt in Profit & Loss Account and was transferred to General Reserve (Annual Report 2000-2001 of M/s. Tamil Nadu Petroproducts Ltd. was referred to by their Counsel in this connection). Any relationship in terms of Section 4(3)(1)(iv) was not to be found between the assessee and M/s. PAPL on account of the above payment of compensation. In this context, reliance was placed on the Tribunal’s decision in CCE v. Hawk Engines . All the facilities provided by the assessee to M/s. PAPL under the Service Agreement were at the cost of the latter. None of these services was free. [In this connection, reference was made to Debit Note dated 30-6-2002 issued by the assessee to M/s. PAPL, wherein an amount of Rs. 31,15,132/- was demanded by the assessee from M/s. PAPL towards the cost of effluent treatment plant (ETP) for the period April to June 2002. Provision of ETP was one of the facilities covered by the Service Agreement between the assessee and M/s. PAPL]. The legal opinion by the Assistant Legal Adviser to Government of India, (Ministry of Law) did not take into account all the relevant facts and hence was not reliable. Rule 9 of the Valuation Rules, 2000 was applicable only when the goods were sold only to a related person, in the instant case, ECH was sold not only to M/s. PAPL but also to other buyers. Hence Rule 9 was inapplicable. [In this connection, reliance was placed on the Tribunal’s judgments in the cases of Pepsico India Holding (P) Ltd. v. CCE and Ultra Refrigerators P. Ltd. v. CCE . The as-sessee’s Counsel also relied on the Board’s Circular No. 643/34/ 2002/CX., dated 1-7-2002)].
5. The Revenue’s case as put forth by Id. SDR is briefly stated here-under:
The JV Company was set up to manufacture resin out of ECH to be supplied exclusively by the assessee. It was set up as a preferred customer of the assessee. [In this connection reference was made to Clause 4.2 of the Supply Agreement dated 22-3-2001 between the assessee and M/s. PAPL]. Even according to the assessee, resin manufacturers in India depended on ECH imports as the cost of manufacture of ECH in India (in the assessee’s factory) was much higher than outside the country. In the circumstances, the assessee was badly in need of a buyer for their product in India and, therefore, they set up the Joint Venture Company. Without PAPL, the assessee could have shut down their factory. Hence the assessee should be held to be interested in the business of M/s. PAPL. PAPL was also interested in the assessee’s business inasmuch as the latter was the sole supplier of their input. Hence there was mutuality of interest between the assessee and M/s. PAPL and, consequently, the sale price contracted between them was not liable to be accepted as transaction value for the purpose of Section 4(1)(a).
Ld. SDR has also argued in support of other findings of the adjudicating Commissioner and against the findings of the appellate Commissioner. She has also argued that PAPL was not to be treated as a different class of buyer vis-a-vis other buyers of ECH by reason of the fact that a different price was charged from them. [In this connection, reference was made to the Supreme Court’s judgment in CCE v. Tisco Ltd. . According to ld. SDR, M/s. PAPL and other domestic resin manufacturers belonged to the same class of buyers for the assessee and, therefore, the highest price charged from them could be adopted as assessable value of the goods under Section 4(1)(b).
6. We have carefully considered the submissions. According to the assessee, the price charged by them from M/s. PAPL should be the assessable value of ECH sold to the latter in terms of Section 4(1)(a) of the Central Excise Act. According to the Revenue, the assessee and M/s. PAPL are related in terms of Section 4(3)(b)(iv) of the Act, and therefore, valuation of the goods has to be done in terms of Section 4(1)(b) of the Act. Section 4(1) reads as under :
Section 4 : Valuation of excisable goods for purposes of charging of duty of excise. – (1) Where under this Act, the duty of excise is chargeable on any excisable goods with reference to their value, then, on each removal of the goods, such value shall –
(a) in a case where the goods are sold by the assessee, for delivery at the time and place of the removal, the assessee and the buyer of the goods are not related and the price is the sole consideration for the sale, be the transaction value.
(b) in any other case, including the case where the goods are not sold, be the value determined in such manner as may be prescribed.
If the assessee is held to be related to M/s. PAPL, the assessable value of the goods sold by them to M/s. PAPL will have to be determined under Clause (b) above. Otherwise, valuation shall be in terms of Clause (a) above. The department’s allegation is that the assessee and M/s. PAPL are related in terms of Section 4(3)(b)(iv). Clause (b) of Sub-section (3) reads as under :
(3) For the purpose of this section,-
(a)….
(b) Persons shall be deemed to be “related” if –
(i) they are inter-connected undertakings; (ii) they are relatives;
(iii) amongst them the buyer is a relative and a distributor of the assessee, or a sub-distributor of such distributor; or
(iv) they are so associated that they have interest, directly or indirectly, in the business of each other.
Explanation – In this clause –
(i) inter-connected undertakings” shall have the meaning assigned to it in Clause (g) of Section 2 of the Monopolies and Restrictive Trade Practices Act, 1969 (64 of 1969); and
(ii) “relative” shall have the meaning assigned to it in Clause (41) of Section 2 of the Companies Act, 1956 (1 of 1956).
The first question to be addressed is whether the assessee was related to M/s. PAPL as alleged by the Department. For this purpose, it has to be ascertained as to whether they had any direct or indirect interest in the business of each other. It is evident from the facts of the case that, on account of higher cost of manufacture of ECH in India, the assessee’s product had to compete, in the domestic market, with like goods imported at lower price. ECH is the basic raw material for resin manufacturers. As it was low priced abroad, resin manufacturers in India used to import it. The assessee wanted takers for their product in the country. It was in this scenario that they promoted the Joint Venture Company (PAPL) and entered into agreements with them. According to these agreements, they were to manufacture ECH by making use of technology provided by their co-promoters and to meet the entire ECH requirement of M/s. PAPL. 86% of their ECH production was sold to M/s. PAPL. Only 14% was sold to other buyers. PAPL was given a preferred customer status under the Supply Agreement entered into between them and the assessee. It was argued by Id. Counsel that this preference was given on account of the fact that a major part of the assessee’s production of ECH was purchased by M/s. PAPL. We have not found anything in any of the agreements to support this submission. On the other hand, it was clearly laid down under Clause 4.2 of the Supply Agreement that PAPL was to be given preferred customer status. The question now arises as to why this preferential treatment was given to M/s. PAPL by the assessee. Clause 4.2 itself would answer this question. This clause reads as under :
4.2. ECH-Price for domestic epoxy market:
Based on current commercial practices in place the reference price for ECH for the domestic epoxy market will be calculated based on the price under 4.1 plus the customs duty on imports of ECH into India. This pricing mechanism is valid as long as such commercial practices prevail. Should BLR import duty fall below ECH duty this adder will be reviewed.
TPL as a joint venture partner of PAPL grants PAPL a preferred customer status. For the calculation of the ECH price for the domestic market for PAPL TPL applies a discount of 20% on customs duties and taxes.
As per the first part of the above clause, the reference price for ECH for the domestic market is the price under Clause 4.1 plus the Customs duty on imports of ECH into India. The second part of Clause 4.2 confers preferred customer status on the assessee on account of their being a joint venture partner of M/s. PAPL and offers them a discount of 20% on customs duty and taxes leviable on ECH imported into India. Thus it is apparent that the preferential treatment given to PAPL by the assessee is linked only to the fact that the latter is a partner of the former. Apart from this, it is also clear that the discount allowed to PAPL is not quantity-based. Thus Id. Counsel’s submissions on these aspects are not supported by the documentary evidence on record. PAPL was set up only to manufacture epoxy resins out of ECH manufactured and supplied by the assessee. There was no other domestic source of raw material for these resins. For the assessee, PAPL was contact-bound to be the major buyer of their product with preferred customer status. For PAPL, the assessee was the only source of their raw material. Without ECH production by the assessee, M/s. PAPL could not have survived at all. The adjudicating Commissioner’s finding of interdependence of the two companies can hardly be faulted. On the facts of the case, it has to be held that the assessee and M/s. PAPL were directly or indirectly interested in the business of each other. Therefore, we agree with the view taken by the adjudicating Commissioner that the assessee was ‘related’ to M/s. PAPL in terms of Section 4(3)(b)(iv) of the Central Excise Act. Consequently the subject goods will have to be valued under Section 4(1)(b).
7. Both sides have relied on the Apex Court’s judgments in Atic Industries (supra). In that case, the buyer-company holding shares in the manufacturing company was held not related to the latter for want of direct or indirect interest in the business of each other. But that was in the facts of that case, quite distinguishable from the facts of the present case. Nonetheless, we find, their lordships’ following observations will be relevant to the instant case :
The assessee and the person alleged to be a related person must have interest, direct or indirect, in the business of each other. Each of them must have a direct or indirect interest 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 business of the former may be indirect. That would not make any difference, so long as each has got some interest, direct or indirect, in the business of each other.
We have already discerned the mutual interest of the assessee and PAPL in the business of each other and our finding of ‘relation’ between them in terms of Section 4(3)(b)(iv) must pass the test laid down in Atic Industries. We have also noticed that the facts of the present case are almost unique and clearly distinguishable from those of all cases cited by Id. Counsel in his endeavour to show that the assessee was not related to PAPL.
8. As already noted, Section 4(1)(b) will govern valuation in this case, the manner in which this valuation is to be done is prescribed under the Valuation Rules. Neither the assessee nor the Revenue has harped on Rules 4 to 7 of these Rules. In the Revenue’s appeal, the appellant wants to have the goods valued under Rule 8. The adjudicating Commissioner has held that the subject goods should be valued in terms of Rules 8, 9 and 10 of the Valuation Rules. These Rules are extracted below :-
RULE 8 : Where the excisable goods are not sold by the assessee but are used for consumption by him or on his behalf in the production or manufacture of other articles, the value shall be (one hundred and ten per cent) of the cost of production or manufacture of such goods.
RULE 9 : When the assessee so arranges that the excisable goods are not sold by an assessee except to or through a person who is related in the manner specified in either of Sub-clause (ii), (iii) or (iv) of Clause (b) of Sub-section (3) of Section 4 of the Act, the value of the goods shall be the normal transaction value at which these are sold by the related person at the time of removal, to buyers (not being related person), who sells such goods in retail :
Provided that in a case where the related person does not sell the goods but uses or consumes such goods in the production or manufacture of articles, the value shall be determined in the manner specified in rule 8.
RULE 10 : When the assessee so arranges that the excisable goods are not sold by him except to or through an inter-connected undertaking, the value of goods shall be determined in the following manner, namely :-
(a) If the undertakings are so connected that they are also related in terms of Sub-clause (ii) (iii) or (iv) of Clause (b) of Sub-section (3) of Section 4 of the Act or the buyer is a holding company or subsidiary company of the assessee, then the value shall be determined in the manner prescribed in rule 9.
Explanation – In this clause “holding company” and “subsidiary company” shall have the same meanings as in the Companies Act, 1956 (1 of 1956).
(b) In any other case, the value shall be determined as if they are not related persons for the purpose of Sub-section (1) of Section 4.
The goods in question having been sold by the assessee. Rule 8 is not applicable. Coming to Rule 9, we find that this rule also does not get attracted inasmuch as the assessee had sold ECH not only to PAPL (related buyer) but to unrelated customers also. The CBEC has correctly clarified this position in Circular No. 643/34/2002-CX dated 1-7-2002. Point No. 12 discussed in this Circular is extracted below :-
How will valuation be done when There is no specific
goods are sold rule covering such a
partly to related persons contingency. Transaction
and partly to independent value in respect of
buy-ers? sales to unrelated buyers
cannot be adopted for
sales to related buyers
since as per Section
to be determined for each
removal. For sales to
unrelated buyers valuation will
be done as per Section 4(1)(a)
and for sale of the same
goods to related buyers
recourse will have to
be taken to the residuary
Rule 11 read with Rule
9(or10). Rule 9 cannot be
applied in such
cases directly since
it covers only those
cases where all the sales
are to related
buyers only.
The Revenue’s case as made out in the show cause notices is that the assessee is related to M/s. PAPL in terms of Sub-clause (iv) of Clause (b) of Sub-section (3) of Section 4 of the Act. They have no case that the assessee and M/s. PAPL are interconnected undertakings. Hence Rule 10 also does not get attracted to the present case. What remains is Rule 11, which reads as under :
RULE 11. If the value of the 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.
Thus, in our considered view, the value of the goods will have to be determined under Rule 11. None of the lower authorities has attempted this method. In the circumstances, we have to remand the case to the adjudicating authorities concerned.
9. Accordingly, the Appeal Nos. E/1280/04 and E/402/05 are allowed by way of remand and the Commissioner is directed to re-adjudicate the cases in terms of this order. In Appeal No. E/897/04, we set aside the orders of both the lower authorities and remand the case to the original authority for re-determination of the assessable value of the subject goods in terms of this order. Thus the Revenue’s appeal also stands allowed by way of remand.
(Order pronounced in open Court on 4-8-2005)