ORDER
K.K. Agarwal, Member (T)
1. This is a stay application for waiver of pre-deposit of Central Excise duty amounting to Rs. 57,28,737/- (Rs. Fifty Seven Lakhs Twenty Eight Thousand Seven Hundred Thirty Seven Only) and imposition of penalty of Rs. 50 Lakhs under Section 11AC on the appellants and penalty of Rs. 5 Lakhs on Shri Viren A. Merchant, Director, Rs. 4 Lakhs on Shri Sudhir A. Merchant, Director and Rs. 1 Lakh on Shri Ajitkumar G. Merchant, Director.
2. The brief facts of the case are that the appellants are engaged in the manufacture of Bulk Drugs. The appellants as per their say were not making profit and therefore, in the year 1995-96 they received an offer from M/s CHT India Pvt. Ltd. to manufacture and supply various Textiles Auxiliary Chemicals and finishing Agents, as per their specifications and quality standards and under their brand name, for exclusive sale to them. M/s CHT India, during relevant period was a joint venture company formed by CHT Germany and Merchant group. Since appellants were making loses, the appellants accepted the proposal and entered into agreement dtd.28.05.1996. They received a show cause notice dated 10.01.2005 proposing demand of duty amounting to Rs. 66,45,344/- alongwith interest and penalty under Section 11AC. The demand was made on differential value between appellants’ sales value and the sale price of M/s CHT India Pvt. Ltd., for the period from 01.07.2000 to 05.07.2001. The show cause notice alleged that as per the amendment to Section 4 effective from 01.07.2000, interconnected undertaking were considered as a related person and since M/s CHT were holding 50% shares in appellants company and were having three common directors besides other factors they were to be considered as interconnected companies. However, from 05.07.2001 M/s CHT India Pvt. Ltd. Lave become 100%, subsidiary of the German company and the merchant group were no longer having any stake in the CHT company, they were not considered as interconnected company and therefore the show cause notice was confined for period from 01.07.2000 to 05.07.2001. The show cause notice referred to various clauses in the agreement entered into between the appellants and M/s CHT to show that the price between the two was controlled by M/s CHT and that the necessary technical know-how was provided by M/s CHT and that the entire goods were required to be sold to M/s CHT and could not be sold to others without the permission of M/s CHT and that the raw materials were to be imported from Germany or procured locally by the appellants as per the standard, quality specification and grade as may be prescribed by M/s CHT and accordingly concluded that based on this the two entities were to be considered as interconnected undertaking and therefore the assessable value should be one at which M/s CHT sold the goods in the market and not the price at which the appellants sold the goods to M/s CHT, The show cause notice also referred to certain sales made to 100% E.O.U.s where the goods were directly supplied by the appellants at a price much higher than the one at which the goods were sold to M/s CHT but the differential amount was paid by the appellants to M/s CHT which shows that the real price was the price at which M/s CHT were selling their goods to its customers and not the price at which the appellants were selling to M/s CHT.
3. The learned advocate for the appellants Shri V. Sridharan submits that the entire show cause notice is based on the ground that the appellants and M/s CHT are interconnected company and therefore in terms of Rule 10 of the Valuation Rules the goods are required to be assessed at price at which M/s CHT were selling their goods to its customer. He submitted that for the purpose of applying Rule 10 it is not sufficient to hold that the two companies are interconnected companies unless it is simultaneously held that the undertakings are so connected that they are also related in terms of Sub-clause (ii), (iii) & (iv) of Clause (b) of Sub-section 3 of Section 4 of the Central Excise Act. He then took us through the provision of Section 4(3)(b) of the Central Excise Act, 1944 and Rule 9 and Rule 10 which read as under:
“Section 4(3)” For the purpose of this section, –
(a) “assessee” means the person who is liable to pay the duty of excise under this Act and includes his agent;
(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 manning 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);”
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-clauses (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); or where such goods are not sold to such buyers, to buyers (being related person), or where such goods are not sold to such buyers, to buyers (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) or (iii) or (iv) of Clause (b) of Sub-section (3) of Section 4 of the Act or the buyers 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.
4. It was accordingly submitted that if the two undertakings are held to be related, it was not sufficient that they should be interconnected but they were further required to be shown as related as per the provision of Clause (ii) (iii) & (iv) of Clause (b) of Sub-section 3 of Section 4. It was submitted that this view find support from CESTAT decision in the case of South Asia Tyres Pvt. Ltd. v. Commr. of C. Ex., Aurangabad and in the Board Circular No. M.F.(D.R.) F.No. 354/81/2000-TRU dtd.30.06.2000 wherein para 24 it has been clarified that though under the amended section interconnected undertakings are to be considered as related under new Section 4 however a provision has been made in the new valuation rules that even if the assessee and buyer are interconnected undertaking the transaction value will be “rejected” only when they are related in the sense of any of Clauses (ii), (iii) & (iv) of Sub-clause 4(3)(b) or the buyer is a holding company or a subsidiary company of the assessee. In other words, while dealing with transaction between interconnected undertakings if the relationship as described in Clause (ii), (iii) or (iv) does not exist and the buyer is not a holding or subsidiary they will not be considered related.
5. It was submitted that the Commissioner has no where in his order held that the two undertakings are related in terms of any of (sic) Clause (ii), (iii) & (iv)of Section 4(3)(b) of the Central Excise Act. In fact in para 86 of his order he has held that the contention of the company that the transaction value will be rejected only when they were related in the sense of any of Clause (ii), (iii) & (iv) of Sub-section 4(3)(b) or the buyer was a holding company or a subsidiary company of the assessee is totally misconceived and accordingly stands rejected. It was submitted that this observation of Commissioner goes against CESTAT decision in the case of South Asia cited supra and the express provision of Rule 10 of the Valuation Rules.
6. As regards mutuality of interest referred to by the Commissioner in Para 87 in his order it was submitted that he has referred to certain sales to 100% E.O.U.s where differential amount was paid back by M/s CHT byway of issuing debit notes. It was submitted that the appellants were only executing the order placed on M/s CHT by the 100% E.O.U.s and since for claiming exemption by 100% E.O.U.s goods are to be supplied directly from the factory, the same were sent to the 100% E.O.U.s directly by the appellants and therefore the appellants paid back the difference between from selling price and price on which M/s CHT has sold the goods to 100% E.O.U.s, as the orders were executed on behalf of M/s CHT. This cannot be considered as a flow back from the buyers to the manufacturer and there was nothing wrong in the transaction. It was denied by him that M/s CHT was having over all control over the activities of the appellants or that the prices were dictated by them as has been held in para 84 by the Commissioner. The fact that the entire goods were sold to M/s CHT and that the price at which the M/s CHT in turn sold the goods to its buyers was much higher is no ground to hold the two as related person and in support thereof, he referred to the decision of the Tribunal in the case of Cheryl Laboratories v. Collector of Central Excise wherein it was held that low price charged from sole customer as apparent from the fact that same goods further sold by customer to its buyers with addition of 300% margin – presumption of commonness of ownership of manufacturing unit and customer unit not permissible from this fact. It was submitted that in this case the entire goods were sold to only one customer & the manufacturer purchased the raw material from the customer & goods bear the trade of mark of customer. Similarly in the case of South Asia Tyres Ltd. v. Commissioner of C. Ex., Aurangabad 2002 (149) E.L.T. 1107 (Tri.-Mumbai) it was held that interest free loan, share participation and constitution of board of directors of assessee indicate presence of interest of buyer companies in affairs of assessee but not any interest of assessee in the affairs of the two companies Mutuality of interest not being in existence, assessee not related to the other two companies. It was submitted that in this case also the buyers were holding 50% of the shares in the assessee’s company. Reference was also invited to CESTAT decision in the case of Ador Multiproducts Ltd. v. Commissioner of C. Ex., Bangalore 2004 (176) E.L.T. 612 (Tri.-Mad.) wherein it was held that where entire production sold by assessee to buyer and goods are manufactured by assessee using own plant, machinery and raw material as per quality specification of buyer, there is a provision in agreement between the two about time schedule, it was held that the transaction is on principal to principal basis, oven though the assessee was required to keep the formulation as secret, & prohibited from further sub-contracting or manufacturing for others etc. Reference was also invited to CESTAT decision in the case of Collector of Central Excise, Vadodara v. Tide Industries wherein sale of entire production was to one buyer who also supplies know-how and even these transaction were hold to be on principal to principal basis in the absence of evidence that the price has been influenced by consideration other than the normal commercial ones and no evidence that the buyers has received extra payment for supplying technical know-how.
7. As regards limitation, it was submitted that the fact that the appellants were selling their goods to their customer who in turn were selling at a much higher price was in the knowledge of the department and in this regard they referred to the letter of the Superintendent, Division I, Ahemdabad dtd.22.11.1996 wherein the appellants were required to show the reason regarding the heavy price difference between their selling price and the price of M/s CHT India Pvt. Ltd. to its customer and therefore it was submitted that the show cause notice was time barred.
8. The learned J.D.R. on the other hand invited attention to the various clauses of the agreement between M/s CHT and the appellants by which the appellants were required to sell entire production to M/s CHT and the goods were required to be manufactured as per know-how provided by M/s CHT to the appellants who were required to comply with ail standard, specifications, testing & quality assurance requirements. There was a prohibition on the appellants that they shall not use the know-how for any purpose other than manufacturing of the product to be sold to M/s CHT and that the raw materials were to be procured as per the specification and quality prescribed by M/s CHT and to inscribe the brand name and trade mark on the packing of the products etc. in the matter as may be specified by M/s CHT. In particular attention was invited to the Para 14 of the agreement where the goods were required to be sold by the appellants at such price and at such rate of discounts as may be mutually agreed between the parties from time to time. It was submitted that since the prices were to be mutually agreed. it cannot be considered as an independent sale and the prices were dictated by M/s CHT. Besides there were three common directors and therefore assessee was under a common management and the entire activity of the appellants were controlled by M/s CHT to whom the goods were sold. All these factors clearly established the mutuality of interest between the two and therefore the goods were required to be assessed at the price at which M/s CHT were selling their goods in the market. They referred to the decision of the CESTAT in the case of Modi Alkly.
9. As regards limitation, it was submitted that the fact that M/s CHT and the appellants have become interconnected companies in the year 2000 was not disclosed to the department which was a relevant fact and the earlier information in the year 1996 was not relevant as at that time the two companies were not interconnected and therefore the question of mutuality of interest was not required to be looked into.
10. We have considered the submissions. We find that in order to hold that the two companies are related it is not sufficient that two should be interconnected companies only but it is further required that the two companies should be related in the sense of any of Clause (ii), (iii) & (iv) of Sub-section 3(b) of Section 4 of the Central Excise Act. Therefore, it has to be established that the two undertakings have mutuality of interest among themselves. We have considered the various clauses in the agreements between M/s CHT and the appellants referred to by the learned J.D.R. and hold that prima facie they do not bring about any mutuality of interest between the two. We find nothing wrong in the buyer placing the order on the manufacturer to manufacture the goods as per his specifications and as per the quality of raw materials specified by him and as per the technical know-how supplied by him, as these are standard agreements entered into whenever the goods are manufactured on job work basis. None of these factors influence the price and the transaction between the two still remain on principal to principal basis. This is a view consistently been held by the tribunal in a series of decision cited by the appellants and the fact that goods are sold at a mutually agreed price between buyer and the manufacturer cannot be held to mean that the price is dictated by the buyer and therefore the two are related person unless it is shown that there is some flow back from the buyer to the customer or that the customer undertakes certain activities which are not in the domain of the buyer but essentially belong to the manufacturer.
11. In view of the same, we hold that the appellants have made out a prima facie case in their favour and we accordingly dispense with the pre-deposit of the entire duty and penalties & stay recovery till disposal of the appeals.
(Pronounced in Court)