ORDER
P. Karthikeyan, Member (T)
1. These appeals are filed by M/s. Karur KCP Pvt. Ltd., Pondicherry (KKCPPL) and V. Sudharson Dy General Manager of the said Company against the order of the Commissioner of Central Excise, Pondicherry, raising a demand of duty of Rs. 1,15,18,485/-from them under Section 11A of the Central Excise Act, 1944 (the Act), the interest due thereon under Section 11 AB of the Act, imposing equal amount of penalty on KKCPPL under Section 11AC of the Act and imposing a penalty of Rs. 25 lakhs on Shri V. Sudarsan, authorized signatory of KKCPPL under Rule 209A of the erstwhile Central Excise Rules, 1944.
2. The facts of the case are that on the basis of investigation conducted by the officers of the Directorate General of Central Excise Intelligence in the year 2002 into the transactions of KKCPPL and M/s. K.C. Palanisamy & Co., (KCP & Co.), a proprietary firm owned by the Chairman and Managing Director of KKCPPL, a Show Cause Notice was issued to KKCPPL and Shri V. Sudarsan, DGM, KKCPPL, alleging evasion of Central Excise duty by undervaluing the paper and paper products manufactured and cleared by KKCPPL to KCP & Co. during the period 01.04.2000 to 31.03.2001. M/s. KCP & Co. purchased paper from KKCPPL and manufactured and cleared paper bags suitable for packing cement. Sales of the appellants were almost solely to KCP & Co. The investigation had revealed that KKCPPL and KCP & Co. were related entities for the purpose of the Central Excise Act, 1944. After considering the reply to the Show Cause Notice, the Commissioner found that the two firms had mutuality of interest. He observed that in the case of Narendra Machine Works v. CCE , the Tribunal had found the following aspects to be determinative of mutuality of interest between two entities:
a. The sale of entire goods manufactured by one unit to another related unit.
b. Advancement of interest free loans between the two units.
c. Effective control of the affairs of one by the other.
The Commissioner found that KKCPPL had received an unsecured loan of Rs. 3103.26 lakhs from Shri K.C. Palanisamy, sole proprietor of KCP & Co. There was a sale of Bottomer/Tuber machinery of value Rs. 5.83 crores by KCP & Co. to KKCPPL at an inflated Rs. 13.65 crores. K.C. Palanisamy, proprietor of KCP & Co. had held above 75% of the total shares of KKCPPL, besides being its Chairman and Managing Director. Therefore, Shri K.C. Palanisamy had controlled the affairs of KKCPPL. Thus, the entities were related persons.
3. In view of the above finding of the Commissioner, assessable value of the two varieties of paper (colour and brown) manufactured by KKCPPL were revised in terms of Valuation Rule 6 (b)(ii) of the Central Excise Valuation Rules, 1975 for the period 01.04.2000 to 30.06.2000 and in terms of Rule 8 of the Central Excise Valuation Rules 2000 for the period 1.7.2000 to 31.03.20-1 based on their respective cost of production ascertained. The above exercise had revealed that the appellants had short paid duty due on the goods cleared during the material period. The appellants had adopted a much lower value compared to the value determined on the basis of cost construction in terms of the relevant Rule 6 (b) (ii) and Rule 8 of the Central Excise Valuation Rules in force during the material period. It was also seen that the appellants had furnished a statement of cost of production for their products on 07.04.2000 which had not taken into account certain elements of cost such as salaries and wages, depreciation, selling expenses, stores and spares. The assessable value worked out on the basis of the cost furnished by the assessee and the cost worked out on the basis of the recognized accounting principles had shown that the declared value was lower by Rs. 12943 per MT in respect of colour paper and Rs. 4856 per MT in respect of brown paper. Accordingly, the differential duty was worked out on comparing the respective sale price adopted and the value arrived at on the basis of the correct cost. After following the due process of law, the Commissioner passed the impugned order.
4. In the appeal filed before us, the assessee has challenged the impugned order, interalia, on the following grounds:
(i) As long as the transaction value was genuine and real, the same was acceptable even if it was less than the cost of production in view of the decision of the Supreme Court in the case of Commissioner v. Gurunanak Refrigeration reported in 2003 (153) ELT 249 (SC).
(ii) The transaction could not be considered as one involving evasion merely because the sale price was less than the cost of production.
(iii) An analysis would show that the payment of duty through PLA by KCP & Co. had been much higher than the duty demanded from the appellants. During the material period KCP & Co had paid an amount of Rs. 2,40,45,790/- as duty on its clearances, whereas the differential duty demanded for goods received by it from KKCPPL was only Rs. 1,15,18,485/- for the period 1.4.2000 to 31.3.2001. Even after absorbing the additional duty demanded by way of cenvat credit, the appellants would still have paid an amount of Rs. 1,25,57,438/- through PLA.
(iv) As per the impugned order, KCP & Co. had advanced an interest free loan of Rs. 31.03 crores and that machinery worth Rs. 5.83 crores had been sold to KCP & Co. at an inflated value of Rs. 13.65 crores. This had indicated that financial transactions had taken place both ways and no adverse inference could be made from them.
It was claimed that the exercise under taken by the department was revenue neutral and that the demand of duty was not maintainable, so also the imposition of penalty under Section 11AC of the Act and demand of interest under Section 11 AB of the Act.
5. During hearing, the Ld. Sr. Counsel for the appellants challenged the impugned order mainly on the ground of limitation. According to him, the assessee had furnished a certificate of cost in respect of products manufactured by them on 7.4.2000 alongwith price declaration. The department had found that the sale price of the assessee was lower than the assessable value determined in terms of the Central Excise Valuation Rules with reference to the actual cost and had issued demand notice in 2004. As the appellants had furnished the details of manufacturing cost of their products on 7.4.2000, the demand made in 2004, on the basis of cost including the elements allegedly excluded by the appellants was barred by limitation.
6. The Ld. Counsel for the appellants cited the following case law in support of the above plea:
1. Asoka Spintex Ltd., v. CCE, Ahmedabad
2. Ganganagar Sugar Mills v. CCE, Jaipur
3. Pragathi Concrete Products Pvt. Ltd. v. CCE, Bangalore
These case law had laid down the following ratio.
In the Asoka Spintex Ltd. case supra, the appellant had declared the price on the basis of the certificate of his Cost Accountant which had not included certain elements of cost of production. The Tribunal held that even if the accountant’s certificate was erroneous, such errors would not constitute mensrea for the assessee unless it was established that the errors were made use of by the assessee to evade payment of duty. No such evidence had been brought to notice by the department. It was held that nothing had prevented the department from making enquiry as to what elements had been specifically included in the cost of production of yarn when the appellant had disclosed that administrative overheads and salaries paid to the workers had been taken into consideration while computing the cost of production. It was not open to the department at a later stage to say that the assessee had not indicated whether he had included bonus, gratuity, interest and profit while computing the cost. It was also held that the appellant had not suppressed the relevant facts and that larger period of limitation could not be invoked.
7. In Ganganagar Sugar Mills case supra, the Tribunal had in a case of similar facts held that the certificate produced by the appellants had shown that they had clearly stated the basis of the costing. Thus there was no suppression of material particulars. If the costing arrived was not reliable, it was for the revenue to raise objection as provided in the normal period under Section 11 A of the Act. The Tribunal allowed the assessee’s appeal on the ground of limitation. The civil appeal filed by the department against the above order of the Tribunal was dismissed by the Hon’ble Supreme Court.
8. In Pragathi Concrete Products Pvt. Ltd. case supra dealing with another similar case, the Tribunal had made the following observations: “It is on record that the appellants had submitted the Chartered Accountant’s certificate in 1995 itself. The department had not taken action for more than 5 years. The appellant’s unit had also been audited several times. They had also filed their periodical records properly. In these circumstances, there is no justification for invoking the longer period. Hence, the demand of duty on account of undervaluation is clearly timebarred”. In that case, the revenue had accepted the Chartered Accountant’s certificate initially on its face value which had not included certain elements of cost.
9. In all these cases, the assessees had filed Chartered Accountant’s certificate certifying the cost of manufacture of the excisable goods manufactured by them for the purpose of assessment. However, the department had taken action to revise the assessable value, finding that the certificate furnished had not included all the relevant elements of cost, and issued demand notice much after the normal period alleging suppression by the respective assessees. In all these cases, the Tribunal had held that the demand was time barred. The Tribunal had held that the department should have taken action to demand differential duty promptly on receipt of declaration of cost certificate by the Chartered Accountants.
10. The Ld Sr Counsel submitted that in terms of the Board’s Circular No. 249/863/96-Cx dated 11.10.96, the assessee was required to file declarations, inter alia, under Rule 173B, Rule 173C, Rule 57G and Rule 57 Q etc of erstwhile Central Excise Rules, 1944. The assessee should make available to the Central Excise officers records and documents including invoices, as and when required by the department. The above Circular also had prescribed duties of Assistant Commissioners/Deputy Commissioners/ Addl. Commissioners etc. The Assistant Commissioner had to ensure that the verification of the declarations under Rule 57 A, G and Q, Rule 173 B, Rule 173 C etc. were made in accordance with the existing instructions and in a time bound manner. The Ld. Sr. Counsel submitted that once the cost certificate certified by a Chartered Accountant had been submitted, the department could not hold later that the correct cost had not been disclosed and therefore it was open to the department to invoke larger period. The case law cited supported the above claim. As the Assistant Commissioner had been required to verify the price declaration, among other declarations, in a time bound manner, it was incumbent on the jurisdictional Assistant Commissioner to verify the cost certificate filed by the appellants. After having failed to do the verification in time, it was not open to the department to allege suppression of facts and to invoke larger period. The Ld. Sr. Counsel argued that during the financial year 2000-2001, KCP & Co. had paid a total amount of Rs. 11,69,25,780/- out of which they had paid from PLA 2,40,45,790/- and from modvat account Rs. 9,26,61,541/-. Therefore, it was submitted that even if the duty demanded in the impugned order had been charged from KCP & Co. by the appellants, KCP & Co would still have paid Rs. 1,25,27,305/- from PLA.
11. Ld. SDR submitted that the appellants were not required to furnish the cost certificate when they had submitted the same. The department had therefore not verified the correctness of the same. She submitted that in the Annexure filed on 7.4.2000 along with the price declaration in terms of Rule 173C(3A), the appellants had suppressed the relationship between them and KCP & Co. In view of this willful misdeclaration suppressing the relationship between KKCPPL and KCP & Co. the larger period was correctly invoked. The Ld. SDR cited the decision of the case Jay Yuhshin Ltd. v. CCE New Delhi 2000 (119) ELT 718 (Tri.- LB) in support of her argument that the revenue neutral situation came about in relation to the credit available to the assessee himself and not by way of availability of credit to the buyer of the assessee’s manufactured goods.
12. After hearing the submissions, order in Appeal No. E/193/2005 was reserved. As Shri V. Sudharson was only an employee in the firm and the appellant company had cleared the excisable goods during the material period discharging duty liability as per the price declaration submitted which was not questioned, we find that Shri V. Sudharson had not dealt with the impugned goods knowing that they were liable for confiscation. Therefore, we find that the penalty imposed on him is not sustainable under Rule 209A of the Central Excise Rules, 1944 and we allow appeal No. E/194/2005. Order allowing his appeal was pronounced in the open Court on 26.3.2007.
13. We have carefully considered the submissions of the appellants and the revenue. The demand has been raised on the appellants on the basis of the assessable value worked out with reference to the cost of production of the goods manufactured by the assessee and sold to the related buyer as per the relevant valuation rule. While undertaking this exercise, it was found that in the cost certificate filed by the appellants, they had omitted to include certain elements of cost. The demand has been made comparing sale price declared and the correct value as per Valuation Rules worked out considering all the relevant elements of cost. The revision of assessable value is therefore, made on the basis of the cost of production of the excisable goods which had been incorrectly declared by the assessee on 7.4.2000. As the appellants had declared the cost as certified by the Chartered Accountant, the department cannot now take the stand that the assessee had misdeclared the cost of production and proceed to raise a demand of differential duty on the basis of cost of production including certain other elements not included by the assessee. In view of the ratio of the decisions cited by the Ld. Sr. Counsel, the department had delayed the verification and the demand was therefore time barred.
14. From the following particulars of duty payment by KCP & Co., from PLA and cenvat credit availed by it during the material period, it is obvious that even if the assessee had discharged duty liability on the higher value now determined by the department for the products of KKCPPL, KCP & Co., would still have been required to pay from PLA Rs. 1,25,27,305/
Duty paid by KCP & Co in the year 2000-01
COLLECTION
PAYMENT
EXCISE DUTY COLLECTED
RG – 23 A-PART II
RG – 23 C-PART II
PEA DEPOSIT
TOTAL
116,924,158.00
92,661,541.00
218,452.00
2,40,45,790.00
116,925,783.00
In the circumstances, the revision in value attempted and demand made would turn out to be a revenue neutral exercise, especially in view of the fact that the department has found the two entities to be related persons.
15. We find that the appellants had declared the break up of the sale price of its products supported by a cost certificate certified by a Chartered Accountant as early as on 7.4.2000. The department had accepted this price declaration and did not verify its correctness till 2004 when the demand notice was issued alleging suppression of facts on the basis that the cost certificate had excluded certain elements of cost. The case law Asoka Spintex Ltd. v. CCE, Ahmedabad, Ganganagar Sugar Mills v. CCE, Jaipur and Pragathi Concrete Products Pvt. Ltd. v. CCE, Bangalore (supra), cited by the Ld. Counsel for the appellants had dealt with cases of similar facts wherein the Tribunal had held that the department was barred from invoking the larger period in such circumstances. Moreover, in the instant case even if the appellants had paid higher duty, no additional revenue would have accrued to the exchequer. This position was demonstrated by the appellants with figures before us. In the circumstances, we find that the impugned order is not sustainable. We set aside the same and allow the appeals.
(pronounced in open Court on 05.04.07)