ORDER
S.L. Peeran, Member (J)
1. All these three appeals arise from a common Order-in-Original No. 37/2001 (Commr.) dated 28.9.2001 by which the learned Commissioner has confirmed the duty demand and imposition of penalties in respect of appellants on the ground that all the three parties are related persons and their clearances are required to be clubbed. He upheld the charge of suppression of facts. The appellants were served with three show cause notices dated 9.5.1996, 3.7.2000 & 1.3.2001 alleging that M/s. Kwality Fun Foods Restaurant (P) Ltd., (herein after referred to as M/s. KFRL) have contravened the provisions of Rule 9(1) and Rule 173Q read with Section 4 of the Central Excise Act inasmuch as that they had cleared Ice creams to M/s. Hindustan Lever Ltd., Chennai, Kerala & Bangalore (earlier named as M/s. Brooke Bond Liptons India Ltd.) (herein after referred to as M/s. HLL) with the brand name “Kwality Walls” and the assessable value adopted by them appeared to be not at arm’s length, the transactions between them could not be considered as to be principal to principal basis and in the course of normal wholesale trade.
2. The allegations were made on the following considerations:
1. Certain machinery namely Mixvat incubator, Autoclave, Oven and Centrifuge installed in M/s. KFRL were received from M/s. HLL as stock transfer.
2. M/s. HLL has extended huge sum of money for upgradation of the factory and for the raw material purchased by M/s. KRFL.
3. From the period from Feb’2000 to Dec’2000 the entire quantity manufactured by M/s. KFRL was cleared to M/s. HLL to the value of Rs. 88,62,226/- which was sold by M/s. HLL for a value of Rs. l,55,53,802.
4. Monthly production plan in respect of various varieties of ice creams to be manufactured & instructions regarding of the working of the factory were given by M/s. HLL to M/s. KRFL.
5. The rate at which the ice creams should be cleared were also instructed from M/s. HLL to M/s. KFRL.
3. In view of the above, it was alleged that the price should not be considered as a price of sole consideration for the sale. It was also alleged that the transaction between them are not on principal to principal basis. The whole sale market exists only at the hand of M/s. HLL who has managerial control and control over the products, and hence the differential duty is recoverable from them. The above allegations were made in the show cause notice dated 1.3.2001.
4. A similar allegations had been made in the show cause notice dated 3.7.2000 and in the show cause notice dated 9.5.1996, wherein M/s. KFRL was directed to show-cause as to why transaction between M/s. KFRL and M/s. Brooke Bond Lipton (India) Ltd., (hereinafter referred to as BBLIL) (now named as M/s. HLL) should not be * considered as not within arm’s length and M/s. BBLIL were held to be favoured buyers and the wholesale market exists only at the hands of M/s. BBLIL and why the price charged by M/s. BBLIL to their distributors with allowable deductions etc., should not be considered as assessable value for the purpose of assessment of and for payment of duty on the ice cream cleared by M/s. KFRL from 16.11.1995 to 31.3.1996 and why Rs. 82,456/- being the differential duty should not be collected.
5. The appellants replied to the show cause notice stating that they had entered into a Sourcing Agreement dated 30.10.95 with M/s. BBLIL and as per the sourcing agreement, the appellants made the factory gate sales to M/s. HLL. The appellant’s entire production was to be picked up by M/s. HLL who would then market the same through their marketing net work. It was mentioned that neither HLL were the promoters of the appellant company (KFRL) nor did they have any managerial or controlling interest in their business at any time and the entire sourcing agreement had been the result of negotiations on a principal to principal basis and arrived at arm’s length between the unrelated parties. M/s. KFRL stated that they had been manufacturing and clearing ice creams after following the proper procedures under the Act including regular filing of RT-12 Returns based on Declarations made under Rule 173Q of the Central Excise Rules, 1944 and the factory was subject to periodical inspections and audits by the Excise authorities. It is stated that after due adjudication the Asst. Commissioner vide Order-in-Original No. C.No.V/21/20/75/96-CE dated September, 1996 held that appellant and M/s, BLIL are not related persons in terms of Section 4 Sub-section 4(4)(c). It is stated that a similar notice and adjudication was held independently against M/s. Kwality Ice Cream (M) Pvt. Ltd. the appellant’s (KFRL) predecessor-in-title of the factory which also culminated in quashing the demand of duty and dropping further proceedings in the matter. The department on 21.5.1999 had visited the factory of KFRL at Coimbatore for inspection and for recording of statements. They were further issued with a show cause notice dated 3.7.2000 for the period December 1995 to February 1999 and on 1.3.2001 the period 1.2.2000 alleging suppression and invoking larger period. They replied to the show cause notice on 26.3.2001 and 2nd August 2001 respectively along with various documents and records. The appellants took the stand that appellant and HLL were not related persons within the meaning of Section 4 of the Act and that they are not liable for duty for extended period as there was no suppression or intention to evade duty. It is stated that appellants at all stages of earlier adjudication in 1996 and during the instant adjudication had fully cooperated and supplied all the documents. The appellants have strongly relied on the previous orders issued by AC dropping the proceedings and holding that the relationship is at arm’s length and that their clearances cannot be clubbed and their relationship is on principal to principal basis. They stated that appellants do not have any shares in the company of buyer, M/s. HLL and vice-versa and neither have they ever had common share holding. None of the Board of Directors of the appellant company is or was at any point in time in the Board of Directors of the buyer, HLL and vice-versa. They stated that appellant and the buyer are neither “holding company” nor a “subsidiary company” nor a “sister company” as defined under Companies Act, 1956. They stated that appellant and the buyer HLL are not relatives or distributors of the appellant. It is stated that the buyer (HLL) is a reputed multi-national Public Limited Company duly incorporated under Companies Act, 1956 and whose shares are the most traded in stock exchanges of India and that too at a premium and by no stretch of imagination could the appellant be deemed to be a “related person” to the said buyer HLL. It was stated that appellant and the buyer do not have any “mutuality of interest” other than the relationship of a manufacturer and a buyer. They stated that they started their factory and business with their own capital and funds. Only subsequently and at times sole buyer did give them some advances for emergency requirements, which of course, were subsequently adjusted against the payments due to the appellant for the supply of the goods. It is stated that appellant procured their own machinery required for the manufacture of ice creams with their own. Only very few machinery was given to the appellant and that too only as a matter of convenience. The premises of the appellant belonged to them and the electricity connection was obtained by them. The workers, clerical staff and management staff were all recruited and employed by the appellant, are on the rolls of the appellant, and paid for by them. Only one quality control staff o the buyer HLL was stationed at the factory of the appellant for the purpose of checking quality parameters only. They also contended that they were independently registered under the Factories Act, ESI Act, Provident Fund Act, Tamil Nadu General Sales Tax Act as well as the Central Sales Tax Act and under the Income Tax Act and raw materials required by them were procured by them with their own finances. Only that the sole buyer would suggest alternative and better quality of material so that he is supplied with the quality product. The appellant is also registered with the Central Excise as a manufacture and the Registration Certificate was given only after a full inspection of the factory premises by the Range authorities. They contended that in their own matter between the same parties a Bench comprising of Hon’ble President and on same facts held that the relationship between the appellant was not of a related person and that they do not have mutuality of interest and on that count set aside the order. It is stated that the cited judgement would apply on all fours to the case in the facts and on the same allegations which was made out in the case of M/s. Kwality Ice Cream Co. v. CCE Chandigarh 2002 (145) ELT 585 (Tri-Del) : 2002 (104) ECR 541 (T) which was also held in party’s favour. It is stated that both on merits and limitation the case is covered in their favour and the appeals are required to be allowed.
6. We have heard learned Senior Counsel Shri Arvind Datar for the appellant M/s. KFRL and M/s. KICM (MADRAS) Ltd. and Shri P.S. Raman for the appellant M/s. HLL and Smt. R. Bhagya Devi, Ld. SDR and Ld. DR, Shri A. Jayachandran for the Revenue.
7. Ld. Senior Counsel took us through the facts of the case and the one in which the Northern Regional Bench has decided the case in their favour and argued that the judgement fully covers this case. He submitted that the relationship between both the parties was at arm’s length and merely because there were some arrangements between them that by itself will not be a cause to club the clearances. He submitted that mere fact of M/s HLL’s giving machineries on loan basis or controlling the quality of the manufacturer by stationing their quality officer in the appellant’s factory will not make the relationship that of principal and agent. The finances were independently floated and they were independently managing their affairs without any interest in each others capital or holding. Further reference was made to the earlier judgement rendered by this Bench in the case of Renowned Auto Products Mfrs. Ltd. v. CCE Chennai wherein on similar facts and circumstances of the case, the appeal was allowed by holding that there was no relationship between the parties. It was stated that the Commissioner had relied on the Tribunal’s judgement rendered in the case of which was set aside by the Apex Court as reported in the case of Pawan Biscuits Co. (Pvt.) Ltd. v. CCE Patna . Further reliance was made on Bharti Telecom Ltd. v. CCE Chandigarh wherein it has been held that if there is a share holding that by itself is no ground to hold the relationship to be that of principal agent.
8. Ld. Sr. Counsel has also filed tabulated submissions to point out that the judgement rendered by the Northern Bench in their own case refers to the same point as determined in this case and that the said judgement is clearly applicable to the facts of this case as they are identical in nature and it cannot be upheld.
9. We have heard Ltd. SDR Smt. Bhagya Devi Ld. DR Shri A. Jayachandran who filed the reply received from the Commissioner who has stated that the judgement rendered by the NRB is different than the one in question and is distinguishable.
10. We have carefully considered the submissions and have gone through the case records. We notice that the allegations made in the show cause notice are that all the three units are related one and that their clearances are required to be clubbed as there is a mutuality of interest. On this very point show cause notice has been issued on 9.5.96 which later resulted in Asstt. Commissioner’s dropping the demands and holding that there is no mutuality of interest. However, subsequently, two show cause notices were issued reopening the issue and alleging that there was suppression of facts and that the demands are required to be confirmed for the period involved in the previous show cause notice dated 9.5.1996. The allegations in all the show cause notices is common as already delineated. The appellants have taken a plea that they had no mutuality of interest in each other’s unit. There is no common share holding and that M/s. HLL have only supplied the machinery and money was given only with a view to purchase raw materials for the purpose of manufacturing the goods to be sold by them in their brand name. M/s. HLL has entered into an agreement for producing ice creams to be produced by M/s. KFRL in their own unit on M/s. HLL’s brand name. It is contended that there are no relationship to each other and mere fact of supply of some machinery for a period of time as a business arrangement and stationing a quality control officer in the premises of M/s. KFRL for the purpose of specifying the quality of production does not make them a related person. We notice that this very point was the subject matter of consideration in their own case decided by the Hon’ble President in the matter cited supra. The bench went into all these allegations in great detail and found that they are not related persons and there is no mutuality of interest and on this findings set aside the orders passed against them. The findings recorded by the Tribunal in paras-9 to 18 are reproduced herein below:
9. We find merit in the contention raised by the appellant regarding allegations made on the method of pricing and regarding Sub-clauses of Clause 6 of the sourcing agreement. The provisions contained under Clause 9 read with Appendices 4 and 5 would clearly show that the price is not being fixed by one sided decision taken by BBLIL. Price is being fixed on the basis of the formula agreed between the parties. Sub-clause (iii) of Clause 6 provides that pending commencement of production by JVC, appellant shall make necessary investments for upgradation, modification or alteration in the existing factory/manufacturing facility as per requirement of BBLIL subject to necessary statutory approval and pending such investments appellant shall not be responsible for any deficiency that such investment is intended to rectify. On the appellant making such investment for upgradation or modification the pricing agreed upon is on a formula which took into consideration the investment made by the appellant for upgradation, modification etc. Therefore in terms of Clause 6(iii) the pricing would not lead to the conclusion that the transaction was not one between principal to principal. So also the appellant is fully justified in contending that the exclusive nature of sourcing is applicable to both the appellant as well as BBLIL and there is no undue advantage provided in favour of BBLIL as per this clause. So also we cannot find any merit in the contention of the Revenue that the appellant is totally under the control of BBLIL/HLL as it has to shut down its unit or even move away to some other location against its will. Sub-clause (ii) of Clause 6 reads as under:
K(north) (ii) undertaking at their own cost (including any asset write off and employee separation cost) save and except and to the extent provided for in 6(i)(c) above to carry out closure of the existing factories/manufacturing facilities as per list being Appendix I hereto, upon BBLIL, calling upon K (North) to discontinue to close down such factories or manufacturing facilities on the premises that these manufacturing facilities are not required as per logistic and other commercial considerations under the sourcing plan and further undertaking to make the required investments in the JVC for relocation to a new factory/manufacturing facility with such capacity, specifications, etc. as BBLIL will intimate provided, however, if K(North) is not ready and willing to exercise such an option of closure of an existing factory or relocation to a new factory, K(North) shall intimate to BBLIL its decision not to exercise such option in writing BBLIL will then be at liberty to entrust such sourcing to any other party of its choice or undertake to set up its own facilities and BBLIL will be discharged of its obligations to K(North) in respect of exclusive sourcing and minimum guaranteed volumes.
A reading of the above would clearly show that an option is given to the appellant to accept the suggestion of BBLIL to discontinue or close down its manufacturing facilities as are not required due to commercial consideration under the sourcing plan and further undertaking to make the required investments in JVC for relocation to a new factory/manufacturing facility. If the appellant is not willing to exercise such an option it can intimate BBLIL about its view. There is nothing to show that BBLIL can compel the appellant to close down the factory or remove it from the location. The only effect of appellant not accepting the option is that BBLIL will be relieved of that obligation under this sourcing agreement. We find nothing wrong in the party to provide for certain conditions on which the terms of agreement can be brought to an end.
10. Now we come to Clauses 6(l)(a) and 6(viii) of the sourcing agreement on the basis of which the Revenue alleges that the appellant has to run its unit at the dictate of BBLIL/HLL 6(i)(a) provides that the product will be manufactured by the appellant in accordance with the specifications set out in Appendix 2 of the agreement that the appellant will purchase and use edible and packaging material only from suppliers approved by BBLIL and that reasons for change in the raw material will be intimated by the appellant to BBLIL. Clause 6(viii) provides that every batch of production must pass through the laboratory test which will be processed by the representatives of BBLIL. In case of any defect/rejection the said quantity will be destroyed under the supervision of BBLIL. These conditions are only appropriate for ensuring quality of a sensitive product like Ice Cream. We do not find any reason to hold that these conditions are unreasonable restrictions on the appellant running its unit.
11. Now we come to two other important allegations on the basis of which the Commissioner (Appeals) has found that there was mutuality of interest between the parties and that the transactions, if any, was not on principal to principal basis. Clause 6(i)(c) of the sourcing agreement provides that BBLIL would make an interest free deposit of Rs. 2.75 crores to the units of K(North). As far as the appellant is concerned, its share comes to only Rs. 50 lakhs. This is intended towards due performance of the sourcing agreement pending formation of JVC. It is also provided that this amount will be liable to be forfeited on termination of sourcing from the appellant and will include compensation for any asset write-off or employee separation costs incurred or to be incurred in future by the appellant.
12. Learned Counsel for the appellant further pointed out that payment in respect of the goods supplied by the appellant is not received immediately and therefore the sale price contained an element of interest on receivable. A reference to Clause 9(a)(iv) of the Sourcing Agreement would show that the appellant had to submit monthly involves to BBLIL and within seven days of the receipt of such invoices, BBLIL shall make payment in full and final settlement of such invoices. This would show that the amount due to the appellant as price of the ice cream manufactured for M/s. BBLIL will be tied up for more than one month before payment is received. Apart from the above, since the appellants are manufacturing goods exclusively and according to the specification of BBLIL, in packing material carrying their brand name, it is always facing the risk of the goods being rejected by BBLIL for reasons other than quality. We find that the contention raised by the appellant that the deposit is taken in commercial expediency and as trade practice required in the circumstances of the case is only to be accepted. No material is placed before us to show that the appellant has lowered the price for the product on account of the above deposit.
13. Next contention to be considered is the one relating to the allegation that the appellant has accepted an amount of Rs. 7.50 crores towards payment of non-competition fee. The appellant is fully justified in contending that the above finding is factually wrong. On going through the non-competition agreement entered into between the parties it is seen that the amount paid to the appellant is only Rs. 0.50 crores. Rs. 7.50 crores was paid to all the units of K(North) together. We are not able to agree with the view taken by the Commissioner (Appeals) that the price is affected due to payment of the above amount to the appellant as a consideration of non-competition in the market with BBLIL as per terms of the sourcing agreement.
14. In the light of the above fact, we will examine whether the finding in the impugned order that there is a mutuality of interest between the appellant and the buyer is justified. This Tribunal had occasion to consider similar terms in an agreement between the manufacturer and buyer in LVT Products Ltd. v. CCE, Belgaum . In the above case dispute arose regarding assessable value of the biscuits manufactured by the appellant with the brand name ‘Horlicks’ and sold to M/s. HMM Ltd. in terms of an agreement entered into between the parties. The assessing authority took the view that the appellant was manufacturing biscuits on behalf of M/s. HMM Ltd. and relied on the following features of the agreement:
(a) HMM Ltd. was supplying one of the main raw materials, namely, Horlicks melted milk food to the appellant;
(b)HMM Ltd. had interest in the activities of the appellant at various stages like the place for storing raw materials, quality control, requirement in regard to the ingredients of the biscuits, control over the plant and machinery;
(c) Packing materials to be used by the appellant were to be strictly according, to the specifications of HMM Ltd. and approved by them; and
(d) HMM Ltd. was entitled to depute their staff for inspection of the goods manufactured by the appellant.
The Tribunal took the view that the above circumstances do not spell out a case of manufacturing activity being carried out by the appellant on behalf of HMM Ltd. It was further held that HMM Ltd. having agreed to purchase 500 MTs of biscuits with ‘Horlicks’ brand name would be naturally concerned with ensuring quality control and the provisions of the agreement had only such an end in view. According to us in the present case also, the terms and conditions of the agreement can lead us only to a similar conclusion. We are also of the view that’ the Revenue has failed to prove in this case that the appellant and BBLIL are ‘related persons’. After referring to its own earlier decisions the Supreme Court in Union of India v. Playworld Electronics Pvt. Ltd. reiterated its view that merely because the goods are produced with customers’ brand name and entire production is sold to the customer it will not lead to a conclusion that the sale was to a related person. The above decision was followed by the Bombay High Court in Ceam Electronics Pvt. Ltd. v. Union of India .
15. Learned Departmental Representative sought to place reliance on three decisions to support the finding of the Commissioner. One of the decision is Television factory-Solana v. CCE, Chandigarh . On going through the above decision we find that the view taken therein is directly against the decision of the Supreme Court referred above. The next decision is Pious Pharmaceuticals Pvt. Ltd. v. CE, Mumbai-III 2000 (126) ELT 875. It is seen that the conclusion in the above decision was arrived at relying on the decision of the Tribunal in Pawan Biscuits Co. (Pvt.) Ltd. v. CCE . It is relevant to note that the decision of this Tribunal in Pawan Biscuits Co. (Pvt.) Ltd. was reversed by the Supreme Court in Pawan Biscuits Co. (Pvt.) Ltd. v. CCE, Patna . Pious Pharmaceuticals Pvt. Ltd. was decided much earlier on 18.2.1997, whereas the decision of the Supreme Court in Pawan Biscuits came on 20.7.2000. Therefore, Revenue cannot place any reliance on Pious Pharmaceuticals in the present case.
16. The third decision relied on by the Revenue is Narendra Industries v. CCE, Rajkot . In this case the facts are entirely different. 100% of the production of the appellants was supplied to M/s. L.M.S. Marketing Pvt. Ltd. The Directors of both the appellant as well as the buyer-were common, office of both the companies was situated at the same place and the appellant was under the management of the buyer company which looked after the sales promotion activities in respect of the product manufactured by the appellant and also incurred expenses towards advertisement, sales promotion, etc. Interest free advance was being given to the appellant against supply of goods and there was substantial financial transaction between the two. It was in this background the Tribunal came to the conclusion that they are related persons. In the present case the terms of the agreement would not justify a similar conclusion. Therefore, this decision is also of no help to the Revenue.
17. In the light of above discussion we hold that the appellant and M/s. BBLIL are not related persons, the transaction between them is one of principal to principal, price was the sole consideration for the sale of the goods and assessable value cannot be computed on the basis of the price at which BBLIL sold the product from its depot.
18. In the result, the impugned orders are set aside and the appeals stand allowed.
11. The above findings are clearly applicable to the facts of the present case. It is not necessary to duplicate the findings as the findings have been rendered on same allegations and identical facts in their own case. Respectfully applying the ratio of the cited judgement as rendered by Northern Regional Bench in appellant’s own case on this very ground, the impugned order is set aside and appeals are allowed with consequential relief, if any, as per law.
(Pronounced in open Court on 18.11.2003)