ORDER
U.L. Bhat, J. (President)
1. The common-appellant in these appeals having filed the appeals against the common original Order No. 33 to 39/COMM/MRT-1/97, dated 27-11-1997 confirming demand of duty of Rs. 4,57,51,508.17 Under Section 11A on the basis of seven show cause notices for different periods, imposing penalty of an equal amount under Rule 173Q of the Rules and confiscating plant and machinery with option to redeem on fine of Rs. 50 lakhs, appellant has filed these applications seeking waiver of the requirement of pre-deposit of the amount of duty and penalty Under Section 35F of the Act. We have heard both sides.
2. Appellant, engaged in the manufacture of cosmetic goods was paying appropriate duty on the clearances. Certain facts which had not been disclosed earlier were discovered during investigation and in the light of these facts, seven show cause notices in respect of clearances made during the overall period from August, 1995 to June, 1997 were issued proposing demand of differential duty and imposition of penalty etc. and the demand has been confirmed and penalty has been imposed. The manufacturing activity by the appellant was on the basis of two agreements entered with Modi Revlon (P) Ltd. (for short MRL), one regarding manufacture and other regarding trade mark. MRL, in turn, had entered into an agreement with M/s. Revlon Mauritious (for short RM) for supply of technical expertise and for use of brand name of MR and the like. The consequences of all these agreements and certain other significant facts were taken into consideration by the Commissioner in Para 18 & 33 of the impugned order. Appellant was required to purchase raw materials of specified quality from the sources specified in the agreement. In case raw materials were not available with those sources, appellant was to purchase raw materials of the prescribed quality from other sources at prices not in excess of the prices charged by the stipulated sources. MRL had undertaken to pay royalty to RM on the value of turnover of these products less excise duty payable and less the cost of bought out and imported components including customs duty payable and the expenses of clearance. The agreement between the appellant and MRL did not require the appellant to discharge the royalty liability. It was also found that MRL was advancing funds to enable the appellant to pay customs duty for imported components or meet other urgent expenses and the amounts so advanced were re-paid without interest by adjustment against the sale price payable to the appellant. It was found that the premises in which the appellant was running the factory belonged to a company associated with MRL and the premises were taken on monthly rent of Rs. 1 lakh and rent had not been paid. Learned Counsel for the appellant points out that the rent had been subsequently paid though not on the respective due dates.
3. On the basis of the above data, the Commissioner came to the conclusion that the price shown in the agreement between the appellant and MRL was not the normal price since it had not taken into consideration the royalty payable by the MRL, interest on advances and the like and that additional consideration in this behalf must be regarded as having flown from MRL to the appellant. The Commissioner also indicated that in the absence of the data to enable quantification of additional consideration, Rule 7 of the Rules should be applicable and quantification of the duty had to be done on the basis of best Judgement. For this purpose, he decided to go by the wholesale prices charged by MRL to their dealers for the products manufactured by the appellant. It was on this basis that the demand of around Rs. 4.57 crores has been confirmed.
4. The show cause notice specifically alleged that transactions between the appellant and MRL were not on principal to principal basis and appellant was functioning as agent of MRL. This allegation was strongly denied by the appellant in the reply to the show cause notices. After referring to various aspects having a bearing on this controversy, the Commissioner indicated in para 30 of the impugned order that the issue to be decided was one of valuation of goods and not as to who manufactured the goods and on whose behalf. He did not record any specific finding on this controversy. This would mean, according to learned Counsel, that the impugned order did not rest on the premise that appellant was acting as an agent of MRL. This contention, prima-facie, appears to be correct.
5. Learned Counsel for the appellant contended that even the show cause notices did not allege relationship between the appellant and MRL within the meaning of Section 4(4)(c) of the Act, that the impugned order also did not rest on any such relationship and therefore, the Commissioner could not have acted on the wholesale price charged by the MRL to their dealers invoking Rule 7of the Valuation Rules. He also pointed out that the wholesale prices charged by MRL would include the profit margin, establishment charges and distribution expenses of MRL and there is no principle of law by which these items of expenses can be included in the assessable value of the goods in hand of the appellant Under Section 4(1)(b) of the Act. This contention is sought to be resisted on behalf of the Department by pointing out that the price agreed to between the appellant and MRL was a depressed price and not the normal price as contemplated Under Section 4(1) of the Act. Accepting that the element of royalty, the element of interest on advances made available by MRL to the appellant must be reflected in the assessable value of the goods in the hands of the appellant, that may provide justification by inclusion of these elements in the assessable value but cannot be a justification for merely adopting wholesale price charged by the MRL and that too without giving deduction to the establishment charges, profit margin or the marketing expenses of MRL. It is pointed out on behalf of the Department that there is an evidence to show that the manufacturing activity of the appellant was supervised by MRL and on this account, technical fees was paid by the appellant to MRL. This also should have been reflected in the assessable value but was not so reflected. If the factual submission is correct, that would justify inclusion of this element also in the assessable value. We are, prima-fade, satisfied that mere adoption of the wholesale price charged by MRL to their wholesale dealers cannot be regarded as justified.
6. Learned Counsel for the appellant stated that royalty payable by MRL to RM was 5% of the turnover of the specific excisable products less excise duty, cost of bought out and imported components including customs duty and clearance expenses. According to him, the total turnover of MRL during the period was around Rs. 26 crores out of which 17 crores related to excisable goods manufactured by the appellant, deducting excise duty of around 5 crores, cost of imported components and expenses of around 5 crores, the balance would be 7 crores and the royalty payable would be 5% of this amount namely, Rs. 35 lakhs. It is pointed out that the addition of Rs. 35 lakhs would be not to the assessable value but to the wholesale price and duty element in this regard would be around Rs. 27 lakhs as duty as 30%. On the question of advances also, it is pointed out that if the element of interest is to be added to the wholesale price and duty worked out, the additional duty that may become payable on account of alleged additional consideration may not exceed Rs. 25 lakhs at the most and the appellant has already furnished bank guarantee for Rs. 25 lakhs at the stage of investigation and the bank guarantee is still in force. In these circumstances, it is contended that there should be waiver of the requirement of pre-deposit.
7. It is contended on behalf of the Department that the figures furnished in the course of arguments about the turnover of MRL etc. are not borne out by records and may not be acted upon. It is unfortunate that the investigating officers did not try to collect the relevant figures to enable quantification of the additional consideration.
8. Learned Counsel for the appellant also submitted that the appellant has been running at a loss and the factory was closed down in June, 1997. The copy of the balance sheet has been produced before us. It shows that the appellant incurred a loss of Rs. 9.3 lakhs in 1995-96 and Rs. 21.18 lakhs in 1996-97. The value of net current assets on 31-3-1997 was Rs. 3.38 crores and the current liability was Rs. 4.39 crores. On this basis, it is contended that appellant is undergoing financial hardship and is not in a position to deposit any substantial part of the amount demanded.
9. In the light of above circumstances and taking into consideration the fact that the bank guarantee for Rs. 25 lakhs is in force and will be renewed from time to time till the disposal of the present appeal, we direct the appellant to deposit a sum of Rs. 50,00,000/- (Rupees fifty lakhs only) within three months from today and report compliance by 8-10-1998. The appeal will come