Commnr. of Central
Excise, Chandigarh Vs M/s. Pepsi Foods Ltd.
J U D G M E N T
GANGULY, J.
1.
These
statutory appeals (Civil Appeal Nos. 1921-1923 of 2003) have been filed under Section
35-L (b) of the Central Excise Act, 1944 (the Act), against the judgment and
final Order No. 353-355/2002-A, dated 8th August, 2002, passed by the Customs,
Excise and Gold (Control) Appellate Tribunal, Bench-A, New Delhi.
2.
The
material facts are that the respondent- assessee, M/s. Pepsi Foods Ltd. is
engaged, inter alia, in the manufacture of edibles, marketed under the names of
Potato Chips, Baked Cheetos Balls, Monster Munch, etc. These are covered under
Chapter Sub-Headings 2001.10 and 1904.10 of the Central Excise Tariff Act, 1985
(Act 5 of 1986). Uptill 12th January, 1998, as much as 96% of these products manufactured
by the respondent, were sold to M/s. Frito-Lay India, a `related person', and the
balance of 4% were sold to independent wholesale buyers. From 12th January,
1998, the sale pattern between the two was changed, wherein M/s. Pepsi Foods Ltd.
started manufacturing the aforesaid products on behalf of M/s. Frito-Lay India.
3.
By
a communication dated 15th December, 1997 addressed to the Assistant Commissioner,
Central Excise, Division Jalandhar, the respondent stated that it had been paying
excise duty on its manufactured excisable goods after taking into account inter
alia, the costs of raw materials, packing materials, conversions and their profit
margin. Subsequently it calculated and paid the differential duty, on the price
at which the final products were sold by M/s. Frito-Lay India to its wholesale
dealers. It enclosed certificate of a chartered accountant in support of its
calculations. In its submission of Annexure-A as required under Rule 173C (3A) of
Central Excise Rules, 1944, it mentioned that the sale of the products occurred
at its factory gate. It was also evident from the letter that the final
products were entering the market stream when they were being sold by M/s. Frito-Lay
India to their wholesale dealers.
4.
The
Revenue, however, accepted the incidence of sale at the time of purchase of the
final products by the whole sellers from M/s. Frito- Lay India and not, as submitted
by the respondent-assessee, at the factory gate. Resultantly, a show-cause notice
dated 13th November, 1998 was issued to the respondent and to that the respondent
showed cause stating inter alia that the sale to the whole sellers was being
effected from the depot of the related person, viz. M/s. Frito-Lay India. Dissatisfied
with the reply, the Revenue demanded duty of Rs.12,26,215/-.
5.
Aggrieved,
the respondent moved the Commissioner of Central Excise (Appeals), Chandigarh. The
Commissioner, however, held that the freight charges arising between the factory
of the respondent and the depot of the related person were to be included in
the sale price as the place of removal of the goods was the depot of the
related person.
6.
Aggrieved
thereby, the respondent appealed to the Central Excise and Gold (Control) Appellate
Tribunal, New Delhi. The Tribunal overruled the decision of the Appellate Authority
inter alia stating that "...Merely because a deeming provision as
contained in the 3rd proviso has to be applied regarding the price of the goods
sold in the course of wholesale trade to a related person, it cannot be
contended that there was no sale at all to the related person at the factory gate,
as alleged by the Revenue. The place of removal, therefore, continues to be the
assessee's factory. The depot premises of the related person from where the
goods are sold cannot be treated as place of removal for the purpose of Section
4 (4) (b). Therefore, the appellant is fully justified in contending that the
cost of transportation from the place of removal, namely, factory to the place
of delivery shall be excluded from the price to arrive at the assessable value
in terms of Section 4 (2)."
7.
Thus
aggrieved, the Revenue appealed before this Court under Section 35-L (b) of the
Act.8. It is an admitted fact here that M/s. Frito- Lay is "related person"
of the M/s. Pepsi Foods Ltd. (Snacks Foods Division). The expression "related
person" has been specifically defined in Section 4 (4) (c): "4. Valuation
of excisable goods for purposes of charging of duty of excise.- (1) ... (2)
... (3) ... (4) For the purposes of this section, - (a) ... (b) ... 6 (c)
"related person" means a person who is so associated with the
assessee that they have interest, directly or indirectly, in the business of
each other and includes a holding company, a subsidiary company, a relative and
a distributor of the assessee, and any sub-distributor of such distributor. Explanation.-
8.
In
this clause "holding company", "subsidiary company" and "relative"
have the same meanings as in the Companies Act, 1956 (1 of 1956).
9.
The
transaction between M/s. Pepsi Foods Ltd. and M/s. Frito-Lay India has to be
understood as one where sale price cannot be known. In situations where the
assessee sold its goods to a related person, it was prudent to understand that
the price in such a sale would be deliberately understated so as to evade taxation
within the scheme of the Act. It was to dissuade such sales that the
legislature had decided to deem the price of the goods at the time of their
sale by the related persons to wholesale market. The `normal price' as mentioned
in Section 4 (1) (a) of the Act. The provision of Section 4(1)(a) is as
follows: "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 value, such value shall, subject to the other
provisions of this section, be deemed to be- (a) the normal price thereof, that
is to say, the price at which such goods are ordinarily sold by the assessee to
a buyer in the course of wholesale trade for delivery at the time and place of
removal, where the buyer is not a related person and the price is the sole
consideration for the sale: Provided that-
i.
where,
in accordance with the normal practice of the wholesale trade in such goods,
such goods are sold by the assessee at different prices to different classes of
buyers (not being related persons) each such price shall, subject to the
existence of the other circumstances specified in clause (a), be deemed to be
the normal price of such goods in relation to each such class of buyers;
ii.
(ii)
where such goods are sold by the assessee in the course of wholesale trade for
delivery at the time and place of removal at a price fixed under any law for the
time being in force or at a price, being the maximum, fixed under any such law,
then, notwithstanding anything contained in clause
iii.
(iii)
of this proviso, the price or the maximum price, as the case may be, so fixed,
shall, in relation to the goods so sold, be deemed to be the normal price
thereof; (iii) where the assessee so arranges that the goods are generally not
sold by him in the course of wholesale trade except to or through a related
person, the normal price of the goods sold by the assessee to or through such
related person shall be deemed to be the price at which they are ordinarily
sold by the related person in the course of wholesale trade at the time of
removal, to dealers (not being related persons) or where such goods are not
sold to such dealers, to dealers (being related persons) who sell such goods in
retail;
1.
2.
3.
4.
5.
6.
7.
8.
9.
10. In these appeals the
Revenue contends that in a sale of excisable goods between an assessee and a
related person under Section 4 (1) (a) (iii) of the Act (as it was prior to its
amendment in 2000) the `normal price' for the sale is deemed to be the one at
which the goods are ordinarily sold by the `related person' to the whole
sellers. Therefore, the place of removal for such goods should be the depot of the
related person from where the goods are sold to the whole sellers, instead of the
factory gate of the assessee. The Revenue contends that an obvious corollary
to this is that the freight charges so arising between the factory gate of the
assessee and the place of removal at the depot of the related person should
constitute the value of the goods for the purposes of computation of excise
duty. It further contends that since, the `place of removal' is not the
assessee's factory gate but rather the depot of the related person, the price
is known, only at the price at which goods are sold to whole sellers by the
related person.
11. Opposing the same,
the learned counsel for the respondent contended that M/s. Frito Lay India is not
a subsidiary of the respondent. The brand names of the products are held by
Pepsi Co. Inc. USA. Respondent's case is that 96% of the products manufactured
by it are sold to M/s. Frito Lay India and only 4% to independent whole sellers.
Originally the assessable value of the items manufactured by the respondent was
arrived at on the basis of price at which the respondent sold them to M/s.
Frito Lay India by taking into account the costs of raw materials, packing
materials, conversions and the profit margin. Their further case is that Pepsi
Co. Inc. USA is a holding company and the respondent and M/s. Frito Lay India
are neither holding companies nor subsidiary companies inter se. The respondent
wants the assessment to be made at the price at which M/s. Frito Lay India sold
the products to its wholesale dealers. That is why they claim deduction towards
freight and transportation charges from the factory gate of the respondent to
the depot of M/s. Frito Lay India. The learned counsel for the respondent also
submitted that the transaction between respondent and M/s. Frito Lay India was
on a job work basis and that the assessment of value should be guided by the
principles laid down in the case of Ujagar Prints etc. etc. v. Union of India
& Ors. reported in AIR 1989 SC 972.
12. The learned counsel
for the appellant submits that the instant case is covered by the three judge Bench
decision of this Court in Commissioner of Central Excise, Belgaum v. Akay
Cosmetics (P) Ltd. [(2005) 3 SCC 764]. It appears that in the instant case the
period in question is between 1st November 1997 and 28th February 1999. Almost the
same period was considered by this Court in its decision in Akay Cosmetics
(supra). In the present case it is not disputed by the respondent that M/s. Frito
Lay India is its related person under Section 4(4) (c). The facts discussed in
Akay Cosmetics (supra) substantially resemble the facts of this case, except of
course the difference in the items manufactured. In para of Akay Cosmetics
(supra) (page 774 of the report) this Court formulated the key question, which is:
"how and when the assessable value of the manufactured product is to be
determined?"
13. Having posed that
question, the learned judges answered the same in para 28, (page 777 of the report)
inter alia, holding as follows:
"Under section
4 (2), it was provided that where the price of the excisable product for
delivery at the place of removal was not known and the value was determined with
reference to the price for delivery at a place other than the place of removal,
the cost of transportation from the place of removal to the place of delivery
had to be excluded from such a price. The reason is important. Section 4 (2) is
a residuary section and applied only to cases where the price at the place of
removal was not known and the taxable value of the excisable product had to be determined
with reference to the price for delivery (sale) at a place other than the price
of removal. Under Section 4 (2), the cost of transportation from the place of removal
to the place of delivery was deductible, provided that the assessable value
(taxable value) was not known at the factory gate and had to be determined with
reference to another place. If the goods were manufactured at place
"X" but the assessable value was determined with reference to place
"Y", the cost of transportation had to be deducted."
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14. In coming to the said
conclusion, the learned judges relied on this Court's decision in Union of India
and others v. Bombay Tyre International Limited and others, (1984) 1 SCC 467.
In para 31 of Akay Cosmetics (supra), the learned judges summed up the essence
of the question by saying, inter alia, "therefore the article became an
object of assessment when it was sold by the manufacturer."
15. It is not in dispute in
the instant case Section 4(2) does not apply. What applies is the provision of
Section 4(1)(a)(iii) as it stood at the relevant time. The rationale of the proviso
(iii) was explained in Akay Cosmetics (supra) as follows:
"...The
implication of the manufacturer, the assessee and the buyer being related to
each other was that the price charged to the related person was presumed to be understated
and to dissuade such sales, the legislature had introduced the said proviso as
anti-evasion measure. Hence, to give deductions to the assessee as claimed,
would defeat the very object of the third proviso. Under all three provisos,
the manufacturer remained the assessee, the "object" of the
assessment remained the same and neither the identity of the manufacturer nor
the identity of the excisable goods underwent any change. Even the place of removal
remained unchanged, under the third proviso, the basis of assessable value
alone changed when the price of the related person was adopted as the basis of
the valuation. Therefore, proviso (iii) did not break the nexus between price
and value under Section 4 (1) (a) of the Act." (Para 33, page 779 of the
report)
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17. The learned counsel
for the respondent tried to distinguish the present case from the ratio of Akay
Cosmetics (supra) by relying on the facts in that case by referring to paras 2
and 7 of the judgment in Akay Cosmetics (supra). The learned counsel submitted that
in Akay Cosmetics (supra), freight charges claimed was the one between the depot
of the related person to the place of the unrelated dealer. Obviously there are
some factual differences that are noted in para 2 of the said judgment, but
that does not impinge upon the ratio on the interpretation of Section
4(1)(a)(iii) of the Act which is quoted above.
18. Therefore, the
finding of the Customs, Excise and Gold (Control) Appellate Tribunal, Bench- A,
New Delhi, which is quoted above and which upholds the contention of the
respondent that it is justified in claiming exclusion of freight charges arising
between the factory gate of the respondent to the depot of the related person, cannot
be sustained. This Court finds that in the facts and circumstances of this
case, Section 4 (2) is not applicable. This Court, therefore, affirms the
order-in-original but with a rider.
19. In the instant case
in the order-in-original a penalty has been imposed which is equal to the amount
of duty. Such penalty has been imposed in exercise of power under Section 11 AC
of the Act. Section 11 AC of the Act as it stood at the relevant point of time
runs as under: "11AC. Where any duty of excise has not been levied or
paid or has been short- levied or short-paid or erroneously refunded by reasons
of fraud, collusion or any wilful mis-statement or suppression of facts, or
contravention of any of the provisions of this Act or of the rules made there under
with intent to evade payment of duty, the person who is liable to pay duty as
determined under sub- section (2) of section 11A, shall also be liable to pay a
penalty equal to the duty so determined: Provided that where the duty determined
to be payable is reduced or increased by the Commissioner (Appeals), the
Appellate Tribunal or, as the case may be, the court, then, for the purposes of
this section, the duty as reduced or increased, as the case may be, shall be taken
into account."
20. From a perusal of the
aforesaid section, especially the underlined portion, it is clear that in order
to attract the penalty provision under Section 11 AC, criminal intent or `mens rea'
is a necessary constituent. In the reply to the show cause notice the stand
which has been taken by the respondent is that it has been paying the duty and
there is no malafide intention on its part to evade the payment of duty. The
further stand is that the goods were cleared from the factory only on payment
of duty. This stand which has been taken in the reply to the show cause notices
was not found to be incorrect in the order-in-original. As such the imposition
of penalty of the equal amount of duty under the order-in-original cannot be
sustained.
21. It is well settled that
when the statutes create an offence and an ingredient of the offence is a
deliberate attempt to evade duty either by fraud or misrepresentation, the statute
requires `mens rea' as a necessary constituent of such an offence. But when factually
no fraud or suppression or mis statement is alleged by the revenue against the
respondent in the show cause notice the imposition of penalty under Section 11
AC is wholly impermissible.
22. The Court in this
connection may remind itself of the fundamental principle "that an accused
person cannot be convicted without proof of mens rea, unless from a
consideration of the terms of the statute and other relevant circumstances it clearly
appears that that must have been the intention of Parliament." [See the
decision of the House of Lords in Vane v. Yiannopoullos, (1964) 3 All ER 820, and
the opinion of Lord Reid at page 823].
23. In Vane (supra), the
word `knowingly' was used in the statute as a condition of creating liability.
24. The aforesaid dictum of
Lord Reid has been followed by this Court also. A reference in this connection
may be made to the decision in Union of India v. Rajasthan Spinning &
Weaving Mills reported in 2009 (238) E.L.T. 3 (S.C.). This Court considering
Section 11 AC of the Act held in para 19 at page 12 of the report as follows: "19.
From the aforesaid discussion it is clear that penalty under Section 11AC, as the
word suggests, is punishment for an act of deliberate deception by the assessee
with the intent to evade duty by adopting any of the means mentioned in the section."
25. Following the aforesaid
well settled principles, this Court quashes that part of the order-in-original which
imposes penalty without any finding of fraud or mis-statement against the respondent.
This part of the order-in-original is quashed. Save as aforesaid, the order-in-original
is upheld. These appeals filed by the revenue are allowed to the extent
indicated above. No costs.
.......................J.
(D.K. JAIN)
.......................J.
(ASOK KUMAR GANGULY)
.......................J.
(H.L. DATTU)
New
Delhi
December
10, 2010
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