Commissioner of
Central Excise, Faridabad Vs. M/S. Food & Healthcare Specialities & ANR.
[Civil Appeal Nos.
6539-6540 of 2010]
Judgment
D.K. JAIN, J.:
1.
These
appeals under Section 35L(b) of the Central Excise Act, 1944 (for short
"the Act") are directed against a common final order, dated 2nd February
2005 in Appeal No. E/5261-62/04-NB(A), passed by the Customs Excise & Service
Tax Appellate Tribunal, New Delhi (for short "the Tribunal"). By the
impugned order the Tribunal has quashed the additional excise duty demand of
`9,34,89,367/- under Section 11A of the Act; penalties of `1.5 crores each on respondent
Nos.1 and 2 1 under Rule 173Q of the Central Excise Rules, 1944 (for short
"the 1944 Rules") and Rule 25(1) of the Central Excise Rules, 2001
(for short "the 2001 Rules") read with Section 38A of the Act and a penalty
of `2 crores under Rule 209A of the 1944 Rules and Rule 26 of 2001 Rules read
with Section 38A of the Act on Respondent No. 2 as confirmed by the Deputy
Commissioner of Central Excise.
2.
Succinctly
put, the material facts giving rise to the present appeals are as under: Respondent
No.1--M/s Food & Healthcare Specialities (for short "the Assessee")
was engaged in the blending and packing of `Glucon D' for M/s Heinz India Pvt.
Ltd. (for short "Heinz"), respondent No.2 in these appeals, pursuant to
an agreement commencing from 1st March 2000. Under the agreement, Heinz was to supply
raw material, packing material and the technical know-how to the Assessee for
the blending and packing of the said product. From March 2000 to September
2000, the Assessee paid excise duty on the basis of wholesale price of the product
at the depots of Heinz.
However, for the period
commencing from October 2000, they filed price declarations seeking to modify the
assessable value of the product as the aggregate of cost of raw material, packing
material and their job work charges and started paying duty on the same. During
the course of investigations undertaken by the revenue, it was found that the
said product was also being processed at the Aligarh factory of Heinz and the duty
on those clearances was being paid at the assessable value/depot sale price of Heinz.
Consequently, three
notices were issued to the Assessee for the period October 2000 to December
2000; January 2001 to June 2001 and July 2001 to February 2002, to show-cause as
to why the assessable value declared by them be not rejected and the price declarations
submitted by them be not amended by determining the assessable value on the
basis of the sale price fixed by Heinz at its depots and the duty so paid be
not recovered along with penalty under Rule 173Q of the 1944 Rules. Upon consideration
of the cause shown by the Assessee, the Adjudicating Authority, by its order dated
31st August 2004, confirmed the differential demand indicated in the show cause
notices and imposed the aforesaid penalties on the Assessee as also on Heinz.
On appeals preferred against
the said order, the Tribunal, by an exceptionally short order, set aside the order-in-original,
concluding that since the Adjudicating Authority has itself given a specific
finding that the status of the Assessee was not better than that of hired
labour and Heinz is the manufacturer, the duty is leviable only on the manufacturer.
Being aggrieved by the dismissal of its appeal 3 under Section 35G of the Act by
the High Court, as not maintainable, the revenue is before us in these appeals.
3.
Mr.
B. Bhattacharyya, learned Additional Solicitor General appearing for the appellant,
referring to several clauses of the agreement between the Assessee and Heinz,
in particular, clauses (d), (1), (2), (5), (7), (9),(13), (15) and (16), vehemently
submitted that the relationship between the Assessee and Heinz was one of
principal and agent and not of principal to principal and therefore, the price
at which, Heinz sold `Glocon-D' in the wholesale market must be taken as the assessable
value. According to the learned counsel, Heinz had complete control over the activities
of the Assessee, who was merely a job worker.
To bring home his
point that the Assessee was merely an extended arm of Heinz, he laid emphasis
on the fact that processed `Glocon- D' was stored at the same premises from
where Heinz was operating; Heinz had also taken an exemption from registration under
Rule 9(2) of the erstwhile Central Excise (No.2) Rules, 2001, in terms of Notification
No. 36/2001 dated 26th June 2001, which was available to a manufacturer who got
his goods manufactured on his account from any other person, subject to the condition
that the said manufacturer authorised the person, who actually manufactured or
fabricated the said goods, to comply with all the procedural 4 formalities under
the Act and the rules made thereunder, in respect of the goods manufactured on
behalf of the said manufacturer.
Relying heavily on the
decision of this Court in Commissioner of Central Excise, Indore Vs. S. Kumars
Ltd. & Ors.1, wherein dealing with the question of assessable value of the processed
goods in relation to the processor the earlier decisions of this Court in M/s
Ujagar Prints & Ors. (II) Vs. Union of India & Ors.2 (for short "Ujagar
Prints (II)"), M/s Ujagar Prints & Ors. (III) Vs. Union of India &
Ors.3 (for short "Ujagar Prints (III)"), Empire Industries Limited
& Ors. Vs. Union of India & Ors.4 and Pawan Biscuits Co. Pvt. Ltd. Vs. Collector
of Central Excise, Patna5, were discussed. Learned counsel argued that the
formula laid down in the Ujagar Prints (II) or (III) would not apply to the
fact-situation. It was stressed that having failed to examine the relationship
between the Assessee and Heinz, the Tribunal's order deserved to be set aside
and the matter was fit to be remitted back to the Tribunal for fresh
adjudication on the touchstone of the ratio of S. Kumars. 1 (2005) 13 SCC 266 2
(1989) 3 SCC 488 3 (1989) 3 SCC 531 4 (1985) 3 SCC 314 5 (2000) 6 SCC 489
4.
Per
Contra Mr. V. Lakshmi Kumaran, learned counsel appearing on behalf of the respondents
submitted that in the show cause notice there was no allegation that the Assessee
and Heinz are related persons and therefore, Section 4 (1)(b) of the Act could
not be invoked to determine the assessable value. It was asserted that in reply
to the show cause notice, it was clearly stated that apart from the fact that dealings
between the Assessee and Heinz were on principal to principal basis, the
Assessee was also processing goods for other manufacturers. In support of this argument,
learned counsel relied upon clause 22 of the agreement between the said
parties, which stipulated that:
"Nothing herein
contained shall constitute or be deemed to or is intended to constitute
F&HS as an agent of Heinz. It is hereby expressly agreed and declared that
F&HS shall not at any time
a) Enter into a
contract in the name of or purporting to be made on behalf of Heinz.
b) .............................................................."
It was argued that the clause clearly shows that the parties were at arm's length
and the Assessee was processing `Glucon-D' only on job-work basis. It was thus
asserted that dealings between the Assessee and Heinz being on principal to
principal basis, the principle laid down in Ujagar Prints (II), as clarified in
Ujagar Prints (III), for determining the assessable value, was on all fours
with the fact-situation at hand and as such the ratio of the judgment in S. Kumars
will not apply.
In the compilation filed
on behalf of the Assessee, reliance is also placed on Circular No.:
619/10/2002-CX dated 19th February 2002, which clarifies that even after the introduction
of new valuation provisions with effect from 1st July 2000, in respect of goods
manufactured on job-work basis, valuation would be governed by Rule 11 read
with Rule 6 of the Central Excise Valuation (Determination of Price of Excisable
Goods) Rules, 2000 (for short "the 2000 Rules") and the decisions of this
Court in Ujagar Prints II and Pawan Biscuits. According to the learned counsel,
the issue raised by the revenue stands concluded by the ratio of Pawan
Biscuits, and therefore, the appeals deserve to be dismissed.
5.
The
principles of valuation of excisable goods for the purpose of charging excise
duty are contained in Section 4 of the Act (as amended with effect from 1st
July 2000), which, insofar as it is relevant, reads 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
their value, then, on each removal of the goods, such value shall-- (a) in a case
where the goods are sold by the assessee, for delivery at the time and place of
the removal, the assessee and the buyer of goods are not related and the price
is the sole consideration for the sale, be the transaction value; 7 (b) in any
other case, including the case where the goods are not sold, be the value
determined in such manner as may be prescribed.
(2) ....................................................................
(3) For the purposes
of this section,-
(a) ............................................................
(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 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 meaning 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); (c) ............................................................
(d) "transaction
value" means the price actually paid or payable for the goods, when sold,
and includes in addition to the amount charged as price, any amount that the
buyer is liable to pay to, or on behalf of, the assessee, by reason of, or in
connection with the sale, whether payable at the time of the sale or at any other
time, including, but not 8 limited to, any amount charged for, or to make
provision for, advertising or publicity, marketing and selling organization expenses,
storage, outward handling, servicing, warranty, commission or any other matter;
but does not include the amount of duty of excise, sales tax and other taxes,
if any, actually paid or actually payable on such goods."
The new Section 4 of
the Act, substituted w.e.f 1st July 2000, and material for our purpose, prescribes
that the value of excisable goods shall be the transaction value subject to
satisfying the conditions that: (i) the price must be the sole consideration;
(ii) the buyer must not be a related person and (iii) the goods must be sold by
the assessee for delivery at the time and place of removal.
The basic principle underlying
Section 4(1)(a) of the Act is the transaction value as defined in clause (d) of
sub-section 3 of Section 4 of the Act, which inter-alia, means the price
actually paid or payable for the goods when sold, provided the assessee and the
buyer of goods are not related. Clause (b) of sub-section (3) of Section 4 of
the Act, inter-alia, stipulates that person shall be deemed to be
"related" if they are so associated that they have interest, directly
or indirectly, in the business of each other. It is clear that if the assessee
and the buyer are related, valuation has to be under Section 4(1) (b) of the Act
read with the 2000 Rules. We may, however, note that conceptually there is no significant
change in the definition of "related person" in the new and repealed
Section 4 of the Act.
6.
Thus,
the pivotal question on which learned counsel for both the parties addressed
us, is whether the Assessee was merely a processor of `Glucon-D', independent of
Heinz or it was related to Heinz. In other words, whether the relationship
between the Assessee and Heinz was one of principal to principal or that of an
agent and principal. As aforesaid, the stand of the revenue is that the Assessee,
as the processor, is not independent of Heinz and therefore, ratio of Ujagar Prints
(III) would not apply. It is evident from the order of the Tribunal that it has
not addressed this aspect of the matter in detail, and has not considered
whether the Assessee and Heinz were related persons. Nevertheless, since the rival
contentions urged before us mainly related to the question as to whether the
formula laid down in Ujagar Prints (III) and reiterated in Pawan Biscuits, would
apply or the principle enunciated in S. Kumar will govern the present case, it will
be useful to notice the principle enunciated in Ujagar Prints (II) and (III) as
also the ratio of S. Kumar.
7.
In
Ujagar Prints (II), a Constitution Bench of this Court was called upon to consider
the correctness of the view taken by this Court in Empire Industries. In Empire
Industries, it was held that the Central Excises and Salt and Additional Duties
of Excise (Amendment) Act, 10 1980, by which, the processes of bleaching, dying
and printing were brought within the definition of `manufacture' for the
purposes of the Central Excise and Salt Act, 1944 and the Additional Duties of
Excise (Goods of Special Importance) Act, 1957 were constitutionally valid.
While upholding the
validity of the Amendment Act, it was observed that when the textile fabrics are
subjected to the processes like bleaching, dyeing and printing etc. by
independent processes, whether on their own account or on job charges basis, the
value for the purposes of assessment under Section 4 of the said Act will not
be the processing charges alone but the intrinsic value of the processed fabrics
which is the price at which such fabrics are sold for the first time in the wholesale
market.
The principle enumerated
in Section 4(1)(a) of the Act was applied to the processed goods. In other
words, the assessable value of the processed goods, as far as the processor was
concerned, had to be the same irrespective of the fact whether the processor manufactures
the goods and then processes them itself or gives the goods and merely
undertakes processing before returning the same to the manufacturer/owner. That
common norm was the wholesale price.
8.
On
an application filed for clarification of the judgment in Ujagar Prints (II),
this Court by a short order in Ujagar Prints (III) clarified as follows: "1...it
is made clear that the assessable value of the processed fabric would be the
value of the grey cloth in the hands of the processor plus the value of the job
work done plus manufacturing profit and manufacturing expenses whatever these
may be, which will either be included in the price at the factory gate or
deemed to be the price at the factory gate for the processed fabric.
The factory gate here
means the "deemed" factory gate as if the processed fabric was sold
by the processor..." The Court went on to explain: "2. If the trader,
who entrusts cotton or man-made fabric to the processor for processing on job work
basis, would give a declaration to the processor as to what would be the price at
which he would be selling the processed goods in the market, that would be taken
by the excise authorities as the assessable value of the processed fabric and
excise duty would be charged to the processor on that basis provided that the
declaration as to the price at which he would be selling the processed goods in
the market, would include only the price or deemed price at which the processed
fabric would leave the processor's factory plus his profit..."
9.
The
decision in Ujagar Prints (III) was subsequently followed by this Court in Pawan
Biscuits. In that case, the Tribunal had held that the assessee was, in reality,
an agent of Britannia Industries Ltd. and, therefore, the price at which Britannia
was selling the manufactured goods in the wholesale market was to be taken as
the assessable value. The decision of the Tribunal was reversed by this Court.
It was found that the
agreement between Pawan Biscuits and Britannia indicated that their
relationship was one of principal to principal and not that of principal and
agent and also that the assessee (Pawan Biscuits) could manufacture biscuits of
other brands and sell them. Observing that Pawan Biscuits had been established
much prior to its agreement with Britannia, it was held that the decisions in
Ujagar Prints (II) and (III) could not be factually distinguished. In short, it
was held that for the purpose of determining assessable value, it is necessary
to include the processor's expenses, costs, and charges plus profit, but it is not
necessary to include the trader's profits who gets the fabrics processed, because
those would be post-manufacturing profits.
10.
A
similar issue again came up for consideration of this Court in S. Kumars. In that
case, the assessee was processing grey fabrics. Sometimes the grey fabrics were
processed on their own account and sometimes the grey fabrics were received for
processing on job charge basis from others, referred to in the judgment as the merchant
manufacturers. The assessee paid excise duty on the fabrics processed by it
treating the value of the processed fabric as being that at which, the merchant
manufacturers were selling the processed goods. This, according to the assessee
was in accordance with the decision in Empire Industries.
However, on the
fabrics processed by it which had been received from the merchant manufacturers,
the assessee valued the processed goods on the basis of the cost of grey
fabrics plus the processing charges as well as its manufacturing expenses and
profits. In other words, the price at which the merchant manufacturers were selling
the processed goods was not taken into consideration. According to the assessee,
this was done in light of the decision in Ujagar Prints (II) and (III). A
notice was issued to the assessee to show-cause as to why differential duty of
Excise along with penalty be not recovered from it as the assessee and the
merchant manufacturers were all firms and companies having a common management and
control with some of them selling grey fabrics to the assessee, which after
processing the fabrics was sold to some independent dealers.
All such independent
dealers as well as the merchant manufacturers were described as `S. Kumars' and
the revenue asserted to treat the price charged by the merchant manufacturers from
independent dealers as the assessable value of the processed fabrics and to
levy excise duty thereon. The assessee denied that the merchant manufacturers were
related persons and thus disputed the basis on which claim for additional
excise duty was made.
The stand of the
assessee was that by virtue of the decision of this Court in Ujagar Prints
(III), they were liable to treat the notional sale by the assessee to the merchant
manufacturers as the relevant point for determining the assessable value.
Examining the provisions of Section 4 of the Act, as it existed at the relevant
time, with reference to the Central Excise Valuation Rules, 1975 and the
decisions of this Court in Ujagar Prints (II) and Ujagar Prints (III) and Pawan
Biscuits, the Court held as follows:
"We, therefore,
do not agree that Ujagar Prints (III) would apply even to a processor who is
not independent and, as is alleged in this case, the merchant manufacturers and
the purchasing traders are merely extensions of the processor. In the latter case,
the processor is not a mere processor but also a merchant manufacturer who purchases/manufactures
the raw material, processes it and sells it himself in the wholesale market. In
such a situation, the profit is not of a processor but of a merchant manufacturer
and a trader.
If the transaction is
between related persons, the profit would not be "normally earned" within
the meaning of Rule 6(b)(ii). If it is established that the dealings were with related
persons of the manufacturer, the sale of the processed fabrics would not be
limited to the formula prescribed by Ujagar Prints (III) but would be subject
to excise duty under the principles enunciated in Empire Industries as affirmed
in Ujagar Prints (II), incorporating t he arms length principle." (Emphasis
supplied by us)
11.
It
is manifest from the above that the only distinctive feature of S. Kumars in comparison
with Ujagar Prints (II) and (III) is the emphasis on the factum of relationship
between the parties viz., the processor and the merchant manufacturers/traders,
in the former. In short, S. Kumars holds that if the processor-assessee is not at
arm's length with the merchant manufacturer and is a related person, the formula
prescribed in Ujagar Prints (III) would not apply and assessable value for the
purpose of levy of excise duty will have to be determined in terms of the ratio
of S. Kumar i.e. in accordance with the procedure contemplated in Section
4(1)(b) of the Act read with the relevant valuation Rules. We deferentially
concur with the ratio of S. Kumars.
12.
In
the present case, as aforesaid, neither did the Tribunal address this aspect of
the matter, nor did it consider whether the Assessee and Heinz are related persons.
It based its decision solely on the observation made by the Adjudicating
Authority "that the status of the Assessee was not better than that of a
hired labour".
We are, therefore, of
the opinion that in the light of the above discussion, it would be necessary
for the Tribunal to examine in depth the agreement between the Assessee and Heinz
as also any other additional material, the parties may like to adduce and
determine the question whether or not both of them are related persons.
13.
Resultantly,
the appeals are allowed and the matter is remanded back to the Tribunal for the
purpose of determining the nature of relationship between the Assessee and
Heinz. If it is found that they are not related persons, then the present
decision of the Tribunal will stand affirmed. However, if the Tribunal finds
that the Assessee and Heinz are related, it shall remit the matter to the Adjudicating
Authority for fresh determination of the assessable value of the goods in question
in accordance with law. However, having regard to the facts and circumstances
of the case, there will be no order as to costs.
.............................................J.
(D.K. JAIN)
.............................................J.
(ANIL R. DAVE)
NEW
DELHI
FEBRUARY
13, 2012.
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