Incidence of sale - whether at factory gate of whole-salers premises

PJ/Case Laws/2010-11/1098

Case: Commnr. of Central Excise, Chandigarh Vs M/s. Pepsi Foods Ltd

Citation: 2010-TIOL-109-SC-SX-LB

Issue:- Whether incidence of sale took place at whole-salers premises or at the factory gate for inclusion of freight charges in sale price of the product?

Brief Facts:- Respondent is engaged in the manufacture of edibles, marketed under the names of Potato Chips, Baked Cheetos Balls, Monster Munch, etc falling under heading 2001.10 and 1904.10. Up till 12.01.1998, as much as 96% of these products manufactured by the respondents were sold to M/s. Frito-Lay India, a `related person', and the balance of 4% was sold to independent wholesale buyers. From 12th January, 1998, the sale pattern between the two was changed and respondent started manufacturing the aforesaid products on behalf of M/s. Frito-Lay India.

Respondent by a communication dated 15.12.10997 intimated the Department 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. Respondent submitted Annexure-A as required under Rule 173C (3A) of Central Excise Rules, 1944 wherein it was 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.

Revenue took the stand that 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, at the factory gate.

Accordingly, show-cause notice was issued to the respondent contending that the sale to the whole sellers was being effected from the depot of the related person, viz. M/s. Frito-Lay India. Demand of duty was confirmed.

In appeal, the Commissioner (Appeal) held that 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.

In further appeal, 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).”

Aggrieved by the impugned order, Revenue is in appeal before the Supreme Court.

Appellants Contention:- Revenue contended 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 contended 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 was further contended 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.

Respondents Contention:- 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. They further stated that Pepsi Co. Inc. USA is a holding company and the respondent and M/s. Frito Lay India is 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.

It was 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 v/s Union of India & Ors [AIR 1989 SC 972].

Respondent further stated 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.

Reasoning of Judgement:- The Supreme Court noted that it is an admitted fact that M/s. Frito- Lay is "related person" of the Respondent. The expression "related person" defined in Section 4 (4) (c) was perused. It was held that the transaction between Respondent 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 is relevant.

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 substantially resemble the facts of this case, except of course the difference in the items manufactured.

It was noted that the question raised in Akay Cosmetics the issue involved was “how and when the assessable value of the manufactured product is to determined?”

In that case it was held that 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.

The Supreme Court noted that the in the case of Akay Cosmestics, reliance was placed on this Court's decision inUnion of India and others v. Bombay Tyre International Limited and others [(1984) 1 SCC 467]. It had been held that therefore the article became an object of assessment when it was sold by the manufacturer.

It was noted that in the instant case Section 4(2) was not applicable but the provision of Section 4(1)(a)(iii) as it stood at the relevant time was applicable.

The Supreme Court referred to the judgment of Akay Cosmetics wherein the rationale of the proviso (iii) was explained as "...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."

The Supreme Court held that although there are some factual differences but that does not impinge upon the ratio on the interpretation of Section 4(1) (a) (iii) of the Act which is quoted above.

The Supreme Court set aside the equal penalty imposed on the ground that the respondent was paying the duty and there was no malafide intention on its part to evade the payment of duty. It was also noted that the goods were cleared from the factory only on payment of duty.

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.

Following the aforesaid well settled principles, the Supreme Court quashed part of the order-in-original which imposed penalty without any finding of fraud or mis-statement against the respondent. Save as aforesaid, the order-in-original is upheld.

Decision:Appeal of the Revenue partly allowed.

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PJ/Case Laws/2010-11/1098

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