The issue in this appeal relates to valuation of free supplies made by the appellant-assessee along with chargeable supplies.

Case:AKZO NOBEL INDIA LTD. Versus COMMISSIONER OF CENTRAL EXCISE, KANPUR
Citation:2018 (11) G.S.T.L. 420 (Tri. - All.)
Issue:The issue in this appeal relates to valuation of free supplies made by the appellant-assessee along with chargeable supplies.
Brief facts:- The brief facts of the case are that the appellant-assessee is a manufacturer having one of its factory situated at Kanpur carrying on the business of manufacture of Catalyst & Refractory Insulator. The appellant is liable to pay duty on finished goods under Section 4 of the Act on ad valorem basis. The brief facts as per the show cause notice dated 17-7-2006 are that it appeared to Revenue that the appellant was suppressing the production of the excisable goods and removing the same clandestinely from the factory premises. There was a search in the factory on 6-1-2005. The officers conducted the physical stock verification of finished goods as well as of the raw materials in the presence of Shri Rajeev Malaviya, Authorized Signatory and along with two independent witnesses. The stock verification of finished goods was prepared on the spot. The stock of raw materials and that of finished goods were found to be tallying with the recorded balance as per computer sheets/records maintained by the appellant. Further, during checking/scrutiny of the records, it was observed that the appellant had cleared “Waste & Scrap Ni Slurry” without payment of duty and without issuing proper Central Excise invoice. On being asked for the reason for non-payment of duty on such waste & scrap cleared through 12 computer generated letter-head papers, and not under the cover of invoices, Shri Rajeev Malaviya, in his statement dated 6/7-1-2005 stated that such goods have been cleared without payment of duty by mistake, he accepted such mistake and voluntarily debited the amount of duty Rs. 1,04,174/- through PLA Entry No. 1, dated 6-1-2005, and further amount of Rs. 13,000/- + Rs. 91,174/- from RG-23A Part-II vide Entry No. 171 on the same date. They also debited Rs. 61,566/- vide PLA Entry No. 3 towards interest on 31-1-2005. As regards these removal of waste and scrap, a separate show cause notice was issued, being SCN No. IV-CE(9)DP-I.ICI/2004-05/3228-31, dated 19-9-2005, which was adjudicated vide Order-in-Original No. 3 Demand ACK-1/06, dated 21-4-2006. It is informed by the Ld. Counsel that the said matter stands finally settled.
It was further observed that the appellant had cleared some part-finished goods at Nil value along with some part-finished goods on payment of duty, under cover of different invoices. For example vide Invoice No. 14, dated 31-8-2002 goods being - PRC 46-1(s) 5600 Ltrs. @ Rs. 818.8 per liter was removed to IFFCO, Phulpur unit and in the same invoice another quantity of goods - PRC 46-4(s), 2100 Ltrs. @ Nil was removed to IFFCO, Phulpur. Similarly, vide Invoice No. 23, dated 14-10-2002 goods - RC 46-3Q, 3675 Ltrs. @ of Rs. 950 per liter was removed along with goods RC 57-4Q, 4375 Ltrs. @ Nil removed to Reliance Industries Ltd. Further, similar removal, was made to two other buyers, namely, SPIC, Tuticorin, & Kochi Refinery Ltd. Shri Rajeev Malaviya, Authorized Signatory, in his statement dated 31-1-2005 & 17-8-2005 under Section 14 of the Central Excise Act, 1944 admitted that sales of such goods either on payment of duty or otherwise through the relevant invoices, raised in favour of buyers, as detailed in Para 5 of the SCN. It appeared to Revenue that at the point of removal of the subject goods, the value was not known since the goods were shown as sold at “Nil” value. It further appeared that under Rule 4 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000, the value of such excisable goods shall be based on the value of such goods sold by the assessee for delivery at any other time nearest to the time of the removal of such goods under assessment, subject, if necessary, to such adjustment on account of the difference in the dates of delivery of such goods and of the excisable goods under assessment, as may appear reasonable. It further appeared from the scrutiny of “minutes of the meeting” dated 2-7-2003 between Southern Petrochemicals Industries Corporation Ltd. (SPIC), Tuticorin and the appellant and suppliers, namely M/s. Johnson Matthey Chemicals India Pvt. Ltd., it was observed that the said suppliers, on behalf of the appellant, reduced the cost of Catalyst to Rs. 800/- per liter and also agreed that 7325 liters of Catalyst will be supplied at Nil cost, but claimed service charges against above supplies, being Rs. 55,00,000/- lump sum and it has been confirmed under suppliers reference letter ER/292, dated 1-7-2003. Against Excise duty, it is mentioned that Excise duty would be charged extra against the Excise invoice, but for the service charges, no excise duty would be paid. The value of 7325 liters of Catalyst said to be supplied at Nil rate, worked out at the agreed rate of Rs. 800/-, will come to Rs. 58,60,000/-, i.e. a little more than the service charges of Rs. 55,00,000/- claimed by the appellant from the buyer. Therefore it appeared that appellant knew very well what the real value of the goods shown as sold at “Nil” value was.
Further, it was observed that in the case of M/s. Mangalore Refinery & Petrochemicals Ltd., Mangalore, in their proposal dated 19-10-2002 and in dispatch instruction note dated 18-2-2002, the appellant, on their pass have mentioned value for free supplies at Rs. NIL but the for purpose of Central Excise duty, mentioned the value against free supply as “For Excise duty purpose @ 780/- per liter” and paid duty thereon vide Invoice Nos. 30, 31 & 32, all dated 19-10-2002. It appeared that the appellant had full knowledge that free supplies made to buyers attract certain sale value for the purpose of payment of Excise duty.
Further, from the correspondence made by the appellant with Reliance Industries Ltd. dated 24-1-2005. The appellant had quoted rates of their products of different varieties with the specific mention that “All statutory dues and levies are chargeable extra as applicable at the time of dispatch. Currently excise duty rate applicable is 16% and CST (against Form C) is 4%.” There was no mention of free supplies in their offer No. ER 246, dated 30-8-2002. However, still some sales at “Nil” value was effected to them just to avoid duty payment.
Whereas, with respect to M/s. Kochi Refineries Ltd., Ernakulam, Kerala, was observed that the appellant while making offer had clearly mentioned against price, that if taxes/duties do apply on free volume, it shall be to the account of supplier of the Catalyst. Here also there was no mention about the value of free volumes. However, still the appellant did not pay duty on some sales at “Nil” value effected to them. That it appeared that the appellant have suppressed the actual value involved in their sales to the buyers with an intent to evade payment of Central Excise duty thereon by showing the subject goods as having been sold at “Nil” value and by not paying duty on such suppressed value. Further, the transaction value of such goods cleared at “Nil” value at the point of removal appear to be determinable as per Rule 4 of Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000, which reads :-
“The value of excisable goods shall be based on the value of such goods sold by the assessee for delivery at any other time nearest to the time of the removal of goods under assessment, subject, if necessary, to such adjustment on account of the difference in the dates of delivery of such goods and of the excisable goods under assessment, as may appear reasonable.”
It appeared that the appellant have cleared the aforementioned goods valued at Rs. 2,36,54,200/- involving Central Excise duty to the tune of Rs. 37,84,672/- by suppressing the value with intent to evade payment of duty. Accordingly they were required to show cause as to why the duty amount so calculated be not demanded under the first proviso to Section 11A(1) of the Central Excise Act, 1944 on the finished goods cleared along with interest and further penalty was proposed under Section 11AC of the of the Central Excise Act, 1944.
Appellant’s contention:The appellant contested the show cause notice by filing the reply dated 18-9-2006, contending therein that the transaction between the appellant and their buyers are on business like terms. The free supplies are nothing but in the nature of quantity discount. It is further explained that they were manufacturing the goods prior to 2-12-2002 on their own account.
M/s. Indian Farmers Fertilizers Ltd., Phulpur on sale inclusive of free supplies as against the contract made under Section 4(1)(a) of the Central Excise Act, 1944. M/s. Reliance Industries Ltd., Jamnagar Refinery on sale inclusive of free supplies as against the offer made under Section 4(1)(a) ibid. M/s. Mangalore Petrochemicals Ltd., Mangalore, the goods were cleared and removed where the price was not the sole consideration. The case falls within the provisions of Section 4(1)(b) of the Act. For the purposes of payment of duty, the market price was taken.
The Catalysts manufactured by the appellant are not meant for general use and can only be used by the specific Petrochemical Industries needing the same. The purchasers of the Catalyst manufactured by the appellants are very few, namely; (i) M/s. Southern Petrochemicals Industries Corporation Ltd., Tuticorin (‘SPIC’ for short) (ii) M/s. Reliance Industries Ltd., Jamnagar Refinery (‘RIL’ for short) (iii) M/s. Kochi Refineries Ltd., Ernakulam, Kerala (‘KRL’ for short) (iv) M/s. Indian Farmers Fertilizer Co-operative Ltd. (‘IFFCO’ for short) & (v) M/s. Mangalore Refineries & Petrochemicals Ltd., Mangalore (‘MRPL’ for short). All the 5 buyers are Petrochemical Industries having big market for their products and they alone are able to decide and dictate the terms of purchase of Catalyst manufactured by the appellant. The appellant had entered into contracts for supply of Catalysts for specified quantity and description as given in the respective contract and the supply of specified quantity was to be made along with the specified quantity of free supplies indicated the respective contract for different other items of Catalyst. In other words, the supply of one variety of Catalyst for a price agreed upon stipulates supply of other variety of Catalyst of different quantity without charging for the same or at nil rate, hence, called free supply, but the price paid by the buyer is attributable to the price of both the goods that is cleared at a price and cleared at nil rate. The quantity cleared at nil rate is in the nature of quantity discount and nothing effectively is supplied free. The duty of Excise on the transactions value as per the price agreed at the applicable rates in force had been duly paid and the entire price must be spread over the total quantity of Catalyst supplied including those alleged by the Revenue as free supplies. Effectively, this is nothing but a case of quantity discount which is due to the nature of the business as the appellant can sell its finished products only to a few buyers can be counted on fingers as herein above mentioned; such big buyers, being big industrial establishments are able to bargain because the appellant manufacturer is unable to find any other buyers. If the goods were not produced and supplied, the factory of the appellant would be closed and they shall go out of business. The Catalysts of different varieties supplied by the appellants as free supplies have price for the same embedded in the price of the Catalysts for which the contracts were entered into commonly for the free supply as well as Catalysts for which price was negotiated and all parties have acted accordingly on the same. The buyers being monopolistic commercial undertakings including Public Sector Undertakings like (KRL, IFFCO & MRPL), the bargain made by them for the price and quantities of goods cannot be deviated from nor can be regarded as anything other than the transaction value on which excise duty have been duly paid.
The case of the Revenue is that the free supplies are not small or insignificant in quantity. The quantity of free supplies agreed upon between the parties cannot be considered as reasonable and hence, the quantity supplied as free material to the buyers should be subjected to duty at the same rate/price at which the chargeable material is considered by the Revenue as the figure of price agreed upon. The entire case of the Revenue has ignored the fact that the contracts with the buyers refer to different items of Catalysts to be supplied as free material because they have no other buyers available in the market and the items specified in the contract as being purchased by them is alone assumed as bought by them. Under such conditions of market and business, the free supplies along with chargeable supplies under the terms of the contract cannot be the basis for alleging non-payment of duty by the appellant. It is settled law that the terms of the contract must be read as a whole and the Revenue cannot accept a part of the contract and reject the remaining part of the contract, as the basis for levy of duty. Further, the production of Catalysts of specified items contacted for cannot be manufactured without the production of Catalysts alleged to have been supplied free, because the two are inseparable and form part of the same production process. The commercial and technical compulsions in running the business necessitate the production of Catalyst for which price is determined explicitly and those for which the free supply is made to ensure that the plant is allowed to run, as there is no store or storing capacity for the items which are considered as free supplies made. Just as sugar cannot be produced without molasses and the sale of sugar can be combined with the sale of molasses, the production of Catalysts specified in the contract cannot be carried out without the production of other Catalysts (joint product or by-product) supplied as free material as both arise in the course of production simultaneously, and both are to be sold/cleared virtually to the same parties who are the few buyers of the product and only have usage of the same in the factories producing chemicals, fertilizers, petrochemicals, etc. in the Petrochemical Industries. The appellant’s counsel further relies on the ruling in the case of Swadeshi Polytex Ltd. v. CCE - 1989 (44) E.L.T. 794, wherein the Apex Court have taken into account such technical production process and exigencies as the basis to grant relief to the assessee. Further, there is no case made out by the Revenue that the appellant had received any extra consideration, which is not accounted for. The transactions are on principal to principal basis, and services at arms length. The buyers are Government Public Undertakings and no extra commercial activity is invoked. The buyers and sellers are not related persons. The price is the sole consideration for the transaction in question. The bargaining power and size of the commercial organization of the buyers is the criteria which determines the price which have been duly negotiated, accepted and acted upon and therefore, the allegation of undervaluation or non-accountal of excisable goods is only based on presumptions and as such the impugned order is not maintainable. Further Service Tax had been paid on the services rendered which stands accepted.
It is further contended by the Learned Counsel for the appellant that as per the Toll Conversion Agreement with M/s. Johnson Matthey Chemicals India Pvt. Ltd., (M/s. JMCIPL) with effect from 2-12-2002, under which the control and management of the appellant company is taken over by M/s. JMCIPL which provides and procures all raw materials, arranges finance, including working capital, procures orders for sale of finished goods and realizes the same from the buyers of the goods and all the contracts are entered into by M/s. JMCIPL for and on behalf of the appellant and the appellant is as such bound by the terms of the contract between M/s. JMCIPL and the buyers of the Catalysts. The transactions are fully transparent and there is no understatement of price in any manner, nor there is any such evidence or finding on record. Being effectively a tripatriate agreement, the very same terms of contracts having been accepted correctly in the hands of the buyers, there is no justification for not accepting and acting upon the same terms for levy of Excise duty on the appellants which has already discharged as per transaction value of the goods based on the price charged in each contract. It is also stated that the very same buyers have been buying the same products/Catalysts, both earlier and later from the appellant and the terms and conditions remained the same except for variation in price on account of market factors, cost escalations, etc. Except for the present dispute, there is no dispute with regard to similar transactions both in the past and thereafter in the future. Therefore, there is no ostensible reason why the present demand raised by the Revenue, only on presumptions should not be set aside, there being no finding/evidence of any suppression of facts, fraud, collusion etc. with intent to evade duty on the part of the appellant.

Respondent’s Contention: The Ld. AR appearing for the Revenue has relied on the impugned order. He further contended that the free supplies made in the present case cannot be termed as trade discount, or as quantity discount as there is no uniformity in the discount. Further he contended that in the appellant’s case, there was no fixity nor rationality about free supplies as it was found to vary from 30% to 150%. It was also submitted that the trade discount can be allowed a deduction/reduction for valuation purposes and the trade discount would mean discount usually expressed as a percentage of deduction/reduction given to the buyer. It was also contended that there is a case of suppression inasmuch as in the returns filed with the Department. The appellant had filed returns which had not brought out the facts that certain portion of the goods cleared were cleared as free supplies although the contracts clearly show them. Accordingly, it was argued that the demand is sustainable and the extended period has been rightly invoked.

Reasoning of Judgement:Having considered the rival contentions and on perusal of the facts on record, the adjudicating authority found that the nature of business of the appellant is very different, inasmuch as they are manufacturing Catalysts for which there are only about five buyers available in the country. In the manufacture of the Catalysts some other Catalysts are also necessarily manufactured by way of a joint product or by-product. It is also a unique situation, wherein the appellant cannot keep in store for long the Catalysts manufactured either main product and also as joint product or byproduct. Adjudicating authority further appreciate that due to very few buyers available in the market, there exists a situation of cartel of the buyers who are able to negotiate special terms for purchase. Under such purchase terms which are duly put into writing the appellant have made the supplies partly chargeable and partly free which are in the nature of quantity discount and call for no adverse inference. Further adjudicating authority find that so far as the allegation in the show cause notice is concerned regarding receipt of part of sale consideration in the form of service charges, we find that such allegation is bald and presumptive. There is no further enquiry from the receiver of service named in the invoices. The Ld. Counsel for the appellant have explained that such service charges are subjected to service tax and are received as their personnel are deputed under the terms of contract in the factory of the buyers to monitor the performance of the Catalyst supplied by them and to give necessary directions/instructions to the buyer for the optimum utilization of the Catalyst. It is also an admitted fact that the appellant have paid duty on the total transaction value which includes the free supplies during the period in question. Further, there is no evidence of any additional consideration received or any flow back in any manner by the appellant. Adjudicating authority also notice that the business of the appellant is running since 1990 or earlier and they have been under similar nature of transactions and business all throughout and thus such transactions have been accepted by the Revenue also in past and also in the future. Adjudicating authority further hold that the whole show cause notice is presumptive and without any substantial basis. In this view of the matter, we allow this appeal and set aside the impugned order. The appellant shall be entitled for consequential benefits, if any, in accordance with law.

Decision: Appeal allowed.
Comment:The kernel of the case is that since the nature of business of the appellant is very different and only few buyers are available they tend to form cartel and can exert pressure on appellant for special prices thus it is considered that part free supplies is nothing but trade discount offered to buyer.The buyers and sellers are not related persons. The price is the sole consideration for the transaction in question. The bargaining power and size of the commercial organization of the buyers is the criteria which determines the price which have been duly negotiated, accepted and acted upon and therefore, the allegation of undervaluation or non-accountal of excisable goods is only based on presumptions and thus order was set aside. Further Service Tax had been paid on the services rendered which stands accepted.Since, no enquiry conducted from alleged receiver of services, allegation of receipt of consideration in form of service charges not sustainable especially when assessee explained such charges are for deploying their personnel to buyer’s premises

Prepared By: Arundhati Bajpai

Comments

PJ/Case Law/2018-2019/3482

Post a Comment

Query