when relation between two parties shall be such that rule 8 of valuation rules shall be applied?

Case:-M/s MENON PISTON RINGS PVT LTD Vs COMMISSIONER OF CENTRAL EXCISE, PUNE-II

Citation:-2014-TIOL-2441-CESTAT-MUM

Brief facts:-Brief facts of the case were that the appellants were manufacturers of part of pistons and sold the same to their groups Co. on transaction value. After introduction of Central Excise Valuation Rules, 2000 it was sought as the appellants were related persons therefore they were required to pay duty under Rule 8 of the Central Excise Valuation Rules, 2000 for the period 01.07.2000 to 30.06.2002. In the circumstance, proceedings were initiated against the appellants and both the lower authorities held that the appellants were required to pay duty as per Rule 8 of the Central Excised Valuation Rules, 2000. Aggrieved by the said orders, the appellants went further.

Appellant’s contention:-The learned Counsel appearing on behalf of the appellants submitted that the appellants were a Private Ltd. Company and the buyer of the goods was a Public Ltd. Co. therefore, they were not to be termed as related persons as per the definition provided in Section 2(41) of the Companies Act, 1956. At the most, the allegation of the Revenue was to be that both the units were interconnected undertakings and for that purpose Rule 10(a) of Central Excise Valuation Rules were to be applied. But as in this case, valuation as per Rule 10(a) of the Central Excise Valuation Rules was not proposed. Therefore, the valuation adopted by the lower authorities under Rule 8 of the Central Excise Valuation Rules was not sustainable. In the circumstance, he prayed for setting aside the impugned order. To support this contention, the learned Counsel relied on the Board Circular F.No.354/81/2000/TRU dated 30.06.2000 and the decision of this Tribunal in the case of South Asia Tyres Pvt. Ltd. v. CCE - 2003 (152) ELT 434 (Tri.) = 2002-TIOL-486-CESTAT-MUM.

Respondent’s contention:-On the other hand, learned A.R. appearing for the Revenue drew attention to the impugned order wherein the learned Commissioner (Appeals) had given a finding that the appellants were relatives as defined in Section 2(41) of the Companies Act, 1956 and this finding was not been controverter by the appellants. Therefore, both the lower authorities had rightly adopted that the valuation was to be determined as per Rule 8 of the Central excise Valuation Rules.

Reasoning of judgment:-As contended by the learned Counsel for the appellants that the appellants were a Private Ltd. Co. and the buyer was a Public Ltd. Co. therefore the same could not be termed as relatives as per Section 2(41) of the Companies Act, 1956 which was reproduced as under:-

(41) "relative" means, with reference to any person, anyone who is related to such person in any of the ways specified in section 6, and no others;
Extract of Section 6 of the Companies Act, 1956 of "relative"
List of Relative
1. Father.
2. Mother (including step-mother).
3. Son (including step-son).
4. Son's wife.
5. Daughter (including step-daughter).
6. Father's father.
7. Father's mother.
8. Mother's mother.
9. Mother's father.
10. Son's son.
11. Son's son's wife.
12. Son's daughter.
13. Son's daughter's husband.
14. Daughter's husband.
15. Daughter's son.
16. Daughter's son's wife.
17. Daughter's daughter.
18. Daughter's daughter's husband.
19. Brother (including step-brothers)
20. Brother's wife.
21. Sister (including step-sister)

Th bench also went through the Rules 8, 9 and 10 of the Central Excise Valuation Rules which were reproduced here-in-under:-

RULE8.Where the excisable goods are not sold by the assessee but are used for consumption by him or on his behalf in the production or manufacture of other articles, the value shall be [one hundred and ten per cent] of the cost of production or manufacture of such goods.

RULE9. When the assessee so arranges that the excisable goods are not sold by an assessee except to or through a person who is related in the manner specified in either of sub-clauses (ii), (iii) or (iv) of clause 9b of sub-section (3) of section 4 of the Act, the value of the goods shall be the normal transaction value at which these are sold by the related person at the time of removal, to buyers (not being related person); or where such goods are not sold to such buyers, to buyers (being related person), who sells such goods in retail :
Provided that in a case where the related person does not sell the goods but uses or consumes such goods in the production or manufacture of articles, the value shall be determined in the manner specified in rule 8.

RULE10. When the assessee so arranges that the excisable goods are not sold by him except to or through an inter-connected undertaking, the value of goods shall be determined in the following manner, namely:-
(a) If the undertakings are so connected that they are also related in terms of sub-clause (ii) or (iii) or (iv) of clause (b) of sub-section (3) of section 4 of the Act or the buyer is a holding company or subsidiary company of the assessee, then the value shall be determined in the manner prescribed in rule 9.

Explanation. In this clause "holding company" and ‘subsidiary company" shall have the same meanings as in the Companies Act, 1956 (1 of 1956) (b) in any other case, the value shall be determined as if they are not related persons for the purpose of sub-section (1) of section 4.

As the appellants were not related persons as discussed here-in-above, the appropriate Rule for valuation was Rule 10 of the Central Excise Valuation Rules. As per the said Rule and relying on the CBEC Circular dated 30.06.2000 it should be established that both the parties were having mutual interest in business and inter-connected with each other. As per Rule 10 of the Central Excise Valuation Rules, it should be inter-connected and as per the Monopolies and Restrictive Trade Practices Act, 1969 it has been defined "Inter-connected undertakings" which is reproduced here-in-under:-
"Where goods are sold through related persons, the transaction value is not applicable.”

However, there was some change in the definition of ‘related persons' vis-a-vis the old definition. It includes "inter-connected undertakings" as defined in the Monopolies and Restrictive Trade Practices Act, 1969. The definition of interconnected undertaking in the said Act reads as follows:

"Inter-connected undertakings" means two or more undertakings which are interconnected with each other in any of the following manners, namely:-
(i) If one owns or controls the other;
(ii) Where the undertakings are owned by firms, if such firms have one or more common partners;
(iii) Where the undertakings are owned by bodies corporate,-
a)    If one body corporate manages the other body corporate; or
b)    If one body corporate is a subsidiary of the other body corporate; or
c)    If the bodies corporate are under the same management; or
d)    If one body corporate exercises control over the other body corporate in any other manner;
(iv)Where one undertaking is owned by a body corporate and the other is owned by a firm, if one or more partners of the firm,-
(a) hold, directly or indirectly, not less than fifty per cent, of the shares, whether preference or equity, of the body corporate; or
(b) Exercise control, directly or indirectly, whether as director or otherwise, over the body corporate;

(i) If one is owned by a body corporate and the other is owned by a firm having bodies corporate as its partners, if such bodies corporate are under the same management;
(ii) If the undertakings are owned or controlled by the same person or by the same group;
(iii) If one is connected with the other either directly or through any number of undertakings which are inter-connected undertakings within the meaning of one or more of the foregoing sub-clauses.

Explanation 1.- For the purposes of this clause, two bodies corporate shall be deemed to be under the same management,-
(i) If one such body corporate exercises control over the other or both are under the control of the same group or any of the constituents of the same group; or
(ii) If the managing director or manager of one such body corporate is the managing director or manager of the other; or
(iii) If one such body corporate holds not less than one-fourth of the equity shares in the other or controls the composition of not less than one-fourth of the total membership of the Board of directors of the other; or
(iv) If one or more directors of one such body corporate constitute, or at any time within a period of six months immediately preceding the day when the question arises as to whether such bodies corporate are under the same management, constituted (whether independently or together with relatives of such directors or employees of the first mentioned body corporate) one-fourth of the directors of the other; or
(v) If the same individual or individuals belonging to a group, while holding (whether by themselves or together with their relatives) not less than 26 [onefourth] of the equity shares in one such body corporate also hold (whether by themselves or together with their relatives) not less than 26 [one-fourth] of the equity shares in the other; or
(vi) If the 27[same body corporate or bodies corporate belonging to a group, holding, whether independently or along with its or their subsidiary or subsidiaries, not less than one-fourth of the equity shares] in one body corporate, also hold not less than 26 [one-fourth] of the equity shares in the other; or
(vii) If not less than 26 [one-fourth] of the total voting power 28 [in relation to] each of the two bodies corporate is exercised or controlled by the same individual (whether independently or together with his relatives) or the same body corporate (whether independently or together with its subsidiaries); or
(viii) If not less than 26 [one-fourth] of the total voting power 28 [in relation to] each of the two bodies corporate is exercised or controlled by the same individuals belonging to a group or by the same bodies corporate belonging to a group, or jointly by such individual or individuals and one or more of such bodies corporate; or
(ix) If the directors of one such body corporate are accustomed to act in accordance with the directions or instructions of one or more of the directors of the other, or if the directors of both the bodies corporate are accustomed to act in accordance with the directions or instructions of an individual, whether belonging to a group or not.
Explanation II.-If a group exercises control over a body corporate, that body corporate and every other body corporate, which is a constituent of, or controlled by, the group shall be deemed to be under the same management.
Explanation III.-If two or more bodies corporate under the same management hold, in the aggregate, not less than one-fourth equity share capital in any other body corporate, such other body corporate shall be deemed to be under the same management as the first mentioned bodies corporate.
Explanation IV- In determining whether or not two or more bodies corporate are under the same management, the shares held by financial institutions in such bodies corporate shall not be taken into account.
Illustration Undertaking B is inter-connected with undertaking A and undertaking C is inter-connected with undertaking B. Undertaking C is inter-connected with undertaking A; if undertaking D is inter-connected with undertaking C, undertaking D will be inter-connected with undertaking B and consequently with undertaking A; and so on.
Thus the term inter-connected undertakings cover large categories of legal entities/undertakings to whom goods are sold by the assessee which may be held as ‘related person' under the new definition. It may be noted, that under the erstwhile provisions under section 4, except for the specifically named categories, namely holding company, subsidiary company, a relative and distributor of the assessee and any sub-distributor of such distributor, buyer was held to be related to selling assessee only if they were so associated that they have interest directly or indirectly in the business of each other. In contrast no such general condition/restriction applies for inter-connected undertakings to be "related" under new section 4. However, a provision has been made in the new valuation rules that even if the assessees and the buyer are inter-connected undertakings, the transaction value will be "rejected" only when they are "related" in the sense of any clause (ii), (iii) or (iv) of sub-section 4(3)(b) or the buyer is a holding company or a subsidiary company of the assessee. In other words, while dealing with transactions between inter-connected undertakings, if the relationship as described in clauses (ii), (iii) or (iv) does not exist and the buyer is also not a holding company or a subsidiary company, then for assessment purposes, they will not be considered related. "Transaction value" could then form the basis of valuation provided other two conditions, namely, price is for delivery at the time and place of removal and the price is the sole consideration for sale are satisfied. If any of the two aforesaid conditions are not satisfied then, quite obviously, value in such cases will be determined under the relevant rule.

On perusal of the definition of the "inter-connected undertakings", it was observed that the appellants were not covered under the definition. It was further found that the issue of mutual interest was also not been alleged against the appellants. In these circumstances, it was held that Rule 8 of the Valuation Rules was not applicable in the facts of this case. Accordingly, they set aside the impugned order and allowed the appeals with consequential relief, if any.

Comment:-the gist of this case is that when parties aren’t related in any way and they do not have any mutual interest in each other than Rule8 of the valuation rules shall not be applicable. Instead rule 10 shall be applicable.

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PJ/CASE LAW/2014-15/2477

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