Whether the factories under common management can be termed as related person? Whether all the overheads can be loaded in costing method when factory not running on full capacity?

CASE: COMMISSIONER OF CENTRAL EXCISE, AHMEDABAD V/S KISSAN INDUSTRIES LTD.

CITATION: 2012 (280) E.L.T 276 (TRI. - AHMEDABAD)

ISSUE:- Whether the factories under common management can be termed as related person? Whether all the overheads can be loaded in costing method when factory not running on full capacity?

BRIEF FACTS: M/s. Kissan Industries, Ahmedabad (M/s. Kl for short) were engaged in manufacture of various excisable products. It was alleged by the Department that the transactions between the assessee and M/s. Nirma Ltd. (M/s. NL for short) were not on principal to principal basis as M/s. NL enjoyed special relationship with the said assessee. Therefore, it was alleged that the assessable value at which the assessee discharge duty on packing materials may be considered as normal price. A Show Cause Notice was issued to the assessee demanding Central Excise duty of Rs. 2,97,77,479/- (Rupees Two Crores, Ninety Seven Lakhs, Seventy Seven Thousands, Four Hundred and Seventy Nine only). On adjudication, the adjudicating authority dropped the proceedings initiated vide Show Cause Notice. Revenue is in appeal against this order of adjudicating authority.

The grounds of appeal are as follows:

"1. the adjudicating authority has erred in re-computing the quantum of Central Excise duty inasmuch as:

(i)                 Para 3 of Circular No. 692/8/2003-CX, dated 13-2-2003 clarifies that henceforth the cost of production captively consumed goods will be done in accordance with CAS-4. The word "henceforth" clearly implies the effect of the Circular is prospective in nature and not retrospective. However, in the instant case, the adjudicating authority has applied the CAS-4 principles even though the period involved is prior to the issuance of the said circular i.e. the years 1996-97 and 1997-98. Thus, the adjudicating authority has erred in computing the cost of production in accordance with CAS-4.
(ii)                Interest on working capital has not been considered as a part of the cost of production in terms of CAS-4 principles. However, during the relevant period, CAS-4 was not applicable as discussed above and it formed a component of the cost of production for the determination of assessable value. In the case of Bombay Tyre International Ltd. 1983 (14) E.L.T. 1896 (S.C.), it has been held by Hon'ble Supreme Court that "In cases where the sale is effected at the factory gate, the ex-penses incurred by the assessee upto the date of delivery on account of storage charges, handling charges, interest on inventories (stock car-ried by the manufacturers after clearance), charges for other services.... cannot be deducted because these expenses promote marketability of the article and thus enter into its value in the trade."
(iii)               The conclusion derived at by observing the standards of CAS-4 re-garding 'Abnormal and non-recurring cost' at Para 24.4 of the im-pugned order is erroneous inasmuch as the CAS-4 standards were not applicable for the period in question as discussed above.
(iv)                As per the accounting principles, the fixed overheads are not to be apportioned. The fixed costs are to be computed on actual basis in-asmuch as the said costs are actually incurred and are not dependent on the quantity manufactured or otherwise. In the subject case, the adjudicating authority has apportioned the fixed overheads and thereby arrived at a faulty conclusion.
(v)                The works overhead expenses such as spares & consumables, repairs & maintenance and other factory overheads should be apportioned on the basis of normal capacity or actual capacity whichever is higher. In the instant case, the adjudicating authority has wrongly apportioned such expenses on the sales value, which cannot be the basis with respect to maintenance of Cost Record. Rules under Sec-tion 209(1)(d) of the Companies Act, 1956 are applicable to the indus-try.
(vi)                In respect of Polyethylene bags for the year 1997-98, the cost of production has been apportioned on the basis of clearance and not on the basis of quantity manufactured. The cost of production should be apportioned on the basis of the quantity manufactured.

The adjudicating authority has erred in holding the demand as time barred inasmuch as the relied upon CESTAT Order No. E/1650- 1653/WZB/2005/C-III, dated 28-8-2005 is pertaining to LAB trans-(erred/cleared by M/s. NL to the said assessee. The said assessee is not the noticee in the said case; rather in the said case they said assessee is the buyer of the goods. Also, the observation made by the CESTAT in the said case, while ruling it as time barred, is not at all relevant to the facts and circum-stances of the present case. Thus, the application of the ratio of CESTAT Order No. E/1650-1653/WZB/2005/C-111, dated 28-8-2005 is erroneous. Further, in the instant case, the said assessee had not disclosed the correct cost of production in the Price Lists filed by them under Rule 173C of the erstwhile Central Excise Rules, 1944 and thus, it is a clear case of willful miss-declaration and suppression of the cost of production. Therefore, the extended period of 5 years is available in the present case."

REASONING OF JUDGEMENT:

Tribunal find that M/s KI are run by a Trust whose main beneficiaries are Shri Karsanbhai K. Patel and his family members and therefore there is a common control of both M/s KI and M/s NL. It is also found from the various evidences that operations between M/s NL and M/s KI were conducted under the common control. In view of this, the transaction between M/s KI and M/s NL were not transparent. We may go even to the extent of saying that the transactions were undertaken to accommodate the needs of M/s KI. In fact the Tribunal found that Commissioner has himself held that the transactions between M/s KI & M/s NL could not be considered at Arm’s Length.

The Commissioner has observed in para 20.1 as under:

     "20.1 That there is no discussion or allegation in the SCN that the other buyers are                     related or not independent or the price is tainted. Hence, I find much force in the argument of M/s. KI that the sales to M/s. NL were made at the same price at which the goods were sold to independent buyers. They have paid duty even on goods cleared on job work done (other than under rule 57F(4) CER, 1944) at the same assessable value during 97-98 while all clearances for job work were under exemption rule 57F(4)."

The Commissioner's findings and adjudication order were primarily on the basis of decision of Hon'ble Supreme Court in the case of Calcutta Chromo-type Ltd. v. Collr. of CE., Calcutta - 1998 (99) E.L.T. 202 (S.C.). The relevant para 12 is extracted below:

    "12. The principle that a company under the Companies Act, 1956 is a separate entity and, therefore, where the manufacturer and the buyer are two separate companies, they cannot, than anything more, be 'related per-sons' within the meaning of clause (c) of sub-section (4) of Section 4 of the Act is not of universal application. Law has traveled quite a bit after decision of the House of Lords in the case of Salomon v. Salomon [1897 AC 221, This is how this Court noticed in Tata Engineering and Locomotive Company Ltd. v. State of Bihar & Ors. [(1964) 6 SCR 885].

"The true legal position in regard to the character of a corporation or a company which owes its incorporation to a statutory authority is not in doubt or dispute. The corporation in law is equal to a natural person and has a legal entity of its own. The entity of the corporation is entirely separate from that of its shareholders; it bears its own name and has a seal of its own; its assets are separate and distinct from those of its members; it can sue and be sued exclusively for its own purposes; its creditors cannot obtain satisfaction from the assets of its members; the liability of the members or shareholders is limited to the capital invested by them; similarly, the creditors of the members have no right to the assets of the corporation. This position has been well-established ever since the decision in the of Salomon v. Salomon & Co. 1(1897) A.C. 22 H.L.1 was pronounced in 1897; and indeed, it has always been the well recognized principle of common law. However, in the course of time, the doctrine that the corporation or a company has a legal and separate entity of its own has been subjected to certain exceptions by the application of the fiction that the veil of the corporation can be lifted and its face examined in substance. The doctrine of the lifting of the veil thus marks a change in the attitude that law had originally adopted to-wards the concept of the separate entity or personality of the corporation. As a result of the impact of the complexity of economic factors, judicial decisions have sometimes recognized exceptions to the rule about the juristic personality of the corporation. It may be that in course of time these exceptions may grow in number and to meet the requirements of different economic problems, the theory about the personality of the corporation may be confined more and more."

Thereafter, the adjudicating authority has taken into consideration the Board's Circular No. 258/92/96-CX, dated 30-10-1996 as also the amending Circular No. 692/8/2003-CX., dated 13-2-2003 and by relying upon various precedent decisions has held as under:

"24.5 Thus, it is clear that the overheads cost on the basis of abnormal idle capacity cannot be charged to normal cost of production. The cost of production during 1997-98 is lower than the sale price. I also find force in the contention raised by M/s. KI that during subsequent years, the cost was further reduced and with the similar sale price and better capacity utilization, they were making profits and department has not raised any demand for subsequent period. This only shows that the sale price was normal but the cost was abnormally high in the initial period which cannot be made the basis of assessment. If the assessment is done on the basis of cost of production plus normal profit as against the AV adopted by them on the basis of sale price on which duty has been paid for both the periods, then also there is no short levy as such.
Thus Tribunal hold that the price charged by M/s KI to buyers other than M/s NL is also applicable to removals to M/s NL and the same was not influenced by the relationship between M/s NL and M/s KI.

Further the demand has also been held to be barred by limitation by observing as under:-
“26. Further , as regards time bar, it is contended by M/s KI that it is clear from the records withdrawn by DGCEI officers and relied upon the documents as per Annexure B to show cause notice at Sr. No. 19 & 20 pertaining to withdrawal of price lists for the period from 1996 to 1999 and assessed copies of RT-12 returns that M/s KI had filed price lists and RT-12 regularly with the department. They submitted that they have filed that price lists from time to time with the proper officer and cleared the goods on payment of duty on the value declared by them. Further, the price list filed by them and assessments made by the competent authority have not been disputed by the jurisdictional officers at any time. Anit evasion officers have grossly failed to ascertain the facts from the jurisdictional officers. Therefore when jurisdictional officers obviously completed the assessment and found nothing incorrect and if anti evasion officers hae different understanding of cost of production, if cannot be a ground for invoking the earlier show cause notice dated 25.2.2000 arising out of the same investigation, issued by the department in the decision of the appeal, vide final order No. E/1650-1653/2005/C-II, dated 28.8.2005{2006(200) E.L.T 213(Tri.-Mum.).

DECISION:- The appeal was rejected on the basis of the above reasons.

Comments:- This is very good decision on valuation related to transactions between related person. It was clearly held that when the units under common management then they will be treated as related person.
Secondly, all the overheads can be loaded in costing method when the unit has idle capacity. The sale made to other independent buyer can be made applicable here. This rule is also followed now also. The valuation says that when the sale is only except or through related person then only costing method is to be adopted. But when sale is through other independent buyer then the valuation rule is to be adopted.

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PJ/Case Laws/2012-13/1173

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