Valuation Rule:- When assessee dealing with not only related parties but with non related parties also

CASE STUDY

Prepared By:

CA Rajani Thanvi &

Parag Ghate (B.Com)

Introduction: -

In the current scenario it is common in the commercial industry the transactions of sale and purchase between related parties. But these are not dependent on each other as their main business is not to trade with each other. Government has made rules and provisions regarding related parties transactions. If any concern is trading only with the related parties then a specific provision is there in the excise law. But what will happen in a case where the concern is dealing/trading not only with the related parties but with non related parties also. The issue is involved in the following case under study:

In the matter of M/s Somi Conveyor Belting Ltd
[Order-In-Appeal nos. 69(CB)CE/JPR-II/2011 dated 17.03.2011

Relevant Legal Provisions: -

Rule 8 of the Central Excise Valuation Rules, 2000:-

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 percent] of the cost of production or manufacture of such goods

Rule 9 of the Central Excise Valuation Rules, 2000:-

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 (b) 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 (being related person), who sells such goods in retail:

Provided that in 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 specified in rule 8.”

Brief facts of the case: -

The appellants are engaged in the manufacture of Conveyor Belt / Sheet falling under subheading no. 40101290 of first Schedule to the Central Excise Tariff Act, 1985. A show cause notice is issued to them alleging that they have short paid Central Excise Duty by clearing Conveyor Belt / Rubber Sheet to related party i.e. M/s Oliver Micon Inc. which is not in accordance with the Rule 9 of the Central Excise Valuation Rules, 2000 during the period November 2008. The order in original was passed confirming the demand of duty with interest and penalty. Being aggrieved by the impugned order, the appellant preferred an appeal before the Commissioner (Appeal).

Appellant’s Contentions: -

The appellant submits that the order in original has been passed just discussing the relevant provisions i.e. sections and rules which were made applicable in the show cause notice. The impugned order has just been passed ignoring all the contentions that were presented by the appellant. In their reply to show cause notice, the appellant had submitted that merely because the two concerns are related. Valuation Rules will no be attracted unless and until the mutuality of interest is proved. In support of their contention they had cited and discussed a no. of decisions wherein it was held that mere fact of being related would not attract the provisions of rule 8 and 9. It should be backed up by the force of fluctuating the prices and also mutuality of interest. Even the verdicts of Supreme Court in the decision of CCE-II, Chennai Vs Beacon Neyrpic Ltd. As cited by them were in their favour. But the respected Deputy Commissioner has failed to give reasons as to why the ratio of these decisions has not been extended to them. Regarding this the reliance is placed on the judgment given by Hon’ble Supreme Court in the case of State of Himachal Pradesh Vs Sardara Singh that an order passed without assigning reasons is void and null.

The appellant submit that the impugned order is passed by simply alleging that the rule 9 is applicable in the case. In this regard, the appellant have already replied to show cause notice that this rule is attracted only when the 100% sale is to the related party. But this is not the case of appellant as they are also selling the goods to the other parties. This fact was duly submitted in their reply to show cause notice. Reliance was also placed on certain case law like Birdi steels Vs CCE, Ludhiana and Ispat Industries Ltd Vs Raigard wherein it was held that the provisions of rule 9 cannot be applied in the case where sale is also made to the parties other than the related person. But while confirming the demand under the said rule 9, the learned Deputy Commissioner has overlooked this submission and has also not at all discussed the above referred decision cited by the appellant. This makes it clear that the impugned order is passed without considering the submissions of the appellant and such and order is void ab initio. As such, the order is non-speaking on this ground also which is not tenable in the light of the decision of Hon’ble Supreme Court in the case of Commissioner of Central Excise, Bangalore versus Srikumar Agencies that an order passed without considering the submissions of the appellant is a non speaking order and a non speaking order is not legally viable in the eyes of law.

The appellant also submits that the learned deputy commissioner is denying the applicability of the rule 8 by saying that the consignee, i.e. M/s Oliver Micon, is not using the goods cleared in the process of manufacture. It is alleged that due to the fact that no manufacturing activity is undertaken, rule 8 is not applicable. In this regard, the appellant submit that as the basic raw material in form of plain rubber sheet is tested and engraved in specific profile for its end-use. The engraved rubber sheet is then approved by QA and laminated and sent for final trimming and packing under brand name of Oliver Micon Inc. Such process changes use and character of plain surface rubber sheet. In the para 4 of the reply to the show cause notice, they had submitted that the process undertaken by their sister concern amounts to manufacture. They had also enclosed the process employed by the sister concern in Annexure to the reply. But this submission has not at all been considered while passing the impugned order. In this regard reliance placed on the cases of wipro computers ltd. vs. commissioner of customs, Chennai and Arbindo Liquors Limited Versus Commissioner of Central Excise, Nagpur. Such an order does not give any insight to the further appellate authority as to the correctness of the findings. It is for this reason that the principles of natural justice require that any order made in adjudication or in appeal, should be a ‘speaking’ order. So the above order passed against the assessee is not tenable in law because the Learned Adjudicating Authority has not discussed the cases and the submissions that were relied on by the appellant.

It is also submitted that the impugned order in Original alleges that the rule 8 is not invokable in this case as the goods purchased by the related person is not used further in manufacture of its final product. The appellant submit that rubber sheet after processing by M/s Oliver is used in fixing on machines on which the conveyor belt is used. But the rubber belt as supplied by the appellant cannot be used for this purpose. The processes undertaken by M/s Oliver have to be under taken to make it fit for such use. As such, this process changes the character and use of this product and as such it amount to manufacture.

It is further submitted that the rule 8 uses not only the term “manufacture” but also “production”. Thus, the allegation of the order in original that the goods supplied by the appellant to the related party are not used in manufacture is totally wrong as the term “production” is also used and if the said processing cannot be said to being amounting to manufacture, it will be very well covered by the term production. Further, as already stated above also that the conveyor belt/ rubber sheet supplied by the appellant is not fit for use unless the processing is done on the same and as such the process changes the character of the product. Further it is reiterated that the term “production” is wider than the term “manufacture” and if the said processing does not fall under the ambit of manufacture, it will definitely fall under the definition of production and thereby under Rule 8. Reliance is placed on following case Law:-

PSL Corrosion Control services Ltd. Vs CCE.[2008(12) STR 504 (Tri.- Ahmd)]
- Midas care pharmaceuticals vs CCE [2008(12) STR 500 (Tri. Mumbai)

Following the above judgments, it is contended that the processing may not fall under manufacture but it fall under production and as such Rule 8 will be applicable if the valuation rules are to be referred to. The appellant again submit that they have correctly assessed the duty liability and that the valuation rules are not to be considered in our case but the order in original is applying Rule 9 and the above contentions point out that if it all valuation rules are to be referred to, then also we are governed by the provisions of Rule 8.

It is further submitted that the respected Deputy Commissioner is pointing out errors in cost sheet provided by the appellant. The adjudicating authority is contending that the normal profit is not included and all the overheads are also not included in the cost sheet. These contentions are not sustainable because while preparing the cost sheet the directives of CAS 4 have been complied with. It is worthwhile to mention here that the cost sheet is prepared by the competent person and the allegation of the impugned order is not justified as it is avoiding this vital fact by making senseless allegations without any proof. The said allegations are also not sustainable on the grounds that the learned Deputy Commissioner has failed to prove these allegations. Such an order which is passed without proving the allegations on which order is passed is not reasonable and is liable to be quashed.

It is further submitted that it has been proposed to recover interest under section 11 AB and impose penalty under section 11AC of the Central Excise Act, 1944. In this respect, it is submitted that there was no malafide intention to evade duty or to suppress facts from the department. Further, suppression of facts means something is required under the law to dispose but one does not discloses which is not in this case. Further it is under the law appellant never showed this in his ER-1 return. The ER-1 return had no such columns where sales if done to related party has to be shown. There is no requirement also prescribed in the law that in such cases the department has to be informed. The facts came to the notice of the department when the Audit party came and pointed out. The audit party has come out with the conclusion after going through the documents and invoices supplied by the appellant. If the appellant had some intention to suppress the facts the department the relevant documents would have never been provided to the audit party. Further there was no intention of suppression as when an audit para was raised or any query was raised, they were duty replied by the appellant. So suppression cannot be invoked against the appellant. Reliance is placed on the following cases in which penalties were set aside because the malafide intention was not proved by the department.

Sundram Fasteners Ltd. Vs Comm. of Cus. & C. Ex., Hyderabad-I [2009 (237) E.L.T. 55 (Tri. - Bang.)]
CST, Bangalore Vs M/s Atria Convergence Technologies Pvt Ltd [2009-TIOL-2020-CESTAT-BANG]
M/s Goran Pharma Pvt Ltd Vs CCE, Bhavnagar [2009-TIOL-1515-CESTAT-AHM]
M/s DNH Spinners Vs CCE, Vapi [2009-TIOL-1447-CESTAT-AHM]

The order in original has said that the appellant has willfully suppressed the facts. The case that relied by the learned adjudicating authority while passing the order is of Grey Nodules Precicast Pvt Ltd Vs Commr. Of C. Ex., Ahmedabad-II. The appellant strongly contend against the applicability of the same here. In this case, the assessee had collected the amount from the customers, that was supposed to form the part of assessable value. But they and against that they have raised the commercial invoice. To evade the payment of duty the invoice had no mention of developing and designing charges. Here neither there was such intention of the appellant nor any commercial bill raised by the appellant. If the appellant had such intentions, they would not had valued the goods according to Section 4 of the Central Excise Act, 1944. The appellant would also not pay any duty of excise as done in the referred case. But the appellant had duly raised the excise invoice and the duty on the same has also been paid. So the case relied for passing the order in original to put the contention of suppression is not at all applicable here.

In continuation to above it is submitted that the order in original has confirmed a time barred demand which is not justified. Extended period can be invoked only in case of fraud or willful suppression of facts which is not the case here and strongly such allegation is rebutted. In this regard it is submitted that law required that only return is to be filed and there was no requirement to file the basis on which the duty has been paid or the ingredients of assessable value. Hence these are not submitted. But they were maintaining the proper records as required under the law. There all were properly filled and recorded in books of accounts. They have duly prepared and filled all the returns and replied of letters issued by the department. Audit of the unit has been conducted from time to time. The appellant have made available all the records to the audit party. All this makes it clear that they did not hide anything from the department. Even the fact of relative person was disclosed in their audit report also. The company is a limited company and this balance sheet goes to many shareholders and as such it cannot be said that they have any malafide intention to evade payment of duty. It has been held by the Hon’ble Apex Court in the case of Pahwa chemicals Private Limited Vs Commissioner of C. Ex., Delhi. When all the facts are within the knowledge of the department, it cannot be alleged that there was willful suppression of facts. This decision was discussed in depth in the reply to show cause notice. But it has not been considered while passing the impugned order in original. Such an order is not tenable in the eyes of law as such is required to be quashed.

Reasoning of the Commissioner (Appeal);

The learned Commissioner appeals have gone through the case records and submission made in the appeal as well as during personal hearing. In this case adjudicating authority has confirmed the demand of duty on value as determinable under rule 9 of the Central Excise Valuation Rules 2009 as the goods have been sold to related concern. The contention of the appellant is that Rule 9 of Valuation Rules is attracted only when the 100% sale is to the related party. But this is not the case of appellant as they are also selling the goods to the other parties. They have relied on the case of Birdi Steels V/s CCE, Ludiana. They also contends that rule 8 ibid is applicable to their case instead of rule 9. Since the process undertaken by their sister concern amounts to manufacture.

From the reading of the Rule 9, it is crystal clear that this rule is applicable only when excisable goods are not sold except to or through a related person, and also found that impugned order that no where it is stated that goods in the present case are sold only through the related person. Therefore, contention of appellant that rule 9 of the Valuation Rules is attracted only when the 100% sale is to the related person whereas they are also selling the goods to other parties. There are lot of decision of the higher forum holding that when excisable goods are assessable under section 4 (1) (a) ibid itself there is no need to go for valuation under 4 (1) (a) ibid.

The case law as referred by appellant squarely covers the facts of this case therefore, respectfully following the decision of Tribunal.

Issue Involved:

The issue involved in this case was that:-

Whether the valuation rule regarding sale to related party is applicable in a case where the 100% sale is not made to related party?

Decision:-

The appeal of assessee is allowed.

Conclusion:

The Commissioner (Appeal) rightly held that the rule 9 of the Valuation Rules is attracted only when the 100% sale is to the related person. It is clear from the same that if there is any sale to sister concern/related party it does not mean that the valuation will be done according to specific provision of rule 9. In order to invoke the provisions of rule 9 it is primarily to be checked that whether the 100% sale is made to the related party or not. If not then the said provision is not attracted.

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PJ/Case Study/2011-12/02
13 April 2011

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PJ/Case Study/2011-12/02 13 April 2011

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PJ/Case Study/2011-12/02
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