Whether the contention of the appellant that Rule 9 of the Central Excise Valuation (Determination of price of Excisable Goods) Rules, 2000 is attracted only when 100% sale is to related party is correct?

CASE STUDY

Introduction:-

The present appeal has been filed along with stay application under Section 35 of the Central Excise Act, 1944 by the appellant M/s Somi Conveyor Belting Ltd., aggrieving by the order-in-original issued by the Addl. Commissioner, Central Excise Commissionerate, Jaipur-II. The appellant is of the view that Rule 9 of the Central Excise Valuation (Determination of price of Excisable Goods) Rules, 2000 is applicable only when the 100% sale is to the related party. But they have sold the goods to related party as well as are also selling the goods to the other independent buyers. The Tribunal has already held in a case of Birdi Steels cited by the appellant that the provisions of Rule 9 are attracted only in the case when the goods are sold wholly to the related person or when the entire sale is affected through the related person. But the department has given demand under Rule 9 and adjudication authority has also confirmed the same. This is the issue in present appeal.

M/s Somi Conveyor Belting Ltd. v/s , Additional Commissioner Central Excise Commissionerate, Jaipur-II
[Order-In-Appeal no. 29(RDN)CE/JPR-II/2012 dated: 07.09.2012]

Relevant Legal Provisions:

Central Excise Valuation (Determination of price of Excisable Goods) Rules, 2000:-

RULE 8.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 suchgoods.

RULE 9.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, 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.

Issue: -Following issue was made before the Commissioner (Appeals):-

             Whether the contention of the appellant that Rule 9 of the Central Excise Valuation (Determination of price of Excisable Goods) Rules, 2000 is attracted only when 100% sale is to related party is correct?

Brief Facts:-

The appellants are engaged in the manufacture of Conveyor Belt/Sheet falling under Chapter sub heading no. 40101290 of first Schedule to the Central Excise Tariff Act, 1985. In the SCN dated 26.11.09, it has been alleged that the appellant-assessee have short paid Central Excise duty amounting to Rs. 1019509/- during the period November, 04 to Aug 09 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 (Determination of price of Excisable Goods) Rules, 2000.
The adjudicating authority has confirmed the demand of Rs. 1019509/- in terms of proviso to Section 11A (1) and interest under Section 11AB of the Central Excise Act, 1944 with a equivalent penalty under section 11AC of the Central Excise Act, 1944 vide impugned order. Aggrieved by the impugned order, the appellant filed this appeal.

Assessee’s Contentions:-

Assessee made following submissions before the Commissioner (Appeal):-

Ø The impugned Order-in-Original passed by the Commissioner is wholly and totally erroneous and is liable to be quashed.

Ø The issue of related party has already been settled in favour of them vide OIA No. 69 (CB) CE/JPR-II/2010 dt. 17.03.11. In this order the Commissioner (Appeals) has held that rule 9 is applicable only when 100% sale is made to the sister concern and since the total sale is not made to the sister concern M/s Oliver Micron Inc., rule 9 is not applicable. As the facts and circumstances under which the decision was delivered were exactly the same, its ratio is to be extended in the instant case. The decision of higher authority is binding on all the lower formations. This is the rule of binding precedent which is to be followed in the hierarchy of judicial forums.
Ø The impugned order is simply confirming the duty demand, interest and penalty /by alleging that since the two concerned persons belong to the same family they have mutuality of interest in business of each other. In this regard, it is submitted that simply being a family member is not enough to prove the mutuality of interest. For proving the mutuality of interest and to apply the valuation rules, the department has to prove that the relationship has influenced the sale price. This decision has been given by the Hon'ble Supreme Court in the case of CCE-II, Chennai v/s Beacon Neyrpic Ltd. [2006 (193) ELT 16 (SC)] that the sale to related person does not mean that the valuation is done as per valuation rules but the department has to prove that relationship has introduced an element other than purely commercial consideration in effecting sale by the assessee to related person. But the same has not been proved in the instant case. Further they had placed reliance on following case laws:
          a) RB Agarwalla & Co. Pvt Ltd V/s CCE [2007(217)ELT 417(Tri-Kolkata)
          b) Alembic Glass Industries Ltd. V/s CCE & Cus [2002(143) ELT 244(SC)]
          c) Y. N. Shah V/s CCE Mumbai [2004(170) ELT 353 (Tri.-Mumbai)]

Ø The adjudicating authority has not discussed the case laws cited by them in their reply to the SCN. As such a non speaking and non reasoned order is passed which is not justified in the light of following decisions:
          a) Commissioner of Central Excise, Bangalore versus Srikumar Agencies [2008 (232) E.L.T. 577 (S.C.)]
          b) CC Vs. Essar Oil Ltd [2010-TOIL-560-HC-AHM-CUS]
        c) M/s Nisha Cement V/s. CCE, Calicut [2010-TOIL-1255-CESTAT-Bang]
Ø The impugned order has simply held that the rule 9 is applicable in the instant case. While arriving at this conclusion, the learned adjudicating authority has not adhered to the submissions made by them in the reply to SCN and during written submissions. They stated that following submissions were not discussed in the findings:
i) Even if it is considered for the sake of argument also that the valuation rules are applicable in the instant case, then too the rule 9 is not applicable. This is so because this rule is applicable only in the case when the goods are sold wholly to the related person or when the entire sale is affected through the related person. It was held in the case of Birdi Steels Vs. CCE, Ludhiana [2005(179)ELT-82(Tri-Delhi) and Ispat Industries Ltd Vs. CCE, Raigad [2007(209)ELT-185(Tri-LB)]
ii) Even if it is assumed that provisions of Rule 9 are applicable then too proviso to this rule is applicable which says that where the goods so sold are further used by the sister concern in the manufacture or production process; rule 8 will be applicable and the value shall be 110% of the cost of production. Since the goods sold by them to M/s Oliver Micon Inc. are not sold as such but they are further used by them to produce its final product and then sold in the market. As such, if any valuation rule is to be applied then it will be rule 8. Here, they reiterate that no valuation rule is to be applied in this case as they do not have 100% sale to sister concern.
iii) Even if the department contention is accepted for the sake of argument also that rule 9 is applicable then too, proviso to this rule is applicable and rule 8 is to be applied therein. But this has not been considered and if this interpretation is considered that rule 9 is applicable then, there will be no use of inserting the said proviso in the language of rule 9. They submitted that the provision should be harmoniously interpreted and any interpretation which reduces or nullifies the impact of any provision should be avoided. Certain decisions were relied upon in this regard.
iv) Flow chart and photographs were submitted in the reply to show cause notice which clarified the process undertaken by the sister concern. This was in support of their contention that even if valuation rules are applicable, rule 8 is to be applied rather than rule 9.
          v) Certificate of CWA was also enclosed which clearly show that the duty paid by them is totally correct. It is paid on the basis of cost of production plus 10% profit. The cost sheet is calculated as per CAS-4 issued by Institute of cost and work accountant. But this has not been considered while passing the impugned order.
         vi) As the records relating to sale price from Oliver were not available from 2004 to 2006, the maximum price of Rs 1259/- was taken. There is only one transaction where the sale has taken place on such a price but this cannot be taken as base for determining price when information is not available. The calculation is not made on conceptual basis and seeking just to increase the burden of duty which will remove the faith from justice. So, the action of Government should be lenient and not too harsh where assessee is unable to provide complete information and a fair and reasonable way should be resorted to. In the case of Rallis India Limited v/s Commissioner of Cus. & C. Ex., Surat [2006 (201) ELT 429 (Tri. - Mumbai), it was decided that when there is sale/transfer of goods to sister unit for captive consumption cleared at higher price then such solitary sale was a sale in special circumstances and such amount cannot become the sale price for all times to come.
vii) Further, the impugned show cause notice is issued on the basis of findings of audit party and the audit paras issued by them (IAR no. 195/2008-09), the period covered by the audit party during this audit was April, 2007 to December, 2008. But the demand has been raised to them for the period from Nov, 04 to Sept, 09. As such, the audit party has gone beyond the period of audit which is not legally sustainable. This was duly submitted in the reply to show cause notice but it has not been considered while passing the impugned order.
viii) No. of case laws were submitted regarding denial of penal provisions in the instant case. In those cases, it was held that where transfer of the goods to sister concern are known to department and monthly returns are regularly filed, intention to evade payment of duty is absent; thus penalty is not imposable. Following decision were relied upon –
-       Sundram Fasteners Ltd. Vs Camm, of Cus. & C. Ex., Hyderabad-I [2009 (237) E.L. T. 55 (Tn. - 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].
In the above referred cases, penalties were set aside because the mala fide intention was not proved by the department. These decisions were cited in the reply to show cause notice and in the written submissions but these have not been considered while passing the impugned order. Moreover, the impugned order has not stated even a single reason as to why the penalty is confirmed. Hence, such an order is not sustainable.
ix) They submitted that in order to invoke extended period of limitation, willful suppression is to be proved which was not proved in their case. The law required that only return is to be filed and there was no requirement to file the copy of invoices. Hence they have not filed the same. But they were maintaining the proper records as required under the law. These all were properly filed and recorded in books of accounts. They have duly prepared and filed all the returns and replies of letters issued by the department. Audit of their unit has been conducted from time to time. They 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 related person was disclosed in their audit report also. Theirs is Limited company and this balance sheet goes to many shareholders and as such it cannot be said that they have any mala fide intention to evade payment of duty. It has been held by the Hon'ble Apex Court in the case of Pahwa Chemicals Private Limited v/s Commissioner of C. Ex., Delhi [2005 (189) ELT 257 (SC)] that in order to invoke the extended period of limitation., the department should prove that there was any willful suppression of facts. When all the facts are within the knowledge of the department, it cannot be alleged that there was willful suppression of facts. But this decision has not been discussed and a time barred demand is being confirmed. Hence the order has proved to be a non speaking order.
x) All the above submissions were the part of the reply to show cause notice and were reiterated in the written submissions. But neither these decisions have been discussed nor any reason have been assigned; as to why the benefit of these decisions have not been extended to them. Such an order is not justified in the light of decision given by Hon'ble Apex Court in the case of State of Himachal Pradesh V/s. Sardara Singh [2008- TIOL-160-SC-NDPS).

Reasoning of the Commissioner (Appeals):-

The Commissioner (Appeals) found that in this case adjudicating authority has confirmed the demand of duty on value as determinable under rule 9 of Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2009 as the goods have been sold to related concern. The appellant has contented 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 independent buyers. They have relied on the case of Birdi Steels V/s CCE, Ludhiana reported in 2005 (179) ELT 82 (Tri-Delhi) in which Tribunal has categorically held that the provisions of Rule 9 ibid are applicable only in the case when the goods are sold wholly to the related person or when the entire sale is affected through the related person. They also contend that rule 8 ibid is applicable to their case instead of rule 9. Since the process undertaken by their sister concern amounts to manufacture. In this regard, they held that by going through the provisions of Rule 9 of the C. Ex. Valuation (Determination of Price of Excisable Goods) Rules, 2000, it is crystal clear that this rule is applicable only when excisable goods are not sold except to or through a related person. They also find from 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, is correct. There are lot of decisions 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 Section 4 (1) (b) ibid.
Further the case law reported at 2005 (179) ELT 82 (Tri.- Delhi) in the case of Birdi Steels V/s CCE, Ludhiana is squarely applicable on the facts of this case therefore, respectfully following the decision of Tribunal, the impugned order does not sustain under law therefore and liable to be set aside. There is no ground for imposition of penalty on this basis in the present case.

Decision:-

The appeal is allowed.

Conclusion:-

The audit party raises the audit para whenever they see that the sale to related person. But this provision is applicable only when the 100% sale is through related party. When the sale of same product also takes place to independent buyer also, then this valuation rule will not apply. But they have to see whether the price charged from related party is same as charged from other parties. If the difference is there and goods are sold at lower price to related person then the duty can be demanded on the same from related party. But the department blindly issues the demand under rule 9 and this is struck down as the same is not applicable. Hence the department loses his case.

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PJ/CASE STUDY/ 2012-13/24
22 September 2012

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PJ/CASE STUDY/ 2012-13/24
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