Judgment:
1. These appeals are directed against the order passed by the Collector of Central Excise, Bombay II to the following effect :- (1) Directing M/s. The New Vinod Silk Mills Pvt. Ltd. to pay Rs. 16,690.56/- as excise duty under Rule 9(2) of the Central Excise Rules, 1944 (for short, the Rules) read with Section 11 A(2) of the Central Excises & Salt Act, 1944 (for short, the Act) paid short on 13,622.24 sq. mtrs. of man-made fabrics.
(2) Holding that 1335.30 sq. mtrs. fabrics seized from M/s. N.P. Textile (N.P.T., for short) valued at Rs. 73,430.00, 4146.87 sq.
mtrs. of fabrics seized from M/s. Shree Mahavir Textile Mills (S.M.T.M., for short) valued at Rs. 1,96,262/-, 6400.88 sq. mtrs.
seized from M/s. Sehgal Silk Mills (S.S.M., for short) valued at Rs. 2,94,616/- and 1539.20 sq. mtrs. of fabrics seized from M/s.
Jamnagar Woollen Textile Mills Pvt. Ltd. (J.W.T.M., for short) valued at Rs. 72,800/- are liable to confiscation under Rule 173Q of the Rules.
(3) Directing those concerns to produce the goods released provisionally from each of them in terms of the conditions of the B11 bonds executed by them and on their failure to produce the goods, directing them to pay Rs. 18,358/-, Rs. 49,066/-, Rs. 73,654/- and Rs. 20,000/- respectively to discharge their obligation under the Bonds.
(4) Directing appropriation of security amounts in the form of Bank guarantees and N.S. Certificates deposited by them against the said Bonds.
(5) Imposing penalties of Rs. 4000/- on each of them under Rule 9(2) of the Rules read with Rule 173Q of the Rules.
The appeals have been filed by the above-named concerns and another as indicated here in below :-Appeal E/738/88 - The New Vinod Silk Mills (Pvt.) Ltd. (for 2. NVS, a processor of man-made fabrics undertaken on job work basis, holds Central Excise licence. Three of the four concerns mentioned above, namely, NPTM, SMTM and SSM supply grey fabrics of NVS for processing. The processed fabrics falling under Chapters 54 and 55 of the 1985 Tariff used to be returned to the three suppliers. The three suppliers opted for the Procedure under Notification No. 305/77 issued under Rule 174A of the Rules which authorised the processor to comply with all procedural formalities under the Act and the Rules in respect of the goods "manufactured" by the processor and furnish information relating to the price at which the suppliers sell the goods. The processor agreed to discharge all statutory liabilities. These records were duly produced before the excise authority. On the basis of information by the suppliers about the prices at which they sell the finished fabrics to buyers, the processor submitted price list and the finished fabrics were being cleared by the processor (NVS) on payment of Central Excise duty on the value so declared by the processor.
3. Officers of the Preventive Branch of the Collectorate visited the premises of JWTM on 19-3-1986 and inspected records. They also conducted further enquiry. It was found that the processor was returning the finished fabrics in lump or takia and the three suppliers were selling 80% of the finished fabrics to JWTM at the prices declared to the excise authority, that JWTM were cutting the fabrics according to requirements and packing the same in cellophone paper and sell the same to wholesalers at prices much higher than the declared prices.
Stocks of the finished fabrics with the three suppliers and JWTM were seized and were subsequently released to the respective concerns on execution of B11 Bonds. Investigation also showed that JWTM is a Private Limited Company incorporated under the Companies Act while the other three concerns are partnership firms and that all the partners of the three firms are close relatives and 80% of the shares of JWTM are owned by these persons and they control the JWTM as well as the partnership firms and thus "related persons". Notice was issued to NVS, the three suppliers and JWTM alleging that false declarations and information were given to the excise authority deliberately with a view to evade duty, that the prices declared were deliberately depressed to achieve the purpose, that the real prices were much higher, namely, the prices at which the cut and packed fabrics were sold by JWTM to their buyers and the transactions between the three suppliers and JWTM were not at arms length. On these allegations it was indicated that the assessable value of finished fabrics on which the processor is required to pay excise duty should be based not at the suppliers' prices to JWTM but on JWTM's prices to their buyers. The notice contained demand of differential duty and proposed confiscation and imposition of penalty.
4. The processor, suppliers and JWTM submitted replies raising contentions, which can be summarised as follows :- The processor has no ownership on the finished fabrics and the suppliers are the owners. The suppliers filed declarations under Notification No. 305/77 about the structure of the fabrics and the prices at which they sell the goods.
The processor filed classification lists, price lists and RT 12 Returns relying on such declarations and maintained statutory records and paid duty. Processor all along acted bonafide and did not contravene the Act or the Rules and assessments also have been made. There was no collusion between the parties and no intention to evade duty or evasion of duty as alleged. JWTM, being a company incorporated under the Companies Act cannot be "related" to partnership firms. JWTM has outside shareholders and directors. The suppliers have no expertise and JWTM has expertise in marketing man-made fabrics and hence the former have been selling to the latter. The sale to JWTM is of fabrics in lumps or takia and on principal to principal basis and at arms length.
JWTM subjects the fabrics to cutting and packing. In the process smaller bits will be left and a part is reduced to waste. JWTM incurs expenditure for cutting, packing and organising sales. JWTM offers cash discount of 5%, incentive bonus at 3% based on minimum annual purchases, brokerage commission of 2%. Packing cost and charges cover 1-1 /2%. Loss resulting from cutting is 7%. In case JWTM's prices are to be the basis for determining the assessable value of fabrics cleared by VNS, deductions have to be given on account of the said factors. The notice is barred by time.
5. The Collector, in the impugned order rejected all the aforesaid contentions except the claim for deduction of cash discount, which he allowed only at 2-1/2% of the total value. Hence these Appeals.
6. Learned counsel for the appellants urged the following contentions :- (a) The findings that the three suppliers and JWTM are "related persons" and their transactions are not at arms length or on principal to principal basis is unsustainable.
(b) Assessable value of goods cleared by the processor should be based on the sum total of cost of grey fabric, cost of processing and profit of the processor.
(c) In any event, assessable value of goods cleared by the processor can be based only on the prices declared by the three suppliers for finished fabrics sold in lump and cannot be based on the prices of JWTM to their buyers for cut and packed fabrics.
(d) In any event, the Collector ought to have allowed the deduction claimed on account of cash discount, incentive bonus, cutting loss and expenses incurred by JWTM in his activity which resulted in fetching prices higher than the prices declared by the suppliers.
(e) Whether the findings regarding liability of seized goods to confiscation, enforcement of bonds and penalty are sustainable.
Learned counsel for the appellants contended that the concept of "related person" as defined in Section 4(4)(c) of the Act cannot be invoked in the case of the three suppliers and JWTM since the former are partnership firms and the latter is a Company with a purely juristic personality. The price at which the goods are ordinarily sold to the buyers in the course of wholesale market for delivery at the time and place of removal is the basis for valuation under Section 4(1)(a) provided the buyer is not a related person and the price is the sole consideration for the sale. "Related persons" means a person so associated with the assessee (in this case, the suppliers) that they have interest directly or indirectly in the business of each other. The particulars of the three supplying firms are the following :-2. N.N. Sehgal, Father of 2. N.N. Sehgal, Father of 2. N.N. Sehgal, Father No. 1.
No. 1.
No. 1 It is seen that father and son are the partners of NPTM, father, son and daughter-in-law are partners of SMTM and Father, Mother, son and another (R.K. Mehra) are partners of SSM. All these close relations, namely, parents, son, daughter-in-law are shareholders and directors of the company which buys the processed fabric from the suppliers. R.K.Mehra, the outside partner of SSM and his wife, Sunita Mehra are also directors of the company. Besides the four close relations and 2 outsiders who are associated with them, the company has four other shareholders and directors, namely, Sudesh Kumar and his wife and two sons. It is not shown that these four persons are otherwise connected with the family of Pravin Kumar Sehgal. There is evidence that out of the 5.25 lakhs shareholding of the company, 4.25 lakhs shareholding belong to Pravin Kumar Sehgal, his parents and wife. The three partnership firms, apparently registered as SSI units are engaged in the same activity, namely, getting grey fabrics processed through NVS and selling the same to JWTM and they had invoked the benefit of Notification No. 305/77. There can be no doubt that the three partnership firms and the company practically belong to Pravinchand Sehgal, his parents and wife and they fully control the management and activities of all the concerns. It must necessarily follow that these concerns have interest in the business of each other. The prices declared by the three suppliers which are the prices at which they sell the processed fabrics include only nominal profit of 5% for them, as could be seen from the price lists filed by the processor on the basis of the suppliers' declarations. However, the prices at which JWTM sells the fabrics after cutting and packing are about 33% higher than the declared prices as could be seen from the data furnished in the show cause notice and the impugned order. The company is thus in the position of a favoured buyer. There can therefore be no doubt that the three suppliers and the Company, the favoured buyer, are related persons and the persons concerned have deliberately entered into this arrangement.
8. In the circumstances referred to above, the contention that the company is a distinct juristic person and as such cannot be related to partnership firms or the partners thereof is not sustainable. If there is a collusive device to attempt evade duty, the statutory authority is justified in piercing the veil of corporate entity and look at the reality behind the facade. See para 7 of the decision in Juggilal Kamlapat v. CIT, AIR 1969 SC 932. The identity of interest between these concerns, the relationship and control are such that the concerns cannot be said to be at arms length or independent parties.
Consequently the prices at which the finished goods are sold by the suppliers to the company cannot be taken to be the prices of the supplier. The prices of JWTM to the wholesalers have to be taken to be the suppliers' real prices. See para 5 of the decision in Mohanlal Maganlal Bhavsar and Ors. v. Union of India and Ors., 1986 (23) E.L.T.3 (SC). Point answered against the appellants.
The appellants, relying on the judgment and clarificatory order in Ujagar Prints case reported in 1988 (38) E.L.T. 535 (SC) and 1989 (39) E.L.T., contended that the assessable value of the finished fabrics removed by the processor must be based not on the suppliers' price but on the sum total of the cost of grey fabrics, the cost of processing and the processors' profit. In cases where the raw material belongs to the supplier and the processed goods are returned by the processor to the supplier, the processing is the manufacturing activity. In Empire Industries Ltd. v. Union of India, 1985 (20) E.L.T. 179 (SC), it was held that the assessable value will not be the processing charges alone but the intrinsic value of the processed fabrics which is the price at which the goods are sold for the first time in the wholesale market which will naturally include the value of the grey fabrics supplied to the processor. The Supreme Court in the Ujagar Prints judgment approved the decision in Empire Industries Ltd. case and indicated that Notification No. 305/87 solves the problem arising out of the peculiar situation caused by the owner of the goods and the manufacturer being different persons. The Court also approved the view taken in the earlier Ujagar Prints case, 1987 (27) E.L.T. 567 (SC) that the assessable value will not be the selling price of the supplier. In the second Ujagar Prints case, 1988 (38) E.L.T. 535 (SC), it was held that the correct assessable value must be the value of the fabric at the factory gate, that is to say the value at which the processed goods leave the processors' factory and enter the mainstream. The mention of two principles was apparently capable of creating some confusion and the two principles were reconciled by the clarificatory order, 1989 (39) E.L.T. 493. The confusion arose because the processor is not the owner of the goods, but the manufacturer of goods and does not sell the goods to wholesale buyers at the factory gate but returns the goods to the supplier. The Supreme Court clarified that the assessable value would be the value of the grey cloth in the hands of the processor plus the value of the job work done plus manufacturing profit and expenses which will be either included in the price at the deemed factory gate of the processor or deemed to the price at the factory gate for the processed fabric. The Court further observed as follows :- "If the trader, who entrusts cotton or man-made fabrics to the processor for processing on job work basis, would give a declaration to the processor as to what would be the price at which he would be selling the processed goods in the market, that would be taken by the Excise authorities as the assessable value of the processed fabric and excise duty would be charged to the processor on that basis provided that the declaration as to the price at which he would be selling the processed goods in the market, would include only the price or deemed price at which the processed fabric would leave the processors' factory plus his profit. Rule 174 ... enjoins .... The price at which he is selling the goods must be the value of the grey cloth or fabric plus the value of the job done plus the manufacturing profit and manufacturing expenses but not any other subsequent profit or expenses. It is necessary to include the processors' expenses, costs and charges plus profit, but it is not necessary to include the traders' profit who gets the fabrics processed, because that would be post-manufacturing profits" In CCE, Hyderabad v. Pharmasia Ltd., 1996 (63) ECR 380 (Tribunal) the Tribunal considered the decisions of the Supreme Court and held, on similar facts that the assessable value would not be the value at which ... (the suppliers) sell the product in the wholesale market, but would be the sum total of the value of the raw materials, the value of the job work, the manufacturing profit and expenses for processing of the processor.
10. On the basis of the Ujagar Prints clarificatory order, we hold that as long as the transactions between supplier and processor are on principal to principal basis and at arms' length, the assessable value of the goods returned or cleared by the processor to the supplier would be the sum total of the cost of grey fabric received by the processor, the value of the job work, the processing expenses of the processor and the value cannot include the expenses incurred by the supplier after receipt of the processed fabric or the profits earned in the sale of the processed fabric. The Department has no case that the processor is a person "related" to the suppliers or that the transactions between them are not on principal to principal basis or not at arms' length.
The Department has also no case that the processing charges have been deliberately depressed to any extent. The suppliers' declared or real price can be the basis of valuation if the price includes only the elements referred to above and do not include the post manufacturing (processing) expenses and profit of the suppliers. The suppliers' declared price in this case and the price of JWTM include various expenses of the suppliers and JWTM and their profit and hence cannot be taken as the measure of assessable value after processed fabrics returned by the processor. The assessable value shall be the sum total of the value of the grey cloth, value of the job work done, processing expenses and the processor's profit. Points answered accordingly.
11. Point (d) : The question of deductions to be made from the real prices of JWTM to the wholesalers do not really arise for consideration in view of our finding on points (b) and (c). However, for the sake of completeness, we will deal with the question.
Cash discount: According to the appellants, JWTM was offering cash discount of 5% to all wholesalers who pay the price in cash promptly and the same should be allowed irrespective of the fact that all the buyers did not make prompt payment and did not earn the benefit. The Collector arrived at the actual cash discount allowed to the wholesalers who actually availed of the same and found that the amount represent 2-1 /2% of the total price realised and allowed 2-1/2% discount. We find the finding of the Collector is contrary to the decision of the High Court of Bombay in Jenson and Nicholson (India) Ltd. v. Union of India, 1984 (17) E.L.T. 4 where it is held that where cash discount is allowed under the terms of the sale and the nature of the discount is known to the parties concerned prior to the actual removal of the goods, deduction should be given irrespective of whether each customer availed of the said discount. Deduction is to be given if the conditions aforesaid are satisfied.
Incentive Bonus : It is contended that JWTM offers to all buyers incentive Bonus subject to minimum purchases made in the year. The Collector has not considered the plea. It has to be allowed if this is as per trade pattern of JWTM and if the facility is offered to all Buyers.
Expenses of JWTM : It is contended that JWTM prices reflect also expenses incurred by them for cutting, packing, etcetera and these are "post-manufacturing expenses" vis-a-vis the processed goods removed by the processor and hence must be deducted from JWTM price, if that price is basis for assessment. In our opinion, the Collector was in error in rejecting this claim for deduction. These expenses are post-manufacturing expenses and this expenditure has atleast partly contributed to the higher price of JWTM. The expenses have to be allowed if JWTM prices are to be adopted to arrive at the assessable value of processed goods.
Loss caused by cutting: The appellants in the replies to the show cause notice indicated clearly that processed goods are received by the suppliers and JWTM in lump or takia and they are cut sizes as per requirement by JWTM and, as a consequence, JWTM will be left with smaller pieces of different sizes and a part becomes fent or rags and a small part becomes total loss and therefore the total quantity received from the processor is not available for sale by JWTM. It is said that about 70% is sold at the higher price of JWTM, 10% is sold as 10% less price, 10% is sold at 20% less price, fent and rags (3%) is sold at 50% less price and 2% as total loss. According to the Collector, the total loss claimed on this account is 7% and this is not supported by any material. Our attention has not been drawn to any documents showing the extent of loss, if any, on this account. Hence we do not agree that any deduction is allowable on account of such alleged loss. As we have indicated, these aspects do not really arise in view of our findings on points (b) and (c).
12. Point (e) : The Collector has found the seized (and released on bonds) goods liable to confiscation solely on the ground to misdeclaration of value on the basis of the finding that assessable value is to be based on the prices of JWTM less 2-1 /2%. We have set aside the finding regarding valuation. The Collector has not found that if assessable value was to be the sum total of the cost of grey fabrics, value of job work done, processing expenses and processor's profit, there was misdeclaration of value. The show cause notice came to be issued only on the basis of the higher prices of JWTM and we have held that sale prices cannot form the basis of assessable value of processed fabric removed by the processor. In this view the seized goods cannot be regarded as liable to confiscation and appellants cannot be held guilty of any act deserving of imposition of penalty.
13. In the result, the impugned order is set aside and the appeals are allowed.