Judgment:
1. Order-in-Original dated 31-7-1992 passed by the Collector of Central Excise, Belgaum is under challenge in this appeal.
2. Appellant is engaged in the manufacture of biscuits since 1971. The dispute in this appeal relates to the period from April 1988 till the end of April 1989. During this period biscuits manufactured by the appellant fall in three categories. Appellant was manufacturing biscuits with brand name of HORLICKS and selling the same to M/s. HMM Ltd. Appellant was manufacturing biscuits with the brand name of Parle and selling the same to them. Appellant was also manufacturing biscuits and selling the same to wholesalers and dealers. The dispute in this appeal relates to the assessable value of the biscuits with the brand name HORLICKS and sold to HMM. Ltd. 3. The manufacture of biscuits with the brand name of HORLICKS was being done in accordance with the terms of the agreement dated 24-1-1986 entered into between the parties. Appellant was filing price lists in respect of the biscuits manufactured. Price, List in Part II was being filed in respect of special blend horlicks biscuit containing the brand name and manufactured by the appellant and sold to HMM Ltd. and the same was approved. Goods were being cleared on payment of appropriate duty. Show cause notice dated 16-6-1989 was issued by the Superintendent to the appellant demanding differential duty for the period 1-12-1988 to 30-4-1989 on the basis of assessable value proposed to be determined not on the basis of prices declared by the appellant but on the sale price of HMM Ltd. to their wholesale dealers. The Collector issued show cause notice dated 7-12-1990 demanding differential duty for the period April 1988 to March 1989 proposing to discard the value declared by the appellant and to adopt wholesale price of HMM Ltd. to their wholesale dealers and also proposing imposition of penalty and confiscation of land, building, plant, machinery, materials and other things used in connection with the manufacture, storage, removal or disposal of the goods. The notice alleged wilful mis-statement to the effect that the sales by the appellant to HMM Ltd. were on principal to principal basis and at arms length and suppression of fact of receipt by the appellant of Rs. 5 lacs as advance from HMM Ltd. with the intention of evading payment of duty. Annexure to the show cause notice alleged that at an earlier stage the appellant had confirmed that there was no written agreement between the parties but investigation showed that there was a written agreement dated 24-1-1986, the terms of which indicate that the manufacture of biscuits by the appellant involved in the show cause notice was on behalf of HMM. Appellant resisted the show cause notice denying the averments regarding mis-statement and suppression of receipt of advance and stating that the agreement had been produced before the Superintendent in April 1986 and May 1986 and also denying manufacture on behalf of HMM Ltd. It was contended that the receipt of Rs. 5 lacs as advance carried interest at 8% per annum and there was no nexus between the receipt of advance and the price and there was no depression of price. It was contended that the terms of the agreement cannot lead to the inference that the manufacture of biscuit was on behalf of HMM. Ltd. 4. The Collector overruled the above contentions raised by the appellant. He also confirmed the demand on the finding that manufacture of biscuits was on behalf of HMM Ltd. The Collector ordered confiscation of land, plant, machinery etc. of the appellant as proposed in the show cause notice giving option to redeem on payment of Rs. 5 lacs. Penalty of Rs. 2 lacs was also imposed. This order of the Collector is under challenge.
5. Learned Counsel for the appellant contended that though the show cause notice referred to receipt of advance of Rs. 5 lacs as a relevant factor, the Collector did not rely on this circumstance in the final order and the Collector's finding was based entirely on the terms of the agreement and the inference drawn by the Collector was not justified on the terms of the agreement. On the facts and circumstances of the case, the finding that manufacture of biscuits by the appellant was on behalf of HMM Ltd. cannot be sustained. He also pointed out that the advantage on account of the receipt of deposit of Rs. 5 lacs would be only to the extent of Rs. 35,000 per year compared to the volume of sales of the particular product which was about Rs. 47 lacs in 1986-87, about Rs. 51 lacs in 1987-88 and about Rs. 97 lacs in 1988-89 and the total sales during the three years being Rs. 1.3 crores, Rs. 1.64 crores and Rs. 5.72 crores approximately. Learned Counsel also contended that since the impugned order is based entirely on the terms of the agreement and since copies of the Agreement were made available to the Department on 21-4-1986 and 13-5-1986, show cause notice dated 7-12-1990 would be barred by time.
Shri T.R. Malik, SDR rebutted the above contentions and contended that the notices were not barred by time and terms of the Agreement clearly point to the conclusion that the transactions between the parties were not on principal to principal basis and that appellant was functioning as an agent of HMM Ltd. and therefore, assessable value should be based on the wholesale price charged by HMM Ltd.Union of India v. Cibatul Limited, 1985 (22) E.L.T. 302 and Gout, of India v. Food Specialities Ltd., 1985 (22) E.L.T. 324 as also the decision of the Tribunal in Paivan Biscuit Co. (P) Ltd. v. CCE, 1991 (53) E.L.T. 595 have considered the circumstances under which it can be said that a person manufactures goods on behalf of another. We will examine the facts in the light of the aforesaid decisions.
7. The following are the values of clearances made by the appellant to HMM Ltd., Parles and to their other wholesale buyers.--------------------------------------------------------------------------------Buyer 1986-87 1987-88 1988-89--------------------------------------------------------------------------------HMM Ltd. Rs. 46,91,928.89 Rs. 50,89,875.49 Rs. 96,58,898.19Buyers Rs. 83,99,892.27 Rs. 73,44,743.48 Rs. 39,65,250.75 ---------------------------------------------------------------TOTAL Rs. 1,30,91,821.16 Rs. 1,64,26,722.47 Rs. 5,71,93,717.78-------------------------------------------------------------------------------- Appellant, receiving Rs. 5 Lakhs as deposit was paying interest at the rate of 8 per cent per annum i.e. Rs. 40,000 per year. If Rs. 5 Lakhs had been deposited in Bank, HMM Ltd. would have earned interest at the rate of 11 per cent per annum i.e. Rs. 55,000 per year. If Rs. 5 Lakhs were required to be borrowed from Bank for operational expenses, appellant would have to pay interest at the rate of 15 per cent per annum i.e. Rs. 75,000 per year. In other words, the deposit entitled loss of Rs. 15,000 per year to HMM Ltd. and gain of Rs. 35,000 per year to the appellant. This is insignificant compared to the total volume of annual sales of the appellant and the volume of annual sales by appellant to HMM Ltd. In 1988-89, total sales of appellant was about Rs. 5.72 Crores and total sales of appellant to HMM Ltd. was about Rs. 97 Lakhs. It is clear that the deposit could have no role to play in establishing special relationship between them or to render appellant agent of HMM Ltd. or in depressing to any extent appellants' price to HMM Ltd. 7.1 The show cause notice issued by the Collector stated that HMM Ltd. supplied Horlicks malted food, an important ingredient of the biscuits manufactured by the appellant and supplied to HMM Ltd. and the supplies were made at concessional price. HMM Ltd. supplied raw materials to other buyers in small glass containers with caps at price ranging from Rs. 50 to Rs. 60 per Kg. Appellant was purchasing these raw materials from HMM Ltd. in containers of 182 Kg. capacity at a price of Rs. 31.30 per Kg. The Collector ignored two important circumstances in this connection. Purchase by the appellant was in huge quantities as can be seen from the copy of Invoice produced which shows the quantity covered by the invoice as 16 packs each of 182 Kgs. i.e., 2,912 Kg. While the purchase by other buyers was in smaller quantities. The appellant was receiving these raw materials in bulk in metal containers each with capacity of 182 Kg. but the raw material was packed in small glass bottles with caps when supplied to other buyers. Expenses by way of cost of glass bottles and caps and related packing materials and the expenses of bottling and packing would be considerable. These two important differences in the sale pattern of Horlicks malted food could cover a substantial part of the price difference. In these circumstances the difference in price, if at all, does not appear to have any significance. The Collector committed a serious error in not examining the question in all its aspects.
8. According to the Collector the terms and conditions of the agreement dated 2-4-1986 entered into between HMM Ltd. (Purchaser) and the appellant (Manufacturer) establish that appellant manufactured biscuits on behalf of HMM Ltd. The special features are said to be :- (a) HMM Ltd. was supplying one of the main raw materials, namely, Horlicks malted milk food to the appellant.
(b) HMM Ltd. had interest in the activities of the appellant at various stages like the place for storing raw materials, quality control, requirement in regard to the ingredients of the biscuits, control over the plant and machinery.
(c) Packing materials to be used by the appellant were to be strictly according to the specifications of HMM Ltd. and approved by them.
(d) HMM Ltd. was entitled to depute their staff for inspection of the goods manufactured by the appellant.
9. Under the agreement, appellant agreed to manufacture biscuits with the trade mark HORLICKS under arrangement with the registered proprietors of the trade mark by use of Malted Milkfood manufactured by HMM Ltd. Appellant will sell first 500 MTs or such larger quantities as may be mutually agreed. The appellant shall comply with the procedures, formulae, specifications, standards and other instructions prescribed by HMM Ltd., from time to time, including in respect of hygenic conditions and cleanliness, temperature control in the process of manufacture and/or packing. The appellant undertook that the goods shall contain requisite ingredients in strict proportions and there shall be compliance with standards prescribed by HMM Ltd. for the manufacture of goods and use of Malted Milkfood supplied by HMM Ltd. HMM Ltd. was entitled to draw samples for testing of manufactured goods. Only goods approved by HMM Ltd. shall be marked with the trade mark HORLICKS and put in packages. The goods rejected on testing or otherwise which do not meet the specification or prescribed quality and do not contain requisite ingredients in correct proportions or not upto the prescribed standards may be released to the market without the trade mark "HORLICKS" only if otherwise fit for human consumption; alternatively the appellant shall be obliged to destroy such goods. The entire raw materials, including malted milkfood, packaging materials shall be acquired by the appellant on their own account and their own risk. All other expenses shall be borne by the appellant. The price shall be mutually agreed upon. Packing material shall be approved by HMM Ltd. The goods shall be packed in accordance with the processes laid down by HMM Ltd. Packing material rejected by the appellant shall be destroyed by the appellant. HMM Ltd. shall supply malted milkfood in powder and in bulk containers in adequate quantity at prices mutually fixed by them and the price shall be payable in cash unless required to be adjusted out of the money which may be due to the appellant. No raw material of an obnoxious nature shall be stored by the appellant so as to cause any contamination of the biscuits or to reduce the quality, test or flavour of the biscuits. The factory shall be periodically fumigated. Title of the malted milkfood sold by HMM Ltd. to the appellant and of the biscuits sold by the appellant to HMM Ltd. shall respectively pass in favour of the vendee at such stage or places as may be decided mutually. Appellant shall maintain proper records relating to receipt and use of Malted Milkfood and the stock shall be open to inspection by agents of HMM Ltd. On termination of the agreement, the appellant shall return to HMM Ltd. the stock of Malted Milkfood, Horlicks biscuits and packing materials for which the latter shall pay reasonable price. Clause 15 of the Agreement reads thus :- "15. To ensure quality control, PURCHASER may nominate any of its servants and/or agent to enter the factory of the SELLER and SELLER hereby agrees to extend such facilities to the nominee of PURCHASER to carry out inspection with a view to determine the state of manufacturing processes or operations and for that purposes the nominee of the PURCHASER may shut down or restart plant and machinery when the goods of the PURCHASER are being manufactured or otherwise view the state of plant and machinery and other equipment, areas where raw materials and packing materials are stored or stocked, to ensure the rights herein contained of the PURCHASER in relation to the goods to be purchased by it from the SELLER AND NOTWITHSTANDING ANYTHING CONTAINED IN THIS CLAUSE, the SELLER shall remain and continue to be liable for all acts, deeds, matters and things done or not done by the SELLER in connection with the manufacture of the goods." 10. The view expressed by the Collector that the main raw material was being supplied by HMM Ltd. though at a price, was only a surmise. In reply to the show cause notice, appellant stated that Malted Milkfood constituted only one per cent of the raw materials. The Collector cited no materials to show that this raw material was the main one. In any event, according to the Agreement, it was the responsibility of the appellant to purchase all raw materials. As explained in the reply to the show cause notice, the appellant was purchasing this raw material from HMM Ltd. as it was available in bulk and as purchase in open market in unit containers would be more expensive. Such purchase cannot lead to the inference that transaction was not between principal to principal or manufacture by the appellant was on behalf of HMM Ltd. The provisions in the agreement relating to storage, inspection, sampling, packing materials, specifications and prescriptions, rejecting of defective goods etcetera were intended to ensure quality control since the goods were to have brand name and HMM Ltd. was buying 500 tons, a huge quantity. Such measures of quality control, by themselves cannot lead to any inference as suggested by the Collector. The Collector was clearly in error in concluding that HMM Ltd. had control over the plant and machinery. This conclusion was drawn evidently on the basis of Clause 15 extracted earlier. Under this clause HMM Ltd. could depute staff to carry out inspection to determine the state of manufacturing process or operation only with a view to ensure quality control. The staff so deputed could shut down or restart the plant and machinery.
This right is not the same as control over plant and machinery.
11. The various circumstances present in the case do not spell out a case of manufacturing activity being carried out by the appellant on behalf of HMM Ltd. HMM Ltd., having agreed to purchase 500 M.Ts. of biscuits with Horlicks brand name would be naturally concerned with ensuring quality control. The provisions of the agreement had only such an end on view. The agreement made it clear that manufacturing activity be carried out by appellant on their own account and at their own risk, as in the case of any other manufacturer and at no risk for the buyer as in the case of any other buyer. There are no circumstances justifying the conclusion that the transactions were not on principal to principal basis or not at arms length.
12. In the circumstances, the Collector was in error in directing assessable value of goods cleared by the appellant by way of sale to HMM Ltd. be valued not at the appellant's declared price but at the price charged by HMM Ltd. to their customers.
13. The demand was made in respect of the period from April, 1988 to the end of April, 1989. The show cause notices were issued on 16-6-1989 and 7-12-1990 respectively, beyond the period of six months prescribed in Section 11A(1) of the Act. The Collector invoked the larger period prescribed by the proviso to Section 11A(1) of the Act. The notice issued by the Collector alleged suppression of the receipt of Rs. 5 lakhs as advance. The annexure to the show cause notice alleged suppression of the agreement dated 2-4-1986. The appellant contended that the deposit had no relevance or significance and copies of the written agreement had been furnished to the officers of the department on 21-4-1986 and again on 31-8-1989. Copy of the letter dated 31-8-1989 indicates that copy of the agreement was furnished, though in letter dated 2-3-1988 appellant informed the Superintendent that there was no written agreement between the parties. No document has been produced to show that copy of the agreement was furnished on 21-4-1986 as stated before us. The later correspondence does not support the claim.
However, the Collector, in the impugned order, did not refer to any of these circumstances, but merely held that suppression was of the "actual assessable value." There is no finding that appellant was guilty of suppression of relevant facts. Hence, going by the factual finding on suppression of facts or rather, the absence of any such factual finding, it has to be held that the proviso to Section 11A(1) of the Act could not have been invoked. The earlier notice issued by the Superintendent did not contain any allegation attracting the application of the proviso. It must follow that the notices are barred by time.
14. In the result, the impugned order is set aside and the appeal is allowed.