Full Judgment
2. Short facts necessary for the disposal of these appeals are as follows : M/s. Samtel Electron Devices Limited (hereinafter referred to as SEDL) is the main appellant. They are engaged in the manufacture of electron guns, vital part of television picture tubes/Another company called M/s. Samtel Colour Limited (hereinafter referred to as SCL) is engaged in the manufacture of picture tubes which are sold to manufacturers of television sets. SEDL sold substantial quantity of their produce, namely, electron guns (more than 99%) to SCL at price of Rs. 250 to Rs. 226 in the case of 14" and Rs. 260 to Rs. 252 in the case of 21" during the period 1-4-1993 to 28-2-1998, that is, the period with, which these appeals relate. Duty on the above produce was paid by SEDL at the above price and SCL availed Modvat credit on its use in the picture tubes manufactured by them.
On an average SEDL used to sell about eight lacs electron guns in each financial year to SCL. They also used to export electron guns at prices ranging between Rs. 253 and Rs. 249 during the relevant period, namely, 1-4-1993 to 28-2-1998. After 10-2-1996, SEDL began to sell a very small quantity of electron guns to persons who were engaged in reconditioning television picture tubes. The quantity sold to these re-conditioners was about 0.1% of the total production. To these purchasers electron guns were sold at a price of Rs. 450 for 14" and Rs. 500 for 21". Central Excise Department wanted to adopt the price at which electron guns were sold to re-conditioners as the normal value of the goods sold to SCL as well, on the allegation that SEDL and SCL are related persons. On this basis show cause notice, dated 20-4-1998 was issued to SEDL demanding duty amounting to Rs. 15,80,57,971 under Rule 9(2) of the Central Excise Rules read with proviso to Section 11A(1) of the Act.
SEDL was also called upon to show cause why penalty under Rule 173Q(a) and (d) should not be imposed, the land, building, plants etc. should not be confiscated, interest on duty short-paid should not be charged under Section 11AB of the Act and why on Shri Satish Kumar Kaura penalty be not imposed under Rule 209A of the Rules.
3. In reply to the show cause notice, SEDL contended that the two companies SEDL and SCL are not related persons; that even if there is relationship, the price at which electron guns were sold to SCL was not depressed; that the price at which electron guns were sold was the normal price of similar goods in the market at the relevant time; that the price at which the negligible quantity of electron guns were sold to re-conditioners cannot be taken as the normal price of the goods manufactured and that the show cause notice, dated 20-4-1998 covering the period from 1-4-1993 to 28-2-1998 is hopelessly barred by limitation. Voluminous evidence was also produced by the noticees to substantiate their contentions against the show cause notice. After considering the contentions raised by the noticees, the Commissioner of Central Excise, Meerut confirmed the demand made in the show cause notice by Order-in-Original No. 15/Commr/M-I/98, dated 19-11-1998. The operative portion of that order is in the following terms : (i) Confirm the duty amount of Rs. 15,80,57,971 (Rupees fifteen crores eighty lacs fifty seven thousands and nine hundred seventy one only) under Rule 9(2) read with Section 11A by invoking the extended period.
(ii) Impose a penalty of Rs. 15,80,57,971 (Rupees fifteen crores eighty lacs fifty seven thousands nine hundred seventy one) on M/s.
Samtel Electron Devices Ltd. under Rule 173Q(a) & (d) read with Section 11 AC. (iii) Confiscate the land, building, plant, machinery and conveyances belonging to M/s. Samtel Electron Devices Ltd. under Rule 173Q(2) but give option to them to redeem the same on payment of redemption fine of Rs. 5,00,00,000/- (Rupees five crores only).
(v) Impose a penalty of Rs. 2,00,00,000/- (Rupees two crores only) on M/s. Samtel Color Ltd. and Rs. 50,00,000 (Rupees fifty lakhs only) on Mr. Satish Kumar Kaura, under Rule 209A.4. Learned Counsel representing the appellant raised the following points for our consideration : (b) Even if it is held that there exists relationship between the two, namely, SEDL and SCL, that relationship did not go to influence the price at which electron guns were sold by SEDL to SCL; (c) Since the Department was aware of the entire transaction between SEDL and SCL right from the very beginning and sale to re-conditioners started only on 10-2-1996, show cause notice covering the period from 1-4-1993 to 28-2-1998 is barred by limitation; and (d) No ground for imposing penalty on the firm or on Shri Satish Kumar Kaura had been established in the case.
5. In the order impugned in this appeal the Commissioner primarily proceeds on the basis that SEDL and SCL are related persons and so the price at which electron guns were sold by SEDL to SCL cannot be taken as the normal price. In such a situation, it is worthwhile to examine the provisions of law where the transaction is between related persons.
In other words, it is to be examined whether on account of the mere fact that the manufacturer and purchaser are related the transaction value is to be discarded in its entirety. Is it not required to examine whether the said relationship between them has gone to influence the price of the goods manufactured? If that relationship has not gone to depress or diminish the value, can that value be taken as the normal value for assessment under the Central Excise law? 6. Section 4 of the Central Excise and Salt Act, 1944 deals with valuation of excisable goods for purposes of charging of duty of excise. As per clause 1 of that section the duty of excise is chargeable with reference to the value of the goods. That value is to be deemed to be the normal price at which such goods are ordinarily sold by the assessee to a buyer in the course of wholesale trade for delivery at the time and place of removal. It also states that the buyer should not be a related person. If the assessee arranges sale through a related person then proviso (iii) states that the normal price of the goods sold should be deemed to be the price at which they are ordinarily sold by related person in the course of wholesale trade to dealers who are not related. From this it is seen that when the sale is by manufacturer to related person, the normal price should be the price at which related person sells it to dealers who are not related.
If the related person who purchases it from the manufacturer, captively consumes the goods, how the normal price is to be found? For the said purpose reference has to be made to Central Excise (Valuation) Rules, 1975. Chapter II of these rules provide for determination of assessable value. Clause (c) of Rule 6 deals with transactions between related persons. Sub-clause (ii) of Clause (c) is concerned with sale to related persons who uses or consumes such goods in the production or manufacture of other article. In such a situation, this sub-clause states that the value should be found out in the manner provided in Clause (b) of Rule 6. Clause (b) with its sub-clauses reads - "(b) where the excisable goods are not sold by the assessee but are used or consumed by him or on his behalf in the production or manufacture of other articles, the value shall be based - (i) on the value of the comparable goods produced or manufactured by the assessee or by any other assessee : Provided that in determining the value under this sub-clause, the proper officer shall make such adjustments as appear to him reasonable, taking into consideration all relevant factors and, in particular, the difference, if any, in the material characteristics of the goods to be assessed and of the comparable goods; (ii) if the value cannot be determined under Sub-clause (i), on the cost of production or manufacture including profits, if any, which the assessee would have normally earned on the sale of such goods. " 7. SEDL produced sufficient material, to establish cost incurred by them in producing electron guns. The margin of profit derived by them was also made available to the departmental authorities. The above materials show that the price at which SEDL sold the goods to SCL was the reasonable price of electron gun available in the market. Data was also made available to the authorities to show that the price at which identical goods were sold by another manufacturer, namely, M/s. JCT was the same. Evidence was also made available to the authorities to show that SCL got identical goods, namely, electron guns imported from foreign countries for the same price at which they were purchasing it from SEDL. SEDL also furnished documentary evidence before the authorities to show that they exported electron guns to foreign countries at the same price at which they sold it to SCL. Revenue has not succeeded in showing that the price of electron guns available in the market was anything above the price at which they were sold to SCL.
In such a situation, it can safely be held that the price at which SEDL sold the goods, namely, electron guns to SCL was at market rate and that the so-called relationship between them has not, at all, gone to suppress or depress its value.
8. Other manufacturers of electron guns were selling their produce at the same price realised by SEDL from SCL. Electron guns of foreign manufacturers were available in India for the same price as well. SEDL were exporting electron guns to foreign countries as well. The price at which those goods were exported was the same as they realised from SCL.
The cost of production of electron guns incurred by SEDL and their margin of profit also go to show that the price realised from SCL was not at a lower rate. Commissioner in the impugned order has not dealt with this aspect of the matter. Learned Counsel representing the Revenue has not succeeded in showing that the price realised by SEDL from SCL on the sale of electron guns was a depressed one. In these circumstances we are clear in our mind that the sale between SEDL and SCL was at arms length and evidences a purely commercial transaction.
The said commercial transaction was not influenced by any extra consideration. Over and above the price realised on the said sale nothing further flowed from SCL to SEDL. Learned Commissioner in the impugned order observed "Admittedly these picture tubes are not manufactured by SEDL and 99% of the electron guns being supplied to SCL for such manufacture would clearly go to show that the price fixation takes into account extra parameters which are outside and beyond the course of normal trade". We are not in a position to understand the logic behind this. SCL were manufacturing picture tubes using electron guns purchased from SEDL. To compete in the market in the sale of picture tubes SCL had to fix its price. Depending on the end price of picture tube they fixed the price of electron guns. That price was given to SEDL. It was on that price SCL got electron guns imported from foreign countries. Picture tubes fitted with imported electron guns and those got from SEDL were sold at the same price. Therefore, it cannot be held that SEDL sold electron guns to SCL at a depressed value.
Fixation of the price of electron guns taking into consideration the price of picture tube which was the end product was purely a commercial consideration. It cannot be termed as underhand dealing on account of relationship between the two companies. These circumstances go to show that the relationship between SEDL and SCL had no effect on the normal price of electron guns sold by SEDL.
9. Section 4(4)(c) defines 'Related Person'. As per that definition a related person is the one who is associated with the assessee and he should have interest directly or indirectly in the business of each other. This definition of related person must be understood in the context of the third proviso to Section 4(1)(a). While so considered the cumulative effect of Section 4(4)(c) and third proviso to Section 4(1)(a) make it clear that three conditions are required to be satisfied. These three conditions, according to the Division Bench of the Bombay High Court in Ralliwolf Ltd. v. Union of India, 1992 (59) E.L.T. 220, are - (ii) the price charged should not be normal price but the price lower to the normal price and that extra commercial considerations have reduced the normal price; and (iii) the alleged related persons should be related to the assessee as defined in Section 4(4)(c).
Evidence on record in this case do not warrant a finding of mutuality of interest. The manufacturer SEDL and purchaser SCL, on the evidence before us, cannot be found to have interest in the business of each other. In any view of the matter, the price charged by SEDL from SCL was not shown to be the normal price. Passing on extra-commercial considerations from SCL to SEDL also has not been established. In such a situation the tests enuntiated by the High Court in the decision Ralliwolf Ltd. v. Union of India (supra) have not been established.
10. It is an admitted case of parties that SEDL sold electron guns to independent buyers from 10-2-1996. (Commissioner in the impugned order observed "while admittedly the sale to independent buyers on record began again only from 10-2-1996", para 22.12.1 of the order). Evidence produced in this case show that during 1995-96 SEDL sold 7,91,822 electron guns to SCL. A negligible quantity of 250 units alone were sold to re-conditioners. Sale to these re-conditioners during the year was 0.03% of total production. During the financial year 1996-97 quantity sold to SCL was 7,18,967, while sale to re-conditioners was 1307 units only i.e., 0.18% of the total produce. During April 1997 to February 1998 SEDL sold 8,22,315 units to SCL, while 1620 units alone were sold to re-conditioners. This worked out to 0.19% of the total production. This miniscule quantity sold to re-conditioners at the higher rate was taken by the Department to be the normal price for finding out the assessable value. Re-conditioners who get less than 0.2% of the total produce should be treated as a different class of buyers as contemplated in Central Excise Act. As against that separate class of buyers, SCL was the bulk purchaser removing more than 99% of the total produce. Therefore SCL stood as a different class by itself.
The price at which the goods were sold to that class of buyer was at the market price at which goods were available. Therefore we hold that the Department was not justified in fixing value of electron guns on the basis of the price at which they were sold to re-conditioners.
11. In view of our finding that the price at which SEDL sold electron guns to SCL was the market rate and that rate was not influenced by any relationship between the two companies, we are not examining the question as to whether these two companies were related person coming within the purview of that term under the Central Excise and Salt Act.
Relationship, even if conceded, has not gone to suppress the price of the goods sold to SCL. It therefore follows that the Department was not justified in initiating action pursuant to show cause notice, dated 20-4-1998 for the transaction between SEDL and SCL was not at all tainted.
12. On the basis of evidence before us, we come to the conclusion that the price at which negligible quantity of electron guns were sold to re-conditioners cannot be the basis for finding out the normal price in terms of Section 4(1)(a) of the Central Excise Act. The price realised by SEDL from SCL on the sale of electron guns was the normal price for finding out the assessable value. The so-called relationship between SEDL and SCL having not gone to depress the value, the Department was not justified in passing the impugned order.
13. Since we find that the show cause notice was issued without any justifiable cause, the question of limitation argued by the Learned Counsel representing the appellant is not to be dealt with.
14. In view of what has been stated above, the imposition of duty, penalty, confiscation of land, building, plant etc. and the imposition of penalty on Shri Satish Kumar Kaura are set aside.