Full Judgment
Schlumberger Measurements & System, a French company. The water meters produced by the appellants were liable to pay Central Excise duty on the basis of their value. The appellants were discharging duty treating their sale price to M/s. Schlumberger Industries India Ltd. as the assessable value. Under the impugned order, Commissioner, Central Excise, Delhi-II has held that the appellant manufacturer and their buyer are related persons and therefore, duty should have been assessed on the sale price of the appellants' related buyer to their unrelated buyers. It is the finding in the impugned order that on account of adopting the lower sale price to the related buyer as the assessable value, there was a short-payment of duty of about Rs. 60 lakhs. The order has confirmed this duty demand for the period January, 1996 to June, 2001. Further, a short levy demand of about Rs. 31,000/- has been confirmed on the ground that there was clandestine removal of 552 water meters during 1998-99. In addition to the duty demands, the impugned order has imposed a penalty of about Rs. 59 lakhs on M/s. Progressive Thermal Controls Pvt. Ltd. and a further penalty of Rs. 2 lakhs has been imposed on Shri G.C. Narang, Managing Director of M/s. Progressive Thermal Controls Pvt. Ltd. on the ground that "he had the knowledge and was responsible for the evasion of Central Excise duty". Further, duty demand of about Rs. 53,000/- has been imposed on the scrap arising out of manufacture. The present appeals contest the duty demands and penalties except for the duty demand of Rs. 53,000/- on the scrap.
2. The main duty demand has been made in view of the definition of related person contained in Section 4(4)(c) of the Central Excise Act, 1944 as a person who is so associated with the assessee that they have interest, directly or indirectly in the business of each other. It may also be noted that Section 4(1)(a)(iii) stipulates a separate provision as under for the valuation of goods sold to or through a related person : "Where the assessee so arranges that the goods are generally not sold by him in the course of wholesale trade except to or through a related person, the normal price of the goods sold by the assessee to or through such related person shall be deemed to be the price at which they are ordinarily sold by the related person in the course of wholesale trade at the time of removal, to dealers (not being related persons) or where such goods are not sold to such dealers, to dealers (being related persons), who sell such goods in retail." 3. The findings that the appellant manufacturer and their buyers are related persons have been rendered for the following reasons : (i) "M/s. Progressive Thermal Controls Pvt. Ltd., Faridabad was supplying their entire production exclusively to M/s. Schlumberger Industries India Ltd., Gurgaon.
(ii) M/s. Schlumberger Industries India Ltd., Gurgaon were procuring their entire supplies of domestic water meters exclusively from M/s.
Progressive Thermal Controls Pvt. Ltd., Faridabad.
(iii) M/s. Schlumberger Industries India Ltd., Gurgaon held 24% equity participation in M/s. Progressive Thermal Controls Pvt. Ltd., Faridabad till as late as 1998.
(iv) Shri J.C. Kapoor of M/s. Indfos Ltd., who held 50% equity participation in M/s. Progressive Thermal Controls Pvt. Ltd., also held substantial equity participation in M/s. Schlumberger Industries India Ltd., Gurgaon.
(v) M/s. Schlumberger Industries India Ltd. supplied the technical know-how/drawings/specification free of charge to M/s. Progressive Thermal Controls Pvt. Ltd., Faridabad.
(vi) M/s. Progressive Thermal Controls Pvt. Ltd. was manufacturing goods bearing the brand name owned by M/s. Schlumberger Industries India Ltd. (vii) The final inspection of the goods was being done by M/s.
Progressive Thermal Controls Pvt. Ltd. and for which no charges were paid to M/s. Progressive Thermal Controls Pvt. Ltd.; that M/s.
Progressive Thermal Controls Pvt. Ltd. has no brand name of its own and is entirely dependent upon M/s. 'Schlumberger Industries India Ltd. for the sale of their products under the brand name owned by Schlumberger Industries India Ltd." (Page 4 of the 4. The impugned order has also placed reliance on the decision of the Tribunal in the case of Associated Porcelain (P) Ltd. v. C.C.E., Calcutta-1 - 2001 (136) E.L.T. 762 (T) in support of the proposition that since the entire production of the appellant is sold to one single buyer, those sales are to be treated as sale to a related person.
5. The appellants contested the findings as contrary to settled law and facts of the case. They relied on the following decisions in support of their case :Union of India and Ors. v. Atic Industries Ltd, - 1984 (17) E.L.T. 323 (S.C.)Rallis India Ltd. v. C.C.E., Bombay - 2000 (118) E.L.T. 780m (Tri.) (d) Kaivan Cosmetics v. C.C.E., Mumbai - 1999 (108) E.L.T. 188 (Tri.)British Health Products India Ltd. v. C.C.E., Jaipur - 1999 (34) RLT 244 (CEGAT)Art Rubber Industries Ltd. v. C.C.E., Aurangabad - 1999 (114) E.L.T. 83 (Tri.)." They have also submitted that the appellants' buyers had only a minority shareholding of 24% in the appellant company and the appellant manufacturing company had no shareholding in their buyer company. Only Shri J.C. Kapoor, who along with his family had a shareholding of 27% in the appellant manufacturing company, had shareholding in M/s.
Indfosis Ltd. and M/s. Indfosis had shareholding of 20% in the appellant's buyer company (M/s. Schlumberger Industries India Ltd.). It is also pointed out that the appellant's buyer divested its 24% share-holding in the appellant manufacturing company w.e.f. 7-1-1998 and therefore, from that date, there was not even shareholding in the appellant's company by their buyers.
6. The appellants have stressed that the factors relied on by the impugned order do not make the sale price liable to be rejected as assessable value in view of the fact that the sale price was a purely commercial price which satisfied the requirement of the normal wholesale price under Section 4(1)(a) of Central Excise Act, 1944.
During the hearing of the case, the learned Counsel representing the appellant has submitted that minority shareholding of the buyer in a manufacturing company does not make it a related person sale. He has, in particular, relied on the decision of the Apex Court in the case of Atic Industries Ltd. in support of this submission. He has also pointed out that it is well settled that even a price between two related parties is not to be rejected for the purpose of being assessable value, provided the sale price is a truly commercial price and is not affected by the relationship and price is the full consideration for the transfer of the goods [1992 (59) E.L.T. 220 (Bom.)]. The learned Counsel also stressed that the commercial nature of the transaction between the parties would be clear also from the fact that the appellant's buyer's mark-up was not abnormally high. In this context, he referred to the illustrative example in Para 31 of the adjudication order and submitted that the margin obtained by the buyer on re-selling the water meters was only Rs. 13 per meter which is by no means an abnormal margin. Learned Counsel for the appellants also pointed out that the appellants buyer was incurring loss on his sale activity while the appellant manufacturer earned a profit by selling at the agreed price. Thus, it is the contention of the appellants that their sale price was a fully commercial price and it was in no way lowered so as to benefit the buyer, irrespective of whether he was related or not.
During the hearing the learned Counsel has also submitted that the decision of the Tribunal in the case of Associated Porcelain (P) Ltd. had no application to the facts of the appellant's case inasmuch as in that case, the Tribunal upheld the rejection of the sale price in view of the fact that the sale price had been affected by many factors including the financial arrangements between buyers and the sellers. In this context, he referred in particular to the observations contained in Paragraphs 5 and 5.1 of the Tribunal decision in the case of Associated Porcelain (P) Ltd, which are reproduced below : "5. We have heard both sides and carefully considered the rivacontentions. We have also perused the case-law to which our attention has been drawn by the learned Consultant. It has been submitted by both the appellants that the Managing Director of the first appellant is one of the directors of the second appellant. It has also been admitted that there is a common office premises for them and the second appellant had given advances to the first appellant to meet all the expenses for manufacture of the goods, and office expenses including payment of salaries etc, because the entire production is sold to the second appellant. The appellants argued that this is a normal practice in trade and industry, and there is nothing abnormal or unusual about it.
5.1 The main question to be decided is whether the second appellant is a "related person" and whether he is a "favoured buyer" by reason of the price being lower than the price finally charged by the second appellant to his customers. The learned Consultant has argued at length to demolish the theory of the Revenue that the second appellant is a "related person" and a "favoured buyer". The law is well settled that commonness of Directors and common office premises do not by themselves establish that both of them are related. What we have to see is whether the transactions are on principal to principal basis whether both of them have interest in each others business and whether there is any financial flowback. In the instant case, as mentioned above, the entire production was sold to the second appellant and the first appellant had been receiving advances, which were used for meeting the manufacturing and other office expenses including salaries to their employees. This clearly establishes the fact that although these two appellants are two independent legal entities by reason of being private limited companies, both of them have financial interest in each others business inasmuch as the entire manufacturing expenses and the office expenses including the salaries of the employees of the first appellant and in consideration the entire production is sold to the second appellant at a lower price. The appellants have advanced the plea that the price charged to the second appellant was not abnormally low. But it is observed that the goods were sold to be second appellant after packing the same with straw. This shows that the first appellant was transferring the entire stock of production to the second appellant who would complete the process of packing at his premises. The condition in which the porcelain insulators' were sold to the second appellant is not the usual condition in which such goods are ordinarily marketed, i.e. the goods are ordinarily sold in cardboard cartons, wooden crates etc. Moreover, this is not a simple case where the first appellant received advances in the normal course of business and in fact, the entire financial dealings between the two establish beyond doubt that there exists a definite financial interest for them in each others business. This has been clearly brought out in the impugned order in the following words : "From the statement of Shri B.K. Sampat, Director of both the noticee company in the show cause notice itself, it becomes clear that M/s. SCPL does not charge any interest from M/s. APL and the production of M/s. APL is controlled by M/s. SCPL as per requirement of the market on the basis of orders secured by M/s. SCPL, 100% production of M/s. APL is sold to M/s. SCPL, the expenditure towards payment for all the purchases, wages and petty expenses in connection with M/s. APL are met by M/s. SCPL, when payments are made on behalf of M/s. APL, debit vouchers are raised on them by M/s. SCPL, thus debit balance of approx. Rs. 44 lakhs of APL in the book of SCPL was accumulated over the last 15 years because SCPL has met all the liabilities of APL." The foregoing narration and discussion make it crystal clear that the relationship between these two appellants is not based on normal business consideration, but have a special common financial interest in the business of each other and it is also prominently points to the fact that the entire manufacturing activity and marketing of the entire production is effectively controlled by the second appellant by reason of firm control over the financial activities of the first appellant. This explains adequately as to why the price charged to second appellant is abnormally low. The Appellants have made a vain bid to refute the charge of abnormal price charged to the second appellant stating that the second appellant had to incur some extra expenditure on account to repacking, handling and transport, godown rent, insurance, commission to agents etc. The facts of the case establish beyond doubt that the second appellant had de facto control over the entire manufacturing and marketing activity of the first appellant who is a mere de jure manufacturer. We find that the investigation has successfully pierced this veil and exposed the true relationship between the two." Learned Counsel also pointed out that it is clear from the above paragraphs that what weighed with the Tribunal was the fact that the sale price between manufacturer and the buyer had been affected by various concessional arrangements and that the sale price was not a commercial price, and not the shareholding. Learned Counsel stressed that in the present case, the price was entirely a commercial price and that such a profitable price was the sole consideration for the transaction between the two parties.
7. As against this, learned JDR has pointed to the shareholding of the appellant's buyer in the appellant manufacturing company and common shareholding of Shri J.C. Kapoor in the appellant company as well as in M/s. Indfosis Industries Ltd. which had shareholding in the buyer company. He also pointed out that the goods have been manufactured to the specification of the buyer and know-how for production was freely supplied by the buyer of the appellant manufacturer. He further pointed out that through their Indian subsidiary, M/s. Schlumberger was trying to enter the water meter market in India, while water meter was reserved for small scale sector according to industrial policy. In his reply, learned Counsel for the appellants has submitted that the know-how supply was of no consequence inasmuch as know-how was brought in by Schlumberger Industries India Ltd. which was a 24% shareholder in the appellant manufacturer. According to him, the know-how being an asset brought in by the minority shareholder in the appellant manufacturer, the know-how has to be treated as belonging to the appellants themselves. In this context, he referred to the decision of this Tribunal in the case of Quality Ice Cream - 2002 (145) E.L.T. 584.
8. A side issue involved is the duty demand of about Rs. 6 lakhs for the period 1-1-96 to 31-3-97, in view of the legal position that a small scale unit which manufactures goods under the brand name of another person was not eligible for small scale exemption. A decision on this issue depends on whether the appellant was affixing the brand name 'Precimag', which belonged to the buyer, on the water meters manufactured by them during the relevant period. The Revenue's contention is that the appellant was affixing a lid, which bore this trade mark, on the water meters during the relevant period in question.
The Revenue has relied upon the statements of Shri V. Thomas, Quality Control Manager and Shri Gurpreet Singh, Manager of M/s. Schlumberger Industries India Ltd. in support of the finding that lid containing the brand name 'Precimag' was being affixed by the appellant manufacturer themselves. As against this, the appellants have contended that during the relevant period, the appellants were manufacturing the meters in question and supplying them without affixing the lid containing brand name. It is their submission that the lids containing the brand name were being separately procured by M/s. Schlumberger Industries India Ltd. and were being fixed on the meters by them and meters were being sold after fixing the lid by M/s. Schlumberger Industries India Ltd. Learned Counsel for the appellants took us through the registers of M/s. Schlumberger Industries India Ltd. relating to procurement and issue of the lids and sale of meters showed that matching number of lids were being issued by M/s. Schlumberger Industries India Ltd. with the sale of meters. Learned Counsel submitted that this evidence along with non-procurement of lids by M/s. Progressive Thermal Controls Pvt.
Ltd. during the period showed that they did not affix the lids bearing brand name during this period. Learned Counsel has also pointed out that the statements suggesting affixing of these lids by the appellant during 1996-97 Shri V. Thomas and Shri Gurpreet Singh were inadvertent errors made by them in regard to period of such use and those statements are required to be discarded in the light of relevant documentary evidence contained in the registers kept by the parties. He also pointed out that the fact that the appellant manufacturer was affixing the lids only from 1-4-97 is evident from the records of both parties and after 1-4-97 the appellant had not claimed small scale exemption. Sale of 3000 water meters under invoice dated 4-6-96 by M/s.
Schlumberger Industries India Ltd. to Chief General Manager, HMWS & SB, Hyderabad and its correlation in regard to issue of lids in M/s.
Schlumberger Industries India Ltd.'s register was shown as proof that M/s. Progressive Thermal Controls Pvt. Ltd. was not affixing the lids before handing over the meters to M/s. Schlumberger Industries India Ltd. 9. With regard to the finding on clandestine removal of 552 water meters, the appellant's explanation is that this allegation is made based on the entries relating to purchase and sales of meters found in the records of M/s. Schlumberger Industries India Ltd. and that this allegation is the result of improper verification of those records. It is being pointed out that first of all, no liability could be fastened on the appellant merely based on the fact that entries relating to purchase and sale in the records of the appellants purchasers did not match. Secondly, it is being mentioned that when all the entries in the appellant's purchaser's records are correlated, it would be clear that allegation of the excess sales of 552 pieces is the result of twice counting as sales of meters which had been returned on account of defects by their buyers. Learned Counsel pointed out that the returned meters had been sent by M/s. Schlumberger Industries India Ltd. to the appellant manufacturer for reconditioning, repair etc. The appellant has shown that such return of meters is also evidenced by D-3 returns filed by the appellants with the Central Excise Authorities. Learned Counsel for the appellants has stressed that allegation of clandestine removal has been raised against the appellant contrary to evidence available on the record.
10. We have perused the records and have considered the submissions made by both parties. We find merit in the appellants' submissions.
Their sales to M/s. Schlumberger Industries India Ltd. cannot be treated as sales to related two persons. While M/s. Schlumberger Industries India Ltd. had minority share holding of 24% in M/s.
Progressive Thermal Controls Pvt. Ltd. during part of the period in dispute, there was no shareholding at any time by M/s. Progressive Thermal Controls Pvt. Ltd. in M/s. Schlumberger Industries India Ltd. That Shri J.C. Kapoor who is a minority shareholder in M/s. Progressive Thermal Controls Pvt. Ltd. had also shareholding in Indfosis and that company had shareholding in M/s. Schlumberger Industries India Ltd. does not make M/s. Progressive Thermal Controls Pvt. Ltd. a shareholder of M/s. Schlumberger Industries India Ltd. and both of them related persons. Thus, the shareholdings are wholly irrelevant for the valuation of goods sold by the appellants to M/s. Schlumberger Industries India Ltd. That the total production of the appellants was sold to a single buyer namely M/s. Schlumberger Industries India Ltd., also makes no difference to the valuation of those goods for the purpose of levy of Central Excise duty. It is to be expected that when the goods are produced according to the specification of a single buyer, the entire production is sold to that buyer. This does not, in any way, vitiate the commercial nature of the transaction. That specification and know-how for the meters were of M/s. Schlumberger Industries India Ltd. also does not affect the valuation of the goods, since M/s. Schlumberger Industries India Ltd. was a minority shareholder in M/s. Progressive Thermal Controls Pvt. Ltd. and M/s.
Schlumberger Industries India Ltd. brought the know-how to M/s.
Progressive Thermal Controls Pvt. Ltd. These issues remain settled in favour of the appellants by the decision of the Apex Court in the case of Atic Industries Ltd. and this Tribunal's decision in the case of Kwality Ice Cream -2002 (145) E.L.T. 584.
11. We do not find the decision of this Tribunal in the case of Associated Porcelain (P) Ltd. to be applicable to the present case. As has been correctly pointed out by the learned Counsel for the appellants, that decision confirmed the rejection of transaction value because of the fact that sale price between the parties was not a commercial price and several financial concession rendered by the buyer to the seller, eroded the commercial nature of the transaction. In the present case there were no concessional transactions between the parties and the transaction was a purely commercial one and price was a commercial price. That decision has no application. In these circumstances, we are of the view that rejection of sale price on the ground of it being transaction between two related persons is not sustainable.
12. The finding that water meters manufactured by M/s. Progressive Thermal Controls Pvt. Ltd. were not entitled to small scale exemption during 1996-97 on the ground that they were affixing the brand name of 'Precimag' during that period and that goods produced affixed with the brand name of another person was not eligible for the exemption. The finding is based on statement of Shri V. Thomas, Quality Control Manager of M/s. Progressive Thermal Controls Pvt. Ltd. and Shri Gurpreet Singh, Manager of M/s. Schlumberger Industries India Ltd. As against this the contention of M/s. Progressive Thermal Controls Pvt.
Ltd. is that they started affixing the brand name 'Precimag' in their factory only w.e.f. 1-4-97 and that they had not availed themselves of small scale exemption for the goods affixed by them with that brand name. It is submitted that prior to 1-4-97 M/s. Progressive Thermal Controls Pvt. Ltd. were not affixing the brand name and the brand name was being affixed by M/s. Schlumberger Industries India Ltd. after purchasing the meters from M/s. Schlumberger Industries India Ltd. With regard to the statements in question, it is submitted that first of all, these statements had been subsequently retracted and secondly the statements had been rendered incorrectly. It is submitted that a comparison of the particulars stated by Shri V. Thomas with the relevant process of manufacture alone would show that Shri Thomas had made an error on facts. Learned Counsel pointed out that in his statement dated 30-8-2000 Shri V. Thomas stated as under with regard to the use of brand name 'Precimag': "We are supplying the water meter M/s. Schlumberger Industries India Ltd. after affixing their brand 'Schlumberger' Trecimag' on the water meters caps since the date of my joining this company that is from 15th March, 1995 on the water meter cap brand name Schlumberger being affixed with the embossing machine along with other embossed particular that is 'Pre-cimag' size of meter that is 15 mm or 20 mm Class of the meter that is Class 'A' or Class 'B' meter number, made in India we are/were supplying water meters to M/s. Schlumberger Industries India Ltd. in sealed condition that is after sealing the water meters caps with sealing lid/rivet. Before the water meters are tested and passed by us then the inspection staff of M/s.
Schlumberger Industries India Ltd. inspect our tested meters and after their approval the water meters were/are being supplied to M/s. Schlumberger Industries India Ltd. We are manufacturing water meters exclusively for M/s. Schlumberger Industries India Ltd. We are manufacturing water meters by assembling, testing and final packing. This is my true and voluntary statement given without any fear or pressure." With the help of samples, learned Counsel has pointed out that brand name 'pre-cimag' is not embossed at all on the water meter caps as stated by Shri V. Thomas. Instead, brand name 'precimag' is to be found only on the lids and these lids with the name 'Schlumberger' 'precimag' cast on it is purchased from the market. Learned Counsel also pointed out that incorrectness of the statement is also clear from the relevant records maintained by parties concerned. In this connection, he referred to the fact that the contemporary records kept by M/s.
Schlumberger Industries India Ltd. showed that they procured the lids and issued them at the time of sale of meters, rather than sending the lids for affixing at the time of manufacture to M/s. Progressive Thermal Controls Pvt. Ltd. It is clear that, statements in question are in conflict with the contemporary business records kept by the parties.
For the period in question, there is no record of purchase or use of lids containing the brand name 'precimag' by the appellants M/s.
Progressive Thermal Controls Pvt. Ltd. Simultaneously, the record kept by the buyer, M/s. Schlumberger Industries India Ltd. shows that the lids were being procured by them and issued along with meters at the time of sale of the meters. Since the oral evidence of the company's official is in conflict with the contemporary records, the more appropriate conclusion would be to attribute the variation in the statement to slip of memory with regard to practice at various times.
The fact that the brand name is not embosses as stated but Shri V.Thomas also shows that his statement is erroneous on this issue. The appellant's explanation that they were not affixing the brand name 'Precimag' on the water meters during 1996-97 has therefore, to be accepted.
13. We are also not able to confirm the finding that 552 water meters had been cleared clandestinely. The entire evidence on record goes contrary to this finding. This allegation and finding are based entirely on purchase and sale records of M/s. Schlumberger Industries India Ltd. The adverse finding has flowed from the fact that M/s.
Schlumberger Industries India Ltd. had sold 552 more pieces than they had purchased from the appellant M/s. Progressive Thermal Controls Pvt.
Ltd. The appellant's contention on this score is that a careful scrutiny and reconciliation of various entries would show that there was actually no excess sales by M/s. Progressive Thermal Controls Pvt.
Ltd. or M/s. Schlumberger Industries India Ltd. It has been pointed out that allegation of excess sales in excess of purchase has been made merely because the Central Excise Authorities had failed to take note of the fact that some of the consignments had been returned by their buyers as defective and the resale of such returned goods after repair has also been treated as new sales. The appellants have shown that some of the returned goods had found their way to the appellant manufacturer themselves and that return of such goods had been reported through D-3 returns filed by the appellant before Central Excise authorities. This explanation of the appellant has been rejected with the observation in the impugned order that "Prima facie this difference of 552 pieces cannot be correlated/reconciled with the receipt of 558 rectified pieces because the difference is of 552 pieces and not of 558 pieces".
We are in agreement with the appellant that the finding of the adjudicating authority is not reasonable. The return of the meters in question remains evidenced by the various statutory records. These records have not been disproved in any way or doubted in the order. The mere discrepancy with regard to 6 pieces is no ground to hold that these entries are required to be rejected for the reason of discrepancy alone. Such an approach is not reasonable at all, particularly in view of the fact that statutory records kept by the appellant manufacturer and filed before the Central Excise authorities themselves indicated the return of the goods. The entries could be rejected only after due verification of their correctness and upon a finding that they are false and erroneous. In the absence of any such enquiry, the Commissioner was clearly in error in holding that because of the discrepancy with regard to six meters the allegation of excess clearances merited confirmation.
14. For the reasons stated above, we are of the view that the findings in the impugned order and the consequential demand of duty and penalty are required to be set aside. We do so. The appeal is allowed with consequential relief to the appellants after setting aside the impugned order.