Judgment:
1. The dispute in this appeal relates to valuation of a product called "Epichlorohydrin" (ECH) which was manufactured by the assessee and supplied to M/s. Petro Araldite Private Limited (PAPL, for short). PAPL was originally promoted as a Joint Venture Company by the assessee and M/s. Ciba-Geigy Limited (Switzerland) along with M/s. Ciba India Private Ltd. and registered as a Private Limited Company in India under the Companies Act in terms of a Joint Venture Agreement dated 09-12-1996 entered into between the three Companies. That was a joint venture to manufacture basic liquid resins in India by PAPL with the technical know-how to be supplied by the Swiss Company and the basic raw material (ECH) to be supplied by the assessee. The assessee held 24% share of equity in the Joint Venture Company and the rest was held by CIBA. The assessee was the lone manufacturer of ECH in India.
According to the Supply Agreement dated 22-01-1998 entered into between the assessee and M/s. PAPL, the entire raw material (ECH) required by the latter had to be supplied by the former. Certain other agreements such as Plant Technology Transfer Agreement, Process Technology Transfer Agreement and Service Agreement were also entered into between the parties. Upon all the agreements having been carried into effect, 86% of the assessee's ECH production was supplied to M/s. PAPL at a price agreed to between them. The remaining 14% was supplied to other buyers in India at prices higher than the price charged to M/s. PAPL.
While, so, there came to be a constitutional change in the JV Company.
CIBA walked out and M/s. Vantico Performance Polymers Private Limited (USA) substituted them. However, the essential terms and conditions of the various agreements remained unaltered. It is said that, till August 2001, the assessee was paying duty on ECH cleared to M/s. PAPL by treating the transaction value of the goods as its assessable value under Section 4(1)(a) of the Central Excise Act and that this was not objected to by the Department. But such valuation of the goods cleared to M/s. PAPL from September 2001 was questioned by the Department through a spate of show-cause notices, wherein the Department held that the assessee and M/s. PAPL were related persons in terms of Section 4(3)(b)(iv) of the Central Excise Act and accordingly took the view that the value of ECH sold to M/s. PAPL had to be determined for the purpose of assessment of duty in terms of Section 4(1)(b) of the Act read with Rules 8, 9 and 10 of the Central Excise Valuation Rules, 2000. These show-cause notices raised differential demands of duty on the assessee for the relevant periods by adopting 115% (up to 04-08-2003) or 110% (from 05-08-2003) of the cost of ECH production as the assessable value of the goods supplied to M/s. PAPL during such periods. These notices also demanded interest on duty under Section 11AB of the Act, apart from proposing penalties under the relevant Central Excise Rules. The demands of duty and other proposals so raised by the department were contested by the assessee.
2. The dispute between the assessee and the department came up before this Tribunal in a group of appeals, one filed by the department and two filed by the assessee. All the appeals were disposed of as per Final Order No. 1079-1081/2005 dated 04.08.2005 since reported in Commissioner of Central Excise, Chennai Vs Tamil Nadu Petro Products Ltd. [2006 (193) E.L.T 430 (Tri.-Chennai)]. In the said final order, the Tribunal found mutual interest of the assessee and PAPL in the business of each other and held them to be "related" in 'terms of Section 4(3)(b)(iv) of the Central Excise Act and, accordingly, it was held that Section 4(1)(b) of the Act would govern valuation in the case. With regard to applicability of the Valuation Rules, it was held that Rules 8, 9 and 10 were not applicable and, therefore, the goods should be valued under Rule 11 of the Valuation Rules. As the lower authorities had not followed this procedure, the case was remanded for fresh decision by the adjudicating authority. Pursuant to this remand order (Final Order No. 1079-1081/2005 ibid), the Commissioner passed Order-in-Original No. 62 to 66/2005 dated 30.11.2005 after giving the assessee an opportunity of being heard. He confirmed demand of duty of over Rs. 4.4 crores against the assessee under Section 11A of the Central Excise Act and imposed on them a penalty of Rs. 50,000 under Rule 25 of the Central Excise Rules, 2002. Interest on duty was also demanded under Section 11AB of the Act. The present appeal is against this decision of the Commissioner.
3. Heard both sides. Learned Counsel submitted that the adjudicating authority ought not to have relied on the proviso to Rule 9 inasmuch as the said provision would apply only when all sales were made to a related buyer and the goods were captively consumed by him. The cost of production of the goods was far higher than its selling price to M/s.
PAPL and other buyers and, therefore, it was not justifiable for the Commissioner to adopt the cost of production as the basis for determining the assessable value of the goods under Rule 9 of the Valuation Rules. The Commissioner should have accepted the price at which the appellants had sold ECH to M/s. PAPL, as the basis for assessable value under Rule 11 of the Valuation Rules. According to learned Counsel, the adjudicating authority ought not to have applied Rules 8 and 9 at all to the case on hand. Learned SDR justified the Commissioner's order by submitting that the same was passed strictly in accordance with the direction issued by this Tribunal. In the remand order, this Tribunal had directed him to determine the assessable value of the goods in terms of Rule 11 of the Valuation Rules and, accordingly, in his best judgment, he determined the value by the Cost Construction Method prescribed under Rule 8. According to learned SDR, it was open to the Commissioner under Rule 11 to adopt a reasonable method from elsewhere in the Valuation Rules. Learned Commissioner had borrowed a method from Rule 8 and quantified the assessable value on the basis of the data made available by the assessee. Such procedure was very much within the scope of M Rule 11, learned SDR argued.
4. After considering the submissions, we find that many of the grounds of this appeal are in the nature of raking up an issue which was already settled by this Bench in Final Order No. 1079-1081/2005 ibid.
The most conspicuous one of such grounds reads thus: In the present case, the Commissioner ought to have held that in respect of the first two periods viz. 9/2001 to 5/2002 and 6/2002 to 12/2003, the price at which the appellants sold to M/s. PAPL was the transaction value under Section 4(1)(a) and in respect of the third period viz. 1/2004 to 12/2004, the price at which the appellants sold ECH to M/s. PAPL was lower by about 9.7% and the same could be allowed under Section 4(1)(a) in view of the contract price based on the bulk purchase.
In the remand order, the Tribunal had rejected the transaction value under Section 4(1)(a) and clearly held that the valuation should be done under Section 4(1)(b). Acting under Section 4(1)(b), the Tribunal ruled out the applicability of the Valuation Rules 8, 9 and 10 and directed valuation under Rule 11. As rightly pointed out by learned SDR, "best judgment" is the spirit of Rule 11. The Rule required that the assessable value should be determined by using reasonable means consistent with the principles of general provisions of the Rules and Sub-section 1 of Section 4 of the Act. Mention of Sub-section 1 of Section 4 of the Act in Rule 11 is not a licence to the assessing authority to consider acceptance of transaction value under Clause (a) of the said Sub-section. The Valuation Rules have to be read with Clause (b) of the said sub-section, only. In our view, learned Commissioner was right in borrowing the Cost Construction Method from Rule 8 and determining the assessable value under Rule 11 by that method. Admittedly, all the necessary data relating to cost of manufacture, required for such determination of assessable value, were available to the Commissioner. Learned Commissioner only worked upon" the data furnished by the assessee. In the circumstances, we are of the considered view that the valuation of the goods was correctly done in terms of Rule 11 pursuant to the remand order of the Tribunal. It is also pertinent to note that no alternative reasonable method was suggested by the assessee before the adjudicating authority.
5. In the aforesaid circumstances, the assessee's challenge against the assessment made by the Commissioner must fail. Accordingly, the demand of duty raised in the impugned order is sustained.
6. In relation to the penalty imposed on the assessee, we have found substance in the submissions made by learned Counsel. The Commissioner found violations of Rule 4 and 6 of the Central Excise Rules, 2002 by the assessee. Rule 4 required correct assessment of excisable goods and Rule 6 required payment of appropriate duty thereon. The Revenue has no case that the assessee did not self-assess the goods or pay duty thereon. In other words, it is not their case that the goods in question were removed otherwise than in terms of Rules 4 and 6. Hence we are unable to sustain the penalty imposed on the asseessee under Rule 25 on the ground of violation of Rules 4 and 6. However, the assessee cannot resist demand of interest on duty under Section 11AB of the Act: 7. In the result, the appeal is allowed only to the extent of setting aside the penalty imposed on the appellants by the Commissioner. The impugned order will stand modified accordingly.