ORDER
M. Jeyapaul, J.
1. The petitioner M/s. Dagger Die Cutting was started in the year 1993. It is engaged in manufacturing and selling of Leather Die Cutting Knives. The petitioner is registered as a small scale industry. It enjoys exemption in payment of excise duty. Excise duty payable on the total value of clearance was exempted to an extent of Rs. 30,00,000/- for the period 1995-2000 and to the extent of Rs. 50,00,000/- from 2000 onwards. The petitioner is also entitled to duty credit via modvat and cum-duty benefits. Her husband Mr. Nilanjan Deshpande has started Dagger International a Concern involved in retailing the Die Cutting Knives. The first respondent Commissioner of Central Excise, Chennai II Commissionerate issued show cause notice dated 19.5.2000 claiming duty for the period from 1995-96 to 2000-2001. The duty has been claimed for the transactions that took place during the years 1995-96. The petitioner countered the claim of excise duty in the show cause notice issued by the first respondent by giving reply to the show cause notice. The first respondent passed an order dated 10.4.2001 confirming the duty demand of Rs. 47,73,201/- against the petitioner in terms of proviso to Section 11A of the Central Excise Act, 1944. Penalty was also imposed invoking the provision under Section 11A of the Central Excise Act, 1944 and Rule 1730 of the Central Excise Rules, 1944. The petitioner took up the matter in appeal before the second respondent. The second respondent upheld the contention of the first respondent that price of M/s. Dagger International was to be accepted. However, the matter was remanded to the first respondent for grant of benefit of modvat credit and to treat the price as cum-duty in terms of the judgments of the Supreme Court. The first respondent also was directed to arrive at the exact amount of duty due on readjustment after giving an opportunity to the petitioner to produce evidence. The petitioner, thereafter, filed a petition before the second respondent seeking for rectification of the original order passed by it on 3rd May 2002. But, the said application was rejected as it was found meritless by the second respondent.
2. The petitioner challenges the order dated 25.4.2003 passed by the second respondent in the rectification application confirming the final order passed by the second respondent on 3.5.2002.
3. It is contended by the petitioner as follows:
The show cause notice issued by the first respondent is time-barred as it was sent after one year period prescribed in law. The impugned orders have been passed on the basis of allegations not contained in the show cause notice. The petitioner had no opportunity to counter the same. The principles of natural justice were blatantly violated. M/s. Dagger International was run by the husband of the Proprietrix of the petitioner who had tremendous experience and contact in the leather industry. Therefore, the petitioner agreed to manufacture the knives ordered by the clients of M/s. Dagger International. M/s. Dagger International and the petitioner are two separate and distinct entities. The petitioner is a manufacturing unit while M/s. Dagger International is a retail unit. M/s. Dagger International obtains purchase orders from its customers and places the same with the petitioner and buys the finished product from the petitioner for resale to its customer. The relationship between the petitioner and M/s. Dagger International is based on sound commercial considerations. There is no mutuality of interest between those two Concerns. There is also no financial flow and backup from one Concern to another and the relationship is clearly at arm's length. There was no allegation of any clandestine activity with the intent to evade duty in the show cause notice issued by the first respondent. The allegation that M/s. Dagger International was a 'related person' is totally untenable. Therefore, the impugned order is liable to be quashed.
4. Learned Senior Central Government Standing Counsel appearing for the respondents would submit that the power of judicial review under Article 226 of the Constitution of India conferred on this Court is very limited.
5. Per contra, learned Counsel appearing for the petitioner would submit that in a case where a perverse order has been passed by the authority concerned, this Court has ample power under Article 226 of the Constitution of India to go through the entire materials to test whether the order impugned is a perverse one.
6. The Supreme Court in Bachan Singh v. Union of India : (2008) 9 SCC 161 has held as follows:
It is well-known and well-settled proposition of law that in proceedings under Article 226 of the Constitution, the High Court cannot sit as a court of appeal over the findings recorded by the GCM. Judicial review under Article 226 of the Constitution is not directed against the decision but is confined to the decision-making process. Judicial review is not an appeal but a review of the manner in which the decision is made. The Court sits in judgment only on the correctness of the decision-making process and not on the correctness of the decision itself.
7. The Supreme Court in Shamshad Ahmad v. Tilak Raj Bajaj : (2008) 9 SCC 1 has held as follows:
Though powers of a High Court under Articles 226 and 227 are wide and extensive over all courts and tribunals throughout the territories in relation to which it exercises jurisdiction, such powers must be exercised within the limits of law. The power is supervisory in nature. The High Court does not act as a court of appeal or a court of error. It can neither review nor re-appreciate, nor reweigh the evidence upon which determination of a subordinate court or inferior tribunal purports to be based or to correct errors of fact or even of law and to substitute its own decision for that of the inferior court or tribunal. The powers are required to be exercised most sparingly and only in appropriate cases in order to keep the subordinate courts and inferior tribunals within the limits of law.
In Chandavarkar Sita Ratna Rao v. Ashalata S. Guram this Court stated SCC p. 458, para 16
16. Unless there was any grave miscarriage of justice or flagrant violation of law calling for intervention it was not for the High Court under Articles 226 and 227 of the Constitution to interfere. If there is evidence on record on which a finding can be arrived at and if the court has not misdirected itself either on law or on fact, then in exercise of the power under Article 226 and Article 227 of the Constitution, the High Court should refrain from interfering with such findings made by the appropriate authorities.
8. It is true that the High Court does not act as a court of appeal. But, the power of this Court to weigh the materials on record to test whether the order under challenge is perverse is well within the realm of the judicial review. During the course of weighing the evidence to test whether there was any perversity in the finding, if the court comes to a conclusion that there are materials to show that such a finding impugned could be arrived at and that there was no misdirection either on law or on facts, the court would not interfere with the findings of the Tribunal concerned. Further, the jurisdictional error committed by the Tribunal while exercising the power can also be corrected by this Court invoking the powers of judicial review under Article 226 of the Constitution of India.
9. Learned Senior Central Government Standing Counsel appearing for the respondents would submit referring to the provision under Section 35-L of the Central Excise Act, 1944 that the final order passed by the second respondent is subject to appeal before the Supreme Court. When the statute provides for appeal, this Court has no jurisdiction to entertain the writ petition filed overlooking the appeal remedy available for the petitioner before the Supreme Court, he would submit.
10. Per contra, the learned Counsel appearing for the petitioner would submit that Section 35-L of the said Act has no application to the facts and circumstances of this case. Even otherwise, when a certiorari remedy has been sought for on the ground that there was violation of principles of natural justice also this Court has every authority to entertain the writ petition under Article 226 of the Constitution of India.
11. An order passed by the Appellate Tribunal relating to determination of any question having a relation to the rate of duty of excise or to the value of goods for the purpose of assessment shall be challenged by way of appeal to the Supreme Court as per Section 35-L of the said Act.
12. The short question which arises for consideration is whether the issues involved in the present case has a relation to the rate of duty of excise or to the value of goods for the purpose of assessment.
13. In the instant case, the second respondent had not decided the rate of duty of excise or the value of goods for the purpose of assessment. The order impugned would explicitly state that the exact amount of excise duty would be adjudicated by the first respondent herein. No dispute has arisen with regard to the value of goods in this case. The value of goods is, in fact, admitted. The issue arisen in the instant case is as to whether the value disclosed by the petitioner is to be taken or that of M/s. Dagger International run by the husband of the Proprietrix of the petitioner. The petitioner has challenged the proceedings of the respondents on the ground that the show cause notice issued to the petitioner was time-barred and that the principles of natural justice were violated, for the orders passed by the respondents were based on materials not specifically referred to in the show cause notice. It is further contended by the petitioner that M/s. Dagger International is not a related party to the petitioner. As rightly submitted by the learned Counsel appearing for the petitioner, the issues determined in this matter do not fall within the scope of Section 35-L of the Act.
14. The Supreme Court in J.K. Cotton Spinning and Weaving Mills Co. Ltd. v. Collector of Central Excise : AIR 1998 SC 1270 has observed that when the question sought to be determined in the appeal has neither any relationship to rate of duty of excise or to the value of goods for the purpose of assessment, no appeal would lie before the Supreme Court.
15. In a case where the assessee moved the High Court invoking the writ jurisdiction without moving the Commissioner of Income Tax to revise the order impugned, the Supreme Court in L. Hirday Narain v. Income-Tax Officer Bareilly : AIR 1971 SC 33 has held as follows:
An order under Section 35 of the Income-tax Act is not appealable. It is true that a petition to revise the order could be moved before the Commissioner of Income-tax. But Hirday Narain moved a petition in the High Court of Allahabad and the High Court entertained that petition. If the High Court had not entertained his petition, Hirday Narain could have moved the Commissioner in revision, because at the date on which the petition was moved the period prescribed by Section 33-A of the Act had not expired. We are unable to hold that because a revision application could have been moved for an order correcting the order of the Income-tax Officer under Section 35, but was not moved, the High Court would be justified in dismissing as not maintainable the petition, which was entertained and was heard on the merits.
16. Applying the above ratio, the court finds that even assuming for the sake of argument that an appeal before the Supreme Court would lie under Section 35-L of the Central Excise Act, 1944, if the High Court had not entertained the writ petition filed under Article 226 of the Constitution of India, the petitioner would have very well moved the Supreme Court. Therefore, there is no justification for this Court to dismiss the writ petition as not maintainable after a lapse of seven years from the date of admission of the writ petition before this Court.
17. Following the aforesaid decision of the Supreme Court, the Madhya Pradesh High Court in Tata Expert Ltd. v. Union of India : 1985 (22) E.L.T. 732 (M.P.) has observed as follows:
The only question that now survives for consideration is the contention of the respondents that since the petitioner had an alternative remedy of appeal Under Section 35 of the Central Excise Act against the impugned orders the present petition is not tenable. The Supreme Court in Hirday Narain v. Income-tax Officer Bareilly AIR 1971 SC 34 held that once a writ petition has been entertained and the alternative remedy was time-barred, the petition should be held to be maintainable. Following this decision, this Court has held in a series of decisions that once a petition has been admitted, to could not be dismissed on the ground of alternative remedy.
18. I am in full agreement with the aforesaid observation of the Madhya Pradesh High Court in the light of the ratio laid down by the Supreme Court in Hirday Narain's case.
19. Answering the objection that the writ petition was not maintainable as alternative remedy was provided under the statute, the Bench of the Andhra Pradesh High Court in Galada Continuous Casting Ltd. v. Assistant Collector : 1987 (32) E.L.T. 474 (A.P.) has held as follows:
In the counter-affidavit an objection is raised that the petitioner rushed to this Court without availing of the alternative remedies provided by the Act itself, and that this Court should not entertain the writ petition in such a situation. We are, however, of the opinion that having entertained the writ petition five years back, i.e., in August, 1982, and granted an interim order, it would not be a proper exercise of discretion to dismiss the writ petition today on the ground of alternative remedy. We are, therefore, not inclined to entertain the said objection at this stage of the proceedings.
20. The Supreme Court in U.P. State v. Mohd. Nooh AIR 1958 SC 86, referring to Halsbury's Laws of England, has observed as follows:
In the next place it must be borne in mind that there is no rule, with regard to certiorari as there is with mandamus, that it will lie only where there is no other equally effective remedy. It is well established that, provided the requisite grounds exist, certiorari will lie although a right of appeal has been conferred by statute.
21. In the instant case, the petitioner has prayed for the remedy of certiorari. When such a remedy has been sought for on the ground that the principles of natural justice were violated, even if the statute provides for an appeal remedy, the party aggrieved for such violation can invoke the jurisdiction of the judicial review under Article 226 of the Constitution of India.
22. The Supreme Court has ruled in Whirlpool Corporation v. Registrar of Trade Mars Mumbai and Ors. : (1998) 8 SCC 1 as follows:
If an effective and efficacious remedy is available, the High Court would not normally exercise its jurisdiction. But the alternative remedy has been consistently held by this Court not to operate as a bar in at least three contingencies, namely, where the writ petition has been filed for the enforcement of any of the Fundamental Rights or where there has been a violation of the principle of natural justice or where the order or proceedings are wholly without jurisdiction or the vires of an Act is challenged.
23. Where any of the fundamental rights is sought to be enforced, or violation of principles of natural justice is sought to be set right or the jurisdiction to pass an order by the authority concerned or the vires of the Act itself is under challenge, the plea that there is alternative remedy available under the statute is not sustainable.
24. The learned Senior Central Government Standing Counsel appearing for the respondents, cited the decision of the Bombay High Court in Colour-Chem. Ltd. v. Union of India : 1998 (98) E.L.T. 303 (Bom.) wherein it has been held as follows:
We have carefully considered the submissions of the learned Counsel for the petitioners. We however, do not find any fore in the same. The admitted position in this case is that an appeal is provided against the impugned order of the Tribunal to the Supreme Court under Section 35L of the Act. Since the Legislature has provided appeal against certain orders only to Supreme Court, in our opinion, it is not open to the aggrieved person to by pass the remedy provided by the Legislature by way of appeal to the Supreme Court and come to the High Court and try to challenge the same before the High Court in its writ jurisdiction. We are of the clear opinion that in such a situation, the High Court should not entertain the writ petition challenging the order against which appeal is provided only to Supreme Court because it would amount to usurping the powers of the Supreme Court in the guise of exercise of writ jurisdiction. In view of the above, we do not find any reason to entertain this writ petition of the petitioners.
25. That was a case where the Tribunal determined the rate of duty of excise under the impugned order passed by it. Considering the fact that as against the determination of excise duty by the Tribunal, only appeal would lie under Section 35-L of the Act, the counsel appearing for the assessee admitted before the High Court of Bombay that appeal alone would lie. Under such circumstances, the aforesaid ratio was laid down by the Bench of the Bombay High Court. In the case on hand, firstly, it is found that there was no determination of excise duty by the second respondent. In fact, the second respondent was directed to determine the excise duty giving opportunity to the petitioner. Secondly, the writ petition which was filed in the year 1997 was taken up for disposal in the very same year. In view of the above, I find that the aforesaid ratio will not apply to the facts and circumstances of this case.
26. This Court in Nivaram Pharma Pvt. Ltd. v. Cegat Madras 2006 (205) E.L.T. 9 (Mad.) has held that when alternative remedy of appeal is available under the statute, the High Court shall not entertain the writ petition.
27. That was a case where there was no allegation of violation of principles of natural justice. Further, it is not clear whether the remedy of certiorari was prayed for in the said case. In view of the above, I find that the above decision will not apply to the facts and circumstances of this case.
28. This Court in Devala Tea Factory v. Central Board of Excise and Customs New Delhi : 2009 (242) E.L.T. 219 (Mad.) has held as follows:
More so, admittedly, as against the order impugned in this Writ Petition, the petitioner has an appeal remedy before the Commissioner of Customs and Central Excise (Appeals), which is not availed of by it. Nothing also prevented the petitioner from availing such remedy. Without availing the said remedy, the petitioner has directly approached this Court under Article 226 of the Constitution of India by way of this Writ Petition, which is not maintainable.
29. Firstly, the court had found in the said case that appeal would lie before the Commissioner of Customs and Central Excise as against the order impugned. Secondly, there was no allegation in the said case that there was violation of principles of natural justice. The aforesaid case is factually distinguishable.
30. In view of the above discussion, I find that this Court has jurisdiction to deal with the writ petition on three grounds viz.,
(1) The impugned order does not decide the issue relating to the determination of excise duty and therefore, no appeal would lie directly before the Supreme Court under Section 35-L of the Central Excise Act, 1944.
(2) Even if appeal remedy is available, when violation of principles of natural justice is alleged, the writ court has jurisdiction to deal with the matter.
(3) After admission of the writ petition and entertaining the same for about seven years, the court is not justified in dismissing the plea of the writ petitioner on the ground that alternative remedy was provided under the statute.
31. The show cause notice was issued on 19.5.2000 demanding duty for the transaction during the period 1995-2000. The show cause notice simply says that there had been suppression and therefore, the period of limitation as provided in Section 11A of the Central Excise Act, 1944 stood extended.
32. Firstly, it is found that the show cause notice does not substantiate the charge of suppression. No averment was made in the show cause notice that there was contravention of relevant provisions with intention to avoid payment of excise duty. Nor could there be any inference upon the facts alleged.
33. As per Section 11A of the Central Excise Act, 1944, where any duty of excise has not been levied or paid or has been short levied or short paid, a Central Excise Officer may within one year from the relevant date, serve notice on the person chargeable with duty which has not been levied or paid or which has been short levied or short paid. But, in a case where any duty of excise has not been levied or paid or has been short levied or short paid by reason of fraud, collusion or any wilful misstatement or suppression of fact with intent to evade payment of duty, a Central Excise Officer may within five years from the relevant date serve notice on the person chargeable with such duty.
34. There shall be a positive act on the assessee's part necessary to justify invocation of extended period of limitation. Mere usage of the words suppression of fact does not amount to suppression. (Associated Pigments Ltd. v. Superintendent of Centrla Excise : 1993 (68) E.L.T. 514 (Cal.)
35. The extended period of five years is inapplicable for some failure or negligence of the manufacturer to take out licence or pay duty when there was scope for doubt that the goods were not dutiable. There should be a specific charge that there was suppression of goods with an intention to evade duty. (Padmini Products v. Collector of Central Excise : 1989 (43) E.L.T. 195 (S.C.)).
36. In the instant case, it has been alleged in the show cause notice that the petitioner failed to take licence under Rule 174 of the Central Excise Rules, 1944. As per the law laid down by the Honourable Supreme Court, mere failure to take licence is not a ground for availing the extended period of limitation by the Revenue.
37. The extension of the period of limitation entails both civil and criminal consequences and therefore the acts of fraud or suppression must be specifically pleaded in the show cause notice. The allegation in regard to suppression of facts must be clear and explicit so as to enable the noticee to reply thereto effectively. In the absence of specific statement, the court is entitled to raise the inference that the case was not one where the extended period of limitation could be invoked. (Larsen and Toubro Ltd. v. Commissioner of Central Excise Pune-II : 2007 (211) E.L.T. 513 (S.C.)).
38. In the present case, there is no specific allegation or substantiation of suppression of facts has been made. Therefore, it has to be inferred by the court that the extended period of limitation cannot be invoked by the Revenue.
39. The High Court of Karnataka in Commissioner of Central Excise Bangalore-III v. Bripanil Synthetics (P) Ltd. : 2006 (203) E.L.T. 11 (Kar.)) has held as follows:
A reading of the same would show that the show cause authority has only said that the assessee has removed 3226.47 kgs of grey fabrics on which MODVAT was availed without following Central Excise procedures and without accounting in the statutory records. This appears to have been done with a wilful intention to suppress the facts. There is absolutely no allegation forthcoming either with regard to fraud, etc. in terms of Section 11A of the Act. Therefore, the case of extended period is not available in the absence of factual foundation in terms of the show cause notice. There should be a positive application of mind and positive finding with regard to rejection of extended period under Section 11A of the Act. Mere presumption would not give any such jurisdiction for extended period of limitation.
40. It has also been further held therein referring to the decision of the Supreme Court that unless there is evidence or proof that the licence was not taken out or duty was not paid on account of any fraud or collusion, wilful misstatement or suppression of facts, show cause notice cannot be issued under Section 11A of the Act invoking the extended period of limitation.
41. There should have been a foundation laid in the show cause notice that there had been wilful suppression of facts to invoke the provision under Section 11A of the Act to avail the extended period of limitation. Mere failure to take licence cannot be a ground to invoke the said proviso. There should be a positive act on the part of the assessee. It is to be noted that the show cause notice issued to the petitioner does not substantiate the allegation of suppression of facts. The mere fact that licence/registration was not taken cannot be a ground for availing the extended period of limitation. Therefore, it is held that the essential ingredients of the proviso under Section 11A of the Central Excise Act, 1944 are not present in this case to issue the subject show cause notice.
42. On a perusal of the order passed by the second respondent, it is found that he had looked into additional grounds which were not found in the show cause notice issued to the petitioner on 9.5.2000. The petitioner is bound to answer only the grounds alleged in the show cause notice issued to him. If any additional grounds are introduced by the authorities behind the back of the petitioner, the petitioner may not be in a position to putforth its defence. Therefore, the introduction of additional grounds after the issuance of show cause notice is against the principles of natural justice.
43. The second respondent has referred to the fact that the petitioner as well as M/s. Dagger International had a common Auditor which exhibits common interest between the parties. It appears that the second respondent has also introduced another ground that M/s. Dagger International had no working capital of its own and it was surviving only on the credit period granted by the petitioner. It has also been observed by the second respondent that Mr. Nilanjan Deshpande was providing his service as Chief Executive Officer gratuitously which would go to show that there was mutuality of interest. It has been commented that Mr. Nilanjan Deshpande was virtually in control of both the Concerns. It was also observed by the second respondent that there was commonality of interest as one Concern was involved in manufacturing and the other Concern was involved in retail business.
44. It is to be noted that there was virtually no allegation in the show cause notice that the petitioner indulged in clandestine manufacture and removal of excise goods. Without affording any opportunity to the petitioner to show cause about those additional grounds, the second respondent had adverted to those additional grounds and slapped on the petitioner with the impugned order.
45. The Bombay High Court in Tata Oil Mills Co. Ltd. v. Union of India and Ors. 1981 E.L.T. 189 (Bom.) has held as follows:
In passing this order, the revisional authority had sought to introduce a new ground by coming to the conclusion that the manufacturers were different. This was never the case of the Department at any stage ever since the enquiry took place. If the petitioners were sought to be made liable on such a ground, then the proper course for the Department would have been either to furnish additional grounds to the petitioners and call upon them to meet the same, or, in any event, afford them an opportunity to meet such a case. It would not be open to the Department to go on changing their grounds from stage to stage with a view to fix the liability on an assessee without giving him an opportunity to meet the ground on which he is sought to be made liable. In view of this, Mr. Manjrekar's contention must now be negatived.
46. In the instant case, it has been demonstrated that the respondents have kept on improving the grounds from stage to stage with a view to fix liability on the petitioner without affording opportunity to the petitioner to meet the grounds on which he was sought to be made liable.
47. The gist of the allegations made in the show cause notice would read that
(1) Some purchase orders raised on the petitioner had the name of Mr. Nilanjan Deshpande.
(2) Mr. Deshpande had been involved in the negotiations for purchase of machinery for the petitioner.
(3) Mr. Deshpande had signed some correspondence sent by the petitioner to its bank.
(4) There was no written agreement between the parties regarding terms of sale.
(5) M/s. Dagger International was not paying the petitioner the purchase prices on a bill-to-bill basis but was paying on a lumpsum basis at intervals.
(6) An internet advertisement placed by the petitioner referred to Mr. Deshpande as person providing Technical Assistance to petitioner.
(7) Address of Dagger International was the residence of the couple - Mr. and Mrs.Deshpande.
(8) The couple had a joint account in ANZ Grindlays Bank other than the individual concern accounts.
(9) A computer and a xerox machine belonging to M/s. Dagger International were found at the premises of the petitioner.
48. It is found that the following additional allegations were suddenly raised by the second respondent in the course of disposal of the appeal:
(1) That the two concerns had common auditors - held shows common interest between the parties.
(2) M/s. Dagger International had no working capital of its own, hence it was surviving only due to the credit period granted by the petitioner - held proves financial accommodation between the parties.
(3) Mr. Nilanjan Deshpande was providing services CEO gratuitously to the petitioner - held proves mutuality of interest.
(4) Mr. Nilanjan Deshpande was de facto in control of both concerns - held shows mutuality of interest.
(5) One concern involved in manufacture, the other in retail - held shows commonality of interest.
49. Significantly, it is only on the basis of the above allegations, the second respondent has arrived at the decision that the two Concerns are related persons. The second respondent has on its own accord built up a case of related persons on the allegations not contained in the show cause notice. Further, the reasoning and finding of the second respondent on the issue of related persons are found to be totally misconceived. The petitioner was not given an opportunity to answer and give his explanation to those additional grounds raised by the second respondent during the course of disposal of the appeal. Thus, the petitioner has demonstrated that there is a violation of principles of natural justice inasmuch as the petitioner was not given an opportunity to answer and explain the additional grounds raised during the course of disposal of the appeal by the second respondent.
50. The learned Senior Central Government Standing Counsel appearing for the respondents would submit that the materials collected by the first respondent would go to show that the petitioner and M/s. Dagger International are related persons. But, the learned Counsel appearing for the petitioner would contend that none of the materials collected by the first respondent would establish that the petitioner and M/s. Dagger International are related persons.
51. The petitioner and M/s. Dagger International have their own office premises. There is no bar for M/s. Dagger International to have its office in his house. Separate bank accounts have been maintained by the petitioner and M/s. Dagger International. The petitioner and M/s. Dagger International have gone in for separate registration under various status. They had engaged separate set of employees for themselves. Just because Mr. Nilanjan Dashpande is the husband of Mrs. Rukhsana Deshpande, one cannot jump to a conclusion that the two units separately run by Nilanjan Dashpande and Rukhsana Deshpande are related persons and have mutuality of interest.
52. If the duty of excise is chargeable on any excisable goods with reference to value, such value shall 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, but in such cases the buyer shall not be a related person as per Section 4 of the Central Excise Act, 1944. 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. As per Section 4(1)(a)(iii) of the said Act. A 'related person' means a person who is so associated with the assessee that they have interest directly or indirectly in the business of each other and includes a relative. The term relative shall have the meaning as found in the Companies Act, 1956.
53. The Bench of the Bombay High Court in Ralliwolf Ltd. v. Union of India : 1992 (59) E.L.T. 220 (Bom.) has held that to invoke the third proviso to Section 4 of the Act, three conditions shall be satisfied:
a) There should be mutuality of interest.
b) The price should not be the normal price but a lower price to the normal price and that the extra-commercial consideration has reduced the normal price.
c) The alleged related persons should be related to the assessee as defined under Section 4(4)(c) of the said Act.
54. Each of these three conditions have to be satisfied for the Department to invoke the third proviso to Section 4 of the Act.
55. The allegations raised in the show cause notice are not sufficient to attract the third proviso to Section 4 of the Act. Irrelevant materials were given much importance by the respondents to arrive at a conclusion that there was mutuality of interest between the petitioner and M/s. Dagger International.
56. It is alleged that a machinery for the petitioner was negotiated by Mr. Deshpande on behalf of the petitioner. Quite unfortunately, the respondents did not consider the explanation that such machinery was purchased by Mr. Deshpande on behalf of the petitioner prior to the formation of M/s. Dagger International. It is complained that correspondences were made to the bank on behalf of the petitioner. It is explained by the petitioner that the correspondences were made when the Proprietrix of the petitioner was out of station. It is further alleged that there is no agreement regarding sale price between M/s. Dagger International and the petitioner. The prices have been revised for the last five years. M/s. Dagger International had not revised its prices upwards for five years. But, they had reduced them at certain times but, the fact remains that the petitioner's prices remained the same and there was no alteration even when M/s. Dagger International reduced their prices.
57. The further charge is that M/s. Dagger International did not pay for the goods purchased from the petitioner immediately on bill-to-bill basis. It has been submitted by the petitioner that the bills were settled as and when the customers of M/s. Dagger International settled the bills to M/s. Dagger International. There is no law that the business should be transacted only under written agreements. The petitioner had associated her husband who had the technical expertise at the initial stage when she faced certain problems in marketing the products. The fact that the husband Mr. Deshpande had acted as Chief Executive Officer on a gratuitous basis, will not establish that there was mutuality of interest.
58. It appears that xerox machine of M/s. Dagger International was found installed in the office of the petitioner. But, quite unfortunately, the plausible explanation given by the petitioner that the xerox machine of M/s. Dagger International was found in the petitioner's premises in view of the renovation work taken place in the premises of M/s. Dagger International was not seriously considered by the respondents.
59. The Supreme Court has held in Union of India v. Atic Industries Ltd. : 1984 (17) E.L.T. 323 (S.C.) as follows:
What the first part of the definition requires is that the person who is sought to be branded as a 'related person' must be a person who is so associated with the assessee that they have interest, directly or indirectly, in the business of each other. It is not enough that the assessee has an interest, direct or indirect, in the business of the person alleged to be a related person nor is it enough that the person alleged to be a related person has an interest, direct or indirect, in the business of the assessee. It is essential to attract the applicability of the first part of the definition that the assessee and the person alleged to be a related person must have interest, direct or indirect interest in the business of the other.
60. Nothing has been shown in this case that the petitioner had interest directly or indirectly in the business of M/s. Dagger International.
61. When a Concern manufactures a special product which can be bought by very few parties in India, the Concern will depend on its retailer to sell its goods. It would be a case of favoured treatment only if the price is found to be unreasonably low. (Union of India v. Hind Lamps Limited 1981 E.L.T. 11 (Del.))
62. In the instant case, it is not the case of the Department that the price was unreasonably low. It is the case of the Department that the price was not raised by the petitioner.
63. In Chetan B. Thadani v. Union of India : 1987 (30) E.L.T. 287 (Bom.) it has been held that the mere fact that the entire product was supplied to one Concern does not make them related parties. Simply because there is no agreement, it cannot be concluded that the transactions are not at arm's length.
64. The learned Senior Central Government Standing Counsel appearing for the respondents cited the decision of the Supreme Court in Flash Laboratories Ltd. v. Colector of Central Excise New Delhi : 2003 (151) E.L.T. 241 (S.C.)) wherein it has been held as follows:
The definition of 'related person' shows that when an assessee is so closely associated with another person, directly or indirectly, in the business, then it could be said that they are 'related persons'. The definition further shows that the holding company and subsidiary company have got special significance. It is clear from the definition that there must be mutuality of interest between the two persons. In Union of India v. Bombay Tyre International 1984 1 SCC 467, the constitutional validity of this provision was challenged and it was contended that the definition of the expression 'related person' was arbitrary as it would include within its ambit a distributor of the assessee. But, this Court held that 'related person' being a relative, a distributor would not come within its fold. It was held that a related person is a person who is so associated with the assessee that they have interest, direct or indirect, in the business of each other and includes a holding company or a subsidiary company and is being used in sufficiently restricted sense for employing a legal fiction.
65. That was a case where it was established that the products manufactured were sold for a low price by the manufacturer. In such circumstances, it was held that both the Companies were related person. But, in the instant case, it has not been established that the products manufactured by the petitioner were sold for a low price to M/s. Dagger International. Therefore, the aforesaid case will not apply to the facts and circumstances of this case.
66. The learned Senior Central Government Standing Counsel appearing for the respondents would cite yet another decision of the Supreme Court in Controller of Central Excise Ahmedabad v. I.T.E.C. (P) Ltd. 2002 (145) E.L.T. 280 (S.C.).
67. That was a case where there were common Directors in both the Companies. On facts, it was established that the benefits of both the Concerns were shared by members of one and the same family. Here, in the instant case, there is no material to show that the profits of both the Companies were shared by the family members of the petitioner and M/s. Dagger International.
68. The price of the goods at which it was sold is very important and essential consideration. The price should be unreasonably low to conclude that the two Bodies are related. In the instant case, even the show cause notice did not make out such an allegation. A related person must be a person who is so associated with the assessee that they have interest directly or indirectly in the business of each other. But, unfortunately, the respondents could not establish that the petitioner and M/s. Dagger International are related persons.
69. In view of the above facts and circumstances, it is held that the show cause notice issued by the respondents is bad in law. There is violation of principles of natural justice in issuing the show cause notice and taking the subsequent proceedings by the respondents. The petitioner and M/s. Dagger International are found not to be related persons.
70. Therefore, the entire impugned proceedings of the respondents are quashed. Consequently, the writ petition is allowed. There is no order as to costs. The connected Miscellaneous Petitions stand closed.