Renowned Auto Products Mfrs. Ltd. Vs. Commissioner of C. Ex. - Court Judgment

Excerpt:
1. this appeal arises from order-in-appeal no. 332/99, dated 31-12-99 by which the commissioner (appeals) has held that the appellants are registered as a subsidiary company of m/s, hydraulics ltd. under the companies act. he has noted that sub-section (4) of section 4 vide clause (c) of the central excise act, 1944 defines "related person" as 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 holding company, a subsidiary company, a relative and distributor of the assessee and any sub-distributor of such distributor and as per the explanation, holding company, subsidiary company and relative have the same meanings as in the companies act, 1956. he has noted that it is not disputed that 83% of the.....

Judgment:
1. This appeal arises from Order-in-Appeal No. 332/99, dated 31-12-99 by which the Commissioner (Appeals) has held that the appellants are registered as a subsidiary company of M/s, Hydraulics Ltd. under the Companies Act. He has noted that Sub-section (4) of Section 4 vide Clause (c) of the Central Excise Act, 1944 defines "related person" as 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 holding company, a subsidiary company, a relative and distributor of the assessee and any sub-distributor of such distributor and as per the explanation, holding company, subsidiary company and relative have the same meanings as in the Companies Act, 1956. He has noted that it is not disputed that 83% of the holdings of the appellant-company are held by M/s. Hydraulics Ltd., the latter are the holding company and the appellants are the subsidiary company. Therefore, he has held that they are to be treated as related persons. As a consequence, he has upheld the AC's ruling that the price at which M/s. Hydraulics Ltd. sells the goods should be taken into consideration for Central Excise purposes and since M/s. Hydraulics Ltd., have two-tier price structure i.e. one for inter state sales and the other for intra state sales respective prices should be taken into consideration and he has directed the range Superintendent to verify the statistical figures, breakup given by the appellants for inter state and intra state clearances and to calculate the duty liability accordingly.

2. Appellant contends in this appeal that merely because the appellant is a subsidiary unit and M/s. Hydraulics Ltd. is a holding company by that fact itself, the selling price of M/s. Hydraulics Ltd. cannot be adopted. It is submitted that there is no mutuality of interest directly or indirectly in the business of each other. It is, further, submitted that the appellant is having "independent sales" and the price is lower than the sale price of Hydraulics Ltd. It was also pointed out that appellant had become sick unit and had been declared as such by BIFR. At a latter stage, M/s. Hydraulics Ltd. took over the appellant's company as a subsidiary company. They are clearing the goods to OE market, space parts market and to Hydraulics Ltd., Chennai and their depots. There are differing sale prices and the price sold to OE and market are lower than the price sold to Hydraulics Ltd. The appellant does not have any interest directly or indirectly in the business of Hydraulics Ltd., and as such the price of M/s. Hydraulics Ltd. cannot be adopted. In this regard, the appellants have relied on large number of judgments which lays down the proposition that for adopting the price of another unit, there has to be mutuality of interest directly or indirectly. Mere fact of one holding the shares of other company, by that fact itself the higher value cannot be adopted.

Reference was drawn to the judgment rendered in the case of India Thermit Corporation Ltd. and Ors. v. CCE, New Delhi - 2003 (151) E.L.T.412 (T) = 2002 (52) R.L.T. 769 (T-N.D.)] which relies on the Apex Court's judgment rendered in Calcutta Chromotype Ltd. v. CCE, Calcutta - 1998 (99) E.L.T. 202 (S.C.) = 1998 (25) R.L.T. 866 (S.C.)] wherein it has been held in Paras 11 and 12 as follows :- "11. Regarding valuation of the products manufactured by M/s. India Thermit Corporation Ltd., we find substance in the submissions of the learned Advocate that the highest of the prices for bulk sale to Railways is comparative price, and the Department cannot take prices for the small quantities sold to Railways for assessing the products used captively. There is no effective rebuttal of the submission made by the learned Advocate that if transport charge is deducted from the price charged by the Appellants, the price declared by them for captive use would be comparable to the price at which Thermit portion was being sold to the Railways in bulk. Further as the valuation aspect has been considered and adjudicated upon by the Assistant Commissioner under various Adjudication Orders and some of the period is over lapping. We agree with the learned Counsel that there cannot be a second proceedings raising demand for the said period. Similarly in case of moulds, the Appellants have adopted the price of Rs. 25/- and they have produced a copy of purchase order of Railways with M/s. Asiatic Thermics Ltd. for bulk supply of moulds @ Rs. 24.60 p in July, 1997. Accordingly, we do not find any under valuation in the present matter. Coming to the question of invokability of extended period of limitation for demanding duty we observe that the classification lists were filed by M/s. ITCL giving full description and these were approved from time to time. Under their letter dated 27-3-79 they had submitted details of the raw materials used and the manufacturing process to the Department. The finding of the Commissioner that, in case any product is likely to attract another Heading of the Tariff, it is imperative on the part of the assessee to make a clear mention of the substance of raw material, applies in our view, more to the Departmental officers who are required to approve the classification lists after examining and verifying the same, it is imperative on their part, in such a situation, to enquire about substance/material out of which the product is made and other further details.

12. The last issue to be decided is whether M/s. ITCL and ATL are related persons. The various reasons advanced by the Adjudicating Authority in the impugned Order to hold that there is mutuality of interest between the two companies are not sufficient to hold the same. It is settled law that a buyer would not become a related person merely because all the goods are sold to a particular person unless the price charged to them is based on extra commercial consideration. Further merely because a company is a subsidiary company, this fact would not make it a related person unless it is established that each has interest in the business of other.

Further, the learned Advocate showed that the price at which ATL were selling the moulds to Railways, the same price has been charged by them from ITCL. The learned Advocate has also referred to ITCL's letter dated 22-1-1996 in which they have explained that Rs. 50/- was being charged by them from Railways as it included the cost of packing, freight and 10% extra for breakage whereas in the case of supply from ATL no such expenses are being incurred. No substantial evidence has been brought on record by the Revenue to prove that ATL was supplying the moulds to ITCL after packing the same. The Appellants, on the other hand, have contended that during the search of their premises (ATL's premise) dry moulds in packed condition were not found in their premises. We are, thus, of the view that the Revenue has not been successful in establishing the charge of undervaluation of the goods by M/s. ATL. Accordingly, no demand of duty can be made from them on this count. In these circumstances no penalty is also imposable on any of the Appellants." 3. Ld. Consultant arguing for the appellants submitted that this judgment applies in all squares to their case and the appeal is required to be allowed on this point alone. Further, reference was drawn to the judgment of Rallis India Ltd. v. CCE, Bombay - 2000 (118) E.L.T. 780 (T) wherein in Para 2 it has been held as follows :- "2. Assessee in this case Rallis Machines Ltd. was a subsidiary of M/s. Rallis India Limited during the period with which we are concerned in this appeal Rallis India Ltd. held nearly 90% of the shares in Rallis Machines Ltd. Even so, according to the learned Counsel representing the appellant, relationship cannot be presumed unless the department succeeds in showing mutuality of interest. In support of this argument, learned counsel brought to our notice two decisions of the Bombay High Court, the case of Dawn Apparels Ltd. v. Union of India, 1989 (43) E.L.T. 401 and in the case of Ralliwolf Ltd. v. Union of India, 1992 (59) E.L.T. 220. In the first case, learned single Judge of the Bombay High Court took the view that the mere fact that assessee happened to be the subsidiary of another company will not in any way go without establishing that the transaction between the subsidiary company and the other company was not at arms length. For a proper understanding of the taw stated by the Bombay High Court, we read paragraph 11 of that judgment: "11. In the present case also, each of the authorities below has proceeded only upon the basis that there was a special relationship between the petitioners and Dawn Mills, in that the petitioner, were a subsidiary of Dawn Mills. No attempt has been made to establish that, in fact, a low price has been charged and/or that Dawn Mills have been accorded any favourable treatment. In the absence of such evidence and merely upon the basis that there is a special relationship such as that of subsidiary and principal it cannot be held that the price at which the subsidiary sells to the principal is not the correct price for the purposes of assessment of excise duty." Same issue came up for consideration before a Division Bench of the same High Court in the second decision referred to above. There, after quoting Section 4(4)(c), their Lordships took the view that the department has to establish three conditions to reject the price of the assessee. Firstly, there should be mutuality of interest, secondly the price charged should not be the normal price but lower to the normal price and extra commercial considerations for reducing the normal price and lastly the person producing the commodity should be related to the assessee. In case all the three conditions are not satisfied, then price cannot be stated to be the one coming under Section 4(1)(a) of the Act." 4. Further reference was drawn to the judgment of this Bench rendered in the case of Spencer Consumer Products & Services Ltd. v. CCE, Madras - 2000 (124) E.L.T. 1064 (Tribunal) = 2000 (39) R.L.T. 992 (CEGAT) wherein also in para 5 it has been held as follows :- "5. We have carefully considered the rival submissions and records of the case. We find that merely because appellants are a wholly owned subsidiary company of M/s. Spencer & Co. Ltd., it cannot, ipso facto, follow that these charges are to be added to the assessable value for the following reasons :- (a) It has not been shown by the department that these sums, though physically collected by an employee of the appellants, reached directly to the appellants. On the contrary, they were collected through invoices of Spencer & Co. Ltd. and it would automatically follow that these amounts were their receipts.

(b) Mere relationship as exists between appellants and Spencer & Co.

Ltd. as subsidiary and holding company, ipso facto, cannot prove undervaluation, unless a clear mutuality of interests is shown to exist. In this case the order, impugned does not show even a single instance where profits of M/s. Spencer & Co. Ltd. flowed back to appellants. On the contrary, appellants had suffered heavy losses during material period. It is well established law that mutuality of interest requires proof of such a flowback of profits.

(c) The agreement between buyers and M/s. Spencer & Go. Ltd. on hiring charges of bottles and security deposit were on principal to principal basis and had no legal connection with the appellants.

(d) There is great force in ld. Advocates submissions that the glass bottles were durable and returnable containers. Appellants sold their goods on condition that buyers supply the containers for filling and same would be returned to them.

(e) Since appellants did not provide the transport facilities to the buyers, the goods were sold on FOB ex-factory gate basis. Therefore, the question of transport charges being included does not arise in the normal price at the factory gate." 5. The ld. Consultant drew reference to similar findings recorded in the case of CCE & CC Mumbai-III v. Ralliwolf Ltd., 1998 (100) E.L.T.528 (T) and also on the judgment rendered by the High Court of Bombay in the case of Ralliwolf Ltd. v. UOI, 1992 (59) E.L.T. 220 (Bom.) wherein also a similar proposition has been held and in para 31, it has been clearly recorded that mere fact of a unit being a subsidiary of holding company by itself is no cause to adopt higher value unless there is flow back and mutuality of interest in each other. Further reference was drawn to the judgment of Bombay High Court rendered in Dawn Apparels Ltd. v. U.O.I., 1989 (43) E.L.T. 401 (Bom.). Reference was also drawn to the judgment of Apex Court rendered in U.O.I. and Ors. v. Atic Industries Ltd., 1984 (17) E.L.T. 323 (S.C.) wherein also it has been held that mere holding of shares will not be a cause to adopt higher value in terms of Clause (a) of Sub-section (4) of Section 4 of the Act, unless there is mutuality of interest and both the units have got interest in each other's factory. Ld. Counsel relied on the judgment rendered by this Bench in the case of Beacon Neypric Ltd. v.CCE, Madras, 2001 (133) E.L.T. 590 (T) wherein also the facts were similar inasmuch the higher price was not to be adopted merely because the buyer is holding 60% of shares of subsidiary unit as there is no mutuality of interest. Reliance was also placed on the judgment rendered in the case of Automotive Axles Ltd. v. CCE, Bangalore, 2002 (142) E.L.T. 706 (T) = 2002 (49) R.L.T 926 (CEGAT-Bom.) on the same proposition and on the judgment of Exide Industries Ltd. v. CCE, Calcutta-Ill 2002 (144) E.L.T. 451 (T-Kolkata). Much reliance was also placed on the judgment of Apex Court rendered in the case of Alembic Glass Industries Ltd. v. CCE & CUS., 2002 (143) E.L.T. 244 (S.C.) wherein a similar situation arose and in view of the fact that both the units not having mutuality of interest, the Apex Court relying on the earlier judgments rendered in the case of Calcutta Chromotype Ltd. v.Collector (supra) held that the Revenue cannot adopt the higher price.

Ld. Consultant pointed out that in the present case, there was no mutuality of interest and hence the price of M/s. Hydraulics Ltd. cannot be adopted.Flash Laboratories Ltd. v. CCE, New Delhi, 2003 (151) E.L.T. 241 (S.C.) wherein the Apex Court noticed that there was mutuality of interest in both the units of holding and subsidiary company inasmuch as that the holding company was incurring the expenses for sales promotion and advertisement for sale of the appellant's product. The Apex Court noticed that there was indirect mutuality of interest in the business of each other and, therefore, the adopting of higher price was upheld.Ld. DR submits that the definition of "related person" under Section 4 of the Central Excise Act has been examined and in that light, the holding company and subsidiary company are included in the definition of 'related person' and, therefore, in the present case as they are related persons, the higher price adopted on the holding company is justified.

7. Ld. Consultant distinguished the Apex Court's judgment and noted that the Apex Court has not differed from its earlier judgment and the Apex Court's found the facts of mutuality of interest between the units and in that light upheld the proceedings in the cited cases relied upon by ld. DR.8. On a careful consideration of the submissions, and on perusal of the entire judgments cited, we find that in the present case, there is no mutuality of interest between the holding company and subsidiary unit.

M/s. Hydraulics Ltd. merely purchased the shares of appellant's unit.

Appellant has been doing business independently by selling to OE manufacturers and in the market and the price is different and lower as contended by them. The appellant is not having any interest in the affairs of M/s. Hydraulics Ltd. There is no mutuality of interest between them and, therefore, the citations referred to by the ld.Consultant directly apply to the facts of this case. The Apex Court's judgment cited by learned DR has found the facts of mutuality of interest and on that count held that higher price of the holding company can be adopted. There has to be mutuality of interest as held by the Apex Court in the case of Flash Laboratories Ltd. (supra) for the purpose of adopting higher price. The Apex Court has also referred to its earlier judgment rendered in U.O.I and Ors. v. Atic Industries Ltd., 1984 (17) E.L.T. 323 (S.C.) and that of Bombay Tyres International Pvt. Ltd., 1983 (14) E.L.T. 1896 (S.C.). They have not differed with the earlier judgments and the facts have found that there was mutuality of interest to negative the appellant's claim. In the present case, there is no mutuality of interest and, therefore, the judgment of the Apex Court rendered in U.O.I. v. Atic Industries Ltd. (supra); Bombay Tyres International (supra), and other judgments relied by the Consultant including the Apex Court judgment in the case of Alembic Glass Industries Ltd. v. CC & CMS. (supra), as well as the majority order rendered by this Bench in M/s. Detergents India Ltd & Shaw Wallace Co. Ltd., vide final order No. 278 to 280/2003, dated 22-4-2003 would apply to the facts of this case. Respectfully following the ratio of these judgments, the impugned order is set aside and appeal is allowed, with consequential relief, if any, as per law.