Commnr. Of Central Excise, Chandigarh vs M/S. Pepsi Foods Ltd

1. These statutory appeals (Civil Appeal Nos.

1921-1923 of 2003) have been filed under

Section 35-L (b) of the Central Excise Act,

1944 (the Act), against the judgment and final

Order No. 353-355/2002-A, dated 8th August,

2002, passed by the Customs, Excise and Gold

1 (Control) Appellate Tribunal, Bench-A, New

Delhi.

2. The material facts are that the respondent-

assessee, M/s. Pepsi Foods Ltd. is engaged,

inter alia, in the manufacture of edibles,

marketed under the names of Potato Chips,

Baked Cheetos Balls, Monster Munch, etc. These

are covered under Chapter Sub-Headings 2001.10

and 1904.10 of the Central Excise Tariff Act,

1985 (Act 5 of 1986). Uptill 12th January,

1998, as much as 96% of these products

manufactured by the respondent, were sold to

M/s. Frito-Lay India, a `related person', and

the balance of 4% were sold to independent

wholesale buyers. From 12th January, 1998, the

sale pattern between the two was changed,

wherein M/s. Pepsi Foods Ltd. started

manufacturing the aforesaid products on behalf

of M/s. Frito-Lay India.

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3. By a communication dated 15th December, 1997

addressed to the Assistant Commissioner,

Central Excise, Division Jalandhar, the

respondent stated that it had been paying

excise duty on its manufactured excisable

goods after taking into account inter alia,

the costs of raw materials, packing materials,

conversions and their profit margin.

Subsequently it calculated and paid the

differential duty, on the price at which the

final products were sold by M/s. Frito-Lay

India to its wholesale dealers. It enclosed

certificate of a chartered accountant in

support of its calculations. In its submission

of Annexure-A as required under Rule 173C (3A)

of Central Excise Rules, 1944, it mentioned

that the sale of the products occurred at its

factory gate. It was also evident from the

letter that the final products were entering

the market stream when they were being sold by

3 M/s. Frito-Lay India to their wholesale

dealers.

4. The Revenue, however, accepted the incidence

of sale at the time of purchase of the final

products by the whole sellers from M/s. Frito-

Lay India and not, as submitted by the

respondent-assessee, at the factory gate.

Resultantly, a show-cause notice dated 13th

November, 1998 was issued to the respondent

and to that the respondent showed cause

stating inter alia that the sale to the whole

sellers was being effected from the depot of

the related person, viz. M/s. Frito-Lay India.

Dissatisfied with the reply, the Revenue

demanded duty of Rs.12,26,215/-.

5. Aggrieved, the respondent moved the

Commissioner of Central Excise (Appeals),

Chandigarh. The Commissioner, however, held

that the freight charges arising between the

4 factory of the respondent and the depot of the

related person were to be included in the sale

price as the place of removal of the goods was

the depot of the related person.

6. Aggrieved thereby, the respondent appealed to

the Central Excise and Gold (Control)

Appellate Tribunal, New Delhi. The Tribunal

overruled the decision of the Appellate

Authority inter alia stating that "...Merely

because a deeming provision as contained in

the 3rd proviso has to be applied regarding the

price of the goods sold in the course of

wholesale trade to a related person, it cannot

be contended that there was no sale at all to

the related person at the factory gate, as

alleged by the Revenue. The place of removal,

therefore, continues to be the assessee's

factory. The depot premises of the related

person from where the goods are sold cannot be

treated as place of removal for the purpose of

5 Section 4 (4) (b). Therefore, the appellant is

fully justified in contending that the cost of

transportation from the place of removal,

namely, factory to the place of delivery shall

be excluded from the price to arrive at the

assessable value in terms of Section 4 (2)."

7. Thus aggrieved, the Revenue appealed before

this Court under Section 35-L (b) of the Act.

8. It is an admitted fact here that M/s. Frito-

Lay is "related person" of the M/s. Pepsi

Foods Ltd. (Snacks Foods Division). The

expression "related person" has been

specifically defined in Section 4 (4) (c):

"4. Valuation of excisable goods for purposes of charging of duty of excise.-

(1) ...

(2) ...

(3) ...

(4) For the purposes of this section, -

(a) ...

(b) ...

6 (c) "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 holding company, a subsidiary company, a relative and a distributor of the assessee, and any sub-distributor of such distributor.

Explanation.- In this clause "holding company", "subsidiary company" and "relative" have the same meanings as in the Companies Act, 1956 (1 of 1956).

9. The transaction between M/s. Pepsi Foods Ltd.

and M/s. Frito-Lay India has to be understood

as one where sale price cannot be known. In

situations where the assessee sold its goods

to a related person, it was prudent to

understand that the price in such a sale would

be deliberately understated so as to evade

taxation within the scheme of the Act. It was

to dissuade such sales that the legislature

had decided to deem the price of the goods at

the time of their sale by the related persons

to wholesale market. The `normal price' is

7 mentioned in Section 4 (1) (a) of the Act. The

provision of Section 4(1)(a) is as follows:

"4. Valuation of excisable goods for purposes of charging of duty of excise.-

(1) Where under this Act, the duty of excise is chargeable on any excisable goods with reference to value, such value shall, subject to the other provisions of this section, be deemed to be-

(a) the normal price thereof, that is to say, the 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, where the buyer is not a related person and the price is the sole consideration for the sale:

Provided that-

(i) where, in accordance with the normal practice of the wholesale trade in such goods, such goods are sold by the assessee at different prices to different classes of buyers (not being related persons) each such price shall, subject to the existence of the other circumstances specified in clause (a), be deemed to be the normal price of such goods in relation to each such class of buyers;

(ii) where such goods are sold by the assessee in the course of wholesale trade for delivery at the time and place of removal at a price fixed under any law for the time being in force or at a price, being the maximum, fixed under any such law, then, notwithstanding anything contained in clause (iii) of this proviso,

8 the price or the maximum price, as the case may be, so fixed, shall, in relation to the goods so sold, be deemed to be the normal price thereof;

(iii) 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;

10. In these appeals the Revenue contends that in

a sale of excisable goods between an assessee

and a related person under Section 4 (1) (a)

(iii) of the Act (as it was prior to its

amendment in 2000) the `normal price' for the

sale is deemed to be the one at which the

goods are ordinarily sold by the `related

person' to the whole sellers. Therefore, the

place of removal for such goods should be the

depot of the related person from where the

goods are sold to the whole sellers, instead

9 of the factory gate of the assessee. The

Revenue contends that an obvious corollary to

this is that the freight charges so arising

between the factory gate of the assessee and

the place of removal at the depot of the

related person should constitute the value of

the goods for the purposes of computation of

excise duty. It further contends that since,

the `place of removal' is not the assessee's

factory gate but rather the depot of the

related person, the price is known, only at

the price at which goods are sold to whole

sellers by the related person.

11. Opposing the same, the learned counsel for the

respondent contended that M/s. Frito Lay India

is not a subsidiary of the respondent. The

brand names of the products are held by Pepsi

Co. Inc. USA. Respondent's case is that 96% of

the products manufactured by it are sold to

M/s. Frito Lay India and only 4% to

1 independent whole sellers. Originally the

assessable value of the items manufactured by

the respondent was arrived at on the basis of

price at which the respondent sold them to

M/s. Frito Lay India by taking into account

the costs of raw materials, packing materials,

conversions and the profit margin. Their

further case is that Pepsi Co. Inc. USA is a

holding company and the respondent and M/s.

Frito Lay India are neither holding companies

nor subsidiary companies inter se. The

respondent wants the assessment to be made at

the price at which M/s. Frito Lay India sold

the products to its wholesale dealers. That is

why they claim deduction towards freight and

transportation charges from the factory gate

of the respondent to the depot of M/s. Frito

Lay India. The learned counsel for the

respondent also submitted that the transaction

between respondent and M/s. Frito Lay India

was on a jobwork basis and that the assessment

1 of value should be guided by the principles

laid down in the case of Ujagar Prints etc.

etc. v. Union of India & Ors. reported in AIR

1989 SC 972.

12. The learned counsel for the appellant submits

that the instant case is covered by the three

judge Bench decision of this Court in

Commissioner of Central Excise, Belgaum v.

Akay Cosmetics (P) Ltd. [(2005) 3 SCC 764]. It

appears that in the instant case the period in

question is between 1st November 1997 and 28th

February 1999. Almost the same period was

considered by this Court in its decision in

Akay Cosmetics (supra). In the present case it

is not disputed by the respondent that M/s.

Frito Lay India is its related person under

Section 4(4)(c). The facts discussed in Akay

Cosmetics (supra) substantially resemble the

facts of this case, except of course the

difference in the items manufactured. In para

1 25 of Akay Cosmetics (supra) (page 774 of the

report) this Court formulated the key

question, which is: "how and when the

assessable value of the manufactured product

is to be determined?"

13. Having posed that question, the learned judges

answered the same in para 28, (page 777 of the

report) inter alia, holding as follows:

"Under section 4 (2), it was provided that where the price of the excisable product for delivery at the place of removal was not known and the value was determined with reference to the price for delivery at a place other than the place of removal, the cost of transportation from the place of removal to the place of delivery had to be excluded from such a price. The reason is important. Section 4 (2) is a residuary section and applied only to cases where the price at the place of removal was not known and the taxable value of the excisable product had to be determined with reference to the price for delivery (sale) at a place other than the price of removal. Under Section 4 (2), the cost of transportation from the place of removal to the place of delivery was deductible, provided that the assessable value (taxable value) was not known at the factory gate and had to be determined with 1 reference to another place. If the goods were manufactured at place "X" but the assessable value was determined with reference to place "Y", the cost of transportation had to be deducted."

14. In coming to the said conclusion, the learned

judges relied on this Court's decision in

Union of India and others v. Bombay Tyre

International Limited and others, (1984) 1 SCC

467. In para 31 of Akay Cosmetics (supra), the

learned judges summed up the essence of the

question by saying, inter alia, "therefore the

article became an object of assessment when it

was sold by the manufacturer."

15. It is not in dispute in the instant case

Section 4(2) does not apply. What applies is

the provision of Section 4(1)(a)(iii) as it

stood at the relevant time. The rationale of

the proviso (iii) was explained in Akay

Cosmetics (supra) as follows:

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"...The implication of the manufacturer, the assessee and the buyer being related to each other was that the price charged to the related person was presumed to be understated and to dissuade such sales, the legislature had introduced the said proviso as anti-evasion measure. Hence, to give deductions to the assessee as claimed, would defeat the very object of the third proviso. Under all three provisos, the manufacturer remained the assessee, the "object" of the assessment remained the same and neither the identity of the manufacturer nor the identity of the excisable goods underwent any change. Even the place of removal remained unchanged, under the third proviso, the basis of assessable value alone changed when the price of the related person was adopted as the basis of the valuation. Therefore, proviso (iii) did not break the nexus between price and value under Section 4 (1) (a) of the Act." (Para 33, page 779 of the report)

16. The learned counsel for the respondent tried

to distinguish the present case from the ratio

of Akay Cosmetics (supra) by relying on the

facts in that case by referring to paras 2 and

7 of the judgment in Akay Cosmetics (supra). The learned counsel submitted that in Akay

Cosmetics (supra), freight charges claimed was

1 the one between the depot of the related

person to the place of the unrelated dealer.

Obviously there are some factual differences

that are noted in para 2 of the said judgment,

but that does not impinge upon the ratio on

the interpretation of Section 4(1)(a)(iii) of

the Act which is quoted above.

17. Therefore, the finding of the Customs, Excise

and Gold (Control) Appellate Tribunal, Bench-

A, New Delhi, which is quoted above and which

upholds the contention of the respondent that

it is justified in claiming exclusion of

freight charges arising between the factory

gate of the respondent to the depot of the

related person, cannot be sustained. This

Court finds that in the facts and

circumstances of this case, Section 4 (2) is

not applicable. This Court, therefore, affirms

the order-in-original but with a rider.

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18. In the instant case in the order-in-original a

penalty has been imposed which is equal to the

amount of duty. Such penalty has been imposed

in exercise of power under Section 11 AC of

the Act. Section 11 AC of the Act as it stood

at the relevant point of time runs as under:

"11AC. Where any duty of excise has not been levied or paid or has been short- levied or short-paid or erroneously refunded by reasons of fraud, collusion or any wilful mis-statement or suppression of facts, or contravention of any of the provisions of this Act or of the rules made thereunder with intent to evade payment of duty, the person who is liable to pay duty as determined under sub- section (2) of section 11A, shall also be liable to pay a penalty equal to the duty so determined:

Provided that where the duty determined to be payable is reduced or increased by the Commissioner (Appeals), the Appellate Tribunal or, as the case may be, the court, then, for the purposes of this section, the duty as reduced or increased, as the case may be, shall be taken into account."

19. From a perusal of the aforesaid section,

especially the underlined portion, it is clear

that in order to attract the penalty provision

under Section 11 AC, criminal intent or `mens 1 rea' is a necessary constituent. In the reply

to the show cause notice the stand which has

been taken by the respondent is that it has

been paying the duty and there is no malafide

intention on its part to evade the payment of

duty. The further stand is that the goods were

cleared from the factory only on payment of

duty. This stand which has been taken in the

reply to the show cause notices was not found

to be incorrect in the order-in-original. As

such the imposition of penalty of the equal

amount of duty under the order-in-original

cannot be sustained.

20. It is well settled that when the statutes

create an offence and an ingredient of the

offence is a deliberate attempt to evade duty

either by fraud or misrepresentation, the

statute requires `mens rea' as a necessary

constituent of such an offence. But when

factually no fraud or suppression or mis-

1 statement is alleged by the revenue against

the respondent in the show cause notice the

imposition of penalty under Section 11 AC is

wholly impermissible.

21. The Court in this connection may remind itself

of the fundamental principle "that an accused

person cannot be convicted without proof of

mens rea, unless from a consideration of the

terms of the statute and other relevant

circumstances it clearly appears that that

must have been the intention of Parliament."

[See the decision of the House of Lords in

Vane v. Yiannopoullos, (1964) 3 All ER 820,

and the opinion of Lord Reid at page 823].

22. In Vane (supra), the word `knowingly' was used

in the statute as a condition of creating

liability.

23. The aforesaid dictum of Lord Reid has been

followed by this Court also. A reference in 1 this connection may be made to the decision in

Union of India v. Rajasthan Spinning & Weaving

Mills reported in 2009 (238) E.L.T. 3 (S.C.).

This Court considering Section 11 AC of the

Act held in para 19 at page 12 of the report

as follows:

"19. From the aforesaid discussion it is clear that penalty under Section 11AC, as the word suggests, is punishment for an act of deliberate deception by the assessee with the intent to evade duty by adopting any of the means mentioned in the section."

24. Following the aforesaid well settled

principles, this Court quashes that part of

the order-in-original which imposes penalty

without any finding of fraud or mis-statement

against the respondent. This part of the

order-in-original is quashed. Save as

aforesaid, the order-in-original is upheld.

These appeals filed by the revenue are allowed

to the extent indicated above. No costs.

2 .......................J. (D.K. JAIN)

.......................J. (ASOK KUMAR GANGULY)

.......................J. (H.L. DATTU) New Delhi December 10, 2010

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