Commr.Of Cen.Exc.Faridabad vs M/S Food & Healthcaare Specialit.& Anr

COMMISSIONER OF CENTRAL EXCISE, -- APPELLANT

FARIDABAD

VERSUS

M/S. FOOD & HEALTHCARE -- RESPONDENTS

SPECIALITIES & ANR.

JUDGMENT

D.K. JAIN, J.:

1. These appeals under Section 35L(b) of the Central Excise Act, 1944

(for short "the Act") are directed against a common final order, dated

2nd February 2005 in Appeal No. E/5261-62/04-NB(A), passed by the

Customs Excise & Service Tax Appellate Tribunal, New Delhi (for

short "the Tribunal"). By the impugned order the Tribunal has quashed

the additional excise duty demand of `9,34,89,367/- under Section 11A

of the Act; penalties of `1.5 crores each on respondent Nos.1 and 2

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under Rule 173Q of the Central Excise Rules, 1944 (for short "the 1944

Rules") and Rule 25(1) of the Central Excise Rules, 2001 (for short "the

2001 Rules") read with Section 38A of the Act and a penalty of `2

crores under Rule 209A of the 1944 Rules and Rule 26 of 2001 Rules

read with Section 38A of the Act on Respondent No. 2 as confirmed by

the Deputy Commissioner of Central Excise.

2. Succinctly put, the material facts giving rise to the present appeals are

as under:

Respondent No.1--M/s Food & Healthcare Specialities (for short "the

Assessee") was engaged in the blending and packing of `Glucon D' for M/s

Heinz India Pvt. Ltd. (for short "Heinz"), respondent No.2 in these appeals,

pursuant to an agreement commencing from 1st March 2000. Under the

agreement, Heinz was to supply raw material, packing material and the

technical know-how to the Assessee for the blending and packing of the said

product. From March 2000 to September 2000, the Assessee paid excise duty

on the basis of wholesale price of the product at the depots of Heinz.

However, for the period commencing from October 2000, they filed price

declarations seeking to modify the assessable value of the product as the

aggregate of cost of raw material, packing material and their job work

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charges and started paying duty on the same. During the course of

investigations undertaken by the revenue, it was found that the said product

was also being processed at the Aligarh factory of Heinz and the duty on

those clearances was being paid at the assessable value/depot sale price of

Heinz. Consequently, three notices were issued to the Assessee for the period

October 2000 to December 2000; January 2001 to June 2001 and July 2001 to

February 2002, to show-cause as to why the assessable value declared by

them be not rejected and the price declarations submitted by them be not

amended by determining the assessable value on the basis of the sale price

fixed by Heinz at its depots and the duty so paid be not recovered along with

penalty under Rule 173Q of the 1944 Rules.

Upon consideration of the cause shown by the Assessee, the

Adjudicating Authority, by its order dated 31st August 2004, confirmed the

differential demand indicated in the show cause notices and imposed the

aforesaid penalties on the Assessee as also on Heinz. On appeals preferred

against the said order, the Tribunal, by an exceptionally short order, set aside

the order-in-original, concluding that since the Adjudicating Authority has

itself given a specific finding that the status of the Assessee was not better

than that of hired labour and Heinz is the manufacturer, the duty is leviable

only on the manufacturer. Being aggrieved by the dismissal of its appeal

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under Section 35G of the Act by the High Court, as not maintainable, the

revenue is before us in these appeals.

3. Mr. B. Bhattacharyya, learned Additional Solicitor General appearing

for the appellant, referring to several clauses of the agreement between the

Assessee and Heinz, in particular, clauses (d), (1), (2), (5), (7), (9),(13), (15)

and (16), vehemently submitted that the relationship between the Assessee

and Heinz was one of principal and agent and not of principal to principal and

therefore, the price at which, Heinz sold `Glocon-D' in the wholesale market

must be taken as the assessable value. According to the learned counsel,

Heinz had complete control over the activities of the Assessee, who was

merely a job worker. To bring home his point that the Assessee was merely an

extended arm of Heinz, he laid emphasis on the fact that processed `Glocon-

D' was stored at the same premises from where Heinz was operating; Heinz

had also taken an exemption from registration under Rule 9(2) of the

erstwhile Central Excise (No.2) Rules, 2001, in terms of Notification No.

36/2001 dated 26th June 2001, which was available to a manufacturer who got

his goods manufactured on his account from any other person, subject to the

condition that the said manufacturer authorised the person, who actually

manufactured or fabricated the said goods, to comply with all the procedural

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formalities under the Act and the rules made thereunder, in respect of the

goods manufactured on behalf of the said manufacturer.

Relying heavily on the decision of this Court in Commissioner of

Central Excise, Indore Vs. S. Kumars Ltd. & Ors.1, wherein dealing with the

question of assessable value of the processed goods in relation to the

processor the earlier decisions of this Court in M/s Ujagar Prints & Ors. (II)

Vs. Union of India & Ors.2 (for short "Ujagar Prints (II)"), M/s Ujagar

Prints & Ors. (III) Vs. Union of India & Ors.3 (for short "Ujagar Prints

(III)"), Empire Industries Limited & Ors. Vs. Union of India & Ors.4 and

Pawan Biscuits Co. Pvt. Ltd. Vs. Collector of Central Excise, Patna5, were

discussed. Learned counsel argued that the formula laid down in the Ujagar

Prints (II) or (III) would not apply to the fact-situation. It was stressed that

having failed to examine the relationship between the Assessee and Heinz, the

Tribunal's order deserved to be set aside and the matter was fit to be remitted

back to the Tribunal for fresh adjudication on the touchstone of the ratio of S.

Kumars.

1 (2005) 13 SCC 266

2 (1989) 3 SCC 488

3 (1989) 3 SCC 531

4 (1985) 3 SCC 314

5 (2000) 6 SCC 489

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4. Per Contra Mr. V. Lakshmi Kumaran, learned counsel appearing on

behalf of the respondents submitted that in the show cause notice there

was no allegation that the Assessee and Heinz are related persons and

therefore, Section 4 (1)(b) of the Act could not be invoked to determine

the assessable value. It was asserted that in reply to the show cause notice,

it was clearly stated that apart from the fact that dealings between the

Assessee and Heinz were on principal to principal basis, the Assessee was

also processing goods for other manufacturers. In support of this

argument, learned counsel relied upon clause 22 of the agreement between

the said parties, which stipulated that:

"Nothing herein contained shall constitute or be deemed to

or is intended to constitute F&HS as an agent of Heinz. It

is hereby expressly agreed and declared that F&HS shall

not at any time-

a) Enter into a contract in the name of or purporting to be

made on behalf of Heinz.

b) .............................................................."

It was argued that the clause clearly shows that the parties were at arm's

length and the Assessee was processing `Glucon-D' only on job-work basis.

It was thus asserted that dealings between the Assessee and Heinz being on

principal to principal basis, the principle laid down in Ujagar Prints (II), as

clarified in Ujagar Prints (III), for determining the assessable value, was on

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all fours with the fact-situation at hand and as such the ratio of the judgment

in S. Kumars will not apply. In the compilation filed on behalf of the

Assessee, reliance is also placed on Circular No.: 619/10/2002-CX dated 19th

February 2002, which clarifies that even after the introduction of new

valuation provisions with effect from 1st July 2000, in respect of goods

manufactured on job-work basis, valuation would be governed by Rule 11

read with Rule 6 of the Central Excise Valuation (Determination of Price of

Excisable Goods) Rules, 2000 (for short "the 2000 Rules") and the decisions

of this Court in Ujagar Prints II and Pawan Biscuits. According to the

learned counsel, the issue raised by the revenue stands concluded by the ratio

of Pawan Biscuits, and therefore, the appeals deserve to be dismissed.

5. The principles of valuation of excisable goods for the purpose of

charging excise duty are contained in Section 4 of the Act (as amended with

effect from 1st July 2000), which, insofar as it is relevant, reads 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 their value,

then, on each removal of the goods, such value shall--

(a) in a case where the goods are sold by the assessee, for

delivery at the time and place of the removal, the assessee

and the buyer of goods are not related and the price is the

sole consideration for the sale, be the transaction value;

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(b) in any other case, including the case where the goods are

not sold, be the value determined in such manner as may

be prescribed.

(2) ....................................................................

(3) For the purposes of this section,--

(a) ............................................................

(b) persons shall be deemed to be "related" if--

(i) they are inter-connected undertakings;

(ii) they are relatives;

(iii) amongst them the buyer is a relative and

distributor of the assessee, or a sub-distributor of

such distributor; or

(iv) they are so associated that they have interest,

directly or indirectly, in the business of each

other.

Explanation.--In this clause--

(i) "inter-connected undertakings" shall have the

meaning assigned to it in clause (g) of section 2 of the

Monopolies and Restrictive Trade Practices Act, 1969 (64

of 1969); and

(ii) "relative" shall have the meaning assigned to it in

clause (41) of section 2 of the Companies Act, 1956 (1 of

1956);

(c) ............................................................

(d) "transaction value" means the price actually paid or

payable for the goods, when sold, and includes in addition

to the amount charged as price, any amount that the buyer

is liable to pay to, or on behalf of, the assessee, by reason

of, or in connection with the sale, whether payable at the

time of the sale or at any other time, including, but not

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limited to, any amount charged for, or to make provision

for, advertising or publicity, marketing and selling

organization expenses, storage, outward handling,

servicing, warranty, commission or any other matter; but

does not include the amount of duty of excise, sales tax

and other taxes, if any, actually paid or actually payable on

such goods."

The new Section 4 of the Act, substituted w.e.f 1st July 2000, and material for

our purpose, prescribes that the value of excisable goods shall be the

transaction value subject to satisfying the conditions that: (i) the price must be

the sole consideration; (ii) the buyer must not be a related person and (iii) the

goods must be sold by the assessee for delivery at the time and place of

removal. The basic principle underlying Section 4(1)(a) of the Act is the

transaction value as defined in clause (d) of sub-section 3 of Section 4 of the

Act, which inter-alia, means the price actually paid or payable for the goods

when sold, provided the assessee and the buyer of goods are not related.

Clause (b) of sub-section (3) of Section 4 of the Act, inter-alia, stipulates that

person shall be deemed to be "related" if they are so associated that they have

interest, directly or indirectly, in the business of each other. It is clear that if

the assessee and the buyer are related, valuation has to be under Section 4(1)

(b) of the Act read with the 2000 Rules. We may, however, note that

conceptually there is no significant change in the definition of "related

person" in the new and repealed Section 4 of the Act.

9 6. Thus, the pivotal question on which learned counsel for both the

parties addressed us, is whether the Assessee was merely a processor

of `Glucon-D', independent of Heinz or it was related to Heinz. In

other words, whether the relationship between the Assessee and Heinz

was one of principal to principal or that of an agent and principal. As

aforesaid, the stand of the revenue is that the Assessee, as the

processor, is not independent of Heinz and therefore, ratio of Ujagar

Prints (III) would not apply. It is evident from the order of the

Tribunal that it has not addressed this aspect of the matter in detail,

and has not considered whether the Assessee and Heinz were related

persons. Nevertheless, since the rival contentions urged before us

mainly related to the question as to whether the formula laid down in

Ujagar Prints (III) and reiterated in Pawan Biscuits, would apply or

the principle enunciated in S. Kumar will govern the present case, it

will be useful to notice the principle enunciated in Ujagar Prints (II)

and (III) as also the ratio of S. Kumar.

7. In Ujagar Prints (II), a Constitution Bench of this Court was called

upon to consider the correctness of the view taken by this Court in

Empire Industries. In Empire Industries, it was held that the Central

Excises and Salt and Additional Duties of Excise (Amendment) Act,

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1980, by which, the processes of bleaching, dying and printing were

brought within the definition of `manufacture' for the purposes of the

Central Excise and Salt Act, 1944 and the Additional Duties of Excise

(Goods of Special Importance) Act, 1957 were constitutionally valid.

While upholding the validity of the Amendment Act, it was observed

that when the textile fabrics are subjected to the processes like

bleaching, dyeing and printing etc. by independent processes, whether

on their own account or on job charges basis, the value for the

purposes of assessment under Section 4 of the said Act will not be the

processing charges alone but the intrinsic value of the processed

fabrics which is the price at which such fabrics are sold for the first

time in the wholesale market. The principle enumerated in Section

4(1)(a) of the Act was applied to the processed goods. In other words,

the assessable value of the processed goods, as far as the processor

was concerned, had to be the same irrespective of the fact whether the

processor manufactures the goods and then processes them itself or

gives the goods and merely undertakes processing before returning the

same to the manufacturer/owner. That common norm was the

wholesale price.

11 8. On an application filed for clarification of the judgment in Ujagar

Prints (II), this Court by a short order in Ujagar Prints (III) clarified

as follows:

"1...it is made clear that the assessable value of the processed

fabric would be the value of the grey cloth in the hands of the

processor plus the value of the job work done plus manufacturing

profit and manufacturing expenses whatever these may be, which

will either be included in the price at the factory gate or deemed

to be the price at the factory gate for the processed fabric. The

factory gate here means the "deemed" factory gate as if the

processed fabric was sold by the processor..."

The Court went on to explain:

"2. If the trader, who entrusts cotton or man-made fabric to the

processor for processing on job work basis, would give a

declaration to the processor as to what would be the price at

which he would be selling the processed goods in the market,

that would be taken by the excise authorities as the assessable

value of the processed fabric and excise duty would be charged

to the processor on that basis provided that the declaration as to

the price at which he would be selling the processed goods in the

market, would include only the price or deemed price at which

the processed fabric would leave the processor's factory plus his

profit..."

9. The decision in Ujagar Prints (III) was subsequently followed by this

Court in Pawan Biscuits. In that case, the Tribunal had held that the

assessee was, in reality, an agent of Britannia Industries Ltd. and,

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therefore, the price at which Britannia was selling the manufactured

goods in the wholesale market was to be taken as the assessable value.

The decision of the Tribunal was reversed by this Court. It was found

that the agreement between Pawan Biscuits and Britannia indicated

that their relationship was one of principal to principal and not that of

principal and agent and also that the assessee (Pawan Biscuits) could

manufacture biscuits of other brands and sell them. Observing that

Pawan Biscuits had been established much prior to its agreement with

Britannia, it was held that the decisions in Ujagar Prints (II) and (III)

could not be factually distinguished. In short, it was held that for the

purpose of determining assessable value, it is necessary to include the

processor's expenses, costs, and charges plus profit, but it is not

necessary to include the trader's profits who gets the fabrics processed,

because those would be post-manufacturing profits.

10. A similar issue again came up for consideration of this Court in S.

Kumars. In that case, the assessee was processing grey fabrics.

Sometimes the grey fabrics were processed on their own account and

sometimes the grey fabrics were received for processing on job charge

basis from others, referred to in the judgment as the merchant

manufacturers. The assessee paid excise duty on the fabrics processed

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by it treating the value of the processed fabric as being that at which,

the merchant manufacturers were selling the processed goods. This,

according to the assessee was in accordance with the decision in

Empire Industries. However, on the fabrics processed by it which had

been received from the merchant manufacturers, the assessee valued

the processed goods on the basis of the cost of grey fabrics plus the

processing charges as well as its manufacturing expenses and profits.

In other words, the price at which the merchant manufacturers were

selling the processed goods was not taken into consideration.

According to the assessee, this was done in light of the decision in

Ujagar Prints (II) and (III). A notice was issued to the assessee to

show-cause as to why differential duty of Excise along with penalty be

not recovered from it as the assessee and the merchant manufacturers

were all firms and companies having a common management and

control with some of them selling grey fabrics to the assessee, which

after processing the fabrics was sold to some independent dealers. All

such independent dealers as well as the merchant manufacturers were

described as `S. Kumars' and the revenue asserted to treat the price

charged by the merchant manufacturers from independent dealers as

the assessable value of the processed fabrics and to levy excise duty

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thereon. The assessee denied that the merchant manufacturers were

related persons and thus disputed the basis on which claim for

additional excise duty was made. The stand of the assessee was that

by virtue of the decision of this Court in Ujagar Prints (III), they were

liable to treat the notional sale by the assessee to the merchant

manufacturers as the relevant point for determining the assessable

value. Examining the provisions of Section 4 of the Act, as it existed at

the relevant time, with reference to the Central Excise Valuation

Rules, 1975 and the decisions of this Court in Ujagar Prints (II) and

Ujagar Prints (III) and Pawan Biscuits, the Court held as follows:

"We, therefore, do not agree that Ujagar Prints (III) would apply

even to a processor who is not independent and, as is alleged in

this case, the merchant manufacturers and the purchasing traders

are merely extensions of the processor. In the latter case, the

processor is not a mere processor but also a merchant

manufacturer who purchases/manufactures the raw material,

processes it and sells it himself in the wholesale market. In such

a situation, the profit is not of a processor but of a merchant

manufacturer and a trader. If the transaction is between related

persons, the profit would not be "normally earned" within the

meaning of Rule 6(b)(ii). If it is established that the dealings

were with related persons of the manufacturer, the sale of the

processed fabrics would not be limited to the formula prescribed

by Ujagar Prints (III) but would be subject to excise duty under

the principles enunciated in Empire Industries as affirmed

in Ujagar Prints (II), incorporating t he arms length principle."

(Emphasis supplied by us)

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11. It is manifest from the above that the only distinctive feature of S.

Kumars in comparison with Ujagar Prints (II) and (III) is the

emphasis on the factum of relationship between the parties viz., the

processor and the merchant manufacturers/traders, in the former. In

short, S. Kumars holds that if the processor-assessee is not at arm's

length with the merchant manufacturer and is a related person, the

formula prescribed in Ujagar Prints (III) would not apply and

assessable value for the purpose of levy of excise duty will have to be

determined in terms of the ratio of S. Kumar i.e. in accordance with

the procedure contemplated in Section 4(1)(b) of the Act read with the

relevant valuation Rules. We deferentially concur with the ratio of S.

Kumars.

12. In the present case, as aforesaid, neither did the Tribunal address this

aspect of the matter, nor did it consider whether the Assessee and

Heinz are related persons. It based its decision solely on the

observation made by the Adjudicating Authority "that the status of the

Assessee was not better than that of a hired labour". We are, therefore,

of the opinion that in the light of the above discussion, it would be

necessary for the Tribunal to examine in depth the agreement between

the Assessee and Heinz as also any other additional material, the

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parties may like to adduce and determine the question whether or not

both of them are related persons.

13. Resultantly, the appeals are allowed and the matter is remanded back

to the Tribunal for the purpose of determining the nature of

relationship between the Assessee and Heinz. If it is found that they

are not related persons, then the present decision of the Tribunal will

stand affirmed. However, if the Tribunal finds that the Assessee and

Heinz are related, it shall remit the matter to the Adjudicating

Authority for fresh determination of the assessable value of the goods

in question in accordance with law. However, having regard to the

facts and circumstances of the case, there will be no order as to costs.

.............................................

(D.K. JAIN, J.)

.............................................

(ANIL R. DAVE, J.)

NEW DELHI;

FEBRUARY 13, 2012.

RS

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