2017 (5) TMI 1716 - AT - Central Excise

Tribunal overturns decision on related party valuation, rules partnership firm not a 'relative'

The Tribunal set aside the lower Authorities' decision in a Central Excise duty valuation case involving related parties. The Tribunal emphasized that a ... Valuation - related party transaction - the appellant strongly contested that they are a private limited company registered under Companies Act, 1956 and M/s Neminath Tubes Industries is a partnership firm. As such, a private limited company cannot be a relative of a partnership firm - demand of differential duty applying Rule 9 readwith Rule 11 of Central Excise Valuation Rules, 2000 - HELD THAT:- The show cause notice as well as both the lower Authorities proceeded against the appellant to recover differential duty only on the ground that the appellants are “relative” of M/s Neminath in terms of Section 4 (3) (b) (ii). The said provision is applicable only if the parties are “relative” as per Section 2 (41) of the Companies Act, 1956. We note that a juristic person, like a private limited company, cannot be called as a ‘relative’ of a partnership firm. The scope of term “relative” will apparently apply to only natural persons - Reference can be made to the decision of Tribunal in CCE, Raipur vs. Akash Ispat Ltd. [2016 (2) TMI 683 - CESTAT NEW DELHI]. On this ground alone, the proceedings against the appellant are unsustainable. Even if some of the Directors of the appellant are partners of the buying firm, this by itself do not make them related persons. It is a well settled legal position that the relationship between two legal entities are to be established by the facts applicable to each case. The lower Authorities have misdirected themselves in examining the legal provision of Section 4 (3) (b) (ii), and without examining the facts of the present case applied a completely inapplicable provisions of law to decide the valuation issue - Appeal allowed - decided in favor of appellant. Issues:1. Valuation of goods for Central Excise duty involving related parties.2. Applicability of provisions of Rule 9 and Rule 11 of Central Excise Valuation Rules.3. Interpretation of the term 'relative' under Section 4 (3) (b) (ii) of the Central Excise Act, 1944.4. Legal position on the relationship between legal entities.Analysis:1. The appeal in this case pertains to the valuation of goods for Central Excise duty concerning the appellant, engaged in the manufacture of Steel Wires, who cleared goods to another entity. The Revenue contended that the appellant and the other entity were related persons, seeking to revise the value of goods cleared and demand differential duty. The lower Authorities confirmed the duty and imposed penalties under Rule 25 and Rule 26 of Central Excise Rules, 2002.2. Despite the absence of the appellant during the proceedings, the Tribunal proceeded based on the appeal records and submissions by the Authorized Representative. The Authorities rejected the transaction value, determining a revised value under Rule 9 read with Rule 11 of the Valuation Rules. The appellant contested the relationship claim, highlighting being a private limited company registered under the Companies Act, 1956, while the other entity was a partnership firm.3. The key issue revolved around the interpretation of the term 'relative' under Section 4 (3) (b) (ii) of the Central Excise Act, 1944. The Authorities considered the appellant and the other entity as related persons based on this provision. However, the Tribunal emphasized that a private limited company cannot be a relative of a partnership firm, as the term 'relative' typically applies to natural persons. Referring to a prior decision, the Tribunal clarified that the relationship between legal entities must be established based on the facts specific to each case.4. The Tribunal found serious legal flaws in the lower Authorities' approach, noting a misinterpretation of Section 4 (3) (b) (ii) without considering the factual circumstances of the case. It was established that the legal provision applied was irrelevant to the situation at hand, leading to an unsustainable proceeding against the appellant. Consequently, the impugned order was set aside, and the appeal was allowed, emphasizing the importance of accurately determining relationships between legal entities based on factual evidence.