2023 (11) TMI 300 - AT - Central Excise

Related party sales at lower value don't trigger Rule 9 when goods sold to independent buyers too

CESTAT Chandigarh set aside the demand order in a valuation dispute case. The appellant cleared finished products to related party at lower value compared ... Method of Valuation - related parties - allegation is that the appellant has been clearing the finished products at lesser value to the buyer M/s Gera Enterprises, Faridabad - time limitation - Suppression of facts or not - HELD THAT:- In the present case, the demand has been confirmed by relying upon Rule 8 and 9 of Central Excise Valuation Rules, 2000 whereas it is an admitted fact in the show cause notice that the entire production has not been cleared to a related person M/s Gera Enterprises in this case. In the show cause notice itself it has been stated that the noticee has been clearing the finished goods at lesser (assessable) value to M/s Gera Enterprises as compared to other customers. Once this fact is admitted then applying Rule 9 is not legally sustainable in view of the larger bench decision of the Tribunal in the case ISPAT INDUSTRIES LTD. VERSUS COMMISSIONER OF C. EX., RAIGAD [2007 (2) TMI 5 - CESTAT, MUMBAI]. Besides, this Tribunal in the case of SUDERSHAN CASTINGS PVT. LTD., SUDERSHAN STEELS PVT. LTD., TRIKUTA STEEL ROLLING MILLS, ROMESH CHANDER GUPTA, SHRI. NARINDER KUMAR GUPTA, MG. DIRECTOR OF SHRI SUDERSHAN KUMAR SHARMA VERSUS CCE, JAMMU. [2017 (5) TMI 1816 - CESTAT CHANDIGARH] held that when the goods are sold to related persons as well as to independent buyers, in that case, Rule 9 will not be applicable. Time Limitation - HELD THAT:- The appellant has been filing the monthly returns regularly and has not concealed any material fact from the department. Therefore, alleging suppression or fraud to invoke the extended period of limitation is not legally sustainable. The impugned order is not sustainable in law and the same is set-aside by allowing the appeal of the appellant. ISSUES PRESENTED AND CONSIDERED 1. Whether Rules 8 and 9 of the Central Excise Valuation Rules, 2000 apply to determine assessable value where the manufacturer sells the same product both to related persons who consume it captively and to unrelated independent buyers. 2. Whether valuation under Rule 8 may be applied by adopting 110% of the price charged to a related purchaser when there is no evidence that that price equals the cost of production. 3. Whether invocation of the extended period of limitation is sustainable where the assessee filed regular monthly returns and there is no material suppression, mis-statement or fraud. ISSUE-WISE DETAILED ANALYSIS Issue 1: Applicability of Rules 8 and 9 where sales are made to both related and unrelated buyers Legal framework: Rule 8 prescribes that where goods manufactured are entirely consumed captively by an assessee, their assessable value shall be 110% of the cost of production. Rule 9 provides that where goods are not sold by an assessee except to a related person who consumes them in production of other articles, valuation is to be determined under Rule 8. Precedent treatment: The Tribunal's Larger Bench has held that Rule 8 does not apply where part of the production is cleared to independent buyers; thus Rule 9 (and hence Rule 8) is inapplicable if the manufacturer sells some production in the open market to unrelated persons. Subsequent Tribunals have followed this view where identical fact-situations arose. Interpretation and reasoning: The Court accepts the textual scheme that Rule 9 links its application to situations where the manufacturer's goods are not sold except to related persons who consume them captively. If the manufacturer clears goods to independent buyers as well, the exceptional valuation mechanism under Rule 8 (via Rule 9) cannot be invoked. The admitted fact in the proceedings that the product was sold to other customers precludes the application of Rule 9 and thereby Rule 8. Ratio vs. Obiter: Ratio - where manufacture is partly sold to unrelated buyers, Rules 9 and 8 cannot be invoked to revalue the sales to related persons at 110% of cost. This principle is applied as decisive reasoning for setting aside the demand. Any discussion of alternative valuation methods not necessary to this conclusion is obiter. Conclusion: Rules 9 and 8 are not attracted because the goods were sold both to related and unrelated parties; therefore the valuation uplift under Rule 8 cannot be imposed on sales to the related purchaser. Issue 2: Use of 110% of the charged price versus 110% of cost of production under Rule 8 Legal framework: Rule 8 fixes assessable value at 110% of cost of production where goods are entirely consumed captively. The valuation formula is cost-based, not transaction-price-based. Precedent treatment: Authorities emphasize that Rule 8's 110% multiplier applies to cost of production; reworking valuation on 110% of the price charged without establishing cost is legally unsound. Interpretation and reasoning: The impugned order computed short levy by applying 110% to the value charged to the related purchaser rather than to the cost of production. There is no evidence on record showing that the price charged equals the cost of production; consequently the method adopted in the order departs from the statutory prescription of Rule 8. Since Rule 8 in any event does not apply on the facts (see Issue 1), reliance on a misapplied arithmetic further undermines the demand. Ratio vs. Obiter: Ratio - valuation under Rule 8 requires reference to cost of production; substituting price charged to a related person without proof of equivalence to cost is erroneous. Observations on appropriate methods to determine cost where disputed are obiter in the absence of a contested cost record. Conclusion: The order's adoption of 110% of the charged value in lieu of 110% of cost is legally unsustainable and, coupled with inapplicability of Rule 8, vitiates the demand calculation. Issue 3: Validity of invoking extended period of limitation where returns were filed and there was no suppression or fraud Legal framework: Extended limitation can be invoked where there is suppression of facts, mis-statement or fraud; ordinary assessment/demand periods apply in absence of such culpable conduct. Regular filing of returns is relevant to the question of concealment. Precedent treatment: Tribunals have held that invocation of extended period is not justified where the assessee has furnished returns and there is no material on record to show suppression, mis-statement or fraud. The larger bench principle relied upon by the appellant has been followed in similar contexts. Interpretation and reasoning: The record shows regular monthly returns were filed disclosing clearances and values. There is no material finding of concealment, mis-statement or fraud justifying extension of limitation. Mere difference in valuation or alleged under-valuation, absent suppression, does not automatically permit invocation of extended limitation. Therefore, the extended period was not legally available for raising the demand. Ratio vs. Obiter: Ratio - extended limitation cannot be invoked without evidence of suppression, mis-statement or fraud; regular filing of returns negates a presumption of concealment absent independent proof. Conclusion: The reliance on extended limitation is unsustainable on the facts; the show cause notice and demand cannot be sustained on that ground. Aggregate Conclusion and Disposition Applying the legal framework and controlling precedents, the Court holds that (a) Rules 9 and 8 are inapplicable where the manufacturer sold the same goods both to related and unrelated buyers; (b) where Rule 8 were to apply, valuation must be based on 110% of cost of production and not 110% of the price charged without proof; and (c) invocation of the extended period of limitation is unjustified in absence of suppression, mis-statement or fraud given regular filing of returns. Consequently, the demand and penalties founded on those bases are set aside.