2024 (9) TMI 1863 - AT - Central Excise

Valuation of finished goods transaction value between parties: agreed sale price accepted; alternative valuation and differential duty rejected.

Determination of assessable value centred on whether the agreed sale price between seller and buyer should be displaced by valuation under reasonable ... Transaction value - Principal-to-principal sale - Assessable value - Related person / mutuality of business interest - Valuation under reasonable means / Rule 11 - recovery of differential duty - Rule 9 valuation (sole buyer / related persons) - Rule 10A (job work valuation) - Penalty under Rule 26, Central Excise Rules, 2002 - Extended period of limitation - Determination of assessable value of FCP sold by MFCPL to IFFL - applicability of provisions of Section 4(1)(a) or Section 4(1)(b) to the transactions between MFCPL and IFFL - HELD THAT:- In the present case, it is argued that the MFCPL is buying all required inputs on their own and after converting the same into finished goods, sells the same outright basis price to IFFL at a mutual agreed price; hence the assessable value has been correctly determined applying Section 4(1)(a) of CEA and for these reasons the Commissioner has held in the impugned order that provisions of Rule 10A of CEVR, 2000 are not applicable. He has further submitted that in the event the Department is of the opinion that the agreed price is not the sole consideration, then recourse should be to Rule 6 of the CEVR, 2000. Further, it is pleaded that there is no mutuality of interest as wrongly held in the impugned order holding that the appellant have an intricate business relationship with IFFL and both of them had interest in each other and one influences the other. He has submitted that the IFFL is a private limited company and none of the Directors of MFCPL is director in IFFL nor any Director of IFFL has any interest in MFCPL; also no common share holding between the companies or any of the individuals. The interest between MFCPL and IFFL is purely on commercial in nature. In our opinion, the meaning of ‘sale’ and ‘purchase’ as prescribed under section 2(h) has been provided a very narrow and pedantic meaning in the context of determination of assessable value under section 4 of CEA,1944 which has been amended from time to time to encompass more than one wholesale transaction based on the circumstances and commercial expediency. In the show cause Notice, it is alleged comparing both the Agreements dated 07.1.2004 and 18.5.2007 that the conditions continued to be more or less the same and hence the relation between MFPCL and IFFL continued to be Principal and Job worker; however, the learned Commissioner in her finding held that Rule 10A of the CEVR, 2000 is not applicable to the present case and confirmed the differential demand of duty short paid adopting the sale price of IFFL resorting to Rule 11 read with Rule 9 considering the relationship between MFCPL and IFFL as that of ‘related person’. In our view, the said approach of the adjudicating authority cannot be sustained as there is no evidence brought on record to establish mutuality of relation or satisfaction of any of the ingredients of the definition of related person under Section 4 (3)(b) of the CEA, 1944. Also, the present proceeding has been initiated after insertion of Rule 10A of CEVR and there has been no allegation under earlier Agreement dated 07.1.2004 that the transaction between MFPCL and IFFL was influenced by their relationship as defined under Section 4(3)(b)(iv) of CEA,1944, hence the price at which FCP supplied by MFPCL to IFFL to be ignored and the assessment of FCP be made at the price at which IFFL sold the goods in the market be adopted. Therefore, in absence of any additional evidence indicating the transaction between MFPCL and IFFL under the agreement 18.5.2007 fall within the definition of ‘related person’, rejecting the ‘Transaction Value between MFPCL and IFFL is contrary to the settled principles of valuation of goods; hence cannot be sustained. In the present case, the appellants have been assessed to duty by determining assessable value following the principle laid down in Ujagar Prints case prior to 01.04.2007, without any allegation of extra commercial relationship between MFCPL and IFFL. Also, both MFCPL and IFFL do not belong to the same Management. Therefore, the said judgment is also not applicable to the present case. The transaction value entered between MFCPL and IFFL be accepted for assessment of FCPs cleared to IFFL and not the value computed under Rule 11 read with Rule 9 of CEVR, 2000, as held in the impugned Order; consequently, the demand of duty confirmed as short paid calculated on the differential value at which appellant MFCPL sold products to IFFL and the price at which IFFL sold the products to customers, during the period in question, cannot be sustained. As the first issue is decided on merit in favour of the appellant MFCPL, other preliminary objections and issues of imposition of penalty, applicability of extended period of limitation in the Appeal No. E/26321/2013, penalty under Rule 26 of Central Excise Rules, 2002 in other Appeals become academic; hence are not delved into . In the result, the impugned orders are set aside and the appeals are allowed with consequential relief, if any, as per law. Issues: Whether the assessable value of food colour preparations (FCP) manufactured by M/s. Mallya Fine-Chem Pvt. Ltd. and sold to M/s. International Flavours & Fragrances India Pvt. Ltd. for the period 26.05.2007 to 30.06.2017 is to be determined on the transaction value between the parties under Section 4(1)(a) of the Central Excise Act, 1944 or on the sale price realized by IFFL under Section 4(1)(b) read with Rule 11 of the Central Excise Valuation Rules, 2000.Analysis: Applicable legal framework includes Section 4(1)(a) and Section 4(1)(b) of the Central Excise Act, 1944 and the valuation Rules, particularly Rule 11 (fallback rule) and the principles reflected in Rule 9 (related-person valuation). Relevant authorities establish that transaction value (price actually paid or payable) is the primary measure where a sale is in the ordinary course of trade between non-related parties and at arm's length; Rule 11 applies where value cannot be determined under Rules 410A and permits use of reasonable means consistent with Section 4 and valuation rules. Comparative precedents clarify that sale under an agreement with commercial conditions does not automatically negate a principal-to-principal, arm's-length transaction and that the mere fact that a manufacturer supplies exclusively to a buyer does not, without evidence of extra-commercial mutuality (common control, shareholding, or flow-back of benefits), make the parties related persons under Section 4(3)(b)(iv). The contractual clauses (including specifications, pricing mechanism, renewal/termination provisions and a principal-to-principal clause) were examined; no admissible evidence established mutuality of business interest, common management or control, or extra-commercial flow-back that would displace the transaction value. The adjudicative reliance on Rule 11 read with Rule 9 and adoption of IFFL's resale prices was not supported by evidence satisfying the statutory definition of related persons or demonstrating that the transaction value could not be applied.Conclusion: The transaction value between MFCPL and IFFL under the agreement dated 18.05.2007 is the appropriate assessable value for the FCP clearances in the period in question; the demand based on IFFL's resale prices under Rule 11 read with Rule 9 is set aside. The appeal is allowed in favour of the assessee.