2005 (11) TMI 71 - SC - Central Excise

Supreme Court remands case for relationship determination & discount consideration. Valuation principles apply.

COMMISSIONER OF CENTRAL EXCISE, INDORE Versus S. KUMARS LTD.

The Supreme Court remanded the case to the Tribunal to determine the relationship between the parties and consider the discounts and deductions claimed. ... Whether Section 4(1)(a) of the Act had to be applied or Section 4(1)(b) of Valuation Rules? Held that:- The respondent No. 1 assessee had submitted before the Department and before us that if the assessee was not permitted to rely upon the formula laid down in M/s. Ujagar Prints III [1989 (1) TMI 124 - SUPREME COURT OF INDIA] then it was entitled to discounts and advertisement expenses. These were not allowed by the Commissioner. As the question whether the respondent No. 1 would be entitled to discounts and deductions claimed would only arise if it held that the ratio of M/s. Ujagar Prints III would not apply, the Tribunal did not address this aspect of the matter at all nor did it consider whether the merchant-manufacturers and the respondent No. 1 were related persons. Since the Tribunal, in our opinion, wrongly upheld the respondent's contention that the formula in M/s. Ujagar Prints III would apply in full measure, it is now necessary for the Tribunal to consider whether the respondents were related persons and whether the respondent No. 1 would be entitled to claim discounts or could exclude the advertisement expenses incurred by the dealers. We therefore allow the appeals and remand the matter back to the Tribunal for the purpose of determining the nature of the alleged relationship between the respondent No. 1 and the other respondents. If it is found that the respondents are not related persons then the earlier decision of the Tribunal will stand. If on the other hand it is found that the respondents are related, the Tribunal will consider the questions of discounts and deductions claimed by the respondents before remanding the matter to the Commissioner for a correct computation of the calculation errors. Issues Involved:1. Valuation of processed fabrics for excise duty purposes.2. Applicability of the 'related persons' concept.3. Entitlement to discounts and advertisement expense deductions.Issue-wise Detailed Analysis:1. Valuation of Processed Fabrics for Excise Duty Purposes:The primary issue revolves around the valuation method for processed fabrics for excise duty purposes. The respondent processed grey fabric both on its own account and on a job charge basis for merchant manufacturers. Initially, the respondent valued the processed fabrics based on the price at which the merchant manufacturer sold the processed goods, in line with the Empire Industries Ltd. v. Union of India decision. However, post-1-3-1989, the respondent valued the processed goods received from merchant manufacturers based on the cost of grey fabrics plus processing charges, manufacturing expenses, and profits, relying on M/s. Ujagar Prints II and III decisions.The Supreme Court examined the principles of valuation under Section 4 of the Central Excise Act, 1944, and the Central Excise (Valuation) Rules, 1975. The Court noted that the basic principle for assessable value is the ordinary wholesale price, subject to exceptions like related persons' transactions. The Court highlighted the deviation in M/s. Ujagar Prints III from the Empire Industries decision, which introduced a deemed sale price at the processor's factory gate instead of the wholesale price at the merchant manufacturer's stage.2. Applicability of the 'Related Persons' Concept:The appellant issued a show cause notice alleging that the respondents were related persons, with common management and control, and proposed to recover differential excise duty. The respondents denied the related persons' allegation and contended that they followed the valuation principles from M/s. Ujagar Prints III. The Commissioner upheld the related persons' claim and the demand for duty.The Tribunal, however, did not address the related persons' issue and remanded the matter for recomputation of duty based on M/s. Ujagar Prints III. The Supreme Court emphasized that if the transactions are between related persons, the profit would not be 'normally earned' within the meaning of Rule 6(b)(ii). The Court held that Ujagar Prints III would not apply if the processor, merchant manufacturers, and traders are related persons, and the valuation should follow the principles from Empire Industries and Ujagar Prints II, incorporating the arms-length principle.3. Entitlement to Discounts and Advertisement Expense Deductions:The respondent claimed entitlement to discounts and advertisement expenses if the M/s. Ujagar Prints III formula was not applicable. The Commissioner rejected these claims. Since the Tribunal upheld the respondent's contention based on M/s. Ujagar Prints III, it did not address the discounts and deductions issue or the related persons' relationship.The Supreme Court remanded the matter to the Tribunal to determine the nature of the relationship between the respondent and other respondents. If found not related, the earlier Tribunal decision would stand. If related, the Tribunal must consider the discounts and deductions before remanding to the Commissioner for correct computation of calculation errors.Conclusion:The Supreme Court allowed the appeals, remanding the matter to the Tribunal to determine the related persons' relationship and consider the discounts and deductions claimed by the respondents. The Tribunal must follow the principles from Empire Industries and Ujagar Prints II if the respondents are found related. No order as to costs was made.