2025 (2) TMI 209 - AT - Central Excise

Inter-connected undertakings under Section 4(3)(b)(i) not automatically subject to Rules 8-9 valuation unless further related

CESTAT Chennai held that inter-connected undertakings under Section 4(3)(b)(i) of Central Excise Act, 1944 are not automatically subject to valuation ... Demand of differential duty of excise short paid on the goods sold - DSRM and DSRMPL are related parties under Section 4(3)(b)(i) of the Central Excise Act, 1944 or not - inter-connected undertakings - applicability of Rules 8, 9, and 10 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 - Extended period of limitation - HELD THAT:- On a plain reading of the said Rule 10, it would be clear that the provisions of Rule 10 would govern transactions between undertakings which were “inter-connected undertaking” and in terms of Rule 10(a) ibid, the inter-connected undertakings should be so connected that they are also related in terms of sub-clause (ii) or (iii) or (iv) of Section 4(3)(b) of CEA to attract determination of the value in the manner prescribed in rule 9. DSRM had contended that from the shareholding patterns it would be amply clear that they are not holding and subsidiary companies and given that they are not covered under the aforementioned sub-clauses, the provisions of Rule 10(a) ibid would not be applicable and that the only recourse left to be taken is the valuation of their goods cleared to DSRMPL under Rule 10(b) ibid which in other words means that the value shall be determined as if they are not related persons for the purpose of sub-section (1) of Section 4. While the contention of DSRM that from the shareholding patterns it would be evident that DSRM and DSRMPL are not holding and subsidiary companies, is not seen controverted in the OIO, it is seen that the adjudicating authority has brushed aside the contention of the appellant that the value has to be determined in accordance with Rule 10 of the valuation rules stating that it is unsustainable since DSRM had adopted the CAS-4 valuation for paying differential duty during 2009-10 - since it is an admitted fact that DSRM and DSRML are treated as related only on the ground of being inter-connected undertakings as stated in sub-clause (i) of Section 4(3)(b), the legal premise based on Rule 9 and Rule 8 that has been invoked in the SCN to foist the requirement of adherence to CAS-4 valuation by DSRM thus stands demolished. Extended period of limitation - HELD THAT:- Admittedly the appellant has adhered to the instructions of the Department as communicated to the appellant vide letter C. No. III/1-318/2010-IA dated 13.09.2010 in appointing a qualified Cost Accountant and adopting CAS-4 valuation. Even thereafter, consequent to the visits of the audit department as and when the appellant has been communicated the CAS-4 valuation which is to be adopted according to the Department, the appellant has implicitly complied with the same. That the appellant, despite having views to the contrary as was communicated by the appellant to the department, had chosen to buy peace by adhering to the CAS-4 valuation provided by the Department, shows that there were interpretational issues involved. Given these circumstances, the demand is also barred by limitation. Conclusion - i) The interconnected undertakings under Section 4(3)(b)(i) are not automatically subject to valuation under Rules 8 or 9 unless further related as specified in sub-clauses (ii), (iii), or (iv). ii) The demand is also barred by limitation. Appeal allowed. ISSUES PRESENTED and CONSIDEREDThe core legal issues considered in this judgment are:Whether DSRM and DSRMPL are related parties under Section 4(3)(b)(i) of the Central Excise Act, 1944, and if so, the implications for determining the assessable value of goods cleared between them.The applicability of Rules 8, 9, and 10 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000, in valuing the goods sold by DSRM to DSRMPL.The validity of the demand for differential duty, interest, and penalties imposed on DSRM under Section 11A, 11AA, and 11AC of the Central Excise Act, 1944.The validity of the denial of Cenvat credit to DSRMPL based on supplementary invoices issued by DSRM, in light of alleged suppression or misstatement by DSRM.The applicability of the extended period of limitation for the demand issued against DSRM.ISSUE-WISE DETAILED ANALYSIS1. Relationship between DSRM and DSRMPLLegal Framework and Precedents: Section 4(3)(b) of the Central Excise Act, 1944, defines related persons, including inter-connected undertakings. Rule 10 of the Central Excise Valuation Rules addresses transactions between interconnected undertakings.Court's Interpretation and Reasoning: The Tribunal noted that DSRM and DSRMPL are interconnected undertakings under Section 4(3)(b)(i) and Section 2(g)(vi) of the MRTP Act, 1969. However, the Tribunal emphasized that Rule 10(b) of the Valuation Rules should apply, meaning the value should be determined as if they are not related persons for the purposes of Section 4(1).Conclusion: The Tribunal concluded that DSRM and DSRMPL are interconnected but not related in the manner that would mandate using Rule 9 or Rule 8 for valuation.2. Applicability of Valuation RulesLegal Framework and Precedents: Rules 8, 9, and 10 of the Central Excise Valuation Rules dictate how to value goods sold to related persons or interconnected undertakings.Court's Interpretation and Reasoning: The Tribunal found that Rule 10(b) applies, which treats the entities as unrelated for valuation purposes unless they are related under sub-clauses (ii), (iii), or (iv) of Section 4(3)(b). The Tribunal referred to the Supreme Court's interpretation in CCE, Pune v. M/s. Mahindra Ugine Steel Co Ltd, which clarified that Rule 9 and Rule 8 do not apply to inter-connected undertakings unless further related as specified.Conclusion: The Tribunal held that the valuation should be based on transaction value under Section 4(1)(a), not the CAS-4 method, as the entities were not related in the manner that would invoke Rule 9 or Rule 8.3. Validity of Demand for Differential Duty, Interest, and PenaltiesLegal Framework and Precedents: Section 11A, 11AA, and 11AC of the Central Excise Act, 1944, provide for recovery of duty, interest, and penalties in cases of short payment or non-payment due to suppression or misstatement.Court's Interpretation and Reasoning: The Tribunal found that the demand was based on an incorrect application of the valuation rules. The Tribunal also noted that DSRM had complied with departmental directions without protest, indicating interpretational issues rather than intent to evade duty.Conclusion: The demand for differential duty, interest, and penalties was set aside as unsustainable on merits and barred by limitation.4. Denial of Cenvat Credit to DSRMPLLegal Framework and Precedents: Rule 9(1)(b) of the Cenvat Credit Rules, 2004, restricts credit on supplementary invoices if the duty becomes payable due to fraud, suppression, or misstatement.Court's Interpretation and Reasoning: The Tribunal held that since the demand against DSRM was unsustainable, the supplementary invoices issued to DSRMPL were valid for Cenvat credit.Conclusion: The denial of Cenvat credit to DSRMPL was set aside, and the supplementary invoices were deemed valid.5. Extended Period of LimitationLegal Framework and Precedents: The extended period under Section 11A is applicable in cases of fraud, suppression, or willful misstatement.Court's Interpretation and Reasoning: The Tribunal found that the issue involved interpretational complexities, and DSRM had adhered to departmental instructions, negating the grounds for invoking the extended period.Conclusion: The Tribunal held that the demand was barred by limitation.SIGNIFICANT HOLDINGSThe Tribunal held that interconnected undertakings under Section 4(3)(b)(i) are not automatically subject to valuation under Rules 8 or 9 unless further related as specified in sub-clauses (ii), (iii), or (iv).The Tribunal emphasized the need for clear statutory invocation in show cause notices, aligning with Supreme Court interpretations.The Tribunal set aside the demands against both DSRM and DSRMPL, affirming the validity of transaction value and supplementary invoices for Cenvat credit.The Tribunal underscored the importance of interpretational clarity and adherence to procedural fairness in tax demands.