2025 (11) TMI 1089 - AT - Central Excise

Appeal allowed: valuation under Rules 10/10A set aside for lack of required relationships or job-work evidence under Rule 9

CESTAT MUMBAI - AT allowed the appeal and set aside the adjudicating order. The Tribunal held that although the buyer is an interconnected undertaking, ... Method of Valuation - Job Work - Related Person - Free Supply - applicability of Rule 10A of the Central Excise Valuation (Determination of price of Excisable Goods) Rules, 2000 or as per value adopted by the appellants under the appropriate Rules of 2000 by including the value of free supplies made - clearance of excisable goods by the appellants to M/s SMS Meer India Limited, which is an inter-connected undertaking of the appellants - HELD THAT:- The appellants and M/s SMS Meer India Limited, are ‘inter-connected undertakings’ inasmuch as they are holding 35% of the shares of the appellants company; the Finance Director of appellant’s joint-venture company shall be nominated by M/s SMS Meer India Limited; they are also part of the appellants joint-venture company; and thus the appellants and M/s SMS Meer India Limited are ‘related’ to each other. However, there is no relationship in terms of ‘distributorship’ or ‘dealership’ between the two business entities or any other business interest, directly or indirectly, between them. From Section 4(3)(b) of the Central Excise Act, 1944, it appears that interconnected undertakings are also related person. However, as per Rule 9 of Central Excise Valuation Rules, 2000, it is clear that Rule 9 ibid shall apply only when the goods are sold through person as specified under sub-clause (ii), (iii) or (iv) of clause (b) of Section 4 of the Act. Further, Provisio of Rule 9 also suggests that merely because buyer is interconnected undertaking that alone is not sufficient for holding as related person, but they should be related in one of the categories mentioned in (ii) to (iv) viz., relatives, relationship of distributor or subdistributor etc. It is nowhere discussed in the impugned order or any evidence produced by the authorities below to state that the appellants and their interconnected undertaking are related in terms of the above provisions of the Central Excise statute. Therefore, the valuation of excisable goods as per Rule 9 ibid is not applicable in this case. It is also found that in the absence of specific determination of the relationship between the appellants and the inter-connected undertaking, being related to each other in terms of Section 4(3) of the Central Excise Act, 1944 and ‘job worker’ as per explanation provided under Rules of 2000, in order to enable application of Rule 10(a) or 10A ibid for valuation of goods, there are no merits in the impugned order insofar as it has treated the transaction between these two, as related party transaction. Therefore, it is not found that there exist sufficient grounds to claim that the valuation of impugned goods shall be done on the basis of Rule 10A ibid. In the case of Nilkamal Limited [2018 (2) TMI 1305 - CESTAT NEW DELHI], the Co-ordinate Bench of the Tribunal has held that valuation of goods between the entities under a MOU is not an arrangement for job work. The impugned order upholding the decision of the original authority in respect of supply of materials as a ‘job worker’ for confirmation of the adjudged demands is not legally sustainable and therefore, the same is liable to be set aside - Appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether clearances of excisable goods by the manufacturer to an inter-connected undertaking fall to be valued under Rule 10A (job-worker/principal manufacturer) of the Central Excise Valuation Rules, 2000 or under Rule 10(b)/Rule 6 as transaction value including value of free supplies. 2. Whether the buyer and seller qualify as 'related persons' for valuation purposes under Section 4(3)(b) of the Central Excise Act, 1944 - specifically, whether the relationship is within sub-clauses (ii), (iii) or (iv) of that provision (i.e., relatives, distributor relationships, or persons so associated as to have direct/indirect business interest) such that Rule 9 or Rule 10(a) becomes applicable. 3. Whether the factual matrix and documentary evidence establish that the manufacturer is a job-worker for the principal manufacturer (inputs supplied by principal, manufacture 'on behalf of' principal) so as to engage the Explanation to Rule 10A. 4. Whether the department discharged the evidentiary burden to reject the transaction value adopted by the manufacturer and substitute valuation under Rules 9/10/10A. ISSUE-WISE DETAILED ANALYSIS - Valuation rule applicable (Rule 10A v. Rule 10(b)/Rule 6) Legal framework: Section 4(1) prescribes transaction value where buyer and seller are not related and price is sole consideration; otherwise value is determined under Valuation Rules, 2000. Rule 6 aggregates transaction value and money value of additional consideration (including value of materials supplied free by buyer). Rule 9 applies where goods sold to/through persons related as per sub-clauses (ii)-(iv) of Section 4(3)(b). Rule 10(b) applies where parties are inter-connected undertakings but not related under sub-clauses (ii)-(iv). Rule 10A governs manufacture by a job-worker on behalf of a principal manufacturer; Explanation defines job-worker as one producing from inputs supplied by the principal. Precedent treatment: Coordinate tribunal decisions hold that mere inter-connected status does not automatically make parties 'related' under clauses (ii)-(iv); absence of evidence that manufacturer is employee/agent/principal's servant defeats job-work characterization; MOU/arrangements may not equate to job-work where manufacturer uses own facilities, personnel and sells on its account. Interpretation and reasoning: The Tribunal examined JV agreement, purchase orders, invoices, transport documents, VAT returns and factory infrastructure. It found (i) inter-connected undertaking status (shareholding) exists, but no evidence that relationship falls within sub-clauses (ii)-(iv) (no distributorship, agency, employee or direct/indirect business interest as contemplated); (ii) manufacturer possessed independent plant, skilled staff, procured most inputs and invoiced full value (including value of free supplied parts) and paid excise duty on the inclusive value; (iii) free supplies were limited components supplied to ensure quality, were specifically valued and included in sale invoices; (iv) transport on ex-works basis and insurance by buyers supported sale at factory gate, not job-work transfer. Ratio vs. Obiter: Ratio - Where inter-connected undertakings do not satisfy the additional relationships in sub-clauses (ii)-(iv) of Section 4(3)(b), Rule 9/10(a) do not apply and transaction value (including value of free materials where included in price) is the proper valuation; mere supply of some inputs by buyer does not make manufacturer a job-worker if manufacture is on manufacturer's account using its facilities and selling finished goods on its invoice. Obiter - Observations on commercial rationale for supply of branded or specialized components to ensure quality. Conclusion: Rule 10A was inapplicable. Valuation on transaction value basis (Rule 10(b)/Rule 6 as appropriate) including the money value of free supplies (already included in assessable value) is correct; rejection of transaction value in favour of Rule 10A/Rule 9 lacked foundation. ISSUE-WISE DETAILED ANALYSIS - 'Related person' status under Section 4(3)(b) Legal framework: Section 4(3)(b) defines 'related' to include inter-connected undertakings and further lists relationships (ii)-(iv) (relatives, distributor relationships, persons so associated as to have business interest) which are critical for application of Rule 9; Explanation imports M&TP Act meaning of inter-connected undertakings. Precedent treatment: Tribunal authorities emphasize that mere inter-connection (common shareholding/management links) does not automatically convert the transaction into one covered by clauses (ii)-(iv); proof required to bring relationship within those sub-clauses to reject transaction value. Interpretation and reasoning: Although shareholding and JV governance rights established inter-connection, records did not show distributorship, agency, employee-servant relationship or other association amounting to business interest as envisaged in clauses (ii)-(iv). The appellate authority below conflated inter-connected status with 'related' under sub-clauses (ii)-(iv) without necessary evidence. The Tribunal held Rule 9 therefore inapplicable. Ratio vs. Obiter: Ratio - Inter-connected undertaking status alone is insufficient to treat parties as 'related' for purposes of Rule 9; additional relationships enumerated in sub-clauses (ii)-(iv) must be established. Obiter - Analysis of JV clauses did not demonstrate control/agency to the extent needed to displace transaction value. Conclusion: The department failed to establish the specific category of 'related person' required to invoke Rule 9 or Rule 10(a); valuation should proceed as between non-related parties under Rule 10(b)/Rule 6 where appropriate. ISSUE-WISE DETAILED ANALYSIS - Whether manufacturer was a job-worker Legal framework: Explanation to Rule 10A defines job-worker as a person engaged in manufacture on behalf of principal manufacturer using inputs supplied by the principal (or authorized by him). Rule 10A prescribes valuation consequences where job-work relationship exists. Precedent treatment: Authority holds that job-worker characterization requires demonstration that manufacture was carried out on behalf of the principal (e.g., agent, employee, or under control/ownership of principal) and not merely supply of some inputs; independent manufacturers with their own plant, labour and trading risk are not job-workers merely because branded inputs or components are supplied. Interpretation and reasoning: Evidence showed independent manufacturing infrastructure, independent procurement, employment of own personnel, issuance of excise invoices by manufacturer for entire value (including free inputs), payment of taxes, and sales on manufacturer's account. Free supplied components were limited and valued; transactions documented as sales (ex-works) with transit insurance by buyers. These facts demonstrate manufacture on own account rather than on behalf of principal; hence job-work definition not satisfied. Ratio vs. Obiter: Ratio - Where manufacturer exercises independent control over production, bears commercial risks, uses own facilities and sells finished goods on its account, it is not a job-worker notwithstanding receipt of certain free inputs from buyer; application of Rule 10A requires actual manufacture 'on behalf of' principal with inputs supplied by principal and appropriate indicia of agency/control. Obiter - Consideration of commercial reasons for buyer supplying specialized components to ensure quality. Conclusion: Job-worker classification under Rule 10A was not made out; valuation under Rule 10A was therefore inappropriate. ISSUE-WISE DETAILED ANALYSIS - Evidentiary burden and rejection of transaction value Legal framework: Section 4 and the Valuation Rules permit rejection of transaction value only when specified relationships or additional considerations warrant substitution of value under other rules; department bears burden to establish such qualifying circumstances. Precedent treatment: Tribunal authorities require record evidence demonstrating the specific relationships or job-work arrangement before rejecting transaction value; mere assertions or existence of inter-connection without supporting documentary proof are inadequate. Interpretation and reasoning: The adjudicating authorities below relied on selective clauses of JV agreement and the fact of free supplies but did not produce evidence showing distributorship/agency/employee status or that manufacture was on behalf of the buyer. The appellants had invoices including value of free supplies, transport documents showing ex-works delivery and buyers arranging transit insurance, and VAT assessments consistent with sale transactions. On this record the department did not discharge its burden to disturb transaction value. Ratio vs. Obiter: Ratio - Transaction value cannot be rejected absent evidence bringing the transaction within statutory exceptions; adjudicating authority must point to concrete indicia of relationships contemplated by Section 4(3)(b)(ii)-(iv) or job-work facts under Rule 10A. Obiter - Criticism of reasoning that equates any free supply or JV connection with job-work. Conclusion: The departmental rejection of transaction value was unsustainable for lack of evidence; the appeal is allowed and demand based on Rule 10A/R9 set aside. OVERALL CONCLUSION The impugned valuation under Rule 10A/Rule 9 was not legally sustainable: inter-connected status alone did not establish the specific 'related person' relationships required by Section 4(3)(b) sub-clauses (ii)-(iv); evidence did not establish a job-worker/principal manufacturer relationship; transferred free inputs were limited and their value was included in invoices and duty paid. Consequently, transaction value (including money value of free supplies as applicable) was the correct basis for valuation and the demand predicated on Rule 10A is set aside.