2026 (2) TMI 664 - AT - Central Excise

Related Party Valuation requires mutuality or flow back; absent that, transaction value rejection and extended demands are unsustainable.

Adjudicatory findings rejecting transaction value under Rule 9/10 and invoking extended provisions were found unsustainable because relatedness was not ... Rejection of transaction value - connected/related persons - Undervaluation - admissibility of the statements - Classification of goods - products comprise micro-computer units with microprocessors, storage, interfaces and ability to accept/deliver data to automatic data processing systems, and use proprietary firmware/software - short payment of excise duty - concept of “Inter-connected Undertakings” - extended period of limitation for demands - HELD THAT:- We find that the crux of the issue in the present appeal is based on the finding of the Adjudication Authority that the appellant and buyers of the product M/s. Taurus Powertronics Pvt. Ltd. (TPPL) and M/s. Taurus Powertronics System (TPS), are related to appellant. In this regard, we find that there is no specific clause referred under Section 4(3)(b) read with Section 2(g) of the MRTP Act, 1969 applicable in the present case and the adjudication authority as per the impugned order merely made certain observations that M/s. MKS System has sold the goods to M/s. Taurus Powertronics Pvt. Ltd. (TPPL) and M/s. Taurus Powertronics System (TPS). Though there is no allegation regarding involvement of financial transactions, it is held that they have mutuality of interest. However, Adjudication Authority has failed to appreciate the factual and legal position that the “proprietary concern” cannot be “inter-connected undertakings” with “partnership Firm” and “Body Corporate”. The concept of “Inter-connected Undertakings” is applicable to Body Corporates. The principle behind the valuation mechanism has to be considered based on the mutuality of interest. There is no allegation regarding flow back of additional consideration from the related party buyer to the manufacturer seller. As regards reliance of the statement recorded from the Managing Director of M/s. Taurus Powertronics Pvt Ltd., Shri M.N. Ravinarayan, we find that in his statement recorded on 25.09.2017 he has given detailed statement regarding procurement of the goods from other sources than the appellant like hook rods, Pelican cases, Packing materials, Wires, etc., from other suppliers, integrated with microprocessor and supplied to their customers. Therefore, the price at which the appellant has sold the goods to the buyer and the composite price at which the buyer has further sold the goods and provided various services as narrated above are not comparable. Further, as per the ratio of the profit, the manufacturer should have been gaining less profit than the buyer. However, we find that the profit percentage of the appellant was 22.24%, whereas the buyers alleged as related party was only 5.01%. Therefore, the finding that the appellant and M/s. Taurus Powertronics Pvt. Ltd. (TPPL) and M/s. Taurus Powertronics System (TPS) are interconnected undertaking and relative to invoke Rule 9 and Rule 10 of the Central Excise (Determination of Price of Excisable Goods) Rules, 2000 and Section 11 A (4) / 11A (10) of the CEA, 1944 is unsustainable. Classification - We find that as per the details furnished by the appellant and following the decision of this Tribunal in the matter of Cascade Systems [2006 (3) TMI 396 - CESTAT, BANGALORE] the equipment manufactured by the appellant are classifiable under CETH 8471. Thus, the finding given the Adjudication Authority regarding classification of goods under CETH 90318220 of the CETA, 1985 is also unsustainable. Short payment of excise duty - On verification of the value declared in ER-1 Return for March 2017, it is evident that the value considered for the month of March 2017 includes an invoice raised in February 2017 on which duty had been paid in February, itself. Thus, there was no short payment of duty for March 2017 as held by Adjudication Authority. Invoking the extended period of limitation - Demand is made for the goods cleared from Jan 2013 to June 2017 and the show cause notice (SCN) was issued on 07.04.2018. We find that as per the evidence produced by the appellant, entire documents were audited for the period from Nov 2003 to October 2006 and CERA had audited the records of the appellant on April 2014 and as per Audit Enquiry No. 3 dated 10.04.2014 in the said audit, short payment of duty paid @10.3% instead of 12.36% was informed and appellant paid the said amount. Moreover, the statement of the proprietor was recorded over a period for years from 20.03.2014 to 08.03.2018. Fact being so, the respondent was aware about the entire transactions and following the ratio of the judgments of the Hon’ble Supreme Court in the matter of Pragathi Concrete Products (P) Ltd [2015 (8) TMI 1053 - SC ORDER], there cannot be any allegation regarding suppression of fact to confirm the demand by invoking the extended period of limitation. Thus, we find that the impugned order is unsustainable and liable to be set aside. Issues: (i) Whether the adjudication authority rightly invoked Rule 9/Rule 10 of the Valuation Rules, 2000 and Sections 11A/11AC of the Central Excise Act, 1944 by treating the appellant and buyers as inter-connected/related persons for rejecting transaction value (undervaluation); (ii) Whether the goods manufactured by the appellant are correctly classifiable under CETH 9031/90318220 or under CETH 8471; (iii) Whether there was short payment of duty for March 2017 and whether the extended period of limitation for demands (Jan 2013-June 2017) is invocable.Issue (i): Whether the appellant and the buyers are inter-connected/related persons so as to justify rejection of transaction value under Rule 9/Rule 10 and invocation of Sections 11A/11AC.Analysis: The findings on relatedness relied on familial relationships and business dealings between a proprietary concern, a partnership firm and a body corporate. Evidence showed buyers performed substantial additional works (accessories, laptops, installation, commissioning, training, after-sales services) and procured certain components from other suppliers. Profit percentages on record showed the appellant had higher profit margins than the buyers. No flow back of additional consideration from buyers to the appellant was established. Applicable statutory definitions and authorities distinguish juristic/ corporate constructs and require mutuality of interest to treat transactions between inter-connected undertakings as related for valuation rejection.Conclusion: The finding that the appellant and the buyers are inter-connected/related for the purpose of invoking Rule 9/Rule 10 and Sections 11A/11AC is unsustainable; transaction value cannot be rejected on the recorded facts.Issue (ii): Whether the appellant's products are classifiable under CETH 9031 (as found by adjudication) or under CETH 8471.Analysis: The products comprise micro-computer units with microprocessors, storage, interfaces and ability to accept/deliver data to automatic data processing systems, and use proprietary firmware/software. The product features satisfy the conditions in Note 5(C) of Chapter 84 of the Central Excise Tariff Act, 1985 and authoritative tribunal precedent treats similar microprocessor-based systems as parts/units classifiable under heading 8471.Conclusion: The reclassification under CETH 90318220 is unsustainable; the equipment are classifiable under CETH 8471.Issue (iii): Whether there was short payment of duty for March 2017 and whether extended period of limitation is invocable for demands relating to Jan 2013-June 2017.Analysis: Reconciliation of ER-1 returns and invoices showed the value included in March 2017 comprised an invoice raised and duty paid in February 2017. Audit records and communications, and repeated statements over the audit period, put the department on notice of the transactions; earlier audits and payments addressed similar issues.Conclusion: There was no short payment of duty for March 2017; invocation of the extended period of limitation to confirm the impugned demand is unsustainable.Final Conclusion: The impugned adjudication order confirming demand and imposing penalty is set aside and the appeal is allowed with consequential reliefs in accordance with law.Ratio Decidendi: Rejection of transaction value under Rule 9/Rule 10 and related provisions requires demonstrable relatedness with mutuality of interest or flow back of consideration; proprietary concerns cannot be treated as inter-connected undertakings with partnership firms/body corporates absent statutory or factual basis, and microprocessor-based units meeting Note 5(C) of Chapter 84 of the Central Excise Tariff Act, 1985 are classifiable under heading 8471.