2010 (12) TMI 15 - SC - Central Excise

Freight from factory to related depot included in assessable value; penalty under s.11AC quashed for lack of mens rea

SC held that freight charges from the manufacturer's factory gate to the related person's depot must be included in the assessable value for excise on ... Valuation of excisable goods for assessable value - place of removal for excise valuation - deeming provision for sales to related persons under Section 4(1)(a)(iii) - deductibility of transportation costs in valuation - requirement of mens rea for imposition of penalty under Section 11ACDeeming provision for sales to related persons under Section 4(1)(a)(iii) - place of removal for excise valuation - deductibility of transportation costs in valuation - Whether, in a sale by an assessee to a related person, the place of removal for determining assessable value is the depot of the related person (and freight between factory and depot is includible) or remains the assessee's factory gate so that such freight is excluded from assessable value. - HELD THAT: - The Court held that proviso (iii) to Section 4(1)(a) operates as an anti-evasion deeming provision altering the basis of valuation but does not change the identity of the manufacturer, the excisable goods or the place of removal. Reliance was placed on the three-judge decision in Akay Cosmetics which explained that where the price charged to a related person is adopted for valuation, the nexus between price and value is changed but the place of removal remains that of the manufacturer. Section 4(2) (relating to deduction of transport costs where valuation is made with reference to price at a place other than place of removal) is not applicable on the facts. Applying that ratio, the Tribunal's view that transport from the factory to the related person's depot must be included was incorrect; the place of removal remains the assessee's factory gate and the cost of transportation from factory to depot is excludible from the assessable value in the circumstances of this case. [Paras 17]Tribunal's finding that place of removal is the related person's depot and that freight between factory and depot must be included in assessable value is unsustainable; place of removal remains the assessee's factory gate and those transportation costs are excluded.Requirement of mens rea for imposition of penalty under Section 11AC - Whether penalty equal to duty under Section 11AC can be imposed where there is no finding of fraud, collusion, or willful mis-statement or suppression of facts. - HELD THAT: - The Court examined Section 11AC and reaffirmed that the provision requires criminal intent (mens rea) - deliberate deception with intent to evade duty - as a necessary ingredient for imposition of the statutory penalty. The assessee had maintained that duty was paid and there was no mala fide intention; the original order did not find fraud or mis-statement. Applying settled principles (including authorities cited in the judgment), the Court held that in the absence of a finding of fraud, suppression or deliberate intent to evade duty, the imposition of penalty under Section 11AC is impermissible and must be quashed. [Paras 19, 20, 24]That part of the order imposing penalty under Section 11AC is quashed for lack of any finding of mens rea or deliberate evasion; the remainder of the order-in-original is upheld.Final Conclusion: Revenue's appeal is allowed insofar as the inclusion of freight from the assessee's factory to the related person's depot in assessable value is disallowed; the Tribunal's contrary conclusion is set aside. However, the imposition of penalty under Section 11AC is quashed for want of any finding of fraud or willful mis-statement; otherwise the order-in-original is affirmed. Issues Involved:1. Determination of the place of removal for excisable goods.2. Inclusion of freight charges in the assessable value.3. Applicability of Section 4(1)(a)(iii) of the Central Excise Act.4. Imposition of penalty under Section 11 AC of the Central Excise Act.Issue-wise Detailed Analysis:1. Determination of the place of removal for excisable goods:The primary issue was whether the place of removal for the goods should be the factory gate of the respondent or the depot of the related person, M/s. Frito-Lay India. The Tribunal held that the place of removal was the factory gate of the respondent, stating, 'The place of removal, therefore, continues to be the assessee's factory.' The Revenue contended that the place of removal should be the depot of the related person from where the goods are sold to wholesalers.2. Inclusion of freight charges in the assessable value:The Tribunal had excluded the freight charges from the factory gate to the depot of the related person in the assessable value. The Revenue argued that these charges should be included, as the place of removal was the depot of the related person. The Supreme Court concluded that Section 4(2) was not applicable, and the freight charges should not be excluded, stating, 'Section 4 (2) is not applicable. This Court, therefore, affirms the order-in-original but with a rider.'3. Applicability of Section 4(1)(a)(iii) of the Central Excise Act:The Court examined the transaction under Section 4(1)(a)(iii) of the Act, which applies when goods are sold to a related person. The Court referred to the decision in Commissioner of Central Excise, Belgaum v. Akay Cosmetics (P) Ltd., emphasizing that the price charged to the related person is presumed to be understated to evade taxation. The Court stated, 'The implication of the manufacturer, the assessee and the buyer being related to each other was that the price charged to the related person was presumed to be understated.'4. Imposition of penalty under Section 11 AC of the Central Excise Act:The original order imposed a penalty equal to the duty amount under Section 11 AC. The Court highlighted that 'mens rea' or criminal intent is a necessary constituent for imposing such a penalty. The Court found no evidence of fraud, misstatement, or suppression by the respondent and quashed the penalty, stating, 'But when factually no fraud or suppression or mis-statement is alleged by the revenue against the respondent in the show cause notice the imposition of penalty under Section 11 AC is wholly impermissible.'Conclusion:The Supreme Court upheld the original order but quashed the penalty imposed under Section 11 AC due to the absence of 'mens rea.' The appeals filed by the Revenue were allowed to the extent indicated, with no costs awarded.