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 sale between related persons; the tribunal's contrary order was reversed and decision rendered for the revenue. However, the imposition of penalty under s.11AC was quashed because the charge requires mens rea (fraud, suppression or misstatement) and the show cause notice contained no allegation of fraud or suppression, making the penalty impermissible.

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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.

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