TaxTMI 
TaxTMI 
2003 (3) TMI 597
X X X X Extracts X X X X
X X X X Extracts X X X X
....5, dt. 30-7-96 1/96 and 2/96 and are being disposed off by this common order since the issues involved are the same and the Collector relying on his finding as impugned in appeal No. E/2955/98, has passed the subsequent orders. 2. Brief facts in appeal No. E/2955/98 are, proceedings of undervaluation of sales made to related person were initiated against this Public Sector Undertaking (hereinafter referred to as M/s. ECIL) by the issue of Show Cause Notice, after conducting enquiries, when the Superintendent on a visit found that: - (a) M/s. ECIL were clearing X-Ray Baggage Inspection Systems (XBIS) valued at Rs. 25 lakhs to Rs. 26 lakhs during the period September, 1994 to February, 1995 to different customers on payment of appropriate duty had sold 16 nos. of such systems to a joint venture company viz., M/s. ECIL Rapiscan, Hyderabad during February, 1995 to March, 1995 at assessable values ranging from Rs. 12 lakhs to Rs. 13 lakhs per system, while the joint venture company in turn had sold the same to various customers at higher prices. (b) The Superintendent during his enquiries observed that joint....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the above, and Section 4(1)(iii) of the Central Excises and Salt Act, 1944 it appears that M/s. ECIL, Hyderabad have to pay the differential Central Excise duty of Rs. 15,89,048/- on the sixteen XBIS sold by M/s. ECIL, Hyderabad to M/s. ECIL Rapiscan Security Products Ltd. Since M/s. ECIL, Hyderabad have undervalued the goods sold to M/s ECIL Rapiscan which resulted in short payment of Central Excise duty." and duty demands were made under Rule 9(1) of the Central Excise Rules and penalty under Rule 173Q was proposed. 3. The Commissioner after granting the personal hearings and considering the records especially Memorandum of Understanding dtd. 13-8-93 and the Joint Venture Agreement dtd. 4-1-94, interim agreement dtd. 13-1-99 and Memorandum of Understanding dtd. 20-11-94 was convinced to conclude that :- "(i) ECIL and ECIL Rapiscan are two independent legal entities and the transaction between both of them is at arms length and on principal to principal basis. It is no doubt true that the OSI and the ECIL are stock holders of the ECIL Rapiscan and the percentage of stock holding is 51% and 49% respectively. Quite obviously, the profit sharing is in proportion t....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... as a 'wholesale price' or 'retail price'. The answer is that the price charged to the actual users shall be treated as a retail price. That being the factual position, the price at which ECIL supplied the XIBS to their customers during September, 1994 and January, 1995 shall be considered as a 'retail price'. However, during the period February - March, 1995, the impugned goods were sold only to the ECIL Rapiscan who in turn sold them to the same customers. The price at which the goods were sold to ECIL Rapiscan ranged between Rs. 12 lakhs to Rs. 13 lakhs. Although the ECIL sold the goods to only one wholesale dealer, i.e. ECIL Rapiscan, such a price can be considered as a 'wholesale price in view of the ratio contained in decision of the Hon'ble Appellate Tribunal in Modi Xerox Ltd. v. CCE [1989 (40) E.L.T. 481 (Trib.)]. Therefore, assessment of excise duty has to be done only with reference to such wholesale price. Since there was no wholesaler during the period September, 1994 to January, 1995, it was perfectly in order to charge duty on the sale price effected to the actual users. But, when the impugned goods were sold to a wholesale dealer, the price charged to such a wholesa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....top of page 2 of the notice, page 22 of the paper book) Rs.15, 89,048/- was demanded from ECIL on this account. The Commissioner of Central Excise, Hyderabad-III vide his order 1/97, dt. 4-8-97 dropped the demand, holding that : * The joint venture company is a separate legal entity dealing with ECIL at arms length and on principal to principal basis (para 10.2 of his order). * There was no mutuality of interest between ECIL and the joint venture company (para 10.3). * The joint venture company was a wholesale buyer (para 10.4) * Prior to the formation of the joint venture company, the sale was to actual users and it was "perfectly in order to charge duty on the sale price effected to actual users"; but thereafter it must be done only with reference to wholesale price (para 10.4, end). * The variation of price before and after the joint venture agreement came about beca....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... is concerned we have held it to be child of convenience of M/s. ECIL. On its behalf certain obligation had been taken by ECIL. In its name certain transactions have been done by the ECIL. It had no place in the entire scheme of things. It had no independent voice. All times it was used as a convenient tool." Given these findings on facts by the Tribunal, it is submitted that the joint venture company was a front for depressing the assessable value, as alleged, and that the impugned order of the Commissioner holding otherwise, was incorrect and deserves to be set aside. Without prejudice to the above, it is also submitted that in a similar situation where the formation of a joint venture company had led to fall in prices, the Tribunal had held that the joint venture company was a "vehicle of convenience and a front to justify the reduction in price." [paras 23, 33-36 of Godrej and Boyce Manufacturing Co. Ltd. v. CCE, Mumbai-II, reported in 2002 (148) E.L.T. 161] Further, in the case of Flash Laboratories v. CCE, New Delhi reported in 2003 (151) E.L.T. 241 (S.C.), the Supreme Court came to a finding of mutuality of interest based on shareholding patterns and marketing arran....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of Directors also confirms this. Thus on one hand though ECIL has been given the right of determining the price of goods manufactured which they will sell it to ECIL Rapiscan, in practice this is not being done. Thus all profits which means even the manufacturing profit of Rs. 71.5 lakhs were transferred to the joint stock company as per the memorandum. This point has been admitted in the order of the Commissioner. However, Commissioner is silent about transferring of all profits including manufacturing profit which was transferred, unless there is mutuality of interest between ECIL and ECIL Rapiscan." On a perusal of the findings in the impugned order, no such admission by the adjudicator to the effect that "........even manufacturing profit of Rs. 71.5 lakhs were transferred to the joint stock company as per the memorandum. This point has been admitted in the order of the Commissioner......" as urged in this ground is found by us. On a question from the Bench, the ld. DR pointed out to para 7(h) of the order where the submissions made on behalf of M/s. ECIL have been recorded as: - "7(h)  The agreement is clearly understood, and duly approved. The two share holde....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... not call for upsetting the impugned order. (b) The second ground taken in appeal by Revenue is : - "Secondly, Commissioner has stated that the price of Rs. 4.25 lakhs charged directly from the customers like Air-India, Airport Authority of India, etc., is a retail price. Fact of the matter is that this product is always customs built i.e it is built according to the specific requirements of the buyer. It is not as though ECIL Rapiscan is buying several machines at any given point of time from ECIL. At best, ECIL Rapiscan can be considered as marketing organisation and they are getting purchase orders from different buyers. However, it cannot be logically concluded that they are wholesale buyers. Legally this concept of whole sale buying in case of XBIS is a legal fiction created in order to show lower values for the purposes of excise. The show cause notice has charged that from February '95 onwards (i.e. up to March '95) that 16 machines (XBIS) had been sold to ECIL Rapiscan at assessable value of around Rs.12 to Rs.13 lakhs. The ECIL could only reply that prices are at earlier point of time when sales were made to consumers. ECIL Rapiscan was not a buyer. Thus indirec....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... it is not permitted. Therefore, this ground/plea cannot be considered to upset the order impugned. (c) The third ground taken, reads as: - "The assessee have thus been able to show an artificial lower price at the factory gate. Assuming but not accepting that Rs. 24 to 25 lakhs is final price of the buyer and that final price cannot be considered as wholesale price, we can also not accept Rs.12 to 13 lakhs as wholesale price. In this assumption the wholesale price may be somewhere in between i.e. retail price minus margin of profit that normally has gone to a wholesaler. The margin of profit for the wholesaler normally would be reasonable amount over and above the normal bank rate of interest i.e. about 25 to 30%. However, under no circumstances can we accept that (i) the margin of profit would be 100% or more of the manufacturing cost, (ii) there will be no manufacturing profit." The finding of the Commissioner is that sales to buyers e.g Air India etc., earlier, were in retail and to the joint venture company in wholesale and such retail prices cannot be compared with wholesale prices. These findings of the impermissible comparison, b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ame Act - and not to draw reference to Bank Rate as was erroneously done by the ld. Revenue in the impugned proceedings - with a view only to justify the bona fides and without prejudice to all the earlier submissions) as against the Hon'ble Government's permissible gross price difference enunciated in terms of Sec. 4A of the Central Excise Act which ranges from 54% to 100% as between the first and final sale points and such a gross price difference when expressed in terms of profit it is less than 10% of ECRL price and not 100% of the ECIL price as was erroneously canvassed by the ld. Revenue in the impugned proceedings pursued by the ld. Revenue; Since profit refers to the net results from operations after abating for operational costs and taxes and duties which ECRL has to bear. This ground alone is sufficient to prove that the ld. Revenue's impugned proceedings are highly contrary to the mixed questions of both law and facts and all the submissions herein were submitted without prejudice independent buyer and were/are at arm's length basis as set out earlier. Further and without prejudice to the above submissions it is submitted that, the comparison between assessable value of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ows :- "It is observed from ECIL, written submission record that during September, 1994 to February, 1995 ECIL received technical know-how for manufacturing similar machines from Rapiscan, UK. For making available this technical know-how (from Rapiscan) ECIL had paid Rs. 1 lakh U.S. Dollars to Rapiscan, UK. The technology transfer by Rapiscan was limited to enable ECIL to produce and market 20 systems (XBIS) these machines were cleared by M/s. ECIL directly to various customers at price between Rs. 25 to 26 lakhs. It is only the subsequent production of similar machines, which they manufactured and supplied to the joint venture company that they have reduced the prices to almost 50%. This highly reduced price to ECIL Rapiscan was not a normal price at which ECIL was selling the goods there were no independent sales to any other customers after Feb., 95 and similar machines supplied to independent customers up to Feb, 95 (with the help of know-how firm Rapiscan UK was around Rs. 25 to 26 lakhs). It is evident that the price was drastically reduced due to free technical know-how provided by ECIL Rapiscan for these machines which were sold only to ECIL Rapiscan who then sold to ind....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the record of the impugned proceedings - it tantamounts to of the fact that the Hon'ble Board in ignorance of all such aspects would like to question the terms of arrangement rather than establishing in what manner such an arrangement leads to deprivation of any legal or propriety aspects while the ld. Revenue purports to concern itself in the invocation of 'related person' concept under the provisions of Sec. 4 of the Central Excise (CE) Act, 1944, inasmuch as the provisions of 'related person' being a deeming fiction under the said Act, it should receive strict and restricted construction whereby transactions between Holding and Subsidiary companies alone are subjected to the rigours of the application of 'related person' concept under Sec. 4(4)(c) of the C.E., Act by virtue of the inclusive nature of the definition roping in the transactions between Holding and Subsidiary companies and not otherwise within the realm of Proviso (iii) to Sec. 4(1)(a). Because, ECIL - Rapiscan joint venture arrangement is one which is not in the nature of a Holding company and Subsidiary company on one hand and on the other hand, the joint venture emerged out of a strict Techno-Commercial supremacy....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sidiary companies cannot be called as having been influenced by the 'related person' concept or definition. These aspects were well considered by the ld. Commissioner while passing the order-in-original. On all these impending, vital, propriety and/or legal aspects, the Hon'ble Board passed sub silentio. Thus, the Hon'ble Board had not called in question as to how the order-in-original passed by the ld. Commissioner is not legal or suffers from impropriety viewed in the context of the definition afforded for the expression 'related person' and the inclusive nature of such definition which provides for encompassing within its realm of 'related person' only such of those transactions that arise between Body Corporates which are interse Holding and Subsidiary Companies and it is this situation that alone would attract or invoke provisions of Sec. 4(1)(a) Proviso (iii) as was dealt with supra while such Holding and Subsidiary company relationship does not exist in the impugned order. 1.4 The ld. Commissioner had considered elaborate submissions made by ECIL on various legal and factual aspects concerning the impugned issue and passed a reasoned order-in-original holding that: ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....oncur with the ground taken that the difference in the prices is due to the supply of technical know-how exist. The differences in prices are explained satisfactorily, to be due to reasons of commercial necessities and are not found to be for the supply of technical know-how of any kind by the joint venture company as made out. Revenue has no case made out in its favour in this ground. (e) It is also found that the ground taken together only reiterate the charges made in the Show Cause Notice and bring out new charges of ECIL-Rapiscan, the joint venture company, not being a buyer and rely on certain averments/statements, which are found to be incorrect and not substantiated by any material evidences. Consequently, points made in all these grounds are required to be ignored and appeals rejected. The ld. DR in the submission made, has valiantly tried to make out a case in favour of Revenue. From the submissions made by the ld. DR, we find that the DR is making a claim that the cost of technical know-how supplied by Rapiscan was not part of the price. This argument is in direct conflict with the written submissions in ground taken in appeal and t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o full bench in Alembic Glass Industries Ltd. v Commissioner [2002 (143) E.L.T. 244 (S.C.)], is not the issue which requires a determination in the facts of this case. Before parting with these observations as regards the applicability of the case laws relied by the ld. SDR, it would be relevant to observe that as regards the requirement of lifting the corporate veil on this issue of 'determination of mutuality of interest vis-a-vis related person', the Full Bench of the Apex Court in the case of Alembic Glass Industries Ltd. [2002 (143) E.L.T. 244 (S.C.)], applied the test of Attic Industries [1984 (17) E.L.T. 323 (S.C.)] has held as follows :- "8. At this stage of the judgment, ld. Counsel for the Revenue draws our attention to the judgment, of a Bench of two ld. Judges of this Court, in Calcutta Chromotype Ltd. v. Collector of Central Excise, Calcutta (99 E.L.T. 202). It does not appear to us that the judgment carries the case of the Revenue any further, nor does ld. Counsel so suggest. He says that he has referred to it because of this sentence therein: "The principle that a company under the Companies Act, 1956 is a separate entity and, therefore, where the manufacture....