TaxTMI 
TaxTMI 
2015 (7) TMI 432
X X X X Extracts X X X X
X X X X Extracts X X X X
....upplied by them. The main features of the agreement between FHS and Heinz are as under: (a) FHS had agreed to blend, pack and deliver the Heinz product Glucon-D and Complan in accordance with statutory requirement and standards and specifications of Heinz. (b) Heinz was to provide knowhow for the purpose of activity of blending and packing to be undertaken by FHS and FHS shall keep the knowhow of blending and packing of the products of Heinz strictly confidential. (c) The product shall be delivered after packing to Heinz or at the destination directed by Heinz for which FHS would receive a mutually agreed upon charges. (d) FHS were blending and packing the products for Heinz out of raw-material and packing material supplied by Heinz and FHS were to ensure that the manufacturing and handling loss does not exceed 1.5% and FHS shall disclose all the necessary information, data, workings, cost and other expenses of their activity which is necessary for determination of the mutually agreed upon job charges. (e) The Delivery schedule shall be prescribed by Heinz which shall be honoured by FHS. (f) Heinz can reject the product not confirming to the quality standards and specificatio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uiry and on going through the terms of the agreement was of the view that the transactions between FHS and Heinz are not on principal to principal basis. It is on this basis that the department was of the view that the assessable value of the glucon-D cleared by FHS to Heinz would be the sale price of the product by Heinz from their depots. It is on this basis that the following three show cause notice were issued for demand of the differential duty along with interest and also for imposition of penalty:- Sl.No. S.C.N. No. & date Amt. involved Period of demand Issue involved 1 CE-20/R-VI/F&HCS/2001 dated 19.10.2001 18,55,924/- 1.10.2000 to 31.12.2000 Evasion of duty by undervalue-ing their finished product 2. CE-20/R-VI/F&HCS/SCN/2001/100 dated 11.01.2002 5,13,37,619/- 1.1.2001 to 30.06.2001 Evasion of duty by undervalue-ing their finished product 3 CE-20/R-VI/F&HCS/SCN/2002/3264 dated 17.07.2002 4,02,95,824/- 1.7.2001 to 28.02.2002 Evasion of duty by undervalue-ing their finished product 1.4. The above three show cause notices were adjudicated by the Commissioner by a common Order-in-Original No. 26, 27 & 28/RH/Adj/2004 dated 31.08.2004 by which the Co....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t dated 13/02/2012 are reproduced below:- "11. It is manifest from the above that the only distinctive feature of S. Kumars in comparison with Ujagar Prints (II) and (III) is the emphasis on the factum of relationship between the parties viz., the processor and the merchant- manufacturers/traders, in the former. In short, S. Kumars holds that if the processor-assessee is not at arm s length with the merchant-manufacturer and is a related person, the formula prescribed in Ujagar Prints (III) would not apply and assessable value for the purpose of levy of excise duty will have to be determined in terms of the ratio of S. Kumar i.e. in accordance with the procedure contemplated in Section 4(1)(b) of the Act read with the relevant valuation Rules. We deferentially concur with the ratio of S. Kumars. 12. In the present case, as aforesaid, neither did the Tribunal address this aspect of the matter, nor did it consider whether the Assessee and Heinz are related persons. It based its decision solely on the observation made by the Adjudicating Authority that the status of the Assessee was not better than that of a hired labour . We are, therefore, of the opinion that in the light of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....inst the amount payable to FHS are not at all interlinked and each has its own commercial relevance in an arm s length transaction; that providing access to Heinz by FHS to their factory premises as well as to their records for inspection does not create any relationship of principal and agent between them, that there is no financial flow back from FHS to Heinz and there is no financial control of Heinz over FHS, that clause 22 of the agreement between FHS & Heinz itself provides that this agreement shall not be one of agency and that FHS and Heinz deal on principal to principal basis and FHS shall not do anything even to induce others to believe that they are an agent of Heinz, that this clause of the agreement itself is a proof that the transactions between FHS and Heinz on principal to principal basis and FHS cannot be treated as an agent or hired labour of Heinz, that from the very first clause of the agreement, it is clear that the factory of FHS was set up by them with their own investment in land, plant and machinery, that FHS apart from the job charges, do not receive any other monetary benefit, directly or indirectly, from Heinz, that firstly the manufacturing operations o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nsactions between FHS and Heinz were not on principal to principal basis. Shri Narasimhan also cited the judgment of Tribunal in the case of Makson Health Care Pvt. Ltd. Vs. CCE, Bhopal reported in 2007 (218) ELT 286 (Tri. Del.) wherein the Tribunal held that when the appellant (job-worker) were manufacturing goods for the raw-material supplier (PGIL) using their own machinery, capital investment, labour, licence and other facilities out of the raw-material/ packing material and manufacturing technology required for manufacture supplied by PGIL and the appellant were entitled to receive processing charges from PGIL for manufacture of the goods and had to take written permission of PGIL for manufacture for any other persons, of any other product similar to the products of PGIL, the relationship between them has still to be treated principal to principal when the agreement between them contained a clause that nothing contained in the agreement shall constitute Agency, partnership, joint venture or any other relationship, fiduciary or otherwise, between the parties. Shri Narasimhan pleaded that the ratio of this judgment of the Tribunal is also squarely applicable to the facts of this....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... was of principal and agent. Subsequently, the assessee (FHS) filed price declaration whereby the assessable value of the product was lowered to include only the aggregate cost of raw-material, packing material and their job charges and the duty for the period from 01.10.2000 to 28.02.2002 was paid on the lower value. In terms of clause 20, FHS was to ensure payment of all taxes duties and levies payable in connection with the blending and packing of said product by them for Heinz in accordance with this agreement. It is in accordance with this clause in the agreement that during the period from 01.03.2000 to 30.09.2000 FHS were paying duty on the goods cleared by them to Heinz on the sale price of Heinz from their depot. There was no justification for them to start paying duty w.e.f. 01.10.2000 on the aggregate of the cost of raw-material, packing material and job charges when the above clause in the agreement indicates their relationship to be other than on principal to principal basis. (2) Clause 7, 8, 9, 12, 13, 15, 16, 17 & 23 (iv) of the agreement indicate excessive control exercised by Heinz upon the assessee. The use of the term such as instructions , direction....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ions between them cannot be said to be on principal to principal basis. (6) Shri.Dixit pleaded that in terms clause 8 of the agreement Heinz will from time to time provide a schedule for blending and packing of the said product for such quantities as it may require at the agreed rate and for the delivery of the packed stock within the time specified. In terms of clause 9 of the agreement, Heinz shall be entitled without being obliged to do so to give FHS instructions, advice and recommendations in respect of the blending and packing of the said product from time to time and FHS shall conform to the said instructions, advice and recommendations given by Heinz at all the times during the continuous of the agreement. Shri. Dixit pleaded that these clauses in the agreement by their restrictive language restrict the freedom of operation of FHS. (7). Shri Dixit pointed out to clause 13 and 15 of the agreement. According to clause 13, FHS shall pack the said products in packages and containers bearing the trade-mark Heinz and in accordance with the directions and specifications in that behalf given or prescribed by Heinz from time to time. In terms of clause 15, during the c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ombay High Court has been affirmed by the Apex Court and has not been reversed. Shri Dixit pleaded that the ratio of this judgment of the Apex Court is squarely applicable to the facts of this case as in this case also entire production of Glucon D by FHS was being cleared to Heinz and FHS were to manufacture blend and pack Glucon D by using the technical knowhow provided by Heinz and as per their instructions, advice and assistance and also under their supervision. (9) Shri. Dixit also cited the judgments of the Apex Court in the case of CCE, New Delhi vs. Modi Alkalies and Chemcials Ltd. reported in 2004 (171) ELT 155 (SC), Supreme Washers (P) Ltd. vs. CCE, Pune reported in 2003 (151) ELT 14 (SC) and Calcutta Chromotype Ltd. vs. CCE, Calcutta reported in 1998 (99) ELT 202 (SC) and pleaded that applying the ratio of these judgments to the facts of this case, FHS and Heinz would have to be treated as related persons and, accordingly, for valuation of the products manufactured by FHS, the judgment of Apex Court in the case of CCE, Indore vs. S.Kumar Ltd. reported in 2005 (190) ELT 145 (SC) would be applicable. (10) Shri Dixit, accordingly, pleaded that there is no infirmity in the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rused the records. FHS in terms of their job work agreement with Heinz, blend and pack, the Glucon D & Complan received in bulk from Heinz, on job work basis as per the specifications and quality control requirements of Heinz. FHS in addition to the Glucon D & Complan powder in bulk also received the packing material from Heinz. The main features of the agreement between FHS & Heinz are as under:- * FHS agrees to blend, pack and deliver to Heinz the product in accordance with the statutory requirements of standards and specifications of Heinz and Heinz is to provide knowhow for the purpose of activity of blending and packing to be undertaken by FHS. The knowhow of blending and packing of the product of Heinz if any, provided by Heinz to FHS shall be kept by FHS strictly confidential. * FHS shall deliver the product after blending and packing to Heinz at the destination directed by Heinz for which FHS would receive mutually agreed upon charges. The manufacture/ handling loss of only 1.5% would be allowed to FHS. * Heinz can reject the product not confirming to its quality standards, specifications and instructions and, destroy the said products and recover the total expense there....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ourt s judgment dated 13.02.2012, remanding this matter to the Tribunal, the only question which is to be examined is as to whether the relationship between FHS and Heinz is on principal to principal basis or otherwise, or in other words whether the two are to be treated as related persons . If the FHS and Heinz are to be treated as related persons within the meaning of this term as defined in section 4(3)(b) of the Central Excise Act, 1944, the assessable value of the goods manufactured and cleared by FHS to Heinz would be the sale price at which the same were sold by Heinz from their depots. In this regard, the Department s contention is that in view of the terms of the agreement between FHS and Heinz as mentioned above, the two have to be treated as related persons. According to the Commissioner s findings on this point in para 33 of the impugned order, in view of the terms of agreement between FHS and Heinz, the FHS were bound, hand and foot during the period of agreement and that they had none of the latitude that an independent manufacturer would have inasmuch as there had very limited freedom of action and hence, FHS have to be treated as an extension of He....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... tax and it is that person who has all pervasive financial and management control over these entities, the same would have to be treated as related persons. The real test of a related person transaction tainted by interest directly or indirectly in the business of each other is that the purpose of the transaction is not the sale of goods/ services by the seller to the buyer at fully commercially providing price but something else, like seller wanting to reduce his tax liability etc. The question as to whether FHS and Heinz are related persons has to be decided from the above criteria. 8.1 Though, the terms of the agreement, Heinz would provide technical knowhow to FHS for blending and packing of the products, the plea of the appellant is that no such technical knowhow has been provided. The Department s contention is that providing of technical knowhow has benefitted the FHS and reduced the cost of manufacture for them. However, the appellant s plea is that they have not received any technical knowhow from Heinz and as such there is no finding of the Commissioner on this point. Without going into the question whether FHS had received and technical knowhow from Heinz or....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ther working expenses with the stipulation that M/s Pilky shall sell the whole stock with the brand name of Bata Shoe Company and it is in these circumstances that Hon'ble Bombay High Court held that Pilky Footwear Company and Bata Shoe Company would have to be treated as related persons and it is this judgment which was subsequently upheld by the Apex Court. In the present case no interest free advance has been received by FHS from Heinz and other than the job charges no other consideration has been received. Therefore, the Apex Court judgment in the case of Pilky Footwear Company (P) Ltd. (supra) would not be applicable to the facts of this case. 8.4 The Ld. DR has cited the judgment of the Apex Court in the case of CCE New Delhi vs Modi Alkalies & Chemicals Ltd.(supra). The point of dispute in this case was as to whether the clearances of Modi Alkalies & Chemicals Ltd. were to be clubbed with the clearances of Mahabaleshwar Gas & Chemicals (P) Ltd., Shri Chamunda Gas & Chemicals (P) Ltd. & Nipon Gas & Chemicals (P) Ltd. for the purpose of determining their eligibility for SSI exemption and the Apex Court held that since Modi Alkalies & Chemicals Ltd. had all pervasive manageria....
X X X X Extracts X X X X
X X X X Extracts X X X X
....h provides that in case the quality of goods manufactured is not found to be as per the specifications and quality standards of Heinz, the same shall not be accepted by them, shall be destroyed and their cost shall be recovered by Heinz from FHS, also cannot be interpreted as the clause which would give an unfair advantage to Heinz over FHS as a principal manufacturer getting his goods manufactured through a job worker out of raw material, packing etc., supplies him can always insist on minimum wastage of his raw material and the goods being as per his quality standards. 8.7 To sum up, the conditions in the job work agreement which require the job-worker to,- (a) Manufacture the goods out of the raw material and packing material and technology, if any, supplied/ provided by the principal manufacturer (owner of the goods manufactured) as per the quality control standards and specifications of the principal manufacturer, with principal manufacturer having right to inspect the manufacturing process; (b) Manufacture the goods as per the production schedule provided by the principal manufacturer and ensure their delivery in time; (c) Manufacture the goods in such a manner out of raw....
X X X X Extracts X X X X
X X X X Extracts X X X X
....wing that the transactions between FHS and Heinz were on principal to principal basis and FHS could not be treated as an agent of Heinz. We find that in the above mentioned case of CCE Goa vs Cosme Pharma Laboratories (supra), in the agreement between M/s Cosme and their job worker, there was a clause that relationship between the parties is to be on principal to principal and not that of principal to agent and from this clause also the Apex Court concluded that it is clear that the job worker were not manufacturing drugs as agents of the respondent or on behalf of the respondent but were carrying out the manufacturing activity independently and, therefore, they were independent manufacturers of drugs as per the provision of Central Excise Act, 1944. In our view the ratio of this judgment of the Apex Court is squarely applicable to the facts of this case. 10. Tribunal in the case of M/s Smith Kline BeeChem Asia Ltd. vs CCE Vishakhapatnam reported in 2004 (168) ELT 40 Tri Bang. examined the question as to when the job worker can be treated as hired labour of the principal manufacturer. The Tribunal in this case in para 11 of the judgment, relying upon the Apex Court s judgment in t....