2024 (12) TMI 1582 - AT - Central Excise

Related persons or not - applicant and the other entity namely CBPL are Related persons in terms of Section 4 of Central Excise Act - clearance of cement in bulk and those packed in 50 KG bags without marking MRP - appellant failed to discharge onus to prove - HELD THAT - In the case on hand it is not the allegation of the Revenue that the said CBPL was a/was not a related party to the appellant in any manner but it was a clear admission by the appellant itself. It is observed from the very Show Cause Notice itself that the appellant had made disclosures in its Annual Reports Form 3CD reports as to CBPL being its associated person which triggered the whole issue. Further in their reply to the Show Cause Notice the appellant has referred to a table at Annexure-I to their reply wherein it was attempted to explain that the selling price to CBPL was more than the selling price in respect of independent buyers. But however very conspicuously they are silent on the 2 invoices specifically referred to in the Show Cause Notice. In the very same reply the appellant has only harped on the non-furnishing of documentary evidence by the Revenue to prove that the said CBPL was their related party very conveniently ignoring the fact that it was picked up from their own financial statements as disclosed by them which form the primary documentary evidence. The onus was therefore on the appellant to explain as to how the entry was made or why made to be part of their financial statements wherein they themselves had declared CBPL as their related party. Thus going by findings of the adjudicating authority and the Primary documentary evidence like the audited financial statements of the Appellant the Revenue has discharged the initial burden but however the Appellant has not discharged the onus. Conclusion - It is not the allegation of the Revenue that the said CBPL was a/was not a related party to the appellant in any manner but it was a clear admission by the appellant itself. There are no merit in the Appeals - appeal dismissed.

Summary

The core legal question considered by the Tribunal was whether the appellant and the entity Chettinad Builders Private Limited (CBPL) qualify as "related persons" under Section 4 of the Central Excise Act for the purpose of determining assessable value and consequent excise duty liability.

Additional issues arose concerning the applicability of provisions relating to valuation rules, the relevance and admissibility of accounting standards and annual reports in determining related party status, the correctness of invoking extended limitation periods under Section 11A proviso, and the validity of penalty imposition.

Regarding the principal issue of related person status under Section 4 of the Central Excise Act, the Tribunal examined the statutory framework which defines "related persons" for valuation purposes. The Act mandates that the assessable value must reflect transaction value between unrelated persons; where transactions occur between related persons, adjustments may be necessary to ensure fair valuation. The appellant contended that the authorities erred in relying on their annual reports and Form 3CD, which declared CBPL as an "associate" under Accounting Standard 18 (AS 18) for income tax purposes, arguing that such declarations are irrelevant to excise valuation and that the definition of related person under Section 4 should be strictly applied without recourse to income tax or accounting standards.

The appellant further argued that CBPL and the appellant are separate legal entities under the Companies Act, lacking shareholding or managerial control that would qualify them as related persons under Section 2(41) of the Companies Act, and thus the authorities had no legal basis to treat them as related parties. They maintained that mere association or common business dealings do not suffice to establish relatedness for excise valuation. Additionally, the appellant contended that the transaction value adopted for cement supply to CBPL should not be disturbed and that the price should be construed as a cum-duty price, invoking Supreme Court precedent. They also challenged the imposition of penalty and the invocation of extended limitation periods.

The Revenue, on the other hand, relied primarily on the appellant's own financial statements and annual reports, which explicitly declared CBPL as a related party or associate. The audit team's scrutiny revealed significant price differentials between sales to CBPL and other industrial customers, raising suspicion of undervaluation. The Revenue argued that the declaration in statutory documents, which were not previously disclosed to the excise authorities, constituted suppression of facts, justifying extended limitation invocation. The adjudicating authority and first appellate authority upheld the duty demands and penalty, relying on Section 4 and the appellant's own disclosures.

The Tribunal's reasoning emphasized that when statutory documents such as annual reports reveal a relationship between entities, the Revenue is entitled to issue show cause notices and seek explanations. The appellant's failure to clarify or rebut the declared relationship in its financial statements was a critical factor. The Tribunal noted that the appellant did not adequately explain the nature or absence of relationship despite multiple opportunities, including before the Tribunal. The Tribunal observed that the appellant's own statutory disclosures triggered the Revenue's inquiry, and the appellant's silence on the relationship in response to the show cause notice was telling.

The Tribunal examined the relevant invoices and found that the price charged to CBPL was significantly lower than to other industrial customers, supporting the Revenue's suspicion of undervaluation. The Tribunal held that the appellant's reliance on AS 18 and income tax definitions was misplaced because Section 4 of the Central Excise Act provides an independent and specific definition of related persons for excise valuation purposes, which must be applied strictly. The Tribunal rejected the appellant's contention that separate legal entity status under the Companies Act precluded relatedness, underscoring that relatedness under excise law is a distinct concept.

Regarding the invocation of extended limitation, the Tribunal accepted the Revenue's argument that the non-disclosure of the related party status in excise filings, despite its presence in publicly available annual reports, constituted suppression of facts, justifying extended limitation under the proviso to Section 11A. The Tribunal did not find merit in the appellant's challenge to penalty imposition, as the concealment was deliberate.

In conclusion, the Tribunal held that the Revenue discharged the initial burden of proof by producing the appellant's own financial statements showing CBPL as an associate. The appellant failed to discharge the onus to rebut or explain this relationship. Consequently, the Tribunal affirmed the demand for differential excise duty, upheld the invocation of extended limitation, and dismissed the appeals.

Significant holdings include the following verbatim excerpt encapsulating the Tribunal's core legal reasoning:

"In view of the above discussion, going by findings of the adjudicating authority and the Primary documentary evidence like the audited financial statements of the Appellant, the Revenue has discharged the initial burden but, however, the Appellant has not discharged the onus. Hence, we do not find any merit in the Appeals and consequently we dismiss the same."

The Tribunal established the principle that declarations of related party status in statutory financial statements are admissible and relevant evidence in excise valuation proceedings. It clarified that the definition of related persons under Section 4 of the Central Excise Act is autonomous and must be applied independently of income tax or accounting standards. The decision underscores the importance of full disclosure by taxpayers of related party relationships in excise matters and confirms that suppression of such information justifies extended limitation and penalty.

On the valuation aspect, the Tribunal implicitly endorsed the application of transaction value adjustments where related party transactions are undervalued, ensuring the government's revenue is protected. The ruling also affirms that separate legal entity status under company law does not automatically exclude relatedness under excise law.

Final determinations:

• The appellant and CBPL are "related persons" under Section 4 of the Central Excise Act.
• The Revenue's demand for differential excise duty based on transaction value adjustments is justified.
• The invocation of extended limitation period under proviso to Section 11A is valid due to suppression of facts.
• The penalty imposed is in accordance with law.
• The appellant's appeals are dismissed.