2025 (7) TMI 144 - AT - Central Excise

Inter-connected units - coomn directors - related persons - applicability of Section 4(3)(b)(i) or Rule 9 of the Valuation Rules 2000 - mutuality of interest - revenue neutrality - extended period of limitation - HELD THAT - The Commissioner(Appeals) has treated the Units as Inter Connected Undertaking only and no efforts have been made to find out the mutuality of interest. In case of Inter Connected Undertaking it is not covered under Rule 9 of the Valuation Rules 2000. Therefore the confirmed demand is set aside. It is clear that when the allegation is to the effect that the goods are cleared by the Appellant to only their inter-connected units the demand should have been quantified by finding out the value at which the alleged inter-connected units were selling the goods to the independent third parties. From that value the value adopted by the Appellant should be deducted and the duty quantified should be on the differential value. But in this case the Department has failed to do so. They have demanded the duty at 100% of the cost of manufacture 10% profit margin in terms of Rule 8 which is applicable where the goods are sold to the related/inter-connected units are consumed by them. Therefore even on this ground the demand is not legally sustainable. On this ground the confirmed demand set aside on merits. Extended period of limitation - HELD THAT - There are force in the Appellant s submission that no case of suppression has been brought out by the Revenue in the proceedings. They are registered with the Department and have been filing their Returns wherein the value adopted by them would have been shown. The Department has not undertaken any scrutiny of the Returns nor have they queried the value adopted by them all these years. Therefore no case of suppression has been made out by Revenue. Hence the confirmed demand is not sustainable on account of time bar also. Appeal stands allowed both on merits as well as on limitation.

Summary

1. ISSUES PRESENTED and CONSIDERED

- Whether the appellant and the three buyers to whom goods were cleared are inter-connected or related undertakings under Section 4(3)(b)(i) or other sub-clauses of Section 4(3)(b) of the Central Excise Act, 1944.

- Whether the Department was justified in invoking the extended period for demand of Excise Duty for the period 2010-11 to 2012-13.

- Whether the demand of Excise Duty was correctly made under Rule 9 of the Central Excise Valuation Rules, 2000, given the classification of the units as inter-connected or related persons.

- Whether the Department established mutuality of interest or direct/indirect association between the appellant and the three buyers sufficient to treat them as related persons under Section 4(3)(b)(iv).

- Whether the demand of duty is sustainable on merits, including the correctness of valuation and the method of demand quantification.

- Whether the demand is barred by limitation given the appellant's regular filing of returns and absence of suppression or intent to evade duty.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Classification of the appellant and buyers as inter-connected or related undertakings under Section 4(3)(b)

Legal framework and precedents: Section 4(3)(b) of the Central Excise Act, 1944, defines "related persons" and "inter-connected undertakings" for the purpose of valuation. Clause (i) deals with inter-connected undertakings, while sub-clauses (ii), (iii), and (iv) deal with related persons having direct or indirect interest in each other's business. Rule 9 of the Valuation Rules applies only to related persons under sub-clauses (ii), (iii), and (iv), while Rule 10 applies to inter-connected undertakings.

Court's interpretation and reasoning: The Tribunal found that the Commissioner (Appeals) had treated the appellant and the buyers as inter-connected undertakings under Section 4(3)(b)(i). However, the Department invoked Rule 9 for demand, which applies only to related persons under sub-clauses (ii), (iii), or (iv), excluding inter-connected undertakings under clause (i). The Tribunal held this to be a fundamental error, as Rule 9 could not be applied when the units were inter-connected undertakings.

Key evidence and findings: The Department's assumption of relatedness was based on common directors and some transactions such as refund adjustments between companies. However, no documentary evidence was produced to establish mutuality of interest or direct/indirect business association as required under sub-clauses (ii), (iii), or (iv).

Application of law to facts: Since the units were treated as inter-connected undertakings, the valuation provisions under Rule 10 should have been applied. Rule 9 was incorrectly invoked, rendering the demand unsustainable.

Treatment of competing arguments: The appellant argued that mere common directorship does not establish relatedness or inter-connectedness, and no mutuality of interest was shown. The Department relied on investigation findings and group association. The Tribunal sided with the appellant due to lack of evidence and incorrect invocation of Rule 9.

Conclusions: The appellant's units fall under Section 4(3)(b)(i) as inter-connected undertakings, and Rule 9 is inapplicable. The demand under Rule 9 is therefore invalid.

Issue 2: Validity of invoking extended period for demand (Limitation)

Legal framework and precedents: Extended period for demand under Central Excise law is invoked where suppression or fraud is established. Regular filing of returns and absence of suppression generally bars extended period demands.

Court's interpretation and reasoning: The appellant was a regular assessee with proper registration and had filed ER-1 returns showing value and duty paid. The Department did not conduct scrutiny or raise queries on the declared value during the relevant period. No documentary evidence of suppression or intent to evade duty was brought forth.

Key evidence and findings: No evidence of suppression or concealment was found. The Department's demand was based on assumptions rather than any concrete proof of evasion.

Application of law to facts: Without evidence of suppression or fraud, the extended period demand is barred by limitation.

Treatment of competing arguments: The Department argued that the investigation revealed relatedness and interest, justifying extended period. The Tribunal rejected this for lack of evidence of suppression.

Conclusions: The demand is barred by limitation and cannot be sustained on this ground.

Issue 3: Correctness of valuation and demand quantification on merits

Legal framework and precedents: Where goods are sold to inter-connected undertakings, valuation should be determined under Rule 10. The value should be based on the price at which the inter-connected undertaking sells the goods to independent buyers, with the differential value subject to duty. Rule 8 applies where goods are consumed or used by related/inter-connected units.

Court's interpretation and reasoning: The Department demanded duty at 100% of cost of manufacture plus 10% profit margin under Rule 8, which is applicable only when goods are consumed by related/inter-connected units, not when sold. The Department failed to determine the value based on resale price to independent buyers, as required under Rule 10.

Key evidence and findings: The Department did not quantify the demand by comparing the resale value of goods by the inter-connected units to independent buyers. Instead, it imposed duty on the entire cost plus profit margin.

Application of law to facts: The Department's method of valuation and demand quantification was incorrect and legally unsustainable.

Treatment of competing arguments: The Department justified the demand based on investigation findings; however, the Tribunal emphasized the legal provisions governing valuation and rejected the demand on merits.

Conclusions: The confirmed demand is not sustainable on merits due to incorrect valuation methodology.

3. SIGNIFICANT HOLDINGS

"In case of Inter Connected Undertaking it is not covered under Rule 9 of the Valuation Rules, 2000. Therefore, we set aside the confirmed demand."

"When the allegation is to the effect that the goods are cleared by the Appellant to only their inter-connected units, the demand should have been quantified by finding out the value at which the alleged inter-connected units were selling the goods to the independent third parties."

"No case of suppression has been brought out by the Revenue in the proceedings... The Department has not undertaken any scrutiny of the Returns, nor have they queried the value adopted by them all these years. Therefore, no case of suppression has been made out by Revenue."

Core principles established include:

• Proper classification of units as inter-connected undertakings or related persons is crucial for application of valuation rules.
• Rule 9 applies only to related persons under sub-clauses (ii), (iii), and (iv) of Section 4(3)(b), not to inter-connected undertakings under clause (i).
• Valuation for inter-connected undertakings must be based on resale price to independent buyers, not cost plus profit margin unless goods are consumed internally.
• Extended period demand requires proof of suppression or evasion; mere assumptions or common directorship are insufficient.

Final determinations:

• The appellant and buyers are inter-connected undertakings under Section 4(3)(b)(i), not related persons under other sub-clauses.
• The Department's demand under Rule 9 is invalid and set aside.
• The demand is barred by limitation due to absence of suppression or intent to evade duty.
• The valuation and demand quantification on merits are incorrect and unsustainable.
• The appeal is allowed on both merits and limitation grounds with consequential relief.