9911796707
TMI Blog2000 (10) TMI 778X X X X Extracts X X X X X X X X Extracts X X X X ..... is a wholly owned subsidiary of FIL as admitted by ihe appellants themselves to be related person of FIL. Therefore, valuation in their case would be in terms of the proviso (iii) to Section 4(1) of the Central Excise Act, 1944. Both these units are engaged in the manufacture of transmission belts commonly known as `V belts', which are finding various uses. The present appeals relate to valuation of V belts known and used in industrial application only. 2. FIL sell their product through a network of wholesale dealers who are thereafter re-selling the same to end-users/actual users and other dealers through factory gate and various depots maintained by them. Valuation of the product manufactured by FIL was the subject-matter of dispute from 1978 onwards and based on certain enquiries made which have been termed by the learned DR to be an audit kind of enquiries, show cause notice was issued to the appellants proposing to demand duty on the V belts sold from depots not on the basis of the factory gate sale prices but on the basis of certain formula adopted in that show cause notice and which after hearing the appellants, the Collector had confirmed to be the depot price, less f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n another case said to have been recovered from the premises of M/s. J.K. Industries office at Delhi from the possession of one Mr. Arun Kumar Chajjer who was the accountant working in that office. This was alleged to be the office of Mr Raghupathi Singhania who was at the material time Vice-Chairman of the FIL. Based on the enquiries made the said diaries and also statements recorded under the provisions of the Central Excise Act, 1944 from various executives and dealers of the FIL, show cause notice dated 28-6-1996 was issued. This show cause notice was based on the following allegations : 1. The trade policy for V belts did not provide for ex-factory billing and for trade discounts other than 20%. 2. Depots of FIL were selling V belts in wholesale. Kumarappan and Vishal Jain, Depot Managers confirmed that all sales from their depots were in the nature of wholesale. 3. The proportion of price of V belts cleared from the factory to those sold from the depots was in the ratio of 65 : 100 4. FIL cleared from the factory direct to the fol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... branch of FIL was not aware of despatches of V belts having been made from factory to SME any time. 14. Benjamin was aware that the trade policy, framed by the MHQ every year contained specific clause for ex-factory billing of all products except V belts. 15. Kumaravel of FIL, Madurai confirmed that for SME, the deviations from normal practice of despatch of V belts through depots were taken on piece-meal basis under the instructions of MHQ but without any written policy circular. Naidu, Manager (Sales Admn), Swaminathan, RSM (South) and Chandrasekharan, VP Finance, confirmed this. 16. After 1-1-1996, Madan Sales Corp., Bombay; New Ball bearings, Pune and Bombay Trading Agencies. Madras started getting supplies from the factory for the first time and in the case of PTC, the supplies from factory were made more frequent, without their asking, thus exposing FIL's tacit admission of the absence of genuine gate sales in the earlier period (Annexures 24 and 35 to the SCN). 17. Credit Note No. 536, dated 30-12-1995 for Rs. 2,21,300/- towards Super Surprise Gift Scheme, covering the period ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 31st March, 1995. Swaminathan in his statement dated 31-5-1995 corroborated this. This appeared to establish the creation of artificial factory gate sales and receipt of flow back. 5. The show cause also alleged that : (a) It appeared that there were generally no factory gate sales for the industrial V belts and the miniscule number available appeared to have been manipulated. The 35 or 50% discounts were deliberately given to make it appear as if the net price to the wholesale/distributors were equal to or less than the factory gate price but in fact were designed to create a conduit for the flow back. Thus the wholesaler and distributors appeared to fall in the category of favoured buyers and the price on which duty was discharged did not appear to be the normal price under Section 4 of the Act. (b) It appeared that the difference between the factory price and depot price was recovered from SME through adjustment in credit notes. In respect of supplies made to NKBJ and PTC from the factory and in respect of all wholesalers who were supplied V belts ex-depots, the higher discounts allowed were not according to any clear and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tory. It appeared that FIL were deliberately prohibiting the dealers/distributors/wholesalers from placing orders on the factory. Instead, without assigning any reason they were forcing them to place orders on and take supplies from the depots. Existence of a very negligible number of invoices and too thrust upon the three dealers for supply from the factory appeared to show their manipulation and mala fides. (g) The other method used for collectng the differential amounts appeared was to utilize the instrument of credit notes on account of special incentive schemes announced from time to time that under these schemes, credit notes were offered as and when the set targets were achieved by the distributors and wholesalers; the amounts indicated in the credit notes or part of it being collected by the FIL executives in cash; that these schemes were circulated in advance but the quantum of benefit was left vague it was to be surprise. It appeared that the quantum were determined through verbal negotiations and credit notes issued accordingly. This contention appeared to be supported by the fact that in respect of distributors and wholesalers, there was no writ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Department therefore invoked the proviso to Section 11A(1) of the CE Act for demand of duty from the appellants for the extended period (1-6-1991 to 31-12-1995) and held them liable for penal action under Rule 173Q. It was held that Shri R.C. Gupta, Managing Director, being the Chief Executive of FIL and Shri K.T. Reddy, Executive Director being in charge of marketing operations of FIL were liable to penal action under Rules 173Q and 209A. 8. Show cause notice was also issued to R.C. Gupta, Managing Director, K.T. Reddy, Executive Director and others and certain employees of dealers proposing to demand duty of Rs. 5,90,19,010/- on FIL under Rule 9(2) read with Section 11A(1) of the CE Act, 1944 being the differential duty short paid during the period 1-6-1991 to 31-12-1995 and as to why penalty should not be imposed under Rule 173Q and/or 229A of the CE Rules. 9. The Commissioner after hearing the appellants and considering the submission made by the appellants came to a finding that : "it can be seen from the above that : (i) only three dealers were supplied directly from the factory, which were in neg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly 20% plus 3% cash discount given in the course of wholesale trade from the depot and assessable value will have to be arrived at from MMRP (list price mentioned herein above) at which the goods were sold from the depot abating the above discount alone and since he came to the conclusion that declaration regarding valuation made about existence of wholesale factory gate sale price were found to be an artificially created one. He established mens rea on the part of FIL to evade payment of duty and found wilful misdeclaration and mis-statement of facts with intent to evade part of FIL to evade payment of duty and found wilful misdeclaration and mis-statement of facts with intent to evade payment of duty and held that the provisions of Section 11A(1) would be rightly invoked in the facts and circumstances of this case and thereafter proceeded to quantity the amount as follows vide para 78 of his order : "M/s. FIL have contended that : (i) If the basis of the working adopted in the earlier O-in-O is also adopted for present proceedings, then the duty discharged is on the higher side than the duty demanded (para 56.3 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utives of FIL viz. R.C. Gupta, MD, K.T. Reddy, Executive Director, and confirmed the duty demand of Rs. 5,90,10,010/- under Rule 9(2) read with Section 11A(2) of the CE Act, 1944 and imposed penalty of Rs. 1,20,00,000/- on FIL and Rs. 2,00,000/- each on the other appellants herein under Rule 209A of the CE Rules, 1944. 10. We have heard Shri V. Sridharan, learned Counsel, for the appellants and Shri S. Kannan, learned JDR assisted by S/Shri Harihara Subramaniam, Supdt. and Narikulam, Inspector, for the Department and after considering their submissions made, we find that : (a) (i) There is considerable force in the arguments advanced by the appellants before us that the demands of duty for the longer period in terms of Section 11A(1) cannot be sustained in the facts and circumstances of this case, since there exists an inter party order on the pattern of sale and valuation and the pattern which is being adopted by the appellants for selling their goods remain unchanged and was well within the knowledge of the Department. (ii) The order of the Tribunal reported in 1991 (52) E.L.T. 460 in FIL's own case was against the order of the Collector who had af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enquiry that the show cause notice was issued in that case. In the present case, i.e. these subsequent enquiries, searches were said to have been conducted which has resulted in revelation of created sales at the factory gate to the dealers of Coimbatore, Secunderabad, etc. Therefore, we find, when the officers and the Department was fully aware of the factory gate prices to be not acceptable and/or genuine, the so called investigation revealed nothing that was not known. (iv) We have considered these submissions and findings arrived at by the Commissioner in this case regarding nature of the so called factory gate price which was declared by the appellants and which had been found to be created and non-existent and/or sporadic. We find that the Commissioner has come to a very definite conclusion after analysing the material as given in Annexure Q to the show cause notice that it was only one percentage of the total V belts sold and in certain cases even less than to three dealers, which he termed as sporadic, in a short period and irregular and also that for the period of three years, they were clearly non-existent. This leads us to a finding that the factory ga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h they declared at the factory gate which has been found to be non-existent. No findings on this aspect has been arrived at by the Commissioner in his order impugned before us. (vi) We find that the learned DR to have submitted that the 'formula' of the earlier Collector is not relevant to the present issue and the present issue is to stand on its own legs and is based on material collected to disprove the declared ex-factory price to be non-existent and also the material evidence have been relied upon that there has been flow back of the amount as is evidenced from the diaries recovered from the possession of Chajjer and also credit notes of discount from seven dealers out of 450 dealers showing flow back to the assessee which constitutes about 40% of the sales and abatement was not permissible even if MRF decision of the SC was not available. He relied upon the decision in the case of SS Miranda Ltd. v. UOI as reported in 1990 (47) E.L.T. 553 (Bombay) to submit that it is their case that discount above 20% was not in fact eligible and this case was a separate case and therefore, provisions of Section 11A(1) has been correctly invoked. We have considered this su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... question of quantification of the demand and determination of the value for the period, the demand could be upheld. We find that the Revenue has submitted that the Commissioner has disallowed the discount in excess of 20% plus 3% for the reason that 35% discount being claimed was other than flow back in the form of credit notes recovered from the said dealers, seven in all constituting 40% of the sales out of 450 dealers. As regards 35% discount claimed it was clearly flow back as per the evidence recovered by the IT Department in the diaries recovered from the possession of one Chajjer, in the office of JK Industries, Delhi. This has to be considered in the light of Section 4(4)(d)(ii). This section does not lay any limit regarding quantum of discount that would be eligible except that trade discount (not being refundable on any account whatsoever) in accordance with normal practice of the wholesale trade at the time of removal of such goods sold or contracted for sale are permissible. Therefore, we have to examine whether the discount of 35% or any amount in excess of 20% as pleaded by the Revenue has been refunded in some form or other. There is material evidence to indicate tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pts from the raw materials suppliers. The diaries do not indicate that the payments indicated therein were in relation to only industrial belts being manufactured by FIL which is the subject-matter of the proceedings before us or for other goods (i.e. belts other than industrial belts). The findings in the order do not help us in any fashion to indicate that the Commissioner has considered this aspect, in the material which has been relied upon, in the show cause notice. Terms of the ruling of the Delhi High Court, and Rule 5 of the Central Excise Valuation Rules is required to be considered. In this view of the matter, we find that the Commissioner has been swayed by the recovery of diaries and also the Department appears to be hunting and haunting the appellants, to fix and question their price. We cannot accept such orders to be passed following the principles of natural justice. All the evidence relied upon should be examined in the light of the law applicable in regard to the valuation and liability to duty and penalties. In the present case, large amount of duties have been confirmed, without giving any reasons as to how the alleged flow back is linked to the clearances made, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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