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TMI Blog2009 (12) TMI 749X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,72,46,505 23,99,145 Penalty (Rs.) U/S 11AC 3,38,07,311 77,87,676 1,72,46,505 23,99,145 Reliance Communication Infrastructure Ltd. Appeal No. E/1002/2006 E/141/2007 E/142/2007 E/143/2007 Penalty (Rs.) U/R 209A/26 50,00,000 10,00,000 25,00,000 3,00,000 M/s. Reliance Industries Ltd., Hazira, Surat (RIL) are, inter alia, engaged in the manufacture of HDPE resin. 1.2 Being a new industrial undertaking, RIL has got exemption from sales tax for sale of HDPE resin from the Gujarat Government. 1.3 RIL sold HDPE resin to M/s. Reliance Communication Infrastructure Ltd. (RCIL) who in turn re-issued the HDPE resin to RIL for manufacture of ducts on job work basis. RIL manufactured ducts on job work basis and supplied the same to RCIL. 1.4 RCIL in turn used the ducts for use in laying telecommunication cables throughout the country to enable them in their business of rendering telecommunication services. 1.5 RIL availed credit of the duty paid on HDPE resin and utilized such credit for payment of duty on ducts manufactured and cleared to RCIL. RIL valued the ducts based on (Ujagar Prints formula i.e., value at which HDPE resin was sold by RIL to RCIL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at that time, RIL would be the owner-cum-Lessor of the duct manufacturing machines. RIL would provide lease finance to RCIL who in turn would pay to the foreign supplier for the price of the machines. (e) RCIL imported the ducts manufacturing machines from foreign supplier and paid the consideration as well. The Bills of Entry for the import of ducts manufacturing machines would show that RCIL was the lessee-importer and RIL were Lessor of the machines. RCIL imported the machines under EPCG licence and undertook to fulfil the export obligation under EPCG licence. 2. 22-7-2000 (a) After the machines arrived in June/July, 2000, there was a drastic change in the understanding. Since RCIL did not have manufacturing experience and due to various other reasons, it was agreed that RIL would manufacture ducts on job work basis for RCIL and RCIL would not manufacture ducts at all. Therefore, the plan to get excise registration by RCIL was dropped. (b) By agreement dated 22-7-2000, it was agreed that RCIL would supply HDPE resin, CMB, SMB and packing straps and labels to RIL. It was further agreed that RIL would manufacture ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n in brief Show Cause Notice dated 14-5-2004 Order-in-Original dated 26-12-2005 Appeal No. E/1001/2006 Duty demanded in SCN Duty dropped by O-in-O Duty confirmed by O-in-O (Rs.) (Rs.) (Rs.) A Deduction on account of credit notes issued by RIL. 7,71,056 0 7,71,056 B Price difference between invoices and cost certificates. 23,03,964 0 23,03,964 C Price difference between invoices and pricing policies. 7,63,728 0 7,63,728 D Quantity discount difference between invoices and cost certificates. 44,29,494 0 44,29,494 E Bulk packing discount difference between invoices and cost certificates. 6,64,923 39,19,445 67,11,366 F Deduction on account of higher and favourable Bulk packing discount. 99,65,888 G Deduction on account of higher and favourable quantity discount. 3,22,32,968 2,56,61,069 65,71,899 H On account of depressed and favoured job charges. 3,12,26,344 3,12,26,344 0 I On account of non-inclusion of cost of SMB - a raw material used in mfr. of ducts. 4,11,21,689 2,88,65,885 1,22,55,804 J On account of non-inclusion of cost of printing ink used in mfr. of ducts. 11,69,103 11,69,103 0 Leas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gher side. 5.1 The appellants submit that if their submission that assessable value has to be determined under Rule 11 read with proviso to Rule 9 read with Rule 8 is accepted, then no part of the demands confirmed by the impugned orders would survive. This portion of the submission is contained in para 17.1 to 30.3 infra of this synopsis. 5.2 Alternatively, the appellants submit that if the above contention is not accepted, still no part of the demand would survive since, it is submitted, that even individually, such elements are not addable. This portion of the submission is contained in para 6.1 to 16.3 infra of this synopsis. Basis for raising demand of Rs. 1,22,55,804 : Cost of SMB absorbed by RIL in their job charges : Such absorption of cost by RIL is not an act of commercially prudent person. Submissions : (i) Agreed job charges of Rs. 6,000/- PMT was on higher side and hence RIL agreed to absorb the SMB cost (ii) No obligation to earn maximum profit and pay maximum duty (iii) Prudence of Revenue not relevant : 6.1 In the impugned order, vide para C-12 (i), the ld. Commissioner has confirmed demand of Rs. 1,22,55,804/- out of Rs. 4,11,21,689/- propo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ely incorrect. The Commissioner itself accepted the calculation submitted by RIL as Annexure-3 to the reply while confirming the demand of Rs. 1,22,55,804/-. As per this Annexure, the SMB cost is equal to Rs. 7,65,98,775/75,792,454 = Rs. 1010. Therefore SMB constitutes a small portion on the job charges. 6.5 In any case, there is no basis in law for notional addition of SMB. 6.6 In ascertaining whether any action of businessmen is prudent or not, the department's view cannot be availed. Prudence has to be judged from point of view of businessmen. 6.7 The submissions made in paras 6.1 to 6.6 supra would apply to demands of Rs. 8,31,516/- Rs. 70,38,277/- and Rs. 13,65,188/- raised in other three appeals. Demand of Rs. 1,22,55,804 is time-barred since RIL had disclosed that SMB is not supplied by RCIL, but was instead absorbed by RIL without increase in job charges : 7.1 Price declarations were filed on 21-8-2000 and 2-9-2000 by RIL with the Excise department. Certificate issued by RCIL for the cost of inputs supplied by RCIL was attached by RIL to these declarations. RIL also filed certificates in support of the declared assessable value of the ducts. In thes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ricing policy. Submission : (i) Discount found reasonable by Commissioner (ii) Basis of demand altered in order-in-Original (iii) Factually incorrect (iv) Supply spilled in subsequent period (v) Discount actually passed on - not disputed - to be allowed : 8.1 In the impugned order, vide para C-12(ii), the ld. Commissioner has confirmed demand of Rs. 1,10,01,393/- (Rs. 44,29,494/- + Rs. 65,71,899/-) out of Rs. 3,66,62,462/- proposed by the show cause notice. 8.2 The show cause notice suggested that Quantity discount at the rate of Rs. 4310/- PMT given by RIL to RCIL at the time of sale of resin, was not deductible as such discount not available to any other buyer. 8.3 In the impugned order, the Commissioner has specifically found the maximum discount being allowed earlier was 3% when RCIL was not in the picture which was raised about 10% when RCIL started purchasing resin from RIL. The Commissioner expressly found having regard to the volume of purchase by RCIL, discount of 10% was reasonable. 8.4 However, the ld. Commissioner calculated the actual average offtake per month, compared the quantity discount applicable as per the price ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od of one year in both the contracts. There was no such commitment or assurance by any other buyer. Thus a buyer purchasing 400 MT per month at a particular price has no commitment in the subsequent months. PE resin is a fluctuating market. RIL price circular are on a monthly basis. No customer commits to purchase PE resin at a fixed price beyond a month, as customer is always apprehensive of decline in prices in subsequent months. On the other hand, RCIL committed regular purchase of resin over a period of a year in both the contracts. Hence quantity discount offered to RCIL is justified. 8.11 Therefore an attempt of the Commissioner to offer quantity discount applicable to average actual offtake is incorrect. This is more so when he has already held that 10% discount is reasonable. 8.12 RCIL has totally agreed to purchase 60,000 MT and 18,000 MT respectively for the period August, 2000 to July, 2001 and August, 2001 to July, 2002. Against this, RIL had made total supply of around 75,000 MT. Thus practically entire contracted quantity of 78,000 MT was actually supplied. 8.13 There is no demand on account of disallowance of quantity discount in subsequent periods ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment to show such show cause notice cannot be a ground to invoke proviso to Section 11A and allege suppression of facts with intention to evade payment of duty. 9.6 In the impugned order, the ld. Commissioner has changed the basis from what is suggested in the Show Cause Notice. The department need to know the actual supply of ducts to RCIL. This is duly reflected in the monthly RT-12 returns. The monthly pricing policy, indicating the various discount slabs, was being regularly filed with the department. 9.7 In view of the above, the demand of Rs. 1,10,01,393/- is time-barred. Demand of Rs. 67,11,366/- : Bulk Packing discount : Only actual saving made on account of bulk packing is eligible. Submissions : (i) Incorrect to hold that actual savings made alone is deductible (ii) Discount in any other name would have been eligible (iii) Discount actually passed on - not disputed - to be allowed : 10.1 In the impugned order, vide para C-12(iv), the ld. Commissioner has confirmed demand of Rs. 67,11,366/- out of Rs. 1,06,30,811/- proposed by the show cause notice. 10.2 Supply to RCIL were being made in bulk without packing in bags. The Show Cause ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed could have been at the time of submission of price declarations itself, since the facts necessary were in the knowledge of the department. 11.4 In view of the above, demand of Rs. 67,11,366/- is barred by limitation. Basis for raising demands of Rs. 7,71,056/- and Rs. 23,03,964/- and Rs. 7,63,728/- : 12.1 Demand of Rs. 23,03,964/- has been raised on the ground that in some cases during the period August, 2000 to July, 2002, RCIL have shown basic price of PE resin in their cost certificate to calculate the cost of said HDPE Resin which is less than the price shown in the excise invoices issued by RIL. Consequent to this, it is alleged that RIL have declared lower assessable value of such ducts based on RCIL's cost certificates. 12.2 Demand of Rs. 7,71,056/- has been raised on the ground that credit notes have been issued after removal of PE resin to undervalue PE resin. As per Revenue, issuing credit note is neither mentioned in pricing policy nor in the excise invoice of PE resin. 12.3 Demand of Rs. 7,63,728/- has been raised on the ground that in some invoices issued under Rule 52A during the period from August, 2000 to July 2002, the value at which RIL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... value of ducts under Ujagar Prints formula, the demand raised is without any basis. 14. The submissions made in paras 13.1 to 13.7 supra would apply for demands of Rs. 24,368/-, Rs. 1,08,562/- and Rs. 2,18,444/- raised in other appeals. Demands of Rs. 63,13,837/- and Rs. 63,98,022/- raised on account of lease rent in Orders passed for the period 21-9-2003 to 31-3-2004 and 1-4-2004 to 31-12-2004 are not maintainable : 15.1 The Order-in-Original dated 26-12-2005 dropped demand on lease rent. No appeal was filed against this portion of the Order-in-Original. In other words, as far as demand on lease rent is concerned, it attained finality in favour of the appellants since Order-in-Original dated 26-12-2005 which was in favour of the appellants was not challenged by a process known to law. 15.2 However, two Orders-in-Original dated 29-9-2006 passed for the period 21-9-2003 to 31-3-2004 and 1-4-2004 to 31-12-2004 did not follow the Order-in-Original dated 26-12-2005 on this point. These two Orders which are contrary to Order-in-Original dated 26-12-2005 are liable to be set aside inasmuch as they confirm demand of duty on lease rent in view of the fact that Order-in- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and due to various other reasons, it was thought that RIL would manufacture ducts on job work basis for RCIL and RCIL would not manufacture ducts at all. Therefore, the plan to get excise registration by RCIL was dropped. 15.9 This change in the understanding necessitated an amendment in the lease agreement dated 20-6-2000. Since the machines were owned by RIL and used by RIL only, RCIL no longer required the machines on lease and was therefore not obliged to pay any lease rentals. Accordingly, an amendment to the lease agreement was carried out. The formal written amendment was dated 28-7-2000 though the decision that RIL would also undertake manufacture of ducts on job work basis and hence no lease of machines to RCIL was simultaneously arrived at between the parties. As per this amendment, there was no obligation for payment of lease rentals under the lease agreement dated 28-6-2000. The fact that the job work agreement was entered into on 22-7-2000 and the formal amendment to lease Agreement was dated 28-7-2000 itself would show that the job charges of Rs. 6,000/- PMT would deem to include the lease rentals. Hence, the question of paying duty once again on lease rentals d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of Ujagar Prints : 17.1 The appellants submit that respondent having come to a specific conclusion that RIL and RCIL were related in terms of sub-clause (i) and sub clause (iv) of sub-section (3) of Section 4 of the Central Excise Act, 1944, he ought to have held that the assessable value for such a transaction was determinable in terms of the law laid down by the Supreme Court in the case of CCE v. S. Kumars reported in 2005 (190) E.L.T. 145 (S.C.) [i.e., in terms of Section 4 of Central Excise Act, 1944 read with Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000] and not based on the formula laid down by the Supreme Court in the case of Ujagar Prints reported in 1989 (39) E.L.T. 493 (S.C.). 17.2 The appellants submit that the very basis on which the impugned order proceeds is incorrect and untenable and the impugned order deserves to be quashed and set aside on this ground alone. 17.3 The appellants submit that the entire basis of valuation followed by the Commissioner for arriving at the value of ducts is contrary to the law laid down by the Hon'ble Supreme Court in the case of S. Kumars. Findings of the Commissioner are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ked out the assessable value on this basis vide Annexure-I to its reply dated 31-12-2004, which establishes that the appellant had paid more duty than what was payable under the law. This method of valuation is the one prescribed in the Board's own instructions, as explained in para 18.8 below : 18.8 The approach of the Commissioner in holding that the transaction of sale of resin between RIL and RCIL was tainted and yet, taking the cost of HDPE as the starting point for working out the cost of production for ducts is clearly erroneous. The question of adopting the cost of HDPE granules as the starting point would have arisen only if the transaction of job work between RIL and RCIL would have been accepted to be a genuine transaction of job work. Since the Commissioner has discarded and rejected both the agreements which the two companies had entered into, he was not entitled to determine the value of the ducts by applying the principles laid down in Ujagar Prints' case, which applies only to a case where there is a genuine job work transaction taking place. As already submitted above, once both the agreements between the two companies are rejected as 'not genuine', the subst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... annot be adopted for sales to related buyers since as per Section 4(1) transaction value is to be determined for each removal. For sales to unrelated buyers valuation will be done as per Section 4(1)(a) and for sale of the same goods to related buyers recourse will have to be taken to the residuary Rule 11 read with Rule 9 (or 10). Rule 9 cannot be applied in such cases directly since it covers only those cases where all the sales are to related buyers only. 20.2 There is no judgment of Supreme Court or High Court contrary to the above circular. Hence principle laid down by Supreme Court in Commissioner v. Ratan Melting & Wire Industries - 2008 (231) E.L.T. 22 (S.C.) = 2008 (12) S.T.R. 416 (S.C.) is inapplicable to the above circular. Therefore this Circular is binding on Revenue. 20.3 Thus, according to the above circular, Rule 9 would apply only if the entire production is sold to related person. However, part of production is sold to related person and part of production is sold to non-related person, Rule 9 as such may not apply for valuing goods sold to related person. Still the value cannot be determined under Section 4(1)(a), as that section does not apply to sal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at (a) RIL to RCIL are related person and (b) there is a sale of resin by RIL to RCIL. Let us not assume that entire sale of resin is to RCIL. Let us also not assume that RCIL is using resin in further manufacture, but is using for providing some service. In this situation also, resin sold to RCIL would be valued based on cost of production plus 15% thereon (10% from August, 2003), in terms of Rule 11 read with proviso to Rule 9 read with Rule 8. The reason is explained in para 21.2 infra. 24.2 Unlike other Rules, (of course other than Rule 11), Rule 8 is the only provision in the entire Valuation Rules which deals with a situation where sale price is not available. Even proviso to Rule 9 also directs us to Rule 8. In the example under discussion, RCIL is using the purchased resin in rendering service and not for further manufacture. Only relaxation that needs to be given while applying Rule 8 is that, instead of the phrase 'used or consumed in the manufacture of other article', it has to be construed as referring to 'used or consumed in providing further services'. Once this relaxation is supplied, Rule 8 is the most appropriate provision in the circumstances. In the circums ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tricity should be done under Rule 8. The CESTAT held that since the poles have not been used in the manufacture of other articles, Rule 8 is not applicable. However, the CESTAT held, no other Rule being applicable to the case, recourse has to be taken to Rule 11 read with Rule 8. In other words, the Tribunal held that poles have to be valued on the basis of 115% of cost of production since this is the most reasonable. 27. It is therefore clear that once RIL and RCIL are treated as related person, resin sold by RIL to RCIL can be valued only under Rule 11 read with proviso to Rule 9 read with Rule 8 of Valuation Rules (i.e. cost of production + 15% thereon (10% after August, 2003). 28. Similarly, when ducts manufactured by RIL are supplied to RCIL, since RIL and RCIL are related, the said value can be done only under Rule 11 read with proviso to Rule 9 read with Rule 8 (i.e. cost of production + 15% thereon (10% after August, 2003). 29. Even otherwise, while valuing the ducts, sale price of RIL to RCIL of resin cannot be the starting point, since RIL to RCIL are related person. If RCIL has purchased the resin from the market then said purchase value could have been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... L has purchased the resin from RIL, since RCIL and RIL are related person. The starting point of the computation of value of duct even as per Ujagar Prints formula would be the cost of producing the resin by RIL. 31. The appellants rely upon the judgment of CESTAT in K.V. Rao v. CCE - 2008 (222) E.L.T. 267 (T). The assessee namely Hy-Grade Pellets Ltd. (HGPL) was engaged in the manufacture of iron ore pellets on their own account as well as on job work basis for other parties. The issue before Tribunal was valuation of the pellets manufactured of pellets on job work basis from iron ore supplied by related person. While clearing the pellets, the assessee paid duty under Rule 8 of Valuation Rules, 2000 i.e., on 115% of the cost of production. As per department, the valuation of pellets should have been in terms of the decision of the Hon'ble Apex Court in the case of Ujagar Prints' case. The Tribunal rejected the contention of the department and held as under : "4.6 As far as the merits of the case is concerned, the appellants have clearly shown that in view of the fact that ESL owns 49% of the share on which the full face value of Rs. 10/- for each share has been paid an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by RIL to RCIL. The appellants submit that they are contending elsewhere in their grounds that these elements are not addable. The very fact that the discounted sale price of resin charged from RCIL with certain additions/adjustments is being adopted by the impugned Order-in-Original shows that the value of the resin adopted by the department is not based on Rule 4. 33.3 If Rule 4 has to be basis, the value of supplies to RCIL has to be simply based on assessable value for other dispatches made by RIL. Further, having regard to the quantity of ducts to be supplied to RCIL by RIL and that too within short span of time and the firm price of resin agreed to between the parties valid for the entire period in question, the value of resin under Rule 4 based on value of resin sold to other buyer is just not available. Perhaps, that is why the same not been adopted either by the show cause notice or by the impugned Order-in-Original. No penalty and interest is imposable : 34. In view of submissions made supra, no penalty and interest is imposable on RIL. No penalty on RCIL : 35. Rule 26 cannot be invoked for imposing penalty on companies. Hence no penalty can be impo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be liable to a personal penalty. 39.3 Thus, penalty under Section 112(b) can be imposed on persons like transporter, warehouse keeper, seller or purchaser who deal with the goods which he knows or has reason to believe are liable to confiscation. The act or omission of these persons or their abetment does not render the goods liable to confiscation. In fact, they handle the goods or deal with the goods only after the goods have become liable to confiscation. 39.4 A company do not fall within the category of persons as explained in para 39.3 above. A company, if at all, may be covered by second part of clause (a) of Section 112 of the Act, which reads as under : "(a) who, in relation to any goods, does or omits to do any act which act or omission would render such goods liable to confiscation under section 111, or abets the doing or omission of such an act, or" 39.5 Thus, first part of clause (a) covers the person who does or omits to do any act which renders the goods liable to confiscation and second part covers the person who abets/aides the person to do or omit to do any act which renders the goods liable to confiscation. Thus, if a company has smuggled g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laid down in the case of M/s. Ujagar Prints. He further submitted that the entire basis for valuation adopted by the Commissioner is contrary to the law laid down by Hon'ble Supreme Court in the case of M/s. S. Kumars Ltd. He submitted that the Commissioner has held that the two agreements between RIL and RCIL i.e. for sale of resin and for conversion of resin into duct were not genuine and held that the transaction between them had to be considered as a transaction for supply of ducts to RCIL. He also submitted that the Commissioner in holding that the transaction of sale of resin between RIL and RCIL was tainted and taking the cost of HDPE as the starting point for working out the cost of production for duct is erroneous. He further submitted that the valuation has to be done in this case under Rule 11 read with proviso to Rule 9 read with Rule 8 of Valuation Rules, 2000 i.e. the cost of production or manufacture + 15% thereon. In view of this he submitted that the appeals be allowed and duty and penalties be set aside. 43. On the other hand, learned SDR reiterated the impugned order and submitted that the Commissioner has rightly invoked the Rule 11 for arriving at the de ..... 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