TMI Blog2009 (12) TMI 749X X X X Extracts X X X X X X X X Extracts X X X X ..... e which are reproduced below as under : Reliance Industies Ltd. (RIL) Appeal No. E/1001/2006 E/138/2007 E/139/2007 E/140/2007 Period August 2000 to 20-9-2003 21-9-2003 to 31-3-2004 1-4-2004 to 31-12-2004 1-1-2005 to 30-9-2005 SCN dated 14-5-2004 6-10-2004 19-4-2005 3-2-2006 O-in-O dated 26-12-2005 29-9-2006 29-9-2006 29-9-2006 Duty (Rs.) 3,38,07,311 77,87,676 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1. 28-6-2000 (a) RCIL conceived the idea of laying ducts all over India for rendering telecommunication services. They made enquiries and found that there was no supplier of quality ducts in the world within the time frame and the quantity required by them. RCIL imported certain ducts from a Korean supplier also. However, the ducts were found to be not of good quality and rejected by the field engineer of RCIL. This prompted RCIL to manufacture ducts themselves. (b) It was agreed that RIL would give a portion of land at their Hazira factory to RCIL who would manufacture ducts on their own and get a separate excise registration also. (c) RIL agreed with RCIL to lease finance the ducts manufacturing machines. Accordingly, lease agreement dated 20-6-2000 was entered into between the RIL and RCIL. (d) As per the understanding prevailing 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 man ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... partment was needlessly taking an adverse view, RIL and RCIL prepared a written agreement confirming the prevailing practice already being followed by the parties in the past. Thus, it was clarified vide agreement dated 17-4-2004 that the Memorandum of Understanding dated 22-7-2000 as amended by 28-7-2000 require further modifications with effect from 23-9-2000 to the effect that Silicon Master Batch (SMB) would be supplied by RIL without any further increase in the agreed job charges of Rs. 6,000/- PMT. Show cause notice dated 14-5-2004 and Order-in-Original dated 26-12-2005. 3. The Commissioner of Central Excise, Surat-I issued show cause notice dated 14-5-2004 proposing to demand duty of Rs. 14,35,90,669/- on ducts manufactured by RIL on job work basis and cleared to RCIL during the period August, 2000 to September, 2003. As per show cause notice, RIL and RCIL were related persons. The element-wise details and the effect of the findings of the Order-in-Original dated 26-12-2005 are as follows : Annex to SCN Allegation in brief Show Cause Notice dated 14-5-2004 Order-in-Original dated 26-12-2005 Appeal No. E/1001/2006 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment of manufacturing ducts as one of job work, by applying the method of valuation prescribed in the case of Ujagar Prints. [1989 (39) E.L.T. 493 (S.C.)] 4.3 The Commissioner has, without alleging under valuation in respect of resin or demanding duty thereon, sought to dispute its assessable value while calculating the assessable value of ducts, by applying the formula laid down in the case of Ujagar Prints. The approach adopted by the Commissioner is contradictory. 4.4 The order of the Commissioner applying the method of valuation laid down in Ujagar Prints, case is no longer sustainable in view of Supreme Court s judgment in S. Kumars [2005 (19) E.L.T. T145 (S.C.)]. The Apex Court in S. Kumar s case has clearly held that the formula of valuation prescribed in Ujagar Prints, case will not apply if the job worker and the principal manufacturer are related. In the present case, the existence of relationship between RIL and RCIL is not in dispute and therefore the formula of valuation prescribed in Ujagar Prints case, which forms the very basis of the Commissioner s order, is no longer sustainable. 4.5 The Commissioner did not deal with the submission made by RIL that, assumi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se costs included a notional amount of Rs. 1,010/- and Rs. 1,548/- respectively towards lease rent. The demand on lease rent has been set aside by the Commissioner. The lease rent was notionally included in these cost sheets submitted during investigation only to establish that even with the addition of lease rent, the cost of conversion was much lesser than Rs. 6,000/- PMT. Otherwise, lease rent was not an expenditure incurred by RIL for the manufacture of ducts. Initially, RCIL was to manufacture the ducts and RIL was to lease the machines to RCIL for which RIL was to receive lease rent from RCIL. Subsequently, RIL itself decided to manufacture the ducts and supply to RCIL. The machines were owned by RIL and therefore there was no question of paying any lease rent by RIL. If therefore the notional amount of lease rent is excluded, the cost of conversion would be Rs. 3,054/- PMT for the period August, 2000 to March, 2001 and Rs. 2,039/- PMT for the period 2001-2002. The job charges were Rs. 6,000/- PMT. Thus, on a conversion cost of only Rs. 3,054/- and Rs. 2,039/-, RIL had a huge markup. 6.3 RCIL, after initial two months, realized that the job charges charged by RIL was alread ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on Master Batch to RIL. 7.5 A comparison would have also shown that job charges have remained unchanged at Rs. 6,000/- PMT. 7.6 From the above, it is clear that all the facts necessary for the department to know that Silicon Master Batch was not being supplied by RCIL contrary to Memorandum of Understanding dated 22-7-2000, were disclosed by RIL. The exercise now done by the present proceeding was possible earlier also on the basis of information contemporaneously disclosed by RIL. In fact, on the very day, the first of such subsequent declarations were filed on 26-7-2000, the present objection could have been raised without any further documents or enquiry. Thus there is no suppression of any fact. 7.7 The observation of the ld. Commissioner that the department cannot scrutinize each and every price declaration submitted by the assessee, is not correct. It is well settled that the duty of the assessee is limited to disclose primary facts and is not extended to disclose inference that may be drawn from those primary facts. RIL has undisputedly disclosed primary facts necessary for demanding duty at the initial stage itself. 7.8 Hence, the entire demand is time-barred. The f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mitted to be purchased and actually purchased by RCIL was phenomenal and incomparable with any other customer. Assured sale of 5,000 MT of PE resin per month for a year and 1,500 MT per month after August, 2001 was the factor which any commercial person could not have ignored. 8.8 The top five customers of RIL for PE resin prior to RCIL coming into picture and the quantities purchased by them were as follows : S. No. Name of the customer Qty. purchased in the year 1999-2000 (MT) 1. Supreme Industries Ltd. 8453 2. East West Polymers 8150 3. Bajaj Plastic 5328 4. Nilkamal Plastics Ltd. 7385 5. Jyothy Laboratories 4068 RIL sold 3,54,686 MT of resin in the year 1999-2000. 8.9 Prior to RCIL corning into picture, there were not many purchasers purchasing quantity above 396 MT per month. Also, the commercial reality was that there were no purchasers beyond say 700 MT a month. Hence there was no column for quantity say above 700 MT. Therefore quantity discount in the pricing policy of PE resin took into account only purchasers buying ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to demand of Rs. 1,30,518/- raised in other appeal. Demand of Rs. 1,10,01,393 is time-barred : 9.1 RIL has filed Memorandum of Understanding dated 22-7-2000 with the Excise department showing that RIL would sell 60,000 MT p.a. to RCIL. 9.2 It is also undisputed fact that RIL has filed their periodical pricing policies with the Excise department. The notice has admitted this fact. 9.3 The pricing policy forms the basis for payment of excise duty. From these pricing policies, it would be clear that quantity discount was being offered to RCIL and would also prove that the progressive quantity discount slabs were enhanced. 9.4 Further, the price declarations filed by RIL for duct enclosed therewith a certificate issued by RCIL. This certificate of RCIL claimed that quantity discount of Rs. 4,310/- PMT was being given by RIL on PE resin purchased by RCIL from RIL. Thus Excise department was aware that quantity discount of Rs. 4,310/- PMT was offered to and availed by RCIL. 9.5 The above disclosure was sufficient for the department to come to the conclusion that peak quantity discount of Rs. 1,207/- PMT was being offered prior to August, 2000 and also that such peak quantity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the bulk packing discount. 10.5 The submissions made in paras 10.1 to 10.4 supra would apply to demands of Rs. 4,87,437/-, Rs. 37,01,644/- and Rs. 8,15,513/- raised in other appeals. Demand of Rs. 67,11,366/- is barred by limitation : 11.1 It is once again reiterated that the notice sought to demand duty on entire Bulk Packing Discount of Rs. 1,000/- PMT. The show cause notice in principle sought to disallow entire Bulk Packing Discount on the ground that it is undue and favourable. Stating that Bulk Packing Discount should be restricted to savings made on account of Bulk Packing is merely a red herring. 11.2 As stated earlier, pricing policies have been regularly filed by RIL with the excise department. Bulk packing discount is indicated in the pricing policy itself. The department was aware that the bulk packing discount of Rs. 1,000/- PMT was offered on PE resin only and not on PTA/PET. Further, RCIL was claiming quantity discount of Rs. 1,000/- PMT in their cost certificate which have been filed by RIL along with price declarations. 11.3 In view of the above, there is no suppression by RIL much less with an intention to evade payment of duty. In view of the above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... suing credit note since the same was immediately availed as credit by RIL and utilised by RIL for payment of duty on ducts. 13.3 Although credit notes were issued after removal of PE resin, it is not a case where the sale price of PE resin is revised downward after removal of PE resin. Sale price of PE resin was agreed much prior to removal of PE resin. 13.4 RCIL considered actual transaction value of PE resin in their cost certificates. RCIL took into account actual purchase cost while issuing the certificates i.e., cost of PE resin after taking into account quantity discount @ Rs. 4,310/- PMT. In other words, RCIL took into account the effect of credit notes issued by RIL in favour of RCIL while issuing certificates to RIL towards PE resin cost. 13.5 It is pertinent to note that the fact that credit note being issued after removal of PE resin is irrelevant to the issue since the notice is not seeking to reassess the value of PE resin. The Department is seeking to reassess value of ducts manufactured from PE resin. 13.6 No part of the amount credited to RCIL has flowed back to RIL. It is not the case of notice that RCIL has shown the cost of PE resin which is less than the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tain ducts from a Korean supplier also. However, the ducts were found to be not of good quality and rejected by the field engineer of RCIL. This prompted RCIL to manufacture ducts themselves. 15.6 It was agreed that RIL would give a portion of land at their Hazira factory to RCIL who would manufacture ducts on their own and get a separate excise registration also. 15.5 RIL agreed with RCIL to lease finance the ducts manufacturing machines. Accordingly, lease agreement dated 20-6-2000 was entered into between the RIL and RCIL. 15.6 As per the understanding prevailing 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. 15.7 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. 15.8 After the machines arrived in June/July, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .C.) (iii) H.B.L. Aircraft Batteries Ltd. v. CCE - 2004 (167) E.L.T. 483 (S.C.). 15.13 Hence demands of Rs. 63,13,837/- and Rs. 63,98,022/- are not sustainable. 16.1 The EPCG licence was later on transferred in the name of RIL who was obliged to fulfil the export obligation. RIL has fulfilled the export obligation and has obtained the discharge certificate. Therefore factually, the EPCG was in the name of the RIL and not RCIL. Besides, if there was any violation, the Department should have demanded customs duty and not excise duty on notional lease rentals. The appropriate authority (i.e., DGFT) has transferred the EPCG licence and the corresponding export obligation. The Central Excise department has no jurisdiction to deem RCIL as owner. 16.2 In any case, there was no charge in the show cause notice that RCIL would be owner till export obligation is fulfilled. The appellants were not put to notice of this allegation. 16.3 In view of the above, the objection raised by the impugned orders that RCIL would be owner till export obligation is fulfilled due to EPCG licence, is incorrect and liable to be set aside. Commissioner has erred in applying the method of valuation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said transaction was a manipulated and tainted one, which warranted lifting of corporate veil . 18.4 In the above-referred paras of the order, the transactions which have been held to be not genuine/manipulated are : (a) the transaction of sale of resin by RIL to RCIL; and (b) the transaction of job work between RIL and RCIL for conversion of resin to ducts. 18.5 In view of the aforesaid findings, the Commissioner was duty bound to conclude that the transaction between the two companies was one simplicitor of manufacture and supply of ducts. 18.6 Since the finding of the Commissioner is that RIL and RCIL are related, the only issue which he was required to determine was what would be the assessable value of ducts manufactured by RIL and supplied to a related person (RCIL) for RCIL s own use? 18.7 The only method of valuation applicable in the above situation is the cost construction method, where the cost of manufacturing the ducts would have to be ascertained by applying the method prescribed in CAS-4 standards, which is the method prescribed by the CBEC itself and approved in a catena of decisions. Appellant had worked out the assessable value on this basis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d be valued as per Rule 8 of the Valuation Rules. This is because, as per new Section 4, transaction value has to be determined for each removal . Where goods are transferred to a sister unit or another unit of the same company valuation will be done as per the proviso to Rule 9. 19.2 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. 19.3 Therefore, in terms of the above circular, if a portion of goods produced are sold they would be valued under Section 4(1)(a). If balance production is captively consumed, the clearances so captively consumed will be valued under Rule 8. 20.1 Again, Circular dated 1-7-2002 clarifies as under : S. No. Point of Doubt Clarification 12. How will valuation be done when goods are sold partly to related persons and partly to independent buyers? There is no specific rule covering such a contingency. Transaction value i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 22.1 Let us also assume for a moment, the following : (a) RIL and RCIL are related persons as defined in Section 4 of the Act. (b) There is a sale of resin by RIL to RCIL. (c) RCIL is using the resin in further manufacture of other goods. (d) Entire sale of resin by RIL to RCIL only. 22.2 Then, undoubtedly the value of resin sold by RIL to RCIL, in the above example/assumption, would be made under proviso to Rule 9 read with Rule 8 of the Valuation Rules. 23. Now, instead of assumption made in para 22.1(d) above, assume that the entire resin is sold to RCIL. Let us assume that some quantity of resin is sold by RIL to other customers and only some balance quantity is sold to RCIL. Let the other assumptions made in para 22.1 remain (namely RIL and RCIL are related person and resin sold to RCIL is further used in the manufacture of other articles by RCIL). Even then, value of resin sold to RCIL would be based on cost of production of resin plus 15% thereon (10% from August, 2003) in terms of Rule 1 read with proviso to Rule 9 read with Rule 8. This follows from para 20.1 to 20.3 supra. 24.1 Now, let us assume that (a) RIL to RCIL are related person and (b) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... il basis. The dispute was valuation of spare parts cleared to EFL who did not in turn sell them but instead used them in their repair and maintenance contracts. In cases, where the assessee cleared spares to EFL who in turn sold them, the assessee paid duty on the basis of the sale price of EFL. However in case where the assessee cleared spares to EFL who in turn used them in their repair and maintenance contract, the assessee paid duty by adopting value under Rule 8 of the Central Excise Valuation Rules, 2000. The department contended that the assessee should pay duty even in such cases on the basis of sale price of EFL in terms of Rule 10(a) read with Rule 9 of the Central Excise Valuation Rules, 2000. The Tribunal rejected the contention of the Revenue and held that when there is no sale, there is no specific rule to cover the same and hence in such a situation, valuation under Rule 8 would be the most appropriate. 26. The CESTAT in CCE v. P.C. Pole Factory - 2006 (199) E.L.T. 865 (T.) upheld that contention of Revenue of that valuation of P.C. poles manufactured and captively used in the transmission of electricity should be done under Rule 8. The CESTAT held that since the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the element. 30.4 The above extract clearly shows that where importer acquires the tools from a seller, the value of the tool which needs to be added to the value of the imported goods is the cost of acquisition of the tool. Where the tool has been produced by the importer itself or it has been produced by a person related to the importer, the interpretative note mandates that the value of the tool would be the cost of producing it. The interpretative note do not suggest that purchase price of tool from related party cum-producer can be taken. 30.5 In the present case, we are not concerned with Custom Valuation Rules. We are also not concerned with addition towards value of tools and dies. However, still the above interpretative note has a material significance. It lays down a principle that whenever the items to be added are produced by a related person, the addition to be made would not be the purchase price but only the cost of producing it. Therefore, even if Ujagar Prints formula to be applied for valuing the ducts, the starting point would not be the price at which RCIL has purchased the resin from RIL, since RCIL and RIL are related person. The starting point of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 31-12-2004 which gave a comparative chart establishing this position, which is enclosed as Annexure-3 with this synopsis. Similar charts filed with other replies for subsequent period are enclosed as Annexure-4, Annexure-5 and Annexure-6 with this synopsis. This factual position has not been disputed in the impugned order. Hence, no part of the demand is maintainable. 32.3 In view of the above, the impugned portion of the Order-in-Original dated 26-12-2005 is liable to be set aside. 33.1 Rule 4 of the Valuation Rules, 2000 is not relevant in the present case either for valuing the HDPE resin or for the ducts. Firstly, neither the show cause notice nor the impugned Order-in-Original have sought to apply the principles of Rule 4. On the other hand, the impugned Order-in-Original has adopted method of valuation which shows that the department is not at all applying Rule 4 or the principles enshrined therein. 33.2 The impugned Order-in-Original determines the assessable value by adding certain elements over and above discounted sale price of resin charged by RIL to RCIL. The appellants submit that they are contending elsewhere in their grounds that these elements are not addable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d below : (b) Any person who acquires possessions of, or is in any way concerned in carrying, removing, harbouring, keeping, concealing, selling or purchasing, or in any other manner deals with, any goods which he knows or has reasons to believe are liable for confiscation under section 111. 39.2 Clause (b) to Section 112 of Customs Act was introduced because it was felt that clause (a) to Section 112 of Customs Act covers only the person who is actually concerned in the contravention. This is evident from the Notes and clauses of Section 112(a) of the Customs Act reads as under : (ii) Under the existing provisions even where a personal penalty is provided in respect of a contravention, it is leviable only on the person acutely concerned in the contravention. Under the proposed clause any person who abets such contravention will also become liable to a personal penalty. Thus a financier who finances smuggling or a dealer who helps in the disposal of smuggled goods will also 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny evidence do not carry any weight in law. Hence, the imposition of penalty on RCIL under Rule 26 is incorrect and unsustainable in law. 41. Apart from this synopsis, the learned Advocate argued the matter on the following points : (a) When both the principal and the job workers are related persons, the assessable value is to be determined as per Rule 8 of Valuation Rules, 2000, (b) on limitation, (c) on merit. 42. Learned Advocate submits that the Commissioner has come to the specific conclusion that RIL and RCIL were related persons in terms of sub-clause (1) and sub-clause (4) of sub-section (sic) of Section 4 of Central Excise Act, 1944. He held that in such a case, the assessable value shall be determined as per law laid down by Hon ble Supreme Court in the case of CCE, Indore v. M/s. S. Kumars Ltd. - 2005 (190) E.L.T. 145 (S.C.) and not on the basis of formula 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8 is not applicable and further held that no other rule being applicable to the case, recourse is to be taken to Rule 11 read with Rule 8. 46. We also find that while valuation done of sale price of RIL to RCIL of resin cannot be the starting point since RIL and RCIL are related persons. In case of K.V. Rao v. CCE, Visakhapatnam, 2008 (222) E.L.T. 267 (Tri.-Bang.), it was held that the valuation adopted by the appellant for clearance of iron pellets on job work basis to ESL is correct i.e. as per Rule 8 of Valuation Rules, 2000 (115% of the cost of production). 47. It is held that in the instant case, the valuation is to be done as per Rule 8 (i.e. 115% of cost of resin + manufacture of duct). Accordingly, the value arrived is much lower than the assessable value on which the duty has already been paid by RIL on duct. At this stage, the learned Advocate submitted that although the duty has been paid in excess, but the appellants shall not claim any consequential relief if their appeals are allowed on this ground. The appellants only want to get rid of this duty demand. 48. In view of the above discussion, we set aside the impugned order and allow the appeals on this ground t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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