TMI Blog2013 (11) TMI 1549X X X X Extracts X X X X X X X X Extracts X X X X ..... business of each other” is not required. As per item (d) of sub-clause (iii) of clause (g), if “one body corporate exercises control over the other body corporate in any manner” would suffice to hold them as inter-connected. From the annual audited accounts of DIPL for the years 2000-01 to 2003-04, it has been found that DIPL had sold its products to Legrand below its cost of production and during the span of four years, it has sold the products at an average loss of ₹ 12 lakhs per year. Paras 7.10 to 7.13 of the show cause notice, dated 2-8-2005 refers. Therefore, the question is when an assessee continuously sells its products at a loss over a period of time, can it be said that price is the sole consideration for sale. - M/s. DIPL and M/s. Legrand are related as they are inter-connected undertakings and hence related as defined in law. Further, since DIPL has been selling its products to Legrand at a price lower than its manufacturing cost, the sale price cannot be held to be the sole consideration for sale. Therefore, the Central Excise Valuation Rules, 2000, would come into play. Since both DIPL and Legrand are inter-connected undertakings, Rule 10 of Central Excise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Appellant. Shri Prasad Paranjape, Advocate, for the Respondent. ORDER Revenue is in appeal against Order-in-Original No. 05/CEX/2007, dated 28-1-2007 passed by the Commissioner of Central Excise, Nasik. 2. The facts relevant to the case are as follows : 2.1 The respondent, M/s. Dipareena Investments Pvt. Ltd. (DIPL for short), is engaged in the manufacture of distribution boards and other electrical goods falling under Chapter 85 of the Central Excise Tariff. The distribution boards manufactured by it were exclusively sold to M/s. Legrand (India) Pvt. Ltd. (M/s. Legrand for short). M/s. Legrand was earlier known as M/s. MDS Switchgear Pvt. Ltd. (M/s. MDS for short). Prior to 1996 M/s. MDS and DIPL were owned and managed by Morarji Group. In the year 1996, 100% shares of MDS were purchased by Legrand group companies and the ownership and control of the company underwent changes. 2.2 Based on intelligence that M/s. Legrand and M/s. DIPL were related persons, Directorate General of Central Excise Intelligence, Pune conducted investigation and undertook searches on 30-9-2003 of the factory and office premises of M/s. Legrand at Jalgaon, Sinnar and Mumbai and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Legrand. He also submitted that in case it was decided to sell M/s. DIPL, then Morarji group had an obligation to offer the shares to the nominees of M/s. Legrand as per the share purchase agreement. 2.4 In his statement, dated 3-12-2004, Mr. Jean Charles Tharud, Managing Director of M/s. Legrand confirmed that M/s. Legrand acquired MDS by purchasing 100% shares and Mrs. U.D. Morarji, Chairperson of M/s. Legrand was also the Chairperson and Managing Director of M/s. DIPL and they have been purchasing distribution boards from M/s. DIPL by lifting 100% of its production. It was also agreed that M/s. Legrand should conduct its business in such a manner that it would treat M/s. DIPL as a first preferred sub-contractor on competitive terms and would guarantee M/s. DIPL a minimum assured business for a period of 3 years from the date of share purchase agreement. Despite the clause of the agreement having expired after three years, M/s. Legrand continued its business by lifting 100% of its requirement of distribution boards from M/s. DIPL. He also confirmed that M/s. Legrand had been designing and developing the distribution boards manufactured by M/s. DIPL and they provided technical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2004, Shri Jean Charles Tharud, Managing Director of M/s. Legrand had also stated that M/s. Legrand had been designing and developing distribution boards manufactured by M/s. DIPL and M/s. Legrand provided technical assistance to M/s. DIPL by way of supervision of M/s. DIPL s operations by Legrand s employees and the selling price of distribution boards manufactured by M/s. DIPL was determined by M/s. Legrand. It is his contention that the adjudicating authority did not appreciate the above facts which clearly establish mutual interest of M/s. DIPL and M/s. Legrand in each other s business and, therefore, the sale price of M/s. DIPL cannot be accepted as a genuine transaction value of distribution boards in terms of Section 4(1)(a) of the Central Excise Act, 1944. It is also his contention that the adjudicating authority failed to appreciate that two companies were closely associated in the business of each other, which is clearly reflected in the share purchase agreement, dated 29-3-1996 by and between the Morarji group and the Legrand group of companies. Though the agreement was valid for a period of three years, but it continued even thereafter for about ten years. Clause 4.5 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and other industrial property rights, goodwill, moulds, dies and equipments related to the manufacture, testing, R D and distribution of the above products. MDS can therefore take back, at any time on short notice, the moulds, dies and equipments kept at the disposal of Dipareena as well as the corresponding sub-contracting activity. Concerning the plastic moulding activity performed by Dipareena, MDS will consider the possibility of integrating this activity and employing the 14 persons concerned. Besides, if MDS does not substitute itself to Dipareena as lessor of its premises at Jalgoan, it will, upon 12 months notice from Dipareena, transfer the equipment owned by MDS to another location. (b) Manufacture of super fuse miniature circuit breakers under ABB licence- whose production is entirely sold to MDS As soon as legally possible, but not later than February 27, 2000, the Morarji Group agrees that it shall conduct the affairs of Dipareena in such a manner and cast their votes in such a manner so that Dipareena shall transfer to the Company all R D, design activities, licensing agreement and intellectual property ri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which are inter-connected with each other in any of the following manner, namely : (i) (ii) (iii) (a) (b) (c) if the bodies corporate are under the same management, or (d) if one body corporate exercises control over the other body corporate in any other manner; (iv) (a) (b) (v) (vi) (vii) Explanation I - For the purposes of this Act, [two bodies corporate,] shall be deemed to be under the same management, - (i) (ii) If the managing director or manager of one such body corporate is the managing director or manager of the other, or . 3.3 Since in the present case Mrs. U.D. Morarji was the Chairperson and Managing Director of DIPL and also the Chairperson of Legrand, both the companies can be said to be under the same management as Mrs. U.D. Morarji had control not only over M/s. DIPL but also over M/s. Legrand. Secondly, both the companies were related person in terms of Section 4(3)(b)(i) of the Central Excise Act, 1944 as connected undertakings. The Learned Special Consultant further points out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent, they have suppressed the facts with an intent to evade payment of Central Excise duty and, therefore, the extended period of time has been rightly invoked. Inasmuch as the respondent has suppressed the facts, penalty under the provisions of Section 11AC on the respondent-firm as also penalty on Mrs. U.D. Morarji, Shri A.P. Subedar, Authorised Signatory and Shri Jean Charles Tharud under Rule 209A of the erstwhile Central Excise Rules, 1944 and Rule 26 of the Central Excise Rules, 2002 are imposable. Accordingly, it is prayed that the impugned order be set aside and the Revenue s appeals be allowed. 4. The learned counsel for the respondents on the other hand submits that the impugned order is correct in law. It is his contention that in the absence of existence of any extra-commercial consideration resulting in artificial lowering of price, the mere fact of sale of entire production to one buyer does not make such a buyer related to the seller so as to levy excise duty on the selling price of such buyer. He relies on the decisions of the Apex Court in the cases of Kanchan Industries v. Commissioner of Customs, Mumbai - 2005 (186) E.L.T. 302 (Tribunal) 2006 (195) E.L.T. A9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ey can be considered as a related persons as defined in Section 4(3)(b) of the Central Excise Act, 1944. As regards the contention that the appellant sold the products below its cost of production and the Hon ble Apex Court s decision in Fiat India s case, cited supra, would apply, it is submitted that in Fiat India s case, the Revenue had issued specific show cause notices demanding excise duty on cost plus profit basis where the company was selling at a loss price. In the present case, it is not the case of the Revenue to demand excise duty on cost plus profit basis and, therefore, the ratio of the Fiat India decision would not apply. It is his contention that the sale of entire production to one buyer and the buyer dictating the price or buyer carrying out designs does not make the buyer and seller related. DIPL and Legrand are neither inter-connected undertakings nor related. There is no financial flow back or any other business consideration on record between both the entities. Therefore, the ratio laid down in the Fiat India judgment is not applicable to the present case. 4.1 It is also argued that the demand is barred by limitation inasmuch as the department had accepted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... produced by M/s. DIPL of the distribution boards and M/s. DIPL is not free to manufacture and sell these products to anybody else. It is also seen that the designs and drawings for the manufacture of the distribution boards are owned and supplied by M/s. Legrand to M/s. DIPL. Further, M/s. Legrand are undertaking all the R D activities required for the manufacture of the distribution boards by M/s. DIPL. It is also a fact on record that M/s. Legrand had been deputing their staff to M/s. DIPL for supervision of the manufacturing activities undertaken by the latter. The price at which the distribution boards are sold by M/s. DIPL is exclusively determined by M/s. Legrand. It is also agreed between the two parties that in case M/s. DIPL decides to sell the firm, first preference has to be given to M/s. Legrand for purchase of 100% of its shares. In view of these above facts, it is clear that M/s. Legrand is exercising control over M/s. DIPL by determining the quantum of production, the price at which the goods are to be sold, by providing technical assistance, by undertaking R D activities for the manufacture of the goods, and by deputation of their staff, etc. Therefore, they would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... auses (c), (d) and (g) of Section 2 of the MRTP Act. Therefore, the decisions relied upon by the respondent in the case of Kanchan Industries; Playworld Electronics Pvt. Ltd.; Sanghi Organization; Alembic Glass and Kaira Dist. Co-Op. Milk Producers Union (supra) would not help them as all of them dealt with a situation in respect of Section 4 as it stood prior to 1-7-2000. In view of the amended definition of related person, so as to include inter-connected undertakings within the purview of related person, these decisions have no relevance. Since in the present case, the two persons, namely, M/s. Legrand and M/s. DIPL are inter-connected and M/s. Legrand exercises control over M/s. DIPL as discussed above, which fact is clearly brought out from the admissions made in the statements of Mrs. U.D. Morarji, Mr. A.P. Subedar and Mr. J.C. Tharud, both the entities have to be deemed as related. Therefore, the findings of the adjudicating authority that they are not related is unsustainable in law. As per the definition of inter-connected undertakings mutuality of interest in the business of each other is not required. As per item (d) of sub-clause (iii) of clause (g), if one body corp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r a particular transaction is one where extra-commercial consideration has entered and, if so, what should be the price to be taken as the value of the excisable article for the purpose of excise duty and that is what exactly has been done in the instant cases and after analysing the evidence on record it is found that extra-commercial consideration had entered into while fixing the price of the sale of the cars to the customers. When the price is not the sole consideration and there are some additional considerations either in the form of cash, kind, services or in any other way, then according to Rule 5 of the 1975 Valuation Rules, the equivalent value of that additional consideration should be added to the price shown by the assessee. The important requirement under Section 4(1)(a) is that the price must be the sole and only consideration for the sale. If the sale is influenced by considerations other than the price, then, Section 4(1)(a) will not apply. In the instant case, the main reason for the assessees to sell their cars at a lower price than the manufacturing cost and profit is to penetrate the market and this will constitute extra-commercial consideration and not the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eration for the period even after 1st July, 2000, in our view, the assessing authority was justified in invoking provisions of the Rules 2000. 5.6 In the case before us, we have clearly held that M/s. DIPL and M/s. Legrand are related as they are inter-connected undertakings and hence related as defined in law. Further, since DIPL has been selling its products to Legrand at a price lower than its manufacturing cost, the sale price cannot be held to be the sole consideration for sale. Therefore, the Central Excise Valuation Rules, 2000, would come into play. Since both DIPL and Legrand are inter-connected undertakings, Rule 10 of Central Excise (Valuation) Rules, 2000 would be relevant. Rule 10 of the said Rules reads as follows :- When the assessee so arranges that the excisable goods are not sold by him except to or through an inter-connected undertaking, the value of goods shall be determined in the following manner, namely :- (a) If the undertakings are so connected that they are also related in terms of sub-clause (ii) or (iii) or (iv) of clause (b) of sub-section (3) of Section 4 of the Act or the buyer is a holding company or subsidiary company of the assessee, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , namely :- (i) value of materials, components, parts and similar items relatable to such goods; (ii) value of tools, dies, moulds, drawings, blue prints, technical maps and charts and similar items used in the production of such goods; (iii) value of material consumed, including packaging materials, in the production of such goods; (iv) value of engineering, development, art work, design work and plans and sketches undertaken elsewhere than in the factory of production and necessary for the production of such goods. Thus the money value of goods and services, whether supplied directly or indirectly by the buyer free of charge or at reduced cost for use in connection with the production and sale of such goods, to the extent that such value has not been included in the price actually paid or payable has to be included under the provisions of Rule 11 read with Rule 6 of the Valuation Rules. Since in the present case, the money value of additional consideration received has not been included, the matter has to go back to the adjudicating authority for fresh consideration of these issues and we order accordingly. 5.8 As regards the invocation of extended p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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