By TIOL News Service

NEW DELHI, MAR 07, 2014: THE facts of the case are that the appellant was manufacturing re-treading and supplying 97% to 98% of their production to M/sBlack Stone Rubber Industries Pvt. Ltd ("the buyer"). During 1996-97, the buyer paid an amount of Rs.6,84,780/- as "compensation" to the appellants in addition to the declared price of the goods. During 1997-98 the buyer paid Rs.6,50,500/- in similar manner.

The case of Revenue is that these amounts should have formed part of the assessable value of goods sold by the appellant to the buyer.

Accordingly, a SCN demanding excise duty of Rs.2,20,835/- was issued and confirmed by the adjudicating authority and also upheld by the Commissioner. However, the Commr(A) set aside the penalty of Rs.25,000/- on the appellant manufacturer and reduced the penalty on the partner to Rs.10,000/-

Aggrieved by this order, the appellant is before the CESTAT.

The contention of the Appellant is that they had an arrangement with the buyer whereby the buyer agreed to provide interest free advance to the main appellant to help the appellant to set up the factory with an undertaking by the appellant that the appellant would supply at least 90% of their production to the buyer. As per the agreement they could either provide interest free advance or pay 90% of its interest cost borne by the appellants in securing the finances. It is further submitted that what they have done is to subsidize the interest cost of the appellant in setting up the factory and this was done only to ensure a regular supply of the finished goods for their business of re-treading and this did not affect the price of the goods sold by the appellants; that the final products were sold at the same price to other buyers who have not provided such help; that since normal price for the goods are available for sale of the goods to independent buyers it is evident that the price has not been vitiated because of the compensation paid. It is also emphasized that the dispute is for the period when the principle of transaction value has not come into force and therefore there is no merit in the argument of the Revenue in view of cited decisions.

The Appellants also pointed out that the Revenue has compared the prices at which dealers have sold the product to retailers to come to the conclusion that there was under valuation and the same is not legally maintainable. Further, the other comparison made by Revenue was with the price of tread rubber of MRF Ltd which also is not an acceptable comparison because the product of that company has a better reputation and can command better price in the market.

The Member (Technical) observed that the comparison made by the Revenue with the prices of retailers and that of MRF Ltd. were only to buttress their argument that the goods were sold at artificially low prices and the demand raised is not based on the same.

After noting that the case laws cited by the appellant were not relevant to the case on hand, the Member (Technical) held that the ‘compensation’ received from the buyer is an additional consideration and includible in the assessable value. 

On the question on suppression, the Member(T) observed -

“15. Thus "suppression" mentioned in section 11A of Central Excise Act is about suppression of information from the Central Excise department. Disclosure to shareholders or any other person cannot be defence against allegation regarding such suppression.

16. Further the issue whether there is any suppression or not on the part of an assessee is to be determined with reference to assessee's actions and not with reference to how the department detected the suppressed information. So we do not find any merit in the argument that the suppressed information was detected by auditing the books of accounts and hence it cannot be considered as suppression.”

He, therefore, dismissed the appeal of the assessee.  In respect of the appeal filed by the partner against the penalty imposed, the Member(T) observed that the partner's actions and the firm's actions which form the basis of the case is the same and, therefore, it is not necessary to impose a separate penalty on the partner.
The Member (Judicial) had a differing view as below -

++     It is seen that the tread rubber is being sold to independent wholesale buyers as also to BSRI at the same price. This fact is sufficient to establish that the price in case of sale to BSRI is not influenced by the fact of compensation given by BSRI to set up the factory. It has to be held that such compensation stands given by BSRI for setting up of the factory for manufacture of tread rubber for ensuring continued supply of tread rubber to them, which fact is also beneficial to the buyer. This is normal business deal.

++     I have also taken into consideration the appellants' specific plea that if the amount of compensation received in two different financial years is added into the assessable value, the same would lead to frivolous results. To substantiate their plea that the amount of compensation received by them has no connection or link with the price of tread rubber, they have submitted that in the year 1996-97, the amount of compensation is Rs.6,84,780/- and tread rubber supplied to the buyer is 60,880 kg. whereas in 1997-98 the same is Rs.6,50,500/- and 1,39,440 kg. Therefore, on this basis, in 1996-97, per kg.compensation comes to Rs.11/- whereas in 1997-98, comes to just Rs.5.50. It clearly shows that the amount of compensation was not linked with quantity of tread rubber to be supplied and price of tread rubber fixed in the agreement was not depressed on account of compensation. For example, if no tread rubber was supplied in 1996-97, even then compensation was to be received and in the absence of assessable value, the same would not have been includable.

++     When an assessee is disclosing the facts of receipt of compensation in their books of accounts as also in their balance sheet, can it be said that he suppressed or misstated any facts with a view to conceal the same from the Revenue and with an intention to evade payment of duty? Such non-disclosure to the revenue when there is disclosure of the factual position in the balance sheets cannot be held to be reflecting upon the malafide of assessee though there may be non-disclosure of that fact to the Revenue. It may be observed here that mere non-disclosure of information to the Revenue by itself cannot be considered to be suppression or misstatement with intent to evade payment of duty.

In fine, it was held by the Member (J) that the appeals are required to be allowed on merits as also on limitation.However, since there is no difference of opinion in the appeal of the partner and, therefore, his appeal was allowed.

The matter, therefore, came to be referred to the Third Member.

The third Member (Judicial) held -

++     Unfortunately show cause-notice did not bring out categorically the allegation that the arrangement was to influence sale price. So also show-cause notice did not attempt to find out whether the buyer was anyway related to manufacturer to take undue advantage of deflating sale price in the guise of compensation. All these aspects were also essential consideration for Revenue. But no attempt was made from show-cause notice stage or at the adjudication stage to understand as to whether there was any intention behind the transaction to cause loss to Revenue. When specific allegation in the manner above does not surface it is difficult to discover a new case today.

++     Specific pleading was made in Para 8 of reply to show cause notice at page 58 of appeal folder stating that comparison of price of dealer of MRF reduced by necessary transportation cost and all other expenses to make the factory cleared goods reachable to the dealer, is well comparable with the price of the appellant and the appellant's price is not less than MRF goods, appellant should not face adjudication proceeding to its detriment. Such specific pleading was brushed aside by all the authorities below without causing inquiry to test veracity of pleading so made. That gave a burial death to the Revenue's proposition of under valuation and Revenue could not come up to prove its case when allegation of above nature made against appellant.

++     Superficial plea (of Revenue) fails to stand for no comparison of sale price of comparative case is cited without any cogent evidence suggesting malafide of appellant. It is also unfortunate to note that at no stage cost of manufacture of goods by the appellant were called for testing. There is no possibility to send the matter back for re-examination in a reference by 3rd Member.

It was held that the appellant should succeed in absence of under valuation.

So, the Majority order is that both the appeals are allowed with consequential relief.

(See 2014-TIOL-358-CESTAT-DEL)