By TIOL News Service

MUMBAI, FEB 19, 2013: THE applicant is engaged in the manufacture of Fills, Welding Powder Alloys, Flux for welding, coated welding electrodes and coated/uncoated gas welding rods falling under chapters 38 and 83 of the first schedule of the Central Excise Tariff Act, 1985. Prior to 01.07.2006 the applicant was paying Central Excise duty on the goods purchased by M/s L&T Ltd. with reference to the price at which the latter sold the goods viz. the selling price of M/s L&T. However, vide letter dated 21.06.2006 the applicant informed the jurisdictional Assistant Commissioner of Central Excise that, from 01.07.2006 the Central Excise duty on all clearances of final product to M/s L&T will be discharged on the transaction value contracted between them i.e. the duty will be paid with reference to the applicant's selling price to M/s. L&T.

After nearly seven months, the jurisdictional Assistant Commissioner sought some documents from the assessee and requested them to pay the differential duty for the period from 01.07.2006 onwards with reference to the sale price of M/s L&T on the grounds that the applicant and M/s L&T are inter-connected undertakings in terms of the provisions of Section 4(3)(b)(iv) of the CEA, 1944 read with s.2(g) of the MRTP Act, 1969 and, therefore, they are related parties.

On receipt of this communication the applicant filed a Writ Petition 423/2007 before the Bombay High Court and vide Order dated 31.03.2007 the High Court dismissed the Writ Petition as withdrawn and allowed the department the liberty to conduct investigation against the petitioner, issue show-cause notice and adjudicate the matter as per law.

Pursuant thereto, investigations were conducted and this resulted in issuance of a SCN dated 03.02.2011 demanding duty for the period July. 2006 to March, 2010 along with interest and also proposing penalties under Section 11AC of CEA, 1944 read with Rule 25/27 of the CER. The second SCN was issued on 04.05.2011 demanding duty for the period 01.04.2010 to 13.12.2010 and proposing similar action.

The CCE, Mumbai-II confirmed the duty demanded of Rs. 25,12,27,613/-, imposed interest and also an equivalent penalty. A Penalty of Rs. 5 crores was also imposed on M/s L&T Ltd. under Rule 26 of the Central Excise Rules.

The applicants are before the CESTAT with Stay applications and submit -

++ that applicant and M/s L&T Ltd. are not related within the meaning of Section 4(3)(b) of CEA, 1944; that they can be held to be held related if and only if they are related within meaning of clause (ii), (iii) & (iv) of the Sec. 4(3)(b) of the Act and that the Commissioner had wrongly held that applicant and M/s L&T Ltd. are related within meaning of Section 4(3)(b)(iv) of the Act as they were interconnected undertaking.

++ though 50% shares of the applicant are held by L&T but applicant does not have any share in L&T Ltd. and L&T does not control Board of Directors of the applicant. Therefore, applicant and M/s L&T Ltd. are not related within the meaning of Section 4(3)(b)(iv) of the Act.

++ in support of their contention that mere being interconnected undertaking is not sufficient for treating them as related persons, the applicant relied upon the following decisions -

(i) South Asia Tyres Pvt. Ltd (2002-TIOL-486-CESTAT-MUM)

(ii) Chennai Petroleum Corporation Ltd. (2009-TIOL-710-CESTAT-MAD)

(iii) Vinny Overseas Pvt. Ltd. (2009-TIOL-678-CESTAT-AHM)

++ Board Circular No. 354/81/2000-TRU dated 30.06.2000 is also relied upon in support.

++ that there is no mutuality of interest between the applicant and M/s. L&T Ltd. and, therefore, they are not related within meaning of clause (iv) of Sec, 4(3)(b) of the Act, as mutuality of interest can be said to exist only when buyer and seller hold shares in each other. Following decisions are cited in this regard -

(i) CCE, Surat vs. Besta Cosmetics Ltd.(2005-TIOL-92-SC-CX-LB)

(ii) Kanchan Industries vs. CC, Mumbai - 2005 (186) ELT 302 (Tri-Del)

(iii) Utkal Alloys (p) Ltd. vs, CCE & Cus., BSSR-II (2005-TIOL-932-CESTAT-KOL).

++ applicability of Rule 9 of the Valuation Rules is also challenged as part of excisable goods manufactured by the applicant were sold directly to buyers other than M/s L&T Ltd. and that transaction between the applicant and M/s L&T Ltd. are at arms length and price is the sole consideration for sale.

++ that the demand is time barred as applicant had informed the Assistant Commissioner on 21.06.2006 whereas SCN for the period 01.07.2006 to 31.03.2010 was issued on 03.02.2011.

The Revenue representative justified the order of the lower authority.

The Bench after considering the submissions and extracting the provisions of section 4(3)(b) of CEA, 1944 and rules 9 & 10 of Valuation Rules, 2000 observed -

"6. Commissioner in the impugned order has examined the applicability of Sec. 2(g) of MRTP Act to hold that the applicant and M/s L&T Ltd. are inter-connected undertakings under same management. Moreover applicant has not denied this fact though they claim that there is no mutuality of interest between them and M/s L&T Ltd. Valuation of transacted goods between two undertakings has to be done under Rule 10 of the valuation Rules. If two undertakings are related in terms of clause (ii), (iii) & (iv) of the Sec. 4(3)(b) of that Act, in that case value of the goods is to be determined in terms of Rule 9 of Valuation Rules i.e at the price on which goods are sold by related person.

7. Shri P.N.Mulgund Sr. Deputy General Manager of M/s L&T Ltd. in his statement dated 27.02.2007 stated that debit notes are issued by M/s L&T Ltd. Hqrs. Corporate Account Section to Machinery & Industrial Products Division (MIPD) which show overhead charges including Administration & Management expenses of Corporate Deptt. Of M/s L&T Ltd. allocated to MIPD which carries trading activities relating to products manufactured by the applicant. Statement further revealed that the salary and other expenses of Officers and Directors of the applicant are also included in the above head.

7.1 We also find that the applicant has entered into a Selling Agency Agreement Domestic Sale dated 17.11.1998. Clause 3(b) and 4(a) of this agreement are reproduced below:-

"3(b) M/s L&T Ltd. shall sell the Products to customers at such prices as L&T shall fix in conjunction with EWAC at the provided that L&T may sell at prices lower than the prices stipulated by EWAC.

4(a) M/s. L & T Ltd. shall use its best endeavours to foster the interests and trade of EWAC and except with the prior consent of EWAC (which consent shall not be unreasonably withheld), will not directly or indirectly be concerned or engaged in any business of the same nature as that of EWAC and competing therewith other than products of companies entitled to use the "EUTECHTIC”/ "CASTOLIN” trade mark.”

8. Based on definition of inter-connected undertaking as defined under Sec 2(g) of MRTP Act and Selling Agency Agreement dated 17.11.1998 and also on the basis of statements of various persons, Commissioner has observed that there is mutuality of interest between the applicant and M/s L&T Ltd. and therefore, they are related in terms of Section 4(3)(b)(iv) of the Act. We therefore, find that the argument of the applicant that the applicant and M.s L&T Ltd, do not have any mutuality of interest is debatable and needs to be examined in depth at the time of regular hearing in light of case laws cited. In respect of contention that applicant has also made clearances to buyers other than M/s L&T Ltd. applicant has not produced any data/details at the time of hearing. Prima Facie we are of the view that applicant does not have a case for complete waiver of pre-deposit on merits.

9. Coming to the limitation, we find that the applicant has written a letter to Assistant Commissioner on 21.06.2006 that w.e.f. 01.07.2006 they would be paying duty at transaction value between the applicant and M/s L&T Ltd. and not on selling price of M/s L&T Ltd. Thereafter, Assistant Commissioner of Central Excise vide his letter dated 13.02.2007 asked them to pay duty at selling price of M/s L&T Ltd. Applicant challenged this letter in Hon'ble High Court by filing Writ Petition. The Writ Petition was dismissed by the Hon'ble High Court on 21.03.2007 with liberty to department to conduct investigation, issue show-cause notice and adjudicate as per Law. Show-cause notice was issued on 03.02.2011 for the period 01.07.2006 to 31.03.2010. We find this show-cause notice is prima facie hit by time limitation but other show-cause notice dated 04.05.2011 demanding duty of Rs. 3,64,97,670/- for the period 01.04.2010 to 13.12.2010 is within the time."

In fine, the bench directed the applicant to make pre-deposit of Rs. 1.80 crore and report compliance.

In passing: Finding the ambit of MRTP Act inadequate for fostering competition in the market and eliminating anti-competitive practices in the national and international trade, the Government of India acting on the report of the Raghavan Committee enacted the new Competition Act, 2002 which has replaced the earlier MRTP Act, 1969. By the Finance Act, 2012 Section 4 of the CEA, 1944 now no longer uses the crutches of the definition of "inter-connected undertaking” as contained in section 2(g) of the erstwhile MRTP Act, 1969. It has mirrored the definition in itself. And by the way, what about L&T Stay application…

(See 2013-TIOL-321-CESTAT-MUM )