By TIOL News Service

NEW DELHI, JULY 27, 2010: THE case has had a chequered history. The appellant (formerly named and styled as Seagrams India Pvt. Ltd.) is a wholly-owned subsidiary of the Seagram Company Ltd., Canada, established for manufacturing/blending of non-molasses based spirits. The appellant imported Concentrate of Alcoholic Beverages - CAB from M/s Joseph E Seagram and Sons Ltd., Scotland, a wholly- owned subsidiary of Seagram Company Ltd., Canada. The strength of CAB imported was about 60%. It is not in dispute that the appellant is a "related person" to the supplier and this fact was disclosed to the Customs Authorities. The import of CAB was of four varieties, each one meant for manufacturing four brands of scotch whiskies, namely "100 Pipers", "Passport", "Something Special" and "International Malts" (Royal Stag; Oaken Glow; Blenders Pride and Imperial Blue). The import of CAB was in wooden barrels and their value was declared separately for assessment. The appellant diluted the imported CAB by adding demineralised water and reduced the strength to 42.8% v/v; packed them in bottles under respective brands; paid State excise duty and sold these to the dealers for ultimate sales to the consumers.

In the year 1999, the Directorate of Revenue Intelligence commenced investigation into the imports of CAB by the appellant, which resulted in the issuance of two show cause notices. The first show cause notice dated 19th December 2000 was issued proposing demand of differential duty of customs amounting to Rs.37,96,70,451/- in respect of imports relating to the period from January 1995 to June 2000 and the second show cause notice dated 16th August 2001 was issued demanding differential duty of customs of Rs.12,08,42,462/- relating to imports during the period July 2000 to May 2001. Penal action was also proposed in both the show-cause notices.

The Commissioner of Customs adjudicated upon both the show cause notices by a common order dated 31st May 2002, finalizing the assessments and confirming the demand of Rs.40.37 crores as against proposed demand of Rs.50.04 crores. The Commissioner classified the imported CAB under the Chapter heading 2808.30 as whisky as against the claim of the appellant under the Chapter heading 2808.10.

Being aggrieved by the order of adjudication, the appellant filed an appeal before the Tribunal. Vide order dated 25th March 2003, while accepting the claim of the appellant that CAB should be classified under heading 2808.10, the Tribunal rejected the plea of the appellant that in spite of the fact that the supplier was a "related person", the value declared by them should be accepted in terms of Rule 4(3)(b) of the 1988 Rules. Nevertheless, the Tribunal remanded the matter to the adjudicating authority for a fresh consideration on the question of applicability of Rule 6 as it felt that the appellant had not been granted adequate opportunity to put forth their case against the proposal to apply Rule 6 (2005-TIOL-1667-CESTAT-DEL).

The appellant challenged the said order before the Supreme Court which was dismissed on 21st November 2003. The appellant pleaded that invocation of Rule 6 by the Commissioner in the final adjudication order was beyond the scope of the show cause notice, in as much as, in the show cause notice itself it was observed that Rule 6 could not be applied because of non-availability of requisite data for adjustments required to be made under the said Rule. It was asserted that the value of CAB imported had to be determined as per Rule 4(3)(b) of 1988 Rules.

Pursuant to the order of the Tribunal, dated 25 th March 2003, the Commissioner passed a fresh order dated 29th August 2003 and held that Rule 6 was applicable on the facts of the instant case. He accordingly, confirmed the demand of duty of customs amounting to Rs.39.96 crores.

The said order was again challenged by the appellant in the Tribunal, mainly on the ground that the value of imported CAB could not be determined under Rule 6. In the alternative, it was pleaded that even the quantification of the value under Rule 6 was seriously flawed.

Accepting the alternative submission of the appellant relating to the errors committed by the Commissioner while determining the assessable value of CAB on the basis of the transaction value of "similar goods", by its order dated 29th June 2005, the Tribunal again set aside the order of adjudication by the Commissioner and remanded the matter back to him with certain directions.

This decision of the Tribunal was not put in issue by the appellant before a higher forum. Pursuant to and in furtherance of the directions issued by the Tribunal in the said order, the Commissioner passed a fresh adjudication order on 20 th June 2006, confirming a total differential duty of Rs.40.37 crores, which happened to be more than the duty amount of Rs.39.96 crores as confirmed in the second adjudication order.

As expected, the appellant challenged the said order by preferring yet another appeal to the Tribunal. Inter-alia, observing that in the first remand order the question of applicability of Rule 6 was left to be decided by the adjudicator and in the second remand order, dated 29th June 2005, the Tribunal did not go into the applicability of the said rule and allowed the appeal on the basis of alternative pleas of the appellant, the Tribunal decided to go into the question of applicability of Rule 6. Upon re-consideration of the issue, the Tribunal upheld the decision of the Commissioner in determining the value of the imports under Rule 6. However, partly accepting the appeal, the Tribunal held that the appellant will be entitled to further adjustments in the value of CAB determined on the basis of the value of similar goods, on account of: (i) imports of substantially higher volumes of CAB; and (ii) where the retail price of bottled whisky was substantially lower than those of the comparable brands. It was, however, clarified that once the assessable value was determined for any brand by following the above method, the assessable value shall not be enhanced till a higher import price of the similar goods was noticed.

Being dissatisfied with the order/directions of the Tribunal, both the parties are before the Supreme Court in this appeal.

Importer's arguments: Both the authorities below have committed a serious error of law by holding that the value of the imported CAB is to be determined as per the procedure prescribed in Rule 6 of the 1988 Rules. Having regard to the fact that scotch whisky is a specialty goods and is not commercially interchangeable, the CAB imported by the appellant and by others cannot be said to be `similar goods' as defined in Rule 2(1)(e) of the 1988 Rules. Even if the goods in question are treated as similar goods, Rule 6 cannot be applied because no suitable adjustments can be made for quantity difference. According to the learned counsel, apart from the fact that any goods, such as scotch whiskies, which are specialty goods, the variations in consumer preferences and the value of trademark and reputation are difficult to ascertain and adjust, there cannot be "demonstrated evidence" for quantifying such differences and, therefore, Rule 6 cannot be applied. The formula devised by the Tribunal, directing loading of the price of imports with 80% of the price differential owing to the differential in quantity imported is arbitrary. It was, thus, pleaded that the order of the tribunal, approving the application of Rule 6 deserves to be set aside. In the alternative, it was urged that if this Court comes to the conclusion that Rule 6 is to be applied for determining the value of CAB, comparison should be made for each year with the lowest price of other imports during the year with at least 40% reduction from the list price to take care of quantity differences.

Revenue's arguments :

The Tribunal committed a serious error of law in re-examining the said question. It was contended that apart from the fact that second remand order dated 29 th June 2005, whereby the Tribunal had directed the Commissioner to apply Rule 6 and re-determine the value of CAB after making adjustments wherever warranted, was not questioned by the appellant, in view of the dismissal of their appeal by this Court against Tribunal's order dated 25th March 2003, the said issue had attained finality and the appellant was estopped from raising it before any forum. The direction by the Tribunal to the Commissioner to give adjustment of 20% while determining the value of the imported CAB is vitiated because no evidence in this behalf was produced by the appellant before the Commissioner. No adjustment on account of difference in quantity can be granted unless there is "demonstrated evidence" on the basis whereof reasonableness and accuracy of the adjustment could be established.

The questions arising for determination are:-

(i) Whether the Tribunal was justified in re-examining the question of applicability of Rule 6?

(ii) If the answer to question (i) is in the affirmative, then whether the value of the CAB for the purpose of levying duty of customs is to be determined as per the procedure prescribed in Rule 6 or in terms of some other Rule?

(iii) Whether the direction by the Tribunal regarding adjustment to the tune of 20% in the price difference between CAB of the appellant and the corresponding CAB of the competitor, on account of volume of imports, is justified?

The Supreme Court held that the issue with regard to the applicability of Rule 6 of the 1988 Rules for valuation of CAB had attained finality on the summary dismissal of the appellant's appeal by this Court vide order dated 21 st November 2003. It is clear from a bare reading of the observations of the Tribunal in its order dated 25th March 2003, that remand to the Commissioner for fresh adjudication was confined only to the errors committed while determining the assessable values based on the transaction value of "similar goods". Thus, in principle, the Tribunal proceeded on the premise that the valuation had to be done as per the procedure laid down in Rule 6. This is also evident from appellant's pleadings when they challenged the order of remand inter-alia, contending in their appeal that Rule 6 had no application on the facts of their case and the value of imported CAB by them had to be determined as per Rule 4(3)(b)of the 1988 Rules. The appeal was, however, dismissed in limine . Once a statutory right of appeal is invoked, dismissal of appeal by the Supreme Court, whether by a speaking order or non speaking order, the doctrine of merger does apply, unlike in the case of dismissal of special leave to appeal under Article 136 of the Constitution by a non-speaking order. In the present case, the appellant preferred statutory appeal under Section 130E of the Act against order of the Tribunal dated 25th March 2003 and, therefore, the dismissal of appeal by this Court though by a non-speaking order, was in exercise of appellate jurisdiction, wherein the merits of the order impugned were subjected to judiciary scrutiny. In the instant case, the doctrine of merger would be attracted and the appellant is estopped from raising the issue of applicability of Rule 6 in their case.

Moreover, in the instant case the issue with regard to the applicability of Rule 6 had attained finality for yet another reason. It is manifest from the Tribunal's order dated 29th June 2005, that the scope and purpose of remand to the Commissioner was limited. As it is evident the Tribunal categorically declined to go into the issue about the appropriateness of Rule 6, with the result that the finding of the Commissioner in his order passed pursuant to Tribunal's earlier order dated 29th August 2003, regarding applicability of Rule 6 remained undisturbed and in fact attained finality, in as much as, the appellant did not question the correctness of the remand order passed by the Tribunal on 29th June 2005.

Keeping in mind the factual scenario, the Supreme Court was of the opinion that the Tribunal erred in re-opening and examining afresh the question as to whether or not the value of CAB could be determined by applying Rule 6 and, therefore, the objection of the revenue in that regard deserves to be accepted. It is ordered accordingly.

In the light of the opinion on the first question, Supreme Court deemed it unnecessary to assess the merits of the submissions made by counsel for the parties on the question of applicability of Rule 6 of the 1988 Rules.

Now the last question , viz. whether or not the direction of the Tribunal to the Commissioner to grant adjustment @ 20% in the price difference between each variety of CAB of the appellant and the corresponding CAB of the competitor on account of higher volume of imports by the appellant, for determining the value of the CAB is justified?

The appellant as well as the revenue are both dissatisfied with the said direction. The former claims that they should get discount of at least 40%. The stand of the latter, to the contrary, is that no demonstrated evidence , establishing the reasonableness and accuracy of the adjustment, having been adduced, the appellant is not entitled to any adjustment.

The Supreme Court observed, “Rule 6 (2) provides that the provisions of clauses (b) and (c) of sub-rules (1) to (3) of Rule 5 of these rules shall mutatis mutandis also apply in respect of similar goods. A similar stipulation appears in note (2) to Rule 6. Rule 5(1)(c) provides that where no sale referred to in clause (b) of sub- rule (1) of this rule, is found, the transaction value of identical goods sold at different commercial level or in different quantities or both, adjusted to take account of the difference attributable to commercial level or to the quantity or both shall be used, provided that such adjustments shall be made on the basis of `demonstrated evidence', which clearly establishes the reasonableness and accuracy of the adjustments. Interpretative Note 4 to Rule 5 reiterates that such adjustment, whether it leads to an increase or a decrease in the value, be made only on the basis of `demonstrated evidence' that clearly establishes the reasonableness and accuracy of the adjustment. One of such evidences could be a valid price list containing prices referring to different levels or different quantities.

The Supreme Court was of the considered opinion, that bearing in mind the object behind the provision for "adjustment" in terms of Rule 5(1)(c), the fine distinction between the words "adjustment" and `discount' sought to be brought out by the appellant is of no relevance to the controversy at hand. The provision is clear and unambiguous meant to provide some adjustment in the price of identical goods, imported by two or more persons but in different quantities. It is plain that such "adjustment" may not necessarily lead to a decrease in the value. It may result in an increase as well. Reference to the word `discount' in the interpretative note is by way of an illustration to indicate that a seller's price list is one of the relevant pieces' of evidence to establish the factum of quantity discount by the seller. It is manifest that "adjustment"in terms of Rule 5(1)(c) of 1988 Rules, for the purpose of determination of value of an import, can be granted only on production of evidence which establishes the reasonableness and accuracy of adjustment and higher volumes of imports per se , would not be sufficient to justify an adjustment, though it may be one of the relevant considerations.

Therefore, in so far as the question of "adjustment" in terms of Rule 5(1)(c) is concerned, the Court was in agreement with the Tribunal that the revenue having accepted the order of remand dated 29th June 2005, cannot now turn around an contend that no adjustment whatsoever is warranted. Similarly, there may also be some substance in the observation of the Tribunal that generally when the transactions are in large volumes over a long period, grant of discount is a normal commercial practice but again a commercial practice, per se, cannot be treated as conclusive evidence for determining real price of a consignment. Therefore, in the absence of some documentary evidence indicating that any rebate/discount was given to the appellant by the supplier, adjustments under Rule 5(1)(c) cannot be justified.

In the present case, it is evident from the impugned order that though the Tribunal had felt that requisite evidence to establish the range of adjustment was lacking and for that purpose, according to it, the matter was required to be remanded to the Commissioner but being influenced by the fact that there had already been three rounds of appeals to the Tribunal, it undertook the exercise itself.

The Supreme Court was convinced that this approach of the Tribunal was not in order and therefore, in the absence of any demonstrated evidence, its direction for ad-hoc adjustment @ 20%, cannot be sustained.

In the result, the appeal preferred by the importer- appellant is dismissed and the revenue's appeal is allowed. The order of the Tribunal under appeal, in so far as it pertains to the applicability of Rule 6 of 1988 Rules, is affirmed, however, the direction with regard to the adjustment on account of volume of imports of CAB by the appellant @ 20% in the price difference between each variety of CAB imported by the appellant and the corresponding CAB of the competitor, is set aside.

(See 2010-TIOL-54-SC-CUS in 'Customs')