By TIOL News Service

MUMBAI, MAY 28, 2014: THE appellant entered into a Joint Venture Agreement and pursuant to the same various other related Agreements were also entered into like Non-competition agreement, assignment of Trademark, Trademarks licence agreement and Manufacturing agreement.

The Joint Venture Agreement and other related agreements were terminated w.e.f. 31/07/1996.

An enquiry was initiated in the year 1996 by the Department to find out as to whether the appellant GSL (Godrej Soaps Ltd.)has under-valued the assessable value of Toilet Soaps of certain brands during the period of its alliance with PGG (Procter & Gamble Godrej Ltd.).  During the course of enquiry, copies of the Agreements obtained from GSL were examined and statements of various officials of GSL were recorded. The enquiry revealed that GSL had manufactured and cleared Toilet Soaps to PGG at an under-valued price inasmuch as it had not included the additional consideration received by it on account of advertisement expenses incurred by PGG during the period 1-3-1993 to 31-7-1996 on the Toilet Soap Brands/Trademarks licenced to PGG by G&B totally amounting to Rs.73,88,56,730/- while computing the assessable value of said goods, thereby short-paid Central Excise duty.  It was further noticed that the amounts of other additional consideration received from PGG in the guise of Non-Competition Agreement & Trademarks Licence Agreement amounting to Rs.34 crore and Rs.7 Crore respectively were also not included in the assessable value of the said goods.

The Commissioner confirmed the duty demanded and imposed lots of penaltiesetc.

The Tribunal by its order dated 21/02/2002 while upholding the levy of central excise duty on account of advertisement and sales promotion, set aside the duty demands on account of non-competition agreement and trademarks licence fees. 

The Apex Court 2008-TIOL-247-SC-CX set aside this order and remanded the proceedings to the Tribunal for fresh considerationonly in respect of the show cause notice issued by Commissioner (Indore) in respect of the Malanpur factory of the appellant. 

Marathon submissions were made by both sides.

The Bench crystallised the issues involved &after examining the case laws cited by both sides gave the following findings -

1. Advertisement expenses/sales promotion expenses incurred by the PGG

+ The only objection to the price is that it is not the sole consideration. To invoke rule 5, there should be some flow back of consideration from the buyer to the assessee directly or indirectly. In the present case, the buyer, PGG has incurred advertisement and sales promotion expenses on the toilet soaps manufactured by and purchased from GSL.  In terms of the Joint Venture Agreement, there was an understanding between the two parties, that is, GSL will manufacture and sell the toilet soaps to PGG and PGG will market these soaps to the ultimate consumers.  There is nothing on record nor any produced before us that there has been any flow back of consideration from PGG to GSL.  After conceding that PGG and GSL are not related, there cannot be any presumption of flow back from PGG to GSL unless there is direct evidence to that effect which is lacking in the present case. In the present case, these expenses have been incurred by PGG after the sale of toilet soaps by GSL to it and therefore, the question of adding such post sale expenses to the assessable value of the goods would not arise at all.

B) Non-compete fee paid by PGG to GSL

+ The non-compete agreement, trade mark agreement and the manufacturing agreement are an integral part of the JVA ….  All these agreements are co-terminus with the JVA.  One does not exist without the other.  In view of this factual position, these agreements cannot be viewed separately or as existing independently. The manufacturing agreement would not have been entered into without the non-compete agreement or the trade mark agreement. Therefore, the consideration paid under any one of the agreements cannot be viewed as a separate transaction in itself and has a bearing on the entire transaction.  The very fact that when the JVA was terminated in1996, all the 3 agreements also ceased to operate/exist is a clear pointer to the fact of inseparability of these agreements.  If that be so, the consideration paid by PGG to GSL under the non-compete agreement and through G&B to GSL under the trademark agreement should have a definite bearing on the price paid by PGG to GSL under the manufacturing agreement and the pricing formula adopted therein. 

C) Trade mark licence fee paid by PGG to G&B

+ The whole arrangement of assignment of trade marks by GSL to G&B, grant of right to use the trade mark to PGG, transfer back of the trade marks to GSL for a nominal sum was only a mechanism adopted for routing the payment for the trade mark indirectly to GSL through G&B.  The Trade marks provide a commercial identity to the product or service and adds value to the product.  In terms of the Supreme Court judgment in the case of Bombay Tyre International, all the expenses which enrich the value of the goods in the eye of the customers is to be included in the price.  Brand names have a certain value and are reflective of goodwill of the manufacturer.  Thus, in the instant case, the consideration paid for the use of the trade marks by PGG to GSL, routed through G&B, is an additional consideration flowing from PGG to GSL and therefore, should certainly form part of the value of the toilet soaps manufactured and sold by GSL to PGG during the currency of the JVA.  The reasons adduced for inclusion of non-compete fee in the assessable value, in the preceding paragraphs, would apply equally well in the case of trademarks also.  Thus, the demand of excise duty on this amount received by or on behalf of GSL is clearly sustainable in law.

D) Limitation

In the absence of relevant and material agreements accompanying the price declarations, the department could not have examined or understood how the prices declared in the price lists were influenced by these agreements.  In the price declarations filed by the appellant with the department, there was no mention of any of the agreements with PGG and others. The fact of receipt of non-compete fee and trademark licence fee by GSL was also not informed/declared to the department.  Thus it is a clear case of deliberate non-disclosure on the part of the appellant with intent to evade payment of appropriate excise duty. Therefore, the invocation of extended period of time to confirm the duty demand is clearly sustainable in law.

E) Penalty & Interest

+ It is a settled position in law that levy of interest is a substantive provision and cannot be applied retrospectively. Interest can be levied only when the provision comes into force. Therefore, in the present case, interest under Section 11AB on the duty demand confirmed will be operative only from 28-9-1996 and not earlier.

+ As regards penalties, section 11AC prescribing mandatory penalty was brought into the statute book only with effect from 28-9-1996.  When the goods were cleared and duty became due, the said provision was not in existence.  Therefore, imposition of penalty under section 11AC of the Act on GSL cannot be sustained.

+ As regards the penalties imposed on PGG, PGIL and G&B, the charge against them is one of abetment.  In the present case, the responsibility of correct declaration of price, assessing and paying excise duty, complying with the statutory provisions was on GSL and not on PGG, PGIL and G&B.  In other words, there was no statutory obligation or requirement on PGG, PGIL and G&B to do any act in respect of their transactions with GSL.  Further the issues involved related to interpretation of statutory provisions relating to valuation of the goods which was the sole responsibility of GSL. In these circumstances impositionof penalties on these parties are not warranted. For the same reasons, penalties imposed on Sri. A.B. Godrej, Sri. SudhirAwasthi and Sri. Vijay Kulkarni, employees of GSL are set aside.

F) Confiscation of Plant & Machinery

Confiscation of plant and machinery of GSL is justified inasmuch as GSL tried to evade excise duty by mis-declaration of value and suppression of facts.

The appeals were disposed of as above.

(See 2014-TIOL-878-CESTAT-MUM)