CX - s.4 of CEA, 1944 - Expression 'interest directly or indirectly' would refer to financial interest only : CESTAT
By TIOL News Service
NEW DELHI, JULY 11, 2015: DURING the period 01.10.2000 to 28.02.2002,the appellant,in terms of their agreement with M/s. Heinz India Pvt. Ltd., were blending and packing Glucon D and Complan on job work basis for Heinz out of the raw material as well as packing material supplied by them.
The dispute in the present case is only in respect of valuation of Glucon-D.The appellant was clearing the blended and packed Glucon D to Heinz on payment of duty on the value determined in terms of the Apex Court's judgment in the case of Ujagar Prints - 2002-TIOL-03-SC-CX-CB , that is, on the basis of cost of raw-material received plus job charges plus their profit margin.
Upon enquiry it was noticed that w.e.f. from October, 2000, the assessable value of Glucon-D manufactured and cleared had been reduced as compared to the AV during the earlier period. Inasmuch as during the period prior to 01.10.2000, appellant were paying duty on the sale price of the product by Heinz from their depots.
Demands came to be issued for recovery of differential CE duty of Rs.9.35 crores and which was confirmed along with interest and penalties.
The Tribunal vide order dated 12.01.2005 had set aside the orders passed by the CCE and allowed the appeal. But, in Revenue appeal, the Supreme Court vide order dated 13.02.2012 - 2012-TIOL-14-SC-CX remanded the matter to the Tribunal for denovo decision observing that if the transaction between job worker and principal manufacturer are not at arms length and the two are related person, the formula prescribed in the Apex Courts judgment in the case of Ujagar Prints (supra) would not apply and that in such a case, the Apex Courts judgement in case of Commissioner vs. S.Kumars - 2005-TIOL-147-SC-CX would apply and the price at which the goods were sold by Heinz would be the assessable value; that the Tribunal did not address this aspect of the matter, as it did not consider whether the assessee and Heinz are related persons and it based its decision solely on the observation made by the adjudicating authority that the status of the assessee was not better than that of a hired labour.
Accordingly, the matter was heard recently.
The Bench after considering the exhaustive submissions made by both sides in a lengthy order, while distinguishing the decisions cited by the AR, observed -
++ If the FHS and Heinz are to be treated as related persons within the meaning of this term as defined in section 4(3)(b) of the Central Excise Act, 1944, the assessable value of the goods manufactured and cleared by FHS to Heinz would be the sale price at which the same were sold by Heinz from their depots.
++ According to the Commissioner's findings on this point in para 33 of the impugned order, in view of the terms of agreement between FHS and Heinz, the FHS were bound, hand and foot during the period of agreement and that they had none of the latitude that an independent manufacturer would have inasmuch as there had very limited freedom of action and hence, FHS have to be treated as an extension of Heinz or hired labour of Heinz.
++ In terms of section 4(3)(b) an assessee and its customer shall be deemed to be related for the purpose of this section if -
* They are interconnected undertakings;
* They are relatives
* Among them the buyer is a relative and distributor of the assessee or a sub distributor of such distributor or;
* They are so associated that they have interest directly or indirectly in the business of each other.
++ It is not the case of either side that FHS & Heinz are "interconnected undertakings" or are "relatives" or that the buyer Heinz is a relative and distributor of the Assessee or sub-distributor of such distributor".
++ The case of the Department is that FHS and Heinz are so associated that they have interest directly or indirectly in the business of each other and that the terms of the agreement between FHS and Heinz clearly indicate to the existence of direct as well as indirect interest in each others business.
++ In our view, the expression - "interest directly or indirectly" used in clause (iv) of section 4(3)(b) would refer to the financial interest only. The real test of a related person transaction tainted by "interest directly or indirectly in the business of each other" is that the purpose of the transaction is not the sale of goods/services by the seller to the buyer at fully commercially providing price but something else, like seller wanting to reduce his tax liability etc.
++ Without going into the question whether FHS had received any technical knowhow from Heinz or not we are of the view that even if, FHS had received technical knowhow from Heinz for blending and packing of Glucon D, since FHS is only a job worker manufacturing the goods for Heinz as per their standards and specifications, providing of technical knowhow by Heinz to FHS would not benefit FHS in any manner, unless FHS were free to use the technical knowhow provided by Heinz to manufacture the goods on their own account and for their other customers. But there is neither any such allegation, nor any evidence.
++ FHS will do the blending and packing of Glucon D and Complan for Heinz as per their specifications and quality standards, and that manufacturing schedule of FHS shall be as per the instructions of Heinz or that Heinz shall have access to the factory of FHS to inspect their operations, cannot be said to be the conditions which will make FHS and Heinz related persons or FHS as a hired labour of Heinz.
++ Similarly the condition that the FHS will be allowed manufacturing/ handling loss of not more than 1.5%, and that the goods which are not found to be as per the specifications and quality standards of Heinz shall be destroyed by Heinz and the cost of the same would be recovered from FHS are the conditions to avoid unnecessary waste and ensure the desired quality of the products and these clauses of the agreement also cannot be said to be the conditions which curtail the financial freedom of FHS to transact with Heinz and make them a pure hired labour and extension of FHS.
++ In the present case FHS had invested in their own plant and machinery and were manufacturing food products for other persons also. There is no allegation that Heinz had made any investment in plant and machinery of FHS for manufacture of their products.
++ In the present case no interest free advance has been received by FHS from Heinz and other than the job charges no other consideration has been received, therefore, the Apex Court judgment in the case of Pilky Footwear Company (P) Ltd. would not be applicable to the facts of this case.
++ In the present case there is neither any allegation nor any evidence to prove that Heinz had all pervasive financial and managerial control over FHS and, therefore, the judgment of Apex Court in case of Modi Alkalies & Chemicals Ltd.
++ To sum up, the conditions in the job work agreement are compatible with arms length transactions as freedom of operation to a job worker also not means freedom to waste the raw material suppliers (Principal Manufacturer) material, or manufacture sub standard goods and not sticking to the delivery schedule of the principal manufacturer.
Conclusion:
We hold that FHS& Heinz cannot be treated as related persons and accordingly the assessable value of the goods manufactured by FHS would have to be determined in accordance with the Apex Courts Judgment in the case of Ujagar Prints and Ors. vs UOI i.e. aggregate the cost of the raw material, job charges and job workers profit and not the price at which the goods were being sold by Heinz form their depots and as such the judgments in the case of S. Kumars vs CCE would not be applicable to the facts of this case. The impugned order is, therefore, set aside and the appeals are allowed.
(See 2015-TIOL-1395-CESTAT-DEL)
