Central Excise - Valuation - Notional Interest on Advance - Onus on Revenue to prove nexus: Supreme Court
By TIOL News Service
NEW DELHI, JAN 22, 2016: A show cause notice dated 16th August, 2002, was issued to M/s. Owens Brockway (I) Pvt. Ltd., the predecessor-company of the respondent which is presently known as Hindustan National Glass and Industries Limited, by the Commissioner of Central Excise, Pune-I, alleging that the manufacturing company was not adding the additional consideration received from the customers in the form of advance and, therefore, the notional interest accrued thereon is to be added to the sale price, for such non-addition had resulted in depression of the assessable value of the goods, namely, the bottles manufactured by the respondent- assessee.
In the show cause notice, it was mentioned that the assessee had short paid the duty on its products, that is, printed glass bottles, by under-valuing the same at the time of clearance from its factory inasmuch as it did not add "additional consideration" received from M/s. Coca Cola India and M/s. Pepsico India Holdings Pvt. Ltd. The show cause notice referred to the statement of the Manager (Sales) of the Company from which it was discernible that the respondent-assessee had received 90% advance from M/s. Coca Cola India and 100% advance from M/s. Pepsico India Holdings Pvt. Ltd. for the goods and it was giving 3-4% discount to the said Companies.
The adjudicating authority passed an order on 28th November, 2003, making a demand of Rs. 33,91,934,00/- under Section 11A(1) of the Central Excise Act, 1944 being the duty payable on the additional consideration received by the assessee from the customers in the form of notional interest accrued on advance payments and also imposed penalty for the same amount under Section 11AC of the Act.
Being grieved by the order of the adjudicating authority, the respondent-assessee preferred an appeal before the Customs, Excise and Service Tax Appellate Tribunal, West Zonal Bench, Mumbai. Initially, the matter was heard by two Members consisting of Member (Judicial) and Member (Technical).
The Member (Technical) came to hold that the revenue had not been able to discharge the onus by adducing cogent material evidence that the advances obtained from a buyer had really been instrumental in depression of the price. He further opined that there was no nexus of interest with the price and hence, the demand was not acceptable and consequently, no penalty could be levied.
The Member (Judicial) adverted to the order passed by the Commissioner wherein the statement of the Manager (Sales) had been adumbrated in detail, referred to the other documents that had been put-forth by the revenue before the adjudicating authority and in course of discussion adverted to the principle stated in Commissioner of Central Excise, New Delhi vs. Hero Honda Motors Ltd. - 2005-TIOL-72-SC-CX-LB and opined that the the matter needs to be remanded to the Commissioner for fresh examination the entire aspect of the use of the advances, income generated from the said advances, their contribution of the pricing structure and their reflection in the Balance-sheet or the Annual Reports of the appellants, and the deployment of the funds so received by them.
As there was difference of opinion, the matter was referred to the third Member and the third Member, who was a Judicial Member, vide order dated 29th August, 2007, cogitated on the concept of assessable value under the Act, the concept of two prices and eventually opined that the decisions in Hero Honda Motors Ltd. and Metal Box India Ltd. vs. Collector of Central Excise, Madras - 2002-TIOL-108-SC-CX are not applicable to the case at hand and accordingly concurred with the opinion expressed by the Member (Technical).
Revenue is in appeal before the Supreme Court.
The Supreme Court observed,
On a scrutiny of the factual score, it is noticeable that the respondent-assessee had obtained certain advance sums from some companies/users to supply the bottles and on that count it had granted 3-4 per cent discount. Though the quantum had not been stated precisely, yet it has been found as a matter of fact that M/s. Coca Cola India and M/s. Pepsico India Holdings Pvt. Ltd. had given advances for 90% and 100% respectively for their purchases.
In the case at hand, the Member (Judicial) has remitted the matter to the competent authority to deal with it afresh in the light of the decision rendered in Hero Honda Motors Ltd.
On a perusal of the order passed by the Commissioner, it is seen that observations have been made on certain aspects and inferences have been drawn. It cannot be said that no material was produced by the revenue. The concerned Commissioner has taken note of the statement made by the Manager (Sales) of the assessee-Company. An aspect raised relates to percentage of total sales made to two companies, but the core issue is whether there was a depression of the sale price on account of receipt of advance. In the case of Metal Box India Ltd., the facts were extremely clear as there was an agreement that M/s. Ponds (I) Ltd. had given 50% advance with a stipulation that it would purchase 90% of the manufactured goods. It was a case where a separate price was charged. In the case of Hero Honda Motors Ltd., the facts, as we perceive, were not clear and, therefore, there was a remit. Be it noted, sale price agreed between two competing parties may get depressed, when substantial and huge advances are periodically extended and given with the objective and purpose that the sale price paid or charged would be lowered, to set off the consideration paid by grant of advances. There should be a connect and link between the two i.e. the money advanced it should be established was a consideration paid which could form the basis for depression of sale price. Evidence and material to establish the said factual matrix has to be uncovered and brought on record to connect and link the sale price paid on paper and the "other" consideration, not gratis, but by way of interest free advances.
In our considered opinion, in the present case, there has to be application of mind by the tribunal regard being had to the amount of money paid by purchasers, namely, M/s. Coca Cola India and M/s. Pepsico India Holdings Pvt. Ltd. and what is the effect of the sales made to the two companies in percentile terms, whether this had the effect of depressing the sale price. The onus would be on the revenue. That being the thrust of the matter, liberty is granted to the revenue to produce the documents in this regard to discharge the onus. As we are remitting the matter, we may note one submission of the respondent-assessee. It is urged by the learned counsel that when the entire activities were within the knowledge of the excise authorities, penalty is not leviable. Needless to emphasize, the tribunal shall advert to the said submission, if required, in the ultimate eventuate, in proper perspective.
In the result, the appeal is allowed, the order passed by the tribunal is set aside and the matter is remitted to the tribunal for fresh disposal. Supreme Court hastened to clarify that it has not expressed any opinion on any of the aspects.
(See 2016-TIOL-07-SC-CX)
