Case Law Details
Hindustan Engineering Enterprises Vs Commissioner of Central Excise (CESTAT Chandigarh)
The appeals were filed by a manufacturing concern and a marketing company against orders of the Commissioner (Appeals) affirming demands of central excise duty and penalties. The dispute arose from investigations conducted by the Anti-Evasion Wing of Central Excise, Panchkula. The Revenue alleged that the manufacturing firm and the marketing company were related persons under Section 4(3)(b) of the Central Excise Act, 1944 and, therefore, valuation of goods cleared by the manufacturer should be determined under Section 4(3)(b)(ii) of the Act read with Rule 9 of the Central Excise Valuation Rules. Show cause notices were issued, adjudicated, and the demands and penalties were confirmed by the lower authorities.
The appellants contended that the issue was already settled in their favour in earlier proceedings involving the same parties. They argued that the authorities had incorrectly treated the two entities as related persons. According to the appellants, Section 2(41) of the Companies Act, 1956 read with Section 6 and Schedule IA defines relationships between natural persons, and therefore two corporate entities cannot be regarded as “relatives” for the purposes of Section 4(3)(b)(ii) of the Central Excise Act. They also relied on judicial precedents supporting this interpretation.
The appellants further submitted that the show cause notice merely alleged that the entities were related persons, whereas the adjudication order travelled beyond the allegations in the notice. It was also argued that the notice did not establish that the transaction value charged by the manufacturer to the marketing company was influenced by any alleged relationship. The marketing company sold the goods at a profit margin of only 5–7%, and the manufacturer did not sell all its goods through the marketing company. Therefore, Rule 9 of the Central Excise Valuation Rules could not be invoked.
After hearing both sides and examining the records, the Tribunal noted that the same issue had already been decided in the appellants’ own case for earlier periods. Referring to its previous decision, the Tribunal observed that Section 4(3)(b)(ii) requires a person to be a “relative” as defined under Section 2(41) of the Companies Act, 1956. Since a private limited company is not a living person and neither a private company nor a partnership firm is included within the relationships specified under Section 6 and Schedule IA of the Companies Act, the entities could not be treated as related persons under the Central Excise Act.
The Tribunal further held that Rule 9 of the Central Excise Valuation Rules applies only where goods are sold exclusively through related persons. In the present case, the manufacturer was also selling goods to government departments and undertaking exports. Since the entire production was not sold through the marketing company, Rule 9 was not applicable. Consequently, the allegation of undervaluation could not be sustained.
The Tribunal also noted that in earlier proceedings for different periods, allegations against the appellants had either been dropped by the Commissioner (Appeals) or Revenue’s appeals had not succeeded. In light of its earlier decisions and the findings regarding the absence of a related-person relationship and the inapplicability of Rule 9, the Tribunal concluded that the issue was squarely covered in favour of the appellants. Accordingly, the impugned orders were set aside and all four appeals were allowed.
FULL TEXT OF THE CESTAT CHANDIGARH ORDER
The appellants, M/s Hindustan Engineering Enterprises (Appeal No. E/1709/2012 & E/1710/2012) and M/s Malkoh Marketing Pvt. Ltd. (Appeal No. E/58705/2013 &E/58706/2013), have filed these appeals against the impugned orders passed by Commissioner (Appeals).
2. Brief facts of the case are that the appellants are engaged in the manufacture of submersible pumps falling under Chapter Sub-Heading 8413.13 of Central Excise Tariff Act, 1985 and are registered with Central Excise; on the basis of an investigation conducted by the officers of the Anti-Evasion Wing of the Central Excise, Panchkula, the Revenue was of the opinion that partners of M/s Hindustan Engineering Enterprise viz. Shri Vijay Kohli and Shri Vinay Kohli are real brothers and sons of Shri M.L. Kohli, who is one of the four directors in the marketing company i.e. M/s Malkoh Marketing Pvt. Ltd; similarly, Shri Rajiv Malhotra and Shri Anil Malhotra are real brothers and sons of Shri P.R. Malhotra, who is one of the four directors of M/s Malkoh Marketing Pvt. Ltd., the remaining directors being Shri Vinay Kohli and Shri Rajiv Malhotra were partners of M/s Hindustan Engineering Enterprises. Therefore, the Revenue entertained an opinion that these two firms are related to one another as per Schedule 1A to the Clause (c) of Section 6 of the Companies Act, 1956 and as provided under Section 4(3)(b) of the Act; therefore, the valuation of the goods, cleared by M/s Hindustan Engineering Enterprises, should be made in terms of Section 4(1)3(b)(ii) of Central Excise Act, 1944 read with Rule 9 of Central Excise Valuation Rules; show cause notices were issued and were adjudicated demanding duty and penalties; the original authority confirmed the demands raised along with penalties and the appeals filed by both the appellants were rejected by the Commissioner (Appeals). Hence, these appeals.
2. Shri Hemant Bajaj, learned Counsel for the appellants, submits that the present issue is no longer res integra between the parties as CESTAT has decided the issue in favour of the appellants in their own case – 2018 (10) TMI 532 (CESTAT) and by the Commissioner (Appeals) vide Order dated 29.01.2024. Learned Counsel submits that the authorities below have wrongly held that both the appellants are related in terms of Section 4(1)3(b)(ii) of Central Excise Act, 1944 read with Rule 9 of Central Excise Valuation Rules; a perusal of Section 2(41) of the Companies Act, 1956 read with Section 6 and Schedule IA of the said Act, it can be appreciated that the relationship between the natural persons have been enumerated as relatives and therefore, two corporate entities cannot be held to be relatives. He relies on M/s Hind Lamps Ltd. – 1977 ELT (J1) (All.) affirmed by the Hon’ble Supreme Court – 1989 (43) ELT 161 (SC) and Jay Engineering Works Ltd. – 1981 (8) ELT 284 (Del.).
3. Learned Counsel further submits that whereas the show cause notice merely alleges that the appellants are related persons the adjudication order proceeds to confirm that the appellants are related as per Section 4(1)(3) of Central Excise Act, 1944; thus, the show cause notice travels beyond the scope of the show cause notice which is not permitted as held in Champdany Industry Ltd. – 2009 (241) ELT 481 (SC) and Balarpur Industries Ltd. – 2007 (215) ELT 489 (SC).
4. Learned Counsel further submits that the show cause notice does not reveal that the transaction price charged by M/s Hindustan Engineering Enterprises to M/s MalkohMarketing Pvt. Ltd; M/s MMPL sold the same goods at the profit of 5-7% only; though M/s Hindustan Engineering Enterprises did not sell 100% of its clearances to M/s Malkoh Marketing Pvt. Ltd., Rule 9 of Central Excise Valuation Rules was wrongly invoked.
5. Shri Yashpal Singh, learned Authorized Representative for the Department reiterates the findings of the OIO and OIA.
6. Heard both sides and perused the records of the case. We find that the same issue has come for consideration before this Bench in the appellant’s own case for the demand raised for the period 200304 and 2005-06. The Bench vide Final Order No.63235-63241/2018 dated 05.10.2018 held that:
11. On going through the above provisions, we find that in terms of section 4(3)(b)(ii), if the person is relative then he should be relative in terms of Section 2(41) of Companies Act, 1956, which defines that relative means with reference to any person who is related to such person in anyway specified section 6 of and no others. The section 6 as cited hereinabove defines the relationship.
12. On going through the same, we find that as the Private Limited Company is not a living person and partnership firm is consist on various partners but the private limited company/partnership firm find no mention in schedule of 1(A) of section 6 of the Companies Act, 1956, therefore, the Revenue’s case fails on this ground only.
13. In view of the above, we hold that the appellants are not related person in terms of Section 4(3)(b)(ii) of the Central Excise Act, 1944.
14. Further, we take note of the fact that valuation is to be done if the goods are not sold by the assessee except through the persons who is related. Admittedly, whole of the goods are not sold by the M/s Hindustan through M/s Malkoh. In fact, M/s Hindustan is selling goods to Government Department as well as for exports. In that circumstances, the provisions of Rule 9 of Central Excise Valuation Rules, 2000, are not applicable to the facts of this case. Therefore, on that ground also, the charge of Revenue of under valuation is not sustainable.
15. Without going to the other aspect of the case, we hold that the appellant are not related persons in terms of section 4(3)(b)(ii) of Central Excise Act,1944 and provisions of Rule 9 of the Central Excise Valuation Rules, 2000, are not applicable to the facts of this case, therefore, the impugned orders are not sustainable in the eyes of law.
7. We further find that Commissioner (Appeals) vide Order dated 16.04.2013, deciding an order passed in respect of proceedings initiated against the appellants for the period January 2010 to September 2010, dropped the allegations. On an appeal filed by the Revenue against the said order, this Bench vide Final Order No.60628-60629/2023 dated 28.11.2023 dismissed the appeal, albeit on monetary grounds. We further find that Commissioner (Appeals) vide Order dated 28.01.2014 dropped the proceedings initiated for the period October 2010 to July 2011.
8. In view of the above, we find that the issue is squarely covered in favour of the appellants and the impugned orders cannot be sustained. Accordingly, we allow all the four appeals.
(Operative part of the order pronounced in the open court)
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