C.C.E.-Ahmedabad-ii Vs Leamak Healthcare P Ltd (CESTAT Ahmedabad)
CESTAT Ahmedabad held that imposition of penalty without granting an opportunity of being heard is against the principles of natural justice and accordingly cannot be sustained.
Facts-
M/s. Leamak Healthcare P Ltd. (LHL) are engaged in the manufacture of confectionary items on behalf of M/s. ITC Ltd. on job work basis. As per the agreement entered between LHL and ITC, the packing material has been supplied by ITC and the goods manufactured by the LHL were handed over to ITC at factory gate. The LHL was paying Central excise duty on the value arrived at on the basis of raw material cost plus packing material cost plus conversion cost. Prior to June, 2005 the LHL was discharging duty on MRP basis under Section 4A of the Central Excise Act, 1944.
A show cause notice was issued by revenue alleging that ITC and LHL have interest directly or indirectly in the business of each other and therefore, the two are related in terms of Section 4(3)(b) of the Central Excise Act, 1944 and therefore, the assessable value should be governed by Rule 9 of Central Excise Valuation (Determination of Price of Excisable goods) Rules, 2000.
Consequently, demand of central excise duty was raised against LHL and notice for imposing penalty was issued to both the LHL and ITC. The said demand was confirmed by OIO holding that LHL and ITC were related in terms of Section 4(3)(b)(iv) of the Central Excise Act, 1944. The penalty was also imposed on both LHL and ITC. Being aggrieved, the present appeal is filed.
Conclusion-
Held that no excise duty needs to be paid on the outward freight from Leamak to ITC, Marketing spends by ITC and fixed costs of ITC relating to activities of ITC other than provision of moulds at concessional cost.
Finally, the impugned order is set aside in so far as it seeks to include outward freight from Leamak to ITC godown and marketing spends for charging excise duty. The impugned order is also set aside in so far as it seeks to include the fixed cost of ITC in total to the assessable value.
Held that the order passed in the instant case is imposing penalty on M/s. ITC Ltd is without following the principles of natural justice and on that count as well the impugned order cannot be sustained. We find merit in the argument of M/s. ITC Ltd. that when the impugned order imposed penalty on the appellant, they should have been granted an opportunity of defend themselves.
FULL TEXT OF THE CESTAT AHMEDABAD ORDER
These appeals have been filed by M/s. Leamak Healthcare P Ltd and M/s. ITC Ltd.
1.2 M/s. Leamak Healthcare P Ltd. (LHL) are engaged in the manufacture of confectionary items on behalf of M/s. ITC Ltd. on job work basis. As per the agreement entered between LHL and ITC, the packing material has been supplied by ITC and the goods manufactured by the LHL were handed over to ITC at factory gate. The LHL was paying Central excise duty on the value arrived at on the basis of raw material cost plus packing material cost plus conversion cost. Prior to June, 2005 the LHL was discharging duty on MRP basis under Section 4A of the Central Excise Act, 1944.
1.3 A show cause notice was issued by revenue alleging that ITC and LHL have interest directly or indirectly in the business of each other and therefore, the two are related in terms of Section 4(3)(b) of the Central Excise Act, 1944 and therefore, the assessable value should be governed by Rule 9 of Central Excise Valuation (Determination of Price of Excisable goods) Rules, 2000. Consequently, demand of central excise duty was raised against LHL and notice for imposing penalty was issued to both the LHL and ITC. The said demand was confirmed by Order-In-Original dated 10.08.2010 holding that LHL and ITC were related in terms of Section 4(3)(b)(iv) of the Central Excise Act, 1944. The penalty was also imposed on both LHL and ITC. The matter was challenged by both the parties before tribunal and tribunal vide order no. A/100002-100003/2014 dated 01.01.2014 set aside the order and remanded the matter back to the original adjudicating authority with following observations :-
11. In view of the above facts though mutuality of interest is not established but it has been correctly held by the adjudicating authority that the judgment of Hon’ble Supreme Court in the case of M/s Ujagar Prints (Supra) cannot be made applicable to the present proceedings because the present case is clearly distinguishable from the facts and the principles laid down by Apex Court for valuation of the goods in case of manufacture of goods on job work basis. In the case of M/s Ujagar Prints only one of the several materials i.e., grey fabrics was supplied to the job worker whereas in the present case all the raw materials and packing materials were supplied by ITC. Various gift articles were also supplied by ITC for packaging, the machinery worth more than Rs.7 crores required for manufacturing of confectionery was supplied by ITC on rent of Rs. 12,000/- per annum in the present proceedings whereas the machinery belonged to M/s Ujagar Prints in the case before Apex Court. In the case of M/s Ujagar Prints the job worker was at liberty to manufacture goods for any client on job work and was not restricted to a particular client as is the case in the present proceedings. As already held the revenue is not able to establish that there is mutuality of interest in view of the monetary gain and flow back to both the appellant and M/s ITC. One way interest has been held by various pronouncements as not the conclusive proof of two individuals being related. In the present proceedings before us appellant will be interested in getting work from M/s ITC as he is getting more financial gains from M/s ITC but it is not coming out anywhere in the case records as to have M/s ITC has financially gained from the appellant in the transactions. There is a clause in the agreement that M/s ITC at any time can get the work entrusted to the appellant, done from others. Therefore the provisions of Rule 9 cannot be pressed into service in the present proceedings. However, at the same time, for reasons recorded above in the present case valuation of confectionary manufactured by M/s Leamak can not be resorted to as per the principles laid down by Apex Court’s decision in the case of M/s Ujagar Prints (supra). In this case the valuation of goods is required to be decided by the adjudicating authority under the provisions of Rule 11 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules 2000 applicable at the relevant time. We accordingly remand the case back to the adjudicating authority to determine the value of the goods as per the provisions of Rule 11 of the Valuation Rule 2000. Needless to say that appellants should be given an opportunity to present their case in de-novo proceedings, before taking a final view on the issue.
The Commissioner in the remand proceeding again confirmed the demand of central excise duty amounting to Rs.2,48,06,064/- along with interest under Section 11AB of the Central Excise Act, 1944, penalty under Section 11AC of the Central Excise Act read with Rule 25(1) of Central Excise Rules, 2002 was also imposed on LHL and a penalty of Rs.60 lacs was imposed on ITC under Rule 26(1) of Central Excise Rules, 2002. Aggrieved by the said order, the LHL and ITC are in appeal before this tribunal. Revenue is also in appeal against the said order.
2. Learned Counsel for LHL and ITC argued that the matter was remanded by tribunal with specific directions to do valuation under Rule 11 of CV Rules. Rule 11 of CV Rules reads as under:-
Rule11. If the value of any excisable goods cannot be determined under the foregoing rules, the value shall be determined using reasonable means consistent with the principles and general provisions of these rules and sub-section (1) of section 4 of the Act.
He argued that the said direction of the tribunal has not been followed by the lower authorities. He argued that Rule 11 of CV Rules clearly lays down that the value is required to be determined using reasonable means however, the manner of determination should be consistent with the principles and general provisions of the valuation rules. He argued that the goods manufactured by LHL are not sold by them therefore, value cannot be determined under Rule 4 to 8 of the Valuation Rules. He further argued that the tribunal has already held that LHL and ITC are not related and therefore, the transaction cannot be done under Rule 9 also. He argued that Rule 10 deals with sales through interconnected undertaking and therefore, since LHL and ITC are not interconnected undertaking Rule 10 can also not be invoked.
2.1 Learned counsel argued that the following are the factors identified which have influenced the assessable value of the goods supplied by LEAMAK to ITC Ltd.
(i) Providing of machinery by ITC valued at Rs.7.38 Crores approximately, to Leamak
(ii) Employees of ITC deployed at Leamak.
(iii) Payment of Rs.25,88,257/- received from ITC towards 50% of the cost of moulds.
(iv) Interest free advance of Rs.49,00,000/- given by ITC to Leamak.
(v) Supply of free gifts by ITC worth Rs.1.5 Crores.
Learned counsel argued that the ITC provided machinery valued at Rs.7.38 approximately to Leamak under Machine Hiring Agreement dated 13.12.2004 at an annual hire charges of Rs.12,000/-P.A. which was periodically renewed up to 01.04.2009 with certain changes in the schedules made from time to time which involved additions of certain assets and also range of products to be manufactured. The most important aspect of this agreement was that Leamak shall deliver the confectionary to ITC ex-factory and deliver the same to the transporter nominated by ITC.
2.2 Learned counsel further argued that the agreement dated 13.12.2004 was amended from time to time and the last agreement was 01.04.2009. The common features of all the agreements entered into on 13.12.2004, 20.05.2005, 01.07.2007, 11.12.2008 and 01.04.2009 are as follows:-
