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the Customs Excise & Service Tax Appellate Tribunal, New Delhi (for short “the Tribunal”). By the impugned order the Tribunal has quashed the additional excise duty demand of `9,34,89,367/- under Section 11A of the Act; penalties of `1.5 crores each on respondent Nos.1 and 2 1 =whether the Assessee and Heinz are related persons. 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”. We are, therefore, of the opinion that in the light of the above discussion, it would be necessary for the Tribunal to examine in depth the agreement between the Assessee and Heinz as also any other additional material, the 16

REPORTABLE

English: Central Excise logo

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IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NOS. 6539-6540 OF 2010
COMMISSIONER OF CENTRAL EXCISE, — APPELLANT

FARIDABAD

 
VERSUS

 
M/S. FOOD & HEALTHCARE — RESPONDENTS

SPECIALITIES & ANR.

 

 

JUDGMENT

 

 

D.K. JAIN, J.:

 
1. These appeals under Section 35L(b) of the Central Excise Act, 1944
(for short “the Act”) are directed against a common final order, dated
2nd February 2005 in Appeal No. E/5261-62/04-NB(A), passed by the
Customs Excise & Service Tax Appellate Tribunal, New Delhi (for
short “the Tribunal”). By the impugned order the Tribunal has quashed
the additional excise duty demand of `9,34,89,367/- under Section 11A
of the Act; penalties of `1.5 crores each on respondent Nos.1 and 2

 
1
under Rule 173Q of the Central Excise Rules, 1944 (for short “the 1944
Rules”) and Rule 25(1) of the Central Excise Rules, 2001 (for short “the
2001 Rules”) read with Section 38A of the Act and a penalty of `2
crores under Rule 209A of the 1944 Rules and Rule 26 of 2001 Rules
read with Section 38A of the Act on Respondent No. 2 as confirmed by
the Deputy Commissioner of Central Excise.

 
2. Succinctly put, the material facts giving rise to the present appeals are
as under:

 
Respondent No.1–M/s Food & Healthcare Specialities (for short “the
Assessee”) was engaged in the blending and packing of `Glucon D’ for M/s
Heinz India Pvt. Ltd. (for short “Heinz”), respondent No.2 in these appeals,
pursuant to an agreement commencing from 1st March 2000. Under the
agreement, Heinz was to supply raw material, packing material and the
technical know-how to the Assessee for the blending and packing of the said
product. From March 2000 to September 2000, the Assessee paid excise duty
on the basis of wholesale price of the product at the depots of Heinz.
However, for the period commencing from October 2000, they filed price
declarations seeking to modify the assessable value of the product as the
aggregate of cost of raw material, packing material and their job work

 

 

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charges and started paying duty on the same. During the course of
investigations undertaken by the revenue, it was found that the said product
was also being processed at the Aligarh factory of Heinz and the duty on
those clearances was being paid at the assessable value/depot sale price of
Heinz. Consequently, three notices were issued to the Assessee for the period
October 2000 to December 2000; January 2001 to June 2001 and July 2001 to
February 2002, to show-cause as to why the assessable value declared by
them be not rejected and the price declarations submitted by them be not
amended by determining the assessable value on the basis of the sale price
fixed by Heinz at its depots and the duty so paid be not recovered along with
penalty under Rule 173Q of the 1944 Rules.

 
Upon consideration of the cause shown by the Assessee, the
Adjudicating Authority, by its order dated 31st August 2004, confirmed the
differential demand indicated in the show cause notices and imposed the
aforesaid penalties on the Assessee as also on Heinz. On appeals preferred
against the said order, the Tribunal, by an exceptionally short order, set aside
the order-in-original, concluding that since the Adjudicating Authority has
itself given a specific finding that the status of the Assessee was not better
than that of hired labour and Heinz is the manufacturer, the duty is leviable
only on the manufacturer. Being aggrieved by the dismissal of its appeal

 
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under Section 35G of the Act by the High Court, as not maintainable, the
revenue is before us in these appeals.

 
3. Mr. B. Bhattacharyya, learned Additional Solicitor General appearing
for the appellant, referring to several clauses of the agreement between the
Assessee and Heinz, in particular, clauses (d), (1), (2), (5), (7), (9),(13), (15)
and (16), vehemently submitted that the relationship between the Assessee
and Heinz was one of principal and agent and not of principal to principal and
therefore, the price at which, Heinz sold `Glocon-D’ in the wholesale market
must be taken as the assessable value. According to the learned counsel,
Heinz had complete control over the activities of the Assessee, who was
merely a job worker. To bring home his point that the Assessee was merely an
extended arm of Heinz, he laid emphasis on the fact that processed `Glocon-
D’ was stored at the same premises from where Heinz was operating; Heinz
had also taken an exemption from registration under Rule 9(2) of the
erstwhile Central Excise (No.2) Rules, 2001, in terms of Notification No.
36/2001 dated 26th June 2001, which was available to a manufacturer who got
his goods manufactured on his account from any other person, subject to the
condition that the said manufacturer authorised the person, who actually
manufactured or fabricated the said goods, to comply with all the procedural

 

 

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formalities under the Act and the rules made thereunder, in respect of the
goods manufactured on behalf of the said manufacturer.

 
Relying heavily on the decision of this Court in Commissioner of
Central Excise, Indore Vs. S. Kumars Ltd. & Ors.1, wherein dealing with the
question of assessable value of the processed goods in relation to the
processor the earlier decisions of this Court in M/s Ujagar Prints & Ors. (II)
Vs. Union of India & Ors.2 (for short “Ujagar Prints (II)”), M/s Ujagar
Prints & Ors. (III) Vs. Union of India & Ors.3 (for short “Ujagar Prints
(III)”), Empire Industries Limited & Ors. Vs. Union of India & Ors.4 and
Pawan Biscuits Co. Pvt. Ltd. Vs. Collector of Central Excise, Patna5, were
discussed. Learned counsel argued that the formula laid down in the Ujagar
Prints (II) or (III) would not apply to the fact-situation. It was stressed that
having failed to examine the relationship between the Assessee and Heinz, the
Tribunal’s order deserved to be set aside and the matter was fit to be remitted
back to the Tribunal for fresh adjudication on the touchstone of the ratio of S.
Kumars.

 

 

1 (2005) 13 SCC 266

2 (1989) 3 SCC 488

3 (1989) 3 SCC 531

4 (1985) 3 SCC 314

5 (2000) 6 SCC 489

 
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4. Per Contra Mr. V. Lakshmi Kumaran, learned counsel appearing on
behalf of the respondents submitted that in the show cause notice there
was no allegation that the Assessee and Heinz are related persons and
therefore, Section 4 (1)(b) of the Act could not be invoked to determine
the assessable value. It was asserted that in reply to the show cause notice,
it was clearly stated that apart from the fact that dealings between the
Assessee and Heinz were on principal to principal basis, the Assessee was
also processing goods for other manufacturers. In support of this
argument, learned counsel relied upon clause 22 of the agreement between
the said parties, which stipulated that:

 
“Nothing herein contained shall constitute or be deemed to

or is intended to constitute F&HS as an agent of Heinz. It

is hereby expressly agreed and declared that F&HS shall

not at any time-
a) Enter into a contract in the name of or purporting to be

made on behalf of Heinz.
b) ……………………………………………………..”

 
It was argued that the clause clearly shows that the parties were at arm’s
length and the Assessee was processing `Glucon-D’ only on job-work basis.
It was thus asserted that dealings between the Assessee and Heinz being on
principal to principal basis, the principle laid down in Ujagar Prints (II), as
clarified in Ujagar Prints (III), for determining the assessable value, was on

 
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all fours with the fact-situation at hand and as such the ratio of the judgment
in S. Kumars will not apply. In the compilation filed on behalf of the
Assessee, reliance is also placed on Circular No.: 619/10/2002-CX dated 19th
February 2002, which clarifies that even after the introduction of new
valuation provisions with effect from 1st July 2000, in respect of goods
manufactured on job-work basis, valuation would be governed by Rule 11
read with Rule 6 of the Central Excise Valuation (Determination of Price of
Excisable Goods) Rules, 2000 (for short “the 2000 Rules”) and the decisions
of this Court in Ujagar Prints II and Pawan Biscuits. According to the
learned counsel, the issue raised by the revenue stands concluded by the ratio
of Pawan Biscuits, and therefore, the appeals deserve to be dismissed.

 
5. The principles of valuation of excisable goods for the purpose of
charging excise duty are contained in Section 4 of the Act (as amended with
effect from 1st July 2000), which, insofar as it is relevant, reads as follows:

 
“4. Valuation of excisable goods for purposes of charging of

duty of excise.–(1) Where under this Act, the duty of excise is

chargeable on any excisable goods with reference to their value,

then, on each removal of the goods, such value shall–
(a) in a case where the goods are sold by the assessee, for

delivery at the time and place of the removal, the assessee

and the buyer of goods are not related and the price is the

sole consideration for the sale, be the transaction value;

 

 

7
(b) in any other case, including the case where the goods are

not sold, be the value determined in such manner as may

be prescribed.
(2) …………………………………………………………..
(3) For the purposes of this section,–
(a) ……………………………………………………
(b) persons shall be deemed to be “related” if–
(i) they are inter-connected undertakings;
(ii) they are relatives;
(iii) amongst them the buyer is a relative and

distributor of the assessee, or a sub-distributor of

such distributor; or
(iv) they are so associated that they have interest,

directly or indirectly, in the business of each

other.
Explanation.–In this clause–
(i) “inter-connected undertakings” shall have the

meaning assigned to it in clause (g) of section 2 of the

Monopolies and Restrictive Trade Practices Act, 1969 (64

of 1969); and
(ii) “relative” shall have the meaning assigned to it in

clause (41) of section 2 of the Companies Act, 1956 (1 of

1956);
(c) ……………………………………………………
(d) “transaction value” means the price actually paid or

payable for the goods, when sold, and includes in addition

to the amount charged as price, any amount that the buyer

is liable to pay to, or on behalf of, the assessee, by reason

of, or in connection with the sale, whether payable at the

time of the sale or at any other time, including, but not

 
8
limited to, any amount charged for, or to make provision

for, advertising or publicity, marketing and selling

organization expenses, storage, outward handling,

servicing, warranty, commission or any other matter; but

does not include the amount of duty of excise, sales tax

and other taxes, if any, actually paid or actually payable on

such goods.”

 
The new Section 4 of the Act, substituted w.e.f 1st July 2000, and material for
our purpose, prescribes that the value of excisable goods shall be the
transaction value subject to satisfying the conditions that: (i) the price must be
the sole consideration; (ii) the buyer must not be a related person and (iii) the
goods must be sold by the assessee for delivery at the time and place of
removal. The basic principle underlying Section 4(1)(a) of the Act is the
transaction value as defined in clause (d) of sub-section 3 of Section 4 of the
Act, which inter-alia, means the price actually paid or payable for the goods
when sold, provided the assessee and the buyer of goods are not related.
Clause (b) of sub-section (3) of Section 4 of the Act, inter-alia, stipulates that
person shall be deemed to be “related” if they are so associated that they have
interest, directly or indirectly, in the business of each other. It is clear that if
the assessee and the buyer are related, valuation has to be under Section 4(1)
(b) of the Act read with the 2000 Rules. We may, however, note that
conceptually there is no significant change in the definition of “related
person” in the new and repealed Section 4 of the Act.

 
9
6. Thus, the pivotal question on which learned counsel for both the
parties addressed us, is whether the Assessee was merely a processor
of `Glucon-D’, independent of Heinz or it was related to Heinz. In
other words, whether the relationship between the Assessee and Heinz
was one of principal to principal or that of an agent and principal. As
aforesaid, the stand of the revenue is that the Assessee, as the
processor, is not independent of Heinz and therefore, ratio of Ujagar
Prints (III) would not apply. It is evident from the order of the
Tribunal that it has not addressed this aspect of the matter in detail,
and has not considered whether the Assessee and Heinz were related
persons. Nevertheless, since the rival contentions urged before us
mainly related to the question as to whether the formula laid down in
Ujagar Prints (III) and reiterated in Pawan Biscuits, would apply or
the principle enunciated in S. Kumar will govern the present case, it
will be useful to notice the principle enunciated in Ujagar Prints (II)
and (III) as also the ratio of S. Kumar.

 
7. In Ujagar Prints (II), a Constitution Bench of this Court was called
upon to consider the correctness of the view taken by this Court in
Empire Industries. In Empire Industries, it was held that the Central
Excises and Salt and Additional Duties of Excise (Amendment) Act,

 
10
1980, by which, the processes of bleaching, dying and printing were
brought within the definition of `manufacture’ for the purposes of the
Central Excise and Salt Act, 1944 and the Additional Duties of Excise
(Goods of Special Importance) Act, 1957 were constitutionally valid.
While upholding the validity of the Amendment Act, it was observed
that when the textile fabrics are subjected to the processes like
bleaching, dyeing and printing etc. by independent processes, whether
on their own account or on job charges basis, the value for the
purposes of assessment under Section 4 of the said Act will not be the
processing charges alone but the intrinsic value of the processed
fabrics which is the price at which such fabrics are sold for the first
time in the wholesale market. The principle enumerated in Section
4(1)(a) of the Act was applied to the processed goods. In other words,
the assessable value of the processed goods, as far as the processor
was concerned, had to be the same irrespective of the fact whether the
processor manufactures the goods and then processes them itself or
gives the goods and merely undertakes processing before returning the
same to the manufacturer/owner. That common norm was the
wholesale price.

 

 

11
8. On an application filed for clarification of the judgment in Ujagar
Prints (II), this Court by a short order in Ujagar Prints (III) clarified
as follows:
“1…it is made clear that the assessable value of the processed

fabric would be the value of the grey cloth in the hands of the

processor plus the value of the job work done plus manufacturing

profit and manufacturing expenses whatever these may be, which

will either be included in the price at the factory gate or deemed

to be the price at the factory gate for the processed fabric. The

factory gate here means the “deemed” factory gate as if the

processed fabric was sold by the processor…”

 

 

The Court went on to explain:
“2. If the trader, who entrusts cotton or man-made fabric to the

processor for processing on job work basis, would give a

declaration to the processor as to what would be the price at

which he would be selling the processed goods in the market,

that would be taken by the excise authorities as the assessable

value of the processed fabric and excise duty would be charged

to the processor on that basis provided that the declaration as to

the price at which he would be selling the processed goods in the

market, would include only the price or deemed price at which

the processed fabric would leave the processor’s factory plus his

profit…”

 
9. The decision in Ujagar Prints (III) was subsequently followed by this
Court in Pawan Biscuits. In that case, the Tribunal had held that the
assessee was, in reality, an agent of Britannia Industries Ltd. and,

 

 

12
therefore, the price at which Britannia was selling the manufactured
goods in the wholesale market was to be taken as the assessable value.
The decision of the Tribunal was reversed by this Court. It was found
that the agreement between Pawan Biscuits and Britannia indicated
that their relationship was one of principal to principal and not that of
principal and agent and also that the assessee (Pawan Biscuits) could
manufacture biscuits of other brands and sell them. Observing that
Pawan Biscuits had been established much prior to its agreement with
Britannia, it was held that the decisions in Ujagar Prints (II) and (III)
could not be factually distinguished. In short, it was held that for the
purpose of determining assessable value, it is necessary to include the
processor’s expenses, costs, and charges plus profit, but it is not
necessary to include the trader’s profits who gets the fabrics processed,
because those would be post-manufacturing profits.

 
10. A similar issue again came up for consideration of this Court in S.
Kumars. In that case, the assessee was processing grey fabrics.
Sometimes the grey fabrics were processed on their own account and
sometimes the grey fabrics were received for processing on job charge
basis from others, referred to in the judgment as the merchant
manufacturers. The assessee paid excise duty on the fabrics processed

 
13
by it treating the value of the processed fabric as being that at which,
the merchant manufacturers were selling the processed goods. This,
according to the assessee was in accordance with the decision in
Empire Industries. However, on the fabrics processed by it which had
been received from the merchant manufacturers, the assessee valued
the processed goods on the basis of the cost of grey fabrics plus the
processing charges as well as its manufacturing expenses and profits.
In other words, the price at which the merchant manufacturers were
selling the processed goods was not taken into consideration.
According to the assessee, this was done in light of the decision in
Ujagar Prints (II) and (III). A notice was issued to the assessee to
show-cause as to why differential duty of Excise along with penalty be
not recovered from it as the assessee and the merchant manufacturers
were all firms and companies having a common management and
control with some of them selling grey fabrics to the assessee, which
after processing the fabrics was sold to some independent dealers. All
such independent dealers as well as the merchant manufacturers were
described as `S. Kumars’ and the revenue asserted to treat the price
charged by the merchant manufacturers from independent dealers as
the assessable value of the processed fabrics and to levy excise duty

 

 

14
thereon. The assessee denied that the merchant manufacturers were
related persons and thus disputed the basis on which claim for
additional excise duty was made. The stand of the assessee was that
by virtue of the decision of this Court in Ujagar Prints (III), they were
liable to treat the notional sale by the assessee to the merchant
manufacturers as the relevant point for determining the assessable
value. Examining the provisions of Section 4 of the Act, as it existed at
the relevant time, with reference to the Central Excise Valuation
Rules, 1975 and the decisions of this Court in Ujagar Prints (II) and
Ujagar Prints (III) and Pawan Biscuits, the Court held as follows:
“We, therefore, do not agree that Ujagar Prints (III) would apply

even to a processor who is not independent and, as is alleged in

this case, the merchant manufacturers and the purchasing traders

are merely extensions of the processor. In the latter case, the

processor is not a mere processor but also a merchant

manufacturer who purchases/manufactures the raw material,

processes it and sells it himself in the wholesale market. In such

a situation, the profit is not of a processor but of a merchant

manufacturer and a trader. If the transaction is between related

persons, the profit would not be “normally earned” within the

meaning of Rule 6(b)(ii). If it is established that the dealings

were with related persons of the manufacturer, the sale of the

processed fabrics would not be limited to the formula prescribed

by
Ujagar
Prints (III) but
would be subject to excise duty under

the
principles enunciated in Empire
Industries as
affirmed

in
Ujagar
Prints (II), incorporating t
he arms length principle.”

(Emphasis supplied by us)

 

 

15
11. It is manifest from the above that the only distinctive feature of S.
Kumars in comparison with Ujagar Prints (II) and (III) is the
emphasis on the factum of relationship between the parties viz., the
processor and the merchant manufacturers/traders, in the former. In
short, S. Kumars holds that if the processor-assessee is not at arm’s
length with the merchant manufacturer and is a related person, the
formula prescribed in Ujagar Prints (III) would not apply and
assessable value for the purpose of levy of excise duty will have to be
determined in terms of the ratio of S. Kumar i.e. in accordance with
the procedure contemplated in Section 4(1)(b) of the Act read with the
relevant valuation Rules. We deferentially concur with the ratio of S.
Kumars.

 
12. In the present case, as aforesaid, neither did the Tribunal address this
aspect of the matter, nor did it consider whether the Assessee and
Heinz are related persons. 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”. We are, therefore,
of the opinion that in the light of the above discussion, it would be
necessary for the Tribunal to examine in depth the agreement between
the Assessee and Heinz as also any other additional material, the

 
16
parties may like to adduce and determine the question whether or not
both of them are related persons.

 
13. Resultantly, the appeals are allowed and the matter is remanded back
to the Tribunal for the purpose of determining the nature of
relationship between the Assessee and Heinz. If it is found that they
are not related persons, then the present decision of the Tribunal will
stand affirmed. However, if the Tribunal finds that the Assessee and
Heinz are related, it shall remit the matter to the Adjudicating
Authority for fresh determination of the assessable value of the goods
in question in accordance with law. However, having regard to the
facts and circumstances of the case, there will be no order as to costs.

 

 

………………………………………

(D.K. JAIN, J.)

 

 

………………………………………

(ANIL R. DAVE, J.)

NEW DELHI;

FEBRUARY 13, 2012.
RS

 

 

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