[Order per : Jyoti Balasundaram, Vice-President]. - The appellants who are manufacturers of Agrochemicals, Textile Chemicals etc. and dealers in such products, also manufacture fungicide under the brand name ‘Dithane M-45’ falling under CET 3808.10 by diluting ‘Mancozeb Technical 85%’ imported by them from M/s. Rohm & Haas Company, France (hereinafter referred to as R&H). They commenced manufacture of the above-mentioned products from 1996. Prior to that period, M/s. Indofil Chemicals Ltd. were importing Mancozeb Technical 85% from R&H and manufacturing fungicide in India under the brand name Dithane M-45. In November, 1995, the appellants entered into an agreement with R&H for import and distribution of Dithane M-45 in India and started importing Mancozeb T-85% from R&H since Feb. 1996 at the following prices :-

2. Show cause notice dated 25-1-2001 was issued to the appellant company proposing to recover alleged differential duty of Rs. 7,19,84,692/- under the proviso to Sec. 28(1) of the Customs Act, 1962 ( by applying the value @ US$ 2.85 per kg. at which M/s. Indofil Chemical Company was importing the same product from R&H) together with interest, proposing confiscation of goods under Sec.111(m) and proposing penal action against the company under the provisions of Sec.112(a)/or under Sec.114A of the Customs Act. Penalty was also proposed on the officers of the company. The show cause notice inter alia alleged that the appellants and R&H are related to each other, that the agreement between the two was a sole distributor agreement, that the two are interested in the activity of each other in view of the financial transactions between them and that this relationship has influenced the price of imported Mancozeb T- 85%, that the sale between the appellants and the R&H is not a sale where the buyer and seller are not interested in the business of each other and the price is the sole consideration for the same as the sale of the same product is ordinarily offered for sale by R&H during the course of international trade at US $ 2.85 per kg, the price at which M/s. Indofil was importing the product from R&H, that the price of Dithane M-45 sold by the appellant has systematically risen and similarly sale price of the identical products sold by M/s. Indofil ( who started manufacturing indigenously since 1996) had also systematically risen, that the appellants connived with R&H to misdeclare the value of the goods. The notice invoked the provisions of Rule 5 of the Customs (Valuation) Rules, 1988. The appellants denied the allegations in the notice which was adjudicated by the Commissioner by rejecting transaction value as per invoice by confirming demand raised thereunder for the period Feb. 1996 to March 2000 together with interest under Sec. 28AB, imposing penalty equal to duty on the importer under Section 114A, penalties of Rs. 10 lakhs each on two Executive Vice-Presidents of the company and penalties of Rs. 5 lakhs each on the Product Registration Manager and on International Trade Manager of the company under Sec. 112(a). Hence these appeals.

3. We have heard both sides. Rule 10A of the Central Excise [(sic) Customs] Valuation Rules, 1988 which has been invoked by the Revenue cannot be invoked merely on the ground that identical goods have been imported into India at a higher price and can be invoked only if there is a doubt as to the genuineness of the transaction value between the exporter and the importer such as in the event of extra remittance by the importer to the exporter. Otherwise, the valuation of imported goods for the purposes of customs duty on the basis of transaction value becomes meaningless. The fact that transaction value cannot be rejected for the reason that identical goods have been imported into India at a higher price has been accepted by the Tribunal as seen from its decision in Finolex Industries Ltd.  v. CC [], Mark Auto Industries v. CC [], Devika Trading  v. CC [ and Gujarat Ambuja Cement [].  The value of same goods imported from the same supplier on the same day at a varying price is legally acceptable, provided that the price is arrived at on commercial consideration.

4. In view of the above, the transaction value in the present case cannot be rejected on the ground that M/s. Indofil has imported Mancozeb  from R&H at a higher price.

5. During the period in dispute, as per clause (I) of Rule 3 of the Customs (Valuation) Rules, 1988, the value of the imported goods shall be the transaction value.  Clause (ii) states that if the value cannot be determined under clause (i), then the value shall be determined in terms of Rules 5 to 8 of the Valuation Rules, 1988. Rule 4 states that the transaction value of the imported goods shall be  “ the  price actually paid or payable for the goods when sold for export to India adjusted in accordance with the provisions of Rule 9 of these rules”. None of the provisions of Rule 9 apply to the present case. Rule 4(2) provides for circumstances under which the transaction value between the importer and the supplier should be rejected and none of such circumstances exists in the present case. Rule 4(2) is reproduced below: -

“Rule 4(2) - The transaction value of imported goods under sub-rule (1) above shall be accepted:

Provided that -

(a)     the sale is in the ordinary course of trade under fully competitive conditions;

(b)     the sale does not involve any abnormal discount or reduction from the ordinary competitive price;

(c)     the sale does not involve special discounts limited to exclusive agents;

(d)     objective and quantifiable data exist with regard to the adjustments required to be made, under the provisions of Rule 9, to the transaction value;

(e)     there are no restrictions as to the disposition or use of the goods by the buyer other than restrictions which -

(i)      are imposed or required by law or by the public authorities in India; or

(ii)     limit the geographical area in which the goods may be resold; or

(iii)    do not substantially affect the value of the goods;

(f)      the sale or price is not subject to same conditions or consideration for which a value cannot be determined in respect of the goods being valued;

(g)     no part of the proceeds of any subsequent resale, disposal or use of the goods by the buyer will accrue directly or indirectly to the seller, unless an appropriate adjustment can be made in accordance with the provisions of Rule 9 of these rules; and

(h)     the buyer and seller are not related, or where the buyer and seller are related, that transaction value is acceptable for customs purposes under the provisions of sub-rule (3) below.”

6. In the case of Eicher Tractors Ltd. [ (S.C.)], the Apex Court has held that transaction value can be discarded only under the circumstances mentioned in Rule 4(2) and not otherwise, and this decision has been followed by the Apex Court itself in the following decisions viz.

Tolin Rubbers Pvt. Ltd. [ (S.C.)] and

Commissioner v. Bureau Veritas [ (S.C.)].

7. As regards adoption of the price at which M/s. Indofil has imported Mancozeb, this cannot be done, because both the transactions are not at the same commercial level and also not at or about the same time and hence Rule 5 does not apply to the present case. The details of imports made by Indofil are as under:-

Details of imports made by Bayer are as follows:-

M/s. Indofil has imported 1680 MT of Mancozeb in 5 years (average of 336 MT per year) whereas Bayer has imported 3653 MT in 4 years ( average of 930 MT per year). Thus, imports by Bayer are three times more than the imports by M/s. Indofil and therefore, both imports are not at the same commercial level and also not at or about the same time, since Indofil stopped import in Feb. 1996. For this reason also the price of Indofil can not be the basis for enhancing the value of imports made by the appellants.

8. The department is assessing the goods in question under Rule 5. It is  submitted that as per Rule 5(3) the lowest of the transaction value of identical goods is required to be adopted.  There is nothing on record to show that the department has adopted the lowest of the transaction value of identical goods.

9. The transaction value between R&H and Bayer has been arrived at after negotiation, taking into account the resale price of imported goods in India and such a method is acceptable under Rule 4 and it also conforms to the value arrived at as per Rule 7 i.e  deductive value method.  The correspondences exchanged (pages 105 to 108, 117 to 121) shows that R&H  price is worked out backward from the resale price of the goods in India for formulation products and this is the conclusive evidence that the price charged by R&H from the appellant is entirely based on commercial consideration. From the resale price of  formulation product in India, the price of the pesticide to be imported by the appellant has been arrived at US $ 2.04 per kg. while R&H wanted to sell Mancozeb at US $ 2.2 per kg. In the statement dated 4 -11-97, Dr.Vasant L.Patil, Research & Development Manager - Agro Chemicals, South Asia of R & H has clearly stated that cif price was fixed by R&H for Bayer India Ltd. imports based on local end-user (farmer) prices prevailing in the market for competitive products. There was another round of negotiation of price US $ 2.10 per kg was agreed to. The price was further negotiated and reduced from US $ 2.25 to US $ 2.10 per kg. based on resale price of goods in India compared with other formulations sold in India.

10. The explanation of the appellants that Indofil wanted to make up its market demand to facilitate Indofil to extend its operation and therefore, wanted R&H to supply requisite quantity during the intermittent period, as brought out from the statements dated 18-12-2000 and 1-1-2001 of Shri K.N.Wahal, Chief Purchase Manager of Indofil and that subsequently R&H dis-invested from Indofil who became their competitor and it is for this reason that R&H sold Mancozeb at higher price to Indofil, appears to be correct.

11. The finding of the Commissioner that Bayer and R&H are related to each other is on the basis that Bayer is the sole distributor of R&H and therefore they are related persons as per sub-rule (2) of Rule 2 of Valuation Rules. Rule 2(2) is re-produced below: -

“   (2) For the purpose of these rules, persons shall be deemed to be “related” only if -

(i)      they are officers or directors of one another’s businesses;

(ii)     they are legally recognized partners in business;

(iii)    they are employer and employee;

(iv)    any person directly or indirectly owns, controls or holds 5 per cent or more of the outstanding voting stock or shares of both of them;

(v)     one of them directly or indirectly controls the other ;

(vi)    both of them are directly or indirectly controlled by a third person;

(vii)   together they directly or indirectly control a third person; or

(viii)  they are members of the same family .

Explanation 1. - The term “person” also includes legal persons.

Explanation II. - Persons who are associated in the business of one another in that one is the sole agent or sole distributor or sole concessionaire, however described, of the other shall be deemed to be related for the purpose of these rules, if they fall within the criteria of this sub-rule.”

The mere existence of a distributorship agreement between Bayer and R&H cannot lead to the conclusion that they are related and the sole distributor is related only when he falls within any of the clauses (i) to (viii) to Rule 2(2). The Commissioner has held that R&H directly or indirectly controls Bayer. Although it may be stated that R&H is interested in the business of Bayer since Bayer is selling its goods, it cannot be said that Bayer is interested in the business of R&H as there is no cross shareholding between the two. At this stage, it will be apt to refer to the observations of the Tribunal in Kerala Electric Lamp Works v. CCE [] para 7 :-

“It is natural that all the manufacturing units, including the assessee, would, for their own enlightened self-interest, wish well of their customer’s business. But that is true practically of every buyer and seller relationship since the buyer’s prosperity means more business for the seller. But that does not mean that the seller has thereby acquired an interest in the business of the buyer. Interest in the business of each other, as contemplated in Section 4(4)(c), is something more definite and tangible interest in the assessee’s business....”

In view of the above, the findings in paras 56 and 57 of the impugned order that R&H and Bayer are interested in the business of each other cannot be sustained. The financial transaction referred to and relied upon in the Commissioner’s order refers to 50% of the reimbursement of cost of advertisement (Rs. 30 lakhs) incurred by Bayer in the year 1996. As per interpretative Note to Rule 4(2), -

“ If the buyer undertakes on his own account, even though by agreement with the seller, activities relating to the marketing of the imported goods, the value of these activities is not part of the value of imported goods nor shall such activities result in rejection of the transaction value.”

In the present case, the seller has reimbursed the buyer i.e. R&H has reimbursed the appellants and therefore, this is not a case where the money has flown from the buyer to the seller for it to be treated as part of the price of the goods imported into India. As noted above, from Feb. 1996 Bayer started importing the goods from R&H and the advertisement charges were incurred by R&H and therefore, in the light of the Apex Court decision in Philips India Ltd. [ (S.C.), this aspect is not relevant for valuation of the imported goods under Sec. 14.

12. The Commissioner has held that sale price of the formulation manufactured by the imported Mancozeb in India has been constantly increasing. However, we note that not only is there no material in the show cause notice or in the impugned order to substantiate this finding but the price of imported Mancozeb which was fixed at US $ 2.10 per kg. in view of the long term agreement is to be treated as the transaction value and the price fluctuation in the international market will not affect assessment of the goods in the importing country and the local selling price of the formulation made from the imported goods will also not affect such price, as per para 4 of the Explanatory Note 1.1 of Technical Committee on Customs Valuation, World Customs Organization which clarifies that “ consequently, provided that the conditions prescribed in Article 1 are fulfilled, the transaction value of imported goods should be accepted irrespective of any market fluctuations after the date when the contract was concluded.”

13. The Commissioner has held that the transaction between Bayer and R&H is not under fully competitive condition.  This is not relevant for the purpose of the present appeal as the requirement that transaction value is to be accepted only when the transaction between the importer and the exporter are under fully competitive condition came into force only in September 2001 with amendment of Rule 4(2) of the Customs Valuation Rules.

14. The Commissioner has found that the price at which Mancozeb has been imported into India by others during 1994 to 2000 is steadily increasing and for this purpose, the following evidence has been cited :-

Import by United Phosphorous from China and Lupin Agro Chemicals from Netherlands

15. We agree with the appellants that import of mancozeb from other countries cannot be treated as import of identical goods into India as per the definition of identical goods in Rule 2(c).  The cif price in US$ is being compared with the price in Indian rupees. It is, however, to be kept in mind that due to rupee devaluation and increase in exchange rate of US$, the cif price in US$ after conversion into Indian rupees always shows a higher price of the goods. Applying the exchange rate of US$ as mentioned in Ground F of the memo of appeal filed by Bayer of US$ 2.10 i.e. the price at which Bayer has imported the goods, then the price in Indian rupees is as under:

Imports from China

Imports from Netherlands

Further, the quantity imported either by M/s. United Phosphorus and M/s. Lupin Agro Chemicals has not been mentioned in the impugned order. Therefore, the price at which others imported Mancozeb into India cannot be treated as import of identical goods so as to reject the value declared by Bayer.

16. Shri Mondal attempted to distinguish the decision of the Apex Court in Eicher Tractors v. CCE [] relied upon by the appellants to support their plea that the transaction value is required to be accepted, by relying on Rule 10A of the Customs Valuation Rules.  However, we note that in the case of Radhey Shyam Ratanlal v. CC [] the Tribunal has held that Eicher decision cannot be distinguished by relying on Rule 10A and further Rule 10A cannot be applied to re-assessment proceedings. In the present case, the imports were partly made prior to introduction of Rule 10A on 19-2-98 and in the case of Adani Exports Ltd. v. CC [], the Tribunal held that Rule 10A is not retrospective and cannot be applied for imports made prior to its introduction in the statute book.  The appeal of the Revenue against this decision was dismissed by the Supreme Court on merits, as seen from .

17. There is yet another reason for the non-applicability of Rule 10A to the facts of the present case. The Rule applies in cases where the proper officer has reasons to doubt the truth and accuracy of the value declared to the customs, where the Customs authorities feel that there has been manipulation in the invoices or in the value declared to Customs and involving extra remittance to the foreign supplier over and above the invoice value. That is no so in the present case as there is no dispute about the truth and accuracy of the declared value.

18. On the plea of limitation also, we find that the appellants have a strong case.  What is used against them is their declaration to Customs that they and R&H are not related.  This declaration was based on the understanding of the Customs Valuation Rules.  The agreement between the appellants and the foreign supplier was submitted to the department on 2-5-97 itself and goods were assessed on the price declared by the appellants and it is only on 25-1-01 that the proceedings for undervaluation have been initiated against them.  It is, therefore, clear that proceedings have been initiated only in view of change of opinion by the department.  Hence allegation of suppression cannot sustain. The extended period of limitation is, therefore, not available to the department. The case law relied upon by Shri Mondal is distinguishable. In the case of CC, Mumbai v. Mukund Ltd. [], the Tribunal adopted the price prevailing in LME Bulletin as the price under Sec. 14 of the Customs Act which is now held to be not correct, by a series of decisions of the Tribunal and this decision was rendered prior to the Apex Court judgment in Eicher Tractors.  In the case of Manjushree Minerals Ltd. [] the question before the High Court was whether cif price of the goods should be debited from the licence or the value at which the goods were assessed by the department should be debited from the licence.  The issue is thus different from the one with which we are concerned in the present case.  The decision in Pan Asia Enterprises [] was delivered prior to Eicher Tracters by the Supreme Court and the value was determined based on quotation and not based on the price at which the goods were imported into India. The cases of Kanji Morarji [] and Deepak Electronics [] were rendered prior to Eicher Tractors supra. The Tribunal’s decision in CC v. Kandla v. East African Traders [] is also distinguishable as that case related to lifting of corporate veil in a transaction between related persons while in the present case, we have already held that R&H and the appellants are not related persons. Lastly the Apex Court decision in Punjab Processors Pvt. Ltd. [ (S.C.)] related to a case where the importer had wish to pay duty on the basis of price at which others have imported into India which was lower than the price at which he imported the goods and did not want pay the duty at the price at which he imported the goods, which is different from the facts of the present case.

19. In the light of the above discussion, we hold that the value declared by the appellant is required to be accepted, set aside the impugned order and allow the appeals.