[Order per : M.V. Ravindran, Member (J)]. - These two appeals are filed against the Orders-in-Appeal No. 74/2009(V-I)C.E. dt. 27-4-2009; No. 110/2009(V-I) C.E., dt. 31-8-2009.
2. The relevant facts that arise for consideration are that the appellants are the manufacturers of Paints & varnishes, thinners falling under chapter 32 and 38 of the schedule to the Central Excise Tariff Act, 1985. The appellants have entered into an agreement with M/s. Sigmakalon India Pvt. Ltd., Mumbai (for brevity sake hereinafter referred to as ‘SIPL’) for manufacture and supply of paints. The paints manufactured by the assessee for SIPL are for industrial and institutional use. So, as per Rule 2A of Standard Weights & Measures Act, 1976, the provisions of Section 4A of Central Excise Act, 1944 are not applicable. Hence, Central Excise duty was paid by the appellants on the value arrived basing on the landing cost of the raw materials and the production overheads which is mutually agreed by both SIPL and the appellants. Appellants were raising invoice on SIPL treating it as Sale at transaction value under Section 4(1)(a) of Central Excise Act, 1944 for the purpose of payment of Central Excise duty. Invoice amounts were adjusted against the advances paid by SIPL. As the transaction between the appellants and SIPL appeared to be a job work, the important and salient features of the agreement were examined for demarcating the roles played by the appellants and SIPL in the said activity of manufacture and supply of paints. Show cause notices were issued to the appellant to treat the appellant as job worker as per the provisions of Rule 10A of the Central Excise Valuation (Determination of price of excisable goods) Rules, 2000 (hereinafter referred to as Rules). The appellant resisted the show cause notices on various grounds and mostly on the ground that they are not job workers, but the transaction between them and SIPL is on principal to principal basis and the agreement is for manufacture and supply of paints. The Adjudicating Authority did not accept the contentions raised by the assessee and held that the appellant/assessee is the job worker and provisions of Rule 10A will be applicable and the value which has been taken by the appellant under the provisions of Section 4(1)(A) of the Central Excise Act, 1944 was not applicable and the value was determined as per the provisions of Section 4(1)(B) of the Central Excise Act, 1944 read with the provisions of the Rules and coming to conclusion that the appellant is liable to pay differential duty as per the provisions of Rule 10A of the said Rules, confirmed the demands, demanded the interest and also imposed penalty under the provisions of Rule 25 of the Central Excise Rules, 2002. Aggrieved by such an order the appellants preferred appeals to the ld. Commissioner (Appeals). Ld. Commissioner (Appeals), after granting an opportunity of hearing to the appellant and after considering the oral and written submissions made by the assessee, upheld the orders-in-original and rejected the appeals. Hence, these appeals.
3. Ld. Advocate appearing on behalf of the appellant would submit that the provisions of Section 4(1)(A) of the Central Excise Act, 1944 are satisfied in this case. It is his submission that Revenue authorities can switch over to provisions of Section 4(1)(B) only if there is additional consideration received or the transaction value is incorrect. It is his submission that the appellant herein is manufacturer of different paints and is not manufacturer of any special application paints like marine paints. It is his submission that the appellant had enough spare capacity for manufacturing the paints. He would submit that SIPL approached the appellant for utilization of such additional capacity and entered into an agreement with the appellant for manufacture and supply of paints. He would draw our attention to the various clauses of the agreement and more specifically to the Clauses, wherein the consideration to be paid is enumerated and tried to impress that the value which has been arrived at is a commercial one based upon the cost of the material etc. and a marginal profit. He would also draw our attention to the Clause 11 of the said agreement. He would submit that the appellant has procured the raw materials from the specified vendors only for the reason that the manufacture of paint for SIPL were for specific application and quality needs to be maintained; there was no compulsion on the part of the SIPL or for the price for the raw materials, on the contrary the price at which the raw materials procured from the supplier were negotiated prices. It is the submission that the purchases of the raw materials were directly done by the appellant and cannot be considered as being directed by SIPL. As regards the finding that the amounts advanced for procurement of raw materials to the vendors was given by the said SIPL, it is his submission that it is a normal commercial consideration and can be considered as an advance received for manufacturing and clearing of special application paints. It is his submission that the concept of job worker in this case would not arise as provided under provisions of Rule 10A of the said Rues. He would draw our attention to the said Rule 10A as was brought into force from the 1st April, 2007. He would submit that the explanation given to the said rule defines job worker as to mean who would directly undertake that the inputs or goods needs to be supplied by principal manufacturer or any other person authorized by him. It is his submission that in this case no such situation arses. He would rely upon the decision of the coordinate Bench in the case of Gillette Diversified Operations Ltd. v. CCE, Chennai [ (Tri.-Chennai)] for the proposition that the supply of machinery on lease for procurement of raw materials from the advance paid cannot be considered as job working undertaken.
4. Ld. DR on the other hand would submit that the agreement indicates that SIPL has absolute control over the functioning of the appellant. It is his submission that the appellants have to return back the raw materials and packing materials to the SIPL. It is also his submission that the agreement provides explicit prohibition of the use of raw materials and packing materials for any other purpose than the manufacture of the products of SIPL. He would also emphasis that on termination of the agreement, all the packing materials and unused raw materials should be returned back to the SIPL upon request. It is his submission that the consideration paid by SIPL to the appellant herein is only a compensation of Rs. 5 per litre and additional profit of Rs. 1 per litre after meeting the cost of raw materials and packing materials which would indicate that the appellant were not allowed to freely decide the price or the value at which they have to sell the product. It is also his submission that first three batch productions were supervised by SIPL and their employees.
5. We have considered the submissions made at length by both sides and perused the records.
6. The issue involved in this case is whether the appellant herein can be considered as job worker under the provisions of Rule 10A of the said Rules. Before we take up these appeals and consider the statutory provisions of job worker as enshrined at Rule 10A of Central Excise Rules, 2002, it is required that a factual matrix be brought on record.
7. It is undisputed that the appellant is manufacturer of paints and had spare capacity. It is also undisputed that appellant wanted to encash the spare capacity by manufacturing paints for SIPL. It is also undisputed that these paints which were to be manufactured by the appellants, were under specific agreement which is termed as ‘Agreement for Manufacture and supply of paints’ entered between the appellant and SIPL. It is also undisputed that the clauses of the agreement indicated that both the parties have understood the arrangement as principal to principal basis. It is seen that clause No. 1 and 2 of the said agreement indicate the actual position when both the parties entered into agreement, which are as under :-
“1. Sigmakalon India Pvt. Ltd. is a dealer of Marine and Protective Coatings (hereinafter called the Products) AT and looking for external extension of its production capacity for a limited range of such products, and does not currently have manufacturing facilities in India,
2. Coromandel Paints Limited has sufficient capacity available at their production facilities at Visakhapatnam and is willing to manufacture and supply paints to Sigmakalon at a price that is mutually beneficial and reasonable.”
8. It can be noticed from the above reproduced clause that the appellant herein was willing to manufacture and supply paints to SIPL at a price i.e. mutually beneficial and reasonable. This would indicate that both the parties had an intention to enter into an agreement for purchase and sale of the paints, which are for specific application and are manufactured only on request of SIPL. All other clauses which have been referred to by the lower authorities are discussing about the commercial terms which have been brought into play in a normal agreement. It is also undisputed that the paint which was to be manufactured by the appellant is for specific applications i.e. for marin applications. If that be so, there is nothing wrong in SIPL putting the condition of selection of raw material suppliers from their side. We also do not find any irrationality in specifying vendors who would supply the specific raw materials for special kind of paints to be manufactured by the appellant.
9. Against this background, we find that the ld. Commissioner (Appeals) while dismissing the appeal filed by the appellant recorded the following findings :-
“6. I have carefully gone through the impugned order and the rival contentions. The issue to be decided by me is whether the transaction between the appellants and Sigmakalon falls under the category of job-worker or on principal to principal basis. The definition of job worker as could be seen from the Explanation to Rule 10A of Valuation Rules is : “job-worker means a person engaged in the manufacture or production of goods on behalf of a principal manufacturer, from any inputs or goods supplied by the principal manufacturer or by any other person authorized by him”. As seen from this, appellants clearly falls under the category of job-worker as discussed in the findings of the impugned order and I am in agreement with the findings of the Adjudicating Authority that the activity undertaken by the appellant is controlled by Sigmakalon from the stage of procurement of raw materials; that the equipment I supplied free of charge for the manufacture of the products, the installation of which will be done by Sigmakalon at the appellant’s premises while retaining the ownership and also the repair & maintenance for the same will be taken up by Sigmakalon; control over the inventory of inputs and process of manufacture and there is a finding in the impugned order to the extent that the raw material/packing material was to be obtained from the persons identified by Sigmakalon. Further, the whole process as to how the advances were paid and the suppliers of raw material/packing material were appointed by Sigmakalon to circumvent the actual transaction of supply of raw material; as to how the price shown in the invoices is not the sole consideration and there are various other considerations as per the terms of the agreement was explained in the impugned order. I do not find any infirmity in the impugned order to cause any disturbance of the decision.”
10. We find that the entire thrust of the findings of ld. Commissioner (Appeals) is the definition of job worker which has been relied upon. We find that the definition or the explanation to Rule 10A of the Valuation Rules which indicates who is a job worker specifically indicates that the job worker would be a person who manufactures or produces goods on behalf of principal manufacturer from any inputs or goods supplied by the principal manufacturer or other persons authorized by him. In the case before us, it is on record and as per the agreement entered between both the parties, that the appellant will purchase and procure the raw materials, packing materials and manufacture the paints as per the specification of the SIPL. The question of receiving advance money for payment towards the purchases of raw materials for is normal commercial terms. It is to be seen that there nothing on record to indicate that SIPL had supplied raw materials or inputs or goods to the appellant for manufacturing in order to bring the appellant into the category of job-worker and apply the provisions of Rule 10A of the Central Excise Rules, 2002 for the purpose of discharge of duty liability on the price of SIPL. It is also seen from the finding of the ld. Commissioner (Appeals), that the activity undertaken by the appellant is controlled by SIPL is totally incorrect, inasmuch as that the equipments which have been supplied by SIPL are of general in nature. It is seen from the Appendix attached to the agreement that the said SIPL had supplied laptops, desk top computers, water cooler, pedestal fan, printers, scanners, files locker, tables, fax machine, ink jet printer, laboratory equipments and Gantry, Chain pulley, electronic balance, manual crimper, water jacket, Kreis Dissolver Control Board, Main switch cum control panel, changeover with panels and allied cables. It can be seen that the equipments which were supplied and as annexed to the agreement in appendix -1 were not disputed by both sides. On the contrary the counsel for the appellants submits that though these equipments were supplied, they were of general natures but they were never utilized and they were never installed in the factory premises as the appellant could manufacture the specific quantity of paint with their own installed equipments.
11. We are of a considered view that the agreement between the assessee/appellant and SIPL is of very commercial nature and hence, any items which are procured for specific manufacturing of paints, SIPL can definitely indicate the specific use. It is to be seen that there is no clause in the agreement which would indicate that the appellant herein has to return the said raw material/packing material without any charge i.e. to say they are bound to return without any consideration. We find that clause No. 11 was relied upon by the ld. SDR to say that the compensation which was given was based upon the material cost + additional specific profit. In our considered view, this in itself cannot be said that the relationship between the appellant and SIPL is that of a job worker and principal manufacturer and the compensation received by a person or a company, can be decided in any manner mutually acceptable to the contracting parties. The specific clause No. 11 of the agreement in no way suggests anyone to take a view that the appellant was a job worker of SIPL. Further, we find that clause No. 15D of the said agreement which we are reproducing herein under would indicate the relationship between the appellant and SIPL.
“15D. This agreement is devised as “AGREMENT FOR MANUFACTURE AND SUPPLY OF PAINTS” for the limited purpose of defining the remuneration/margin of profit eligible to be retained by M/s. Coromandel Paints Ltd., Visakhapatnam, in pursuance of this agreement. The production and supply of paints by Coromandel to Sigmakalon will be on principal to principal basis and all applicable taxes on such sale shall be paid by Coromandel at the time of its supply.
For all statutory purposes, including payments of taxes, compliance of labour and other loss, including the responsibility of manufacturing quality paints as per the prescribed specification, M/s. Coromandel Paints Ltd. shall be manufacturer and is expected to discharge the entire liability cast on them as manufacturer, under this agreement.
Excise duty, sales tax and other levies will have to be paid by Coromandel treating the same as sales to Sigmakalon, on the full value determined and agreed between the parties from time to time.”
12. It was argued by the ld. SDR relying on the findings by the lower authorities that the said clause is only for the limited purposes of defining the remuneration/margin of profit for discharge of applicable taxes. It can be seen from the above reproduced clause, entire tenor of the agreement was for manufacture and supply of paints, is totally on principal to principal basis and the indication in the said clause specifically indicates that all the taxes have to be paid on such sale prices at the time of supply of paints by the appellant. It is also seen that the agreement between both the parties is indicating that the prices which are charged by M/s. Coromandel should be treated as sale to SIPL and on the full value they have to discharge the duty liability and sales tax.
13. In our considered view, the findings of the ld. Commissioner (Appeals) to come to conclusion that the relationship between the appellant and SIPL is i.e. job worker and principal manufacturer is incorrect. By merely indicating the vendors of the raw materials or by giving advance money for procurement of such materials or installing the equipments giving by the SIPL would not render the appellant as a job worker. We are fortified in our above view by the judgment and order of co-ordinate Bench in the case of Gillette Diversified Operations Ltd. (supra). We may reproduce the ratio which has been recorded by the Bench in para 3 of the order.
3. In the present case, it is the case of M/s. GDOL that their relationship with M/s. REPL was on principal-to-principal basis and that they had only purchased the goods from M/s. REPL in terms of the sale and supply agreement entered between them. The transaction was a normal commercial transaction and was not in the nature of job work insofar as M/s. REPL were concerned. We have found a valid point for M/s. GDOL. They did not supply any raw material or capital goods to M/s. REPL for the manufacture of the subject goods, nor did they provide work force for the purpose. Deputation of supervisors by them to the factory of M/s. REPL did not make any dent in the commercial nature of the transaction between the companies. M/s. GDOL had nothing to do with the lease arrangement between M/s. REPL and M/s. BIPL in respect of the capital goods. It was lawful for M/s. REPL to hire capital goods and use it for manufacturing excisable goods. That was precisely what they did in this case. Advancing of amounts, interest-free, by M/s. GDOL to M/s. REPL has also been satisfactorily explained by the appellants. The sale consideration payable by M/s. GDOL to M/s. REPL for the goods in question was adjusted against the amounts advanced. Apparently, learned Commissioner has not attached any importance to this aspect.
14. We find that the ratio as reproduced by us in the case of Gillette Diversified Operations Ltd. squarely covers the issue before us in this case. Accordingly, in view of the findings recorded by us and respectfully following the ratio as laid down by the co-ordinate Bench, we are of the considered view that the impugned orders are unsustainable and are liable to be set aside and we do so. The impugned orders are set aside and the appeals are allowed with consequential relief, if any.
(Pronounced in court on 8-9-2010)