LAKME LTD. Vs. COMMISSIONER OF CENTRAL EXCISE

JUDGEMENT

(1.) Lakme Ltd. was engaged in the manufacture of cosmetics and toilet preparations. Until 31.10.1995, it sold the goods that it manufactured directly to its wholesale dealers, the basis for the assessable value of the goods being the price at which the goods were sold to the dealers. In the early part of 1996, the appellant entered into an agreement with Hindustan Lever Ltd. as a result of which a new company, Lakme Lever Ltd., was created. The appellant and Hindustan Lever Ltd. each had held 50% of the shares of this company. The object of Lakme Lever Ltd. was to engage in marketing and distribution of cosmetic and toilet preparations. On the 12th July, 1996, the appellant entered into an agreement with Lakme Lever Ltd. whereby it was agreed that the appellant would sell to Lakme Lever Ltd. the entire quantity of cosmetics and toilet preparations, that it manufactured, that was listed in annexure 1 to the agreement and these goods would be marketed by Lakme Lever Ltd. The appellant reduced from that day onwards the prices of the goods that it sold.

(2.) The department responded with issue of two show cause notices dated 3.4.1997. The notices alleged that the appellant and Lakme Lever Ltd. were related for the reasons that the entire production of the cosmetics of the appellant was purchased by Lakme Lever Ltd. and that the appellant held 50% of the shares of Lakme Lever Ltd. By applying the provisions of Clause (3) of the proviso under Clause (a) of Sub -section (1) of Section 4 of the Act, the notices proposed to take as the assessable value the price at which Lakme Lever Ltd. sold the goods to its dealers by. Penalty was also proposed under Rule 173Q. The assessee contended in reply that it was not related to Lakme Lever Ltd. because the requirements contained in the Explanation below Section 4 of the Act that for two persons to be related to each other, each must had a direct or indirect interest in the business of the other was not satisfied. While Lakme Lever Ltd. could be said to have an interest in the affairs of the appellant, it could not be said to have an interest in the affairs of Lakme Lever Ltd. It relied upon the judgment of the Supreme Court in UOI v. Atic Industries Ltd. 1984 (17) ELT 323. It further contended, relying upon the Supreme Court's judgment in UOI v. Playworld Electronics 1989 (41) ELT 368 that the mere fact that the entire production of goods of the appellant was sold to Lakme Lever Ltd. did not make it related persons.

(3.) The Assistant Commissioner did not accept these contentions. Relying upon the judgment of the Supreme Court in McDowell & Co. Ltd. v. Commercial Tax Officer AIR 1986 SC 649 and its judgment in Calcutta Chromotype Ltd. v. CCE 1998 (99) ELT 202, he found that the truth was that the two companies were related in that there was an identity of interest. He found that Lakme Lever Ltd. came into existence purely in order to take over the marketing and distribution and the goods being manufactured by Lakme Lever Ltd. The entire infrastructure for this purpose consisting of the appellant's employees, stockists, network was transferred to the new company for a considerable sum of Rs. 32 crores. Lakme Lever Ltd. in fact had assets of Rs. 20,00,20,000/ - in the agreement that was made and had no previous experience of marketing any commodity. In effect he said, the entire marketing expenditure of Lever Ltd. was transferred to Lakme Lever Ltd. on credit. The executive director of Lakme Lever Ltd. became the managing director of Lakme Ltd. for five years and the chairperson of Lakme Lever Ltd. became the chairperson of Lakme Ltd. The only reason for the drastic reduction of the prices of the goods was that the fact that the cost of sales and marketing which were earlier incurred by Lakme Lever Ltd. would no longer be incurred by it. These charges would now be incurred by Lakme Lever Ltd. There was no reduction in the prices of the commodities that were charged to wholesale dealers or in the price to ultimate consumers, or any other factor which would justify the reduction in the price. He also noted that the parties had entered into an ingenious arrangement in order to avoid the cost of brand name Lakme. The appellant took over a company Shine Marketing Ltd. with a capital of Rs. 4200 and renamed it Lakme Brands Ltd. The entire brand name was however transferred to it for Rs. 78 crores, to be paid in future. Lakme Brands Ltd. name in turn authorised Lakme Lever Ltd., to use the brand name on payment of royalty at 5% on annual sales and 8% on exports. Lakme Brands Ltd. had received Rs. 5.76 crores as royalty in this manner and paid a dividend of Rs. 1.78 crores to Lakme Ltd. He therefore confirmed the demand for duty and imposed the penalty. On appeal from this order, the Commissioner (Appeals) confirmed the Assistant Commissioner's order on essentially the same grounds as those advanced by him. Hence this appeal.