CESTAT Chandigarh: Manufacturer and Marketing Company Cannot Be Treated as Related Persons Under Central Excise Valuation Rules

Background and Overview

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Chandigarh Bench, recently delivered a significant ruling in the matter of Hindustan Engineering Enterprises Vs Commissioner of Central Excise and Service Tax, settling a recurring dispute over central excise valuation and the applicability of the related-person concept to corporate entities. The Tribunal set aside the impugned order and allowed the appeals filed by the assessee, reaffirming its earlier position on the same question of law.

The case centered on whether a manufacturer of submersible pumps and its associated marketing company could be treated as "related persons" for the purposes of central excise duty valuation — and whether the differential pricing adopted for inter-entity transactions amounted to deliberate undervaluation attracting duty liability.

Facts of the Case

M/s Hindustan Engineering Enterprises (HEE) is engaged in the manufacture of submersible pumps classifiable under Chapter Heading 841313 of the Central Excise Tariff. The assessee sold its manufactured goods through M/s Malkoh Marketing Pvt. Ltd. (MMPL), a separate marketing entity.

The Department initiated investigations and alleged that HEE had deliberately suppressed the assessable value of its products by channelling sales through MMPL at reduced prices, resulting in systematic underpayment of central excise duty. The Department contended that the two entities were "related persons" within the meaning of Section 4(3)(b)(ii) of the Central Excise Act, 1944, read with Rule 9 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000, and Section 2(41) of the Companies Act, 1956.

This was not an isolated scrutiny — show cause notices had been issued to the assessee starting as far back as 2003-04, and the dispute concerning the period September 2015 to June 2016 was merely the latest in a series of proceedings involving the same parties. Based on its investigations, the Department computed alleged evasion of central excise duty amounting to ₹2,28,348/- for this period and issued a Show Cause Notice dated 05.10.2016, proposing recovery of the said amount along with interest and penalties.

The Adjudicating Authority vide Order-in-Original dated 18.10.2017 confirmed the demand, levied interest, and imposed penalties on both HEE and MMPL. The Commissioner (Appeals), CGST, Panchkula, by way of a common order dated 15.03.2018, upheld the original order and dismissed the assessee's appeal. Both entities approached the CESTAT Chandigarh challenging this outcome.

The central legal question before the Tribunal was whether a private limited company (HEE) and another private limited company or marketing concern (MMPL) could be classified as "relatives" and thereby "related persons" under Section 4(3)(b)(ii) of the Central Excise Act, 1944.

Section 4(3)(b)(ii) treats persons as related if one is a relative of the other. The term "relative" is defined by reference to Section 2(41) of the Companies Act, 1956, which in turn refers to Section 6 and Schedule IA of the said Act. The schedule enumerates specific familial relationships applicable to natural persons.