REPORTABLE

IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NOs. 1921-1923 OF 2003

Commnr. of Central Excise, Chandigarh  ..Appellant(s)

- Versus -

M/s. Pepsi Foods Ltd.     ..Respondent(s)

J U D G M E N T

GANGULY, J.

1. These  statutory  appeals  (Civil  Appeal  Nos.  

1921-1923  of  2003)  have  been  filed  under  

Section 35-L (b) of the Central Excise Act,  

1944 (the Act), against the judgment and final  

Order  No.  353-355/2002-A,  dated  8th August,  

2002, passed by the Customs, Excise and Gold  

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(Control)  Appellate  Tribunal,  Bench-A,  New  

Delhi.  

2. The  material  facts  are  that  the  respondent-

assessee,  M/s.  Pepsi  Foods  Ltd.  is  engaged,  

inter  alia,  in  the  manufacture  of  edibles,  

marketed  under  the  names  of  Potato  Chips,  

Baked Cheetos Balls, Monster Munch, etc. These  

are covered under Chapter Sub-Headings 2001.10  

and 1904.10 of the Central Excise Tariff Act,  

1985  (Act  5  of  1986).  Uptill  12th January,  

1998,  as  much  as  96%  of  these  products  

manufactured by the respondent, were sold to  

M/s. Frito-Lay India, a ‘related person’, and  

the  balance  of  4%  were  sold  to  independent  

wholesale buyers. From 12th January, 1998, the  

sale  pattern  between  the  two  was  changed,  

wherein  M/s.  Pepsi  Foods  Ltd.  started  

manufacturing the aforesaid products on behalf  

of M/s. Frito-Lay India.

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3. By a communication dated 15th December, 1997  

addressed  to  the  Assistant  Commissioner,  

Central  Excise,  Division  Jalandhar,  the  

respondent  stated  that  it  had  been  paying  

excise  duty  on  its  manufactured  excisable  

goods  after  taking  into  account  inter  alia,  

the costs of raw materials, packing materials,  

conversions  and  their  profit  margin.  

Subsequently  it  calculated  and  paid  the  

differential duty, on the price at which the  

final  products  were  sold  by  M/s.  Frito-Lay  

India  to  its  wholesale  dealers.  It  enclosed  

certificate  of  a  chartered  accountant  in  

support of its calculations. In its submission  

of Annexure-A as required under Rule 173C (3A)  

of  Central  Excise  Rules,  1944,  it  mentioned  

that the sale of the products occurred at its  

factory  gate.  It  was  also  evident  from  the  

letter that the final products were entering  

the market stream when they were being sold by  

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M/s.  Frito-Lay  India  to  their  wholesale  

dealers.

4. The Revenue, however, accepted the incidence  

of sale at the time of purchase of the final  

products by the whole sellers from M/s. Frito-

Lay  India  and  not,  as  submitted  by  the  

respondent-assessee,  at  the  factory  gate.  

Resultantly,  a  show-cause  notice  dated  13th  

November,  1998  was  issued  to  the  respondent  

and  to  that  the  respondent  showed  cause  

stating inter alia that the sale to the whole  

sellers was being effected from the depot of  

the related person, viz. M/s. Frito-Lay India.  

Dissatisfied  with  the  reply,  the  Revenue  

demanded duty of Rs.12,26,215/-.  

5. Aggrieved,  the  respondent  moved  the  

Commissioner  of  Central  Excise  (Appeals),  

Chandigarh.  The  Commissioner,  however,  held  

that the freight charges arising between the  

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factory of the respondent and the depot of the  

related person were to be included in the sale  

price as the place of removal of the goods was  

the depot of the related person.  

6. Aggrieved thereby, the respondent appealed to  

the  Central  Excise  and  Gold  (Control)  

Appellate  Tribunal,  New  Delhi.  The  Tribunal  

overruled  the  decision  of  the  Appellate  

Authority  inter  alia  stating  that  “…Merely  

because  a  deeming  provision  as  contained  in  

the 3rd proviso has to be applied regarding the  

price  of  the  goods  sold  in  the  course  of  

wholesale trade to a related person, it cannot  

be contended that there was no sale at all to  

the  related  person  at  the  factory  gate,  as  

alleged by the Revenue. The place of removal,  

therefore,  continues  to  be  the  assessee’s  

factory.  The  depot  premises  of  the  related  

person from where the goods are sold cannot be  

treated as place of removal for the purpose of  

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Section 4 (4) (b). Therefore, the appellant is  

fully justified in contending that the cost of  

transportation  from  the  place  of  removal,  

namely, factory to the place of delivery shall  

be excluded from the price to arrive at the  

assessable value in terms of Section 4 (2).”

7. Thus  aggrieved,  the  Revenue  appealed  before  

this Court under Section 35-L (b) of the Act.  

8. It is an admitted fact here that M/s. Frito-

Lay  is  “related  person”  of  the  M/s.  Pepsi  

Foods  Ltd.  (Snacks  Foods  Division).  The  

expression  “related  person”  has  been  

specifically defined in Section 4 (4) (c):

“4.  Valuation  of  excisable  goods  for  purposes  of  charging  of  duty  of  excise.- (1) … (2) … (3) … (4) For the purposes of this section, -

(a) … (b) …

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(c) "related person" means a person who is  so associated with the assessee that they  have interest, directly or indirectly, in  the business of each other and includes a  holding  company,  a  subsidiary  company,  a  relative and a distributor of the assessee,  and  any  sub-distributor  of  such  distributor. Explanation.-  In  this  clause  "holding  company",  "subsidiary  company"  and  "relative" have the same meanings as in the  Companies Act, 1956 (1 of 1956).

9. The transaction between M/s. Pepsi Foods Ltd.  

and M/s. Frito-Lay India has to be understood  

as one where sale price cannot be known. In  

situations where the assessee sold its goods  

to  a  related  person,  it  was  prudent  to  

understand that the price in such a sale would  

be  deliberately  understated  so  as  to  evade  

taxation within the scheme of the Act. It was  

to  dissuade  such  sales  that  the  legislature  

had decided to deem the price of the goods at  

the time of their sale by the related persons  

to  wholesale  market.  The  ‘normal  price’  is  

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mentioned in Section 4 (1) (a) of the Act. The  

provision of Section 4(1)(a) is 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 value, such value  shall, subject to the other provisions of  this section, be deemed to be- (a) the normal price thereof, that is to  say,  the  price  at  which  such  goods  are  ordinarily sold by the assessee to a buyer  in  the  course  of  wholesale  trade  for  delivery at the time and place of removal,  where the buyer is not a related person  and  the  price  is  the  sole  consideration  for the sale:

Provided that-

(i) where, in accordance with the normal  practice  of  the  wholesale  trade  in  such  goods, such goods are sold by the assessee  at different prices to different classes of  buyers  (not  being  related  persons)  each  such price shall, subject to the existence  of  the  other  circumstances  specified  in  clause  (a),  be  deemed  to  be  the  normal  price  of  such  goods  in  relation  to  each  such class of buyers;

(ii) where  such  goods  are  sold  by  the  assessee in the course of wholesale trade  for  delivery  at  the  time  and  place  of  removal at a price fixed under any law for  the  time  being  in  force  or  at  a  price,  being  the  maximum,  fixed  under  any  such  law,  then,  notwithstanding  anything  contained in clause (iii) of this proviso,  

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the price or the maximum price, as the case  may be, so fixed, shall, in relation to the  goods so sold, be deemed to be the normal  price thereof;

(iii) where  the  assessee  so  arranges that the goods are generally not  sold  by  him  in  the  course  of  wholesale  trade  except  to  or  through  a  related  person, the normal price of the goods sold  by the assessee to or through such related  person shall be deemed to be the price at  which  they  are  ordinarily  sold  by  the  related person in the course of wholesale  trade at the time of removal, to dealers  (not being related persons) or where such  goods  are  not  sold  to  such  dealers,  to  dealers  (being  related  persons)  who  sell  such goods in retail;

10. In these appeals the Revenue contends that in  

a sale of excisable goods between an assessee  

and a related person under Section 4 (1) (a)  

(iii)  of  the  Act  (as  it  was  prior  to  its  

amendment in 2000) the ‘normal price’ for the  

sale  is  deemed  to  be  the  one  at  which  the  

goods  are  ordinarily  sold  by  the  ‘related  

person’ to the whole sellers. Therefore, the  

place of removal for such goods should be the  

depot  of  the  related  person  from  where  the  

goods are sold to the whole sellers, instead  9

of  the  factory  gate  of  the  assessee.  The  

Revenue contends that an obvious corollary to  

this is that the freight charges so arising  

between the factory gate of the assessee and  

the  place  of  removal  at  the  depot  of  the  

related person should constitute the value of  

the goods for the purposes of computation of  

excise duty. It further contends that since,  

the ‘place of removal’ is not the assessee’s  

factory  gate  but  rather  the  depot  of  the  

related person,  the price is known, only at  

the price at which goods are sold to whole  

sellers by the related person.

11. Opposing the same, the learned counsel for the  

respondent contended that M/s. Frito Lay India  

is  not  a  subsidiary  of  the  respondent.  The  

brand names of the products are held by Pepsi  

Co. Inc. USA. Respondent’s case is that 96% of  

the products manufactured by it are sold to  

M/s.  Frito  Lay  India  and  only  4%  to  

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independent  whole  sellers.  Originally  the  

assessable value of the items manufactured by  

the respondent was arrived at on the basis of  

price  at  which  the  respondent  sold  them  to  

M/s. Frito Lay India by taking into account  

the costs of raw materials, packing materials,  

conversions  and  the  profit  margin.  Their  

further case is that Pepsi Co. Inc. USA is a  

holding  company  and  the  respondent  and  M/s.  

Frito Lay India are neither holding companies  

nor  subsidiary  companies  inter  se.  The  

respondent wants the assessment to be made at  

the price at which M/s. Frito Lay India sold  

the products to its wholesale dealers. That is  

why they claim deduction towards freight and  

transportation charges from the factory gate  

of the respondent to the depot of M/s. Frito  

Lay  India.  The  learned  counsel  for  the  

respondent also submitted that the transaction  

between  respondent  and  M/s.  Frito  Lay  India  

was on a jobwork basis and that the assessment  

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of value should be guided by the principles  

laid down in the case of  Ujagar Prints etc.  etc. v. Union of India & Ors. reported in  AIR  1989 SC 972.

12. The learned counsel for the appellant submits  

that the instant case is covered by the three  

judge  Bench  decision  of  this  Court  in  

Commissioner  of  Central  Excise,  Belgaum v.  

Akay Cosmetics (P) Ltd. [(2005) 3 SCC 764]. It  

appears that in the instant case the period in  

question is between 1st November 1997 and 28th  

February  1999.  Almost  the  same  period  was  

considered by this Court in its decision in  

Akay Cosmetics (supra). In the present case it  

is not disputed by the respondent that M/s.  

Frito Lay India is its related person under  

Section 4(4)(c). The facts discussed in  Akay  

Cosmetics (supra)  substantially  resemble  the  

facts  of  this  case,  except  of  course  the  

difference in the items manufactured. In para  

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25 of Akay Cosmetics (supra) (page 774 of the  

report)  this  Court  formulated  the  key  

question,  which  is:  “how  and  when  the  

assessable value of the manufactured product  

is to be determined?”

13. Having posed that question, the learned judges  

answered the same in para 28, (page 777 of the  

report) inter alia, holding as follows:  

“Under section 4 (2), it was provided that  where the price of the excisable product  for delivery at the place of removal  was  not  known and  the  value  was  determined  with reference to the price for delivery  at  a  place  other  than  the  place  of  removal, the cost of transportation from  the  place  of  removal  to  the  place  of  delivery had to be excluded from such a  price. The reason is important.  Section 4  (2)  is  a  residuary  section  and  applied  only to cases where the price at the place  of removal was not known and the taxable  value of the excisable product had to be  determined with reference to the price for  delivery (sale) at a place other than the  price of removal. Under Section 4 (2), the  cost of transportation from the place of  removal  to  the  place  of  delivery  was  deductible,  provided  that  the  assessable  value (taxable value) was not known at the  factory gate and had to be determined with  

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reference to another place. If the goods  were  manufactured  at  place  “X”  but  the  assessable  value  was  determined  with  reference  to  place  “Y”,  the  cost  of  transportation had to be deducted.”

14. In coming to the said conclusion, the learned  

judges  relied  on  this  Court’s  decision  in  

Union  of  India  and  others v.  Bombay  Tyre  

International Limited and others, (1984) 1 SCC  

467. In para 31 of Akay Cosmetics (supra), the  

learned judges summed up the essence of the  

question by saying, inter alia, “therefore the  

article became an object of assessment when it  

was sold by the manufacturer.”

15. It  is  not  in  dispute  in  the  instant  case  

Section 4(2) does not apply.  What applies is  

the  provision  of  Section  4(1)(a)(iii)  as  it  

stood at the relevant time. The rationale of  

the  proviso  (iii)  was  explained  in  Akay  

Cosmetics (supra) as follows:

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“...The  implication  of  the  manufacturer,  the assessee and the buyer being related  to each other was that the price charged  to the related person was presumed to be  understated  and  to  dissuade  such  sales,  the  legislature  had  introduced  the  said  proviso as anti-evasion measure. Hence, to  give  deductions  to  the  assessee  as  claimed, would defeat the very object of  the  third  proviso.  Under  all  three  provisos,  the  manufacturer  remained  the  assessee, the “object” of the assessment  remained the same and neither the identity  of  the  manufacturer  nor  the  identity  of  the excisable goods underwent any change.  Even  the  place  of  removal  remained  unchanged,  under  the  third  proviso,  the  basis  of  assessable  value  alone  changed  when the price of the related person was  adopted  as  the  basis  of  the  valuation.  Therefore, proviso (iii) did not break the  nexus  between  price  and  value  under  Section 4 (1) (a) of the Act.” (Para 33,  page 779 of the report)

16. The learned counsel for the respondent tried  

to distinguish the present case from the ratio  

of  Akay Cosmetics (supra) by relying on the  

facts in that case by referring to paras 2 and  

7 of the judgment in  Akay Cosmetics (supra).  The  learned  counsel  submitted  that  in  Akay  

Cosmetics (supra), freight charges claimed was  

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the  one  between  the  depot  of  the  related  

person to the place of the unrelated dealer.  

Obviously there are some factual differences  

that are noted in para 2 of the said judgment,  

but that does not impinge upon the ratio on  

the interpretation of Section 4(1)(a)(iii) of  

the Act which is quoted above.  

17. Therefore, the finding of the Customs, Excise  

and Gold (Control) Appellate Tribunal, Bench-

A, New Delhi, which is quoted above and which  

upholds the contention of the respondent that  

it  is  justified  in  claiming  exclusion  of  

freight  charges  arising  between  the  factory  

gate of the respondent to the depot of the  

related  person,  cannot  be  sustained.  This  

Court  finds  that  in  the  facts  and  

circumstances of this case, Section 4 (2) is  

not applicable. This Court, therefore, affirms  

the order-in-original but with a rider.

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18. In the instant case in the order-in-original a  

penalty has been imposed which is equal to the  

amount of duty. Such penalty has been imposed  

in exercise of power under Section 11 AC of  

the Act. Section 11 AC of the Act as it stood  

at the relevant point of time runs as under:

“11AC. Where any duty of excise has not  been  levied  or  paid  or  has  been  short- levied  or  short-paid  or  erroneously  refunded by reasons of fraud, collusion or  any wilful mis-statement or suppression of  facts,  or  contravention  of  any  of  the  provisions  of  this  Act  or  of  the  rules  made  thereunder  with  intent  to  evade  payment of duty, the person who is liable  to  pay  duty  as  determined  under  sub- section (2) of section 11A, shall also be  liable to pay a penalty equal to the duty  so determined:

Provided that where the duty  determined  to  be  payable  is  reduced  or  increased  by  the  Commissioner  (Appeals),  the Appellate Tribunal or, as the case may  be, the court, then, for the purposes of  this  section,  the  duty  as  reduced  or  increased, as the case may be, shall be  taken into account.”

 19. From  a  perusal  of  the  aforesaid  section,  

especially the underlined portion, it is clear  

that in order to attract the penalty provision  

under Section 11 AC, criminal intent or ‘mens  1

rea’ is a necessary constituent. In the reply  

to the show cause notice the stand which has  

been taken by the respondent is that it has  

been paying the duty and there is no malafide  

intention on its part to evade the payment of  

duty. The further stand is that the goods were  

cleared from the factory only on payment of  

duty. This stand which has been taken in the  

reply to the show cause notices was not found  

to be incorrect in the order-in-original. As  

such the imposition of penalty of the equal  

amount  of  duty  under  the  order-in-original  

cannot be sustained.  

20. It  is  well  settled  that  when  the  statutes  

create  an  offence  and  an  ingredient  of  the  

offence is a deliberate attempt to evade duty  

either  by  fraud  or  misrepresentation,  the  

statute  requires  ‘mens  rea’  as  a  necessary  

constituent  of  such  an  offence.  But  when  

factually  no  fraud  or  suppression  or  mis-

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statement  is  alleged  by  the  revenue  against  

the respondent in the show cause notice the  

imposition of penalty under Section 11 AC is  

wholly impermissible.  

21. The Court in this connection may remind itself  

of the fundamental principle “that an accused  

person  cannot  be  convicted  without  proof  of  

mens rea, unless from a consideration of the  

terms  of  the  statute  and  other  relevant  

circumstances  it  clearly  appears  that  that  

must have been the intention of Parliament.”  

[See the decision of the House of Lords in  

Vane v.  Yiannopoullos, (1964) 3 All ER 820,  and the opinion of Lord Reid at page 823].   

22. In Vane (supra), the word ‘knowingly’ was used  in  the  statute  as  a  condition  of  creating  

liability.   

23. The  aforesaid  dictum  of  Lord  Reid  has  been  

followed by this Court also. A reference in  1

this connection may be made to the decision in  

Union of India v. Rajasthan Spinning & Weaving  Mills reported in 2009 (238) E.L.T. 3 (S.C.).  This Court considering Section 11 AC of the  

Act held in para 19 at page 12 of the report  

as follows:

“19. From the aforesaid discussion  it  is  clear  that  penalty  under  Section  11AC, as the word suggests, is punishment  for an act of deliberate deception by the  assessee with the intent to evade duty by  adopting any of the means mentioned in the  section.”

24. Following  the  aforesaid  well  settled  

principles,  this  Court  quashes  that  part  of  

the  order-in-original  which  imposes  penalty  

without any finding of fraud or mis-statement  

against  the  respondent.  This  part  of  the  

order-in-original  is  quashed.  Save  as  

aforesaid,  the  order-in-original  is  upheld.  

These appeals filed by the revenue are allowed  

to the extent indicated above. No costs.

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.......................J. (D.K. JAIN)

.......................J. (ASOK KUMAR GANGULY)

.......................J. (H.L. DATTU)

New Delhi December 10, 2010  

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