Related Person under the Central Excise Tariff Act, 1985

In the matter of Commissioner, Central Excise,Chandigarh v. M/s. Kwality Ice Cream Co. dated 26/11/2010 the Hon’ble Supreme Court of India discussed in the detail about who can be called as related person under the Central Excise Tariff Act, 1985(for short `the Act'). It observed that under Section 4 of the Act provides as under: "SECTION 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 pro visions 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; (ia) where the price at which such goods are ordinarily sold by the assessee is different for different places of removal, each such price shall, subject to the existence of other circumstances specified in clause (a), be deemed to be the normal price of such goods in relation to each such place of removal; (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, 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; (b) Where the normal price of such goods is not ascertainable for the reason, that such goods are not sold or for any other reason, the nearest ascertainable equivalent thereof determined in such manner as may be prescribed. (2)........... (3)........... (4) For the purposes of this section,- (a) "Assessee" means the person who is liable to pay the duty of excise under this Act and includes his agent;(b).............(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." According to clause (c) of sub-section (4) of Section 4 of the Act, `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 etc. The explanation to Section 4 (4) (c) further provides that in this clause `holding company', `subsidiary company' and ` relative' have the same meanings as in the Companies Act, 1956. It is in this background that the validity or otherwise of the Tribunal's order is required to be analyzed and judged. In Union of India vs. Bombay Tyre International Ltd.1, this Court examined the scheme of Section 4 (1) (a) before the Amendment Act, 1973 and also the position after the amendment. It was contended in that case before this Court that the definition of the expression "related person" was arbitrary and it included within its ambit a distributor of the assessee. This Court, however, held that in the definition of `related person' being a relative and a distributor could be legitimately read down and its validity upheld. The definition of `related person' should be so read, this Court emphasised, that the words "a relative and a distributor of the assessee" should be understood to mean a distributor who was a relative of the assessee. The Explanation to Section 4(4)(c) provides that the expression "relative" has the same meaning as in the Companies Act, 1956. The definition of "related person", as being "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 ...", shows a sufficiently restricted basis for employing the legal fiction. It was reiterated that it is well settled that in a suitable case the Court could lift the corporate veil where the companies share the relationship of a holding company and a subsidiary company and also pay regard to the economic realities behind the legal facade. This aspect was further examined by this Court in Union of India Vs. ATIC Industries Ltd.This Court referred to the decision of Bombay Tyre International Ltd. (supra) and also referred to the first part of the definition `related person' in clause (c) of Section 4 [ 1984 (17) ELT 323 SC = 1984 (3) SCR 930]. (4) which defines `related person'. This Court observed that if the transactions between the manufacturer and his customers were on principal to principal basis and the whole sale price charged by the assessee to the customers was the sole consideration for the same and no extra commercial considerations entered in the determination ofsuch a price, the customer cannot be held to be a `related person' merely because he holds 50% share in the manufacturing company. It is held: "It is not enough that the assessee has an interest, direct or indirect, in the business of the person alleged to be a related person nor is it enough that the person alleged to be a related person has an interest, direct or indirect, in the business of the assessee. It is essential to attract the applicability of the first part of the definition that the assessee and the person alleged to be a related person must have interest, direct or indirect, in the business of each other. Each of them must have a direct or indirect interest in the business of the other. The equality and degree of interest which each has in the business of the other may be different; the interest of one in the business of the other may be direct, while the interest of the latter in the business of the former may be indirect. That would not make any difference, so long as each has got some interest, direct or indirect, in the business of the other" In Union of India vs. Playworld Electronics Pvt.Ltd., this Court took the view that merely because goods are produced with customer brand name and the entire production sold to the owner of the brand name, cannot be treated as a sale between `related persons'. The case was that Playworld Electronics Pvt.Ltd. manufactured its products in the brand name of `Bush' from the very beginning and was selling the same exclusively to M/s. Bush India Limited or its authorized dealers only. This Court took the view that the market value of the goods of Playworld Electronics Pvt. Ltd. was the price charged from M/s. Bush India Ltd. and not the market value at which price M/s. Bush India Ltd. sold to its wholesalers for the purpose of payment of excise duty. In Calcutta Chromotype Ltd. vs.Collector of Central Excise, Calcutta4 . The said decision refers the decision of this court in Atic Industries Ltd. (supra). The Court in the said decision also noticed the view expressed by this Court in Collector of Central Excise, Madras vs. T.I. Millers Ltd., Madras and T.I. Diamond Chain, Madras [ 1988 (35) E.L.T. 8 (SC)], Snow White Industrial Corporation vs. Collector of Central Excise [ 1989 (41) E.L.T. 360 (SC)]. After the analysis of all the said decisions this Court held: "If we examine the thrust of all the decisions, there is no bar on the authorities to lift the veil of a company, whether a manufacturer or a buyer, to see it was not wearing that mask of not being treated as related person when, in fact, both, the manufacturer and the buyer, are in fact the same persons. Under sub-section (1) of Section 4 of the Act, value of the excisable goods shall not be deemed to be normal price thereof, i.e., 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, if the buyer is a related person and price is not the sole consideration for sale. As to who is a related person, we have to see its definition in Section 4(4)(c) of the Act. It is not only that both the manufacturer and the buyer are associated with each other for which corporate veil may be lifted to see who is behind it but also that they should have interest, directly or indirectly, in the business of each other. But once it is found that persons behind the manufacturer and the buyer are same, it is apparent that the buyer is associated with the manufacturer, i.e., the assessee and then regard being had to the common course of natural events, human conduct and public and private business it can be presumed that they have interest, directly or indirectly, in the business of each other (refer Section 114 of the Evidence Act). It is, however, difficult to lay down any broad principle to hold as to when the corporate veil should be lifted or if on doing that, it could be said that the assessee and the buyer are related persons. That will depend upon the facts and circumstances of each case and it will have to be seen who is calling the shots in both the assessee and the buyer. When it is the same person the authorities can certainly fall back on the third proviso to clause (a) of Section 4(1) of the Act, to arrive at the value of the excisable goods. It cannot be that when the same person incorporates two companies of which one is the manufacturer of excisable goods and the other is the buyer of those goods, the two companies being separate legal entities, the Excise authorities are barred from probing anything further to find out who is the person behind these two companies. It is difficult to accept such a narrow interpretation. True that shareholdings in a company can change but that is the very purpose to lift the veil to find out if the two companies are associated with each other. Law is specific that when duty of excise is chargeable on the goods with reference to its value then the normal price on which the goods are sold shall be deemed to be the value provided (1) the buyer is not a related person and (2) the price is the sole consideration. It is a deeming provision and the two conditions have to be satisfied for the case to fall under clause (a) of Section 4(1) keeping in view as to who is the related person within the meaning of clause (c) of Section 4(4) of the Act. Again if the price is not the sole consideration, then again clause (a) of Section 4(1) will not be applicable to arrive at the value of the excisable goods for the purpose of levy of duty of excise." In Flash Laboratories Ltd. vs. Collector of Central Excise, New Delhi the appellant-Company was a manufacturer of toothpaste ("Prudent") falling under Sub-Heading 3306.00 of the Schedule to the Act. It had been selling its products to its holding Company, PP Ltd. as well as to PB Ltd. which was also a subsidiary Company of PP Ltd. The appellant had been paying duty at the price at which the goods were sold to the holding Company. Having regard to the fact that both appellant as well as PB Ltd. were subsidiary Companies of PP Ltd., this Court took the view that though the relationship between the appellant and PB Ltd. is indirect, they had mutual interest in the business of each other. The facts and circumstances of the case reveal that there is a mutuality of interest between the three Companies as 60% of the products of the appellants was sold to PP Ltd. And remaining 40% of the total products of toothpaste was being sold to PB Ltd. Moreover, it was found that PP Ltd. Was incurring expenses for sales promotion and advertisement for the sale of the appellants' products namely "Prudent Toothpaste". It was under those circumstances it was held that the parties to the transactions were `related persons'. In CCE vs.Xerographic Ltd., this Court reiterated the well settled principle and laid down the three conditions that are required to be satisfied before invoking the third proviso, namely, firstly, there should be mutuality of interest; secondly, that the alleged `related person' should be related to the assessee as per definition of Section 4 (4) (c) given in the Act and thirdly, and importantly, that the price charged from the `related persons' was not the normal price but the price lower than the normal price and because of extra-commercial considerations the price charged was less than the normal value. On analysis of the decisions referred to herein above, it appears what is important is that each of the parties involved should have an interest, whether direct or indirect in the business of each other.In Supreme Washers Pvt. Ltd. vs. Commissioner of Central Excise, Pune7, the Court had to consider and analyse the concept of mutual interest and it was found that there was common procurement of raw material, parties had common stock accounting and planning and interdependence in manufacturing operations. It was held that having common stock of raw material and semi finished goods, having common use of machinery between the three units, having common marketing arrangements and free flow of finance between the three units cumulatively indicates interdependence of the three units with each other as also inter-relationship, cumulatively establishes the appellants inter relationships and interdependence with each other.