TMI Blog2015 (4) TMI 358X X X X Extracts X X X X X X X X Extracts X X X X ..... ndirectly through such related person. It is only when all three considerations are cumulatively met that proviso (iii) can be said to be attracted. When we come to the definition of “related person” the legislature has used a well known technique. It first employs the expression “means” and states that persons who are associated with the assessee so that they have a direct or indirect interest in the business of each other would get covered. The definition then goes on to use the expression “and includes” thereby indicating that the legislature intends to extend the definition to also include various persons that would not otherwise have so been included. These include a holding company, a subsidiary company, a relative and a distributor of the assessee and any sub-distributor of such distributor. The necessity for including holding and subsidiary companies as defined under the Companies Act, 1956 is to lift the corporate veil in order to get to the economic realities of the transaction. A reading of the definition of “relative” would show that the relative need not be a person who is so associated with the assessee that they have mutual interest in each other’s businesses. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... venue. - Civil Appeal Nos. 9049-9051 of 2003, Civil Appeal Nos.4645-4646 of 2004, Civil Appeal Nos. 6166-6168 of 2004, Civil Appeal No. 7495 of 2004 - - - Dated:- 8-4-2015 - A. K. Sikri And R. F. Nariman,JJ. JUDGMENT R. F. Nariman, J. 1. These four sets of appeals relate to the correct construction of Section 4(1)(a) proviso (iii) and Section 4(4)(c) of the Central Excise and Salt Act as they stood prior to the 2000 amendment of Section 4. In short, these appeals deal with the definition of related person and the price at which valuation is to take place if sales are made to related persons in the course of wholesale trade. 2. It is important to note that the assessee, M/s Detergents India Limited, is the same in all the appeals, which arise out of different show cause notices for periods ranging from 1.3.1992 to September 1997. Detergents India Limited later changed its name to Henkel Marketing India Limited. 3. The facts of Civil Appeal Nos.9049-9051 of 2003 are as follows: A show cause notice dated 8.12.1995 was issued demanding an amount of ₹ 3,21,450/- for the period 20.7.1995 to 30.7.1995. The demand made under this notice was dropped vide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the two companies has been established in this case. None of the commonalities suggested by the Ld. SDR in his bid to set up a relation between the two companies would, individually or collectively, amount to mutuality of interest expounded by the Apex Court. The decisions cited by him are easily distinguishable. On the other hand, the decisions cited by the counsel are largely supportive of the assessee s stand in this case. I do not think it necessary to elaborate this aspect as a detailed discussion has already been made in this behalf by Ld. Member (J). I am in full agreement with him on the issue. 7. As DIL and SWCL have already been found not to be related persons , it cannot be said that the former suppressed (in their price lists filed with the department) any relationship before the department with an intent to evade payment of duty. The fact is that there was no mutuality of interest between DIL and SWCL and hence they were not related persons within the meaning of Section 4(1) (a) of the Act. The fact alleged by the department in the show cause notice did not exist at all to be suppressed by the notice. Therefore, the extended period of limitation was not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fact, the price charged by these independent manufacturers to SWC is lower than the price charged by DIL. As held in 1989 (43) ELT 401 (Bom) in Dawn Apparels Limited, the price charged by the subsidiary company to the holding company is not rejectable merely on the ground of such relationship of subsidiary and principal in the absence of any evidence of low price having been charged or any favourable treatment accorded. In the present case, the Department has not produced any material to show that their price to SWC is not the normal price. 6. It was also pleaded that processing charges of different products were different. This is to be found in the very show cause notice dated 26.3.1997 with which we are concerned as follows:- 3.6 File bearing Nos. 45 and 71 seized from the factory at Kodur on 16.5.1995 were shown to him and he was asked to explain in detail about the audit reports of M/s. SWC available in that file. He explained that he had seen the internal audit report of M/s. SWC dated 2.4.1993 from page No.37 to 58 in file No.45 and added that M/s. SWC were periodically conducting audit (M/s. SWC being the holding company) of the functioning of M/s. DIL, Kodur which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e same premises; DIL sends monthly newsletters to Shaw Wallace showing production, despatches, purpose, technical problems, quality problems, details of power consumption etc. - and Shaw Wallace fixes the price of DIL products; and unsecured loans of approximately ₹ 55 lakhs were given by Shaw Wallace to its subsidiary DIL. It is argued that all these facts would show that Shaw Wallace and DIL were related persons and that the price paid by Shaw Wallace to DIL was a depressed price and would, therefore fall within proviso (iii) of Section 4(1)(a) as it stood prior to 2000. Learned counsel for the Revenue also argued that the moment there is a holding/subsidiary company relationship, the definition of related person under Section 4(4)(c) gets attracted and proviso (iii) to Section 4(1)(a) in turn gets attracted and therefore it is the price at which Shaw Wallace and Company sells the self same goods to its customers that is the price that is to be taken into account on the facts of the present case. 8. Shri Lakshmikumaran, learned counsel for the appellants has argued that even though Shaw Wallace and DIL may be holding and subsidiary companies, yet on a true construction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o advert to Section 4 as it stood after the Amendment Act of 1973 but before the Amendment Act of 2000. Section 4 reads 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny 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; (d) value in relation to any excisable goods,- (i) where the goods are delivered at the time of removal in a packed condition, includes the cost of such packing except the cost of the packing which is of a durable nature and is returnable by the buyer to the assessee. Explanation.-In this sub-clause packing means the wrapper, container, bobbin, pirn, spool, reel or warp beam or any other thing in which or on which the excisable goods are wrapped, contained or wound; (ii) does not include the amount of the duty of excise, sales tax and other taxes, if any, payable on such goods and, subject to such rules as may be made, the trade discount (such discount not being refundable on any account whatsoever) allowed in accordance with the normal practice of the wholesale trade at the time of removal in respect of such goods sold or contracted for sale; (e) wholesale trade means sales to dealers, industrial consumers. Government, local authorities and other buyers, who or which purchase their r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ature intends to extend the definition to also include various persons that would not otherwise have so been included. These include a holding company, a subsidiary company, a relative and a distributor of the assessee and any sub-distributor of such distributor. The necessity for including holding and subsidiary companies as defined under the Companies Act, 1956 is to lift the corporate veil in order to get to the economic realities of the transaction. 13. Now to the case law. In Union of India v. Bombay Tyre International Ltd., (1984) 1 SCC 467, Section 4 as amended by the 1973 Amendment Act was challenged before this Court. This Court repelled the challenge. It held that even under Section 4 prior to the 1973 Amendment, the wholesale cash price would consist of a sale by a manufacturer in the course of wholesale trade to a wholesale dealer, which sale would have to be at arm s length and in the usual course of business. The court held: 32. It will be noticed that the basic scheme for determination of the price in the new Section 4 is characterised by the same dichotomy as that observable in the old Section 4. It was not the intention of Parliament, when enacting the new ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... price where the buyer is not the related person and the price is the sole consideration for the sale . The expression related person has been specifically defined in the new Section 4(4)(c), and transactions in which a related person is involved are covered by the third proviso of Section 4 (1)(a). 14. These observations have a vital bearing on the construction of Section 4(1)(a). Section 4, before the amendment of 1973, did not contain the expression where the buyer is not a related person and the price is the sole consideration for the sale . The pre-amended Section 4 was understood in Voltas s case by this Court to mean that the wholesale cash price can only be ascertained on the basis of arm s length transactions. If there is a special or favoured buyer like a relative of the manufacturer to whom a specially low price is charged because of extra commercial considerations, such price cannot be the price referred to in Section 4(1)(a). Taking a cue from the fact that the post-amendment Section 4 makes no change in the law laid down in Voltas s case, as far as arm s length transactions are concerned, it is clear that where the price is the sole consideration for the sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purchasers (who are unrelated) for the same goods, in the case of the former the higher price paid by purchasers from the related person would be the price on which excise duty would be calculated which would be more than the normal price under Section 4(1)(a). Such a result is not contemplated by the amended Section 4(1) (a), which must therefore be read in the manner indicated above. 16. So far as related persons are concerned, the Court in the Bombay Tyre International Limited case stated: 43. Learned counsel for the assessees contends that the provisions regarding related persons are wholly unnecessary because to counteract evasion or avoidance any artificially arranged price between the manufacturer and his wholesale buyer can be rejected in any case under Section 4, and we are referred to the observations of this Court in Voltas Limited [(1973) 3 SCC 503 : 1973 SCC (Tax) 261 : AIR 1973 SC 225 : (1973) 2 SCR 1089] and Atic Industries Ltd. [(1975) 1 SCC 499 : 1975 SCC (Tax) 135 : AIR 1975 SC 960 : (1975) 3 SCR 563] It is true, we think, that the new Section 4(1) contains inherently within it the power to determine the true value of the excisable article, after taking ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... another. The provisions of the law may indeed be so enacted that the actual existence of such motive may be wholly immaterial, and what has been done by the assessee may even proceed from wholly bona fide intention. With the aid of legal fiction, the Legislature fastens the liability on the assessee. When the Legislature employs such a device, and the liability is attached without qualification, it is reasonable to infer that an irrebuttable presumption has been created by law. Such provisions have been held to be within the legislative competence of the Legislature and as falling within its power of taxation, and reference may be made to Balaji v. ITO [AIR 1962 SC 123 : (1962) 2 SCR 983 : (1961) 43 ITR 393] ; Navnitlal C. Javeri v. CIT [AIR 1965 SC 1375 : (1965) 1 SCR 909 : (1965) 56 ITR 198] and Punjab Distilling Industries Ltd. v. CIT. [AIR 1965 SC 1862 : (1965) 3 SCR 1 : (1965) 57 ITR 1 : 35 Com Cas 541] 45. It is contended for the assessees that the definition of the expression related person is so arbitrary that it includes within that expression a distributor of the assessee. It is urged that the provision falls outside the ambit of Entry 84 of List I of the Seventh Sch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... behind the legal facade, for example, where the corporate entity was used for tax evasion or to circumvent tax obligation. 17. On a reading of the aforesaid paragraphs, it is clear that proviso (iii) would be referable only to tainted transactions. Only such cases would raise an irrebuttable presumption which will then be governed by the said proviso. It is also interesting to note that the definition of related person was read down by this Court to make the distributor covered by it to be a relative of the assessee. When holding company and subsidiary company was spoken of, the Court held again that the idea of including these two types of companies within the definition of related person is only so that the corporate veil of such companies can be lifted so that economic realities behind the legal fa ade can be looked at so that tax is not evaded or avoided. 18. Some other decisions may be taken note of at this stage. In Flash Laboratories Limited v. Collector of Central Excise, New Delhi, (2003) 2 SCC 86, the appellant was a subsidiary company of M/s Parle Products Limited. M/s Parle Biscuits Limited is also a subsidiary company of M/s Parle Products Limited. What w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidiary, not being a depressed price, would be the price that would be taken into consideration for valuation under Section 4(1)(a). 20. Similarly, in CCE, II, Chennai v. Beacon Neyrpic Ltd., 2006(193) ELT 16, this Court in a short two paragraph order held: 1. Assuming that the assessee was related to its subsidiary company i.e. M/s Best Crompton Ltd. (BCL), this by itself would not be sufficient for the purpose of invoking the Central Excise (Valuation) Rules, 1975 read with Section 4(1)(a) of the Central Excise Act, 1944. The Department would have to go further and show that the relationship has introduced an element other than purely commercial consideration in effecting the sale by the assessee to BCL. No such evidence has been produced by the Revenue. 2. In the circumstances, the appeal is dismissed. 21. In Commissioner Central Excise, New Delhi v. India Thervit Corporation, Ltd., (2008) 17 SCC 374, ATL a subsidiary of ITCL, sold all goods manufactured by it to ITCL. Despite the fact that on facts ATL and ITCL may be taken to be related persons, (though this Court did not hold so), since there is no under valuation as the price paid by the Railways (an arm s le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... further established that the transaction in question is not based on principal to principal and that extracommercial considerations have lowered the normal price. It is only then the third proviso to Section 4(1) (a) is attracted. The view which we have taken is also supported by the judgment of the Supreme Court in the case of Atic Industries (supra) as well as the judgment of the Supreme Court in the case of Moped India Ltd. v. Collector of Central Excise reported in1986(23)ELT8(SC) . 23. We find it difficult to agree with some of the conclusions reached in the aforesaid paragraph. As has been stated by us above, means and includes is a legislative device by which the includes part brings by way of extension various persons, categories, or things which would not otherwise have been included in the means part. If this is so, obviously both parts cannot be read conjunctively. What is in the includes part is relatable only to the subject that is to be defined and takes within its sweep persons, objects, or things which are not included in the first part. We have already pointed out that the reason for including holding and subsidiary companies in the includes part i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e only part of the definition of related person in clause (c) of sub-section (4) of Section 4 on which he could rely was the first part which defines related person to mean a person who is so associated with the assessee that they have interest directly or indirectly in the business of each other . The second part of the definition which adds an inclusive clause was admittedly not applicable, because neither Atul Products Limited nor Crescent Dyes and Chemicals Limited was a holding company or a subsidiary company nor was either of them a relative of the assessee, so as to fall within the second part of the definition. 25. It is clear therefore that the Bombay High Court judgment does not lay down the law correctly insofar as the correct construction of Section 4(4)(c) of the Act is concerned. 26. Section 4(4)(c) is in two parts. The first part requires the department to apply a de facto test, whereas the second part requires the application of a de jure test. Relative in the Companies Act, 1956 is defined as follows:- 6. Meaning of relative .-A person shall be deemed to be a relative of another if, and only if,- (a) they are members of a Hindu undivided famil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents India Limited are related persons because of a multitude of factors pointed out in the Commissioner s order. 28. That Shaw Wallace and Detergents India Limited are related persons is made out by their holding/subsidiary relationship. However, from this, it does not follow that there is any arrangement of tax avoidance or tax evasion on the facts of this case. This being the case, proviso (iii) to Section 4(1)(a) would not be applicable. Further, it would also not be applicable for the reason that there is no predominance of sales by Detergents India Limited to Shaw Wallace. As has been pointed out above, only 10% of its manufacturing capacity has been sold to Shaw Wallace, 90% being sold to Hindustan Lever Limited. For this reason also, proviso (iii) does not get attracted. This being the case, on facts here Section 4(1)(a) and not proviso (iii) is attracted inasmuch as on facts the presumption of a transaction not being at arm s length has been rebutted. Revenue s comparison of price paid by Hindustan Lever to DIL with price paid by Shaw Wallace to DIL is unwarranted as the products sold and processing charges are wholly different. The basis of the Commissioner s orders ..... X X X X Extracts X X X X X X X X Extracts X X X X
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