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2015 (4) TMI 358 - SUPREME COURT

2015 (4) TMI 358 - SUPREME COURT - 2015 (318) E.L.T. 559 (SC), 2015 (7) SCC 198, 2015 (6) JT 590, 2015 (4) SCALE 631, - Valuation - normal price - Related person / party - wholesale purchaser - Applicability 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 - Evasion of duty - Held that:- “arrangement” spoken of in the proviso must be something by which the assessee and the related person “arrange” that .....

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r way of saying that such sale can be effected directly to or indirectly 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 othe .....

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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. If that were the case, the expression “relative” in the second part would be otiose inasmuch as a relative would be subsumed within “person” in the first part. Thus, “relatives” would also be “persons” who are so associat .....

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y Shaw Wallace and Company for the same/similar products as was sold by unrelated entities to it was even lower than the price paid by Shaw Wallace to Detergents India Ltd. This being the case, it is clear that on facts here there is no “arrangement” between Shaw Wallace and Detergents India Limited to depress a price which is otherwise at arm’s length. Though this fact is pleaded expressly before the Commissioner as pointed out above, the Commissioner’s order does not contain any finding based .....

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ii) 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.

Further, the single most relevant fact, namely, that Shaw Wallace paid for the same/similar goods .....

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f 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 r .....

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s), Hyderabad, by an order dated 5.1.2000. The appeal filed before CEGAT was also dismissed by the impugned judgment dated 22.4.2003. 4. By a separate show cause notice dated 26.3.1997 for the period 1.3.1992 to 31.3.1995, the Commissioner by an order dated 31.8.1999 confirmed a demand of ₹ 1,12,42,499/- and also confiscated land, building, plant and machinery, and further ordered redemption of the same in lieu of confiscation on payment of a fine of ₹ 5,00,000/-. Penalties of ₹ .....

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w Wallace at a much lower price as compared to the price at which these goods were sold by the assessee in the market to wholesale purchaser Hindustan Lever and another. The Technical Member, therefore, remanded the matter for a proper adjudication on facts. The Legal Member, on the other hand, found in favour of the assessee finding that the issue in the present appeals was covered by the judgment of Union of India v. Atic, (1984) 3 SCC 575 and Raliwolf Limited v. Union of India, 59 ELT 220 Bom .....

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is for determination of the assessable value of the goods, and not the price charged by the latter to their dealers. SWCL cannot be said to be related to DIL within the meaning of this expression as used in Section 4(1)(a) as no mutuality of interest between 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 .....

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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 invocable in this case. I agree with Ld. Member (J) on t .....

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India Limited, making Detergents India Limited a subsidiary of Shaw Wallace as understood by the definition of holding company and subsidiary company contained in the Companies Act, 1956. 90% of the manufacturing capacity of Detergents India Limited was to manufacture various products for Hindustan Lever Limited which were then branded with Hindustan Lever names in small packs. A processing charge was paid by Hindustan Lever Limited for this job work, and it is clear that different processing c .....

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fact that the price paid by Shaw Wallace and Company for the purchase of the same/similar products from the other firms/companies was less than the price paid to Detergents India Limited. This can be found as a fact in the Commissioner s order dated 7.11.2000 in Civil Appeal Nos.6166-6168 of 2004 in which the following fact was pleaded before the learned Commissioner:- SWC procures only a part of its requirement from DIL and there are various other independent manufacturers like M/s Deepti Chemi .....

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e 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 .....

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DIL, Kodur which was its subsidiary to control and monitor the activities of its subsidiaries. When enquired he stated that the processing charges paid by M/s. HLL to M/s. DIL is ₹ 1,200 per MT upto 1994 and later M/s. HLL reduced the processing charges to ₹ 1125 per MT: that for the goods supplied to M/s. SWC, M/s. DIL used to file the price list with the Central Excise Department after mutually agreeing with M/s. SWC taking into account the raw material landed cost and the processi .....

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processing charges charged to M/s. HLL for spray dried sunlight detergent powder was ₹ 2,100 per MT; that the processing charges for both Chek detergent powder and sunlight detergent powder are similar; that the packing style for Sunlight detergent powder varies from packing of Chek detergent powder, the difference being Chek Powder was packed in bulk quantities more and in the case of Sunlight powder the entire packing was in 500 Gms. Only; that in respect of detergent cakes made for M/s. .....

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f Section 4(4)(c) of the Act and stated that some of these factors are that advertisement expenses of DIL brands had been borne by the holding Company Shaw Wallace; processing charges paid by Shaw Wallace to DIL is less than processing charges paid to Hindustan Lever; employees of Shaw Wallace and its subsidiaries were freely transferred from one company to another; depots of Shaw Wallace and DIL were in the same premises; DIL sends monthly newsletters to Shaw Wallace showing production, despatc .....

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ned 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 .....

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racted when such arrangement is predominantly a sale to or through a related person. According to him, on the facts of the present case, there is no arrangement between Shaw Wallace and DIL which has led to any depression in the normal price at which such goods are sold. Also, since only 10% of the production of DIL is sold to Shaw Wallace, the goods are not generally sold to Shaw Wallace. 9. To appreciate the aforesaid controversy, it is necessary to set out Section 4 as it existed before its a .....

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place of manufacture or production, or if a wholesale market does not exist for such article at such place, at the nearest place where such market exists, or (b) where such price is not ascertainable, the price at which an article of the like kind and quality is sold or is capable of being sold by the manufacturer or producer, or his agent, at the time of the removal of the article chargeable with duty from such factory or other premises for delivery at the place of manufacture or production, o .....

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on 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 .....

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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, the price or the maximum price, as the case may be, so fixed, shall, in relation to the goods .....

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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) Where, in relation to any excisable goods the price thereof for delivery at the place of removal is not known and the value thereof is determined with reference to the price for deliv .....

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) a factory or any other place or premises of production or manufacture of the excisable goods; or (ii) a warehouse or any other place or premises wherein the excisable goods have been permitted to be deposited without payment of duty, from where such goods are removed; (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 distri .....

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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 remova .....

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f wholesale trade. The price should be the sole consideration for the sale. If the buyer is a related person, there is a presumption that a sale to a related person would be at a price which is not the sole consideration for the sale. 10. Proviso (iii) then deals with the price that is to be taken into consideration in case sales are made to related persons. Three basic ingredients are necessary before proviso (iii) gets attracted. The first ingredient is that the assessee must arrange that good .....

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w the normal price, so that tax is either avoided or evaded by such arrangement. Secondly, the expression generally also shows that such goods must predominantly be sold by the assessee to or through the related person - in mathematical terms, sales that are to or through a related person must consist of at least 50% of the goods that are manufactured and sold. The expression to or through a related person again goes back to the arrangement and is another way of saying that such sale can be effe .....

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se 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 realiti .....

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. 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 Section 4 to create a scheme materially different from that embodied in the superseded Section 4. The object and purpose remained the same, and so did the central principle at the heart of the scheme. The new scheme was merely more comprehensi .....

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or any place or premises wherein the excisable goods have been permitted to be deposited without payment of duty and from where such goods are removed. The judicial construction of the provisions of the old Section 4 had already declared that the price envisaged under clauses (a) and (b) of that section was the price charged by the manufacturer in a transaction at arm's length. After referring to several cases, some of which have already been mentioned here earlier, this Court pointed out in .....

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4 (a) of the Act. A sole distributor might or might not be a favoured buyer according as terms of the agreement with him are fair and reasonable and were arrived at on purely commercial basis. 33. That was also the view taken in Atic Industries Ltd. [(1975) 1 SCC 499 : 1975 SCC (Tax) 135 : AIR 1975 SC 960 : (1975) 3 SCR 563] The new Section 4 makes express provision in that behalf. Under the new Section 4 also, it is necessary to take the price charged by the manufacturer as one which is unaffe .....

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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 c .....

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1973 amendment would apply. Read in accordance with the object of the pre-amended Section 4 as explained in Voltas s case it is clear that the expression where the buyer is not a related person and the price is the sole consideration for the sale is to be read conjunctively as meaning that because the buyer is a related person, the price usually ceases to be the sole consideration for the sale. This merely raises a rebuttable presumption. Once the presumption is rebutted and it is shown that eve .....

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er to go to any other facts. 15. On a reading of the aforesaid judgment, it becomes clear that the object of enacting Section 4 is that transactions at arm s length between manufacturer and wholesale purchaser which yield the price which is the sole consideration for the sale alone is contemplated. Any concessional or manipulative considerations which depress price below the normal price are, therefore, not to be taken into consideration. Judged at from this premise, it is clear that arrangement .....

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the basis for valuation as the normal price of the goods. A literal reading of the Section would otherwise lead to an absurdity. Where it is proved that the same price is paid by related persons as well as arm s length 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 no .....

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, 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 into account any concession shown to a special or favoured buyer because of extra-commercia .....

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able article for the purpose of excise duty. Nonetheless, it was open to Parliament to incorporate provisions in the section declaring that certain specified categories of transactions fall within the tainted class, in which case an irrebuttable presumption will arise that transactions belonging to those categories are transactions which cannot be dealt with under the usual meaning of the expression normal price set forth in the new Section 4(1)(a). They are cases where it will not be necessary .....

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rary, and cannot be said to be reasonably calculated to deal with the issue of evasion or avoidance of excise. It is said that the assessment on the manufacturer by reference to the sale price charged by his distributor is wholly incompatible with the nature of excise , and we are referred to Atic Industries Ltd. [(1975) 1 SCC 499 : 1975 SCC (Tax) 135 : AIR 1975 SC 960 : (1975) 3 SCR 563] Now, it is a well known legislative practice to enact provisions in certain limited cases where an assessee .....

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de 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 : (19 .....

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o the Constitution inasmuch as it is wholly inconsistent with the levy of excise, and if it is attempted to seek support for the provision from the residuary Entry 97 of List I as a non-descript tax the attempt must fail because there is no charging section in the Central Excises and Salt Act empowering the levy of such non-descript tax nor any machinery provision in the Act for collecting such a tax. The charging provision and the machinery provisions of the Act, it is pointed out, deal exclusi .....

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of related person should be so read that the words a relative and a distributor of the assessee should be understood to mean a distributor who is a relative of the assessee. It will be noticed that the Explanation provides that the expression relative has the same meaning as in the Companies Act, 1956. As regards the other provisions of the definition of related person , that is to say, a person who is so associated with the assessee that they have interest, directly or indirectly, in the busine .....

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] where the principle was approved by this Court that the corporate veil could be lifted where the companies shared the relationship of a holding company and a subsidiary company, and to Juggi Lal Kamlapat v.C.I.T. [AIR 1969 SC 932 : (1969) 1 SCR 988 : (1969) 73 ITR 702] where this Court held that the veil of corporate entity could be lifted to pay regard to the economic realities behind the legal facade, for example, where the corporate entity was used for tax evasion or to circumvent tax oblig .....

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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 façade 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 Biscui .....

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facts of that case, the related person, namely, M/s Parle Biscuits Limited was neither a holding company nor a subsidiary company of the assessee i.e. M/s Flash Laboratories Limited. This being the case, this Court held: 7. Having regard to the above decision and the plain meaning of the definition of related person , it is to be noticed that the appellant is a subsidiary company of Messrs Parle Products Limited and Messrs Parle Biscuits Limited is also a subsidiary company of Messrs Parle Prod .....

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Messrs Parle Products Limited are incurring the expenses for sales promotion and advertisement for the sale of the appellant's product, namely, Prudent toothpaste . This judgment, therefore, is an authority only for the application of the first part of Section 4(4)(c). It is in this context that the Court held in paragraph 5 that there must be mutuality of interest between two persons who are both subsidiaries of a particular holding company. 19. In Commissioner of Central Excise Bombay v. .....

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, 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. .....

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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 length purchaser) was the same as the price paid by ITCL, the price paid by the holding company to its subsidiary was taken to be a price on which excise duty would be calculated. 22. Since the Tribunal in the judgment under appeal has referred to and relied upon Raliwolf v. UOI, 59 ELT 220 Bombay (1992), we must refer to the same. The Bombay Hig .....

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ns are required to be satisfied before invoking the third proviso : Firstly, there should be mutuality of interest. Secondly, the price charged should not be normal price but the price lower to the normal price, and that extra-commercial considerations have reduced the normal price. Thirdly, the alleged related person should be related to the assessed as defined in Section 4(4)(c) of the said Act. It is only if the above three conditions are satisfied, then alone it can be said that the third pr .....

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ed counsel for the respondent is accepted, then the word "and" which joins the two parts of the definition would be rendered meaningless. It is well-settled rule of interpretation that the Legislative mandate should be so read that no word used by the Parliament should be rendered nugatory. Reading the section as a whole it is clear that merely because a company is the subsidiary of holding company, ipso facto, it cannot attract Section 4(4) (c). It must be further established that eac .....

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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 s .....

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nition is not rendered meaningless. It is necessary because it precedes the word includes and brings in to the definition clause persons, objects, or things that would not otherwise be included within the means part. 24. The High Court is also wrong in saying that its view is supported by the judgment of this Court in Union of India v. Atic Industries Ltd., (1984) 3 SCC 575. On facts, Atic s case did not deal with holding and subsidiary companies. Atul Products Limited held 50% of the share capi .....

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d and Crescent Dyes and Chemicals Limited on the other were related persons within the meaning of the first part of the definition of the term related person and the assessable value of the dyes manufactured by the assessee for the purpose of excise duty was, therefore, liable to be determined with reference to the price at which the dyes were ordinarily sold by Atul Products Limited and Crescent Dyes and Chemicals Limited. This view taken by the Assistant Collector was set aside by the High Cou .....

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rt was assailed before us by the learned Attorney-General appearing on behalf of the Revenue. He fairly conceded that the 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 .....

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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 family; or (b) they are husband and wife; or (c) the one is related to the other in the manner indicated in Schedule I-A. Schedule I-A. [See Section 6(c)] LIST OF RELATIVES 1. Father. 2. Mother (including st .....

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. Brother's wife. 21. Sister (including step-sister). 22. Sister's husband. 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. If that were the case, the expression relative in the second part would be otiose inasmuch as a relative would be subsumed within person in the first part. Thus, relatives would also be persons who are so associated with the ass .....

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d by Shaw Wallace and Company for the same/similar products as was sold by unrelated entities to it was even lower than the price paid by Shaw Wallace to Detergents India Ltd. This being the case, it is clear that on facts here there is no arrangement between Shaw Wallace and Detergents India Limited to depress a price which is otherwise at arm s length. Though this fact is pleaded expressly before the Commissioner as pointed out above, the Commissioner s order does not contain any finding based .....

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