TMI Blog1930 (10) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... spect of the rest of the country, however, about 90% of its sales are effected to Usha Sales Limited (hereinafter referred to as 'Usha') and to some extent directly to bulk institutional buyers. 2. We are concerned in this writ petition with the determination of the assessable value of the electric fans manufactured and sold by the petitioner for purposes of the Central Excises and Salt Act, 1944 (hereinafter referred to as the 'Act'). The dispute relates to the period subsequent to 1st October, 1975 with effect from which date Section 4 of the Act was amended by Parliament. The respondents have taken the view that the assessable value is the price at which Usha after purchasing the goods from the assessees, sold the same to other dealers and further that the value of the regulators should also be included in the said assessable value. The Petitioner's contention, however, is that the assessable value of the goods should be the price at which the petitioner sold the goods to Usha and not the re-sale price of Usha to other dealers. It is also contended on behalf of the petitioner that the value of the regulators should not be included in the assessable value of the electric fans t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld be the sole consideration for the sale. If the buyer is a related person then clause (iii) of the proviso will come into operation which runs as follows : "(iii) where the assessee so arranges that the goods are generally no sold by him in the course of wholesale trade except to or through 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 the are ordinarily sold, by the related person in the course of wholesale trade at the time of removal to dealers (not being related persons), o: where such goods are not sold to such dealers, to dealers (being) related persons), who sell such goods in retail." In other words if the manufacturer sells the goods generally to or through a related person the price at which they are sold to the related person will be ignored. Instead of that the price at which the related person sells those goods to other dealers in the course of wholesale trade will be taken into account provided such wholesale dealers are also not related persons. If, however, even the wholesale dealers to whom the goods are sold by the, related person are related persons then all such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oner. Assuming that the term of the agreement create an interest in Usha vis-a-vis the business of the petitioner there is nothing to indicate and no material to justify the conclusion that the petitioner has any interest in the business of Usha. As will be seen later the petitioner sells its goods to Usha and receives the price therefor within 90 days. It has no doubt certain responsibilities for servicing the goods sold by Usha but there is no manner of interest direct or indirect in the business of Usha so far as the petitioner is concerned. The terms of the above definition contemplate two persons who are so associated that they are mutually interested in the business of each other. Examples of the kind may be two companies associated with each other as holding and subsidiary companies or two companies or persons associated as the company and its managing agent or the company and its Secretaries and Treasurers, firms having related partners, companies having common shareholders in the majority and the like. It is very difficult to say that a mere purchaser or even a sole selling agent (if Usha could be said to be one) would be a related person within the meaning of the first pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dge said : "The value of the goods for the purpose of excise must take into account only the manufacturing cost and the manufacturing profit and it must not be loaded with post-manufacturing cost or profit arising from post-manufacturing operation. The price charged by the manufacturer for sale of the goods in wholesale would, therefore, represent the real value of the goods for the purpose of assessment of excise duty. If the price charged by the wholesale dealers who purchases the goods from the manufacturer and sells them in wholesale to another dealer were taken as the value of the goods it would include not only the manufacturing cost and the manufacturing profit of the manufacturer but also the wholesale dealer's selling cost and selling profit and that would be wholly incompatible with the nature of excise. It may be noted that wholesale market in a particular type of goods may be in several tiers and the goods may reach the consumer after a series of wholesale transactions. In fact the more common and less expensive the goods there would be greater possibility of more than one tier of wholesale transactions. For instance, in a textile trade, a manufacturer may sell his en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... les sold in their territory. The attempt of the excise department to ignore the price at which the goods were sold to these dealers was negatived by the Supreme Court which held that the sales to the wholesale dealers did not cease to be wholesale sales merely because the wholesale dealers had entered into agreements with the respondent under which certain commercial benefits were conferred upon them in consideration of their undertaking to do service to the articles sold, or because of the fact that no other person could purchase the articles wholesale from the manufacturer. It was pointed out that the wholesale cash price had to be ascertained on the basis of transactions at arms, length. If there was a special or favoured buyer to whom a specially low price was charged because of extra commercial considerations such as for example his relationship with the manufacturer, the price charged could not be the wholesale cash price. The court, however, emphasised and pointed out : "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. Once wholesale dealings at arm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess of distribution or where, even though he may be entering into a contract with the manufacturer, what he has bargained for is an outright purchase of the goods manufactured by the manufacturer. In such a case where the distributor so called purchases the goods of the manufacturer outright there is no reason to presume, in the absence of any particular facts, that there is no deal at arms' length or that there is likely to be a manipulation which needs to be safeguarded against. Shri Ravinder Narain in fact raised a contention that if the definition of related person is to be read in a very wide and extensive manner leading to the very negation of the concept of excise duty as a result of such an interpretation (as envisaged by the Supreme Court in the Atics case) then the very concept of related person would be ultra vires. He relied in support of this contention on a decision of the Gujarat High Court in the case or Cibatual Limited [1979 E.L.T. (J 407)] where the definition of related persons in such a wide manner has been declared to be unconstitutional. We do not think it is necessary to dilate on this aspect of the matter. For the reasons already stated we are of opinion th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctly in the business of the four customer-companies. The concept of relatives was held to have no application to the case because the five customer-companies were not natural persons but impersonal bodies. Turning to the expression 'distributor' the court observed :- "The word 'distributor, is understood in commerce as an agent or one who distributes goods to consumers. It is not the case of the Central Excise Authorities that the five customer companies are the agents of the petitioner-company. The Customer-companies are not distributing the products of the petitioner-company to consumers, but generally sell in wholesale dealers. It is also not the case of Central Excise authorities that the customer-companies are the distributors of the petitioner-company." 12. In Nagpal Petro-Chem. Ltd. v. Assistant Collector of Central Excise (1979 ELT J 117) the petitioner was engaged in the manufacture of petro-chemical products. The petitioner's products were in great demand in Bombay where about 80% of the total production of the product were sold. M/s. Sikri and Grover were the main buyers for sale of the products of the petitioner at Bombay. They had selling branches at Bombay, Calcut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest between the petitioner and the alleged related persons in the business of each other nor have they shown that the bulk of the petitioner's products have been sold to Sikri and Grover at such concessional rates as to lead to the inescapable conclusion that extra commercial consideration have weighed with the assessee to charge such a concessional rates to Sikri and Grover. On this one ground alone, the petitioners challenge of the impugned order has to be sustained." 13. The Andhra Pradesh High Court had occasion to consider a similar question in Indo-National Limited, Nellore-4 v. Union of India and others (1979 ELT J 334). The judgment has dealt with several points and it is sufficient of our purpose to refer to paragraph 57 on page 71 - In Writ Petition No. 5948 of 1975, eleven out of the twelve authorised wholesale dealers of the petitioner-company are treated as related persons within the meaning of the third proviso to section 4(1)(a) of the Act and that the excise duty is levied on the goods manufactured by the petitioner-company on the basis of the price charged by those authorised wholesale dealers from their buyers. It is true that some of the partners of elev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpanies, Atul Products Limited and Imperial Chemical Industries Limited which were in turn subsidiaries of two companies which were the shareholders of the assessee company. One of the contentions raised on behalf of the assessee was that the sale price charged by the assessee company to Atul Products Limited and Imperial Chemical Industries Limited could not be ignored by the excise authorities in determining the assessable value. In support of this contention, it was urged that Section 4 as amended was ultra vires the Constitution and Section 3 of the Act. This contention was accepted and following the earlier decision of the court in the case of Cibatual (earlier referred to) the expression "the buyer is not a related person and" in the main part of Section 4(1) and proviso (iii) to clause (a) of sub-section (1) of Section 4 were struck down. It had also been contended on behalf of the assessee company that the petitioner-ompany and its buyers were not related persons. Upholding this contention also, it was held that the petitioner-company and the two buyers could not be said to have any mutuality of interest direct or indirect. It could be that the two buyers had an interest in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fy the definition of related person it was not sufficient for either of the two persons, i.e., the manufacturer and the buyer to have an interest in the other. The interest must be mutual. In order to establish mutuality of business interest direct or indirect the manufacturer must in his own interest promote the business of the buyer and likewise the buyer in his own interest promote the business of the manufacturer. Referring to the earlier decision in Cibatul of Gujarat High Court it was pointed out that between a manufacturer and a buyer there is only a one way business and that this was not sufficient to bring the case within the meaning of the definition. The mere fact that the buyers effected after sales service during the warranty period would not also indicate that the buyers had any interest in the business of the manufacturer. The petitioner-company itself had at some stage referred to its having a network of wholesale dealers distributors and stockists. On the strength of this admission as well as on the facts it is contended that the five buyers should be treated as distributors and hence as related persons. On this point, the Court, after referring to the decision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s whereas here the parties were governed by an agreement which made it clear that Usha was a distributor of the assessee. The argument is not quite correct for, at least in the Gujarat case there was a written agreement. But that apart, the question whether a person is a `distributor' or not cannot, it seems to us, depend merely on the existence or otherwise of written agreement; it must depend upon the dealings between the parties and these, in the present case, appear to be no different from those in the cases cited. Further, we are unable to agree with Sri Sapra that the agreement in this case spells a distributorship on the part of Usha. The terms of the agreement between the petitioner-Company and Usha have been set out in the order of the Assistant Collector dated 31-7-1979. The learned counsel for the respondents points out that under the agreement between the two parties a territory comprising of the whole of India except West Bengal and Andaman Nicobar Islands has been assigned to Usha; under clause (3) Usha is to organise sales and the distribution of the product, canvass and procure orders, maintain adequate stocks, arrange for sales promotion measures and provide afte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reflect parely a relationship between two principals. Apart from a vague mention that one of the directors of Usha is also the Chairman of the petitioner-company there is nothing else to show how the two concerns are interested in each other. In our opinion, it is clear from the facts on record which are undisputed that Usha is an independent buyer of the major part of the assessee goods and it cannot be said to be a related person within the meaning of Section 4. 17. We, therefore, accept the contention of the assessee that the sales made by the assessee to Usha cannot be ignored while determining the assessable value of the goods manufactured by it. 18. So far as the contention regarding the deductibility of post-manufacturing expenses are concerned there can be no doubt that the assessee is entitled to the deduction of post-manufacturing expenses, the element of which has also crept into the price at which the goods are sold to Usha. This aspect of the matter is directly covered by the judgment of this court in Hindustan Milkfood Manufacturers Limited v. Union of India and Others (1980 ELT 487) (to which one of us was a party). We may also refer to the decision of the Madras ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gulator. The Assistant Collector in his order has admitted the position that fans are actually used without speed regulators in public places like railway stations, cinema halls, examination halls and the like. The manufacture of electric ceiling fans cannot be said to be incomplete without the manufacture of speed regulators. In the process of manufacture of the ceiling fan the excisable Item, namely, electric fan comes into existence immediately upon the completion of manufacture of electric fan. The speed regulator need not be simultaneously manufactured. In fact in the present case, as mentioned earlier, it is the case of the excise authorities that the regulators were not manufactured by the present petitioner but got done through somebody else. Though, generally, a regulator may also be purchased along with a fan, it cannot be said that a fan without a speed regulator is no fan at all. The position is some what analogous to the voltage stabiliser which has become an almost indispensable accessory in regard to electrical goods in places where the electric supply widely fluctuates in its voltage. A voltage stabiliser is almost indispensable particularly when such costly equipme ..... X X X X Extracts X X X X X X X X Extracts X X X X
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