Full Judgment Text
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PETITIONER:
MOPED INDIA LTD.
Vs.
RESPONDENT:
THE ASSTT. COLLECTOR OF CENTRAL EXCISE, NELLORE AND OTHERS
DATE OF JUDGMENT26/02/1985
BENCH:
BHAGWATI, P.N.
BENCH:
BHAGWATI, P.N.
ERADI, V. BALAKRISHNA (J)
CITATION:
1985 SCR Supl. (1) 954 1986 SCC (1) 125
1985 SCALE (2)1379
ACT:
Central Excise and Salt Act 1944: Section 4(4) (c)-
’related person’-who is-Assessee and person alleged to be
’related person’ to have interest direct or indirect in
business of each other.
Manufacturer of Mopeds-Mopeds sold to dealers-
Agreements for sale entered by manufacturer with dealer-
Dealers to give deposit for guarantee, entitlement to
’commission’ etc.-Transactions on principal to principal
basis-Dealers-Whether ’related person’-’Commission’ allowed
to dealers-Whether ’trade discount’ whether ’commission’
could be deducted from assessable value of manufactured
goods for purpose of excise duty.
HEADNOTE:
The appellants manufactured Mopeds under three
different brand names. Mopeds were liable to excise duty
under the Central Excise and Salt Act, 1944. The bulk of the
Mopeds manufactured were delivered to various dealers at
depots maintained by the appellants. The appellants entered
into agreements with these dealers in connection with the
sale of the Mopeds. The agreements provided that the dealer
shall keep a deposit with the appellants as a guarantee for
due fulfillment of the agreement, that the dealers were
entitled to get a commission on each Moped, that the dealers
were to insure the Mopeds against all risks of pilferage,
non-delivery etc. (Clause 5), and that, the dealers were to
maintain adequate organisation for sale and service of the
Mopeds including show-rooms, service stations, repair-shops
etc. (clause 6).
The appellants submitted their price lists for approval
to the excise authorities and the price lists showed the
price charged by the dealers after deducting the commission
of Rs. 110, Rs. 145 and Rs. 165 or the three different
brands of the Mopeds. The price lists were approved by the
excise authorities and excise duty was paid by the
appellants on the basis of these price lists at the time of
clearance of the Mopeds. This practice continued till 30th
April, 1979, when the Assistant Collector of Central Excise
took the view that the appellants were not entitled to
deduction of the aforesaid commission from the price charged
to the dealers for arriving at the excisable value of the
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Mopeds. The Assistant Collector thereupon issued a notice of
demand under clauses (a) and (b) of Rule 10(1) of the
Central Excise Rules, 1944 dated 15th May, 1979 to the
appellants demanding a sum of Rs. 6,96,177.09 representing
the amount of differential duty in respect of Mopeds
manufactured and cleared during the period 1st October 1975
to 30th April, 1979.
955
The appellants assailed the aforesaid notice in a writ
petition in the High Court contending, that they were
entitled to deduction of the amount of commission in
arriving at the excisable value of the Mopeds and that the
demands made by the Assistant Collector was not justified.
The Division Bench however dismissed the writ petition and
held that the discount of Rs. 110, Rs. 145 and Rs. 165 for
the different varieties of Mopeds was being given for
organising sale and providing facilities and this was
clearly an example of the mutual interest which the ’related
person’s and the appellant were having in the business of
each other, and that the commission of Rs. 110, Rs. 145 and
Rs. 165 in respect of the different varieties of Mopeds was
not ’trade discount’ and therefore not liable to be deducted
from the price charged to the dealers and the Assistant
Collector was right in making the demand from the
appellants.
In the appeal to this court it was contended on behalf
of the appellants that: (1) there was absolutely nothing to
show that the dealers were related persons vis-a-vis the
appellants and that the High Court was clearly wrong in
taking that view, and (2) the Division Bench was not right
in taking the view that the commission of Rs. 110, Rs 145
and Rs. 165 per Moped in respect of the different varieties
of Mopeds sold to the dealers could not be said to be trade
discount.
Allowing the appeal,
^
HELD: 1. The amounts allowed to the dealers by the
appellants in respect of different varieties of Mopeds of
Rs. 110, Rs. 145 and Rs. 165 were clearly trade discount
liable to be deducted from the price charge to the dealers
for the purpose of arriving at the excisable value of the
Mopeds. [963G]
2. The judgment of the Division Bench of the High Court
set aside. The notice dated 15.5.79 issued by the Assistant
Collector of Central Excise and the order dated 25.9.79 made
in pursuance of that notice are quashed. The respondents
will refund to the appellants any payments made by the
appellants under the order dated 25th September, 1979 within
3 months [963H; 964A]
3. The concept of ’related person’ was for the first
time introduced in the Central Excise and Salt Act, 1944 by
the Amending Act 22 of 1974 and the expression ’related
person’ came to be defined in clause (c) of sub-section (4)
of Section 4. [960G]
4. In Union of India v. Bombay Tyre International Ltd
[1984] 1 SCC 467 it has been held that the definition of
’related’ person in sub-section (4) (c) of Section 4 is not
unduly wide and does not suffer from any constitutional
infirmity and, Union of India v. Attic Industries Ltd, AIR
1984 SC 1495 that the person who is sought to be branded as
a ’related person’ must be a person who is so associated
with the assessee that they have interest, directly, or
indirectly, in the business of each other. It is not enough
that the assessee has an interest, direct or indirect, in
the business of the assesses. It is essential that the
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assessee and the person alleged to be a ’related person,
must have interest direct or indirect, in the business of
each other. [961A; F-G]
956
In the instant case, the terms of the agreement
indicate that the dealers where wholesale buyers of the
Mopeds manufactured by the appellants and since the
transactions between them were on principal to principal
basis, the dealers could not, therefore, be said to be
related persons vis-a-vis the appellants. The excise duty on
the Mopeds were hence liable to be determined only on the
basis of the wholesale price charged by the appellants to
the dealers. [962 D-E]
5. The amount allowed to the dealers has been referred
to in the agreement as ’commission’ but the label given by
the parties cannot be determinative because it is for the
court to decide whether the amount is trade discount, or not
whatever be the name given to it. [963B]
In the instant case, the clauses of the agreement
clearly show beyond doulet that under the agreement the
Mopeds were sold by the appellants to the dealers and the
dealers did not act as agents of the appellants for the
purpose of effecting sales on their behalf. It is clear from
clause 5(a) that the bills in respect of the Mopeds
delivered to the dealers were to be sent by the appellants
through their bankers and it was the responsibility of the
dealers to collect the bills for the purpose of taking
delivery. Clauses 5(b) laid an obligation on the dealers to
insure the Mopeds against all risks, pilferage, non-delivery
etc. and under clause (6) the dealers were liable to
maintain adequate organisation for sale and service of the
Mopeds. The Relationship between the appellants and the
dealers was clearly on principal to principal basis and in
these circumstances the amount of Rs. 110, Rs. 145 and Rs.
165 allowed to the dealers in respect of the different
varieties of Mopeds could not be regarded as anything other
than ’trade discount’. [963 B-F]
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 52 of
1985.
From the Judgment and Order dated 27.9.1984 of the
Andhra Pradesh High Court in Writ Petition No. 7680 of 1979.
F.S. Nariman and K.R. Nambiar for the Appellant.
Gopal Subramanium and R.N. Poddar for the Respondents.
The Judgment of the Court was delivered by
BHAGWATI, J. This appeal by certificate is directed
against a judgment of a Division Bench of the High Court of
Andhra Pradesh upholding a notice issued by the Assistant
Collector of Central Excise, Nellore demanding a sum of Rs.
6,96,177.09 representing the
957
amount of differential duty in respect of Mopeds
manufactured by the Appellants and cleared from their
Factory during the period from 1st October 1975 upto 30th
April 1979. The facts giving rise to the present appeal are
few and may be briefly stated as follows:
The Appellants manufacture Mopeds under the brand names
of Suvega Standard, Suvega Deluxe and Suvega Samrat. These
Mopeds manufactured by the Appellants are liable to excise
duty under the Central Excise and Salt Act, 1944,
(hereinafter referred to as the Act). The appellants have
179 dealers all over the country to whom 98% of the Mopeds
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manufactured by them are sold. Not more than 2% of the
Mopeds are delivered at the Factory gate; the bulk of the
mopeds representing about 80% of the manufactures are
delivered to the various dealers at the depots maintained by
the appellants. The Appellants have entered into agreements
with the dealers in connection with the sale of the Mopeds
manufactured by them and these agreements are substantially
in the same terms and it will, therefore, be sufficient if
we refer to a specimen agreement for the purpose of
ascertaining the terms and conditions on which the mopeds
are supplied by the appellants to the dealers. Clause 2 (a)
of the agreement provides that the dealer shall keep a
deposit of Rs. 6,000 with the appellants as a guarantee for
due fulfillment of the agreement and this deposit will carry
simple interest at the rate of 4 1/2% per annum and clause 2
(b) declares inter-alia that upon termination of the
agreement, the balance of the deposit if any, after
deducting all amounts due to the Appellants shall be
returned to the dealer with interest. Clause 3 (a) of the
agreement is material since considerable reliance has been
placed upon it on behalf of the Department.
It reads as follows:
"The Dealer will get a commission of Rs. 110
(Rupees one hundred and ten only) for Suvega Moped and
Rs. 145(Rupees one hundred and forty five only) per
Suvega moped fitted with Shock Absorber which will be
introduced shortly."
The Appellants are entitled to change prices from time to
time as per clause 4 of the agreement and that clause
proceeds to add the Appellants shall not be bound to execute
the order pending execution with the dealer at the old rate
and will be entitled to change the
958
price ruling on the date on which the moped leaves the
factory or stockyard of the Appellants. Clauses 5 and 6 are
material for the purpose of determination of the controversy
between the parties and they reads as follows:
5(a) "Unless otherwise agreed specifically to all
deliveries to the dealer shall be ex-factory in
unpacked condition and the bills/RB/LB/PWB shall
be sent through their bankers and all bank charges
thereon shall be borne by the dealer. In case the
dealer does not honour the Bills sent through bank
immediately on presentation by Bankers, the dealer
shall be liable to the Company for all
damages/losses and expenses incurred in this
connection and the same will be recovered from the
deposit lying with the company.
(b) The despatches by the company will be insured by
the dealer against all risks, pilferage, non-
delivery and SRCC including breakage, wherever
applicable from the time of leaving of the
Company’s factory or stockyard until arrival at
dealer’s premises, and all such expenditure
incidental to transit shall be to the account of
the dealer.
6. The dealer shall at his own expenditure maintain
such organisation for the sale and service of the
said vehicles, including showrooms, service
stations, repair shops, parts store rooms,
salesmen, etc. The dealer shall train mechanics at
their own cost with Company. The dealer shall give
three free services to every vehicle sold by him
and the company shall reimburse to the dealer at
Rs. 4 per each free service rendered by him."
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The rest of the clause. Of the agreement are not relevant
but it might be useful to refer to sub-clauses (a) & (b) of
Clause 10(iii) which provide as follows:
"10(iii) (a) The Company upon termination of this agreement
may require the dealer to immediately turn over to
the company all or any bonafide retail buyers
orders
959
that he may have on hand unfulfilled, together
with all deposits made thereon by the purchasers
and also the list of prospective buyers with the
dealer.
(b) In the event of the termination of this agreement,
however, the dealer shall not be released from any
obligation arising out of any transaction entered
into or consummated prior to the date of such
termination, either by him or his branches.
There are the material terms and conditions on which mopeds
are supplied by the appellants to the dealers.
The Appellants submitted their price lists for approval
to the excise authorities and the price lists showed the
price charged by the Appellants to the dealers after
deducting the so-called commission of Rs. 110 in respect of
Suvega Standard Moped, Rs. 145 in respect of Suvega Deluxe
Moped and Rs. 165 in respect of Suvega Samrat Moped. These
price lists were approved by the excise authorities and
excise duty was paid by the Appellants on the basis of these
price lists at the time of clearance of the mopeds. This
practice continued right upto 30th April 1979 when the
Assistant Collector of Central Excise, Nellore took the view
that the appellants were not entitled deduction of the
commission of Rs. 110 for Suvega Standard, Rs. 145 for
Suvega Deluxe and Rs. 165 for Suvega Samrat mopeds from the
price charged to the dealers for arriving at the exciseable
value of the mopeds liable to excise duty. The Assistant
Collector of Central Excise, Nellore thereupon issued a
notice dated 15 May 1979 to the Appellants demanding a sum
of Rs. 6,96, 177.09 representing the amount of differential
duty in respect of mopeds manufactured and cleared by the
appellants from their factory during the period 1st October
1975 to 30th April 1979. This demand was purported to be
made by the Assistant Collector of Central Excise under
clauses (a) and (b) of Rule 10 (1) of the Central Excise
Rule 1944. The appellants thereupon preferred a writ
petition in the High Court of Andhra Pradesh contending that
the appellants were entitled to deduction of the amount of
commission in arriving at the excisable value of the mopeds
and the demands made by the Asstt. Collector of Central
Excise was therefore, not justified.
960
The Writ Petition filed by the appellants came to be
heard by a Division Bench of the High Court of Andhra
Pradesh. Though it is difficult to ascertain what exactly
was the view taken by the Division Bench, it appears that
they came to the conclusion that the dealers were related
persons vis-a-vis the appellants and "the discount of Rs.
110, 145 and 165 for the different varieties of mopeds was
being given for organising sale and providing facilities and
this was clearly an example of the mutual interest which the
related person and the appellants are having in the business
of each other. The Division Bench, it seems, mixed up two
different points, one relating to the question whether the
dealers are related persons and the other relating to the
question whether the commission of Rs. 110, 145 and Rs. 165
allowed in respect of different varieties of mopeds to the
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dealers could be regarded as a trade discount or not. The
ultimate decision however was that the commission of Rs.
110, 145 and Rs. 165 in respect of different varieties of
mopeds was not trade discount and, therefore, in any event,
it was not liable to be deducted from the price charged to
the dealers and the Assistant Collector of Central Excise
was consequently right in making a demand of Rs. 6,96,177.09
from the appellants. The appellants being aggrieved by the
decision of the Division Bench preferred the present appeal
after obtaining a certificate from the High Court.
Mr. Nariman learned counsel appearing on behalf of the
appellants assailed the judgment of the Division Bench of
the High Court on both the grounds on which the impugned
demand was challenged in the High Court. He contended that
there was absolutely nothing to show that the dealers were
related persons vis-a-vis the appellants and the Division
Bench of the High Court was, therefore, clearly in error in
taking the view that the dealers were related persons. Now
the concept of related persons was for the first time
introduced in the Act by the amending Act 22 of 1973 and the
expression ’related person’ came to be defined in clause (c)
of sub-section (4) of Section 4 to mean 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 asscssee and sub-distributor of
such distributor. This definition came up for consideration
before this Court in the Union of India v. Bombay Tyre
International Ltd. [1984] (1) SCC 467 where this Court
construing, the definition held:
961
"On a proper interpretation of the definition of
’related person’ in sub-section (4) (c) of section 4,
the words a relative and a distributor of the assesee"
do not refer to any distributor but they are limited
only to a distributor who is a relative of the assessee
within the meaning of the Companies Act, 1956. So read,
the definition of "related person" is not unduly wide
and does not suffer from any constitutional infirmity."
It is therefore obvious that the dealers vis-a-vis the
appellants under the last part of the definition in sub-
section (4) (c) of Sec. 4, could not be said to be related
persons since they were admittedly not relatives of the
appellants within the meaning of the Companies Act, 1956,
But the argument urged on behalf of the department was and,
that is the argument which found favour with the Division
Bench of the High Court, that the dealers were related
persons within the meaning of the first part of the
definition in sub-section 4 (c) of Section 4. It was
contended on behalf of the department that the dealers were
so associated with the appellants that they had interest
directly or indirectly in the business of each other. Now
this part of the definition also came up for consideration
before this Court in another decision namely, Union of India
v. Atic Industries Ltd, AIR 1984 SC 1495, and the Court
pointed in that case:
"What the first part of the definition requires is
that the person who is sought to be branded as a
"related person" must be a person who is so associated
with the assessee that they have interest, directly or
indirectly, in the business of each other. 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
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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 quality 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
962
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."
Here on the facts it is difficult to see how it can at all
be contended that the appellants had any interest in the
business of the dealers or that the dealers had any interest
in the business of the appellants. We shall presently
analyse the terms of the agreement between the appellants
and the dealers but one thing is clear from the terms of the
agreement that the appellants sold the mopeds to the dealers
on principal to principal basis and if that be so it is not
possible to say that the appellants had any interest in the
business of the dealers. The dealers were wholesale buyers
of the mopeds manufactured by the appellants and since the
transactions between them were on principal to principal
basis, it is difficult to appreciate how the appellants
could possibly be said to have any interest, direct or
indirect, in the business of the dealers. The dealers could
not, therefore, be said to be related persons vis-a-vis the
appellants. We must in the circumstances hold that the
Division Bench of High Court was in error in holding that
they were related persons. It is indeed surprising that
though the Division Bench of the High Court took the view
that the dealers were related person, the Division Bench did
not determine the exciseable value of the mopeds on the
basis of the price at which the dealers in their terms sold
the mopeds to the consumers but took into the account only
the price charged by the appellants to the dealers. If the
dealers were related persons, the exciseable value of the
mopeds could have been determined only on the basis of the
price at which the dealers sold the mopeds to the retailers
or the consumers. But, as we have pointed out it is not
possible to hold that the dealers were related persons and
hence the excise duty on the mopeds was liable to be
determined only on the basis of the wholesale price charged
by the appellants to the dealers.
That takes us to the second question, namely, whether
the Division Bench was right in taking the view that the
Commission of Rs. 110, 145 and 165 per moped in respect of
different varieties of mopeds sold to the dealers could not
be said to be trade discount. Mr. Nariman, Learned Counsel
appearing on behalf of the appellants contended that this
Commission allowed to the dealers was clearly
963
trade discount and was, therefore, liable to be deducted in
determining the exciseable value of the mopeds by reasons of
sub section (b) (ii) of Section 4 of the Act. Now it is
true that this amount allowed to the dealers has been
referred to in the agreement as commission but the level
given by the parties cannot be determinative because it is
for the court to decide whether the amount is trade discount
or not, whatever be the name given to it. If we look at the
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terms of the agreement, it is clear that the agreement was
between the appellants and the dealers on principal to
principal basis. The clauses of the agreement which we have
set out above clearly show beyond doubt that under the
agreement, the mopeds were sold by the appellants to the
dealers and the dealers did not act as agents of the
appellants for the purpose of effecting sales on behalf of
the appellants. It is clear from clause 5 (a) of the
agreement that the bills in respect of the mopeds delivered
to the dealers were to be sent by the appellants through
their bankers and it was the responsibility of the dealers
to retire the bills for the purpose of taking delivery of
the mopeds. Clause 5 (b) of the agreement laid an obligation
on the dealers to insure the mopeds against all risks,
pilferage, non-delivery and SRCC including breakage from the
time the mopeds left the factory or stockyard of the
appellants until they arrived at the premises of the dealer
and this again would show that the dealers acted as
principal to principal in purchasing the mopeds from the
appellants. The dealers were also liable under Clause 6 of
the agreement to maintain adequate organisation for sale and
service of the mopeds including service stations, repair
shops, spare parts. salesmen etc. and the mechanics were
also to be trained at the cost of the dealers. The
relationship between the appellants and the dealers was
clearly on principal to principal basis and in the
circumstances it is difficult to see how the amount of Rs.
11 , 145 and 165 allowed to the dealers. in respect of
different varieties of mopeds could be regarded as anything
other than trade discount. The appellants charged to the
dealer the price of the mopeds sold to them less the amount
of Rs. 110, Rs. 145 and Rs. 165 in respect of different
varieties of mopeds. These amounts allowed to the dealers
were clearly trade discount liable to be deducted from the
price charged to the dealers for the mopeds. purpose of
arriving at the exciseable value of the moped.
We therefore, allow the appeal, set aside the Judgment
of the Division Bench of the High Court and quash the notice
dated 15.5.1979 issued by the Assistant Collector of Central
Excise made and the order dated 25.9.79 made in pursuance of
that notice. If any
964
payments have been made by the Appellants under the order
dated 25th September 1979, the respondents will refund the
same to the appellants within 3 months from the date of
receipt of this order. The Bank Guarantee given by the
appellants will stand discharged, There will be no order as
to costs.
N.V.K. Appeal allowed.
1