Full Judgment Text
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PETITIONER:
COLLECTOR OF CENTRAL EXCISE, MADRAS
Vs.
RESPONDENT:
T.I. MILLERS LTD. MADRAS & T.I. DIAMOND CHAIN, MADRAS
DATE OF JUDGMENT28/03/1988
BENCH:
MUKHARJI, SABYASACHI (J)
BENCH:
MUKHARJI, SABYASACHI (J)
RANGNATHAN, S.
CITATION:
1988 AIR 1154 1988 SCR (3) 355
1988 SCC Supl. 361 JT 1988 (2) 86
1988 SCALE (1)716
CITATOR INFO :
D 1989 SC1555 (12)
ACT:
Central Excises and Salt Act, 1944-Sec. 4-Assessable
value of goods for levy of duty under Sec. 3-How to
determine assessable value.
Central Excises and Salt Act, 1944-Sub-sec. 4(c) of
Section 4-Related Person-Who is-Criteria for its
determination.
HEADNOTE:
%
The respondents manufactured goods which were
assessable under Item 68 of the Central Excise Tariff. The
respondents filed price lists for the sale of the goods
through their distributors one of them being M/s. T.I & M-
Sales Ltd., quoting their price to the distributors as
assessable value. Subsequently the respondents required that
the price charged by them from buyers at the factory gate
should be accepted as the assessable value and not the price
to the distributors. The Assistant Collector found that the
distributors were related persons as per section 4 of the
Central Excises and Salt Act, 1944 and the price at which
the distributors sold the goods should therefore be the
assessable value. On appeal by the appellant-revenue, the
Appellate Collector held that these could not be held to be
the related persons. The Revenue had found that there was an
agreement existing between the respondents and their
distributors according to which they were the company’s
distributors for the sale of their goods. Major portion of
the sales were effected through M/s. T.I. & M. Sales Ltd.
who were the main distributors of M/s. Tube Investments of
India Ltd. and its subsidiary companies and rest of the
sales through the other two distributors. M/s. Tube
Investment of India was the holding company of M/s. T.I.
Millers Ltd. The agreement between the assessee and the T.I
JUDGMENT:
Revenue had further found that there was a territorial
earmarking for the operation of the distributors, who also
undertook advertisements and helped the sub-dealers for
maintaining show-rooms in dealer’s premises. The
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distributors did not deal with competitor’s goods. The
Revenue had also noted that the assessee granted mark up to
the distributors to cover their establishment expenses,
travelling expenses, advertisements and
356
sundry expenses. In view of this the revenue filed a review
petition, but the Appellate Tribunal rejected the review
petition and upheld the finding of the Appellate Collector.
Hence these appeals under section 351(b) of the Act. The
question was whether the distributors were related persons
of the respondents and secondly whether the expenses
incurred for maintaining the show-room, advertisements etc.
should also be added to the assessable value.
Dismissing the appeals this Court,
^
HELD: To find out whether the distributors were related
persons of the manufacturers it is necessary to find out
whether the buyer is holding company or subsidiary company
or relative of the manufacturer. From the explanation of the
relationship furnished in this case, such is not the
position. It appears that the link between the respondents
T.I. Miller Ltd. Company and T.I. & M. Sales Ltd., is that
the latter are the main distributors of M/s. Tube
Investments of India Ltd., which is the holding company of
the respondents. This relationship does not satisfy the
criteria for establishing the related persons concept. These
were limited companies at the material time, and it will be
difficult to say that a limited company has any interest
direct or indirect in the business carried on by one of its
shareholders. [362A-C]
The mark up in the price was allowed in connection with
the requirement to display the maximum sale price. The sales
pattern shows also sales to other than distributors and it
is not restricted only to the appointed distributors of T.I.
India Limited. In the background of the facts mentioned
hereinbefore and in the light of the decisions of this Court
in Bombay Tyre International and Atic Industries cases we
are of the opinion that the Tribunal was right and there is
no cause for interference with the order of the Tribunal.
[362C-E]
Union of India and others v. Atic Industries Limited,
[1984] 3 S.C.R. 930 and Union of India and Others etc. etc.
v. Bombay Tyre International Ltd. etc. etc., [1984] 1 S.C.R.
347, referred to.
&
CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 1938-39
of 1987.
From the Order dated 1.10.1985 of the Customs Excise
and Gold (Control) Appellate Tribunal, New Delhi in Appeal
Nos. ED (SR) T. 1415/82 Al and 1533/84-A.
357
M.K. Banerjee, Solicitor General, A.K. Ganguli and P.
Parmeshwaran for the Appellant.
A.T.M. Sampath for the Respondents.
The Judgment of the Court was delivered by
SABYASACHI MUKHARJI, J. These are appeals under section
35L(b) of the Central Excises and Salt Act, 1944
(hereinafter called ’the Act’). The respondents-T.I. Millers
Ltd. and T.I. Diamond Chain manufacture cycle lamps and
automative chains. Both these goods are assessable under
Item 68 of the Central Excise Tariff. The said respondents
filed price lists for the sale of the goods through their
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distributors, namely, M/s. T.I. and M-Sales Ltd., M/s.
Charmvel Agencies and M/s. Ambadi Enterprises Pvt. Ltd.
quoting their price to the distributor as assessable value.
However, subsequently following the decision of the Madras
High Court in a valuation case, the respondents required
that the price charged by them from buyers at the factory
gate should be accepted as the assessable value and not the
price to the distributors. The question is whether the price
charged by the respondents from buyers at the factory gate
should be accepted as the assessable value for the levy of
duty under section 3 of the Act. The Assistant Collector
found from the sales pattern of the respondents that the
distributors were ’related persons’ as per section 4 of the
Act and the price at which the distributors sold the goods
should, therefore, be the assessable value.
The respondents went up in appeal before the Appellate
Collector. The Appellate Collector held that in order to
establish mutuality of business interests, direct and
indirect between manufacturer and buyer, it should be shown
that they have been promoting the business of each other in
their own interest and that in the absence of such a finding
in the Assistant Collector’s order, these could not be held
to be related persons. Section 4 of the Act provides that
where the duty of excise is chargeable on any excisable
goods with reference to value, such value should be
determined on the basis of 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. We are not concerned for the
purpose of these appeals with the provisos nor with sub-
section (2) or sub-section (3) of section 4 of the Act. Sub-
section 4(c) of section 4 defines ’related person’ to mean a
person who is so
358
associated with the assessee that they have interest, direct
or indirect, in the business of each other and includes a
holding company, a subsidiary company, a relative and a
distributor of the assessee, and any sub-distributor of such
distributor. The explanation provides that ’holding
company’, ’subsidiary company’ and ’relative’ have the same
meanings as in the Companies Act, 1956.
The words "related person" have been considered by this
Court in Union of India and others v. Atic Industries
Limited, [1984] 3 S.C.R. 930. Bhagwati, J., as the learned
Chief Justice then was, speaking for the Court held that the
first part of the definition of "related person" in clause
(c) of sub-section (4) of section 4 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". It is not enough, the Court
observed, that the assessee has an interest, direct or
indirect in the business of the person alleged to be a
related person has an innough, that the person alleged to be
a related person has an interest, direct or indirect in the
business of the assessee. To attract the applicability of
the first part of the definition, it was observed, 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 in the
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business of the former may be indirect. That would not make
any difference so long as each has got some interest, direct
or indirect in the business of the other.
In the notice issued by the Central Government seeking
to review the Appellate Collector’s order, the Central
Government indicated that there was an agreement existing
between the respondents and their distributors according to
which they were the company’s distributors for the sale of
their goods. Major portion of the sales were effected
through M/s. T.I. and M-Sales Ltd. who were the main
distributors of M/s. Tube Investments of India Ltd. and its
subsidiary companies and rest of the sales through the other
two distributors. M/s. Tube Investment of India was the
holding company of M/s. T.I. Millers Ltd. The agreement
between the assessee and the T.I. and M Sales Ltd. was
registered under the MRTP Act. The Government of India also
found that there was a territorial earmarking for the
operation of the distributors, who also undertook
advertisements and helped the sub-dealers for maintaining
show rooms in dealer’s pre-
359
mises. The distributors did not deal with competitor’s
goods. The Government of India also noted that the assessee
granted mark up to the distributors to cover their
establishment expenses, travelling expenses, advertisement
and sundry expenses. On these grounds, the Government of
India tentatively considered that it was a fit case for
reversing the order of the Appellate Collector who had held
that the distributors were not related persons under section
4 of the Act. The question is, whether the distributors in
this case were related persons of the respondents and
secondly, whether the expenses incurred for maintaining the
show-room, advertisements etc. should also be added to the
assessable value. How the value should be computed has been
examined by this Court in Union of India and others etc.
etc. v. Bombay Tyre International Ltd. etc. etc., [1984] 1
S.C.R. 347. There, Pathak, J. as the learned Chief Justice
then was, held that the definition of the words "related
person" did not suffer from any constitutional infirmity.
This Court reiterated that on a true construction of its
provisions in the context of the statutory scheme the old
section 4(a) should be considered as applicable to the
circumstances of the particular assessee himself and not of
manufacturers generally. The Court further reiterated that
pursuant to the old section 4(a) the value of an excisable
article for the purpose of the excise levy should be taken
to be the price at which the excisable article is sold by
the assessee to a buyer at arm’s length in the course of
whole sale trade at the time and place of removal. Where,
however, the excisable article is not sold by the assessee
in wholesale trade, but for example, is consumed by the
assessee in his own industry the case is one where under the
old section 4(a) the value must be determined as the price
at which the excisable article or an article of the like
kind and quality is capable of being sold in wholesale trade
at the time and place of removal. This Court analysed the
position under the Central Excise and Salt Act, 1944 as
amended by Act XXII of 1973 that if the price at which the
excisable 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 as defined in sub-section (4)(b)
of section 4 is the basis for determination of excisable
value provided, of course, the buyer is not a related person
within the meaning of sub-section (4)(c) of section 4 and
the price is the sole consideration for the sale, that would
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be the value. The proposition is subject to the terms of the
three provisos to subsection (1)(a) of section 4. Where the
wholesale price of any excisable goods for delivery at the
place of removal is not known and the value thereof is
determined with reference to the wholesale price for
delivery at a place other than the place of removal, the
cost of transportation from the place of removal to the
place of delivery should be
360
excluded from such price. It was further held that these
principles could not apply where the tariff value had been
fixed in respect of any excisable goods under sub-section
(2) of section 3. The Court also dealt with the
interpretation of definition of ’related person’. The Court
further held that the expenses incurred on account of the
several factors which have contributed to its value upto the
date of sale, which apparently would be the date of
delivery, are liable to be included. Consequently, where the
sale is effected at the factory gate, expenses incurred by
the assessee upto the date of delivery on account of storage
charges, outward handling charges, interest on inventories
(stocks carried by the manufacturer after clearance),
charges for other services after delivery to the buyer,
namely, after sales service and marketing and selling
organisation expenses including advertisement expenses
marketing and selling organisation expenses and after-sales
service promote the marketability of the article and enter
into its value in the trade. Where the sale in the course of
wholesale trade is effected by the assessee through its
sales organisation at a place or places outside the factory
gate, the expenses incurred by the assessee upto the date of
delivery under the aforesaid heads cannot, on the same
grounds, be deducted. The assessee will be entitled to a
deduction on account of the cost of transportation of the
excisable article from the factory gate to the place or
places where it is sold. The cost of transportation will
include the cost of insurance on the freight for
transportation of the goods from the factory gate to the
place or places of delivery. The new section 4(4)(d)(i) has
made express provision for including the cost of packing in
the determination of "value" for the purpose of excise duty.
The review application, by the change of law, was
forwarded to the Tribunal. It was contended before the
Tribunal on behalf of the appellant that the distributors
were related persons in terms of the judgment of this Court
in Bombay Tyre International case (supra). Our attention was
drawn to a letter dated 10th September, 1981 from the
respondents to the Assistant Collector that the mark up
allowed to the distributors was to cover their establishment
expenses, advertisement, travelling expenses and he pointed
out that this mark up included certain elements which have
to be included in the assessable value. The Tribunal held
that according to the judgment of this Court in Bombay Tyre
International case (supra) where the sale is effected at the
factory gate, expenses incurred on account of charges for
services after delivery to the buyer, namely after sale
service and marketing and selling organisation expenses,
including advertisement expenses could not be deducted from
the assessable value. It was further urged
361
on behalf of the appellant that other features like division
of territory amongst the distributors and the marginal
quantity of direct sales otherwise, as well as the fact that
the distributors did not deal in competitor’s goods, clearly
indicated that these are related persons. Learned Counsel
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drew our attention to the meaning of the term ’ordinarily’
given in K.G. Iyer’s Judicial Dictionary at page 704 and
explained that it meant ’habitually’, or ’usually’, or
’normally’. In this case, ordinarily sales are only through
distributors and the sales are made by them on behalf of the
manufacturer. Learned Counsel pointed out that this was a
case where it was an extension of the manufacturer’s self to
the point of sale by the distributor. Learned Counsel for
the revenue urged that it was a case of indirect
relationship and came within the ratio of the aforesaid
decision of this Court in Bombay Tyre International case
(supra). In this case, it was highlighted that manufacturer
had interest in the buyer who were their distributors and
the distributors were only charging limited commission,
maintained showrooms, and did not deal in the products of
competitors of the manufacturer. It was further contended
that sales of their products as original equipment, could
not be considered as sales in the ordinary course of
wholesale trade. It was further highlighted that the norm of
inter-connected undertakings found in MRTP Act is not
relevant to decide ’related persons’ in the Act. It was
further argued that mere area restriction is not relevant
for proving mutuality of interests, but it has to be shown
that the sale was not at an arms length and but a principal
to principal transaction. It appears from the letter dated
10th September, 1981 from the appellants to the Department
that the distributors paid for their own advertisements. In
some case, the manufacturer might release advertisements
through the distributors. It was also urged that even a sole
distributor could be an independent buyer on behalf of the
manufacturer and the distributor and in this connection
reliance was placed on the observations of this A.K. Roy’s
case (1977 ELT 177 S.C.). After sales service undertaken by
the distributors was more in the nature of replacement of
defective goods sold, which any manufacturer was bound to do
and that is a normal essential service of a distributor.
Regarding the ’mark up’ allowed by the manufacturer to
the distributor as indicating special relationship, it was
contended that it was provided for in the context of the
requirement to indicate maximum selling price to be marked
on the goods, and in fact, it was in this context that the
appellants had made a reference to the MRTP Commission. The
Tribunal held that the distributors were not related persons
and in the light of the observations of this Court in Atic
In-
362
dustries case (supra) set out hereinbefore. We are of the
opinion that what was necessary to find out, was whether the
buyer is holding company or subsidiary company or relative
of the manufacturer. From the explanation of the
relationship furnished in this case, such is not the
position. It appears that the link between the respondents
T.I.Miller Ltd. company and T.I. & M. Sales Ltd., is the
main distributors of M/s. Tube Investments of India Ltd.,
who are the holding company of the respondents. This
relationship does not satisfy the criteria for establishing
the related persons concept. These were limited companies at
the material time, and it will be difficult to say that a
limited company has any interest direct or indirect in the
business carried on by one of its shareholders.
It has been explained that the mark up in the price was
allowed in connection with the requirement to display the
maximum sale price. The sales pattern shows also sales to
other than distributors and it is not restricted only to the
appointed distributors of T.I. India Limited.
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In the premises the Tribunal’s upholding the order of
the Appellate Collector, was right and correct. In the
background of the facts mentioned hereinbefore and in the
light of the decisions of this Court in Bombay Tyre
International and Atic Industries cases (supra), we are of
the opinion that the Tribunal was right and there is no
cause for interference with the order of the Tribunal. In
the premises, we decline to admit the appeals.
H.S.K. Appeals dismissed.
363