2015 (4) TMI 358 - SC - Central Excise

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 the goods are sold at something below 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 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 other would get covered. The definition then goes on to use the expression and includes thereby indicating that the legislature intends to extend the definition to also include various persons that would not otherwise have so been included. These include a holding company, a subsidiary company, a relative and a distributor of the assessee and any sub-distributor of such distributor. The necessity for including holding and subsidiary companies as defined under the Companies Act, 1956 is to lift the corporate veil in order to get to the economic realities of the transaction. A reading of the definition of relative would show that the relative need not be a person who is so associated with the assessee that they have mutual interest in each other s businesses. 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 assessee that they have a mutual interest in each other s businesses. The legislature by application of a de jure test has extended the meaning of related persons to include the entire list of relatives per se without more as related persons. Similarly, holding companies and subsidiary companies by virtue of the exercise of control by a holding company over a subsidiary company are similarly included by application of a de jure test. Assessee argued that the price paid 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 on this fact. On the other hand, there are copious findings as to how Shaw Wallace and Detergents India Limited are related persons because of a multitude of factors pointed out in the Commissioner s order. That Shaw Wallace and Detergents India Limited are related persons is made out by their holding/subsidiary relationship. However, from this, it does not follow that there is any arrangement of tax avoidance or tax evasion on the facts of this case. This being the case, proviso (iii) to Section 4(1)(a) would not be applicable. Further, it would also not be applicable for the reason that there is no predominance of sales by Detergents India Limited to Shaw Wallace. As has been pointed out above, only 10% of its manufacturing capacity has been sold to Shaw Wallace, 90% being sold to Hindustan Lever Limited. For this reason also, proviso (iii) does not get attracted. Further, the single most relevant fact, namely, that Shaw Wallace paid for the same/similar goods to unrelated suppliers at a price lower than the price paid by Shaw Wallace to DIL, has not been adverted to at all by the Commissioner. - The appeals by Revenue are devoid of merit - Decided against Revenue.

Summary

Issues Involved:

1. Correct construction of Section 4(1)(a) proviso (iii) and Section 4(4)(c) of the Central Excise and Salt Act.
2. Definition of "related person" and its implications for valuation in the course of wholesale trade.
3. Validity of demands and penalties imposed on the assessee and its holding company.

Issue-Wise Detailed Analysis:

1. Correct Construction of Section 4(1)(a) Proviso (iii) and Section 4(4)(c):

The judgment revolves around the interpretation of Section 4(1)(a) proviso (iii) and Section 4(4)(c) of the Central Excise and Salt Act as they stood before the 2000 amendment. The main contention was whether Shaw Wallace and Detergents India Limited (DIL) were "related persons" and if the price at which DIL sold goods to Shaw Wallace should be the basis for determining the assessable value.

The court emphasized that Section 4(1)(a) deals with the "normal price" at which goods are ordinarily sold in the course of wholesale trade. If the buyer is a related person, there is a presumption that the sale price is not the sole consideration. Proviso (iii) to Section 4(1)(a) specifies the conditions under which the price to or through a related person should be considered for valuation. The court clarified that three basic ingredients must be met for proviso (iii) to apply: an arrangement between the assessee and the related person, the goods being generally sold to or through the related person, and the sale being below the normal price due to the arrangement.

2. Definition of "Related Person":

The court analyzed the definition of "related person" under Section 4(4)(c), which includes persons associated with the assessee such that they have mutual interest in each other's business. This definition also extends to holding and subsidiary companies, relatives, and distributors. The court noted that the legislative intent behind including holding and subsidiary companies was to lift the corporate veil and look at the economic realities of the transaction.

The court referred to various judgments, including Union of India v. Bombay Tyre International Ltd., which emphasized that the price should be unaffected by concessional or manipulative considerations. It was held that even if the buyer is a related person, if the price is the sole consideration and not a specially low price due to extra-commercial considerations, it should be considered the normal price under Section 4(1)(a).

3. Validity of Demands and Penalties:

The court examined the facts of the case, noting that DIL was a subsidiary of Shaw Wallace, with Shaw Wallace's subsidiaries holding 57% of DIL's share capital. It was found that 90% of DIL's manufacturing capacity was used for Hindustan Lever Limited, and only 10% was sold to Shaw Wallace. The court observed that the price paid by Shaw Wallace for similar products from other unrelated manufacturers was lower than the price paid to DIL.

The court concluded that there was no arrangement between Shaw Wallace and DIL to depress the price below the normal price, and the presumption of a transaction not being at arm's length was rebutted. Therefore, proviso (iii) to Section 4(1)(a) was not applicable. The court also noted that the extended period of limitation was not invocable as there was no mutuality of interest between DIL and Shaw Wallace.

The court dismissed the Revenue's appeals and upheld the CEGAT's judgment, which set aside the penalties imposed on Shaw Wallace and DIL. The court found that the ingredients necessary to attract Rule 209A were not mentioned in any show cause notice against Shaw Wallace, making the Commissioner's findings beyond the show cause notice.

Conclusion:

The appeals by the Revenue were dismissed, and the CEGAT's judgment setting aside the penalties on Shaw Wallace and DIL was upheld. The court emphasized that the price paid by Shaw Wallace to DIL should be considered the normal price for valuation purposes, as there was no arrangement to depress the price below the normal price.