2015 (8) TMI 61 - SC - Central Excise

Valuation of goods - related person - mutuality of interest - interest free loan - suppression of facts - willful mis-declaration of Assessable value - Evasion of duty - Held that - The expression in the business of each other clearly denotes that interest of the two persons have to be mutual i.e. in each other in order to treat them as related persons. We find from the order of the Member Judicial that only on the ground that the two companies had given a loan of 85.66 crores to the assessee company was treated as sufficient to establish the relationship between the assessee and the buyers. That only shows one way traffic whereas requirement is that of two way traffic. The other Member in our opinion aptly held that this cannot be the factor which would show the mutuality of interest - The assessee did not have any interest in the business of the buyers (Goodyear Indian Limited and CEAT Limited). Given this the requirement of mutuality of interest which is a pre-requisite under section 4(4)(c) of the Act does not get satisfied. The matter is squarely covered by the decisions of this Court in the case of Atic Industries Ltd. We have gone through the judgment in the case of Atic Industries Ltd. 1984 (6) TMI 51 - SUPREME COURT OF INDIA wherein this court categorically held that there should be mutuality of interest in the business of each other. No doubt the two buyers had given 85.66 crores interest free loan to the assessee. However that by itself may not be a reason to hold them as related persons within the meaning of Section 4(4)(c) of the Act. In the absence of any mutuality of interest existing between them giving of this interest free loan could have been a basis to include the notional interest while arriving at the cost of product sold by the assessee to the two buyers. However instead of doing that the appellant wanted to make use of this factor to hold that the assessee and the two buyers are related persons which position is difficult to comprehend having regard to the principle laid down in Atic Industries Ltd s case. After taking over of the assessee company by Goodyear more than 70 per cent of the sales by the assessee company are to the third parties. That apart there was another contention of the assessee viz. that the goods sold to the outsiders are at a lesser rates than sold to Goodyear. These two contentions have not been refuted by the Revenue - Decided against Revenue.

Issues Involved:
1. Whether CEAT and Goodyear are "related persons" to the assessee under Section 4(4)(c) of the Central Excise Act, 1944.
2. Whether the additional consideration flowing back to the assessee should be included in the assessable value of goods.
3. Whether the extended period for issuing the show cause notice was justified.
4. Whether the assessee and Goodyear were "related persons" after the joint venture agreement was terminated.

Detailed Analysis:

1. Related Persons under Section 4(4)(c) of the Central Excise Act, 1944:
The primary issue was whether CEAT and Goodyear were "related persons" to the assessee. The Commissioner of Central Excise issued a show cause notice alleging that CEAT and Goodyear were related persons within the meaning of Section 4(4)(c) of the Act. This was based on the fact that CEAT and Goodyear had given an unsecured interest-free loan of Rs. 85.66 crores to the assessee and provided moulds and equipment worth Rs. 10 crores free of cost. The assessee contended that there was no mutuality of interest and that the sales were on a principal-to-principal basis.

The Supreme Court held that merely providing a loan did not establish mutuality of interest. The definition of "related person" requires mutual interest in each other's business, which was not present in this case. The Court referred to the judgment in 'Union of India v. Atic Industries Ltd.' which emphasized that both parties must have a direct or indirect interest in each other's business. The assessee did not have any interest in the business of CEAT or Goodyear, thus failing the mutuality requirement. Consequently, CEAT and Goodyear were not considered related persons.

2. Additional Consideration and Assessable Value:
The show cause notice also proposed to include the additional consideration flowing back to the assessee in the assessable value of goods under Rule 5 of the Central Excise (Valuation) Rules, 1975. The Supreme Court observed that without mutuality of interest, the additional consideration could not be used to establish a related person relationship. Instead, it could only be a basis to include notional interest in the cost of the product. Therefore, the demand for differential duty based on related person valuation was not justified.

3. Extended Period for Issuing Show Cause Notice:
The Commissioner invoked the extended period under the proviso to Section 11A(1) of the Act, alleging suppression of facts and willful mis-declaration by the assessee. The Supreme Court did not specifically address this issue in detail, but the dismissal of the related person argument implies that the extended period invocation was also not justified.

4. Related Persons Post-Termination of Joint Venture Agreement:
In Civil Appeal No. 4370 of 2003, the period involved was from 01.07.2000 to 26.09.2000, during which the joint venture agreement was terminated, and the assessee became a subsidiary of Goodyear USA. The show cause notice treated the assessee and Goodyear as related persons due to this new relationship.

The Supreme Court acknowledged that the assessee became a fully owned subsidiary of Goodyear USA, making them "inter-connected undertakings" under the amended Section 4(4)(3)(b) of the Act. However, the Court accepted the assessee's argument that Rule 9 of the Valuation Rules did not apply as it covers only clauses (ii), (iii), or (iv) of Section 4(3)(b), not clause (i) which pertains to inter-connected undertakings.

Additionally, the Court noted that more than 70% of the assessee's sales were to third parties, and goods sold to outsiders were at lower rates than those sold to Goodyear. These facts were not refuted by the Revenue. The Court referred to the judgment in 'Commissioner of Central Excise, Hyderabad v. M/s. Detergents India Limited and Another,' which emphasized that an arrangement to sell goods below normal price must be proven for Rule 9 to apply. Since these conditions were not met, the appeal was dismissed.

Conclusion:
The Supreme Court dismissed both appeals, holding that CEAT and Goodyear were not related persons to the assessee due to lack of mutuality of interest, and the provisions of Rule 9 of the Valuation Rules were not applicable post-termination of the joint venture agreement. The extended period for issuing the show cause notice was also not justified.

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