1987 (1) TMI 102 - HC - Central Excise

Valuation - Related person - Interpretation of fiscal statute - Taxation - Construction of statute

Summary

Issues Involved:
1. Whether the six wholesale dealers can be considered "related persons" under Section 4(4)(c) of the Central Excises and Salt Act, 1944.

Issue-wise Detailed Analysis:

1. Definition and Interpretation of "Related Persons":
The core issue in this case is the interpretation of the term "related persons" under Section 4(4)(c) of the Central Excises and Salt Act, 1944. The appellant contends that the six wholesale dealers, with whom it conducts wholesale transactions, are not "related persons" as defined by the Act. The Assistant Collector of Central Excise had earlier concluded that these dealers were "related persons," a decision that was upheld by the learned Judge but is now challenged in this appeal.

2. Facts and Nature of Transactions:
The appellant, a public limited company, manufactures brake assemblies and sells them through two types of transactions: direct sales to State Transport undertakings and sales through independent wholesale buyers. The independent buyers receive a discount and are reviewed annually for sales promotion expenses. The associated wholesale buyers, M/s. T.V.S. & Sons and Impal, have shareholdings in the appellant company. The Assistant Collector had categorized these associated buyers as "related persons" due to their shareholding and the nature of their transactions.

3. Assistant Collector's Reasoning:
The Assistant Collector's decision was based on several factors:
- Payment of a 5% commission to distributors for maintaining contacts and ensuring prompt payment.
- Sales promotion expenses paid to distributors.
- Business policy of the appellant company to sell only through distributors.

4. Appellant's Arguments:
The appellant argued that:
- Mutuality of interest in business is required to define "related persons."
- Direct sales to public undertakings do not satisfy the mutuality test.
- Shareholding alone does not establish mutual business interest.
- The definition of "related persons" should be strictly construed, especially in fiscal legislation.

5. Department's Arguments:
The Department contended that:
- Remuneration paid to wholesale dealers indicated an agency relationship.
- Shareholding by M/s. T.V.S. & Sons and certain directors in Impal indicated mutual interest.
- Sales promotion expenses further demonstrated a relationship of agency.

6. Legal Provisions and Interpretation:
Section 4 of the Act defines the value of excisable goods and the term "related person." The Supreme Court's interpretation in Union of India v. Atic Industries emphasized mutuality of business interest. The definition requires that both parties have a direct or indirect interest in each other's business.

7. Analysis of Mutuality of Interest:
The court found that:
- The mere shareholding of 21% by M/s. T.V.S. & Sons does not establish mutual business interest.
- Shareholding by directors in Impal does not indicate that the two companies have mutual business interests.
- Payments for sales promotion expenses and commissions do not transform the nature of the transactions into those between related persons.

8. Previous Judgments and Precedents:
The court referred to previous judgments, including the Supreme Court's decision in Atic Industries, which clarified the concept of mutuality of interest. The case of Standard Electric Appliances also supported the view that commercial transactions at arm's length are not affected by Section 4(4)(c).

Conclusion:
The court concluded that the Assistant Collector and the learned Judge were in error in holding that the six companies were related persons. The appeal was allowed, the order of the learned Judge was set aside, and the impugned order of the Assistant Collector was quashed. The court emphasized that fiscal authorities must exercise their quasi-judicial functions with utmost care and attention, considering settled law and authoritative pronouncements.