1989 (5) TMI 65 - SC - Central Excise

Whether the five customer companies can be regarded as related persons as defined in Section 4(4) (c)? Held that - There is a lurking doubt that the five customer companies were the favoured Customers; but no investigation seems to have been carried out. The High Court while allowing the writ petition held that it was open to the Central Excise authorities to examine whether or not the five customer companies were the favoured customers and whether the price at which the respondent-company sold its products to these were the normal prices at which such goods were ordinarily sold by a manufacturer in the course of wholesale trade for delivery at the time and place of removal. Apparently, no such scrutiny was done. Appeal dismissed - the judgment and order of the High Court of Allahabad must be upheld

Issues: Valuation of goods for excise duty, Interpretation of "related persons" under Section 4(4)(c)

In this case, the main issue revolved around the valuation of goods for the purpose of levy of excise duty under the Central Excises & Salt Act, 1944. The respondent-company challenged the direction of the Superintendent, arguing that the value of its products for excise duty should be based on the prices at which it sold the products to customer companies, not the prices at which the customer companies sold them to wholesale dealers. The High Court of Allahabad initially ruled in favor of the respondent-company, stating that the prices charged by the respondent-company to customer companies should be the basis for excise duty valuation. However, the central excise authorities contended that this decision did not apply post the Amendment Act of 1973. The Supreme Court, citing previous judgments, clarified that the new amendment did not alter the fundamental principles of valuation under the Act, emphasizing that the value is defined as the price charged by the assessee in wholesale trade. The Court highlighted that the relationship between the respondent-company and customer companies did not meet the criteria of "related persons" as defined under Section 4(4)(c) of the Act.

The Court delved into the definition of "related persons" under Section 4(4)(c) of the Act, which includes two parts: one involving mutual interest in each other's business and the other encompassing holding companies, subsidiaries, relatives, and distributors. The High Court determined that the customer companies must have a direct or indirect interest in the respondent-company's business to be considered "related persons." The Court examined precedents to elucidate the concept of "interest, directly or indirectly" in business relationships. It was emphasized that mere shareholding by customer companies did not establish a direct interest in the respondent-company's business. The Court referenced a case involving the sale of dyes to illustrate the interpretation of "related person" and the necessity of a direct or indirect mutual interest in each other's business for the classification.

Moreover, the Court analyzed the similarities between the present case and previous judgments regarding the relationship between the respondent-company and customer companies. The Court noted the absence of any extra-commercial considerations in the transactions between the parties and the uniform pricing structure across all customers. The Court agreed with the arguments presented, affirming the High Court's decision that the customer companies were not "related persons" as defined in the Act. The Court highlighted the need for further scrutiny by central excise authorities to determine if the customer companies were favored customers and if the prices were in line with normal wholesale trade practices. Ultimately, the Court upheld the judgment of the High Court of Allahabad, dismissing the appeal without costs.

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