1996 (7) TMI 251 - AT - Central Excise

Summary

Issues Involved:
1. Legality of the demand for differential duty based on the relationship between the manufacturer and the buyer.
2. Determination of "related persons" under Section 4(4) of the Central Excises and Salt Act, 1944.
3. Validity of invoking the proviso to Section 11A of the Act.
4. Assessment of the transaction being at arm's length and on a principal-to-principal basis.
5. Consideration of limitation in the claim covered by the show cause notice dated 3-11-1982.

Issue-wise Detailed Analysis:

1. Legality of the demand for differential duty based on the relationship between the manufacturer and the buyer:
The Assistant Collector confirmed demands made in four show cause notices against the appellant, which were upheld by the Collector (Appeals). The demands were based on the assertion that the trade discount was not passed on to the buyer's customers, and the manufacturer and the buyer were sister concerns. Consequently, the trade discount was not deductible in arriving at the assessable value of the goods sold to the sister concern.

2. Determination of "related persons" under Section 4(4) of the Central Excises and Salt Act, 1944:
The appellate order presumed "mutuality of interest" based on the personal relationship of the partners of the two firms. Section 4(1)(a) of the Act defines assessable value based on the normal price at which goods are sold to a buyer in wholesale trade, where the buyer is not a related person. "Related persons" is defined in Section 4(4) as persons with direct or indirect interest in each other's business. The Supreme Court in Bombay Tyre International case and Atic Industries case emphasized that mutuality of interest is essential for determining related persons.

3. Validity of invoking the proviso to Section 11A of the Act:
The appellant challenged the invocation of the proviso to Section 11A of the Act, arguing that a part of the claim covered by the show cause notice dated 3-11-1982 is barred by limitation. However, this contention was not pressed during the proceedings.

4. Assessment of the transaction being at arm's length and on a principal-to-principal basis:
The partners of the two firms were closely related, and one partner was common until February 1980. However, personal relationships alone do not satisfy the criteria for "related persons" under Section 4(4)(c) of the Act. The Supreme Court in A.W. Figgies and Company and Deputy Commissioner of Sales Tax v. K. Kelukutty highlighted that a partnership firm is distinct from its partners. The agreement between the firms was not examined, and there was no indication that the transaction was not at arm's length or on a principal-to-principal basis. The trade discount could be justified as a quantity discount, and the buyer not passing the discount to customers does not imply mutual interest in each other's business.

5. Consideration of limitation in the claim covered by the show cause notice dated 3-11-1982:
Given the decision on the main issues, it was unnecessary to consider the contention regarding limitation.

Conclusion:
The impugned orders were set aside, and the appeal was allowed. The department failed to establish that the buyer was a "related person" of the manufacturer, and thus the assessable value could not be based on the price charged by the buyer to its customers.