Related person - Definition / Legal Terminology - Income Tax

Explanation. -For the purposes of section 245K of the Income tax Act 1961 , Related person with respect to a person means,- (i) where such person is an individual, any company in which such person holds more than fifty per cent. of the shares or voting rights at any time, or any firm or association of persons or body of individuals in which such person is entitled to more than fifty per cent. of the profits at any time, or any Hindu undivided family in which such person is a karta; (ii) where such person is a company, any individual who held more than fifty per cent. of the shares or voting rights in such company at any time before the date of application before the Settlement Commission by such person; (iii) where such person is a firm or association of persons or body of individuals, any individual who was entitled to more than fifty per cent. of the profits in such firm, association of persons or body of individuals, at any time before the date of application before the Settlement Commission by such person; (iv) where such person is a Hindu undivided family, the karta of that Hindu undivided family. Correct construction 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 - COMMISSIONER OF CENTRAL EXCISE, HYDERABAD VERSUS M/S. DETERGENTS INDIA LTD. ANOTHER- 2015 (4) TMI 358 - SUPREME COURT (c) related person means a person who is so associated with the assessee that they have interest, directly or indirectly, in the business of each other and includes a holding company , a subsidiary company , a relative and a distributor of the assessee, and any sub-distributor of such distributor. Explanation. -In this clause holding company , subsidiary company and relative have the same meanings as in the Companies Act, 1956; 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. It is also interesting to note that the definition of related person was read down by this Court to make the distributor covered by it to be a relative of the assessee. When holding company and subsidiary company was spoken of, the Court held again that the idea of including these two types of companies within the definition of related person is only so that the corporate veil of such companies can be lifted so that economic realities behind the legal fa ade can be looked at so that tax is not evaded or avoided. In Flash Laboratories Limited v. Collector of Central Excise, New Delhi, (2003) 2 SCC 86, the appellant was a subsidiary company of M/s Parle Products Limited. M/s Parle Biscuits Limited is also a subsidiary company of M/s Parle Products Limited. What was in question in that case was the relationship between two subsidiary companies. It is clear that the relationship between a subsidiary company and another subsidiary company would not be governed by the second part of Section 4(4)(c). In order that the second part of Section 4(4) (c) be attracted, it must be shown that the related person must either be a holding company or a subsidiary company of the assessee. In the facts of that case, the related person, namely, M/s Parle Biscuits Limited was neither a holding company nor a subsidiary company of the assessee i.e. M/s Flash Laboratories Limited. The High Court is also wrong in saying that its view is supported by the judgment of this Court in Union of India v. Atic Industries Ltd., (1984) 3 SCC 575. On facts, Atic s case did not deal with holding and subsidiary companies. Atul Products Limited held 50% of the share capital of Atic Industries which would not enable Atul products to be called the holding company of Atic Industries. Further, this Court held:- 5. The second ground on which the assessee assailed the validity of the demand made by the Assistant Collector for differential duty related to the applicability of the definition of related person in clause (c) of sub-section (4) of Section 4 of the amended Act. The Assistant Collector took the view that the assessee on the one hand and Atul Products Limited and Crescent Dyes and Chemicals Limited on the other were related persons within the meaning of the first part of the definition of the term related person and the assessable value of the dyes manufactured by the assessee for the purpose of excise duty was, therefore, liable to be determined with reference to the price at which the dyes were ordinarily sold by Atul Products Limited and Crescent Dyes and Chemicals Limited. This view taken by the Assistant Collector was set aside by the High Court on the ground that the assessee on the one hand and Atul Products Limited and Crescent Dyes and Chemicals Limited on the other were not related persons and the wholesale cash price charged by the assessee to Atul Products Limited and Crescent Dyes and Chemicals Limited and not the price at which the latter sold the dyes to the dealers or the consumers, represented the true measure of the value of the dyes for the purpose of chargeability to excise duty. This conclusion reached by the High Court was assailed before us by the learned Attorney-General appearing on behalf of the Revenue. He fairly conceded that the only part of the definition of related person in clause (c) of sub-section (4) of Section 4 on which he could rely was the first part which defines related person to mean a person who is so associated with the assessee that they have interest directly or indirectly in the business of each other . The second part of the definition which adds an inclusive clause was admittedly not applicable, because neither Atul Products Limited nor Crescent Dyes and Chemicals Limited was a holding company or a subsidiary company nor was either of them a relative of the assessee, so as to fall within the second part of the definition.