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TMI Blog2015 (4) TMI 358X X X X Extracts X X X X X X X X Extracts X X X X ..... they stood prior to the 2000 amendment of Section 4. In short, these appeals deal with the definition of "related person" and the price at which valuation is to take place if sales are made to "related persons" in the course of wholesale trade. 2. It is important to note that the assessee, M/s Detergents India Limited, is the same in all the appeals, which arise out of different show cause notices for periods ranging from 1.3.1992 to September 1997. Detergents India Limited later changed its name to Henkel Marketing India Limited. 3. The facts of Civil Appeal Nos.9049-9051 of 2003 are as follows: A show cause notice dated 8.12.1995 was issued demanding an amount of Rs. 3,21,450/- for the period 20.7.1995 to 30.7.1995. The demand made under this notice was dropped vide order dated 11.3.1997 by the Deputy Commissioner, Hyderabad. An appeal against this order was dismissed by the Commissioner (Appeals), Hyderabad, by an order dated 5.1.2000. The appeal filed before CEGAT was also dismissed by the impugned judgment dated 22.4.2003. 4. By a separate show cause notice dated 26.3.1997 for the period 1.3.1992 to 31.3.1995, the Commissioner by an order dated 31.8.1999 confirmed a deman ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase. I do not think it necessary to elaborate this aspect as a detailed discussion has already been made in this behalf by Ld. Member (J). I am in full agreement with him on the issue. 7. As DIL and SWCL have already been found not to be "related persons", it cannot be said that the former suppressed (in their price lists filed with the department) any "relationship" before the department with an intent to evade payment of duty. The fact is that there was no mutuality of interest between DIL and SWCL and hence they were not "related persons" within the meaning of Section 4(1)(a) of the Act. The fact alleged by the department in the show cause notice did not exist at all to be suppressed by the notice. Therefore, the extended period of limitation was not invocable in this case. I agree with Ld. Member (J) on this score also. 8. In the result, the appeals filed by DIL and SWCL have to be allowed and the Revenue's appeal to be rejected." It is this impugned judgment that has merely been followed in the other appeals. 5. The facts further show that Detergents India Limited, now Henkel Marketing India Limited, was at the relevant time a subsidiary of Shaw Wallace and Company Limit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se, the Department has not produced any material to show that their price to SWC is not the normal price." 6. It was also pleaded that processing charges of different products were different. This is to be found in the very show cause notice dated 26.3.1997 with which we are concerned as follows:- "3.6 File bearing Nos. 45 and 71 seized from the factory at Kodur on 16.5.1995 were shown to him and he was asked to explain in detail about the audit reports of M/s. SWC available in that file. He explained that he had seen the internal audit report of M/s. SWC dated 2.4.1993 from page No.37 to 58 in file No.45 and added that M/s. SWC were periodically conducting audit (M/s. SWC being the holding company) of the functioning of M/s. DIL, Kodur which was its subsidiary to control and monitor the activities of its subsidiaries. When enquired he stated that the processing charges paid by M/s. HLL to M/s. DIL is Rs. 1,200 per MT upto 1994 and later M/s. HLL reduced the processing charges to Rs. 1125 per MT: that for the goods supplied to M/s. SWC, M/s. DIL used to file the price list with the Central Excise Department after mutually agreeing with M/s. SWC taking into account the raw materi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rice and would, therefore fall within proviso (iii) of Section 4(1)(a) as it stood prior to 2000. Learned counsel for the Revenue also argued that the moment there is a holding/subsidiary company relationship, the definition of "related person" under Section 4(4)(c) gets attracted and proviso (iii) to Section 4(1)(a) in turn gets attracted and therefore it is the price at which Shaw Wallace and Company sells the self same goods to its customers that is the price that is to be taken into account on the facts of the present case. 8. Shri Lakshmikumaran, learned counsel for the appellants has argued that even though Shaw Wallace and DIL may be holding and subsidiary companies, yet on a true construction of Section 4(4)(c) they are not related persons within the meaning of the definition clause. Further, he argued that on a true construction of proviso (iii) to Section 4(1)(a), it is necessary that the assessee must first enter into an arrangement with the related person, which arrangement leads to a price being charged which is lower than the normal price. Further, the proviso only gets attracted when such arrangement is predominantly a sale to or through a related person. According ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld by the assessee to a buyer in the course of wholesale trade for delivery at the time and place of removal, where the buyer is not a related person and the price is the sole consideration for the sale: Provided that- (i) where, in accordance with the normal practice of the wholesale trade in such goods, such goods are sold by the assessee at different prices to different classes of buyers (not being related persons) each such price shall, subject to the existence of the other circumstances specified in clause (a), be deemed to be the normal price of such goods in relation to each such class of buyers; (ii) where such goods are sold by the assessee in the course of wholesale trade for delivery at the time and place of removal at a price fixed under any law for the time being in force or at a price, being the maximum, fixed under any such law, then, notwithstanding anything contained in clause (iii) of this proviso, the price or the maximum price, as the case may be, so fixed, shall, in relation to the goods so sold, be deemed to be the normal price thereof; (iii) where the assessee so arranges that the goods are generally not sold by him in the course of wholesale trade ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , container, bobbin, pirn, spool, reel or warp beam or any other thing in which or on which the excisable goods are wrapped, contained or wound; (ii) does not include the amount of the duty of excise, sales tax and other taxes, if any, payable on such goods and, subject to such rules as may be made, the trade discount (such discount not being refundable on any account whatsoever) allowed in accordance with the normal practice of the wholesale trade at the time of removal in respect of such goods sold or contracted for sale; (e) 'wholesale trade' means sales to dealers, industrial consumers. Government, local authorities and other buyers, who or which purchase their requirements otherwise than in retail." The first thing that one notices on a reading of Section 4(1)(a), as it then stood, is that a duty of excise is chargeable with reference to "normal price", that is to say the price at which such goods are ordinarily sold by the assessee to a buyer in the course of wholesale trade. The price should be the sole consideration for the sale. If the buyer is a related person, there is a presumption that a sale to a related person would be at a price which is not the sole considerat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l Ltd., (1984) 1 SCC 467, Section 4 as amended by the 1973 Amendment Act was challenged before this Court. This Court repelled the challenge. It held that even under Section 4 prior to the 1973 Amendment, the wholesale cash price would consist of a sale by a manufacturer in the course of wholesale trade to a wholesale dealer, which sale would have to be at arm's length and in the usual course of business. The court held: "32. It will be noticed that the basic scheme for determination of the price in the new Section 4 is characterised by the same dichotomy as that observable in the old Section 4. It was not the intention of Parliament, when enacting the new Section 4 to create a scheme materially different from that embodied in the superseded Section 4. The object and purpose remained the same, and so did the central principle at the heart of the scheme. The new scheme was merely more comprehensive and the language employed more precise and definite. As in the old Section 4, the terms in which the value was defined remained the price charged by the assessee in the course of wholesale trade for delivery at the time and place of removal. Under the new Section 4 the phrase "place of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eration for the sale". The pre-amended Section 4 was understood in Voltas's case by this Court to mean that the wholesale cash price can only be ascertained on the basis of arm's length transactions. If there is a special or favoured buyer like a relative of the manufacturer to whom a specially low price is charged because of extra commercial considerations, such price cannot be the price referred to in Section 4(1)(a). Taking a cue from the fact that the post-amendment Section 4 makes no change in the law laid down in Voltas's case, as far as arm's length transactions are concerned, it is clear that where the price is the sole consideration for the sale and is not a specially low price because of extra commercial considerations, even where a buyer is a related person, the normal price mentioned in Section 4(1)(a) post the 1973 amendment would apply. Read in accordance with the object of the pre-amended Section 4 as explained in Voltas's case it is clear that the expression "where the buyer is not a related person and the price is the sole consideration for the sale" is to be read conjunctively as meaning that because the buyer is a related person, the price usually ceases to be th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es contends that the provisions regarding related persons are wholly unnecessary because to counteract evasion or avoidance any artificially arranged price between the manufacturer and his wholesale buyer can be rejected in any case under Section 4, and we are referred to the observations of this Court in Voltas Limited [(1973) 3 SCC 503 : 1973 SCC (Tax) 261 : AIR 1973 SC 225 : (1973) 2 SCR 1089] and Atic Industries Ltd. [(1975) 1 SCC 499 : 1975 SCC (Tax) 135 : AIR 1975 SC 960 : (1975) 3 SCR 563] It is true, we think, that the new Section 4(1) contains inherently within it the power to determine the true value of the excisable article, after taking into account any concession shown to a special or favoured buyer because of extra-commercial considerations, in order that the price be ascertained only on the basis that it is a transaction at arm's length. That requirement is emphasised by the provision in the new Section 4(1)(a) that the price should be the sole consideration for the sale. In every such case, it will be for the Revenue to determine on the evidence before it whether the transaction is one where extra-commercial considerations have entered and, if so, what should be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpetence of the Legislature and as falling within its power of taxation, and reference may be made to Balaji v. ITO [AIR 1962 SC 123 : (1962) 2 SCR 983 : (1961) 43 ITR 393] ; Navnitlal C. Javeri v. CIT [AIR 1965 SC 1375 : (1965) 1 SCR 909 : (1965) 56 ITR 198] and Punjab Distilling Industries Ltd. v. CIT. [AIR 1965 SC 1862 : (1965) 3 SCR 1 : (1965) 57 ITR 1 : 35 Com Cas 541] 45. It is contended for the assessees that the definition of the expression "related person" is so arbitrary that it includes within that expression a distributor of the assessee. It is urged that the provision falls outside the ambit of Entry 84 of List I of the Seventh Schedule to the Constitution inasmuch as it is wholly inconsistent with the levy of excise, and if it is attempted to seek support for the provision from the residuary Entry 97 of List I as a non-descript tax the attempt must fail because there is no charging section in the Central Excises and Salt Act empowering the levy of such non-descript tax nor any machinery provision in the Act for collecting such a tax. The charging provision and the machinery provisions of the Act, it is pointed out, deal exclusively with excise duty and not with any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any" 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 façade can be looked at so that tax is not evaded or avoided. 18. Some other decisions may be taken note of at this stage. 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 subsidia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt would have to go further and show that the relationship has introduced an element other than purely commercial consideration in effecting the sale by the assessee to BCL. No such evidence has been produced by the Revenue. 2. In the circumstances, the appeal is dismissed." 21. In Commissioner Central Excise, New Delhi v. India Thervit Corporation, Ltd., (2008) 17 SCC 374, ATL a subsidiary of ITCL, sold all goods manufactured by it to ITCL. Despite the fact that on facts ATL and ITCL may be taken to be related persons, (though this Court did not hold so), since there is no under valuation as the price paid by the Railways (an arm's length purchaser) was the same as the price paid by ITCL, the price paid by the holding company to its subsidiary was taken to be a price on which excise duty would be calculated. 22. Since the Tribunal in the judgment under appeal has referred to and relied upon Raliwolf v. UOI, 59 ELT 220 Bombay (1992), we must refer to the same. The Bombay High Court in that judgment construed Section 4(4)(c) as follows: "31. We are not inclined to accept the contention of the Department as submitted by Mr. Sethna, the learned counsel appearing for the responde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reached in the aforesaid paragraph. As has been stated by us above, "means" "and includes" is a legislative device by which the "includes" part brings by way of extension various persons, categories, or things which would not otherwise have been included in the "means" part. If this is so, obviously both parts cannot be read conjunctively. What is in the "includes" part is relatable only to the subject that is to be defined and takes within its sweep persons, objects, or things which are not included in the first part. We have already pointed out that the reason for including holding and subsidiary companies in the "includes" part is so that the authorities may look behind the corporate veil. To say that the holding and subsidiary companies must in addition have a mutual interest in the business of each other is wholly incorrect. Further, the word "and" which joins the two parts of the definition is not rendered meaningless. It is necessary because it precedes the word "includes" and brings in to the definition clause persons, objects, or things that would not otherwise be included within the "means" part. 24. The High Court is also wrong in saying that its view is supported by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee, so as to fall within the second part of the definition." 25. It is clear therefore that the Bombay High Court judgment does not lay down the law correctly insofar as the correct construction of Section 4(4)(c) of the Act is concerned. 26. Section 4(4)(c) is in two parts. The first part requires the department to apply a de facto test, whereas the second part requires the application of a de jure test. "Relative" in the Companies Act, 1956 is defined as follows:- "6. Meaning of "relative".-A person shall be deemed to be a relative of another if, and only if,- (a) they are members of a Hindu undivided family; or (b) they are husband and wife; or (c) the one is related to the other in the manner indicated in Schedule I-A." "Schedule I-A. [See Section 6(c)] LIST OF RELATIVES 1. Father. 2. Mother (including step-mother). 3. Son (including step-son). 4. Son's wife. 5. Daughter (including step-daughter). 6. Father's father. 7. Father's mother. 8. Mother's mother. 9. Mother's father. 10. Son's son. 11. Son's son's wife. 12. Son's daughter. 13. Son's daughter's husband. 14. Daughter's h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n pointed out above, only 10% of its manufacturing capacity has been sold to Shaw Wallace, 90% being sold to Hindustan Lever Limited. For this reason also, proviso (iii) does not get attracted. This being the case, on facts here Section 4(1)(a) and not proviso (iii) is attracted inasmuch as on facts the presumption of a transaction not being at arm's length has been rebutted. Revenue's comparison of price paid by Hindustan Lever to DIL with price paid by Shaw Wallace to DIL is unwarranted as the products sold and processing charges are wholly different. The basis of the Commissioner's orders thus goes. Further, the single most relevant fact, namely, that Shaw Wallace paid for the same/similar goods to unrelated suppliers at a price lower than the price paid by Shaw Wallace to DIL, has not been adverted to at all by the Commissioner. 29. Mr. Bagaria, learned counsel appearing on behalf of Shaw Wallace, is aggrieved by penalties levied upon Shaw Wallace by the orders of the Commissioner. These penalties have been set aside by CEGAT. He pointed out to us that the ingredients necessary to attract Rule 209A were not mentioned in any show cause notice against Shaw Wallace and that the C ..... X X X X Extracts X X X X X X X X Extracts X X X X
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