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TMI Blog2017 (3) TMI 64X X X X Extracts X X X X X X X X Extracts X X X X ..... ship of manufacturer and distributor, nothing has been placed on record, which would fulfill the ingredients of clause (c) of sub-section (4) of section 4 of the Central Excise and Salt Act, 1944 - M/s. Boots is not concerned as to whether the Petitioners make a loss or profit in the business and similarly, the petitioners are not concerned whether M/s. Boots makes a loss or profit in the onward sale of Betonin. They are not holding and subsidiary company - The foundation being totally weak and unsustainable in law, we cannot uphold the impugned order - Petition disposed of. - WRIT PETITION NO. 2635 OF 1995 with WRIT PETITION NO. 5421 OF 2005 - - - Dated:- 27-2-2017 - S. C. DHARMADHIKARI B. P. COLABAWALLA, JJ. Mr. V. Sridharan Senior Advocate with Mr. Jeshan Sinha and Mr. Arpit Singhvi i/b. M/s. Wadia Ghandy and Co. for the petitioners. Mr. C. P. Yadav AGP for respondent nos. 1 to 3. Judgment :- (Per S. C. Dharmadhikari, J.) 1. The writ petition (W. P. No. 2635 of 1995) was placed for directions by us as it is pending from 1995. We have, as a policy to give priority to old matters, listed such petitions under the caption for directions , but wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y further letter dated 21st January, 1995, the second respondent purported to state that the approved price lists of the petitioners dated 1st July, 1994 and 1st November, 1994 were being cancelled. The approved price list of M/s. Boots dated 15th July, 1993 stood provisionally approved in the case of the first petitioner and that is how they were called upon to pay the differential excise duty. Then, on 25th January, 1995, the second respondent purported to state that the amount of excise duty paid by the first petitioner on the basis of the approved list of 1st June, 1993 was in excess of the amount paid on the basis of the first petitioner's approved list of 1994 and therefore, a differential sum of ₹ 7,96,043.08 be paid. 7. The petitioners gave a detailed reply to these letters by pointing out that the value of the goods declared in their price list was the correct value as arrived at under the provisions of the said Act read with section 4(1)(a) of the Central Excise and Salt Act, 1944. The petitioners gave a detailed explanation and replied by their letter dated 3rd February, 1995, copy of which is at Annexure 'H' to the petition. However, respondent no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as to be heard and disposed of by 1st July, 1995 and the order, if adverse, was to be kept in abeyance for one week. This was on the condition that the petitioners furnish a bank guarantee in the sum of ₹ 10 lakhs to the Collector, Pune, which bank guarantee would be kept alive for three months. Thereafter, the time was extended to pass the order. It is in pursuance of such extensions granted that the Commissioner passed the order dated 20th July, 1995. After that order was passed, the writ petition came to be amended. The amendment was granted. The petition was admitted after the amendment and interim relief in terms of prayer clause (c) (i) was granted on certain terms and conditions. 9. Based on the amendments to the petition, the petitioners have incorporated grounds and which are to be found in the rider at pages 48-A to 48-Q of the petition. 10. An affidavit in reply has been filed to this writ petition by the Superintendent of State Excise, Pune, in which, the order of the second respondent is supported fully. It is stated that the product under reference, namely, Betonin was originally manufactured by Boots Pharmaceuticals Ltd. on loan licencee arrangement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... petitioners approached the Commissioner, who has passed an exhaustive order. The stand of the petitioners in the writ petition is denied. It is stated that the petitioners and M/s. Boots are related persons . The criteria in that behalf, as laid down by law is fulfilled. That is how the conclusion in the impugned order is fully supported. It is submitted that this is a plank to avoid duty liability. 11. The petitioners have filed a rejoinder affidavit and denied all the allegations in the affidavit in reply. They reiterated their stand in the writ petition and also contended that the affidavit in reply purports to supply or add to the reasons already assigned in the impugned order. 12. When this petition was placed before us, we were informed that a supplementary affidavit would be filed on behalf of the petitioners. The supplementary affidavit is indeed to elaborate as to how the petitioners and M/s.Boots cannot be termed as related persons. In that regard, what is alleged is as under:- 3. I say that around the time of filing the captioned Writ Petition, Petitioner No. 1 was also manufacturing various medicinal preparations/products, which did not contain al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Department has also accepted that Petitioner No. 1 and Abbott are not related persons under the Act. 13. It is on this material that we have heard Mr. Sridharan learned senior counsel appearing for the petitioners and Mr.Yadav learned AGP appearing for the respondents. 14. Mr. Sridharan would submit that the impugned order is contrary to law. It is ex-facie erroneous and illegal. It is based on certain assumptions, which have no basis in law. The second respondent/Commissioner for State Excise has completely misread and misinterpreted the relevant statutory provisions. He has also not been able to appreciate the arrangement between Pharma companies. He submits that the petitioners and M/s.Boots are not covered by the term related persons as defined in law. 15. Mr. Sridharan submits that during the relevant period, the expression related persons was defined in section 4(4)(c) of the Central Excise and Salt Act, 1944. The ingredients thereof have been relied upon to urge that the respondents have not referred to any particular portion of this definition to suggest that the petitioners and M/s. Boots are related persons. He would submit that the expression ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. Boots is entirely irrelevant to decide the issue at hand. The issue at hand is whether the petitioners, the seller and M/s. Boots, the purchaser/buyer are related persons. For all these reasons, he would submit that the finding and conclusion reached in the impugned order is perverse. It is also contrary to the well settled principles and statutory provisions. It is thus vitiated by an error of law apparent on the face of the record. Hence, the impugned order be set aside. 18. On the other hand, Mr. Yadav, learned AGP appearing for the respondents relies upon the affidavit in reply and the factual conclusion. He submits that the medicine belongs to M/s. Boots. The petitioners' premises originally belonged to M/s. Boots. Relying upon page 73 of the paper book, which is a copy of the letter dated 21st January, 1995 and particularly the information sought by the same, Mr. Yadav would submit that the rates of M/s. Boots are reduced. This reduction has never been explained. The price lists were not approved by the respondents for this reason. That is why they validly called upon the petitioners to explain as to why the rates charged by M/s. Boots should not be applicabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, 1955 provides for levy and collection of duties of excise on medicinal and toilet preparations containing alcohol, narcotic drug or narcotic. 22. That is an Act, which was enacted so as to bring uniformity in the rates and procedures for collection of the duty on medicinal and toilet preparations containing alcohol. The definitions are contained in section 2. Clause (a) thereof defines alcohol . Then, the definition of the term collecting Government is relevant. That appears in clause (b) of section 2 and to mean the Central Government or, as the case may be, the State Government which is entitled to collect the duties levied under this Act. The term excise officer is defined in clause (d) of section 2 to mean an officer of the Excise Department of any State and includes any person empowered by the collecting Government to exercise all or any of the powers of an excise officer under this Act. The term medicinal preparation is defined in clause (g) of section 2 to include all drugs which are a remedy or prescription prepared for internal or external use of human beings or animals and all substances intended to be used for or in the treatment, mitigation or prev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n M/s.Boots was the manufacturer, the production was done by Borachem on job work basis. It is significant that in 1994, when M/s. Boots surrendered their licence and Biostar obtained the licence for manufacture of Betonin, four directors were common in Biostar and Borachem Industries. Petitioner Biostar increased the rates of the maximum retail price of the product with effect from 1st July, 1994. While, on the other hand, the assessable value, instead of increasing proportionately was reduced from ₹ 8.50/- as on 15th July, 1993, when M/s. Boots was the manufacturer, to ₹ 7.18/- in the case of Betonin 200 ml. pack and ₹ 15.96 to ₹ 14.26 in the case of 450 ml. pack. There is no wholesaler discount shown in respect of the petitioners' sales to M/s. Boots. That, according to the respondents, is unimaginable in absence of a peculiar arrangement. When Biostar charged such a low price to M/s. Boots, M/s. Boots sold the product to the wholesalers at a much higher price, namely, ₹ 13.89/- for 200 ml. pack at 7% discount and ₹ 24.08/- at 7% discount in respect of 450 ml. pack. Therefore, it is obvious that this kind of arrangement has been made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such increases. That is why the appellate authority concludes that the transactions between petitioner no.1 Biostar and M/s. Boots cannot be construed to be at arms length and in the ordinary course of business. The terms of agreement between the parties are not fair and reasonable. M/s. Boots, who is a sole distributor, is selling the entire production with an unusually big margin between so called manufacturers' price and the price the goods can fetch in the market. It is very unusual that the Boots has made its trade mark available to the Biostar without any royalty or consideration. Thus, M/s. Boots, the sole distributor, is a favoured buyer and a related person. The transactions between Boots and Biostar are neither at arms length nor in the ordinary course of business. Therefore, ingredients of section 4(4)(c) of the Central Excise and Salt Act, 1944 are satisfied. 25. Each of the above conclusions have to be tested on the touchstone of the settled legal principles. We must now refer to section 4. Section 4 of the Central Excise and Salt Act, 1944, to the extent relevant, reads as under:- ..... 4(c) related person means a person who is so associated with t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clusion 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) 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. But we do not think that even the limited contention urged by the learned Attorney General on behalf of the Revenue based on the first part of the definition can succeed. What the first part of the definition requires is that the person who is sought to be branded as a related person must be a person who is so associated with the assessee that they have interest, directly or indirectly, in the business of each othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r is it concerned whether Atul Products Limited sells such dyes at a loss. It is impossible to contend that the assessee has any direct or indirect interest in the business of a wholesale dealer who purchases dyes from it on principal to principal basis. The same position obtains in regard to Crescent Dyes and Chemicals Limited. Perhaps the position in regard to Crescent Dyes and Chemicals Limited is much stronger than that in regard to Atul Products Limited. Crescent Dyes and Chemicals Limited is not even a shareholder of the assessee and it has, therefore, no interest direct or indirect in the business of the assessee. It is Imperial Chemical Industries Limited, London which holds 50 per cent of the share capital of the assessee and this foreign company also holds 40 per cent of the share capital of Crescent Chemicals and Dyes Limited. Imperial Chemicals Industries Limited, London would admittedly have an interest in the business of the assessee in its capacity as a shareholder, but how can Crescent Dyes and Chemicals Limited of which 40 per cent of the shares are held by Imperial Chemical Industries Limited, London which in its turn is a share holder of the assessee, can not be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... son must be associated with the assessee; secondly, the person so associated and the assessee must have interest in the business of each other; and thirdly, such interest may be direct or indirect. Mutuality of interest between the other person and the assessee in the business of each other, whether direct or indirect, is necessary to label such a person as a related person. 28. It may be that in that case such mutuality and interest between the other persons and the assessee was established, but the test is as above. 29. In the later decision rendered in the case of Flash Laboratories Limited vs. Collector of Central Excise AIR 2003 SC 1894 , a three Judge Bench judgment, the Hon'ble Supreme Court of India considered the Bombay Tyres International (supra) and Atic Industries Ltd. (supra) and came to the conclusion that there is mutuality of interest. 30. Mr. Sridharan has invited our attention to a decision of the Hon'ble Supreme Court of India in the case of Alembic Glass Industries Ltd. vs. Collector of Central Excise 2002 (143) ELT 244 (SC), where, again the facts were that the assessee held shares in a chemical company and the chemical company h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered by the provisions of amended section 4(4)(3)(b). 33. We need not multiply the precedents, save and except making reference to another judgment, which was cited by Mr. Sridharan in the case of Kirloskar Oil Engines Ltd. vs. Union of India 1986 (26) ELT 504. This judgment holds that the distributors could not be treated as holding company, subsidiary company or relative. Mr. Sridharan relied upon another prior judgment in the case of Amar Dye-Chem Ltd. vs. Union of India 1981 (8) ELT 348 (Bom.), where, once again it was held that merely by the use of the word distributor in the price list or in the forwarding letter, it cannot be said that the distributor was a related person. Whether the distributor falls within the definition of related person depends upon the real substance of the transaction between the manufacturer and the distributor (see para 14). 34. We referred to the definition of the term related person , the binding judgments interpreting it only to emphasise that the foundation or basis of the Commissioner's conclusion is ex-facie contrary thereto. It is wholly unsustainable in law. Before us, the Commissioner applies a test which defies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acturer and such distributor are related persons. There is no presumption that the manufacturer supplying its entire production to a sole distributor would mean they have an interest in the business of each other. Pertinently, the petitioners and Borachem are supposed to be having something common, inasmuch as there were four directors, who were on the board of both. However, the licence was possessed by M/s. Boots and when it surrendered the same to Biostar, beyond the relationship of manufacturer and distributor, nothing has been placed on record, which would fulfill the ingredients of clause (c) of sub-section (4) of section 4 of the Central Excise and Salt Act, 1944. It may be that when M/s.Boots was holding the licence, it was manufacturing its product Betonin at the premises of Borachem and these are the very premises, from which, petitioner no. 1 is now producing the goods and supplying them to M/s. Boots. By this, it is not established and proved and as rightly contended by Mr.Sridharan that there is an interest, direct or indirect, in the business of each other. The goods have been sold on outright basis (principal to principal) to M/s. Boots. The reciprocity of inter ..... X X X X Extracts X X X X X X X X Extracts X X X X
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