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TMI Blog1980 (1) TMI 90X X X X Extracts X X X X X X X X Extracts X X X X ..... effect that the new section 4 of the Central Excises and Salt Act would come into force from 1st October, 1975. On 15th September, 1975, price lists were filed by the 1st petitioner-Company in Part-I declaring therein as the assessable value the prices charged by the 1st petitioner-Company to its five buyers, namely, (i) Promar Sales Pvt. Ltd., Bombay; (ii) Selsar Marketing Pvt. Ltd., Delhi; (iii) Veldi Sales Pvt. Ltd., Calcutta; (iv) Associated Marketing Agencies, Madras; and (v) Associated Radio Agencies, Bangalore. By his letter dated 25th September, 1975, the Superintendent of Central Excise requested the 1st petitioner-Company to give a list of its wholesale dealers and a declaration to the effect that the aforementioned wholesale dealers were not "related persons" within the meaning of the new section 4. On 26th September, 1975, the Superintendent (Tech.) for and on behalf of the Assistant Collector, addressed a letter to the 1st petitioner-Company calling upon it to intimate to him whether the aforesaid wholesale dealers were or were not "related persons" within the meaning of the new section 4 and to file a declaration accordingly. Thereupon on 1st October, 1975, the 1st p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice dated 21st November, 1975, the Assistant Collector issued a supplementary show cause notice dated 17th January, 1976 calling upon the 1st petitioner-Company to show cause (i) why Promar Sales Pvt. Ltd. should not be treated as a distributor of the 1st petitioner-Company on the ground that the dealers had to buy the goods from Promar Sales Pvt. Ltd, in terms of a certain circular letter dated 15th November, 1973; (ii) that Promar Sales Pvt. Ltd. did servicing work during the warranty period; and (iii) that Promar Sales Pvt. Ltd. looked after the sales promotion of the 1st petitioner-Company's product. On 14th February, 1976, the 1st petitioner-Company gave its reply to the aforesaid supplementary show cause notice, emphasising that the transactions with the aforesaid buyers were on principal to principal basis. At the personal hearing given by the Assistant Collector on 12th March, 1976, the 1st petitioner-Company was asked to explain why a retailer would not prefer to come to the 1st petitioner-Company's factory-gate to purchase the goods rather than to buy the same from the wholesalers at a higher price. Thereupon, the requisite explanation was furnished by the 1st petitioner- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny's television sets are "related persons". One reason is that the arrangements between them and the 1st petitioner-Company were in the nature of a restrictive trade practice under section 33 of the M.R.T.P. Act. After referring to Section 2A of the M.R.T.P. Act of 1969, the Assistant Collector held that- "By having the arrangement of sale to the five buyers only I hold that the transactions are on the basis of understanding of M/s. S.M. Chemicals with the buyers and these transactions attract the provisions of section 33 sub-section (1) and clause A & D of M.R.T.P. Act, 1969. The conditions for sale imposed by M/s. S.M. Chemicals and the arrangement they are having with five buyers very clearly make them as falling under this clause of section 33 attracting Restrictive Trade Practice. In the circumstances, I conclude that the buyers and the sellers have interest directly or indirectly in the business of each other and hence are related persons in terms of clause (c) of sub-section 4 of section 4." Pausing here for a moment, it may be observed that the stand taken by the Assistant Collector in his impugned order regarding the application of the provisions of the M.R.T.P Act, was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... matter of the previous decision." and the observations of the Supreme Court in The Commissioner of Sales Tax Madhya Pradesh v. M/s. Jaswant Singh Charan Singh, A.I.R. 1967 S.C. 1454, that— "It is a wall-settled principle that-in construing a word in an Act caution is necessary in adopting a meaning ascribed in that word in other statutes." the Division Bench of the Gujarat High Court held in Cibatul Ltd. case that - "...the declaration made under the M.R.T.P. Act that the manufacturer and the buyer were 'inter-connected undertakings' could not have been taken into by central excise authorities for deciding the case under the Excise Act." 10. The decision in the Cibatul case was followed by the Division Bench of the Gujarat High Court in Atic Industries Ltd. v. Union of India & Others - 1979 (4) E.L.T. (J 513), where it was held that the Central Excise authorities cannot apply the norm of "inter-connected undertakings" as laid down in the M.R.T.P. Act, for judging whether the undertakings are "related person" under section 4 of the Central Excises Act. At paragraph 5 of the report it was observed as under : "....... We are, therefore, of the view that the Central Excise author ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ication of the provisions of section 4(a) of the Excise Act. Particular reliance was placed on clauses 1 to 11 in those agreements with the dealers which restricted the rights of the dealers in the matter of trading in the goods manufactured by the petitioner-Company. Under clause 8, the dealers had undertaken to give service to the Crystal Room air-conditioners and 'Tushar' Water Coolers and de-humidifying units sold by them in their territory free of charge during the guarantee period of 12 months. Under clause 9, the dealers had agreed to employ at least one serviceman for giving adequate service and to depute servicemen for training to the petitioners' workshops at Delhi or Bombay. It was observed by the Division Bench that the air-conditioning and refrigeration units and machineries and components manufactured by the petitioner Company were highly specialised engineering items and they were of such a nature requiring after-sales service by competent well-trained engineers and technicians. Under the circumstances, the agreements made between the manufacturers and their dealers provided for the proper upkeep of the units. Thus even in respect of sales effected by the petitioner- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rest in the other. The interest must be mutual. In other words, there must be a mutuality of interest. It can hardly be gainsaid that if the nature of the business transacted between the 1st petitioner-Company and its five buyers discloses only that the former manufactures and the other purchases mutuality of interest between them must be ruled out. The interest of the manufacturer, viz., the 1st petitioner-Company, would cease as soon as he sold the goods to the five buyers and the latter's interest would cease as soon as the purchase was complete. In order to establish mutuality of business interest (direct or indirect) between the manufacturer and the buyer, the manufacturer must in his own interest promote the business of the buyer and the buyer must in his own interest promote the business of the manufacturer. In the present matter, it is not even the Department's case much less the petitioners', that any mutuality of interest existed, directly or indirectly between the 1st petitioner-Company and its five buyers. One did not mutually promote the business of the other. That the interest must be mutual and not one-sided is brought to the forefront by the two decisions of the Div ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d others - 1977 E.L.T. (J 1). In that case, the petitioner-Company had submitted to the Excise authorities its price list containing the prices at which it claimed to be selling its products to five companies. The petitioner-Company, which was registered under the Indian Companies Act, had five shareholders, namely, (1) Bajaj Electrical Limited, Bombay; (2) Crompton Parkinson Ltd., London; (3) N.V. Philips, Eindhoven (Holland); (4) General Electric Co. Ltd., London; and (5) Mazda Lamp Co. Ltd., Liecester, England. Bajaj Electricals Ltd. held 1,80,000 shares in the petitioner-Company and the remaining four foreign companies together held 1,80,000 shares. The petitioner-Company manufactured various kinds of lamps and sold its entire output exclusively to Bajaj Electricals Ltd., Philips India Ltd., Cromption Greaves Ltd., General Electric Co. of India Ltd., and Mazda Lamps Co. Ltd., after putting the brand names or trade marks like Philips, Osram, Mazda, Crompton and Bajaj of the respective Customer Companies according to their directions. The Customer Companies in turn sold those goods under their names at prices higher than the prices charged by the petitioner-Company. The controver ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... buyers. Merely because the buyers effected after-sales service during the warranty period, does not bring them within the ambit of "related persons" if the decision of the Division Bench in Voltas case is to be followed, which indeed it must. In the circumstances, the finding of the Assistant Collector that the buyer had the interest of the manufacturer indirectly, is entirely without foundation and Mr. Bhatt is justified in so criticising and thus assailing this finding in the impugned order. Even assuming the five buyers had an interest in the business of the 1st petitioner-Company, there is nothing to indicate that the latter had also any interest in the business of the former. Thus mutuality of interest being absent the concept of their being "related persons" must necessarily be ruled out. 16. In his impugned order, the Assistant Collector has attracted the provisions of section 4(4)(c) of the Excise Act in the present case on the ground that the five buyers were the distributors of the 1st petitioner-Company. No doubt the definition of "related person" in section 4(4)(c) includes a distributor of the assessee'. The question that, however, arises is whether the five buyers w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relations with them on principal to principal basis. On the basis of this letter, the Assistant Collector has, in his impugned order, come to the conclusion that the 1st petitioner-Company made it clear that it sells its products through these five buyers and that even from this point of view these five buyers would be the distributors since the goods are arranged to be sold through them. 18. The reliance placed by the Assistant Collector on the circular letter dated 15th November, 1973 addressed by Telerad Pvt. Ltd. to its dealers, can be of no assistance to the respondents. It must be remembered that this letter was addressed not by the 1st petitioner-Company but its predecessor-in-title on the eve of the take-over by the 1st petitioner-Company. The 1st petitioner-Company had nothing to do with this letter. It can hardly be contended with any validity that, apart from the fact that there is nothing in this letter of 15th November, 1973 from which it can be gathered that the five buyers were the distributors of the 1st petitioner-Company and hence were "related persons", the alleged admissions made in this letter by the 1st petitioner's predecessor can be said to be binding on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... how that from the number of buyers, viz. five, their relationship with the 1st petitioner-Company was that of "distributors". Though in the impugned order the Assistant Collector has relied upon the statements made in this letter to the effect that the goods are sold by the 1st petitioner-Company through the said five buyers, he has nowhere fastened upon the use of the word "distributor" in the said letter, and rightly so, for the word distributor', in that letter has obviously been used in a loose manner at a time when the new section 4 was not even in force as is brought out by reading the letter as a whole and particularly that the transactions with the five buyers were on principal to principal basis. 21. In the impugned order, the Assistant Collector has also alluded to the fact that at the personal hearing on 12th March, 1976, the 1st petitioner-Company promised to send a letter as to why the dealers were not coming forward and accordingly the 1st petitioner-Company submitted a letter dated 15th March, 1976. However, the Assistant Collector opined that the 1st petitioner-Company had not given any satisfactory answer as to why the large number of dealers could not buy the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... If there is an actual price for the goods themselves at the time and place of sale, and if that is a wholesale cash price, clause (a) of section 4 would be applicable." That decision and observations of the Allahabad High Court, with which I am in respectful agreement, must, therefore, render utterly unacceptable the reasoning given by the Assistant Collector in his impugned order for holding that the five buyers are distributors because the goods were sold by the 1st petitioner-Company only to these five buyers. Merely because goods were sold wholesale to these five buyers would not make these five buyers the distributors of the 1st petitioner-Company. There is no provision that a manufacturer can sell only to a certain number of persons before a sale can be characterised as wholesale. Merely by virtue of limited numbers if wholesalers were to be categorised as distributors, all wholesalers would automatically be garbed as distributors despite the fact that the transactions had all the ingredients of wholesale trade. In a distributorship must enter the concept of agency between the manufacturer and the distributor. As observed in the Hind Lamps case, 1977 E.L.T. (J 1) (supra) - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chasers may and do accord credit facilities to the retail shopkeepers and they are wholly responsible for the same. None of these functions of the five buyers can spell out the relationship of agent and principal quae the 1st petitioner-Company. Significantly enough in his impugned order, the Assistant Collector has not given any reason why he has found any of the reasons given by the 1st petitioner-Company in its letter dated 15th March, 1976 to be unsatisfactory beyond making a bare assertion to that effect, more so when it is not even the Department's case that any of the functions setout in the 1st petitioner-Company's letter of 15th March, 1976 were not within the province of any of the five buyers. If the Assistant Collector was not satisfied as stated by him in his order, some reasons (not necessarily detailed) could and should have been given by him after calling upon the petitioners to offer their explanation. He has chosen to do neither. 25. Mr. Dalal relied on the definition of "distributor" appearing in Random House Dictionary at page 414 as under : "One who or that which distributes; one engaged in the general distribution or the marketing of some article or class of ..... 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