Case: Commnr. Of Central Excise, Hyderabad Vs. M/S. Detergents India Ltd.

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.” 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 RELATIVES1. Father.2. Mother (including step-mother).3. Son (including step-son).4. Sons wife.5. Daughter (including step-daughter).6. Fathers father.7. Fathers mother.8. Mothers mother.9. Mothers father.10. Sons son.11. Sons sons wife.12. Sons daughter.13. Sons daughters husband.14. Daughters husband.15. Daughter’s son16. Daughters sons wife.17. Daughters daughter.18. Daughters daughters husband.19. Brother (including step-brother).20. Brothers wife.21. Sister (including step-sister).22. Sisters husband.” A reading of the definition of “relative” would show that the relative need not be a person who is so associated with the assessee that they have mutual interest in each other’s businesses. If that were the case, the expression “relative” in the second part would be otiose inasmuch as a relative would be subsumed within “person” in the first part. Thus, “relatives” would also be “persons” who are so associated with the assessee that they have a mutual interest in each other’s businesses. The legislature by application of a de jure test has extended the meaning of “related persons” to include the entire list of relatives per se without more as related persons. Similarly, holding companies and subsidiary companies by virtue of the exercise of control by a holding company over a subsidiary company are similarly included by application of a de jure test. 27. We have indicated that the assessee argued that the price paid by Shaw Wallace and Company for the same/similar products as was sold by unrelated entities to it was even lower than the price paid by Shaw Wallace to Detergents India Ltd. This being the case, it is clear that on facts here there is no “arrangement” between Shaw Wallace and Detergents India Limited to depress a price which is otherwise at arm’s length. Though this fact is pleaded expressly before the Commissioner as pointed out above, the Commissioner’s order does not contain any finding based on this fact. On the other hand, there are copious findings as to how Shaw Wallace and Detergents India Limited are related persons because of a multitude of factors pointed out in the Commissioner’s order.28. That Shaw Wallace and Detergents India Limited are “related persons” is made out by their holding/subsidiary relationship. However, from this, it does not follow that there is any arrangement of tax avoidance or tax evasion on the facts of this case. This being the case, proviso (iii) to Section 4(1)(a) would not be applicable. Further, it would also not be applicable for the reason that there is no predominance of sales by Detergents India Limited to Shaw Wallace. As has been 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 Commissioner’s finding as a result thereof would have to be held to be beyond the show cause notice. He cited a number of judgments in support of this proposition. In view of the judgment delivered by us on merits, we do not think it necessary to go into the contention raised by Shri Bagaria. Suffice it to say that we are dismissing Revenue’s appeals. CEGAT’s judgment itself set aside all penalties imposed on Shaw Wallace as well as DIL. That part of CEGAT’s judgment will remain undisturbed.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]15. On a reading of the aforesaid judgment, it becomes clear that the object of enacting Section 4 is that transactions atlength between manufacturer and wholesale purchaser which yield the price which is the sole consideration for the sale alone is contemplated. Any concessional or manipulative considerations which depress price below the normal price are, therefore, not to be taken into consideration. Judged at from this premise, it is clear that arrangements with related persons which yield a price below the normal price because of concessional or manipulative considerations cannot ever be equated to normal price. But at the same time, it must be remembered that absent concessional or manipulative considerations, where a sale is between a manufacturer and a related person in the course of wholesale trade, the transaction being a transaction where it is proved by evidence that price is the sole consideration for the sale, then such price must form the basis for valuation as theof the goods. A literal reading of the Section would otherwise lead to an absurdity. Where it is proved that the same price is paid by related persons as well aslength purchasers (who are unrelated) for the same goods, in the case of the former the higher price paid by purchasers from the related person would be the price on which excise duty would be calculated which would be more than theer Section 4(1)(a). Such a result is not contemplated by the amended Section 4(1) (a), which must therefore be read in the manner indicated above.16. So far asOn a reading of the aforesaid paragraphs, it is clear that proviso (iii) would be referable only to tainted transactions. Only such cases would raise an irrebuttable presumption which will then be governed by the said proviso. It is also interesting to note that the definition ofas read down by this Court to make the distributor covered by it to be a relative of the assessee. Whenwas 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.We find it difficult to agree with some of the conclusions reached in the aforesaid paragraph. As has been stated by us above,is a legislative device by which thepart brings by way of extension various persons, categories, or things which would not otherwise have been included in thepart. If this is so, obviously both parts cannot be read conjunctively. What is in thepart 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 thepart 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 wordwhich joins the two parts of the definition is not rendered meaningless. It is necessary because it precedes the wordand brings in to the definition clause persons, objects, or things that would not otherwise be included within the. 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.We have indicated that the assessee argued that the price paid by Shaw Wallace and Company for the same/similar products as was sold by unrelated entities to it was even lower than the price paid by Shaw Wallace to Detergents India Ltd. This being the case, it is clear that on facts here there is nobetween Shaw Wallace and Detergents India Limited to depress a price which is otherwise atlength. Though this fact is pleaded expressly before the Commissioner as pointed out above, theorder does not contain any finding based on this fact. On the other hand, there are copious findings as to how Shaw Wallace and Detergents India Limited are related persons because of a multitude of factors pointed out in theorder.28. That Shaw Wallace and Detergents India Limited areis made out by their holding/subsidiary relationship. However, from this, it does not follow that there is any arrangement of tax avoidance or tax evasion on the facts of this case. This being the case, proviso (iii) to Section 4(1)(a) would not be applicable. Further, it would also not be applicable for the reason that there is no predominance of sales by Detergents India Limited to Shaw Wallace. As has been 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 atlength has been rebutted.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 theorders 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.