Case: M/S. Biostar Pharmaceuticals Limited &amp; Another Vs. The State of Maharashtra &amp; Others

3. The facts lie in a very narrow compass. The petitioners before us manufacture a product known as Betonin. The first petitioner is in the business, inter alia, of manufacturing and sale of various drugs and pharmaceutical products. One of the products is Betonin 200 ml. and 450 ml., which is referred to as the said goods hereafter, which is a sugar freeElixir (syrup) administered to patients suffering from vitamin B deficiency and especially to diabetic patients.4. The respondents to these petitions are the State of Maharashtra and the officials empowered by the Medicinal and Toilet Preparations (Excise Duties) Act, 1995 to recover duties of excise on the said goods, as the same contain alcohol.5. The petitioners state that they filed a price list in respect of the said goods dated 1st July, 1994. It was duly approved by the second respondent, by his letter dated 28th September, 1994. Copies of these documents are annexed as Annexures A to D to the petition.6. Then, the petitioners received a letter dated 3rd January, 1995, in which, the second respondent stated that the prices of the said goods, declared by the petitioners in their approved price list of 1st November, 1994, were less than those previously declared by M/s. Boots on 15th July, 1993. Hence, the petitioners were called upon the explain why this reduction in price. The petitioners were informed to pay excess duty on differential price of the said goods, namely, a difference in the prices as per the price list of M/s. Boots dated 15th July, 1993 and that of the petitioners dated 1st November, 1994. Then, by 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 petitioners approved list of 1994 and therefore, a differential sum of Rs.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. 2 persisted in the demand and reiterated it by his letter dated 13th February, 1995, copy of which is at Annexure I. The second respondent also issued a notice to the petitioner to remain present in his office with the requisite documents on 6th March, 1995. The petitioners gave a detailed reply by their advocates letter dated 23rd February, 1995 and refuted the allegations and disputed the demand. A copy of this letter is at Annexure K to the petition.8. Then, there was another demand raised in the sum of Rs.42,90,996/for the period from 1st July, 1994 onwards. The petitioners state that every information having been furnished, explanation provided, the demand ought to have been withdrawn. However, the second respondent insisted on compliance with his requisitions. The petitioners being aggrieved and dissatisfied with the demand and the communications from respondent no. 2, preferred an appeal before the Commissioner of State Excise and applied for a stay. That was because the petitioners licence was in jeopardy. It was threatened to be cancelled. That is why an interim stay was sought and a direction to renew the licence. It is stated that on 19th April, 1995, the licence was directed to be renewed by the said Commissioner. Thereafter, theauthority was called upon the renew the licence. The second respondent, despite such position, could not direct the officials reporting to him to renew the licence. It is in these circumstances that the petitioners had to approach this court. The petitioner had, in the absence of a licence, been forced to discontinue the sales and when the prices were not approved and the matter was kept pending, there was a threat of virtual closure of the business. It is in these circumstances that the petitioners contended that the revised price list, as approved by the second respondent on 3rd January, 1995 being not acceptable that the petitioners decided to press their appeal or to approach this court in writ jurisdiction. Finding that even the appeal was not being heard, they moved this court. This court protected the petitioners by directing that the second respondent should decide the appeals and in the event his decision is adverse to the petitioners interest, the same should not be enforced and executed for a period of one week. Thus, the appeal was 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 Rs.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 pagesof 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 with Borachem Industries, a sister concern of the petitioners. The manufacturing by M/s. Boots continued till 31st March, 1994, on which date, as the licence expired, M/s. Boots surrendered the same on 14th June, 1994. In that case, the excise duty liability was calculated on the basis of the price list of M/s. Boots. In order to reduce their liability in respect of the excise duty, M/s. Boots have entered into various documents and agreements with the petitioners and the petitioners have also in turn entered into agreements in such a crafty manner that the burden of excise duty could be avoided. The petitioner applied, in March, 1994, for a licence to manufacture a syrup known as Bonitone with same ingredients as Betonin. However, they never manufactured such a product though a licence was granted. Then, the petitioners made an application for change of the name of the product from Bonitone to Betonin and that application was granted on the basis of the arrangement with M/s. Boots. M/s.Boots transferred the brand name and property rights thereof to one Zest Pharmaceutical Ltd. along with brand name of other products for a paltry sum of Rs.The said Zest Pharma, on the same day, transferred the user licence of the said brand name of Betonin in favour of the petitioners. Hence, the petitioner started manufacturing the earlier product of the Boots, namely, Betonin as its own as per the arrangements in their own factory. This factory was earlier used by Borachem Industries. The price list was approved in respect of the product Betonin, when it was manufactured by M/s. Boots. The details of the price list and the price pack size are set out at pagesof the paper book in the affidavit in reply of the respondents. The said respondent, on verification, found that the same products manufactured by the petitioners were charged less in their price list, which was approved, much below that of M/s. Boots. It is for that reason that the petitioners were called upon to furnish an explanation and to the demand of the differential sum. The second respondent could not obtain any particulars from the petitioners and therefore, based on the information available with him and from the market, he raised the demand andthe arrears of duty liability at Rs.42,90,996.00. That is how the petitioners were called upon to pay the sum. The 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 asI 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 alcohol as part of its ingredients. By virtue thereof, the excise duty on the said products was being levied and collected by the Central Excise Department. The said medicinal products were also being sold by Petitioner No. 1 to Abbott inter alia, as is the case in the captioned writ petition where the Respondents have sought to hold Petitioner No. 1 and Abbott as related persons under the Act for the sale of Betonin.

Reasoning:
32. In this judgment, the Honble Supreme Court of India analysed the amended provision of section 4(4)(3)(b) and concluded that the assessee became the fully owned company of Goodyear, the relationship between the two would be that of related persons as they became interconnected undertakings and are covered 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 AmarLtd. 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 Commissioners conclusion iscontrary thereto. It is wholly unsustainable in law. Before us, the Commissioner applies a test which defies even commonsense. He comes to a conclusion that M/s. Boots were manufacturing their product Betonin under the licence granted to them at the premises of Borachem Industries. These are the same premises where Biostar is now producing these goods and supplying to M/s.Boots. Even when M/s. Boots was the manufacturer, the production was done by Borachem Industries Ltd. on job work basis. It is significant that when M/s. Boots surrendered its licence and Biostar obtained it for manufacture of Betonin, four directors were common in Biostar and Borachem Industries Ltd. The further criteria or test that he applies and which appears to be a little strange is that M/s. Boots are the owners of the trade mark Betonin. It sold the same to Zest Pharma on 1st October, 1993 and the Zest Pharma, in turn allowed the use of this trade mark to Biostar by an agreement of the same date and that too without charging any royalty or any other remuneration from Biostar. This clearly shows that M/s. Boots and Biostar had commercial interest in common and are interrelated. We cannot uphold this conclusion on the touchstone of the legal principles enunciated in detail above. Merely because M/s. Boots is the sole distributor, is selling the entire production of the petitioner with unusually big margin between so called manufacturers price and the price the goods can fetch in the market is termed as unusual, coupled with making available the trade mark of the goods by M/s. Boots, does not mean that petitioner no. 1 and M/s. Boots are related persons. The test applied in para 7.0(a) cannot, therefore, be enough for holding that section 4(4)(c) of the Act is attracted. For that to be attracted, it is evident that the Commissioner would have to conclude that M/s. Boots is so associated with petitioner no. 1 that they have interest, directly or indirectly, in the business of each other. We find that the Commissioner seems to be indicating that the transaction to be termed at arms length would require the parties to be so unrelated and independent, but M/s. Boots, who is the sole distributor and selling the entire production of petitioner no. 1 with an unusually big margin would necessarily mean that there is an interest in the business of each other and which interest could be direct or indirect. The law, as laid, is that being a sole distributor is not enough to hold that the manufacturer 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(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 interest is not established and proved. The interest in this case is that of a buyer and seller. The petitioners do not have any share holding in M/s.Boots and vice versa. 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. They are independent corporate legal entities. It is in these circumstances and when the entire business of manufacturing of the goods is carried out by the petitioners on their own supports our conclusion that petitioner no. 1 and M/s.Boots are not related persons. That there is a common director in Zest Pharma and M/s. Boots is entirely irrelevant for our conclusion, for we are considering and probing the legality and validity of the respondents reasoning that petitioner no. 1 and M/s. Boots are related persons.