Case: Snow White Industrial Corporation, Madras Vs. Collector Of Central Excise, Madras

2. The appellants are the manufacturers of Supercem Waterproof Cement Paint , hereinafter called as the Product , and other allied products in their factory at Madras. They manufacture and market this product throughout India. It is stated that the appellants are a small manufacturing firm with no branches and/or sales offices in any other State, city or town. In these circumstances, an agreement for sale described as an agreement of sale dated 1st May, 1962 was entered into with Gillanders Arbuthnot & Co. Ltd., of Calcutta, hereinafter called Gillanders . The said company has a very big sales organisation having its offices located at all important places in the territory of Union of India and they market goods of all types, not only of the appellants herein, but also of several other reputed manufacturers through their well staffed offices in all the States of India. The appellants vide their letters dated 23rd April, 1979 and 15th May, 1980 to the Excise authorities, had claimed a refund of Rs. 2, 39, 153.63 on account of excess excise duty paid on the assessable value on the basis of price at which the Gillanders had sold the products to its customers, during the period July, 1977 to March, 1979. Both the Assistant Collector by his order dated 29th May, 1980 and the Collector by his order dated 24th March, 1981 rejected the contention of the appellants and held that the assessable value is the price at which Gillanders sold the goods.The Tribunal in its order dated 20th January, 1984 referred to relevant clauses in the said agreement dated 1st May, 1962 and came to the conclusion that it was abundantly clear from the conditions that the title to and the ownership in the goods consigned to Gillanders was not to pass to them. According to the Tribunal a sine qua non of a sale is that the title should pass from the seller to the purchaser. When once that were not so, according to the Tribunal, then it was futile to contend that it was an agreement for sale. The Tribunal on an analysis of conditions of agreement, came to the conclusion that the true character of the agreement was that it was an agreement for sole selling agency and not an agreement for sale. The Tribunal also referred to the expression a related person in the definition given by Section 4(4)(c) of the Act and held that Gillanders was a related person and, therefore, the assessable value of the goods for levy of excise duty must be on the basis of the price at which Gillanders ordinarily sold these in the course of wholesale trade less the transportation cost and other permissible deductions such as duty of excise and sales tax, if any, subject to proof. Aggrieved thereby, the appellants have come up in this appeal to this Court4. In the said agreement, the appellants have been described as a partnership firm carrying on business at Madras and referred to as The Manufacturer and Gillanders of Calcutta described as The Selling Agents . The agreement, inter-alia, stated that the selling agents had agreed to stock adequate quantities of the product for the purpose of sale thereafter. The manufacturer however agreed to accept return of all stocks held by the selling agents for a period of more than two years and replace such stocks free of all charges, provided the lids of the containers were intact and sealed. The agreement further stated that all consignments would be despatched by the manufacturer at Railway risk. In case there was any damage or shortage in transit the selling agents would lodge a claim on the Railways, provided, however, that the manufacturer should take all suitable actions for recovery of the damages from the Railway authorities and should reimburse the selling agents all losses and damages that they might suffer in the premises. It was further agreed that in consideration of the premises, the manufacturer should pay the selling agents a discount, namely, 17-1/2% on the transfer prices of all materials supplied against the orders received from the selling agents from its offices at Calcutta, Kanpur, Delhi and Bombay; 18% on the transfer prices of all materials supplied against the orders received from the selling agents from its Madras Office. It also provided for an additional cash discount of 1-1/2% on the net transfer price, that is to say, transfer price less the discount specified above provided the selling agents paid the price of the goods supplied by the manufacturer within 30 days from the date of the bills by the manufacturer in respect of orders placed by the selling agents from its offices at Calcutta, Bombay, Madras and Delhi and within 45 days from the date of the bill by the manufacturer in respect of orders placed by the selling agents from its Kanpur office. It also provided for an additional turnover discount of 1% on the transfer prices over and above the discount specified above provided the total sales calculated at the selling prices exceeded Rs. 4 lakhs per annum and 1-1/2% on the transfer prices on such amount exceeding Rs. 4 lakhs per annum. In calculation of the turnover figure of Rs. 4 lakhs, the orders received by the manufacturer directly from the Government would not be taken into consideration. The manufacturer would normally, the agreement provided, expect the selling agents to pay all bills within 60 days from the date of such bills to the selling agents. The selling agents agreed to send to manufacturer the necessary C Declaration Forms under the Central Sales Tax Act as quickly as possible in respect of sales made directly to the selling agents. The manufacturer further agreed to supply the selling agents with all necessary publicity materials and to advertise at their own cost at regular intervals through the media of the daily press, trade journals, Government publications and cinema slides and in all such advertisements should mention that the selling agents were the sole selling agents of the products. The manufacturer also agreed to supply the selling agents reasonable quantities of sample free of charge. All expenses such as godown rent, transport charges, postal and telegram charges, bank commission etc., connected with the sales of the products, it was stipulated, would be borne by the selling agents. It was, inter-alia, provided that the selling prices and transfer prices of the product would be mutually agreed to from time to time between the manufacturer and the selling agents. Current selling prices and transfer prices were set out in the schedule to the agreement. It was stipulated also that the selling agents might allow any discount to any dealer at their discretion. The manufacturer agreed to execute and despatch orders to all dealers outside the State of Madras, provided firm instructions were received to that effect from the selling agents, to eliminate unnecessary handling charges. The agreement provided that in such cases, the manufacturer would credit the selling agents with their usual commission after deducting therefrom any discounts which might be allowed to the dealer on the specific instructions of the selling agents. The manufacturer further agreed to execute such orders against the guarantee of the selling agents. In the case of direct orders to dealers outside the State of Madras, the selling agents might quote either F.O.R. station of despatch or destination terms. If the goods supplied by the manufacturer were found to be sub-standard goods or inferior in quality the manufacturer should at his own cost take back the goods and replace the goods of satisfactory marketable quality at its own cost. The manufacturer should not be responsible for failure to deliver or for any delay in delivery if such failure or delay was due to act of God or enemies of the State, wars, revolution, embargo, riots, civil or political disturbances, strikes, lockouts declared due to circumstances beyond the control of the manufacturer, shortage of labour, cut or failure of power supply or service, force majeure or any other cause beyond their control. The agreement, it was stipulated by clause 19 thereof, would remain in force for one year from the date of the agreement. But the parties had the right to terminate the agreement by giving three months notice in writing to either side. It was further stipulated that if the agreement was terminated whether by the manufacturer or by the selling agents, the manufacturer should accept return of all unsold stocks lying with the selling agents at their various branches and to reimburse the selling agents with the net value of such stocks at the transfer prices in force on the date of the termination of the agreement. There was arbitration clause and other clauses which are not material for the present purpose5. The Tribunal analysed the agreement and emphasised that Gillanders were described as sole selling agent of the product of the appellants throughout India. It also noticed that the appellants were to supply to the Gillanders with advertisement material. The Tribunal also noted the clause which provided that the stocks left over unsold beyond two years from their receipt with Gillanders could be returned to the appellants who were bound to replace these. The Tribunal noticed that it was not the appellant who was to prefer claims for recovery of damages from the carriers. The Tribunal referred to the clause which stipulated that Gillanders were to promote sales of the product throughout India and were not to handle sales of any other material likely to conflict with the sales of the appellants product. It noted that any reduction in price during the currency of the agreement was to be duly reflected in the price of stock lying unsold with Gillanders. Although, the appellants retained the right of sale directly to large Government consumers, Gillanders were to follow up such transactions and were to be paid an over-riding commission of 2-1/2%. Where, however, Gillanders tendered for Government supplies and followed it up, they were to be paid a commission of 5%. In all other cases, they were to earn a commission, described, however, as a discount and additional cash discount apart from total sales discount in case where total sales exceeded Rs. 4 lakhs, on the orders received from Gillanders. The Tribunal also referred to the clause which provided that on termination of the agreement by either party, unsold stocks lying with the Gillanders were to be returned to the appellants. On an analysis of the aforesaid aspects of the clauses, the Tribunal came to the conclusion that the title to and ownership of goods, continued with the appellants and did not pass to the Gillanders. In order to be sale, the title should pass from the seller to the purchaser for a price. If it is not so, the Tribunal noted, then it was not sale. The Tribunal came to the conclusion that it was an agreement for sole selling agency and not an agreement for sale. The question is whether the Tribunal was right on this aspect.

Reasoning: 12. Our attention was also drawn to the observations of this Court in Union of India and Others v. Bombay Tyre International Ltd. -1983 E.L.T. 1896 (S.C.) = 1984 (1) SCR 347  where this Court explained the purpose of the introduction of related person in the new Section 4(4)(c) and the transactions of related person covered under Section4(4)(c)of theAct after amendment. In that context, it was contended that where there was such relationship independentof thetransaction in question which conferred certain additional or extra-commercial advantages only on the persons involved in such relationship could be considered to be related persons. It was submitted that in the instant case that was not so. Our attention was drawn to the observations of this Court in Union of India and Others v. Atic Industries Ltd. -1984 (17) E.L.T. 323 (S.C.) = 1984 (3) SCR 930 , at page 937of thereport, where this Court held that on a proper interpretationof thedefinition of related person in Section, the words relative and a distributorof theassessee did not refer to any distributor but they were limited only to a distributor who was a relativeof theassessee within the meaning ofthe Companies Act, 1956. So read, the definition of related person was not unduly wide and did not suffer from any constitutional infirmity. This Court explained the nature of relationship required by the persons to have interest directly or indirectly in the business of each other under Section 4(4)(c)of theAct. Our attention was also drawn to the observations of this Court in Collector of Central Excise, Madras v. T.L Millers Ltd., Madras and T.I. Diamond Chain, Madras -1988 (35) E.L.T. 8 (S.C.) = 1988 SCC Supp. 36113. Having regard however to the fact that we have come to the conclusion that the Tribunal was right in holding that the transaction with the Gillanders was not a transaction of sale but an agreement for agency, there was, therefore, no sale in favour of Gillanders as contended for by the appellants. If that is the position, then the first sale was by the Gillanders to the customersof themarket. Then the price of that sale would be the assessable value under Section 4 in this case. The decisionof theTribunal is, therefore, right in any viewof thematter, and this other aspectof thematter referred to by the Tribunal is not necessary for us to determine to dispose of this appeal. In that viewof thematter, the decisionof theTribunal must be upheld. Therefore, we areof theopinion that subject to the order passed in that review matter, such deductions, as may ultimately be held to be deductible be permitted to the appellants upon proof7. It is well settled that in a situation like this, whether there was an agreement for sale or an agreement of agency, must depend upon the facts and the circumstances and the terms of each case. Such facts and terms must be judged in the backgroundof thetotalityof thecircumstances. All the terms and conditions should be properly appreciated. It is also correct that though the appellants described the Gillanders as selling agent, but that is not conclusive. And it is also correct to state that the differenceof theprices between the transfer and the selling prices is suggestive of an outright sale. In W.T. Lamb and Sons. v. Goring Brick Company Ltd. (1932 (1) KB 710), by an agreement in writing certain manufacturers of bricks and other building materials appointed a firm of builders merchants sole selling agents of all bricks and other materials manufactured at their works . The agreement was expressed to be for three years and afterwards continuous subject to twelve months notice by either party. While the agreement was in force, the manufacturers informed the merchants that they intended in the future to sell their goods themselves without the intervention of any agent, and thereafter they effected sales to customers directly. In an action by the merchants against the manufacturers for breackof theagreement, it was held both by Justice Wright in the Trial Court and on appeal by the Court of Appeal, that the effectof theagreement was to confer on the plaintiffs the sole right of selling the goods manufactured by the defendants at their works, so that neither the defendants themselves nor any agent appointed by them, other than the plaintiffs, should have the right of selling such goods.