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

The facts further show that Detergents India Limited, now Henkel Marketing India Limited, was at the relevant time a subsidiary of Shaw Wallace and Company Limited. Both were public limited companies. Shawsubsidiary companies held 57% of the paid up share capital of Detergents India Limited, making Detergents India Limited a subsidiary of Shaw Wallace as understood by the definition ofcontained in the Companies Act, 1956. 90% of the manufacturing capacity of Detergents India Limited was to manufacture various products for Hindustan Lever Limited which were then branded with Hindustan Lever names in small packs. A processing charge was paid by Hindustan Lever Limited for this job work, and it is clear that different processing charges were paid depending upon the size of the product and the product itself. The excess 10% capacity which was not mopped up by Hindustan Lever was sold to Shaw Wallace, its holding Company. Various other manufacturers/sellers also sold the same and similar products to Shaw Wallace and Company. A large number of these manufacturers were not subsidiary companies of Shaw Wallace and indeed had no business relationship with Shaw Wallace other than the sale of these products. It was pleaded as a fact that the price paid by Shaw Wallace and Company for the purchase of the same/similar products from the other firms/companies was less than the price paid to Detergents India Limited. This can be found as a fact in theorder dated 7.11.2000 in Civil Appeal Nos.6166-6168 of 2004 in which the following fact was pleaded before the learnedprocures only a part of its requirement from DIL and there are various other independent manufacturers like M/s Deepti Chemicals, Kanpur, M/s Geeta Chemicals, Unnao, M/s Kari Detergents, Muzaffarnagar, M/s Standard Surfactants, Kanpur, M/s Jaina detergents, Kanpur, M/s Sara Soaps, Kanpur, M/s Venkteshwar Detergents (P) Limited, Hyderabad and M/s Varuna Detergents, Kanpur. There is no allegation that any of these companies are related to SWC. In fact, the price charged by these independent manufacturers to SWC is lower than the price charged by DIL. As held in 1989 (43) ELT 401 (Bom) in Dawn Apparels Limited, the price charged by the subsidiary company to the holding company is not rejectable merely on the ground of such relationship of subsidiary and principal in the absence of any evidence of low price having been charged or any favourable treatment accorded. In the present case, the Department has not produced any material to show that their price to SWC is not the normal price.It was also pleaded that processing charges of different products were different. This is to be found in the very show cause notice dated 26.3.1997 with which we are concerned asFile bearing Nos. 45 and 71 seized from the factory at Kodur on 16.5.1995 were shown to him and he was asked to explain in detail about the audit reports of M/s. SWC available in that file. He explained that he had seen the internal audit report of M/s. SWC dated 2.4.1993 from page No.37 to 58 in file No.45 and added that M/s. SWC were periodically conducting audit (M/s. SWC being the holding company) of the functioning of M/s. DIL, Kodur which was its subsidiary to control and monitor the activities of its subsidiaries. When enquired he stated that the processing charges paid by M/s. HLL to M/s. DIL is Rs.1,200 per MT upto 1994 and later M/s. HLL reduced the processing charges to Rs.1125 per MT: that for the goods supplied to M/s. SWC, M/s. DIL used to file the price list with the Central Excise Department after mutually agreeing with M/s. SWC taking into account the raw material landed cost and the processing charges; that every month M/s. DIL were sending landed cost of raw material and packing material monthwise to M/s. SWC; that the processing charges was mutually agreed to be Rs.800 per MT during 1992 and 1993 and it was Rs.900 per MT during 1994, Rs.950 per MT during 1995, Rs.1125 per MT during 1996 for detergent cakes; that the processing charges for Hand Mix Check Powder to M/s SWC was Rs.400 per MT, Rs.1850 for Spray dried powder during 1992 to 1996; that the processing charges charged to M/s. HLL for spray dried sunlight detergent powder was Rs.2,100 per MT; that the processing charges for both Chek detergent powder and sunlight detergent powder are similar; that the packing style for Sunlight detergent powder varies from packing of Chek detergent powder, the difference being Chek Powder was packed in bulk quantities more and in the case of Sunlight powder the entire packing was in 500 Gms. Only; that in respect of detergent cakes made for M/s. SWC and M/s. HLL, the processing is similar and the size of the cake was given according to the requirement; that however, in the agreement with M/s. HLL for processing on job work basis there was no mention about the size of the detergent cake oris on these facts that the present appeals have to be decided.

Court's reasoning:
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.