2015 (4) TMI 358 - SC - Central Excise

Revenue appeals dismissed: Section 4 proviso applies only when three specific conditions met for related person sales valuation

The SC dismissed Revenue's appeals regarding valuation under Central Excise and Salt Act Section 4. The court held that proviso (iii) applies only when ... Valuation - normal price - implications for valuation in the course of wholesale trade - Applicability of Section 4(1)(a) proviso (iii) and Section 4(4)(c) of the Central Excise and Salt Act as they stood prior to the 2000 amendment of Section 4 - Evasion of duty - Meaning of “related persons”. HELD THAT:- The “arrangement” spoken of in the proviso must be something by which the assessee and the related person “arrange” that the goods are sold at something below the normal price, so that tax is either avoided or evaded by such arrangement. Secondly, the expression “generally” also shows that such goods must predominantly be sold by the assessee to or through the related person - in mathematical terms, sales that are to or through a related person must consist of at least 50% of the goods that are manufactured and sold. The expression “to or through a related person” again goes back to the “arrangement” and is another way of saying that such sale can be effected directly to or indirectly through such related person. It is only when all three considerations are cumulatively met that proviso (iii) can be said to be attracted. When we come to the definition of “related person” the legislature has used a well known technique. It first employs the expression “means” and states that persons who are associated with the assessee so that they have a direct or indirect interest in the business of each other would get covered. The definition then goes on to use the expression “and includes” thereby indicating that the legislature intends to extend the definition to also include various persons that would not otherwise have so been included. These include a holding company, a subsidiary company, a relative and a distributor of the assessee and any sub-distributor of such distributor. The necessity for including holding and subsidiary companies as defined under the Companies Act, 1956 is to lift the corporate veil in order to get to the economic realities of the transaction. On a reading of the judgment of Voltas’s case [1972 (12) TMI 37 - SUPREME COURT], it becomes clear that the object of enacting Section 4 is that transactions at arm’s length 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 the “normal price” of 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 as arm’s length 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 the “normal price” under 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. 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. 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. 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. The appeals by Revenue are devoid of merit and are accordingly dismissed. There shall be no order as to costs. 1. ISSUES PRESENTED and CONSIDEREDThe primary issues considered in these appeals relate to the interpretation of Section 4(1)(a) proviso (iii) and Section 4(4)(c) of the Central Excise and Salt Act, prior to its amendment in 2000. Specifically, the court examined:The definition of 'related person' and whether Shaw Wallace and Detergents India Limited (DIL) qualify as such under the Act.The determination of the assessable value of goods sold by DIL to Shaw Wallace, considering whether the transaction price should be based on sales to related persons or the market price.The applicability of proviso (iii) of Section 4(1)(a) concerning sales to or through related persons.The validity of penalties imposed on Shaw Wallace and DIL by the Commissioner.2. ISSUE-WISE DETAILED ANALYSISDefinition of 'Related Person'Relevant legal framework and precedents: Section 4(4)(c) defines a 'related person' as someone associated with the assessee such that they have a mutual interest in each other's business. The definition includes holding and subsidiary companies.Court's interpretation and reasoning: The Court emphasized that the definition of 'related person' employs a de jure test for holding and subsidiary companies, allowing the corporate veil to be lifted to examine the economic realities behind transactions.Key evidence and findings: Shaw Wallace held 57% of DIL's share capital, making DIL a subsidiary. However, the Court found no evidence of mutual interest impacting business dealings.Application of law to facts: The Court determined that Shaw Wallace and DIL were related persons due to their corporate relationship but found no arrangement to manipulate prices.Treatment of competing arguments: The Revenue argued for a broad interpretation, while the appellants emphasized the absence of mutual interest affecting transactions. The Court sided with the appellants.Conclusions: Shaw Wallace and DIL are related persons, but this does not automatically imply price manipulation for tax evasion.Assessable Value and Proviso (iii) of Section 4(1)(a)Relevant legal framework and precedents: Proviso (iii) applies when goods are generally sold to or through a related person, suggesting a price arrangement below the normal market price.Court's interpretation and reasoning: The Court held that proviso (iii) requires an arrangement leading to a depressed price and that sales to related persons must be predominant (at least 50% of total sales).Key evidence and findings: Only 10% of DIL's production was sold to Shaw Wallace, with no evidence of price depression compared to unrelated buyers.Application of law to facts: The Court found that the conditions for applying proviso (iii) were not met, as there was no predominant sale to Shaw Wallace nor evidence of price manipulation.Treatment of competing arguments: The Revenue's comparison of prices paid by Hindustan Lever and Shaw Wallace was deemed irrelevant due to different products and processing charges.Conclusions: Proviso (iii) was not applicable, and the price paid by Shaw Wallace was considered the normal price for valuation.Penalties Imposed on Shaw Wallace and DILRelevant legal framework and precedents: Penalties were imposed under Rule 209A, which requires specific conditions to be met.Court's interpretation and reasoning: The Court noted that the necessary conditions for imposing penalties were not mentioned in the show cause notice against Shaw Wallace.Key evidence and findings: The Tribunal had already set aside the penalties, and the Court found no basis to disturb this finding.Application of law to facts: The absence of specific allegations in the show cause notice rendered the penalties unjustified.Treatment of competing arguments: The Court did not find it necessary to delve into detailed arguments on penalties due to the dismissal of Revenue's appeals on merits.Conclusions: Penalties on Shaw Wallace and DIL were not warranted and were rightfully set aside by the Tribunal.3. SIGNIFICANT HOLDINGSCore principles established: The definition of 'related person' under Section 4(4)(c) includes holding and subsidiary companies without the need for mutual interest in business dealings. Proviso (iii) applies only when there is an arrangement to depress prices and sales to related persons are predominant.Final determinations on each issue: The Court concluded that Shaw Wallace and DIL are related persons, but there was no price manipulation. Proviso (iii) was not applicable due to the lack of predominant sales and absence of price depression. Penalties imposed on Shaw Wallace and DIL were unjustified and set aside.Verbatim quotes of crucial legal reasoning: 'The necessity for including holding and subsidiary companies as defined under the Companies Act, 1956 is to lift the corporate veil in order to get to the economic realities of the transaction.' 'Proviso (iii) then deals with the price that is to be taken into consideration in case sales are made to related persons. Three basic ingredients are necessary before proviso (iii) gets attracted.'