Job-work valuation depends on arm's length dealing, not routine control clauses or depot sale price.

In a job-work arrangement, ordinary clauses on production schedules, quality control, inspection, rejection of defective goods and disclosure of costing data do not by themselves create a related-person relationship. Such status arises only where the agreement shows direct or indirect financial interest, cross-holding, all-pervasive control, or another extra-commercial device that destroys arm's length dealing. Where the job-worker has its own plant, machinery, labour and independent activity and receives only job charges, the parties remain on a principal-to-principal basis. Valuation must then follow the job-work formula of raw material cost plus job charges and profit, not depot sale price.

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Issues: Whether the job-worker and principal manufacturer were related persons so as to displace valuation under the job-work formula and require assessment on the depot sale price.

Analysis: The agreement was examined to determine whether its clauses created direct or indirect financial interest in each other's business or showed that the job-worker functioned as hired labour of the principal manufacturer. The Court noted that the job-worker had its own plant, machinery, labour and independent business activity, received only job charges, and there was no evidence of any financial flow back, all-pervasive managerial control, cross-holding, or use of the arrangement as an extra-commercial device. Clauses relating to production schedule, quality control, inspection, rejection of substandard goods, and disclosure of costing data were treated as ordinary commercial safeguards in a job-work arrangement and not as indicators of a related-person relationship.

Conclusion: The parties were not related persons and their dealings were on principal to principal basis; valuation had to be made on the basis of raw material cost plus job charges and job-worker's profit, not the depot sale price.

Final Conclusion: The impugned valuation and penalties based on related-person treatment could not be sustained, and the appeals succeeded.

Ratio Decidendi: In a job-work arrangement, ordinary quality-control, production-schedule, inspection and cost-disclosure clauses do not by themselves establish related-person status; such status arises only where the arrangement shows direct or indirect financial interest or other extra-commercial control destroying arm's length dealing.

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