1985 (2) TMI 42 - SC - Central Excise

Supreme Court overturns High Court decision, quashes Central Excise notice, orders refund to appellants.

The Supreme Court allowed the appeal, set aside the judgment of the Division Bench of the High Court, and quashed the notice issued by the Assistant ... Trade discount - related person - definition of 'related person' under Section 4(4)(c) - excisable value - principal to principal sale - deduction in determining excisable valueRelated person - definition of 'related person' under Section 4(4)(c) - Whether the dealers were 'related persons' vis-a -vis the appellants for the purpose of determining excisable value. - HELD THAT: - The Court examined the statutory definition and earlier decisions constraining the phrase to situations where the assessee and the other person each have an interest, direct or indirect, in the business of the other. The terms of the dealership agreement show wholesale purchases on a principal-to-principal basis, with dealers bearing risks of transit, retiring bills, maintaining sales and service infrastructure and training mechanics at their cost. There is no evidence that the appellants had any interest in the dealers' business or that the dealers had any interest in the appellants' business such that each had an interest in the other's business. Accordingly the dealers could not be treated as 'related persons' under the definition and the Division Bench erred in so holding. [Paras 5]Dealers were not 'related persons' vis-a -vis the appellants; excisable value could not be determined on prices at which dealers sold to consumers on that basis.Trade discount - excisable value - principal to principal sale - deduction in determining excisable value - Whether the amounts described as commission payable to dealers were trade discounts deductible in determining the excisable value of mopeds. - HELD THAT: - Irrespective of the label 'commission' in the agreement, the Court looked to the substance of the arrangement. The agreement established sales on principal-to-principal terms: bills sent through bankers to be retired by dealers, insurance in transit borne by dealers, and dealers' obligation to maintain sales and service organisation and bear training costs. The appellants charged dealers the price less the specified amounts, demonstrating that these amounts functioned as reductions from the dealer price. By their nature and operation these amounts constituted trade discounts and therefore were properly deductible from the price charged to dealers when arriving at the excisable value under the Act. [Paras 6]The amounts in question (Rs. 110/-, Rs. 145/- and Rs. 165/- per moped) are trade discounts and are deductible in determining the excisable value.Final Conclusion: Appeal allowed; judgment of the High Court set aside; notice and consequential order issuing demand of differential duty quashed; any sums paid to be refunded and bank guarantee discharged. Issues Involved:1. Whether the dealers were 'related persons' vis-a-vis the appellants.2. Whether the commission allowed to the dealers could be regarded as trade discount.Issue-wise Detailed Analysis:1. Whether the dealers were 'related persons' vis-a-vis the appellants:The appellants contended that there was no evidence to show that the dealers were related persons vis-a-vis the appellants. The concept of 'related persons' was introduced in the Act by the Amending Act 22 of 1973, defined in clause (c) of sub-section (4) of Section 4. This definition was considered in the Union of India v. Bombay Tyre International Ltd., where it was held that the term 'related person' is limited to a distributor who is a relative of the assessee within the meaning of the Companies Act, 1956. The appellants argued that the dealers were not relatives of the appellants within this meaning. The Department argued that the dealers were related persons as they were so associated with the appellants that they had an interest, directly or indirectly, in the business of each other. This part of the definition was considered in Union of India v. Atic Industries Ltd., where it was stated that both the assessee and the alleged related person must have an interest in the business of each other. The Court found that the appellants sold mopeds to the dealers on a principal-to-principal basis, and thus, neither party had an interest in the business of the other. Therefore, the dealers could not be considered related persons vis-a-vis the appellants. The Division Bench of the High Court erred in holding that the dealers were related persons. Consequently, the excise duty on the mopeds was to be determined based on the wholesale price charged by the appellants to the dealers.2. Whether the commission allowed to the dealers could be regarded as trade discount:The Division Bench of the High Court concluded that the commission of Rs. 110/-, Rs. 145/-, and Rs. 165/- per moped for different varieties could not be regarded as trade discount. Mr. Nariman, representing the appellants, argued that this commission was indeed a trade discount and should be deducted in determining the excisable value of the mopeds under sub-section (b)(ii) of Section 4 of the Act. The agreement between the appellants and the dealers was on a principal-to-principal basis, and the terms of the agreement supported this. Clauses 5(a) and 5(b) indicated that the dealers bore the responsibility for retiring bills and insuring the mopeds from the factory to their premises. Clause 6 required the dealers to maintain an organization for sale and service, including showrooms and service stations, at their own cost. The Court found that the relationship between the appellants and the dealers was clearly on a principal-to-principal basis. Therefore, the amounts of Rs. 110/-, Rs. 145/-, and Rs. 165/- allowed to the dealers were trade discounts and should be deducted from the price charged to the dealers to determine the excisable value of the mopeds.Conclusion:The Supreme Court allowed the appeal, set aside the judgment of the Division Bench of the High Court, and quashed the notice dated 15-5-1979 issued by the Assistant Collector of Central Excise and the order dated 25-9-1979 made in pursuance of that notice. Any payments made by the appellants under the order dated 25-9-1979 were to be refunded by the respondents within three months from the date of receipt of this order. The Bank Guarantee given by the appellants was to be discharged. There was no order as to costs.