Court rules distributors not related persons under Central Excises & Salt Act - excise duty overturned

KIRLOSKAR OIL ENGINES LTD. AND ANOTHER Versus UNION OF INDIA AND OTHERS

KIRLOSKAR OIL ENGINES LTD. AND ANOTHER Versus UNION OF INDIA AND OTHERS - 1986 (26) E.L.T. 504 (Bom.) Issues Involved:
1. Whether the distributors are 'related persons' within the meaning of Section 4(4)(c) of the Central Excises & Salt Act, 1944.
2. Whether the sales between the assessee and its distributors are at arm's length and on a principal-to-principal basis.

Issue-Wise Detailed Analysis:

1. Whether the distributors are 'related persons' within the meaning of Section 4(4)(c) of the Central Excises & Salt Act, 1944:

The primary contention revolved around whether the distributors of the assessee qualified as 'related persons' under Section 4(4)(c) of the Act. The Assistant Collector initially determined that the distributors were not 'related persons' based on the arm's length nature and principal-to-principal basis of the transactions. However, the Collector, upon review, disagreed and issued a notice to the assessee, suggesting that the distributors were 'related persons' and thus liable for excise duty based on the price at which the distributors sold the products to their constituents. The Collector's decision was based on various provisions in the distributor agreements that indicated a close association between the assessee and its distributors.

The Court examined the provisions of Section 4(4)(c) of the Act, which defines 'related person' in two parts:
1. A person who is so associated with the assessee that they have interest, directly or indirectly, in the business of each other.
2. A holding company, a subsidiary company, a relative, and a distributor of the assessee, and any sub-distributor of such distributor.

The Court referred to the Supreme Court decisions in Union of India v. Bombay Tyre International Ltd. and Union of India v. Atic Industries Ltd., which clarified that the term 'related person' does not include a distributor simpliciter unless the distributor is also a holding company, a subsidiary company, or a relative within the meaning of the Companies Act, 1956. The Court found that the Collector did not provide evidence that the distributors had mutual business interests with the assessee or that they fell into the categories specified in the Companies Act.

2. Whether the sales between the assessee and its distributors are at arm's length and on a principal-to-principal basis:

The Court analyzed the agreements between the assessee and its distributors to determine whether the transactions were at arm's length and on a principal-to-principal basis. The agreements contained provisions such as territorial restrictions, prohibition on selling competitive products, price fixing by the manufacturer, maintenance of service standards, and submission of sales reports. The Collector argued that these provisions indicated a relationship beyond a mere buyer-seller dynamic, suggesting an agency relationship.

However, the Court noted that similar provisions were present in the case of Moped India Limited v. Assistant Collector of Central Excise, where the Supreme Court held that such agreements were typical commercial arrangements dictated by business considerations and did not imply an agency relationship. The Court concluded that the agreements between the assessee and its distributors were standard commercial contracts and did not establish the distributors as agents of the assessee.

Conclusion:

The Court held that the distributors were not 'related persons' within the meaning of Section 4(4)(c) of the Act and that the sales between the assessee and its distributors were at arm's length and on a principal-to-principal basis. Consequently, the impugned order of the Collector was set aside, and the petition was allowed. The rule was made absolute in terms of prayer (a) with no order as to costs.