2010 (11) TMI 38 - SC - Central Excise

Supreme Court affirms ice cream companies not 'related persons' for tax valuation

CCE, CHANDIGARH Versus KWALITY ICE CREAM CO.

The Supreme Court upheld the Tribunal's decision that M/s. Kwality Ice Cream and BBLIL/HLL are not 'related persons' for computing the assessable value of ... Related Persons / related party - valuation - Held that: it appears what is important is that each of the parties involved should have an interest, whether direct or indirect in the business of each other - The Tribunal upon meticulous analysis of the terms and conditions of the agreement found that the price was being fixed on the basis of the formula agreed between the parties - The Tribunal rightly arrived at the conclusion that pricing in terms of clause (6)(iii) would not lead to the conclusion that the transaction was not one between principal to principal. - M/s. Kwality Ice Cream and BBLIL are not `related persons'. The transaction between them is of the nature of principal to principal and the price was the sole consideration for the sale of goods. Therefore, the assessable value cannot be computed on the basis of the price at which BBLIL sold the product from its depot. Issues Involved:1. Whether M/s. Kwality Ice Cream Company and Brooke Bond Lipton India Limited (BBLIL), later merged with Hindustan Lever Limited (HLL), are to be treated as 'related persons' for computing the assessable value of ice cream.2. Whether duty should be demanded from M/s. Kwality Ice Cream based on the price at which BBLIL sold the product from its depot.Issue-Wise Detailed Analysis:1. Relationship Between M/s. Kwality Ice Cream and BBLIL/HLL:The central question was whether M/s. Kwality Ice Cream and BBLIL/HLL are 'related persons' under Section 4 of the Central Excise Act, 1944. According to the Act, 'related person' means a person who is so associated with the assessee that they have interest, directly or indirectly, in the business of each other.Arguments from M/s. Kwality Ice Cream:- The transactions were on a principal to principal basis.- The price was the sole consideration for the sale of goods.- The price was determined based on a formula provided in the agreement, not exclusively by BBLIL.Arguments from the Department:- The entire transaction was controlled by BBLIL/HLL, indicating a lack of autonomy for M/s. Kwality Ice Cream.- The presence of interest-free deposits and control over pricing mechanisms suggested mutual interest in each other's business.Tribunal's Findings:- The Tribunal concluded that the transactions were on a principal to principal basis.- The price was fixed based on a mutually agreed formula, not solely by BBLIL.- There was no evidence of mutual interest in each other's business to classify them as 'related persons.'Supreme Court's Analysis:- The Court examined various precedents, including Union of India vs. Bombay Tyre International Ltd. and Union of India vs. ATIC Industries Ltd., which emphasized the need for mutual interest in each other's business to be considered 'related persons.'- The Court found that the relationship between M/s. Kwality Ice Cream and BBLIL/HLL was one-sided, lacking the required mutual interest.- The clauses in the agreement did not indicate that M/s. Kwality Ice Cream was under the control of BBLIL/HLL or that there was any interdependence beyond a typical commercial relationship.2. Computation of Assessable Value:The next issue was whether the assessable value of ice cream should be computed based on the price at which BBLIL sold the product from its depot.Department's Contention:- The Department argued that the price at which BBLIL sold the product should be the basis for assessing the value.Tribunal's Findings:- The Tribunal held that since the transaction was on a principal to principal basis and the price was the sole consideration, the assessable value could not be computed based on BBLIL's depot price.Supreme Court's Analysis:- The Court upheld the Tribunal's view, stating that the assessable value should be based on the price agreed upon between M/s. Kwality Ice Cream and BBLIL, as it was determined through a mutually agreed formula.- The Court reiterated that the price at which BBLIL sold the product from its depot could not be used for computing the assessable value since the parties were not 'related persons.'Conclusion:The Supreme Court dismissed the appeals, affirming the Tribunal's conclusion that M/s. Kwality Ice Cream and BBLIL/HLL are not 'related persons.' The transaction was found to be on a principal to principal basis, and the price was the sole consideration for the sale of goods. Therefore, the assessable value could not be computed based on the price at which BBLIL sold the product from its depot.