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PETITIONER: MOPED INDIA LTD.

       Vs.

RESPONDENT: THE ASSTT. COLLECTOR OF CENTRAL EXCISE, NELLORE AND OTHERS

DATE OF JUDGMENT26/02/1985

BENCH: BHAGWATI, P.N. BENCH: BHAGWATI, P.N. ERADI, V. BALAKRISHNA (J)

CITATION:  1985 SCR  Supl. (1) 954  1986 SCC  (1) 125  1985 SCALE  (2)1379

ACT:      Central Excise  and Salt  Act 1944:  Section 4(4)  (c)- ’related person’-who  is-Assessee and  person alleged  to be ’related person’  to have  interest direct  or  indirect  in business of each other.      Manufacturer  of   Mopeds-Mopeds   sold   to   dealers- Agreements for  sale entered  by manufacturer  with  dealer- Dealers  to  give  deposit  for  guarantee,  entitlement  to ’commission’ etc.-Transactions  on  principal  to  principal basis-Dealers-Whether ’related  person’-’Commission’ allowed to dealers-Whether  ’trade  discount’  whether  ’commission’ could be  deducted from  assessable  value  of  manufactured goods for purpose of excise duty.

HEADNOTE:      The  appellants   manufactured   Mopeds   under   three different brand  names. Mopeds  were liable  to excise  duty under the Central Excise and Salt Act, 1944. The bulk of the Mopeds manufactured  were delivered  to various  dealers  at depots maintained  by the appellants. The appellants entered into agreements  with these  dealers in  connection with the sale of  the Mopeds. The agreements provided that the dealer shall keep  a deposit with the appellants as a guarantee for due fulfillment  of the  agreement, that  the  dealers  were entitled to get a commission on each Moped, that the dealers were to  insure the  Mopeds against  all risks of pilferage, non-delivery etc.  (Clause 5), and that, the dealers were to maintain adequate  organisation for  sale and service of the Mopeds including  show-rooms, service stations, repair-shops etc. (clause 6).      The appellants submitted their price lists for approval to the  excise authorities  and the  price lists  showed the price charged  by the dealers after deducting the commission of Rs.  110, Rs.  145 and  Rs. 165  or the  three  different brands of  the Mopeds.  The price lists were approved by the excise  authorities   and  excise   duty  was  paid  by  the appellants on  the basis of these price lists at the time of clearance of  the Mopeds.  This practice continued till 30th April, 1979,  when the Assistant Collector of Central Excise took the  view that  the appellants  were  not  entitled  to deduction of the aforesaid commission from the price charged to the  dealers for  arriving at  the excisable value of the

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Mopeds. The Assistant Collector thereupon issued a notice of demand under  clauses (a)  and (b)  of  Rule  10(1)  of  the Central Excise  Rules, 1944  dated 15th  May,  1979  to  the appellants demanding  a sum  of Rs. 6,96,177.09 representing the  amount  of  differential  duty  in  respect  of  Mopeds manufactured and  cleared during the period 1st October 1975 to 30th April, 1979. 955      The appellants  assailed the aforesaid notice in a writ petition in  the  High  Court  contending,  that  they  were entitled to  deduction of  the  amount  of    commission  in arriving at  the excisable  value of the Mopeds and that the demands made  by the  Assistant Collector was not justified. The Division  Bench however  dismissed the writ petition and held that  the discount  of Rs. 110, Rs. 145 and Rs. 165 for the different  varieties  of  Mopeds  was  being  given  for organising  sale  and  providing  facilities  and  this  was clearly an example of the mutual interest which the ’related person’s and  the appellant  were having  in the business of each other,  and that the commission of Rs. 110, Rs. 145 and Rs. 165  in respect of the different varieties of Mopeds was not ’trade discount’ and therefore not liable to be deducted from the  price charged  to the  dealers and  the  Assistant Collector  was   right  in   making  the   demand  from  the appellants.      In the  appeal to this court it was contended on behalf of the  appellants that: (1) there was absolutely nothing to show that  the dealers  were related  persons vis-a-vis  the appellants and  that the  High Court  was clearly  wrong  in taking that  view, and  (2) the Division Bench was not right in taking  the view  that the  commission of Rs. 110, Rs 145 and Rs.  165 per Moped in respect of the different varieties of Mopeds  sold to the dealers could not be said to be trade discount.      Allowing the appeal, ^      HELD: 1.  The amounts  allowed to  the dealers  by  the appellants in  respect of  different varieties  of Mopeds of Rs. 110,  Rs. 145  and Rs.  165 were  clearly trade discount liable to  be deducted  from the price charge to the dealers for the  purpose of  arriving at  the excisable value of the Mopeds. [963G]      2. The judgment of the Division Bench of the High Court set aside.  The notice dated 15.5.79 issued by the Assistant Collector of Central Excise and the order dated 25.9.79 made in pursuance  of that  notice are  quashed. The  respondents will refund  to the  appellants any  payments  made  by  the appellants under the order dated 25th September, 1979 within 3 months [963H; 964A]      3. The  concept of  ’related person’  was for the first time introduced  in the Central Excise and Salt Act, 1944 by the Amending  Act 22  of 1974  and the  expression  ’related person’ came  to be defined in clause (c) of sub-section (4) of Section 4. [960G]      4. In  Union of  India v. Bombay Tyre International Ltd [1984] 1  SCC 467  it has  been held  that the definition of ’related’ person  in sub-section (4) (c) of Section 4 is not unduly wide  and does  not suffer  from  any  constitutional infirmity and,   Union of India v. Attic Industries Ltd, AIR 1984 SC  1495 that the person who is sought to be branded as a ’related  person’ must  be a  person who  is so associated with the  assessee that  they have  interest,  directly,  or indirectly, in  the business of each other. It is not enough that the  assessee has  an interest,  direct or indirect, in the business  of the  assesses. It  is  essential  that  the

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assessee and  the person  alleged to  be a  ’related person, must have  interest direct  or indirect,  in the business of each other. [961A; F-G] 956      In  the  instant  case,  the  terms  of  the  agreement indicate that  the dealers  where wholesale  buyers  of  the Mopeds  manufactured   by  the   appellants  and  since  the transactions between  them were  on principal  to  principal basis, the  dealers could  not, therefore,  be  said  to  be related persons vis-a-vis the appellants. The excise duty on the Mopeds  were hence  liable to  be determined only on the basis of  the wholesale  price charged  by the appellants to the dealers. [962 D-E]      5. The  amount allowed to the dealers has been referred to in  the agreement  as ’commission’ but the label given by the parties  cannot be  determinative because  it is for the court to decide whether the amount is trade discount, or not whatever be the name given to it. [963B]      In the  instant case,  the  clauses  of  the  agreement clearly show  beyond doulet  that under  the  agreement  the Mopeds were  sold by  the appellants  to the dealers and the dealers did  not act  as agents  of the  appellants for  the purpose of effecting sales on their behalf. It is clear from clause  5(a)  that  the  bills  in  respect  of  the  Mopeds delivered to  the dealers  were to be sent by the appellants through their  bankers and  it was the responsibility of the dealers to  collect the  bills for  the  purpose  of  taking delivery. Clauses  5(b) laid an obligation on the dealers to insure the Mopeds against all risks, pilferage, non-delivery etc. and  under  clause  (6)  the  dealers  were  liable  to maintain adequate  organisation for  sale and service of the Mopeds. The  Relationship between  the  appellants  and  the dealers was  clearly on  principal to principal basis and in these circumstances  the amount  of Rs. 110, Rs. 145 and Rs. 165 allowed  to the  dealers in  respect  of  the  different varieties of  Mopeds could not be regarded as anything other than ’trade discount’. [963 B-F]

JUDGMENT:      CIVIL APPELLATE  JURISDICTION: Civil  Appeal No.  52 of 1985.      From the  Judgment and  Order dated  27.9.1984  of  the Andhra Pradesh High Court in Writ Petition No. 7680 of 1979.      F.S. Nariman and K.R. Nambiar for the Appellant.      Gopal Subramanium and R.N. Poddar for the Respondents.      The Judgment of the Court was delivered by      BHAGWATI, J.  This appeal  by certificate  is  directed against a  judgment of a Division Bench of the High Court of Andhra Pradesh  upholding a  notice issued  by the Assistant Collector of  Central Excise, Nellore demanding a sum of Rs. 6,96,177.09 representing the 957 amount  of   differential  duty   in   respect   of   Mopeds manufactured  by  the  Appellants  and  cleared  from  their Factory during  the period  from 1st  October 1975 upto 30th April 1979.  The facts giving rise to the present appeal are few and may be briefly stated as follows:      The Appellants manufacture Mopeds under the brand names of Suvega  Standard, Suvega  Deluxe and Suvega Samrat. These Mopeds manufactured  by the  Appellants are liable to excise duty  under   the  Central   Excise  and   Salt  Act,  1944, (hereinafter referred  to as  the Act).  The appellants have 179 dealers  all over  the country to whom 98% of the Mopeds

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manufactured by  them are  sold. Not  more than  2%  of  the Mopeds are  delivered at  the Factory  gate; the bulk of the mopeds  representing  about  80%  of  the  manufactures  are delivered to the various dealers at the depots maintained by the appellants.  The Appellants have entered into agreements with the  dealers in  connection with the sale of the Mopeds manufactured by  them and these agreements are substantially in the  same terms  and it will, therefore, be sufficient if we  refer  to  a  specimen  agreement  for  the  purpose  of ascertaining the  terms and  conditions on  which the mopeds are supplied  by the appellants to the dealers. Clause 2 (a) of the  agreement provides  that the  dealer  shall  keep  a deposit of  Rs. 6,000 with the appellants as a guarantee for due fulfillment of the agreement and this deposit will carry simple interest at the rate of 4 1/2% per annum and clause 2 (b)  declares   inter-alia  that  upon  termination  of  the agreement,  the   balance  of  the  deposit  if  any,  after deducting  all  amounts  due  to  the  Appellants  shall  be returned to  the dealer  with interest.  Clause 3 (a) of the agreement is  material since  considerable reliance has been placed upon it on behalf of the Department. It reads as follows:           "The Dealer  will get  a  commission  of  Rs.  110      (Rupees one  hundred and ten only) for Suvega Moped and      Rs. 145(Rupees  one hundred  and forty  five only)  per      Suvega moped  fitted with  Shock Absorber which will be      introduced shortly." The Appellants  are entitled  to change  prices from time to time as  per clause  4 of  the  agreement  and  that  clause proceeds to add the Appellants shall not be bound to execute the order  pending execution with the dealer at the old rate and will be entitled to change the 958 price ruling  on the  date on  which the  moped  leaves  the factory or  stockyard of the Appellants. Clauses 5 and 6 are material for the purpose of determination of the controversy between the parties and they reads as follows:      5(a) "Unless  otherwise   agreed  specifically  to  all           deliveries to  the dealer  shall be  ex-factory in           unpacked condition  and the  bills/RB/LB/PWB shall           be sent through their bankers and all bank charges           thereon shall  be borne by the dealer. In case the           dealer does not honour the Bills sent through bank           immediately on presentation by Bankers, the dealer           shall  be   liable  to   the   Company   for   all           damages/losses  and   expenses  incurred  in  this           connection and the same will be recovered from the           deposit lying with the company.      (b)  The despatches  by the  company will be insured by           the dealer  against  all  risks,  pilferage,  non-           delivery and  SRCC  including  breakage,  wherever           applicable  from   the  time  of  leaving  of  the           Company’s factory  or stockyard  until arrival  at           dealer’s  premises,   and  all   such  expenditure           incidental to  transit shall  be to the account of           the dealer.      6.   The dealer  shall at  his own expenditure maintain           such organisation  for the sale and service of the           said  vehicles,   including   showrooms,   service           stations,  repair   shops,  parts   store   rooms,           salesmen, etc. The dealer shall train mechanics at           their own cost with Company. The dealer shall give           three free  services to  every vehicle sold by him           and the  company shall  reimburse to the dealer at           Rs. 4 per each free service rendered by him."

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The rest  of the  clause. Of  the agreement are not relevant but it  might be useful to refer to sub-clauses (a) & (b) of Clause 10(iii) which provide as follows: "10(iii) (a)  The Company upon termination of this agreement           may require the dealer to immediately turn over to           the company  all or  any  bonafide  retail  buyers           orders 959           that he  may have  on hand  unfulfilled,  together           with all  deposits made  thereon by the purchasers           and also  the list  of prospective buyers with the           dealer.      (b)  In the event of the termination of this agreement,           however, the dealer shall not be released from any           obligation arising  out of any transaction entered           into or  consummated prior  to the  date  of  such           termination, either by him or his branches. There are  the material terms and conditions on which mopeds are supplied by the appellants to the dealers.      The Appellants submitted their price lists for approval to the  excise authorities  and the  price lists  showed the price  charged  by  the  Appellants  to  the  dealers  after deducting the  so-called commission of Rs. 110 in respect of Suvega Standard  Moped, Rs.  145 in respect of Suvega Deluxe Moped and  Rs. 165  in respect of Suvega Samrat Moped. These price lists  were approved  by the  excise  authorities  and excise duty was paid by the Appellants on the basis of these price lists  at the  time of  clearance of  the mopeds. This practice continued  right upto  30th  April  1979  when  the Assistant Collector of Central Excise, Nellore took the view that the  appellants were  not  entitled  deduction  of  the commission of  Rs. 110  for Suvega  Standard,  Rs.  145  for Suvega Deluxe  and Rs. 165 for Suvega Samrat mopeds from the price charged  to the dealers for arriving at the exciseable value of  the mopeds  liable to  excise duty.  The Assistant Collector of  Central Excise,  Nellore  thereupon  issued  a notice dated  15 May  1979 to the Appellants demanding a sum of Rs.  6,96, 177.09 representing the amount of differential duty in  respect of  mopeds manufactured  and cleared by the appellants from  their factory during the period 1st October 1975 to  30th April  1979. This  demand was  purported to be made by  the Assistant  Collector of  Central  Excise  under clauses (a)  and (b)  of Rule  10 (1)  of the Central Excise Rule  1944.   The  appellants  thereupon  preferred  a  writ petition in the High Court of Andhra Pradesh contending that the appellants  were entitled  to deduction of the amount of commission in  arriving at the excisable value of the mopeds and the  demands made  by the  Asstt. Collector  of  Central Excise was therefore, not justified. 960      The Writ  Petition filed  by the  appellants came to be heard by  a Division  Bench of  the  High  Court  of  Andhra Pradesh. Though  it is  difficult to  ascertain what exactly was the  view taken  by the  Division Bench, it appears that they came  to the  conclusion that  the dealers were related persons vis-a-vis  the appellants  and "the  discount of Rs. 110, 145  and 165  for the different varieties of mopeds was being given for organising sale and providing facilities and this was clearly an example of the mutual interest which the related person and the appellants are having in the business of each  other. The  Division Bench,  it seems, mixed up two different points,  one relating  to the question whether the dealers are  related persons  and the  other relating to the question whether  the commission of Rs. 110, 145 and Rs. 165 allowed in  respect of  different varieties of mopeds to the

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dealers could  be regarded  as a  trade discount or not. The ultimate decision  however was  that the  commission of  Rs. 110, 145  and Rs.  165 in  respect of different varieties of mopeds was  not trade discount and, therefore, in any event, it was  not liable  to be deducted from the price charged to the dealers  and the  Assistant Collector  of Central Excise was consequently right in making a demand of Rs. 6,96,177.09 from the  appellants. The  appellants being aggrieved by the decision of  the Division Bench preferred the present appeal after obtaining a certificate from the High Court.      Mr. Nariman  learned counsel appearing on behalf of the appellants assailed  the judgment  of the  Division Bench of the High  Court on  both the  grounds on  which the impugned demand was  challenged in  the High Court. He contended that there was  absolutely nothing  to show that the dealers were related persons  vis-a-vis the  appellants and  the Division Bench of  the High Court was, therefore, clearly in error in taking the  view that  the dealers were related persons. Now the concept  of related  persons  was  for  the  first  time introduced in the Act by the amending Act 22 of 1973 and the expression ’related person’ came to be defined in clause (c) of sub-section  (4) of  Section 4 to mean a person who is so associated  with  the  assessee  that  they  have  interest, directly or  indirectly, in  the business  of each other and includes a holding company, a subsidiary company, a relative and a  distributor of  the asscssee  and sub-distributor  of such distributor.  This definition came up for consideration before this  Court in  the Union  of India  v.  Bombay  Tyre International Ltd.  [1984] (1)  SCC  467  where  this  Court construing, the definition held: 961           "On a  proper interpretation  of the definition of      ’related person’  in sub-section  (4) (c) of section 4,      the words  a relative and a distributor of the assesee"      do not  refer to  any distributor  but they are limited      only to a distributor who is a relative of the assessee      within the meaning of the Companies Act, 1956. So read,      the definition  of "related  person" is not unduly wide      and does not suffer from any constitutional infirmity."      It is  therefore obvious that the dealers vis-a-vis the appellants under  the last  part of  the definition  in sub- section (4)  (c) of  Sec. 4, could not be said to be related persons since  they were  admittedly not  relatives  of  the appellants within  the meaning  of the  Companies Act, 1956, But the  argument urged on behalf of the department was and, that is  the argument  which found  favour with the Division Bench of  the High  Court, that  the  dealers  were  related persons  within  the  meaning  of  the  first  part  of  the definition in  sub-section  4  (c)  of  Section  4.  It  was contended on  behalf of the department that the dealers were so associated  with the  appellants that  they had  interest directly or  indirectly in  the business  of each other. Now this part  of the  definition also came up for consideration before this Court in another decision namely, Union of India v. Atic  Industries Ltd,  AIR 1984  SC 1495,  and the  Court pointed in that case:           "What the first part of the definition requires is      that the  person who  is sought  to  be  branded  as  a      "related person"  must be a person who is so associated      with the  assessee that they have interest, directly or      indirectly, in  the business  of each  other. It is not      enough that  the assessee  has an  interest, direct  or      indirect, in the business of the person alleged to be a      related person nor is it enough that the person alleged      to be  a related  person has  an  interest,  direct  or

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    indirect, in  the  business  of  the  assessee.  It  is      essential to  attract the  applicability of  the  first      part of the definition that the assessee and the person      alleged to  be a  related person  must  have  interest,      direct or indirect, in the business of each other. Each      of them  must have a direct or indirect interest in the      business of  the  other.  The  quality  and  degree  of      interest which  each has  in the  business of the other      may be  different; the  interest of one in the business      of the  other may  be direct, while the interest of the      latter 962      in the  business of  the former  may be  indirect. That      would not  make any difference, so long as each has got      some interest  direct or  indirect, in  the business of      the other." Here on  the facts  it is difficult to see how it can at all be contended  that the  appellants had  any interest  in the business of the dealers or that the dealers had any interest in the  business  of  the  appellants.  We  shall  presently analyse the  terms of  the agreement  between the appellants and the dealers but one thing is clear from the terms of the agreement that the appellants sold the mopeds to the dealers on principal  to principal basis and if that be so it is not possible to  say that the appellants had any interest in the business of  the dealers.  The dealers were wholesale buyers of the  mopeds manufactured  by the appellants and since the transactions between  them were  on principal  to  principal basis, it  is difficult  to appreciate  how  the  appellants could possibly  be said  to have  any  interest,  direct  or indirect, in  the business of the dealers. The dealers could not, therefore,  be said to be related persons vis-a-vis the appellants. We  must in  the  circumstances  hold  that  the Division Bench  of High  Court was  in error in holding that they were  related persons.  It is  indeed  surprising  that though the  Division Bench  of the  High Court took the view that the dealers were related person, the Division Bench did not determine  the exciseable  value of  the mopeds  on  the basis of  the price at which the dealers in their terms sold the mopeds  to the  consumers but took into the account only the price  charged by  the appellants to the dealers. If the dealers were  related persons,  the exciseable  value of the mopeds could  have been  determined only on the basis of the price at  which the dealers sold the mopeds to the retailers or the  consumers. But,  as we  have pointed  out it  is not possible to  hold that  the dealers were related persons and hence the  excise duty  on  the  mopeds  was  liable  to  be determined only  on the basis of the wholesale price charged by the appellants to the dealers.      That takes  us to  the second question, namely, whether the Division  Bench was  right in  taking the  view that the Commission of  Rs. 110,  145 and 165 per moped in respect of different varieties  of mopeds sold to the dealers could not be said  to be  trade discount. Mr. Nariman, Learned Counsel appearing on  behalf of  the appellants  contended that this Commission allowed to the dealers was clearly 963 trade discount  and was, therefore, liable to be deducted in determining the exciseable value of the mopeds by reasons of sub section  (b)   (ii) of  Section 4  of the Act. Now it is true that  this amount  allowed  to  the  dealers  has  been referred to  in the  agreement as  commission but  the level given by  the parties  cannot be determinative because it is for the court to decide whether the amount is trade discount or not,  whatever be the name given to it. If we look at the

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terms of  the agreement,  it is clear that the agreement was between the  appellants and  the  dealers  on  principal  to principal basis.  The clauses of the agreement which we have set out  above clearly  show beyond  doubt  that  under  the agreement, the  mopeds were  sold by  the appellants  to the dealers and  the dealers  did  not  act  as  agents  of  the appellants for  the purpose  of effecting sales on behalf of the appellants.  It is  clear  from  clause  5  (a)  of  the agreement that  the bills in respect of the mopeds delivered to the  dealers were  to be  sent by  the appellants through their bankers  and it  was the responsibility of the dealers to retire  the bills  for the  purpose of taking delivery of the mopeds. Clause 5 (b) of the agreement laid an obligation on the  dealers to  insure the  mopeds  against  all  risks, pilferage, non-delivery and SRCC including breakage from the time the  mopeds  left  the  factory  or  stockyard  of  the appellants until  they arrived at the premises of the dealer and  this  again  would  show  that  the  dealers  acted  as principal to  principal in  purchasing the  mopeds from  the appellants. The  dealers were  also liable under Clause 6 of the agreement to maintain adequate organisation for sale and service of  the mopeds  including service  stations,  repair shops, spare  parts. salesmen  etc. and  the mechanics  were also  to  be  trained  at  the  cost  of  the  dealers.  The relationship between  the appellants  and  the  dealers  was clearly  on   principal  to   principal  basis  and  in  the circumstances it  is difficult  to see how the amount of Rs. 11 ,  145 and  165 allowed  to the  dealers. in  respect  of different varieties  of mopeds could be regarded as anything other than  trade discount.  The appellants  charged to  the dealer the  price of the mopeds sold to them less the amount of Rs.  110, Rs.  145 and  Rs. 165  in respect  of different varieties of  mopeds. These  amounts allowed  to the dealers were clearly  trade discount  liable to be deducted from the price charged  to the  dealers for  the mopeds.  purpose  of arriving at the exciseable value of the moped.      We therefore,  allow the appeal, set aside the Judgment of the Division Bench of the High Court and quash the notice dated 15.5.1979 issued by the Assistant Collector of Central Excise made and the order dated 25.9.79 made in pursuance of that notice. If any 964 payments have  been made  by the  Appellants under the order dated 25th  September 1979,  the respondents will refund the same to  the appellants  within 3  months from  the date  of receipt of  this order.  The Bank  Guarantee  given  by  the appellants will  stand discharged, There will be no order as to costs. N.V.K.          Appeal allowed. 1