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PETITIONER: COLLECTOR OF CENTRAL EXCISE, MADRAS

       Vs.

RESPONDENT: T.I. MILLERS LTD. MADRAS & T.I. DIAMOND CHAIN, MADRAS

DATE OF JUDGMENT28/03/1988

BENCH: MUKHARJI, SABYASACHI (J) BENCH: MUKHARJI, SABYASACHI (J) RANGNATHAN, S.

CITATION:  1988 AIR 1154            1988 SCR  (3) 355  1988 SCC  Supl.  361     JT 1988 (2)    86  1988 SCALE  (1)716  CITATOR INFO :  D          1989 SC1555  (12)

ACT:      Central Excises  and Salt  Act, 1944-Sec.  4-Assessable value of  goods  for  levy  of  duty  under  Sec.  3-How  to determine assessable value.      Central Excises  and Salt  Act, 1944-Sub-sec.  4(c)  of Section   4-Related    Person-Who   is-Criteria    for   its determination.

HEADNOTE: %      The   respondents   manufactured   goods   which   were assessable under  Item 68  of the Central Excise Tariff. The respondents filed  price lists  for the  sale of  the  goods through their  distributors one  of them being M/s. T.I & M- Sales Ltd.,  quoting their  price  to  the  distributors  as assessable value. Subsequently the respondents required that the price  charged by  them from  buyers at the factory gate should be accepted as the assessable value and not the price to the  distributors. The Assistant Collector found that the distributors were  related persons  as per  section 4 of the Central Excises  and Salt  Act, 1944  and the price at which the distributors  sold the  goods should  therefore  be  the assessable value.  On appeal  by the  appellant-revenue, the Appellate Collector  held that these could not be held to be the related persons. The Revenue had found that there was an agreement  existing   between  the   respondents  and  their distributors according  to which  they  were  the  company’s distributors for  the sale  of their goods. Major portion of the sales  were effected  through M/s.  T.I. & M. Sales Ltd. who were  the main  distributors of M/s. Tube Investments of India Ltd.  and its  subsidiary companies  and rest  of  the sales  through   the  other   two  distributors.  M/s.  Tube Investment of  India was  the holding  company of  M/s. T.I. Millers Ltd.  The agreement between the assessee and the T.I JUDGMENT: Revenue had  further found  that  there  was  a  territorial earmarking for  the operation  of the distributors, who also undertook advertisements  and  helped  the  sub-dealers  for maintaining   show-rooms    in   dealer’s    premises.   The

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distributors did  not  deal  with  competitor’s  goods.  The Revenue had  also noted that the assessee granted mark up to the distributors  to  cover  their  establishment  expenses, travelling expenses, advertisements and 356 sundry expenses.  In view of this the revenue filed a review petition, but  the Appellate  Tribunal rejected  the  review petition and  upheld the finding of the Appellate Collector. Hence these  appeals under  section 351(b)  of the  Act. The question was  whether the  distributors were related persons of  the   respondents  and  secondly  whether  the  expenses incurred for  maintaining the show-room, advertisements etc. should also be added to the assessable value.      Dismissing the appeals this Court, ^      HELD: To find out whether the distributors were related persons of  the manufacturers  it is  necessary to  find out whether the  buyer is  holding company or subsidiary company or relative of the manufacturer. From the explanation of the relationship  furnished  in  this  case,  such  is  not  the position. It  appears that  the link between the respondents T.I. Miller  Ltd. Company  and T.I. & M. Sales Ltd., is that the  latter   are  the   main  distributors   of  M/s.  Tube Investments of  India Ltd.,  which is the holding company of the respondents.  This relationship  does  not  satisfy  the criteria for establishing the related persons concept. These were limited  companies at the material time, and it will be difficult to  say that  a limited  company has  any interest direct or  indirect in the business carried on by one of its shareholders. [362A-C]      The mark up in the price was allowed in connection with the requirement to display the maximum sale price. The sales pattern shows  also sales  to other than distributors and it is not restricted only to the appointed distributors of T.I. India Limited.  In the  background of  the  facts  mentioned hereinbefore and in the light of the decisions of this Court in Bombay  Tyre International  and Atic  Industries cases we are of  the opinion that the Tribunal was right and there is no cause  for interference  with the  order of the Tribunal. [362C-E]      Union of  India and  others v. Atic Industries Limited, [1984] 3  S.C.R. 930 and Union of India and Others etc. etc. v. Bombay Tyre International Ltd. etc. etc., [1984] 1 S.C.R. 347, referred to.

&      CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 1938-39 of 1987.      From the  Order dated  1.10.1985 of  the Customs Excise and Gold  (Control) Appellate  Tribunal, New Delhi in Appeal Nos. ED (SR) T. 1415/82 Al and 1533/84-A. 357      M.K. Banerjee,  Solicitor General,  A.K. Ganguli and P. Parmeshwaran for the Appellant.      A.T.M. Sampath for the Respondents.      The Judgment of the Court was delivered by      SABYASACHI MUKHARJI, J. These are appeals under section 35L(b)  of   the  Central   Excises  and   Salt  Act,   1944 (hereinafter called ’the Act’). The respondents-T.I. Millers Ltd. and  T.I. Diamond  Chain manufacture  cycle  lamps  and automative chains.  Both these  goods are  assessable  under Item 68  of the  Central Excise Tariff. The said respondents filed price  lists for  the sale  of the goods through their

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distributors, namely,  M/s.  T.I.  and  M-Sales  Ltd.,  M/s. Charmvel Agencies  and M/s.  Ambadi  Enterprises  Pvt.  Ltd. quoting their  price to the distributor as assessable value. However, subsequently  following the  decision of the Madras High Court  in a  valuation case,  the respondents  required that the  price charged  by them  from buyers at the factory gate should  be accepted as the assessable value and not the price to the distributors. The question is whether the price charged by  the respondents  from buyers at the factory gate should be  accepted as  the assessable value for the levy of duty under  section 3  of the  Act. The  Assistant Collector found from  the sales  pattern of  the respondents  that the distributors were  ’related persons’ as per section 4 of the Act and  the price  at which the distributors sold the goods should, therefore, be the assessable value.      The respondents  went up in appeal before the Appellate Collector. The  Appellate Collector  held that  in order  to establish  mutuality   of  business  interests,  direct  and indirect between  manufacturer and buyer, it should be shown that they  have been promoting the business of each other in their own interest and that in the absence of such a finding in the  Assistant Collector’s order, these could not be held to be  related persons.  Section 4  of the Act provides that where the  duty of  excise is  chargeable on  any  excisable goods  with   reference  to  value,  such  value  should  be determined on the basis of the normal price thereof, that is to say, the price at which such goods are ordinarily sold by the assessee to a buyer in the course of wholesale trade for delivery at  the time  and place of removal, where the buyer is  not   a  related  person  and  the  price  is  the  sole consideration for  the sale.  We are  not concerned  for the purpose of  these appeals  with the  provisos nor  with sub- section (2) or sub-section (3) of section 4 of the Act. Sub- section 4(c) of section 4 defines ’related person’ to mean a person who is so 358 associated with the assessee that they have interest, direct or indirect,  in the  business of  each other and includes a holding company,  a subsidiary  company, a  relative  and  a distributor of the assessee, and any sub-distributor of such distributor.  The   explanation   provides   that   ’holding company’, ’subsidiary  company’ and ’relative’ have the same meanings as in the Companies Act, 1956.      The words "related person" have been considered by this Court in  Union of  India  and  others  v.  Atic  Industries Limited, [1984]  3 S.C.R.  930. Bhagwati, J., as the learned Chief Justice then was, speaking for the Court held that the first part  of the  definition of "related person" in clause (c) of sub-section (4) of section 4 defines "related person" to mean  "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,  the  Court observed, that  the assessee  has  an  interest,  direct  or indirect in  the business  of the  person alleged  to  be  a related person has an innough, that the person alleged to be a related  person has an interest, direct or indirect in the business of  the assessee.  To attract  the applicability of the first  part of  the definition,  it  was  observed,  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  in  the

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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.      In the  notice issued by the Central Government seeking to review  the  Appellate  Collector’s  order,  the  Central Government indicated  that there  was an  agreement existing between the  respondents and their distributors according to which they  were the  company’s distributors for the sale of their goods.  Major  portion  of  the  sales  were  effected through M/s.  T.I.  and  M-Sales  Ltd.  who  were  the  main distributors of  M/s. Tube Investments of India Ltd. and its subsidiary companies and rest of the sales through the other two distributors.  M/s. Tube  Investment of  India  was  the holding company  of M/s.  T.I. Millers  Ltd.  The  agreement between the  assessee and  the T.I.  and M  Sales  Ltd.  was registered under  the MRTP Act. The Government of India also found that  there  was  a  territorial  earmarking  for  the operation  of   the   distributors,   who   also   undertook advertisements and  helped the  sub-dealers for  maintaining show rooms in dealer’s pre- 359 mises. The  distributors  did  not  deal  with  competitor’s goods. The  Government of India also noted that the assessee granted  mark   up  to   the  distributors  to  cover  their establishment expenses,  travelling expenses,  advertisement and sundry  expenses. On  these grounds,  the Government  of India tentatively  considered that  it was  a fit  case  for reversing the  order of the Appellate Collector who had held that the distributors were not related persons under section 4 of  the Act.  The question is, whether the distributors in this case  were  related  persons  of  the  respondents  and secondly, whether  the expenses incurred for maintaining the show-room, advertisements  etc. should  also be added to the assessable value.  How the value should be computed has been examined by  this Court  in Union  of India  and others etc. etc. v.  Bombay Tyre  International Ltd. etc. etc., [1984] 1 S.C.R. 347.  There, Pathak,  J. as the learned Chief Justice then was,  held that  the definition  of the  words "related person" did  not suffer  from any  constitutional infirmity. This Court  reiterated that  on a  true construction  of its provisions in  the context  of the  statutory scheme the old section 4(a)  should be  considered  as  applicable  to  the circumstances of  the particular assessee himself and not of manufacturers generally.  The Court  further reiterated that pursuant to  the old  section 4(a) the value of an excisable article for  the purpose  of the excise levy should be taken to be  the price  at which  the excisable article is sold by the assessee  to a  buyer at  arm’s length  in the course of whole sale  trade at  the time  and place of removal. Where, however, the  excisable article  is not sold by the assessee in wholesale  trade, but  for example,  is consumed  by  the assessee in his own industry the case is one where under the old section  4(a) the  value must be determined as the price at which  the excisable  article or  an article  of the like kind and quality is capable of being sold in wholesale trade at the  time and  place of  removal. This Court analysed the position under  the Central  Excise and  Salt Act,  1944  as amended by  Act XXII  of 1973 that if the price at which the excisable goods  are ordinarily  sold by  the assessee  to a buyer in  the course  of wholesale trade for delivery at the time and  place of  removal as defined in sub-section (4)(b) of section  4 is  the basis  for determination  of excisable value provided, of course, the buyer is not a related person within the  meaning of  sub-section (4)(c)  of section 4 and the price is the sole consideration for the sale, that would

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be the value. The proposition is subject to the terms of the three provisos  to subsection (1)(a) of section 4. Where the wholesale price  of any  excisable goods for delivery at the place of  removal is  not known  and the  value  thereof  is determined  with   reference  to  the  wholesale  price  for delivery at  a place  other than  the place  of removal, the cost of  transportation from  the place  of removal  to  the place of delivery should be 360 excluded from  such price.  It was  further held  that these principles could  not apply  where the tariff value had been fixed in  respect of  any excisable  goods under sub-section (2)  of   section  3.   The  Court   also  dealt   with  the interpretation of  definition of ’related person’. The Court further held  that the  expenses incurred  on account of the several factors which have contributed to its value upto the date  of  sale,  which  apparently  would  be  the  date  of delivery, are liable to be included. Consequently, where the sale is  effected at  the factory gate, expenses incurred by the assessee upto the date of delivery on account of storage charges, outward  handling charges,  interest on inventories (stocks  carried   by  the  manufacturer  after  clearance), charges for  other services  after delivery  to  the  buyer, namely,  after  sales  service  and  marketing  and  selling organisation  expenses   including  advertisement   expenses marketing and  selling organisation expenses and after-sales service promote  the marketability  of the article and enter into its value in the trade. Where the sale in the course of wholesale trade  is effected  by the  assessee  through  its sales organisation  at a place or places outside the factory gate, the expenses incurred by the assessee upto the date of delivery under  the aforesaid  heads  cannot,  on  the  same grounds, be  deducted. The  assessee will  be entitled  to a deduction on  account of  the cost  of transportation of the excisable article  from the  factory gate  to the  place  or places where  it is  sold. The  cost of  transportation will include  the   cost  of   insurance  on   the  freight   for transportation of  the goods  from the  factory gate  to the place or  places of delivery. The new section 4(4)(d)(i) has made express  provision for including the cost of packing in the determination of "value" for the purpose of excise duty.      The review  application, by  the  change  of  law,  was forwarded to  the Tribunal.  It  was  contended  before  the Tribunal on  behalf of  the appellant  that the distributors were related  persons in terms of the judgment of this Court in Bombay Tyre International case (supra). Our attention was drawn to  a letter  dated  10th  September,  1981  from  the respondents to  the Assistant  Collector that  the  mark  up allowed to the distributors was to cover their establishment expenses, advertisement,  travelling expenses and he pointed out that  this mark  up included certain elements which have to be  included in  the assessable  value. The Tribunal held that according  to the judgment of this Court in Bombay Tyre International case (supra) where the sale is effected at the factory gate,  expenses incurred  on account  of charges for services after  delivery to  the buyer,  namely  after  sale service and  marketing and  selling  organisation  expenses, including advertisement  expenses could not be deducted from the assessable value. It was further urged 361 on behalf of the appellant that other features like division of territory  amongst  the  distributors  and  the  marginal quantity of direct sales otherwise, as well as the fact that the distributors did not deal in competitor’s goods, clearly indicated that  these are  related persons.  Learned Counsel

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drew our  attention to  the meaning of the term ’ordinarily’ given in  K.G. Iyer’s  Judicial Dictionary  at page  704 and explained that  it  meant  ’habitually’,  or  ’usually’,  or ’normally’. In  this case, ordinarily sales are only through distributors and the sales are made by them on behalf of the manufacturer. Learned  Counsel pointed  out that  this was a case where it was an extension of the manufacturer’s self to the point  of sale  by the  distributor. Learned Counsel for the  revenue   urged  that   it  was   a  case  of  indirect relationship and  came within  the ratio  of  the  aforesaid decision of  this Court  in Bombay  Tyre International  case (supra). In  this case, it was highlighted that manufacturer had interest  in the  buyer who  were their distributors and the distributors  were  only  charging  limited  commission, maintained showrooms,  and did  not deal  in the products of competitors of  the manufacturer.  It was  further contended that sales  of their  products as  original equipment, could not be  considered  as  sales  in  the  ordinary  course  of wholesale trade. It was further highlighted that the norm of inter-connected  undertakings  found  in  MRTP  Act  is  not relevant to  decide ’related  persons’ in  the Act.  It  was further argued  that mere  area restriction  is not relevant for proving  mutuality of  interests, but it has to be shown that the  sale was not at an arms length and but a principal to principal  transaction. It  appears from the letter dated 10th September,  1981 from  the appellants to the Department that the  distributors paid for their own advertisements. In some case,  the manufacturer  might  release  advertisements through the distributors. It was also urged that even a sole distributor could  be an  independent buyer on behalf of the manufacturer and  the distributor  and  in  this  connection reliance was  placed on  the observations of this A.K. Roy’s case (1977  ELT 177 S.C.). After sales service undertaken by the distributors  was more  in the  nature of replacement of defective goods sold, which any manufacturer was bound to do and that is a normal essential service of a distributor.      Regarding the  ’mark up’ allowed by the manufacturer to the distributor  as indicating  special relationship, it was contended that  it was  provided for  in the  context of the requirement to  indicate maximum  selling price to be marked on the  goods, and  in fact, it was in this context that the appellants had  made a reference to the MRTP Commission. The Tribunal held that the distributors were not related persons and in  the light  of the observations of this Court in Atic In- 362 dustries case  (supra) set  out hereinbefore.  We are of the opinion that what was necessary to find out, was whether the buyer is  holding company  or subsidiary company or relative of  the   manufacturer.  From   the   explanation   of   the relationship  furnished  in  this  case,  such  is  not  the position. It  appears that  the link between the respondents T.I.Miller Ltd.  company and  T.I. &  M. Sales  Ltd., is the main distributors  of M/s.  Tube Investments  of India Ltd., who  are  the  holding  company  of  the  respondents.  This relationship does  not satisfy the criteria for establishing the related persons concept. These were limited companies at the material  time, and  it will  be difficult to say that a limited company  has any  interest direct or indirect in the business carried on by one of its shareholders.      It has been explained that the mark up in the price was allowed in  connection with  the requirement  to display the maximum sale  price. The  sales pattern  shows also sales to other than distributors and it is not restricted only to the appointed distributors of T.I. India Limited.

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    In the  premises the  Tribunal’s upholding the order of the Appellate  Collector, was  right  and  correct.  In  the background of  the facts  mentioned hereinbefore  and in the light  of  the  decisions  of  this  Court  in  Bombay  Tyre International and  Atic Industries  cases (supra), we are of the opinion  that the  Tribunal was  right and  there is  no cause for  interference with  the order  of the Tribunal. In the premises, we decline to admit the appeals. H.S.K.                               Appeals dismissed. 363