JUDGMENT
1. The first petitioner is a private limited company having a factory which manufactures rubber hose pipes. The second petitioner is the director and shareholder of the first petitioner. For the disposal of this petition the first petitioner will hereinafter be referred to as "the petitioner".
2. The petitioner submitted a price list in proforma Part I showing the normal price. After examining the same the Assistant Collector of Central Excise, Bombay 'X' Division, issued a notice dated 29th October 1976 asking the petitioner to show cause why the petitioner should not be ordered to submit the price list in proforma Form IV. The petitioner sent a reply on 15th of December, 1976. Thereafter on 5th of April 1977 the Assistant Collector passed an order requiring the petitioner to submit the price list in proforma Part IV. This order was challenged by the petitioner in an appeal, which was allowed by the Appellate Collector of Central Excise on 19th of July, 1977 and the matter was remanded to the authority of first instance. By a fresh order dated 22nd December 1977, the Assistant Collector again asked the petitioner to file the price list in proforma Part IV and also to pay the differential duty. The appeal preferred by the petitioner, being Appeal No. 1025 of 1979, was dismissed by the Appellate Collector by his order dated 25th September 1979, which is the subject-matter of challenge in this petition under Article 226 of the Constitution of India.
3. In order to appreciate the challenge made on behalf of the petitioner to the order of the Appellate Collector, it will be advantageous to notice the ground on which the Appellate Collector confirmed the order of the authority below him requiring the petitioner to submit the price list in proforma Part IV. The reasoning of the Appellate Collector is to be found in paragraph 3 of his order, which is as follows :-
"3. I have gone through the appeal petition and the case records. The fact that there is a common director and that very close relatives of the directors form part of the owners of the other firms purchasing goods from the appellant has not been disputed. The firms, who form the wholesale buyers from the appellants, account for about 80% of the appellant's sale. The remaining 20% are sold to other customers. The appellants' contention that these firms who are their wholesale dealers should not be taken as related persons cannot be accepted, in view of the undisputed fact about their relationship. The selling firms who act as their wholesale dealers cannot be taken as separate entities as they are not public limited companies."
4. Mr. Hidayatullah, the learned Advocate appearing in support of the petition, has challenged the two grounds on which basically the Appellate Collector has taken the view that the petitioner ought to submit the price list in proforma Part IV. One is the ground that nearly 80% of the sales of the petitioner company are to entities which are to be regarded as related persons and secondly that the wholesalers in the instant case are related persons though in fact they are separate legal entities. The provisions of Section 4 of the Central Excises and Salt Act, hereinafter referred to as "the said Act", as amended after 1975, are to be interpreted in order to examine the validity of the order of the Appellate Collector as well as the validity of the contentions raised on behalf of the petitioner. Under Section 4 of the said Act, where duty of excise is chargeable on any excisable goods with reference to value, such value shall, subject to the other provisions of the said Section, be the normal price thereof at which such goods are ordinarily sold by the assessee to a buyer in the course of wholesale trade. There are, however, certain provisos to this Section. Proviso (iii) is as follows :-
"Where the assessee so arranges that the goods are generally not sold by him in the course of wholesale trade except to or through a related person, the normal price of the goods sold by the assessee to or through such related person shall be deemed to be the price at which they are ordinarily sold by the related person in the course of wholesale trade at the time of removal, to dealers (not being related persons) or where such goods are not sold to such dealers, of dealers (being related persons) who sell such goods in retail."
The language of this proviso clearly shows that it applies only where all the goods are sold through a related person. If some of the goods are sold to persons or entities other than the related persons, naturally this proviso would not come into operation. One of the earliest judgments on this aspect of the case is to be found in A. K. Roy v. Voltas Ltd., 1977 E.L.T. 177. The facts of that case disclosed that the respondent, namely Voltas Limited, was a company carrying on, among other things, the business of manufacturing airconditioners, water coolers and component parts thereof. It had sales office at different places from where it effected sales to consumers at list prices and the sales so effected came to about 90 to 95 per cent of its production. Apart from these sales, it also sold articles to wholesale dealers from different parts of the country in pursuance of agreement entered into with them. The agreement with the wholesale dealers provided, among other things, that they should not sell the articles sold to them except in accordance with the list prices fixed by the respondent. The question that was canvassed before the Court was whether the respondent was liable to be charged with excise duty on the basis of the price of retail sales made by it directly to the consumers from its head office and branch offices or whether it was liable to be charged on the basis of the price payable by the wholesale dealers after deducting the 22% discount under clause (a) of Section 4 of the Act, as it then stood. The Supreme Court did not think that for a wholesale market to exist there should be a market in the physical sense of the term where articles of a like kind or quality are sold or that the articles should be sold to so-called independent buyers. The price at which the company was selling its products to the wholesalers, it was held, was the basis on which excise duty could be levied.
5. That apart, Mr. Hidayatullah has also contended that merely because some of the persons who hold offices in the petitioner company also hold offices in the entities which are the wholesale dealers of the petitioner company's products or have their relative in the said entities, that does not make those entities or companies related persons as contemplated under Section 4 of the Act. In this connection he has relied upon a recent judgment of the Supreme Court in Union of India v. Kantilal Chunilal, 1986 (26) E.L.T. 289. The facts of that case disclosed that Kantilal Chunilal, a limited company, was carrying on the business of manufacturing textiles in Surat. They sold the entire goods manufactured by them to about 15 to 20 wholesale dealers and one of such dealers was the firm of M/s. Alok Textiles. The partners of Alok Textiles were related to some of the directors of Kantilal Chunilal. It was contended on behalf of the department that the value of the excisable goods for the purpose of levy of excise duty in the hands of Kantilal Chunilal must be calculated by reference to the wholesale cash price at which this firm sold goods in the course of wholesale trade because, according to the department, M/s. Alok Textiles was a related person. In the High Court this view of the department was negatived and the department went in appeal to the Supreme Court. The Supreme Court pointed out that in Union of India v. Bombay Tyre International [1984 (1) SCR 347 = 1983 ELT 1896] the definition of "related person" in clause (c) of sub-section (4) of Section 4 of the Act was read down so that the Section itself could not be struck down as unconstitutional. Thereafter the Supreme Court proceeded to state as follows :-
"But even on the interpretation placed by us on the definition of 'related person' it is difficult to see how the firm of M/s. Alok Textiles could be said to fall within the category of 'related person' because though the firm of M/s. Alok Textiles had interest in the business of the respondents, it could not be said that the respondents had any interest, directly or indirectly, in the business of M/s. Alok Textiles. Moreover, the firm of M/s. Alok Textiles was not the only firm to which the excisable goods were sold by the respondent in the wholesale trade. The respondents sold only 34 to 40% of the total production to the firm of M/s. Alok Textiles and the remaining production was sold to other wholesale dealers. The assessing authorities were therefore clearly wrong in taking the wholesale traders as the value of excisable goods for the purpose of levy of excise duty. The wholesale cash price at which the excisable goods were sold by the respondents to M/s. Alok Textiles and other wholesale dealers was the only price liable to be Taken for determination of the value for the purpose of levy of excise duty."
6. In my opinion, the above extract from the judgment of the Supreme Court in Union of India v. Kantilal Chunilal answers both the questions which have been raised in this petition. In the first place, it shows that merely because a large volume of the sales of a particular company goes to some partnership or other entities, that itself does not make that other entities related persons and does not authorise the department to levy excise duty on the prices at which these later entities sell the products. Secondly, this authority also shows that merely because there are certain directors common to the assessee and the wholesalers, be they partnership firms or limited companies, that it self does not make the latter as related persons under Section 4 of the Act unless there is some mutuality. It has not been suggested by the department that there is any mutuality between the petitioner company and the other entities to whom the products are sold as wholesalers by the petitioner company
7. At one stage Mr. Sethna for the respondents thought that the impugned order is supportable on the ground that the first part of the definition of related persons could be invoked in the instant case, but it must be said in fairness to him that this attempt was given up because the wholesalers involved in this case are partnership firms and they could not be said to be persons who are associated with the assessee. They obviously do not come under the latter part of the definition of 'related person' because they are not a holding company, a subsidiary company, a relative or a distributor of the assessee because a partnership firm cannot be a relative just as a limited company cannot be a relative. This petition must, therefore, succeed. Though Mr. Hidayatullah has urged certain other grounds also, I do not find it necessary to examine them.
8. In the result, the petition succeeds. The succeeds. Rule is made absolute in terms of prayer clauses (c) and (d)(iii). The amount of duty paid by the petitioners as per the order dated 19th November 1979 shall be refunded to the petitioners.
9. The petitioners are entitled for costs of this petition from the respondents.
JUDGMENT
1. The first petitioner is a private limited company having a factory which manufactures rubber hose pipes. The second petitioner is the director and shareholder of the first petitioner. For the disposal of this petition the first petitioner will hereinafter be referred to as "the petitioner".
2. The petitioner submitted a price list in proforma Part I showing the normal price. After examining the same the Assistant Collector of Central Excise, Bombay 'X' Division, issued a notice dated 29th October 1976 asking the petitioner to show cause why the petitioner should not be ordered to submit the price list in proforma Form IV. The petitioner sent a reply on 15th of December, 1976. Thereafter on 5th of April 1977 the Assistant Collector passed an order requiring the petitioner to submit the price list in proforma Part IV. This order was challenged by the petitioner in an appeal, which was allowed by the Appellate Collector of Central Excise on 19th of July, 1977 and the matter was remanded to the authority of first instance. By a fresh order dated 22nd December 1977, the Assistant Collector again asked the petitioner to file the price list in proforma Part IV and also to pay the differential duty. The appeal preferred by the petitioner, being Appeal No. 1025 of 1979, was dismissed by the Appellate Collector by his order dated 25th September 1979, which is the subject-matter of challenge in this petition under Article 226 of the Constitution of India.
3. In order to appreciate the challenge made on behalf of the petitioner to the order of the Appellate Collector, it will be advantageous to notice the ground on which the Appellate Collector confirmed the order of the authority below him requiring the petitioner to submit the price list in proforma Part IV. The reasoning of the Appellate Collector is to be found in paragraph 3 of his order, which is as follows :-
"3. I have gone through the appeal petition and the case records. The fact that there is a common director and that very close relatives of the directors form part of the owners of the other firms purchasing goods from the appellant has not been disputed. The firms, who form the wholesale buyers from the appellants, account for about 80% of the appellant's sale. The remaining 20% are sold to other customers. The appellants' contention that these firms who are their wholesale dealers should not be taken as related persons cannot be accepted, in view of the undisputed fact about their relationship. The selling firms who act as their wholesale dealers cannot be taken as separate entities as they are not public limited companies."
4. Mr. Hidayatullah, the learned Advocate appearing in support of the petition, has challenged the two grounds on which basically the Appellate Collector has taken the view that the petitioner ought to submit the price list in proforma Part IV. One is the ground that nearly 80% of the sales of the petitioner company are to entities which are to be regarded as related persons and secondly that the wholesalers in the instant case are related persons though in fact they are separate legal entities. The provisions of Section 4 of the Central Excises and Salt Act, hereinafter referred to as "the said Act", as amended after 1975, are to be interpreted in order to examine the validity of the order of the Appellate Collector as well as the validity of the contentions raised on behalf of the petitioner. Under Section 4 of the said Act, where duty of excise is chargeable on any excisable goods with reference to value, such value shall, subject to the other provisions of the said Section, be the normal price thereof at which such goods are ordinarily sold by the assessee to a buyer in the course of wholesale trade. There are, however, certain provisos to this Section. Proviso (iii) is as follows :-
"Where the assessee so arranges that the goods are generally not sold by him in the course of wholesale trade except to or through a related person, the normal price of the goods sold by the assessee to or through such related person shall be deemed to be the price at which they are ordinarily sold by the related person in the course of wholesale trade at the time of removal, to dealers (not being related persons) or where such goods are not sold to such dealers, of dealers (being related persons) who sell such goods in retail."
The language of this proviso clearly shows that it applies only where all the goods are sold through a related person. If some of the goods are sold to persons or entities other than the related persons, naturally this proviso would not come into operation. One of the earliest judgments on this aspect of the case is to be found in A. K. Roy v. Voltas Ltd., 1977 E.L.T. 177. The facts of that case disclosed that the respondent, namely Voltas Limited, was a company carrying on, among other things, the business of manufacturing airconditioners, water coolers and component parts thereof. It had sales office at different places from where it effected sales to consumers at list prices and the sales so effected came to about 90 to 95 per cent of its production. Apart from these sales, it also sold articles to wholesale dealers from different parts of the country in pursuance of agreement entered into with them. The agreement with the wholesale dealers provided, among other things, that they should not sell the articles sold to them except in accordance with the list prices fixed by the respondent. The question that was canvassed before the Court was whether the respondent was liable to be charged with excise duty on the basis of the price of retail sales made by it directly to the consumers from its head office and branch offices or whether it was liable to be charged on the basis of the price payable by the wholesale dealers after deducting the 22% discount under clause (a) of Section 4 of the Act, as it then stood. The Supreme Court did not think that for a wholesale market to exist there should be a market in the physical sense of the term where articles of a like kind or quality are sold or that the articles should be sold to so-called independent buyers. The price at which the company was selling its products to the wholesalers, it was held, was the basis on which excise duty could be levied.
5. That apart, Mr. Hidayatullah has also contended that merely because some of the persons who hold offices in the petitioner company also hold offices in the entities which are the wholesale dealers of the petitioner company's products or have their relative in the said entities, that does not make those entities or companies related persons as contemplated under Section 4 of the Act. In this connection he has relied upon a recent judgment of the Supreme Court in Union of India v. Kantilal Chunilal, 1986 (26) E.L.T. 289. The facts of that case disclosed that Kantilal Chunilal, a limited company, was carrying on the business of manufacturing textiles in Surat. They sold the entire goods manufactured by them to about 15 to 20 wholesale dealers and one of such dealers was the firm of M/s. Alok Textiles. The partners of Alok Textiles were related to some of the directors of Kantilal Chunilal. It was contended on behalf of the department that the value of the excisable goods for the purpose of levy of excise duty in the hands of Kantilal Chunilal must be calculated by reference to the wholesale cash price at which this firm sold goods in the course of wholesale trade because, according to the department, M/s. Alok Textiles was a related person. In the High Court this view of the department was negatived and the department went in appeal to the Supreme Court. The Supreme Court pointed out that in Union of India v. Bombay Tyre International [1984 (1) SCR 347 = 1983 ELT 1896] the definition of "related person" in clause (c) of sub-section (4) of Section 4 of the Act was read down so that the Section itself could not be struck down as unconstitutional. Thereafter the Supreme Court proceeded to state as follows :-
"But even on the interpretation placed by us on the definition of 'related person' it is difficult to see how the firm of M/s. Alok Textiles could be said to fall within the category of 'related person' because though the firm of M/s. Alok Textiles had interest in the business of the respondents, it could not be said that the respondents had any interest, directly or indirectly, in the business of M/s. Alok Textiles. Moreover, the firm of M/s. Alok Textiles was not the only firm to which the excisable goods were sold by the respondent in the wholesale trade. The respondents sold only 34 to 40% of the total production to the firm of M/s. Alok Textiles and the remaining production was sold to other wholesale dealers. The assessing authorities were therefore clearly wrong in taking the wholesale traders as the value of excisable goods for the purpose of levy of excise duty. The wholesale cash price at which the excisable goods were sold by the respondents to M/s. Alok Textiles and other wholesale dealers was the only price liable to be Taken for determination of the value for the purpose of levy of excise duty."
6. In my opinion, the above extract from the judgment of the Supreme Court in Union of India v. Kantilal Chunilal answers both the questions which have been raised in this petition. In the first place, it shows that merely because a large volume of the sales of a particular company goes to some partnership or other entities, that itself does not make that other entities related persons and does not authorise the department to levy excise duty on the prices at which these later entities sell the products. Secondly, this authority also shows that merely because there are certain directors common to the assessee and the wholesalers, be they partnership firms or limited companies, that it self does not make the latter as related persons under Section 4 of the Act unless there is some mutuality. It has not been suggested by the department that there is any mutuality between the petitioner company and the other entities to whom the products are sold as wholesalers by the petitioner company
7. At one stage Mr. Sethna for the respondents thought that the impugned order is supportable on the ground that the first part of the definition of related persons could be invoked in the instant case, but it must be said in fairness to him that this attempt was given up because the wholesalers involved in this case are partnership firms and they could not be said to be persons who are associated with the assessee. They obviously do not come under the latter part of the definition of 'related person' because they are not a holding company, a subsidiary company, a relative or a distributor of the assessee because a partnership firm cannot be a relative just as a limited company cannot be a relative. This petition must, therefore, succeed. Though Mr. Hidayatullah has urged certain other grounds also, I do not find it necessary to examine them.
8. In the result, the petition succeeds. The succeeds. Rule is made absolute in terms of prayer clauses (c) and (d)(iii). The amount of duty paid by the petitioners as per the order dated 19th November 1979 shall be refunded to the petitioners.
9. The petitioners are entitled for costs of this petition from the respondents.
Short Summary The Bombay High Court held that the petitioner company was not required to submit a price list in proforma Part IV for excise duty purposes. The Court ruled that the wholesalers of the petitioner's products were not "related persons" under Section 4 of the Central Excises and Salt Act merely because some directors were common or a large volume of sales went to them, absent any mutuality or control.
Facts Cosmos (India) Rubber Works, the petitioner, manufactured rubber hose pipes. The Assistant Collector of Central Excise ordered them to submit a price list in proforma Part IV, arguing their sales were primarily to "related persons." The petitioner appealed, and the Appellate Collector upheld the Assistant Collector's order, leading to this writ petition challenging that decision. The Appellate Collector reasoned that nearly 80% of sales were to related entities and that the wholesalers were related persons despite being separate legal entities.
Issues
Petitioner's Arguments
Respondent's Arguments
Court's Reasoning The Court relied on Union of India v. Kantilal Chunilal, stating that a large volume of sales to certain entities does not automatically make those entities "related persons." It further reasoned that common directors or relatives in the wholesale entities do not establish a "related person" relationship under Section 4 unless there is evidence of mutuality or control. The Court found no evidence of mutuality between the petitioner and its wholesalers. The court also noted that partnership firms cannot be considered "relatives" under the definition of "related person."
Conclusion The Bombay High Court allowed the petition. The order requiring the petitioner to submit the price list in proforma Part IV was quashed. The amount of duty paid by the petitioners as per the order dated 19th November 1979 shall be refunded to the petitioners. The petitioners were awarded costs.
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