Valuation rules should not be invoked, if the transaction is done on arm’s length price even in case of related parties – SC

Brief of the Case

In the case of Commissioner of Central Excise V/s. M/S. Detergents India Ltd. & Anr., Supreme Court has held that in case of related party transactions, proviso (iii) of Section  4(1)(a) will not be applicable when there is no “arrangement” between Shaw the related parties to depress a  price  which  is  otherwise  at arm’s length.

Brief Facts

Detergents India Limited (DIL), now Henkel Marketing India Limited, was at the relevant time a subsidiary of Shaw Wallace and Company Limited. Both were public limited companies.  Shaw Wallace’s subsidiary companies held 57% of the paid up  share  capital of  Detergents  India  Limited,  making Detergents  India  Limited  a subsidiary of Shaw Wallace as understood by the definition of “holding company” and “subsidiary company”  contained  in  the  Companies  Act, 1956.  90% of the manufacturing capacity of Detergents India  Limited was to manufacture various products for Hindustan Lever Limited  which were then branded  with  Hindustan  Lever  names  in  small  packs.  A processing charge was paid by Hindustan Lever  Limited  for  this  jobwork, and it is clear that  different  processing  charges  were  paid depending upon the size of the product and the  product  itself.   The excess 10% capacity which was not mopped up by Hindustan Lever was sold to Shaw Wallace,   its   holding   Company. Various other independent manufacturers/sellers also sold the same and similar products to Shaw Wallace and Company.

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