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.
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.
Various show cause notices were issued alleging that demand of differential duty as the price paid by Shaw Wallace and Company for the purchase of the same/similar products from the other firms/companies was less than the price paid to Detergents India Limited.
Contentions of the Revenue
The Revenue contented that Shaw Wallace and DIL are related persons within the meaning of Section 4(4) (c) of the Act and stated that some of these factors are that
- Advertisement expenses of DIL brands had been borne by the holding Company Shaw Wallace;
- Processing charges paid by Shaw Wallace to DIL is less than processing charges paid to Hindustan Lever;
- Employees of Shaw Wallace and its subsidiaries were freely transferred from one company to another;
- Depots of Shaw Wallace and DIL were in the same premises;
- DIL sends monthly newsletters to Shaw Wallace showing production, despatches, purpose, technical problems, quality problems, details of power consumption etc. – and Shaw Wallace fixes the price of DIL products;
- Unsecured loans of approximately Rs.55 lakhs were given by Shaw Wallace to its subsidiary DIL.
It is argued that all these facts would show that Shaw Wallace and DIL were related persons and that the price paid by Shaw Wallace to DIL was a depressed price and would, therefore fall within proviso (iii) of Section 4(1)(a) as it stood prior to year 2000. The moment there is a holding/subsidiary company relationship, the definition of “related person” under Section 4(4)(c) gets attracted and proviso (iii) to Section 4(1)(a) in turn gets attracted and therefore it is the price at which Shaw Wallace and Company sells the self same goods to its customers that is the price that is to be taken into account on the facts of the present case.
Contentions of the Assessee
The assessee contended that even though Shaw Wallace and DIL may be holding and subsidiary companies, yet on a true construction of Section 4(4)(c) they are not related persons within the meaning of the definition clause. Further, on a true construction of proviso (iii) to Section 4(1) (a), it is necessary that the assessee must first enter into an arrangement with the related person, which arrangement leads to a price being charged which is lower than the normal price.
Further, the proviso only gets attracted when such arrangement is predominantly a sale to or through a related person. There is no arrangement between Shaw Wallace and DIL which has led to any depression in the normal price at which such goods are sold. Also, since only 10% of the production of DIL is sold to Shaw Wallace, the goods are not “generally” sold to Shaw Wallace.
Held by Supreme Court of India
The Hon’ble Supreme court stated that the first thing that one notices on a reading of Section 4(1)(a), as it then stood, is that a duty of excise is chargeable with reference to “normal price”, 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. The price should be the sole consideration for the sale. If the buyer is a related person, there is a presumption that a sale to a related person would be at a price which is not the sole consideration for the sale. Further, Proviso (iii) then deals with the price that is to be taken into consideration in case sales are made to related persons. Three basic ingredients are necessary before proviso (iii) gets attracted:-
- The first ingredient is that the assessee must “arrange” that goods are sold by him in a particular manner.
- The second ingredient is that such arrangement must be such that the goods are “generally” sold by the assessee in the course of wholesale trade to or through a related person.
- Thirdly, such sale need not be to the related person – it can even be through the related person.
The Hon’ble court is of the view that the “arrangement” spoken of in the proviso must be something by which the assessee and the related person “arrange” that the goods are sold at something below the normal price, so that tax is either avoided or evaded by such arrangement. Secondly, the expression “generally” also shows that such goods must predominantly be sold by the assessee to or through the related person – in mathematical terms, sales that are to or through a related person must consist of at least 50% of the goods that are manufactured and sold. The expression “to or through a related person” again goes back to the “arrangement” and is another way of saying that such sale can be effected directly to or indirectly through such related person. It is only when all three considerations are cumulatively met that proviso (iii) can be said to be attracted.
The Hon’ble court referred to the judgement in the case of Union of India v. Bombay Tyre International Ltd., (1984) 1 SCC 467, it was held that even under Section 4 prior to the 1973 Amendment, the wholesale cash price would consist of a sale by a manufacturer in the course of wholesale trade to a wholesale dealer, which sale would have to be at arm’s length and in the usual course of business.
The Hon’ble Court clarified that the object of enacting Section 4 is that transactions at arm’s length between manufacturer and wholesale purchaser which yield the price which is the sole consideration for the sale alone is contemplated. Any concessional or manipulative considerations which depress price below the normal price are, therefore, not to be taken into consideration. The arrangements with related persons which yield a price below the normal price because of concessional or manipulative considerations cannot ever be equated to normal price. But at the same time, it must be remembered that absent concessional or manipulative considerations, where a sale is between a manufacturer and a related person in the course of wholesale trade, the transaction being a transaction where it is proved by evidence that price is the sole consideration for the sale, then such price must form the basis for valuation as the “normal price” of the goods.
Where it is proved that the same price is paid by related persons as well as arm’s length purchasers (who are unrelated) for the same goods, in the case of the former the higher price paid by purchasers from the related person would be the price on which excise duty would be calculated which would be more than the “normal price” under Section 4(1)(a). Such a result is not contemplated by the amended Section 4(1) (a), which must therefore be read in the manner indicated above.
The Hon’ble court referred the judgement in the case of Flash Laboratories Limited v. Collector of Central Excise, New Delhi, (2003) 2 SCC 86, wherein the appellant was a subsidiary company of M/s Parle Products Limited. M/s Parle Biscuits Limited is also a subsidiary company of M/s Parle Products Limited. What was in question in that case was the relationship between two subsidiary companies. It is clear that the relationship between a subsidiary company and another subsidiary company would not be governed by the second part of Section 4(4) (c). In order that the second part of Section 4(4)(c) be attracted, it must be shown that the related person must either be a holding company or a subsidiary company of the assessee. In the facts of that case, the related person, namely, M/s Parle Biscuits Limited was neither a holding company nor a subsidiary company of the assessee i.e. M/s Flash Laboratories Limited. This being the case, this Court held that there must be mutuality of interest between two persons who are both subsidiaries of a particular holding company.
The Hon’ble court referred the judgement in the case of Commissioner of Central Excise Bombay v. Universal Luggage Manufacturing Company Limited, (2005)190 ELT 3, this Court found as a matter of fact that the assessee (holding company) was selling its products through its wholly owned subsidiary at the same price at which it was selling the same goods to other buyers at arm’s length, in which the subsidiary company had no role to play. This being the case, this Court agreed with the Tribunal that the price at which sales have been effected through the subsidiary, not being a depressed price, would be the price that would be taken into consideration for valuation under Section 4(1)(a).
The Hon’ble court stated that Section 4(4) (c) is in two parts. The first part requires the department to apply a de facto test, whereas the second part requires the application of a de jure test. “Relative” is defined in the Companies Act, 1956. The Hon’ble Court further stated that a reading of the definition of “relative” would show that the relative need not be a person who is so associated with the assessee that they have mutual interest in each other’s businesses. If that were the case, the expression “relative” in the second part would be otiose inasmuch as a relative would be subsumed within “person” in the first part. Thus, “relatives” would also be “persons” who are so associated with the assessee that they have a mutual interest in each other’s businesses. The legislature by application of a de jure test has extended the meaning of “related persons” to include the entire list of relatives per se without more as related persons. Similarly, holding companies and subsidiary companies by virtue of the exercise of control by a holding company over a subsidiary company are similarly included by application of a de jure test.
The Hon’ble Court stated in the present case, the price paid by Shaw Wallace and Company for the same/similar products as was sold by unrelated entities to it was even lower than the price paid by Shaw Wallace to Detergents India Ltd. This being the case, it is clear that on facts here there is no “arrangement” between Shaw Wallace and Detergents India Limited to depress a price which is otherwise at arm’s length.
Shaw Wallace and Detergents India Limited are “related persons” is made out by their holding/subsidiary relationship. However, from this, it does not follow that there is any arrangement of tax avoidance or tax evasion on the facts of this case. This being the case, proviso (iii) to Section 4(1) (a) would not be applicable.
Further, it would also not be applicable for the reason that there is no predominance of sales by Detergents India Limited to Shaw Wallace. As has been pointed out above, only 10% of its manufacturing capacity has been sold to Shaw Wallace, 90% being sold to Hindustan Lever Limited. For this reason also, proviso (iii) does not get attracted.
This being the case, on facts here Section 4(1)(a) and not proviso (iii) is attracted inasmuch as on facts the presumption of a transaction not being at arm’s length has been rebutted. Revenue’s comparison of price paid by Hindustan Lever to DIL with price paid by Shaw Wallace to DIL is unwarranted as the products sold and processing charges are wholly different. Further, the single most relevant fact, namely, that Shaw Wallace paid for the same/similar goods to unrelated suppliers at a price lower than the price paid by Shaw Wallace to DIL, has not been adverted to at all by the Revenue.
In view of the above, the appeals by Revenue are devoid of merit and are accordingly dismissed.