c MOPED INDIA LTD. v. THE ASSTT. COLLECTOR OF CENTRAL EXCISE, NELLORE AND OTHERS February 26, 1985 [P.N. BHAGWATI AllD V. BALAKRISHNA ERADI, JJ.] Central Excise and Salt Act 1944: Section 4(4) (c)-'related person'-Wh,, is-Assessee and person alleged to be •relaJed person' to have inetrest direct or indirect in business of each other.
Manufacturer of Mopeds-Mopeds sold to dealers-Agreements for sa'e enttreJ by manufact11rer with dealer-Dealers to give depoisl for guarantee, entitleme'nt 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.
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 fulfilment 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 6J. The appellants submitted their price lists for approval to the excise authorities and the price lists showed the price lcharged by the dealers after deducting the commission of Rs. 110, Rs. 145 and Rs. 16S or the three different brands of the Mopeds. The prtce 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 tho aforesaid commission from the price charged to the dealers for arriving at tho excisable value of tht Mopeds. Tho Assistant Collector thereupon issued. a notice of demand under clauses (a) and (b) ofRule 10(1) of tho 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 Isl October 1975 to 30th April, 1979.
i MOPBD INDiA LTD. V. AsSTT COLLECTOR i!ltclSB ;55 The appellants assailed the aforesaid notice In a writ petition in the High Court contending, that they were entitled to deduction or 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 tbis was clearly an example of the mutual interest which the 'related person:s and the appellants 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 riaht in making the demand from the appellants.
In the appeal to this court it was contended on behalf of the appellants that : (l) 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 ~ l. 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. [9630] 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 Exise 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; 964AJ 3. The concept of•related person' was for the first tirne introduced in the Central Excise and Salt Act, 1944 by the Amending Act 22of1974 and lhe expression 'related person• came to be de.fined in clause (c) of sub.:.section (4) of Section 4. [9600 J
4. Jn Union of India v. Bombay Tyre International Ltd. [198411SCC467 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, in Union of India v. Atic 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 asscssee bas an interest, direct or indirect, in the business of the assesses. It is essential that the assessee and the person alleged to be a 'related person, must have interest direct or indirect, in the business of each other.
[96JA; F-G) c II c SUPRBMB COURT REPORTS (1985] SUPPL. s.c.R. In the instant case, the terms of the agreement indicate that the dealers where wholesale buyers of the Mopeds n1annfactured 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 appel- lants. The excise duty on the Mopeds were hence liable to be det:!rmined only on the basis of the wholesale price charged by the appellants to the dealers. [962 D·E]
The amount allowed to the dealers has been referred to in the agreement as 'commission' but the label given by the parties cannot be deter- minative because it is for the court to d~cide whether the amount i s 'trade discount, or not v. hatever be the name given to it. [963BJ Tn 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 responsibilty of the dealers to collect the bills for the purpose of taking delivery. Clauses 5tb) laid an obligation on the dealers to insure the Mopeds agaiilst 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 circum- stances 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-FJ
CIVIL APPELLATE JURISDICTION 1985. Civil Appeal No. 52 of From the Judgment aud 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.
Gopa/ 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 MOPED INDIA LTD, v. ASSTT COLLECTOR EXCISE (Bhagwati, 1.)
amount of differential duty in respect of Mopeds manufactured by the Appellants and cleared from their Factory during the period from !st 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 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 manu- factures are delivered to the various dealers at the depots maintained by the appellants. The Appellants have enteted into agreements with the dealers in connection with the sale of the Mopeds manu· factured 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 fulfil· ment of the agreement and this deposit will carry simple interest at the rate of 4 112% per annum and clause 2 (b) declares inter-a/ia 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 Deparatment.
It reads as follows : "The Dealer will get a comm 1ss1on 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." c The Appellants are entitled tQ change prices from time to time as per clause 4 of the agreement and that clause proceeds to add that the Appellants shall not be bound to execute the order pending execution with the dealer at the old rate and wUI \le
~ntitled to change th~ c 9.S8 (1985) SUPPL. s.c.R. 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 follow& :
S(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 sa'e and service of the said vehicles, including showrooms, service stations, repair shops, parts store rooms, salesmen, etc. The
dealer shall train meachanics 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." 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 IO(iii) which provide as follows : "IO(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 'i !,jOPJD ll'ID!A LTD, '• ASSTT. COLLICTOR ElCCISI (Bllagwatl, I,) 959 that he may have on hand unfulfilled, together with all deposits made thereon by the purchasers and also
the list of prospective buyen with the dealer. (b) In the event of tho termination of this agreement, however, the dealer shall not be released from any obligation arising out of any transaction entered into
or consumated 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 10 respect of Suvega Samrat Moped. Thes• 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 or the mopeds. This practice continued right upto ~0th April 1979 when the Assistant Collector of Central Excise, Nellore took the view that the appellants were not entitled deduction of the commision of Rs. 110 for Suvega Standard, Rs. 145 for Suvega Deluxe and Rs. 165 for Suvega Samra! 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 respresenting 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 {I) of the Central Excise Ruic 1944. The appell- ants 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 Justifiell·
f c SUPll.EMB COURT REPORTS (1985) SUPPL. s.c.I!.. 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 presons 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 per- son 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 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 Assis- tant 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 appel- lants 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 a'!lending Act 22 of 1973 and the .expression 'related person' came to be defined in clause (c) of sub-sect10n (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 d. t ibutor of the assessee and sub-distributor of such d1str1butor. IS r
h' h This definition came up for consideration before t ts ourt tn t e Union of India .v Bombay Tyre International Ltd. [ 1984] (1) SCC 467 where this Court construing, the definition held ;
MOPED !NOIA LTD. v. ASSTT. COLLECTOR EXC!SB (Bhagwati, J.) 961 "On a proper interpretation of the definition of 'relat- ed person' in sub-section (4) (c) of section 4, the words a relative arrd a distributor of the assesuee" do not refer to any distributor but they are limited only to a distribu- tor 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 bas an interest, direct or indirect, in the busi-
ness of the assessee. It is essential to attract the applicability of the first part of the definition that the asse<See and the person alleged to be a related person mu;t hw' intere;t, direct or indirect, in the business of
each other. Each of them must have a direct or indirect interest in the busines 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 c
II c (1985] SUPPL. S.C.R. 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 appdhnts 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 ap xeciate 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 persans, 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 dealer> were related persons, the exciseahle 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 arpellants lo 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. Nari man, Learned Coun1el appearing on behalf of the appellants contended that this Commission allowed to the dealer& was clearly MOPED INDIA LTD. v. AssTT. COLLECTOR EXC!S• Bhagwati, J.)
trade discount and was, therefore, liable to be deducted in determin- ing 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, whatoTer be the name given to it. If we look at the terms of the agreement. it is clear that the agreement was between the appell- ants and the dealers on principal to principal basis.
T~e clauses of the agreement which we have set out above clearly show beyond doubt that under the agreement, the mopeds were sold by the appell- ants to the dealers and the dealers d;d not act as agents of the appell- ants for the purpose of effecting sales on behalf of the appellants. It is clear from clame 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 porpose of taking delivery of the mopeds. Clause 5 (b) of the agreement laid an obligation on the dealers to insure the mopedi 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 princiral 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 includmg show rooms. 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 any· thing other than trade discount. The appellants charged to the dealer the price or 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 or arriving at the etei 0eable value of the moped
c We therefore, allow the apreal, set aside the ;udgment of the Division Bench of the High Court and quash the notice dated 15.31979 issued by the Assistent Colkctor of Central Excise made and the order dated 25.9.79 made in pursuance of that notice. If any SUPR.liM.b OOUllT B.EPOB.TS
[ ! 985j SUPPL. S.l.N .. 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 a/lowed.