Assessee is liable for duty as per provisions regarding related party transactions

PJ/Case Laws/2010-11/1033

Case: Commissioner of C. Ex., Chandigarh v/s Kwality Ice Cream Co

Citation: 2010 (260) E.L.T. 327 (S.C)

Issue:- Whether the assessee is liable for duty as per provisions regarding related party transactions in a case where the transactions between the parties are principal to principal basis and the price is sole consideration.

Brief Facts:- Respondent is engaged in the manufacture of ice cream. It entered into an agreement for the sale of the entire production to Brooke Bond Lipton India Limited (BBLIL), which later merged with Hindustan Lever Ltd (HLL), for marketing. Revenue contended that the respondent and BBLIL (later HLL) are to be treated as related persons for computing the assessable value of ice-cream manufactured by the respondent.

For the period from February 1996 to November 1997, demand under show cause notices was raised and confirmed by the Assistant Commissioner under Section 11 of Central Excise Act, 1944. Respondent had contended that the entire transaction between the parties covered by the agreement was on principal to principal basis and that the price was sole consideration for the sale of the goods was not accepted by the departmental authorities.

Appeals preferred against the said order by the respondent were rejected on the ground that the agreement between the parties indicated that the respondent had no autonomy to run its unit. Starting from the procurement of raw material to the manufacture of final product all the activities of the respondent were fully controlled by HLL. The nature and type of machinery to be put in use was in terms of the directions of HLL. Respondent did not have any liberty to market its goods. The Appellate Authority took the view that the transactions between the parties were not on principal to principal basis. Interest accrued on interest free deposit of appellant read with the terms and conditions of the agreement, reveal that it was clearly an extra commercial consideration.

Against this order, respondent preferred an appeal before the Tribunal. The Tribunal found that the provisions contained in clause (9) read with Appendix 4 and 5 of the agreement between the parties clearly establish that the price was not being fixed by BBLIL exclusively but on the other hand the price was fixed on the basis of the formula agreed between the parties. The Tribunal concluded that the transaction between the parties was on principal to principal basis. The Tribunal accordingly held that the respondent and M/s. BBLIL are not related and the transaction between them is one on principal to principal basis and the price was the sole consideration for the sale of the goods and assessable value cannot be computed on the basis of the price at which BBLIL sold the products from its depot.

Revenue has challenged the order of the Tribunal before the Apex Court.

Appellants Contention:- Revenue contended that the nature and extent of control over the activities of the respondent and the huge interest free deposits, complete control pver price fixation mechanism unerringly pointed to the facts that respondent and HLL were related person.

Respondent’s contention:- Respondent submitted that the findings recorded by the Tribunal do no warrant any interference by this court as the same were based on proper appreciation of the material available on record. It was submitted that the Tribunal merely applied the principle enunciated by this Court and came to the right conclusion that the parties are not to be treated as related persons in the matter of computing assessable value of ice cream manufactured by respondent. It was submitted that even on the facts pleaded by the Department there is no evidence of any mutuality of interest in the business of each other.

Reasoning of Judgment:- The Apex Court perused the provisions of Section 4 of the Central Excise Act, 1944. It was noted that Section 4 (4) (c) provided that related person means 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 etc.

Apex Court also perused the judgments given in Union of India v/s Bombay Tyre International Ltd [1983 (14) ELT 1896 (SC)], Union of India v/s Attic Industries Ltd [1984 (17) ELT 323 (SC)], Union of India v/s Playwood Electronics Pvt Ltd [1989 (41) ELT 368 (SC)].

In these judgments it was held that as under:

If the transactions between the manufacturer and his customers were on principal to principal basis and the whole sale price charged by the assessee to the customers was the sole consideration for the same and no extra commercial considerations entered in the determination of such a price, the customer cannot be held to be a ‘related person’ merely because he holds 50% share in the manufacturing company.
Merely because goods are produced with customer brand name and the entire production sold to the owner of the brand name, cannot be treated as a sale between ‘related persons’.

The Apex Court also perused the judgments relied upon by the Appellant – Calcutta Chromotype Ltd v/s Collector of Central Excise, Calcutta [1998 (99) ELT 202 (SC)], Flash Laboratories Ltd v/s Collector of Central Excise, New Delhi [2003 (151) ELT 241 (SC)], CCE v/s Xerographic Ltd [2010 (257) ELT 11 (SC)].

It was held that what is important is that each of the parties involved should have an interest, whether direct or indirect in the business of each other.

On this basis, the clauses of the agreement between the respondent and BBLIL/HLL were examined. It was observed that the Tribunal upon meticulous analysis of the terms and conditions of the agreement found that the price was being fixed on the basis of the formula agreed between the parties. Reliance was placed on sub-clause (iii) of Clause 6 which provides that pending commencement of production by JVC, respondent shall make necessary investments for upgradation, modification or alteration in the existing factory facilities as per required by BBLIL subject to necessary approvals and pending such investments respondent shall not be responsible for any deficiency. On respondent’s making such investment for upgradation or modification, the pricing agreed upon is on a formula on which has taken into consideration the investments made by the respondent.

The Apex Court held that the Tribunal rightly arrived at the conclusion that pricing in terms of clause (6)(iii) would not lead to the conclusion that the transaction was not one between principal to principal.

It was noted that the clause (6) (ii) provided an option to respondent the suggestion of HLL and to discontinue or close down its manufacturing facilities or not to accept the same since liberty was given to respondent. There is nothing to show in that clause that the factory closes or move it from its current location. The only effect will be not acceptance of the suggestion and relieved of its obligations under the sourcing agreement. This clause merely indicates conditions on which the terms of sourcing agreement could be brought to an end.

The Tribunal also analyzed clause (6) (i) (c) of the sourcing agreement with provides that HLL would make interest free deposit of Rs 2.75 crores to the units of respondent. The Tribunal on fair analysis of the clause in the sourcing agreement held that the deposits from HLL were taken by respondent as a matter of Commercial expendiency and as a trade practice required in the circumstances of the case. This was so because the amount due to respondent as price of the ice cream manufactured up for more than one month before payment is received by respondent and goods were exclusively manufactured according to specifications of BBLIL and even packing material required carrying their brand name, there was any amount of risk of goods being rejected by BBLIL for reasons other than quality and this was the commercial expediency for making such deposits.

Accordingly, it was held that the Tribunal did not commit any error in coming to the conclusion that respondent and BBLIL are not related persons. The transaction between them is of the nature of principal to principal and the price was the sole consideration for the sale of goods. Therefore, the assessable value cannot be computed on the basis of the price at which BBLIL sold the product from its depot.

Decision:- Appeal dismissed accordingly.

Comment:- This decision gives a clear view to the fact that if the transactions between the parties are in the nature of principal to principal basis and price was the sole consideration than it cannot be held as related party transactions.

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PJ/Case Laws/2010-11/1033

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