These two appeals are filed by the Commissioner
Central Excise, Aurangabad, wherein the respondent arrayed
is same. The issue involved also is common which pertains
to the valuation of goods, sold by the assessee, for the JUDGMENT purposes of charging excise duty. For this reason, both the
appeals were taken up together and are being disposed of by
this common judgment. However, keeping in view some
distinct feature in the second appeal, viz., Civil Appeal
No. 4370 of 2003, the same shall be taken up for discussion
separately to address the distinct features.
The respondent (hereinafter referred to as the
'assessee') holds Central Excise Registration for the
manufacture of Tyres, Tubes, Flaps, Bladders, etc., falling
under Chapter 40 of the Central Excise Tariff Act, 1985. In
the first appeal, the period involved for the purposes of
excise duty is 01.03.1997 to 16.04.1998. The assessee was
originally M/s. RPG CEAT Group Company. Later on 'RPG SATL'
and 'Goodyear' entered into a Joint Venture Agreement dated
10.09.1993 to form a third company in the name of M/s. SATL
(the assessee), which came into existence on 30.09.94. The
primary objective of the assessee was to manufacture OTR
Tyres and Radial tyres exclusively for CEAT and Goodyear
under their brand names. The promoters namely Goodyear USA
and Goodyear India on one side and RPG CEAT on the other
were holding 50:50 equity each in the assessee, and were
exclusive buyers of goods manufactured by the assessee. In
the said Joint Venture Agreement, various other stipulations
were mentioned showing interest of both Goodyear as well as
CEAT in the assessee. As per the said agreement, the
assessee also received unsecured interest free loan of JUDGMENT Rs.85.66 crores from CEAT and Goodyear. Some moulds and
other equipments worth Rs. 10 crores free of cost, on loan
basis, were also given by these two companies to the
assessee.
This kind of arrangement led to the issuance of show
cause notice by the Commissioner of Central Excise and
Customs on 25.01.1999, alleging that CEAT and Goodyear are
related persons of the assessee within the meaning of
Section 4(4)(c) of the Act of 1944 and as such the selling
price of CEAT and Goodyear shall be the assessable value of
goods produced by the assessee under section 4 of the Act.
Alternatively, it was also alleged as to why the additional
consideration flowing back to the assessee should not be
added in their present selling price in terms of Rule 5 of
the Central Excise (Valuation) Rules, 1975 r/w Section 4 of
the Act. In this way a Demand cum Show Cause Notice was
issued to the assessee demanding differential duty of
Rs.8,76,85,385/- for the period from 01.03.1997 to
16.04.1998 for under valuation of the goods. Contravention
of Section 4 of the Act read with Rules 9, 9(2), 52, 173C,
173F, 173G of the Rules was also alleged and penal action
was proposed under Section 11AC of the Act read with Rules
173 of the Rules, alongwith penal interest under section
11AB of the Act.
The notice also invoked extended period under proviso
to Section 11A(1) of the Act for suppression of facts and
willful mis-declaration of Assessable value by assessee with
intent to evade payment of Central Excise duty. The notice
was also issued to four individuals, working for the
assessee.
The assessee rebutted the aforesaid allegations in the
show cause notice by putting up the defence to the effect
that the assessee on the one hand and the CEAT and Goodyear
on the other hand, were not related persons as there was no
mutuality of interest and that no extra commercial
considerations were pointed out regarding price fixation.
It was contended that the sale of goods by assessee to these
two companies was on principal to principal basis and at
arm's length. The Commissioner heard the matter and
thereafter, passed Orders-in-Original dated 11.05.2000
confirming the demand in the show cause notice. Some
penalties were also imposed. The matter was taken in appeal
before the Customs, Excise and Gold (Control) Appellate
Tribunal (hereinafter referred to as 'CEGAT'). A Bench of
the CEGAT heard the appeal on 18.05.2001. By an order dated
28.05.2002, the two members of the Bench differed with each
other; one member allowing the appeal and the other
remanding it. Accordingly, the matter was referred to a
third member, who heard the appeals. By her order dated JUDGMENT 26.07.2002, she concurred with the view that the appeals
were to be allowed. Accordingly, the order of CEGAT was
recorded on 31.07.2002 allowing the appeals.
This order of CEGAT is the subject matter of Civil
Appeal Nos. 1947-1950 of 2003.
Mr. K. Radhakrishnan, learned senior counsel appearing
for the Department, has extensively read the contents of the
show cause notice as well as the Order of the Commissioner
and from there he has pointed out that there is evidence to
show deep interest of the Goodyear and CEAT in the assessee
company. He thus, submitted that the Commissioner was right
in holding that these were 'related persons'. It is not
necessary to narrate those features which are pointed out by
Mr. Radhakrishnan inasmuch as those features only indicate
interest of the two companies, viz., CEAT and Goodyear in
the assessee to bring the case within the definition of
'related persons'. What is necessary is to prove mutuality
of interest, viz., interest both ways, i.e., of the two
companies in the assessee as well as of the assessee in the
said two companies. This legal requirement is necessary in
view of the definition of related persons contained in
clause (c) of Sub-Section (4) of Section 4 of the Central
Excise Act (hereinafter referred to as 'Act') which reads as
under: - JUDGMENT
“(c) “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, a relative and
a distributor of the assessee, and any
sub-distributor of such distributor.
Explanation. - In this clause “holding company”,
“subsidiary company” and “relative” have the same
meanings as in the Companies Act, 1956 (1 of 1956).”
The expression 'in the business of each other' clearly
denotes that interest of the two persons have to be mutual,
i.e., in each other, in order to treat them as related
persons. We find from the order of the Member Judicial that
only on the ground that the two companies had given a loan
of Rs. 85.66 crores to the assessee company, was treated as
sufficient to establish the relationship between the
assessee and the buyers. That only shows one way traffic
whereas requirement is that of two way traffic. The other
Member, in our opinion, aptly held that this cannot be the
factor which would show the mutuality of interest. For this
purpose, he referred to the judgment of this Court in
'Union of India v. Atic Industries Ltd. [1984 (17) ELT 323].
The third Member has, therefore, rightly, concurred with the
aforesaid view of Member (Technical).
The assessee did not have any interest in the business
of the buyers (Goodyear Indian Limited and CEAT Limited).
Given this, the requirement of 'mutuality of interest' which
is a pre-requisite under section 4(4)(c) of the Act does not JUDGMENT get satisfied. The matter is squarely covered by the
decisions of this Court in the case of Atic Industries Ltd.
We have gone through the judgment in the case of Atic
Industries Ltd. wherein this court categorically held that
there should be mutuality of interest in the business of
each other. After referring to the definition of 'related
persons', the aforesaid essential feature occurring therein
which needs to be satisfied is elaborated in the following
manner:-
“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
has an interest, direct or indirect, in the business
of the assessee. It is essential to attract the
applicability of the first part of the definition
that the assessee and the person alleged to be a
related person must have interest, direct or
indirect, in the business of each other. Each of
them must have a direct or indirect interest in the
business of the other. The equality 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 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. Now, in the present case,
Atul Products Limited has undoubtedly interest in the
business of the assessee, since Atul Products Limited
holds 50 per cent of the share capital of the
assessee and has interest as share holder in the
business carried on by the assessee. But it is not
possible to say that the assessee has any interest in
the business of Atul Products Limited. There are two points of view from which the relationship between
the assessee and Atul Products Limited may be
considered. First, it may be noted that Atul
Products Limited is a shareholder of the assessee to
the extent of 50 per cent of the share capital. But
we fail to see how it can be said that a limited
company has any interest, direct or indirect, in the
business carried on by one of its shareholders, even
though the shareholding of such shareholder may be 50
per cent. Secondly, Atul Products Limited is a
wholesale buyer of the dyes manufactured by the
assessee but even then, since the transactions
between them are as principal to principal, it is
difficult to appreciate how the assessee could be
said by virtue of that circumstance to have any
interest, direct or indirect, in the business of Atul
Products Limited. Atul Products Limited buys dyes
from the assessee in wholesale on principal to
principal basis and then sells such dyes in the
market. The assessee is not concerned whether Atul
Products Limited sells or does not sell the dyes
purchased by it from the assessee nor is it concerned
whether Atul Products Limited sells such dyes at a
profit or at a loss. It is impossible to contend
that the assessee has any direct or indirect interest
in the business of a wholesale dealer who purchases
dyes from it on principal to principal basis.
No doubt, the two buyers had given Rs. 85.66 crores
interest free loan to the assessee. However, that by itself
may not be a reason to hold them as related persons within
the meaning of Section 4(4)(c) of the Act. In the absence
of any mutuality of interest existing between them, giving
of this interest free loan could have been a basis to
include the notional interest while arriving at the cost of
product sold by the assessee to the two buyers. However,
instead of doing that, the appellant wanted to make use of
this factor to hold that the assessee and the two buyers are
“related persons” which position is difficult to comprehend
having regard to the principle laid down in Atic Industries Ltd's case. JUDGMENT
We thus, do not find any fault or error in the
impugned judgment. These appeals are, accordingly,
dismissed.
Civil Appeal No. 4370 of 2003
The period involved in Civil Appeal No. 4370 of 2003
is from 01.07.2000 to 26.09.2000. It so happened that the
joint venture agreement between the parties was terminated
and the CEAT transferred its entire shareholding in the
Goodyear group of which 97 percent is held by Goodyear USA
and 3 per cent is held by Goodyear India Private Limited.
Thus, the assessee became the subsidiary of Goodyear USA.
On this basis, show cause notice was issued for the
aforesaid period treating the assessee and Goodyear as
related persons having mutuality of interest.
No doubt that the assessee became the fully owned
company of Goodyear, the relationship between the two would
be that of related persons as they became “inter connected
undertaking” and are covered by the provisions of amended
Section 4(4)(3)(b) of the Act which provides that the person
would be deemed to be “related” if:
“i. they are inter-connected undertakings,
ii. they are relatives,
iii. Amongst them the buyer is a relative and a
distributor of the assessee, or a
sub-distributor of such distributor, or iv. they are so associated they have interest,
directly or indirectly, in the business of each
other.”
This position was not denied even by the assessee.
However, their submission was that provisions of Rule 9 of
the Valuation Rules are not attracted as this Rule applies
only when assessee so arranges its affairs that the
excisable goods are not sold by it except to or through a
person who is related in the manner specified in either of
the sub clauses (ii), (iii) or (iv) of Section 4(3)(b) of
the Act. [Rule 9 does not cover clause (i)]
This contention of the assessee is accepted by the
CEGAT and the CEGAT is justified in adopting this course of
action. It is clear that the two are companies and
therefore, they are not relatives and therefore, clauses
(ii) and (iii) are not applicable on the basis of it.
Insofar as clause (iv) is concerned, what is to be shown is
that they have interest, directly or indirectly, in the
business of each other. The expression “each other” would
signify the element of mutuality and we have already held
above that this mutuality principle has not been satisfied
in the instant case.
Apart from the above, it would be significant to
mention that after taking over of the assessee company by
Goodyear, more than 70 per cent of the sales by the assessee
company are to the third parties. That apart, there was JUDGMENT another contention of the assessee, viz., that the goods
sold to the outsiders are at a lesser rates than sold to
Goodyear. These two contentions have not been refuted by
the Revenue. The case, therefore, would be clearly covered
by a recent judgment of this Court in 'Commissioner of
Central Excise, Hyderabad v. M/s. Detergents India Limited
and Another' [2015 (4) SCALE 631] wherein it was held:-
“We are of the view that the “arrangement” spoken of
C.A. Nos. 1947-1950/2003 etc. 10
in the proviso must be something by which the
assessee and the related person “arrange” that the
goods are sold at 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.”
On these grounds, even this appeal fails and is
dismissed.
[ A.K. SIKRI ]
New Delhi; July 22, 2015. JUDGMENT
C.A. Nos. 1947-1950/2003 etc. 11