Central Excise Act - To Be "Related Person", Buyer & Seller Must Have Direct Or Indirect Interest In Each Other’s Business : Supreme Court

The Supreme Court while ascertaining who is the “Related Party” under the Central Excise Act for the purpose of valuation held that before the clause in Section 4(4)(c) could be used, the buyer and seller had to be interested in one another's businesses. Since two-way traffic is required, there shouldn't be any one-way traffic.

The division bench of Justice S. Ravindra Bhat and Justice Dipankar Datta referred to various precedents which explained that Section 4(4)(c) defines “related person” 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.

The first part of the definition requires 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.

Second Part defines “related person” which 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 the assessee, and any sub-distributor of such distributor.”

The appellant, BIL was incorporated as Mitsu Industries Ltd. in 1992. It was founded by members of the Bilkhias family, who served as its primary shareholders and promoters.MIL used to manufacture pesticides, insecticides, and their intermediaries, which were classifiable under Chapter 38 of the Central Tariff Act of 1985 (CETA). These fell under the broad category of pyrethroid products. Besides other products like cypermethrin and alpha-cypermethrin, MIL manufactured allethrins, deltamethrins, and intermediates for the entire range of products. Before July 1999, MIL did not manufacture esbiothrin or esbiol.

The department proposed to treat the price at which Aventis Crop Science (India) Ltd. sold the product to the end customers as the assessable value ignoring the transaction cost. The duty demand was Rs. 1,68,81,685.

An amount of Rs.2,39,54,913 was demanded on the ground that AgrEvo SA/Aventis CropScience SA had recovered a sum of Rs.14,97,18,205 through its 100% owned subsidiary Aventis CropScience (India) Ltd. towards expenses incurred for advertising, publicity, marketing and selling expenses, storage, outward handling, servicing, warranty, etc. The amount paid by Sumitomo to AgrEvo SA/ Aventis CropScience SA should be treated as additional consideration and added to the value of the goods manufactured and cleared to BIL. An amount of Rs. 5,95,97,434 was demanded as differential duty on Esbiuothrin on the ground that the price at which the goods were sold to end customers by Sumitomo should be the basis for the determination of assessable value and that the sale by BIL to Aventis CropScience (India) Ltd. was to a “related” person.

The order was originally appealed by BIL, to the CESTAT. ‘

The issue raised was whether the price at which the appellant BIL sold its products to the buyer, should be treated as a transaction with a “related person” under Section 4(4)(c) of the Central Excise Act, 1944.

The CESTAT noted that BIL had developed a process for the manufacture of esbiothrin that did not reach the final stage. Before that, AgrEvo SA, the foreign company, became aware that a competitor was emerging, and it entered into a JVA. The result was that BIL stopped the development of the process. It obtained the know-how of the complete manufacturing process as well as the right to manufacture the product, then sold the whole thing to a subsidiary of AgrEvo SA. In return, BIL received technical know-how and a free marketing set-up, and the consumers identified by them would remain intact in the absence of any competitor.

According to CESTAT, the transactions between the foreign company and its two Indian subsidiaries were a joint venture in which both parties benefited. Therefore, the price at which BIL sold the goods to Aventis Crop Science (India) Ltd. was to be treated as sales to a "related person".

The appellant contended that the test applied consistently by the court to decide if an entity was “related” to another has been whether the seller has an interest in the business and affairs of the buyer. Likewise, whether the buyer has an interest in the business of the seller. Even if one were present, in the absence of the other, there would be no relationship, for the purpose of Section 4(4)(c) and the transaction should be treated as one at arm’s length.

The department pointed out that business relationships and the interest of one entity in the affairs or business of another cannot be placed in a straitjacket. The formation of the JVA and BIL, in which the foreign company AgrEvo SA/Aventis CropScience SA is a major shareholder, was for the purpose of ensuring that the products manufactured reached its overseas markets, through the medium of its subsidiary, Aventis CropScience (India) Ltd., which was owned to the extent of 100% by AgrEvo SA/Aventi CropScience SA.

The court held that the department had the materials before it in the form of documents that indicated the markup toward the profit margin and other objective evidence to compare. If the cost of the goods sold was depressed or was comparable to the market price of the same or similar goods. There is no evidence that the goods' price was lower than what they were selling for in the market.

The court observed that the CESTAT’s decision to reject the value at which the goods were sold by treating the assessee as a related person was erroneous. Central Excise Act, 1944. The price at which the assessee sold its products to the buyer, was not to be treated as a transaction with a "related person" under Section 4(4)(c) of the Central Excise Act, 1944.

Case Title: M/S Bilag Industries P. Ltd. & Anr. Versus Commr. Of Cen. Exc. Daman & Anr.

Citation: 2023 LiveLaw (SC) 257

Central Excise Act 1994- Section 4(4)(c)- Test to determine "related party"- buyer and seller had to be interested in one another's businesses. Since two-way traffic is required, there shouldn't be any one-way traffic.

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