'NON-REPORTABLE'
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NOS. 1947-1950 OF 2003
COMMISSIONER OF CENTRAL EXCISE, AURANGABAD ... Appellant
VERSUS
M/S.GOODYEAR SOUTH ASIA TYRES P. L.& ORS. ... Respondents
WITH
CIVIL APPEAL NO. 4370 OF 2003
COMMISSIONER OF CENTRAL EXCISE, AURANGABAD ... Appellant
VERSUS
M/S.GOODYEAR SOUTH ASIA TYRES PVT. LTD. ... Respondent
J U D G M E N T
A. K. SIKRI, J.
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 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 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 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: -
“(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 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.
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 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 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.
........................., J.
[ A.K. SIKRI ]
........................., J.
[ ROHINTON FALI NARIMAN ]
New Delhi;
July 22, 2015.