Supreme Court: Buyer and Seller Must have Inter-Relationship in Business to be ‘Related Party’ under Central Excise Act

Supreme Court: Buyer and Seller Must have Inter-Relationship in Business to be ‘Related Party’ under Central Excise Act

The Supreme Court by its division bench of Justices S. Ravindra Bhat and Dipankar Datta held that, while ascertaining who is the “Related Party” under the Central Excise Act for the purpose of valuation under Section 4(4)(c), the buyer and seller must have inter-relationship in one another’s business.

The factual matrix of the case is that the appellant, BIL was incorporated as Mitsu Industries Ltd. (hereafter ‘MIL’) in 1992; it was formed by members of the Bilkhias family who were its major shareholders/promoters. MIL used to manufacture pesticides, insecticides and their intermediaries classifiable under Chapter 38, Central Tariff Act, 1985 (hereafter ‘CETA’).

On 16.02.1998, AgrEvo GmbH and MIL signed a Letter of Intent, and on 22.11.1998 they signed a letter of Memorandum of Understanding (‘MOU’) expressing their intention to form a joint venture for research, manufacture, and sale of mainly synthetic pyrethroids products and their intermediates. Thereafter, MIL, AgrEvo GmbH, and AgrEvo SA entered into a Joint Venture Agreement (JVA) on 03.07.1999. This was for the purpose of researching, developing and manufacturing agrochemicals and environmental health products. MIL agreed to first transfer its entire non-pyrothroid business to another company, namely, Mitsu Pesticides Ltd.

in BIL, AgrEvo SA held 51% of the share capital initially (which was increased to 74% subsequently) and it continued to hold more than 51%. BIL thus became a subsidiary of AgrEvo SA. AgrEvo SA held 100% shares in Aventis Crop Science (India) Ltd. Therefore, both BIL and Aventis Crop Science (India) Ltd. became subsidiaries of AgrEvo SA (the name of which was changed to Aventis CropScience SA around March 2000; both names are used interchangeably hereafter) during the relevant period. The dispute in this case arose as regards value of Esbiothrin.

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 in original was appealed by BIL, to the Customs, Excise and Service Tax Appellate Tribunal (CESTAT).

The question that arose for consideration in the appeals directed against the order of the CESTAT was whether the price at which the appellant M/s Bilag Industries Ltd., Vapi 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 Act).

The Court referred the decision passed in Supreme Washers Pvt. Ltd. v. Commissioner of Central Excise, Pune, wherein the assessee and the buyer were involved in common procurement of raw material; they had common stock accounting and planning and interdependence in manufacturing operations.

The Supreme Court had held that, holding common stock of raw material and semi-finished goods, with common use of machinery between the three units, with common marketing arrangements and free flow of finance between the three units, cumulatively established the assessees’ inter relationships and interdependence of all three units with each other.

However, in the present case, the Court noted that AgrEvo SA/ Aventis CropScience SA holds the entire shareholding in Aventis CropScience (India) Ltd. (the buyer). It also is a shareholder in BIL. All of the latter’s products were sold to Aventis CropScience (India) Ltd.

However, the Court opined that this did not show that BIL has any business interest or interest in the affairs of Aventis CropScience (India) Ltd., nor, conversely, that Aventis CropScience (India) Ltd has any such interest, direct or indirectly in BIL.

In this regard, the Court held that, “the revenue’s concern in examining whether the parties were related might be justified; however, it could not have concluded that such relationship, as is contemplated by Section 4(4)(c) could have been inferred, without applying the proper test.”

Additionally, the Court noted that the revenue had the materials before it, in the form of documents which indicated the mark up towards profit margin, and other objective evidence to compare, the cost of the goods sold, were depressed, or were comparable to the market price of the same or similar goods. There was no finding that the price of the goods was lower than what was the price of those goods, in the market, stated the bench.

Hence, 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.