Holding

The distributors are not related persons under Section 4(c) and the expenses for show‑rooms, advertising etc. are not to be included in the assessable value.

Summary

The respondents, manufacturers of cycle lamps and automotive chains, sought to have the factory‑gate price treated as the assessable value for excise duty, arguing that their distributors were not "related persons" under Section 4(c) of the Central Excises and Salt Act, 1944. The Assistant Collector had held the distributors to be related persons, thereby fixing the assessable value at the distributors' resale price. The Appellate Collector reversed this finding, and the Revenue appealed. The Supreme Court examined the definition of "related person" and held that a distributor who is merely a limited company and a main distributor of the holding company does not satisfy the criteria of a related person. Consequently, the factory‑gate price is the assessable value and the markup for showroom, advertising and other expenses is not to be added. The Court dismissed the appeals.

Issues considered

Whether the distributors of T.I. Millers Ltd. qualify as "related persons" under Section 4(c) of the Central Excises and Salt Act, 1944.
Whether expenses incurred for show‑rooms, advertisements and other distributor‑incurred costs should be added to the assessable value of the goods.

Legislation cited

Central Excises and Salt Act, 1944s. 3, s. 4, s. 4(c)
Companies Act, 1956
Monopolies and Restrictive Trade Practices (MRTP) Act

Subjects

central exciseassessable valuerelated persondistributorSection 4(c)Central Excises and Salt Acttax valuationmarkupshowroom expenses

Judgment

4 .

COLLECTOR OF CENTRAL EXCISE, MADRAS
A
v.
T.I. MILLERS LTD. MADRAS & T.I. DIAMOND CHAIN,
MADRAS

MARCH 28, 1988
B
_)i [SABYASACHI MUKHARJI ANDS. RANGANATHAN, JJ.]

Central Excises and Salt Act, 1944--Sec. 4--Assessable value of
goods for levy of duty under Sec. 3-How to determine assessable
value.
~+
~ Central Excises and Salt Act, 1944--Sub-sec. 4(c) of Section 4-- c
I ' Related Person-Who is-Criteria for its determination.

The respondents manufactured goods which were assessable
under Item 68 of the Central Excise Tariff. The respondents filed price
lists for the sale of the goods through their distributors one of them D
being M/s. T .I. & M-Sales Ltd., quoting their price to the distributors
as assessable value. Subsequently the respondents required that the
price charged by them from buyers at the factory gate should be
accepted as the assessable value and not the price to the distributors.
The Assistant Collector found that the distributors were related persons
~ as per section 4 of the Central Excises and Salt Act, 1944 and the price E
at which the distributors sold the goods should therefore be the assess-
able value. On appeal by the appellant-revenue, tlie Appellate Collector
held that these could not be held to be the related persons. The Revenue
bad found that there was an agreement existing between the respon-
dents and their distributors according to which they were the com-
-i pany's distributors for the sale of their goods. Major portion of the sales
were effected through M/s. T .I. & M. Sales Ltd. who were the main
F

I! distributors of M/s. Tube Investments of India Ltd. and its subsidiary
companies and rest of the sales through the other two distributors. M/s.
Tube Investment of India was the holding company of M/s. T .I. Millers
Ltd. The agreement.between the assessee and the T.l & M. Sales Ltd.
was registered under the MRTP Act. The Revenue had further found G
. that there was a territorial earmarking for the operation of the dis-
~ tributors, who also undertook advertisements and helped the sub-
dealers for maintaining show-rooms .in dealer's premises. The distri-
butors did not deal with competitor's goods. The Revenue had also
noted that the assessee granted mark up to the distributors to cover
their establishment expenses, travelling expenses, advertisements and H
355
356 SUPREME COURT REPORTS I 1988] 3 S.C.R.
A sundry expenses. In view of this the revenue filed a review petition, but
the Appellate Tribunal rejected the review petition and upheld the tin.d-
ing of the Appellate Collector. Hence these appeals under section
3SL(b) of the Act. The question was whether the distributors were
related persons of the respondents and secondly whether the expenses
incurred for maintaining the show-room, advertisements etc. should
B
also be added to the assessable value.

Dismissing the appeals this Court,

HELD: To find out whether the distributors were related persons
of the manufacturers it is necessary to find out whether the buyer is
-
c holding company or subsidiary company or relative of the manufac-
turer. From the explanation of the relationship furnished in this case,
such is not the position. It appears that the link between the respon-
dents T.I. Miller Ltd. Company and T.I. & M. Sales Ltd., is that the
latter are the main distributors of M/s. Tube Investments of India Ltd.,
which is the holding company of the respondents. This relationship does
D
not satisfy the criteria for establishing the related persons concept.
These were limited companies at the material time, and it will be diffi-
cult to say that a limited company has any interest direct or indirect in
the business carried on by one of its shareholders. l362A-C]

The mark up in the price was allowed in connection with the
E
requirement to display the maximum sale price. The sales pattern
shows also sales to other than distributors and it is not restricted only to
the appointed distributors of T .I. India Limited. In the background of
the facts mentioned hereinhefore and in the light of the decisions of this
Court in Bombay Tyre International and Alic Industries cases we are of
the opinion that the Tribunal was right and there is no cause for
F
interference with the order of the Tribunal. l362C-E]

Union of India and others v. Atic Industries Limited, [1984] 3
S.C.R. 930 and Union of India and Others etc. etc. v. Bombay Tyre
International Ltd. etc. etc., 11984] I S.C.R. 347, referred to.
G CIVIL APPELLATE JURISDICTION: Civil Appeal Nos.
1938-39 of 1987.

From the Order dated 1. 10. 1985 of the Customs Excise and
Gold (Control) Appellate Tribunal, New Delhi in Appeal Nos. ED
(SR) T. 1415/82 Al and 1533/84-A.
H
COLLECTOR OF C.E. v. T.I. MILLERS LTD. [MUKHARJI, J.I 357

M. K. Banerjee, Solicitor General, A.K. Ganguli and P. Parmes-
A
hwaran for the Appellant.

A.T.M. Sampath for the Respondents.

The Judgment of the Court was delivered by
B
SABY ASACHI MUKHARJI, J. These are appeals under section

- 35L(b) of the Central Excises and Salt Act, 1944 (hereinafter called
'the Act'). The respondents-T.I. Millers Ltd. and T.I. Diamond
Chain manufacture cycle lamps and automative chains. Both these
goods are assessable under Item 68 of the Central Excise Tariff. The
said respondents filed price lists for the sale of the goods through their
distributors, namely, M/s. T.I. and M-Sales Ltd., M/s. Charmvel c
Agencies and M/s. Ambadi Enterprises Pvt. Ltd. quoting their price to
the distributor as assessable value. However, subsequently following
the decision of the Madras High Court in a valuation case, the respon-
dents required that the price charged by them from buyers at the
factory gate should be accepted as the assessable value and not the D
price to the distributors. The question is whether the price charged by
the respondents from buyers at the factory gate should be accepted as
the assessable value for the levy of duty under section 3 of the Act. The
Assistant Collector found from the sales pattern of the respondents
that the distributors were 'related persons' as per section 4 of the Act
and the price at which the distributors sold the goods should, there- E
fore, be the assessable value.

The respondents went up in appeal before the Appellate Col-
lector. The Appellate Collector held that in order to establish mutual-
ity of business interests, direct and indirect between manufacturer and
buyer, it should be shown that they have been promoting the business F
of each other in their own interest and that in the absence of such a
finding in the Assistant Collector's order, these could not be held to be
related persons. Section 4 of the Act provides that where the duty of
excise is chargeable on any excisable goods with reference to value,
such value should be determined on the basis of the normal price
thereof, that is to say, the price at which such goods are ordinarily sold G
by the assessee to a buyer in the course of wholesale trade for delivery
at the time and place of removal, where the buyer is not a related
person and the price is the sole consideration for the sale. We are not
concerned for the purpose of these appeals with the provisos nor with
sub-section (2) or sub-section (3) of section 4 of the Act. Sub-section
4(c) of section 4 defines 'related person' to mean a person who is so H
358 SUPREME COURT REPORTS [1988] 3 S.C.ll.

A associated with the assessee that they have interest, direct or indirect,
in the business of each other and includes a holding company, a sub-
sidiary company, a relative and a distributor of the assessee, and any
sub-distributor of such distributor. The explanation provides that
'holding company', 'subsidiary company' and 'relative' have the same
meanings as in the Companies Act, 1956.
B
The words "related person" have been considered by this Court
in Union of India and others v. Alic Industries Limited, 11984] 3 S.~.R. I
930. Bhagwati, J., as the learned Chief Justice then was, speaking for
the Cotirt held that the first part of the definition of "related person"
in clause (c) of sub-section (4) .of section 4 defines "related person" to
--•
c mean "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, the Court observed, 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. To attract the
D applicability of the first part of the definition, it was observed, the
assessee and the p_erson 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
quality '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
E may be'ldirect 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. ·

F
In the notice issued by the Central Government seeking to
review the Appellate Collector's order, the Central Government indi-
cated that there was an agreement existing between the respondents
and their distributors according to which they were the company's
>-
distributors for the sale of their goods. Major portion of the sales were
effected through M/s. T.I. and M-Sales Ltd. who were the main dis-
tributors of M/s. Tube Investments of India Ltd. and its subsidiary
G companies and rest of the sales through the other two distributors.
M/s. Tube Investment of India was the holding company of M/s. T.I.
Millers Ltd. The agreement between the assessee and the T.I. and M
Sales Ltd. was registered under the MRTP Act. The Government of
India also found that there was·a territorial earmarking for the opera-
tion of the distributors, who also undertook advertisements and
H helped the sub-dealers for maintaining show rooms in dealer's pre-
COLLECTOR OF C.E. v. T.I. MILLERS LTD. (MUKHARJI, J.] 359

mises. The distributors did ilot deal with competitor's goods. The Gov-
A
ernment of India also noted that the assessee granted mark up to the
distributors to cover their establishment expenses, travelling expenses,
·advertisement and sundry expenses. On these grounds, the Govern-
ment of India tentatively considered that it was a fit case for reversing
the order of the Appellate Collector who had held that the distributors
were not related persons under section 4 of the Act; The ·question is, B
whether the distributors in this case were .related persons of the
respondents and secondly, whether the expenses incurred for main-
taining the show-room, advertisements etc. should also be added to
the assessable value. How the value should be computed has been
examined by this Court in Union of India and others .etc. etc. v.
Bombay Tyre International Ltd. etc. etc., [1984] 1 S.C.R. 347. There,
Pathak, J. as the learned Chief Justice then was, held that the defini- c
tion of the words "related person" did ncit suffer from any constitu-
tional infirmity. This Court reiterated that on a true i:onstniction of its
provisions in the context of the statutory scheme the old section 4(a)
should be considered as applicable to the circumstances of the particu-
lar assessee himself and not of manufacturers generil.Ily .. The Court D
further reiterated that pursuant to the old section 4(a) !he value of an
excisable article for the purpose of the excise levy should be taken to
be the price at which the excisable article is sold by the assessee to a
buyer at arm's length in the course of whole sale trade at the time and
place of removal. Where, however, the excisable article is not sold by
the assessee in wholesale trade, but for example, is consumed by the E
assessee in his own industry the case is one where under the old section
4(a) the value must be determined as the price at which the excisable·
article or an article of the like kind and quality is capable of being sold
in wholesale trade at the time and place of removal. 'This Court
analysed the position under the Central Excise and Salt Act, 1944 as
amended by Act XXII of 1973 that if the price at which the excisable F
goods are ordinarily sold by the assessee to a buyer in the course of
wholesale trade for delivery at the time ancl place of removal as
defined in sub-section (4)(b) of section 4 is the.basis for determination
of excisable value provided, of course, the buyer is not a related
person within the meaning of sub-section (4)(c) of section 4 and the
price is the sole consideration for the sale, that would be ·the value. G
The proposition is subject to the terms of the three provisos to sub-
section (l)(a) of section 4. Where the wholesale price of any excisable
goods for delivery at the place of removal is not known and the value
thereof is determined with reference to the wholesale price for deliv-
ery at a place other than the place of removal, the cost of transporta-
tion from the place of removal to the place of delivery should be H
360 SUPREME COURT REPORTS [19881 3 S.C.R.

A excluded from such price. It was further held that these principles
could not apply where the tariff value had been fixed in respect of any
excisable goods under sub-section (2) of section 3. The Court also
dealt with the interpretation of definition of 'related person'. The
Court further held that the expenses incurred on account of. the several
factors which have contributed to its value upto the date of sale, which
B apparently would be the date of delivery, are liable to be included.
Consequently, where the sale is effected at the factory gate, expenses
incurred by the assessee upto the date of delivery on account of stor-
age charges, outward handling charges, interest on inventories (stocks
carried by the manufacturer after clearance), charges for other ser-
vices after delivery to the buyer, namely, after sales service and
marketing and selling organisation expenses including advertisement
c expenses marketing and selling organisation expenses and after-sales
service promote the marketability of the article and enter into its value
in the trade. Where the sale in the course of wholesale trade is effected
by the assessee through its sales organisation at a place or places
outside the factory gate, the expenses incurred by the assessee upto
D the date of delivery under the aforesaid heads cannot, on the same
grounds, be deducted. The assessee will be entitled to a deduction on
account of the cost of transportation o.f the excisable article from the
factory gate to the place or places where it is sold. The cost of trans-
portation will include the cost of insurance on the freight for transpor-
tation of the goods from the factory gate to the place or places of
E delivery. The new section 4(4)(d)(i) has made express provision for
including the cost of packing in the determination of "value" for the
purpose of excise duty.

The review application, by the change of law, was forwarded to
the Tribunal. It was contended before the Tribunal on behalf of the
F appellant that the distributors were related persons in terms of the
judgment of this Court in Bombay Tyre International case (supra). Our
attention was drawn to a letter dated 10th September, 1981 from the
respondents to the Assistant Collector that the mark up allowed to the
distributors was to cover their establishment expenses, advertisement,
travelling expenses and he pointed out that this mark up included
G certain elements which have to be included in the assessable value.
The Tribunal held that according to the judgment of this Court in
Bombay Tyre International case (supra) where the sale is effected at
the factory gate, expenses incurred on account of charges for services
after delivery to the buyer, namely after sale service and marketing
and selling organisation expenses, including advertisement expenses
H could not be deducted from the assessable value. It was further urged
COLLECTOR OF C.E. v. T.I. MILLERS LTD. [MUKHARJI, J.J 361

on behalf of the appellant that other features like division of territory
A
amongst the distributors and the marginal quantity of direct sales
otherwise, as well as the fact that the distributors did not deal in
competitor's goods, clearly indicated that these are related persons.
Learned Counsel drew our attention to the meaning of the term 'ordi-
narily' given .in K. G. Iyer's Judicial Dictionary at page 704 and
explained that it meant 'habitually', or 'usually', or 'normally'. In this B
case, ordinarily sales are only through distributors and the sales are
made by them on behalf of the manufacturer. Learned Counsel pointed
out that this was a c.ase where it was an extension of the manufacturer's
self to the point of sale by the distributor. Learned Counsel for the
revenue urged that it was a case of indirect relationship and came
within the ratio of the aforesaid decision of this Court in Bombay Tyre
International case (supra). In this case, it was highlighted that man-
c
ufacturer had interest in the buyer who were their distributors and the
distributors were only charging limited commission, maintained show-
rooms, and did not deal in the products of competitors of the man-
ufacturer. It was further contended that sales of their products as
original equipment, could not be considered as sales in the ordinary D
course of wholesale trade. It was further highlighted that the norm of
inter-connected undertakings found in MRTP Act is not relevant to
decide 'related persons' in the Act. It was further argued that mere area
restriction is not relevant for proving mutuality of interests, but it has
to be shown that the sale was not at an arms length and but a principal
to principal transaction. It appears from the letter dated 10th E
September, 1981 from the appellants to the Department that the dis-
tributors paid for their own advertisements. In some case, the man-
ufacturer might release advertisements through the distributors. It was
also urged that even a sole distributor could be an independent buyer
on behalf of the manufacturer and the distributor and in this connec-
tion reliance was placed on the observations of this A.K. Roy's case F
(1977 ELT 177. S.C.). After sales service undertaken by the distri-
butors was more in the nature of replacement of defective goods sold,
which any manufacturer was bound to do and that is a normal essential
service of a distributor.

Regarding the 'mark up' allowed by the manufacturer to the G
distributor as indicating special relationship, it was contended that it
was provided for in the context of the requirement to indicate max-
imum selling price to be marked on the goods, and in fact, it was in this
context that the appellants had made a reference to the MRTP Com-
mission. The Tribunal held that the distributors were not related
persons and in the light of the observations of this Court in Atic In" H
362 SUPREME COURT REPORTS [1988] 3 S.C.R. i
A dustries case (supra) set out hereinbefore. We are of the opinion that
what was necessary to find out, was whether the buyer is holding
company or subsidiary company or relative of the manufacturer. From
the explanation of the relationship furnished in this case, such is nat
the position. It appears that the link between the respondents T .I .Mil-
ler Ltd. company and T.I. & M. Sales Ltd., is the main distributors of
:s M/s. Tube Investments of India Ltd., who are the holding company of "J..
the· respondents. This relationship does not satisfy the criteria for
establishing the related persons concept. These were limited com-
panies at the material time, and it will be difficult to say that a limited
company has any interest direct or indirect in the business carried on
by one of its shareholders.
c
It has been explained that the mark up in the price was allowed in
connection with the requirement to display the maximum sale price.
The sales pattern shows also sales to other than distributors and it is
not restricted only to the appointed distributors ofT.I. India Limited.
D
In the premises the Tribunal's upholding the order of the Appel-
late Collector, was right and correct. In the background of the' facts
mentioned hereinbefore and in the light of the decisions of this Court
in Bombay Tyre International and Atic Industries cases (supra), we are
of the opinion that the Tribunal was right and there is no cause for
interference with the order of the Tribunal. In the premises, we de-
E dine to admit the appeals.

H.S.K. Appeals dismissed.

)-

)...__