COMMISSIONER, CENTRAL EXCISE, CHANDIGARHversusM/S. KWALITY ICE CREAM CO.

               [2010] 14 (ADDL.) S.C.R. 409


  COMMISSIONER, CENTRAL EXCISE, CHANDIGARH                         A
                               v.
             M/S. KWALITY ICE CREAM CO.
          (Civil Appeal Nos. 8456-8463 of 2002)
                   NOVEMBER 26, 2010
                                                                   B
   [B. SUDERSHAN REDDY AND SURINDER SINGH
                  NIJJAR, JJ.]

      Central Excise Tariff Act, 1985 - s. 4(4)(c) - Valuation
of excisable goods - Manufacturer-assessee entering into           C
sourcing agreement with a company for marketing its product
- Revenue holding the manufacturer-company and
distributor-company as related persons and demanding duty
on the basis of the price at which distributor-company selling
the product - Demand confirmed by appellate authority -            D
Tribunal negating the demand - On appeal, held: The
Manufacturer!assessee-company and the distributor-
company were not 'related persons' - Transaction between
them was on principal to principal basis ...,. The assessable
value cannot be computed on the basis of the price at which        E
the distributor-company sold the product.

     Words and Phrases - 'Related persons' - Meaning of,
in the context of s. 4(4)(c) of Central Excise Tariff Act, 1985.

    The respondent assessee-company, manufacturer of F
ice-cream, entered into a so1.Jrce agreement with a
company for the sale of its entire product, for marketing.
The Department issued show-cause notice demanding
the duty, computing the assessable value of the product
on the basis of the price at which the distributor-company G
sold the product. The demand was confirmed by the
authority concerned. The appellate authority confirmed ·
the demand holding that the manufacturing/assessee-
company and the distributor-company were related
                             409                           H
    410    SUPREME COURT REPORTS [2010] 14 (ADDL.) S.C.R.


A persons and the transaction between them was not on
  principal to principal basis. On appeal, CEGAT held that
  the manufacturer assessee-company and the distributor~
  company were not related persons and the transaction
  between them was on principal to principal basis.
B Therefore, the instant appeals were filed by the Revenue.

          Dismissing the appeals, the Court

      HELD: 1. The Tribunal did not commit any error in
  coming to the conclusion that the assessee and the
C distributor-company were not 'related persons'. The
  transaction between them is of the nature of principal to
  principal and the price was the sole consideration for the
  sale of goods. Therefore, the assessable value cannot be
  computed on the basis of the price at which the
D distributor-company sold the product from its depot.
  [Para 21] [426-F]

       2. According to clause (c) of sub-section (4) ,of
  Section 4 of Central Excise Tariff Act, 1985, 'related
E person' means a person who is so associated with the
  assessee that they have interest, directly or indirectly, and
  includes a holding company, a subsidiary company etc.
  The Explanation to Section 4(4)(c) further provides that
  in this cla1,1se 'holding company', 'subsidiary company'
  and ' relative' have the same meanings as in the
F Companies Act, 1956. What is of importance is certain
  interdependence and reciprocity beyond .the relationship
  of either a distributor or manufacturer so as to consider
  as to whether the parties are 'related persons'. Essentially
  the relationship between the assessee-company and the
G distributor-company is one sided and the facts do not
  suggest that each one of. them have interest direct or
  indirect, in the business of each other. [Paras 9 and 19]
  [418-F-G; 425-F; 426-A-B]

H         3. The Departmental authorities, on the basis of
                                             ..

    COMMNR., CENTRAL EXCISE, CHANDIGARH v.               411
            KWAUTY ICE CREAM CO.

Clause S(i) of the Source Agreement took the view that          A
the terms and conditions of the agreement between the
assessee-company and the distributor-company had
mutuality of interests and therefore, the transactions
between them were not on a principal to principal basis.
The Tribunal upon meticulous analysis of the terms and          B
conditions of the agreement found that the price was
being fixed on the basis of the formula agreed between
the parties. Sub-clause (iii) of Clause 6 provides that
pendirig commencement of production by the assessee-
com pany, it shall make necessary investments for               c
upgradation, modification or alteration in the existing
factory/manufacturing facilities as required by the
distributor-company subject to necessary approvals and
pending such investments the assessee-company shall
not be responsible for any deficiency. On assessee-             0
company making such investment for upgradation or
modification, the pricing agreed upon is on a formula
which took into consideration the investments made by
assessee-company for upgradation, modification. The
Tribunal rightly arrived at the conclusion that pricing in      E
terms of clause (S)(iii) of the Source Agreement would not
lead to the conclusion that the transaction was not one
between principal to principal. [Para 16) [424-D-H]

     4. The Tribunal while interpreting clause (S)(ii) of the
agreement found that the assessee-company was not               F
under the control of the distributor-company. There is
nothing to show in that clause that the distributor-
company can compel the assessee-company to close
down the factory or move it from its current location. The
only effect of the assessee-company accepting the               G
suggestion is that the distributor-company will be
relieved of its obligations under the sourcing agreement.
This clause merely indicates the conditions on which the
terms of sourcing agreement could be brought to an end.
[Para 17) [425-A-D]                                             H
    412    SUPREME COURT REPORTS [201 OJ 14 (ADDL.) S.C.R.


A      5. The Tribunal on fair analysis of clause (6)(i)(cc) of
  the agreement held that the deposits from the distributor-
  company were taken by the assessee-company as a
  matter of commercial expediency and as a trade practice
  required in the circumstances of the case. This was so
B because the amount due to the assessee-company as
  price of the Ice-Cream manufactured for the distributor-
  com pany is tied up for more than one month before
  payment is received by the assessee-company and
  goods were exclusively manufactured according to the
c specifications of the distributor-company and even
  packing material required carrying their brand name,
  there was any amount of risk of goods being rejected by
  the distributor-comapny for reasons other than quality
  and this was the commercial expediency for making such
  deposits. [Para 18] [425-E-G]
0
       Union of India vs. Bombay Tyre International Ltd. 1983
  ELT 1896 SC; Union of India vs. A TIC Industries Ltd. 1984
  (3) SCR 930; Union of India vs. Playworld Electronics Pvt. Ltd.
  1989 (41) ELT 368 SC; CCE VS. Xerographic Ltd. (2006) 9
E sec 556 - relied on.

         Supreme Washers Pvt. Ltd. vs. Commissioner of Central
    Excise, Pune (2003) 1 SCC 142 - distinguished.

         Calcutta Chromotype Ltd. vs. Collector of Central Excise,
F   Calcutta1998 (99) ELT 202 (SC); Flash Laboratories Ltd. vs.
    Collector of Central Excise, New Delhi 2003 (2) SCC 86 -
    referred to.
                         Case Law Reference:
G                                 Relied on             Para 10
          1983 ELT 1896 SC
          1984 (3) SCR 930        Relied on             Para 10
          1989 (41) ELT 368 SC Relied on                Para 11

H
    COMMNR., CENTRAL EXCISE, CHANDIGARH v.               413
            KWALITY ICE CREAM CO.

    1998 (99) ELT 202 (SC) Referred to             Para 12      A

    2003 (2) SCC 86          Referred to           Para 13
    (2006) 9 sec 556         Relied on             Para 14
    (2003) 1 sec 142         Distinguished         Para 20      B
    CIVIL APPELLATE JURISDICTION : Civil Appeal No.
8456-8463 of 2002.

    From the Judgment & Order dated 03.04.2002 of the
Central Excise & Gold [Control] Appellate Tribunal, New Delhi   c
['CEGAT'] in Appeal No. El1880-1884 & 1885-188712001-A.

                           WITH

C.A. Nos. 5216-5217 of 2003.
                                                                D
     K. Swami, B.K. Prasad, B. Sunita, Priya Bhatnagar, Anil
Katiyar for the Appellant.

    Ravinder Narain, Sonu Bhatnagar, Ajay Aggarwal, Mallika
Joshi, Ranjan Narain for the Riaspondent.
                                                                E
    The Judgment of the Court was delivered by

     B. SUDERSHAN REDDY, J. 1. The short question that
arises for our consideration in these appeals is whether Mis.
Kwality Ice Cream Company on the one hand and Brooke            F
Bond Lipton India Limited -(BBLIL) on the other (which later
merged with Hindustan Lever Limited -HLL) are treated to be
related persons in the matter of computing assessable value
of ice cream manufactured by Mis. Kwality Ice Cream and as
to whether duty should be demanded from Mis. Kwality Ice        G
Cream on the basis of the price at which BBLIL sold the said
product from its depot.

    2. Mis. Kwality Ice Cream (respondent-assessee) is
engaged in the manufacture of ice cream falling under the
                                                                H1
    414   SUPREME COURT REPORTS (2010] 14 (ADDL.) S.C.R.


A Schedule to the Central Excise Tariff Act, 1985 (for short 'the
  Act'). It entered into an agreement for the sale of the entire
  production to BBLIL, which later merged with HLL, for
  marketing. It has entered into agreement with BBLIL for a
  period ending on March 21, 1997. Later an agreement was
B entered into with Mis. HLL with effect from March 22, 1997. The
  terms and conditions of this agreement are the.same as those
  with BBLIL.

         3. The contention raised by Mis. Kwality Ice Cream that
    the entire transaction between the parties covered by the
C   agreement was on principal to principal basis and that the price
    was sole consideration for the sale of the goods was not
    accepted by the departmental authorities. The demand under
    show cause notices covering the period from February, 1996
    to November, 1997 was confirmed by the Assistant
D   Commissioner under Section 11 of the Central Excise Act,
    1944. Appeals preferred by Mis. Kwality Ice Cream against the
    said order were rejected on the ground that the agreement
    between Mis. Kwality Ice Cream and BBLIUHLL does not leave
    any scope but to in~icate that Mis. Kwality Ice Cream has no
E   autonomy to run its unit. Starting from the procurement/purchase
    of raw material to the manufacture of final product, all the
    activities of Mis. Kwality Ice Cream were fully controlled by
    BBLIUHLL. The nature and type of machinery to be put in use
    was in terms of the directions of BBLIUHLL. Mis. Kwality Ice
F   Cream did not have any liberty to market its goods. The
    appellate authority took the view that the transactions between
    the parties were not on principal to principal basis. Interest
    accrued on interest free deposit with Mis. Kwality Ice Cream,
    read with other terms and conditions of the agreement, reveal
G   that it was clearly an extra commercial consideration.

        4. Mis. Kwality Ice Cream preferred appeals challenging
    the order passed by the Commissioner before CEGAT, New
    Delhi, inter-alia, contending that the price of the product was
    not determined exclusively at the instance of BBLIL but was
H
  COMMNR., CENTRAL EXCISE, CHANDIGARH v.       415
KWALITY ICE CREAM CO. [B. SUDERSHAN REDDY, J.]
determined in terms of the formula given in Appendix 4 to the          A
source agreement. The formula was an integral part of the
source agreement according to which the price was fixed.
There was even a provision for pricing after upgrading of the
existing factories/manufacturing facilities or at the new factories/
manufacturing location of M/s. Kwality Ice Cream.                      B

     5. The CEGAT after elaborate consideration of the matter
found that the provisions contained in clause (9) read with
Appendix 4 and 5 of the agreement between the parties clearly
establish that the price was not being fixed by BBLIL exclusively      C
but on the other hand the price was fixed on the basis of the
formula agreed between the parties. The Tribunal concluded
that the transaction between the parties was on principal to
principal basis. The Tribunal accordingly held that Mis. Kwality
Ice Cream and Mis. BBLIL/HLL are not 'related persons' and
the transaction between them is one on principal to principal          D
basis and the price was the sole consideration for the sale of
the goods and assessable value cannot be computed on the
basis of the price at which BBLIL sold the products from its
depot. It is that order which is under challenge in these appeals
preferred under Section 35-L of the Central Excise and Salt Act,       E
1944.

     6. Learned counsel for the Department strenuously
contended before us that the Tribunal committed an error in
coming to the conclusion in characterizing the same as on              F
principal to principal basis, and not as between related
persons. The submission was that the nature and extent of
control over the activities of M/s. Kwality Ice Cream and huge
interest free deposits, complete control over price fixation
mechanism unerringly point to the fact that the M/s. Kwality Ice       G
Cream and HLL were 'related persons'. Learned counsel for
the respondent - assessee submitted that the findings recorded
by the Tribunal do not warrant any interference by this Court as
the same were based on proper appreciation of the material
available on record. It was submitted that the Tribunal merely         H
    416    SUPREME COURT REPORTS [2010] 14 (ADDL.) S.C.R.


A   applied the principle enunciated by this Court and came to the
    right conclusion that the parties are not to be treated as 'related
    persons' in the matter of computing assessable value of ice
    cream manufactured by M/s. Kwality Ice Cream. It was
    submitted that even on the facts pleaded by the Department
s   there is no evidence of any mutuality of interest in the business
    of each other.

         7. We have carefully considered the submissions made by
    the learned counsel in these appeals.

C       8. It becomes necessary to examine the ambit and scope
  of the term 'related persons' in order to gauge whether the
  relationship between Mis. Kwality Ice Cream and HLL can be
  brought within its fold. A catena of cases have explored and
  expounded the concept of 'related persons' and the intricacies
D involved in invoking its application. We shall refer to some of
  those relevant cases in order to decide the points urged by the
  learned counsel for the Department but before we do so it is
  necessary to have a glance at the relevant provisions of the Act.
  Section 4 of the Act provides as under:
E
          "SECTION 4. VALUATION OF EXCISABLE GOODS
          FOR PURPOSES OF CHARGING OF DUTY OF
          EXCISE.

          (1) Where under this Act, the duty of excise is chargeable
F         on any excisable goods with reference to value, such
          value shall, subject to the other pro visions of this section,
          be deemed to be-

          (a) The normal price thereof, that is to say, the price at
G         which such goods are ordinarily sold 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:

          Provided that -
H
  COMMNR., CENTRAL EXCISE, CHANDIGARH v.       417
KWALITY ICE CREAM CO. [B. SUDERSHAN REDDY, J.]

   (i) Where, in accordance with the normal practice of the         A
   wholesale trade in such goods, such goods are sold by
   the assessee at different prices to different classes of
   buyers (not being related persons) each such price shall,
   subject to the existence of the other circumstances
   specified in clause (a), be deemed to be the normal price        B
   of such goods in relation to each such class of buyers;

   (ia) where the price at which such goods are ordinarily sold
   by the assessee is different for different el-?ces of removal,
   each such price shall, subject to the existence of other         c
   circumstances specified in clause (a), be deemed to be
   the normal price of such goods in relation to each such
   place of removal;

   (ii) Where such goods are sold by the assessee in the
   course of wholesale trade for delivery at the time and place     D
   of removal at a price fixed under any law for the time being
   in force or at a price, being the maximum, fixed under any
   such law, then, notwithstanding anything contained in
   clause (iii) of this proviso, the price or the maximum price,
   as the case may be, so fixed, shall, in relation to the goods    E
   so sold, be deemed to be the normal price thereof;

   (iii) Where the assessee so arranges that the goods are
   generally not sold by him in the course of whqlesale trade
   except to or through a related person, the normal price of       F
   the goods sold by the assessee to or through such related
   person shall be deemed to be the price at which they are
   ordinarily sold by the related person in the course of
   wholesale trade at the time of removal, to dealers (not
   being related persons) or where such goods are not sold          G
   to such dealers, to dealers (being related persons), who
   sell such goods in retail;

   (b) Where the normal price of such goods is not
   ascertainable for the reason, that such goods are not sold
   or for any other reason, the nearest ascertainable               H
    418     SUPREME COURT REPORTS (2010] 14 (ADDL.) S.C.R.


A         equivalent thereof determined in such manner as may be
          prescribed.

          (2) .......... .

          (3) .......... .
B
          (4) For the purposes of this section,-

          (a) "Assessee" means the person who is liable to pay the
          duty of excise under this Act and includes his agent;
c         (b)

          (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
D         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
E         Companies Act, 1956."

          9. According to clause (c) of sub-section (4) of Section 4
  of the Act, 'related person' means a person who is so
  associated with the assessee that they have interest, directly
F or indirectly, in the business of each other· and includes a
  holding company, a subsidiary company etc. The explanation
  to Section 4 (4) (c} further provides that in this clause 'holding
  company', 'subsidiary company' and ' relative' have the same
  meanings as in the Companies Act, 1956. It is in this
G background that the validity or otherwise of the Tribunal's order
  is required to be analyzed and judged.

          10. In Union of India vs. Bombay Tyre International Ltd. 1,
    this Court examined the scheme of Section 4 (1) (a) before the

H   1.   [1983 ELT 1896 SC]
  COMMNR., CENTRAL EXCISE, CHANDIGARH v.       419
KWALITY ICE CREAM CO. [B. SUDERSHAN REDDY, J.]
Amendment Act, 1973 and also the position after the                       A
amendment. It was contended in that case before this Court that
the definition of the expression "related person" was arbitrary
and it included within its ambit a distributor of the assessee.
This Court, however, held that in the definition of 'related person'
being a relative and a distributor could be legitimately read             B
down and its validity upheld. The definition of 'related person'
should be so read, this Court emphasised, that the words "a
relative and a distributor of the assessee" should be understood
to mean a distributor who was a relative of the assessee. The
Explanation to Section 4(4)(c) provides that the expression               c
"relative" has the same meaning as in the Companies Act,
1956. The definition of "related person", as being "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 ... ", shows a                    0
sufficiently restricted basis for employing the legal fiction. It was
reiterated that it is well settled that in a' suitable case the Court
could lift the corporate veil where the companies share the
relationship of a holding company and a subsidiary company
and also pay regard to the economic realities behind the legal            E
facade. This aspect was further examined by this Court in
Union of India Vs. A TIC Industries Ltd. 2 This Court referred to
the decision of Bombay Tyre International Ltd. (supra) and also
referred to the first part of the definition 'related person' in clause
(c) of Section 4 (4) which defines 'related person'. This Court
observed that if the transactions between the manufacturer and            F
his customers were on principal to principal basis and the whole
sale price charged by the assessee to the customers was the
sole consideration for the same and no extra commercial
considerations entered in the determination of such a price, the
customer cannot be held to be a 'related person' merely                   G
because he holds 50% share in the manufacturing company. It
is held:

      "It is not enough that the assessee has an interest, direct
2.   (1984 (17) ELT 323 SC = 1984 (3) SCR 930].                           H
    420     SUPREME COURT REPORTS [2010] 14 (ADDL.) S.C.R.


A         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
B         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
c         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"
D         11. In Union of India vs. Playworld Electronics Pvt. Ltd. 3,
  this Court took the view that merely because goods are
  produced with customer brand name and the entire production
  sold to the owner of the brand name, cannot be treated as a
  sale between 'related persons'. The case was that Playworld
E Electronics Pvt. Ltd. manufactured its products in the brand
  name of 'Bush' from the very beginning and was selling the
  same exclusively to M/s. Bush India Limited or its authorized
  dealers only. This Court took the view that the market value of
  the goods of Playworld Electronics Pvt. Ltd. was the price
F charged from Mis. Bush India Ltd. and not the market value at
  which price Mis. Bush India Ltd. sold to its wholesalers for the
  purpose of payment of excise duty.

          12. We shall now notice the judgment upon which reliance
G has been placed by the learned counsel for the appellant in
  Calcutta Chromotype Ltd. vs. Collector of Central Excise,
  Calcutta 4 • The said decision refers the decision of this court in
  Atic Industries Ltd. (supra) and does not take any different
    3.   (1989 (41) ELT 368 SC].
H 4.     (1998 (99) ELT 202 (SC)]
  COMMNR., CENTRAL EXCISE, CHANDIGARH v.       421
KWALITY ICE CREAM CO. [B. SUDERSHAN REDDY, J.]

opinion. The Court in the said decision also noticed the view           A
expressed by this Court in Collector of Central Excise, Madras
vs. T.I. Millers Ltd., Madras and T.I. Diamond Chain, Madras
[ 1988 (35) E.L.T. 8 (SC)], Snow White Industrial Corporation
vs. Collector of Central Excise [ 1989 (41) E.L.T. 360 (SC)].
After the analysis of all the said decisions this Court held:           B

    "If we examine the thrust of all the decisions, there is no
    bar on the authorities to lift the veil of a company, whether
    a manufacturer or a buyer, to see it was not wearing that
    mask of not being treated as related person when, in fact,          C
    both, the manufacturer and the buyer, are in fact the same
    persons. Under sub-section (1) of Section 4 of the Act,
    value of the excisable goods shall not be deemed to be
    normal price thereof, i.e., the price at which such goods
    are ordinarily sold by the assessee to a buyer in the course
    of wholesale trade for delivery at the time and place of·           D
    removal, if the buyer is a related person and price is not
    the sole consideration for sale. As to who is a related
    person, we have to see its definition in Section 4(4)(c) of
    the Act. It is not only that both the manufacturer and the
    buyer are associated with each other for which corporate            E
    veil may be lifted to see who is behind it but also that they
    should have interest, directly or indirectly, in the business
    of each other. But once it is found that persons behind the
    manufacturer and the buyer are same, it is apparent that
    the buyer is associated with the manufacturer, i.e., the            F
    assessee and then regard being had to the common
    course of natural events, human conduct and public and
    private business it can be presumed that they have
    interest, directly or indirectly, in the business of each other
    (refer Section 114 of the Evidence Act). It is, however,            G
    difficult to lay down any broad principle to hold as to when
    the corporate veil should be lifted or if on doing that, it could
    be said that the assessee and the buyer are related
    persons. That will depend upon the facts and
    circumstances of each case and it will have to be seen who          H
    422     SUPREME COURT REPORTS (2010] 14 (ADDL.) S.C.R.


A         is calling the shots in both the assessee and the buyer.
          When it is the same person the authorities can certainly
          fall back on the third proviso to clause (a) of Section 4(1)
          of the Act, to arrive at the value of the excisable goods. It
          cannot be that when the same person incorporates two
B         companies of which one is the manufacturer of excisable
          goods and the other is the buyer of those goods, the two
          companies being separate legal entities, the Excise
          authorities are barred from probing anything further to find
          out who is the person behind these two companies. It is
c         difficult to accept such a narrow interpretation. True that
          shareholdings in a company can change but that is the very
          purpose to lift the veil to find out if the two companies are
          associated with each other. Law is specific that when duty
          of excise is chargeable on the goods with reference to its
          value then the normal price on which the goods are sold
D
          shall be deemed to be the value provided (1) the buyer is
          not a related person and (2) the price is the sole
          consideration. It is a deeming provision and the two
          conditions have to be satisfied for the case to fall under
          clause (a) of Section 4(1) keeping in view as to who is the
E
          related person within the meaning of clause (c) of Section
          4(4) of the Act. Again if the price is not the sole
          consideration, then again clause (a) of Section 4(1) will not
          be applicable to arrive at the value of the excisable goods
          for the purpose of levy of duty of excise."
F
        13. In Flash Laboratories Ltd. vs. Collector of Central
    Excise, New Delhi5 upon which strong reliance has been
  placed by the learned counsel for the appellant, in our
  considered opinion, does not take any different view other than
G the one taken by this Court in Bombay Tyre International Ltd.
  and A TIC Industries Ltd. (supra). In that case the appellant-
  Company was a manufacturer of toothpaste ("Prudent") falling
  under Sub-Heading 3306.00 of the Schedule to the Act. It had
  been selling its products to its holding Company, PP Ltd. as
H s. 12003 (2) sec ae.
  COMMNR., CENTRAL EXCISE, CHANDIGARH v.      423
KWAUTY ICE CREAM CO. [B. SUDERSHAN REDDY, J.]

well as to PB Ltd. which was also a subsidiary Company of PP        A
Ltd. The appellant had been paying duty at the price at which
the goods were sold to the holding Company. Having regard
to the fact that both appellant as well as PB Ltd. were
subsidiary Companies of PP Ltd., this Court took the view that
though the relationship between the appellant and PB Ltd. is        B
indirect, they had mutual interest in the business of each other.
The facts and circumstances of the case reveal that there is a
mutuality of interest between the three Companies as 60% of
the products of the appellants was sold to PP Ltd. and
remaining 40% of the total products of toothpaste was being         c
sold to PB Ltd. Moreover, it was found that PP Ltd. was
incurring expenses for sales promotion and advertisement for
the sale of the appellants' products namely "Prudent
Toothpaste". It was under those circumstances it was held that
the parties to the transactions were 'related persons'. The said
                                                                    0
decision in no manner supports the point urged by the learned
counsel for the appellants.

      14. In CCE vs. Xerographic Ltd. 6, this Court reiterated the
well settled principle and laid down the three conditions that are
required to be satisfied before invoking the third proviso, E
namely, firstly, there should be mutuality of interest; secondly,
that the alleged 'related person' should be related tp the/
assessee as per definition of Section 4 (4) (c) given inthe-1\ct
and thirdly, and importantly, that the price charged from the
'related persons' was not the normal price but the price lower F
than the normal price and because of extra-commercial
considerations the price charged was less than the normal
value.

     15. On analysis of the decisions referred to herein above, G
it appears what is important is that each of the parties involved
should have an interest, whether direct or indirect in the
business of each other. The following are the relevant clauses
of the agreement between M/s. Kwality Ice Cream and BBLIU ·

6.   1c2006) g sec 556.                                             H
    424    SUPREME COURT REPORTS [2010] 14 (ADDL.) S.C.R.


A   HLL based on which and applying the principles referred to
    herein above, a view is required to be taken as to whether they
    are 'related persons'.

           "6 (i) - Kwality Ice Cream (K-North) agrees to exclusively
          source and produce products for BBLIL.
B
          (i) (a) - The products will be manufactured and produced
          by K(North) in accordance with the specifications,
          particulars of which are set out in Appendix -2 of the
          Agreement which inter alia provides that reasons for
c         change in raw material will be intimated by the party to
          BBLIL and approved list of suppliers of material will be
          intimated by BBLIL and K (North)."

          16. It is based on these clauses, the Departmental
0   authorities took the view that the terms and conditions of the
    agreement between the respondent and BBLIL/HLL have
    mutuality of interest and therefore, the transactions between
    them are not on a principal to principal basis. The Tribunal upon
    meticulous analysis of the terms and conditions of the
E   agreement found that the price was being fixed on the basis
    of the formula agreed between the parties. Reliance was
    placed on sub-clause (iii) of Clause 6 which provides that
    pending commencement of production by JVC, M/s. Kwality Ice
    Cream shall make necessary investments for upgradation,
    modification or alteration in the existing factory/manufacturing
F   facilities as per required by BBLIL subject to necessary
    approvals and pending such investments M/s. Kwality Ice
    Cream shall not be responsible for any deficiency. On M/s.
    Kwality Ice Cream making such investment for upgradation or
    modification, the pricing agreed upon is on a formula which has
G   taken into consideration the investments made by Mis. Kwality
    Ice Cream for upgradation, modification. The Tribunal rightly
    arrived at the conclusion that pricing in terms of clause (6)(iii) ·
    would not lead to the conclusion that the transaction was not
    one between principal to principal.
H
          ·-
  COMMNR., CENTRAL EXCISE, CHANDIGARH v.       425
KWALITY ICE CREAM CO. [B. SUDERSHAN REDDY, J.]

     17. The Tribunal while interpreting clause (6) (ii) found that   A
Mis. Kwality Ice Cream, as contended by the Department, was
not under the control of BBLIL/HLL as it was not under any
obligation to shut down its unit or even move to some other
location against its will as contended by the Department. The
clause provides that an option was given to Mis. Kwality Ice          B
Cream to accept the suggestion of BBLIL/HLL and to
discontinue or close down its manufacturing facilities or not to
accept the same since liberty was given to Mis. Kwality Ice
Cream to intimate BBLIL/HLL about its view in the matter.
There is nothing to show in that clause that BBLIL/HLL can            c
compel Mis. Kwality Ice Cream to close down the factory or
move it from its current location. The only affect of Mis. Kwality
Ice Cream not accepting the suggestion is that BBLIL/HLL will
be relieved of its obligations under the sourcing agreement.
This clause merely indicates conditions on which the terms of         D
sourcing agreement could be brought to an end.

     18. The Tribunal also analyzed clause (6) (i) (c) of the
sourcing agreement which inter alia provides that BBLIL/HLL
would make interest free deposits of Rs. 2.75 crores to the units
of Mis. Kwality Ice Cream. The Tribunal on fair analysis of the       E
clause in the sourcing agreement held that the deposits from
BBLIL/HLL were taken by Mis. Kwality Ice Cream as a matter
of commercial expediency and as a trade practice required in
the circumstances of the case. This was so because the
amount due to Mis. Kwality Ice Cream as price of the Ice Cream        F
manufactured for Mis. BBLIL is tied up for more than one month
before payment is received by Mis. Kwality Ice Cream and
goods were exclusively manufactured according to the
specifications of BBLIL and even packing material required
carrying their brand name, there was any amount of risk of            G
goods being rejected by BBLIL for reasons other than quality
and this was the commercial expediency for making such
deposits.

     19. What is of importance is certain interdependence and
                                                                      H
    426      SUPREME COURT REPORTS [2010] 14 (AOOL.) S.C.R.


A   reciprocity beyond the relationship of either a distributor or
    manufacturer so as to consider as to whether the parties are
    'related persons'. On the facts it is noticed, essentially the
    relationship between Mis. Kwality Ice Cream and BBLIUHLL
    is one sided and the facts do not suggest that each one of them
B   have interest direct or indirect, in the business of each other.

        20. In Supreme Washers Pvt. Ltd. vs. Commissioner of
  Central Excise, Pune 7, the Court had to consider and analyse
  the concept of mutual interest and it was found that there was
  common procurement of raw material, parties had common
C stock accounting and planning and interdependence in
  manufacturing operations. It was held that having common
  stock of raw material and semi finished goods, having common
  use of machinery between the three units, having common
  marketing arrangements and free flow of finance between the
D three units cumulatively ind!cates interdependence of the three
  units with each other as also inter-relationship, cumulatively
  establishes the appellants inter relationships and
  interdependence with each other. No such interdependence is
  found in the instant case.
E
        21. For the aforesaid reasons, we are of the considered
  opinion that the Tribunal did not commit any error in coming to
  the conclusion that M/s. Kwality Ice Cream and BBLIL are not
  'related persons'. The transaction between them is of the nature
F of principal to principal and the price was the sole consideration
  for the sale of goods. Therefore, the assessable value cannot
  be computed on the basis of the price at which BBLIL sold the
  product from its depot.

       22. We, accordingly, find no merit in these appeals and
G they are accordingly dismissed.

    K.K.T.                                      Appeal dismissed.


    1.   [(2003) 1   sec 142.