SC clear on transaction with related persons

EXPERT EYE

The subject of related persons in central excise has been a source of controversy, which is not dying out in spite of several Supreme Court judgments on the issue.

The principles are not unknown but the revenue department goes to the Supreme Court repeatedly even if the issue is settled.

A recent judgment of the Supreme Court on the issue in the case of CCE, Mumbai versus Universal Luggage Mfg Co Ltd"�2005 (190) ELT 3 (SC) has clearly enunciated a relevant proposition that while proving the related nature of an assessee (seller) with another person (buyer), it is not enough to look into the relation between these two persons but also into the relation of the assessee with unrelated persons.

The main proposition here is that if the assessee has sold a substantial amount of goods to an unrelated person at the same price at which he has sold the goods to the allegedly related person, he cannot be said to have evaded duty.

Coming to the crux of the matter, the main fear of the revenue department has been that a central excise assessee can sell goods to a person who is related to him at a price lower than the normal. This is how he is supposed to evade excise duty.

There has to be a proof of the existence of favoured buyers and not just that the goods were sold to related persons. This was held by the Supreme Court in the case of CCE versus Bisleri International Ltd , 2005 (186) ELT 257 (SC).

This judgment observed that under Section 4 (1) (a) of the Excise Act, value in relation to any excisable goods is a function of the price and therefore, value is derived from the normal price at the factory gate-charged to an unrelated person on a wholesale basis.

If follows that just because a part of the goods are sold to related persons, the value can be determined by ignoring the sale to unrelated persons altogether.

The same principle has been upheld in several judgments such as in the case of Sundaram Industries versus CCE, 2005(183) ELT 93 (T), Birdi Steel versus CCE, 2005 (179) ELT 82(T), and Sarda Plywood versus UOI , 1994(74)ELT 528 (T).

There is also another point. Just because two companies are related, it does not mean that the price is depressed to evade duty. And the whole thing depends on the facts. One has to go into the facts of the case and find out whether there is, in effect, a mutual business relation favouring each other in a particular transaction.

That is to say that the decision depends on finding out if a particular price charged by the seller has favoured the buyer or not. In the present case, CCE, Mumbai versus Universal Luggage Ltd (supra), the Supreme Court found that significant sales were made by the assessee to unrelated persons at the same price at which the goods were sold to the related person.

Therefore, the price at which the goods were sold to different classes of buyers is the same. So the Supreme Court observed that the price at which goods were sold to unrelated persons would form the basis for assessment. Just because the allegedly related person was a subsidiary, it could not be concluded that the price itself was depressed to suit the related person.

The conclusion is that in a clear case like this where there is no evasion because the price to both related and unrelated persons was the same, still the revenue department went to the Supreme Court against the order of the Collector and the Tribunal.

The department was destined to lose the case. This has been an exercise in futility. It amounts to wasting money on meaningless and fruitless litigation.