Sukumar Mukhopadhyay: Related person tough to prove

EXPERT EYE

There is no end to controversies about this subject of related person in business. And the main reason is that all the judgments ultimately revolve around the facts of the case.

Last few judgments on the subject in customs and excise once again show that in practically all the cases, revenue has failed to nail the evidence against the allegedly related persons.

In the latest reported case, Committee of Central Excise (CCE) vs Cocepa Fiscal Industries, 2004 (166) ELT A 45 (SC), the Supreme Court has observed that mutuality of interest in the business of each other is fundamental to and bedrock of the concept of related person.

This concept of mutuality of interest is incorporated in some individual notifications but is mainly known for its association with the definition of related person in excise valuation.

Now coming to the concept of mutuality of interest in the definition of related person as in Section 4(4) (c) of the Excise Act , the definition has two parts.

Related person is one who has mutual interest with the assessee and includes holding company- subsidiary company etc. So the question arises if it is a case of holding company-subsidiary company, is it still necessary to prove mutuality of interest?

Revenue has been holding in many cases that in case of a holding company-subsidiary company situation, the mutuality of interest is not to be proved.

For this reliance is usually placed on the judgment on the Supreme Court in the case of Union of India vs Bombay Tyre International 1983(14) ELT 1896(SC). The observation in para 42 of the judgment is usually referred to. The para 42 really does not say at all what Revenue claims.

This issue has been specifically decided in the following judgments: (a) Dawn Apparels Ltd vs UOI 1989(43) ELT 401(Bom) (b) Ralliwolf Ltd vs UOI 1992(59) ELT 220(Bom) (c) UOI vs Atic Industries 1984 (17) ELT 323 (SC) and (d) Moped India vs ACCE 1986 (23) ELT 8 (SC).

Thus, it is very clear on this legal issue that mutuality of interest has to be established even if it is a case of holding company-subsidiary company situation.

In an important judgment on the subject by the tribunal in the case of Poornalaya Electricals vs CCE1999(107) ELT 660(T), one finds a most detailed discussion encompassing all the judicial pronouncements.

The tribunal has said, "Applying the above principles to the facts of the case it is seen that the recital in the agreement as well as the fact that the whole production is sold to Ms Prompt India and that they have furnished the technical know-how do not make the transaction and Ms Prompt India as that of a related person.

"By virtue of the said agreement, transaction between the two parties does not cease to be at arm's length. There is also nothing to show that there is any mutuality of interest between these two firms."

In a very recent and detailed judgment in the case of Flash Lab vs CCE reported in 2003 (151) ELT 241 (SC), the Supreme Court has delved deep into the structure of sales of the holding company to its subsidiaries to find out the relation which it says is indicative of mutual interest.

The conclusion is that mutual relation is not automatically established just because they are holding and subsidiary companies. It has to be proved the hard way with hard evidence.

smuker2000@yahoo.com