B.N. Kirpal, J.
1. The main question which arises for consideration in this writ petition concerns the interpretation of Section 4 of the Central Excises and Salt Act, 1944 (hereinafter referred to as 'the Act').
2. The petitioners, inter alia, manufacture various kinds of papers and paper boards which are subject to excise under Tariff Item No. 17 of the First Schedule of the Central Excises and Salt Act, 1944. The paper so manufactured is sold by the petitioners to or through 32 wholesalers situate in various parts of the country. According to the petition, these wholesalers are independent persons and none of them have any shareholding in the petitioner-company. It is also averred that the petitioner-company, in turn, has no financial interest or shareholding in the business of the said wholesalers.
3. According to the petitioners, the goods are sold by them at prices which are fixed by the Government. The sale prices are published and a trade discount of 10% is given by the petitioner-company to the wholesalers. In fact two types of transactions take place. According to the petitioners, in certain cases the wholesalers purchase the goods from the petitioner-company and get a trade discount of 10% and thereafter the wholesalers, in turn, sell the goods to third parties and pass on a discount of 5% out of the aforesaid 10% obtained by them. The other types of cases are those where orders are booked by the wholesalers and, on their instructions, the company dispatches the goods directly to the purchasers. In such cases, the wholesalers instruct the petitioner-company to give a discount of 5% to such purchasers and the remaining 5% discount is credited to the wholesalers' account. It is to be noted that in either case the amount of discount which is retained by the wholesalers is only 5%.
4. According to the petitioners no over-riding commission is given to any of the wholesalers. It is further averred that exclusive territories are not assigned to different wholesalers.
5. The petitioners contend that the said wholesalers are not related persons, within the meaning of that expression as postulated by Section 4(4)(c) of the Act and, furthermore, in order to determine the value of the goods on which excise duty is leviable, no expenses or charges relating to post manufacturing activity can be included. The Divisional Officer, Central Excises, Bhopal, by his order dated 10th November, 1976 came to the conclusion that the wholesalers appointed by the petitioner-company had monetary interest in the promotion of sales of the petitioner-company and they were, thereforee, not independent wholesale dealers but were related persons having direct interest in the business of the petitioner-company within the meaning of Section 4(4)(c) of the Act. He further held that the petitioner-company was entitled to deduct only 5% by way of trade discount and not 10% as had been claimed by the petitioners. By the said order a penalty of Rs. 250/- under rule 173Q(d) was levied and the Divisional Officer also ordered the withdrawal of approval accorded to the price lists submitted by the petitioner-company and further directed that the goods cleared by the petitioner-company should be re-assessed by deducting trade discount of 5% only. The petitioner-company was also directed to furnish a fresh price list in the light of the observations made in the said order. The implication was that the wholesale price on which the petitioner-company would be asked to pay excise duty would be that which is charged by the wholesalers, and not by the petitioner-company, on the ground that the wholesalers were related persons.
6. The petitioners filed an appeal against the aforesaid order of the Divisional Officer. By order dated 15th March, 1978 the Appellate Collector, Central Excise, Delhi dismissed the appeal. After going through the facts the Appellate Collector noted that sales were made not to the/wholesalers but were made through them to different buyers. It was observed that 'this status of sales promoters reduces them (wholesalers) to that of related persons as at Section 4(1)(a) proviso (iii)'. It was further held that as the said wholesalers were related persons, the price at which the goods were sold by them will be taken to be the normal value and the discount given to these related persons will not be allowable as a deduction.
7. A revision application was then filed by the petitioner-company to the Central Government. After setting out the facts, by order dated 31st January, 1979, the revision was dismissed in the following terms :-
'Government of India observe that in terms of the agreement between the petitioners and the wholesalers they were at liberty to retain the entire 10% discount and direct that 5% be credited on the invoice separately. Documents have been produced to show that in the event of non-payment by an independent wholesale buyers, the amount will be adjusted from the deposit lying with the petitioners. This would show that the socalled wholesalers have interest in the business of the petitioners and vice-versa and, thereforee, they are 'related person' within the meaning of new section 4. The quantum of discount which is uniformally passed on to any independent wholesale buyer is normal wholesale rate being 5% the same is admissible for abatement and not 10% as claimed by the petitioners, which is given preferentially to selected wholesale buyers.'
8. The aforesaid decisions are sought to be challenged in the present writ petition. The two main submissions of the petitioners are that the wholesalers were not related persons and, secondly, the goods have not been properly valued for the purposes of arriving at the assessable value.
9. In the return the respondents have supported the impugned orders. With regard to the question of related persons it has further been alleged that the wholesalers 'were acting just like distributors and they were interested in the business of the petitioners and were related persons.'
10. At the outset we may observe that neither of the three authorities have found as a fact that the wholesalers were acting as distributors of the petitioner-company. In the absence of such a finding of fact it is not open to the respondents to contend that the said wholesalers were acting as distributors. In any case mere ipse dixit of the respondents cannot be accepted. If the respondents were serious in contending that the wholesalers were distributors then they should have placed material on the record on the basis of which one could have come to that conclusion. This the respondents have failed to do. The aforesaid contention of the respondents has, thereforee, to be rejected.
11. As already noted, the only reason for which the Government of India has held that the wholesalers are related persons is that 'the so-called wholesalers have interest in the business of the petitioners and vice-versa and, thereforee, they are 'related persons' within the meaning of new section 4.' In order to appreciate this finding, reference may be made to section 4 of the Act, as inserted with effect from 1st October, 1975. The relevant portion of the said section reads as under :-
'4. (1) Where under this Act, the duty of excise is chargeable on any excisable goods with reference to value, such value shall, subject to the other provisions of this section, be deemed to be -
(a) the normal price thereof, that is to say, the price at which such goods are ordinarily sold by the assessed to a buyer in the course of wholesale trade for deliver 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 :
(i) .... ..... ....(ii) .... ..... ....(iii) where the assessed so arranges that the goods are generally not sold by him in the course of wholesale trade except to or through a related person, the normal price of the goods sold by the assessed to or through such related person shall be deemed to be the price at which they are ordinary 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 to such dealers, to dealers (being related persons) who sell such goods in retail :
(b) .... ..... ....
(2) .... ..... ....
(3) .... ..... ....
(4) For the purposes of this section -
(a) .... ..... ....
(b) .... ..... ....
(c) 'related person' means a person who is so associated with the assessed that they have interest, directly or indirectly, in the business of each other and includes a holding company, a subsidiary company, a relative and a distributor of the assessed, and any sub-distributor of such distributor.'
It appears to us that the definition of the expression 'related person' can be divided into two parts. The first part is where a related person would mean a person who is so associated with the assessed that the two of them have direct or indirect interest in the business of each other. The second part is where, by fiction, certain entities or persons like holding company, subsidiary company, a relative and a distributor of the assessed, and any sub-distributor of such distributor are included in the term 'related person'. In the present case we need not dilate on the second part of the definition, because the wholesalers have not been held by the Central Government to fall under any of the said categories including the category of distributor. The only point which remains to be considered is whether the wholesalers and the petitioner-company are so associated with each other that they have a direct or indirect interest in each other's business.
12. As we read the expression 'related person' it appears to us that a mere commercial contract between two independent parties for the purchase and sale of the goods manufactured by one party cannot, ipso facto, lead to the conclusion that the two of them are so associated as to have interest in the business of each other. In order that a person may be regarded as a related person the important ingredient is that the two persons should be so associated with each other as to have interest in the business of each other. This association and interest has to be a financial or managerial association and interest in the business of each other. For instance, if some of the shareholders of the two persons are common or if each of them is a partner or a shareholder in the other entity, then it could be said that the two of them would be regarded as related persons because they would then be associated with each other and would be having interest in the business of each other. If the reasoning in the impugned order is correct them any commercial transaction between two parties would mean that they would become related persons. That certainly was not the intention of the provision. In order to be regarded as related persons both the ingredients have to be satisfied, namely, the two have to be associated with each other and they should have interest in the business of each other. 'Interest in the business of each other' would not mean a mere business connection between two persons. The interest has essentially to be a financial or managerial interest.
13. A similar question came up for consideration before this Court in the case of Jay Engineering Works Ltd. and another v. Union of India & Others, 1981 E.L.T. 284. M/s. Jay Engineering Works were effecting sales through Usha Sales Limited (referred to in the said judgment as Usha) and approximately 90% of the sales were to Usha. A question arose as to whether Usha could be regarded as a related person or not. While holding that Usha was not a related person, it was observed by this Court as follows :
'Assuming that the term of the agreement create an interest in Usha vis-a-vis the business of the petitioner there is nothing to indicate and no material to justify the conclusion that the petitioner has any interest in the business of Usha. As will be seen later, the petitioner sells its goods to Usha and receives the price thereforee within 90 days. It has no doubts certain responsibilities for servicing the goods sold by Usha but there is no manner of interest direct or indirect in the business of Usha so far as the petitioner is concerned. The term of the above definition contemplate two persons who are so associated that they are mutually interested in the business of each other. Examples of the kind may be two companies associated with each other as holding and subsidiary companies or two companies or persons associated as the company and its managing agent or the company and its Secretaries and Treasurers, firms having related partners, companies having common shareholders in the majority and the like. It is very difficult to say that a mere purchaser or even a sole selling agent (if Usha could be said to be one) would be a related person within the meaning of the first part of the definition. We are, thereforee, unable to accept the contention of learned counsel for the respondents that Usha will be a related person under the above portion of the definition clause. Certain judicial decisions to which we shall be referring later also touch upon this aspect of the matter and reinforce our conclusion.'
The aforesaid observations are clearly applicable to the present case, in our opinion, in the present case also the wholesalers, who admittedly do not have any business association or interest in the company, cannot be regarded as related persons merely because they were appointed as wholesalers by the petitioner-company. The decision of the respondents to the contrary is, thereforee, clearly incorrect.
14. The next question which arises is with regard to the valuation of the goods. In the proforma, which has been prescribed for determination of the value, the petitioners had indicated in column 3 thereof the price including excise duty, cess and trade discount. Columns 5 to 10 of the proforma were not filled in. In Column 11 the petitioner stated the value whose approval was sought by the petitioner and which represented manufacturing cost and manufacturing profit as certified by a Cost Accountant. The value so given in column 11 was much less than the price indicated in column 3. The aforesaid price list for approval was submitted by the petitioners on 11th August, 1981. On 21st August, 1981 it wrote to the Superintendent Central Excise, Bhopal to the effect that the excise duty was a tax on manufacture and the assessable value could include only manufacturing cost an manufacturing profit. It was represented that till now the petitioners had been paying excise duty on a wrong assessable value, under a mistake of law, and that is why the correct assessable value, comprising of manufacturing cost and manufacturing profits as certified by registered Cost Accountants' firm was being submitted. It was further stated that these figures should be verified and checked by the Central Excise Department as and when desired. By order dated 28th August, 1981 these prices were not approved. It may here be noted that this Court in the case of Hindustan Milk food Manufacturers Limited vs. Union of India and others, 1980 E.L.T. 487 has, in effect, held that post manufacturing cost and profits have to be excluded in arriving at the assessable value under section 4 of the Act. In the impugned order, however, it was stated that the petitioners had not given the requisite information as for in columns 5 to 10 of the proforma submitted by them. In the absence of the particulars, it was held, the price specified in column 11 could not be accepted. In our opinion, the Assistant Collector erred in not referring to the letter dt. 21st August, 1981. In the said letter it was stated that the figures contained in the proforma had been certified by a registered Cost Accountants' firm. It was further stated that if the figures were to be verified and checked then the Excise Department could do so as and when desired. It was lastly submitted in this letter that 'in case the Department wished to examine the records of the company for satisfying itself about the correctness of the cost certificate we may please be given permission to avail provisional assessment under rule 9B of the Central Excise Rules, 1944 pending approval of our price list, as provided under sub-rule (6) of rule 173(c)'. In case the Assistant Collector felt that certain date had not been furnished by the petitioners then in accordance with the principles of natural justice, he ought to have asked for the same, more so when it in the aforesaid letter dated 21st August, 1981 the petitioner-company itself had offered to supply all the particulars which would be asked for by the Department. The request of the petitioner-company that it should be granted the permission to avail of provisional assessment was reasonable. The Department, in our opinion, erred in not following this course. The non-reference of the said letter 21st August, 1981 clearly vitiates the order dated 28th August, 1981.
15. For the aforesaid reasons, the writ petition is allowed, the impugned orders dated 10th November, 1976, 15th March, 1978, 31st January, 1979 (annexures D, F and G to the writ petition) and order dated 28th August, 1981 (Annexure O to the writ petition) are quashed. The respondents are directed to allow the petitioners to avail of the provisional assessment under rule 9B and they are further directed to re-consider the price list submitted by the petitioners in accordance with the principles enunciated by this Court in Hindustan Milk food Manufacturers' case. (Supra). The petitioners would be entitled to costs. Counsels fee Rs. 550/-.