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Sylvania and Laxman Ltd. and Another Vs. Union of India and Others - Court Judgment

LegalCrystal Citation
SubjectExcise
CourtDelhi High Court
Decided On
Case NumberC.W. No. 511 of 1979
Judge
Reported in1982(10)ELT463(Del)
ActsCentral Excise Act, 1944 - Sections 4, 4(1) and (4)
AppellantSylvania and Laxman Ltd. and Another
RespondentUnion of India and Others
Cases ReferredC) and Atic Industries v. H.H. Dave
Excerpt:
.....must have interest directly or indirectly in the business of each other - the mere purchase of goods from manufacturer of goods did not create inter se interest between the two persons directly or indirectly in the business of each other - further, the interest in the business of each other contemplated by the section was some thing more than the fulfilllment of one single commercial transaction entered between the parties - - it is a limited liability company of which the second petitioner is the managing director as well as a shareholder. 284. 9. learned counsel for the respondents has raised an interesting point that what has to be found out is the 'normal price' in a wholesale transaction in which case it will be section 4(b) read with the relevant rules that would be..........and electric tube lights for sale through its own agencies, it entered into a contract with m/s. philips india ltd. to manufacture electric bulbs and electric tube-lights as required by the said m/s. philips india ltd. and sell the same to the said company. the dispute is with regard to assessable value of this part of the first petitioner's manufacture. it is the petitioner's case that m/s. philips india ltd. is a competitor which also manufactures and sells electric bulbs and electric tube lights in the market. some of the electric bulbs and electric tube lights sold in the market by m/s. philips india ltd. are purchased by it from the first petitioner. the goods that are manufactured by the first petitioner for being sold to m/s. philips india ltd. under the contract with it are.....
Judgment:

Prakash Narain, C.J.

1. The first petitioner is a manufacturer of electric bulbs and electric tube lights. It is a limited liability company of which the second petitioner is the Managing Director as well as a shareholder.

2. It is not in dispute that the electric bulbs and electric tube lights manufactured by the first petitioner attract excise duty under Tariff Item 32(1) and (2) of the First Schedule of the Central Excises and Salt Act, 1944, hereinafter referred to as the Act. The excise duty is livable on an ad valorem basis as a percentage of the value of goods calculable on the cost of manufacture or in legal terminology the assessable value of the goods. It is also not in dispute that the assessable value has to be arrived at in accordance with the provisions of the Act and rules framed there under which gives the basis for making the levy on such value comprised of manufacturing cost and manufacturing profits to be computed in accordance with the rule laid down by the Supreme Court in A.K. Roy v. Voltas Ltd., : 1973ECR60(SC) and Atic Industries v. H.H. Dave, : 1978(2)ELT444(SC)

3. The first petitioner manufactures electric bulbs and electric tube lights for sale in the market through its own selling agencies. There is no dispute with regard to the levy of excise on such manufacture. Inasmuch as the first petitioner has some excess manufacturing capacity which is not utilised by it to manufacture electric bulbs and electric tube lights for sale through its own agencies, it entered into a contract with M/s. Philips India Ltd. to manufacture electric bulbs and electric tube-lights as required by the said M/s. Philips India Ltd. and sell the same to the said Company. The dispute is with regard to assessable value of this part of the first petitioner's manufacture. It is the petitioner's case that M/s. Philips India Ltd. is a competitor which also manufactures and sells electric bulbs and electric tube lights in the market. Some of the electric bulbs and electric tube lights sold in the market by M/s. Philips India Ltd. are purchased by it from the first petitioner. The goods that are manufactured by the first petitioner for being sold to M/s. Philips India Ltd. under the contract with it are branded with the name and mark of M/s. Philips India Ltd. and not with the brand and mark of the first petitioner. The respondents contend that the assessable value of the goods sold by the first petitioner to M/s. Philips India Ltd. is not the price at which the petitioner manufactures or sells the same to M/s. Philips India Ltd. but the price at which M/s. Philips India Ltd. would make the subsequent sale of goods bought from the first petitioner to its dealers. This the respondents seek to do by treating M/s. Philips India Ltd. to be a 'related person' within the meaning of section 4(4)(c) of the Act. The petitioners contest this stand and approach of the respondents and assert that the assessable value for the goods manufactured by the petitioner for sale to M/s. Philips India Ltd. has to be priced at which the petitioners have agreed to supply the said goods to M/s. Philips India Ltd.

4. The petitioners contend that if the respondents are permitted to levy excise duty as they are doing, it would amount to levy of sales tax and would cease to be a levy on manufacture, as contemplated by the Act. If a reading of section 4(1)(a), proviso (iii) read with section 4(4)(c) and (d) of the Act along with the relevant rules permits levy of excise duty in the manner in which the respondents are doing, the said provisions of the Act and the rules will be beyond the legislative competence of Parliament as Parliament cannot legislate with regard to sales tax and would have to be struck down as being ultra virus the legislative competence of Parliament. In the alternative they contend that if the levy is made on the basis of manufacturing cost and manufacturing profits calculated in a sale at arm's length or the price at the factory gate, the the impugned action of the respondents has to be struck down and it has to be held that the assessable value has to be arrived at by taking into consideration only the price at which the petitioners have agreed to sell the electric bulbs and electric tube-lights to M/s. Philips India Ltd. In that view of the matter the price list submitted by the petitioners should be approved and the demand of the respondents as contained in the Memorandum dated March 20, 1979 (Annexure K) that the petitioners should submit revised price list has to be quashed and the price list already submitted has to be directed to be approved.

5. The respondents' stand is that since the goods in question are manufactured by the first petitioner for and on behalf of M/s Philips India Ltd. with the latter's brand name and are sold by the latter under the said brand name the price at which M/s. Philips India Ltd. sell the said goods in the wholesale market becomes the 'normal price' which determines the assessable value for the purposes of section 4 of the Act. It is disputed that the transaction between the first petitioner and M/s. Philips India Ltd. shows that the sale to M/s. Philips India Ltd. is at arm's length with price as the sole consideration. It is disputed that the first petitioner and M/s. Philips India Ltd. are unconnected with each other. In short, the case of the respondents is that the parties fall within the mischief of the term 'related person' and that the parties have interest in the business of each other. The petitioners counter this assertion by contending that the contract between the first petitioner and M/s. Philips India Ltd. is a purely commercial transaction and, in any case, by no stretch of imagination can the parties be regarded as related persons, as contended by the respondents.

6. It is not necessary to dilate at any great length on the legal propositions urged at the Bar. The short point for consideration is whether the stand taken by the respondents in the communication addressed to the first petitioner by the Assistant Collector of Central Excise vide his communication No. V(32)17/1/78/3113, dated February 16, 1979 (Annexure Q to the petition) that M/s. Philips India Ltd. are an interested party and thus covered by the definition of 'related person' as given in section 4(4)(c) of the Act is a tenable stand. The term 'related person' is defined in clause (c) of section 4(4) which reads as follows :-

'(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.

Explanation. - In this clause 'holding company', 'subsidiary company' and 'relative' have the same meaning as in Companies Act, 1956 (1 of 1956).'

Analysing the above provision of law in the context of the facts of this case it is not the case of any of the parties that either the first petitioner or M/s. Philips India Ltd. fall within the ambit of the expressions 'holding company' or 'subsidiary company' or a 'relative' (which can only apply to a natural person) or a distributor or a 'sub-distributor' of each other. The only question is whether there is inter se between the first petitioner and M/s. Philips India Ltd. any 'interest, directly or indirectly, in the business of each other' proved on the record. There is none. The mere purchase of goods by M/s. Philips India Ltd. from the first petitioner or manufacture of goods by the first petitioner for M/s. Philips India Ltd. does not create inter se interest between the two companies, directly or indirectly in the business of each other. The only interest that M/s. Philips India Ltd. has is to ensure that it gets the goods it has ordered in time and of the specifications required. The only interest in the transaction which the first petitioner has is to get the price of the goods it manufactures for M/s. Philips India Ltd. It is a pure transaction of sale. The interest in the business of each other contemplated by the section is something more than the fulfillment of one single commercial transaction entered into between the parties. M/s. Philips India Ltd. are not concerned whether the first petitioner makes a profit or loss in the transaction covered by the contract between the two. Likewise, the first petitioner is not interested as to whether M/s. Philips India Ltd. sell or does not sell or sells at a profit or loss the goods purchased by it from the first petitioner. Indeed, the two companies are competitors in the trade of manufacturing and selling electric bulbs and electric tube-lights. They cannot have any interest in the business of each other, their interest being confined only to successful fulfillment of one contract in question.

7. M/s. Philips India Ltd. cannot even be regarded as a distributor of the first petitioner with regard to the goods covered by the contract between the parties. The distributor, inter alia, has to sell the goods of the manufacturer whereas in the present case M/s. Philips India Ltd. sell the goods they get manufactured from the first petitioner under their brand name as their own goods.

8. The above construction, in our view, is the only reasonable construction that can be placed on Section 4(4)(c) of the Act. If the price at which M/s. Philips India Ltd. sells to its dealers or distributors is taken as the assessable value, the levy may become one in the nature of sales tax in which case the levy, if authorised by the provisions of the Act, would become ultra virus the legislative competence of the Parliament and the provisions would have to be struck down. thereforee, a correct reading of the provisions of the Act is what this court has already dilated upon in Jay Engineering Works Ltd. and another v. Union of India and others, 1981 E.L.T. 284.

9. Learned counsel for the respondents has raised an interesting point that what has to be found out is the 'normal price' in a wholesale transaction in which case it will be section 4(b) read with the relevant rules that would be attracted. It will be for the appropriate authorities of the respondents to find out, even if it held that the parties do not fall within the mischief of the term 'related person'. This is not the stand taken by the respondents either in their communications or in their return. At first glance it may appear attractive that we only quash the impugned memorandum issued by the Assistant Collector and direct him to re-examine the question of the 'normal price' in accordance with the provisions of section 4(b) read with the relevant rules by finding out what is the wholesale price in a sale at arm's length. On a closer examination, however, we find that it may lead to another round of litigation and we would not like to promote unnecessary litigation. The law regarding computing assessable value is settled. It is the price which the manufacturer charges at the factory gate. In other words, it is the sale at arm's length which becomes the normal price for levy of excise duty. Unless it is shown and it is not shown here, that the contract between the parties is not a normal commercial contract, it is the price at which the goods are supplied at the factory gate by the first petitioner to M/s. Philips India Ltd. which alone will be the assessable value. A careful perusal of the contract between the parties shows that the property in the goods passes from the first petitioner to M/s. Philips India Ltd. on delivery at the factory gate. thereforee, that price at which the first petitioner sells the goods to M/s. Philips India Ltd. is the only relevant price.

10. In this view of the matter we issue a mandamus to the Assistant Collector and the Superintendent of Central Excise (respondents 2 and 3) to cancel and withdraw their impugned letters dated February 16, 1979 (Annexure G) and March 20, 1979 (Annexure K) and further direct them to approve the price list submitted by the first petitioner without reference to proviso (iii) of section 4(1)(a) read with section 4(4)(c) of the Act and to permit the first petitioner to clear the goods referred to in the agreement dated January 25, 1979 entered into between the first petitioner and M/s. Philips India Ltd. in accordance with the prices as per the agreement. We declare illegal the stand of the respondents that price at which M/s. Philips India Ltd. sells the goods manufactured by the first petitioner for M/s. Philips India Ltd. to its buyers would be the assessable value. We further direct the respondents to accept the price-list under Form Part II of the valuation Rules and not to insist on submission of price-list in Form Part IV of the Valuation Rules. The respondents are directed not to levy and collect duty of excise in respect of product covered by the agreement dated January 25, 1979 manufactured by the first petitioner and supplied to M/s. Philips India Ltd. under the latter's brand name on a price higher than the price at which the first petitioner sells the said goods to M/s. Philips India Ltd. The petitioners will also be entitled to their costs. Counsel's fee Rs. 500/-.


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