1. The petitioner in W. P. No. 4764 of 1978 is engaged in the manufacturer of heavy duty motor vehicle and the goods manufactured by it are liable to excise duty under the Central Excises & Salt Act, 1944, hereinafter called the Act. Since there was a change in the wording of Section 4 of the Act effective from 1-10-1975, the petitioner was directed to submit its price lists of various goods and accordingly they were submitted. The 'value' of the goods has to be determined at the price at which it charged to its dealer; whereas the third respondent treated the main dealers appointed by the petitioner in India as 'related persons' within the meaning of the definition of that word under Section 4(4)(c) of the Act, which is to the following effect :
''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 holding company, a subsidiary company, a relative and a distributor of the assessee, and any sub-distributor of such distributor.'
The claim of the respondents is that the amount which the main dealer was entitled to earn on selling the goods to other dealers should be treated as part of the price of the vehicle sold by the petitioner and that excise duty should be paid on the total amount of the price for which the main dealer sells the goods. Since there was need for maintaining continuity of business without interruption, the petitioner complied with the requirements under protest and has filed this writ petition aggrieved not only against the order of the third respondent but also against the orders of the second respondent and first respondent, which had confirmed the stand of the third respondent in appeal and revision filed respectively.
2. Sri Ramasubramaniam, learned counsel for the petitioner contends that the word 'related person' would be applicable only to such of those instances where the manufacturer is directly or indirectly interested in the business of the main dealer or distributor and that those interests should exist mutually. The definition of the word 'related person' being inclusive in nature, it is not every distributor of an assessee's products who would be a 'related person'. The main dealer cannot ipso facto be treated as a 'distributor' and what is to be seen is, whether, from the terms and conditions of the agreement, the relationship is one which brings about the ingredients contemplated under the expression 'related person' and not to be approached on the nomenclature used, be it 'distributor' 'main dealer' or otherwise. According to him in the instant case, apart from the expression 'main dealer' being used, even the terms and conditions clearly bring about that the sales have been effected on principal to principal basis and the legal rights in the goods get transferred favour of the 'main dealer' as soon as the goods are delivered to him. Further 'main dealer' in his own right can deal with the goods subject to the usual conditions which are necessary for maintaining the obligations for business efficiency and on such other terms which are in the interests of the ultimate consumers. The agreement entered into is only with regard to post-sale obligations which would not detract from the fact that a completed sale has taken place in favour of the 'main dealer'. A 'distributor' is placed in a different position and the different connotations between a 'dealer' and a 'main dealer' had not been properly understood by the respondents. It is not every distributor who would be involved in the concept of 'related person' but only to that category of distributor who is also a relative of the assessee. He relies upon the decisions rendered in S. M. Chemicals & Electronics and another V. R. Parthasarathy & others 1980 E.L.T. 197. Jay Engineering Works Ltd. V. Union of India 1981 E.L.T.284 (Delhi) and Amar Dye-Chem Ltd. V. Union of India 1981 E.L.T. 348 claiming that on identical points involved in those decisions, the orders passed by the authorities under the Act have been set aside.
3. Sri K. N. Balasubramaniam, learned counsel for the respondents first by referring to the counter-affidavit would state that it is provided in the Act that if on account of there being a preferential buyer or selling agents, distributors or special purchasers, the relationship between the manufacturer and the buyer should be assessed and the element of concession given to such preferred purchaser should be added to the price to arrive at the assessable value. The test to be applied is whether each has a direct or indirect interest in the business of the other. When the petitioner itself accepts that its dealers are acting as main dealers which in other terms means that they perform the functions of a distributor, it cannot be said that the agreement involved in this petition would not come within the ambit of the definition 'related person'. A distributor is ordinarily distinguished from the dealer in that he is not merely interested in buying the goods for selling the same for making a profit but is also interested in the equitable and proper distribution of the goods, sales promotion and after-sales service, whereas a dealer is not such a person. A dealer has no such obligation and further he is free to deal in similar products of other competitors, whereas in the case of distributors, they are debarred from engaging in the sale of competitors' products. A distributor is paid overriding commission in respect of direct sales made by the assessee in his territory, whereas the dealer does not have this benefit. Advertisements are also effected at the cost of the main dealer/distributor. When the petitioner requires the main dealer to perform certain after-sale service, they have mutual business interests. The concept of manufacturing cost and profit should be understood in the correct perspective in which it has been stated and as held by the Supreme Court, the wholesale cash price has to be ascertained only on the basis of transactions at arm's length. Looked at from these aspects, the terms and conditions of the agreement entered into between the petitioner and its main dealers do not, to any extent, support any of any claims made by the petitioner.
4. The assessable value is being determined under Section 4 of the Act. It is only the terms and conditions which are to be looked at to find out whether the concept of 'related person' as defined under section 4(4)(c) of the Act exists, in that, in the business conducted by the assessee and that of the persons associated with it, they have interest, directly or indirectly, in the business of each other or not.
5. In Jay Engineering Works Ltd. V. Union of India 1981 E.L.T. 284 , it was held that the word 'distributor' is not defined and that it is a very wide expression which gains colour from the context in which it is employed. Its meaning is also very vague, extensive and indefinite. It must be given a very restricted meaning. Reference is made therein to Atic's case : 1978(2)ELT444(SC) wherein it was held that
'the only relevant price for assessment of the value of goods for the purpose of excise in such a case would be the wholesale cash price which the manufacturer receives from sale to the first wholesale dealer, that is, when the goods first enter the stream of trade. Once the goods have entered the stream of trade and are on their onward journey to the consumer, whether along a short or a long course depending on the nature of the goods and the conditions of the trade, excise is not concerned with what happens subsequently to the goods.'
The further conclusion arrived at was to the effect that
'in order to establish mutuality of business interest direct or indirect, the manufacturer must in his own interest promote the business of the buyer and likewise the buyer in his own interest promote the business of the manufacturer.'
The use of a particular word is not determinative but the terms of the agreement will have to be looked into. After analysing the terms and conditions of the agreement, it was held that the assessee's claim will have to be upheld.
6. In Amar Dye Chem. Ltd. V. Union of India 1981 E.L.T.348 a Division Bench of the Bombay High Court held that it is wholly immaterial whether the price is paid in cash or the goods are suppled on credit, provided it be established that the property in the goods had passed in favour of the buyer, who may be described as a distributor and such expressions are not conclusive and what is to be looked at is the legal incidences of the sale.
7. The relevant terms and conditions of the agreement are referred to in the order of the third respondent. The first condition is that the main dealer is given the sole right of selling the products within the territory. Assigning a particular area for sale of goods purchased to a main dealer is nothing inconsistent with the transfer of property in the goods taking place in favour of the buyer, who is prevented from selling to others outside the territorial limits. Hence it cannot be said that the restricted territory given would make it a distributorship agreement.
8. The second clause referred to is about the right of the company to take action in the event of the main dealer failing to appoint a dealer or a branch office acceptable to the company. It is not even the case of the petitioner that the main dealer is to be ranked as a consumer, but the only endeavour made is to show that none of the terms would make the agreement, when put together, a distributor agreement. Therefore this right to safeguard the business interests of the buyer in the event of failure of the main dealer to carry out his obligations fits in with the role of the main dealer securing full rights over the goods purchased by him from the manufacturer. The other clause referred to is a prohibition against the main dealer selling the products to any person outside the territorial limits and of the liability on the part of the main dealer to pay amount by way of compensation for breach of the conditions of the agreement.
9. The commission payable in respect of the products sold is left to the absolute discreation of the company. If it is shown that out of the commission earned by the main dealer, he is to contribute something to the manufacturer by way of a partnership agreement, then there could be a direct or indirect interest in the business of each other. To fix the commission payable on percent basis is equally uncertain, as the amount which the main dealer may get from time to time would also vary depending on variation in price more or less similar to what is now obtaining by adopting a different basis for payment of commission. Mainly because it is left to the discreation of the company/manufacturer, it cannot be said that the main dealer, on such determinations made, does not acquire absolute interest in the goods purchased by him.
10. A ban imposed on dealing in goods belonging to other manufacturing companies is also intended to safeguard the interest of the manufacturer, to which a main dealer or even an ordinary dealer invariably agrees, in his own interests. The right to advertise is given to the main dealer, which itself shows that he in his own interests, has to canvass for larger sales to be effected, so that he may earn more money by way of commission payable to him. Yet another clause provides for the main dealer to appoint sub-dealers which would not mean that the company acquires interests in the business of the main dealer.
11. As for after sale service obligations, when the goods are sold, they are covered by a warranty period and the obligation is on the manufacturer to satisfy the customer by such after sale service, which the main dealer undertakes to do. This condition is conceived of in the interests of the consumer. This obligation has to be discharged for the benefit of the consumer by the manufacturer, main dealer and dealer. This cannot be considered as resulting in a direct or indirect interest in the business of each other.
12. Therefore the contention of Sri Ramasubramaniam, learned counsel for the petitioner that the fixation of a territorial limit, the obligation to restrict activities within the territory, to discharge the post-sale obligations to comply with the warranty conditions etc. would not by themselves or even put together, result in the concept of 'related person' being injected in the transactions entered into by the petitioner with its main dealers.
13. What is more significant is that, an invoice is prepared in favour of the main dealer who pays the price and takes delivery of the vehicles and thereafter they belong to him. In turn he makes the invoice on the dealer or a sub-dealer, in his own right. It is this essential feature which had not been properly considered by the respondents. When there is a transfer of interest in the property and the transaction partakes the character of principal to principal basis, and each having independent business, it would be improper to hold that the relationship is one of manufacturer and distributor, and not between a manufacturer and an independent purchaser bearing the stamp of a main dealer.
14. Though Sri K. N. Balasubramaniam learned counsel for the respondents, took considerable pains to distinguish the two decisions above referred to and by reference to the provisions of the Act that the expression 'main dealer' is a camouflage or a disguise for distributorship and that the grant of special discount itself exposes that the main dealer is a preferred purchaser, in the light of what has been held by the Supreme Court in Atic's case : 1978(2)ELT444(SC) and in Jay Engineering Works Ltd. V. Union of India 1981 E.L.T. 284 and S. M. Chemicals & Electronics and another V.R. Parthasarathy and others 1980 E.L.T. 197, it is not the nomenclature which is determinative, but the legal incidences which flow out of an agreement which will have to be looked at, and if the totality of the terms and conditions enforceable between the parties partakes the nature of a distributor arrangement, then the 'related person' concept would be applicable.
15. Sri Balasubramaniam would persit to contend that the ban imposed on dealing in goods belonging to others, and the after-sale service shall not be lightly brushed aside but be treated as essential features which expose the real nature of the transaction. In Jay Engineering Works Ltd. V. Union of India 1981 E.L.T. 284 it was held that
'the mere fact that the buyers effected after-sale services during the warranty period would not also indicate that the buyers had any interest in the business of the manufacturer.'
16. Therefore in the instant matter, on an analysis of the terms and conditions entered into, it has to be held that the petitioner's main dealers cannot be treated as 'related persons' and hence the Rule Nisi is made absolute. No costs.