JUDGMENT
M.N. Chandurkar, C.J.
1. The only question which arises in this appeal, is whether the six whole-sale dealers, with whom the appellant-company deals on the basis of wholesale transactions of sale of its products, can be said to be related persons within the meaning of Section 4(4)(c) of the Central Excise and Salt Act, 1944 herein after referred to as the Act.
2. The brief facts which are necessary for the decision of the above question are:
3. The appellant is a public limited company manufacturing brake assemblies by obtaining brake linings from the manufacturers of brake linings without payment of duty under bond against L.6 licence under Chapter X procedure. Basically there are two kinds of transactions, one set of transactions is in the nature of sales of brake assemblies made directly by the appellant-company to State Transport undertakings on what is known as rate contract. There is no dispute that there is a direct privity of contract between the Transport undertakings and the appellant-company so that the transactions are commercial transactions at arms length. The other transactions are through independent wholesale buyers. These wholesale buyers are of two kinds. There are four companies namely, M/s. Central Automobiles, M/s. Associated Auto Parts, M/s. Jullundur Motor Agency and M/s. Howrah Motor Company. These four wholesale buyers are described by the appellant as independent wholesale buyers. To these buyers the appellant-company offers a discount of 32-l±2 per cent on the list price. In addition to this discount, at the end of each year the performance of these wholesale buyers in promoting sales of companies’ products is reviewed and the Board of Directors of the Company approves payment of specific amounts towards the sales promotion expenses incurred by these wholesale buyers. The other set of wholesale buyers are described by the appellant-company as associated wholesale buyers. It is this phraseology which seems to have landed the appellant in trouble. These two buyers in question are Messrs. T.V.S. & Sons Limited, herein after referred to as M/s. T.V.S. & Sons and M/s. India Motor Parts and Accessories Limited, as ‘Impal’. Both these companies are private limited companies under the Indian Companies Act. In so far as T.V.S. & Sons, is concerned it holds 21 per cent share-holding in the appellant company. In so far as Impal is concerned, some of the Directors of the appellant company have different shareholdings varying from 0.1 per cent to 1.5 per cent in Impal. To these companies, though the appellant originally offered a discount of 40 per cent on the list price, for the purpose of assessment to excise duty, the discount has been computed at 32 per cent on par with the discount to the other wholesale buyers.
4. The Assistant Collector of Central Excise has taken the view that the sales made through the two companies M/s. T.V.S. & Sons and Impal, which have been described as associates will be treated as sales through related persons. The Assistant Collector has given no reasons for this conclusion. With regard to the four other distributors, who are, in fact, wholesale dealers with transactions at arms length, while referring to the pattern of sales to these wholesale dealers, the Assistant Collector has referred to the following circumstances:
(i) Five percent commission is paid to the distributors of the respective areas to compensate them in maintaining contacts with the various State Transport undertakings to encourage the State Transport undertakings to place orders on them, follow up their bills and ensure prompt payment. In addition, these distributors are given specific amounts towards the sales promotion expenses incurred, by them.
(ii) The distribution of product through distributors and associates would confer the relationship between the Brakes India and their distributors.
(iii) As a matter of business policy and principle, the appellant-company insisted on sales only through their distributors.
5. Taking these considerations into account, the “Assistant Collector held that “the distributors” of the company are ‘related persons’ within the meaning of Section 4″ and directed the company to file a fresh price list under Part IV quoting the price at which such distributors sell their products to unrelated wholesale dealers.
6. This order of the Assistant Collector was challenged by the appellant in a writ petition in this Court. The prayer made in the writ petition was that the order of the Assistant Collector should be quashed and the ground taken in the writ petition was that the Assistant Collector was in error in holding that the wholesales dealers were related persons within the meaning of the Act. In the counter affidavit filed on behalf of the Department a bald averment was made that the so-called wholesale dealers were certainly distributors in whose business the appellant has interest and Vice Versa and this was fortified by the following facts:
1. Whenever a buyer approaches them for goods, they are being directed to approach the Distributors.
2. In respect of sales to State Transport Undertakings, the distributors got overriding commission, which showed that the distributors took active interest in the appellant’s goods.
3. To cater to the needs of the replacement market the goods are channelled only through M/s. Ashok Leyland who happened to be one of the appellant’s major domestic customers.
4. At the end of each year, the dealers (distributors) were paid specific amounts towards sales promotion expenses.
7. In other words, each of the grounds relied upon by the Assistant Collector was re-stated.
8. The learned Judge seems to have accepted the reasoning of the Assistant Collector as correct. The circumstances which weighed with the learned Judge in coming to the conclusion that the Assistant Collector was right in holding that these whole sale dealers were ‘related persons’, were the same as those referred to by the Assistant Collector. It also appears from the order of the learned Judge that the fact that M/s. T.V.S. & Sons had 21 per cent shareholding in the appellant-company and that the Directors of the appellant-company had shareholdings ranging between 0.1 per cent to 1.5 per cent in Impal also weighed with the learned Judge in holding that the manufacturer and the distributors were having interest directly or indirectly in the business of each other. The learned Judge, thus, dismissed the writ petition. This order of the learned Judge is now challenged in this appeal.
9. The short submission of the learned Counsel appearing on behalf of the appellant is that before a person can be said to be a ‘related person’ within the meaning of the term defined in Section 4(4)(c) of the Act, it has to be shown that there is a mutuality of interest in the business of each other of the person who is said to be a ‘related person’. The argument is that, in so far as the direct sales to public undertakings are concerned, the test of mutuality is clearly not satisfied, because public undertakings have no interest in the business of the appellant, neither does the appellant have any business with the public undertakings. The interest, it was contended, must be pecuniary or commercial interest in the commercial sense of the term. The other argument is that, so far as the companies which were described as associate-companies, namely, M/S. T.V.S. & Sons and Impal are concerned, merely because T.V.S. & Sons had 21 per cent shareholding in the appellant-company and some of the Directors of the appellant-company had a negligible shareholding in Impal, that by itself could not mean that the two companies were commercially interested in the business of each other. An argument was also advanced that, in so far as the shareholding is concerned, the only nature of shareholding contempalted as being necessary for a person to became a related person was the one which was referred to in the latter part of the definition to ‘related person’ and, unless the shareholding was such that the person which included the company constituted a holding company or a subsidiary company, that shareholding had to be ignored.
10. Mr. Somasundaram, appearing for the Department has contended before us, firstly, that the remuneration which is paid to the wholesale dealers in the areas in which the public transport undertakings were located clearly indicated that these wholesale dealers were really acting in the capacity of an agent and that there was a relationship of agent and principal between the wholesale dealers and the appellant. It was also contended that the payment of fixed amounts by way of sales promotion expenses would also show that the relationship between the wholesale dealers and the appellant was one of agency. Then with regard to M/s. T.V.S. & Sons it was contended that, since M/s. T.V.S. & Sons held 21 per cent of equity shareholding of the appellant-company, it must be deemed to be interested in the business of the company and the appellant-company must conversely be deemed to be interested in the business of M/s. T.V.S. & Sons, with the result that the test of mutuality is satisfied. Similarly it was also contended that the fact that certain directors of the Appellant company held shares in Imphal, whatever may be the quantum, clearly showed that the two companies had interest in the business of each other.
11. It is necessary at this stage to deal with the relevant provisions of Section 4 of the Act Section 4(1) reads as follows:
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 beta) the normal price thereof, that is to say, the price at which such goods are ordinarily sold by the assessee to a buyer in the course of wholesale trade for delivery 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) Where, in accordance with the normal practice of the wholesale trade in such goods, such goods are sold by the assessee at different prices to different classes of buyers (not being related persons) each such price shall, subject to the existence of the other circumstances specified in Clause (a), be deemed to be the normal price of such goods in relation to each such class or buyers.
(ii)…
(iii) Where the assessee 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 assessee to or through such related person shall be deemed to be the price at which they are ordinarily 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) where the normal price of such goods is not ascertainable for the reason that such goods are not sold or for any other reason, the nearest ascertainable equivalent thereof determined in such manner as may be prescribed.
(2)…
(3)…
(4) For purposes of this section-
(a)…
(b)…
(c) “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.
Now it is well established that, in so far as the levy of excise duty on a manufacturer is concerned, except in the case of a related person, the value is the normal price of the excisable goods, which means the price at which the goods are sold by the assessee to the buyer in the course of a wholesale trade for delivery at the time and place of removal. Clause (i) of the proviso takes note of the fact that goods are sold at different prices to different classes of buyers and it provides that, in accordance with the normal practice of the wholesale trade in such goods, such goods are sold by the assessee at different prices to different classes of buyers each such price being subject to the existence of the other circumstances specified in Clause (a) be deemed to be the normal price of such goods in relation to each such class of buyers.
12. In so far as transactions with the related persons are concerned, the valuation of the goods for the purpose of excise is governed by Clause (iii) of the proviso. Under that clause, where the assessee 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 assessee to or through such related person shall be deemed to be the price at which they are ordinarily 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.
13. It is obvious that, according to the Department, in respect of transactions entered into with the six companies in question for the purpose of excise duty, it is the price as contemplated in the (iii) clause of the proviso to Section 4 of the Act that is relevant and that is why by the order impugned in the writ petition, the Assistant Collector directed the appellant to quote the price at which the distributors, namely, the wholesalers, in the instant case sold their product to unrelated wholesale dealers. According to the appellant-company, the excisable value has to be determined in accordance with Clause (a) of Section 4(1) of the Act, because the six companies in question do not fall within the meaning of ‘related person’ under Section 4(4)(c) of the Act.
14. In so far as the definition of ‘related person’ is concerned, Mr. Somasundaram was fair enough to state on behalf of the Department that the latter part of the definition, which is inclusive in nature so as to include holding company, a subsidiary company, a relative and a distributor of the assessee and any sub-distributor of such distributor, is not invoked by the Department and that even according to the Department, the six companies were related persons within the substantive part of the definition of related person. It is to be pointed out that, before a person can be described as a related person for the purpose of Section 4 of the Act, it has to be first established that such person is associated with the assessee and this association has to be in the nature of haying an interest which may be direct or indirect in the business of each other. In other words, it is not enough that the assessee has an interest in the business of another person that alone will not make such other person a related person. The prerequisite of such other person being a related person is that such other person must also have an interest in the business of the assessee. In other words, there has to be a mutuality of interest in the business of each other and, unless this mutuality of interest in the business of each other is established. It would not be possible to describe, the person as being a related person. Though the definition of ‘related person’ itself clearly spells out the concept of this mutuality of interest, the controversy is also now settled by the decision of the Supreme Court in Union of India v. Atic Industries . That decision was in an appeal from the decision of the Gujarat High Court in Atic Industries Ltd. v. Union of India 1979 E.L.T.(J) 513. We are not concerned with that part of the decision of the Gujarat High Court in which the provision relating to the related person was declared to be unconstitutional and it may be stated that part of the decision has been overruled by the Supreme Court. In that decision, the Gujarat High Court was dealing with the question whether the Company, Atul Products Limited, which held 50 per cent share in the equity holding of the Atic Industries Ltd. could be said to be a related person. In construing the words “related person” in Section 4(4)-(c) of the Act, the Gujarat High Court followed its earlier decision in Cibatul Limited, P.O. Atul v. Union of India and Ors. (1980)21 Guj. L.R. 284 : 1979 E.L.T.(J) 407, in which the view taken was that the expression “they have interest, directly or indirectly, in the business of each other” connotes mutuality of business interest. In the earlier decision in the case cited supra it was pointed out by the Division Bench of the Gujarat High Court at page J.437 as follows:
The particular words” in the business of each other” used in the definition are capable of no other meaning than that there must exist mutuality of business interest between the two. If the nature of business transacted between the two shows that the one only manufacturers and the other only buys from him there is no Mutuality of business-interest between them. Merely because there is an agreement between the two on this subject, it cannot be said that there is mutuality of business interest between them. In order to establish mutuality of business interest between the two, the manufacturer must, in his own interest, promote the business of the buyer and the buyer, in his own interest, promote the business of the manufacturer.
With respect, we agree with these observations. In other words, it is clear that mutuality of business interest between the two persons cannot be said to be established by merely showing that they have business with each other. It is to be further shown that each one has some special interest in the promotion of the business of the other, though such interest may be direct or indirect. Thus, in Atic Industries Case, 1979 E.L.T. (J) 513, the Gujarat High Court followed the decision in Cibatul Ltd. v. Union of India 1979 E.L.T. (J) 407 : 21 Guj. L.R. 284. It was Atic Industries case which went to the Supreme Court in appeal and the construction placed by the Gujarat High Court on the words “related person” was in terms approved by the Supreme Court in that decision. Referring to the decision of the Supreme Court in Union of India v. Bombay Tyres International Limited , where the challenge to the constitutional validity of the definition of the term ‘related person’ was negatived, the Supreme Court pointed out that the definition of ‘related person’ had to be read down. The observations made by the Supreme Court reading down the definition of ‘related person’ in the Bombay Tyres International Ltd., case (1983)4 S.C.C. 210 : (1983)3 Comp. L.J. 270 : 1984 Tax L.R. 2436 : A.I.R. 1984 S.C. 420, were quoted by the Supreme Court in Atic Industries Ltd., case 1984 Tax. L.R. 2559 : A.I.R. 1984 S.C. 1495. These observations are as follows:
On a proper interpretation of the definition of “related person” in Sub-section (4)(c) of Section 4, the words, “relative and a distributor of the assessee” do not refer to any distributor but they are limited only to a distributor who is a relative of the assessee within the meaning of the Companies Act, 1956.
What is, however, important is that on the test of mutuality in the context of determining the question whether Atul Products Limited, which had 50 per cent shareholding in the assessee company Atic Industries Limited, could be said to be a ‘related person’, the Supreme Court observed as follows:
What the first part of the definition requires is that the person who is sought to be branded as a “related person” must be a person who is so associated with the assessee that they have interest, directly or indirectly, in the business of each other. It is not enough that the assessee has an interest, direct or indirect, in the business of the person alleged to be a related person nor is it enough that the person alleged to be a related person has an interest, direct or indirect, in the business of the assessee. It is essential to attract the applicability of the first part of the definition that the assessee and the person alleged to be a related person must have interest, direct or indirect, in the business of each other. Each of them must have a direct or indirect interest in the business of the other; The quality and degree of interest which each has in the business of the other may be direct, while the interest of the latter in the business of the former may be direct.
15. With this decision of the Supreme Court, it is difficult to see how the Department can even remotely contend that the two companies in question fall within the definition of “related person” In Section 4(4)(c) of the Act, On the ratio of the decision of the Supreme Court, the mere fact that M/s T.V.S. & Sons held 21 per cent shareholding in the assessee company is of no consequence for purposes of determining whether M/s. T.V.S. & Sons was a ‘related person’. The provisions of the Excise Act are provisions in a fiscal legislation. This provision will, therefore, have to be construed strictly. The effect of the provisos (i) and (iii) to Section 4(1)(a) of the Act is that, if the wholesale buyer is not a related person, the liability to pay excise duty is evidently on a lesser amount; if the transaction falls in the category of a transaction with a related person under Clause (iii) of the provision to Section 4(1)(a) of the Act the liability is increased. It must, therefore, be the for the Department to satisfy the court that the transactions are different from what they clearly appear to be, and, unless the Department is able to establish positively that there were circumstances, which indicated that the wholesale buyer stands In the relationship of a ‘related person’, normally, the liability of the manufacturer will have to be determined in accordance with the general provision in Section 4(1)(a) of the Act. The only circumstance, so far as M/s. T.V.S. & Sons is concerned was their shareholding of 21 per cent in the appellant company. Beyond this nothing more has been established; neither is there any indication anywhere on the record to show that M/s. T.V.S. & Sons were Interested in the business of the assessee company or the. assessee company was interested in the business of M/s T.V.S. & Sons. The test of mutuality was clearly not satisfied.
16. The same appears to be the case with regard to Impal. Merely because some shareholders of the appellant company happened to be holding equity shares in Impal and they are Directors for the time being in the assessee company, the two companies cannot them-selves be said to have any interest In the business of each other. A shareholder and a company are two different entities in law. An incorporated company is itself an independent entity in law. Thus, though a member of an incorporated company may have some shareholding in some other company, with which the incorporated company has business dealings, that by itself would never indicate that the two companies have interest in the business of each other.
17. Now so far as the four other companies are concerned, the learned Counsel appearing on behalf of the Department has taken a stand before us that the four companies must be treated as agents of the assessee company. This argument is self-defeating and cuts at the root of the case of the Department. If the four companies are to be treated as agents of the assessee company as now argued, then the transactions by these agents with third parties will have to be held as not entered into by these companies in their own right, but for and on behalf of the assessee company. This, unfortunately, was not the case of the Department at any stage. The learned Counsel was prompted to raise this argument, because, according to him some remuneration is paid to these companies even in respect of sales which are made to the State Transport undertaking within the area in which the wholesalers function, Now it is to be borne in mind that remuneration is not paid in respect of the wholesale transactions which take place through the agency or medium of any of the four companies. Those transactions admittedly take place directly between the appellant-company and the State Transport undertakings. The remuneration which is paid, is not in connection with or by way of consideration for bringing about those transactions, because the transactions are not brought about by the wholesale dealer. The payment is in the nature of compensation for services rendered to the appellant company by way of following up the bills and ensuring prompt payment and maintaining contract with Public Sector undertakings. It is, therefore, difficult to see how the four companies can be said to be related persons, when admittedly in respect of transactions with the public sector under-takings there are direct dealings between the assessee company and those undertakings and the other transactions with the wholesalers are also commercial transactions at arms length.
18. Now so far as the sale promotion expenses are concerned, it is also difficult to hold that payment of such expenses would make the wholesaler a related person. Mr. Somasundaram has fairly brought to our notice the decision of this Court in which payment to the wholesaler for certain services rendered to the consumer was in issue and it was held that as long as the transaction with a wholesaler is at a commercial price, it is that price which must be treated as a wholesale cash price. The decision is reported in Standard Electric Appliances, Tuticorin v. Superintendent of Central Excise, Tirunelveli and Ors. 1986 E.L.T. 302 (Mad.). In that decision this Court has taken the view that even under the amended provisions of Section 4 of the Act the concept of “related person” is a very narrow concept and sales, which are made in the course of a normal commercial dealings and at arms length, are not hit by Section 4(4)(c) of the Act. It was also pointed out that, even though a product was being advertised by the wholesaler and the wholesaler had undertaken to give after-sales services and comply with the normal warranties, such sales could not be considered as sales to favoured buyers. In paragraph 16 of the judgment, it is observed as follows:
It is also difficult to appreciate how merely because the product was being advertised by the wholesaler and the wholesaler had undertaken to give after sales services and comply with the normal warranties, Messrs. Philips India Ltd., could be considered as favoured buyers. It is common knowledge that when a consumer purchases an article from a dealer, In the case of service facilities, he looks to the dealer and not to the manufacturer. In cases of replacements of defective parts also he will look to the dealer from whom he has purchased and notwithstanding the fact that the wholesale dealer may ultimately have the parts replaced by them reimbursed from the manufacturer, the service facilities are provided by the wholesaler with a view to earn the goodwill and attract customers.
The contention of the Department in that case was that goods were sold to a wholesale buyer who purchased a bulk of the product at a much lower price than the price at which goods were sold to retailers and, since the wholesale buyer was attending to advertisements, sales, service and warrantly claims, the wholesaler must be considered to be a favoured buyer or in any case he must be held to be a ‘related person’. That contention was negatived. The ratio of that decision must squarely apply to the instant case, where at the end of the year certain specific amounts are paid by way of sales-promotion expenses to the wholesale buyers. That fact does not in our view affect the basic nature of the transaction between the manufacturer and the wholesaler and by no stretch of imagination can such a wholesaler be described as a ‘related person’.
19. It is, therefore, clear to us that the learned Judge and the Assistant Collector were in error in holding that the six companies in question were related persons.
20. The learned Counsel for the appellant has, however, vehementhly argued that arbitrary orders passed by the authorities like the one in question, seriously prejudice the citizens and many times when a large amount of tax liability is determined arbitrarily the business itself is ruined. He wanted us to indicate that the authorities who are enjoined with the duty of determining fiscal liability should do so with more care and attention. Now undoubtedly, when a question of liability to tax is to be determined by the authorities under the relevant fiscal statutes, one must assume that, since they are called upon to exercise quasi-judicial functions, they do so with utmost care, and, where a question of construction of certain provisions of law is concerned, they must seriously apply their minds to the relevant law on the subject. Determination of tax matters in a quasi-judicial way cannot be equated with making an administrative or an executive order. Though it is normally expected that questions involving such tax liabilities will be normally decided with utmost care and caution and with a judicial approach, it still seems necessary to emphasise that questions like those which are raised in this case which turn on the construction of the different provisions of law, some of which are also decided either by the High Courts or the Supreme Court, must be elaborately dealt with after taking into account the relevant authoritative pronouncements by Courts. An executive approach merely having an eye on collecting revenue has no place in dealing with a matter which has to be decided by a quasi-judicial order. It would be perfectly justified in expecting the authorities under the Act to decide the relevant questions, having regard to the settled law of the land, rather than by summary decisions in such matters. It is to be realised that such decisions rendered without full application of mind, most of the time with an executive approach, cause serious harm and prejudice to the citizens apart from contributing to the increase in the number of cases in the Courts. These observations, we think, are enough, to dispose of the contention raised before us by the learned Counsel for the appellant.
21. Having regard to what we have said earlier, the appeal has to be allowed.
22. Accordingly, the appeal is allowed, the order of the learned Judge dismissing the writ petition is set aside and the impugned order of the Assistant Collector dated 21.4.1979 is quashed. In the circumstances, we make no orders as to costs.