JUDGMENT
Singla, J.
1. This is a petition under Article 226 of the Constitution of India challenging the order of the Collector, Central Excise & Customs (hereinafter referred to as the ‘Collector’), dated 12th March, 1982 passed under Section 35A of the Central Excises & Salt Act, 1944 (hereinafter referred to as the ‘Act’).
2. Petitioner No. 1 (hereinafter referred to as the ‘assessee’), a company inter alia manufactures internal combustion engines falling under Tariff Item No. 29. Its sales are mostly through the five regional distributors :
(1) Parry & Co. Ltd., Madras
(2) Meera & Co., Ludhiana
(3) Meera Sales Corporation, Karad
(4) U.P. Sales and Services Ltd., Kanpur
(5) Kirloskar Brothers Ltd., Pune.
Its branch office ‘Koel Sales and Service’ has also operated as a regional distributor. The distributorship is given under the agreements which are identical. It is common ground that if the aforesaid distributors fall in the category “related person” within the meaning of Section 4(4)(c) of the Act, the assessee will be liable to excise duty not on the price at which it sells its products to the distributors but on the price at which the distributors in turn sell the products to their constituents. The Assistant Collector, Central Excise and Customs, Pune (hereinafter referred to as the ‘Assistant Collector’) was once prima facie of the view that the distributors were “related person” and had issued show cause notice dated 23rd March 1978 in this regard. However, on going through the assessee’s reply dated 5th July 1978, discussions he had with the assessee’s representative during the course of personal hearing and a note on the arguments dated 24th November 1978, the Assistant Collector was satisfied that the assessee’s distributors were not “related person” within the meaning of Section 4(4)(c) of the Act as the sales were at arm’s length and on principal to principal basis. His order to this effect is dated 28/29th June 1979. The Collector felt that the order dated 28/29th June 1979 passed by the Assistant Collector was erroneous in law. Accordingly he issued a notice dated 26th June 1980 under Section 35A of the Act requiring the assessee to show cause why the order of the Assistant Collector be not set aside and the distributors be treated as “related person” within the meaning of Section 4(4)(c) of the Act, the main ground being that the assessee’s sales are through the distributors and therefore the price at which the assessee has sold its products to them is not the normal sale price. The reply to the above show cause notice is dated 16th July 1978 in which the assessee has reiterated all its submissions which it had made before the Assistant Collector. The position has been further explained by the assessee vide its letters dated 26/27th August 1980 and 2nd December 1980. Eventually the Collector has passed an order on 12th March 1982 under Section 35A of the Act setting aside the order of the Assistant Collector holding the assessee’s distributors to be “related person” within the meaning of Section 4(4)(c) of the Act. Observing that the transactions of the assessee are not on principal to principal basis and/or at arm’s length, he further held that the assessee is liable to excise duty on the price at which the distributors have sold the goods to their constituents. For this purpose the Collector has on going through one of the sample agreements noted as many as 11 provisions which indicated that not only in nomenclature, the assessee’s distributors are distributors in reality. According to him mere mention of the expressions such as the agreement is on principal to principal basis or that the distributor is not the agent of the assessee, in clause 16 of the agreement has no meaning and he had to consider the substance of the matter which he did.
3. At the time of hearing before us, Shri Talyarkhan, the learned Counsel for the assessee took us through the agreements at length to show that the transactions are at arm’s length and on principal to principal basis. Taking us through the provisions of Section 4(4)(c) of the Act, he pointed out that clause (c) of sub-section (4) of Section 4 has two parts namely, (i) a person who is so associated with the assessee that they have interest, directly or indirectly, in the business of each other is a “related person” and (ii) a holding company, a subsidiary company, a relative and distributor of the assessee, and any sub-distributor of such distributor is also a “related person”. The Collector, it was stated, has not even suggested that the distributors are the persons who are so associated with the assessee that they have interest directly or indirectly in the business of each other or that they constitute a holding company, a subsidiary company, or relative within the meaning of the provisions of the Companies Act. The only ground given by the Collector for holding the distributors to be ‘related person’ within the meaning of clause (c) of sub-section (4) of Section 4 of the Act is that they are distributors both in nomenclature and in substance.
4. Reiterating that the assessee’s distributors are distributors only in name but also in the real sense of the term, Shri Talyarkhan invited our attention to the Supreme Court decision in the case of Union of India and Others v. Bombay Tyre International Ltd. and etc., (relevant observations being at page 439 paras 43 to 46) for the proposition that the term “related person” does not include a distributor simpliciter. The term will include a distributor only if the said distributor is also a holding company, a subsidiary company or a relative within the meaning of the Companies Act, 1956. The above view, it was stated, has been reaffirmed by the Supreme Court in a later decision in the case of Union of India and others v. Atic Industries Ltd. . He, thus, contended that in view of the above Supreme Court decision strictly speaking it may not be necessary to go through the agreements with a view to find whether or not the assessee’s distributors are distributors only in name or in reality also.
5. However, he did invite our attention to another Supreme Court decision in the case of Moped India Limited v. Assistant Collector of Central Excise, Nellore and others, 1986 (23) ELT 8 (S.C.) for the purpose of showing that the facts in that case were much worse. The distributors were given commission and from that point of view the sales could not be said to be outright sales, yet vide para 5 at page 12 of the decision the Supreme Court held that all the clauses in the agreement were usual clauses in such agreements dictated by commercial consideration only. Anticipating that the learned Counsel for the respondents might alternatively contend that the assessee’s distributors are covered by the first part of clause (c) of sub-section (4) of Section 4 of the Act, Shri Talyarkhan stated that there was no mutuality of the interest involved between the distributors and the assessee and that mere fact that they were distributors and selling assessee’s products does and cannot by any stretch of imagination justify a conclusion that the distributors are interested in the business of the assessee or that the assessee is interested in the business of the distributors.
6. Shri Desai, the learned Counsel appearing on behalf of the respondents has fairly admitted the legal position. However, he vehemently urged that the case requires to be decided on the basis of its own facts. For this purpose he took us through the sample agreement (which is at pages 48 to 58 of the paper book) to invite our attention to various clauses in the agreement which according to him indicated that this was not the case of outright sale at all. Apart from 11 provisions in the agreement specifically mentioned by the Collector in his order, Shri Desai laid great emphasis on clauses 11 and 12 of the agreement which provide for non-payment of commission to the distributors in the event of certain direct sales. This, according to Shri Desai, meant that in respect of other sales the distributors were entitled to commission. If the distributors are entitled to commission on sales, Shri Desai contended, sales to them cannot be treated as sales at arm’s length or on principal to principal basis.
7. We have heard the parties and have carefully gone through the material on record including the sample agreement and the decisions relied on. The word ‘distributor’ has not been defined in the Act. Having regard to the nature and the manner in which the agreements are entered into by the assessee with the distributors, however, the distributors can be said to be the distributors in reality and not merely in name as understood in common parlance. However, nothing will turn on this conclusion inasmuch as the agreements entered into between assessee and the distributors are the usual type of agreements entered into by any manufacturer of repute with his stockists, dealers or distributors on purely commercial consideration.
8. We may briefly refer to the objections taken by the Collector to the different clauses in the agreement. The first objection is that the distributors are described as distributors for given territory. They are prohibited from manufacturing or selling competitive products. The price at which the products are to be sold by the distributors is fixed by the manufacturer. The distributors and required to maintain servicing and showrooms of a particular standard which is subject to the inspection by the manufacturer. The distributors have to send periodical sales reports to the assessee about the sales. The distributors cannot give tenders or quotations to Government or other marketing federations, corporations, banks etc. The assessee has, of course, reserved its right to sell the goods at the factory and in certain circumstances no commission is to be paid to the distributors. We fail to understand how these provisions make the distributors as the agents of the assessee as held by the Collector. The facts in the Supreme Court decision in the case of Moped India Limited v. Assistant Collector of Central Excise, Nellore and others (supra) were almost identical if not worse and yet it was held that the sales to the distributors were at arm’s length and on principal to principal basis. In this view of the matter we have little difficulty in holding that the assessee’s sales to the distributors are also at arm’s length and on principal to principal basis.
9. Next question that requires consideration is whether the distributors herein are “related person” within the meaning of Section 4(4)(c) of the Act. Clause (c) of Section 4(4) of the Act reads as under:
“(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 or such distributor.
Explanation : In this clause ‘holding company”, “subsidiary company” and “relative” have the same meaning as in the Companies Act, 1956.”
As pointed out by Shri Talyarkhan the clause has two limbs (i) a person who is so associated with the assessee that they have interest directly or indirectly in the business of each other is a ‘related person’ and (ii) a holding company, a subsidiary company, a relative and a distributor of the assessee and any sub-distributor of such distributor are also ‘related person’. Despite the submissions made by Shri Desai particularly on the basis of clauses 11 and 12 of the agreement, we are not satisfied that in terms of the agreement relationship between the distributors and the assessee is of a type that it can fall within the first part of clause (c). We do not agree with Shri Desai that merely because a provision is made in the two clauses that the distributors will not be entitled to any commission on direct sales it would follow that on all other sales they are entitled to commission. In fact, the agreements do not provide for payment of any commission and it is not possible for us to infer a provision for payment of commission on the basis of converse of the proposition. It appears that clauses 11 and 12 in the agreements are by way of abundant precaution. Accordingly, we have no difficulty in holding that the first limb of clause (c) is not applicable to this case.
10. The second limb might have presented some difficulty. However, the legal position has now been settled by the Supreme Court by decision in the case of Union of India v. Bombay Tyres International (supra), where Their Lordships read the second limb as meaning distributors who are a holding company, a subsidiary company or relative within the meaning of the Companies Act, 1956 alone would fall in that category. The relevant observations of the Supreme Court at pages 441-42 paras 48(v) are:
“On a proper interpretation of the definition of ‘related person’ in Sub-Sec. (4)(c) of Section 4, the words “a 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. So read, the definition of ‘related person’ is not unduly wide and does not suffer from any constitutional infirmity. It is within the legislative competence of Parliament. It is only when an assessee so arranges that the goods are generally not sold by him in the course of wholesale trade except to or through such a related person that the price a which the goods 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 is liable to be taken as the excisable value of the goods under proviso (iii) of sub-section (1)(a) of Section 4.”
There is not even a suggestion that the distributors are or could be treated as a holding company, a subsidiary company or a relative. Accordingly we hold that the second limb of the clause is also not satisfied in this case. It may be mentioned that the Supreme Court has reaffirmed its above view in a subsequent decision in the case of Union of India v. Atic Industries Ltd. (supra). In another case reported in Moped India Limited v. Assistant Collector of Central Excise, Nellore (supra) the terms of the agreements were more or less the same if not worse in the sense a commission was allowed to the distributors. Yet it was held that the sales to the distributors were at arm’s length and on principal to principal basis. We further find that this very view has been taken by a Division Bench of this Court in the case of Union of India & Another v. Murphy India Ltd. and Another in Appeal No. 349 of 1985 arising out of Writ Petition No. 1232 of 1980, decided on 11th and 12th December, 1985 by the then Acting Chief Justice Kania and Pendse J. In the above view of the matter we accept the submissions made on behalf of the petitioners.
11. In the result, petition succeeds. The impugned order of the Collector of Central Excise & Customs. Pune dated 12.3.82 is set aside. Rule is made absolute in terms of prayer (a) with no order as to costs.