ORDER
K.L. Rekhi, Member (T)
1. The appellants manufacture branded chewing tobacco, an excisable item. Prior to their incorporation on 12.8.1985, they were a partnership firm. Another partnership firm, M/s. Ratna Zarda Supply Company, were their sole selling agents/distributors. The two firms had no common partners. But 7 (out of 11) partners of Ratna were related to one or the other of 8 (out of 9) partners of Prabhat. The main point of dispute to be decided in this appeal is whether Ratna was a ‘related person’ of Prabhat within the meaning of Section 4(4)(c) of the Central Excises and Salt Act, 1944. If the answer to this question is in negative, the other point to be looked into is whether Ratna was really a consignment agent of Prabhat, working on commission agency basis. The period of the controversy started from 1.10.1975, the date on which the new Section 4 of the Act with its concept of ‘related person’ came into force.
2. The legislative provision in the new Section 4(4)(c) on ‘related person’ read as under :-
“related persons 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 a distributor of the assessee, and any sub-distributor of the such distributor”.
Proviso (iii) to Section 4(1)(a) provided for as under :-
“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”.
3. The department’s contention is that Ratna was a ‘related person’ of Prabhat because of mutuality of interest between the two, i.e., under the first part of Section 4(4)(c). This is the finding of the lower authorities also. In the alternative, the department’s contention, now raised for the first time before us on the facts already available on the record, is that Ratna was “a relative and a distributor” of Prabhat within the meaning of the second part of Section 4(4)(c). In either case, if Ratna is held to be a related person of Prabhat, the implication would be, as per proviso (iii) to Section 4(1)(a), that Ratna’s re-sale price for the goods to their dealers would become the basis for assessing the Central Excise duty and not Prabhat’s initial sale price charged to Ratna. As regards the department’s second proposition, if it is established that Ratna was only a consignment agent working on commission agency basis, the amount of commission given by Prabhat to Ratna would become inadmissible for exclusion from the assessable value vide Supreme Court judgment in the case of M/s. Coromandel Fertilisers Limited – 1984 (17) E.L.T. 607 (S.C.). In that event, the assessment here too would have to be made on Ratna’s sale price to their dealers.
4. The appellant’s main proposition as pressed for before us is that Ratna was not a related person of Prabhat and that Prabhat’s price to Ratna should be accepted as the one being from principal to principal and at arm’s length. If this is not acceptable, the appellants claim the following two deductions from Ratna’s sale price to their dealers :-
(i) equalised freight included in the published list prices for dealers which were uniform all over India.
(ii) cost of additional packing done by Ratna over and above Prabhat’s packing in which the goods were cleared from the appellant’s factory.
No other relief is pressed for by the appellants before us.
5. The law regarding the concept of ‘related person1 has been well settled by the Hon’ble Supreme Court in their following two judgments :-
(1) 1984 (17) E.L.T. 323 (S.C.) – Union of India v. Atic Industries Ltd.
(2) 1983 E.L.T. 1896 (S.C.) – Bombay Tyres International Ltd. v. Union of India.
It has been laid down by the Hon’ble Supreme Court that under the first part of Section 4(4)(c), there should be mutuality of interest between the two persons before they can be considered ‘related persons’; only one-sided interest is not sufficient. However, once the two-way interest is established, it does not matter whether the interest is direct or indirect. The degree of interest is also not material. So long as the two persons have some common mutual interest in the business of each other, whether direct or indirect, they could be considered ‘related persons’. Under the second part of Section 4(4)(c), the customer, besides being a distributor of the assessee, should also be a relative of the assessee within the meaning of the term under the Companies Act, 1956.
6. It is in the light of the aforesaid principles laid down by Hon’ble Supreme Court that the facts of the present case have to be judged. For a proper appreciation of the facts, we have for guidance the judgement of the Hon’ble Supreme Court in the case of Mohan Lai Magan lal Bhavsar and Ors. Vs. Union of India and Ors. – 1986 (23) E.L.T. 3 (S.C.). In that case, there were two separate partnership firms – the manufacturing firm and the chief distributor firm. The three partners of the manufacturing firm along with a son of each of them were also the partners of the chief distributor firm. From this fact, the Supreme Court observed that there was “identity of interest” between the two firms. There were certain additional circumstances also in that case. The chief distributor firm had their offices in the same premises as the manufacturing firm and the sons of the three partners of the manufacturing firm were to share only in the profits of the chief distributor firm but not to be liable for any losses. The Supreme Court concluded that the two firms could not be said to be at arm’s length or independent parties and the prices at which the goods were sold by the manufacturing firm to the chief distributor firm could not be taken to be the real value of the goods.
The Bhavsar case aforesaid was put to the appellants during the hearing and they addressed their arguments distinguishing the facts of their own case. The appellants stated that the Bhavsar case was under the old Section 4, when there was no concept of ‘related person’ and that the point of dispute in that case was whether the dealings between the manufacturer and the distributor were at arm’s length or not. Their argument is correct, but only technically. We note that there was a clear finding by the Hon’ble Supreme Court that the inter-relationship among the partners of the two firms in the Bhavsar case created “identity of interest”. There is no difference between ‘identity of interest’ under the old Section 4 and ‘mutuality of interest’ in the new Section 4. Both mean the same thing. The Supreme Court have also held in their judgment in the case of Bombay Tyres International Ltd., aforesaid and further in their judgment in the case of M.R.F. Limited – 1987 (27) E.L.T. 553 (S.C.) that there was no material difference between the provisions of the old Section 4 and the new Section 4. In fact, we find that the new Section 4 goes even further ; it raises a presumption of the price not being at arm’s length if the conditions laid down in subsection (4)(c) thereof are satisfied. The appellants then stated that certain detailed features of the Bhavsar case did not tally with the facts of their case, namely, that in the Bhavsar case all partners of the manufacturing firm were related to all the partners of the distributor firm, that both the firms had their offices located in the same premises and that the sons of the three partners of the manufacturing firm were to share only in the profits of the distributor firm, but not to be liable for any losses.
7. We observe that the detailed facts of no two cases would be alike. What is to be seen is the totality of the circumstances of each case and draw comparison between the substance of the relationship in the two cases.
8. Coming to the facts of their own case, the appellants stated that both the firms, Prabhat as well as Ratna, existed long before the Central Excise duty was imposed on branded chewing tobacco on 1.3.1975. Prabhat was set-up in 1962 and Ratna in 1970. It could not, therefore, be said that Ratna was created as a separate firm with the object of avoiding payment of a part of the Central Excise duty. Further, both the firms had been registered separately as partnership firms and they were separate assessees for the purpose of Income-tax. We observe that, unlike under the Income-tax Act, under the Central Excises and Salt Act or the Partnership Act a firm is not a juristic person. “The firm’s name is only a collective name for the individual partners” 1986 (24) E.L.T. 186 (S.C.) – Deputy Commissioner of Sales Tax (Law) v. .K. Kelukutty. Further, because of the related person concept embodied in Section 4 of the Central Excises and Salt Act, 1944, the mere fact of the two firms having a separate entity and registration is of little consequence. Under Section 4, even two limited companies can be related persons if they have interest in the business of each other. For the purpose of Section 4, we are concerned with the substance of the relationship between the two companies or among the partners of the two firms. We have already seen in the Bhavsar case that inspite of there being two separate partnership firms – the manufacturing firm and the distributor firm – the Hon’ble Supreme Court held that because of the inter-relationship between the partners of the two firms, there was identity of interest between the two.
9. When we consider the facts of the appellant’s own case in the above background, we discover the following features and un-usual circumstances :-
(i) No doubt, there were no common partners as between Prabhat and Ratha. It is also true that all partners of Prabhat were not related to all the partners of Ratna. Yet, there was an overwhelming inter-relationship among the partners of the two firms. As many as 7 partners of Ratna out of the total of 11, were related to 8 out of the total of 9 partners of Prabhat. The four partners of Ratna, who were not related to any partner of Prabhat, together held only 20% shares in Ratna. Similarly, the one partner of Prabhat who was not related to any partner of Ratna held only 15-16.13% share in Prabhat. In other words, the partners having 80% interest together in Ratna were related to partners of Prabhat having together 84/85% interest in Prabhat. With such predominant inter-relationship among the partners of the two firms, the conclusion is obvious that Ratna, the distributor firm, was a relative of Prabhat, the manufacturing firm. In other words, Ratna was both, a relative and a distributor within the second part of the definition of Section 4(4)(c).
(ii) The overwhelming commonality of interest between the two firms, because of closely related partners having predomihent shares in the tw6 firms, also established the two-way mutuality of interest as between Prabhat and Ratna under the first part of the definition in Section 4(4)(c).
(iii) That there was mutuality of interest between the two firms was also established because of certain peculiar features of the agreements between the two firms from time to time. We find that the manufacturing firm, Prabhat, very cleverly passed on their own functions of publicity and sales promotion of their products to the distributor firm, Ratna, and made it the responsibility of Ratna to safegraud the goodwill of Prabhat’s products in the country-wide markets. For instance, we quote the following clauses from their Deed of Agreement dated 1.4.1980. In these clauses, “FIRST PARTY” refers to Prabhat and “SECOND PARTY” refers to Ratna :-
“(14) That it has been mutually agreed that the expenses on advertisement, publicity and sale-promotion will be borne by the parties in the following manner :-
(a) The SECOND PARTY will bear the following expenses :-
(i) expenses on advertisements in magazines, newspapers, journals and periodicals and souvenirs, and also on pamphlets, brochures, hand-bills etc.
(ii) expenses (including incoming and outgoing freight) by means of free gifts, prizes and sample distribution of zarda and other articles under any scheme meant for sale promotion;
(iii) expenses on sale promotion activities by means of show centres, pavilions or gates in exhibitions, fairs, melas, festivals and at other suitable places ; and
(iv) the salary or remuneration paid to hawkers and salesmen appointed for sale promotion.
(b) The FIRST PARTY will bear the following expenses :-
(i) expenses on advertisement articles like neonsigns, calenders and posters, name-plates, sign-boards, banners, bags, pads, stickers, key-rings, table stationeries and like materials; and
(ii) rent or hire charges for the land or site meant for the purposes given in clause (a)(iii) of the Article.”
“(15) That due to neglect on the part of SECOND PARTY, any market within their jurisdiction is damaged or receives set-back in business, the cost of setting such market right will be borne by the SECOND PARTY”.
We find that the appellants kept with themselves the minimal part of publicity and sales promotion work and the bulk of it, which was directed towards creating product awareness and sales promotion, was entrusted to Ratna. So much so that if sales of the appellant’s products in any market suffered due to “neglect” on the part of Ratna, the cost of setting such market right was to be borne by Ratna. With Ratna incurring such additional expenses on publicity and goodwill protection for the appellants’ products, it could hardly be said that the payments made by Ratna to Prabhat were the sole consideration for the sale. It cannot be said that all the publicity done by Ratna was for increasing Ratna’s own sales. Ratna had no competitors so far as Prabhat’s products were concerned because Ratna was their sole-selling agent for India. Any customer wanting to buy Prabhat’s products had to come to Ratna only. In the circumstances, the entire publicity and sales promotion efforts of Ratna were for creating product awareness for, and preserving the image of, Prabhat’s products. The financial involvement between the two was apparent beyond doubt. Ratna rendered services to Prabhat in taking care of the publicity and sales promotion for Prabhat’s products. In return, Prabhat made Ratna the sole-selling agent for the whole of India which enabled Ratna to earn 11-12% net commission on all sales of Prabhat’s products.
(iv) The statement made in the Deed of Agreement between Prabhat and Ratna that the dealings between the two will be on the basis of principal to principal has, therefore, to be taken with a pinch of salt. This statement is at least partly belied by the Deed of Agreement dated 1.4.1980 itself. Clause (2) of this Deed laid down that the Muzaffarpur office of Ratna was to purchase goods from Prabhat, but Ratna were doing business from their Delhi office as commission agent of Prabhat and Prabhat agreed to despatch goods to the Delhi office of the SECOND PARTY to be sold in the commission agency of the SECOND PARTY”. The terms and conditions of the commission agency were to be settled by mutual correspondences between the parties. It is clear, therefore, that at least in respect of the despatches to Ratna’s Delhi office, there could be no question of deduction of any trade discount for the purpose of determining the assessable value; the commission given to Ratna on the goods despatched by Prabhat to them on consignment basis is inadmissible for deduction in view of the Hon’ble Supreme Court’s judgment in the case of M/s. Coromandel Fertilisers Ltd., 1984 (17) E.L.T. 607 (S.C.).
(v) There was no clear co-relation between sale bills issued and despatches made by Prabhat to Ratna on the one hand and payments made by Ratna to Prabhat on the other. We re-produce below Clause (12) of the used of Agreement dated 1.4.1980 to show how the buyer-seller relationship was blurred by a smokescreen :-
“That for payment of the dues of the FIRST PARTY by the SECOND PARTY it has been mutually agreed between the parties that the SECOND PARTY will receive payments from their customers in the manner suitable to them and will make payment to the FIRST PARTY in cash so far as practicable keeping in view the cash requirements of the FIRST PARTY for meeting day to day expenses like wages, purchases of raw materials, payments to creditors and other unavoidable expenses. The FIRST PARTY will have no objection if payments to them by the SECOND PARTY are made in cash or otherwise in more than one installments on a particular day. It has been further agreed that on directions from the FIRST PARTY, the SECOND PARTY will make payments or advance to the creditors and suppliers of the FIRST PARTY and may also make payments against the dues payable by the FIRST PARTY. Such payments and advances shall be made in the account of the FIRST PARTY and shall be in effect payments to the FIRST PARTY. The SECOND PARTY shall inform the FIRST PARTY regarding the payments or advances so made within a reasonable time”.
This peculiar arrangement as to payments showed as if Ratna was functioning as an extended arm of Prabhat itself. In fact, Ratna’s position was no better than that of Prabhat’s own selling organization. We are told that Ratna was set-up 5 years earlier to imposition of the Central Excise duty on branded chewing tobacco on 1.3.1975. It may be that Ratna was originally setup as an Income-tax “planning” device but the arrangement came handy when Central Excise duty also came into the picture and Ratna was then used for artificially bifurcating the manufacturing expenses and selling expenses of Prabhat’s products.
10. Taking the totality of the circumstances into consideration, we have no doubt that Ratna was Prabhat’s related person as well as commission agent. The agent’s commission given to Ratna was not admissible for deduction for arriving at the assessable value, as already stated, For the reason of Ratna being a related person, the value of the goods had to be fixed in terms of proviso (iii) to Section 4(1 )(a). To that extent, the impugned orders are correct and are upheld.
11. However, certain deductions from the sale-price charged by Ratna are admissible. The appellants pressed for only two deductions :-(i) equalised freight ; and (ii) additional packing done by Ratna themselves over and above Prabhat’s factory packing. The learned representative of the department had no objection to equalised freight being deducted after verification of the amounts by the Assistant Collector. Regarding the cost of additional packing, he submitted that the facts were not clear. Since no lower authority had gone into the detailed facts as to packing, the learned representative of the department requested that the question of packing may be remanded to the Assistant Collector for a decision in the first instance. We agree with him. Let the Assistant Collector verify the freight amount and the facts regarding packing. It is established that Ratna had done some additional packing or repacking, over and above the packing done by Prabhat at the time of clearance of the goods from Prabhat’s factory, the cost of additional packing or re-packing done by Ratna would not be includible in the assessable value. The freight would also not be includible.
12. Except for the modifications regarding the equalised freight and the cost of additional packing as above, we confirm the lower orders and dismiss this appeal.