ORDER
S.B. Wad, J.
1. The petitioners challenge the order of the Assistant Collector dated 7th January, 1983. The Assistant Collector had held that the petitioner and M/s. Modi Rubber Ltd., are related persons within the meaning of Section 4(4)(c) of the Central Excises and Salt Act, 1944. The Assistant Collector further held that the petitioners were liable to pay excise duty on the price of M/s. Modi Rubber Ltd. The Assistant Collector further clubbed the sales of the petitioners and M/s. Modi Rubber Ltd., and held that the petitioners were not entitled to exemption under Notification No. 65/81, dated 25-3-1981 as a small scale industry as the turnover would exceed rupees two crores.
2. The petitioners produce the sheets of rubber called flaps used in the trucks Along with the tyres. The raw material is supplied by M/s. Modi Rubber Ltd. Under the contract between the petitioners and M/s. Modi Rubber Ltd., the petitioners use the brand name “Modi Continental” and mark the flaps with the said brand name. The wholesale sale of the flap is made by the petitioners to M/s. Modi Rubber Ltd. M/s. Modi Rubber Ltd. add 12% handing charges to the price at which the petitioners sell the flaps to them and sells the flaps in open market. The submission of the petitioners is that the Assistant Collector was wrong in clubbing them with M/s. Modi Rubber Ltd., as they are not related persons within the purview of Section 4(4)(c) of the Act. They further submit that since they are not related persons, the price at which the excise duty can be levied on the flaps is the price at which they sell the flaps to M/s. Modi Rubber Ltd., and not at the price at which M/s. Modi Rubber Ltd., sells the product in the market. It is further submitted that since the two companies are not related persons, their turnover cannot be clubbed and the petitioner cannot be denied the exemption as a small scale industry under Notification No. 65/81 dated 25-3-1981. For the facility of easy reference, we will describe the petitioners as sellers and M/s. Modi Rubber Ltd. as the buyer in this Judgment.
3. The question as to who are ‘related persons’ within Section 4(4)(c) of the Act and what is the value at which the excise is leviable where brand name of the other establishment is used, are no more res integra. They are concluded by various decisions of the Supreme Court. In Union of India v. Cibatul Limited, , the Supreme Court laid down the test for deciding who are related persons for the purposes of Section 4(4)(c) of the Act. The test is, whether the goods are manufactured by the seller or are manufactured by the seller on behalf of the buyer. The Supreme Court further held that mere use of brand name or trademark of another establishment does not make the manufacture by the seller on behalf of the buyer. On the facts of that case, the Court held “The seller owns the plant and the machinery, the raw material and labour, and manufactures the goods and under the agreement, affixes the trademark on the goods. The goods are manufactured by the seller on its own account and the seller sells the goods with the trademark affixed on them to they buyer.” This principle was upheld by the Supreme Court further in the recent Judgment reported in Judgment Today, and cited as 1989 (3) SC 18. In Union of India v. Play-world Electronic Pvt. Ltd., the Supreme Court further laid down that even though the entire production is sold by the seller to the buyer, although under the brand name of the buyer, relationship of ‘related persons’ is not established. In Union of India and others v. Atic Industries Ltd., the Supreme Court had earlier clarified the concept of relationship in the first part of Section 4(4)(c). The Court observed, “It is essential to attract the applicability of the first part of the definition that the assessed 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. In that case, the buyer company was the shareholder in the assessed company to the extent of 50 per cent of the share capital, but the assessed company had no interest in the buyer company. The Supreme Court held that the test of mutuality of interest was not satisfied in that case. This test was applicable to the general business interest of the seller and buyer. But the Supreme Court laid down further test in regard to the business interest in the product in question which was being subjected to excise on the basis of the buyer’s price. The Supreme Court held that if there is a wholesale trade on principal to principal basis, between the buyer and the seller, they cannot be treated as ‘related persons’.
4. As regards the valuation for the purposes of excise duty, the Supreme Court has held that if the buyer and the seller and not related persons, within the meaning of Section 4(4)(c) of the Act, it is not the buyer’s price but the seller’s price that is relevant. In other words, the value cannot be determined u/s 4(i)(a) and (iii). [Union of India v. Cibatul Ltd., 1985 (22) ELT 302; Joint Secretary to Govt. of India v. Food Specialities Ltd. – 1985 (22) ELT 324].
5. The Assistant Collector has held that the buyer and seller are the interrelated persons on the following considerations.
The buyer uses the brand name of the seller; the flap with the brand name is sold wholesale by the buyer through its own depot; the flaps are not sold in open market by the seller. The impugned order also notices that the raw material is supplied by the seller to the buyer and the seller can reject the flaps if they are not according to the specification.
6. The close reading of the impugned order would show that the Assistant Collector has ignored the fact that the buyer makes a wholesale trade of the flaps to the seller and after adding 12% handling charges, the seller makes a further sale. The petitioners have specifically averred that the raw material is sold to them by the seller and they have also attached the receipt showing the separate payments made for such sale of raw material. There is nothing to show that the buyer manufactures the flaps on behalf of the seller which is a requirement laid down by Supreme Court decisions cited above. Mere right to reject some goods or that the entire stock of manufactured goods is sold to the seller does not create the relationship envisaged by Section 4(4)(c). That the brand name of the seller is valuable and that the brand name is used by the buyer are also not decisive of the relationship. The learned Assistant Collector has not even addressed to the question of mutuality of interest in the business of buyer and seller which is the most important test laid down by the Supreme Court for deciding the related relationship u/s. 4(4)(c) of the Act. Since the impugned order is contrary to the decisions of the Supreme Court, it has to be quashed.
7. As the buyer and the seller in the present petition are not related persons, they can’t be clubbed together on the basis of their respective and separate production. The only valid basis for excise duty payable by the petitioners is the price at which they sell flaps to M/s. Modi Rubber Ltd. and not the price at which M/s. Modi Rubber Ltd. sells the flaps by adding 12 percent handling charges. In view of this, the petitioners cannot be denied exemption under Notification No. 65/81 dated 25th March, 1981.
8. For the reasons stated above, the impugned order is set aside. The petition succeeds with costs. Rule is made absolute.