Customs, Excise and Gold Tribunal - Delhi
Shiva Tobacco Company vs Collector Of C. Ex. on 1 July, 1996
Equivalent citations: 1996(87)ELT177(TRI-DEL)
ORDER
U.L. Bhat, J. (President)
1. The Assistant Collector, Ambala passed an order confirming the demands made in four show cause notices against the appellant and the Collector (Appeals) dismissed the appeals filed against the order by the Manufacturer-assessee. Hence the present Appeal by the manufacturer.
2. The appellant who is engaged in the manufacture of chewing tobacco and branded Hooka tobacco filed price lists No. 18/79, dated 23-4-1979 and No. 39/79, dated 13-9-1979 declaring that the entire production was being sold to M/s. Shiva Sales Corporation at a trade discount of 12 1/2%. They were approved subject to verification of the invoices of the buyer. Price lists were filed for the subsequent periods also. The Superintendent of Central Excise issued four show cause notices dated 3-11-1982 for the period 6-10-1979 to 31-10-1982 under proviso to Section 11A of the Central Excises and Salt Act, 1944, for short, the Act and dated 4-1-1983, 5-3-1983 and 18-4-1983 for the subsequent periods stating that the verification of the invoices of the buyer issued to the latter's customers showed that the trade discount was not passed on to any of the latter's customers, that the Manufacturer and the buyer were sister concerns, that there were no sales at the factory gate to independent buyers, that hence the trade discount was not liable to be deducted in arriving at the assessable value of the goods manufactured by the appellant and sold to the sister concern and the differential amount of duty was payable. The appellant denied the legality of the demand in the show cause notices. However, the Assistant Collector confirmed the demand. The Collector (Appeals) held further that the manufacturer and the buyer are partnership firms and the partners of the two firms are closely related to each other and hence mutuality of interest exists and the buyer is "related person" of the Manufacturer and hence the assessable value should be based on the price at which the buyer sold the goods to the customers and since the trade discount has not been passed on to such customers, it cannot be deducted from the assessable value.
3. Learned counsel for the appellant challenged the above findings and also contended that a part of the claim covered by the show cause notice dated 3-11-1982 is barred by limitation as the proviso to Section 11A of the Act could not have been invoked. Learned counsel made it clear the challenge against the order confirming the demand under two of the notices as violative of principles of justice is not pressed.
4. The show cause notices and the order of the Assistant Collector merely mention that the two firms are sister concerns and do not indicate the basis for holding that they are "related persons". The appellate order presumes "mutuality of interest" merely on the basis of the personal relationship of the partners of the two firms.
5. According to Section 4(1)(a) of the Act, the assessable value shall be deemed to be the normal price, that is, 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. "Related persons" is defined in Section 4(4) of the Act as follows :-
" 'Related persons' means a person who is so associated that they have interest directly or indirectly, in the business of each other and includes a holding company, a subsidary company a relative and a distributor of the assessee, and any sub-distributor of such distributor.
Explanation. - In this clause "holding company", "subsidiary company" and "relative" have the same meaning as in the Companies Act, 1956 (1 of 1956);"
The Supreme Court in Bombay Tyre International case 1983 (14) E.L.T. 1896 stated that the expression "relative" means a distributor who is a relative of the assessee.
6. Since the expression 'related person" is defined, the definition and not the popular meaning of the expression has to be looked into. Only a person who is so associated with the assessee that they have interest directly or indirectly in the business of each other, can be regarded as a related person. Mutuality of interest, direct or indirect, in the business of each other is essential. In Atic Industries case 1984 (17) E.L.T. 323, the Supreme Court held that it cannot be said a limited company has any interest in the business carried on by one of its shareholders.
7. The two persons in this case are partnership firms. Till February, 1980, the partners were :-
Manufacturer (1) Shiv Prasad Agarwal, Managing Partner.
(2) Ratanlal Agarwal S/o Shiv Prasad Agarwal
(3) Mahender Kumar S/o Shiv Prasad Agarwal
Buyer (1) Kamla Devi, W/o Shiv Prasad Agarwal
(2) Mahender Kumar, Managing Partner till he
died in 1980
(3) Sudha Bansal, Wife of Mahender Kumar, Managing
Partner after the death of her husband
Thus it is seen that the partners of the two firms are close relations and till February, 1980, one of the partners was common. This circumstances by itself will not make the two firms "related persons" as long as the criteria contemplated in Section 4 (4) (c) of the Act are not satisfied.
8. Under the Income-tax law and Sales-tax law in India, a partnership firm is treated as an entity distinct from the persons constituting the firm. See A. W. Piggies and Company and Ors., AIR 1953 SC 455. The Supreme Court had occasion to consider this aspect in the backdrop of partners of a firm carrying on one business, constituting another partnership firm carrying on a separate and distinct business, in Deputy Commissioner of Sales Tax v. K. Kelukutty -1986 (24) E.L.T. 186. Referring to the principle laid down in the decision in A.W. Piggies and Company, the Court observed :-
"What that implies is that for the purposes of assessment to tax the income of the partnership firm has to be assessed in the hands of the firm as a single unit, the firm itself being treated as an assessable entity separate and distinct from the partners constituting it. The firm is an assessable unit separate and distinct from the individual partners, who as individuals constitute assessable units separate and distinct from the firm. It is on that basis that the provisions of the tax law are structured into a scheme providing for the assessment of partnership income. We do not think the principle goes beyond the purposes of that scheme. It does not confer a corporate personality on the firm.
Now in every case when the assessee professes that it is a partnership firm and claims to be taxed in that status, the first duty of the assessing officer is to determine whether it is, in law and in fact, a partnership firm.
...
But for determining whether there is a firm, the assessing officer will apply the partnership law, subject of course, to any specific provision in that regard in the tax law modifying the partnership law. Having decided the legal identity of the assessee, that it is a partnership firm, he will then turn to the tax law and apply its relevant provisions for assessing the partnership income."
The Court further indicated :-
"...each partnership agreement may constitute a distinct and separate partnership and therefore distinct and separate firms. That is not to say that a firm is a Corporate entity or enjoys a juristic personality in that sense. The firm name is only a collective name for the individual partners. But each partnership is a distinct relationship...The intention may be to constitute two separate partnerships and, therefore, two distinct firms or to extend merely a partnership, originally constituted to carry on one business to the carrying on of another business. It will depend on the intention of the partners."
9. In Mohanlal Maganlal Bhavsar and Ors. v. Union of India and Ors. - 1986 (23) E.L.T. 3, the Supreme Court considered the case of goods manufactured by a firm of three partners being taken by another firm consisting of the same three partners and the son of each of them, as Chief Distributor. Excise duty was levied on the value of goods at the wholesale price charged by the Chief Distributor and not at the price charged by the Manufacturer to the Chief Distributor. The firms had their offices in the same premises. Under the agreement of partnership, the sons of the three partners were to share only in the profits and not to be liable for the losses. In these circumstances, the court held that the two firms were not at arms length or independent parties and the price at which the goods were supplied by the Manufacturer firm to the Chief Distributor cannot be taken to be the real value of the goods.
10. Our attention has been invited to certain decisions of the Tribunal. In Collector of Central Excise v. Paper Packing Industries - 1988 (36) E.L.T. 340 manufacture was carried out in the name of two firms, one with two partners and other with same persons and their wives as partners, each partner having an equal share of profit and loss in the respective firms. The second firm came into existence while exemption to SSI Units based on value of clearances was in force. On the basis of the materials on record it was held that the second firm was set up only in order to defeat the provisions of the exemption Notification, in regard to the exemption limit as the clearances of the first firm had reached the exemption limit and hence the clearances by the two firms are to be clubbed. The Tribunal indicated that in appropriate cases the clearances attributed to the wives based on their profit and loss share may be relatable to the firm, without referring to a contrary Tribunal decision in G.D. Industrial Engineers v. Collector of Customs and Central Excise - 1983 (14) E.L.T. 1994. The Tribunal had no occasion to consider the definition of "Related persons" or apply the definition to the facts of the case and hence the decision is not helpful in the context. In this context, we may refer to another decision in G.D. Industrial Engineers, Faridabad v. Collector of Customs and Central Excise - 1983 (14) E.L.T. 1994. There were three partnership firms composed of identical partners, though their shares in each firm varied. The firms came into existence in 1932, 1946 and 1961. The dispute related to clubbing clearances in the context of exemption Notification No. 89/79. It was held that manufacture in the firm is not by or on behalf of any partner but on behalf of the firm and the machines in the three factories cannot be treated as collective entity relying on the decision of the Privy Council in Bhagwanji Morarji Gokul Das v. Olympic Chemical Works Company - AIR 1948 P.C. 100, of the decision of the Supreme Court in Assistant Collector of Central Excise and Customs v. J.C. Shah and Ors. - 1978 (2) E.L.T. (J 317) since a partner is distinct from the firm and each of the firms is separate and distinct from the other two and also distinct from the individual partner. It was also held that individual partners cannot be regarded as manufacturer. This decision also had no occasion to consider the aspect of "related person" and hence is not helpful.
11. In Prabhat Zarda Factory Ltd. v. Collector of Central Excise, Patna - 1988 (34) E.L.T. 239 (T), the appellant before incorporation was a firm. Another firm was the sole selling agent/distributor. The firms had no common partners. But eight of the nine partners of the manufacturing firm were related to one or the other of seven of eight partners of the distributor firm. The partners who were so related together had 85 per cent interest in the manufacturing firm, which was held to indicate overwhelming mutuality of interest between the two firms. Under the agreement, the manufacturing firm passed on to the Distributor the function of publicity, sales promotion and safeguarding the goodwill of the products in the market. It was also provided that if due to the neglect of the distributor market is adversely affected, the cost of setting right would be not by the latter. In these circumstances, it was held that the payment made by the distributor to the manufacturer was not the sole consideration for the sale, that financial involvement was beyond doubt and that the sale was not on principal to principal basis. There was indication to show that the distributor was functioning as an extended arm of the manufacturer. Hence it was held that the distributor was related person.
12. Though a partnership firm has no corporate personality, it has a personality distinct from the partners of the firm. The present is not a case where all the partners of the two firms are common. There was only one common partner and all the partners of the two firms are personally related to each other. The firms were not under common management. The agreement relating to sale has not been examined by the lower authorities. The impugned orders do not indicate that the transaction was not on principal to principal basis or that the transaction or the firms were not at arms length. It would not always be reasonable to expect that a buyer who takes over the entire production and who is therefore in the position of a wholesaler will ordinarily pay the same price as price which can be charged to smaller wholesalers who will buy only a part of the production. The trade discount granted to the buyer can be justified from the perspective of quantity discount. If the sole buyer did not pass on the whole or part of the trade discount to his customers, in the circumstances, that cannot lead to the inference that the transaction between the manufacturer and the buyer was not on principal to principal basis or was not at arms length or that they have mutual interest in each others' business merely on account of personal relationship between the partners of the two firms and existence of a common partner for some time. The department has no case that the buyer-firm is make-believe or not genuine. In these circumstances, we hold that the department has failed to establish that the buyer is a "related person" of the manufacturer and hence the assessable value cannot be based on the price charged by the buyer to its customers.
13. In this view, it is unnecessary to consider the contention regarding limitation.
14. In the result, the impugned orders are set aside and the appeal is allowed.