Bombay High Court
S.M. Chemicals & Electronics And ... vs R. Parthasarathy And Others on 1 January, 1800
Equivalent citations: 1980CENCUS130D, 1980(6)ELT197(BOM)
ORDER
1. By this petition the petitioners seek an appropriate writ for setting aside the order dated 3rd April, 1976 passed by the Assistant Collector of the Central Excise, namely, the 1st respondent. Respondents 2, 3, and 4 are the Superintendent of Central Excise, the Collector of Central Excise and the Union of India respectively.
2. The 1st petitioner is a public limited Company where of the 2nd petitioner is a Director and Shareholder. The 1st petitioner- company manufacturers inter alia radios and television sets at Bombay . Until 15th November, 1973 the 1st petitioner-Company was owned by Telerad Limited and was known as the "Telerad Division" of Telerad Limited . On the from the close of business on 15th November 1973 "Telerad Division" was transferred and the assigned by Telerad Limited to the 1st petitioner company.
3. On 8th August, 1975 a Notification was published tot the effected that the new section 4 of the Central Excises and Salt Act would come to the force from 1st October, 1975. On 15th September, 1975 price limits were filed by the 1st petitioner- company. in Part -I declaring there in a the assessable value the price charged by the 1st petitioner-company to its five buyers namely, (i) Promar Sales Pvt. Ltd., Bombay; (ii) Selsar Marketing Pvt. Ltd., Delhi, (iii) Veldi Sales Pvt. Ltd. Calcutta; (iv) Associated Marketing Agencies, Madras; and (v) Associated Radio Agencies Bangalore by his letter dated 25th September, 1975 the Superintendent of Central Excise requested the 1st petitioner - company to give a list of its wholesale dealers and a declaration to the effect that ten the aforementioned wholesale dealers were not "related person" within the meaning of the new section 4 and to file a declaration accordingly.
Thereupon on 1st October, 1975 the 1st petitioner-company addressed a letter to the Superintendent of Central Excise intimating that there were five parties who," from the past records " of the 1st petitioner- company were found to the be its buyers and to the whom the goods were sold by the 1st petitioner- company were found the be its buyers and to whom the goods were sold the by the 1st petitioner-company. in the the course of wholesale trade and gave the requisite declaration that none of the those buyers were" relate persons " within the meaning of the new section 4. BY his letter dated 6th October, 1975 the Superintendent (Tech). for and on the behalf of the Collector, permitted the 1st petitioner-company to clear the goods on furnishing B-13 Bond till the price lists were approved.
4. On 21st November, 1975 a show cause notice was issued by the Assistant Collector calling upon the 1st petitioner-company to explain why it should not be asked to file price lists in Part IV on the basis that on the aforesaid five buyers viz Promar Sales Pvt. Ltd. was a "related person" on the three grounds namely, (i) that Promar Sales Pvt. Ltd., was managed by one Narayan who was paid Director of the Company and who was also an employee of Sarabhai Technolotgicol Development Syndicate Pvt. Ltd. whose employees could be posted to any of the companies of Sarabhai Group which included Telerad Pvt. Ltd. and further that the said buyer was a subsidiary of the Karamchand Premchand Pvt. Ltd. with Mr. Gautam Sarabhai and Mrs. Manorama Sarabhai as Director; (ii) that the said buyer and the 1st petitioner company wife inter- related under section 41(c) of the Companies Act 1956, and (iii) that the afore said buyer nd the 1st petitioner- Company could be termed as inter-connected undertaking 2(g) of the M. R. T. P. Act, 1969 on 19th December, 1975 the 1st petitioner-Company addressed a letter in reply to the aforesaid show cause notice Here it may be stated that the aforesaid three grounds were subsequently given up by the Assistant Collector.
5. On 14th January, 1976 a hearing was given the by Assistant Collector when a contention was raised by him that one of therefore said five buyers, namely, M/s. Promar Sales Pvt. Ltd. Should be considered as a distributor notice dated 21st November, 1975, the hearing was adjourned by the Assistant Collector at the behest of the 1st petitioner-Company.
6. In continuation of the earlier show cause notice dated 21st November, 1975 the Assistant Collector issued a supplementary show cause notice date 17th January, 1976 calling upon the 1st petitioner Company to show cause (i) why Promar Sales Pvt. Ltd. should not be treated as a distributor of the 1st petitioner- Company on the ground that the treated as a distributor of the 1st petitioner-company on the ground that the dealers had to buy the goods from the Promar Sales Pvt. Ltd. in terms of the certain circular latter dated 15th November, 1973; (ii) that Promar Sales Pvt. Ltd. did servicing work during the warranty period; (iii)that Promar Sales Pvt. Ltd. looked after the sales promotion-company product. On 14th February, 1976. the 1st petitioner-company gave its reply tot he afore said supplementary show cause notice emphasizing that the transaction with the for said buyers were not on the principal to principal basis. At the personal hearing given by the Assistant Collector on 12th March. 1976 the 1st petitioner-company gave its reply to the aforesaid supplementary show cause notice emphasising that the transaction with the afore said buys were on principal to principal basis. At the personal hearing given by the Assistant Collector on 12th March, 1976, the 1st petitioner- Company was asked to explain why a retailer would not prefer to come to the 1st petitioner company's factory-gate to purchase the goods rather than to buy the same from the wholesalers at the higher price . Thereupon the requisite explanation was furnished by the 1st petitioner company by its letter dated 15th March 1976, addressed to the Assistant Collector.
7. On 3rd April, 1976, the Assistant Collector passed his impugned order holding that he aforesaid five buyers were " related persons' to whom the 1st petitioner- company sold its television sets and that the prices charged that them did not constitute the non price under section 4 of the Excise Act. By the impugned order the assessable value was ordered to be taken on the basis of the price charged by the five buyers to the dealers It further held that the price was not the sole consideration for the transaction between the 1st petitioner- company and the aforesaid five buyers as the latter undertook "some of the functions of servicing" during the warranty period. hence the present petitioner.
8. Before the analysing the impugned order in order to test the validity of the grounds on which the Assistant Collector came to the conclusion that the five buyers were "related persons", it would be pertinent to refer to the relevant provision of the new section 4 which pertains to valuation of excisable goods for purposes of charging of duty of excise. Sub-section (1) states as follows :
"(1) where the under this act, the duty of excise is chargeable on any excise gods with reference value such value such small, subject to the other provisions of this section be deemed to be -
(a) the normal price thereof, that is to be say, the at which the such goods are ordinarily sold by the assessee to a buyer course of the wholesale trade for delivery at the time and place of remind where the buyer is not a related person and price is the sole consideration for the sale."
The term "related person" has been defined in sub-section (4)(c) as under :
'(4)(c) "Related person" means as person who is so associated with the assessee that they have interest directly or indirectly in the business of the each other and the includes.....a distributor of the assessee, and any sub-distributor of such distributor.
"wholesale trade " has been defined in sub-section (4)(c) as under.
'(4)(c) "Wholesale trade" means sales to dealers, industrial consumers, Government local authorities and other buyers, who or which purchase their requirements otherwise than in retail.'
9. In the impugned order, the Assistant Collector has given his reason why the aforesaid five buyers of the 1st petitioner- company television sets are 'related persons. one reason is that the arranged between them and the 1st petitioner-company were in the nature of a restrictive trade practice under section 33, of the M. R. T. P. Act referring to section 2A of the M. R. T. P. Act of 1969 the Assistant Collector held that -
"By having the arrangement of sale to the five buyer's only I hold that the transactions are on the basis of the understanding of M/s. S. M. Chemicals with the buyers and these transaction attract the provisions of the section 35 sub-section (1) and clause A & D of M. R. T. P. Act 1969. The conditions for the sale imposed by M/s. S. M. Chemicals and the arrangement they are having with five buyers very clearly make them as falling under this clause of the section 33 attracting Restrictive Trade Practice. In the circumstances. Ii conclude that the buyers and three sellers hence interest directly or indirectly in the business of each other and hence are related persons in terms of the clause (c) of sub-section 4 of the section 4."
Pausing here for a moment, it may be observed that the stand taken by the Assistant Collector in his impugned order regarding the application of the provision of the M. R. T. P. Act, was different from the one taken in the show cause notice dated 21st November, 1975, inasmuch as while in the show cause notice was it alleged that he 1st petitioner-Company and its buyers were inter-connected undertakings within the meaning of section 2(g) of the M. R. T. P. Act and hence were 'related person" in the impugned order the reason given was that the transactions between the 1st petitioner-Company and the five buyers disclosed a restictive pattern of trade practice under the section 33 of M. R. T. P. Act, and hence they were "related persons" Be that the as it may the question that arises is -can definition and expressions used in one Act be used for the purpose of construction or application of provisions of another Act as done in the impugned order ? Mr. Bhatt, the learned counsel appearing on behalf of the petitioner. is correct when the contends in the negative there is no doubt that the provisions of another Act as done in the impugned order? Mr. Bhatt, the learned Counsel appearing on behalf of the petitioner. is correct when he contends in the negative. There is no doubt that the provisions of M.R.T.P. Act relied on by the Assistant Collector in his impugned order are not relevant for the purpose of determining whether the 1st petitioner-company and eats five buyers are "related persons" within the meaning of section 4 of the Excise Act. The concept of the M. R. T. P. Act cannot be imported into section 4 of the Excise Act. As observed by the Division Bench of the Gujarat High Court in the Cibatul Limited v. Union of India and others 1979 (J 407) at para 85 -
" The definition give in one statue is for effectuating he provisions of the statute and not for effectuating the provisions of another statute. It is, therefore risky to rely upon the definition given in one Act, for the purpose of the applying the provisions of the another Act."
After referring the observations of the Supreme Court in Ram Narain v. The State of Uttar Pradesh and other , that-
"It is not a sound principle of construction to interpret expressions used in one Act with reference to their use in another Act. The meaning of the words and expressions used in an Act must keen their colour from the context in which they appear."
and the observations of the Supreme Court in Smt. Lila Vati Rai v. State of the Bombay , that -
".......observations made by a court with reference to the constructions of one statute cannot be applied with reference to the Prussians of the another statute which is not pari materia with the statute which the forms the subject matter of the previous decision."
and the observations of the Supreme Court in The Commissioner of Sales Tax, Madhya Pradesh v. M/s. Jaswant Singh Charan Singh, , that -
"It is a well- settled principle that in construing a word in an Act caution is necessary in adopting a meaning ascribed in that the word in other statutes."
the Division Bench of the Gujarat High Court held in Cibatual Ltd. case that -
"........the declaration made under the M. R. T. P. Act that the manufacturer and the buyers were 'inter-connected undertaking' could not have been taken into by central excise authorities for the deciding the case under the Excise Act."
10. The decision in the Cibatul case was followed by the Division Bench of the Gujarat High Court Atic Industries Ltd. v. Union of India & Other 1979 E. L. T. (J 513) Where it was held that the Central Excise authorities cannot apply the norm of "inter- connected undertaking" as laid down in the M. R. T. P. Act, for the judging the undertakings are "related person" under section 4 of the Central Excises Act. At para 5 of the report it was observed as under :
" ........We are, therefore, of the view that the Central Excise authorities were in error in the applying the norm of the 'inter- connected undertakings' laid down by Parliament in Monopolies and Restrictive Trade Practices Act for judging whether the petitioner- company and its two buyers are 'related person ' under section 4 of the Central Excises and SAlt Act. Whether they are 'related persons' or not must be judged in the Light of the definition of 'related persons' given in section 4 ........."
These decisions with which I am in respectful agreement are by themselves sufficient to negative the reasoning of the Assistant Collector and to uphold the first ground of challenge urged on the behalf of the petitioner.
11. The next ground on which the Assistant Collector held against the petitioner was that because the aforesaid five buyers of the 1st petitioners company had undertaken after sales services they were 'related persons ' within the the meaning of the section 4 of the Excise Act on this aspect the relevant excerpts from the impugned order are as under :
"Regarding the services after the sales M/s. S. M. Chemicals have stated that the servicing is to take place after removal and as such it is not of the consequence in determining the price for the purpose of section 4. The question of service after sale is linked with the actual sale promotion of any manufacturing organization........siimilarly the servicing under the warranty period is given by the manufacturer in the interest of the reputation of the product as well as the reputation of the firm who are manufacturing. In the circumstances servicing is invariably the function of the manufacturer and is not of the a dealer............."
On this aspect, it was urge on behalf of the petitioner that merely because the buyer rendered after-sales service during the warranty period, they did not become "related persons" under section 4 of the Excise Act, This contention is borne out by the decision of the Divisions Bench of this Court in Voltas Ltd. v. A. K. Roy, 73 Bom L. R. 229 where a similar point had arisen certain agreements had respective processions and the prices mentioned therein the were accordingly not wholesale cash prices as the necessary for application of he provisions of section 4(a) of the Excise Act. Particular reliance was places on clauses 1 to 11 in those agreements with the dealers which rusticated the right of the dealers in the matter of trading in the goods manufactured by the petitioner-company. Under clause 8 the dealers had undertaken to give service to the Crystal Room air-conditions and the 'Tushar" water Coolers and de-humidifying units sold by them in their territory free of charge during the guarantee period of 12 months. Under clause 9 the dealers had agreed to employ at least one serviceman for training tot he petitioners workshops at Delhi or Bombay. It was observed by the Division Bench that the air-conditioning and refrigeration units and machineries and components manufactured by the petitioner Company were highly specialised engineering items and they were of such a nature requiting after -sales services by competent well -trained engineers and the technicians Under the circumstances, the agreements made between the manufacturers and their dealers provided for the proper upkeep of their units. Thus even in the respect of sales effected by the petitioner- company itself to consumers the company itself gave guarantee for 12 months and undertook during the guarantee period to render service of the kinds mentioned in the different clauses of the dealers agreements. It was further observed by the Dividends Bench that as those clauses described as restrictive were agreed between the petition-Company and the dealers only with a view to the promote the sales of the articles manufactured by the petitioner-company it was not possible to hold that those so- called restrictive conditions in the agreements were not genuine wholesale cash prices.
12. The decision and observation in Voltas case lay at rest this controversy and clearly demonstrate that merely because of the afore said five buyers undertook to carry out after-sales services during the warranty period by itself would not make them as "related persons" within the meaning of section 4 of the Excise Act. Hence the second ground of challenge urged on behalf of the petitioner must succeed.
13. Another ground on which the Assistant Collector decided against the 1st petitioner company was that the five buyers had an indirect interest of the manufacturer, viz the 1st petitioner- company, with the result that the buyer become "related persons" within the meaning of section 4 of the Excise Act. On this aspect, after referring to the after-sales service rendered by the five buyers, the impugned order reads as under :
"A dealer deals with the various products and he does not give the guarantee on his own because he is not aware how the manufacture takes places and what are the components needed for the manufacture and what is the standard of their quality. In view of these factors the dealers only honor the present case the buyers is prepared to fulfill certain functions of the manufacturer and is certainly taking more interest than any independent buyers. In the circumstances he has the interest of the manufacturer indirectly and hence under sub-section 4 of the section 4 he becomes related persons."
The reasoning given in the impugned order is clearly fallacious. It may be recalled the at the definition "related person' is section 4 of the Act provides for an interest direct or indirect, in the business of each other, namely, the manufacturer and the buyer. Thus it is not sufficient for one to the have interest in the other. the interest. It can hardly be gainsaid that if the nature of the business transacted between the 1st petitioner-Company and the its five buyers discloses only that the former manufacturers and the other purchases, Mutuality of interest between then must be ruled out. The interest of the manufacturer, viz, the 1st petitioner-Company would cease as soon as he sold the goods to the five buyers nd the latter's interest would cease as soon as the purchase was complete. In order to establish and the of business interest (direct or indirect) between the manufacturer the buyer. the manufacturer must in his own interest promote the business of the buyer and the buyer must in this own interest promote the business the buyer and the buyer must in his own interest promote the business of the manufacturers., In the present matter it is not even the Department case much less the petitioner that any mutuality of interest existed directly or indirectly, between the 1st petitioner-Company and its five buyers. One did not mutually promote the bushiness of the other. That the interest must be mutual and not one-sides is brought to the forefront by the two decisions of the Division Bench of the Gujarat High Court in the Cibatual case (supra) and the Atic Case (Supra). In the Cibatual Case, it was observed by the Divisions Bench of the Gujarat High Court at para 81 of the report as under :
".........the manufacturer and the buyer must " have interest, directly or the indirectly, in the business of each other......In the instant case, the manufacturer manufactures the goods and the buyer buys them. Therefore, there is only one-way business between them. In other words, the elements of mutuality of business interest between them is significantly absent..... The particular words ' in the business of each other' used in the definition are capable of no other meaning than the there must exist mutuality of business interest between the two. If the nature of the business transacted between the two shows that the one only manufacturers and that 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 treat there is mutuality of the business interest between them. In order to establish mutuality of business interest between the two, the manufacturer must, in this own interest, promote the business of thee the buyer and the buyer, in his own interest promote the business of the manufacturer.........Mutuality of business interest between two persons cannot be established by merely showing that they have business dealings between them. It must be further shown that one has special interest in the promotion or development of the business of another. Such interest may be direct or indirect. Between the manufacturer nd the buyers, this elements is lacking........" (The underlining is mine).
14. In Atic Industries case (Supra) the question of mutually of interest between the manufacturer and its two buyers had come up for consideration. It was observed by the Division Bench of the Gujarat High Court in that case that while it cannot be gainsaid that the two buyers had an interest in the business of the manufacturer it could not be said that the latter had any interest in the business of its two buyers, because if these two buyers did not purchase the products of the manufacturers,the latter could as well as the sell them to the other person. A similar question arose before the Division Bench of the Allahabad High Court in M/s. Hind Lamps Ltd. v. The Union of India and the others 1977 E. L. T. (J 1) In that case the petitioner-company had submitted to the Excise authorities its price list containing the prices at which it claimed to be selling its products to five companies. The petitioner-Company which was registered under the Indian Companies Act had five shareholders namely , (1) Bajaj Electrical Limited, Bombay; (2) Crompton Parkinson Ltd. London; (3) N. V. Philips , Eindhoven (Holland); (4) General Electric Co. Ltd. London; and (5) Mazda Lamp Co. Ltd. Liecester, England. Bajaj Electrical Ltd. held 1,80,000 share in the petitioner- company and the remaining four foreign companies together held 1,80,000 shares. The petitioner -company manufactured various kinds of lamps and sold its entire output exclusively to Bajaj Electrical Ltd. Philips India Ltd. Crompton Graves Ltd. Generals Electric Co. of India, Ltd. and Mazda Lamps co. Ltd. after putting the brand names or trade marks like Philips, Osram Mazda, Crompton and Bajaj of the respective customers Companies according to their directions. The Customer Companies in turn sold those goods under their names at the prices higher than the prices charged by the petitioner-Company, The Controversy in Hind Lamps case revolved on whether the five Customer Companies could be regarded as "related persons " as defined in section 4(4)(c) of the Excise Act. Accepting the contention urged on behalf of the petitioner-company, it was observed by the Allahabad High Court that in order to come with in the first part of the definition of "related person" , the petitioner-Company and the Customer Companies must have in the interest, directly, or indirectly in the business of each other and that only the customer Company namely, Bajaj Electrical, Ltd., which held shares in the petitioner-company could be said to the have interest in the business of the petitioner-Company and not the other Customers Companies. It was further held that even assuming that all those Customers Companies. It was further held that even assuming that all those four Customs Companies (viz. other than Bajaj Electrical Ltd.) had interest in the business of the petitioner-company. it was not shown that the petitioner - Company had any interest, directly or indirectly, in the business of those four Customer Companies.
15. The ratio of the decisions in those cases apply on all fours to the mater before me. Merely by selling its products to the five buyers ; cannot be said that the 1st petitioner Company was taking any interest in or was promoting the business of the five buyers. Similarly, merely by reason of the fact that the five buyers purchased the goods from the 1st petitioner Company it cannot be said that they took any interest in the business of the 1st petitioner-Company. If the buyers were not satisfied with the products manufactured by the 1st petitioner-Company, they were at liberty to go elsewhere for their requirements. Hence, the buyers purchased the 1st petitioner-Company's products out of their own self-interest and not to advance of promote the interest of the 1st petitioner-Company. Similarly, the petitioners sold their products to the five buyers not to promote or advance the business of the five buyers but to promote or advance the interest of the petitioners themselves. Thus,it is obvious that there was no mutuality of interest between the 1st petitioner-Company and the five buyers. While there is nothing on record to indicate that the 1st petitioner-Company and its five buyers had any mutual interest in the business of each other, even less is there anything to indicate that the 1st petitioner-Company had any interest in the business of each other, even less is there anything to indicate that the 1st petitioner-Company had any interest in the business of its five buyers. Merely because the buyers effected after-sales service during the warranty period, does not bring them within the ambit of "related persons" if the decision of the Division Bench in Voltas case is to be followed, which indeed it must. In the circumstances, the finding of the Assistant Collector that the buyer had the interest of the manufacture indirectly, is entirely without foundation and Mr. Bhatt is justified in so criticising and thus assailing this finding in the impugned orders. Even assuming the five buyers had an interest in the business of the 1st petitioner-Company, there is nothing to indicate that the latter had also any interest in the business of the former. Thus mutuality of interest being absent the concept of their being "related persons" must necessarily be ruled out.
16. In his impugned order, the Assistant Collector has attracted the provisions of section 4(4)(c) of the Excise Act in the present case on the ground that the five buyers were the distributors of the 1st petitioner-Company. No doubt the definition of "related person" in section 4(4)(c) includes `a distributor of the assessee'. The question that, however, arises is whether the five buyers were the 1st petitioner- Company's distributors as held by the Assistant Collector or whether they were wholesale buyers as urged by the petitioners. The ground on which the Assistant Collector has come to the conclusion that the five buyers were the distributors of the 1st petitioner- Company is on the basis of a circular letter dated 15th November, 1973 written by Telerad Pvt. Ltd. to their dealers and a letter dated 20th September, 1974 addressed by the 1st petitioner-Company to the Assistant Collector. In the letter dated 15th November, 1973, Telerad Pvt. Ltd. wrote to "All Telerad Dealers" informing them of the re- organisation of marketing or Telerad products and stated that effective from 16th November, 1973 all Telerad products in the dealer's area would be marketed by M/s. Promar Sales Pvt. Ltd. to whom the dealer's area requested to refer for their requirements. By this letter the dealers were further requested to continue making payments for all Telerad supplies made to them by the branch of Telerad Pvt. Ltd., by cheques or drafts, in the name of Telerad Pvt. Ltd. to M/s. Promar Sales Pvt. Ltd. who would forward the same to Telerad Pvt. Ltd. By this letter all Telerad dealers were requested to confirm the balance of their account with Telerad Pvt. Ltd. as on 15th November, 1973 so as to avoid any confusion in future and to clear the old outstanding at an early date. The letter ends with a request to the Telerad Dealers to extend their co-operation to the marketing Company, namely, M/s. Promar Sales Pvt. Ltd., who would do everything possible to assist the dealers in Telerad products. Relying on this circular letter, the Assistant Collector has, in his impugned order, concluded that the 1st petitioner-Company has admitted that its products were available to the dealers only through these its buyers with the result the five buyers were "distributors of Telerad products with allocated areas for distribution."
17. The letter dated 20th September, 1974 from the 1st petitioner- Company to the Assistant Collector states that the 1st petitioner- Company has "got a pet-work of Wholesale Dealers. Distributors" whose names were set out in that letter. It was further stated in that letter that the 1st petitioner-Company sells the products through them, that they are independent business houses and that the 1st petitioner-Company has business -relations with them on principal to principal basis. On the basis of this letter, the Assistant Collector has, in his impugned order, come to the conclusion that the 1st petitioner- Company made it clear that it sells its products through these five buyers and that even from this point of view these five buyers would be the distributions since the goods are arranged to be sold through them.
18. The reliance placed by the Assistant Collector on the circular letter dated 15th November, 1973 addressed by Telerad Pvt. Ltd. to its dealers can be of no assistance to the respondents. It must be remembered that this letter was addressed not by the 1st petitioner- Company but its predecessor- in-title on the eye of the take-over by the 1st petitioner- Company. The 1st petitioner-Company had nothing to do with this letter. It can hardly be contended with any validity that, apart from the fact that there is nothing in this letter of 15th November, 1973 from which it can be gathered that the five buyers were the distributors of the 1st petitioner-Company and hence the five buyers were the distributors of the 1st petitioner- Company and hence were related persons", the alleged admissions made in this letter by the 1st petitioner's predecessor can be said to be binding on the 1st petitioner which had nothing to do with the issuance of that letter.
19. Though in the impugned order the Assistant Collector has relied on the letter dated 20th September, 1974 written by the 1st petitioner- Company, it is apparent that this particular letter on which the Assistant Collector based his finding against the petitioners on the question of distributorship, was even not brought in the notice of the petitioners and no explanation was sought for from there. There is nothing in the impugned order to indicate that this letter was brought to the notice of the petitioners. In the affidavit-in-reply, the Department is unable to say that this letter was brought to the notice of the petitioners. Even in the notes of personal hearing maintained by the Department there is no reference to this letter or that it had been brought to the notice of the petitioners. The petitioners have, therefore, correctly made a grievance that by relying on this letter without the same having been brought to the notice of the petitioners and without an opportunity being given to them to gives their explanation, principles of nature justice were violated.
20. Assuming for the sake of argument that the Assistant Collector was justified in relying on this letter, even so there is nothing in this letter from which it can be gathered that the five buyers were the distributors of the 1st petitioner-Company. Mr. Dalal, the learned Counsel appearing on behalf of the respondents, urged that in this letter the 1st petitioner-Company has itself referred to the fact that it has a "network of wholesale dealers, distributors", named in that letter. Hence, according to Mr. Dalal, the petitioners themselves admitted that the five buyers are their distributors. Mr. Dalal further urged that in this letter the petitioners had also stated that they sell their products through those five buyers which, according to Mr. Dalal, would mean distributorship. This contention of Mr. Dalal does not take into account the succeeding scientific, namely, that these [viz. the five buyers are independent business houses with whom the 1st petitioner Company has business relations on principal to principal basis. What is also important is that this construction now placed across the Bar by Mr. Dalal on this letter has not even been placed in the impugned order itself where this letter has been relied upon to show that from the number of buyers, viz. five, their relationship with the 1st petitioner-Company was that of distributors. Though in the impugned order, the Assistant Collector has relied upon the statements made in this letter to the effect that the goods are sold by the 1st petitioner-Company though the said five buyers, he has nowhere fastened upon the use of the word "distributor" in the said letter, and rightly so, for the word "distributor" in that letter has obviously been used in a loose manner at a time when the new section 4 was not even in force as is brought out by reading the letter as a whole and particularly that the transactions with the five buyers were on principal to principal basis.
21. In the impugned order, the Assistant Collector has also alluded to the fact that at the personal hearing on 12th March, 1976, the 1st petitioner-Company promised to send a letter as to why the dealers were not coming forward and accordingly the 1st petitioner-Company submitted a letter dated 15th March, 1976. However, the Assistant Collector opined that the 1st petitioner-Company had not given any satisfactory answer as to why the large number of dealers could not buy the proceeds directly from the factory and why they were paying a higher price to the five buyers. Thus, from this point of view, the Assistant Collector held in his impugned order that the television sets manufactured by the 1st petitioner-Company were not freely available to all the dealers at the factory-gate and that they have to approach only these five buyers with the result that these five buyers acted as distributors.
22. Mr. Bhatt urged that even assuming that there were only five buyers of the 1st petitioner-Company's products and that the goods were not freely available to any other buyer, neither the number of buyers not the fact that the goods were not freely available to any other buyer, would deprive the transaction of its character of being in the course of wholesale trade and would not deprive the five buyers as being characterised as wholesalers. Mr. Bhatt urged that section 4(1)(a) provides that the assessable value shall be the normal price of the goods where the goods are sold by the assessee to a buyer "in the course of wholesale trade", and relied on the condition of "wholesale trade" in section 4(4)(b) as meaning sales to dealers, industrial consumers, Government, local authorities and other buyers, who or which purchase their requirements otherwise than in retail. Thus, according to Mr. Bhatt, the number of sale transactions is not, and cannot be made, the basis to define what is wholesale trade, because it is the nature of the transaction and not the number of the transactions which is important. For instance, in the Atic Industries case (supra) the number of buyers was only 2. Yet on that ground they were not classified as "related persons". Much less can it be so done in the present case where the buyers are more, viz., five.
23. In Hind Lamps Ltd. v. Union of India and others, 1978 E.L.T. (J. 78), (not supra though the facts are the same), it was held by the Division Bench of the Allahabad High Court that the fact no other persons could purchase the articles wholesale from the manufacturing company did not detract from the sales being wholesale. At paragraph 13 of the report was observed as under :
".. So long as the sale, are not to relatives they will be wholesale sales. The fact that no other person could purchase the articles wholesale from the manufacturing company did not detract from the sales being wholesale. If there is an actual price for the goods themselves at the time and place of sale, and if that is a wholesale cash price, clause (a) of section 4 would be applicable."
That decision and observations of the Allahabad High Court, with which I am in respectful agreement, must, therefore, render utterly unacceptable the reasoning given by the distributors because the goods were sold by the 1st petitioner-Company only to these five buyers. Merely because goods were sold wholesale to these five buyers would not make these five buyers the distributors of the 1st petitioner- Company. There is no provision that a manufacturer can sell only to a certain number of persons before a sale can be characterised as wholesale. Merely by virtue of limited numbers if wholesalers were to be categorised as distributors, all wholesalers would automatically be garbed as distributors despite the fact that the transactions had all the ingredients of wholesale trade. In a distributorship must enter the concept of agency between the manufacturer and the distributor. As observed in the Hind Lamps case, 1977 E.L.T. (J. 1) (supra) -
"The word `distributor' is understood in commerce as an agent or one who distributes goods to consumers."
24. In the matter before me it is not even the Department's case that the five buyers acted as agents of the 1st petitioner- Company. There is no doubt that after purchasing the goods in bulk or, in other words, on wholesale basis from the 1st petitioner-Company, the five buyers sold the goods to the dealers on such terms and conditions as the five buyers,in their own discretion, thought fit without in any manner being guided by or accountable to the 1st petitioner-Company. Once the goods were sold by the petitioners to their five buyers, the petitioners had no right to insist at what price or other terms the five buyers sold the television sets to the dealers. That was a matter entirely between the five buyers and the dealers, in which the petitioners had no say or control. Thus even the basis relationship of principal and agent was conspicuous by its absence in the transactions between the 1st petitioner-Company and its five buyers, which were transactions of ale on principal to principal basis. What also cannot be lost sight of is that in the letter dated 15th March, 1976 addressed by the 1st petitioner-Company to the Assistant Collector, the functions of the five wholesale purchasers have been set out, viz.,
(i) to purchase goods regularly in wholesale, i.e. in large quantities by placing indents on ex-factory basis for cash, backed by goods banking facilities; (ii) to sell such goods in retail to shop-keepers and for the purpose to have sufficient stocks; (iii) to bear all marketing expenses for selling the goods in retail, namely, incurring rent for premises, salary to staff, transport and other charges; (iv) to plan and execute selling strategies and surveys; (v) to render after sales service during the warranty period which is the responsibility of the wholesale purchasers and for which they had to maintain adequate staff and equipments; (vi) to supply all spare- parts including picture tubes during the guarantee period; (vii) the vagaries of changing the retail prices must be undertaken by the wholesaler since the wholesaler purchases no principal to principal basis;(viii) all sales promotion expenses such as having, publicity, hoardings, incentive bonus in sale, etc., are incurred and borne by the wholesale purchasers; and (i) retail shopkeepers and they are wholly responsible for the same.
None of these functions of the five buyers can spell out the relationship or agent and principal quae the 1st petitioner- Company. Significantly enough in his impugned order the Assistant Collector has not given any reason why he has found any of the reasons given by the 1st petitioner-Company in its letter dated 15th March, 1976 to be unsatisfactory beyond making a bare assertion in that effect, more so when it is not even the Department's case that any of the function setout in the 1st petitioner-Company's letter of 15th March, 1976 were not within the province of any of the five buyers. If the Assistant Collector was not satisfied as stated by him or his order, some reason (not necessarily detailed) could and should have been given by him after calling upon the petitioners to offer their explanation. He has chosen to do neither.
25. Mr. Dalal relied on the definition of "distributor" appearing in Random House Dictionary at page 414 as under :
"One who or that which distributes; one engaged in the general distribution or the marketing of some article or class of goods ; a wholesaler who has exclusive rights to market within a given territory the gods of a manufacturer or company."
26. On the other hand, on behalf of the petitioners, reliance was placed on the definition of "distributor" as appearing in Webster's Dictionary as under :
"As agent or business firm that distributes goods to consumers."
27. It is unnecessary to be relegated to the dictionary definition of "distributor" as urged on behalf of the petitioners and the respondents respectively. The fact and circumstances of this case put beyond the pale of controversy that the five buyers can be said to be distributors within the meaning of section 4 of the Excise Act. It is futile for Mr. Dalal to urge that there appears to be some secret understanding or arrangement of distributorship between the 1st petitioner-Company petitioner- Company and the five buyers. No such secret understanding or arrangement has even been alluded to even by the Assistant Collector himself in his impugned order and is now put across the Bar in the form of an ipse dixit. There is also no merit in Mr. Dalal's contention that no one would buy regularly in wholesale unless there was "some agreement of distributorship". This is by far too sweepings a pronouncement which need not detain me any longer than it has.
28. It was finally urged by Mr. Dalal, that the impugned order is not perverse and hence does not merit interference in the exercise of writ jurisdiction. It is sufficient that the order offends against the law as laid down by various High Court in various cases.
In the result, the grounds of challenge to the impugned order must succeed.
29. On behalf of the petitioners, it was also urge that the concept of "related person" in section 4 is ultra vires the legislative competence of Parliament under Article 246 read with entry 84 in the Union List and entry 54 in the State List, Mr. Bhatt relied on the decision of the Division Bench of the Gujarat High Court in Cibatul case (supra). However, as the other grounds of challenge urged on behalf the petitioners have met with success, it becomes unnecessary to enter into the aspect of the constitutional validity of section 4.
30. In the result, the impugned order is set aside and the petition is allowed in terms of prayer (c). There will be no order as to costs Rule is made absolute accordingly.