M/S Bilag Industries P. Ltd. & Anr. v. Commr. of Cen. Exc. Daman & Anr.

S. RAVINDRA BHAT, J. 1. The question which arises for consideration in these appeals , directed against an order of the Customs, Excise and S ervice Tax Appellate Tribunal1 (hereafter ‘CESTAT’ or ‘tribunal’) is whether the price at which the appellant M/s Bilag Industries Ltd., V api (hereafter ‘BIL’) sold its products to the buyer, should be treated as a transaction with a “related person” under Section 4(4)(c) of the Central Excise Act, 1944 (hereafter “the Act”). 2. BIL was incorporated as Mitsu Industries Ltd. (hereafter ‘MIL’) in 1992; it was formed by members of the Bilkhias family who were its major shareholders/promoters. MIL used to manufacture p esticides, insecticides and their intermediaries classifiable under Chapter 38, Central Tariff Act, 1985 (hereafter ‘CETA’). These fell under the broad category of pyrethroid products. Besides other products like Cypermet hrin and alpha Cyermethrin, MIL manufactured Allethrins, Deltamethr in, and intermediates for the entire range of products. Before Jul y 1999, MIL did not manufacture Esbiothrin and Esbiol (falling under the product group of Allethrins). 3. On 16.02.1998, AgrEvo GmbH and MIL signed a Letter of Intent, and on 22.11.1998 they signed a letter of Memo randum of Understanding (‘MOU’) expressing their intention to form a joint venture for research, manufacture, and sale of mainly synthetic pyrethroids products and their intermediates. Thereafter, MIL, AgrEvo GmbH, and AgrEvo SA entered into a Joint Venture Agreement (JVA) on 03.07.1999. This was for the purpose of researching, developing and manufacturing agrochemicals and environmental health products. MIL agreed to firs t transfer its entire non-pyrothroid business to another company, namely, Mitsu Pesticides Ltd. 4. On the date of closing of the JVA, MIL’s name was changed to M/s Bilag Industries Ltd. (‘BIL’). At the time of formation of the joint venture, AgrEvo SA held 51% of the share capital in BIL and the balance share capital in BIL was held by the Bilakhias family. Further to the JVA, a Technology and Know-How Licence Agreement (d ated 13.07.1999) was entered into by AgrEvo SA and MIL. In terms of this licence agreement, the necessary process and know-how to manufacture 1 Dated 23.04.2010 in Order No. 330-337/WZD/AHB/20210 621 Esbiothrin and Esbiol as per the specifications provided by AgrEvo SA was transferred to BIL. In terms of this agreement, AgrE vo SA had agreed to licence BIL to manufacture the allethrin mol ecules (i.e., Esbiothrin and Esbiol products) conforming to AgrEv o SA’s specifications. Thus, as a JV partner, AgrEvo SA invested a certain amount as capital in BIL and also brought the technical know-how for the Joint Venture Company (BIL) to manufacture Esbiothrin and Esbiol products. In terms of the JVA, it was agreed that three members of the Bilakhias family (who were directors of MIL), were to be paid non- compete fee of ` 25.51 crores as conforming parties to the JVA. This non-compete fee bound the Bilakhias to not compete with the JVA after it came into force, i.e., from 03.07.1999. 5. BIL had been selling its manufactured products to various bulk formulators including Rhone Poulenc Agro Chemicals India Ltd./ Aventis CropScience (India) Ltd. The Esbiothrin purchased from BIL had been sold by Aventis CropScience (India) Ltd., to various end-consumer s. Other products purchased from BIL were used by Aventis CropScience (India) Ltd., for formulation. The price at which the goods manufactured by BIL and sold to AgrEvo SA on export was based on supply agreement dated 03.07.1999. According to the supply agreement, BIL agreed to sell deltamethrin product at a particular price for different periods from April 1999 to March 2003. The price was to be arrived at on the basis of actual cost of production plus profit margin as mentioned in the table in Annexure 3.1(a) of the supply agreement dated 03.07.1999. Similarly, the allethrin products (Esbiothrin) were also agreed to be sold by BIL to AgrEvo SA at the actual cost plus mark up of 35% in 1999-2000, 30% in 2000-2001 and 25% in 2002-2003. Esbiothrin products were sold by AgrEvo SA outside India. BIL arrived at the price in the same manner for its sale to AgrEvo (India) Ltd. / Aventis CropScience (India) Ltd. within India. Certain changes in share holding patterns of foreign companies occurred later; however, they are not relevant for the purposes of deciding this case. 6. What is relevant for this case is that in BIL, AgrEvo S A held 51% of the share capital initially (which was incre ased to 74% subsequently) and it continued to hold more than 51%. BIL thus became a subsidiary of AgrEvo SA. AgrEvo SA held 100% shares in Aventis Crop Science (India) Ltd. Therefore, both BIL and Aventis Crop Science (India) Ltd. became subsidiaries of AgrEvo SA (the name of which was M/S BILAG INDUSTRIES P. LTD. v. COMMR. OF CEN. EXC. DAMAN [S. RAVINDRA BHAT, J.] changed to Aventis CropScience SA around March 2000; both name s are used interchangeably hereafter) during the relevant peri od. The dispute in this case arose as regards value of Esbiot hrin. During the period between 19.04.2000 - 23.05.2001, BIL sold the goods to Aventis CropScience (India) Ltd., who sold the same to end customers. For this period, the revenue proposed to treat the price at which Aventis Crop Science (India) Ltd. sold the product to the end custo mers as the assessable value ignoring the transaction cost. The duty demand was ` 1,68,81,685/- for that period. An amount of ` 2,39,54,913/- was demanded on the ground that AgrEvo SA/ Aventis CropScience SA had recovered a sum of ` 14,97,18,205/- through its 100% owned subsidiary Aventis CropScience (India) Ltd. towards expenses i ncurred for advertising, publicity, marketing and selling expenses, storage, outward handling, servicing, warranty, etc., in terms of the agree ment entered into with Sumitomo on the ground that since AgrEvo SA/ Aventis CropScience SA was the holding company of BIL, the amount paid by Sumitomo to AgrEvo SA/ Aventis CropScience SA should be treated as additional consideration and added to the value of the goods manufactured and cleared to BIL. An amount of ` 5,95,97,434/- was demanded as differential duty on Esbiuothrin during the period 09.06.2001 to 25.03.2004, on the ground that the price at which the goods were sold to end customers by Sumitomo should be the basis for determinat ion of assessable value and that the sale by BIL to Aventis CropScience (India) Ltd. was to a “related” person. The order in original was appeal ed by BIL, to the CESTAT. 7. By the impugned order, the CESTAT noted that BIL had developed a process of manufacture of Esbiothrin which did not reach the final stage. Before that, AgrEvo SA, the foreign company became aware that a competitor was emerging, and it entered into a JVA. The result was that BIL stopped development of the process. I t obtained know-how of the complete manufacturing process as well as the right to manufacture the product and then, sold the whole product to a subsidiary of AgrEvo SA. In return, BIL received technical know-how free of cost as well as an existing marketing set up developed by a s ubsidiary company of AgrEvo SA, at no cost. BIL was also assured of sale of the product and a level of profit for the manufacturing activities undertaken by it. It was free to develop other products. The shareholder s of the private company, Bilakhias family members also got a lum psum non- compete fee. In return, AgrEvo SA and the Indian subsidiary ensured 623 that there were no competitors. The market established by them was intact. Furthermore, the product price at which they sold, ne eded no revision. The marketing set up and the consumers identified by th em would remain intact in the absence of any competitor. According to the CESTAT, these transactions between the foreign company (AgrEvo SA, later known as Aventis CropScience SA) and two Indian subs idiaries was a combined operation by which both benefited. Therefore, the price at which BIL sold the goods to Aventis Crop Science (India) Ltd., was to be treated as sales to a “related person”. 8. Mr. V. Shridharan, learned senior advocate appearing on behalf of BIL, submitted that the impugned order is erroneous. He submi tted that the test applied consistently by this court to decide if an entity was “related” to another has been whether the seller has an i nterest in the business and affairs of the buyer; and likewise, whether the buye r has an interest in the business of the seller. Even if one were present, in the absence of the other, there would be no relationship, for the purpose of Section 4(4)(c) and the transaction should be treated as one at arm’s length. Learned counsel relied on the decisions of this court, reported as Union of India & Others v. Atic Industries Ltd. 2, Union Of India & Ors v. Hind Lamp Ltd. 3, Commissioner of Central Excise, Hyderabad v. Detergents India Ltd. 4, and Commissioner of Central Excise, Chandigarh v. M/s Kwality Ice Cream Co. 5. It was argued that the synergies in production, achieved by the creation of the JVA, optimised the development and resources of the JV partners; the sale by BIL (the assessee), to Aventis CropScience (India) Ltd. (the buyer), another subsidiary of AgrEvo SA/Aventis CropScience SA did not result in BIL being deemed to have an interest in its business or affa irs; likewise, Aventis Crop Science (India) Ltd. did not have any interest i n BIL’s business. 9. Mr. Arijit Prasad, learned senior counsel appearing for the revenue, pointed out that business relationships, and interest of one entity in the affairs or business of another cannot be placed in a straitjacket. The formation of the JV A and BIL, in which the foreign company AgrEvo SA/Aventis CropScience SA is a major shareholder, was for the purpose of ensuring that the products manufactured reached its overseas markets, 2 [1984] 3 SCR 930 3 [1989] 2 SCR 1023 4 [2015] 6 SCR 886 5 [2010] 14 SCR 409 M/S BILAG INDUSTRIES P. LTD. v. COMMR. OF CEN. EXC. DAMAN [S. RAVINDRA BHAT, J.] through the medium of its subsidiary, Aventis CropScience (India) Ltd., which was owned to the extent of 100% by AgrEvo SA/ Aventi CropScience SA. These clearly showed a real and live inte rest in the businesses of the buyer in each other. He therefore, submitted tha t the CESTAT’s order should not be interfered with. Analysis and Reasoning 10. The relevant part of Section 4 of the Act reads as follows: “4. V aluation of excisable goods for purposes of charging of duty of excise- (1) Where under this Act, the duty of excise is chargeable on any excisable goods with reference to their value, then, on each removal of the goods, such value shall- (a) in a case where the goods are sold by the assess ee, for delivery at the time and place of the removal, the a ssessee and the buyer of goods are not related and the price is the sole consideration for the sale, be the transaction v alue; (b) in any other case, including the case where the goods are not sold, be the value determined in such manner as may be prescribed. Explanation. - For the removal of doubts, it is hereby declare d that the price-cum-duty of the excisable goods sold by the assessee shall be the price actually paid to him for the goods sold and the money value of the additional consideration , if any, flowing directly or indirectly from the buyer to the assessee in connection with the sale of such goods, and such price-cum-duty, excluding sales tax and other taxes, if any, actually paid, shall be deemed to include the duty payable on such goods. (2) Where, in relation to any excisable goods the price ther eof for delivery at the place of removal is not known a nd the value thereof is determined with reference to the p rice for delivery at a place other than the place of removal, th e cost of transportation from the place of removal to the place of delivery shall be excluded from such price. (3) The provisions of this section shall not apply in resp ect of any excisable goods for which a tariff value has been fixed under sub-section (2) of section 3. 625 (4) For the purposes of this section- (a) “assessee” means the person who is liable to pay the duty of excise under this Act and includes his agent; *********** ********** (c) “related person” means a person who is so assoc iated with the assessee that they have interest, directly or indi rectly 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 of the assessee, a nd any sub-distributor of such distributor.” 11. In Atic Industries (supra), this court examined the expression “related person”: “What the first part of the definition requires is that the p erson who is sought to be branded as a related person” must be a person who is so associated with the assessee that they have interest, directly or indirectly, in the business of eac h other. It is not enough that the assessee has an interest, di rect, or indirect in the business of the person alleged to be a rel ated person nor is it enough that the person alleged to be a relat ed person has an interest, direct or indirect, in the business of the assessee. It is essential to attract the applicabili ty of the first part of the definition that the assessee and the person alleged to be a related person must have interest, direct indirect, in the business of each other. Each of th em must have a direct or indirect interest in the business of the ot her. The equality and degree of interest which each has in the business of the other may be different; the interest of one in the business of the other may be direct, while the int erest of the latter in the business of the former may be indirect. That would not make any difference, so long as each has got some interest, direct or indirect, in the business of the other . Now, in the present case, Atul Products Limited has undou btedly interest in the business of the assessee, since Atu l Products Limited holds 50 per cent of the share capital of the ass essee and has interest as shareholder in the business carried on by the assessee. But it is not possible to say that the asse ssee has any interest in the business of Atul Products Limite d. There M/S BILAG INDUSTRIES P. LTD. v. COMMR. OF CEN. EXC. DAMAN [S. RAVINDRA BHAT, J.] are two points of view from which the relationship bet ween the assessee and Atul Products Limited may be consid ered. First, it may be noted that Atul Products Limited i s a shareholder of the assessee to the extent of 50 per cent o f the share capital. But we fail to see how it can be sai d that a limited company has any interest, direct or indirec t, in the business carried on by one of its shareholders, even t hough the shareholding of such shareholder may be 50 per cent. Secondly, Atul Products Limited is a wholesale buyer o f the dyes manufactured by the assessee but even then, si nce the transactions between them are principal to principa l, it is difficult to appreciate how the assessee could be said by v irtue of that circumstance to have any interest, direct or indi rect, in the business of Atul Products Limited. ‘Atul Products Limi ted buys dyes from the assessee in wholesale on princip al-to- principal basis and then sells such dyes in the mar ket. The assessee is not concerned whether Atul Products Limited sells or does not sell the dyes purchased by it from the a ssessee nor is it concerned whether Atul Products Limited sells s uch dyes at a loss. It is impossible to contend that the assessee has any direct or indirect interest in the business of a wholesale dealer who purchases dyes from it on principal to princi pal basis. The same position obtains in regard to Crescent Dy es and Chemicals Limited. Perhaps the position in rega rd to Crescent Dyes and Chemicals Limited is much stronger then that in regard to Atul Products Limited. Crescent Dy es and Chemicals Limited is not even a shareholder of the a ssessee and it has, therefore, no interest direct or indire ct in the business of the assessee.” 12. In the subsequent decision Hind Lamp Ltd. (supra), the same principle was echoed: “It is not enough that the assessee has an interest, or indi rect in the business of person alleged to be a related pers on nor is it enough that the person alleged to be a relate d person has an interest, direct or indirect in the business of the assessee. To attract the applicability of the first part of the definition, the assessee and the person alleged to be a related person must have interest direct or indirect in the busines s of each 627 other. Each of them must have a direct or indirect interes t in the business of the other. The quality and degree of interest which each must have in the business of the other m ay be different; the interest of one in the business of the othe r may be direct while the interest of the latter in the business of the former may be indirect. After analysing the facts, th is Court came to the conclusion that there was no relationship.” 13. In Detergents India Ltd. (supra), this court examined both parts of the definition in Section 4(4)(c) and observed as follows: “Section 4(4)(c) is in two parts. The first part re quires the department to apply a de facto test, whereas the second part requires the application of a de jure test. “Relative ” in the Companies Act, 1956 is defined as follows: ***************** *************** A reading of the definition of “relative” would show that the relative need not be a person who is so associated w ith the Assessee that they have mutual interest in each oth er’s businesses. If that were the case, the expression “relati ve” in the second part would be otiose inasmuch as a relative would be subsumed within “person” in the first part. Thus , “relatives” would also be “persons” who are so associat ed with the Assessee that they have a mutual interest in each other’s businesses. The legislature by application of a de j ure test has extended the meaning of “related persons” to includ e the entire list of relatives per se without more as related persons. Similarly, holding companies and subsidiary compani es by virtue of the exercise of control by a holding company over a subsidiary company are similarly included by applicat ion of a de jure test. We have indicated that the Assessee argued that the price paid by Shaw Wallace and Company for the same/simil ar products as was sold by unrelated entities to it was even l ower than the price paid by Shaw Wallace to Detergents India Ltd. This being the case, it is clear that on facts here ther e is no “arrangement” between Shaw Wallace and Detergents India Limited to depress a price which is otherwise at arm’s len gth. Though this fact is pleaded expressly before the Commission er M/S BILAG INDUSTRIES P. LTD. v. COMMR. OF CEN. EXC. DAMAN [S. RAVINDRA BHAT, J.] as pointed out above, the Commissioner’s order does not contain any finding based on this fact.” 14. The decision in Commissioner of Central Excise, Aurangabad v. Goodyear South Asia Tyres Pvt. Ltd. & Ors. 6 is instructive. The assessee, a JV entity of Goodyear and CEAT (both of whom had equal share in it), had borrowed substantial sums of mone y from both Goodyear and CEAT. Later, CEAT transferre d its entire shareholding to Goodyear. The revenue alleged that the assessee and Goodyear were related persons, which was negatived by this court: “7. The expression ‘in the business of each other’ clearly denotes that interest of the two persons have to be mutual, i.e., in each other, in order to treat them as related perso ns. 8. We find from the order of the Member Judicial that only on the ground that the two companies had given a loan of Rs. 85.66 crores to the Assessee company, was treated as suffici ent to establish the relationship between the Assessee and the buyers. That only shows one way traffic whereas requirement is that of two way traffic. The other Member, in our opinio n, aptly held that this cannot be the factor which would show the mutuality of interest…” 15. In Kwality Ice Cream (supra) again, the court underlined the interdependence and mutuality of business interests of the two entities, viz. the assessee and the buyer: “On analysis of the decisions referred to herein ab ove, it appears what is important is that each of the parties inv olved should have an interest, whether direct or indirect in the business of each other. The following are the relevant clauses of the agreement between M/s. Kwality Ice Cream and BBLIL/ HLL based on which and applying the principles referr ed to herein above, a view is required to be taken as to w hether they are ‘related persons’. ************* ************* What is of importance is certain interdependence an d reciprocity beyond the relationship of either a distribut or or 6 (2015) 11 SCC 646 629 manufacturer so as to consider as to whether the parties are ‘related persons’. On the facts it is noticed, esse ntially the relationship between M/s. Kwality Ice Cream and BBLIL/HL L is one sided and the facts do not suggest that each one of them have interest direct or indirect, in the business of each other.” 16. On the other hand, if one were to consider what constitutes inter-relationship, the decision in Supreme Washers Pvt. Ltd. v. Commissioner of Central Excise, Pune 7, is instructive. The assessee and the buyer were involved in common procurement of raw material; they had common stock accounting and planning and interdependence in manufacturing operations. This court held that holding common stock of raw material and semi-finished goods, with common use of machinery between the three units, with common marketing arrangements and free flow of finance between the three units, cumulatively esta blished the assessees’ inter relationships and interdependence of all three units with each other. 17. In the present case, undoubtedly AgrEvo SA/ Ave ntis CropScience SA holds the entire shareholding in Aventis CropScience (India) Ltd. (the buyer). It also is a shareholder in BIL. All of the latter’s products are sold to Aventis CropScience (India) Ltd. Howeve r, this does not show that BIL has any business interest or interest in the affairs of Aventis CropScience (India) Ltd., nor, conversely, that Aventis CropScience (India) Ltd has any such interest, direct or indir ectly in BIL. The revenue’s concern in examining whether the pa rties were related might be justified; however, it could not have concluded th at such relationship, as is contemplated by Section 4(4)(c) could have been inferred, without applying the proper test. Additionally, the revenue had the materials before it, in the form of documents which i ndicated the mark up towards profit margin, and other objective evidence to compare, if indeed, the cost of the goods sold, were depressed, or were comparable to the market price of the same or similar goods. There is no finding that the price of the goods was lower than what was the price of those goods, in the market. 18. In view of the foregoing discussion, it has to be concluded that the revenue’s decision in rejecting the value at which the good s were 7 (2003) 1 SCC 142 M/S BILAG INDUSTRIES P. LTD. v. COMMR. OF CEN. EXC. DAMAN [S. RAVINDRA BHAT, J.] sold, by treating the assessee as a related person, was er roneous. For the same reasons, it is held that the impugned order cannot be sustained; it is set aside. The appeals are allowed, but in the circumstances, without any order on costs. Ankit Gyan Appeals allowed. (Assisted by : Mahendra Yadav, LCRA)