When determining who is the “Related Party” under the Central Excise Act for the purpose of valuation, the Supreme Court, presided over by Justices S. Ravindra Bhat and Dipankar Datta, held that the buyer and seller had to be interested in one another’s businesses before the clause in Section 4(4)(c) Central Excise Act, 1944 could be used.
The bench considered the question against an order of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) that whether the price at which the appellant M/s Bilag Industries Ltd., (BIL) sold its products to the buyer, should be treated as a transaction with a “related person” under Section 4(4)(c) Central Excise Act.
The appellant, BIL was established in 1992 as Mitsu Industries Ltd. (MIL) by members of the Bilkhias family, who served as the company’s principal shareholders and promoters.
MIL used to produce pesticides, insecticides, and the intermediaries of these substances that are included under Chapter 38 of the Central Excise Tariff Act of 1985. They belonged to the big group of pyrethroid goods. MIL also produced Allethrins, Deltamethrin, and intermediates for the complete range of goods in addition to other items including Cypermethrin and alpha Cyermethrin.
On July 3, 1999, MIL, AgrEvo GmbH, and AgrEvo SA signed a Joint Venture Agreement (JVA). This was done in order to develop and manufacture agrochemicals and goods for environmental health. MIL agreed to initially transfer every aspect of its non-pyrothroid business to Mitsu Pesticides Ltd.
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-consumers.
The important fact which is relevant in this case in BIL is that AgrEvo SA held 51% of the share capital initially (which was increased to 74% subsequently) and it continued to hold more than 51%. BIL thus became a subsidiary of AgrEvo SA.
Therefore, both BIL and Aventis Crop Science (India) Ltd. became subsidiaries of AgrEvo SA (the name of which was changed to Aventis CropScience SA around March 2000; both names are used interchangeably hereafter) during the relevant period.
It was ordered by the authority that as they are subsidiaries of the same company, the price given by BIL to Aventis should be treated as ‘sale to a related person’. Further BIL filed an appeal before the CESTAT.
According to the CESTAT, these transactions between the foreign company (AgrEvo SA, later known as Aventis CropScience SA) and two Indian subsidiaries 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”.
The bench noted the precedents which explained the definition of ‘Related Person’ under the concerned and stated that the definition has two parts. In the first portion, the department must use a de facto test, whereas in the second, a de jure test must be used.
As per the meaning of the definition provided in the precedents mentioned by the bench, he first part of the definition requires is that the person 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 each other. It is not enough that the assessee has an interest, direct, or indirect in the business of the person alleged to be a related person nor is it enough that the person alleged to be a related person has an interest, direct or indirect, in the business of the assessee.
The court noted that there is no proof that the goods’ pricing was less than their market value. Additionally, it was determined that CESTAT erred in treating the assessee as a related person and rejecting the value at which the products were sold. Thus set aside the order of the CESTAT.
Subscribe Taxscan Premium to view the JudgmentSupport our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates
