Sales to Distributor Managed by Family Members Constitute Related Party Transaction: CESTAT [Read Order]

The Chennai Bench of the Customs, Excise, and Service Tax Appellate Tribunal ( CESTAT ) ruled that sales to a distributor managed by family members constituted a related party transaction and upheld the differential excise duty demand based on Rule 9 valuation.

Beva Silicones Pvt. Ltd., the appellant, manufactured textile chemicals and sold goods to M/s. Harris and Menuk, a distributor managed by the family members of the appellant’s directors. The department alleged undervaluation and treated the appellant and distributor as related persons under Section 4(3)(b) of the Central Excise Act, 1944, valuing the sales under Rule 9 of the Valuation Rules.

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A show cause notice was issued demanding differential duty along with interest and penalties. Though the original adjudicating authority dropped the proceedings, the Commissioner (Appeals) reversed the order and confirmed the demand. Aggrieved, the appellant approached the CESTAT.

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The appellant’s counsel argued that family relationships alone did not establish mutuality of interest and relied on various case laws to claim that corporate entities must be separately recognized unless fraud or evasion is proved. They also argued that no financial flow-back was shown and that the voluntary payment of duty was made without admitting liability.

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The revenue counsel submitted that the close family control and lower pricing to the distributor indicated mutuality of interest affecting the transaction value. They argued that the payment of duty without protest further supported the undervaluation claim.

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The two-member bench comprising P. Dinesha (Judicial Member) and Vasa Seshagiri Rao (Technical Member) held that the family relationship and consistent undervaluation established mutuality of interest. The tribunal observed that the concept of lifting the corporate veil was applicable in family-controlled businesses where the formal corporate structure was being used to mask related transactions.

The tribunal ruled that lifting the corporate veil was justified, and valuation under Rule 9 was correctly applied. Since no penalty was confirmed by the Commissioner (Appeals) and no cross-appeal was filed, no penalty was imposed. The appeal was dismissed on the merits, granting no further relief to the appellant.

To Read the full text of the Order CLICK HERE

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