Calcutta
Choromtype Ltd. Vs. Collector of Central Excise, Calcutta [1998] INSC 190 (31 March 1998)
Sujata
V. Manohar, D. P. Wadhwa D.P. Wadhwa. J.
ACT:
HEAD NOTE:
M/s.
Calcutta Chromotype Ltd. has filed this appeal against the order dated October
30. 1989 of the Custom, Excise and Gold (Control) Appellate Tribunal, New Delhi, (for short `Appellate Tribunal').
By this judgment the Appellate Tribunal while upholding the order of the
Collector of Appeals observed that though there was an identity of interest between
the appellant, manufacturer and M/s. Ganga Saran & Sons Pvt. Ltd., its sole
distributor, the Assistant Collector had not considered the break up of the
shares of each member of the family of the manufacturer and distributor. The
Appellate Tribunal held that the fact that there was identity of interest was
the determining factor in holding whether a person is a related person within
the meaning of Section 4(4) (c) of the Central Excise and Salt Act, 1944 (for
short `the Act'). Since the Assistant Collector had not considered the break up
of the shares of each member of the family comprising the two companies being
the manufacturer and the distributor, the Tribunal remanded the matter to the
Assistant Collector to consider the break up of the shares of each member of
the family and if the "test of identity" was satisfied, he should
confirm the order.
The
appellant manufactures playing cards. it sells the entire stock of playing
cards manufactured by it to its sole distributor M/s. Ganga Saran & Sons
Pvt. Ltd. The Assistant Collector, Central Excise under the Act levied duty at
the price at which the playing cards were sold by M/s. Ganga Saran & Sons
Pvt. Ltd. as according to the Assistant Collector it was related person within
the meaning of Section 4(4) (c) of the Act of the appellant. Collector of
Appeal confirmed the order of the Assistant Collector also holding that M/s. Ganga
Saran & Sons Pvt. Ltd. was the related person of the appellant. Against the
order of the Collector the appellant filed a revision application under Section
36 of the Act, prior to its amendment, and thereafter the revision application
was transferred to the Appellate Tribunal and heard as appeal.
The
Assistant Collector, Central Excise found that both the appellant and its sole
distributor were limited companies registered under the Companies Act, 1960. He
found that the Board of Directors of both these companies were constituted:
"Appellant
1. Shri
Narendra Sharma, managing Director
2. Smt.
Brahma Devi, Director
3. Smt.
Indu Sharma, Director M/s. Ganga Saran & Sons Co.
1. Shri
Narendra Sharma, Managing Director
2. Smt.
Brahma Devi, Director
3. Shri
Brajendra Sharma, Director
4. Shri
Rajendra Sharma, Director"
Assistant
Collector also found that shares of the appellant and its sole distributor were
held by the members of the Sharma family, i.e., persons who were related to
each other and that both the companies were having the common Managing Director
and further that the appellant was selling the goods with the brand name of its
distributor, namely M/s . Ganga Saran & Sons Pvt. Ltd. It was contended
before the Tribunal that both the companies were registered under the Companies
Act and were separate legal entitles and therefore, could not be considered as
related persons. It was submitted that having the common Director was not the
determining factor to hold that M/s. Ganga Saran & Sons Pvt. Ltd. was a
related person and further that the fact that the manufacturer was printing the
name of the buyer and was selling the entire product to the buyer also did not
make the buyer a related person. It was also submitted that the authorities
below had failed to establish that M/s. Ganga Saran & Sons Pvt. Ltd. had
been accorded a favourable treatment and that, in fact, low price had been
charged on that account. The appellant said that in the absence of any such
evidence it was not correct to hold that the price at which M/s. Ganga Saran
& Sons Pvt. Ltd. sold the product was the price for the purpose of
determining the assessable value.
The
Appellate Tribunal was also of the view with reference to Section 4(4) (c) of
the Act that if a person is so associated with the assessee that they have
interest in the business of each other then the person was a related person of
the other within the meaning of the Section.
Appellate
Tribunal noted that Collector (Appeal) had held that the appellant as well as
M/s. Ganga Saran & Sons Pvt. Ltd. were started and established by G.S.
Sharma and his family members and further that Assistant Collector had found
that the shares of the appellant and the shares of the buyer company were held
by the members of the same Sharma family and, thus, by the persons that who
were related to each other. The Appellate Tribunal referred to the decision of
this Court in Mohanlal Magan Lal Bhavsar (Deseaced) through LRs. and Ors. vs. Union of Indian and Ors. [(1986) 23 ELT 3] and also to
tits own decision in Diamond Clock Manufacturing Co. Ltd. vs CCE. Pune [(1988)
34 ELT 662] where it interpreted the definition of related person.
Relying
on these two decisions as applicable to the facts of this case, the Appellate
Tribunal was of the view that there was identity of interest and M/s. Ganga
Saran & Sons Pvt. Ltd was related person within the meaning of Section 4(4)(c)
of the Act. The Appellate Tribunal disposed of the appeal with the directions
aforesaid.
Mr.
Dave, learned counsel for the appellant, contended that the Appellate Tribunal
erred in holding that the appellant and M/s. Ganga Saran & Sons Pvt. Ltd. were related persons or that
there was an identity of interest between the two. He said the two judgments,
one of Supreme Court and other of the Appellate Tribunal itself on which the
Appellate Tribunal relied were not applicable inasmuch as facts in the said two
cases were entirely different and decisions were clearly distinguishable. he
said that in order to be a related person within the meaning of Section 4(4)
(c) of the Act the person alleged to be related must have interest, direct or
indirect, in the business of the assessee and that in the present case both the
appellant and its buyer were private limited companies established much before
the imposition of the excise duty on playing cards and had been dealing with
each other at arm's length. He said there was no evidence before the Appellate
Tribunal as to the shareholding in each of the two companies and to say that
shareholdings were held by Sharma family was a misnomer and that such a fragile
test could not be applied to test the identity or mutuality of interest.
Mr.
Dave said that the Appellate Tribunal came to a wrong conclusion on prima facie
holding that Sharma family controlled both the companies. Sharma family is a
vague term and did not reflect as to what was the exact shareholding of the
members in both the companies and how they were related to each other. Lastly,
Mr. Dave submitted that there was no allegation and no finding ever recorded
that the dealings between the appellant and its distributor were not at arm's
length or that prices at which the goods were sold to the distributor were
exceptionally low, having been influenced by some extra commercial
consideration. Mr. Dave said that the Appellate Tribunal did not examine the
whole facts of the case and law applicable thereto in proper perspective and that
led it to give directions which are incorrect and these were now being
impugned.
Mr.
Dave also submitted that for subsequent years the Department took the view that
the buyer was not a related person. He also cited a few judgments of this Court
in support of his submissions. Before we refer to these judgments, we may
reproduce the relevant provisions of Section 4 of the Act:
"4.
Valuation 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 value, such value shall, subject to the other provisions of
this section be deemed to be-
(a) the
normal price thereof, that is to say, 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:
Provided
that- (i) ...
(ii)
...
(iii)where
the assessee so arranges that the goods are generally not sold by him in the
course of wholesale trade except to or through a related person, the normal
price of the goods sold by the assessee to or through such related person shall
be deemed to be the price at which they are ordinarily sold by the related
person in the course of wholesale trade at the time of removal, to dealers (not
being related persons) or where such goods are not sold to such dealers, to
dealers (being related persons) who sell such goods in retail ;
(b)
...
(2)
...
(3)
...
(4) or
the purpose 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 associated with the assessee
that they have interest, directly or indirectly, 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 such distributor.
Explanation.- In this clause "holding
company", "a subsidiary company" and "relative" have
the same meanings as in the Companies Act, 1956;
(d)
...
(e)
...
Negatively
put, it will not, therefore, be normal price for the purpose of valuation, if
the buyer is a related person and the price is not the sole consideration for
sale.
Both
the conditions must co-exist so that the price at which the manufactured goods
are sold by the assessee to the buyer is taken as the value for the purpose of
assessment of duty of excise. As to who is a "related person" within
the meaning of clause (c) of Section 4(4), this Court in Union of India &
Ors. vs. ATIC Industries Ltd. [(1984) 3 SCC 575] said:
"What
the 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. it is essential to attract the
applicability of the first part of the definition that the assessee and the
person alleged to be a related person must have interest, direct or indirect,
in the business of each other. Each of them must have a direct or indirect
interest in the business of the other. 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 interest 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." This was followed in subsequent cases in Collector
of Central Excise, Madras vs. T.I. Millers Ltd.. Madras and T.I. Diamond Chain, Madras [1988 (Supp) SCC 361]; Snow White
Industrial Corporation vs. Collector of Central Excise [1989 (41) ELT 360
(SC)]. It was also pointed out that this Court in a special appeal ( Civil
Appeal No. 9850/95, decided on April 4, 1996) filed against the order of the
Appellate Tribunal had dismissed the same where the Appellate Tribunal had held
that mere commonness of partners and Directors between the buyer and seller was
not sufficient to treat the buyer as a `related person' even if entire
production was sold through them. We have examined the file of C.A.9850/95.
What was find is that the appeal was filed by the Revenue which was barred by
limitation and delay was condoned subject to payment of cost Rs. 500/- payable
within four weeks to the counsel for respondents. Since the cost had not been
paid the appeal was dismissed by order dated April 4, 1996. This dismissal of the appeal, therefore, does not help the
appellant. The Appellate Tribunal in the order, which was impugned in CA
9850/95, found that the assessee had sold 95 out of 96 are lamps to a company
of which one of the partners of the assessee firm was a director. On this
Department took the view that the company was a related person and sought to
assess the goods at a higher price at which the assessee sold the goods to the
buyer company.
Appellate
Tribunal was of the view that merely because there was some common directors
between the assessee and the company that itself would not be sufficient ground
fro holding that both were related persons. Appellate Tribunal found that no
evidence regarding mutuality of interest had been brought on record except the
sale of goods by the assessee to the buyer company. It said that while this
fact of sale may create one way interest of the company in the business of the assessee
firm it was not indicative of the interest of the assessee in the business of
the buyer company.
Reference
was also made to two orders of the Appellate Tribunal in Mahalakshmi Glass
Works Ltd., vs. Collector of Central Excise [1991 (53) ELT 120 (Tribunal)] and Weikfield
Products Co. (India) vs. Collector or Central Excise [1993 (63) ELT 672
(tribunal)]. In the first case, three out of four Directors of the assessee
were also the Directors of its whole sale buyer M/s. Western India Class Works.
The Tribunal noticed that it was not the case of the department that sales to
customers other than to M/s. Western India Glass Works were at prices different
from prices of sales to M/s Western India Glass Works. The Appellate Tribunal
held that in the absence of any other factor like mutuality of interest,
commonness of some Directors was not sufficient to constitute relationship
between the two companies which were common independent corporate legal
entitles. In the second case, the assessee sold its goods through two broad
channels, viz., directly to Canteen Stores Department and to the Weikfield
Central Marketing Organisation. While 20% discount was allowed to Canteen
Stores Department, 30% discount was allowed to Weikfield Central marketing Organisation.
Assessee justified the reason for allowed higher discount in one case because
the department was of the view that transaction between the assessee and the Weikfield
Central Marketing Organisation could not be treated as at arms length in view
of the fact that most of the partners in the firm were close relatives of the
Directors of the assessee which was a company company under the Companies Act,
1956. The appellate Tribunal was of the view that the assessee being a
corporate concern and Weikfield Central Marketing Organisation a partnership
concern, the latter could not be called a relative of the assessee and to
consider Weikfield Central Marketing Organisation as a favoured buyer, there
must be sufficient proof to show that specifically low price was charged.
Mr.
Sharma, counsel for the Revenue, referred to a decision of this Court in Mohanlal
Maganlal Bhavsar (Deceased) through LRs. & ors. vs. Union of India & Ors.[1986 (23) ELT 3 (SC)]. IN this
case one of the pleas raised by the appellant was that the High Court was not
correct in holding that the wholesale price of the preparation of the appellant
could not be taken for the purpose of valuation under Section 4 of the Act at
the price at which these were supplied to M/s M.B. Bhavsar & Sons, Chief
Distributor of the appellant. This Court observed as under:
"The
next contention of the Appellants, which was also negatived by the High Court,
was that in determining the value of the medicinal preparations for the purpose
of levying excise duty thereon the authorities erred in taking the wholesale
price of the said preparations and not the price at which these preparation
were supplied by the said firm to their Chief distributor Messrs. M.B. Bhavsar
& Sons. In order to test the correctness of this contention it is necessary
to set out a few facts which are material to this aspect of the case. The firm of
Messrs. M.B. Bhavsar & Sons, though a separate partnership fir, was in fact
a firm in which not only the original a First Appellant and Appellants Nos.2
and 3 were partners but a son of each of them was also a partner. There was
thus identity to interest between the firm of Messrs. M.B. Bhavsar & Sons
and the firm M/s. Bhavsar Chemical Works. Both these firms had their offices in
the same premises and under the partnership agreement the sons of the original
First Appellant and the other two Appellants were to share only in the profits
of Messrs. M.B. Bhavsar & Sons but not to be liable for any losses. These
two firms, therefore, cannot be said to be at arm's length or independent
parties and the prices at which the medicinal preparations were supplied by Bhavsar
Chemical Works to Messrs.
M.B. Bhavsar
& Sons cannot be taken to be the real value of the said preparations. The
High Court was, therefore, right in rejecting this contention also." The
principle that a company under the Companies Act, 1956 is a separate entity
and, therefore, where the manufacturer and the buyer are two separate
companies, they cannot, than anything more, be `related persons' within the
meaning of clause (c) of sub-section (4) of Section 4 of the Act is not of
universal application. Law has travelled quite a bit after decision of the
House of Lords in the case of Salomon vs. Salomon [1897 AC 22]. This is how
this Court State of Bihar & Ors. [(1964) 6 SCR 885]:
"The
true legal position regard to the character of a corporation or a company which
owes its incorporation to a statutory authority, is not in doubt or dispute.
The corporation in law is equal to a natural person and has a legal entity of
its own. The entity of the corporation is entirely separate from that of its
shareholders; it bears its own name and has a seal of its own; its assets are
separate and distinct from those of its members; it can sue and be sued
exclusively for its own purpose'; its creditors cannot obtain satisfaction from
the assets of its members; the liability of the members or shareholders is
limited to the capital invested by them; similarly, the creditors of the
members have no right to the assets of the corporation. This position has been
well-established ever since the decision the of Salomon vs. Salomon & Co.
[] (1897) A.C. 22 H.L. ] was pronounced in 1987; and indeed, it has always been
the well recognised principle of common law. However, in the course of time,
the doctrine that the corporation or a company has a legal and separate centity
of its own has been subjected to certain exceptions by the application of the
fiction that the veil of the corporation can be lifted and its face examined in
substance. The doctrine of the lifting of the veil thus marks a change in the
attitude that law had originally adopted towards the concept of the separate
entity or personality of the corporation. As a result of the impact of the
complexity of economic fac tors, judicial decisions have sometimes recognised
exceptions to the rule about the juristic personality of the corporation. It
may be that in course of time these exceptions may grow in number ant to meet
the requirements of different economic problems, the theory about the
personality of the corporation may be confined more and more.
In
life Insurance Corporation of India vs.
Escorts Ltd. & Ors. [(1986) 1 SCC 264), this Court again considered this
question and said:
"While
it is firmly established ever since Salomon vs. A, Salomon & Co. Ltd.
[(1897) AC 22 HL] was decided that a company has an independent and legal
personality distinct from the individuals who are its members, it has since
been held that the corporate veil may be lifted, the corporate personality may
be ignored and the individual members recognised for who they are in certain
exceptional circumstances. Pennington in his Company Law (4th Ed.) states:
"Four
inroads have been made by the law on the principle of separate legal
personality of companies. By far the most extensive of these has been made by
legislation imposing taxation.
The
government, naturally enough, does not willingly suffer schemes for the
avoidance of taxation which depend for their success on the employment of the
principle of separate legal personality, and in fact legislation has gone so
far that in certain circumstances taxation can be heavier if companies are
employed by the taxpayer in a n attempt to minimise his tax liability than if
he uses other means to give effect to his wishes.
Taxation
of companies is a complex subject, and is outside the scope of this book. The
reader who wishes to pursue the subject is referred to the many standard text
books on Corporation Tax, Income Tax, Capital Gains Tax and Capital Transfer
Tax.
The
other inroads on the principle of separate corporate personality have been made
by two sections of the Companies Act, 1948, by judicial disregard of the
principle where the protection of public interests is of paramount importance,
or where the company has been formed to evade obligations imposed by the law,
and by the courts implying certain cases that a company is an agent or trustee
for its members.
In
Palmer's Company Law (23rd Ed.), the present position in England is stated and the occasions when
the corporate veil may be lifted have been enumerated and classified into
fourteen categories. Similarly in Gower's Company Law (4th Ed.), a chapter is
devoted to `lifting the veil' and the various occasions when that may be done
are discussed. In Tata engineering and Locomotive Co. Ltd. [(1964) 6 SCR 885],
the company wanted the corporate veil to be lifted so as to sustain the
maintainability of the petition, filed by the company under Article 32 of the
Constitution, by treating it as one filed by the shareholders of the company.
The request of the company was turned down on the ground that it was not possible
to treat the company as a citizen for the purposes of Article 19. In CIT vs. Sri
Meenakshi Mills Ltd. [AIR 1967 SC 819], the corporate veil was lifted and
evasion of income tax prevented by paying regard to the economic realities
being the legal facade. In Workmen vs. Associated Rubber Industry Ltd. [(1985_
4 SCC 114], resort was had to the principle of lifting the veil to prevent
devices to avoid welfare legislation. It was emphasised that regard must be had
to substance and not the form of a transaction.
Generally
and broadly speaking, we may say that the corporate well may be lifted where a
statute itself contemplates lifting the veil, or fraud or improper conduct is
intended to be prevented, or a taxing statute or a beneficent statute is sought
to be evaded or where associated companies are inextricably connected as to be,
in reality, part of one concern. It is neither necessary nor desirable to
enumerate the classes of cases where lifting the veil is permissible, since
that must necessarily depend on the relevant statutory or other provisions, the
object sought to be achieved, the impugned conduct, the involvement of the
element of the public interest, the effect on parties who may be affected
etc." In M/s Mcdowel and Company Ltd. vs. Commercial Tax Officer [(1985) 3
SCC 230 = (1985) 154 ITR 148], this Court examined the concept of tax avoidance
or rather the legitimacy of the art of dodging tax without breaking the law.
This Court stressed upon the need to make a departure from the Westminster
principle based upon the observation of Lord Tomlin in the case of IRC vs. Duke
of Westminster [(1936) AC 1] that every assessee is entitled to arrange his
affairs as to not attract taxes. The Court said that tax planning may be
legitimate provided it is within the framework of law. Colourable devices,
however, cannot be part of tax planning. Dubious methods resorting to artifice
or subterfuge to avoid payment of taxes on what really is income can today no
longer be applauded and legitimised as a splendid work by a wise man but has to
be condemned and punished with severest of penalties. If we examine the thrust
of all the decisions, there is no bar on the authorities to lift the veil of a
company, whether a manufacturer or a buyer, to see it was not wearing that mask
of not being treated as related person when, in fact, both, the manufacturer
and the buyer, are in fact the same persons. Under sub-section (1) of Section 4
of the Act, value of the excisable goods shall not be deemed to be normal price
thereof, i.e., 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, if the buyer is a related person and price is not the sole
consideration for sale. As to who is a related person, we have to see its
definition in Section 4(4) (c) of the Ac t. It is not only that both, the
manufacturer and the buyer, are associated with each other for which corporate
well may be lifted to see who is being it but also that they should have
interest, directly or indirectly, in the business of each other. But once it is
found that persons being the manufacturer and the buyer are same, it is
apparent that buyer is associated with the manufacturer, i.e., the assessee and
then regard being had to the common course of natural events, human conduct and
public and private business it can be presumed that they have interest,
directly or indirectly, in the business of each other (refer Section 114 of the
Evidence Act). It is, however, difficult to lay down any broad principle to
hold as to when corporate veil should be lifted or if on doing that, could it
be said that the assessee and the buyer are related persons. That will depend
upon the facts and circumstances of each case and it will have to be seen who
is calling the shots in both the assessee and the buyer. When it is the same
person the authorities can certainly fall back on the third proviso to clause
(a) of Section 4(1) of the Act, to arrive at the value of the excisable goods.
It cannot be that when the same person incorporates two companies of which one
is the manufacturer of excisable good and other is the buyer of those goods,
the two companies being separate legal entities the excise authorities are
barred from probing anything further to find out who is the person being these
two companies. it is difficult to accept such a narrow interpretation. True
that shareholdings in a company can change by that is the very purpose to lift
the veil to find out id the two companies are associated with each other. Law
is specific that when duty of excise is chargeable on the goods with reference
to its value than the normal price on which the goods are sold shall be deemed
to be the value provided (1) the buyer is not a related person and (2) the
price is the sole consideration. It is a deeming provision and the two
conditions have to be satisfied for the case is to fall under clause (a) of
Section 4(1) keeping in view as to who is the related person within the meaning
of clause (c) of Section 4(4) of the Act. Again if the price is not the sole
consideration, then again clause (a) of Section 4(1) will not be applicable to
arrive at the value of the excisable goods for the purpose of levy of duty of
excise.
In the
present case, we do find that the authorities of and the Appellate Tribunal did
address themselves to the basic question as to the shareholdings of both, the assessee
and the buyer, inasmuch as they found that the Managing Director of both the
companies was the same and one more director was common. It was also found that
the shares of both the companies were held by the members of the `Sharma
family' but that is quite a vague expression and, therefore, in our view, the
Appellate Tribunal was partly right in giving the direction to ascertain the break-up
of the shares of each member of the family in the two companies. To lift the
veil the actual shareholding of both the companies and the persons in control
of the management of both the companies needed to be ascertained to consider
the identity of interest of both the companies in the business of each other.
No presumption of such mutuality of interest in the business of each other
could have been drawn without the factual data.
However,
in the present case, we are told that for subsequent years, the authorities
have not treated M/s, Ganga Saran & Sons Pvt. Ltd., the sole distributor of
the appellant, as a related person which fact has not been controverted by the
respondent and have accepted the price at which the goods are sold by the assessee
to the sole distributor as the sole consideration for sale. The matter pertains
to the year 1976. Order of the Assistant Collector is of the year 1978. We do
not think at this late stage any purpose will be served to inquire into the
shareholdings of the assessee, the appellant and its sole distributor as
directed by the Appellate Tribunal. We are, therefore, inclined to hold that no
effect be given to the judgment of the Appellate Tribunal.
Accordingly,
the appeals are allowed and the impugned judgment of the Appellate Tribunal is
set aside. There will be no order as to costs.
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