Commnr. of Central Excise, Aurangabad vs M/S. Goodyear South Asia Tyres Pvt. Ltd.

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NOS. 1947-1950 OF 2003

COMMISSIONER OF CENTRAL EXCISE, AURANGABAD ... Appellant

VERSUS

M/S.GOODYEAR SOUTH ASIA TYRES P. L.& ORS. ... Respondents

WITH

CIVIL APPEAL NO. 4370 OF 2003

COMMISSIONER OF CENTRAL EXCISE, AURANGABAD ... Appellant

VERSUS

M/S.GOODYEAR SOUTH ASIA TYRES PVT. LTD. ... Respondent

J U D G M E N T

A. K. SIKRI, J.

These two appeals are filed by the Commissioner

Central Excise, Aurangabad, wherein the respondent arrayed

is same. The issue involved also is common which pertains

to the valuation of goods, sold by the assessee, for the

purposes of charging excise duty. For this reason, both the

appeals were taken up together and are being disposed of by

this common judgment. However, keeping in view some

distinct feature in the second appeal, viz., Civil Appeal

No. 4370 of 2003, the same shall be taken up for discussion

Signature Not Verified separately to address the distinct features. Digitally signed by Suman Wadhwa Date: 2015.07.30 17:06:35 IST Reason:

The respondent (hereinafter referred to as the

C.A. Nos. 1947-1950/2003 etc. 1 'assessee') holds Central Excise Registration for the

manufacture of Tyres, Tubes, Flaps, Bladders, etc., falling

under Chapter 40 of the Central Excise Tariff Act, 1985. In

the first appeal, the period involved for the purposes of

excise duty is 01.03.1997 to 16.04.1998. The assessee was

originally M/s. RPG CEAT Group Company. Later on 'RPG SATL'

and 'Goodyear' entered into a Joint Venture Agreement dated

10.09.1993 to form a third company in the name of M/s. SATL

(the assessee), which came into existence on 30.09.94. The

primary objective of the assessee was to manufacture OTR

Tyres and Radial tyres exclusively for CEAT and Goodyear

under their brand names. The promoters namely Goodyear USA

and Goodyear India on one side and RPG CEAT on the other

were holding 50:50 equity each in the assessee, and were

exclusive buyers of goods manufactured by the assessee. In

the said Joint Venture Agreement, various other stipulations

were mentioned showing interest of both Goodyear as well as

CEAT in the assessee. As per the said agreement, the

assessee also received unsecured interest free loan of

Rs.85.66 crores from CEAT and Goodyear. Some moulds and

other equipments worth Rs. 10 crores free of cost, on loan

basis, were also given by these two companies to the

assessee.

This kind of arrangement led to the issuance of show

cause notice by the Commissioner of Central Excise and

C.A. Nos. 1947-1950/2003 etc. 2 Customs on 25.01.1999, alleging that CEAT and Goodyear are

related persons of the assessee within the meaning of

Section 4(4)(c) of the Act of 1944 and as such the selling

price of CEAT and Goodyear shall be the assessable value of

goods produced by the assessee under section 4 of the Act.

Alternatively, it was also alleged as to why the additional

consideration flowing back to the assessee should not be

added in their present selling price in terms of Rule 5 of

the Central Excise (Valuation) Rules, 1975 r/w Section 4 of

the Act. In this way a Demand cum Show Cause Notice was

issued to the assessee demanding differential duty of

Rs.8,76,85,385/- for the period from 01.03.1997 to

16.04.1998 for under valuation of the goods. Contravention

of Section 4 of the Act read with Rules 9, 9(2), 52, 173C,

173F, 173G of the Rules was also alleged and penal action

was proposed under Section 11AC of the Act read with Rules

173 of the Rules, alongwith penal interest under section

11AB of the Act.

The notice also invoked extended period under proviso

to Section 11A(1) of the Act for suppression of facts and

willful mis-declaration of Assessable value by assessee with

intent to evade payment of Central Excise duty. The notice

was also issued to four individuals, working for the

assessee.

C.A. Nos. 1947-1950/2003 etc. 3 The assessee rebutted the aforesaid allegations in the

show cause notice by putting up the defence to the effect

that the assessee on the one hand and the CEAT and Goodyear

on the other hand, were not related persons as there was no

mutuality of interest and that no extra commercial

considerations were pointed out regarding price fixation.

It was contended that the sale of goods by assessee to these

two companies was on principal to principal basis and at

arm's length. The Commissioner heard the matter and

thereafter, passed Orders-in-Original dated 11.05.2000

confirming the demand in the show cause notice. Some

penalties were also imposed. The matter was taken in appeal

before the Customs, Excise and Gold (Control) Appellate

Tribunal (hereinafter referred to as 'CEGAT'). A Bench of

the CEGAT heard the appeal on 18.05.2001. By an order dated

28.05.2002, the two members of the Bench differed with each

other; one member allowing the appeal and the other

remanding it. Accordingly, the matter was referred to a

third member, who heard the appeals. By her order dated

26.07.2002, she concurred with the view that the appeals

were to be allowed. Accordingly, the order of CEGAT was

recorded on 31.07.2002 allowing the appeals.

This order of CEGAT is the subject matter of Civil

Appeal Nos. 1947-1950 of 2003.

C.A. Nos. 1947-1950/2003 etc. 4 Mr. K. Radhakrishnan, learned senior counsel appearing

for the Department, has extensively read the contents of the

show cause notice as well as the Order of the Commissioner

and from there he has pointed out that there is evidence to

show deep interest of the Goodyear and CEAT in the assessee

company. He thus, submitted that the Commissioner was right

in holding that these were 'related persons'. It is not

necessary to narrate those features which are pointed out by

Mr. Radhakrishnan inasmuch as those features only indicate

interest of the two companies, viz., CEAT and Goodyear in

the assessee to bring the case within the definition of

'related persons'. What is necessary is to prove mutuality

of interest, viz., interest both ways, i.e., of the two

companies in the assessee as well as of the assessee in the

said two companies. This legal requirement is necessary in

view of the definition of related persons contained in

clause (c) of Sub-Section (4) of Section 4 of the Central

Excise Act (hereinafter referred to as 'Act') which reads as

under: -

“(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”, “subsidiary company” and “relative” have the same meanings as in the Companies Act, 1956 (1 of 1956).”

The expression 'in the business of each other' clearly

C.A. Nos. 1947-1950/2003 etc. 5 denotes that interest of the two persons have to be mutual,

i.e., in each other, in order to treat them as related

persons. 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

sufficient 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 opinion, aptly held that this cannot be the

factor which would show the mutuality of interest. For this

purpose, he referred to the judgment of this Court in

'Union of India v. Atic Industries Ltd. [1984 (17) ELT 323].

The third Member has, therefore, rightly, concurred with the

aforesaid view of Member (Technical).

The assessee did not have any interest in the business

of the buyers (Goodyear Indian Limited and CEAT Limited).

Given this, the requirement of 'mutuality of interest' which

is a pre-requisite under section 4(4)(c) of the Act does not

get satisfied. The matter is squarely covered by the

decisions of this Court in the case of Atic Industries Ltd.

We have gone through the judgment in the case of Atic

Industries Ltd. wherein this court categorically held that

there should be mutuality of interest in the business of

each other. After referring to the definition of 'related

C.A. Nos. 1947-1950/2003 etc. 6 persons', the aforesaid essential feature occurring therein

which needs to be satisfied is elaborated in the following

manner:-

“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. Now, in the present case, Atul Products Limited has undoubtedly interest in the business of the assessee, since Atul Products Limited holds 50 per cent of the share capital of the assessee and has interest as share holder in the business carried on by the assessee. But it is not possible to say that the assessee has any interest in the business of Atul Products Limited. There are two points of view from which the relationship between the assessee and Atul Products Limited may be considered. First, it may be noted that Atul Products Limited is a shareholder of the assessee to the extent of 50 per cent of the share capital. But we fail to see how it can be said that a limited company has any interest, direct or indirect, in the business carried on by one of its shareholders, even though the shareholding of such shareholder may be 50 per cent. Secondly, Atul Products Limited is a wholesale buyer of the dyes manufactured by the assessee but even then, since the transactions between them are as principal to principal, it is difficult to appreciate how the assessee could be said by virtue of that circumstance to have any interest, direct or indirect, in the business of Atul

C.A. Nos. 1947-1950/2003 etc. 7 Products Limited. Atul Products Limited buys dyes from the assessee in wholesale on principal to principal basis and then sells such dyes in the market. The assessee is not concerned whether Atul Products Limited sells or does not sell the dyes purchased by it from the assessee nor is it concerned whether Atul Products Limited sells such dyes at a profit or 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 principal basis.

No doubt, the two buyers had given Rs. 85.66 crores

interest free loan to the assessee. However, that by itself

may not be a reason to hold them as related persons within

the meaning of Section 4(4)(c) of the Act. In the absence

of any mutuality of interest existing between them, giving

of this interest free loan could have been a basis to

include the notional interest while arriving at the cost of

product sold by the assessee to the two buyers. However,

instead of doing that, the appellant wanted to make use of

this factor to hold that the assessee and the two buyers are

“related persons” which position is difficult to comprehend

having regard to the principle laid down in Atic Industries

Ltd's case.

We thus, do not find any fault or error in the

impugned judgment. These appeals are, accordingly,

dismissed.

Civil Appeal No. 4370 of 2003 The period involved in Civil Appeal No. 4370 of 2003

C.A. Nos. 1947-1950/2003 etc. 8 is from 01.07.2000 to 26.09.2000. It so happened that the

joint venture agreement between the parties was terminated

and the CEAT transferred its entire shareholding in the

Goodyear group of which 97 percent is held by Goodyear USA

and 3 per cent is held by Goodyear India Private Limited.

Thus, the assessee became the subsidiary of Goodyear USA.

On this basis, show cause notice was issued for the

aforesaid period treating the assessee and Goodyear as

related persons having mutuality of interest.

No doubt that the assessee became the fully owned

company of Goodyear, the relationship between the two would

be that of related persons as they became “inter connected

undertaking” and are covered by the provisions of amended

Section 4(4)(3)(b) of the Act which provides that the person

would be deemed to be “related” if:

“i. they are inter-connected undertakings, ii. they are relatives, iii. Amongst them the buyer is a relative and a distributor of the assessee, or a sub-distributor of such distributor, or iv. they are so associated they have interest, directly or indirectly, in the business of each other.”

This position was not denied even by the assessee.

However, their submission was that provisions of Rule 9 of

the Valuation Rules are not attracted as this Rule applies

only when assessee so arranges its affairs that the

excisable goods are not sold by it except to or through a

person who is related in the manner specified in either of

C.A. Nos. 1947-1950/2003 etc. 9 the sub clauses (ii), (iii) or (iv) of Section 4(3)(b) of

the Act. [Rule 9 does not cover clause (i)]

This contention of the assessee is accepted by the

CEGAT and the CEGAT is justified in adopting this course of

action. It is clear that the two are companies and

therefore, they are not relatives and therefore, clauses

(ii) and (iii) are not applicable on the basis of it.

Insofar as clause (iv) is concerned, what is to be shown is

that they have interest, directly or indirectly, in the

business of each other. The expression “each other” would

signify the element of mutuality and we have already held

above that this mutuality principle has not been satisfied

in the instant case.

Apart from the above, it would be significant to

mention that after taking over of the assessee company by

Goodyear, more than 70 per cent of the sales by the assessee

company are to the third parties. That apart, there was

another contention of the assessee, viz., that the goods

sold to the outsiders are at a lesser rates than sold to

Goodyear. These two contentions have not been refuted by

the Revenue. The case, therefore, would be clearly covered

by a recent judgment of this Court in 'Commissioner of

Central Excise, Hyderabad v. M/s. Detergents India Limited

and Another' [2015 (4) SCALE 631] wherein it was held:-

“We are of the view that the “arrangement” spoken of

C.A. Nos. 1947-1950/2003 etc. 10 in the proviso must be something by which the assessee and the related person “arrange” that the goods are sold at something by which the assessee and the related person “arrange” that the goods are sold at something below the normal price, so that tax is either avoided or evaded by such arrangement. Secondly, the expression “generally” also shows that such goods must predominantly be sold by the assessee to or through the related person – in mathematical terms, sales that are to or through a related person must consist of at least 50% of the goods that are manufactured and sold. The expression “to or through a related person” again goes back to the “arrangement” and is another way of saying that such sale can be effected directly to or indirectly through such related person. It is only when all three considerations are cumulatively met that proviso (iii) can be said to be attracted.”

On these grounds, even this appeal fails and is

dismissed.

........................., J.

[ A.K. SIKRI ]

........................., J.

[ ROHINTON FALI NARIMAN ]

New Delhi;

July 22, 2015.

C.A. Nos. 1947-1950/2003 etc. 11

ITEM NO.102 COURT NO.12 SECTION III

S U P R E M E C O U R T O F I N D I A RECORD OF PROCEEDINGS

Civil Appeal Nos. 1947-1950/2003

COMMNR. OF CENTRAL EXCISE, AURANGABAD Appellant(s) VERSUS M/S.GOODYEAR SOUTH ASIA TYRES P. L.&ORS. Respondent(s)

(With appln. (s) for stay and office report)

WITH

C.A. No. 4370/2003 (With Office Report)

Date : 22/07/2015 These appeals were called on for hearing today.

CORAM :

HON'BLE MR. JUSTICE A.K. SIKRI HON'BLE MR. JUSTICE ROHINTON FALI NARIMAN

For Appellant(s) Mr. K. Radhakrishnan, Sr. Adv.

Mr. Ajay Singh, Adv.

Mr. Arijit Prasad, Adv.

Mr. B. Krishna Prasad, Adv.

For Respondent(s) Mr. V. Lakshmikumaran, Adv.

Mr. M. P. Devanath, Adv.

Mr. Vivek Sharma, Adv.

Ms. L. Charanaya, Adv.

Mr. R. Ramchandran, Adv.

Mr. Aditya Bhattacharya, Adv.

Mr. Hemant Bajaj, Adv.

Mr. Anandh K., Adv.

Mr. Atul Gupta, Adv.

UPON hearing the counsel the Court made the following O R D E R

The appeals are dismissed in terms of the signed non-reportable judgment.

(Nidhi Ahuja) (Suman Jain) COURT MASTER COURT MASTER

[Signed non-reportable judgment is placed on the file.]

C.A. Nos. 1947-1950/2003 etc. 12