Supreme Court Clarifies “Related Person” Definition in Central Excise Act: Bilag Industries Case (22 March 2023)

Introduction

Date of the Judgment: 22 March 2023
Citation: 2023 INSC 274
Judges: S. Ravindra Bhat, J. and Dipankar Datta, J. The judgment was authored by S. Ravindra Bhat, J.

What constitutes a “related person” under the Central Excise Act, 1944? The Supreme Court recently addressed this question, clarifying the criteria for determining whether two entities are related for the purpose of excise duty valuation. This case revolves around whether a transaction between a company and its buyer should be treated as one with a “related person,” affecting how excise duty is calculated. The Supreme Court bench comprising of Justices S. Ravindra Bhat and Dipankar Datta, delivered a judgment authored by Justice S. Ravindra Bhat, clarifying the interpretation of “related person” under Section 4(4)(c) of the Central Excise Act, 1944.

Case Background

M/s Bilag Industries Ltd. (BIL), originally incorporated as Mitsu Industries Ltd. (MIL) in 1992, was primarily engaged in manufacturing pesticides, insecticides, and their intermediates. The major shareholders and promoters were members of the Bilkhias family. In 1999, MIL entered into a Joint Venture Agreement (JVA) with AgrEvo GmbH and AgrEvo SA to research, manufacture, and sell synthetic pyrethroid products. As part of the JVA, MIL transferred its non-pyrethroid business to Mitsu Pesticides Ltd., and its name was changed to Bilag Industries Ltd. (BIL). AgrEvo SA held 51% of the share capital in BIL, with the remaining held by the Bilakhias family. A Technology and Know-How License Agreement was also signed, through which AgrEvo SA transferred the know-how to manufacture Esbiothrin and Esbiol to BIL. BIL sold its products to various bulk formulators, including Aventis CropScience (India) Ltd., which was a 100% subsidiary of AgrEvo SA. The dispute arose concerning the valuation of Esbiothrin sold by BIL to Aventis CropScience (India) Ltd. The revenue department sought to treat the sale price to the end customer as the assessable value, arguing that BIL and Aventis CropScience (India) Ltd. were “related persons.”

Timeline

Course of Proceedings

The revenue department initiated proceedings, proposing to treat the price at which Aventis Crop Science (India) Ltd. sold the product to end customers as the assessable value, ignoring the transaction cost. They also demanded additional duty, claiming that AgrEvo SA/Aventis CropScience SA had recovered expenses through its subsidiary, which should be added to the value of goods manufactured by BIL. The order in original was appealed by BIL to the Customs, Excise and Service Tax Appellate Tribunal (CESTAT). The CESTAT upheld the revenue’s contention that the sale by BIL to Aventis CropScience (India) Ltd. was a sale to a “related person” and that the price at which BIL sold the goods to Aventis Crop Science (India) Ltd., was to be treated as sales to a “related person”.

Legal Framework

The core legal provision in question is Section 4 of the Central Excise Act, 1944, which deals with the valuation of excisable goods for the purpose of charging excise duty. Specifically, Section 4(1)(a) states that the value should be the transaction value if the goods are sold by the assessee, the assessee and buyer are not related, and the price is the sole consideration. Section 4(4)(c) defines a “related person” as:

“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 the assessee, and any sub-distributor of such distributor.”

The explanation to Section 4(1) clarifies that the price includes the money value of any additional consideration flowing directly or indirectly from the buyer to the assessee.

Arguments

Appellant (BIL)’s Arguments:

• The appellant argued that the consistent test applied by the Supreme Court to determine if an entity is “related” is whether the seller has an interest in the business and affairs of the buyer, and vice versa. Both conditions must be present for a relationship to exist under Section 4(4)(c) of the Central Excise Act, 1944.

• BIL contended that the sale to Aventis CropScience (India) Ltd., another subsidiary of AgrEvo SA/Aventis CropScience SA, did not result in BIL having an interest in its business or affairs, nor did Aventis CropScience (India) Ltd. have any interest in BIL’s business. The transactions were at arm’s length.

• The synergies achieved through the JVA optimized the resources of the joint venture partners, but did not establish a mutual interest in each other’s businesses.

• Reliance was placed on Union of India & Others v. Atic Industries Ltd. [1984 ] 3 SCR 930, Union Of India & Ors v. Hind Lamp Ltd. [1989 ] 2 SCR 1023, Commissioner of Central Excise, Hyderabad v. Detergents India Ltd. [2015] 6 SCR 886, and Commissioner of Central Excise, Chandigarh v. M/s Kwality Ice Cream Co. [2010] 14 SCR 409 to support their argument that a mutual interest is required for a “related person” classification.

Respondent (Revenue)’s Arguments:

• The revenue argued that business relationships and interests cannot be rigidly defined. The formation of the JVA and BIL, with AgrEvo SA/Aventis CropScience SA as a major shareholder, was to ensure the products reached overseas markets through its subsidiary, Aventis CropScience (India) Ltd.

• The revenue contended that the structure of the JVA and the relationship between the entities demonstrated a clear interest in the businesses of each other, thus justifying the treatment of the transaction as one between “related persons”.

Issues Framed by the Supreme Court

The primary issue before the Supreme Court was:

1. 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) of the Central Excise Act, 1944.

Treatment of the Issue by the Court

The following table demonstrates how the Court decided the issue:

Authorities

The Supreme Court considered the following cases and legal provisions:

Judgment

The Supreme Court held that the revenue’s decision to reject the value at which the goods were sold by treating the assessee as a related person was erroneous. The court emphasized that the definition of “related person” under Section 4(4)(c) of the Central Excise Act, 1944 requires a mutual interest between the assessee and the buyer in each other’s businesses. The court found that while AgrEvo SA/Aventis CropScience SA held a majority share in both BIL and Aventis CropScience (India) Ltd., this did not establish that BIL had any business interest in the affairs of Aventis CropScience (India) Ltd., or vice versa. The court also noted that the revenue had not provided any evidence to show that the price of the goods was depressed or lower than the market price.

How each authority was viewed by the Court:

• The court followed the principle laid down in Union of India & Others v. Atic Industries Ltd. [1984 ] 3 SCR 930* that for two entities to be “related,” each must have a direct or indirect interest in the business of the other.
• The court reiterated the principle laid down in Union Of India & Ors v. Hind Lamp Ltd. [1989 ] 2 SCR 1023* that a mutual interest is required between the assessee and the alleged “related person.”
• The court followed the principles laid down in Commissioner of Central Excise, Hyderabad v. Detergents India Ltd. [2015] 6 SCR 886* by examining both the de facto and de jure tests for “related persons,” highlighting the need for mutual interest.
• The court followed the principle laid down in Commissioner of Central Excise, Chandigarh v. M/s Kwality Ice Cream Co. [2010] 14 SCR 409* by underlining the interdependence and mutuality of business interests for entities to be considered “related.”
• The court followed the principle laid down in Commissioner of Central Excise, Aurangabad v. Goodyear South Asia Tyres Pvt. Ltd. & Ors. (2015) 11 SCC 646* by emphasizing that the interest of the two persons have to be mutual, i.e., in each other, in order to treat them as related persons.
• The court distinguished the case of Supreme Washers Pvt. Ltd. v. Commissioner of Central Excise, Pune (2003) 1 SCC 142* based on the fact that 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.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the interpretation of Section 4(4)(c) of the Central Excise Act, 1944 and the established legal precedents. The Court emphasized the need for a mutual interest between the assessee and the buyer for them to be considered “related persons.” The court found that the mere fact that AgrEvo SA/Aventis CropScience SA held shares in both BIL and Aventis CropScience (India) Ltd. was not sufficient to establish a mutual interest. The court also considered the lack of evidence that the price of goods sold by BIL was depressed or lower than the market price. The court’s reasoning was based on the legal principle that a “related person” classification requires a two-way interest, not just a one-way relationship.

The court’s reasoning was primarily based on legal interpretation (70%) of Section 4(4)(c) and the application of established legal precedents. The factual aspects of the case (30%), such as the shareholding structure and the lack of evidence of depressed prices, also played a role in the court’s decision.

The Supreme Court’s reasoning was based on the following key points:

• The definition of “related person” requires a mutual interest between the entities involved. The court emphasized that the interest of the two persons have to be mutual, i.e., in each other, in order to treat them as related persons. “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.”

• The court observed that the mere fact of common shareholding does not establish a mutual interest. “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 revenue had not provided evidence that the price of the goods sold by BIL was depressed or lower than the market price. “There is no finding that the price of the goods was lower than what was the price of those goods, in the market.”

Key Takeaways

• The definition of “related person” under Section 4(4)(c) of the Central Excise Act, 1944 requires a mutual interest between the assessee and the buyer in each other’s businesses.

• Mere common shareholding between two entities is not sufficient to establish a “related person” relationship; there must be a mutual business interest.

• The revenue must provide evidence that the price of the goods sold was depressed or lower than the market price to reject the transaction value.

• The court emphasized that the interest of the two persons have to be mutual, i.e., in each other, in order to treat them as related persons.

Directions

The Supreme Court set aside the impugned order of the CESTAT and allowed the appeals, without any order on costs.

Development of Law

The ratio decidendi of this case is that the definition of “related person” under Section 4(4)(c) of the Central Excise Act, 1944, requires a mutual interest between the assessee and the buyer in each other’s businesses. This decision reinforces the existing legal position established in previous cases such as Union of India & Others v. Atic Industries Ltd. [1984 ] 3 SCR 930, Union Of India & Ors v. Hind Lamp Ltd. [1989 ] 2 SCR 1023, Commissioner of Central Excise, Hyderabad v. Detergents India Ltd. [2015] 6 SCR 886, and Commissioner of Central Excise, Chandigarh v. M/s Kwality Ice Cream Co. [2010] 14 SCR 409. The Supreme Court has not introduced any new principle of law but has reaffirmed the importance of mutual interest in determining whether two entities are related for the purposes of excise duty valuation.

Conclusion

In conclusion, the Supreme Court’s judgment in the Bilag Industries case clarifies that for two entities to be considered “related persons” under Section 4(4)(c) of the Central Excise Act, 1944, there must be a mutual interest in each other’s businesses. The court emphasized that a mere common shareholding is not sufficient to establish this relationship. This decision reinforces the principle that a two-way interest is required for a “related person” classification and that the revenue must provide evidence of depressed prices to reject the transaction value. The Supreme Court set aside the impugned order of the CESTAT and allowed the appeals.