Supreme Court Clarifies “Related Person” Definition under Central Excise Act: Bilag Industries vs. Commissioner of Central Excise (22 March 2023)

Date of the Judgment: 22 March 2023

Citation: 2023 INSC 239

Judges: S. Ravindra Bhat, J., Dipankar Datta, J.

Can a company be considered a “related person” to its buyer simply because they share a common parent company? The Supreme Court recently addressed this question in a dispute over excise duty, clarifying the scope of “related person” under the Central Excise Act, 1944. The court examined whether a transaction between two subsidiary companies of the same parent company should be treated as a sale to a related party, which would affect the valuation of goods for excise duty purposes. The judgment was delivered by a two-judge bench comprising Justices S. Ravindra Bhat and Dipankar Datta, with Justice S. Ravindra Bhat authoring the opinion.

Case Background

In 1992, the Bilakhia family formed Mitsu Industries Ltd. (MIL), which manufactured pesticides and insecticides. In 1998, MIL signed a Letter of Intent with AgrEvo GmbH, followed by a Memorandum of Understanding (MOU) to form a joint venture.

On July 3, 1999, MIL, AgrEvo GmbH, and AgrEvo SA entered into a Joint Venture Agreement (JVA) to research, develop, and manufacture agrochemicals. MIL transferred its non-pyrethroid business to Mitsu Pesticides Ltd. MIL’s name was then changed to M/s Bilag Industries Ltd. (BIL). AgrEvo SA held 51% of the share capital in BIL, with the rest held by the Bilakhia family.

A Technology and Know-How Licence Agreement was also signed, where AgrEvo SA transferred the process and know-how to manufacture Esbiothrin and Esbiol to BIL. The agreement also included a non-compete fee of ₹25.51 crores for the Bilakhia family to prevent them from competing with the joint venture.

BIL sold its products to various formulators, including Rhone Poulenc Agro Chemicals India Ltd./ Aventis CropScience (India) Ltd. The price at which BIL sold goods to AgrEvo SA for export was based on a supply agreement, which considered the actual cost of production plus a profit margin. Similarly, the price for sales to Aventis CropScience (India) Ltd. within India was determined.

AgrEvo SA held 51% of the share capital in BIL (later increased to 74%), making BIL a subsidiary. AgrEvo SA also held 100% shares in Aventis Crop Science (India) Ltd. Thus, both BIL and Aventis Crop Science (India) Ltd. were subsidiaries of AgrEvo SA.

The dispute arose regarding the valuation of Esbiothrin. The revenue department sought 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. The revenue department also demanded an additional amount, claiming that expenses incurred by AgrEvo SA/ Aventis CropScience SA for advertising and marketing should be added to the value of the goods manufactured by BIL. A further demand for differential duty was made, arguing that the sale by BIL to Aventis Crop Science (India) Ltd. was to a “related” person.

Timeline:

Arguments

Appellant (Bilag Industries) 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 of the buyer and vice versa.

• The appellant contended that even if one party has an interest in the other’s business, the absence of a reciprocal interest means they are not “related” under Section 4(4)(c) of the Central Excise Act, 1944.

• The appellant relied on previous Supreme Court decisions, including 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 position.

• The appellant argued that the joint venture optimized resources but did not create a situation where BIL had an interest in the business of Aventis CropScience (India) Ltd., or vice versa.

Respondent (Revenue) Arguments:

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

• The revenue contended that the structure clearly demonstrated a mutual interest in the businesses of both entities.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for consideration:

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 as to how the Court decided the issues:

Authorities

The Supreme Court considered the following authorities:

Cases:

• Union of India & Others v. Atic Industries Ltd. [1984] 3 SCR 930 – Supreme Court of India: This case was cited to explain the meaning of “related person” under Section 4(4)(c) of the Central Excise Act, 1944, emphasizing the requirement of mutual interest in each other’s business.
• Union Of India & Ors v. Hind Lamp Ltd. [1989] 2 SCR 1023 – Supreme Court of India: This case was relied upon to reiterate the principle that both entities must have a direct or indirect interest in each other’s business to be considered “related persons.”
• Commissioner of Central Excise, Hyderabad v. Detergents India Ltd. [2015] 6 SCR 886 – Supreme Court of India: This case was cited to differentiate between de facto and de jure tests for determining “related persons,” and to emphasize that the definition of “relative” in the Companies Act, 1956, does not require mutual interest.
• Commissioner of Central Excise, Chandigarh v. M/s Kwality Ice Cream Co. [2010] 14 SCR 409 – Supreme Court of India: This case was used to highlight the importance of interdependence and reciprocity beyond a typical distributor-manufacturer relationship to consider parties as “related persons.”
• Commissioner of Central Excise, Aurangabad v. Goodyear South Asia Tyres Pvt. Ltd. & Ors. (2015) 11 SCC 646 – Supreme Court of India: This case was cited to emphasize that the interest of the two persons have to be mutual to treat them as related persons.
• Supreme Washers Pvt. Ltd. v. Commissioner of Central Excise, Pune (2003) 1 SCC 142 – Supreme Court of India: This case was cited to illustrate what constitutes inter-relationship, where the assessee and buyer were involved in common procurement of raw material, common stock accounting and planning and interdependence in manufacturing operations.

Legal Provisions:

• Section 4 of the Central Excise Act, 1944: This section deals with the valuation of excisable goods for the purpose of charging excise duty. Specifically, Section 4(4)(c) defines “related person.”

Treatment of Authorities

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The court cited Atic Industries [1984] 3 SCR 930* to emphasize that for a person to be branded as a related person, it is essential that both the assessee and the person alleged to be a related person must have interest, direct or indirect, in the business of each other.
• The court relied on Hind Lamp Ltd. [1989] 2 SCR 1023* to reiterate that it is not enough that the assessee has an interest 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 in the business of the assessee.
• The court referred to Detergents India Ltd. [2015] 6 SCR 886* to distinguish between the de facto test and de jure test and to emphasize that the expression “relative” does not require mutual interest in each other’s business.
• The court used Kwality Ice Cream Co. [2010] 14 SCR 409* to highlight the importance of interdependence and reciprocity beyond a typical distributor-manufacturer relationship to consider parties as “related persons.”
• The court cited Goodyear South Asia Tyres Pvt. Ltd. (2015) 11 SCC 646* to reiterate that the interest of the two persons have to be mutual to treat them as related persons.
• The court distinguished Supreme Washers Pvt. Ltd. (2003) 1 SCC 142* to illustrate what constitutes inter-relationship, where the assessee and buyer were involved in common procurement of raw material, 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 the term “related person” under Section 4(4)(c) of the Central Excise Act, 1944. The court emphasized the need for a mutual interest between the assessee and the buyer for them to be considered “related.” The court found that the mere fact that both BIL and Aventis CropScience (India) Ltd. were subsidiaries of the same parent company did not automatically make them “related persons” for the purpose of excise valuation. The court also noted that the revenue had not presented sufficient evidence to show that the price of the goods was depressed or not comparable to market rates. The court relied heavily on previous judgments that had interpreted the definition of “related person,” underscoring the importance of a two-way interest between the parties.

Sentiment Analysis of Reasons

Fact:Law Ratio

Logical Reasoning

The Court considered alternative interpretations but rejected them because they did not align with the established legal understanding of the term “related person” as interpreted in previous judgments. The Court emphasized that the definition requires a mutual interest, not just a common parent company.

The Supreme Court concluded that the revenue’s decision to treat BIL and Aventis CropScience (India) Ltd. as “related persons” was erroneous. The court reasoned that the mere existence of a common parent company does not automatically make two subsidiaries “related persons” under Section 4(4)(c) of the Central Excise Act, 1944. The court emphasized the need for a mutual interest between the two entities, which was not present in this case.

The court’s decision was based on the following reasons:

• 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.
• The court found no evidence of mutual interest between BIL and Aventis CropScience (India) Ltd.
• The court relied on previous judgments, such as Atic Industries, Hind Lamp Ltd., Detergents India Ltd., and Kwality Ice Cream Co., to support its interpretation of “related person.”
• The court noted that the revenue had not presented any evidence to show that the price of the goods was depressed or not comparable to market rates.

The court quoted the following from the judgment:

• “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 indirect, in the business of each other.”

There were no dissenting opinions in this case. The judgment was delivered by a two-judge bench comprising Justices S. Ravindra Bhat and Dipankar Datta, with Justice S. Ravindra Bhat authoring the opinion.

The decision has implications for future cases involving the valuation of goods for excise duty purposes, particularly in situations where transactions occur between subsidiary companies of the same parent company. The judgment clarifies that the definition of “related person” requires a mutual interest, not just a common parent company.

The court did not introduce any new doctrines or legal principles but reaffirmed the established interpretation of “related person” under Section 4(4)(c) of the Central Excise Act, 1944. The court rejected the revenue’s argument that the JVA and shareholding structure automatically created a “related person” relationship, emphasizing the need for a two-way interest.

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.
• The mere fact that two companies are subsidiaries of the same parent company does not automatically make them “related persons” for the purpose of excise duty valuation.
• Revenue authorities need to establish a mutual interest between the assessee and the buyer to treat them as “related persons.”
• The price of goods sold between two entities should be accepted unless there is evidence of depressed pricing or that the transaction is not at arm’s length.

This judgment clarifies the scope of the term “related person” and may lead to fewer disputes in cases involving transactions between subsidiary companies. It reinforces the need for a thorough analysis of the relationship between the parties and the need to establish a mutual interest before treating them as “related persons”.

Directions

The Supreme Court set aside the impugned order of the CESTAT.

Specific Amendments Analysis

There is no specific amendment mentioned in the judgment.

Development of Law

The ratio decidendi of this case is 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 between them. The mere fact that they are subsidiaries of the same parent company is not sufficient. This judgment reinforces the established interpretation of “related person” and does not introduce any new legal principles.

Conclusion

The Supreme Court allowed the appeals filed by M/s Bilag Industries P. Ltd., holding that the company was not a “related person” to its buyer, Aventis CropScience (India) Ltd., under Section 4(4)(c) of the Central Excise Act, 1944. The court emphasized that the definition of “related person” requires a mutual interest between the assessee and the buyer, which was not established in this case. The judgment clarifies that the mere existence of a common parent company does not automatically make two subsidiaries “related persons” for the purpose of excise duty valuation.