KIRLOSKAR OIL ENGINES LTD Vs. UNION OF INDIA

JUDGEMENT

(1.) This is a petition under Article 226 of the Constitution of India challenging the order of the Collector, Central Excise & Customs (hereinafter referred to as the 'Collector'), dated 12th March, 1982 passed under Section 35A of the Central Excises & Salt Act, 1944 (hereinafter referred to as the 'Act').

(2.) Petitioner No. 1 (hereinafter referred to as the 'assessee'), a company inter alia manufactures internal combustion engines falling under Tariff Item No. 29. Its sales are mostly through the five regional distributors : (1) Parry & Co. Ltd., Madras (2) Meera & Co., Ludhiana (3) Meera Sales Corporation, Karad (4) U.P. Sales and Services Ltd., Kanpur (5) Kirloskar Brothers Ltd., Pune. Its branch office 'Koel Sales and Service' has also operated as a regional distributor. The distributorship is given under the agreements which are identical. It is common ground that if the aforesaid distributors fall in the category "related person" within the meaning of Section 4(4)(c) of the Act, the assessee will be liable to excise duty not on the price at which it sells its products to the distributors but on the price at which the distributors in turn sell the products to their constituents. The Assistant Collector, Central Excise and Customs, Pune (hereinafter referred to as the 'Assistant Collector') was once prima facie of the view that the distributors were "related person" and had issued show cause notice dated 23rd March 1978 in this regard. However, on going through the assessee's reply dated 5th July 1978, discussions he had with the assessee's representative during the course of personal hearing and a note on the arguments dated 24th November 1978, the Assistant Collector was satisfied that the assessee's distributors were not "related person" within the meaning of Section 4(4)(c) of the Act as the sales were at arm's length and on principal to principal basis. His order to this effect is dated 28/29th June 1979. The Collector felt that the order dated 28/29th June 1979 passed by the Assistant Collector was erroneous in law. Accordingly he issued a notice dated 26th June 1980 under Section 35A of the Act requiring the assessee to show cause why the order of the Assistant Collector be not set aside and the distributors be treated as "related person" within the meaning of Section 4(4)(c) of the Act, the main ground being that the assessee's sales are through the distributors and therefore the price at which the assessee has sold its products to them is not the normal sale price. The reply to the above show cause notice is dated 16th July 1978 in which the assessee has reiterated all its submissions which it had made before the Assistant Collector. The position has been further explained by the assessee vide its letters dated 26/27th August 1980 and 2nd December 1980. Eventually the Collector has passed an order on 12th March 1982 under Section 35A of the Act setting aside the order of the Assistant Collector holding the assessee's distributors to be "related person" within the meaning of Section 4(4)(c) of the Act. Observing that the transactions of the assessee are not on principal to principal basis and/or at arm's length, he further held that the assessee is liable to excise duty on the price at which the distributors have sold the goods to their constituents. For this purpose the Collector has on going through one of the sample agreements noted as many as 11 provisions which indicated that not only in nomenclature, the assessee's distributors are distributors in reality. According to him mere mention of the expressions such as the agreement is on principal to principal basis or that the distributor is not the agent of the assessee, in clause 16 of the agreement has no meaning and he had to consider the substance of the matter which he did.

(3.) At the time of hearing before us, Shri Talyarkhan, the learned Counsel for the assessee took us through the agreements at length to show that the transactions are at arm's length and on principal to principal basis. Taking us through the provisions of Section 4(4)(c) of the Act, he pointed out that clause (c) of sub-section (4) of Section 4 has two parts namely, (i) a person who is so associated with the assessee that they have interest, directly or indirectly, in the business of each other is a "related person" and (ii) a holding company, a subsidiary company, a relative and distributor of the assessee, and any sub-distributor of such distributor is also a "related person". The Collector, it was stated, has not even suggested that the distributors are the persons who are so associated with the assessee that they have interest directly or indirectly in the business of each other or that they constitute a holding company, a subsidiary company, or relative within the meaning of the provisions of the Companies Act. The only ground given by the Collector for holding the distributors to be 'related person' within the meaning of clause (c) of sub-section (4) of Section 4 of the Act is that they are distributors both in nomenclature and in substance.