Holding

The amounts allowed to dealers as commission are trade discounts deductible from the assessable value, and the dealers are not related persons of the appellant.

Summary

Moped India Ltd manufactured mopeds and sold them to a network of dealers under agreements that allowed the dealers a commission of Rs.110, Rs.145 or Rs.165 per unit, which the company treated as a trade discount and deducted from the price list for excise duty purposes. The Assistant Collector of Central Excise held that the commission was not a trade discount and that the dealers were "related persons" under Section 4(4)(c) of the Central Excise and Salt Act, 1944, issuing a demand for differential duty. The High Court upheld the collector’s view. On appeal, the Supreme Court examined whether the dealers qualified as related persons and whether the commission constituted a trade discount. It held that the dealer‑appellant relationship was on a principal‑to‑principal basis, so the dealers were not related persons, and the commission was indeed a trade discount deductible under Section 4(b)(ii). Consequently, the notice and demand were quashed and the appellants were ordered to be refunded any amounts paid.

Issues considered

Whether the dealers are "related persons" of the appellant within the meaning of Section 4(4)(c) of the Central Excise and Salt Act, 1944.
Whether the commission allowed to dealers constitutes a trade discount deductible from the assessable value of the mopeds under Section 4(b)(ii) of the Act.
Whether excise duty should be calculated on the wholesale price after deduction of the commission.

Legislation cited

Amending Act 22 of 1974
Central Excise and Salt Act, 1944s. 4(4)(c), s. 4(b)(ii)
Central Excise Rules, 1944s. Rule 10(1)

Subjects

central exciserelated persontrade discountexcise dutycommissionprincipal to principalSection 4Central Excise and Salt Act

Judgment

954
MOPED INDIA LTD.
A
v.

THE ASSTT. COLLECTOR OF CENTRAL EXCISE,
NELLORE AND OTHERS
B
February 26, 1985

[P.N. BHAGWATI AllD V. BALAKRISHNA ERADI, JJ.]
Central Excise and Salt Act 1944: Section 4(4) (c)-'related person'-Wh,,
c is-Assessee and person alleged to be •relaJed person' to have inetrest direct or
indirect in business of each other.

Manufacturer of Mopeds-Mopeds sold to dealers-Agreements for sa'e
enttreJ by manufact11rer with dealer-Dealers to give depoisl for guarantee,
entitleme'nt to 'commission' etc.-Transactions on principal to principal basis-
Dealers- Whether 'related person'-'Commission' allowed to dealers-Whether
D 'trade discount' whether 'commission' could be deducted from assessable value of
manufactured goods for purpose of excise duty.

The appellants manufactured Mopeds under three different brand names.
Mopeds were liable to excise duty under the Central Excise and Salt Act, 1944.
The bulk of the Mopeds manufactured were delivered to various dealers at
E depots maintained by the appellants. The appellants entered into agreements
with these dealers in connection with the sale of the Mopeds. The agreements
provided that the dealer shall keep a deposit with the appellants as a guarantee
for due fulfilment of the agreement, that the dealers were entitled to get a
commission on each Moped, that the dealers were to insure the Mopeds against
all risks of pilferage, non-delivery etc. (Clause 5), and that, the dealers were to
maintain adequate organisation for sale and service of the Mopeds including
F show-rooms, service stations, repair-shops etc. (clause 6J.

The appellants submitted their price lists for approval to the excise
authorities and the price lists showed the price lcharged by the dealers after
deducting the commission of Rs. 110, Rs. 145 and Rs. 16S or the three different
brands of the Mopeds. The prtce lists were approved by the excise authorities
G and excise duty was paid by the appellants on the basis of these price lists at
the time of clearance of the Mopeds. This practice continued till 30th April,
1979, when the Assistant Collector of Central Excise took the view that the
appellants were not entitled to deduction of tho aforesaid commission from the
price charged to the dealers for arriving at tho excisable value of tht Mopeds.
Tho Assistant Collector thereupon issued. a notice of demand under clauses (a)
H and (b) ofRule 10(1) of tho Central Excise Rules, 1944 dated 15th May, 1979
to the appellants demanding a sum of Rs. 6,96,177.09 representing the amount
of differential duty In respect of Mopeds manufactured and cleared during the
period Isl October 1975 to 30th April, 1979.
MOPBD INDiA LTD. V. AsSTT COLLECTOR i!ltclSB ;55
The appellants assailed the aforesaid notice In a writ petition in the
High Court contending, that they were entitled to deduction or the amount of A
commission in arriving at the excisable value of the Mopeds and that the
demands made by the Assistant Collector was not justified. The Division
Bench however dismissed the writ petition and held that the discount of
Rs. 110, Rs. 145 and Rs. 165 for the different varieties of Mopeds was being
given for organising sale and providing facilities and tbis was clearly an
example of the mutual interest which the 'related person:s and the appellants
were having in the business of each other, and that the commission of Rs. 110, 8
Rs. 145 and Rs. 165 in respect of the different varieties of Mopeds was
not 'trade discount' and therefore not liable to be deducted from the price
charged to the dealers and the Assistant Collector was riaht in making the
demand from the appellants.

In the appeal to this court it was contended on behalf of the appellants c
that : (l) there was absolutely nothing to show that the dealers were related
persons vis-a-vis the appellants and that the High Court was clearly wrong in
taking that view, and (2) the Division Bench was not right in taking the view
that the commission of Rs. 110, Rs. 145 and Rs. 165 per Moped in respect of
the different varieties of Mopeds sold to the dealers could not be said to be
trade discount.
D
Allowing the appeal,

HELD ~ l. The amounts allowed to the dealers by the appellants in
respect of different varieties of Mopeds of Rs. 110, Rs. 145 and Rs. 165 were
clearly trade discount liable to be deducted from the price charge to the dealers
for the purpose of arriving at the excisable value of the Mopeds. [9630] E

2. The judgment of the Division Bench of the High Court set aside,
The notice dated 15.5.79 issued by the Assistant Collector of Central Exise and
the order dated 25.9.79 made in pursuance of that notice are quashed. The
respondents will refund to the appellants any payments made by the appellants
under the order dated 25th September, 1979 within 3 months. [963H; 964AJ F
3. The concept of•related person' was for the first tirne introduced in
the Central Excise and Salt Act, 1944 by the Amending Act 22of1974 and lhe
expression 'related person• came to be de.fined in clause (c) of sub.:.section (4)
of Section 4. [9600 J
G
i 4. Jn Union of India v. Bombay Tyre International Ltd. [198411SCC467 it
has been held that the definition of •related' person in sub-section (4) (c) of
Section 4 is not unduly wide and does not suffer from any constitutional
infirmity and, in Union of India v. Atic Industries Ltd., AIR 1984 SC 1495 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 asscssee bas II
an interest, direct or indirect, in the business of the assesses. It is essential that
the assessee and the person alleged to be a 'related person, must have interest
direct or indirect, in the business of each other. [96JA; F-G)
SUPRBMB COURT REPORTS (1985] SUPPL. s.c.R.
In the instant case, the terms of the agreement indicate that the dealers
A where wholesale buyers of the Mopeds n1annfactured by the appellants and
since the transactions between them were on principal to principal basis, the
dealers could not, therefore, be said to be related persons vis-a-vis the appel-
lants. The excise duty on the Mopeds were hence liable to be det:!rmined only
on the basis of the wholesale price charged by the appellants to the dealers.
[962 D·E]

B S. The amount allowed to the dealers has been referred to in the
agreement as 'commission' but the label given by the parties cannot be deter-
minative because it is for the court to d~cide whether the amount i s 'trade
discount, or not v. hatever be the name given to it. [963BJ

Tn the instant case, the clauses of the agreement clearly show beyond
c doulet that under the agreement the Mopeds were sold by the appellants to the
dealers and the dealers did not act as agents of the appellants for the purpose
of effecting sales on their behalf. It is clear from clause 5(a) that the bills in
respect of the Mopeds delivered to the dealers were to be sent by the appellants
through their bankers and it was the responsibilty of the dealers to collect the
bills for the purpose of taking delivery. Clauses 5tb) laid an obligation on the
dealers to insure the Mopeds agaiilst all risks, pilferage, non-delivery etc. and
D under clause (6) the dealers were liable to maintain adequate organisation for
sale and service of the Mopeds. The Relationship between the appellants and
the dealers was clearly on principal to principal basis and in these circum-
stances the amount of Rs. 110, Rs. 145 and Rs. 165 allowed to the dealers in
respect of the different varieties of Mopeds could not be regarded as anything
other than 'trade discount'. [963 B-FJ

CIVIL APPELLATE JURISDICTION Civil Appeal No. 52 of
1985.

From the Judgment aud Order dated 27.9.1984 of the Andhra
F Pradesh High Court in Writ Petition No. 7680 of 1979.

F.S. Nariman and K.R. Nambiar for the Appellant.

Gopa/ Subramanium and R.N. Poddar for the Respondents.
G The Judgment of the Court was delivered by

BHAGWATI, J. This appeal by certificate is directed against a
judgment of a Division Bench of the High Court of Andhra Pradesh
upholding a notice issued by the Assistant Collector of Central
H Excise, Nellore demanding a sum of Rs. 6,96,177.09 representing the
MOPED INDIA LTD, v. ASSTT COLLECTOR EXCISE (Bhagwati, 1.) 957

amount of differential duty in respect of Mopeds manufactured by
the Appellants and cleared from their Factory during the period from A
!st October 1975 upto 30th April 1979. The facts giving rise to the
present appeal are few and may be briefly stated as follows :

The Appellants manufacture Mopeds under the brand names of
Suvega Standard, Suvega Deluxe and Suvega Samrat. These B
Mopeds manufactured by the Appellants are liable to excise duty
under the Central Excise and Salt Act, 1944, (hereinafter referred
to as the Act). The appellants have 179 dealers all over the
country to whom 98% of the Mopeds manufactured by them are
sold. Not more than 2% of the Mopeds are delivered at the Factory c
gate; the bulk of the mopeds representing about 80/. of the manu-
factures are delivered to the various dealers at the depots maintained
by the appellants. The Appellants have enteted into agreements
with the dealers in connection with the sale of the Mopeds manu·
factured by them and these agreements are substantially in the same
terms and it will, therefore, be sufficient if we refer to a specimen
D
agreement for the purpose of ascertaining the terms and conditions
on which the mopeds are supplied by the appellants to the dealers.
Clause 2 (a) of the agreement provides that the dealer shall keep a
deposit of Rs. 6,000 with the appellants as a guarantee for due fulfil·
ment of the agreement and this deposit will carry simple interest at E
the rate of 4 112% per annum and clause 2 (b) declares inter-a/ia that
upon termination of the agreement, the balance of the deposit if any,
after deducting all amounts due to the Appellants shall be returned
to the dealer with interest. Clause 3 (a) of the agreement is material
since considerable reliance has been placed upon it on behalf of the
Deparatment.
F

It reads as follows :

"The Dealer will get a comm 1ss1on of Rs. 110
(Rupees one hundred and ten only) for Suvega Moped and G
Rs. 145 (Rupees one hundred and forty five only) per
Suvega moped fitted with Shock Absorber which will be
introduced shortly."

The Appellants are entitled tQ change prices from time to time as per H
clause 4 of the agreement and that clause proceeds to add that the
Appellants shall not be bound to execute the order pending execution
with the dealer at the old rate and wUI \le ~ntitled to change th~
9.S8 SUPREME COURT REPORTS (1985) SUPPL. s.c.R.

price ruling on the date on which the moped leaves the factory or
A stockyard of the Appellants. Clauses 5 and 6 are material for the
purpose of determination of the controversy between the parties
and they reads as follow& :

S(a) "Unless otherwise agreed specifically to all deliveries
B to the dealer shall be ex-factory in unpacked
condition and the bills/RB/LB/PWB shall be sent
through their bankers and all bank charges thereon
shall be borne by the dealer. In case the dealer does
not honour the Bills sent through bank immediately
on presentation by Bankers, the dealer shall be liable
c to the Company for all damages/losses and expenses
incurred in this connection and the same will be
recovered from the deposit lying with the company.

(b) The despatches by the company will be insured by the
D dealer against all risks, pilferage, non-delivery and
SRCC including breakage, wherever applicable from
the time of leaving of the Company's factory or
stockyard until arrival at dealer's premises, and all
such expenditure incidental to transit shall be to the
account of the dealer.
E
6. The dealer shall at his own expenditure maintain such
organisation for the sa'e and service of the said
vehicles, including showrooms, service stations,
repair shops, parts store rooms, salesmen, etc. The
F dealer shall train meachanics at their own cost with
Company. The dealer shall give three free services
to every vehicle sold by him and the company shall
reimburse to the dealer at Rs. 4 per each free service
rendered by him."
G
The rest of the clause' of the agreement are not relevant but it might
be useful to refer to sub-clauses (a) & (b) of Clause IO(iii) which
provide as follows :

"IO(iii) (a) The Company upon termination of this agreement
may require the dealer to immediately turn over to
the company all or any bonafide retail buyers orders
I

!,jOPJD ll'ID!A LTD, '• ASSTT. COLLICTOR ElCCISI (Bllagwatl, I,) 959

that he may have on hand unfulfilled, together with
all deposits made thereon by the purchasers and also A
- 'i
the list of prospective buyen with the dealer.

(b) In the event of tho termination of this agreement,
however, the dealer shall not be released from any B
obligation arising out of any transaction entered into
or consumated prior to the date of such termination,
either by him or his branches.

There are the material terms and conditions on which mopeds are C
supplied by the appellants to the dealers.

The Appellants submitted their price lists for approval to the
excise authorities and the price lists showed the price charged by the
Appellants to the dealers after deducting the so-called commission of D
Rs. 110 in respect of Suvega Standard Moped, Rs. 145 in respect of
Suvega Deluxe Moped and Rs. 165 10 respect of Suvega Samrat
Moped. Thes• price lists were approved by the excise authorities
and excise duty was paid by the Appellants on the basis of these
price lists at the time of clearance or the mopeds. This practice
continued right upto ~0th April 1979 when the Assistant Collector of E
Central Excise, Nellore took the view that the appellants were not
entitled deduction of the commision of Rs. 110 for Suvega Standard,
Rs. 145 for Suvega Deluxe and Rs. 165 for Suvega Samra! mopeds
from the price charged to the dealers for arriving at the exciseable
value of the mopeds liable to excise duty, The Assistant Collector of
Central Excise, Nellore thereupon issued a notice dated 15 May 1979
f
to the Appellants demanding a sum of Rs. 6,96, 177.09 respresenting
the amount of differential duty in respect of mopeds manufactured
and cleared by the appellants from their factory during the period
1st October 1975 to 30th April 1979. This demand was purported to
be made by the Assistant Collector of Central Excise under clauses (a)
G
and (b) of Rule 10 {I) of the Central Excise Ruic 1944. The appell-
ants thereupon preferred a writ petition in the High Court of Andhra
Pradesh contending that the appellants were entitled to deduction of
the amount of commission in arriving at the excisable value of the
H
mopeds and the demands made by the Asstt. Collector of Central
Excise was therefore, not Justifiell·
960 SUPll.EMB COURT REPORTS (1985) SUPPL. s.c.I!..

The Writ Petition filed by the appellants came to be heard
by a Division Bench of the High Court of Andhra Pradesh.
Though it is difficult to ascertain what exactly was the view taken
by the Division Bench, it appears that they came to the conclusion
that the dealers were related presons vis-a-vis the appellants and "the
discount of Rs. 110, 145 and 165 for the different varieties of mopeds
8 was being given for organising sale and providing facilities and this
was clearly an example of the mutual interest which the related per-
son and the appellants are having in the business of each other. The
Division Bench, it seems, mixed up two different points, one relating
to the question whether the dealers are related persons and the other
relating to the question whether the commission of Rs. 110, 145 and
c Rs. 165 allowed in respect of different varieties of mopeds
to the dealers could be regarded as a trade discount or not.
The ultimate decision however was that the commission of
Rs. 110, 145 and Rs. 165 in respect of different varieties of mopeds
was not trade discount and, therefore, in any event, it was not liable
D to be deducted from the price charged to the dealers and the Assis-
tant Collector of Central Excise was consequently right in making a
demand of Rs. 6,96, 177.09 from the appellants. The appellants
being aggrieved by the decision of the Division Bench preferred the
present appeal after obtaining a certificate from the High Court.
•
Mr. Nariman learned counsel appearing on behalf of the appel-
lants assailed the judgment of the Division Bench of the High Court
on both the grounds on which the impugned demand was challenged
in the High Court. He contended that there was absolutely nothing
to show that the dealers were related persons vis-a-vis the appellants
F and the Division Bench of the High Court was, therefore, clearly in
error in taking the view that the dealers were related persons. Now the
concept of related persons was for the first time introduced in the
Act by the a'!lending Act 22 of 1973 and the .expression 'related
person' came to be defined in clause (c) of sub-sect10n (4) of Section 4
G to mean 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
. t ibutor of the assessee and sub-distributor of such d1str1butor.
dIS r h' C . h
This definition came up for consideration before t ts ourt tn t e
H Union of India .v Bombay Tyre International Ltd. [ 1984] (1) SCC 467
where this Court construing, the definition held ;
MOPED !NOIA LTD. v. ASSTT. COLLECTOR EXC!SB (Bhagwati, J.) 961

"On a proper interpretation of the definition of 'relat-
ed person' in sub-section (4) (c) of section 4, the words A
a relative arrd a distributor of the assesuee" do not refer
to any distributor but they are limited only to a distribu-
tor who is a relative of the assessee within the meaning
of the Companies Act, 1956. So read, the definition of
"related person" is not unduly wide and does not suffer B
from any constitutional infirmity."

. It is therefore obvious that the dealers vis-a-vis the appellants
under the last part of the definition in sub-section (4) (c) of Sec. 4,
could not be said to be related persons since they were admittedly
not relatives of the appellants within the meaning of the Companies
c
Act, 1956, But the argument urged on behalf of the department
was and, that is the argument which found favour with the Division
Bench of the High Court, that the dealers were related persons within
the meaning of the first part of the definition in sub-section 4 (c) of
Section 4. It was contended on behalf of the department that the D
dealers were so associated with the appellants that they had interest
directly or indirectly in the business of each other. Now this part
of the definition also came up for consideration before this Court in
another decision namely, Union of India v. Atic Industries Ltd, AIR
1984 SC 1495, and the Court pointed in that case :
E
"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 F
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 bas an interest, direct or indirect, in the busi-
ness of the assessee. It is essential to attract the
G
applicability of the first part of the definition that the
asse<See and the person alleged to be a related person
mu;t hw' intere;t, direct or indirect, in the business of
each other. Each of them must have a direct or indirect
interest in the busines of the other. The quality and H
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
962 SUPREME COURT REPORTS (1985] SUPPL. S.C.R.

in the business of the former may be indirect. That
A would not make any difference, so long as each has got
some interest direct or indirect, in the business of the
other."

Here on the facts it is difficult to see how it can at all be
II contended that the appdhnts had any interest in the business
of the dealers or that the dealers had any interest in the
business of the appellants. We shall presently analyse the terms
of the agreement between the appellants and the dealers but one
thing is clear from the terms of the agreement that the appellants
c sold the mopeds to the dealers on principal to principal basis and
if that be so, it is not possible to say that the appellants had any
interest in the business of the dealers. The dealers were wholesale
buyers of the mopeds manufactured by the appellants and since the
transactions between them were on principal to principal basis, it is
difficult to ap xeciate how the appellants could possibly be said to
D have any interest, direct or indirect, in the business of the dealers.
The dealers could not, therefore, be said to be related persons vis-a-
vis the appellants. We must in the circumstances hold that the
Division Bench of High Court was in error in holding that they were
related persons. It is indeed surprising that though the Division
Bench of the High Court took the view that the dealers were related
persans, the Division Bench did not determine the exciseable value
of the mopeds on the basis of the price at which the dealers in their
terms sold the mopeds to the consumers, but took into the account
only the price charged by the appellants to the dealers. If the
dealer> were related persons, the exciseahle value of the mopeds
F could have been determined only on the basis of the price at which
the dealers sold the mopeds to the retailers or the consumers. But, as
we have pointed out, it is not possible to hold that the dealers were
related persons and hence the excise duty on the mopeds was liable to
be determined only on the basis of the wholesale price charged by the
arpellants lo the dealers.
G
That takes us to the second question, namely, whether the
Division Bench was right in taking the view that the Commission of
Rs. 110, 145 and 165 per moped in respect of different varieties of
H mopeds sold to the dealers could not be said to be trade discount.
Mr. Nari man, Learned Coun1el appearing on behalf of the appellants
contended that this Commission allowed to the dealer& was clearly
MOPED INDIA LTD. v. AssTT. COLLECTOR EXC!S• Bhagwati, J.) 963

trade discount and was, therefore, liable to be deducted in determin-
ing the exciseable value of the mopeds by reasons of sub section (b) A
(ii) of Section 4 of the Act. Now it is true that this amount allowed
to the dealers has been referred to in the agreement as commission
but the level given by the parties cannot be determinative because it
is for the court to decide whether the amount is trade discount or
not, whatoTer be the name given to it. If we look at the terms of B
the agreement. it is clear that the agreement was between the appell-
ants and the dealers on principal to principal basis. T~e clauses of
the agreement which we have set out above clearly show beyond
doubt that under the agreement, the mopeds were sold by the appell-
ants to the dealers and the dealers d;d not act as agents of the appell-
ants for the purpose of effecting sales on behalf of the appellants. It
c
is clear from clame 5 (a) of the agreement that the bills in respect of
the mopeds delivered to the dealers were to be sent by the appellants
through their bankers and it was the responsibility of the dealers to
retire the bills for the porpose of taking delivery of the mopeds.
Clause 5 (b) of the agreement laid an obligation on the dealers to D
insure the mopedi against all risks, pilferage, non-delivery and SRCC
including breakage from the time the mopeds left the factory or
stockyard of the appellants until they arrived at the premises of the
dealer and this again would show that the dealers acted as princiral
to principal in purchasing the mopeds from the appellants. The
E
dealers were also liable under Clause 6 of the agreement to maintain
adequate organisation for sale and service of the mopeds includmg
show rooms. service stations, repair shops, spare parts. salesmen etc.
and the mechanics were also to be trained at the cost of the dealers.
The relationship between the appellants and the dealers was clearly
on principal to principal basis and in the circumstances it is difficult F
to see how the amount of Rs. 11 , 145 and 165 allowed to the dealers.
in respect of different varieties of mopeds could be regarded as any·
thing other than trade discount. The appellants charged to the dealer
the price or the mopeds sold to them less the amount of Rs. 110, Rs.
145 and Rs. 165 in respect of different varieties of mopeds. These
G
amounts allowed to the dealers were clearly trade discount liable to
be deducted from the price charged to the dealers for the mopeds.
purpose or arriving at the etei 0 eable value of the moped

We therefore, allow the apreal, set aside the ;udgment of the H
Division Bench of the High Court and quash the notice dated
15.31979 issued by the Assistent Colkctor of Central Excise made
and the order dated 25.9.79 made in pursuance of that notice. If any
964 SUPR.liM.b OOUllT B.EPOB.TS [ ! 985j SUPPL. S.l.N..

payments have been made by the Appellants under the order dated
A 25th September 1979, the respondents will refund the same to the
appellants within 3 months from the date of receipt of this order.
The Bank Guarantee given by the appellants will stand discharged,
There will be no order as to costs.

8 N.V.K. Appeal a/lowed.