M/S BILAG INDUSTRIES P. LTD. & ANR. versus COMMR. OF CEN. EXC. DAMAN & ANR. on 22 March 2023

1. The question which arises for consideration in these appeals,directed against an order of the Customs, Excise and Service TaxAppellate Tribunal[1] (hereafter ‘CESTAT’ or ‘tribunal’) is whether theBprice at which the appellant M/s Bilag Industries Ltd., Vapi (hereafter‘BIL’) sold its products to the buyer, should be treated as a transactionwith a “related person” under Section 4(4)(c) of the Central Excise Act,1944 (hereafter “the Act”).

2. BIL was incorporated as Mitsu Industries Ltd. (hereafter ‘MIL’)Cin 1992; it was formed by members of the Bilkhias family who were itsmajor shareholders/promoters. MIL used to manufacture pesticides,insecticides and their intermediaries classifiable under Chapter 38, CentralTariff Act, 1985 (hereafter ‘CETA’). These fell under the broad categoryof pyrethroid products. Besides other products like Cypermethrin andDalpha Cyermethrin, MIL manufactured Allethrins, Deltamethrin, andintermediates for the entire range of products. Before July 1999, MILdid not manufacture Esbiothrin and Esbiol (falling under the product groupof Allethrins).

3. On 16.02.1998, AgrEvo GmbH and MIL signed a Letter ofEIntent, and on 22.11.1998 they signed a letter of Memorandum ofUnderstanding (‘MOU’) expressing their intention to form a joint venturefor research, manufacture, and sale of mainly synthetic pyrethroidsproducts and their intermediates. Thereafter, MIL, AgrEvo GmbH, andAgrEvo SA entered into a Joint Venture Agreement (JVA) on 03.07.1999.This was for the purpose of researching, developing and manufacturingFagrochemicals and environmental health products. MIL agreed to firsttransfer its entire non-pyrothroid business to another company, namely,Mitsu Pesticides Ltd.

4. On the date of closing of the JVA, MIL’s name was changed toM/s Bilag Industries Ltd. (‘BIL’). At the time of formation of the jointGventure, AgrEvo SA held 51% of the share capital in BIL and the balanceshare capital in BIL was held by the Bilakhias family. Further to theJVA, a Technology and Know-How Licence Agreement (dated13.07.1999) was entered into by AgrEvo SA and MIL. In terms of thislicence agreement, the necessary process and know-how to manufactureH1 Dated 23.04.2010 in Order No. 330-337/WZD/AHB/20210

Esbiothrin and Esbiol as per the specifications provided by AgrEvo SAwas transferred to BIL. In terms of this agreement, AgrEvo SA hadagreed to licence BIL to manufacture the allethrin molecules (i.e.,Esbiothrin and Esbiol products) conforming to AgrEvo SA’sspecifications. Thus, as a JV partner, AgrEvo SA invested a certainamount as capital in BIL and also brought the technical know-how forthe Joint Venture Company (BIL) to manufacture Esbiothrin and Esbiolproducts. In terms of the JVA, it was agreed that three members of theBilakhias family (who were directors of MIL), were to be paid non-compete fee of ` 25.51 crores as conforming parties to the JVA. Thisnon-compete fee bound the Bilakhias to not compete with the JVA afterit came into force, i.e., from 03.07.1999.

5. BIL had been selling its manufactured products to various bulkformulators including Rhone Poulenc Agro Chemicals India Ltd./ AventisCropScience (India) Ltd. The Esbiothrin purchased from BIL had beensold by Aventis CropScience (India) Ltd., to various end-consumers.Other products purchased from BIL were used by Aventis CropScience(India) Ltd., for formulation. The price at which the goods manufacturedby BIL and sold to AgrEvo SA on export was based on supply agreementdated 03.07.1999. According to the supply agreement, BIL agreed tosell deltamethrin product at a particular price for different periods fromApril 1999 to March 2003. The price was to be arrived at on the basis ofactual cost of production plus profit margin as mentioned in the table inAnnexure 3.1(a) of the supply agreement dated 03.07.1999. Similarly,the allethrin products (Esbiothrin) were also agreed to be sold by BIL toAgrEvo SA at the actual cost plus mark up of 35% in 1999-2000, 30% in2000-2001 and 25% in 2002-2003. Esbiothrin products were sold byAgrEvo SA outside India. BIL arrived at the price in the same mannerfor its sale to AgrEvo (India) Ltd. / Aventis CropScience (India) Ltd.within India. Certain changes in share holding patterns of foreigncompanies occurred later; however, they are not relevant for the purposesof deciding this case.

6. What is relevant for this case is that in BIL, AgrEvo SA held51% of the share capital initially (which was increased to 74%subsequently) and it continued to hold more than 51%. BIL thus becamea subsidiary of AgrEvo SA. AgrEvo SA held 100% shares in AventisCrop Science (India) Ltd. Therefore, both BIL and Aventis Crop Science(India) Ltd. became subsidiaries of AgrEvo SA (the name of which was AB

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Achanged to Aventis CropScience SA around March 2000; both namesare used interchangeably hereafter) during the relevant period. Thedispute in this case arose as regards value of Esbiothrin. During theperiod between 19.04.2000 - 23.05.2001, BIL sold the goods to AventisCropScience (India) Ltd., who sold the same to end customers. For thisperiod, the revenue proposed to treat the price at which Aventis CropBScience (India) Ltd. sold the product to the end customers as theassessable valueignoring the transaction cost. The duty demand was` 1,68,81,685/- for that period. An amount of ` 2,39,54,913/- wasdemanded on the ground that AgrEvo SA/ Aventis CropScience SA hadrecovered a sum of ` 14,97,18,205/- through its 100% owned subsidiaryCAventis CropScience (India) Ltd. towards expenses incurred foradvertising, publicity, marketing and selling expenses, storage, outwardhandling, servicing, warranty, etc., in terms of the agreement enteredinto with Sumitomo on the ground that since AgrEvo SA/ AventisCropScience SA was the holding company of BIL, the amount paid bySumitomo to AgrEvo SA/ Aventis CropScience SA should be treated asDadditional consideration and added to the value of the goods manufacturedand cleared to BIL. An amount of ` 5,95,97,434/- was demanded asdifferential duty on Esbiuothrin during the period 09.06.2001 to25.03.2004, on the ground that the price at which the goods were sold toend customers by Sumitomo should be the basis for determination ofEassessable value and that the sale by BIL to Aventis CropScience (India)Ltd. was to a “related” person. The order in original was appealed byBIL, to the CESTAT.

7. By the impugned order, the CESTAT noted that BIL haddeveloped a process of manufacture of Esbiothrin which did not reach Fthe final stage. Before that, AgrEvo SA, the foreign company becameaware that a competitor was emerging, and it entered into a JVA. Theresult was that BIL stopped development of the process. It obtainedknow-how of the complete manufacturing process as well as the right tomanufacture the product and then, sold the whole product to a subsidiary

of AgrEvo SA. In return, BIL received technical know-how free of costGas well as an existing marketing set up developed by a subsidiarycompany of AgrEvo SA, at no cost. BIL was also assured of sale of theproduct and a level of profit for the manufacturing activities undertakenby it. It was free to develop other products. The shareholders of theprivate company, Bilakhias family members also got a lumpsum non-Hcompete fee. In return, AgrEvo SA and the Indian subsidiary ensured that there were no competitors. The market established by them wasintact. Furthermore, the product price at which they sold, needed norevision. The marketing set up and the consumers identified by themwould remain intact in the absence of any competitor. According to theCESTAT, these transactions between the foreign company (AgrEvo SA,later known as Aventis CropScience SA) and two Indian subsidiarieswas a combined operation by which both benefited. Therefore, the priceat which BIL sold the goods to Aventis Crop Science (India) Ltd., wasto be treated as sales to a “related person”.

8. Mr. V. Shridharan, learned senior advocate appearing on behalfof BIL, submitted that the impugned order is erroneous. He submittedthat the test applied consistently by this court to decide if an entity was“related” to another has been whether the seller has an interest in thebusiness and affairs of the buyer; and likewise, whether the buyer hasan interest in the business of the seller. Even if one were present, in theabsence of the other, there would be no relationship, for the purpose ofSection 4(4)(c) and the transaction should be treated as one at arm’slength. Learned counsel relied on the decisions of this court, reported asUnion of India & Others v. Atic Industries Ltd.[2], Union Of India &Ors v. Hind Lamp Ltd.[3], Commissioner of Central Excise, Hyderabadv. Detergents India Ltd.[4], and Commissioner of Central Excise,Chandigarh v. M/s Kwality Ice Cream Co.[5]. It was argued that thesynergies in production, achieved by the creation of the JVA, optimisedthe development and resources of the JV partners; the sale by BIL (theassessee), to Aventis CropScience (India) Ltd. (the buyer), anothersubsidiary of AgrEvo SA/Aventis CropScience SA did not result in BILbeing deemed to have an interest in its business or affairs; likewise,Aventis Crop Science (India) Ltd. did not have any interest in BIL’sbusiness.

9. Mr. Arijit Prasad, learned senior counsel appearing for therevenue, pointed out that business relationships, and interest of one entityin the affairs or business of another cannot be placed in a straitjacket.The formation of the JVA and BIL, in which the foreign company AgrEvoSA/Aventis CropScience SA is a major shareholder, was for the purposeof ensuring that the products manufactured reached its overseas markets,2 [1984] 3 SCR 9303 [1989] 2 SCR 10234 [2015] 6 SCR 8865 [2010] 14 SCR 409

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Athrough the medium of its subsidiary, Aventis CropScience (India) Ltd.,which was owned to the extent of 100% by AgrEvo SA/AventiCropScience SA. These clearly showed a real and live interest in thebusinesses of the buyer in each other. He therefore, submitted that theCESTAT’s order should not be interfered with.

BAnalysis and Reasoning

10. The relevant part of Section 4 of the Act reads as follows:

“4. Valuation of excisable goods for purposes of charging ofduty of excise- (1) Where under this Act, the duty of excise ischargeable on any excisable goods with reference to theirCvalue, then, on each removal of the goods, such value shall-

(a) in a case where the goods are sold by the assessee, fordelivery at the time and place of the removal, the assesseeand the buyer of goods are not related and the price is thesole consideration for the sale, be the transaction value; D

(b) in any other case, including the case where the goods arenot sold, be the value determined in such manner as may beprescribed.

Explanation. - For the removal of doubts, it is hereby declaredthat the price-cum-duty of the excisable goods sold by theEassessee shall be the price actually paid to him for the goodssold and the money value of the additional consideration, ifany, flowing directly or indirectly from the buyer to theassessee in connection with the sale of such goods, and suchprice-cum-duty, excluding sales tax and other taxes, if any,Factually paid, shall be deemed to include the duty payable onsuch goods.

(2) Where, in relation to any excisable goods the price thereoffor delivery at the place of removal is not known and thevalue thereof is determined with reference to the price forGdelivery at a place other than the place of removal, the costof transportation from the place of removal to the place ofdelivery shall be excluded from such price.

(3) The provisions of this section shall not apply in respect ofany excisable goods for which a tariff value has been fixedHunder sub-section (2) of section 3.

(4) For the purposes of this section-

(a) “assessee” means the person who is liable to pay the dutyof excise under this Act and includes his agent;*********************

(c) “related person” means a person who is so associatedwith the assessee that they have interest, directly or indirectlyin the business of each other and includes a holding companya subsidiary company, a relative and a distributor of theassessee and any sub-distributor of the assessee, and anysub-distributor of such distributor.”

11. In Atic Industries (supra), this court examined the expression“related person”:

“What the first part of the definition requires is that the personwho is sought to be branded as a related person” must be aperson who is so associated with the assessee that they haveinterest, directly or indirectly, in the business of each other. Itis not enough that the assessee has an interest, direct, orindirect in the business of the person alleged to be a relatedperson nor is it enough that the person alleged to be a relatedperson has an interest, direct or indirect, in the business ofthe assessee. It is essential to attract the applicability of thefirst part of the definition that the assessee and the personalleged to be a related person must have interest, directindirect, in the business of each other. Each of them musthave a direct or indirect interest in the business of the other.The equality and degree of interest which each has in thebusiness of the other may be different; the interest of one inthe business of the other may be direct, while the interest ofthe latter in the business of the former may be indirect. Thatwould not make any difference, so long as each has got someinterest, direct or indirect, in the business of the other. Now,in the present case, Atul Products Limited has undoubtedlyinterest in the business of the assessee, since Atul ProductsLimited holds 50 per cent of the share capital of the assesseeand has interest as shareholder in the business carried on bythe assessee. But it is not possible to say that the assessee hasany interest in the business of Atul Products Limited. There A

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Aare two points of view from which the relationship betweenthe assessee and Atul Products Limited may be considered.First, it may be noted that Atul Products Limited is ashareholder of the assessee to the extent of 50 per cent of theshare capital. But we fail to see how it can be said that alimited company has any interest, direct or indirect, in theBbusiness carried on by one of its shareholders, even thoughthe shareholding of such shareholder may be 50 per cent.Secondly, Atul Products Limited is a wholesale buyer of thedyes manufactured by the assessee but even then, since thetransactions between them are principal to principal, it isCdifficult to appreciate how the assessee could be said by virtueof that circumstance to have any interest, direct or indirect, inthe business of Atul Products Limited. ‘Atul Products Limitedbuys dyes from the assessee in wholesale on principal-to-principal basis and then sells such dyes in the market. Theassessee is not concerned whether Atul Products Limited sellsDor does not sell the dyes purchased by it from the assesseenor is it concerned whether Atul Products Limited sells suchdyes at a loss. It is impossible to contend that the assesseehas any direct or indirect interest in the business of a wholesaledealer who purchases dyes from it on principal to principalEbasis. The same position obtains in regard to Crescent Dyesand Chemicals Limited. Perhaps the position in regard toCrescent Dyes and Chemicals Limited is much stronger thenthat in regard to Atul Products Limited. Crescent Dyes andChemicals Limited is not even a shareholder of the assesseeand it has, therefore, no interest direct or indirect in theFbusiness of the assessee.”

12. In the subsequent decision Hind Lamp Ltd. (supra), the sameprinciple was echoed:

“It is not enough that the assessee has an interest, or indirectin the business of person alleged to be a related person noris it enough that the person alleged to be a related personhas an interest, direct or indirect in the business of the assessee.To attract the applicability of the first part of the definition,the assessee and the person alleged to be a related personmust have interest direct or indirect in the business of each G

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M/S BILAG INDUSTRIES P. LTD. v. COMMR. OF CEN. EXC.DAMAN [S. RAVINDRA BHAT, J.]

other. Each of them must have a direct or indirect interest inthe business of the other. The quality and degree of interestwhich each must have in the business of the other may bedifferent; the interest of one in the business of the other maybe direct while the interest of the latter in the business of theformer may be indirect. After analysing the facts, this Courtcame to the conclusion that there was no relationship.”

13. In Detergents India Ltd. (supra), this court examined bothparts of the definition in Section 4(4)(c) and observed as follows:

“Section 4(4)(c) is in two parts. The first part requires thedepartment to apply a de facto test, whereas the second partrequires the application of a de jure test. “Relative” in theCompanies Act, 1956 is defined as follows:

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A reading of the definition of “relative” would show that therelative need not be a person who is so associated with theAssessee that they have mutual interest in each other’sbusinesses. If that were the case, the expression “relative” inthe second part would be otiose inasmuch as a relative wouldbe subsumed within “person” in the first part. Thus,“relatives” would also be “persons” who are so associatedwith the Assessee that they have a mutual interest in eachother’s businesses. The legislature by application of a de juretest has extended the meaning of “related persons” to includethe entire list of relatives per se without more as related persons.Similarly, holding companies and subsidiary companies byvirtue of the exercise of control by a holding company over asubsidiary company are similarly included by application ofa de jure test.

We have indicated that the Assessee argued that the pricepaid by Shaw Wallace and Company for the same/similarproducts as was sold by unrelated entities to it was even lowerthan the price paid by Shaw Wallace to Detergents India Ltd.This being the case, it is clear that on facts here there is no“arrangement” between Shaw Wallace and Detergents IndiaLimited to depress a price which is otherwise at arm’s length.Though this fact is pleaded expressly before the Commissioner AB

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Aas pointed out above, the Commissioner’s order does notcontain any finding based on this fact.”

14. The decision in Commissioner of Central Excise,Aurangabad v. Goodyear South Asia Tyres Pvt. Ltd. & Ors.[6]isinstructive. The assessee, a JV entity of Goodyear and CEAT (both ofBwhom had equal share in it), had borrowed substantial sums of moneyfrom both Goodyear and CEAT. Later, CEAT transferred its entireshareholding to Goodyear. The revenue alleged that the assessee andGoodyear were related persons, which was negatived by this court:

“7. The expression ‘in the business of each other’ clearlyCdenotes that interest of the two persons have to be mutual,i.e., in each other, in order to treat them as related persons.

8. We find from the order of the Member Judicial that only onthe ground that the two companies had given a loan of Rs.85.66 crores to the Assessee company, was treated as sufficientDto establish the relationship between the Assessee and thebuyers. That only shows one way traffic whereas requirementis that of two way traffic. The other Member, in our opinion,aptly held that this cannot be the factor which would showthe mutuality of interest…”

E15. In Kwality Ice Cream (supra) again, the court underlined theinterdependence and mutuality of business interests of the two entities,viz. the assessee and the buyer:

“On analysis of the decisions referred to herein above, itappears what is important is that each of the parties involvedshould have an interest, whether direct or indirect in theFbusiness of each other. The following are the relevant clausesof the agreement between M/s. Kwality Ice Cream and BBLIL/HLL based on which and applying the principles referred toherein above, a view is required to be taken as to whetherthey are ‘related persons’.G**************************

What is of importance is certain interdependence andreciprocity beyond the relationship of either a distributor or M/S BILAG INDUSTRIES P. LTD. v. COMMR. OF CEN. EXC.DAMAN [S. RAVINDRA BHAT, J.]

manufacturer so as to consider as to whether the parties are‘related persons’. On the facts it is noticed, essentially therelationship between M/s. Kwality Ice Cream and BBLIL/HLLis one sided and the facts do not suggest that each one ofthem have interest direct or indirect, in the business of eachother.”

16. On the other hand, if one were to consider what constitutesinter-relationship, the decision in Supreme Washers Pvt. Ltd. v.Commissioner of Central Excise, Pune[7], is instructive. The assesseeand the buyer were involved in common procurement of raw material;they had common stock accounting and planning and interdependencein manufacturing operations. This court held that holding common stockof raw material and semi-finished goods, with common use of machinerybetween the three units, with common marketing arrangements and freeflow of finance between the three units, cumulatively established theassessees’ inter relationships and interdependence of all three units witheach other.

17. In the present case, undoubtedly AgrEvo SA/ AventisCropScience SA holds the entire shareholding in Aventis CropScience(India) Ltd. (the buyer). It also is a shareholder in BIL. All of the latter’sproducts are sold to Aventis CropScience (India) Ltd. However, thisdoes not show that BIL has any business interest or interest in the affairsof Aventis CropScience (India) Ltd., nor, conversely, that AventisCropScience (India) Ltd has any such interest, direct or indirectly inBIL. The revenue’s concern in examining whether the parties wererelated might be justified; however, it could not have concluded thatsuch relationship, as is contemplated by Section 4(4)(c) could have beeninferred, without applying the proper test. Additionally, the revenue hadthe materials before it, in the form of documents which indicated themark up towards profit margin, and other objective evidence to compare,if indeed, the cost of the goods sold, were depressed, or were comparableto the market price of the same or similar goods. There is no finding thatthe price of the goods was lower than what was the price of thosegoods, in the market.

18. In view of the foregoing discussion, it has to be concluded thatthe revenue’s decision in rejecting the value at which the goods were 7 (2003) 1 SCC 142

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Asold, by treating the assessee as a related person, was erroneous. Forthe same reasons, it is held that the impugned order cannot be sustained;it is set aside. The appeals are allowed, but in the circumstances, withoutany order on costs.

BAnkit Gyan

(Assisted by : Mahendra Yadav, LCRA)

Appeals allowed.

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