Related Persons :
Section 4(3) (b) states that persons shall be deemed to be related if:
(a) they are inter-connected undertakings;
(b) they are relatives;
(c) amongst them the buyer is a relative and distributor of the assessee or a sub-distributor of such distributor; or
(d) they are so associated that they have interest directly or indirectly in the business of each other.
1. Relative: Coming now to the definition of “relative”, one has to read sections 2(41), 6 and schedule I-A of the Companies Act, 1956 together. Section 2(41) of Companies Act, 1956 defines “relative” to mean persons related as per section 6 and no other. Section 6 of the said Act, states that the following are relatives: –
(a) members of a HUF;
(b) husband and wife;
(c) persons related to one another in the manner indicated in Schedule I -A. The Schedule is a detailed one and enumerates 22 different relationships. Thus, all of the above categories will be covered within the definition of relatives and transactions between an assessee and such relatives will be covered within the ambit of section 4(4)(c) of the Act.
2. Distributor: Section 4(3)(b) governing related person incorporates the word ‘distributor‘. The phrase ‘relative and a distributor of the assessee‘ as occurring in the section apparently implies that even a distributor should be a related person. In its landmark decision in the Bombay Tyres International’s case, the Supreme Court has given a narrow and interesting interpretation of this expression. The Court held that the words “a relative and distributor of an assessee”, do not refer to any distributor but they are limited only to a distributor who is also a relative of the assessee, within the meaning of the Companies Act, 1956.
So analyzing the definition of relative read with the decision given by Supreme Court in Bombay Tyres case, if a company or a firm is appointed as a distributor, it can never be related person since an impersonal body cannot be treated as a relative under section 4( 3)(b).
The words “relative & a distributor of the assessee” do not refer to any distributor but the distributor who is relative of the assessee within the meaning of the Companies Act, 1956 – UOI v. Bombay Tyre International Ltd. 1983 (14) E.L.T. 1986 (S.C.)
Price charged by the manufacturer to the distributor is to be assessable value, when the dealings are on principal to principal basis – UOI v. Mahindra & Mahindra Ltd. 1989 (43) E.L.T. 611 (Bom.)
3. Mutuality of business interest: In U.O.I Vs. Atic Industries Ltd. 1984 (17) E.L.T. 323, the Supreme Court has held that in order to attract the first part of the definition, the assessee and the person alleged to be a related person must have interest, direct or indirect, in the business of each other. Each of them must have direct or indirect interest in the business of the other. The quality and degree of interest which each has in the business of the other may be different, the interest of the one in the business of the other may be direct, while inter est of the latter in the business of the former may be indirect. That would not make any difference so long as each has got some interest, direct or indirect, in the business of the other .
In U.O.I Vs. Hind Lamp 1989 (43)ELT 161, the Supreme Court reiterated the principle that it is not enough that the assessee has an interest, direct or indirect, in the business of the assessee. Both must have an interest in the business of each other. The degree and quality of their respective interests in each other may be different. In CCE Vs. Vikram Engineering Co. 1989 (39) ELT 143, the Tribunal followed the decision in Atic‘s case by holding that the degree of mutual interest was not material in order to attract the definition but the existence of some interest was all that was required.
4. Summary of various decisions on this issue is given in the following table:
| Decision | Citation |
| The definition of ‘related person’ requires mutuality of interest in the business to be proved. | UOI v. Atic Industries Ltd. 1984 (17) E.L.T. 323(S.C.) |
| The mutuality of business interest between the manufacturer and his buyer can be shown only if one has special interest in the promotion or development of the business of another. | Cibatul Ltd. v. UOI 1979 (4) E.L.T. (J407) (Guj.) |
| If one of the directors of the buyer company is also chairman of the manufacturing company, it cannot be said that they have mutual interest in the business. | Jay Engg. Works Ltd. v. UOI 1981 (8) E.L.T. 284 (Del.) |
| A limited company cannot have indirect interests in the business carried by one of its shareholders. | Collector v. T.I. Miller Ltd. 1988 (35) E.L.T. 8 (S.C.) |
| The words “relative & a distributor of the assessee” do not refer to any distributor but the distributor who is relative of the assessee within the meaning of the Companies Act, 1956. | UOI v. Bombay Tyre International Ltd. 1983 (14) E.L.T. 1986 (S.C.) |
| Goods sold to dealers under agreement. Dealers to have own show room, repair shop etc. Dealer not a related person. | Moped India Ltd v. AC 1986 (23) E.L.T. 8 (S.C.) |
| Goods sold to dealers having no funds of their own or business premises. Dealers merely a sham and to be ignored. | JK Cotton Spg. & Weaving Mills Co. Ltd v. CCE 1997 (91) E.L.T. 534 (SC). |
| Once existence of mutual interest is established, the extent of such interest is not material. | UOI v. Atic Inds. Ltd. 1984 (17) E.L.T. 323 (S.C.) |
| Merely because, goods are manufactured with customer’s brand name and entire production sold to customer, does not mean that sales are to related person. | Ceam Electronics P. Ltd. v. UOI 1991 (51) E.L.T. 309 (Bom.) |
| Regional sale offices/godowns are not related persons. | Indo-National Ltd. v. UOI 1979 (4) E.L.T. (J334) (A. P.) |
| After sales service by dealers during warranty period do not make such dealers related persons. | S.M. Chemicals & Electronics v. R. Parthasarathi 1980 (6) E.L.T. 197 (Bom.) |
| Price charged by the manufacturer to the distributor, to be assessable value, when the dealings are on principal to principal basis. | UOI v. Mahindra & Mahindra Ltd. 1989 (43) E.L.T. 611 (Bom.) |
| “Main dealer” cannot be treated as distributor or related person, when goods are sold through main dealer as well as independent purchasers. | GOI v. Ashok Leyland Ltd. 1983 (14) E.L.T. 2168 (Mad.) |
| Sale of entire production to one buyer does not make Buyer & Seller related persons. | Ceam Electronics P. Ltd. v. UOI 1991 (51) E.L.T. 309 (Bom.) |
| Customers can not be treated as related, if the sales are on principal to principal basis to a shareholding company and associate companies of foreign shareholding companies. | UOI v. Hind Lamps Ltd. 1989 (43) E.L.T. 161 (S.C.) |
| Merely because goods are manufactured with customer’s brand name and entire production sold to him, it cannot be treated as a sale to a related person. | UOI v. Play World Electronics P. Ltd. 1989 (41) E.L.T. 368 (S.C.) |
| Brand name value cannot be added to the value of goods manufactured by manufacturer for brand name owner unless it is proved that they are related persons. | UOI v. Purolator India Ltd. 1989 (24) ECR 216 (S.C.) |
| Whole sale price at which goods are sold to the buyer to be the assessable value, when goods are manufactured under agreement with buyer’s trade mark. | UOI v. Cibatul Ltd. 1985 (22) E.L.T. 302 (S.C.) |
| Buyer to be held as related person when manufacturer was to accept back unsold stock etc. and the buyer’s price held to be assessable value. | Snow White Indl. Corpn. v. Collector 1990 (46) E.L.T. 3 (S.C.) |
| Partner of one of the dealers related to director of the manufacturing company to whom only 34% – 40% of production is sold, cannot be treated as related person and the price at which goods are sold to him is assessable value. | UOI v. Kantilal Chunilal 1986 (26) E.L.T. 289 (S.C.) |
| Dealers cannot be treated as relative of the manufacturer or even otherwise, when the dealer is required to deposit specific sum for each moped, getting fixed commission and all payments are through bank. | Mopeds India Ltd. v. Asst. Collector 1986 (23) E.L.T. 8 (S.C.) |
| When 90% of the goods are sold to the wholesaler, and only 10% to the related person, the assessable value will be price charged to wholesale dealers. | Kirloskar Cummins Ltd. v. UOI 1991(51) E.L.T. 325(Bom.) |
| Department can lift the corporate veil even if the assessee concerned are limited companies. | Calcutta Chromotype Ltd v. CCE 1998 (99) E.L.T. 202 (SC) |
| Two concerns belonging to the same family and members thereof sharing the benefits of both concerns also having common directors who are relatives, have a direct interest in the business of each other and mutuality of interest is apparent. | CCE v. I.T.E.C (P) Ltd. 2002 (145) ELT 280 (SC) |
| Sale of goods by the society to the federation of which the society is a member will not be sufficient to hold the federation as a related person of the society. | UOI v. Kaira Distt. Co-Op Milk Producers Union Ltd 2002 (146) ELT 502 (SC) |