Thursday, 13 August 2015

SC confirms mutuality of interest as a pre-requisite to constitute a related party transaction for the purpose of valuation under Central Excise


This Tax Alert gives an update of a recent Supreme Court (SC) decision1 on valuation of manufactured goods sold by the assessee for the purpose of charging excise duty having regard to the applicability of the provisions involving related party transaction.


SC held that what is necessary to prove mutuality of interest, is interest both ways. This legal requirement is necessary in view of the definition of related persons. The expression “in the business of each other” clearly denotes that interest of the two persons have to be mutual, i.e., in each other, in order to treat them as related persons. In absence of mutuality of interest between the seller and the buyer, Apex Court concluded that the transaction between the parties is not a related party transaction.


Further, where assessee is an inter-connected undertaking as per the definition of related party, Rule 9 of CE Valuation Rules shall not apply as it does not include inter-connected undertakings.


SC ruling will provide relief to companies where relationship does not involve any mutuality of interest. Facts of each case need to be examined to understand if mutuality of interest exists between the companies.


The subjectivity in the provisions of Central Excise law pertaining to related party transactions still exist, which can be eliminated to avoid any possible litigation.

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