SC explains 'related' companies in taxation

If two companies have to be declared 'related persons' for excise purposes, there should be mutuality of interest in the business of each other. If there is only 'one-way traffic', the two companies are not related. The revenue authorities must prove mutuality of interest or "two-way traffic", Supreme Court stated while dismissing the appeal of the commissioner of central excise against the order of the appellate tribunal in a case involving Goodyear South Asia Tyres Ltd. The company in this case was a joint venture of RPG SATL and Goodyear. It manufactured and supplied tyres exclusively to Ceat and Goodyear sold in their brand names. Goodyear and RPG Ceat had 50:50 shares in the assessee company. The excise authorities issued demand notice to the company on the basis of related persons under section 4 of the Excise Act. The company contended that its sale of tyres to the two companies was on principal to principal basis and at arm's length. The commissioner rejected the plea but the tribunal accepted it. On appeal, Supreme Court upheld the tribunal's view The assessee company had no interest in the business of the other two. "The fact that the two buyers had given Rs 85.66 crore interest-free loan to the assessee company by itself may not be a reason to hold them as related persons in the absence of any mutuality of interest existing between them," the judgment said.

Article referred: http://www.business-standard.com/article/opinion/sc-explains-related-companies-in-taxation-115080900763_1.html