PETITIONER:
UNION OF INDIA & ORS. ETC. ETC.
Vs.
RESPONDENT:
BOMBAY TYRE INTERNATIONAL LTD. ETC. ETC.
DATE OF JUDGMENT07/10/1983
BENCH:
PATHAK, R.S.
BENCH:
PATHAK, R.S.
BHAGWATI, P.N.
SEN, AMARENDRA NATH (J)
CITATION:
1984 SCR (1) 347 1983 SCALE (2)449
ACT:
Central Excises and Salt Act, 1944 (1 of 1944)-Old s. 4
prior to and new s. 4 after amendment by the Central Excises
and Salt (Amendment) Act, 1973 (22 of 1973)-Interpretation
of-Section validly enacted-Scheme and object of old s. 4 and
new s. 4 are same. Mode of determining value of an article
for excise levy-Value-Whether can be confined to
manufacturing cost and manufacturing profit only-Whether
post manufacturing expenses like freight, insurance and
packing etc. can be included in the value of article.
Central Excises and Salt Act, 1944-S. 4 (4) (c)-
Definition of "related person"-Scope of. Definition not
unduly wide-Does not suffer from constitutional infirmity.
Words "a relative and a distributor of the Assessee" do not
refer to any distributor but only to a distributor who is a
relative of the assessee within the meaning of the Companies
Act, 1956.
Central Excises and Salt Act, 1944-S. 4 (4) (d)-
'Value'-Definition of-Scope of. Packing-Primary, secondary
and special secondary-Cost of special secondary packing to
be excluded from value.
Constitution of India Art.246, Schedule 7, List 1.
Entry 84-Concept of duty of excise-What is.
HEADNOTE:
Sub-sec. (1) of sec. 3 of the Central Excises and Salt
Act, 1944 provided that duties of excise shall be levied and
collected on all excisable goods, other than salt which were
produced or manufactured in India at the rates set-forth in
the First Schedule. Sub-sec. (2) of sec. 3 empowered the
Central Government to fix, for the purpose of levying the
duties, tariff values of the articles enumerated in the
First Schedule as chargeable with duty ad valorem. Section 4
of the Act provided that the value of an article for the
purposes of duty shall be (a) the wholesale cash price for
which an article of the like kind and quality was sold or
was capable of being sold at the time removal of the article
chargeable with duty from the factory or any other premises
of manufacture or production for delivery at the place of
manufacture or production or (b) where such price was not
ascertainable, the price at which an article of the like
kind and quality was sold or was capable of being sold at
the time of the removal of the article chargeable with duty
from such factory or other premises for delivery at the
place of manufacture or production. With the increase in the
ad valorem levies in the Central Excise Tariff the operation
of sec. 4 presented certain practical difficulties; some of
which were prominently brought out in the judgment of this
court in A.K. Roy and Anr. v. Voltas Ltd, [1973] 2 S.C.R.
1089. In that case, the Court inter alia said that
348
the real value of an article for the purposes of the excise
levy would include only the manufacturing cost plus
manufacturing profits. In order to overcome various
difficulties, the original sec. 4 of the Act was substituted
by a new sec. 4 by Act 22 of 1973. The new sec. 4 provided
that the value of an article for the purposes of duty shall,
subject to the other provisions of this section, be deemed
to be the normal price thereof that is to say, the price at
which such goods were ordinarily sold by the assessee to a
buyer in the course of wholesale trade for delivery at the
time and place of removal, where the buyer was not a related
person and the price was the sole consideration for the sale
and where the normal price of such goods was not
ascertainable for the reason that such goods were not sold
or for any other reason, the nearest ascertainable
equivalent thereof determined in such manner as may be
prescribed. Clauses (c) and (d) of sub-sec. (4) of sec. 4
defined "related person" and "value" respectively.
The Central issue which arose between the Revenue and
the assessees in these appeals was whether the value of an
article for the purposes of the excise levy must be
determined by reference exclusively to the manufacturing
cost and the manufacturing profit of the manufacturer as
contended by the assessees or should be represented by the
entire wholesale price charged by the manufacturer which
consisted of not merely his manufacturing cost and his
manufacturing profit but included "post manufacturing
expenses" and "post manufacturing profit" arising between
the completion of the manufacturing process and the point of
sale by the manufacturer. The other points of dispute were
principally in respect of the connotation of the expression
'related person' in the new s.4 as well as the nature of the
deductions which could be claimed by the assessee as post
manufacturing expenses and post manufacturing profit from
the price for the purpose of determining the "value".
HELD: The question whether the value of an article for
the purpose of the excise levy must be confined to the
manufacturing cost and the manufacturing profit in respect
of the article has to be answered in the negative. While the
levy of excise duty is on the manufacture or production of
goods, the stage of collection need not in point of time
synchronize with the completion of the manufacturing
process. While the levy in this country has the status of a
constitutional concept, the point of collection is located
where the statute declares it will be. [384 H, 364 F-G]
The Central Provinces and Berar Sales of Motor Spirit
and Lubricants Taxation Act, 1938, [1938-39] F.C.R. 18; The
Province of Madras v. Messers Boddu Paidanna and Sons,
[1942] F.C.R. 90, 101; Governor-General in Council v.
Province of Madras, [1945] F.C.R. 179; R.C. Jall v. Union of
India, [1962] Suppl. 3 S.C.R. 436; In Re. The Bill To Amend
s. 20 of the Sea Customs Act, 1878, and s. 3 of the Central
Excises And Salt Act, 1944, [1964] 3 S.C.R. 787; Union of
India v. Delhi Cloth & General Mills, [1963] Suppl. 1 S.C.R.
586; M/S Guruswamy & Co. Etc. v. State of Mysore &
Ors.,[1967] 1 S.C.R. 548; and South Bihar Sugar Mills Ltd.
etc. v. Union of India & Ors.,[1968] 3 S.C.R. referred to.
The levy of a tax is defined by its nature, while the
measure of the tax may be assessed by its own standard. It
is true that the standard adopted as the
349
measure of the levy may indicate the nature of the tax but
it does not necessarily determine it. When enacting a
measure to serve as a standard for assessing the levy the
legislature need not contour it along lines which spell out
the character of the levy itself. A broader based standard
of reference may be adopted for the purpose of determining
the measure of the levy. Any standard which maintains a
nexus with the essential character of the levy can be
regarded as a valid basis for assessing the measure of the
levy. The original s. 4 and the new s. 4 of the Central
Excises and Salt Act satisfy this test. [366 C; 367 D-F]
Ralla Ram v. The Province of East Punjab, [1948] F.C.R.
207; Atma Ram Budhia v. State of Bihar, A.I.R. 1952 Patna
359; M/s Sainik Motors, Jodhpur and Ors. v. The State of
Rajasthan, [1962] 1 S.C.R. 517; D.C. Gouse and Co. etc. v.
The State of Kerala & Anr. etc., [1980] 1 S.C.R. 804;
Searvai's Constitutional Law of India, Second Edition. Vol.
2 at page 1258; Re. A Reference under the Government of
Ireland Act, 1920 and Sec. 3 of the Finance Act (Northern
Ireland), 1934, L.R. 1936 A.C. 352; R.R. Engineering Co. v.
aila Parished, Bareilly & Anr., [1980] 3 S.C.R. 1; and The
Hingir-Rampur Coal Co., Ltd. and Ors. v. The State of Orissa
and Ors., [1961} 2 S.C.R. 537 referred to.
It was open to the legislature to specify the measure
for assessing the levy. The legislature has done so. In both
the old s. 4 and the new s. 4 the price charged by the
manufacturer on a sale by him represents the measure. Price
and sale are related concepts, and price has a definite
connotation. The "value" of the excisable article has to be
computed with reference to the price charged by the
manufacturer, the computation being made in accordance with
the terms of s. 4. [368 D-E]
On a true construction of its provisions in the context
of the statutory scheme the old s. (4) (a) should be
considered as applicable to the circumstances of the
particular assessee himself and not of manufacturers
generally.[381 C-D]
Pursuant to the old s. 4 (a) the value of an excisable
article for the purpose of the excise levy should be taken
to be the price at which the excisable article is sold by
the assessee to a buyer at arm's length in the course of
wholesale trade at the time and place of removal. Where,
however, the excisable article is not sold by the assessee
in wholesale trade but, for example, is consumed by the
assessee in his own industry the case is one where under the
old s. 4 (a) the value must be determined as the price at
which the excisable article or an article of the like kind
and quality is capable of being sold in wholesale trade at
the time and place of removal. [376 F-H]
Where the excisable article or an article of the like
kind and quality is not sold in wholesale trade at the place
of removal, that is, at the factory gate, but is sold in the
wholesale trade at a place out side the factory gate, the
value should be determined as the price at which the
excisable article is sold in the wholesale trade at such
place, after deducting therefrom the cost of transportation
of the excisable article from the factory gate to such
place. [376 H; 77 A-B]
350
Where the wholesale price of the excisable article or
an article of the like kind and quality is not
ascertainable, then pursuant to the old s. 4 (b) the value
of the excisable article shall be the price at which the
excisable article or an article of the like kind and quality
is sold or is capable of being sold by the assessee at the
time and place of removal or if the excisable article is not
sold or is not capable of being sold at such place, then the
price at which it is sold or is capable of being sold by the
assessee at any other place nearest thereto. [377 B-C]
In every case the fundamental criterion for computing
the value of an excisable article is the price at which the
excisable article or an article of the like kind and quality
is sold or is capable of being sold by the manufacturer and
it is not the bare manufacturing cost and manufacturing
profit which constitutes the basis for determining such
value. [377 D]
Vacuum Oil Company v. Secretary of State for India in
Council L.R. 59 I.A. 258; Ford Motor Company of India Ltd.
v. Secretary of State for India in Council, L.R. 65 I.A. 32;
and Atic Industries Ltd. v. H.H. Dave, Asst Collector of
Central Excise and Ors.,[1975] 3 S.C.R. 563, referred to.
The basic scheme for determination of the price in the
new s. 4 is characterised by the same dichotomy as that
observable in the old s. 4. It was not the intention of
Parliament, when enacting the new s. 4 to create a scheme
materially different from that embodied in the superseded s.
4. The object and purpose remained the same, and so did the
central principle at the heart of the scheme. The new scheme
was merely-more comprehensive and the language employed more
precise and definite. As in the old s. 4, the terms in which
the value was defined remained the price charged by the
assessee in the course of wholesale trade for delivery at
the time and place of removal. [377 H; 378 A-B]
It is not possible to conceive of the price under the
new s. 4 (1) (a) being confined to the manufacturing cost
and the manufacturing profit. Moreover, it is reasonable to
suppose that the central principle for the determination of
the value of the excisable article should be the same,
whether the case falls under cl. (a) or cl. (b) of the old
s. 4 or under the new s. 4 (1). When regard is had to the
provision of cl. (b) in each case, it is not possible to
limit the price to its components representing the
manufacturing cost and manufacturing profit. [379 E-G]
The contention that the provisions regarding related
persons are wholly unnecessary because to counter act
evasion of tax any artificially arranged price between the
manufacturer and his wholesale buyer can be rejected in any
case under s. 4 is not acceptable. The new s. 4 (1) contains
inherently within it the power to determine the true value
of the excisable article, after taking into account any
concession shown to a special or favoured buyer because of
extra-commercial consideration, in order that the price be
ascertained only on the basis that it is a transaction at
arm's length. That requirement is emphasised by the
provision in the news. 4 (1) (a) that the price should be
the sole consideration for the sale. In every such case, it
will
351
be for the Revenue to determine on the evidence before it
whether the transaction is one where extra-commercial
considerations have entered and, if so, what should be the
price to be taken as the value of the excisable article for
the purpose of excise duty. Nonetheless it was open to
Parliament to incorporate provisions in the section
declaring that certain specified categories of transactions
fall within the tainted class, in which case an irrebuttable
presumption will arise that transactions belonging to those
categories are transactions which cannot be dealt with under
the usual meaning of the expression "normal price" set forth
in the new s. 4 (1) (a). They are cases where it will not be
necessary for the Revenue to examine the entire gamut of
evidence in order to determine whether the transaction is
one prompted by extra-commercial considerations. It will be
open to the Revenue, on being satisfied that the third
provision to the new s. 4 (1) (a) read with the definition
of "related person" in s. 4 (4) (c) is attracted, to proceed
to determine the "value" in accordance with the terms of the
third proviso. [385 F-H; 386 A-D]
The argument that the assessment on the manufacturer by
reference to the sale price charged by his distributor is
"wholly incompatible with the nature of excise" has no
force. It is a well known legislative practice to enact
provisions in certain limited cases where an assessee may be
taxed in respect of the income or property truly belonging
to another. They are cases where the Legislature intervenes
to prevent the circumvention of the tax obligation by tax
payers seeking to avoid or reduce their tax liability
through modes resulting in the income or property arising to
another. The provisions of the law may be so enacted that
the actual existence of such motive may be wholly
immaterial, even if what has been done by the assessee may
proceed from wholly bona fide intention. With the aid of a
legal fiction, the Legislature fastens the liability on the
assessee. When the Legislature employs such a device, and
the liability is attached without qualification, it is
reasonable to infer that an irrebuttable presumption has
been created by law. Such provisions have been held to be
within the legislative competence of the Legislature and as
falling within its power of taxation. [386 D-H]
Balaji v. Income-Tax Officer, Special Investigation
Circle, [1962] 2 S.C.R. 938; Navnitlal C. Javeri v. K.K.Sen,
Appellate Assistant Commissioner of Income tax. 'D' Range,
[1965] 1 S.C.R. 909; Bombay and Punjab Distilling Industries
Ltd. v. Commissioner of Income-Tax, Punjab, [1965] 3 S.C.R.
1, referred to.
The argument that the definition of the expression
"related person" is so arbitrary that it includes within it
a distributor of the assessee is also without much force.
The provision in the definition of "related person" relating
to a distributor can be legitimately read down and its
validity upheld. The definition of related person should be
so read that the words "a relative and a distributor of the
assessee" should be understood to mean a distributor who is
a relative of the assessee. The Explanation to s. 4 (4) (c)
provides that the expression "relative" has the same meaning
as in the Companies Act, 1956. The definition of "related
person ', as being "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 ..," shows a sufficiently restricted
basis for employing the legal fiction. Here again,
352
regard must be had to the Explanation which provides that
the expression "holding company and subsidiary" have the
same meanings as in the Companies Act, 1956. It is well
settled that in a suitable case the court can lift the
corporate veil where the companies share the relationship of
a holding company and a subsidiary company and also to pay
regard to the economic realities behind the legal facade,
[387 B-H; 388 A]
Tata Engineering and Locomotive Co. Ltd. v. State of
Bihar and Others. [1964] 6 S.C.R. 885; Juggi Lal Kamlapat v.
Commissioner of Income-Tax, U.P. [1969] 1 S.C.R. 988,
referred to.
The true position under the Central Excises and Salt
Act 1944 as amended by Act XXII of 1973 is as follows:
(i) The price at which the excisable goods are
ordinarily sold by the assessee to a buyer in the
course of wholesale trade for delivery at the time
and place of removal as defined in subsection (4)
(b) of section 4 is the basis for determination of
excisable value provided, of course, the buyer is
not a related person within the meaning of sub-
section (4) (c) of section 4 and the price is the
sole consideration for the sale. The proposition
is subject to the terms of the three provisos to
sub-section (1) (a) of section 4. [388 D-F]
(ii) Where the price of excisable goods in the course
of wholesale trade for delivery at the time and
place of removal cannot be ascertained for the
reason that such goods are not sold or for any
other reason, the nearest ascertainable equivalent
thereof determined in the manner prescribed by the
Central Excise (Valuation) Rules, 1975 should be
taken as representing the excisable value of the
goods; [388 G-H]
(iii)Where wholesale price of any excisable goods for
delivery at the place of removal is not known and
the value thereof is determined with reference to
the wholesale price for delivery at a place other
than the place of removal, the cost of
transportation from the place of removal to the
place of delivery should be excluded from such
price; [389 A-B]
(iv) Of course, these principles cannot apply where the
tariff value has been fixed in respect of any
excisable goods under sub-section (2) of section
3; [389 C]
(v) On a proper interpretation of the definition of
'related person' in sub-section (4) (c) of section
4 the words "a relative and a distributor of the
assessee" do not refer to any distributor but they
are limited only to a distributor who is a
relative of the
353
assessee within the meaning of the Companies Act,
1956. So read, the definition of 'related person'
is not unduly wide and does not suffer from any
constitutional infirmity. It is within the
legislative competence of Parliament. It is only
when an assessee so arranges that the goods are
generally not sold by him in the course of
wholesale trade except to or through such a
related person that the price at which the goods
are ordinarily sold by the related person in the
course of wholesale trade at the time of removal
to dealers (not being related persons) or where
such goods are not sold to such dealers, to
dealers (being related persons) who sell such
goods in retail is liable to be taken as the
excisable value of the goods under proviso (iii)
to sub-section (1) (a) of section 4. [389 D-F]
For the purpose of determining the "value", broadly
speaking both old s. 4 (a) and the new s. 4 (1) (a) speak of
the price for sale in the course of wholesale trade of an
article for delivery at the time and place of removal,
namely, the factory gate. Where the price contemplated under
the old s. 4 (a) or under new s. 4 (1) (a) is not
ascertainable, the price is determined under the old s. 4
(b) or the new s. 4 (1) (b). Now, the price of an article is
related to its value (using this term in a general sense),
and into that value have poured several components,
including those which have enriched its value and given to
the article its marketability in the trade. Therefore, the
expenses incurred on account of the several factors which
have contributed to its value upto the date of sale, which
apparently would be the date of delivery, are liable to be
included. Consequently, where the sale is effected at the
factory gate, expenses incurred by the assessee upto the
date of delivery on account of storage charges, outward
handling charges, interest on inventories (stocks carried by
the manufacturer after clearance), charges for other
services after delivery to the buyer, namely after-sales
service and marketing and selling organisation expenses
including advertisement expenses marketing and selling
organisation expenses and after-sales service promote the
marketability of the article and enter into its value in the
trade. Where the sale in the course of wholesale trade is
effected by the assessee through its sales organisation at a
place or places outside the factory gate, the expenses
incurred by the assessee upto the date of delivery under the
aforesaid heads cannot, on the same grounds, be deducted.
[391 C-H]
The assessee will be entitled to a deduction on account
of the cost of transportation of the exciseable article from
the factory gate to the place or places where it is sold.
The cost of transportation will include the cost of
insurance on the freight for transportation of the goods
from the factory gate to the place or places of delivery.
[391 H; 392 A]
Where freight is averaged and the averaged freight is
included in the wholesale cash price so that the wholesale
cash price at any place or places outside the factory gate
is the same as the wholesale cash price at the factory gate,
the averaged freight included in such wholesale cash price
has to be deducted in order to arrive at the real wholesale
cash price at the factory gate and no excise duty can be
charged on it. [392 A-B]
354
The new s. 4 (4) (d) (i) has made express provision for
including the cost of packing in the determination of
"value" for the purpose of excise duty. The packing, of
which the cost is included, is the packing in which the
goods are wrapped, contained or wound when the goods are
delivered at the time of removal. The cost of primary
packing, that is to say, the packing in which the article is
contained and in which it is made marketable for the
ordinary consumer, must be regarded as falling within s. 4
(4) (d) (i). There is secondary packing which consists of
larger cartons in which a standard number of primary cartons
(in the sense mentioned earlier) are packed. The large
cartons may be packed into even larger cartons for
facilitating the easier transport of the goods by the
wholesale dealer. Is all the packing, no matter to what
degree, in which the wholesale dealer takes delivery of the
goods to be considered for including the cost thereof in the
"value" ? Or does the law require a line to be drawn
somewhere ? One must remember that while packing is
necessary to make the excisable article, marketable, the
statutory provision calls for strict construction because
the levy is sought to be extended beyond the manufactured
article itself. If seems to us that the degree of secondary
packing which is necessary for putting the excisable article
in the condition in which it is generally sold in the
wholesale market at the factory gate is the degree of
packing whose cost can be included in the "value" of the
article for the purpose of the excise levy. To that extent,
the cost of secondary packing cannot be deducted from the
wholesale cash price of the excisable article at the factory
gate. [392 C; 392 G-H; 393 A-E]
If any special secondary packing is provided by the
assessee at the instance of a whole-sale buyer which is not
generally provided as a normal feature of the wholesale
trade, the cost of such packing shall be deducted from the
wholesale cash price. [393 F]
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 2269 of
1980 etc.
From the Judgment and order dated 30.7.80 of the High
Court of Bombay in Appeal No. 252/1980 etc.
K. Parasaran Sol. Genl., N.C. Talukdar, Dr. Y.S.
Chitale, K.K Venugopal, Suraj Udai Singh, Dalveer Bhandari,
C.V. Subba Rao, R.N. Poddar, M.S. Ganesh, Ravi Naghmave, T.
Shrinivasamoorthi, K.S. John, Vithalbhai B. Patel, R.P.
Kapur, Bhaskar Gupta, R.K Chaudhary, A. T. Patra and Parveen
Kumar for the Appellants Petitioners.
N.A. Palkhivala, J.C. Bhatt, Soli J. Sorabjee, Ashok
Desai, D.B. Engineer, B.H. Antia, Ravinder Narain, O.C.
Mathur. Talat Ansari, Mrs. A.K Verma, Ashok Sagar, Miss
Rainu Walia, Sukumaran, D.N. Mishra and A.N. Haskar for the
Respondents.
355
The Judgment of the Court was delivered by
PATHAK. J: On May 9, 1983 we made an order setting
forth the legal position in respect of various aspects of
the levy of excise duty under the Central Excises and Salt
Act, 1944, both before its amendment by the Central Excises
and Salt (Amendment) Act. 1973 (Act XXII of 1973) and after
such amendment. We record now the reasons for that order.
At the outset, we may state that it is not possible in
this judgment to deal with the numerous individual appeals,
writ petitions, special leave petitions and transferred
cases before us on the particular facts of each, and we
propose to consider the points arising therein from a
general perspective.
The Central Excises and Salt Act, 1944 relates to
central duties of excise and to salt. Sub-s. (1) of s.3
provides that duties of excise shall be levied and collected
on all excisable goods, other than salt, which are produced
or manufactured in India, at the rates set forth in the
First Schedule. We are not concerned with the provision
relating to salt. Sub-s. (2) empowers the Central Government
to fix, for the purpose of levying the duties, tariff values
of the articles enumerated in the First Schedule as
chargeable with duty ad valorem.
Before its amendment by Act XXII of 1973 s.4 read as
follows:
“4. Determination of value for the purposes of duty.-
Where, under this Act, any article is chargeable with
duty at a rate dependent on the value of the article,
such value shall be deemed to be-
(a) the wholesale cash price for which an article of
the like kind and quality is sold or is capable of
being sold at the time of the removal of the
article chargeable with duty from the factory or
any other premises of manufacture or production
for delivery at the place of manufacture or
production, or if a wholesale market does not
exist for such article at such place, at the
nearest place where such market exists, or
(b) where such price is not ascertainable, the price
at which an article of the like kind and quality
is sold or is capable of being sold by the
manufacturer or
356
producer, or his agent, at the time of the removal
of the article chargeable with duty from such
factory or other premises for delivery at the
place of manufacture or production, or if such
article is not sold or is not capable of being
sold at such place, at any other place nearest
thereto.
Explanation-In determining the price of any
article under this section, no abatement or deduction
shall be allowed except in respect of trade discount
and the amount of duty payable at the time of the
removal of the article chargeable with duty from the
factory or other premises aforesaid.”
It seems that with the increase in the ad valorem
levies in the Central Excise Tariff the operation of s.4
presented certain practical difficulties, some of which were
prominently brought out in the judgment of this Court in A.
K. Roy & Anr, v. Voltas Limited. Among other observations
the Court appears to have said that the real value of an
article for the purposes of the excise levy would include
only the manufacturing cost plus the manufacturing profit.
In order to overcome the various difficulties, Parliament
enacted Act XXII of 1973 which substituted a new s.4 for the
original Provision with effect from October 1, 1975. The new
section 4 provides:-
“4. Valuation of excisable goods for purposes of
charging of duty of excise.-(1) Where under this Act,
the duty of excise is chargeable on any excisable goods
with reference to value, such value shall, subject to
the other provisions of this section be deemed to be-
(a) the normal price thereof, that is to say, the
price at which such goods are ordinarily sold by
the assessee to a buyer in the course of wholesale
trade for delivery at the time and place of
removal, where the buyer is not a related person
and the price is the sole consideration for the
sale:
Provided that-
(i) where in accordance with the normal practice of
the wholesale trade in such goods, such goods are
sold
357
by the assessee at different prices to different
classes of buyers (not being related persons) each
such price, shall, subject to the existence of the
other circumstances specified in clause (a), be
deemed to be the normal price of such goods in
relation to each such class of buyers;
(ii) where such goods are sold by the assessee in the
course of wholesale trade for delivery at the time
and place of removal at a price fixed under any
law for the time being in force, or at a price,
being the maximum fixed under any such law, then,
notwithstanding anything contained in cl. (iii) of
this proviso the price or the maximum price, as
the case may be, so fixed shall, in relation to
the goods so sold, be deemed to be the normal
price thereof;
(iii)where the assessee so arranges that the goods are
generally not sold by him in the course of
wholesale trade except to or through a related
person, the normal price of the goods sold by the
assessee to or through such related person shall
be deemed to be the price at which they are
ordinarily sold by the related person in the
course of wholesale trade at the time of removal,
to dealers (not being related persons) or where
such goods are not sold to such dealers, to
dealers (being related persons) who sell such
goods in retail;
(b) where the normal price of such goods is not
ascertainable for the reason that such goods are
not sold or for any other reason, the nearest
ascertainable equivalent thereof determined in
such manner as may be prescribed.
(2) Where, in relation to any excisable goods the
price thereof for delivery at the place of removal is
not known and the value thereof is determined with
reference to the price for delivery at a place other
than the place of removal, the cost of transportation
from the place of removal, to the place of delivery
shall be excluded from such price.
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(3) The provisions of this section shall not apply
in respect of any excisable goods for which a tariff
value has been fixed under sub-section (2) of Section
3.
(4) or the purposes of this section.-
(a) “assessee” means the person who is liable to pay
the duty of excise under this Act and includes his
agent;
(b) “place of removal” means-
(i) a factory or any other place or premises of
production or manufacture of the excisable
goods; or
(ii) a warehouse or any other place or premises
wherein the excisable goods have been
permitted to be deposited without payment of
duty,
from where such goods are removed;
(c) “related person” means 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 distributor
of the assessee, and any sub-distributor of such
distributor.
Explanation.-In this clause “holding
company”, “a subsidiary company” and “relative”
have the same meanings as in the Companies Act,
1956;
(d) “value”, in relation to any excisable goods.-
(i) where the goods are delivered at the time of
removal in a packed condition, includes the
cost of such packing except the cost of the
packing which is of a durable nature and is
returnable by the buyer to the assessee.
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Explanation.-In this sub-clause “packing” means
the wrapper, container, bobbin, pirn, spool, reel or
warp beam or any other thing in which or on which the
excisable goods are wrapped. contained or wound;
(ii) does not include the amount of the duty of
excise, sales tax and other taxes, if any,
payable on such goods and, subject to such
rules as may be made, the trade discount
(such discount not being refundable on any
account whatsoever) allowed in accordance
with the normal practice of the wholesale
trade at the time of removal in respect of
such goods sold or contracted for sale;
(e) “wholesale trade” means sales to dealers,
industrial consumers, Government local authorities
and other buyers, who or which purchase their
requirements otherwise than in retail.”
In the cases before us there has been considerable
debate on the true meaning and scope of s.4 before and after
its amendment. The points raised are not without difficulty,
but we have had the advantage of hearing counsel of eminence
on both sides, and we are grateful to them for the
considerable assistance they have given us throughout the
hearing of these cases.
The central issue between the parties is whether the
value of an article for the purposes of the excise levy must
be determined by reference exclusively to the manufacturing
cost and the manufacturing profit of the manufacturer or
should be represented by the entire wholesale price charged
by the manufacturer. The wholesale price actually charged by
the manufacturer consists of not merely his manufacturing
cost and his manufacturing profit but includes, in addition,
a whole range of expenses and an element of profit
(conveniently referred to as “post manufacturing expenses”
and “post manufacturing profit”) arising between the
completion of the manufacturing process and the point of
sale by the manufacturer.
Mr. N.A. Palkhivala, learned counsel for the assessees,
has propounded three principles which, he contends, form the
essential characteristics of a duty of excise. Firstly, he
says, excise is a tax on
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manufacture or production and not on anything else.
Secondly, uniformity of incidence is a basic characteristic
of excise. And thirdly, the exclusion of post manufacturing
expenses and post manufacturing profits is necessarily
involved in the first principle and helps to achieve the
second. Learned counsel urges that where excise duty is
levied on an ad valorem basis the value on which such duty
is levied is a “conceptual value”, and that the conceptual
nature is borne out by the circumstance that the identity of
the manufacturer and the identity of the goods as well as
the actual wholesale price charged by the manufacturer are
not the determining factors. It is urged that the old s.4
(a) clearly indicates that a conceptual value forms the
basis of the levy, and that the actual wholesale price
charged by the particular assessee cannot be the basis of
the excise levy. It is said that the criterion adopted in
clause (a) succeeds in producing uniform taxation, whether
the assessees are manufacturers who sell their goods in
wholesale, semi-wholesale or in retail, whether they have a
vast selling and marketing net work or have none, whether
they sell at depots and branches or sell at the factory
gate, and whether they load the ex-factory price with post
manufacturing expenses and profits or do not do so. Because
the value of the article rests on a conceptual base, it is
urged, the result of the assessment under s.4 (a) cannot be
different from the result of an assessment under s 4 (b).
The contention is that the principle of uniformity of
taxation requires the exclusion of post manufacturing
expenses and profits, a factor which would vary from one
manufacturer to another. It is pointed out that such
exclusion is necessary to create a direct and immediate
nexus between the levy and the manufacturing activity, and
to bring about a uniformity in the incidence of the levy.
Learned counsel contends that the position is the same under
the new s.4 which, he says, must needs be so because of the
fundamental nature of the principles propounded earlier.
Referring to the actual language of the new s.4 (1) (a), it
is pointed out that the expression “normal price” therein
means “normal for the purposes of excise”, that is to say,
that the price must exclude post manufacturing expenses and
post manufacturing profit and must not be loaded with any
extraneous element. It is conceded, however, that under the
new s.4 (1) (a) there is no attempt to preserve uniformity
as regards the amount of duty between one manufacturer and
another, but it is urged that the basis on which the value
is determined is constituted by the same conceptual
criterion, that post manufacturing expenses and post
manufacturing profit must be excluded. Considerable emphasis
has been laid on the submission that as excise duty is a tax
on the manufacture or
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production of goods it must be a tax intimately linked with
the manufacture or production of the excisable article and,
therefore, it can be imposed only on the assessable value
determined with reference to the excisable article at the
stage of completed manufacture and to no point beyond. To
preserve this intimate link or nexus between the nature of
the tax and the assessment of the tax, it is urged that all
extraneous elements included in the “value” in the nature of
post manufacturing expenses and post manufacturing profits
have to be off-loaded. It is pointed out that factors such
as volume, quantity and weight, which enter into the measure
of the tax, are intimately linked with the manufacturing
activity, and that the power of Parliament under Entry 84 of
List I of the Seventh Schedule to the Constitution to
legislate in respect of “value” is restricted by the
conceptual need to link the basis for determining the
measure of the tax with the very nature of the tax.
Shri K. Parasaran, the learned Solicitor General of
India (when these cases were heard), and now the Attorney
General of India) has strongly contended that the value of
an excisable article for the purposes of the levy must be
taken at the price charged by the manufacturer on a
wholesale transaction, the computation being made strictly
in terms of the express provisions of the statute and, he
says, there is no warrant for confining the value to the
assessee’s manufacturing cost plus manufacturing profit.
According to him, although excise is a levy on the
manufacture of goods, it is open to Parliament to adopt any
basis for determining the value of an excisable article,
that the measure for assessing the levy need not correspond
completely to the nature of the levy, and no fault can be
found with the measure so long as it bears a nexus with the
charge.
Besides this fundamental issue, there are other points
of dispute, principally in respect of the connotation of the
expression “related person” in the new s.4 as well as the
nature of the deductions which can be claimed by the
assessee as post manufacturing expenses and post
manufacturing profit from the price for the purpose of
determining the “value”.
The submissions made by learned counsel for the parties
in support of their respective contentions cover a wide
area, and several questions of a fundamental nature have
been raised. We consider it necessary to deal with them
because they enter into and determine the conclusions
reached by us.
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We think it appropriate that at the very beginning we
should briefly indicate the concept of a duty of excise.
Both Entry 45 of List I of the Seventh Schedule to the
Government of India Act, 1935, under which the original
Central Excises and Salt Act was enacted, and Entry 84 of
List I of the Seventh Schedule to the Constitution under
which the Amendment Act of 1973 was enacted, refer to
“Duties of excise on…….goods manufactured or produced in
India”. A duty of excise, according to the Federal Court in
The Central Provinces and Berar Sales of Motor Spirit and
Lubricants Taxation Act, 1938 is a duty ordinarily levied on
the manufacturer or producer in respect of the manufacture
or production of the commodity taxed. A distinction was
drawn between the nature of the tax and the point at which
it was collected, and Gwyer C.J. observed that theoretically
“there can be no reason why an excise duty should not be
imposed even on the retail sale of an article, if the taxing
Act so provides. Subject always to the legislative
competence of the taxing authority, a duty on home-produced
goods will obviously be imposed at the stage which the
authority find to be most convenient and the most lucrative,
wherever it may be; but that is a matter of the machinery of
collection, and does not affect the essential nature of the
tax. The ultimate incidence of an excise duty, a typical
indirect tax, must always be on the consumer, who pays as he
consumes or expends; and it continues to be an excise duty,
that is, a duty on home-produced or home-manufactured goods,
no matter at what stage it is collected” (emphasis
supplied). The position was explained further in The
Province of Madras v. Messers. Boddu Paidanna and Sons where
the Federal Court observed:-
“There is in theory nothing to prevent the Central
Legislature from imposing a duty of excise on a
commodity as soon as it comes into existence, no matter
what happens to it afterwards, whether it be sold,
consumed, destroyed, or given away. A taxing authority
will not ordinarily impose such a duty, because it is
much more convenient administratively to collect the
duty (as in the case of most of the Indian Excise Acts)
when the commodity leaves the factory for the first
time, and also because the duty is intended to be an
indirect duty which the manufacturer or producer is to
pass on to the ultimate consumer, which he could not do
if the commodity had,
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for example, been destroyed in the factory itself. It
is the fact of manufacture which attracts the duty,
even though it may be collected later.”
The observations show that while the nature of an excise is
indicated by the fact that is imposed in respect of the
manufacture or production of an article, the point at which
it is collected is not determined by the point of time when
its manufacture is completed but will rest on considerations
of administrative convenience, and that generally it is
collected when the article leaves the factory for the first
time. In other words, the circumstance that the article
becomes the object of assessment when it is sold by the
manufacturer does not detract from its true nature, that it
is a levy on the fact of manufacture. In a subsequent case,
Governor-General in Council v. Province of Madras, the Privy
Council referred to both in The Central Provinces and Berar
Sales of Motor Spirit and Lubricants Taxation Act, 1938
(supra) and The Province of Madras v. Messers. Boddu
Paidanna and Sons (supra) and affirmed that when excise was
levied on a manufacturer at the point of the first sale by
him “that may be because the taxation authority imposing a
duty of excise finds it convenient to impose that duty at
the moment when the excisable article leaves the factory or
workshop for the first time on the occasion of its sale. But
that method of collecting the tax is an accident of
administration; it is not of the essence of the duty of
excise, which is attracted by the manufacture itself.” This
Court had occasion to consider a similar question in R.C.
Jall v. Union of India. In that case, the Central Government
was authorised by an ordinance to levy and collect as a cess
on coal and coke despatched from collieries in British India
duty of excise at a specified rate. Rule 3 made under
Ordinance empowered the Government to impose a duty of
excise on coal and coke when such coal and coke was
despatched by rail from the collieries of the coke plants,
and the duty was to be collected by the Railway
Administration by means of a surcharge on freight either
from the consignor or consignee. It was contended by the
assessee that the excise duty could not legally be levied on
the consignee who had nothing to do with the manufacture or
production of coal. The Court remarked:
“The argument confuses the incidence of taxation
with the machinery provided for the collection
thereof,”
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and reference was made to In re. the Central Provinces and
Berar Act No. XIV of 1938 (supra), The Province of Madras v.
Boddu Paidanna and Sons (supra) and Governer-General in
Council v. Province of Madras (supra). This Court then
summarised the law as follows:-
“Excise duty is primarily a duty on the production
or manufacture of goods produced or manufactured within
the country. It is an indirect duty which the
manufacturer or producer passes on to the ultimate
consumer, that is, its ultimate incidence will always
be on the consumer. Therefore, subject always to the
legislative competence of the taxing authority, the
said tax can be levied at a convenient stage so long as
the character of the impost, that is, it is a duty on
the manufacture or production, is not lost. The method
of collection does not affect the essence of the duty,
but only relates to the machinery of collection for
administrative convenience.”
Other cases followed where the nature of excise duty was
reaffirmed in the terms set out earlier, and reference may
be made to In Re. The Bill To Amend S. 20 of the Sea Customs
Act, 1878, and S. 3 of the Central Excises And Salt Act,
1944, Union of India v. Delhi Cloth & General Mills, M/s
Guruswamy & Co. Etc. v. State of Mysore & Ors. and South
Bihar Sugar Mills Ltd. etc. v. Union of India & Ors.
We think we have shown sufficiently that while the levy
is on the manufacture or production of goods, the stage of
collection need not in point of time synchronize with the
completion of the manufacturing process. While the levy in
our country has the status of a constitutional concept, the
point of collection is located where the statute declares it
will be. We shall return to this later when it is necessary
to consider a submission in regard to the effect of
transactions to or through “related persons”.
We move on now to a different dimension, to the
conceptual consideration of the measure of the tax. S. 3 of
the Central Excises and Salt Act provides for the levy of
the duty of excise. It creates
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the charge, and defines the nature of the charge. That it is
a levy on excisable goods, produced or manufactured in
India, is mentioned in terms in the section itself. Section
4 of the Act provides the measure by reference to which the
charge is to be levied. The duty of excise is chargeable
with reference to the value of the excisable goods, and the
value is defined in express terms by that section. It has
long been recognised that the measure employed for assessing
a tax must not be confused with the nature of the tax. In
Ralla Ram v. Province of East Punjab the Federal Court held
that a tax on buildings under s. 3 of the Punjab Urban
Immovable Property Tax Act, 1940 measured by a percentage of
the annual value of such buildings remained a tax on
buildings under that Act even though the measure of annual
value of a building was also adopted as a standard for
determining income from property under the Income Tax Act.
It was pointed out that although the same standard was
adopted as a measure for the two levies, the levies remained
separate and distinct imposts by virtue of their nature. In
other words, the measure adopted could not be identified
with the nature of the tax. The distinction was observed by
a Special Bench of the Patna High Court in Atma Ram Budhia
v. State of Bihar where a tax on passengers and goods was
assessed as a rate on the fares and freights payable by the
owners of the motor vehicles. Atma Ram Budiha (supra) was
referred to with approval by this Court in M/s Sainik
Motors, Jodhpur and Others v. The State of Rajasthan. This
Court in that case repelled the contention that the levy was
a tax upon income and not upon passengers and goods. It
pointed out that “though the measure of the tax is furnished
by the fares and freights it does not cease to be a tax on
passengers and goods”. The point was considered by this
Court again in D.C. Gouse and Co. etc. v. State of Kerala &
Anr. etc. where reference was made to the measure adopted
for the purpose of the levy of tax on buildings under the
Kerala Building Tax Act. The Court examined the different
modes available to the Legislature for measuring the levy,
and upheld the action of the Legislature in linking the levy
with the annual value of the building and prescribing a
uniform formula for determining its capital value and for
calculating the tax. In the course of its judgment, the
Court cited with approval a passage from Seervai’s
Constitutional Law of India.
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“Another principle for reconciling apparently
conflicting tax entries follows from the fact that a
tax has two elements: the person, thing of activity on
which the tax is imposed, and the amount of the tax.
The amount may be measured in may ways; but decided
cases establish a clear distinction between the subject
matter of a tax and the standard by which the amount of
tax is measured. These two elements are described as
the subject of a tax and the measure of a tax.”
It is, therefore, clear that the levy of a tax is defined by
its nature, while the measure of the tax may be assessed by
its own standard. It is true that the standard adopted as
the measure of the levy may indicate the nature of the tax
but it does not necessarily determine it. The relationship
was aptly expressed by the Privy council in Re. A Reference
under the Government of Ireland Act, 1920 and Sect. 3 of the
Finance Act (Northern Ireland), 1934 when it said:-
“……It is the essential characteristic of the
particular tax charged that is to be regarded, and the
nature of the machinery-often complicated-by which the
tax is to be assessed is not of assistance, except in
so far as it may throw light on the general character
of the tax.”
The case was referred to by a Constitution Bench of this
Court in R.R. Engineering Co. v. Zila Parishad, Bareilly &
Anr., where the relationship was succinctly described thus:-
“It may be, and is often so, that the tax on
circumstances and property is levied on the basis of
income which the assessee receives from his profession,
trade, calling or property. That is, however, not
conclusive on the nature of the tax. It is only as a
matter of convenience that income is adopted as a
yardstick or measure for assessing the tax. As pointed
out in Re. a Reference under Govt. of Ireland Act
(supra), the measure of the tax is not a true test of
the nature of the tax. Therefore, while determining the
nature of a tax, though the standard on which the tax
is levied may be a relevant consideration, it is not a
conclusive consideration.”
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The principle was reaffirmed by this Court in The Hingir-
Rampur Coal Co., Ltd. and Others v. The State of Orissa and
Others where the form in which the levy was imposed was held
to be and impermissible test for defining in itself the
character of the levy. It was observed:-
“…..the mere fact that the levy imposed by the
impugned Act had adopted the method of determining the
rate of the levy by reference to the minerals produced
by the mines would not by itself make the levy a duty
of excise. The method thus adopted may be relevant in
considering the character of the impost but its effect
must be weighed along with and in the light of the
other relevant circumstances.”
It is apparent, therefore, that when enacting a measure to
serve as a standard for assessing the levy the Legislature
need not contour it along lines which spell out the
character of the levy itself. Viewed from this standpoint,
it is not possible to accept the contention that because the
levy of excise is a levy on goods manufactured or produced
the value of an excisable article must be limited to the
manufacturing cost plus the manufacturing profit. We are of
opinion that a broader based standard of reference may be
adopted for the purpose of determining the measure of the
levy. Any standard which maintains a nexus with the
essential character of the levy can be regarded as a valid
basis for assessing the measure of the levy. In our opinion,
the original s.4 and the new s.4 of the Central Excises and
Salt Act satisfy this test.
S.4 envisages a method of collecting tax at the point
of the first sale effected by the manufacturer. Under the
old s.4 (a), the value of the excisable article was deemed
to be the wholesale cash price for which an article of the
like kind and quality was sold, or was capable of being
sold, at the time of the removal of the article chargeable
with duty from the factory or any other premises of
manufacture or production for delivery at the place of
manufacture or production, or if a wholesale market did not
exist for such article at such place, then delivery was
envisaged at the nearest place where such market existed.
Sec.4 (b) declared that where such price was not
ascertainable, the value would be deemed to be the price to
be the price at which an article of the
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like kind and quality was sold or was capable of being sold
by the manufacturer or producer, or his agent, at the time
of the removal of the article chargeable with duty from such
factory or other premises for delivery at the place of
manufacture or production, and if such article was not sold
or was not capable of being sold at such place, at any other
place nearest thereto. Then there was an explanation which
declared that no abatement or deduction would be allowed
except in respect of trade discount and the duty payable at
the time of the removal of the article from the factory. The
wholesale price was envisaged as a cash price in order to
make it a uniform standard, because it was then a price
freed from the burden of an increase on account of credit or
other advantage allowed to a buyer, a factor which may vary
from transaction to transaction and from buyer to buyer. The
essential distinction between cl. (a) and cl. (b) of s.4
appears to lie in this, that cl. (a) is invoked when the
wholesale cash price is ascertainable and cl. (b) when the
wholesale cash price cannot be ascertained.
As we have said, it was open to the Legislature to
specify the measure for assessing the levy. The Legislature
has done so. In both the old s.4 and the new s.4, the price
charged by the manufacturer on a sale by him represents the
measure. Price and sale are related concepts, and price has
a definite connotation. The “value” of the excisable article
has to be computed with reference to the price charged by
the manufacturer, the computation being made in accordance
with the terms of s.4.
A contention was raised for some of the assessees, that
the measure was to be found by reading s.3 with s.4, thus
drawing the ingredients of s.3 into the exercise. We are
unable to agree. We are concerned with s.3(1), and we find
nothing there which clothes the provision with a dual
character, a charging provision as well as a provision
defining the measure of the charge.
At this stage, it would be advantageous to refer to
certain decisions which have some bearing on the proper
construction of cl. (a) and cl. (b) of the old s.4.
In Vacuum Oil Company v. Secretary of State for India
in Council the Privy Council had to construe the scope of
s.30 of the Sea Customs Act, 1878 which contained cls. (a)
and (b) substantially comparable with the two clauses of the
old s.4 of the Central
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Excises and Salt Act. The appellants in this case
manufactured different grades of lubricating oil in the
United States. Large quantities of lubricating oil of
particular manufacture and mark were imported into India
through the port of Bombay and sold by the appellants
directly to consumers. A dispute arose as to the provisions
under which duty under the Sea Customs Act was attracted.
Section 30 of that Act provided that for the purposes of the
duty the real value should be deemed to be “(a) the
wholesale cash price, less trade discount, for which goods
of the like kind and quality are sold or are capable of
being sold, at the time and place of importation………or
(b) where such price is not ascertainable, the cost at which
goods of the like and quality could be delivered at such
place,…..” The government contended that the real value of
the appellants’ oil was its “wholesale cash price” referred
to in s.30(a) a price ascertainable, without difficulty. The
appellants replied that in view of the unique character of
their oil and of the invariable course of business pursued
by them in relation to its sale, a “wholesale cash price”
for that oil had never existed and was not ascertainable and
that therefore its real value must be determined in
accordance with s.30(b) of the Act. The Privy council
observed that there was no other oil in Bombay which could
be said to be “of the like kind and quality” as the oil
imported by the appellants and therefore the relevant
“wholesale cash price” for the appellants, if there be such
price, was to be found in the actual sales of those oils in
Bombay by the appellants themselves provided that such sales
had taken place. It was noted that large stocks of oil were
imported at Bombay and all contracts for sale were made with
reference to stocks. The oils were disposed of directly to
consumers and never to dealers. The appellants themselves
discharged all the functions of retailers of their oil as so
sold. Besides, the selling price to consumers was about 70
per cent above the entry price, the difference representing
the appellant’s retailing profit and the expenses incurred
by them in respect of matters subsequent to importation. The
quantities of oil purchased by individual consumers were in
some cases very large indeed. The Privy council took the
view that in no sense could the price charged to consumers
for the oils imported by the appellants be regarded as “a
wholesale case price”, and that therefore the case did not
fall within s.30(a) but must be regarded as attracting s.30
(b).
On the other side of the line is Ford Motor Company of
India Ltd. v. Secretary of State for India in Council, in
which the
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Privy Council had to consider the scope of s. 30 of the
Indian Sea Customs Act again. The appellants imported Ford
motor vehicles into India from Canada and sold them to
authorised dealers or distributors. They possessed a
monopoly in India as regards the supply of such vehicles.
The appellants issued from time to time a price list and the
terms of business were that the retail price to be charged
by the distributors to the public was that stated in the
price list current at the time of arrival of the vehicles in
India, and the price payable by the distributors to the
appellants was the same price less a discount of 20 per
cent. The Collector of Customs assessed customs duty on a
consignment of 256 Ford motor cars under s. 30 (a). The
appellants contended that for the motor-cars in question no
wholesale cash price was ascertainable and the duty should
have been assessed under s. 30 (b). The Privy Council
approached the case from the stand point that if a wholesale
price satisfying the description contained in s. 30 (a) was
ascertainable, the goods could not be dealt with under s. 30
(b), and in this connection they referred to the expression
“ascertainable” as importing more than could be satisfied by
the result of a mere estimate. The Privy Council held that
the appellant’s price to the distributors was a wholesale
price within the meaning of s. 30 (a) because it was a cash
price, and only discount had been deducted, and the sum
payable by the distributor had been deduced to a price
referable to a car in the condition in which it arrived in
Bombay. It was contended for the appellants that “goods of
the like kind and quality” in cl. (a) was a phrase which
suggested other goods than that under assessment and
therefore, the price fetched by the goods, themselves must
be disregarded or should be considered only to see what
price other similar goods would have realised. It was urged
that since that test was not satisfied cl.(a) could not be
invoked. The Privy Council rejected the contention,
observing that the application of cl.(a) did not depend upon
any hypothesis to the effect that at the time and place of
importation an indefinite amount of further goods added to
the available supply had effect upon the wholesale price.
And what is important, the Privy Council further observed:
“But if there is an actual price for the goods themselves at
the time and place of importation, and if it is a “wholesale
cash price, less trade discount” the clause is not
inapplicable for want of sales of other goods. The clause
can be applied distributively to each of the motor cars in
this consignment, and even if they are regarded collectively
the clause is not defeated. A particular car may be sold at
a price which, having regard to other transactions in such
cars, or to other circumstances,
371
is too high or too low. In that sense, the actual price in a
particular instance does not necessarily or finally
establish a wholesale price to satisfy cl. (a), whether the
particular car or cars sold be part of the shipment in
question or not. But the goods under assessment may under
cl. (a) be considered as members of their own class even
although at the time and place of importation there are no
other members. The price obtained for them may correctly
represent the price obtainable for goods of the like kind
and quality at the time and place of importation.”
These two cases illustrate the fundamental distinction
between provisions such as the two clauses of s. 4 of the
Central Excises and Salt Act.
Great reliance has been placed by the assessees on two
important decisions of this Court in support of the
contention that only the manufacturing cost and the
manufacturing profit can be taken into account for assessing
the “value” of an excisable article. The first case is A.K.
Roy v. Voltas Ltd. (supra). The assessee manufactured air
conditioners and water coolers, and sold those article from
its head office at Bombay and at branch officers in
different towns in the country directly to consumers at list
prices. The sales so effected amounted to about 90% to 95%
of its production. It also sold the articles to wholesale
dealers on terms which required them to sell the products at
list prices, and that the assessee would sell them the
articles at the listed price less 22% discount. The assessee
contended before the excise authorities that the list price
minus 22% discount allowed to the wholesale dealers would
constitute the “wholesale cash price” for ascertaining the
real value of the articles. The contention was accepted by
the excise authorities, and assessments were made on that
basis. Subsequently, the Superintendent of Central Excise
began to assess the duty on the basis of the retail price
and not the wholesale cash price. The case was taken by writ
petition to the High Court, which held that the duty fell to
be assessed under the old s.4(a) of the Central Excises and
Salt Act on the basis of the wholesale cash price payable by
the wholesale dealers, and not under s.4(b) on the basis of
the price of retail sales effected directly to the
consumers. The case was brought in appeal to this Court. The
Court observed that for the purposes of s.4(a), it was not
necessary for a wholesale market to exist in the physical
sense of the term where articles of a like kind or quality
are or could be sold. A wholesale market, it was observed,
could also mean “the potentiality of the articles being
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sold on a wholesale basis”. What was necessary was that the
articles could be sold wholesale to traders. It was observed
further that the application of s.4(a) of the Act did not
depend upon any hypothesis to the effect that at the time
and place of sale any further articles of the like kind and
quality should have been sold. If there was an actual price
for the goods themselves at the time and place of sale and
if that was a ‘wholesale cash price’, the clause was not
inapplicable for want of sale of other goods of a like kind
and quality. Later follow the words which have brought on
the present controversy:
“Excise is a tax on the production and manufacture
of goods (see Union of India v. Delhi Cloth and General
Mills (supra). Section 4 of the Act therefore provides
that the real value should be found after deducting the
selling cost and selling profit and that the real value
can include only the manufacturing cost and the
manufacturing profit. The section makes it clear that
excise is levied only on the amount representing the
manufacturing cost plus the manufacturing profit and
excludes post manufacturing cost and the profit arising
from post manufacturing operation, namely selling
profit.”
Those observations were made when the Court was examining
the meaning of the expression “wholesale cash price”. What
the Court intended to say was that the entire cost of the
article to the manufacturer (which would include various
items of expense composing the value of the article) plus
his profit on the manufactured article (which would have to
take into account the deduction of 22% allowed as discount)
would constitute the real value had to be arrived at after
off-loading the discount of 22%, which in fact represented
the wholesale dealer’s profit. A careful reading of the
judgment will show that there was no issue inviting the
Court’s decision on the point now raised in these cases by
the assessees.
The other case is Atic Industries Ltd. v. H.H. Dove,
Asstt. Collector of Central Excise and Ors. The appellant,
Atic Industries Ltd., was a manufacturer of dye stuffs. It
sold its products to two wholesale buyers, 70% of its total
production to one and 30% to the other. The price charged
was a uniform price described as the “basic selling price”
less a trade discount of 18%. The wholesale dealers in turn
resold the dyestuffs to distributors and also directly to
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large consumers, including textile mills. The large
consumers paid the basic selling price, while the
distributors paid a higher price but subject to a trade
discount. The distributors sold the product to consumers.
The question arose as to how the value of the dyestuffs
manufactured by the appellants should be determined under
s.4. The appellants contended that the value should be the
price at which the appellants sold in wholesale to the two
wholesale buyers, less a uniform trade discount of 18%. The
excise authorities took the view that the value should be
the price at which the wholesale buyers had sold the dye
stuffs to the distributors without taking into account the
discount given to the distributors. Before this Court, the
excise authorities pressed the same contention, urging that
s.4 (a) did not provide that in every case the wholesale
price charged by the manufacturer should be taken into
consideration and not the wholesale price charged by the
wholesale buyers who sold the product also in wholesale to
the next buyers. One of us (Bhagwati J.) spoke for the Court
in that case, and delivered a closely enunciated and lucid
exposition of the true legal position. It was explained:
“The value of the goods for the purpose of excise must
take into account only the manufacturing cost and the
manufacturing profit and it must not be loaded with
post manufacturing cost or profit arising from post-
manufacturing operation. The price charged by the
manufacturer for sale of the goods in wholesale would,
therefore, represent the real value of the goods for
the purpose of assessment of excise duty. If the price
charged by the whole sale dealer who purchases the
goods from the manufacturer and sells them in wholesale
to another dealer were taken as the value of the goods,
it would include not only the manufacturing cost and
the manufacturing profit of the manufacturer but also
the wholesale dealer’s selling cost and selling profit
and that would be wholly incompatible with the nature
of excise. It may be noted that wholesale market in a
particular type of goods may be in several tiers and
the goods may reach the consumer after a series of
wholesale transactions. In fact the more common and
less expensive the goods, there would be greater
possibility of more than one tier of wholesale
transactions. For instance, in a textile trade, a
manufacturer may sell his entire production to a single
wholesale dealer and the latter may in his turn sell
the goods purchased by him from the manufacturer to
different wholesale dealers at
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State level, and they may in their turn sell the goods
to wholesale dealers at the district level and from the
wholesale dealers at the district level the goods may
pass by sale to wholesale dealers at the city level and
then, ultimately from the wholesale dealers at the city
level, the goods may reach the consumers. The only
relevant price for assessment of value of the goods for
the purpose of excise in such a case would be the
wholesale cash price which the manufacturer from sale
to the first wholesale dealer, that is, when the goods
first enter the stream of trade. Once the goods have
entered the stream of trade and are on their onward
journey to the consumer, whether along a short or a
long course depending on the nature of the goods and
the conditions of the trade, excise is not concerned
with what happens subsequently to the goods. It is the
first immediate contact between the manufacturer and
the trade that is made decisive for determining the
wholesale cash price which is to be the measure of the
value of the goods for the purpose of excise. The
second or subsequent price, even though on wholesale
basis, is not material. If excise were levied on the
basis of second or subsequent wholesale price, it would
load the price with a post manufacturing element,
namely, selling cost and selling profit of the
wholesale dealer. That would be plainly contrary to the
true nature of excise as explained in the Voltas’ case
(supra). Secondly, this would also violate the concept
of the factory gate sale which is the basis of
determination of value of the goods for the purpose of
excise.
There can, therefore, be no doubt that where a
manufacturer sells the goods manufactured by him in
wholesale to a wholesale dealer at arms length and in
the usual course of business, the wholesale cash price
charged by him to the wholesale dealer less trade
discount would represent the value of the goods for the
purpose of assessment of excise. That would be the
wholesale cash price for which the goods are sold at
the factory gate within the meaning of s.4 (a). The
price received by the wholesale dealer who purchases
the goods from the manufacturer and in his turn sells
the same in wholesale to other dealers would be
irrelevant to the determination
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of the value and the goods would not be chargeable to
excise on that basis.”
This case also does not support the case of the
assessees. When it refers to post-manufacturing expenses and
post-manufacturing profit arising from post-manufacturing
operations, it clearly intends to refer not to the expenses
and profits pertaining to the sale transactions effected by
the manufacturer but to those pertaining to the subsequent
sale transactions effected by the wholesale buyers in favour
of other dealers.
Having explained the true scope of Voltas Ltd. (supra)
and Atic Ltd. (supra), we may now proceed directly to the
consideration of certain aspects of the provisions of the
old s.4. There has been serious argument on the question
whether s.4 (a) provides for the value of the assessee’s
excisable article being determined on the basis of the
wholesale cash price charged or chargeable for articles of
the like kind and quality sold by manufacturers generally or
on the basis of the wholesale cash price of articles of the
like and quality sold by the assessee. At first blush, it
would seem that the former construction should be accepted,
and indeed some support can be derived for that view from
the observations of the Privy Council in Vacuum Oil Co.
(supra), where the “wholesale cash price” mentioned in s.30
(a) of the Sea Customs Act, 1878, was construed to mean
“that price current for staple articles. the amount of
which, if not a subject of daily publication in the press,
is easily ascertainable in appropriate trade circles”. But
this general observation can be of no help to the assessees,
because since then, he courts have proceeded to make the
position amply clear. The problem presented itself again to
the Privy Council in Ford Motor Co. of India Ltd. (supra),
and while taking note of what it had said in the earlier
case, the Privy Council laid down that where the excisable
goods constituted a class of their own and it was not
possible to say that other manufacturers produced goods of
that kind and quality, the goods under assessment could be
considered as members of their own class for the purpose of
s.30 (a) even although at the time and place of importation
there were no other members. The price obtained for them, it
was said, would correctly represent the price obtainable for
goods of the like kind and quality at the time and place of
importation. Then in Voltas Ltd. (supra), this Court
observed that the application of s.4 (a) of the Central
Excises and Salt Act did not depend upon any hypothesis to
the effect that at the time and place of sale, any further
articles of like kind and quality should have been sold. If
there was
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an actual price for the goods themselves at the time and
place of sale and if that was a “wholesale cash price”, the
clause was not inapplicable for want of sale of other goods
of a like kind and quality. It seems to us that the more
practical way of looking at the problem is that there are
very few cases indeed where two manufacturers produce an
article of the like kind and quality. An instance has been
supplied by learned counsel for the assessees, and we are
referred to the case of a factory which manufactures
identical electric bulbs for supply to a number of companies
who sell them in the market under their own distinctive
trade names. While such examples are possible, we are
inclined to accept the statement of the learned Solicitor
General that goods manufactured by different manufacturers
generally differ in both kind and quality. Further, the
manufacturing and other costs would vary from one
manufacturer to another, depending on the efficiency of
manufacturing techniques and management methods employed.
Other important considerations are certainty and convenience
in the administration of the levy from the view-point of
both the assessee and the Revenue. There is the further
consideration that the wholesale cash price charged by the
assessee must be ascertained on the basis that the sale to
the wholesale dealer is at arm’s length. We are, therefore,
of the view that we should prefer the construction suggested
by the Revenue that s.4 (a) applies to the goods
manufactured by the assessee himself. We may also point out
that this conclusion is in accord with the general intent
expressed in the new s.4 (1) (a), and as we shall show
presently it is the case of both the assessees and the
Revenue that in enacting the new s.4 in supersession of the
old section, no material departure was intended from the
basic scheme for determining the value of the excisable
article.
Accordingly, we hold that pursuant to the old s.4 (a)
the value of an excisable article for the purpose of the
excise levy should be taken to be the price at which the
excisable article is sold by the assessee to a buyer at
arm’s length in the course of wholesale trade at the time
and place of removal. Where, however, the excisable article
is not sold by the assessee in wholesale trade but, for
example, is consumed by the assessee in his own industry the
case is one where under the old s.4 (a) the value must be
determined as the price at which the excisable article or an
article of the like kind and quality is capable of being
sold in wholesale trade at the time and place of removal.
Where the excisable article or an article of the like
kind and quality is not sold in wholesale trade at the place
of removal, that is,
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at the factory gate, but is sold in the wholesale trade at a
place outside the factory gate, the value should be
determined as the price at which the excisable article is
sold in the wholesale trade at such place, after deducting
therefrom the cost of transportation of the excisable
article from the factory gate to such place. The claim to
other deductions will be dealt with later.
Finally, where the wholesale price of the excisable
article or an article of the like kind and quality is not
ascertainable, then pursuant to the old s.4 (b) the value of
the excisable article shall be the price at which the
excisable article or an article of the like kind and quality
is sold or is capable of being sold by the assessee at the
time and place of removal or if the excisable article is not
sold or is not capable of being sold at such place, then the
price at which it is sold or is capable of being sold by the
assessee at any other place nearest thereto.
In every case the fundamental criterion for computing
the value of an excisable article is the price at which the
excisable article or an article of the like kind and quality
is sold or is capable of being sold by determining such
value.
As we have noted, Parliament amended the General
Excises and Salt Act by Act XXII of 1973. In particular,
Parliament introduced a new s.4 which totally superseded the
old section, and embodied a much more comprehensive and
clearly enunciated scheme for the determination of the real
value of an excisable article. Clause (a) of the new s.4
speaks of the “value” being the “normal price, that is to
say, the price at which such goods are ordinarily sold to a
buyer in the course of wholesale trade for delivery at the
time and place of removal where the buyer is not a related
person and the price is the sole consideration for the
sale.”
Where the normal price of such good is not
ascertainable for the reason that such goods are not sold or
for any other reason, the new s.4 (1) (b) provides that the
nearest ascertainable equivalent thereof determined in such
manner as may be prescribed shall be the value of the
excisable goods for the purpose of charging the excise duty.
It will be noticed that the basic scheme for
determination of the price in the new s.4 is characterised
by the same dichotomy as that observable in the old s.4. It
was not the intention of Parliament, when enacting the new
s.4 to create a scheme materially different
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from that embodied in the superseded s.4. The object and
purpose remained the same, and so did the central principle
at the heart of the scheme. The new scheme was merely more
comprehensive and the language employed more precise and
definite. As in the old s.4, the terms in which the value
was defined remained the price charged by the assesseee in
the course of wholesale trade for delivery at the time and
place of removal. Under the new s.4 the phrase “place of
removal” was defined by s.4 (b) not merely as “the factory
or any other place or premises of production or manufacture
of the excisable goods” from where such goods are removed
but was extended to “a warehouse or any place or premises
wherein the excisable goods have been permitted to be
deposited without payment of duty” and from where such goods
are removed. The judicial construction of the provisions of
the old s.4 had already declared that the price envisaged
under clauses (a) and (b) of that section was the price
charged by the manufacturer in a transaction at arms length.
After referring to several cases, some of which have already
been mentioned here earlier, this Court pointed out in
Voltas Limited (supra) that “the wholesale cash has to be
ascertained only on the basis of transactions at arms
length. If there is a special or favoured buyer to whom a
specially low price is charged because of extra-commercial
considerations, e.g., because he is a relative of the
manufacturer, the price charged for those sales would not be
the “wholesale cash price” for levying excise under s.4 (a)
of the Act. A sole distributor might or might not be a
favoured buyer according as terms of the agreement with him
are fair and reasonable and were arrived at on purely
commercial basis.”
That was also the view taken in Atic Industries Ltd.
(supra). The new s.4 makes express provision in that behalf.
Under the new s.4 also, it is necessary to take the price
charged by the manufacturer as one which is un-effected by
any concessional or manipulative considerations, and
therefore the “normal price” mentioned in the new s.4 (1)
(a) speaks of a price “where the buyer is not the related
person and the price is the sole consideration for the
sale.” The expression “related person” has been specifically
defined in the new s.4 (4) (c), and transactions in which a
“related person” is involved are covered by the third
proviso of s.4 (1) (a).
Both learned counsel for the assessees and the learned
Solicitor General for the Revenue are agreed that in
enacting the new s.4 Parliament did not intend to bring into
existence a scheme of valuation different from that embodied
in the old s.4
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Reference was made in that connection to the Statement of
Objects and Reasons. The difference, however, lies in this
that while learned counsel for the assessee attempted to
show by reference to the old s.4 that the legislative intent
was to confine the value of an excisable article to the
manufacturing cost and manufacturing profit and that
therefore the same limitations should be read into the new
s.4, the learned Solicitor General approached the problem
from the other end and contended that since on a plain
reading of the new s.4 the price actually charged by the
assessee was the true criterion and was not limited to the
manufacturing cost and manufacturing profit it is that
construction which should be put also on the old s.4. We
have earlier indicated our inability to accept the
proposition that the old s.4 defined the value of an
excisable article in terms of the manufacturing cost and
manufacturing profit exclusively. We find from an
examination of the provisions of the new s.4 that a similar
conclusion must follow. The normal price mentioned in the
new s.4 (1) (a) is the price at which the goods are
ordinarily sold by the assessee in the course of wholesale
trade. It is the wholesale price charged by him. It is a
price which may vary, according to the first proviso to the
new s.4 (a) with different classes of buyers. It may also
be, according to the second proviso to the new s.4 (1) (a)
the price fixed as the wholesale price under any law or the
maximum price where the law fixes a maximum. The price may
also be a different price if the case falls within the third
proviso to the new s 4 (1) (a). In that event it will be the
price charged by a related person in the course of wholesale
trade. Clearly, it is not possible to conceive of the price
under the new s.4 (1) (a) being confined to the
manufacturing cost and the manufacturing profit. Moreover,
it is reasonable to suppose that the central principle for
the determination of the value of the excisable article
should be the same, whether the case falls under cl. (a) or
cl (b) of the old s.4 or under the new s.4 (1). When regard
is had to the provision of cl. (b) in each case, it is not
possible to limit the price to its components representing
the manufacturing cost and manufacturing profit.
We have examined the principles of an excise levy and
have considered the statutory construction of the Act,
before and after its amendment, in view of the three
propositions formulated, on behalf of the assessees, as
principle constituting the essential characteristics of a
duty of excise. It is apparent that the first proposition,
that excise is a tax on the manufacture or production of
goods, and not on anything else, is indisputable and is
supported by a catena of cases beginning with The Central
Provinces and Berar Sales of Motor
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Spirit and Lubricants Taxation Act. 1938 (supra). As regards
the second proposition, that uniformity of incidence is a
basic characteristic of excise, we are inclined to think
that the accuracy of the proposition depends on the level at
which the statute rests it. We shall discuss that presently.
As to the third proposition, that the exclusion of post
manufacturing expenses and post manufacturing profit is
necessarily involved in the first principle does not
inevitably follow. The exclusion of post manufacturing
expenses and post manufacturing of profits is a matter
pertaining to the ascertainment of the “value” of the
excisable article, and not to the nature of the excise duty,
and as we have explained, the standard adopted by the
Legislature for determining the “value’ may possess a
broader base than that on which the charging provision
proceeds. The acceptance of the further statement contained
in the formulation of the third proposition, that the
exclusion of post manufacturing expenses and post
manufacturing profits helps to achieve uniformity of
incidence in the levy of excise duty, depends on what is the
point at which such uniformity of incidence is contemplated.
It is not necessarily involved at the stage of sale of the
article by the manufacturer because we find for example that
under the amended s.3 (3) of the Central Excises and Salt
Act, different tariff values may be fixed not only (a) for
different classes of descriptions of the same excisable
goods, but also (b) for excisable goods of the same class or
description (i) produced or manufactured by different
classes of producers or manufacturers, or (ii) sold to
different classes of buyers. That the “value” of excisable
goods determined under the new s.4 (a) may also vary
according to certain circumstances is evident from the three
clauses of the proviso to that clause. Clause (i) recognises
that in the normal practice of wholesale trade the same
class of goods may be sold by the assessee at different
prices to different classes of buyers; in that event, each
such price shall, subject to the other conditions of cl.
(a), be deemed to be the normal price of such goods in
relation to each class of buyers. Clause (ii) provides that
where the goods are sold in wholesale at a price fixed under
any law or at a price being the maximum, fixed under any
such law, then the price or the maximum price, as the case
may be, so fixed, shall in relation to the goods be deemed
to be the normal price thereof. Under cl. (iii), where the
goods are sold in the course of wholesale trade by the
assessee to or through a related person, the normal price
shall be the price at which the goods are sold by the
related person in the course of wholesale trade at the time
of removal to dealers (not being related persons) or where
such goods are not sold to such dealers,
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to dealers (being related persons) who sell such goods in
retail. The verity of the three principles propounded by
learned counsel for the assessees has been, as indeed it had
to be, examined in the context of the Act before and after
its amendment. For the case of the assessees is that the
amendment has made no material change in the basic scheme of
the levy and the provisions for determining the value of the
excisable article.
Learned counsel for the assessees has contended that
the old s. 4 (a) expresses the conceptual nature of the
“value” of an excisable article because neither the identity
of the manufacturer nor the identity of the goods sought to
be charged nor the actual wholesale price charged by the
manufacturer is the determining factor. We have come to the
conclusion after carefully weighing the matter that on a
true construction of its provisions in the context of the
statutory scheme the old s (a) should be considered as
applicable to the circumstances of the particular assessee
himself and not of manufacturers generally. As regards the
second element, namely, the identity of the goods sought to
be charged, that also, to our mind, is a determining factor
because the statute speaks of “an article of the like kind
and quality”. The third element, namely, the actual
wholesale price charged by the manufacturer is likewise a
determining factor in view of our conclusion that the
identity of the manufacturer is material in the application
of the old s. 4 (a).
Learned counsel for the assessees urged that the
expression “normal price” in the new s. 4 (1) (a) means the
price normal for the purposes of the excise duty and that,
it is said, means the manufacturing cost plus the
manufacturing profit. It is urged that the normal price for
the purposes of the levy must be a price not loaded with
extraneous elements, extraneous to the nature of the impost.
It is pointed out that in order to bring the operation of
the statute within the purpose intended by the Legislature
the courts are justified is doing “some violence to the
words” and support is taken from Luke v. I.R.C., and the
principle adopted by this Court in Commissioner of Income-
Tax, Central, Calcutta v. National Taj Traders and in KP.
Varghese v. Income-Tax Officer, Ernakulam and Another. A
somewhat similar approach had already been adopted by this
Court in Commissioner of Income Tax,
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(Central), Calcutta v. B.N. Bhattachargee and Another.
Learned counsel also referred to Commissioner of Wealth-Tax,
Bihar and Orissa v. Kripashankar Dayashankar Worah and R.B
Jodha Mal Kuthiala v. Commissioner of Income-Tax. Punjab.
Jammu & Kashmir and Himachal Pradesh. When the new s. 4 (1)
(a) is read as a whole, the meaning of the expression
“normal price” becomes plainly evident. It will be noticed
the expression “normal price’ is followed by the phrase
“that is to say”. The phrase “that is to say” says Stroud’s
Judicial Dictionary (Fourth Edition, Vol. 5 p. 2753)” is the
commencement of an ancillary clause which explains the
meaning of the principal clause. It bas the following
properties: (1) it must not be contrary to the principal
clause; (2) it must neither increase nor diminish it; (3)
but where the principal clause is general in terms it may
restrict it,” and reference has been made to Stuckeley v.
Butler and Harrington v Pole. Therefore, the phrase “normal
price” is defined by the words in s. 4 (1) (a) which follow.
It is ‘the price at which such goods are ordinarily sold by
the assessee to a buyer in the course of wholesale trade for
delivery at the time and place of removal where the buyer is
not a related person and the price is the sole consideration
for the sale,”
Learned counsel for the assessees contended that the
new s. 4 (1) (a) also levies excise on the basis of a
conceptual value which must exclude post manufacturing
profit and in support of that submission he has adduced a
number of reasons. It is said that the essential principle
of excise dictates the exclusion of post manufacturing
expenses and profit. That, it is pointed out, is also
suggested by the principle of uniformity of incidence, for
it is only by such exclusion that uniform criterion can be
applied to all manufacturers, those who have selling and
marketing organisations and who load the ex-factory
wholesale price to recoup themselves the costs of the
selling organisation and of equalised freight and those who
do not load their wholesale price with such post
manufacturing expenses. Reliance is placed on the
legislative history, it being contended that the new s. 4.
should be interpreted on the same basis as the old s. 4.
Reference is made to the Statement of Objects and Reasons of
Act XXIII of 1973 to show that no change
383
of substance in the basis of the charge or levy was intended
by the amendment of s. 4. It is said that the phrase “that
is to say” in the new s. 4 (1) (a) indicates that the
conceptual criterion for determining the value is
substantially the same as it was in the old s. 4. Then, it
is pointed out, s. 4 (1) (b) enacts that “where the normal
price is not ascertainable, the nearest ascertainable
equivalent thereof” has to be determined. As a consequence,
it is urged that where sales are made on ex-depots post
manufacturing expenses and post manufacturing profit must be
deducted. The same principle should apply in the
construction of the new s. 4 (1) (a). By adopting the same
principle for cases falling under s. 4 (1) (a) and s. 4 (1)
(b) it is possible it is said, to reach uniformity of
incidence in both classes of cases. It is pointed out, that
the value of the goods must be the same for the purposes of
the levy, whether the goods are sold ex-factory or ex-depot.
It is urged that although the new s. 4 (4) (d) (ii) permits
two types of deductions of taxes and discount, it does not
prohibit deductions other shall the two permitted. Finally,
if the wholesale p. ice can be adjusted upward by the
department making additions thereto, it can be adjusted,
downward, at the instance of the assessee, to make it
conform to the conceptual criterion of the value on which
excise can be levied.
The essential content of the reasons stated by learned
counsel proceeds on the assumption that a conceptual value
governs the assessment of the levy. We have already examined
the validity of the three principles underlying the concept,
and we have indicated the extent to which they cannot be
accepted. We have observed that . the old s 4 as well as the
new s. 4 determine the value on the basis price charged or
chargeable by the particular assessee, and the price is
charged or is chargeable in respect of the article
manufactured by him. The value of the excisable article is
determined in that context. When that is so, the
fundamental basis on which the argument has been raised on
behalf of the assessees cannot survive. We may add that
whether any further deductions can be claimed beyond those
already mentioned in the statute will depend on the nature
of those claims in the case of a particular assessee.
Our attention has been drawn to the observation of this
Court in Chotabhai Jethabhai Patel and Co. v. The Union Of
India and Another that “a duty of excise is a tax-levy on
home-produced goods of a specified class or description, the
duty being calculated according
384
to the quantity or value of the goods and which is levied
because of the mere fact of the goods having been produced
or manufactured and unrelated to and not dependent on any
commercial transaction in then”. Clearly, when the Court
referred to the calculation of the duty according to the
quantity or value of the goods, it referred disjunctively-
to the nature of the levy, and it is the nature of the levy
13 not the value for assessing the levy, which it had in
mind when it pointed to the goods having been produced or
manufactured, and observed that the nature of the levy is
not related to or dependent on any commercial transaction.
The following observation of Gwyer, C.J. in The Central
Provinces and Berar Sales of Motor Spirit and Lubricants
Taxation Act, 1938 (supra) was also placed before us:
“In my opinion the power to make laws with respect to
duties of excise given by the Constitution Act to the
Federal Legislature is to be construed as a power to
impose duties of excise upon the manufacturer or
producer of the excisable articles, or at least at the
stage of, or in connection with, manufacture or
production, and extends no further.”
The learned Chief Justice was referring in this statement to
the power to make a law respect of a duty of excise. He
construed it as a power to impose the duty upon the
manufacturer or producer, and explained that the levy
related to the manufacture or production and to no further
stage. It was the nature of the levy which was adverted to
by the learned Chief Justice, namely, that it was a levy on
goods manufactured or produced. It will be remembered that
the question before the Federal Court in that case whether
the levy in question was a levy of excise or a levy of sales
tax. A levy of excise turns on the manufacture or production
of the excisable article, while a levy of sales tax by its
nature, arises at a stage beyond, namely, the sale of the
article. The task before the Court was to identify the
nature of the levy. It was not concerned with the assessment
of the value of the article for the purpose of the levy.
This brings to a close in these cases the question
whether the value of an article for the purpose of the
excise levy must be confined to the manufacturing cost and
the manufacturing profit in respect of the article. In our
judgment, the question has to be answered in the negative.
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The next question for consideration is whether the
provisions in the new s. 4 in respect of transactions’
effected by the assessee to or through “a related person”
are invalid. The new s. 4 (1) (a) provides that the value
shall be deemed to be the normal price, and the normal price
is defined as the price at which the goods are ordinarily
sold by the assessee in the course of wholesale trade where
the buyer is not a “related person” and the price is the
sole consideration for the sale. The third proviso to the
new s. 4 (1) (a) provides that where the assessee so
arranges that the goods are generally not sold by him in the
course of wholesale trade except to or through a related
person, the normal price of the goods sold by the assessee
to or through such related person shall be deemed to be the
price at which they are ordinarily sold by the related
person in the course of wholesale trade at the time of
removal, to dealers (not being related persons) or where
such goods are not sold to such dealers, to dealers (being
related persons) who sell such goods in retail. The new s. 4
(4) (c) defines the expression “related person” as follows:
“(c) ‘related person’ means 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 distributor
of the assessee, and any sub- distributor of such
distributor.
Explanation :- In this clause ‘holding company’,
‘subsidiary company’ and ‘relative’ have the same
meanings as in the Companies Act, 1956 (1 of 1956).”
Learned counsel for the assessees contends that the
provisions regarding related persons are wholly unnecessary
because to counter-act evasion or avoidance any artificially
arranged price between the manufacturer and his wholesale
buyer can be rejected in any case under s. 4, and we are
referred to the observations of this Court in Voltas Limited
(supra) and Atic Industries Ltd. (supra). It is true, we
think, that the new s. 4 (1) contains inherently within it
the power to determine the true value of the excisable
article, after taking into account any concession shown to a
special or favoured buyer because of extra-commercial
considerations, in order that the price be ascertained only
on the basis that it is a transaction at arms length. That
requirement is emphasised by the provision in the new s. 4
(1) (a) that the price should be the sole consideration for
the sale. In every
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such case, it will be for the Revenue to determine on the
evidence before it whether the transaction is one where
extra-commercial considerations have entered and, if so,
what should be the price to be taken as the value of the
excisable article for the purpose of excise duty.
Nonetheless, it was open to Parliament to incorporate
provisions in the section declaring that certain specified
categories of transactions fall within the tainted class, in
which case an irrebuttable presumption will arise that
transactions belonging to those categories are transactions
which cannot be dealt with under the usual meaning of the
expression “normal price” set forth in the new s. 4 (1) (a).
They are cases where it will not be necessary for the
Revenue to examine the entire gamut of evidence in order to
determine whether the transaction is one prompted by extra-
commercial considerations. It will be open to the Revenue on
being satisfied that the third proviso to the new s. 4 (l)
(a) read with the definition of “related person” in s. 4 (4)
(c) is attracted, to proceed to determine the “value in
accordance with the terms of the third proviso.
It is urged on behalf of the assessee that the
provisions are, whimsical and arbitrary, and cannot be said
to be reasonably calculated to deal with the issue of
evasion or avoidance of excise. It is said that the
assessment on the manufacturer by reference to the sale
price charged by his distributor is “wholly incompatible
with the nature of excise”, and we are referred to Atic
Industries Ltd. (supra). Now, is a well known legislative
practice to enact provisions in certain limited case where
an assessee may be taxed in respect of the income or
property truly belonging to another. They are cases where
the Legislature intervenes to prevent the circumvention of
the tax obligation by tax payers seeking to avoid or reduce
their tax liability through modes resulting in the income or
property- arising to another. The provisions of the law may
indeed be so enacted that the actual existence of such
motive may be wholly immaterial, and what has been done by
the assessee may even, proceed from wholly bona fide
intention. With the aid of legal fiction, the Legislature
fastens the liability on the assessee. When the legislature
employs such a device, and the liability is attached without
qualification, it is reasonable to infer that an
irrebuttable presumption has been created by law. Such
provisions have been held to be within the legislative
competence of the Legislature and as falling within its
power of taxation, and reference may be made to Balaji v.
Income-Tax Officer, Special Investigation Circle,
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Navnitlal C. Javeri v. K.K Sen, Appellate Assistant
Commissioner of Income-Tax, ‘D’ Range, Bombay and Punjab
Distilling Industries Ltd. v. Commissioner of Income-Tax,
Punjab.
It is contended for the assessees that the definition
of the expression “related person” is so arbitrary that it
includes within that expression a distributor of the
assessee. It is urged that the provision falls outside the
ambit of Entry 84 of List I of the Seventh Schedule to the
Constitution inasmuch as it is wholly inconsistent with the
levy of excise, and if it is attempted to seek support for
the provision from the residuary Entry 97 of List l as a
non-descript tax the attempt must fail because there is no
charging section in the Central Excises and Salt Act
empowering the levy of such non-descript tax nor any
machinery provision in the Act for collection such a tax.
The charging provision and the machinery provisions of the
Act, it is pointed out, deal exclusively with excise duty
and not with any other tax. The validity of the provisions
is assailed also on the ground that it violates Articles 14
and 19 of the Constitution. The challenge made on behalf of
the assessees is powerful and far-reaching. But it seems to
us unnecessary to enter into that question because we are
satisfied that the provision in the definition of “related
person” relating to a distributor can be legitimately read
down and its validity thus upheld. In our opinion, the
definition of related person should he so read that the
words “a relative and a distributor of the assessee” should
be understood to mean a distributor who is a relative of the
assessee. It will be noticed that the Explanation provides
that the expression “relative” has the same meaning as in
the Companies Act, 1956. As regards the other provisions of
the definition of “related person”, that is to say, “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.
.”, we think that the provision shows a sufficiently
restricted basis for employing the legal fiction. Here
again, regard must be had to the Explanation which provides
that the expression “holding company and subsidiary” have
the same meanings as in the Companies Act, 1956. Reference
in this connection may be made to Tata Engineering and
Locomotive Co. Ltd. v. State of Bihar and others where the
principle was approved by this Court that the corporate veil
could be lifted where
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the companies shared the relationship of a holding company
and a subsidiary company, and to Juggi Lal Kamlapat v.
Commissioner Of Income-Tax, U.P., where this Court held
that the veil of corporate entity could be lifted to pay
regard to the economic realities behind the legal facade,
for example, where the corporate entity was used for tax
evasion or to circumvent tax obligation.
At one stage, it was urged for the assessees that by
making provision in the Central Excises and Salt Act
respecting transactions to or through a “related person”,
Parliament was very close to making the levy a sales tax.
The contention cannot be accepted and we need merely refer
to the position delineated earlier and set forth in the
series of cases beginning with The Central Provinces and
Berar Sales of Motor Spirit and Lubricants Taxation Act,
1938 (supra) See also Jullundur Rubber Goods Manufacturers’
Association v. Union of India & Anr,
From what has gone before, we consider that the true
position under the Central Excises and Salt Act, 1944 as
amended by Act XXII of 1973 can be set forth as follows .
(i) The price at which the excisable goods are
ordinarily sold by the assessee to a buyer in the
course of wholesale trade for delivery at the time
and place of removal as defined in sub-section (4)
(b) of section 4 is the basis for determination of
excisable value provided, of course, the buyer is
not a related person within the meaning of
sub-section (4) (c) of section 4 and the price is
the sole consideration for the sale. This
proposition is subject to the terms of three
provisos to sub-section (1) (a) of section 4.
(ii) There the price of excisable goods in the course
of wholesale trade for delivery at the time and
place of removal cannot be ascertained for the
reason that such goods are not sold or for any
other reason, the nearest ascertainable equivalent
thereof determined in the manner prescribed by the
Central Excises (Valuation) Rules. 1975 should be
taken as representing the excisable value of the
goods;
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(iii) Where wholesale price of any excisable goods for
delivery at the place of removal is not known and
the value thereof is determined with reference to
the wholesale Price for delivery at a place other
than the place of removal, the cost of
transportation from the place of removal to the
place of delivery should be excluded from such
price;
(iv) Of course, these principles cannot apply where the
tariff value has been fixed in respect of any
excisable goods under sub-section (2) of section
3;
(v) On a proper interpretation of the definition of
‘related person’ in sub-section (4) (c) of section
4, the words “a relative and a distributor of the
assessee” do not refer to any distributor but they
are limited only to a distributor who is a
relative of the assessee with in the meaning of
the Companies Act, 1956. So read, the definition
of ‘relates person’ is not unduly wide and does
not suffer from any constitutional infirmity. It
is within the legislative competence of
Parliament. It is only when an assessee so
arranges that the goods are generally not sold by
him in the course of wholesale trade except to or
through such a related person that the price at
which the goods are ordinarily sold by the related
person in the course of wholesale trade at the
time of removal to dealers (not being related
persons) or where such goods are not sold to such
dealers, to dealers (being related persons who
sell such goods in retail is liable to be taken as
the excisable value of the goods proviso under
(iii) to sub-section (1) (a) of section 4.
We now proceed to the question whether any post
manufacturing expenses are deductible from the price when
determining the “value” of the excisable article. The old s.
4 provided by the Explanation there to that in determining
the price of any article under that section no abatement or
deduction would be allowed except in respect of trade
discount and the amount of duty payable at the time of the
removal of the article chargeable with duty from the factory
or other premises aforesaid. The new s. 4 provides by
subs.(2) that where the price of excisable goods for
delivery at the place
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of removal is not known and the value is determined with
reference to the price for delivery at a place other than
the place of removal, the cost of transportation from the
place of removal to the place of delivery has to be excluded
from such price. The new s. 4 also contains sub-s. (4) (d)
(ii) which declares that the expression “value” in relation
to any excisable goods, does not include the amount of the
duty of excise, sales tax and other taxes, if any, payable
on such goods and, subject to such rules as may be made, the
trade discount (such discount not being refundable on any
account whatsoever allowed in accordance with the normal
practice of the wholesale trade at the time of removal in
respect of such goods sold or contracted for sale. Now these
are clear provisions expressly a providing for deduction,
from the price, of certain items of expenditure. But learned
counsel for the assessees contend that besides the heads so
specified a proper construction of the section does not
prohibit the deduction of other categories of post
manufacturing expenses. It is also urged that although the
new s. 4(4) (d) (i) declares that in computing the “value”
of an excisable article, the cost of packing shall be
included, the provision should be construed as confined to
primary packing and as not extending to secondary packing.
The head under which the claim to deduction is made are
detailed below :
(1) Storage charges.
(2) Freight or other transport charges, whether
specific or equalised.
(3) Outward handling charges, whether specific or
equalised.
(4) Interest on inventories (stocks carried by the
manufacturer after clearance).
(5) Charges for other services after delivery to the
buyer.
(6) Insurance after the goods have left the factory
gate.
(7) Packing charges.
(8) Marketing and Selling organisation expenses,
including advertisement and Publicity expenses.
At the outset, we must make it clear that the
contentions in this regard on behalf of the assessees
proceeds on two broad bases.
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The first is that to determine the value of an excisable
article, all expenses must be excluded which do not enter
into the formula of manufacturing cost plus manufacturing
profit. This follows from the principal plank of the
assessees’ case that the “value” must be confined to the
manufacturing cost, and the manufacturing profit. For, it is
said, that if the deductions claimed are allowed, the price
would be brought down to the conceptual value. All post
manufacturing expenses are claimed from that perspective and
within that context. The other basis on which the claim
proceeds, is that the price at the factory gate and the
price at a depot outside the factory gate are identical.
We shall now examine the claim. It is apparent that for
the purpose of determining the “value”, broadly speaking
both the old s. 4(a) and the now s 4(1) (a) speak of the
price for sale in the course of wholesale trade of an
article for delivery at the time and place of removal
namely, the factory gate where the price contemplated under
the old s. 4(a) or under the new s. 4(1)(a) is not
ascertainable, the price is determined under the old s. 4(b)
or the new s. 4 (1) (b). Now, the price of an article is
related to its value (using this term in a general sense),
and into that value have poured several components,
including those which have enriched its value and given to
the article its marketability in the trade. Therefore, the
expenses incurred on account of the several factors which
have contributed to its value upto the date of sale, which
apparently would be the date of delivery, are liable to be
included. Consequently where the sale is effected at the
factory gate, expenses incurred by the assessee up to the
date of delivery on account of storage charges, outward
handling charges, interest on inventories (stocks carried by
the manufacturer after clearance), charges for other
services after delivery to the buyer, namely after-sales
service and marketing and selling organisation expenses
including advertisement expenses cannot be deducted. It will
be noted that advertisement expenses, marketing and selling
organisation expenses and after-sales service promote the
marketability of the article and enter into its value in the
trade. Where the sale in the course of wholesale trade is
effected by the assessee through its sales organisation at a
place or places outside the factory gate, the expenses
incurred by the assessee upto the date of delivery under the
aforesaid heads cannot, on the same grounds, be deducted But
the assessee will be entitled to a deduction on account of
the cost of transportation of the excisable article from the
factory gate to the place or places where it is sold. The
cost of transportation will include the cost of insurance on
the
392
freight for transportation of the goods from the factory
gate to the place or places of delivery.
Where freight is averaged and the averaged freight is
included in the wholesale cash price so that the wholesale
cash price at any place or places outside the factory gate
is the same as the wholesale cash price at the factory gate,
the averaged freight included in such wholesale cash price
has to be deducted in order to arrive at the real wholesale
cash price at the factory gate and Do excise duty can be
charged on it.
The case in respect of the cost of packing is somewhat
complex. The new s. 4(4)(d)(i) has made express provision
for including the cost of packing in the determination of
“value” for the purpose of excise duty. Inasmuch as the case
of the parties is that the new s. 4 substantially reflects
the position obtaining under the unamended Act. We shall
proceed on the basis that the position in regard to the cost
of packing is the same under the Act, both before and after
the amendment of the Act S. 4(4) (d) (i) reads:
“(4) For the purposes of this section-
(d) “value”, in relation to any excisable goods,-
(i) where the goods are delivered at the time of
removal in a packed condition, includes the
cost of such packing-except the cost of the
packing which is of a durable nature and is
returnable by the buyer to the assessee.
Explanation.-In this sub-clause “packing” means
the wrapper, container, bobbin, pirn, spool, reel or
sarp beam or any other thing in which or on which the
excisable goods are wrapped, contained or wound.”
It is relevant to note that the packing, of which the cost
is included is the packing of which the goods are wrapped,
contained or wound when the goods are delivered at the time
of removal. In other words, it is the packing in which it is
ordinarily sold in the course of wholesale trade to the
wholesale buyer. The degree of packing in which the
excisable article is contained will vary from one class of
articles to another. From the particulars detailed before us
by the assessees, it is apparent that the cost of primary
packing, that is to say, the ‘packing in which the article
is contained and in which
393
it is made marketable for the ordinary consumer, for example
a tube of toothpaste or a bottle of tablets in a cardboard
carton, or biscuits in a paper wrapper or in a tin
container, must be regarded as falling within s. 4(4)
(d)(i). That is indeed conceded by learned counsel for the
assessee. It is the cost of secondary packing which has
raised serious dispute. Secondary packing which different
grades. There is the secondary packing which consists of
larger cartons in which a standard number of primary cartons
in the sense mentioned earlier) are packed. The large
cartons may be packed in to even larger cartons for
facilitating the easier transport of the goods by the
wholesale dealer. Is all the packing, no matter to what
degree, in which the wholesale dealer takes delivery of the
goods to be considered for including the cost thereof in the
“value” ? Or does the law require a line to be drawn
somewhere? We must remember that while packing is necessary
to make the excisable article marketable, the statutory
provision calls for strict construction because the levy is
sought to be extended beyond the manufactured article
itself. It seems to us that the degree of secondary packing
which is necessary for putting the excisable article in the
condition in which it is generally sold in the wholesale
market it the factory gate is the degree of packing whose
cost can be included in the “value” of the article for the
purpose of the excise levy. To that extent, the cost of
secondary packing cannot be deducted from the wholesale cash
price of the excisable article at the factory gate.
If any special secondary packing is provided by the
assessee at the instance of a wholesale buyer which is not
generally provided as a normal feature of the wholesale
trade, the cost of such packing shall be deducted from the
wholesale cash price.
We have also been referred to s. 2(f) of the Act which
defines the expression “manufacture”, and it is urged that
the degree of packing to be considered for the purpose of
including its cost in the “value” of an excisable article
should be spelled out from that definition. We are unable to
accept the suggestion. The expression “manufacture” is
related to the taxable event and refers to a process which
enters into the character of the article, while “packing”
has been defined by s. 4 (4) (d) (i) in relation to the
“value” of the article.
That, we think, is the position in regard to the cost
of packing under the Act, both before a its amendment and
after.
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We have considered the claim to deductions under the
specific heads enumerated by the assessees, and our judgment
is confined to those items. No other head of expenses has
been placed before us for our opinion.
Learned counsel for the parties have drawn our
attention to a number of decisions rendered by different
High Courts on some of the points raised before us. We have
examined those cases, but we think it unnecessary to refer
to them as they do not add to the considerations we have
kept before us in arriving at our conclusions.
These are the reasons for our order of May 9,1983, and
they explain the scope within which that order must be
construed as well as the basis on which it was made.
The individual appeals, writ petitions, special leave
petitions and transferred cases will be listed now for
appropriate orders in the light of this judgment on October
31, 1983.
H.S.K.
395