1. The present proceedings arise out of a Show Cause Notice dated 6th October, 1980 issued by the Central Government to M/s. Madras Rubber Factory Ltd., Madras (hereinafter referred to as MRF) under Section 36(2) of the Central Excises and Salt Act, 1944 (hereinafter referred to as the Act). The notice was in relation to Order-in-Appeal No.1215/80, dated 21-4-1980 passed by the Appellate Collector of Central Excise, Madras, whereby the Appellate Collector disposed of the appeal before him against the order of adjudication dated 24-1-1978 passed by the Assistant Collector of Central Excise, Madras.
2. The proceedings initiated with the issue of the aforesaid Show Cause Notice came to be transferred to this Tribunal in terms of Section 35-P(2) of the Central Excises and Salt Act for disposal as if it were an appeal filed before it.
3. The Supreme Court, in Special Leave Petition (Civil) Nos.
1409-10/77, 10108/80 and C.A. Nos. 3195/79 and 6811/83 (The Asstt Collector of Central Excise etc. etc. v. M/s. Madras Rubber Factory, etc. etc.), passed an order dated 8-11-1983 directing the Tribunal to dispose of the question as to whether the sales effected by MRF at their depots are not retail sales as contended by the Union of India in its Review Notice dated 6-10-1980. If they are retail sales, the Tribunal was directed to also determine what are the deductions that are permissible to MRF under Rule 6(a) of the Central Excise (Valuation) Rules, 1975 (hereinafter referred to as Valuation Rules).
In pursuance of the directions of the Supreme Court the appellant and the respondent have filed documents in support of their respective stands.
4. Consequent on the coming into force of the new Section 4 of the Central Excises and Salt Act, 1944 with effect from 1-10-1975, MRF submitted on 22-9-1975 a price list in Form V in terms of Rule 6(a) of the Valuation Rules in respect of the goods covered by Items No. 16, 16A, etc. of the Central Excise Tariff Schedule (CET) which were manufactured by them. In the said letter, they declared that there was no sale by them to a buyer in the course of wholesale trade for delivery at the time and place of removal and that, therefore, Section 4(1) (a) of the Act was inapplicable. Hence, the assessable value, according to MRF, fell to be determined under Section 4(1) (b) of the Act. They further stated that their goods were transported to their various Branches throughout the country from where they were sold to various persons, retail outlets and others who purchased their specific requirements from time to time in retail. MRF declared that there was no sale of tyres direct to the consumer. In all, they had more than 5,700 retail outlets. There was no agreement between MRF and the outlets either on the off-take of volume or the value. The price for delivery at any place of destination was uniform because MRF had built into the price list freight-equalization. For all these reasons, MRF contended that the goods were sold by them in retail and that the prices shown in the price list were retail prices and that their case was covered by Rule 6(a) of the Valuation Rules. MRF claimed appropriate deductions from these retail prices to arrive at the price at which they could have sold such goods in the course of wholesale trade. For this purpose, they enclosed certain statements of calculations.
5. The Assistant Collector, however, considered that the assessable value had to be determined in terms of Valuation Rule 7 since, in his view, the sales were wholesale other than ex-factory.
6. By a letter dated 1-10-1975 addressed to the MRF, the Assistant Collector stated that since the dealers who purchased goods from MRF would re-sell them in retail, the prices at which MRF sold the goods to the dealers could not be treated as retail prices. He also stated that the sale to industrial consumers and State Transport Organisations, Government, etc., should be deemed as wholesale in view of the definition of "wholesale trade" in Section 4 of the Act. He, therefore, treated the billing price as wholesale price and considered that Valuation Rule 7 was applicable to the facts of the case. There was some further exchange of correspondence between MRF and the Department.
7. By a notice dated 17-11-1975, the Assistant Collector called upon MRF to show cause why the assessable value of their goods should not be finalised on the basis of their total sale price or billing price less actual cost on transportation from the factory to the sales depots and the element of excise duty contained therein. After considering the written and oral submissions of MRF, the Assistant Collector passed an adjudication order on 24-1-1978 holding that- (a) since there was no sale of goods at the factory gate, Section 4(1) (a) was not applicable; (b) the assessable value had, therefore, to be determined in terms of Section 4(2) of the Act ; (c) applying Valuation Rule 4, the assessable value was the value at which the goods were sold from the depots maintained by MRF ; (d) the only permissible deduction from the said price was the transportation charges and the duty element. The law did not permit the exclusion of the post-manufacturing expenses from the assessable value.
The Assistant Collector directed that the assessable value of all the products of MRF would thus be on the basis of their total sale price or billing price less actual cost of transportation and element of excise duty.
8. Aggrieved with the Assistant Collector's orders, MRF filed an appeal before the Appellate Collector of Central Excise, Madras, who, by his order dated 21-4-1980, held that- (a) the department had not adduced any evidence to reject MRF's contention that the prices quoted by them were retail prices ; (b) the uniform prices at which the goods were delivered in MRF's depots were nothing but retail prices; (c) consequently, the normal prices of the goods have to be determined under Valuation Rule 6(a).
He directed the lower authorities to allow post-manufacturing expenses after verification and to fix the assessable value of the goods under Rule 6(a).
9. It appears that the Central Government, acting in exercise of the powers vested in them under Section 36(2) of the Act, examined the records relating to the order dated 21-4-1980 passed by the Appellate Collector with a view to deciding whether the said order was proper, legal and correct. Coming tentatively to the view that the said order was not proper, legal and correct, the Central Government issued a notice dated 6-10-1980 to MRF calling upon them to show cause why the Appellate Collector's order dated 21-4-1980 should not be set aside and why the Assistant Collector's order dated 21-4-1978 should not be restored. In the said notice, Government stated that it observed that the buyers of MRF goods purchased them from the MRF sale depots in wholesale lots and thereafter sell the goods in retail by adding a margin of profit of 7.5% to MRF's depot sale prices. It, therefore, appeared to Government, said the notice, that the ex-depot sale prices were in the nature of wholesale prices and, therefore, only the cost of transportation from the factory to the sale depot would qualify for deduction from the ex-depot sale price in order to arrive at the assessable value of the goods.
10. MRF, by their reply dated 3-1-1981, contended that the Appellate Collector's order being based on the admitted material and the actual position that MRF's prices were retail prices, was proper, legal and correct, MRF reiterated that there were no sales at the factory gate, the prices at which the goods were sold to consumers and dealers were the same, the dealers' hands were not tied down by any conditions and that the dealers bought only one or two tyres at a time. Thus, MRF depots were in retail trade and not in wholesale trade. If, however, the ex-depot prices were taken as wholesale prices, then it had to be divested of the extraneous charges that had gone into the making up of the price other than the manufacturing cost and the manufacturing profit.
11. The case was heard on the 23rd, 24th and 25th January, 1984. We have heard with great interest Shri N.V. Raghavan Iyer and Shri Mahesh Kumar for the Appellants and Shri F.S. Nariman and Shri V.J.Taraporewala, Counsel for the Respondent. We have also perused the records very carefully. The submissions made on behalf of the appellant may be summarised thus : - (a) A sale to a dealer is a sale in wholesale. The quantity in a particular transaction is not necessarily relevant or conclusive of the character of the sale. In this connection Shri Iyer drew our attention to the definition of ''wholesale dealer" appearing in Section 2(k) of the Act and that of "wholesale trade" in Section 4(4)(e).
(b) The definition of "wholesale trade" in Section 4(4) (e) was an artificial one. The natural meaning was sale to a dealer for the purpose of re-sale in retail. However, the definition covered not only wholesale dealers but also industrial consumers, Government, local authorities, and other buyers, who or which purchase their requirements otherwise than in retail. That is, those who buy not necessarily for re-sale but with the object of using the goods in a manufacturing or trading activity. Illustrating the point, it was stated that Ashok Leyland, an industrial consumer, purchased tyres and tubes from MRF for the purpose of fitment to the motor vehicles manufactured by them. Government Transport Undertakings, fleet owners, etc. who similarly purchased tyres and tubes from MRF, used them for fitment to their fleet of vehicles which would be engaged in running transport services. Therefore, the concept of wholesale trade had an in-built element of manufacturing or trading activity unlike a retail sale which implied sale to an individual consumer for his consumption and not for any manufacturing or trading activity.
(c) From the Chartered Accountant's certificate enclosed with the letter dated 22-9-1975 to the Assistant Collector, it may be seen that the deductions sought for were under heads such as distribution expenses, travelling expenses, advertisement expenses, octroi charges and taxes, freight charges and interest charges. The Supreme Court has, in its judgment delivered on 9th May, 1983, in the case of Union of India and Ors. v. Bombay Tyres International Ltd. and Ors.-1983 E.L.T. 1896, has dealt with the very same heads of expenses in its judgment and held that barring the cost of transportation from the factory to the wholesale dealer and the element of taxes, no element was deductible from the sale price to arrive at the assessable value.
(d) What, in effect, the MRF is asking is that their goods should be assessed on the basis of a value from which all post-manufacturing expenses and post-manufacturing profits are excluded. The Supreme Court has held that 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 clearances), charges for other services after delivery to the buyer, namely, after-sale service and marketing and selling organisation expenses, including advertisement expenses, cannot be deducted. The Court has further held that where the sale in the course of wholesale trade is effected by the assessee through its sale 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 ground, be deducted. However, deduction on account of the cost of transportation of the goods from the factory gate to the place or places where it is sold, including the cost of insurance on the freight or transportation would be deductible. The deductions being claimed are the very same deductions which were claimed all these years as post-manufacturing expenses.
(e) It is the same deductions on account of post-manufacturing expenses that have been claimed all these years.
(f) There are about 42 depots or distribution centres of MRF and over 4,000 individual dealers. More than 55% of the MRF sales pass through these dealers, as borne out by MRF's affidavit. Sales from the depots to individual consumers is a very rare occurrence.
(g) There are no invoices for removal of goods from the factory to their depots; there are only stock-transfer challans. Therefore, there are no ex-factory sales.
(h) In the circumstances, the Assistant Collector had correctly resorted to Valuation Rule 4. Rule 6 cannot be applied unless Rules 4 and 5 are ruled out as inapplicable. And, the assessee must establish that his sales are retail sales.
(i) Even in the memorandum of appeal before the Appellate Collector, MRF did not claim valuation under Valuation Rule 6(a). The entire claim was on account of post-manufacturing expenses. In the Writ Petition against the Asstt. Collector's order before the Madras High Court also, MRF did not claim valuation in terms of Rule 6(a). The issue before the Madras and Kerala High Courts in MRF's cases was deduction on account of post-manufacturing expenses.
(j) Assuming that Rule 6(a) is attracted, it is to be noted that MRF had two prices-one called "Net Billing Prices" at which MRF goods are sold to dealers and the other called "Recommended Retail Prices" which is the maximum price at which dealers may sell the goods to customers. The latter prices are higher than the former ones and MRF permitted the dealers a maximum commission of 7.5%. A number of sales to dealers, industrial consumers, transport undertakings, were in substantial quantities : 105 tyres, 92 tyres and 92 tubes, 200 tyres, etc. Surely, these were not retail sales.
(k) Sales from MRF depots to dealers, industrial consumers, transport undertakings, etc. were at uniform prices. These constituted about 95% of the total MRF sales. Sales to industrial consumers etc. constituted wholesale trade as per Section 4(4) (e).
Sales to dealers for re-sale to consumers were also in the course of wholesale trade having regard to the quantities involved. Instances were cited to show that a number of sales were effected to the same dealer on the same day in small lots of 2s and 4s. It was submitted that these were attempts at camouflaging the true nature of the sale, i.e. wholesale sales. The totality of the transactions and not individual transactions is relevant. In this context, reliance was placed on the Privy Council decision in the Vacuum Oil Company case-1978 E.L.T. J 260.
(1) Ex-factory sales to Defence authorities constitute only about 5% of the total MRF sales. It was all along being contended by MRF that there were no ex-factory sales. The fact of direct sales ex-factory to Defence authorities is being introduced for the first time now.
This should not be permitted. MRF is apparently trying to show that these were sales in wholesale (and, therefore, wholesale cash prices) at the factory gate all the time. To this extent, the affidavit now filed should be ignored.
(m) Assuming that the evidence regarding Defence sales is admitted, it was submitted that prices to Defence authorities were not normal price for other classes of buyers. Defence sales (constituting 5% of the total sales) were at specially contracted prices (the difference between Defence prices and depot prices going upto even 17%) and cannot determine the true nature of the remaining 95% sales.
(n) Concluding, it was submitted that, considering the totality of circumstances, MRF sales, leaving aside the 5% sales to Defence authorities, were in wholesale and not retail.
12. The submissions on behalf of MRF by Shri F.S. Nariman may be summarised as follows :- (a) In terms of the order of the Supreme Court dated 8-11-1983, the only questions for decision are whether MRF sales ex-depot are not retail sales and if they are retail sales, what are the permissible deductions under Valuation Rule 6(a). Whether Rule 4 or Rule 6 applies is not open to question.
(b) In law and in fact, the sales effected ex-MRF depots are sales in retail.
(c) It is not correct that every sale to a dealer must be a sale in wholesale. The nature of MRF sales cannot be ascertained by looking at only a few isolated transactions. 95% of the sales of truck tyres, the most important item, are in 2s, 4s and 6s to dealers, over 4,000 in numbers.
(d) The mere fact that MRF sells goods to dealers would not make such transactions, sales in wholesale. One has to see whether the dealers purchase their requirements in bulk or not. Government itself considered that the essential pre-requisite is that the buyers should buy in wholesale lots and not in retail quantities, as evidenced by Government's instructions in letter F. No. 312/1/75-CX. 10; dated 8-8-1975 to all Collectors. The size of the lot sold and not the sale price is relevant for determining whether the sale is in wholesale or retail. In the view of the learned Counsel, upto 10 tyres could be considered a retail quantity. Transactions over a period (e.g. a year) would not be relevant.
(e) The document "Marketing Pattern of MRF" filed by the Department itself showed that the sales were in retail. This has not been controverted by any affidavit, nor by any evidence. Stray invoices relied upon by the Department cannot determine the true nature of the transactions. The majority of sales are in retail in 6s and below, about 5% of the sales (Defence sales) being in wholesale.
(f) It is not correct that ex-factory sales to Defence authorities is being brought up for the first time now as evidenced by the relative price lists which were verified by the Department.
(g) The Defence sales are in wholesale lots and these are made at the factory gate. If it is held that these are sales to a class of buyers, appropriate adjustments (additions and deductions) may be made to these prices to arrive at the assessable value in respect of sales to the other classes of buyers which would be MRF's wholesale to dealers.
(h) In the alternative, the learned Counsel submitted that in order to arrive at the assessable values from MRF's retail prices, the admissible deductions would be the very same elements held by the Supreme Court as inadmissible deductions from wholesale prices-except perhaps storage charges which MRF had, in any case, to incur. The admissible deductions could be ascertained from the Chartered Accountant's Certificates.
13. In answer to the queries from the Bench, Shri V.J. Taraporewala, the learned Counsel for MRF, inter alia stated that- (a) There is no agreement between MRF and the dealers. Even a non-dealer could go to a depot and buy his requirements on cash payment but such instances are few and far between.
(b) Though dealers and other buyers are designated as "account-holders", they do not deposit any amounts with MRF. Once in 6 months, the accounts are scrutinised and 1 % of the value of purchases, irrespective of the value, is given as discount by way of a Credit Note. However, no deductions have been claimed on this score so far perhaps because they are not discounts given at the time of sales.
(c) An individual customer (in the rare instance of such sale ex-factory) would not get the above turnover discount because he is not a registered dealer, but this would be off-set by the fact that he would have to pay a higher price to the dealer.
14. The undisputed position relating to the sales pattern followed by MRF, Madras, may be stated thus- (a). Apart from Defence sales [see para (f) below], all sales are made through 42 depots of MRF, located at different places in the country.Removals to depots are on stock-transfer challans. There are noinvoices covering these transactions and, therefore, no ex-factory sales are involved. ...
(b) Individual dealers., numbering over 4,b00, purchase their requirements from these depots. The total sales to dealers was of the value of Rs. 108 crores during 1981-82 out of the total sales of Rs. 185 crores.
(c) The proportion of sales to individual dealers : total sales ranged from 53.76% in 1976-77 to 68.87% in 1974-75. Barring 1979-80 when the percentage was 48.17, in the remaining years during the period from 1974-75 to 1981-82, the percentage was over 50.
(d) The other categories of purchasers of MRF goods (other than dealers) at the sales depots are manufacturers of motor vehicles, State Transport Undertakings, fleet owners, etc.
(e) Sales to motor vehicle manufacturers and State Transport Undertakings in 1981-82 were of the order of Rs. 65.26 crores out of the total sales value of Rs. 185 crores. [see also (b) and (c) above].
(f) Defence sales are effected at the factory gate, in wholesale lots (as per the affidavit dated 14-12-1983 of Mr. Gopinathan, Kartha of MRF). During 1981-82, such sales amounted to Rs. 8.5 crores out of the total sales of the order of Rs. 185 crores.
(g) The prices at which defence sales were effected were lower than the prices for dealers by 17.5% in 1977, 15% in 1979, 1980 and 1981, 6.1% in 1982.
(h) MRF sell their goods at the same prices to dealers, motor vehicle manufacturers, State Transport Undertakings, etc. from the MRF depots. MRF has two types of price circulars. One shows "Net Billing Prices" which are the prices at which goods are sold to dealers and other non-defence buyers. The other : "Recommended price list for re-sale to consumers" is meant for dealers. These prices are shown as maximum and dealers are told that in no circumstances should these prices be exceeded though lower prices may be charged.
According to MRF's document "Marketing Pattern", MRF have recommended to the dealers to sell the goods by adding 7 1/2% to their (MRF's) billing prices to meet their (the dealers) expenses.
15. We have noted that defence sales, according to MRF, are sales in whole-sale. However, such sales are effected by MRF at the factory gate and not from their depots away from the factory. But they constitute only a small proportion of MRF's total sales-Rs. 8.5 crores out of Rs. 185 crores in 1981-82, i.e. 4.59%. The prices are distinctly lower than those charged to other buyers. The terms are F.O.R. ex-factory unlike in the case of sale to other buyers. These are, therefore, in the nature of sales to a particular class of buyers, governed by DGSD rate contracts. These prices do not form part of the dispute before us and, therefore, our order does not concern itself with MRF sales to defence authorities and the prices charged from them. However, we have adverted to Defence sales because a submission was made before us by the learned Counsel for MRF that since these are ex-factory sales in wholesale lots (i.e. Defence sales), the prices in such sales with appropriate adjustments should form the basis for working out the assessable values in respect of other buyers. We shall deal with this submission at the appropriate stage. However, let it be noted that there is no finding of the lower authorities on the subject of Defence sales before us.
The learned Departmental Representative has objected to the introduction, at this stage, of the fact of ex-factory sales when MRF's stand before the authorities so far had been that there were no ex-factory sales. We do not see much force in this objection because the price lists relating to Defence sales as far back as in 1976 filed by MRF had been verified and provisionally approved by the Excise authorities.
16. The learned Counsel for MRF has contended that, in accordance with the order of the Supreme Court dated 8-11-1983, we can go only into the question whether the ex-depot sales are not retail sales and if these are retail sales, what are the permissible deductions under Valuation Rule 6(a). According to him, no question as to whether Rule 4 or Rule 6 applies is open for consideration. We find it difficult to agree to this interpretation. The Supreme Court has directed the Tribunal to hear to review proceedings initiated by the Central Government which stand transferred to the Tribunal.
The review notice, in terms, has called upon MRF to show cause why the Appellate Collector's order should not be set aside and gives as the basis the tentative view of the Government that the ex-depot sale prices are in the nature of wholesale prices and, therefore, only the cost of transportation of the goods from the factory gate to the depots is deductible from the ex-depot prices. In our view, therefore, the Supreme Court's direction to us is to determine whether the ex-depot prices are wholesale or retail prices and if they are retail prices, to determine the permissible deductions.
17. Prolonged arguments have been advanced by both the sides on the concept of "wholesale" and "retail". Before proceeding further, we may usefully note the meanings assigned to these words in "New Webster's Dictionary of the English Language" : "Retail" is "the sale of goods in small quantities directly to a consumer". "Wholesale" is the "sale of commodities in large quantities, and especially for the purpose of re-sale, as to retailers or jobbers rather than to consumers directly".
Stroud's Judicial Dictionary (4th edition) gives the following meanings :- "Wholesale"-"As a general rule 'wholesale' merchants deal only with persons who buy to sell again : whilst 'retail' merchants deal with consumers". (Page 3006, Vol. 5).
"Retail"-"The distinctive characteristic of a ratail shop is that it should be a building to which the public can resort for the purpose of having particular wants supplied and services rendered therein without the intervention of a 'middleman'." (Page 2381, Vol. 4).
We may also note in this context the definition of "wholesale dealer" in Section 2(k) of the Central Excises and Salt Act as "a person who buys or sells excisable goods wholesale for the purpose of trade or manufacture, and includes a broker or commission agent who, in addition to making contracts for the sale or purchase of excisable goods for others, stocks such goods belonging to others as an agent for the purpose of sale".
Though the expression "wholesale dealer" is not directly relevant for our purpose, we have reproduced it only to note that the concept is the same as in the dictionary meanings we have referred to in the preceding paragraphs.
18. The expression with which we are concerned here is "wholesale trade" which has been defined in Section 4(4) (e) of the Act in these terms :- "Wholesale trade" means sales to dealers, industrial consumers, Government, local authorities and other buyers, who or which purchase their requirements otherwise than in retail..
We have thus to see whether MRF's. sales ex-depots to dealers and other buyers constitute "wholesale trade".
19. From the above meanings, it is obvious that the concept of re-sale to consumers is built into "wholesale". In other words, one purchases goods in wholesale in order to sell them in retail to consumers. The trading interest referred to by Shri Raghavan Iyer is very much there in a wholesale purchase (as opposed to a retail purchase). In this view, the quantity involved in a particular transaction is not conclusive of the true character of the transaction.
20. Some judgments of foreign Courts have been cited in an effort to throw light on the point in issue. In our view, there can be no cut and dry answer based on tangible criteria of universal application to the question of what constitutes a sale in "wholesale" and a sale "in retail". There is no - there cannot possibly be-such a definition containing a ready answer to every situation. For, the concept has necessarily to vary depending on factors such as the nature of goods under consideration, their value, the customer-community or group and their purchasing power. Therefore, what may be good law in foreign countries may not necessarily be so in our country.
The case law cited by Shri Nariman does not help us in answering the present questions. In Kentucky Consumer's Oil Co. v. Commonwealth -South Western Reporter 893, after considering dictionary meanings, the Court said : "There is a well-defined and clearly understood distinction between the words "retail" and "wholesale" ; they are used in opposition one to the other, one being a sale in large quantities, the other in small quantities. Whether the sale is one by retail or wholesale will depend upon the facts of the particular transaction".
Mark the last sentence and we at once realise the difficult nature of the problem.
The case of Wright v. Edwards-States Reports (S.A.) 267-is also of no help. In that case, it was held by the Court that no compounding or dispensing of prescriptions was done at the branch shop and, therefore, there was no retailing, compounding or dispensing of drugs at the branch shop.
We do not think it necessary to advert to the other cases cited by Shri Nariman as they do not advance the plea put forth.
However, Shri Raghavan Iyer has referred to the Privy Council decision in Vacuum Oil Co. v. Secretary of State-1978 E.L.T. (J 260) which is with reference to Section 30 of the erstwhile Sea Customs Act, 1878. It was held therein that the words "wholesale...price" are used in contradistinction to a "retail price" and that only on the ground that such is a well-recognised meaning of the words but because their association with the words "trade discount" indicates that sales to the trade are those in contemplation.
21. The contention of the appellant is that sales to the trade are sales in "wholesale" as opposed to sales to the ultimate individual consumers which are sales in "retail". MRF contend that the quantities sold should determine the character of individual transactions and, on this basis, argue that the bulk of the sales of tyres and tubes are in 2s, 4s and 6s and rarely over 10s and, therefore, these are in "retail". Revenue, however, contends that it is not the quantities involved in individual transactions but the totality of the transactions that should determine the true nature of the sales. In this connection Shri Mahesh Kumar, the learned Representative of the appellant, has referred us to several instances of sales of tyres and tubes in small quantities of 2s and 4s on the same day to the same dealer on invoices bearing consecutive serial numbers. There are instances of such sales to other dealers too as also other classes of buyers. The picture that emerges hardly gives credibility to MRF's contention that these are sales in retail. Assuming for a moment that sales of 2s and 4s are necessarily retail sales, no convincing explanation is forthcoming about what prompted MRF to make out several invoices for sales in 2s and 4s to the same dealer on the same day. To our mind, this is a deliberate attempt to camouflage wholesale transactions as retail transactions. For all these reasons we agree with the contention put forth on behalf of the Revenue.
22. It is not in dispute that MRF's sales to dealers are for the purpose of re-sale to consumers. They are thus sales to the trade.
Applying the ratio of the Privy Council decision in the Vacuum Oil Co.
case-1978 E.L.T. (J 260), such sales are to be considered as sales in "wholesale". It is significant that, barring perhaps some very rare instances of sales to individual customers at the factory gate (as contended by MRF), MRF sales ex-depots are to dealers over 4000 in number. These dealers are billed at "net billing prices" (NBP) and are allowed to re-sell at "recommended retail prices" (RRP) with a built-in commission of 7i%. That some dealers choose to re-sell at less than the RRP's does not make any difference. They are enjoined not to sell at higher than the RRP's. The dealers are required to be account-holders with the MRF, the clear implication being that they are expected to have a number of transactions over a period which indeed is the case.
Every 6 months, 1 % of the value of purchases is given by MRF to the dealers by means of a credit note. This seems to be in the nature of a turnover discount. It is not admissible to individual customers who may happen to be sold goods at the factory gate. All these factors leave us in no doubt as to the true nature of the ex-depot sales to dealers : they are sales in "wholesale".
23. The question remains whether MRF's dealers, and for that matter, the other institutional buyers such as State Transport Undertakings, motor vehicle manufacturers, etc. purchase their requirements from MRF otherwise than in retail as contemplated in Section 4(4) (e) of the Act. We have seen how MRF has been splitting up sales of quantities of goods which cannot be termed small into a large number of sales involving small quantities and issuing several invoices. This aspect of the sales itself is a tell-tale indication of the true nature of such sales and purchases. Purchases of the requirements of these buyers are given the appearance of purchases of their requirements in retail. But that cannot detract from the true nature of these purchases and sales : they are otherwise than in retail. While the element of direct re-sale may not be there in the case of the institutional buyers, they have a commercial interest in the purchase of MRF's goods. Vehicle manufacturers, for instance, fit tyres and tubes as original equipment on vehicles manufactured by them for sale. Transport Undertakings fit them to their vehicles which ply on commercial basis. The fact that the element of direct re-sale (of tyres, tubes purchased from MRF) may be absent in the case of such buyers would not detract from the position that such purchases (and MRF sales to them) are not purchases (sales) in retail.
24. In the above view of the matter, we would read Government's instructions dated 8-8-1975 as only enjoining upon the Collectors to see that the essential pre-requisite, namely, that buyers should buy their requirements in wholesale lots and not in retail quantities, is satisfied before the sale could be considered to be in the course of wholesale trade. We would not read these instructions to mean that even in a. situation, as in the present case, where wholesale transactions are made to look like retail transactions, they should nevertheless be considered to be in retail and not in wholesale.
We have adverted to Government's instructions because the learned Counsel for MRF referred to them. We may, however, observe that the said instructions, as we see them, do not connote anything different from the conclusions independently reached by us.
25. The learned Counsel for MRF has contended that since Defence sales at the factory gate constitute wholesale transactions, Section 4(1)(b) cannot have any application to the facts of the case. The assessable values in respect of sales from the depots would have to be worked out to arrive at a notional value as close to the ex-factory wholesale prices as possible with appropriate adjustments. As we have stated earlier, there is no finding of the lower authorities on the point whether sales to Defence authorities at the factory gate constitute sales in the course of wholesale trade. Indeed, they could not have given a finding on this because MRF's pleadings all the time had been that they had no sales at the factory gate and that the sales from the depots were only in retail. And, with reference to such eX-depot sales, MRF had been contending before the lower authorities all the time that all elements of post-manufacturing expenses should be excluded to arrive at the assessable values. In the proceedings before us also, the sales at the factory gate do not form one of the issues. It, however, appears to us that unlike sales from the depots to dealers, State Transport Undertakings, motor vehicle manufacturers, etc., sales to Defence authorities have some special features. They are based on DGSD rate contracts. The prices are distinctly lower than those charged to other classes of buyers. The terms are for ex-factory unlike in the case of sales to other buyers. Defence sales constitute only a small proportion of MRF's total sales-less than 5% in 1981-82. We are, therefore, inclined to consider that these are sales to a special category of buyers and the prices charged to the Defence authorities cannot form a reasonable or satisfactory basis for arriving at the assessable values in respect of the overwhelming majority of sales (adding upto more than 95% in 1981-82) to other classes of buyers in respect of whom, admittedly, there are no ex-factory sales.
26. Section 4(4) (e) takes in, besides sales to dealers, sales to industrial consumers (e.g. motor vehicle manufacturers), Government, local authorities (e.g. State Transport Undertakings) and other buyers.
Therefore, sales to such buyers (other than dealers) constitute "wholesale trade" so long as they purchase their requirements otherwise than in retail.
27. Having regard to the above discussion, we hold that the sales effected by MRF at their depots are not retail sales but sales in "wholesale trade" within the meaning of Section 4(4) (e) of the Act.
However, since sales at such depots do not constitute sales at the factory gate, the assessable value of the goods has to be determined in accordance with Section 4(1) (b) of the Act read with Rule 4 of the Valuation Rules and in accordance with the ratio of the Supreme Court decision as reported in 1983 E.L.T. 1896 (S.C.) -(Union of India and Ors., etc. v. Bombay Tyre International Ltd. etc. etc.). The plea of MRF that their case is governed by Valuation Rule 6(a) is without any substance and is, therefore, repelled.
28. Since the claim of MRF before the lower authorities has been that ex-depot sales were retail sales and that all elements of post-manufacturing expenses and profits should be excluded from such retail prices to arrive at the assessable value, the lower authorities had no occasion to identify and quantify the elements of permissible deductions from the ex-depot sale prices. Nor have such elements been clearly identified and quantified before us in these proceedings.
Therefore, we consider it appropriate that the lower authorities should undertake this exercise after giving due opportunity to MRF.29. In the result, we allow this appeal and set aside the impugned order of the Appellate Collector. Consequently, the Assistant Collector concerned is directed to dispose of the matter in accordance with the directions given above.
30. Before parting, we must place on record our appreciation for the valuable assistance rendered by the representatives of both the sides in dealing with the vexed questions involved in this case.