S.C. Pratap, J.
1. This petition under Article 226 of the Constitution relates to proceedings originally commenced under the Central Excises and Salt Act, 1944, and the Central Excise Rules, 1944, framed thereunder (hereafter, for the sake of brevity, referred to as the Act and the Rules).
2. The International Tractor Company of India Limited - engaged at the relevant time in the manufacture of tractors - was by order dated 18th May 1978, passed by this Court in Company Petition No. 789 of 1977, amalgamated with Mahindra & Mahindra Limited, the petitioners herein. Both these are, hereafter for convenience, referred to as the petitioners.
3. For manufacture of tractors the petitioners needed parts and accessories of motor vehicles for use as original equipments. Tariff Item No. 34A of the First Schedule to the Act prescribed the rates of duty for such parts and accessories. In exercise of its powers under Rule 8 of the Rules, the Central Government issued on 29th May 1971 a notification, being Notification No. 101 of 1971-C.E., exempting motor vehicle parts, which were therein specified, from the whole of the duty of excise leviable thereon, provided (a) it was proved to the satisfaction of the Collector Excise that the said parts were intended to be used as original equipment parts by the manufacturers of motor vehicles falling under Item No. 34 of the First Schedule to the Act and (b) in relation to any concession in respect of such parts, the procedures set out in Chapter X of the Rules providing for remission of duty on goods used for special industrial purposes was followed.
4. To avail of the said exemption, the petitioners made, under Rule 192 of Chapter X of the Rules, the requisite application to the Collector of Central Excise for receiving the said parts from the manufacturers thereof without payment of excise duty. This application was granted. The petitioners thereupon received the said parts from the manufacturers thereof without payment of excise duty which otherwise and but for the exemption would have been payable thereon. Subsequently, in 1973-74 the petitioners found a certain quantity of the said parts surplus to their needs. Approval of the excise authorities was, therefore, sought under Rule 196A of Chapter X of the Rules to clear or divert this surplus on payment of duty payable thereon and sell the same in the market. The petitioners also expressed their willingness to submit price lists and other details for assessing excise duty payable on the surplus so intended to be cleared or diverted. In their letter of 7th February 1973 the petitioners also expressed willingness for provisional assessment of duty with undertaking to pay the difference demanded. The excise authority granted the necessary approval to divert the surplus goods. The petitioners thereafter cleared various quantities of surplus parts between the period 26th February 1973 and 27th November 1974 after paying thereon, in the first instance, duty at a rate prevalent on the date on which the said goods were cleared from the petitioners' premises but on the wholesale cash price of the original manufacturers of the said parts as in force on the respective dates on which the petitioners had originally purchased the same.
5. The petitioners furnished statement showing the actual price at which the goods were sold and the amount of differential duty which, on the petitioners' own calculation, was payable. Relying on this very data, the department called upon the petitioners to pay the differential amount of duty Rs. 2,56,835.15 i.e. difference between the duty actually paid at the time of clearance or diversion and the duty which, as per the department, the petitioners were liable to pay. The petitioners denied this liability but to no avail. The Superintendent of Central Excise reiterated the demand and called upon the petitioners to honour the same. The petitioners appealed under Section 35 of the Act but failed. Hence this petition.
6. Mr. Atul Setalvad, learned Counsel for the petitioners, did not press the contention that the original assessment was not provisional but final and hence no further demand could be made. Indeed, the very procedure, on the basis whereof approval to divert was granted, indicated a provisional assessment in the first instance. The petitioners also in their own letter of 7th February 1973 categorically stated :
'We are agreeable for provisional assessment of duty and we undertake to pay any difference demanded...'
The department consequently was entitled to proceed on the basis of a provisional assessment initially. Contention to the contrary was in the circumstances rightly not pressed or pursued.
7. Before proceeding further, it may be mentioned that there is no dispute that the petitioners, on diversion of the surplus parts, became liable to pay excise duty thereon at a rate (20 per cent ad valorem) in force at the time of the said diversion.
8. The main questions arising for determination in this petition are :
(1) How is the value of the diverted goods to be determined ?
(a) Is it the price or the value for which the goods on diversion were sold by the petitioners in the market Or
(b) Is it the value thereof in terms of Section 4 of the Act ?
(2) If the value is as per (b) supra i.e. in terms of Section 4 of the Act, question next is :
Which is the relevant point of time qua which the said value is to be fixed ?
(i) Is it the time when the goods in question were actually manufactured or produced Or
(ii) Is it the time when the same were sold by the manufacturers to the petitioners free of excise duty under the exemption obtained or
(iii) Is it the time when the same were subsequently diverted by the petitioners and sold in the market ?
9. While considering these questions, it becomes necessary to appreciate briefly the nature and concept of excise. It is axiomatic that excise is a tax on goods manufactured or produced in the taxing country. It is primarily a tax on the manufacturer or producer though its ultimate incidence is on the consumer. It partakes the character of an indirect tax as distinguished from a direct impost. It is not a tax directly on the goods but on the manufacture thereof. The taxable event is the manufacture of goods. Therefore, irrespective of the point and stage of its assessment and collection, it would still be a duty of excise if it does not lose its fundamental character and its basic element viz., duty on manufacture or production. Excise has thus a close and direct nexus with manufacture and production. It is the fact of manufacture or production that attracts this duty. Excise duty is attracted basically and essentially by the manufacture of excisable goods. That is its true essence and that is how it is understood both in ordinary as also in constitutional law. Being a tax on the production or manufacture of goods, it is directly related to the incidents and elements constituting manufacturing activity which includes manufacturing costs but not the post-manufacturing or the non-manufacturing expenses. It also includes the manufacturing profit but not profit attributable or related to or arising from any post-manufacturing operation or activity or any non-manufacturing operation or activity.
10. Section 3 of the Act is the charging section creating the liability to pay. If the conditions thereof stand satisfied viz., the goods are manufactured or produced in the country and the same are excisable, then levy of excise duty gets attached itself thereto. The assessment and collection thereof could be at a convenient stage and not necessarily and only at the point of time of actual manufacture or production. Unlike Section 3 of the Act, which deals with the concept of chargeability, Section 4 deals with the concept of assessment of the amount of duty payable. It is a machinery provision. It provides for the determination of value for quantifying the duty in question. The construction or interpretation of Section 4 should not, therefore, run counter to or militate against the basic concept of excise duty nor result in expanding, widening or enlarging the scope and ambit thereof.
11. Applying these tests and principles to the present case, was the department justified in taking the value of the diverted surplus parts here to be the price or the value for which the same, on diversion, was sold in the market by the petitioners Obviously not. Such price or value would have the effect of converting the levy thereon into one of tax on the sale of goods i.e. sales tax which tax was not only beyond the purview of the Act here but also beyond the legislative competency of Parliament by virtue of Article 246 read with Entry 83, List I, Seventh Schedule of the Constitution (unless covered by Entry 92A of the said List I) and within the exclusive jurisdiction and competency of the State Legislature vide Entry 54, List II, Seventh Schedule of the Constitution. Such value and demand based thereon per se militates against the basic concept of excise which, as indicated, is a tax on manufacture or production and nothing else. Such value is neither the wholesale cash price under Section 4(a) nor the price under Section 4(b) of the Act. The impugned demand based on the petitioners' selling price cuts at the very root of the fundamental concept of excise. It also equates the petitioners with the manufacturers which in fact they are not. It also includes post-manufacturing costs which cannot be included. It seeks to load the wholesale cash price of the manufacturer with the petitioners' selling profit which is not permissible. Indeed, the wholesale cash price must in law be relieved of the said loading. It must be free from any loading representing the non-manufacturing elements as also from elements unconnected with manufacturing costs and/or manufacturing profits. The petitioners' selling price is of no relevance. That the said selling price is much higher than the wholesale cash price is again of no relevance. The impugned demand can only result in unjust enrichment. Elements and factors irrelevant in law have gone into the said demand. It is a demand unsustainable and, therefore, liable to be quashed.
12. Contention of Mr. Sethna, learned Counsel for the respondents, however, is that for assessing excise duty, the petitioners themselves agreed to furnish and did furnish accordingly their sale price lists and later on also, the petitioners themselves worked out the quantum of differential duty which was without question accepted by the department which finalised the assessment exactly in accordance therewith. The petitioners, submitted the learned Counsel, cannot therefore be now permitted to turn round and challenge the demand. Now, it is true that the impugned demand is based on the data furnished by the petitioners themselves. But then, if the demand militates against the basic legal concepts involved and is consequently invalid and bad in law, such a demand surely cannot be permitted to be enforced. Factual conduct of the petitioners cannot in law validate a demand otherwise invalid or cure a patent illegality. Besides, the end-result is a mistake of law. There is no bar against legal rectification. There cannot be estoppel against a statute, all the more so when it is a taxing statute.
13. This does not, however, mean that the value of the diverted goods for the purposes of excise duty is nil or that the petitioners can, even on diversion, continue to enjoy the erstwhile exemption from payment of duty thereon. Indeed, such is not the contention even of the petitioners. On the exemption becoming inoperative, the goods, which were till then exempted, became liable to excise duty. The goods, which were originally excisable but had in the interregnum ceased to be so, revived their original character and became excisable. And the value thereof for assessing excise duty payable thereon would obviously then be the wholesale cash price at the factory gate of the original manufacturers in terms of Section 4(a) or where such price is not ascertainable, the price in terms of Section 4(b) of the Act. This decides the first question.
14. Question next is which is the relevant point of time qua which the said value in terms of Section 4 of the Act is to be determined or fixed As indicated in question No. 2 framed in the earlier part of this judgment, is it the point of time (a) when the goods in question were actually manufactured or produced or (b) when the same were sold by the manufacturers to the petitioners free of excise duty under the exemption obtained or (c) when the same were later diverted by the petitioners and sold in the market Section 3 of the Act does not itself specify the point of time in this behalf. Now, in this respect, the first indicated point of time viz., when the goods in question were actually manufactured or produced, stands ruled out by virtue of a Division Bench ruling of this Court in The Union of India and Ors. v. The Elphinstone Spinning & Weaving Mills Co. Ltd. : 1978(2)ELT680(Bom) , negativing the same. As held therein :-
'.... The point of time at which we have to see whether the goods were liable to duty would be thus the date of removal of the goods from the factory or warehouse and not the date of manufacture or production, for the duty when the goods were sought to be removed from the factory or from the warehouse, they were goods of the description mentioned in one of the items in the First Schedule as being subject to a duty of excise....'
And further :
'For the reasons stated above, we are of the opinion that the mills are liable to pay duty of excise under Item 22B on goods of the description falling within that item when they sought to remove such goods from the factory on or after midnight of February 29, 1968 and the fact that these goods might have been manufactured prior to the date was irrelevant to the liability to pay the duty of excise ....'
(page 690 paragraph 19)
The same was assumed to be the position in yet another Division Bench ruling of this Court in Sandoz India Limited v. Union of India & Ors. : 1980(6)ELT696(Bom) , wherein it was held :-
'.... We are not, therefore, satisfied that the department was justified in making a demand for excise duty on the basis that For on liquid was a changed form of the pigment at the time of its removal from the factory.'
(page 704 paragraph 16)
15. Of the remaining two dates viz., the date of the original sale by the manufacturers to the petitioners and the date of subsequent diversion and sale in the market by the petitioners, there are inherent indications in Rule 196A itself providing an answer on the relevant date or point of time.
Rule 196A(1) :
'If any excisable goods obtained under rule 192 become surplus to the needs of the applicant for any reason, the applicant may, with the previous approval of the proper officer, (i) clear the goods on payment of duty, the rate of duty and the tariff valuation, if any, applicable to such goods being the rate and valuation, if any, in force on the date of actual removal of the goods from the applicant's premises....'
Thus, the rate of duty and the tariff valuation, if any, applicable to such goods, would be the rate and valuation, if any, in force on the date of actual removal of the goods from the applicant's premises. This date in the present case would be the date of diversion of the surplus i.e. the date when the surplus parts were removed from the petitioners' premises and sold in the market. Now, if this date of diversion is the relevant date for determining the rate of duty and the tariff valuation, if any, there is no good reason why for determination of value under Section 4 of the Act, not the same date of diversion but some other date (e.g. the date of the original sale by the manufacturers to the petitioners) should be considered as the relevant date. Rule 196A makes it clear that the relevant date for rate of duty and tariff valuation need not necessarily be the date of the original sale by the manufacturers to the petitioners and that it can as well be some other or another date. If so, it stands to reason that this some other or another date should be uniform date qua all the three elements or factors viz., rate of duty, tariff valuation, if any, and value determination under Section 4. It could not be the intention to apply today's rate of duty to a bygone value under Section 4. If the rate of duty applicable is that in force at the date of actual removal of the goods from the petitioners' premises and if the same is also the date for tariff valuation, if any, applicable, the same would also - in the absence of anything specific to the contrary - be the date for determining the value under Section 4. If the quantum of duty need not necessarily be the duty originally payable at the time of the sale by the manufacturers to the petitioners if in the meanwhile either the rate or the tariff valuation, if any, has been altered, the value determination under Section 4 also then need not necessarily be the original value at the time of the sale by the manufacturers to the petitioners if similarly and in the meanwhile, at the time of diversion, the said value has also undergone a change.
16. This position is further corroborated by Rule 196A(ii) itself under which :
'If any excisable goods obtained under Rule 192 become surplus to the needs of the applicant for any reason, the applicant may, with previous approval of the proper officer,
(ii) return the goods to be original manufacturer of the goods from whom the applicant had obtained them under bond and every such returned goods shall be added to the non-duty-paid stock of the original manufacturer and dealt with accordingly....'
Thus, if instead of diverting the surplus and selling it in the market, the petitioners had returned the same to the original manufacturers, the said surplus would then, in terms of the above rule, have stood added to the non-duty-paid stock of the manufacturer. What would then be the relevant date for determining its value under Section 4 if at some subsequent date the manufacturer sells the same Would it be the date of the original sale or the date of the subsequent sale It would obviously be the date of the subsequent sale of the goods by the manufacturers after the return thereof by the petitioners and after its consequent addition to the non-duty-paid stock of the manufacturers. This, therefore, is yet another indication that the relevant date for determining the value of the surplus parts in the present case would be the date of the diversion thereof by the petitioners. Virtually the same indication or position emerges from Rule 9A of the Rules. The relevant date or point of time with reference to which the value of the diverted parts here has to be determined would thus be that date or point of time when the said parts were diverted by the petitioners and sold in the market. It may incidentally be noted in this context that the petitioners' own contention in their appeal under Section 35 of the Act was virtually the same :
'.... the assessable value of the goods in question has to be determined with reference to the wholesale cash price prevalent at the place of manufacture on the crucial date viz., the date on which the appellant disposed of the goods and not with reference to the price charged by the appellant in the course of subsequent transaction....'
(vide ground No. 3 at page 64 of the petition)
17. To summarise : For assessing the excise duty payable thereon, the value of the surplus parts diverted and sold in the market would be the wholesale cash price thereof at the factory gate of the original manufacturers thereof, in terms of Section 4(a) or where such price is not ascertainable, the price in terms of Section 4(b) of the Act and the relevant date or the point of time with reference to which this value has to be determined would be the date or the point of time when the surplus parts were diverted and sold. Thus, for assessing the excise duty payable on the goods in question here the value of the surplus parts diverted and sold in the market by the petitioners would be :
The wholesale cash price thereof at the factory gate of the original manufacturers in terms of Section 4(a) at the time the same were diverted and sold by the petitioners or if such price is not ascertainable, the price in terms of Section 4(b) of the Act at the time the same were diverted and sold by the petitioners.
18. In the result, this petition succeeds and is allowed. The appellate order dated 17th November 1978, the letter dated 12th August 1977 and the demand dated 7th July 1977 (Exhibits H, F & D respectively to the petition) are set aside and quashed. The bank guarantee is revoked and cancelled. However, in the interests of justice and to prevent loss to the revenue or to the petitioners, as the case may be, respondent No. 3 will resume the assessment proceedings from the stage of provisional assessment and after notice to and hearing the petitioners, determine, within four months from today and in the light of the findings and conclusions in this judgment, the differential duty, if any, payable by the petitioners to the Union of India or the refund, if any, due to the petitioners qua the amount provisionally assessed and paid.
19. Rule earlier issued on this petition is made absolute in terms aforesaid. The respondents to pay the costs of this petition to the petitioners and bear their own.