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Bombay Tyres International Ltd. Vs. Union of India (Uoi) and ors. - Court Judgment

LegalCrystal Citation
SubjectExcise
CourtMumbai High Court
Decided On
Case NumberMiscellaneous Petition No. 1646 of 1975
Judge
Reported in1990LC298(Bombay); 1980CENCUS37D; 1979(4)ELT625(Bom)
ActsCentral Excise Act, 1944 - Sections 3, 3(1), 3(2), 4 and 4(1); Central Excise (Amendment) Act, 1973
AppellantBombay Tyres International Ltd.
RespondentUnion of India (Uoi) and ors.
Appellant AdvocateA.M. Setalvad, ;F.H.J. Talyarkhan, ;R.A. Dada and ;S.F. Pochkhanwalla, Advs.;K.C. Cooper, ;R.L. Dalal and ;R.L. Mukherjee, Advs.
Respondent AdvocateR.J. Joshi,
Excerpt:
.....the factory-gate price to a non-related person, without involving therein any other concept like post-manufacturing cost and profit arising from post-manufacturing operation, viz. joshi also relied upon the aims and objects .of enacting the new section 4, namely to overcome the difficulties created by the decision of the supreme court in voltas case to which i shall be presently referring to. 4. in order to appreciate these rival contentions, it would be pertinent to refer both to the old and new section 4. the old section 4 which was in force prior to 1st october, 1975 provided for determination of value for the purpose of duty and read as under :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..........on 25th september, 1975, the petitioner had also claimed, as it had done earlier, deduction of post-manufacturing expenses including freight and profits attributable to post-manufacturing operations at 9% supported by a certificate from the petitioner's auditors. the petitioner further pointed out that there had been no change in this position even after the coming into force of the new section 4 - on 27th september, 1975, the assistant collector, central excise, addressed a letter to the petitioner approving the price list without taking into consideration the petitioner's deduction of 9% on the ground that the deductions claimed by the petitioner were not permissible under the new section 4 of the act as in that section there was no provision for deduction of post-manufacturing.....
Judgment:

B. Lentin, J.

1. The petitioner-Company manufactures tyres and other rubber products in Bombay. Since the past several years, the petitioner submitted its price list in the prescribed preformed to the Assistant Collector of Central Excise under the old Section 4(a) of the Central Excise and Salt Act, 1944. The new Section 4 came into force with effect from 1st October, 1975. On or about 25th September, 1975, the petitioner submitted its revised price lists in the prescribed proforma to the Assistant Collector of Central Excise, with its covering letter wherein it was pointed out that there had been no change in the price lists of the petitioner's products after 26th June, 1975 when the petitioner had submitted the earlier price lists to the Central Excise authority. In the revised price list submitted on 25th September, 1975, the petitioner had also claimed, as it had done earlier, deduction of post-manufacturing expenses including freight and profits attributable to post-manufacturing operations at 9% supported by a certificate from the petitioner's auditors. The petitioner further pointed out that there had been no change in this position even after the coming into force of the new Section 4 - On 27th September, 1975, the Assistant Collector, Central Excise, addressed a letter to the petitioner approving the price list without taking into consideration the petitioner's deduction of 9% on the ground that the deductions claimed by the petitioner were not permissible under the new Section 4 of the Act as in that section there was no provision for deduction of post-manufacturing expenses. By its letter dated 30th September, 1975 addressed to the Assistant Collector, the petitioner expressed its inability to accept the latter's decision and stated that the duty would be paid by the petitioner under protest, which between 1st. October, 1975 and 30th November, 1975, the petitioner paid in the aggregate sum of Rs. 31,94,680.49. On 18th December, 1975, the petitioner filed the present petition for an appropriate writ to set acid the order dated 27th September, 1975 passed by the Assistant Collector and for a refund of the amount of Rs 31,94,680.49 paid by the petitioner under protest.

2. Mr. Setalvad, the learned Counsel appearing on behalf of the petitioner, challenged the impugned order dated 27th September, 1975 on two grounds. Firstly, Mr. Setalvad urged that on a true construction of the new Section 4, post-manufacturing expenses and profits attributable to post-manufacturing operations must be excluded from the value determined under Section 4. In the alternative, Mr. Setalvad urged that Section 4 partakes of the character of a sales tax falling under Entry 54 of List II in the VII Schedule of the Constitution and is therefore ultra vires the legislative competence of Parliament.

3. In reply to the first ground of challenge, Mr. Joshi, the learned Counsel appearing on behalf of the respondents, urged that under the new Section 4, the concept of post-manufacturing expenses and profits attributable to post-manufacturing operations did not come into picture at all, inasmuch as under the new Section 4, the dominant and only factor to be taken into consideration was the normal price and nothing else. According to Mr. Joshi, under Section 4, the normal price is the factory-gate price to a non-related person, without involving therein any other concept like post-manufacturing cost and profit arising from post-manufacturing operation, viz. selling profit and so forth. Mr. Joshi also relied upon the aims and objects . of enacting the new Section 4, namely to overcome the difficulties created by the decision of the Supreme Court in Voltas case to which I shall be presently referring to.

4. In order to appreciate these rival contentions, it would be pertinent to refer both to the old and new Section 4. The old Section 4 which was in force prior to 1st October, 1975 provided for determination of value for the purpose of duty and read as under : -

'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....'

* * * *''Explanation. - In determining the price of any article under this section, no abatement or deduction shall be allowed except in respect of the trade discount and the amount of duty payable at the time of the removal of the article chargeable with duty from the factory....'

5. The new Section 4 which came into force from 1st October, 1975 provides for the valuation of excisable goods for the purpose of charging of duty of excise and reads as under :

'(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 1 to say, the price at which such goods are ordinarily sold by the accessory 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 'or the sale :'

* * * *'(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 whereof determined in such manner as may be prescribed.'

* * * *The question that arises is whether on an interpretation of the new Section 4, it can be construed that the post-manufacturing expenses and profits attributable to post-manufacturing operations must be excluded from the value determined under Section 4. In other words, would the 'normal price' be inclusive or exclusive of the post-manufacturing expenses and profits attributable to post-manufacturing operations.

6. Before the new Section 4 came into force, in two leading cases of the Supreme Court and in two cases of the Division Bench of this Court, it was held that under the old Section 4 which was then in force 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 manufacturing profit to the exclusion of post-manufacturing cost and profit arising from post-manufacturing operation, namely, selling profit. So it was held by the Supreme Court in A.K. Roy v. Voltas Ltd.., 1977 E.L.T. (J177)= : 1973ECR60(SC) . Discussing the meaning of the term 'wholesale cash price', it was observed at para. 20 of the Report as under : -

'Excise is a tax on the production and manufacture of goods (see Union of India v. Delhi Cloth and General Mills, : 1973ECR56(SC) . Section 4 of the Act therefore provides that the real value should be found after deducting the selling cost and selling profits 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 profits. The section postulates that the wholesale price should be taken on the basis of cash payment thus eliminating the interest involved in wholesale price which gives credit to the wholesale buyer for a period of time and that the price has to be fixed for delivery at the factory gate thereby eliminating freight, octopi and other charges involved in the transport of the articles....'

7. The decision in Voltas case was followed in another decision of the Supreme Court in Atic Industries v. Asstt. Collector, Central Excise, : 1978(2)ELT444(SC) , where it was held that 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 profit arising from post-manufacturing operation and that 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 wholesale 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 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.

8. Nearer home is the decision of the Division Bench of this Court in Indian Tobacco Co. Ltd. v. Union of India and Ors., 1979 E.L.T. (J476), where it was held that Section 3(1) is the charging section which creates the liability to pay the excise duty while the provisions of Section 4 are in the nature of machinery provision, with the result that anything said therein must be read so as to carry out the basic concept of excise duty and not so as to militate against that concept. At para 12 of the Report, it was observed as under : -

'In other .words, Section 4 cannot be construed so as to enlarge the ambit of duty by including therein the post-manufacturing or non-manufacturing elements. Secondly the expression 'deem' is of flexible import and it does not always create a fiction as has been explained by Lord

Radcliffe in St. Aubyn and Ors. v. Attorney-General, 1952 A.C. 15....

* * * *In our view, therefore, there is nothing either in the deeming provision nor in the language of the section which suggests that while arriving at the assessable value of manufactured article the expenses of profits attributable to post-manufacturing activity or non-manufacturing activity should not be excluded for the purpose of calculating the excise duty payable on such article.'.

9. In Century Spinning and Manufacturing Co. v. Union of India, 1979 E.L.T. (J199), a Division Bench of this Court also followed, the ratio laid down in Voltas case Aue's and the Indian Tobacco case. At page 207 of the Report, it was observed us under : -

'It is, therefore clear r that the levy of excise must have relation to the production or the manufacturing cost of the goods produced by a manufacturer. Any levy of excise which takes into account the factors which are not connected with the production cost and profit on goods by the manufacturer would not be legal. That Sub-section (1) of Section 3 is the charging section and the objective must be to levy excise as laid down in Sub-section (1) is also clear from the wording of Section 3(2). The power conferred on the Central Government to issue notification must be for the purpose of levying the said duty which means the duties leviable under Sub-section (1) of Section 3. It would at once, therefore, be clear that the Central Government cannot transgress the limits of levying excise duty as laid down in Sub-section (1) of Section 3 by fixing the tariff values which have the result of fixing the values higher than the manufacturing cost and the manufacturing profit of the product. Under Section 4, it is the whole-sale cash price which is the assessable value. It is well-settled that the 'wholesale cash price' means the manufacturing cost and the manufacturing profit, and the post-manufacturing cost and the post-manufacturing profit has got to be ignored for finding out the assessable value for levying the excise duty at the rates laid down in the Schedule... In other words, the true character of excise duty is the tax on production and manufacture of goods. It would, therefore, follow that a levy of excise duty to be valid must be based on the production or manufacturing cost in addition to the manufacturing profit as the basis of excise duty. The valuation for the purpose of levying excise duty thus solely depends on the production and manufacturing cost and manufacturing profit of the product. This necessarily would exclude in inflation of cost and profit by the weighted average method or otherwise....On a consideration of the scheme of the provisions of Sub-sections (2) and (3) of Section 3 and Section 4, it would appear that they are machinery provisions which must conform to the main charging section which is Sub-section (1) of Section 3 and cannot go beyond that....

On reading the provisions of Section 3(1) and 3(2) and Section 4 together, it appears to us that it being a tax on production and manufacture of goods, the outer limit for fixation of the assessable value is the manufacturing cost together with manufacturing profit which has been expressed to mean the wholesale cash price in Section 4....'

10. Relying on these two decisions of the Supreme Court and the two decisions of the Division Bench of this Court, Mr. Setalvad urged that even though the new Section 4 had been substituted in the place of the old, no change whatsoever had been made in the charging section, namely Section 3, which remains the same and that merely a new machinery section, namely the new Section 4 was substituted for the old machinery section, namely the old Section 4, with the result that the rationale of the judgments of the Supreme Court and the Division Bench of this Court, continue to apply to the new Section 4. Mr. Setalvad finds support in no less than six decisions of various High Courts in India as stated presently.

11. The concept of 'normal price' appearing in the new Section 4 has been the subject matter of decisions of not less than six High Courts in India. In Indo-National Ltd. v. Union of India, 1979 ELT (J334). the new Section 4 had come up for consideration before the Division Bench of the Andhra Pradesh High Court which held that excise duty is a tax on the production or manufacture of excisable goods and unrelated to the sale of the same. The taxable event is the manufacture of goods and the duty is not directly on the goods but on manufacture thereof. The duty can be levied at any convenient stage so long as the essential character of the impost, namely that it is a duty on the manufacture or production, is not lost. In that case, after considering the decisions of the Supreme Court in Voltas case and Atic Industries case and other decisions of other High Courts under the old Section 4, the Andhra Pradesh High Court proceeded to examine the meaning and scope of the new Section 4 of the Act. On a consideration thereof, it held that excise duty payable under the charging Section 3 being a tax on manufacture, it could only be on manufacturing cost and manufacturing profit and the assessable value cannot be loaded to any extent by any other cost or profit which is unrelated to the cost of manufacture. It was observed at page 366 of the Report -

'...In other words, to arrive at the real value of the goods for the purpose of levy of duty, the price of the goods must be free from being loaded with post-manufacturing costs and expenses. If the price charged by the manufacturer or producer to his first buyer includes post-manufacturing costs or expenses which are unrelated to the manufacture or production, the price must be relieved of such loading arising out of the inclusion of post-manufacturing expenses and costs for the purpose of determining the assessable value. For the purpose of determining the assessable value under Section 4 of the Act, as it stood prior to 1-10-1975, the 'wholesale cash price' was to be ascertaired. After the amendment from 1-10-1975, the `normal price' is to be ascertained. Section 3 of the Act authorising the levy of excise duty on the manufacture and production of goods, it may be noted, is left intact and has not been amended by the Amending Act of 1973. What is more, the concept of 'Factory Gate sale' which was the basis for determination of the assessable value under Section of the Act as it stood [SIC] Affirmed in the amended Section and in the definition of 'normal pries' [SIC] in the amended Section 4, the element of sale of goods for delivery at the time and place of the removal has been preserved. The basis of excise duty, the before continue to be the manufacturing cost and manufacturing profit and the amendment of Section 4 does not and cannot, in any way, alter the basis of the levy of excise duty contained in Section 3 of the Act, remaining the same untouched and unlamented even after the substitution of the new Section 4....'

(The underlining is mine).

At page 368 of the Report it was observed as under : -

'Section 4 of the Act must, therefore, be construed as authorising the levy of excise duty on the manufacturing cost of the goods and manufacturing profit of the manufacturer. In other words, the normal price for the purpose of levy of duty must be free from being loaded with post-manufacturing costs, expenses and profits which are unrelated to the manufacture or production of the goods.'

(The underlining is mine).

12. In Nappal Petro-Chem. Ltd. v. Assistant Collector of Central Excise, Madras, 1979 ELT (J117), the new Section 4 had also come up for interpretation by the Madras High Court. After considering the decision of the Supreme Court in Voltas case and Atic Industries case and the decision of the Division Bench of this Court in Indian Tobacco case, it was observed by the Madras High Court at page 122 of the Report as under : - -

''Under Section 3 of the Act, excise is a tax on the production and manufacture of the goods. Therefore, post-manufacturing expenses and profits must be excluded from consideration in determining the wholesale market value of the excisable goods. Even the amended Section 4 Sub-section (l)(a) says that the normal price of the goods should be taken to be the price at which such goods were ordinarily sold by the assessee in the course of wholesale trade for delivery at the time and place of removal, subject to the condition the buyer is not a related person and the price is the sole consideration for the sale. Inasmuch as the petitioner effects a few sales at wholesale market rate at the factory gate itself, it is that rate which has to be taken as the normal price of the products, especially when the respondents have not shown that such sales have not taken place or that such sales were to related persons or that the sales were effected on other considerations than of price alone. Secondly, the respondents have also not placed materials to show that the rates at which the goods have been sold at Bombay to Sikri and Grover are lesser in value than the wholesale market rate for sales effected at factory gate. On account of all these factors also, the petitioner's challenge about the correctness of '' the impugned order has to be sustained'.

13. The construction of the new Section 4 also came up for determination before the Division Bench of the Kerala High Court in Madras Rubber Factory Ltd. v. Assistant Collector of Central Excise, Kottayam, 1979 ELT 397, where it was held that the post-manufacturing expenses and profits cannot be included in the assessable value because inclusion of post-manufacturing expenses would indicate that the levy is something other than a duty of excise.

14. On the interpretation of the new Section 4, the Delhi High Court held in Madras Rubber Factory Ltd. v. Union of India, 1979 E LT 173 that the value of goods for the purpose of excise should take into consideration only the manufacturing cost and the manufacturing profits without being loaded with post-manufacturing cost or profits arising from post-manufacturing operation. In that case also, reliance was placed on the decision of the Supreme Court in the A tic Industries case.

15. The new Section 4 also came up for construction before the Division Bench of the Patna High Court in Tata Engineering and Locomotive Co. Ltd. v. S.N. Guha Thakurta, 1977 E L.T 14, where, after a comparison of old and new Section 4 and after considering the decision of the Supreme Court in Voltas case and other cases, the Patna High Court observed at page 21 of the Report as under : -

'Judged in the background of the decisions, the provisions of amended Section 4 have to be construed. Section 4(l)(a) lays down that the 'normal price' will be the price at which the 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 assessee and the buyer have no interest, directly or indirectly, in the business of each other and the price is the sole consideration for the sale. The first proviso provides for situation where 'normal price' in wholesale trade may be different for different classes of buyers under the circumstances mentioned therein. It is not disputed that the petitioner's vehicles are sold to buyers in course of wholesale trade and it is the 'wholesale cash price' which will be the 'normal price' thereof under the amended provision of S 4(l)(a) of the Act. Undoubtedly, therefore, the value of the vehicles for the purpose of charging excise duty will be the aforesaid 'normal price'....'

16. The new Section 4 had also come up for construction before the Division Bench of the Gujarat High Court in Cibatul Ltd. v. Union of India, 1979 E L T 407, where after considering the decision of the Supreme Court in Voltas case and Atic Industries Case and other decisions, it was held by the Gujarat High Court that the duty of excise is a tax on manufacture or production of goods and it can be levied on the assessable value thereof which consists of manufacturing costs and manufacturing profits and cannot be loaded with any post-manufacturing costs and post-manufacturing profits which arise out of subsequent, operation. At para 19 of the Report at page 417, it was observed as under : -

'...it must be linked with manufacture or production of an excisable article. It can be levied on the assessable value of excisable goods which consists of manufacturing costs and manufacturing profits and which cannot be loaded with post, manufacturing costs and pout-manufacturing profits such as those which arise out of subsequent sales....'

(The underlining is mine,)

It was further held that it was wrong to say that having imposed excise duty under the charging section, unrelated, strange or unconnected measures can be provided to realise it and such measures need not necessarily have any relation whatsoever to the impost levied under the charging section.

17. Mr. Setalvad's contention, there, is supported by not less than six decisions of various High Courts in India, which, briefly recapitulated, have held that under the new Section 4, excise is levied only on the amount representing the manufacturing cost plus the manufacturing profit and excludes, post manufacturing costs and profit arising from post-manufacturing operations, namely selling profit. These decisions bring out in bold relief that the normal price for the purpose of levy of duty cannot be burdened with post-manufacturing costs, expenses and profits unrelated to the production of the goods. With these decisions I am in respectful agreement. Thus the ratio laid down under the old Section 4 in Voltas case, Atic Industries case and the Indian Tobacco case, is the same even under the new Section 4.

18. The emphasis of Mr. Joshi on the objects and reasons for enacting the new Section 4, namely to overcome the difficulties created by the decision in Voltas case, can be of no avail to the respondents in the teeth of the numerous decisions referred to earlier. Furthermore, it is not sufficient merely to emphasise the objects and reasons for enacting the new Section 4 where on the construction of that section itself the factors and basis of determining the normal price can be arrived at.

19. Mr. Joshi relied on the decision of the Supreme Court in McDowell and Co. v. Commercial Tax Officer, : [1977]1SCR914 where it was held that 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, ultimate incidence will always be on the customer. 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 import, namely that 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. Thus laws are to be found which impose a duty of excise at stages subsequent to the manufacture or production. Mr. Joshi urged that therefore the question of the dissection as to how much is the manufacturing cost and manufacturing profit and other such factors do not arise. Mr. Joshi also relied on the decision of the Division Bench of this Court in the Elphinston Mills case reported in 1978 E L T (J680) where it was held that the method of collection does not affect the essence of duly but only relates to the machinery of collection for administrative convenience. There is nothing either in McDowell's case or Elphinston Mills case which in any manner detracts from the ratio laid down by the Supreme Court and other High Courts in India in the cases starting from Voltas case.

20. In the result, the first ground of challenge urged by Mr. Setalvad must be accepted and on that ground the impugned order dated 27th September, 1975 is liable to be set aside.

21. In view thereof, the alternate ground of challenge urged by Mr. Setalvad becomes academic and it is unnecessary to enter into that aspect of the matter.

22. In the result, the impugned order dated 27th September 1975 is set aside and the petition is allowed in terms of prayer (a). Regarding the refund of the amount of Rs. 31,94,680.49 paid by the petitioner under protest, the respondents shall consider within six months from today the petitioner's revised price lists in the light of this judgment and shall within three months thereafter refund to the petitioner such amount as is refundable. There will be no order as to costs. Rule is made absolute accordingly.Advocates : Mr. A.M. Setalvad with Mr. F.H.J. Talyarkhan, Air. R.A. Dada and Mr. S.F. Pochkhanwalla for the Petitioner. Mr. R. J. Joshi with Mr. K.C Cooper, Mr. R.L. Dalai and Mr. R.L. Mukherjee for the Respondents.


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