Avadh Behari Rohatgi, J.
(1) (ORAL) Since the days of electricity we all know what an electric lamp is. It is a glass bulb-shaped container of the incandescent filament used for producing electric light in a glow lamp. Nearly a hundred years ae:o, in 1882, the electric bulb was inven.ted. In recent times fluorescent tubes have come in fashion. This case deals with the levy of excise duty on component parts of electric- bulbs and fluorescent tubes.
(2) Hind Lamp Ltd., petitioners in this case, are a. company incorporated under the Indian Companies Act, (the company) . They are engaged in the manufacture of electric bulbs and fluorescent tubes. Their factory is at Shikohabad. They have two units. One is called lamp unit. The other is known as glassware unit. In the lamp unit the company manufactures incandescent lamps and fluorescent tubes. These are sold by them to various companies who market these lamps and tubes under their own brand names. No question, however, is in these proceedings raised as to the electric bulbs and fluorescent tubes in their finished form ready for sale. They were the subject of another proceeding in the Allahabad High Court.
(3) In the glassware unit the company manufactures glass shells and tubes. These are component parts of electric bulbs and fluorescent tubes. Shells and tubes are without flange and exhaust tubings which constitute the stem of the lamp. Other manufacturers use these glass shells and tubes for the manufacture of electric bulb and fluorescent tube.
(4) The company sells their glass shells and tubes to a firm at Calcutta known as Unipro Lamp Components. The company does not sell these commodities to any independent purchaser. Anyone who is interested in the component parts of the company has to purchase them through Unipro.
(5) Since March 1961 all glass and glassware were subjected to excise duty by virtue of item 23A of the First Schedule to the Central Excise and Salt Act, 1944 (The Act) . thereforee from 1961 these two components manufactured by the company were assessable to excise.
(6) The Superintendent of Central Excise is the exciseman. He inspects and rates articles liable to excise and collects and enforces payment of excise due.
(7) From 1961 to 1965 the procedure for the assessment of excise duty was broadly this. The company used to supply its price list every quarter to the Superintendent. He would approve the prices. The prices so approved formed the basis of assessment and levy of excise duty. This was the invariable course of businew. This basis of value was accepted by the excise authorities up to June, 1965. It is for the restoration of this basis, and of the assessment on this footing, that the company contends in this petition.
(8) On 3rd July, 1965 the Deputy Superintendent of Central Excise addressed a letter to the company. He said:
'AS the entire supplies for outside parties are made through or to Messrs. Unipro Limited, Calcutta, the wholesale prices declared by you cannot be treated as the ones for the purposes of assessment'.
On July 7, 1965 the Superintendent wrote:
'THE prices already approved by the Superintendent thereforee- stand withdrawn from 1965'.
(It may be mentioned that Unipro Ltd. is a misnomer here. Unipro is a partnership firm and not a limited company) .
(9) Dispute arose. The excise authorities were not willing to accept the wholesale price at which the company sold their products to Unipro as the basis of assessment under section 4 of the Act.
(10) The company on the other hand contended that the price charged to Unipro at the factory gate ought to form the basis of assessment under section 4. The excise authorities did not accept the contention of the company. In August, 1965 they decided to adopt the price which was being charged by Unipro Ltd. to the purchasers as the basis of the assessment.
(11) In June, 1966 the Superintendent also made a claim for 'differential duty' for the past years. He claimed the difference in duty already paid and the duty which became payable on the basis of assessment now adopted by him. Two demands were raised-one for Rs. 2,42.215.46 and the other for Rs. 8,837.24. These related to the period from 1st March, 1961 to 3rd May, 1965.
(12) Aggrieved by this stand of the Superintendent the company made a representation to the Assistant Collector of Central Excise at Agra. He passed an order on 1st December, 1965. His conclusions- may be summarised as follows:
1. That it is a case of special relationship.
2. That Bajaj Electricals Ltd. are a partner of the firm of Unipro having a share of 8 annas in a rupee and they are also the shareholder in the company holding 50 per cent shares. On this basis he held that it is not a case of sale to an independent purchaser but a case of sale brought about by 'special relationship' between .the- parties.
3. That the price charged to M/s. Unipro was not the real, value, and thereforee did not afford the basis for assessment under section 4.
4. That the price which was being charged by Unipro at Calcutta from independent purchasers to whom these goods were sold represents the real value and formed the basis of assessment under section 4.
(13) Against the order of the Assistant Collector an appeal was taken to the Collector of Central Excise. He dismissed the appeal on 16th November, 1966.
(14) The company filed a revision before the Central Government. By an order dated llth/18th March, 1968 the Central Government dismissed the revision. But it gave relief to the company to this extent 'that the demands for differential duty in question shall be waived or modified as per the limitation prescribed under Rule 10 of Central Excise Rules, 1944 and consequential relief allowed to the petitioners'. This meant that the time barred claims of excise duty could not be recovered from the company. But it was no great gain. The new basis of assessment which had been adopted by the Superintendent and the Assistant Collector and affirmed in appeal stood. It is now the principal bone of contention.
(15) On 29th August, 1968 the company filed the present writ petition under Articles 226 and 227 of the Constitution of India. Their main complaint is that on this new and erroneous principle they have been charged with and have been compelled to pay duty in excess of what _was lawful. Their claim is to recover the excess so paid. They pray that the orders of the excise authorities be quashed and the correct basis declared
(16) It will be convenient to set forth at once the provisions of section 4 of the Act as it stood before amendment :
'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 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 be sold or is 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, or if such article is not sold or is not capable of being sold at such place, at any other place nearest thereto. Explanationn: 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'.
(17) Section 4 was amended subsequently. The amendment came into force on October 1, 1975. It is common ground that the amended section has no application to this case.
(18) The chief point to be- decided in this case is: What is the proper basis of assessment under section 4 The facts are not in dispute. The company manufactures glass shells and tubes. They sell their entire production to Unipro of Calcutta. Unipro sells it further to independent purchasers. In Unipro, Bajaj Electricals Ltd. as a partner thereof have a share of 8 anna's in rupee. They are also- a shareholder of the company to the extent of 50 per cent of the entire share-holding.
(19) The excise authorities have adopted the prices charged by Unipro to independent purchasers as the basis of assessment. Is this the correct basis This is the question to be decided.
(20) The law on the subject was wrapped in fogs of vague thinking till the decision of the Supreme Court in A. K. Roy and another v. Voltas Ltd. : 1973ECR60(SC) was given on 1st December, 1972. The High Courts had held that the price of sales to wholesale dealers did not represent the 'wholesale cash price' for the purpose of section 4(a) of the Act and that in order that saies might be wholesale sales, the purchasers must be independent persons. The Supreme Court held this view to be erroneous. The Court said:
'EVEN if the articles in question were sold only to wholesale dealers on the basis of agreements and not to independent persons, that would not make the price for the sales anything other than the 'wholesale cash price.'
(21) VOLTAS' case is a landmark in excise law. With the decisions of the High Courts law had become foggier still. Voltas' case overruled the view of the High Courts which had held the field till then. It laid down a clear test. In unambiguous terms it held :
'SECTION 4 of the Act thereforee 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 manufactuling 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.'
(22) The decision in Voltas' case (supra) was followed last year by the Supreme Court in a recent decision: Atic Industries Ltd. v. H. H. Dave, Assistant Collector of Central Excise & others, : 1978(2)ELT444(SC) .
(23) Under section 4 there are two fundamental considerations which have to be borne in mind. The first is that excise is a tax on the production and manufacture of goods. Excise is an internal duty levied upon the manufacture of a commodity. It is an indirect tax that falls on the ultimate consumer. But in the first instance it is an impost levied on the producers of exciseable commodities.
(24) Section 4 provides that the real value of the article chargeable with duty should be found. The real value can include only the manufacturing cost and the manufacturing profit. The section makes it clear that excise is to be levied only on the amount representing the manufacturing cost plus the manufacturing profit.
(25) The second important consideration is that it is a sale at the factory gate as the section, says. If the sale is at the factory gate that is the place and time at which we have to ascertain the real value of the goods. That is the point of time when the goods enter the mainstream of trade. We are not concerned with the further flow of goods or their onward journey. Before they reach the hands of the consumer they pass through many hands-hands of wholesalers.and retailers. With those sales the excise authorities have nothing to do. It is the sale by the manufacturer to the first wholesale dealer at the factory gate that is made decisive under section 4. The price charged by the manufacturer to the wholesale dealer at that time and place would represent the real value of the goods for purposes of assessment of excise duty. This is the concept of the factory gate sale. In Atic Industries case (supra) their lordships said :
'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.'
(26) All that has to be seen is : Does the sale price at the factory gate represent of the 'wholesale cash price' The test is this. If the price charged to the purchaser at the factory gate is fair and reasonable and has been arrived at only on purely commercial basis then that should represent the 'wholesale cash price' under section 4(a) of the Act. This is the price which has been charged by the manufacturer from the wholesale purchaser or sole distributor. It may be under an agreement with them. What has to be seen is that this agreement is made 'at arms length and in the usual course of business'. If it was not made at arms length or in the usual course of business then that will not be the real value of the goods. Suppose the sale is to a favored buyer or to a relative or is the result of a secret agreement with him for obtaining extra-commercial advantages. In that case it will not represent the real value. It will be a sale at a cost lower than the real value. Mathew, J. speaking for the court said:
'IF there is a special or favored buyer to whom a specially low price is charged because of extra-commercial considerations, e.g., because he is relative of the manufacturer, the price charged for those sales would not be the 'wholesale ash price' for levying excise under section 4(a) of the Act' (P. 230) .
(27) Applying the principle of Voltas' case to the facts of the instant case it is quite clear that the new basis adopted by the excise authorities is not the right one. The basis of assessment which found favor with them is the price charged by Unipro from independent purchasers. The right basis ought to be the price charged by the company to Unipro at the factory gate. This will represent the manufacturing cost plus the manufacturing profit. If the price charged by Unipro from independent purchasers is adopted as the basis that will mean that the selling cost plus selling profit will become the basis of assessment. Under the Act the 'Wholesale cash price' means not the selling cost plus selling profit. It means the manufacturing cost plus manufacturing profit.
(28) The Standing Government Counsel argues that, as found by the Assistant Collector, it is a case of special relationship and thereforee, the price charged to Unipro at the factory gate cannot be said to be the 'wholesale cash price' for the purposes of section 4(a) . He advocates the basis adopted by the excise authorities as the correct one. I cannot accept this submission. It was not the case of the excise authorities at any time that specially low prices were charged by the company to Unipro because of extra-commercial consideration or that the transactions were anything but fair and reasonable or arrived at purely only on commercial basis. It was never pleaded in the counter affidavit that the sale to Unipro is not a sale at arms length and not in the usual course of business. All that was said in the affidavit was this :
'M/S.Unipro Lamp Components, Calcutta had special relationship ith petitioner inasmuch as the entire sales of M/s. Hind Lamps were to or through M/s Unipro Lamps Components, Calcutta.'
(29) The excise authorities think that Unipro is a favored buyer as apart from it no independent buyer could purchase the articles in wholesale market directly from the manufacturer at the factory gate. This is the basis of their decision. In so thinking the authorities have completely misunderstood the meaning and purpose of section 4.
(30) That there is special relationship is an argument that only fogs the issue in debate. These glass goods are amongst the goods 'chargeable with duty', the amount of duty to be charged being made dependent upon the 'value' or the 'price' of the goods. How is the value or price to be ascertained The assessable value is 'the price. The price to be ascertained is 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 manufacture or production. This is the meaning and connotation of the statutory expression: 'the wholesale cash price'.
(31) In order to ascertain the 'wholesale cash price' the statute (section 4) posits a wholesale market. It is not necessary that there should be a market in the physical sense of the term. If an actual market for a particular article does not exist the court will have to postulate a hypothetical market and a hypothetical purchaser keeping in view the potentiality of the article for sale on a wholesale basis and what a purchaser might be expected to pay in ready cash in the higgling of the market. The concept of wholesale market was explained by Mathew, J. He said .
'A wholesale market does not always mean that there should be an actual place where articles are sold and bought on a wholesale basis. These words can also mean the potentiality of the articles being sold on a wholesale basis. So, even if there was no market in the physical sense of the term at or near the place of manufacture where the articles of a like kind and quality are or could be sold, that would not in any way affect the existence of market in the proper sense of the term provided the articles themselves could be sold wholesale to traders, even though the articles are sold to them on the basis of agreements which confer certain commercial advantages upon them'.
(32) The concept of wholesale market is like the concept of a hypothetical tenant in rating law. There must always enter an element of conjecture, assumption and legal imagination in such a conception for otherwise the statutory concept will break down if it is too impeccably applied in terms of its real existence to this temporal world of ours. But Mr. Justice Cardozo has said that concepts are useful, indeed, indispensable, if kept within their place. They are the tools of the legislature employed to achieve a definite result.
(33) If the goods in question are such that they or their like kind and quality are not readily available in the market it does not mean that their value cannot be ascertained. As Sir George Rankin said in the Privy Council case of Ford Motor Company v. Secretary of State that those goods then may be considered as 'members of their own class' even though at the relevant time there are no other members and the price obtained for them may correctly represent the price obtainable for goods of a like kind and quality at the relevant time and place.
(34) Nor is it necessary for a wholesale market to exist that there should be a large number of wholesale sales. Even one sale may in certain circumstances be representative of a wholesale market. As Mathew, J. said:
'THE quantum of goods sold by a manufacturer on wholesale basis is entirely irrelevant. The mere fact ther such sales may be few or scanty does not alter the true position'.
(35) That the entire sales by the company were made through Unipro is the index of a special relationship. This is the logic of the argument of the excise authorities. But the Supreme Court has held that a manufacturer is not prevented by law from making all his sales to a sole selling agent or sole distributor. He can route all his products through one single individual or firm or company. He can refuse to sell his goods to independent purchasers. He can say to them 'if you are interested in buying my products go to such and such'. There is no bar to his so acting. It does not mean that Unipro is a favored buyer and the price charged to in is not fair or reasonable or the real value of the goods. It is for the excise authorities to show that the price charged to Unipro was a concessional or specially low price or a price charged to show favor and to gain in return extra-commercial advantages. If it is successfully shown that the price charged to Unipro is lower than the real value of the goods (which will mean the manufacturing cost plus manufacturing profit) or that there is a secret arrangement between the manufacturer and the wholesale single buyer to understate the price of the article to defeat the claim of the revenue the excise authorities can refuse to accept that price. That was never the case of excise authorities at any stage. Nor was it the basis of their decision.
(36) The adoption of the price charged by Unipro to independent purchasers cannot form the basis of assessment. Firstly it is the retail price and not the wholesale price. In the second place the price charged by Unipro represents the selling cost plus selling profit. That cannot be said to be the 'wholesale cash price' as held by the Supreme Court. The conclusion thereforee is that the basis adopted by the excise authorities is not lawful.
(37) Counsel for the petitioner company Mr. S. L. Watel says excise duty was also being charged on l/10th of the packing charges illegally. But it was not challenged before the excise authorities. The company did not contest the inclusion of l/10th of packing charges in the prices quoted by it. There was acquiscense. It is not thereforee open to the company now to challenge the inclusion of l/IOth of the packing charges in the prices. As the counsel has not pressed this point I say nothing about it.
(38) For these reasons I would accept the writ petition and quash the orders of the excise authorities on the glass shells and glass tubes manufactured by the company. I direct the respondents to refund to the company forthwith the amount collected in excess of the correct duty of excise as pronounced in this judgment. The excise authorities are forbidden from recovering the excess duty claimed by them and which has not so far been paid to them. The respondents will pay costs to the company. Council's fee Rs. 250.00 .