TMI Blog1979 (2) TMI 108X X X X Extracts X X X X X X X X Extracts X X X X ..... 30% of its share capital is held by the Swiss company and the remaining 5% of its share capital is held by the buyer. So far as the buyer is concerned, 65% of its capital is held by the Swiss Company. The Swiss Company has registered trade marks in respect of which licence has been granted by it to buyer to use them. Two agreements dated 24th March, 1971 and 7th December, 1971 were entered into between the manufacturer and the buyer. Agreement dated 24th March, 1971 provided for the sale of certain manufactured goods to the buyer. Agreement dated 7th March 1971 is a tripartite agreement between the manufacturer, the buyer and the Swiss Company. Under this agreement, the manufacturer is permitted to affix a certain trade mark of the Swiss Company on goods manufactured by the manufacturer and sold to the buyer under the agreement dated 24th March, 1971. Two more agreements, similar in character, dated 1st June, 1973 and 1st December, 1973, in respect of certain other goods manufactured by the manufacturer were entered into. 2. The manufacturer is required by the Central Excise authorities to pay excise duty not on the price which the manufacturer charges the buyer but whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expression "Duties of excise". The question, in our opinion, is not open to debate because it has been the subject matter of several decisions of the highest Court of this country. They are binding on us. 4. In the matter of the Central Provinces and Berar Sales of Motor Spirit and Lubricants Taxation Act, 1938 A.I.R. 1939 F.C. 1 = 1978 E.L.T. (J 269), the Federal Court has laid down certain principles which may be noted. So far as the interpretation of legislative powers of the Federal Legislature and Provincial Legislatures was concerned, the Federal Court observed that no narrow and technical construction should be placed upon them. Taking into account the magnitude of subjects dealt with by the Government of India, Act 1935, in a few words, a large and liberal interpretation should be given to them so that the Central Government, within certain fixed limits, may be mistress in her own house and the Provinces, to a great extent but again within certain fixed limits, are mistresses in their houses. So far as the width and amplitude of the duties of excise was concerned, Sir Maurice Gwyer C.J. stated that the power to make laws with respect to duties of excise given to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... overlap." Mr. Vakil has also pointed out to us that the taxes on the sale of goods include even first sales that, while approaching a question of this kind, the Court must try to find out the pith and substance of the levy and not its form. Mr. Vakil has made this attempt to show that under the scheme of Section 4 (as amended), there is no overlapping of excise duty and sales tax and that if there is any, on a liberal construction of the relevant entries, it is constitutionally permissible. 6. In The Province of Madras v. Messrs Boddu Paidanna Sons, AIR 1942 F.C. 33 - 1978 E.L.T. (J 272), the Federal Court observed in the context of Entry 45 of the Federal Legislative List that the duties of excise which the Government of India Act, 1935, assigned exclusively to the Central Legislature were duties leviable upon the manufacturer or producer. Where power to levy duties of excise and sales tax has been given to two independent authorities. the expression "duty of excise" must be given a more restricted meaning than it might otherwise bear even though that expression is wide enough to include a tax on sales. The principles laid down in the earlier decision in Centra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rican and Canadian decisions were cited before the Supreme Court. The Supreme Court felt that not much assistance could be derived from those decisions for discovering the scope and content of the expression "duty of excise" used in Entry 84 in the Union List. On behalf of the Central Government, it was contended in that case that an excise duty is a duty which may be imposed upon home-produced goods at any stage from production to consumption and that, therefore, the central legislative power extended to imposing excise duty at any stage. It was observed by the Supreme Court that there was no reason in theory why an excise duty should not be imposed even on a retail sale of an article if the taxing Act so provided subject always to the legislative competence of the taxing authority. It has also been laid down by the Supreme Court in that case that the taxable event in case of an excise duty is manufacture or production of goods and that it is immaterial what happens to the goods afterwards, whether they are sold, destroyed or given away. The Supreme Court has referred with approval to the following paragraph in the decision of the Privy Council in the Province of Madras case (supr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... " is that it is a tax on articles produced or manufactured in the taxing country and intended for home consumption. Relying to this decision, Mr. Vakil has argued that the observations made by the Supreme Court have no relation to the measure of tax, to any component thereof or to any considerations relevant to the measure of tax. He has also tried to argue that this decision merely relates to the rational connection between the tax and the persons on whom it is imposed. It is true that this decision does not deal with the measure of tax. But can it, therefore, be said that this decision authorizes the collection in the name of excise duty of something else which clearly falls within the State List or can it be said that it is totally irrelevant and inapplicable to the question which we are called upon to answer ? We think not. 11. In Union of India and another v. Delhi Cloth and General Mills Co .Ltd., AIR 1963 S. C. 791 = 1977 E.L.T. (J 199), the Supreme Court has laid down that the excise duty is a tax on the manufacture of goods and not on their sale. Mr. Vakil has tried to distinguish this decision by arguing that it deals with the taxable event in case of a duty of e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e manufacture or production of goods has to be decided on the facts of each case. While deciding the question, the following principles are required to be borne in mind. Firstly, it must be uniform in its incidence. Secondly, it must be closely related to production or manufacture of goods. Thirdly, if a levy is made not at the moment of manufacture or production but at later stage, it does not matter. Fourthly, if a duty has been levied on an excisable article but is collected from a dealer, it does not necessarily cease to be an excise duty. Fifthly, if the levy is made for the privilege of selling an excisable article and if the excisable article has already borne the duty and the duty has been paid, there must be clear terms in the charging section to indicate that what is being levied for the purpose of privilege of sale is, in fact, a duty of excise. This question arose in the context of the Mysore Health Case Act (28 of 1962). In reply, Mr. Vakil has only stated that this decision deals with the levy and not the measure. He did not amplify his reply and left us to guess what he was driving at. If he could not show his desideratum, we would not, on our own, venture to dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nufacturing cost and manufacturing profits. In the opinion of the Supreme Court, the excise duty should be levied on the amount of manufacturing costs and manufacturing profits and post-manufacturing costs and post-manufacturing profits arising from post-manufacturing operations, viz. the sale ought to be excluded. Next, while determining the assessable value of goods for the purpose of excise duty, manufacturing costs and manufacturing profits alone should be taken into account and they must not be loaded with post-manufacturing profits arising from post-manufacturing operations. In this context, it has been observed that the price charged by the manufacturer on the wholesale goods would represent the real value of the goods for the purpose of assessment of excise duty. Adverting to the attempt to assess excise duty on the price charged by the wholesaler and not by the manufacturer from whom the wholesaler has purchased the excisable goods, this is what the Supreme Court has observed : "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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n that decision, the Supreme Court has interpreted repealed Section 4 and not Entry 84 in the Union List. The interpretation which a Court places upon a particular section must necessarily be consistent with its legislative competence if it holds it valid. Therefore, it is erroneous to say that the interpretation placed by the Supreme Court upon repealed Section 4 has no connection whatsoever with Entry 84 in the Union List. For the purpose of determining the legislative competence of Parliament and for the purpose of finding out the mischief which the Parliament has tried to cure, we are bound to take into account the binding principles laid down by the Supreme Court. What the Parliament has now done by amending Section 4 is not what was done by the Central Excise authorities earlier. The executive action of the Central Excise authorities was called in question in the earlier decisions. In order to get over the decisions of the Supreme Court in this behalf, the Parliament has amended section 4. But, amended Section 4 cannot enjoy greater sanctity if the Parliament does not have the legislative competence to enact it. In this behalf, it will be appropriate to note the STATEMENT OF ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y. Generally speaking, the tax is on the manufacturer or the producer, yet laws are to be found which impose a duty of excise at stages subsequent to the manufacture or production (vide paragraph 9). It has been further observed that the levy of excise duty should be essentially linked with production or manufacture of an excisable article, though it may be recovered in the form of a licence fee (paragraph 10 of the report). Where, however, the levy or tax has no nexus with the manufacture or production of an article, the impost or tax cannot be regarded to be one in the nature of excise duty. 19. It is clear from all these decisions rendered during a period of 37 years from 1939 to 1976 that a duty of excise within the meaning of Entry 84 in the Union List is a tax on manufacture or production. In other words, 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 post-manufacturing profits such as those which arise out of subsequent sales. Once the link of the levy wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se. That view has found repeated approval of the Supreme Court in several decisions rendered in context of Entry 84 in the Union List. We may also note that in the Central Provinces ' case (supra), the Federal Court applied the doctrine of "pith and substance." 23. Our attention has also been invited to certain decisions which have a bearing upon the principles of construction. In Chaturbhai M. Patel v. Union of India and others, AIR 1960 S.C. 424, the principle which has been laid down is : "In every case where the legislative competence of a legislature in regard to a particular enactment is challenged with reference to the entries in the various Lists it is necessary to examine the pith and substance of the Act and if the matter comes substantially within an item in the Central List it is not deemed to come within an entry in the Provincial List even though the classes of subjects looked at singly overlap in many respects. It is within the competence of the Central Legislature to provide for matters which may otherwise fall within the competence of the Provincial Legislature if they are necessarily incidental to effective legislation by the Central Legislature on a su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with duty at a rate dependent on the value of the article, such value be deemed to be:- (a) the wholesale cash price for which an article of the like kind and quality is sold or is capable of being sold at the time of the removal of the article chargeable with duty from the factory or any other premises of manufacture or production for delivery at the place of manufacture or production or if a wholesale market does not exist for such article at such place, at the nearest place where such market exists, or ...". We are not concerned with clause (b) of Section 4 in the instant case. Section 4 after its amendment, inter alia , provides as follows :- "4(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- (i) the normal price thereof, that is to say, the price at which such goods are ordinarily sold by the assessee to a buyer in the course of whole-sale trade for delivery at the time and place of removal, where the buyer is not a related person and the price is the sole consideration for the sale :- Provided that- (i) ... (ii) ... ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich a "related person" is charged by the manufacturer be necessarily ignored as Section 4 provides ? The definition of the expression "related person" casts its sweep wide and large. But, that is a matter of legislative policy for Parliament to determine. The basic question which has been raised is this. Assuming that the manufacturer charges "a related person" a fully commercial price representing the manufacturing costs and manufacturing profits, can it be ignored ? Section 4 wants it to be done. Parliament, under Entry 84 in the Union List, cannot levy excise duty upon anything other than manufacturing costs and manufacturing profits. However, Section 4 wants the fully commercial price a manufacturer charges his "related person" to be ignored. If it is ignored, which is the price which should be taken into account ? 30. Proviso (iii) to clause (a) of sub-section (1) of Section 4 if read in light of the principal part of sub-section (1) of Section 4, makes it very clear to us that in case of a sale to a "related person", the price which that related person charges his buyer is the assessable value for the purpose of assessing excise duty even though the buyer, in his turn, mu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... b-section (1) of Section 4 of the Excise Act brings out the following result. We assume that the manufacturer's buyer is a "related person". We also assume that the manufacturer has charged such buyer of his the commercial price which fully reflects manufacturing costs and manufacturing profits and that the transaction between the two has been at arm's length. Now, this fully commercial price, in terms of sub-section (1) of Section 4, must be ignored and the second or subsequent price which the manufacturer's buyer charges his buyer must be taken into account as the assessable value of the excisable goods. The second price will consist of four elements: (i) manufacturing cost and (ii) manufacturing profits which the manufacturer's buyer (related person) has paid the manufacturer; (iii) selling cost and (iv) selling profits of the manufacturer's buyer (the related person). It cannot be gainsaid that selling costs and selling profits of the "related person" has nothing to do with the manufacturing activity. It is a pure transaction of sale totally unrelated to manufacturing activity of the manufacturer. In fact, it is a post-manufacturing activity. In our opinion, any tax on selling ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oes not matter whether the assessee arranges to sell his excisable goods in the course of wholesale trade at the time of their removal to or through a "related person" if such "related person" pays the price which wholly reflects manufacturing costs and manufacturing profits. Merely because a manufacturer has sold the goods to a "related person", it does not mean that the price which he pays even though it is a fully commercial price should be ignored and that the second price should be taken into account. Therefore, "related person" or no 'related person' as long as the manufacturer charges his buyer a fully commercial price, reflecting manufacturing costs and manufacturing profits, it ought to be taken into account for the purpose of determining the assessable value for excise duty. 35. Again, "related person" or no "related person" if a manufacturer charges his buyer a concessional price which is deflected by extra-commercial considerations and which does not fully reflect the manufacturing costs and manufacturing profits, the central excise authorities are entitled to ignore it. In other words, the test of "transaction at an arm's length" which the Supreme Court has e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not have an opportunity to meet this contention. We, therefore, disallowed this contention in limine only on the ground that the respondents, having failed to raise it in their written pleadings, have denied the petitioners a reasonable opportunity of being heard in the matter. However, Mr. J.G. Bhatt out of abundant caution submitted extempore that this was not an Emergency legislation. The amending legislation was enacted on 19th May, 1973. It received the Presidential assent on 21st May, 1973. Except Section 2, which amended Section 4 of the Excise Act, all provisions came into force at once on 21st May, 1975. Section 2 which amended Section 4 was brought into force on 1st October, 1975 by a notification issued on 8th August, 1975. According to Mr. Bhatt, these facts show that the material section of the amending Act-Section 2,- which amended Section 4 was enacted before the second Emergency was proclaimed. We are not expressing any opinion on this aspect because the petitioners did not have a reasonable opportunity to meet it on account of the fact that the respondents did not raise it in their affidavits-in-reply. 39. Mr. S.B. Vakil has next argued that constitutiona ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... argument raised by Mr. Vakil because whichever section, whether the charging section or the machinery section, goes beyond the legislative field denoted by Entry 84 in the Union List and entrenches upon Entry 54 in the State List suffers from the constitutional vice and must be struck down. 42. The next argument which Mr. Vakil has raised is that if there is any encroachment which Section 4 makes on the legislative field earmarked for a State Legislature under Entry 54 in the State List, it is incidental and that such an impost, in pith and substance, falls under Entry 84 in the Union List. In the first instance, what the Parliament has done by amending Section 4 is not an incidental encroachment upon the State List, because the Parliament has classified manufacturers and producers into two categories: (i) those who sell their products to or through "related persons" and (ii) the rest. In case of the first mentioned class of manufacturers or producers, Parliament wants the second price to be taken into account and not the first price even though the first price fully reflects manufacturing costs and manufacturing profits. Under these circumstances, it is difficult to brin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h of the Bombay High Court that prima facie it was not a tax on income. It is in this context that Mr. Justice Broomfield in his separate but concurring judgment observed that the mode of assessment does not determine the character of a tax. The learned Judge has further observed that the Court in each case has to discover what is the "essential character" of the tax and what it is "in pith and substance" apart from the mere machinery by which it is assessed. He has also relied upon the next observation that the measure of tax is not the test. This observation was borrowed from a reference to the Government of Ireland Act, 1920 (1936 A.C. 352) 46. The next decision upon which he has relied is Ralla Ram v. The Province of East Punjab, AIR 1949 F.C. 81. In that case, tax on buildings payable by the owner was levied under Punjab Urban Immovable Property Tax Act, 1940. The question which arose was whether it was a tax within the legislative competence of the Provincial Legislature under Entry 42, List II, Seventh Schedule, Government of India Act, 1935 or whether it was an income-tax falling under the federal legislative list in the Government of India Act, 1935. Therei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at it was neither a tax nor an excise duty but was a fee. In this context, the Supreme Court has observed that where an impugned statute passed by a State Legislature is relatable to an Entry in List II it is not permissible to challenge its vires on the ground that the method adopted by it for the recovery of the impost is generally adopted in levying a duty of excise. 49. In Sudhir Chandra Nawn v. Wealth-tax Officer, Calcutta and others , AIR 1969 S.C. 59, a similar question arose in the context of Wealth tax Act under which assets were adopted as the basis of valuation. That basis was challenged on the ground that it fell under Entry 49 in the State List and not under Entry 86 in the Union List. That argument was negatived by the Supreme Court with an observation that, assuming that there was some overlapping between the two Entries, tax on the capital value of assets bears no definable relation to lands and buildings which may form a component of the total assets of the assessee. 50. In The Second Gift Tax Officer, Mangalore, etc. v. D.H. Haxareth etc., AIR 1970 S.C. 999, the question of overlapping entries arose in the context of Gift Tax Act, 1959. It was held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the essential characteristics of the sales tax levied under Bihar Sales Tax Act, 1947, is that sales-tax is payable in the event of a sale, where as a duty of excise is primarily levied on the commodity or the manufacturer and is a tax on goods and not on the sales of the produce or the goods. The sales-tax is ordinarily a tax on the sales or proceeds of the sales of goods. 55. Next decision upon which reliance has been placed by Mr. Vakil is in A.B. Abdulkadir and others v. The State of Kerala and another , AIR 1962 S.C. 922. It has been laid down in that decision that while a duty of excise is a tax on goods produced or manufactured in the taxing country, the levy of sale-tax pre-supposes levy thereof on each sale and that it is the essence of sales-tax. 56. In Deputy Commercial Tax Officer, Saidapet (in all the appeals), Madras and another v. Enfield India Ltd. Cooperative Canteen Ltd. (in all the appeals), AIR 1968 S.C. 838, the question as to what was the meaning of the expression 'sale of goods' within the meaning of the relevant legislative entries in the Constitution and in the Government of India Act, 1935 in the context of the said expression used ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in Boddu Paidanna's case (supra) by the Federal Court. Therefore, for the purpose of levying excise duty, the first sale is only incidental. It is not the first sale which attracts the levy of excise duty but it is the manufacture or production which attracts it irrespective of whether the excisable goods, after manufacture or production, are sold or not. 61. He has next argued that it is open to the Parliament to levy excise duty at any rate, may be at 100% of the assessable value or even at 200% of the assessable value. This argument has been pressed into service in order to show that so far as the rates of taxes are concerned, the Parliament does not suffer from any fetters. It may be so. Assuming that Parliament has unlimited power to levy excise duty at any rate, it may do so but whatever rate it prescribes must be in relation to the manufacturing cost and manufacturing profits of an excisable commodity. However, it cannot prescribe a lower rate and provide machinery under which tax is realized in a larger quantity and under some other head which is not within its legislative competence. 62 . In this context, we were surprised to hear the argument raised ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 4 in case of a "related person" does not partake of sales-tax, that, it is partakes of sales-tax, it is only an incidental encroachment and is cured by the doctrine of pith and substance and that the measure of a tax need not necessarily have any link with the impost itself. 64. Mr. Vakil has then argued that the reason which prompts the Legislature to make a particular provision does not necessarily show the reason of its legislative competence. It may be so. Yet while examining the legislative competence of a Legislature in the context of a particular enactment, it is open to the Court to take all reasons into account and to find out the source of power under which it has enacted a particular legislation. If the Court finds that the Legislature which has enacted a particular legislation has entrenched upon the forbidden field, the Court is bound to strike it down. Date 21-2-1979 65. In a possible attempt to escape the rigour of the principles laid down by the Supreme Court in its several decisions, Mr. Vakil would not call Section 4 the machinery section or the assessment section but he would call it a valuation section. We do not propose to quarrel wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent in order to enable him to argue that what has been done by Parliament by amending Section 4 is constitutionally valid under Entry 97 in the Union List-the residuary entry. We are separately dealing with this aspect. 68. These are all the arguments which Mr. Vakil has raised to defend the constitutionality of amended Section 4 which has been called in question. For the reasons which we have stated, we are not impressed by any of the arguments which he has raised. 69. Mr. Vakil has next tried to justify the constitutionality of Section 4 by relying upon Entry 92A in the Union List. This argument has been advanced because, Mr. J.C. Bhatt, learned Counsel for the petitioner, has argued that, under amended Section 4, the Parliament has been directing the Central Excise authorities to collect, in the name of excise duty, a sales-tax. Indeed, a part of the excise duty assessed under Section 4 is in our opinion a sales-tax. Mr. Vakil has tried to argue that if it is a sales-tax, it is saved under Entry 92A. Entry 92A of the Union List reads thus: "Taxes on the sale or purchase of goods other than newspapers, where such sale or purchase takes place in the course o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o making the valuation processes more effective." It does not show that either the whole of it or a part of it was intended to be distributed amongst the States unlike Central Sales-tax Act, 1956. The preamble to the Central Sales-tax Act, 1956 reads thus: "An Act to formulate principles for determining when a sale of purchase of .goods takes place in the course of inter-State trade or commerce or outside a State or in the course of import into or export from India, to provide for the levy, collection and distribution of taxes on sales of goods in the course of inter-State trade or commerce and to declare certain goods to be of special importance in inter-State trade or commerce and specify the restrictions and conditions to which State laws imposing taxes on the sale or purchase of such goods of special importance shall be subject." It is, therefore, clear that whereas one of the objects of the Central Sales-tax Act is to distribute at least a part of the collection amongst the States there is no intention to distribute amongst the States the tax assessed and collected under Section 4 of the Excise Act. It is clear, therefore, that, by amending Section 4, the Parliament was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facturers' Association v. The Union of India and another , AIR 1970 S.C. 1589. It was a case under the Rubber Act, 1947. Section 12 (1) of the Rubber Act imposed a new rubber cess to be collected from the owners of the rubber estates. Sub-section (1) of Section 12 imposed the levy in the following terms :- "With effect from such date as the Central Government may, by notification in the Official Gazette, appoint, there shall be levied as a cess for the purposes of this Act, a duty of excise on all rubber produced in India at such rate, not exceeding fifty naya paise per kilogram of rubber so produced, as the Central Government may fix." The contentions which were raised were as follows: The duty sought to be imposed under Section 12 of the Rubber Act as amended was outside the ambit of Entry 84 in the Union List and, therefore, beyond the legislative competence of the Parliament. Section 12 (2) suffered from the vice of excessive delegation. We are concerned in this case with the answer which the Supreme Court gave to the first contention raised in that case. The Supreme Court referred with approval to the observations of Gwyer, C.J. in the Central Provinces case (supra) an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in Union of India v. Harbhajan Singh Dhillon , AIR 1972 S.C. 1061. It was a case in which the constitutional validity of Section 24 of the Finance Act, 1969 was challenged. By that section, certain provisions of the Wealth Tax Act were amended with the object of including capital value of agricultural land for computing net wealth. On consideration of several factors, the view which has been expressed in that case is that the Act impugned therein fell entirely within Entry 97 in the Union List. It has been further observed in that case that the Supreme Court has never held earlier that the original Wealth Tax Act fell under Entry 86 in the Union List and that it only assumed that the original Wealth Tax Act fell within Entry 86 in the Union List. It has been further observed that on that assumption Entry 86 was analysed and contrasted with Entry 48 in the State List. Therefore, the final conclusion which the Supreme Court recorded in that behalf was that no part of the impugned legislation fell within Entry 86 in the Union List (vide paragraph 77 of the report). Therefore, that decision is not an authority for the proposition that the constitutionality of an impugned legislati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... because the nomenclature suggests that it is all Excise duty. We have gone into its substance and discovered, on a meticulous and penetrating analysis, that in the name of Excise duty; sales-tax is also collected. We have therefore followed the guideline which Mr. Vakil was at pains to point out to us. 76. Having been confronted with a series of decisions bearing on the subject, Mr. Vakil has unsuccessfully tried to persuade this Court to hold that all these decisions contain loose observations made by the Supreme Court and that they do not lay down ratio decidendi or even obiter dicta . Mr. Vakil who appears for the Union of India ought not to have advanced this shocking argument and ought not to have taken a lot of one time by citing decisions after decisions before us to show what is ratio decidendi , what is obiter dictum and what is a loose observation. At the High Court bar, such an attempt ought not to be made by the Central Government counsel before senior Judge of the Court. He could have safely assumed that we know the distinction between ratio decidendi, obiter dictum and a loose observation. It is not necessary for us to deal with each of those decis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Government. **** It is clear, therefore, that Section 3 which is the charging section levies excise duty and nothing else. Section 4 provides for the machinery to determine and collect excise duty levied under Section 3. In Wallace Brothers and Co. Ltd . v. Commissioner of Income-tax, Bombay Suburban District, (1948) 16 ITR 240, the Privy Council has laid down the principle that the liability to pay tax arises by virtue of the charging section alone. This principle has been affirmed by the Supreme Court in Kalwa Devadattam and others v. Union of India and others , (1963) 49 ITR 165 and by the Gujarat High Court in Commissioner of Wealth-tax, Gujarat v. Raipur Manufacturing Company Limited , (1964) 52 lTR 482. It appears that there are three machinery sections in the Excise Act, Section 3(2), 4(1) and 4(2). 78. Mr. Vakil has argued in the context of amended Section 4 that the plea that a particular section is ultra vires another section of the same legislation cannot be raised. In other words, according to him, if the machinery section goes beyond the ambit of the charging section, it must be held that the machinery section modifies the charging section p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operation, namely, selling profit, "referring to the old section. Therefore even if the law is settled that duty of excise for the purpose of Section 4 as it then stood can take is only the manufacturing cost and manufacturing profit , it cannot be said to be the law for the purpose of interpreting the new Section 4 also. It is against this background that I propose to consider the new section and its impact on the determination of the value for excise duty". (Emphasis supplied). In that case an argument based on Entry 97 of the Union List was advanced. The learned Judge did not examine that argument because, according to him, the Supreme Court had viewed with disfavour the indiscriminate resort to Entry 97 in cases where a party is kept at bay with reference to a particular Entry and secondly because, in his view, Section 3 did not define 'duty of excise' to take in only the manufacturing costs and manufacturing profits. While making this observation, the learned judge appears to have overlooked that the width and amplitude of the expression `duty of excise' was laid down by the Supreme Court in the context of Entry 84 in the Union List. Therefore, it is applicable both to Sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion and the appropriate legislative Entry in the Union List have remained unamended. We reproduce with interest a few more observations from his judgment: "The excise duty forms part of the cost structure which the manufacturer or the dealer passes on to the consumer and it is he who bears the burden. The real object appears to be to inflate the post-manufacturing expenses detailed above and thereby swell the pockets of the manufacturer. Not without justification, is it suggested by the department that the post-manufacturing expenses like selling and administrative expenses, salaries, wages paid to the selling staff, advertising expenses, godown charges, freight and distribution expenses are so grossly exaggerated only to benefit the manufacturers so that they can make undue profits." With respect, this is an erroneous approach. What the mischief-mongers were doing and what difficulties the department was facing under the old law and what remedies have been provided by Parliament by amending the legislation to overcome such a situation are not so much relevant considerations as the constitutional competence of the Parliament to do so when vires of the amended legislation are c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any allowed the manufacturer to affix its trade mark. After having examined them, the contention that the price paid by the buyer to the manufacturer could not be taken as the assessable value for the purpose of excise duty was turned down. In other words, they were business agreements pure and simple. They did not show any mutuality of business interest between the two. Mutuality of business interest between two persons cannot be established by merely showing that they have business dealings between them. It must be further shown that one has special interest in the promotion or development of the business of another. Such interest may be direct or indirect. Between the manufacturer and the buyer, this element is lacking. The agreements which were examined by this Court in the case above referred to are still in force. In the affidavits filed on behalf of the department, nothing has been alleged against the agreements between the buyer and the manufacturer or between the buyer, the manufacturer and the Swiss company. 82. Let us now examine the second part of the definition of "related person". The question which arises in this context is this: Is the buyer a holding com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atisfied, that is to say- (a) that a person cannot be appointed thereto without the exercise in his favour by that other company of such a power as aforesaid; (b) that a person's appointment thereto follows necessarily from his appointment as Director, managing agent, secretaries and treasurers, or manager of, or to any other office or employment in, that other company; or (c) that the directorship is held by an individual nominated by that other company or a subsidiary thereof. (3) In determining whether one company is a subsidiary of another- (a) any shares held or power exercisable by that other company in a fiduciary capacity shall be treated as not held or exercisable by it; (b) subject to the provisions of clauses (c) and (d), any shares held or power exercisable- (i) by any person as a nominee for that other company (except where that other is concerned only in a fiduciary capacity); or (ii) by, or by a nominee for, a subsidiary of that other company, not being a subsidiary which is concerned only in a fiduciary capacity; shall be treated as held or exercisable by that other company; (c) any shares held or power exercisable by any person by virtue of the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re an allegation that the manufacturer has such power under the Articles of Association of the buyer. Therefore, clause (a) does not come into play in this case. 83. Clause (b) of sub-section (1) provides that a company which holds preference shares of another company with the same voting rights as the holders of equity shares exercise and exercises or controls more than half of the total voting power of such company is a holding company. Clause (b) of sub-section (1) further provides that if a company holds more than half in nominal value of the equity share capital of another company, it is a holding company. So far as share holding is concerned, the buyer holds only 5% of the manufacturer's shares. So far as the buyer is concerned, 65% of its shares are held by the Swiss company. The manufacturer holds no shares of the buyer. Therefore, requirements of clause (b) of sub-section (1) of Section 4 are not satisfied. So far as the requirement of clause (c) is concerned, it is also not satisfied because there is no evidence to show that the buyer is a subsidiary of any other company-in this case, Swiss company of which the manufacturer is also a subsidiary. Therefore, such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act. Allahabad High Court examined the scheme of Sections 2, 3 and Section 4 (as amended) and also examined some decisions of the Privy Council and the Supreme Court. The controversy which arose was whether the five customer companies were 'related persons' of M/s. Hind Lamps Ltd. within the meaning of the definition of that expression given in Section 4. The High Court held that the first ingredient which is necessary to be established for being a "related person". In that the assessee company (M/s. Hind Lamps Ltd ) and its customer company must "have interest, directly or indirectly, in the business of each other". In the opinion of the High Court, such of the customer companies which held shares of the assessees company (M/s Hind Lamps Ltd.) can be said to have interest in the business of the assessee company. But, since the converse was not established, there was no mutuality of business interest between them. We are in respectful agreement with the principle laid down in that decision. In supports the view which we have taken. So far as holding of shares was concerned, only Bajaj Electricals Ltd,. Bombay,held shares of the assessee company. The remaining four customer compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subject matter of the provisions decision." 88. In The Commissioner of Sales Tax, Madhya Pradesh, Indore v. M/s. Jaswant Singh Charan Singh , AIR 1967 S.C. 1454, it has been observed : "It is a well-settled principle that in construing a word in an Act caution is necessary in adopting a meaning ascribed in that word in other statutes." (paragraph 8 of the report). 89. In Director, Enforcement Directorate , Government of India and others v. Saroj Kumar, Bhotika and another (1978) 49 Company Cases 649, Calcutta High Court has laid down a similar principle. In our opinion, therefore, the declaration made under the MRTP Act that the manufacturer and the buyer were "inter-connected undertakings" could not have been taken into account by central excise authorities for deciding the case under the Excise Act. 90. The next proposition which Mr. Bhatt has tried to make out is that the impugned orders could not have been supported on the grounds other than those which were stated in the orders themselves. The two orders Annexures "J" and "J/1" state certain ground for holding that the manufacturer and the buyer are "related persons". Those grounds are sought to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , after the Central Government has decided the revision application and secondly because the petitioner has pleaded sufficient facts to enable us to come to the final conclusion. The respondents have hardly controverted them except to the extent stated in this judgment. Thirdly, even though the buyer has been paying the manufacturer the fully commercial price, the manufacturer required to pay excise duty on the price which the buyer charges his buyer merely because the buyer and the manufacturer are regarded as "related persons". We have struck down the concept of "related person" because it is ultra vires the legislative competence of Parliament under Article 246 read with Entry 84 in the Union List and Entry 54 in the State List. Merely because the buyer and the manufacturer are "related person", assuming that it is so though we have decided otherwise, the central excise authorities have no jurisdiction to assess excise duty on the second price and to ignore the first price. It, therefore, raises a jurisdictional question. We have, therefore, decided the second contention. 92. In the result, we hold that the expression "where the buyer is not a related person" used in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... question of law which, in our opinion, is required to be decided by the Supreme Court. The substantial question of law which arises in this case is whether a part of the amended Section 4 of the Excise Act is ultra Vires the legislative competence of Parliament. This question is a substantial question of law of general importance because it pertains to the realm of central excise which is levied throughout the country. We also certify this case as fit for appeal to the Supreme Court under Article 132 because it involves the interpretation of Entries 84, 92A and 97 in the Union List and Entry 54 in the State List. Though we have relied upon the Supreme Court decisions for recording the conclusions which we have done, we think it is necessary to finally lay down the cumulative effect of all these Entries on amended Section 4. 97. Mr. Vakil applies for time to approach the Supreme Court for obtaining necessary interim orders in this case and therefore, prays for staying the operation of the writ which we have issued. We order that the operation of the writ issued herein shall, in the first instance, be stayed for a period of two months from to-day. - - TaxTMI - TMITax ..... X X X X Extracts X X X X X X X X Extracts X X X X
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