TMI Blog1980 (3) TMI 253X X X X Extracts X X X X X X X X Extracts X X X X ..... e of milk food and dairy products and sells, inter alia, the goods popularly known as Horlicks, Elaichi Horlicks and Boost. These products fall under Tariff Item No. I-B of the list set out in the First Schedule to the Central Excises and Salt Act, 1944 (`the Act ) viz. Prepared or preserved foods put up in unit containers and ordinarily intended for sale.... Excise duty is leviable on them ad valorem on the assessable value determined under Section 4 of the Act. The duty, leviable was 10% on the said value from 1-3-1969 to 28-3-1978. From 1-3-1978, a special duty of 5% was added thereto. However, with effect from 1-3-1979 the special duty was abolished but the rate of duty was raised to 15%. We are, however, concerned in these writ petitions with goods manufactured and sought to be cleared between 15th May, 1971 and December, 1976. One material fact that is of great importance in deciding the writ petitions is that Section 4 of the Act which provides for the determination of the Assessable Value was substantially and materially amended by Act 22 of 1973 (with effect from 1-10-1975). The questions at issue in these writ petitions, therefore, need separate consideration under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... salers, sub-distributors and stockists, collected the sale proceeds and forwarded the same to the assessee deducting their commission. After 1-11-1975, it is claimed that they had no sub-distributors and directly sold the products to the wholesalers but otherwise the procedure was the same. The sales to the three agents were consignment sales and it is common ground that the title to the goods remained in the manufacturers (assessees) till the goods were passed on to the wholesale purchasers. This being so, the assessee had to Bear the costs of transport and insurance for conveying the packed goods to the various stations where sales were effected. It is also claimed that the assessee maintained a marketing division which looked after all aspects of sale, advertisement and incidental activities. Since the assessee remained the owner of the goods until the stockists purchased them, it is claimed that the prices at which they were sold to them had to include all the above types of expenditure incurred by the assessee. It is claimed that the assessee s endeavour was to sell its products at uniform rates throughout India to the ultimate consumer, but that since transport charges, sales ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 (which will be referred to later). Part IV gave the price list of sales at various places. Price list I of the Faridabad packing station, effective from 1-10-1975, is extracted below giving the details of prices in respect of the same commodity in respect of three far flung stations to bring out the points made by the Petitioners :- Delhi Bombay Bangalore Rs. Rs. Rs. Price at which goods are ordinarily sold in the course of wholesale trade by the related persons to dealers other than retail traders. 115.64 110.58 111.16 Deductions claimed from above price under Section 4(2), 4(4)(d) Freight 0.25 2.30 4.00 Octroi 0.43 6.66 2.22 Insurance 0.26 0.26 0.26 Service charges to distributor 4.56 4.56 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ained with the petitioners till they entered the wholesale stream of trade. Moreover, the claims for freight, octroi and insurance were based on averages, not actuals, and were, therefore, not allowable. He, therefore, ordered that the highest price at which the goods had been sold during the given time less excise duty payable in the case of the prices declared inclusive of excise duty will constitute the assessable value under Section 4 (old) for purposes of assessment and that the 21 price lists submitted be approved on the above basis. For the second period, he passed a separate order on the same date. But though referring to the new Section 4(1)(a)(iii), the order merely embodied the same conclusion as before. Here again he rejected the nominal sales to the agents as not reflecting the market value and selected the highest prevalent price as the basis for assessable value. He also rejected the claim for deductions for the same reasons as before. 8. The petitioner preferred two appeals to the Appellate Controller of Central Excise which were disposed of by a common order dated 15-6-1977. The appellate Controller held that as the appellants had one uniform price for all de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... period that not the highest price but the price at which the agent, who sold the goods nearest to the factory in the course of wholesale trade, markets the goods should be taken as the assessable value. 10. The petitioner has filed C.W. 980/79 challenging the correctness of the above determination of the Central Government. The other petitions arise in like circumstances and raise the same issues. 11. The Act, passed in 1944, was declared by its preamble to have been intended to consolidate and amend the law relating to central duties of excise on goods manufactured or produced in British India - now certain parts of India - (leaving out the reference to Salt, which is irrelevant for our present purposes). It may be mentioned here that the legislative competence in this respect was derived in so far as the imposition of excise duties was concerned from Item 45 of List I of the Seventh Schedule to the Government of India Act, 1935. Item 45, referred to above which now finds its counterpart in Item 84 in the Union Legislative list appended to the Constitution of India reads : Duties of excise on tobacco and other goods manufactured or produced in India except... Sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In support of this plea, they have raised a cloud of suspicion regarding the genuineness of the arrangement claimed by the petitioner and have also raised a legal contention that, at any rate, the selling agents are favoured buyers and the transactions with them cannot be considered to be at arms length. We think that Shri Gulati is right in contending that the aspersions on the genuineness of the arrangement are based on no material. The petitioner s case is that while the selling agents serve as conduit pipes for the distribution of the major part of the petitioner s production, they are also the direct purchasers from the petitioner of about 4% of the goods. This fact does not appear to be disputed by the respondents but it is said that the selling agents do not have proper office, godown or marketing arrangements for the resale of the goods purchased by them and that the office premises claimed to be occupied by them in a portion of the packing station had not been specifically shown in the ground plan of the factory submitted under the rules. Shri Gulati points out that oral evidence and correspondence had been placed before the officer which showed that the packing stati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed, were manipulated or colourable. 14. The real stand of the respondents, which Mr. Chandrashekheran also put forward, appears to be that the sale price to the agents at the factory gate should be ignored because they are not third parties but favoured buyers . His argument was that the petitioners and the selling agents had a mutual commercial relationship; in respect of 96% of the petitioner s sales, they had to rely upon the selling agents and so the arrangement on direct sales must have involved some concession or special treatment. In this context, both sides relied upon the leading Supreme Court decisions in Voltas - 1977 E.L.T. (J 177) = AIR 1973 S.C. 225 and Atics - 1978 (2) E.L.T. (J 444) - AIR 1975 SC 960. It will be necessary to refer to these two decisions later while discussing the second point of controversy but so far as the present issue is concerned, these two decisions, following the ruling of the Privy Council in the Ford Motors Co. case 1978 E.L.T. (J 265) - AIR 1938 PC 15 and overruling several High Court decisions held that the price at which the goods are sold on wholesale basis cannot be ignored merely because the percentage of such sales to the total ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted (vide paras 11 and 12). We therefore, hold that the price at which the goods were sold to the selling agents at the respective packing stations will be the wholesale cash price for purpose of old Section 4. 15. This takes us to the question whether the petitioner is entitled to claim any deductions (other than trade discount provided for in the explanation to Section 4) from the wholesale cash price determined as above in order to arrive at the assessable value. In Voltas (supra), the Supreme Court pointed out the characteristic feature of excise duty and explained how, in charging duty on the basis of the wholesale cash price at the factory gate, the section ensured that post-manufacture elements like interest, freight, octroi and other charges are excluded from the purview of the duty and Mathew J. who spoke for the court said : Excise is a tax on the production and manufacture of goods [see Union of India v. Delhi Cloth and General Mills, (1963) Supp. I SCR 586 = AIR 1963 SC 791] Section 4 of the Act therefore provides that the real value should be found after deducting the selling cost and selling profits that the real value can include only the manufacturing cost an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions claimed, four viz., freight, octroi, insurance and excise duty are based on actuals whereas the other three viz., insurance, service charges and selling of expenses have been worked out on an average basis. The full details were, Mr. Gulati says, placed before the authorities for necessary verification, if need be, and even now, he says the petitioner does not shirk an examination. So far as octroi is concerned, it is a matter of simple verification as to the rates prevalent at the several stations. So far as freight is concerned, Mr Gulati points out, the contracts between the petitioners and various transport organisations as well as their bills were placed before the authorities. For instance, the transport charges in respect of 500 packages (i.e. 1000 units) from Faridabad to Cuttack, Patna, Madras and Vijayawada respectively are shown from the bills to be ₹ 2,950/-, ₹ 2,100/-, ₹ 4000/- and ₹ 3300/- respectively. The deductions listed in respect of freight at these places are ₹ 2.95, ₹ 2.10, ₹ 4.00 and ₹ 3.30 respectively. It does, therefore appear, that the freight are only being claimed at actuals in the above cases and thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pect of selling expenses and service charges. 17. If we come to the wholesale cash price determined as above in the above context, it will be seen that there can be no deductions claimed in respect thereof except the average selling expenses per unit. There can be no octroi or freight at the packing station. Nor can there be any question of insurance for risks in the course of transport and the insurance on the factory stock etc. will be covered in the manufacturing cost and so not deductible. No deduction for service charges can be claimed against this either as that can arise only in respect of goods handled by the selling agents. The only two aspects of the question, that arise for consideration here are (a) whether the petitioner is entitled to claim deduction against the factory gate sale price in respect of the expenses incurred by it for putting the goods in the stream of trade, by creating and managing the selling force or promoting the sales of goods by known methods of advertisement and sale campaigns and (b) whether such a deduction could be claimed on an average or equalised basis. Neither Voltas nor Atics cover this situation for, in those cases, no deductions appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , therefore, be necessary to bifurcate the total cost of advertisement and other expenses claimed by the petitioner under this head, and only such part of the expenditure, if any as may be referable or attributable to the selling activity of the petitioner, will have to be deducted from the wholesale price charged by it to wholesalers. 18. We may say that we would not have arrived at the above conclusion which seems at first blush to run counter to the mandate of Section 4 that the wholesale cash price at the factory gate less trade discount should be taken as the assessable value but for two important considerations. The first is that the duty levied under the Act is an excise duty within the meaning of Entry 45 of the Central list in the Government of India Act and is intended to be a tax on goods at the stage of manufacture or production and, therefore, as pointed out in Voltas, is a tax on the value of the goods reflecting the manufacturing cost and the manufacturing profits. It is not intended to include within the purview of the duty any selling cost and selling profit. The interpretation of the statute should, therefore, be harmonious with the scope of the legislative ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one of allowing any deduction but one of exclusion of post-manufacturing expenses and profit in arriving at the assessable value having regard to the true nature of excise duty. As regards advertising expenses and interest it was held that it might be necessary to bifurcate the same between the manufacturing activity and the selling activity and deduct only the latter and it was pointed out that marketing and distribution expenses would ordinarily be referable to selling activity. As regards freight, Tulzapurkar, J. observed : ...as regards freight, though it is true that in both types of delivery - i.e. at the factory gate and at the wholesaler s godowns- effected by the petitioner company to its wholesalers a uniform price is being charged, that by itself would not be a valid ground to refuse the relief of deduction. The mere fact that the same price is charged both at the factory gate and also at the godowns of the wholesalers would not mean that the price charged at the factory gate would always be exclusive of non-manufacturing element of freight. It is quite possible that the petitioner company may have for the purpose of maintaining good relations with its wholesalers f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nery of collection of excise duty for administrative convenience. If, in enacting Section4 and Explanation thereto, any words are used which are capable of being construed as enabling the excise authorities to calculate the excise duty on anything other than manufacture or production of goods by the well known doctrine of Reading down , which has been evolved by courts of law, first in Australia and then followed in India, the language of Section4 must be confined to the power of the Legislature referable to Item 84 in the Union List in the Seventh Schedule to the Constitution, viz. that only the manufacture or production should be borne in mind and no post-manufacturing item of expenditure should be taken into consideration by the excise authorities while fixing the value of the goods for the purpose of excise duty when excise duty is leviable on an ad valorem basis. Again in para 37 it was observed after discussing Voltas and Atics : Mr. Subrahmanya Reddy for the appellants in the writ appeals and the respondents in the writ petitions with which we are concerned in these cases has very strongly relied upon the conclusion of the Supreme Court in Atic Industries v. Asst. C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... process of reading down it must be held that any item other than manufacturing costs, including costs which are necessarily incidental to manufacturing process and manufacturing profit must be excluded for the purpose of arriving at wholesale cash price. If such loading of post-manufacturing costs even in the price charged by the manufacturer to the first wholesaler with whom an agreement was entered into at arms length is permitted the concept of excise duty, being a duty payable on the manufacture or production of goods, would be violated. We are, therefore, unable to accept this contention of Mr. Subrahmanya Reddy. 20. In view of the above discussion, we hold that, for the pre-amendment sales, the sale price to the selling agents at the packing stations should be taken as the assessable value, after deducting therefrom the whole or such part of the selling expenses as are attributable to post-manufacturing activities. 21. We now turn to the position after the introduction of the amended Section 4, which in so far as is relevant runs as follows: Section 4. Valuation of excisable goods for purposes of charging of duty of excise. - (1) Where under this Act, the duty of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mises wherein the excisable goods have been permitted to be deposited without payment of duty : from where such goods are removed; (c) related person means a person who is so associated with the assessee that they have interest, directly or indirectly, in the business of each other and includes a holding company, a subsidiary company, a relative and a distributor of the assessee, and any sub-distributor of such distributor. Explanation. - In this clause holding company , a subsidiary company and relative have the same meanings as in the Companies Act, 1956; (d) value in relation to any excisable goods, (i) where the goods are delivered at the time of removal in a packed condition, includes the cost of such packing except the cost of the packing which is of a durable nature and is returnable by the buyer to the assessee, Explanation. In this sub-clause packing means the wrapper, container, bobbin, pirn, spool, reel or wrap beam or any other thing in which or on which the excisable goods are wrapped, contained or wound : (ii) does not include the amount of the duty of excise, sales tax and other taxes, if any, payable on such goods and subject to such r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... try 84 of the Union List in the light of Entry 54 of the State List in the Constitution. The expression the buyer is not a related person and... and proviso (iii) to clause (a) in Section 4 (1) were struck down accordingly. It may not, however, be necessary to consider this aspect of the matter as Mr. Gulati contended that, for his purposes, it was sufficient if the provisions of the new section were read down in comformity with the Constitution and that, if this were done it would not be necessary for him to take up any stand on the constitutionality of the amendment. We shall, therefore, proceed, for the time being, on the basis that the amendment is valid and fully operative in law. 24. On the above basis, there is no controversy before us that the selling agents are related persons within the meaning of the definition. Mr. Gulati, however, has drawn our attention to the evidence led before the authorities which remained uncontradicted, that after October, 1975 there were no sub- distributors appointed by the petitioner or the selling agents, as before. A representative of G. Atherton Co. deposed that they did not maintain any distribution stockists after October, 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ash price was liable to be adjusted so as to eliminate post-manufacturing cost and profits. 26. Mr. Gulati brings to our notice that there are decisions to the like effect even after the amendment. The Patna High Court considered the question in the TELCO case - 1977 Tax. L.R. 2189=1977 E.L.T. (J 14) In this case, the petitioner objected to the treatment of its regional sales offices at different places as related persons and also contended that post-manufacturing expenses should be deducted from the gross-price for arriving at the assessable value. These contentions were accepted. This case was followed and applied by the Kerala High Court in Madras Rubber Factory [1979 E.L.T. (J 397)]. This Company was engaged in the manufacture of automobile tubes, tread rubber and other rubber products. Its products were supplied to its 32 depots at various places throughout the country and the depots in their turn sold to other dealers or consumers. There were no factory gate sales. Excise duty was sought to be levied on the value of the goods after taking into account the post-manufacturing cost and profit on such items as freight, transport, interest, travelling expenses of agents, insura ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he course of wholesale trade for delivery at the time and place of removal where the buyer is not a related person. It is the case of the petitioner that this section would not apply to it, as it has no factory gate sale. That is quite apart from its contention that the Section itself is ultra vires. The Central Government pleader also placed reliance on Section 4(1)(b) where a power is given to determine the value of the goods in such manner as may be prescribed. But neither this power nor the power to determine tariffs as provided in the First Schedule to the Act, and as relied on the Central Government pleader, would carry with it a power to cross the frontier of the levy sanctioned by Section 3 of the Act. Both by reason of the legislative entry-Entry 84 of List I and by reason of the express provision of Section 3 the power is only to levy a duty of excise, as explained by the Supreme Court in Voltas case (AIR 1974 SC 225), Atic Industries s case (AIR 1975 SC 960), and Shinde Brothers s case (AIR 1967 SC 1512)- not to mention the other case referred to already. The very nature of excise duty requires a proximate connection with production or manufacture. At any rate, what has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se, AIR 1975 Supreme Court 960, and has been followed by the Division Bench of this Court in Indian Tobacco Co. Ltd. v. Union of India, 1979 E.L.T. 476, and in Century Spinning and Manufacturing Co. v. Union of India, 1979 E.L.T. 199. Those decisions were under the old Section 4. However, while interpreting the new Section 4, the same ratio laid down by the Supreme Court in Voltas and Atic Industries case has been followed by not less than six High Courts in India, namely, by the Andhra Pradesh High Court in Indo-National Ltd. v. Union of India, 1979 E.L.T. 334, the Madras High Court in Nagpal Petro-Chem. Ltd. v. Assistant Collector, 1979 E.L.T. 117, the Kerala High Court in Madras Rubber Factory v. Assistant Collector, 1979 E.L.T. 397, the Delhi High Court in Madras Rubber Factory Ltd v. Union of India 1977 E.L.T. 173, the Patna High Court in Tata Engineering and Locomotive Co. Ltd. v. S.N. Guha Thakuria, 1977 E.L.T. 14, and the Gujarat High Court in Cibatul Ltd. v. Union of India 1979 E.L.T. 407 . 6. In the circumstances looked at from any angle, the transportation cost being a post-manufacturing expense must be excluded from the assessable value and cannot be taken into acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the sphere of valuation. It will thus be seen from the above that no intention is manifested to modify the position resulting from the decision of the Supreme Court that the assessable value would include only manufacturing cost plus manufacturer s profits. All that is intended to be done is to make specific stipulations regarding situations frequently encountered. The amended section, therefore, does not contain any words to suggest or imply that the value of the goods should also be loaded with any part or ingredients of post-manufacture cost or profit. On the other hand the new section also requires the department only to take into account the wholesale cash price at the factory gate with the difference that this rule is modified where the wholesale transactions are put through with the help of related persons. This, as the Supreme Court pointed out in para 21 of its judgment in Voltas extracted earlier, only emphasises the basic character of excise duty and the intention to exclude post-manufacture charges from its ambit. The exclusion of transportation costs, where the value is determined with reference to the price at a place other than the place of removal-sub-section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... em 84 of the Union List in the Constitution (vice, the observations of Gwyer C.J. in In re: C.P. Motor Spirit Act. AIR 1939 FCI at p. 12, adopted in Ralla Ram v. U.P., 1948 FCR 207 at 215 and Gordhandas v. Municipal Commissioner, AIR 1963 SC 742). We shall assume, with Mr. Chandrashekheran, that, in view of Entry 97 in the Union List under the Constitution, it is open to and competent for the legislature to expand or even modify the nature of the levy. The question however, will be whether it has done so. The statement of objects and reasons does not contain a whisper about such a radical change if intended to be made by it. The preamble to the Act, the language of the charging section and the description of the levy throughout remains the same as before. These amendments only touch cases where ad valorem duty is levied and have no impact on cases where duty is charged on number, weight or volume which will be governed by the same considerations as before. We have also pointed out that even the language of Section 4 does not spell any indications of any radical change. The pith and substance of the legislation remains the same. An avowed attempt to remove certain difficulties in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... construction which could not be disputed that `the general words of the Act are not to be so construed as to alter the previous policy of the law, unless no sense or meaning can be applied to those words consistently with the intention of preserving the existing policy untouched. 32. We also find that this matter has been considered, though briefly, by the Kerala High Court in the Madras Rubber Factory case [1979 E.L.T. (J 397)] : The Central Government Pleader had one other argument to sustain the levy. He contended that the power of taxation was available to the Union Government under the residuary powers under Articles 248 of the Constitution read with the Entry 97 of List I of the 7th Schedule. The Article and the Entry give power only with respect to a matter `not enumerated in Concurrent List or State List. The duty is expressly termed as excise duty . That seems to be clearly referable to Entry 84 of List I; and we see no case for pressing into service the residuary powers under Article 248 and Entry 97 of List I. Section 3 of the Act, again expressly refers to the duty as a duty of excise. In these circumstances we are afraid we cannot sustain the levy under the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o this controversy or the further question whether even assuming that Entry 54 applies a part of the levy could be sustained under Entry 92A of the Union List in the view we have taken of the scope of the amendment and the interpretation of the amended section. 33. For the reasons discussed above, we are of opinion that, while the respondent were right in determining the wholesale price in the manner they did, they erred in refusing to permit the deductions of the several ingredients which, according to the petitioners, have entered the said wholesale price. However, as stated under the discussion regarding pre-October 1975 sales, the claims regarding freight, octroi and insurance may have to be verified and the claim of service charges and selling expenses may need to be bifurcated between the manufacturing and selling operations. 34. Shri Gulati stated that all the writ petitions involve only the above contentions. While Civil Writ Petition No. 980/79 which relates to the Faridabad factory raises the question of determination of assessable value under Section 4 both before and after the amendment, C.W.P. 1169/76 and C.W.P. 876/79 pertain to the production cleared at the Ban ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 4, is not free from difficulty and most of the decisions cited by counsel are also recent. We, therefore, give no directions except that the matter be re-heard by the Government of India in the light of this decision and disposed of expeditiously. 37. In the result, these writ petitions are allowed to the extent indicated above. The petitioner will be entitled to one set of costs in C.W. 980/79 only. Counsel s fee ₹ 500/-. March 31, 1980. Sd/ S. Ranganathan JUDGE. [Order per : D.R. Khanna, J.]. - I have the privilege of going through the judgment of my learned brother. The conclusions arrived at have been in consonance with the almost unanimous view taken by different High Courts in the country. I therefore concur with the overall decision. So far as the pre-amendment period of Section 4 of the Central Excises and Salt Act, 1944, there is not much scope for controversy in view of the decisions given by the Supreme Court in the cases of Voltas (AIR 1975 SC 225) and Atics (AIR 1975 SC 960). Earlier there was also the decision of the Privy Council in the Ford Motors Co. case (AIR 1938 PC 15). It is, however, with the post amendment period ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same statute enacted by the same legislature. If the provisions are within the statutory and constitutional competency of that legislature then normally no exception can be taken to them simply because by deeming effect a wider meaning is extended to a term or provision. Plain words must be allowed to have their natural and full flow. Reference to preambly or what could have been the underlying purport or intention of the legislature, can be availed for resolving ambiguity, if any, and not to restrict or curtail meanings of the words which are otherwise clear and unmistakable. Furthermore, when the legislature in its wisdom incorporates an amendment with certain object in view of for undoing an interpretation which it considers was not inconsonance with the legislative intent of the original enactment, one should be slow to assume that the amendment was ineffective and the position of law continued to be the same. 3. As the objects and reasons for introducing amendment in Section 4 of the Act showed, it was motivated to render ineffective small percentages of sales at lesser value and thus getting the overall assessable value of the entire produce reduced. As such the concept o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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