TMI Blog1982 (10) TMI 216X X X X Extracts X X X X X X X X Extracts X X X X ..... Revenue hundreds of millions of rupees (recovered over last several years by way of duty which will have to be refunded to the manufacturers all over India). The Problem 2. For more than 30 years, ever since the enactment of Excise Act in 1944, manufacturers of goods all over India have been paying excise duty at the prescribed rates. Wherever duty is payable ad valorem, it is being paid under Section 3 read with Section 4 of the Excise Act on the valuation made on the basis of the wholesale price fetched by the goods at the factory gate or the price at which the same could reasonably be expected to be sold at the factory gate, without protest or demur. A question as to whether the sale price obtained by the manufacturer from the wholesaler determined on the 'factory gate' concept should be the basis for computation of the duty under Section 4 of the Excise Act or whether the sale price obtained by the first wholesale purchaser who sold to the second wholesale purchaser or retailer should be the basis, arose in A.K. Roy v. Voltas Ltd. 1973ECR60(SC) (hereafter called the 'Voltas Case'). The Supreme Court declared that the price at which the goods could be sold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... took the view that such expenses, which were styled as post-manufacturing expenses, were not includible in making the computation for the purposes of levy. In view of the earlier Division Bench Judgment in First Golden Tobacco Case, the matter might well have been required to be referred to a larger Bench. The Division Bench presumably did not consider it necessary to do so in view of the fact that Section 4 of the Excise Act had been amended meanwhile as can be gathered from the fact that the earlier judgment in First Gold Tobacco Case was referred to as having been rendered in the context of the unamended provision. Thereafter a number of petitions have been instituted on the premise that expenses of the aforesaid categories (1) publicity expenses, (2) storage expenses, (3) charges of insurance of finished goods, (4) expenses of promotion of sales, (5) expenses of marketing and distribution, (6) freight charges, etc., are not includible in making computation for the purposes of levy. Deduction from the valuation of goods made by the petitioners themselves is claimed in regard to the estimated expenses incurred in this connection as per the computation made by a Chartered Accounta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4. Determine of value for the 4. Valuation of excisable goods purposes of duty. - Where for purpose of charging of under this Act, any article duty of excise. - (1) Where is chargeable with duty at a under this fact, the duty rate dependent on the value of excise is chargeable on of the article, such value any excisable goods with shall be deemed to be - reference to value, such value, shall subject to the other provisions of this (1) the wholesale cash price Section, be deemed to be for which an article of the (a) the normal price like kind and quality is sold thereof, that is to say or is capable of being sold the price at which such at the time of the removal goods are ordinarily sold by of the article chargeable the assessee to a buyer in with duty from the factory the course of wholesale or any other premises of trade for delivery at the manufacturer or production time and place of removal for delivery at the place where the buyer is not a of manufacture or production, related person and the price or if a wholesale market does is the sole consideration not exist for such article for the sale. at such place, at the nearest place where such market ... ... ... exists, or (b) Whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... distance. Nor are we concerned with a situation where the manufacturer does not sell to a wholesaler but himself sells the product through his own sales organisation. If the wholesale price at the factory gate can be determined, that must be be the value on the basis of which duty must be computed. There can be no doubt or debate about it since the Legislature in terms say that this will be deemed to be the value. No question arises or can arise of making any deduction from this deemed value on account of say (1) expenses of advertisement or publicity or (2) expenses of storage of finished goods. There is no warrant, therefore, for making any deduction on any account from such wholesale price at the factory gate in the context of the mode of valuation prescribed by section 4 of the Excise Act. Where then is the question of making an estimate of the advertisement or publicity expenses to be incurred during the whole year in which the goods are manufactured and cleared the goods soon after the goods are manufactured from time to time say from January to December in every calendar year on the basis of the valuation made by themselves as per the price list filed by them (as approved by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f place at this juncture to pause for a while and reflect on the question as to what exactly is the law declared by the Supreme Court and how the decisions of the Supreme Court are required to be interpreted. And fortunately for us, the Supreme Court itself has made it abundantly clear in a number of pronouncements as to what exactly binds the lower courts. No room for doubt is left on the score that it is not everything said by the Supreme Court in its judgment which is binding as law declared by the Supreme Court. What is considered binding to all the courts is the ratio decidendi of the decision which is to be gathered from the statements of principles of law applicable to the legal problems disclosed by the facts of the case decided by the Supreme Court in Dalbir Singh v. State of Punjab A.I.R. 1979, Supreme Court, 1384 at pages 1390 and 1391. Sen, J. speaking for the Supreme Court has observed as under :- According to the well settled theory of precedents every decision contains three basic ingredients : (i) findings of material facts, direct and inferential. An inferential finding of facts is the inference which the Judge draws from the direct or perceptible facts; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd for the proposition that a case is only an authority for what it actually decides. In fact, the court has gone to the extent of observing in the aforesaid decision that a case cannot be quoted from a proposition that may seem to follow logically from it for to do so would be to assume that the law is necessarily a logical code, whereas every lawyer must acknowledge that the law is not always logical at all . Be that as it may, it can scarcely be doubted that before culling out the ratio of a decision, the court must of necessity examine the precise question or the precise issue which arose before the court and identify the principles of law applied by the court in resolving the issue and make a further effort to find out what is the proposition of law which emerges from the decision of the court. It is in this perspective that the question will have to be examined as to what exactly has been decided by the Supreme Court in Voltas' Case and the proposition which emerges therefrom. This exercise will have to be undertaken because as pointed out earlier a particular expression used by the court in that case, namely manufacturing cost plus manufacturing profits has given birt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om the manufacturer's profit), and in order to bring home the point as regards the concept of reasonably expected wholesale price at factory gate, the telling phrase 'manufacturing cost plus manufacturing profit' has been employed. What a manufacturer would demand from a wholesale purchaser would of necessity be a price which is worked out on the basis of his quick computation of the cost of production and the profit he would expect to make thereon. No manufacturer would ordinarily sell at a loss. He would expect reasonable profit over and above the cost of production. Hence this is what he would quote to the wholesaler. That is why the phrase 'manufacturing cost plus manufacturing profit' is coined. It is neither an exposition of the true scope or consent of excise nor any magic formula to replace or displace the statutory formula embedded in section 4. The Supreme Court was in fact not rewriting section 4 or substituting its own formula, for computation in place of the formula prescribed by the Parliament in section 4. The Supreme Court was merely making explicit the effect of section 4 in its own words on the fact situation of the case before it. The Supreme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce at which other similar articles are marketed by his rivals (who may drive him out if he quotes more). All thus the manufacturing cost and manufacturing profit takes into account every one of conceivable items of expenditure that would enter into the cost structure. We have, therefore, no hesitation in concluding that :- (1) The Supreme Court was never called upon to make any pronouncement in regard to the true nature or content of the concept of excise duty, and the Supreme Court has in fact not made any such pronouncement in Voltas' Case. (2) The Supreme Court has not declared that whatever be the legislative mandata enclosed in section 4 of the Excise Act which prescribes the formula for working out the deemed valuation of excisable goods, some deduction not warranted by the statutory formula should be made from the deemed valuation arrived at as per the formula. (3) The phrase manufacturing cost plus manufacturing profit has been employed merely with a view to underscore the point that the price charged by the wholesaler to the retailer cannot be taken as a basis for computation (as the same would take within sweep the wholesaler's profit). (4) Nothing m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dget of the Central Government has been moulded on the assumption that this duty can be lawfully levied for more than 30 years not to speak of the formulation of the budget by the appropriate Government prior to the enforcement of the Constitution of India upon the attainment of Independence. (2) Income Tax must have been collected from tens of thousands of assessees on this footing. (3) the importer must have marketed the goods on this premise. (4) The consumer must have been made to pay the price on this assumption (5) and while the real losers, the consumers, cannot be identified and compensated, the importers will be enabled to make windfall profits and unjust enrichment. (6) the Central budget will have to bear an unanticipated outflow which will have to be passed on the tax payer, and (7) the consumer, the original and real sufferer, will again have to suffer as the burden will have to be again borne by him. He will have to pay the price for his pocket having been picked in the past instead of being compensated for it - thus insult will be added to injury. While, therefore, the court will not be deterred from upholding the plea if this was the only interpretation which was po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the sense that the manner of payment and the quantification of the levy ought to be clear and plain not only to the contributor but to every other person lost the tax gatherer can either aggravate the tax upon any obnoxious contributor or extort for his own benefit more amount than is payable and (2) that the manner of the imposition of the levy must be convenient for the collector as well as the contributor. The following passages from Adam Smith's well known treatise The Wealth of Nations may be quoted with advantage in this context (see Great Books of the Western Worlds published by Encyclopaedia Britannica Inc. 1978 39 361) :- II. The tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, the quantity to be said, ought all to be clear and plain to the contributor, and to every other person. Where it is otherwise, every person subject to the tax is put more or less in the power of the tax gathered, who can either aggravate the tax upon any obnoxious contributor, or extort, by the terror of such aggravation, some present or perquisite to himself. The uncertainty of taxation encourages the insolence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . So far as the department is concerned, unless it employs an army of chartered accountants at every manufacture centre who verifies the statements prepared by the Chartered Accountants of the manufacturers, it will not be possible for the department to determine the post-manufacturing element included in the market price or selling price. In reality, therefore, whatever is the computation made by the Chartered Accountant of the manufacturing concern will have to be accepted. We may assume the complete integrity of the manufacturer as also the complete integrity of the Chartered Accountant employed by him; we may even assume the thorough ability and efficiency of the Chartered Accountant concerned. We may even assume that there would be no inbuilt bias in the mind of the Chartered Accountant in favour of employer, namely, the manufacturer from whom he gets the remuneration; even then cannot assume that he cannot commit an error or make a mistake. And such an error or mistake cannot be detected by the excise authorities unless an army of equally competent Chartered Accountants is engaged all over the country in order to examine the statements prepared by the tens of thousands of Cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... L.T. (J 125), decided on November 20, 1976 reliance has in terms been placed on the decision rendered by Division Bench of this High Court in the first Golden Tobacco case [1977 E.L.T. (J 130)]. The reasoning which found favour with the learned Judge of the Punjab and Haryana High Court is reflected in paragraph 12 of the report which for the sake of preciseness may be quoted :- I have very carefully gone through the judgments of their Lordships of the Supreme Court in Voltas case and Atic Industries case (supra) and in my considered opinion both the judgments cannot be interpreted in the manner as is being contended by the learned counsel for the petitioners in order to construe the ratio of the decision of their lordships of the Supreme Court in the above mentioned cases, the facts and the points in issue in the said cases have to be kept in view. M/s. Voltas is a manufacturing concern of air-conditioners, water coolers etc. and had its own sale organisations for sale at its various offices from which direct sales to the consumers had been made at the list prices to the extent of 90 to 95 per cent of the production and the remaining percentage of goods was being sold to the w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the factory gate in the context of the controversy whether the retail price realised by the manufacturing concern a large percentage of goods produced in a case where the manufacturer has also the selling organisation for sale directly to the consumers, should be taken as a basis for computing the liability. This decision could never be pressed in aid for the view that any further deductions were contemplated to be made in favour of the manufacturer on any score, which are nowhere indicated in section 4(a) keeping in view the Explanation to section 4 of the Act. The observations made were only for clearly bringing out distinction between the wholesale and retail prices. Reference to the freight and octroi made by their Lordships, was the necessary adjustments to give effect to the concept of wholesale cash price at the factory gate and to arrive at the net wholesale cash price. The scope of the Explanation to section 4 never came up for consideration in the said judgment. If the said judgment is interpreted in the manner as is being done by the learned counsel for the petitioners it would be reading some thing more in section 4 of the Act which is non-existing that notwithstandi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd Atic Case and has based its decision in the context of the ratio of the aforesaid two decisions rendered by the Supreme Court which have introduced the concept of post-manufacturing expenses from the stand point of making a distinction between the first wholesale price and the subsequent price after the goods have entered the stream of trade. Nothing more can be read into the two judgments of the Supreme Court. It is, therefore, futile to clutch at the user of the expression post-manufacturing expenses from the decision of the Supreme Court for the said post-manufacturing expenses cannot be included in the sale price in disregard of the fact that the proposition has been enunciated in order to emphasise that it is the first wholesale price which must be taken into account and not the subsequent price after the goods entered into the stream of trade. Calcutta High Court 10. This very question arose before a Division Bench of the Calcutta High Court consisting of Chief Justice Mr. A. N. Sen (as he then was) and Mr. Justice M.M. Dutta in Collector of Central Excise, West Bengal v. Dunlop India Ltd. 1981 E.L.T. 398 (Cal.) decided on December 11, 1980. The question arose in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g cost and selling profit in the wholesale cash price could not be thought of in Voltas' Case, for there was no scope for so thinking in view of the facts involved in that case. Says the Calcutta High Court : Indeed, no such argument was advanced before the Supreme Court. In the circumstances, it will be quite unreasonable to assume that in Voltas' Case, the Supreme Court laid down the concept of selling cost and selling profit in wholesale cash price. The ratio of the decision rendered by the Supreme Court in Atic's case (supra) has also been discussed in paragraph 12 of the judgment wherein it is made clear from the observations made by Bhagwati J. that the price charged by the manufacturer for sale of the goods in wholesale represents the real value of the goods for the assessment of excise duty and has observed that it was manifestly clear that the question of post-manufacturing operation involving post-manufacturing cost and profit will arise only when, after the goods enter the stream of trade, that is, after the first wholesale by the manufacturer, there is a further sale of the goods, retail or wholesale. The Calcutta High Court has interpreted the ratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... market for the goods at the factory gate of the respondent and, therefore, there is no question of wholesale cash price at the factory gate. In the absence of market at the factory gate, the different depots at which the respondent sells the goods in wholesale will obviously be the nearest place where such market exists within the meaning of Section 4(a). It may be that the price at which the goods of the respondent are sold at the depots includes some additional costs, nevertheless that price should be regarded as the wholesale cash price within the meaning of Section 4(a). In this connection, we may refer to the explanation to Section 4 of the Act. It provides inter alia that in determining the price of an article no abatement or deduction shall be allowed except the trade discount and any duty payable at the time of removal of the article. In case the Legislature had intended that the cost that might be incurred by a manufacturer for wholesale of the goods chargeable to excise duty at the nearest place where a market for such goods might exist, it would have surely made a provision in that regard. But that has been provided for is that except the trade discount and any duty tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng in view the demand for the goods, the competition he has to face in the market and the economic condition of the consumers of such goods. Thus the above analysis reveals that there is no scope for any selling profit or post-manufacturing profit as claimed by the respondent, nor is there any reasonable method of ascertaining such selling profit or post-manufacturing profit. The Division Bench of the Calcutta High Court has observed in paragraph 23 of its judgment that the observations of the Supreme Court in Voltas' Case and Atic's Case were not susceptible to the interpretation canvassed on behalf of the manufacturers having particular regard to the facts involved in the said two cases and the fact the Supreme Court was never faced with the question as to whether a further deduction should be made from the wholesale cash price while levying excise duty on the first wholesale cash price on account of post-manufacturing cost and post-manufacturing profit. Says the Calcutta High Court : In our opinion, no such interpretation of the observation of the Supreme Court in Voltas' Case and Atic's Case is possible, particularly in view of the facts involved therein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar and simple terms in the following words :- This case is an authority for the proposition that for purposes of calculating the assessable value, the manufacture impost plus the manufacturing profit have alone to be taken into account and all post-manufacturing costs and profit have to be excluded. A similar view was taken in Atic Industries Ltd. vs. H. H. Dave (1972)1CTR(SC)334 where it was clearly laid down that for purpose of determining the wholesale cash price for calculating the assessable value, the first wholesale price fixed between the manufacturer and the wholesaler has to be taken into account, and the second or subsequent prices have to be ignored, as the subsequent prices would be loaded with a post-manufacturing element, namely, selling cost and selling profit. Such a method of calculation would also vitiate the concept of factory gate sale, which is the basis for determination of the value of the goods for purposes of excise. After considering the scheme of sections 3 and 4 of the Act the Allahabad High Court has taken the same view as was taken by the Gujarat High Court in the First Golden Tobacco Case, namely that these two provisions are supplementary to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emembered that the decision of the Supreme Court in the Voltas' Case and Atic Industries Case, when they laid down the test that only manufacturing costs and manufacturing profit could be taken into account for purposes of excise duty, and post-manufacturing cost had to be excluded, and that the duty was chargeable on the wholesale price payable at the factory gate at the time of delivery, did nothing more than to interpret Sections 3 and 4, of the Excise Act. Majority of these concepts are to be found in Sections 3 and 4 of the Act. It must also be noted that while pointing out that the wholesale cash price which the manufacturer gets from the wholesale buyer at the factory gate has to be taken into account for purposes of imposing duty. Now, can it be said that the wholesale price which consists of only the cost which are strictly incurred for manufacturing an article without costs incurred for it being put in a marketable condition so that it can be fed in the main stream of wholesale trade. We are of the view that all costs which the manufacturer incurs for putting an article in a marketable condition, so that it can be delivered at the factory gate to wholesale purchasers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed section 4 and the valuation rules. While the view has been taken into consideration, the basis of the decision being different, we do not propose to discuss the decision at length. II. Whether expenses of the aforesaid categories (such as publicity, storage, etc.) are now deductible in making computation in context of amendment of section 4 of the Act by Act 22 of the 1973 even if the same were not deductible before the amendment ? 13. This is the second ramification of the matter which we indicated in the opening part of our judgment. We might not have posed this question at all as in fact so far as the claim for deductions on the basis of the interpretation of the expression manufacturing cost plus manufacturing profit as employed in Voltas' Case (supra) are concerned, but for the fact that the decision in First Golden Tobacco Case [1977 E.L.T 113)] has not been followed by another Bench of this Court in Second Golden Tobacco Case (1980 E.L.T. J 437) and a contrary view has been taken on the ground that the former case arose in the context of the unamended section 4 whereas the latter case arose in the context of amended Section 4. We have reproduced (in just a pos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or wound. Petitioners contend that notwithstanding section 4(4) and notwithstanding the Explanation which makes it explicit that cost of packing material will be includible in determining the valuation for the purposes of computation of duty (unless the packing is of durable nature and returnable by the buyer to the seller) cost of packing should be deducted from the wholesale price at the factory gate even when goods are sold in a packed condition. The obvious answer to this argument is that when the relevant section expressly provides for inclusion, unless the section is held to be ultra vires to the extent it so provides effect must be given to it. Counsel has therefore challenged the vires of the section. Before we deal with the said submission we may observe that inasmuch as the excisable article cannot be sold in a loose condition (in the wholesale market at the factory gate) without being packed in a container or packing material, as the case may be, and inasmuch as the process of manufacture of the article is not complete until it is put in a condition in which it is generally sold in the wholesale market at the factory gate, the cost is includible in valuation of the exci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the provision must be declared to be ultra vires if it cannot be read down. V. Is Section 4(4)(d)(1) ultra vires ? 17. The first contention is that since the packing material is not manufactured by the manufacturer of excisable goods packed in the said packing material, inclusion of its value in order to levy excise duty would tantamount to tax on 'sale' or packing material. What is permitted is levy of tax on 'manufacture' and not levy of tax on sale of packing material. It would therefore be sales tax which is a tax leviable by the State and not the Union Government. Such is the argument. In our opinion there is a basic misconception and a fundamental fallacy in this argument. Certain basic aspects are overlooked. What is overlooked is that section 3 and section 4 of the Act taken as a whole embloc and read conjointly constitutes the charging section. It is fallacious to assume that section 3 standing alone is the charging section. This is as evident as day light if the test we will presently formulate is applied. Can the impost be given effect at all if both the sections are not read as supplementary and complementary ? If section 4 were not there, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acking. In other words the levy becomes 10% of value of excisable article loaded with the packing factor. There is nothing illegal, unconstitutional or impermissible in evolving this formula for computation. It is therefore futile to contend that it partakes of the character of sales tax. Secondly, sales tax is payable on manufacture (at the time of clearance since the rules so provide and yet is linked to manufacture of the article). Not to its sale. Even if the manufacturer does not sell the goods he has to pay excise duty. But sales tax is not payable at all till a 'sale' takes place, that being the taxing event. In the present case levy is on 'manufacture' and not on 'sale'. Even if packed goods are not sold excise levy is attracted. Hence it is not tax on sales. Again what is sold in substance is the excisable article (though in a packed condition) and not the packing. The packing goes with the article because it is not marketable otherwise. Till the excisable article is packed its manufacture as a marketable product is not complete. It is an integrated inseparable part of the process of manufacture of the excisable article. Hence cost element of the pa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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