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TMI Blog2005 (11) TMI 71X X X X Extracts X X X X X X X X Extracts X X X X ..... fabrics processed by it which had been received from the merchant manufacturers, the respondent No. 1 valued the processed goods on the basis of the cost of grey fabrics plus the processing charges as well as its manufacturing expenses and profits. In other words, the price at which the merchant manufacturer was selling the processed goods was not taken. This was done relying upon the decision of this Court in M/s. Ujagar Prints and Others v. Union of India (1989) 3 SCC 488 (briefly referred to as M/s. Ujagar Prints II) as explained in M/s. Ujagar Prints and Others v. Union of India and Others (1989) 3 SCC 531 (briefly referred to as M/s. Ujagar Prints III). 2.On 5th October 1990, a show cause notice was issued by the appellant to the respondent proposing to recover differential duty of excise amounting to Rs. 4,84,62,452/- from the respondent No. 1 within the extended time limit under the proviso of Section 11A of the Central Excise Act, 1944 (hereinafter referred to as 'the Act') and proposing to impose penalty against the respondents. The basis of the demand against the respondents was that they were all firms and companies having a common management and control with some of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s merely followed the decision in the case of the respondents. 5.The demand for excise duty raised by the appellant against the respondent's covers the period 1985 to 1989. The period in question may conveniently be considered in two parts, namely, (1) 1-9-1985 to 28-2-1989 and (2) 1-3-1989 to 30-9-1989. The reason for the division of the period in two parts is the law which this Court has laid down in M/s. Ujagar Prints III. The first question, therefore, is what did this Court decide in that decision? Having determined that, the next question would be whether the principles so laid down apply to the respondents' case. 6.But before we determine these questions we would have to consider the law in the background of which the decision in M/s. Ujagar Prints III was rendered. 7.The principles of valuation for the purposes of charging excise duty are contained in Section 4 of the Act. Section 4 in so far as it is relevant, provides : Where under this Act, the duty of excise"(1) is chargeable on any excisable goods with reference to value, such value shall, subject to the other provisions of this section, be deemed to be : (a) The normal p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... applicability of the succeeding rules save that they are to be considered for application in numerical order. Rule 4 deals with the determination of the value of excisable goods on the basis of sale by the assessee at any other time nearest to the time of the removal of the goods being assessed. Rule 5 deals with a situation when the excisable goods are sold in circumstances specified in Section 4(1)(a) of the Act. If the price is not the sole consideration, the value of the excisable goods is required to be based on the aggregate of the price and "the amount of the money value of any additional consideration flowing directly or indirectly from the buyer to the assessee". If the value of the excisable goods cannot be determined under Rules 4 or 5 then the procedure prescribed under Rule 6 would have to be followed viz. Where such goods are sold by the"(a) assessee in retail, the value shall be based on the retail price of such goods reduced by such amount as is necessary and reasonable in the opinion of the proper officer to arrive at the price at which the assessee would have sold such goods in the course of wholesale trade to a person other than a related person; Provided that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .Thus the basic principle relating to the assessable value of manufactured goods is normally the ordinary wholesale price. That is the principle underlying Section 4(1)(a), which principle may also be made applicable to Section 4(1)(b) read with Rules 3, 5 and 7 of the Valuation Rules. The principle is subject to certain exceptions among them being the qualification that the sale is not to or through a related person as defined in Section 4(4)(c) of the Act. 11.In Ujagar Prints II, the Constitution Bench was required to consider the correctness of the view taken by three Judges of this Court in Empire Industries. In Empire Industries, this Court had primarily held that the Central Excise & Salt and Additional Duties on Excise (Amendment) Act, 1980 by which the processes of bleaching, dyeing and printing were brought within the definition of "manufacture" for the purposes of the Central Excise and Salt Act, 1944 and the Addition Duties of Excise (Goods of Special Importance) Act, 1957, was constitutionally competent. While upholding the validity of the Amendment Act this Court had stated:- "When the textile fabrics are subjected to the processes like bleaching, dyeing and printing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would give a declaration to the processor as to what would be the price at which he would be selling the processed goods in the market that would be taken by the excise authorities as the assessable value of the processed fabrics and excise duty would be charged to the processor on that basis. Where a manufacturer sells the goods manufactured by him in wholesale to a wholesale dealer at the arms length and in the usual course of business, the wholesale cash price charged by him to the wholesale dealer less trade discount would represent the value of the goods for the purpose of assessment of excise. But the price received by the wholesale dealer who purchases the goods from the manufacturer and in his turn sells the same in wholesale to other dealer, would be irrelevant for determination of the value of the goods and the goods would not be charged on that basis". …. It has to be reiterated that the valuation must be on the basis of wholesale cash price at the time when the manufactured goods enter into the open market". (Emphasis supplied). 16.This was therefore, in terms, an unconditional approval of the ratio in Empire Industries. However on an application filed for clarificati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... market was to be taken as the assessable value. The Tribunal's decision was reversed by this Court. It was found that the agreement between the parties indicated that the relationship was one of principal to principal and not principal and agent and also that the assessee could manufacture biscuits of other brands and sell the same. It was observed that the assessee had been established much prior to its agreement with Britannia Industries Limited. In the circumstances it was held that the decision in M/s. Ujagar Prints II and others could not be factually distinguished. The Court proceeded on the basis that the last three lines of the explanatory order in M/s. Ujagar Prints III (which we have quoted earlier) contained the ratio of the decision of both M/s. Ujagar Prints II and III. 20.In M/s. Ujagar Prints II and III, the assessees were independent processors and the Court proceeded on that factual basis. The appellant's contention therefore is that as the processor (the respondent No.1 in this case) is not independent of the merchant manufacturer or trader, the ratio of M/s. Ujagar Prints III would not apply. In Pawan Biscuits although no conclusion from the facts has been reco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l be open to the Revenue to say that the cost of grey fabrics as well as the processed charges were depressed because the parties were related persons. Indeed, the underlying principle of all the Rules as well as Section 4 is that different considerations would apply if the transactions concerned are not at arms length. Neither Section 4(1)(b) nor Rule 6(b)(ii) have done away with the concept of "related person". 24.We therefore do not agree that Ujagar Prints III would apply even to a processor who is not independent and, as is alleged in this case, the merchant manufacturers and the purchasing traders are merely extensions of the processor. In the latter case, the processor is not a mere processor but also a merchant manufacturer who purchases/manufactures the raw material, processes it and sells it himself in the wholesale market. In such a situation, the profit is not of a processor but of a merchant manufacturer and a trader. If the transaction is between related persons, the profit would not be "normally earned" within the meaning of Rule 6(b)(ii). If it is established that the dealings were with related persons of the manufacturer the sale of the processed fabrics would not ..... X X X X Extracts X X X X X X X X Extracts X X X X
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