At, High Court of Gujarat At Ahmedabad
By, THE HONOURABLE MR. JUSTICE S.H. SHETH & THE HONOURABLE MR. JUSTICE S.L. TALATI
For the Appearing Parties: Anil Divan , S.N. Shelat, Advocates.
(1) The petitioner is a company incorporated under the Indian Companies Act and has been engaged in the manufacture of cigarettes Amongst other places it has got a factory at Baroda. On the manufacture of cigarettes the petitioner company was called upon to ply excise duty. While determining the assessable value of cigarettes for the purpose of collecting excise duty the Central excise authorities included in it certain post manufacturing expenses such as advertisement expenses storage expenses marketing and distribution expenses and Bank charges and interest recovered by the petitioner Company from wholesale buyers who enjoy a certain credit. The Assistant Collector of Central Excise determined the assessable value after including therein expenses under all these heads. The petitioner appealed against the order to the Appellate Collector of Central Excise who confirmed it.
(2) Under the aforesaid circumstances the petitioner has filed this petition in which two questions are raised for our decision :
(1) Assessable value for excise duty cannot include post manufacturing expenses because excise duty is a tax on manufacture on production.
(2) If post manufacturing expenses are included the assessable value sec. 4 of the Central Excise and Salt Act 1944 would be ultra vires the legislative competence of Parliament under Art. 246 of the Constitution read with Entry 84 in List I and Entry 54 in List II.
(3) In order to answer the questions which have been raised before us it is necessary to make a short reference to a few decisions which have a bearing on the first question. Some of them have interpreted sec. 4 as it was before it was amended in 1975 and the others have interpreted the new section.
(4) Sec. 4 before it was amended on 1/10/1975 read as under :
Where under this Act any articles is chargeable with duty at a rate dependent on the value of the article such value shall be deemed to be (a) the wholesale cash price for which an article of the like kind and quality is sold 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 (b) Where such price is not ascertainable the price at which an article of the like kind and quality is sold or is capable of being sold by the manufacturer or producer or his agent
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at the time of the removal of the article chargeable with duty from such factory or other premises for delivery at the place of manufacture or production or if such article is not sold or is not capable of being sold at such place at any other place nearest thereto.
Explanation :- In determining the price of any article under this section no abatement or deduction shall be allowed except in respect of the trade discount and the amount of duty payable at the time of the removal of the article chargeable with duty from the factory or other premises aforesaid Sec. 4 before it was amended specified the wholesale cash price except when it could not be ascertained for determining the assessable value of an excisable goods and also laid down the manner of which the whole sale cash price could be determined.
(5) On 1/10/1975 sec. 4 was amended. Amended sec. 4 (i) (a) reads as under :
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- (a) 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 wholesale 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.
There is a provision to clause (a) of sub-sec. (1) of sec. 4 which includes three clauses. Clause (b) of sub-sec. (1) of sec. 4 lays down the procedure for fixing the normal price. Sub-sec. (2) provides for excluding the cost of transportation from the place of removal to the place of delivery where the price of the excisable goods for delivery at the place of removal is not known and its value has been determined with reference to the price for delivery at a place other than the place of removal. Sub-secs. (3) and (4) are not material for the purpose of the present case.
(6) In terms of the amended sec. 4 the question which we are required to answer is this: What is the normal price of the excisable goods and whether it includes certain costs or expenses which follow the completion of the manufacturing process ?
(7) In Cibatul Limited v. Union of India and Others 1979 E.L.T. (J 407) XXI G.L.R. 284 this Court whilst striking down the expression where the buyer is not a related person used in clause (a) of sub-sec. (1) of sec. 4 and while striking down clause (iii) in the proviso to clause (a) of sub-sec. (1) of sec. 4 examined the question of determining the assessable value of an excisable goods. After having examined several decisions of the Federal Court and the Supreme Court this Court observed in paragraph 15 of the report that the excise is a tax on the production and manufacture of goods and that the excise duty can be levied only on the amount representing the manufacturing cost plus the manufacturing profit and that the post manufacturing cost and the profit arising from post manufacturing operations are excluded.
(8) Relying upon the decision of the Supreme Court in Atic Industries Ltd. v. H. H. Dave Asstt Collector of Central Excise and Others AIR 1975 S.C. 960 this Court observed in Paragraph 17 of the report as follows:
In the opinion of the SuPreme Court the excise duty should he levied on the amount of manufacturing costs and manufacturing profits and post manufacturing costs and post manufacturing profits arising from post anufacturing operations viz. the sale bought to be excluded.
It also observed that 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 that they must not be loaded with post manufacturing profits arising from post manufacturing operations.
(9) In paragraph 19 of the report this Court summed up in the following terms its conclusion after having reviewed a number of decisions on the subject commencing from 1939 :
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 with the manufacture or production of an excisable commodity has been established it does not matter at what stage it is recovered.
In paragraph 22 of the report it has been expressly observed that the question whether costs incurred under a particular head will be a part of manufacturing costs or not had not arisen in that case. That is the question which has now arisen in the present petition.
(10) So far as this Court is concerned th is decision is the authority for the proposition that assessable value of an excisable goods can be made up only of manufacturing costs and manufacturing profits and that upon the assessable value so determined excise duty can be levied.
(11) Our attention has also been invited by Mr. Divan to certain other decisions which have a direct or indirect bearing on the subject matter of controversy before us.
(12) In The Union of India and Others v. The Vazir Sultan Tobacco Co. Ltd. Hyderabad 1978 Taxation Law Reports 1824 a Division Bench of the Andhra Pradesh High Court has laid down that the excise duty which is a duty payable on the manufacture or production of goods can only be on the aggregate of manufacturing costs and manufacturing profit. It has been further observed: If there are any item; of costs which are necessarily incidental to the process of manufacture they will also be a part of the manufacturing costs. But if it can be demonstrated by a particular manufacturer that even on the first sale to the first wholesale dealer there is an element other than that of manufacturing cost and manufacturing profit and thus the price charged in the first wholesaler includes post manufacturing cost such post manufacturing cost must be eliminated by the excise authorities from their calculations. In that case an earlier decision of this Court reported in Special Civil Application No. 858 of 1974 decided on 8/09/1976 by J. B. Mehta Act C. J. and M. P. Thakkar J. was dissented from. We are shortly referring to that decision
(13) Next decision to which our attention has been invited by Mr. Divan is in Indo National Limited Nellore v. Union of India and Others 1979 E.L.T. (J 334). A Division Bench of the Andhra Pradesh High Court has observed in that decision that under sec. 3 which is the charging section excise being a tax on manufacture can only be levied on the manufacturing costs and manufacturing profits. It has been observed that if the price charged by the manufacturer from its first buyer includes post manufacturing costs or expenses which are unrelated to the manufacture or production the price must be relieved of such loading for the purpose of determining the assessable value under new section 4 provided such expenses are actually incurred.
(14) In Bombay Tyres International Ltd. v. Union of India and Others 1979 E.L.T. (J 625) Mr. Justice Lentin of the High Court of Bombay sitting singly observed: Excise duty is leviable only on the amount representing the manufacturing cost plus the manufacturing profit and excludes post manufacturing costs and profit arising from post manufacturing operations namely selling profit.
(15) In Indian Tobacco Company Limited v. Union of India and Others 1979 E.L.T. (J 476) to which our attention has been invited by Mr. Divan a Division Bench of the High Court of Bombay has observed that sec. 4 cannot be construed so as to enlarge the ambit of duty by including therein the post manufacturing or nonmanufacturing expenses. It has also been observed that freight charges paid by a manufacturer for removing the goods to certain other place for delivering it to his wholesale buyer cannot be included in the assessable value of the excisable goods. It has also been held that so far as advertisement expenses are concerned so much of them which have reference to selling activity must be excluded from the assessable value.
(16) In Cibatuls case (supra) after having reviewed a number of decisions this Court has construed entry 84 in the Union List and held that since duty of excise can be levied on production or manufacturing of an excisable article it can be levied only on the price which truly and fully reflects the manufacturing costs and manufacturing profits. To levy excise duty on an assessable value consisting of manufacturing costs and manufacturing profits and loaded with certain other post manufacturing costs or expenses would be ultra vires the legislative competence of Parliament under entry 84 in the Union List read with entry 54 in the State List. Therefore to expand the concept of normal price specified in sec. 4 (as amended) and to include therein something which has no reference to the manufacturing activity is to render sec 4 ultra vires Art. 246 read with entry 84 in the Union List. It is therefore necessary to confine the operation of sec. 4 (as amended) so as to determine the assessable value or she normal price of an excisable goods which represents only the manufacturing costs and manufacturing profits.
(17) Let us in that light see whether expenses under four heads specified above can be included in the manufacturing costs so as to determine a higher assessable value for the purpose of levy and collection of excise duty.
(18) The first head of expenses of which the petitioner seeks exclusion from the assessable value or normal price relates to storage of the excisable goods at various depots. The question of storing the finished or manufactured goods either in the local depot or elsewhere arises only after the excisable goods have been fully manufactured and before they find their market. Storage of excisable goods after they have been manufactured have therefore nothing to do with the manufacturing activity and expenses incurred in that behalf are not referable to manufacturing costs or manufacturing activity. By any standard storage is a post manufacturing activity and expenses incurred in that behalf are post manufacturing expenses. Therefore expenses incurred by a manufacturer on storage of its finished products cannot enter into determination of its assessable value which can be made up only of manufacturing costs and manufacturing profits. Ordinarily a manufacturer who stores his goods before they are marketed may have to pay rent for the godown for storing facility and to suffer loss of interest in investment made by him in the manufactured goods. Expenses under both these heads have nothing to do with manufacturing activity and therefore they are unquestionably post manufacturing expenses.
(19) The second head of expenses with which we are concerned relates to marketing and distribution arrangements. Marketing and distribution may include the salaries of the staff engaged exclusively for selling operations. Similarly marketing and distribution expenses may include transportation charges. The question of marketing an excisable goods arises only after it has been fully manufactured and is ready to be marketed Manufacturing activity ends at the point where marketability of the goods commences. Therefore marketing and distribution of an excisable goods have no relation or reference to its manufacture at all. Therefore expenses incurred on marketing and distribution arrangements of an excisable goods cannot form part of manufacturing costs and therefore of their assessable value.
(20) The third head of expenses in respect of which the petitioner claims deduction are Bank charges and loss of interest suffered by it on account of its having given credit to its wholesaler buyer for payment of the price of the goods sold them. Recovery of the price of the excisable goods sold by the petitioner to a wholesaler through the agency of the Bank saddles him with Bank charges. Secondly he suffers loss of interest by giving credit for a certain period to his wholesale buyer to pay the price of the goods sold to him they do fall not within the range of manufacturing activity but they fall within the range of sale of the excisable goods. They in our opinion have nothing to do with the manufacturing activities and therefor they do not have reference or relation to the manufacturing activities.
(21) The last head under which the petitioner seeks benefit relates to advertisement expenses. What is good in case of storage expenses marketing or distribution expenses and Bank charges does not necessarily hold good in respect of advertisement expenses. Before the excisable goods is manufactured or produced it may be advertised in order to secure market for it in future. Expenses incurred on such advertisements would necessarily have reference or relation to the manufacturing activity and can form a part of manufacturing costs leading to the determination of assessable value on that basis. However an excisable commodity may be advertised even after it has been manufactured or produced. Expenses incurred on such advertisements would fall clearly within the realm of the sale of that commodity rather than within the realm of its manufature. It is quite probable that whereas on one hand an excisable commodity goes on being manufactured from day to day advertisements in relation to that commodity may go on being published from day to day. Such an advertisement process will necessarily involve expenses for a manufacturer but all such expenses cannot be referred to or cannot have relation to the manufacturing activity. In our opinion a part of it will have reference to manufacturing activity while another part will have reference to the selling activity. In such a case the central excise authorities will have to apportion on some rational principle the advertisement expenses between the manufacturing activity on one hand and the selling or marketing activity on the other hand and would be justified in including in the manufacturing cost whatever advertisement expenses have been apportioned by them as relating to the manufacturing activity of the excisable goods.
(22) Our attention has been invited to a Division Bench decision of this Court in Golden Tobacco Co. ltd. Bombay v. Union of India and Another 1977 E.L.T. (J 113). In that decision the question which arose related to marketing expenses transportation costs and Bank charges as well as advertisement and publicity costs. After having construed the expression wholesale cash price used in sec. 4 before it was amended this Court in paragraph 6 of the report laid down that the wholesale cash price would include the interest element and the freight cost if the commodity was transported from the factory to the nearest market place. In that behalf this Court observed as follows :
.....freight also would have to be incidentally adjusted to translate the price on then and there basis right at the factory gate or the nearest market place. (Emphasis supplied)
This Court next observed in paragraph 6 of the report as follows :
Therefore when in this context it is emphasised that the selling cost and the selling profit should be excluded the emphasis is on this basic concept of excise that the measure should not be of the second or subsequent wholesale price or the retail price as that would load the real price with post manufacturing element namely selling profits of the wholesale dealers. That would be clearly violative of not only the basic concept of excise where the taxing event is production or manufacture of goods but would violate even the basic factory gate concept because the price would be loaded with post manufacturing elements after the article has entered the stream of wholesale trade.
In paragraph 14 of the report it has been observed by this Court:
The post manufacturing element or the selling cost and selling profit of the wholesale dealer would enter in the picture if the basis taken is the second or the subsequent price and not the first wholesale price charged by the manufacturer himself in wholesale to a wholesale dealer at arms length and the usual course of business of course less the trade discount envisaged by the Explanation.
It has been observed in that decision Such a net wholesale cash price for the goods sold at the factory gate within the meaning of sec. 4 (a) would be properly falling within the concept of excise. Proceeding further this Court observed :
The whole aspect of post manufacturing expenses would come in only after the first wholesale sale at the stage of subsequent wholesale price or retail price is not to be the basis for this excise levy it is obvious that no adjustment could be made by way of any such apportionment which would make the whole price uncertain and not easily ascertainable as envisaged by their Lordships.
Lastly it has been observed that the petitioner in that case had never pleaded that it had both the manufacturing activity combined in the sales organization and that the nature of its arrangement with the distributors had not been disclosed.
(23) Mr. Shelat who appears on behalf of the respondents has argued that 60 far as this Court is concerned this decision concludes the controversy and that it is binding on us. It is necessary to note in this context that the Court in that decision was concerned with interpreting the expression wholesale cash price which expression does rot occur in the amended sec. 4 with which we are concerned. In the amended section we are concerned with the expression normal price which shall be the assessable value for the purpose of levy and collection of excise duty. Secondly that decision turned upon the interpretation of sec. 4 as it was prior to its amendment. With its amendment with effect from 1st of October 1975 the new section has teen substituted for the old section. Next in Cibatuls case (supra) we have declared a part of sec. 4 (as amended) ultra vires the legislative competence of Parliament under Art. 246 read with entry 84 in the Union List. That situation did not obtain before the Division Bench when it decided that case. Next as the report shows this Court had proceeded on the assumption of there and then sale at the factory gate and had not thought of consequences which would follow from the passage of time lag between the manufacture of an excisable goods and its sale. The present petitioner was the petitioner in that case. Whether the petitioner had a sales organization or not was not pleaded in that case. In view of the reasons which we have stated and more particularly in light of the substitution of new sec. 4 for old sec. 4 by the amending enactment we cannot hold that it is applicable to the facts of the present case and is binding upon us.
(24) Our attention has been invited by Mr. Shelat to the decision of the learned single Judge of the Madras High Court in Aurofood Private Limited v. Union of India and others 1978 E. L. T. (J. 673). In that decision the earlier decision of this Court to which we have referred has been referred to with approval.
(25) In the result the petition succeeds. It is declared that the aforesaid expenses incurred by the petitioner on the excisable goods after they have been manufactured (except advertisement expenses) cannot form a part of a normal price within the meaning of sec. 4(1) (a) of the Central Excises and Salt Act 1944 and cannot therefore enter into the assessable value of its product for the purpose of collection of excise duty. So far as advertisement expenses are concerned a part of it will enter into the manufacturing cost and therefore the normal price which is the basis for determining the assessable value. It would be open to central excise authorities to determine in each case how much of advertisement expenses shall be included within the normal price for the purpose of assessing excise and and now much shall be excluded indeed depending upon what part has relation or reference to the manufacturing activity and what part has relation to the saleability or marketability of the commodity after it has been manufactured.
(26) On behalf of the petitioner Mr. Divan has also raised the question whether the value of corrugated fibre containers (CFC) or wooden cases can be included in the assessable value of the petitioners products. It has been conceded on behalf of the central excise authorities in the affidavit in reply filed in this case that the value of CFC containers or wooden cases used in packing material by the petitioner for its products shall not form a part of the assessable value. On the concession made by the central excise authorities it is accordingly declared.
(27) Mr. S. N. Shelat who appears on behalf of the central excise authorities states that the petitioners claim for refund in relation to the value of CFC containers or wooden cases shall be finalised by the central excise authorities within a period of three months. Since we have upheld the first contention it is not mecessary for us to answer the second contention.
(28) The impugned orders annexed at Annexures D F I K L and M are in view of our decision quashed. It will be open to the central excise authorities to redetermine the normal price or the assessable value of the excisable goods in light of this decision. If it is found that the petitioner has paid anything more than what it should have paid if the assessable value or the normal price was determined in light of the principles laid down in this decision the central excise authorities shall refund such excess amount to the petitioner.
(29) Rule is made absolute with costs.
(30) Mr. S. N. Shelat who appears on behalf of the respondents applies for certificate of fitness under Art. 133(1) of the Constitution to appeal against this decision to the Supreme Court. He has pointed out to us that we have granted such a certificate to the Union of India and the central excise authorities in Cibatuls case (supra). In that case we have interpreted the constitutional provision. We have not interpreted any constitutional provision in this case. Secondly the interpretation which we have placed upon sec. 4 does not raise any substantial question of law so as to warrant granting of a certificate of fitness under Art. 133 (1). The oral application made by Mr. Shelat is therefore rejected.
(31) Whatever arrangement was ordered to be made by this Court during the pendency of this petition shall remain in force for a period of two months after which it shall stand vacated. So far as the payment of difference of excise duty in future is concerned it shall be open to the petitioner to furnish Bank guarantee for the entire amount of difference. This arrangement also shall remain in force for a period of two months