2002 (2) TMI 101 - SC - Central Excise

Manufacturers Must Pay Excise Duty on Scrap Materials Sold, Even When Original Raw Materials Incurred No Initial Taxation

COMMISSIONER OF CENTRAL EXCISE, DELHI Versus MARUTI UDYOG LTD.

In this tax case, the SC addressed excise duty on waste and scrap materials. The Court held that excise duty is payable on scrap sold by a manufacturer, ... Valuation in Central Excise - Cum-duty price when charged, then in arriving at the excisable value of the goods the element of duty which is payable has to be excluded - Wholesale price which is charged is deemed to be the value for the purpose of levy of excise duty under Section 4 of Central Excise Act, 1944, but the element of excise duty, sales tax or other taxes which is included in the wholesale price is to be excluded in arriving at the assessable value The core legal questions considered in this judgment revolve around the applicability and valuation of excise duty on the sale of waste and scrap generated during manufacturing, specifically:1. Whether excise duty is payable on the sale of waste and scrap materials arising from the manufacturing process when no excise duty has been paid on the raw materials.2. How the assessable value for excise duty on such scrap should be determined, particularly whether the sale price includes excise duty (cum-duty price) and if so, whether the excise duty element should be excluded in valuation under the relevant statutory provisions.3. The interpretation and application of Section 4 of the Central Excises and Salt Act, 1944, especially Section 4(1) and Section 4(4)(d)(ii), in the context of valuation of excisable goods sold by the manufacturer.Issue-wise detailed analysis:Issue 1: Liability to pay excise duty on sale of waste and scrap when no excise duty is paid on raw materialsThe respondent, engaged in manufacturing motor vehicles, availed MODVAT credit on inputs but did not pay excise duty on the raw materials themselves. The Collector raised a demand for excise duty on the waste and scrap (aluminium, iron, and steel) sold by the respondent. The respondent challenged this demand.The Court noted that since no excise duty was paid on the raw materials, the waste and scrap generated became liable for excise duty when sold. This aligns with the principle that excise duty is chargeable on excisable goods manufactured or produced, including waste and scrap, unless specifically exempted.The Tribunal upheld this view, confirming that excise duty was payable on the scrap sold. The Court did not find any error in this determination, affirming the principle that waste and scrap are excisable goods liable to duty when sold.Issue 2: Determination of assessable value - whether the sale price is a cum-duty price and exclusion of excise duty element under Section 4(4)(d)(ii)The principal controversy concerned the valuation of the scrap for excise duty purposes. The respondent sold the scrap at a price which, according to the respondent, did not require the purchaser to pay any additional amount beyond the stated price. The Tribunal treated this as a cum-duty price transaction.Section 4(1) of the Central Excises and Salt Act, 1944, mandates that excise duty is chargeable on excisable goods with reference to the value deemed to be the price at which such goods are ordinarily sold by the assessee to a buyer in wholesale trade, where the price is the sole consideration.Section 4(4)(d)(ii) excludes from the value the amount of excise duty, sales tax, and other taxes payable on such goods, and allows deductions such as trade discounts.The Court referred to the precedent set in a prior ruling where it was held that when the price charged is a cum-duty price (i.e., inclusive of excise duty), the excise duty element must be excluded to arrive at the assessable value. This principle was applied to the present case.The Court reasoned that since the purchaser was not liable to pay any amount beyond the sale price, the excise duty was effectively borne by the respondent. Therefore, the sale price included the excise duty element, and the value for levy of excise duty must exclude this element as mandated by Section 4(4)(d)(ii).The Court relied on the reasoning in a previous decision where it was observed that excise duty, though included in the sale price, is part of the consideration payable by the purchaser, regardless of whether it is separately shown or included in the price. The seller, in effect, recovers the excise duty from the purchaser as part of the sale price.Applying this rationale, the Court concluded that the Tribunal correctly directed that the excise duty element be excluded from the sale price to determine the assessable value.Issue 3: Treatment of competing arguments and final conclusionsThe Revenue challenged the Tribunal's approach to valuation, contending that the excise duty element should not be excluded from the sale price. The Court rejected this argument, emphasizing the statutory language and prior judicial interpretation that excise duty included in the sale price must be excluded to avoid double taxation.There was no evidence that the respondent sought to recover the excise duty from the purchaser after the sale, reinforcing the view that the sale price was inclusive of excise duty and that the respondent bore the tax burden.The Court found no error in the Tribunal's approach and upheld the direction that the respondent was entitled to the benefit of Section 4(4)(d)(ii) of the Central Excises and Salt Act.Significant holdings:'The Tribunal has, therefore, rightly proceeded on the basis that the amount realised by the respondent from the sale of scrap has to be regarded as a normal wholesale price and in determining the value on which excise duty is payable the element of excise duty which must be regarded as having been incorporated in the sale price, must be excluded.''The sale price realised by the respondent has to be regarded as the entire price inclusive of excise duty because it is the respondent who has, by necessary implication, taken on the liability to pay all taxes on the goods sold and has not sought to realise any sum in addition to the price obtained by it from the purchaser.''Section 4(4)(d)(ii) clearly indicates that the wholesale price which is charged is deemed to be the value for the purpose of levy of excise duty, by the element of excise duty, sales tax, or other taxes which is included in the wholesale price is to be excluded in arriving at the excisable value.'The Court affirmed the principle that when the sale price is inclusive of excise duty (cum-duty price), the excise duty element must be excluded from the assessable value under Section 4(4)(d)(ii) to ensure proper valuation and avoid taxing the duty itself.Accordingly, the Court dismissed the appeal, upholding the Tribunal's decision that excise duty is payable on the scrap sold, but the assessable value must exclude the excise duty component embedded in the sale price.