1983 (10) TMI 51 - SC - Central Excise

Court clarifies excisable goods valuation for duty based on wholesale price incl. certain expenses & profits.

The court's judgment clarified that the value of excisable goods for duty purposes should be based on the wholesale price charged by the manufacturer, ... Valuation of excisable goods - wholesale cash price - manufacturing cost and manufacturing profit - post-manufacturing expenses and post-manufacturing profit - normal price - related person - deductions from value (trade discount, duties, transport, packing) - arm's length transactionValuation of excisable goods - wholesale cash price - manufacturing cost and manufacturing profit - Whether the value for excise must be confined to manufacturing cost plus manufacturing profit or may be taken as the wholesale price charged by the manufacturer - HELD THAT: - The Court held that the measure adopted for assessing excise (value) is distinct from the nature of the levy and Parliament may adopt a broader standard so long as it bears a nexus with the charge. Both the old Section 4 and the substituted Section 4(1) prescribe the price charged by the manufacturer in the course of wholesale trade at the time and place of removal as the basis for value. The value is not confined to the bare manufacturing cost and manufacturing profit; instead the fundamental criterion is the price at which the excisable article (or an article of the like kind and quality) is sold or is capable of being sold by the manufacturer. Judicial precedents (including Voltas and Atic) are read as consistent with this approach and do not support the proposition that value must be limited to manufacturing cost plus manufacturing profit. [Paras 15, 25, 28, 33, 40]Value for excise is the wholesale price charged (or chargeable) by the manufacturer in the course of wholesale trade at the time and place of removal and is not confined solely to manufacturing cost plus manufacturing profit.Normal price - arm's length transaction - wholesale cash price - Construction and application of the new Section 4(1)(a) (the 'normal price') and requirement of arm's length pricing - HELD THAT: - The expression 'normal price' is defined in Section 4(1)(a) by the words that follow ('that is to say') and denotes the price at which goods are ordinarily sold by the assessee in the course of wholesale trade for delivery at the time and place of removal, provided the buyer is not a related person and the price is the sole consideration. Transactions tainted by extracommercial considerations are excluded; the statute requires that the price be one arrived at on an arm's length commercial basis. The new Section 4 therefore embodies the same basic scheme as the old Section 4 while giving more precise formulation and specifying conditions (including provisos) under which alternative prices or adjustments apply. [Paras 29, 31, 32, 33, 36]Under Section 4(1)(a) the 'normal price' is the manufacturer's wholesale price in an arm's length transaction and is to be ascertained in accordance with the provisos and definitions contained in the section.Related person - legal fiction - constitutional competence - Validity and construction of the definition of 'related person' in Section 4(4)(c), particularly the inclusion of a 'distributor' - HELD THAT: - The Court recognised Parliament's power to treat certain categories of transactions as tainted for taxation purposes by employing a legal fiction. However, to avoid arbitrariness and constitutional infirmity the Court read down the definition so that the words 'a relative and a distributor of the assessee' are understood to mean a distributor who is a relative of the assessee. Other parts of the definition (persons associated with interest, holding and subsidiary companies and relatives as defined in the Companies Act) provide a sufficiently narrow basis for invoking the proviso. So read, the provision falls within legislative competence and does not convert the excise into a sales tax. [Paras 41, 42, 43, 44, 46]The definition of 'related person' is constitutionally sustainable when read to limit 'distributor' to a distributor who is a relative of the assessee; other specified relationships remain within the section's legitimate scope.Deductions from value - transport cost - trade discount - packing - Which post-manufacturing expenses are deductible from the wholesale price in determining excisable value - HELD THAT: - The statute expressly permits certain deductions: trade discount and the amount of duty payable at removal (old section) and, in the amended section, duties, sales tax and (subject to rules) trade discount; where value is determined with reference to a place other than the place of removal the cost of transportation from place of removal must be excluded. The Court held that expenses incurred up to the date of delivery which enter into the marketability and value of the article at the factory gate (storage, outward handling, interest on inventories, after-sales services, marketing/selling organisation including advertising) cannot be deducted. If the sale occurs outside the factory gate, the manufacturer is entitled to deduct the transportation cost (including insurance on freight) to arrive at factorygate value; where freight is averaged and included in the price, the averaged freight must be deducted. Packing costs are included where goods are delivered in packed condition; primary packing and that degree of secondary packing necessary to put the article in the condition ordinarily sold in wholesale trade at the factory gate are includible in value. Special secondary packing provided at the buyer's instance, not normally used in trade, is deductible. [Paras 49, 50, 51, 52, 54]Only the deductions expressly or necessarily contemplated by Section 4 are permissible: trade discount, duties/taxes, transport cost (when value is taken at a place other than removal) and limited treatment of packing; ordinary postmanufacturing expenses and selling/marketing costs are not deductible when sale is at factory gate.Final Conclusion: The Court ruled that under the Central Excises and Salt Act (pre and postamendment) the excisable value is to be determined primarily by the manufacturer's wholesale price in an arm's length wholesale transaction at the time and place of removal, not by a narrow conceptual value confined to manufacturing cost plus manufacturing profit; the definition of 'related person' must be read down to avoid constitutional infirmity (so that 'distributor' is limited to a distributor who is a relative), and deductions for postmanufacturing expenses are restricted to those expressly provided or necessarily implied by Section 4 (notably trade discount, specified taxes/duties, transport costs where applicable, and specified packing treatment). Issues Involved:1. Determination of the value of excisable goods for the purposes of duty under Section 4 of the Central Excises and Salt Act, 1944.2. Inclusion of post-manufacturing expenses and profits in the value of excisable goods.3. Interpretation of the term 'related person' under the amended Section 4.4. Deductibility of post-manufacturing expenses from the price of excisable goods.5. Inclusion of packing costs in the value of excisable goods.Issue-wise Detailed Analysis:1. Determination of the value of excisable goods for the purposes of duty under Section 4 of the Central Excises and Salt Act, 1944:The judgment addresses the legal position of excise duty valuation under the Central Excises and Salt Act, 1944, both before and after its amendment by Act XXII of 1973. The core issue was whether the value for excise purposes should be based solely on manufacturing cost and profit or the entire wholesale price, including post-manufacturing expenses and profits. The court concluded that the value must be determined by the price charged by the manufacturer in the course of wholesale trade, not limited to manufacturing cost and profit.2. Inclusion of post-manufacturing expenses and profits in the value of excisable goods:The court rejected the argument that excise duty should be confined to manufacturing cost and profit, stating that a broader standard may be adopted for determining the measure of the levy. It emphasized that the value of excisable goods includes the wholesale price charged by the manufacturer, which encompasses post-manufacturing expenses and profits.3. Interpretation of the term 'related person' under the amended Section 4:The judgment addressed the definition of 'related person' in the amended Section 4(4)(c), which includes a holding company, subsidiary company, relative, and distributor of the assessee. The court read down the definition to mean that a distributor must also be a relative of the assessee to fall within the term 'related person.' This interpretation was necessary to avoid constitutional infirmity and ensure legislative competence.4. Deductibility of post-manufacturing expenses from the price of excisable goods:The court examined whether various post-manufacturing expenses could be deducted from the price when determining the value of excisable goods. It concluded that expenses such as storage charges, outward handling charges, interest on inventories, charges for other services after delivery, and marketing and selling organization expenses, including advertisement expenses, cannot be deducted. However, the cost of transportation from the factory gate to the place of delivery can be deducted.5. Inclusion of packing costs in the value of excisable goods:The judgment clarified that the cost of primary packing, necessary to make the article marketable, must be included in the value of excisable goods. However, the cost of secondary packing, which is not generally provided as a normal feature of wholesale trade, should be excluded. The court emphasized that the degree of secondary packing necessary for the article's marketability at the factory gate is included in the value, but special secondary packing requested by the buyer is not.Conclusion:The court's judgment provided a comprehensive analysis of the determination of the value of excisable goods, emphasizing that the value includes the wholesale price charged by the manufacturer, which encompasses post-manufacturing expenses and profits. It also clarified the interpretation of 'related person' and the deductibility of post-manufacturing expenses and packing costs. The judgment aimed to ensure uniformity and fairness in the application of excise duty while adhering to the legislative intent and constitutional principles.