2000 (5) TMI 60 - AT - Central Excise

HDPE bags cost not deductible under Central Excise Act - Importance of returnability clause clarified

The tribunal held that the cost of HDPE bags used for packing detergent powder was not deductible under Section 4(4)(d)(i) of the Central Excise Act. The ... Valuation (Central Excise) - Cost of HDPE bags Issues Involved:1. Eligibility for deduction of the cost of HDPE bags under Section 4(4)(d)(i) of the Central Excise Act.2. Interpretation of the term 'returnability' of packing material.3. Validity of the arrangement between the manufacturer and the trader concerning the returnability of packing material.Detailed Analysis:1. Eligibility for Deduction of the Cost of HDPE Bags:The primary issue was whether the cost of HDPE bags used for packing detergent powder could be deducted under Section 4(4)(d)(i) of the Central Excise Act. The appellants argued that the HDPE bags were durable and returnable, thus qualifying for deduction. They relied on various case laws, including K. Radha Krishaniah (1987), Mahalaxmi Glass (1988), and others, to support their claim that an implied agreement for returnability sufficed for the deduction.2. Interpretation of 'Returnability':The tribunal examined the term 'returnability' extensively. The appellants cited several judgments, such as Jayant Paper Mills Ltd. v. Collector of Central Excise, Vadodara (1996) and Collector of Central Excise, Ahmedabad v. Maize Products (1996), to argue that the returnability clause on the trader's invoices was sufficient. They emphasized that the packing material must be returnable under an arrangement, and there was no need for a formal contract.However, the tribunal noted that the arrangement for returnability must exist at the time of removal of goods from the manufacturer to the buyer. In this case, there was no buyer at the time of removal from the appellant's factory, and no agreement or arrangement between the manufacturer and the trader was produced. The tribunal concluded that the arrangement for returnability between the trader and their customers did not satisfy the requirements of Section 4(4)(d)(i).3. Validity of the Arrangement Between Manufacturer and Trader:The tribunal scrutinized the arrangement between the manufacturer (appellant) and the trader (Hindustan Lever Ltd.). The appellants argued that the clause on the trader's invoices should suffice for the deduction. However, the tribunal found that there was no agreement or arrangement for returnability at the time of removal of goods from the appellant's factory. The tribunal emphasized that the returnability clause must be between the manufacturer and the buyer at the time of removal, not between the trader and their customers.The tribunal also referred to the Supreme Court's decision in Ujjager Prints (1989), which stated that the value should include the processor's expenses, costs, and charges plus profit but not the trader's profit. Therefore, any deduction for the cost of HDPE bags would effectively reduce the trader's profit, which is not permissible.Conclusion:The tribunal concluded that the cost of HDPE bags was not deductible under Section 4(4)(d)(i) of the Central Excise Act. The arrangement for returnability must exist at the time of removal of goods from the manufacturer, and in this case, there was no such arrangement. Therefore, the reference was answered in favor of the revenue, denying the deduction for the cost of HDPE bags.