COMMISSIONER OF CENTRAL EXCISE, versus M/S GRASIM INDUSTRIES LTD.THROUGH ITS SECRETARY on 11 May 2018

[2018] 6 S.C.R. 1099

COMMISSIONER OF CENTRAL EXCISE, INDORE

v.

M/S GRASIM INDUSTRIES LTD.THROUGH ITS SECRETARY

(Civil Appeal No. 3159 of 2004)

MAY 11, 2018

[RANJAN GOGOI, N. V. RAMANA, R. BANUMATHI,MOHAN M. SHANTANAGOUDARAND S. ABDUL NAZEER, JJ.]

Central Excise Act, 1944 – ss.3 and 4 – Whether s.4 of theCentral Excise Act, 1944 (as substituted with effect from 1-7-2000)and the definition of “transaction value” in clause (d) of sub-section(3) of s.4 are subject to s.3 of the Act – Held: The observationsmade in Acer India Ltd. to the effect that ‘transaction value’ definedwould be subject to the charging provisions contained in s.3 of theAct will have viewed in the context of a situation where an additionof the value of a non-dutiable item was sought to be made to thevalue of a dutiable item for the purpose of determination of thetransaction value of the composite item – This is the limited contextin which the subservience of s.4(3)(d) to s.3 was expressed and hasto be understood – If so understood, the views expressed in thatparagraph of Acer India Ltd. case cannot be read to be in conflictwith the decision of Bombay Tyre International Ltd..

Central Excise Act, 1944 – ss.3 and 4 – Whether ss. 3 and 4of the Act despite being interlinked, operate in different fields –Held: The measure of the levy contemplated in s.4 of the Act is notcontrolled by the nature of the levy – So long a reasonable nexus isdiscernible between the measure and the nature of the levy both ss.3 and 4 would operate in their respective fields – The view expressedin Bombay Tyre International Ltd. is the correct exposition of thelaw in this regard.

Central Excise Act, 1944 – ss.3 and 4 – Whether the conceptof “transaction value” makes any material departure from thedeemed normal price concept of the erstwhile s.4(1)(a) of the Act –Held: “Transaction value” as defined in s.4(3)(d) brought into forceby the Amendment Act, 2000, statutorily engrafts the additions tothe ‘normal price’ under old s.4 as held to be permissible in Bombay

A

B

C

D

E

F

G

H

ATyre International Ltd. besides giving effect to the changeddescription of the levy of excise introduced in s.3 of the Act by theAmendment of 2000 – There is no discernible difference in thestatutory concept of ‘transaction value’ and judicially evolvedmeaning of ‘normal price’.

BAnswering the referred issues, the CourtHELD: 1. The amendment to Section 3 of Central ExciseAct, 1944 by substitution of the words “a duty of excise on allexcisable goods” by the words “a duty of excise to be called theCentral Value Added Tax (CENVAT) on all excisable goods” isCconspicuous. The amendment of Section 3 to the Act not onlyincorporates the essentials of a changed concept of charging oftax on additions to the value of goods and services at each stageof production but also engrafts in the statute what was judiciallyheld to be permissible additions to the manufacturing cost andmanufacturing profit in Bombay Tyre International Ltd.. ThisDfundamental change by introduction of the concept underlyingvalue-added taxation in the provisions of Section 3 really findreflection in the definition of ‘transaction value’ as defined bySection 4(3)(d) of the Act besides incorporating what was explicitlyheld to be permissible in Bombay Tyre International Ltd.. SectionE4(3)(d), thus, defines ‘transaction value’ by specifically includingall value additions made to the manufactured article prior to itsclearance, as permissible additions to be price charged forpurpose of the levy. [Para 21][1119-B-F]

2. Considering the decision in Acer India Ltd. in the saidFcase, softwares which were duty free items and could betransacted as softwares came to be combined with the computerhardware which was a dutiable item for purposes of clearance.The Revenue sought to take into account the value of thecomputer software for the purposes of determination of‘transaction value’ with regard to the computer. This CourtGnegatived the stand of the Revenue taking the view that whensoftware as a separate item was not dutiable its inclusion in thehard-disk of the computer cannot alter the duty liability of thesoftware so as to permit the addition of the price/value of thesoftware for the purpose of levy of duty. It is in the above contextH

COMMNR. OF CENTRAL EXCISE, INDORE v. M/S GRASIMINDUSTRIES LTD.THR. ITS SECY.

that the decision of this Court in Acer India Ltd. has to beunderstood. The observations made in paragraph 84 thereof tothe effect that ‘transaction value’ defined in Section 4(3)(d) ofthe Act would be subject to the charging provisions contained inSection 3 of the Act will have to be viewed in the context of asituation where an addition of the value of a non-dutiable itemwas sought to be made to the value of a dutiable item for thepurpose of determination of the transaction value of the compositeitem. This is the limited context in which the subservience ofSection 4(3)(d) to Section 3 of the Act was expressed and has tobe understood. If so understood, the views expressed in AcerIndia Ltd. can be read to be in conflict with the decision ofBombayTyre International Ltd. [Para 22][1119-F-H; 1120-A-C]

3. The measure of the levy contemplated in Section 4 ofthe Act will not be controlled by the nature of the levy. So long areasonable nexus is discernible between the measure and thenature of the levy both Section 3 and 4 would operate in theirrespective fields. The view expressed in Bombay TyreInternational Ltd.is the correct exposition of the law in this regard.Further, “transaction value” as defined in Section 4(3)(d) broughtinto force by the Amendment Act,2000, statutorily engrafts theadditions to the ‘normal price’ under the old Section 4 as held tobe permissible in Bombay Tyre International Ltd. besides givingeffect to the changed description of the levy of excise introducedin Section 3 of the Act by the Amendment of 2000. In fact, thereis no discernible difference in the statutory concept of ‘transactionvalue’ and the judicially evolved meaning of ‘normal price’. [Para23][1120-C-F]

Union of India and Ors. v. Bombay Tyre InternationalLtd. and Ors. [1984] 1 SCR 347 : (1984) 1 SCC 467 –affirmed Commissioner of Central Excise, Pondicherry v. AcerIndia Ltd.[2004] 4 Suppl. SCR 676 : (2004) 8 SCC 173;C.C.E. Indore v. Grasim Industries Ltd. [2009] 12SCR 204 : (2009) 14 SCC 596; C.C.E. Indore v. GrasimIndustries Ltd. (2016) 6 SCC 391; The Province ofMadras v. Messrs. Boddu Paidanna & Sons A.I.R. (29)

AB

C

D

E

F

G

H

From the final Order No.672/2003-NB(A) dated 10.12.2003 ofthe Customs, Excise & Service Tax Appellate Tribunal, New Delhi inAppeal No.E/1370/2003-NB(A).F

WITH

C.A. Nos. 3455/2004, 7272/2005, 2982-2985/2005, 2986/2005,7143/2005, 2261/2006, 2246-2247/2008, 2934-2935/2008, 3528/2008,4820/2008, 6695/2008, 2534/2009, 253/2010, 8541/2009, 445/2010, 1382/2010, 2003-2004/2010, 2430/2010, 2363/2010, 7174-7175/2010, 4696/2011,G6984/2011 and 2705/2012.

Ms. Pinky Anand, ASG, K. Radhakrishnan, S.K. Bagaria,V. Sridharan, Sr. Advs., Rupesh Kumar, Arijit Prasad, Ritesh Kumar,Mrs. Rashmi Malhotra, B. Krishna Prasad, Balendu Shekhar, SumitTeterwal, Ms. Saudamini Sharma, Hemant Arya, Ms. Snidha Mehra,HMs. Kirti Dua, Mukesh Kumar Maroria, Ramesh Singh, Nikhil Goel,

Ms. Naveen Goel (for Mrs. Sheela Goel), S. Sukumaran, Anand Sukumar,Bhupesh Kumar Pathak, K. Rajeev, Mrs. Meera Mathur, Kumar AjitSingh, L. Badri Narayanan, Aditya Bhattacharya, Victor Das,Ms. Apeksha Mehta, M.P. Devanath, Joseph Pookkatt, Prashant Kumari,Dinesh Kumar (for M/s Ap & J Chambers), Ravinder Narain, AjayAggarwal, Ms. Mallika Joshi, Ms. Ruchika Singh, Rajat Gava, RajanNarain, Rajesh Kumar, Ms. Chandani Patel, S. Nandakumar,M.S. Sarankumar, Ms. Deepika Nandakumar, Suba Somu,V. N. Raghupathy, Nikhil Nayyar, N. Sai Vinod, Dhananjay Baijal,Ms. Smriti Shah, Divyanshu Rai, S. Jaikumar, B. Venugopal, Kartik Jindal,Ajinkya Tiwari, Rajendra Singhvi, K.K.L. Gautam, Ms. ArundhatiChakraborty, Brij Bhushan, Advs. for the appearing parties.

The Judgment of the Court was delivered by RANJAN GOGOI, J. 1. First, the facts:

The respondent – Assessees are manufacturers of dissolved andcompressed industrial gases, liquid chlorine and other allied products.Cotton yarn and Post Mix Concentrate manufactured by two otherindividualassessees are also in issue. These articles are supplied to thecustomers in tonners, cylinders, carboys, paper cones and HDPE bags,BIBs, pipeline and canisters, which may be more conveniently referredto as “containers”. In some cases the containers are provided by theAssesseesto the customers on rent whereas in others the customersbring their own containers. For making available or for filling up thecontainers provided by the customers the Assessees charge thecustomers certain amounts under different heads viz. packing charges,wear and tear charges, facility charges, service charges, delivery andcollection charges, rental charges, repair and testing charges. TheAssessees treat the said amounts as their income from ancillary or alliedventures.

2. The issue arising is whether the aforesaid charges realised bythe Assessees are liable to be taken into account for determination ofvalue for the purpose of levy of duty in terms of Section 4 of the CentralExcise Act, 1944 (hereinafter referred to as “the Act”) as amendedwith effect from 1[st] July, 2000.

3. Perceiving a conflict between the two decisions of this courtinUnion of India and Ors.v.Bombay Tyre International Ltd. and Ors.1and Commissioner of Central Excise, Pondicherry v.Acer India ABC

DEF

G

H

ALtd.[2],a two judge Bench of this Court by order dated 30[th] July, 2009[3]referred the following questions for an answer by a larger bench:

“1. Whether Section 4 of the Central Excise Act, 1944 (assubstituted with effect from 1-7-2000) and the definition of“transaction value” in clause (d) of sub-section (3) of Section 4Bare subject to Section 3 of the Act?

2. Whether Sections 3 and 4 of the Central Excise Act, despitebeing interlinked, operate in different fields and what is their realscope and ambit?

3. Whether the concept of “transaction value” makes any materialCdeparture from the deemed normal price concept of the erstwhileSection 4(1)(a) of the Act?”

4. As the decisions in Bombay Tyre International Ltd.(supra)andAcer India Ltd.(supra) were rendered by Benches of Three Hon’bleJudges of this Court, the above questions were referred by order datedD30[th] March, 2016[4] to an even larger Bench. This is how we are in seisinof the matter.

5. What is excise duty and what is the relationship between thenature of the duty and the measure of the levy are the two precisequestions that would arise for determination in the present reference.

E

6. On first principles, there can be no dispute. Excise is a levy onmanufactureand upon the manufacturer who is entitled under law topass on the burden to the first purchaser of the manufactured goods.The levy of excise flows from a constitutional authorisationunder Entry84 of List I of the Seventh Schedule to the Constitution of India. TheFstage of collection of the levy and the measure thereof is, however, astatutory function.So long the statutory exercise in this regard is acompetent exercise of legislative power,the legislative wisdom both withregard to the stage of collection and the measure of the levy must beallowed to prevail. The measure of the levy must not be confused withthe nature thereof though there must be some nexus between the two.GBut the measure cannot be controlled by the rigors of the nature. Theseare some of the settled principles of laws emanating from a long line ofdecisions of this Court which we will take note of shortly. Do these 2 (2004) 8 SCC 173

3 (2009) 14 SCC 596

H 4 (2016) 6 SCC 391

principles that have withstood the test of time require a rethink is thequestion that poses for an answer in the present reference.

A

7. At this stage, it may be necessary to specifically take note ofthe provisions of Sections 3 and 4 as originally enacted and as amendedfrom time to time.

B

Section 3

Section 3 of the Act in force prior to Relevant portion of Section 3 as amendment by Finance Act 2000 (Act substituted/amended (with effect from 10 of 2000) 12[th] May, 2000) by Section 92 of the Finance Act, 2000 (No.10 of 2000) 3. Duties specified in the First 3. Duties specified in [the First Schedule CSchedule to be levied. – and the Second Schedule] to the Central Excise Tariff Act, 1985] to be levied.- (1) There shall be levied and collected in such manner as may be prescribed,- There shall be levied and collected in such manner as may be prescribed,-(a) a duty of excise on all excisable Dgoods which are produced or manufactured in India as, and at the rates, (a) a duty of excise to be called the set forth in the First Schedule to the Central Value Added Tax (CENVAT) on all Central Excise Tariff Act, 1985; excisable goods which are produced or manufactured in India as, and at the rates, set forth in the First Schedule to the Central Excise Tariff Act, 1985 (5 of E1986); (b)…………(b)………….

Section 4

Section 4 as originally enacted Section 4 as amended by Section 4 as amended by (in the Central Excise and Amendment Act No.22 of Finance Act, 2000 with Salt Act, 1944), 1973 effect from 1.7.2000 Determination of value for the Valuation of excisable goods Valuation of excisable purposes of duty – Where for purposes of charging of goods for purposes of under this Act any article is duty of excise.-(1) Where charging of duty of excise. chargeable with duty at a rate under this Act, the duty of - (1) Where under this Act, dependent on the value of the excise is chargeable on any the duty of excise is article, such value shall be excisable goods with chargeable on any excisable deemed to be the wholesale reference to value, such value goods with reference to cash price for which an article shall, subject to the other their value, then, on each of the like kind and quality is provisions of this section, be removal of the goods, such sold or is capable of being sold deemed to be- value shall - F

G

H

F

G

H

Afor delivery at the place of (a) the normal price thereof, (a) in a case where the manufacture and at the time of that is to say, the price at which goods are sold by the its removal therefrom, without such goods are ordinarily sold assessee, for delivery at any abatement of deduction by the assessee to a buyer in the the time and place of the whatever except trade discount course of wholesale trade for removal, the assessee and and the amount of duty then delivery at the time and place the buyer of goods are not related and the price is the payable. of removal, where the buyer is Bsole consideration for the not a related person and the sale, be the transaction price is the sole consideration value; for the sale: (b) in any other case, including the case where Provided that- the goods are not sold, be Cthe value determined in (i) where, in accordance with such manner as may be the normal practice of the prescribed. wholesale trade in such goods, such goods are sold by the assessee at different prices to (2) The provisions of this different classes of buyers (not section shall not apply in Dbeing related persons) each respect of any excisable such price shall, subject to the goods for which a tariff existence of the other value has been fixed under circumstances specified in sub-section (2) of section clause (a), be deemed to be the 3. normal price of such goods in relation to each such class of Ebuyers; (3) For the purpose of this section,- (ii) where such goods are sold (a) "assessee" means the by the assessee in the course of person who is liable to pay wholesale trade for delivery at the duty of excise under the time and place of removal this Act and includes his Fat a price fixed under any law agent; for the time being in force or at a price, being the maximum, (b) persons shall be deemed to be "related" if - fixed under any such law, then, notwithstanding anything (i) they are inter-contained in clause (iii) of this connected undertakings; Gproviso, the price or the maximum price, as the case (ii) they are relatives; may be, so fixed, shall, in relation to the goods so sold, be (iii) amongst them the buyer is a relative and deemed to be the normal price distributor of the assessee, thereof; or a sub-distributor of such Hdistributor; or

A(iii) where the assessee so (iv) they are so associated arranges that the goods are that they have interest, generally not sold by him in directly or indirectly, in the the course of wholesale trade business of each other. except to or through a related Explanation. - In this person, the normal price of the clause- Bgoods sold by the assessee to or through such related person (i)“inter-connected shall be deemed to be the price undertakings” shall have at which they are ordinarily the meaning assigned to it sold by the related person in in clause (g) of section 2 of the course of wholesale trade at the Monopolies and Cthe time of removal, to dealers Restrictive Trade Practices (not being related persons) or Act, 1969 (64 of 1969); where such goods are not sold and to such dealers, to dealers (being related persons) who sell such goods in retail; (ii)“relative” shall have the Dmeaning assigned to it in clause (41) of section 2 of (b) where the normal price of the Companies Act, 1956 such goods is not ascertainable (1 of 1956); for the reason that such goods are not sold or for any other reason, the nearest (c) “place of removal” Eascertainable equivalent means – thereof determined in such manner as may be prescribed. (i) a factory or any other place or premises of production or manufacture (2) Where, in relation to any of the excisable goods; Fexcisable goods the price (ii) a warehouse or any thereof for delivery at the place other place or premises of removal is not known and wherein the excisable the value thereof is determined goods have been permitted with reference to the price for to be deposited without delivery at a place other than Gpayment of duty, from the place of removal, the cost where such goods are of transportation from the place removed; of removal to the place of delivery shall be excluded from such price. H

A

A(3) The provisions of thissection shall not apply in respect of any excisable goods for which a tariff value has been fixed under sub- section (2) of section 3. B (4) For the purposes of this section,- (a) " assessee" means the Cperson who is liable to pay the duty of excise under this Act and includes his agent; (b) " place of removal" means- (i) a factory or any other place Dor premises of production or manufacture of the excisable goods; or (ii) a warehouse or any other place or premises wherein the excisable goods have been Epermitted to be deposited without payment of duty, from where such goods are removed; F (c) "related person" means a person who is so associated with the assessee that they have interest, directly or indirectly, in the business of Geach other and includes a holding company, a subsidiary company, a relative and a distributor of the assessee, and any sub- distributor of such distributor. H

(d) “transaction value” means the price actually paid or payable for the goods, when sold, and includes in addition to the amount charged as price, any amount that the buyer is liable to pay to, or on behalf of, the assessee, by reason of, or in connection with the sale, whether payable at the time of the sale or at any other time, including, but not limited to, any amount charged for, or to make provision for, advertising or publicity, marketing and selling organization expenses, storage, outward handling, servicing, warranty, commission or any other matter; but does not include the amount of duty of excise, sales tax and other taxes, if any, actually paid or actually payable on such goods.

1109Explanation.-In this clause" Aholding company"," subsidiary company and" relative" have the same meanings as in the Companies Act, 1956 ; (1 of 1956 ) (d) "value", in relation to any Bexcisable goods,- (i) where the goods are delivered at the time of removal in a packed condition, includes the cost of such packing except the cost of the packing which is of a durable nature Cand is returnable by the buyer to the assessee. Explanation.- In this sub- clause," packing" means the wrapper, Dcontainer, bobbin, pirn, spool, reel or warp beam or any other thing in which or on which the excisable goods are wrapped, contained or wound; (ii) does not include the amount of Ethe duty of excise, sales tax and other taxes, if any, payable on such goods and, subject to such rules as may be made, the trade discount (such discount not being refundable on any account whatsoever) allowed in accordance with the Fnormal practice of the wholesale trade at the time of removal in respect of such goods sold or contracted for sale.G(e) “wholesale trade” means sales to dealers, industrial consumers, Government, local authorities and other buyers, who or which purchase their requirements / otherwise than in retail. H

A8. It may be appropriate, at this stage, to make a brief narration ofthe developments in the particular branch of fiscal jurisprudence whichis in issue in the present cases. The Central Provinces and BerarSales of Motor Spirit and Lubricants Taxation Act, 1938, (CentralProvinces and Berar Act No.XIV of 1938) authorised the levy andcollection from every retail dealer, as defined by the Act, a tax on theBretail sales of motor spirits and lubricants at the rate of five per cent onthe value of such sales. The levy was challenged and what arose fordecision before the Federal Court on a reference, made by the GovernorGeneral under Section 213 of the Government of India Act, 1935 (oftenreferred to as “the Constitution Act”) is the question whether the saidClevy was a duty of excise under Entry 45 of List-I in the Seventh Scheduleto the Constitution Act or a tax on sale of goods under Entry 48 of List IIof the said Schedule. While the eventual answer in the reference holdingthe levy to be a tax on sale of goods and therefore within the competenceof the Provincial Legislature is of no consequence to the present issue,what may require a specific notice is that Entry 45 which empoweredDthe Federal Legislature to make laws with respect to “duties of exciseon tobacco and other goods manufactured or produced in India;except…” corresponds to Entry 84 of List-I of the Seventh Schedule tothe Constitution of India.

9. Some extracts from the opinion rendered by ChiefEJusticeGwyer(all the Judges on the Bench gave their own opinions whileagreeing to the eventual conclusion) would throw light on the nature ofthe levy of excise and is therefore being recollected below:- “The federal legislative power extends to making laws with respectto duties of excise on goods manufactured or produced in India.F“Excise” is stated in the Oxford Dictionary to have been originallyaccise”, a word derived through the Dutch from the late Latinaccensare, to tax; the modern form, which ousted accise” at anearly date, being apparently due to a mistaken derivation from theLatin excidere, to cut out. It was at first a general word for a tollGor tax, but since the 17th century it has acquired in the UnitedKingdom a particular, though not always precise, signification.The primary meaning of “excise duty” or “duty of excise” hascome to be that of a tax on certain articles of luxury (such asspirits, beer or tobacco) produced or manufactured in the UnitedKingdom, and it is used in contradistinction to customs duties onH

articles imported into the country from elsewhere. At a later datethe licence fees payable by persons who produced or sold excisablearticles also became known as duties of excise; and the expressionwas still later extended to licence fees imposed for revenue,administrative, or regulative purposes on persons engaged in anumber of other trades or callings. Even the duty payable onpayments for admission to places of entertainment in the UnitedKingdom is called a duty of excise; and, generally speaking, theexpression is used to cover all duties and taxes which, togetherwith customs duties, are collected and administered by theCommissioners of Customs and Excise. But its primary andfundamental meaning in English is still that of a tax on articlesproduced or manufactured in the taxing country and intended forhome consumption. I am satisfied that that is also its primary andfundamental meaning in India; and no one has suggested that ithas any other meaning in Entry (45).

…There can be no reason in theory why an excise duty shouldnot be imposed even on the retail sale of an article, if the taxingAct so provides. Subject always to the legislative competenceof the taxing authority, a duty on home produced goods willobviously be imposed at the stage which the authority findto be the most convenient and the most lucrative, whereverit may be; but that is a matter of the machinery of collection,and does not affect the essential nature of the tax.The ultimateincidence of an excise duty, a typical indirect tax, must always beon the consumer, who pays as he consumes or expends; and itcontinues to be an excise duty, that is, a duty on home-producedor home-manufactured goods, no matter at what stage it iscollected. The definition of excise duties is therefore of littleassistance in determining the extent of the legislative power toimpose them; for the duty imposed by a restricted legislative powerdoes not differ in essence from the duty imposed by an extendedone.

It was argued on behalf of the Provincial Government thatan excise duty was a tax on production or manufacture only A

B

C

D

E

FG

H

1112SUPREME COURT REPORTS

Aand that it could not therefore be levied at any later stage.Whether or not there be any difference between a tax onproduction and a tax on the thing produced, this contention,no less than that of the Government of India, confuses thenature of the duty with the extent of the legislative powerto impose it. Nor, for the reasons already given, is it possibleBto agree that in no circumstances could an excise duty belevied at a stage subsequent to production or manufacture.”

(Underlining and bold is ours)

10. The issue was considered further in The Province ofCMadrasvs.Messrs. BodduPaidanna& Sons5. The followingobservation would be relevant.

“In 1939 F.C.R. 18 the opinions expressed were advisory opinionsonly, but we do not think that we ought to regard them as any lessbinding upon us on that account. We accept, therefore, the generalDdivision between the Central and Provincial spheres of taxationwhich commended itself to the majority of the Court in thatcase…………….. They recognized that the expression ‘duty ofexcise’ is wide enough to include a tax on sales ; but where poweris expressly given to another authority to levy a tax on sales, it isclear that “duty of excise” must be given a more restricted meaningEthan it might otherwise bear. On the other hand the fact that “dutyof excise” is itself an expression of very general import is noreason at all for refusing to give to the expression “tax on sales”the meaning which it would ordinarily and naturally convey. Inthese circumstances the question at issue in the present appealFappears to us to lie within a very small compass.

The duties of excise which the Constitution Act assigns exclusivelyto the Central Legislature are,- according to the 1939 F.C.R 18,duties levied upon the manufacturer or producer in respect of themanufacture or production of the commodity taxed. The tax onGthe sale of goods, which the Act assigns exclusively to the ProvincialLegislatures, is a tax levied on the occasion of the sale of thegoods. Plainly a tax levied on the first sale must in the nature ofthings be a tax on the sale by the manufacturer or producer ; but 5 A.I.R. (29) 1942 Federal Court 33 (from Madras)

it is levied upon him qua seller and not qua manufacturer orproducer.

……………If the taxpayer who pays a sales tax is also amanufacturer or producer of commodities subject to a centralduty of excise, there may no doubt be an overlapping in one sense; but there is no overlapping in law. The two taxes which he iscalled on to pay are economically two separate and distinctimposts.There is in theory nothing to prevent the CentralLegislature from imposing a duty of excise on a commodityas soon as it comes into existence, no matter what happensto it afterwards, whether it be sold, consumed, destroyed,or given away. A taxing authority will not ordinarily imposesuch a duty, because it is much more convenientadministratively to collect the duty (as in the case of mostof the Excise Acts) when the commodity leaves the factoryfor the first time, and also because the duty is intended tobe an indirect duty which the manufacturer or producer isto pass on to the ultimate consumer, which he could not doif the commodity had, for example, been destroyed in thefactory itself.It is the fact of manufacture which attracts theduty, even though it may be collected later ; and we maydraw attention to the Sugar Excise Act in which it is speciallyprovided that the duty is payable not only in respect of sugarwhich is issued from the factory but also in respect of sugarwhich is consumed within the factory.In the case of a salestax, the liability to tax arises on the occasion of a sale, anda sale has no necessary connexion with manufacture orproduction. The manufacturer or producer cannot of coursesell his commodity unless he has first manufactured orproduced it; but he is liable, if at all, to a sales tax becausehe sells and not because he manufactures or produces; andhe would be free from liability if he chose to give awayeverything which came from his factory.”

11. The early views on the nature of excise duty as a levy and thestage of collection thereof would make it clear that though the impost ison the manufacture of an article the point of collection of the same neednot necessarily coincide with the time of manufacture. The stage ofcollection can and usually is a matter of administrative convenience and ABC

DE

F

G

H

Asuch stage, normally, is the stage of clearance of article when it, for thefirst time, enters the trade for sale. The above position was affirmed bythe Privy Council in Governor-General in Councilv. Province ofMadras6wherein it was, inter alia, held as follows:

“The term “ duty of excise “ is a somewhat flexible one: it may, nodoubt, cover a tax on first and, perhaps, on other sales: it may in aBproper context have an even wider meaning. An exhaustivediscussion of this subject, from which their Lordships have obtainedvaluable assistance, is to be found in the judgment of the FederalCourt in 1939 F. C. R. 18. Consistently with this decision, theirLordships are of opinion that a duty of excise is primarily a dutyClevied upon a manufacturer or producer in respect of thecommodity manufactured or produced. It is a tax upon goods notupon sales or the proceeds of sale of goods. Here again, theirLordships find themselves in complete accord with the reasoningand conclusions of the Federal Court in the BodduPaidanna case.The two taxes, the one levied upon a manufacturer in respect ofDhis goods, the other upon a vendor in respect of his sales, may, asis there pointed out, in one sense overlap. But in law there is nooverlapping. The taxes are separate and distinct imposts. If infact they overlap, that may be because the taxing authority,imposing a duty of excise, finds it convenient to impose that dutyEat the moment when the exciseable article leaves the factory orworkshop for the first time on the occasion of its sale. But thatmethod of collecting the tax is an accident of administration; it isnot of the essence of the duty of excise, which is attracted by themanufacture itself.”12. The above views received the consideration of this Court inF7R.C. Jall Parsi v.Union of India and anr.wherein this Court heldthat while excise duty is essentially a duty on manufacture which ispassed on to the consumer, the stage of collection, subject to legislativecompetence of the taxing authority, could be at any stage convenient solong the character of the levy i.e. duty on manufacture is not altogetherGlost. The further view expressed was to the effect that “the method ofcollection does not affect the essence of the duty, but only relates to themachinery of collection for administrative convenience.”

13. It will hardly be necessary to reiterate the long lines ofpronouncements that have consistently followed the above view,except 6 [A.I.R. (32) 1945 Privy Council 98]H 7 AIR 1962 SC 1281

to make a little detailed reference to Bombay Tyre InternationalLtd.(supra), not only because the true ratio of the decision in the saidcase has to be understood for the purpose of this reference so as to dealwith the perceived conflict with Acer India Ltd. (supra) but also onaccount of the fact that the subject in issue had received a full anddetailed consideration of this Court.

14. InBombay Tyre International Ltd.(supra) the issue, shortlyput, waswhether determination of assessable value for thelevy of exciseduty can be only on the manufacturing cost and the manufacturing profit.It was contended before this Court, by relying on the decision of thisCourt inA.K. Roy and Anothervs.Voltas Limited8, that having regardto the character of the levy the measure must be restrictedthereto. Thecontention was rejected by referring to a long line of precedents includingthose referred to herein above to hold that “the levy of a tax is definedby its nature, while the measure of the tax may be assessed by itsown standard. It is true that the standard adopted as the measureof the levy may indicate the nature of the tax but it does notnecessarily determine it.”. The further view expressed in Bombay

Tyre International Ltd.(supra)is that merely because excise is a levyon manufactured goods the value of the excisable article for the purposeof levy cannot be limited to only the manufacturing cost plusmanufacturing profit. This Court went on to hold that “a broader basedstandard of reference may be adopted for the purpose ofdetermining the measure of the levy. Any standard whichmaintains a nexus with the essential character of the levy can beregarded as a valid basis for assessing the measure of the levy.”

15. A reading of Section 4 of the Act, as originally enacted; asamended by 1973 Amendment; and as further amended by 2000Amendment would clearly show that the value of the article for thepurposes of levy of ad valorem duty was with reference to the price i.e.‘normal price’ prior to the 2000 Amendment and thereafter withreference to the ‘transaction value’ which has been defined (alreadyextracted) to mean “the price actually paid or payable for the goods,when sold, and includes in addition to the amount charged as price……”

16. The measure for the purpose of the levy is, therefore, essentiallythe price charged in respect of a transaction which must necessarily beat arm’s length. Inclusions and additions that enrich the value of the 8 (1973) 3 SCC 503

A

B

C

DE

F

G

H

AArticle till its clearance are permissible additions to the price that can betaken into account to determine ‘value’ under the old Section 4 (prior to2000) as well as the ‘transaction value’ under the amended sectioneffective from 1.7.2000. While such additions have been judicially heldto be permissible under the old Act inBombay Tyre International Ltd.(supra) the very same heads have been statutorily engrafted by theBamendment made in 2000.

17. The price charged for a manufactured article at the stagewhen the article enters into the stream of trade in order to determine thevalue/transaction value for computation of the quantum of excise dutypayable does not come into conflict with the essential character or natureCof the levy. The measure is the value and value isrelated to price. Theprice charged at the stage of clearance, in addition to manufacturingcost and manufacturing profit, can include certain value additions andinclusions which enrich the value of the product to make it suitable forsale or to facilitate such sale. At this stage, imposthas nothing to do withDthe sale. The impost is on manufacture. But it is the value upto thestage of the first sale that is taken as the measure. Doing so does notintroduce any inconsistency between the nature and character of thelevy and the measure adopted.

18. The above aspect had been considered in Bombay TyreEInternational Ltd.(supra) on a specific contention advanced on behalfof the Assessees that the deductions under the following heads shouldbe made from the sale price in the following terms:

“48. We now proceed to the question whether any post-manufacturing expenses are deductible from the price whenFdetermining the “value” of the excisable article. The old Section 4provided by the Explanation thereto that in determining the priceof any article under that section no abatement or deduction wouldbe allowed except in respect of trade discount and the amount ofduty payable at the time of the removal of the article chargeablewith duty from the factory or other premises aforesaid. The newGSection 4 provides by sub-section (2) that where the price ofexcisable goods for delivery at the place of removal is not knownand the value is determined with reference to the price for deliveryat a place other than the place of removal, the cost of transportationfrom the place of removal to the place of delivery has to be H

excluded from such price. The new Section 4 also contains sub-section (4)(d)(ii) which declares that the expression “value” inrelation to any excisable goods, does not include the amount ofthe duty of excise, sales tax and other taxes, if any, payable onsuch goods and, subject to such rules as may be made, the tradediscount (such discount not being refundable on any accountwhatsoever) allowed in accordance with the normal practice ofthe wholesale trade at the time of removal in respect of suchgoods sold or contracted for sale. Now these are clear provisionsexpressly providing for deduction, from the price, of certain itemsof expenditure. But learned counsel for the assessees contendthat besides the heads so specified a proper construction of thesection does not prohibit the deduction of other categories of post-manufacturing expenses. It is also urged that although the newSection 4(4)(d)(i) declares that in computing the “value” of anexcisable article, the cost of packing shall be included, the provisionshould be construed as confined to primary packing and as notextending to secondary packing. The heads under which the claimto deduction is made are detailed below:

(1) Storage charges.

(2) Freight or other transport charges, whether specific orequalised.

(3) Outward handling charges, whether specific or equalised.

(4) Interest on inventories (stocks carried by the manufacturerafter clearance).

(5) Charges for other services after delivery to the buyer.

(6) Insurance after the goods have left the factory gate.

(7) Packing charges.

(8) Marketing and Selling Organisation expenses, includingadvertisement and publicity expenses.

(Underlining is ours)

19. The above issue was answeredby saying - “50. We shall now examine the claim. It is apparent that for thepurpose of determining the “value”, broadly speaking both the old A

B

C

D

E

F

G

H

SUPREME COURT REPORTS

ASection 4 (a) and the new Section 4(1)(a) speak of the price forsale in the course of wholesale trade of an article for delivery atthe time and place of removal, namely, the factory gate. Wherethe price contemplated under the old Section 4 (a) or under thenew Section 4(1)(a) is not ascertainable, the price is determinedunder the old Section 4(b) or the new Section 4(1)(b). Now, theBprice of an article is related to its value (using this term in a generalsense), and into that value have poured several components,including those which have enriched its value and given to thearticle its marketability in the trade. Therefore, the expensesincurred on account of the several factors which have contributedCto its value upto the date of sale, which apparently would be thedate of delivery, are liable to be included.Consequently, wherethe sale is effected at the factory gate, expenses incurred by theassesseeupto the date of delivery on account of storage charges,outward handling charges, interest on inventories (stocks carriedby the manufacturer after clearance), charges for other servicesDafter delivery to the buyer, namely after-sales service andmarketing and selling organisation expenses including advertisementexpenses cannot be deducted. It will be noted that advertisement-expenses, marketing and selling organisation expenses and aftersales service promote the marketability of the article and enterEinto its value in the trade.Where the sale in the course of wholesaletrade is effected by the assessee through its sales organisation ata place or places outside the factory gate, the expenses incurredby the assesseeupto the date of delivery under the aforesaid headscannot, on the same grounds, be deducted. But the assessee willbe entitled to a deduction on account of the cost of transportationFof the excisable article from the factory gate to the place or placeswhere it is sold. The cost of transportation will include the cost ofinsurance on the freight for transportation of the goods from thefactory gate to the place or places of delivery.”

(Underlining is ours)

G

20. We find no room whatsoever for any disagreement with theabove view taken by this court in Bombay Tyre InternationalLtd.(supra). It is a view consistent with what was held by the FederalCourt and the Privy Council in Central Provinces and Berar(supra),BodduPaidanna(supra) and Province of Madras(supra) andH

the decisions that followed thereafter including the decision in VoltasLimited(supra) and Atic Industries Limited vs. H.H. Dewa, Asstt.Collector of Central Excise and ors9 the true purport of which wasexplained in Bombay Tyre International Ltd.(supra). Both the aboveopinions were clarified to mean that neither of themlay down anyproposition to the effect that the excise duty can be levied only on themanufacturing cost plus the manufacturing profit only.

21. At this stage, the amendment to Section 3 by substitution ofthe words “a duty of excise on all excisable goods” by the words “a dutyof excise to be called the Central Value Added Tax (CENVAT) on allexcisable goods” is conspicuous. The amendment of Section 3 to theAct not only incorporates the essentials of achanged concept of chargingof tax onadditions to the value of goods and services at each stage ofproduction but also engrafts in the statute what was judicially held to bepermissible additions to the manufacturing cost and manufacturing profitinBombay Tyre International Ltd.(supra). This fundamental changeby introduction of the concept underlying value-added taxation in theprovisions of Section 3 really find reflection in the definition of ‘transactionvalue’ as defined by Section 4(3)(d) of the Act besides incorporatingwhat was explicitly held to be permissible inBombay Tyre InternationalLtd.(supra). Section 4(3)(d), thus, defines ‘transaction value’ byspecifically including all value additions made to the manufactured articleprior to its clearance, as permissible additions to be price charged forpurpose of the levy.

22. This would bring us to a consideration of the decision of thisCourt in Acer India Ltd(supra). The details need not detain us.Softwares which were duty free items and could be transacted assoftwares came to be combined with the computer hardware whichwas a dutiable item for purposes of clearance. The Revenue sought totake into account the value of the computer software for the purposesof determination of ‘transaction value’ with regard to the computer. ThisCourt negatived the stand of the Revenue taking the view that whensoftware as a separate item was not dutiable its inclusion in the hard-disk of the computer cannot alter the duty liability of the software so asto permit the addition of the price/value of the software for the purposeof levy of duty. It is in the above context that the decision of this Court inAcer India Ltd.(supra)has to be understood.The observations made in AB

C

D

E

F

G

H

Aparagraph 84 thereof to the effect that ‘transaction value’ defined inSection 4(3)(d) of the Act would be subject to the charging provisionscontained in Section 3 of the Act will have viewed in the context of asituation where an addition of the value of a non-dutiable itemwas soughtto be made to the value of a dutiable item for the purpose of determinationof the transaction value of the composite item. This is the limited contextBin which the subservience of Section 4(3)(d) to Section 3 of the Act wasexpressed and has to be understood. If so understood, we do not seehow the views expressed in paragraph 84 of Acer India Ltd. (supra)can be read to be in conflict with the decision of Bombay TyreInternational Ltd.(supra).

C

C

23. Accordingly, we answer the reference by holding that themeasure of the levy contemplated in Section 4 of the Act will not becontrolled by the nature of the levy.So long a reasonable nexus isdiscernible between the measure and the nature of the levy both Section3 and 4 would operate in their respective fields as indicated above.TheDview expressed in Bombay Tyre International Ltd.(supra) is thecorrect exposition of the law in this regard. Further, we hold that“transaction value” as defined in Section 4(3)(d) brought into force bythe Amendment Act,2000, statutorily engrafts the additions to the ‘normalprice’ under the old Section 4 as heldto be permissible inBombay TyreInternational Ltd.(supra) besides giving effect to the changedEdescription of the levy of excise introduced in Section 3 of the Act by theAmendment of 2000. Infact, we are of the view that there is no discernibledifference in the statutory concept of ‘transaction value’ and the judiciallyevolved meaning of ‘normal price’.

24. The above answers would comprehend the issues specificallyFarising in all the three questions that have been referred for our opinion.

Ankit Gyan

Referred issues answered.

G

H