A.TIC INDUSTRIES LTD v. H. H. DA VE, ASSTT. COLLECTOR OF CENTRAL EXCfSE & Ors.

There was no excise duty on dye stuffs prior to 1st March, 1961, but with effect from that date excise duty was imposed for the first time on dye-stuffs, including those manufactured by the appellants. The· excise duty chargeable under the relevant entry Schedule read with section 3, sub-section· (1) of the Central Excise and Salt Act, 1944 was ad valorem, and it was, therefore, necessary to determine the value of the dye-stuffs manufactured by the appel lants for the purpose of assessing the excise duty payable on them. Section 4 of the Act provided how the value of an article chargeable with duty at a rate depending .om its value shall be determined for the purpose of assessment of excise duty. It said : "Determinhtion of value for the purpose of duty. Where under this Act, any article is chargeable with duty at a rate dependent on the value of the article, such value be deemed to be- ( a) the whole sale 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 charge able with duty from the factory or any other pre mises of manufacture or production, or if a wholesa!e 566 SUPREME COURT REPORTS [1975] 3 s.c.R. (b) market does oot exist for such article at such place, at the nearest place where such market exists, or where such price is not ascertainable, the price at which an article of the like kind and quality sold or is capable of being sold by the manufacturer or producer, or his agent, at the time of the removal of of the article chargeable with duty from dUCh factory or other premises for delivery at the place of manu facture 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. EX'{J'lan.ation.-In determining the price of any artick under this sec1fon no abatement or deduction shall be allow ed except in respect of trade discount and amount of duty payable at the time of the removal of the article chargeable with duty from the factory or other premises aforesa~d." The question arose as to how ithe value of the dye stuffs manufactured by th~ appellants should be determined on a proper app!iq.tion of the rule laid down iri section 4. The appellants contended before Excise Au.thorities that for the purpose of assessing the excise duty, the value of the dye stuffs manufactured by the appellants should .be taken to be the price at which the appellants sold the same in whole sale units to ICI and Atul, less a uniform trade discount of 18% which these · two wholesale the appellants at the relevant time gave to buyers. This contention was niot accepted by the Superintendent of Central Excise who was the original assessing authority. He took the view that the value of the dye stuffs for the purpose of assessment of excise duty should be taken to be the price at which ICI and Atul sold the· dye stuffs to the distributors and no deduction should be allowed in respect of the discount given by them to the distributors since it was n'ot uniform, being 10% in case of ICI and 2!% in case of Atul. The appellants appealed against the assessment Assistant Collector of Central Excise, but the appeal was unsuccess ful and the a£3essment was confirmed. That led to the filling of a further appeal to the Collector of Central Excise. This appeal resulted in some gain, little though it was, as the Collector of Central Excise held that in determining fueassessable value~ •trade discount of 2!% which was given by Atul to the distributors should be allowed to be deducted from the price charged by ICI to the distributors. This was, however, plainly illogical. If the price charged by JCI was taken as a basis, trade discount of 10% should have been allowed as that was the discount given by ICI to the distributors. Trade discount of 2!% given by Attil on the lower price charged by it to the distributors could not be deducted from the price charged by ICI to the distrr butors which was fixed at a higher fornre because of the lanrer trade discount 0f l 0% given bv it to the distributors. The assessable value determined by the Collector of Central Fxcise was a strange hvbrid. The anflPllants oref Prr<'<l a revi<inn aooli<'ation to t11P Central Govern ment against the order of the Collector of Central Excise. The Central A B. c E F G H ATIC INDUSTRIES v. ASST. COLLECTOR (Bhagwati, J.) 567 A c 0 E F G H Government in revision rejected the main contention of the appellants that tne value of tile dye stuffs shoukJ be amved at the pnce at wmch the same were &01d by tbe appellant to ICI and Atul less 18% trade discount allowed to them. The reason for rejecting this conten tion was Lhat since dye stuffs rsanufactured by the appellants. "!'ere not "available to an independr:'11 i:>uyer in open market . C<?Dditlons at prices at which these are sc:!d by them to the .Sole D,iatribu.ors1 M/s !CI Ltd. and M/s Atul ProdJK;~S Ltd., these pr.tees cannot be aoopte~ as the basis of ad-valorrm assessUlent" under section 4 of tte Act. The Central Government. however, observed that these dye stuffs were "available to any independent buyer in open market conditions at the sole distributors' prices''., that is, at the price charged by ICT and Atul to the distributors and, therefore, these prices should form the basis of assessment after allowing discount of 10% on the prices charged by !CI from the beginning arid 21% on the prices ~har&i:d by Atul upto 30th April, 1963 and 10% thereafter and on this basIS directed refund of the excise duty collected by the Excise Autho- ·rities. · The appellants were obviously not satisfied with this rather trivial and insignificant success and since their main plea was negatived by the Central Government, they filed a petition in the High Court of Gujarnt under Art. 226 of the Constitution challenging the validity of the various orders made by the Excise authorities culminating in the order of the Central Government and seeking a writ directing the Union of India "to refund excess duty amounting to Rs. 1,26,229.80 illegally recovered from the petitioners and to forbear from recovering duty from the petitioners in respect of the said products otherwise than on the basis of the prices charged by the petitioners to the said wholesale buyers viz. ICI and Atul." The Division Bench which heard the petition took the view, following certain decisions of the Calcutta, Mvsore, Andhra Pradesh and Bombay High Courts, that where th~ entire production is sold by a manufacturer to one or more favoured d:stributors, there is no wholesale market in the sense of open market at the site of the factory where an independent buyer can purchase the goods in wholesale and in such a case the price at which goods are sold by the manufacturer to the favoured distributors can not be taken to be the assessable value of the goods but the assess able value must be taken to be the price at which the favoured dis tributors, in their turn, sell the goods in wholesale and if not wholesale, then in retail. The Division Bench accordingly held that the price charged by t:12 :ippellants to ICI . and Atul less 18 % trnde discount could not be ado"lted for determining the assessable value of the dye stuffs since ICI ~1d Atul were favoured distributors and not independent buyers and the Central Government was taking the price charged by ICI less 10% trade discount and the price charged by Atul less 2!% trade discount as the assessable value be cause_ "that was the wholesale cash price at which the indeoendeo t buyers could get these goods in the nearest wholesale market at the relevant time.'' The aooellants being ae:!!rieved bv the decision of the High Court preferred the present appeal after obtaining certificate of fitness from the High Court. 5-470SupCI/75 1 5<i8 SUPREME COURT REPORTS [1975] 3 s.c.R. Jt would be seen f;om the judgment of the High Court that .the only ground on which the High Court negatived the con·cntion of the appellants tlut the price charged by the appellants to lCl and Atul less 18 % trade cLscount shomd be taken as the assessable value W<1s that lCl and A'ul were favoured cl.istnbutors and apart from them, no independent buy::r could purchase the dye stuffs wholesa~e marke< at or near the place or manufacture so as to attract the apph cability of the first part of section 4(a). This. ground of course, at ·one time, looked highly plausible, supported as 1t ~a.s by dec~s1ons of several High Courts. But now, after the recent dec1S1on o! this Court in A. K. Roy v. VoUas Ltd.(') it stands completely decimated. The facts of that case are a little interesting and requires to be not.iced Ill order to understand the true ratio of the decision. The respondent in that case carried on inter alia. busim:ss of manufacturing air-conditioners, water-coolers and their component parts. It effected direct sales to consumers at list prices and the sale~ so effected came to about 90% to 95% of i~s production during the relevant period. It also sold its articles amounting to 5% to 10% of its production to wholesale dealers from different parts of the country in pursuance of agreements entered into with them. The agreements provided among other things that the dealers should not sell the arti cles sold to them except in accordance with the list prices fixed by the respondent and the respondent would sell the articles to them at the list prices less 22 % discount. The dealers were also r1~quired under the agreements to give service to the units sold in their terri tory. Excise duty on the basis of ad-valorem value was imposed on air-conditioners, water-coolers and parts of water-coolers from March 1, 1961. The respondent claimed, in accordance with section 4(a), that the list prices after deducting the discount of 22 % allovred to the wholesale dealers should be taken to be price' for ascertaining the real value of the articles. This claim was resisted by the Excise Authorities and tiJe respondent was therefore constrained to file a writ petition in the High Court of Bombay. The High Court allowed the petition holding that the list prices at which the articles were sold to the wh0lesale dealers,. less 22 % discount allowed to them under the agteements, represented 'the wholesale cash price' and excise duty was accordingly chargeable under section 4( a). The Excise Authorities thereupon preferred an appeal by certi ficate to this Court. 'the wholesale, The same argument was advanced before this Court on behalf of the Excise Authorities wliich has foud favour wi•h the High Court ia the presi:nt case. The Excise Authorities contended that the agree ments with the whole-sale dealers conferred certain extra-commercial advantages upon them, and so, the sales to them were not sales to independent purchasers but to favoured ones, and, ~rice c~&rge:d would not reoresent the "wliolesale cash price" as men tioned m s. 4 (a) of the Act. They anmed that s. 4 (a) vi~ualizE"s a wliol~~:ile marlcet at the place of manufacture where a:ticles of like therefore, {l) [197312 S.C.R. 1088. A B c D E F G H A B c D E F H ATIC INDUSTRIES v. ASST. COLLECTOR (Bhagwati, /.) 56 9 kind and quaiity are sold or could be sold and that it also postulates a market where any wholesale purchaser can purchase the articles, and, as no articles of a like kind and quality were sold, at or near the place of manufacture, and as the wholesale sales were confined to tn<: favoured buyers, there was no wholesale market at the place of manufacture. It was further argued that "articles of a. like kind and quaii~y" is a phrase which suggests goods other than those under assessment and that one must disregard the price fetched by the sale of the goods themselves. This argument was squarely negatived by the Court. Mathew, J., speaking on beh.alf of the Court, explained the true scope and mean ing of section 4(a) and its applicability in a situation of this kind in. the following words : "We do not think that for a wholesale market to exist, it is necessary that there should be a market in the physical sense of the term where articles of a like kind or quality are or could be sold or that the ·articles should be sold to so-called independent buyers. Even if it is assumed that the latter part of s. 4(a) proceeds on the assumption that the former part will apply only if there is a wholesale market at the place of manu facture for articles of a like kind and quality, the question is what exactly is the concept of ·wholesale market in the context. A wholesale market does not always mean that there should be an actual place where articles are sold and bought on a wholesale basis. These words can also mean potentiality of the articles being sold on a wholesale basis. So, even if there was no market in the physical sense of the term at or near the place <'f manufacture where articles of a like kind and quality are or could be sold, that would not in any way affect the existence of market in the proper sense of the term provided the articles themselves could be sold wholesale to traders, even though the articles are sold to them on the basis of agreements which confer certain commercial advantages upon them. In other words, the sale to the wholesale dealers did not cease to be whole sale sales merely because the wholesale dealers had entered into agreement with the respondent under which certain commercial benefits were conferred upon them in considera·· tion of their undertaking to do service 10 the articles sold, or because of the fact that oo other person could purchase the articles wholesale from the respondent. We also think that the aoolication of clause (a) of ~. 4 of the Act does not depend upon any hypothesis to the effect that at the time and place of sale, any further articles of like kind and quality should have been sold. If there is an actual price for the goods themselves at the time. and olace of sale and if that is a 'wholesale cash price'. the clause is not inannlicable for wa11t of sale of other goods of a like kind and quality. 570 . SUPREME COURT REPORTS l1975l 3 s.c.R. The learned Judge then referred to the decision of the Privy Council in Ford Motor Company of llldia Limited v. Secretary of State India in Council(') and pointed out that : "This case is an authority for the proposition that mero existence of the agreements between the respondent and d1e wholesale dealers under which zertain obligations were undertaken by them like service to the articles, would not render Uie price any the less the 'wholesale cash price'. To put it in other words, even if the articles in question were 11old only to wholesale dealers on the basis of agreements and not to independent persons, that would not make the price for the sales anything other .than the 'wholesale c~sh . price'. The argument that what was relevant to determme the 'wholesale cash price' under cl. (a) of s. 30 of the S1~a Customs Act, 1878, was the price of goods of a like kind anid quality was negatived· by the Privy Council by saying that goods under assessment may, under cl. (a) be con sidered as members of their own class even though at the time and place of importation there are no other members all/d that the price obtained for them may correctly repre sent the price obtainable for goods of a like kind and quality at the time and place of importation." Then, with reference to the decisions of the various High Courts, which had taken a different view, the learned Judge observed : "We do not think that these decisions, in so far as they hold that th1e price of sales to wholesale dealers would not represent the wholesale cash price for the purpose of s. 4(a) of the Act merely because the mam:a facturers had entered into agreements with them stipulating for com mercial advantages, are correct", and proceeded to add : "If a manufacturer were to enter into agreements with dealers for wholesale sales of the articles manufactured on certain terms and conditions, it would not follow from th:\t alone that the price for those sales would not be the 'wholt:l sale cash price' for the purpose of s. 4 (a) of the Act the agreements were made at arms length and in the usual course of business. If there is a special or favoured buyer There can be no doubt that the 'wholesale cash price has to be ascertained only on the basjs of transactions at arms length. whom a specially low price is charged because of extm . commercial considerations, e.g. because he is relative of the manufacturer, the price charged for those sales would not be .the 'wholesale cash pric§ fo~ !~vying ~xcise u~der section 4(a) of the Act. A sole dtstnbutor nnght or might not be a favoured buyer according as terms of the airree~ ment with him are fair and reasonable and were arrived a:t on pure~ commercial basis. Once wholesale dealings at arms length are established, the getermination of the who1e- (t) 65 I.A.Ji. A B c D F G H A B c D E F G H ATIC INDUSTRIES v. ASST, COLLECTOR (Bhagwati, J.) 571 sale cash price for the purpose of s. 4(a} of the Act may not depend upon the number of such wholesale dealing. The fact that the respondent sold 90 to 95 per cent of the articles manufactured to consumers direct would not make the price of the wholesale sales of the rest of the articles any the less the 'wholesale cash price' for the purpose of s. 4( a), even if these sales were made pursuant to agreements stipulating for certain commercial advantages, provided the agreements were entered into at arms length and in the ordi nary course of business." "- it is not necessary for attracting the operations of s. 4(a) that there should be a large number of wholesale sales. The quantum of goods sold by .a manufacturer on wholesale basis is entirely irrelevant. The mere fact that such sales may be few or scanty does not alter the true position." On this view, it was held that charged with excise duty on the basis of the price payable by wholesale d;:alers, after deducting 22% · 4(a). discount, under respondent was liable to be section This decision provides a complete refutation of the view taken by the High Court illr the present case. In fact, the present case much stronger than the Volt11is case (supra). In the Voltas' case (supra) , 90 to 9 5 per cent of the production was sold by the manu facturer in retail and only a small percentage, namely,, 5 to 10 per cent was sold in wholesale and yet the price charged by the manu facturer to the wholesale dealers less trade discount of 22% · was taken as 'the wholesale cash price' for assessmeDlt of value under s. 4 (a). Here, on the contrary, no retail sales at all were effected by the appellants and the entire production was sold in wholesale to ICI and Atul under agreements entered into with them. Moreover, it was not in dispute between the parties that the agreements entered into by the appellants with ICI and Atul were made at arms length and in the usual. course of business. It was not the case of the Excise Authorities at any time that specially low prices were charged by the appellantS to ICI and Atul because of extra commercial considera tions or that the agreements were anything but fair and reasonable or arrived at on purely commercial basis. The wholesale dealings between the appellants and ICI and Atul ·were purely commercial dealings at. anns length and the price charged by the appellants for sales in wholesale made to ICI and Atul less trade discount of 18% was, therefore, clearly 'wholesale cash price' within the mcanin11; of s. 4(a) and it did not make any difference that the wholesale dealings. of the appellants were confined exclusively to ICI and Atul apart from these two, no independ'ent buyers could purchase the tlye stuffs in wholesale from the appellants. · The Excise Authorities. robbed of what they thought was a stron2 argument prior to the decision in Voltas' case (supra), then tried to SUPREME COURT REPORTS [1975] 3 S.C.R. fall back on a subsidiary argument in an attempt to save the assess ments. They contended that all that s. 4(a) provides is value of the article soui:ht to be charged to excise duty shall be deemed to be the wholesale cash price for which the article is sold or is capable of being sold and it does not say which wholesale cash price shall be taken to be the value of the article-that char1cd by the manufacturer to the wholesale dealer or that charged by wholesale dealer who having purchased the article from the manufac turer sells it in wholesale to another dealer. The latter price, they pointed out,. would equally be the wholesale cash price within the meaning of s. 4 (a) as it would be the price at which the article sold or in any event capable of being sold in the wholesale market and there is no reason why it should not be taken to be the value of the article for the purpose of assessment under s. 4(a). The conten tion, therefore, was that the price charged by IC[ and Atul to dealers less trade discount allowed to them should be taken to be the assessable value of the dye stuffs and not the price charged by the appellants to ICI and Atul less trade discount of 18 % . This con tention is without force and must be rejected. It violates two basic principles underlying imposition of excise duty. · In the first place, as pointed out by J1:1athew, J., in Voltt~' case (supra), ''excise is a tax on the product10~ and manufacture of go~ds-Section 4 of the. Act therefore provides that t~e real vah1e should be found after deducting the seUing cost and selhng profit and that the real value can include only the manufacturing cost and the manufacturing profit. The section makes it clear that excise iH levied only on the amount representing the manufacturing cost plus manufacturing profit and excludes post-manufacturing cost and the profit arising from po~ manufacturing operation, namely, selling profit." The va:ue of the goods for the purpose of excise mu.st take the manufac1uring into account only the manufacturing cost and profit and it must not be loaded with post-manufacturing cost or profit arising from post-manufacturing operation. The price charged by the manufacturer for sale of the goods in wholesale would,. there fore. represent the real value of the goods for the purpose of assess ment of excise duty. If the price charged by the wholesale dealer who ·purchases the goods from the manufacturer and sells them in whole sale to another dealer were taken as the value of the goods, it would include. not only the manufacturing cost and the manufacturing pro fit of the manufacturer but also the wholesale dealer's selling cost and selling profit and that would be wholly incompatible with the nature of excise. It may be noted that wholesale market in a par•icular type of goods may be in several tiers and the goods may reach the con sumer after a series of wholesale transactions. In fact the more com mon and less expensive the good~. there would be greater possibility of more than one tier of wholesale transactions. For instance .. in a textile trade, a manufacturer may sell his entire production to a single wholesale dealer and the latter mw in his turn sell the goods pur chased by him from the l)lanufacturer to different wholesale dealers at State level, and they may in their turn sell the goods to wholesale A B c D E F G H A B c D E F ATIC INDUSTRIES v. ASST. COLLECTOR (Bhagwati, J.) s 7 3 dealers at the district level and from the wholesale dealers at district level the goods may pass by sale to wholesale dealers at the city level and tnen, u1,1miite1y rrom tne who1esa1e aea1ers at the c~ty the goods may reach the consumers. The only relevant price for ,;ssessment of value of the goods for the purpose of excise such a case would be the wholesale cash price which the manufacturer receives from sale to the first wholesale dealer, that is, when goods first enter the stream of trade. Once the goods have entered the stream of trade and are on their onward journey to. the con sumer, whether along a short or a long course depending on nature of the goods and the conditions of the trade, excise is not concorned with what harpens subsequently to the goods. It is first immediate contact between the manufacturer and the trade that is made <lecisive for determining the wholesale cash price which is to be ue measure of the value of the goods for the purpose of excise . . The second or subsequent price, even though on wholesale basis, is If excise were levied 01' the basis of second or subse not matenal. q ue 1Jt wholesale price, it would load the price with a post manu facturing element, namely, selling cost and sellin~ profit of the whole sale dealer. That would be plainly contrary to the true nature of excise as explained in the Valtas' case (supra). Secondly, this would also violate the concept of the factory. gate sale which is the basis of determination of value of the goods for the purpose of excise. There can, therefore, be no doubt that where a manufacturer ~sell& the goods manufactured by him in wholesale to a wholesale dealer at arms length and in the usual course of business, the whole sale cash price charged by him to the wholesale dealer less trade dis.c count would represent the value of the goods for the purpose of assessment of excise. That would be the wholesale cash price which the goods are sold at the factory gate within the meaning of s. 4 (a). The price received by the wholesale dealer who purchases the goods from the manufac'urer anp in his turn sells the same in wholesale to other dealers would be irrelevant to the determination of the value and the goods wou!C: not be chargeable to excise on that basis. The conclusion is, therefore, inescapable that the assessable value of the dye stuffs manufactured by the appellants must be taken to be the price at which they were sold by the appellants to JCT and Atul less l~o/c trade discount, and not the price charged by ICI and ·. Atul to their dealers. . · G H . We, therefore, allow the appeal, reverse the judgment of · the High Court and quash and set aside the assessments to excise duty made by the Excise Authorities on the dye stuffs manufactured by the ap~ellants. We direct the r~spondents to refund to the appellants for~hw1th. the amount collected m excess of the correct du•y of excise lev1able 111 accorda~,ce with the princio1e laid down .in this judgment. The respondents will pay to the appellants costs in this Court as well as in the High Court. P.B.R. Appt!al al/owtd.