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CASE NO.:

Appeal (civil) 4172-4185 of 2000

PETITIONER:

Commnr. of Central Excise, Indore

RESPONDENT:

M/s S. Kumars Ltd. & Ors.

DATE OF JUDGMENT: 21/11/2005

BENCH:

Ruma Pal & H.K. Sema

JUDGMENT:

J U D G M E N T

With

C.A. Nos. 775-781 of 2004

RUMA PAL, J.

The respondent No. 1 processes grey fabric. Sometimes

the grey fabrics are processed on its own account and

sometimes the grey fabrics are received for processing on job

charge basis from others (who are referred to as 'the merchant

manufacturers). For the period 01.09.1985 to 28.02.1989, the

respondent No. 1 had paid excise duty on the fabrics processed

by it during this period, calculating the duty payable by treating

the value of the processed fabrics as being that at which the

merchant manufacturer was selling the processed goods.

According to the respondents, this was in keeping with the

decision of this Court in Empire Industries Ltd. V. Union of

India & Ors. (1985) 3 SCC 314 (briefly referred to as Empire

Industries). With effect from 01.03.1989, the same method was

followed in respect of the fabrics processed by the respondent

No. 1 on its own account. However, on the fabrics processed

by it which had been received from the merchant

manufacturers, the respondent No. 1 valued the processed

goods on the basis of the cost of grey fabrics plus the

processing charges as well as its manufacturing expenses and

profits. In other words, the price at which the merchant

manufacturer was selling the processed goods was not taken.

This was done relying upon the decision of this Court in M/s

Ujagar Prints and Others V. Union of India (1989) 3 SCC 488

(briefly referred to as M/s. Ujagar Prints II) as explained in M/s

Ujagar Prints and Others V. Union of India and Others

(1989) 3 SCC 531 (briefly referred to as M/s. Ujagar Prints III).

On 5th October 1990, a show cause notice was issued by

the appellant to the respondent proposing to recover differential

duty of excise amounting to Rs.4,84,62,452/- from the

respondent No. 1 within the extended time limit under the

proviso of Section 11A of the Central Excise Act, 1944

(hereinafter referred to as 'the Act') and proposing to impose

penalty against the respondents. The basis of the demand

against the respondents was that they were all firms and

companies having a common management and control with

some of them selling grey fabric to the respondent No.1 which,

after processing the fabrics, sold the same to some of the other

respondents. The latter ultimately sold the processed fabrics to

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independent dealers. All the respondents were described as

'S.Kumars' and the appellants claimed to treat the price

charged by the trader respondents from the independent

dealers as the assessable value of the processed fabrics and to

levy excise duty thereon. The respondents replied to the show

cause notice. They denied that the respondents were related

persons and disputed the basis for the additional claim of

excise duty. It was submitted that by virtue of this Court's

decision in M/s. Ujagar Prints III they were liable to treat the

notional sale by the respondent No.1 to the merchant

manufacturers as the relevant point for determining the

assessable value. The claim of the respondent No.1 was that

prior to the decision in M/s. Ujagar Prints III it had paid the

excise duty by taking the assessable value of the processed

fabric at the wholesale price at the time the goods reached the

open market. This was followed till the decision of this Court in

Ujagar Prints III. It was submitted that in any event the

respondent No.1 was not only entitled to discounts in respect of

the excise duty levied for the period 01.09.1985 to 28.02.1989

but there were gross inaccuracies in the computations made by

the appellant. The Commissioner of Central Excise, held that

the respondents were related persons and upheld the demand

for duty to the extent of Rs.3,82,41,53 for the period 01.09.1985

to 30.09.1989 from the respondent No. 1. The claim for

discounts was also rejected.

The respondents appealed before the Customs, Excise

and Gold (Control) Appellate Tribunal (hereinafter referred to as

the 'Tribunal'). The Tribunal held that the respondents had

rightly invoked the principles of M/s Ujagar Prints III. In doing

so, it did not go into the question whether the respondents were

related persons as alleged in the show cause notice. The

Tribunal therefore allowed the respondents' appeal and

remanded the matter back to the Commissioner in order to re-

compute the duty payable.

Being aggrieved, the appellant has preferred these

appeals. By this judgment, we propose to dispose of these

appeals as well as other appeals preferred by the appellant

from orders of the Tribunal in which the Tribunal has merely

followed the decision in the case of the respondents.

The demand for excise duty raised by the appellant

against the respondent's covers the period 1985 to 1989. The

period in question may conveniently be considered in two parts,

namely, (1) 01.09.1985 to 28.02.89 and (2) 01.03.1989 to

30.09.1989. The reason for the division of the period in two

parts is the law which this Court has laid down in M/s Ujagar

Prints III. The first question, therefore, is what did this Court

decide in that decision? Having determined that, the next

question would be whether the principles so laid down apply to

the respondents' case.

But before we determine these questions we would have

to consider the law in the background of which the decision in

M/s. Ujagar Prints III was rendered.

The principles of valuation for the purposes of

charging excise duty are contained in Section 4 of the

Act. Section 4 in so far as it is relevant, provides:-

"(1) Where under this Act, the duty of excise is

chargeable on any excisable goods with

reference to value, such value shall, subject to

the other provisions of this section, be deemed

to be\027

(a) the normal price thereof, that is to say, the

price at which such goods are ordinarily sold

by the assessee to a buyer in the course of

wholesale trade for delivery at the time and

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place of removal, where the buyer is not a

related person and the price is the sole

consideration for the sale:

Provided that---

(iii) where the assessee so arranges that the

goods are generally not sold by him in the

course of wholesale trade except to or through a

related person, the normal price of the goods

sold by the assessee to or through such related

person shall be deemed to be the price at which

they are ordinarily sold by the related person in

the course of wholesale trade at the time of

removal, to dealers (not being related persons)

or where such goods are not sold to such

dealers, to dealers (being related persons) who

sell such goods in retail;

(b) where the normal price of such goods is not

ascertainable for the reason that such goods

are not sold or for any other reason, the

nearest ascertainable equivalent thereof

determined in such manner as may be

prescribed.

(2) xxx xxx xxx xxx xxx

(3) xxx xxx xxx xxx xxx

(4) (a) xxx xxx xxx xxx xxx

(b) xxx xxx xxx xxx xxx

"(c) related person" means a person who is

so associated with the assessee that they

have interest, directly or indirectly, in the

business of each other and includes a

holding company, a subsidiary company,

and relative and a distributor of the

assessee and any sub-distributor of such

distributor".

Section 4(1)(a) deals with cases where the assessee

sells the manufactured goods to a buyer, whereas Section

4(1)(b) deals with cases other than sale. Chapter II of the

Central Excise (Valuation) Rules, 1975 (referred to hereafter

the Rules), provides for the determination of the value of any

excisable goods for the purposes of Section 4 (1)(b) of the Act.

We may note at the outset that Rule 3 provides for the

applicability of all the valuation rules when it says 'the value of

any excisable goods shall, for the purposes of clause (b) of

sub-section (1) of Section 4 of the Act, be determined by the

proper officer in accordance with these rules'. No distinction is

made between the applicability of the succeeding rules save

that they are to be considered for application in numerical

order. Rule 4 deals with the determination of the value of

excisable goods on the basis of sale by the assessee at any

other time nearest to the time of the removal of the goods

being assessed. Rule 5 deals with a situation when the

excisable goods are sold in circumstances specified in Section

4(1)(a) of the Act. If the price is not the sole consideration, the

value of the excisable goods is required to be based on the

aggregate of the price and "the amount of the money value of

any additional consideration flowing directly or indirectly from

the buyer to the assessee". If the value of the excisable goods

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cannot be determined under Rules 4 or 5 then the procedure

prescribed under Rule 6 would have to be followed viz.

"(a) where such goods are sold by the

assessee in retail, the value shall be based on

the retail price of such goods reduced by such

amount as is necessary and reasonable in the

opinion of the proper officer to arrive at the

price at which the assessee would have sold

such goods in the course of wholesale trade to

a person other than a related person;

Provided that in determining the

amount of reduction, due regard shall be had

to the nature of excisable goods, the trade

practice in that commodity and other relevant

factors.

(b) where the excisable goods are not sold by

the assessee but are used or consumed by

him or on his behalf in the production or

manufacture of other articles, the value shall

be based--

(i) on the value of the comparable goods

produced or manufactured by the assessee or

by any other assessee:

Provided that in determining the value

under this sub-clause, the proper officer shall

make such adjustments as appear to him

reasonable, taking into consideration all

relevant factors and, in particular, the

difference, if any, in the material characteristics

of the goods to be assessed and of the

comparable goods;

(ii) if the value cannot be determined under

sub-clause (i), on the cost of production or

manufacture including profits, if any, which the

assessee would have normally earned on the

sale of such goods;

(c) where the assessee so arranges that the

excisable goods are generally not sold by him

in the course of wholesale trade except to or

through a related person and the value cannot

be determined under clause (iii) of the proviso

to clause (a) of sub-section (1) of Section 4 of

the Act, the value of the goods so sold shall be

determined--

(i) in a case where the assessee sells the

goods to a related person who sells such

goods in retail, in the manner specified in

clause (a) of this rule;

(ii) in a case where a related person does not

sell the goods but uses or consumes such

goods in the production or manufacture of

other articles, in the manner specified in clause

(b) of this rule:

(iii) in a case where a related person sells the

goods in the course of wholesale trade to

buyers, other than dealers and related

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persons, and the class to which such buyers

belong is known at the time of removal, on the

basis of the price at which the goods are

ordinarily sold by the related person to such

class of buyers". (Emphasis supplied)

Rule 7 is the residuary section in the sense that if the

value of excisable goods cannot be determined under Rules 4

to 6, the proper officer is required to determine the value of the

excisable goods according to the best of his judgment, and for

this purpose, he "may have regard, among other things, to any

one or more of the methods provided for in the foregoing rules".

Thus the basic principle relating to the assessable value

of manufactured goods is normally the ordinary wholesale

price. That is the principle underlying Section 4(1)(a), which

principle may also be made applicable to Section 4(1)(b) read

with rules 3,5 and 7 of the Valuation Rules. The principle is

subject to certain exceptions among them being the

qualification that the sale is not to or through a related person

as defined in Section 4 (4) (c ) of the Act.

In Ujagar Prints II, the Constitution Bench was required

to consider the correctness of the view taken by three Judges

of this Court in Empire Industries. In Empire Industries, this

Court had primarily held that the Central Excise & Salt and

Additional Duties on Excise (Amendment) Act, 1980 by which

the processes of bleaching, dyeing and printing were brought

within the definition of "manufacture" for the purposes of the

Central Excise and Salt Act, 1944 and the Addition Duties of

Excise (Goods of Special Importance) Act, 1957, was

constitutionally competent. While upholding the validity of the

Amendment Act this Court had stated:-

"When the textile fabrics are subjected to the

processes like bleaching, dyeing and printing

etc. by independent processes, (sic)

(processors) whether on their own account or

on job charge basis, the value for the

purposes of assessment under Section 4 of the

Central Excise Act will not be the processing

charges alone but the intrinsic value of the

processed fabrics which is the price at which

such fabrics are sold for the first time in the

wholesale market".(pg.342) (Emphasis

supplied)

In other words the basic principle enumerated in Section

4(1) (a) of the Act was applied to processed goods. The

respondents had applied this principle and paid excise duty for

the first period taking the price at which the processed goods

were first sold in the open market as the assessable value.

M/s. Ujagar Prints II affirmed the decision in Empire

Industries in all respects including the passage quoted earlier.

The submission of the independent processors that the

assessable value of the processed fabric could comprise only

of the processing charges was rejected in the following words:-

"The incidence of the levy should be uniform,

uninfluenced by fortuitous considerations. The

method of determination of the assessable

value suggested by the processors would lead

to the untenable position that while in one class

of grey fabric processed by the same

processor on bailment, the assessable value

would have to be determined differently

dependent upon the consideration that the

processing house had carried out of

processing operations on job work basis, in the

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other class of cases, as it not unoften happens,

the goods would have to be valued differently

only for the reason the same processing house

has itself purchased the grey fabric and

carried out the processing operations on its

own". (pg.520)

Therefore, the assessable value of the processed goods,

as far as that processor was concerned, would have to be the

same irrespective of the fact that it either manufactures the

goods and then process it itself or is given the goods and

merely undertakes the processing before returning the same to

the manufacturer/owner. That common norm was the wholesale

price.

This was made abundantly clear by Justice Mukharji, J.

(as he then was). He delivered a separate but concurring

judgment and was the author of the judgment in Empire

Industries. He said:-

"If the trader, who entrusted cotton or

manmade fabrics to the processor for

processing on job work basis, would give a

declaration to the processor as to what would

be the price at which he would be selling the

processed goods in the market that would be

taken by the excise authorities as the

assessable value of the processed fabrics and

excise duty would be charged to the processor

on that basis. Where a manufacturer sells the

goods manufactured by him in wholesale to a

wholesale dealer at the arms length and in the

usual course of business, the wholesale cash

price charged by him to the whole sale dealer

less trade discount would represent the value

of the goods for the purpose of assessment of

excise. But the price received by the

wholesale dealer who purchases the goods

from the manufacturer and in his turn sells the

same in wholesale to other dealer, would be

irrelevant for determination of the value of the

goods and the goods would not be charged on

that basis".

\005 It has to be reiterated that the valuation

must be on the basis of wholesale cash price

at the time when the manufactured goods enter

into the open market". (Emphasis supplied).

This was therefore, in terms, an unconditional approval of

the ratio in Empire Industries. However on an application filed

for clarification of the judgment in M/s. Ujagar Prints II, this

Court in a short order in M/s. Ujagar Prints III clarified:-

"\005 it is made clear that the assessable value

of the processed fabric would be the value of

the grey cloth in the hands of the processor

plus the value of the job work done plus

manufacturing profit and manufacturing

expenses whatever these may be, which will

either be included in the price at the factory

gate or deemed to be the price at the factory

gate as if the processed fabric was sold by the

processor". (pg. 531)

This clarification, in fact, was a deviation from the formula

approved in Empire Industries. In other words, it was not the

wholesale price at the merchant manufacturers stage which

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would be the assessable value of the processed goods, but the

value of the processed fabrics on the basis of a deemed sale at

the factory gate of the processor. The Court went on to say:-

"If the trader, who entrusts cotton or manmade

fabric to the processor for processing on job

work basis, would give a declaration to the

processor as to what would be the price at

which he would be selling the processed goods

in the market, that would be taken by the

excise authorities as the assessable value of

the processed fabric and excise duty would be

charged to the processor on that basis

provided that the declaration as to the price at

which he would be selling the processed goods

in the market, would include only the price or

deemed price at which the processed fabric

would leave the processor's factory plus his

profit".

\005It is necessary to include the processor's

expenses, costs and charges plus profit, but it

is not necessary to include the trader's profits

who gets the fabrics processed, because those

would be post-manufacturing profits".

(Emphasis supplied)

The actual wholesale price was jettisoned in favour of a

deemed sale price by the processor to the merchant

manufacturer.

The decision in M/s. Ujagar Prints III was construed and

followed subsequently by this Court in Pawan Biscuits

Company Private Limited V. Collector of Central Excise

(2000) 120 ELT 24; (2000) 6 SCC 489 (briefly referred to as

Pawan Biscuits). In that case, it was alleged that the assessee

was really an agent of M/s. Britannia Industries Limited and,

therefore the price at which M/s. Britannia Industries Limited

was selling the manufactured goods in the wholesale market

was to be taken as the assessable value. The Tribunal's

decision was reversed by this Court. It was found that the

agreement between the parties indicated that the relationship

was one of principal to principal and not principal and agent and

also that the assessee could manufacture biscuits of other

brands and sell the same. It was observed that the assessee

had been established much prior to its agreement with Britannia

Industries Limited. In the circumstances it was held that the

decision in M/s. Ujagar Prints II and others could not be

factually distinguished. The Court proceeded on the basis that

the last three lines of the explanatory order in M/s. Ujagar

Prints III (which we have quoted earlier) contained the ratio of

the decision of both M/s. Ujagar Prints II and III.

In M/s. Ujagar Prints II and III, the assessees were

independent processors and the Court proceeded on that

factual basis. The appellant's contention therefore is that as

the processor (the respondent No.1 in this case) is not

independent of the merchant manufacturer or trader, the ratio of

M/s. Ujagar Prints III would not apply. In Pawan Biscuits

although no conclusion from the facts has been recorded, it is

clear that it was the facts which induced the Court to come to

the conclusion that the relationship between the assessee and

M/s. Britannia Industries Limited was that of an independent

processor and a merchant manufacturer and that M/s. Ujagar

Prints II and III were factually on all fours. The decision

therefore does not take us nearer to a solution of the dispute

raised by the appellant.

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The contention of the respondents is that neither the

show cause notice nor the Commissioner in his order

proceeded on the basis that Section 4(1) (a) of the Act applied

but that they had applied Section 4(1) (b) and the Valuation

Rules. It is their submission that the concept of deemed sale at

the processors factory introduced by M/s. Ujagar Prints III,

does not strictly fall within Valuation Rules 4 or 5. They urged,

and the Tribunals view was, that M/s. Ujagar Prints III applied

the procedure prescribed in Rule 6(b)(ii). As we have seen Rule

6(b) deals with excisable goods which are not sold by assessee

but "are used" or "consumed" by him or on his behalf in the

production or manufacture of "other" articles. In such case, the

value of the excisable goods is to be based either (i) on the

value of the comparable goods produced or manufactured by

the assessee or by any other assessee, or if that is not possible

under (ii) on the cost of production or manufacture, including

profits, if any, which the assessee would have normally earned

on the sale of such goods.

We do not agree that if Section 4(1)(b) is invoked Rules 4

and 5 do not apply. We have already held that Rule 3 does not

make any distinction between the rules which may be invoked

even when Section 4 (1) (b) is invoked. If none of the rules i.e.

4, 5 or 6, in terms apply, then Rule 7 would. In other words, the

sale which is referred to in Rules 4, 5 and 6 may in the

circumstances reflect a notional sale and provide a guideline for

applying analogous principles mutatis mutandis under Rule 7.

Rule 6(b) relied on by the respondent does not in terms

apply. As we have noted, Rule 6(b)(ii) envisages a situation

where a manufacturer consumes the manufactured commodity

himself for making other excisable articles. But assuming it

does in terms apply it is noteworthy that Rule 6(b)(ii) speaks of

the excisable value being the cost of manufacture including the

profits "normally" earned. Thus, it would still be open to the

Revenue to say that the cost of grey fabrics as well as the

processed charges were depressed because the parties were

related persons. Indeed, the underlying principle of all the Rules

as well as Section 4 is that different considerations would apply

if the transactions concerned are not at arms length. Neither

section 4(1) (b) nor Rule 6(b)(ii) have done away with the

concept of "related person".

We therefore do not agree that Ujagar Prints III would

apply even to a processor who is not independent and, as is

alleged in this case, the merchant manufacturers and the

purchasing traders are merely extensions of the processor. In

the latter case, the processor is not a mere processor but also a

merchant manufacturer who purchases/manufactures the raw

material, processes it and sells it himself in the wholesale

market. In such a situation, the profit is not of a processor but

of a merchant manufacturer and a trader. If the transaction is

between related persons, the profit would not be "normally

earned" within the meaning of Rule 6(b)(ii). If it is established

that the dealings were with related persons of the manufacturer

the sale of the processed fabrics would not be limited to the

formula prescribed by Ujagar Prints III but would be subject to

excise duty under the principles enunciated in Empire

Industries as affirmed in Ujagar Prints II, incorporating the

arms length principle.

The respondent No.1 assessee had submitted before the

Department and before us that if the assessee was not

permitted to rely upon the formula laid down in M/s. Ujagar

Prints III then it was entitled to discounts and advertisement

expenses. These were not allowed by the Commissioner. As

the question whether the respondent No.1 would be entitled to

discounts and deductions claimed would only arise if it held that

the ratio of M/s. Ujagar Prints III would not apply, the Tribunal

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did not address this aspect of the matter at all nor did it

consider whether the merchant-manufacturers and the

respondent No.1 were related persons. Since the Tribunal, in

our opinion, wrongly upheld the respondent's contention that

the formula in M/s. Ujagar Prints III would apply in full

measure, it is now necessary for the Tribunal to consider

whether the respondents were related persons and whether the

respondent No. 1 would be entitled to claim discounts or could

exclude the advertisement expenses incurred by the dealers.

We therefore allow the appeals and remand the matter

back to the Tribunal for the purpose of determining the nature

of the alleged relationship between the respondent No.1 and

the other respondents. If it is found that the respondents are not

related persons then the earlier decision of the Tribunal will

stand. If on the other hand it is found that the respondents are

related, the Tribunal will consider the questions of discounts

and deductions claimed by the respondents before remanding

the matter to the Commissioner for a correct computation of the

calculation errors. No order as to costs.