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Ballarpur Industries Ltd. And Another v. Union Of India And Others

Bombay High Court

Dec 19, 1986

Judgment

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Factual and Procedural Background

The petition originally challenged an assessment order dated 8-1-1981 in which the Assistant Collector rejected the petitioners' price-list and the basis for assessing excise duty on various grades of paper manufactured by petitioner no.1, a company located at Ballarpur, Maharashtra. During the pendency of that petition a second assessment order was passed on 19-8-1986 pursuant to an interim/directions order of this Court dated 3-3-1986; that second order was also impugned and the petition was amended to challenge it. The petitioners are the paper-manufacturing company and a shareholder; the respondents include the Union of India, the Central Board of Excise and Customs, the Collector of Central Excise and Customs (Nagpur), and subordinate excise officers. Interim orders dated 14-12-1981 and 13-1-1982 had allowed the petitioner to clear goods on the basis of values declared in the price-list; the petitioners also furnished bank guarantees and made substantial payments of excise duty while the matters remained pending. The Court was asked to consider the validity of the impugned assessments in light of changes in section 4 of the Central Excises and Salt Act, 1944 and subsequent judicial decisions interpreting the assessable value and permissible deductions from "normal price."

Legal Issues Presented

Whether the Assistant Collector's rejection of the petitioners' price-list and the disallowance of certain deductions from the normal price (including dealers' commission, additional discounts not reflected in invoices, and special secondary packing) was legally justified.
Whether the Assistant Collector correctly applied binding Supreme Court precedent (notably Union of India v. Bombay Tyres International, Godfrey Philips, and Moped India) when determining permissible deductions from the normal price under the amended section 4.
Whether the assessing authority could lawfully rely on earlier High Court decisions (in particular an Andhra Pradesh High Court decision on Moped India) that had been overruled by the Supreme Court.
Whether the respondents could claim interest on the total assessment amounts in the absence of a statutory provision similar to that under the Income Tax Act, 1961, and in light of interim directions previously given by this Court.

Arguments of the Parties

Petitioners' Arguments

The petitioners had filed a price-list and claimed assessment based on manufacturing cost plus manufacturing profit, consistent with the law as understood by various courts prior to the Supreme Court's decision in the Bombay Tyres International litigation; they acted in accordance with that understanding and subsequent procedure directed by the Court.
After the format/order of 3-3-1986, the petitioners filed fresh statements claiming deductions from the normal price for (i) normal discount, (ii) dealers' commission (credited by issuing credit notes, though not reflected on original invoices), (iii) additional discounts (similarly evidenced by credit notes and accounting records), and (iv) special packing. The credit notes and entries in the company and dealers' account books substantiate these deductions.
Transactions with dealers were conducted on a principal-to-principal basis at arm's length, making commissions effectively trade discounts allowable under the Supreme Court's later rulings.
Secondary/special packing employed by the petitioners was used to facilitate transport/delivery and therefore its cost should be deductible as per later Supreme Court decisions.
The petitioners had furnished bank guarantees and had paid significant sums in excise duty during the pendency of litigation, evidencing bona fide dispute and good faith.

Respondents' Arguments

The Assistant Collector rejected deductions (dealers' commission and additional discounts) largely on the basis of a High Court judgment in the Moped India case (Andhra Pradesh High Court position) and on the ground that certain deductions were not reflected in invoices or were taken after June 1983.
The respondents sought interest on the total assessment amount, relying implicitly on the right to claim interest though no statutory provision for such interest under excise law was cited in the opinion.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
A. K. Roy v. Voltas	Illustration of earlier line of authorities holding assessable value based on manufacturing cost plus manufacturing profit and exclusion of non-manufacturing/post-manufacturing elements from wholesale cash price (interpretation of old Section 4).	Used to describe the historical position of the law prior to amendment and later Supreme Court clarification.
India Tobacco Co. v. Union of India (Bombay High Court, 1979 ELT (J) 476)	Held under old section 4 that assessable value was based on manufacturing cost and manufacturing profit and that various post-manufacturing expenses were deductible from wholesale cash price.	Referenced as part of the body of High Court decisions that supported the manufacturing-cost approach prior to the substitution of section 4.
Bombay Tyres International v. Union of India (Bombay High Court, 1979 ELT 625)	Held that assessable value should be based on manufacturing cost and manufacturing profit even after amendment (i.e., from the normal price post-manufacture certain post-manufacturing expenses to be deducted).	Its reasoning prompted appeal to the Supreme Court; the Supreme Court ultimately rejected the assessee's contention and laid down that 'normal price' is the basis subject to specified statutory and judicially recognised deductions.
Union of India v. Bombay Tyres International (Supreme Court, reported 1983 ELT 869; detailed reported 1983 ELT-1986; clarificatory 1984 (17) ELT 329)	Held that the basis of assessment is the 'normal price' of goods sold from the factory gate, subject to deductions expressly permissible (freight, transit insurance, special secondary packing requested by buyers, trade discount, etc.). Also provided procedure for dealing with pending cases and clarified that some deductions need not appear on invoices or be given at time of delivery.	The Court treated this Supreme Court decision as binding; it faulted the Assistant Collector for not applying these principles when rejecting the petitioners' claimed deductions and relied on these principles to order re-assessment and to permit certain categories of deductions to be considered.
Union of India v. Godfrey Philips [1985 (22) ELT 306]	Majority held that cost of secondary packing employed solely for facilitating transport or for smooth delivery can be excluded from the normal price (permissible deduction).	The Court applied this principle to conclude that the petitioners' special secondary packing fell within the deductible category (packaging to facilitate transport/delivery) and that the Assistant Collector had erred in rejecting such deductions.
Moped India v. Assistant Collector [1986 (23) ELT 8]; earlier Andhra Pradesh High Court position cited as [1985 (18) ELT 249]	Supreme Court held that "commission" given to wholesale dealers, even if described as such, would be a "trade discount" and permitted as a deduction under new section 4 provided dealings are on a principal-to-principal basis at arm's length. The earlier Andhra Pradesh High Court view was overruled on this point.	The Court found the Assistant Collector had relied on the Andhra Pradesh High Court position while ignoring the Supreme Court's decision; it struck down the rejection of dealers' commission deductions and directed reassessment consistent with the Moped India principle.

Court's Reasoning and Analysis

The Court proceeded by placing the contested assessment within the evolving statutory and judicial framework governing the assessable value of excisable goods. It recognized the shift from the old interpretation (manufacturing cost plus profit) to the post-amendment regime where "normal price" at the factory gate is the starting point, subject to statutory and judicially recognised deductions as clarified by the Supreme Court in the Bombay Tyres International line of decisions.

The Court's step-by-step reasoning included:

The second impugned order (19-8-1986) was the operative order and subsumed the earlier 8-1-1981 order; both parties agreed that the earlier order had merged into the second order.
The Assistant Collector rejected claims for dealers' commission, additional discounts (not on invoices), and special packing. The Court examined whether those rejections were legally sustainable in the light of Supreme Court precedents.
Dealers' commission: The Assistant Collector relied on a High Court precedent in Moped India instead of the subsequent Supreme Court ruling. Because the Supreme Court in Moped India had held that dealers' commission constituted an allowable trade discount where transactions are on principal-to-principal, the Assistant Collector's rejection (which did not refer to the Supreme Court decision) was legally unsound. The Court verified that dealings were, in fact, principal to principal and at arm's length and that invoice terms supported this finding; accordingly, the rejection had to be struck down.
Additional discounts and discounts not reflected on invoices: The Court rejected the Assistant Collector's aspersion that credits given in or after June 1983 were opportunistic. It noted that only a brief operative order was available in May/June 1983 whereas the detailed clarificatory judgment was reported later; moreover, credit notes had been issued even prior to June 1983 and were reflected in company and dealers' books. Given the procedural directions issued by the Court and the changed law, the petitioners were entitled to claim such deductions subject to verification; therefore, rejection of these deductions was unsustainable.
Special secondary packing: Relying on the Supreme Court's Godfrey Philips decision, which permitted deduction of the cost of secondary packing used solely to facilitate transport or smooth delivery, the Court analysed types of packing and categorized six types of packing recognized in the case law. It concluded petitioners' secondary packing fell within the deductible category (packing employed solely to facilitate transport) and that the Assistant Collector had failed to apply Godfrey Philips; thus, the rejection of the special packing deduction was also incorrect.
Remedy and verification: While striking down the second impugned order due to these errors in legal application, the Court directed reassessment by the Assessing Authority after due verification of relevant account books and, if necessary, cross-checking dealers' accounts. The Court made clear that deductions not directly reflected on invoices required verification but deserved fresh consideration under the correct legal principles.
Other pending issues and interim consequences: The Court noted one sub judice issue related to primary packing valuation and differing values declared by the petitioner's sister unit; that issue should be reconsidered by the appropriate appellate authority and, in any event, no duty should be demanded on that aspect at present.
Interest claim by respondents: The Court found no statutory provision under excise law authorizing interest like that under the Income Tax Act and observed that the respondents never pressed for interest during the lengthy pendency; having found a bona fide dispute and substantial payments/bank guarantees by the petitioners, the Court declined to direct payment of interest.

Holding and Implications

Holding:

The second impugned order dated 19-8-1986 is set aside (the order is struck down) and the petition is partly allowed as detailed in the reasons. There shall be no order as to costs.

Immediate consequences and directions:

The Assessing Authority is directed to re-assess the duty payable after due verification of all relevant items in the petitioners' account books and, if necessary, cross-checking the dealers' account books. The claim for deductions in respect of dealers' commission, additional discounts (including those not shown in invoices but evidenced by credit notes and accounting entries), and secondary/special packing deserves fresh consideration and reassessment in light of the Supreme Court authorities.
No duty should be demanded at this stage in respect of a sub judice issue relating to primary packing valuation and differences in values declared by a sister unit; that issue remains under consideration before the Collector (Appeals).
The respondents' claim for interest on the total assessment amounts is not allowed; the Court declined to make any order for interest in the circumstances described (no statutory provision under excise law analogous to Income Tax Act, non-pressing of interest during pendency, bona fide dispute, and substantial payments/guarantees by petitioners).
No costs were awarded against or in favour of any party ("There shall be no order as to costs").

The opinion confines itself to setting aside the defective assessment and remitting the matter for re-assessment in accordance with binding Supreme Court jurisprudence; it does not purport to lay down any new precedent beyond applying existing Supreme Court decisions to the facts before it.

Show all summary ...

1. The petition as originally filed, challenges the order dated 8-12-1981 rejecting the price list and the basis of assessment of the goods of purpose of Excise duty. Subsequently, during the period of pendency of this petition, another order of assessment came to be passed on 19-8-1986 as directed by the interim order of this Court dated 3-3-1986. This order is also challenged by the petitioner.

2. The petitioner no. 1 is a Company registered under the provisions of the Companies Act, 1956 having its Registered office at Ballarpur, District Chandrapur, State of Maharashtra. The petitioner Company is carrying on the business of manufacturing paper of various qualities inter alia at its factory situated at Ballarpur. The second petitioner is a shareholder of the Company. The first respondent is the Union of India, while the second respondent is the Central Board of Excise and Customs, New Delhi and the third respondent is Collector, Central Excise and Customs, Nagpur. The Fourth and Fifth respondents are the Assistant Collector and Superintendent of Excise and Customs concerned with the relevant orders.

3. Under the decisions rendered by the Supreme Court as well as various High Courts in India, the assessable value of the goods had to be based on the manufacturing cost plus manufacturing profits of the goods. This was as per the interpretation of the old Section 4 of Central Excises and Salt Act, 1944. In other words, from the wholesale cash price all elements of cost pertaining to non-manufacturing or post manufacturing operations (P.M.E. and P.M.P.) had to be excluded. Reference may be made to A. K. Roy v. Voltas . In 1975, however, the High Court of Bombay in India Tobacco Co. v. Union of India 1979 ELT (J 476) held that under old section 4 of the Act assessable value of the goods had to be based on the manufacturing cost and manufacturing profit. Various P.M.E. were held to be deductible from the wholesale cash price. This was also the view taken by number of High Courts in India, except Gujarat and Punjab.

4. The old section 4 was substituted by new section 4 by an amendment brought into force on 1-10-1975 and the basis of assessment of goods was the "normal price" of the goods as sold by the assessee in the course of his trade from the factory gate.

5. In spite of new section 4, Bombay High Court in the case of Bombay Tyres International v. Union of India (1979 ELT 625) held that the basis of assessment had to be on the manufacturing cost and manufacturing profit of the goods. In other words, from the normal price of goods, post manufacturing expenses had to be deducted to arrive at the assessable value. The Union of India, thereafter preferred appeal to the Supreme Court. The said judgment is reported in Union of India vs. Bombay Tyres International (1983 ELT 869). By this judgment, the Supreme Court rejected the contention of the assessee that the assessable value under both old section 4 and new section 4 had to be based on manufacturing cost and manufacturing profit. The Supreme Court held that the basis of assessment had to be the normal price of goods subject to deductions permissible statutorily as well as those initially itemised in the order. A brief operative part of the order was available to all the parties some time in May 1983, but the detailed judgment was subsequently reported in November/December 1983 vide Union of India vs. Bombay Tyres International (1983 ELT-1986). The Supreme Court itemised the deductions permissible from the normal price such as Freight whether actual or averaged, Transit Insurance and Special Secondary Packing requested by the buyers. The other statutory deductions were also permissible from the normal price.

6. A clarificatory order was issued in the same case by the Supreme Court as reported subsequently in Union of India vs. Bombay Tyres International [1984 (17) ELT 329]. Certain additional deductions were held permissible such as trade discount etc.

7. Lastly, in a later judgment in Union of India vs. Godfrey Philips [1985 (22) ELT 306] the Supreme Court by a majority held that cost of secondary packing employed for the smooth delivery of the goods or for facilitating the transport of the goods without damage in transit was permissible as a deduction from the normal price. The Supreme Court in another later judgment in Moped India vs. Assistant Collector [1986 (23) ELT 8] held that "commission" given to wholesale dealers even if described as such would be a "trade discount" and permitted as a deduction under new section 4, provided however that the dealings were on a principal to principal basis at arm's length.

8. It would thus be observed and as rightly contended by Shri Hidayatullah for the petitioners that the petitioner Company had filed their price-list and claimed assessment on the value of different types of papers manufactured on the manufacturing cost and manufacturing profit as per the law laid down up to that date. Yet, however, the Assistant Collector by the first order of assessment dated 8-1-1981 rejected the price-list of the petitioner Company and it was this order which was initially impugned by the petitioner.

9. This Court passed interim orders dated 14-12-1981 and 13-1-1982 allowing the petitioner to clear its goods on the basis of assessable value declared in the price-list from time to time. The petitioner company has not only paid most of the taxes on the said basis, but has also furnished Bank Guarantees amounting to over Rs. 3 crores.

10. After section 4 was amended in 1975 and during the pendency of the Court case, the Supreme Court having delivered its judgment in Bombay Tyres International case, also laid down a binding procedure for dealing with pending cases. In pursuance with that, this Court had passed a format order on 3-3-1986 giving directions to both parties - the petitioners and the respondents. In pursuance of the said directions, the petitioners filed fresh statements and claimed deductions from the normal price on the ground of;

(i) Normal discount;

(ii) Dealers commission (not reflected in the invoices);

(iii) Additional discount (not reflected in the invoices);

(iv) Special packing.

11. Item nos. (ii) and (iii) were not reflected according to the petitioner in the invoices, but were given by issuing credit notes in favour of the dealers. Those credit notes were however duly reflected in the books of accounts as well as the account books of the dealers. This aspect can also be verified by the Assessing Authorities.

12. By the "second impugned order" dated 19-8-1986, the Assistant Collector rejected all claims of deductions except normal discount. The petitioners have, therefore, suitably amended the petition challenging the validity of the "second impugned order" also.

13. During the hearing, both parties conceded that in law and in fact, the earlier impugned order has merged into the second impugned order and it is this second impugned order which is being challenged by the petitioner.

14. We have gone through the second impugned order which has been filed by the respondents and we find that the deductions on account of dealers commission has been rejected only on the ground of judgment of the High Court in Moped India vs. Assistant Collector [1985 (18) ELT 249]. However, the Assessing Authority has apparently overlooked the fact that Andhra Pradesh High Court judgment has been overruled on this very aspect by the Supreme Court in Moped India vs. Assistant Collector [1986 (23) ELT 8]. The Assistant Collector has not even referred to the Supreme Court's judgment. Obviously, therefore, the order of Assistant Collector rejecting the deductions on dealers commission has to be struck down.

15. Admittedly the transaction between the petitioner Company and its dealers is on principal to principal basis and pertains to transactions at arm's length. That is why the petitioners right from 1975 have been asked to file price-list in Part-I and not in Part-II which relates to the concept of a related person. The principal to principal basis has been categorically stated in Moped India case by the Supreme Court. The terms and conditions of the transactions are found on the reverse of the invoices raised by the petitioner Company. All risk is to be borne by the dealers after delivery of goods to carriers. All documents and bills are to be retired by the dealers through Banks. It is in these circumstances, we find that the second impugned order in respect of the dealers commission will have to be struck down. The ground that the dealers commission was not reflected in the invoices is also irrelevant now in view of the clarificatory order of Supreme Court in Bombay Tyres International case reported in 1984 (17) ELT 329 which expressly holds that the discount need not be reflected in the invoices or be given at the time of delivery of goods.

16. Insofar as deductions on the ground of additional discount is concerned, the Assistant Collector has drawn aspersions on the petitioners by stating that the additional discounts were given in June 1983 taking the benefit of the Supreme Court judgment. We do not find that this allegation has any justification. We have already observed that in June 1983 only the operative part of the brief order was reported, whereas it was as late as Nov. 1983 that the detailed order was reported in 1984 (17) ELT 329. We have also seen that the credit notes were issued from time to time even prior to June 1983 and these credits can be seen duly reflected in the account books of the Company and the dealers. Further the contention of the respondents that such deductions were not claimed earlier is also patently irrelevant, because the law as laid down prior to the Bombay Tyres International case (supra) was that price-list has to be on the basis of manufacturing cost and manufacturing profit only. It was only after the format order was passed by this Court that the petitioner Company could legitimately claim those deductions. For these reasons also, we find that the rejection of the claim of deductions on additional discount deserves to be struck down. It must, however, be observed that the Assessing Authority must verify the relevant account books of the Company.

17. As regards the claim for special packing, it is again obvious that the Assessing Authority has not taken into consideration the Supreme Court judgment in Union of India vs. Godfrey Philips [1985 (22) ELT 306]. There the Supreme Court by majority has held that cost of secondary packing employed solely for facilitating the transport of goods to the dealers or for effecting smooth delivery to the dealers can be excluded from the normal price.

18. From the various judgments of the Supreme Court and particularly those latter decisions given in Bombay Tyres International and Godfrey Philips (supra), it is clear that six types of packing have been judicially recognised. The cost of some of these is permissible as a deduction from normal price, while in some cases it cannot be deducted. They may be itemised as follows;

(a) Cost of primary packing, which cannot be deducted.

(b) Cost of Secondary packing which cannot be deducted.

(d) Cost of secondary packing which is "durable and returnable" which can be deducted.

(e) Cost of special secondary packing requested for by the buyers which can be deducted.

(f) Cost of secondary packing which is employed solely for facilitating transport which can be deducted.

19. The Secondary packing employed by the petitioners, in our view, falls under category (f) and its cost is permissible as a deduction. The second impugned order, therefore, also deserves to be struck down on this ground.

20. Having held that the second impugned order suffers from various irregularities and illegalities particularly because of non-application of the relevant case law, we have no hesitiation to hold that the same deserves to be struck down in its entirety. It must, however, be observed that the Assessing Authority should re-assess the duty payable after the due verification of all the items from the account books of the petitioner company in respect of those deductions which are not directly reflected on the invoices. If necessary, the Assessing Authority may have a cross check on the relevant dealers accounts books. The claim for deduction of the petitioners on the ground of dealer's commission, additional discounts or discounts not shown in invoices and secondary packing, therefore, deserves fresh consideration and re-assessment.

21. Lastly, it must also be observed that apart from directing re-assessment after due verification in the light of the law as declared the second impugned order as stated in Column 7(a) and 7(b) calculating differential duty claimed on primary packing and based on the value declared by the petitioner in the return and its higher value declared by the petitioners' sister unit located in Haryana also deserves re-consideration because that issue is sub judice and is pending before the Collector, Central Excise (Appeals), Bombay. At any rate, no duty should be demanded on this aspect at this stage.

22. Before we part with this case, it is to be noted that the respondent has filed an application claiming for interest on the total assessment. We do not find that there is any statutory provision for claiming such interest on the amounts due unlike the one available under Income Tax Act, 1961. It is further to be noted that in the interim directions given by this Court after due hearing given to the respondents on 14-12-1981 and 13-1-1982, no such directions regarding the interest was given by this Court. The format which was issued in pursuance to the directions of the Supreme Court and the language adopted therein cannot afford a right to demand interest on the respondents, since the respondents never pressed for interest during the entire pendency of this petition. Moreover, the relief of interest is discretionary. We however, find that there has been a bona fide dispute between the parties regarding the correct assessment and also in view of the changing law laid down by the Supreme Court from time to time. We have also observed that the petitioners have furnished not only Bank Guarantees, but have paid full assessment of Excise Duty and have made payments worth several crores of rupees from time to time. It is in these circumstances, that we feel no order needs be made in respect of the claim of interest made by the respondent, particularly because we have taken a decision and have struck down the second impugned order the assessment and have directed fresh assessment in the light of the observations made above.

23. Above are the reasons, therefore, whereby we have passed the operative order dated 19-12-1986 as follows;

"Rule is made partly absolute as detailed above. There shall be no order as to costs".