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Madras Rubber Factory Limited And Others v. Superintendent Of Central Excise, Madras And Others
Concise Analytical Summary of the Provided Opinion
Factual and Procedural Background
The Court consolidated and disposed of several writ petitions together because the issues were practically the same. The petitioners in WP No. 2180 of 1972 are The Madras Rubber Factory Ltd., manufacturers of automobile tyres marketed under the brand name “Mansfield.” Their factory is at Thiruvottiyur, outside Madras City. The company sells tyres nationwide through dealers via a separate sales and technical service organisation (distinct from the manufacturing unit). In 1967 this sales organisation comprised six sales divisions/districts and about 25 sales depots/branches functioning under divisional or district offices.
The company did not make sales for delivery at the factory gate. Instead, it made tyres available through dealers at a uniform national price structure consisting of a billing price (the uniform price charged to dealers anywhere in India) and a list price (the uniform price charged to consumers, incorporating the dealer’s margin). The petitioners contended that 8.71% of the billing price represented post-manufacture expenses; the petition sets out those items and their percentage components as follows:
- Distribution expenses referable to Sales organisation only: 2.01%
- Travelling expenses of sales and inspection staff: 0.57%
- Advertisement expenses wholly attributable: 0.99%
- Insurance charges on goods in transit (estimated): 0.02%
- Octroi charges and sales taxes: 0.32%
- Interest on finished goods stored outside factory (estimated): 1.50%
- Freight charges: 3.30%
- Total: 8.71%
Procedural history: The petitioners claimed before the Excise Authorities that the portion of the billing price representing post-manufacture expenses should not be included in the assessable value under Section 3 read with Section 4 of the Central Excises and Salt Act, 1944 (the Act), and so excise should be levied only on manufacturing cost plus manufacturer's profit. The Superintendent of Central Excise, Madras North (first respondent), by order dated 9-7-1970 rejected that claim. The Collector of Central Excise, on appeal, confirmed that order by his order dated 9-11-1970. The Government of India (third respondent) by order dated 7-4-1972 held that because there was no direct sale at the place of production, the petitioners’ sale depots should be treated as the wholesale market under Section 4 and that the uniform prices at those depots should be treated as the price in force at the nearest market. The petitioners sought a Writ of Certiorari in this Court to quash the orders of the respondents.
Legal Issues Presented
- Whether portions of the billing price representing post-manufacturing expenses (distribution, travelling, advertisement, insurance in transit, octroi and sales taxes, interest on depot stock, freight) are excludable from the assessable value for excise under Section 3 read with Section 4 of the Central Excises and Salt Act, 1944.
- Whether sales effected at the petitioners’ sales depots/distribution depots are to be treated as sales "at the factory gate" (i.e., part of the factory), such that the price charged at those depots must be taken as the wholesale cash price for excise assessment.
- Whether the phrase "when goods first enter the stream of trade" (as used in earlier authority) requires that the price at the point the goods first enter the stream of trade be treated as the wholesale cash price without reference to place of sale or the components of the sale price.
Arguments of the Parties
Petitioners' Arguments
- For determining the wholesale cash price the relevant price is a notional ex-factory or factory-gate price (manufacturing cost plus manufacturing profit) and does not include post-manufacturing expenses attributable to the sales organisation.
- The billing price charged to dealers nationally includes post-manufacture expenses and therefore should not be used as the assessable wholesale cash price for excise purposes in its entirety.
Respondents' Arguments (as advanced by the Advocate-General)
- The petitioners’ sales depots should be regarded as part of the factory; sales at those depots should be treated as sales at the factory gate.
- The price charged at the sales depots (the billing price) should therefore be taken as the wholesale cash price even if that price includes transport, insurance and other post-manufacture services.
- Relying on Supreme Court observations in Atic Industries v. Asst. Collector, Central Excise, it was argued that the relevant price is the price when the goods first enter the stream of trade and that this should be the basis for determining the wholesale cash price.
Administrative/Departmental Position (Central Board / Excise Department)
- The Excise Department (Central Board of Revenue) had previously dealt with a similar claim in the Bata Shoe Company case (1967) and held that post-manufacture expenses attributable to the sales organisation should be excluded when arriving at the value of goods for excise assessment.
- Those departmental instructions (as set out in the Manual of Departmental Instructions on Excisable Manufactured Products) identified particular expenses attributable to the sales organisation that could be excluded: distribution expenses (reasonable and pertaining to staff wholly engaged in wholesale depot organisation), travelling expenses of inspection/sales staff (reasonable), advertisement expenses wholly attributable to the sales organisation, insurance charges on goods in transit to customers and sales depots and on stocks in sales depots (but not insurance on stores and stocks in the factory or transit from factory to wholesale depots), interest on value of stocks at sales depots, octroi and sales taxes; and guidance on freight (theoretical exclusion but rebate denied where factory voluntarily incurred freight to maintain price parity).
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Atic Industries v. Asst. Collector, Central Excise — 1978 E.L.T. (J) 444 | The Supreme Court observed that the value of the goods when they first enter the stream of trade should be taken as the wholesale cash price; this was stated in the context of a chain of transactions among wholesale dealers and the price the manufacturer received from the first wholesale dealer was treated as the relevant price. | The Court distinguished the Atic Industries observation on its facts and context, noting the reference to "stream of trade" arose when dealing with wholesale-dealer chains. The Court rejected the respondents' reliance on Atic to argue that the price at first entry into the stream of trade must be taken as the wholesale cash price without regard to the place of sale or components of the sale price. |
| Bata Shoe Company (Central Board of Revenue decision; 1967) and related Manual instructions | The Central Board ruled that post-manufacture expenses attributable to sales organisation should be excluded for arriving at the assessable value for excise; set out examples of expenses attributable to the sales organisation to be excluded (distribution, travelling, advertisement, certain insurance charges, interest on depot stocks, octroi/sales taxes), and guidance on freight treatment. | The Court relied on these departmental instructions to conclude that the petitioners' claim for exclusion of post-manufacturing expenses could not be rejected outright. The Court observed it was unclear why a different rule had been applied to the petitioners and ultimately directed that excise duty be determined after excluding post-manufacturing expenses. |
Court's Reasoning and Analysis
The Court proceeded by first recognising that the core factual matrix (manufacturing separate from distribution, uniform national billing/list prices, and the allocation of an identifiable percentage of billing price to post-manufacture costs) applied across the writ petitions and so they should be disposed of together.
It analysed the legal position in three connected strands:
- Examination of the petitioners' pricing and distribution arrangement and the claim that the wholesale cash price for excise purposes should be a notional ex-factory price (manufacturing cost plus manufacturing profit) excluding post-manufacturing expenses.
- Consideration of the respondents' contention (via the Advocate-General) that sales at distribution depots are to be treated as sales at the factory gate and that the depot/billing price should accordingly be taken as the wholesale cash price irrespective of its composition; and the respondents' reliance on the Supreme Court's observation in Atic Industries about the price when goods first enter the stream of trade.
- Review of departmental practice and precedent: the Court noted that the Excise Department itself had accepted in the Bata Shoe Company matter that elements attributable to the sales organisation should be excluded when computing the ex-factory/wholesale cash price. The Court quoted the Manual of Departmental Instructions which expressly identified categories of costs attributable to the sales organisation that ought to be excluded, and it explained the limited and qualified treatment of freight.
On the Atic Industries point, the Court emphasised context: the Supreme Court’s reference to the “stream of trade” arose in a factual scenario dealing with a chain of transactions among wholesale dealers, where the appropriate price was the price the manufacturer received from the first wholesale dealer. The present case was distinguishable. The Court therefore rejected the Advocate-General’s submission that the price when goods first enter the stream of trade must be treated as the wholesale cash price without any further inquiry into the place of sale or the components of the sale price.
Given the departmental ruling and instructions from the Board (Bata Shoe Company), the Court found there was no justification for rejecting the petitioners’ claim for exclusion of post-manufacturing expenses outright. The Court concluded that the respondents’ refusal to make any allowance for post-manufacturing expenses when assessing excise was not justified.
Holding and Implications
Holding: The writ petitions are allowed. The Court directed that the Superintendent of Central Excise in each writ petition determine the excise duty after excluding the post-manufacturing expenses claimed by the petitioners. There will be no order as to costs.
Implications:
- Direct effect: The petitioners are to be assessed for excise duty on the manufacturing cost plus manufacturing profit, with the post-manufacturing expenses (as identified and argued) excluded from the assessable value for the purpose of excise duty determination in these matters.
- Administrative guidance: The Court relied on and applied the Central Board’s earlier position (Bata Shoe Company and the Departmental Manual instructions) as the correct approach to excluding sales-organisation expenses from the ex-factory/wholesale cash price where appropriate.
- Scope of precedent: The Court distinguished the Supreme Court’s observations in Atic Industries on grounds of contextual difference and did not accept that observation as a free-standing rule to be applied without reference to place of sale and components of the price. The opinion directs the specific relief sought by the petitioners; it does not purport to lay down a broader new principle beyond its factual and legal analysis in this case.
No other precedents or party arguments beyond those summarized above were contained in the provided opinion.
1. Since the issues involved in all these writ petitions are practically the same, I find it convenient to dispose of them together.
2. The petitioners in WP. No. 2180 of 1972, are The Madras Rubber Factory Ltd., who are manufacturers of automobile tyres under the brand name of “Mansfield”. The tyres manufactured by the petitioners are sold to the consumers through dealers all over India. Their factory is situate at Thiruvottiyur which is outside the Madras City. For the purpose of effecting the sale of their tyres, they have a separate sales and technical service organisation independent of its manufacturing unit. In the year 1967, this sales organisation consisted of six sales divisions or districts, each one of the division consisting of 2 or 3 States and as many as 25 sales depots including branches, functioning under the Divisional or District Office.
3. The petitioners do not enter into any sales of their tyres for delivery at the factory gate. On the other hand, they make the tyres available to their consumers throughout India through their dealers, at a uniform price. For this purpose they have two prices, one the billing price and the other the ‘list price’. The billing price is a uniform price at which the tyres are sold to the dealers anywhere in India These dealers will sell the tyres to the consumers at the ‘list price’ which includes the dealers’ margin of profit. The list price is also a uniform price prevailing throughout India so that the consumers who purchases Mansfield tyres anywhere in India, will pay the same amount, notwithstanding the fact that the expenses involved by way of foreight, insurance, etc., would be widely divergent, depending upon the distance of the sale point from the factory. According to the petitioners 8.71 percent of the billing price represents the following costs.
1. Distribution expenses referable to Sales organisation only. 2.01 2. Travelling expenses of sales and inspection staff 0.57 3. Advertisement expenses wholly attributable 0.99 4, Insurance charges on goods in transit (estimated) 0.02 5. Octroi charges and sales taxes 0.32 6. Interest on finished goods stored outside factory (estimated) 1.50 7. Freight charges 3.30 Total 8.71
4. The Petitioners claimed before the Excise Authorities that a portion of the billing price which represents post-manufacture expenses as aforesaid will not come under charging provision in Section 3 read with Section 4 of the Central Excises and Salt Act, 1944, hereinafter referred to as the Act, and that therefore the levy under the Act should be restricted only to the manufacturing cost plus Manufacturer's profit. By an order dated 9-7-1970, the Superintendent of Central Excise, Madras North, the first respondent herein, informed the petitioners that section 4 of the Act did not provide for any abatement of duty in respect of post-manufacturing expenses incurred by the Company from the assessable value and that, as such the Company is not entitled to reduction of any post-manufacturing expenses. As against that order, the petitioners went on appeal to the Collector of Central Excise, who, however, by his order dated 9-11-1970 confirmed the original order passed by the first respondent. His view was that section 4 of the Act provided for deduction only in respect of the trade discount, if any, and that there was no provision to deduct any other element of cost from the ruling sale price. The petitioners thereafter appealed to the Government of India, the third respondent herein, who by its order dated 7-4-1972 held that as there is no direct sale at the place of production, the sale depots of the petitioners throughout the country should be taken to be the wholesale market for the purpose of section 4 of the Act, and that the uniform prices charged at the various depots should be taken to be he price in force at the nearest market. Thus the petitioners' claim for exclusion of the post-manufacturing expenses from the assessable value determined for the purpose of excise duty having been rejected by all the authorities, they have approached this Court for the issue of a Writ of Certiorari to quash those orders passed by the respondents.
5. According to the petitioners, for the purpose of determining the wholesale cash price, the price which would have been charged by the Petitioners if the tyres manufactured by them have been sold at the factory gate and it will normally be the aggregate of the manufacturing cost plus the manufacturing profit and such notional price will not include the post-manufacturing expenses.
6. According to the learned Advocate-General appearing for the respondents the various depots established by the; petitioners for effecting sales of the tyres manufactured by them should be taken to be part of their factory and the sales effected at those depots should be deemed to be the sales at the factory gate and therefore, the price charged for the articles at the sales depots should be taken as the wholesale cash price, irrespective of the fact whether such price includes the cost of transport, insurance or of any other services. It is said on behalf of the respondents that the wholesale market price is the price charged for the goods article at the time when it enters the stream of trade, and that the goods having entered the stream of trade on their sales effected in the sale depots, the price charged at the sale depots should be taken to be the wholesale cash price.
7. The Excise Department itself has accepted the principle that post-manufacturing expenses cannot be taken note of for determining the wholesale cash price while dealing with a case in the year 1967 where a similar claim was put forward by Beta Shoe Company. The Bata Shoe Company had also a uniform price for their goods ruling at different places within the country as such, the uniform prices would include an ex-factory processes. While dealing with the said case, the Central Board of Revenue ruled that the post-manufacture expenses could not be taken note of for arriving at the value of the goods for assessment to excise duty. Basing on the said decision of the Board, instructions have been issued to the Excise authorities as to how the wholesale cash price in the case of firms clearing goods from the manufacturing premises to their distribution depots should be arrived at. Those instructions are found in the basic Manual of Departmental Instructions on Excisable Manufactured Products. Those instructions are extracted below:
“4. As regards point No. (ii) above, the Board has held that Section ibid. clearly envisages the wholesale cash price crevalent at the factory gate, in other words for the purpose of assessment under that section, what is contemplated is an ex-factory price which includes full factory profits. It follows, therefore, that elements which are attributable to post-factory processes (which in this case were referable to the Sales Organisation as distinct from the manufacturing unit proper) should be excluded. In the matter of detail, the Board has observed that the following expenses could be considered as referable to sales organisation:
(a) Distribution expenses when they are reasonable and pertain to salaries and emoluments of that portion of the staff who is wholly engaged in the organisational work of the Wholesale Depot;
(b) Travelling expenses when they are reasonable and pertain to the inspection Staff of the Sales organisation;
(c) Expenses on advertisement wholly attributable to the Sales Organisation;
(d) Insurance charges on footwear in transit to various customers and Sales Depots as well as those incurred on the stocks in Sales Depots. Insurance charges on account of stores and stocks in the factory and on goods in transit from the factory to the wholesale depots will, therefore, be inadmissible.
(e) Interest on the value of stocks at Sales Depots.
(f) Expenses on account of octroi and Sales Taxes.
As regards the freight, while in theory the actul freight charges incurred between the factory or the nearest wholesale market and the place of actual consumption should be excluded from the value assessable to duty, rebate on account of the expenses incurred by the factory on freight charges should not be allowed, if such charges are voluntarily incurred by the factory with a view to maintain parity of prices at all places where the products are marketed.”.
8. In view of these instructions, the petitioner' Claim for exclusion of post-manufacturing expenses for determination of the assessable value of the goods, cannot straight away be denied, and it is not known as to why a different rule has been applied in the petitioners' case.
9. The learned Advocate General would, however, contend relying on the observations of the Supreme Court in Atic Industries v. Asst. Collector, Central Excise— 1978 E.L.T (J 444) that the value of the goods at the time when they first enter the stream of trade should be taken to be the wholesale cash price and that should be adopted as the basis for finding out the wholesale cash price. But, I find that the reference to the “stream of trade” was made by the Supreme Court while dealing with a chain of transactions among the wholesale dealers. While rejecting the contention of the respondents that the sale price charged by the last wholesale dealer to the retail dealer alone should be taken as the wholesale cash price, the Supreme Court pointed out that the only relevant price for assessment of value of the goods for the purpose of excise in such a case would be the price which the manufacturer receives from the first wholesale dealer, that is, when the goods first enter the stream of trade and that once the goods have entered the stream of trade and are on their onward journey to the consumer, whether along a short or a long course depending on the nature of the goods and the conditions of the trade, excise is not concerned with what happens subsequently to the goods. Having regard to the context in which the reference has been made by the Supreme Court to the words “stream of trade”. I am not able to accept the contention of the learned Advocate General that the price charged for the goods when it first enters the stream of trade should be treated as the wholesale cash price without reference to the place of sale and the components of the sale price. In my view, the respondents are not justified in their stand that they are entitled to levy duty on the billing price without making allowance for the post-manufacturing expenses.
10. The petitioners claim seven items of expenses as post-manufacturing charges as earlier detailed. The respondents have rejected the petitioners' claim for exclusion in toto on the erroneous basis that they cannot be excluded. Now tbct it has been held that the petitioners art liable to pay excise duty only in relation to the manufacturing cast plus manufacturing profit; all the writ petitions are allowed and the Superintendent of Central Excise in each of the Writ Petitions is directed to determine the Excise duty after excluding the post-manufacturing expenses. There will be no order as to costs.
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