- Bookmark
- Share
- CaseIQ
Madras Rubber Factory Ltd. v. The Assistant Collector Of Central Excise And Others
Factual and Procedural Background
The matters in these two connected petitions arise from O.P. 1290 of 1973 (the main petition) and O.P. No. 1524 of 1973 (a connected petition for refund). The petitioner in O.P. 1290 of 1973 is Madras Rubber Factory Limited, a company registered under the Companies Act engaged in manufacturing automobile tubes, tread rubber with cushion and related rubber products sold under the trade name "Mansfield". Manufacturing at the petitioner's factory in Kottayam commenced in 1970.
The petitioner operates an independent sales and technical organization separate from its manufacturing unit. Goods are not sold ex-factory but are despatched to sales depots across India and sold at a uniform price at those depots. Two prices are fixed for products: a billing price (the price at which goods are sold at depots to dealers) and the consumer price (the price at which dealers sell to consumers). The petitioner had been paying excise duty under section 3 of the Central Excises and Salt Act, 1944 on the basis of the billing price. A dispute arose about whether the billing price (the depot/dealer price) was the correct basis for determining value for excise duty under section 4 of the Act.
O.P. No. 1524 of 1973 seeks refund of amounts alleged to have been wrongly collected as excise duty in the past. No refund had previously been obtained from the department; the court directed that liability and refund claims be reconsidered in light of the judgment rendered in the main petition.
Legal Issues Presented
- Whether the billing price at sales depots (the price at which the petitioner sells to dealers) is the proper value "for the purpose of duty" under Section 4 of the Central Excises and Salt Act, 1944.
- Whether post-manufacturing items (freight, godown charges, post-manufacturing expenses and any trading profit) form part of the value on which excise duty is leviable, or whether excise duty must be based solely on manufacturing cost and manufacturer's profit.
- Whether the petitioner is entitled to refunds of excise duty amounts previously collected if those amounts were calculated on an improper valuation basis.
Arguments of the Parties
Petitioner's Arguments
- The petitioner contended that the billing price realised at the sales depots (uniform across India) should not be taken as the value for determination of excise duty under Section 4 of the Central Excises and Salt Act, 1944.
- Implicit in the petitioner's position is that billing price includes post-manufacturing costs (freight, godown charges, other expenses) and possibly trading profit, which are not components of the value of goods "as manufactured" for excise purposes.
Respondents' Arguments
- The respondents (Superintendent of Central Excise, the Collector, Central Excise and Customs and the Central Government) had taken the stand that they were entitled to levy excise duty on the billing price and did not make allowance for all items of operation subsequent to manufacture.
- The opinion states that the respondents' stand, as taken, "cannot be sustained" (the court directed a different approach), although the court also acknowledged that authorities are entitled to levy duty on a billing price without allowing for every post-manufacturing item unless properly examined and deducted.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| A.K. Roy v. Voltas Ltd. ((1973) 3 SCC 503; AIR 1973 SC 225) | The concept of a "wholesale market" under Section 4(a) does not require an actual physical market; it may include the potentiality of wholesale sale. Sales to wholesale dealers do not cease to be wholesale merely because those dealers deal under agreements or commercial arrangements with the manufacturer. | The court relied on this passage to interpret Section 4(a) and to support the proposition that the billing price at remote sales depots is not automatically the value for excise duty where such price includes post-manufacturing costs and trading elements; the court followed the Supreme Court's interpretation of "wholesale market". |
| Atic Industries v. Asstt. Collector, Central Excise ((1975) 1 SCC 499; AIR 1975 SC 960) | Approval (with citation) of the A.K. Roy passage concerning the concept of wholesale market and application of Section 4. | The court noted that the passage from A.K. Roy was cited with approval in Atic Industries and stated that it would respectfully follow these decisions in determining the valuation question in the present petitions. |
Court's Reasoning and Analysis
The court's analysis proceeded from the text of Section 4 of the Central Excises and Salt Act, 1944 (quoted in the opinion), which defines the value for duty as either:
- the "wholesale cash price" for which an article of like kind and quality is sold or capable of being sold at the time of removal from the factory for delivery at the place of manufacture (Section 4(a)); or
- where such price is not ascertainable, the price at which the article is sold or capable of being sold by the manufacturer or his agent at the time of removal (Section 4(b)).
From the statute and the facts, the court reasoned that:
- Excise duty is leviable on the value of goods "as manufactured" — i.e., the manufacturing cost and the manufacturer's profit are the relevant components for valuation.
- Post-manufacturing operations (freight to sales depots, godown charges, other distribution expenses) and trading profit that accrues further down the distribution chain are not components of the cost of goods "as manufactured" and therefore are not to be included in the value for excise purposes.
- Section 4(a)'s reference to "wholesale cash price" and the stipulation about the place of manufacture must be understood to permit a notional or potential wholesale market where a physical wholesale market may not exist; the Supreme Court authority (A.K. Roy) explains that wholesale market can mean the potentiality of wholesale sale rather than an actual trading floor.
- Applying these principles to the petitioner's facts, the court found the petitioner justified in contending that the billing price realised at sales depots should not automatically be treated as the excise valuation base, because that billing price includes post-manufacturing expenses (and possibly trading profit), which are irrelevant to valuation "as manufactured".
- At the same time, the court observed that excise authorities were correct in asserting that they are entitled to levy duty on billing prices without making allowance for every item of post-manufacturing operation; however, what specific items should be deducted from the billing price is a matter for competent excise authorities to examine and determine.
- The court placed controlling reliance on the Supreme Court decisions cited (A.K. Roy and Atic Industries) and stated it would follow the rule laid down in those precedents in determining valuation under Section 4.
Holding and Implications
Holding: The court held that the petitioner is entitled to succeed in O.P No. 1290 of 1975 (as stated in the opinion). The court directed that the respondents will levy excise duty on items manufactured by the petitioner taking into account the manufacturing cost and the manufacturer's profit, to be determined in accordance with the judgment and the principles cited from higher authority.
On the connected petition (O.P No. 1524 of 1973) for refund of amounts allegedly wrongly collected, the court directed that the authorities reconsider the petitioner's liability and the prayer for refund afresh in the light of the view expressed in this judgment. The petitioner was allowed as indicated, and parties were directed to suffer costs.
Implications:
- The immediate legal consequence is that excise valuation for the petitioner's manufactured goods must be recalculated on the basis of manufacturing cost plus manufacturer's profit rather than automatically using the billing price realized at sales depots if that price includes post-manufacturing elements.
- The question of which specific post-manufacturing items should be deducted from the billing price and the determination of any refund for past payments were remitted to the competent excise authorities for fresh consideration in light of this ruling.
- The court explicitly followed and applied existing Supreme Court authority (A.K. Roy and Atic Industries) rather than announcing a novel rule; thus the decision implements those precedents rather than establishing a new departure from Supreme Court law.
1. The matter arising in these two petitions are connected. O.P 1290 of 1973 is the main petition and therefore I will first refer to the facts of that petition. The petitioner is the Madras Rubber Factory Limited, a company registered under the Companies Act. It is engaged in the business of manufacturing automobile tubes, tread rubber with cushion etc. These goods are sold under the trade name “Mansfield”. The petitioner is having a factory at Kottayam in which factory the manufacture of automotive tubes and other rubber products was commenced from 1970.
2. The petitioner company has sales and technical organisation independent of the manufacturing units. There is no ex-factory price for the products manufactured by the petitioner and normally no contract is entered into for the sale of the products for delivery at the factory gate. On the other hand the goods are sent over to the sales depots of the petitioner company situated in various places in India and irrespective of the distance of the depots from the factory or its location goods are sold at a uniform price in all these depots. There are two prices fixed for the products, one the billing price and the other the price at which it is sold to the consumers. The billing prices are the prices at which the goods are sold at the depots to dealers. As stated earlier this is the same all over India. The prices at which the dealers are to sell these goods to the consumers are again uniform throughout India. The petitioner has all along been paying excise duty under section 3 of the Central Excises and Salt Act, 1944 on the basis of the billing price of the goods manufactured. The said section provides lor the levy of excise duty on all excisable goods which are produced or manufactured in India at the rates set forth in the First Schedule to the Act. Section 4 of the Act deals with determination of value for the purpose of duty. It read:
Where under this Act, any article is chargeable with duty at a rate dependent on the value of the article, such value shall be deemed to be-
(a) the wholesale 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 chargeable with duty from the factory or any other premises or manufacture or production for delivery at the place of manufacture or productions, or if a wholesale market does not exist for such article at such place, at the nearest place where such market exists, or
(b) where such price is not ascertainable, the price at which an article of the like kind and quality is sold or is capable of being sold by the manufacturer or producer, of his agent, at the time of the removal of the article chargeable with duty from such factory or to her premises for delivery of the place of manufacture 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.
Explanation.— “In determining the price of any article under this section, no abatement or deduction shall be allowed except in respect of trade discount and the amount of duty payable at the time of the removal of the article chargeable with duty from the factory or other premises aforesaid.”
3. It is evident from Section 4 that the value to be adopted for the purpose of assessment to duty is not the price at which the manufacturers actually sells the goods at the sales depots or the price at which goods are sold by the dealers to the customers, but a factional price contemplated by the section. The controversy has arisen because the petitioner company, which was paying excise duty on its billing price objected to such payment later and contended that the price at which the goods are sold to its dealers throughout India cannot be taken to be the price on which excise duty is to be determined under section 4 of the Act. Excise duty is leviable on the value of goods as manufactured. That takes into account manufacturing cost and manufacturing profit. There may be post manufacturing operations in respect of goods produced such as freight incurred in conveying the goods to the sales depots, godown charges and other expenses. No doubt when the goods are sold ultimately these may become part of the cost structure, But these are not components in the cost of the goods manufactured.
4. In other words if manufacturers cost and margin of profit, along is to be taken into account ‘to determine manufacturers price these are irrelevant. There may be manufacturing concerns having their own marketing and sales organisation. Goods may be sold through or to any particular dealer or agent with whom the company may enter into a contract for the sale of its products. That is in cases where the company may have no sales organisation of its own. But where it has one, the price it ultimately receives, includes not only the manufacturing cost and all the post manufacturing expenses but manufacturer's profit as well as trader’ profit. Trading profit cannot be taken into account for determining the price for the purpose of levy of excise duty. Therefore in a case where the price realised is a price of a point where the goods are sold after post-manufacturing operations, it may be that the cost-structure may include (1) manufacturing cost, (2) manufacturer's profit, (3) freight and other charges and (4) the trading profit. Only the first two of these are to be taken into account for the purpose of levy of excise duty for, it is on the goods as manufactured and deliverable at the factory gate that duty has to be levied
5. Section 4(a) refers to the wholesale cash price for which an article is sold or is capable of being sold and the time is that of removal of article chargeable with duty and the place of manufacture or production. It is further provide in the section that if wholesale market does not exist for such article at the factory site the price is to be as at the nearest place where such market exists. It is not as if what is contemplated under the section is a physical market for the goods may be that actually there is no physical market for the particular category of goods at the place where the factory is situated. But if the goods could be sold wholesale at that place the price that could be fetched as at such fictional market is what is to be reckoned for the purpose of Section 4(a). There may be goods for which at the factory gate even a fictional market cannot be assumed for it is possible the goods may not find a potential for sale at that place. It is then that the latter part of the section would operate for, then the price would be that at nearest place where such market could exist.
6. if this be the correct position, then the petitioner is justified in contending that the bill price realised on the goods when sold to dealers at the various sale depots in India should not be taken to be the value on which duty is to be levied, for, such bill price would include the manufacturing cost, the way of freight etc. in taking the goods from Kuttayam to various sales depots in India until they are disposed of and possibly a trading profit. Whether the last element is also involved in this particular case is not a matter on which I am called upon to express my opinion in view of the course which I purpose to adopt in this petition. Suffice to say that the Excise authorities were right in their stand that they are entitled to levy duty on the billing price without making allowance for ail Items of operation subsequent to manufacture. What all Items should be deducted from the bill price is a matter which calls for examination by the authorities competent to levy the excise duty. The stand taken by the respondents, the Superintendent of Central Excise, the Collector, Central Excise and Customs and the Central Government cannot be sustained.
7. In the view that I have taken here, I am supported by the observations made by the Supreme Court in the recent decision in A.K Roy v. Voltas Ltd.—(1973) 3 SCC 503 : AIR 1973 SC 225 : (1973 Tax LR 1710). The court said in that case thus—
“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 it is assumed that the latter part of Section 4(a) proceeds on the assumption that the former part will apply only if there is a wholesale market at the place of manufacture 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 cats also mean the 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 of manufacture where the articles of a like kind and quality are or could be so Id, 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 sales to the wholesale dealers did not cease to be wholesale merely because the wholesale dealers had entered into agreement with the respondent under which certain commercial benefits were conferred upon them in consideration of their undertaking to do service to the articles sold, or because of the fact that no other person could purchase the articles wholesale from the respondent. We also think that the application of clause (a) of Section 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 place of sale and if that is a “wholesale cash price,” the clause is not inapplicable for want of sale of other goods of a like kind and quality.”
8. The said passage was cited with, approval by the Supreme Court in Atic Industries v. Asstt. Collector, Central Excise.—(1975) 1 SCC 499 : AIR 1975 SC 960 : (1975 Tax LR 1515). I have only to respectfully follow these decisions and apply the rule laid down by the Supreme Court to the cases before me. Hence the petitioner is entitled to succeed in O.P No. 1290 of 1975. The respondents will levy excise duty on items manufactured by the petitioner taking into account the manufacturing cost and the manufacturer's profit and that would be determined in accordance with what been said in the judgment.
9. The connected petition O.P No. 1524 of 1973, if for refund off amounts wrongly collected as excise duty in the past. Of course, no re??? was obtained from the department by the Petitioner in the light of the view taken by it. But in the light of what I have said about the liability to pay excise duty, the question calls for a fresh approach. Since I am directing the authortties to look into the matter of the liability of the petitioner that should apply equally well to the prayer for refund also. That also will be gone into afresh in the light of what has been said in this judgment. The petitioner are allowed as indicated. Parties are directed to suffer costs.
Alert