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Superintendent Of Central Excise Kottayam And Others v. Madras Rubber Factory Ltd., Madras
Structured Summary of the Opinion Delivered by Govindan Nair, C.J.
Factual and Procedural Background
These appeals arise from a common judgment disposing of O.P. No. 1290 of 1973 and O.P. No. 1524 of 1973 brought by the respondent, Madras Rubber Factory Ltd. In O.P. No. 1290 of 1973 the primary relief sought was a writ of mandamus or other appropriate order to restrain respondents from levying excise duty on items other than manufacturing costs and manufacturing profits. In O.P. No. 1524 of 1973 the primary relief sought was a writ directing respondents to refund Rs. 17,58,383.91 alleged to have been collected as excise duty on items other than manufacturing costs and manufacturing profits for products manufactured at the petitioner’s factories in Kottayam (including the Muttambalam Unit) from May 1970 onwards (documents Exts. P2 to P9 were relied on). Additional prayers were added by later orders (28-2-1974 on C.M.P. No. 13722 of 1973 and 3-6-1975 on C.M.P. No. 3146 of 1974).
Factually, the Madras Rubber Factory Ltd. (the petitioner in the original petitions) manufactured automobile tubes and other rubber products under the trade name "Mansfield" at a factory in Kottayam commencing in 1970. The company maintained a sales and technical organisation separate from manufacturing units; goods were dispatched to sales depots around India and sold at a uniform price at those depots. Two prices were used: a billing price (price at which goods were sold at depots to dealers) and a consumer price. 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.
The learned trial judge allowed the petitions, holding that the petitioner was entitled to succeed in O.P. 1290 of 1973 and directing authorities to determine excise liability taking into account manufacturing cost plus manufacturing profit. The connected petition for refund (O.P. 1524 of 1973) was directed to be gone into afresh in light of that conclusion.
Legal Issues Presented
- Whether ad valorem excise duty on the respondent’s manufactured articles must be related only to the manufacturing cost plus manufacturing profit (i.e., exclude post-manufacturing costs such as freight, insurance and selling promotion), or whether the ad valorem duty is to be calculated with reference to the billing price/wholesale cash price under section 4 of the Central Excises and Salt Act, 1944.
- Whether the connected petition for refund of amounts collected as excise duty (O.P. No. 1524 of 1973) must be reexamined in light of the proper interpretation of section 4 and the conclusion about what constitutes the taxable value for excise duty.
Arguments of the Parties
Appellants' (Revenue) Arguments — as advanced by the Advocate-General
- The view taken by the learned Judge (that ad valorem excise duty must be related only to manufacturing costs plus manufacturing profits) is not justifiable in view of section 4 of the Central Excises and Salt Act, 1944.
- The billing prices fixed by the respondent should be treated as the wholesale cash price and, under the latter part of section 4(a), ad valorem excise duty should be calculated on such billing/wholesale prices.
- The court should treat certain observations in earlier Supreme Court decisions (referred to by the respondent) as obiter dicta; the Advocate-General relied on the decision in H.H. Maharajadhiraja Madhav Rao Jivaji Rao Scindia Bahadur v. Union of India to diminish the weight of those observations and argued that obiter observations should not be followed strictly.
Respondent's (Madras Rubber Factory Ltd.) Arguments
- The excise duty must be based only on the actual cost of production (manufacturing costs) plus manufacturing profits.
- The billing price used by the company reflects not only manufacturing cost and manufacturing profit but also freight, insurance, sale-promotion costs and portions of overheads attributable to the sales organisation; consequently, billing price is not the correct base for ad valorem excise duty without deductions for post-manufacturing elements.
- The respondent had been paying excise on the basis of the billing price but sought declaratory relief and refund in respect of amounts allegedly collected on items other than manufacturing costs and profits.
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 | Interpretation of section 4 of the Central Excises and Salt Act: meaning of "wholesale cash price", the temporal and spatial limits (price at time of removal for delivery at place of manufacture), and that wholesale cash price excludes freight, insurance and post-manufacturing selling costs; that market need not be a physical market for application of the clause. | The High Court relied on the Supreme Court's passages (paras 9, 10 and others) to conclude that billing price includes post-manufacturing costs and therefore wholesale cash price must be ascertained by eliminating freight, insurance and sale-promotion costs; the High Court treated the A.K. Roy observations as binding and applicable. |
| Atic Industries Ltd. v. H.H. Dave, Asstt. Collector of Central Excise, (1975) 1 SCC 499 : AIR 1975 SC 960 | Support and approval of the interpretation of section 4 given in A.K. Roy; elaboration of the same principles regarding exclusion of post-manufacturing costs from excise valuation. | The High Court noted that A.K. Roy was quoted with approval in Atic Industries; this reinforced the Court's view that the valuation should exclude post-manufacturing costs and that the trial judge's directions were correct. |
| Union of India v. Delhi Cloth and General Mills, (1963) Supp 1 SCR 586 : AIR 1963 SC 791 | General principle that excise is a tax on production and manufacture of goods. | Quoted (via the Supreme Court in A.K. Roy) as background to the proposition that excise should be levied on manufacturing cost plus manufacturing profit, excluding post-manufacturing charges. |
| H.H. Maharajadhiraja Madhav Rao Jivaji Rao Scindia Bahadur v. Union of India, (1971) 1 SCC 85 : AIR 1971 SC 530 | Cited by the Advocate-General to urge that certain observations in earlier cases are obiter and to argue against placing heavy weight on those observations. | The High Court considered this authority but held that the particular observations relied upon in A.K. Roy and related cases were not merely obiter; the High Court refused to accept that those observations could be ignored and treated them as binding guidance. |
| In re: Bengal Immunity, AIR 1955 SC 661 | Principle that the Supreme Court can overrule earlier decisions; referenced in context of the Advocate-General’s submissions about the status of judicial observations. | The Court acknowledged the general capacity of the Supreme Court to overrule earlier decisions but nonetheless held that High Courts should not ignore observations made by the Supreme Court even if described as obiter; the High Court considered the A.K. Roy observations to be authoritative for the present matter. |
Court's Reasoning and Analysis
The Court set out the statutory background, referring to section 3 (the charging section) of the Central Excises and Salt Act, 1944, and to item 16 and 16A of Schedule I which provide for ad valorem duties in relation to tyres and rubber products. The Court identified section 4 as the most important provision for the present dispute and relied heavily on the Supreme Court's interpretation of section 4 in A.K. Roy v. Voltas Ltd. and its subsequent treatment in Atic Industries Ltd. v. H.H. Dave.
The Court distilled the following interpretive points from A.K. Roy and related authority:
- "Wholesale cash price" refers to a price for which an article is actually sold or is capable of being sold; actual sale is not necessary to visualise such a price.
- The sale contemplated by the section must be at the time of removal of the article charged with duty for delivery at the place of manufacture or production; consequently, the price so taken cannot include freight, insurance, or post-manufacturing promotion and selling costs attendant on transporting goods to distant depots.
- Excise is a tax on production and manufacture; sec. 4 contemplates that the real value for excise purposes is the manufacturing cost plus manufacturing profit and excludes post-manufacturing cost and selling profit.
Applying those principles to the facts, the Court observed that the respondent's billing price (the uniform depot price) reflected not only manufacturing cost and manufacturing profit but also freight, insurance, sale promotion costs and a portion of overheads attributable to the sales organisation. Therefore, the billing price cannot automatically be equated with the manufacturing cost plus manufacturing profit.
The Court addressed the Advocate-General’s contention that the latter part of section 4(a) should apply because there were no actual sales at the site of manufacture and no evidence of a local wholesale market: the Court noted that the petition averred the articles were "capable of being sold at the time of removal of the articles at the place of manufacture." The Court found no specific denial of that averment in the counter affidavits and therefore proceeded on the basis that the goods were capable of being sold at the place of manufacture at the time of removal.
Given those facts and the Supreme Court’s interpretation, the Court endorsed the trial judge’s approach: from the billing price the authorities should eliminate such amounts as are legitimately attributable to freight, insurance and sale-promotion efforts to arrive at the wholesale cash price (i.e., the price representative of manufacturing cost plus manufacturing profit). The High Court stated it could not suggest more detail but saw no error in the trial judge’s directions.
On the Advocate-General’s submission that relevant Supreme Court observations were obiter and should be afforded limited weight, the High Court examined the context and concluded the observations in A.K. Roy and the later approval in Atic Industries were not merely obiter. The Court held that High Courts are bound to give effect to such authoritative observations and that it was not permissible to ignore them on the grounds urged by the Advocate-General.
Holding and Implications
Holding: The High Court DISMISSED both appeals and declined to interfere with the judgment under appeal. There will be no order as to costs.
Implications:
- Direct effect: The trial judge’s directions stand. The authorities are to determine excise liability by ascertaining the appropriate wholesale cash price at the time of removal for delivery at the place of manufacture — which requires eliminating from the billing price those elements legitimately attributable to freight, insurance and sale-promotion (i.e., post-manufacturing costs and selling profit) so that the taxable value corresponds to manufacturing cost plus manufacturing profit.
- Connected refund petition (O.P. 1524 of 1973) must be gone into afresh in light of the correct approach to valuation for excise as indicated by the judgment.
- The Court treated the relevant Supreme Court observations (A.K. Roy and approvals in Atic Industries) as authoritative for the construction of section 4; the decision affirms that High Courts should follow those interpretive pronouncements rather than treat them as mere obiter dicta. The opinion does not purport to lay down a new legal principle beyond applying the Supreme Court’s interpretation to the facts at hand.
Note: This summary is based exclusively on the content of the provided opinion and does not include information or inference beyond that text.
The Judgment of the Court was delivered by
Govindan Nair, C.J:— These appeals are from a common judgment disposing of O.P Nos. 1290 of 1973 and 1524 of 1973 [1977 E.L.T (J 85)] both moved by the respondent to these appeals, the Madras Rubber Factory Ltd. In OP. No. 1290 of 1973 the first prayer was to “issue a writ of mandamus or any other appropriate writ, direction or order to forbear the respondents from levying excise duty on items other than on the manufacturing costs and manufacturing profits” and the first prayer in O.P No. 1524 of 1973 was to issue “a writ of mandamus or any other appropriate writ, direction or order directing the respondents herein to refund the excise duty of Rs. 17,58,383.91 collected on items other than on the manufacturing costs and manufacturing profits in respect of the petitioner's products manufactured at their factories in Kottayam including the Muttambalam Unit from the period May 1970 onwards covered by Exts. P2 to P9”. Additional prayers have been added in that O.P by orders dated 28-2-1974 on C.M.P No. 13722 of 1973 and 3-6-1975 on C.M.P No. 3146 of 1974.
2. The learned Judge observed thus in paragraphs 6 and 7 of the judgment:—
“6. Hence the petitioner is entitled to succeed in O.P 1290 of 1973. The respondents vrill 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 has been said in this judgment.
7. The connected petition, O.P 1524 of 1973, is for refund of the amounts wrongly collected as excise duty in the past. Of course, no relief 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 authorities 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 petitions are allowed as indicated….”
3. In these appeals the learned Advocate-General who appeared for tie appellants contended before us that the view taken by the learned Judge in the judgment under appeal that the ad valorem excise duty chargeable on the articles manufactured by the respondent in these appeals must be related to the manufacturing costs plus the manufacturing profits alone, is not justifiable in view of the provision in section 4 of the Central Excises and Salt Act, 1944, for short the Act, We shall examine this contention. Before we do so, it is necessary to advert to section 3 of the Act which may be termed as the charging section. That section has insisted that “there shall be levied and collected in such manner as may be prescribed duties of excise on all excisable goods other than salt which are produced or manufactured in India and a duty on salt manufactured in, or imported by land into, any part of India as, and at the rates, set forth in the First Schedule”.
4. It is clear from the section that the duties of excise are imposed on all excisable goods which are produced or manufactured in India and in the case of salt, also imported by land into any part of India. Schedule 1 in item 16 deals with tyres and defines tyre as a pneumatic tyre in the manufacture of which rubber is used, and includes the inner tube and the outer cover of such a tyre. Tyres for motor vehicles are dealt with separately and cycle tyres other than motor cycle tyres have also been separately dealt with and there is an omnibus provision for all other tyres. In relation to all these articles ad valorem fees at varying percentages have been provided under item 16 of Schedule 1 and item 16A dealt generally with rubber products enumerated therein. Under this item also the fee chargeable is ad Valorem. The most important section with which we are concerned is section 4 which we shall extract in full.
5. The facts of the cases relevant for our purposes have been briefly stated in the judgment under appeal in these terms:
“…………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 automobile tubes and other rubber products was commenced from 1970.
The petitioner company has a 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 its product for delivery at the factory gate. On the other hand the goods are sent over to the sales depots of the petitions company situate 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 of them is 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.………”
6. The contention before the learned Judge by the respondent herein that the excise duty must be based only on the actual cost of production or manufacturing costs, plus manufacturing profits has been accepted by the learned Judge. The short question therefore arising for decision is whether the view taken by the learned Judge is the cbrrect view to take. The learned Advocate-General contended that the view taken by the learned Judge requires reconsideration. According to the Advocate General the billing prices will be the prices on which ad valorem excise duty will have to be calculated in view of the latter part of section 4(a) of the Act.
7. It appears that the judgment in the original petitions which gave rise to these appeals was rendered on the principle of the decision of the Supreme Court in A.K Roy v. Voltas Ltd., (1973) 3 SCC 503 : AIR 1973 S.C 225 [1977 E.L.T (J 177)] wherein section 4 of the Act came up for interpretation. Before we refer to the relevant passages from this judgment we have to emphasise certain aspects which are clearly discernible from the wording of the section itself. The wholesale cash price is a price for which an article is actually sold or is capable of being sold. This necessarily implies that there need not be actual sale of the article, in order to visualise a wholesale cash price for that article. The other aspect which we wish to emphasise is that the sale contemplated by the section must beat the time of the removal of the article chargeable with duty from the factory or any other premises of manufacture or production for delivery at the place of manufacture or production. These, we think, are very important aspects for if the price should be at the time of the removal of the article chargeable for delivery at the place of manufacture, by no stretch of imagination, can that price comprehend any freight or insurance or amounts expended for promotion of sale by a manufacture who may have sales organisations elsewhere and who may choose to carry his goods from the place of manufacture to distant parts in India. What we have said above is on all fours with the observations of the Supreme Court in A.K Roy v. Voltas Ltd., (1973) 3 SCC 503 : AIR 1973 S.C 225 [1977 E.L.T (J 177)]. We shall refer to certain passages in paragraphs 9 and 10 of the judgment.
“We do not think that for a wholesale market to exist, it is necessary that there should be a market in the physical sense of the term Where articles of a like kind or quality are or could be sold or that the articles should be sold to so-called independent buyers.
Even if it is assumed that the latter part of 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 wholesale basis. These words can 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 sold, that would not in any way affect the existence of market in the proper sense of the term provided the articles themselves could be sold wholesale to traders, even though the articles are sold to them on the basis of agreement which confer certain commercial advantages upon them………. We also think that the application of cl. (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 ‘wholesole cash price’, the clause is not inapplicable for want of sale of other goods of a like kind and quality.”
8. We must refer to one more paragraph in the judgment, paragraph 21 which reads as follows:—
“21. Excise is a tax on the production and manufacture of goods (see-Union of India v. Delhi Cloth and General Mills, (1963) Supp 1 SCR 586 - AIR 1963 SC 791 [1977 ELT (J 199)]. Sec. 4 of the Act therefore provides that the real value should be found after deducting the selling cost and selling profits and that the real value can include only the manufacturing cost and the manufacturing profit. The section makes it clear that excise is levied only on the amount representing the manufacturing cost plus the manufacturing profit and excludes post-manufacturing cost and the profit arising from post-manufacturing operation, namely, selling profit. The section postulates that the wholesale price should be taken on the basis of cash payment thus eliminating the interest involved in wholesale price which gives credit to the wholesale buyer for a period of time and that the price has to be fixed for delivery at the factory gate thereby eliminating freight, octroi and other charges involved in the transport of the articles………”
9. In the light of these observations of the Supreme Court it is evident that the billing prices for which the articles manufactured by the respondents are sold to the various depots all over India do not represent the manufacturing cost plus the manufacturing profit alone. The goods have to be taken to far off places and to nearby places and it appears that the respondent has Struck an average as the uniform cost of transport which is added and the billing price fixed for sale to the depots wherever they are situate. This is only a means by which a uniform price is fixed for the goods to bo supplied to the depots wherever they are situate in India. But the important aspect is that price, termed the billing price, reflects not only the manufacturing cost and the manufacturing profit but the freight, insurance and the sale promotion cost and the portion of the cost attributable to overheads as far as the sales organisation is concerned. This was the specific contention of the respondent and the contention is acceptable. On the wording of the section and as it is interpreted by the Supreme Court, there is no justification for taking the billing price, unless it be as contended by the learned Advocate-General that it is possible to postulate that on the facts of the cases it is the latter part of section 4(a) of the Act that should apply. We must therefore now turn to that aspect. The Advocate-General contended that it is an admitted fact that the respondent does not effect any sales of the manufactured articles at the site of manufacture. It is also contended that there is no material and not even an averment that there are sales of articles of like kind and quality at the site of manufacture. It was therefore urged that the authorities were right in taking the billing price which represented the wholesale cash price at the nearest place where such market existed. This argument fails to take note of two specific relevant factors. In paragraph 7 of the original petitions it has been categorically stated that the articles manufactured by the respondent are capable of being sold at the time of removal of the articles at the place of manufacture. Though we have been taken through the various paragraphs in the counter affidavits, paragraphs 5 to 9, we are not able to find any specific denial of the averment in paragraph 7 of the original petition. We have therefore to proceed on the basis that the articles are capable of being sold at the place of manufacture at the time of removal from the factory. The Supreme Court has further held that market does not mean that there should be a physical market in the sense that there is a place to which the articles could be taken and where such or like articles could ordinarily be sold. If the articles are capable of being sold at the time of removal and at the site of manufacture even in the absence of any evidence of actual wholesale cash price for such sales, such cash price of sale will have to be ascertained by reference to established factors. What the learned Judge has directed in the judgment under appeal is that from the billing price such amounts as can legitimately be attributed to freight and insurance and sale promotion, efforts, must be eliminated and the wholesale cash price ascertained. It is of course not for this court to suggest anything more than this and we are not able to discern any error in these directions. The view taken in A.K Roy v. Voltas Ltd., (1973) 3 SCC 503 : AIR 1973 S.C 225 [1977 E.L.T (J 177)] has been quoted with appoval by a later decision of the Supreme Court in Atic Industries Ltd. v. H.H Dave, Asstt. Collector of Central Excise, (1975) 1 SCC 499 : AIR 1975 S.C 960 [1978 E.L.T (J 444)]. The matter has been elaborated in paragraph 12 of the judgment.
10. The Advocate-General contended that the observations made by the Supreme Court in paragraphs 9 and 10 of the judgment in A.K Roy v. Voltas Ltd., (1973) 3 SCC 503 : AIR 1973 S.C 225 [1977 E.L.T (J 177)] and even in the decision Atic Industries Ltd. v. H.H Dave, Asstt. Collector of Central Excise, (1975) 1 SCC 499 : AIR 1975 S.C 960 [1978 E.L.T (J 444)] are obiter and invited our attention to the decision in H.H Maharaja dhiraja Madhav Rao Jivaji Rao Scindia Bahadur v. Union of India., (1971) 1 SCC 85 : AIR 1971 S.C 530. and took us through paragraphs 324, 325 and 326 and contended that the observations in such and similar cases are of varying strength and being obiter dicta we should not place too much weight on those observations. The observations made by the Supreme Court in H.H Maharajadhiraja Madhav Rao Jivaji Rao Scindia Bahadur v. Union of India, (1971) 1 SCC 85 : AIR 1971 S.C 530 are observations made by the Supreme Court itself with regard to the court's earlier decision. It is certainly open to the Supreme Court to make those Observations or even overrule the earlier decisions as has been held In re: Bengal Immunity (AIR 1955 S.C 661). But we do not think that the High Courts can ignore even observations made by a superior court which are in their nature obiter. We think we are bound by these observations. We must add that we are not satisfied that the particular observations on which reliance was placed by the respondent were obiter. In both the decision the Supreme Court had to deal with the scope and ambit of section 4 bearing in mind the concept of Excise Duty and section 3 of the Act, and construe section 4. The facts of the case in A.K Roy v. Voltas Ltd., (1973) 3 SCC 503 : A.I.R 1973 S.C 225 [1977 E.L.T (J 177)] indicated that certain percentages of the goods were sold on the basis of agreements at the time of removal at the place of manufacture and the prices of such sales were known. Nevertheless it was contended that there was no market at the place of manufacture. So it was necessary to interpret the section and explain the true import. This is what has done by the Supreme Court. The observations in the judgment which we have extracted cannot therefore be held to be obiter.
11. We see no reason to interfere with the judgment under appeal. We dismiss both these appeals. There will be no order as to costs
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