1. Because a common question of law arises for consideration in these two writ petitions, they are disposed by this common order.
2. The petitioner in WP. 1957 of 1974 is a company engaged in the manufacture of cigarettes at several places in India. In this writ petition we are concerned with the liability of the petitioner under the provisions of the Central Excise & Selt Act, 1944 (hereinafter referred to as the Act), in so far as the goods manufactured by the petitioner at its factory in Bangalore. The petitioner in WP. 1292 of 1973 is also a company which manufactures rubber products in Bangalore.
3. The goods manufactured by the two petitioners are liable for payment of excise duty under the provisions of the Act on ad valorem basis. The relevant provisions of the Act are Ss. 3 and 4. They read as follows:
“3. Duties specified in the First Schedule to be levied.—
(1) 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.
(2) The Central Govt. may, by notification in the Official Gazette, fix, for the purpose of levying the said duties, tariff values of any articles enumerated, either specifically or under general headings, in the First Schedule as chargeable with duty ad valorem and may alter any tariff values for the time being in force.
(3) Different tariff values may be fixed for different classes or descriptions of the same articles.
(3A) ****
(4) Determination of value for the purposes of duty—where, under this Act, any article is chargeable with duty at a rate dependent on the value of the article, such values 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 of manufacture or production for delivery at the place of manufacture or production, 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, or his agent, at the time of the removal of the article changeable with duty from such factory or other premises for delivery at the place of manufacture or production if such article is not sold or is not capable of being sold in 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 removal of the article chargeable with duty from the factory or other premises aforesaid.”
4. Under Items 4 and 16A of the First Schedule of the Act, cigarettes and rubber products are respectively made liable to, payment of excise duty on an ad valorem basis.
5. The petitioner in WP. 1957 of 1974 sells its goods to wholesalers at places other than Bangalore also. Similarly, the petitioner in the other writ petition has got its Branch Offices at several places in India where the goods manufactured by it are sold in favour of the wholesalers. Until the decision of the Supreme Court in A.K Roy v. Voltas Ltd.(1) was delivered, the petitioners were, paying excise duty on the basis of the list prices at which the goods were sold ta the wholesalers at different places in India. After the above decision was rendered, the petitioners claimed before the Central Excise Authorities that the computation of the liability of the petitioners under the Act on the basis of the prices at which the goods were actually sold to the wholesalers at different places in India was incorrect and inconsistent with the principle enunciated by the Supreme Court in Voltas' case. They claimed that while determining the taxable base, the Central Excise Authority should deduct from the prices at which the goods were sold to the wholesalers at different places, several items of expenditure incurred by them, to which reference will be made a little later, after the manufacturing process of the goods was over. They relied Upon the observations of the Supreme Court in Voltas' Case in support of their contention.
6. The Asst. Collector of Central Excise, Bangalore passed an order on 1-4-1974 rejecting the contention of the petitioner in WP. 1957 of 1974 in respect of the period referred to therein. In respect of three other periods on the basis of order passed by him on 1-4-1974 he made a demand on the petitioner in WP. 1957 of 1974 to file fresh lists so that excise duty payable by it could be computed on the basis of the prices at which the goods were sold to the wholesalers at different places. Aggrieved by the order di/. 1-4-1974 and the three notices in respect of subsequent periods, the petitioner has filed WP. 1957 of 1974.
7. In WP. 1292 of 1973 the petitioner has questioned the correctness of the notice d/. 26-4-1973 issued by the Asst. Collector of Central Excise calling upon it to show cause as to why it should not be made liable to pay excise duty in respect of 19.5 per cent of the list prices at which the goods were sold to the wholesalers, which according to the petitioner therein, was attributable to post-manufacturing expenses incurred by it.
8. The petitions are resisted by the revenue.
9. At the outset, it is necessary to dispose of the preliminary objection raised, by the learned Advocate General, who appeared for the) Revenue, regarding the maintainability of these petitions. It is contended that against an order passed by the Asst. Collector an appeal would lie to a higher authority, both on facts and law and therefore, this Court should not exercise its jurisdiction under Art. 226 of the Constn of India and interfere with the proceedings at this stage. Ordinarily, this Court would not exercise the jurisdiction under Art. 226 of the Constn, if it is shown that a party, who approaches the Court has an adequate alternative remedy. I am of the view that in the instant case, interference is called for because as can seen from the order passed on 1-4-1974 by the Asst. Collector of Central Excise, which is impugned in WP. 1957 of 1974, he has failed to apply the principle enunciated by the Supreme Court, in Volyas' case and has failed to recognise the distinction between the manufacturing profits and the selling profits as indicated by the Supreme Court in the above decision. When a subordinate authority proceeds to dispose of a case in direct contravention of the enunciation made by the Supreme Court, interference by this Court would be necessary notwithstanding that there is an appeal provided against the action of the authority. The preliminary objection raised on behalf of the Revenue is overruled.
10. The expression ‘excise duty’ is understood in different ways in different contexts. In its widest amplitude, it is a ‘tax’ on goods payable by a person who manufactures them or by some other person who is required by law to, pay the same on the basis of the quantity of goods manufactured and may be levied on the basis of the expenses incurred by the manufacturer until the goods actually reach the hands of the consumer. So far as our country is concerned, the meaning of the expression ‘excise duty’ has been explained by the Supreme Court in more than one case. Hence it is unnecessary to refer to the cases of other countries. In Chhotabhai Jethabhai Patel & Co.…Plaintiff- v. The Union Of India…Defendants-(2) the Supreme Court held that a duty of excise was a tax-levy on home-produced goods of a specified class or description, the duty being calculated according to the quantity or value of the goods and which was levied because of the mere fact of the goods having been produced or manufactured and unrelated to and not dependent on any commercial transaction in them. In Amalgamated. Coalfields Ltd. v. Union of India(3) the Supreme Court observed that excise duty was primarily a duty on the production or manufacture of goods produced or manufactured within the country, and it was an indirect duty which the manufacturer or producer passed on to the ultimate consumer. It was, however, observed that the method of collection did not affect the essence of the duty that it was a tape on manufacture or production. In a case arising under the Sea Customs Act in re: Sea Customs Act (1878)(4) it was observed that the taxable event in the case of duties of excise was the manufacture of goods and the duty was not directly on the goods but on the manufacture thereof.
11. The views expressed in the three Supreme Court cases referred to above, were reiterated in Shinde Brothers Etc. v. Deputy Commissioner, Raichur & Others Etc.(5). Having regard to the consistent view taken by the Supreme Court with regard to nature and incidence of excise duty, the Supreme Court held in A.K Roy v. Voltas Ltd. as follows:
“Excise is a tape on the production and manufacture of goods (see Union of India v. Delhi Cloth & General Mills ((1963) Supp. 1 SCR 586). S. 4 of the Act therefore provides that the real value should be found after deducting the sellnig cost and selling profits and that the real value can include only the manufacturing costs 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 profit arsing from post-manufacturing operation, namely selling profit. The section postulates that the wholesale price should be taken on the basis off 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. As already stated it is not necessary for attracting the operation of S. 4(a) that there should be a large number of wholesale sales. The quantum of goods sold by a manufacturer on wholesale basis is entirely irrelevant. The metre fact that such sales may be few or scanty does not alter the true position.”
12. The occasion for making the above pronouncement arose in the following circumstances.
13. Voltas Ltd. was a company which was carrying on the business of manufacturing air conditioners, water coolers etc. It had its Head Office at Bombay and Branch Offices at Calcutta, Delhi, Madras, Bangalore, Cochin and Lucknow. From these several branch offices it effeced direct sales to consumers at list prices and such sales amounted to 90 to 95 per cent of its total production. Apart from the said sales, it also sold certain products at its head office. The case of the petitioner was that the list price after deducting the discount of 22 per cent allowed to the wholesale dealers alone constituted the “whole sale cash price” within the meaning of S. 4 of the Act for ascertaining the real value of the articles on the basis of which ad valorem excise duty could be levied. The Excise Authorities were, however, of the view that the expression “wholesale cash price” referred to the list price at which the goods were sold to the retailers and that no deduction was permissible therefrom for the purpose under S. 4(a) of the Act. In the above context, the Supreme Court was called upon to interpret the expression “wholesale cash price” appearing in Sec. 4(a). The Supreme Court rejected the contention of the Revenue that the trade discount in respect of which a deduction was claimed by the assessae did not fall within the scope of the explanation to S. 4 of the Act. The Supreme Court observed that unless it was shown that the discount that was allowed was given to the wholesalers with a view to conferring on them certain extra commercial advantages, it was obligatory on the part of the Excise Authorities to exclude the said sum from the list price in order to determine the ‘wholesale cash price’. In substance, the view of the Supreme Court was that the expenses incurred by a manufacturer from the stage at which the goods left the factory premises including interest payable on the value of the goods on account of deferred payment, could not form part of ‘wholesale cash price’, referred to in S. 4(a).
14. In WP. 1957 of 1974, the petitioner has claimed that four items of expenditure, namely, expenses incurred in connection with marketing and distribution, advertising, interest and freight paid for transporting the goods from the factory premises to the jelling points, had to be deducted from the list prices in order to determine the ‘wholesale cash price’. In WP. 1292 of 1973, the claim of the petitioner was that 19.5 per cent of the list, prices would, constitute post-manufacturing expenses and consequently would be deductible from the list price. The question which arises for consideration, therefore, is whether the expenses in respect of which deduction is claimed by the petitioners from part of the manufacturing expenses or not. Production of goods in the classical sense involves four economic factors, namely, (1) land, (2) labour, (3) capital and (4) organisation. In order to secure the above four factors an enterpreneur has to pay rent, wages, interest and provide for certain amount of profits to himself. We are not concerned in this case with the first three factors. There is no dispute regarding them. What, is, however, to be decided is whether the sums in respect of which deduction is claimed by the petitioners form part of managerial expenses relatable to production or whether they ane unconnected with production. The expenses incurred in connection with marketing and distribution of goods, interest on the value of goods attributable to the period between the time at which the goods leave the premises and the time at which the pride is paid by the wholesaler and the freight charges for transporting the goods from the factory gate to the selling points where goods are sold to the wholesalers, clearly fall outside the scope of the manufacturing expenses in view of the enunciation made by the Supreme Court in Voltas' case. Hence, a proportionate deduction from the list prices has to be made before arriving at the wholesale cash price. But so far as the expenses incurred in connection with advertisement are concerned, the question appears to be res integra.
15. Production involve two process, (1) the physical process, namely the process of converting material in-puts into production out-puts and (2) the decision making process which involves production planning and control, forecasting of market conditions, ascertainment of demand for new products, establishment of research centre with a view to reducing cost of production and improving the quality of the product and determination of process standards. It also involves maintenance of lines of communication with the ultimate consumer, which can be conveniently done in modem days by advertisement media. Just like a buyer does not buy the goods to put them on dung hill the manufacturer also does not manufacture goods to put them on a dung-hill. It is absolutely necessary for the manufacturer in order to earn what is known as manufacturing profits to manufacture such articles and goods which would be sold in the market. If he fails to do so the wheels of production will come to a standstill. It was, however, argued by Sriyuths Soli Sorabji, Desai and Ravender Narayana, learned Counsel for the petitioner in WP. 1957 of 1974 that the entire cost incurred by the manufacturer in advertisement had to be the exclude from the computation of taxable base, i.e, the wholesale cash price on the ground that it related only to selling activity of the manufacturer as such. It is difficult to subscribe to the above extreme view canvassed by the petitioner. It was alternatively contended that even granting for the purpose of argument the entire cost of advertisement cannot be allowed to be deducted, an attempt should at least be made to bifurcate the total costs of advertisement between the manufacturing activity on the one hand, and manufacturer's selling activity on the owner. In support of the above contention, reliance was placed on the the decision of the Supreme Court in Commr. of I.T v. Ahmedbhai Umarbhai & Co.(6) in which the Supreme Court cited with approval the decision of the Privy Council in International Harrest Co. of Canada v. Provincial Tax Commn(7) and another decision in Anglo-French Textile Co. v. Commr. of I.T(8). The question which arose, for consideration in Ahmedbhai Umarbhai & Co's case was, whether the entire profits earned by a manufacturer who had its factory within a Princely State was liable to payment of tax on his entire profits under the Excess Profits Tax Act merely because the goods manufactured were sold in British India. The Supreme Court held that the entire profits of the assessees accrued in British India alone as part of the profits was earned by the assessees within the Princely State as soon as the goods were manufactured. The Supreme Court, therefore, affirmed the decision of the Bombay High Court upholding the contention of the assessees that the portion of the profit earned by them which was attributable to their business of manufacture was not liable to tax under the British Indian Act.
16. On the above analogy, it is contended that it is necessary to determine in a given case how much of the advertisement expenses can be attributed tq the managerial activity of the entrepeneur and how much is attributable to his selling activity. There is great force in the above submission. I am of the view that the Excise Authorities can treat only a part of the advertisement expenses as manufacturing cost and not the whole of it. Hence, having regard the extent of advertisement cost attributable to the selling activity a proportionate sum should be deducted from the list prices to determine the wholesale cash price. It is a matter to be decided on the material placed before the authorities concerned in each case. At this stage, it is not possible to decide on the available material what portion of the advertisement expenses incurred by the petitioners can be allowed to be deducted from the list prices in order to arrive at the ‘wholesale cash price’. The assessing authority has, therefore, to decide on the evidence produced before him to what extent the advertisement expenditure incurred by the petitioners can be traceable to the selling activity and on the basis of the above finding, to allow deduction to that extent from the list prices. The remaining part of the advertisement expenses should be included in the wholesale cash price for the purposes of levying excise duty. In the result, these petitions are allowed. The order passed by the Asst. Collector of Excise, which is impugned in WP. 1957 of 1974, is quashed. Similarly, three notices issued to the petitioners in WP. 1957 of 1974 and notices issued to the petitioner in WP. 1292 of 1973 are quashed.
17. The Asst. Collector of Excise is directed to issue fresh notices to the petitioners in these two cases in the light of the decision of Voltas' case, and the observations made herein, and determine the liability of the petitioners under the Act.
18. No costs.