Full Judgment Text
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CASE NO.:
Appeal (civil) 43-44 of 1998
PETITIONER:
M/s Alembic Glass Industries Ltd.
RESPONDENT:
The Commissioner of Central Excise
DATE OF JUDGMENT: 14/08/2006
BENCH:
ARIJIT PASAYAT & TARUN CHATTERJEE
JUDGMENT:
J U D G M E N T
(WITH CIVIL APPEAL NOS.4234-4247/1999)
ARIJIT PASAYAT, J.
Challenge in these appeals is to the orders passed by
the Customs, Excise and Gold (Control) Appellate Tribunal,
West Regional Bench at Bombay (in short ’CEGAT’). While
appellate order dated 13.6.1997 is the subject-matter of
challenge in Civil Appeal No.43 of 1998, the other appeal
relates to the order dated 28.11.1997 passed on an
application for rectification of errors filed by the appellant.
Background facts in a nutshell essentially are as
follows:
The appellant-company, incorporated under the
Companies Act, 1956 is a manufacturer of glass and
glassware. It holds license issued under the Central Excise
Act, 1944 (in short the ’Act’) read with the Central Excise
Rules, 1944 (in short the ’Rules’). The dispute relates to the
period 1.1.1988 to 28.2.1990. The articles manufactured by
the appellant are classified under Chapter 70 of the Central
Excise Tariff Act, 1985 (in short ’’Tariff Act’). There was a
prolonged strike in the factory of the appellant in 1987,
which according to the appellant resulted in closure of the
appellant’s factory and came to a standstill position so far
production is concerned. The appellant decided to cut down
expenditure in areas like labour, packing, inventory,
advertisement etc. M/s Darshak Ltd. who was a bulk
purchaser of the appellant’s products started advertising to
boost its sales in respect of glass and glassware purchased
from the appellant. Inquiries were conducted by the Central
Excise Authorities regarding expenditure on publicity and
sales promotion incurred by M/s Darshak Ltd. on the goods
purchased from the appellant. Statements of some of the
officials of M/s Darshak Limited and Executive Director of
the appellant were recorded during investigation. The
appellant received show-cause notice dated 4.4.1991 from
the Central Excise and Customs Directorate, Baroda
proposing to recover duty amounting to Rs.18,79,775.31
under proviso to Section 11A(1) of the Act. The notice was
issued by the Collector, Central Excise and Customs,
Baroda. The substance of the notice was that the appellant
had gradually transferred the expenditure on sales
promotion and/or publicity of its product to M/s Darshak
Ltd. The amount spent by M/s Darshak Ltd. was to be
included in the assessable value declared by the appellant
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and, therefore, on the amount spent by M/s Darshak Ltd.
being Rs.71,61,049 the duty payable was Rs.18,79,775.31.
The appellant submitted its reply to the show-cause notice.
It was submitted that the show-cause notice was barred by
time; the appellant has been carrying on all of its activities
within knowledge of the excise authorities; at every stage of
changing the market pattern Department was a party; all
sales were being made on principal to principal basis i.e. the
appellant and M/s Darshak Ltd. are not related persons.
Request was made to examine or cross-examine some
persons. A further reply was filed on 21.11.1991 pointing
out that the price list submitted by the appellant had been
approved by the Department. The stand of the appellant
was not accepted by the Collector and order in original
confirming the show-cause notice was passed. Reference
was made to the statement of Mr. R.S. Guard, General
Manager Marketing of M/s Darshak Ltd. to the effect that
upward trend in expenses for publicity was attributable to
increase in sales. Though the buyer was not incurring any
advertisement expenses on their behalf under any express
or implied instructions, yet the fact that the advertisement
expenses by the appellant were reduced/stopped indicated
that the same was part of a well thought out policy. M/s
Darshak Ltd. was a customer of the appellant since 1985.
Expenses for advertisement and sales promotion were
exclusively made by M/s Darshak Ltd. which led to increase
in volume of sales. Expenses on advertisement are
unavoidable for marketing the goods irrespective of the fact
as to who incurs the expenses. It was held that once it is
established that the expenses for advertisement are
additional considerations, the question of related person is
immaterial. It was a case of implied instruction and,
therefore, the assessable value was required to be
accordingly fixed, and the expenses were required to be
included in the assessable value under Rule 5 of the Central
Excise (Valuation) Rules, 1975 (in short the ’Valuation
Rules’). Demand was confirmed under Section 11A of the
Act and penalty of Rs.10 lakhs under Rule 173Q(1) of the
Rules was imposed. Land, buildings, plant and machinery
belonging to the appellant was confiscated under Rule
173Q(2) of the Rules. However, option was given to pay fine
of Rs.2 lakhs in lieu of confiscation.
Appellant preferred appeal before the CEGAT.
It was the appellant’s stand before the CEGAT that
there was no special relationship between the appellant and
M/s Darshak Ltd. The former was selling goods at the same
price to other dealers also. Therefore, there was a factory
gate price for the products and that was the assessable
value under Section 4 of the Act. Reference was made to
the assessee’s own case in Commissioner of Central Excise,
Vadodara v. Alembic Glass Industries Ltd. (1996) 88 ELT
296) in which CEGAT had given a categorical finding that
M/s Darshak Ltd. was not a favoured buyer as there was no
evidence of discretion or favoured treatment. It was pointed
out that admittedly the advertising expenses were incurred
only by the customer M/s Darshak Ltd. and up to the point
of clearance, the appellant had not incurred any such
expenditure.
The expenses incurred towards sales promotion and
publicity by both the appellant and M/s Darshak Ltd. were
as follows:
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Expenditure on Sales Promotion & Publicity
Year M/s Alembic M/s Darshak Volumes of Sales
1986 Rs.11,91,192/- Rs.1,91,928/- Rs.2,05,52,607/-
1987 Rs.13,192/- Rs.2,25,945/- Rs.22,77,19,769/-
1988-89
(1.1.88 to
31.3.89) Rs.48,81,732/- Rs.69,69,18,966/-
Stand of the Revenue was that initially appellant was
incurring advertisement expenses which were gradually
shifted to M/s Darshak Ltd. who were purchasing about
98% of its product. Reference was made to a decision of the
Tribunal where it was noted that there was understanding
over sharing advertisement expenses on 50:50 basis and the
expenses were to be added to the assessable value.
By the impugned judgment dated 13.6.1997 the
CEGAT confirmed the findings of the Revenue authorities on
the question of valuation as well as suppression. However,
the quantum of penalty was reduced to Rs.2 lacs from Rs.10
lacs. It was noted by the CEGAT that the reasons why M/s
Darshak Ltd. came to make a bulk purchases resulted from
economic crisis, as bulk purchase was one of the methods
of rehabilitation. Brand name "Yera" is owned by the
appellant and packing is done by M/s Darshak Ltd. It is
clearly indicated that the appellant was the owner. The
advertising expenses by M/s Darshak Ltd. are nothing but a
deal for revival of the appellant’s factory. Reference was
made to the accepted position that if M/s Darshak Ltd. was
not to make bulk purchases the appellant would have
incurred advertisement expenses to promote sales. It was
held that if price is not the sole consideration, then
additional consideration has to be included in assessable
value. Though M/s Darshak Ltd. is not a favoured
buyer/related person, that is really of no consequence.
Since the response of the appellant was ’No’ to question
No.19 in questionnaire in the price list, Section 11-A has
been rightly invoked. Reference was made by the CEGAT to
Rule 5 of Valuation Rules to hold that the expenses on sales
promotion and advertisement were to be included in the
assessable value of the goods. It was held that demand of
duty from the appellant under Section 11-A read with
proviso to sub-section (1) was clearly applicable as the
appellant had suppressed information with the intention to
evade payment of duty. Tribunal found that the
circumstances under which M/s Darshak Ltd. had given
assurance of bulk purchase and commenced increased
outlet advertising the appellant’s product clearly indicated
that it was a package deal for revival of the appellant’s
factory arrived at between them and M/s Darshak Ltd., and
was a part of the cost reduction exercise of the appellant. An
application for rectification was filed which was dismissed.
The appellant’s argument in support of the rectification
application was that the CEGAT did not consider the
various judgments which were cited before it and there was
no suppression of facts because the assessee had submitted
its Balance Sheets and other documents. Stand of the
Revenue that no case for rectification was accepted the
rectification application was dismissed.
In support of the appeal, learned counsel for the
appellants submitted that the methodology of working out
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assessable value has been highlighted by this Court in
many cases. In Union of India v. Bombay Tyre
International Ltd. (1984 (1) SCC 467), it was held that the
value of an excisable article for the purpose of levying excise
was to be taken to be the price at which the excisable article
is sold by the assessee to a buyer at arms’ length in the
course of wholesale trade at the time and place of removal.
Learned counsel for the Revenue on the other hand
supported the orders of CEGAT. Relying on a decision of
this Court in Commissioner of Central Excise, Surat v.
Surat Textiles Mills Ltd. and Ors. (2004 (5) SCC 201) he
contended that Tribunal’s conclusions are in terra firma.
In the instant case CEGAT held that the Collector’s
view that the expenditure on advertisement and sale
promotion incurred by M/s Darshak Ltd. forms additional
consideration to be added to the sales price under Rule 5 of
the Valuation Rules is well founded. It was held that
addition was not being done on the ground that M/s
Darshak Ltd. is favoured buyer or that they are related
persons to the appellant. In Collector of Cenetral Excise,
Baroda v. Besta Cosmetics Ltd. (2005 (3) SCC 792) this
Court held that where advertisement cost is incurred by the
manufactures/customers compulsorily or mandatorily and
where manufacturer has enforceable legal right against the
customers to insist on incurring of such advertisement
expenditure by the customers, the advertisement cost would
be includible in the assessable value. In Besta Cosmetics
case (supra) it was observed by a three-Judge Bench that
without affirming the view taken in CCE v. Surat Textile
Mills Ltd. (2004 (5) SCC 201) it is clear even on the basis of
the judgment that the agreement should give the
manufacturers/marketing agent, the discretion whether or
not to advertise the assessee’s product. There was no
enforceable legal right with the assessee to insist on the
advertisement under the agreement. In the instant case
there was no finding recorded by CEGAT that the assessee
had any enforceable legal right. On the contrary the CEGAT
proceeded on the basis that till 1987 the assessee was
incurring the expenses. The circumstances under which
M/s Darshak Ltd. gave an assurance of bulk purchase and
commenced progressively increasing outlay on advertising
the appellant’s product indicated that it was package outlay
or revival of the appellant’s factory arrived at between them
as a part of cost reduction exercise of the assessee. There
was no material before the CEGAT to conclude that there
was any tacit understanding which was the stand of the
Revenue. No material was placed by Revenue to justify this
inferential presumption, which was also not spelt out in the
show cause notice.
In Philips India Ltd. v. Collector of Central Excise,
Pune (1997 (6) SCC 31), this Court noted as follows:
"2. The learned counsel for the appellant
drew attention to the judgment of a Division
Bench of the High Court at Madras in
Standard Electric Appliances v. Supdt. of
Central Excise [(1986) 23 ELT 302 (Mad)].
The Court said that it was common
knowledge that when a consumer purchased
an article from a dealer, in the case of
service facilities he looked to the dealer and
not to the manufacturer. For replacement of
defective parts also he looked to the dealer
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from whom he had purchased and,
notwithstanding the fact that the wholesale
dealer might ultimately have the parts
replaced by it reimbursed from the
manufacturer, the service facilities were
provided by the wholesaler with a view to
earn goodwill and attract customers. The
advertising of a product by the wholesaler
was one of the well-known methods by
which the wholesaler attracted customers
and if, as a result of increasing its business,
the demand for the product of the
manufacturer also increased, the advertising
by the manufacturer could not be said to be
for and on behalf of the manufacturer.
3. In Union of India v. Mahindra and
Mahindra Ltd. [(1989) 43 ELT 611 (Cal)] the
High Court at Bombay emphasised the
relationship between the parties, being of
buyer and seller on principal-to-principal
basis. The Court observed that the
manufacturer and its distributor had a
mutual interest in maximising the sale of
the products. The provisions in the contract
between them relating to advertising and the
like were in furtherance of this desire on the
part of both the manufacturer and its
distributor and in no way affected the real
nature of the transaction which appeared to
be of sale on principal-to-principal basis.
5. It seems to us clear that the
advertisement which the dealer was required
to make at its own cost benefited in equal
degree the appellant and the dealer and that
for this reason the cost of such
advertisement was borne half and half by
the appellant and the dealer. Making a
deduction out of the trade discount on this
account was, therefore, uncalled for.
6. As to the after-sales service that the
dealer was required under the agreement to
provide, it did of course enhance in the eyes
of intending purchasers the value of the
appellant’s product, but such enhancement
of value enured not only for the benefit of
the appellant; it also enured for the benefit
of the dealer for, by reason thereof, the
dealer got to sell more and earn a larger
profit. The guarantee attached to the
appellant’s products specified that they
could be repaired during the guarantee
period by the appellant’s dealers anywhere
in the country. Thus, though one dealer
might have to repair goods sold by another
dealer and incur costs in that regard, he
also had the benefit of having the goods he
sold reparable throughout the country. The
provision as to after-sales service, therefore,
benefited not only the appellant; it was a
provision of mutual benefit to the appellant
and the dealer."
In that case it was noted that advertisement which the
purchaser was required to make at its own cost benefited in
equal degree the assessee and the purchaser and for that
reason the cost of such advertisement was borne equally
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and making a deduction out of the trade discount was held
to be uncalled for. It was pointed out that while adjudicating
the matters such as this, the Excise Authorities would do
well to keep in mind the legitimate business considerations.
It is to be further noted that there is no material to
show that there is no arrangement for reimbursement. The
factual position shows that the transaction was on a
principal to principal basis. The findings of this Court in
A.K. Roy and Anr. v. Voltas Limited (1973 (3) SCC 503) also
throw considerable light on the controversy.
"20. There can be no doubt that the
’wholesale cash price’ has to be ascertained
only on the basis of transactions at arms
length. If there is a special or favoured buyer
to whom a special low price is charged
because of extra-commercial considerations,
e.g. because he is relative of the
manufacturer, the price charged for those
sales would not be the ’wholesale cash price’
for levying excise under Section 4(a) of the
Act. A sole distributor might or might not be
a favoured buyer according as terms of the
agreement with him are fair and reasonable
and were arrived at on purely commercial
basis. Once wholesale dealings at arms
length are established, the determination of
the wholesale cash price for the purpose of
Section 4(a) of the Act may not depend upon
the number of such wholesale dealings. The
fact that the appellant sold 90 to 95 per
cent. of the articles manufactured to
consumers direct would not make the price
of the wholesale sales of the rest of the
articles any the less the ’wholesale cash
price’ for the purpose Section 4(a), even if
these sales were made pursuant to
agreements stipulating for certain
commercial advantages, provided the
agreements were entered into at arms length
and in the ordinary course of business.
22. 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). Section 4 of the Act therefore
provides that the real value should be found
after deducting the selling cost and selling
profit 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. As already stated it
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is not necessary for attracting the operation
of Section 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 mere fact
that such sales may be few or scanty does
not alter the true position.
That being so, there is no scope for making any
addition as done the Central Excise Authorities and upheld
by CEGAT. In view of the above-said findings it is not
necessary to consider the question whether the extended
period of limitation applied. The appeals deserve to be
allowed which we direct by setting aside the impugned
orders of CEGAT. No costs.