Bombay High Court
A.K. Roy And Ors. vs Carona Sahu Company Limited on 1 January, 1800
Equivalent citations: 1979(4)ELT521(BOM)
JUDGMENT
1. The Collector of Central Excise and the Assistant Collector of Central Excise have filed this against the judgment and order of K.K. Desai J. whereby he quashed and set aside the two Notices of Demand dated January 30, 1967, calling upon the Petitioners to pay different duty and the order made by the Assistant Collector of Central Excise on May 27, 1967, and the appellate order made by the Collector Central Excise on February 6, 1968. Carona Sahu Company Limited, the Petitioners, carry on business of manufacture and sale of foot-wear. They have two factories at Jogeshwari, in one of which they manufacture Cavas/Rubber Foot-wear while in the other they manufacture Leather Foot-wear. Under Item 36 of the First Schedule to the Central Excises and Salt Act, 1914 (hereinafter referred to as "the Act"), duty of excise was levied on foot-wear with effect from February 28, 1964. By a Notification of exemption dated February 28, 1965, the levy was withdrawn with effect from February 28, 1965. In this appeal we are concerned with the Notices of Demand for payment of excise duty made by the Department for the October 1, 1964, to February 26, 1965.
2. Before the learned trial Judge two contentions were urged on behalf of the Petitioners. The first contention was that having regard to the provisiona of Section 4 of the Act, the only basis for determination of the excise duty payable by the petitioners Company was the price charged by the petitoners to the distributors with the abatement of trade discount which was admittedly continously being given by the Agreement of Distribution. According to the Petitioners, the price charged by the distributors to the wholesale purchasers, with whom they dealt, was entirely irrelevant in assessing the excise duty payable by the Petitioner. Secondly, it was contended before him that during the relevant peiod, i.e., October 1, 1964 to February 26, 1965, final and complete assessments of excise duty were made and the amounts assessed to be due were recovered and paid. It was urged that in fact there was no provisional assessment and the provisions of Rule 9-B of the Rules were not attraction in effect or in substance. The demand made from the Petitioners by the two Notices of demand was in respect of duty short levied; but the same was time-barred and the petitioners could not be called upon to pay the same. The learned trial Judge accepted the contention of the petitioners inter alia holding that the finding made in the impugned appellate order that the prices charged to the distributors could not be accepted as wholesale price particylarly when the distributors were selling the goods in their turn in wholesale to other dealers and the distributors had not given any discount in certain cases. He also accepted the other contention on behalf of the Petitionrs that there was no provisional assessment as contemplated by Rule 9-B. On these grounds he quashed the two Notices of Demand and the imnpugned orders passed by the Assistant Collector of Central Excise and the Collector of Central Excise. It is against this Judgment and order that the present appeal is filed by the Excise authority.
3. mr. Dalal on behalf of Excise authorities contended that the transactions between the Factory and the distributors in Bombay could not be deemed to be wholesale transactions and the price charged to the distributors could not be accepted as wholesale price. Upon proper onterpretation of the provisions of section 4 of the Act his submission was that Excise duty had to be paid having regard to the prices charged by the distributors to the wholesale dealers and that the Petitioners were not entitled to any deduction eithe by way of trade discount or Onward Freight Allowance or Special Rebate as contemplated in the agreement between the petitioners and the distributors. Secondly, he submitted that as the question of determination of the price for the purpose of levy of Excise duty was pending detemination by the appropriate authorities, the order that was passed by the approppriate authorities for refund of the balances in the two Current Accounts was merely provisional and the demands made by the two ompugned. Notices of Demand were fully justified as it was at that stage that the prices were really determined for determination of the value for payment of Excise duty.
4. Section 3 of the Act contains the charging provisions and it provides that thee shall be levied and collected in such manner duties of excise on all excisable goods other than salt, which are produced or manufactured in India....... at the rate set forth in the First Schedule to the said Act. "Excisable goods" under section 2(d) of the Act are defined as goods specified in the First Schedule as being subject to duty of excise. it is not October 1, 1964 to Februaru 28, 1965, `Foot-wear' was included as an excisable item being Item No. 36 in the First Schedule to the said Act. Section 4 of the Act provides how the value has to be determined for the purposes of duty. Section 4 reads as under:-
"Detemination of value for the purpose of duty-Where under this Act, any articles is chargeable with duty at a rate dependent on the value of the article, such value be deemed to be-
(a) the wholesale cash price for which an article of the like kind and quality is sold or is capable with duty from the factory or any other premises of manufacture or production for delivery at the places of manufacture or production, or if a wholesale market does not exist for such articles 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 cpaable of being sold by the manufacturer pr producer, or his agent, at the time of the removal of the article chargeable with duty from such factory or other premises for delivery at the place 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 the detemining 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 frm the factory or other premises aforesaid."
It is not disputed before us that the wholesale cash price for which foot-wear of the quality manufactured by the petitioners could be sold was capable of being determined. The petitioners had Distributors for the sale of the products. A specimen of the agreement entered into by the petitioners with such distributors is annexed as Exhibit `K' to the petition. The sale agreements refers to the terms entered with Elko Shoe Company, Bombay. The elevant terms of this Agreement are as under :-
"1. This Agreement shall be remain force 1st May, 1964 to 30th April 1965. Subject to Clause 11, this agreement is terminable bya month's notice in writing by either party.
2. QUOTA: The Distributors bind themselves to guarantee the Company a monthly sale of Nine Thousand pairs of cavas and rubber shoes manufactured by the company during the currency of this agreement."
Clause 3 if this agreement provides a deposit of Rs. 2,000/- by the Distributors with the petitioners. Clause 4 of the agreement reads as under:
"4. PRICES: All supplies shall be involved at price ruling on the date of despatch and prices are F.O.R. destination by goods trains only. If at the request of the distributors consignment/consignments is/are company. The Distributors shall sell the Company's products at prices fixed by the Company (Special clearance rebates excluded), the Distributors shall be reimbursed with the difference in prices only on supplies made 28 days preceeding the day the reduction takes effect.
5. The Distrobutors shall be entitled to remuneration as per Schedule below:
Trade dis- Onward Freight Octri Special Bonus count Allowance Rebate 8(Eight) 1.50 per cent Nil 1.50% Nil per cent (One & Half)
8. The suplly of goods shall be made to the distributor against their orders on utright sale basis and the Railway Receipt/P.W.D./C. Note along with the Sight Draft shall be sent through the bank for collection. Company accepts no liability for payments amde to employees by cash or any other mode than the one mentioned above."
The rest of the terms are not material for the purpose of determination of the matter in controversy between the parties.
5. The short question that has to be determined in the present case is whether 11 persent reduction comprising of 8 per cent trade discount, 1.50 per cent Onward Freight Allowance and 1.50 per cent Special Rebate was deductable from the wholesellers for the purpose of determining the value under Section 4 of the Act for levy of Excise duty. The argument of mr. Dalal is that the payment of the entire 11 per cent is an extra-commercial benefit allowed to the distributors by reason of the stringent terms that the Distributors agreed undeer the distribution agreement. According to him, such stingent terms comprise of agreement of fixed duration, liability to guarantee a monthly sale of nine thousand pairs of canvas and rubber shoes and to make a deposit of Rs. 2,000/. It is not disputed before us that hiving regard to the Explanation to Section 4 of the Act, if deduction of 11 per cent as contemlated by Clause 5 of thr Agreement truesly and in substance represented trade discount as normally understood in mercantile community, then it would be premissible deduction for the purpose of detemination of the value of the excisable goods for levy of excise duty. A trade discount normally means a deduction or a reduction in price allowed by the manufacturers to a merchant. The label which may be asigned to such deduction or reduction can never be regarded as decision. It is the substance of the matter that has to be looked at and not the form which has been asigned to it. It is undoubtedy true that if the deduction is an extra commercial benefit, then it cannot be permitted/ to be deducted as `trade discount' for determination of the value for the levy of excise duty. it is clear from the provision of Clause 8 of the Distribution Agreement that every distributors has to effect an outright purchase. He is liable to pay the price by demand drafts on the date of the despatch. The distributors is under an obligation to sell the petitioners' products at the price that may be fixed by them from time to time. Thus, every transaction between the petitioners and the distributors is that of "principle ro principal" and they are under the obligation to have a minimum monthly quota of 9,000 pairs of canvas and rubber shoes. for the purpose of Section 4 of the Act the "wholesale cash price" has normally to be ascertained on that basis of transaction at arms length. if there is a special or favoured buyer to whom a speciallylow price is charged becuase of extra-commercial consideration, the price charged for those sales would not be the 'wholesale cash price" for levying excise under Section 4 ofthe Act. the ordinary meaning of the expression "trade discount" is a percentage deduction form the regularlist or catalouge price of goods. it is not even the case of the department that the specimen of the agreement that has been annexed to the petition as Exhibit `K' is a manipulated document with a view to reduce liability for levy of the excise nor is it even contended that the distributors are selected for consideration other than business consideration. No element of favour or special consideration has been imputed to the petitioners. if the distributors have effect an outright purchase in accouradance with their obligations under the agreement, then naturally the price paid by them for bulk purchases to be effected by then under the aagreement will represent the wholesale cashe price. the simple question that has to be considered in the present case is whethe the deduction of 11 per cent is permissible to a distributor or any poart of levy of excise duty. It is an erroneous interpretation of the agreement to infer that the agreement is for a fixed period though undoubtedly the agrrements states that the same was for a period of one year; but either party is at liberty to terminate the same by one month's notice. it is undoubtedly true that there is an obligation on the part of every distributor to guarantee a monthly sale of 9,000 pairs of canvas and rubber shoes. For determination of `wholesale cash price' a bulk purchase is an essential element and the fact that the distributor has to guarantee a mininmum purchase of the nature described will not go to show that any deduction permitted to him under any of the three heads is by way of favour or special consideration. It should not be overlooked the prices that will be invoied will be F.O.R. destination by goods train. Thus, the prices are inclusive of the entire freight payable for the goods train. If any distributor wanted a special benefit of having the goods transported by a passenger train, then a different consideration liability to pay 50% of the freight was imposed pon the distributor. Thus, in our opnion, even though under the agreement the composit deducion of 11% comprises of three items described as trade discount, onward freight allowance and special rebate, in the nature thereof, there is a no distinction. If it is a genuine trade discount, then no objection can be raised to 8 per cent trade discount in view of the provisions of the Explanation of Section 4 of the Act. So far as the item of `Onward Freight Allowance, is concerned, through such an expression is used, it is a deduction or reduction permitted by a manufacturer to a merchant with a view to reimburse the merchant any expenses he has to incur or such goods of which he has to take delivery. The words "Special rebate" also cannotes the same idea as the work `discount'. The dictionary meaning of the word `rebate' as given in the Oxford Dictionary is : "Deduction from the sum to be paid discount, draw-back." Thus,`rebate' stands on the same footing as `discount' and if no element of special consideration or favour was imputed in orde to entitle a distributor for claiming this rebate, then naturally it cannot be treated differently than a trade discount. Actually all the three items though they have been described in a different manner, are items of deduction from the regular list or catalouge prices of goods and in our opinion having regard to the nature and terms of the agreement between the view that the entire distributors the learned Judge was right in taking the view that the entire amount of 11% was a trade discount and had to be deducted while determining the value of the goods for levy of excise duty in view of the provisions of Explanatiin to Section 4 of the Act.
6. reference was made to a decision of the Supreme Court in the case of A.K.Ry v. Voltas Ltd.,-. This decision of the Supreme court rather than supporting the contention of the Exicse authorities goes to support the view that has been taken by the learned trial Judge. The question that arose for detemination before the Supreme court was of a different nature and we are not concerned with the facts thereof. The principle that thas been laid down in that case is that if there is a special or favoured buyer to whom a specially low price is charged because of extra- commercial consideration, i.e., because he is relative of the manufacturer the price charged for those slaes would be `wholesale cahs price'. 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. In this case expression "trade discount" has been given the meaning "a percentage deduction from the regular list or cateouge price of goods". On the facts of the case, the Supreme Court tok the view that as it was not the case of the Excise authorities that there was any secret arrangement between the wholesale dealers and the manufactuees in respect of the sales to them or that the price of the article s was understated in the agreement or that any extra- commercial advantages to the dealers were taken into account in fixing the prrice, the Supreme Court did not consider it necessary to go into the question whether the discount allowed to the wholesale dealers was 'trade discount" or not for the purpose of the Axplanation.
7. As we indicated earlier, none of the three deductions, which have been permitted under the terms of the Distribution Agreement, is in the nature of extra-commercial benefit. It is not even the case of the Excise authorities that the Distribution Agreement is not a genuine agreement nor was any deduction permissible therin by reason of consideration of favour. The agreements were between the manufacturers and the distributors ans, therefore, the entire deduction of 11 per cent comprising of three items of trade discount, onward freight allowance and the special rebate, was permisible having regard to the language of the explanation to Section 4 of the Act. Thus, in oun opinion, the collector of Central Excise was in error in taking the view that this deducion was not permissible.
8. As the decision on this point is sufficient to dispose of this appeal, it is necessary for the purpose of the present case to go into the question whether when the refund was allowed of the balance of the amount from the two Current Account there was any provisional assessment or there wasa case of mere short levied excise duty.
9. In the result, the appeal fails and is dismissed with costs. the costs are quantifies at Rs. 500/. Liberty to the respodents to withdraw the amount of Rs. 500/-by way of costs.