Bombay High Court
Indian Tobacco Company Limited vs Union Of India And Ors. on 1 January, 1800
Equivalent citations: 1979(4)ELT476(BOM)
JUDGMENT
1. By this writ petition field under Article 226 of the Consitution the petitioner-Comapny (Indian Tobacco Company Ltd.) is deeking to quash the decision of the Assistant Collector of Central Excise, Bombay (Respondent No. 2) dated 14th January, 1974 disallowing the deduction in respect of the selling expenses post-manufacturing expenses under four heads viz. (a) Marketing and distribution expenses, (b) Advertising expenses, (c) Freight on cigarette and smoking mixture, and (d) Interest from the wholesale price charged by it to its wholesale dealers-(wholesale buyers) while arriving at the assessable value under section 4(a) of the Central Excises and Salt Act, 1944 for levying excise duty on the products manufactured by it and praying for issuance of the writ of mandamus directing the three respondents (The Union of India, Assistant Collector of Central Excise, Bombay and Collector of Central Excise, Bombay) not to collect or recover any excise duty from it by including in the wholesale price of its products the post-manufacturing costs and expenses and to allow the petitioner-Company to clear its products on the basis of the prices list showing the wholesale cash price after excluding the post- manufacturing costs and expenses from the price recovered by it from its wholesale dealers. The petitioner-Company is also seeking to claim a refund of the sum of Ts. 5,213,743.19P. being the excess colected up to 22nd March, 1974 and any further amount that may be collected by the respondents after that date by failing to exclude from the wholesale cash price of its products the post-manufacturing costs and expenses.
2. Mr. Sorabjee for the petitioner-Comapny has contended that reading section 3 and 4 of the Act together it becomes clear that the excise is a tax on the production and manufacture of goods so produced or manufactured for the purpose of levying duty under section 4(a) of the Act the post-manufacturing expenses which are referable to post- manufacturing activity or rather non-manufacturing activity will have to be excluded and similarly, post-manufacturing profits will also have to be excluded from the price which the manufcture charges to his wholesaler. In other words, for arriving at the true wholesale cash price of excisable commodity under Section 4(a) of the Act, any loading of the price with items of expenses which are referable to post- manufacuring activity or rather non-manufacturing activity is not permissible. According to him, section 4(a) itself makes it clear that excise is levied only on the amount representing the manufacturing cost plus manufacturing profit and excludes post-manufacturing cost and profit arriving from post-manufacrturing operation, namely, selling profit and this postition is derived from the very nature and character of duty or impost. He, therefore, urged that since after ascertaining the facts the auditors of the petitioner-Comapny had certified that the price list initially submitted by the petitioner- Company and which was approved by the Excise Authorities showed the price of its products (which were charged by the petitioner-company to its wholesale dealers) which included post-manufacturing expenses under four heads viz. marketing and distribution expenses, advertisement expenses, freight and interest, the 2nd repondent should have excluded such post-manufacturing expenses fron the prices mentioned in the list for arriving at the true asessable value of the products for the purpose of levying excise duty. He further contended that the Explanation to sec 4, on which reliance was placed by the 2nd respondent, while rejecting the petitioner-Comapny's claim, could not and cannot come in the way of arriving at the assessable value of the petitioner-Comapny's product under section 4(a) of the Act in the manner canvassed by the petitioner-Company. He pointed out that before one could resort to Explanation which unquestionably specifies two items of deductions in deremining the price of any article under section 4, it would be necessary to determine whether in arriving at the assessable value of the goofs for the purpose of levying the excise duty under section 4(a) the items of expenses which are referable to post- manufacturing activities or rather which are referable to non- manufacturing activites will have to be excluded from the wholesale price which is charged by the manufacturer to his wholesale dealer and if because of the very nature or character of the duty or impost such items of expenses are required to be excluded from such wholesale price, the same will have to be done and the exclusion will not depend upon whether the same could be done under the Explanation. He therefore, contended that the decision of the 2nd respondent dated 14- 1-1974 is liable to be quashed or set aside. In support of his aforesaid contentions strong reliance was placed by Mr. Sorabjee on the observations of the Supreme Court in the case of A.K. Roy and another v. Voltas Ltd. whch have been reiterated and approved by that very court in its subsequent decision in the case of Atic Industries Ltd. v. H.H.Dave, Assistant Collector of Central Excise and Cus. . He also pointed out that following the decision of the Supreme Court in Voltas case, in the case of this very petitioner-company the Karnataka High Court has granted reliefs (similar to the reliefs sought therin) in Writ Petition No. 1975 of 1974 preferred by the petitioner-company in respect of its products manufactured in its Bangalore factory and the decision of Karnataka High Court is reported in (1975) 1 Karnatak law Journal, 442. REliance was also placed by Mr. Sorabjee upon two decision of this Court :(1) First Appeal No. 287 of 1972 decided on 16-9-1974 by Desmukh and Mukhi JJ. Union of India v. Mansinghka Industries Pvt. Ltd.-1979 E.L.T.(J 158) and (2) Spl Civil Application No. 1295 of 1973 decided on 14/15- 7-1975 by Deshpande and Mukhi JJ. Ogale Glass Works Ltd. v. Union of India and Ors.-1979 E.L.T.(J).
3. On the other hand, on behalf of the respondents Mr. Joshi raised two or three contentions with a view to sustain the impugned decision of the 2nd respondent dated 14-1-1974. In the first place, on the question of construction of section 4 of the Act, he raised a two-fold contention. He contended that having regard to the deeming provision which is contained in section 4 of the Act and having regard to the language employed therein, it would not be permissible to dissect the wholesale cash price that is being charged by a manufacturer (petitioner-company) to his or its wholesaler at the time and place of clearnace of such manufactured articles or goods from his or its factory for the purpose of ridding such price of expenses or profits attributable to post-manufacturing operation, and he urged that a deeming provision had been enacted to avoid the Excise Officer undertaking the job of a Cost Accountant. Secondly, he contended that in view of the Explanation to section 4, which specifically lays down that in determining the price of any article under the section no abatement or deduction shall be allowed expect those specified therein no deduction of any other kind from the wholesale cash price charged by the petitioner-company to its wholesalers would be permissible in determining the price of the goods under section 4. In support of these two contentions be strongly relied upon a decision of this Court in Ford Motor Company of India Ltd. v. The Secretary of State for India reported in 38 Bom. L.R. 283 which was a case under the Sea Customs Act, 1878, where this Court has taken the view that for the purpose of Section 30 (a) of the Sea Customs Act "the Court has to find a sale of goods at a wholesale cash price, and it is not legitimate to dissect the actual price paid, deduct from it such portions as may be ascertained to represent something other than the price of goods, e.g. the cost of service, and then say that the residue left is the wholesale cash price of the goods". Mr. Joshi submitted that the general observations made by the Supreme Court in Voltas' case, on which Mr. Sorabjee has relied, will have to read in the context of facts of that case and the Court has properly explained those observations in its subsequent decision in Atic Industries case and as such the said observations cannot avail the petitioner-Comapny in support of its case claiming the relief of the type sought in the petition. Thirdly he contended that all the expenses incurred by the petitioner-Company under four heads viz.(a) Marketing and Distribution Expenses, (b) Advertisement Expenses, (c) Freight, and (d) Interest, were not and could not be referred to post-manufacturing activity, as for instance, the advertising expenses must have been incurred by them both before as well as after manufacturing was complete. An advertisement inserted for securing the service of personuel or employees would be an expenditure referable to manufacturing activity while advertising done for the purpose of organization and promotion of the sale of proucts would represent post-manufacturing expenses and it would be extermely difficult for the Excise Officer to undertake an investigation into this aspect for the purpose of determining the assessable value of the products. As regards freight Mr. Joshi pointed out that under two types of agreements that were generally entered into by the petitioner-Comapny with the wholesalers two types of delivery were contemplated; (a) Delivery at the factory gate where the wholesalers bring their carriers-inw hich case there was no question of any freight entering into the price charged, and (b) Delivery at the godowns of the wholesalers effected by the petitioner- Comapny by their lorries-in which case the element of freight would enter into the price charged. Mr. Joshi contended that sicne in both the types of delivery the petitioner-Company admittedly charged a uniform price to its wholesalers there was no question of such wholesalers price including any element of freight. Similarly he urged that marketing and distribution expenses would form part of manufacturing cost and manufacturing profit. He, therefore, urged that the petitioner-Comapny was not entitled to claim any deduction under any of the heads from the wholesale cash price which it was charging to its wholesalers under its agreements with them while arriving at the assessable value of its product under section 4(a) of the Act. We shall deal with these contentions of Mr. Joshi presently.
4. Dealing first with the question of proper construction of section 4 of the Act, it is undoubtedly true that section 4 contains a deeming provision and in substance it enacts that where under the Act any article is chargeable with duty at a rate dependent on the value of the Article `such value' (meaning assessable value of the article) shall be deemed to be the wholesale cash price that is charged by the manufacturer to the wholesale buyer at the time and place of clearance of such manufactured article from his or its factory. Mr. Joshi, therefore, urged that by enacting a deeming provision the legislature has clearly indicated that the wholesale cash price that is charged by the manufacturer to the wholesale buyer at the time and place of clearance of such manufactured article from his or its factory shall be taken to be the assessable value for the purpose of calculating the excise duty payable thereon. In the instant case admittedly the petitioner-Company was and has been charging to its wholesalers for its products the wholesale price indicated by it in the price list submitted by it and approved by the Excise Authorities and as such that wholesale cash price as indicated in the price list must be taken to be the assessable value of the products for the purpose of calculating the excise duty payable thereon. The section, according to Mr. Joshi, nowhere mentions that such wholesale price is to be arrived at by deducting the so called post-manufacturing expenses or manufacturing profits. He pointed out that having regard to the fact that the section contained a deeming provision it was never contemplated that the Excise Officer should undertake any investigation for ascertaining whether such wholesale cash price is charged by the manufacturer, etc. Its wholesales at its factory gate included portions representing expenses or profits attributable to post-manufacturing activity and it was with a view to avoid such investigation (which ordinarily would be the job of a Cost Account) by the Excise Officer that a deeming provision was made. He therefore, urged that having regard to the deeming provision contained in the section and having regard to the language employed therin, it would be clear that there was no question of deducting any so-called post- manufacturing expenses or post-manufacturing profit from the wholesale cash price that was being charged by the petitioner-Comapny to its wholesalers. He also relied upon the Explanation to suggest that beyond the two specified items indicated therein no other type of abatement or deduction from the wholesale cash price is permissible in determining the price under section 4.
5. It is not possible to accept these contentions of Mr. Joshi for more than one reason. In the first place, on the question of construction of section 4 it cannot be disputed that sec 3(1) is a charging section, which creates the liability to pay the excise duty on the goods produced or manufactured in India and the said sub- section clearly indicates the nature and character of the duty, namely that it is a tax on production and manufacture of goods, while the provision of section 4 is in the nature of machinery provision and, therefore, anything said therin must be read so as to carry out the basic concept of excise duty and not so as to militate against that concept. In other words, section 4 cannot be construed so as to enlarge the ambit of duty by including therein the post-manufacturing or non- manufacturing elements. Secondly the expression `deem' os pf flexible import and it does not always create a fiction as has been explained by Lord Radcliffe in St. Aubyn and Ors. v. Attorney-General, 1952 A.C. 15. The learned law Lord has observed thus :
"The word `deem' is used a great deal in modern legislation. Sometimes it is used to impose for the purposes of a statute an artificial construction of a word or phrase that would not otherwise prevail. Sometimes it is used to put beyond doubt a particular construction that might otherwise be uncrtain. Some times it is used to give a comprehensive description that includes what is obvious, what is uncertain and what is, in the ordinary sense, impossible."
6. In our view, therefore, there is nothing either in the deeming provision nor in the language of the section which suggest that while arriving at the assessable value of manufactured article the expenses of profits attributable to post-manufacturing activity or non- manufacturing activity should not be excluded for the purpose of calculating the excise duty payable on such article.
7. As regards the Explanation to section 4, on which reliance was placed by Mr. Joshi, it seems to us clear that the question of considering the Explanation or applying the same to the claim put forward by the petitioner-Comapny cannot arise. It is true that the said Explanation lays down that in determining the price of any article under section 4 no abatement or deduction shall be allowed except in respect of two items specified therein, but the question here is not one of allowing any deduction as such from the price determinable under section 4 but the question relates to exclusion of post-manufacturing expenses and post- manufacturing profit while arriving at the assessable value of manufactured article for the purpose of calculating the excise duty payable on such article and the contention is that having regard to the nature or character of excise duty which is a tax only on the production or manufacture of goods the same is leviable only on that amount which represents manufacturing cost and manufacturing profit and cannot be levied on account which included post-manufacturing cost or profit arising from post-manufacturing operation, namely selling profit, and in our view, on construction of section 3(1) and section 4 of the Act read together it is clear to us that such post-manufacturing cost or post-manufacturing profit will have to be excluded from the wholesale price charged by the petitioner-company from the wholesale price charged by petitioner-Company to its wholesalers for the purpose of arriving at the assessable value of the goods manufactured by the petitioner-company. The reference to the Explanation and reliance thereon placed by the 2nd respondent in his order dated 14-1-1974 therefore is clearly irrelevant and erroneous. The difficulties of administration, particularly the fact that the Excise Officer will have to undertake an investigation generally done by a Cost Accountant for ascertaining what portion of the wholesale price charged by the manufactuerto its wholesaler represent elements of post-manufacturing cost or post-manufacturing profit etc. which were put forward by Mr. Joshi are, in our opinion strictly irrelevant. Moreover, from what has been doen in Bata Shoe Co.'s case (being excise Appeal No. 12- A/13A/MP. 1957, decided on 16-10-1957=1977 E.L.T.(J 207) the dificulties appear to be imaginary rather than real.
8. The last contention of Mr. Joshi has been that the expenses incurred by the petitioner-Company under any of the four heads vis. (a) Marketing and Distribution Expenses, (b) Advertising Expenese, (c) Freight, and (d) Interest, could not be allowed to be deducted from the wholesale price charged by it to ex-wholesalers in arriving at the wholesale cash price for calculating the excise duty under section 4(a) of the Act, inasmuch as, according to him, these expenses incurred under the aforesaid heads wre not all referable to post-manufacturing activity. He pressed this contention particulary in regard to advertising expenses and freight. He urged that the entire cost of advertisement could never be allowed to be deducted, inasmuch as, such advertising expenses must have been incurred by the petitioner-Company before as well as after the manufacturing was complete; for instance, he pointed out that advertising expenses must have been incurred by the petitioner-Comapny for securing the services of personnel or employees for the purpose of manufacturing its products and such expenditure which would be referable to manufacturing activity could not be allowed. As regards freight he pointed out that the petitioner- company usually entered into agreements with its whoesalers under which one or the other type of delivery was effected, namely (a) delivery at the factory gate where the wholesalers brought their carrier, in which case there was no question of any freight entering into the price charged, and (b) delivery at the godowns of the wholesalers by the petitioner-company by its lorries, in which case the element of freight would enter into the price charged, but he urged that since in both the types of delivery the petitioner-Comapny admittedly charged a uniform price to its wholesalers there was no question of such wholesale price including any element of freight and as such no deduction on account of freight could be claimed by the petitioner-Company from the wholesale price charged by it to its wholesalers. It is not possible to accept these submissions of Mr. Joshi. As regards advertising expenses it is true that the petitioner- Company would be incurring such expenditure both before as well as after the manufacturing may be referable to manufacturing activity but part of it would be referable to its selling activity and it will, therefore, be necessary to bifurcate the total cost of advertisement incurred by the petitioner-Company between its manufacturing activity on the one hand and its selling activitu on the other and only such part of advertising expenditure which is referable or attributable to its selling activity that will have to be deducted from the wholesale price charged by it to its wholesalers, Mr. Joshi is, therefore, not right in his contention that no part of advertising expenses incurred by the petitioner-Company could be deducted. Similarly as regards freight though it is true that in both types of delivery generally effected by the petitioner-Company to its wholesalers a uniform price is being charged, that by itself would not be a valid ground to refuse the relief of deduction. The mere fact that the same price is charged both at the factory gate and also at the godowns of the wholesalers would not mean that the price charged at the factory gate would not mean that the price charged at the factory gate would always be exclusive of not-manufacturing element of freight. It is quite possible that the petitioner-Company may have for the purpose of maintaining good relations with its wholesalers fixed a uniform price in both types of delivery, but at the same time in fixing the uniform price may have struck an average in regard to freight. It would, therefore be amtter of investigation and ascertainment whether the wholesale price charged by the petitioner- company at its factory gate included non-manufacturing element of freight. As regards marketing and distribution expenses, it is obvious that the expenses incutted under that head would ordinarily be referable to selling activity of the petitioner-Companyand as such a deduction in that behalf will have to be allowed. Similar would be the position with regard to the item of interest to the extent to which the expenses under this head are referable to no-manufacturing activity or selling activity of the petitioner-Company the relief in that behalf will have to be given to the petitioner-Company. We are, therefore, clearly of the view that the expenses incurred by the petitioner-company under the aforesaid four heads in so far as and to the extent to which such expenses are attributable to its post- manufacturing activity or non-manufacturing activity will have to be deducted from the wholesale cash prices indicated in its approved price lists and charged by it to its wholesalers while arriving at the assessable value of its products for the purpose of levying the excise duty thereon and the refusal of relief in that behalf of the petitioner-company by the 2nd repondent under his Order or decision dated 14-1-1974 is clearly wrong.
9. Having regard to the above discussion, the impugned decision/order of the 2nd respondent is quashed or set aside and it is declared that the petitioner-company is entitled to the relief or deduction sought by it and is further entitled to clear its products on the basis of the price-list showing the wholesale cash price after excluding the post-manufacturing cost and expenses under the aforesaid four heads from the price recovered by its wholesale dealers. However, it will not be possible for us to straightway grant the relief of refund of Rs. 52,13,743.19 P. as claimed by the petitioner-Company, inasmuch as, the matter will have to go back to the Excise Authorities for the purpose of ascertaining the exact extent to which the petitioner- Company would be entitled to the relief of deduction of expenses under the aforesaid four heads and it is only after the matter is investigated into and the precise extent to which the relief could be granted to the petitioner-Company is acertained that the petitioner- Company would become entitled to claim the exact refund. In the circumstances we set aside the impugued decision and/or order of the 2nd respondent dated 14-1-1974 and further orders, if any passed by him on the basis of the impugned decision and further orders, if any passed by him on the basis of the impugned decision and further issue a mandamus in terms of prayers (b)(ii) and (b)(iii) of the petition. Further we send the matter pertaining the claim for refund and other reliefs back to the Excise Authorities for disposal according to law in the light of the above judgment. The Excise Authorities are directed ro consider and determine the claim for refund and other reliefs within a period of three months.
10. The mandamus issued in terms of prayers (b)(ii) and (b)(iii) or the petition will apply to goods cleared on or before cleared on or before 30th September, 1975.
11. The respondents will pay the cost of the petitioners quantified at Rs. 4,000/-.