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1. 'Heads' the petitioners, manufacturers of textile goods at Ahmedabad (who have recovered the excise duty from the consumers) win (and make a windfall profit, the doctrine of 'unjust enrichment' not withstanding), 'Tails' the consumers, who have already suffered the burden of the levy, lose. Such are the implications of the problem posed in this group of petitions raising a question which one might be tempted to call 'a million dollar question' but for the fact that it would be gross under-statement. For, the question, if answered the way desired by the petitioners, can cost the Revenue hundreds of millions of rupees (recovered over last several years by way of duty which will have to be refunded to the manufacturers all over India).

The Problem:

2. For more than 38 years, ever since the enactment of Excise Act in 1944, manufacturers of goods all over India have been paying excise duty at the prescribed rates. Wherever duty is payable ad valorem, it is being paid under Section 3 read with Section 4 of the Excise Act on the valuation made on the basis of the wholesale price fetched by the goods at the factory gate or the price at which the same could reasonably be expected to be sold at the factory gate, without protest or demur. A question as to whether the sale price obtained by the manufacturer from the wholesaler determined on the 'factory-gate' concept should be the basis for computation of the duty under Section 4 of the Excise Act or whether the sale price obtained by the first wholesale purchaser who sold to the second wholesale purchaser or retailer should be the basis, arose in 1975 Cen-Cus 104C : ECR C 412 SC A K. Roy v. Voltas Ltd. (hereafter called the 'Voltas Case'). The Supreme Court declared that the price at which the goods could be sold to the first wholesaler at the factory gate should be the basis. In order to stress the point that price charged by the manufacturer to the first wholesaler alone matters, the consequences had to be analysed. The price charged by the manufacturer to the first wholesaler would take care of the cost of the manufacture as also his profits (if any). The price charged by the wholesaler thereafter would take into account his profit as well. To bring out this factor the Supreme Court inter alia observed to the effect that excise duty was payable on manufacturing costs plus manufacturing profits and that wholesaler's profits cannot be included in the computation, the same being post-manufacturing expenses. Drawing inspiration from the phrase 'manufacturing costs plus manufacturing profits' employed by the Supreme Court in the aforesaid context a number of writ petitions came to be filed in various High Courts contending that expenses incurred by the manufacturers such as (1) publicity expenses, (2) storage expenses, (3) expenses pertaining to promotion of sales etc. required to be deducted from the wholesale price at which goods were sold by the manufacturer at the factory gate or could be expected to be sold by him at the factory gate. Some High Courts upheld the plea. A Division Bench of this High Court negatived it in 1977 Cen-Cus 93D golden Tobacco Co. Ltd. Bombay v. Union of India 1977 E.L.T. (J. 113) (hereinafter referred to as the 'First Golden Tobacco Case'). The view was taken that there was noting in the Voltas judgement which required any deduction being made from the price at which the goods were sold (or were saleable) to a wholesaler at the factory gate. All that was decided in Voltas case was that the price at which goods were sold or saleable to a wholesaler at the factory gate alone was relevant, and not the price at which such a wholesale purchaser sold to a subsequent purchaser, for that would take within its sweep the said wholesaler's profits which could not be subjected to duty leviable from the manufacturer under Section 4 of the excise Act. Shortly thereafter Section 4 was amended. The controversy persisted even after the amendment. A Division Bench of this High Court which was presented with the same problem some time later 1980 Cen-Cus 427D Golden Tobacco Co. Limited v. Union India 1980 E.L.T. 437 : referred to as 'second' Golden Tobacco judgment) took the view that such expenses, which were styled as post-manufacturing expenses, were not includible in making the computation for the purposes of levy. In view of the earlier Devision Bench judgment in 1977 Cen-Cus 93D First Golden Tobacco Case the matter might well have been required to be referred to a larger Bench. The Division Bench presumably did not consider it necessary to do so in view of the fact that Section 4 of the Excise Act had been amended meanwhile as can be gathered from the fact that the earlier judgment in 1975 Cen-Cus 104C : ECR C 412 SC First Golden Tobacco Case was referred to as having been rendered in the context of the unamended provision. Thereafter a number of petitions have been institution on the premise that expenses of the aforesaid categories (1) publicity expenses; (2) storage expenses, (3) charges of insurance of finished goods, (4) expenses of promotion of sales, (5) expenses of marketing and distribution, (6) freight charges, etc., are not includible in making computation for the purpose of levy. Deduction from the valuation of goods made by the petitioners themselves is claimed in regard to the computation made by a Chartered Accountant and proportionate refund is claimed in regard to the duty paid on goods cleared during past ten years. A direction to compute duty on this basis in respect of goods manufactured in future is also prayed for. So far as the first part of the prayer is concerned, refund to the tune of about Rs. 3 crores is claimed in special civil application No. 502 of 1980 Similar claims for different amounts have been made in the allied matters. Such it the backdrop of the problem.

3. We propose to deal with the problem in three phases:

(1) whether expenses of any such categories are deductible in making computation of the value of goods for the purposes of the levy in the context of Section 4 of the Excise Act prior to its amendment by act 22 of 1973 with effect from October 1, 1975.
(2) whether after the amendment of Section 4 the position has been altered and the aforesaid items of expenditure are now deductible.
(3) whether charges in relation to primary and secondary packing are includible under amended Section 4 even if post-manufacturing expenses are considered to be includible.
(1) Wholesale price.
(2) at a particular place.
(3) at a particular time.

and the price is the wholesale price, the place is the place of clearance, and the time is the time of clearance. Hence the expression 'factory-gate'. Three concepts telescope into each other-(1) wholesale price (2) prevailing at the time of clearance and (3) at the factory gate. The Supreme Court negatived the plea that the sale-price fetched by a second wholesale transaction should be the basis for computation. Why? Because the wholesale price at factory gate means the wholesale price which the manufacturer would get. The price at which the purchaser from the manufacturer sells or can sell is wholly irrelevantbe it a sale by the first wholesale purchaser to a second wholesale purchaser or to a retailer. In order to emphasize this aspect the Supreme Court has used the expression 'manufacturing cost plus manufacturing profit'. The expression is used to clear the mist and make manifest the point. When the wholesale purchaser sells his profit would enter into the sale price. Since Section 4 takes into account nothing other than the wholesale price at the factory gate which the manufacturer can reasonably expect, for making the competition, the price obtained by the wholesaler in his turn cannot be take as a measure. To make manifest the rational basis ('why of the rule') it is observed that this cannot be done because it would taken within its embrace the wholesaler's profit (as contra-distinguished from the manufacturer's profit). And in order to bring home the point as regards the concept of reasonably expected wholesale price at factory gate, the telling phrase 'manufacturing cost plus manufacturing profit' has been employed. What a manufacturer would demand from a wholesale purchaser would of necessity be a price which is worked out on the basis of his quick computation of the cost of production and the profit he would expect to make thereon. Mo manufacturer woul. ordinarily sell at a loss. He would expect reasonable profit over and above the cost of production. Hence this is what he would quote to the wholesales. That is why the phrase 'manufacturing cost plus manufacturing profit' le coined. It is neither an exposition of the true scope or concept of excise nor any magic formula to replace or displace the statutory formula embo deid in Section 4. The Supreme Court was in fact not re-writing section or substituting its own formula for computation in place of the formula prescribed by the Parliament in Section 4. The Supreme Court was merela making explicit the effect of Section 4 in its own words in the fact-situatioy of the case before it. The Supreme Court was in fact unfolding the trun meaning of the words inscribed in Section 4 by the parliament. The Supreme Court was not supplementing or adding anything to the formule embodied in Section 4 by using the phrase 'manufacturing cost plus manufacturing profit'. The Supreme Court has been grossly misunderstood and is taken to have virtually said 'forget what Section 4 says for it is contrary to the very concept of excise. Treat Section 4 as having been repealed and-replaced by the new measure for computation of duty to wit, 'manufacturing cost plus manufacturing profit'. Be it realized that the Supreme Court was never faced with the problem of the supposed true nature and scope of the baste concept of excite. It was merely faced with the problem of valuation of excisable goods in the context of Section 4 of the Act in the backdrop of the fact cluster obtaining in Voltas' case. And this is all that the Supreme Court has done. The Supreme Court has not defined the true nature and content of the basic concept of excise. No such question arose and the court was neither invited to do so nor did the court have any occasion to undertake the exercise and in fact it has not done so. The Supreme Court has merely interpreted and made manifest the formula packed into Section 4. Otherwise from where does one get the concept of manufacturing cost? What is manufacturing cost? Manufacturing cost is the cost of the manufacture of the product. It does not merely mean cost of raw material plus the cost of energy. It means the cost of manufacturing the article. Now, from the standpoint of a Cost Accountant every conceivable item of expenditure-even future expenditure-would enter into manufacturing cost such as: