Central Excise, Delhi Vs. M/S. Pearl Drinks Ltd.  INSC 444 (6 July 2010)
SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICITION CIVIL APPEAL NOS.2059-2060
OF 2003 Commissioner of Central Excise, Delhi ...Appellant Versus M/s Pearl
Drinks Ltd. ...Respondent
These appeals have been filed under Section 35(L)(b) of the
Central Excise Act, 1944. They are directed against an order dated 22nd July,
2002 passed by the Customs, 2 Excise and Gold (Control) Appellate Tribunal,
whereby an appeal preferred by the Revenue against an order passed by the
Commissioner of Central Excise has been dismissed on the principle of merger.
The Tribunal has held that the order passed by the Excise Commissioner had
merged in that passed by the former in an earlier appeal filed by the assessee
against the very same order. The fact that the said appeal was limited to only
two of the eight deductions that formed the subject matter of controversy
between the parties, according to the Tribunal made no difference.
The respondent-company is engaged in the manufacture and sale of
aerated water falling under heading 22.01 and 22.02 of Chapter 22 of the
Schedule to the Central
Excise Tariff Act, 1985. In the course of scrutiny of
records the excise authorities noticed that the respondent- company had not
affected any sale of aerated water to any wholesale buyer at its factory gate.
It had instead been clearing the manufactured product in glass bottles after
making payment of the duty and removing them to a duty 3 paid godown situated
at B-42, Lawrence Road Industrial Area, Delhi, adjacent to the factory. The
duty paid stocks so removed were then sent to the customers in lorries owned by
the respondent or taken on hire by them on long term basis from other parties.
The driver-cum-salesman employed for that purpose would deliver the goods to
the customers/dealers at a higher price and issue cash memos to them, while
unsold stocks and empties were brought back to the company's duty paid godown.
In the declarations filed by the respondent-company from time to
time it had while disclosing the wholesale price/assessable value for various
sizes and flavours claimed deductions towards excise duty, sales tax,
transportation charges, container service charges and other service charges
including trade discounts etc. before arriving at the assessable value under
Section 4 of the Central Excise & Salt Act, 1944. Being of the view that
such deductions were not legally admissible, the adjudicating authority issued
a notice dated 3rd November, 1995 calling upon the 4 respondents to show cause
why the deductions claimed under the following eight heads be not denied to
Mazdoor and cartage expenses on account of bringing of breakdown vehicles.
Service charges including handling.
Establishment cost of sale and Shipping Department.
Interest on Containers.
Deduction claimed on account of loss of beverages in duty paid godown and
transporting the goods from the duty paid godown to the customers.
discount given to the privileged customers.
trade discount by way of one or more bottles free of cost to customers."
The respondent filed a reply to the notice aforementioned upon
consideration whereof the Principal Commissioner of Central Excise, Delhi
passed an order in 5 original dated 14th March, 2001 disallowing deductions to
the extent of Rs.13,42,924/- on account of loss of beverages in the duty paid
godown and a sum of Rs.27,50,072/- on account of loss in transit from the said
godown to the customers and discount made on account of free supply of bottles
of aerated water. Insofar as the remaining six heads under which deductions
were claimed by the company the order in original accepted the said claim.
Aggrieved by the order aforementioned the respondent-company filed
an appeal under Section 35(E)(1) of the Central Excise before the CEGAT who by
a reasoned order dismissed the same, holding that the disallowance of
deductions under the two heads referred to above was perfectly in order. A
further appeal filed by the assessee before this Court was also dismissed on
23rd September, 2002 thereby finally settling in favour of the Revenue the
controversy as regards the admissibility of deductions under the two heads
referred to above are concerned.
As regards the admissibility of deductions under the remaining six
heads which the adjudicating authority allowed to the company, the Central
Board of Excise and Customs (for short `CBEC') appears to have reviewed the
order of the Commissioner Excise under Section 35(E)(1) of the Central Excise
Act and come to the conclusion that the grant of deductions under the said six
heads was unjustified. The Board accordingly directed the Commissioner of
Central Excise to approach the CEGAT for a correct determination of the
Whether the Commissioner was right in allowing the deductions claimed by the
party without first verifying whether these were included in the wholesale
price and if so, whether the same were included as a part of transportation
cost only as claimed by the party and allowed by them.
Whether the Commissioner was right in allowing the deduction of Rs.6975/-,
Rs.24,00,000/-, Rs.62,12,578/-, Rs.7,66,662, Rs.2,27,329/- and Rs.91,000/- from
the wholesale price, which do not appear to be admissible.
Whether the Commissioner was right in not imposing the penalty as proposed in
It is noteworthy that the Board while passing the above order
referred to the disallowance of similar deductions claimed by the respondent
for the period immediately preceding the period relevant to the show cause
notice in question. The Board noted that the CEGAT had by its order dated 2nd
March, 2001 (reported in (2002) 150 ELT 661) affirmed the said disallowance
except for two items. The effect of the said disallowance had not according to
the Board been taken into consideration by the adjudicating authority while
granting the deductions claimed by the respondent-company.
In compliance with the order passed by the CBEC the Commissioner
of Central Excise preferred an appeal under Section 35E(4) of the Act which was
dismissed by the CEGAT by its order dated 22nd of July, 2002 holding that the
order under challenge had merged in the earlier order dated 24th 8 January,
2002 passed by the Tribunal in the company's appeal whereby disallowance of two
of the eight deductions in dispute had been upheld. The present appeal
questions the correctness of the said order as noticed earlier.
Appearing for the appellant Mr. Gourab Banerjee, learned
Additional Solicitor General argued that the Tribunal had fallen in a palpable
error in applying the doctrine of merger and dismissing the appeal filed by the
Revenue. It was submitted that the doctrine of merger had no application to a
case like the one at hand where the content and the subject matter of challenge
in the two proceedings, namely, the appeal filed by the assessee and that filed
by the Revenue were totally different. Reliance in support was placed by the
learned counsel upon the decision of this Court in Kunhayammed & Ors. v.
State of Kerala & Anr. (2000) 6 SCC 359. Reliance was also placed upon the
decision of this Court in Mauria Udyog Ltd. v. Commissioner of Central Excise,
Delhi II (2003) 9 SCC 139 to contend that the doctrine of merger is not a
doctrine 9 of universal application and that the difference in the subject
matter or the content of the proceedings could take a decision inter se parties
out of the purview of the said doctrine.
On behalf of the respondent-company it was per contra argued that
the order passed by the adjudicating authority could not be split into two and
that the doctrine of merger applied no matter the issue which arose for
determination in the two appeals were distinctly different.
The doctrine of merger has its origin in common law. It has its
application not only in the realm of judicial orders but also in the realm of
estates. In its application two orders passed by judicial & quasi-judicial
courts and authorities it implies that the order passed by a lower authority
would lose its finality and efficacy in favour of an order passed by a higher
authority before whom correctness of such an order may have been assailed in
appeal or revision. The doctrine applies regardless whether the higher court or
authority 10 affirms or modifies the order passed by the lower court or
authority. The juristic basis of the doctrine has been examined by this Court
in a long line of decisions. One of the earliest of the said decisions was
rendered in Commissioner of Income Tax, Bombay v. Amritlal Bhogilal & Co.
(AIR 1958 SC 868). The Court in that case declared that as a result of the
confirmation or affirmation of the decision of the Tribunal by the Appellate
Authority, the original decision merges in appellate decision whereupon it is
only the appellate decision which subsists and is operative and capable of
In State of Madras v. Madurai Mills Co. Ltd. (AIR 1967 SC 681)
this Court had another occasion to examine the true scope and purport of the
doctrine of merger. The court declared that the doctrine of merger was not a
doctrine of rigid and universal application nor could it be said that where
there are two orders one by the inferior authority and the other by a superior
authority they must necessarily merge irrespective of the subject matter of the
appeal or the 11 revision or the scope of the proceedings in which such orders
are passed. Subsequent decisions of this Court in Gojer Bros. (Pvt.) Ltd. v.
Ratan Lal Singh (1974) 2 SCC 453 and S.S. Rathore v. State of Madhya Pradesh
(1989) 4 SCC 582 have reiterated and explained that position. No reference to
the pronouncements of this Court on the subject can be complete without a
reference to the decision of this Court in Kunhayammed's case (supra) and
Mauria's case (supra). In Kunhayammed's case (supra) a three-Judge Bench of
this Court reviewed the decisions rendered on the subject and summed up its
conclusions in para 44 of this decision. One of the said conclusions apposite
to the case at hand is in the following words:
To sum up, our conclusions are:
doctrine of merger is not a doctrine of universal or unlimited application. It
will depend on the nature of jurisdiction exercised by the superior forum and
the content or subject-matter of challenge laid or capable of being laid shall
be determinative of the applicability of merger. The superior jurisdiction
should be capable of reversing, modifying or affirming the order put in issue
before it. Under Article 136 of the 12 Constitution the Supreme Court may
reverse, modify or affirm the judgment-decree or order appealed against while
exercising its appellate jurisdiction and not while exercising the
discretionary jurisdiction disposing of petition for special leave to appeal.
The doctrine of merger can therefore be applied to the former and not to the
There is in the light of the above pronouncements no gainsaying
that the doctrine of merger will depend largely on the nature of the
jurisdiction exercised by the superior court and the content or the subject
matter of challenge laid or capable of being laid before it.
Applying the above test to the case at hand the doctrine would
have no application for the plain and simple reason that the subject matter of
the appeal filed by the assessee against the adjudicating authority's order in
original was limited to disallowance of two out of eight deductions claimed by
the assessee. The Tribunal was in that appeal concerned only with the question
whether the adjudicating authority was justified in disallowing deductions
under the said two heads. It had no occasion to examine the 13 admissibility of
the deductions under the remaining six heads obviously because the assessee's
appeal did not question the grant of such deductions. Admissibility of the said
deductions could have been raised only by the Revenue who had lost its case qua
those deductions before the adjudicating authority. Dismissal of the appeal
filed by the assessee could consequently bring finality only to the question of
admissibility of deductions under the two heads regarding which the appeal was
filed. The said order could not be understood to mean that the Tribunal had
expressed any opinion regarding the admissibility of deductions under the
remaining six heads which were not the subject matter of scrutiny before the
Tribunal. That being so, the proceedings instituted by the Commissioner,
Central Excise pursuant to the order passed by the Central Board of Excise and
Customs brought up a subject matter which was distinctively different from that
which had been examined and determined in the assessee's appeal no matter
against the same order, especially when the decision was not 14 rendered on a
principle of law that could foreclose the Revenue's case. The Tribunal
obviously failed to notice this distinction and proceeded to apply the doctrine
of merger rather mechanically. It failed to take into consideration a situation
where an order may be partly in favour and partly against a party in which
event the part that goes in favour of the party can be separately assailed by
them in appeal filed before the appellate Court or authority but dismissal on
merits or otherwise of any such appeal against a part only of the order will
not foreclose the right of the party who is aggrieved of the other part of this
order. If the doctrine of merger were to be applied in a pedantic or wooden
manner it would lead to anomalous results inasmuch as a party who has lost in
part can by getting his appeal dismissed claim that the opposite party who may
be aggrieved of another part of the very same order cannot assail its
correctness no matter the appeal earlier disposed of by the Court or authority
had not examined the correctness of that part of the order.
We have in the light of the above no hesitation in holding that
the order passed by the Tribunal dismissing the appeal by the Revenue on the
doctrine of merger is erroneous and unsustainable. We accordingly allow these
appeals, set aside the impugned order and remand the matter back to the
Tribunal for a fresh disposal in accordance with law. The parties to appear
before the Tribunal on 6th September, 2010.
.....................................J. (D.K. JAIN)