VST
Industries Ltd. Vs. Collector of Central Excise, Hyderabad [1998] INSC 10 (8 January 1998)
B.N.
Kirpal, V.N. Khare Kirpal.J.
ACT:
HEAD NOTE:
WITH Civil
Appeal Nos. 2523 and 2611 of 1992
These
appeals Involve for decision the question whether notional interest on the
Interest free security deposit received should be considered for the purpose of
arriving at the assessable value under the Excise Act by Including Interest at
the rate of 12% per cent per annum on such security deposits.
VST
Industries Ltd. (appellant in CA No.2524/92) is a company carrying on business
of manufacture and also of cigarettes which was assessable to duty under the
erstwhile Item No.4 of the First Schedule to the Central Excise and Salt Act,
1944. The other two appellants, namely, Venus Tobacco Company Pvt. Ltd.
(appellant in CA No.2523/92) and Hyderabad Deccan Cigarette Factory Ltd.
(appellant in CA No.2611/92) are also cigarette manufacturers and use their
plant and machinery to manufacture cigarettes for an on behalf of VST Industries
Ltd. (hereinafter referred to as "VST"). The question involved in
these appeals, therefore, related to the fixation of the assessable value of
the cigarettes manufactured and sold under the brand name owned by VST.
The
undisputed facts are that the cigarettes manufactured by the appellants are
sold in wholesale, factory, at cum-duty prices to main dealers who buy these
cigarettes on a principal-to-principal basis. The main dealers in turn sell the
cigarettes t other wholesale dealers called sub-dealers who in turn sel these
cigarettes to the retallers. The cigarettes were being sold by the appellants
either on cast-and-carry basis or by extending credit facilities to few of the
main dealers. As the appellant company, namely, VST found that several of the
main dealers were taking considerable time in making remittances for cigarettes
which were delivered to them, they issued a circular dated 22nd September, 1981 whereby it introduced credit
facility if interest free security deposits were made with the company. In the
said circular it was written that with a view to pro vide the facility of such
credit to its customers and to safeguard itself against the commensurate risk
and for introducing some uniformity the company nor proposes that w.e.f.
1.10.1981 those of its main dealers as are desirous of getting credit
facilities would have to keep security deposit (interest face) with the Company
equivalent to about 21 days of their normal monthly purchases.
It is
of course entirely upto the main dealers to request for this facility and they
will be at full liberty to take delivery against payments if they do not want
to make the security deposit.
The
company reserves the right to apply the amount of security deposit towards
payment of unpaid price or any other amounts which may be due to the buyer to
the company or any account whatsoever. On discontribution of trading with the
buyer the company will return the security deposit or the balance if any
remaining after the company has deducted/adjusted any amount due to the company
by the buyer on any accounts whatsoever and this will be strictly without
prejudice to and in addition to the company's other right.
A copy
of the revised conditions sale for cigarettes effective from October 3, 1981 are annexed herewith.
In the
event of your desiring to avail yourself of the credit facilities kindly send a
letter as per the form enclosed for your convenience.
A show
cause notice dated 28th December, 1987 was issued from the office of the
Collector of Central Excise to the appellants., In the said notice it was,
inter all, stated that the receipt of security deposits by VST from the main
dealers and without payment of interest would influence the sale price of its
cigarettes to the ease main dealers. It was accordingly proposed to work out a
notional interest at the rate of 12 per cent on the sums of security deposits
received by VST from the main dealers and to add this to the sale price of the
cigarettes so as to re- determine the assessable value as well as differential
duty payable for the cigarettes cleared by the company during the above period.
This was proposed on the ground that the sale price of the cigarettes by VST
dealers did not constitute the normal price under Section 45 of the Central
Excise and Salt Act and in such a situation where an additional money
consideration has been there between the parties concerned, the normal price
had to be determined only under Rule 5 of the Valuation Rules, 1975. The said
show cause notice also referred to the receipt of the freight service charges
by the appellants, but in these appeals we are not concerned with that
question.
Reply
was sent to the said show cause notice refuting the claim of the excise
authorities. VST while denying its liability paid the demand of Rs.2,23,10,405.79
under protest. The other two appellants, namely, Venus Tobacco Company Pvt.
Ltd. and Hyderabad Deccan Cigarettes Factory Ltd. similarly paid Rs.3,92,864.89
and Rs.18,84,718.74 respectively.
On 17th March, 1988 the Assistant Collector of Central
Excise passed an adjudication order against VST Industries Ltd. and confirmed
the demand of Rs.2.23.10.405.79. Similar orders were also passed against other
two appellants by their respective Assistant Collectors of Central Excise. All
the three appellants then filed appeals. The Collector of Central Excise
(Appeals) passed an order on 19th August, 1988
whereby he set aside that part of the Assistant Collector's order which sought
to add notional interest to security deposits for reworking the assessable
value, while confirming the addition the freight service charges.
The
excise authorities then filed appeals against the deletion of the notional
interest from the assessable value.
The
Tribunal allowed the department's appeal holding that notional interest charges
should be considered for arriving at the assessable value of cigarettes but
such extra commercial consideration should be added to price and not to
assessable value. It is against this decision of the Tribunal that the present
appeals have been filed.
On
behalf of the appellants it was contended by Shri Anil B.Divan, learned senior
counsel, that the wholesale price which was charged by the appellants was not
in any way influenced by the security deposit which some of the dealers had
made who wanted to get goods on credit. He submitted that the transaction with
the dealers were on principal-to- principal basis and the appellants charged a
uniform price from all dealers, irrespective of the fact whether the sale was
made on cash basis or on credit. He drew put attention to the latest circular
issued by the Central Board of Central Excise and Customs dated 27th May, 1996
in which it was, inter alia, stated that the Ministry of Law had advised that
if there was no nexus between the security deposit/advance made by the
wholesale buyer and the sale price of the excisable goods or if the department
is not in a position to determining the money value of the additional
consideration, the provisions of Rule 5 of Central Excise (Valuation) Rules,
1975 would not be applicable. The circular further stated that normally
"where the same price is charged form buyers who have given the deposit
and from those who have not given the deposit and/or where the advance is
purely a security deposit and the interest earned by such deposit is credited
to the buyer the notional interest on such advance cannot be added to the
price." Refuting the aforesaid submission Shri N.K. Bajpal, learned
counsel for the respondent, submitted that the appellants gained considerable
pecuniary advantage by having received interest free security deposit. The
receipt of this deposit must be taken into account in determining the
assessable value. He contended that Rule 5 of the Central Excise is applicable
because price was not the sole consideration and the value of such goods has to
be based on the aggregate of the price and the amount of notional interest on
the security deposit received by the appellants.
In
support of his submission strong reliance was placed on the decision of this
Court in the case of Metal Box India 90].
Before
referring to the decision Metal Box's case it will be appropriate to refer to
other decisions which are relevant on the point in issue which are Collector of
Ltd. [1995 (77) E.L.T. 433 (S.C.)]. In Indian oxygen case two questions which
arose for consideration were whether rental charges for gas cullenders and
interest earned on deposit made for gas cullenders and interest earned on
deposit mad for several return of gas cullenders, whether interest be notional
or actual, could be whether Interest be notional or actual, could be included
in determining the assessable value. It was observed by this Court as follows:
"It
is well settled that the levy under the Act, is on the manufacture. Under
Section 4 (1)(a) of the Act, excise duty is chargeable on any excisable goods
with reference to value, such value shall, subject to the other provisions of
this Section, be deemed to be the normal price thereof, that is to say, there
price at which such gods are ordinary sold by the assesses to a buyer in the
course of wholesale trade for delivery at the time and place or removal, where
the buyer is not a related person and the price is the sole consideration for
the sale. Here the sale is of the gases. The levy is on the manufacture of gases
and the excisable goods are these gases." It was held that the supply of
gas cullenders was ancillary to the supply of gases. It was open to the
customers to bring their own cylinders and deposit was required to be given
only if the customers required the company to lend the cullenders. This
activity of giving cylinders was held to be ancillary and profits and gains
from the deposit so received was not required to be taken into account while
computing the value of the escapable goods. It and also been contended on
behalf of the Revenue that there were two different classes of buyers; one
class of such buyers was that who used to being their own cylinders and the
other who used to get supply of gases from the cylinders of the suppliers. It
was, therefore, submitted that different rates for these two classes of buyers
constituted two different markets which was permissible under Section 4.
Dealing with this contention it was observed at page 732 as follows:
"There
may be different classes of buyers for different classes of goods. Section 4(1)(a)
of the Act exhaustless that if the goods is of the same type, the prices should
also be the same. The proviso to the said Section postulates that where in
accordance with normal practice such goods, namely, the gases are sold to
different classes of buyers then different prices may be charged. it gases had
been sold to different classes of buyers at different rates, it is possible
that there might be different markets for the same. But here the charges like
rentals for the cylinders and the notional interest income, are for ancillary
or allied services and that is not an activity of manufacture. hence Section
4(1)(a) proviso can be of no avail to the revenue." (emphasis added) In
Madras Rubber Factory case (supra) this Court analysed Section 4 and observed
as under:
"It
is obvious that the value of excisable goods for the purpose of sub-section (1)
of Section 4 is ordinarily determined with reference to the normal price at
which such good are sold, i.e., under clause (a) of sub-section (1) of Section
4. Only where the goods are not sold and, therefore, the price of such goods is
not ascertainable or in a situation where the normal price of such goods is not
ascertainable for some other reason that clause (b) is attracted, hereunder the
nearest ascertainable equivalent price is ascertained in accordance with the
rules framed in that behalf. Clause (b) is in the nature of a residuary clause
which should be resorted to where the normal price cannot be ascertained for
the reasons mentioned therein. In other words, where the normal price cannot be
ascertained for the reasons mentioned therein. In other words, where the normal
price is available or is ascertainable, resort to clause (b) is not
permissible." It then considered as to what are the various deductions
from the price received which were permissible in order to arrive at the
assessable value. One of the amounts claimed as a deduction from the amount
received by the manufacturer was the element of interest received by it on the
goods sold on credit. Dealing with this the Court at Page 470 observed as
under:
"The
case of the assesses (Madras Rubber Factory) is that where the goods are sold
to up-country wholesale buyers and payments are received quite sometime later,
it is indeed a case of sale on credit and, therefore, the interest charged from
the date of delivery of goods till the date of realization of the price thereof
should be deducted from the value of the goods. The interest charged, it is
submitted, is only in lieu of the time taken in making the payments by the
up-country wholesale buyer. Since this is the amount received subsequent to the
sale from the depots and does not fell within the ambient of any of the
expresses held includible in Bombay Tyre International, it is clearly
excludable. The claim for this deducting is, therefore, allowed." The
aforesaid observations clearly show that when goods are sold on credit and
interest is received that does not form part of the price on which excise duty
is payable.
Coming
to the facts of the present case it is not in dispute that the appellants are
charging a uniform price from their wholesale dealers. The price at which the
cigarettes are sold at the factory gate was the same, irrespective of the fact
whether the dealers wee buying the cigarettes on credit or against payment of
money. As is indicated in the circular, and there is no dispute to what has
been stated therein, one of the commercial considerations for introducing
interest free deposit scheme was to cover the risk of credit salad extended to
bulk customers. There is nothing on the record to show that the receipt of the
deposit from some of the dealers could possible influence the fixation of the
sale price even with regard to those sales which were made at the factory gate
against cash and not on credit. Had there been a difference in the selling
price where, for example, special discount was given to the dealers who had
given a deposit then it may have been possible to say that there were two
different markets and two different prices and that lesser price was being
charged for an extractor consideration and, in such a case the notional or
actual interest could be added. But that is not the case here, Metal Box case
(supra) was the one where two different prices were being charged. In Metal Box
case the assesses was manufacturing goods which were offered for sale to M/s
Ponds India Ltd., a wholesale buyer, who required bulk of the containers
manufactured by the assesses for marketing its cosmetic products. In order to
ensure a steady and regular supply Ponds India Ltd. gave large advances and an
agreement had been entered into between the parties as a result whereof
discounts were given by the assesses Ponds India Ltd. which were to be deducted
from the gross price. The deduction was not allowed by the excise authorities
and the Tribunal. It was contended on behalf of the assesses in this Court that
the Tribunal erred innerspring the loading of purchase price by the ad hoc
Interest on advances made by Ponds India Ltd. to the assesses. While rejecting
this contention this Court took notice of the Fact that Ponds India Ltd. was a
wholesale buyer who was lifting ninety per cent of the total production of the
appellant. The assesses was giving to Ponds India Ltd. fifty per cent discount
from normal price and Ponds India ltd. had given large amounts of money free of
interest to the assesses. In the these circumstances it was held that the price
charged by the appellant from Ponds India Ltd, could not be said to be the
normal price of containers and, therefore, the action of the department in
taking into account the notional interest on the advances given was upheld.
Metal
Box case is clearly distinguishable. The amounts given as security deposit in
he present cases represents only avoid of 21 days supply in a year whereas in
Metal Box case large amounts of money had been advanced. Secondly, and what is
more important, in Metal Box case the assesses had given fifty per cent
discount to Ponds India Ltd. on it gross sale price and thereby charged lesser
price than what was charged from the other buyers. In the present case the
cigarettes are sold at the factory gate to the wholesale dealers at a uniform
price irrespective of the fact whether the purchaser is buying the cigarettes on
credit or against payment of money in cash.
Excise
duty, as has been held, is on the manufacture of goods at the price paid. The
price paid in the present case is the same by all the dealers. There is nothing
show that there was any special consideration which was shown to the dealers
who had given the security deposit. Now has it been shown by reference to any
documents or data that because of the receipt of such deposit the price charged
from all the buyers was reduced. Merely because interest pre-deposit was
reduced from some dealers cannot, by itself, lead to the conclusion arrived at
by the excise authorities and the Tribunal. This also followed from the
decisions in the Indian Oxygen and Madras Rubber Factory's cases (supra).
There
was, thus, no justification for disregarding the uniform wholesale price which
was being charged from all the dealers and adding the element of notional
interest of the security deposit to their said price.
This
additional Collector, In our opinion, was right in coming to the conclusion
that Rule 5 of the Valuation Rules was not applicable in the present case as it
was not shown that the price charged was not the sole consideration. When the
appellants are nor requiring all the dealers to give security deposit and it is
only those who avail of credit facilities who are required to give the security
deposit but get no discount or pay a reduced price, then in such a case excise
duty can be charged only on the uniform price paid by the dealers without any
addition of notional interest.
For
the aforesaid reasons these appeals are allowed.
The
order of the CEGAT is set aside and extra demands raise by the respondent
pursuant to the show cause notices issued by them are quashed. The appellants
will also be entitled to costs.
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