National
Leather Cloth Manufacturing Co. Vs. Union of India & ANR. [2010] INSC 520
(23 July 2010)
Judgment
IN THE
SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO. 3403 OF
2003 NATIONAL LEATHER CLOTH ... APPELLANT
MANUFACTURING
CO.
VERSUS
D.K.
JAIN, J.
1.
This appeal, by special leave, is directed against the judgment
and order dated 10th July 2002, passed by the High Court of Judicature at
Bombay, whereby the High Court has dismissed the writ petition filed by the
appellant (for short "the assessee") and affirmed the order passed by
the Assistant Commissioner of Central Excise, Bombay-II ("the Adjudicating
Authority" for short), rejecting the claim preferred by the assessee for
refund of the excess amount of excise duty paid by them as time barred 2 as
also on merits on account of disallowance of post manufacturing expenses for
the purpose of valuation of the goods in terms of Section 4 of the Central
Excise Act, 1944 (for short "the Act") as it existed at the relevant
time.
2.
The background facts, giving rise to this appeal, are as follows:
The
assessee was engaged in the manufacture of coated fabrics. The price of goods
declared by the assessee in the price list, as required under Rule 173C of the
Central Excise Rules, 1944 (for short "the Rules"), was approved by
the Revenue from time to time. However, for the first time, in the two revised
price lists, both dated 12th November 1980, the assessee indicated that prices
declared by them earlier contained certain post manufacturing expenses, which
had to be excluded while computing the value of the fabric for the purpose of
assessment to excise duty. The claim was rejected by the Adjudicating Authority
vide order dated 7th January 1981. Thereafter, the assessee, vide their letter dated
7th July 1981, made a claim of consolidated refund, amounting to
Rs.40,18,805.60, for the period from 13th November 1977 to 12th November 1980,
representing differential excess duty paid by them on various elements of post
manufacturing expenses. One of the deductions so claimed, with which we are
concerned 3 in this appeal, was on account of cost of material used for packing
the final product. Having failed to get any response, the assessee filed a Writ
Petition (No.1001 of 1981) in the Bombay High Court seeking appropriate
directions for refund along with interest thereon. On 8th February 1982, the
assessee revised their refund claim to Rs.40,59,856.40/-. During the pendency
of the petition, certain interim orders regarding deposit of the said amount by
the revenue and submission of documentary evidence by the assessee before the
Adjudicating Authority were passed by the High Court. Eventually, upon
consideration of the evidence adduced by the assessee, vide order dated 12th
April 1984, the Adjudicating Authority rejected their claim for excluding the
cost of polythene bags, printed as well as plain, and hessian cloth used for
packing the fabrics. The Adjudicating Authority was of the view that the
packing of coated fabrics in polythene bags for delivery to the customers
located in Bombay as also packing of three such rolls in hessian cloth and
stitching them into one bundle for dispatch to up-country customers was in the
normal course of trade and, therefore, there was nothing special about such
packing so as to exclude its cost from the value of the fabric. The
Adjudicating Authority also held that the refund claim was barred by time.
3.
On rejection of the claim, the assessee amended the writ petition
in order to challenge the validity of order dated 12th April 1984. As stated
above, the order of the Adjudicating Authority has been affirmed by the High
Court. Rejecting the plea of the assessee that additional packing of three
rolls of fabric in hessian cloth was done at the specific request of the up-
country customers in order to protect the packed fabric from damage during the
course of transportation and, therefore, at least the cost of such secondary
packing should be excluded from the assessable value, the High Court held as
follows:
"...in
view of the clear finding given by the adjudicating authority to the effect
that the Assessee has been uniformly using hessian cloth for all the delivery
to the up-country customers, irrespective of any specific request, the use of
hessian cloth as secondary packing has to be held to be normal packing which
are offered to the wholesalers at the factory gate.
In view
of the clear finding given by the Adjudicating Authority and in the light of
decision of the Apex Court in the 433, the cost of the secondary packaging in
which the goods are ordinarily sold to the wholesalers is liable to be included
in the assessable value. In this view of the matter denial of deduction on
account of secondary packaging from the assessable value as post manufacturing
expenses is justified. Apart from that, it is not the case of the assessee that
the secondary packing is of a durable nature and is returned by the buyer to
the assessee.
Therefore,
the cost of such packing has to be included in the assessable value."
4.
The High Court also held that the refund claim was beyond the
period prescribed under the Act. Aggrieved, the assessee is before us in this
appeal.
5.
Vide order dated 31st March 2003, leave was granted limited to the
question "whether the cost of secondary packing is to be included in the
assessable value of the appellant's goods?"
6.
We have heard learned counsel for the parties.
7.
In support of the appeal, Mr. Jay Savla, learned counsel appearing
for the appellant, submitted that the High Court as well as the Adjudicating
Authority failed to appreciate the distinction between the primary and the
secondary packing, as enunciated by this Court in Union of India & Ors. contended
that admittedly the rolls of coated fabric were packed in polythene bags for
sale at the factory gate in the course of wholesale trade and the bundling of
three such rolls in hessian cloth was an additional packing done at the request
of up-country customers in order to protect the goods from damage and,
therefore, the cost of such packing could not be included in the value of the
cloth. In support of the plea that 1 (1984) 1 SCC 467 6 additional packing
according to the requirement of the buyer constitutes secondary packing and,
therefore, its cost cannot be included in the value of the fabric, reliance was
placed on the decisions of this Court in Safety Glass Works Ltd. & Ors.2
and Commissioner of Central Excise,
8.
Per contra, Mr. R.P. Bhat, learned senior counsel appearing for
the revenue, while supporting the decision of the High Court, submitted that in
view of the finding by the Adjudicating Authority, affirmed by the High Court
to the effect that hessian cloth was the standard packing for the fabric for
sale in the wholesale market, its cost was includible in the value of the goods
in terms of Section 4 of the Act.
9.
The short question arising for consideration is whether the cost
of packing of fabric in hessian cloth, which, according to the assessee, is not
required for sale of their goods at the factory gate and is necessitated to
protect the fabric from damage during the course of transportation to up-
country customers is includible in the assessable value of the coated 2 (2005)
3 SCC 468 3 (2005) 3 SCC 489 7 fabric manufactured by the assessee for the
purpose of levy of excise duty? 10.Section 4 of the Act, in so far as it is
relevant for our purpose, reads as follows :
"4.
Valuation of excisable goods for purposes of charging of duty of excise.--(1)
Where under this Act, the duty of excise 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-- (a) the normal price thereof, that is to say,
the price at which such goods are ordinarily sold by the assessee to a buyer in
the course of wholesale trade for delivery at the time and place of removal,
where the buyer is not a related person and the price is the sole consideration
for the sale:
.... ....
.... ....
(4) For
the purposes of this section,-- .... .... .... ....
(d)
`value', in relation to any excisable goods,-- (i) where the goods are
delivered at the time of removal in a packed condition, includes the cost of
such packing except the cost of the packing which is of a durable nature and is
returnable by the buyer to the assessee;
Explanation.--
In this sub-clause `packing' means the wrapper, container, bobbin, pirn, spool,
reel or warp beam or any other thing in which or on which the excisable goods
are wrapped, contained or wound;"
8 11.The
Section provides as to how the value of excisable goods is to be determined.
The expression "value" has been extended to include the cost of
packing. As per Section 4(4)(d)(i) of the Act, the cost of packing is to be
included in working out the value of the goods, unless the packing is of a durable
nature and is returnable by the buyer to the assessee. Explanation thereto
enumerates various types of packing, of which cost has to be included in the
value of the goods. It is evident that by including the cost of packing in the
value of goods, the legislature has sought to extend the levy beyond the
manufactured article itself and, therefore, the provision has to be strictly
construed.
12.Although
the provision is clear and unambiguous, yet the concept of "primary
packing" and "secondary packing" was evolved by this Court in
Bombay Tyre International Ltd. (supra). In that case, while observing that the
degree of packing would vary from one class of excisable goods to another and
the packing may be of different grades, which may be necessary to make an
article marketable, it was held "that the degree of secondary packing
which is necessary for putting the excisable article in the condition in which
it is generally sold in the wholesale market at the factory gate is the degree
of packing whose cost can be included in the 9 "value" of the article
for the purpose of the excise levy." Thus, the test laid down was that it
is only the cost of packing ordinarily required for selling the goods in the
course of wholesale trade to a wholesale buyer at the factory gate which would
be includible in the value of the goods and not the cost of any additional or
special packing.
arose as
to whether the cigarettes manufactured and packed in cardboard packets, each
containing 10 to 20 cigarettes and those packets were packed in corrugated fiberboard
cartons/containers, the cost of corrugated fibreboard containers was liable to
be included in determination of the value of the cigarettes for the purpose of
excise duty. The majority view was that since the corrugated cartons were
employed as secondary packing only for the purpose of avoiding damage or injury
during transit and were not necessary for selling the cigarettes in the
wholesale market at the factory gate, their cost was not to be included in the
value of the cigarettes for the purpose of levy of excise duty.
manufacturing
batteries and torches. The torches and batteries 4 (1985) 4 SCC 369 5 1992 (61)
E.L.T. 328 (S.C.) 10 manufactured by them were first packed in polythene bags
and then these polythene bags were placed in cardboard cartons. The cardboard
cartons were placed in the wooden boxes at the time of delivery at the factory
gate. Though there was no dispute about the inclusion of cost of polythene bags
and cardboard cartons, the dispute was whether the cost of wooden boxes, in
which the cardboard boxes were packed, was to be included in the value of
batteries and torches. It was held by a bench of three Judges of this Court
that the wooden boxes were in the nature to secondary packing and, therefore,
their cost was not includible in the value of batteries and torches.
15.In
Hindustan Safety Glass Works Ltd. (supra) referring to the ratio of decisions
in Bombay Tyre International Ltd. (supra) and Geep Industrial Syndicate Ltd.
(supra), again a bench of three learned Judges summed up the test on the issue,
as follows :- "14...The test is whether the packing is done in order to
put the goods in a marketable condition. Another way of testing would be to see
whether the goods are capable of reaching the market without the type of
packing concerned. Each case would have to be decided on its own facts. It must
also be remembered that Section 4(4)(d)(i) specifies that the cost of packing
is includible when the packing is not of a durable nature and returnable to the
buyer. Thus, the burden to show that the cost of packing is not includible is
always on the assessee. Also under Section 4(a) the value is to be the normal
price at which 11 such goods are ordinarily sold in the course of wholesale
trade for delivery at the time and place of removal."
16.Having
examined the facts of the instant case on the touchstone of the test laid down
in the aforementioned cases, we are of the opinion that since admittedly the
fabric manufactured by the assessee was sold by the assessee to the wholesalers
at the factory gate only in polythene bags, the further packing of three rolls
in hessian cloth was not in the course of normal delivery to the customers in
the wholesale trade at the factory gate and was, therefore, not required to make
the product marketable.
The
additional packing in the nature of a secondary packing was done for the
purpose of convenience of the up-country customers in the transportation of the
goods manufactured by the assessee. We, therefore, hold that the cost of secondary
packing in hessian cloth cannot be included in the value of the goods in terms
of Section 4(4)(d)(i) of the Act for the purpose of assessment of excise duty.
17.In so
far as the question of limitation is concerned, as already stated, leave was granted
only on the afore-noted limited issue and, therefore, we express no opinion on
that aspect.
12 18.We,
accordingly, allow the appeal partly and set aside the impugned order to the
extent indicated above, leaving the parties to bear their own costs.
.......................................J. (D.K. JAIN)
........................................J. (ANIL R. DAVE)
NEW DELHI;
JULY 23, 2010.
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