IN THE HIGH COURT OF JUDICATURE AT BOMBAY IN THE HIGH COURT OF JUDICATURE AT BOMBAY IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORDINARY ORDINARY ORIGINAL CIVIL JURISDICTION ORIGINAL CIVIL JURISDICTION ORIGINAL CIVIL JURISDICTION WRIT PETITION NO.246 OF 2006 WRIT PETITION NO.246 OF 2006 WRIT PETITION NO.246 OF 2006 1. Indian Drugs Manufacturer’s ) Association, A Society registered ) under the Socities Registration ) Act, through principals secretary ) Having his office at 102-B, ) Poonam Chambers, ‘A’ Wing, Dr.A.B.) Road, Worli, Mumbai- 400 018. ) ) 2. M/s.EMIL Pharmaceuticals ) Industries Pvt. Ltd., through ) Mr.Tushkar Korday, Director ) having his office at 101, ) Mangalam, Kulup Wadi, Near ) National Park, Borivili (East), ) Mumbai - 400 066. )..Petitioners. V/s. 1. Union of India, Through the ) Joint Secretary, Ministry of ) Law Justice and Company Affairs ) Aayakar Bhavan, M.K. Road, ) Churchgate, Mumbai - 400 020. ) ) 2. Central Board of Excise & Customs ) A statutory body incorporated ) under The Central Board of ) Revenues Act, 1963 having its ) office at North Block, New Delhi ) ) 3. Ministry of Chemicals and ) Fertilishers. Through Secretary, ) Department of Chemicals and ) Petrochemicals, Having his ) office at Shastri Bhavan, ) New Delhi - 110 001. )..Respondents. Mr.Vikram S.Nankani, Advocate with Mr.M.R.Baya with Ms. Aarti Sathe for the petitioners. Mr.A.J.Rana, senior Advocate with Mr.Y.S.Bhate for respondents. -= : 2 : =- CORAM : CORAM : CORAM : H.L.GOKHALE AND H.L.GOKHALE AND H.L.GOKHALE AND J.P.DEVADHAR, JJ. J.P.DEVADHAR, JJ. J.P.DEVADHAR, JJ. JUDGMENT RESERVED ON : 28TH AUGUST, 2006 JUDGMENT RESERVED ON : 28TH AUGUST, 2006 JUDGMENT RESERVED ON : 28TH AUGUST, 2006 JUDGMENT PRONOUNCED ON : 28TH SEPTEMBER, 2006 JUDGMENT PRONOUNCED ON : 28TH SEPTEMBER, 2006 JUDGMENT PRONOUNCED ON : 28TH SEPTEMBER, 2006 JUDGMENT (PER J.P.DEVADHAR, J.) JUDGMENT (PER J.P.DEVADHAR, J.) JUDGMENT (PER J.P.DEVADHAR, J.) 1. Heard Counsel for the parties. Rule. Rule made returnable forthwith. By consent of parties, the petition is taken up for final hearing. 2. This petition is filed to challenge the validity of circular No.813 dated 25/4/2005 issued by the Central Board of Excise and Customs, Government of India, New Delhi ( ‘Board’ for short). By the said circular the Board has clarified that the valuation of physicians free samples should be made under Rule 4 of the Central Excise Valuation (determination of price of excisable goods) Rules, 2000 (‘2000 rules’ for short) and not under Rule 11 read with Rule 8 of 2000 Rules as stated in its earlier circular No.643 dated 1/7/2000. 3. The main argument of the petitioners is that the physicians samples cleared from the factory are not sold but are supplied freely to the medical practitioners and, therefore, the valuation of -= : 3 : =- physicians free samples have to be made by applying the method applicable to the goods which are not sold. It is contended that for more than three decades, the revenue has been valuing the physicians samples by applying the method applicable to goods which are used for captive consumption as per the judicial decisions rendered to that effect. Even after the 2000 Rules were framed, the Board had issued a circular No.643 dated 1/7/2002 directing that the valuation of physicians free samples should be made by applying the method applicable to the goods cleared for captive consumption. Therefore, the impugned circular No.813 dated 25/4/2005 which seeks to value the free samples by applying Rule 4 (applicable to goods that are sold) instead of Rule 8 (applicable to goods that are not sold) is contrary to the judicial decisions holding the field for more than three decades and, hence the said circular No.813 dated 25/4/2005 is liable to be struck down as illegal and contrary to law. 4. The petitioner No.1 Association is a society registered under the Societies Registration Act, 1860. Members of the petitioner No.1 association are engaged in the manufacture of drugs which are cleared on payment of excise duty either for sale in the wholesale trade or for distribution as physicians free samples. -= : 4 : =- 5. On issuance of the impugned circular No.813 dated 25/4/2005, the petitioners had made representations to the Board and also to the concerned Ministry stating that the rule 4 of the 2000 rules is applicable to the goods which are sold whereas, in the case of physicians free samples, there is no sale and, therefore, Rule 4 cannot be applied for valuing the physicians free samples. As there was no response to the said representations, the petitioners have filed the present petition to challenge the validity of circular No.813 dated 25/4/2005. 6. Under the Central Excise Act, 1944 (‘the Act for short) as it stood prior to 1/7/2000 the concept of valuation of excisable goods was based on the deemed value. The deemed value as per section 4(1) (a) of the Act as it stood prior to 1/7/2000 was the normal price at which such goods were ordinarily sold for delivery at the time and place of removal to a buyer who was not a related person and price was the sole consideration. Where the normal price of the goods was not ascertainable for the reason that such goods were not sold or for any other reason, then, as per section 4 (1)(b) of the Act, the valuation was to be determined in the manner prescribed. -= : 5 : =- 7. For determining the value of the excisable goods covered under section 4(1) (b) of the Act, the Central Government had framed Central Excise (Valuation) Rules, 1975 (‘1975 rules’ for short). Rule 4, 6 & 7 of 1975 Rules to the extent relevant read thus:- Rule-4. The value of excisable goods shall be based on the value of such goods sold by the assessee for delivery at any other time nearest to the time of the removal of goods under assessment, subject, if necessary, to such adjustment on account of the difference in the dates of delivery of such goods and of the excisable goods under assessment, as may appear reasonable to the proper officer. Rule-6. If the value of the excisable goods under assessment cannot be determined under rule 4 or rule 5, and - (a) ....... (b) where the excisable goods are not sold by the assessee but are used or consumed by him or on his behalf in the production or manufacture of other articles, the value shall be based - (i) on the value of the comparable goods produced or manufactured by the assessee or by any other assessee: Provided that in determining the value under this sub-clause, the proper officer shall make such adjustments as appear to him reasonable, taking into consideration all relevant factors -= : 6 : =- and, in particular, the difference, if any, in the material characteristics of the goods to be assessed of the comparable goods. (ii) if the value cannot be determined under sub - clause (i), on the cost of production or manufacture including profits, if any, which the assessee would have normally earned on the sale of such goods; (c) ...... Rule-7. If the value of excisable goods cannot be determined under the rules, the proper officer shall determine the value of such goods according the best of his judgment, and for this purpose he may have regard, among other things, to one or more of the methods provided for in the foregoing rules. 8. The Excise Act has been amended substantially with effect from 1/7/2000 (‘amended Act’ for short). Under the amended Act, section 4 (1)(a) has been substituted whereby the old concept of valuing the excisable goods based on the deemed value has been done away with and a new concept of valuing the excisable goods based on the transaction value has been introduced. Section 4(1) of the amended Act relevant for the purpose herein reads as under:- "Section 4. Section 4. Section 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 -= : 7 : =- excisable goods with reference to their value, then, on each removal of the goods, such value shall- (a) in a case where the goods are sold by the assessee, for delivery at the time and place of the removal, the assessee and the buyer of the goods are not related and the price is the sole consideration for the sale, be the transaction value; (b) in any other case, including the case where the goods are not sold, be the value determined in such manner as may be prescribed. Section 4 (3)(d) of the amended Act defines the expression ‘transaction value’ as follows:- S.4(3)(d) ‘transaction value’ means the price actually paid or payable for the goods, when sold, and includes in addition to the amount charged as price, any amount that the buyer is liable to pay to, or on behalf of, the assessee, by reason of, or in connection with the sale, whether payable at the time of the sale or at any other time, including, but not limited to, any amount charged for, or to make provision for, advertising or publicity, marketing and selling organization expenses, storage, outward handling, servicing, warranty, commission or any other matter; but does not include the amount of duty of excise, sales tax and other taxes, if any, actually paid or actually payable on such goods. 9. With the introduction of the concept of valuation of excisable goods based on transaction value, the Central Government has issued 2000 Rules for valuation of goods covered under section 4(1) (b) of the Act. Rules 4, 8 & 11 of the 2000 rules read thus:- -= : 8 : =- Rule 4. The value of the excisable goods shall be based on the value of such goods sold by the assessee for delivery at any other time nearest to the time of the removal of goods under assessment, subject, if necessary, to such adjustment on account of the difference in the dates of delivery of such goods and of the excisable goods under assessment, as may appear reasonable. Rule 8. Where the excisable goods are not sold by the assessee but are used for consumption by him or on his behalf in the production or manufacture of other articles, the value shall be [one hundred and ten per cent] of the cost of production or manufacture of such goods. Rule 11. If the value of any excisable goods cannot be determined under the foregoing rules, the value shall be determined using reasonable means consistent with the principles and the general provisions of these rules and sub- section (1) of section 4 of the Act. 10. Since 2000 Rules do not contain a specific Rule for valuing the physicians free samples, the Board by its circular No.643 dated 1/7/2002 directed that the valuation of the physicians free samples be done under the rule 11 with the spirit of rule 8 of the 2000 rules. The relevant portion of the circular No. 643 dated 1/7/2002 is reproduced herein below:- 13. How will valuation of Since the goods are not samples be done which sold Section 4 (1) (a) are distributed free, will not apply and as part of marketing recourse will have to be strategy, or as taken to the Valuation covers such a contig- ency. Except Rule 8 all the other rules cover contingencies where sale is involved -= : 9 : =- in some form or the other. Therefore, the residuary Rule 11 will have to be adopted along with the spirit of the Rule 8. In other words, the assessable value would be 115% of the ‘cost of production or manufacture’ of the goods. 11. By the impugned circular No.813 dated 25/4/2005 the Board has amended its earlier circular No.643 dated 1/7/2002 and clarified that the valuation of the physicians free samples should be determined under Rule 4 instead of Rule 8 of the 2000 Rules. The relevant portion of the circular No. 813 read thus: ------------------------------------------------------- Sl. Old Point of Doubt Clarification No. Sl.No. ------------------------------------------------------- 1. 13 How will valuation In case of free of samples be done samples, the which are distri- value, should be buted free, as part determined under of marketing Rule 4 of Central strategy, or as of Central Excise gifts or donations? Valuation (Determination of price of Excis -able Goods Rules, 2000. ------------------------------------------------------- 12. Validity of this circular No.813 dated 25/4/2005 is challenged in the present petition. -= : 10 : =- 13. Mr.Nankani, learned counsel appearing on behalf of the petitioner submitted that- a) Section 4(1) (a) of the amended Act applies to the goods sold at the time and place of removal of goods, whereas, Section 4(1)(b) of the amended Act applies to the goods which are sold at a time and place other than the time and place of removal as also to the goods which are not sold. As the physicians samples are not sold but distributed freely to the medical practitioners, the valuation of physicians free samples have to be made under section 4(1)(b) of the Act. b) Since 1975 the physicians free samples are valued under section 4 (1)(b) of the Act read with Rule 6(b) of 1975 rules which is applicable to the goods used or captively consumed in the manufacture of other articles. As Rule 8 of 2000 Rules is similar to Rule 6(b) of 1975 Rules, the physicians free samples are liable to be valued by applying Rule 8 of 2000 Rules. c) The fact that Rule 6 (b) of 1975 Rules provided -= : 11 : =- for two methods of valuation of excisable goods covered under section 4 (1)(b) of the Act namely, valuation based on the value of comparable goods and the valuation based on the cost of production, whereas, Rule 8 of 2000 Rules provides for only one method of valuation based on cost of production, makes no difference, because of the change in the concept of valuation of excisable goods from deemed value to the transaction value. The submission is that in view of the concept of valuation based on ‘deemed value’ contained in section 4 of the old Act, it was provided in Rule 6 (b) of 1975 Rules that the captively consumed goods could be valued by applying the method applicable to the comparable goods produced or manufactured by the assessee. Once the concept of valuing the goods based on the deemed value was given up and the concept of transaction value was introduced from 1/7/2000, the question of applying the method applicable to comparable goods did not arise and therefore, the Central Government in Rule 8 of 2000 Rules provided that the valuation of captively consumed goods be made by the only method based on the cost of production. Therefore, there is no reason to -= : 12 : =- deviate from the prevailing practice of valuing the physicians free samples under the rule applicable to captively consumed goods. d) Relying upon the decisions in the case of Sun Sun Sun Pharmaceutical Industries V/s. Commissioner of Pharmaceutical Industries V/s. Commissioner of Pharmaceutical Industries V/s. Commissioner of Central Excise Central Excise Central Excise reported in 2005 (183) E.L.T. 42 2005 (183) E.L.T. 42 2005 (183) E.L.T. 42 (Tri.) (Tri.) (Tri.), Commissioner of Central Excise V/s. Commissioner of Central Excise V/s. Commissioner of Central Excise V/s. Trinity Pharmaceuticals Pvt.Ltd. Trinity Pharmaceuticals Pvt.Ltd. Trinity Pharmaceuticals Pvt.Ltd. reported in 2005 (188) E.L.T.48 (Tri.) 2005 (188) E.L.T.48 (Tri.) 2005 (188) E.L.T.48 (Tri.) and Medley Medley Medley Pharmaceuticals Ltd. V/s. Commissioner of Pharmaceuticals Ltd. V/s. Commissioner of Pharmaceuticals Ltd. V/s. Commissioner of Central Excise Central Excise Central Excise reported in 2005(183) E.L.T. 471 2005(183) E.L.T. 471 2005(183) E.L.T. 471 (Tri.) (Tri.) (Tri.), it is submitted that the consistent judicial view taken in the matter during the period from 1975 to 1/7/2000 is that the physicians free samples are liable to be valued by applying the method applicable to captively consumed goods. Even after the introduction of the concept of valuation based on the transaction value, the physicians free samples have been valued by applying the method applicable to captively consumed goods as per circular No.643 dated 1/7/2002. Therefore, the circular No.813 dated 25/4/2005 issued by the Board, directing that the physicians free samples be valued under Rule 4 of 2000 Rules is -= : 13 : =- totally erroneous, contrary to the judicial decisions prevailing for more than three decades and hence liable to be quashed and set aside. e) Rule 4 of 2000 Rules applies to the goods which are sold, whereas physicians samples are not sold but distributed freely to the medical practitioners. Rule 4 provides that where the goods are sold but not delivered to the buyer at the time and place of removal, then the valuation of such goods have to be determined with reference to the valuation of similar goods sold and delivered at the time and place of removal nearest to the time and place of removal of the goods under assessment. Since the Physicians free samples are neither sold and delivered at the factory gate nor sold and delivered at any other time, Rule 4 of 2000 Rules cannot be applied and Rule 8 being the only rule applicable to the goods which are not sold, the proper rule to value the physicians free samples is Rule 8 of 2000 Rules. f) Relying upon the decisions in the case of Sunflag Iron & Steel Co. Ltd. V/s. Additional Sunflag Iron & Steel Co. Ltd. V/s. Additional Sunflag Iron & Steel Co. Ltd. V/s. Additional Collector of Central Excise Collector of Central Excise Collector of Central Excise reported in 2003 2003 2003 -= : 14 : =- (162) E.L.T. 105 (Bom.) (162) E.L.T. 105 (Bom.) (162) E.L.T. 105 (Bom.), Raymon Glues & Raymon Glues & Raymon Glues & Chemicals V/s. Union of India Chemicals V/s. Union of India Chemicals V/s. Union of India reported in 2000 2000 2000 (117) E.L.T.29 (Guj.) (117) E.L.T.29 (Guj.) (117) E.L.T.29 (Guj.) and Indichem V/s. Union Indichem V/s. Union Indichem V/s. Union of India of India of India reported in 1996 (88) E.L.T. 35 1996 (88) E.L.T. 35 1996 (88) E.L.T. 35 (Guj.) (Guj.) (Guj.), it is submitted that the circular No.813 dated 25/4/2005 which is in conflict with the various orders of the Tribunal and which is in conflict with the circular No.643 dated 1/7/2002 is liable to be quashed and set aside. g) Physicians samples are goods distinct from the goods which are sold in commercial pack. As per Rule 96(ix) of the Drugs & Cosmetics Rules, 1995, every drug intended for distribution to the medical practitioners as a free sample is required to contain a label on the container with the words "physician’s sample Not to be Sold". Under the Drugs (Price Control) Order, 1995 issued under the Essential Commodities Act, 1955 the cost of physicians sample is added to the price fixed for the drugs which are to be sold. As per the Accounting Standards (AS-2) issued by the Institute of Chartered Accountants of India, the value of the physicians free samples is to be determined based on the cost of production for purposes of valuing the inventory -= : 15 : =- and when such samples are distributed free, the Accounting Standards prescribe that they be treated as part of expenses towards sale of goods. Therefore, on introduction of the concept of valuation based on the transaction value, it is not open to the revenue to apply Rule 4 which is applicable to the goods that are sold for valuing the physicians samples which are admittedly not sold. In this connection reliance is placed on the decisions of the Apex Court in the case Collector V/s. Dai Ichi Collector V/s. Dai Ichi Collector V/s. Dai Ichi Karkaria Ltd. Karkaria Ltd. Karkaria Ltd. reported in (1999) 112 E.L.T. (1999) 112 E.L.T. (1999) 112 E.L.T. 353 (S.C.) 353 (S.C.) 353 (S.C.) and the decision in the case of Commissioner V/s. Cadbury India Ltd. Commissioner V/s. Cadbury India Ltd. Commissioner V/s. Cadbury India Ltd. reported in 2006(200) R.L.T. 353 2006(200) R.L.T. 353 2006(200) R.L.T. 353. h) relying upon the decision of the Delhi High Court in the case of Commissioner of Sales Tax Commissioner of Sales Tax Commissioner of Sales Tax V/s. Prem Nath Motor (43 S.T.C. 52 V/s. Prem Nath Motor (43 S.T.C. 52 V/s. Prem Nath Motor (43 S.T.C. 52) and the decision of Kerala High Court in Geo Motors V/s. Geo Motors V/s. Geo Motors V/s. State of Kerala (122 S.T.C. 285) State of Kerala (122 S.T.C. 285) State of Kerala (122 S.T.C. 285), it is submitted that since the value of physicians free samples are already included while calculating the value of the goods meant for sale in the wholesale trade, it is not open to the revenue to value physicians free samples by -= : 16 : =- applying the value of the goods sold and delivered at the factory gate or any time thereafter. i) relying upon the decision of the Apex Court in the case of State of Rajasthan V/s. Rajasthan State of Rajasthan V/s. Rajasthan State of Rajasthan V/s. Rajasthan Chemist Association Chemist Association Chemist Association reported in 147 S.T.C. 542 147 S.T.C. 542 147 S.T.C. 542, it is submitted that just as the levy of a tax would depend on the occurrence of the taxing event, the measure would depend also on the immediate event inviting the levy and cannot be premised on a non proximate basis. j) lastly, it is submitted that with the concept of valuation based on the transaction value of each clearances, where the goods are cleared partly on sale and partly for captive consumption, the valuation of the goods cleared on sale would be based on the transaction value under the amended section 4 (1)(a) of the Act and the valuation of the goods cleared for captive consumption would be governed by Rule 8 of 2000 Rules framed under section 4 (1)(b) of the Act. As the physicians free samples are not sold and Rule 8 is the only rule which deals with the goods that are not sold, the physicians free samples are liable to -= : 17 : =- be valued under Rule 11 read with Rule 8 of 2000 Rules. Accordingly, it is submitted that the circular No.813 dated 25/4/2005 which is illegal and contrary to law be quashed and set aside. 14. Mr.Rana, learned senior advocate appearing on behalf of the respondents submitted that the physicians free samples are physically, chemically and functionally same as those goods which are sold in the wholesale market and, therefore, the contention of the petitioners that the physicians free samples are different from the goods sold in the wholesale trade is without any merit. 15. Relying upon the decision of the Apex Court in the case of Ranbaxy Laboratories Ltd. Ranbaxy Laboratories Ltd. Ranbaxy Laboratories Ltd. reported in (2003) 9 S.C.C. 109 (2003) 9 S.C.C. 109 (2003) 9 S.C.C. 109, Mr.Rana submitted that the physicians free samples are excisable goods and being the final product, the physicians free samples cannot be considered on par with the goods which are captively consumed in the production or manufacture of final product. 16. Mr.Rana further submitted that Rule 4 of 2000 Rules is the proper rule applicable for valuation of physicians free samples because usage of the term -= : 18 : =- ‘physicians sample’ itself implies that these samples are representative of the whole i.e. ‘such goods’ sold commercially. The purpose of physicians samples is to promote the goods which are introduced in the market or being introduced in the market. Therefore, the physicians samples and the goods sold in the market are same, they are liable to be valued under Rule 4 of 2000 Rules. Rule 8 applies to goods captively consumed in the manufacture of