Case: Commnr. Of Central Excise, Indore Vs. M/S.S. Kumars Ltd.

the relationship was one of principal to principal and not principal and agent and also that the assessee could manufacture biscuits of other brands and sell the same. It was observed that the assessee had been established much prior to its agreement with Britannia Industries Limited. In the circumstances it was held that the decision in M/s. Ujagar Prints II and others could not be factually distinguished. The Court proceeded on the basis that the last three lines of the explanatory order in M/s. Ujagar Prints III (which we have quoted earlier) contained the ratio of the decision of both M/s. Ujagar Prints II and III. 19. In M/s. Ujagar Prints II and III, the assessees were independent processors and the Court proceeded on that factual basis. The appellants contention therefore is that as the processor (the respondent No.1 in this case) is not independent of the merchant manufacturer or trader, the ratio of M/s. Ujagar Prints III would not apply. In Pawan Biscuits although no conclusion from the facts has been recorded, it is clear that it was the facts which induced the Court to come to the conclusion that the relationship between the assessee and M/s. Britannia Industries Limited was that of an independent processor and a merchant manufacturer and that M/s. Ujagar Prints II and III were factually on all fours. The decision therefore does not take us nearer to a solution of the dispute raised by the appellant.20. The contention of the respondents is that neither the show cause notice nor the Commissioner in his order proceeded on the basis that Section 4(1) (a) of the Act applied but that they had applied Section 4(1) (b) and the Valuation Rules. It is their submission that the concept of deemed sale at the processors factory introduced by M/s. Ujagar Prints III, does not strictly fall within Valuation Rules 4 or 5. They urged, and the Tribunals view was, that M/s. Ujagar Prints III applied the procedure prescribed in Rule 6(b)(ii). As we have seen Rule 6(b) deals with excisable goods which are not sold by assessee but "are used" or "consumed" by him or on his behalf in the production or manufacture of "other" articles. In such case, the value of the excisable goods is to be based either (i) on the value of the comparable goods produced or manufactured by the assessee or by any other assessee, or if that is not possible under (ii) on the cost of production or manufacture, including profits, if any, which the assessee would have normally earned on the sale of such goods. 21. We do not agree that if Section 4(1)(b) is invoked Rules 4 and 5 do not apply. We have already held that Rule 3 does not make any distinction between the rules which may be invoked even when Section 4 (1) (b) is invoked. If none of the rules i.e. 4, 5 or 6, in terms apply, then Rule 7 would. In other words, the sale which is referred to in Rules 4, 5 and 6 may in the circumstances reflect a notional sale and provide a guideline for applying analogous principles mutatis mutandis under Rule 7.22. Rule 6(b) relied on by the respondent does not in terms apply. As we have noted, Rule 6(b)(ii) envisages a situation where a manufacturer consumes the manufactured commodity himself for making other excisable articles. But assuming it does in terms apply it is noteworthy that Rule 6(b)(ii) speaks of the excisable value being the cost of manufacture including the profits "normally" earned. Thus, it would still be open to the Revenue to say that the cost of grey fabrics as well as the processed charges were depressed because the parties were related persons. Indeed, the underlying principle of all the Rules as well as Section 4 is that different considerations would apply if the transactions concerned are not at arms length. Neither section 4(1) (b) nor Rule 6(b)(ii) have done away with the concept of "related person".23. We therefore do not agree that Ujagar Prints III would apply even to a processor who is not independent and, as is alleged in this case, the merchant manufacturers and the purchasing traders are merely extensions of the processor. In the latter case, the processor is not a mere processor but also a merchant manufacturer who purchases/manufactures the raw material, processes it and sells it himself in the wholesale market. In such a situation, the profit is not of a processor but of a merchant manufacturer and a trader. If the transaction is between related persons, the profit would not be "normally earned" within the meaning of Rule 6(b)(ii). If it is established that the dealings were with related persons of the manufacturer the sale of the processed fabrics would not be limited to the formula prescribed by Ujagar Prints III but would be subject to excise duty under the principles enunciated in Empire Industries as affirmed in Ujagar Prints II, incorporating the arms length principle.24. The respondent No.1 assessee had submitted before the Department and before us that if the assessee was not permitted to rely upon the formula laid down in M/s. Ujagar Prints III then it was entitled to discounts and advertisement expenses. These were not allowed by the Commissioner. As the question whether the respondent No.1 would be entitled to discounts and deductions claimed would only arise if it held that the ratio of M/s. Ujagar Prints III would not apply, the Tribunal did not address this aspect of the matter at all nor did it consider whether the merchant-manufacturers and the respondent No.1 were related persons. Since the Tribunal, in our opinion, wrongly upheld the respondents contention that the formula in M/s. Ujagar Prints III would apply in full measure, it is now necessary for the Tribunal to consider whether the respondents were related persons and whether the respondent No. 1 would be entitled to claim discounts or could exclude the advertisement expenses incurred by the dealers.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]We may note at the outset that Rule 3 provides for the applicability of all the valuation rules when it says the value of any excisable goods shall, for the purposes of clause (b) of(1) of Section 4 of the Act, be determined by the proper officer in accordance with these rules. No distinction is made between the applicability of the succeeding rules save that they are to be considered for application in numerical order. Rule 4 deals with the determination of the value of excisable goods on the basis of sale by the assessee at any other time nearest to the time of the removal of the goods being assessed. Rule 5 deals with a situation when the excisable goods are sold in circumstances specified in Section 4(1)(a) of the Act. If the price is not the sole consideration, the value of the excisable goods is required to be based on the aggregate of the price and "the amount of the money value of any additional consideration flowing directly or indirectly from the buyer to the assessee". If the value of the excisable goods cannot be determined under Rules 4 or 5 then the procedure prescribed under Rule 6 would have to be followed viz.We do not agree that if Section 4(1)(b) is invoked Rules 4 and 5 do not apply. We have already held that Rule 3 does not make any distinction between the rules which may be invoked even when Section 4 (1) (b) is invoked. If none of the rules i.e. 4, 5 or 6, in terms apply, then Rule 7 would. In other words, the sale which is referred to in Rules 4, 5 and 6 may in the circumstances reflect a notional sale and provide a guideline for applying analogous principles mutatis mutandis under Rule 7.22. Rule 6(b) relied on by the respondent does not in terms apply. As we have noted, Rule 6(b)(ii) envisages a situation where a manufacturer consumes the manufactured commodity himself for making other excisable articles. But assuming it does in terms apply it is noteworthy that Rule 6(b)(ii) speaks of the excisable value being the cost of manufacture including the profits "normally" earned. Thus, it would still be open to the Revenue to say that the cost of grey fabrics as well as the processed charges were depressed because the parties were related persons. Indeed, the underlying principle of all the Rules as well as Section 4 is that different considerations would apply if the transactions concerned are not at arms length. Neither section 4(1) (b) nor Rule 6(b)(ii) have done away with the concept of "related person".23. We therefore do not agree that Ujagar Prints III would apply even to a processor who is not independent and, as is alleged in this case, the merchant manufacturers and the purchasing traders are merely extensions of the processor. In the latter case, the processor is not a mere processor but also a merchant manufacturer who purchases/manufactures the raw material, processes it and sells it himself in the wholesale market. In such a situation, the profit is not of a processor but of a merchant manufacturer and a trader. If the transaction is between related persons, the profit would not be "normally earned" within the meaning of Rule 6(b)(ii). If it is established that the dealings were with related persons of the manufacturer the sale of the processed fabrics would not be limited to the formula prescribed by Ujagar Prints III but would be subject to excise duty under the principles enunciated in Empire Industries as affirmed in Ujagar Prints II, incorporating the arms length principle.24. The respondent No.1 assessee had submitted before the Department and before us that if the assessee was not permitted to rely upon the formula laid down in M/s. Ujagar Prints III then it was entitled to discounts and advertisement expenses. These were not allowed by the Commissioner. As the question whether the respondent No.1 would be entitled to discounts and deductions claimed would only arise if it held that the ratio of M/s. Ujagar Prints III would not apply, the Tribunal did not address this aspect of the matter at all nor did it consider whether theand the respondent No.1 were related persons. Since the Tribunal, in our opinion, wrongly upheld the respondents contention that the formula in M/s. Ujagar Prints III would apply in full measure, it is now necessary for the Tribunal to consider whether the respondents were related persons and whether the respondent No. 1 would be entitled to claim discounts or could exclude the advertisement expenses incurred by the dealers.