Case: M/S. Kirloskar Bros. Ltd Vs. Union Of India

This Civil Appeal arises from the order dated November 27, 1980 passed by the Divisional Bench of the Madhya Pradesh High Court in proceedings under Article 226 of the Constitution of India. The proceedings under Article 226 of the Constitution were directed against an order dated January 19, 1977 passed by the Government of India in exercise of the powers conferred upon them under Section 36 of the Central Excises and Salt Act, 1944 (hereinafter called the Act)2. The proceedings before the Central Government arose out of the review of an order in appeal passed by the Appellate Collector of Central Excise, New Delhi dated July 14, 1975. The Appellate Collector by the aforesaid order had accepted various appeals filed by M/s. Kirloskar Brothers Limited, appellant before us against various orders passed by the Assistant Collector, Central Excise, Indore3. The material facts giving rise to this litigation are as followsThe appellant carries on business of manufacturing power-driven pumps and mono block pumps at Dewas. For manufacturing mono block type P.D. pump sets and power driven pumps, the appellant purchases electric motors from another company M/s. Kirloskar Electric Co. Ltd. The Superintendent Central Excise issued eight show cause notices to the appellant calling upon them to show cause why the short levy as mentioned in the notices should not be recovered from the appellant. The period to which the alleged short levy related was from March 17, 1972 to March 31, 19734. The grounds on which the amount referred to in the notices issued was proposed to be recovered were - (i) less determination of the assessable value of pumps due to the non-inclusion of Central Excise duty paid on electric motors used in manufacture of pumps and (ii) deduction of irregular trade discount on wholesale cash price while determining the assessable value of the articles in question5. The Assistant Collector of Central Excise held that the excise duty paid by the appellant on electric motors fitted to the pumps could not be deducted while computing the assessable value of the pump sets for purposes of assessment under the Act6. With regard to the question of trade discount the Assistant Collector held that in terms of explanation to Section 4 of the Act deduction in respect of trade discount on wholesale cash price of the articles to be removed from the factory has to be allowed; the trade discount allowed has to be at uniform rate as held by the Supreme Court; once the wholesale price is fixed and the quantum of trade discount is decided it must be given uniformly to all wholesalers irrespective of their relations with the manufacturers. The Assistant Collector observed"The party had admitted that they have three types of wholesale dealers and each of them allowed trade discount at different rate. The first category of wholesale dealers numbering about 15 got the maximum trade discount. A perusal of the list of these 15 wholesale dealers reveal that most of them are merely selling depots of the party who get the maximum trade discount in comparison to other types of wholesale dealers of the party. The Honble Supreme Court has held that the wholesale price has to be ascertained only on the basis of transactions at arms length. Their Lordships have further opined that if there is a relative of the manufacturer and if he is charged specially low price, the price charged would not constitute the wholesale cash price for levying the excise duty. The maximum trade discount allowed to a particular class of wholesale dealers which is mostly consisted of their own selling depots, therefore, does not represent the trade discount in its true sense in terms of Section 4 according to which the trade discount has to be allowed at a uniform rate and not arbitrarily. Therefore, the fixation of wholesale cash price after allowing the maximum trade discount to a particular type of wholesale dealers cannot be treated as a transaction made at arms length in an ordinary course of business and, therefore, not in keeping with provisions of Section 4 of the Act and consequently cannot represent the correct wholesale cash price in terms of Section 4 of the Act for assessment purposes." *7. The Assistant Collector held that the wholesale cash price minus the trade discount, which is uniformly given to all wholesale dealers, would represent the assessable value for assessment purposes. Accordingly the Assistant Collector directed that duties short levied, as pointed out in the show cause notices, should be paid by the appellant8. Aggrieved by the orders of the Assistant Collector the appellant preferred an appeal before the Appellate Collector who held that the assessable value of the pumps had to be arrived at after deduction from the wholesale cash price of the excise duty payable not only on the pumps which are manufactured but also the excise duty paid on the electric motors which were used as a component of the pumps. The Appellate Collector further held that in determining the assessable value of PD pumps a discount of 30 per cent declared by the appellant and allowed to wholesale dealers was liable to be deducted from the wholesale cash price of the pumps under the provisions of Section 4 of the Act. In this view of the matter the Appellate Collector allowed the appeals and quashed the demand notices. While allowing the appeals the Appellate Collector, dealing with the deduction of trade discount observed as follows"With regard to the second issue i.e. admissibility of trade discount of 30 per cent declared by the appellants and approved by the jurisdictional Central Excise Officer, it was contended by the appellants that according to the pattern of their sale they had appointed 16 area dealers for sale of their products over a particular area. These area dealers had also appointed sub-dealers within their respective jurisdiction. Thus where the sales were made by the area dealer himself the full discount of 30 per cent was allowed to him while if the goods were dispatched on the advice of the area dealer to any of his sub-dealers, the discount advised by him to be granted to the sub-dealers was passed on to the sub-dealers while the discount remaining out of the 30 per cent was passed on by a credit voucher to the area dealer. In either case the full discount of 30 per cent was being passed on to the trade on all wholesale transactions. The above contention of the appellants was verified from the sales invoices produced by them in respect of wholesale transactions and it was noticed that the above contention of the appellants is correct. It was also noticed that some sales were also made in small lots by the appellants to the dealers falling outside the jurisdiction of the area dealers. These sales represented 1 per cent to 9. 7 per cent of the total sales and could be regarded as sales to retailers. In their case the discount passed on was less than 30 per cent discount allowed in the case of wholesale dealers. It was explained that in view of the fact that such dealers did not have the facility and the technical know-how for providing after sale service, the discount allowed to them was lesser than that allowed to the dealers (wholesale dealers) who were required to afford the services after sales. However, in view of the fact that such sales are meager and are in much smaller lots, they did not materially change the situation." *9. When this order came to the notice of the Central Government the Central Government suo moto issued show cause notice to the appellant proposing to set aside the order of the Appellate Collector, which appeared to it to be not correct in law, and restore the orders passed by the Assistant Collector of Central Excise, Indore. The reasons for the proposed revision were contained in the show cause notice dated June 21, 1976, the relevant part of which, for facility of understanding, is reproduced hereunder"6. In terms of the explanation to Section 4 of the Central Excises and Salt Act, 1944 in determining the price of any article under that section a deduction is admissible from the wholesale cash price towards the amount of duty payable at the time of the removal of the article chargeable with duty from the factory or other premises. It appears to the Central Government that the deduction contemplated therein is in respect of the duty leviable on the article which is being cleared from the factory and not the duty paid or leviable on the raw materials or component which went into the manufacture of that excisable article. In other words what is allowed deduction is only that duty leviable on the finished excisable article and not the total duty incidence. To have held otherwise appears to be repugnant to the correct construction of the expression amount of duty payable at the time of removal of the article chargeable with duty payable at the time of removal of the article chargeable with duty from the factory7. It, therefore, appears to the Central Government that in holding that the deduction was admissible not only in respect of the duty leviable on the PD Pumps but also in respect of the duty paid on the electric motor the Appellate Collector has (sic erred) in his decision8. The second question to be determined by the Appellate Collector was the admissibility of a trade discount of 30 per cent which the party was granting in respect of sales to their area dealer or through area dealers to sub-dealers while to another category of dealers called independent dealers a less amount of trade was granted. The case records reveal that the party had three types of wholesale dealers namely the following(a) Area dealers which number about 15 get the maximum trade discount(b) The sub-dealers of these area dealers. These sub-dealers usually get the goods from the area dealers at the particular discount and can also get the goods directly from the party on a discount advised by the area dealers and the balance discount out of the total 30 per cent discount is passed on thereafter to the area dealers and;(c) The last category of dealers who operate in areas not covered by the area dealers and get a less amount of discount9. It also appears that approximately 90 per cent of the goods are sold through the area dealers or their sub-dealers and only the rest through other independent dealers10. The Appellate Collector held that the sales to dealers other than the area dealers were only upto 10 per cent of the total sales and as such these could be regarded as sales to retailers. Accordingly the Appellate Collector held that since a substantial quantity of goods was sold through the area dealers or their sub-dealers the price charged to them was the correct wholesale cash price and that the 30 per cent trade discount given to them was admissible and sales to other dealers which were in small quantity could be ignored and could be treated as sales to retailers11. It appears to the Central Government that the Appellate Collector failed to take note of the fact that the sales to these independent dealers in their respective areas, however, small in quantity were nonetheless sales to wholesale dealers. These could not be categorised as retail sales which are essentially different from wholesale sales. These independent dealers were as much wholesale dealers as the area dealers. Further the Appellate Collector also failed to take note of the fact that the so-called area dealers in a large number of cases were no other than the partys own selling depots and the price charged to them could not prima facie be accepted as genuine unless there was compelling evidence to establish that the transaction was at arms length. It accordingly appears to the Central Government that the wholesale cash price charged to the independent dealers and discount given to them is alone a genuine wholesale cash price and that once the genuine wholesale cash price is ascertainable the quantum of sale however meager is irrelevant. By holding that the discount given to the area dealers was admissible and that sales to independent dealers being meager could be treated as retail sales and thus ignored, it appears to the Central Government that the Appellate Collector has erred in his decision."10. The appellant filed a reply dated August 30, 1976 and inter alia contended"We deal with these two points separately as below(i) Assessable Value of Monoblock Pumps;At the outset we wish to state that the grounds of appeal advanced, against the various orders in appeal issued by the Assistant Collector, Central Excise, Indore before Appellate Collector, Central Excise and Customs, New Delhi, will form part of our reply and we would rely on them. We presume that the records of the case are already with you and there is no need of reproducing here our argumentsHowever without prejudice to whatever stated in above referred appeal memo we wish to state as under(A) Central Excise duty is an indirect tax and this tax is not taken into consideration for assessment purposes. In accordance with the explanation given in Section 4 it is true that what is cleared by us is Monoblock Pump and not electric motor alone and not a mere pump. Since we have paid central excise Duty to our suppliers of electric motor, we have to recover the same from the parties to whom monoblock pumps are sold(B) Had we sold only an Electric motor, the same recovery of duty would have been made separately by us and our cost would have been the price paid to supplier exclusive of central excise duty(C) Just because the motor is used in the manufacture of Monoblock Pumps, it does not deprive us of our right to recover the duty on the Electric Motor paid by us when this is ascertainable(D) The same would be the case in respect of other components of Monoblock pumps, viz. Steel, paint, shafting, material etc. However, we are not in a position to ascertain the duty paid on these Raw Materials. That is why we have to recover the total amount including the cost and central excise duty paid in the raw material, so that the central excise duty paid on them will automatically be recovered. Such an amount has to go into the total value. But in respect of the items of the raw materials if we can ascertain the central excise duty paid, we can certainly recover the same in form of duty and not by way of the cost of the material(E) The whole principle of costing is to see what an article produced by any manufacturer has cost him. If the duty is ascertainable, there is no reason as to why it should go into the cost necessarily (sic). There is no law to warrant such a procedure(F) The inclusion of central excise duty in the cost of Monoblock pumps would further complicate the matters. In that extent we will not be in a position to recover the full duty paid on electric motor as we have to allow the proportionate trade discount on the duty element. This would tantamount to depriving us of our right to recover the full amount of central excise duty paid by us(G) Further without prejudice, if the duty is so included what would be the amount to be included and at what stage. It will have to be decided whether the whole of the duty on electric motor i.e. 15 per cent is to be included in the cost or the balance available from the said duty amount after availing of the set-off admissible under Notification No. 84/72 as amended by No. 113/72Under these circumstances, we would request you not to force us to include the element of central excise duty paid on Electric motors, in the value of our Monoblock Pumps for purposes of assessments(ii) Wholesale Cash Price and Quantum of DiscountAt the outset we wish to state that the grounds of appeal advanced against the various orders in appeal issued by the Assistant Collector, Central Excise, Indore before the Appellate Collector, Central Excise and Customs, New Delhi will form part of our reply and we would rely on them. We presume that the records of the case are already with you and there is no need to reproduce there our argumentsHowever, without prejudice to whatever stated in above referred appeal memos we would like to state as follows(A) It is contended in the show cause notice that the wholesale cash price, charged to the independent dealers and the discount given to them is alone a genuine wholesale cash price and that once the wholesale cash price is ascertainable the quantum of the sale, however meager, is irrelevant. Further it is also contended that the so called dealers in a large number of cases were no other than parties own selling depots and the price charged to them could not prima facie be accepted as genuine, unless there was compelling evidence to establish that the transaction was at arms lengthIn this connection we would like to submit as follows(B) Out of our total production 90 per cent of the goods are marketed through area dealers to whom 30 per cent discount is given. Out of these 15 area dealers, 5 are quite independent parties not connected with the depots and they are responsible for marketing about 30 per cent of our total production and the sales to these dealers are from principal to principal and are at arms length(C) The Kirloskar Brothers depots are being treated on par with these area dealers and the dealings are from principal to principal. Simply because they are depots of Kirloskar Brothers it cannot be presumed that the dealings are not at arms length(D) It is not the case of department that the goods are sold to these area dealers at a specially low rate. The facts that there are 5 independent dealers along with depots goes to prove that no special treatment is accorded to the depots(E) We would insist with all force that these transactions are at arms length and this represents the normal trade practice. The sales to independent dealers may not be treated as retail sales but there is no reason as the why the price charged to these few so called independent dealers should be preferred to the price charged to independent area dealers(F) The whole idea of assessments seems to have been misconceived. Now it is an established law that Excise is a Tax on the production and manufacture of goods (see Union of India v. Delhi Cloth and General Mills, 1963). Section 4 of the Act therefore provides that the real value should be found after deducting the selling cost and the selling profits and the real value can include only the manufacturing cost and the manufacturing profit(G) The section also makes it clear that the excise is levied only on the amount representing the manufacturing cost plus the manufacturing profit, and the excludes post manufacturing costs and the profit arising from the post manufacturing operations(H) In our case the amount charged by giving lesser discount to the so called independent dealers represents the selling profits and cannot be attributed to the manufacturing activity. Under these circumstances the value that could be approved for our assessment would be the list price less maximum discount and this will represent the manufacturing cost plus the manufacturing profit(I) Under the circumstances it is abundantly clear that the price cannot be loaded with any kind of selling cost or selling profit irrespective of whether the same is of the wholesellers or of the manufacturer, the reason being that neither is attributable to manufacturing activity(J) After the decision in Voltas case there have been a number of cases before both the Supreme Court and various High Courts, wherein the decision in Voltas case have been followed meticulouslyUnder these circumstances there is no reason to reopen the matter and give an adverse decision."11. An opportunity of personal hearing was also granted. It is noticed in the order of the Central Government that"During the Course of personal hearing on October 19, 1976 various contentions were reiterated and it was emphasised that the manufacturers had two patterns of sales, namely - (i) through area distributors who are given exclusive rights of sale within their respective areas and who were further authorised to appoint sub-distributors, and (ii) some 10 per cent sales were to other dealers to whom a less percentage of discount was given. It was emphasised that the discrimination between the two patterns sales was on account of the fact that area distributors provided after sales service etc. which could be treated as post manufacturing operations. It was pointed out to them during the course of personal hearing that majority of the so-called area distributors were depots of M/s. Kirloskar Brothers Ltd., only. They contended that though the over-all authority was the Kirloskar Group of Companies, yet these depots were independent entities by themselves. They were asked to submit detailed information about the composition of all the Directors of M/s. Kirloskar Electricals, Bangalore, the Directors of Dewas factory and their agreements with various area distributors with their sub-distributors. The information was to be submitted by November 16, 1976 but could not be received within the time stipulated." *12. The Central Government after considering the points raised by the appellant in its written reply to the show cause notice as well as points urged during the course of personal hearing took the view that under Section 4 of the Act the abatement of duty is admissible only in respect of the article in question and not the duty paid on the raw material or the component which had gone into its manufacture, and accordingly held that the view of the Appellate Collector is incorrect. Regarding the question of discount the Central Government took the view that the independent wholesale dealers are those who are other than the depots of M/s. Kirloskar Brothers. The view of the Appellate Collector treating sales to these dealers as retail sales is incorrect. The Central Government held that once the wholesale cash price is ascertainable the quantum of sales to such wholesale dealers is irrelevant and in the instant case even the quantum of sale to the independent wholesale dealers is 10 per cent. The wholesale cash price is thus ascertainable. In this view of the matter the Central Government in exercise of the powers conferred on it under sub-section (2) of Section 36 of the Act set aside the impugned order passed by the Appellate Collector and restored all the orders passed by the Assistant Collector of Central Excise13. Before the High Court the above referred order of the Central Government was impugned in the aforesaid circumstances. It was contended on behalf of appellant before the High Court that the Government of India erred in holding that the duty paid on the electric motors was not deductible in computing the wholesale cash price under the provisions of Act. It was also contended that the Government of India erred in restoring the orders of the Assistant Collector whereby only 25 per cent held to be deductible by way of trade discount in computing the wholesale cash price of the pumps in question. The High Court held that to Section 4 of the Act provides for deduction of trade discount amount of the duty payable at the time of removal of the article from the factory. The duty referred to in the explanation is the duty payable on product which is manufactured and does not refer to the duty paid on the raw material or the component of the product manufactured. Faced with this difficulty before the High Court the counsel for the appellant stated that he was not relying on the explanation to Section 4 of the Act for contending that the duty paid on electric motors fitted to the pumps was liable to be deducted from the wholesale cash price of the article in question. It was urged before the High Court that the excise duty paid on the component parts could not be treated as manufacturing cost and that it was not competent for the Government to levy excise duty on excise duty paid. The High Court rejected the contention. As regards the deduction of trade discount the High Court agreed with the order of the Central Government

Reasoning: 17. In view of our conclusion on the first point itself no useful purpose would be served in examining the second question as the appellant himself had given the reasons before the Central Government as to why they gave higher trade discount to their depots and other area distributors20. It is clear from the explanation itself that while computing the assessable value the deduction has to be allowed apart from trade discount to the amount of duty payable at the time of removal of the article chargeable with duty from the factory. Here the article concerned was the pump which had an electric motor which was duty paid. But what was deductible while assessing the assessable value was merely the excise duty payable on the pump and not the excise duty already paid on the electric motor which was merely a component24. It is thus clear from the provisos that while charging duty after computing the assessable value, the appellant will be entitled to reduction of duty paid on the electric motors from the over all excise duty payable on the pump. The value of the excise duty paid on the electric motor is not deductible while arriving at the assessable value under Section 4(a) of the Act. This becomes further clear from the wording of the second proviso which contemplates where the duty of excise on power driven pumps becomes less than the excise duty paid on the electric motor then no part of the excise duty is liable to be refunded to the manufacturer. Therefore the purpose of the first proviso and the second proviso is only to the calculation of excise duty payable and has no relevance to the calculation of assessable value of the articles manufactured when it is cleared from the factory16. In A. K. Roy v. Voltas Limited ( 1973 (3) SCC 503 : 1973 SCC(Tax) 261 : 1973 (2) SCR 1089 ) the Supreme Court emphasised at page 1097 SCC(p) 509, para 20) that there can be no doubt that the wholesale cash price has to be ascertained only on the basis of transactions at arms length. Once wholesale dealings at arms length are established, the determination of the wholesale cash price for the purpose of Section 4(a) of the Act may not depend upon the number of such wholesale dealers. Before the Central Government it was emphasised by the appellant itself that the discrimination between the two patterns of sales was on account of the fact that area distributors provided after sales service etc. which could be treated as post manufacturing operation. It is clear from the submission made by the appellant itself before the Central Government that the discount to area distributors was also in consideration for also providing after sales service which is not required to be taken into account while dealing with trade discount within the meaning of explanation to Section 4(a) of the Act. Therefore the Central Government rightly did not take into account such area distributors who may have to provide after sales service. The trade discount given to such wholesalers who were under no obligation to provide after sales service is the relevant trade discount given to the wholesalers