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

The respondent No. 1 processes grey fabric. Sometimes the grey fabrics are processed on its own account and sometimes the grey fabrics are received for processing on job charge basis from others (who are referred to as the merchant manufacturers). For the period 01.09.1985 to 28.02.1989, the respondent No. 1 had paid excise duty on the fabrics processed by it during this period, calculating the duty payable by treating the value of the processed fabrics as being that at which the merchant manufacturer was selling the processed goods. According to the respondents, this was in keeping with the decision of this Court in Empire Industries Ltd. V. Union of India & Ors. (1985) 3 SCC 314 (briefly referred to as Empire Industries). With effect from 01.03.1989, the same method was followed in respect of the fabrics processed by the respondent No. 1 on its own account. However, on the fabrics processed by it which had been received from the merchant manufacturers, the respondent No. 1 valued the processed goods on the basis of the cost of grey fabrics plus the processing charges as well as its manufacturing expenses and profits. In other words, the price at which the merchant manufacturer was selling the processed goods was not taken. This was done relying upon the decision of this Court in M/s. Ujagar Prints and Others V. Union of India (1989) 3 SCC 488 (briefly referred to as M/s. Ujagar Prints II) as explained in M/s. Ujagar Prints and Others V. Union of India and Others (1989) 3 SCC 531 (briefly referred to as M/s. Ujagar Prints III).2. On 5th October 1990, a show cause notice was issued by the appellant to the respondent proposing to recover differential duty of excise amounting to Rs.4,84,62,452/from the respondent No. 1 within the extended time limit under the proviso of Section 11A of the Central Excise Act, 1944 (hereinafter referred to as the Act) and proposing to impose penalty against the respondents. The basis of the demand against the respondents was that they were all firms and companies having a common management and control with some of them selling grey fabric to the respondent No.1 which, after processing the fabrics, sold the same to some of the other respondents. The latter ultimately sold the processed fabrics to independent dealers. All the respondents were described as S. Kumars and the appellants claimed to treat the price charged by the trader respondents from the independent dealers as the assessable value of the processed fabrics and to levy excise duty thereon. The respondents replied to the show cause notice. They denied that the respondents were related persons and disputed the basis for the additional claim of excise duty. It was submitted that by virtue of this Courts decision in M/s. Ujagar Prints III they were liable to treat the notional sale by the respondent No.1 to the merchant manufacturers as the relevant point for determining the assessable value. The claim of the respondent No.1 was that prior to the decision in M/s. Ujagar Prints III it had paid the excise duty by taking the assessable value of the processed fabric at the wholesale price at the time the goods reached the open market. This was followed till the decision of this Court in Ujagar Prints III. It was submitted that in any event the respondent No.1 was not only entitled to discounts in respect of the excise duty levied for the period 01.09.1985 to 28.02.1989 but there were gross inaccuracies in the computations made by the appellant. The Commissioner of Central Excise, held that the respondents were related persons and upheld the demand for duty to the extent of Rs.3,82,41,53 for the period 01.09.1985 to 30.09.1989 from the respondent No. 1. The claim for discounts was also rejected.3. The respondents appealed before the Customs, Excise and Gold (Control) Appellate Tribunal (hereinafter referred to as the Tribunal). The Tribunal held that the respondents had rightly invoked the principles of M/s Ujagar Prints III. In doing so, it did not go into the question whether the respondents were related persons as alleged in the show cause notice. The Tribunal therefore allowed the respondents appeal and remanded the matter back to the Commissioner in order to recompute the duty payable.4. Being aggrieved, the appellant has preferred these appeals. By this judgment, we propose to dispose of these appeals as well as other appeals preferred by the appellant from orders of the Tribunal in which the Tribunal has merely followed the decision in the case of the respondents.

Reasoning:
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.