Case: A.K. Roy &amp; Another Vs. Voltas Limited

1. Voltas Ltd., the respondent here, filed a writ petition before the High Court of Bombay, challenging the validity of the appellate order passed by the 1st appellant on May 2, 1967, in respect of the liability of the respondent to pay excise duty for the year 1963 and the orders of the Assistant Collector of Central Excise relating to the liability of the respondent to pay excise duty for the years 1962, 1964, 1965 and 1966 as also the notices demanding the assessed amount of Rupees 27,57,177.19. The High Court allowed the petition. This appeal, by certificate is against that order.2. Voltas Ltd. is a company registered under the Companies Act. It carries on, among others, the business of manufacturing air conditioners, water coolers and component parts thereof. It organises the sales of these articles from its head office at Bombay as also from its branch offices at Calcutta, Delhi Madras, Bangalore, Cochin and Lucknow. From these offices it effects direct sales to consumers at list prices and the sales so effected came to about 90 to 95 per cent of its production of these articles in the factory in question during the relevant period. Apart from these sales, it also sells the articles to wholesale dealers from different parts of the country in pursuance of agreements entered into with them. The agreements with the wholesale dealers for the relevant years contained terms and conditions similar to those mentioned in Exhibit A annexed to the writ petition. The agreements provided, among other things, that the dealers should not sell the articles sold to them except in accordance with the list prices fixed by the respondent, that the respondent would sell them the articles at the list prices less 22 per cent discount, that the dealers will not be entitled to any discount on the prices of accessories mentioned in the price schedule and that the dealers should give service to the units sold in their territory.3. Excise duty on the basis of ad velorem value was imposed on air conditioners, water coolers on air conditioners, water coolers and parts of water coolers from March 1, 1961. The respondents case was that the list price after deducting the discount of 22 per cent allowed to the wholesale dealers would constitute the "wholesale cash price" for ascertaining the real value of the articles. This case was accepted by the excise authorities and assessments were made upto the end of 1962 on that basis.4. In April, 1964, the Superintendent of Central Excise intimated the respondent that excise duty would be assessed and levied not on the footing of the wholesale cash price but on the basis of the retail price and, by his three orders dated September 5, 1964 and one dated September 10, 1964, he assessed the respondent to excise duty in respect of the sales on the footing of list prices for sale to consumers for the period from January 1, 1963 to December 31, 1963, and a notice of demand dated October 8, 1964, was served on the respondent calling upon it to pay the above sum. The respondent filed an appeal against the orders but that was dismissed by the 1st appellant by his order dated May 2, 1967 and this was the main order that was challenged in the writ petition.5. The question that was canvassed before the High Court was whether the respondent was liable to be charged with excise duty on the basis of the price of retail sales made by it directly to the consumers from its head office and branch offices under clause (b) of Sec. 4 or whether it was liable to be charged on the basis of the price payable by the wholesale dealers, after deducting the 22 per cent discount, under clause (a) of Sec. 4 ofthe Central Excises and Salt Act, 1944 (hereinafter referred to as the Act)?6. The High Court held that the price for which the articles were sold to the wholesale dealers less the discount allowed to them under the agreements represented the "wholesale cash price" and that excise duty was chargeable under Section 4 (a) of the Act.

Court's reasoning:
19. There can be no doubt that the "wholesale cash price" has to be ascertained only on the basis of transactions at arms length. If there is a special or favoured buyer to whom a specially low price is charged because of extra-commercial considerations, e.g., because he is relative of the manufacturer, the price charged for those sales would not be the "wholesale cash price" for levying excise under Section 4 (a) of the Act. A sole distributor might or might not be a favoured buyer according as terms of the agreement with him are fair and reasonable and were arrived at on purely commercial basis. 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 dealings. The fact that the appellant sold 90 to 95 per cent of the articles manufactured to consumers direct would not make the price of the wholesale sales of the rest of the articles any the less the "wholesale cash price" for the purpose of Section 4 (a), even if these sales were made pursuant to agreements stipulating for certain commercial advantages, provided the agreements were entered into at arms length and in the ordinary course of business.20.The next question is: what exactly is the meaning of the term the "wholesale cashprice"? In Vacuum Oil Co. v. Secretary of State for India in Council, 59 Ind App 258 = (AIR 1932 PC 168  ), it was held that the term means the price paid by retail traders on wholesale purchase. The essence of the idea is that the purchase must be a wholesale purchase and not a retail one. In other words, the sale must be wholesale and not a retail one in order that the price realised may be termed the "wholesale cash price". In that case the appellants before the Privy Council imported at Bombay, very large quantities of lubricating oil of a particular manufacture and mark. They sold it direct to numerous, customers, never to dealers. The price they charged was the same whether a large or small quantity was bought, except that if a consumer contracted to buy from them all his requirements for a year, he was entitled to a discount from 21/2 to 15 per cent according to the quantity bought in the year. No other lubricating oil of a like kind and quality was sold in Bombay. On the question whether the appellant was bound to pay customs duty on the basis of clause (a) or clause (b) of Section 30 of the Sea Customs Act, 1878, the Privy Council held that since the sales were to customers direct, the real value of the goods cannot be ascertained under clause (a) of Section 30 and that cl. (b) of Section 30 was applicable. Their Lordships said that in determining the price which is to represent the real value of the goods to be taxed, "the price must be conservative in every respect and free in particular from any loading for any post importation charges incurred in relation to the goods". "The price is to be a price for goods, as they are both at the time, and place of importation. It is to be a cash price, that is to say a price free from any augmentation for credit or other advantage allowed to a buyer it is to be a net price, that is to say it is a price less trade discount ". Their Lordships, therefore, held that the words the wholesale price were used in the section in contradistinction to a retail price, and that not only on the ground that such is a well-recognised meaning of the words but because their association with the words trade discount indicates that sales to the trade are those in contemplation, and alsod because only by attaching that meaning to the word is the wholesale price relieved of the loading representing post-importation expenses which, as a matter of business, must always be charged to the consumer, and which are eliminated.21. Excise is a tax on the production and manufacture of goods (see Union of India v. Delhi Cloth and General Mills, (1963) Supp 1 SCR 586 = (AIR 1963 SC 791  ) ) Sec. 4 of the Act therefore provides that the real value should be found after deducting the selling cost and selling profits and that the real value can include only the manufacturing cost and the manufacturing profit. The section makes it clear that excise is levied only on the amount representing the manufacturing cost plus the manufacturing profit and excludes post-manufacturing cost and the profit arising from post-manufacturing operation, namely selling profit. The section postulates that the wholesale price should be taken on the basis of cash payment thus eliminating the interest involved in wholesale price which gives credit to the wholesale buyer for a period of time and that the price has to be fixed for delivery at the factory gate thereby eliminating freight, octroi and other charges involved in the transport of the articles. As already stated it is not necessary for attracting the operation of Section 4 (a) that there should be a large number of wholesale sales. The quantum of goods sold by a manufacturer on wholesale basis is entirely irrelevant. The mere fact that such sales may be few or scanty does not alter the the true position.22. The appellant contended that 22 per cent discount allowed under the agreements with the wholesale dealers was not trade discount, on the ground that there was no evidence to show that the discount allowed was trade discount within the meaning of the Explanation to Section 4. There was no contention by the appellants before the High Court that the discount allowed to the wholesale dealers was not trade discount. The whole argument before the High Court proceeded on the basis that direct sales by the respondent to consumers constituted the major portion of the sales and that the sales to the wholesale dealers only represented a minor portion and, therefore, the price charged for the sales to wholesale dealers would not represent the wholesale cash price of the articles sold. No data was placed before the High Court by the appellant to show that the 22% discount did not represent "trade discount for the purpose of the Explanation. A "trade discount" is a percentage deduction from the regular list or catalogue price of goods. As there was no case for the appellants that there was any secret arrangement between the wholesale dealers and the respondent in respect of the sales to them or that the price of the articles was under-stated in the agreements or that any extra-commercial advantages to the dealers were taken into account in fixing the price, we do not think that we should go into the question whether the discount allowed to the wholesale dealers was trade discount or not for the purpose of the Explanation.