Case: Union of India and Another Vs. Century Manufacturing Company Limited

4. The Century Spinning and Manufacturing Co. Ltd. (the respondent, hereinafter referred to as the assessee) challenged the fixation of the tariff value of sulphuric acid and liquid chlorine at the amount referred to earlier. Its contention, developed in three steps was this : (a) that an excise duty being a duty on manufacture or production, its levy can be based on the cost of production or manufacture together with any margin of profit the manufacturer may be able to make when he sells the goods in a wholesale market at or near the factory gate;(b) the tariff value fixed under Section 3(2) can also be only on this basis and cannot be based on the sale price of the goods, much less on a weighted average sale price as in the present case;(c) If Section 3(2) were to be interpreted differently in a wide manner, as empowering the Central Government to fix tariff values wholly at its discretion - unfettered by the formula indicated in (a) above - at any figure it chooses, the sub section should be struck down as violative of Article 14 as there are no guidelines indicated in the statute for fixation of such tariffThe Bombay High Court, in its Judgment (report as Century Spinning & Mfg. Co. v. Union Of India ((1979) 4 ELT (J) 199 (Bom)) accepted the first two steps in the assessees line of reasoning. It, therefore, allowed the writ petitions filed by the assessee and gave certain directions. We are informed that a similar view as to the scope of Section 3(2) of the Act has also been taken in Subbarayan v. Union Of India ((1979) 4 ELT (J) 473 (Mad)) and Gwalior Rayon Silk Mfg. (Weaving) Co. Ltd. v. Union Of India ( 1981 (8) ELT 52 (MP)) . v. Veeran v. Union Of India ( 1981 (8) ELT 515 (Ker)) and Gwalior Rayon Silk Mfg. (weaving) Co. Ltd. v. Union of India ( 1988 (34) ELT 562 (MP)) take a contrary view but these decisions were rendered after an amendment of 1973 (effective from October 1975) and are, according to the assessee, distinguishable on that ground. The issue, being one of some importance and constant recurrence, the Union of India has preferred these appeals

Court's reasoning:
3. The effect of these two sections read with the definition in Section 2(d) of and the First Schedule to, the Act may be summarised thus : Excise duty is charged on all goods specified in the First Schedule to the Act. It is duty on such goods produced or manufactured in India. It is levied at the rates specified in the First Schedule. These rates are charged in some cases on the basis of length, area, volume and weight but, in most cases the rate is ad valorem i.e. dependent on the value of the goods. We are concerned here with the last of these modes of rate fixation where the rate is applied to thewe have said, it was open to the legislature to specify the measure for assessing the levy. The legislature has done so. In both the old Section 4 and the new Section 4, the price charged by the manufacturer on a sale by him represents the measure. Price and sale are related concepts, and price has a definite connotation. The value of the excisable article has to be computed with reference to the price charged by the manufacturer, the computation being made in accordance with the terms of Sectionare unable to agree. We are concerned with Section 3(1), and we find nothing there which clothes the provision with a dual character, a charging provision as well as a provision defining the measure of theShort the High Courts reasoning restrict the freedom of rate fixation under Section 3(1) to the mode of determination of value set out in section 4 and to the manufacturing cost and profit of an individual manufacturer-assessee before the authorities. It overlooks that, reading Section 3(1), 3(2) and 4 together, in the light of Bombay Tyre ( 1984 (1) SCC 467 : 1984 SCC(Tax) 17 : 1984 (1) SCR 347 ) it is clear that the rate of excise duty need not necessarily be ad valorem;that, even when it is ad valorem, the mode of determination of value outlined in Section 4 is only one of the modes available to the Central Government which comes into operation only where the value of any item of goods is not otherwise specified in notifications issued under section 3(2);and that even where the value is to be determined under Section 4, it can have any nexus with the wholesale price and is not limited the manufacturing cost and profit. In our opinion, The High Court has erred in reading Sections 3(1) and (2) as being subject to the parameters of Section 4. It is clear that Section 3(1) read with the schedule is very wide and unrestricted in its language and permits the levy of duty on any basis that has nexus with manufacture or production as explained in Bombay Tyre ( 1984 (1) SCC 467 : 1984 SCC(Tax) 17 : 1984 (1) SCR 347 ). Section 3(2) comes into operation only in cases of goods where an ad valorem duty is set forth in the Schedule but, subject only to this restriction, this sub-section too does not carry any limitation as to the manner in which the value is to be fixed, much less any limitation that the value should be determined in the same manner as under Section 4. Even Section 4 does not restrict the levy to manufacturing cost and profit but, this apart, this section, read with the relevant rules only sets out the procedure by which the assessing officer is to determine the value in individual cases that come up before him. Naturally, in such cases, the statute proceed on the basis of the position in the individual case before the officer. Whether it be the manufacturing cost plus profit basis (as erroneously thought by the High Court) or the price basis (as explained in Bombay Tyre ( 1984 (1) SCC 467 : 1984 SCC(Tax) 17 : 1984 (1) SCR 347 )) the officer determines the value on the facts of the individual case without taking into account similar considerations in the case of other manufactures. But it would not be correct to read this limitation into Section 3(2) as well. Section 3(2) is a general provision which gives full liberty to the Central Government to determine the value in cases where the First Schedule prescribes an ad valorem levy. Section 4 does not control or limit the power of the Central Government to fix rates under Section 3(2). Section 4 is subject to Section 3(2) and is not attracted to case where the value is notified under section 3(2) and not vice versa. The High Court was, therefore, not correct in finding fault with the Central Government for having fixed the tariff value at a figure related to an average of the prices at which the goods are sold by various manufacturers. There is nothing in the statute which precludes the Government from fixing the tariff value in thisthink that the contention proceeds on a misconception. While we undoubtedly say that Section 3(2) confers a power on the Central Government to fix tariff values for goods at its pleasure, unrestricted to the terms of Section 4, we do not say that this can be done at the whim and caprice of the Government. This discretion has to be exercised by the Government in accordance with the crucial guideline that is in built into the statute and also illustrated by the manner in which the determination is provided for in section 4. The statute leaves one in no doubt that the rate of duty is to be fixed ad valorem i.e. on the basis of the value of the goods. It cannot be disputed that the normal indication of the value of the goods will be it price and, that the statute intends price to be the relevant factor is clear from the language of Section 4 under which the statute itself fixes the value for the majority of cases. But where one had got bogged down, possibly due to certain earlier observation of this Court in a different context, was in thinking that the value of goods can only comprise manufacturing cost and profit. Actually it has been made to depend on the wholesale price of the manufacturer concern under Section 4 (old and new). But this need not be the sole criterion. The value may be derived with reference to the wholesale price, the retail price or the average price at which the goods are sold by the manufacturer concerned or even by the price at which the goods are sold by any particular person or place or the average price which the goods command in the whole country or any part thereof. It can be fixed at the lowest of such prices, at the highest of such prices or at some average (mean, median, mode etc.) of such prices as the Government may consider appropriate in the case of any particularIn our opinion, the tariff value has been notified under Section 3(2) for valid reasons and on germane ground having a nexus to the value of the goods and the High Court erred in accepting the assessees plea that "the notifications are arbitrary, preserve and display a non application of mind on the part of the authorities as the tariff values fixed are unrelated to the value or price or the manufacturing cost and manufacturing profit of the products". That the weighted average so fixed exceeds the manufacturing cost and profit of a particular manufacturer, can be no reason for doubting is validity. Equally, there is no acceptable logic in the High Courts suggestion that it should be fixed at the lowest of the prices at which the manufacturer is able to sell his goods in the wholesale market. To apply such a measure will restrict the fixation of the value at figures even less than those that can be arrived at under section 4. The whole purpose of Section 3(2) is to enable the Revenue to free itself from the shackles of section 4, inter alia, in cases where, as here, the Government feels that the application of that section would lead to difficulties and harassments. The criticism that the tariff value has been manipulated to enhance the rate of duty has also no force. The Central Government has to undoubted power to enhance the rate and the validity of a notification having such an effect is not open to challenge even if it is down (sic done) under the "guise" of fixing a tariff value. But, as already pointed out by us, there is no such guise or facade in this case and the tariff value has been fixed on the basis of relevant criteria having a nexus to the value of the goods12. We have so far avoided any reference to Section 3(3), inserted in 1978, and Section 4(3), inserted with effect from October 1, 1975, as these amendment came into effect later than the period with which we are concerned and we wished to look at the provisions of the statute as they stood before these amendments. In the light of our interpretation outlined above, it will be seen that these amendments are clarificatory in nature. The generality of Section 3(2) is unrestricted and Section 3(3) only explains a few possible ways in which that power can be, and could be always have been, exercised. Likewise, the scheme of Section 3 and 4 leave no doubt that section 4 is without prejudice to the provisions of Section 3 and newly inserted Section 4(3) only makers this abundantlyWe have principally dealt with the reasoning of the judgment under appeal and it is unnecessary to deal specifically with the earlier decision of the M.P. High Court viz Gwalior Rayon Silk Mfg. (Wvg.) Co. v. Union of India ( 1981 (8) ELT 52 (MP)) and the Madras decision Subbarayan v. Union ((1979) 4 ELT (J) 473 (Mad)) which have adopted a similar approach. The decision in Union of India v. Vazir Sultan Tobacco Co. Ltd. 1978 TaxLR 1824 : (1978) 1 Andh WR 233 : 1978 ELT (J) 461) is not directly in point. The Second Gwalior Rayon ( 1988 (34) ELT 562 (MP)) decision and the Kerala decision v. Veeran v. Union ( 1981 (8) ELT 515 (ker)) set out the correct position though they restrict themselves to a consideration of Section 4 of the Act after is amendment in 1973/1975