Case: ATIC Industries Ltd Vs. H. H. Dave and Ors

The facts giving rise to the appeal are few and may be briefly stated as follows.2. The appellants carry on business of manufacturing dye-stuffs in a factory situate in a small township called Atul in Bulsar District in the State of Gujarat. The dye-stuffs manufactured by the appellants were, throughout the period relevant to this appeal, sold by them in wholesale units to two wholesale buyers, namely, ICI (India) Ltd. (hereinafter referred to as ICI) and Atul Products Ltd. (hereinafter referred to as Atul) under respective agreements entered into by them with ICI and Atul. Seventy per cent of the dye-stuffs manufactured by the appellants were sold to ICI, while the remaining 30% to Atul. The price charged by the appellants to ICI and Atul was a uniform price described as "the basic selling price" less trade discount of 18%. ICI and Atul, in their turn, resold the dye stuffs purchased by them from the appellants to two categories of buyers. One was the category of textile mills and other large consumers, while the other was the category of distributors. The sales by ICI and Atul to the textile mills and other large consumers were at the basic selling price without any discount, but so far as the distributors were concerned, the sales to them by ICI and Atul were at a higher price though with trade discount. ICI charged a higher price but allowed 10% trade discount, while Atul charged a slightly lower price and allowed two and a half per cent trade discount. The prices were, however, so adjusted that the net selling prices charged by ICI and Atul to the distributors were almost the same. The distributors, in their turn, resold the dye-stuffs purchased by them from ICI and Atul to the small-consumers at a slightly higher price referred to as "small consumers price". No discount was given by the distributors to the small consumers.3. The position which, therefore, obtained during the relevant period was that the appellants sold the dye stuffs manufactured by them in wholesale units, 70 % to ICI and 30% to Atul, at the basic selling price, less trade discount of 18%: ICI and Atul in their turn resold a part of the dye-stuffs. in retail units to the textile mills and large consumers at the basic selling price and the balance in wholesale units to the distributors at higher selling prices with 10% trade discount in case of ICI and 21/2% trade discount in case of Atul, the net selling prices charged by both of them, however, being the same; and the distributors, in their turn, re-sold the dye-stuffs to small consumers in retail units at the small consumers price. It may be pointed out that though Atul initially charged a lower selling price and gave a trade discount of 21/2%, it fell in line with ICI and adopted the same selling price as ICI with trade discount of 10% from and after 1st May, 1963.4. There was no excise duty on dye stuffs prior to 1st March, 1961, but with effect from that date excise duty was imposed for the first time on dye-stuffs, including those manufactured by the appellants. The excise duty chargeable under the relevant entry in the first Schedule read with Section 3, sub-section (1) ofthe Central Excises and Salt Act, 1944 was ad valorm, and it was, therefore, necessary to determine the value of the dye-stuffs manufactured by the appellants for the purpose of assessing the excise duty payable on them. Section 4 of the Act provided how the value of an article chargeable with duty at a rate depending on its value shall be determined for the purpose of assessment of excise duty. It said:"Determination of value for the purposes of duty. Where under this Act, any article is chargeable with duty at a rate dependent on the value of the article, such value be deemed to be -(a) the wholesale cash price for which an article of the like kind and quality is sold or is capable of being sold at the time of the removal of the article chargeable with duty from the factory or any other premises of manufacture or production, or if a wholesale market does not exist for such article at such place, at the nearest place where such market exists, or(b) where such price is not ascertainable, the price at which an article of the like kind and quality sold or is capable of being sold by the manufacturer or producer, or his agent, at the time of the removal of the article chargeable with duty from such factory or other premises for delivery at the place of manufacture or production or if such article is not sold or is not capable of being sold at such place, at any other place, nearest thereto.Explanation - In determining the price of any article under this section no abatement or deduction shall be allowed except in respect of trade discount and amount of duty payable at the time of the removal of the article chargeable with duty from the factory or other premises aforesaid."The question arose as to how the value of the dye stuffs manufactured by the appellants should be determined on a proper application of the rule laid down in Section 4. The appellants contended before the Excise Authorities that for the purpose of assessing the excise duty, the value of the dye-stuffs manufactured by the appellants should be taken to be the price at which the appellants sold the same in wholesale units to ICI and Atul, less a uniform trade discount of 18% which the appellants at the relevant time gave to these two wholesale buyers. This contention was not accepted by the Superintendent of Central Excise who was the original assessing authority. He took the view that the value of the dyestuffs for the purpose of assessment of excise duty should be taken to be the price at which ICI and Atul sold the dye stuffs to the distributors and no deduction should be allowed in respect of the discount given by them to the distributors since it was not uniform, being 10% in case of ICI and 21/2 % in case of Atul. The appellants appealed against the assessment to the Assistant Collector of Central Excise, but the appeal was unsuccessful and the assessment was confirmed. That led to the filing of a further appeal to the Collector of Central Excise. This appeal resulted in some gain, little though it was, as the Collector of Central Excise held that in determining the assessable value trade discount of 2 1/2% which was given by Atul to the distributors should be allowed to be deducted from the price charged by ICI to the distributors. This was, however, plainly illogical. If the price charged by ICI was taken as a basis, trade discount of 10% should have been allowed as that was the discount given by ICI to the distributors. Trade discount of 21/2% given by Atul on the lower price charged by it to the distributors could not be deducted from the price charged by ICI to the distributors which was fixed at a higher figure because of the larger trade discount of 10% given by it to the distributors. The assessable value determined by the Collector of Central Excise was a strange hybrid. The appellants preferred a revision application to the Central Government against the order of the Collector of Central Excise. The Central Government in revision rejected the main contention of the appellants that the value of the dye-stuffs should be arrived at the price at which the same were sold by the appellant to ICI and Atul less 18% trade discount allowed to them. The reason for rejecting this contention was that since dye-stuffs manufactured by the appellants were "available to an independent buyer in open market conditions at prices at which these are sold by them to the sole Distributors, M/s. ICI Ltd. and M/s Atul Products Ltd., these prices cannot be adopted as the basis of ad valorem assessment" under Sec. 4 of the Act. The Central Government, however, observed that these dyestuffs were "available to any independent buyer in open market conditions at the sole distributors prices", that is, at the prices charged by ICI and Atul to the distributors and, therefore, these prices should form the basis of assessment after allowing discount of 10% on the prices charged by ICI from the beginning and 2 1/2 % on the prices charged by Atul upto 30th April, 1963 and 10% thereafter and on this basis directed refund of the excess duty collected by the Excise Authorities.5. The appellants were obviously not satisfied with this rather trivial and insignificant success and since their main plea was negatived by the Central Government, they filed a petition in the High Court of Gujarat under Article 226 of the Constitution challenging the validity of the various orders made by the Excise authorities culminating in the order of the Central Government and seeking a writ directing the Union of India "to refund excess duty amounting to Rs. 1,26,229.80 illegally recovered from the petitioners and to forbear from recovering duty from the petitioners in respect of the said products otherwise than on the basis of the prices charged by the petitioners to the said wholesale buyers viz. ICI and Atul." The Division Bench which heard the petition took the view, following certain decisions of the Calcutta, Mysore, Andhra Pradesh and Bombay High Courts, that where the entire production is sold by a manufacturer to one or more favoured distributors, there is no wholesale market in the sense of open market at the site of the factory where an independent buyer can purchase the goods in wholesale and in such a case the price at which the goods are sold by the manufacturer to the favoured distributors cannot be taken to be the assessable value of the goods but the assessable value must be taken to be the price at which the favoured distributors, in their turn, sell the goods in wholesale and if not in wholesale, then in retail. The Division Bench accordingly held that the price charged by the appellants to ICI and Atul less 18% trade discount could not be adopted for determining the assessable value of the dye stuffs since ICI and Atul were favoured distributors and not independent buyers and the Central Government was right in taking the price charged by ICI less 10% trade discount and the price charged by Atul less 2 1/2% trade discount as the assessable value because "that was the wholesale cash price at which the independent buyers could get these goods in the nearest wholesale market at the relevant time." The appellants being aggrieved by the decision of the High Court preferred the present appeal after obtaining certificate of fitness from the High court.

Court's reasoning:
10. This decision provides a complete refutation of the view taken by the High Court in the present case. In fact, the present case is much stronger than the Voltas caseon the contrary, no retail sales at all were effected by the appellants and the entire production was sold in wholesale to ICI and Atul under agreements entered into with them. Moreover, it was not in dispute between the parties that the agreements entered into by the appellants with ICI and Atul were made at arms length and in the usual course of business. It was not the case of the Excise Authorities at any time that specially low prices were charged by the appellants to ICI and Atul because of extra commercial considerations or that the agreements were anything but fair and reasonable or arrived at on purely commercial basis. The wholesale dealings between the appellants and ICI and Atul were purely commercial dealings at arms length and the price charged by the appellants for sales in wholesale made to ICI and Atul less trade discount of 18% was, therefore, clearly wholesale cash price within the meaning of Section 4 (a) and it did not make any difference that the wholesale dealings of the appellants were confined exclusively to ICI and Atul and apart from these two, no independent buyers could purchase the dye-stuffs in wholesale from thecontention, therefore, was that the price charged by ICI and Atul to the dealers less trade discount allowed to them should be taken to be the assessable value of the dye-stuffs and not the price charged by the appellants to ICI and Atul less trade discount of 18%. This contention is without force and must be rejected. It violates two basic principles underlying imposition of excise -duty.12. In the first place, as pointed out by Mathew, J., in Voltas case (supra), "excise is a tax on the production and manufacture of goods...Section 4 of the Act therefore provides that the real value should be found after deducting the selling cost and selling profit 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 value of the goods for the purpose of excise must take into account only the manufacturing cost and the manufacturing profit and it must not be loaded with post-manufacturing cost or profit arising from post-manufacturing operation. The price charged by the manufacturer for sale of the goods in wholesale would, therefore, represent the real value of the goods for the purpose of assessment of excise duty. If the price charged by the wholesale dealer who purchases the goods from the manufacturer and sells them in wholesale to another dealer were taken as the value of the goods, it would include not only the manufacturing cost and the manufacturing profit of the manufacturer but also the wholesale dealers selling cost and selling profit and that would be wholly incompatible with the nature of excise. It may be noted that whole sale market in a particular type of goods may be in several tiers and the goods may reach the consumer after a series of wholesale transactions. In-fact the more common and less expensive the goods there would be greater possibility of more than one tier of wholesale transactions. For instance, in a textile trade, a manufacturer may sell his entire production to a single wholesale dealer and the latter may in his turn sell the goods purchased by him from the manufacturer to different wholesale dealers at State level, and they may in their turn sell the goods to wholesale dealers at the district level and from the wholesale dealers at the district level the goods may pass by sale to wholesale dealers at the city level and then, ultimately from the wholesale dealers at the city level, the goods may reach the consumers. The only relevant price for assessment of value of the goods for the purpose of excise in such a case would be the wholesale cash price which the manufacturer receives from sale to the first wholesale dealer, that is, when the goods first enter the stream of trade. Once the goods have entered the stream of trade and are on their onward journey to the consumer, whether along a short or a long course depending on the nature of the goods and the conditions of the trade, excise is not concerned with what happens subsequently to the goods. It is the first immediate contact between the manufacturer and the trade that is made decisive for determining the wholesale cash price which is to be the measure of the value of the goods for the purpose of excise. The second or subsequent price, even though on wholesale basis, is not material. If excise were levied on the basis of second or subsequent wholesale price, it would load the price with a post-manufacturing element, namely, selling cost and selling profit of the wholesale dealer. That would be plainly contrary to the true nature of excise as explained in the Voltas case (supra). Secondly, this would also violate the concept of the factory gate sale which is the basis of determination of value of the goods for the purpose of excise.13. There can, therefore, be no doubt that where a manufacturer sells the goods manufactured by him in wholesale to a wholesale dealer at arms length and in the usual course of business, the wholesale cash price charged by him to the wholesale dealer less trade discount would represent the value of the goods for the purpose of assessment of excise. That would be the wholesale cash price for which the goods are sold at the factory gate within the meaning of Section 4 (a). The price received by the wholesale dealer who purchases the goods from the manufacturer and in his turn sells the same in wholesale to other dealers would be irrelevant to the determination of the value and the goods would not be chargeable to excise on that basis. The conclusion is, therefore, inescapable that the assessable value of the dye-stuffs manufactured by the appellants must be taken to be the price at which they were sold by the appellants to ICI and Atul less 18% trade discount, and not the price charged by ICI and Atul to their dealers.