Case: Modipon Fibre Company, Modinagar, U.P Vs. Commissioner of Central Excise, Meerut

The appellant-assessee is engaged in the manufacture of Nylon and Polyester Yarn which is manufactured in its factory in U.P. and cleared to its various Depots situated all over India including Surat from where the Yarn is sold to dealers. The assessee used to pay duty during the relevant period, at the time of removal of yarn, on the basis of the depot sale price, after claiming permissible deductions under section 4 of the Central Excise Act, 1944 ("1944 Act"). One such deduction was TOT in respect of yarn cleared and despatched to Surat depot from the factory of the assessee in U.P.. In respect of such despatch, the assessee claimed deduction at 2% on account of TOT. This was on the footing that the Government of Gujarat vide Notification dated 19.10.1993 had exempted sale of Yarn of all kinds by a registered dealer to a special manufacturer of processed Yarn or to an eligible unit to the extent to which the rate of TOT exceeded 0.5% of the total turnover. This was provided the specified manufacturer furnished to the selling dealer a certificate in Form 26 and if the processed Yarn stood sold within the State of19.3.1999, a show cause notice was issued by the Department to the assessee in which it was alleged that the assessee had filed its price declaration under Rule 173-C in regard to the goods transferred to its depot in Surat for sale therefrom; that in the said price declaration, the assessee had indicated variety-wise ex-depot sale price, amount of various deductions for sales tax, freight, discount, TOT, excise duty etc.; that in the price declaration, the assessee had also declared the assessable value arrived at by deducting the abovementioned elements from ex-depot sale price; that, however, in the price declaration, the assessee had suppressed from the Department the fact that there were two types of sales, one in the backward area as notified by the Gujarat Government and the other in areas other than the backward area; that the assessee had failed to declare that the TOT was leviable on sale of goods during the period March, 1994 to March, 1997 at the dual rate of 0.5% (for sales in backward areas) and at 2% (for sales in areas other than backward areas) respectively. According to the show cause notice, the assessee had claimed deduction for TOT at 2% from ex-depot sale price in order to arrive at the assessable value; that although sales stood effected from the depot at two different rates, the assessee claimed deduction for TOT at the full rate of 2% in respect of entire clearances of Nylon Yarn sent to its Surat depot without mentioning that in the State of Gujarat on account of Notification dated 19.10.1993 two rates of TOT existed and, therefore, according to the show cause notice, the assessee had claimed wrongfully the deduction at a higher rate of 2% as against the rate of 0.5%. According to the show cause notice, since the assessee had deducted TOT at a higher rate to arrive at the assessable value, it had lowered the assessable value to the extent of 1.5% and, as such, a demand for difference was made on the assessee. According to the show cause notice, in the peculiar facts of this case, there should have been different assessable values in respect of Normal Areas Sales and Backward Areas Sales, particularly when the rate of TOT was different for the two types of sales; that in the case of Normal Areas Sales, the assessable value should have been arrived at allowing a deduction of 2% on account of TOT and in the case of Backward Areas Sales, the assessable value should have been arrived at by deduction of 0.5% on account of TOT. However, according to the Department, in the price declaration filed by the assessee, the assessee has claimed deduction at 2% on account of TOT in respect of the entire clearance and thus, according to the Department, the assessee had claimed wrongfully a larger deduction than what he was entitled to. Therefore, according to the show cause notice, the difference between the amount of TOT actually paid should have formed part of the assessable value and accordingly, the Department called upon the assessee to pay excise duty on the differential value. According to the Department, the assessee had wrongfully claimed deduction on account of TOT; that the assessee had claimed wrongfully deduction on the entire clearances at 2%; that the assessee had claimed in the price declaration deduction on account of TOT at 2% when it had actually paid TOT @ 0.5% in respect of backward area sales and, to that extent, the assessee had evaded excise duty by wrongfully claiming excess amount of deduction on the amount of deduction on account of TOT as compared to what was actually paid by it. The demand has been confirmed by all the authorities. Hence, these civil appeals.

Court's reasoning:
In our view, the above two judgments of the Bombay High Court lay down the correct principle underlying the Explanation to section 4(4)(d)(ii). As held in TOMCOs case (supra), the exemption was not by way of a windfall for the manufacturer-assessee but on account of cotton seed oil used by TOMCO in the manufacture of Pakav. Similarly, in the case of B. K. Paper Mills (supra), the Bombay High Court has correctly analysed section 4(4)(d)(ii) with the Explanation to say that only the reduced rate of duty can be excluded from the value of the goods and that Explanation explains what was implicit in that Section. That, the said section 4(4)(d)(ii) did not refer to duty leviable under the relevant tariff entry without reference to exemption Notification that may be in existence at the time of clearance/removal. That, section 47 of the Finance Act, 1982 which inserted the Explanation expressly sets out what is meant by the expression "the amount of duty of excise payable on any excisable goods." By the amount of duty of excise what is meant is the effective duty of excise payable on such goods under the Act and, therefore, effective duty of excise is the duty calculated on the basis of the prescribed rate as reduced by the exemption notification. This alone is excluded from the normal price under section 4(4)(d)(ii).