Case: M/S.Alembic Glass Inds. Ltd Vs. Commissioner Of Cent.Excise

3. The appellant-company, incorporated under the Companies Act, 1956 is a manufacturer of glass and glassware. It holds license issued under the Central Excise Act, 1944 (in short the Act) read with the Central Excise Rules, 1944 (in short the Rules). The dispute relates to the period 1.1.1988 to 28.2.1990. The articles manufactured by the appellant are classified under Chapter 70 of the Central Excise Tariff Act, 1985 (in short Tariff Act). There was a prolonged strike in the factory of the appellant in 1987, which according to the appellant resulted in closure of the appellants factory and came to a standstill position so far production is concerned. The appellant decided to cut down expenditure in areas like labour, packing, inventory, advertisement etc. M/s Darshak Ltd. who was a bulk purchaser of the appellants products started advertising to boost its sales in respect of glass and glassware purchased from the appellant. Inquiries were conducted by the Central Excise Authorities regarding expenditure on publicity and sales promotion incurred by M/s Darshak Ltd. on the goods purchased from the appellant. Statements of some of the officials of M/s Darshak Limited and Executive Director of the appellant were recorded during investigation. The appellant received show-cause notice dated 4.4.1991 from the Central Excise and Customs Directorate, Baroda proposing to recover duty amounting to Rs.18,79,775.31 under proviso to Section 11A(1) of the Act. The notice was issued by the Collector, Central Excise and Customs, Baroda. The substance of the notice was that the appellant had gradually transferred the expenditure on sales promotion and/or publicity of its product to M/s Darshak Ltd. The amount spent by M/s Darshak Ltd. was to be included in the assessable value declared by the appellant and, therefore, on the amount spent by M/s Darshak Ltd. being Rs.71,61,049 the duty payable was Rs.18,79,775.31. The appellant submitted its reply to the show-cause notice. It was submitted that the show-cause notice was barred by time; the appellant has been carrying on all of its activities within knowledge of the excise authorities; at every stage of changing the market pattern Department was a party; all sales were being made on principal to principal basis i.e. the appellant and M/s Darshak Ltd. are not related persons. Request was made to examine or cross-examine some persons. A further reply was filed on 21.11.1991 pointing out that the price list submitted by the appellant had been approved by the Department. The stand of the appellant was not accepted by the Collector and order in original confirming the show-cause notice was passed. Reference was made to the statement of Mr. R.S. Guard, General Manager Marketing of M/s Darshak Ltd. to the effect that upward trend in expenses for publicity was attributable to increase in sales. Though the buyer was not incurring any advertisement expenses on their behalf under any express or implied instructions, yet the fact that the advertisement expenses by the appellant were reduced/stopped indicated that the same was part of a well thought out policy. M/s Darshak Ltd. was a customer of the appellant since 1985. Expenses for advertisement and sales promotion were exclusively made by M/s Darshak Ltd. which led to increase in volume of sales. Expenses on advertisement are unavoidable for marketing the goods irrespective of the fact as to who incurs the expenses. It was held that once it is established that the expenses for advertisement are additional considerations, the question of related person is immaterial. It was a case of implied instruction and, therefore, the assessable value was required to be accordingly fixed, and the expenses were required to be included in the assessable value under Rule 5 of the Central Excise (Valuation) Rules, 1975 (in short the Valuation Rules). Demand was confirmed under Section 11A of the Act and penalty of Rs.10 lakhs under Rule 173Q(1) of the Rules was imposed. Land, buildings, plant and machinery belonging to the appellant was confiscated under Rule 173Q(2) of the Rules. However, option was given to pay fine of Rs.2 lakhs in lieu of confiscation4. Appellant preferred appeal before the CEGAT. It was the appellants stand before the CEGAT that there was no special relationship between the appellant and M/s Darshak Ltd. The former was selling goods at the same price to other dealers also. Therefore, there was a factory gate price for the products and that was the assessable value under Section 4 of the Act. Reference was made to the assessees own case in Commissioner of Central Excise, Vadodara v. Alembic Glass Industries Ltd. (1996) 88 ELT 296) in which CEGAT had given a categorical finding that M/s Darshak Ltd. was not a favoured buyer as there was no evidence of discretion or favoured treatment. It was pointed out that admittedly the advertising expenses were incurred only by the customer M/s Darshak Ltd. and up to the point of clearance, the appellant had not incurred any such expenditure5. The expenses incurred towards sales promotion and publicity by both the appellant and M/s Darshak Ltd. were as follows:Expenditure on Sales Promotion & PublicityYearM/s. AlembicM/s. DarshakVolumes of Sales1986Rs. 11,91,192/-Rs. 1,91,928/-Rs. 2,05,52,607/-1987Rs. 13,192/-Rs. 2,25,945/-Rs. 22,77,19,769/-1988-89 (1.1.88 to 31.3.89)Rs. 48,81,732/-Rs. 69,69,18,966/-6. Stand of the Revenue was that initially appellant was incurring advertisement expenses which were gradually shifted to M/s Darshak Ltd. who were purchasing about 98% of its product. Reference was made to a decision of the Tribunal where it was noted that there was understanding over sharing advertisement expenses on 50:50 basis and the expenses were to be added to the assessable value7. By the impugned judgment dated 13.6.1997 the CEGAT confirmed the findings of the Revenue authorities on the question of valuation as well as suppression. However, the quantum of penalty was reduced to Rs.2 lacs from Rs.10 lacs. It was noted by the CEGAT that the reasons why M/s Darshak Ltd. came to make a bulk purchases resulted from economic crisis, as bulk purchase was one of the methods of rehabilitation. Brand name "Yera" is owned by the appellant and packing is done by M/s Darshak Ltd. It is clearly indicated that the appellant was the owner. The advertising expenses by M/s Darshak Ltd. are nothing but a deal for revival of the appellants factory. Reference was made to the accepted position that if M/s Darshak Ltd. was not to make bulk purchases the appellant would have incurred advertisement expenses to promote sales. It was held that if price is not the sole consideration, then additional consideration has to be included in assessable value. Though M/s Darshak Ltd. is not a favoured buyer/related person, that is really of no consequence. Since the response of the appellant was No to question No.19 in questionnaire in the price list, Section 11-A has been rightly invoked. Reference was made by the CEGAT to Rule 5 of Valuation Rules to hold that the expenses on sales promotion and advertisement were to be included in the assessable value of the goods. It was held that demand of duty from the appellant under Section 11-A read with proviso to sub-section (1) was clearly applicable as the appellant had suppressed information with the intention to evade payment of duty. Tribunal found that the circumstances under which M/s Darshak Ltd. had given assurance of bulk purchase and commenced increased outlet advertising the appellants product clearly indicated that it was a package deal for revival of the appellants factory arrived at between them and M/s Darshak Ltd., and was a part of the cost reduction exercise of the appellant. An application for rectification was filed which was dismissed. The appellants argument in support of the rectification application was that the CEGAT did not consider the various judgments which were cited before it and there was no suppression of facts because the assessee had submitted its Balance Sheets and other documents. Stand of the Revenue that no case for rectification was accepted the rectification application was dismissed.

Court's reasoning:
In that case it was noted that advertisement which the purchaser was required to make at its own cost benefited in equal degree the assessee and the purchaser and for that reason the cost of such advertisement was borne equally and making a deduction out of the trade discount was held to be uncalled for. It was pointed out that while adjudicating the matters such as this, the Excise Authorities would do well to keep in mind the legitimate business considerations. It is to be further noted that there is no material to show that there is no arrangement for reimbursement. The factual position shows that the transaction was on a principal to principal basis. The findings of this Court in A.K. Roy and Anr. v. Voltas Limited (1973 (3) SCC 503 ) also throw considerable light on the controversy21. 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). 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 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 true position."