The Govt. of India and Ors. Etc. v. the Madras Rubber Factory Ltd. Etc.

Mukharji, J., while Ranganathan, J. delivered a separate but concurring opinion. The relevant facts are : the respondent­ assessee was the manufacturer of talcum powder and face powder. The excise authorities noticed that small packings of 15,18,20,30,40 and 100 gms. D powder were first packed in dozen and then packed in secondary packings for easy transportation to the wholesale buyer. They found that "the secon­ dary packings were a must for delivery to the wholesale dealers". The Assistant Collector accordingly held that the cost of such secondary pack­ ing was liable to be included. Mukharji, J. referred to the ratio of Bombay Tyre International and observed that though the principle in Bombay Tyre E International does not admit of any dispute "there has been some diver­ gence of emphasis" with respect to the criteria upon which the inclusion or exclusion of the cost of packing should be determined. The learned Judge referred to the decision in Godfrey Philips India Limited and Hindustan Polymers v. Collector of Central Excise, [1989] 3 S.C.R. 974 and observed: "In my opinion , the views expressed by the majority of the judges in Godfrey Philips case were in consonance with the views of this Court in the Bombay Tyre International case. T7ie question is not for what purpose a particular kind of packing is done but the test is whether a particular packing is done in order to put the goods in the condition in which they are generally sold in the wholesale market al the factory gate and if they are generally sold in the wholesale market at the factory gate in ce1tain packed condition whatever may be the reason for such packing, the cost of such packing would be includible in the value of the goods for assessment to excise duty." ( Govr. OF INDIA··· MADRAS RUBBER FACTORY LID. (B.P. JEEVAN REDDY. l.( 1177 (Emphasis added) A The learned Judge then referred to the decision in Geep Indust1ial Syndicate Limited and held finally : "In my opinion, the co1rect position seems to be that the cost of that much of packings. be they primwy or secondmy, which are required B to make the articles marketable would be includible in the value. However n1uch packing is necessa1y to nzake the goods n1a1*etable is a question of fact to be detemiined by application of the c01rect approach.* Packing, which is primarily done or mainly done for protecting the goods, and not for making the goods marketable C should not be included ............ The question is whether these goods could be so sold, but the question is whether these goods are so sold usually and as such used to become marketable in such manner." (Emphasis in original) We are in entire and respectful agreement with the test evolved and the position of law stated by the learned Judge. It is wholly in tune with the test in Bombay Tyre Intemational - indeed a reiteration of it. In his concurring opinion, Ranganathan, J. referred to the ratio in Bombay Tyre Intemational and pointed ont: "the reference in Bombay Tyre E Intemational to secondary packing 'which is necessary' led to a further refinement in Godfrey Philips· and Geep Industrial Syndicate." After refer­ ring to the holding in the said two decisions and in Hindustan Polymers, the learned Judge opined : "There is, therefore, much to be said for the view that, in judging the condition of packing whose cost is to be included in the assessable value, one should go by the conduct of the parties and the nature of the packing in which the goods generally are - not, can be - placed in the wholesale market.. ...... It seems to me, therefore, that what is to be really seen is this: What is the condition of packing G considered by the manufacturers, having regard to .the nature of the business, the type of goods concerned, the unit of sale· in the wholesale market and other relevant considerations, to be general- ly necessary for placing the goods for sale in the wholesale market Emphasis supplied. H at the factory gate. In Godfrey Philips and Geep,. tlzis Cowt was concemed with a special type of packing wlticlz seemed intended more to protect the packed goods against injury or damage rather than to enable it being placed on t/!e market. Indeed, in Godfrey Philips, this was a facmal position that !tad been accepted by the depmtmental authorities earlier for a period of a little over six years which they later wamed to go back upon. Can the same be said of the goods and the packing with which we are concerned here is a question to be decided on the facts, as the appellate controller did and not' as a proposition of law settled by, or the automatic consequence of the decision in the Godfrey Philips case, as seems to have been done by the Tribunal and as is being argued for the respondents. I would, therefore, agree that the matter should be remanded to be reconsidered in the light of our observations." (Emphasis supplied) We respectfully record our concurrence with the above observations. In our respectful opinion, the tests evolved by Mukharji, J. and Ran­ ganathan, J., which are the same in essence, are wholly consistent with the test evolved in Bombay Tyre International. To repeat, "the question is not for what purpose, a particular kind of packing is done but the test is E whether a particular packing is done in order to put the goods in the condition in which they are generally sold in the wholesale market at the factory gate and if they are generally sold in the wholesale market at the factory gate in certain packed condition, whatever may be the reason for such packing, the cost of such packing would be includible in the value of F the goods for assessment of excise duty. (per Mukharji, J.)" We are also in complete agreement with the understanding of Ranganathan, J. of the majority opinion in Godfrey Philips and of the opinion in Geep Industrial syndicate. Reference may also be made to the decision in Hindustan Polymers G rendered by a Bench comprising Sabyasachi Mukharji, S. Ranganathan and J.S. Verma, JJ. The facts of this case, however, are markedly different. The appellant-assessee was engaged in the manufacture and sale of fuse! oil. Its case was that the fuse! oil manufactured by it was mainly sold in bulk and that only a small portion was being supplied to the customers in drums H supplied by such customers. It was contended that the cost of the drums ( GOVT. OF INDIA'· MADRAS RUBBER FACTORY LTD. [BP. JEEVAK REDDY.!.[ 1179 cannot be included in the value of the oil so sold. Mukharji, J. held that A imsmuch as the material on record established that the goods were not sold in drums generally in the course of wholesale trade, that in the wholesale trade these goods were delivered directly into tankers and that delivery in drums was only to facilitate their transport in small quantities. In view of the said material, the learned Judge held, the cost of the drums B is not includible. Ranganathan, J. agreed with the conclusion arrived at by Mukharji, J. but on a wholly different basis. The learned Judge held that according to Section 4(4)(d)(i), where the manufacturer supplies the drums and charges the customers separately therefor, the cost of such drums has to be included in the value except where the packing is of a durable nature C and is to be returned to the manufacturer. But if, on the other hand, the manufacturer asks the customer to bring his own container and does not charge anything therefor, then the cost of such packing cannot be notionally added to the price charged for the goods. Verma, J. agreed with the reasoning of Ranganathan, J. and held that since the drums were supplied D by the buyer and were not supplied by the manufacturer, their cost cannot be included. The decision in this case thus turned upon the particular facts of the case, viz., the drums being supplied by the buyer and not by the assessee . . The position emerging from the review of the decisions aforesaid may E now be summarised : each and every decision has accepted and acted upon the law laid down in Bombay Tyre International. The test evolved in the said decision has been e'.'Pressly reiterated in all the judgments, though it is a fact that there has been some divergence in what may be called 'emphasis'. Since the said decision lays down that the cost of "that. F degree of secondary packing which is necessary for putting the excisable article in the condition in which it is generally sold in the wholesale market at the factory gate" is to be included, the court enquired in Godfrey Philips (majority opinion) whether the CFCs were necessary for such delivery. The court found on the facts of that case that they were not so G necessary and accordingly held that the cost of , CFCs is not in­ cludible. In Geep Industrial Syndicate, the court adopted the approach of the majority in Godfrey Philips on the footing that the wooden boxes were not "necessary" for delivery at the gate. In Ponds, however, both the learned Judges constituting the Bench laid down tests consistent with the one in H 1180 SUPREME COURT REPORTS [1995) 3 S.C.R. A Bombay Tyre Intemational. Indeed, Ranganathan, J. understood the majority decision in Godfrey Philips and the decision in Geep Industrial Syndicate in the same manner as we have done - a fact emphasised by us hereinabove while discussing the ratio of Ponds. As pointed out by us hereinabove, it would not be reasonable to infer any conflict or deduce any B inconsistency between the ratio of Bombay Tyre Intemational and the ratio of Godfrey Philips for the reason that not only both Benches were of coordinate jurisdiction (Bombay Tyre International was thus binding upon the latter Bench) but also because both the decisions were rendered by the very same Bench. The adage in such matters is: look for harmony, not C divergence. It is equally releva:it to point out that Bombay Tyre Internation­ al was equally binding upon the Bench {of three learned Judges) which decided Geep Industrial Syndicate and that it would be equally un­ reasonable to suggest that the Bench (deciding Geep Industrial Syndicate) would lay down an inconsistent proposition from the one in Bombay Tyre D International without even referring to the decision or its ratio. The con­ clusion in these two later cases turned upon the finding as to factual situation obtaining therein whereas the two opinions in Ponds not only follow the test in Bombay Tyre International but reiterate it in clear terms. The test laid down in Bombay Tyre International has never been departed from in any of the later decisions and must be treated as good and sound. E We may as well stress the obvious: in a matter like this, certainty in law is essential. It may be that in applying the principle having regard to the facts of a given case, there may be some divergence in conclusion but so far as the principle - the relevant test to be applied - is concerned, there should be no uncertainty. The test is: whether packing, the cost whereof is sought F to be included is the packing in which it is ordinarily sold in the course of a wholesale trade to the wholesale buyer. In other words, whether such packing is necessary for putting the excisable article in the condition in which it is generally sol<l in the wholesale market at the factory gate. If it is, then its cost is liable to be included in the value of the goods; and if it G is not, the cost of such packing has to be excluded. Further, even if the packing is "necessary" in the above sense, its value will not be included if the packing is of a durable nature and is returnable by the buyer to the assessee. We must also emphasis that whether in a given case the packing is of such a nature as is contemplated by the aforesaid test, or not, is always H a question of fact to be decided having regard to the facts and circumstan- GOVT. OF INDIA,. MADRAS RUBBER FACTORY LTil. (B.P. JEEVAN REDDY,J.J 1181 ces of a given case. Keeping the above principle in mind, we shall now turn to the facts in Civil Appeal No. 5375/95 of f995 arising out of S.L.P. (C) 4041 of 1981 (Union of India v. Hindustan Lever) because it is in this--case that the issue of cost of packing has been argued by Sri Harish Salve. The assessee claims B deduction of the cost of 'outer packing'. The Assistant Collector who examined the claim pursuant to the 'format order' rejected the claim. He has stated· in his order that in the first instance, the asses see claimed that the said packages are of a durable nature and have a ready resale value all over the country and that to avoid transportation cost, the trade (buyers), C instead of sending the packages back to the company, resell the same. The assessee conceded that though it is possible to pack the produce for sale in the ordinary packings they are also packed in special outer packings for the sake of uniformity. At a later stage of hearing, the assessee adopted a different stand. It contended that the cost of only the primary packing, viz., the packing which is in physical contact with the soap and is wrapped D around the soap, is includible and that the cost of cartons and cardboard boxes in which the soaps are then packed in outer packing has to be' excluded. The Assistant Collector rejected both the contentions on the following reasoning: (a) in the instant case, the company has not adduced any evidence to show that there are any agreements or contracts between E it and its buyers for return of such packings; (b) as a matter of fact, the goods in question are invariably delivered to their customers packed in cartons/cardboard boxes; (c) the unit of sale for the said goods for which • the company files its price lists from time to time is a wholesale package comprising of a dozen or gross pieces; ( d) the packing of such goods in F cartons/cardboard boxes is indispensable, as in the absence of the same, they cannot be conveniently delivered to the customers; ( e) not a single / instance could be shown where the asscssee ever delivered the goods without the above packing and (f) the assessee conceded that its buyers are not returning such packages to it on account of the cost of transporta- G ~ tion. We are of the opinion that on the above findings recorded by the Assistant Collector, th~ only conclusion that can follow is that the cost of the cartons/cardboard boxes cannot be excluded from the value of the goods. If, however, the assessee wishes to challenge the correctness of the findings of fact recorded by the Assistant Collector, the proper course is H 1182 SUPREMECOURTREPORTS [1995] 3 S.C.R. A to file an appeal as provided by Jaw. PART-IV We may now take up for consideration the several claims of deduc­ tion relating to trade discounts. But what does the expression "discount" B mean? According to the Concise Oxford Dictionary, it means "a deduction from the bill or amount due given especially in consideration, of prompt or advance payment or to a special class of buyers". Now, accprding to the latter part of sub-clause (ii) of Section 4( 4)( d) such trade di~ounts, as are .._ not refundable under any circumstances, and are allowed ln accordance C with the normal practice of the wholesale trade at the time of removal of such goods, are to be excluded from the value of the goods, According to the "List of dates and events" filed by Sri Nariman, the follo).ving claims of deductions have been allowed by the Assistant Collector, KC)ttayam (by his Orders dated October 16, 1984, January 17, 1985, April 29,, 1985 and July 11, 1985): "1. Cost of Transportation 2. Additional Sales Tax, 3. Octroi, E 4. TAC/Warranty Discount, 5. 1 % Turnover Discount, 6. Discount to Government and other Deptts. F 7. Year Ending Discount, 8. Prompt Payment Discount, 9. Special Secondary Packing and Tread Rubbe•." G Out of the above items, Items (1) to (3) and (6) ar~ not disputed by the Revenue before us. Only Items ( 4), (5), (7), (8) and (9) are in dispute. The deductions disallowed by the Assistant Colle~or, Kottayam are the f.ollowing: H "1. Overriding Commission to H.P.C. (Hindustan Petroleum Car- ( ' I ... oovr. OF INDIA,. MADRAS RUBBER FACTORY LTD. (B.P. JEEVAN RED~Y,J.J 1183 poration.) 2. 17% interest Discount to R.C.S. (Recurring Credit Scheme) Dealers. 3. Tax on processed Tyre cord. 4. Product Discount. 5 . Cost of Distribution. 6. Interest on Finished Goods. 7. Interest on receivables.' Out of these seven items, Sri Nariman did not press Items (1), (2) and ( 4). Item (3) has already been given up by the assessee in Kirloskar Brothers Limited v. Union of India, (1992] 59 E.L.T. 3. The only items, therefore, now in issue are Items (5), (6) and (7). Incidentally, it may be D mentioned, these Items ((5), (6) and (7)] were allowed by this court's order dated December 20, 1986 (Assistant Collector of Central Excise v. Madras Rubber Factory). We shall now take up each of the claims individually. E TAC/Warranty discount : The claim of the Assessee-Madras Rubber Factory is to the following effect: the expression 'TAC' means 'Tyre Adjustment Committee'. The TAC discount originated in the year 1943. It was a voluntary body set up F by the four tyre manufacturing companies in the country then in existence, viz., Goodyear, Dunlop, Firestone and India Super. The committee was composed of District Managers and Service Engineers of the Tyre Com­ panies. At present, each manufacturer has constituted its own TAC, be­ cause, it is stated, the M.R.T.P. Commission objected to the common G committee. The duty of the committee is to examine the tyres brought back by the purchaser for defects discovered during the course of user. The committee deals with only latent defects, i.e., defects which were not apparent or evident at the time of sale but which were discovered during the course of user of the tyre. Where such tyre is brought to the company by the customer, the company refers the matter to the committee to H 1184 SUPREME COURT REPORTS (1995) 3 S.C.R. A determine whether there was any manufacturing defect in the tyre and if so, the amount of remission the customer is entitled to. Instead of paying the said amount in cash to the customer, it is explained, the company supplied a new tyre (at the price obtaining on the date of sale of such new tyre) but deducts the said amount refundable to the customer from out of B the price of the new tyre. The assessee's case is that this is a case of discount and that it is a discount which is given in accordance with the normal practice of the trade. It is submitted that even at the time of the sale of the· first tyre - for that matter, every tyre - it is known and understood that if any manufacturing defect is discovered during the course of user, the assessee shall make it good in the above manner. It is C claimed that it is deductible in terms of Section 4( 4)( d)(ii) of the Act. The Assistant Collector allowed this claim holding that it is a discount granted according to established practice and that the nature of the allowance is also known at the time of removal of goods. The new tyre which is sold by way of replacement to the customer in lieu of the defective tyre is only a D case of removal for replacement of a defective one with a fresh one, at a reduced rate. Hence, the deduction claimed is allowable subject to the condition that the total admissible TAC/warranty discount claimed by all the units of Madras Rubber Factory together should not exceed the amount specified in Annexure-1. (Certain further directions were also given with respect to the manner in which the deduction has to be worked out which E it is not necessary to mention here). The learned Additional Solicitor General submits that this deduction cannot be allowed according to law. He refers to Rule 96 of the Central Excise Rules which provides that where a manufacturer desires that certain F tyres which are damaged during the curse of manufacture should be assessed at a lesser value than the standard selling price, he should declare in writing on the application for clearance of such goods that such damage has been sustained and that each of such tyre shall be clearly and legibly embossed or indelibly stamped with the words "second', 'clearance' or 'defective'. He submits that the claim in question does not fall under Rule G 96 and that there is no other rule or provision under which it can be granted. According to him, it is not a case of trade discount within the meaning of Section 4(4)(d)(ii). Learned counsel pointed out that the sale of first tyre lu.s taken place at full value and so has sale of second tyre and the mere fact that the amount refundable to the buyer on account of the H manufacturing defect in the first tyre is set off against the price of the new ( , { GOVT. OF INDIA'· MADRAS RUBBER FACTORY LTD. (B.P. JEEVAN REDDY,J.) 1185 tyre does not mean that the new tyre is being sold at a discount - nor can A it be suggested that the discount is being given out of the price of the old tyre. The learned Additional Solicitor General brought to our notice that in the judgment dated i;:>ecember 20, 1986 this court has disallowed the said claim and that the assessee has not chosen to question the same by way of a review petition. On the other hand, Sri Nariman, learned counsel for the assessee submits that this is a discount clearly within the meaning and contemplation of Section 4(4}(d)(ii). The evidence adduced by the assessee, which has been accepted by the Assistant Collector, shows that this discount is being made in accordance with an established practice and understanding, prevalent over more than fifty years and there can be no doubt about its genuineness. Learned counsel submits that certain defects in the manufacture are not apparent at the time of their removal or sale B_ but come to light only later in the course of user. In such cases, the customer is entitled to proportionate remission attributable to the manufacturing defect. In recognition of the said claim and also in the business interest of the assessee, says the learned counsel, the assessee D honours the said claim provided it is certified by the TAC. Instead of refunding the money in cash, the assessee replaces the old tyre with a new tyre. In other words, the assessee takes back the defective tyre sold earlier and supplies a new tyre and from the price of the new tyre, the amount which has been found remittable to the customer, is deducted. The assessee collects only the balance price. Sri N ariman brought to our notice that the E claims on this account did never exceed'2-3 percent in any year over the last several years. In the clarificatory Order in Bombay Tyre International (dated 14/15th November, 1983) this court has held: "discounts allowed in the Trade (by whatever name such discount is described) should be allowed to be deducted from the sale price having regard to the nature of the goods, if established under agreements or under terms of sale or by established practice, the allowance and the nature of the discount being known at or prior to the removal of the goods. Such Trade Discount shall not be disallowed only because they are not payable at the time of each invoice G or deducted from the invoice price". The question is whether the claim, put forward as TAC/Warranty discount is a trade discount within the meaning of Section 4(4}(d)(ii}? We think not. It is only a claim for refund by the buyer for the manufacturing H 1186 SUPREME COURT REPORTS (1995] 3 S.C.R. A defect in the tyre sold by the assessee, which is being hqnoured by the assessee in a manner acceptable to both the parties. In a given case, a buyer may well insist that he must be reimbursed in cash and not in kind. In such .a case, the assessee cannot certainly refuse such a claim; it would have to pay cash. The nature and character of the amount so being refunded is certainly not a trade discount contemplated by Section 4(4)(d)(ii), whether the claim is honoured by paying cash or by deducting it from the price of the new tyre. As rightly pointed out by Bhagwati, C.J. in the Order dated December 20, 1986, "what is really relevant is the nature of the transaction". The learned Chief Justice pointed out further that "the warranty is not a discount on the tyre already sold, but relate to the goods which are being C subsequently sold to the same customers. It cannot be strictly called as discount on the tyre being sold. It is in the nature of a benefit given to the customers by way of compensation for the loss suffered by them in the previous sale. 11 He characterised it as 11 a compensation in the nature of warranty allowance on a defective tyre". We express our respectful concur- D rence with the said observations. This claim of the assessee is accordingly rejected. One Percent Tum Over Discount: E The assessee's case in this behalf is this: this is a discount granted to all dealers operating under Recurring Credit Scheme (RCS) with effect from April 1, 1980. The discount is being given on a half-yearly basis depending upon the volume of purchases made. by each such dealer. Out of the total Madras Rubber Factory dealers, about eighty percent are said to be RCS dealers and out of the total sales effected by the Madras Rubber F Factory, over sixty percent sales are made by these RCS dealers (as per the figures relating to the year 1981-82). The discount is being granted by issuing credit notes to dealers and though the said discount is not shown on the face of each invoice, it is known to all the Madras Rubber Factory dealers. The discount cannot ii.deed be shown in the invoice for the simple G reason that the discount is known only at the end of the half year. The Assistant Collector allowed the said claim on the finding that this discount is given with a view to encourage the turn over of the sales and that having regard to the objects underlying the Recurring Credit f -. Scheme, this deduction is liable to be allowed. He found that in the H ultimate analysis the dealer pays one percent less then the catalogue price GOVT. OF INDIA'· MADRAS RUBBER FACTORY LID. (BP. JEEVAN REDDY, J.J 1187 and that the said claim is also consistent with the clarificatory order of this A court in Bombay Tyre International. { The learned Additional Solicitor General, however, contended that this discount, not being known or paid at the time of removal/sale, cannot be allowed. In the light of the findings recorded by the Assistant Collector, it must be held that this is a discount which is known and understood at the time of removal of the goods though it is quantified later. The Assistant Collector has also recorded a finding, "I also find that such system of grant of discount is not uncommon in the trade". Keeping in view the clarificatory c Order of this Court in Bombay Tyre International, this claim must be held to have been rightly allowed by the Assistant Collector. Year Ending Discount and Prompt Payment Discount: What is called 'Year-ending discount' is really a bonus given by D Madras Rubber Factory to its dealers @Rupees fifty per tyre in respect of a particular type of tyres. This discount is payable only where the payments are actually received within forty five days from the date of the invoice. Under this scheme, it appears that a declaration is to be received dealer- wise and thereafter provision is to be made at the head office of MRF for E the bonus. The Assistant Collector has found that this discount was allowed by the assessee not out of any extra-commercial considerations but that they were meant only to boost the sales particularly in the year 1981-82 in respect of Leader Tyre in order to achieve the target of sales for that year. He has recorded a finding that "such a system of grant of discount is prevalent in normal trade practice and the only difference may be that F MRF limited have granted the discount only at the end of the year and not at the time of actual sales". The learned Additional Solicitor General disputed the correctness of the basis on which the Assistant Collector has allowed this deduction. He commended for our acceptance the reasoning in Para 13(ii) of the judgment dated December 20, 1986 (Assistant Collector G of Central Excise v. Madras Rubber Factory.) The reasoning in the said order runs thus: -..A "The allowance of the discount is not known at or prior to the removal of the goods. The calculations are made at the end of the year and the Bonus at the said rate is granted only to a particular H A class of Dealers. This is computed after taking stock of the ac­ counts between MRF and its dealers. It is not in the nature of a discount but is in the nature of a Bonus or an incentive much after the invoice is raised and the removal of the goods is complete. In the circumstances, we are of the opinion that MRF is not entitled to-deduction under this head." We are, however, of the respectful opinion that the said reasoning cannot be accepted in view of the clear finding recorded by the Assistant Collector that this system of discount is prevalent in the industry and is known and understood at the time of removal of particular goods, though C the amount is quantified later. In view of the said finding and in the light of the clarificatory Order in Bombay Tyre International, we hold that this claim has been rightly allowed by the Assistant Collector. So far as the prompt payment discount is concerned, it is payable under a scheme called 'prompt payment discount scheme' which is ap- D plicable only to up-country non-RCS dealers (except, of course, the govern­ ment and DGS&D accounts). The discount is @ 0.75% on the total value of the invoice including sales tax, snrcharge etc. provided the bill is cleared/paid within 26 days from the date of invoice. The case of the Union of India is that this discount is limited only to certain varieties of products E as explained in the scheme document and is valid only for a limited period. The Assistant Collector, however, dealt with this discount along with the year ending discount and allowed it on the same reasoning as is applicable to the year ending discount. In view of the findings recorded by the Assistant Collector and the F clarificatory order in Bombay Tyre International this claim too must be held to have been rightly allowed by the Assistant Collector. Special Secondary Packing and Tread Rubber: So far as this claim is concerned, we are of the opinion that the G decision in Para-19 of the judgment dated December 20, 1986 (Assistant Collector of Central Excise v. Madras Rubber Factory) is the correct one and needs no departure. In the said judgment, this court referred to the ' I judgment of Bharucha, J. in Miscellaneous Petition No. 1534 of 1979 ) ~ decided on January 7, 1986 wherein the learned Judge had set out the H factual situation and the reasons for rejecting the claim at some length. In - ( { GOVT. OF IND!Av. MADRAS RUBBER FACTORY LTD. [B.P. JEEVAN REDDY, J.] 1189 the absence of any other material placed before us to take a different view, A it would be appropriate to set out the relevant portion of Para-19 including the conclusion, which we respe.ctfully adopt: "It has been brought to our notice that in a Judgment delivered by the Bombay High Court in Misc. Petition No. 1534 of 1979 (Judg­ ment dated 7th January 1986) Bharucha, J. of Bombay High Court B in Bombay Tyres International Ltd. v .. Union of India & Oi,., has considered the Judgment in Godfrey Phillips India Ltd. (supra) with specific reference to.the question of secondary packaging for tread rubber. It has been brought to our notice that such packaging consists of cardboard cartons or wooden cases. In that case the C tread rubber as packed was produced before Bharucha, J. He has described that the tread rubber is a strip of rubber approximately 6" wide and about 1" thick which is tightly wound into a roll. Each roll weighs between 15 Kgs and 40 Kgs. The roll is not held together by any means. The roll is inserted into a loose and open polythene bag. That bag also cannot hold the roll together. The D bag is placed in a cardboard carton or a wooden case. '!'he cardboard carton is held together by rubber bands. The wooden case is nailed together. Though, it was contended that the cardboard cartons and wooden cases were in the nature of secon­ dary packaging whose cost was not includible in the value of tread rubber, Bharucha, J. held that a roll of tread rubber cannot be sold E without the cardboard carton or the wooden case. It is further stated that the secondary packing in which tread rubber is sold is in the course of wholesale trade. The secondary packing is not employed merely for the purpose of facilitating transport or smooth transit and is necessary for selling the tread rubber in the F wholesale trade. Bharucha, J, refused to remand the matter to the authorities as the tread rubber as packed had been produced before him and he was of the firm view that the cardboard cartons and the wooden cases are not such secondary packing materials can be excluded in computing the assessabte value of the Petitioner's tread rubber. In the circumstances that this very issue G has been decided on a visual personal inspection of Bharucha, J. in the case of Bombay Tyre International Ltd. (supra), pronounced after the decision in Godfrey Phillips India Ltd., (supra) we are of the view that the cost of cardboard cartons and wooden cases or any other special secondary packing charges incurred by the MRG H 1190 on tread rubber should not be excluded from th~ assessable value. Tread rubber is a product which if even slightly damaged becomes unfit or un- usable. The vital element "cushion compound" which is applied to the bottom of the tread rubber and which helps the tread rubber to stick to the buffed surface of the old tyre which is to be retreaded is very delicate. A polythene sheet is put over the layer of the compound before the same is rolled and put into another polythene bag to avoid sticking to the outer side of the tread rubber and getting contaminated by dust. It is stated that such production cannot be marketed without the polythene bags and/or cardboard boxes. These are the findings of the Assistant Collector, Goa and in the light of the cumulative decisions of the Assistant Collector, Goa and of the Bombay High Court, we are of the view that the secondary special packing charges for tread rubber cannot be deducted from the assessable value of tread rubber." D We may now take up the deduction which have been disallowed by the Assistant Collectors and are now in issue before us. They are: cost of distribution, interest on finished goods and interest on receivables. So far as cost of distribution is concerned, we have already dealt with it herein­ before. We may now take up "interest on finished goods". Interest On Finished Goods: The claim pertains to the interest on value of finished goods from the date the stocks are cleared from the gate till the date of sale through p the depots. The contention of the assessee is that inasmuch as this is an expense incurred subsequent to the removal of the goods from the gate they are post-removal expenses and, therefore, qualify for deduction. The learned counsel for the assessee commended for our acceptance the reasoning in Para- 14 of the judgment dated December 20, 1986 on this count. We are, however, unable to agree with the said submission. We have G already held, following Bombay Tyre International, that expenditure in­ curred on sales organisation cannot be deducted. The claim herein is in reality "expenses incurred by the assessee upto the date of delivery on account of storage charges" held not excludible in Bombay Tyre lntema­ tional, even where the "wholesale trade is effected by the assessee through H its sales organisation at a place or places outside the factory gate". { oovr. OP IND!Av. MADRAS RUBBER FACTORY LTD. (B.P. JEEVAN REDDY,J.] 1191 Interest on receivables: The case of the assessee (Madras Rubber Factory) is that where the goods are sold to up-country wholesale buyers and payments are received quite sometime. later, it is indeed a case of sale on credit and, therefore, the interest charged from the date of delivery of goods till the date of realisation of the price thereof should be deducted from the value of the B goods. The interest charged, it is submitted, is only in lieu of the time taken in making the payment by the up-country wholesale buyer. Since this 1s the amount received subsequent to the sale from the depots and does not fall within the ambit of any of the expenses held includible in Bombay Tyre lntemationa~ it is clearly excludible. The claim for this deduction 1s, C therefore, allowed. PART - V The last issue urged before us relates to the method of computation of assessable value in a cum-duty price. The issue is whether the excise D duty should be first deducted or the permissible deductions should be first deducted from the selling price? After some discussion, the learned coun- sel for the assessees agreed that the decision in Para-22 of the judgment dated December 20, 1986 (Assistant Collector of Central Excise v. Madras Rubber Factory) represents the correct view. We also find ourselves in E respectful agreement with the said holding. Accordingly, we direct that the method of computation of assessable value shall be the one indicated in Para-22 of the said judgment which we re-produce hereinbelow for the reason that the judgment has since been reviewed and recalled. The paragraph runs as follows: "22. The last important issue relates to the method of computation of assessable value in a cuµi-duty price at a factory gate sale. The issue is whether Excise Duty should be first deducted or the permissible deduction should be first deducted from the selling price for the re-assessments before the Assistant Collectors. The assessment of excise duty both in relation to Section 4 and in G relation to the Valuation Rules is now subject to the definition contained in Section 4( 4)( d) of the Excise Act. The value as . defined thereunder is to be arrived at after tl\e cost of packaging of a durable nature or a returnable nature as also amounts of duty of excise, sales tax and other taxes and trade discount allowed in H accordance with the normal practice of wholesale trade is deter­ mined. It is thus implicit that no excise duty is payable on an element of excise duty in the price. The value as contemplated under Section 4 cannot include a component of excise duty. In the circumstances, where the computation of an assessable value has to be made from the factory gate sale price which is a cum-duty price, the first question which will have to be addressed is what are. the exclusions and permissible deductions from such a sale price. The petitioners have contended that their cum-duty price was arrived at after calculating and adding excise duty payable, i.e., before actual duty was paid. They contend that their price lists for several articles is approved much in advance of the removal from the factory. They contend that when the assessable value is to be arrived at, the same amount of excise duty which was pre­ determined and added to the factory price is naturally to be deducted first and only thereafter the permissible deductions should be deducted to arrive at the value. For the purposes of argument, MRF submitted the following example for considera­ tion: They suggest that their selling price should be considered (cum-duty selling price) as Rs. 3200. They further submitted that the permissible deductions whether on account of trade discount or on account of cost of secondary packaging or sales tax or other taxes packaging or sales tax or other taxes should hypothetically be considered at Rs. 200. The rate of excise duty chargeable is 60% ad valorem for automatic tyres. Assuming for the same of argument that the value of the product is actually Rs. 2075. In accordance with the provisions of Section 4( 4)( d) permissible deductions are made. The assessable value would be Rs. 1875 being the difference of Rs. 2075 and Rs. 200. The excise duty at the rate of 60% would thereafter be computed on the sum of Rs. 1875 and would aggregate Rs. 1125. The selling price which is a cum-duty price would be the sum total of the assessable value, the permis­ sible deductions and the excise duty. Putting this as a mathematical formula the selling price (cum-duty price) is equal to assessable value plus permissible deductions plus excise duty. Cum-duty Paid Selling Price = Assessable value + Excise Duty + Permissible deductions. Again Excise duty is a computed as a ratio of the { GOVf. OF INDIA•. MADRAS RUBBER FACTORY LTD. (BP . .TEEVAN REDDY, J.( 1193 assessable value where duty is ad va/orem. For the purposes of A ascertaining of the assessable value, if three of the components . namely the cum-duty selling price, the quantum of permissible deductions and th.e rate of excise duty are known, the proper and appropriate method of determining the assessable value would be the following formula:- B Assessable value = cum-duty selling price - permissible deductions - (1 +Rate of excise duty) Thus in the instant case working backward, if the cum-duty C selling price is known to be Rs. 3200 an<! the permissible deduc­ tions are known to be Rs. 200 and the rate of excise duty is known to. be 60%, the assessable value is computed as under: Selling price - permissible deductions = 3200 - Rs. 200 = Rs. 3000. D Assessable value is equal to difference in selling price and permis­ sible deductions divided by 1 plus 60/1000 which is equal .to 3000/1.6 which is equal to Rs. 1875. The excise duty at 60% ad valorem rate would be Rs. 1125 on the E assessable value of Rs. 1875. The mathematical formula enumerated above balances. For example, if the cum-duty paid selling price is equal to Rs. 3200, the F assessable value is Rs. 1875 excise duty is Rs. 1125 and permissible deductions is Rs. 200, the aggregate of the asses­ sable value, the permissible deduction and the excise duty is equal to the selling price (cum-duty paid). Any other method of computation of excise duty or assessable value is erroneous. The Petitioner's basis that the assessable value is to ·be arrived at by taking into consideration the same amount of excise duty which is hypothetically pre-determined and added to the factory price and that this element in an attempt to compnte the assessable value should naturally be deducted first, is putting H the cart before the horse. The excise duty is onjy known as a ratio of the assessable value when an ad va/orem duty is included in the cum-duty paid selling price. The quantum of excise duty cannot be pre-deducted or pre-determined till the assessable value is known. It is only the permissible deductions in concrete monetary terms and amount which are known. The cum-duty paid sale price being available for computation and a known value of deductions permitted being also known, the assessable value and the excise duty as a ratio of the assessable value can be only decided by first deducting the permissible deductions, from the cum-duty paid selling price and thereafter computing the value in accordance with the equation mentioned above. This has both a legal and a math­ ematical basis. If the pre-determined amount of excise duty as per the illustration given by MRF Ltd. is first deducted, the equation will not tally. For example, if from a hypothetical cum-duty price of Rs. 150 (comprised of the value of the product at Rs. 100 and ad valorem excise duty @ 50% at Rs. 50) if the excise duty of Rs. 50 is first deducted, the assessable value arrived al would be Rs. 95. The rate of excise duty is 50% and the excise duty @50% of the assessable value of Rs. 95 would be Rs. 47.50 and not Rs. 50 as earlier deducted. There would be a constant difference of Rs. 2.50 in the computation. It is, therefore, an incorrect method of evaluating the assessable value in instances of cum-duty selling price. This interpretation is borne out by the definition contained in Section 4( 4)( d) of the Excise Act. MRFs contention that the excise duty should be deducted first and then the permissible deductions is. incorrect. In ordinary cases where the factory price is not a cum-duty price, the first step in arriving at the assessable value is to deduct the permissible deductions and thereafter to compute the excise on an ad va/orem basis. The excise duty cannot be computed unless the permissible deductions are first made. The assessable value is orrived at only after the permissible deductions are made. Excise duty is a ratio of the assessable value. Ad valorem excise duty is computed only on assessable value after arriving at such assessable value by making proper permissible deductions. Excise duty cannot be computed without proper determination of the assessable value, namely assessable value exclusive of permis­ sible deductions. Even in the cum-duty sale price, the same prin­ ciple must be followed to arrive at the assessable value. To compute an excise duty as a pre-determined amount without J ( I { GOVT. OF INDIA•. MADRAS RUBBER FACTORY LTD. [B.P. JEEVAN REDDY,!.[ 1195 making the permissible deductions for reducing the cum-duty A selling price is a fallacy both legally and mathematically as demonstrated above. The ad valorem excise duty can only be computed after reducing the assessable value by permissible deductions and then applying the tariff rate to the assessable value. To reverse this sequence is to mis-interpret the scheme and mode of levy of excise duty on the assessable value." B CIVIL APPEAL NO. 1097 OF 1981 (UNION OF IND/Av. TATA CHEMICALS LTD.) This appeal is preferred by the Union of India against the judgment C of a learned Single judge of the Bombay High Court dated September 19, 1979 in Miscellaneous Petition No. 451 of 1971. The question at issue is whether the cost of containers, i.e., bags of jute and/or of polythene and the drums are durable and returnable withi:t the meaning of Section 4( 4)( d)(i) of the Act. The appeal was filed directly in this Court against the judgment of the learned Single Judg~ evidently because at that time D the law on the subject was not supposed to be clearly settled. Now that the principles have all been properly enunciated and also because the question whether the packing is durable and returnable by the buyer to the assessee is essentially a question of fact the proper course would be to remit the matter to the excise authorities for determination of the said question of E fact. The matter will, therefore, go back to the Assistant Collector of Central Excise concerned who shall decide the said question in accordance with law and on the basis of the material that may be placed before him. Similar direction should follow in Civil Appeal No. 1807 of 1977 (Synthetic & Polymer Industries v. Union of India & Ors. where too the dispute is whether the packing is durable and returnable. The matter shall go back F to the concerned Assistant Collector of Central Excise who shall decide the said question in accordance with law and on the basis of the material placed before him. PART - VI Accordingly, Civil Appeal No. 3195 of 1979 (Union of India & Ors. G1 v. Madras Rubber Factory), Civil Appeal Nos. 4731- 32 of 1984 (The Superintendent of Central Excise, Kottayam & Ors. v. Madras Rubber Factory Limited, Civil Appeal No. 793 of 1984 (Madras Rubber Factory Limited v. Collector of Central Excise, Madras), Civil Appeal No. 5373 of 1995 arising H 1196 SUPREME COURT REPORTS (1995) 3 S.C.R. A out of Special Leave Petition (C) No. 10108of1980 (Union of India & Ors. v. Madras Rubber Factory) are allowed in part in the above terms. Civil Appeal No. 5375 of 1995 arising out of S.L.P.(C) No. 4041 of 1981 (Union of India v. HindusttQI Lever) is allowed for the reasons recorded herein­ before. There shall be no orders as to costs. B We have pronounced upon various submissions urged before us. 11- is obvious that if in any individual case, any other claim for deduction arises, its admissibility has to be decided keeping in view the principles contained herein. The individual appeals listed before us shall be posted immediately C after vacation for disposal in the light of this judgment. S.M. Appeals partly allowed. \ ' I