http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 15  

PETITIONER: ASSISTANT COLLECTOR OFCENTRAL EXCISE & OTHERS ETC.

       Vs.

RESPONDENT: MADRAS RUBBER FACTORY LTD.

DATE OF JUDGMENT20/12/1986

BENCH: BHAGWATI, P.N. (CJ) BENCH: BHAGWATI, P.N. (CJ) KHALID, V. (J)

CITATION:  1987 AIR  701            1987 SCR  (1) 846  1986 SCC  Supl.  751     JT 1987 (1)    41  1986 SCALE  (2)1239  CITATOR INFO :  RF         1987 SC 729  (2)  C&F        1989 SC1525  (14)  R          1989 SC2121  (3)  D          1990 SC 977  (9)  RF         1990 SC1814  (15)

ACT:     Central  Excise and Salt Act, 1944: Section  4;  Central Excise  Rules,  1944: Rule 96;  Central  Excise  (Valuation) Rules, 1975: Rule 4.     Excise  duty--Valuation of excisable  goods--’Assessable Value--Determination  of-- TAC/Warranty,  product  discount, Overriding  commission,  duty paid on processed  tyre  cord, secondary  packaging cost, interest on goods  after  removal from  factory gate till date of sale, interest  on  receiva- bles, cost of distribution at duty paid sales depots--Deduc- tion of--Whether permissible and valid. Lower  price  for  Government  Departments--Whether   normal price.     Computation  of assessable value in a cum-duty price  at factory gate--Permissible deductions should first be deduct- ed.

HEADNOTE:     In  Union of India v. Bombay Tyres  International  Ltd., [1984]  1  SCR 347, this Court held that under  s.4  of  the Central Excise and Salt Act, 1944, only those expenses which were  incurred  on account of factors  contributing  to  the product’s value upto the date of sale or the date of  deliv- ery  at the factory. gate were liable to be included in  the assessable  value. On November 14/15, 1983 the Court made  a clarificatory  order  wherein it was stated  that  discounts allowed  in  the trade (by whatever name called)  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,  and  that such allowance and the nature of discount should be known at or  prior  to  the removal of the goods and  should  not  be disallowed only because they were not payable at the time of each invoice or deducted from the invoice price.     The respondent-Rubber Factory claimed various deductions

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 15  

of the nature of post-manufacturing expenses for determining the assessable value of their products under s.4 of the  Act which were disallowed 847 by the Excise authorities. Its writ petitions were, however, allowed by the High Court.     In  appeals by the Union of India for setting aside  the High Court judgment it was contended for the respondent: (a) that  the  TAC/ Warranty discount, which was  sought  to  be deducted for determining the assessable value, satisfied all the criteria of a trade discount stipulated in the  clarifi- catory  order; (b) that the claim for deduction  of  product discounts--prompt payment discount, year-ending discount and campaign discount--was justified on the same reasoning;  (c) that the interest on finished goods from the date the stocks were  cleared till the date of sale was a  proper  deduction for  determination  of the assessable value;  (d)  that  the claim  for  deduction  of interest  on  receivables  (sundry debtors  for  sales) was justified on the ground  that  this cost was inbuilt in the price and was incurred on account of the  time factor between the delivery of goods and  realisa- tion  of moneys; (e) that the overriding commission  allowed to the Hindustan Petroleum Corporation for exclusive sale of company’s products through their dealer net work was also of the nature of a discount; (f) that the cost of  distribution at  the  duty paid sales depot was a proper  deduction;  (g) that  the  difference between the lower price at  which  the product  was  sold to the Government and the  price  charged from  ordinary dealer was of the nature of a  discount;  (h) that the claim for deduction of special secondary  packaging charges  squarely falls within s.4(4)(d)(i) of the Act,  and (i) that the company was entitled to the deduction of excise duty paid on processed typecord under s.4(4)(d)(ii).     The respondents also disputed the method of  computation of ’assessable value’ in a cure-duty price at a factory gate sale  and contended that such value was to be arrived at  by first  deducting the predetermined excise duty added to  the factory price and only thereafter the permissible deductions were to be deducted. Disposing of the appeals, the Court,     HELD: 1.1 The respondent company is not entitled to  the deduction of TAC/Warranty discount for determining  assessa- ble   value  of  tyres  since  it  does  not   come   within s.4(4)(d)(ii)  of  the Central Excise and  Salt  Act,  1944. [856H, 857A, 855H]     1.2 Even though giving of TAC/Warranty is established by practice for the wholesale trade or capable of being  decid- ed,  what is really relevant is the nature of the  traction. It is not a discount on the 848 tyres already sold, but relate to the goods which are  being subsequently sold to the same customers. 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. [8S6B]     1.3  A trade discount of any nature could be allowed  to be deducted provided it is known at or prior to the  removal of the goods. In the instant case, this condition  precedent is  not  satisfied as the committee decided  the  claim  for TAC/Warranty subsequent to the removal of the tyre. [856C]     1.4 The analogy of Rule 96 of the Central Excise  Rules, 1944 relating to abatement of duty of defective tyres cannot be made applicable to justify the claim for deduction of the TAC/Warranty  discount. A tyre being sold as a "seconds"  or "defective" would be sold at a discount, such discount being known  before the goods were removed/cleared,  thereby  also

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 15  

satisfying the pre-condition of s.4(4)(d,(ii) of the  Excise Act.  The assessable vase and price list submitted would  be one relating the ’seconds’ tyres. [856G]     Union  of  India  v. Bombay  Tyres  International  Ltd., [1984] 17 ELT 329, referred to.     2.1  The respondent is entitled to deduction of  ’prompt payment  discount’ which is a ’trade discount’ given to  the dealers by the company. It is established under the terms of sale or by established practice and is known at or prior  to the removal of the goods- [857E-F]     2.2  The  company is not entitled to  deduction  of  the ’year-ending discount’. The allowance of the discount is not known at or prior to the removal of the goods. The  calcula- tions  are made at the end of the year and the bonus at  the said rate is granted only to a particular class of  dealers. This is computed after taking stock of the accounts  between the  company and its dealers. It is not in the nature  of  a discount  but in the nature of a bonus or an incentive  much after the invoice is raised and the removal of the goods  is complete. [857G-858A]     2.3  The campaign bonus cannot be a permitted  deduction to  the company. The allowance of the discount is not  known at  or  prior to the removal of the goods.  The  qnantum  is unascertained  at the point of removal. The discount is  not on  the  wholesale cash price of the articles  sold  but  is based an the total sales effected of a particular variety of tyre calculated after the removal. [858D] 849     3.1  Expenses  incurred on account  of  several  factors which have contributed to the product’s value upto the  date of  sale, which apparently would he the date of delivery  at the factory gate, are liable to he included in the  assessa- ble value. [858F]     3.2  The company was justified in claiming deduction  of interest  an finished goods until they were sold and  deliv- ered  at  the factory gate. But interest on  finished  goods from the date of delivery at the factory gate up to the date of  delivery  from the sales depot would be an  expense  in- curred  after the date of removal from the factory gate  and it  would, therefore, not he liable to he included since  it would add to the value of the goods after the date of remov- al from the factory gate. [858G-H]     Union  of  India  v. Bombay  Tyres  International  Ltd., [1984] 1 SCR 347, referred to.     4.  The interest cost and expenses on sundry debtors  or interest on receivables is an expense subsequent to the date of sale and removal or delivery of goods and, therefore, the company  would  not he eligible to claim deduction  on  this account. [859H]     5. The overriding commission paid by the company to  the Hindustan  Petroleum Corporation for sale of their  products exclusively through HPC dealer network is not deductible. It was agreed to in consideration of the COrporation not agree- ing to enter upon agreement with any other tyre  manufactur- ing   company   vis-a-vis  by  reason  of   the   respondent undertaking  not to enter upon any agreement with any  other oil  company. It is a compensation granted for the  sale  of company’s  products through HPC dealers and is a  commission for  services  rendered by the agent. It is not  a  discount known at or prior to the removal of the goods. [859A-C]     6.  The cost of distribution incurred at the  duty  paid sales  depots is not to he included in the assessable  value in  case  the wholesale dealers take delivery of  the  goods from outside such godown. The wholesale dealers having taken delivery of the goods manufactured by the company and  there

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 15  

being a removal of the goods from the factory gate, the cost of  distribution at duty paid sales depots cannot  he  taken into  account for the purpose of determining the  assessable value of the goods. [859H-860A]     Union  of India & Ors. v. Duphar Interfram Ltd.,  [1984] ECR 1443, referred to. 850     7.  Merely because the product is sold at a lower  price to  the Government it cannot be said that the difference  in price  with reference to an ordinary dealer and the  Govern- ment  is  a discount to the Government.  The  position  that there  can be different price lists of articles  of  similar description sold to different classes of dealers or  differ- ent  classes of buyers in wholesale is  specifically  recog- nised  under  s.4(1)(a), proviso (1) of the Act.  The  lower price  for the Government constitutes a normal price for  it as a class of buyer and no deduction on this head is  liable to  the  company  for the purpose of  determination  of  the assessable value of the article. [860D, C, E]     8.1 Section 4(4)(d)(i) of the Act read with the Explana- tion  thereto makes it apparent that the ’secondary  packag- ing’  done  for the purpose of  facilitating  transport  and smooth transit of the goods to be delivered to the buyer  in the wholesale trade cannot be included in the value for  the purpose of assessment of excise duty. If a packaging is  not necessary  for  the  sale of the product  in  the  wholesale market  at the factory gate, the same cannot be included  in the value for the purpose of assessment of excise duty. [860 FG]     8.2  In  the instant case, the secondary  packaging  for tread rubber consists of cardboard cartons and wooden cases. This  secondary packing is not employed merely for the  pur- pose  of  facilitating transport or smooth  transit  but  is necessary  for  selling the tread rubber  in  the  wholesale trade. The cost of these cardboard cartons and wooden  cases or  any  other  special secondary charges  incurred  by  the company  on tread rubber could not, therefore,  be  excluded from its assessable value. [861A, D, E-F]    Union  of  India & Ors. v. Godfrey  Philips  India  Ltd., [1985]  22  ELT 306 and Bombay Tyres International  Ltd.  v. Union  of India & Ors., Bombay High Court M.P. No.  1534  of 1979 decided an January 7, 1986, referred to.     9.  The company is eligible for deduction  from  selling price  of tyre of excise duty paid on processed  tyre  cord. This is in accord with s.4(4)(d)(ii) of new s.4 of the  Act. [862F-G]     10.1  The assessment of excise duty both in relation  to s.4 and in relation to the Valuation Rules is now subject to the  definition contained in s.4(4)(d) of the Act. The  ’va- lue’  as  defined thereunder is to be arrived at  after  the 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 851 discount  allowed in accordance with the normal practice  of wholesale trade is determined. It is implicit that no excise duty  is payable on an element of excise duty in the  price. The value as contemplated under s.4 cannot include a  compo- nent of excise duty. [863AB]     10.2 The aggregate of the assessable value, the  permis- sible deduction and the excise duty is equal to the  selling price  (cure-duty paid). The excise duty is only known as  a ratio  of  the assessable value when an ad valorem  duty  is included in the cure-duty paid selling price. The quantum of excise  duty cannot be pre-deducted or  pre-determined  till

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 15  

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 the value of deduction permitted being  also known,  the assessable value and the excise duty as a  ratio of the assessable value can be only found by first deducting the  permissible deductions from the cum-duty  paid  selling price  and  thereafter computing the value by  dividing  the difference by (1 +rate of excise duty). This method has both a legal and mathematical basis. To reverse this sequence  is to  mis-interpret the scheme and the mode of levy of  excise duty on the assessable value. [864E-G, 865B, 865G]     10.3  Where the factory price is not a cure-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 valorem basis by applying  the  tariff rate to the assessable value. [865D]

JUDGMENT:     CIVIL  APPELLATE JURISDICTION: Civil Appeal No. 3195  of 1979 etc.     From the Judgment and Order dated 20th June, 1979 of the Kerala High Court in Writ Appeal No. 302 of 1978.     F.S.  Nariman,  M. Chandrasekharan, K.R.  Nambiar,  C.V. Subba Rao, Ms. A. Subhashini, A.K. Ganguli, Mrs. R.  Rangas- wamy,  Hemant  Sharma,  K. Swamy and Ms. S.  Relan  for  the appearing parties. The Judgment of the Court was delivered by     BHAGWATI CJ. 1. The above cases are involving a  company known as Madras Rubber Factory Ltd. (popularly known as  MRF Ltd.)  MRE  has four factories;  Kottayam  (Kerala),  Madras (Tamil Nadu), Arkonam (Tamil Nadu) and Goa (Union Territory) engaged in 852 the manufacture of automotive tyres, tubes and other  rubber factory  products. Each of these factories are under  juris- diction of different Assistant Collectors. The four proceed- ings arising for our consideration are as under: (i)  Civil Appeal No. 3195 of 1979 is an appeal by  certifi- cate  filed  by  the Union of India  through  the  Assistant Collector  of Central Excise, Kottayam against the  Judgment dated 20th June 1979 of the Division Bench of the High Court of  Kerala  from Writ Appeal No. 302 of 1978  allowing  post manufacturing expenses under the new Section 4 of the Excise Act. This relates to the Kottayam factory. (ii) Civil Appeals Nos. 4731-32 of 1984 are appeals filed by Union  of   India  through the   Superintendent  of  Central Excise,  Kottayam against the Judgment dated 1st April  1976 of  the Division Bench of the High Court of Kerala  allowing post  manufacturing expenses under the old Section 4 of  the Excise Act. (iii) SLP (Civil) No. 10108 of 1980 is another appeal of the Union of India against the Judgment of the Additional  Judi- cial Commissioner, Goa, Daman and Diu allowing post manufac- turing expenses under the old Section 4 of the Excise Act in respect of the factory at Goa. In respect of new Section  4, the Union of India and MRF were agreed that the decision  in Writ  Appeal  No. 302 of 1978 being the  subject  matter  of Civil Appeal 3195 of 1979 would be applicable to the factory at Goa. (iv)  Civil  Appeal No. 793 of 1981 is  MRF’s  Appeal  under Section 35L of the Central Excise and Salt Act (as amended)’ against  the order and decision dated 1st February  1984  of

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 15  

the  Tribunal  (CEGAT) deciding that the sale of  tyres  and other  rubber  products through their 42  Depots  throughout India were not retail sales but were in the nature of whole- sale sales and MRF was not entitled to deductions under Rule 6A of the Central Excise (Valuation) Rules, 1975  (hereinaf- ter referred to as the "Valuation Rules").      2. These proceedings are now arising for our considera- tion  after the pronouncement of the Judgment by this  Court in  the  case  of Union of India & Others  v.  Bombay  Tyres International  Ltd., [1983] Vol. 14 Excise Law  Times  1896) decided on the 7th October 1983 and the clarificatory  order passed by this Court in the same case of Union of 853 India & Others v. Bombay Tyres International Ltd.,  reported in 1984 ELT 329. This clarification was given by the Supreme Court  on 14th and 15th November 1983. Pursuant to  hearings held  in this Court in several cases relating to  post-manu- facturing expenses and after the latter clarificatory  order in  the  case  of Union of India & Others  v.  Bombay  Tyres International   Ltd. (supra), the Tribunal  (CEGAT)  decided the  Review Notice and set aside the order of the  Appellate Collector on 1st February 1984 and on 9th February 1984  the Civil  Appeal  No. 793 of 1984 was admitted.  Format  orders were passed by this Court in the pending appeals relating to post-manufacturing  expenses.  Even in the  present  matters format orders were passed on or around 3rd May, 1984. Format orders  were also passed in the pending Writ Appeal No.  590 of 1979 pending before the High Court at Madras. In  accord- ance with the format orders and within the timeframe  stipu- lated,  amendments  to price lists were to be filed  by  MRF Ltd.  The  present Appeals are now to consider  the  various deductions claimed by MRF Ltd. and/or disallowed and/or  not allowed  by the Assistant Collector, or allowed by  the  As- sistant  Collector,  in the various  jurisdictions  qua  the factories  of MRF Ltd. in the cross Appeals of the Union  of India and the MRF Ltd.     3.  For the sake of convenience, the deductions  arising for  consideration  of  this  Court  can  be  summarised  as under:-- (i) TAC/Warranty discount (ii) Product discounts (iii)  Interest on finished goods and stocks carried by  the manufacturer after clearance (iv) Over-riding commission to Hindustan Petroleum  Corpora- tion (v) Cost of distribution incurred at duty paid Sales Depots (vi) Interest on receivables (vii) 1% turnover discount allowed to RCS Dealers (viii) Secondary packing cost on tread rubber (ix) Discount to Government and other Departments 854     4.  The Appeals further also raise the issue of  whether the  price  to the Defence Department Ex-factory  gate  (ex- factory)  is  to be considered as the wholesale  cash  price under old Section 4 as this was disallowed by the  Assistant Collector, and further the issue as to the method of  compu- tation  of  assessable value where the selling  price  is  a cum-duty price. This issue involves the consideration as  to how excise duty has to be deducted, whether after  deducting permissible deductions or otherwise. We propose to deal with the  issues as follows. For the purpose of this Judgment  we are not repeating and setting out the text of the un-amended Section  4 and the amended Section 4 as the same are  exten- sively  quoted in our Judgment in Union of India  v.  Bombay Tyres  International Ltd., (1983 ELT  1896).  Recapitulating

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 15  

our  Judgment  in Union of India & Others  v.  Bombay  Tyres International Ltd. (supra) we held that: "broadly speaking both the old s.4(a) and the new s.4(1) (a) speak of the price for sale in the course of wholesale trade of an article for delivery at the time and place of removal, namely, the factory gate. Where the price contemplated under the old s.4(a) or under the new s.4(1) (a) is not ascertain- able,  the price is determined under the old s.4(b)  or  the new  s.4(1)(b). Now, the price of an article is  related  to its  value  (using this term in a general sense),  and  into that  value are poured several components,  including  those which  have enriched its value and given to the article  its marketability in the trade. Therefore, the expenses incurred on account of the several factors which have contributed  to its  value upto the date of sale, which apparently would  be the date of delivery, are liable to be included. Consequent- ly, where the sale is effected at the factory gate, expenses incurred  by the assessee upto the date of delivery  on  ac- count of storage charges, outward handling charges, interest on  inventories  (stocks carried by the  manufacturer  after clearance), charges for other services after delivery to the buyer, namely after-sales service and marketing and  selling organisation   expenses  including  advertisement   expenses cannot  be  deducted. It will be  noted  that  advertisement expenses,  marketing and selling organisation  expenses  and after-sales service promote the marketability of the article and  enter  its value in the trade. Where the  sale  in  the course  of  wholesale  trade is  effected  by  the  assessee through its sales organisation at a place or places  outside the factory gate, the expenses incurred by 855 the  assessee upto the date of delivery under the  aforesaid heads  cannot,  on the same grounds, be  deducted.  But  the assessee  will be entitled to a deduction on account of  the cost  of  transportation of the excisable article  from  the factory  gate to the place or places where it is  sold.  The cost of transportation will include the cost of insurance on the freight for transportation of the goods from the factory gate to the place or places of delivery."     5.  In the clarificatory order in Union of India &  Ors. v. Bombay Tyres International Ltd., reported in 1984 Vol. 17 ELT 329 we clarified that discounts allowed in the trade (by whatever name called) 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  dis- count  should  be known at or prior to the  removal  of  the goods and shall not be disallowed only because they are  not payable  at  the time of each invoice or deducted  from  the invoice price.     6.  In relation to the first head of  deduction,  namely TAC/ Warranty discount, the petitioners contend that  deduc- tion on account of TAC/Warranty discount ought to be permit- ted as a deduction for determining the assessable value.  It is  submitted  by  them that this discount  relates  to  the claims of the customers on account of any defect in the tyre already  sold and assessed to duty. Such claims are  scruti- nised by a committee of technical personnel of the assessee. The  Committee decides as to what amount of money should  be refunded  to the customers on account of the defect  in  the manufactured  tyre  already sold to the customers  by  which defect  the tyre does not get its full life tenure.  Instead of refunding the amount in cash the customers are  permitted to  buy  a new tyre, the price of which new  tyre  would  be reduced  by the amount refundable to customers as per  deci-

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 8 of 15  

sion  of the committee. ’17he petitioners contend  that  the TAC/Warranty discount satisfied all the criteria of a  trade discount  stipulated in our order dated  14th/15th  November 1983 in that it is a discount established by practice  since 1943,  it is a discount given to the consumer of a MRF  tyre in respect of a tyre purchased earlier, the factum of allow- ance  is known is trade prior to removal, the nature of  the discount is not arbitrary or ad hoc and easily determinable.     7. The Revenue disputes this claim on the ground that it does  not come within Section 4(4)(d)(ii) of the  Act  since the  claim is not in accordance with the normal practice  of the wholesale trade at the time 856 of  removal  of the goods in respect to which the  claim  is made and also on the ground that this is not normally claim- able as trade discount.     8.  We  are  inclined to accept the  contention  of  the department. Even though the giving of TAC/Warranty is estab- lished  by  practice or capable of being  decided,  what  is really  relevant is the nature of the transaction. The  war- ranty is not a discount on the tyre already sold, but relate to  the goods which are being 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.     9.  In our order dated 14-th/15th November 1983 we  have said that trade discounts of any nature should be allowed to be  deducted provided, however, the discount is known at  or prior to the removal of the goods. In the present case  this condition  precedent is not satisfied as the  Committee  de- cides the claim subsequent to the removal of the tyre.     10.  The  Petitioners have further  contended  that  the Excise Act and the Rules framed thereunder contemplate  such an  allowance and an abatement of duty on  defective  tyres. Counsel  for the Petitioners has drawn an attention to  Rule 96 which reads as follows: "Rule 96. Abatement of duty on defective tyres:- If a  manu- facturer  desires that certain tyres should, in  consequence of  damage  sustained during the course of  manufacture,  be assessed on a value less than the standard selling price  he shall declare in writing on the application for clearance of the goods, that such damage has been sustained and each such tyre shall be clearly legibly embossed or indelibly  stamped with  the  word  "Second",  "Clearance"  or "Defective".     11. There is, however, a distinction between a compensa- tion in the nature of warranty allowance on a defective tyre after it has been sold and removed from the factory gate and selling  a defective tyre as a "seconds" or "defective".  In our  view the analogy of Rule 96 is not applicable.  A  tyre being  sold as a "seconds or "defective" would be sold at  a discount,  such discount being known before the  goods  were removed/cleared,  thereby also satisfying the  pre-condition of  section  4(4)(d)(ii) of the Excise Act.  The  assessable value  and  price list submitted would be  one  relating  to "seconds" tyres. We, therefore, 857 disallow the claim in respect of TAC/Warranty discount.     12. The next head of deductions arising for our  consid- eration  is in respect of product discounts. This head  com- prises of 3 tyres of discounts: (1) Prompt Payment Discount (2) Year Ending Discount (3) Campaign Discount 13. We deal with each of the heads individually as under:--

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 9 of 15  

   (i)  Under  the prompt payment discount  scheme  MRF  in relation  to  up-country Non-RCS Bills  in  the  replacement market  except  Government and DGS & D accounts, a  rate  of 0.75% on the total value of the invoice including sales tax, surcharge,  etc. is offered if the bill is cleared/paid  for within 26 days from the date of invoice. The Union of  India disputes this claim on the ground that it is limited to only certain  varieties  of products as explained in  the  scheme document  and is only for a limited period. We are  not  in- clined  to  accept the contention of the Union of  India  in this  regard. A prompt payment discount is a trade  discount given  to  the dealers by MRF. It is established  under  the terms of sale or by established practice and is known at  or prior to the removal of the goods. It squarely falls  within our  order of clarification in the case of Union of India  & Ors. v. Bombay Tyres International Ltd. (supra). The MRF  is entitled to deduction on this account.     (ii)  In the Special year-end Bonus to Dealers MRF  pro- poses and claims this deduction as a year-end discount. This Bonus of Rs.50 per tyre is for certain specific tyres and is receivable only on those invoices where payments are actual- ly  receivable within 45 days from the date of the  invoice. Under this scheme a declaration is to be received dealerwise and thereafter provision is to be made at the head office of MRF  for  the Bonus. The allowance of the  discount  is  not known at or prior to the removal of the goods. The  calcula- tions  are made at the end of the year and the Bonus at  the said rate is granted only to a particular class of  Dealers. This is computed after taking stock of the accounts  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 858 raised  and  the removal of the goods is  complete.  In  the circumstances,  we are of the opinion that MRF is not  enti- tled to deduction under this head.     (iii) MRF proposed "Superlug Piggy-back campaign  Bonus" in March/April 1983 for invoices during a particular  period whereby  bonus  of Rs.50 per tyre for  every  Superlug  tyre and/or  any other particular variety of tyres is given.  The bonus  was again applicable only on invoices for which  pay- ments  were received within 45 days. Details of bonus  earn- ings  per dealer were to be computed after taking  stock  of the  accounts  between  MRF and its dealers  and  the  bonus amount was to be credited after June 1983 or mid-July  1983. On  the  same reasoning as  the  year-ending  discount/bonus scheme,  the campaign bonus cannot be a permitted  deduction to  MRF.  The allowance of the discount is not known  at  or prior  to the removal of the goods. The quantum is  unascer- tained  at the point of removal. The discount is not on  the wholesale  cash price of the articles sold but is  based  on the  total  sales effected of a particular variety  of  tyre calculated  after  the removal. We accordingly  reject  this claim of MRF.     14. Interest on finished goods from the date the  stocks are cleared till the date of the sale was disallowed by  the Assistant  Collector,  Kottayam. This head  has  again  been urged for our consideration as a proper deduction for deter- mination of the assessable value. As quoted in our  judgment in  Union  of India and Ors. v. Bombay  Tyres  International Ltd. (supra), we have held that expenses incurred on account of several factors which have contributed to its value  upto the  date  of  sale which apparently would be  the  date  of delivery at the factory gate are liable to be included.  The interest on the finished goods until the goods are sold  and

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 10 of 15  

delivered  at the factory gate would therefore  necessarily, according to the judgment in Bombay Tyres International case (supra)  have to be included but interest on finished  goods from the date of delivery at the factory gate up to the date of  delivery  from the sales depot would be an  expense  in- curred  after the date of removal from the factory gate  and it  would  therefore, according to the  judgment  in  Bombay Tyres International case (supra) not be liable to be includ- ed  since it would add to the value of the goods  after  the date  of removal from the factory gate. We  would  therefore have to allow the claim of MRF Ltd. as above. 859     15.  The next head of deduction relates  to  over-riding commission to the Hindustan Petroleum Corporation which  was disallowed.  MRF  entered  into a  contract  with  Hindustan Petroleum  Corporation  Ltd.  for  sale  of  their  products through  HPC  dealer network. An overriding  commission  was agreed to, in consideration of HPC not agreeing to  entering upon  agreement  with any other tyre  manufacturing  company vis-a-vis by reason of MRF undertaking not to enter upon any agreement with any other oil company. The discount  proposed was as a percentage of sale effected through the HPC dealers on  half  yearly basis. On the face of it,  the  over-riding commission payable to HPC is a commission for sales. It is a compensation  granted for the sale of MRF  products  through HPC dealers and is a commission for services rendered by the agent. It is not a discount known at or prior to the removal of  the  goods and we accordingly reject this claim  of  MRF Ltd.     16. Another head of deduction disallowed to MRF  relates to  interest on receivables (sundry debtors for sales).  MRF has  represented that this cost is inbuilt in the price  and is  incurred on account of the time factor between the  time the  goods  are delivered and the time the moneys  are  rea- lised.  The  cost is incurred only where  credit  terms  are given  in case of up-country and other buyers where  payment is made much after the sales are effected. They contend that it  is nothing but an extension of the principle  underlying Rule 4 of the Central Excise (Valuation) Rules. They contend that  this is an adjustment in value required to be made  to take into account and provide for the difference in the time of delivery and the realisation of the sale value. As stated in  our  judgment in Union of India & Ors. v.  Bombay  Tyres International  Ltd.   (supra),  it is  only  those  expenses incurred on account of factors which have contributed to its value  upto the date of sale or the date of  delivery  which are  liable  to  be included in the  assessable  value.  The interest cost and expenses on sundry debtors or interest  on receivables is an expense subsequent to the date of sale and removal  or  delivery of goods and in our opinion  MRF  Ltd. would be eligible to claim deduction on this account.     17. The next head which was urged for our  consideration relates  to  the cost of distribution incurred at  the  duty paid  sales  depots. In our judgment in Union of  India  and Others  v.  Duphar Interfram Ltd. (Civil Appeal No.  569  of 1981)  reported in 1984 Excise and Customs Reporter at  page 1443,  we have held that the cost of distribution is not  to be  included in the assessable value in case  the  wholesale dealers  take delivery of the goods from outside  duty  paid godown. The 860 wholesale  dealers having taken delivery of the goods  manu- factured by MRF. Ltd. and there being a removal of the goods from the factory gate, the cost of distribution at duty paid sales depots cannot be taken into account for the purpose of

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 11 of 15  

determining the assessable value of the goods.     18. The next head of deduction disallowed to MRF relates to discount to Government and other Departments. In our view the Assistant Collector, Goa has rightly rejected the  claim of MRF though the Assistant Collector, Kottayam allowed  the claim  of MRF. MRF Ltd. sells its products at a lower  price as  per  contract with the Government  or  its  Departments. Separate  price lists for the Government and  other  Depart- ments  were  filed by MRF distinct and  different  from  the price  lists in relation to dealers. The position that  dif- ferent  price  lists  for different classes  of  dealers  or different classes of buyers is specifically recognised under section  4(1),  proviso (i), of the  Excise  Act.  Different prices  can be declared with reference to different  classes of  buyers and each price is deemed to be a normal price  of such  goods. In this view of the matter, merely because  the product  is sold at a lower price to the Government and  its Departments  does  not enable the MRF to  contend  that  the difference in price with reference to an ordinary dealer and the Government is a discount to the Government. The  differ- ence  in  price is not a discount but constitutes  a  normal price  for the Government as a class of buyer and no  deduc- tion on this head is liable to MRF Ltd.     19. The next question which arises for our consideration relates  to  special secondary packaging charges  for  tread rubber.  It  has been the contention of the MRF  that  their case is covered by the judgment in Union of India & Ors.  v. Godfrey  Philips  India Ltd., reported in 1985 Vol.  22  ELT 306.  The  majority judgment in Godfrey Philips  India  Ltd. (Supra)  holds  that  "on  a  proper  construction  of  Sec. 4(4)(d)(i) of the Act read with the Explanation, the second- ary packaging done for the purpose of facilitating transport and smooth transit of the goods to be delivered to the buyer in  the wholesale trade cannot be included in the value  for the purpose of assessment of excise duty. If a packaging  is not  necessary for the sale of the product in the  wholesale market  at the factory gate, the same cannot be included  in the value for the purpose of assessment of excise duty."  It has been brought to our notice that in a Judgment  delivered by the Bombay High Court in Misc. Petition No. 1534 of  1979 (Judgment dated 7th January 1986) Bharucha J. of Bombay High Court in Bombay Tyres International Ltd. v. Union of India & Ors., has considered the Judgment in 861 Godfrey  Philips 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 tread rubber  as  packed was produced before Bharucha  J.  He  has described that the tread rubber is a strip of rubber approx- imately 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 bag is placed in  a  cardboard carton  or a wooden case. The cardboard carton is  held  to- gether 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 secondary packaging whose cost was not includable in the value of tread rubber, Bharu- cha  J.  held  that a roll of tread rubber  cannot  be  sold 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

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 12 of 15  

facilitating  transport or smooth transit and  is  necessary for selling the tread rubber in the wholesale trade.  Bharu- cha  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 as can be  excluded in computing the assessable value of the  Peti- tioner’s  tread rubber. In the circumstances that this  very issue  has been decided on a visual personal  inspection  of Bharucha  J. in the case of Bombay Tyres International  Ltd. (supra)  pronounced  after the decision in  Godfrey  Philips 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  MRF  on  tread rubber  should  not be excluded from the  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  poly- thene bags and/or cardboard boxes. These are the findings of the Assistant Collector, Goa and in the light of the cumula- tive  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 862 cannot  be deducted from the assessable value of tread  rub- ber.     20. In relation to the determination of wholesale  price of  tyres on the basis of the ex-factory price  for  Defence supplies, with reference to the old Section 4 in view of our Judgment  in  Union of India v. Bombay  Tyres  International Ltd. (supra) also reported in [1984] 1 SCR 347 at 376E, this Court has held that "in the new Section 4 in supersession of the  old Section 4, no material departure was intended  from the  basic scheme for determining value of  excisable  arti- cles." It has been contended by the Union of India that even after  our  format  orders referred to above,  MRF  has  not submitted any statement of deductions/amendments in  respect of  price  lists filed nor submitted any  fresh  prices.  It claims several deductions on percentage basis by  furnishing calculations  vis-a-vis the entire company but did not  fur- nish  item-wise  or factory-wise break up  of  such  claims. Having held that there is no material departure in the basic scheme  for determining the value of excisable  articles  in the old Section 4 and the new Section 4, there is nothing in the  unamended  Section 4 to justify an inference  that  the wholesale cash price of articles of similar description sold cannot  be  different  for different classes  of  buyers  in wholesale.  Different  prices can be normal prices  for  the purposes  of  determination of the assessable value  of  the article.  We accordingly reject the contention of  the  MRF. Even though the MRF has not filed a separate price list  for the factory gate clearances to Defence Department under  the old  Section 4, in view of our now holding that there is  no material schematic difference between old Section 4 and  new Section  4, we permit MRF Ltd. to file revised  price  lists with  reference to the class of buyers namely, Defence on  a different  basis for a different normal price and  avail  of all the necessary reliefs with reference to lower assessable

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 13 of 15  

value, if the same has not already been filed.     21.  In so far as the deductions claimed towards  excise duty paid on processed tyre cord, the contention of the  MRF has been upheld by the Goa Bench in Special Civil Appeal No. 28 of 1983 and the claim has been allowed to MRF for  deduc- tion  from  selling price of excise duty on  processed  tyre cord. This is in accordance with Section 4(4) (d)(ii) of the new Section 4 and we accordingly confirm that MRF is  eligi- ble to this deduction.     22.  The last important issue relates to the  method  of computation  of  assessable value in a cum-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- 863 assessments before the Assistant Collectors. The  assessment of excise duty both in relation to Section 4 and in 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 the  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 accordance with the normal  prac- tice  of wholesale trade is determined. 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  circum- stances, 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 list for several articles  is  ap- proved 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  argu- ment, MRF submitted the following example for consideration:     They  suggested that their selling price should be  con- sidered  (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 packag- ing  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 automotive tyres. Assuming for the sake 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  permissible  deductions and  the  excise  duty. Putting  this  as a mathematical formula the  selling  price (cum-duty price) is equal to assessable value plus permissi- ble deductions plus excise duty. Cumduty Paid Selling  Price =  Assessable Value + Excise Duty + Permissible  deductions. Again  excise duty is computed as a ratio of the  assessable value where duty is ad valorem. For the purposes of ascer- 864

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 14 of 15  

taining  the  assessable value, if three of  the  components namely, the cum-duty selling price, the quantum of permissi- ble  deductions and the rate of excise duty are  known,  the proper and appropriate method of determining the  assessable value would be the following formula:- Assessable  value  = cum-duty selling  price  -  permissible deductions divided by ( 1 + Rate of excise duty)     Thus  in the instant case working backward, if the  cum- duty selling price is known to be Rs.3200 and the  permissi- ble deductions 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           = Rs.3200=RS.200 = Rs.3000 Assessable value is equal to difference in selling price and permissible  deductions  divided by 1 plus 60/100  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 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 assessable value is Rs. 1875, excise  duty  is Rs. 1125 and permissible deductions is Rs.200, the aggregate of the assessable value, the permissible deductions 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  was hypothetically pre-determined and added to the factory price and that this element in an attempt to compute the  assessa- ble value should naturally be deducted first, is putting the cart  before the horse. The excise duty is only known  as  a ratio  of  the assessable value when an ad valorem  duty  is included in the cum-duty paid selling price. The quantum  of excise duty cannot be pre-deducted or predetermined till the assessable value is known. It is only the permissible deduc- tions in concrete monetary terms and amount which are 865 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  accord- ance  with  the equation mentioned above. This  has  both  a legal and a mathematical 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 cumduty 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 and thereafter the permissible deduction of Rs.5 is deducted,  the assessable value arrived at 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 differ- ence  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. MRF’s 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 assessa-

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 15 of 15  

ble value is to deduct the permissible deductions and there- after  to  compute the excise on an ad  valorem  basis.  The excise duty cannot be computed unless the permissible deduc- tions  are  first made. The assessable value is  arrived  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 permissible deductions. Even in the cum-duty sale  price, the same principle must be followed to arrive at the assess- able  value. To compute an excise duty as  a  pre-determined amount without making the permissible deductions for  reduc- ing the cum-duty 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.     23. In the light of our aforesaid discussions and  keep- ing  in line with our previous format orders, we direct  the assessing authorities to 866 quantify  and  re-determine the  permissible  deductions  in accordance with our present Judgment. The assessee, MRF Ltd. already having been required to file the permissible  deduc- tions/amendments  to the price lists within a period of  one month  in  the last instance in May 1984 is once  again  re- quired  by us to file fresh price lists in the light of  our present Judgment within one month for all the periods  under consideration.  The assessing authorities after hearing  the assessee would quantify the correct assessable value in  the light of our Judgment. In making the assessments for each of the  periods, the authorities would include the set  off  in respect of further refunds, if any, allowable on account  of fresh  deductions  permitted and/or already allowed  to  the assessee. MRF would be at liberty to obtain suitable  direc- tions in the pending Writ Appeal No. 590 of 1979 in the High Court  of Madras in accordance with our Judgment.  We  leave the parties to bear their own costs.                            ORDER     In  respect of items claimed by the assessee which  have been  allowed by us in this judgment or where the  allowance by  Assistant Collector has been upheld the quantum will  be adjusted by giving appropriate credit in the personal Ledger Accounts. P.S.S.                                        Appeals   dis- posed of. 867