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CASE NO.: Appeal (civil)  3792-3803 of 2000

PETITIONER: Commissioner of Central Excise,Belgaum

RESPONDENT: M/s Akay Cosmetics Pvt. Ltd

DATE OF JUDGMENT: 01/04/2005

BENCH: S.N. VARIAVA,Dr. AR. LAKSHMANAN & S.H. KAPADIA

JUDGMENT: J U D G M E N T

KAPADIA, J.

       If the selling price of M/s Nemaru "a related person" as  defined in section 4(4)(c) of the Central Excise Act, 1944 (for  short "the 1944 Act") was considered as the basis of the  assessable value in terms of proviso (iii) to section 4(1)(a) for  the goods manufactured and cleared by M/s Akay Cosmetics  Pvt. Ltd. (assessee herein), then was the claim for deduction  from the assessable value in respect of cost of secondary  packing (special packing), freight, handling charges, insurance,  octroi, turnover tax and cost of bought-out items admissible  under section 4(4)(d) of the 1944 Act, is the question which  arises for determination in these captioned civil appeals filed by  the department under section 35-L (b) of the 1944 Act, as it  then stood.

       M/s Akay Cosmetics Pvt. Ltd., Hubli (hereinafter  referred to for the sake of brevity as "the assessee") was the  manufacturer of instant hair colour under the brand name  "Bigen", falling under chapter sub-heading 3305.90.  The  assessee filed its price list no.1/88-89 effective from 1.1.1988 in  respect of the said product seeking approval of the assessable  value @ Rs.4.38 per bottle of 6 grams.  Since the product was  sold and marketed by M/s Nemaru Coiffure (for short "M/s  Nemaru") @ Rs.18.78 per bottle of 6 grams at Hubli, the  Assistant Collector approved the price-list by fixing the  assessable value @ Rs.7 per bottle of 6 grams for the period  1/88 to 8/88, vide order dated 29.8.1988.  Against the said  approval, the assessee had appealed before the Collector of  Central Excise (Appeals), who remanded the case back to the  Assistant Collector for determining the assessable value and to  ascertain the wholesale price of M/s Nemaru at Hubli  (hereinafter referred to for the sake of brevity as "de novo  adjudication").

       Accordingly, in the de novo adjudication, the Assistant  collector issued show-cause notice dated 21.3.1989 asking the  assessee to show-cause as to why the assessable value of a  bottle of instant hair colour of 6 grams should not be  determined under section 4 based on wholesale price of M/s  Nemaru, Hubli, which, as stated above, effected the sale of the  said product @ Rs.18.78 per bottle of 6 grams.

       In the meantime, the Superintendent of Central Excise  issued seven show-cause notices for the period 9/88 to 7/91  proposing revision of assessable value from Rs.7 per bottle to

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Rs.7.80 per bottle of 6 grams.

       In the above de novo adjudication, the Assistant  Collector, vide his order dated 29.9.1991, revised the assessable  value from Rs.7 to Rs.7.80 per bottle, not only in respect of the  above show-cause notices covering the period 9/88 to 7/91 but  also in respect of the clearances made by the assessee during  the period 1/88 to 8/88 already covered under order dated  29.8.1988.

       Aggrieved by the de novo order dated 29.9.1991, the  assessee filed an appeal before the Collector (Appeals), who  vide his order dated 29.5.1992 remanded the case back to the  Assistant Collector inter alia on the ground of lack of  discussion on the point of disallowance of trade-discount and  cost of accessories from the assessable value (hereafter referred  to as the "second de novo adjudication).

       By order dated 11.1.1994, the Assistant Collector re- decided the issue against the assessee holding that M/s Nemaru,  Hubli was the "related person" and the price of the bottle  should be fixed taking into consideration the price at which M/s  Nemaru sold the product at Hubli; that since the basis of the  sale price was the price charged by M/s Nemaru, the assessee  was not entitled to deduction for freight, insurance, octroi,  selling and handling charges as these expenses contributed to  the selling price of M/s Nemaru.  It was further held that the  office of M/s Nemaru was in the compound of the assessee, M/s  Akay Cosmetics Pvt. Ltd., Hubli and, therefore, the assessee  was not entitled to deduction in respect of storage and  transportation charges, as claimed.  However, deduction was  allowed to the assessee for payment of sales tax and central  excise duty.  With regard to bought-out items, namely, the  plastic measuring cups and hand-gloves, deduction was  disallowed on the ground that the assessee had failed to prove  that the gloves and measuring cups were supplied with their  product (Bigen); that there was no evidence of bulk purchase of  measuring cups; and lastly, that there was no evidence to show  that these measuring cups were sold along with the product as  accessories.  Accordingly, vide order dated 11.1.1994, the  Assistant Collector confirmed the assessable value at Rs.7.80  per bottle of 6 grams from 1/88 to 7/91 and claimed the  differential duty of Rs.5,60,166.63.   

       Being aggrieved by the decision dated 11.1.1994, the  matter was carried in appeal by the assessee to the  Commissioner (Appeals), who by his order dated 30.8.1996  came to the conclusion that the assessee was not entitled to  deduction for the cost of special packing as such cost was  incurred by M/s Nemaru.  By the said decision, it was further  held that the assessee had failed to produce evidence indicating  payment of additional tax and turnover tax and, therefore, the  assessee was not entitled to deduction.  Further, it was held that  without the measuring cup, the product could not be used and,  therefore, the value of the measuring cup supplied with the  carton was not deductible from the assessable value.  By the  said decision, the Commissioner (Appeals) disallowed  deduction on account of freight, insurance, octroi, selling and  handling charges.  Accordingly, the Commissioner confirmed  the demand raised by the department.

       Aggrieved by the decision, the assessee carried the matter  in appeal to the Customs, Excise and Gold (Control) Appellate  Tribunal (hereinafter referred to as "the tribunal).  By the  impugned decision dated 6.1.2000, the tribunal came to the

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conclusion that the demand for Rs.1,59,606.22 towards the  differential duty for the period 1/88 to 8/88 was not sustainable  as there was no show-cause notice given to the assessee raising  the demand for the said period under section 11-A of the Act.   On the question of the assessee and M/s Nemaru being related  person under section 4(4)((c), the tribunal recorded the  concession made on behalf of the assessee that the assessee and  M/s Nemaru were related person up to 3/91.

       On the question of deduction, the tribunal held that the  assessee was entitled to deduction for the special packing.  In  this connection, the tribunal found that the assessee was  engaged in the manufacture of hair-dye, which was sold in  bottles of 6 grams each, which bottles in turn were packed in  individual cartons of 12 units.  According to the tribunal, these  individual cartons constituted packing necessary for the  marketability of the product at the factory gate.  According to  the tribunal, the individual cartons were placed in the bigger  cartons by M/s Nemaru within its premises and not in the  factory premises of the assessee.  The tribunal found that even  the cost of the bigger cartons was borne by M/s Nemaru and not  by the assessee and, therefore, the tribunal held that the cost of  the bigger cartons (special packing) was not includible in the  assessable value in the hands of the assessee.  Lastly, the  tribunal found that the cost of special packing was not  recovered by the assessee from M/s Nemaru and, therefore, it  was not includible in the assessable value.   

       By the impugned judgment, the tribunal allowed  deduction under section 4(4)(d)(ii) for turnover tax and octroi.   

       As regards bought-out items supplied with the bottles, the  tribunal held that the measuring-cups and hand-gloves were not  essential items to be used by the customers and, consequently,  allowed deduction for the said bought-out items.   

       The tribunal also allowed deduction for freight, insurance  as well as selling handling charges.  However, there is no  discussion for granting such deduction.   

       Lastly, the tribunal found, on examination of facts, that,  on and after 1.4.1991, M/s Nemaru had undergone  organizational changes; that, the assessee had filed its price-list  with reference to a new agreement dated 2.1.1991 with M/s  Nemaru and consequently, the tribunal remanded the matter  back to the Commissioner (Appeals) to re-examine the demand  for differential duty for the period from 4/91 to 3/93.  This  remand became necessary as the assessee submitted that M/s  Nemaru was no longer a related person in terms of section  4(4)(c) in view of the above changes.

       Aggrieved by the decision of the tribunal dated 6.1.2000,  the department has come to this Court by filing these civil  appeals under section 35-L (b) of the 1944 Act.

       Shri K. Swamy, learned counsel for the department  submitted that the assessee was not entitled to deduction for  special packing, freight, insurance, handling charges, octroi,  turnover tax and cost of bought-out items during the period  1/88 to 3/91.  In this connection, it was urged that hair-dye  bottles of 6 grams were sold by M/s Nemaru @ Rs.18.78 per  bottle.  That, admittedly, during the aforestated period, M/s  Nemaru was a related person under section 4(4)(c) of the Act.   That, the department was, therefore, right in treating the said  price of Rs.18.78 per bottle as the basis of the assessable value

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under proviso (iii) to section 4(1)(a) of the Act and in the  circumstances, the department was justified in disallowing the  deductions in respect of the above items.  According to the  learned counsel, the department was right in holding that the  deduction for the special packing done by M/s Nemaru was not  admissible as M/s Nemaru was "a related person" under section  4(4)(c) and that in view of the third proviso to section 4(1)(a),  the factory gate had shifted from the place of removal of the  assessee to the premises of M/s Nemaru.

       Learned counsel submitted that in view of the recent  judgments of this Court, the assessee was entitled to deduction  for turnover-tax and octroi subject to the assessee’s producing  proof of payment of taxes during the relevant period.   

       Learned counsel for the department next contended that  the assessee was not entitled to deduction on bought-out items.   In this connection, it was urged that under the literature  supplied to the customer, dosage of hair-dye of prescribed  measure had been mentioned and, therefore, the measuring-cup  was not only meant to facilitate the user in pouring out the  stipulated quantity of the dye but it was an essential part of the  product as the customer was required to use the prescribed  dosage of the product.  It was urged that without the measuring  cup, the customer was not in a position to apply the prescribed  dosage of hair-dye and, therefore, the cost of the measuring cup  was includible in the assessable value.  The same argument was  also applied to hand-gloves.  That, in any event, the assessee  had failed to produce evidence regarding purchase of hand- gloves and measuring cups during the aforestated period 1/88 to  3/91.  That, there was no evidence of supply of these items with  the product during the said period.

       Lastly, it was urged that the tribunal had erred in  remanding the matter back to the Commissioner (Appeals) in  respect of the differential duty demanded for the period 4/91 to  3/93, as M/s Nemaru continued to be a related person even after  1.4.1991.  It was submitted that the new contract dated 2.1.1991  was a pretence, that there was no change in the constitution of  the firms and that there was no evidence of the new pattern of  pricing on and after 1.4.1991.  In the circumstances, it was  submitted that the tribunal should not have remitted the matter.

       Learned counsel next contended that the tribunal had  erred in allowing deduction in respect of freight, insurance and  handling charges.  In this connection, it was urged that the  actual amount spent on the above heads, even if admissible,  was not proved.  That, the tribunal erred in allowing deduction  without proof of actual expenditure.

       Learned counsel next submitted that the tribunal had  erred in setting aside the demand for differential duty under  section 11A for the period 1/88 to 8/88 on the ground that there  was no show-cause notice given to the assessee for that period.   That, the tribunal had erred in holding that the assessee was  entitled to the show cause notice.  That, the tribunal had taken  hyper technical view in setting aside the demand.   

       Shri Anoop Chaudhary, learned senior counsel appearing  on behalf of the assessee submitted that during the period 1/88  to 3/91, M/s Nemaru admittedly was a related person to the  assessee; that during this period, M/s Nemaru was almost the  sole buyer of the said product; that as the case came under  proviso (iii) to section 4(1)(a), the factory gate of the assessee  had shifted to the deemed factory gate of M/s Nemaru; that

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when the price of M/s Nemaru was taken as the basis for  determination of the assessable value, the department had erred  in disallowing deduction in respect of freight, insurance,  handling charges from the assessable value. In this connection,  it was further urged that it was not open to the department to  adopt the price of M/s Nemaru as the basis of assessable value  and at the same time deny deduction therefrom on the basis of  the clearance of the product from the factory gate of the  assessee.  That, in any event, in respect of special packing, the  assessee was entitled to deduction as the said packing was done  by M/s Nemaru after clearance of the product from the factory  gate of the assessee in individual cartons.  That, the cost of the  special packing was borne by M/s Nemaru.  That, this special  packing was done in the premises of M/s Nemaru.  In the  circumstances, learned counsel submitted that the cost of the  special packing was not includible in the assessable value.   

       As regards, the bought-out items, it was submitted that  the measuring cups and hand-gloves were accessories and were  not essential parts of the product.  A user of the hair-dye could  use the product even without the measuring cup and the hand- gloves and in the circumstances, the cost of these bought-out  items was also not includible in the assessable value.  

       Lastly, on behalf of the assessee, it was urged that on  2.1.1991, the assessee had entered into a new contract with M/s  Nemaru; that after 2.1.1991, the organizational set-ups of both  the entities had undergone a change and in the circumstances,   M/s Nemaru had ceased to be a related person under section  4(4)(c) of the Act.  Learned counsel submitted that on 8.4.1991,  the assessee had submitted its price-list w.e.f. 1.4.1991 on the  basis of the new contract and the new set-up and, therefore, the  tribunal was right in remanding the matter back to the  Commissioner (Appeals) for reconsideration of the demand for  differential duty in respect of the period 4/91 to 3/93.

       The key question to be answered is : how and when the  assessable value of the manufactured product is to be  determined?

       To answer the above question, we quote hereinbelow  section 4 of the 1944 Act (as it then stood): "4.     Valuation of excisable goods for purposes  of charging of duty of excise.\027(1) Where under  this Act, the duty of excise is chargeable on any  excisable goods with reference to value, such value  shall, subject to the other provisions of this section,  be deemed to be\027

(a)     the normal price thereof, that is to say, the  price at which such goods are ordinarily sold  by the assessee to a buyer in the course of  wholesale trade for delivery at the time and  place of removal, where the buyer is not a  related person and the price is the sole  consideration for the sale:

Provided that\027

(i)     where, in accordance with the normal  practice of the wholesale trade in such  goods, such goods are sold by the  assessee at different prices to different  classes of buyers (not being related  persons) each such price shall, subject

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to the existence of the other  circumstances specified in clause (a),  be deemed to be the normal price of  such goods in relation to each such  class of buyers;

(ii)    where such goods are sold by the  assessee in the course of wholesale  trade for delivery at the time and  place of removal at a price fixed  under any law for the time being in  force or at a price, being the  maximum, fixed under any such law,  then, notwithstanding anything  contained in clause (iii) of this  proviso, the price or the maximum  price, as the case may be, so fixed,  shall, in relation to the goods so sold,  be deemed to be the normal price  thereof;

(iii)   where the assessee so arranges that  the goods are generally not sold by  him in the course of wholesale trade  except to or through a related person,  the normal price of the goods sold by  the assessee to or through such related  person shall be deemed to be the price  at which they are ordinarily sold by  the related person in the course of  wholesale trade at the time of  removal, to dealers (not being related  persons) or where such goods are not  sold to such dealers, to dealers (being  related persons) who sell such goods  in retail;

(b)     where the normal price of such goods is not  ascertainable for the reason that such goods  are not sold or for any other reason, the  nearest ascertainable equivalent thereof  determined in such manner as may be  prescribed.

(2)     Where, in relation to any excisable goods  the price thereof for delivery at the place of  removal is not known and the value thereof is  determined with reference to the price for delivery  at a place other than the place of removal, the cost  of transportation from the place of removal to the  place of delivery shall be excluded from such  price.

(3)     The provisions of this section shall not apply  in respect of any excisable goods for which a tariff  value has been fixed under sub-section (2) of  Section 3.

(4)     For the purposes of this section,\027

(a)     "assessee" means the person who is  liable to pay the duty of excise under  this Act and includes his agent;

(b)     "place of removal" means\027

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(i)     a factory or any other place or  premises of production or  manufacture of the excisable  goods; or

(ii)    a warehouse or any other place  or premises wherein the  excisable goods have been  permitted to be deposited  without payment of duty, from  where such goods are removed;

(c)     "related person" means a person who  is so associated with the assessee that  they have interest, directly or  indirectly, in the business of each  other and includes a holding  company, a subsidiary company, a  relative and a distributor of the  assessee, and any sub-distributor of  such distributor.

Explanation.\027 In this clause "holding  company", "subsidiary company" and  "relative" have the same meanings as in the  Companies Act, 1956 (1 of 1956).

(d)     "value" in relation to any excisable  goods,\027

(i)     where the goods are delivered  at the time of removal in a  packed condition, includes the  cost of such packing except the  cost of the packing which is of  a durable nature and is  returnable by the buyer to the  assessee.

Explanation.\027 In this sub-clause  "packing" means the wrapper,  container, bobbin, pirn, spool, reel or  warp beam or any other thing in  which or on which the excisable  goods are wrapped, contained or  wound;

(ii)    does not include the amount of  the duty of excise, sales tax and  other taxes, if any, payable on  such goods and, subject to such  rules as may be made, the trade  discount (such discount not  being refundable on any  account whatsoever) allowed in  accordance with the normal  practice of the wholesale trade  at the time of removal in  respect of such goods sold or  contracted for sale;

Explanation.\027 For the purposes of  this sub-clause, the amount of the  duty of excise payable on any

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excisable goods shall be the sum total  of\027

(a)     the effective duty of excise  payable on such goods under  this Act; and

(b)     the aggregate of the effective  duties of excise payable under  other Central Acts, if any,  providing for the levy of duties  of excise on such goods,

and the effective duty of excise on  such goods under each Act referred to  in clause (a) or clause (b) shall be,\027

(i)     in a case where a notification or  order providing for any exemption  (not being an exemption for giving  credit with respect to, or reduction of  duty of excise under such Act on such  goods equal to, any duty of excise  under such Act, or the additional duty  under Section 3 of the Customs Tariff  Act, 1975 (51 of 1975), already paid  on the raw material or component  parts used in the production or  manufacture of such goods) from the  duty of excise under such Act is for  the time being in force, the duty of  excise computed with reference to the  rate specified in such Act in respect of  such goods as reduced so as to give  full and complete effect to such  exemption; and

(ii)    in any other case, the duty of  excise computed with reference to the  rate specified in such Act in respect of  such goods.

(e)     "wholesale trade" means sales to  dealers, industrial consumers,  Government, local authorities and  other buyers, who or which purchase  their requirements otherwise than in  retail."

       Parliament amended the Central Excise Act, 1944 by Act  XXII of 1973.  Clause (a) of section 4(1) spoke of the "value"  being the "normal price", that is to say, the price at which such  goods were ordinarily sold to a buyer in the course of wholesale  trade for delivery at the time and place of removal, where the  buyer was not a related person and price was the sole  consideration for the sale.  In cases of intermediate products,  where the normal price was not ascertainable for the reason that  such goods were not sold or for any other reason, like captive  consumption, section 4(1)(b) provided that the nearest  ascertainable equivalent shall be the "value" of the excisable  product for the purpose of charging excise duty.  Under section  4(4)(b), the phrase "place of removal" was defined not merely  as "the factory or any other place or premises of production or  manufacture" from where such goods are removed but it also  covered "a warehouse" from where such goods are removed.  

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However, three circumstances were mentioned in the three  provisos to section 4(1)(a) under which "value" could vary.   Proviso (i) recognized that in the normal practice the same class  of goods could be sold by the assessee at different prices to  different classes of buyers; in that event each such price was  deemed to be the "normal price" of such goods in relation to  such buyers.  Proviso (ii) provided that where the goods were  sold in wholesale at a price statutorily fixed then such price was  deemed to be the "normal price".  Under the third proviso,  where the goods were sold through a "related person" as  defined under section 4(4)(c), the normal price was the price at  which the goods were sold by the related person in the course  of wholesale trade at the time of removal to the dealers.   

       Under section 4(2), it was provided that where the price  of the excisable product for delivery at the place of removal  was not known and the value was determined with reference to  the price for delivery at a place other than the place of removal,  the cost of transportation from the place of removal to the place  of delivery had to be excluded from such a price.  The reason is  important.  Section 4(2) is a residuary section and applied only  to cases where the price at the place of removal was not known  and the taxable value of the excisable product had to be  determined with reference to the price for delivery (sale) at a  place other than the price of removal.  Under section 4(2), the  cost of transportation from the place of removal to the place of  delivery was deductible, provided that the assessable value  (taxable value) was not known at the factory gate and had to be  determined with reference to another place.  If the goods were  manufactured at place "X" but the assessable value was  determined with reference to place "Y", the cost of  transportation had to be deducted.  The answer is given in the  judgment of this Court in  Union of India & others v. Bombay  Tyre International Ltd. reported in AIR 1984 SC 420, paras 50  and 51.  Under the Excise Act, price was co-related to the value  and not only to the manufacturing cost.  When the assessable  value was determined with reference to place "Y" in the above  illustration, it did not represent the "normal price" at the factory  gate because the price at place "Y" was higher than the "normal  price" on account of transportation cost.  Hence deduction. The  object of such deduction was to bring down the price at place  "Y" to derive the "normal price" at place "X", as the legislature  intended to fix the assessable value on the basis of the price for  delivery at the factory gate.  Ultimately, the excisable article  became the object of assessment when it was sold for a price in  the wholesale trade at the factory gate.   

       In the matter of interpretation of tax laws, deductions are  admissible in terms of the section and not on the basis of  general concepts.  Hence, deduction for transport was confined  to section 4(2).  Similarly, under section 4(4)(d)(ii), the  expression "value" was defined so as not to include excise duty,  sales tax and other taxes.  Similarly, section 4(4)(d)(i) made an  express provision for including the "cost of packing" in the  determination of "value" for the purposes of excise duty  provided it was for goods ordinarily sold in the course of  wholesale trade.

       As stated above, it has been contended on behalf of the  assessee that when the basis of the assessable value was the  price of the related person, namely, M/s Nemaru in this case,  the department had erred in denying to the assessee the  deduction for expenses incurred by the assessee towards freight,  insurance and handling charges.  It was urged that if the price at  which M/s Nemaru effected sales in the course of wholesale

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trade was the basis for determination of the assessable value  under section 4(1)(a) read with the proviso (iii) then the  assessee was entitled to deduction for the said three items,  particularly when the goods are delivered from the premises of  M/s Nemaru and not from the factory gate of the assessee.  It  was urged that the department cannot fix the assessable value  on the basis of the price charged by the related person and at the  same time refuse deductions on the basis of the pricing at the  factory gate of the assessee.

       We do not find any merit in the above argument  advanced on behalf of the assessee.  As held by this Court in  Union of India & others v. Bombay Tyre International Ltd.  reported in AIR 1984 SC 420, there is a difference between the  nature of levy and the measure of the levy.  The method of  collection does not affect the essence of the duty.  While the  nature of excise duty was indicated by the fact that it was  imposed in respect of the manufacture, the point at which it was  collected was when the article left the factory gate.  Therefore,  the article became an object of assessment when it was sold by  the manufacturer.

       It has now been recognized that the measure employed  for assessing a tax must not be confused with the nature of tax.   The factors such as volume, quantity, weight and price which  enter into the measure of the tax have nexus with the  manufacturing activity.

       Applying the above tests to section 4(1)(a), it is clear that  the Parliament opted for "price" as the measure of tax, without  altering the nature of the levy, and co-related it to "value", as  defined under section 4(4)(d).  Hence, the article became the  object of assessment only when it was cleared by the  manufacturer at the factory gate.  The circumstance that the  article becomes the object of assessment when it was sold by  the manufacturer, as held in the case of Bombay Tyre (supra),  remained unchanged even under the three provisos to section  4(1)(a).  The "value" under section 4 depended on price, place  and person.  The word "assessment" had to be read in the  context of section 4.  The article becomes the object of  assessment only when it was sold.  The only change brought  above by the three provisos was that under given circumstances  the price which would not be the "normal price" or the "value",  was deemed to be the normal price for the purposes of  assessment under section 4.  For example, under the proviso (ii)  to section 4(1)(a), the statutory price was deemed to be the  normal price for purposes of assessment.  Similarly, in the case  of proviso (iii), the price charged by the related person was  deemed to be the normal price.  The reason was obvious.  The  implication of the manufacturer, the assessee and the buyer  being related to each other was that the price charged to the  related person was presumed to be understated and to dissuade  such sales, the legislature had introduced the said proviso as  anti-evasion measure.  Hence, to give deductions to the  assessee, as claimed, would defeat the very object of the third  proviso.  Under all the three provisos, the manufacturer  remained the assessee, the "object" of the assessment remained  the same and neither the identity of the manufacturer nor the  identity of the excisable goods underwent any change.  Even  the place of removal remained unchanged.  Under the third  proviso, the basis of assessable value alone changed when the  price of the related person was adopted as the basis of the  valuation.  Therefore, proviso (iii) did not break the nexus  between price and value under section 4(1)(a) of the Act.

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       Now coming to the question of deduction, we may point  out that for the purposes of assessment, price and value are co- related under section 4.  As stated above, "price" was taken as a  factor in determination of "value" under section 4.  However,  "deduction", though a part of assessment, had to be strictly  construed.  The reason was obvious.  No deduction could be  allowed if it was extended beyond the levy.  In this connection,  we may useful quote paragraph 53 of the judgment of this Court  in the case of Bombay Tyre (supra) in the context of claim for  deduction in respect of cost of primary packing which reads as  under:- "53.    The case in respect of the cost of packing is  somewhat complex.  The new Section 4(4)(d)(i)  has made express provision for including the cost  of packing in the determination of "value" for the  purpose of excise duty.  Inasmuch as the case of  the parties is that the new Section 4 substantially  reflects the position obtaining under the  unamended Act, we shall proceed on the basis that  the position in regard to the cost of packing is the  same under the Act, both before and after the  amendment of the Act.  Section 4(4)(d)(i) reads:

       (4)     For the purposes of this section,\027

(d)     "value" in relation to any excisable  goods,\027

       (i)     where the goods are delivered  at the time of removal in a packed condition,  includes the cost of such packing except the  cost of the packing which is of a durable  nature and is returnable by the buyer to the  assessee.

       Explanation.\027 In this sub-clause  "packing" means the wrapper, container,  bobbin, pirn, spool, reel or warp beam or  any other thing in which or on which the  excisable goods are wrapped, contained or  wound."

It is relevant to note that the packing, of which the  cost is included, is the packing in which the goods  are wrapped, contained or wound when the goods  are delivered at the time of removal.  In other  words, it is the packing in which it is ordinarily  sold in the course of wholesale trade to the  wholesale buyer.  The degree of packing in which  the excisable article is contained will vary from  one class of articles to another.  From the  particulars detailed before us by the assessees, it is  apparent that the cost of primary packing, that is to  say, the packing in which the article is contained  and in which it is made marketable for the ordinary  consumer, for example a tube of toothpaste or a  bottle of tablets in a cardboard carton, or biscuits  in a paper wrapper or in a tin container, must be  regarded as falling within Section 4(4)(d)(i).  That  is indeed conceded by learned counsel for the  assessee.  It is the cost of secondary packing which  has raised serious dispute.  Secondary packing is  of different grades.   There is the secondary  packing which consists of larger cartons in which a  standard number of primary cartons (in the sense

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mentioned earlier) are packed.  The large cartons  may be packed into even larger cartons for  facilitating the easier transport of the goods by the  wholesale dealer.  Is all the packing, no matter to  what degree, in which the wholesale dealer takes  delivery of the goods to be considered for  including the cost thereof in the "value"?  Or does  the law require a line to be drawn somewhere?  We  must remember that while packing is necessary to  make the excisable article marketable, the  statutory provision calls for strict construction  because the levy is sought to be extended beyond  the manufactured article itself.  It seems to us that  the 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 the degree  of packing whose cost can be included in the  "value" of the article for the purpose of the excise  levy.  To that extent, the cost of secondary packing  cannot be deducted from the wholesale cash price  of the excisable article at the factory gate."

       As stated above, the word "deduction" in terms of section  4(4)(d) had to be strictly construed.  Every deduction from the  "gross profit" was not deduction.  To constitute "deduction",  the item had to fall within section 4.  For example, in cases  falling under section 4(2), the cost of transportation was  deductible.  Similarly, deduction was admissible for taxes  actually paid under section 4(4)(d)(ii).  So also for trade  discounts, deduction was allowable under section 4(4)(d)(ii).   However, the Court in this connection had to examine the  nature of deduction.  For example, under proviso (i) to section  4(1)(a), an assessee was entitled to file separate price-lists for  the Government, to whom concessional price is charged, vis-a- vis Other Dealers.  In such a case, it was not open to the  assessee to treat the price difference as a trade discount under  section 4(4)(d)(ii).  This was because under the first proviso to  section 4(1)(a) the price charged to the Government was treated  by a deeming fiction to be "normal price".  

       In tax accounting, we have what is called a matching  concept.  As stated above, value as defined under section  4(4)(d) was co-related to the price at the factory gate.   Therefore, costs (expenses) for factors up to the stage of "price"  at the factory gate alone could be taken into account.   Deduction is a matter of adjustment.  It is a matter of set off.   When the "value" for the purposes of section 4 was the price at  the factory gate, the costs which are includible up to that stage  alone were includible.  Cost is the function of time and place  under section 4(4)(d).  Therefore, costs beyond that stage was  not includible in the assessable value as it was not capable of  being deducted from the price beyond the factory gate.  If the  price at the factory gate was the basis for the purposes of  assessable value, deduction had to be confined to that price  alone.  Hence, secondary packing costs was not includible.   Therefore, as stated above, levy could not extend beyond the  manufactured article itself.

       Lastly, in the present case, section 4(2) was not  applicable as a finding of fact stood recorded that price was  known at the factory gate.  This matter came under the third  proviso to section 4(1)(a) and not under section 4(2) of the Act.

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       For the aforestated reasons, we hold that the department  was right in disallowing deduction for expenses in respect of  freight, insurance and handling charges from the assessable  value for the period 9/88 to 3/91.

       Now coming to the question of deduction claimed by the  assessee on account of payment of octroi and turnover tax, we  are in agreement with the view expressed by the tribunal in the  impugned judgment that the expenses for these items were  deductible from the assessable value under section 4(4)(d)(ii).   

       In the case of Union of India & others  v. Bombay Tyres  International Pvt. Ltd. reported in 1984 (17) ELT 329, this  Court has taken the view that sales tax, turnover tax, surcharge  on sales tax and other local taxes are deductible from the sale  price in order to arrive at the assessable value.   

       In the case of Commissioner of Customs & Excise,  Bangalore v. M/s Sujata Textile Mills Ltd. reported in 2005  (181) ELT 379, this Court [speaking through one of us,  Variava, J.] has held that under section 4(4)(d)(ii), the value  will not include duty of excise, sales tax and other local taxes  payable on the goods.  However, it was clarified by this Court  that in the matter of deduction, the department while granting  deduction can ask for proof indicating actual payment of tax.   

       Accordingly, we hold that the assessee was entitled to  deduction on account of expenses incurred towards the octroi  and turnover tax, subject to the assessee’s producing requisite  proof of actual payment during the entire period 9/88 to 3/91.         As regards the special packing, the facts brought on  record show that the assessee was the manufacturer of hair- dyes. That, the assessee had sold the product in bottles, each  containing 6 grams of powder.   These bottles in turn were  packed in an individual cartons of 12 units.  These individual  cartons were manufactured in the factory of the assessee.  That,  the said bottles were packed in the individual cartons and  delivered at the factory gate to M/s Nemaru.  After taking  delivery, M/s Nemaru packed the product in bigger cartons in  its premises at its own cost.  That, once the goods become  marketable in the individual packing of the assessee and  removed from its factory gate, as such, the question as to  whether M/s Nemaru was a "related person" or not became  insignificant and consequently, the cost of special packing was  not includible in the assessable value.  [See: Hindustan  Polymers v. Collector of Central Excise reported in 1989 (43)  ELT 165].

       In the case of Commissioner of Central Excise,  Allahabad etc. v. M/s Hindustan Safety Glass Works Ltd. etc.  reported in 2005 (2) Scale 246, this Court [speaking through  one of us, Variava, J.], observed: "14.    \005 The question is not for what purpose the  packing is done.  The test is whether the packing is  done in order to put the goods in a marketable  condition.  Another way of testing would be to see  whether the goods are capable of reaching the  market without the type of packing concerned.   Each case would have to be decided on its own  facts.  It must also be remembered that Section  4(4)(d)(i) specifies that the cost of packing is  includible when the packing is not of a durable  nature and returnable to the buyer.  Thus, the  burden to show that the costs of packing is not  includible is always on the assessee.  Also under

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Section 4(a) the value is to be the normal price at  which such goods are ordinarily sold in the course  of wholesale trade for delivery at time and place of  removal.  Thus, at this stage, it would be  convenient to refer to the case of A.K. Roy & Anr.  v. Voltas Limited reported in 1977 (1) ELT J177  wherein the concept of wholesale market has been  explained in the following terms:-

8.      We do not think that for a wholesale  market to exist, it is necessary that there  should be a market in the physical sense of  the term where articles of a like kind or  quality are or could be sold or that the  articles should be sold to so-called  independent buyers.

9.      Even if it is assumed that the latter  part of s. 4(a) proceeds on the assumption  that the former part will apply only if there  is a wholesale market at the place of  manufacture for articles of a like kind and  quality, the question is what exactly is the  concept of wholesale market in the context.   A wholesale market does not always mean  that there should be an actual place where  articles are sold and bought on a wholesale  basis.  These words can also mean that  potentiality of the articles being sold on a  wholesale basis.  So, even if there was no  market in the physical sense of the term at or  near the place of manufacture where the  articles of a like kind and quality are or  could be sold, that would in any way affect  the existence of market in the proper sense  of the term provided the articles themselves  could be sold wholesale to traders, even  though the articles are sold to them on the  basis of agreements which confer certain  commercial advantages upon them.  In other  words, the sales to the wholesale dealers did  not cease to be wholesale sales merely  because the wholesale dealers had entered  into agreement with the respondent under  which certain commercial benefits were  conferred upon them is consideration of  their undertaking to do service to the articles  sold, or because of the fact that no other  person could purchase the articles wholesale  from the respondent.  We also think that the  application of clause (a) of s. 4 of the Act  does not depend upon any hypothesis to the  effect that at the time and place of sale, any  further articles of like kind and quality have  been sold.  If there is an actual price for the  goods themselves at the time and the place  of sale and if that is a "wholesale cash  price", the clause is not inapplicable for  want of sale of other goods of a like kind  and quality."

       Consequently, the department is directed to allow  deduction from the assessable value in respect of special  packing for the period 9/88 to 3/91.

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       Lastly, as regards bought-out items, namely, hand-gloves  and plastic measuring cups, we find no infirmity in the  impugned judgment.  In this connection, we reiterate that  initially the assessee used to supply plastic measuring cups and  hand-gloves with the product for use of the product by the user.   Subsequently, the supply of hand-gloves stood discontinued.  Applying the test of essentiality, we find that the hand-gloves  and measuring cups were not essential for delivery of the  product in question in wholesale at the factory gate of the  assessee.  As held by the tribunal in its impugned judgment  herein, hand-gloves were used as protective cover by the users.   That, the said product was capable of being used without the  hand-gloves.  That, the measuring cup was not essential for the  simple reason that the liquid was capable of being applied  without the measuring cup.  In the circumstances found by the  tribunal on evidence, we hold that the cost of the said bought- out items was not includible in the assessable value during the  period 9/88 to 3/91.  However, we need to clarify, that,  although in principle the deduction for these two items was  admissible, on the facts of this case, the assessee was required  to produce evidence indicating the price at which the assessee  had bought these items during the entire period 9/88 to 3/91.   The assessee was also required to prove the supply of these  items with the product.  Accordingly, we remit the matter to the  Commissioner (Appeals) to decide the quantification of  deduction in respect of these two items for the above period.

       Lastly, we find that the demand for differential duty for  the period 1.1.1988 to 31.8.1988 without issue of show-cause  notice under section 11-A, was unsustainable.   

       In the case of Union of India & others  v. Madhumilan  Syntex Pvt. Ltd. reported in 1988 (35) ELT 349, this Court held  that the demand raised without notice was invalid.  That,  section 11-A clearly proceeded to say that prior show-cause  notice must be issued to the person against whom any demand  on grounds of short-levy or non-levy was proposed and,  therefore, post-facto show-cause notice cannot be regarded as  adequate in law.                    Applying the said judgment to the facts of the present  case, we hold that the demand for differential duty for the  period 1/88 to 8/88 without issue of show-cause notice under  section 11A was unsustainable.  Absence of show-cause notice  was not disputed.  In the circumstances, the tribunal was right  in setting aside the demand for differential duty amounting to  Rs.1,59,606.22 for the said period.  Consequently, demand  made for the said period under any of the seven items is set  aside.  

       To sum up, we hold, that, deduction for expenses  incurred on account of special packing, turnover tax, octroi and  bought-out items was admissible for the period 9/88 to 3/91,  subject to the assessee submitting proof of incurring actual  expenses in respect of the above items before the Commissioner  (Appeals).  That, the department was right in disallowing  deduction for expenses on account of freight, insurance and  handling charges for the period 9/88 to 3/91.          We also do not see any reason to interfere with the  impugned order of the tribunal remanding the matter to the  Commissioner (Appeals) to decide afresh the question of  "related person" during the period 4/91 to 3/93, in view of the  changed circumstances indicated hereinabove.

       Accordingly, the appeals filed by the department are

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partly allowed, with no order as to costs.