REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICITION

CIVIL APPEAL NOS.2059-2060 OF 2003

Commissioner of Central Excise, Delhi …Appellant

Versus

M/s Pearl Drinks Ltd. …Respondent

J U D G M E N T

T.S. THAKUR, J.

1. These appeals have been filed under Section 35(L)(b)  

of the Central Excise Act, 1944.  They are directed against  

an  order  dated  22nd July,  2002  passed  by  the  Customs,

Excise  and  Gold  (Control)  Appellate  Tribunal,  whereby  an  

appeal preferred by the Revenue against an order passed by  

the Commissioner of Central Excise has been dismissed on  

the principle of merger. The Tribunal has held that the order  

passed  by  the  Excise  Commissioner  had  merged  in  that  

passed  by  the  former  in  an  earlier  appeal  filed  by  the  

assessee against  the very same order.   The fact that the  

said appeal was limited to only two of the eight deductions  

that formed the subject matter of controversy between the  

parties, according to the Tribunal made no difference.  

2. The  respondent-company  is  engaged  in  the  

manufacture and sale of aerated water falling under heading  

22.01  and  22.02  of  Chapter  22  of  the  Schedule  to  the  

Central Excise Tariff Act, 1985. In the course of scrutiny of  

records the excise authorities noticed that the respondent-

company had not affected any sale of aerated water to any  

wholesale  buyer  at  its  factory  gate.  It  had  instead  been  

clearing  the  manufactured  product  in  glass  bottles  after  

making payment of the duty and removing them to a duty  

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paid  godown  situated  at  B-42,  Lawrence  Road  Industrial  

Area, Delhi, adjacent to the factory. The duty paid stocks so  

removed were then sent to the customers in lorries owned  

by the respondent or taken on hire by them on long term  

basis  from  other  parties.  The  driver-cum-salesman  

employed for that purpose would deliver the goods to the  

customers/dealers at a higher price and issue cash memos  

to them, while unsold stocks and empties were brought back  

to the company’s duty paid godown.  

3. In  the  declarations  filed  by  the  respondent-company  

from  time  to  time  it  had  while  disclosing  the  wholesale  

price/assessable value for various sizes and flavours claimed  

deductions  towards  excise  duty,  sales  tax,  transportation  

charges, container service charges and other service charges  

including  trade  discounts  etc.  before  arriving  at  the  

assessable  value under  Section 4 of  the Central  Excise  &  

Salt Act, 1944. Being of the view that such deductions were  

not  legally  admissible,  the adjudicating authority  issued a  

notice  dated  3rd November,  1995  calling  upon  the  

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respondents  to  show  cause  why  the  deductions  claimed  

under the following eight heads be not denied to them:

“1. Mazdoor  and  cartage  expenses  on  account  of  bringing  of  breakdown  vehicles.

2. Service charges including handling.

3. Establishment cost of sale and Shipping  Department.

4. Shell Repair Cost.

5. Interest on Containers.

6. Deduction claimed on account of loss of  beverages  in  duty  paid  godown  and  transporting  the  goods  from  the  duty  paid godown to the customers.  

7. Trade  discount  given  to  the  privileged  customers.  

8. Other trade discount by way of one or  more bottles free of cost to customers.”

4. The  respondent  filed  a  reply  to  the  notice  

aforementioned  upon  consideration  whereof  the  Principal  

Commissioner  of  Central  Excise,  Delhi  passed an order  in  

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original dated 14th March, 2001 disallowing deductions to the  

extent of Rs.13,42,924/- on account of loss of beverages in  

the  duty  paid  godown  and  a  sum  of  Rs.27,50,072/-  on  

account  of  loss  in  transit  from  the  said  godown  to  the  

customers and discount made on account of  free supply of  

bottles of aerated water. Insofar as the remaining six heads  

under which deductions were claimed by the company the  

order in original accepted the said claim.  

5. Aggrieved  by  the  order  aforementioned  the  

respondent-company filed an appeal under Section 35(E)(1)  

of the Central Excise before the CEGAT who by a reasoned  

order dismissed the same, holding that the disallowance of  

deductions  under  the  two  heads  referred  to  above  was  

perfectly  in  order.  A  further  appeal  filed  by  the assessee  

before  this  Court  was  also  dismissed  on  23rd September,  

2002 thereby finally settling in favour of the Revenue the  

controversy as regards the admissibility of deductions under  

the two heads referred to above are concerned.  

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6. As  regards  the  admissibility  of  deductions  under  the  

remaining six heads which the adjudicating authority allowed  

to the company, the Central Board of Excise and Customs  

(for short ‘CBEC’) appears to have reviewed the order of the  

Commissioner Excise under Section 35(E)(1) of the Central  

Excise  Act  and  come to  the  conclusion  that  the  grant  of  

deductions  under  the  said  six  heads  was  unjustified.  The  

Board  accordingly  directed  the  Commissioner  of  Central  

Excise to approach the CEGAT for a correct determination of  

the following points:  

“(i) Whether the Commissioner was right in  allowing the deductions claimed by the  party  without  first  verifying  whether  these  were  included  in  the  wholesale  price and if so, whether the same were  included as a part of transportation cost  only  as  claimed  by  the  party  and  allowed by them.

(ii) Whether the Commissioner was right in  allowing  the  deduction  of  Rs.6975/-,  Rs.24,00,000/-,  Rs.62,12,578/-,  Rs.7,66,662,  Rs.2,27,329/-  and  Rs.91,000/-  from  the  wholesale  price,  which do not appear to be admissible.  

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(iii) Whether the Commissioner was right in  not imposing the penalty as proposed in  the SCN.”  

7. It is noteworthy that the Board while passing the above  

order  referred  to  the  disallowance  of  similar  deductions  

claimed  by  the  respondent  for  the  period  immediately  

preceding the period relevant to the show cause notice in  

question. The Board noted that the CEGAT had by its order  

dated 2nd March, 2001 (reported in  (2002) 150 ELT 661)  

affirmed  the  said  disallowance  except  for  two  items.  The  

effect  of  the  said  disallowance  had  not  according  to  the  

Board  been  taken  into  consideration  by  the  adjudicating  

authority  while  granting  the  deductions  claimed  by  the  

respondent-company.  

8. In compliance with the order passed by the CBEC the  

Commissioner of Central Excise preferred an appeal under  

Section 35E(4) of the Act which was dismissed by the CEGAT  

by its order dated 22nd of July, 2002 holding that the order  

under challenge had merged in the earlier order dated 24th  

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January,  2002  passed  by  the  Tribunal  in  the  company’s  

appeal whereby disallowance of two of the eight deductions  

in dispute had been upheld. The present appeal questions  

the correctness of the said order as noticed earlier.

9. Appearing  for  the  appellant  Mr.  Gourab  Banerjee,  

learned Additional Solicitor General argued that the Tribunal  

had fallen  in  a  palpable  error  in  applying  the  doctrine  of  

merger and dismissing the appeal filed by the Revenue. It  

was  submitted  that  the  doctrine  of  merger  had  no  

application to a case like the one at hand where the content  

and the subject matter of challenge in the two proceedings,  

namely, the appeal filed by the assessee and that filed by  

the Revenue were totally different. Reliance  in  support  was  

placed by the learned counsel upon the decision of this Court  

in  Kunhayammed  &  Ors.  v. State  of  Kerala  &  Anr.  

(2000)  6  SCC  359.  Reliance  was  also  placed  upon  the  

decision  of  this  Court  in  Mauria  Udyog  Ltd.  v.  

Commissioner of Central Excise, Delhi II (2003) 9 SCC  

139 to contend that the doctrine of merger is not a doctrine  

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of universal application and that the difference in the subject  

matter  or  the  content  of  the  proceedings  could  take  a  

decision  inter  se  parties  out  of  the  purview  of  the  said  

doctrine.

10. On behalf of the respondent-company it was per contra  

argued that the order passed by the adjudicating authority  

could not be split into two and that the doctrine of merger  

applied no matter the issue which arose for determination in  

the two appeals were distinctly different.

11. The doctrine of merger has its origin in common law. It  

has its application not only in the realm of judicial orders but  

also in the realm of estates. In its application two orders  

passed by judicial & quasi-judicial courts and authorities it  

implies  that  the order  passed by a lower  authority  would  

lose its finality and efficacy in favour of an order passed by a  

higher authority before whom correctness of such an order  

may have been assailed in appeal or revision. The doctrine  

applies  regardless  whether  the  higher  court  or  authority  

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affirms or modifies the order passed by the lower court or  

authority.  The  juristic  basis  of  the  doctrine  has  been  

examined by this Court in a long line of decisions. One of the  

earliest  of  the  said  decisions  was  rendered  in  

Commissioner  of  Income  Tax,  Bombay  v. Amritlal  

Bhogilal & Co. (AIR 1958 SC 868). The Court in that case  

declared that as a result of the confirmation or affirmation of  

the decision of the Tribunal by the Appellate Authority, the  

original decision merges in appellate decision whereupon it  

is only the appellate decision which subsists and is operative  

and capable of enforcement.  

12. In  State of Madras  v. Madurai Mills Co. Ltd. (AIR  

1967 SC 681) this Court had another occasion to examine  

the true scope and purport of the doctrine of merger. The  

court  declared  that  the  doctrine  of  merger  was  not  a  

doctrine of rigid and universal application nor could it be said  

that where there are two orders one by the inferior authority  

and the other by a superior authority they must necessarily  

merge irrespective of the subject matter of the appeal or the  

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revision  or  the  scope  of  the  proceedings  in  which  such  

orders  are  passed.  Subsequent  decisions  of  this  Court  in  

Gojer Bros. (Pvt.) Ltd. v. Ratan Lal Singh (1974) 2 SCC  

453 and  S.S.  Rathore  v. State  of  Madhya  Pradesh  

(1989)  4  SCC  582 have  reiterated  and  explained  that  

position. No reference to the pronouncements of this Court  

on the subject can be complete without a reference to the  

decision of this Court in Kunhayammed’s case (supra) and  

Mauria’s case (supra). In Kunhayammed’s case (supra) a  

three-Judge  Bench  of  this  Court  reviewed  the  decisions  

rendered on the subject and summed up its conclusions in  

para 44 of this decision. One of the said conclusions apposite  

to the case at hand is in the following words:

“44. To sum up, our conclusions are: …. (iii) The doctrine of merger is not a doctrine  of  universal  or  unlimited application.  It  will  depend  on  the  nature  of  jurisdiction  exercised  by  the  superior  forum  and  the  content or subject-matter of challenge laid or  capable of being laid shall be determinative  of  the applicability  of  merger.  The superior  jurisdiction  should  be  capable  of  reversing,  modifying or affirming the order put in issue  before  it.  Under  Article  136  of  the  

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Constitution the Supreme Court may reverse,  modify  or  affirm  the  judgment-decree  or  order  appealed  against  while  exercising  its  appellate jurisdiction and not while exercising  the  discretionary  jurisdiction  disposing  of  petition  for  special  leave  to  appeal.  The  doctrine of merger can therefore be applied  to the former and not to the latter. …”

13. There is in the light of the above pronouncements no  

gainsaying that the doctrine of merger will depend largely on  

the nature of the jurisdiction exercised by the superior court  

and the content or the subject matter of challenge laid or  

capable of being laid before it.  

14. Applying  the  above  test  to  the  case  at  hand  the  

doctrine would have no application for the plain and simple  

reason that the subject  matter of  the appeal  filed by the  

assessee  against  the  adjudicating  authority’s  order  in  

original  was  limited  to  disallowance  of  two  out  of  eight  

deductions  claimed  by  the  assessee.  The  Tribunal  was  in  

that appeal concerned only with the question whether the  

adjudicating authority was justified in disallowing deductions  

under the said two heads. It had no occasion to examine the  

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admissibility  of  the  deductions  under  the  remaining  six  

heads  obviously  because  the  assessee’s  appeal  did  not  

question the grant of such deductions. Admissibility of the  

said deductions could have been raised only by the Revenue  

who  had  lost  its  case  qua  those  deductions  before  the  

adjudicating authority. Dismissal of the appeal filed by the  

assessee  could  consequently  bring  finality  only  to  the  

question of admissibility of deductions under the two heads  

regarding which the appeal was filed. The said order could  

not be understood to mean that the Tribunal had expressed  

any opinion regarding the admissibility of deductions under  

the remaining six heads which were not the subject matter  

of  scrutiny  before  the  Tribunal.  That  being  so,  the  

proceedings instituted by the Commissioner, Central Excise  

pursuant to the order passed by the Central Board of Excise  

and  Customs  brought  up  a  subject  matter  which  was  

distinctively  different  from that which had been examined  

and determined in the assessee’s appeal no matter against  

the  same  order,  especially  when  the  decision  was  not  

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rendered  on  a  principle  of  law  that  could  foreclose  the  

Revenue’s case. The Tribunal obviously failed to notice this  

distinction and proceeded to apply the doctrine of merger  

rather  mechanically.  It  failed  to  take  into  consideration  a  

situation where an order may be partly in favour and partly  

against a party in which event the part that goes in favour of  

the party can be separately assailed by them in appeal filed  

before  the  appellate  Court  or  authority  but  dismissal  on  

merits or otherwise of any such appeal against a part only of  

the order  will  not  foreclose the right  of  the party who is  

aggrieved of the other part of this order. If the doctrine of  

merger were to be applied in a pedantic or wooden manner  

it would lead to anomalous results inasmuch as a party who  

has lost in part can by getting his appeal dismissed claim  

that the opposite party who may be aggrieved of another  

part of the very same order cannot assail its correctness no  

matter  the  appeal  earlier  disposed  of  by  the  Court  or  

authority had not examined the correctness of that part of  

the order.

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15. We  have  in  the  light  of  the  above  no  hesitation  in  

holding that the order passed by the Tribunal dismissing the  

appeal  by  the  Revenue  on  the  doctrine  of  merger  is  

erroneous  and  unsustainable.  We  accordingly  allow  these  

appeals,  set  aside  the  impugned  order  and  remand  the  

matter  back  to  the  Tribunal  for  a  fresh  disposal  in  

accordance  with  law.  The  parties  to  appear  before  the  

Tribunal on 6th September, 2010.

…………………………….…J. (D.K. JAIN)

…………………………….…J. (T.S. THAKUR)

New Delhi July 6, 2010

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