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CASE NO.: Appeal (civil)  898 of 1998

PETITIONER: M/S.H.B.C Aircraft Batteries Ltd.

RESPONDENT: Commissioner of central excise, Hyderabad.

DATE OF JUDGMENT: 05/05/2004

BENCH: CJI & G.P.MATHUR.

JUDGMENT: JUDGMENT

RAJENDRA BABU, CJI. :

The  appellants are the manufacturers of silver  oxide zinc batteries (hereinafter referred to as  "batteries") supplied to Ministry of Defence (hereinafter  referred to as ’MOD’)  and Hindustan Aeronautics  Limited (hereinafter referred to as ’HAL’).  The issue in  this appeal relates to the excise duty in respect of the  batteries supplied to the ’MOD’.  The appellants  supplied the batteries to ’HAL’ at a higher price than  the price charge to ’MOD’.  The price charged to  ’MOD’   was Rs.33,393/- and  to ’HAL’ was Rs.53,993/-.   The  prices charged were in terms of  the contract entered  into by the appellants with the respective buyers. Silver  is one of the raw materials used in the manufacture of  the "batteries". In the case of supplies to MOD, there  was a stipulation in the contract that the appellants   would be supplied with the silver.  MOD was holding the  stock of silver in Bombay and Calcutta Mints and  supplied the same to various manufacturers of  batteries from whom it was purchasing the batteries.   MOD used to obtain silver at Rs.2,500/- per Kg. from  the Mints.  After sometime, MOD’s stock of silver at  Bombay and Calcutta Mints got depleted.  Hence, they  supplied the old life expired batteries to various  manufacturers to recover the silver from those  batteries and  use the  recovered silver in the  manufacturing of the fresh batteries and the appellants  were to give a rebate to the MOD in the price to be  charged per battery.  The appellants while invoicing   the goods to the MOD, took the value of the silver used  in those  batteries as  was recovered from the life   expired batteries at the rate of Rs.2,500/- per kg. as  against Rs.6,666/- per kg. which was adapted for the  batteries supplied to HAL.  According to  appellants, the  reason for taking the value of silver at Rs.2,500/-  per  kg. was that the MOD was allowed to purchase  the  silver from the mint at the rate of Rs.2,500/- per kg.   and according to the contract, the stipulation  was that  the price of the silver to be adapted for arriving at the  price  to be charged was to be Rs.2,500/- per kg.  The  Collector of Central Excise, Hyderabad, after noticing   the difference  in the price charged on the batteries  supplied to MOD and HAL issued a show  cause notice  demanding differential duty on batteries supplied by  appellants to MOD, on the ground that the market  value of silver should be taken as the basis for

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determining the assessable value. Inspite of demur the  said demand was confirmed.   On appeal, the Appellate Tribunal held that  the  price determined by the appellants for the batteries by  adapting the lower silver price at the rate of Rs.2,500/-  per kg. as against the open market price of Rs.6,666/-  was a notional workout and the  price indicated by the  MOD  is not  reflective  of the  true value of the silver.   The Tribunal held that as per  Section 4 of the Central  Excise Act, 1944 the price that is to  form the basis for   assessment  is the price at which the goods are sold in  the ordinary course of business and the  sale to MOD  cannot be  taken to be the sale in the ordinary course  of business.  The  sale of batteries to MOD was held to  be   a special arrangement and a notional price of silver  was adapted. The Tribunal held that this cannot be  considered as transaction in the ordinary course of  business and  the price which  is chargeable in the open  market  should form the basis of assessment. It was  held that  price based on  comparable goods was to be  adapted as the price of the silver i.e. at the  rate of   Rs.6,666/- per kg. as was adapted in case of supply of  batteries to HAL and  dismissed the appeal.  Hence this  appeal.   The question that arises for consideration is as to   what is the assessable value of silver which is used in  the manufacture of silver oxide zinc  batteries supplied  to MOD.  Is it the  price at which MOD got silver from  the mint or the  market price of the silver?  The  contention of the appellant is that the contract price at  which the batteries are sold to MOD is the sole  consideration of the sale of  batteries to the MOD and   on that contract price  the assessable value of silver  has to be  determined.           Relying on the first proviso  to Section 4(1)(a),   which speaks about sale of goods, two classes of  buyers and the price at which the goods are sold to  each buyer should be taken as the normal price of such  goods in relation to each such class of buyers,  the  appellants contend that the price at which the batteries  are sold to "MOD" shall be taken as the ’normal price’  of the batteries.  Appellants also rely on rule 5 of the  Central Excise (Valuation) Rules, 1975.         The appellants contend that even if it is assumed  that price is not the sole consideration in the  transaction with MOD,  the money  value of the silver  flowing from MOD to the appellant, i.e.,  Rs. 2500/- per  kg. should be taken into account while determining the  assessable value.  Appellants contend that the  comparable price taken by the silver in determining the  value of silver is not correct.  Comparable value under  Rule 6(b)(ii) could be taken into account when the  value of the excisable goods cannot be ascertained  under Rule 4 or Rule 5.  Reliance is placed on Ashok  Leyland Ltd.   Vs.  Collector of Central Excise,  Madras, 2002 (146)ELT 503 (SC), in which it was  held that sale of goods to different classes of buyers  does not make normal price unascertainable as to  attract Section 4(1)(b).  It is contended that the normal  price of battery is the price at which it is sold to MOD  and accordingly  the value of silver is to be ascertained.         Respondents contend that normal price should be  ascertained by reference to the transaction.   Since the  transaction with MOD is a special arrangement,  the  contract price cannot be taken into account as such

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transaction is not done in the ordinary course of  business.  Therefore,  the market value of the silver  should be taken into account. It is contended that in  order to claim the benefit of the proviso,  the appellant  should show  "normal practice" of whole sale trade.   Since the supply of old life expired batteries to retrieve  the silver forms a special arrangement it will not  constitute a "normal practice".  It is contended that  even if some raw material is supplied free of cost for  the purpose of excise duty,  the market value should be  taken into account.            Section 4 of the Central Excise and Salt Act  deals with valuation of excisable goods which are  chargeable to duty with reference to the value.   Valuation is based ordinarily on the price thereof that is  at the price at which goods subject to excise duty are  sold by manufacturer to a buyer. In exceptional  circumstances when the valuation cannot be so more  that closest equivalent thereof is determined in the  manner prescribed in the valuation  Rules.  ’Value’ for  the purpose of the said Rules is value  under Section 4  of the Act and is to be determined under  Rules 4 and  5.  Rule 6  has to be invoked only in situation when  assessment of value of goods subject to excise duty  cannot be determined under Rules 4 & 5.  When the  goods  are not sold  by the  manufacturer but are used  or consumed in the manufacture of other goods,  the  value is to  be determined upon the value of  compatable goods manufactured, and if that cannot be  done on the cost of production, if any, which he would  have normally earned as the sale of such goods. This view, we have set out above finds support  from decisions  in  Ashok Layland Vs. CCE Madras,  2002 (146) ELT 503;  Union Carbide (India)  Vs.  CCE Calcutta, 2003 (158) ELT 15,  Burn_ Standard   Company Ltd. Vs. UOI, 1992 (60) ELT  671; CCE  Vs. Dai Ichi Karkaria Ltd., 1999 (112) ELT 353. The assessable value of the silver should be taken  at Rs. 2500/- per kg. which is the rate at which MOD  used to get the silver from the mint.  The price charged  by the appellants was in terms of the contract entered  into by them with MOD.  As per the terms of the  contract, MOD was to supply the silver to manufacture  the batteries.   Since the stock of silver in the mint  depleted, MOD supplied the old life expired batteries to  retrieve the silver and to use the recovered silver in the  manufacture of new batteries.   As per terms of the  contract, the appellants were to give a rebate to the  MOD in the price to be charged per battery and this  was the reason  for the difference in prices between the  batteries supplied to MOD and HAL.         The value of the silver supplied to the appellants is  determinable. Had the stock of silver in the mint did  not deplete,  MOD would have supplied silver from the  mint.  Since the stock depleted, MOD supplied old life  expired batteries for the recovery of silver.   This will  not make the value of silver undeterminable.   The  value of the silver supplied would be Rs. 2500/- per  kg.,  the price at which MOD would get the silver from  the mint.  The question of determining the assessable  value of silver based on the value of the comparable  goods would arise only when the value is  undeterminable.  In the present case  that question  does not arise.         The supply of silver by MOD being one of the

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stipulation in the contract between MOD and the  appellant,  would constitute a ’normal practice’  of the  wholesale trade in such goods.   As per the first proviso  to Section 4(1)(b), where in accordance with the  normal practice of the wholesale trade,  goods are sold  at different prices to different classes of buyers,  each  such price shall be deemed to be the normal price of  such goods in relation to each such class of buyers.   Therefore, the normal price of battery sold to MOD by  the appellants is Rs. 33,393/- and the assessable value  of silver used in the manufacture of such battery is at  Rs. 2500/- per kg. and cannot take the  market value  of silver.         The contract between the MOD and the assessee   provided for supply of sliver from the mint at a  particular  rate and had to be supplied by the MOD and  in lieu thereof the appellants were allowed to retrieve   silver from old used batteries, and their special feature  cannot be ignored.  Batteries of the nature in question  are largely used only by MOD. Hence the view taken by  the Tribunal down to adjudicating authority cannot be  sustained.         Hence, we allow this appeal and set aside the  order of the Tribunal and thereby the order for  differential demand cannot be  enforced.         Appeal allowed accordingly.