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CASE NO.: Appeal (civil)  8529-8531 of 2001

PETITIONER: M/s Modipon Fibre Company,Modinagar, U.P.

RESPONDENT: Commissioner of Central Excise,Meerut

DATE OF JUDGMENT: 25/10/2007

BENCH: S. H. Kapadia & B. Sudershan Reddy

JUDGMENT: J U D G M E N T

CIVIL APPEAL NOS. 8529-8531 OF 2001 with Civil Appeal Nos. 2008-2010 of 2002

KAPADIA, J.

       Delay condoned.          2.      These cross appeals are filed by M/s Modipon Fibre  Company and the Department under Section 35L of Central  Excise Act, 1944 against order dated 3.7.2001 passed by the  Customs Excise & Gold (Control) Appellate Tribunal  ("CEGAT") holding that the assessee was entitled to  deduction in respect of turnover tax ("TOT") only at 0.5%  and not at 2% as claimed.

Civil Appeal Nos. 8529-8531 of 2001 3.      The appellant-assessee is engaged in the manufacture  of Nylon and Polyester Yarn which is manufactured in its  factory in U.P. and cleared to its various Depots situated  all over India including Surat from where the Yarn is sold  to dealers. The assessee used to pay duty during the  relevant period, at the time of removal of yarn, on the  basis of the depot sale price, after claiming permissible  deductions under section 4 of the Central Excise Act, 1944  ("1944 Act").  One such deduction was TOT in respect of  yarn cleared and despatched to Surat depot from the factory  of the assessee in U.P.. In respect of such despatch, the  assessee claimed deduction at 2% on account of TOT. This  was on the footing that the Government of Gujarat vide  Notification dated 19.10.1993 had exempted sale of Yarn of  all kinds by a registered dealer to a special manufacturer  of processed Yarn or to an eligible unit to the extent to  which the rate of TOT exceeded 0.5% of the total turnover.  This was provided the specified manufacturer furnished to  the selling dealer a certificate in Form 26 and if the  processed Yarn stood sold within the State of Gujarat.

4.      On 19.3.1999, a show cause notice was issued by the  Department to the assessee in which it was alleged that the  assessee had filed its price declaration under Rule 173-C  in regard to the goods transferred to its depot in Surat  for sale therefrom; that in the said price declaration, the  assessee had indicated variety-wise ex-depot sale price,  amount of various deductions for sales tax, freight,  discount, TOT, excise duty etc.; that in the price  declaration, the assessee had also declared the assessable

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value arrived at by deducting the abovementioned elements  from ex-depot sale price; that, however, in the price  declaration, the assessee had suppressed from the  Department the fact that there were two types of sales, one  in the backward area as notified by the Gujarat Government  and the other in areas other than the backward area; that  the assessee had failed to declare that the TOT was  leviable on sale of goods during the period March, 1994 to  March, 1997 at the dual rate of 0.5% (for sales in backward  areas) and at 2% (for sales in areas other than backward  areas) respectively. According to the show cause notice,  the assessee had claimed deduction for TOT at 2% from ex- depot sale price in order to arrive at the assessable  value; that although sales stood effected from the depot at  two different rates, the assessee claimed deduction for TOT  at the full rate of 2% in respect of entire clearances of  Nylon Yarn sent to its Surat depot without mentioning that  in the State of Gujarat on account of Notification dated  19.10.1993 two rates of TOT existed and, therefore,  according to the show cause notice, the assessee had  claimed wrongfully the deduction at a higher rate of 2% as  against the rate of 0.5%. According to the show cause  notice, since the assessee had deducted TOT at a higher  rate to arrive at the assessable value, it had lowered the  assessable value to the extent of 1.5% and, as such, a  demand for difference was made on the assessee. According  to the show cause notice, in the peculiar facts of this  case, there should have been different assessable values in  respect of Normal Areas Sales and Backward Areas Sales,  particularly when the rate of TOT was different for the two  types of sales; that in the case of Normal Areas Sales, the  assessable value should have been arrived at allowing a  deduction of 2% on account of TOT and in the case of  Backward Areas Sales, the assessable value should have been  arrived at by deduction of 0.5% on account of TOT. However,  according to the Department, in the price declaration filed  by the assessee, the assessee has claimed deduction at 2%  on account of TOT in respect of the entire clearance and  thus, according to the Department, the assessee had claimed  wrongfully a larger deduction than what he was entitled to.  Therefore, according to the show cause notice, the  difference between the amount of TOT actually paid should  have formed part of the assessable value and accordingly,  the Department called upon the assessee to pay excise duty  on the differential value. According to the Department, the  assessee had wrongfully claimed deduction on account of  TOT; that the assessee had claimed wrongfully deduction on  the entire clearances at 2%; that the assessee had claimed  in the price declaration deduction on account of TOT at 2%  when it had actually paid TOT @ 0.5% in respect of backward  area sales and, to that extent, the assessee had evaded  excise duty by wrongfully claiming excess amount of  deduction on the amount of deduction on account of TOT as  compared to what was actually paid by it. The demand has  been confirmed by all the authorities. Hence, these civil  appeals.

5.      Mr. S.K. Bagaria, learned senior counsel, appearing on  behalf of the assessee, submitted that the word "payable"  in section 4(4)(d)(ii) is a function of charging duty. If  there is a charge, payability exists. If there is a charge,  liability exists. That, levy of duty is the legislative  function.  The first step is liability, whereas the second  step is when the tax becomes due. On completion of  assessment, the tax becomes due. Till such assessment,

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liability may exist but tax does not become due till  quantification takes place. According to the learned  counsel, the expression "payable" in section 4(4)(d)(ii) is  "time related concept" as the assessable value has got to  be determined at the time of clearance/removal. Learned  counsel submitted that, therefore, the word "payable" in  section 4(4)(d)(ii) should not be given a notional meaning.  According to the learned counsel, assessable value is a  matter relatable to chargeability. That, liability to be  assessed is not the same as payability as under the 1944  Act, "payability" has to be decided at the time of  clearance of goods and, therefore, from the ex-depot price,  assessee was required to deduct under section 4(2) the cost  of transportation as well as elements enumerated in section  4(4)(d)(ii). According to the learned counsel, on the date  of the clearance of the goods, it was not possible for the  assessee to visualize as to how many sales would be Normal  Area Sales and how many sales would be Backward Area Sales  as it depended on eligibility of special manufacturers.  According to the learned counsel, on the date of clearance,  the assessee was only aware of the fact that the turnover  tax was 2%. Therefore, there was no mis-declaration as  alleged by the Department. According to the learned  counsel, the assessee used to manufacture variety of yarns.  The factory of the assessee was in U.P.. These different  varieties of yarns were despatched from the factory in U.P.  to various sales depot of the assessee all over India. One  such sales depot of the assessee was in Surat. Learned  counsel pointed out that under the exemption Notification  sales in backward areas were subject to certain eligibility  criteria and compliance of the procedure mentioned in the  exemption Notification issued by the Gujarat Government in  1993. According to the learned counsel, it was impossible  for the assessee to have visualized as to how many dealers  in Surat in future would be entitled to the benefit of  exemption Notification, particularly at the time when the  yarn was cleared at the factory gate of the assessee in  U.P. and, therefore, according to the assessee, eligibility  of the dealers in Surat, who were liable to pay TOT  constituted post-clearance event. According to the learned  counsel, such post-clearance events are assumptions; that  chargeability of excise duty cannot depend on such  assumptions; that liability did not depend on assessment as  it is fixed ex-hypothesis and, consequently, according to  the learned counsel, the assessee was right in claiming  deduction on account of TOT at 2% as that was the only rate  which existed on the date when the goods were cleared at  the factory gate. According to the learned counsel, at the  time of filing the price declaration under Rule 173-C, the  assessee had no means of knowing whether ultimately the TOT  would be payable at 2% or at 0.5% and, therefore, the  assessee was justified in claiming deduction of TOT at 2%  being the prescribed tariff rate. According to the learned  counsel, 0.5% was the concessional rate which depended upon  fulfilment of conditions and eligibility criteria and,  therefore, it was not possible for the assessee to  visualize whether ultimately TOT would be payable at 2% or  at 0.5%. According to the learned counsel, section 4 of the  1944 Act provides for deduction of tax "payable" and since  TOT was normally payable at the prescribed rate of 2%, the  assessee was justified in deducting TOT at 2% from the  normal price in order to arrive at the assessable value at  the factory gate (place of removal). According to the  learned counsel for the assessee, in terms of section  4(4)(d)(ii) and the Explanation thereto, the concept of

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"effective duty of excise" payable on the goods was  restricted only to excise duty. It was not extended to  sales tax/TOT payable and, therefore, the assessee was  justified in deducting the TOT payable in the State of  Gujarat at the normal prescribed tariff rate of 2% from the  normal price of the yarn to arrive at the assessable value  instead of deducting the concessional rate of TOT at 0.5%  prescribed by Notification dated 19.10.1993, which exempted  the processors in backward areas in the State of Gujarat  from paying TOT at 2% and instead provided for payment of  TOT at 0.5%.    According to the learned counsel, under the  above circumstances, at the time of sale, the assessee was  not aware whether ultimately the TOT would be payable at 2%  or at 0.5%, therefore, the learned counsel urged that the  assessee was justified in claiming deduction for TOT at 2%  from the normal price. In this connection, learned counsel  placed reliance on the judgments of this Court in the cases  of IDL Chemicals Ltd.  v.  Collector of Central Excise  reported in (1997) 5 SCC 311; MRF Ltd.  v.  Collector of  Central Excise, Madras reported in (1997) 5 SCC 104; J.K.  Synthetics Ltd. v. Commercial Taxes Officer reported in  (1994) 4 SCC 276; Harshad Shantilal Mehta v. Custodian and  ors. reported in (1998) 5 SCC 1 and Associated Cement  Companies Ltd. v. State of Bihar and ors. reported in  (2004) 7 SCC 642.

6.      Dr. R.G. Padia, learned senior counsel appearing on  behalf of the Department, submitted that on the date when  the assessee had filed price declaration under Rule 173-C,  the assessee was aware of Notification dated 19.10.1993  issued by the Gujarat Government; that the assessee was  also aware that there existed backward area sales and  normal area sales on the date when it filed the price  declaration; that the assessee had never informed the  Department that there were two separate rates prevalent  under the above Notification dated 19.10.1993; that if the  amount of TOT paid by the assessee was less than the amount  claimed as TOT deduction at the time of ex-factory  clearances, the assessee should have paid the differential  excise duty but the assessee never disclosed to the  Department that there were two types of sales, namely,  backward area sales and normal area sales and nor did the  assessee inform the Department about the TOT actually paid  by it and, therefore, Department was right in confirming  the show cause notice dated 19.3.1999 for the period March,  1994 to March, 1997.

7.      The question to be answered is the meaning of the word  "payable" in section 4(4)(d)(ii). The said word is  descriptive. One has to see the context in which the said  word finds place in the aforestated section 4(4)(d)(ii). We  quote hereinbelow section 4(4)(d)(ii), which reads as  under:

"4.     Valuation of excisable goods for  purposes of charging of duty of excise.-

(1) to (3)      xxx             xxx             xxx

(4)     For the purposes of this section, -

(a) to (c)      xxx     xxx     xxx

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

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(i)             xxx     xxx     xxx

(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.- For purposes of this sub- clause, the amount of the duty of excise  payable on any excisable goods shall be the  sum total of \026  

(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, -

(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 of  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."                                        (emphasis supplied)

As can be seen from the above quoted section, excise duty  can be deducted if it had not been included in the invoice  price. According to the Explanation, what is deductible is  the effective rate of duty. Where any exemption has been  granted, that exemption has to be deducted from the ad  valorem  duty. In other words, it is only the net duty  liability of the assessee that can be deducted in computing  the assessable value. The said principle stands  incorporated in the Explanation. For example, if the  assessee recovers duty at the tariff rate but pays duty at  confessional rate, then excise duty has to be a part of the  assessable value. Similarly, refund  of excise duty cannot  be treated as net profit and added on to the value of

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clearances. There is no provision in section 4 of the 1944  Act to treat refund as part of assessable value. If excise  duty paid to the Government is collected at actuals from  the customers and if, subsequently, exemption becomes  available, such excise duty which is not passed on to the  assessee, would become part of assessable value under  section 4(4)(d)(ii).

8.      In the case of TOMCO v. Union of India reported in  1980 ELT 768 (Bom.) the assessees were manufacturers of  vegetable product known as ’Pakav’. The prices were fixed  by the Controller, who fixed the prices statutorily under  the Vegetable Control Order, 1947. These prices were fixed  by the Controller, net of any tax during the period March,  1969 to December, 1969. The prices so fixed by the  Controller included the element of excise duty payable  thereon. TOMCO contended that it was entitled to claim  rebate of duty by virtue of Notification No. 6/62-CE dated  10.2.1962. TOMCO further contended that, it was declaring  the assessable value after deducting the element of duty at  5% from the price fixed by the Controller and, therefore,  entitled to deduct from the selling price the duty payable  at 5% ad valorem. At this stage, it may be noted that TOMCO  showed the deduction at 5% from the price fixed by the  Controller on the duty payable under the above Notification  whereas, according to the Department, the correct method to  arrive at the assessable value ("a.v.") was to deduct from  the selling price not the duty payable under the  Notification but the duty actually payable after the  rebate, which the assessee was entitled to on account of  cotton seed oil content. In other words, according to the  Department, the duty element of the rebate was also  admissible for deduction from the selling price in order to  arrive at the correct a.v.. This was the controversy before  the Bombay High Court. Therefore, the main issue, which  arose before the High Court was whether TOMCO was entitled  to deduction of 5% ad valorem or whether it was entitled to  the deduction of 5% ad valorem minus the rebate which it  was entitled to receive under  exemption Notification No.  6/62-CE dated 10.2.1962. According to TOMCO, the rebate of  6 paise was admissible to the manufacturers who used  indigenous cotton seed oil in the manufacture of vegetable  product, namely, Pakav (ghee) and, therefore, according to  TOMCO, what was given by rabate/exemption under the above  Notification was not deductible from the excise duty. In  short, as in the present case, TOMCO claimed higher  deduction of 5% whereas Department contended that the  assessee was entitled to deduction of 5% minus 6 paise  (rebate). On behalf of TOMCO, as in the present case, it  was argued that exemption was given under the Notification  by way of an encouragement to a manufacturer to make use of  cotton seeds in the manufacture of Pakav. The rebate in  duty was not a general rebate. It was a rebate admissible  only to the manufacturer satisfying certain conditions.  Therefore, the position, in the present case, and the  position prevalent in TOMCO’s case were identical. In the  present case also the TOT deduction was available only on  fulfilment of certain conditions. Rejecting the arguments  of TOMCO, the Bombay High Court held that the rebate of 6  paise had to be deducted from 5% ad valorem duty as the  exemption under the Notification was not by way of a  windfall for the manufacturer but it was admissible only on  account of the use of cotton seed oil in the manufacture of  Pakav.

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9.      At this stage, we may note that there was a conflict  of views at the relevant time when TOMCO case was decided  by Bombay High Court on 24.7.1980. It is precisely in order  to avoid the conflict that the Legislature inserted the  above Explanation in section 4(4)(d)(ii) of the 1944 Act by  using the words "the effective duty of excise payable on  goods under this Act."

10.     In the case of B.K. Paper Mills Pvt. Ltd. v.  Union of  India and ors. Reported in 1984 (18) ELT 701 (Bom.) the  assessee was the manufacturer of various types of papers at  their factory in Bombay. The papers manufactured by the  assessee was liable to excise duty under Tariff Item 17 of  the First Schedule to the 1944 Act (as it then stood) at  the rate specified therein. Under Notification No. 45/73  dated 1.3.1973 an exemption from excise duty to the extent  mentioned in the Notification was given in respect of  certain types of papers cleared by the assessee  (manufacturer). In preparing the invoices, the assessees  did not give the benefit of exemption Notification to their  customers. The assessees contended that the exempted duty  of excise was, in fact, a subsidy and, therefore, they were  not required to pass on the benefit of exemption to their  customers. The assessees filed their price lists for the  period July, 1976 to July, 1979 under Rule 173-C. The  Department issued a show cause notice stating that the  assessees were paying duty at a concessional rate while, in  fact, they were charging full tariff rate of duty to their  buyers and, therefore, they were liable to pay the  differential duty calculated on the revised a.v. by  applying section 4 of the 1944 Act. The Department directed  the a.v. to be determined by deducting from the normal  price the actual value of the duty payable. This  determination was challenged by the assessee. The Bombay  High Court, speaking through Sujata V. Manohar, J., as she  then was, held vide para 25 that looking to the provisions  of section 4(4)(d)(ii) of the 1944 Act and the language  used therein, it  was clear that only the reduced rate of  duty was excludible from the value of the goods. That, the  Explanation did not add something extra to section  4(4)(d)(ii) as it merely explained what was implicit in  that Section.

11.     In our view, the above two judgments of the Bombay  High Court lay down the correct principle underlying the  Explanation to section 4(4)(d)(ii). As held in TOMCO’s case  (supra), the exemption was not by way of a windfall for the  manufacturer-assessee but on account of cotton seed oil  used by TOMCO in the manufacture of Pakav. Similarly, in  the case of B. K. Paper Mills (supra), the Bombay High  Court has correctly analysed section 4(4)(d)(ii) with the  Explanation to say that only the reduced rate of duty can  be excluded from the value of the goods and that  Explanation explains what was implicit in that Section.  That, the said section 4(4)(d)(ii) did not refer to duty  leviable under the relevant tariff entry without reference  to exemption Notification that may be in existence at the  time of clearance/removal. That, section 47 of the Finance  Act, 1982 which inserted the Explanation expressly sets out  what is meant by the expression "the amount of duty of  excise payable on any excisable goods." By the amount of  duty of excise what is meant is the effective duty of  excise payable on such goods under the Act and, therefore,  effective duty of excise is the duty calculated on the  basis of the prescribed rate as reduced by the exemption

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notification. This alone is excluded from the normal price  under section 4(4)(d)(ii).

12.     It is true that the Explanation to section 4(4)(d)(ii)  only refers to the amount of duty of excise payable on  excisable goods, however, as held by the Bombay High Court  in the case of B.K. Paper Mills (supra), the Explanation  expressly sets out what is implicit in section 4(4)(d)(ii)  which states that "value" in relation to excisable goods  does not include the amount of duty of excise, sales tax  and other taxes if payable on such goods. Therefore, the  test to be applied is that of the "actual value of the duty  payable" and, therefore, there is no merit in the argument  advanced on behalf of the assessee that the Explanation is  restricted to the duty of excise. This principle can  therefore apply also to actual value of any other tax  including TOT payable. Even without the Explanation, the  scheme of section 4(4)(d)(ii) shows that in computing the  assessable value, one has to go by the actual value of the  duty payable and, therefore, only the reduced duty was  deductible from the value of the goods.

13.     To the same effect is the judgment of the Division  Bench of the Bombay High Court in the  case of Central  India Spinning, Weaving and Manufacturing Co. Ltd. and ors.   v.  Union of India and ors. reported in 1987 (30) ELT 217  (Bom.). We quote hereinbelow para 7 of the said judgment,  which reads as follows: "It is true that according to Section  4(4)(d)(ii) of the Central Excises Act, the  value does not include the amount of duty of  excise, if any payable on such goods, but in  view of Explanation to Section 4(4)(d)(ii),  the ’duty of excise’ means the duty payable  in terms of the Central Excise Tariff read  with Exemption Notification issued under  Rule 8 of the Central Excise Rules. In this  view of the matter, the only deduction that  is permissible is of the actual duty paid or  payable while fixing the assessable value.  Thus where the company/ manufacturer whose  goods were liable to excise duty at a  reduced rate in consequence of an exemption  notification, while paying duty at reduced  rate collected duty at a higher rate i.e.  tariff rate from its customers the  authorities were justified in holding that  what was being collected by the company as  excise duty was not excise duty but the  value in substance of the goods and  therefore, the excess value collected by the  petitioner from the customers was  recoverable under Section 11A of the Central  Excises and Salt Act, 1944."  

14.     Applying the above tests to the facts of the present  case, it is clear that on the date when the assessee filed  its price declaration under Rule 173-C the assessee was  aware that there was an exemption Notification dated  19.10.1993 in the State of Gujarat; that there were depot  sales in Surat; that there were two types of sales, namely,  backward area sales and normal area sales and that the rate  of TOT in respect of backward area sales was 0.5% whereas  the rate of TOT for normal area sales was at 2% and yet the  assessee after suppressing the aforestated data claimed the

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TOT deductions at the rate of 2% across the board for all  clearances and, therefore, the Department was justified in  calling upon the assessee to pay differential excise duty.  We accordingly confirm the demand.  

15.     Before concluding, we may add that every efficient  manufacturer has to plan his operations sufficiently  carefully to know what raw materials he will use and in  what proportion he will use the raw materials in the  manufacture of his final product. Generally, such  manufacturers maintain what is called as Order Book. A  manufacturer who is prudent would ordinarily worked out on  estimation, the extent of exemption which he is likely to  get, in which event, the uncertainty to which  the learned  counsel has made reference would in fact hardly arise.  In  the present case, we are concerned with the amount of  deduction. That deduction has been claimed by the assessee- manufacturer (appellant). The burden is on such  manufacturer to maintain proper records, as the burden is  on it to file a proper price declaration under Rule 173-C.  The burden to claim deduction is on the manufacturer. In  the present case, the assessee has filed a declaration  under the said Rule 173-C without disclosing to the  Department any of the aforestated details. We are,  therefore, of the view that the Department was  right not  only in raising the demand for differential duty but also  for invoking the extended period of limitation.

16.     For the aforestated reasons, we find no merit in these  civil appeals and the same are accordingly dismissed with  no order as to costs.

Civil Appeal Nos. 2008-2010 of 2002

17.     This batch of civil appeals have been filed by the  Department against order dated 3.7.2001 passed by the CEGAT  ("the Tribunal") which order stands confirmed by our above  judgment in civil appeal Nos. 8529-8531 of 2001 in favour  of the Department.

18.     By the impugned order, the Tribunal has confirmed the  demand made on the assessee vide show cause notice dated  19.3.1999 for the period March, 1994 to March, 1997.  However, the Tribunal found that the demand made by the  Department was beyond limitation after the assessee had  categorically informed the Department vide letter dated  14.1.1997 that there were two types of sales, namely,  backward area sales and normal area sales. According to the  Tribunal, therefore, there was no suppression after the  Department had acquired the knowledge for the first time  vide the assessee’s letter dated 14.1.1997 and, therefore,  it was not open to the Department to claim suppression  after 14.1.1997.

19.     We see no reason to interfere with the findings  recorded by the Tribunal on the question of suppression.

20.     Accordingly, civil appeal Nos. 8529-8531 of 2001 filed  by the assessee and the cross civil appeal Nos. 2008-2010  of 2002  filed by the Department stand dismissed with no  order as to costs.