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PETITIONER: VST INDUSTRIES LTD.

       Vs.

RESPONDENT: COLLECTOR OF CENTRAL EXCISE, HYDERABAD

DATE OF JUDGMENT:       08/01/1998

BENCH: B.N. KIRPAL, V.N. KHARE

ACT:

HEADNOTE:

JUDGMENT:                             WITH           Civil Appeal Nos. 2523 and 2611 of 1992                       J U D G M E N T Kirpal.J.      These appeals Involve for decision the question whether notional interest  on the  Interest  free  security  deposit received should be considered for the purpose of arriving at the assessable  value under  the  Excise  Act  by  Including Interest at  the rate  of 12%  per cent  per annum  on  such security deposits.      VST Industries  Ltd. (appellant  in CA No.2524/92) is a company carrying  on business  of manufacture  and  also  of cigarettes which  was assessable to duty under the erstwhile Item No.4  of the  First Schedule  to the Central Excise and Salt Act,  1944. The  other two  appellants,  namely,  Venus Tobacco Company  Pvt. Ltd.  (appellant in CA No.2523/92) and Hyderabad Deccan  Cigarette Factory  Ltd. (appellant  in  CA No.2611/92) are  also cigarette  manufacturers and use their plant and  machinery to  manufacture cigarettes  for  an  on behalf of  VST Industries  Ltd. (hereinafter  referred to as "VST"). The  question involved  in these appeals, therefore, related to  the fixation  of   the assessable  value of  the cigarettes manufactured  and sold under the brand name owned by VST.      The  undisputed   facts   are   that   the   cigarettes manufactured  by  the  appellants  are  sold  in  wholesale, factory, at  cum-duty prices  to main  dealers who buy these cigarettes  on  a  principal-to-principal  basis.  The  main dealers in  turn  sell  the  cigarettes  t  other  wholesale dealers called  sub-dealers who in turn sel these cigarettes to the  retallers. The  cigarettes were  being sold  by  the appellants either  on cast-and-carry  basis or  by extending credit facilities  to  few  of  the  main  dealers.  As  the appellant company,  namely, VST  found that  several of  the main  dealers   were  taking  considerable  time  in  making remittances for  cigarettes which  were delivered  to  them, they issued a circular dated 22nd September, 1981 whereby it introduced  credit   facility  if   interest  free  security deposits were made with the company. In the said circular it was written  that with  a view  to pro  vide the facility of

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such credit to its customers and to safeguard itself against the commensurate  risk and  for introducing  some uniformity the company  nor proposes that w.e.f. 1.10.1981 those of its main dealers  as are  desirous of  getting credit facilities would have to keep security deposit (interest face) with the Company equivalent  to about 21 days of their normal monthly purchases.       It is  of course  entirely upto  the main  dealers  to request for  this facility  and they will be at full liberty to take  delivery against  payments if  they do  not want to make the security deposit.      The company  reserves the  right to apply the amount of security deposit  towards payment  of unpaid  price  or  any other amounts  which may  be due to the buyer to the company or any  account whatsoever.  On discontribution  of  trading with the  buyer the company will return the security deposit or the  balance if  any  remaining  after  the  company  has deducted/adjusted any amount due to the company by the buyer on any accounts whatsoever and this will be strictly without prejudice to and in addition to the company’s other right.      A copy  of the  revised conditions  sale for cigarettes effective from October 3, 1981 are annexed herewith.      In the  event of your desiring to avail yourself of the credit facilities  kindly send  a letter  as  per  the  form enclosed for your convenience.      A show  cause notice  dated  28th  December,  1987  was issued from the office of the Collector of Central Excise to the appellants.,  In the  said notice  it  was,  inter  all, stated that  the receipt  of security  deposits by VST  from the main  dealers and  without  payment  of  interest  would influence the  sale price of its cigarettes to the ease main dealers. It  was accordingly proposed to work out a notional interest at  the rate of 12 per cent on the sums of security deposits received  by VST   from the main dealers and to add this to  the sale  price of  the cigarettes  so  as  to  re- determine the  assessable value as well as differential duty payable for the cigarettes cleared by the company during the above period.  This was proposed on the ground that the sale price of  the cigarettes  by VST  dealers did not constitute the normal  price under Section 45 of the Central Excise and Salt Act  and in  such a situation where an additional money consideration has  been there between the parties concerned, the normal  price had  to be determined only under Rule 5 of the Valuation  Rules, 1975.  The said show cause notice also referred to  the receipt  of the  freight service charges by the appellants,  but in  these appeals  we are not concerned with that question.      Reply was  sent to  the said show cause notice refuting the claim  of the  excise authorities. VST while denying its liability  paid   the  demand   of  Rs.2,23,10,405.79  under protest. The  other two  appellants, namely,  Venus  Tobacco Company Pvt.  Ltd. and  Hyderabad Deccan  Cigarettes Factory Ltd.  similarly   paid  Rs.3,92,864.89  and  Rs.18,84,718.74 respectively.      On 17th  March, 1988 the Assistant Collector of Central Excise passed  an adjudication  order against VST Industries Ltd. and  confirmed the demand of Rs.2.23.10.405.79. Similar orders were  also passed  against other  two  appellants  by their respective Assistant Collectors of Central Excise. All the three  appellants then  filed appeals.  The Collector of Central Excise  (Appeals) passed  an order  on 19th  August, 1988 whereby  he  set  aside  that  part  of  the  Assistant Collector’s order  which sought  to add notional interest to security deposits  for reworking the assessable value, while confirming the addition the freight service charges.

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    The excise  authorities then  filed appeals against the deletion of the notional interest from the assessable value. The Tribunal  allowed the  department’s appeal  holding that notional interest  charges should be considered for arriving at  the  assessable  value  of  cigarettes  but  such  extra commercial consideration should be added to price and not to assessable  value.  It  is  against  this  decision  of  the Tribunal that the present appeals have been filed.      On behalf  of the  appellants it  was contended by Shri Anil B.Divan,  learned senior  counsel, that  the  wholesale price which was charged by the appellants was not in any way influenced by the security deposit which some of the dealers had made  who wanted  to get  goods on  credit. He submitted that the  transaction with the dealers were on principal-to- principal basis  and the  appellants charged a uniform price from all  dealers, irrespective of the fact whether the sale was made  on cash  basis or on credit. He drew put attention to the  latest circular  issued  by  the  Central  Board  of Central Excise  and Customs dated 27th May, 1996 in which it was, inter alia, stated that the Ministry of Law had advised that  if   there  was   no  nexus   between   the   security deposit/advance made  by the  wholesale buyer  and the  sale price of  the excisable goods or if the department is not in a position  to determining the money value of the additional consideration, the  provisions of  Rule 5  of Central Excise (Valuation)  Rules,   1975  would  not  be  applicable.  The circular further  stated that normally "where the same price is charged  form buyers  who have given the deposit and from those who  have not  given  the  deposit  and/or  where  the advance is purely a security deposit and the interest earned by such  deposit is  credited  to  the  buyer  the  notional interest on such advance cannot be added to the price."      Refuting the  aforesaid submission  Shri  N.K.  Bajpal, learned counsel  for  the  respondent,  submitted  that  the appellants gained considerable pecuniary advantage by having received interest free security deposit. The receipt of this deposit must  be  taken  into  account  in  determining  the assessable value.  He contended  that Rule  5 of the Central Excise  is   applicable  because  price  was  not  the  sole consideration and the value of such goods has to be based on the aggregate  of the  price  and  the  amount  of  notional interest on the security deposit received by the appellants. In support  of his  submission strong reliance was placed on the decision  of this  Court in  the case of Metal Box India Ltd. Vs.  Collector of  Central Excise, Madras [(1995) 2 SCC 90].      Before referring  to the  decision Metal  Box’s case it will be  appropriate to  refer to  other decisions which are relevant on  the point  in  issue  which  are  Collector  of Central Excise  Vs. Indian Oxygen Ltd. [1988 (36) E.L.T. 730 (S.C.)] and  Government of  India Vs.  Madras Rubber Factory Ltd. [1995  (77) E.L.T.  433 (S.C.)].  In Indian oxygen case two questions  which arose  for consideration  were  whether rental charges  for gas  cullenders and  interest earned  on deposit made  for gas  cullenders  and  interest  earned  on deposit mad  for several  return of  gas cullenders, whether interest be notional or actual, could be whether Interest be notional or  actual, could  be included  in determining  the assessable value. It was observed by this Court as follows:      "It is  well settled  that the levy      under   the    Act,   is   on   the      manufacture. Under Section 4 (1)(a)      of  the   Act,   excise   duty   is      chargeable on  any excisable  goods      with reference to value, such value

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    shall,   subject   to   the   other      provisions  of   this  Section,  be      deemed  to   be  the  normal  price      thereof,  that  is  to  say,  there      price  at   which  such   gods  are      ordinary sold  by the assesses to a      buyer in  the course  of  wholesale      trade for  delivery at the time and      place or  removal, where  the buyer      is not  a related  person  and  the      price is the sole consideration for      the sale.  Here the  sale is of the      gases.   The   levy   is   on   the      manufacture  of   gases   and   the      excisable goods are these gases." It was  held that the supply of gas cullenders was ancillary to the  supply of  gases. It  was open  to the  customers to bring their  own cylinders  and deposit  was required  to be given only if the customers required the company to lend the cullenders. This activity of giving cylinders was held to be ancillary and profits and gains from the deposit so received was not  required to  be taken  into account while computing the value of the escapable goods. It and also been contended on behalf  of the  Revenue that  there  were  two  different classes of  buyers; one  class of  such buyers  was that who used to  being their own cylinders and the other who used to get supply  of gases from the cylinders of the suppliers. It was, therefore, submitted that different rates for these two classes of  buyers constituted  two different  markets which was  permissible   under  Section   4.  Dealing   with  this contention it was observed at page 732 as follows:      "There may  be different classes of      buyers  for  different  classes  of      goods. Section  4(1)(a) of  the Act      exhaustless that if the goods is of      the same  type, the  prices  should      also be  the same.  The proviso  to      the said  Section  postulates  that      where  in  accordance  with  normal      practice such  goods,  namely,  the      gases are sold to different classes      of buyers then different prices may      be charged.  it gases had been sold      to different  classes of  buyers at      different  rates,  it  is  possible      that  there   might  be   different      markets for  the same. But here the      charges  like   rentals   for   the      cylinders and the notional interest      income, are for ancillary or allied      services  and   that  is   not   an      activity  of   manufacture.   hence      Section 4(1)(a)  proviso can  be of      no avail to the revenue."             (emphasis added) In Madras  Rubber Factory  case (supra)  this Court analysed Section 4 and observed as under:      "It is  obvious that  the value  of      excisable goods  for the purpose of      sub-section (1)  of  Section  4  is      ordinarily     determined      with      reference to  the normal  price  at      which such  good  are  sold,  i.e.,      under clause (a) of sub-section (1)      of Section  4. Only where the goods

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    are not  sold and,  therefore,  the      price  of   such   goods   is   not      ascertainable  or  in  a  situation      where  the  normal  price  of  such      goods is not ascertainable for some      other reason  that  clause  (b)  is      attracted,  hereunder  the  nearest      ascertainable equivalent  price  is      ascertained in  accordance with the      rules framed in that behalf. Clause      (b) is in the nature of a residuary      clause which  should be resorted to      where the  normal price  cannot  be      ascertained   for    the    reasons      mentioned therein.  In other words,      where the  normal price  cannot  be      ascertained   for    the    reasons      mentioned therein.  In other words,      where the normal price is available      or  is   ascertainable,  resort  to      clause (b) is not permissible." It then  considered as  to what  are the  various deductions from the  price received  which were permissible in order to arrive at  the assessable  value. One of the amounts claimed as a  deduction from the amount received by the manufacturer was the element of interest received by it on the goods sold on credit.  Dealing with this the Court at Page 470 observed as under:      "The case  of the  assesses (Madras      Rubber Factory)  is that  where the      goods  are   sold   to   up-country      wholesale buyers  and payments  are      received quite  sometime later,  it      is indeed  a case of sale on credit      and,   therefore,    the   interest      charged from  the date  of delivery      of   goods   till   the   date   of      realization of  the  price  thereof      should be  deducted from  the value      of the goods. The interest charged,      it is submitted, is only in lieu of      the  time   taken  in   making  the      payments    by    the    up-country      wholesale buyer.  Since this is the      amount received  subsequent to  the      sale from  the depots  and does not      fell within  the ambient  of any of      the expresses  held  includible  in      Bombay Tyre  International,  it  is      clearly excludable.  The claim  for      this   deducting   is,   therefore,      allowed." The aforesaid  observations clearly show that when goods are sold on  credit and  interest is received that does not form part of the price on which excise duty is payable.      Coming to  the facts  of the  present case it is not in dispute that  the appellants  are charging  a uniform  price from  their  wholesale  dealers.  The  price  at  which  the cigarettes are  sold at  the  factory  gate  was  the  same, irrespective of  the fact whether the dealers wee buying the cigarettes on  credit or  against payment  of money.  As  is indicated in  the circular,  and there is no dispute to what has   been   stated   therein,   one   of   the   commercial considerations for  introducing interest free deposit scheme was to  cover the  risk of  credit salad  extended  to  bulk

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customers. There  is nothing  on the record to show that the receipt of  the deposit  from  some  of  the  dealers  could possible influence  the fixation of the sale price even with regard to  those sales  which were  made at the factory gate against cash  and not on credit. Had there been a difference in the  selling price  where, for  example, special discount was given to the dealers who had given a deposit then it may have been  possible to  say that  there were  two  different markets and  two different  prices and that lesser price was being charged  for an extractor consideration and, in such a case the  notional or  actual interest  could be  added. But that is  not the  case here,  Metal Box case (supra) was the one where  two different prices were being charged. In Metal Box case  the assesses  was manufacturing  goods which  were offered for sale to M/s Ponds India Ltd., a wholesale buyer, who required  bulk of  the containers  manufactured  by  the assesses for  marketing its  cosmetic products.  In order to ensure a  steady and  regular supply  Ponds India  Ltd. gave large advances  and  an  agreement  had  been  entered  into between the parties as a result whereof discounts were given by the  assesses Ponds  India Ltd. which were to be deducted from the  gross price.  The deduction was not allowed by the excise authorities  and the  Tribunal. It  was contended  on behalf of the assesses in this Court that the Tribunal erred innerspring the  loading of  purchase price  by the  ad  hoc Interest on  advances  made  by  Ponds  India  Ltd.  to  the assesses. While  rejecting this  contention this  Court took notice of  the Fact  that Ponds  India Ltd.  was a wholesale buyer  who   was  lifting  ninety  per  cent  of  the  total production of  the appellant.  The assesses  was  giving  to Ponds India  Ltd. fifty  per cent discount from normal price and Ponds  India ltd.  had given large amounts of money free of interest  to the  assesses. In the these circumstances it was held  that the price charged by the appellant from Ponds India Ltd,  could not  be said  to be  the normal  price  of containers and,  therefore, the  action of the department in taking into  account the  notional interest  on the advances given was upheld.      Metal Box  case is clearly distinguishable. The amounts given as  security deposit  in he  present cases  represents only avoid  of 21 days supply in a year whereas in Metal Box case large amounts of money had been advanced. Secondly, and what is  more important,  in Metal Box case the assesses had given fifty  per cent  discount to  Ponds India  Ltd. on  it gross sale  price and thereby charged lesser price than what was charged  from the  other buyers. In the present case the cigarettes are  sold at  the factory  gate to  the wholesale dealers at  a uniform price irrespective of the fact whether the purchaser  is buying the cigarettes on credit or against payment of money in cash.      Excise duty, as has been held, is on the manufacture of goods at  the price paid. The price paid in the present case is the  same by  all the dealers. There is nothing show that there was  any special  consideration which was shown to the dealers who  had given the security deposit. Now has it been shown by  reference to any documents or data that because of the receipt  of such  deposit the price charged from all the buyers was  reduced. Merely because interest pre-deposit was reduced from  some dealers  cannot, by  itself, lead  to the conclusion arrived  at by  the excise  authorities  and  the Tribunal. This  also followed  from  the  decisions  in  the Indian Oxygen  and Madras  Rubber Factory’s  cases  (supra). There was,  thus,  no  justification  for  disregarding  the uniform wholesale price which was being charged from all the dealers and  adding the  element of notional interest of the

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security deposit to their said price.      This additional Collector, In our opinion, was right in coming to  the conclusion that Rule 5 of the Valuation Rules was not  applicable in  the present case as it was not shown that the  price charged was not the sole consideration. When the appellants  are nor  requiring all  the dealers  to give security deposit  and it  is only  those who avail of credit facilities who are required to give the security deposit but get no  discount or pay a reduced price, then in such a case excise duty can be charged only on the uniform price paid by the dealers without any addition of notional interest.      For the  aforesaid reasons  these appeals  are allowed. The order  of the CEGAT is set aside and extra demands raise by the  respondent pursuant to the show cause notices issued by them are quashed. The appellants will also be entitled to costs.