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CASE NO.: Appeal (civil)  43-44 of 1998

PETITIONER: M/s Alembic Glass Industries Ltd.

RESPONDENT: The Commissioner of Central Excise

DATE OF JUDGMENT: 14/08/2006

BENCH: ARIJIT PASAYAT & TARUN CHATTERJEE

JUDGMENT: J U D G M E N T (WITH CIVIL APPEAL NOS.4234-4247/1999)

ARIJIT PASAYAT, J.  

        Challenge in these appeals is to the orders passed by  the Customs, Excise and Gold (Control) Appellate Tribunal,  West Regional Bench at Bombay (in short ’CEGAT’).  While  appellate order dated 13.6.1997 is the subject-matter of  challenge in Civil Appeal No.43 of 1998, the other appeal  relates to the order dated 28.11.1997 passed on an  application for rectification of errors filed by the appellant.   

       Background facts in a nutshell essentially are as  follows:

       The appellant-company, incorporated under the  Companies Act, 1956 is a manufacturer of glass and  glassware.  It holds license issued under the Central Excise  Act, 1944 (in short the ’Act’) read with the Central Excise  Rules, 1944 (in short the ’Rules’).  The dispute relates to the  period 1.1.1988 to 28.2.1990.  The articles manufactured by  the appellant are classified under Chapter 70 of the Central  Excise Tariff Act, 1985 (in short ’’Tariff Act’).  There was a  prolonged strike in the factory of the appellant in 1987,  which according to the appellant resulted in closure of the  appellant’s factory and came to a standstill position so far  production is concerned.  The appellant decided to cut down  expenditure in areas like labour, packing, inventory,  advertisement etc. M/s Darshak Ltd. who was a bulk  purchaser of the appellant’s products started advertising to  boost its sales in respect of glass and glassware purchased  from the appellant.  Inquiries were conducted by the Central  Excise Authorities regarding expenditure on publicity and  sales promotion incurred by M/s Darshak Ltd. on the goods  purchased from the appellant. Statements of some of the  officials of M/s Darshak Limited and Executive Director of  the appellant were recorded during investigation. The  appellant received show-cause notice dated 4.4.1991 from  the Central Excise and Customs Directorate, Baroda  proposing to recover duty amounting to Rs.18,79,775.31  under proviso to Section 11A(1) of the Act.  The notice was  issued by the Collector, Central Excise and Customs,  Baroda. The substance of the notice was that the appellant  had gradually transferred the expenditure on sales  promotion and/or publicity of its product to M/s Darshak  Ltd.  The amount spent by M/s Darshak Ltd. was to be  included in the assessable value declared by the appellant

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and, therefore, on the amount spent by M/s Darshak Ltd.  being Rs.71,61,049 the duty payable was Rs.18,79,775.31.  The appellant submitted its reply to the show-cause notice.  It was submitted that the show-cause notice was barred by  time; the appellant has been carrying on all of its activities  within knowledge of the excise authorities; at every stage of  changing the market pattern Department was a party; all  sales were being made on principal to principal basis i.e. the  appellant and M/s Darshak Ltd.  are not related persons.  Request was made to examine or cross-examine some  persons. A further reply was filed on 21.11.1991 pointing  out that the price list submitted by the appellant had been  approved by the Department.  The stand of the appellant  was not accepted by the Collector and order in original  confirming the show-cause notice was passed.  Reference  was made to the statement of Mr. R.S. Guard, General  Manager Marketing of M/s Darshak Ltd. to the effect that  upward trend in expenses for publicity was attributable to  increase in sales. Though the buyer was not incurring any  advertisement expenses on their behalf under any express  or implied instructions, yet the fact that the advertisement  expenses by the appellant were reduced/stopped indicated  that the same was part of a well thought out policy.  M/s  Darshak Ltd. was a customer of the appellant since 1985.  Expenses for advertisement and sales promotion were  exclusively made by M/s Darshak Ltd. which led to increase  in volume of sales. Expenses on advertisement are  unavoidable for marketing the goods irrespective of the fact  as to who incurs the expenses.  It was held that once it is  established that the expenses for advertisement are  additional considerations, the question of related person is  immaterial. It was a case of implied instruction and,  therefore, the assessable value was required to be  accordingly fixed, and the expenses were required to be  included in the assessable value under Rule 5 of the Central  Excise (Valuation) Rules, 1975 (in short the ’Valuation  Rules’).  Demand was confirmed under Section 11A of the  Act and penalty of Rs.10 lakhs under Rule 173Q(1) of the  Rules was imposed. Land, buildings, plant and machinery  belonging to the appellant was confiscated under Rule  173Q(2) of the Rules. However, option was given to pay fine  of Rs.2 lakhs in lieu of confiscation.          

Appellant preferred appeal before the CEGAT.  

       It was the appellant’s stand before the CEGAT that  there was no special relationship between the appellant and  M/s Darshak Ltd. The former was selling goods at the same  price to other dealers also.  Therefore, there was a factory  gate price for the products and that was the assessable  value under Section 4 of the Act.  Reference was made to  the assessee’s own case in Commissioner of Central Excise,  Vadodara v. Alembic Glass Industries Ltd. (1996) 88 ELT  296) in which CEGAT had given a categorical finding that  M/s Darshak Ltd. was not a favoured buyer as there was no  evidence of discretion or favoured treatment. It was pointed  out that admittedly the advertising expenses were incurred  only by the customer M/s Darshak Ltd. and up to the point  of clearance, the appellant had not incurred any such  expenditure.   

The expenses incurred towards sales promotion and  publicity by both the appellant and M/s Darshak Ltd. were  as follows:

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Expenditure on Sales Promotion & Publicity    

Year            M/s Alembic     M/s Darshak      Volumes of Sales 1986            Rs.11,91,192/-    Rs.1,91,928/-  Rs.2,05,52,607/-   1987                    Rs.13,192/-       Rs.2,25,945/-  Rs.22,77,19,769/- 1988-89 (1.1.88 to 31.3.89)                                 Rs.48,81,732/- Rs.69,69,18,966/-        

Stand of the Revenue was that initially appellant was  incurring advertisement expenses which were gradually  shifted to M/s Darshak Ltd. who were purchasing about  98% of its product.  Reference was made to a decision of the  Tribunal where it was noted that there was understanding  over sharing advertisement expenses on 50:50 basis and the  expenses were to be added to the assessable value.   

By the impugned judgment dated 13.6.1997 the  CEGAT confirmed the findings of the Revenue authorities on  the question of valuation as well as suppression. However,  the quantum of penalty was reduced to Rs.2 lacs from Rs.10  lacs.  It was noted by the CEGAT that the reasons why M/s  Darshak Ltd. came to make a bulk purchases resulted from  economic crisis, as bulk purchase was one of the methods  of rehabilitation.  Brand name "Yera" is owned by the  appellant and packing is done by M/s Darshak Ltd. It is  clearly indicated that the appellant was the owner. The  advertising expenses by M/s Darshak Ltd. are nothing but a  deal for revival of the appellant’s factory. Reference was  made to the accepted position that if M/s Darshak Ltd. was  not to make bulk purchases the appellant would have  incurred advertisement expenses to promote sales. It was  held that if price is not the sole consideration, then  additional consideration has to be included in assessable  value. Though M/s Darshak Ltd. is not a favoured  buyer/related person, that is really of no consequence.  Since the response of the appellant was ’No’ to question  No.19 in questionnaire in the price list, Section 11-A has  been rightly invoked. Reference was made by the CEGAT to  Rule 5 of Valuation Rules to hold that the expenses on sales  promotion and advertisement were to be included in the  assessable value of the goods.  It was held that demand of  duty from the appellant under Section 11-A read with  proviso to sub-section (1) was clearly applicable as the  appellant had suppressed information with the intention to  evade payment of duty.  Tribunal found that the  circumstances under which M/s Darshak Ltd. had given  assurance of bulk purchase and commenced increased  outlet advertising the appellant’s product clearly indicated  that it was a package deal for revival of the appellant’s  factory arrived at between them and M/s Darshak Ltd., and  was a part of the cost reduction exercise of the appellant. An  application for rectification was filed which was dismissed.  The appellant’s argument in support of the rectification  application was that the CEGAT did not consider the  various judgments which were cited before it and there was  no suppression of facts because the assessee had submitted  its Balance Sheets and other documents. Stand of the  Revenue that no case for rectification was accepted the  rectification application was dismissed.   

       In support of the appeal, learned counsel for the  appellants submitted that the methodology of working out

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assessable value has been highlighted by this Court in  many cases.  In Union of India  v. Bombay Tyre  International Ltd. (1984 (1) SCC 467), it was held that the  value of an excisable article for the purpose of levying excise  was to be taken to be the price at which the excisable article  is sold by the assessee to a buyer at arms’ length in the  course of wholesale trade at the time and place of removal.   

       Learned counsel for the Revenue on the other hand  supported the orders of CEGAT.  Relying on a decision of  this Court in Commissioner of Central Excise, Surat v.  Surat Textiles Mills Ltd. and Ors. (2004 (5) SCC 201) he  contended that Tribunal’s conclusions are in terra firma.

       In the instant case CEGAT held that the Collector’s  view that the expenditure on advertisement and sale  promotion incurred by M/s Darshak Ltd. forms additional  consideration to be added to the sales price under Rule 5 of  the Valuation Rules is well founded. It was held that  addition was not being done on the ground that M/s  Darshak Ltd. is favoured buyer or that they are related  persons to the appellant. In Collector of Cenetral Excise,  Baroda v. Besta Cosmetics Ltd. (2005 (3) SCC 792) this  Court held that where advertisement cost is incurred by the  manufactures/customers compulsorily or mandatorily and  where manufacturer has enforceable legal right against the  customers to insist on incurring of such advertisement  expenditure by the customers, the advertisement cost would  be includible in the assessable value. In Besta Cosmetics  case (supra) it was observed by a three-Judge Bench that  without affirming the view taken in CCE v. Surat Textile  Mills Ltd. (2004 (5) SCC 201) it is clear even on the basis of  the judgment that the agreement should give the  manufacturers/marketing agent, the discretion whether or  not to advertise the assessee’s product. There was no  enforceable legal right with the assessee to insist on the  advertisement under the agreement. In the instant case  there was no finding recorded by CEGAT that the assessee  had any enforceable legal right. On the contrary the CEGAT  proceeded on the basis that till 1987 the assessee was  incurring the expenses. The circumstances under which  M/s Darshak Ltd. gave an assurance of bulk purchase and  commenced progressively increasing outlay on advertising  the appellant’s product indicated that it was package outlay  or revival of the appellant’s factory arrived at between them  as a part of cost reduction exercise of the assessee. There  was no material before the CEGAT to conclude that there  was any tacit understanding which was the stand of the  Revenue.  No material was placed by Revenue to justify this  inferential presumption, which was also not spelt out in the  show cause notice.

       In  Philips India Ltd. v. Collector of Central Excise,  Pune (1997 (6) SCC 31), this Court noted as follows:    "2. The learned counsel for the appellant  drew attention to the judgment of a Division  Bench of the High Court at Madras in  Standard Electric Appliances v. Supdt. of  Central Excise [(1986) 23 ELT 302 (Mad)].  The Court said that it was common  knowledge that when a consumer purchased  an article from a dealer, in the case of  service facilities he looked to the dealer and  not to the manufacturer. For replacement of  defective parts also he looked to the dealer

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from whom he had purchased and,  notwithstanding the fact that the wholesale  dealer might ultimately have the parts  replaced by it reimbursed from the  manufacturer, the service facilities were  provided by the wholesaler with a view to  earn goodwill and attract customers. The  advertising of a product by the wholesaler  was one of the well-known methods by  which the wholesaler attracted customers  and if, as a result of increasing its business,  the demand for the product of the  manufacturer also increased, the advertising  by the manufacturer could not be said to be  for and on behalf of the manufacturer.  3. In Union of India v. Mahindra and  Mahindra Ltd. [(1989) 43 ELT 611 (Cal)] the  High Court at Bombay emphasised the  relationship between the parties, being of  buyer and seller on principal-to-principal  basis. The Court observed that the  manufacturer and its distributor had a  mutual interest in maximising the sale of  the products. The provisions in the contract  between them relating to advertising and the  like were in furtherance of this desire on the  part of both the manufacturer and its  distributor and in no way affected the real  nature of the transaction which appeared to  be of sale on principal-to-principal basis.  5. It seems to us clear that the  advertisement which the dealer was required  to make at its own cost benefited in equal  degree the appellant and the dealer and that  for this reason the cost of such  advertisement was borne half and half by  the appellant and the dealer. Making a  deduction out of the trade discount on this  account was, therefore, uncalled for.  6. As to the after-sales service that the  dealer was required under the agreement to  provide, it did of course enhance in the eyes  of intending purchasers the value of the  appellant’s product, but such enhancement  of value enured not only for the benefit of  the appellant; it also enured for the benefit  of the dealer for, by reason thereof, the  dealer got to sell more and earn a larger  profit. The guarantee attached to the  appellant’s products specified that they  could be repaired during the guarantee  period by the appellant’s dealers anywhere  in the country. Thus, though one dealer  might have to repair goods sold by another  dealer and incur costs in that regard, he  also had the benefit of having the goods he  sold reparable throughout the country. The  provision as to after-sales service, therefore,  benefited not only the appellant; it was a  provision of mutual benefit to the appellant  and the dealer."          In that case it was noted that advertisement which the  purchaser was required to make at its own cost benefited in  equal degree the assessee and the purchaser and for that  reason the cost of such advertisement was borne equally

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and making a deduction out of the trade discount was held  to be uncalled for. It was pointed out that while adjudicating  the matters such as this, the Excise Authorities would do  well to keep in mind the legitimate business considerations.  

       It is to be further noted that there is no material to  show that there is no arrangement for reimbursement.  The  factual position shows that the transaction was on a  principal to principal basis.  The findings of this Court in  A.K. Roy and Anr. v. Voltas Limited (1973 (3) SCC 503) also  throw considerable light on the controversy.   "20.    There can be no doubt that the  ’wholesale cash price’ has to be ascertained  only on the basis of transactions at arms  length. If there is a special or favoured buyer  to whom a special low price is charged  because of extra-commercial considerations,  e.g. because he is relative of the  manufacturer, the price charged for those  sales would not be the ’wholesale cash price’  for levying excise under Section 4(a) of the  Act. A sole distributor might or might not be  a favoured buyer according as terms of the  agreement with him are fair and reasonable  and were arrived at on purely commercial  basis. Once wholesale dealings at arms  length are established, the determination of  the wholesale cash price for the purpose of  Section 4(a) of the Act may not depend upon  the number of such wholesale dealings. The  fact that the appellant sold 90 to 95 per  cent. of the articles manufactured to  consumers direct would not make the price  of the wholesale sales of the rest of the  articles any the less the ’wholesale cash  price’ for the purpose Section 4(a), even if  these sales were made pursuant to  agreements stipulating for certain  commercial advantages, provided the  agreements were entered into at arms length  and in the ordinary course of business.  22. Excise is a tax on the production and  manufacture of goods (see Union of India v.  Delhi Cloth and General Mills ([1963] Supp  1 SCR 586). Section 4 of the Act therefore  provides that the real value should be found  after deducting the selling cost and selling  profit and that the real value can include  only the manufacturing cost and the  manufacturing profit. The section makes it  clear that excise is levied only on the  amount representing the manufacturing  cost plus the manufacturing profit and  excludes post-manufacturing cost and the  profit arising from post-manufacturing  operation, namely selling profit. The section  postulates that the wholesale price should  be taken on the basis of cash payment thus  eliminating the interest involved in  wholesale price which gives credit to the  wholesale buyer for a period of time and that  the price has to be fixed for delivery at the  factory gate thereby eliminating freight,  octroi and other charges involved in the  transport of the articles. As already stated it

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is not necessary for attracting the operation  of Section 4(a) that there should be a large  number of wholesale sales. The quantum of  goods sold by a manufacturer on wholesale  basis is entirely irrelevant. The mere fact  that such sales may be few or scanty does  not alter the true position.  

       That being so, there is no scope for making any  addition as done the Central Excise Authorities and upheld  by CEGAT.  In view of the above-said findings it is not  necessary to consider the question whether the extended  period of limitation applied.  The appeals deserve to be  allowed which we direct by setting aside the impugned  orders of CEGAT.  No costs.