REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL  APPELLATE  JURISDICTION

CIVIL APPEAL NO. 3403 OF 2003

NATIONAL LEATHER CLOTH ... APPELLANT MANUFACTURING CO.

VERSUS

UNION OF INDIA & ANR. ... RESPONDENTS

J U D G M E N T  

D.K. JAIN, J.  

1. This appeal, by special leave, is directed against the judgment and order  

dated 10th July 2002, passed by the High Court of Judicature at Bombay,  

whereby  the  High  Court  has  dismissed  the  writ  petition  filed  by  the  

appellant (for short “the assessee”) and affirmed the order passed by the  

Assistant Commissioner of Central Excise, Bombay-II (“the Adjudicating  

Authority” for short), rejecting the claim preferred by the assessee for  

refund of the excess amount of excise duty paid by them as time barred

as  also  on  merits  on  account  of  disallowance  of  post  manufacturing  

expenses for the purpose of valuation of the goods in terms of Section 4  

of the Central Excise Act, 1944 (for short “the Act”) as it existed at the  

relevant time.   

2. The background facts, giving rise to this appeal, are as follows:

The assessee was engaged in the manufacture of coated fabrics.  The  

price of goods declared by the assessee in the price list, as required under  

Rule 173C of the Central Excise Rules, 1944 (for short “the Rules”), was  

approved by the Revenue from time to time.  However, for the first time, in  

the two revised  price  lists,  both dated 12th November  1980,  the  assessee  

indicated  that  prices  declared  by  them  earlier  contained  certain  post  

manufacturing  expenses,  which  had to  be  excluded while  computing  the  

value of the fabric for the purpose of assessment to excise duty.  The claim  

was  rejected  by  the  Adjudicating  Authority  vide  order  dated  7th January  

1981.  Thereafter, the assessee, vide their letter dated 7th July 1981, made a  

claim of  consolidated refund, amounting to Rs.40,18,805.60, for the period  

from 13th November 1977 to 12th November 1980, representing differential  

excess  duty  paid  by  them  on  various  elements  of  post  manufacturing  

expenses.   One of the deductions so claimed, with which we are concerned  

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in this appeal, was on account of cost of material used for packing the final  

product.  Having failed to get any response, the assessee filed a Writ Petition  

(No.1001 of 1981) in the Bombay High Court seeking appropriate directions  

for refund along with interest thereon.  On 8th February 1982, the assessee  

revised their refund claim to Rs.40,59,856.40/-.  During the pendency of the  

petition, certain interim orders regarding deposit of the said amount by the  

revenue and submission of documentary evidence by the assessee before the  

Adjudicating Authority were passed by the High Court.  Eventually,  upon  

consideration of the evidence adduced by the assessee, vide order dated 12th  

April 1984, the Adjudicating Authority rejected their claim for excluding the  

cost of polythene bags, printed as well as plain, and hessian cloth used for  

packing the fabrics.   The Adjudicating Authority was of the view that the  

packing of coated fabrics in polythene bags for delivery to the customers  

located in Bombay as also packing of three such rolls in hessian cloth and  

stitching them into one bundle for dispatch to up-country customers was in  

the normal course of trade and, therefore, there was nothing special about  

such packing so as to exclude its cost from the value of the fabric.   The  

Adjudicating Authority also held that the refund claim was barred by time.  

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3. On rejection of the claim, the assessee amended the writ petition in order  

to challenge the validity of order dated 12th April 1984.  As stated above,  

the order of the Adjudicating Authority has been affirmed by the High  

Court.  Rejecting the plea of the assessee that additional packing of three  

rolls of fabric in hessian cloth was done at the specific request of the up-

country customers  in  order  to  protect  the  packed fabric  from damage  

during the course of transportation and, therefore, at least the cost of such  

secondary  packing  should  be  excluded from the  assessable  value,  the  

High Court held as follows:

“…in  view  of  the  clear  finding  given  by  the  adjudicating  authority  to  the  effect  that  the  Assessee  has  been  uniformly  using  hessian  cloth  for  all  the  delivery  to  the  up-country  customers,  irrespective  of  any  specific  request,  the  use  of  hessian cloth as secondary packing has to be held to be normal  packing which are offered to the wholesalers at the factory gate.  In  view  of  the  clear  finding  given  by  the  Adjudicating  Authority and in the light of decision of the Apex Court in the  case of Union of India Vs. MRF reported in 1995 (77) ELT  433, the cost of the secondary packaging in which the goods are  ordinarily sold to the wholesalers is liable to be included in the  assessable value.  In this view of the matter denial of deduction  on account of secondary packaging from the assessable value as  post manufacturing expenses is justified.  Apart from that, it is  not the case of the assessee that the secondary packing is of a  durable  nature  and is  returned by the  buyer  to  the  assessee.  Therefore, the cost of such packing has to be included in the  assessable value.”

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4. The High Court also held that the refund claim was beyond the period  

prescribed under the Act.  Aggrieved, the assessee is before us in this  

appeal.  

5. Vide  order  dated  31st March  2003,  leave  was  granted  limited  to  the  

question “whether the cost of secondary packing is to be included in the  

assessable value of the appellant’s goods?”  

6. We have heard learned counsel for the parties.  

7. In support of the appeal, Mr. Jay Savla, learned counsel appearing for the  

appellant,  submitted  that  the  High  Court  as  well  as  the  Adjudicating  

Authority failed to appreciate the distinction between the primary and the  

secondary packing, as enunciated by this Court in Union of India & Ors.  

Vs. Bombay  Tyre  International  Ltd.  &  Ors.1.   Learned  counsel  

contended  that  admittedly  the  rolls  of  coated  fabric  were  packed  in  

polythene bags for  sale at  the factory gate in the course of wholesale  

trade  and  the  bundling  of  three  such  rolls  in  hessian  cloth  was  an  

additional packing done at the request of up-country customers in order  

to protect the goods from damage and, therefore, the cost of such packing  

could not be included in the value of the cloth.  In support of the plea that  

1 (1984) 1 SCC 467

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additional packing according to the requirement of the buyer constitutes  

secondary packing and, therefore, its cost cannot be included in the value  

of  the  fabric,  reliance  was  placed  on  the  decisions  of  this  Court  in  

Commissioner  of  Central  Excise,  Allahabad  &  Ors.  Vs. Hindustan  

Safety Glass Works Ltd. & Ors.2 and Commissioner of Central Excise,   

Calcutta Vs. Hindustan National Glass & Industries  Ltd.3  

8. Per  contra,  Mr.  R.P.  Bhat,  learned  senior  counsel  appearing  for  the  

revenue, while supporting the decision of the High Court, submitted that  

in view of the finding by the Adjudicating Authority, affirmed by the  

High Court to the effect that hessian cloth was the standard packing for  

the fabric for sale in the wholesale market, its cost was includible in the  

value of the goods in terms of Section 4 of the Act.

9. The  short  question  arising  for  consideration  is  whether  the  cost  of  

packing of fabric in hessian cloth, which, according to the assessee, is not  

required for sale of their goods at the factory gate and is necessitated to  

protect the fabric from damage during the course of transportation to up-

country  customers  is  includible  in  the  assessable  value  of  the  coated  

2 (2005) 3 SCC 468 3 (2005) 3 SCC 489

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fabric manufactured by the assessee for  the purpose of levy of excise  

duty?   

10.Section 4 of the Act, in so far as it is relevant for our purpose, reads as  

follows :

“4. Valuation of excisable goods for purposes of charging of  duty of excise.—(1) Where under this Act, the duty of excise is  chargeable on any excisable goods with reference to value, such  value shall, subject to the other provisions of this section, be  deemed to be—

(a) the normal price thereof, that is to say, the price at  which such goods are ordinarily sold by the assessee  to  a  buyer  in  the  course  of  wholesale  trade  for  delivery at the time and place of removal, where the  buyer is not a related person and the price is the sole  consideration for the sale:

.... .... .... ....

(4) For the purposes of this section,--

.... .... .... ....

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

(i) where the goods are delivered at the time of removal in a  packed condition, includes the cost of such packing except the  cost  of  the  packing  which  is  of  a  durable  nature  and  is  returnable by the buyer to the assessee;

Explanation.— In this sub-clause ‘packing’ means the wrapper,  container, bobbin, pirn, spool, reel or warp beam or any other  thing in which or on which the excisable goods are wrapped,  contained or wound;”

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11.The Section provides as to how the value of excisable goods is to be  

determined.  The expression “value” has been extended to include the  

cost of packing.  As per Section 4(4)(d)(i) of the Act, the cost of packing  

is  to  be  included  in  working  out  the  value  of  the  goods,  unless  the  

packing is  of  a  durable  nature and is  returnable  by the  buyer  to  the  

assessee.  Explanation thereto enumerates various types of packing, of  

which cost has to be included in the value of the goods.  It is evident that  

by including the cost of packing in the value of goods, the legislature has  

sought  to  extend the  levy beyond the  manufactured  article  itself  and,  

therefore, the provision has to be strictly construed.  

12.Although the  provision  is  clear  and unambiguous,  yet  the  concept  of  

“primary packing” and “secondary packing” was evolved by this Court in  

Bombay Tyre International Ltd. (supra).   In that case, while observing  

that the degree of packing would vary from one class of excisable goods  

to another and the packing may be of different grades, which may be  

necessary to make an article marketable, it was held “that the degree of  

secondary packing which is necessary for putting the excisable article in  

the condition in which it is generally sold in the wholesale market at the  

factory gate is the degree of packing whose cost can be included in the  

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“value” of the article for the purpose of the excise levy.”  Thus, the test  

laid down was that it is only the cost of packing ordinarily required for  

selling the goods in the course of wholesale trade to a wholesale buyer at  

the factory gate which would be includible in the value of the goods and  

not the cost of any additional or special packing.

13.In  Union of India & Ors.  Vs. Godfrey Philips India Ltd.4, a question  

arose as to whether the cigarettes manufactured and packed in cardboard  

packets,  each  containing  10  to  20  cigarettes  and  those  packets  were  

packed in corrugated fibreboard cartons/containers, the cost of corrugated  

fibreboard containers was liable to be included in determination of the  

value of the cigarettes for the purpose of excise duty.  The majority view  

was  that  since  the  corrugated  cartons  were  employed  as  secondary  

packing only for the purpose of avoiding damage or injury during transit  

and were not necessary for selling the cigarettes in the wholesale market  

at the factory gate, their cost was not to be included in the value of the  

cigarettes for the purpose of levy of excise duty.   

14.In Geep Industrial Syndicate Ltd. Vs. Union of India5, the assessee was  

manufacturing  batteries  and  torches.   The  torches  and  batteries  

4 (1985) 4 SCC 369  5 1992 (61) E.L.T. 328 (S.C.)

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manufactured by them were first packed in polythene bags and then these  

polythene bags were placed in cardboard cartons.  The cardboard cartons  

were placed in the wooden boxes at the time of delivery at the factory  

gate.   Though  there  was  no  dispute  about  the  inclusion  of  cost  of  

polythene bags and cardboard cartons, the dispute was whether the cost  

of wooden boxes, in which the cardboard boxes were packed, was to be  

included in the value of batteries and torches.  It was held by a bench of  

three Judges of this Court that the wooden boxes were in the nature to  

secondary packing and,  therefore,  their  cost  was not  includible  in  the  

value of batteries and torches.  

15.In  Hindustan Safety Glass Works Ltd.  (supra) referring to the ratio of  

decisions  in  Bombay  Tyre  International  Ltd.  (supra)  and  Geep  

Industrial Syndicate Ltd. (supra), again a bench of three learned Judges  

summed up the test on the issue, as follows  :-

“14…The test is whether the packing is done in order to put the  goods in a marketable condition. Another way of testing would  be to see whether the goods are capable of reaching the market  without the type of packing concerned.  Each case would have  to be decided on its own facts.  It must also be remembered that  Section  4(4)(d)(i)  specifies  that  the  cost   of  packing  is  includible  when the  packing is  not  of  a   durable  nature  and  returnable to the buyer.  Thus, the burden to show that the cost  of packing is not includible is  always on the assessee.  Also  under Section 4(a) the value is to be the normal price at which  

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such goods are ordinarily sold in the course of wholesale trade  for delivery at the time and place of removal.”

16.Having examined the facts of the instant case on the touchstone  of the  

test laid down in the aforementioned cases, we are of the opinion that  

since admittedly the fabric manufactured by the assessee was sold by the  

assessee to the wholesalers at the factory gate only in polythene bags, the  

further packing  of three rolls in hessian cloth was not in the course of  

normal delivery to the customers in the wholesale trade at the factory  

gate and was, therefore, not required to make the product marketable.  

The additional packing in the nature of a secondary packing was done for  

the  purpose  of  convenience  of  the  up-country  customers  in  the  

transportation of the goods manufactured by the assessee.  We, therefore,  

hold  that  the  cost  of  secondary  packing  in  hessian  cloth  cannot  be  

included in the value of the goods in terms of Section 4(4)(d)(i) of the  

Act for the purpose of assessment of excise duty.   

17.In so far as the question of limitation is concerned, as already stated,  

leave was granted only on the afore-noted limited issue and, therefore,  

we express no opinion on that aspect.

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18.We, accordingly,  allow the  appeal  partly  and set  aside  the  impugned  

order to the extent indicated above, leaving the parties to bear their own  

costs.

.......................................J.     (D.K. JAIN)

........................................J.   (ANIL R. DAVE)

NEW DELHI; JULY 23, 2010.  

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