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CASE NO.: Appeal (civil)  3844 of 2000

PETITIONER: Procter & Gamble Hygiene & Health Care Ltd.                      

RESPONDENT: Commissioner of Central Excise,Bhopal.                                   

DATE OF JUDGMENT: 28/11/2005

BENCH: ASHOK BHAN & S.H. KAPADIA

JUDGMENT: J U D G M E N T

KAPADIA, J.

       This is a statutory appeal under section 35-L (b) of the  Central Excise Act, 1944 (hereinafter referred to as "the said  Act") against the judgment and order dated 19.6.2000 passed by  the Customs, Excise & Gold (Control) Appellate Tribunal, New  Delhi ("tribunal" for short).

       A short question which arises for determination in this  civil appeal is \026 whether, on the facts and circumstances of this  case, cost of repacking of detergent powder into 20 gms. and 30  gms. sachets, which did not amount to manufacture at the  relevant time, was includible in the assessable value of "ariel  micro-system" (AMS) cleared by Procter & Gamble  ("assessees" for short") in bulk packs of 25 kgs. at its factory  gate at Mandideep, Bhopal.

       Assessees \026 appellants are engaged in the manufacture of  detergent powder (AMS) falling under chapter 34 of the  schedule to the Central Excise Tariff Act, 1985 (for short "the  1985 Act") at their factory at Mandideep, Bhopal within the  jurisdiction of the Commissioner of Central Excise, Indore.  On  8/10.6.1994, a show-cause notice was issued by the collector in  which it was alleged that during the period December, 1992 to  December, 1993, the appellants had removed AMS in bulk  packs of 25 kgs. for further repacking in 20 gms. and 30 gms.  sachets by M/s Industrial Enterprises (Detergent), Kanpur  ("IED" for short);  that, the said IED was an extended arm of  appellants; that, the appellants had cleared 25 kgs. bulk packs  of AMS on pricing, based on the cost method, and thereby did  not pay the appropriate amount of duty on AMS in the  condition in which it emerged after repacking by IED, Kanpur;  that, the appellants did not pay duty on the prices of the sachets;  that, the appellants had failed to disclose to the department the  particulars of the agreement with IED for the repacking of the  detergent powder (AMS); that, the appellants had removed the  AMS in 25 kgs. packs with the sole intention of getting it  packed in 20 gms. and 30 gms. sachets by IED Kanpur;  that,  the entire modus operandi on the part of the appellants was to  deliberately declare only the cost of 25 kgs. bulk packs for  payment of excise duty; and, consequently, there was  suppression of the true price of AMS in the condition in which  it was removed after packing in the sachets of the above  dimensions.  In the show-cause notice, it was further alleged  that the appellants had wilfully suppressed the facts; that the 20  gms. sachets in blue and green colours were sold through the

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depots of the appellants at a price of Rs.2.50 and Rs.2.00 per  piece.  That the said sachets were supplied by IED to the  appellants, who in turn sold the same through their depots.  Consequently, the department issued the above show-cause  notice as to why differential duty of Rs.1,10,40,613/- should not  be levied on the appellants.  By the said show-cause notice, the  department invoked the extended period of limitation in terms  of the proviso to section 11A(1) of the said Act.

       In its reply to the show-cause notice, the appellants  denied that the IED, Kanpur was the extended arm of the  appellants.  According to the appellants, effective from January  1993, they had started clearing AMS in 25 kgs. bulk packs, on  payment of duty to IED, Kanpur for repacking into 20 gms. and  30 gms. sachets; that, the repacking in sachets was undertaken  by IED on job work basis; that, such repacking was not a  manufacturing activity under the said Act and consequently, no  duty was payable by IED on the repacking of AMS 25 kgs.  packs into 20 gms. and 30 gms. sachets till 1.3.1994, when  chapter note 6 was introduced in chapter 34 making such  repacking activity a "manufacture" in terms of section 2(f) of  the said Act.  After 1.3.1994, IED had applied and obtained  registration under the Act.  They are since then paying duty on  20 gms. and 30 gms. sachets repacked by them.  In their reply,  the appellants further pointed out that prior to the period in  question, IED used to manufacture AMS;  and that, vide letter  dated 26.11.1992, IED had informed the Assistant Collector,  Kanpur that it had entered into a contract with the appellants for  repacking AMS from bulk packing into sachets, hence, there  was no suppression on the part of the appellants as alleged.  By  the said reply, IED further pleaded that "repacking did not  amount to manufacture and, consequently, the department had  erred in including the repacking charges into the assessable  value.  Similarly, by another letter dated 5.3.1994, IED had  informed the department that it had stopped carrying out  manufacturing operations and that it had surrendered L-4  license.  Further, vide letter dated 11.11.1991, addressed by the  Assistant Collector, Kanpur, clarification was given that  "repacking" of the detergent powder did not amount to  "manufacture".  The appellants relied upon the aforestated  circumstances in support of their contention that there was no  wilful suppression on their part and, therefore, the department  was not entitled to invoke the extended period of limitation, as  was sought to be done vide the above show-cause notice.  In  reply to the show-cause notice, the appellants further submitted  that the demand for differential duty was proposed by the  department on the ground that the duty was payable on the price  of the sachets, which were sold.  In reply, the appellants  contended that 25 kgs. bulk packs were cleared at their  factory’s gate at Mandideep, Bhopal; that, they were not sold;  that, 25 kgs. bulk packs were sent by the appellants to IED for  repacking in sachets and since such repacking did not constitute  "manufacture", the department was not entitled to levy  differential duty on the price of the sachets.  According to the  appellants, the demand for differential duty was not on the  value of 25 kgs. bulk packs but on the price at which 20 gms.  and 30 gms. sachets were sold.  According to the appellants, at  the relevant time, "repacking" did not amount to "manufacture"  under section 2(f) of the said Act, and, therefore, the cost of  repacking or the repacking charges were not includible in the  assessable value of the bulk packs.  According to the appellants,  the clearance of 25 kgs. bulk packs on payment of duty was  known to the department.  They had filed a price list in which  they had indicated such clearance.  These bulk packs were not  sold in the market.  They were cleared for subsequent repacking

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into retail packs at IED Kanpur and, therefore, even assuming  that IED was an extended arm of the appellants, the department  was not entitled to demand differential duty because  "repacking" did not constitute "manufacture" and since  "repacking" did not amount to "manufacture" at the relevant  time, the department had erred in demanding differential duty  on the price of the sachets.  According to the appellants, since  the clearance at the factory gate at Mandideep was not by way  of sale, the appellants were entitled to value the bulk packs on  the basis of costing under rule 6(b) of the Valuation Rules,  1975.  According to the appellants, the impugned demand was  not legally sustainable because the department had demanded  duty on the price at which the retail packs were sold.  Lastly,  they contended that the impugned show-cause notice has  proceeded on the basis that the detergent powder cleared in bulk  packs and subsequently repacked into sachets and sold at a  higher price in wholesale resulted in loss of revenue.  However,  vide Finance Bill, 1994, which was not retrospective, note 6  was added in chapter 34 of the schedule to the 1985 Act, by  which repacking amounted to "manufacture" and, therefore,  there was no suppression on the part of the assessees, as alleged  by the department.  According to the appellants, the subsequent  change in the law itself indicated that there was some confusion  on the aforestated point which was clarified vide Finance Bill,  1994 and, therefore, under any circumstances, wilful  suppression cannot be alleged against the appellants.

       By the adjudication order dated 10.12.1997, passed by  the Commissioner, Indore, it was held that IED was an  extended arm of the appellants;  that, under the contract  between the appellants and the IED, activity of IED was not  disclosed by the appellants; that, the appellants had removed  the AMS in 25 kgs. packs with the sole intention of getting it  packed in 20 gms. and 30 gms. sachets by IED, Kanpur; that,  the appellants had deliberately declared only the cost of 25 kgs.  bulk packs for payment of excise duty; and, that, the appellants  had suppressed the true price of AMS in the condition in which  the said AMS was removed after repacking in 20 gms. and 30  gms. sachets on which the appellants failed to pay duty and,  consequently, the demand raised by the department was legal  and justifiable.  Consequently, the commissioner confirmed the  show-cause notice.

       Being aggrieved by the order of the commissioner dated  10.12.1997, the assessees carried the matter in appeal to the  tribunal.  By the impugned judgment, the tribunal came to the  conclusion that the IED was an extended arm of the appellants;  that, the entire dispute was about under-valuation of the 25 kgs.  bulk packs cleared from Mandideep and, therefore, the  commissioner of central excise at Indore had jurisdiction to  decide the issue of valuation.  According to the tribunal, the  appellants had cleared the AMS in 25 kgs. by bulk packs at  Mandideep.  They had valued the clearance at Mandideep on  cost basis.  According to the tribunal, every assessee was  required to give reasons as to why "normal price" was not  ascertainable under section 4(1)(a) of the Act or the Valuation  Rules, 1975.  According to the tribunal, although, the appellants  were fully aware that 25 kgs. bulk packs were cleared in order  to be repacked by IED into sachets, the details of repacking  were deliberately suppressed by the appellants and, therefore,  the department was right in invoking the extended period of  limitation.  In the circumstances, the tribunal dismissed the  appeal filed by the assessee.  Hence, this civil appeal.

       Briefly stated, Mr. V. Lakshmikumaran, learned counsel

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for the appellants submitted that the show-cause notice did not  contain allegations regarding valuation of 25 kgs. bulk packs;  and that, the said notice had worked out the demand only on the  basis of the price of 20 gms. and 30 gms. sachets.  Before us,  the learned counsel did not challenge the concurrent finding of  fact, namely, that the IED was the extended arm of the  appellants.  Learned counsel however submitted that even  according to the department at the relevant time, repacking did  not constitute "manufacture" and, therefore, the demand for  differential duty only on the basis of the price of the sachets  was untenable in law.  Learned counsel also contended that the  value of the 25 kgs. bulk packs was approved by the department  as declared in the price list for captive consumption and,  therefore, there was no question of suppression on the part of  the appellants. Learned counsel further submitted that the price  list filed by the appellants was prepared on the basis of costing  because the clearance of 25 kgs. bulk packs was for captive  consumption and not for sale and, consequently, the concept of  "normal price" was not applicable in the present case.  Learned  counsel further submitted that repacking at the relevant time did  not amount to "manufacture" in terms of section 2(f) of the said  Act, and consequently, the repacking charges, in any event,  were not includible in the assessable value of the AMS.  Learned counsel further urged that the tribunal has not at all  gone into the question of valuation, particularly, when the entire  case related to the scope of section 4(4)(d)(i) of the said Act.   Learned counsel also submitted that if repacking activity did  not amount to "manufacture" at the relevant time then the cost  of repacking cannot be included in the assessable value.     Lastly, it was urged that repacking amounted to "manufacture"  only after the Finance Act No.2 of 1994;  that, after the said  1994 Act, IED had obtained the requisite registration, and that  IED has since been paying excise duty on the manufacture of  retail packs.  Consequently, it was urged that there was no  suppression on the part of the appellants.  Learned counsel  submitted that none of these facts have been considered by the  tribunal.

       Shri Mohan Parasaran, learned Additional Solicitor  General submitted on behalf of the appellants that during the  relevant period, AMS was manufactured by the appellants and  not by the IED and, therefore, the department was right in  demanding the differential duty on the price of the sachets.  He  submitted that the appellants removed the detergent powder in  25 kgs. bulk packs from the factory gate at Mandideep, Bhopal  with the sole intention of getting it packed into sachets of the  aforestated dimensions by IED, Kanpur.  He contended that the  appellants had deliberately declared only the cost of 25 kgs.  bulk packs and they had suppressed the price of AMS in the  condition in which the powder was removed after packing in 20  gms. and 30 gms. sachets.  Learned counsel urged that in the  entire proceedings before the adjudicating authority, the  appellants contended that the IED was an independent job  worker and that the IED was not an extended arm of the  appellants, whereas the finding of the commissioner that IED  was an extended arm of the appellants is not challenged.  In this  connection, learned counsel submitted that the retail packs were  in fact cleared through the depots of the appellants and in the  circumstances, the commissioner was right in coming to the  conclusion that there was a wilful suppression on the part of the  appellants under the proviso to section 11A(1).  Learned  counsel submitted that in the present case, the commissioner  has categorically recorded a finding of fact to the effect that the  appellants had suppressed the true price of AMS in the  condition it was removed after packing in sachets.  He

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submitted that even on valuation, the commissioner has  recorded a finding that the appellants were required to pay duty  on the assessable value of 20 gms. and 30 gms. sachets supplied  by the IED to the depots of the appellants.  Learned counsel  submitted that this finding on valuation has been accepted by  the tribunal and, therefore, no interference was called for in the  present case.

       This case relates to valuation.  At the outset, we would  like to clarify certain concepts under the Excise Law.  The levy  of excise duty is on the "manufacture" of goods.  The excisable  event is the manufacture.  The levy is on the manufacture.  The  measure or the yardstick for computing the levy is the "normal  price" under section 4(1)(a) of the Act. The concept of  "excisability" is different from the concept of "valuation".  In  the present case, as stated above, we are concerned with  valuation and not with excisability.  In the present case, there is  no dispute that AMS came under sub-heading 3402.90 of the  Tariff.  There is no dispute in the present case that AMS was  dutiable under section 3 of the Act.  In the case of Union of  India & others etc.  v. Bombay India International Ltd. etc.  reported in AIR 1984 SC 420, this Court observed that the  measure of levy did not conclusively determine the nature of  the levy.  It was held that the fundamental criterion for  computing the value of an excisable article was the price at  which the excisable article was sold or was capable of being  sold by the manufacturer.  It was further held that the price of  an article was related to its value and in that value, we have  several components, including those components which  enhance the commercial value of the article and which give to  the article its marketability in the trade.  Therefore, the  expenses incurred on such factors inter alia have to be included  in the assessable value of the article up to the date of the sale,  which was the date of delivery.

       In the case of Sidhartha Tubes Ltd. v. Collector of  Central Excise reported in 2000 (115) ELT 32, this court held  that the process of galvanization, though did not amount to  "manufacture", resulted in value addition and, therefore, the  galvanization charges were includible in the assessable value of  the M.S. black pipe.  

       The concepts of "manufacture" and "valuation" are two  different and distinct concepts.  In the present case, we are  concerned with valuation.  Value is the function of price under  section 4(1)(a) of the said Act.  In the present case, the taxable  event took place when detergent powder was manufactured by  the appellants.  The said powder was packed into bulk packs of  25 kgs.  They were cleared from the factory of the appellants at  Mandideep, Bhopal on payment of excise duty.   The appellants  followed self-removal procedure.  These bulk packs were sent  to IED, Kanpur.  The appellants contended that IED, Kanpur  was their job-worker.  The commissioner found on facts that  IED, Kanpur was the extended arm of the appellants.  The  commissioner found price manipulation.  According to the  commissioner, the appellants had removed AMS in bulk packs  from its factory gate at Mandideep, Bhopal with the sole  intention of getting AMS packed in the sachets of 20 gms. and  30 gms. by IED, Kanpur from where the sachets were taken to  the depots of the appellants and cleared at the price list  indicated in the show-cause notice.  According to the  commissioner, the appellants had suppressed the true price of  AMS in the condition in which it was removed after packing in  20 gms. and 30 gms. sachets.  Therefore, the commissioner  took the price of the sachets at the depots of the appellants as

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the basis for computing the assessable value of AMS cleared by  the appellants in 25 kgs. bulk packs at Mandideep, Bhopal.   

       Unfortunately, when the matter came before the tribunal  in the appeal preferred by the assessees, the tribunal has not  adverted to the valuation of the bulk packs cleared by the  appellants at Mandideep, Bhopal.  Before the tribunal, the  appellants contended that the department had cleared the bulk  packs on payment of duty by the appellants.  According to the  appellants, the activity of "repacking" did not amount to  "manufacture" at the relevant time and if the said activity did  not amount to manufacture, the department was not entitled to  compute the assessable value of the bulk packs based on the  retail price of 20 gms. and 30 gms. sachets.  The appellants  contended that even if IED was taken as an extended arm of the  appellants, the department was not entitled to compute the  assessable value based on the retail prices of the sachets,  particularly, when the activity of "repacking" did not amount to  "manufacture".  The appellants also contended that they were  not guilty of suppression because the activity of "repacking"  amounted to "deemed manufacture" under section 2(f) only  after introduction of note 6 in chapter 34 of the schedule to the  Tariff Act vide Finance Bill, 1994.

       The key question which was required to be decided by  the tribunal in the present case was concerning determination of  the "assessable value" of 25 kgs. bulk packs of AMS from the  appellants’ factory at Mandideep, Bhopal.  If the activity of  repacking did not amount to manufacture at the relevant time,  was the commissioner justified in computing the assessable  value of the bulk packs based on the retail price of 20 gms. and  30 gms. sachets sold through the depots of the appellants?  This  question has not been decided by the tribunal.  Similarly, in the  context of suppression and in the context of invocation of the  extended period of limitation, the tribunal has not considered  the argument of the appellants that they were not guilty of  suppression as the law was amended vide Finance Bill, 1994,  when the activity of "repacking" was treated as "manufacture"  for the first time.  In our view, these questions were required to  be decided by the tribunal in the present case, particularly, in  the light of the provisions of section 4(4)(d)(i) of the said Act.   They have not been decided by the tribunal.

       In the circumstances, this civil appeal filed by the  assessees is allowed, the impugned judgment of the tribunal is  set aside and the matter is remitted to the tribunal for its fresh  decision in accordance with the principles enunciated  hereinabove.  There will be no order as to costs.