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PETITIONER: UNION OF INDIA & ORS.

       Vs.

RESPONDENT: ClBATUL LIMITED

DATE OF JUDGMENT27/09/1985

BENCH: PATHAK, R.S. BENCH: PATHAK, R.S. BHAGWATI, P.N. (CJ) SEN, AMARENDRA NATH (J)

CITATION:  1986 AIR  281            1985 SCR  Supl. (3)  95  1985 SCC  (4) 535        1985 SCALE  (2)770  CITATOR INFO :  F          1987 SC  61  (1)  R          1989 SC 516  (3)  APL        1990 SC 202  (7)

ACT:      Central Excises and Salt Act, 1944 - Sub-s.(2) of s. 36 Manufacture of  Goods -  Joint programme of seller and buyer Goods manufactured  by seller  - Supplied  to buyer - Who is manufacturer - ’Wholesale‘ price charged by seller - Whether true basis for determination and levy of Excise Duty.

HEADNOTE:        The  respondent - Cibatul Ltd. (the "seller") entered into two  agreements with  Ciba Geigy  of  India  Ltd.  (the "buyer") for  manufacturing Resins  by the seller. The joint manufacturing programme indicated that the Resins were to be manufactured  in   accordance  with   the  restrictions  and specifications  constituting   the  buyer’s   standard   and supplied at  prices to be agreed upon from time to time. The buyer was  entitled to  test a  sample of  each batch of the goods and  after its  approval the goods were to be released for sale  to the  buyer. The  products  would  bear  certain trade-marks being  the property  of the foreign company Ciba Geigy of  Basle. Tripartite  agreements were  also  executed between the  buyer, the  seller  and  the  foreign  company, recognizing the  buyer as the registered or licensed user of the trademarks,  authorising the  seller to affix the trade- marks on  the products  manufactured "as an agent for and on behalf of  the buyer  and not  of his  own account"  and the right of  the buyer  being reserved  to revoke the authority given to the seller to affix the trade-marks. -        The  respondent filed declaration for the purposes of the levy  of excise  under the Central Excises and Salt Act, 1944 showing  the wholesale  prices of  different classes of goods sold  by it  during the period May, 1972 to May, 1975. The  declaration   included  the  wholesale  prices  of  the different  Resins   manufactured  under  the  two  aforesaid agreements. The Assistant Collector of Customs revised those prices upwards  on the basis that the wholesale price should be the  price for  which the  buyer sold  the product in the market. According  to the  Assistant Collector the buyer was

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the manufacturer of goods and not the seller- 96       The Collector of Central Excise allowed the appeals of the respondent  and accepted  the plea  that  the  wholesale price disclosed  by the  seller was  the  proper  basis  for determining the excise- duty.        The  Appellate orders  were, however,  revised by the Central Government  under sub-s.(2)  of s.36  of the Act and the orders  made by  the Assistant  Collector were restored. According to  the Central Government the buyer is the person engaged in the production of the goods and the seller merely manufactures them  on behalf of the buyer and that under the agreements the  seller is  required to affix the trade-marks of the  buyer on  the manufactured  goods and that indicates that the goods belong to the buyer.        The orders of the Central Govt. were challenged under Article 226.  The  High  Court  held  that  the  goods  were manufactured by  the seller as its own goods, and therefore, the wholesale price charged by the seller must form the true basis for the levy of excise duty.      Dismissing the appeals of the Union of India, ^        HELD:  1. The High Court was right in concluding that the wholesale  price of the goods manufactured by the seller is the  wholesale price at which it sells those goods to the buyer, and  it is not the wholesale price at which the buyer sells those goods to others. [101 D-E]        2.  The relevant provisions of the agreements and the other material  on the  record show  that the  manufacturing programme is  drawn up  jointly by  the buyer and the seller and not  merely by  the buyer, and that the buyer is obliged to purchase the manufactured product from the seller only if it conforms  to the  buyer’s standard.  For this purpose the buyer is  entitled to  test a  sample of  each batch  of the manufactured product  and it is only on approval by him that the product is released for sale by the seller to the buyer. It is apparent that the seller cannot be said to manufacture the goods on behalf of the buyer. [100 B-C; F]       3. It is clear from the record that the trade-marks of the buyer  are to  be affixed  on those goods only which are found  to   conform  to   the  specifications   or  standard stipulated by the buyer. All goods not approved by the buyer cannot bear  those trade-marks  and are  disposed of  by the sellers without the 97 advantage of  those trade-Larks. The trade-marks are affixed only A  after the  goods have been approved by the buyer for sale by  the seller  to the buyer. The seller owns the plant and  machinery,   the  raw   material  and  the  labour  and manufactures the goods and under the agreements, affixes the trade-marks on  the goods. The goods are manufactured by the seller on  its own  account and  the seller  sells the goods with the trade-marks affixed on them to the buyer.      Union of India v. Delhi Cloth and General Mills, [1963] Supp. 1  S.C.R. 586, 592, 598, South Bihar Sugar Mills Ltd., etc. .  Union of  India and  Others. [1968] S.C.R. 21 at 31, Union of  India and  Others v.  Free Indian Dry-Accumulators Ltd. [1983]  Excise Law  Taxes 733 at 734 and Union of India and others  etc. etc. v. Bombay Tyre International Ltd. etc. etc. [1983] Excise Law Times 1896, inapplicable.

JUDGMENT:      CIVIL APPELLATE JURISDICTION : Civil Appeal No. 2619 of

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1977.        From  the Judgment  and Order  dated 25.6.1977 of the Gujarat High  Court in Special Civil Application No. 1324 of 1976.                             AND                Civil Appeal No. 4399 of 1985        From  the Judgment  and Order dated 14.12.1976 of the Gujarat High  Court in  Special Civil Application No.. 68 of 1975.        K. Parasaran, Solicitor General, N.C. Talukdar, Suraj Udai Singh, Dalveer Bhandari, C.V. Subba Rao and R.N. Poddar for the Appellants.      N.A. Palkhiwala, J.C. Bhatt, D.B. Engineer, B.H. Antia, Ravinder Narain,  O.C. Mathur,  Kamal Mehta,  Talat  Ansari, Mrs. A.K.  Verma, Ashok  Sagar, hiss  Rainu Walia, Sukumaran and D.N. Misra for the Respondent.      The Judgment of the Court was delivered by       PATHAK, J. These appeals by special leave are directed against the  judgments and  orders of the Gujarat high Court allowing two  writ petitions  preferred  by  the  respondent challenging the levy of excise duty. As they raise identical questions of  law for  consideration they  are disposed by a common judgment 98        The respondent is a company limited by shares. of the total share  capital, 65  per cent is owned by Atul Products Limited, 30  per cent  belongs to a foreign company known as Ciba Geigy  of Basle  in Switzerland and the remaining 5 per cent to  Ciba Geigy of India Limited. The respondent Cibatul Limited (referred  to shortly  as the "seller") entered into an agreement  with the  Ciba Geigy  of India  Limited  ("the buyer") on  March 24,  1971 under  which  certain  specified products, which  included U.F.  Resins and M.F. Resins, were to be  manufactured by  the  seller  in  accordance  with  a manufacturing programme  drawn up  jointly by the seller and the buyer.  The resins were to be manufactured in accordance with  restrictions   and  specifications   constituting  the buyer’s standard,  and they  were supplied  at prices agreed upon between the seller and the buyer from time to time. The buyer was  entitled to  test a sample of each batch of these goods, and  it was only after it had given its approval that the goods were to be released for sale to the buyer. Another agreement between  the two  took place  on June  1, 1975  in respect of  Epoxy Resins and the terms of the agreement were similar to  the terms  of  the  earlier  agreement.  It  was understood that  the products  manufactured  under  the  two agreements would  bear certain  trade marks  which were  the property of  the foreign  company, Ciba  Geigy of  Basle. In this connection,  on December 7, 1971 a tripartite agreement was executed  between the  buyer the seller, and the foreign company in  respect of  four trade-marks, Aerolite, Melocol, Melolam and Resicart. The foreign company, which owned these trade-marks, as  well as  the seller recognised the buyer as the  registered   or  licensed   user  thereof.   The  buyer authorised the  seller to  affix the said trade-marks on the products manufactured  under the  first  contract,  and  the seller was  to do  so "as  an agent for and on behalf of the buyer and  not of  his own  account." The  seller  had  also agreed to  refrain from  selling or  dealing in, directly or indirectly, goods  bearing the said trade-marks or any other marks similar  thereto save  and  except  for  the  explicit purpose of  fulfilling the  seller’s obligations  under  the first agreement.  The buyer reserved the right to revoke the authority given  to the  seller to  affix the  trade-mark. A similar tripartite  agreement was executed between the three

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parties on  December  1,  1973  in  respect  of  the  second agreement between  the buyers  and the  seller, namely, that relating to  Epoxy  Resins.  The  trade-mark  concerned  was Araldite.       The respondent filed a declaration for the purposes of the levy  of excise  under the Central Excises and Salt Act, 1944 showing  the wholesale  prices of  different classes of goods sold by it 99 during the  period May,  1972 to  May, 1975. The declaration included  the  wholesale  prices  of  the  different  resins manufactured  under   the  two   aforesaid  agreements.  The Assistant Collector  of Customs revised those prices upwards on the  basis that  the wholesale  price should be the price for which  the buyer  sold the  product in  the market.  The Assistant Collector  proceeded on the footing that the buyer was the  manufacturer of  the goods  and not the seller. The respondent appealed  to the Collector of Central Excise. The appeals were  allowed by  the Collector, and he accepted the plea that  the wholesale  price disclosed  by the seller was the proper  basis  for  determining  the  excise  duty.  The appellate orders  were,  however,  revised  by  the  Central Government under  sub-s.(2) of  s. 36  of the  Act, and  the orders made  by the  Assistant Collector  were restored. The respondent filed  a writ  petition in the Gujarat High Court against the  orders of  the Central Government, and the High Court held  that the  Central Government  was wrong  and the appellate Collector  was right  on the  question as  to  the liability of the seller to excise duty.       The basis on which the Central Government proceeded in holding that  the wholesale price of the goods should be the wholesale price  charged by the buyer is that the goods were manufactured by the seller on behalf of the buyer, specially as they were embossed with the trade-mark of which the buyer alone was  the  registered  user  in  India,  that  the  two agreements between  the seller  and the buyer envisaged that the goods  were manufactured  by the seller on behalf of the buyer and that therefore the buyer itself should be regarded as the  manufacturer of the goods for the purpose of levying excise duty. The High Court has differed from the view taken by the  Central Government  and has held that the goods were manufactured by  the seller  as its own goods, and therefore the wholesale price charged by the seller must form the true basis for the levy of excise duty.      Excise duty is levied under s. 3 of the Central Excises and Salt  Act, 1944  on goods  manufactured  in  India  and, broadly, for the purposes of computing the duty the value of the article  is deemed  under s.  4 of  the Act (as it stood before its  amendment  by  Act  XXII  of  1973)  to  be  the wholesale cash  price for  which an article of the like kind and quality  is sold or is capable of being sold at the time of the  removal of the article chargeable with duty from the factory for  delivery at the place of manufacture. The words "manufacture" and "manufacturer" have been defined by clause (f) of s. 2 of the Act, and for the purposes of 100 the present controversy what is relevant is that part of the definition which  defined   "manufacturer of  goods as being any person who engages in their production or manufacture on his own  account." The  appellant contends that on the facts and circumstances  of this  case it  must be  held that  the buyer is  the person  engaged in the production of the goods and the  seller merely  manufactures them  on behalf  of the buyer.       The entire question before us is whether the goods are

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manufactured by the seller or are manufactured by the seller on behalf  of the  buyer. The  relevant  provisions  of  the agreements and  the other  material on  the record show that the manufacturing programme is drawn up jointly by the buyer and the seller and  not  merely by  the buyer, and that the buyer is obliged to purchase the manufactured product from the seller only if it conforms to the buyer’s standard. For this purpose the buyer is  entitled   to  test  a  sample  of  each  batch  of  the manufactured product  and it is only on approval by him that the product is released for sale by the seller to the buyer. In other  words, the buyer has the right to reject the goods if he  does not  approve of  them. If the manufactured goods are not  in accordance  with the  buyer’s standard, they are either reprocessed to bring them up to the requisite quality or if  that is  not possible the goods are sold to the buyer for a  different purpose  if they  are compatible  with  the specifications of  some other  product and provided that the buyer has  a need for that product, or the goods are sold to others in  the market as sub-standard goods at a lower price of the  goods are  destroyed. It is significant to note that the buyer  is not obliged to purchase the goods manufactured by the  seller regardless  of their quality, and that in the event of  rejection by  the buyer  the alternatives  present before the  seller extent  to the  sale of  the manufactured goods to  others or  even to  the very  destruction  of  the goods. It  is apparent  that the  seller cannot  be said  to manufacture the Roods on behalf of the buyer.        The  appellant relies  also on  the circumstance that under the  agreements the  seller is  required to  affix the trade-marks of  the buyer  on the manufactured goods and, it is said,  that indicates that the goods belong to the buyer. It seems to us clear from the record that the trade-marks of the buyer  are to  be affixed  on those goods only which are found  to   conform  to   the  specifications   or  standard stipulated by the buyer. All goods not approved by the buyer cannot bear  those trade-marks  and are  disposed of  by the sellers without  the advantage  of  those  trade-marks.  The trade marks are affixed only after the goods 101 have been  approved by  the buyer  for sale by the seller to the  buyer. The seller owns the plant and machinery, the raw material and the labour and manufactures the goods and under the agreements  affixes the  trade-marks on  the goods.  The goods are  manufactured by the seller on its own account and the seller  sells the  goods with the trade marks affixed on them to the buyer.        The  appellant has  invited our  attention to certain observations in  Union of  India v.  Delhi Cloth and General Mills [1963] Supp. 1 S.C.R. 586 at 592 and 598., South Bihar Sugar Mills Ltd.., etc. v. Union of India and Others, [1968] 3 S.C.R.  21 at 31., Union of India and Others v. Free India Dry Accumulators  Ltd. [1983]  Excise Law Times 733 at 734., and Union  of India  &  Others  etc.  etc.  v.  Bombay  Tyre International Ltd. etc. etc., [1983] Excise Law Times 1896., but in  none of those observations do we find any acceptable support for  the proposition that the goods are manufactured by the seller on behalf of the buyer.       In the result, we hold that the High Court is right in concluding  that   the  wholesale   price   of   the   goods manufactured by  the seller  is the wholesale price at which it sells  those goods  to the  buyer,  and  it  is  not  the wholesale price  at which  the buyer  sells those  goods  to others.      The appeals are dismissed with costs.

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                A.P.J. Appeals Dismissed. 102