http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 13  

PETITIONER: UNION OF INDIA AND ANR.

       Vs.

RESPONDENT: CENTURY MANUFACTURING COMPANY LTD.

DATE OF JUDGMENT14/05/1992

BENCH: RANGNATHAN, S. BENCH: RANGNATHAN, S. RAMASWAMI, V. (J) II YOGESHWAR DAYAL (J)

CITATION:  1992 AIR 2055            1992 SCR  (3) 282  1992 SCC  (3) 418        JT 1992 (3)   382  1992 SCALE  (1)1200

ACT:      Central Excises and Salt Act, 1944:      Section  3(2),  4  and First  Schedule-Fixation  of  ad valorem  rate  of tariff by Central  Government-Adoption  of mode   of   fixation  having  nexus  with   manufacture   or production-Determination of value as provided under  section 4 not the only basis-Power conferred on Government  Fixation at average price-Whether unrestricted and  arbitrary-Whether violative of Article 14 of the Constitution of India.      Constitution of India, 1950:      Article 14-Power conferred on Central Government  under section  3(2)  of the Central Excises and  Salt  Act,  1944- Fixation  of  ad  valorem rate  of  duty-With  reference  to average prices-Whether arbitrary, unrestricted and violative of.

HEADNOTE:      In  exercise of its power conferred under section  3(2) of  the  Central  Excises and Salt Act,  1944,  the  Central Government   issued  notifications  dated   28.11.1970   and 26.7.1971  fixing  the tariff value on the  basis  of  which excise  duty was to be levied on sulphuric acid  and  liquid chlorine respectively.      The Respondent-assessee challenged the fixation of  the tariff  values for the abovesaid two items, by filling  Writ petitions  before the High Court.  The main  contentions  of the  assessee  were  that  excise  duty  being  a  duty   on manufacture  or production, its levy could be based  on  the cost  of production or manufacture or production,  its  levy could  be  based on the cost of  production  or  manufacture together  with any margin of profit the manufacturer may  be able to make when he sells the goods in a whole-sale  market at  or  near the factory gate; that the tariff  value  fixed under  section  3(2) of the Act could also be  only  on  the basis  mentioned  above and could not be based on  the  sale price  of  the goods much less on a  weighted  average  sale price;                                                        283 and that section 3(2) gave a wide and unfettered  discretion to the Central Government to fix the value at any figure  it

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 13  

chose  and  so  section 3(2) of the  Act  was  violative  of Article  14 of the Constitution of India, as  no  guidelines have been indicated in the statute.      The  High  Court allowed the Writ  Petitions  and  gave certain   directions  to  the  Central  Government.    Being aggrieved  against the said judgment of the High Court,  the Revenue has preferred the present appeals.      Allowing the appeals, this Court,      Held:  1.  The  tariff values  of  sulphuric  acid  and chlorine   were   validly   fixed   under   the   respective notifications  issued  by the Central  Government.   Section 3(2)  of  the  Central Excises and Salt Act,  1944  and  the notifications  dated 28.11.1970 and 26.7.1971 are valid  and constitutional. [299 D, E]      2.1.  The High Court’s reasoning restricts the  freedom of  rate  fixation  under  section  3(1)  to  the  mode   of determination  of  value  set out in section 4  and  to  the manufacturing    cost   and   profit   of   an    individual manufacturer-assessee before the authorities.  It  overlooks that, reading ss.3(1), 3(2) and 4 together, in the light  of Bombay Tyres, it is clear that the rate of excise duty  need not  necessarily  be ad valorem; that, even when  it  is  ad valorem,  the  mode of determination of  value  outlined  in section 4 is only one of the modes available to the  Central Government  which comes into operation only where the  value of  any  item  of  goods  is  not  otherwise  specified   in notifications issued under section 3(2); and that even where the  value is to be determined under section 4, it can  have any  nexus  with the wholesale price and is not  limited  to manufacturing cost and profit.  The High Court has erred  in reading  ss.3(1) and (2) as being subject to the  parameters of  section 4.  It is clear that section 3(1) read with  the schedule  is very wide and unrestricted in its language  and permits  the levy of duty on any basis that has  nexus  with manufacture   or  production.   Section  3(1)   comes   into operation only in cases of goods where an ad valorem duty is set  forth  in  the  schedule  but,  subject  only  to  this restriction,  this  sub-section  too  does  not  carry   any limitation  as  to the manner in which the value  is  to  be fixed,  much  less any limitation that the value  should  be determined in the same manner as under section 4. [294 C-G]      2.2.  Even  section  4 does not restrict  the  levy  to manufacturing cost                                                        284 and profit.  This section read with the relevant rules  only sets out the procedure by which the assessing officer has to determine the value in individual cases that come up  before him.  Naturally, in such cases, the statute proceeds on  the basis  of  the position in the individual  case  before  the officer.   Whether it be the manufacturing cost plus  profit basis  or the price basis, the officer determines the  value on  the  facts of the individual case  without  taking  into account   similar  considerations  in  the  case  of   other manufacturers.   But  it would not be correct to  read  this limitation  into  section 3(2) as well.  Section 3(2)  is  a general  provision  which  gives  full  liberty  to  Central Government  to determine the value in cases where the  first schedule prescribes an ad valorem levy.  Section 4 does  not control or limit the power of the Central Government to  fix rates  under section 3(2).  Section 4 is subject to  section 3(2)  and  is  not attracted to cases  where  the  value  is notified  under section 3(2) and not vice versa.   The  High Court was, therefore, not correct in finding fault with  the Central  Government for having fixed the tariff value  at  a figure  related  to an average of the prices  at  which  the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 13  

goods  are sold to various manufacturers.  There is  nothing in  the statute which precludes the Government  from  fixing the tariff value in this manner. [294 G, H; 295 A-C]      Union  of  India v. Bombay  Tyres  International  Ltd., [1984] 1 SCR 347, relied on.      3.1. While section 3(2) confers a power on the  Central Government  to fix tariff values for goods at its  pleasure, unrestricted to the terms of section 4, this cannot be  done at the whim and caprice of the Government.  This  discretion has to be exercised by the Government in accordance with the crucial guideline that is inbuilt into the statute and  also illustrated  by  the  manner in which the  determination  is provided  for  in section 4.  The statute leaves one  in  no doubt  that the rate of duty is to be fixed ad valorem  i.e. on  the  basis  of the value of the  goods.   It  cannot  be disputed  that  the normal indication of the  value  of  the goods will be its price and, that the statute intends  price to  be  the relevant factor is clear from  the  language  of section 4 under which the statute itself fixes the value for the  majority  of  cases.  The value  may  be  derived  with reference  to the wholesale price, the retail price  or  the average   price  at  which  the  goods  are  sold   by   the manufacturer  concerned  or even by the price at  which  the goods are sold by the manufacturer concerned or even by  the price  at which the goods are sold by any particular  person or place or the average price which the goods command in the whole country or any part thereof.  It can be fixed at the                                                        285 lowest  of such prices, at the highest of such prices or  at some average (mean, media, mode etc.) of such prices as  the Government  may  consider  appropriate in the  case  of  any particular commodity. [295 E-H; 296 A,B]      3.2.  That  the weighted average so fixed  exceeds  the manufacturing cost and profit of a particular  manufacturer, can be no reason for doubting its validity.  Equally,  there is  no acceptable logic in the High Court’s suggestion  that it should be fixed at the lowest of the prices at which  the manufacturer  is  able to sell his goods  in  the  wholesale market.  To apply such a measure will restrict the  fixation of  the  value at figures even less than those that  can  be arrived  at under section 4.  The whole purpose  of  section 3(2)  is  to  enable the Revenue to  free  itself  from  the shackles  of  section  4, inter alia,  in  cases  where  the Government feels that the application of that section  would lead  to  difficulties and harassments.  It cannot  be  said that  the tariff value has been manipulated to  enhance  the rate  of  duty.  The Central Government  has  the  undoubted power   to  enhance  the  rates  and  the  validity   of   a notification having such an effect is not open to  challenge even  if  it is done under the "guise" of  fixing  a  tariff value.   But there is no such guise or facade in  this  case and the tariff value has been fixed on the basis of relevant criteria having a nexus to the value of the goods. [298 D-G]      Veeran v. Union of India, (1981) 8 ELT 515, Kerala  and Gwalior  Rayon  Silk  Mfg. (Weaving) co. Ltd.  v.  Union  of India, (1988) 34 ELT 562 M.P., approved.      Century Spinning & Mfg. Co. v. Union, (1979) 4 ELT  (J) 199, reversed.      Subbarayan v. Union of India, (1979) 4 ELT (J) 473 Mad. and  Gwalior Rayon Silk Mfg. (Weaving) Co. Ltd. v. Union  of India, (1981) 5 ELT 52 M.P., overruled.      Union  of India v. Vazir Sultan Tobacco Co. Ltd.,  1978 Tax LR 1824, distinguished.      Roy  v.  Voltas  Ltd.,  [1973]  2  SCR  1089  and  Atic Industries  v. Asst. Collector, [1975] 3 SCR  563,  referred

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 13  

to.      4.  The generality of section 3(2) is unrestricted  and section 3(3) only explains a few possible ways in which that power can be, and could always                                                        286 have  been, exercised.  Likewise, the scheme of ss.3  and  4 leave  no doubt that section 4 is without prejudice  to  the provisions of section 3 and the newly inserted section  4(3) only makes this abundantly clear. [299 A]

JUDGMENT:      CIVIL  APPELLATE JURISDICTION : Civil Appeal Nos.  1432 and 33 of 1984.      From the Judgment and Order dated 15/27.11.1978 of  the Bombay High Court in Special Civil Application Nos.  1066/72 and 1276 of 1972.      A.K.  Ganguli, P. Parmeshwaran, Dilip Tandon and Ms.  A Subhashini for the Appellants.      C.M. Lodha, S.S. Shroff, Rajiv Shakdhar and S.A. Shroff for the Respondent.      The Judgment of the Court was delivered by      S.  RANGANATHAN,  J. These two  appeals  under  Central Excises  & Salt Act, 1944 (hereinafter referred to  as  ’the Act’)  raise  an interesting question as to  the  vires  and interpretation of s.3(2) of the Act.  Under that  provision, the Central Government issued notifications dated 28.11.1970 and 26.7.1971 fixing the tariff value on the basis of  which excise  duty was to be levied on sulphuric acid  and  liquid chlorine respectively.  In respect of the former, the tariff value fixed was Rs. 260 per metric tonne where the  strength of  the  acid  was 93% to 99% and  a  proportionately  lower figure where the strength of the acid was less.  The  tariff value for chlorine was fixed at Rs. 500 per metric tonne.      It is necessary to set out the provisions of sections 3 and  4  of the Act, as they stood at the relevant  time,  to enable  a  proper understanding of the issue  raised.   They read thus:           3.  Duties specified in the First Schedule  to  be          levied           (1)  There shall be levied and collected  in  such          manner as may be prescribed duties of excise on all          excisable goods other than salt which are  produced          or  manufactured  in  India  and  a  duty  on  salt          manufactured in, or imported by land into, any part          of  India  as and at the rates, set  forth  in  the First Schedule.                                                        287           (1A) x  x  x           (2) The Central Government may, by notification in          the  official  Gazette,  fix, for  the  purpose of          levying  the  said  duties, tariff  values  of  any          articles  enumerated, either specifically or  under          general   headings   in  the  First   Schedule   as          chargeable  with duty ad valorem and may alter  any          tariff values the time being in force.           4. Determination of value for the purpose of duty:           Where,  under this Act, any article is  chargeable          with  duty at a rate dependent on the value of  the          article, such value shall be deemed to be -           (a) 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,  or

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 13  

        any other premises of manufacture or production for          delivery at the place of manufacture or production,          or  if a wholesale market does not exist  for  such          article  at such place, at the nearest place  where          such market exists, or           (b)  where  such price is not  ascertainable,  the          price  at  which an article of the  like  kind  and          quality is sold or is capable of being sold by  the          manufacturer or producer or his agent, at the  time          of the removal of the article chargeable with  duty          from such factory or other premises for delivery at          the place of manufacture or production, or if  such          article is not sold or is not capable of being sold          at such place, at any other place nearest thereto.           Explanation  -  In determining the  price  of  any          article   under  this  section,  no   abatement  or          deduction  shall  be allowed except in  respect  of          trade  discount and the amount of duty  payable  at          the  time of the removal of the article  chargeable          with  duty  from  the  factory  or  other  premises          aforesaid."      The  effect  of  these  two  sections  read  with   the definition in s.2(d) of, and the First Schedule to, the  Act may be summarised thus : Excise duty is charged on all goods specified in the First Schedule to the Act.  It is a duty on such  goods produced or manufactured in India. It is  levied at the                                                        288 rates  specified  in the First Schedule.   These  rates  are charged  in some cases on the basis of length, area,  volume and  weight but, in most cases, the rate is ad valorem  i.e. dependent on the value of the goods.  We are concerned  here with the last of these modes of rate fixation where the rate is  applied  to the value.  Naturally, in  such  cases,  the crucial  question  is : what is the value of  the  goods  to which the rate is to be applied?  This question is  answered in  two  ways.  S.3(2) empowers the Central  Government,  in such cases, to fix the tariff value by Gazette notifications issued  from  time  to time.   S.4  empowers  the  assessing authority  to determine the vales of the excisable goods  in individual  cases on the basis of the wholesale  cash  price for which the goods are sold at the factory gate.      The  Century Spinning and Manufacturing Co.  Ltd.  (the respondent, hereinafter  referred  to  as  ’the   assessee’) challenged  the fixation of the tariff values  of  sulphuric acid and liquid chlorine at the amounts referred to earlier. Its contention, developed in three steps, was this: (a) that an  excise duty being a duty on manufacture  or  production, its  levy  can  be  based  on  the  cost  of  production  or manufacture   together  with  any  margin  of   profit   the manufacturer may be able to make when he sells the goods  in a  wholesale  market at or near the factory  gate;  (b)  the tariff  value  fixed under S.3(2) can also be only  on  this basis  and cannot be based on the sale price of  the  goods, much less on a weighted average sale price as in the present case; (c) if S.3(2) were to be interpreted differently in  a wide  manner,  as empowering the Central Government  to  fix tariff  values wholly at its discretion - unfetttered by the formula  indicated in (a) above - at any figure it  chooses, the  sub-section  should  be struck  down  as  violative  of article  14  as  there are no guidelines  indicated  in  the statute for fixation of such tariff value.      The  Bombay  High Court, in its judgment  [reported  as Century Spinning & Mfg. Co. v. Union, (1979) 4 ELT (J)  199] accepted  the  first  two steps in the  assessee’s  line  of

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 13  

reasoning.  It, therefore, allowed the writ petitions  filed by  the  assessee  and  gave  certain  directions.   We  are informed that a similar view as to the scope of Section 3(2) of  the  Act has also been taken in Subbarayan v.  Union  of India,  [(1979) 4 ELT (J) 473 (Mad) and Gwalior  Rayon  Silk Mfg.  (Weaving) Co. Ltd. v. Union of India, (1981) 5 ELT  52 (M.P.)].  Veeran v. Union of India, [(1981) 8 ELT 515  (Ker) and  Gwalior Rayon Silk Mfg. (Weaving) Co. Ltd. v. Union  of India,  (1988) 34 ELT 562 (M.P.)] take a contrary  view  but these decisions were rendered after an                                                        289 amendment  of  1973 (effective from October 1975)  and  are, according  to the assessee, distinguishable on that  ground. The  issue,  being  one  of  some  importance  and  constant recurrence, the Union of India has preferred these appeals.      The  High Court, in the judgment under appeal has  been greatly influenced by certain observations of this Court  in Roy v. Voltas Ltd., [1973] 2 S.C.R. 1089 and Atic Industries v.  Asst.  Collector,  [1975] 3 S.C.R.  563  explaining  the concept  and  nature of an excise duty.  In  the  former  of these cases, this Court was concerned with an attempt of the Revenue  to ignore what was clearly a wholesale  transaction because  it represented only 10% of the total sales  and  to levy excise duty on the basis of retail sales which  covered the major percentage of the total production.  Pointing  out the  error of this and, after analysing the language of  s.4 of the Act the Court observed:           "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 = AIR 1963  SC          791. Sec. 4 of the Act therefore provides that  the          real  value  should be found  after  deducting  the          selling cost and selling profits 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  the   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 hereby eliminating          freight,  octroi and other charges involved in  the          transport of the articles.  As already stated it 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          manufacture   on  whole-sale  basis   is   entirely          irrelevant.   The mere fact that such sales may  be          few or scanty does not alter the true position."                                              (Emphasis added)                                                        290      This  Court  adopted  the  above  passage  and  further elucidated  it  in the latter case.  There,  the  court  was concerned  with an attempt of the Revenue to levy duty,  not on  the basis of the wholesale sale price, but on the  basis of the price at which the wholesale purchaser sold the goods to  distributors and large consumers.  In this  context  the court  observed that if excise were levied on the  basis  of second  or  subsequent wholesale price, it  would  load  the price with a post manufacturing element, namely, the selling

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 13  

cost and selling profit of the wholesale dealer.  That would be  plainly  contrary  to  the  true  nature  of  excise  as explained  in  voltas  case and it would  also  violate  the concept  of  the  factory gate sale which is  the  basis  of determination  of the value of the goods for the purpose  of excise.      Unfortunately,  the observations of this Court  in  the above  cases came to be understood as laying down a  general proposition  that  excise  duty  can  be  levied  only  with reference to a hypothetical value of the manufactured  goods comprising  of  its  manufacturing  cost  and  manufacturing profit and nothing more. This conceptual error was rectified and  the correct legal position expounded in Union of  India v. Bombay Tyres International Ltd., [1984] 1 S.C.R. 347.  It is  true that, by the time this decision was  rendered,  s.4 had  undergone  certain  amendments.   But  this  makes   no difference  to the point at issue before us and it  will  be useful  to  extract  certain  relevant  passage  from   this judgment:      (a) The central issue between the parties is that  case was           "whether the value of an article for the  purposes          of the excise levy must be determined by  reference          exclusively  to  the  manufacturing  cost  and  the          manufacturing profit of the manufacturer or  should          be  represented  by  the  entire  wholesale   price          charged  by the manufacturer.  The wholesale  price          actually  charged by the manufacturer  consists  of          not   merely   his  manufacturing  cost   and   his          manufacturing  profit but includes, in addition,  a          whole  range of expenses and an element  of  profit          (conveniently  referred to as  "post  manufacturing          expenses" and "post manufacturing profit")  arising          between the completion of the manufacturing process          and the point of sale by the manufacturer.      On  this  issue, the contention urged on behalf of  the Union  of India which was accepted by the court ran  on  the following lines:                                                        291           "Shri K. Parasaran, the learned Solicitor  General          of India (when these cases were heard, and now  the          Attorney  General of India) has strongly  contended          that  the  value of an excisable  article  for  the          purposes  of  the levy must be taken at  the  price          charged   by  the  manufacturer  on   a   wholesale          transaction, the computation being made strictly in          terms of the express provisions of the statute and,          he  says,  there is no warrant  for  confining  the          value  to  the assessee’s manufacturing  cost  plus          manufacturing  profit.  According to him,  although          excise is a levy on the manufacture of goods, it is          open   to  Parliament  to  adopt  any   basis   for          determining the value of an excisable article, that          the  measure  for  assessing  the  levy  need   not          correspond  completely to the nature of  the  levy,          and no fault can be found with the measure so  long          as it bears a nexus with the charge.      and the court expressed its conclusion in the following words:           "It  is apparent, therefore, that when enacting  a measure  to serve as a standard for assessing the  levy  the Legislature need not contour it along lines which spell  out the  character  of  the  levy  itself.   Viewed  from   this standpoint, it is not possible to accept the contention that because  the levy of excise is a levy on goods  manufactured

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 8 of 13  

or  produced  the  value of an  excisable  article  must  be limited  to  the manufacturing cost plus  the  manufacturing profit.  We are of opinion that a broader based standard  of reference may be adopted for the purpose of determining  the measure  of the levy.  Any standard which maintains a  nexus with the essential character of the levy can be regarded  as a valid basis for assessing the measure of the levy.  In our opinion  the  original s.4 and the new s.4  of  the  Central Excises and Salt Act satisfy this test."      (b)  Dealing with the old and new section 4, the  Court had this to say:           "As  we have said, it was open to the  Legislature          to specify the measure for assessing the levy.  The          Legislature  has done so.  In both the old s.4  and          the new s.4, the price charged by the  manufacturer          on a sale by him represents the measure.  Price and          sale are related concepts, and price has a definite          connotation.  The "value" of the excisable  article          has to be                                                        292          computed with reference to the price charged by the          manufacturer,   the  computation  being   made   in          accordance with the terms of s.4.    A  contention was raised for some of the assessees,  that the  measure was to be found by reading s.3 with  s.4,  thus drawing  the ingredients of s.3 into the exercise.   We  are enable to agree.  We are concerned with s.3(1), and we  find nothing  there  which  clothes the  provision  with  a  dual character,  a  charging provision as  well  as  a  provision defining the measure of the charge."      (c)  Touching  upon  A.K. Roy & Anr.  v.  Voltas  Ltd., [1973]  2 S.C.R. 1089 and the passage from it which we  have quoted earlier, the Court observed:           "Those  observations were made when the Court  was          examining the meaning of the expression  "wholesale          cash  price".  What the Court intended to  say  was          that  the  entire  cost  of  the  article  to   the          manufacturer (which would include various items  of          expense  composing the value of the  article)  plus          his profit on the manufactured article (which would          have  to  take into account the  deduction  of  22%          allowed  as  discount) would  constitute  the  real          value  had to be arrived at after  off-loading  the          discount  of  22%, which in  fact  represented  the          wholesale  dealer’s profit.  A careful  reading  of          the  judgment  will show that there  was  no  issue          inviting  the  court’s decision on  the  point  now          raised in these cases by the assessees."      (d)  As  to Atic Industries Ltd. v. H.H.  Dove,  Asstt. Collector  of Central Excise and Ors., [1975] 3  S.C.R.  the Court, after quoting extensively from the decision,  pointed out:           "This  case also does not support the case of  the          assessees.   When it refers  to  post-manufacturing          expenses and post-manufacturing profit arising from          post - manufacturing operations, it clearly intends          to refer not to the expenses and profits pertaining          to   the   sale   transaction   effected   by   the          manufacturer   but  to  those  pertaining  to   the          subsequent   sale  transactions  effected  by   the          wholesale buyers in favour of other dealers."                                                        293      If  we  look now at the judgment under  appeal  in  the light of the above clarifications, it becomes clear that  it does not state the correct law.  Its basic premise is  based

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 9 of 13  

on wrong interpretation of s.3(1) and s.4.  It observes:           "Section 3(1) of the Central Excise and Salt  Act,          1944,  provides  that  there shall  be  levied  and          collected  duties of excise on all excisable  goods          which are produced or manufactured in India at  the          rates  set  forth  in  the  First  Schedule.    The          charging section, therefore, enables levy of excise          duty  on production and manufacture of  goods.   It          is,  therefore, clear that the levy of excise  must          have   relation   to   the   production   or    the          manufacturing  cost  of  the goods  produced  by  a          manufacturer.  Any levy of excise which takes  into          account  the factors which are not  connected  with          the  production  cost and profit on  goods  by  the          manufacturer would not be legal."      It is true that the sub-section (1) of section 3  makes a reference to the First Schedule.  But, as already  pointed out,  the  first schedule specifies rates based  on  length, area,  volume and weight in a number of cases which may  not and  need  not have any relation to manufacturing  cost  and profit.   Even where the Schedule fixes  a rate  ad  valorem and the value is governed by s.4, there is no restriction of the value to manufacturing cost and profit.  The High  Court observes:           "Under  S.4, it is the wholesale cash price  which          is  the assessable value.  It is well sellted  that          the "wholesale cash price" means the  manufacturing          cost  and the manufacturing profit, and  the  post-          manufacturing   cost  and  the   post-manufacturing          profit  has got to be ignored for finding  out  the          assessable value for levying the excise duty at the          rates laid down in the Schedule."     Proceeding further, the Court ties up the value not only to the manufacturing cost and profit but also ties it up  to the manufacturing cost and profit of the particular producer who is the assessee.  It observes:           "The valuation for the purpose  of levying  excise          duty thus solely depends on the production and  the          manufacturing cost and manufacturing profit of  the          product.    This  necessarily  would  exclude   the          inflation  of  cost  and  profit  by  the  weighted          average                                                        294           method   or   otherwise.   One   producer   or   a          manufacturer  has  no control whatsoever  over  the          production  or manufacture by another  manufacturer          or producer.  It appears to us clear that the value          for the purposes of the excise duty on a particular          product produced or manufactured by a purchaser  or          a  manufacturer must be arrived at on the basis  of          manufacturing cost and manufacturing profit of that          particular purchaser or manufacturer.  The Weighted          average  basis  necessarily  introduces  irrelevant          considerations,    viz.,    the    production    or          manufacturing  cost  or  manufacturing  profit   of          another manufacturer or producer altogether.   This          in  our  view would be foreign to  the  concept  of          excise as envisaged by the charging section 3(1)."      In  short,  the High Court’s  reasoning  restricts  the freedom  of  rate  fixation  under s.3(1)  to  the  mode  of determination   of  value  set  out  in  s.4  and   to   the manufacturing cost and profit of an individual manufacturer- as-sessee  before  the  authorities.   It  overlooks   that, reading ss.3(1), 3(2) and 4 together, in the light of Bombay Tyres,  it  is clear that the rate of excise duty  need  not

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 10 of 13  

necessarily be ad valorem; that, even when it is ad valorem, the  mode of determination of value outlined in s.4 is  only one  of the modes available to the Central Government  which comes  into  operation only where the value of any  item  of goods  is  not otherwise specified in  notifications  issued under  s.3(2);  and  that  even where the  value  is  to  be determined  under  s.4,  it  can have  any  nexus  with  the wholesale price and is not limited to the manufacturing cost and  profit.  In out opinion, the High Court  has  erred  in reading ss.3(1) and (2) as being subject to the  parameteres of  s.4.  It is clear that s.3(1) read with the schedule  is very  wide and unrestricted in its language and permits  the levy of duty on any basis that has a nexus with  manufacture or  production  as explained in Bombay Tyres.  Section  3(2) comes  into  operation only in cases of goods  where  an  ad valorem duty is set forth in the schedule but, subject  only to this restriction, this sub-section too does not carry any limitations  as  to the manner in which the value is  to  be fixed,  much  less any limitation that the value  should  be determined  in the same manner as under s.4. Even  s.4  does not restrict the levy to manufacturing cost and profit  but, this apart, this section, read with the relevant rules  only sets out the procedure by which the assessing officer is  to determines the value in individual cases that come up before him.  Naturally, in such cases, the statute proceeds on  the basis of the position                                                        295 in  the individual case before the officer.  Whether  it  be the  manufacturing  cost plus profit basis  (as  erroneously thought by the High Court) or the price basis (as  explained in  Bombay  Tyres) the officer determines the value  on  the facts   of   the  individual  case   without   taking   into account   similar  considerations  in  the  case  of   other manufactures.   But  it would not be correct  to  read  this limitation  into  s.3(2)  as  well.  s.3(2)  is  a   general provision which gives full liberty to Central Government  to determine  the  value  in cases  where  the  first  schedule prescribes  an ad valorem levy.  Section 4 does not  control or  limit the power of the Central Government to  fix  rates under  s.3(2).   Section 4 is subject to s.3(2) and  is  not attracted to cases where the value is notified under  s.3(2) and  not  vice versa.  The High Court  was,  therefore,  not correct  in  finding fault with the Central  Government  for having  fixed  the tariff value at a figure  related  to  an average of the prices at which the goods are sold by various manufacturers.   There  is  nothing  in  the  statute  which precludes  the  Government from fixing the tariff  value  in this manner.      But, then, says learned counsel, to read s.3(2) in  the manner indicated above, would make the provision  vulnerable to challenge on the basis of violation of Article 14 of  the Constitution.   Such  an interpretation, it is  said,  would leave it open to the Central Government to fix tariff values at  its  whim and caprice without any  statutory  guidelines laying down the parameters of such fixation.  We think  that the  contention  proceeds  on  a  misconception.   While  we undoubtedly  say that s.3(2) confers a power on the  Central Government  to fix tariff values for goods at its  pleasure, unrestricted  to the terms of s.4, we do not say  that  this can  be done at the whim and caprice of the Government.  The discretion  has  to  be  exercised  by  the  Government   in accordance  with the crucial guideline that is inbuilt  into the statute and also illustrated by the manner in which  the determination  is proved for in s.4.  The statute leves  one in no doubt that the rate of duty is to be fixed ad  valorem

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 11 of 13  

i.e.  on the basis of the value of the goods.  It cannot  be disputed  that  the normal indication of the  value  of  the goods will be its price and, that the statute intends  price to be the relevant factor is clear form the language of  s.4 under  which  the  statute itself fixes the  value  for  the majority  of  cases.   But where one had  got  bogged  down, possibly  due to certain earlier observations of this  Court in  a different context, was in thinking that the  value  of goods  can only comprise of manufacturing cost  and  profit. Actually  it has been made to depend on the wholesale  price of the manufacturer concerned under s.4 (old and new).                                                        296 But  this need not be the sole criterion.  The value may  be derived  with reference to the wholesale price,  the  retail price  or the average price at which the goods are  sold  by the manufacturer concerned or even by the price at which the goods  are  sold by any particular person or  place  or  the average  price which the goods command in the whole  country or any part thereof.  If can be fixed at the lowest of  such prices,  at  the highest of such prices or at  some  average (mean,  media, mode etc.) of such prices as  the  Government may  consider  appropriate  in the case  of  the  particular commodity.      In  the case of the goods with which we are  concerned, the basis on which tariff value was fixed by the  Government was  explained  before the High Court, we  may  extract  the relevant passage:           "On  rule being issued, affidavits in  reply  were          filed on behalf of the respondents in Special Civil          Application  No.  1066 of 1972.  The  affidavit  of          Shri   S.R.   Narayan,  Under  Secretary   to   the          Government  of India, Central Board of  Excise  and          Customs, New Delhi, shows that notifications fixing          the tariff values in respect of sulphuric acid were          being issued from time to time since the year 1962.          These tariff values were fixed from time to time on          the  basic of weighted average value  of  sulphuric          acid based on statistics collected.  This  weighted          average  value was based on the data  collected  on          all-India  basis.   It is also  contended  in  this          affidavit that it would be a practicable method  to          fix tariff values on the basis of weighted  average          on  all- India basis by taking  into  consideration          the    assessable   values   of    the    different          manufacturers  and then taking a  weighted  average          thereof which would be a uniform rate of tariff for          all  the manufacturers.  It has been  also  pointed          out that in some of the sales in view of the tariff          value  so fixed the petitioners have  benefited  as          they  were  required to pay excise duty at  a  rate          less  than  what  would  have  been  payable  under          section 4. It was also pointed out that there is  a          difference  between the method of  determining  the          value under section 4 and under sub-section (2)  of          section 3, and once the tariff value is fixed,  the          determination  of  value under section 4  would  be          irrelevant.   In  the affidavit,  the  fixation  of          tariff  value  in respect of these items  has  been          justified on the ground that it is a useful  method          to                                                        297          fix  tariff  value where the price  fluctuation  is          violent and it has been pointed out that the tariff          values have been fixed after a close study of price          fluctuations,  and  it cannot, therefore,  be  said

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 12 of 13  

        that  the  Central  Government  has  absolute   and          unfettered  discretion  which is being used  in  an          arbitrary  manner.  A similar approach is found  in          the affidavit of Shri S.R. Narayan is Special Civil          Application   No.  1276  of  1972  in  respect   of          chlorine, and the fixation of the tariff values  on          weighted  average basis is justified on the  ground          that it is the only workable method for determining          the  assessable  value  which  would  be  fair  and          acceptable   to   all   the   manufacturing   units          throughout the country.  It has been contended that          by its very nature, such an average value is  bound          to  be  higher  or lower or even at  par  with  the          selling  prices of the various  manufacturers,  but          this  cannot be helped if a uniform tariff rate  is          to be fixed.  It is further stated in the affidavit          that  since 1962, notifications were issued by  the          Central  Government fixing the values  of  chlorine          and    other    products    in    gaseous     form.          Representations   were   also   made   by   certain          manufacturers  and by the Western U.P. Chambers  of          Commerce  and  Industries for  fixation  of  tariff          values.   The various Collectorates were  asked  to          furnish particulars regarding the assessable  value          of   the  various  gases  manufactured   in   their          Collectorates,  and  after the data  was  collected          from  them,  tariff values were fixed  for  various          gases including chlorine.  It was pointed out  that          even  in  the case of chlorine, there  has  been  a          considerable   fluctuation  in  its  price.    This          contention   was  sought  to  be  demonstrated   by          reference   to   the  information   regarding   the          manufacturing  cost  and  manufacturing  profit  of          chlorine  gas manufactured by the  petitioners  for          the period from January 1972 to April 1972. In  the          month  of January 1972, there was a fluctuation  in          price  from  Rs. 50 to Rs. 900.  in  the  month  of          February, the price fluctuation was between  Rs.250          to  Rs.800;  in  the month of March  1972,  it  was          between  Rs. 250 to Rs. 1,000, and in the month  of          April 1972 the price fluctuation was between Rs.250          to  Rs.800.   It  was contended  that  there  is  a          considerable  fluctuation in prices and  a  uniform          rate of tariff value might at times also be to  the          benefit of the petitioner-company when the                                                        298           manufacturing  cost and the  manufacturing  profit          would be higher than the tariff value, although  it          may  be put to a loss when such value  is  actually          less  than the tariff value.  The respondents  deny          the  petitioners’  contention  that  the   impugned          notifications  issued  under sub-  section  (2)  of          section 3 of the Act were arbitrary or unreasonable          or  that  the  provisions  of  sub-section  (2)  of          section  3  and sub-section (3) of section  3  were          ultra  vires or violative of any provisions of  the          Constitution of India.  It is not necessary for  us          to elaborately mention the other points made out in          the  affidavits  is  reply  having  regard  to  the          arguments advanced by the counsel on both sides."      In  our  opinion, the tariff value  has  been  notified under s.3(2) for valid reasons and on germane grounds having a nexus to the ’value’ of the goods and the High Court erred in accepting the assessee’s plea that "the notifications are arbitrary, perverse and display a non-application of mind on

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 13 of 13  

the  part of the authorities as the tariff values fixed  are unrelated  to the value or price or the  manufacturing  cost and  manufacturing  profit  of  the  products".   That   the weighted  average so fixed exceeds the  manufacturing   cost and  profit of a particular manufacturer, can be  no  reason for doubting its validity.  Equally, there is no  acceptable logic in the High Court’s suggestion that it should be fixed at  the  lowest of the prices at which the  manufacturer  is able  to sell his goods in the wholesale market.   To  apply such  a measure will restrict the fixation of the  value  at figures  even less than those that can be arrived  at  under s.4.   The whole purpose of s.3(2) is to enable the  Revenue to  free  itself from the shackles of s.4,  inter  alia,  in cases  where,  as  here,  the  Government  feels  that   the application  of that section would lead to difficulties  and harassments.   The criticism that the tariff value has  been manipulated  to enhance the rate of duty has also no  force. The  Central Government has the undoubted power to   enhance the rates and the validity of a notification having such  an effect is not open to challenge even if it is done under the "guise"  of fixing a tariff value.  But, as already  pointed out by us, there is no such guise or facade in this case and the  tariff  value has been fixed o the  basis  of  relevant criteria having a nexus to the value of the goods.      We  have  so  far  avoided  any  reference  to  s.3(3), inserted  in  1978, and s.4(3), inserted  with  effect  from 1.10.1975,  as these amendments came into effect later  than the period with which we are concerned and we wished                                                        299 to  look  at  the provisions of the statute  as  they  stood before these amendments.  In the light of our interpretation outlined  above, it will be seen that these  amendments  are clarificatory  in  nature.   The  generality  of  s.3(2)  is unrestricted and s.3(3) only explains a few possible ways in which  that  power  can  be, and  could  always  have  been, exercised.   Likewise,  the scheme of ss.3 and  4  leave  no doubt that s.4 is without prejudice to the provisions of s.3 and  the  newly inserted s.4(3) only makes  this  abundantly clear.      We  have  principally dealt with the reasoning  of  the judgment  under  appeal  and  it  is  unnecessary  to   deal specifically  with  the earlier decision of  the  M.P.  High Court  viz. Gwalior Rayon Silk Mfg. (Wvg.) Co. v.  Union  of India,  (1981)  5  E.L.T. 52 M.P. and  the  Madras  decision Subbarayan  v.  Union, (1975) 4 E.L.T. (J)  473  which  have adopted a similar approach.  The decision in Union of  India v. Vazir Sultan Tobacco Co. Ltd., (1978) Tax LR 1824 is  not directly in point.  The second Gwalior Rayon decision (1988) 34  E.L.T.  562  (M.P.) and the Kerala  decision  Veeran  v. Union,  (1981)  8 E.L.T. 515 set out  the  correct  position though they restrict themselves to a consideration of s.4 of the Act after its amendment in 1973/1975.      For the reasons discussed above, we are of opinion that the  tariff  values  of sulphuric  acid  and  chlorine  were validly  fixed under the impugned notifications.  S.3(2)  of the Act as well as the notifications are declared valid  and constitutional.   The  Judgment  of  the  High  Court  under appeal is set aside.  The appeals are allowed but we  direct that the parties should bear their own costs. G.N.                                         Appeals allowed.                                                        300