‘DHARMADA’ – TO BE INCLUDED IN TRANSACTION VALUE?

[Mr. M. GOVINDARAJAN]

‘Dharmada’ is well known in India to be a donation or an offering made for the purpose of charity as distinct from a commercial transaction.   Wilson Gloss and Molesworth Dictionary observed that dharmada means ‘an alms or a gift in charity’. This is a voluntary payment made by the buyers to the sellers.  The dharmada fee may be at any rate.  There is no fixed rate of dharmada fee.  This fee is shown in the bill along with the price of the goods.  The dharmada fee collected from the buyer will not be credited in the trading account.  This will be transferred to the body for which the dharmada fee is utilized.

In ‘Commissioner of Income Tax v. Bijli Cotton Mills’ - 1978 (11) TMI 1 - SUPREME COURT, a case under the Income Tax Act, 1961, it was held that Dharmada collected for charitable purposes and spent on charity purposes is not a part of the income of the assessee.  The Supreme Court held that the sum collected as Dharmada cannot be regarded as part of the price or a surcharge on price of goods purchased in a addition to the price of goods which he purchases from the assessee but the purchase of the goods by the customer would be the occasion and not the consideration for the Dharmada amount taken from the customer. The Supreme Court indicated that the “Dharamada” amount is clearly not a part of the price but a payment for the specific purpose of being spent on charitable purposes.

In ‘Mohan & Company v/s Collector’ - 1987 (5) TMI 146 - CEGAT, NEW DELHI, it was held that Dharmada is not includible in the assessable value. The law laid down in Mohan & Company case was affirmed by the Supreme court and the appeal of the revenue was dismissed as reported in COLLECTOR VERSUS MOHAN & CO., MADRAS  - 1995 (3) TMI 470 - SUPREME COURT.  In ‘Collector of Central Excise v/s Electrical Corporation of India’ - 1996 (1) TMI 262 - CEGAT, NEW DELHI, it was reaffirmed that Dharmada in not part of the assessable value.

In ‘Collector v. Panchmuki Engineering works’ – 2002 (11) TMI 122 - SUPREME COURT OF INDIA, the Supreme Court held that the dhamada charged by the assessee is liable to be included in the assessable value.

In ‘D.J. Malpani v. Commissioner of Central Excise, Nasik’ 2019 (4) TMI 587 - SUPREME COURT – Civil Appeal No. 5282/2005 (decided on 09.04.2019) the appellant is manufacturing goods falling under Chapter 24 of the Schedule of the Central Excise Act, 1944.  While selling the goods, the appellant charged the customs invoices for the price of goods plus ‘dharmada’ a charitable donation.  The Revenue issued a show cause notice to the appellant and raised demand of duty on the part of ‘dharmada’ claiming it was a part of the price of sale of manufactured goods and included it for computing assessable value.   Initially, the Adjudicating Authority held that ‘dharmada’ will not form part of the transaction value and dropped the demand of duty and penalty.

Another show cause notice was issued by the Commissioner under section 4 of the Central Excise Act calling upon the appellant to show cause as to why penalty under section 173Q and interest under section 11AA should not be levied.  In this case also it was held that ‘dharmada’ would not form part of transaction value and therefore no duty was payable on the dharmada component.

Against the said order the Revenue filed appeal before Commissioner (Appeals).  The Commissioner (Appeals) held that the dharmada was liable to be included in the assessable value and therefore excise duty was payable based on the price and the dharmada.  The appellant filed appeal against the order of Commissioner (Appeals) before the Tribunal.  The Tribunal rejected the contention of the appellant that the dharmada was not part of the transaction value.   However the Tribunal directed to re-assess the duty.

The appellant filed appeal before the Division Bench of the Supreme Court.   After considering the contentions of both the party, the Division Bench referred the following question to the Larger Bench-

• Whether the dharmada collected by the appellant which is clearly an optional payment made by the buyer can be regarded as part of the transaction value for the sale of goods?

The Larger Bench observed that the dharmada fee is paid voluntarily by the buyers and the receipt was made over to the charity.  The certificates issued by the Chartered Accountants revealed that the dharmada collection was credited to a separate account and donated to the trust during the period of the show cause notices.  The seller is acting as a conduit between the purchaser and the charity.

Under the Act, excise duty is payable with reference to the value on removal of the goods.  In case of sale of goods where price is the sole consideration for the sale, duty is charged on the transaction value vide section 4.    Additional consideration, if any, is also included in the duty payable.  The transaction value is the price actually paid or payable for the goods, when sold and includes in addition to the amount charged as price, any amount that the buyer is liable to pay to, or on behalf of the assessee by reason of or in connection with the sale but does not include the amount of duty of excise, sales tax and other taxes, actually, if any paid or actually payable on such goods.

The test of determining whether in a transaction of a sale any amount has been paid as price so that it can be treated as transaction value is only whether, the money was paid for the consideration or the money value on any additional consideration paid in connection with the sale of goods.   No amount not paid as consideration for the goods can go to make the transaction value.    Thus if an amount is paid at the time of sale transaction for a purpose other than the price of the goods, it cannot be form part of the transaction value; also for the reason that such payment is not for the transaction value i.e., for the transfer of possession of goods.

Then the Larger Bench analyzed the meaning of dharmada and also relied on the judgment of Supreme Court in ‘Commissioner of Income Tax v. Bijli Cotton Mills’ (supra).  It was observed that it cannot be disputed that among trading or commercial community in various parts of the country, a gift or payment for dharmada is by custom invariably regarded as a gift for the charitable purposes.  Dharmada amounts cannot be said to have been paid involuntarily by the customers  and in any case the compulsory nature of the payments, if there by any, cannot impress the receipts with the character of being trade receipts.

The Larger Bench found that in the present case the receipts on account of dharmada were voluntarily, earmarked for charity and in fact created as such.  The purchase of goods is the occasion and not consideration for dharmada paid by the customer.  The Larger Bench answered the query raised by the Division Bench as – The Dharmada collected by the appellant  which is clearly an optional payment made by the buyer cannot be regarded as part of the  transaction value for the sales of goods.   The decision of CESTAT is set aside by the Bench.