1986 (12) TMI 35 - SC - Central Excise

Whether the price to the Defence Department Ex-factory gate (ex-factory) is to be considered as the wholesale cash price under old Section 4 as this was disallowed .by the Assistant Collector/ Held that - Different prices can be declared with reference to different classes of buyers and each price is deemed to be a normal price of such goods. In this view of the matter, merely because the product is sold at a lower price to the Government and its Departments does not enable the MRF to contend that the difference in price with reference to an ordinary dealer and the Government is a discount to the Government. The difference in price is not a discount but constitutes a normal price for the Government as a class of buyer and no deduction on this head is liable to MRF Ltd. 1983 (11) TMI 70 - SUPREME COURT OF INDIA The assessable value is arrived at only after the permissible deductions are made. Excise duty is a ratio of the assessable value. Ad valorem excise duty is computed only on assessable value after arriving at such assessable value by making proper permissible deductions. Excise duty cannot be computed without proper determination of the assessable value, namely assessable value exclusive of permissible deductions. Even in the cum-duty sale price, the same principle must be followed to arrive at the assessable value. To compute an excise duty as a pre-determined amount without making the permissible deductions for reducing the cum-duty selling price is a fallacy both legally and mathematically as demonstrated above. The ad valorem excise duty can only be computed after reducing the assessable value by permissible deductions and then applying the tariff rate to the assessable value. To reverse this sequence is to mis-interpret the scheme and mode of levy of excise duty on the assessable value. In the light of our aforesaid discussions and keeping in line with our previous format orders, we direct the assessing authorities to quantify and re-determine the permissible deductions

Issues Involved:

1. TAC/Warranty discount
2. Product discounts
3. Interest on finished goods and stocks carried by the manufacturer after clearance
4. Over-riding commission to Hindustan Petroleum Corporation
5. Cost of distribution incurred at duty paid Sales Depots
6. Interest on receivables
7. 1% turnover discount allowed to RCS Dealers
8. Secondary packing cost on tread rubber
9. Discount to Government and other Departments
10. Determination of wholesale price of tyres on the basis of the ex-factory price for Defence supplies
11. Deductions claimed towards excise duty paid on processed tyre cord
12. Method of computation of assessable value in a cum-duty price at a factory gate sale

Issue-wise Detailed Analysis:

1. TAC/Warranty Discount:
The petitioners argued that TAC/Warranty discounts should be deducted when determining the assessable value, claiming it is a trade discount established by practice since 1943. However, the court found that the warranty discount is not a discount on the tyre already sold but relates to goods subsequently sold to the same customers. It is a form of compensation for previous defects and does not satisfy the condition of being known at or prior to the removal of the goods. Therefore, the court disallowed the claim for TAC/Warranty discounts.

2. Product Discounts:
- Prompt Payment Discount: The court recognized this as a trade discount known at or prior to the removal of goods, thus allowing the deduction.
- Year-End Discount: Disallowed as it is computed at the end of the year and not known at the time of removal, making it more of a bonus or incentive.
- Campaign Discount: Similarly disallowed as it is calculated after the removal of goods and not known at the time of removal.

3. Interest on Finished Goods:
The court allowed the deduction of interest on finished goods from the date of delivery at the factory gate to the date of sale. However, interest incurred after delivery from the sales depot is not deductible, as it adds to the value of the goods post-removal.

4. Over-riding Commission to Hindustan Petroleum Corporation:
The court rejected this claim, stating that the commission is not a trade discount known at or prior to the removal of goods but a compensation for sales through HPC dealers.

5. Cost of Distribution:
The court held that the cost of distribution at duty-paid sales depots is not to be included in the assessable value, as the wholesale dealers take delivery from outside duty-paid godowns.

6. Interest on Receivables:
The court allowed the deduction for interest on receivables, as it is an expense incurred after the sale and removal of goods, aligning with the principle that only expenses contributing to the value up to the date of sale are includable.

7. 1% Turnover Discount to RCS Dealers:
The court did not specifically address this issue in the judgment text provided, but the principles applied to other discounts would likely apply here, requiring the discount to be known at or prior to the removal of goods.

8. Secondary Packing Cost on Tread Rubber:
The court, referencing the Bombay High Court's decision in the Bombay Tyres International Ltd. case, held that secondary packing charges for tread rubber cannot be excluded from the assessable value, as the packing is necessary for selling the product in the wholesale trade.

9. Discount to Government and Other Departments:
The court rejected the claim, stating that selling products at a lower price to the Government constitutes a normal price for that class of buyers and not a discount.

10. Determination of Wholesale Price for Defence Supplies:
The court allowed MRF Ltd. to file revised price lists for Defence Department supplies under the old Section 4, recognizing that different prices for different classes of buyers are permissible.

11. Deductions for Excise Duty on Processed Tyre Cord:
The court upheld the deduction for excise duty on processed tyre cord, aligning with Section 4(4)(d)(ii) of the new Section 4.

12. Method of Computation of Assessable Value in a Cum-duty Price:
The court clarified that the assessable value should be computed by first deducting permissible deductions from the cum-duty selling price and then applying the excise duty rate. The court rejected the method of pre-deducting excise duty before permissible deductions, emphasizing that excise duty is a ratio of the assessable value and should be computed accordingly.

Conclusion:
The court directed the assessing authorities to quantify and re-determine the permissible deductions in accordance with the judgment, requiring MRF Ltd. to file fresh price lists within one month. The court also allowed for appropriate credits in the Personal Ledger Accounts for items where deductions were allowed.

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