Important Point
In determining the cost of an excisable product covered by the Modvat scheme under Section 4(1)(b) of the Act read with Rule 6 of the Valuation Rules the excise duty paid on raw material also covered by the Modvat scheme is not to be included.

Headnote:Contral Excise and Salt Act, 1944 - Section 4-Central Excise (Valuation) Rules, 1975-RR 6 and 57A to 57J-Actual cost of intermidiate product covered by Modvat scheme-Determination of-Manufacturer purchasing raw material and using same in manufacture of intemediate Product-Internediate product used in manufacture of final product-Rawmaterial and intermediate produce are liable to excise duty and specified goods for Modvat-Dctrmination of cost of exciseable product - Revenues stand price paid by manufacturer to seller of raw material is part of manufacturer and it has to be taken into account in computing assessable value of excisable product-Held : In determining cost of an excisable product covered by Modvat scheme u/s 4(1)(b) read with Rule 6 of Valuation Rules excise duty paid on raw material also covered by Modvat scheme is not to be included.
       Held : In determining the assessable value of the intermediate product the cost of the raw material has to be taken into account. The question is : is part of the cost of the raw material the price paid byteh manufacturer to its seller, as contended by the Revenue, or is it the price of the raw material less the excise duty thereon, which has been paid by the seller and for which the manufacturer is intitled to credit under the Modvat scheme, to be utilised against the payment of excise duty on products manufactured by him, including the intermediate product, as contended by the manufacturer. (Para 2)
       Section 4 deals with the valuation of excisable goods which are chargeable to excise duty with reference to their value. The valustion is to be based ordinarily on the price thereof, that is to say, the price at which the excisable goods are ordinarily sold by the manufacturer to a buyer. It is only when the valuation cannot be so made that the closest equivalent thereof has to be determined, in the manner prescribed under the Valuation Rules. “Value” for the purposes of the Valuation Rules means the value under Section 4 of the Act. It is to be determined, ordinarily, under Rules 4 and 5. Rule 6 comes into play when the valuation of the excisable goods under assessment cannot be so determined. When the excisable goods are not sold by the assessee but are used or consumed by him in the manufacture of other products, as here, the value is to be based upon the value of comparable goods manufactured by the manufacturer, and, it that cannot be done, on the “cost of production or manufacture including profits, if any, which the assessee would have normally earned on the sale of such goods”. (Para 8)
       It is clear from RR 57A to 57J of the Valuation Rules, that a manufacturer obtains credit for the excise duty paid on raw material to be used by him in the production of an excisable product immediately it makes the requisite declaration and obtains an acknowledgement thereof. It is entitled to use the credit at any time thereafter when making payment of excise duty on the excisable product. There is no provision in the Rules which provides for a reversal of the credit by the excise authorities except where it has been illegally or irregularly taken, in which event it stands cancelled or, if utilised, has to be paid for. We are here really concerned with credit that has been validly taken, and its benefit is available to the manufacturer without any limitation in time or otherwise unless the manufacturer itself chooses not to use the raw material in its excisable product. The credit is, therefore, indefeasible. It should also be noted that there is no co-relation of the raw material and the final product; that is to say, it is not as if credit can be taken only on a final product that is manufactured out of the particular raw material to which the credit is related. The credit may be taken against the excise duty on a final product manufactured on the very day that it becomes available. (Para 16)
       The cost of the excisable product for the purposes of assessment of excise duty under Section 4(1)(b) of the Act read with Rule 6 of the Valuation Rules should be reckoned as it would be reckoned by a man of commerce. We think that such realism must inform the meaning that the Courts give to words of a commercial nature, like cost, which are not defined in the statutes which use them. A man of commerce would, in our view, look at the matter thus : “I paid Rs. 100/- to the seller of the raw material as the price thereof. The seller of the raw material had paid Rs. 10/- as the excise duty thereon. Consequent upon purchasing the raw material and by virtue of the Modvat scheme, I have become entitled to the credit of Rs. 10/- with the excise authorities and can utilise this credit when I pay excise duty on my finished product. The real cost of the raw material (exclusive of freight, insurance and the like) to me is, therefore, Rs. 90/- on this account.” This, in real terms, is the cost of the raw material (exclusive of freight, insurance and the like) and it is this, in our view, which should properly be included in computing the cost of the excisable product. (Para 23)
       Therefore, in determining the cost of an excisable product covered by the Modvat scheme under Section 4(1)(b) of the Act read with Rule 6 of the Valuation Rules the excise duty paid on raw material also covered by the Modvat scheme is not to be included. (Para 25).

Judgment

Bharucha, J.-It is convenient to set out, at the outset, the question involved in these appeals.

2. The manufacturer purchases raw material. He uses the raw material in the maunfacture of an intermediate product. He then uses the intermediate product in the manufacture of a final product. The raw material and the intermediatae product are liable to excise duty and they are specified goods for the purposes of the Modvat scheme. The assessable value of the intermediate product for the purposes of excise duty has, it is agreed in the instant case, to be determined on the basis of its cost. In determining the assessable value of the intermediate product the cost of the raw material has to be taken into account. The question is : is part of the cost of the raw material the price paid byteh manufacturer to its seller, as contended by the Revenue, or is it the price of the raw material less the excise duty thereon, which has been paid by the seller and for which the manufacturer is intitled to credit under the Modvat scheme, to be utilised against the payment of excise duty on products manufactured by him, including the intermediate product, as contended by the manufacturer.

3. The Central Excise and Gold Control Appellate Tribunal decided the question in favour of the respondent-manufacturers and the Revenue is in appeal. The reasoning of the Tribunal is unclear and has not been relied upon by learned counsel for the manufacturers. Broadly put, the logic of its decision is this : since the manufacturer gets credit for the amount of the excise duty that has been paid on the raw material, the amount of such excise duty cannot by said to form a part of the cost that is incurred by the manufacturer in procuring it.

4. It was argued on behalf of the manufacturers that the Revenue itself had taken a stand that supporte the manufacturers and that, therefore, it could not now urge to the contrary. The learned Attorney General, however, pointed out, with the reference to documents, that the stand of the Revenue had been different at different times. The divergent stand of the Revenue at different times only serves to illustrate the difficulty in answering the question.

5. In the first appeal the manufacturer, M/s. Dai Lchi Karkaria Ltd., purchases a raw material known as ‘lab’ for short, it uses the ‘lab’ in the manufacture of an intermediate product, surface active agent or surfactant. It uses the surfactant in the manufacture of a final product, emulsifer. The other respondent manufacturers purchase other raw materials, manufacture other intermediate products and use them in manufacturing other final products. We are here concerned with the assessment for the purposes of excise duty of the intermediate product. For the sake of convenience, therefore, we shall refer to the intermediate product as the excisable product.

6. To understand the contentions in the appeal, it is necessary to set out the provisions of Section 4 of the Central Excises and Salt Act, 1944 (“the Act”) and some provisions of the Central Excise (Valuation) Rules, 1975.

“Section 4. Valuation of excisable goods for purposes of charging of duty of excise.-(1) Where under this Act, the duty of excise is chargeable on any excisable goods with reference to value, such value shall, subject to the other provisions of this section, be deemed to be-

(a) the normal price thereof, that is to say, the price at which such goods are ordinarily sold by the assessee to a buyer in the course of wholesale trade for delivery at the time and place of removal, where the buyer is not a related person and the price is the sole consideration for the sale:

Provided that-

(i) where, in accordance with teh normal practice of the wholesale trade in such goods, such goods are sold by the assessee at different prices to different classes of buyers (not being related persons) each such price shall, subject to the existence of the other circ

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1999 Supreme(SC) 834

Important PointIn determining the cost of an excisable product covered by the Modvat scheme under Section 4(1)(b) of the Act read with Rule 6 of the Valuation Rules the excise duty paid on raw material also covered by the Modvat scheme is not to be included.

Cases Referred (5)

Important Point
In determining the cost of an excisable product covered by the Modvat scheme under Section 4(1)(b) of the Act read with Rule 6 of the Valuation Rules the excise duty paid on raw material also covered by the Modvat scheme is not to be included.