2005 Supreme(SC) 557

2005(3) Supreme 534
Supreme Court of India
(From Central Excise, Customs and Gold (Control) Appellate Tribunal, South Zonal Bench at Madras)
S.N. Variava, Dr. AR. Lakshmanan & S.H. Kapadia, JJ.
Commissioner of Central Excise, Belgaum —Appellant
versus
M/s. Akay Cosmetics Pvt. Ltd. —Respondent
Civil Appeal Nos. 3792-3803 of 2000
Decided on 1-4-2005
Counsel for the Parties :
For the Appellant : K. Swamy, Tufail A. Khan, Rupesh Kumar, P. Parmeswaran and B. Krishna Prasad, Advocates.
For the Respondent : Anoop Choudhary, Sr. Advocate, Rajesh Kumar, Advocate.

Important point
In the matter of interpretation of tax laws, deductions are admissible in terms of the section and not on the basis of general concepts.

Headnote:(i) Central Excise and Salt Act, 1944—Sections 4(4)(c), 4(1)(a)(iii), 4(4)(d), 35L(b)—Assessable value—How and when the assessable value of the manufactured product is to be determined—Claim of deductions for freight, insurance as well as selling handling charges—Assessee was manufacturer of instant hair colour under the brand name ‘Bigen’—Assessee filed its price list seeking approval of assessable value @ Rs. 4.38 per bottle of 6 gms—Product was sold and marketed by M/s Nemaru @ Rs. 18.78 per bottle of 6 gms—Assistant Collector approved the price list by fixing the assessable value @ Rs. 7 per bottle of 6 gms.—Assistant Collector issued show cause notice as to why the assessable value of bottle of instant hair colour should not be determined under Section 4 based on wholesale price of M/s Nemaru which effected sale @ Rs. 18.78 per bottle—Revision of assessable value from Rs. 7 to Rs. 7.80 per bottle—Commissioner disallowed deduction on account of freight, insurance, octroi, selling and handling charges—Tribunal recorded the concession made on behalf of the assessee that assessee and M/s Nemaru were related person—Assessee was held entitled to deduction for the special packing—Whether the department was right in disallowing deduction for expenses in respect of freight, insurance and handling charges from the assessable value—(Yes).

       Held : The Parliament opted for “price” as the measure of tax, without altering the nature of the levy, and co-related it to “value”, as defined under section 4(4)(d). Hence, the article became the object of assessment only when it was cleared by the manufacturer at the factory gate. The circumstance that the article becomes the object of assessment when it was sold by the manufacturer, as held in the case of Bombay Tyre (supra), remained unchanged even under the three provisos to section 4(1)(a). The “value” under section 4 depended on price, place and person. The word “assessment” had to be read in the context of section 4. The article becomes the object of assessment only when it was sold. The only change brought above by the three provisos was that under given circumstances the price which would not be the “normal price” or the “value”, was deemed to be the normal price for the purposes of assessment under section 4. For example, under the proviso (ii) to section 4(1)(a), the statutory price was deemed to be the normal price for purposes of assessment. Similarly, in the case of proviso (iii), the price charged by the related person was deemed to be the normal price. The reason was obvious. The implication of the manufacturer, the assessee and the buyer being related to each other was that the price charged to the related person was presumed to be understated and to dissuade such sales, the legislature had introduced the said proviso as anti-evasion measure. Hence, to give deductions to the assessee, as claimed, would defeat the very object of the third proviso. Under all the three provisos, the manufacturer remained the assessee, the “object” of the assessment remained the same and neither the identity of the manufacturer nor the identity of the excisable goods underwent any change. Even the place of removal remained unchanged. Under the third proviso, the basis of assessable value alone changed when the price of the related person was adopted as the basis of the valuation. Therefore, proviso (iii) did not break the nexus between price and value under section 4(1)(a) of the Act. (Para 33)

       Now coming to the question of deduction, we may point out that for the purposes of assessment, price and value are co-related under section 4. As stated above, “price” was taken as a factor in determination of “value” under section 4. However, “deduction”, though a part of assessment, had to be strictly construed. The reason was obvious. No deduction could be allowed if it was extended beyond the levy. (Para 34)

       As stated above, the word “deduction” in terms of section 4(4)(d) had to be strictly construed. Every deduction from the “gross profit” was not deduction. To constitute “deduction”, the item had to fall within section 4. For example, in cases falling under section 4(2), the cost of transportation was deductible. Similarly, deduction was admissible for taxes actually paid under section 4(4)(d)(ii). So also for trade discounts, deduction was allowable under section 4(4)(d)(ii). However, the Court in this connection had to examine the nature of deduction. For example, under proviso (i) to section 4(1)(a), an assessee was entitled to file separate price-lists for the Government, to whom concessional price is charged, vis-a-vis Other Dealers. In such a case, it was not open to the assessee to treat the price difference as a trade discount under section 4(4)(d)(ii). This was because under the first proviso to section 4(1)(a) the price charged to the Government was treated by a deeming fiction to be “normal price”. In tax accounting, we have what is called a matching concept. As stated above, value as defined under section 4(4)(d) was co-related to the price at the factory gate. Therefore, costs (expenses) for factors up to the stage of “price” at the factory gate alone could be taken into account. Deduction is a matter of adjustment. It is a matter of set off. When the “value” for the purposes of section 4 was the price at the factory gate, the costs which are includible up to that stage alone were includible. Cost is the function of time and place under section 4(4)(d). Therefore, costs beyond that stage was not includible in the assessable value as it was not capable of being deducted from the price beyond the factory gate. If the price at the factory gate was the basis for the purposes of assessable value, deduction had to be confined to that price alone. Hence, secondary packing costs was not includible. Therefore, as stated above, levy could not extend beyond the manufactured article itself. Lastly, in the present case, section 4(2) was not applicable as a finding of fact stood recorded that price was known at the factory gate. This matter came under the third proviso to section 4(1)(a) and not under section 4(2) of the Act. For the aforestated reasons, we hold that the department was right in disallowing deduction for expenses in respect of freight, insurance and handling charges from the assessable value for the period 9/88 to 3/91. (Paras 35 to 38)

       Accordingly, we hold that the assessee was entitled to deduction on account of expenses incurred towards the octroi and turnover tax, subject to the assessee’s producing requisite proof of actual payment during the entire period 9/88 to 3/91. (Para 42)

       As regards the special packing, the facts brought on record show that the assessee was the manufacturer of hair-dyes. That, the assessee had sold the product in bottles, each containing 6 grams of powder. These bottles in turn were packed in an individual cartons of 12 units. These individual cartons were manufactured in the factory of the assessee. That, the said bottles were packed in the individual cartons and delivered at the factory gate to M/s Nemaru. After taking delivery, M/s Nemaru packed the product in bigger cartons in its premises at its own cost. That, once the goods become marketable in the individual packing of the assessee and removed from its factory gate, as such, the question as to whether M/s Nemaru was a “related person” or not became insignificant and consequently, the cost of special packing was not includible in the assessable value. (Para 43)

       (ii) Interpretation of Statutes—Tax Laws—Deductions are admissible in terms of the section and not on the basis of general concepts.

       Held : In the matter of interpretation of tax laws, deductions are admissible in terms of the section and not on the basis of general concepts. Hence, deduction for transport was confined to section 4(2). Similarly, under section 4(4)(d)(ii), the expression “value” was defined so as not to include excise duty, sales tax and other taxes. Similarly, section 4(4)(d)(i) made an express provision for including the “cost of packing” in the determination of “value” for the purposes of excise duty provided it was for goods ordinarily sold in the course of wholesale trade. (Para 29)