THE GOVT. OF INDIA AND ORS. ETC. v. ' I THE MADRAS RUBBER FACTORY LTD. ETC.

The learned Additional Solicitor General submits that this deduction cannot be allowed according to law. He refers to Rule 96 of the Central Excise Rules which provides that where a manufacturer desires that certain F tyres which are damaged during the curse of manufacture should be assessed at a lesser value than the standard selling price, he should declare in writing on the application for clearance of such goods that such damage has been sustained and that each of such tyre shall be clearly and legibly embossed or indelibly stamped with the words "second', 'clearance' or 'defective'. He submits that the claim in question does not fall under Rule G 96 and that there is no other rule or provision under which it can be granted. According to him, it is not a case of trade discount within the meaning of Section 4(4)(d)(ii). Learned counsel pointed out that the sale of first tyre lu.s taken place at full value and so has sale of second tyre and the mere fact that the amount refundable to the buyer on account of the manufacturing defect in the first tyre is set off against the price of the new

(, GOVT. OF INDIA'· MADRAS RUBBER FACTORY LTD. (B.P. JEEVAN REDDY,J.) 1185

tyre does not mean that the new tyre is being sold at a discount - nor can it be suggested that the discount is being given out of the price of the old { tyre. The learned Additional Solicitor General brought to our notice that in the judgment dated i;:>ecember 20, 1986 this court has disallowed the said claim and that the assessee has not chosen to question the same by way of a review petition. On the other hand, Sri Nariman, learned counsel for the assessee submits that this is a discount clearly within the meaning B_ and contemplation of Section 4(4}(d)(ii). The evidence adduced by the assessee, which has been accepted by the Assistant Collector, shows that this discount is being made in accordance with an established practice and understanding, prevalent over more than fifty years and there can be no doubt about its genuineness. Learned counsel submits that certain defects c in the manufacture are not apparent at the time of their removal or sale but come to light only later in the course of user. In such cases, the customer is entitled to proportionate remission attributable to the manufacturing defect. In recognition of the said claim and also in the business interest of the assessee, says the learned counsel, the assessee honours the said claim provided it is certified by the TAC. Instead of refunding the money in cash, the assessee replaces the old tyre with a new tyre. In other words, the assessee takes back the defective tyre sold earlier and supplies a new tyre and from the price of the new tyre, the amount which has been found remittable to the customer, is deducted. The assessee collects only the balance price. Sri Nariman brought to our notice that the claims on this account did never exceed'2-3 percent in any year over the last several years.

In the clarificatory Order in Bombay Tyre International (dated 14/15th November, 1983) this court has held: "discounts allowed in the F Trade (by whatever name such discount is described) should be allowed to be deducted from the sale price having regard to the nature of the goods, if established under agreements or under terms of sale or by established practice, the allowance and the nature of the discount being known at or prior to the removal of the goods. Such Trade Discount shall not be disallowed only because they are not payable at the time of each invoice G or deducted from the invoice price".

The question is whether the claim, put forward as TAC/Warranty discount is a trade discount within the meaning of Section 4(4}(d)(ii}? We think not. It is only a claim for refund by the buyer for the manufacturing H

1186 SUPREME COURT REPORTS (1995] 3 S.C.R.

A defect in the tyre sold by the assessee, which is being hqnoured by the assessee in a manner acceptable to both the parties. In a given case, a buyer may well insist that he must be reimbursed in cash and not in kind. In such .a case, the assessee cannot certainly refuse such a claim; it would have to pay cash. The nature and character of the amount so being refunded is certainly not a trade discount contemplated by Section 4(4)(d)(ii), whether the claim is honoured by paying cash or by deducting it from the price of the new tyre. As rightly pointed out by Bhagwati, C.J. in the Order dated December 20, 1986, "what is really relevant is the nature of the transaction". The learned Chief Justice pointed out further that "the warranty is not a discount on the tyre already sold, but relate to the goods which are being subsequently sold to the same customers. It cannot be strictly called as discount on the tyre being sold. It is in the nature of a benefit given to the customers by way of compensation for the loss suffered by them in the previous sale. 11 He characterised it as 11 a compensation in the nature of warranty allowance on a defective tyre". We express our respectful concur- D rence with the said observations. This claim of the assessee is accordingly rejected.

One Percent Tum Over Discount:

E The assessee's case in this behalf is this: this is a discount granted to all dealers operating under Recurring Credit Scheme (RCS) with effect from April 1, 1980. The discount is being given on a half-yearly basis depending upon the volume of purchases made. by each such dealer. Out of the total Madras Rubber Factory dealers, about eighty percent are said to be RCS dealers and out of the total sales effected by the Madras Rubber F Factory, over sixty percent sales are made by these RCS dealers (as per the figures relating to the year 1981-82). The discount is being granted by issuing credit notes to dealers and though the said discount is not shown on the face of each invoice, it is known to all the Madras Rubber Factory dealers. The discount cannot ii.deed be shown in the invoice for the simple reason that the discount is known only at the end of the half year.

The Assistant Collector allowed the said claim on the finding that this discount is given with a view to encourage the turn over of the sales and that having regard to the objects underlying the Recurring Credit f -. Scheme, this deduction is liable to be allowed. He found that in the ultimate analysis the dealer pays one percent less then the catalogue price

GOVT. OF INDIA'· MADRAS RUBBER FACTORY LID. (BP. JEEVAN REDDY, J.J 1187

and that the said claim is also consistent with the clarificatory order of this court in Bombay Tyre International. { The learned Additional Solicitor General, however, contended that this discount, not being known or paid at the time of removal/sale, cannot be allowed. B In the light of the findings recorded by the Assistant Collector, it must be held that this is a discount which is known and understood at the time of removal of the goods though it is quantified later. The Assistant Collector has also recorded a finding, "I also find that such system of grant of discount is not uncommon in the trade". Keeping in view the clarificatory Order of this Court in Bombay Tyre International, this claim must be held c to have been rightly allowed by the Assistant Collector.

Year Ending Discount and Prompt Payment Discount:

What is called 'Year-ending discount' is really a bonus given by D Madras Rubber Factory to its dealers @Rupees fifty per tyre in respect of a particular type of tyres. This discount is payable only where the payments are actually received within forty five days from the date of the invoice. Under this scheme, it appears that a declaration is to be received dealer- wise and thereafter provision is to be made at the head office of MRF for the bonus. The Assistant Collector has found that this discount was allowed E by the assessee not out of any extra-commercial considerations but that they were meant only to boost the sales particularly in the year 1981-82 in respect of Leader Tyre in order to achieve the target of sales for that year. He has recorded a finding that "such a system of grant of discount is prevalent in normal trade practice and the only difference may be that F MRF limited have granted the discount only at the end of the year and not at the time of actual sales". The learned Additional Solicitor General disputed the correctness of the basis on which the Assistant Collector has allowed this deduction. He commended for our acceptance the reasoning in Para 13(ii) of the judgment dated December 20, 1986 (Assistant Collector of Central Excise v. Madras Rubber Factory.) The reasoning in the said G order runs thus:

-..A "The allowance of the discount is not known at or prior to the removal of the goods. The calculations are made at the end of the year and the Bonus at the said rate is granted only to a particular H

1188 SUPREME COURT REPORTS [1995] 3 S.C.R.

A class of Dealers. This is computed after taking stock of the ac- counts between MRF and its dealers. It is not in the nature of a discount but is in the nature of a Bonus or an incentive much after the invoice is raised and the removal of the goods is complete. In the circumstances, we are of the opinion that MRF is not entitled to-deduction under this head." B We are, however, of the respectful opinion that the said reasoning cannot be accepted in view of the clear finding recorded by the Assistant Collector that this system of discount is prevalent in the industry and is known and understood at the time of removal of particular goods, though C the amount is quantified later. In view of the said finding and in the light of the clarificatory Order in Bombay Tyre International, we hold that this claim has been rightly allowed by the Assistant Collector.

So far as the prompt payment discount is concerned, it is payable under a scheme called 'prompt payment discount scheme' which is ap- D plicable only to up-country non-RCS dealers (except, of course, the govern- ment and DGS&D accounts). The discount is @ 0.75% on the total value of the invoice including sales tax, snrcharge etc. provided the bill is cleared/paid within 26 days from the date of invoice. The case of the Union of India is that this discount is limited only to certain varieties of products as explained in the scheme document and is valid only for a limited period. The Assistant Collector, however, dealt with this discount along with the year ending discount and allowed it on the same reasoning as is applicable to the year ending discount.

In view of the findings recorded by the Assistant Collector and the clarificatory order in Bombay Tyre International this claim too must be held to have been rightly allowed by the Assistant Collector.

Special Secondary Packing and Tread Rubber:

So far as this claim is concerned, we are of the opinion that the decision in Para-19 of the judgment dated December 20, 1986 (Assistant Collector of Central Excise v. Madras Rubber Factory) is the correct one and needs no departure. In the said judgment, this court referred to the judgment of Bharucha, J. in Miscellaneous Petition No. 1534 of 1979 ) ~ decided on January 7, 1986 wherein the learned Judge had set out the factual situation and the reasons for rejecting the claim at some length. In

- ( GOVT. OF IND!Av. MADRAS RUBBER FACTORY LTD. [B.P. JEEVAN REDDY, J.] 1189

the absence of any other material placed before us to take a different view, it would be appropriate to set out the relevant portion of Para-19 including { the conclusion, which we respe.ctfully adopt:

1190 SUPREME COURT REPORTS [1995] 3 S.C.R.

A on tread rubber should not be excluded from th~ assessable value. Tread rubber is a product which if even slightly damaged becomes unfit or un- usable. The vital element "cushion compound" which is applied to the bottom of the tread rubber and which helps the tread rubber to stick to the buffed surface of the old tyre which is to be retreaded is very delicate. A polythene sheet is put over the B layer of the compound before the same is rolled and put into another polythene bag to avoid sticking to the outer side of the tread rubber and getting contaminated by dust. It is stated that such production cannot be marketed without the polythene bags and/or cardboard boxes. These are the findings of the Assistant Collector, Goa and in the light of the cumulative decisions of the c Assistant Collector, Goa and of the Bombay High Court, we are of the view that the secondary special packing charges for tread rubber cannot be deducted from the assessable value of tread rubber."

D We may now take up the deduction which have been disallowed by the Assistant Collectors and are now in issue before us. They are: cost of distribution, interest on finished goods and interest on receivables. So far as cost of distribution is concerned, we have already dealt with it herein- before. We may now take up "interest on finished goods". E Interest On Finished Goods:

The claim pertains to the interest on value of finished goods from the date the stocks are cleared from the gate till the date of sale through p the depots. The contention of the assessee is that inasmuch as this is an expense incurred subsequent to the removal of the goods from the gate they are post-removal expenses and, therefore, qualify for deduction. The learned counsel for the assessee commended for our acceptance the reasoning in Para- 14 of the judgment dated December 20, 1986 on this count. We are, however, unable to agree with the said submission. We have already held, following Bombay Tyre International, that expenditure in- curred on sales organisation cannot be deducted. The claim herein is in reality "expenses incurred by the assessee upto the date of delivery on account of storage charges" held not excludible in Bombay Tyre lntema- tional, even where the "wholesale trade is effected by the assessee through its sales organisation at a place or places outside the factory gate".

oovr. OP IND!Av. MADRAS RUBBER FACTORY LTD. (B.P. JEEVAN REDDY,J.] 1191

Interest on receivables: A { The case of the assessee (Madras Rubber Factory) is that where the goods are sold to up-country wholesale buyers and payments are received quite sometime. later, it is indeed a case of sale on credit and, therefore, the interest charged from the date of delivery of goods till the date of realisation of the price thereof should be deducted from the value of the B goods. The interest charged, it is submitted, is only in lieu of the time taken in making the payment by the up-country wholesale buyer. Since this 1s the amount received subsequent to the sale from the depots and does not fall within the ambit of any of the expenses held includible in Bombay Tyre lntemationa~ it is clearly excludible. The claim for this deduction 1s, C therefore, allowed.

PART - V

The last issue urged before us relates to the method of computation of assessable value in a cum-duty price. The issue is whether the excise duty should be first deducted or the permissible deductions should be first deducted from the selling price? After some discussion, the learned coun- sel for the assessees agreed that the decision in Para-22 of the judgment dated December 20, 1986 (Assistant Collector of Central Excise v. Madras Rubber Factory) represents the correct view. We also find ourselves in respectful agreement with the said holding. Accordingly, we direct that the method of computation of assessable value shall be the one indicated in Para-22 of the said judgment which we re-produce hereinbelow for the reason that the judgment has since been reviewed and recalled. The paragraph runs as follows: F "22. The last important issue relates to the method of computation of assessable value in a cuµi-duty price at a factory gate sale. The issue is whether Excise Duty should be first deducted or the permissible deduction should be first deducted from the selling price for the re-assessments before the Assistant Collectors. The assessment of excise duty both in relation to Section 4 and in G relation to the Valuation Rules is now subject to the definition contained in Section 4( 4)( d) of the Excise Act. The value as . defined thereunder is to be arrived at after tl\e cost of packaging of a durable nature or a returnable nature as also amounts of duty of excise, sales tax and other taxes and trade discount allowed in H

1192 SUPREME COURT REPORTS [1995] 3 S.C.R.

A accordance with the normal practice of wholesale trade is deter- mined. It is thus implicit that no excise duty is payable on an element of excise duty in the price. The value as contemplated under Section 4 cannot include a component of excise duty. In the circumstances, where the computation of an assessable value has to be made from the factory gate sale price which is a cum-duty B price, the first question which will have to be addressed is what are. the exclusions and permissible deductions from such a sale price. The petitioners have contended that their cum-duty price was arrived at after calculating and adding excise duty payable, i.e., before actual duty was paid. They contend that their price lists c for several articles is approved much in advance of the removal from the factory. They contend that when the assessable value is to be arrived at, the same amount of excise duty which was pre- determined and added to the factory price is naturally to be deducted first and only thereafter the permissible deductions should be deducted to arrive at the value. For the purposes of argument, MRF submitted the following example for considera- tion:

They suggest that their selling price should be considered (cum-duty selling price) as Rs. 3200. They further submitted that the permissible deductions whether on account of trade discount or on account of cost of secondary packaging or sales tax or other taxes packaging or sales tax or other taxes should hypothetically be considered at Rs. 200. The rate of excise duty chargeable is 60% ad valorem for automatic tyres. Assuming for the same of argument that the value of the product is actually Rs. 2075. In accordance with the provisions of Section 4(4)(d) permissible deductions are made. The assessable value would be Rs. 1875 being the difference of Rs. 2075 and Rs. 200. The excise duty at the rate of 60% would thereafter be computed on the sum of Rs. 1875 and would aggregate Rs. 1125. The selling price which is a cum-duty price would be the sum total of the assessable value, the permis- sible deductions and the excise duty. Putting this as a mathematical formula the selling price (cum-duty price) is equal to assessable value plus permissible deductions plus excise duty. Cum-duty Paid Selling Price = Assessable value + Excise Duty + Permissible H deductions. Again Excise duty is a computed as a ratio of the

GOVf. OF INDIA•. MADRAS RUBBER FACTORY LTD. (BP. .TEEVAN REDDY, J.( 1193

{ assessable value where duty is ad va/orem. For the purposes of A ascertaining of the assessable value, if three of the components . namely the cum-duty selling price, the quantum of permissible deductions and th.e rate of excise duty are known, the proper and appropriate method of determining the assessable value would be the following formula:- B Assessable value = cum-duty selling price - permissible deductions - (1 +Rate of excise duty)

Thus in the instant case working backward, if the cum-duty C selling price is known to be Rs. 3200 an<! the permissible deduc- tions are known to be Rs. 200 and the rate of excise duty is known to. be 60%, the assessable value is computed as under:

Selling price - permissible deductions = 3200 - Rs. 200 = Rs.

3000. D Assessable value is equal to difference in selling price and permis- sible deductions divided by 1 plus 60/1000 which is equal .to 3000/1.6 which is equal to Rs. 1875.

The excise duty at 60% ad valorem rate would be Rs. 1125 on the assessable value of Rs. 1875.

The mathematical formula enumerated above balances. For example, if

the cum-duty paid selling price is equal to Rs. 3200, the assessable value is Rs. 1875 excise duty is Rs. 1125 and permissible deductions is Rs. 200, the aggregate of the asses- sable value, the permissible deduction and the excise duty is equal to the selling price (cum-duty paid).

Any other method of computation of excise duty or assessable value is erroneous. The Petitioner's basis that the assessable value is to ·be arrived at by taking into consideration the same amount of excise duty which is hypothetically pre-determined and added to the factory price and that this element in an attempt to compnte the assessable value should naturally be deducted first, is putting H

1194 SUPREME COURT REPORTS [1995]3 S.C.R.

A the cart before the horse. The excise duty is onjy known as a ratio of the assessable value when an ad va/orem duty is included in the cum-duty paid selling price. The quantum of excise duty cannot be pre-deducted or pre-determined till the assessable value is known. It is only the permissible deductions in concrete monetary terms and amount which are known. The cum-duty paid sale price B being available for computation and a known value of deductions permitted being also known, the assessable value and the excise duty as a ratio of the assessable value can be only decided by first deducting the permissible deductions, from the cum-duty paid selling price and thereafter computing the value in accordance with c the equation mentioned above. This has both a legal and a math- ematical basis. If the pre-determined amount of excise duty as per the illustration given by MRF Ltd. is first deducted, the equation will not tally. For example, if from a hypothetical cum-duty price of Rs. 150 (comprised of the value of the product at Rs. 100 and ad valorem excise duty @ 50% at Rs. 50) if the excise duty of Rs. D 50 is first deducted, the assessable value arrived al would be Rs.

95. The rate of excise duty is 50% and the excise duty @50% of the assessable value of Rs. 95 would be Rs. 47.50 and not Rs. 50 as earlier deducted. There would be a constant difference of Rs. 2.50 in the computation. It is, therefore, an incorrect method of evaluating the assessable value in instances of cum-duty selling price. This interpretation is borne out by the definition contained in Section 4(4)(d) of the Excise Act. MRFs contention that the excise duty should be deducted first and then the permissible deductions is. incorrect. In ordinary cases where the factory price is not a cum-duty price, the first step in arriving at the assessable value is to deduct the permissible deductions and thereafter to compute the excise on an ad va/orem basis. The excise duty cannot be computed unless the permissible deductions are first made. The assessable value is orrived 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 permis- J sible deductions. Even in the cum-duty sale price, the same prin- ciple must be followed to arrive at the assessable value. To compute an excise duty as a pre-determined amount without H

GOVT. OF INDIA•. MADRAS RUBBER FACTORY LTD. [B.P. JEEVAN REDDY,!.[ 1195

{ making the permissible deductions for reducing the cum-duty A 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." B CIVIL APPEAL NO. 1097 OF 1981 (UNION OF IND/Av. TATA CHEMICALS LTD.)

This appeal is preferred by the Union of India against the judgment of a learned Single judge of the Bombay High Court dated September 19, 1979 in Miscellaneous Petition No. 451 of 1971. The question at issue is whether the cost of containers, i.e., bags of jute and/or of polythene and the drums are durable and returnable withi:t the meaning of Section 4( 4)( d)(i) of the Act. The appeal was filed directly in this Court against the judgment of the learned Single Judg~ evidently because at that time the law on the subject was not supposed to be clearly settled. Now that the principles have all been properly enunciated and also because the question whether the packing is durable and returnable by the buyer to the assessee is essentially a question of fact the proper course would be to remit the matter to the excise authorities for determination of the said question of fact. The matter will, therefore, go back to the Assistant Collector of Central Excise concerned who shall decide the said question in accordance with law and on the basis of the material that may be placed before him. Similar direction should follow in Civil Appeal No. 1807 of 1977 (Synthetic & Polymer Industries v. Union of India & Ors. where too the dispute is whether the packing is durable and returnable. The matter shall go back to the concerned Assistant Collector of Central Excise who shall decide the said question in accordance with law and on the basis of the material placed before him.

PART - VI G1 Accordingly, Civil Appeal No. 3195 of 1979 (Union of India & Ors. v. Madras Rubber Factory), Civil Appeal Nos. 4731- 32 of 1984 (The Superintendent of Central Excise, Kottayam & Ors. v. Madras Rubber Factory Limited, Civil Appeal No. 793 of 1984 (Madras Rubber Factory Limited v. Collector of Central Excise, Madras), Civil Appeal No. 5373 of 1995 arising H

1196 SUPREME COURT REPORTS (1995) 3 S.C.R.

A out of Special Leave Petition (C) No. 10108of1980 (Union of India & Ors. v. Madras Rubber Factory) are allowed in part in the above terms. Civil Appeal No. 5375 of 1995 arising out of S.L.P.(C) No. 4041 of 1981 (Union of India v. HindusttQI Lever) is allowed for the reasons recorded herein- before. There shall be no orders as to costs.

B We have pronounced upon various submissions urged before us. 11- is obvious that if in any individual case, any other claim for deduction arises, its admissibility has to be decided keeping in view the principles contained herein.

The individual appeals listed before us shall be posted immediately C after vacation for disposal in the light of this judgment. S.M. Appeals partly allowed.