Holding

Deduction for special packing, turnover tax, octroi and bought‑out items is admissible subject to proof, while deduction for freight, insurance and handling charges is not, and a demand for differential duty without a show‑cause notice is unsustainable.

Summary

The Commissioner of Central Excise appealed against Mis. Aka Y Cosmetics Pvt. Ltd., which claimed deductions from assessable value for special packing, turnover tax, octroi, and bought‑out items while the assessable value was based on the selling price to a related person under proviso (iii) of Sec. 4(1)(a) of the Central Excise Act, 1944. The Supreme Court examined whether such deductions were permissible under Sec. 4(4)(d) and whether deductions for freight, insurance and handling charges could also be allowed. It held that deductions for special packing, turnover tax, octroi and bought‑out items are admissible provided the assessee produces proof of actual expenses, but deductions for freight, insurance and handling charges are not admissible. The Court also ruled that the demand for differential duty for the period 1‑1988 to 31‑8‑1988 without a show‑cause notice under Sec. 11A was unsustainable. Consequently, the department’s appeal was partly allowed, the demand for that period was set aside, and the matter was remitted to the Commissioner (Appeals) to quantify deductions for special packing and bought‑out items.

Issues considered

Whether deduction for special packing, turnover tax, octroi and bought‑out items is admissible under Sec. 4(4)(d) when assessable value is based on the price of a related person.
Whether deduction for freight, insurance and handling charges is permissible under the same provision.
Whether the demand for differential duty without a prior show‑cause notice under Sec. 11A is valid.
Whether the cost of bought‑out items (hand‑gloves and measuring cups) is includable in assessable value.
Whether the status of Mis Nemaru as a "related person" ceased after the 1991 contract amendment.

Legislation cited

Central Excise Act, 1944s. 11A, s. 35-L(b), s. 4(1)(a), s. 4(2), s. 4(4)(c), s. 4(4)(d)

Subjects

central exciseassessable valuerelated persondeductionspecial packingturnover taxoctroibought‑out itemsdifferential dutyshow‑cause noticeSection 4Section 11A

Judgment

A COMMISSIONER OF CENTRAL EXCISE, BELGAUM
v.
MIS. AKA Y COSMETICS PVT. LTD.

APRIL I, 2005

B [S.N. VARlAVA, DR. AR. LAKSHMANAN AND S.H. KAPADIA, JJ.]

Central Excise Act, 1944:

Sections 4(J)(a), 4(4)(c) and (d)-Excise duty-Manufacture of goods
C by assessee-Selling price of 'a related person' considered as basis of
assessable value-Deduction from the assessable value in respect of cost of
secondary packing, turnover tax, octroi, boughtout items, freight, insurance
and handling charges-Admissibility of-Held: Deduction for expenses for
secondary packing, turnover tax, octroi and brought out items are admissible
D subject to assessee submitting proofofactual expenses-Deductions in respect
offreight, insurance and handling charges are not admissible.

Section I I-A-Differential duty-Demand of-Without issue of show
cause notice-Permissibility-Held: Such demand is unsustainable.

E The question for determination in the present case is whether the
claim of assessee for deduction from the assessable value in respect of cost
of secondary packing (special packing), freight, handling charges,
insurance, octroi, turnover tax and cost of bought out items was admissible
u/s 4(4) 4(4)(d) of Central Excise Act, 1944, ifthe selling price of 'a related
person' as defined in Section 4(4)(c) was considered as the basis of the
F assessable value in terms of proviso(iii) to Section 4(1)(a) for the goods
manufactured and cleared by the assessee.

Partly allowing the appeal, the Court

HELD: 1.1. Deduction for expenses incurred on account of special
G packing, turnover tax, octroi and bought out items was admissible subject
to the assessee submitting proof of incurring actual expenses in respect of
the above items before the Commissioner (Appeals). The department was
right indisallowing deduction for expenses on account of freight, insurance
and handling charges. (139-B]
H 118
C.C.E. BELGAUM v .. AKA Y COSMETICS PVT.LTD. 119
Union of India and Ors. v. Bombay Tyres International Pvt. Ltd., (J 984) A
17 ELT 329 and Commissioner of Customs and Excise, Bangalore v. Mis.
Sujata Textile Mills Ltd., (2005) 181 ELT 379, relied on.

· 1.2. 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 the company alleged to be related was a "related person" or B
not became insignificant and consequently, the cost <'!sredal packing was
not includible in the assessable value. (137-D""'E)

Commissioner ofCentral Excise, Allahabad etc. v. Mis. Hindustan Safety
Glass Works Ltd. etc., (2005) 2 Scale 246, relied on.
c
Hindustan Polymers v. Collector ofCentral Excise, (1989) 43 ELT 165,
referred to.

1.3. Applying the test of essentiality, it is found that the bought out
items hand-gloves and measuring cups were not essential for delivery of D
the product in question in wholesale at the factory gate of the assessee.
Hence the cost of the bought-ou~ items was not includible in the assessable
value during the period. However, it is clarified that although in principle
the deduction for these items was admissible, on the facts of this case, the
assessee was required to produce evidence indicating the price at which
the assessee had bought these items during the entire period. The assessee E
was also required to prove the supply of these items with the product.
Accordingly, the matter is remitted to the Commissioner (Appeals) to
decide the quantification of deduction in respect of these two items for
the period. [139-B-F]

1.4. In the matter of interpretation of tax laws, deductions are F
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 G
determination of "value" for the purposes of excise duty provided it was
for goods ordinarily sold in the course of wholesale trade. (132-D-E]

1.5. There is a difference between the nature oflev)' and the measure
of the levy. The method of collection does not affect the essence of the duty.
While the natu~e of excise d~ty was indicated by the fact that it was H
120 SUPREME COURT REPORTS [2005] 3 S.C.R.

A imposed in respect of the manufacture, the point at which it was collected
was when the article left the factory gate. Therefore the article became
an object of assessment when it was sold by the manufacturer. The
measure employed for assessing a tax must not be confused with the nature
of tax. The factors such as volume, quantity, weight and price which enter
B into the measure of the tax have nexus with the manufacturing activity.
[133-A-C]

Union of India and Ors. v. Bombay Tyre International Ltd, Am (1984)
SC 420, relied on.

1.6. In respect of Section 4(l)(a), the Parliament by Amendment Act
C XXII of 1973 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 "value" under
Section 4 depended on price, place and person. The word "assessment"
D 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. The
implication. of the manufact_urer~ the assessee and the buyer being related
E 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
F 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 th-e valuation.
Therefore, proviso (iii) did not break the nexus between price and value
G under Section 4(1)(a) of the Act. [133-D-H; 134-'AJ
1.7. For the purposes of assessment, price and value are co-related
under Section 4. "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. No deduction could be allowed if it was extended
H beyond the levy. Every deduction from the "gross profit" was not
C.C.E. BELGAUM v. AKAY COSMETICS PVT. LTD. 121
deduction. To constitute "deduction", the item had to fall within Section A
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. B
[134-B-C; 135-F-GJ

Bombay Tyre International Pvt. Ltd., (1984) 17 ELT 329, relied on.

1.8. In tax accounting, there is a matching concept. 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 C
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 D
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, levy could not extend beyond the manufactured
article itself. [136-B-D] E
1.9. 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(l)(a) and not under
section 4(2) of the Act. [136-D-E) F
2. The demand for differential duty for the period without issue of
show-cause notice under section llA was unsustainable. [139-E-F)

Union of India and Ors. v. Madhumilan Syntex Pvt. Ltd, (1988) 35 ELT
349, relied on.
G
CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 3792-3803
of 2000.

From the Judgment and Order dated 6.1.2000 of the Central Excise,
Customs and Gold (Control) Appellate Tribunal, South Zonal Bench at Madras H
122 SUPREME COURT REPORTS. [2005) 3 S.C.R.

A in F.O. Nos. 60-71/2000 in A. No. E/389/97, e/390- 396/97 and E/1006-1009
of 1997/Md.

K. Swamy, Tufail A.· Khan, Rupesh Kuamar, P. Parmeswaran and B.
Krishna Prasad for the Appellant

B Anoop Choudhary and Rajesh Kumar with him for the Respondent.

The Judgment of the Court was delivered :

KAPADIA, J. If the selling price of Mis Nemaru "a related person" as
defined in section 4(4)(c) of the Central Excise Act, 1944 (for short "the
C 1944 Act") was considered as the basis of the assessable value in terms of
proviso (iii) to section 4(l)(a) for the goods manufactured and cleared by Ml
s Akay Cosmetics Pvt. Ltd. (assessee herein), then was the claim for deduction
from the assessable value in respect of cost of secondary packing (special
packing), freight, handling charges, insurance, octroi, turnover tax and cost
of bought-out items admissible under section 4(4)(d) of the 1944Act, is the
D question which arises for determination in these captioned civil appeals filed.
by the department under section 35-L (b) of the 1944 Act, as it then stood.

Mis Akay Cosmetics Pvt. Ltd., Hubli (hereinafter referred to for the
sake of brevity as "the. assessee") was the manufacturer of instant hair colour
E under the brand name "Bigen", falling under chapter sub-heading 3305.90.
The assessee filed its. price list no. l/88-89 effective from l.l .1988 in respect
of the said product seeking approval of the assessable value @ Rs. 4.38 per
bottle of 6 grams. Since the product was sold and marketed by M/s Nemaru
Coiffure (for short "Mis Nemaru") @ Rs. 18.78 per bottle of 6 grams at
H~bli, the Assistant Collector approved the price-list by fixing the assessable
F value @ Rs. 7 per bottle of 6 grams for the period 1/88 to 8/88, vide order
dated 29.8.1988. Against the said approval, the assessee had appealed before
the Collector of Central Excise (Appeals), who remanded the case back to the
Assistant Collector for determining the assessable value and to ascertain the
wholesale price of M/s Nemaru at Hub Ii (hereinafter referred to for the sake
G of brevity as "de novo adjudication").

Accordingly, in the de novo adjudication, the Assistant collector issued
show-cause notice dated 21.3.1989 asking the assessee to show-cause as to
why the assessable value of a bottle of instant hair colour of 6 grams should
not be determined under sectiori 4 based on wholesale price of Mis Nemaru,
H Hubli, which, as stated above, effected the sale of the said product @ Rs.
-- C.C.E. BELGAUM v. AKA Y COSMETICS PVT. LTD. {KAPADIA, J.] 123

18.78 per bottle of 6 grams. A
In the meantime, the Superintendent of Central Excise issued seven
show-cause notices for the period 9/88 to 7/91 proposing revision of assessable
value from Rs. 7 per bottle to Rs. 7.80 per bottle of 6 grams.

B
--
In the above de novo adjudication, the Assistant Collector, vide his
order dated 29 .9 .1991, revised the assessable value from Rs. 7 to Rs. 7.80 per
bottle, not only in respect of the above show-cause notices covering the
period 9/88 to 7/91 but also in respect of the clearances made by the assessee
during the period 1/88 to 8/88 already covered under order dated 29.8.1988.
Aggrieved by the de novo order dated 29.9.1991, the assessee filed an C
appeal before the Collector (Appeals), who vide his order dated 29.5.1992
remanded the case back to the Assistant Collector inter alia on the ground
of lack of discussion on the point of disallowance of trade-discount and cost
of aceessories from the assessable value (hereafter referred to as the "second
de novo adjudication).
D
By order dated 11.1.1994, the Assistant Collector re-decided the issue
against the assessee holding that Mis Nemaru, Hubli was the "related person"
and the price of the bottle should be fixed taking into consideration the price
at which Mis Nemaru sold the product at Hubli; that since the basis of the
sale price was the price charged by Mis Nemaru, the assessee was not entitled
to deduction for freight, insurance, octroi, selling and handling charges as E
these expenses contributed to the selling price of Mis Nemaru. It was further
held that the office of Mis Nemaru was in the compound of the assessee, Ml
s Akay Cosmetics Pvt. Ltd., Hubli and, therefore, the assessee was not entitled
to deduction in respect of storage and transportation charges, as claimed.
However, deduction was allowed to the assessee for payment of sales tax and F
central excise duty. With regard to bought-out items, namely, the plastic
measuring cups and hand-gloves, deduction was disallowed on the ground
that the assessee had failed to prove that the gloves and measuring cups were
supplied with their product (Bigen); that there was no evidence of bulk
purchase of measuring cups; and lastly, that there was no evidence to show
that these measuring cups were sold along with the product as accessories. G
Accordingly, vide order dated 11.1.1994, the Assistant Collector confirmed
the assessable value at Rs. 7.80 per bottle of 6 grams from 1/88 to 7/91 and
claimed the differential duty of Rs. 5,60,166.63.

Being aggrieved by the decision dated 11.1.1994, the matter was carried
in appeal by the assessee to the Commissioner (Appeals), who by his order H
124 SUPREME COURT REPORTS [2005] 3 S.C.R.

A dated 30.8.1996 came to the conclusion that the assessee was not entitled to
-
'\

deduction for the cost of special packing as such cost was incurred by Mis
Nemaru. By the said decision, it was further held that the assessee had failed
to produce evidence indicating payment of additional tax and turnover tax
and, therefore, the assessee was not entitled to deduction. Further, it was held
B that without the measuring cup, the product could not be used and, therefore,
the value of the measuring cup supplied with the carton was not deductible
from the assessable value. By the said decision, the Commissioner (Appeals)
disallowed deduction on account of freight, insurance, octroi, selling and
handling charges. Accordingly, the Commissioner confirmed the demand raised
by the department.
c Aggrieved by the decision, the assessee carried the matter in appeal to.
the Customs, Excise and Gold (Control) Appellate Tribunal (hereinafter
referred to as "the tribunal). By the impugned decision dated 6. l.2000, the
tribunal came to the conclusion that the demand for Rs. 1,59,606.22 towards
the differential duty for the period 1/88 to 8188 was not sustainable as there
D was no show-cause notice given to the assessee raising the demand for the
said period under section I I-A of the Act. On the question of the assessee
and Mis Nemaru being related person under section 4(4)((c), the tribunal
recorded the concession made on behalf of the assessee that the assessee and
Mis Nemaru were related person up to 319 I.
E On the question of deduction, the tribunal held that the assessee was
entitled to deduction for the special packing. In this connection, the tribunal
found that the assessee was engaged in the manufacture of hair-dye, which
was sold in bottles of 6 grams each, which bottles in tum were packed in
individual cartons of I2 units. According to the tribunal, these individual
F cartons constituted packin~ necessary for the marketability of the product at
the factory gate. According to the tribunal, the individual cartons were placed
in the bigger cartons by M's Nemaru within its premises and not in the
factory premises of the assessee. The tribunal found that even the cost of the
bigger cartons was borne by Mis Nemaru and not by the assessee and,
therefore, the tribunal held that the cost of the bigger cartons (special packing)
G was not includible in the assessable value in the hands of the assessee. Lastly,
the tribunal found that the cost of special packing was not recovered by the
assessee from Mis Nemaru and, therefore, it was not includibfo in the assessable
value.

By the impugned judgment, the tribunal allowed deduction under section
H 4(4)(d)(ii) for turnover tax and octroi. ·
C.C.E BELGAUM v. AKAY.COSMETICS PVT. LTD. [KAPADIA, J.] 125
As regards bought-out items supplied with the bottles, the tribunal A
held that the measuring-cups and hand-gloves were not essential items to be
used by the customers and, consequently, allowed deduction for the said
bought-out items.

The tribunal also allowed deduction for freight, insurance as well as
selling handling charges. However, there is no discussion for granting such B
deduction.

Lastly, the tribunal found, on examination of facts, that, on and after
1.4.1991, Mis Nemaru had undergone organizational changes; that, the assessee

- had filed its price-list with reference to a new agreement dated 2.1.1991 with
Mis Nemaru and consequently, the tribunal ;emanded the matter back to the
Commissioner (Appeals) to re-examine the demand for differential duty for
the period from 4191 to 3193. This remand became necessary as the assessee
C

submitted that Mis Nemaru was no longer a related person in terms of section
4(4)(c) in view of the above changes.
D
Aggrieved by the decision of the tribunal dated 6.1.2000, the department
has come to this Court by filing these civil appeals under section 35-L (b) of
the 1944 Act.

Shri K. Swamy, learned counsel for the department submitted that the
assessee was not entitled to deduction for special packing, freight, insurance, E
handling charges, octroi, turnover tax and cost of bought-out items during the
-; period 1/88 to 3191. In this connection, it was urged that hair-dye bottles of
6 grams were sold by Mis Nemaru@ Rs. 18.78 per bottle. That, admittedly,
during the aforestated period, Mis Nemaru was a related person under section
4(4)(c) of the Act. That, the department was, therefore, right in treating the
said price of Rs. 18.78 per bottle as the basis of the assessable value under F
proviso (iii) to section 4(1 )(a) of the Act and in the circumstances, the
department was justified in disallowing the deductions in respect of the above
items. According to the learned counsel, the department was right in holding
that the deduction for the special packing done by Mis Nemaru was not
admissible as Mis Nemaru was "a related person" under section 4(4)(c) and G
that in view of the third proviso to section 4(l)(a), the factory gate had
shifted from the place of removal of the assessee to the premises of Mis
Nemaru.

Learned counsel submitted that in view of the recent judgments of this
Court, the assessee was entitled to deduction for turnover-tax and octroi . H
\__
I

126 SUPREME COURT REPORTS [2005] 3 S.C.R.

A subject to the assessee's producing proof of payment of taxes during the
relevant period.

Learned counsel for the department next contended that the assessee
was not entitled to deduction on bought-out items. In this connection, it was
urged that under the literature supplied to the customer, dosage of hair-dye
B of prescribed measure had been mentioned and, therefore, the measuring-cup
was not only meant to facilitate the user in pouring out the stipulated quantity
of the dye but it was an essential part of the product as the customer was \

~
required to use the prescribed dosage of the product. It was urged that without
the measuring cup, the customer was not in a position to apply the prescribed
C dosage of hair-dye and, therefore, the cost of the measuring cup was includible
in the assessable value. The same argument was also applied to hand-gloves.
That,. in any event, the assessee had· failed to produce evidence regarding
- ,j

purchase of hand-gloves and measuring cups during the aforestated period l/
88 to 3/91. That, there was no evidence of supply of these items with the
product during the said period.
D
Lastly, it was· urged that the tribunal had erred in remanding the matter
back to the Commissioner (Appeals) in respect of the differential duty
demanded for the period 4/91 to 3/93, as Mis Nemaru continued to _be a
related person even after 1.4.199 l. It was submitted that the new contract
dated 2.1.1991 was a pretence, that there was no change in the constitution
E of the firms and that there was no evidence of the new pattern of pricing on
and after l.4.1991. In the circumstances, it was submitted that the tribunal .~..
I
should not have remitted the matter. 1
i"

Learned counsel next contended that the tribunal had erred in allowing
F deduction in respect of freight, insurance and handling charges. In this
connection, it was urged that the actual amount spent on the above heads,
even if admissible, was not proved. That, the tribunal erred in allowing
deduction without proof of actual expenditure. .
,.__

Learned counsel next submitted that the tribunal had erred in setting
G aside the demand for differential duty under section 1lA for the period 1/88
to 8/88 on the ground that there was no show-cause notice given to the
assessee for that period. That, the tribunal had erred in holding that the
assessee was entitled to the show cause notice. That, the tribunal had taken
hyper technical view in setting aside the demand.

H Shri Anoop Chaudhary, learned senior counsel appearing on behalf of
C.C.E. BELGAUM v. AKAYCOSMETICS PVT. LTD. [KAPADIA, J.] 127

the assessee submitted that during the period l/88 to 3/91, M/s Nemaru A
admittedly was a related person to the assessee; that during this period, Ml
s Nemaru was almost the sole buyer of the said product; that as the case came
under proviso (iii) to section 4(1)(a), the factory gate of the assessee had
shifted to the deemed factory gate of Mis Nemaru; that when the price of Ml
s Nemaru was taken as the basis for determination of the assessable value,
the department had erred in disallowing deduction in respect of freight, B
insurance, handling charges from the assessable value. In this connection, it
was further urged that it was not open to the department to adopt the price
of Mis Nemaru as the basis of assessable value and at the same time deny
deduction therefrom on the basis of the clearance of the product from the
factory gate of the assessee. That, in any event, in respect of special packing, C
the assessee was entitled to deduction as the said packing was done by Ml
s Nemaru.after clearance of the product from the factory gate of the assessee
in individual cartons. That, the cost of the special packing was borne by Ml
s Nemaru. That, this special packing was done in the premises of Mis Nemaru.
In the circumstances, learned counsel submitted that the cost of the special
packing was not includible in the assessable value. D
As regards, the bought-out items, it was submitted that the measuring
cups and hand-gloves were accessories and were not essential parts of the
product. A user of the hair-dye could use the product even without the
measuring cup and the hand-gloves and in the circumstances, the cost of E
these bought-out items was also not includible in the assessable value.

Lastly, on behalf of the assessee, it was urged that on 2.l.1991, the
assessee had entered into a new contract with Mis Nemaru; that after 2.1.1991,
the organizational set-ups of both the entities had undergone a change and in
the circumstances, M/s Nemaru had ceased to be a related person under p
section 4(4)(c) of the Act. Learned counsel submitted that on 8.4.1991, the
assessee had submitted its price-list w.e.f. 1.4.1991 on the basis of the new
contract and the new set-up and, therefore, the tribunal was right in remanding
the matter back to the Commissioner (Appeals) for reconsideration of the
demand for differential duty in respect of the period 4/91 to 3/93.
G
The key question to be answered is : how and when the assessable
value of the manufactured product is to be detennined?

To answer the above question, we quote hereinbelow section 4 of the
1944 Act (as it then stood):
H
128 SUPREME COURT REPORTS [2005] 3 S.C.R:

A "4. Valuation of excisable goods/or purposes of charging of duty of
excise. -{I) 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
B 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 s::i!e:

Provided that-
c (i) where, in accordance with the 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 circumstances specified in clause (a),
D be deemed to be the normal price of such goods in relation
to each such class of buyers;

(ii) where such goods are sold by the assessee in the course of
wholesale trade for delivery at the time and place of removal
at a price fixed under any law for the time being in force or
E at a price, being the maximum, fixed under any such law,
then, notwithstanding anything contained in clause (iii) of
this proviso, the price or the maximum price, as the case
may be, so fixed, shall, in relation to the goods so sold, be
deemed to be the normal price thereof;
F (iii) where the assessee so arranges that the goods are generally
not sold by him in the course of wholesale trade except to
or through a related person, the normal price of the goods· ..
sold by the assessee to or through such related person shall
be deemed to be the price at which they are ordinarily sold
G by the related person in the course of wholesale trade at the
time of removal, to dealers (not being related persons) or
where such goods are not sold to such dealers, to dealers
(being related persons) who sell such goods in retail;

(b) where the normal price of such goods is not ascertainable for the
H
C.C.E. BELGAUM v. AKA Y COSMETICS PVT.LTD. [KAPADIA, .I.] 129

reason that such goods are not sold or for any other reason, the A
nearest ascertainable equivalent thereof determined in such
manner as may be prescribed.

(2) Where, in relation to any excisable goods the price thereof for
delivery at the place of removal is not known and the value thereof
is determined with reference to the price for delivery at a place other B
than the place of removal, the cost of transportation from the place
of removal to the place of delivery shall be excluded from such price.

(3) The provisions of this section shall not apply in respect of any
excisable goods for which a tariff value has been fixed under sub-
section (2) of Section 3. C
(4) For the purposes of this section,-

(a) "assessee" means the person who is liable to pay the duty of
excise under this Act and includes his agent;
(b) "place of removal" means D
(i) a factory or any other place or premises of production or
manufacture of the excisable goods; or

(ii) a warehouse or any other place or premises wherein the
excisable goods have been permitted to be deposited without E
payment of duty, from where such goods are removed;

(c) "related person" means a person who is so associated with the
assessee that they have interest, directly or indirectly, in the
business of each other and includes a holding company, a
subsidiary company, a relative and a distributor of the assessee, F
and any sub-distributor of such distributor.

Explanation. In this clause "holding company", "subsidiary
company" and "relative" have the same meanings as in the
Companies Act, 1956 (l of 1956).

(d) "value" in relation to any excisable goods, G
(i) where the goods are delivered at the time of removal in a
packed condition, includes the cost of such packing except
the cost of the packing which is of a durable nature and is
returnable by the buyer to the assessee.
H
130 SUPREME COURT REPORTS [2005] 3 S.C.R.

A Explanation.-ln this sub-clause "packing" means the wrapper,
container, bobbin, pirn, spool, reel or warp beam or any other
thing in which or on which the excisable goods are wrapped,
contained or wound;

(ii) does not include the amount of the duty of excise, sales tax
B and other taxes, if any, payable on such goods and, subject
to such rules as may be made, the trade discount (such
discount not being refundable on any account whatsoever)
allowed in accordance with the normal practice of the
wholesale trade at the time of removal in respect of such
goods sold or contracted for sale;
c
Explanation.-For the purposes of this sub-clause, the amount
of the duty of excise payable on any excisable goods shall be the
sum total of

(a) the effective duty of excise payable on such goods under
D this Act; and

(b) the aggregate of the effective duties of excise payable under
other Central Acts, if any, proviaing for the levy of duties
of excise on such goods,

and the effective duty of excise on such goods under each
E
Act referred to in clause (a) or clause (b) shall be,

(i) in a case where a notification or order providing for any
exemption (not being an exemption for giving credit with
respect to, or reduction of duty of excise under such Act on
F such goods equal to, any duty of excise under such Act, or
the additional duty under Section 3 of the Customs Tariff
Act, 1975 (51 of 1975), already paid on the raw material or
component parts used in the production or manufacture of
such goods) from the duty of excise under such Act is for
the time being in force, the duty of excise computed with
G reference to the rate specified in such Act in respect of such
goods as reduced so as to give full and complete effect to
such exemption; and

(ii) in any other case, the duty of excise computed with
reference to the rate specified in such .Act in respect of such
H
C.C.E. BELGAUM v. AKA Y COSMETICS PVT. LTD. [KAPADIA, .J.] 131

goods. A
(e) "wholesale trade" means sales to dealers, industrial consumers,
Government, local authorities and other buyers, who or which
purchase their requirements otherwise than in retail."

Parliament amended the Central Excise Act, 1944 by Act XXII of B
1973. Clause (a) of section 4(1) spoke of the "value" being the "normal
price", that is to say, the price at which such goods were ordinarily sold to
a buyer in the course of wholesale trade for delivery at the time and place
of removal, where the buyer was not a related person and price was the sole
consideration for the sale. In cases of intermediate products, where the normal
price was not ascertainable for the reason that such goods were not sold or C
for any other reason, like captive consumption, section 4(l)(b) provided that
the nearest ascertainable equivalent shall be the "value" of the excisable
product for the purpose of charging excise duty. Under section 4(4)(b), the
phrase "place of removal" was defined not merely as "the factory or any
other place or premises of production or manufacture" from where such D
goods are removed but it also covered "a warehouse" from where such goods
are removed. However, three circumstances were mentioned in the three
provisos to section 4(l)(a) under which "value" could vary. Proviso (i)
recognized that in the normal practice the same class of goods could be sold
by the assessee at different prices to different classes of buyers; in that event
each such price was deemed to be the "normal price" of such goods in E
relation to such buyers. Proviso (ii) provided that where the goods were sold
in wholesale at a price statutorily fixed then such price was deemed to be the
"normal price". Under the third proviso, where the goods were sold throi.;gh
a "related person" as defined under section 4(4)(c), the normal price was the
price at which the goods were sold by the related person in the course of
wholesale trade at the time of removal to the dealers. F
Under section 4(2), it was provided that where the price of the excisable
product for delivery at the place of removal was not known and the value was
determined with reference to the price for delivery at a place other than the
place of removal, the cost of transportation from the place of removal to the G
place of delivery had to be excluded from such a price. The reason is important.
Section 4(2) is a residuary section and applied only to cases where the price
at the place of removal was not known and the taxable value of the excisable
product had to be determined with reference to the price for delivery (sale)
at a place other than the price of removal. Under section 4(2), the cost of
transportation from the place of removal to the place of delivery was H
132 SUPREME COURT REPORTS [2005] 3 S.C.R.

A deductible, provided that the assessable value (taxable value) was not known
at the factory gate and had to be determined with reference to another place.
If the goods were manufactured at place "X" but the assessable value was
determined with reference to place "Y'', the cost of transportation had to be
deducted. The answer is given in the judgment of this Court in Union of
B India and Ors. v. Bombay Tyre international ltd., reported in AIR (1984) SC
420, paras 50 and 51. Under the Excise Act, price was co-related to the value
and not only to the manufacturing cost. When the assessable value was
detennined with reference to place "Y" in the above illustration, it did not
represent the "normal price" at the factory gate because the price at place
"Y" was higher than the "normal price" on account of transportation cost.
C Hence deduction. The object of such deduction was to bring down the price
at place "Y" to derive the "normal price" at place "X", as the legislature
intended to fix the assessable value on the basis of the price for delivery at
the factory gate. Ultimately, the excisable article became the object of
assessment when it was sold for a priee in the wholesale trade at the factory
D gate.

In the matter of interpretation of tax laws, deductions are admissible in
tenns of the sect.ion 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 exdse duty, sales tax
E and other taxes. Similarly, section 4(4)(d)(i) made an express provision for
including the "cost of packing" in the detennination of"value" for the purposes
of excise duty provided it was for goods ordinarily sold in the course of
wholesale trade.

As stated above, it has been contended on behalf of the assessee that
·F when the basis of the assessable value was the price of the related person,
namely, Mis Nemaru in this case, the department had erred in denying to the
assessee the deduction for expenses incurred by the assessee towards freight,
insurance and handling charges. It was urged that if the price at which Mis
Nemaru effected sales in the course of wholesale trade was the basis for
determination of the assessable value under section 4(l)(a) read with the
G proviso (iii) then the assessee was entitled to deduction for the said three
items, particularly when the goods are delivered from the premi~es of Mis
Nemaru and not from the factory gate of the assessee. It was urged that the
department cannot fix the assessable value on the basis of the price charged
by the related person and at the same time refuse deductions on the basis of
H the pricing at the factory gate of the assessee.
CC.E. BELGAUM v. AKAY COSMETICS PVT. LTD. [KAPADIA. J.] 133

We do not find any merit in the above argument advanced on behalf A
of the assessee. As held by this Court in Union of India and Ors. v. Bombay
Tyre International Ltd., reported in AIR (1984) SC 420, there is a difference
between the nature of :evy and the measure of the levy. The method of
collection does not affect the essence of the duty. While the nature of excise
duty was indicated by the fact that it was imposed in respect of the
manl!facture, the point at which it was collected was when the article left the B
factory gate. Therefore, the article became an object of assessment when it
was sold by the manufacturer.

It has now been recognized that the measure employed for assessing a
tax must not be confused with the nature of tax. The factors such as volume, C
quantity, weight and price which enter into the measure of the tax have nexus
with the manufacturing activity.

Applying the above tests to section 4(1 )(a), it is clear that 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 secti9n 4(4)(d). Hence, D
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(l)(a). The "value" under section 4 depended on price,
place and person. The word "assessment" had to be read in the context of E
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(I)(a), the F
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 G
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 H
134 SUPREME COURT REPORTS (2005) 3 S.C.R.

A 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.

Now coming to the question of deduction, we may point out that for the
B 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. In this connection, we may usefully quote
C paragraph 53 of the judgment of this Court in the case of Bombay Tyre
(supra) in the context of claim for deduction in respect of cost of primary
packing which reads as under:-"

53. The case in respect of the cost of packing is somewhat complex.
The new Section 4(4)(d)(i) has made express provision for including
D the cost of packing in the determination of "value" for the purpose
of excise duty. Inasmuch as the case of the parties is that the new
Section 4 substantially reflects the position obtaining under the
unamended Act, we shall proceed on the basis that the position in
regard to the cost of packing is the same under the Act, both before
and after the amendment of the Act. Section 4(4)(d)(i) reads:
E
(4) For the purposes of this section,

(d) "value" in relation to any excisable goods,

(i) where the goods are delivered at the time of removal
in a packed condition, includes the cost of such packing except
F the cost of the packing which is of a durable nature and is
returnable by the buyer to the assessee.
Exp/anation.~ln this sub-clause "packing" means the
wrapper, container, bobbin, pirn, spool, reel or warp beam or
any other thing in which or on which the excisable goods are
G wrapped, contained or wound."

It is relevant to note that the packing, of which the cost is included,
is the packing in which the goods are wrapped, contained or wound
when the goods are delivered at the· time of removal. In other words,
it is the packing in which it is ordinarily sold in the course of wholesale
H
C.C.E. BELGAUM v. AKAY COSMETICS PVT. LTD. (KAPADIA, J.] 135

trade to the wholesale buyer. The degree of packing in which the A
excisable article is contained will vary from one class of articles to
another. From the particulars detailed before us by the assessees, it is
apparent that the cost of primary packing, that is to say, the packing
in which the article is contained and in which it is made marketable
for the ordinary consumer, for example a tube of toothpaste or a
bottle of tablets in a cardboard carton, or biscuits in a paper wrapper B
or in a tin container, must be regarded as Lllin~ within Section
4(4)(d)(i). That is indeed conceded by learned counsel for the assessee.
It is the cost of secondary packing which has raised serious dispute.
Secondary packing is of different grades. There is the secondary
packing which consists of larger cartons in which a standard number C
of primary cartons (iii the sense mentioned earlier) are packed. The
large cartons may be packed into even larger cartons for facilitating
the easier transport of the goods by the wholesale dealer. Is all the
packing, no matter to what degree, in which the wholesale dealer
takes delivery of the goods to be considered for including the cost
thereof in the "value"? Or does the law require a line to be drawn D
somewhere? We must remember that while packing is necessary to
make the excisable article marketable, the statutory provision calls
for strict construction because the levy is sought to be extended beyon,d
the manufactured article itself. It seems to us that the degree of
secondary packing which is necessary for putting the excisable article E
in the condition in which it is generally sold in the wholesale market
at the factory gate is the degree of packing whose cost can be included
in the "value" of the article for the purpose of the excise levy. To th~t
extent, the cost of secondary packing cannot be deducted from the
wholesale cash price of the excisable article at the factory gate."
F
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 G
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 H
136 SUPREME COURT REPORTS [2005] 3 S.C.R.

A section 4(4)(d)(ii). This was because under the first proviso to section 4(l)(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
B 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
C and place under section 4(4)(d). Therefore, costs beyond that stage was not
includible in the assessable value as it was riot 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
D 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(l)(a) and not under section 4(2) of
the Act.
E
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. ·

Now coming to the question of deduction claimed by the assessee on
F account of payment of octroi and turnover tax, we are in agreement with the
view expressed by the tribunal in the impugned judgment that the expenses
for these items were deductible from the assessable value under section
4(4)(d)(ii).

G In the case of Union of India and Ors. v. Bombay Tyres International
Pvt. Ltd., reported in (1984) 17 ELT 329, this Court has taken the view that
sales tax, turnover tax, surcharge on sales tax and other local taxes are
deductible from the sale price in order to arrive at the assessable· value.

In the case of Commissioner of Customs & Excise, Bangalore v. Mis
H Sujata Textile Mills Ltd. reported in (2005) 181ELT379, this Court [speaking
C.C.E. BELGAUM 1·. AKAY COSMETICS PVT. LTD. [KAPADIA . .1.) 137

through one of us, Variava, J.] has held that under section 4(4)(d)(ii), the A
value will not include duty of excise, sales tax and other local taxes payable
on the goods. However, it was clarified by this Court that in the matter of
deduction, the department while granting deduction can ask for proof indicating
actual payment of tax.

Accordingly, we hold that the assessee was entitled to deduction on B
account of expenses incurred toward.s the octroi and turnover tax, subject to
the assessee's producing requisite proof of actual payment during the entire
period 9188 to 319 l.

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 C
the product in bottles, each containing 6 grams of powder. These bottles in
tum 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 Mis
Nemaru. After taking delivery, Mis 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 Mis Nemaru was a "related person" or not
became insignificant and consequently, the cost of special packing was .not
includible in the assessable value. [See: Hindustan Polymers v. Collector of
Central Excise, reported in (1989) 43 EL T 165]. l

In the case of Commissioner of Central Excise, Allahabad etc. v. Mis
Hindustan Safety Glass Works ltd. etc. reported in (2005) 2 Scale 246, this
Court [speaking through one of us, Variava, J.], observed:

"14. The question is not for what purpose the packing is done. The B
test is whether the packing is done in order to put the goods in a
marketable condition. Another way of testing would be to see whether
the goods are capable of reaching the market without the type of
packing concerned. Each case would have to be decided on its own
facts. It must also be remembered that Section 4(4)(d)(i) specifies (
that the cost of packing is includible when the packing is not of a
durable nature and returnable to the buyer. Thus, the burden to show
that the costs of packing is not includible is always on the assessee.
Also under Section 4(a) the value is to be the normal price at which
such goods are ordinarily sold in the course of wholesale trade for
11
138 SUPREME COURT REPORTS [2005) 3 S.C.R.

A delivery at time and place of removal. Thus, at this stage, it would be
convenient to refer to the case of A.K. Roy and Anr. v. Valtas Limited
reported in (1977) l EL T J 177 wherein the concept of wholesale
market has been explained in the following terms:-

8. We do not think that for a wholesale market to exist, it is
B necessary that there should be a market in the physical sense of
the term where articles of a like kind or quality are or could be
sold or that the articles should be sold to so-called independent
buyers.
9. Even if it is assumed that the latter part of s. 4(a) proceeds on
c the assumption that the former part will apply only if there is a
wholesale market at the place of manufacture for articles of a
like kind and quality, the question is what exactly is the concept
of wholesale market in the context. A wholesale market does not
always mean that there should be an actual place where articles
are sold and bought on a wholesale basis. These words can also
D mean that potentiality of the articles being sold on a wholesale
basis. So, even if there was no market in the physical sense of
the term at or near the place of manufacture where the articles
of a like kind and quality are or could be sold, that would in any
way affect the existence of market in the proper sense of the
E term provided the articles themselves could be sold wholesale to
traders, even though the articles are sold to them on the basis of
agreements which confer certain commercial advantages upon
them. In other words, the sales to the wholesale dealers did not
cease to be wholesale sales merely because the wholesale dealers
had entered into agreement with the respondent under which
F certain commercial benefits were conferred upon them is
consideration of their undertaking to do service to the articles
sold, or because of the fact that no other person could purchase
the articles wholesale from the respondent. We also think that
the application of clause (a) of s. 4 of the Act does not depend
G upon any hypothesis to the effect that at the time and place of
sale, any further articles of like kind and quality have been sold.
If there is an actual price for the goods themselves at the time
and the place of sale and if that is a "wholesale cash price", the
clause is not inapplicable for want of sale of other goods of a
like kind and quality."
H
C.C.E. BELGAUM 1·: AKA Y COSMETICS PVT. LTD. [KAPADIA. J ] J39

Consequently, the department is directed to allow deduction from the A
assessable value in respect of special packing for the period 9/88 to 3/91.

Lastly, as regards bought-out items, namely, hand-gloves and plastic
measuring cups, we find no infirmity in the impugned judgment. ln this
connection, we reiterate that initially the assessee used to supply plastic
measuring cups and hand-gloves with the product for use of the product by B
---· the user. Subsequently, the supply of hand-gloves stood discontinued. Applying
the test of essentiality, we find that the hand-gloves and measuring cups were
not essential for delivery of the product in question in wholesale at the
factory gate of the assessee. As held by the tribunal in its impugned judgment
herein, hand-gloves were used as protective cover by the users. That, the said C
product was capable of being used without the hand-gloves. That, the
measuring cup was not essential for the simple reason that the liquid was
capable of being applied without the measuring cup. In the circumstances
found by the tribunal on evidence, we hold that the cost of the said bought-
out items was not includible in the assessable value during the period 9/88
to 3/91. However, we need to clarify, that, although in principle the deduction D
for these two items was admissible, on the facts of this case, the assessee was
required to produce evidence indicating the price at which the assessee had
bought these items during the entire period 9/88 to 3/91. The assessee was
also required to prove the supply of these items with the product. Accordingly,
we remit the matter to the Commissioner (Appeals) to decide the quantification E
of deduction in respect of these two items for the above period.

Lastly, we find that the demand for differential duty for the period
l.1.1988 to 31.8.1988 without issue of show-cause notice under section I I-
A, was unsustainable.
F
In the case of Union of India and Ors. v. Madhumilan Syntex Pvt. Ltd.,
reported in (1988) 35 ELT 349, this Court held that the demand raised without
notice was invalid. That, section I I -A clearly proceeded to say that prior
show-cause notice must be issued to the person against whom any demand
on grounds of short-levy or non-levy was proposed and, therefore, post-facto
show-cause notice cannot be regarded as adequate in law. G
Applying the said judgment to the facts of the present case, we hold
that the demand for differential duty for the period 1/88 to 8/88 without issue
of show-cause notice under section I IA was unsustainable. Absence of show-
cause notice was not disputed. In the circumstances, the tribunal was right in
setting aside the demand for differential duty amounting to Rs. 1,59,606.22 H
140 SUPREME COURT REPORTS. [2005] 3 S.C.R.

A for the said period. Consequently, demand made for the said period under
any of the seven items is set aside.

To sum up, we hold, that, deduction for expenses incurred on account
of special packing, turnover tax, octroi and bought-out items was admissible
for the period 9/88 to 3/91, subject to the assessee submitting proof of incurring
B actual expenses in respect of the above items before the Commissioner
(Appeals). That, the department was right in disallowing deduction for
expenses on account of freight, insurance and handling charges for the period
9/88 to 3/91.

We also do not see any reason to interfere with the impugned order
C of the tribunal remanding the matter to the Commissioner (Appeals) to decide
afresh the question of "related person" during the period 4/91 to 3/93, in
view of the changed circumstances indicated h.ereinabove.

Accordingly, the appeals filed by the .department are partly allowed,
D with no order as to costs.

K.K.T. Appeal dismissed.