Holding

The assessable value of processed goods is the ordinary wholesale price unless the sale is to or through a related person, in which case the Ujagar Prints III formula does not apply and valuation must follow the arms‑length principle.

Summary

The Commissioner of Central Excise challenged the valuation method used by Mis. S. Kumars Ltd. for processed grey fabric. The respondent sometimes processed fabric on its own account and sometimes on a job‑work basis for "merchant manufacturers". For 1‑Sept‑1985 to 28‑Feb‑1989 it valued the processed goods at the wholesale price at which the merchant manufacturer sold them, but from 1‑Mar‑1989 onward it valued the goods received from merchant manufacturers on a cost‑plus‑profit basis, relying on the ratio in Mis. Ujagar Prints III. The Commissioner issued a show‑cause notice under Section 11A of the Central Excise Act, alleging a differential duty and that the parties were related persons. The Tribunal allowed the respondent and remanded for recomputation, without examining the related‑person issue. The Supreme Court held that the assessable value is normally the ordinary wholesale price unless the sale is to or through a related person; if related, the Ujagar Prints III formula does not apply and valuation must follow the arms‑length principle as affirmed in Empire Industries. Consequently, the Court allowed the appeals, remanded the matter to the Tribunal to determine the existence of a related‑person relationship and, if so, to consider discounts and recompute duty.

Issues considered

The applicability of the principles laid down in Mis. Ujagar Prints III to the valuation of processed grey fabric.
Whether the transaction between the respondent and the merchant manufacturers is between related persons under Section 4(4)(c) of the Central Excise Act.
Whether Rule 6(b) of the Central Excise (Valuation) Rules, 1975 applies to the present case.
Whether the assessable value should be the ordinary wholesale price or the cost‑plus‑profit method advocated by the respondent.
The correctness of the Tribunal’s omission to consider the related‑person aspect and the claim for discounts/deductions.

Legislation cited

Central Excise Act, 1944s. 11A, s. 4(1)(a), s. 4(1)(b), s. 4(4)(c)
Central Excise (Valuation) Rules, 1975s. Rule 3, s. Rule 4, s. Rule 5, s. Rule 6(b), s. Rule 7

Subjects

central excisevaluationassessable valuerelated personwholesale priceMis. Ujagar PrintsEmpire IndustriesSection 4Rule 6(b)discountexcise dutyprocessormerchant manufacturer

Judgment

A COMMISSIONER OF CENTRAL EXCISE, INDORE
V.

MIS. S. KUMARS LTD. AND ORS.

NOVEMBER 21, .2005

B [RUMA PAL AND H.K. SEMA, JJ.]

Central Excise (Valuation) Rules, 1975: Rules 3,· 4, .5 and 7.

Processed goods-Assessable value of~Assessee processed grey fabric-
C Sometimes the grey fabrics were processed on its own account and sometimes
·the grey fabrics were re<;:eived for processing on job charge basis from
"merchant manufacturers'"--For the period 01.9.1985 to 28.2.1989, the
assessee had paid excise duty on the fabrics processed by it during this period,
calculating the duty payable by treating the value of the processed febrics as
D being that at which the "merchant manufacturer" was selling the.processed
goods-With effect from 0I.3.1989, the same method was followed in respec~
of the fabrics processed by the gssessee on its own account-However, on the
fabrics processed by it which had been received from the ''merchant
manufacturers'', the assessee valued the processed goods on the basis of the
cost of grey fabrics plus the processing charges as well as its manufacturing
E expenses and profits-The price at which the ''merchant manufacturer'' was
selling the processed goods was not taken into account-Etcise authorities
issued show cause notice proposing to recover differential duty of excise from
the assessee-Excise authorities claimed to treat the price charged by the
assessee from the independent dealers as the assessable value of the processed
F fabrics and to levy excise duty thereon-The Tribunal allowed the appeal filed
by the ·assessee-However, the Tribunal did not go into the question whether
the assessee were related persons as alleged in the show cause n/Jtice-
Correctness of-Held: The assessable value ofmanufactured goods is normally
the ordinary wholesale price-However, this principle is subject to certain
exceptions among them being the qualifica,tion that the sale is not tu or through
G a related person as defined in S. 4(4)(c)~fJthe transaction is between related
persons, the profit would not be ''normally earned'' within the meaning of R.
6(b)(ii)-Hence, matter remitted to the Tribunal to determine whether the
assessee and the ''merchant manufacturers'' were related persons and whether
the assessee would be entitled to claim discounts or could claim the

H 370
COMMR. OF CENTRAL EXCISE v. S. KUMARS LTD. 371
advertisement expenses incurred by the dealers-Central Excise Act, 1944. A
r Respondent No.:1-assessee processed grey fabric. Sometimes the grey
fabrics were processed on its own account and sometimes the grey fabrics
were received for processing on job charge basis from "merchant
manufacturers". For the period from 01.9.1985 to 28.2.1989, the a~sessee
had paid excise duty on the fabrics processed by it during this period, B
calculating the duty payable by treating the value of the processed fabrics
as being that at which the "merchant manufacturer" was selling the
processed goods. With effect from 01.3.1989, the same method was
followed in respect of the fabrics processed by the assessee on its own
account. However, on the fabrics processed by it which had hen received
from the "merchant manufacturers", the assessee valued the processed
c
goods on the basis of the cost of grey fabrics plus the processing charges
as well as its manufacturing expenses and profits. The price at which the
"merchant manufacturer" was selling the processed goods was not taken
into account. The appellant issued a show cause notice proposing to recover
differential duty of excise from the assessee under the proviso to Section D
llA of the Central Excise Act, 1944. The appellant claimed to treat the
price charged by the assessee from the independent dealers as the
assessable value of the processed fabrics and to levy excise duty thereon.
The Customs, Excise and Gold (Control) Appellate Tribunal allowed the
appeal filed by the assessee on the ground that the assessee had rightly
invoked the principles of Mis. Ujagar Prints III. However, the Tribunal did
E
not go into. the question whether the assessee and th.e "merchant
manufacturers" were related persons as alleged in the show cause notice.
Hence the appeal.

The following question arose before the Court:- F
• Whether the principles laid down in Mis. Ujagar Prints III apply to
the respondent-assessee's case?

Disposing the appeal, the Court

HELD: 1. The demand for excise duty raised by the appellant against
G
the respondent's covers the period 1985 to 1989. The period in question
may conveniently be considered in two parts, namely, (l) 01.09.1985 to
28.02.1989 and (2) 01.03.1989 to 30.09.1989. The reason for the division
of the period in two parts is the law which this Court has laid down in
Mis. Ujagar Prints Ill. {376-A) H

-'
372 SUPREME COURT REPORTS (2005) SUPP. 5 S.C.R.
..
A Mis. Ujagar Prints v. Union of India, (1989) 3 SCC 531, referred to.

2. The basic principle relating to the assessable value of
manufactured goods is normally the ordinary wholesale price. That is the
principle underlying Section 4(1)(a) of the Central Excise Act, 1944, which
principle may also be made applicable to Section 4(1)(b) read with Rules
B 3, 5 and 7 of the Central Excise (Valuation) Rules, 1975. The principle is
subject to certain exceptions among them being the qualification that the
sale is not to or'through a related person as defined in Section 4(4)(c) of
the Act. (379-A-BJ

c assessee3. Rule 6(b) deals with excisable goods which are not sold by the
but "are used" or "consumed" by him or on his behalf in the
production or manufacture of "other" articles. In such case, the value of
the excisable goods is to be based either (i) on the value of the comparable
goods produced or manufactured by the assessee or by any other assess,
or if that is not possible under (ii) on the cost of production or
D manufacture, including profits, if any, which the assessee would have
normally earned on the sale of such goods. (382-G-HJ

Empire Industries ltd. v. Union ofIndia, (1985) 3 SCC 314, Mis. Ujagar
Prints v. Union of India, (1989] 3 SCC 488, Mis. Ujagar Prints v. Union of
India, (1989] 3 SCC 533 and Pawan Biscuits Company Private Ltd v. CCE,
E (2000) 120 ELT 24, referred to.
4. It is not possible to accept the contention that if Section 4(1)(b) is
invoked Rules 4 and 5 do not apply. Rule 3 does not make any distinction
between the Rules which may be invoked even when Section 4(1}(b) is
invoked. If none of the Rules i.e. 4, 5 or 6 in terms apply, then Rule 7
F would. In other words, the sale which is referred to in Rules 4, 5 and 6
may in the circumstances reflect a notional sale and provide a guidelines •
for applying analogous principles mutatis mutandis under Rule 7.
(383-A-B)
5. Rule 6(b) relied on by the respondent <loes not in terms apply. Rule
G 6(b)(ii) envisages a situation where a manufacturer consumes the
manufactured commodity himself for making other excisable articles. But
assuming it does in terms apply it is notworthy that Rule 6(b)(ii) speaks
of the excisable value being the cost of manufacture including the profits
"normally" earned. Thus, it would still be open to the Revenue to say
H that the cost of grey fabrics as well as the processed charges were
COMMR. OF CENTRAL EXCISE v. S. KUMARS LTD. 373
depressed because the parties were related persons. Indeed, the underlying A
principle of all the Rules as well as Section 4 is that different considerations
would apply if the transactions concerned are not at arms length. Neither
Section 4(l)(b) nor Rule 6(b)(ii) has done away with the concept of "related
person". (383-8-D]

6. It is not possible to accept the contention that Ujagar Prints /lI B
would apply even to a processor who is not i~dependent and, as is alleged
in this case, the merchant manufacturers arid the purchasing traders are
merely extensions of the processor. In the latter case, the processor is not
a mere processor but also a merchant manufacturing who purchases/
manufactures the raw material, processed it and sells it himself in the
wholesale market. In such a situation the profit is not of a processor but C
of a merchant manufacturer and a trader. If the transaction is between
related persons, the profit would not be "normally earned" within the
meaning of Rule 6(b)(ii). If it is established that the dealings were with
related persons of the manufacturer the sale of the processed fabrics would
not be limited to the formula prescribed by Ujagar Prints /lI but would be D
subject to excise duty under the principles enunciated in Empire Industries
as affirmed in Ujagar Prints /ll, incorporating the arms length principle.
(383-E-G]

Empire Industries Ltd. v. Union of India, (1985] 3 SCC 314, Mis. Ujagar
Prints v. Union of India, (1989) 3 SCC 488 and Mis. Ujagar Prints v. Union E
of India, (1989) 3 SCC 533, referred to.

7. As the question whether the respondent No. 1 would be entitled
to discounts and deductions claimed would only arise if it is held that the
ratio of Mis. Ujagar Prints Ill would not apply; the Tribunal did not address
this aspect of the matter at all nor did it consider whether the merchant- F
manufacturers and the respondent No. 1 were related persons. Since the
Tribunal wrongly upheld the respondent's contention that the formula in
Mis. Ujagar Prints lll would apply in full measure, it is now necessary for
the Tribunal to consider whether the respondents were related persons
and whether the respondent No. 1 would be entitled to claim discounts or G
could exclude the advertisement expenses incurred by the dealers.
(384-A-B]

Mis. Ujagar Prints v. Union ofindia, (1989) 3 SCC 533, referred to.

CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 4172-4 l&S
of 2000. H
374 SUPREME COURT REPORTS (2005] SUPP. 5 S.C.R.

A From the Judgment and Order dated 4.1.2000 of the Customs, Excise
and Gold (Control) App~llate Tribunal, New Delhi in F.O. Nos. 1660 to
1673/99-A in A. Nos. E/2514, 2624, 2675, 2676, 2677, 2685, 2686, 2687,
2688, 2689, 2721, 2722, 2852 and 2979 of 1998-A.

WITH
·B
C.A. Nos. 775-781 of 2004.

Raj iv Dutta, Shailendra Sharma, Raghunath Kapoor, Ms. Shalini Sharma,
S. Beno Bencigar, P. Parmeswaran, V. Lakshmikumaran, Alok Yadav, M.P.
Devanath, V. Balacharidran, P.H. Parekh and Ms. Shakun Sharma for the y

C appearing parties.

The Judgment of the Court was delivered by

RUMA PAL, J. The respondent No. l processes grey fabric.
Sometimes the grey fabrics are processed on its own account and sometimes
D the grey fabrics are received for processing on job charge basis from others
(who are referred to as 'the merchant manufacturers). For the period
01.09.1985 to 28.02.1989, the respondent No. 1 had paid excise duty on the
fabrics processed by it during this period, calculating the duty payable by
treating the value of the processed fabrics as being that at which the merchant
E manufacturer was selling the processed goods. According to the respondents,
this was in keeping with the decision of this Court in Empire Industries Ltd.
v: Union of India and Ors., [1985] 3 SCC 314 (briefly referred to as Empire
Industries). With ~ffect from 01.03.1989, the same method was followed in
respect of the fabrics processed by the respondent No. l on its own account.
However, on the fabrics processed by it which had been received from the
F merchant manufacturers, the respondent No. 1 valued the processed goods on
the basis of the cost of grey fabrics plus the processing charges as well as its
manufacturing expenses and profits. In other words, the price at which the
merchant manufacturer was selling the processed goods was not taken. This
was done relying upon the decision of this Court in Mis. Ujagar Prints and
G Ors. v. Union of India, [ 1989] 3 SCC 488 (briefly referred to as Mis. Ujagar
Prints JI) as explained in Mis Ujagar Prints and Ors. v. Union of India and
Ors., [ 1989] 3 SCC 531 (briefly referred to as Mis. Ujagar Prints III).

On 5th October 1990, a show cause notice was issued by the appellant
to the respondent proposing to recover differential duty of excise amounting
H to Rs.4,84,62,452/- from the respondent No. 1 within the extended time limit
COMMR.OFCENTRALEXCISEv. S.KUMARSLTD.[RUMAPAL, J.] 375

• under the proviso of Section I 1A of the Central Excise Act, I 944 (hereinafter A
referred to as 'the Act') and proposing to impose penalty against the
. respondents. The basis of the demand against the respondents was that they
were all firms and companies having a common management and control
with some of them selling grey fabric to the respondent No. I which, after
processing the fabrics, sold the same to some of the other respondents. The
latter ultimately sold the processed fabrics to independent dealers. All the B
respondents were described as 'S. Kumars' and the appellants claimed to
treat the price charged by the trader respondents from the independent dealers
as the assessable value of the processed fabrics and to levy excise duty
thereon. The respondents replied to the show cause notice. They denied that
the respondents were related persons and disputed the basis for the additional c
claim of excise duty. It was submitted that by virtue of this Court's decision
in Mis. Ujagar Prints III they were liable to treat the notional sale by the
respondent No. I to the merchant manufacturers as the relevant poiQt for
determining the assessable value. The claim of the respondent No. I was that
prior to the decision in Mis. Ujagar Prints III it had paid the excise duty by
taking the assessable value of the processed fabric at the wholesale price at D
the time the goods reached the open market. This was followed till the decision
of this Court in Ujagar Prints III. It was submitted that in any event the
respondent No. I was not only entitled to discounts in respect of the excise .........
duty levied for the period 01.09.I985 to 28.02.I989 but there were gross
inaccuracies in the computations made by the appellant. The Commissioner E
of Central Excise, held that the respondents were related persons and upheld
the demand for duty to the extent ofRs.3,82,4I,53 for the period Ol.09.I985
to 30.09.1989 from the respondent No. 1. The claim for discounts was also
rejected.

The respondents appealed before the Customs, Excise and Gold (Control) F
Appellate Tribunal (hereinafter referred to as the 'Tribunal'). The Tribunal
held that the respondents had rightly invoked the principles of Mis. Ujagar
Prints III. In doing so, it did not go into th.~ question whether the respondents
were related persons as alleged in the show cause notice. The Tribunal therefore
allowed the respondents' appeal and: remanded the matter back to the
Commissioner in order to re-compute the duty payable.
G

Being aggrieved, the appellant has preferred these appeals. By this
judgment, we propose to dispose of these appeals as well as other appeals
preferred by the appellant from orders of the Tribunal in which the Tribunal
has merely followed the decision in the case of the respondents.
H
376 SUPREME COURT REPORTS [2005] SUPP. S S.C.R. ..

A The demand for excise duty raised by the appellant against the
respondent's covers the period 1985 to 1989. The period in question may
conveniently be considered in two parts, namely, (I) 01.09.1985 to 28.02.89
and (2) 01.03.1989 to 30.09 . 1989. The reason for the division of the period
in two parts is the law which this Court has laid down in Mis. Ujagar Prints
B III. The first question, therefore, is what did this Court decide in that decision?
Having determined that, the next question would be whether the principles so
laid down apply to the respondents' case.

But before we determine these questions we would have to consider the
law in the background of which the decision in. Mis. Ujagar Prints Ill was
C rendered.

The principles of valuation for the purposes of charging excise duty are
contained in Section 4 of the Act. Section 4 in so far as it is relevant,
provides:-

D "(l) Where under this Act, the duty of excise is chargeable on any
excisable goods with reference to value, such value shall, subject to
the other provisions of this section, be deemed to be-

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

Provided that-

(iii) where the assessee so arranges that the goods are generally not
F 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 ~e the price at
which they are ordinarily sold by the related person in the course of
wholesale trade at the -time of removal, to dealers (not being related
G persons) or where sucW'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
reason that such goods are not sold or for any other reason, the
nearest ascertainable equivalent thereof determined in such
H manner as may be prescribed.
COMMR. OF CENTRAL EXCISEv. S. KUMARSLTD. [RUMA PAL, J.] 377

(2) xxx xxx xxx xxx xxx A
(3) xxx xxx xxx xxx xxx ,
(4) (a) xxx xxx xxx xxx xxx

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

Section 4(1 )(a) deals with cases where the assessee sells the C
manufactured goods to a buyer, whereas Section 4( 1)(b) deals with cases
other than sale. Chapter II of the Central Excise (Valuation) Rules, 1975
(referred to hereafter the Rules), provides for the determination of the value
of any excisable goods for the purposes of Section 4 (l)(b) of the Act. We
may note at the outset that Rule 3 provides for the applicability of all the D
valuation rules when it says 'the value of any excisable goods shall, for the
purposes of clause (b) of sub-section (1) of Section 4 of the Act, be determined
by the proper officer in accordance with these rules'. No distinction is made
between the applicability of the succeeding rules save that they are to be
considered for application in numerical order. Rule 4 deals with-the
determination of the value of excisable goods on the basis of sale by the E
assessee at any other time nearest to the time of the removal of the goods
being assessed. Rule 5 deals with a situation when the excisable goods are
sold in circumstances specified in Section 4(l)(a) of the Act. If the price is
not the sole consideration, the value of the excisable goods is required to be
based on the aggregate of the price and "the amount of the money value of F
any additional consideration flowing directly or indirectly from the buyer to
the assessee". If the value of the excisable goods cannot be determined under
Rules 4 or 5 then the procedure prescribed under Rule 6 would have to be
followed viz.

"(a) where such goods are sold by the assessee in retail, the value G
shall be based on the retail price of such goods reduced by such
amount as is necessary and reasonable in the opinion of the proper
officer to arrive at the price at which the assessee would have sold
such goods in the course of wholesale trade to a person other than a
related person;
H
378 SUPREME COURT REPORTS [2005) SUPP. 5 S.C.R.

A Provided that in determining the amount of reduction, due regard
shall be had to the nature of excisable goods, the trade practice in that
commodity and other relevant factors.

(b) where the excisable goods are not sold by the assessee but are
used or consumed by him or on his behalf in the production or
B manufacture of other articles, the value shall be based-

(i) on the value of the comparable goods produced or manufactured
by the assessee or by any other assessee:

Provided that in determining the value under this sub-clause, the
C proper officer shall make such adjustments as appear to him reasonable,
taking into consideration all relevant factors and, in particular, the
difference, if any, in the material characteristics of the goods to be
assessed and of the comparable goods;

(ii) if the value cannot be determined under sub-clause (i), on the cost
D of production or manufacture including profits, if any, which the
assessee would have normally earned on the sale of such goods;

(c) where the assessee so arranges that the excisable goods are
generally not sold by him in the course of wholesale trade except to
or through a related person and the value cannot be determined under
E '·· clause (iii) of the proviso to clause (a) of sub-section (1) of Section
4 of the Act, the value of the goods so sold shall be determined-

(i) in a case where the assessee sells the goods to a related person
who sells such goods in retail, in the manner specified in clause (a)
. of this rule; . .
F
(ii) in a case where a related person does not sell the goods but uses
or consumes such goods in the production or manufacture of other
articles, in the manner specified in clau~e (b) of this rule:

(iii) in a case where a related person sells the goods in the course of
wholesale trade to buyers, other than dealers and related persons, and
G
the class to which such buyers belong is known at the time of removal,
on the basis of the price at which the goods are ordinarily sold by the
related person to such class of buyers". (Emphasis supplied)

Rule 7 is the residuary section in the St'?nse that if the value of excisable
H goods can~ot be determined under Rules 4 to 6, the proper officer is required
COMMR. OF CENTRAL EXCISE v. S. KUMARS LTD. [RUMA PAL, J.) 379

to determine the value of the excisable goods according to the best of his A
judgment, and for this purpose, he "may have regard, among other .things, to
• any one or more of the methods provided for in the foregoing rules".

Thus the basic principle relating to the assessable value of manufactured
goods is normally the ordinary wholesale price. That is the principle underlying
Section 4(l)(a), which principle may also be made applicable to Section B
4(l)(b) read with rules 3, 5 and 7 of the Valuation Rules. The principle is
subject to certain exceptions among them being the qualification that the sale
is not to or through a related person as defined in Section 4 (4) (c ) of the
Act.

In Ujagar Prints II, the Constitution Bench was required to consider C
the correctness of the view taken by three Judges of this Court in Empire
Industries. In Empire Industries, this Court had primarily held that the Central
Excise & Salt and Additional Duties on Excise (Amendment) Act, 1980 by
which the processes of bleaching, dyeing and printing were brought within
the definition of "manufacture" for the purposes of the Central Excise and D ,
Salt Act, 1944 and the Addition Duties of Excise (Goods of Special
Importance) Act, 1957, was constitutionally competent. While upholding the
validity of the Amendment Act this Court had stated:-

"When the textile fabrics are subjected to the processes like bleaching,
dyeing and printing etc. by independent processes, (sic) (processors) E
whether on their own account or on job charge basis, the value for
the purposes of assessment under Section 4 of the Central Excise Act
will not be the processing charges alone but the intrinsic value of the
processed fabrics which is the price at which such fabrics are sold
for the first time in the wholesale market".(pg.342) (Emphasis F
supplied)

In other words the basic principle enumerated in Section 4(1) (a) of the
Act was applied to processed goods. The respondents had applied this principle
and paid excise duty for the first period taking the price at which the processed
goods were first sold in the open market as the assessable value. G
Mis. Ujagar Prints II affinned the decision in Empire Industries in all
respects including the passage quoted earlier. The submission of the
independent processors that the assessable value of the processed fabric could
comprise only of the processing charges was rejected in the following words:-
H
380 SUPREME COURT REPORTS [2005] SUPP. 5 S.C.R.

A "The incidence of the levy should be uniform, uninfluenced by
fortuitous considerations. The method of determination of the
assessable value. suggested by the processors would lead tO' the
untenable position that while in one class of grey fabric processed by
the same processor on bailment, the assessable value would have to
be determined differently dependent upon the consideration that the
B processing house had· carried out of processing operations on job
work basis, in the other class of cases, as it not unoften happens, the
goods would have to be valued differently only for the reason the
same processing house has itself purchased the grey fabric and carried
out the processing operations on its own". (pg.520)
c Therefore, the assessable value of the processed goods, as far as that
processor was concerned, would have to be the same irrespective of the fact
that it either manufactures the goods and then process it itself or is given the
goods and merely undertakes the processing before returning the same to the
manufacturer/owner. That common norm was the wholesale price.
D
This was made abundantly clear by Justice Mukharji, J. (as he then
was). He delivered a separate but concurring judgment and was the author of
the judgment in Empire Industries. He said:-

"If the trader, who entrusted cotton or manmade fabrics to the
E processor for processing on job work basis, would give a declaration
to the processor as to what would be the price at which he would be
selling the processed goods in the market that would be taken by the
excise authorities as the assessable value of the processed fabrics and
excise duty would be charged to the processor on that basis. Where
a manufacturer sells the goods manufactured by him in wholesale to
F a wholesale dealer at the arms length and in the usual course of
business, the wholesale cash price charged by him to the whole sale
dealer less trade discount would represent the value of the goods for
the purpose of assessment of excise. But the price received by the
wholesale dealer who purchases the goods from the manufacturer and
G in his tum sells the same in wholesale to other dealer, would be
irrelevant for determination of the value of the goods and the goods
would not be charged on that basis" .

... .It has to be reiterated that the valuation must be on the basis of
wholesale cash price at the time when the manufactured goods enter
H into the open market". (Emphasis supplied).
COMMR. OF CENTRAL EXCISE v. S. KUMARS LTD. [RUMA PAL, J.] 381

This was therefore, in terms, an unconditional approval of the ratio in A
Empire Industries. However on an application filed for clarification of the
judgment in Mis. Ujagar Prints II, this Court in a short order in Mis. Ujagar
Prints Ill clarified:-

" ... .it is made clear that the assessable value of the processed fabric
would be the value of the grey cloth in the hands of the processor B
plus the value of the job work done plus manufacturing profit and
manufacturing expenses whatever these may be, which will either be
included in the price at the factory gate or deemed to be the price at
the factory gate as if the processed fabric was sold by the processor".
(pg. 531) c
,'
This clarification, in fact, was a deviation from the formula approved
in Empire Industries. In other words, it was not the wholesale price at the
· merchant manufacturers stage which would be the assessable value of the
processed goods, but the value of the processed fabrics on the basis of a
deemed sale at the factory gate of the processor. The Court went on to say:- D'
"If the trader, who entrusts cotton or manmade fabric to the processor
for processing on job work basis, would give a declaration to the
processor as to what would be the price at which he would be selling
the processed goods in the market, that would be taken by the excise
authorities as the assessable value of the processed fabric and excise E
duty would be charged to the processor on that basis provided that
the declaration as to the price at which. he would be selling the
processed goods in the market, would include only the price or deemed
price at which the processed fabric would leave the processor's factory•
plus his profit".
F
.. .It is necessmy to include the processor's expenses, costs and charges
plus profit, but it is not necessary to include the trader's profits who
gets the fabrics processed, because those would be post-manufacturing
profits". (Emphasis supplied)

The actual wholesale price was jettisoned in favour of a deemed sale G
price by the processor to the merchant manufacturer.

The decision in Mis. Ujagar Prints Ill was construed and followed
subsequently by this Court in Pawan Biscuits Co"inpany Private Limited v.
Collector of Central Excise, (2000) 120 EL T 24; [2000] 6 SCC 489 (briefly
referred to as Pawan Biscuits). In that case, it was alleged that the assessee H
382 SUPREME COURT REPO!HS (2005) SUPP. 5 S.C.R.

A was really an agent of Mis. Britannia Industries limited and, therefore the
price at which Mis. Britannia Industries limited was selling the manufactured
goods in the wholesale market was to be taken as the assessable value. The
Tribunal's decision was reversed by this Court. It was found that the agreement
between the parties indicated that the relationship was one of principal to
B principal ·and not principal and agent and also that the assessee could
manufacture biscuits of other brands and sell the same. It was observed that
the assessee had been established much prior to its agreement with Britannia
Industries Limited. In the circumstances it was held that the decision in
Mis. Ujagar Prints II and others could not be factually distinguished. The
Court proceeded on the basis that the last three lines of the explanatory order
C in Mis. Ujagar Prints Ill (which we have quoted earlier) contained the ratio
of the decision of both Mis. Ujagar Prints II and Ill.

In Mis. Ujagar Prints II and III, the assessees were independent
processors and the Court proceeded on that factual basis. The appellant's
contention therefore is that as the processor (the respondent No. I in this case)
D is not independent of the merchant manufacturer or trader, the ratio of Mis.
Ujagar Prints III would not apply. In Pawan Biscuits although no conclusion
· from the facts has been recorded, it is clear that it was the facts which
induced the Court to come to the conclusion that the relationship between t~e
assessee and Mis. Britannia Industries Limited was that of an independent
E processor and a merchant manufacturer and that Mis. Ujagar Prints II and Ill
were factually on all fours. The decision therefore does not take us nearer to
a solution of the dispute raised by the appellant.

The contention of the respondents is that neither the show cause notice
nor the Commissioner in his order proceeded on the basis that Section 4( I)
F (a) of the Act applied but that they had applied Section 4(1) (b) and the
Valuation Rules. It is their submission that the concept of deemed sale at the
processors factory introduced by Mis. Ujagar Prints Ill, does not strictly fall
within Valuation Rules 4 or 5. They urged, and the Tribunals view was, that
Mis. Ujagar Prints Ill applied the procedure prescribed in Rule 6(b)(ii). As
we have seen Rule 6(b) deals with excisable goods which are not sold by
G assessee but "are used" or "consumed" by him or on his behalf in the
production or manufacture of "other" articles. In such case, the value of the
excisable goods is to be based either (i) on the value of the comparable goods
produced or manufactured by the assessee or by any other assessee, or if that
is not possible under (ii) on the cost of production or manufacture, including
H profits, if any, which the assessee would have normally earned on the sale of
--:OMMR. OF CENTRAL EXCISE v. S. KUMAR8 LTD. [RUMA PAL, J.] 383

such goods. A
·, We do not.agree that if Section 4(1)(b) is invoked Rules 4 and 5 do not
apply. We have already held that Rule 3 does not make any distinction
between the rules which may be invoked even when Section 4 (I) (b) is
invoked. If none of the rules i.e. 4, 5 or 6, in terms apply, then Rule 7 would.
In other words, the sale which is referred to in Rules 4, 5 and 6. may in the B
circumstances reflect a notional sale and provide a guideline for applying ·'
analogous principles mutatis mutandis under Rule 7. Rule 6(b) relied on by
the respondent does not in terms apply. As we have noted, Rule 6(b)(ii)
envisages a situation where a manufacturer consumes the manufactured
r
commodity himself for making other excisable articles. But assuming it does C

•
Ill
in terms apply it is noteworthy that Rule 6(b)(ii) speaks of the excisable
value being the cost of manufacture including the profits "normally" earned.
Thus, it would still be open to the Revenue to say that the cost of grey fabrics
as well as the processed charges were depressed because the parties were
related persons. Indeed, the underlying principle of all the Rules as well as
Section 4 is that different considerations would apply if the transactions D'
concerned are not at arms length. Neither section 4(1) (b) nor Rule 6(b)(ii)
have done away with the concept of "related person".

We therefore do not agree that Ujagar Prints III would apply even to
a processor who is not independent and, as is alleged in this case, the merchant E
manufacturers and the purchasing traders are merely extensions of the
processor. In the latter case, the processor is not a mere processor but also
a merchant manufacturer who purchases/manufactures the raw material,
processes it and sells it himself in the wholesale market. In such a situation,
the profit is not of a processor but of a merchant manufacturer and a trader.
If the transaction is between related persons, the profit would not be "normally F
earned" within the meaning of Rule 6(b)(ii). If it is established that the
dealings were with related persons of the manufacturer the sale of the processed
fabrics would not be limited to the formula prescribed by Ujagar Prints III
but would be subject to excise duty under the principles enunciated in Empire
Industries as affirmed in Ujagar Prints II, incorporating the arms length G.
principle.

The respondent No. I assessee had submitted before the Department
and before us that if the assessee was not permitted to rely upon the formula
laid down in Mis. Ujagar Prints III then it was entitled to discounts and
advertisement expenses. These were not allowed by the Commissioner. As H
384 SUPREME.COURT REPORTS [2005) SUPP. 5 S.C.R.

A the question whether the respondent No. I would be entitled to discounts and
deductions claimed would only arise if it held that the ratio of Mis. Ujagar
Prints Ill would not apply, the Tri~unal did not address this aspect of the
matter at all nor did it consider whether the merchant-manufacturers and the
respondent No. I were related persons. Since the Tribunal, in our opinion,
B wrongly upheld the respondent's contention that the formula in Mis. Ujagar
Prints Ill would apply in full measure, it is now necessary for the Tribunal
to consider whether the respondents were related persons and whether the
respondent No. l would be entitled to claim discounts or could exclude the
advertisement expenses incurred by the dealers.

C We therefore allow the appeals and remand the matter back to the' .
Tribuna! for the purpose of determining the nature of the alleged relationship
between'he respondent No. I and the other respondents. If it is found that the
respondents are not relate_d persons then the earlier decision of the Tribunal
will stand. If on the other hand it is found that the respondents are related,
the Tribunal will consider the questions of discounts and deductions claimed
D by the respondents before remanding the matter to the Commissioner for a
correct computation of the calculation errors. No order as to costs.

v.s.s. Appeal disposed of.

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