Holding

A discount to bulk buyers is not permissible unless the assessee proves that it is in accordance with normal wholesale trade practice and is supported by a rational commercial basis; here, such proof was lacking.

Summary

Kirloskar Brothers Ltd filed two price lists for its compressors, one showing a lower price for sales to alleged bulk buyers. The revenue authorities disallowed the lower price, contending that bulk buyers could not be distinguished from other wholesale buyers and that only one price could be charged for the same class of buyers. The Collector (Appeals) allowed the lower price, but the Central Excise and Gold (Control) Appellate Tribunal (CEGAT) reversed, holding that no rational or commercial basis existed for the classification. On appeal, the Supreme Court held that under Section 4(1)(a) proviso (i) of the Central Excise Act, a discount to a different class of buyers is permissible only if the assessee demonstrates that such discount is in line with normal wholesale trade practice and is supported by a rational, identifiable commercial rationale. The Court found that Kirloskar failed to establish such a basis, and therefore dismissed the appeal.

Issues considered

Whether a discount to bulk buyers is permissible under Section 4(1)(a) proviso (i) of the Central Excise Act, 1944.
Whether the classification of buyers into different classes for the purpose of granting discounts must be based on a rational and commercial basis.
Whether the findings of the CEGAT can be interfered with when the assessee fails to demonstrate normal trade practice.

Legislation cited

Central Excise Act, 1944s. 130-E, s. 2(k), s. 4(1)(a) proviso (i), s. 4(4)(c), s. 4(4)(e)

Subjects

Central Excisevaluationdiscountbulk buyersnormal priceclassificationrational basisSection 4provisotribunalCEGAT

Judgment

A KIRLOSKAR BROTHERS LTD.
l'.

COMMISSIONER OF
. CENTRAL
. EXCISE.. PUNE.·.
"

MARCH 7, 2005 ' ' '

B
'L • '

[RUMA PAL, ARIJIT PASAY AT AND C.K. THAKKER, JJ.]
. rr• •
.-
Central Excise Act, 1944, SectionS4(/)(a) clause (i) of th~ pi·oviso, 2(k),
4(4)(e)-Class· of buye~s-Charging of lesser price from bulk bz1yers-
C Permissibility of -Held : For charging lesser price from different buyers,
assessee is required to establish {hat discount allowed and lesser price charged
was in accordance with normal practice and founded on some rqtiona/ basis-
Assessee having failed to show rational and commercial consideration to
distinguish bulk buyers from other wholesale buyers; charging of lower price
held not permissible.
D
Assessee filed two price lists, one in Part-I and .other in Part-II for
same 'kind of product', showing a lesser price for sales to bulk buyer.
Revenue authorities issued notke rejecting the lower price on the ground
that the bulk buyers- cannot be distinguished from other wholesale bu'yers
and ·there cannot be more than one price for the same class of buyers.
E Assistant Collector confirmed proposal contained in the notice. Collector
(Appeals) however held in favour. of assessee. Revenue pre_ferred appeal
before CEGAT, which held thaf there is no rational or commercial
consideration to distinguish the bulk buyers from any other buyers.
Aggrieved assessee preferred the present appeal.
F Dismissing the appeal, the Court

HELD: I. Where the goods are sold to different class of buyers at
different price, then assessee is required .to establish that discount allowed
and the lesser price charged was in accordance with normal practice of
G the wholesale trade in such goods. One or two instances cannot be termed
as the normal practice of the wholesale trade. It essentially depends upon
the number Of person engaged in such trade. In the. instant case, the
assessee has not placed on record the number of persons engaged in the
wholesale trade. 1573-A, B, Cl

H 568
KIRLOSKAR BROTHERS LTD. v. C.C.E. 569

Metal Box India ltd. v. Collector o.l Central Excise, Madras 119951 2 A
SCC 90 and Gora Mal Hari Ram ltd. '"Collector of Central Excise. Delhi
1994(69) EL T 269, referred to.

2. J. Classification can be made on the basis of region depending upon
the quantum of turnover in a particular region and special factors
relatable to that region. It cannot be said that the discount should be B
uniform in all circumstances in all categories of buyers all over the
country. But discount has to be as per the normal practice of the wholesale
trade in such goods and the discount cannot be given on extraneous
considerations and has to be founded on some rational basis. (573-EI

2.2. There may be cases, where in a particular region there is a scope C
for increasing the turnover by giving incentive to some. But there must
be some intelligible criteria for treating the benefited persons differently
from others. Comparison may be made intra-region and not by taking all
regions together. The assessee has not shown the justification for wide
variation within the same region, and has failed to establish rational basis D
for selecting the persons. On considering the relevant factors, the
authorities and CEGAT ha\•e rightly recorded finding of fact that no
rational basis has been established. (573-G, H; 574-BI

Collector of Customs, Bombay v. Swastic Wollens (P) Ltd. and Ors.,
(19881 Supp. SCC 796; West Bengal Electricity Regulat01y Commission v. E
CESC ltd., (200218 SCC 715; Commissioner of Customs, Chennai v. Adani
Exports ltd. and Anr., (20041 4 SCC 367 and Commissioner of Customs,
Mumbai v. Mis Bureau Veritas and Ors., JT (2005) 2 SC 348, relied on.

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 6938 of 1999.
F
From the Judgment and Order dated 28.9.99 of the Central Excise,
Customs and Gold (Control) Appellate Tribunal, Western Regional Bench at
Mumbai in F.O. No. C-I/2444/WRB/1999 in A. No. E/2559 of 1994-A.

Akhil Sibal, Rajan Sheth, Ms. Ruby Singh Ahuja, Ms. Nandini Gore,
Ms. Saloni Gupta, Ms. Kanika Agnihotri and Mrs. Manik Karanjawala for G
the Appellant.

K. Swami and B. Krishna Prasad for the Respondent.

The Judgment of the Court was delivered by
H
A
570 SUPREME COURT REPORTS [2005] 2 S.C.R.

ARIJIT PASA Y AT, J. Appellant calls in question legality of the
judgment rendered by the West Regional Bench at Mumbai of the Customs
--
Excise and Gold (Control) Appellate Tribunal (in short the .~CEGAT'). ·

The factual position giving rise to the controversy is as follows:
. .
B The appellant (also described as 'assessee ') had filed a price list in Part
I of the Fomrnt prescribed for determination. ofv~lue under.Section 4 of the
Centr~I .Excise and S~lt Act, j 944 (in ~hort tl1e ',~ct') for the compressors
manu_factured by it. It also filed price list in Part II for the same kind of
compressors showing a lesser price of Rs. I 50 o{ assessable value per
~ I • ~ • •

compressor than in the Part I price list for sales to alleged bulk buyers.
C Notice was issued proposing disallowance of the lower price on the ·ground
that the bulk buyers did not constitute a different class of buyers and cannot
be distinguished from other wholesale buyers; there cannot be more than one
price for the same class of buyers. Jn the notice it1 was alleged that the claim
for lower price on the ground that the bulk buyers purchased a substantial
D quantity had not been justified. The Assistant Collector declined to accept the
assessee's contention that the price was on account of the fact that the bulk_
buyers constituted a different class because of the quantity of compressors
that they purchased and higher purchases in the.past than other buyers. He
confinned the proposal in the notice.

E On appeal by the assessee, the. Collector (Appeals) acc.epte.d the
contention of the assessee that the bulk buyers were a different class and that
the lower price was permissible.
I
An appeal was preferred by the present-respondent questioning
correctness of the order of the Collector (Appeals). Stand of the.Revenue was
F that normal price applicable to wholesale dealer should be made applicable
to the· so-called bulk buyers and the Collector (Appeals) erred in concluding
that there can be more than one class'of dealers. CEGAT by the impugned
judgment held that there can be different class of buyers. While it is open to
the assessee to classify buyers according to commercial consideration, the
G classification has to be rational and identifiable based ori
commercial
consideration and it cannot be arbitrary. According to tl;e CEGA T it is not
possible to see the existence of any rational or commercial consideration to
distinguish the bulk buyers from any other buyers. The existence of any
relationship with a customer to prove business. consideration w~s also not -
es ta bl ished.
H
KIRLOSKAR BROTHERS LTD. v. C.C.E. fPASAYAT . .I.] 571

Accordingly, Revenue's appeal was allowed. A
In support of the appeal, learned counsel for the appellant submitted
that CEGAT has missed the most rel~vant factor that the Revenue's case was
not that any extra commercial consideration existed so far as the present
appellant is concerned. That being so, the presumption is that the price fixed
was rational and the Collector (Appeals) had rightly decided in favour of the B
appellant. The beneficiaries were clearly identifiable. The names of the persons
belonging to different regions were noted. Taking into account the previous
periods' turnover, the price concession was given. The authorities were clearly
in error by observing that classifications cannot be made on regional basis.
The comparison of the sales figures has been made by the authorities and C
CEGAT by taking all the regions together and not inter-zones. Merely because
no minimum number of sales was indicated while deciding the persons to
whom concession is to be given, that does not per se make the claim irrational.
Reliance was placed on Metal Box India Ltd. v. Collector of Central Excise,
Madras, [I 995] 2 SCC 90 to submit that even a single individual whose
transactions were considerable can constitute a class for granting discount. D
As discount was not based on any extra commercial consideration it was
deductible in terms of Section 4( I )(a) (proviso) (i) of the Act. Reference was
also made to a decision of the Special Bench of CEGA T, New Delhi in Gora
Mal Hari Ram ltd. v. Collector of Central Excise, Delhi (1994) 69 ELT 269
to contend that where there is a rational differentia based on valid commercial E
consideration which has been established, the Revenue cannot refuse to
recognize the same unless it is established that the transactions were not at
arm's length and in the usual course of business. It was further submrtted that
the dealers as referred to in Section 4(4)(c) of the Act do not constitute a
class different from other buyers as noted in the definition of "wholesale
trade". The Revenue Authorities were not justified in holding that the dealers F
constituted a class and there cannot be class within the class. To justify its
claim that grant of such discount was a nonnal trade practice, the price-list
of another manufacturer Mis Sriram Refrigeration Industries Ltd., Hyderabad,
was filed with all relevant details. CEGA T came to an incorrect conclusion
that the details were not filed.
G
In response, Mr. K. Swami, learned counsel for the respondent submitted
that mere absence of any extra commercial considerations does not per se
entitle an assessee to the benefit in terms of Section 4(1 )(a) (proviso) unless
an intelligible rationale for choosing differently between different groups of
buyers is established. The assessee was granted an opportunity to.justify the H
572 SUPREME COURT REPORTS [20051 2 S.C.R.

A ground for granting discount to the named persons .. Except stating. that the
management had taken a decision in that regard, no other material was placed
for consideration. It was, therefore, contended that the Revenue Authorities
and the CEGAT were justified ·in rejecting claim made by the· assessee-
appellant. ' .
,,
B We are concerned with clause (i) of the proviso to Section 4( I)(a). The
relevant provision reads as under:

"Section 4. Valuation of excisable goods for purposes or' ~h~rging 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
c shall, subject to other provisions of this section, be deemed tO be -
' - • 1 • '

(a) the normal price thereof, that is to say, the price at which such'
goods are ordinarily sold by the assessee to a buyer in the course of
a 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
D consideration for the sale:
· .. ' ..
Provided that -

(i) where, in accordance "with the ncmnal practice of the wholesale
trade in such goods, such goods are sold by the assessee at different
E prices of different classes of buyers (not being related persons) each
such price shall, subject to the existence of the other circ~mstances
specified in clause (a), be deemed. to be the normal price _of such in
relation to each such class of buyers.".

The expression "wholesale dealer" is defined in Section 2(k). ·section
F 4(4)(e) defines "wholesale trade" and the same reads as under:
"Wholesale trade" means sales to dealers, industrial consumers,
Government, local authorities and other buyers, who or which purchase their
requirements otherwise than in retail."

G In order to get benefit of Section 4( I )(a) (proviso) (i) the assessee has
to establish that discount claimed was in accordance with the nonnal practice
of wholesale trade in the concerned goods sold to different classes of buyers,
and it shall be subject to the existence of other circumstances specified in
clause (a). Such circumstances are: (a) Charging of normal price at which
H such goods are ordinarily sold; (b) sale must be to a buyer in the course of
KIRLOSKAR BROTHERS LTD. L C.C.E. IPASAYAT . .I.] 573
wholesale trade: (c) the sale must be in the wholesale trade for delivery at the A
place and time of removal; (d) the buyer is not a related person; and (e) the.
price is the sole consideration for the sale. In order to show that the goods
are sold to different class of buyers in accordance with normal practice it has
to be established that same was the normal practice of the wholesale trade in
such goods. One or two instances cannot be termed as the normal practice of
the wholesale trade. It essentially depends upon numb~r of persons engaged B
- in such trade. By way of illustration it can be said that if out of ten dealers
engaged in the wholesale trade in the concerned goods only :wo give discount
while others do not it cannot certainly be normal practice of the wholesale
trade in such goods. It would depend upon the question whether majority of
the persons engaged in the wholesale trade grant such discount. The question C
has to be adjudicated on the factual premises. In the instant case the assessee-
appellant has not placed ·on record the number of persons engaged in the
wholesale trade.

We need not go into the broader question as to whether the "dealers"
referred to in clause (e) of Section 4(4) only refers to those who buy in bulk D
for trading and whether the bulk purchasers constitute a different class amongst
the class of buyers as referred to in Section 4(4)(e).

It is true, classification can be made on the basis of region depending
upon the quantum of turnover in a particular region and special factors relatable
to that region. It cannot be said that the discount should be uniform in all E
circumstances in all categories of buyers all over the country. But discount
has to be as per the normal practice of the wholesale trade in such goods and
the discount cannot be given on extraneous considerations and has to be
founded on some rational basis.

The expression "rational" means as per The Law Lexicon, Second
F
Edition 1997, "endowed with reasons".

The expression "Irrational" means as per The Law Lexicon, Second
Edition 1997, illogical not endowed with reason, insane.
G
There may be cases, where in a particular region there is a scope for
increasing the turnover by giving incentive to some. But there must be some
intelligible criteria for treating the benefited persons differently from others.
It is true that compai"ison can or may be made intra-region and not by taking
all regions together. But even then the appellant has not shown the justification
for wide variation within the same region. For example, in region where H
574 SUPREME COURT REPORTS [2005) 2 S.C.R.

A transactions are substantial i.e. Delhi the variation i.s between 546 and 1523.
Similar is the position in Ahmedabad Zone where the variation is between
414 and 1541. In Madras Zone it varies between 52 to 368. No reason was
indicated as to why the named persons were chosen. Even though it is open
to the assessee to chose the persons, it cannot be .left to its ipse dixit. No
B rational basis for selecting the persons was established. On considering the
/ relevant factors, the authorities and CEGAT have recorded finding of fact
that no rational basis has been established.

The scope for. interference with findings recorded by the Tribunal if
it has kept in view .the correct legal position, ha.s been dealt with by this
C Cour:t in many cases. The position was illuminatingly stated by this Court in
Collector of Customs, Bombay v. Swastic Woollens (P) Ltd and Ors., (1988]
Supp. SCC 796 as follows:

"9. The expression "wool wastes" is not defined in the relevant·
Act or in the notification. This expression is not an expression of art.
D. It may be understood, as fo most of financial measures where the
expressions are not defined, not in a technical or preconceived basis
but on the basis of trade understanding of those who deal with these
goods as mentioned hereinbefore. The Tribunal proceeded on that
basis. The Tribunal has not ignored the Technical Committee's
observations. We have noted in brief the Tribunal's handling of that
E report. The Tribunal has neither ignored the observations of CCCN
nor the Board's Tariff Advice. These observations have been examined
in the light of the facts and circumstances of the case. One of the
basi~ factual disputes was long length of sliver tops. Having regard
to the long length, we find that the Tribunal was not in error. Whether
F a pa~icular item and the particular goods in this case are wool wastes,
should be so considered or not is primarily and essentially a question
of fact. The decision of such a question of fact must be arrived at
without ignoring the material and relevant facts and bearing in mind
the correct legal principles. Judged by these yardsticks the finding of
the Tribunal in this case is unassailable. We are, however, of the view·
G that if a fact finding aut!10rity comes to a conclusion within the above
parameters honestly aiid bona .fide, the fact that another authority be
it the Supreme Court or the High Court may have a different
perspective of that question, in our opinion, is no ground to interfere
with that finding in an appeal from such a finding. In the new scheme
of things, the Tribunals have been entrusted with the authority and
H
KIRLOSKAR BROTHERS LTD. v. C.C.E. [PASA YAT. J.] 575

the jurisdiction to decide the questions involving determination of the A
rate of duty of excise or to the value of goods for purposes of
assessment. An appeal has been provided to this Court to oversee that
the subordinate tribunals act within the law. Merely because another
view might be possible by a competent court of law is no ground for
interference under Section 130-E of the Act though in relation to the B
rate of duty of customs or to the value 0f goods for purposes of
assessment, the amplitude of appeal is unlimited. But because the
jurisdiction is unlimited, there is inherent limitation imposed in such
appeals. The Tribunal has not deviated from the path of correct
principle and has considered all the relevant factors. If the Tribunal
has acted bona fide with the natural justice by a speaking order, in C
our opinion, even if superior court feels that another view is possible,
that is no ground for substitution of that view in exercise of power
under clause (b) of Section 130-E of the Act.''

The position was reiterated in West Bengal Electricity Regulatory
Commission v. CESC Ltd., [2002) 8 SCC 715, Commissioner of Customs, D
Chennai v ..Adani Exports Ltd. and Anr., [2004) 4 SCC 367 and recently in
Commissioner ofCustoms, Mumbai v. Mis Bureau Veritas and Ors., JT (2005)
2 SC 348.

Above being the position, we find no merit in this appeal which is
accordingly dismissed with no order as to costs. E
D.G. Appeal dismissed.