Holding

Advertising costs incurred by a buyer are not includable in the assessable value of the seller’s goods where the seller lacks an enforceable legal right to compel such expenditure, and the transaction is at arm’s length.

Summary

Alembic Glass Industries Ltd., a glass manufacturer whose factory was closed after a strike, reduced its advertising expenditure. Its bulk purchaser, Mis Darshak Ltd., began advertising the glass to boost sales. The Central Excise authorities issued a show‑cause notice demanding duty on the basis that the advertising cost incurred by the purchaser should be added to the assessable value of the glass under Section 4(a) of the Central Excise Act and Rule 5 of the Valuation Rules. The CEGAT upheld the demand, treating the expense as additional consideration. The Supreme Court held that where the manufacturer has no enforceable legal right to compel the buyer to incur advertising expenses, such costs are not part of the assessable value; the transaction is at arm’s length and the wholesale cash price must be determined on that basis, excluding post‑manufacturing costs. Consequently, the Court set aside the CEGAT orders and allowed the appeals.

Issues considered

The advertising expense incurred by the bulk purchaser can be treated as additional consideration and included in the assessable value of the manufacturer’s goods under Section 4(a) of the Central Excise Act and Rule 5 of the Valuation Rules.
Whether the transaction between Alembic Glass Industries and Mis Darshak Ltd. is an arm‑length, principal‑to‑principal sale, and whether the buyer is a favoured or related party affecting valuation.

Legislation cited

Central Excises and Salt Act, 1944s. 11A(l), s. 4(a)
Central Excise (Valuation) Rules, 1975s. Rule 5

Subjects

Central ExciseAssessable ValueAdvertising CostArm's Length TransactionWholesale Cash PriceSection 4(a)Valuation RulesBulk PurchaserRelated PartyCost Reduction

Judgment

A M/S. ALEMBIC GLASS INDUSTRIES LTD.
v.
THE COMMISSIONER OF CENTRAL EXCISE

AUGUST 14, 2006

B [ARIJIT PASA YAT AND TARUN CHATTERJEE, JJ.]

Central Excises and Salt Act, 1944-Section 4(a)-Arms length
transaction-Factory of assessee closed down--For revival, assessee cut
C down its costs on advertising and publicity--Adveriising cost incurred by
bulk purchaser to boost up sale--Inclusion of, in assessable value ofassessee's
goods--Held: There was no enforceable legal right with assessee to insist on
advertising under the agreement with bulk purchaser-Transaction was at
arms length, hence cost so incurred by bulk purchaser is not includible in
assessable value of assessee's goods.
D
Due to closure of the appellant's glass factory, the production came to
an end. The appellant then decided to cut down expenditure in advertisement.
'D' who was bulk purchaser of assessee's product started advertising to boost
its sales in respect of glass purchased from the appellant. The Department
issued SCN demanding duty on the ground that appellant had gradually
E transferred the expenditure on sales promotion and on publicity of its product
to 'D' and the amount spent by 'D' was to be included in assessable value of
glass manufactured by appellant and, therefore, duty was payable on the
amount spent by 'D'. Collector confirmed the demand. Appellant unsuccessfully
filed appeal before the CEGAT. Hence these appeals.

F Allowing the appeals, the Court

HELD:t.1 Where advertisement cost is incurred by the manufacturer's
custoll'ers compulsorily and where manufacturer has enforceable legal right
against the customers to insist on incurring of such advertisement expenditure
G by the customers, the advertisement cost would be includible in the assessable
value. (556-A-B(

1.2. There was no enforceable legal right with the appellant to insist on
the advertisement under the agreement nor any finding recorded by CEGA T
that it had any enforceable legal right. On the contrary the CEGAT proceeded
H 550
ALEMBIC GLASS INDUSTRIES LTD. v. THE COMMR. OF CENTRAL EXCISE 55 J

on the basis, that till 1987 the appellant was incurring the expenses. The A
circumstan~es under which 'D' gave an assurance of bulk purchase and
commenced'progressively increasing outlay on advertising the appellant's
product indicated that it was package outlay or revival of the appellant's factory
). I
arrived at between them as a part of cost reduction exercise of the appellant.
I
No material was placed by Revenue before the CEGAT that there was any tacit B
understanding which was also not spelt out in the show cause notice.
: (566-C-El
I

Co/lect~r of Central Excise, Baroda v. Bes/a Cosmetics Ltd., (200513
I
sec 792, relied on.
Union of India v. Bombay Tyre International Ltd., (198411 SCC 467; C
Commissioner of Central Excise, Surat v. Surat Textiles Mills Ltd. and Ors.,
(2004( 5 SCC 201 and Commissioner of Central Excise, Vadodara v. Alembic
Glass Industries Ltd., (1996) 88 ELT 296, referred to.

2. There is no material to show that there is no arrangement for D
reimbursement. The factual position shows that the transaction was on a
principal to principal basis. Once wholesale dealings at arms length are
established, the determination of the wholesale cash price for the purpose of
Section 4(a) of the Central Excise Act may not depend upon the number of
such wholesale dealings. (558-B-E(
E
3. The 'wholesale cash price' has to be ascertained only on the basis of
transactions at arms length. If there is a special or favoured buyer to whom
a special price is charged because of extra-commercial considerations, the
price so charged would not be the 'wholesale cash price' for levying excise
under Section 4(a) of the Act. (558-C-Dl
F
A.K. Roy and Anr. v. Voltas limited, (197313 SCC 503, relied on.

Philips India Ltd. v. Collector of Central Excise, Pune ( 1997( 6 SCC
31, referred to.

CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 43-44of1998. G .
From the Judgment and Order dated 13.6.1997 of the Customs, Excise
& Gold (Control) Appellate Tribunal, West Regional Bench at Mumbai in
Order No. 251 O/dtd. 5/97 in Appeal No. E/4968/92-A and Order dated 19 .11.1997
,... in Order No. 5218/WZB/l 997 in Stay No.E/Misc (MODFIN) 475/97-Bom.
H
552 SUPREME COURT REPORTS [20061 SUPP. 4 S.C.R.

A WITH

Civil Appeal Nos. 4234-4247/1999.

D.A. Dave, Nandini Gore, Pragya Singh Bansal, R.N. Karanjawala, Manik
c
Karanjawala, Rahul Narain, Meenakshi Arora and Priya Rao for the Appellants.
B M.F. Humayunnisa, Rupesh Kumar and P. Parmeswaran for the
Respondent.
The Judgment of the Court was delivered by
ARIJIT PASA YAT, J. Challenge in these appeals is to the orders passed
by the Customs, Excise and Gold (Control) Appellate Tribunal, West Regional
C Bench at Bombay (in short 'CEGA T'). While appellate order dated 13.6.1997
is the subject-matter of challenge in Civil Appeal No.43 of 1998, the other
appeal relates to the order dated 28.11.1997 passed on an application for
rectification of errors filed by the appellant.

Background facts in a nutshell essentially are as follows:
D The appellant-company, incorporated under the Companies Aci, 1956 is a
manufacturer of glass and glassware. It holds license issued under the Central
Excise Act, 1944 (in short the 'Act') read with the Central Excise Rules, 1944
(in short the 'Rules'). The dispute relates to the period 1.1.1988 to 28.2.1990.
The articles manufactured by the appellant are classified under Chapter 70 of
E the Central Excise Tariff Act, 1985 (in short "Tariff Act'). There was a prokmged
strike in the factory of the appellant in 1987, which according to the appellant
resulted in closure of the appellant's factory and came to a standstill position
so far production is concerned. The appellant decided to cut down expenditure
in areas like labour, packing, inventory, advertisement etc. Mis Darshak Ltd.
who was a bulk purchaser of the appellant's products started advertising to
F boost its sales in respect of glass and glassware purchased from the appellant.
Inquiries were conducted by the Central Excise Authorities regarding
expenditure on pub!icity and sales promotion incurred by Mis Darshak Ltd.
on the goods purchased from the appellant. Statements of some of the
officials of Mis Darshak Limited and Executive Director of the appellant were
G recorded during investigation. The appellant received show-cause notice
dated 4.4.1991 from the Central Excise and Customs Directorate, Baroda
proposing to recover duty amounting to Rs.18,79, 775.31 under proviso to
Section l IA(l) of the Act. The notice was issued by the Collector, Central
Excise and Customs, Baroda. The substance of the notice was that the
appellant had gradually transferred the expenditure on sales promotion and/
H
ALEMBIC GLASS INDUSTRIES LTD. v. THECOMMR. OF CENTRAL EXCISE [PASA YAT, J.]553

or publicity of its product to Mis Darshak Ltd. The amount spent by Mis A
Darshak Ltd. was to be included in the assessable value declared by the
appellant and, therefore, on the amount spent by Mis Darshak Ltd. being
Rs. 71,61,049 the duty payable was Rs.18,79, 775.31. The appellant submitted
its reply to the show-cause notice. It was submitted that the show-cause
notice was barr~d by time; the appellant has been carrying on all of its B
activities within knowledge of the excise authorities; at every stage of changing
the market pattern Department was a party; all sales were being made on
principal to principal basis i.e. the appellant and Mis Darshak Ltd. are not
related persons. Request was made to examine or cross-examine some persons.
A further reply was filed on 21.11.1991 pointing out that the price list submitted
by the appellant had been approved by the Department. The stand of the C
appellant was not accepted by the Collector and order in original confirming
the show-cause notice was passed. Reference was made to the statement of
Mr. R.S. Guard, General Manager Marketing ofM/s Darshak Ltd. to the effect
that upward trend in expenses for publicity was attributable to increase in
sales. Though the buyer was not incurring any advertisement expenses on
their behalf under any express or implied instructions, yet the fact that the D
advertisement expenses by the appellant were reduced/stopped indicated that
the same was part of a well thought out policy. Mis Darshak Ltd. was a
customer of the appellant since 1985. Expenses for advertisement and sales
promotion were exclusively made by Mis Darshak Ltd. which led to increase
in volume of sales. Expenses on advertisement are unavoidable for marketing E
the goods irrespective of the fact as to who incurs the expenses. It was held
that once it is established that the expenses for advertisement are additional
considerations, the question of related person is immaterial. It was a case of
implied instruction and, therefore, the assessable value was required to be
accordingly fixed, and the expenses were required to be included in the
assessable value under Rule 5 of the Central Excise (Valuation) Rules, 1975 F
(in short the 'Valuation Rules'). Demand.was confirmed under Section I IA of
the Act and penalty of Rs.10 lakhs under Rule I 73Q(l) of the Rules was
imposed. Land, buildings, plant and machinery belonging to the appellant was
confiscated under Rule \ 73Q(2) of the Rules. However, option was given to
pay fine of Rs.2 lakhs in lieu of confiscation. G
Appellant preferred appeal before the CEGA T.

It was the appellant's stand before the CEGAT that there was no speCial
relationship between the appellant and Mis Darshak .Ltd. The former was

- selling goods at the same price to other dealers also. Therefore, there was a H
554 SUPREME COURT REPORTS [2006) SUPP. 4 S.C.R.

A factory gate price for the products and that was the assessable value under
Section 4 of the Act. Reference was made to the assessee's own case in
Commissioner of Central Excise, Vadodara v. Alembic Glass Industries ltd.
( 1996) 88 EL T 296 in which CEGA T had given a categorical finding that M/
s Darshak Ltd. was not a favoured buyer as there was no evidence of
B discretion or favoured treatment. It was pointed out that admittedly the
advertising expenses were incurred only by the customer Mis Darshak Ltd.
and up to the point of clearance, the appellant had not incurred any such
expenditure.

The expenses incurred towards sales promotion and publicity by both
C the appellant and M/s Darshak Ltd. were as follows:
Expenditure on Sales Promotion & Publicity

Year Mis Alembic Mis Darshak Volumes of Sales

1986 Rs. 11,91,1921- Rs. 1,91,928/- Rs. 2,05,52,607/-
D
1987 Rs. 13, 192/- Rs. 2,25,9451- Rs. 22, 77, 19, 769/-
1988-89
( 1.1.88 to
31.3.89) Rs. 48,81,732/- Rs. 69,69, 18,966/-
E
Stand of the Revenue was that initially appellant was incurring
advertisement expenses which were gradually shifted to Mis Darshak Ltd.
who were purchasing about 98% of its product. Reference was made to a
decision of the Tribunal where it was noted that there was understanding
over sharing advertisement expenses on 50:50 basis and the expenses were
F to be added to the assessable value.
By the impugned judgment dated 13.6.1997 the CEGAT confirmed the
findings of the Revenue authorities on the question of valuation as well as
suppression. However, the quantum of penalty was reduced to Rs.2 lacs from
Rs. I0 lacs. It was noted by the CEGA T that the reasons why Mis Darshak
G Ltd. came to make a bulk purchases resulted from economic crisis, as bulk
purchase was one of the methods of rehabilitation. Brand name "Yera" is
owned by the appellant and packing is done by M/s Darshak Ltd. It is clearly
indicated that the appellant was the owner. The advertising expenses by M/
s Darshak Ltd. are nothing but a deal for revival of the appellant's factory.
H Reference was made to the accepted position that if M/s Darshak Ltd. was
ALEMBIC GLASS INDUSTRIES LTD. v. THE COMMR. OF CENTRAL EXCISE [PASA YAT. J.J555

not to make bulk purchases the appellant would have incurred advertisement A
expenses to promote sales. It was held that if price is not the sole consideration,
then additional consideration has to be included in assessable value. Though
M/s Darshak Ltd. is not a favoured buyer/related person, that is really of no
consequence. Since the response of the appellant was 'No' to question No. I9
in questionnaire in the price list, Section I I-A has been rightly invoked. B
Reference was made by the CEGA T to Rule 5 of Valuation Rules to hold that
the expenses on sales promotion and advertisement were to be included in
the assessable value of the goods. It was held that demand of duty from the
appellant under Section I I-A read with proviso to sub-section (I) was clearly
applicable as the appellant had suppressed information with the intention to
evade payment of duty. Tribunal found that the circumstances under which C
Mis Darshak,Ltd. had given assurance of bulk purchase and commenced
increased outlet advertising the appellant's product clearly indicated that it
was a package deal for revival of the appellant's factory arrived at between
them and M/s Darshak Ltd., and was a part of the cost reduction exercise of
the appellant. An application for rectification was filed which was dismissed.
n~--
The appellant's argument in support of the rectification application was that
the CEGAT did not consider the various judgments which were cited before
it and there was no suppression of facts because the assessee had submitted
its Balance Sheets and other documents. Stand of the Revenue that no case
for rectification was accepted the rectification application was dismissed.
E
In support of the appeal, learned counsel for the appellants submitted
that the methodology-of working out assessable value has been highlighted
by this Court in many cases. In Union of India v. Bombay Tyre International
Ltd., [1984] 1 SCC 467, it was held that the value of an excisable article for
the purpose of levying excise was to be taken to be the price at which the
excisable article is sold by the assessee to a buyer at arms' length in the F
course of wholesale trade at the time and place of removal.

Learned counsel for the Revenue on the other hand supported the
orders of CEGAT. Relying on a decision of this Court in Commissioner of
Central Excise, Surat v. Surat Textiles Mills Ltd. and Ors., [2004] 5 SCC 201
he contended that Tribunal's conclusions are in terra firma. G

In the instant case CEGAT held that the Collector's view that the
expenditure on advertisemer.t and sale promotion incurred by Mis Darshak
Ltd. forms additional consideration to be added to the sales price under Rule
5 of the Valuation Rules is well founded. It was held that addition was not H
556 SUPREME COURT REPORTS [2006] SUPP. 4 S.C.R.

A being done on the ground that Mis Darshak Ltd. is favoured buyer or that
they are related persons to the appellant. In Collector of Cenetral Excise,
Baroda v. Besta Cosmetics Ltd., [2005] 3 SCC 792 this Court held that where
advertisement cost is incurred by the manufactures/customers compulsorily
or mandatorily and where manufacturer has enforceable legal right against the
customers to insist on incurring of such advertisement expenditure by the
B customers, the advertisement cost would be includible in the assessable
value. In Besta Cosmetics case (supra) it was observed by a three-Judge
Bench that without affirming the view taken in CCE v. Surat Textile Mills Ltd.
[2004] 5 SCC 20 I it is clear even on the basis of the judgment that the
agreement should give the manufacturers/marketing agent, the discretion
C whether or not to advertise the assessee's product. There was no enforceable
legal right with the assessee to insist on the advertisement under the agreement.
In the instant case there was no finding recorded by CEGA T that the assessee
had any enforceable legal right. On the contrary the CEGA T proceeded on the
basi., that rill 1987 the assessee was incurring the expenses. The circumstances
under which Mts Darshak Ltd. gave an assurance of bulk purchase and
D commenced progressively increasing outlay on advertising the appellant's
product indicated that it was package outlay or revival of the appellant's
factory arrived at between them as a part of cost reduction exercise of the
assessee. There was no material before the CEGA T to conclude that there was
any tacit understanding which was the stand of the Revenue. No material was
E placed by Revenue to justify this inferential presumption, which was also not
spelt out in the show cause notice.

In Philips India Ltd. v. Collector of Central Excise, Pune, [1997] 6 SCC
31, this Court noted as follows:

F "2. The learned counsel for the appellant drew attention to the
judgment ofa Division Bench of the High Court at Madras in Standard
Electric Appliances v. Supdt. of Central Excise, (1986) 23 ELT 302
(Mad). The Court said that it was common knowledge that when a
consumer purchased an article from a dealer, in the case of service
facilities he looked to the dealer and not to the manufacturer. For
G replacement of defective parts also he looked to the dealer from whom
he had purchased and, notwithstanding the fact that the wholesale
dealer might ultimately have the parts replaced by it reimbursed from
the manufacturer, the service facilities were provided by the wholesaler
with a view to earn goodwill and attract customers. The advertising
H of a product by the wholesaler was one of the well-known methods
ALEMBIC GLASS INDUSTRIES LTD. v. THE COMMR. OF CENTRAL EXCISE [PASA YAT, J.]557

by which the wholesaler attracted customers and if, as a result of A
increasing its b~siness, the demand for the product of the manufacturer
also increased, the advertising by the manufacturer could not be said
to be for and on behalf of the manufacturer.

3. In Union of India v. Mahindra and Mahindra Ltd., (1989) 43 ELT
611 (Cal) the High Court at Bombay emphasised the relationship B
between the parties, being of buyer and seller on principal-to-principal
basis. The Court observed that the manufacturer and its distributor
had a mutual interest in maximising the sale of the products. The
provisions in the contract between them relating to advertising and
the like were in furtherance of this desire on the part of both the C
manufacturer and its distributor and in no way affected the real nature
of the transaction which appeared to be of sale on principal-to-principal
basis.

5. It seems to us clear that the advertisement which the dealer was
required to make at its own cost benefited in equal degree the appellant D
and the dealer and that for this reason the cost of such advertisement
was borne half and half by the appellant and the dealer. Making a
deduction out of the trade discount on this account was, therefore,
uncalled for.

6. As to the after-sales service that the dealer was required under the E
agreement to provide, it did of course enhance in the eyes of intending
purchasers the value of the appellant's product, but such enhancement
of value enured not only for the benefit of the appellant; it also
enured for the benefit of the dealer for, by reason thereof, the dealer
· got to sell more and earn a larger profit. The guarantee attached to
the appellant's products specified that they could be repaired during F
the guarantee period by the appellant's dealers anywhere in the
country. Thus, though one dealer might .have to repair goods sold by
another dealer and incur costs in that regard, he also had the benefit
of having the goods he sold reparable throughout the country. The
provision as to after-sales service, therefore, benefited not only the G
appellant; it was a provision of mutual benefit to the appellant and the
dealer."

In that case it was noted that advertisement which the purchaser was
required to make at its own cost benefited in equal degree the assessee and
the purchaser and for that reason the cost of such advertisement was borne H
558 SUPREME COURT REPORTS (2006] SUPP. 4 S.C.R.

A equally and making a deduction out of the trade discount was held to be
uncalled for. It was pointed out that while adjudicating the matters such as
this, the Excise Authorities would do well to keep in mind the legitimate
business considerations.

It is to be further noted that there is no material to show that there is
B no arrangement for reimbursement. The factual position shows that the
transaction was on a principal to principal basis. The findings of this Court
in A.K. Ruy and Anr. v. Vul1us limited, [ 1973]3 SCC 503 also throw considerable
light on the controversy.

"20. There can be no doubt that the 'wholesale cash price' has to be
c ascertained only on the basis of transactions at arms length. If there
is a special or favoured buyer to whom a special low price is charged
because of extra-commercial considerations, e.g. because he is relative
of the manufacturer. the price charged for those sales would not be
the 'wholesak cash price' for levying excise under Section 4(a) of the
D Act. A sole distributor might or might not be a favoured buyer
according as terms of the agre.:mcnt with him are fair and reasonable
and were arrived at on purely Cl)mmercial basis. Once wholesale
dealings at arms length are established, the determination of the
wholesale cash price for the purpose of Section 4(a) of the Act may
not depend upon the number of such wholesale dealings. The fact
E that the appellant sold 90 to 95 per cent. of the articles manufactured
to consumers direct would not make the price of the wholesale sales
of the rest of the articles any the less the 'wholesale cash price' for
the purpose Section 4(a), even if these sales were made pursuant to
agreements stipulating for certain commercial advantages, provided
F the agreements were entered into at arms length and in the ordinary
course of business.

22. Excise is a tax on the production and manufacture of goods (see
Union of India v. Delhi Cloth and General Mills, [ 1963] Supp I SCR
586. Section 4 of the Act therefore provides that the real value should
G be found after deducting the selling cost and selling profit and that
the real value can include only the manufacturing cost and the
manufacturing profit. The section makes it clear that excise is levied
only on the amount representing the manufacturing cost plus the
manufacturing profit and excludes post-manufacturing cost and the
profit arising from post-manufacturing operation, namely selling profit.
H The section postulates that the wholesale price should be taken on
ALEMBIC GLASS INDUSTRIES LTD. v. THE COMMR OF CENTRAL EXCISE [PASA YAT,l] 559

the basis of cash payment thus eliminating the interest involved in A
wholesale price which gives credit to the wholesale buyer for a period
of time and that the price has to be fixed for delivery at the factory
gate thereby eliminating freight, octroi and other charges involved in
the transport of the articles. As already stated it is not necessary for
attracting the operation of Section 4(a) that there should be a large B
number of wholesale sales. The quantum of goods sold by a
manufacturer on wholesale basis is entirely irrelevant The mere fact
that such sales may be few or scanty coes not alter the true position.

That being so, there is no scope for making any addition as done the
Central Excise Authorities and upheld by CEGAT. In view of the above-said C
findings it is not necessary to consider the question whether the extended
period of limitation applied. The appeals deserve to be allowed which we
direct by setting aside the impugned orders of CEGAT. No costs.

D.G. Appeals allowed.