Holding

The assessable value comprises the cost of raw material supplied by the principal together with the processor's manufacturing costs and profit, excluding the principal's profit and any post‑manufacturing expenses.

Summary

MIS. PA WAN BISCUITS CO. PVT. LTD. entered into an agreement with Britannia Industries Ltd. under which Britannia supplied raw materials and the recipe, and the appellant manufactured biscuits and received processing charges. The Assistant Collector of Excise, treating the appellant as an agent, fixed the assessable value on the basis of Britannia's wholesale cash price. The Tribunal affirmed this view. On appeal, the Supreme Court held that for assessable value under Sec. 4 of the Central Excise Act, the cost of raw material supplied by Britannia must be added to the appellant's manufacturing costs and profit, while Britannia's profit and any post‑manufacturing expenses are excluded. Consequently, the excise authorities may recompute the duty in accordance with this principle. The appeal was allowed.

Issues considered

Whether the assessable value of biscuits manufactured by a processor who receives raw material from a principal should include the principal's wholesale price or only the cost of raw material plus the processor's manufacturing costs and profit.
Whether the appellant is to be treated as an agent of Britannia for purposes of valuation under Sec. 4 of the Central Excise Act.

Legislation cited

Central Excise (Valuation) Rules, 1975

Subjects

assessable valuecentral excisevaluationprocessing houseprincipal‑agent relationshipraw material costmanufacturing profitSec. 4excise duty

Judgment

A MIS. PA WAN BISCUITS CO. PVT. LTD. .
v.
COLLECTOR OF"CENTRAL EXCISE, PATNA

JULY 20, 2000

B [B.N. KIRPAL AND D.P. MOHAPATRA, JJ.]

Central Excises & Salt Act, I 944: Section 4.

Central Excise (Valuation) Rules, 1975.
c
Excise duty-Computation of-Assessee Company-Manufacturing
biscuit under agreement for Britania Company-Assessable value of biscuits-
Held, would include cost of raw material supplied by latter company in
addition to assess~e company's manufacturing costs and profits but profit of
latter company or expenses incurred after the manufacture of the biscuits by
D the assessee company-Not includible.

The appellant-company established a unit for manufacture of biscuits.
It entered into an agreement with Britannia Industries Ltd. The terms of the
agreement provided that (1) the ingredients for the manufacture of biscuits
as well as the recipe or method by which the biscuits were to be manufactured
E
were to be supplied by Britannia; (2) the ingredients so supplied were to be
regarded as belonging to Britannia for the manufacture of the biscuits; (3)
the appellant was requin!d to make packages as directed by Britannia and
then supply the same under Britannia's instructions; (4) for the work done,
the appellant was entitled to receive certain amount which was to be fixed from
F time to time; (5) relationship between the parties shall always be that of
principal and principal and not principal and agent (6) the appellant shall be
entitled to continue to manufacture biscuits under other brands and to sell
the same.

The Assistant Collector of Excise calculated the excise value of the
G biscuits manufactured by the appellant - company on the basis of Britannia's
wholesale cash price. The Collector (Appeals) affirmed the order of the
Assistant Collector. The Tribunal held that the appellant was an agent of
Britannia and therefore it was the Britannia's wholesale price which should
be taken into consideration for arriving at the normal value for the purposes
of computing excise duty of the biscuits manufactured by the appellant. Hence
H 628 ..........,
PAWAN BISCUITS CO. PVf. LTD. v. COLLECTOR OF CENTRAL EXCISE (KIRPAL, J.] 629

this appeal by the assessee. A
Allowing the appeal, this Court

HELD: It is settled law that for the purpose of ascertaining assessable
value post-manufacturing expenses have not to be taken into consideration.
In the present case the raw material for the manufacture of biscuits is given B
to the appellant by the Britania industries. After the biscuits are made. they
are given back to or are delivered under the instructions of Britannia. The
appellant was entitled to receive processing charges which would include its
expenses plus profits for the purposes of determining the excise value.
However, the cost of the raw material supplied by Britannia will have to be C
included in addition to the appellant's manufacturing costs and profit. What
cannot be included is only profit of Britannia or expenses which are incurred
after the manufacture of the biscuits by the appellant. Consequently, the excise
authorities will be at liberty to determine the amount of excise duty afresh in
accordance with law. (631-C; 632-G; 633-AI
D
Mis. Ujagar Prints & Ors. (II) v. Union of India & Ors., (1989) 3 SCC
488 and Ujagar Prints & Ors. (II) v. Union of India & Ors., (1989) 3 SCC
531, relied on.

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1819of1991.
E
From the Judgment and Order dated 8.1. 91 of the Customs Excise, and
Gold (Control) Appellate Tribunal, New Delhi in FlA. No. 2523/89-A in 0. No.
16191-A

Anil B. Divan, R.N. Das, T.L.V. Iyer, Ravinder Narain, Ashok Sagar,
Janesh Baweja, fyfs. Sonu Bhatnagar, Dilip Tandon, R.N. Verma and P. F
Parmeswaran for the appearing parties.

The Judgment of the Court was delivered by

KIRPAL, J. The appellant who is manufacturing biscuits is seeking to
impugn the assessable value of the biscuits manufactured by it for MIS. G
Britannia Industries Ltd. (hereinafter referred to as 'Britannia') pursuant to an
agreement which had been entered into between the two Companies.

It is not in dispute that the appellant was incorporated on 30.12.1982
and after making arrangements for obtaining finance it started a Unit from
3.1.1985 wherein it commenced commercial production of its own brand of H
630 SUPREME COURT REPORTS [2000) SUPP. I S.C.R.

A bisc11its.

On 15.12.1986, an agreement was entered into between the appellant and
Britannia which required the appellant to manufacture biscuits for Britannia.
The terms of the agreement, broadly speaking envisaged that the ingredients
for the manufacture of biscuits as well as the recipe or method by which the
B biscuits were to be manufactured were to be supplied by Britannia The
ingredients so supplied were also to be regarded as belonging to Britannia
for the manufacture of the biscuits. The appellant was required to make
packages as directed by Britannia and then supply the same under Britannia's
instructions. For the work done, the appellant was entitled to receive certain
C amount which was to b1: fixed from time to time. The agreement also
contemplated that if the biscuits were not manufactured upto the required
standard, then the same were to be destroyed and in respect of those biscuits
no payment was to be made to the appellant and on the contrary, the appellant
would become liable to pay for the cost of the ingredients which had got
spoiled.
D
What is material in this agreement is that there was a clause which
specifically provided that "relationship between the parties shall always be
that of principal and princ:ipal and not principal and agent". The agreement
also gave liberty to the appellant to continue to manufacture biscuits under
E other brands and to sell the same.

It is nobody's case that the Unit in question was established by or at
the behest of Britannia. The Unit had come into existence before the agreement
dated 15.12.1986 entered into between the parties.

F The trouble for appellant arose when it received a show cause notice
dated 16.11.1987 from the Assistant Collector requiring the appellant to show
cause as to why the assessable value should not be approved on the basis
of Britannia's wholesale cash price. A reference in the said show cause notice
was made to the agreement dated 15.12.1986.

G The appellant showed cause but the Assistant Collector by his order
dated 29.6.1988 came to the conclusion that the biscuits manufactured by the
appellant were to be cleared and excise to be paid on the value of the said
biscuits calculated after taking into consideration Britannia's wholesale price.

The appellant filed an appeal before the Collector (Appeals) and the
H Collector (Appeals) passed an order rejecting the said appeal and affirmed the
PAWAN BISCUITS CO. PVT. LTD. v. COLLECTOR OF CENTRAL EXCISE [KIRPAL, J.] 631

order of the Assistant Collector dated 29 .6.1988. In fact the Tribunal held that A
the appellant was an agent of Britannia and therefore it is the Britannia's
wholesale price which is to be taken into consideration for arriving at the
normal value for the purposes of computing the excise duty of the biscuits
manufactured by the appellant.

After hearing the learned counsel for the parties, we are of the opinion B
that the point in issue is no longer res integra. This Court has time and again
held that for the purpose of ascertaining assessable value post-manufacturing
expenses have not to be taken into consideration. This Court in Mis Ujagar
Prints and Others (II) v. Union of India and Others, (1989] 3 SCC 488, was
concerned with a number of issues raised by the appellant. The appellant was C
a processing house which inter a/ia processed the grey fabrics. Amongst
other issues which were raised, one of the contentions urged on behalf of the
appellant therein was that the grey fabric which was given for processing
continued to belong to the customer and the processing house was only
entitled to charge the processing charges. It was the case of the appellant
therein that the price of the grey cloth, of which the processing house had D
never become the owner, could never be taken into consideration in arriving
at the assessable value.

Repelling this contentions, this Court noticed that according to Sec. 4
of the Central Excise Act, the value of an article for the purposes of duty shall E
be deemed to be the wholesale cash price for which an article of the like kind
and quality was sold or was capable of being sold at the time of removal of
the article from the factory or premises of manufacture. It was then observed
that in the case of processing houses they became liable to pay excise duty
not because they were the owners of the goods but .because they caused the ·
manufacture of the goods. F
It was held that it could not be contended, keeping in view the
provisions of Sec 4 and the Central Excise (Valuation) Rules, 1975 that the
assessable value of the processed fabric should comprise only of the
processing charges disregarding the value of the grey cloth.
G
Justice Mukharji, in a separate but concurring judgment observed that
the assessable value of the goods manufactured would include the value of
the grey cloth in the hands of the processor plus the value of the job. work
done plus manufacturing profits and manufacturing expenses. The correct
.... assessable value was to be the value of the fabric at the factory gate at the H
632 SUPREME COURT REPORTS (2000] SUPP. I S.C.R.

A time when the manufactured goods leave the factory and enter the mainstream.
After the aforesaid judgment in Ujagar Prints' case was delivered on
4.11.1988 a civil miscellaneous application for clarification was filed.

The Constitution Bench in a two paragraph order dated 27.1.1989
B reported in [1989] 3 SCC 531, Mis Ujagar Prints and Others, (II) v. Union of
India and Others, clarified that the assessable value of the processed fabric
would be the value of the: grey cloth in the hands of the processor plus the
value of the job work done plus manufacturing profit and manufacturing
expenses whatever they pay. The factory gate was to mean the "deemed"
C factory gate as if the processed fabric was sold by the processor. To make
the position clear this Court gave the following example:

"If the value of the grey cloth in the hands of the processor is Rs.
20 and the value of the job work done is Rs. 5, then in such a case
the value would be Rs. 30, being the value of the grey cloth plus the
D value of the job work done plus manufacturing profit and expenses.
That would be the correct assessable value."

It was further observed that the brand at which the processing house
sells the goods "must be the value of the grey cloth or fabric plus the value
of the job work done plus the manufacturing profit and the manufacturing
E expenses but not any oth1:r subsequent profit or expenses. It is necessary 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".

The present case is similar to Ujagar Prints case. In Ujagar Prints'
F case, it was the grey cloth which was given to the processor whereas in the
present case it was the raw material for the manufacture of biscuits given to
the appellant. After the biscuits are made, they are given back to or are
delivered under the instmctions of Britannia. The appellant was entitled to
receive processing charges which would include its expenses plus profits for
G the purpose of determining the excise value. However, the cost of the raw
material supplied by Bri1annia will have to be included in addition to the
appellant's manufacturing costs and profit. What cannot be included on the
ratio of Ujagar Prints' case is any profit of Britannia or expenses which are
incurred after the manufacture of the biscuits by the appellant. Despite repeated
attempts made by the learned counsel for the respondent, we are unable to
H distinguish this case from the ratio laid down by this Court in the aforesaid
PAW AN BISCUITS CO. PVT.LTD. v COLLECTOR OF CENTRAL EXCISE [KIRPAL, J.] 633

two decisions of Ujagar Prints' case. A
This appeal is accordingly allowed. The excise authorities will be at
liberty to determine the amount of excise duty afresh in accordance with law.
There will be no order as to costs.

T.N.A. Appeal allowed. B