Holding

Only deductions expressly enumerated in Section 4 of the Central Excises and Salt Act are permissible; depot‑maintenance costs, TAC/warranty discounts and interest on finished goods are non‑deductible, while transportation, insurance, known trade discounts and interest on receivables are deductible, and assessable value in a cum‑duty price must be arrived at by first deducting permissible deductions before applying duty.

Summary

The Government of India appealed against the assessment orders of the Assistant Collector of Central Excise which allowed Madras Rubber Factory Ltd. (MRF) various deductions under Section 4 of the Central Excises and Salt Act, 1944, while disallowing others. The key disputes concerned whether expenses incurred in maintaining depots, special secondary packing, the Tyre Adjustment Committee (TAC)/warranty discount, turnover, year‑ending and prompt‑payment discounts, and interest on finished goods or receivables could be deducted from the wholesale price to determine assessable value. The Court held that only deductions expressly provided in Section 4 are permissible: depot‑maintenance costs cannot be deducted, but transportation and freight insurance can; secondary packing necessary for marketability is includable in value and not deductible; the TAC/warranty discount is a warranty claim, not a trade discount, and is non‑deductible; turnover, year‑ending and prompt‑payment discounts are known at removal and therefore deductible; interest on finished goods is non‑deductible, while interest on receivables is deductible. It also clarified that the assessable value in a cum‑duty price must be computed by first subtracting permissible deductions and then applying the ad‑valorem duty. The appeals were partly allowed, confirming the deductions allowed and disallowing those rejected by the revenue.

Issues considered

Whether expenses incurred in maintaining depots outside the factory gate are deductible under Section 4(1)(a) and 4(2).
Whether the cost of special secondary packing for tread rubber is deductible.
Whether the TAC/Warranty discount qualifies as a trade discount under Section 4(4)(d)(ii).
Whether the one‑percent turnover discount, year‑ending discount and prompt‑payment discount are deductible as trade discounts.
Whether interest on finished goods and interest on receivables are deductible post‑removal expenses.
How the assessable value should be computed when the selling price is a cum‑duty price.

Legislation cited

Central Excise Ruless. Rule 96
Central Excises and Salt Act, 1944s. 4(1)(a), s. 4(2), s. 4(4)(d)(i), s. 4(4)(d)(ii)

Subjects

central exciseassessable valuepost‑removal expensesdepot expensespackingtrade discountTAC warranty discountturnover discountyear‑ending discountprompt‑payment discountinterest on finished goodsinterest on receivablescum‑duty priceSection 4Central Excise Act

Judgment

THE GOVT. OF INDIA AND ORS. ETC. A
v.
' I THE MADRAS RUBBER FACTORY LTD. ETC.

MAY 3, 1995

[B.P. JEEVAN REDDY, SUHAS C. SEN, G.T. NANAVATI, JJ.] B

Central Excises and Salt Ac~ 19#-S. 4(1)(a) read with s.4(2)--Deter-
mination of assessable value-Post-removal expenses, deduction of-Goods
sold in course of wholesale trade not at place of removal but at depots outside
factory gate-Held, expenses in maintaining depots cannot be deducted from C
price; cost of transportation, cost of insurance on freight deductible.

Central Excises and Salt Act 19#-S.4(4)(d)(i)--Determination of
assessable value-Post-removal expenses, deduction of-<:ost ofpacking-
Held, is liable to be included in the value if such packing is necessary for
putting the excisable article in condition in which sold in wholesale market. D

Central Excises and Salt Ac~ 19#-S.4(4)(d)(ii)--Determination' of
f assessable value-Post-removal expenses, deduction of-Trade dis-
.counts-Whether 'Tyre Adjustment Committee' (TAC)/WlllTanty discount is
a trade discount that is deductible-Held, no; is only a claim for refund by E
buyer for manufacturing defect in goods . .

Central Excises and Salt Act, 19#-S.4(4)(d)(ii)--Determination of
assessable value-Post-removal expenses; deduction of-Trade dis-
counts-7'1ssessee granting dealers one per cent turnover discount on half
yearly basis depending on volume of purchases made by dealer-Held, is a F
discount known and understood at time or removal and hence deductible. .
. Central Excises and Salt Ac~ 19#-S.4(4)(d)(ii)--Determination of
assessable value-Post-removal expenses, deduction of-Trade dis-
count.s-Assessee granting dealers year-ending discount and p,rompt payment
discounHfeld, deductible since this system of discount is prevalent in the G
industry.

Central Excises and Salt Ac~ 19#-S.4(1)(a)--Determination of asses-
sable value-Post-removal expenses, deduction oHnterest on fmished
goods-Held, not deductible. H
1143
1144 SUPREME COURT REPORTS (1995] 3 S.C.R.

A Central Excises and Salt Act, 1944-S.4(1)(a}-Determination of asses-
sable value-Post-removal expenses, deduction of-interest on receiv- I
ables--Held, being amount received subsequent to sale from the depots is
excludible from value and hence deductible

Central Excises and Salt Act, 194<f-S.4(l)(a) read with s.4(4)(d)(ii)
B Explanation II-Computation of assessable value in a cum-duty price-Held,
decision in Assl Coll. of Central Excise v. Madras Rubber Factory, represents
co"ect view.

Words and Phrase~'Post-manufacturing expenses'-Held, is a legally
C inaccurate expression; post-removal expenses is more apt.

Consequent upon the judgment in Union of India & Ors. v. Bombay
Tyre international Ltd., (1984] 1 SCR 34, where this court enunciated the
principle governing the interpretation of S.4 of the Central Excises and
Salt Act, 1944 ('Act'), the Assistant Collectors (Central Excise) forwarded
D to this court orders allowing certain claims of the assessees for deductions
while disallowing certain others. The appeals were initially disposed of by
this court Assistant Collector of Central Excise & Ors. v. Madras Rubber
Factory Limited & Ors., (1987) 2 E.L.T. 553 but subsequently restored for
hearing after the Review Petition by the Revenue was allowed.
E MRF claimed that in respect of sales made at depots outside the
factory gate, the price charged included the charges for transportation as
also the expenses incurred in maintaining the depots apart from insurance
and storage charges. Since these were post-removal expenses ought to be
deducted from the price charged at the depot to arrive at the price charged
F at the place or removal in the course or wholesale trade. Alternative, the
department could accept the price at which MRF sold its goods to the
government at the factory gate as the normal price or all goods.

The Revenue disputed the deduction allowed to MRF in respect of
special secondary packing for tread rubber, Tyre Adjustment Committee
G (TAC)/ Warranty discount, one per cent turnover discount, year-ending
and prompt payment discount. Hindustan Lever's claim for deduction in
respect or 'outer packing' or cartons and cardboard boxes for their soaps ~-
was disallowed by the Assistant Collector. Tata Chemical Claimed deduc-
tion in respect or cost or packing or the goods in jute and polythe11e bags
H as well as drums.
t
GOVT. OFINDIAic MADRAS RUBBER FACTORY LTD. 1145

Partly allowing the appeals, this Court A
HELD : 1.1. Where the goods are sold in the course of wholesale
trade at place or places outside the place of removal, i.e., at depots, the
expenses incurred in maintaining and running the said depots cannot be
deducted from the price but the cost of transportation along with the c.ost
of insurance on freight can be deducted as held in Bombay Tyre lntema- ll
tional. [1170-E]

1.2 The only deduction permissible in such a situation is the one
expressly provided by the sub-section and no other. Where the freight is
averaged and the average freight is included in the wholesale case price so C
that the wholesale cash price at any place or places outside the factory gate
is the same as the wholesale cash price at the factory gate, the average
freight included in such wholesale cash price has to be deducted in order
to arrive at the real wholesale cash price at the factory gate and no excise
duty can be charged on such average freight. (1169-C, El
D
1.3. So far as depot sales are concerned, they are to a different class
of buyers and the price charged to each such class of buyer would be the
normal price. No direction can be given to the authorities to adopt the
price at which the assessee sells its goods to the government as the price
in respect of its total sales.
E
Union of India & Ors. v. Bombaj Tyre International Ltd. , [1984] 1
SCR347 and Union of India & Ors. v.Bombay Tyre International Pvt., (1984) ·
17 E.L.T. 329, followed.

Assistant Collector of Central Excise & Ors. v. Madras Rubber Factory
Limited & Ors., [1987] 2 E.L.T. 553 and Union of India & Ors. v. Duphar F
lnteifran Limited, (1987) 27 E.L.T. 599, explained and harmonised.

Assistant Collector of Central Excise & Ors. v. Madras Rubber Factory
Limited & Ors., (1989) 2 SCR 817; Vacuum Oil Company v. Secretary of
State for India in Council, L.R. 59 I.A. 258; Ford Motor Company of India G
Ltd. v. Secretary of State for India in Coundl, 65 I.A. 32; A.K Roy & Anr. v.
Voltas Ltd., [1973) 2 SCR 1089 and Attic Industries Limited v. H.H. Dave,
Assistant Collector of Central Excise & Ors., [1975) 3 SCR 563, referred to.

2.1 The test is whether the packing, the cost whereof Is sought to be
included, Is olfe in which It Is ordinarily sold in the course of a wholesale H
1146 SUPREME COURT REPORTS [1995] 3 S.C.R.

A trade to the wholesale buyer. If such packing is necessary for putting the
excisable article in the condition in which it is generally sold in the
wholesale market at the factory gate, then its cost is liable to be included
in the value of the good; and if it is not, the cost of such packing has to be
excluded. (1170-C]

B Union of India & Ors. v. Bombay Tyre Intemational Ltd., [1984] 1 SCR
347 and Unio11 of India & Ors. v. Godfrey Philips India Limited, [1985]
Suppl. 3 SCR 123, explained and harmonised.

Geep lnd~strial Syndicate Ltd. v.Union of India, (1992) 62 E.L.T. 328;
Collector of Central Excise v. M/s. Ponds India Ltd., [1989] 4 SCC 759 and
C Hindustan Polymers v. Collectors of Central Excise, [1989] 3 ·scR 974,
referred to.

2.2. On the findings recorded by the Assistant Collector disallowing
the plea of Hindustan Lever the only conclusion that can follow is that the
D cost of the cartons/cardboard boxes cannot be excluded frotp the value of
the goods. The judgment in Assistant Collector of Central Excise & Ors. •v
Madras Rubber Factory Limited & Ors., that secondary special packing
charges for tread rubber cannot be deducted from the assessable value Is
the correct one and needs no departure. The question in Union of India v.
Tata Chemicals, whether the bags of jute and drums are durable and
E therefore, their cost is deductible is essentially a question of facL The
· matter \\ill go back to the Assistant Collector who shall decide the question.
[1181·Gl

3.1. TAC/Warranty discount Is not a trade discount within the mean·
ing of Section 4(4)(d)(ii). It is only a claim for refund by the buyer for the
F manufacturing defect in the tyre sold by the assessee, which Is being
honoured by the assessee in a manner acceptable to both the parties.
[1185·H, 1186-A]
Union of India & Ors. v. Bombay Tyre International Ltd., (1984] 1 SCR
347, followed.
G
3.2. One percent turnover discount is known and understood at the
time of removal of the goods though it Is quantlfted later. This claim was
rightly allowed by the Assistant Collector. [1187·C]

3.3. Year-ending discount and prompt payment discount are
H prevalent in the industry and known and understood at the time of removal
GOVT. OFIND!Av. MADRAS RUBBER FACTORY LTD. 1147

of particular goods, though the amount is quantified later. This claim has A
I been rightly allowed by the Assistant Collector. [1188•C]

· 4. Interest on finished goods is expenditure incurred by the assessee
upto the date of delivery on account of storage charges and cannot be
deducted. Interest on receivables is the amount received subsequent to the
sale from the depots and does not fall within the ambit of any of the B
expenses held lncludlble in Bombay Tyre International, It Is clearly ex·
cludlble. The claim for this deduction Is, therefore, allowed. (1191-C)

Union of India & Ors. v. Bombay Tyre International Ltd., (1984] 1 SCR
347.
c
S. The method of computation of assessable value In a cum-duty
price, shall be the one indicated in Para 22 of the Judgment in Assistant
Collector of Central Excise & Ors. v. Madras Rubber Factory Limited & Ors.,
which represents the correct view. (1191-E]

6. The principles enunciated in Bombay Tyre International do estab· D
llsh that the expression 'post· manufacturing expenses' Is not only legally
inaccurate but Is also likely to lead to some confusion. The expression
'post-removal expenses' may be a more apt expression but even this expres·
sion may not be quite a correct expression. (1162-E, Fl
E
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 3195 of
1979 Etc. Etc.

From the Judgment-and Order dated 20.6.79 of the Kerala High Court
in WA No. 302 of 1978.

M. Chandersekbaran, Additional Solicitor General, Barish N. Salve, F
A.B. Diwan, Soli J. Sorabjee, F.S. Nariman, C.S. Vaidyanathan, A. Sobba
Rao, V.J. Francis, M. Gauri Shankar, N.K. Bajpai, V.K. Verma, C.V. Sobba
Rao, P. Parmeshwaran, K. Vasudev, Ms. A. Subhashini, Krishna Kumar,
Darshan Singh, Ms. Malini Sud, S.K. Gambhir, Vivek Gambhir, Ms. M.
Grover, P.H. Parekb, S. Faz!, Ms. P.S. Shroff, Ms. Monika Sharma, S.S. G
Shroff, S. Ganesh, Ravinder Narain, Rajan Narain, Ms. Amrita Mitra, Ms. S.
Bhatnagar, Rajiv Dutta, M.K. Michae~ Raju K. Lukose, K.R. Nambiar, S.C.
Sharma, K.V. Mohan, Mr. T.V.S.N. Chari, Sri Narian, K.J. Johan, Mohan Lal
Verma, H.K. Pur~ K.C. Dua and N.K. Aggarwal for the Appearing parties.

The Jndgment of the Court was delivered by H
1148 SUPREME COURT REPORTS [1995] 3 S.C.R.

A B. P. JEEVAN REDDY, J. Leave granted in S.L.P. (C) Nos. 10108 of
1980 and 4041 of 1981.

Having enunciated the principles governing the interpretation of
Section 4 of the Central Excise and Salt Act, as it stood before and after
the Amendment Act XXIJ of 1973 in Union of India & Ors. v. Bombay Tyre
B Intematiimal Ltd. & Ors., [1984] 1 S.C.R. 347, tthis Court (the bench
comprising P.N. Bhagwati, R.S. Pathak and A.N. Sen, JJ.) took up in-
dividual cases for disposal on May 3, 1984. The appeals and petitions were
allowed under what are called 'format orders' and the matters remitted to
assessing authorities with a direction to quantify and re-determine the
permissible deductior_.s in accordance with the law enunciated by them in
C their opinion in Bombay Tyre International as clarified in Union of India &
Ors. v. Bombay Tyre International Pvt. Ltd., [1984) 17 E.L.T. 329. Certain
other directions were also given with respect to the manner in which the
assessing authorities were to proceed in the matter of determing the value
to which it is not necessary to refer at this stage. The Assistant Collectors
D (Central Excise) accordingly passed orders allowing certain claims for
deductions and rejecting certain others. In terms of the format orders, the
assessing authorities forwarded the orders of assessment made by them to
this court along with the objections filed by the assessees in each cash. The
Revenue too filed certain objections. The matters were posted before a
Bench of this Court comprising P.N. Bhagwati, C.J. and V. Khalid, J. for
E finally determining and deciding several issues arising between the parties.
By their judgment dated December 20, 1986, the Bench disposed of the
appeals, Assistant Collector of Central Excise & . Ors. v. Madras Rubber
Factory Limited & Ors., (1987) 2 S.L.T. 553. Contending that the said
judgment is not in accord with the judgment in Bombay Tyre Intemationa~
the Revenue filed review petitions, which came to be allowed by a bench
F comprising R. S. Pathak, C.J. and L.M. Sharma, J. on May 1, 1989 reported
in 1989 (2) S.C.R. 817. By this order, the judgment and order dated
December 20, 1986 was recalled and the appeals restored to their original
number. It was directed that the appeals be listed again for fresh considera-
tion. It is pursuant to the order dated May 1, 1989 that these appeals have
G now come up before us for final disposal.
SECTION 4 AS IT STOOD BEFORE THE AMENDMENT ACT
XXII OF 1973 AND AS IT STANDS NOW: '"· '

Prior to the Amendment Act XXII of 1973, which came into force
H with effect from October 1, 1975, Section 4 read thus :
(
<

GOVT. OF INDIA v. MADRAS RUBBERFACTORY LID. (B.P. JEEVAN REDDY, J.J 1149

"4. Determination of value for the purposes of duty. - Where under A
this Act, any article is chargeable with duty at a rate dependent
on the value of the articl~, such value be deemed to be

(a) the whole sale cash price for which an article of the like
kind and quality is sold or is capable of being sold at the time
of the removal of the article chargeable with duty from the B
factory or any other premises. of manufacture or production
for delivery at the place of manufacture or production, or if
a wholesale market does not exist for such article at such
place,at the nearest place where such market exists, or

(b) where such price is not ascertainable, the price at which C
an article of the like kind and quality sold or is capable of
being sold by the manufacturer or producer, or his agent, at
the time of the removal of the article chargeable with duty
fro~ such factory or other premises for delivery at the place
of manufacture or production or if such article is not sold or D
is not capable of being sold at such place, at any other place
nearest thereto.

Explanation - In determining the price of any article under this
section no abatement or deduction shall be allowed except in
respect of trade discount or amount of duty payable at the time of E
the removal of the artiC:e chargeable with duty from the factory or
other premises aforesaid."

This section was practically a re-production of Section 30 of the Sea
Customs Act, 1878 which was the subject matter of two decisions of the
Privy Council in Vacuum Oil Company v. Secretory of State for India in F
council, (L.R. 59 I.A. 258) and Ford Motor Company of India Limited v.
Secretory of State for India in Council, (65 IA 32). Section 4 itself was the
subject matter of two decisions of this Court in A.K. Roy & Anr. v. Vol/as
Limited, (1973) 2 S.C.R. 1089 and Alic Industries Limired v. H.H. Dove,
· Assistant Collector of Central Excise & Ors., (1975] 3 S.C.R. 563. The G
Government of lndia felt that the operation of Section A (~Id) presented
certain practical difficulties some of which, according to it, were high-
lighted in the decision of this Court in Voltas Limited. With a view to
overcome the said difficulties in the working of the section, it felt· it
necessary to suitably revise the provisions contained in Section 4. Accord-
ingly, it introduced a Bill in the Parliament seeking to substitute the existing H
\

1150 SUPREME COURT REPORTS [1995] 3 S.C.R.

A Section 4 altogether. The Statement of Objects and Reasons appended to
the Bill (which later became the Amendment Act XXII of 1973) stated
under inter alia: ' in order the overcome the various difficulties experienced
in the working of the section it is proposed to suitably revised the valuation
provision contained in section 4 of the Act, providing, as far as practicable,
for assessment of excisable goods at the transaction value, except in ~reas
B where there may be scope for manipulation (such as sales to or through
related persons) and making specific stipulations with respect of situations
frequently encountered in the sphere of valuation'. Section 4, as substituted
by the said Amendment Act, reads thus :

"4. Valuation of excisable goods for purposes of charging of duty
c of excise .- (1) Where under this Act, the duty of excise is char-
geable 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
D
such goods are ordinarily sold by the assessee to a buyer in
the course of wholesale trade for delivery at the time and
place of removal, where the buyer is not a related person and
the price is the sole consideration for the sale :

E Provided that -

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

(ii) where such goods are sold by the assessee in the course
of wholesale trade for delivery at the time and place of
G removal at a price fixed under any law for the time being in
force or at a price, being the maximum, fixed under any such
law, then, notwithstanding anything contained in clause (iii)
of this proviso, the price or the maximum price, as the case
may be, so fixed shall in relation to the goods so sold, be
H deemed to ·be the normal price thereof;
(

oovr. OF INDIM. MADRAS RUBBER FACTORY LID. (B.P. JEEVAN REDDY, J.) 1~51

(iii) Where the assessee so arranges that the goods are A
.., f generally not sold by him in the course of wholesale trade
except to or through a related person, the normal price of
the goods sold by the assessee to or through such related
person shall be deemed to be the price at which they are
ordinarily sold by the related person in the course of
B
wholesale trade at the time of removal, to dealers (not being
related persons) or .lVhere such goods are not sold to such
dealer, to dealers (being related persons) who sell such goods
._._,... in retail;

(b) where the normal price of such goods is not ascer- c
tainable for the reason, that such goods are not sold or for
any other reason, the nearest ascertainable equivalent thereof
determined in such manner as may be prescribed.

(2) Where, in relation to any excisable goods the price thereof for
D
. .. delivery at the place of removal is. not known and the value thereof
is determined with reference to the price for delivery at 1a place
other· than the plai:e of. removal, the cost of transportation from
the place . of removal to the place of delivery shall be excluded
from such price
E
(3) The provisions of this section shall not apply in respect of any
excisable gods for which a tariff value has been fixed under sub-
section (2) of Sec. 3.

~
- (4) For the purpose of this Section, --
F
(a) "assessee" means the person who is liable to pay the duty
of excise under this Act and includes his ageni;

(b) "place of removal" means --

(i) a factory or any other place or premises of production or
G
•-', manufacture of the excisable goods; or

(ii) A warehouse or any other place or premises wherein the
excisable goods have been permitted· to be deposited without
payment of duty, from where goods are removed; H
1152 SUPREME COURT REPORTS [1995] 3 S.C.R.

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

B Explanation. - In this clause "holding company, "subsidiary
company" and "relative" have the same meaniogs as io the
Companies Act 1956 (1 of 1956);

(d) "value'', io relation to any excisable goods, --
c (i) where the goods are delivered at the time of removal in a
packed condition, includes the cost of such packiog except
the cost of the packiog which is of a durable nature and is
returnable by the buyer to the assessee.

D Explanation. - In this sub-clause, "packiog" means the wrap-
per, contaioer, bobbio, pirn, spool, reel and warp beam or
any other thiog io which or on which the excisable goods are
wrapped, contained or wound;

(ii) does not ioclude the amount of the duty of excise, sales
E tax and other taxes, if any, payable on such goods and, subject
to such rules as may be made, the trade discount (such
discount not beiog refundable on any account whatsoever)
allowed in accordance with the normal practice of the
wholesale trade at the time of removal io respect of such
goods sold or contracted for sale;
F
[Explanation added by Fioance Act, 1982 omitted as not
necessary for the purposes of this case,]

(e) "wholesale trade" means sales to dealers, industrial con-
G sumers, Government, local authorities and other buyers, who
or which purchase their requirements other wise than io
retail."

A reading of Section 4 lends itself to the following analysis:

H Where the duty of excise is chargeable on excisable goods with
(
GOVf. OF INDIA v. MADRAS RUBBER FACTORY LID. (B.P. JEEVAN REDDY, J.j 1153

reference to their value, the normal price at which such goods are A
i sol~ shall be deemed to be the value of such goods subject to other
' provisions of Section 4.

"Normal price" means the price at which'such goods are or-
dinarily sold by the assessee to a buyer in the course of wholesale
trade for delivery at the time and place of removal. If, however, B.
the buyer is a 'related persons" and the priced is not the sole
consideration for the sale, the price cannot be treated as the
__... 11
normal price 11 • In the case of sale to or through "related person",
normal price shall be determined as provided in proviso (iii) to
Section 4(1). c
It is, however, not necessary that there should be one uniform
normal price for all the goods sold by an assessee. There may be
cases where the goods are sold by the assessee at different prices
to different classes of buyer (not being, of course, related persons).
In such a case, the price charged to each class of buyers shall be D
deemed to be the normal price of such good in relation to each
such class of buyers, subjec~ of course, to the existence of other
circumstances specified in clause (a).

Where, however, the goods are sold in the course of wholesale
E
trade for delivery at the time and place of removal at a price fixed
under any law in force or where the law has specified the maximum
price, the price so fixed or the maximum price so specified, as the
case may be, shall be deemed to be the normal price of such goods.
~

" Where, however, the assessee generally sells his goods in the F
course of wholesale trade only to or through a related person, the
normal price shall be deemed to be the price at which such related
persons sells the said goods in the course of wholesale trade at the
time of removal to the dealers (not being related persons). [Since
this Rule is not relevant for our purposes, we are not stating the
Rule fully.]
G

If the normal price of excisable goods is not ascertainable for
the reason that the goods are not sold or for any other reason, the
value of such excisable goods (i.e., the nearest ascertainable
equivalent) shall be determined in the manner prescribed by rules H
1154 SUPREME COURT REPORTS (1995) 3 S.C.R.

A (Valuation Rules).

Where the price of any excisable goods at the place of removal '
is not known and, therefore, the value of such goods is determined
with reference to the price charged at a place other than the place
of removal, the cost of transportation from the place of removal
B to the place of delivery shall be excluded from such price.

The provisions of Section 4 do not, however, apply in respect
of any excisable goods for which tariff values are fixed under
sub-section (2) of Section 3.

c "Place of removal" means (i) a factory or any other place or
premises where the excisable goods are produced or manufac-
lured; (ii) a warehouse or any other place or premises where any
excisable goods have been permitted to be deposited without
payment of duty according to rules and from where such goods
D are removed.

"Value" includes the cost of packing where the goods are
delivered at the time of removal in a packed condition. "value" does _,
not, however, include the cost of packing which is of a durable
nature and is returnable by the buyer to the assessee. "Packing"
E shall be understood as defined in the explanation to Section
4(4)(d)(i).

"Value" does not include the amount of duty of excise, sales tax
and other taxes, if any, payable on such goods.

F • "
"Value" does not also include, subject to such rules as may be
made, trade discount allowed in accordance with the normal prac-
tice of the wholesale trade at the time of removal of such goods.
To qualify as a trade discount, the discount should not be refun-
dable on any account whatsoever,
G
Wholesale trade 11 means sales to dealers, industrial consumers,
11

government, local authorities and other buyers who purchase their
requirements otherwise than in retail.

Inasmuch as it is agreed before us by all the parties - with which
H submission we are in agreement - that the law enunciated by this Court in
(
GOVT. OF INDIA•. MADRAS RUBBER FACTORY LID. [B.P. JEEVANREDDY,J.J 1155

Bombay Tyre International represents the correct interpretation of Section A
4, both old and new, we do not think it necessary either to tefer to the
decisions of the Privy Council or of this Court referred to above. Indeed
all the relevant decisions rendered till then have been considered in the
said decision. We shall, therefore, proceed to ascertain the principles
enunciated in the said decision.
B
The main issue, referred to as 11 central issue", in that case was
"whether the value of an article for the purposes of the excise levy must be
determined by reference exclusively to the manufacturing cost and the
manufacturing profit of the manufacturer or should be represented by the
entire wholesale charged by the manufacture." This question arose in the
context of the fact that "the wholesale price actually charged by the c
manufacturer consists of not merely his manufacturing cost and his
manufacturing profit but includes, in addition, a whole range of expenses
and an element of profit (conveniently referred to as "post-manufacturing
expenses" and "post-manufacturing profit") arising between the completion
of the manufacturing process and the point of sale by the manufacturer." D
The contention of Sri N.A. Palkhivala, learned counsel for the assessees
was that the duty of excise has three essential characterstics, viz., (1) it is
a tax on manufacture or production and not on any thing else; (ii) unifor-
mity of incidence is a basic characterstic of the duty of excise; and (iii)
exclusion of post manufacturing expenses and post-manufacturing profits
is necessarily involved in the first principle and helps to achieve the second. E
On the other hand, the contention of Sri K. Parasaran, learned Solicitor
General/Attorney General of India, who appeared for the Union of India,
was that "the value of. an excisable article for the purposes of the levy must
be taken at the price charged by the manufacturer on a wholesale transac-
tion, the computation being made strictly in terms of the express provisions
of the statute ..... (and that) there is no warrant for confining the value to F
the assessee's manufacturing cost plus manufacturing profit". According to
him, "though the duty of excise is a levy on the manufacture of goods, it
was open to Parliament to adopt any basis for determining the value of an
excisable article, that the measure for assessing the levy need not cor-
respond completely to the nature of the levy and (that) no fault can be G
found with the measure so long as it bears a nexus with the charge."

·-' In the course of their judgment, the learned Judges laid down the
following principles:

(a) In enacting new Section 4, Parliament did not intend to bring into H
1156 SUPREME COURT REPORTS [1995J 3 S.C.R.

A existence a scheme of valuation different from that embodied in the old
Section 4. The object and purpose remained the same as also the central
principle at the heart of the scheme. The new Section 4 embodies a much
more comprehensive and clearly enunciated scheme for the determination
of the real value of an excisable article.

B (b) While the levy in our country has the status of a constitutional
concept, the point of collection is located where the statute declares it will
be. The measure adopted cannot be identified with the nature of the tax.
The measure employed for assessing a tax must not be confused with the
nature of the tax. While the levy of a tax is defined by its nature, the
C measure of the tax may be assessed by its own standard. While the measure
of the levy may indicate the nature of the tax, it does not necessarily
determine it. Hence, the Legislature, while enacting a measure to serve as
a standard for assessing the levy need not contour it along the lines which
spell out the character of the levy itself.

D (c) The contention that the duty of excise can be and must be levied
only on manufacturing cost and manufacturing profit is unacceptable. "In
both the old Section 4 and the new Section 4, the price charged by the
manufacturer on a sale by him represents the measure. Price and sale are
related concept and price has a definite connotation. The 'value' of the
excisable article has to be computed with reference to the price charged
E by the manufacturer, the computation being made in accordance with the
terms of Section 4."

(d) The normal price mentioned in new Section 4(1)(a) is the priced
at which the goods are ordinarily sold by the assessee in the course of
wholesale trade. It is the wholesale price charged by him. This is also the
F scheme underlying old Section 4.

(e) The value of excisable goods determined under new Section
4(1)(a) may very according to certain circumstances, a fact evident from
the three clauses in the proviso appended to clause (a) of sub-section (1).
G (I) The phrase "that is to say" following the expression "normal price"
in new Section 4(1)(a) make it clear that normal price is the price at which
such goods are ordinarily sold by the assessee to a buyer in the course of
wholesale trade for delivery at the time and place of removal where the
buyer is not a related person and the price is the sole consideration for the
H sale.
(
GOVT. OF INDIA•·. MADRAS RUBBER FACTORY LTD. (B.P. JEEVAN REDDY, J.( 1157

(g) The deductions specifically mentioned in Section 4 may not be A
exhaustive. The question "whether any further deductions can be claimed
i beyond those already mentioned in the statute will depend on the nature
of those claims in the case of a particular assessee."

It would be appropriate to set out the purpose of Section 4, both old
and new, as summarised in the judgment : B

"(i) The price at which the excisable goods are ordinarily sold by
the assessee to a buyer in the course of wholesale trade for delivery
..._ _..
_
at the time and place of removal as defined in sub-section (4)(b)
of Section 4 is the basis for determination of excisable value
provided, of course, the buyer is not a related person within the
c
meaning of sub-section ( 4)(c) of section 4 and the price is the sole
consideration for the sale. This proposition is subject to the terms
of three provisos to sub-section (l)(a) of section 4;

(ii) Where the price of excisable goods in the course of wholesale D
trade for delivery at the time and place of removal cannol be
ascertained for the reason that such goods are not sold or for any
other reason, the nearest ascertainable equivalent thereof deter-
mined in the manner prescribed by the Central Excises (Valuation)
Rules, 1975 should be taken as representing the excisable value of
the goods; E

(iii) Where wholesale price of any excisable goods for delivery at
the place of removal is not known and the valne thereof is deter-
mined with reference to the wholesale price for delivery at a place .
other than the place of removal, the cost of transportation from
F
the place of removal to the place of delivery should be excluded
from such price;

(iv) Of course, these principles cannot apply where the tariff value
has been fixed in respect of any excisable goods under sub-section
(2) of Section 3." G
(While setting out the summary, we have omitted the paras relating to the
---l meaning of the expression 'related person', since it is not necessary for the
purpose of the present appeals.)

The Court then took up the question whether any post- manufactur- H
1158 SUPREME COURT REPORTS [1995] 3 S.C.R.

A ing expenses are deductible from the price while determming the value of
an excisable article. Since this aspect is crucial to the issues arising herein,
it is necessary to examine this portion of the judgment with great care.
Pathak, J. observed in the first instance, that while old Section 4 provided
by its Explanation that in determining the price of any article under that
B section, no abatement or deduction would be allowed except, in respect of
trade discount and the amount of duty payable at the time of the removal
of the article chargeable with duty from the factory or other premises

c
aforesaid, the new Section 4 specifically provides for certain deductions.
The learned Judge mentioned the deductions claimed by the assessees in
those matters as :
~. -
(1) Storage charges.

(2) Freight or other transport charges, whether specific or
equalised.

D (3) Outward handling charges, whether specific or equalised.

(4) Interest on inventories (stocks carried by the manufacturer
after clearance.)

(5) Charges for other services after delivery to the buyer.
E (6) Insurance after the goods have left the factory gate. ·

(7) Packing charges.

(8) Marketing and Selling Organisation expenses, including adver-
tisement and Publicity expenses."
F
The learned Judge then mentioned the "two broac' bases" put forward
by the learned counsel on the basis of which the said deductions were
claimed, viz., (a) that in determining the value of an excisable article, all
expenses must be excluded which do not enter into the formula of manufac-
G turing cost plus manufacturing profit (an echo of the main contention of
Sri Palkhivala, which was rejected by the Court) and (b) that the price at
the factory gate and the. price at the depot outside the factory gate are
identical. The learned Judge then made the following observations which
are of particular relevance to the issues arising herein :

H "Now, the price of an article is related to its value (using this term
(
GOVT. OFINDJA,, MADRAS RUBBER FACTORY LTD. [B.P. JEEVAN REDDY, J.J 1159

in a general sense), and into that value have poured several ,.\
i components, including those which have enriched its value and
given to the article its marketability in the trade. Therefore, the
expenses incurred on account of the several factors which have
contributed to its value upto the date of sale, which apparently
would be the date of delivery, are liable to be included. Conse-
quently where the sale is effected at the factory gate, expenses
B
incurred by the assessee upto the date of delivery on account of
storage charges, outward handling charges, interest on inventories
,.. __ ,,,.. (stocks carried by the manufacturer after clearance), charges for
other services after delivery to the buyer, namely after-sales service
and marketing and selling organisation expenses including advertise- c
ment expenses cannot be deducted. It will be noted that advertise-
ment expenses, marketing and selling organisation expenses and
after-sales service promote the marketability of the article and
enter into its value in the trade. Where the sale in the course of
wholesale trade is effected by the assessee through its sales
D
organisation at a place or places outside the factory gate, the
exi{enses incurred by the assessee upto the date of delivery under
l the aforesaid heads cannot, on the same grounds, be deducted. But
the assessee will be entitled to a deduction on account of the cost
of transportation of the excisable article from the factory gate to
the place or places where it is sold. The cost of transportation will E
include the cost of insurance on the freight for transportation of
the goods from the factory gate to the place or places of delivery."

(Emphasis supplied)
" F
The learned Judge added :

"Where freight is averaged and the averaged freight is included in
the wholesale cash price so that the wholesale cash price at any
place or places outside the factory gate is the same as the wholesale
cash price at the factory gate, the averaged freight included in such G
wholesale cash price has to be deducted in order to arrive at the
--1 real wholesale cash price at ,the factory gate and no excise duty
can be charged on it."

The learned Judge then took up the issue of packing. After referring H
1160 SUPREME COURT REPORTS [1995) 3 S.C.R.

A to sub-clause (i) of clause (d) of sub-section (4) and the explanation
appended to the said sub-clause, the learned Judge observed, "the packing \
of which the cost is included is the packing of which the goods are
wrapped, contained or wound when the goods are delivered at the time of
removal. In other words it is the packing in which it is ordinarily sold in the
B course of wholesale trade to the wholesale buyer." (Emphasis added) The
learned Judge referred to the fact that the degree of packing will vary from
one class of articles to another and to the concept of primary and secon-
dary packings and observed :

"We must remember that while packing is necessary to make the
c excisable article marketable the statutory provision calls for strict
construction because the levy is sought to be extended beyond the
manufactured article itself. It seems to us that the degree of secon-
dary packing which is necessary for putting the excisable article in
the condition in which it is generally sold in the wholesale market
the factory gate is the degree of packing whose cost can be included
D in the "value" of the article for the purposes of the excise levy. To
that extent, the cost of secondary packing cannot be deducted
from the wholesale cash price of the excisable article at the factory
gate. 11

(Emphasis supplied)
E
The learned Judge appended a clarificatory note to the above state-
ment to the effect, "if any special secondary packing is provided by the
assessee at the instance of a wholesale buyer which is not generally
provided as a normal feature of the wholesale trade, the cost of such
packing shall be deducted from the wholesale cash price". Towards the
F end, the learned Judge made it clear that the position explained by him in
regard to the cost of packing under the Act is the same both before and
after the Amendment of Section 4.

On November 14/15, 1983, the very same Bench made the following
G clarifications with respect to certain claims for deductions. It would be
appropriate to set out the entire order [except paragraph (6) which con-
tains a direction regarding posting the matters] :

"1. Trade Discounts. - Discounts allowed in the trade (by whatever
name such discount is described) should be allowed to be deducted
H from the sale price having regard to the nature of the goods, if
(
oovr. OF INDIA'· MADRAS RUBBER FACTORY LTD. [B.P. JEEVAN REDDY,J.J 1161

established under agreements or under terms of sale or by estab- A
lished practice, the allowance and the nature of the discount being
known at or prior to the removal of the goods. Such Trade
Discounts shall !'ot be disallowed only because they are not payable
at the time of each invoice or deducted from the· invoice price.

2. Taxes, - Additional Sales Tax, Surcharge on Sale Tai<,. and B.
Turnover tax should be allowed to be deducted from the sale price
in order to arrive at the assessable ·value, and also octroi where
payable/paid by the manufacturer. These taxes if proved to have
been paid, should be allowed even if they are paid periodically to
the relevant taxing authorities in accordance with the relevant C
provisions of taxing statutes/rules.

3. It is clarified that the cost of insurance mentioned in the judg-
ment as part of the cost of transportation which is to be included
as a deduction is the transit transport insurance covering transpor-
tation of the goods from the factory gate to the place or places of D
delivery.

4. Where a company has more than one factory located at different
places and the prices at the depots is the same irrespective of the
lack of identification of the goods from a particular factory of E
production, the deductions as set out in this judgment and as
explained in this order shall be computed and allowed on the basis
of such price.

5. This order shall be by way of clarification of the judgment
delivered on 7th October, 1983." F

(Emphasis in the original)

Thereafter, individual appeals were taken up and disposed of under
'minutes of the orders' ('format orders') signed by counsel for both the
sides. Pursuant to format orders, the concerned Assistant Collectors of G
Excise passed o~ders after an elaborate enquiry and hearing. In terms of
the format orders, the assessment orders along with the objections filed
against them came up for hearing before a Bench comprising P.N. Bhag-
wati, C.J. and V. Khalid, J. as stated hereinbefore. By their judgment and
order dated December 20, 1986, the learned Judgment dealt with each of H
'\

SUPREME COURT REPORTS [1995] 3 S.C.R.

A the deductions claimed and recorded their opinion therein. The said
judgment, however, has been recalled by another bench on May 1, 1989.
The order dated May 1, 1989 directs that the cases be restored to their
original number and be listed against for fresh consideration.

We may mention at this juncture that tho~gh the objections filed by
B the State to the orders of assessment made by the Assistant Collectors were
confined to two deductions only, viz., DAC!fAC/warranty discount and
special secondary packing, the Revenue was allowed to raise objections
with respect to other deductions (allowed by the Assistant Collectors) also
before the Bench of P.N. Bhagwati, C.J. and V. Khalid, J. We too are of
C the opinion that this is a matter where we should not feel inhibited by such
technicalities. Further because the Review Order states that the appeals be
listed for fresh hearing and also because the aforesaid technical objection
may not be available in all the matters now before us, we have permitted
the learned counsel for the assessees and the Revenue to make their
D submissions on all the issues arising from the orders of tJie Assistant
Collectors in the matters before us.

Before we proceed further, it is appropriate to correct a certain
phraseological inexactitude: the principles enunciated in Bombay Tyre
Intemational do establish that the expression "post manufacturing expen-
E ses" is not only legally inaccurate but is also likely to lead to some con-
fusion. The said expression is associated with and an extension of the
concept of manufacturing cost and manufacturing profit espoused by the
learned counsel for the assesses in the said case but rejected by the Court.
The expression "post-removal expenses" may be more apt expression but
F even this expression may not be quite a correct expression. As pointed out
specifically in Bombay Tyre Intemational, there are quite a few "charges for
other services after delivery to the buyer, viz., after-sales service and
marketing and selling organisation expenses including advertisement ex-
penses" which though incurred after the removal of the goods from the
place of removal, cannot yet be deducted from the price. Therefore,
G 11
wherever the expression post-removal expenses" occurs hereinafter, it
must be understood only as a convenient expression rather than a precise
expression with a definite connotation.

It is obvious that the value of excisable goods for the purpose of
H sub-section(l) of Section 4 is ordinarily determined with reference to the
(
GOVT. OF INDIA• MADRAS RUBBER FACIDRY LTD. [B.P. JEEV AN REDDY. 1.J 1163

normal price at which such goods are sold, i.e., under clause (a) of A
! sub-section (1) of Section 4. Only where the goods are not sold and,
therefore, the price of such goods is not ascertainable or in a situation
where the normal price of such goods is not ascertainable for some other
reason that clause (b) is attracted, whereunder the nearest ascertainable
equivalent price is ascertained in accordance with the rules framed in that
behalf. Clause (b) is in the nature of a residuary clause which should be B
resorted to where the normal price cannot he ascertained for the reasons
mentioned therein. In other words, where the normal price is available or

... ,. is ascertainable, resort to clause (b) is not permissible.

PART - II c
We may now proceed to deal with each of the deductions in issue in
these matters keeping in mind the provisions of Section 4 and the prin-
ciples enunciated by this Court in Bombay Tyre International. The first
deduction which happens to be the principle claim made by the Madras
D
Rubber Factory - and urged strongly by Sri F.S. Nariman - is the deduction
of the expenses incurred by the assessee upon the maintenance of the
depots from where the goods manufactured by it is delivered in the course
of wholesale trade. It is explained that the Madras Rubber Factory sells all
the tyres and other goods manufactured by it (except those sold to the
government) only through its depots. Only the sales to the government are E
at the place of removal, i.e., at the gate. Except the sales to government,
there are no sales at the gate. The goods manufactured are first taken to
several depots spread all .over the country and sold from such depots in
the course of wholesale trade. This is done both in the business interest of
'
. the assessee as also to provide convenient delivery points to the buyers .
The value under Section 4(1), says the learned counsel, has to be deter- F
mined with reference to the place or removal, i.e., at the gate. The price
charged at the depots includes the charges incurred for transporting the
goods from the place of removal to the depots concerned as also the
expenses incurred in maintaining the depot. It also includes the insurance
charges incurred for insuring the goods while in transit and also while the
goods are stored at the depots. Storage charges and several other charges
G
are also incurred at the depots. All these charges are incurred, says Sri
Nariman, subsequent to the removal of goods, i.e., removal from the gate.
Since they are all post-removal expenses, learned counsel says, _they must
necessarily be deducted from the price charged at the depot for ascertain-
ing the price charged at the place of removal in _the course of wholesale H
/

1164 SUPREME COURT REPORTS [1995] 3 S.C.R.

A trade. Sri Nariman has an alternate, and a simpler, solution. He suggests
that all the aforesaid exercise can be avoided if the department accepts the '
price at which the assessee sells its goods to the government at the gate as
the normal price of all the goods sold for the purpose of Section 4(1)(a).
He submits that it is not the case of Revenue that the sales to the
government are not normal or genuine transactions. It is also not suggested,
B he says, that the price at which the goods arc sold to the government is not
the normal price in the course of wholesale trade. In such a situation, the
most convenient • convenient form the point of view of the Revenue as well
as the assessee · course would be to treat the price at which the goods are
sold to the government as the normal price within the meaning of Section
C 4(1)(a). In fact, the foarned counsel says, that should be the only method.
However, if for some reason, the Revenue is not prepared to adopt this
course then, he says, the Revenue has to deduct all the aforesaid expenses
and not merely the transportation charges as specifically provided by
sub-section (2) of Section 4. Sri Nariman relies upon the holding in Bombay
Tyre International that deductions other than those specifically mentioned
D in Section 4 are permissible in law, depending no doubt upon the character
of the deduction claimed. On the other hand, Sri Chandrasekheran,
learned Additional Solicitor General, submits that sub-section (2) of Sec-
tion 4 does specifically envisage and provide for the situation concerned
herein. It provides expressly that where the price of any excisable goods is
E not known at the place of removal and the value of such goods is deter·
mined with reference to the price charged at the time of their delivery from
a place other than the place of removal, the transportation charges in·
curred for transporting the goods from the place of removal to the place
of such delivery shall be excluded. The learned Additional Solicitor
General says that since the Act has provided only for one specific deduc-
F tion, it is reasonable to presume that it does not permit any other deduc· '
tion. Both counsel rely upon certain observations in Bombay Tyre
International in support of their respective contentions which we may quote
hereinbelow : having $el out the several deductions which were in issue
before them, Pathak, J. proceeded to deal with them. Inasmuch as Sri
G Nariman says that the said observations have to be understood in the light
of and in the context of certain preceding observations, we set out the
relevant paragraph along with the preceding paragraph :

"At the outset, we must make it clear that the contentions in this
".
regard on behalf of the assessees proceeds on two broad bases.
H The first is that to determine the value of an excisable article, all
(
GOVT. OF INDIA,. MADRAS RUBBER FACTORY LTD. [B.P. JEEVAN REDDY,J.] 1165

expenses must be excluded which do not enter into the formula of A
manufacturing cost plus manufacturing profit. This follows from
the principal plank of the assessees' case that the "value" must be
confined to the manufacturing cost, and the manufacturing profit.
For, it is said, that if the deductions claimed are allowed, the price
would be brought dowo to the conceptual value. All post manufac- B
luring expenses are claimed from that perspective and within that
context. The other basis on which' the claim proceeds, is that the
price at the factory gate and the price at a depot outside the factory
gate are identical.

We shall now examine the claim. It is apparent that for the purpose C
of determining the "value", broadly speaking both the old s.4(a)
and the new s.4(1)(a) speak of the price for sale in the course of
wholesale trade of an article for delivery at the time and place of
removal, namely, the factory gate where the price contemplated
under the old s.4(a) or under the new s.4(1)(a) is not ascertainable, D
the price is determined under the old s.4(b) or the new s.4(1)(b).
Now, the price of an article is related to its value (using this term
in a general sense), and into that vaiue have poured several
components, including those which have enriched its value and
given to the article its marketability in the trade. Therefore, the
expenses incurred on account of the several factors which have E
contributed to its value upto the date of sale, which apparently
would be the date of delivery, are liable to be included. Conse-
quently where the sale is effected at the factory gate, expenses
incurred by the assessee up to the date of delivery on account of .
storage charges, outward handling charges, interest on inventories
(stocks carried by the manuf?cturer after clearance), charges for F
other seroices after delivery to the buyer, namely after-sales seroice
and marketing and selling organisation expenses including advertise-
ment expenses cannot be deducted. It will be noted that advertisment
expenses, marketing and selling organisation expenses tind after sales
I' seroice promote the marketability of the article and enter into its value G
in the trade. Where the sale in the course of wholesale trade is effected
by the assessee through its sales organisation at a place or places
outside the factory gate, the expenses incurred by the assessee upto
the date of delivery u11der the aforesaid heads ca1111ot, on the same
grounds, be deducted. But the assessee will be e11titled to a deduction
011 accou11t of the cost of transpo1tatio11 of the excisable 01ticle from H
'\,

1166 SUPREME COURT REPORTS [1995] 3 S.C.R.

A the fact01y gate to the place or places where it is sold. The cost of
transportation will include the cost of insurance on the freight for
transportation of the goods from the factory gate to the place or
places of delivery."

(Emphasis added).
B
We may also set out the paragraph immediately succeeding the above
paras:

~-
"Where freight is averaged and the averaged freight is included in
the wholesale cash price so that the wholesale cash price at any
c place or places outside the factory gate is the same as the wholesale
cash price at the factory gate, the averaged freight included in such
wholesale cash price has to be deducted in order to arrive at the
real wholesale cash price at the factory gate and no excise duty
can be charged on it."
D
The relevant paragraph states two propositions relevant in this be-
half, viz., (i) where the sale is effected at the factory gate, the several
expenses mentioned including "charges for other services after delivery to
the buyer, viz., after-sales service and marketing and selling organisation
expenses cannot be deducted" from the price and (ii) where the sale is
E effected through the assessee's sales organisation at a place or places
outside the factory gate, even there the aforesaid expenses ·cannot be
deducted. The assessee, however, will be entitled in such a case to deduct
the cost of transportation (including the cost of insurance on the freight)
incurred for transporting the goods from the gate to the place of delivery.

F The contention of Sri Chandrasekharan is that in view of the
aforesaid emphatic statement, the expenses claimed by the assessee on
account of the maintenance of the depots cannot be allowed. Sri Nariman,
however, contends that the said observations must be understood in the
light of the two "bases" set out in the preceedings paragraph and particular-
ly the second of them which reads: "(T)he other basis on which the claim
G proceeds is that the price at the factory gate and the price at a depot '
outside the factory gate are identical". Learned counsel contends that only L
where the price at the factory gate and price at the depot outside the
factory gate is identical tO.at the statement aforesaid applies and not
otherwise. We find it difficult to agree with this explanation or under-
H standing, as it may be called. We may elaborate. If the selling price at the
(

GOVT. OF INDIA,. MADRAS RUBBER FACTORY LTD. (B.P. JEEVAN REDDY,J.j 1167

factory gate and the depot outside the factory gate) are identical, question A
of deducting the transportation charges from the price charged at the
depots does not arise. If the price at the depot is known, there is no
occasion for going further and indulging in the exercise provided by
sub-section (2) of Section 4. Only whether the price at the gate (at the
place of removal) is not known that one is put to the necessity of making
the aforesaid deduction from the price charged at the depot; this deduction B
is made precisely for the purpose of ascertaining the price at the gate. It
may also be noted that the first of two bases (referred to in the first
,...< paragraph in the above extract) is admittedly inapplicable, having been
roundly rejected in Bombay Tyre llltemational. Then how is it that the
second basis alone is applicable. The very idea is a contradiction in terms. C
We, cannot, therefore, understand the aforesaid statement of law in Bom-
bay Tyre International. as premised on the basis urged by Sri Nariman. The
· reasoning of Sri Nariman does appear to be logical and attractive exfacie
but it flies directly in the face of the clear holding in Bombay Tyre
International and cannot, therefor, be accepted.
D
It is brought to our notice that this claim was accepted by the Bench
comprising Bhagwati, C.J. and Khalid, J. in their judgment dated Decem-
ber 20, 1986 inAssistant Collector of Central Excise & Ors v. Madras Rubber
Factory Ltd. & Anr, (1987) 27 E.L.T. 553 - the judgment since reviewed and
recalled. Paragraph (17) of the Judgment reads:
E
"The next head which was urged for our consideration relates to
the cost of distribution incurred at the duty paid sales depots. in
the judgment in Union of India and Others v. Duphar Inteifran Ltd.,
(Civil Appeal No. 569 of 1981) reported in 1984 Excise and
Customs Reporter at page 1443, we have held that the cost of
distribution is not to be included in the ass.essable value in case F
the wholesale dealers take delivery of the goods from outside duty
paid godown. The wholesale dealers having taken delivery of the
goods manufactured by MRF Ltd. and there being a removal of
the goods from the factory gate, the cost of distribution at duty
paid sales depots cannot be taken into account for the purpose of G
determining the assessable value of the goods."

Apart from the fact that this judgment was recalled at the instance
of Revenue on the ground that 'jJJinia facie ......... in respect of certain items
an inconsistency is present in the impugned judgment when regard is had
to the law laid down by this Court in Union of llldia v. Bombay Tyre H
1168 SUPREME COURT REPORTS [1995] 3 S.C.R.

A International" (as per the Order in Review Petition), the above holding
appears to be mainly influenced by what is said to have been decided in
Union of India & Ors v. Duphar lnteifran Limited, (1987) 27 E.L.T. 599.
The order in Duphar lnteifran Limited, however, does not appear to bear
it out. The entire order comprises only one short paragraph which reads
as follows :
B
"The only question that arises in this appeal relates to the five per
cent extra charge which is made by the respondent to the wholesale
dealers in respect of packing and distribution costs, this charge of
five per cent does not represent the cost of unit packing but merely
c represents the cost of additional packing if it is so desired by the
wholesale dealers and moreover in such case the wholesale dealers
take delivery of the goods manufactured by the respondent from the
duty-paid warehouse situated outside the factory premises. Since
these averments made by the respondent in the Writ Petition have
not been controverted on behalf of the appellants, we must hold
D that 5 per cent extra charge cannot be taken into account by the
authorities for the purpose of determining the assessable value of
the goods for excise duty. The High Court was in the circumstances
right ih excluding 5 per cent extra charge from the assessable value
and the appeal must, therefore, fall and be dismissed with no order
E as to costs."

(Emphasis added)

A reading of the Order makes it clear that the extra five percent
p charge, which was allowed, represented the cost of additional packing
desired by the buyer. The further observation to the effect, "and moreover
in such case the wholesale dealers take delivery of the goods manufactured
by the respondent from the duty-paid warehouse situated outside the
factory premises" does not mean that any portion of five percent extra
charge represented the expenses incurred on maintaining and running the
G depots outside the place of removal. The order appears to have turned
more on the ground of absence of denial of assessee's averments by the
I. .
Revenue. In any event, it is not possible to read the said Order as laying
down a proposition contrary to the considered and specific holding in the
decision in Bombay Tyre International. It is also not reasonable to read any
H inconsistency between both the orders, inasmuch as the Bench which made
(

GOVL OF INDIA•·. MADRAS RUBBER FACTORY LID. [RP. JEEVAN REDDYJJ 1169

the order in Duphar Inte1fra11 Limited is the very same bench which A
delivered the judgment in Bombay Tyre Inte111atio11al. The learned Judges
could not have certainty laid down a contrary proposition in Duphar
Inteifran Limited to the .one specifically laid down in Bombay Tyre I11ter-
11atio11al. In this behalf, it is relevant to note that sub- section {2) of Section
4 which envisages a situation where the goods are not sold at the place of
removal but are sold at a place other than the place of removal, pr6vides
B·
for deduction of the cost of transportation from the place of removal to
the place of delivery. It would be reasonable to presume that the only
deduction permissible in such a situation is the one expressly provided by
#· ..
the sub-section and no other. So far as insurance charges on the freight
transported from the place of removal to the selling points allowed in C
Bombay Tyre Imemational are concerned, they were allowed evidently
because they form an adjunct of the transportation charges and are in-
cidental thereto. We are also of the opinion that the holding in Bombay
Tyre International that deductions other than those specifically mentioned
in Section 4 can yet be conceived of may not be available to the assessee D
herein in view of the express enunciation of law in the very decision on ihe
issue now in question. We may add here that where the freight is averaged
and the average freight is included in the wholesale cash price so that the
wholesale cash price at any place or places outside the factory gate is the
same as the wholesale cash price at the factory gate, the averaged freight
included in such wholesale cash price has .to be deducted in order to arrive E
at the real wholesale cash price at the factory gate and no excise duty can
be charged on such averaged freight, as clarified in Bombay Tyre Interna-
tional (paragraph quoted supra).,

We agree that it is for each assessee to decide where to sell his goods. p
He can choose to sell his goods at the gate, at the place of removal or he
may choose to sell his goods through his selling organisation, as in the case
of Madras Rubber Factory. Where the goods are sold in the course of
wholesale trade through depots outside the place of removal, the assessee
does no doubt incur expenses not only for transporting the goods from the
place of removal to the depots but also on maintenance and running of G
depots but these. expenses, according to Bombay Tyre International are on
the same par as after-sale service charges and advertisement charges and
hence cannot be deducted. Where, however,· the freight charges are
equalised in the manner indicated in the preceding paragraph, such char-
ges can be deducted from the normal price; it is obvious that such deduc- H
1170 SUPREME COURT REPORTS [1995) 3 S.C.R.

A tion will be common to the price at the gate and at the depots outside the
gate-because of the equalisation, the price will equally be uniform at the
gate as well as at the depots. This aspect will become clearer once we deal
with the permissibility of the deductions claimed.

With respect to the alternative argument of Sri Nariman, we must say
B that no direction can be given to the authorities to adopt the price at which
the assessee sells its goods to the government as the price in respect of its
total sales. Firstly, by virtue of proviso (i) to Section 4{1){a), the govern-
ment would be a 'class by itself and the price charged to it would be relevant
only to the goods sold to it. So far as depot sales are concerned, they are
C to a different class or classes of buyers and in respect of the goods sold to
them, the price charged to each of such class of buyers would be the normal
price. The price charged to one class of buyer cannot, therefore, be
directed to be adopted as the price in respect of all the classes of buyers.
Since the position under the old Section 4 and new Section 4 is held to be
the same, this holding holds good for both periods.
D
For the above reasons, we are unable to give effect to the submission
of Sri Nariman. We hold that in cases where the goods are sold in the
course of wholesale trade at place or places outside the place of removal,
i.e., at depots, as in the case of Madras Rubber Factory, the expenses
E incurred in maintaining and running the said depots cannot be dedncted
from the price but the cost of transportation along with the cost of
insurance on freight can be deducted as held in Bombay Tyre International.
This holding does not, of course, prevent the assesses from representing
their case to the government if they are so advised in this behalf and it is
for the government to consider the same in the light of all relevant
F circumstances.
PART-III

We may now take up the issue relating to packing charges. Sub-
clause (i) of clause (d) of sub-section ( 4) of Section 4 says that "value in
G relation to any excisable goods, where the goods are delivered at the time
of removal in a packed condition, includes the cost of such packing except
the cost of the packing which is of a durable nature and is returnable by
I.•
t1!e buyer to the assessee". The Explanation to the sub-clause defines what
does "packing" mean in the said sub-clause. The provision in the sub-clause
H is a plain one and does not admit of any ambiguity. What it says is that
(
GOVT.OF INDIA•. MADRAS RUBBERFACTORYLlD.{B.P.JEEVANREDDY,J.{ 1171

where the goods are delivered in a packed condition, at the time of A
removaL the cost of such packing shall be included and that only where
such packing is of a durable nature and is returnable by the buyer to the
assessee, should the cost of such packing be not included in the value of
the goods. The concept of primary and secondary packing has, however,
been urged by the assessees and recognised to some extent in the decisions B
of this Court including Bombay Tyre International. While it may not be
possible for us to wish away the said distinction, we cannot but remind
ourselves that this is a refinement not borne but by the express language
of the enactment and must, therefore, be resorted to with care and cir-
cumspection. Be that as it may, we shall now turn to the law on the subject
as enunciated in Bombay Tyre International. C
After referring to the sub-clause and the explanation aforesaid,
Pathak, J. stated that the cost ofpacking contemplated by the said sub-clause
as included in the value of the goods packed is the cost of ''packing in which
it is ordinarily sold in the course of wholesale trade to the wholesale buyer."
The learned Judge recognised that the degree of packing will vary from D
one class of excisable goods to another and observed that while there is no
controversy about what may be called the 'primary packing' (examples of
which were given by him), serious dispute has arisen with respect to the
cost of secondary packing. Observing that secondary packing may be of
different grades, the learned Judge posed the questions "is all the packing, E
no matter to what degree, in which the wholesale dealer takes delivery of
the goods to be considered for including the cost thereof in the 'value'? or
does the law require a line to be drawn somewhere?" and answered them
in the following words :

"We must remember that while packing is necessary to make the F
excisable article marketable, the statutory provision calls for strict
construction because the levy is sought to be extended beyond the
manufactured article itself. It seems to us that the degree of secon-
dary packing which is necessary for putting the excisable article in
the condition in which it is generally sold in the wholesale market at G
the factory gate is the degree of packing whose cost can be included
in the "value" of the article for the purpose of the excise levy. To that
extent, the cost of secondary packing cannot be deducted from the.
wholesale cash price of the excisable article at the factory gate."

(Emphasis added) H.
1172 SUPREME COURT REPORTS [1995] 3 S.C.R.
A The learned Judge added that if any case special secondary packing
is provided by the assessee at the instance of the .wholesale buyer, which
is not generally provided as a normal feature of the wholesale trade, the
cost of such packing shall be deducted from the wholesale cash price. The
basic test evolved by the learned Judge is the one which we have under-
B lined/ emphasised in the preceding paragraph. The test, to repeat, is: that
packing in which it is ordinarily sold in the course of wholesale trade to
the wholesale buyer, which test was elaborated to mean that degree of
secondary packing which is necessary for putting the excisable article in
the condition in which it is generally sold in the wholesale market at the
factory gate. It is the cost of such packing that has to be included in the
C value of the excisable goods unless the packing is of a durable nature and
I
is returnable by the buyer to the assessee. This holding in Bombay Tyre
International has been uniformly accepted and applied in the subsequent
decisions of this Court though there has been some divergence in emphasis
in some of them, to which it is necessary to refer in view of the contentions
D urged by Sri Harish Salve, learned Counsel for the assessee in one of the
appeals.

The decision of this Court in Union of India & Ors. v. Godfrey Philips
India Limited Etc. Etc., [1985] Supp. 3 S.C.R. 123 was heard by the very
E same Bench of three learned Judges that decided Bombay Tyre Internation-
al. All the three learned Judges uniformly reiterated the principles and the
test evolved in Bombay Tyre International but arrived at divergent con-
clusions (the majority comprising Pathak and Sen, JJ. taking one view and
Bhagwati, C.J., the other) on the basis of differing perceptions as to the
F factual situation in that case. The relevant facts as set out in the opinion
of Bhagwati, C.J. are : the respondent-assessee was engaged in the
manufacture of cigarettes. The cigarettes were packing initially in
paper/cardboard packets of ten and twenty. These packets were packed
together in paper/cardboard cartons/outers. These cartons/outers were
then placed in corrugated fibreboard containers. It is these corrugated
G fibreboard containers (CFCs} filled with cartons/outer containing the pack-
ets of cigarettes of ten and twenty which were delivered by the assessee to
the wholesale dealers at their factory gate. So ar as the cost of initial
packing is concerned, there was no dispute. Similarly, there was no dispute ;.
with respect to the cost of paper/cardboard cartons/outers. The dispute,
H however, centred round the cost of CFCs. Bhagwati, C.J., referred to the
(
GOVT. OF INDIA"· MADRAS RUBBER FACTORY LTD. (B.P. JEEVAN REDDY, J.) 1173

holding in Bombay Tyre International, to the provisions of Section A
4(4)(d)(i) and the explanation thereto and opined:

"It is apparent from ihe wide language of the Explanation that
every kind of container in which it can be said that the excisable
goods are contained would be 'packing' within the meaning of the B
Explanation and this would necessarily include a fortiorari cor-
rugated fibre board containers in which the cigarettes are con-
tained...... corrugated fibre board containers in which the cigarettes
are contained fall within the definition of 'packing' in the Explana-
tion and if they from part of the packing in which the goods are
packed when delivered at the time of removal, it is difficult to resist C
the conclusion that under Section 4(4)(d)(i) read with the Explana-
tion, the cost of such corrugated fibre board containers would be
liable to be included in the value of the cigarettes."

The learned Chief Justice then evolved the test of "necessity or essenti,ality D
of such secondary packing" for sale of the excisable goods at the factory
gate in the course of wholesale trade and held that the fact that the CFCs
are used in order to protect the goods against damage during the course
of transportation is no ground to exclude their cost. The learned Chief
Justice observed :
E
"The question is not for what purpose a particular kind of packing
is done. The test is whether a particular kind of packing is done
in order to put the goods in the condition in which they are
generally sold in the wholesale market at the factory gate and if
they are generally sold in the wholesale market at the factory gate F
in a certain packed condition, whatever may be the reason for such
packing, the cost of such packing would be includible in the value
of the gods for assessment to excise duty."

The learned Chief Justice next considered the question of promissory G
estoppel and on that ground held in favour of the assessee for a particular
specified period. In respect of other periods, he held against the assessee.

In his separate opinion, Pathak, J. reiterated the holding in Bombay
Tyre International that inasmuch as the definition of the expression 11value 11
in Section 4(4)( d)(i) has been extended to include the cost of packing and H
1174 SUPREME COURT REPORTS [1995] 3 S.C.R.

A because packing itseif is not the subject of the levy ot excise duty, the
extension must be strictly construed. The learned Judge then posed the
question, "is the packing in corrugated fibre board containers necessary for
putting the cigarettes in the condition in which they are generally sold in
the wholesale market at the factory gate?"* and answered it in the nega-
tive. The learned Judge observed :
B
"The corrugated fibre board containers are employed only for the
purpose of avoiding damage or injury during transit. It is perfectly
conceivable that the wholesale dealer who takes delivery may have
his depot a very short distance only from the factory gate or may
c have such transport arrangements available that damage or injury
to the cigarettes can be avoided. The corrugated fibre board
containers are not necessary for selling the cigarettes in the
wholesale market at the factory gate".

D It is thus clear that the learned Judge held the cost of CFCs not
includible in the wholesale cash price in view of his finding - factual finding
- that the CFCs were not necessary for delivering the excisable goods at
the gate. The approach of A.N. Sen, J. is similar to the one adopted by
Pathak, J., viz., the test of necessity of such packing. The learned Judge
observed:
E

"Cartons of cigarettes are usually further packed in corrugated
fibre containers for facilitating transport in the course of delivery
to buyers in the wholesale trade where there is any possibility of
the cartons becoming otherwise damaged in course of transit.
F
Naturally, in such cases, delivery of the cigarettes in those cartons
is effected to the buyers at the factory gate after further packing
these cartons in corrugated fibre board containers. The further
packing of cartons in which the packets of cigarettes have been
packed in the conugated fibre board containers is not, indeed, in the
G course of delivery to the buyer in the wholesale trade at the factory
gate but is only for the purpose of facilitating the smooth transpo1t
of the cartons containing the packets of cigarettes to the buyer in the
whole-sale trade". (Emphasis added)
"Note the uniformity of the test adopted both by the learned Chief Justice and Pathak,
H J. viz., the test of necessity. a reiteration of test evolved in 801nbay Tyr~.
(
GOVT. OFIND!Av. MADRAS RUBBBRFACTORYLTD. (B.P.JBBVANRBDDY,.T.( 1175

On the above factual position, the learned Judge held, the cost of A
CFCs cannot be included in the value of cigarettes.

It is thus clear that the differing conclusions arrived at by the majority
and minority was not on account of their adopting a different test or
principle but only on account of their differing perceptions of the factual B
situation. So far as the test applicable is concerned, all the three learned
Judges were at one. It is, therefore, idle to contend that this decision has
laid down a principle or a test different ·from the one in Bombay Tyre
International.

The next decision is in Geep Industrial Syndicate Ltd. v. Union of C
India, [1992] 61 E.L.T. 328. (This decision was actually rendered on April
2, 1986 though reported in 1992.) The decision was rendered by a Bench
comprising Bhagwati, C.J., V. Khalid and G.L. Oza, JJ. The appellant-as-
sessee was the manufacture of batteries and torches. The torches and
batteries manufactured by it were first packed in polythene boxes and then D
these polythene boxes were placed in cardboard cartons. There was no
dispute about the inclusion of the value of polythene boxes and cardboard
f cartons. The dispute was only with respect to the cost of wooden boxes in
which the cardboard cartons were placed at the time of delivery at the
factory gate. There was a dispute between the parties whether the
cardboard cartons were packed in wooden boxes in all the cases or not. It E
was suggested by the assessee that they were placed in wooden boxes at
the . time of delivery at the gate only where the delivery was taken by
wholesale dealers outside the city of Allahabad. The Bench, however, was
of the opinion that it was unnecessary for them to go into this disputed
question of fact on the ground that, "even if the Cardboard Cartons are F
packed in wooden boxes in all cases, it is clear that the cost of such
secondary packing in wooden boxes is not includible in determination of
the value of batteries and torches", as per the decision of the majority in
Godfrey Philips. The Bench referred to the holding in Godfrey Philips in
the following words: "This court took the view by a majority of two against
one that corrugated fibre board containers were used as secondary packing G
only in order to ensure cartons or outers against injury or damage during
transport and that it was not necessary for putting the cigarettes in the
corrugated fibre board containers for their sale in the wholesale market at
the factory gate and the cost of such secondary packing was therefore not
liable to be included in determination of the value of the cigarettes for the H
1176 SUPREME COURT REPORTS [1995] 3 S.C.R.

A purpose of excise duty." The Bench held that the same reasoning must
apply in the case before them and accordingly allowed the assessee's
appeal. It is thus ·implicitly clear that the factual position in this case
perceived to be the same as in Godfrey Philips (majority opinion) to wit,
wooden boxes were not necessary for putting the torches and batteries in
B the condition in which they are generally sold in the wholesale market at
the gate and on that basis it was held that the cost of such wooden boxes
cannot be included.

We may now refer to the decision in Collector of Central Excise v.
Mis. Ponds India Limited, [1989] 4 S.C.C. 759, a decision rendered by a
C Bench comprising Sabyasachi Mukharji and S. Ranganathan, JJ. The main
opinion was delivered by Mukharji, J., while Ranganathan, J. delivered a
separate but concurring opinion. The relevant facts are : the respondent-
assessee was the manufacturer of talcum powder and face powder. The
excise authorities noticed that small packings of 15,18,20,30,40 and 100 gms.
D powder were first packed in dozen and then packed in secondary packings
for easy transportation to the wholesale buyer. They found that "the secon-
dary packings were a must for delivery to the wholesale dealers". The
Assistant Collector accordingly held that the cost of such secondary pack-
ing was liable to be included. Mukharji, J. referred to the ratio of Bombay
Tyre International and observed that though the principle in Bombay Tyre
E International does not admit of any dispute "there has been some diver-
gence of emphasis" with respect to the criteria upon which the inclusion or
exclusion of the cost of packing should be determined. The learned Judge
referred to the decision in Godfrey Philips India Limited and Hindustan
Polymers v. Collector of Central Excise, [1989] 3 S.C.R. 974 and observed:
F
"In my opinion , the views expressed by the majority of the judges
in Godfrey Philips case were in consonance with the views of this
Court in the Bombay Tyre International case. T7ie question is not
for what purpose a particular kind of packing is done but the test is
G whether a particular packing is done in order to put the goods in the
condition in which they are generally sold in the wholesale market
al the factory gate and if they are generally sold in the wholesale
market at the factory gate in ce1tain packed condition whatever may
be the reason for such packing, the cost of such packing would be
H includible in the value of the goods for assessment to excise duty."
(
Govr. OF INDIA··· MADRAS RUBBER FACTORY LID. (B.P. JEEVAN REDDY. l.( 1177

(Emphasis added) A
The learned Judge then referred to the decision in Geep Indust1ial
Syndicate Limited and held finally :

"In my opinion, the co1rect position seems to be that the cost of that
much of packings. be they primwy or secondmy, which are required B
to make the articles marketable would be includible in the value.
However n1uch packing is necessa1y to nzake the goods n1a1*etable
is a question of fact to be detemiined by application of the c01rect
approach.* Packing, which is primarily done or mainly done for
protecting the goods, and not for making the goods marketable C
should not be included ............ The question is whether these goods
could be so sold, but the question is whether these goods are so sold
usually and as such used to become marketable in such manner."

(Emphasis in original)
D
We are in entire and respectful agreement with the test evolved and
the position of law stated by the learned Judge. It is wholly in tune with
the test in Bombay Tyre Intemational - indeed a reiteration of it.

In his concurring opinion, Ranganathan, J. referred to the ratio in
Bombay Tyre Intemational and pointed ont: "the reference in Bombay Tyre E
Intemational to secondary packing 'which is necessary' led to a further
refinement in Godfrey Philips· and Geep Industrial Syndicate." After refer-
ring to the holding in the said two decisions and in Hindustan Polymers,
the learned Judge opined :

"There is, therefore, much to be said for the view that, in judging F
the condition ofpacking whose cost is to be included in the assessable
value, one should go by the conduct of the parties and the nature of
the packing in which the goods generally are - not, can be - placed
in the wholesale market.. ...... It seems to me, therefore, that what
is to be really seen is this: What is the condition of packing G
considered by the manufacturers, having regard to .the nature of
the business, the type of goods concerned, the unit of sale· in the
wholesale market and other relevant considerations, to be general-
ly necessary for placing the goods for sale in the wholesale market
Emphasis supplied. H
1178 SUPREME COURT REPORTS [1995] 3 S.C.R.

A at the factory gate. In Godfrey Philips and Geep,. tlzis Cowt was
concemed with a special type of packing wlticlz seemed intended
more to protect the packed goods against injury or damage rather
than to enable it being placed on t/!e market. Indeed, in Godfrey
Philips, this was a facmal position that !tad been accepted by the
depmtmental authorities earlier for a period of a little over six years
B which they later wamed to go back upon. Can the same be said of
the goods and the packing with which we are concerned here is a
question to be decided on the facts, as the appellate controller did
and not' as a proposition of law settled by, or the automatic
consequence of the decision in the Godfrey Philips case, as seems
c to have been done by the Tribunal and as is being argued for the
respondents. I would, therefore, agree that the matter should be
remanded to be reconsidered in the light of our observations."

(Emphasis supplied)

D We respectfully record our concurrence with the above observations.
In our respectful opinion, the tests evolved by Mukharji, J. and Ran-
ganathan, J., which are the same in essence, are wholly consistent with the
test evolved in Bombay Tyre International. To repeat, "the question is not
for what purpose, a particular kind of packing is done but the test is
E whether a particular packing is done in order to put the goods in the
condition in which they are generally sold in the wholesale market at the
factory gate and if they are generally sold in the wholesale market at the
factory gate in certain packed condition, whatever may be the reason for
such packing, the cost of such packing would be includible in the value of
the goods for assessment of excise duty. (per Mukharji, J.)" We are also in
F complete agreement with the understanding of Ranganathan, J. of the
majority opinion in Godfrey Philips and of the opinion in Geep Industrial
syndicate.

Reference may also be made to the decision in Hindustan Polymers
G rendered by a Bench comprising Sabyasachi Mukharji, S. Ranganathan and
J.S. Verma, JJ. The facts of this case, however, are markedly different. The
appellant-assessee was engaged in the manufacture and sale of fuse! oil. Its
case was that the fuse! oil manufactured by it was mainly sold in bulk and
that only a small portion was being supplied to the customers in drums
H supplied by such customers. It was contended that the cost of the drums
(

GOVT. OF INDIA'· MADRAS RUBBER FACTORY LTD. [BP. JEEVAK REDDY.!.[ 1179

cannot be included in the value of the oil so sold. Mukharji, J. held that A
imsmuch as the material on record established that the goods were not
sold in drums generally in the course of wholesale trade, that in the
wholesale trade these goods were delivered directly into tankers and that
delivery in drums was only to facilitate their transport in small quantities.
In view of the said material, the learned Judge held, the cost of the drums B
is not includible. Ranganathan, J. agreed with the conclusion arrived at by
Mukharji, J. but on a wholly different basis. The learned Judge held that
according to Section 4(4)(d)(i), where the manufacturer supplies the drums
and charges the customers separately therefor, the cost of such drums has
to be included in the value except where the packing is of a durable nature C
and is to be returned to the manufacturer. But if, on the other hand, the
manufacturer asks the customer to bring his own container and does not
charge anything therefor, then the cost of such packing cannot be notionally
added to the price charged for the goods. Verma, J. agreed with the
reasoning of Ranganathan, J. and held that since the drums were supplied D
by the buyer and were not supplied by the manufacturer, their cost cannot
be included. The decision in this case thus turned upon the particular facts
of the case, viz., the drums being supplied by the buyer and not by the
assessee .

. The position emerging from the review of the decisions aforesaid may E
now be summarised : each and every decision has accepted and acted
upon the law laid down in Bombay Tyre International. The test evolved in
the said decision has been e'.'Pressly reiterated in all the judgments, though
it is a fact that there has been some divergence in what may be called
'emphasis'. Since the said decision lays down that the cost of "that. F
degree of secondary packing which is necessary for putting the excisable
article in the condition in which it is generally sold in the wholesale
market at the factory gate" is to be included, the court enquired in Godfrey
Philips (majority opinion) whether the CFCs were necessary for such
delivery. The court found on the facts of that case that they were not so G
necessary and accordingly held that the cost of , CFCs is not in-
cludible. In Geep Industrial Syndicate, the court adopted the approach of
the majority in Godfrey Philips on the footing that the wooden boxes were
not "necessary" for delivery at the gate. In Ponds, however, both the learned
Judges constituting the Bench laid down tests consistent with the one in H
1180 SUPREME COURT REPORTS [1995) 3 S.C.R.

A Bombay Tyre Intemational. Indeed, Ranganathan, J. understood the
majority decision in Godfrey Philips and the decision in Geep Industrial
Syndicate in the same manner as we have done - a fact emphasised by us
hereinabove while discussing the ratio of Ponds. As pointed out by us
hereinabove, it would not be reasonable to infer any conflict or deduce any
B inconsistency between the ratio of Bombay Tyre Intemational and the ratio
of Godfrey Philips for the reason that not only both Benches were of
coordinate jurisdiction (Bombay Tyre International was thus binding upon
the latter Bench) but also because both the decisions were rendered by the
very same Bench. The adage in such matters is: look for harmony, not
C divergence. It is equally releva:it to point out that Bombay Tyre Internation-
al was equally binding upon the Bench {of three learned Judges) which
decided Geep Industrial Syndicate and that it would be equally un-
reasonable to suggest that the Bench (deciding Geep Industrial Syndicate)
would lay down an inconsistent proposition from the one in Bombay Tyre
D International without even referring to the decision or its ratio. The con-
clusion in these two later cases turned upon the finding as to factual
situation obtaining therein whereas the two opinions in Ponds not only
follow the test in Bombay Tyre International but reiterate it in clear terms.
The test laid down in Bombay Tyre International has never been departed
from in any of the later decisions and must be treated as good and sound.
E We may as well stress the obvious: in a matter like this, certainty in law is
essential. It may be that in applying the principle having regard to the facts
of a given case, there may be some divergence in conclusion but so far as
the principle - the relevant test to be applied - is concerned, there should
be no uncertainty. The test is: whether packing, the cost whereof is sought
F to be included is the packing in which it is ordinarily sold in the course of
a wholesale trade to the wholesale buyer. In other words, whether such
packing is necessary for putting the excisable article in the condition in
which it is generally sol<l in the wholesale market at the factory gate. If it
is, then its cost is liable to be included in the value of the goods; and if it
G is not, the cost of such packing has to be excluded. Further, even if the
packing is "necessary" in the above sense, its value will not be included if
the packing is of a durable nature and is returnable by the buyer to the
assessee. We must also emphasis that whether in a given case the packing
is of such a nature as is contemplated by the aforesaid test, or not, is always
H a question of fact to be decided having regard to the facts and circumstan-
GOVT. OF INDIA,. MADRAS RUBBER FACTORY LTil. (B.P. JEEVAN REDDY,J.J 1181

ces of a given case. A
Keeping the above principle in mind, we shall now turn to the facts
in Civil Appeal No. 5375/95 of f995 arising out of S.L.P. (C) 4041 of 1981
(Union of India v. Hindustan Lever) because it is in this--case that the issue
of cost of packing has been argued by Sri Harish Salve. The assessee claims B
deduction of the cost of 'outer packing'. The Assistant Collector who
examined the claim pursuant to the 'format order' rejected the claim. He
has stated· in his order that in the first instance, the asses see claimed that
the said packages are of a durable nature and have a ready resale value all
over the country and that to avoid transportation cost, the trade (buyers), C
instead of sending the packages back to the company, resell the same. The
assessee conceded that though it is possible to pack the produce for sale
in the ordinary packings they are also packed in special outer packings for
the sake of uniformity. At a later stage of hearing, the assessee adopted a
different stand. It contended that the cost of only the primary packing, viz.,
the packing which is in physical contact with the soap and is wrapped D
around the soap, is includible and that the cost of cartons and cardboard
boxes in which the soaps are then packed in outer packing has to be'
excluded. The Assistant Collector rejected both the contentions on the
following reasoning: (a) in the instant case, the company has not adduced
any evidence to show that there are any agreements or contracts between E
it and its buyers for return of such packings; (b) as a matter of fact, the
goods in question are invariably delivered to their customers packed in
cartons/cardboard boxes; (c) the unit of sale for the said goods for which
• the company files its price lists from time to time is a wholesale package
comprising of a dozen or gross pieces; (d) the packing of such goods in F
cartons/cardboard boxes is indispensable, as in the absence of the same,
/
they cannot be conveniently delivered to the customers; (e) not a single
instance could be shown where the asscssee ever delivered the goods
without the above packing and (f) the assessee conceded that its buyers
are not returning such packages to it on account of the cost of transporta- G
~ tion. We are of the opinion that on the above findings recorded by the
Assistant Collector, th~ only conclusion that can follow is that the cost of
the cartons/cardboard boxes cannot be excluded from the value of the
goods. If, however, the assessee wishes to challenge the correctness of the
findings of fact recorded by the Assistant Collector, the proper course is H
1182 SUPREMECOURTREPORTS [1995] 3 S.C.R.

A to file an appeal as provided by Jaw.
PART-IV

We may now take up for consideration the several claims of deduc-
tion relating to trade discounts. But what does the expression "discount"
B mean? According to the Concise Oxford Dictionary, it means "a deduction
from the bill or amount due given especially in consideration, of prompt or
advance payment or to a special class of buyers". Now, accprding to the
latter part of sub-clause (ii) of Section 4(4)( d) such trade di~ounts, as are .._
not refundable under any circumstances, and are allowed ln accordance
C with the normal practice of the wholesale trade at the time of removal of
such goods, are to be excluded from the value of the goods, According to
the "List of dates and events" filed by Sri Nariman, the follo).ving claims of
deductions have been allowed by the Assistant Collector, KC)ttayam (by his
Orders dated October 16, 1984, January 17, 1985, April 29,, 1985 and July
11, 1985):
D
"1. Cost of Transportation

2. Additional Sales Tax,

3. Octroi,
E 4. TAC/Warranty Discount,

5. 1% Turnover Discount,

6. Discount to Government and other Deptts.

F 7. Year Ending Discount,

8. Prompt Payment Discount,

9. Special Secondary Packing and Tread Rubbe•."

G Out of the above items, Items (1) to (3) and (6) ar~ not disputed by
the Revenue before us. Only Items ( 4), (5), (7), (8) and (9) are in dispute.

The deductions disallowed by the Assistant Colle~or, Kottayam are
the f.ollowing:

H "1. Overriding Commission to H.P.C. (Hindustan Petroleum Car-
(
'

oovr. OF INDIA,. MADRAS RUBBER FACTORY LTD. (B.P. JEEVAN RED~Y,J.J 1183

I poration.) A
2. 17% interest Discount to R.C.S. (Recurring Credit Scheme)
Dealers.

3. Tax on processed Tyre cord.
B
4. Product Discount.

... 5. Cost of Distribution.

6. Interest on Finished Goods.
c
7. Interest on receivables.'

Out of these seven items, Sri Nariman did not press Items (1), (2)
and (4). Item (3) has already been given up by the assessee in Kirloskar
Brothers Limited v. Union of India, (1992] 59 E.L.T. 3. The only items,
therefore, now in issue are Items (5), (6) and (7). Incidentally, it may be D
mentioned, these Items ((5), (6) and (7)] were allowed by this court's order
dated December 20, 1986 (Assistant Collector of Central Excise v. Madras
Rubber Factory).

We shall now take up each of the claims individually.
E
TAC/Warranty discount :

The claim of the Assessee-Madras Rubber Factory is to the following
effect: the expression 'TAC' means 'Tyre Adjustment Committee'. The
TAC discount originated in the year 1943. It was a voluntary body set up F
by the four tyre manufacturing companies in the country then in existence,
viz., Goodyear, Dunlop, Firestone and India Super. The committee was
composed of District Managers and Service Engineers of the Tyre Com-
panies. At present, each manufacturer has constituted its own TAC, be-
cause, it is stated, the M.R.T.P. Commission objected to the common G
committee. The duty of the committee is to examine the tyres brought back
by the purchaser for defects discovered during the course of user. The
committee deals with only latent defects, i.e., defects which were not
apparent or evident at the time of sale but which were discovered during
the course of user of the tyre. Where such tyre is brought to the company
by the customer, the company refers the matter to the committee to H
1184 SUPREME COURT REPORTS (1995) 3 S.C.R.

A determine whether there was any manufacturing defect in the tyre and if
so, the amount of remission the customer is entitled to. Instead of paying
the said amount in cash to the customer, it is explained, the company
supplied a new tyre (at the price obtaining on the date of sale of such new
tyre) but deducts the said amount refundable to the customer from out of
B the price of the new tyre. The assessee's case is that this is a case of
discount and that it is a discount which is given in accordance with the
normal practice of the trade. It is submitted that even at the time of the
sale of the· first tyre - for that matter, every tyre - it is known and
understood that if any manufacturing defect is discovered during the
course of user, the assessee shall make it good in the above manner. It is
C claimed that it is deductible in terms of Section 4(4)(d)(ii) of the Act. The
Assistant Collector allowed this claim holding that it is a discount granted
according to established practice and that the nature of the allowance is
also known at the time of removal of goods. The new tyre which is sold by
way of replacement to the customer in lieu of the defective tyre is only a
D case of removal for replacement of a defective one with a fresh one, at a
reduced rate. Hence, the deduction claimed is allowable subject to the
condition that the total admissible TAC/warranty discount claimed by all
the units of Madras Rubber Factory together should not exceed the amount
specified in Annexure-1. (Certain further directions were also given with
respect to the manner in which the deduction has to be worked out which
E it is not necessary to mention here).

The learned Additional Solicitor General submits that this deduction
cannot be allowed according to law. He refers to Rule 96 of the Central
Excise Rules which provides that where a manufacturer desires that certain
F tyres which are damaged during the curse of manufacture should be
assessed at a lesser value than the standard selling price, he should declare
in writing on the application for clearance of such goods that such damage
has been sustained and that each of such tyre shall be clearly and legibly
embossed or indelibly stamped with the words "second', 'clearance' or
'defective'. He submits that the claim in question does not fall under Rule
G 96 and that there is no other rule or provision under which it can be
granted. According to him, it is not a case of trade discount within the
meaning of Section 4(4)(d)(ii). Learned counsel pointed out that the sale
of first tyre lu.s taken place at full value and so has sale of second tyre and
the mere fact that the amount refundable to the buyer on account of the
H manufacturing defect in the first tyre is set off against the price of the new
(,
GOVT. OF INDIA'· MADRAS RUBBER FACTORY LTD. (B.P. JEEVAN REDDY,J.) 1185

tyre does not mean that the new tyre is being sold at a discount - nor can A
it be suggested that the discount is being given out of the price of the old
{ tyre. The learned Additional Solicitor General brought to our notice that
in the judgment dated i;:>ecember 20, 1986 this court has disallowed the
said claim and that the assessee has not chosen to question the same by
way of a review petition. On the other hand, Sri Nariman, learned counsel
for the assessee submits that this is a discount clearly within the meaning
B_
and contemplation of Section 4(4}(d)(ii). The evidence adduced by the
assessee, which has been accepted by the Assistant Collector, shows that
this discount is being made in accordance with an established practice and
understanding, prevalent over more than fifty years and there can be no
doubt about its genuineness. Learned counsel submits that certain defects c
in the manufacture are not apparent at the time of their removal or sale
but come to light only later in the course of user. In such cases, the
customer is entitled to proportionate remission attributable to the
manufacturing defect. In recognition of the said claim and also in the
business interest of the assessee, says the learned counsel, the assessee D
honours the said claim provided it is certified by the TAC. Instead of
refunding the money in cash, the assessee replaces the old tyre with a new
tyre. In other words, the assessee takes back the defective tyre sold earlier
and supplies a new tyre and from the price of the new tyre, the amount
which has been found remittable to the customer, is deducted. The assessee
collects only the balance price. Sri Nariman brought to our notice that the E
claims on this account did never exceed'2-3 percent in any year over the
last several years.

In the clarificatory Order in Bombay Tyre International (dated
14/15th November, 1983) this court has held: "discounts allowed in the
F
Trade (by whatever name such discount is described) should be allowed
to be deducted from the sale price having regard to the nature of the goods,
if established under agreements or under terms of sale or by established
practice, the allowance and the nature of the discount being known at or
prior to the removal of the goods. Such Trade Discount shall not be
disallowed only because they are not payable at the time of each invoice G
or deducted from the invoice price".

The question is whether the claim, put forward as TAC/Warranty
discount is a trade discount within the meaning of Section 4(4}(d)(ii}? We
think not. It is only a claim for refund by the buyer for the manufacturing H
1186 SUPREME COURT REPORTS (1995] 3 S.C.R.

A defect in the tyre sold by the assessee, which is being hqnoured by the
assessee in a manner acceptable to both the parties. In a given case, a buyer
may well insist that he must be reimbursed in cash and not in kind. In such
.a case, the assessee cannot certainly refuse such a claim; it would have to
pay cash. The nature and character of the amount so being refunded is
certainly not a trade discount contemplated by Section 4(4)(d)(ii), whether
B the claim is honoured by paying cash or by deducting it from the price of
the new tyre. As rightly pointed out by Bhagwati, C.J. in the Order dated
December 20, 1986, "what is really relevant is the nature of the transaction".
The learned Chief Justice pointed out further that "the warranty is not a
discount on the tyre already sold, but relate to the goods which are being
C subsequently sold to the same customers. It cannot be strictly called as
discount on the tyre being sold. It is in the nature of a benefit given to the
customers by way of compensation for the loss suffered by them in the
previous sale. 11 He characterised it as 11 a compensation in the nature of
warranty allowance on a defective tyre". We express our respectful concur-
D rence with the said observations.
This claim of the assessee is accordingly rejected.

One Percent Tum Over Discount:

E The assessee's case in this behalf is this: this is a discount granted to
all dealers operating under Recurring Credit Scheme (RCS) with effect
from April 1, 1980. The discount is being given on a half-yearly basis
depending upon the volume of purchases made. by each such dealer. Out
of the total Madras Rubber Factory dealers, about eighty percent are said
to be RCS dealers and out of the total sales effected by the Madras Rubber
F Factory, over sixty percent sales are made by these RCS dealers (as per
the figures relating to the year 1981-82). The discount is being granted by
issuing credit notes to dealers and though the said discount is not shown
on the face of each invoice, it is known to all the Madras Rubber Factory
dealers. The discount cannot ii.deed be shown in the invoice for the simple
G reason that the discount is known only at the end of the half year.

The Assistant Collector allowed the said claim on the finding that
this discount is given with a view to encourage the turn over of the sales
and that having regard to the objects underlying the Recurring Credit f -.
Scheme, this deduction is liable to be allowed. He found that in the
H ultimate analysis the dealer pays one percent less then the catalogue price
GOVT. OF INDIA'· MADRAS RUBBER FACTORY LID. (BP. JEEVAN REDDY, J.J 1187

and that the said claim is also consistent with the clarificatory order of this A
court in Bombay Tyre International.
{
The learned Additional Solicitor General, however, contended that
this discount, not being known or paid at the time of removal/sale, cannot
be allowed.
B
In the light of the findings recorded by the Assistant Collector, it
must be held that this is a discount which is known and understood at the
time of removal of the goods though it is quantified later. The Assistant
Collector has also recorded a finding, "I also find that such system of grant
of discount is not uncommon in the trade". Keeping in view the clarificatory
Order of this Court in Bombay Tyre International, this claim must be held
c
to have been rightly allowed by the Assistant Collector.

Year Ending Discount and Prompt Payment Discount:

What is called 'Year-ending discount' is really a bonus given by D
Madras Rubber Factory to its dealers @Rupees fifty per tyre in respect of
a particular type of tyres. This discount is payable only where the payments
are actually received within forty five days from the date of the invoice.
Under this scheme, it appears that a declaration is to be received dealer-
wise and thereafter provision is to be made at the head office of MRF for
the bonus. The Assistant Collector has found that this discount was allowed
E
by the assessee not out of any extra-commercial considerations but that
they were meant only to boost the sales particularly in the year 1981-82 in
respect of Leader Tyre in order to achieve the target of sales for that year.
He has recorded a finding that "such a system of grant of discount is
prevalent in normal trade practice and the only difference may be that F
MRF limited have granted the discount only at the end of the year and not
at the time of actual sales". The learned Additional Solicitor General
disputed the correctness of the basis on which the Assistant Collector has
allowed this deduction. He commended for our acceptance the reasoning
in Para 13(ii) of the judgment dated December 20, 1986 (Assistant Collector
of Central Excise v. Madras Rubber Factory.) The reasoning in the said
G
order runs thus:

-..A "The allowance of the discount is not known at or prior to the
removal of the goods. The calculations are made at the end of the
year and the Bonus at the said rate is granted only to a particular H
'
I

1188 SUPREME COURT REPORTS [1995] 3 S.C.R.

A class of Dealers. This is computed after taking stock of the ac-
counts between MRF and its dealers. It is not in the nature of a
discount but is in the nature of a Bonus or an incentive much after
the invoice is raised and the removal of the goods is complete. In
the circumstances, we are of the opinion that MRF is not entitled
to-deduction under this head."
B
We are, however, of the respectful opinion that the said reasoning
cannot be accepted in view of the clear finding recorded by the Assistant
Collector that this system of discount is prevalent in the industry and is
known and understood at the time of removal of particular goods, though
C the amount is quantified later. In view of the said finding and in the light
of the clarificatory Order in Bombay Tyre International, we hold that this
claim has been rightly allowed by the Assistant Collector.

So far as the prompt payment discount is concerned, it is payable
under a scheme called 'prompt payment discount scheme' which is ap-
D plicable only to up-country non-RCS dealers (except, of course, the govern-
ment and DGS&D accounts). The discount is @ 0.75% on the total value
of the invoice including sales tax, snrcharge etc. provided the bill is
cleared/paid within 26 days from the date of invoice. The case of the Union
of India is that this discount is limited only to certain varieties of products
E as explained in the scheme document and is valid only for a limited period.
The Assistant Collector, however, dealt with this discount along with the
year ending discount and allowed it on the same reasoning as is applicable
to the year ending discount.

In view of the findings recorded by the Assistant Collector and the
F clarificatory order in Bombay Tyre International this claim too must be held
to have been rightly allowed by the Assistant Collector.

Special Secondary Packing and Tread Rubber:

So far as this claim is concerned, we are of the opinion that the
G decision in Para-19 of the judgment dated December 20, 1986 (Assistant
Collector of Central Excise v. Madras Rubber Factory) is the correct one and
needs no departure. In the said judgment, this court referred to the
judgment of Bharucha, J. in Miscellaneous Petition No. 1534 of 1979 )~
decided on January 7, 1986 wherein the learned Judge had set out the
H factual situation and the reasons for rejecting the claim at some length. In
- (
GOVT. OF IND!Av. MADRAS RUBBER FACTORY LTD. [B.P. JEEVAN REDDY, J.] 1189

the absence of any other material placed before us to take a different view, A
it would be appropriate to set out the relevant portion of Para-19 including
{ the conclusion, which we respe.ctfully adopt:

"It has been brought to our notice that in a Judgment delivered by
the Bombay High Court in Misc. Petition No. 1534 of 1979 (Judg-
ment dated 7th January 1986) Bharucha, J. of Bombay High Court B
in Bombay Tyres International Ltd. v.. Union of India & Oi,., has
considered the Judgment in Godfrey Phillips India Ltd. (supra)
with specific reference to.the question of secondary packaging for
tread rubber. It has been brought to our notice that such packaging
consists of cardboard cartons or wooden cases. In that case the C
tread rubber as packed was produced before Bharucha, J. He has
described that the tread rubber is a strip of rubber approximately
6" wide and about 1" thick which is tightly wound into a roll. Each
roll weighs between 15 Kgs and 40 Kgs. The roll is not held
together by any means. The roll is inserted into a loose and open
polythene bag. That bag also cannot hold the roll together. The D
bag is placed in a cardboard carton or a wooden case. '!'he
cardboard carton is held together by rubber bands. The wooden
case is nailed together. Though, it was contended that the
cardboard cartons and wooden cases were in the nature of secon-
dary packaging whose cost was not includible in the value of tread
rubber, Bharucha, J. held that a roll of tread rubber cannot be sold E
without the cardboard carton or the wooden case. It is further
stated that the secondary packing in which tread rubber is sold is
in the course of wholesale trade. The secondary packing is not
employed merely for the purpose of facilitating transport or
smooth transit and is necessary for selling the tread rubber in the F
wholesale trade. Bharucha, J, refused to remand the matter to the
authorities as the tread rubber as packed had been produced
before him and he was of the firm view that the cardboard cartons
and the wooden cases are not such secondary packing materials
can be excluded in computing the assessabte value of the
Petitioner's tread rubber. In the circumstances that this very issue G
has been decided on a visual personal inspection of Bharucha, J.
in the case of Bombay Tyre International Ltd. (supra), pronounced
after the decision in Godfrey Phillips India Ltd., (supra) we are of
the view that the cost of cardboard cartons and wooden cases or
any other special secondary packing charges incurred by the MRG H
1190 SUPREME COURT REPORTS [1995] 3 S.C.R.

A on tread rubber should not be excluded from th~ assessable value.
Tread rubber is a product which if even slightly damaged becomes
unfit or un- usable. The vital element "cushion compound" which
is applied to the bottom of the tread rubber and which helps the
tread rubber to stick to the buffed surface of the old tyre which is
to be retreaded is very delicate. A polythene sheet is put over the
B layer of the compound before the same is rolled and put into
another polythene bag to avoid sticking to the outer side of the
tread rubber and getting contaminated by dust. It is stated that
such production cannot be marketed without the polythene bags
and/or cardboard boxes. These are the findings of the Assistant
Collector, Goa and in the light of the cumulative decisions of the
c Assistant Collector, Goa and of the Bombay High Court, we are
of the view that the secondary special packing charges for tread
rubber cannot be deducted from the assessable value of tread
rubber."

D We may now take up the deduction which have been disallowed by
the Assistant Collectors and are now in issue before us. They are: cost of
distribution, interest on finished goods and interest on receivables. So far
as cost of distribution is concerned, we have already dealt with it herein-
before. We may now take up "interest on finished goods".
E
Interest On Finished Goods:

The claim pertains to the interest on value of finished goods from
the date the stocks are cleared from the gate till the date of sale through
p the depots. The contention of the assessee is that inasmuch as this is an
expense incurred subsequent to the removal of the goods from the gate
they are post-removal expenses and, therefore, qualify for deduction. The
learned counsel for the assessee commended for our acceptance the
reasoning in Para- 14 of the judgment dated December 20, 1986 on this
count. We are, however, unable to agree with the said submission. We have
G already held, following Bombay Tyre International, that expenditure in-
curred on sales organisation cannot be deducted. The claim herein is in
reality "expenses incurred by the assessee upto the date of delivery on
account of storage charges" held not excludible in Bombay Tyre lntema-
tional, even where the "wholesale trade is effected by the assessee through
H its sales organisation at a place or places outside the factory gate".
oovr. OP IND!Av. MADRAS RUBBER FACTORY LTD. (B.P. JEEVAN REDDY,J.] 1191

Interest on receivables: A
{ The case of the assessee (Madras Rubber Factory) is that where the
goods are sold to up-country wholesale buyers and payments are received
quite sometime. later, it is indeed a case of sale on credit and, therefore,
the interest charged from the date of delivery of goods till the date of
realisation of the price thereof should be deducted from the value of the B
goods. The interest charged, it is submitted, is only in lieu of the time taken
in making the payment by the up-country wholesale buyer. Since this 1s the
amount received subsequent to the sale from the depots and does not fall
within the ambit of any of the expenses held includible in Bombay Tyre
lntemationa~ it is clearly excludible. The claim for this deduction 1s, C
therefore, allowed.

PART - V

The last issue urged before us relates to the method of computation
of assessable value in a cum-duty price. The issue is whether the excise D
duty should be first deducted or the permissible deductions should be first
deducted from the selling price? After some discussion, the learned coun-
sel for the assessees agreed that the decision in Para-22 of the judgment
dated December 20, 1986 (Assistant Collector of Central Excise v. Madras
Rubber Factory) represents the correct view. We also find ourselves in E
respectful agreement with the said holding. Accordingly, we direct that the
method of computation of assessable value shall be the one indicated in
Para-22 of the said judgment which we re-produce hereinbelow for the
reason that the judgment has since been reviewed and recalled. The
paragraph runs as follows:
F
"22. The last important issue relates to the method of computation
of assessable value in a cuµi-duty price at a factory gate sale. The
issue is whether Excise Duty should be first deducted or the
permissible deduction should be first deducted from the selling
price for the re-assessments before the Assistant Collectors. The
assessment of excise duty both in relation to Section 4 and in G
relation to the Valuation Rules is now subject to the definition
contained in Section 4( 4)( d) of the Excise Act. The value as .
defined thereunder is to be arrived at after tl\e cost of packaging
of a durable nature or a returnable nature as also amounts of duty
of excise, sales tax and other taxes and trade discount allowed in H
1192 SUPREME COURT REPORTS [1995] 3 S.C.R.

A accordance with the normal practice of wholesale trade is deter-
mined. It is thus implicit that no excise duty is payable on an
element of excise duty in the price. The value as contemplated
under Section 4 cannot include a component of excise duty. In the
circumstances, where the computation of an assessable value has
to be made from the factory gate sale price which is a cum-duty
B price, the first question which will have to be addressed is what
are. the exclusions and permissible deductions from such a sale
price. The petitioners have contended that their cum-duty price
was arrived at after calculating and adding excise duty payable,
i.e., before actual duty was paid. They contend that their price lists
c for several articles is approved much in advance of the removal
from the factory. They contend that when the assessable value is
to be arrived at, the same amount of excise duty which was pre-
determined and added to the factory price is naturally to be
deducted first and only thereafter the permissible deductions
should be deducted to arrive at the value. For the purposes of
D
argument, MRF submitted the following example for considera-
tion:

They suggest that their selling price should be considered
(cum-duty selling price) as Rs. 3200. They further submitted that
E the permissible deductions whether on account of trade discount
or on account of cost of secondary packaging or sales tax or other
taxes packaging or sales tax or other taxes should hypothetically
be considered at Rs. 200. The rate of excise duty chargeable is
60% ad valorem for automatic tyres. Assuming for the same of
F argument that the value of the product is actually Rs. 2075. In
accordance with the provisions of Section 4(4)(d) permissible
deductions are made. The assessable value would be Rs. 1875 being
the difference of Rs. 2075 and Rs. 200. The excise duty at the rate
of 60% would thereafter be computed on the sum of Rs. 1875 and
would aggregate Rs. 1125. The selling price which is a cum-duty
G price would be the sum total of the assessable value, the permis-
sible deductions and the excise duty. Putting this as a mathematical
formula the selling price (cum-duty price) is equal to assessable
value plus permissible deductions plus excise duty. Cum-duty Paid
Selling Price = Assessable value + Excise Duty + Permissible
H deductions. Again Excise duty is a computed as a ratio of the
GOVf. OF INDIA•. MADRAS RUBBER FACTORY LTD. (BP. .TEEVAN REDDY, J.( 1193

{ assessable value where duty is ad va/orem. For the purposes of A
ascertaining of the assessable value, if three of the components .
namely the cum-duty selling price, the quantum of permissible
deductions and th.e rate of excise duty are known, the proper and
appropriate method of determining the assessable value would be
the following formula:-
B
Assessable value = cum-duty selling price
- permissible deductions
- (1 +Rate of excise duty)

Thus in the instant case working backward, if the cum-duty C
selling price is known to be Rs. 3200 an<! the permissible deduc-
tions are known to be Rs. 200 and the rate of excise duty is known
to. be 60%, the assessable value is computed as under:

Selling price - permissible deductions = 3200 - Rs. 200 = Rs.
3000. D
Assessable value is equal to difference in selling price and permis-
sible deductions divided by 1 plus 60/1000 which is equal .to
3000/1.6 which is equal to Rs. 1875.

The excise duty at 60% ad valorem rate would be Rs. 1125 on the E
assessable value of Rs. 1875.

The mathematical formula enumerated above balances. For
example, if

the cum-duty paid selling price is equal to Rs. 3200, the F
assessable value is Rs. 1875 excise duty is Rs. 1125 and
permissible deductions is Rs. 200, the aggregate of the asses-
sable value, the permissible deduction and the excise duty is
equal to the selling price (cum-duty paid).

Any other method of computation of excise duty or assessable
G
value is erroneous. The Petitioner's basis that the assessable value
is to ·be arrived at by taking into consideration the same amount
of excise duty which is hypothetically pre-determined and added
to the factory price and that this element in an attempt to compnte
the assessable value should naturally be deducted first, is putting H
1194 SUPREME COURT REPORTS [1995]3 S.C.R.

A the cart before the horse. The excise duty is onjy known as a ratio
of the assessable value when an ad va/orem duty is included in the
cum-duty paid selling price. The quantum of excise duty cannot
be pre-deducted or pre-determined till the assessable value is
known. It is only the permissible deductions in concrete monetary
terms and amount which are known. The cum-duty paid sale price
B being available for computation and a known value of deductions
permitted being also known, the assessable value and the excise
duty as a ratio of the assessable value can be only decided by first
deducting the permissible deductions, from the cum-duty paid
selling price and thereafter computing the value in accordance with
c the equation mentioned above. This has both a legal and a math-
ematical basis. If the pre-determined amount of excise duty as per
the illustration given by MRF Ltd. is first deducted, the equation
will not tally. For example, if from a hypothetical cum-duty price
of Rs. 150 (comprised of the value of the product at Rs. 100 and
ad valorem excise duty @ 50% at Rs. 50) if the excise duty of Rs.
D 50 is first deducted, the assessable value arrived al would be Rs.
95. The rate of excise duty is 50% and the excise duty @50% of
the assessable value of Rs. 95 would be Rs. 47.50 and not Rs. 50
as earlier deducted. There would be a constant difference of Rs.
2.50 in the computation. It is, therefore, an incorrect method of
evaluating the assessable value in instances of cum-duty selling
E price. This interpretation is borne out by the definition contained
in Section 4(4)(d) of the Excise Act. MRFs contention that the
excise duty should be deducted first and then the permissible
deductions is. incorrect. In ordinary cases where the factory price
is not a cum-duty price, the first step in arriving at the assessable
F value is to deduct the permissible deductions and thereafter to
compute the excise on an ad va/orem basis. The excise duty cannot
be computed unless the permissible deductions are first made. The
assessable value is orrived at only after the permissible deductions
are made. Excise duty is a ratio of the assessable value. Ad valorem
excise duty is computed only on assessable value after arriving at
G such assessable value by making proper permissible deductions.
Excise duty cannot be computed without proper determination of
the assessable value, namely assessable value exclusive of permis-
J
sible deductions. Even in the cum-duty sale price, the same prin-
ciple must be followed to arrive at the assessable value. To
compute an excise duty as a pre-determined amount without
H
(
I

GOVT. OF INDIA•. MADRAS RUBBER FACTORY LTD. [B.P. JEEVAN REDDY,!.[ 1195

{ making the permissible deductions for reducing the cum-duty A
selling price is a fallacy both legally and mathematically as
demonstrated above. The ad valorem excise duty can only be
computed after reducing the assessable value by permissible
deductions and then applying the tariff rate to the assessable value.
To reverse this sequence is to mis-interpret the scheme and mode
of levy of excise duty on the assessable value." B
CIVIL APPEAL NO. 1097 OF 1981
(UNION OF IND/Av. TATA CHEMICALS LTD.)

This appeal is preferred by the Union of India against the judgment C
of a learned Single judge of the Bombay High Court dated September 19,
1979 in Miscellaneous Petition No. 451 of 1971. The question at issue is
whether the cost of containers, i.e., bags of jute and/or of polythene and
the drums are durable and returnable withi:t the meaning of Section
4( 4)( d)(i) of the Act. The appeal was filed directly in this Court against
the judgment of the learned Single Judg~ evidently because at that time D
the law on the subject was not supposed to be clearly settled. Now that the
principles have all been properly enunciated and also because the question
whether the packing is durable and returnable by the buyer to the assessee
is essentially a question of fact the proper course would be to remit the
matter to the excise authorities for determination of the said question of E
fact. The matter will, therefore, go back to the Assistant Collector of
Central Excise concerned who shall decide the said question in accordance
with law and on the basis of the material that may be placed before him.
Similar direction should follow in Civil Appeal No. 1807 of 1977 (Synthetic
& Polymer Industries v. Union of India & Ors. where too the dispute is
whether the packing is durable and returnable. The matter shall go back F
to the concerned Assistant Collector of Central Excise who shall decide
the said question in accordance with law and on the basis of the material
placed before him.

PART - VI
G1
Accordingly, Civil Appeal No. 3195 of 1979 (Union of India & Ors.
v. Madras Rubber Factory), Civil Appeal Nos. 4731- 32 of 1984 (The
Superintendent of Central Excise, Kottayam & Ors. v. Madras Rubber Factory
Limited, Civil Appeal No. 793 of 1984 (Madras Rubber Factory Limited v.
Collector of Central Excise, Madras), Civil Appeal No. 5373 of 1995 arising H
\'
I

1196 SUPREME COURT REPORTS (1995) 3 S.C.R.

A out of Special Leave Petition (C) No. 10108of1980 (Union of India & Ors.
v. Madras Rubber Factory) are allowed in part in the above terms. Civil
Appeal No. 5375 of 1995 arising out of S.L.P.(C) No. 4041 of 1981 (Union
of India v. HindusttQI Lever) is allowed for the reasons recorded herein-
before. There shall be no orders as to costs.

B We have pronounced upon various submissions urged before us. 11-
is obvious that if in any individual case, any other claim for deduction
arises, its admissibility has to be decided keeping in view the principles
contained herein.

The individual appeals listed before us shall be posted immediately
C after vacation for disposal in the light of this judgment.
S.M. Appeals partly allowed.