Holding

The value of an excisable article for excise duty is the wholesale (normal) price charged by the assessee, inclusive of post‑manufacturing expenses and primary packing, with limited deductions, and the definition of "related person" is confined to a relative distributor as per the Companies Act, 1956.

Summary

The Supreme Court examined the interpretation of Section 4 of the Central Excises and Salt Act, 1944, both before and after its amendment by the Central Excises and Salt (Amendment) Act, 1973, to determine how the "value" of an excisable article should be computed for excise duty. The Court held that the value is not limited to manufacturing cost and profit but is the wholesale (normal) price charged by the assessee, which may include post‑manufacturing expenses such as freight, insurance, storage, and primary packing, subject to specific deductions. The definition of "related person" was narrowed to a distributor who is a relative of the assessee, as per the Companies Act, 1956. The Court also clarified the treatment of secondary packing and affirmed that the legislative scheme before and after amendment remained essentially the same. Consequently, the earlier order of May 9, 1983, favoring the revenue’s assessment was upheld.

Issues considered

The proper interpretation of the old and new Section 4 of the Central Excises and Salt Act, 1944 for determining the value of excisable goods.
Whether the value for excise duty must be confined to manufacturing cost and profit or may include post‑manufacturing expenses and profit.
The scope and constitutional validity of the definition of "related person" under Section 4(4)(c).
The inclusion of packing costs, especially primary versus secondary packing, in the valuation of excisable goods.
The permissible deductions from the wholesale price for computing the value under the Act.

Legislation cited

Central Excises and Salt Act, 1944s. 3, s. 4, s. 4(4)(c), s. 4(4)(d)
Central Excises and Salt (Amendment) Act, 1973s. 22
Central Excise (Valuation) Rules, 1975
Companies Act, 1956

Subjects

excise dutyvaluationSection 4related personpost‑manufacturing expensespacking costsCentral Excise Actconstitutional validitywholesale pricetax assessment

Judgment

347

UNION OF INDIA & ORS. ETC. ETC.·
A
v.

BOMBAY TYRE INTERNATIONAL LTD. ETC. ETC.

October 7, 1983
8
[P.N. BHAGWATI,
. .
R.S. PATHAK AND AMARENDRA NATH SEN, JJ.)

Central ExciseS and Salt A.ct, 1944 (1 of 1944)-0/d s. 4 prior to and new
s. 4 after a1nendment by the .Cen1ral Excises and Salt (An1endn1ent) Act, 1973
(22 ~! 1973) ..:...interpretation of-Sectioll val(dly enacted-Scheme and o/Jjeci of
olds. 4 and news. 4 are sa1ne. ~Mode of deterndning value of an article/or e:Xcise
leVy-Vcilue-Whether can be confined to manufacturing cost and manufacturing G
profit only-Whether pos.t ma11ufact1irlng,eXpenses like freight,· insurance and
+ packinK etc.- can be iiicluded in the value of article.

, . Central Excises and Salt Aci, 1944-S. 4 (4) (c)-De/in1tion of "relate<!
person"-SCope of. Definition not unduly wide-DoeS not suffer from constitutional
infirmity. . Words "a relative and a distributOr of tire Assessee" dO not· refer to D.
any distributor but only to a distributor who is a relative of the asses.see wirhln the
meaning of the Companies Act, 1956 •
..,.. Central Excises arid Salt Act, f944-S. 4 (4) (d)-'Value'~Definition of-
.scope of. Pqcking-Primary, secorfary and special secondary-Cost of sPecia/
secpndary packing to be excludedfro111 WJl,ue. ""-
E
Constitution of India Art. 246, Schedule 7, List J. Eniry 84-Concept of

-
duty of excise-What is.

Sub-s~c .. (1) of sec. 3 of the Central Excises and Salt Act, 1944 provided'
that duties of excise shall be levied and collected on all excisable goods, other
than salt which were· produced or 1nanufactured in India at the rates set.for.th
in the First Schedule. Sub-sec. (2) of sec. 3 empoWered the Central Government F
to fiX, for the pµrpose of le\•ying the duties, tariff values of ihe articles •
· cnumerate.d jn the First Schedule as chargeable with duty ad valoren1. Section· 4
of the ACt prodded that the value of an article for the purposes of duty shall
be {a) the w4olesale cash price for which an article of the like kir.d and quality
was sold oi- was capable of being sold at the time removal of the article
chaJ.geable with duty froln .the factory' or any other premises of inanufacture
or production for dClivery at the -place of manufacture or production or
(b} where 1such price was not ascertainable, the 'price at which ari
article of the like kind ·and quality was sold or. was capable of being sold
at the time of the removal of the article ch"argeable with duty from such
factory or other pr'emises for deli.very at the place of manufacture or prodUction.
With the increase in· the ad• valoren1 levies in the Central Excise Tariff .the B
oPeration 9f sec. 4 presented certain practical difficulties, sOme of which were
prominently brought out in the judgment of this Court in A.K. Roy dnd Anr. v.
Valtas Ltd., [1973] 2 S.C 1R:. 1039.. In ~hat case, the Coµrt. ilf:ier alia said th~t
b.

348 SUPREME COURT REPORTS (1984i I S.C.R.
the real value of an article for the purposes of the excise levy would include
only the manufacturing cost plus manufacturing profits. In o~der to overcome
various difficulties, the original sec. 4 of the Act was . substituted by a new
sec. 4 by Act 22 of 1973. The new sec. 4 provided that the v3.lue of an article
for the purposes of duty shall, subject to the other provisions of this section,
be deemed. to b_e the normal price thereof that is to say, the price at which such
goods were ordinarily sold by the asscssee to a buyer in the course of wholesale
trade for delivery at the .time and placC of remov'aJ, where the buyer was not a
B related persOn and_ the price was the sole consideration for the sale and where
,,the normal price of such g0ods was not ascertain~ble for the reason that such
'goods were not sold or for any other reaSon, the nearest asFertainable equiva ..
lent thereof determined in such manner as may be prescribed. Clauses (c) and
(d) Of s:ib..sec. (4) of sec. 4 defined "related pc;;rson" and ''value•: respectively.

c The Central issue which arose between the Revenue and the assessees
in these appeals was whi':ther the value of an article for the purposes of the
excise levy must be determinCd by reference exclusively to the manufacturing
cost and the manufacturing profit of the manufacturer as contended bY the
assessees or shOUld be represented by the eritire wholesale pric.e charged by the
nianufacturer which consisted of not merely his manufacturing cost' . and his
manufacturing profit. but included "post maiiufacturing expenses" and '~post·
D manufacturing profit" arising between the completion' of the manufacturing
process and the point of sale by the manufacturer. The other points of dispute
were principally in respect of the connotation of the expression 'related person'
in the new s.4 as well as the itature of the deductions which could be claimed
by the assessee as post manufacturing expenses and post .manufacturing profit
from the price for the purpose of determining the "value".
E
HELD: The question whether the value of. an article for the purpose
of the excise levy must be confined to the nian~facturing cost and the n1anufac~
turing profit in respect of the article has to be answered in the negative. While
the levy of excise duty is on the manufacture or production of goods, tlie stage
of collection need not in point of time synchronize with the completion of the
• manufacturing process. While the levy in this collntry has the status of a
constitutional concept, the point of collection is located where the statute .
declam it will be. [384 H, 364 F·GJ

The Central Provinces and Berar Sales of Motor Spirit and Lubricants
T~xation Act, 1938, [1?38-39] F.C.R. 18; The Province of Madras v. Messers '
Boddu Paidanna and Sons, [1942] F.C.R. 90, 101; Go_vernor-Gencral irf Council. v. ·.~

G Province of Madras, [1945] F.C.R. 179; R.C. Jal/ v. Union of lnqia, [1962] Suppl. '.:...
3 S.C.R. 436; In ]Je. ·The B~ll To Amends. 20 of the Sea Customs·Act, 1878, and
s. 3 of the Central Excises And Salt Act, 19.44, [1964] J S.C.R. 7117; Union of
India v. Delhi Cloth & General Mills, [1963] fuppl. I S.C.R. 586; M/s
Guruswamy & Co; Etc. v. State of Mysore & Ors., [1967] I S.C.R. 548;
and South Biltar Sugar Mills Ltd. etc. v. Union of India & Ors., [1968] 3 S.C.R.
H referred to.

The levy of a tax .is defined by its nature, while the measure of th~ tax may
be assessed by its own ~tandard. H is trve that the standard adopted as the
.•
UNION V. BOMBAY TYRE 349
measure of the levy may indicate the nature of the tax but it does not neces-
sarily determine it. When ena~_ting a measure to serve as a standard for A
assessing· the levy the legislature need not contour it along lines which spell out
· the character of the lev"y itself. A broader based standard of reference may be ·
adopted for the purpose of determining the measure of the levy. Any standard
which maintains a nexus With the essential character of the levy can be regar-
ded as a valid basis.for asSessing the measure of the levy. The originals. 4 and
.the news. 4 of the Central Excises and Salt Act satisfy this test.
I [366 C; 367 D-F] 8
Ra/la Ram v. The Province of East Punjab, [1948) F.C.R. 207; Atma Ram
Budhia v. State of Bihar, A.LR. 1952 Patna ~59; M/s Sainik Motors, Jodhpur
and Ors. v. The State of Rajasthan; [1962] 1 S.C.R. 517; D.C. Gouse and Co.
ltc. v. The State of Kerafa & Anr. etc., .[1980J 1 S.C.R. 804; Searvai's
Constitutional "Law of India, Second Edition. Vol. 2 at page 1258"; Re. A
Reference under the Government of Ireland Act, 1920 and Sec. 3 of the Finance c
Act (Northern Ire/and), 1934, ,L.R. 1936 A.C. 352; R.R. Engineering Co. v. Zita
Parished, Bareilly & Anr., [1980J 3 S.C.R. 1; and The Hingir-Rampur Coal ·co.,
Ltd. and Ors. v. The State of Orissa and Ors., [1961] 2 S.C.R. 537
referred to. •
It was open to the legislature to specify the m·easure for assessing the levy~ D
The legislature has. done so. In both. the old s. 4 and the riew s.· 4 the price
charil:ed by the" manufacturer on a sale by him represents the measure. Price
and sale are related concepts, and price has a definite ~onnotation. The "value"
of the excisable article has to be computed with reference to the price charged
by the manutacturer, the computation being made in accordance with the
tern;s of s. 4. [368 D-E]
Ill
On a true construction of its provisions in the context· of the statutory
scheme the old, S. ·(4) (a) should be considered as applicabie to the circumstances
.
of the particular assessce himself and not cif manufacturers ienerally. [381 C.;.DJ
.
Pursuant to the old s. 4 (a) the value of .ant excisable article fOr the
purpcse of the ~xcise levy should be taken to be the price at which the excisabfe F
article is sold by the assessee to a buyer at arm's length in the course ofw]1olc-
sa1e trade at the time and place of removal. Where, however, the excisable
article is not sold by the assessee in wholesale trade but, 'for example, is consu~
med .by the assessee in his own industry the case is one where under the old
s. 4 (a) the value n1ust be determined as the prjCe at whjch the exch:able article
or an article of the like kind and quality is capable of being sold" in wholesale
trade at the time. and place of removal. [376 F:HJ G

Where the excisable article or an art"icle of the like kind and quality is
not sold in wholesale trade at the place of removal, that is, at the factory gate,
but is sold in the wholesale trade at a place out side the factory gate, the value
should be determined as the price at which the exciStble article is sold in the H
wholesale trade at such place, after deducting ther·efrOJT!. the cost of
transportation of the e~cisabl~ article fron1 the factory gat~ to such place.
{376 H; '.·77 A-BJ
350 SUPREMll COURT REPORTS (1984) l S.C.R.

Where the wholesale price of the excisable article or . an article of the
like kind and '1,Uality is not ascertain~ble, then pursuant to the olds. 4 (b) the
value of the exciSable article shall be the pdce at which the. excisable art"iclc
or an article of the like kind and ciuality is sold or. :is capable of being. sold by
the asseSsee at the time and place of removal of. if the excisable article is not
sold or is nO_t capable: of being s<;>ld at such place, then the piice at which it iii
aold or is capable of being sold by the asscssce at any other tftace nearest ·~
thereto. [377 B-C] )

• B
In every· case the fundamental criterion for computina the value Of an
cxCiabie article is the price at which the excisable articie or an aqiclc of th1
like kind ·and quality is sold or i$ c<lpable of being sold by th_e manufacturer and
it is not the bare manufacturing cost and manufacturing profit which constitut"e1
the basis for determining such value. [37iD]
c
Vacuum Oil Com,any v. S'crttary of State for lndia in Council L.R ..59 "+
I.A. 258; Ford Motor Company of lndi" Ltd. v. Secretary -0/ State for India· in
Council, L.R. 65 I.A. 32; and A.tic Industries Ltd. v. H.H. Dave, A.sstt. Collector
. of Central &cise and Ors., [1975] 3 S.C.R. 563, referred to.

D ·The bas"ic scheme for determination of the price in the new 1. 4 is
charaeterhed by the same dichotomy as that obaerv.able in the old s; 4. It . was
nOt the intention of Parli~ent; when cnactirig the news. 4 to create a scheme
materially different from th~t embodied in the superseded s. 4. The object and
purpose remained the same, arid so did t~e Central principle at thejleart of the
scheme. The new scheme waS rr1erely more comprehensive ·and the language
E. eniployed more precise. and definite. As in the old S. 4, the terms in Which the
value was defined remained the price charged by the asse'ssee in the' cOurse of
"".holesale trade for delivery at tf·e ti~e and place of removal.' [377 H; 378 A-BJ

'
. It is no.i pos~i bl e to concCi~e of the price under the new s.
4{ 1) (a) being
. confined to the manufacturing cos_t aa,d the manufacturin~ profit. Moreover,
it is reison<ible to suppose that the central principle for the determination of
the value of the excisable article sholl.id be the same, whether the ca.se falls
-
under cl. (a) or cl. (b) of the cld s. 4 or under the news. 4 (!). When regard is
, had to the provi$.ion of cl. (b) in each case, it is not Possible to limit the priCe
to its· components representing th• manufacturiD.8 cost and manufacturing
profit. [379 E-G].

• The ct>D.tentiO-n that the provisions regarding related persons .arc
whoUy unncc«1ssary because· to counter act evasion of tax any artificially
arranged price between the manufacturer and his Wholesale buyer can be
·~·

rejected in any case under s. 4 is not acceptable. The new s. 4 (1) contains
inherently within it the power tq determine the· true value of the excisable
'article, after taking into ace.aunt .ally concession shown to a special or favoured
buyer because of extra-cothmercial Consideratia:n, in· order that the price be
ascertained only on the basis th~t it is a transaction at arm's leD@th. •That
requirement is emphasised by tbe provision in the· new.s. 4 (1) (a)· that the
pricQ should b~ the ~ole c;:on!lideration for th~ ~ale. )u ev~ry such case, it .will
•
.UNION v. BOMBAY TYRB ast
be for the Revenue to determine oD. the evidenCe before it whether the trans-
action is one where extra~commercial considerations have entered and, if so,
what should be the priCe to-be taken as the value of the excisable ar:ticle for ·the A
purpose of excise duty. Nonetheless it was open to Parliament to inCQrporate
provisisons in the seCtion declaring tbat certain specified categories of ~raos-·
actions fall within the tainted class, in which case an irrebuttable presumPtion
will arise that transactions belongi"i:ig to those categories are transactions which
cannOt be dealt with under the usual meaning of the expression "n~rmal price"
set forth in the news. 4 (1) (a). Th~y are'Cases where it will ·not be necessary B
for the Rcvenqe to exariiineihe entire gamut of evidence in order to determine
whether the transaction is one prompted by- extra.commercial considerations.
"u will be oPen tQ the Revenue, on ~eing satisfied that the third provisio to the
news. 4 (I) (a) read with the definition of "related person" in s. 4 (4) (C} is
attracted, to proceed to determine the "value"· in accordance With the terms of
the third proviso. [3115 F-H; 386 A-DJ.
c
The argument. that the assessment on the manufacturer by reference to
·the sale price charged by his distributor is '.iwholly incompatible with the
' nature of excise" has ·no force. It is a well known legislative practice to enact
provisions in certain lin1ited cases y.'here an assessee n1ay b~ taxed in respect of
the incon1e or property truly belonging to another. ·They are cases where the
Legislature intervenes to prevent the circ.umvedtion of the tax obliga1ion by tax D
payers seeking to avoid or reduce their tax. liability through modes r~sulting in
the income or property arising to an_other. The pfovisions of the -law n1ay be
iiO enacted: that the actual existence of such motive may be wholly immaterial,
even if what has been done by the assessee may proceed from wholly bona fide
intention. With the aid of a legal fiction, the Lea;islature fastens the liability
on the assessee. When the Legislature employs such a device, arid the liability
is attached without qualification, it is reasonable. to infer that an irrebuttablc
presumption has been created by law. Such provisions have been held to. be
- within the legislative competence of the Legislature and as falling within its
pdwer of taxation. [3i6 D-H] · ·

· Balaji v. Income-Tax Officer, Special Investigation. Cirde [1962] 2 S.C.R.
938; Navnitlal~. ..faveri v. K.K. Sen, Appellate ASsisiant Commi~sioner of Income· JI
tax. 'D' Range, [1965] I S.C.R. 909; Bombay and Punjab Distilling Industries Ltd.
v. Commissioner of lnco1ne-Tax, Punjab, [1965] 3 S.C.R. 1•. referred to.

The a'rgument that the definition of the expression "related person" is
so arbitrary that it includes within it a distribUtof"Sf the assessee is also with..
out m~ch force. The provision in the definition of "re1ated person" reiating
to a distributo! can be legitimately" read down and its validity uPheld. The
definition of related person Should be so read that the words "a relative and a
distributor of the assessee" should be understood to mean a distributor who is
a relative of the asse~see. The Explanation io s. 4 (4) (c) Provides that the
expression "relative" has the same meaning as in. the -Companies Act, 1956.
The definition of "related person·•, as bCina "a person who is so· assoCi&ted with H
the a-ssessee that they have interest, directly or indirectly, in the business of

.
each other and includes a holding.con1pany; a subsidiary company ...............",
shows a s~ffi~iep.tly restricted basis for employing the legal fiction. Here igaill,
352 • SUl'RBMB COURT REPORts (1984] I s.C.tt.
regard must be had tO the Explanation which provides that ·the expression
A ~'h~lding company and s.ubsidiarY'' have the san1e meanings as in the
Companies Act, 1956. -It is well settled that in a suitable case the court can lift
the corporate veil where the companies share the relationship of a holding
Company and a subsidiary company and also to pay regard to the economic
realities behind the legal facade, [387 B·II> 388 A)

8 Tata Engineering and Locomotive Co. Ltd. v. State of Bihar and Others. · ·
[1964] 6 S.C.R. 885; Juggi Lal Kam/apat v. Commissioner' of Income-Tax, U.P.
[1969] l S.C.R. 988, referred to.
...
.

The true position under the Central Excises. and Salt Act 1944 as
amended by Act XXll of 1973 is as follows :
c
.. (i) The price at Which the excisable goods are ordinarily sOld by ·
the assessee to a buyer in the coUrS:e 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
excisab_le value provided, of c'ourse, the buyer is not a related
person within the meaning of sub-section1 (4) (c) of section 4 and
D "the price is the sole consideration fOr the sale. The proposition
is subject to thC terms of the three provisOs ~o sub-section (I) (a)
of section 4. [388 D· FJ '

(ii) Where the price o"f excisable goods in the course of wholesale
trade for delivary :it the time an!-"f place of removal cannot be
E ascertained for the reason .that such ·goods are not sold or for
any other reason, the nearest ascertainable equivalent thereof
determined in ·the manner prescribed by the Central ExciSe
(Valuation) Rules, 1975 should be taken as representing the
excisable value of the goods; [388 G-IIJ
'
F .#
(iii) .Where wholesale price of any excisable eoods for delivery at the
place of remoVat is not known and the value thereof is deter-
mined with reference t.O the wholesale price for delivery at a
place other than the place of removal, the coSt of transportation
from the place of removal to the place of delivery should be
excluded from such price; [389 A-Bl •
G
•
(iv) Of course, these principles cannot apply where the tariff value
has been fixed in respect of anf excisable· goo.ds under
sub;section (2) of section 3; [389'C]

lV) On a proper interpretation of the definition of 'related person' in
sub-section (4) (c) of section 4 the words "a relative and a
distributor of the assessee" do not refer to any distri~utor but
they are limited only t.o a distributor wlio · is a· relative· of the
f
tJNION •V. BOMBAY TYRE
. . 353
a~sessee within the meaning of the Companies Act, 1956. So
read, the definition of 'related1Jerson' is not unduly wid~ and A
does not ·suffer from, any constitutional infirmity. It is within
the legislative cor:D.peience of. Parliament. It 'is only _when an
as;essee so arranges that the goods are generally not sold by him
in the course of wholesale trade except to or through such a
related person that the.price at which. the goods· are ordinarily
sold by the related person, in the course of wholesale trade at
the time of removal to dealers (not being related tpersons) or B
where such goods are not sold to such dealers, to dealers (being
related persons) who sen such goods in retail is liable to be
taken as .the excisable value of the goods under proviso (iii) to
sub·section (1) (a) of section 4. · [389 D-F]

For the purpose of determining the "value" ,.broadly sPeaking both old .c
·s. 4 (a) and the news. 4 (1) (a) speak of the price fcir sale in the cours"e of
wholesale trade of an.article for delivery at the time and place of ren1oval,
namely, the factory gate. Wh~r~ th: price contemplated under the old·s.-4 (,a) or
under news. 4 (1) (a} is not ascertainable, the price is determined under the
oJJ s. 4 (b) or the news. 4 (1) (b). Now, the pi:ict! of an article is related to its •
value (using this term in a general sense), and .jato that value have poured
sever.al con1ponents. inl:luding those which have enriched its value arid given to D
_the article its market'ability in the trade. Therefore, the expenses incurred on
acCount of the several factJrs Which have contributed to its value upto the ·date
of sale, .which apparently would be the date of delivery, are liable to be
included. Consequently, where the sale is effected at the factory gate, expenses
incurred by the assessee upto the .date of d~livery on account of storage charges,
outward handling Cha~ges, interest on inventories (stocks carried by the
,manufacturer after cleararice), charges for other services -after delivery to
the buyer, namely after-sales service and marketing and selling organisation
expenses including advertisement 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 saie 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 under the aforesaid heads cannot, on the same grounds, ..
be deducted .. [391 C·H]
T
The a·ssessee will be entitled to a deduction on account of the cost of
transportation of the exciseable article from the factory gate· to the place or
places where it is sold. The cost of transportation will include the cost of
· insuran~e on the freight for transportation of the goods from the factory gate to
G
the place or places of delivery. [39.1 H; 392 A]

Where freight is ~verag~d and the aveiaged 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 H
gate, the averaged f.reight inclllded in such wholesale cash price· has to be
deducted in order to arrive at'\he real ~holesale cash price at the factory gate
and no excise duty can be charged on it. [392 A~B]
.stJPlUlME COtJRT REPORTS (1984] 1 s:c.a.

• . The news. 4 (4) (d) (i) has made express provision for inch~iag th; cost
A 'of packing in the de.termination of Hvalue" f9r the purpQse of excise duty. The
packing, of which the cost is included, is the packing in which the goOds are
wrapped·, contained or wound when the goods .are d~livered at the time of
removal. The cost of primary packing, that is to say, the packing in which the
article is contained arid in which it is made marketable for the ordinary consu-
mer, must be tegarded as falling within s. 4 (4) (d) (i). There is secondary
packing which consists of larger cartons in Which a·standard nbmber of primary
B cartons (in the sense mentioned earlier) ·ate packed. The large .cartons may
be packed into even larger cartons for facilitating the easier transport of 'the
goodS by the wholesale dealer. ·Is all the packing, no.matter to. what ·degree,
in which the wholesate dealer takes delivery of the go6dS: to be considered for
including the cost thereof in the "value" ? Or . does. the law. require a line
. . . to be dra"':'n somewhere ? One must remember that while packing is necessary
c to make the excisaQle article, marketa.ble,. the stattitory provision calls for
stri•t construction because the levy is sought to ·bC extended beyound the manu-
factured article itself. It seems to us that the degree of secondary packing which
is necessary fo~ putting the excisable arti~le in the condition• in which it is
generally sold in the wholesale market ttt the factory gate is the degree of
pac~ing whOse cost can be included in the "'value" of the article for the
• purpose of the excise levy. To that extent, the cost of secondiiry packing cannot
D be dedllcted from the wholesale cash pdce of the excisable article at the factory
gate. [392 C; 392 G-H; 393 A,E]

' If any special secondary ·packing is provided by the assessec at the
instance of a whole-sale buyer which is not generally provided as anormal
feature of the wholesale tra~e, the cpst of 13Uch packing shall be deduCted from
the wholesale cash price. [393 F] ·
Pl
•
CIVIL APPELLATE JURISDICTION; Civil Appeal No. 2269 of 1980
etc.

From the Judgment and Order dated 30.7.80 of the High Court
.• of Bombay in Appeal No. 252/1980 etc.

K.. Parasaran, Sol. Genl., N.C. · Ta/ukdar, Dr.
Y.S. C.hita/e,
K.K; Venugoflf!l, Suraj Udai ·Singh, Dalveer Bhandari, C. V. Subba
Rao, R.N. Poddar, M.S. Ganesh, Ravi Naghmave, T. Shrinivasamoorthi,
K.S. John, Vitha/bhai B. P,atel, R.P. Kapur, Bhaskar Gupta, R.K. ·
Chaudlrary, A.T. Patra ·and Parveen Kumar for .the ·Appellants/
Petitiol)ers.

N.A. Palkhiva/a, J.C. Bhatt, So/i J. Sorabjee, Ashok Desai,
H D.B. Engineer, B.H. Antia, Ravinder Narain, 0,C. Mathur, Talat
Ansari, Mrs. A.K. Verma, Ashok Sagar, Miss Rainu WaUa, Sukumaran,
D.N. Mish~a and A.N. Haskar for the Respondents.
UNION v. BOMBAY TYRE (Pathak, J.) 355
The Judgment of the Court was delivered by

PATHAK. J : On May 9, 1983 we made an order setting forth
the legal position in respect of various aspects of the levy Of excise
duty under the Central Excises and Salt Act, 1944, both before its
amendment by the Central Excises and Salt (Amendment) Act, 1973
(Act XXII ~f 1973) and after such amendment. We record now the
reasons for that order. · B

At the outset, we may state that it js not possible ·in this judg-
ment to deal. with the numerous individual appeals, writ petitions,
special ieave petitions and transferred cases before us on the parti•
cular facts of each, and we propose to consider the· points ari'sing
therein from a general perspective.
c
The Central Excises and Salt Act, 1944 relates to central duties
of excise and to salt. Sub-s, ( l) of s. 3 provltles that duties of excise
. shall be levied and collected on all excisable goods, other than salt,
which are produced or manufactured in India, at the rates set forth
in the First Schedule. We are not ·concerned with the provision
·relating to salt. Sub-s. · (2)'empowers the C~ntral Government to
fix, for the purpose of levying the duties, tariff ·values of the articles
enumerated in the First Scheaule as chargeable with duty' ad valorem.

.
Before its amendment by Act XXII of 1973 s.4 read as follows:
.
"4. Determination of value for the purposes ·of duty.-
E

Where; under this Act, any article is chargeable with duty·
at a rate dependent on the value of the article, such value
shall be deemed to be -
.F
(a) the wholesale cash< price. for which an article of the
like kind and quality is sold or is capable of being
sold at tbe tinie oftbe removal of the article chargea-
ble with duty fr~~ the factory or any other premises
of manufacture or production for delivery at the
' place of manufacture or production, or if a whole-
sale market does not exist for such article at such
place,~ the nearest place where such market exists,
or
B
(b) where such price is not ascertainable, the price at
whi~h an article ofthe like kind and quality is sold
or. is capable of being sold by the manufacturer or
SUPREME COl.iRt REPORTS (1984) I s.c.a.

producer, or his agent, at the time of'
the reincival of
A the article chargeable with duty from. such factory
or othe.r premises for delivery at the place. of manu-
facture or production, or if such article is not' sold
or is not capable of being·sold at such place, at any
other place nearest· thereto.
B Explanation-In determining the price of any article
under this section, no abatement or deductiou shall be
allowed except in respect of trade discount and the amout
o~ duty payable at the time of the r.emoval of the article
chargeable witb duty from the factory or other premises
c aforesaid."
It seems that with the increase in the ad valorem levies in the
Central Excise Tariff the operation of s.4 presented certain pra~tical
difficulties, some of 'IVhich were prominently brought ouf in the
judgment of this Court in A. K. Roy & Anr, v. Volt as Limited.(')
Among other observations the Court appears to have said that the
real value ·or an article for the purposes of the excise levy would
include only the manufacturillg cost plus the manufacturing profit.
Jn order to overcome the various difficulties, Parliament enacted AC!
XXII of !'973 which substituted a new s.4 for the original Provision
with effect from October I, 1975. The new section 4 provides:-
E
.
"4. Valuation of excisable goods for purposes
.
of charging
of duty of excise.-(!) Where under· this Act, the duty of
excise is chargeable on any excisable goods with ref~rence
to value, such value shall, subject to the other provisions
of this section be deemed to be -
F
(a) the normal price thereof, that is to say, the price at
which such goods are ordinarily sold by the assessee
to a buyer in the course of wholesale trade for deli-
very at the time and place of removal, where the
buyer is not a relate<l person and the price ·is the
G
sole consideration for the sale :

Provided that -

(i) · where in accordance with the normal practice of the
H wholesale trade in such goods, such go.ods are sol<l

(1) (1973) 2 S.C.R. 1089.
•

i:J~ION v. BOMBAY TYRE (Pathak, J.) 357

by the assessee, at different prices to different
classes of buyers (not being related persons)
each such price, ' shall, subject to the existence
0£ the other circumstances specified in clause (a),
be deemed to be the normal priee of such goods in
relation to each such class of buyers;
B
(ii) where such goods are sold by the assessee in the
• course of wholesale trade for delivery at the ti)lle and
·place of 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 1aw' then' notwith-.
standing anything contained in cl. (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 ·
• deemed to be the. normal price thereof;

(iii) where the assessee so arran~es that. the goods are
generally not sold by him in the. course of wholesale
D
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 wholesale trade at the E
time of removal, to dealers (not being related per~
sons) ·or where such goods are not sold to such
dealers, to dealers (being related persons) who sell
such goods in retail; -

(b) where the normal. price of such goods is not ascer- F
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 ..
G
(2) V. here, in relation to any excisable goods the
price thereof for delivery at the place of removal is not
known and· the value thereof is determined with reference ·~ .
to the price for delivery at a place other than the ·~
place of removal, the cost of transportation from the B
place of removal, to the place of delivery shall be excfoded
from such price.
•
' 358 SUPREME OOURT REPORTS . (1984] I S,C R,

(3) The provisions of this section shall not apply in
. respect of any excisable goods for which a tariff value
·has been fixed under sub-section (2) of Section 3.

(4) or the purposes of this section.~

(a) "assessee;' means the person who is liable to
B pay the duty of excise under this Act and inclu-
des his agent;

(b) "place of removal" means -.

(i). a factory or any other place or premises of
c production or manufacture of the excisable
goods; or

(ii) a warehouse or any other place or premises •
wherein . the..excisable goods have been
nermitted to . be deposited . without
payment' of duty,

from where such goods are removed;

(c) "related person" means a person who is so
ass6ciated with the assessee that they have
interest, directly or indirectly, in the business of
of ei!ch other and includes. a holding company,
a subsidiary compa,ny, a relative and a distri•.
butor of the assessee, and any sub•distributor of
iuch distributor, - · · ·

Explanation.-In this clause "holding com•
pany", ''a s·ubsidiary compa~y" alld "re]ative"
~have the same meanings as i'n the Companies
Aci, 1956;
G
(d) "value", in relation to any excisable goods.-·

\
(i) where the goods are delivered:at the time·
of removal in a packed condition, includes.
H the cost of such packing except. the cost of
a
. the packing which is of durable. nature
and is returnable by the buyer to the .
·assessee.
. UNION v. BOMBAY TYRE (Pathak, J.) 359

Explanation.-In this sub-clause "packing" means
the wrapper, container, bobbin, pirn, spool, reel or warp
beam or any other thing in which or on which the exci-
sable goods are .wrapped. contained or wound;

(ii) does not include the amount of the duty of
excise, sales tax and other taxes, ii any, payable
on sucb goods and, subject to such rules as may
B
be made, t.he trade discount (such discount
not being refundable on any account whatso-
ever) allowed in accordance with the normal
practice of the wholesale trade at the time of
remova,l in respect of such goods sold or ·con- c
tracted for sale;
'
(e) "whoiesale trade" means sales to dealers, industrial
consumers, Government local authorities and other
·buyers, who or which purchase. their requirementg
otherwise than in retail."

In t'he cases before us there has been considerable debate on
the true•meaning and scope of s.4 before and after its amendment.
The points raised are not without difficulty, but we have had the
a.dvantage of headn~ counsel of eminence on both sides, a,nd we are
grateful to them for the.considerable assistance· they have given us

- •
throughout the hearing of these cases.

The central .issue between the parties is whether the value of
an article for the purposes of the excise levy m.ust be determined by F
reference.exclusively to the manufacturing cost and the manufacturing
profit of the manufacturer or should be represented oy the entire
wholesale _price charged by the manufacturer. The wholesale price
actually charged by the 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 (con-·
. veniently referred to as "post manufacturing expenses" and "pqst
manufacturing profit") arising between the completion of.the manu-'
facturing process and the point of sale by the manufacturer.
H
Mr. N.A. Palkhivala, learned counsel for the assessees, has
propounded three principles which, he contends, form the essential
characteristics.of a duty of excise. Firstly, he says, excis~ is a tax on.
I
"360 SUPREME COURT REPORTS . (1984) I .sc.R.'
. .
manufacture or production and not on anything else. Secondly, uni-
A formity of incidence is a basic characteristic of excise. And thirdly,
• the exclusion of post manufacturing expenses and post manufacturing
profits is necessarily involved in the first principle and kelps to
achieve the second: Learn 'd couniel urges that where .excise duty
is levied. on an ad valorem basis · the value on which such duty is
B levied is a '·conceptual value", and that the conceptual nature is.
. borne out by the circumstance that the identity of the manufacturer
and the identity of the goods as w~tt as tl}e actual wholesale price
charged by the manufacturer are not the determining factors. ·rt is
urged that the old s.4 (a) clearly indicates that a conceptuar value
forms the basis of the levy, and that the actual wholesale price
c charged by the particular assessee cannot be the basis of the excise
levy. Tt is said that the criterion adopted in clause (a) succeeds in
producing uniform taxatio,n, whether the- assessees are manufacturers
who ;ell their goods in wholesale, semi-wholesale or in retail, whether
they have a vast selling and, marketing net work or have none,
whether they sell at depots and branches or sell at the factory gate,
D
and whether they load the ex-factory price with post manufacturing
expenses and profits or do not do so. Because the value of the
article rests on a conceptual base, it is urged, the result of the
assessment under s.4 (a) cannot be different from the result of an
assessment under s 4 (b). The contention is that the pri~ciple of
uniformity of taxation requires the exclusion of post manufacturing
expenses ahd profits, a factor which would vary from one manufac-

F
turer to another. It is po_inted out that such exclusion is necessary
to create a direct and immediate nexus betweeµ the levy and
the manufacturing activity, and to bring about a uniformity in the
incidence of the levy. Learned counsel contends that the position ·
is the same under the new s.4 which, he says, must needs be so •
-
because of the fundamental . nature of the principles propounded
earlier. Referring to the actual language of the new s.4 (I) (a), it
is pointed out that the expression "normal price" therein means
"normal for the purposes of excise'', that is to say, that the· price
G must exclude post manufacturing expenses and post manufacturing
'profit and must not be loaded with any extraneous element. It is
conceded, however, that under the new s.4 (1) (a) there is no attempt
to preserve uniformity as regards the amount of duty between one.
manufacturer and another, but it ·is urged thatthe basis on which
ii the value is determined is constituted by the same conceptual criter-
ion, that post manufacturing expenses and post manufacturing profit
.must be excluded. Considerable emphasis ·has been laid on the l

submission that as excise duty is a tal on the manufacture or
UNION v. BOMBAY TYRE (Pathak, J.) 361

procjuction of goods it must be a tax intimately linked with the manu•
facture or production of the excisable article and, there.fore, it can A'
be imposed only on the assessable value determined with reference to
the excisable article at the stage of completed manufacture and to
no point beyond. To preserve this intimate .link or nexus between
the nature of the tax and the assessment of the tax, it is urged that
all extraneous elements included in the "value" in the nature of post
B
manufacturing expenses and post manufacturing profits have to be
off-loaded. .It is pointed out that factors such as volume, quantity

-
and weight, which enter into the measure of the tax, are intimately
linked with the manufacturing activity,. and that the power of Parlia-
ment under Entry 84 of List I of the Seventh Schedule ,fo the Consti-
tution to legislate in respect of "value" is restricted by the conceptual c
need to link the basis for determining the measure of the tax with
the very nature of the tax. '

Shri K. Parasaran, the learned Solicitor General of India (when
these cases were heard), and now the Attorrney General of India) has
strongly contended that ·the value of an excisable article for the D
purposes of the levy must be taken at !Jie price charged by the manu-
facturer on a wholesale transaction, the computation being made
strictly in terms of the express provisions of the statute and, be says,
there is no warrant for confining the value to the assessee's manu-
facturing· cost plus manufacturing . profit. According to him, E
although excise is a levy on the manufacture of goods, it is open to

- Parliament to adopt any basis for determining the value of an
excisable article, that the measure for assessing the levy need not
•
correspond completely to the nature of the levy, and no fault can be
•

found w.itb the measure so long as it bears a nexus with tli: charge.
•
Besides this fundamental issue, there are other points of dispute,
principally in respect' of the connotation of the expression "related ·
person" in the new s.4 as weli as the nature of the deductions which
can be claimed by the assessee as post manufactuhng expenses and
post manufacturing profit from the price for the purpose of detel'-
minirig the "value". · G

The subm'issions made by learned counsel for the parties in
support of their respective contentions cover a wide area, and several•
questtons of a fundamental nature have been raised. We consider it
necessary to deal with them because they enter into and determine H
the conclusions r~acbed by u.s.
•

362 SUPREME COURT REPORTS [1984) 1 s.c.R.

. We think it appropriate that at the very beginning we should
briefly indicate the concept of a duty of excise, Both Entry 45 of List I
of the Seve.nth Schedule to the Government of India Act,· 1935, under
which the original Central Excises and Salt Act was enacted, and ·
Entry 84 of List I of the Seventh Schedule to the Constitution under
whicli the Amendment Act of 1973 was enacted, refer to "Duties. of
excise on ...... -. ......... goods manufactured or produced in India".
B
· A duty of excise, according to the Federal Court in The' Central
Provinces and Berar Sales of Motor Spirit and Lubricants Taxation Act,
1938(1) is a duty ordinarily levied on the manufacturer .or producer.
in respect of the manufacture or production of the commodity taxed.
A distinction w{s drawn between the nature of the tax and the point
at whic)l it was collecteJ:], and Gwyer C.J. observed that theoretically
"there can be no reason why an ex~ise duty should not· be imposed
even on the retail sale of an article, if the "taxing Act so provides.
.....
Subject always to the legislative competence of the taxing authority, a
. duty on home-produced goods will obviously be imposed at the
stage which the authority find to be most convenient and the most
lucrative, wherever it may be; but that is a ma.tier of the. machinery of
collection, and does not affect the . essential nature of the tax. The
•ultimate incidence of an excise duty, a typical indirect tax, must
always be on the c.onsumer, who ·pays as he c~munies or expends;
and it continues. to- be an excise duty, that is, a duty on home-produ-
E ced ·~r .borne-manufactured goods, no maiter at what stage it is
collected" (emphasis supplied). The position was explained further

-
in The Province of Madras v. Messers. Qoddu Paidanna awl Son•(')
where the FedQl'al Court observed :- ·

'.'There is in theory nothing to ·prevent the Central
Legislature from imposing a duty of excise on a commo·
dity as. soon as it comes into existence, no matter what
happens to it afterwards, whether it be sold, consumed,
destroyed, or given away. A taxing authority· will not
ordinarily impose scuh a duty, because it is much more
G convenient administratively to collect the duty (as in the
case of most of the Indian Excise Acts) when the commo-
dity leaves the factory for the first time, and also because
the duty is intended to be an indirect duty which the
manufacturer or producer' is to pass on to the ultimate
H qonsumer, which he could not do if the commodity had,

(1) [1939] F.C.R. 18.
(2) (1942] F.C.R. 90, 101.
UNION v. BOMBAY TYRE (Pathak, J.) 363

for example, been' destroyed in.the factory itself. It is the
fact of manufacture which attracts the duty, even though A ..
it may be collected later."

The observations show that while the nature of an ·excise is
indicated by the fact that is imposed in respect of the manufacture
or production of an article, the point at which it is collected is ·not
determined by the point of time ween iis manufacture is completed B
but will rest on considerations of administrative convenience, atid that
generally it is collected when the article leaves the factory' for the
first time. In other words, the circumstance that the article becomes
the object of assessment when it is sold by the manufactu; er does
not detract from its true nature, that it is a levy on the fact of
manufacture. In a subsequent case, Governor-Genera/ fn Co~nci/ v/
c
Province of Madras,(1) the Privy Council Teferred to both in
The Central Provinces and Berar ·Sa/es of Motor Spirit and
Lubricants Ta5calion Act, 1938 (supra) and The Province of Madras v.
Messers. Boddu Paidanna and Sons (supra) and affirmed that when
0

excise was levied on a.ma nufacturer at the point of the first ·sale by . D.
hiin "th_at may be because· the taxation authority imposing a duty
of excise finds it CQ.llvenient to impose. that duty at the moment when
'7 the excisa~le article leaves the factory or workshop for the first time
on the occasion of its sale. But that method of collecting the tax is an ·
accident of administration; it is not of the essence of the duty of E
excise, which is attracted by the manufacture itself." This ·Court

-
had occasion to contider a similar question in R.C. Jal/ v. Union of
lndia('). In that case, the Central Government was authorised by an
Ordinance to levy and collect as a cess on CQal and coke despatched·
from collieries in British India duty of excise at a specified rate. Rule
3 made under Ordinance .empowered the ·Government to impose a F
duty of excise on coal and coke when such coal< and coke was des- ·
patched by rail from the collieries of the coke piants, and the duty
was to be collected by the Railway Administration by means of a ·
surcharge on freight either from the consignor or consignee. It was
contended by the assessec that the excise duty cauld not legally be G
levied on the con5ignee who had nothing to do with the manufacture
or production of coal. The Court remarked : .
,
"The argument confuses the incidence of taxation
with the machinery provided for the collection thereof,"

(I) [1945] F.C.R. 179.
(2) [19621 Suppl. 3 S.C.R. 43~ ..
364 • SUPREME COURT RE)'ORTS (1984) l s.c.a.

·and reference was made to In re. the Central Pro>inces and fJerar Act
· A N~. XIV of 1?38 (supra), The Province of Madras v. Boddu Paidqm1a
and Sons ·(supra) and Governer·General in Council v. Province of
Madras (supra). This Court then summarised the law as ·follows :-

"Excise duty is primarily a duty on the production or
manufacture of goods produced or manufactured within
B the country. It is an' indirect duty which the I\]anufacturer
or producer passes on to the·ultimate consumer, that is,
it; ultimate incidence will· always be on the ·consumer.
Therefore, subject always to the legislative competence of
the taxing authority, the. said tax .can be .levied at a con-
c venient stage so long as the ~haracter of the impost, ·that
is, It is a duty on the manufacture or production, is not
lost. The method of collection does not affect the essence
of the duty, but only relates to the machinery of collection
for adminstrative convenience."

D Other cases followed where the nature of excise duty was
reaffirmed . in the terms set out· earlier, and reference may' be
made to In Re. The Bill To Amend S. 20 of the Sea Customs Act,
1878, and S. 3 oj the Cent;(ll Excises And Salt A;t, 1944,(1) Union of
India v. Delhi Cloth & Genera{ Mills,(') M/s Guruswamy & Co. Etc.
v. State of Mysore & Ors.(') and South Bihar Sugar Mills Ltd. etc. v,
Ill Unio'n of India & Ors.(')

F,
.
We think we have shown sufficiently that ~hile the levy is on
. the manufacture or production of goods, the stage of collection
need not in point of time synchronize with the completion of the
manufacturing.process. 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. We.shall return to this later when
it is. necessary to consider a submission in regard to the effect of
transactions to or through "related persons".

G We move on now to a different dimension, to the conceptual
consideration of the measure of the tax. S. 3 of the G:entral Excises
and Salt Act provides for the levy of the duty of excise. It creates·

(I) [19641 3 S.C.R. 787.
H (2) [1963JSuppl.1S.C.R.586,
(3) [1967] I S.C.R. 548.
(4) [1968J .3 S.C.R. 21,
UNION P. BOMBAY TYRE (Pathak, J.) 365

the charge, and defines the nature of the charge. That it is a levy on
excisable goods, produced or manufactured in India, is ~entioned in
terms in the section itself. Section 4 of the Act provides the measure
by reference to which the charge is to be levied. The duty of excise is
chargeable with reference to the value of tho excisable goods, and the
value is defined in express terms by that section. It has long been
recognised that the measure employed for assessing a tax must not
j,
be confused with the nature of the tax. In Ra/la Ram v. Province of .a
East. Punjab(') the Federal Court li.eld that a tax o~ buildings under
s. 3 of the' Punjab Urban Immovable Property Tax Act, 1940. measu-
red by a percentage of the. annual value of such buildings remained
a tax .on buildings under that Act even though the measure of annual
• value of a building was also adopted as a standard for determining re
income from property under the Income Tax Act. It was pointed
out that although the same standard was adopted as a measure for
the two levies, the levJes remained separate and distinct imposts by
virtue of their nature. In other w6rds, the measure adopted could
not·be identified with the nature of the tax. The distinction was
observed by a Special Bench of the Patna High Court in Atma Rqm D
Budhia v. State of Bihar( 2 ) where a tax on passengers and goods was
asses,ed as a rate on the fares and freights payable by the owners
of the motor vehicles. Atm~ Ram Budiha (supra) was referred to with
approval by this Court in M/s Sainik Motors, Jodhpur and Others v.
The State of Rajasthan('). This Court in that case repelled the ·E
coutention that the levy was a tax upon income and not upon passen-.

-
gers and goods. It pointed out that "though the measure of the tax
is furnished by the fares and freights it does not cease to be a .tax on
passengers an<] goods". The point was considered by this Court
again in D.C. Gouse and Co. ,etc. v. State of Kera/a & Anr. etc.(')
where reference was made to the measure adopted for the purpose F
·of the levy· of tax on buildings under the Kerala Building Tax Act.
The Court examined.the different modes available to the Legislature
for measuring the levy, and upheld the action of the Legislature in
linking the levy witli the annual value of the building and prescribing
a uniform formula for determining its capital value and for calcula-
ting the tax. In the course of its. judgment, the Court cited with
G
approval a passage from Seervai's Constitutional Law of India.(')

(I) [19481 F.C.R. 207.
(2) A.I.R. 1952 Patna 359. R
(3) [196211 S.C.R. 517.
(4) [198011 S.C.R. 804.
(5) Second Edition, Vol. 2 at page 12~8,
366 .•
• SUPREME COURT REPORTS [t 984) I s.c.a.

"Another principle for reconciling apparently conflic-
ting tax entries follows from the fact that a tax has two
element,s : the person, thing of activity on which the tax
is imposed, and the amount of the tax. The amount may
• be measured in niay ways;· but decided cases establish
a clear distinction between the subject matter of a tax
and the standard by which the amount of tax is meas·
n.. ured. These two elements are described ag the subject
of a tax and the measure of a tax.''

It is, therefore, clear ihat the levy of a tax is defined by its nature,
. while the measure of the t~x may be assessed by its own standard.
C It is true that the standard .adopted :as the measure of the levy may
indicate the nature of the tax but it does nor necessarily determine
it. The relationship was aptly expressed by the Privy council in· Re.
A Reference under the Government of Ireland ,Act, 1920 and Sect. 3
of the Finance Act (Northern lreiand), 1934(')'when it said:·

" ........ It. is the essential characteristic of the par·
ticular tax charged ·that is to be regarded, and the
nature of the machinery·often complicated-by which the
tax is to be assessed is not of assistance, except in so
far as it may throw light on the general character of
the tax."
E •
The case was referred to by a Constitution Bench of this Court in·
R.R. Engineering Co. v. Zila Parishad, Barei/ly & Anr.('), where
the relationship was succinctly described thus:·. .-
"It may be, and ls often so, that the tax on circum··
F stances and property is levied on the basis of income
which the assessee · receives from his profession, trade
calling or property. That is, however, not conclusive o~
the nature of the tax. it is.only as a matter of convenience
that income is adopted as a yardstick or measure for
assessing the tax. As pointed out in. Re. a· Reference
under Gpvt. of Ireland Act (supra), the measure of the
tax is not a true test of the nature of the tax. There·
fore, while determining the nature of a tax, though the
standard on which the .tax is levied may be a relevant
H consideration, it is not a conclusive consideration;''

(I) L.R. 1936 A.C. 352. •
(2) !1980) 3 S.C.R.),
UN!O\.i \i'. BOMB~ y TY!Ul (Pathak, i.)
The principle was reaffirmed by this Court in The Hingir-Rampur
Coal Co., Ltd. and Others .v. The State of Orlssa and Others (1) A
where the form in which the levy was imposed was held tci be and
~ impermissible test for defining in itself the character of the levy .
..i It was observed:-

"~..... ; .. the mere fact that the levy imposed by_ the
B
impugned Act had adopted the method of determining
the rate of the levy by reference to the minerals produced
by th.e mines would not by itself make the levy a duty
of excise. The method thus adopted may be relevant.in
considering the character of the impost but its effect
must be weighed along with ·and in the light of the c
other relevant circumstances!'

It is apparent, therefore, that when enacting a measure to serve as
a standard for assessing the levy the Legislature need notcontour it
·along lines which spell.out the character of the levy itself. 'Viewed ·
•from this standpoint, it is not possible .to accept th~ contention D
that because the levy of excise is a levy .on goods manufactured or
produced the value of an excisable article must be limited to. the:
manufacturing cost plus the manufacturing profit, We are of opinion .
. that a broader· based standard of reference may be adopted for the
purpose of determinining the measure of the levy; Any standard
E
which maintains a nexus with the essential character of the levy
~an be regarded as a valid basis for assessing the· measure of the

-- levy. In our opinion, the. original s.4 and the new s.4 of the Central
Excices and Salt Act satisfy this test.

S.4 envisages a method of collecting tax at the ·point of the
first sale effected by the manufacturer. Under the old s.4 (a),
the value of the excisable article was deemed to be the wholesale
cash price for which an article of the like kind and quality was
.sold, or was· capable of being sold, at the time of the removal
of the article chargable with· duty from the factory or. any
other premises of manufacture or production for delivery at the
place of manufacture or production, or if a wholesale market <lid •
not exist for such article ·at such place, then delivery was envisaged
at the nearest place where such market existed. Sec.4 (b) declared.
. that where such price was not :iscertainable, the value would be
deemed to be the price to be the price at which an article of the H

(!) [1961] 2 S.C.R. 537,
.'
. '
SUPREME COURT REPORTS (19S4) i S.C.R.
•
like kind and quality was sold .or was capable of being sold by the
manufa?turer or producer, or his , agent, at the time of ihe
removal of the articie chargeable with duty from such factory
or other premises for delivery at the place of manufacture ar
production, and if such article was not sold or was not capable
of being sold at such place, at any other place nearest thereto. Then
there was an expla?ation which declared that no abatement or .
8 deduction would be allowed except in ·respect of trade discount and
the duty payable at the time of the removal of the article from
the factory. The wholeasale price was envisaged as a cash price
in· order .to make it a uniform standard, because·it was then a price
.....
fr~ed from the burden of an increase on account of credit oi;, other
c advantage allowed to a buyer, a factor which may vary from tran-
saction to transaction and from buyer to buyer. The essential distinc- ·
tion between cl. (a) and cl. (b) of s.4 appears to lie in thi~. that
cl. (a) is invoked when the wholesale cash price is ascertainable
and cl. (b) when the wholesale cash price cannot be ascertained.
D
As we have said, it was open to the Legislature to specify'
the measure for assessing the levy. The Legislature has done so.
In both the old s.4 and the new s.4, the price charged by the
. manufacturer on a sale by him represents the ma.sure. · Price and sale
E are related concepts, and· price has a definite connotation. The 1'·
"value" of the excisable article has to be computed with reference
to the price charged by the manufacturer, the computation being
made in accordance with the terms of s.4.
A contention was raised for some of the as!:essees, that the
·measure was to be found by reading s.} with· s.4, thus drawing
the ingredients of s.3 into the exercise. We are unable to agree.
We are concerned with, s.3(1), a(ld we find nothing there which
·clothes the provision with a dual character, a charging provision as
• well as a provision defining the measure of the charge .
At thi's stage, it would be advantageous fo refer to certain
G decisions which have some bearing on the proper.construction of cl.
(a) and cl. (b) of the old s.4.
•
In Vacuum Oil Company v: Secretary 'of State for India in
CouncU (1) the Privy Council had to construe tije scope .of s.30 of
H the Sea Customs Act, 1878 which contained els. (a) and (b) substa·
ntially comparable with the two clauses of the old s.4 of the. Central

(I) LR 59 I.A. 258
UNION V. BOMBAY TYRE .(Pothak, J.) 36~

IJxcises and Salt Act. The appellants in this case manufactured: diffe• •
rent grades of lubricating oil in the 'United· States. Large quantities of A
lubricating oil of particular manufacture and mark were imported
. into India through the port of Bombay and sold by the appellants
directly to consumers. A dispute arose as to the provisions under
which duty under the Sea Customs Act was attracted. Section 30
of that Act provided that for the purposes of the duty the real value B
should be deemed io be '."(a) the wholesale cash price, less trade
discount, for which goods of the like kind and quality are sold or
are capable of being sold, at the time and place of importation.......•.
or (b) where such price is not ascertainable, the cost" at which
goods of the like and quality could be delivered at such place, ....... .''.
The government c9ntended that the reai value of the ap_pellants' c
oil was its "wholesale cash price" referred to in s.30(a) a price
asc~rtainable, without difficulty. The appellants replied that in .
view of the unique cha.racter of their oil and of the invariable
course of business pursued by them in relation to its sale, a "whole-
sale cash price" for_ that oil had never exi;ted and was ·not ascerta-
inable and that therefore its real value must be determined in D
accordance with ·s.30(b} of· the Act. The Privy council observed
· that there was no other oil in Bombay which could be said to be ·
"of the like kind and quality" as the oil imported by the appellants
and therefore the relevant "wholesale cash price" for the appellants,
if there be such price, was to be found in the actual sales of those E
oils in Bombay by the appellants themselves provided that such
sales had taken place. It was noted that large stocks of oil were
imported at Bombay and all contracts for sale were made with
reference "to stocks. The oils were disposed of directly to consumers
and never to dealers. The appellants themselves discharged all the
functions of retailers . of their oil as so sold. Besides, the selling F
price to consumers. was about i 0 per cent above the entry price, the
difference representing the appellant's retailing profit and the expen-
ses incurred· by them in respeci of matters subsequent to importation.
The quantities of oil purchased by individual consumers were in
some cases very large indeed. The Privy council took ·the view that G
in no·sense could the price charged to consumers for the oils impor•
ted by the appellants be regarded as "a wholesale. case price", and
that therefore the case did not fall within s.30(a} but must be regar,
ded as attracting s. 30 (b).
On the other side of the line is Ford Motor Company of B
India Ltd. v. Secretary of State for India· in Council\'), in which the
(!) L.R. 65 I.A. 32.
..

370 SUPREME COURT• REPoRTS (1984] 1 s.C.R.

• Privy Council had to consider the 'scope of s. 30 of the Indian Sea
A Customs Act again. The appellants imported · Ford D)Otor vehicles
into India from Canada and sold them to authorised dealers or
distributors. They possessed a monopoly iµ In.dia as regards the
supply of such vehicles. The appellants issued from time to time a
price list and t])e terms of business were that the retail price to be
charged by the distributors to the public was that otat'ed in tbe price
B
list current at the time of arrival of the vehicles in India, and the
price payable by the distributors to the appellants was the same ·price
less a discount of 20 per cent. The . Collector' of Customs assessed·
customs duty on a consignment of 256 Ford motor cars under
s. 30 (a). The appellants contended· that for the motpr-cars in
c question no wholesale cash price was. ascertainable and the duty
should have been assessed under s. 30 ,(b). The Privy Council
. approached the case from the stand point that if a wholesale .price
satisfying the description contained in s. 30 (a) was ascertainable, the
goods 'could not be dealt with under s. 30 (b), and in this connection
they referred to the expression "ascertainable;' as importing more .
D than could be satisfiea by the result of a mere estimate. The Privy
Council held that tbe. appellant's price to the distributors was a
wholesale p_rice within the meaning ·of s. 30 (a) because it was a '
cash price, and only discount had been deducted, and the sum payable
by the distributor bad been deduced to a price· referable to a car in
E the condition in which it arrived in Bombay. H was contended for
the appelants that "goods of the like kind and quality'' in cl. '(a} was
a phrase which suggested other goods than that under assessment •
and therefore, the price .fetched by the goods, themselves must be
disregarded or should be considered only to see what price other
similar goods would have realised.' It was urged that since that test
--
F was not satisfied cl.(a) could not be invoked. The Privy Council '·
rejected the contention, observing that the application of cl.(a) did
not depend upon any hypothesis to the effect that at · the time and
place of importation ari indefinite amount of further goods added to
the available supply had had effect upon ihe wholesale price.·· 'And
G what is important, the Privy Council further observed : "But if there
. is an actual pric~ for the goods themselves at the time and place of
importation, and if it is a "wholesale cash price, less trade discount"
the clause is not inapplicable for want of sales of other goods. The
clause can be applied distributively to each of the motor cars in this
H consignment, and even if they are regarded collectively the clause is
not defeated. A particular car may be sold ·at a price which, having
to
regard other transactions in ,sccb cars, or to .cther circumstances,
tJNION V.,BOMBAY TYRE "(Pathak, J.) 371

is too high or too low. In that sense, the actual price in a parti•
cular instance does not necessarily . or finally establish a wholesale
price to satisfy cl. (a), whether the particular car or cars sold be part
of the shipment in question or not. But the goods under assessment
inay under cl. (a) be considered as members of their own class even
.
although
.
at the time and' place
.
of importation there are -
no othet
..
members. . The price olitained for them may correctly represent the
pr.ice obtainable for goods of the like kind and· quality at the time
B
and place of importation.". ·

These two cases illustrate the fundamental distincHon between·
provisions such as the two clauses of s. 4 of the Central· Excises and•
~~ c
Grea.t reliance has 'been p\aced 'by. the assessees on two ·
important decisions 'of this Court- in support of the contention
that only t)le manufacturing cost and the. manufacturing profit can · •
be taken into account for assessing the "value" of an excisable
article. The first case is A.K. Roy, v. .Voltas Ltd, (supra). The asses- D
· see manufactured air conditioners and water coolers, and sold those
article from its head office at Bombay and at b'n\nch officers· in
·different towns in the country directly to consumers at list prices.
·The sales so effected amounted to about 90% to 95% of its
production. It also sold the articles to wholesale dealers on terms Ill
which required them to sell the products at list prices, and that the
assessee would seil them the articles at the listed price le~ 22%
discount. The assessee contended before the excise authorities that
the list price ·minus 22% discount allowed to the wholesale dealers
would constitute the "wholesale cash price" for ascertaining· the real
value of the articles. The contention was accepted by the excise ~ ·
authorities, and assessments were made on that basis., Subsequently,
the Superintendent of Central .Excise began to assess the duty on the
basis of the. retail price and l\Ot the wholesale . cash price. The
r
Y·
case was taken by writ petition 'to the High Court, which held that
the duty fell to be as.sessed under th,e old s.4(a) of the Central (;
Excises and S11t Act .on the b1Sis of the wholesale cas~ price payable ·,
by the wholesale dealers, and· not under s.4(b) on the basis of the
price of retail sales effected directly to the consumers. The case was
brought in appeal to this Court. The Court observed that for the
purposes of s.4(a), it was not necessary for a wholesale market to ff
exist in the physical sense of the term 'where articles of a like
kind or quality are or could be sold. ·A wholesale market, it was
observed, could also mean ''the ·poteptiality of the articles. being
.
372 SUPREMfl COURT REPoRTS !19841 i s.c.it.
sold on a ',\'holesale · ba~is" .. What was necessary was that the
articles could be sold wholesale to traders. It was observed further
that the application of s.4(a) of the Act did not d_epend upon any
hypothesis to the effect that at the-time and place of sale any further
articles of the like kind and quality should have been sold. If
there was an actual price for the goods themselves at the time and.
place of sale and if that was a 'wholesale .cash price', the clause
8 ·was not inapplicable for want of sale of other goods of a like kind
·and quality. Later follow the words which have brought on the
present controversy :

"Excise is a tax on the production 'J,nd manufacture
.
of goods (see Union of India v. Delhi Cloth and General
c Mills (supra). Section-;! of the Act therefore provides
that the real value should be found after deducting the
selling cost and selling. profit and that the real value can
include only the. manufacturing cost and the manufact-
uring profit. The section makes it clear that excise is
D levied only on the amount representing the manufacturing
cost plus the manufacturing profit and excludes post-
manufacturing cost and the profit arising from post-
manufacturing operation, namely selling profit."

Those observations were made when the 'court was examining
E the meaning of the expression "wholesale cash price". What
the CGurt intended t<l say was that the entire cost of the article to
the manufacturer (which. would include various items of expense
composing the value of the article) plus his profit on the manufact- 1
•
ured article . (which would have to take into account the deduction
of 22% allowed as discount) would co"nstitute the real value had to
I.I' be arrived at after off-loading the discount of 22%, which in fact
I

represented the wholesale dealer's profit .. A careful reading of the
judgment will show ·that there was no issue inviting the Court's
.
· decision on the point now raised
.
in<these cases by the assessees,

G . ·The other case is Alic Industries Ltd. v. H.H. Dove, Asstt,
Co//ector of Central Excise and Ors.(1) The appellant, Atic Industries
Ltd., was a manufacturer of dye stuffs. It sold its products to
two wholesale buyers, 70% of its total production to one and 30% to
the other. The price charged was a uniform price described as the ·
.H "basic selling price" less a trade . discount of 18%. The wholesale 1r
dealers hi turn resold the dyestuffs to distributors and also directly to

(!) [1975) 3 S.C_;R. 563.
. UNION v. BOMBAY TYRE (Pathak, J.)

large consumers, including textile mills. The large consumers paid the
basic selling price, while the distributors paid a higher price but A
subject to a trade .discount. The. distributors sold the product to •
consumers, The question arose as to how the value of the dyestuffs
manufactu_red by the appellants should be determined under s.4. The
appellants contended that the value should be the price at which the
appellants sold in wholesale to the two wholesale buyers, Jess a
B
uniform trade discount of 18%. The excise authorities took the
view that the value should be the price at which the wholesale buyers
bad sold the dye stuffs to the distributors witho_ut taking into acco-
unt the discount given to the destributors. Before this Court, the
excise authorities pressed the same contention, urging that s.4 (a)
ddd not provide that in every case the wholesale price charged by c
the manufacturer should be taken into consideration and not the
wholesale price _charged. by the wholesale 'buyers who sold the· ·
I;roduct also in wholesale to the.next buyers. One of us (Bhagwati J.)
spoke for the Court"in that case, and delivered a closely· enuncia-
. .
ted and lucid exposition of the true legal position. It was explained :
. •D
"The value of the goods for the purpose of excise must
take into account only the manufacturing cost and the
manufacturing profit and it' must not be loaded with post-
manufacturing cost or profit arising fro111 post· manufact·
uring operation: The price charged by the manufa2turer E
for sale of the goods in wholesale would, therefore, re pre·
sent the real ~alue of the goods for the purpose of assess-

'
ment of excise duty. If the price charged by the whole·
sale dealer who purchases the goods from the manufact·
urer and ;ells them in wholesale to . another d~aler were
taken as the value of the goods, it would include not only f
the manufacturing cost and the manufacturing profit
• of the manufacturer but also the wholesale dealer's selling
-v "cost and selling profit and that ·WOUid be Wholly incom-.
patible with the nature of excise. It may be noted that
(
wholesale market in a particular type of goods may be in
G
several tiers and the goods may reach the consumer after
a series of wholesale 'transactiol)s. In fact the more com-
mon and less expensive the goods, there wonld be greater
possibility of more than one tier' of wholesale transactions.
For instance, in a textile trade, a manufacturer may sell 'H
his entire production to a single wholesale dealer and
the latter may in his turn sell _the goods purchased by him
from the manufacturer to different wholesale dealers at
..

974 SUPRllME COURT REi>oRTS (1984] 1 s.c.a.
· State level, and they may in their turn iell the goods to
A wholesale dealers at the district level and from the whole·
sale dealers at the district level the goods may pass by ·
sale to wholesale dealers at the. city level and then, ulti-
mately from the wholesale dealers at the city level, the
·goods may reach the consumers. The only relevant
price for assessment of Value of the goods for the purpose · .....
B
of excise in such a case would be the wholesale casq price
which the manufacturer from sale to the first wholesale
. '

dealer, thai is, when the goods first enter the stream of
trade. Once the goods have entered the stream of trade
and are on their onward journey to the consumer; whether
.c along a short' or a long course depending .on the 'nature
of the gooqs and the conditions of.the trade, exc.ise is n~t
concerned with what happens subs«quently to the goods.
It is the fir•t immediate contact between the manufacturer
and the trade ihat is made decisive for determining the
wholesale cash .price which is to be the measu.re of the
D value of the goods for the purpose of excise. The second
or subsequent price, eve~ though on wholesale basis,
.is not material. If excise were levied on the basis of
second or subsequent wholesale price, it would iload the
· price with a post manufacturing element, ·namely, selling
,
E · cost and selling profit of the wholesale dealer. That would
be plainly contrary' to the true nature of excise as expla-
ined in the Xoltas' case (supra). Secondly, this would
also violate the concept of the factory gate sale which is
the basis .of determination of value of the goods for the
purpose of excise.
Ii'
There can, therefore, be no doubt· that where a
manufacturer sells the. goocls manufactured by him in·
wholesale to a wholesale dealer at arms length · and in the
usual course of business, the whole~ale cash price charged
by him to the wholesale dealer less trade discount would
''l.
G represent the value of the goods for the putpose of
assessment of excise. That would be the' wholesale cash
price for which the· goods are sold at. the factory gate
within the meaning of s.4 (a). Tlje price . received by
the wholesale dealer who purchases the goods from the
H manufacturer and' in his turn sells the same in wholesale
to other dealers would be irrelevant to the determination
UNION v. BOMBAY TYRE (Pathak, J.) 375

of the value and the goods would not be charteable. to
excise en that basis." . A
This case also does not support the case of the assessees. When
). it refers to post-manufacturing expenses and post-manufacturing
proj\t arising from post.manufacturing qperations, it clearly intends
to refer not to the expenses and profits pertaining to the sale tran• ·
sactions effected by the manufacturer but to those pertaining to the B·
"subsequent sale transactions effected by the wholesale buyers in
favour of .other dealers..
Having.explained the true scope of "Voltas Ltd. (supra) and
·. Alic Ltd. (supra), we may now proceed airectly to the consideration c
of certain aspects of the provisions of the old s.4. There has been
serious argument on the question whether s.4 (a) . provides for the
value of the assessee's excisable article being determined on the basis
of the wholesale cash. price charged or chargeable for articles of the
• like kind and quality sold by manufacturers generally. or on .the basis
of the wholesale cash pricefot articles of the like and qtlality sold by D
the assessee. · At first blµsh, it. would'seem that the former constru•
ction should be accepted, and indeed some support can be derived
for that view from the observations of the Privy Council in Vac1'um
Oil Co. (supra), where the "wholesale cash. price" mentioned in s.30 .
(a) of!he Sea Customs Act, 1878, was construed t<A mean "that

-
price current for staple articles. the amount of which, if not a sub-
ject of daily publication in the press. is easily ascertainable in appro·
·priate trade circles". But this. geneTal observation can be of no help
to tile assessees, because since then, he courts ·have proceeded'to
make the position amp.ly clear. The problem presented -itself again
to the Privy Council in Ford Motor Co. of India Ltd. (supra), and
while taking note of what it had said in the earlier case, the Privy
Council laid down that where· the excisable goods constituted a class
of their own and it was not possible to say that other manufacturers

J 'produced goods of that kind and quality, the goods under assessment
could. be considered as members of their own class for the purpose
of s.30 (a) even although at the time and place of imporfati<in there G
were no other members. The price obtained for them, it was said,
would correctly represent the price obtainable for g6ods of the like ·
kind and quality at the time and place of importation. Then in
Voltas Ltd. (supra), this Court observed that the application of s.4
(a) of the Central ExCises and Salt Act did not depend upon any
hypothesis to the effect that at the time and place of sale, any further
J!rlic!es of li)l:e )l:iqd and quality should have been sold. If there was·
SUPREME COURT REPORTS [1984i I s.c.R.

an actual prict!'for the _goods themselves at the time and place of
A .. sale and if that was a "wholesale cash price", the c:Jause was not
inapplicable for want of sale of other goods of a like kind and qua-
'lity. It s.eems to us that the more practical w~y of' looking at the
problem is that there are very few cases indeed where two manufac-
turers produce an article of the like kind. and quality. An instance
has been supplied by learned counsel for the assesse1is, and we are
B referred to.the case of a factory which manufactures identical electric
bulbs for supply to a number of c6mpanies who sell them in the

-
market under their own distinctive trade names. While such exam·
pies are possible, we are inclined to accep't the statement of· the
k:arned Solicitor General that goods manufactured by different
manufacturers generally differ in both kind and quality. Further,
c the manufacturing and other costs would vary from one manufac-
urer to another, depending on the efficiency of manufacturing . ).
techniques and managen1ent ·methods employed. Other important
considerations
. are certainly and convenience in the ' administration
.
of the levy from the view-point of both the assessee and the Revenue. •
There is the further consideration that the wholesale cash price
· -charged by the assessec must "e ascertained on the basis that the
sale to the wholesale dealer is at arm's ·length. We are, therefore,
9'r
the view that we should prefer the construction suggested by the
Revenue that s.4 (a) applies to the goods manufactured by the
'\ssessee himself. We may also point out that this conclusion is .in
E '\CCord with the general intent expressed in the new s.4 (l) (a), and
a,s we shall show presently it is the case of both th(: assessees and
the Revenue that in enacting the new s.4 in superscssion of tht old
section, no material departure was intended from the basic scheme
for determining the value of the excisable article.
F Accordingly; we hold that pursuant to the old s.4 (a) the value
of an excisable article for the purpose of the exci"e levy should be
taken to be the price· at which the ·excisable artieie is sold by the.
assessee to a buyer at arm's length in the course of wholesale trade
at the time and place of removal. Where, however, the excisable'
article is not sold by the assessee in wholesale trade but, for example,
is consumed by the assessee in his own industry the case is one where
under the old s.4 (a) the value must be determined as the price. at
which the excisable article or an article of the like kind and quality
is capable of being sold in wholesale trade. at the time and place of
removal.

Where the excisable article or an article 9f th'~ like kind and
" quality .is not sold in wholesale trade at the place of removal, .that is,
UNION V. BOMBAY TYRE (Pathah, J.) 377
at the factory gate, but is sold in the wholesale trade at a place out•
side the factory gate, the value shoule be determined as the price at A.
which the excisable article is sold in the wholesale trade at such
place, after deducting therefrom the cost of transportation of the
l excisable article froin the factory g!ite to such place. The claim to
other deductions will be dealt with later.

Fi!].ally, where the wholesale price of the excisable article or. B
an article of the like kind and quality is not ascertainable, then
pursuant to the old s.4 (b) the value of the excisable a~ticle shall be
the price at which the excisable article or an article of the like kind·.
a~d quality is sold or is capable of being sold by the ass;ssee at the
time and place of removal or if th~ excisable article is not sold or is .C
not capable of being sold at such place, then the price at which it
is sold or is capable of being sold by the assessee at any other place
nearest thereto.

In every case the fundamental criterion · for computing the
value 'or an excisable article is the price at which the excisable article D
or an article of the like kind an·d quality is sold or is capable of

..
being sold by determining sucli volue. ·

As we have noted, Parliament amended the General Excises
and Salt Act by Act XXII of 1973:' In particular, Parliament intro-
duced a new s.4 which· tbtally superseded the old section, and E

-
embodied a much more comprehensive and clearly enunciated scheme
tor the determination of the real. value of an excisable article. Clause
(a)· of the new s.4 speaks of the "value" being the "normal price,
that is to say, the price at which ·Such goods are ordinarily sold to a
buyer in the course of wholesale trade for delivery at the time ·and . F
place Of removal where the buyer is not '1 related person and the
price is the sole consideration for the sale."

Where the normal price of such good is not asertainable for
the reason that such goods are not'sold or for any other reason, the ·
new s.4 (1) (b) provides that the nearest ascertainable equivalent G
thereof determined in such manner as may be prescibed shall be the
value of the excisable goods for the purpose of charging the excise
duty.
It will be noticed that the basic scheme for determination of H
the price in the' new s.4 is characterised by the same dichotomy as
that observable in the old s.4. It was not the intention of Parliament,
. when enacting the new s.4 to create a scheme materially different
..
378 SUPREME COURT REPORTS ' (1984) 1 S.C.R,

• ·rrom that em6odied .in the superseded s.4. The object and purpose
A remained the same, and so did the central principle at the heart of
-the scheme. The new scheme was merely more comprehensive. and
' ' .
the language empfoyed more precise and definite. As in the old s.4,
the terms in which the value was defined remained the price charged
by the assesseee in the course of wholesale tr_ade for delivery at the
time and place of removal. . Under the new s.4 the phrase "place of
B
removal" was defined by s.4 (b) not merely as "the factory or any
other place or premises of production or manufacture of the ecxisa•
ble goods" from· where such goods are removed but was extended to
"a warehouse or any place or premises wherein the excisable goods
have been permitted to be deposited without payment of duty" and
c from where such goods are removed. The judicial construction of
the provisions !>f the old s·4 bad already declared that the price
-envisaged under. clauses (a) and (b) of that section was the price
charged by the-manufacturer in a transaction at arms length. After
referring tO several cases, some of which have already be.!nmentioned
here earlier, this Court pointeo out in Vo/tas Limited (supra) that
D "the wholesale cash has to be ascertained only on the basis of
transactions at arms length. If there is a special or favoured buyer
to whom a specially low price is charged because of extracommercial
considerations, ~.g., because he is a relative of the manufaciure~. the
price charged for those sales wol\ld not be the "wholesale cash price"
E for levying excise under s.4 '(a) of the Act. A sole distributor might
or might not be a favoured buyer according as term 0 of the agreement
with him are fair . and reasonable and were arrived at ·on purely
commerci:ll basis."

That was ~!so the view'taken in Atic Industries Ltd. (supra). The
hew s.4 makes express provision iri tba_t behalf. Under the new
s.4 also, it is necessary to take the price charged by the manufacturer
as one which is un -effected by any concessional or manipulative
considerations, an<l therefor,e the "normal price" . mentioned iri the
new s.4 ( 1) (a) speaks ofa price "where the buyer is not the related
G person and the price is the Sole consideration for the sale." . The
expression "related person" has been specifically defined in the new
s.4 (4) (c), and transactions in which a "related person" is involved
are covered by the third proviso of s.4 (!) (a).

H Both learned. counsel for the assessees and the 'learned .
Solicitor -General for the Revenue are agreed that in enacting the
new s.4 Parliament -did not intend to bring into existence a
scheme of valuation different from that embodied in the old s.4
..
UNION v. BOMBAY TYRE (Pathak, J.) 319

Reference was made in that connecti(l!l> to the Statement of Objects
and Reasons. The difference, however, lies in this that while learned A
counsel for the assessee attempted to show by reference to the old
s.4 that the legislative intent was to confine the value of an· excisable
article to the manufacturing cost and manufacturing profit and that
therefore the same limit:itions should be read into the new s.4, the
learned Solicitor General approa~hed the problem ·from the other B
end and contended that since on a plain reading of the new s.4 the'
price actually charged by the assessee was the true criterion and
was not limited to the manufacturiag cost and manufacturing profit
it is that construction which should be put also on the old s.4. We
have earlier indicated our inability to accept the proposition thatthe
old s.4 defined the value of an excisable article in terms of the manu· c
facturing cost and manufacturing profit exclusively. We find from
an examination of the provisions of the new s.4 that a similar conclu·
sion must follow. The normal price mentioned in the new s.4 (I)
(a) is the price at whicl\ the goods are ordinarily sold by the l)SSe·
ssee in the course ·of wholesale trade. It is the wholesale price
D
' charged by him. It is a price which may vary, according to the
first proviso to the new s.4 (a) with different classes of buyers. It
may also be, according t.o the second proviso to the new s.4 (I) (a)
the price fixed as the wholesale price under any law l'r the maximum
price where the law fixes a maximum. The price may also be a
different price if the case falls within the third proviso to the new E
s 4 (I) (a). 'In that event it will be the price charged by a related

- person in the course of wholes.ale trade. Clearly, it is not possible to
conceive of the price under the new s.4 (l) (a) being confined to the
manufacturing cost and the manufacturing profit. Moreover, it is
reasonable to suppose that the central principle for the determination
of the value of the excisable article should be the same, whether the F
case falls under cl. (a) or cl. (b) of the old s.4 or under the new s.4
(I). When regard is had to the provision of cl. (b) in each case,
· it is not possible to limit the price to· its components representing
the manufacturing cost and manufacturing profit.
G
We have examined the p;inciples of. an' excise levy and have
considered the statutory consrutction of the Act, before and after it.s
amendment, in view of the three propositions formulated, on behalf
of the assessees, as principle constituting the essential charac'teristics
of a duty of excise. It is app~rent that the first proposition, that H
excise is a tax on the manufacture or production of goods, ;md not
on anything else, is indisputable: and is supported by a Catena of
cases beginning with The Central Prov1\1c~~ an{i Berar Sales of Motor
380. SUPltEMB COUltT REPORTS [1984) 1 s.c.lt.
·•
Spirit and Lubricants TaxatiDll Act. 1938 (supra). As regards the
4 second proposition, that uniformity of incidence is a basic charact·
eristic. of excise, w~ are inclined. to ihink that the accuracy of the
proposition depends on the level at which the statute rests it. We
shall discuss that presently. 'As to the third proposition, that the ~-
exclusion of post manufacturing expenses and post· manufacturing
profit "is necessarily invcilve.d in the first principle does. not inevitably
B follow. The exclusion of post manufacturing ·.expenses and post
manufacturing of profits is a matter pertaining· to the ascertainment
of the "value" o( the excisable article, and not to the nature· of the
excise duty, and as 'we have explained, the standard adopted by the
Legislature'for determining the "value ' may possess a broade.r base
c than th~t on which the charging provision proceeds. The acceptance
of the further.statement contained in the'formulation. of the third
proposition, that the exclusion of post manufaciuring expenses and
post manufacturing profits helps to achieve uniformity of incidence
in the levy of excise duty, depends on what is the point at which
such uniformity of incidence is contemp!'ated. It is not necessarily
.involved at the stage of sale of the ·article by the manufacturer
because we find for example that under the amended s.3 (3) of the
Central Excises and Salt A"ct, different tariff values may be fixed not ,,,.
only (a) for different classes of descriptions of the same excisable
goods, but also (b) for excisable goods of the same class or descrip-
tion. (i) produced or manufactured by different classes ofp;oducers
or manufacturers, or' (ii) sold to different classes of buyers. That the
"value" of excisable goods determined under the new s.4 (a) may
also vary according to certain circumstances is evident from the three
clauses of the proviso to that clause. Clause (i) recognises that in
the normal practice of whol~sale trade the same class of goods· may
be sold by the assessee at different prices to different classes of
-
buyers: in that event, each such price shall, subject to the other )r
·conditions of cl. (a), be deemed to be the normal price of such goods
in relation to each class of buyers. Clause (ii) provides that where.
the goods are sold in wholesale.at a price fixed under any law or at
a price being the maximum, fixed .nnder any such law, then ·the price ·
·t_,.
G
or the maximum price, as the case may b•, so fixed, shall in relation
to the goods be deemed to be the normal price tliereof. Under cl.
(iii), where the goods are sold.in the course of wholesale trade by
. the assessee to or through a related person, .•the normal price shall
be the price at which the goods are sold by the related person in tlie
H course of wholesale trrde at t!ie time of removal to dealers (not being
related ,p~r~q11s) or w]\ere sqch ~ooqs are no\ sold tq ~11ch dealers,
..
UNION 1'. l!OMBAY TYRE (Pathak, J.) 381

·to dealers (being'telated persons) who sell such goods in retail. The
.. verity of the three principles propounded by learned couns.el for the
assessees has been, as indeed it had to be, examined in the context
of the Act before aµd after its amendment. For the case of the
· assessees is that the amendment has 'made no material change in the
basic schme of the levy and the privisions for determining the Vjllue
of the excisable artiCle. ·
·B
J,,earned counse1 for the assessees has contended that t!\e old
· s.4 (a) expresses the conceptual nature of .the "value" of an
excisable article because neither the identity of the manufacturer nor
· the iden,tity of the goods sought to be· charged nor the actual whole·
sale price charged by the manufacturer is the determining factor.
We'have come to. the conclusion after carefully weighing the .matter
c
that on a true>construction of its provisions in the context of the ·
statutory scheme the old s (a) ;hould be -consid·ered as applicable to
the circumstances of the particular assessee himself and not of manu•
· facturers generally. As regards the" second element, namely, the
identity of the goods sought to be charged, that also, to our mind,
is a determining factor because .the statute speaks of "an article of
the like kind and quality". The third eleme~t, namely, the actual
• wholesalcprice charged by the manufacturer is lij(ewise a determining
factor in view of our conclusion that the identity of the manufacturer
is material in the application :.Of the old s.4 (a). · E

- •
Learned counsel for the assessees urged that the expression
"normal price" in the new s.4 (I) (a) means the price· normal for the
purposes. of the excise du)y and that, it is•said,.means the manufact-
uring cost plus the manufacturing profit. It is urged that the nor·
ma! price for the purposes .of the levy must .be a price not loaded F
with extraneous elements, 'extraneous. to the nature of the
impost. It is pointed out that in order .to bring the operation of .
the statute within the purpose intended by the Legislature the
courts are justified in doing "some.violence to the words" and support
is taken from Luke v.- I.R.C.,( 1) and the principle adopted by
G
this Court in Commis~io.ner of Income-Tax, Central, Calcutta v.
National Taj Traders(') and· in K.P. Varghese v. Income-Tax Officer,
Ernakulam and Another.(') A somewhat similar approach had already
been adopted by this Court in Commississioner of Income Tax,
.H
(I). [1963] A.C. 557.
(2) [1980] 121 ITR 535.,
(3) [1981] 131 JTR·597,

"'
382 . SUPREME COURT REPORTS . 1.1984] 1 s.c.P..

(Central), Calcutta v. B.N. Bhattachargee and Another.(') Learned
A counsel also referred to Cormissioner of Wealth-Tax, Bihar and
Ortssa v. Kripashankar Dayashankar Wora/J(') and R.B Jodha Mal
Kuthiala v. 'Commissioner of Income-TAX. Punjab. Jammu & ·Kashmir
and Himachal Pradesh.(') When the new s.4 (!) (a) is read as a
whole, the meaning of the expression "normal price" becomes ·
plai~ly evident. It will be noticed the expression "normal price' 'is
B
followed by the phrase "that is to say". 'The phrase "that is to say''
says Stroud's Judidal Dictionary (Fourth Edition, Vol.5 p. 2753)"
is the commencement of an ancillary da.use which explains the
meaning of the principal clause. It has the following properties: (1) ,.
it must not be contrary to the prin~ipal clause; (2) it must neither
c increase nor diminhh it; (3) but where the principal clause Is general
.in terins it may restrict it," and reference has been made to
Stuckeley(') v. Butler and Harrington. v Pole.(') Therefore, the phrase
"normal price" is defined hy the words in s.4 (11 (a) which follow. It
is •·the price at which such goods are ordinarily sold by the. asses see
to a buyer in the course of·wholesale trade for delivery at the time
D a~d place of removal where the buyer is not a related person and the
price is the sole consideiation for the sale,"

Learned counsel for the astessees contended that the new s.4
· (I) (a) ·also levies excise on the basis. of a conceptual value which
E n1u')t excluclc· post ma.riufa'cturing expenses and post manufacturing
profit. and in Sllpport of that submission l,e has adduffd ·a number
of reasons. It is said that the essential principle of excise .dictates
the exclusion of post manufacturing exrenses and profit. That, it is
·pointed 'out, is also suggested by the principle of uniformity of inCi-
F dence, for it is only by such exclusion that uniform criterion can be
applied to all manufacturers, those who have sellin_g and marketing
or.ganisations and who load the ex-factory wholesale price to recoup
themselves the costs of the selling organisation and of equalised
freight and those who do not load their wholesale price with' such
post manufacturing expenses. Reliance is placed on-· the legislative
G history, it being contended that the new sA should be interpreted on
the same basis as the old s.4. Reference is· made to the. Statement of ·
Objects and Reasons' of Act XXII of 1973 \q show tha\ no ~liaDge
--~--------
•
Cl)[1979) 1181TR4~1.
H (2)[1971] 81 !TR 76;.
(3) [1971] 82 lTR 570.
(4) Hob. 171.'
(5) Dy. 77b, p. 1.38.
U\.i10ii v. fioi.!BAY TYRE (Path.:k, J.)

of substance in the basis of the charge or levy was intended by the
amendment of s.4. It is said that the phrase "that is to say"' in the A
new s.4 (I) (a) indicates that the conceptual criterion for determining
the value is substantially the same a5 it was. in the old s.4. Then,
it is, pointed· out, s.4 (I) lb) enacts that "where tne normal price is
not a5certainaole, the nearest ac.cenainablc equivalent thereof" has
to be determined. As a consequence, it is urged thai where sales
8
are made on ex-depots post manufacturing expenses and post manu-
facturing profit must be deducted. The same principle should apply
in the construction of the new s.4 (I) (~). By adopting the same
principle for cases falling under s.4 (I) (a) and s.4 (1) (bl it is possible
it is.said, to reach uniformity of incid~nce in both classes of cases.
It is pointed out, that the value of the goods must be the same for c
the purposes of the levy, whether the goods are sold ex-factory or ex-
depot. It is urged that alihough the new s.4 (4) (d) (ii) permits two
types of deductions of taxes and discount, it does not pcohibit deduc-
• tions other than the two permitted. Finally, if the wholesale price
can be adjusted ·upward by the dopartment making additions thereto,
it can be adjusted, downward, at the instance of the assessec, to make u •
.it conform to the c'onceptual criterion of the value on which excise
can be levied.
•
The essential content of the reasons stated by learned coumel
·'"'. proceeds on the assumption that a conceptual . valuiog01·erns the
assessment of the levy. We have already examined the validity of E
the three principles underlying the concept, and we have indicated
the extent to which they cannot be accepted. We'have observed that
the old s 4 as >Nell as the new s.4 d~termine the value on the basis
price charged or ~hargeable by the particular a'sessee, and the price
is charge.d or is chargeable in respect of the article manufactured by, F
him. The value of the excisable article is determined in that context.
When that is so, the fundamental basis on which the argument has
been raised on .behalf of the assessees cannot survive. We may add
that whether any further deductions can be claimed beyond those
alre.ady mentioned in the statute will derend on the nature of those
claims in the case of a particular assessee . G

Our attention has been drawn to • the observation of this Court
in Chotabhai Jethabhai Patel and Co. v. The Union of India and An•
other(1 )that "a duty of excise ~s a tax'-Jevy on home-produce~ goods
of a.specified class or description,.the duty being calculated according

(I) [1962] Suppl. 2 S.C.R. I, 26,
384 .
SUPR.EME
. COuRT REPORTS (1984) i s.c.it.

, to the quantity or value .of the goods and· which is -levied because · of
A the mere fact of the goods having been produced or manufactured
and unrelated to and not dependent ou any commercial transaction
. in then". Clearly, when the Court referred to the caiculation of the
duty according to· the quantity or value of the goods, it referred
disjunctively to the nature Of the levy, and it is the nature of the levy
B not the value for assessing the levy, which it had in mind. when it
p"ointed. to the goods having been produced· or manufactured, and
.observed that the nature.of the levy _is not related to or 'dependent
on any commercial transaction.
. . The following observation of Gwyer ' ·
C.J. in The Ceiitral Provinces and Berar ·Sales of Motor Spirit and
Lubricants Taxation Act; 1938 (supra) was also placed before us :·
c ' .
"In my opinion the power to make laws with respect to ·. ~
to _duties of excise given by the Constitution Act to the
Federal Legislature is to be construed as a power to
impose duties of excise upon· the manufacturer or •
producer o_f the exeisable articles; cir at least at the
stage of, or in· connexion· with, · manufacture or produc- ·
tion, and extends no_ furtl;er.'.'

The learned Chief. Justic_e was referring in this statement to. the
power ,to make a iaw . respect of a duty of excise. He construed
E it as a: powe} to impose the duty upon the manufacturer or producer
and explained that the levy related to the manufacture or productio~
and to no further Stage. It was the nature of the levy . which · was
adverted to by the learned Qhief Justice, namely, that it was a levy
on'goods man\!factur~d. or produced. It will be remembered that-
the question before the Federal Court in that case 'whether the levy
in question was a levy of excise or a levy 'of sales tax. A levy of
-
\
l
excise turns on the manufacture or production of the excisable
article,. while a levy of sales. tax by its nature, arises at ·a stage beyond,
~amely, the sale of the article.' The fask. before the Court was to
identify the nature of the levy.. It was n9t concerned with the
G
•.· ~ssessment of. the value of the article _for the· purpose of the levy.,

• This brings t<>' a: close in ihese cases the question whether the
value of an article for the purpose of. the excise levy must be confined"
·to the mahufaqturing cost and the manufacturing profit in respect
H of the article. In our judg"1ent, the que5tiou has to be answered in
the uegative.

.1

'
thl!ON v. BOMBAY TYRB (Pathak, J.) 385
The .next question for consideration is ·whether the proyisions
in the new s.~ in respect of transactions effecte~ by the assessee to or A.
through "a related 'person" are invalid. The new s.4 (I) (a)
provides that the. value shall be d'eemed to be the n9rnial price,
and the normal price is defined as the price at which the' goods
are ordinarily sold by the assessee in the course of wholesale trade
wber~ the buyer is not a "related person" atid ·the price is the sole
B
consideration for the sale. The third proviso to the new.s.4 (!)(a)
provides that where the assessee so arranges that the goods are_
generally not -sold by him in the course of wholesale trade except .
a
to or through related 'persoa, the normal price of the ·goods sold
by the assessee to or through such related person sball be deemed to
be. the price at which they are ordinarily sold by the related person c
in the course of wholesale trade at the time of removal, to dealers·
(not being related persons) or where such· goo~s are not sold to such
dealers, to dealers (being related persons) who sell such goods in
retail. The ·new s.4 (4) (e). defines the expression "related person"
as follows': •
D
•,
"(c) 'related person' means a person who is so asso"'1ted
with the assessee that they have interest, directly or
indirectly, in the busines-s of each other and includes
a holding company, a subsidiary company, a relative
and ·a distributor of the· ,assessee, and any sub· E
distributor of such distribntor.

Explanation· :" In this clause 'holding company',
·•subsidiary company' and 'relative' ·have' the same
meanings as in the Companies Act, 1956 (I of 1?56)."

Learned counsel for the assessees contends that the provisions
regarding related persons are wholly unnecessary because to counter·
act evasion or avoidance any· artificially arranged price between
the manufacturer aud his wholesale buy~r can be rejected in any
case under s.4, and we are referred to the observations of this Court
in Voltas Limited (supra) and Atic Industries Ltd. (supra). It is true,
we think, that the rtew s.4 (I) contains inherently within it the power
to determine the true value of the excisable article, after. taking into
account any concession shown to a special or favoured buyer because
o( extra-commercial considerat_ions, in order that the price be ascer· H
tained only on the basis that i.t is a transaction at arms length. That
requirement is emphasised by the provision in the new s.4 (I) (a) that
the price should be the sole consideration for the sale. In every
386 SUPREMR. COURT REPORfS tt~84) -I s.c.R.

such case, it will be for the Revenue to determine on the evidence
before it whether the transaction• is ·one where extra-coD;1mercial
considerations have entered and, if so, what should be the price to
be taken as the value of the exci$able article for the purpose of excise
duty. Nonetheless, it was open to Parliament to incorporate provi- j
sions in tbe · section declaring that certain specified categories of ~
transactions fall within the tainted class, in which case an irrebuttable \
B presumption will arise that transactions belonging to those categories 1.
are transactions which cannot be dealt with under the usual meaning
of the expression "normal .price" set forth in the new s.4 (I) (a,r.
They are cases where it will not be necessary for the Revenue to
examine the entire gamut of evidence in order to determine whether
c the transaction is one prompted by extra-commercial considerations.
It will be open to the Revenue. dn being satisfied that the third ·
proviso to the new s.4 (1) (a) read with the definition of "related
person" in s.4 (4) (c) is attracted, to proceed to determine the "value"
in accordance with the terms of the third proviso.
D It is urged on behalf of the assessee that the provisions are

.
whimsicai.and arbitrary, and cannot be said to be reasonably calcu-
lated to deal with the issue of evasion or avoidance
' '
of excise. It
said that the assessment on the manufacturer by reference to the
·sale price charged by his distributor is "wholly incompatible with
.
is

the nature of excise'',. and we are referred to A tic Industries Ltd. .
(supra). Now, is a well known legislative practice to enact pro-
visions ·in certain Jimi.ted case where an assessee may be taxed in
respect. of the income. or property truly belonging to another. They
are cases where the Legislature intervenes to prevent the circumven-
. tion of the tax obligation by tax payers .seeking to avoid or
reduce their tax liability through modes resulting in the income or
property .arisiitg to ·another . . The provisions of the Jaw may'
indeed be SO' enacted that the actual existence of such motive 'may
be wholly immaterial, and what has been done by the assessee may
· even, proceed from wholly bona fide intention. With the aid of legal.
fiction
. '
· the Legislature fastens the liability
. on the 'assessee. When
. .
G the legislature employs such a dev\ce, and the liability is .attached..
without qualification, it is reasonable to infer that an irrebuttable
pesumption has been created by law., Such provisions have been. held
to be.within the· Jegsilative competence of the Legislature and as
falling within its power of tax~tion, and reference. may be' made to
H Ba/aji v. lncome-T9x Officer, Speda/ Investigation Circ/e,(1)

(I) [1962].2 S.C.R. 983.
UN10N v. lloi.tBAY TYRE (Pathak, i.) 387
Navnitlal C. la•eri v. K.K Sen, Appel/ate Assistant Commissioner of
Income-Tax, 'D' Range, Bombay(') and Punj4b Distif/ing Industries A·
Ltd. v. Commissioner of Income-Tax,Punjab.(')

' It is co~tended for the assessees that the definition of the expres-
sion "related person" is so orbitrary that it includes within that
expression a distributor of the assessee. It is urged that the provision
B
falls' outside the.ambit of Entry 84 of List I of the Seventh Schedule
to the Constitution inasmuch as it is wholly inconsistent with the
levy of excise, and if.it is attempted to seek support' for the provi-
sion from the residuary Entry 97 of t.ist I as a non-descript tax the
attempt must fail because there is no charging section in the.Central
Excises and Salt Act empowerini: the levy of such ·non-descript tax c
nor any machinery provision in the Act for collecting such a tax.
The char,ging provision and the machinery provisions of the Act,
· it is pointed out, deal exclu>ively. with excise duty and not with any
other tax. The validity· of the provisions is assailed also on the
ground that it violates Articles 14 and 19 of the Constitution. 1he ·
D
challenge made on behalf of the assessees is powc1ful and far-
reaching. B1t it seems to us unnecessary to enter into that quei\ion
because we are satisfied that the . provision in the. definition 'Of
~'related )?erson" relating to a distributor can be Jegil!inately read
down and its validity thus upheld. In our opinion, the definition
of related person should he so read that the words "a relative and E
a distributor of the assessO'e" should be understood to mean a
distributor who is a relative of the assessee. It will be noticed that
the Explanation provides that the expression "relative" has the same
meaning as in the Companies Act, 1956. As regards the other
provsions of the definition of "related ·person", that is to say, "a
person who is so associated with the assessee that they have interest F
directly or indirectly, in the business of each other and includes a
holding .company, a subsidiary company .. .", we think that the
provision shows a sufficiently restricted basis for emp.loying the legal
fiction. Here again, regard mu~t be had. to the· Explanation which
provides that ~e expression "holding compan¥ amd_ subsidiary"
have the same meanings ils in the Companies Act, 1956. Reference
in this connection may be made to Tata Engineering and Locomotive
Co." Ltd. v. State of Bihar and Others (8) where the principle was .
approved by this Court that the corporate veil could be lifted where
H
(I) [196511 S.C.R. 909.
(2) [1965]3 S.C.R. I. .
(3) 11964) 6 S.C.R. 885.
'

388 · SiJl>REMB COtJllT REPORTS 11~84} 1 s.c.R.

the companies shared the rBlationship of a holding .company ana a
A subsidiary .company, and to Juggi Lal Kam/apat v. Commissioner
of Income: Tax, U.P., (') where this Court held that'ihe veil of.corpo-
rate entity coµld be lifted to pay regard to the economic realities
behind the legal facade, for example, where the corporate entity was
used for tax evasion or to· circumvent tax obligation_.
·B
· At one stage, it was urged for the assessees lhat by makin
provision in the Central Excises and Salt Act respecting transactions
to or through. a "related persDn", Parliament was-very close to
· making the levy a sales tax.· The contention cannot ·be accepted and
we need merely refer to the position delineated earlier. and set forth
in the-series of cases beginning .with The Central Provinces and
Berar Sales of Motor Spirit ~nd Lubricants Taxation Act,1938 .(supra) )
See also Jul/urldur Rubber Goods Manufacturers' Association. v. Union
of India & Anr,{'!

From what has gone .before, we consider that the true position
D under the Central Excises and Bait Act, 1944 as amended by Act
xxn of 1973 can be set forth as follows :
. (i) The price at which the excisable goods are ordinarily-
,sold by the a'ssessee to a buyer in the course of
E · · wholesale trade for· delivery at the time and place of
removal as defined in suiHection (4) (b) of .section 4
•
is the basis for determination of excisable val11e pro,-
vided, of course, the buyer is not a related person

F
. . within the meaning of sub-section (4) (c) ·of section 4 .
and the price is the sole consideration for the sale.
This proposion is subject to .the -terms of three
provisos to sub-secti.on (I) (a) of section 4.

. (ii) There the price of excisable goods in the course of
wholesale trade for delivery at the time and place of
removal cannot be ascertained. for th~ reason· that
G
such goods are not sold or for any other reason, the
nearest asertainable equivalent thereof determined in .
the manner prescribed by the Central Excises (Valua-
tion) Rules. 1975 should be taken as representing the
excisable value of the goods;
H l
(I) (1969] I S.C.R. 988.
(2) [1970) 2 S.C.R. 68. ' •
tiNION v. ilOMBAY TYRE (Pathak, i) 989

(iii) Where wholesale price of any excirnble goods for
·delivery at the place of removal !s not known and A
the value thereof is determined with reference to the .
. wholesale Price for delivery at a place other than the
place of removal, .the cost of transport~tion from the ,
place of removal to the place of delivery should be .
excluded from such price;

(iv) Of co-urse, these principles cannot . apply where the •
tariff value has been fixed in respec·t of any excisable
goods under· sub-section '(2) of. section 3;

(v) On a proper interpretation of the definition of 'related
c
person' in sub-section (4) (c) of ~ection 4, the words
"a relative and a distributor, of. the assessee" do not.
refer to any . distributor but they are limited only
to ·a distributor who is a relative of the assesse~ with-
in the meaning of the Companies Act, 1956. So D
read, the definition of 'related person'· is not unduly
wide and does not suffer from any constitutional
infirmity.' It is within- the legislative competence of
Padiameni. It is o~ly when an assessee so arranges .
·that the goods are generally not sold by 'him in the .
course of wholesale .trade ex.cept to or through such. E
a related person that the price at, which the goods
are ordinarily . sold by the related. person in the.
course of wholesale frade . at the time of removal to
dealers (not being related persons) or where such .
goods are not sold to such dealers, to dealers (being F
related persons)· who sell such goods in retail is
( ·liable io be taken as the excisable value of the goods
proviso under (iii) to sub-section (I) (a) of section 4.

, We 'now proceed to the question whether any post manufactur•
ing expenses are deductibk from the price when ·determining the
"value" of the excisable article. The old s.4 provided by the Ex-
plantiori there to thai in determining the price of any article under
'that section no abatement or deductio;,, would be allowed except in
respect of trade discount and the amount of duty payable at the
H
time·of the removal of the article chargeable' with duty from the
factory· or other premises · aforesaid.· The new s.4 provides by sub,
s.(2) that where the price of excisable goods for delivery at the place
SUPREME COURT iulfo!lts [ 1984] i s.c ..ii..

of ·removal is not known and the value is determined with
A reference to the price for delivery at a place other than the place of
removal, the 9ost of transportaiion from the place of removal to ·the
place of delivery has to be excluded from such price. The new s.4
also contains sub·s. (4) (dJ (ii) whieh declares that the expression
"va'ue" in relation· to any excisable goods, does not include the
B amount of the duty of excise, sales tax and ether taxes, if any, pay-
able on such goods ·and, subject to such rules as may be made, the
trade discount (such discount not being refundable on any account
whatsoever allowed in accordance with the normal practice of the
whelesale trade at the time of removal in respect of such goods s~ld
· or contracted for sale. Now these are clear provisions expressly
providing for deduction, from the price, of certain items of exp.e11di-
ture. But learned counsel for the assessees contend that besides the
heads so specified a proper construction of the section does not
prohibit the deduction of either categories of post manufacturing
expenses: It is also urged that although the new s.4(4) (d) (i)
D declares tha.t in computing the "value" of an exciwble article, the
cost of packing shali .be included •. the provision should be construed
.as confined to primary packing and as not. extending to secondary
' packing. The head under which the claim to deduction is made are
detailed below : ·
•
E (I) Storage charges.

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

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

' (4) Interest on inventories (stocks carried by the manu-
facturer after clearance).

{5) Charges for other services after delivery to the buyer.
G ' •
(6) Insurance· after the goods have left the •factory gate.
(7) Packing charges.
•
(8) Marketing and Selling Organisation expens.es, inclu;
H ding advertisement and Publicity expenses.

At the outset, we must make it clear .that the contentions in
. ~Pis regard on ·behalf of the assessees proceeds on two broad bases.
•

'UNION ,v. BOMBAY TYRE (Pathak, J.) 391

, The first is that to detrmine the value of an excisable article, all
expenses must be exCludcd which do not enter into the formula of A
manufacturing cost plus·manufacturing profit. This follows from
the princip1l plank of the assessees' case that the "value" must be
.,,A confined to the mahufacturing cost, and the manufact~ri,ng profit .
For, it is said, that if the deductions claimed are allowed, the price

• would be brought down to the conceptual value. All p6st manu:
facturing expenses are claiJT,ed fr cm that perspective and within that
context. The ather basis on which the claim proceeds, is that the
price at the factory gate and the price at a depot outside the factory
gate a·e identical. , '

We shall now examine the claim. It is apparent that for the
purpose of determining the "value", broadly speaking both the old
c
s.4(a) and the 11ow 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 contemp·
lated under the old s.4(a) or under the new s.4(1)(a) is not .ascer-
tainable, the pdce is determined under the old s.4(b) or the new s.4 D
(1) (b). Now, the price of an article' is related to its value (using
this term in a general sense), and into that value have poured several
components, including those which have enriched its value and
given to the article its marketabiHy in the trade. Therefore, the
expenses incurred on account of the ceveral factors whith have
contributed to its value upto the date of sale, which. apparently E
would be the d•te of dd;very; are liable to be included. Consequently
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 manufacturer after clearance), charges for other ·services after
delivery to the buyer, namely after-sales se~vice and. marketing and
selling organisation expemes including advertisement expenses
cannot be deducted. It will be noted that adv'~rtisement expenses,
marketing and selling origan:sation expenses and after-sales. service
promote the marketability of the article and enter into its valne in
the trade. Where the sale in the course of wholesale trade is effected G
by the assessec through its sales organisation at a place or places
outside the factory gate, the expenses incurred by the assessee upto
the date ot delivery. under the aforernid heads cannot, on the same
groundsr be deducted. But the assessee will be entitled to a
deduction on account of the cm.t of transportation 0f the excisable H
article from the factory gate to the place or places where it is sold.
The cost of transpo1taticn will include the cost ofin;urance on the
'392 SUPREME COURT REPoRTS (1984) 1 S.C.R.

freight for transportation of the goods from the factory gate to the
.A place or places of delivery.

Where freight is averaged and the ·averaged freight is included
in t~e wholesale cash. price so that the wholesale cash price at any
place or places outside the factory gate is the same as the whole."
< sale cash price at the factory gate, ·the· averaged freight included in
B such wohlesale cash price has to be deducted in order to arrive at
the.real wholesale cash price at the factory gate ~nd no excise duty
can be charged on it. . \ . . .

The case in respect of' the cost of pacl<;ing is somewhat com·
plex. The new s.4(4){d)(i) 11as made express provision fo~ including ·
tlie cost of packing in the. determination of "value" for the purpose
of excise duty. Inasmuch as the case of the parties is that the new
. s.4 substantially reflects the position obtaining under the unamendedc
Act. We shall proceed on the ·basis that the position in regard to

D the amendment. of the Act S.4(4) (d) (i) reads:
' .
the cost of packing is the same under the Act, both before and after
.

"(4) For the purposes of this section -

(d) "value", in. relation to any excisable goods,-

(i) where the goods are. delivered at the time of
. rem(Jval 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
dy the buyer to the assessee.
ll
Explanation.-In this sub-clause "packing" means.
the wrapper, container, bobbin, pirn, spool, reel or sarp
beam or any other thing.in· which· or on which the ex-
cisable goods are wrapped, contained or wound." .
•
It is relevant to note that the packing, of.which the cost is included
G is t)le packing ·or whlch 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 sofd in the course
of wholesale trade to the wholesale buyer. The degree of packing
· in which the excisable article is contained will vary from one class
B· of articles to another. From the particulars detailed before us by
the assessees, it is apparent that the cost ofprimary packing, that
is to say, the packing in which the article is contained a.nd in which
UNION v. BOMBAY TYRE (Pathak, J..) 393
it is made marketable for the ordinary consqmer,. for example a tube .
of toothpaste or a bottle of tablets in a cardboard carton, or ·biscuits
in a paper wrapper or in a tin container, must be regarded as
falling within s.4(4) (d)(i). Th~t is iildeed conceded by learned counsel
. for 'the assessee. It is- the cost of secondary packing which has
raised serious dispute. Secondary packing which different ·grades.
There is the sec~ndary packing which consists of larger cartons in B
which a standard numb~.r of primary~ cartons (in the. sense mentioned
earlier) ate packed. The large cartons may ·be packed in to even
larger cartons for facilitating the easier transport of the goods RY
the wholesale dealer. Is all the pa<:king, no matter to what degree,
in which the wholesale dealer takes delivery of the goods to be consi-
dered for including the cost thereof in the "value" ? Or does the c
law require a line to be. drawn somewhere? We must rem.ember
that while packing is necessary to make the· excisable article marke·
table, 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 secondary. packing which is neces· D
sary for putting the excisable article in the ~ondition in which it is

• . generally sold in the .wholesale market it 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 froni the wholesale cash price
of the excisable article at the factory gate. E

If any special secondary packing is provided by t!ie 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
lhall be deducted from the wholesale cash price, F
We have also been referred to s.2(f) of the Act which defines
the expressi'on."manufacture'', and it is ·urged that the degree of
packing to be considered for the purpose of inchiding its cost in the
"value" of an excisable article should be spelled -0ut from that
definition. We are unable to accept .the suggestion. The expression G
"manufacture" is related to the taxable event aud refers to a process
which enters into the. character. of the article, while "packing" has
been defined by s. 4 (4) (d) (il · in . relation to the "value" of the
article.
H
That, we think, is the position in regard to the cost of
pa~king'under the Act, both before a its amendment and ll.fter,
394 . SUPREME COURT REPORTS [1984) 1 S.C.k~

We bave considered the claim to deauctions uuder the. specific
A heads enumerated· by the asses~ees, and our judgment is confined
to those items. No other head of expenses has been placed before
us for our opinion.

B
Learned counsel for the parties have drawn our attention to a·
number of decisions rendered by different High Courts on some of
••
the points raised before us. We have examined those cases, but we
think it unnecessary to refer to them as they do not add to the
considerations we have kept before us in arriving at our conclusions. ·
I

'These are the reasons for our Order of May 9, 1983, and they
c explain the scope within which that Order must be construed as
·we)! as the_ basis on which it wa~ made.

The i11divid_ual appeals, writ petetions, special leave petitions
and transferred cases will be listed now for appropriate orders in
the light of this judgment on October 31, 1983.
D
H.S.K.

·.

.!

•'