Holding

Notional interest on interest‑free security deposits cannot be added to the assessable value when the sale price is uniform and constitutes the sole consideration; therefore, Rule 5 is not applicable.

Issues considered

Whether notional interest on interest‑free security deposits should be included in the assessable value of excisable goods under the Central Excise Act.
Whether Rule 5 of the Central Excise (Valuation) Rules, 1975 applies when the sale price is uniform and is the sole consideration.
Whether the receipt of security deposits influences the normal price of the goods, thereby creating two distinct markets.

Legislation cited

Central Excise (Valuation) Rules, 1975s. Rule 5

Subjects

Excise dutyAssessable valueNotional interestSecurity depositRule 5Uniform priceCredit facilityCentral Excise Act

Judgment

VST INDUSTRIES LTD. A
v.
COLLECTOR OF CENTRAL EXCISE, HYDERABAD

JANUARY 8, 1998

[J.S. VERMA, B.N. KIRPAL AND V.N. KHARE, JJ.) B
>i

Excise Law:

Central Excises and Salt Act, 1994-Section 4-First Schedule Item- C
4.

Central Excise (Valuation) Rule, 1975-Rule 5.

Excise duty-Determination of assessable value -Addition of notional
interest on interest free security deposit received to the sale price of the D
-"\ goods-Dealers availing credit facility given no discount by the appellant
after taking security deposits-Wholesale price of the goods not influenced
by such deposits-Held, notional interest cannot be added tu the sale price
to determine all the assessable value.

The appellant has been carrying on business of manufacture and sale E
of cigarettes which is assessable to duty under erstwhile item No. 4 of First
Schedule to the Central Excise & Salt Act, 1944. The appellant, vide cir.cular ·
dated 22nd September, 1981, introduced credit facility scheme, if interest
free security deposits were made with them with a view to cover the risk of
credit sales extended to the bulk customers. The Collector of Central Excise F
-(. issued show cause notice dated 28th December, 1987 to the appellant to add
12 % notional interest to security deposits for working out the assessable
value. On receipt of reply the Assistant Collector of Central Excise Passed
an order against the appellant. On appeal, The Collector of Central Excise
(Appeal) set-aside part of Assistant Collector's Order. The appeal filed by the
Respondents against the order was allowed by the Tribunal holding that G
notional interest should be considered for arriving at the assessable value.

In this appeal challenging the decision of the Tribunal the appellants
contended that the wholesale price charged by the appellant was not influenced
by security deposits which some of the dealers had made who wanted to get H
31
32 SUPREME COURT REPORTS [1998] 1 S.C.R.

A goods on credit. Uniform price was charged form all the dealers irrespective
of the fact whether the sale was made on cash basis or on credit.

The Respondent contended that Rule 5 of Central Excise (Valuation)
,.,
Rules, 1975 is applicable because price was not the sole consideration. The
value of such goods has to be based on the aggregate of the price and the
B amount of notional interest on the security deposit received by the appellant.

Allowing the appeal, this Court

HELD : 1. When the goods are sold on credit and interest is received
that does not form part of the price on which excise duty is payable.
c
1.2. The Additional Collector was right in holding that Rule 5 of the
valuation rules is not applicable as it was not shown that the price charged
was not the sole consideration. When the appellant Company does not require
all the dealers to give security deposit and it is only those who avail of credit
D facilities who are required to give the security deposit but get no discount
or pay a reduced price, then in such a case excise duty can be charged only
on the uniform price paid by the dealers without any addition of notional
interest. 140 A-Bl

1.3. Excise duty is on manufacture of goods at the price paid and the
E price paid in the present case is same by all the dealers. There is nothing
to show that on receipt of security deposit the price charged from all the
buyers was reduced. Thus, there was no justification for disregarding the
uniform wholesale price which was being charged from all the dealers and
adding element of notional interest of security deposit to the said price
merely because interest pre deposit was reduced from some dealers.
F
Collector ofCentral Excise v. Indian Oxygen Ltd.. (1988) 36 E.L.T. 730
SC and Govt. of India v. Madras Rubber Factory Ltd., (1995) 77 ELT 433
SC, relied on. 139 F-H]

1.4. The appellant has been charging uniform price from their
G wholesale dealers. Had there been a difference in the selling price where for
example special discount was given to the dealers who had given a deposit
then it may have been possible to say that there were two different markets
and two different prices and that lesser price was being charged for an
extraneous consideration and in such a case the notional or actual interest
H could be added. [38 E; G-H]
VST INDUSTRIES LTD. v. C.C.E. [KIRPAL, J.] 33
Metal Box Ind Ltd. v. Collector of Central Excise, Madras, [1995) 2 A
sec 90, distinguished.
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 2524of1992.

From the Judgment and Order dated 23.8.90 of the Central Excise and
Gold (Control) Appellate Tribunal, Delhi in E/3234 of 1988-A. B
Anil B. Devan and S.R. Setia for the Appellant.

N.K. Bajpai, Pallav Shishodia and V.K. Verma for the Respondents:

The Judgment· of the Court was delivered c
KfRP AL, J. These appeals involve for decision the question whether
notional interest on the Interest free security deposit received should be

- considered for the purpose of arriving at the assessable value under the
Excise Act by including interest at the rate of 12% per cent per annum on
such security deposits. D
VST Industries Ltd. (appellant in CA No.2524/92) is a company carrying
on business of manufacture and sale of cigarettes which was assessable to
duty under the erstwhile Item No.4 of the First Schedule to the Central Excise
and Salt Act, I 944. The other two appellants, namely, Venus Tobacco Company
Pvt. Ltd. (appellant in CA No.2523/92) and Hyderabad Deccan Cigarette Factory E
Ltd. (appellant in CA No.2611192) are also cigarette manufacturers and use
their plant and machinery to manufacture cigarettes for and on behalf of VST
Industries Ltd. (hereinafter referred to as "VST"). The question involved in
these appeals, therefore, relates to the fixation of the assessable value of the
cigarettes manufactured and sold under the brand name owned by VST. F
The undisputed facts are that the cigarettes manufactured by the
appellants are sold in wholesale, ex-factory, at cum-duty prices to main dealers
who buy these cigarettes on a principal-to-principal basis. The main dealers
in turn sell the cigarettes to other wholesale dealers called sub-dealers who
in turn sell these cigarettes to the retailers. The cigarettes were being sold by G
the appellants either on cash-and-carry basis or by extending credit facilities
to few of the main dealers. As the appellant company, namely, VST found that
several of the main dealers were taking considerable time in making remittances
for cigarettes which were delivered to them, they issued a circular dated 22nd
September, 1981 whereby it introduced credit facility if interest free security
deposits were made with the company. In the said circular it was written that H
34 SUPREME COURT REPORTS [ 1998] l S.C.R.

A "with a view to provide the facility of such credit to its customers and to
safeguard itself against the commensurate risk and for introducing some
uniformity the company now proposes that w.e.f. 1.10.1981 those of its main .F.
dealers as are desirous of getting credit facilities would have to keep security
deposit (interest free) with the Company equivalent to about 21 days of their
B normal monthly purchases.

It is of course entirely upto the main dealers to request for this facility ~
and they will be at full liberty to take delivery against payments if they do
not want to make the security deposit.

C The company reserves the right to apply the amount of security deposit
towards .payment of unpaid price or any other amounts which may be due to
the buyer to the company or any account whatsoever. On discontinuation of
trading with the buyer the company will return the security deposit or the
balance if any remaining after the company has deducted/adjusted any amount
due to the company by the buyer on any accounts whatsoever and this will
D be strictly without prejudice to and in addition to the company's other right.

A copy of the revised conditions of sale for cigarettes effective from
October I, 1981 are annexed herewith.

E In the event of your desiring to avail yourself of the credit facilities
kindly send a letter as per the form enclosed for your convenience."

A show cause notice dated 28th December, 1987 was issued from the
office of the Collector of Central Excise to the appellants., In the said notice
it was, inter alia, stated that the receipt of security deposits by VST from the
F main dealers and without payment of interest would influence the sale price
of it's cigarettes to these main dealers. It was accordingly proposed to work
out a notional interest at the rate of 12 per cent on the sums of security
deposits received by VST from the main dealers and to add this to the sale
price of the cigarettes so as to re-determine the asses-sable value as well as
differential duty payable for the cigarettes cleared by the company during the
G above period. This was proposed on the ground that the sale price of the
cigarettes by VST dealers did not constitute the normal price under Section
4 of the Central Excise and Salt Act and in such a situation where an_
additional money consideration has been there between the parties concerned,
the normal price had to be determined only under Rule 5 of the Valuation
H Rules, 1975. The said show cause notice also referred to the receipt of the
VST INDUSTRIES LTD. v. C.C.E. [KIRPAL, J.] 35
freight service charges by the appellants, but in these appeals we are not A
concerned with that quesiion.

Reply was sent to the said show cause notice refuting the claim of the
excise authorities. VST while denying its liability paid the demand of Rs.
2,23, 10,405.79 under protest. The other two appellants, namely, Venus Tobacco
Company Pvt. Ltd. and Hyderabad Deccan Cigarettes Factory Ltd. similarly B
paid Rs. 3,92,864.89 and Rs. 18,84,718.74 respectively.

On 17th March, 1988 the Assistant Collector of Central Excise passed
an adjudication order against VST Industries Ltd. and confirmed the 'demand
of Rs. 2,23, I 0,405.79. Similar· orders were also passed against other two C
appellants by their respective Assistant Collectors of Central Excise. All the
three appellants then filed appeals. The Collector of Central Excise (Appeals)
passed an order on 19th August, 1988 whereby he set aside that part of the
Assistant Collector's order which sought to add notional interest to security
deposits for reworking the assessable value, while confirming the addition of
the freight service charges. D

The excise authorities then filed appeals against the deletion of the
notional interest from the assessable value. The Tribunal allowed the
department's appeal holding that notional interest charges should be considered
for arriving at the assessable value of cigarettes but such extra commercial E
consideration should be added to price and not to assessable value. It is
against this decision of the Tribunal that the present appeals have been filed.

On behalf of the appellants it was contended by Shri Anil B.Divan,
learned senior counsel, that the wholesale price which was charged by the
appellants was not in any way influenced by the security deposit which some p
of the dealers had made who wanted to get goods on credit. He submitted
that the transactions with the dealers were on principal-to-principal basis and
the appellants charged a unifonn price from all dealers, inespective of the fact
whether the sale was made on cash basis or on credit. He drew our attention
to the latest circular issued by the Central Board of Central Excise and
Customs dated 27th May, 1996 in which it was, inter alia, stated that the G
Ministry of Law had advised that if there was no nexus between the security
deposit/advance made by the wholesale buyer and the sale price of the
excisable goods or if the department is not in a position to determining the
money value of the additional consideration, the provisions of Rule 5 of
Central Excise (Valuation) Rules, 1975 would 11:ot be applicable. The circular H
36 SUPREME COURT REPORTS (1998] I S.C.R.

A further stated that normally "where the same price is charged from buyers
who have given the deposit and from those who have not given the deposit
and/or where the advance is purely a security deposit and the interest earned
by such deposit is credited to the buyer the notional interest on such advance
cannot be added to the price."

B Refuting the aforesaid submission Shri N.K. Bajpai, learned counsel for .ll;

the respondent, submitted that the appellants gained considerable pecuniary
advantage by having received interest free security deposit. The receipt of
this deposit must be taken into account in determining the assessable value.
He contended that Rule 5 of the Central Excise is applicable because price was
C not the sole consideration and the value of such goods has to be based on
the aggregate of the price and the amount of notional interest on the security
deposit received by the appellants. In support of his submission strong
reliance was placed on the decision of this Court in the case of Metal Box
India Ltd. v. Collector of Central Excise, Madras, [1995] 2 SCC 90.

D Before referring to the decision Metal Box's case it will be appropriate
to refer to other decisions which are relevant on the point in issue which are
Collector of Central Excise v. Indian Oxygen Ltd., (1988) 36 E.L.T. 730 S.C.
and Government of India v. Madras Rubber Factory Ltd., (1995) 77 E.L.T. 433
S.C. In Indian oxygen case two questions which arose for consideration were
E whether rental charges for gas cylinders and interest earned on deposit made
for several return of gas cylinders, whether interest be notional or actual,
could be included in determining the assessable value. It was observed .by
this Court as follows:

"It is well settled that the levy under the Act, is on the manufacture.
F Under Section 4 (I )(a) of the Act, excise duty is chargeable on any
excisable goods with reference to value, such value shall, subject to
the other provisions of this Section, be deemed to be the normal price
thereof, that is to say, there price at which such goods are ordinary
sold by the assessee to a buyer in the course of wholesale trade for
delivery at the time and place or removal, where the buyer is not a
G
related person and the price is the sole consideration for the sale.
Here the sale is of the gases. The levy is on the manufacture of gases
and the excisable goods are these gases."

It was held that the supply of gas cylinders was ancillary to the supply of
H gases. It was open to the customers to bring their own cylinders and deposit
VST INDUSTRIES LTD. v. C.C.E. [KfRPAL, J.] 37
was required to be given only if the customers required the company to lend A
the cylinders. This activity of giving cylinders was held to be ancillary and
profits and gains from the deposit so received was not required to be taken
into account while computing the value of the excisable head goods. It and
also been contended on behalf of the Revenue that there were two different
classes of buyers; one class of such buyers was that who used to being their B
f. own cylinders and the other who used to get supply of gases from the
cylinders of the suppliers. It was, therefore, submitted that different rates for
these two classes of buyers constituted two different markets which was
permissible under Section 4. Dealing with this contention it was observed at
page 732 as follows:

"There may be different classes of buyers for different classes of
c
goods. Section 4(1)(a) of the Act emphases that if the goods is of the
same type, the prices should also be the same. The proviso to the said
Section postulates that where in accordance with normal practice such
goods, namely, the gases are sold to different classes of buyers then
different prices may be charged. If gases had been sold to different D
classes of buyers at different rates, it is possible that there might be
different markets for the same. But here the charges like rentals for
the cylinders and the notional interest income, are for ancillary or
allied services and that is not an activity of manufacture. Hence
Section 4(1 )(a) proviso can be of no avail to the revenue."
E
(emphasis added)

In Madras Rubber Factory case (supra) this Court analysed Section 4 and
observed as under:

"It is obvious that the value of excisable goods for the purpose of F
sub-section (I) of Section 4 is ordinarily determined with reference to
the normal price at which such good are sold, i.e., under clause (a) of
sub-section (I) of Section 4. Only where the goods are not sold and,
therefore, the price of such goods is not ascertainable or in a situation
where the normal price of such goods is not ascertainable for some G
other reason that clause (b) is attracted, whereunder the nearest
ascertainable equivalent price is ascertained in accordance with the
rules framed in that behalf. Clause (b) is in the nature of a residuary
clause which should be resorted to where the normal price cannot be
ascertained for the reasons mentioned therein. In other words, where
the normal price is available or is ascertainable, resort to clause (b) H
38 SUPREME COURT REPORTS [1998) l S.C.R.
A is not permissible."

It then considered as to what are the various deductions from the price
received which were permissible in order to arrive at the assessable value.
One of the amounts claimed as a deduction from the amount received by the
manufacturer was the element of interest received by it on the goods sold on
B credit. Dealing with this the Court at Page 470 observed as under:
l(.
"The case of the assessee (Madras Rubber Factory) is that where the
goods are sold to up-country wholesale buyers and payments are
received quite sometime later, it is indeed a case of sale on credit and,
therefore, the interest charged from the date of delivery of goods till
c the date of realisation of the price thereof should be deducted from
the value of the goods. The interest charged, it is submitted, is only
in lieu of the time taken in making the payment by the up-country
wholesale buyer. Since this is the amount received subsequent to the
sale from the depots and does not fall within the ambit of any of the
D expresses held includible in Bombay Tyre International, it is clearly
excludible. The claim for this deduction is, therefore, allowed."

The aforesaid observations clearly show that when goods are sold on credit
and interest is received that does not form part of the price on which excise
duty is payable.
E Coming to the facts of the present case it is not in dispute that the
appellants are charging a uniform price from their wholesale dealers. The price
at which the cigarettes are sold at the factory gate was the same, irrespective
of the fact whether the dealers were buying the cigarettes on credit or against
payment 6f money. As is indicated in the circular and there is no dispute to
F what has been stated therein, one of the commercial considerations for
introducing interest free deposit scheme was to cover the risk of credit sales
extended to bulk customers. There is nothing on the record to show that the
receipt of the deposit from some of the dealers could possible influence the
fixation of the sale price even with regard to those sales which were made at
G the factoty gate against cash and not on credit. Had there been -<I difference
in the selling price where for example, special discount was given to the
dealers who had given a deposit then it may have been possible to say that
there were two different markets and two different prices and that lesser price
was being charged for an extraneous consideration and, in such a case the
notional or actual interest could be added. But that is not the case here, Metal
H Box case (supra) was the one where two different prices were being charged.
VST INDUSTRIES LTD. v. C.C.E. [Kl RP AL, J.] 39
Jn Metal Box case the assesses was manufacturing goods which were offered A
-.:: for sale to Mis Ponds India Ltd., a wholesale buyer, who required bulk of the
containers manufactured by the assesses for marketing its cosmetic products.
In order to ensure a steady and regular supply Ponds India Ltd. gave large
advances and an agreement had been entered into between the parties as a
result whereof discounts were given by the assesses Ponds India Ltd. which
were to be deducted from the gross price. This deduction was not allowed
B
)t.
by the excise authorities and the Tribunal. It was contended on behalf of the
assesses in this Court that the Tribunal erred in restoring the loading of
purchase price by the ad hoc Interest on advances made by Ponds India Ltd.
to the assessee. While rejecting this contention this Court took notice of the
Fact that Ponds India Ltd. was a wholesale buyer who was lifting ninety per c
cent of the total production of the appellant. The assessee was giving to
Ponds India Ltd. fifty per cent discount from normal price and Ponds India
Ltd. had given large amounts of money free of interest to the assessee. In
these circumstances it was held that the price charged by the appellant from
Ponds India Ltd, could not be said to be the normal price of containers and,
-<: therefore, the action of the department in taking into account the notional D
interest on the advances given was upheld.

Metal Box case is clearly distinguishable. The amounts given as security
deposit in he present cases represents value avoid of 21 days supply in a year
whereas in Metal Box case large amounts of money had been advanced.
Secondly and what is more important, in Metal Box. case the assesses had
E
given fifty per cent discount to Ponds India Ltd. on its gross sale price and
thereby charged lesser price than what was charged from the other buyers.
In the present case the cigarettes are sold at the factory gate to the wholesale
dealers at a uniform price irrespect.ive of the fact whether the purchaser is
buying the cigarettes on credit or against payment of money in cash. F
+-
Excise duty, as has been held, is on the manufacture of goods at the
price paid. The price paid in the present case is the same by all the dealers.
There is nothing to show that there was any special consideration which was
shown to the dealers who had given the security deposit. Nor has it been
shown by reference to any documents or data that because of the receipt of G
such deposit the price charged from all the buyers was reduced. Merely
~ because interest pre-deposit was reduced from some dealers cannot, by itself,
.., lead to the conclusion arrived at by the excise authorities and the Tribunal.
This also followed from the decisions iP the Indian Oxygen and Madras
Rubber Factory's cases (supra). There was, thus, no justification for dis- H
40 SUPREME COURT REPORTS [ 1998] l S.C.R.

A regarding the uniform wholesale price which was being charged from all the
dealers and adding the element of notional interest of the security deposit to
the said price.

This additional Collector, in our opinion, was right in coming to the
conclusion that Rule 5 of the Valuation Rules was not applicable in tile
B present case as it was not shown that the price charged was not the sole
consideration. When the appellants are not requiring all the dealers to give
security deposit and it is only those who avail of credit facilities who are
required to give the security deposit but get no discount or pay a reduced
price, then in such a case excise duty can be charged only on the uniform
C price paid by the dealers without any addition of notional interest.

For the aforesaid reasons these appeals are allowed. The order of the
CEGA T is set aside and extra demands raised by the respondent pursuant to
the show cause notices issued by them are quashed. The appellants will also
be entitled to costs.
D
N.J. Appeals allowed.