Supreme Court clarifies valuation for excise duty: Grasim Industries Ltd. vs. Commissioner of Central Excise (2018)

Date of the Judgment: May 11, 2018

Citation: (2018) INSC 432

Judges: Ranjan Gogoi, J., N.V. Ramana, J., R. Banumathi, J., Mohan M. Shantanagoudar, J., S. Abdul Nazeer, J.

Can charges collected by manufacturers for packing, handling, and other services be included in the value of goods for excise duty? The Supreme Court of India addressed this question in a significant judgment, clarifying the scope of “transaction value” under the Central Excise Act, 1944. This case involved multiple appeals concerning the valuation of excisable goods and the inclusion of various charges in the assessable value.

The Supreme Court, in a five-judge bench, clarified the relationship between Sections 3 and 4 of the Central Excise Act, 1944, specifically addressing whether the concept of “transaction value” under Section 4(3)(d) is subject to the charging provisions of Section 3. The Court also examined whether the “transaction value” makes a material departure from the “deemed normal price” concept of the erstwhile Section 4(1)(a) of the Act. The majority opinion was authored by Justice Ranjan Gogoi.

Case Background

The respondent companies were manufacturers of various industrial gases, liquid chlorine, cotton yarn, and post-mix concentrate. These products were supplied to customers in different containers like tonners, cylinders, and HDPE bags. In some cases, the containers were provided by the manufacturers on rent, while in others, the customers provided their own containers. The manufacturers charged customers amounts under various heads such as packing charges, wear and tear charges, facility charges, service charges, delivery and collection charges, rental charges, and repair and testing charges. The manufacturers treated these amounts as income from ancillary ventures.

The central issue was whether these charges should be included in the value of the excisable goods for the purpose of levying excise duty under Section 4 of the Central Excise Act, 1944, as amended in 2000. The revenue department contended that these charges were part of the transaction value and should be included for excise duty calculation.

Timeline:

Course of Proceedings

The matter reached the Supreme Court due to a perceived conflict between two earlier decisions of the court: Union of India and Ors. v. Bombay Tyre International Ltd. and Ors. and Commissioner of Central Excise, Pondicherry v. Acer India Ltd.. The conflict was regarding the interpretation of Section 4 of the Central Excise Act, 1944, specifically the concept of “transaction value” introduced by the 2000 amendment. A two-judge bench initially referred the questions to a larger bench, which was later expanded to a five-judge bench due to the earlier decisions being by three-judge benches.

Legal Framework

The judgment primarily revolves around Sections 3 and 4 of the Central Excise Act, 1944. Section 3 is the charging section that levies excise duty on goods manufactured in India. Section 4 provides the mechanism for determining the value of goods for the purpose of calculating the excise duty. The 2000 amendment to Section 4 introduced the concept of “transaction value,” which is defined as:

“the price actually paid or payable for the goods, when sold, and includes in addition to the amount charged as price, any amount that the buyer is liable to pay to, or on behalf of, the assessee, by reason of, or in connection with the sale, whether payable at the time of the sale or at any other time, including, but not limited to, any amount charged for, or to make provision for, advertising or publicity, marketing and selling organization expenses, storage, outward handling, servicing, warranty, commission or any other matter; but does not include the amount of duty of excise, sales tax and other taxes, if any, actually paid or actually payable on such goods.”

The court also considered the historical context of excise duty, referencing the Central Provinces and Berar Sales of Motor Spirit and Lubricants Taxation Act, 1938, and earlier decisions by the Federal Court and the Privy Council, which established that excise duty is a tax on manufacture, though the collection point can be at a later stage, such as the point of sale.

Arguments

The arguments presented before the Supreme Court revolved around the interpretation of “transaction value” and its relationship with the charging provision under Section 3 of the Central Excise Act, 1944. The arguments of both sides are summarized below:

• Revenue’s Arguments:
  • The Revenue argued that the “transaction value” as defined in Section 4(3)(d) of the Central Excise Act, 1944, should include all charges that the buyer is liable to pay to the manufacturer in connection with the sale.
  • They contended that the various charges collected by the manufacturers, such as packing charges, handling charges, and rental charges, are all part of the transaction value and should be included for the purpose of calculating excise duty.
  • The Revenue relied on the amended Section 4, which specifically includes various charges in the definition of “transaction value,” to support their claim that these charges should not be excluded from the assessable value.
  • They argued that the amendment to Section 3, introducing the Central Value Added Tax (CENVAT), and the definition of “transaction value” in Section 4(3)(d) statutorily engrafts the additions to the ‘normal price’ as held to be permissible in Bombay Tyre International Ltd.
• Assessees’ Arguments:
  • The assessees argued that the charges collected for packing, handling, and other services were not directly related to the manufacturing process and should not be included in the assessable value for excise duty.
  • They contended that the “transaction value” should be limited to the price of the manufactured goods and should not include charges for services provided after the goods have been manufactured.
  • The assessees argued that the definition of “transaction value” should be interpreted in light of the charging provision of Section 3, which levies duty on the manufacture of goods.
  • They relied on the decision in Acer India Ltd. to argue that Section 4 is subservient to Section 3 and that the definition of “transaction value” should not include charges that are not directly related to the manufacture of goods.

The core of the dispute was whether the “transaction value” under Section 4(3)(d) should be interpreted broadly to include all charges related to the sale or whether it should be limited to the value of the manufactured goods at the point of removal.

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. Whether Section 4 of the Central Excise Act, 1944 (as substituted with effect from 1-7-2000) and the definition of “transaction value” in clause (d) of sub-section (3) of Section 4 are subject to Section 3 of the Act?
2. Whether Sections 3 and 4 of the Central Excise Act, despite being interlinked, operate in different fields and what is their real scope and ambit?
3. Whether the concept of “transaction value” makes any material departure from the deemed normal price concept of the erstwhile Section 4(1)(a) of the Act?

Treatment of the Issue by the Court

The following table demonstrates how the Court addressed each issue:

Authorities

The Supreme Court considered the following authorities in its judgment:

Judgment

The Supreme Court held that the measure of the levy under Section 4 of the Central Excise Act, 1944, is not controlled by the nature of the levy under Section 3. The Court clarified that both Sections 3 and 4 operate in their respective fields, with Section 3 being the charging section and Section 4 providing the mechanism for valuation. The Court also held that “transaction value” as defined in Section 4(3)(d) statutorily includes the additions to the ‘normal price’ as held to be permissible in Bombay Tyre International Ltd.

The Court specifically affirmed the decision in Bombay Tyre International Ltd., stating that it correctly expounds the law. The Court clarified that the concept of “transaction value” under the amended Section 4 is essentially the same as the judicially evolved meaning of “normal price” under the old Section 4. The Court also clarified that the observations in Acer India Ltd. regarding the subservience of Section 4(3)(d) to Section 3 were limited to the specific context of that case.

The court observed that the amendment to Section 3 by substituting the words “a duty of excise on all excisable goods” by the words “a duty of excise to be called the Central Value Added Tax (CENVAT) on all excisable goods” is significant. This amendment incorporates the concept of charging tax on value additions at each stage of production, which is reflected in the definition of ‘transaction value’ under Section 4(3)(d).

“The measure for the purpose of the levy is, therefore, essentially the price charged in respect of a transaction which must necessarily be at arm’s length.”

“The price charged for a manufactured article at the stage when the article enters into the stream of trade in order to determine the value/transaction value for computation of the quantum of excise duty payable does not come into conflict with the essential character or nature of the levy.”

“Infact, we are of the view that there is no discernible difference in the statutory concept of ‘transaction value’ and the judicially evolved meaning of ‘normal price’.”

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the need to reconcile the charging provision of Section 3 with the valuation mechanism under Section 4 of the Central Excise Act, 1944. The court emphasized that while the excise duty is a levy on manufacture, the measure of the levy, i.e., the value of the goods, can include various charges that contribute to the value of the goods up to the point of sale. The court’s reasoning was also driven by the legislative intent behind the 2000 amendment, which introduced the concept of “transaction value” and the Central Value Added Tax (CENVAT), aiming to tax value additions at each stage of production.

The court’s decision was heavily influenced by the legal interpretation of Sections 3 and 4 of the Act and the legislative intent behind the amendments. While the factual aspects of the case were considered, the legal framework and statutory provisions played a more significant role in the court’s reasoning.

Key Takeaways

• “Transaction value” for excise duty includes all charges that the buyer is liable to pay to the manufacturer in connection with the sale, including packing, handling, and other service charges.
• The measure of the excise duty levy is not limited to the manufacturing cost but includes all value additions up to the point of sale.
• Sections 3 and 4 of the Central Excise Act, 1944, operate in their respective fields, with Section 3 being the charging section and Section 4 providing the mechanism for valuation.
• The concept of “transaction value” introduced by the 2000 amendment is essentially the same as the judicially evolved meaning of “normal price” under the old Section 4.
• The decision in Bombay Tyre International Ltd. was affirmed as the correct exposition of the law.

Directions

No specific directions were given by the Supreme Court in this judgment.

Development of Law

The ratio decidendi of this case is that the “transaction value” for excise duty purposes includes all charges that the buyer is liable to pay to the manufacturer in connection with the sale. This judgment clarifies that the measure of excise duty is not limited to the manufacturing cost but includes all value additions up to the point of sale. This decision reinforces the principles laid down in Bombay Tyre International Ltd. and clarifies the interpretation of “transaction value” under the amended Section 4 of the Central Excise Act, 1944.

There is no change in the previous position of law, but the judgment clarifies the scope of ‘transaction value’ and reinforces the principles laid down in Bombay Tyre International Ltd.

Conclusion

The Supreme Court’s judgment in Commissioner of Central Excise, Indore vs. M/s Grasim Industries Ltd. provides a comprehensive analysis of the valuation of excisable goods for excise duty purposes. The Court clarified that the “transaction value” includes all charges that enrich the value of the product up to the point of sale, thereby resolving the conflict between previous decisions and providing a clear framework for excise duty valuation.