Supreme Court settles if Dharmada is part of Transaction Value in Central Excise Cases (9 April 2019)

Introduction

Date of the Judgment: 9 April 2019

Citation: 2019 INSC 347

Judges: S.A. Bobde, J., Deepak Gupta, J., Vineet Saran, J.

Can a voluntary charitable donation, known as “Dharmada,” be considered part of the sale price when calculating excise duty? The Supreme Court of India addressed this question in a recent judgment, clarifying the scope of “transaction value” under the Central Excise Act, 1944. This ruling has significant implications for businesses that collect Dharmada alongside the sale of goods.

The core issue was whether the amount collected as Dharmada, a voluntary donation for charitable purposes, should be included in the assessable value of manufactured goods for excise duty purposes. The Court examined the nature of Dharmada and its relationship to the sale transaction.

The judgment was delivered by a three-judge bench comprising Justice S.A. Bobde, Justice Deepak Gupta, and Justice Vineet Saran, with the opinion authored by Justice S.A. Bobde.

Case Background

M/s D.J. Malpani, the appellant, manufactured goods falling under Chapter 24 of the Central Excise Act, 1944, specifically chewing tobacco. When selling their products, they charged customers the price of the goods plus an additional amount labeled as “Dharmada,” which they stated was a voluntary charitable donation. This Dharmada was then credited to a separate charity account.

The Central Excise Department, however, issued show cause notices, claiming that the Dharmada was part of the sale price and should be included in the assessable value for calculating excise duty. The department argued that it was not a voluntary payment.

Initially, the Adjudicating Authority sided with the appellant, holding that Dharmada was not part of the trading receipts and could not be included in the assessable value. However, the Commissioner (Appeals) later reversed this decision, ruling that Dharmada should be included as part of the assessable value.

The Central Excise and Service Tax Appellate Tribunal (CESTAT) partly allowed the appeal, ordering a recalculation of the duty but rejecting the appellant’s contention that Dharmada should not be included in the transaction value. CESTAT relied on a previous Supreme Court judgment in Collector vs. Panchmukhi Engineering Works, which had held that Dharmada should be included in the assessable value.

Timeline

Legal Framework

The Supreme Court examined the following legal provisions:

• ✓ Section 2(h) of the Sale of Goods Act, 1930: Defines sale as the transfer of possession of goods for payment or other valuable consideration.
• ✓ Section 4 of the Sale of Goods Act, 1930: Defines a contract of sale as a transfer of property in goods from the seller to the buyer for a price.
• ✓ Section 4 of the Central Excise Act, 1944: Specifies that excise duty is chargeable on the transaction value of goods when sold, where the price is the sole consideration. It also defines transaction value as the price actually paid or payable for the goods, including any additional amount the buyer is liable to pay to the assessee in connection with the sale.
  
  “transaction value” means 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.
• ✓ Rule 6 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000: States that the value of goods sold shall be deemed to be the transaction value and the amount of money value of any considerations flowing directly or indirectly from the buyer to the assessee.

Arguments

Appellant’s Arguments:

• ✓ The appellant argued that Dharmada is a voluntary payment made by the customers for charitable purposes and is not part of the sale price.
• ✓ They contended that the decision in Panchmukhi Engineering Works, which included Dharmada in assessable value, was based on an incorrect application of the Tata Iron & Steel Co. Ltd. case.
• ✓ The appellant relied on the Supreme Court’s decision in Commissioner of Income Tax vs. Bijli Cotton Mills, which held that Dharmada amounts received for charitable purposes are not income of the assessee.
• ✓ They argued that the seller acts merely as a conduit between the purchaser and the charity.
• ✓ They contended that the payment of Dharmada was not a consideration for the transfer of goods, but a separate payment for charity.

Revenue’s Arguments:

• ✓ The revenue contended that Dharmada is part of the transaction value because it is collected along with the price of the goods.
• ✓ They argued that the decision in Panchmukhi Engineering Works, which followed the Tata Iron & Steel Co. Ltd. case, should be followed.
• ✓ They submitted that the payment of Dharmada, though for charity, is still a part of the price paid by the buyer.

The innovativeness of the argument by the appellant lies in distinguishing the nature of Dharmada from a surcharge, highlighting that Dharmada is a voluntary payment for charity, not a mandatory addition to the price of goods.

Issues Framed by the Supreme Court

The Supreme Court framed the following issue:

✓ Whether the Dharmada collected by the appellant which is clearly an optional payment made by the buyer can be regarded as part of the transaction value for the sale of goods.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

Cases:

• ✓ Collector vs. Panchmukhi Engineering Works [2003 (158) ELT 550 (SC)] – Supreme Court of India: This case was relied upon by the CESTAT to include Dharmada in the assessable value. The Supreme Court in the present case held that this case was not good law.
• ✓ Tata Iron & Steel Co. Ltd. vs. Collector of Central Excise, Jamshedpur [2002 (146) ELT 3 (SC)] – Supreme Court of India: This case dealt with a surcharge on steel prices, which was held to be part of the price. The Supreme Court distinguished this case from the present case.
• ✓ The Commissioner of Income Tax (Central) Delhi, New Delhi vs. Bijli Cotton Mills (P) Ltd. Hathras, District Aligarh [(1979) 1 SCC 496] – Supreme Court of India: This case held that Dharmada amounts received for charitable purposes are not income of the assessee. The Supreme Court relied on this case.
• ✓ Thakur Das Shyam Sunder vs. Additional CIT [93 ITR 27] – Allahabad High Court: This case was cited to support the view that Dharmada is a gift for charitable purposes.
• ✓ CIT, West Bengal, Calcutta vs. Tollygunge Club Ltd., Calcutta [(1977) 2 SCC 790] – Supreme Court of India: This case held that a surcharge for charity is not part of the admission price. The Supreme Court relied on this case.

Legal Provisions:

• ✓ Section 2(h) of the Sale of Goods Act, 1930: Defined sale as transfer of possession of goods for consideration.
• ✓ Section 4 of the Sale of Goods Act, 1930: Defined contract of sale as transfer of property in goods for a price.
• ✓ Section 4 of the Central Excise Act, 1944: Specified how excise duty is charged on transaction value.
• ✓ Rule 6 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000: Defined how to determine the value of goods sold.

Judgment

The Supreme Court analyzed the submissions made by both parties and the authorities cited. The Court observed that the amount collected as Dharmada was a voluntary payment made by the buyer for charitable purposes and not a payment for the goods themselves.

The Court specifically addressed how each authority was viewed:

• ✓ Collector vs. Panchmukhi Engineering Works [2003 (158) ELT 550 (SC)]: The Court overruled this judgment, stating that it was decided without proper discussion and without considering the crucial aspects of the law. The Court noted that the judgment in Panchmukhi was based on a concession by the counsel and not on a thorough analysis of the law.
• ✓ Tata Iron & Steel Co. Ltd. vs. Collector of Central Excise, Jamshedpur [2002 (146) ELT 3 (SC)]: The Court distinguished this case, stating that the surcharge in that case was part of the price of steel, whereas Dharmada is a voluntary payment for charity.
• ✓ The Commissioner of Income Tax (Central) Delhi, New Delhi vs. Bijli Cotton Mills (P) Ltd. Hathras, District Aligarh [(1979) 1 SCC 496]: The Court relied on this case, which held that amounts received for Dharmada and earmarked for charitable purposes are not income of the assessee.
• ✓ CIT, West Bengal, Calcutta vs. Tollygunge Club Ltd., Calcutta [(1977) 2 SCC 790]: The Court relied on this case, which held that a surcharge for charity is not part of the admission price, supporting the view that Dharmada is not part of the price of goods.

What weighed in the mind of the Court?

The Supreme Court’s decision was heavily influenced by the following factors:

• ✓ The voluntary nature of Dharmada payments.
• ✓ The fact that Dharmada is intended for charitable purposes.
• ✓ The distinction between Dharmada and a surcharge or mandatory addition to the price.
• ✓ The principle that the seller acts as a conduit for the charitable donation.
• ✓ The fact that Dharmada is not a consideration for the transfer of goods.

Logical Reasoning:

The Court reasoned that since Dharmada is a voluntary payment for charity and is not a consideration for the transfer of goods, it cannot be included in the transaction value for excise duty purposes.

The Court considered the interpretation that Dharmada, being collected alongside the sale price, could be seen as part of the transaction. However, it rejected this interpretation, emphasizing that the payment is not for the goods but for a separate charitable purpose. The Court also highlighted that the seller acts as a conduit, passing on the donation to the charity.

The Court’s decision was based on the understanding that transaction value is the price paid for the goods. Since Dharmada is a payment for charity, it cannot be considered part of the price. The Court also held that the decision in Panchmukhi was not a good law and was based on a misapplication of the Tata Iron & Steel case.

The Court quoted from the judgment in Bijli Cotton Mills:

“The “Dharmada” amount is, therefore, clearly not a part of the price, but a payment for the specific purpose of being spent on charitable purposes.”

The Court also quoted from the definition of transaction value:

“transaction value” means 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…

The Court observed that:

“Thus, if an amount is paid at the time of the sale transaction for a purpose other than the price of the goods, it cannot form part of the transaction value; also for the reason that such payment is not for the transaction of sale i.e. for the transfer of possession of goods.”

Key Takeaways

• ✓ Dharmada, if collected voluntarily and meant for charity, is not part of the transaction value for excise duty.
• ✓ Businesses collecting Dharmada should ensure it is credited to a separate charity account and not treated as part of their income.
• ✓ The judgment overrules the previous decision in Collector vs. Panchmukhi Engineering Works.
• ✓ This ruling provides clarity on the treatment of charitable donations in excise duty assessments.
• ✓ The decision reinforces the principle that transaction value is the price paid for goods, not additional charitable payments.

Directions

The Supreme Court set aside the judgment of the CESTAT.

Development of Law

The ratio decidendi of this case is that Dharmada, when collected voluntarily and meant for charity, is not part of the transaction value for excise duty purposes. This decision overrules the previous position of law established in Collector vs. Panchmukhi Engineering Works, providing a clear distinction between the price of goods and charitable donations in excise duty assessments.

Conclusion

The Supreme Court’s judgment in M/s D.J. Malpani vs. Commissioner of Central Excise, Nashik clarifies that Dharmada, a voluntary charitable donation, is not part of the transaction value for calculating excise duty. This ruling provides much-needed clarity for businesses that collect Dharmada, ensuring that they are not taxed on amounts meant for charity. The Court’s decision overrules a previous judgment, reinforcing the principle that transaction value is the price paid for goods, not additional charitable payments.