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Judgment
The petitioner is a public limited company at Coimbatore. They have their factories in the Coimbatore District and they manufacture textile
machineries. The machineries are manufactured according to precise specification and designs of their customers. In other words, the machineries
are manufactured to suit the individual customer''s need and requirements. If a particular customer does not take delivery of the finished goods, the
petitioners will be prejudiced and they will have considerable difficulty in disposing of such machines. With a view to avoid such contingencies, it is
stated that the petitioners take advance security deposits from the customers. Normally, the amount of security deposited is 10% of the value of
orders. It is also contended by the petitioner that the widespread practice in the industry manufacturing tailor-made machineries to observe certain
norms and conditions. They are as follows :-
(A) For the buyer not to pay interest
(i) on the retention money on the part of the buyer for proper performance of the goods;
(ii) In case of delay occasioned by postponement or order execution pending decision on further subsidiary specifications or due to subsequent
changes/modifications required by the buyer;
(iii) In case of delay by the buyer in taking delivery of the ready goods;
(iv) In case of delay by the buyer in making payments of balance moneys for goods sold.
(B) For manufacturer-Sellers not to pay interest on security deposit/advance received from the Buyer.
The second respondent had issued a circular on 20-10-1986 giving certain directions to the authorities to the effect that addition of notional interest
on such advance will arise only in those cases where the authorities are in a position to establish a nexus between the receipt of the advance
deposited and the depression of the sale price on account of such interest free deposits. By memorandum dated 13-6-1990, the Department of
Revenue in the Government of India and Ministry of Finance had issued certain instructions on the basis of the decision of the second respondent
to the effect that interest accrued on such deposits are includible in the assessable value of the goods for the purpose of the Central Excise Act and
that there is no need to establish separately the nexus between the deposits and the price. It was also made clear that the earlier second
respondent''s circular dated 20-10-1986 will stand modified to the said extent. Consequently Trade Notice No. 200 of 1990 was issued on 26-
10-1990 by the Office of the Collector of Central Excise, following the said instructions, the third respondent has issued a show cause notice to the
petitioner on 30-10-1990. The show cause notice proceeds on the basis that for the period from October 1985 to September 1989, the
petitioners have evaded Central Excise duty to the tune of Rs. 1,87,34,141.70. The said amount is said to have been arrived at on scrutiny of the
account for the relevant period. It was found that advance money had been collected by the petitioners from their customers. The show cause
notice proceeds on the assumption that there has been tie up, that there was indirect consideration created in favour of the petitioners, whereby he
got interest-free working capital and that the same had not been reflected in the value of the goods manufactured. The show cause notice proceeds
to assume that interest at the rate of 18% on the advance money should be notionally charged and that the same amount should have been
reflected in the value of the product. Inasmuch as the said notional interest has been suppressed, action was taken under Rule 9(2) of the Central
Excise Rules read with Section 4 of the Salt Act, hereinafter called the Act.
It is under these circumstances the petitioner has approached this Honourable Court for the issue of Certiorari-fied-mandamus to quash the
general instruction issued on 13-6-1990 by the first respondent, the T.N. No. 200/90 issued by the third respondent and consequently forbear the
respondents from levying and collecting excise duties on the notional interest on security deposits collected by the petitioners.
A counter-affidavit has been filed by the respondents, in which it has been stated that there is an indirect consideration created by the interest-
free working capital that is provided by the customers. It is clear that if the petitioners had borrowed the same amount from financial institutions
they would have paid interest for the loan amounts which is certainly includible in the assessable value. The inclusion of notional interest is not
uncommon to Central Excise law and even in the circular of the second respondent dated 13-6-1990, the inclusion of notional interest had been
permitted in cases where nexus had been established between the receipt of advance/deposit and the depression of the sale price. Reliance is
placed on Britannia Industries Ltd. Vs. Union Bank of India, , for the proposition that such deposits are similar to the bank loans and the interest
paid thereon is includible in the assessable value. It is also pointed out that the principles relating to assessment of the value of the goods as
incorporated in Section 4 of the Act read with Rule 5 of the Valuation Rules is always kept in mind. According to the respondents, the
clarifications are well within the said provisions of law. The sum and substance of the stand taken by the respondents is that the interest element
influences the price of the goods and tantamounts to additional consideration enjoyed by the manufacturers. On the question of the impugned
circulars tying the hands of the Quasi-Judicial Authorities, the respondents contend that they are within the powers of the second respondent.
In elaborating the plea of the petitioners, Shri K. Parasaran, raises the following points :-
(1) The very inclusion of notional interest on deposits/advances made by customers in respect of industries which manufacture tailor-made
machineries on specific orders in the assessable value is contrary to Section 4 of the Act.
(2) In any event as per the earlier circular dated 20-10-1986 a nexus should be established between the additional consideration and the sale
price.
(3) The memorandum dated 13-6-1990 and the Trade Notice dated 26-10-1990 holding that it was not necessary to establish a nexus between
the deposits and the sale price is not only illegal, but purport to interfere with the Quasi-Judicial powers of the statutory authorities.
Shri K. Parasaran, refers to the important decisions on the subject to understand the scope of Section 4 of the Act read with Rule 5 of the
Valuation Rules. In A.K. Roy v. Voltas Ltd. (1973 2 SCR 1088), the argument of the Excise authorities was that where the agreements with the
wholesalers conferred certain extra-commercial advantages upon them, then sales to them were not sales to independent purchasers but to favored
ones and therefore the price charged would not represent the ""wholesale cash price"" as mentioned in Section 4(a) of the Act. They argued that
Section 4(a) visualizes a wholesale market at the place of manufacture where articles of like kind and quality are sold or could be sole. The
argument was negatived by Supreme Court in the following words :
We do not think that for a wholesale market to exist, it is necessary that there should be a market in the physical sense of the term where articles
of a like kind or quality are or could be sold or that the articles should be sold to so-called independent buyers.
Even if it is assumed that the latter part of S. 4(a) proceeds on the assumption that the former part will apply if there is a wholesale market at the
place of manufacture for articles of a like kind and quality, the question is what exactly is the concept of wholesale market in the context. A
wholesale market does not always mean that there should be an actual place where articles are sold and bought on a wholesale basis. These words
can also mean the potentiality of the articles being sold on a wholesale basis. So, even if there was no market in the physical sense of the term at or
near the place of manufacture where the articles of a like kind and quality are or could be sold, that would not in any way affect the existence of
market in the proper sense of the term provided the articles themselves could be sold wholesale to traders, even though the articles are sold to
them on the basis of agreements which confer certain commercial advantage upon them. In other words, the sale to the wholesale dealers did not
cease to be the wholesale sales merely because the wholesale dealers had entered into agreement with the respondent under which certain
commercial benefits were conferred upon them in consideration of their undertaking to do service to the articles sold, or because of the fact that no
other person could purchase the articles wholesale from the respondent. We also think that the application of clause (a) of Section 4 of the Act
does not depend upon any hypothesis to the effect that at the time and place of sale, any further articles of like kind and quality should have been
sold. If there is an actual price for the goods themselves at the time and place of sale and if that is a ''wholesale cash price'' the clause is not
inapplicable for want of sale of other goods of a like kind and quality.
In Atic Industries Ltd. Vs. H.H. Dewa, Asstt. Collector of Central Excise and Others, it was factually found that the parties had entered into
agreements with two wholesale units at arm''s length and in the usual course of business. It was not the case of Excise authorities that specially low
prices were charged because of extra-commercial considerations.
The Supreme Court re-affirmed its earlier decision in the following manner :
The only relevant price for assessment of value of the goods for the purpose of excise in such a case would be wholesale cash price which the
manufacturer receives from sale to the first wholesale dealer, that 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 along a short or a long course depending on the nature of the goods
and the conditions of the trade, excise, is not concerned with what happens subsequently to the goods. It is the first immediate contact between the
manufacturer and the trade that is made decisive for determining the wholesale cash price which is to be the measure of the value of the goods for
the purpose of excise.
We then come to the Union of India (UOI) and Others Vs. Bombay Tyre International Ltd. and Others, . The proposition of law laid down in
this case by the apex court can be divided into two parts - (1) The position prior to the quality is sole or is capable of being sold by the
manufacturer, and it is not the bare manufacturing cost and manufacturing profit which constitute the basis for determining such value.
With this background of law as laid down by the Supreme Court, it would be easier to examine the case relied on by the respondents, namely,
Britania Industries case. The Bombay High Court had taken note of the Judgment of the Supreme Court in the Bombay Tyres case and set before
itself only three points for consideration. They related only to deductions which can be made from the assessable value. Out of the three heads of
deduction claimed by Britania Industries, we are concerned with the third item, namely, interest paid on deposits made by distributors. It was
claimed that the Britania Industries had received advance deposits from wholesale dealers, which were in the nature of security so that they would
not default in making payments in respect of supplies. The company paid interest at 8% to the distributors on the deposits made by them. This
claim for deduction was rejected by the authorities on the ground that the advances had been utilised for the working of the company and for
utilising such money they had paid interest to their authorised wholesale dealers. It was contended that the advances did not differ from monies
borrowed by the company from banks or other financing institutions. It was argued in that case by the Central Excise authorities that the amounts
paid by way of interest were in no way connected with the determination of the assessable value of the goods, the Bombay High Court came to the
conclusion that the assesses in that case did not adduce evidence to show that the said advances were not at all utilised as capital. Liability to pay
interest on these deposits was to be discharged out of the miscellaneous income arising, if any, by way of deposits and not out of the sale price of
the goods. It was further held that payment of interest was made for use of money borrowed, lent or advanced. It was held that such payment of
interest cannot be deducted in assessing the wholesale price u/s 4 of the Act.
Shri K. Parasaran argues that on the same analogy, the notional interest payable on the advances received by the petitioner in this case cannot
be added to the assessable value. While in the Bombay case, the question was one of deduction from the wholesale price on account of interest
actually paid by the assessee, we are concerned with the addition of notional interest to the assessable value. In one sense both the concepts lead
to the same result. While in the Bombay case the quantum of interest had been shown in the books of account as constituting the wholesale price
and therefore the deduction was claimed, in the present case, the change is that the notional interest had not been added to the assessable value of
the goods in the books of account. But the basic question is the same, namely, whether an assessee receiving advances from his customers or
distributors and consequently utilising the advances in the working of his industry is bound to show the interest element or price of the goods. In my
opinion this will definitely depend upon the facts of each case. In every case, one has to ultimately apply Rule 5 of the Central Excise Valuation
Rules, 1975 and see whether the deposits and advances constituted an additional consideration flowing directly or indirectly from the buyer and
whether such additional consideration could be computed in terms of money. Ultimately, the authorities can only go by Section 4 read with Rule 5
of the Valuation Rules. The primary part of Section 4 says that the value shall be the normal price being the price of the goods which are ordinarily
sold by assessee to a buyer in wholesale trade for delivery at time and place of removal. Where the buyer is not a related person and the price is
the sole consideration for the sale. Rule 5 of the Valuation Rules says that where the price is not the sole consideration, ""Value of such goods shall
be based on aggregate of such price and the amount of the money value or any additional consideration flowing directly or indirectly from the buyer
to the assessee."" In other words one has to see in each case whether the deposits/advance received by the assessee goes to the depression of the
sale price. I am clearly of the opinion that this factual assessment has to be made by the Quasi-Judicial Authorities prescribed under the Act, it
cannot be laid down as a uniform and inflexible rule that notional interest payable on advances/deposits made by customers can or cannot be
included in the assessable value of the goods. In a particular case, the notional interest may influence the sale price as amounting to additional
consideration. In a particular case it may not so influence.
There is an interesting judgment of the 1991 (32) ECR 346 The following line of thinking lends support to the view taken by me. After
extracting a passage from the M/s. Hindustan Polymers Vs. Collector of Central Excise, , the Tribunal says -
The language of Section 4 and the extract of the Supreme Court''s Judgment reproduced above show that the interpretation as given by the
Supreme Court alone is the correct one. Rule 5 of Valuation Rules and Section 4 of the Act have to be read together. A harmonious construction
can lead only to one conclusion that the extra accrual should be added to the wholesale price and the assessable value worked back after allowing
admissible deductions. Addition of such extra accruals to the assessable value would distort the meaning of the section because there is no way in
which abatement of excise duty which is permitted by Section 4 can be given if the extra accrual is directly added to the assessable value.
In 1989 (41) ELT 610 the Tribunal holds that any interest accruing on deposits received for such cylinders cannot constitute a part of
assessable value.
Again the view that facts of each case has to be analysed and assessed before taking a view one way or the other is seen also from 1989 (24)
ECC 81 . The following passage is relevant.
It is well-settled law that where the goods are sold by an assessee, in the course of wholesale trade at a price where the price is the sole
consideration and the buyer and seller are not related persons that such prices would become the normal price for the purposes of Section 4 of the
Act. Admittedly a substantial portion of the polyurethane foam namely about 46% was sold to dealers who have never given any advance to the
appellants. There is no price difference between the dealers from whom advances were taken and others. Under these circumstances we hold that
there is no case for invoking the provisions of Rule 5 of the Valuation Rules to include the interest element to the prices for arriving at the
assessable value. Even if the 3 dealers happen to be related, which position would be the worst that can be assumed against the appellants, the
price charged to others, admittedly unrelated buyers, would still form the basis for assessment in respect of the sales made to the assumed related
persons also, according to settled law. The advances seem to have been taken from the 3 dealers only to ensure speedy deliveries but not for a
special price.
Again in 1988 (14) ECR 331 the following passage is helpful.
On careful consideration, we agree with the assessee that the first two elements - the security deposit and Crompton spending on marketing and
sale promotion of its branded goods - did not amount to any extra consideration accruing from Crompton to the assessee. But the third element -
the salaries of the Chief Executive and the Works manager - did. These salaries have to enter the manufacturing cost of the goods and since they
were paid separately by the customers, these have to be added to the assessable value of the goods under Rule 5 of the Central Excise (Valuation)
Rules, 1975.
In Ramdas Motor Transport Ltd. v. Collector of Central Excise [1988 (36) ELT 629], the Tribunal held that the appellant got considerable
working capital which they would otherwise have had to borrow from Bank and pay the Commercial Bank interest thereon. Accordingly, it was
held that the interest-free deposit taken from one or more authorised dealer or dealers constituted additional consideration for the sale of their
goods which flowed bank to the appellants.
A conspectus of these decisions only fortify my view that the inclusion of the notional interest in the assessable value or the wholesale price will
depend upon the facts of each case. In a particular case there may be a deposit or advance by one or few of the customers. In a particular there
may be a special arrangement between the parties. It would be improper to generalise.
In respect of machines manufactured by the petitioners in this case, the aspect of the machines being useful only to the particular customer has
also to be taken note of. It may be that the deposit was made only for that purpose. It may be that the deposit having been made for that purpose,
but the manufacturer utilised the same as interest-free loan, because no industrialist would keep such amount idling. In the latter event automatically
the question whether the receipt of advance goes towards depreciation of the sale price has to be determined by taking evidence. The net result of
the above analysis leads me to the conclusion that the earlier circular dated 20-10-1986 struck the correct note by saying that the department has
to establish in each case that additional consideration had a nexus to the sale price of the excisable goods. Though Sri K. Parasaran had misgivings
about the said circular also, I must point out that the validity of the said circular has not been challenged. Further, it seems to me that no exception
could be taken to the said circular as being in conformity with Section 4 of the Act and Rule 5 of the Valuation Rules. In respect of the first
question addressed by Sri K. Parasaran, I hold that the question of notional interest being added in the assessable value will depend upon the facts
of the case.
On the second question, for the reasons given above, I also hold the earlier circular dated 20-10-1986 is valid and should be implemented in
all cases. Consequently, it follows that the modification in the impugned memorandum dated 13-6-1990 and the Trade Notice dated 26-10-1990,
that it is not necessary to establish a nexus between the deposits and the price, is illegal and invalid. I am clearly of the view that the impugned
orders dispensing with proof of nexus between the security deposits and the ultimate price of the goods is contrary to Section 4(a) of the Act read
with Rule 5 of the Valuation Rules.
The last point which has to be decided is whether the first and third respondents have jurisdiction to issue such circulars which bind the quasi-
judicial authorities without leaving any room for exercising their quasi-judicial powers. The respondents can take umbrage, only u/s 37(B) of the
Act. Sri K. Parasaran argues that Section 37(B) should be to the classification of excisable goods or with reference to levy of duties of excise on
such goods. In other words, it is argued that the words ""all such goods"" are relatable only to the classification of excisable goods. If the argument
of the revenue with regard to the scope of Section 37(B) is accepted, it will only mean that the second respondent can give any direction to any of
the statutory authorities and direct them to impose duty in a particular manner. I am clearly of the opinion that could not have been the intention of
the legislature. The quasi-judicial authorities are certainly supposed to apply the charging provisions to the facts of a case and find out whether the
goods are assessable and if so what would be the assessable value. Certainly Section 37(B) does not enable to second respondent to give a
direction that in respect of advances/deposits, notional interest is definitely chargeable and includible in the assessable value in all cases,
notwithstanding the fact whether the same had an effect on the price, directly or indirectly or did not have such an effect. In support of this
contention the decision in B. Rajagopala Naidu Vs. State Transport Appellate Tribunal and Others, and in Orient Paper Mills Ltd. Vs. Union of
India (UOI), are relied upon. It was clearly held that with reference to matters which fall within the jurisdiction of the quasi-judicial authorities, it
was not open to the executive to give directions or instructions. The following passage in Rajagopal Naidu''s case is apposite.
We have therefore, come to the conclusion that the impugned order is outside the purview of S. 43A inasmuch as it purports to give directions in
respect of matters which have been entrusted to the Tribunals constituted under the Act and which have to be dealt with by these Tribunals in a
quasi-judicial manner.
In Orient Paper Mills Ltd. Vs. Union of India (UOI), a direction of the Central Board was itself in question. The following passage directly on
point.
There is hardly any doubt that the power exercised by the appellate authority, i.e., the Collector, u/s 35 is also a quasi-judicial power. He is
designated as an appellate authority; before him there was a lis between the appellant which had paid the duty and the Revenue; and his order is
subject to revision by the Central Government. Therefore, it is obvious that the power exercised by him is a quasi-judicial power.
Another case in Gestetner Duplicators Pvt. Ltd. Vs. Commissioner of Income Tax, West Bengal, dealing with a circular issued by the Central
Board of Revenue, The Supreme Court observed that such a circular cannot affect the question in issue before the quasi-judicial authority. The
Supreme Court held that the quasi-judicial authority should go more by the statute rather than by the circular.
21.There are two judgments of the Gujarat High Court on the interpretation of Section 37(B) of the Act. The first is by a Division Bench consisting
of Chief Justice Gokulakrishnan and Nanavati, have held that Section 37(B) is intra vires to the Constitution of India. But the court also held that it
was ultimately for the quasi-judicial authority to render a decision on the basis of the statutory provision and the statutory authority shall not be
governed by the clarification by way of a trade notice. The authority should prefer the statutory provisions rather than a clarification by the Central
Board. In another decision of the same High court dated 5th May 1989, comprising of Justice Nanavati and Justice Vaidya, it was held that a
trade notice though not binding on the quasi-judicial authority shall not be overlooked by him. They have gone to the extent of saying that the trade
notice should be followed provided it is not contrary to the statutory provisions. Therefore, the only conclusion we can arrive at is that a circular u/s
37(B) cannot interfere with the powers of a quasi-judicial authority in so far as the quasi-judicial authority applies the statutory provisions, the
clarification issued u/s 37(B) cannot bind the quasi-judicial authority hand and foot so that the quasi-judicial authority merely obeys the circular and
passes a particular order. In this view of the matter, I am clearly of the opinion that the impugned circulars and trade notice have gone beyond the
limited scope of Section 37(B) and have attempted to bind the quasi-judicial authorities with a general direction that notional interest in all cases of
security deposits/advances shall be included in the assessable value of the goods. I am therefore of the opinion that the impugned government
memorandum and the Trade Notice are invalid and liable to be set aside and they are accordingly set aside.
Now coming to the impugned show cause notice Mr. Jayachandran, learned Counsel for the Respondents points out that even before the
impugned government memorandum and Trade Notice, the respondents have without reference to them had earlier issued show cause notices on
15-3-1990, 11-6-1990 and on 30-8-1990. But the fact remains that after the impugned Trade Notice, a fresh show cause notice has been issued.
The counter-affidavit and certain subsequent letters make it clear that the respondents have no intention of ignoring the Trade Notice. On the other
hand, they justify the circular and Trade Notice. Even though the impugned show cause notice dated 30-10-1990 does not in terms refer to the
circular and Trade Notice, having regard to the findings given by me, it is but proper that the respondents give fresh show cause notice and
proceed in accordance with the findings given in this judgment. The impugned show cause notice is therefore quashed.
In fine, the Writ Petition is allowed, the Government Memorandum of the first respondent No. F. 6/1/90 CXI dated 13-6-1990, the Trade
notice of the third respondent No. 200/90 dated 26-10-1990 and the show cause notice dated 30-10-1990 issued by the third respondent are
quashed. Liberty is given to the respondents to issue a fresh show cause notice without reference to the orders quashed about and proceed in
accordance with law.