UNION OF INDIA & ORS. ETC. ETC.· v. BOMBAY TYRE INTERNATIONAL LTD. ETC. ETC.

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.

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 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 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 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 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 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; 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 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 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 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.