1. These appeals were taken up for hearing in pursuance of the Order No. M/331-332/WZB/Ah'bad/2007 dated 14.3.2007, by which the matter was referred for final hearing before the Larger Bench.
(a) The appellant is a manufacturer of P & P medicines falling under Chapter 3003 of the Central Excise Tariff Act. The appellant is indicating (Maximum Retail Price) MRP on the boxes/packets in terms of provisions contained in Drugs Price Control Order, 1995 (DPCO).
(b) P & P medicaments were notified under Section 4A by the Central Government with effect from 8.1.2005 in terms of Notification No. 2/2005-CE(NT) dated 7.1.2005, as amended.
(c) The appellant claims to have given free goods in various percentages to the wholesale dealers/distributors as quantity discount. As for example, 25 boxes are given free along with purchase of 100 boxes.
(d) The goods which are given as quantity discount to the wholesalers also contained MRP prices printed on them as the same are requirements under the DPCO. (e) The original authority held that as the goods are covered under the provisions of Section 4A of the Central Excise Act, 1944, the quantity discount claimed was not admissible and the assessable value was to be arrived at for the entire quantity by adopting the retail sale price less abatement at 40%.
(f) Commissioner (Appeals) has upheld the order of the adjudicating authority.
(g) In the case relating to Appeal No. E/183/07, a demand of Rs. 4,47,974/- relating to the period June 2005 to December 2005 stands confirmed besides imposition of equal penalty under Section 11AC. In addition, interest under Section 11AB is also demanded.
(h) In the case relating to Appeal No. E/184/07, a sum of Rs. 1,71,735/- stands demanded also for the period June, 2005 to December 2005 along with interest. Penalty under Section 11AC also stands imposed.
4.1 Shri P.M. Dave, learned Advocate for the appellant inter alia, submits that the appellant gives quantity discount to various distributors and wholesale dealers. In respect of such goods given as quantity discount, no sale is involved and therefore, duty can be demanded only on the net quantity. In other words, if they sell 100 boxes and supply 25 boxes free, the duty payable is only on 100 boxes applying MRP and giving abatement of 40% as envisaged in the notification. He relies on the Tribunals decision in the case of Vinayak Mosquito Coil Manufacturing Company v. C.C.E., Bangalore reported in 2004 (174) ELT 107 (Tri- Bang. The Department's appeal against the Tribunal's order in Vinayak Mosquito Coil Manufacturing Co.
cited supra has been dismissed by the Hon'ble Supreme Court, the order of the Tribunal stands affirmed and is, therefore, a binding precedent and therefore, requires to be followed in their case.
4.2 He also submits that even though the Hon'ble Supreme Court has summarily dismissed the appeal in the case of Vinayak Mosquito Coil Manufacturing Co., the same should be held to be binding in the light of judgments in the following cases:S. Kumar's Ltd. v. C.C.E, Indore.
(iii) 1994 (70) ELT A 182 Rajasthan Processors (India) Ltd. v. Collector 5.1 Learned Joint C.D.R. submits that in respect of ad valorem based goods, there are two clear streams of valuation - one provided under Section 4 and the other provided under Section 4A. Valuation under Section 4(1)(a) is dependent upon the transaction value subject to fulfillment of conditions prescribed thereunder. When Section 4(1)(a) is not applicable either due to the conditions not being fulfilled or because the goods are not sold or for any other reason, provisions of Section 4(1)(b) and the Valuation Rules made thereunder shall be applicable.
5.2 The Central Government notifies the goods for which valuation under Section 4A has to be applied. Goods which can be notified are goods for which the retail prices are required to be affixed either under the Standards of Weights and Measures Act or other laws like Drug (Prices Control) Order. In respect of such notified goods, the Central Govt.
also specifies the quantum of abatement from maximum retail price (MRP) that should be given to arrive at the assessable value. No other deductions is permissible.
5.3 The provisions of Rule 12, 14 and 16 of the Drug (Prices Control) Order require that the manufacturers of medicines are to indicate the retail prices and also prescribe the mode of fixing the retail price and the extent of margin/discount that should be given to the retailers so that the goods reach the ultimate customer at a price not exceeding the maximum retail price. The said rules prescribe the manner of indicating the retail prices on the packages.
5.4 The physician samples which are ultimately distributed free and where no sales are involved are also subject to duty and as no MRP is required to be affixed on such packages that they are being subject to assessment in terms of Section 4.
5.5 Rule 2(q) of Standards of Weights and Measures Act defines retail sale which goes beyond sale and covers other forms of distribution.
5.6 The Tribunal's order that Vinayaka Mosquito Coil Manufacturing Co.
has relied on the ratio of Surya Food and Agro Ltd. v. Commissioner 2002 (156) ELT 488 (Tribunal) which, in turn, relies on the CBEC Circular No. 673/64/2002-CX dated 28.10.2002. The CBEC circular is related to valuation of product supplied in multi piece package with the free item which is not carrying MRP.5.7 Drug (Prices Control) Order which applies to P & P medicaments does not recognize multi-piece package.
5.8. The cases of free supplies where the discount is permitted in relation to valuation under Section 4A are cases where the benefit is ultimately available to the consumer. Section 4A does not discriminate on the basis of customer and the ultimate disposal of the goods sold whether it is further sold or distributed free etc. is immaterial.C.C.E., Mumbai v. Godrej Industries Ltd. 2006 (300) ELT 348 (Tri-Mumbai) (iii) C.C.E., Mumbai v. Godrej Soaps Ltd. 2006 (198) ELT 450 (Tri-Mumbai)Sun Export Corporation v. C.C., Bombay 7.1 The excise duty is on the manufacture; the manufactured goods need to discharge the duty liability at the time of removal and Rule 4 of the Central Excise Rules stipulates that no removal without payment of duty is permissible; accounting of Goods manufactured and cleared are required to be maintained on a day to day basis in terms of Rule 10 of the Central Excise Rules; at the time of removal, Rule 11(2) envisages that invoice shall be prepared, inter alia, indicating quantity of goods and value of goods which are removed.
7.2 The removal from the factory of manufacture or other approved places of removal is the stage at which the goods are liable to duty.
Duty is liable even if it is removed for captive consumption within the same factory unless there is exemption for such captive consumption.
There is no sale involved in cases of captive consumption but still duty becomes payable as there is removal of goods in terms of Rule 4 of the Central Excise Rules.
7.3 Duty becomes payable on removals whether the goods are subject to duty on specific rate or on ad valorem basis applying valuation in terms of Section 4 and the Valuation Rules made thereunder or cleared adopting valuation in terms of Section 4A.8. When specific rated items are cleared (as in the case of chewing tobacco) the transaction price becomes totally irrelevant for determining the quantum of duty as there is a clear stipulation that valuation provisions under Section 4 are applicable only in respect of goods subject to duty with reference to their value. The measure of tax being definite, like number, Weight, Volume, issues like whether sale is made through related person, or whether used captively become irrelevant. The tax becomes payable on the actual quantity removed.
9.1 When goods are subject to duty on ad valorem basis, they are to be assessed in terms of Section 4, the relevant portion of which reads as follows: Section 4. Valuation of excisable goods for purposes of charging of duty of excise -- (1) where under this Act, the duty of excise is chargeable on any excisable goods with reference to their value, then, on each removal of the goods, such value shall - (a) in a case where the goods are sold by the assessee, for delivery at the time and place of removal, the assessee and the buyer of the goods are not related and the price is the sole consideration for the sale, be the transaction value; (b) in any other case, including the case where the goods are not sold, be the value determined in such manner as may be prescribed.
[Explanation - for the removal of doubts it is hereby declared that the price cum duty of the excisable goods sold by the assessee shall be the price actually paid to him for the goods sold and the money value of the additional consideration, if any, flowing directly or indirectly from the buyer to the assessee in connection with the sale of such goods, and such price cum duty, excluding sale tax and other taxes, if any, actually paid, shall be deemed to include the duty payable on such goods.
9.2 When the conditions prescribed in Section 4(1)(a) are not fulfilled, even when there are sales, the goods are to be assessed in terms of the valuation rules. The valuation rules also provides for goods removed for captive consumption under Rule 8 of the Valuation Rules. If free gift is given there is no automatic exemption. In such cases, valuation requires to be determined in terms of Rule 11 of the Valuation Rules adopting the best judgment method using "reasonable means".
9.3 The Section 4 valuation permits deduction of trade discount as the transaction price becomes relevant. Discount basically means a reduction in the sale consideration. The quantity discount is one form of discount. When a person offers quantity discount (in the present case, 25 boxes are claimed to be given free with every 100 boxes), are they discount in quantity? Obviously, no. The quantity is being given in addition and therefore, it is not really discount in quantum. It is basically discount in price worked out indirectly. Strictly speaking, there is nothing like free supply in these type of transactions. The seller, in this case, has sold 125 boxes at the rate applicable to 100 boxes. The interpretation that 100 boxes are sold and 25 are given free of cost may not be a logical interpretation. In other words, the sale transaction is for gross quantity and the price is the net amount charged.
9.4 In the above situation, the assessee is required to account the entire 125 boxes as manufactured in the daily stock account and at the time of removal show the entire quantity in the invoices and the value shall be the discounted price which happens to be the transaction price., which the assessee has received from the seller.
10. The Parliament, with a view to minimize valuation disputes, enacted Section 4A, which provides for an alternate mode of valuation applicable in respect of commodities specifically otified by the Central Government. The relevant portion of Section 4A reads as follows: Section 4A. Valuation of excisable goods with reference to retail sale price - (1) The Central Government may, by notification in the Official Gazette, specify any goods, in relation to which it is required, under the provisions of the Standards of Weights and Measures Act, 1976 (60 of 1976) or the rules made thereunder or under any other law for the time being in force, on the package thereof the retail sale price of such goods, to which the provisions of Sub-section (2) shall apply.
(2) Where the goods specified under Sub-section (1) are excisable goods and are chargeable to duty of excise with reference to value, then, notwithstanding anything contained in Section 4, such value shall be deemed to be the retail sale price declared on such goods less such amount of abatement, if any, from such retail sale price as the Central Government may allow by notification in the Official Gazette.
(3) The Central Government may, for the purpose of allowing any abatement under Sub-section (2), take into account the amount of duty of excise, sales tax and other taxes, if any, payable on such goods.
(4) Where any goods specified under Sub-section (1) are excisable goods and the manufacturer - (a) removes such goods from the place of manufacture, without declaring the retail sale price of such goods on the packages or declares a retail sale price which is not the retail sale price as required to be declared under the provisions of the Act, rules or other law as referred to in Sub-section (1); or (b) tampers with, obliterates or alters the retail sale price declared on the package of such goods after their removal from the place of manufacture.
then, such goods shall be liable to confiscation and the retail sale price of such goods shall be ascertained in the prescribed manner and such price shall be deemed to be the retail sale price for the purpose of this section.
Explanation. 1 - For the purpose of this Section, 'retail sale price' means the maximum price at which the excisable goods in packaged form may be said to the ultimate consumer and includes all taxes, local or otherwise, freight, transport charges, commission payable to dealers, and all charges towards advertisement, delivery, packing, forwarding and the like and the price is the sole consideration for such sale; Provided that in case the provisions of the Act, rules or other law as referred to in Sub-section (1) require to declare on the package, the retail sale price excluding any taxes, local or otherwise, the retail sale price shall be construed accordingly.
(a) where on the package of any excisable goods more than one retail sale price is declared, the maximum of such retail sale prices shall be deemed to be the retail sale price; (b) where the retail sale price, declared on the package of any excisable goods at the time of its clearance from the place of manufacture, is altered to increase the retail sale price, such altered retail sale price shall be deemed to be retail sale price; (c) where different retail sale prices are declared on different packages for the sale of any excisable goods in packaged form in different areas, each such retail sale price shall be the retail sale price for the purposes of valuation of the excisable goods intended to be sold in the area to which the retail sale price relates.
10.1 When removal is of goods covered under Section 4A, the transaction price becomes irrelevant both from assessee's the point of view and Department's point of view. What applies to Section 4 valuation need not automatically percolate to valuation under Section 4A. The provisions of Section 4A is of overriding in nature. The non-obstinate clause in Sub-section (2) of Section 4A "Notwithstanding anything contained in Section 4" makes this abundantly clear.
10.2 The Central Government specifies the commodity to which Section 4A is to be applied and also specifies the abatement to be given from the MRP to arrive at the value for excise purposes. The MRP minus abatement is taken as the assessable value under Section 4A. If the assessee happens to sell the product at a price more than such an arrived at value, the Department is not at liberty to charge duty on the excess collection. Similarly, if the assessee sells at a price lower than the above arrived at value, they cannot opt to pay duty at the lesser transaction price. In other words, the transaction price is not relevant. If sale is through a related person, the same is immaterial.
Trade discounts such as cash discount, prompt discounts are not relevant. Discounts that could not be allowed directly cannot be allowed by back door method. The quantity discount is a concept under Section 4 basically to arrive at the transaction price and such transaction price is not relevant to valuation under Section 4A. In other words, by supplying 125 boxes at the price applicable to 100 boxes, no inference can be drawn that 25 boxes are being given free.
This is basically a linked sale which is sale of 125 boxes as a whole.
The price is for 125 boxes only. To claim that 25 boxes are supplied free by artificial splitting part of the quantity is not correct understanding of the factual position.
11.1 At this stage, it may be appropriate to discuss the implications of Circular No. 673/64/2002-CX dated 28.10.2002 dealing with valuation of multi piece package. The multi piece package has been defined under Rule 2(g) of the Standards of Weights and Measures (Package Commodities) Rules, 1977.
4. I am also directed to say that there is no uniformity in valuation of multi-piece packages, consisting of 2 or more consumer items of the same kind, with MRP printed both on the individual items and the multi pack. For valuing such multi-packs it is clarified that: (i) If the individual items consisting the multi-pack have clear markings that they are not to be sold separately or are packed in such a way that they cannot be sold separately, then the MRP indicated on the multi-pack would be considered for payment of Under Section 4A. (ii) If the individual items do not contain any such inscription (that they are not to be sold separately) and are capable of being sold separately at the MRP printed on the individual pieces, then the aggregate of the MRPs of the pieces comprising the multi-pack would be considered for payment of duty on the multi-pack under Section 4A. Thus clause will apply to only those multi-packs where the MRPs, both on the multi-pack and each of the individual items comprising the multi-pack, are clearly visible (e.g. soap, powders, tooth paste etc). Only then can Explanation 2 (a) to Section 4A apply.
(iii) If the individual items have MRPs printed on them but are scored out then the MRP printed on the multi-pack will be taken for purposes of valuation under Section 4A. (iv) If the individual item is supplied free in the multi-pack and has no MRP printed on it, the MRP printed on the multi-pack will be taken for purposes of valuation under Section 4.
11.3 From the above said circular it could be seen that the individual package contained in the multi-piece packages did not have the MRP.Only the outer package of the multi piece packages contained MRP and the same was meant to reach the ultimate customer in the said package and with the said MRP. Since the item mentioned as free was contained in the multi-piece pack, and the overall package contained MRP, the assessment is sought to be made on the basis of MRP mentioned in the multi piece package.
12. The above Circular has been heavily relied upon in reaching the decision in the case of Surya Food and Agro Ltd. v. C.C.E., Noida reported in 2003 (156) ELT 488 (Tri.-Del). In the said case, the appellant manufactured biscuits which were covered under MRP based valuation under Section 4A. While supplying certain varieties of biscuits, the assessee supplied small quantity of certain varieties free. In the case Surya Food and Agro Ld. the Tribunal considered the decision of Kothari Detergents (P) Ltd. v. Commissioner rendered in the context of Section 4 and heavily relying on the Board's circular dated 28.10.2002 came to the conclusion that in the said circumstances, the quantity discount given, irrespective of manner of administering, are eligible for deduction while fixing the assessable value of excisable goods which are subject to duty on ad valorem basis. In the said case, Tribunal rightly held that certain varieties of biscuits which were in multi-piece packages could be considered as free and part of quantity discount as the overall value of the multi piece packages which was relevant for valuation were not in dispute.
13.1 Valuation of free supplies in respect of commodity covered under Section 4A was also dealt with in the case of Vinayaka Mosquito Coil Manufacturing Co. v. C.C.E., Bangalore reported in 2004 (174) ELT 107 (Tri-Bang.). The judgment in the above case is reproduced below: The above appeal arises out of the order of Commissioner of Central Excise (Appeals), Bangalore upholding duty demand of Rs. 77,317/- for the period December 1999 to September 2000 on mosquito repellent/coils, and reducing the penalty imposed by the adjudicating authority from Rs. 7,500/- to Rs. 2,000/-. The issue is whether free supplies of mosquito coils are liable to be included in their assessable value.
2. We have heard both sides. We find that it cannot be disputed that with every twelve coils one coil was supplied free, as seen from letters addressed by the assessee to the Department through out the entire period in dispute. Further the position is clarified by the audit report wherein it has categorically accepted that the assessee is giving one case free for every twelve cases and each case contains ten packets of coils. The contention of the appellants that in the case of a free supply there is no sale and therefore the provisions of Section 4A are not attracted, is well found. In the light of the above factual position the ratio of the Tribunal's order in Surya Food and Agro Ltd. v. CCE, Noida 2003 (156) E.L.T. 488 (Tri-Del.), holding that free supplies are not includible in the assessable value under Section 4A of Central Excise Act (MRP) is squarely applicable. Following the ratio thereof we set aside the impugned order and allow the appeal.
13.2 On the basis of the letters addressed by the assessee to the department throughout the entire period in dispute, the Tribunal held that that one coil was supplied free with every 12 coils. Based on the above finding of fact that the coils were supplied free as in the case of Surya Food and Agro Ltd., the Tribunal took the view that no duty was chargeable.
The above decision has been rendered on the ground that the ratio of the case of Surya Food and Agro Ltd was squarely applicable to the said case.
13.3 However, there is an observation - "The contention of the appellants that in the case of a free supply there is no sale and therefore the provisions of Section 4A are not attracted, is well found." 14.1 The above observation, in our considered opinion is not legally correct. It gives the impression that if there is a free supply and if there is no sale, then no duty becomes chargeable.
14.2 The above inference would be contrary to specific provisions of law which envisages payment of duty on removal whether on sale or otherwise. If no duty is chargeable when there is no sale, then there is no need of various exemption notifications on free gift, for example, exemption granted to gifts made to agencies undertaking to earthquake relief measures.
15.1 The decision of the Tribunal in the case of Vinayaka Mosquito Coil Manufacturing Company was taken up on appeal by the Department which has been summarily dismissed by the Hon'ble Supreme Court. Therefore, the order of the Tribunal merged with the order of the Hon'ble Supreme Court and became final.
15.2 The present case deals with P & P medicaments which are governed by the provisions of DPCO which prescribed in detail the mode of fixing the retail prices, the extent of margin to be given to the retailers, the manner of indicating the retail prices on the packages. It is also mandatory to affix retail prices even in packets of medicaments which are claimed to be supplied free. In the present case, it is basically the linked sale which is sale of 125 boxes at the price applicable to 100 boxes. Therefore, the claim that the goods are supplied free is not acceptable. The reliance placed by the appellant on the decision of the Tribunal in the case of Vinayaka Mosquito Coil Manufacturing Company cited supra is, therefore, misplaced. Further, we are not in agreement with the contention that if there is no sale, no duty is payable. No such ratio can be attributed to the order of Hon'ble the Supreme Court summarily dismissing the appeal against the order made by the Tribunal in Vinayaka Mosquito Coil Manufacturing.
(a) sale is not a necessary condition for charging to excise duty.
Duty becomes payable (unless otherwise exempted) in respect of every removal of excisable goods.
(b) The concept of quantity discount applicable in the context of valuation under Section 4 is not applicable in determining value under Section 4A for the forgoing reasons.
(c) In the present case, the sale is for the gross quantity at the net price and the claimed free supply is not meant for the ultimate customer; such quantity claimed to be given also carried MRP. Therefore, duty shall be discharged on the entire quantity including goods covered as "the quantity discount" on the basis of valued arrived at under Section 4A after giving the abatement provided for.
17. In the light of the above we hold that the appeals are liable to be dismissed and accordingly dismiss the same.