Commnr. of Central Excise, New Delhi Vs. M/S. Vikram Detergent Ltd. - Court Judgment

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excise - deductions - section 4 (4) of central excise and salt act, 1944 - whether customs excise and gold (control) appellate tribunal justified in holding that bank charges for collection of sale proceeds and discount for damages are allowable deductions in computing value of manufactured goods under section 4 - object of 'damage discount' is to compensate buyer for damaged goods therefore compensation for damaged goods could not feature as relevant consideration for determining price of goods as manufactured at time of clearance of goods - on other hand bank charges being in nature of post clearing expenses are deductible while calculating assessable value of goods. - [ a.k. sarkar,; j.r. mudholkar,; k. subbarao,; n. rajgopala ayyangar and; raghubar dayal, jj.] under a. 413 of the calcutta municipal act, 1951, no person shall without a licence granted by the corporation of calcutta, keep open any cinema house for public amusement in calcutta. under s. 548(2), for every licence under the act, a fee may be charged at such rate as may from time to time be fixed by the corporation. in 1948, the appellant (corporation) fixed fees on the basis of annual valuation of the cinema house. the respondent, who was the owner and licensee of a cinema theatre, had been paying a licence fee of rs. 400 per year on that basis. in 1958, the appellant, by a resolution, changed the basis of assessment of the fee. under the new method the fee was to be assessed at rates prescribed per show according to the sanctioned seating capacity of the cinema house; and the respondent had to pay a fee of rs. 6,000 per year. the respondent, therefore moved the high court for the issue of a writ quashing the resolution and the application was allowed. in the appeal to the supreme court the appellant contended that (i) the levy was a tax and not a fee in return for services and (ii) s. 548(2) does not suffer from the vice of excessive delegation; while the respondent contended that (i) the levy was a fee in return for services to be rendered and not a tax, and as it was not commensurate with the costs incurred by the corporation in providing the services, the levy was invalid; (ii) if s. 548 authorised the levy of a tax, as distinct from a fee in return for service rendered, it was invalid, as it amounted to an illegal delegation of legislative functions to the appellant to fix the amount of a tax without any guidance for the purpose and (iii) the levy was invalid as violating art. 19(1) (f) and (g) of the constitute. held (per sarkar, raghubar dayal and mudholkar jj) : (i) the was not a fee but a tax. [490 f] the act does not intend to use the word "fee" as referring only to a levy in return for services, for, the levies authorised by some other sections of the act are really "taxes", though called "fees". besides, the words used are "fee for the licence" and these words do not necessarily mean a "fee in return for services" as is apparent from arts. 110(2) and 199(2) of the constitution, where both expressions are used indicating that they are not the same. [483 g-h] the word "fee" in s. 548 must be read as referring to a tax as any other reading would make the section invalid, and in interpreting a statute, it ought to be made valid if possible. [484 b-c] the decisions of this court establish that in order to make a levy a fee for services rendered, the levy must confer special benefit on the persons on whom it is imposed. the levy under s. 548 (2) is not a "fee in return for services" as the act does not provide for any services of a special kind being rendered, resulting in benefits to the person on whom it is imposed. s. 527(43) permits by laws to be framed for regulating the inspection, supervision and control, among others, of cinema houses; but it is not obligatory to make such by laws and therefore, there may be no services to render. even the by law made provides only for inspection, and the work of inspection done by the appellant was only to see that the terms of the licence were observed by the licensee. it was not a service to him, and so, no question arises of correlating the amount of levy to the costs of any service. the levy therefore is not a fee and must be tax. [485 b-c, f; 488 e; 490 e-f] the commissioner, hindu religious endowments, madras v. shri lakshmindra thirtha swamiar of sirur mutt, [1954] s.c.r. 1005, h. h. sudhindra thirtha swamiar v. commissioner for hindu religious and charitable endowments, [1963] supp. 2 s.c.r. 302 and the hingir rampur coal co. ltd. v. the state of orissa and ors. [1961] 2 s.c.r. 537, referred to. whether a particular levy is a fee or a tax has to be decided only by reference to the terms of the section. its position in the act cannot determine its nature ; an imposition which is by its terms a tax and not a fee, cannot become a fee by reason of its having been placed in a certain part of the statute. [489 b] it is not right to say that s. 443 does not impose any duty on the appellant and that therefore, the licence fee leviable under s. 548, should be fixed only with reference to rendering of services. the corporation has been set up only to perform municipal duties and its powers are for enabling it to perform those duties. but, since there is no provision for service being rendered, the levy cannot be a fee and would indisputably be a tax. [490 b, c, d] (ii) the fixing of the rate of a tax is not of the essence of legislative power and the fixing of rates may be left to a non legislative body. when it is so left to another body the legislature must provide guidance for such fixation. since there is sufficient guidance in the act as to how the rate of the levy under s. 548 is to be fixed, the section is valid. [492 d, f; 493 g-h; 497 b] the appellant is an autonomous body. it has to perform various statutory functions. it is given power to decide when and in what manner the functions are to be performed. for all this it needs money and its needs will vary from time to time with the prevailing exigencies. its power to collect tax is necessarily limited by the expenses required to discharge the functions. it has, therefore, where rates have not been specified in the statute, to fix such rates as may be necessary to meet its needs, and that would be sufficient guidance to make the exercise of its power to fix the rate, valid. [496 d-f] case law reviewed. (iii) the challenge to the levy on the ground that it amounts to expropriation is wholly unfounded. no doubt the increase in the rate of fee was large but considering the available seating capacity of the respondent, it cannot be said to be unreasonably high. [482 e-f] the contention of the appellant that even if no guidance for taxation has been prescribed the section would still be valid, because, the act may be said to have been passed under entry 5 of list ii of the seventh schedule to the constitution and that entry authorises the passing of a law concerning the powers of a municipal corporation and that such powers must necessarily include the power to levy a tax, was left open. [497 d-e, h] per subba rao and ayyangar, jj (dissenting) (i) if on a proper construction of the act one reached the conclusion that part iv of the act was not exhaustive of the range of levies permitted by the act, and the fees permitted to be levied by s. 548(2) were also taxes, there would be nothing in s. 127(3) or (4) to militate against that construction. but, an examination of the provisions of the act makes three matters abundantly clear; (a) that the act draws a sharp and clear distinction between taxes properly so called and fees; (b) that the division into parts and chapters is logical and clear cut and no matter which properly falls under a subject set out under a part or chanter heading, is dealt with in any other; and (c) that taxes, by whatever designation they might be called, are all comprehended and dealt with by part iv and by part iv alone, and that what is permitted to be imposed by s. 548(2) is only a fee as distinguished from a tax. as admittedly there is no correlation between the fee charged and the service rendered, the impugned levy was not authorised and the high court was right in granting relief to the respondent. [525 b-c; 526 d-g] to say that to enable a fee strictly so called to be levied, an immediate advantage measurable in terms of money should be conferred on the payer is to take too narrow a view of the concept of a fee. the word "services" in the context has to be understood in a wide sense, as including supervision and control over the activities for the excess of which the fee is charged. the judgements of this court in the shirur mutt case, [1954] s.c.r. 1005, and the cases following it, do not lay down that where an activity is regulated by licenses, the imposition of charges for the inspection, supervision and control of the activity to ensure compliance with the regulation is not a benefit conferred on the licensee, so as to render the amount charged for such a licence not a fee in the real sense, but a tax, whose constitutional validity could be sustained by reference to the taxation entries in lists i and ii. [508 a; 515 f-g; 517 h; 518 a] case law considered. also, art. 110(2) of the constitution far from supporting the appellant's contention, negatives it. if pure taxation measures, employing the machinery of licences and fees, would be money-bills, then the fees for licences which are outside the definition, would be those fees which are imposed to meet the cost of regulation and supervision of an activity which is controlled by the requirements of a licence and compliance with its terms. besides, if the levy of such licence fees on various activities which form the subject of legislative control or regulation under the various non-taxation entries in the lists were treated as tax, entries 96 and 66 in the respective lists would have to be read as taxation entries, because, such a levy is permitted only by those entries. this however would be con- trary to the entire scheme on which the several entries in the lists are made, namely, setting out the exclusive general legislative powers the enumeration of taxes which could be imposed and finally the power to, impose fees in respect of any of the matters in the list. [502 c; 519 b-c, e, g] (ii) viewed as a tax the delegation in s. 548(2) is unconstitutional, as essential legislative functions are parted with to the municipality, a subordinate law making body, and therefore the provision is unconstitutional. [546 b] essential legislative functions cannot be delegated but where the law lays down the principles and affords guidance to the subordinate lawmaking authority details may be left for being filled up by the executive or by other authorities vested with quasi-legislative power. the power to fix a rate of tax is an essential legislative function and therefore, unless the subordinate law-making authority is afforded guidance by the policies being formulated, principles enunciated and standards laid down, the legislation will suffer from the vice of excessive delegation and would be void as arbitrary and unconstitutional. the _provisions of the act do not afford any guidance to the municipal corporation to fix the rate of levy. no doubt, the municipal government of calcutta was vested in the corporation under s. 24 of the act, but the expression "government" does not gather within its fold all powers necessary for administration nor does it create an independent sovereign body entitled to legislate in any manner it likes for the purpose of carrying on civic government. the corporation is still a subordinate body which is the creation of the legislature and can only function within the framework of the powers conferred upon it by the act. no assistance is derived in this regard from the powers of supervision which the state government has over the municipal affairs under a. 42 and 47. if no standards have been laid down by the act for the corporation to afford it a guidance for the fixation of a rate, the fact that supervisory power is conferred upon the executive would not obviate that objection, for the government itself would have no guidance from the legislature as to the policy to be adopted in exercising the supervision. [541 e--g; 542 c-g; 545 a] it cannot be said that as a result of as. 115, 117 and 126 no taxes could be raised except such as were needed for the expenditure for which provision had been made in the budget and the rate of tax was, therefore, determined by the needs of the corporation. if the amount of money which a municipality needs for discharging its functions, affords any guidance, then the need of a state or the union ought to afford sufficient guidance to sustain the validity of any skeleton legislation. [545 a-c] the orissa ceramic industries ltd. v. executive officer, jharsuguda municipality a.l.r, 1963 orissa 171 disapproved. the quantum of power which a law could bestow upon an institution or body of its creation is determined, first, by the view of the legislature to what are necessary for achieving the purposes for which the institution or body is created and, secondly, by the overall limitations imposed by the constitution by the distribution of legislative power. nothing therefore turns on the use of the word "powers" in entry 5 of the list 11 which deals with the constitution and powers of municipal corporations for the purpose of local self-government. the state legislature cannot, therefore, authorise a municipal body which it creates, even though, it be for the purpose of local self-govemment, to exercise a power higher than what it itself possesses. any legislative practice prevailing before 1st april, 1937 when india was under a unitary form of government or prevailing before the constitution, does not serve as a guide for interpreting the legislative entries in the constitution and any such legislative practise cannot prevail over the limitations imposed by the distribution of legislative power in respect of post-constitution legislation. [527 f-g;530 d, g; 532 f-g ; 533 e-f; 534 c] the analogy of american decisions also cannot afford any guidance for the application of a different rule as to what constitutes excessive delegation in the case of legislation creating municipal bodies. the rule to limits of delegation by the legislatures constituted in india, by the consti- tution, has been the subject of elaborate consideration by this court and the decisions have not laid down that a different rule applies when the delegation of legislative power is in favour of a municipal corporation. [535 c-d, e] case law considered.   - since the price in both cases was fixed with reference to the sale at the depots to the redistribution stockists, clearly in terms of sub-section (2) of section 4, the respondent would be entitled to deduction of the cost of transportation from the factory to the selling depots. and others 1983ecr653d(sc) as well as assistant collector of central excise and others v. 1987(27)elt553(sc) as well as government of india v.ruma pal, j.1. in both these appeals, the appellant has challenged the decision of the customs excise and gold (control) appellate tribunal holding that bank charges for collection of sale proceeds and discount for damages are allowable deductions in computing the value of the manufactured goods under section 4 of the central excise and salt act, 1944. civil appeal no. 2579 of 20002. in this appeal, the respondent, m/s vikram detergent ltd. is engaged in the packing of detergent powder received by it from m/s hindustan lever ltd. (hll). after the goods are packed, they are cleared from the factory by hll and sold through it's clearing and forwarding agents from their depots all over the country to wholesale buyers who are known as redistribution stockists. the department calculated the excise duty payable on the detergent powder on the price charged by hll from the redistribution stockists. civil appeal no. 3160 of 2000 3. m/s ipf vikram india ltd., the respondent in this appeal produces detergent under agreement with m/s indexport ltd. (iel) and stepan chemicals ltd. (scl) under the brand name 'wheel'. the respondent despatches the goods manufactured by it to the destinations specified by iel/scl. according to this respondent, iel and sel send the goods to clearing and forwarding agents' depots from where the goods are sold and delivered to redistribution stockists. the price lists filed by the respondent with the excise authorities are according to the advice of iel/scl and reflect the price charged by them for the goods in the wholesale market. 4. both the respondents inter alia claimed deduction on account of damage discount and bank charges on outstation cheques from the price charged in arriving at the assessable value of the goods for the purposes of excise duty. it is not necessary to set out in detail the proceedings before the authorities under the act except to state briefly that in the first appeal, the assistant commissioner disallowed the respondent's claim but the commissioner allowed the respondent's appeal. the tribunal affirmed the commissioner's decision. in the second appeal, both the assistant commissioner and the commissioner had disallowed this respondent's claim for discount of damaged goods and bank charges relying on the decision of this court in government of india v. mrf 1995 : 1995(77)elt433(sc) . the respondent challenged the decision before the tribunal. the tribunal allowed the appeal. both the orders of the tribunal are now the subject matter of challenge before us. the issues are the same in both appeals as are the relevant facts. we have heard one set of arguments and our decision disposes of both matters. 5. according to the appellant, the discount on the damaged goods could not be known at the time of their removal from the factory and as such was not admissible as a deduction on the wholesale price. it was contended that what the respondents claimed as discount was in fact a refund to the buyers for receiving goods damaged in transit. as far as bank collection charges are concerned, according to the appellant, these were neither cash discounts nor any other discount within the meaning of the word in section 4(4)(d)(ii) of the act. 6. it was submitted by the respondents that deduction on account of damages represented discounts allowed to the whole-sellers for damages suffered by the goods cleared from the factory during transit there being no sale at the factory and were incurred in lieu of transit insurance. bank collection charges, according to the respondents were post manufacturing expenses and had been correctly held to be deductible from the assessable value of the goods. 7. the issue of value depends on the construction of section 4 of the central excise act, 1944 ( referred to as the 'act'). the relevant extract of the section for the purposes of this judgment reads as follows: 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 value, such value shall, subject to the other provisions of this section, be deemed to be-(a) the normal price thereof, that is to say, the price at which such goods are ordinarily sold by the assessee to a buyer in the course of wholesale trade for delivery at the time and place of removal, where the buyer is not a related person and the price is the sole consideration for the sale. xxx xxx xxx xxx (2) where, in relation to any excisable goods the price thereof for delivery at the place of removal is not known and the value thereof is determined with reference to the price for delivery at a place other than the place of removal, the cost of transportation from the place of removal to the place of delivery shall be excluded from such price. (3) xxx xxx xxx xxx(4) for the purpose of this section, -xxx xxx xxx xxx(d) 'value', in relation to any excisable goods, -xxx xxx xxx xxx(ii) does not include the amount of the duty of excise, sales tax and other taxes, if any, payable 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 wholesale trade at the time of removal in respect of such goods sold or contracted for sale.' 8. the 'normal price' in this case, would have to be determined with reference to the time and place of removal of the goods from the respondents' respective factories. since the price in both cases was fixed with reference to the sale at the depots to the redistribution stockists, clearly in terms of sub-section (2) of section 4, the respondent would be entitled to deduction of the cost of transportation from the factory to the selling depots. it has been so held in union of india and others v. bombay tyre international ltd. and others : 1983ecr653d(sc) as well as assistant collector of central excise and others v. madras rubber factory ltd. : 1987(27)elt553(sc) as well as government of india v. madras factory ltd. : 1995(77)elt433(sc) . these decisions also held that the cost of transportation would include cost of insurance on the freight for transportation of the goods from the factory gate to the place or places of delivery but would not include compensation for defective goods. the position was further clarified in collector of central excise, meerut v. surya roshni ltd. : 2000(122)elt3(sc) where it was held that: 'the payment made by the respondent to its customers for breakages and losses cannot tantamount to insurance. nor can, by any means, such compensation be treated as a part of the cost of transportation; it is a clear case of making up to the customer by means of a credit note the monies that it has lost on account of breakages or losses in transit.' 9. the respondents sought to distinguish the decision in surya roshni case (supra) by contending that the claim for deduction on account of damaged goods was a claim not under sub-section (2) of section 4 as being part of the cost of the transportation but under sub-section 4(d) (ii) of section 4 as a trade discount. we are unable to accept the submission. 10. the object of 'damage discount' is to compensate the buyer for the damaged goods and logically, compensation for damaged goods could not feature as a relevant consideration for determining the price of the goods as manufactured at the time of clearance of the goods. the 'discount' is admittedly on account of damages suffered by goods after removal from the factory. a similar deduction claimed as a 'warranty discount' was negatived in the two madras rubber factory judgments referred to earlier. bhagwati c.j's dictum in the first of such judgments which was quoted with approval in the second was: 'what is really relevant is the nature of the transaction. ... the warranty is not a discount on the tyre already sold, but relates to the goods which are being subsequently sold to the same customers. it cannot be strictly called as discount on the tyre being sold. it is in the nature of a benefit given to the customers by way of compensation for the loss suffered by them in the previous sale..... a compensation in the nature of warranty allowance on a defective tyre'. the finding of the tribunal on this issue therefore cannot be sustained. 11. on the question of bank charges, however we are of the view that bank charges being in the nature of post clearing expenses are deductible while calculating the assessable value of the goods. in assistant collector of central excise and others v. madras rubber factory (supra) and shriram fertilizers & chemicals v. union of india 1997 (96) elt 12(sc) and government of india and others v. madras rubber factory ltd. and others : 1995(77)elt433(sc) , this court has held that interest on receivables earned on account of the time lapse between the delivery of the goods and the realisation of the monies is deductible from the assessable value of the goods at the time of removal from the respondents' factories. for the same reason, bank charges included in the price on account of clearance of outstation cheques cannot form part of the price of the goods at the time of removal and are as such excludible from the price while calculating the assessable value of the goods. the tribunal had, as such, correctly allowed this deduction. 12. in the circumstances, the appeals are allowed to the extent of disallowing the respondents' claim for deduction on account of damage discount and dismissed in so far as the respondents' claims for deduction of bank charges are concerned. there will be no order as to costs.