By TIOL News Service

NEW DELHI, MAY 12, 2018: SECTION  3 of the Central Excise Act, 1944  inter alia  provides that there shall be levied and collected in such manner as may be prescribed, a duty of excise to be called the Central Value Added Tax (CENVAT) on all excisable goods which are produced or manufactured in India as, and at the rates, set forth in the First Schedule to the Central Excise Tariff Act, 1985.

Section 4 of the Act provides for valuation of excisable goods for the purposes of charging of duty of excise. The concept of Transaction value was introduced in the year 2000.

Is there a conflict between Section 3 and Section 4? Can/should the cost of transport be included in the assessable value when Section 3 stipulates a duty on goods manufactured?

In the celebrated  Bombay Tyre International  -  2002-TIOL-374-SC-CX  case, the Supreme Court held,  "Section 3 of the Central Excises and Salt Act provides for the levy of the duty of excise. It creates the charge, and defines the nature of the charge. That it is a levy on excisable goods, produced or manufactured in India, is mentioned in terms in the Section itself. Section 4 of the Act provides the measure by reference to which the charge is to be levied. The duty of excise is chargeable with reference to the value of the excisable goods, and the value is defined in express terms by that Section. It has long been recognized that the measure employed for assessing a tax must not be confused with the nature of the tax."

In  Acer Ltd  -  2004-TIOL-81-SC-CX-LB  case which considered the amended version of 2000, the Supreme Court held,  "So far as the valuation of goods in terms of "transaction value" thereof, as defined in Section 4(3)(d) of the Act is concerned, suffice it to say that the said provision would be subject to the charging provisions contained in Section 3 of the Act."

A Division Bench of the Supreme Court in  Grasim Industries  -  2009-TIOL-108-SC-CX  did not agree with the Acer judgement for the reasons that:

1. Section 3 is a charging Section providing for levy of excise duty on excisable goods, whereas Section 4 provides for the measure for valuation of excisable goods with reference to which the charge of excise duty is to be levied,

2. Both operate in their independent fields even though there may be a link between the two and

3. In the case of Bombay Tyre (a three-Judge Bench), the contention of the assessees that  "the measure was to be found by reading Section 3 with Section 4, thus drawing the ingredients of Section 3 into the exercise"  was specifically rejected.

So, the matter was referred to a Larger Bench with the following questions:

1. Whether Section 4 of the Central Excise Act, 1944 (as substituted with effect from 01.07.2000) and the definition of  "Transaction Value"  in Clause (d) of sub-Section (3) of Section 4 are subject to Section 3 of the Act?

2. Whether Sections 3 and 4 of the Central Excise Act, despite being interlinked, operate in different fields and what is their real scope and ambit?

3. Whether the concept of  "Transaction Value"  makes any material departure from the deemed normal price concept of the erstwhile Section 4(1)(a) of the Act?

The Larger Bench gave its decision on 30.03.2016 . Please see - 2016-TIOL-38-SC-CX-LB.

The Larger Bench felt that  another Coordinate Bench should not venture into the issues raised and even attempt to express any opinion on the merits of either of the views expressed in Union of India &   Ors. Vs. Bombay   Tyre   International Ltd. &   Ors . and Commissioner of Central Excise Vs.   Acer   Ltd. Rather, the questions referred should receive consideration of a Larger Bench.

So, the question was referred to a five Member Bench.

And the decision was delivered yesterday .

The Constitution Bench observed that the settled principles of law are –

++ Excise is a levy on manufacture and upon the manufacturer who is entitled under law to pass on the burden to the first purchaser of the manufactured goods.

++ The levy of excise flows from a constitutional authorisation under Entry 84 of List I of the Seventh Schedule to the Constitution of India.

++ The stage of collection of the levy and the measure thereof is, however, a statutory function. So long the statutory exercise in this regard is a competent exercise of legislative power, the legislative wisdom both with regard to the stage of collection and the measure of the levy must be allowed to prevail.

++ The measure of the levy must not be confused with the nature thereof though there must be some nexus between the two. But the measure cannot be controlled by the rigors of the nature.

After tabulating the provisions of sections 3 and section 4 as originally enacted and as amended from time to time, the Bench adverted to the decisions by the Federal Court in matter of challenge made to the Central Province and Berar Sales of Motor Spirit and Lubricants Taxation Act, 1938 and the decision in The Province of Madras vs. Messrs. Boddu Paidanna & Sons and the Privy Council decision in Governor-General in Council vs. Province of Madras - 2002-TIOL-269-SC-CX as well as the apex court decision in R.C.Jall Parsi vs. UOI & Anr. [AIR 1962 SC 1281] (wherein it has been held that while excise duty is essentially a duty on manufacture which is passed on to the consumer, the stage of collection, subject to legislative competence of the taxing authority, could be at any stage convenient so long as the character of the levy i.e duty on manufacture is not altogether lost)and observed that the method of collection does not affect the essence of the duty, but only relates to the machinery of collection for administrative convenience.

Upon reading section 4 of the CEA as originally enacted and amended last by the Finance Act, 2000, the Constitution Bench further observed –

+ Value of the article for the purposes of levy of ad valorem duty was with reference to the price i.e. 'normal price' prior to the 2000 Amendment and thereafter with reference to the 'transaction value' which has been defined to mean "the price actually paid or payable for the goods, when sold, and includes in addition to the amount charged as price..."

+ The measure for the purpose of the levy is, therefore, essentially the price charged in respect of a transaction which must necessarily be at arm's length. Inclusions and additions that enrich the value of the Article till its clearance are permissible additions to the price that can be taken into account to determine 'value' under the old Section 4 (prior to 2000) as well as the 'transaction value' under the amended section effective from 1.7.2000. While such additions have been judicially held to be permissible under the old Act in Bombay Tyre International Ltd. (supra) the very same heads have been statutorily engrafted by the amendment made in 2000.

+ The price charged for a manufactured article at the stage when the article enters into the stream of trade in order to determine the value/transaction value for computation of the quantum of excise duty payable does not come into conflict with the essential character or nature of the levy. The measure is the value and value is related to price. The price charged at the stage of clearance, in addition to manufacturing cost and manufacturing profit, can include certain value additions and inclusions which enrich the value of the product to make it suitable for sale or to facilitate such sale. At this stage, impost has nothing to do with the sale. The impost is on manufacture. But it is the value upto the stage of the first sale that is taken as the measure . Doing so does not introduce any inconsistency between the nature and character of the levy and the measure adopted.

After extracting paragraphs 48 & 50 of the apex court decision in Bombay Tyre International Ltd. (supra) laying down the deductions that are available under the various heads from the sale price, the Constitution Bench held that it is in agreement with the view taken therein and which view is consistent with what was held by the Federal Court and the Privy Council; that the excise duty can be levied only on the manufacturing cost plus the manufacturing profit only .

Referring to the amendment made in section 3 of the CEA, 1944 by the Finance Act, 2000 by substitution of the words 'a duty of excise on all excisable goods' by the words 'a duty of excise to be called the Central Value Added Tax (CENVAT) on all excisable goods", the Bench observed –

"…The amendment of Section 3 to the Act not only incorporates the essentials of a changed concept of charging of tax on additions to the value of goods and services at each stage of production but also engrafts in the statute what was judicially held to be permissible additions to the manufacturing cost and manufacturing profit in Bombay Tyre International Ltd. (supra). This fundamental change by introduction of the concept underlying value-added taxation in the provisions of Section 3 really find reflection in the definition of 'transaction value' as defined by Section 4(3)(d) of the Act besides incorporating what was explicitly held to be permissible in Bombay Tyre International Ltd. (supra). Section 4(3)(d), thus, defines 'transaction value' by specifically including all value additions made to the manufactured article prior to its clearance, as permissible additions to be price charged for purpose of the levy."

The Bench then adverted to the apex court decision in Acer India Ltd. (supra) wherein the facts were that the Revenue had sought to take into account the value of the computer software for the purposes of determination of 'transaction value' with regard to computer and the court had negatived the stand of the Revenue by taking the view that when software as a separate item was not dutiable, its inclusion in the hard-disk of the computer cannot alter the duty liability of the software so as to permit the addition of the price/value of the software for the purpose of levy of duty.

Noting that the observations made in paragraph 84 of the said decision to the effect that "transaction value" defined in section 4(3)(d) of the Act will be subject to the charging provisions contained in section 3 of Act would have to be viewed in the context of the situation where an addition of the value of a non-dutiable item was sought to be made to the value of a dutiable item for the purpose of determination of the transaction value of the composite item, the Constitution Bench held that it is in this limited context in which the subservience of section 4(3)(d) to section 3 was expressed and had to be understood.

Concluding that the views expressed in paragraph 84 of Acer India (supra) are not in conflict with the decision in Bombay Tyre International , and the views expressed in Bombay Tyre International is the correct exposition of the law, the Constitution Bench answered the reference thus –

++ The measure of the levy contemplated in Section 4 of the Act will not be controlled by the nature of the levy. So long a reasonable nexus is discernible between the measure and the nature of the levy, both Section 3 and 4 would operate in their respective fields.

++ "Transaction value" as defined in Section 4(3)(d) brought into force by the Amendment Act, 2000, statutorily engrafts the additions to the 'normal price' under the old Section 4 as held to be permissible in Bombay Tyre International Ltd. (supra) besides giving effect to the changed description of the levy of excise introduced in Section 3 of the Act by the Amendment of 2000.

++ There is no discernible difference in the statutory concept of 'transaction value' and the judicially evolved meaning of 'normal price'.

(See 2018-TIOL-181-SC-CX-CB)