Holding

Only trade discounts known prior to removal of goods and expenses that contribute to value up to the date of sale are deductible; consequently, the Court allowed the prompt‑payment discount, interest on finished goods up to the factory gate and deduction of excise duty on processed tyre cord, and disallowed all other claimed deductions, while prescribing that permissible deductions be subtracted from the cum‑duty price before calculating assessable value.

Summary

Madras Rubber Factory Ltd. (MRF) claimed a series of post‑manufacturing deductions – including TAC/Warranty discount, product discounts, interest on stock and receivables, overriding commission, distribution costs, government price differentials, secondary packaging charges and excise duty on processed tyre cord – to reduce the assessable value of its tyres under Section 4 of the Central Excise and Salt Act, 1944. The Union of India appealed against High Court orders that had allowed many of these deductions. The Supreme Court examined whether each claim satisfied the requirement that a discount be a trade discount known prior to removal of the goods and whether the expenses contributed to the value up to the date of sale. It held that only the prompt‑payment discount, interest on finished goods up to the factory gate, and the deduction for excise duty on processed tyre cord were permissible, while all other claimed deductions were disallowed. The Court also clarified that when the selling price is a cum‑duty price, permissible deductions must be subtracted first before computing the assessable value, not the excise duty itself. Consequently, the Court directed the assessing authorities to recompute the assessable value accordingly and to file fresh price lists.

Issues considered

Whether the TAC/Warranty discount is a permissible trade discount under s.4(4)(d)(ii) of the Central Excise and Salt Act
Whether prompt‑payment, year‑ending and campaign discounts qualify as trade discounts deductible under the Act
Whether interest on finished goods and interest on receivables can be deducted from the assessable value
Whether the overriding commission paid to Hindustan Petroleum Corporation is deductible
Whether cost of distribution incurred at duty‑paid sales depots is deductible
Whether a lower price to Government departments constitutes a deductible discount
Whether secondary packaging costs for tread rubber are deductible
Whether excise duty paid on processed tyre cord is deductible under s.4(4)(d)(ii)
Method of computing assessable value when the selling price is a cum‑duty price – order of deductions

Legislation cited

Central Excise and Salt Act, 1944s. 4, s. 4(4)(d)(i), s. 4(4)(d)(ii)
Central Excise Rules, 1944s. Rule 96
Central Excise (Valuation) Rules, 1975s. Rule 4

Subjects

excise dutyassessable valuetrade discountTAC warranty discountpost‑manufacturing expensessecondary packagingcum‑duty priceCentral Excise Actdeductions

Judgment

ASSISTANT COLLECTOR OF
A CENTRAL EXCISE & OTIIERS ETC.
v.
MADRAS RUBBER FACTORY LTD.

DECEMBER 20, 1986
13
[P.N. BHAGWATI, CJ AND V. KHALID, J.]

Central Excise and Salt Act, 1944: Section 4; Central Excise Rules,
1944: Rule 96; Central Excise (Valuation) Rules, 1975: Ru/e4.

Excise duty-Valuation of.excisable goods-'Assessable Value'- ~
C Determination of-TAC/Warranty, product discount, overriding com-
mission, duty paid on processed tyre cord, secondary packaging cost,
interest on goods after removal from factory gate till date of sale, interest -f'
on receivables, cost of distribution at duty paid sales depots-Deduction
of-Whether permissible and valid.
D
Lower price for Government Departments-Wh~t~er normal
price.

Computation of assessable value in a cum-duty price at factory
gate-Permissible deductions should first be deducted.
E
In Union of India v. Bombay Tyres International Ltd., [1984] I
SCR 347, this Court held that under s.4 of the Central Excise and Sah
Act, 1944, only those expenses which, were incurred on account of
factors contribnting to the product's value upto the date of sale or the
date of delivery at the factory gate were liable to be included in the
F assessable value. On November 14/15, 1983 the Court made a clarificat- . ...,

ory order wherein it was stated that discounts allowe«! :u the trade (by
whatever name called) should be allowed to be deducted from the sale
price having regard to the nature of the goods, if established under
agreements or under terms of sale or by established practice, and that
such allowance and the nature of discount should be known at or prior
G to the removal of the goods and should not be disallowed only becallSe
they were not payable at the time of each invoice or deducted from the
invoice price.

The respondent-Rubber Factory claimed various deductions of !
the nature of post-manufacturing expenses for determining the assess-
H able value of their products under s.4 of the Act which were disallowed

846
A.C.C.E. v. MADRAS RUBBER FACTORY 847

by the Excise authorities. Its writ petitions were, however, allowed by
the High Court. A

In appeals by the Union of India for setting aside the High Court
judgment it was contended for the respondent: (a) that the TAC/
Warranty discount, which was sought to be deducted for determining
• the assessable value, ·satisfied all the criteria of a trade discount B
stipulated in the clarificatory order; (b) that the claim for deduction of
product discounts-prompt payment discount, year-ending discount
and campaign discount-was justified on the same reasoning; (c) that
the interest on finished goods from the date the stocks were cleared till
the date of sale was a proper deduction for determination of the assess·
able value; (d) that the claim for deduction or interest on rec:eivables
(sundry debtors for sales) was justified on the ground that this cost was c
inbuilt in the price and was incurred on account of the time factor
between the delivery ·of goods lmd realisation or moneys; (e) that the
overriding commission allowed to the Hindustan Petroleum Corpora•
lion for exclusive sale of company's products through their dealer net
work was also of the natore of a discount; (f) that the cost of distribution D
at the duty paid sales depot was a proper deduction; (g) that the differ·
ence between the lower price at which the product was sold to the
Government and the price charged from brdinary dealer was of the
natore of a discount; (h) that the claim for deduction of special secon-
dary packaging charges squarely falls within s.4(4)(d)(i) of the Act, and
(i) that the company was entitled to the deduction of excise duty paid on E
processed tyre cord under s.4(4)(d)(ii).

The respondents also disputed the method of computation of
'assessable value' in a cum-dtity price at a factory gate sale and con-
-... r tended that such value was to be arrived at by first deducting the
predetermined excise duty added to the factory price and only there· F
after the permissible deductions were to be deducted.

Disposing of the appeals, the Court,

HELD: I.I The respondent company is not eE1titled to the deduc•
lion of TAC/Warranty discount for determining assessable ~aloe of G
tyres since it does not come within s.4(4)(d)(ii) of the Central Excise and
Salt Act, 1944. [8568, 857A, 8558]

1.2 Even though giving of TAC/Warranty is established by
practice for the wholesale trade or capable of bein1~ decided, what is
really relevant is the natore of the transaction. It is not a di!lcount on the H
!
848 SUPREME COURT REPORTS [1987] 1 S.C.R.

tyres already sold, but relate to the goods which are being subsequently
A sold to the same customers. It is in the nature of a benefit given to the
customers by way of compens~tion for the loss suffered hy them in the
previous sale. [856B]
i
I.3 A trade discount of any nature could be allowed to be de-
B ducted provided it is known ~t or prior to the removal of the goods. In
the instant case, this condition precedent is not satisfied as the commit-
tee decided the claim for TAC/Warranty subsequent to the removal of
the tyre. [856C] ;

1.4 The analogy of Rule 96 of the Central Excioe Rules, 1944 rela-
ting to abatement of duty of defective tyres canuot be made applicable to
C justify the claim for deduction of the TAC/Warranty discount. A tyre
being sold as a "secouds" or "defective" would be sold at a l.!iscount
' '
such disCount being knowu before the goods were removed/cleared,
thereby also satisfying the' pre-condition of s.4(4)(d)(ii) of the Excise
Act. The assessable vciue al.d price list submitted would be one relating
D the 'seconds' tyres. (856G] '

Union of India v. Bombay Tyres lnternationar Ltd., [1984] 17
. EL T 329, referred to. :· ·

2.1 The respondent is entitled to deduction of 'prompt payment
E disc:ount' which is a 'trade discount' given to the dealers by the com·
pany. It is estabHshed under the terms of sale or by established practice
to
and is known at or prior the removal orthe goods. [8S7E-F]
,~~
i J'
2.2 The company is not entitled to deduction of the 'year-i!nding -..,,_ l 'fr.

(~
disc:ount'. The llllow1111tt 'of the dlseouM is not known at or prior to the
F removal of the goods. The calculations are made at the end of the year
and the hl,lnus at the said rate is granted only to a particular class of
dealers. This is computed after taking stock of the accounts between the
company md its dealers. It is not in the nature of a discoont but in the
n8'ure of a bonus or an incentive much .ner the invoice is raised and
the removal of the goods is complete. [857G-858A]
G
2.3 The campaigD bonus cannm be a permitted deduction to the
company. The allowance of the discount is not knowu at or prior to the
removal of the goods. ·The quantum is unascertained at the point of
removal. The disc:ount is not on the wholesale cash price of the articles
sold hot is IMsed on the total sales effected of a particular variety of tyre
H cakulated after the removal. [8580]
A.C.C.E. v. MADRAS RUBBER FACTORY 849

3.1 Expenses incurred on account of several factors which have
contributed to the product's value upto the date of sale, which appa- A
rently would be the date of delivery at the factory gate, are liable to be
included in the - h i e value. [858F]

. 3.2 The company was justified in claiming deduction of interest
on finished goods llllltil they were sold and delivered at the factory gate. B
But interest on finished goods from the date of delivery at the factory
gate up to the date of delivery from the sales depot would be an expense
~ ~. incurred after the date of removal from the factory gate and it would,
therefore, not be liable to be included since it would add to the value of
the goods after the date of removal from the factory gate. [858G-H]
--y· c
Union of India v. Bombay Tyres International Ltd., [1984] I SCR
347, referred to.

4. The interest cost and expenses on sundry debtors or interest on
receivables is an expense subsequent to the date of sale and removal or
delivery of goods and, therefore, the company would not be eligible to D
claim deduction on this account. [8S9H]

-+. 5. The overriding commission paid by the company to the
· -Hindustan Petroleum Corporation for sale of their products exclusively
through HPC dealer network is not deductible. It was agreed to in
consideration of the Corporation not agreeing to enter upon agreement E
with any other tyre manufacturing company vis-a-vis by reason of the
respondent undm1aking not to enter upon any agreement with any
r~ other oil company. It is a compensation granted for the sale ol com-
pany's products through HPC dealers and is a commission for services
.... rendered by the agent. It is not a discount known at or prior to the
...... , removal of the goods. [8S9A-C] F
I

6. The cost of distribution incurred at the duty paid sales depots
is not to be included in the -..able value in case the wholesale dealers
take delivery of the goods from outside sucli godown. The wholesale
dealers having taken delivery of the goods manufactured by the com-
pany and there being a removal ol the goods from the factory gate, the G
cost of distribution at duty paid sales depots cannot be taken into
account for the purpose of determining the -..able value ol the
goods. [859H-860A]

Union of India & Ors. v. Duphar lnterfram Ltd., [1984] ECR
1443, referred to. H
850 SUPREME COURT REPORTS (1987] 1 S.C.R.

A 7. Merely because the product is sold at a lower price to the
Government it cannot be said that the difference in price with reference
· to an ordinary dealer and the Government is a discount to the Govern-
ment. The position that there can he different price lists of articles of
similar description sold to different classes of dealen or different clas-
ses of buyers in wholesale is specifically recognised under s.4(1)(a), "' ..
B proviso (i) of the Act. The lower price for the Government constitotes a
normal price for it as a class of buyer and no deduction on this bead is
liable to the company for the purpose of determination of the assessable
value of the article. [860D, C, El

8.1 Section 4(4)(d)(i) of the Act read with the Explanation thereto
C makes it apparent that the 'secondary packaging' done for the purpose
of facilitating transport and smooth transit of the goods to he delivered
to the buyer in the wholesale trade cannot he included in tbe value for
the purpose of assessment of excise duty. If a packaging is not necessary
for the sale of the product in the wholesale market at the factory gate,
the same cannot he included in the value for the purpose of a.<isessment
D ofexcise duty. [860FG]

8.2 In the instant case, the secondary packaging for tread rubber
consists of cardboard cartons and wooden cases. This secondary pack-
ing is not employed merely for tbe purpose of facilitating transport ot
smooth transit but is necessary for selling tbe tread rubber in the
E wholesale trade. The cost of these cardboard cartons and wooden cases
or any other special secondary charges incurred by tbe company on
tread rubber coold not, therefore, he excluded from its assessable
value. [861A, D, E-F]

Union of India & Ors. v. Godfrey Philips India Ltd., (1985] 22
F ELT 306 and Bombay Tyres International Ltd. v. Union of India &
Ors., Bombay High Court M.P. No. 1534of1?79decided on January 7,
1986, referred to.

9. The company is eligible for deduction from selliog price of tyre
of excise duty paid on processed tyre cord. This is in accord with
G s.4(4)(d)(ii) ofnew s.4 ofthe Act. [862F-G]

10. l The assessment of excise duty both in relation to s.4 and in
relation to the Valuation Rules is now subject to tbe defioition contained
in s.4(4)(d) ofthe Act. The 'value' u defined thereunder is to he arrived
at after the cost of packaging of a dnrable natore or a returnable nature
H as also amounts of duty or excise, sales tax and other taxes and trade
A.C.C.E. v. MADRAS RUBBER FACTORY [BHAGWATI, CJ.] 851

discount atlowed in accordance with the normal practice of wholesllle
A
trade is determlned. It is implicit that no excise duty is payable on an
element of excise duty in the price. The value as contemplated under s.4
cannot include a component of excise duty. [863AB)

10.2 The aggregate of the assessable value, the permissible
deduction and the excise duty is equal to the selling price (cum-duty B
paid). The excise duty is only known as a ratio of the assessable value
when an ad valorem duty is included in the cum-duty paid selling price.
The quantum of excise duty cannot be pre-deducted or pre-determined
till the assessable value is known. It is only the permissible deductions in
concrete monetary terms and amount which are known. The cum-duty
paid sale price being available for computation and the value of deduc· C
·-oy tion pennltted being also known, the assessable value and the excise
duty as a ratio of the assessable value can be only found by first deduct·
ing the permissible deductions from the cum-duty paid selling price and
thereafter computing the value by dividing the difference by (1 +rate of
excise duty). This method has both a legal and mathematical basis. To
reverse this sequence is to mis-interpret the scheme and the mode of o
levy of excise duty on the assessable value. [864E-G, 865B, 865G)

10.3 Where the factory price is not a cum-duty price, the first
--~ step in arriving at the aSsessable value is to deduct the permissible
deductions and thereafter to compute the excise on an ad valorem basis
by applying the tariff rate to the assessable value, [865D) E

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 3195
of 1979 etc.

From the Judgment and Order dated 20th June, 1979 of the Kerala
High Court in Writ Appeal No. 302 of 1978. F

F.S. Nariman, M. Chandrasekharan, K.R. Nambiar, C.V.
Subba Rao, Ms. A. Subhashini, A. K. Ganguli, Mrs. R. Rangaswamy,
Hemani Sharma, K. Swamy and Ms. S. Relan for the appearing
parties.
G
The Judgment of the Court was delivered by

BHAGWATI CJ. l. The above cases are involving a company
known as Madras Rubber Factory Ltd. (popularly known as MRF
Ltd.) MRF has four factories; Kottayam (Kerala), Madras (Tamil
Nadu), Arkonam (Tamil Nadu) and Goa (Urtion Territory) engaged in H
852 SUPREME COURT REPORTS [1987] I S.C.R.

the manufacture of automotive tyres, tubes and other rubber factory ~...,
A products. Each of these factories are under jurisdiction of different
Assistant Collectors. The four proceedings arising for our consideration
are as under:

(i) Civil Appeal No. 3195 of 1979 is an appeal by certificate filed by
B the Union of India through the Assistant Collector of Central ~
Excise, Kottayam against \he Judgment dated 20th June 1979 of
the Division Bench of the High Court of Kerala from Writ
Appeal No. 302 of 1978 allowing post manufacturing expenses
under the new Section 4 of the Excise Act. This relates to the
Kottayam factory.

c (ii) Civil Appeals Nos. 4731-32 of 1984 are appeals filed by Union
·of India through the Superintendent of Central Excise,
+
Kottayam against the Judgment dated !st April 1976 of the Divi-
sion Bench of the High Court of Kerala allowing post manu-
facturing expenses under the old Section 4 of the Excise Act.
D
(iii) SLP (Civil) No. 10108 of 1980 is another appeal of the
blnion of India against the Judgment of the Additional Judi-
cial Commissioner, Goa, Daman and Diu allowing post manu-
facturing expenses undt)\ the old Section 4 of the Excise Act in .,.+- -
respect of the factory at Goa. In respect of new Section 4, the
E Union of India and MRF were agreed that the decision in Writ
Appeal No. 302 of 1978 being the subject matter of Civil Appeal
3195 of 1979 would be applicable to the factory at Goa.

F
(iv) Civil Appeal No. 793 of 1981 is MRF's Appeal under Sec-
tion 35L of the Central Excise and Salt Act (as amended)'against
the order and decision dated Isl February 1984 of the Tribunal
(€EGAT) deciding that the sale of tyres and other rubber pro-
f ·
ducts through their 42 Depots throughout India were not retail
sales but were in the nature of wholesale sales and MRF was not
entitled to deductions under Rule 6A of the Central Excise
(Valuation) Rules, !9751hereinafter referred to astiiz "V&lua-
G lion Rules").

2. These proceedings are now arising for our consideration after f-
the pronouncement of the Judgment by this Court in the case of Unicu
of India & Others v. Bombay Tyres International Ltd., [ 1983] Vol. 1-l
Excise Law· Times 1896) decided on the 7th October 1983 and the
H clarificatol'}'. order passed by this Court in the same case of Union of
A.C.C.E. v. MADRAS RUBBER FACTORY [BHAGWATI, CJ:] 853

India & Others v. Bombay Tyres International Ltd., reported in 1984 A
ELT 329. This clarification was given by the Supreme Court on 14th
and 15th November 1983. Pursuant to hearings held in this Court in
several cases relating to post-manufacturing expenses and after the
latter clarificatory order in the case of Union of India & Others v.
Bombay Tyres International Ltd. (supra), the Tribunal (CEGAT)
decided the Review Notice and set aside the order of the Appellate B
Collector on 1st February 1984 and on 9th February 1984 the Civil
Appeal No. 793 of 1984 was admitted. Format orders were passed by
this Court in the pending appeals relating to post-manufacturing ex-
penses. Even in the present matters format orders were passed on or
around 3rd May, 1984. Format orders were also passed in the pending
Writ Appeal No. 590 of 1979 pending before the High Court at
Madras. In accordance with the format orders and within the time- C
frame stipulated, amendments to price lists were to be filed by MRF
Ltd. The present Appeals are now to consider the various deductions
claimed by MRF Ltd. and/or disallowed and/or not allowed by the
Assistant Collector, or allowed by the Assistant Collector, in the vari-
ous jurisdictions qua the factories of MRF Ltd. in the cross Appeals of D
the Union of India and the MRF Ltd.

3. For the sake of convenience, the deductions arising for con-
sideration of this Court can be summarised as under:-
(i) TAC/Warranty discount
E
(ii)° Product discounts

(iii) Interest on finished goods and stocks carried by the manu-
facturer after clearance

(iv) Over-riding commission to Hindustan Petroleum Cor- F
poration

(v) Cost of distribution incurred at duty paid Sales Depots

(vi) Iriterest on receivables

\vii) 1% turnover discount allowed to RCS Dealers

(viii) Secondary packing cost on tread rubber

(ix) Discount to Government and other Departments
I H
854 SUPREME COURT REPORTS [1987] 1 S.C.R.

4. The Appeals further also raise the issue of whether the price
A to the Defence Department Ex-factory gate (ex-factory) is to be con-
sidered as the wholesale cash price under old Section 4 as this was
disallowed by the Assistant Collector, and further the issue as to the
method of computation of assessable value where the selling price is a
cum-duty price. This issue involves the consideration as to how excise
B duty has to be deducted, whether after deducting permissible deduc-
tions or otherwise. We propose to deal with the issues as follows. For
the purpose of this Judgment we are not repeating and setting out the
text of the un-amended Section 4 and the amended Section 4 as the
same are extensively quoted in our Judgment in Union of India v.
Bombay Tyres International Ltd., (1983 ELT 1896). Recapitulating
our Judgment in Union of India & Others v. Bombay Tyres Interna-
C tional Ltd. (supra) we held that:

"broadly speaking both the old s.4(a) and the new 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
D removal, namely, the factory gate. Where the price con-
templated under the old s.4(a) or under the new s.4(1) (a)
is not ascertainable, the price is determined under the old
s.4(b) or the new s.4(1)(b). Now, the price of an article is
related to its value (using this term in a general sense), and
into that value are poured several components, including
E
those which have enriched its value and given to the article
its marketability in the trade. Therefore, the expenses
incurred on account of the several factors which have con-
tributed to its value upto the date of sale, which appa-
rently would be the date of delivery, are liable to be
included. Consequently, where the sale is effected at the
F factory gate, expenses incurred by the assessee upto 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 ser-
vices after delivery to the buyer, namely after-sales service
and marketing and selling organisation expenses including
advertisement expenses cannot be deducted. It will be
G
noted that advertisement expenses, marketing and selling
organisation expenses and after-sales service promote the
marketability of the article and enter its value in the trade.
Where the sale in the course of wholesale trade is effected
by the assessee through its sales organisation at a place or
H places outside the factory gate, the expenses incurred by
A.C.C.E. v. MADRAS RUBBER FACTORY [BHAGWATI, CJ.] 855

the assessee upto the date of delivery under the aforesaid
heads cannot, on the same grounds, be deducted. But the A
assessee will be entitled to a deduction on account of the
cost of transportation of the excisable article from the
factory gate to the place or places where it is sold. The cost
of transportation will include the cost of insurance on the
freight for transportation of the goods from the factory gate 8
to the place or places of delivery."

5. In the clarificatory order in Union of India & Ors. v. Bombay
Tyres International Ltd., reported in 1984 Vol. 17 ELT 329 we clarified
that discounts allowed in the trade (by whatever name called) should
be allowed to be deducted from the sale price having regard to the
nature of the goods, if established under agreements or under terms of C
sale or by established practice. The allowance and the nature of dis-
count should be known at or prior to the removal of the goods and
shall not be disallowed only because they are not payable at the time of
each invoice ,Jr deducted from the invoice price.
D
6. In relation to the first head of deduction, namely TAC/
Warranty discount, the petitioners contend that deduction on account
of TAC/Warranty discount ought to be permitted as a deduction for
determining the assessable value. It is submitted by them that this
discount relates to ·the claims of the customers on account of any defect
in the tyre already sold and assessed to duty. Such claims are scruti-
E
nised by a committee of technical personnel of the assessee. The Com-
mittee decid1:s as to what amount of money should be refunded to the
customers on account of the defect in the manufactured tyre already
sold to the customers by which defect the tyre does not get its full life
tenure. Instead of refunding the amount in cash the customers are
permitted to buy a new tyre, the price of which new tyre would be F
reduced by the amount refundable to customers as per decision of
the committee. The petitioners contend that the TAC/Warranty dis-
count satisfied all the criteria of a trade discount stipulated in our·
order dated 14th/ 15th November 1983 in that it is a discount estab-
lished by practice since 1943, it is a discount given to the consumer of a
MRF tyre in respect of a tyre purchased earlier, the factum of allo-
G
wance is known is trade prior to removal, the nature of the discount is
not arbitrary or ad hoc and easily determinable. ··

7. The Revenue disputes this claim on the ground that it does· not
come within Section 4(4)(d)(ii) of the Act since the claim is not in
accordance with the normal practice of the wholesale trade at the time H
856 SUPREME COURT REPORTS [ 1987] I S.C.R.

A of removal of the goods in respect to which the claim is made and also
on the ground that this is not normally claimable as trade discount.

8. We are inclined to accept the contention of the department.
Even though the giving of TAC/Warranty is established by practice or
capable of being decided, what is really relevant is the nature of the
B transaction. The warranty is not a discount on the tyre already sold,
but relate 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.

9. In our order dated 14th/15th November 1983 we have said
C that trade discounts of any nature should be allowed to be deducted
provided, however, the discount is known at or prior to the removal of
the goods. In the present case this condition precedent is not satisfied
as the Committee decides the claim subsequent to the removal of the
tyre.
D
10. The Petitioners have further contended that the Excise Act
and the Rules framed thereunder contemplate such an allowance and
an abatement of duty on defective tyres. Counsel for the Petitioners
has drawn an attention to Rule 96 which reads as follows: ~-

E "Rule 96. Abatement of duty on defective tyres:- If a
manufacturer desires that certain tyres should, in consequ-
ence of damage sustained during the course of manufac-
ture, be assessed on a value less than the standard selling

i
price he shall declare in writing on the application for clear- -
ance of the goods, that such damage has bcu sustained and
F each such tyre shall be clearly legibly embossed or indelibly
stamped with the word "Second", "Clearance" or ·
"Defective".

l l. There is, however, a distinct.ion between a compensation in
the nature of warranty allowance on a defective tyre after it has been
G sold and removed from the factory gate and selling a defective. iyre as
a "seconds" or "defective". In our view the analogy of Rule 96 is not
applicable. A tyre being sold as a "~conds or "defective'.' would be )
sold at a discount, such discount being known before the goods were
removed/cleared, thereby als() satisfying t_he pre-condition ()f section
4(4 )(d)(ii),of the Excise Act. The assessable _value and price list sub-
H milted would be one relating to "seconds" tyres. We, therefore,
A.C.C.E. v. MADRAS RUBBER FACTORY [BHAGWATI. Cl.) 857

disallow the claim in respect of TAC/Warranty discount.
A
12. The next head of deductions arising for our consideration is
in respect of product discounts. This head comprises of 3 tyres of
discounts:

(I) Prompt Payment Discount B

(2) Year Ending Discount

(3) Campaign Discount

13. We deal with each of the heads individually as under:-
c
(i) Under the prompt payment discount scheme MRF in relation
to up-country Non-RCS Bills in the replacement market except
Government and DOS & D accounts, a rate of 0.75% on the total
value of the invoice including sales tax, surcharge, etc. is offered if the
bill is cleared/paid for within 26 days from the date of invoice.'The D
Union of India disputes this claim on the ground that it is limited to
only certain varieties of products a~ explained in the scheme document
and is only for a limited period. We are not inclined to accept the

+ contention of the Union of India in this regard. A prompt payment
discount is a trade discount given to the dealers by MRF. It is es-
tablished under the terms of sale or by established practice and is E
known at or prior to the removal of the goods. It squarely falls within
our order of clarification in the case of Union of India & Ors.
v. Bombay Tyres International Ltd. (supra). The MRF is entitled to
deduction on this account.

(ii) In the Special year-end Bonus to Dealers MRF proposes and F
claims this deduction as a year-end discount. This Bonus of Rs.50 per
tyre is for certain specific tyres and is receivable only on those invoices
where payments are actually receivable within 45 days from the date of
the invoice. Under this scheme a declaration is to be received dealer-
wise and thereafter provision is to be made at the head office of MRF
for the Bonus. The allowance of the discount is not known at or prior G
to the removal of the goods. The calculations are made at the end of
the year and the Bonus at the said rate is granted only to a particular
class of Dealers. This is computed after taking stock of the accounts
between MRF and its dealers. It is not in the nature of a discount but
is in the nature of a Bonus or an incentive much after the invoice is
H
858 SUPREME COURT REPORTS [1987] 1 S.C.R.
A
raised and the removal of the goods is complete. In the circumstances,
we are of the opinion that MRF is not entitled to deduction under this
head.

B (iii) MRF proposed "Superlug Piggy-back campaign Bonus" in
March/ April 1983 for invoices during a particular period whereby
bonus of Rs.50 per tyre for every Superlug tyre and/or any other
particular variety of tyres is given. The bonus was again applicable
only on invoices for which payments were received within 45 days.
Details of bonus earnings per dealer were to be computed after taking
C stock of the accoutns between MRF and its dealers and the bonus
amount was to be credited afterJune 1983 or mid-July 1983. On the
same reasoning as the year-ending discount/bonus scheme, the
campaign bonus cannot be a permitted deduction to MRF. The
allowance of the discount is not known at or prior to the removal of the
goods. The quantum is unascertained at the point of removal. The
D discount is not on the wholesale cash price of the articles sold but
is based on the total sales effected of a particular variety of tyre
calculated after the removal. We accordingly reject this claim of
MRF.

E 14. Interest on finished goods from the date the stocks are
cleared till the date of the sale was disallowed by the Assistant Col-
lector, Kottayam. This head has again been urged for our considera-
tion as a proper deduction for determination of the assessable value.
As quoted in our judgment in Union of India and Ors. v. Bombay
Tyres International Ltd. (supra), we have held that expenses incurred
F on account of several factors which have contributed to its value upto
the date of sale which apparently would be the date of delivery at the
factory gate are liable to be included. The interest on the finished
goods until the goods are sold and delivered at the factory gate would
therefore necessarily, according to the judgment in Bombay Tyres
International case (supra) have to be included but interest on finished
G goods from the date of delivery at the factory gate up to the date of
delivery from the sales depot would be an expense incurred after the
date of removal from the factory gate and it would therefore, accord-
ing to the judgment in Bombay Tyres International case (supra) not be j
liable to be included since it would add to the value of the goods after
the date of removal from the factory gate, We would therefore have to
H allow the claim of MRF Ltd. as above.
A.C.C.E. v. MADRAS RUBBER FACTORY IBHAGWATI, CJ.] 859

15. The next head of deduction relates to over-riding commis-
sion to the Hindustan Petroleum Corporation which was disallowed. A
MRF entered into a contract with Hindustan Petroleum Corporation
Ltd. for sale of their products through HPC dealer network. An over·
riding commission was agreed to, in consideration of HPC not agree-
ing to entering upon agreement with any other tyre manufacturing
company vis·a-vis by reason of MRF undertaking not to enter upon B
any agreement with any other oil company. The discount proposed
was as a percentage of sale effected through the HPC dealers on half
yearly basis. On the face of it, the over-riding comlnission payable to
' HPC is a commission for sales. It is a compensation granted for the
sale of MRF products through HPC dealers and is a commission for
services rendered by the agent. It is not a discount known at or prior to
the removal of the goods and we accordingly reject this claim of MRF C
Ltd.

16. Another head of deduction disallowed to MRF relates to
interest on receivables (sundry debtors for sales). MRF has represen-
ted that this cost is inbuilt in the price and is incurred on account of the D
time factor between the time the goods are delivered and the time the
moneys are realised. The cost is incurred only where credit tenns are
given in case of up-country and other buyers where payment is made
much after the sales are effected. They contend that it is nothing but
an extension of the principle underlying Rule 4 of the Central Excise
(Valuation) Rules. They contend that this is an adjustment in value E
required to be made to take into account and provide for the differ-
ence in the time of delivery and the realisation of the sale value. As
stated in our judgment in Union of India & Ors. v. Bombay Tyres
International Ltd. (supra), it is only those expenses incurred on
account of factors which have contributed to its value upto the date of
sale or the date of delivery which are liable to be included in the F
assessable valµe. The interest cost and expenses on sundry debtors or
interest on receivables is an expense subsequent to the date of sale and
removal or delivery of goods and in our opinion MRF Ltd. would be
eligible to claim deduction on this account.

17. The next head which was urged for our consideration relates G
to the cost of distribution incurred at the duty paid sales depots. In our
judgment in Union of India and Others v. Duphar lnterfram Ltd.
(Civil Appeal No. 569 of 1981) reported in 1984 Excise and Customs
Reporter at page 1443, we have held that the cost of distribution is not
to be included in the assessable value in case the wholesale dealers
take delivery of the goods from outside duty paid godown. The H
860 SUPREME COURT REPORTS [1987] 1 S.C.R.

wholesale dealers having taken delivery of the goods manufactured by
A MRF. Ltd. and there being a removal of the goods from the factory
gate, the cost of distribution at duty paid sales depots cannot be taken
into account for the purpose of determining the assessable value of the
goods.

l3 18. The next head of deduction disallowed to MRF relates to
discount to Government and other Departments. In our view the
Assistant Collector, Goa has rightly rejected the claim of MRF though
the Assistant Collector, Kottayam allowed the claim of MRF. MRF
Ltd. sells its products at a lower price as per contract with the Govern-
ment or its Departments. Separate price lists for the Government and
other Departments were filed by MRF distinct and different from the
c price lists in relation to dealers. The position that different price lists -f
for different classes of dealers or different classes of buyers is specifi-
cally recognised under section 4(1), proviso (i), of the Excise Act.
Different prices can be declared with reference to different classes of
buyers and each price is deemed to be a normal price of such goods. In
D this view of the matter, merely because the product is sold at a lower
price to the Government and its Departments does not enable the
MRF to contend that the difference in price with reference to an
ordinary dealer and the Government is a discount to the Government.
The difference in price is not a discount but constitutes a normal price
for the Government as a class of buyer and no deduction on this head
E is liable to MRF Ltd.

19. The Jlext question which arises for our consideration relates
to special secondary packaging charges for tread rubber. It has been
the contention of the MRF that their case is covered by the judgment
in Union of India & Ors. v. Godfrey Philips India Ltd., reported in
F 1985 Vol. 22 ELT 306. The majority judgment in Godfrey Philips
India Ltd. (Supra) holds that "on a proper construction of Sec.
4(4)(d)(i) of the Act read with the Explanation, the secondary packag-
ing done for the purpose of facilitating transport and smooth transit ·at
the goods to be delivered to the buyer in the wholesale trade cannot be
included in the value for the purpose of assessment of excise duty. If a
G packaging is not necessary for the sale of the product in the wholesale
market at the factory gate, the same cannot be included in the value
for the purpose of assessment of excise duty." It has been broguht to
our notice that in a Judgment delivered by the Bombay High Court in
Misc. Petition No. 1534 of 1979 (Judgment dated 7th January 1986)
Bharucha J. of Bombay High Court in Bombay Tyres International
H Ltd. v. Union of India & Ors., has considered the Judgment in
A.C.C.E. v. MADRAS RUBBER FACTORY (BHAGWATI, CJ.] 861

Godfrey Philips India Ltd. (supra) with specific reference to the ques-
A
tion of secondary packaging for tread rubber. It has been brought to
our notice that such packaging consists of cardboard cartons or
wooden cases. In that case the tread rubber as packed was produced
before Bharucha J. He has described that the tread rubber is a strip of
rubber approximately 6 11 wide and about J" thick which is tightly
+ wound into a roll. Each roll weighs between 15 Kgs and 40 Kgs. The
roll is not held together by any means. The roll is inserted into a loose
B

and open polythene bag. That bag also cannot hold the roll together.
The bag is placed in a cardboard carton or a wooden case. The card-
board carton is held together by rubber bands. The wooden case is
nailed together. Though, it was contended that the cardboard cartons
and wooden cases were in the nature of secondary packaging whose
cost was not includable in the value of tread rubber, Bharucha J. held
c
that a roll of tread rubber cannot be sold without the cardboard carton
or the wooden case. It is further stated that the secondary packing in
which tread rubber is sold is in the course of wholesale trade. The
secondary packing is not employed merely for the purpose of facilitat-
ing transport or smooth transit and is necessary for selling the tread D
rubber in the wholesale trade. Bharucha J. refused to remand the
matter to the authorities as the tread rubber as packed had been pro-
duced before him and he was of the firm view that the· cardboard
· ~- cartons and the wooden cases are not such secondary packing mate-
. rials as can be excluded in computing the assessable value of the
Petitioner's tread rubber. In the circumstances that this very issue has E
been decided on a visual personal inspection of Bharucha J. in the case
of Bombay· Tyres International Ltd. (supra) pronounced after the
decision in Godfrey Philips India Ltd. (supra) we are of the view that
·the cost of cardboard cartons and wooden cases or any other special
secondary packing charges incurred by the MRF on tread rubber
should not be excluded from the assessable value. Tread rubber is a F
product which if even slightly damaged becomes unfit or un-usable.
The vital element "cushion compound" which is applied to the bottom
of the tread rubber and which helps the tread rubber to stick to the
buffed surface of the old tyre which is to be retreaded is very delicate.
A polythene sheet is put over the layer of the compound before the
same is rolled and put into another polythene bag to avoid sticking to G
the outer side of the tread rubber and getting contaminated by dust. It
is stated that such production cannot be marketed without the poly-
thene bags and/or cardboard boxes: These are the findings of the
Assistant Collector, Goa and in the light of the cumulative decisions of
the Assistant Collector. Goa and of the Bombay High Court, we are of
the view that the secondary special packing charges for tread rubber H
862 SUPREME COURT REPORTS [1987] 1 S.C.R.

A cannot be deducted from the assessable value of tread rubber.

20. In relation to the determination of wholesale price of tyres
on the basis of the ex-factory price for Defence supplies, with refer-
ence to the old Section 4 in view of our Judgment in Union of India v.
Bombay Tyres International Ltd. (supra) also reported in [1984] l
ll SCR 347 at 376E, this Court has held that "in the new Section 4 in +
supersession of the old Section -1, no material departure was intended
from the basic scheme for determining value of excisable articles ... It
has been contended by the Union of India that even after our format
orders referred to above, MRF has not submitted any statement of
deductions/amendments in respect of price lists filed nor submitted
C any fresh prices. It claims several deductions on percentage basis by
furnishing calculations vis-a-vis the entire company but did not furnish
item-wise or factory-wise break up of such claims. Having held that
there is no material departure in the basic scheme for determining the
value of excisable articles in the old Section 4 and the new Section 4,
there is nothing in the unamended Section -I to justify an inference that
D the wholesale cash price· of articles of similar description sold cannot
be different for different classes of buyers in wholesale. Different
prices can be normal prices for the purposes of determination of the
assessable value of the article. We accordingly reject the contention of
the MRF. Even though the MRF has not filed a separate price list for
the factory gate clearances to Defence Department under the old Sec-
E tion -1, in view of our now holding that there is no material schematic
difference between old Section -I and new Section -1, we permit MRF
Ltd. to file revised price lists with reference to the class of buyers
namely, Defence on a different basis for a different normal price and
avail of all the necessary reliefs with reference to lower assessable
value, if the same has not already been filed.
F
2 I. In so far as the deductions claimed towards excise duty paid
on processed tyre cord, the contention of the MRF has been upheld by
the Goa Bench in Special Civil Appeal No. 28 of 1983 and the claim
has been allowed to MRF for deduction from selling price of excise
duty on processed tyre cord. This is in accordance with Section 4(-1)
G (d)(ii) of the new Section 4 and we accordingly confirm that MRF is
eligible to this deduction.

22. The last important issue relates to the method of computa-
tion of assessable value in a cum-duty price at a factory gate sale. The
issue is whether excise duty should be first deducted or the permissible
H deduction should be first deducted from the selling price for the re-
A.C.C.E. v. MADRAS RUBBER FACTORY [BHAGWATI, CJ.] 863

k
assessments before the Assistant Collectors. The assessment of excise
duty both in relation to Section 4 and in relation to the Valuation A
Rules is now subject to the definition contained in Section 4(4)(d) of
the Excise Act. The value as defined thereunder is to be arrived at
after the cost of packaging of a durable nature or a returnable nature
as also amounts of duty of excise, sales tax and other taxes and trade
+
discount allowed in accordance with the normal practice of wholesale B
trade is determined. It is thus implicit that no excise duty is payable on
an element of excise duty in the price. The value as contemplated
under Section 4 cannot include a component of excise duty. In tne
r circumstances, where the computation of an assessable value has to be
made from the factory gate s·ale price which is a cum-duty price, the
first question which will have to be addressed is what are the exclu-
~ ers have
sions and permissible deductions from such a sale price. The petition- c
contended that their cum-duty price was arrived at after ,
calculating and adding excise duty payable i.e., before actual duty was
paid. They contend that their price list for several articles is approved
much in advance of the removal from the factory. They contend that
when the assessable value is to be arrived at, the same amount of D
excise duty which was pre-determined and added to the factory price is
naturally to be deducted first and only thereafter the permissible de-
ductions should be deducted to arrive at the value. For the purposes of
~- argument, MRF submitted the following example for consideration:

They suggested that their selling price should be considered E
(cum-duty selling price) as Rs. 3200. They further submitted that the
permissible deductions whether on account of trade discount or on
account of cost of secondary packaging or sales tax or other taxes,
I packaging or sales tax or other _taxes should hypothetically be con-
sidered at Rs.200. The rate of excise duty chargeable is 60% ad va/o-
~ rem for automotive tyres. Assuming for the sake of argument that the
value of the product is actually Rs.2075: In accordance with the provi-
f
sions of Section 4(4)(d) permissible deductions are made. The assess- ·
able value would be Rs.1875 being the difference of Rs.2075 and Rs.200.
The excise duty at the rate of 60% would thereafter be computed on
the sum of Rs. 1875 and would aggregate Rs. 1125. The selling price
which is a cum-duty price would be the sum total of the assessable
G
~ value, the permissible deductions and the excise duty. Putting this as a
mathematical formula the selling price (cum-duty price) is equal to
assessable value plus permissible deductions plus excise duty. Cum,
duty Paid Selling Price =Assessable Value +Excise Duty + Permissi-
ble deductions. Agltin excise guty is computed as a ·ratio of tl)e
assessable value where duty is ad va/orem. For the purposes ·of .ascer- H
864 SUPREME COURT REPORTS (1987] 1 S.C.R.

taining the assessable value, if three of the components name]y, the
A cum-duty selling price, the quantum of permissible deductions and the
rate of excise duty are known, the proper and appropriate method of
determining the assessable value would be the following formula:-

Assessable value=cum-duty selling price-permissible deductions·
B ( 1 +Rate of excise duty)

Thus in the instant case working backward, if the cum-duty sel-
ling price is known to be Rs.3200 and the permissible deductions are
known to be Rs.200 and the rate of excise duty is known to be 60% the "l
assessable value is computed as under:
c Selling price-permissible deductions
= Rs.3200'."C;Rs.200 = Rs.3000

Assessable value is equal to difference in selling price and permissible
deductions divided by 1 plus 60/100 which is equal to 3000/1.6 which
O is equal to Rs.1875.

The excise duty at 60% ad valorem rate would be Rs. 1125 on the
assessable value of Rs. 1875.

E The mathematical formula enumerated above balances. For
example, if the cum-duty paid selling price is equal to Rs.3200, the
assessable value is Rs.1875, excise duty is Rs.1125 and permissible
deductions is Rs.200, the aggregate of the assessable value, the
permissible deductions and the excise duty is equal to the selling price
(cum-duty paid).
F

Any other method of computation of excise duty or assessable
value is erroneous. The Petitioner's basis that the assessable value is to
be arrived at by taking into consideration the same amount of excise
duty which was hypothetically pre-determined and added to the
G factory price and that this element in an attempt to compute the assess-
able value should naturally be deducted first, is putting the cart before
the horse. The excise duty is only known as a ratio of the assessable
value when an ad valorem duty is included in the cum-duty paid selling
price. The quantum of excise duty cannot be pre-deducted or pre-
determined till the assessable value is known. It is only the pcrmissi-
H ble deductions in concrete monetary terms and amount which are
A.C.C.E. v. MADRAS RUBBER FACTORY [BHAGWATI, CJ.) 865

known. The cum-duty paid sale price being available for computation
and a known value of deductions permitted being also known, the A
assessable value and the excise duty as a ratio of the assessable value
can be only decided by first deducting the permissible deductions,
from the cum-duty paid selling price and thereafter computing the
value in accordance with the equation mentioned above. This has both
a legal and a mathematical basis. If the pre-determined amount of B
excise duty as per the illustration given by MRF Ltd. is first deducted,
the equation will not tally. For example, if from a hypothetical cum-
duty price of Rs.150 (comprised of the value of the product at Rs.100
and ad va/orem excise duty.@50% at Rs.50) if the excise duty of Rs.SO
is first deducted and thereafter the permissible deduction of Rs.5 is
deducted, the assessable value arrived at would be Rs.95. The rate of
··-'t excise duty is 50% and the excise duty@50% of the assessable value of
Rs.95 would be Rs.47.50 and not Rs.50 as earlier deducted. There
C

would be a constant difference of Rs.2.50 in the computation. It is,
therefore, an incorrect method of evaluating the assessable value in
instances of cum-duty selling price. This interpretation is borne out by
the definition contained in Section 4(4)(d) of the Excise Act. MRF's D
contention that the excise duty should be deducted first and then the
permissible deductions is incorrect. In ordinary cases where the
factory price is not a cum-duty price, the first step in arriving at the
assessable value is to deduct the permissible deductions and there'after
to compute the excise on an ad va/orem basis. The excise duty cannot
be computed. unless the permissible deductions are first made. The E
assessable value is arrived at only after the permissible deductions are
made. Excise duty is a ratio of the assessable value. Ad valorem exci~e
duty is computed only on assessable value after arriving at such assess-
able value by making proper permissible deductions. Excise duty can-
not be computed without proper determination of the assessable
value, namely assessable value exclusive of permissible deductions. F
Even in the cum-duty sale price, the same principle must be followed
to arrive at the assessable value. To compute an excise duty as a
pre-determined amount without making the permissible deductions
for reducing the cum-duty selling price is a fallacy both legally and
mathematically as demonstrated above. The ad valorem excise duty
can only be computed after redu.cing the assessable value .by permissi- G
ble deductions and then applying the tariff rate to the assessable value.
To reverse this sequence is to mis-interpret the scheme and mode of
levy of excise duty on the assessable value.

23. In t!ie light of our aforesaid discussions and keeping in line
with our previous format orders, we direct the assessing authorities to H
866 SUPREME COURT REPORTS (1987] 1 S.C.R.
·-,j
,
A quantify and re-determine the permissible deductions in accordance
with our present Judgment. The assessee, MRF Ltd. already having
been required to file the permissible deductions/amendments to the
price lists within a period of one month in the last instance in May
1984 is once again required by us to file fresh price lists in the light of
our present Judgment within one month for all the periods under
B consideration. The assessing authorities after hearing the assessee
would quantify the correct assessable value in the light of our Judg-
ment. In making the assessments for each of the periods, the autho-
rities would include the set off 'in respect of further refunds, if any,
allowable on account of fresh deductions permitted and/or already
allowed to the assessee. MRF would be at liberty to obtain suitable
• C directions in the pending Writ Appeal No. 590 of 1979 in the High Court
of Madras in accordance with our Judgment. We leave the parties to
bear their own costs.

ORDER
D In respect of items claimed by the assessee which have been
allowed by us in this judgment or where the allowance by Assistant
. Collector has been upheld the quantum will be adjusted by giving
appr-Jpriate credit in the personal Ledger Accounts.

P.S.S. Appeals dis posed of .

I

\