Holding

Damage discounts are not deductible, whereas bank charges are deductible from the assessable value of excisable goods.

Summary

Vikram Detergent Ltd and Vikram India Ltd, engaged in packing detergent powder received from manufacturers, claimed deductions for damage discounts and bank charges while computing the assessable value of the goods under Section 4 of the Central Excise and Salt Act, 1944. The Customs, Excise and Gold (Control) Appellate Tribunal allowed both deductions, prompting appeals to the Supreme Court. The Court held that a damage discount is merely compensation for goods damaged after removal from the factory and therefore cannot be treated as a trade discount for valuation purposes; consequently, it is not deductible. In contrast, bank charges incurred as post‑clearing expenses are excluded from the price of the goods at the time of removal and are deductible from the assessable value. The Court allowed the appeals in part, disallowing the damage‑discount deduction while upholding the deduction of bank charges, and made no order as to costs.

Issues considered

The applicability of damage discount as a deductible trade discount under Section 4(4)(d)(ii) of the Central Excise and Salt Act, 1944.
The eligibility of bank charges on outstation cheques to be deducted from the assessable value of excisable goods.
The proper interpretation of "normal price" and "trade discount" for valuation under Section 4.

Legislation cited

Central Excise and Salt Act, 1944s. 4(1), s. 4(2), s. 4(4)(d)(ii)

Subjects

Excise dutyAssessable valueDamage discountBank chargesTrade discountSection 4Central Excise ActValuationDeductionPost‑clearing expenses

Judgment

A COMMISSIONER OF CENTRAL EXCISE, NEW DELHI
v.
VIKRAM DETERGENT LTD.

JANUARY 16, 2001

B [S.P. BHARUCHA, DORAISWAMY RAJU AND RUMA PAL, JJ.)

Excise Law:

Central Excises and Salt Act, 1944:
c
Section 4(2f-Assessable value of goods-Bank charges and aunfi:ige
discount-Deductibility of-Assessee engaged in packing of detergent powder
received from manufacturer-After packing, goods were sold to wholesale
buyers known as Redistribution Stockists-Assessee claimed deduction of
damage. discount and bank charges on outstanding cheques from the price
D charged in arriving at the assessable value of the good~-Tribunal allowed
the deduction-Validity of-Held: Dam11ge discount is to compensate the·
buyer and, therefore, cannot be allowed as deduction-However, bank charges
being in the nature of post clearing expenses are excludible from the price
of goods while calculating the assessable value of goods.
E
Words and Phrases:

"Damage discount"-Meaning of

The respondent was engaged in the packing of detergent powder received
F by it from the manufacturer. After the goods were packed, they were cleared
from the factory by the manufacturer and sold through its clearing and
forwarding agents from their depots all over the country to wholesale buyers
who were known as Redistribution Stockists. The respondent elaimed
deduction on account of damage discount and bank charges on outstation
G cheques from the price charged in arriving at the assessable value of the
goods for the purpose of excises duty under Section 4 of the Central Excise
and Salt Act, 1944. The Customs, Excise and Gold (Control) Appellate
Tribunal allowed the deduction. Hence this appeal.

Allowing the appeal, the Court
H 392
C.C.E. v VIKRAM DETERGENT LTD. 393
l-IELD: I. The "normal price" in this case, would have to be determined A
with reference to the time and place of removal of the goods from the
respondent's factory. Since the price was fixed with reference to the sale at
the depots to the Redistribution Stockists, clearly in terms of Section 4(2)
of the Central Excises and Salt Act, 1944, the respondent would be entitled
to deduction of the cost of transportation from the factory to the selling B
depots. 1396-F-G; 394-CI

Union of India v. Bombay Tyre International Ltd., 119841 1 SCC 467;
AssiJtant Collector Central Excise v. Madras Rubber Factory Ltd., 119861
Supp. SCC 751; Govemment of l11dia v. Madras Rubber Factory Ltd., 119951
4 SCC 349 and CC£, Meerut v. Swya Roshni Ltd., (2000) 122 ELT 3 (SC), C
retied on.

2. 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 D
admittedly on account of damages suffered by goods after removal from the
factory. 1397-DI

3. The bank charges being in the nature of post clearing expenses are
deductible while calculating the assessable. value of the goods. Therefore,
bank charges included in the price on account of clearance of outstation E
~

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. 1397-G; 398-BI

Assistant Collector of Central fa·cise v. Madras Rubber factory Ltd.,
119861 Supp. SCC 751; Shriram Fer1tlisers & Chemicals v. Union of India, p
119971 96 ELT 12 (SC) and Government of India v. Madras Rubber Factory
Ltd.. 119951 4 sec 349, relied on.

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 2579 of
2000.

From the Final Order No. 1333/99-A, dated 17 .09 .1999 in Appeal No. El
G
-" 2776/98-A passed by the Customs, Excise and Gold (Control) Appellate
Tribunal, New Delhi

With

C.A. No. 3160 of2000. H
394 SUPREME COURT REPORTS [2001 J 1s.c.rc
A Soli J. Sorabjee Attorney General, Harish N. Salve Solicior General, Rajiv
Nanda, Ms. Nisha Bagchi, Dileep Tandon, Ms. Smita Inna, B.K. Prasad, P.
Parmeswaran, S. Ganesh, Ravinder Narain and Vikram Singh for J.B.D. & Co.
for the appearing parties.

The Judgment of the Court was delivered by
B
RUMA PAL, J. 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
C under Section 4 of the Central Excise and Salt Act, 1944.

Civil Appeal No. 2579 of 2000

In this appeal, the respondent, Mis. Vikram Detergent Ltd. is engaged
in the packing of detergent powder received by it from Mis Hindustan Lever
D 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.

E Civil Appeal No. 3160 of 2000

Mis. lPF Vikram India Ltd., the respondent in this appeal produces
detergent under agreement with Mis. fndexport Ltd. (IEL) and Stephan
Chemicals Ltd. (SCL) under the brand name 'Wheel' The respondent
despatches the goods manufactured by it to the destinations specified by
F !EL/SCL. According to this respondent, !EL and SE.L 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.
G
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.
ft 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
H Commissioner disallowed the respondent's claim but the Commissioner allowed
C.C.E. v. VIKRAM DETERGENT LTD. [RUMA PAL .1.] 395
the respondent's appeal. The Tribunal affirmed the Commissioner's decision. A
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) 77 EL T 433. The respondent challenged the decision
before the Tribunal. The Tribunal allowed the appeal. Both the orders of the B
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.

According to the appellant, the discount on the damag·ed goods could C
not be known at the time of their removal form 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 D
Act.

It was submitted by the respondents that deduction on account of
damages represented discounts allowed to the wholesellers 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
E
charges, according to the respondents were post manufacturing expenses and
had been correctly held to be deductible from the assessable value of the
goods.

The issue of value depends on the construction of Section 4 of the F
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 G
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 H
396 SUPREME COURT REl'ORIS [200 I] I S.C.R.

A place of removal, wliere the buyer is not a related person
and the price is the sole consideration for the sale.

xxx xxx xxx
(2) Where, in relation to any excisable goods the price thereof for
B 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.

xxx xxx
c xxx

(4) For the purpose of this section,-

xxx xxx xxx xxx
(d) "value", in relation to any excisable goods,-
D 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
E 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.''

The ''normal price" in this case, would have to be determined with
F 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
G held in Union of India and Others v. Bombay Tyre International Ltd. and J>.
Others, [1984] I SCC 467= 1984 17 EL T 329 SC as well as Assistant Collector
of Central Excise and Others v. Madras Rubber Factory ltd, [1986] Supp.
SCC 751, as well as Gorernment of India v. Madra~'factory lid.. [ 1995] 4 SCC
349, 359. These decisions also held that the cost of transportation would
include cost of insurance on the freight for transportation of the goods from
H the' factory gate to the place or places of delivery but would not include
C.C.E. v. VIKRAM DETERGENT LTD. [RUMA PAL. J.] 397
compensation for "defective goods. The position was further clarified in A
"'lC Collector a/Central Excise, Meerut v. Surya Roshni Ltd., (2000) 122 ELT 3
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; B
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."

The respondents sought to distinguished the decision in SlllJ'a Roshni
case (supra) by contending that the claim for deduction on account of damaged C
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.

The object of "damage discount" is to· compensate the buyer for the
damaged ·goods and logically, compensation for damaged goods could not D
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 E
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 F
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.

On the question of bank charges, however we are of the view that bank G
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
Fertilisers & Chemicals v. Union of India, (1997) 96 ELT 12 SC and
Government of India and Others v. Madras Rubber Factory ltd. and Others,
[1995) 4 SCC 349, this Court has held that interest on receivables earned on H
+
398 SUPREME COURT REPORTS (2001) l S.C.R.

A 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 removai and are as such '
B excludible from the price while calculating the assessable value of the goods.
The Tribunal had, as such, correctly aliowed this deduction.

Jn 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
C are concerned. There will be no order as to costs.

v.s.s. Appeals allowed.