Holding

Advertising expenses incurred by a manufacturer's customer are includable in the assessable value only when the manufacturer has an enforceable legal right to compel the customer to incur such expenses, and a bona‑fide belief of exemption precludes the operation of the extended limitation period.

Summary

The Commissioner of Central Excise appealed against orders of the Custom, Excise and Gold (Control) Appellate Tribunal (CEGAT) which had held that advertising expenses recovered from dealers could not be added to the assessable value of processed fabrics and beverage bases. The Supreme Court examined whether such sales‑promotion costs should be included in the assessable value and whether the Tribunal correctly applied earlier precedents. It held that advertising expenditure incurred by a manufacturer's customer is includable only when the manufacturer possesses an enforceable legal right to compel the customer to bear such costs, and that a bona‑fide belief of exemption bars the operation of a longer limitation period. The Court also observed that the Tribunal had failed to consider these principles and the honesty of the assessee. Consequently, all the appeals were disposed of and remitted to the respective CEGAT benches for fresh consideration in light of the correct legal position.

Issues considered

Whether advertising expenses recovered from dealers should be included in the assessable value of the goods manufactured.
Whether the manufacturer must have an enforceable legal right over the customer to impose such advertising expenses for inclusion in assessable value.
Whether the Tribunal correctly applied the ratio of Philips India Ltd. v. CCE and Ujagar Prints cases.
Whether the longer limitation period applies when the assessee acts honestly and in bona‑fide belief of exemption.
Whether the creation of merchant manufacturers to camouflage duty avoidance affects the inclusion of advertising expenses.

Legislation cited

Central Excise and Salt Act, 1944s. 4

Subjects

advertising expenseassessable valuecentral exciseexcise dutylimitation periodbona fide beliefenforceable legal rightCEGATremand

Judgment

r'
j

A COMMISSIONER OF CENTRAL EXCISE, SURAT
v.
MIS. SURAT TEXTILE MILLS LTD. AND ORS.

APRIL 26, 2004

B [S. RAJENDRA BABU, DR. AR. LAKSHMANAN AND G.P. MATHUR, JJ.]

Central Excises and Salt Act, 1944-Excise duty-Levy of-Inclusion
of advertisement expenditure if¥:urred by manufacturers' customers in the
assessable value of the goods of the manufacturers-In different appeals
-c CEGAT decided in favour as well as against revenue-On appeal, matters
remitted back to the Tribunal for reconsideration.

In Civil Appeal Nos. 2357-236112002 Excise authorities held that
expenses towards advertisement, which the owners of.the processed fabrics
D incurred, but passed on to the dealers of these goods, were includible in the
assessable value of the processed fabrics. Custom, Excise and Gold (Control)
Appellate Tribunal (CEGAT) allowed the appeal of the assessees holding that
such sales promotion expenses was not includible in the assessable value
relying on Philips v. C.C.E., Pune, (1997) 6 SCC 31 and Mis. Ujagar Prints
and Ors. v. U.O.I. and Ors., (19P9) 3 SCC 531.
E
In Civil Appeal Nos. 13400/1996, 4672/1997 and 4762/1997, the
appellant-Companies were manufacturers of non-alchoholic beverage base.
The beverage base was further sold to their customers who manufactured
finished product i.e. aerated water. Excise authorities levied duty on the
beverage base holding that the cost of advertisement. incurred by the
F manufacturers of finished products was indudible in the assessable value of
the beverage base. CEGAT decided in favour of revenue upholding the view of
Excise authorities. Hence the present appeals.

Disposing of the appeals and remitting them back to CEGAT, the Court
G HELD: Custom, Excise and Gold (Control) Appellate Tribunal failed to
appreciate that in several earlier judgments, it consistently held that the
advertisement expenditure incurred by a manufacturers customer can be added
to the sale price for determining the assess!'ble value, only if the manufacturer
has an enforceable legal right against the customer to insist on the incurring
H 640
C.C.E v. SURAT TEXTILE MILLS LTD. 641
of such advertisement expenses by.the customer. In some cases, CEGAT failed A
to appreciate that the appellants have acted honestly and under bona fide belief
that the Beverage Base were exempted from excise duty. The CEGAT in the
orders impugned in these appeals have also failed to appreciate and follow the
ratio of several judgments of this Court wherein it has been laid down that if
the assessee acts honestly and under the bona fide belief and manufactur~d B
products are exempted from duty, the longer period of limitation is not
attracted. Therefore, these matters require reconsideration by the CEGAT to
arrive at a correct finding on the issues involved. [648-A-D)

Government of India and Ors. v. Madras Rubber Factory Ltd and Ors.,
(1995) 4 SCC 349; Philips India Ltd v. Collector of Central Excise, Pune, C
(1997) 6 SCC 31; Mis. Ujagar Prints and Ors. (lll) v. Union of India and
Ors., [1989) 3 SCC 531; Pepsi Foods Ltd v. CCE, Chandigarh, (l003) 111
ECR 776 (SC) = JT (2003) 9 SC 595; Union of India and Ors. v. Bombay
Tyre International Ltd and Ors., [1984) l SCC 467; Assistant Collector of
CentratExcise and Ors. v. Madras Rubber Factory Ltd etc., [1986) Supp.
SCC 751; Assistant Collector of Central Excise and Ors. v. Madras Rubber D
Factory Ltd, [1989) 3 SCC 238; Collector of Central Excise, Madras v. T.L
Millers Ltd, Madras and T.L Diamond Chain, Madras, [1986) Supp. SCC 361;
Collector of Central Excise, Hyderabad v. Mis. Jayant Oil Mills Pvt. Ltd,
[1989) 3 SCC 343; Cosmic Dye Chemical v. Collector of Central Excise,
Bombay, (1995) 75 ELT 721 (SC) and Amco Batteries Ltd C:ollector ofCentral E
Excise, Bangalore, (2003) 153 ELT 7 (SC), referred to.

CIVIL.APPELLATE JURISDICTION: Civil Appeal No. 2357-2361 of
·2002.

From the Judgment and Order dated 29.3.2001 of the Central Excise, F
Customs and Gold (Control) Appellate Tribunal, West Zonal Bench, Mumbai
in F.O. No. C-1/1064-1068/WZB/200 l in A. No. E/4563-4567 of 1995 SB(WR)

WITH

C.A. Nos. 13400/96, 4672 of 1997~
G
A.K. Ganguli, Joseph Vellapally, Dushyant Dave, Daleep Tandon, Ms.
Nisha Bagehi, K.C. Kaushik, B.K. Prasad, D.N. Mehta, Ms. Suruchii Aggarwal,
U.A. Rana, Arvind Kumar, Sadeep Khare!, P.H. Parekh, Sameer Parekh, S.
Ramakrishnan and Ms. Ranjeet Rohtagi for the appearing parties.
H
642 SUPREME COURT REPORTS (2004] SUPP. I S.C.R.

A The Judgment of the Court was delivered by

DR. AR. LAKSHMANAN,J. In Civil Appeal Nos. 2357-2361/2002 ...

This appeal is filed by the Commissioner of Central Excise, Surat, ~gainst
the final judgment and order dated 29.3.2001 of the Custom, Excise and Gold
B (Control) Appellate Tribunal, West Zonal Bench at Mumbai passed in Order
No. C-I/1064-1068/WZB/2001 in Appeal No. E/4563-4567/95 SB(WR). In.this
case, the Commissioner of Central Excise held that the expenses towards
advertisement which Garden Silk Mills Ltd. and owners of the processed
fabrics incurred, but passed on to the dealers of these goods, were includible
in the assessable value of the processed fabrics. He further held that the
C assessable value of the. second quality fabrics sold by Garden Silk Mills Lta; ·
to Vareli Associates and Garden Associates should be the price at which
these two concerns sold them to their dealers.

The appeals filed by the assessee before the CEGAT were allowed and
D the impugned order of the Commissioner was set aside. Aggrieved by the
sai~ judgment and order of the CEGAT, the Commissioner of Central Excise
filed the above appeals.

According to the appellants, the question which arises for the
determination is as to whether the CEGAT was correct in not including the
E sales promotion expenses, (Advertising expenses) recovered by the
manufacturer from its own dealers in respect of the goods sold t_o them, in
the assessable value of the goods processed and sold by them from their
factory.

A further question also arises for consideration to the effect that as to
F whether the CEGAT was correct in not. appreciating the facts that all Merchant
Manufacturers were created by main Mills i.e., Mis Garden Silk Mills Ltd:, and
were created with a vi«?w to c<Ullouflage and avoid excise duty, as subsequently
most of the (Merchant Manufacturers) were either dissolved or amalgamated
with other companies.

G It is pertinent to notice that the CEGAT, in the instant case, allowed the
appeals of the Mills and Merchant Manufacturers with the contention that
in the case of Philips India Ltd. v. CCE, Pune, (1998) 74) ERC 722 = [1997]
6 SCC 31, this Court held that the expenses incurred by the dealers towards
advertising of a manufactured product should not form part of the assessable
H value of the product. Applying the ratio of this judgment, the expenses
C.C.E v. SURAT TEXTILE MILLS LTD. [LAKSHMANAN, J.] 64 3
incurred by the dealers should not form part of the assessable value. The A
expenses incurred towards advertisement by the owner of the fabrics which
Garden Silk Mills Ltd. processed, would in any case, not form part of the
assessable value of these goods. ·The CEGAT also relied upon the judgment
of this Court in the case of Mis Ujagar Prints and Ors. v. Union of India and
Ors., (l 989) 39 ELT 439 = [1989]3 SCC 531 wherein this Court laid down that B
it is the cost of raw material and the cost incurred by the processor towards
its processing should form the assessable value of the goods.

When the above appeals came up before this Court on 24.2.2003, a
Bench of two Judges of this Court while placing the matter before Hon'ble
the Chief Justice of India for directions, passed the following order: C
"Learned counsel for the appellant has relied upon the judgment of
this Court in the case of Govt. of India and Ors. v. Madras Rubber
Factory Ltd and Ors., reported in [1995] 4 SCC 349 which is a judgment
of a three, Judge Bench, while the Tribunal has relied upon the
judgment of this Court in the case of Philips India Ltd v. Collector D
of Central Excise, Pune, reported in [ 1997] 6 SCC 31. Since there
appears to be some conflict in these - judgments, we think it appropriate
that this matter should be referred to a three Judge Bench. Hence, the
papers be placed before Hon'ble the Chief Justice for directions."

Several other grounds have also been taken by the appellants E
questioning the correctness of the judgment and order of the CEGAT which
is impugned in these appeals.

A counter affidavit was filed by the respondents herein submitting that
the matter is squarely covered by the judgments of this Court in the case of
Mis Philips India Ltd (supra) and in the case of Mis Ujagar Prints (supra) F
as also held in the impugned judgment. It was submitted that the sales
promotion expenditure is not liable to be added in the value of the fabrics and,
therefore, not exigible to excise duty.

Several other factual and legal contentions have also been taken in the G
counter affidavit filed by the respondents.

In Civil Appeal No. 13400/1996

This appeal is filed by M/s Delhi Bottling Co. Pvt. Ltd. questioning the
. correctness of the order dated 9. 7.1996 passed by the CEGAT, New Delhi in H
644 SUPREME COURT REPORTS (2004) SUPP. I S.C.R.

A Appeal No. E/2751184-A arising out of order in Appeal No. 68/84 dated
29. I 0.1984 passed by the Additional Collector of Central Excise, New Delhi.
This matter relates to the inclusion of the amount separately collected by the \
appellant- Delhi Bottling Co. Pvt. Ltd., in short "DBC", by raising subsidiary.
invoices in the name of Cooperative All India Advertisements, from their.
B customers to whom they were supplying the beverage base, while detennining -
the assessable value of such beverage base. The Department had alleged
that the value mentioned in the regular sale invoices as well as the value -
collected separately through subsidiary invoices constitute the value of the
beverage base manufactured by DBC. The DBC was availing of the benefit
of exemption Notification No. 120/75-CE dated 30.4.1975 and had declared the
C value collected through regular. sale invoices only. The Department had.
alleged that the value mentioned in the regular sale invoices as well as_
subsidiary sale invoices constituted the value of the goods and for the
assessment under Notification No. 120175-CE, the full invoice price will be
taken into consideration. According to the appellants, the following substantial
questions of law arise for consideration in this appeal:
D
"(i) Whether the authorities were justified in including the cost incurred
for advertisement of aerated waters in the assessable value_ of the
concentrate required for the manufacture of aerated waters by treating
the cost of the advertisement so incurred as the cost of the
advertisement of the concentrate;
E
(ii) Whether CEGAT was justified in denying the appellant the benefit
of Notification No. 120175-CE when the appellant had opted for the
facility contained therein specifically in respect of items falling under
the erstwhile Item 68 of the Central Excise Tariff as in the case of the
appellant and invoking instead contrary to the law settled by this
F,
Court, the provisions of Section 4 of the Central Excise and Salt Act
for determining the assessable value due to mere suspicion without
any proof that the appellant had not made proper declaration of the
Invoice value in terms of the Notification no. 120/1975 CE ibid;"

Several other factual and legal contentions were taken challenging the
G
legality and correctness of the order passed by the CEGA T.

In Civil Appeal No. 4672/1997

This appeal is tilt:d by Parle (Exports) Pvt. Ltd. Here again, the appellants
H engaged in the manufacture of Non-Alcoholic Beverage Bases (NABBs).
I
C.C.E v. SURAT TEXTILE MILLS LTD. [LAKSHMANAN, J.] 645 .

NABB is sold by the appellants to bottlers who are Franchise holders. The A
Bottlers/Franchise holders manufacture aerated waters under the trade name
of Thums Up, Gold Spot etc. from NABB sold to them by the appellants.
There are 55 such bottlers/franchise holders all over the country. The bottlers/
franchise holders decided that a cooperative and consolidated advertising
campaign sh6uld be organised on an All India basis on their behalf for which B
initially the appellants and subsequently M/s. Advance Advertisement &
Services Pvt. Ltd. were to act as monitoring agencies. The advertisement
campaign was in respect of the finished products, namely, aerated water being
sold under the Trade name of Gold Spot, Thumps Up etc. for which
proportionate contributions were made by the bottlers/franchise holders. A
show cause notice was issued by the Collector of Central Excise, Ahmedabad, C
to the appellants alleging that the amounts of the advertising expenses were
includible in the assessable value of the NABB. The appellants filed their
written explanation· denying the allegation made in the show cause notice.
The Collector, Central Excise, Ahmedabad, by his order dated 29.3.1990
confirmed the demand for duty and also imposed penalty. The appellants
preferred an appeal and the CEGAT by its order dated 18.2.1997 partly allowed D
the appeal of the appellants while holding that the cost of advertisement
expenses in respect of finished products, namely, aerated waters incurred by
the bottlers/franchise holders was liable to be included in the sale price of the
· appellants. The CEGAT also upheld the larger period of limitation in the
appellant's case. E
The present civil appeal was filed by the appellants against the order
of the CEGAT questioning the legality and correctness of the said order.

Before the CEGAT, several judgments were cited by the counsel appearing
on either side. Several legal contentions were also taken by the appellants. F
According to the appellants/assesses, the CEGAT has grossly erred in law
in holding that the amount of advertising expenses incurred by and/or on
behalf of the purchasers of NABB, was liable to be loaded on to the assessable
value of the NABB manufactured by the appellant and that the CEGAT failed
to appreciate that the said advertising expenses were incurred in respect of
aerated waters which were a distinct and different manufactured product as G
compared to the product manufactured by the appellant-Company, i.e., NABB.

It was further submitted that the advertisement expenses were not
incurred for or on behalf of the appellants or on the appellants' product
NABB but in order to advertise the products manufactured by the appellants' H
646 SUPREME COURT REPORTS (2004) SUPP. I S.C.R.

A customers, the bottlers and for and on .their behalf.
In Civil Appeal No. 4762/1997

This appeal is filed by the appellants - Parle International Ltd. against
an Order No. 260/1997-A dated 18.2.1997 of the CEGAT, New Delhi in Appeal
B No. E-1020/90-A. Here again, the appellants are engaged in the manufacture
of non-alcoholic Beverage Bases (NABBs) which is sold by the ·appellants to
bottlers who are franchise ~olders. This case stands on identical footings as
that of Civil Appeal No. 4672/1997. In the present appeal, this Court on
9.2.1998 passed an interim order which re~ds as under:
c "In view of the order of the Customs, Excise and Gold Control Appellate
Tribunal dated 18.2.1997, the Commissioner shall determine .the demand
for duty for the balance period as set out in paragraph 13 of that order
within four weeks from today after notice to both sides. The appellants
shall deposit 50% of the amount so determined and give bank guarantee
for the balance amount to the satisfaction of the Commissioner. In the
D
event of there being any existing deposit or bank guarantee, the credit
for the same shall be taken while furnishing the deposit or bank
guarantee provided the bank guarantee or guarantees are kept alive
till the disposal of the present appeals."

E This interim order will be subject to the final outcome of the judgment
and order that may be passed by the CEGAT on remand by this Court.

It was submitted that the CEGAT upheld and confirmed the said addition
of the advertisement expenses to the appellants' sale price of the 'NABB',
even though the said advertisement expenses were not incurred in respect of
F NABB at all but were incurred only in respect of aerated waters which are an
entirely distinct and different manufactured product, which is produced by
the bottlers aitd not by the appellants. Further, the said addition to the
assessable value has been upheld by the CEGAT even though the Department
had not even alleged, much less established that there was any binding legal
G obligation cast on the bottlers to incur the said advertisement expenses.
We heard Mr. A.K. Ganguli, learned senior counsel, Mr. D.N. Mehta, Mr,
U.A. Rana, learned counsel, Mr. Joseph Vellapally and Mr. D.A. Dave, learned
senior counsel and Mr. P.H. Parekh, learned counsel. Learned counsel for the
respective parties reiterated before us the contentions raised by them in their
H respective appeals. We have perused the order passed by the CEGAT in Civil
C.C.Ev. SURAT TEXTILE MILLS LTD. [LAKSHMANAN ,J.] 647

Appeal Nos. 2357-2361/2002 and the orders passed in other three appeals. In A
Civil Appeal Nos. 2357-2361/2002, the CEGAT passed the judgment and order
against the Revenue and in favour of the assessee whereas a contrary view
was taken by the CEGAT in the other three appeals holding in favour of the
Revenue and against the assessee.

At the time of hearing, learned counsel appearing on either side placed 8
strong reliance on the following judgments for and against :

I. Government of India and Ors. v. Madras Rubbf!r Factory Ltd
and Ors., [1995) 4 SCC 349
2 Philips India Ltd V; Collector of Central Excise, Pune, [1997) 6
SCC31
c
3. Mis. Ujagar Prints and Ors. (III) v. Union of India and Ors.,
[1989)3 SCC531
4. Pepsi Foods Ltd. v. CCE, Chandigarh, (2003) 111 ECR 776 SC=
JT (2003) 9 SC 595 D
5. Union of India and Ors. v. Bombay Tyre International Ltd and
Ors., (1984] I SCC 467
6. Assistant Collector of Central Excise and Ors. v. Madras Rubber
Factory Ltd etc., [1986] Supp SCC 751

- 7. Assistant Collector ofCentral Excise and Ors. v. Madras Rubber
Factory Ltd [1989] 3 SCC 238
E

8. Collector of Central Excise, Madras v. T.I. Millers Ltd., Madras
and T.L Diamond Chain, Madras, [1988) Supp SCC 361
9. Collector of Central Excise, Hyderabad v. Mis Jayant Oil Mills F
Pvt. Ltd, c1989) 3 sec 343
IO. Cosmic Dye Chemical v. Collector of Central Excise, Bombay,
(1995) 75 ELT 721 SC
ll. Amco Batteries Ltd v. Collector of Central Excise, Bangalore,
(2003) 153 ELT7 SC
G

We have carefully perused the judgments and orders passed by the
CEGA T which are impugned in these appeals. As rightly contended by the
counsel appearing on either side, the CEGAT failed to appreciate the arguments
advanced before it by the counsel appearing on either party in its proper H
648 SUPREME COURT REPORTS [2004) SuPP. I S.C.R.

A perspective. In fact, in Civil Appeal Nos. 134~0/1996, 4672/1997 and 4762/
1997, the CEGAT failed to appreciate that in several earlier judgments, the
CEGAT consistently held that the advertisement expenditure incurred by a
·manufacturers' customer can be added to the sale price for determining the
assessable value, only if the manufacturer has an enforceable legal .right
B against the customer to insist on the incurring of such advertisement expenses
by the customer.

In some cases, the CEGAT failed to appreciate that the appellants have
acted honestly and under bona fide belief that the NABB were exempted from
excise duty by such offence and that the appellants' claim for exemption, in
C fact, upheld by the CEGAT itself in its appellants' own case in Parle Exports
(P) Ltd v. CCE, 1981 (27) ELT 349. The CEGAT in the orders impugned in
these appeals have also failed to appreciate and follow the ratio of several
judgments of this Court wherein it has been laid down that if the assessee
acts honestly and under the bona fide belief and manufactured products are
exempted from duty, the longer period of limitation is not attracted.
D
We, therefore, feel that these matters require reconsideration :by the
CEGAT in the background of several judgments cited, retied on and referred
to in this judgment to arrive at a correct finding on the issues involved. All
the appeals are remitted back to the respective Tribunals to consider the.
matterS afresh in the light of the judgments relied on by the partie.s. Both
E parties are at liberty to file additional pleadings and, annexures and records,
if any, in respect of their respective claim.

All the appeals stand disposed of accordingly with the above direction.
There will be no order as to costs.

K.K.T. Appeal disposed of.