M/S. H.B.L. AIRCRAFT BATTERIES LTD.versusCOMMISSIONER OF CENTRAL EXCISE, HYDERABAD

A                MIS. H.B.L. AIRCRAFT BATTERIES LTD.
                                        v.
          COMMISSIONER OF CENTRAL EXCISE, HYDERABAD

                                  MAY 5, 2004
B             [RA.IENDRA BABU, CJ. AND G.P. MA THUR, J.]

          Central Excises and Salt Act. 1944/Central Excise (Valuation) Rules,
    1975-Section 4 /Rules 4, 5 and 6{bj(iil-Assessable value of goods-
    Determination of-Goods supplied to one of rhe consumers at lower price
C   ascerrained under a contract-Revenue derermined rhe assessable value on
    the basis ofmarket price taking into account comparable value~'orrectness
    of-Held : Value should be on the basis of con1rac1 price and not the
    market value-Determination on the basis of comparable value to arise
    only when the value is undeterminable.
D
         Appellant-assessee was manufa;turing Silver Oxide Zinc Batteries,
    in which silver was used as raw material. It used to supply the batteries
    to Ministry of Defence at a lower price and to Hindustan Aeronautics
    Ltd. (HAL) at a higher price. The lower price was as a result of
E   contract entered into between the Ministry and the appellant, wherein
    it was stipulated that the Ministry would be supplying silver to the
    appellants. Ministry used to supply the silver after obtaining the same
    from its mints at the rate ol Rs. 2,500 per kg. After depletion of the
    stocks from the mints, it supplied old batteries to recover silver from
                                                                                  ...   -
F   them. Appellants while invoicing goods to the Ministry, took the value
    of the silver recovered from the old batteries at Rs. 2,500 per kg. as
    against the market rate of silver.

          Revenue, after noticing the difference in the price of the batteries
    supplied to Defence Ministry and to HAL, demanded differential duty
G   on batteries supplied to Ministry, on the ground that the market value
    of silver should be taken as the basis for determining the assessable
    value. After confirmation of demand appellate authority held that in
    the present case price based on comparable goods was to be adopted
    as the price of silver,· since according to Section 4 of Central Excise and
H   Salt Act, 1944, the price that is to form the basis of assessment is the
                                        94
                      H.B.L. AIRCRAFT BATTERIES LTD. v. C.C.E.                95
   .,.   price at which the goods are sold in the ordinary course of business, A
         it is not attracted, because the sale to the Ministry was not a transaction
         in the ordinary course of business; it was a special arrangement and
         a national price of silver was adopted.

               In appeal to this Court, appellant contended that assessable value B
         of silver has to be determined on the contract price; that in view of
         proviso to Section 4(l)(a) the price at which the goods are sold to each
         buyer shall be taken as normal price, and therefore the price at which
         the batteries were sold to Ministry would be taken as normal price;
         that comparable value under Rule 6(a)(ii) could be taken into account
         when the value of the goods cannot be ascertained under Rule 4 or Rule
                                                                                   c
         5 of Central Excise (Valuation) Rules, 1975.

              Revenue contended that the market price and not the contract
         price should be taken into account; that since retrieving silver from
                                                                               D
  •      old batteries is a special arrangement and not a 'normal practice',
         appellant cannot get the benefit of proviso to Section 4(l)(a).

              Allowing the appeal, the Court

               HELD: I. Section 4 of the Central Excises and Salt Act deals with E
         valuation of excisable goods which are chargeable to duty with
         reference to the value. Valuation is based ordinarily on the price
         thereof that is at the price at which goods subjected to ex~ise duty are
- .-     sold by manufacturer to a buyer. In exceptional circumstances when
         the valuation cannot be so more that closest equivalent thereof is F
         determined in the manner prescribed in the valuation Rule. 'Value' for
         the purpose of the said Rules is value under Section 4 of the Act and
         is to be determined under Rules 4 and 5. Rule 6 has to be invoked only
         in situation when assessment of value of goods subject to excise duty
         cannot be determined under Rules 4 and 5. When the goods are not G
         sold by the manufacturer but are used or consumed in the manufacture
         of other goods, the value is to be determined upon the value of
         comparable goods manufactured, and if that canaot be done on the
   f
         cost of production, if any, which he would have normally earned as the
         sale of such goods. [99-E-G[                                             H
    96                SUPREME COURT REPORTS [2004] SUPP. 2 S.C.R.

A         Ashok Leylandv. CCEMadras, (2002) 146 ELT 503; Union Carbide            ... .
    (India) v. CCE Calcutta, (2003) 153 ELT 15, Burn Standard Company
    Ltd. v. U.O.I.. (1992) 50 ELT 671 and CCE v. Dai !chi Karkaria Ltd.,
    (1999) ll2 ELT 353, referred to.

         2. The value of the silver supplied to the appellants is determinable.
B Had the stock of silver in the mint did not deplete, Ministry of Defence
  (MOD) would have supplied silver from the mint. Since the stock
  depleted, MOD supplied old batteries for the recovery of silver. This
  will not make the value of silver undeterminable. The value of the silver
  supplied would be Rs. 2500 per kg., the price at which MOD would
C get the silver from the mint. The question of determining the assessable
  value of silver based on the value of the comparable goods would arise
  only when the value is undeterminable. In the present case that
  question does not arise. (100-D-E]

         3. The supply of silver by MOD being one of the stipulations in
D the contract between MOD and the appellant, would constitute a
    'normal practice' of the wholesale trade in such goods. As per the first
    proviso to Section 4(l)(b), where in accordance with the normal
    practice of the wholesale trade, goods are sold at different prices to
    different classes of buyers, each such price shall be deemed to be the
E   normal price of such goods in relation to each such class of buyers.
    Therefore, the normal price of battery sold to MOD by the appellants
    is Rs. 33,393 and the assessable v:~lue of silver used in the manufacture
    of such battery is at Rs. 2500 per kg. and Revenue cannot take the
    market value of silver. (100-F-H(
                                                                                   .. .
F        CIVIL APPELLATE JURISDICTION : Civil Appeal No. 898 of
    1998.

         From the Judgment and Order dated I 0.11.97 of the Central Excise,
    Customs and Gold (Control) Appellate Tribunal, South Zonal Bench at
G   Chennai in F.O. No. 2907/97 in A. No. E/1376/93-A.

        V. Lakshmikumaran, Alok Yadav and V. Balachandaran for the
    Appellant.

         Raju Ramachandran, Additional Solicitor General, Mrs. Nisha Bagchi,
H P. Manish, Parul Rajan and B.K. Prasad for the Respondent.
    H.B.L. AIRCRAFT BA TIERIES LTD. v. C.C.E.[RAJENDRA BABU, CJ.]       97

     The Judgment of the Court was delivered by                              A

      RAJENDRA Bl\BU, CJ. : The appellants are the manufacturers of
silver oxide zinc batteries (hereinafter referred to as "batteries") supplied
to Ministry of Defence (hereinafter referred to as 'MOD') and Hindustan
Aeronautics Limited (hereinafter referred to as 'HAL'). The issue in this B
appeal relates to the excise duty in respect of the batteries supplied to the
'MOD'. The appellants supplied the batteries to 'HAL' at a higher price
than the price charge to 'MOD'. The price charged to 'MOD' was
Rs.33,393 and to 'HAL' was Rs.53,993 . The prices charged were in terms
of the contract entered into by the appellants with the respective buyers. C
Silver is one of the raw materials used in the manufacture of the "batteries".
In the case of supplies to MOD, there was a stipulation in the contract that
the appellants WOifld be supplied with the silver. MOD was holding the
stock of silver in Bombay and Calcutta Mints and supplied the same to
various manufacturers of batteries from whom it was purchasing the
batteries. MOD used to obtain silver at Rs.2,500 per Kg. from the Mints. D
After sometime, MOD's stock of silver at Bombay and Calcutta Mints got
depleted. Hence, they supplied the old life expired batteries to various
manufacturers to recover the silver from those batteries and use the
recovered silver in the manufacturing of the fresh batteries and the
appellants were to give a rebate to the MOD in the price to be charged per E
battery. The appellants while invoicing the goods to the MOD, took the
value of the silver used in those batteries as was recovered from the life
expired batteries at the rate of Rs.2,500 per kg. as against Rs.6,666 per kg.
which was adapted for the batteries supplied to HAL. According to
appellants, the reason for taking the value of silver at Rs.2,500 per kg. was F
that the MOD was allowed to purchase the silver from the mint at the rate
of Rs.2,500 per kg. and according to the contract, the stipulation was that
the price of the silver to be adapted for arriving at the price to be charged
was to be Rs.2,500 per kg. The Collector of Central Excise, Hyderabad,
after noticing the difference in the price charged on the batteries supplied
to MOD and HAL issued a show cause notice demanding differential duty G
on batteries supplied by appellants to MOD, on the ground that the market
value of silver should be taken as the basis for determining the assessable
value. Inspite of demur the said demand was confirmed.

     On appeal, the Appellate Tribunal held that the price determined by H
    98                  SUPREME COURT REPORTS [2004] SUPP. 2 S.C.R.

A the appellants for the batteries by adapting the lower silver price at the rate
  of Rs.2,500 per kg. as against the open market price of Rs.6,666 was a
  notional workout and the price indicated by the MOD is not reflective of
  the true value of the silver. The Tribunal held that as per Section 4 of the
  Central Excise Act, 1944 the price that is to form the basis for assessment
B is the price at which the goods are sold in the ordinary course of business
  and the sale to MOD cannot be taken to be the sale in the ordinary course
  of business. The sale of batteries to MOD was held to be a special
  arrangement and a notional price of silver was adapted. The Tribunal held
  that this cannot be considered as transaction in the ordinary course of
C business and the price which is chargeable in the open market should form
  the basis of assessment. It was held that price based on comparable goods
  was to be adapted as the price of the silver i.e. at the rate of Rs.6,666 per
  kg. as was adapted in case of supply of batteries to HAL and dismissed
  the appeal. Hence this appeal.

D         The question that arises for consideration is as to what is the
    assessable value of silver which is used in the manufacture of silver oxide
    zinc batteries supplied to MOD. Is it the price at which MOD got silver
    from the mint or the market price of the silver? The contention of the
    appellant is that the contract price at which the batteries are sold to MOD
E   is the sole consideration of the sale of batteries to the MOD and on that
    contract price the assessable value of silver has to be determined.

          Relying on the first proviso to Section 4(1 )(a), which speaks about
    sale of goods, two classes of buyers and the price at which the goods are
F   sold to each buyer should be taken as the normal price of such goods in
    relation to each such class of buyers, the appellants contend that the price
    at which the batteries are sold to "MOD" shall be taken as the 'normal
    price' of the batteries. Appellants also rely on rule 5 of the Central Excise
    (Valuation) Rules, 1975.

G         The appellants contend that even if it is assumed that price is not the
    sole consideration in the transaction with MOD, the money value of the
    silver flowing from MOD to the appellant, i.e., Rs. 2500 per kg. should
    be taken into account while determining the assessable value. Appellants
    contend that the comparable price taken by the silver in determining the
H   value of silver is not correct. Comparable value under Rule 6(b )(ii) could
    H.B.L. AIRCRAFT BATTERIES LTD. v. C.C.E.[RAJENDRA BABU, CJ.]      99

be taken into account when the value of the excisable goods cannot be A
ascertained under Rule 4 or Rule 5. Reliance is placed on Ashok Leyland
Ltd. v. Collector of Central Excise, Madras, (2002) 146 EL T 503 (SC),
in which it was held that sale of goods to different classes of buyers does
not make normal price unasce11ainable as to attract Section 4(1)(b). It is
contended that the nonnal price of battery is the price at which it is sold B
to MOD and accordingly the value of silver is to be ascertained.

      Respondents contend that normal price should be ascertained by
reference to the transaction. Since the transaction with MOD is a special ·
arrangement, the contract price cannot be. taken into account as such
transaction is not done in the ordinary course of business. Therefore, the C
market value of the silver should be taken into account. It is contended that
in order to claim the benefit of the proviso, the appellant should show
"normal practice" of whole sale trade. Since the supply of old life expired
batteries to retrieve the silver forms a special arrangement it will not
constitute a ';no1mal practice". It is contended that even if some raw D
material is supplied free of cost for the purpose of excise duty, the market
value should be taken into account.

     Section 4 of the Central Excise and Salt Act deals with valuation of
excisable goods which are chargeable to duty with reference to the value. E
Valuation is based ordinarily on the price thereof that is at the price at
which goods subject to excise duty are sold by manufacturer to a buyer.
In exceptional circumstances when the valuation cannot be so more that
closest equivalent thereof is determined in the manner prescribed in the
valuation Rules. 'Value' for the purpose of the said Rules is value under F
Section 4 of the Act and is to be determined under Rules 4 and 5. Rule
6 has .to be invoked only in situation when assessment of value of goods
subject to excise duty cannot be determined under Rules 4 & 5. When the
goods are not sold by the manufacturer but are used or consumed in the
manufacture of other goods, the value is to be determined upon the value
of comparable goods manufactured, and if that cannot be done on the cost G
of production, if any, which he would have normally earned as the sale
of such goods.

    This view, we have set out above finds support from decisions in
Ashok Layland v. CCE Madras, (2002) 146 EL T 503; Union Carbide H
    100                SUPREME COURT REPORTS [2004] SUPP. 2 S.C.R.

A (India) v. CCE Calcutta, (2003) 158 EL T 15, Burn Standard Company Ltd.
    v. UOI, (1992) 60 ELT 67land CCE v. Dai Jchi Karkaria Ltd., (1999) 112
    ELT 353.

          The assessable value of the silver should be taken at Rs. 2500 per kg.
B which is the rate at which MOD used to get the silver from the mint. The
    price charged by the appellants was in terms of the contract entered into
    by them with MOD. As per the terms of the contract, MOD was to supply
    the silver to manufacture the batteries. Since the stock of silver in the mint
    depleted, MOD supplied the old life expired batteries to retrieve the silver
C   and to use the recovered silver in the manufacture of new batteries. As per
    terms of the contract, the appdlants were to give a rebate to the MOD in
    the price to be charged per battery and this was the reason for the difference
    in prices between the batteries supplied to MOD and HAL.

          The value of the silver supplied to the appellants is determinable. Had
P   the stock of silver in the mint did not deplete, MOD would have supplied
    silver from the mint. Since the stock depleted, MOD supplied old
    life expired batteries for the recovery of silver. This will not make the
    value of silver undeterminable. The value of the silver supplied would
    be Rs. 2500 per kg., the price at which MOD would get the silver
E   from the mint. The question of determining the assessable value of
    silver based on the value of the comparable goods would arise only
    when the value is undeterminable. In the present case that question does
    not arise.
                                                                                     .
F      The supply of silver by MOD being one of the stipulation in the
  contract between MOD and the appellant, would constitute a 'normal
  practice' of the wholesale trade in such goods. As per the first proviso to
  Section 4(1)(b), where in accordance with the normal practice of the
  wholesale trade, goods are sold at different prices to different classes of
  buyers, each such price shall be deemed to be the normal price of such
G goods in relation to each such class of buyers. Therefore, the normal price
  of battery sold to MOD by the appellants is Rs. 33,393 and the assessable
  value of silver used in the manufacture of such battery is at Rs. 2500 per
  kg. and cannot take the market value of silver.

H         The contract between the MOD and the assessee provided for supply
    ..       H.B.L. AIRCRAFT BATTERIES LID. v. C.C.E.[RAJENDRA BABU, CJ.] I 0 I

         of sliver from the mint at a particular rate and had to be supplied by the A
         MOD and in lieu thereof the appellants were allowed to retrieve silver from
         old used batteries, and their special feature cannot be ignored. Batteries of
         the nature in question are largely used only by MOD. Hence the view taken
         by the Tribunal down to adjudicating authority cannot be sustained.
                                                                                    B
              Hence, we allow this appeal and set aside the order of the Tribunal
         and thereby the order for differential demand cannot be enforced.
)
              Appeal allowed accordingly.

         K.K.T.                                                   Appeal allowed.   C