UNION OF INDIA & ORS.versusCLBATUL LIMITED

                                                                  95


                      UNION OF INDIA & ORS.                            A
                                 v.
                          ClllATIJL LIMITED

                         SEPTEMBER 27, 1985

  [P.Jj. liHAGWATI, CJ., R.s. PATHAK AND AMARENDRA NATH SEN, JJ • J    B

      Central Excises and Salt Act, 1944 - Sub-s.(2) of s. 36 -
Manufacture of Goods - Joint programme of seller and buyer -
Goods manufactured by seller - Supplied to buyer          Who is
manufacturer - 'Wholesale' price charged by seller - Whether true
basis for determination and levy of Excise Duty.                       c
        The respondent - Cibatul Ltd. (the "seller") entered into
two agreements with Ciba Geigy of India Ltd. (the "buyer") for
manufacturing Resins by the seller. The joint manufacturing
progr811111e indicated that the Resins were to be manufactured in
accordance with the restrictions and specifications constituting       D
the buyer's standard and supplied at prices to be agreed upon
from time to time. The buyer was entitled to test a sample of
each batch of the goods and after its approval the goods were to
be released for sale to the buyer. The products would besr
certain trade-marks being the property of the foreign company -
Ciba Geigy of Basle. Tripartite agreements were also executed          E
between the buyer, the seller and the foreign company, recognis-
ing the buyer as the registered or licensed user of the trade-
marks, authorising the seller to affix the trade-marks on the
products manufactured "as an agent for and on behalf of the buyer
and not of his own account" and the right of the buyer being
reserved to revoke the authority given to the seller to affix the
trade-marks.                                                           F

      The respondent filed declaration for the purposes of the
levy of excise under the Central Excises and Salt Act, 1944
showing the wholesale prices of different classes of goods sold
by it during the period May, 1972 to May, 1975. The declaration
included· the wholesale prices of the different Resins                 G
manufactured under the two aforesaid agreements. The Assistant
Collector of Customs revised those prices upwards on the basis
that the whclesale price should be the price for which the buyer
sold the product in the market. According to the Assistant
Collector the buyer was the manufacturer of goods and not the
seller.
                                                                       H
    96                SUPREME COURT REPORTS      [1985] SUPP.3 s.c.R.

A
          'lbe Collector of Central Exc:iae allowed the appeals of the
    respondent and ac:cepted the plea that the wholesale price
    disclosed by the seller was the proper basis for determining the
    ezcile duty.

B         The Appellate orders were, however, revised by the Central
    Government under sub-8.(2) of a.36 of the Act and the orders made
    by the Alsiatant Collector were restored• According to the
    Central Government the buyer is the person engaged in the
    production of the goods and the seller merely manufactures them
    on behalf of the buyer and that under the agreements the seller
    ia required to affix the trade-,narks of the buyer on the
c   manufactured goods and that indicstea that the goods belong to
    the buyer.

      - The orders of the Central Govt. were challenged under
  Article 226. The High Court held that the goods were manufactured
  by the seller as its own goods, and therefore, the wholesale
  prlce charged by the seller must form the true basis for the levy
D of excise duty.

          Dismissing the appeals of the Union of India,

          llELD: l. The High Co11rt was right in concluding that the
    wholesale price of the goods manufactured by the seller is the
E   wholesale price at which it sells those goods to the buyer,. and
    it is not the wholesale price at which the buyer sells those
    goods to others. [101 D-E]

        2. The relevant provisions of the agreements and the other
  material on the record show that the manufacturing programne is
F drawn up jointly by the buyer and the seller and not merely by
  the buyer, and that the buyer is obliged to purchase the manu-
  factured product from the seller only if it conforms to the
  buyer's standard. For this purpose the buyer is entitled to test
  a sample of each batch of the manufactured product and it is only
  on approval by him that the product is released for sale by the
G seller to the buyer. It is apparent that the seller Cannot be
  said to manufacture the goods on behalf of the buyer. (100 B-C;
    F)

          3, It ia clear from the record that the trade-,narks of the
   buyer are to be affixed on those goods only which are found to
H conform to the specifications or sta::dard stipulated by the
 · buyer. All goods not approved by the buyer cannot bear those
   trade-,narks and are disposed of by the sellers without the
                  u.o.r v. CIBATUL LTD. [PA'IEAR, J.]           97


advantage of those trade-marks. The trade-marks are affixed only
                                                                      A
after the goods have been approved by the buyer for sale by the
seller to the buyer. The seller owns the plant and machinery, the
raw material and the labour and manufactures the goods and under
the agreements, affixes the trade-marks on the goods. The goods
are l:l8Ilufactured by the seller on its own account and the seller
sells the goods with the trade-marks affixed on them to the
buyer.

      Unioo of India v. Delh1 Cloth and General M1lls, (1963]
Supp. 1 s.c.R. 586, 592, 598, South Bibar Sugar M1lls Ltd., etc.
v. Unioo of India and Others. [1968] s.c.R. 21 at 31, Union of
India and Others v• Free IDdiBn Dry-4cnm1l ators Ltd. [ 1983]
Eu:iae law T1-s 733 at 734 and Union of India and others etc.
                                                                      c
etc. v. bbay Tyre International Ltd. etc. etc. [ 1983] Excise
law Times 1896, inapplicable.

        CIVIL APPELLATE JU.RISDICTION     Civil Appeal No. 2619 of
1977.
                                                                      L

     . From the Judgment and Order dated 29.6.1977 of the Gujarat
High Court in Special Civil Application No. 1324 of 1976.

                                 AND
                                                                      E
                    Civil Appeal No. 4399 of 1985

      From the Judgment and Order dated 14.12.1976 of the Gujarat
High Court in Special Civil Application No. 68 of 1975.

      K. Farasaran, Solicitor General, N.C. Talukdar, Suraj Udai
Singh, Dalveer Bhandari, c.v. Subba Rao and R.!-i. Foddar fQr the
                                                                      F
Appellants.

      N.A. Falkhiwala, J.C. Bhatt, D.B. Engineer, B.!l. Antia,
Ravinder Narain, o.c .. ~<athur, Kamal hehta, Talat Ansari, Mrs.
A.K. Verma, Ashok Sagar, Miss Rainu J,alia, · Suklimaran and D.N.
Misra for the Respondent.
                                                                      G

        The Judgment of the Court was delivered by

      PATHAK, J. These appeals by special leave are directed
against the judgments and orde£s of the Gujarat high Court allow-
ing two writ petitions preferred by the respondent challenging
the levy of excise duty. As they raise identical questions of law
                                                                      R
for consideration they are disposed by a common judgment.
    98               SUPREME COURT REPORTS      [1985] SUPP.3 s.c.R.


A         The respondent is a company limited by shares. Of the total
    share capital, 65 per cent is owned by Atul Products Limited, 30
    per cent belongs to a foreign company known as Ciba Geigy of
    Basle in Switzerland and the remaining 5 per cent to Ciba Geigy
    vf India Limited. The respondent Cibatul Limited (referred to
    shortly as the "seller") entered into an agreement with the Ciba
B   Geigy of India Limited ("the buyer") on March 24, 1971 under
    which certain specified products, which included U.F. Rasins and
    M.F. Resins, were to be manufactured by the seller in accordance
    with a manufacturing progrannne drawn up jointly by the seller
    and the buyer. The resins were to be manufactured in accordance
    with restrictions and specifications constituting the buyer's
    standard, and they were supplied at prices agreed upon between
C   the seller and the buyer from time to time. The buyer was
    entitled to test a sample of each batch of these goods, and it
    was only after it had given its approval that the goods were to
    be released for sale to the buyer. Another agreement between the
    two took place on June 1, 1975 in respect of Epoxy Resins and the
    terms of the agreement were similar to the terms of the earlier
    agreement. It was understood that the products manufactured under
D   the two agreements would bear certain trade marks which were the
    property of the foreign company, Ciba Geigy of Basle. In this
    connection, on December 7, 1971 a tripartite agreement was
    executed between the buyer the seller, and the foreign company in
    respect of four trade-marks, Aerolite, Melocol, Melolam and
    Resicart. The foreign company, which owned these trade-marks, as
E   well as the seller recognised the buyer as the registered or
    licensed user thereof. The buyer authorised the seller to affix
    the said trade-marks on the products manufactured under the first
    contract, and the seller was to do so "as an agent for and on
    behalf of the buyer and not of his own account." The seller had
    also agreed to refrain from selling or dealing in, directly or
F   indirectly, goods bearing the said trade-marks or any other marks
    similar thereto save and except for the explicit purpose of
    fulfilling the seller's obligations under the first agreement.
    The buyer reserved the right to revoke the authority given to the
    seller to affix the trade-mark. A similar tripartite agreement
    was executed between the three parties on Dec.ember 1, 1973 in
G   resp~ct of the . second agreement between the buyers and the
    seller, namely, that relating to Epoxy Resins. The trade-mark
    concerned was Araldite.

          The respondent filed a declaration for the purposes of the
    levy of excise under the Central Excises and Salt Act, 1944 show-
H   ing the wholesale prices of different classes of goods sold by it
                U.O.I v. CIBATUL LTD. [PATHAK, J.]              99


during the period May, 1972 to May, 1975. The declaration inclu-      A
ded the wholesale prices of the different resins manufactured
under the two aforesaid agreements. The Assistant Collector of
Customs revised those prices upwards on the basis that the
wholesale price should be the price for which the buyer sold the
product in the market. The Assistant Collector proceeded on the.
footing that the buyer was the manufacturer of the goods aiid not     B
the seller. The. respondent appealed to the Collector of Central
Excise. The appeals were allowed by the Collector, and he
accepted the plea that ·the wholesale price disclosed by the
seller was the proper basis for determining the excise duty. The
appeliate .orders were, however, revised by the Central Government
under sub-s.(2) of s. 36 of the Act, and the orders made by the       c
Assistant Collector. were restored. The respondent filed a writ
petition in the Gujarat High Court against the orders of the
Central Government, and the High Cdurt held that the Central
Government was wrong and the appellate Collector was right on the
question as to the liability of the seller to excise duty.
                                                                      D
      The basis on which the Central Government proceeded in
holding that the wholesale pr~ce of the goods should be the
wholesale price charged by the buyer is that the goods were
manufactured by the seller on behalf of the buyer, specially as
they were embossed with the trade-mark. of which the buyer alone
was the registered user in India, that the two agreements between     E
the seller and the buyer envisaged that the goods were
manufactured by the seller on behalf of the buyer and that
therefore the buyer itself should be regarded as the manufacturer
of the goods for the purpose of levying excise duty. The High
Court has differed from the view taken by the Central Goverriment
and has held that the goods were manufactured by the seller as
its own goods, and therefore the ~holesale price charged by the       F
seller must form the true basis for the levy of excise duty.

      Excise duty is levied under s. 3 of the Central Excises and
Salt Act, 1944 on goods manufactured in India and, broadly, for
the purposes of computing the duty the value of the article is
deemed under s. 4 of the Act (as i t stood before its amendment by    G
Act XXII of 1973) to be the wholesale cash price for which an
article of the like kind and quality is sold or is capable of
being sold at the time of the removal of the article chargeable
with duty from the factory for delivery at the place of
manufacture. The words ."manufacture" and ..manufacturer" have been
defined by clause (f) of s. 2 of the Act, and for the purposes of
                                                                      H
     100               SUPREME COURT REPORTS      [1985J SUPP.3 s.c.R.

A    the present controversy what is relevant is that part of the
     definition which defines a "manufacturer" of goods as being "any
     person who eiigages in their production or manufacture on his own
     account."   The appellant contends that on the facts and
     circWDStances of this case it U11St be held that the buyer is the
     person engaged in the production of the goods and the seller
II   merely manufactures them on behalf of the buyer.

            The entire question before us is whether the goods are
     manufactured by the seller or are manufactured by the seller on
     behalf of the buyer. ·The rel.evant provisions of the agreements
     and the other material on the record show that the manufacturing
     progranme is drawn up jointly by the buyer and the seller and
c    not merely by the buyer, and that the buyer is obliged to
     purchase the manufactured product from the seller only i f it
     conforms to the buyer' s standard. For this purpose the buyer is
     entitled to test a sample of each batch of the manufactured
     product and it is only on .approval by him that the product is
     released for sale by the seller to the buyer. In other words, the
     buyer has the right to reject the goods if he does not approve of
D
     them. If the manufactured goods are not in accordance with the
     buyer's standard, they are either reprocessed to bring them up to
     the requisite quality ur if that is not possible the goods are
     sold to the quyer for a different purpose if they are compatible
     with the specifications of some other product and provided that
     the buyer has a need for that product, or the goods are sold to
E
     others in the market as sub-standard goods at a lower price of
     the goods are destroyed. It is sifnificant to note that the buyer
     is not obliged to purchase the goods manufactured by the seller
     regardless of their quality, and that in the event of rejection
     by the buyer the alternatives present before the seller extent to
     the sale of the manufactured goods to others or even to the very
F
     destruction of the goods. It is apparent that the seller cannot
     be said to manufacture the goods on behalf of the buyer.

           The appellant relies also on the circumstance that under
     the agreements the seller is required to affix the trade-marks of
     the buyer on the manufactured goods and, it is said, that
G
     indicates that the goods belong to the buyer. It seems to us
     clear from the r~cord that the trade-marks of the buyer are to be
     affixed on those goods only which are found to conform to the
     specifications or standard stipulated by the buyer. All goods not
     approved by the buyer cannot bear those trade-marks and are
     disposed of by the sellers without ·the advantage of those
H
     trade-marks. The trade marks are affixed only after the goods
                   U.O.I v. CIBATUL LTD. [PATHAK, J.]            101


have been approved by the buyer for sale by the seller to the          A
buyer. The seller owns the plant and machinery, the raw material
and the labour and manufactures the goods and under the
agreements affixes the trade'-marks on the goods. The goods are
manufactured by the seller on its own account and the seller
sells the goods with the trade marks affixed on them to the
buyer.                                                                 B

      The appellant has invited our attention to certain observa-
tions in Union of Indi& v. Delhi Cloth and General Mills[l963]
Supp. 1 S.C.R. 586 at 592 and 598., South Bihar Sugar Mills Ltd.,
etc. v. Union of India and Others,[1968] 3 s.C.R. 21 at 31.,Union
of India and Others v. Free India Dry Acc~tors Ltd. [1983]             C
Excise Law Times 733 at 734. , and Union of India & Others etc.
etc. v. Bombay Tyre International Ltd. etc. etc., [1983] Excise
Law Times 1896., but in none of those observations do we find any
acceptable support for the proposition that the goods are
manufactured by the seller on behalf of the buyer.
                                                                       D
      In the result, we hold that the High Court is right in
concluding that the wholesale price of the goods manufactured by
the seller is the wholesale price at which it sells those. goods
to the buyer, and · it .is not the wholesale price at which the
buyer sells those goods to others.
                                                                       E
         The appeals are dismissed with costs.




A.P.J.                                            Appeals Dismissed.