REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NOS. 6539-6540 OF 2010

COMMISSIONER OF CENTRAL EXCISE,  FARIDABAD

— APPELLANT

VERSUS

M/S. FOOD & HEALTHCARE  SPECIALITIES & ANR.

— RESPONDENTS

JUDGMENT

D.K. JAIN, J.:

1. These appeals under Section 35L(b) of the Central Excise Act,  1944  

(for short “the Act”) are directed against a common final order, dated  

2nd February 2005 in Appeal No. E/5261-62/04-NB(A), passed by the  

Customs  Excise  & Service  Tax  Appellate  Tribunal,  New Delhi  (for  

short “the Tribunal”). By the impugned order the Tribunal has quashed  

the additional excise duty demand of `9,34,89,367/- under Section 11A  

of the Act;  penalties  of  `1.5 crores  each on respondent  Nos.1 and 2  

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under Rule 173Q of the Central Excise Rules, 1944 (for short “the 1944  

Rules”) and Rule 25(1) of the Central Excise Rules, 2001 (for short “the  

2001 Rules”) read with Section  38A of the Act and a penalty of  `2  

crores under Rule 209A of the 1944 Rules and Rule 26 of 2001 Rules  

read with Section 38A of the Act on Respondent No. 2 as confirmed by  

the Deputy Commissioner of Central Excise.

2. Succinctly put, the material facts giving rise to the present appeals are  

as under:  

Respondent No.1—M/s Food & Healthcare Specialities (for short “the  

Assessee”) was engaged in the blending and packing of ‘Glucon D’ for M/s  

Heinz India Pvt. Ltd. (for short “Heinz”), respondent No.2 in these appeals,  

pursuant  to  an  agreement  commencing  from  1st March  2000.  Under  the  

agreement,  Heinz  was  to  supply  raw  material,  packing  material  and  the  

technical know-how to the Assessee for the blending and packing of the said  

product. From March 2000 to September 2000, the Assessee paid excise duty  

on  the  basis  of  wholesale  price  of  the  product  at  the  depots  of  Heinz.  

However,  for  the period commencing  from October 2000, they filed price  

declarations  seeking  to  modify  the  assessable  value  of  the  product  as  the  

aggregate  of  cost  of   raw  material,  packing  material  and  their  job  work  

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charges  and  started  paying  duty  on  the  same.  During  the  course  of  

investigations undertaken by the revenue, it was found that the said product  

was also being processed at the Aligarh factory of Heinz and the duty on  

those clearances was being paid at the assessable value/depot sale price of  

Heinz.  Consequently, three notices were issued to the Assessee for the period  

October 2000 to December 2000; January 2001 to June 2001 and July 2001 to  

February 2002, to show-cause as to why the assessable  value declared by  

them be not  rejected  and the price  declarations  submitted by them be not  

amended by determining the assessable value on the basis of the sale price  

fixed by Heinz at its depots and the duty so paid be not recovered along with  

penalty under Rule 173Q of the 1944 Rules.

Upon  consideration  of  the  cause  shown  by  the  Assessee,  the  

Adjudicating Authority, by its order dated 31st August 2004, confirmed the  

differential  demand  indicated  in  the  show cause  notices  and  imposed  the  

aforesaid penalties on the Assessee as also on Heinz. On appeals preferred  

against the said order, the Tribunal, by an exceptionally short order, set aside  

the  order-in-original,  concluding that  since  the Adjudicating Authority  has  

itself given a specific finding that the status of the Assessee was not better  

than that of hired labour and Heinz is the manufacturer, the duty is leviable  

only  on  the  manufacturer.  Being aggrieved  by the  dismissal  of  its  appeal  

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under Section 35G of the Act by the High Court, as not maintainable, the  

revenue is before us in these appeals.

3. Mr. B. Bhattacharyya, learned Additional Solicitor General appearing  

for the appellant, referring to several clauses of the agreement between the  

Assessee and Heinz, in particular, clauses (d), (1), (2), (5), (7), (9),(13), (15)  

and (16),  vehemently submitted that the relationship between the Assessee  

and Heinz was one of principal and agent and not of principal to principal and  

therefore, the price at which, Heinz sold ‘Glocon-D’ in the wholesale market  

must  be taken as the assessable value.   According to the  learned counsel,  

Heinz  had  complete  control  over  the  activities  of  the  Assessee,  who  was  

merely a job worker. To bring home his point that the Assessee was merely an  

extended arm of Heinz, he laid emphasis on the fact that processed ‘Glocon-

D’ was stored at the same premises from where Heinz was operating; Heinz  

had  also  taken  an  exemption  from  registration  under  Rule  9(2)  of  the  

erstwhile  Central  Excise  (No.2)  Rules,  2001,  in  terms of  Notification  No.  

36/2001 dated 26th June 2001, which was available to a manufacturer who got  

his goods manufactured on his account from any other person,  subject to the  

condition  that  the  said  manufacturer  authorised  the  person,  who  actually  

manufactured or fabricated the said goods, to comply with all the procedural  

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formalities under the Act and the rules made thereunder,  in respect  of the  

goods manufactured on behalf of the said manufacturer.   

Relying  heavily  on  the  decision  of  this  Court  in  Commissioner  of   

Central Excise, Indore Vs. S. Kumars Ltd. & Ors.1, wherein dealing with the  

question  of  assessable  value  of  the  processed  goods  in  relation  to  the  

processor the earlier decisions of this Court in M/s Ujagar Prints & Ors. (II)   

Vs. Union of India & Ors.2 (for short “Ujagar Prints (II)”), M/s Ujagar  

Prints & Ors. (III)  Vs.  Union of India & Ors.3 (for short  “Ujagar Prints  

(III)”), Empire Industries Limited & Ors.  Vs. Union of India & Ors.4 and  

Pawan Biscuits Co. Pvt. Ltd.  Vs. Collector of Central Excise, Patna5, were  

discussed. Learned counsel argued that the formula laid down in the Ujagar  

Prints (II) or (III)  would not apply to the fact-situation.  It was stressed that  

having failed to examine the relationship between the Assessee and Heinz, the  

Tribunal’s order deserved to be set aside and the matter was fit to be remitted  

back to the Tribunal for fresh adjudication on the touchstone of the ratio of S.  

Kumars.   

1 (2005) 13 SCC 266 2 (1989) 3 SCC 488 3 (1989) 3 SCC 531 4 (1985) 3 SCC 314 5 (2000) 6 SCC 489

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4. Per  Contra Mr.  V.  Lakshmi  Kumaran,  learned  counsel  appearing  on  

behalf of the respondents submitted that in the show cause notice there  

was  no allegation  that  the  Assessee  and Heinz are  related  persons  and  

therefore, Section 4 (1)(b) of the Act could not be invoked to determine  

the assessable value.  It was asserted that in reply to the show cause notice,  

it  was clearly  stated that  apart  from the fact  that  dealings between the  

Assessee and Heinz were on principal to principal basis, the Assessee was  

also  processing  goods  for  other  manufacturers.   In  support  of  this  

argument, learned counsel relied upon clause 22 of the agreement between  

the said parties, which stipulated that:  

“Nothing herein contained shall constitute or be deemed to  or is intended to constitute F&HS as an agent of Heinz. It  is hereby expressly agreed and declared that F&HS shall  not at any time-

a) Enter into a contract in the name of or purporting to be  made on behalf of Heinz.

b) ……………………………………………………..”

It  was argued that  the  clause clearly shows that  the parties  were at  arm’s  

length and the Assessee was processing ‘Glucon-D’ only on job-work basis.  

It was thus asserted that dealings between the Assessee and Heinz being on  

principal to principal basis, the principle laid down in Ujagar Prints (II), as  

clarified in Ujagar Prints (III), for determining the assessable value, was on  

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all fours with the fact-situation at hand and as such the ratio of the judgment  

in  S.  Kumars   will  not  apply.  In  the  compilation  filed  on  behalf  of  the  

Assessee, reliance is also placed on Circular No.: 619/10/2002-CX dated 19th  

February  2002,  which  clarifies  that  even  after  the  introduction  of  new  

valuation  provisions  with  effect  from  1st July  2000,  in  respect  of  goods  

manufactured on job-work basis, valuation would be governed by Rule 11  

read with Rule 6 of the Central Excise Valuation (Determination of Price of  

Excisable Goods) Rules, 2000 (for short “the 2000 Rules”) and the decisions  

of this Court in  Ujagar Prints II  and  Pawan Biscuits.   According to the  

learned counsel, the issue raised by the revenue stands concluded by the ratio  

of Pawan Biscuits, and therefore, the appeals deserve to be dismissed.

5. The principles  of  valuation of  excisable  goods for  the purpose  of  

charging excise duty are contained in Section 4 of the Act (as amended with  

effect from 1st July 2000), which, insofar as it is relevant, 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 their value,  then, on each removal of the goods, such value shall—

(a) in a case where the goods are sold by the assessee,  for  delivery at the time and place of the removal, the assessee  and the buyer of goods are not related and the price is the  sole consideration for the sale, be the transaction value;

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(b) in any other case, including the case where the goods are  not sold, be the value determined in such manner as may  be prescribed.

(2) …………………………………………………………..   

(3) For the purposes of this section,—

(a) ……………………………………………………

(b) persons shall be deemed to be “related” if—   

(i) they are inter-connected undertakings;

(ii) they are relatives;

(iii) amongst  them  the  buyer  is  a  relative  and  distributor of the assessee, or a sub-distributor of  such distributor; or

(iv) they  are  so  associated  that  they  have  interest,  directly  or  indirectly,  in  the  business  of  each  other.

Explanation.—In this clause—

(i) “inter-connected  undertakings”  shall  have  the  meaning assigned to it  in clause (g)  of section 2 of the  Monopolies and Restrictive Trade Practices Act, 1969 (64  of 1969); and  

(ii) “relative” shall have the meaning assigned to it in  clause (41) of section 2 of the Companies Act, 1956 (1 of  1956);

(c) ……………………………………………………

(d) “transaction value” means the price actually paid or  payable for the goods, when sold, and includes in addition  to the amount charged as price, any amount that the buyer  is liable to pay to, or on behalf of, the assessee, by reason  of, or in connection with the sale, whether payable at the  time of the sale or at any other time, including, but not  

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limited to, any amount charged for, or to make provision  for,  advertising  or  publicity,  marketing  and  selling  organization  expenses,  storage,  outward  handling,  servicing, warranty, commission or any other matter; but  does not include the amount of duty of excise, sales tax  and other taxes, if any, actually paid or actually payable on  such goods.”  

The new Section 4 of the Act, substituted w.e.f 1st July 2000, and material for  

our  purpose,  prescribes  that  the  value  of  excisable  goods  shall  be  the  

transaction value subject to satisfying the conditions that: (i) the price must be  

the sole consideration; (ii) the buyer must not be a related person and (iii) the  

goods  must  be sold  by  the  assessee  for  delivery at  the  time and place of  

removal.   The basic principle  underlying Section 4(1)(a)  of the Act is the  

transaction value as defined in clause (d) of sub-section 3 of Section 4 of the  

Act, which inter-alia, means the price actually paid or payable for the goods  

when sold,  provided  the  assessee  and the  buyer  of  goods  are  not  related.  

Clause (b) of sub-section (3) of Section 4 of the Act, inter-alia, stipulates that  

person shall be deemed to be “related” if they are so associated that they have  

interest, directly or indirectly, in the business of each other.  It is clear that if  

the assessee and the buyer are related, valuation has to be under Section 4(1)  

(b)  of  the  Act  read  with  the  2000  Rules.   We  may,  however,  note  that  

conceptually  there  is  no  significant  change  in  the  definition  of  “related  

person” in the new and repealed Section 4 of the Act.

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6. Thus,  the  pivotal  question  on  which  learned  counsel  for  both  the  

parties addressed us, is whether the Assessee was merely a processor  

of ‘Glucon-D’, independent of Heinz or it was related to Heinz.  In  

other words, whether the relationship between the Assessee and Heinz  

was one of principal to principal or that of an agent and principal. As  

aforesaid,  the  stand  of  the  revenue  is  that  the  Assessee,  as  the  

processor, is not independent of Heinz and therefore, ratio of  Ujagar  

Prints  (III)  would  not  apply.   It  is  evident  from the  order  of  the  

Tribunal that it has not addressed this aspect of the matter in detail,  

and has not considered whether the Assessee and Heinz were related  

persons.   Nevertheless,  since  the  rival  contentions  urged  before  us  

mainly related to the question as to whether the formula laid down in  

Ujagar Prints (III) and reiterated in Pawan Biscuits, would apply or  

the principle enunciated in S. Kumar  will govern the present case, it  

will be useful to notice the principle enunciated in Ujagar Prints (II)  

and (III) as also the ratio of S. Kumar.   

7. In  Ujagar Prints (II), a Constitution Bench of this Court was called  

upon to consider the correctness of the view taken by this Court in  

Empire Industries.  In Empire Industries, it was held that the Central  

Excises and Salt and Additional Duties of Excise (Amendment) Act,  

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1980, by which, the processes of bleaching, dying and printing were  

brought within the definition of ‘manufacture’ for the purposes of the  

Central Excise and Salt Act, 1944 and the Additional Duties of Excise  

(Goods of Special Importance) Act, 1957 were constitutionally valid.  

While upholding the validity of the Amendment Act, it was observed  

that  when  the  textile  fabrics  are  subjected  to  the  processes  like  

bleaching, dyeing and printing etc. by independent processes, whether  

on  their  own  account  or  on  job  charges  basis,  the  value  for  the  

purposes of assessment under Section 4 of the said Act will not be the  

processing  charges  alone  but  the  intrinsic  value  of  the  processed  

fabrics which is the price at which such fabrics are sold for the first  

time in the wholesale market.   The principle enumerated in Section  

4(1)(a) of the Act was applied to the processed goods.  In other words,  

the assessable value of the processed goods, as far as the processor  

was concerned, had to be the same irrespective of the fact whether the  

processor manufactures the goods and then processes them itself  or  

gives the goods and merely undertakes processing before returning the  

same  to  the  manufacturer/owner.   That  common  norm  was  the  

wholesale price.

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8. On an application filed for  clarification  of  the  judgment in  Ujagar  

Prints (II), this Court by a short order in Ujagar Prints (III) clarified  

as follows:

“1…it is made clear that the assessable value of the processed  fabric would be the value of the grey cloth in the hands of the  processor plus the value of the job work done plus manufacturing  profit and manufacturing expenses whatever these may be, which  will either be included in the price at the factory gate or deemed  to be the price at the factory gate for the processed fabric.  The  factory  gate  here  means  the  “deemed”  factory  gate  as  if  the  processed fabric was sold by the processor…”

The Court went on to explain:

“2. If the trader, who entrusts cotton or man-made fabric to the  processor  for  processing  on  job  work  basis,  would  give  a  declaration  to  the  processor  as  to  what  would be the  price  at  which he would be selling the processed goods in the market,  that would be taken by the excise authorities as the assessable  value of the processed fabric and excise duty would be charged  to the processor on that basis provided that the declaration as to  the price at which he would be selling the processed goods in the  market, would include only the price or deemed price at which  the processed fabric would leave the processor’s factory plus his  profit...”

9. The decision in Ujagar Prints (III) was subsequently followed by this  

Court in Pawan Biscuits.  In that case, the Tribunal had held that the  

assessee  was,  in  reality,  an  agent  of  Britannia  Industries  Ltd.  and,  

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therefore, the price at which Britannia was selling the manufactured  

goods in the wholesale market was to be taken as the assessable value.  

The decision of the Tribunal was reversed by this Court.  It was found  

that  the agreement between Pawan Biscuits  and Britannia  indicated  

that their relationship was one of principal to principal and not that of  

principal  and agent and also that the assessee (Pawan Biscuits) could  

manufacture biscuits of other brands and sell them.   Observing that  

Pawan Biscuits had been established much prior to its agreement with  

Britannia, it was held that the decisions in Ujagar Prints (II) and (III)  

could not be factually distinguished.  In short, it was held that for the  

purpose of determining assessable value, it is necessary to include the  

processor’s  expenses,  costs,  and  charges  plus  profit,  but  it  is  not  

necessary to include the trader’s profits who gets the fabrics processed,  

because those would be post-manufacturing profits.

10. A similar issue again came up for consideration of this Court in  S.  

Kumars.   In  that  case,  the  assessee  was  processing  grey  fabrics.  

Sometimes the grey fabrics were processed on their own account and  

sometimes the grey fabrics were received for processing on job charge  

basis  from  others,  referred  to  in  the  judgment  as  the  merchant  

manufacturers. The assessee paid excise duty on the fabrics processed  

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by it treating the value of the processed fabric as being that at which,  

the merchant manufacturers were selling the processed goods.  This,  

according  to  the  assessee  was  in  accordance  with  the  decision  in  

Empire Industries.  However, on the fabrics processed by it which had  

been received from the merchant manufacturers, the assessee valued  

the processed goods on the basis of the cost of grey fabrics plus the  

processing charges as well as its manufacturing expenses and profits.  

In other words, the price at which the merchant manufacturers were  

selling  the  processed  goods  was  not  taken  into  consideration.  

According to the assessee, this was done in light of the decision in  

Ujagar Prints (II) and  (III).  A notice was issued to the assessee to  

show-cause as to why differential duty of Excise along with penalty be  

not recovered from it as the assessee and the merchant manufacturers  

were  all  firms  and  companies  having  a  common  management  and  

control with some of them selling grey fabrics to the assessee, which  

after processing the fabrics was sold to some independent dealers.  All  

such independent dealers as well as the merchant manufacturers were  

described as ‘S. Kumars’  and  the revenue asserted to treat the price  

charged by the merchant manufacturers from independent dealers as  

the assessable value of the processed fabrics and to levy excise duty  

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thereon.   The assessee denied that the merchant manufacturers were  

related  persons  and  thus  disputed  the  basis  on  which  claim  for  

additional excise duty was made.  The stand of the assessee was that  

by virtue of the decision of this Court in Ujagar Prints (III), they were  

liable  to  treat  the  notional  sale  by  the  assessee  to  the  merchant  

manufacturers  as  the  relevant  point  for  determining  the  assessable  

value. Examining the provisions of Section 4 of the Act, as it existed at  

the  relevant  time,  with  reference  to  the  Central  Excise  Valuation  

Rules, 1975 and the decisions of this Court in Ujagar Prints (II) and  

Ujagar Prints (III) and Pawan Biscuits, the Court held as follows:

“We, therefore, do not agree that Ujagar Prints (III) would apply  even to a processor who is not independent and, as is alleged in  this case, the merchant manufacturers and the purchasing traders  are  merely  extensions  of  the  processor.  In  the  latter  case,  the  processor  is  not  a  mere  processor  but  also  a  merchant  manufacturer  who  purchases/manufactures  the  raw  material,  processes it and sells it himself in the wholesale market. In such  a  situation,  the profit  is  not  of  a processor  but  of  a  merchant  manufacturer and a trader. If the transaction is between related  persons,  the profit  would not  be "normally earned" within the  meaning  of  Rule  6(b)(ii).  If  it  is  established that  the  dealings  were with related persons of the manufacturer,  the sale of the  processed fabrics would not be limited to the formula prescribed  by     Ujagar Prints (III)     but would be subject to excise duty under    the  principles  enunciated  in     Empire  Industries     as  affirmed    in     Ujagar Prints (II)  ,     incorporating the arms length principle.  ”

(Emphasis supplied by us)

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11. It  is manifest  from the above that the only distinctive feature of  S.  

Kumars  in  comparison  with  Ujagar  Prints  (II)  and (III) is  the  

emphasis on the factum of relationship between the parties viz., the  

processor  and the merchant manufacturers/traders,  in the  former.  In  

short,  S. Kumars  holds that if the processor-assessee is not at arm’s  

length  with  the  merchant  manufacturer  and is  a  related  person,  the  

formula  prescribed  in  Ujagar  Prints  (III)  would  not  apply  and  

assessable value for the purpose of levy of excise duty will have to be  

determined in terms of the ratio of  S. Kumar  i.e. in accordance with  

the procedure contemplated in Section 4(1)(b) of the Act read with the  

relevant valuation Rules. We deferentially concur with the ratio of S.  

Kumars.

12. In the present case, as aforesaid, neither did the Tribunal address this  

aspect  of  the  matter,  nor  did  it  consider  whether  the  Assessee  and  

Heinz  are  related  persons.   It  based  its  decision  solely  on  the  

observation made by the Adjudicating Authority “that the status of the  

Assessee was not better than that of a hired labour”.  We are, therefore,  

of the opinion that in the light of the above discussion, it would be  

necessary for the Tribunal to examine in depth the agreement between  

the  Assessee  and  Heinz  as  also  any  other  additional  material,  the  

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parties may like to adduce and determine the question whether or not  

both of them are related persons.

13. Resultantly, the appeals are allowed and the matter is remanded back  

to  the  Tribunal  for  the  purpose  of  determining  the  nature  of  

relationship between the Assessee and Heinz.  If it is found that they  

are not related persons, then the present decision of the Tribunal will  

stand affirmed.  However, if the Tribunal finds that the Assessee and  

Heinz  are  related,  it  shall  remit  the  matter  to  the  Adjudicating  

Authority for fresh determination of the assessable value of the goods  

in question in accordance with law.  However, having regard to the  

facts and circumstances of the case, there will be no order as to costs.

...……………………………………         (D.K. JAIN, J.)  

                             ..…………………………………….         (ANIL R. DAVE, J.)

NEW DELHI; FEBRUARY 13, 2012.

RS

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