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Thursday, August 27, 2015

''transaction value" means the price actually paid or payable for the goods, when sold, and includes in addition to amount charged as priced, any amount that they 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 sale or at any other time, including , but not 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." M/s Purolator India Limited (hereinafter referred to as the appellant) is engaged in the manufacture of excisable goods, namely Filter Elements, Inserts, and Cartridges and Components. These goods are either cleared by the appellant to various vehicle manufacturers or stock transferred to depots from where they are further stock transferred to clearing and forwarding agents. 2. For effecting stock transfers, the appellant filed declarations under Rule 173C with the excise department. In these declarations, the appellant claimed deduction towards Sales Tax, Cash Discount and Volume Discount on excise duty payable to arrive at the assessable value under Section 4 of the Central Excise and Salt Act, 1944.Insofar as the other point of defective goods and volume discount on sales tax is concerned, the Tribunal has stated:- “8. We have considered the submissions of both the sides. Regarding defective goods, we observe from the statement dated 9.10.2000 of Shri R.K. Gulati that he has clearly deposed therein that "the goods so received from various customers under the said D3s,have not actually been rectified and entire new finished products have been sent to the buyer taking it as the goods rectified." This is clear admission on the part of the authorized signatory for Excise matters that new excisable goods were cleared in place of defective goods received back. This statement has not been retracted by Shri Gulati at all. The certificate given by the Chartered Engineer is dated 5.7.2002 which is much after the period involved in the present matter before us and cannot overcome the clear admission by the authorized signatory of the Appellant company. We also do not find any force in the submission that Shri Gulati's statement can be relied upon only in respect of Khandsa factory not in respect of factory at Mehrauli Road since no such qualification has been attached by Shri Gulati in his statement. Further, if the defective goods were substituted by new goods at one factory, it is reasonable to include that the same practice would be prevalent at the other factory of the same manufacturer. We, therefore, hold that the Appellants were removing the new excisable goods to their customers in lieu of defective goods received back by them. We, however, find force in the contention of the learned Advocate that duty cannot be demanded in respect of the defective goods against which no excisable goods were cleared by the Appellants. This aspect is being remanded to the jurisdictional Adjudicating Authority for reconsideration of the material/evidence that may be produced by the Appellants within two months of receipt of this Order. 9. Regarding volume discount and sales tax, the dispute is not with regard to their deduction but the actual amount of volume discount passed or sales tax paid. In our view the actual amount of volume discount passed on by the Appellant and actual amount of sale tax paid/payable have to be deducted from for the purpose of determining the assessable value of the goods. This is a factual matter which has to be looked into again by the jurisdictional Adjudicating Authority after considering the material adduced by the Appellants within two months of receipt of this Order.” 28. Both parties have requested us that since the matter is going to be remanded in terms of the Tribunal’s order on these issues, the remand should be an open-ended one, namely, that both parties should be free to argue afresh on all points that arise insofar as these issues are concerned. We therefore, while affirming the Tribunal’s order of remand, allow both parties to argue all points that may arise insofar as these issues are concerned. So far as the cash discount issue is concerned, we set aside the Tribunal’s order. 29. Appeal is disposed of accordingly.

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 1959 OF 2006

M/S PUROLATOR INDIA LTD. …APPELLANT
VERSUS
COMMISSIONER OF CENTRAL EXCISE,
DELHI – III ...RESPONDENT

J U D G M E N T

R.F. Nariman, J.

1. M/s Purolator India Limited (hereinafter referred to as the
appellant) is engaged in the manufacture of excisable goods, namely Filter
Elements, Inserts, and Cartridges and Components. These goods are either
cleared by the appellant to various vehicle manufacturers or stock
transferred to depots from where they are further stock transferred to
clearing and forwarding agents.

2. For effecting stock transfers, the appellant filed declarations under
Rule 173C with the excise department. In these declarations, the appellant
claimed deduction towards Sales Tax, Cash Discount and Volume Discount on
excise duty payable to arrive at the assessable value under Section 4 of
the Central Excise and Salt Act, 1944.

3. Apart from undertaking manufacturing activities, the appellant at
times also receives goods from customers for repair in case of defects
noticed by the customers. The customers either reject the entire lot or a
particular box etc. if they notice any defect, so that their time is not
wasted in checking each and every item and thus, goods are sent back to the
appellant. On receipt of such consignments, the appellant checks the same
for defects indicated and undertakes necessary repairs. Thereafter, the
finished products are returned to customers. The appellant was filing the
necessary D-3 declarations for receipt of such returned goods and was
maintaining the register required in Form V for the said purposes and was
thereafter returning such repaired items under the provisions of Rule 173H
without payment of duty thereon.

4. A Show Cause Notice dated 2.4.2002 was issued wherein it was alleged
that the appellant is not eligible for the various deductions claimed on
account of volume discount, sales tax and cash discount. Besides this it
was also alleged that the appellant has removed new finished excisable
goods instead of old/repaired goods.

5. The appellant filed a detailed reply to the show cause notice
countering each and every allegation. The Commissioner of Central Excise,
Delhi-III passed an Order dated 31.12.2003 dropping the duty demands on all
the issues for the period April 1996 to February 1997, being more than five
years old. Further, he dropped the duty demand on the issue of cash
discount for the period prior to July 2000. However, on the remaining
issues, the Commissioner has confirmed duty demand of Rs. 44,66,247/- and
also imposed penalty of Rs. 49,66,247/- on the appellant as follows:-

“ORDER

With a view to the discussion and findings recorded above

(i) invoke extended period of limitation provided in first proviso to
Section 11A(1) of the Central Excise Act, 1944, and determine the following
amounts in terms of provisions of Section 11A and direct the assessee to
pay the same forthwith.

(a) Rs. 13,43,046/- towards duty involved on replaced goods cleared between
March 1997 to March 2001.

(b) Rs. 14,27,483/- towards duty computed for the period of March 1997 to
March, 2001 on volume discount.

(c) Rs, 11,96,601/- towards duty computed for the period of March 97 to
March, 2001 on Sales Tax deduction and

(d) Rs. 4,99,117/- towards duty on cash discount for the period of July
2000 to March, 2001

(ii) confirm that the interest in terms of provisions of Section 11AB ibid
is payable by the assessee on the amounts of (i) (a) to (i) (d) above;

(iii) impose a penalty of Rs. 44,66,247/- on assessee under the provisions
of Section 11AC ibid;

(iv) impose a penalty of Rs. 5 lakhs on assessee in terms of provisions of
Rule 173Q of the Central Excise Rules, 1944 and Rule 25 of the Central
Excise Rules, 2001 both read with section 38A of the Central Excise Act,
and

(v) appropriate the amounts of Rs. 29,140/-, Rs. 38,896/-, Rs. 42,728/- and
Rs. 19,443/- which were voluntarily paid by the assessee on account of duty
on handling charges and differential duty.

It is clarified that the amount of penalty in (iii) above shall be reduced
to 25% thereof if the assessee deposits the amounts of the duty, interest
and penalty, determined vide this order within 30 days from the date of
communication of this order; and that if the assessee has already deposited
/paid some amount in relation to the dues determined above, then such
payment shall be adjusted against the dues.”

6. When it came to cash discount, the Tribunal upheld the finding of the
Commissioner on the following basis:-

“10. Regarding cash discount, it is not in dispute that the duty has been
demanded in respect of cash discount which was not actually passed on to
the customers. The learned Advocate has relied upon the decision in Pace
Marketing Specialities Ltd, supra, wherein it has been held by the Tribunal
that cash discount is a discount allowed for prompt payment for the goods
and when this discount is reduced from the invoice price, transaction value
at the time of delivery of goods is obtained, otherwise, the invoice price
is a future price and as the assessable value is to be determined with
regard to time of removal financing and other cost cannot form part of the
assessable value. With due regard, we find ourselves unable to agree with
this view. The measure for valuation under New Section 4 of the Central
Excise Act (with effect from 1.7.2000) is the "transaction value" and not
the "deemed value" which was the case under the Old Section 4 of the Act.
Under Old Section 4 the value shall be deemed to be the normal price, 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 or delivery at the
time and place of removal. In view of this clear language of the Section
itself, the Bombay High Court in the case of Jenson & Nicholson (India)
Ltd. Vs. Union of India, 1984 (17) ELT 4 (Bom.) has filed that the
wholesale cash price on which the excisable duty is assessable will
naturally be the price minus the cash discount allowed in the invoice. The
Hon'ble High Court has proceeded on the basis that the sales are effected
on the basis of the price basis which themselves mention the various terms
subject to which the sales are effected. The Tribunal followed the said
Judgment in CCE, Meerut Vs. Station Shox Ltd. 1996 (85) ELT 139 (T). The
provision of Section 4 of the Central Excise Act have since then completely
changed. As per new Section 4. Value shall "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 buyers of the goods are not related and the price is
the sole consideration for the sale, be the transaction value." Thus in the
present matter, the value for the purpose of Section 4 shall be the
transaction value which has been defined in clause (d) of sub-section(3) of
Section 4 of the Act as under:-

''transaction value" means the price actually paid or payable for the
goods, when sold, and includes in addition to amount charged as priced, any
amount that they 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 sale or at any other time, including , but not 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."

11. Thus the value has under gone a complete change. The question to be
asked for determination of the assessable value under new Section 4 is what
is the "transaction value" of the goods that is "the price actually paid or
payable for the goods when sold." Contrary to these provisions, under the
old Section 4 the value was a deemed one, that is to say, the price at
which goods a ordinarily sold in the course of wholesale trade. Now under
New Section 4, one has not to look as to what is the price at which goods
are ordinarily sold in the course of wholesale trade. The price actually
paid or payable is to be taken up as the assessable value. In the present
matter, the transaction value has to be taken for the purpose of
assessment of duty under Section 4 of the Central Excise Act and as
admittedly no cash discount has been given to the customers, the actual
price paid by them shall be the assessable value.

12. Accordingly, we reject the appeal as far as it relates to the allowance
of deduction on account of cash discount. In respect of volume discount and
sales tax and duty liability in respect of returned goods, the matter is
remanded to the jurisdictional Adjudicating Authority for re-adjudication
in terms of our direction. We leave the issue regarding imposition of
penalty open to be decided by the Adjudicating Authority.”

7. Shri Lakshmikumaran, learned counsel for the appellant, has argued
that Section 4 of the Central Excise and Salt Act, 1944 as amended in 2000,
has made no change in the situation qua cash discount as it obtained under
the old Section 4. According to him, what has to be seen in order to
arrive at the correct value of excisable goods under Section 4 is such
value at the time of removal, and this being so under both the old Section
and the new Section, cash discount has to be allowed as has been held in
Union of India v. Bombay Tyre International Limited, 1984 (17) ELT 329
(SC), and Government of India v. Madras Rubber Factory Ltd., 1995 (77) ELT
433 (SC).

8. Further, according to the learned counsel, “transaction value” which
was introduced for the first time into the amended Section 4 does not make
any change with regard to the fact that such transaction value is only at
the time of removal from the factory or depot, being the time of clearance
of excisable goods from the factory premises or depot as the case may be.
According to him, every agreement of sale entered into by the assessee with
its buyers makes it known before the goods are cleared that there is to be
a cash discount insofar as the appellant’s goods are concerned. Therefore,
this being the case, it is clear that at the time of clearance of the
excisable goods from the appellant’s factory, such discounted price alone
has to be the value of the goods cleared from the appellant’s factory even
under the amended Section 4.

9. Ms. Pinky Anand, learned Additional Solicitor General, has, on the
other hand, stated that the introduction of “transaction value” into the
amended Section 4 makes a world of difference and that therefore only what
is actually paid ultimately is to be looked at for the purpose of valuation
of the appellant’s goods. If it is found that what is “actually paid” is
not the discounted price, then the transaction value cannot possibly
include cash discount. For this purpose, she relied upon the decision in
Commissioner of Central Excise, Jaipur-II v. Super Synotex (India) Ltd. and
Ors., 2014 (301) ELT 273 (SC).

10. We have heard learned counsel for the parties. In order to better
appreciate the arguments on both the sides, it is necessary to set out
Section 4 of the Central Excise and Salt Act as it obtained prior to the
amendment made in 1973, the amendment made in 1973; and finally the
amendment made in 2000.

11. Section 4, prior to its amendment in 1973, read as follows:-

“4. Where under this Act, any article is chargeable with duty at a rate
dependent on the value of the article, such value shall be deemed 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 or any other premises of
manufacture or production, or if a whole the place of manufacture or
production, or if a wholesale market does not exist for such article at
such place, at the nearest place where such market exists, or

Where such price is not ascertainable, the price at which an article of the
like kind and quality is sold or is capable of being sold by the
manufacturer or producer, or his agent, at the time of the removal of the
article chargeable with duty from such factory or other premises for
delivery at the place of manufacture or production, or if such article is
not sold or is not capable of being sold at place at any other place
nearest thereto.

Explanation-In determining the price of any article under this
section, no abatement or deduction shall be allowed except in respect of
trade discount and the amount of duty payable at the time of the removal of
the article chargeable with duty from the factory or other premises
aforesaid.”

12. After the amendment of 1973, Section 4 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 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 place of removal, where the buyer is not
a related person and the price is the sole consideration for the sale:

Provided that -

(i) where, in accordance with the normal practice of the wholesale trade in
such goods, such goods are sold by the assessee at different prices to
different classes of buyers (not being related persons) each such price
shall, subject to the existence of the other circumstances specified in
clause (a), be deemed to be the normal price of such goods in relation to
each such class of buyers;
(ia) where the price at which such goods are ordinarily sold by the
assessee is different for different places of removal, each such price
shall, subject to the existence of other circumstances specified in clause
(a), be deemed to be the normal price of such goods in relation to each
such place of removal;

(ii) where such goods are sold by the assessee in the course of wholesale
trade for delivery at the time and place of removal at a price fixed under
any law for the time being in force or at a price, being the maximum, fixed
under any such law, then, notwithstanding anything contained in clause
(iii) of this proviso, the price or the maximum price, as the case may be,
so fixed, shall, in relation to the goods so sold, be deemed to be the
normal price thereof;

(iii) where the assessee so arranges that the goods are generally not sold
by him in the course of wholesale trade except to or through a related
person, the normal price of the goods sold by the assessee to or through
such related person shall be deemed to be the price at which they are
ordinarily sold by the related person in the course of wholesale trade at
the time of removal, to dealers (not being related persons) or where such
goods are not sold to such dealers, to dealers (being related persons), who
sell such goods in retail;

(b) where the normal price of such goods is not ascertainable for the
reason, that such goods are not sold or for any other reason, the nearest
ascertainable equivalent thereof determined in such manner as may be
prescribed.

(2) Where, in relation to any excisable goods the price thereof for
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.
(3) The provisions of this section shall not apply in respect of any
excisable goods for which a tariff value has been fixed under sub-section
(2) of section 3.

(4) For the purposes of this section, -

(a) "assessee" means the person who is liable to pay the duty of excise
under this Act and includes his agent;

(b) "place of removal" means-

(i) a factory or any other place or premises of production or manufacture
of the excisable goods;

(ii) a warehouse or any other place or premises wherein the excisable goods
have been permitted to be deposited without payment of duty;

(iii) a depot, premises of a consignment agent or any other place or
premises from where the excisable goods are to be sold after their
clearance from the factory and,

from where such goods are removed;

(ba) "time of removal", in respect of goods removed from the place of
removal referred to in sub-clause (iii) of clause (b), shall be deemed to
be the time at which such goods are cleared from the factory;

(c) "related person" means a person who is so associated with the assessee
that they have interest, directly or indirectly, in the business of each
other and includes a holding company, a subsidiary company, a relative and
a distributor of the assessee, and any sub-distributor of such distributor.

Explanation. - In this clause "holding company", "subsidiary company" and
"relative” have the same meanings as in the Companies Act, 1956 (1 of
1956);

(d) "value", in relation to any excisable goods,-

(i) where the goods are delivered at the time of removal in a packed
condition, includes the cost of such packing except the cost of the packing
which is of a durable nature and is returnable by the buyer to the
assessee.

Explanation. – In this sub-clause, “ packing” means the wrapper, container,
bobbin, pirn, spool, reel or warp beam or any other thing in which or on
which the excisable goods are wrapped, contained or wound;

(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 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.

Explanation. - For the purposes of this sub-clause, the amount of the duty
of excise payable on any excisable goods shall be the sum total of –

(a) the effective duty of excise payable on such goods under this Act; and

(b) the aggregate of the effective duties of excise payable under other
Central Acts, if any, providing for the levy of duties of excise on such
goods,

and the effective duty of excise on such goods under each Act referred to
in clause (a) or clause (b) shall be,-

(i) in a case where a notification or order providing for any exemption
(not being an exemption for giving credit with respect to, or reduction of
duty of excise under such Act on such goods equal to, any duty of excise
under such Act, or the additional duty under section 3 of the Customs
Tariff Act, 1975 (51 of 1975), already paid on the raw material or
component parts used in the production or manufacture of such goods) from
the duty of excise under such Act is for the time being in force, the duty
of excise computed with reference to the rate specified in such Act, in
respect of such goods as reduced so as to give full and complete effect to
such exemption; and

(ii) in any other case, the duty of excise computed with reference to the
rate specified in such Act in respect of such goods.

(e) "wholesale trade" means sales to dealers, industrial consumers,
Government, local authorities and other buyers, who or which purchase their
requirements otherwise than in retail.”

13. Section 4, as it reads after the amendment of 2000, is as follows:-

“4. Valuation of excisable goods for purposes of charging of duty of
excise.-

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 –

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 the goods are
not related and the price is the sole consideration for the sale, be the
transaction value;

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

The provisions of this section shall not apply in respect of any excisable
goods for which a tariff value has been fixed under sub-section (2) of
section 3.

For the purpose of this Section,-

“assessee” means the person who is liable to pay the duty of excise under
this Act and includes his agent;

persons shall be deemed to be “related” if-

they are inter-connected undertakings;

they are relatives;

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

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

Explanation. – In this clause –

“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

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

“place of removal” means -

(i) a factory or any other place or premises of production or manufacture
of the excisable goods;

(ii) a warehouse or any other place or premises wherein the excisable
goods have been permitted to be deposited without payment of duty,

from where such goods are removed;

(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 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.”

14. It can be seen that the common thread running through Section 4,
whether it is prior to 1973, after the amendment in 1973, or after the
amendment of 2000, is that excisable goods have to have a determination of
“price” only “at the time of removal”. This basic feature of Section 4 has
never changed even after two amendments. The “place of removal” has been
amended from time to time so that it could be expanded from a factory or
any other premises of manufacture or production, to warehouses or depots
wherein the excisable goods have been permitted to be deposited either with
payment of duty, or from which such excisable goods are to be sold after
clearance from a factory. In fact, Section 4(2) pre- 2000 made it clear
that where the price of excisable goods for 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 is to
be excluded from such price. This is because the value of excisable goods
under the Section is to be determined only at the time and place of
removal. Even after the amendment of Section 4 in 2000, the same scheme
continues. Only, Section 4(2) is in terms replaced by Rule 5 of the Central
Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000.

15. Post 1973, this Court has in two of its decisions, namely, in Union
of India v. Bombay Tyre International Limited, 1984 (17) ELT 329 (SC),
clearly held as follows:-

“Trade Discounts. – Discounts allowed in the Trade (by whatever name such
discount is described) should be allowed to be deducted from the sale price
having regard to the nature of the goods, if established under agreements
or under terms of sale or by established practice, the allowance and the
nature of the discount being known at or prior to the removal of the goods.
Such Trade Discounts shall not be disallowed only because they are not
payable at the time of each invoice or deducted from the invoice price.”
(at para 1)

16. In the second judgment in Government of India v. Madras Rubber
Factory Ltd., 1995 (77) ELT 433 (SC), what has been held is as follows:-

“Year Ending Discount and Prompt Payment Discount:

What is called 'Year-ending discount' is really a bonus given by Madras
Rubber Factory to its dealers @ Rupees fifty per tyre in respect of a
particular type of tyres. This discount is payable only where the payments
are actually received within forty five days from the date of the invoice.
Under this scheme, it appears that a declaration is to be received dealer-
wise and thereafter provision is to be made at the head office of MRF for
the bonus. The Assistant Collector has found that this discount was allowed
by the assessee not out of any extra-commercial considerations but that
they were meant only to boost the sales particularly in the year 1981-82 in
respect of Leader Tyre in order to achieve the target of sales for that
year. He has recorded a finding that "such a system of grant of discount is
prevalent in normal trade practice and the only difference may be that MRF
limited have granted the discount only at the end of the year and not at
the time of actual sales". The learned Additional Solicitor General
disputed the correctness of the basis on which the Assistant Collector has
allowed this deduction. He commended for our acceptance the reasoning in
Para 13(ii) of the judgment dated December 20,1986 (Assistant Collector of
Central Excise v. Madras Rubber Factory.) The reasoning in the said order
runs thus:

“The allowance of the discount is not known at or prior to the removal of
the goods. The calculations are made at the end of the year and the Bonus
at the said rate is granted only to a particular class of Dealers. This is
computed after taking stock of the accounts between MRF and its dealers. It
is not in the nature of a discount but is in the nature of a Bonus or an
incentive much after the invoice is raised and the removal of the goods is
complete. In the circumstances, we are of the opinion that MRF is not
entitled to deduction under this head.”

We are, however, of the respectful opinion that the said reasoning cannot
be accepted in view of the clear finding recorded by the Assistant
Collector that this system of discount is prevalent in the industry and is
known and understood at the time of removal of particular goods, though the
amount is quantified later. In view of the said finding and in the light of
the clarificatory Order in Bombay Tyre International, we hold that this
claim has been rightly allowed by the Assistant Collector.

So far as the prompt payment discount is concerned, it is payable under a
scheme called 'prompt payment discount scheme' which is applicable only to
up-country non-RCS dealers (except, of course, the Government and DGS&D
accounts). The discount is @ 0.75% on the total value of the invoice
including sales tax, surcharge etc. provided the bill is cleared/paid
within 26 days from the date of invoice. The case of the Union of India is
that this discount is limited only to certain varieties of products as
explained in the scheme document and is valid only for a limited period.
The Assistant Collector, however, dealt with this discount along with the
year ending discount and allowed it on the same reasoning as is applicable
to the year ending discount.

In view of the findings recorded by the Assistant Collector and the
clarificatory order in Bombay Tyre International this claim too must be
held to have been rightly allowed by the Assistant Collector.” (at
paras 59 to 62)

17. The only question that falls for our determination is whether Section
4 as amended in the year 2000 makes no change to the aforesaid position.

18. It can be seen that Section 4 as amended introduces the concept of
“transaction value” so that on each removal of excisable goods, the
“transaction value” of such goods becomes determinable. Whereas previously,
the value of such excisable goods was the price at which such goods were
ordinarily sold in the course of wholesale trade, post amendment each
transaction is looked at by itself. However, “transaction value” as
defined in sub-clause (3)(d) of Section 4 has to be read along with the
expression “for delivery at the time and place of removal”. It is clear,
therefore, that what is paramount is that the value of the excisable goods
even on the basis of “transaction value” has only to be at the time of
removal, that is, the time of clearance of the goods from the appellant’s
factory or depot as the case may be. The expression “actually paid or
payable for the goods, when sold” only means that whatever is agreed to as
the price for the goods forms the basis of value, whether such price has
been paid, has been paid in part, or has not been paid at all. The basis of
“transaction value” is therefore the agreed contractual price. Further,
the expression “when sold” is not meant to indicate the time at which such
goods are sold, but is meant to indicate that goods are the subject matter
of an agreement of sale. Once this becomes clear, what the learned counsel
for the assessee has argued must necessarily be accepted inasmuch as cash
discount is something which is “known” at or prior to the clearance of the
goods, being contained in the agreement of sale between the assessee and
its buyers, and must therefore be deducted from the sale price in order to
arrive at the value of excisable goods “at the time of removal”.

19. We were referred to the Central Board of Excise and Customs Bulletin
for the period January-March, 1975 in which the Board laid down:-

“Cash Discounts

That is, discounts for prompt payment of price of goods on delivery, are
admissible in arriving at the assessable value if they are available to all
buyers. This aspect has been dealt with in detail under the heading
“price”.

“…Some assessee may give to all his buyers cash discount, that is a
discount for prompt payment. In other words, they charge a somewhat lesser
price where there is cash payment, but charge a higher price (i.e. without
deduction of the cash discount) if the payment is not made in cash. In such
cases, the cash discount, if allowed, will be admissible on the principle
that only the net price obtained after deduction of the cash discount is
the price of the goods.”

“Illustrations.

(iv) Assessee A sells the goods at Rs. 100 per unit but given a cash
discount of 2% if payment is made at the time of delivery or within a
specified period. Such cash discount will be admissible and the price will
be Rs. 100 per unit minus 2%.”

20. This understanding of the Board would necessarily continue in view of
what is said above as regards cash discounts even after the amendment of
Section 4 in the year 2000.

21. We were referred to the judgment of this Court in Deputy Commissioner
of Sales Tax (Law) Board of Revenue (Taxes), Ernakulam v. Advani Oorlikon
(P) Ltd., 1981 (8) ELT 801 (S.C.), in which it was stated:-

“… Cash discount is allowed when the purchaser makes payment promptly or
within the period of credit allowed. It is a discount granted in
consideration of expeditious payment. A trade discount is a deduction from
the catalogue price of goods allowed by wholesalers to retailers engaged in
the trade. The allowance enables the retailer to sell the goods at the
catalogue price and yet make a reasonable margin of profit after taking
into account his business expense. The outward invoice sent by a wholesale
dealer to a retailer shows the catalogue price and against that a deduction
of the trade discount is shown. The net amount is the sale price, and it is
that net amount which is entered in the books of the respective parties as
the amount realisable.” (at para 5)

22. This judgment arose in the context of the Central Sales Tax Act, but
it is instructive only in that it makes it clear that a cash discount is
the discount granted in consideration of expeditious payment, and is
therefore directly related to price.

23. It only remains to discuss the sheet anchor of revenue’s case,
namely, the judgment of this Court in Commissioner of Central Excise,
Jaipur-II v. Super Synotex (India) Ltd. and Ors. (supra). The said judgment
was concerned with sales tax incentives that were given under the Rajasthan
Sales Tax Incentives Scheme. On the facts of that case, 25% of the sales
tax was paid to the Government, and 75% of the said amount of sales tax was
retained by the assessee and became the assessee’s profit. Under the
earlier Board’s circulars that were issued by the Central Board of Excise
and Customs, the amount of 75% of sales tax that was never paid to the
Government but retained by the assessee was also liable to be deducted from
“price” under the old Section 4, that is, Section 4 before its amendment in
the year 2000. This Court held that the amended Section 4 would require
that such amount of 75% is not deductible as sales tax because, according
to this Court, only sales tax that is “actually paid” could be deducted
post Section 4 as amended in 2000. This Court said:-

“It is evincible from the language employed in the aforesaid circular that
set off is to be taken into account for calculating the amount of sales tax
permissible for arriving at the "transaction value" under Section 4 of the
Act because the set off does not change the rate of sales tax
payable/chargeable, but a lower amount is in fact paid due to set off of
the sales tax paid on the input. Thus, if sales tax was not paid on the
input, full amount is payable and has to be excluded for arriving at the
"transaction value". That is not the factual matrix in the present case.
The assessee in the present case has paid only 25% and retained 75% of the
amount which was collected as sales tax. 75% of the amount collected was
retained and became the profit or the effective cost paid to the assessee
by the purchaser. The amount payable as sales tax was only 25% of the
normal sales tax. Purpose and objective in defining "transaction value" or
value in relation to excisable goods is obvious. The price or cost paid to
the manufacturer constitutes the assessable value on which excise duty is
payable. It is also obvious that the excise duty payable has to be excluded
while calculating transaction value for levy of excise duty. Sales tax or
VAT or turnover tax is payable or paid to the State Government on the
transaction, which is regarded as sale, i.e., for transfer of title in the
manufactured goods. The amount paid or payable to the State Government
towards sales tax, VAT, etc. is excluded because it is not an amount paid
to the manufacturer towards the price, but an amount paid or payable to the
State Government for the sale transaction, i.e., transfer of title from the
manufacturer to a third party. Accordingly, the amount paid to the State
Government is only excludible from the transaction value. What is not
payable or to be paid as sales tax/VAT, should not be charged from the
third party/customer, but if it charged and is not payable or paid, it is a
part and should not be excluded from the transaction value. This is the
position after the amendment, for as per the amended provision the words
"transaction value" mean payment made on actual basis or actually paid by
the assessee. The words that gain signification are "actually paid". The
situation after 1.7.2000 does not cover a situation which was covered under
the circular dated 12.3.1998. Be that as it may, the clear legislative
intent, as it seems to us, is on "actually paid". The question of "actually
payable" does not arise in this case.” (at para 22)

24. It will be noticed that this Court did not deal with Section 4(1)(a)
as amended in the year 2000 insofar as it speaks of delivery of goods at
the time and place of removal. This Court was only concerned with whether
sales tax is to be deducted from “transaction value” as newly defined. We
have already seen that “transaction value” specifically states that it will
not include sales tax “actually paid or actually payable on such goods”.
On the facts of that case, this Court was not concerned with the expression
“actually payable” as it did not arise in that case. This Court was only
concerned with sales tax not “actually paid” to the Rajasthan Government,
and therefore held that since 75% of sales tax was retained by the
assessee, the said amount could not be deducted as only amounts payable to
the State Government as sales tax can be deducted. This was so held on an
interpretation of the last part of the definition of “transaction value”.
The facts of the present case are concerned with the first part of the
definition of “transaction value” which has to be read with Section 4(1)(a)
as has been stated above.

25. This judgment does not in any manner deviate from the settled legal
position so far as cash discounts are concerned as has been laid down in
Union of India v. Bombay Tyre International (supra) and Government of
India v. MRF (supra). In fact, as has been pointed out earlier, this
judgment did not concern itself with the “price” of excisable goods that
must be ascertained only at the time of removal from the factory gate.
Since this Court was only concerned with whether or not certain amounts by
way of sales tax were or were not to be deducted from “price”, the said
judgment has little application to the facts of the present case.

26. In view of what has been said above, it is clear that “cash discount”
has therefore to be taken into account in arriving at “price” even under
Section 4 as amended in 2000.

27. Insofar as the other point of defective goods and volume discount on
sales tax is concerned, the Tribunal has stated:-

“8. We have considered the submissions of both the sides. Regarding
defective goods, we observe from the statement dated 9.10.2000 of Shri R.K.
Gulati that he has clearly deposed therein that "the goods so received from
various customers under the said D3s,have not actually been rectified and
entire new finished products have been sent to the buyer taking it as the
goods rectified." This is clear admission on the part of the authorized
signatory for Excise matters that new excisable goods were cleared in place
of defective goods received back. This statement has not been retracted by
Shri Gulati at all. The certificate given by the Chartered Engineer is
dated 5.7.2002 which is much after the period involved in the present
matter before us and cannot overcome the clear admission by the authorized
signatory of the Appellant company. We also do not find any force in the
submission that Shri Gulati's statement can be relied upon only in respect
of Khandsa factory not in respect of factory at Mehrauli Road since no such
qualification has been attached by Shri Gulati in his statement. Further,
if the defective goods were substituted by new goods at one factory, it is
reasonable to include that the same practice would be prevalent at the
other factory of the same manufacturer. We, therefore, hold that the
Appellants were removing the new excisable goods to their customers in lieu
of defective goods received back by them. We, however, find force in the
contention of the learned Advocate that duty cannot be demanded in respect
of the defective goods against which no excisable goods were cleared by the
Appellants. This aspect is being remanded to the jurisdictional
Adjudicating Authority for reconsideration of the material/evidence that
may be produced by the Appellants within two months of receipt of this
Order.

9. Regarding volume discount and sales tax, the dispute is not with regard
to their deduction but the actual amount of volume discount passed or sales
tax paid. In our view the actual amount of volume discount passed on by the
Appellant and actual amount of sale tax paid/payable have to be deducted
from for the purpose of determining the assessable value of the goods. This
is a factual matter which has to be looked into again by the jurisdictional
Adjudicating Authority after considering the material adduced by the
Appellants within two months of receipt of this Order.”

28. Both parties have requested us that since the matter is going to be
remanded in terms of the Tribunal’s order on these issues, the remand
should be an open-ended one, namely, that both parties should be free to
argue afresh on all points that arise insofar as these issues are
concerned. We therefore, while affirming the Tribunal’s order of remand,
allow both parties to argue all points that may arise insofar as these
issues are concerned. So far as the cash discount issue is concerned, we
set aside the Tribunal’s order.

29. Appeal is disposed of accordingly.

……………………J.

(A.K. Sikri)

……………………J.

(R.F. Nariman)

New Delhi;

August 25, 2015.

ITEM NO.1B COURT NO.13 SECTION III
(FOR JUDGMENT)
S U P R E M E C O U R T O F I N D I A
RECORD OF PROCEEDINGS

Civil Appeal No(s). 1959/2006

M/S. PUROLATOR INDIA LTD. Appellant(s)

VERSUS

COMMNR. OF CENTRAL EXCISE, DELHI-III Respondent(s)

Date : 25/08/2015 This appeal was called on for pronouncement of
Judgment today.

For Appellant(s) Mr. Rajesh Kumar,Adv.

For Respondent(s) Ms. Pinky Anand, ASG
Ms. Nisha Bagchi, Adv.
Ms. Snidha Mehra, Adv.
Ms. Aruna Gupta, Adv.
Mr. B. Krishna Prasad,Adv.

Hon'ble Mr. Justice Rohinton Fali Nariman pronounced the Judgment of
the Bench comprising Hon'ble Mr. Justice A.K.Sikri and His Lordship.

The appeal is disposed of in terms of the signed reportable judgment.

Pending application(s), if any, stand disposed of.

(Ashwani Thakur) (Renu Diwan)
COURT MASTER COURT MASTER

(Signed reportable judgment is placed on the file)

whether Vaseline Intensive Care Heel Guard (for short, 'VHG') is to be treated as merely a skin care preparation or it is a medicament having curing properties. Based on the answer to the aforesaid question, classification of this product will be determined. If it is only a skin care preparation then VHG is classifiable under Chapter Heading 3304.00 of the First Schedule to the Central Excise Tariff Act, 1985 (for short, the 'Act'). On the other hand, if it is to be treated as a medicament, VHG would get covered under Chapter Heading 3003.10 of the First Schedule. The rate at which the excise duty is payable depends on the said classification. =As pointed out above, the product in question, Vaseline Intensive Care Heel Guard, is marketed as a solution for cracked heels and it is claimed that this solution is specially developed by the scientists at Vaseline Research. The composition of this product includes salicylic acid I.P. 1.5% w/w. lactic acid 8.0% w/w. Triclosan 0.1% w/w. Cream base – q.s. Salicylic acid is described as keratolytic substance having bacteriostalic and fungicidal properties used in the treatment of fungus infection of the skin. The Tribunal, while deciding that the aforesaid product is a medicament, pointed out that the product was formulated and essentially used for treatment of 'cracked heels', protection from further cracks in the human heels due to extreme climatic conditions and low humidity, constant exposure of feet to water and due to absence of shoe or other protection while walking. It also found that this product was manufactured under a drug licence as drug authorities had treated the same as a medicament. The Tribunal also found that the usage of this product was related to the effect of therapeutic or mitigating substance of prophylactic substances added. Thus, the effect of mitigation of an external condition is primary effect and the effect of smoothing the skin was secondary in nature and, therefore, it was to be treated as a medicament and classified under Chapter 30. Interestingly, all the aforesaid features of the product are accepted by the Department. However, only on the ground that salicylic acid contained in the product is marginal, the Department took the view that it was a subsidiary substance. Having regard to the exposition of law narrated above, this was clearly an erroneous approach on the part of the Revenue as percentage of the said substance is immaterial to label it as subsidiary. Another more important factor which needs to be stated at this stage is that though the burden was on the Department, it did not lead any evidence or produce any material to discharge this onus. It simply went by the pamphlet of the product, that too selectively picking up that portion where the product was described as good for care of the skin as well, ignoring the fact that the same very literature gives more emphasis to the therapeutic value of the product. On the other hand, the assessee had filed various affidavits of the dealers as well as consumers in support of its plea that the product was essentially a medicament, which material was blissfully ignored by the Department. From the aforesaid, we conclude that the decision of the Tribunal holding the product in question to be a medicament and, therefore, covered by Chapter Heading 3003.10 is perfectly justified and does not call for any interference. The civil appeal is, accordingly, dismissed with no order as to costs.

NON-REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 1941 OF 2006

|COMMISSIONER OF CENTRAL EXCISE, CHENNAI-IV |.....APPELLANT(S) |
|VERSUS | |
|HINDUSTAN LEVER LTD. |.....RESPONDENT(S) |

J U D G M E N T

A.K. SIKRI, J.
The issue involved in the present appeal is as to whether
Vaseline Intensive Care Heel Guard (for short, 'VHG') is to be treated as
merely a skin care preparation or it is a medicament having curing
properties. Based on the answer to the aforesaid question, classification
of this product will be determined. If it is only a skin care preparation
then VHG is classifiable under Chapter Heading 3304.00 of the First
Schedule to the Central Excise Tariff Act, 1985 (for short, the 'Act'). On
the other hand, if it is to be treated as a medicament, VHG would get
covered under Chapter Heading 3003.10 of the First Schedule. The rate at
which the excise duty is payable depends on the said classification.

Chapter 33 under which the Revenue wants to cover VHG pertains to
'essential oils and resinoids; perfumery, cosmetic or toilet preparations'
and, therefore, 40% duty is paid. Entry 33.04 thereof, which is
specifically sought to be attracted by the Revenue, reads as under:
“33.04 Beauty or make-up preparations and preparations for the care of the
skin (other than medicaments), including sunscreen and suntan preparations;
manicure or pedicure preparations”

If a particular product is to be covered under the aforesaid Entry, the
basic trait of the said product is that it is beauty or make-up
preparations and preparations for the care of the skin. Some products like
sunscreen and suntan preparations; manicure or pedicure preparations are
specifically included, meaning thereby they are to be treated as beauty or
make-up preparations or preparations for care of the skin. At the same
time, medicaments are specifically excluded therefrom. We would also like
to point out here certain chapter notes of Chapter 30 which are pressed
into service by the Revenue in order to claim that VHG is nothing but
preparation for the care of the skin. These are chapter notes 2 and 5 and
we reproduce the same as under:
“2. Heading Nos. 33.03 to 33.07 apply, inter alia, to products, whether or
not mixed (other than aqueous distillates and aqueous solutions of
essential oils), suitable for use as goods of these headings and put up in
packings with labels, literature or other indications that they are for use
as cosmetics or toilet preparations or put up in a form clearly specialized
to such use and includes products whether or not they contain subsidiary
pharmaceutical or antiseptic constituents, or are held out as having
subsidiary curative or prophylactic value.”

“5. Heading No. 33.04 applies, inter alia, to the following products :
beauty creams, vanishing creams, cold creams, make-up creams, cleansing
creams, skinfoods, skin tonics, face powders, baby powders, toilet powders,
talcum powders and grease paints, lipsticks, eyeshadow and eyebrow pencils,
nail polishes and varnishes, cuticle removers and other preparations for
use in manicure or chiropody and barrier creams to give protection against
skin irritants.”

On the other hand, as per the assessee VHG is a medicament and, therefor,
it should be covered by Chapter 30. Chapter 30 deals with 'pharmaceutical
products'. Entry 30.03, within which the assessee seeks to cover this
product, reads as under:
“30.03 Medicaments (including veterinary
medicaments”

| 3003.10 |Patent or proprietary |
|– |medicaments, other than those |
| |medicaments which are |
| |exclusively Ayurvedic, Unani, |
| |Siddha, Homoeopathic or |
| |Bio-chemic |
| | |
| 3003.20 |Medicaments (other than patent |
|– |or proprietary) other than |
| |those which are exclusively |
| |used in Ayurvedic, Unani, |
| |Siddha, Homoeopathic or |
| |Bio-chemic systems |
| | |
| |Medicaments, including those |
|– |used in Ayurvedic, Unani, |
| |Siddha, Homoeopathic or |
| |Bio-chemic systems; |
| | |
| 3003.31 |Manufactured exclusively in |
|– |accordance with the formulae |
| |described in the authoritative |
| |books specified in the First |
| |Schedule to the Drugs and |
| |Cosmetics Act, 1940 (23 of |
| |1940) or Homoeopathic |
| |Pharmacopoeia of India or the |
| |United States of America or the|
| |United Kingdom or the German |
| |Homoeopathic Pharmacopoeia, as |
| |the case may be, and sold under|
| |the name as specified in such |
| |book or pharmacopoeia. |
| 3003.32 |Medicaments (including |
|– |veterinary medicaments) used in|
| |bio-chemic system and not |
| |bearing a brand name. |
| | |
| 3003.39 |Other” |
|– | |

The position which is taken by the assessee is that VHG is patent or
proprietary medicament and is, therefore, classifiable under Chapter
Heading 3003.10 and only 15% duty is paid. There are certain chapter
notes attached to Chapter 30 as well and first two notes are relevant for
our purposes which we reproduce below:
“1. This Chapter does not cover:

(a) Foods or beverages (such as, dietetic, diabetic or fortified foods,
food supplements, tonic beverages and mineral waters) (Section 1V);

(b) Plasters specially calcined or finely ground for use in dentistry
(Chapter 25);

(c) Aqueous distillates or aqueous solutions of essential oils, suitable
for medicinal uses (Chapter 33);

(d) Preparations of Chapter 33 even if they have therapeutic or
prophylactic properties;

(e) Soap or other products of Chapter 34 containing added medicaments;

(f) Preparations with a basis of plaster for use in dentistry (Chapter
34);

(g) Blood albumin not prepared for therapeutic or for prophylactic uses
(Chapter 35).

2. For the purposes of heading No. 30.03—

(i) 'medicaments' means goods (other than foods or beverages such as
dietetic, diabetic or fortified foods, tonic beverages) not falling within
heading No. 30.03 or 30.04 which are either:—

(a) products comprising two or more constituents which have been
mixed or compounded together for therapeutic or prophylactic uses; or.

(b) unmixed products suitable for such uses put up in measured
doses or in packings for retail sale or for use in hospitals;

(ii) 'Patent or proprietary medicaments' means any drug or medicinal
preparation, in whatever form, for use in the internal or external
treatment of, or for the prevention of ailments in human beings or animals,
which bears either on itself or on its container or both, a name which is
not specified in a monograph, in a Pharmacopoeia, Formulary or other
publications, namely:—
(a) The Indian Pharmacopoeia:
(b) The International Pharmacopoeia;
(c) The British Pharmacopoeia;
(d) The British Pharmacopoeia;
(e) The British Pharmaceutical Codex;
(f) The British Veterinary Codex;
(g) The United States Pharmacopoeia;
(h) The National Formulary of the U.S.A.;
(i) The Dental Formulary of the U.S.A; and
(j) The State Pharmacopoeia of the U.S.S.R.;
or which is a brand name, that is, a name or a registered trade mark under
the Trade and Merchandise Marks Act, 1958 (43 of 1958), or any other mark
such as a symbol, monogram, label, signature or invented words or any
writing which is used in relation to that medicine for the purpose of
indicating or so as to indicate a connection in the course of trade between
the medicine and some person, having the right either as proprietor or
otherwise to use the name or mark with or without any indication of the
identity of that person.”

While contrasting the two Entries, namely, Entry 3304.00 on the one hand
and 3003.10 on the other, it can be discerned that if it is a product for
care of the skin, then it would fall under Chapter Heading 3304.00 but if
it is for the cure of skin disease then the product in-question would be
medicament; meaning thereby the inquiry has to be whether it is a care
product or a product meant for cure. Another aspect, while comparing the
two Entries, which needs to be mentioned is that Entry 3304.00 specifically
excludes medicaments. The obvious purpose is that if it is a medicament, it
has to fall under Chapter 30. Because of this specific exclusion of
medicament from Chapter Heading 3304.00, necessary consequence is that if
the Revenue wants to cover it under 3304.00, the onus is on the Revenue to
show that the particular product is not a medicament. At the same time,
reading of this Entry along with chapter notes 2 and 5, already extracted
above, would indicate that if pharmaceutical or antiseptic constituents
contained in the product are only subsidiary in nature, or having
subsidiary curative or prophylactic value, then that would not make the
product as medicament. Again, certain preparation for skin like
preparations for use in manicure or chiropody and barrier creams which give
protection against skin irritants are still to be treated as preparations
for care of the skin and would not be treated as curing the skin diseases.
That is the clear intent of chapter note 5 of Chapter 33. This is made
further clear with the heading of chapter note no. 1(d) of Chapter 30 which
specifically excludes preparation of Chapter 33 even if they have
therapeutic or prophylactic properties. However, a conjoint reading of note
5 of Chapter 33 and note 1(d) of Chapter 30 needs us to clarify that in
order to see as to whether a particular preparation falls under Chapter 33
or not (or gets excluded from Chapter 30), such therapeutic or prophylactic
properties have to be subsidiary in nature. Further, medicaments are
specifically defined in note 2 of Chapter 30 and the attributes of this
definition are to be kept in mind in order to decide whether a particular
product is a medicament or not.
To put it in a nutshell, if a particular product is
substantially for the care of skin and simply because it contains
subsidiary pharmaceutical or antiseptic constituents or is having
subsidiary curative or prophylactic value, it would not become medicament
and would still qualify as the product for the care of the skin. There
would be certain products which would be purely for the care of skin and
certain other products would be clearly medicament and such cases may not
pose any problem. The issue of determination as to whether a particular
product falls in Chapter 33 or Chapter 30 would arise in those cases where
certain products have the shades or qualities of both, namely, skin care as
well as cure of skin diseases. In such cases, the necessary exercise
requires to be undertaken. Whenever product has curative or prophylactic
value as well, but the Department still wants the said product to be
brought under Chapter Heading 3304.00, onus is on the Department to show
that it is not medicament. For this, it will have to demonstrate that
curative or prophylactic value is only subsidiary in nature or that the
product is covered by the description under chapter notes 5, namely, either
it is chiropody or barrier cream to give protection against skin irritants.
If the Department fails to discharge this onus, the product has to be
treated as medicament and would be covered under Chapter 30.

In BPL Pharmaceuticals Ltd. v. CCE, Vadodra[1], this Court has laid down
the principles which are to be kept in mind while deciding as to whether a
particular product would fall under Chapter 30 or under competing Chapter
33. That was a case where the assessee was engaged in manufacture of
Selenium Sulfide Lotion which contained 2.5% selenium sulfide W/V. The
assessee was manufacturing this product under a loan licence from Abbott
Laboratories in accordance with Abbott's specifications, raw materials,
packing materials and quality control. It was sold under the private name
'Selsun'. The assessee in that case claimed that this product was used in
the therapeutic quantity i.e. 2.5% W/V which was the only active ingredient
and other ingredient merely served the purpose of a bare medium. It was
also claimed that the product is manufactured under a drug licence issued
by the Food and Drug Administration. The assessee, thus, wanted the
product to be classified under heading 3003.19 as Pharmaceutical Product
under Chapter 30. However, the Revenue took the plea that it would fall
under sub-heading 3305.90 i.e. under Chapter 33. Thus, the respective
contentions of the Department as well as the assessee were almost on the
same lines as in the present case, namely, whether the said product was
Pharmaceutical product or it was a cosmetic/toiletry preparation. The only
difference was of sub-headings under those Chapters. This Court went into
the essential characteristics of the product and found it that dominant use
of the product was medicinal, as it was sold only on medical prescription
as a medicine for treatment of disease known as Seborrhoeic Dermatitis,
commonly known as Dandruff. It was manufactured under a Drug Licence; the
Food and Drug Administration had certified it as a Drug; and the Drug
Controller had categorically opined that Selenium Sulfide present in Selsun
was in a therapeutic concentration etc. The relevant passages from the
said judgment throwing light on these aspects are reproduced below:
“19. So far as medicinal properties of the product are concerned it can be
gathered from the technical and/or pharmaceutical references that Selenium
Sulfide has anti-fungal and anti-seborrhoeic properties and is used in a
detergent medium for the treatment of dandruff on the scalp which is milder
form of Seborrhoeic Dermatitis and Tinea Versicolour 2.5% of this compound
is the therapeutic quantity.

xx xx xx

24. Elaborating the above submissions, the learned counsel for the
respondents invited our attention to chapter notes of Chapter 30 and
Chapter 33 and also the rules of interpretation. According to the learned
counsel a careful reading of chapter notes of Chapter 30 would show that
preparations of Chapter 33 even if they have therapeutic or prophylactic
properties would not fall under Chapter 30. However, he fairly admitted
that ‘medicaments’ are those that have therapeutic or prophylactic uses.
Nevertheless those medicaments, if they are classifiable under Chapter 33
or Chapter 34 will not fall under Chapter 30, according to him, if they are
more specifically preparations falling under Chapter 33 or Chapter 34. In
other words, he wants to equate the product in question to ‘shampoo’
enumerated under Heading No. 33.05. He also invited our attention to the
fact that the appellants before the coming into force of the new Tariff Act
described the product as shampoo and they have omitted the word ‘shampoo’
deliberately only to claim that the product would fall under Chapter 30.

25. We do not think that we can accept all the contentions of the learned
counsel for the respondents except certain obvious admitted positions. The
submission that the product in question must be equated to shampoo falling
under Chapter 33 is not at all correct.

26. It is true that the learned counsel for the appellants have placed
reliance on the definition of the words “cosmetic and drug” as defined in
the Drugs and Cosmetics Act, 1940. On a perusal of the definitions, we can
broadly distinguish cosmetic and drug as follows:

“A ‘cosmetic’ means any article intended to be rubbed, poured, sprinkled or
sprayed on, or introduced into, or otherwise applied to, the human body or
any part thereof for cleansing, beautifying, promoting attractiveness, or
altering the appearance, and includes any article intended for use as a
component of cosmetic.”
and
“A ‘drug’ includes all medicines for internal or external use of human
beings or animals and all substances intended to be used for or in the
diagnosis, treatment, mitigation or prevention of any disease or disorder
in human beings or animals, including preparations applied on human body
for the purpose of repelling insects.”

27. We cannot ignore the above broad classification while considering the
character of the product in question. Certainly, the product in question is
not intended for cleansing, beautifying, promoting attractiveness or
altering appearance. On the other hand it is intended to cure certain
diseases as mentioned supra.

xx xx xx

35. The learned counsel also placed reliance on a number of judgments to
support his argument that in common and commercial parlance the product is
known as medicine rather than cosmetic. As pointed out already and in
support of that submission, affidavits and letters from chemists, doctors
and customers are filed to show that the product is sold under prescription
only in chemists’ shops unlike shampoos sold in any shop including
provision shops. This conclusion, namely, that the product is understood in
the common and commercial parlance as a patent and proprietary medicine was
also found by the Central Board of Excise and Customs as early as in 1981
and accepted by the Excise authorities and in the absence of any new
material on the side of the respondents there is no difficulty in accepting
this contention without referring to decision cited by the counsel for the
appellants.”

The aforesaid case draws and delineates a clear distinction between a
'cosmetic' and a 'drug'. It further lays down that essential character of
the product in question is to be kept in mind for ascertaining whether it
would be a cosmetic or a drug. Another relevant consideration, which is
highlighted, is to see whether in common and commercial parlance the
product is known as medicine or cosmetic/skin care product. If the product
is registered as medicament by the Drug Controller, that would be a strong
factor to consider it as having curative or prophylactic value and it is
not for the care of the skin per se.

This Court in Muller & Phipps (India) Ltd. v. Collector of Central Excise,
Bombay-I[2] was called upon to decide as to whether prickly heat power,
which was manufactured and marketed by the appellant/assessee therein under
the brand name Johnson's Prickly Heat Powder and Phipps Processed Talc, was
a medicament or was simply a product for care of the skin. The case put-
forth by the assessee therein was that prickly heat power contains a range
of medicines and is used only for the treatment and prevention of a skin
ailment known as Milaria Rubra, commonly known as prickly heat. Prickly
heat powders are manufactured under a Drug Licence issued under the Drug
and Cosmetics Act, 1940 and have been treated as a drug and not a cosmetic
by the authorities under the Drugs Act. On a reference made by the Finance
Ministry, the Drug Controller of India has opined that due to the high
content of 5% boric acid in a prickly heat powder, it would be classifiable
as a drug or medicament and not as a cosmetic. From 1970 till 1985,
prickly heat powders have been classified and assessed under Tariff Item
14E of the old tariff as 'Patent or Proprietary Medicines'. It was also
contended that prickly heat power not only relieves prickly heat faster but
actually helps prevent it. When a person perspires profusely the sweat
stays on the skin too long and the person becomes a potential victim of
prickly heat. This specially formulated prickly heat powder absorbs the
sweat better and faster and prevents the build up of bacteria on the skin.
Therefore, the person avoids getting a red rash, itching and burning. No
person who requires ordinary talk for the purposes of beautifying her or
himself would use the said products which contain the aforesaid active
therapeutic ingredients. These products are known as, as already mentioned
above, prickly heat/ Milaria Rubra. The sale of these products is much
higher in hot summer months when this disease frequently erupts.

Accepting the aforesaid case set up by the assessee therein, the Court held
that the said prickly heat power was a medicament for treatment of red
rashes, itching and burning and not merely a powder for care of skin or for
the purpose of beauty. The Court was greatly influenced by the fact that a
department like Drug Controller and Central Sales Tax authorities had
accepted the product in question as medicinal preparation. The discussion
which is relevant for our purposes is contained in paras 11 and 12 of the
said judgment and we reproduce the same hereinbelow:
“11. But in the present case when throughout the meaning given to products
in question not only by the department itself but also by other departments
like Drug Controller and Central Sales Tax authorities is that the product
in question is a medicinal preparation should be accepted.

12. Applying the principles enunciated in BPL Pharmaceuticals Ltd. case
and taking into consideration various circumstances as to the manner in
which the goods had been treated on the earlier occasions by the department
and the product having been utilised with reference to the commercial
parlance and understanding, that it had been treated as a drug it would not
cease to be one notwithstanding the fact that new tariff act has come into
force. What is to be seen in such cases is when in the common parlance,
for purposes of the Drug Act, for purposes of Sales Tax Act and in various
findings recorded on earlier occasions by the department itself having been
noticed, the conclusion is inevitable that the products in question must be
treated as medicinal preparations.”
Interplay of Chapter 30 vis-a-vis Chapter 34 (which deals with detergent
products) came up for consideration in Commissioner of Central Excise v.
Wockhardt Life Sciences Limited[3]. In that case, the Court again
emphasized 'common parlance test' or the 'commercial usage test' as the mot
common test for determining the classification in such cases. After taking
note of number of earlier decisions, this aspect was highlighted as under:
“33. There is no fixed test for classification of a taxable commodity.
This is probably the reason why the “common parlance test” or the
“commercial usage test” are the most common (see A. Nagaraju Bros. v. State
of A.P., (1994) Supp 3 SCC 122). Whether a particular article will fall
within a particular tariff heading or not has to be decided on the basis of
the tangible material or evidence to determine how such an article is
understood in “common parlance” or in “commercial world” or in “trade
circle” or in its popular sense meaning. It is they who are concerned with
it and it is the sense in which they understand it that constitutes the
definitive index of the legislative intention, when the statute was enacted
(see Delhi Cloth and General Mills Co. Ltd. v. State of Rajasthan, (1980) 4
SCC 71).

34. One of the essential factors for determining whether a product falls
within Chapter 30 or not is whether the product is understood as a
pharmaceutical product in common parlance (see CCE v. Shree Baidyanath
Ayurved Bhavan Ltd., (2009) 12 SCC 419, and CCE v. Ishaan Research Lab (P)
Ltd., (2008) 13 SCC 349). Further the quantity of medicament used in a
particular product will also not be a relevant factor for, normally, the
extent of use of medicinal ingredients is very low because a larger use may
be harmful for the human body. [Puma Ayurvedic Herbal (P) Ltd. v. CCE,
(2006) 3 SCC 266, State of Goa v. Colfax Laboratories Ltd., (2004) 9 SCC
83, and B.P.L. Pharmaceuticals Ltd. v. CCE, 1995 Supp (3) SCC 1].

35. However, there cannot be a static parameter for the correct
classification of a commodity. This Court in Indian Aluminium Cables Ltd.
v. Union of India, (1985) 3 SCC 284, has culled out this principle in the
following words: (SCC p. 291, para 13):

“13. To sum up the true position, the process of manufacture of a product
and the end use to which it is put, cannot necessarily be determinative of
the classification of that product under a fiscal schedule like the Central
Excise Tariff. What is more important is whether the broad description of
the article fits in with the expression used in the Tariff.”

36. Moreover, the functional utility and predominant or primary usage of
the commodity which is being classified must be taken into account, apart
from the understanding in common parlance. [See O.K. Play (India) Ltd. v.
CCE, (2005) 2 SCC 460, Alpine Industries v. CCE, (2003) 3 SCC 111, Sujanil
Chemo Industries v. CCE & Customs, (2005) 4 SCC 189, ICPA Health Products
(P) Ltd. v. CCE, (2004) 4 SCC 481, Puma Ayurvedic Herbal, (2006) 3 SCC 266,
CCE v. Ishaan Research Lab (P) Ltd., (2008) 13 SCC 349, and CCE v. Uni
Products India Ltd., (2009) 9 SCC 295].

37. A commodity cannot be classified in a residuary entry, in the presence
of a specific entry, even if such specific entry requires the product to be
understood in the technical sense (see Akbar Badrudin Giwani v. Collector
of Customs, (1990) 2 SCC 203 and Commnr. Of Customs v. G.C. Jain, (2011) 12
SCC 713). A residuary entry can be taken refuge of only in the absence of
a specific entry; that is to say, the latter will always prevail over the
former [see CCE v. Jayant Oil Mills (P) Ltd., (1989) 3 SCC 343, HPL
Chemicals Ltd. v. CCE, (2006) 5 SCC 208, Western India Plywoods Ltd. v.
Collector of Customs, (2005) 12 SCC 731, and CCE v. Carrier Aircon Ltd.,
(2006) 5 SCC 596].

38. In CCE v. Carrier Aircon Ltd., (2006) 5 SCC 596, this Court held: (SCC
p. 601, para 14):

“14...There are a number of factors which have to be taken into
consideration for determining the classification of a product. For the
purposes of classification, the relevant factors inter alia are statutory
fiscal entry, the basic character, function and use of the goods. When a
commodity falls within a tariff entry by virtue of the purpose for which it
is put to (sic produced), the end use to which the product is put to,
cannot determine the classification of that product.”

39. In our view, as we have already stated, the combined factors that
require to be taken note of for the purpose of the classification of the
goods are the composition, the product literature, the label, the character
of the product and the user to which the product is put. However, the
miniscule quantity of the prophylactic ingredient is not a relevant factor.
In the instant case, it is not in dispute that this is used by the
surgeons for the purpose of cleaning or degerming their hands and scrubbing
the surface of the skin of the patient before that portion is operated
upon. The purpose is to prevent the infection or disease. Therefore, the
product in question can be safely classified as a “medicament” which would
fall under Chapter Sub-Heading 3003 which is a specific entry and not under
Chapter Sub-Heading 3402.90 which is a residuary entry.”

It is required to be noted that in para 36 quoted above, the Court also
laid importance to the functional utility and predominant or primary usage
of the commodity that is to be taken into account while classifying the
product. Another important aspect which needs to be noted is that the
combined effect of the aforesaid factors is to be taken into consideration,
which would include composition, the product literature, the label, the
character of the product and the user to which the product is put. It was
also clarified that miniscule quantity of the prophylactic ingredient is
not a relevant factor.

Discussion on this aspect was again revisited in the case of Commissioner
of Central Excise, Mumbai IV v. Ciens Laboratories, Mumbai[4]. In that
case, a moisturising cream sold under the brand name 'Moisturex' was the
product and it was to be determined as to whether it was used simply for
care of the skin or was intended for treating or curing dry skin complaints
like fissure feet, dry scaly skin conditions, ichthyosis etc. and,
therefore, was a medicament. The argument of the Revenue that this cream
was used merely for softening the skin was rejected in the following
manner:
“15. The contention that “Moisturex” is a moisturising cream used for
softening the skin cannot be appreciated. As we have already discussed,
the use of the cream is not for the care of the skin. “Moisturex” is also
not primarily intended to protect the skin from sun, tan or dryness, etc.
On the other hand, it is intended for treating or curing the dry skin
conditions of the human skin and for a few other skin complaints like
fissure feet, dry scaly skin conditions, ichthyosis, etc. The argument
advanced on behalf of the Central Excise that use of urea or lactic acid or
propylene glycon, etc. is only as subsidiary pharmaceutical constituents
and, hence, they cannot be held out as having curative, therapeutic or
prophylactic value, cannot also be appreciated. It is the presence of the
ingredients of the pharmaceutical constituents which makes the difference
and not the percentage of the ingredients as held by this Court in Meghdoot
Gramodyog Sewa Sansthan v. CCE, (2005) 4 SCC 15...”

Main feature which needs to be taken note of from the aforesaid discussion
is that small percentage of the ingredients of pharmaceutical constituents
would not be a reason by itself to conclude that pharmaceutical
constituents are subsidiary in nature. On the other hand, what is more
relevant is the purpose for which the product is used, namely, functional
test. On that basis, the product in that case was treated as medicament.
What is important is that the Court, in the process, laid down the guiding
principles which are to be kept in mind while determining the
classification. These principles are formulated in the following manner:
“22. Thus, the following guiding principles emerge from the above
discussion:

22.1. Firstly, when a product contains pharmaceutical ingredients that
have therapeutic or prophylactic or curative properties, the proportion of
such ingredients is not invariably decisive. What is of importance is the
curative attributes of such ingredients that render the product a
medicament and not a cosmetic.

22.2. Secondly, though a product is sold without a prescription of a
medical practitioner, it does not lead to the immediate conclusion that all
products that are sold over/across the counter are cosmetics. There are
several products that are sold over the counter and are yet, medicaments.

22.3. Thirdly, prior to adjudicating upon whether a product is a
medicament or not, the courts have to see what the people who actually use
the product understand the product to be. If a product's primary function
is “care” and not “cure”, it is not a medicament. Cosmetic products are
used in enhancing or improving a person's appearance or beauty, whereas
medicinal products are used to treat or cure some medical condition. A
product that is used mainly in curing or treating ailments or diseases and
contains curative ingredients even in small quantities, is to be branded as
a medicament.”

After straitening the position in law, we now proceed to apply this
principles to the present case.

As pointed out above, the product in question, Vaseline Intensive Care Heel
Guard, is marketed as a solution for cracked heels and it is claimed that
this solution is specially developed by the scientists at Vaseline
Research. The composition of this product includes salicylic acid I.P.
1.5% w/w. lactic acid 8.0% w/w. Triclosan 0.1% w/w. Cream base – q.s.
Salicylic acid is described as keratolytic substance having bacteriostalic
and fungicidal properties used in the treatment of fungus infection of the
skin. The Tribunal, while deciding that the aforesaid product is a
medicament, pointed out that the product was formulated and essentially
used for treatment of 'cracked heels', protection from further cracks in
the human heels due to extreme climatic conditions and low humidity,
constant exposure of feet to water and due to absence of shoe or other
protection while walking. It also found that this product was manufactured
under a drug licence as drug authorities had treated the same as a
medicament. The Tribunal also found that the usage of this product was
related to the effect of therapeutic or mitigating substance of
prophylactic substances added. Thus, the effect of mitigation of an
external condition is primary effect and the effect of smoothing the skin
was secondary in nature and, therefore, it was to be treated as a
medicament and classified under Chapter 30.

Interestingly, all the aforesaid features of the product are accepted by
the Department. However, only on the ground that salicylic acid contained
in the product is marginal, the Department took the view that it was a
subsidiary substance. Having regard to the exposition of law narrated
above, this was clearly an erroneous approach on the part of the Revenue as
percentage of the said substance is immaterial to label it as subsidiary.

Another more important factor which needs to be stated at this stage is
that though the burden was on the Department, it did not lead any evidence
or produce any material to discharge this onus. It simply went by the
pamphlet of the product, that too selectively picking up that portion where
the product was described as good for care of the skin as well, ignoring
the fact that the same very literature gives more emphasis to the
therapeutic value of the product. On the other hand, the assessee had
filed various affidavits of the dealers as well as consumers in support of
its plea that the product was essentially a medicament, which material was
blissfully ignored by the Department.

From the aforesaid, we conclude that the decision of the Tribunal holding
the product in question to be a medicament and, therefore, covered by
Chapter Heading 3003.10 is perfectly justified and does not call for any
interference.

The civil appeal is, accordingly, dismissed with no order as to costs.
.............................................J.
(A.K. SIKRI)

.............................................J.
(ROHINTON FALI NARIMAN)
NEW DELHI;
AUGUST 25, 2015

ITEM NO.1A COURT NO.13 SECTION III
(FOR JUDGMENT)
S U P R E M E C O U R T O F I N D I A
RECORD OF PROCEEDINGS

Civil Appeal No(s). 1941/2006

C.C.E., CHENNAI Appellant(s)

VERSUS

HINDUSTAN LEVER LTD. Respondent(s)

Date : 25/08/2015 This appeal was called on for pronouncement of
Judgment today.

For Appellant(s) Mr. B. Krishna Prasad,Adv.

For Respondent(s) Mr. Rajan Narain,Adv.

Hon'ble Mr. Justice A.K.Sikri pronounced the Judgment of the Bench
comprising His Lordship and Hon'ble Mr. Justice Rohinton Fali Nariman.
The appeal is dismissed in terms of the signed non-reportable
judgment.

Pending application(s), if any, stand disposed of.

We have pronounced the judgment today whereby dismissing the appeal
of the Revenue. In the consequence, if any, amount is refunded to the
respondent, the same shall be done in accordance with law.

(Ashwani Thakur) (Renu Diwan)
COURT MASTER COURT MASTER

(Signed non-reportable judgment is placed on the file)

-----------------------
[1]

(1995) Supp 3 SCC 1
[2] 2004 (167) ELT 374 (SC)
[3] (2012) 5 SCC 585
[4] (2013) 14 SCC 133

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Thursday, August 27, 2015