1986 JTR(SC) 580
1987 AIR(SC) 874 ; 1987 62 CompCas 548 ; 1987 1 CurCC(SC) 537 ; 1987 27 ELT 567 ; 1986 2 Scale 1218 ; 1986 Supp SCC 652 ; 1987 SCC(Tax) 107 ; 1987 TaxLR 1902 ; 1987 1 UJ 209 ; 1986 KHC 580
SUPREME COURT OF INDIA
P.N. Bhagwati, CJI., G.L. OZA, J.
Writ Petn. No. 12183 of 1985 etc. etc., with C. A. Nos. 1685-1766 of 1979,
D/- 19-12-86.
M/s. Ujagar Prints, Appellant
Versus
Union of India, Respondent.
WITH
Union of India, others, Appellants
Versus
Narendra Processing Industries etc. etc., Respondents.
Act
Referred
:CENTRAL EXCISE ACT : S.4
CENTRAL EXCISE AND SALT ACT : S.2(f)
CONSTITUTION OF INDIA : Art.141
(A) The Central Excises and Salt Act, as amended by the Central Excises and Salt and Additional Duty of Excise (Amendment) Act 1980, governs the levy of excise duty on goods manufactured in India. Sections 4, 2(f), and read with Rule 56-A and Rule 96-D of the Central Excises Rules are attracted where a processor undertakes job work processing of grey cotton and man-made fabrics supplied by a trader. The provisions contemplate that once processing is completed, the manufactured fabric leaves the factory and attracts excise duty on its value at the factory gate, while the Act and rules provide mechanisms to aggregate the value of raw materials and processing charges for assessable value. The Constitution of India, Article 141, mandates that the law declared by this Court is to be followed by all courts and authorities, binding judicial interpretations across hierarchies and ensuring uniform application across similar factual matrices involving central taxation.
(B) The core legal principles are: (i) processing of grey fabric on job work basis constitutes manufacture within the meaning of the Central Excises and Salt Act; (ii) assessable value of the processed fabric is determined at the factory gate, comprising the value of grey fabric supplied plus processing charges; (iii) the value must exclude the subsequent trading profit of the buyer and cannot be based on the higher sale price at which the trader sells in the market; and (iv) where a prior Bench of three Judges has laid down a view, a Bench of two Judges should refer to a larger Bench rather than depart from that view.
Facts of the case:
A processor receives grey cotton and man-made fabrics from a trader on a job work basis, undertakes processes such as bleaching, dyeing, printing, and mercerising, and returns the processed fabrics to the trader. The trader sells the finished fabrics in the market at a price higher than the value declared by him to the processor. The excise authorities assess excise duty on the basis of the traders declared or higher sale price, including the traders profit, leading to disputes regarding the correct basis of valuation and the nature of the transaction.
Findings of Court:
The Court held that processing on job work basis amounts to manufacture both pre- and post-amendment, and the processed fabrics are assessable in the hands of the jobber. However, the assessable value must be the wholesale cash price at the factory gate, covering the value of grey fabric and processing charges, and must not include the selling profit of the trader. The Court declined to depart from the earlier three-Judge Bench view and noted that the determination of value and the scope of manufacture require consideration by a larger Bench.
Issues:
(1) Whether processes such as bleaching, dyeing, printing, and mercerising on job work basis amount to manufacture under the Central Excises and Salt Act as amended and unamended, and whether processed fabrics are liable to excise duty; (2) if so, what is the correct basis for assessing the value of the processed fabricswhether it can include the traders selling profit or is limited to the value of grey fabric plus processing charges.
Ratio Decidendi:
Processing of grey fabrics on job work constitutes manufacture, attracting excise duty. The assessable value is the wholesale cash price at the factory gate, comprising the value of raw grey fabric and processing charges, and excludes any subsequent trading profit of the buyer. A Bench of two Judges must refer to a larger Bench when departing from an earlier three-Judge Bench decision.
Result:
The writ petitions and appeals are referred to a larger Bench of five Judges for determination of both the question of manufacture and the correct mode of valuation, while adhering to the earlier three-Judge Bench ruling on liability of excise duty.
(A) The Central Excises and Salt Act, as amended by the Central Excises and Salt and Additional Duty of Excise (Amendment) Act 1980, governs the levy of excise duty on goods manufactured in India. Sections 4, 2(f), and read with Rule 56-A and Rule 96-D of the Central Excises Rules are attracted where a processor undertakes job work processing of grey cotton and man-made fabrics supplied by a trader. The provisions contemplate that once processing is completed, the manufactured fabric leaves the factory and attracts excise duty on its value at the factory gate, while the Act and rules provide mechanisms to aggregate the value of raw materials and processing charges for assessable value. The Constitution of India, Article 141, mandates that the law declared by this Court is to be followed by all courts and authorities, binding judicial interpretations across hierarchies and ensuring uniform application across similar factual matrices involving central taxation.
(B) The core legal principles are: (i) processing of grey fabric on job work basis constitutes manufacture within the meaning of the Central Excises and Salt Act; (ii) assessable value of the processed fabric is determined at the factory gate, comprising the value of grey fabric supplied plus processing charges; (iii) the value must exclude the subsequent trading profit of the buyer and cannot be based on the higher sale price at which the trader sells in the market; and (iv) where a prior Bench of three Judges has laid down a view, a Bench of two Judges should refer to a larger Bench rather than depart from that view.
Facts of the case:
A processor receives grey cotton and man-made fabrics from a trader on a job work basis, undertakes processes such as bleaching, dyeing, printing, and mercerising, and returns the processed fabrics to the trader. The trader sells the finished fabrics in the market at a price higher than the value declared by him to the processor. The excise authorities assess excise duty on the basis of the traders declared or higher sale price, including the traders profit, leading to disputes regarding the correct basis of valuation and the nature of the transaction.
Findings of Court:
The Court held that processing on job work basis amounts to manufacture both pre- and post-amendment, and the processed fabrics are assessable in the hands of the jobber. However, the assessable value must be the wholesale cash price at the factory gate, covering the value of grey fabric and processing charges, and must not include the selling profit of the trader. The Court declined to depart from the earlier three-Judge Bench view and noted that the determination of value and the scope of manufacture require consideration by a larger Bench.
Issues:
(1) Whether processes such as bleaching, dyeing, printing, and mercerising on job work basis amount to manufacture under the Central Excises and Salt Act as amended and unamended, and whether processed fabrics are liable to excise duty; (2) if so, what is the correct basis for assessing the value of the processed fabricswhether it can include the traders selling profit or is limited to the value of grey fabric plus processing charges.
Ratio Decidendi:
Processing of grey fabrics on job work constitutes manufacture, attracting excise duty. The assessable value is the wholesale cash price at the factory gate, comprising the value of raw grey fabric and processing charges, and excludes any subsequent trading profit of the buyer. A Bench of two Judges must refer to a larger Bench when departing from an earlier three-Judge Bench decision.
Result:
The writ petitions and appeals are referred to a larger Bench of five Judges for determination of both the question of manufacture and the correct mode of valuation, while adhering to the earlier three-Judge Bench ruling on liability of excise duty.
A.Subhashini, B.Kanta Rao, BINA GUPTA, C.V.SUBBA RAO, D.BHALLA, E.C.AGARWAL, H.K.PURI, Harjinder Singh, J.VAD, K.K.BHADUR, K.PARASARAN ATTORNEY, KAILASH VASUDEV, M.CHANDRASEKHRAN, M.KARANJAVALA, NARAIN, P.C.KAPUR, P.H.Parekh, PARIJAT SINHA, R.P.KAPUR, Rajiv Datta, S.S.Khanduja, SOLI J.SORABJI, SVARUP JOHN, V.D.KHANNA
ORDER :- Two questions have been raised for consideration in this group of cases. One question is whether the processes of bleaching, dyeing, printing, mercerising, etc., carried on by a processor on job work basis in respect of grey cotton fabrics and man made fabrics belonging to the customer and entrusted by him for processing amount to manufacture within the meaning of the Central Excises and Salt Act as it stood prior to its amendment by the Central Excises and Salt and Additional Duty of Excise (Amendment) Act 1980 so as to attract levy of excise duty on the processed fabrics and whether, in any event, after the Amendment Act, these processes amount to manufacture and excise duty is leviable on the processed fabrics. The other question is whether, even if the processed fabrics are assessable to excise duty in the hands of the processor who carries on these processes on job work basis, what is the value on the basis of which the processed fabrics are liable to be assessed. So far as the first question is concerned, it was agitated before this Court in Empire Industries Ltd. v. U. O. I. (1985) 3 SCC 314: (AIR 1986 SC 662) and this Court held that the processes of bleaching, mercerising, dyeing, printing, water-proofing, etc., carried out by the processors on job work basis amount to manufacture both under the Act as it stood prior to the amendment as also under the Act subsequent to the amendment and the processed fabrics are liable to be assessed to excise duty in the hands of what may be called jobbers. Since this was a decision given by a Bench of three-Judges, the petitioners and appellants who are carrying on business of processing on job work basis could not contend that these processes do not amount to manufacture and that the processed fabrics are not liable to be assessed to excise duty in the hands of the jobbers. But, it was the second question which provoked serious controversy before us. So far as this question is concerned, it was also incidentally argued in the Empire Industries case (supra) and Mukharji, J. speaking on behalf of the Court observed as follows (at pp 678-79 of AIR) :
"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 S. 4, Central Excises 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. That is the effect of S. 4 of the Act. The value would naturally include the value of grey fabrics supplied to the independent processors to be utilised for the payment on the processed fabrics in accordance with Rule 56-A or 96-D of the Central Excises Rules, as the case may be."
The learned counsel for the petitioners and the appellants contended that these observations did not represent the correct law on the subject and that this question was required to be reconsidered in some depth because it vitally affected the processors who were carrying on processing of cotton and man made fabrics on job work basis.
2. It was common ground between the parties that the procedure followed by the excise authorities was that the trader, who entrusted cotton or man made fabrics 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 and that would be taken by the excise authorities as the assessable value of the processed fabrics and excise duty would be charged to the processor on that basis. This may be illustrated by giving the following example :
(1) Value of grey cloth in the hands of the processor Rs. 20,00
(2) Value of job work done Rs. 5.00
Value of finished cloth returned to the trader (1 + 2) Rs. 25,00
(3) Traders selling price inclusive of his selling profits, etc. Rs. 30.00
The assessable value in the case given in this example would be taken by the Excise authorities at Rs. 30/- which was the sale price of the trader. There were also instances where, on finding that the trader had sold the processed fabrics in the market at a higher rate than that mentioned in the declaration; the excise authorities raised a further demand against the processor for excise duty on the basis of such higher price. This, contended the learned counsel appearing on behalf of the petitioners and the appellants, was clearly not justified under the provisions of the Act. The learned counsel urged that since the processor is doing only job work of processing in respect of gray fabric cloth which does not belong to him but belongs to the trader who has commissioned him to do the job work and the processed fabric is returned to the trader, levy of excise duty could only be on the value of the job work done and no other elements could be loaded into this value. It was also contended in the alternative by the learned counsel that in any event the assessable value of the processed fabric could not possibly include the profit at which the trader sold the processed fabric since the processor was concerned only with the processing of the gray fabric and was not concerned with the sale which the trader might effect after the processing was done and the manufacture of processed fabric was completed. We do not agree with the first contention of the learned counsel on behalf of the petitioners and the appellants but the alternative contention urged by him is certainly well founded.
3. It is clear from the decision of this Court in Union of India v. Bombay Tyre International Ltd. (1984) 1 SCR 347 : (AIR 1984 SC 420) that under the Central Excises and Salt Act and the Rules made thereunder the assessable value of the manufactured goods is to be determined at the factory gate that is at the stage when the manufactured goods leave the factory and enter the main stream. We may assume and indeed in view of the decision of this Court in Empire Industries case (AIR 1986 SC 662) (supra) we must so assume, that processing of grey fabric involves manufacture and that when the processor carries out processing on the grey fabric he manufactures the processed fabric. But the assessable value of the processed fabric must obviously be taken to be the wholesale cash price of the processed fabric at the factory gate that is when the processed fabric leaves the factory of the processor and it cannot possibly include the selling profit of the trader who subsequently sells the processed fabric. It is at the point when the processed fabric leaves the factory of the processor that is assessable value has to be determined and that assessable value cannot include the selling profit of the trader.
4. We cannot accept the contention of the learned counsel on behalf of the petitioners and the appellants that the value of the grey cloth which is processed by the processor should not be included in the assessable value of the processed fabric since the grey cloth is one of the raw materials which goes into the manufacture of the processed fabric and the value of the processed fabric cannot be computed without including the value of the raw material that goes into its manufacture. The assessable value of the processed fabric cannot therefore be limited merely to the value of the job work done but it must be determined by reference to the wholesale cash price of the processed fabric at the gate of the factory of the processor. Thus in the example given above the assessable value of the processed fabric must be taken to be Rs. 20 + 5 that is Rs. 25/- and the profit of Rs. 5/- which the trader may make by selling the processed fabric cannot be included in the assessable value. The element of selling profit of the trader would he entirely an extraneous element and it cannot be taken into account for the purpose of determining the assessable value of the processed fabric which would comprise the value of the grey cloth and the job work charges but exclude the profit at which the trader may subsequently sell the processed fabric.
5. This according to us is the correct mode of determination of the assessable value of the processed fabric in the hands of the processor who does job work in respect of grey cloth supplied by the manufacturer or trader. We would have proceeded to decide these writ petitions and appellants (appeals?) on the basis of this view which we are inclined to take but we find that in Empire Industries case (supra) Mukharji, J. speaking on behalf of a Bench of three Judges has expressed a view which is different from the one we are taking and though that view has been expressed by Mukharji, J. incidentally we do not think it would be right for us to ignore what Mukharji, J. has said and to proceed to take a view different from that taken by him on behalf of the Bench. Judicial discipline requires that a Bench of two Judges should not disregard the decision of a Bench of three Judges but if the Bench of two Judges is inclined to disagree with what has been said by the Bench of three Judges on the ground that it does not represent the correct law on the subject, the case should be referred by the Bench of two Judges to a larger Bench.
6. We accordingly refer these writ petitions and appeals to a larger Bench of five Judges. Of course, when these writ petitions and appeals are referred to the larger Bench it will be open to the larger Bench to consider not only the question of determination of the assessable value but also the other question, namely, whether processing of grey fabric by a processor on job work basis constitutes manufacture, because the judgment in Empire Industries case (AIR 1986 SC 662) (supra) which has decided this question in favour of the Revenue and against the processor is a judgment of a Bench of only three Judges and now the present writ petitions and appeals will be heard by a Bench of five Judges.
Order accordingly.