Central Excise Act - Valuation under Section 4a

The cardinal issue involved in the present matter is : Why quantity discounts should NOT be taxed u/s. 4a of the Central Excise Act?

1.HOW THE DISPUTE ABOUT VALUATION HAS ARISEN?

DIFFERENCE OF OPINION BETWEEN DIFFERENT TRIBUNALS:


HOW THE DISPUTE AROSE?

The Vinayaka Mosquito Coil’s (VMC) case 2004 (174) ELT 107 held that during valuation, free supplies in respect of the commodities covered under section (u/s) 4a, are not to be included during valuation of the commodities.

Similar view came forth in Re. Surya Food and Agro’s (SFA) case 2003 156 ELT 488 (Tri- Delhi) and the ratio herein was also followed in the VMC’s case. Also see: Sony India Ltd., V/s. CC. (2004 (167) ELT 385(S.C.) )

The above position of law which was taking a concrete shape has been upset by recent decision in Re. Indica Laboratories P.Ltd. (ILPL) V/s. CCE pronounced on 21/05/2007. The ILPL decision in turn is in lines with (1). Intel Industries P. Ltd. V/s. CCE, Calicut {2004 (163) ELT 219 – Bang}; (2). Nestle India Ltd. V/s. CCE, Goa {2004 (163) ELT 249}; (3). CCE Mumbai V/s. Godrej Industries Ltd. {2006 (200) ELT 348 (Tri- Mumbai)}.


WHY THE DECISION IN ILPL, INTEL, NESTLE AND GODREJ IS NOT BINDING ON ASSESSEE?

Looking to the decision on either side i.e. SFC and VMC’s case on one side and the views taken in ILPL, Intel, Nestle and Godrej on the other side, one thing is clear that the tribunals are divided on their opinion. That is, there is no uniformity of the opinion on the question of law : Whether the quantity discount should be taxed u/s. 4a or not. Therefore, the decision in Intel, Godrej and Nestle’s case is not conclusive and binding. This issue remains open for challenge before the High Court and the Supreme Court.

2. WHY QUANTITY DISCOUNTS SHOULD NOT BE TAXED?

WHAT IS THE GROUND POSITION OF LAW?


The Supreme Court has dismissed the department’s appeal in the VMC’s case filed by the department in Appeal No. 7917 OF 2004. VMC case was favoring assessee and held that quantity discounts should not be taxed u/s. 4a. The bench consisting of Justice Ruma Pal and Justice CK Thakkar has dismissed the petition in limine. Here, it is pertinent to point out that the dismissal of the petition certainly indicates that the department could not bring any sort of point of law in the matter which requires interference by the Apex court (because the point of law for allowing the trade discount by whatever name called is well settled). The decision of the Bangalore Tribunal and the Karnataka High Court were not disturbed by the Supreme Court (Apex Court).

What does this mean? Does it mean that the VMCs case gets the approval of the Apex Court. Well, dismissal of the petition in limine does not mean that the Supreme Court has entered into merits of the case. See VM Salgaocar & Bros Pvt. Ltd. V/s. Commissioner of Income Tax (AIR 2000 SC 1623). Therefore, right now it will not be appropriate to take the view that the VMC case has been backed up by the Supreme Court.

The question of not taxing the quantity discounts u/s. 4a is a question of law.

Therefore, it can be safely construed that the dispute is open and the department does not have any upper hand against the assessee. On the contrary, since the VMC’s case has been dismissed in limine by the Supreme Court, the decision although not on merits, favors the point of law as explained by the Tribunal Bangalore and Karnataka High Court in the VMC’s case (in view of the fact that the Apex Court did not disturb it). The question as to why the quantity discounts should not be taxed is elaborated hereunder the “grounds of law”.

GROUNDS OF LAW:

HOW AND FROM WHERE SECTION 4A CAME INTO EXISTENCE?

CONCEPT OF “VALUE”:

We have to go back to the basics of “Central Excise” in order to understand why the quantity discounts cannot be taxed & how section 4a came into existence. Not taxing Quantity Discounts is a matter of principle of law which cannot be disturbed even after introduction of Section 4a. The Ahmedabad Tribunal has acted against the settled law. It is pertinent to state that Section 4a is not a new or novel method of taxation. It is only another way of calculating “Value” of the goods. The method as given u/s. 4a has been introduced by the parliament by Clause 80 of Finance Bill, 1997. The very objective was to minimize the tax disputes and make the calculation of “Value” more easy and dispute-free (looking to the fact that India is going Global).

The excise duty is on the manufacture of the goods. Under Excise Law, there are only two methods of taxing goods. First method is called Specific Rates. “Specific rate” means excise tax on the quantity produced (e.g. k.g., meter, liter etc.). Few items e.g. cigarette, marble are taxed this way.

Another method by which tax is imposed is by specifying Ad Valorem Rates. This means taxing on “Value”. The term “Value” is very important for our purpose because our argument of quantity discounts allowable u/s. 4a is resting on the concept of “Value” (which is common to both Section 4 and Section 4a).

Section 4a was introduced after Section 4. Section 4a has been drafted with a Non-obstense clause before it. This means, once a notification specifies Goods to be valued in terms of RSP (Retail Sale Price) then the valuation as per method of Section 4 should not be done. Therefore, before going to Section 4a (and quantity discount argument) it is important to understand the objective behind Section 4 and then see why Section 4a was introduced?

Section 4 of the Excise Act, as it stands now has its roots in the amendment, of Central Excise Act in 1973. The Government amended the Excise Act. Government restructured Section 4 by this amendment. Government introduced Notification no. 176/75 to implement amendments. This is how New Section 4 as it is to-day came into existence.

The question which needs to be asked is: Why the government amended the Section 4 and repealed the Old Section 4 in 1973.

The answer is: In AK Roy V/s. Voltas Limited (1977 ELT – J/177), the Supreme Court inter-alia gave a judgment by which Supreme Court said: (1). Since constitutionality and statutorily the scope of Central Excise is confined to manufacture, as such, the value for assessment cannot be stretched to areas beyond manufacture. (2). The “Value” should be confined to (a). Manufacturing cost & (b). Manufacturing profits only. (3). Value should not include any ingredient pertaining to post-manufacturing activities, post manufacturing costs and profit. This means, packing, marketing, commissions etc. could not be taxed & included in the definition of “value”.

Due to this landmark decision, the Old section 4 suffered serious damage. Therefore, government came out with new law. Section 4 (as it generally stands to-day) was introduced in 1973. This amendment law enacted by Parliament specifically overturned the judgment of Supreme Court as given in the case of Voltas Ltd.

Section 4 therefore, introduced the concept for calculating “Value” based on “Normal Price”. Provisions regarding durable & returnable packing, discounts etc. were specifically made. “Normal Price” means duty levied on the goods based on “Normal” wholesale price at the factory gate. “Normal Price” may not be the same as invoice price. In spite of being different from invoice price, “Normal Price” due to then prevailing law, had to be accepted for determining the assessable value. “Normal Price” method therefore led to controversies.

With a view to minimize controversies, two changes were again made by the Government. They were:

a. Section 4a was introduced in 1997 by which the “value” was based on MRP, if certain conditions are fulfilled. The MRP cannot be questioned by department since nothing in Law permitted the department to challenge MRP. The Assessees may fix any MRP they like (See ITC LIMITED’s case in AIR 2005 S.C. 1370) &
b. Section 4 was amended by Finance Act 2000 by which “Transaction Value” replaced the “Normal Price”.

It is clearly seen that Section 4a was introduced in addition to Section 4 in year 1997. Section 4a introduced the method of calculating ad valorem rate based on MRP / RSP (Retail Sale Price) as declared by the assessee on the packed commodity.

Three years later Section 4 was also amended by introducing Section 94 in Finance Act, 2000 (No.10/2000). The basic change that has taken place is: Now the department has to accept the price which the assessee declares on his invoice if the buyer is not related and price is the sole consideration of sale.

Section 4 amendment in year 2000 appears to be in line with Section 4a as introduced in year 1997 because under Section 4a, MRP has to be accepted by the department (See ITC, supra). As far as Section 4a is concerned MRP becomes base for the “Assessable value”. Thus “Assessable Value” is the transaction which takes place on MRP. By this way u/s. 4a the government in practical terms fixed the “transaction value” which is the declared MRP/RSP. Similarly now for Section 4, “Assessable value” is the “Transaction Value”. The Transaction Value has to be accepted and the concept of “Normal Price” is amended.

Let us understand this, a little better. Government with an objective of making valuation mechanism simple, user-friendly and also commercially acceptable introduced the concept of “Transaction Value” from 1st July, 2000. Section 4 of Central Excise Act, based on concept of 'normal price', was replaced by a new section based on 'transaction value' for assessment.

The new section 4 (as amended in year 2000) essentially seeks to accept different transaction values which may be charged by the assessee to different customers, for assessment purposes so long as these are based upon purely commercial consideration where buyer and the seller have no relationship and price is the sole consideration for sale. Thus, it enables valuation of goods for excise purposes on value charged as per commercial practices rather than looking for a notionally determined value.

This again is similar to MRP based valuation. Because in MRP based valuation, if there are more then one MRP for different regions, then different MRP for respective region will be used for arriving at the tax. Similarly (u/s. 4) if there are more then one transaction value then different transaction value (as per invoice) has to be taken as a base for calculating tax.

As far as Section 4 is concerned : Discount of any type or description given on any normal price payable for any transaction will not form part of the transaction value for the goods, e.g. quantity discount for goods purchased or cash discount for the prompt payment etc. will therefore not form part of the transaction value. However, it is important to establish that the discount has actually been passed on to the buyer of the goods. The differential discounts extended as per commercial considerations on different transactions to unrelated buyers if extended can not be objected to and different actual prices paid or payable for various transactions are to be accepted. Where the assessee claims that the discount of any description for a transaction is not readily known but would be known only subsequently – as for example, year end discount – the assessment for such transactions may be made on a provisional basis. However, the assessee has to disclose the intention of allowing such discount to the department and make a request for provisional assessment.

The question is why is the trade discount (in whatever form i.e. cash discount, turnover discount, quantity discount) is allowed as deduction?

The controversy begun with the Voltas Case. The Apex Court ruling favored the assessee. The law was changed. After that came the Bombay Tyre’s International Ltd’s case. (BTIL).

The Supreme Court in Bombay Tyre’s case (1983-(014)-ELT -1896 –SC), held that the assessable value included sales, publicity, marketing and all charges incurred upto the factory gate (not discount). This view has been upheld in the Madras Rubber Factory – (MRF case) Government Of India V. Madras Rubber Factory Ltd. 1995-(077)-ELT -0433 -SC. (It does not include “Discounts” since discounts do not add to the value in any way).

In BTIL, while discussing Section 4, Supreme Court stated that in Section 4 there was an Explanation which declared that no abatement or deduction would be allowed except in respect of trade discount and the duty payable at the time of the removal of the article from the factory (See Para 14 – BTIL, Supra). This explanation was with reference to Section 4.

While explaining Section 4, the Apex court in BTIL’s case stated: “The "value" of the excisable article has to be computed with reference to the price charged by the manufacturer, the computation being made in accordance with the terms of s. 4.”

Although in BTIL’s case the Apex Court dissented from the Voltas Case as far as the concept of “Value” is concerned. However, the Apex Court while explaining its stand in the Voltas Case observed – “Those observation were made when the Court was examining the meaning of the expression "wholesale cash price". What the Court intended to say was that the entire cost of the article to the manufacturer (which would include various items of expense composing the value of the article) plus his profit on the manufactured article (which would have to take into account the deduction of 22% allowed as discount) would constitute the real value had to be arrived at after off-loading the discount of 22%, which in fact represented the wholesale dealer's profit. A careful reading of the judgment will show that there was no issue inviting the Court's decision on the point now raised in these cases by the assesses” (See Para 21, Supra). The view of the Supreme Court in evaluating the deduction of trade discounts was uniform and in both the cases i.e. Voltas and BTIL.

Therefore, in BTIL’s case the court stated that for arriving at the “Value” of the goods the “discount” factor has to be off-loaded.

Similarly while discussing about “related persons”, the Apex Court stated: “It is true, we think, that the new S. 4(1) contains inherently within it the power to determine the true value of the excisable article, after taking into account any concession shown to a special or favoured buyer because of extra-commercial considerations, in order that the price be ascertained only on the basis that it is a transaction at arms length..” (See Para 42, BTIL, Supra)

Section 4 contained specific provision relating to the trade discounts. Referring to this the Supreme Court stated – “The new s. 4 also contains sub-section (4)(d)(ii) which declares that the expression "value" in relation to any excisable goods, 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.” (See Para 47, BTIL, Supra).

Now, the price of an article is related to its value (using this term in a general sense), and into that value now poured several component, including those which have enriched its value and given to the article its marketability in the trade. Therefore, the expenses incurred on account of the several factors which have contributed to its value upto the date of sale, which apparently would be the date of delivery, are liable to be included. (See Para 49, BTIL, Supra).

The rationale that the Supreme Court adopted in BTIL and MRF’s case was whether the expense adds any value to the goods. If it adds value then the expense should be included in calculating assessable value. Contrary, if the expense does not add a value e.g. trade discounts, then it cannot be included in ascertaining Assessable Value.

After BTIL’s case, the issue about discounts was elaborately discussed in Re. MRF’s case. While referring to the BTIL’s case in Re. MRF’s at Para 45, under Part IV of Judgment the Supreme Court referred – “In the clarificatory Order in Bombay Tyre International (dated 14/15th November, 1983) this court has held : "discounts allowed in the Trade by whatever name such discount as 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 Discount shall not be disallowed only because they are not payable at the time of each invoice or deducted from the invoice price".

The idea is that discounts have to be allowed, if it is in tandem with the normal practice. On this grounds 1% Turnover discount (Para 55, MRF’s case, Supra) Year Ending Discount, Prompt Payment discount (See Para 59-61,MRF, Supra) were allowed.

On the above principle i.e. if the expense adds to the “Value” of the goods, the expense should be included in transaction value other-wise not. In lines with this principle, the Apex Court also allowed “Interest on receivable” as a permissible deductions, although the law did not specify about it.

Also see Collr. Of C. Ex., Chandigarh V. Punjab Chemicals & Pharmaceuticals 1999-(107)-ELT -0057 –TRIB, Commissioner of Central Excise, Chennai v. Hindustan Lever Ltd. 2002-(142)-ELT -0513 -SC (Definition of quantity discount as given by the Supreme Court)


INTRODUCTION OF SECTION 4A IN THE CENTRAL EX. ACT:


In Section 4, Assessable value is reached at by adding various components to the transaction value (as per the principle elaborated above). That is marketing and selling expenses, packing expenses (if separately charged) are added up to reach at Transaction value. All factors which add to the “Value” of the product are added to the Transaction Value. Factors such as Trade Discount, Interest on receivables are however not added to the transaction value because they do not add “Value” as contemplated by the Supreme Court.

It is manifest that whenever there arised a question of adding up various expenses to reach at the “Assessable Value”, there were plethora of disputes as to what should be included in assessable value and what should be excluded from the Assessable Value.

In Order to minimize the disputes, the Central Government post liberalization has tried to be more assessee friendly and put across assessment procedures which aim to be transparent and fair. e.g.: reducing the Central Excise Rules from 234 to 72, permitting fortnightly payment, reducing documentation etc. With this avowed objective of making the valuation system more hassle-free, Section 4A was introduced.

SCHEME OF SECTION 4a:

Value based on Retail Sale Price - Section 4A of CEA (inserted w.e.f. 14.5.1997) empowers Central Government to specify goods on which duty will be payable based on 'retail sale price'. The provisions are as follows:

a. The goods should be covered under provisions of Standards of Weights and Measures Act.

b. Central Government can permit reasonable abatement (deductions) from the 'retail sale price'. While allowing such abatement, Central government shall take into account excise duty, sales tax and other taxes payable on the goods.

c. If more than one 'retail sale price' is printed on the same packing, the maximum of such retail price will be considered.

d. The 'retail sale price' should be the maximum price at which excisable goods in packaged forms are sold to ultimate consumer. It includes all taxes, freight, transport charges, commission payable to dealers and all charges towards advertisement, delivery, packing, forwarding charges etc.
e. Central Government has to issue a notification in Official gazette specifying the commodities for which the provision is applicable and the abatements permissible.

After initial introduction of Section 4a, the following explanation was added by the Amendment act. This described the meaning of RPS in a form of an inclusive definition:

“Explanation 1.— For the purposes of this section, “retail sale price” means the maximum price at which the excisable goods in packaged form may be sold to the ultimate consumer and includes all taxes local or otherwise, freight, transport charges, commission payable to dealers, and all charges towards advertisement, delivery, packing, forwarding and the like, as the case may be, and the price is the sole consideration for such sale.”

From the first glance of the above definition of the “retail sale price”, it is apparent that this definition is an “inclusive definition” within the meaning of law.

What is an inclusive definition and how should it be interpreted?

This question was answered by the Apex Court in Re. V. M. Salgaocar & Bros. P. Ltd. Etc. V. Commissioner Of Income-tax Etc. And Commissioner Of Income-tax, Karnat (2000-(038)-RLT -0619 –SC). The Supreme Court said:

“The word "includes" is often used in interpretation clauses in order to enlarge the meaning of the words or phrases occurring in the body of the statute. It is a cardinal rule of interpretation that if, by an inclusive definition, the meaning of the word is to be enlarged, it would receive a strict interpretation. It is also a cardinal rule of construction of a fiscal statute that, even if two views are possible, the view which is favourable to the assessee must be accepted while construing the provisions of a taxing statute.”

The Supreme Court therefore held three things in Re. Salgaocar’s case (Supra): (1). When inclusive definition is used, the word / definition is to be enlarged; (2). But the interpretation would be strict. (therefore it will only include that meaning / words which lie in line with the words used in the definition); (3). When two interpretation are possible, the one beneficial to the assessee should be adopted.

Now let us analyze the “Inclusive Definition” used by the Central Excise Act to define “RPS”. RPS according to law will include: (1). taxes local or otherwise, (2). freight, transport charges, (3). commission payable to dealers, and (4). all charges towards advertisement, delivery, packing, forwarding.

The definition covers four types of charges which are already included in the RPS. They cover: taxes, transport, commission and marketing / advertising expense (and the like).

The definition also clarifies that the transaction should be between the unrelated parties i.e. price should be the sole consideration of sale.

The Legislature / parliament included the above definition to ensure that the doubts about the RPS are removed. Therefore, as per law, RPS will include four factors. They are: Taxes, Transport, Commission & Marketing / Ad. Expense. Since the definition is inclusive, obviously all that falls within the ambit of these four heads gets covered by the definition. It is pertinent to examine the term “Quantity Discount” in comparison with the above mentioned four criteria adopted in the inclusive definition before identifying whether “Quantity Discount” comes within the ambit of RSP.

The Apex Court in Re: Commissioner of C. Ex., Chandigarh v. I. P. F. Vikram India Ltd. 2002-(144)-ELT -0004 –SC held:

“Quantity discount, to put it simply, works thus : a dealer receives from the assessee a stated extra quantity if he buys a certain other quantity. That this will happen is known and agreed at the time the transaction is entered into. It is, therefore, a trade discount and the authorities below have correctly allowed it as such.”

Therefore, quantity discount does not fall under any of the categories included in the inclusive definition of “RPS” given under Explanation introduced by the Amendment Act. This is because quantity discount has nothing to do with transport costs, taxation, commission or advertisement.

Against the above, the scheme of Section 4a also says that abatement shall be given taking into consideration the quantum of other prevailing taxes. Needless to state after analyzing the definition of “RPS”, that quantity discounts do not form part of RPS. The flat abatement given by the act in terms of the notifications is for the purpose of removal of tax factor from the “Value” of goods.

Under law RPS is used as a measure of tax.. Since quantity discounts do not form a part of RPS, they cannot be taxed. The mere fact that RPS is mentioned on package does not make the goods taxable as per Sec. 4a. The taxation should be backed up by Notification. Even if the goods are covered by Std. Weights and Measures Act, they cannot be taxed only because they are so covered in absence of a notification to that effect under the Central Excise Act. That is why voluntary affixing MRP will not attract valuation u/s. 4a. Therefore, taxation is not incidental upon printing MRP on packages. It is incidental in terms of Section 4a notification.

In the case of Collector of Estate Duty v. M/s. Kanakasabai & Ors. [1973 (3) SCR 747], the Supreme Court has held that “it is a well accepted Rule of Construction that if a taxing provision is ambiguous and is reasonably capable of more than one interpretation, that interpretation which is beneficial to the subject must be adopted. It is impermissible for the Court to read into a taxing provision any word which are not there or exclude words which are there.”

The point is: we cannot add the word “Quantity discount” when nothing in the explanation and neither in the law mandates to include it for the purpose of taxation. Doing so would be to abdicate the settled practice and the settled interpretation of “Value”. It is needless to state the the Tribunal Ahmedabad should not have given interpretation to Section 4a which was de hors the legislative intention.

The Madras High Court in Re. Siv Industries Ltd. V. Commissioner Of C. Ex., Coimbatore. {2001-(129)-ELT -0048 –MAD} quoted a passage from Judgment rendered by Supreme Court in Re. Deputy Chief Controller of Imports and Exports v. K. T. Kosalram [(1970) 3 SCC 82].
“…What particular meaning should be attached to words and phrases in a given instrument is usually to be gathered from the context, the nature of the subject-matter, the purpose or the intention of the author and the effect of giving to them one or the other permissible meaning on the object to be achieved. Words are after all used merely as a vehicle to convey the idea of the speaker or the writer and the words have naturally, therefore, to be so construed as to fit in with the idea which emerges on a consideration of the entire context”.
It is necessary to observe that Section 4a was introduced in the back-ground of Section 4. The explanation introduced by the Legislature to Section 4a to define RPS in fact brought out the similarities between the two Sections i.e. Section 4 and 4a.

Section 4 speaks about “Price to be the sole consideration of sale”. Same is the case with Section 4a. Section 4 (after judicial interpretation in MRF and BTIL case) included the marketing costs, transportation costs, packaging costs etc. to reach at the “Transaction Value”. Same is done in case of RPS based valuation where the explanation to the definition states that RPS will include marketing costs, transportation costs etc.

The fundamental difference betwee Section 4 and Section 4a is that the computation u/s. 4a is done in reverse Order. What we did under Section 4 was to take “Transaction Value” and add to the transaction value various factors like marketing, packaging, transportation etc. to reach at Transaction Value.

Under Section 4a, exactly opposite is done when a single price (called MRP / RPS) is fixed up. MRP will include all the charges on account of commissions, marketing etc. (as per Explanation given under Section). From this Retail Price predetermined abatement is reduced to arrive at “Assessable Value”.

If for example, some consideration (influencing thing) influences the assessable value but does not form a part of the MRP and has been left out, then that can be added up just like it is done in the case of Section 4 valuation. For example, see departmental Circular No. 697/13/2003-CXdtd. 27th February, 2003 which deals with the issue of valuation of empty bottles. Here the department pointed out that if the MRP is not the sole consideration of sale then cash consideration should be added up to reach at the assessable value.
This interpretation of adding values is very much the same as per section 4 of the act. Therefore, only way by which Section 4 and Section 4a differ is at the first phase of reaching at the “assessable value”. In section 4 we add up various factors influencing value and drop those factors such as Quantity discounts etc. which do not influence the value and by this way we reach at the Assessable value. In section 4a, we have one consolidated value called MRP / RPS. If some external considerations are found influencing the value then they should be added to MRP / RSP. By natural corollary, since quantity discounts do not influence value in any way, they have to be dropped during assessment. After reaching at the value we deduct specified abatements. That means under this scheme, a portion of the MRP is sliced of to make allowance for average margins, transport cost, local taxes, element of excise duty and the balance of MRP is treated as value for excise purposes. Since quantity discounts are not included, we therefore cannot impose cental excise duty on quantity discounts.
In either case, the quantity discounts are not counted for the purpose of reaching at the “Assessable Value” because Trade / Quantity Discount does not add to the value in any way and solely depends upon the trade practices and the commercial considerations.

In Bata India Ltd. V. C. C. E., Calcutta-i. 2000-(041)-RLT -0426 –CEGAT Equivalent: 2001-(128)-ELT -0524 –TRIB, it was held:

“Merely because the price mentioned under Rule 57CC does not expressly provide for deduction of the trade discount and only refers to the exclusion of sales tax and other taxes, does not mean that the discount given by the assessee has to form part of the price. Inasmuch as the total consideration received by the assessee is only after allowing the trade discount to their customers, the stand taken by the Revenue would amount to addition of trade discount to the price received by the appellants from their customers, which cannot be permitted at any cost.”

Therefore, merely because Section 4a is silent about “Trade Discounts”/ “Quantity Discounts” will not mean that some interpretation should be hypothetically construed to tax even those goods which are given by way of “Quantity Discounts”
In the MRF case, the Supreme court worked out at the formula of getting to the assessable value u/s. 4. The Apex Court stated (Read Para 5 with Para 67):
“The selling price which is a cum-duty price would be the sum total of the assessable value, the permissible deductions and the excise duty. Putting this as a mathematical formula the selling price (cum-duty price) is equal to assessable value plus permissible deductions plus excise duty. Cum-duty Paid Selling Price = Assessable Value + Excise duty + Permissible deductions. Again Excise duty is computed as a ratio of the assessable value where duty is ad valorem. For the purposes of ascertaining of the assessable value, if three of the components namely the cum-duty selling price, the quantum of permissible deductions and the rate of excise duty are known, the proper and appropriate method of determining the assessable value would be the following formula :-
Assessable value = cum-duty selling price - permissible deductions - (1 + Rate of excise duty)” (Para 67)
Definition of term “Value” was explained by the Supreme Court in following words:
"Value" does not include the amount of duty of excise, sales tax and other taxes, if any, payable on such goods.
"Value" does not also include, subject to such rules as may be made, trade discount allowed in accordance with the normal practice of the wholesale trade at the time of removal of such goods. To qualify as a trade discount, the discount should not be refundable on any account whatsoever. (Para 5).
Now let us once again understand the explanation to Section 4a. Above referred explanation clearly provides for abatement to be fixed by the government after taking into account the taxes payable. This is precisely what Supreme Court pointed out in the MRF case. But the court, as it was considering the issue of discounts also pointed out that trade discounts have to be allowed (only condition is that the discount should have been actually passed on).
Question: Section 4a does not provide for quantity discounts and neither amended Section 4 provides for quantity discounts? Still how can we reach at a conclusion that quantity discounts are allowed?
From the exhaustive interpretation given by the Supreme Court and looking to the elaborate discussion above, we can certainly come to a legal conclusion that the quantity discounts have to be allowed and no excise can be levied on the goods given as quantity discount. The law intends to tax the goods manufactured. The measure of tax is contained in the valuation rules specified u/s. 4 and 4a (they are methods of computing value; S. 4a is not a new scheme for valuation). The “Assessable Value” as explained will include factors which add to the value of goods (whether added to transaction value u/s. 4 or included in “RPS” u/s. 4a). “Trade Discounts” do not add to value in either case. Therefore, they cannot be taxed.
Even as far as section 4 goes, the amendment was incorporated in the section effective from 01/07/2000. After this amendment the provisions in earlier section 4 in respect of packing charges, durable and returnable packing, class of buyer and trade discount are absent in new section 4 (after year 2000 amendment).
But, merely because the Statute is silent, the very fabric or intention of the statute cannot be abdicated. Merely because new Section 4 does not mention about quantity discount, it does not mean that quantity discounts have to be included in the term “Value” and consequently taxed. (Same will hold true for Section 4a of the Act because both only point out different computations. They are not new methods of taxation).
Since there were doubts prevailing after year 2000 amendment to Section 4 within the department itself, the department clarified this matter in Circular no. F.No. 354/81/2000-TRU , Dt. 30/06/2000 inter alia which it was clarified that pursuant to the interpretation of the Supreme Court, the trade discounts (including quantity discounts) would be allowed.
It is therefore necessary to understand that the legislative intention has not been changed since the Central Excise act has been amended from the time to time and the interpretation of the legislative intention to tax the production has not been altered and the MRF’s case and the BTIL’s explanations hold good even-today (since the Apex court has settled the law on this point by exhaustively interpreting the law).

DEPARTMENTAL CIRCULARS – Was it right for Ahmedabad Tribunal to rely on department’s circular for interpreting statute and by placing such reliance was the tribunal correct in distingusing SFC’s case from ILPL’s case?:
In ILPL case (Supra), the Tribunal (Ahmedabad) discussed the effect of Section 4a. While doing so Tribunal came to a conclusion that quantity discounts should be taxed. For the purpose of justifying the logic for taxing the quantity discount, the Tribunal sought to differentiate and used the Department Circular no. 673/64/2002-CX dtd. 28/10/2002 relied in the SFC’s case (Supra).
After quoting the above referred circular, the Tribunal explained that looking to the circular the multi-pack can have free item piece and individual package within multi-pack should not bear MRP. After saying this, the tribunal concluded that if criterion (as specified in circular) is satisfied then the MRP on the multi-pack will be taken into consideration for taxing purposes.
The tribunal held that since in the ILPL’s case the MRP is printed on the medicines given by way of “Quantity discounts”, therefore no benefit of Circular will be given to the ILPL (based on the interpretation of the circular). Tribunal did not consider the fact that assessee has no option but to print MRP in terms of the prevailing law relating to DPCO. Secondly, the Tribunal, Ahmedabad also did not consider that taxation u/s. 4a is not incidental upon printing MRP but it is incidental upon notification (as explained earlier). Therefore, there is no logic in saying that because MRP is printed on goods given as “quantity discount”, they will not be allowed. Assessee naturally cannot be expected to clear goods without printing MRP because doing that will be illegal.
Now, coming back to “circulars” the question is: how far can circulars be used to interpret the statute?
Whether “quantity discounts” are to be taxed or not while interpreting Section 4a qua Section 4; scope of Section 4a, was a matter of interpretation of law based on (1). Language of law; (2). The intention of legislature to enact the law; (3). Prevailing interpretations and explanations given by the Supreme Court / High Courts on this point.
Unfortunately, Ahmedabad tribunal decided to use a circular of department and by relying on departmental circular Tribunal reached at a conclusion and held that the quantity discounts should be taxed. Was this approach correct?
The answer lies in identifying the legislative / statutory force behind the circular. That is, if the circular has the force of legislature (just like a law enacted from the floor of parliament has), then circulars are binding to the assessee and the courts may use them to interpret law. In that case the circulars will govern the decision of the courts. On the other hand, if circulars do not have a binding effect, they they cannot form basis of interpretation of law.
The law on this point is totally settled. The circulars have no legislative force. They are not binding on assessee and lead no succor to interpret the law. Circulars do not bind courts. Let us see what the courts say on this point.
In Izharul Haque V. Joint Director General Of Foreign Trade. 2001-(132)-ELT -0539 –CAL, it was held:
“It has also been held further that the impugned clarification and/or notice has no statutory force and by the impugned circular right under the licences cannot be taken away. In the Supreme Court's decision 1993 (66) E.L.T. 13 cited by Mr. Mehta it has been held amongst others that the departmental clarifications and circulars cannot be given effect to in derogation of the provisions of the Act and also the previous notification.”
In Cce, Jaipur V. P. G. Foils Ltd. 1999-(083)-ECR -0558 -TRIB it was held:
“Further in my opinion, it is not correct to say that the Trade Notices issued by the Collectorate have a statutory force. In any eventuality, the Tribunal is not bound by them or the the Board’s Circular could differ on good and sufficient grounds in accordance with its interpretation of law and procedure and in the light of the High Court or Supreme Court judgments and precedents.”
In CBDT V/s. Oberoi Hotels 1998-(004)-SCC -0552 –SC), the Supreme Court explained about the circular while quoting the binding effect of circular on revenue explained by it in Keshavji Ravji and Co. V/s. CIT (1990 2 SCC 231) in following words (quoted at SCC pp. 250-51 (Supra), paras 32-35)
"32. This contention and the proposition on which it rests, namely, that all circulars issued by the Board have a binding legal quality incurs, quite obviously, the criticism of being too broadly stated. The Board cannot pre-empt a judicial interpretation of the scope and ambit of a provision of the “Act” by issuing circulars on the subject. This is too obvious a proposition to require any argument for it. A circular cannot even impose on the taxpayer a burden higher than what the Act itself on a true interpretation envisages. The task of interpretation of the laws is the exclusive domain of the courts. However, - this is what Sri Ramachandran really has in mind - circulars beneficial to the assessees and which tone down the rigour of the law issued in exercise of the statutory power under Section 119 of the Act or under corresponding provisions of the predecessor Act are binding on the authorities in the administration of the Act. The Tribunal, much less the High Court, is an authority under the Act. The circulars do not bind them. But the benefits of such circulars to the assessees have been held to be permissible even though the circulars might have departed from the strict tenor of the statutory provision and mitigated the rigour of the law. But that is not the same thing as saying that such circulars would either have a binding effect in the interpretation of the provision itself or that the Tribunal and the High Court are supposed to interpret the law in the light of the circular. There is, however, support of certain judicial observations for the view that such circulars constitute external aids to construction.”
33. In State Bank of Travancore v. CIT ((1986) 2 SCC 11 : 1986 SCC (Tax) 289 : (1986) 158 ITR 102) however, this Court referring to certain circulars of the Board said : (SCC p. 51, para 43 : ITR p. 139)
'... The earlier circulars being executive in character cannot alter the provisions of the Act. These were in the nature of concessions and could always be prospectively withdrawn. However, on what lines the rights of the parties should be adjusted in consonance with justice in view of these circulars is not a subject-matter to be adjudicated by us and as rightly contended by counsel for the Revenue, the circulars cannot detract from the Act.'”
Reading the above, it can be very well understood that Supreme Court stated following:
1. The Board cannot pre-empt (block/obstruct) judicial interpretation of the scope and ambit of a provision of the “Act” by issuing circulars on the subject;
2. Circulars do not bind the courts;
3. A circular cannot even impose on the taxpayer a burden higher than what the Act itself on a true interpretation envisages;
4. If benefits are given by circular then the assessee can get the benefits even if the circular lies beyond the Law.
The Ahmedabad Tribunal did not consider the above points while relying on the referred circular and interpreting law in light of the circular having no statutory force.
Apart from the above, for better understand about the discounts, following is summarized (from the judicial views) about discounts:
Admissible and inadmissible discounts.
Ø Discounts known at or prior to the removal of the goods are allowable if the discounts are actually given. Trade discounts not given uniformly can be rejected considering the circumstances of transaction.
Ø There is no reason to suppose that a trade discount is always in the form of money. A quantity discount is an accepted form of trade discount and is allowable on goods sold in wholesale, is deductible like cash discount.
Ø Turnover discount given depending upon the purchases made by each dealer is an admissible discount.
Ø Prompt payment discount is a trade discount and allowable as deduction.
Ø Free samples of medicines given to the physician constitute an admissible discount.
Ø TAC/Warranty discount is in the nature of benefit given to the customers by way of compensation for loss suffered by them on the previous sale. As it is not in accordance with the normal practice of the wholesale trade at the time of removal of goods in respect whereof the claim is made, the discount is inadmissible.
Ø Year end discount or Campaign discount are in the nature of bonus or incentive given much after the removal of goods is complete and are, therefore, not deductible.========================================