Cost of Returnable Packing Material not to be included in assessable value– SC

Brief of the Case

In the case of M/s. Tata Chemicals Ltd. V/s Collector of Central Excise it was held by Supreme Court that Cost of Returnable Packing Material need not to be included in assessable value.

Brief Facts

There was an arrangement between the manufacturer and their customers to return the durable packing, namely, gunny bags, and accordingly the claim put forth by them that the value of gunny bags used for packing soda ash manufactured by them should be excluded in finding out the   assessable value.

Dispute with regard to these gunny bags between the assessee and revenue have arisen for the period from 1970 to 1985.   As is evident, proceedings for the entire   period were   taken   in   three compartments, namely, 1970-75, 1976-1980 and 1981-1985. Initially the dispute related to payment of duty of excise on the value of goods manufactured i.e. soda ash, after exclusion of post-manufacturing expenses. Subsequently, it was settled as a proposition that post-manufacturing expenses as such were not deductible and that the deduction/exclusions could only be in terms of specific provisions contained in Section 4 of the Central Excise Act, 1944 (for brevity, ‘the Act’).   On the basis of the aforesaid law laid down, the matters were remanded by this Court for reconsideration.

It was for the first period, that is, 1970-75, the matter was remanded to the Assistant Commissioner to decide the issue relating to exclusion/inclusion of cost of packing in determining the value of goods for payment of excise duty under Section 4 of the Act. The claim of the assessee was eventually rejected. That compelled the assessee to prefer an appeal. The said appeal has been disposed of by this Court vide judgment and order dated 21.8.2014 and remanded back the matter to Tribunal.

It is necessary to mention here that for the subsequent period, i.e. 1976-1980, the matter is still   subjudice   before   the   adjudicating authorities. The present batch of appeals relates to the period 1981-1985. It is apt to note here that when the batch of appeals was listed before a three-Judge Bench, it referred to Section 4(4)(d) of the Act and letters issued by the appellant; took note of the decisions in Mahalakshmi Glass Works (P) Ltd. v. Collector of Central Excise [2], Triveni Glass Ltd. v.   Union of India & Ors. [3] and Commissioner of Central Excise v. Hindustan National Glass & Industries Ltd.[4]; adverted to the order of the tribunal that has not accepted the documents holding that it did not show that there was any arrangement regarding returnability of gunny bags which would justify the exclusion of cost of gunny bags from the cost of soda ash; analysed the proposition of law stated in K. Radha Krishnaiah v. Inspector of Central Excise and others [5].

Contentions of the Assessee

The Assessee contended that the controversy has to be appreciated regard being had to the applicability of the word “value” as employed in Section 4(4)(d)(i) of the Act in relation to excisable goods and the interpretation placed by this Court on various authorities in the backdrop of the letters that have been brought on record. It is also submitted that the concept of durability and returnability has to be understood on the bedrock of the propositions laid down by the decisions of this Court. Additionally, it is canvassed by assessee that once it is established that there has been an arrangement, the authorities can be asked to appreciate   the   other documents, regard being had to the period in question to find out whether the arrangement was in vogue during that period.

Contentions of the Revenue

The revenue contended that the letters presented by the assessee cannot be accepted as documents providing for the arrangement between the assessee and its customers in regards to return of packing material.

Held by Hon’ble Supreme Court of India

The Hon’ble Supreme Court stated that the tribunal held that there has been no arrangement between the manufacturer and their customers to return the durable packing and therefore, the claim put forth by the assessee that the value of gunny bags used for packing soda ash manufactured by them should be excluded in finding out the assessable value is untenable.

The Hon’ble Court referred to the decision in Triveni Glass Limited, 2005 (supra) which has been approved by the Constitution Bench clearly lays down that it is not the physical capability of packing to be returned which is the determining factor but the condition that if the buyer chooses to return the packing, the seller is obliged to accept it and refund the stipulated amount.   The question whether the packing is actually returned or not has no relevance. It must be manifest that it is the obligation of the assessee to take back the packing items from the purchaser.   The tribunal has interpreted the letters treating them that they do not meet the nature and character of an “arrangement”. It is urged by the assessee-appellant that it is circulated to all the dealers and that there has been responses from the buyers to the letters circulated by the assessee. It is put forth that communications from the buyers were brought on record before the tribunal by way of an affidavit and invoices were also brought on record.

The letters clearly show the obligation of the assessee-appellant to take back the packing materials.

The Hon’ble Court stated that an arrangement need not be in a particular form, it can be oral or in writing by way of an agreement or can be ascertained from communication or letters exchanged. When oral it has to be proved and established and when in writing it should be genuine and not a camouflage, but an arrangement cannot be ignored and treated as non est because it is by means of written communications.

In Hindustan Polymers (supra), it has been clearly held that when an arrangement per se exists for return of durable packaging by the buyer to the manufacturer, then whether or not the packaging was in fact returned would be inconsequential. More importantly, it was held therein that if the durable packaging was supplied by the buyer to the assessee and was returnable to the buyer, the cost of durable packaging would not form a part of the assessable value. To treat value of the durable supplied by the buyer as a part of the assessable value, it was observed, would result in an absurd situation.   In this context, it was held that proper contextual interpretation was required to be placed on the words of Section 4(4)(d)(i), as literal interpretation would lead to difficulties.

In view of the aforesaid analysis, the Hon’ble court stated that the letters spell out an arrangement between the assessee and the buyers. The tribunal has not accepted the stand of the appellant on the ground that it is not an arrangement and on that basis has remanded the matter to the adjudicating authority for computation of the actual amount of duty payable by the appellant. Once the existence arrangement and choice to return the packing material for reuse are established for the period in question in view of the second decision in Triveni Glass Limited (supra), the packing cost would not be included. If the assessee succeeds in establishing the choice mentioned in the documents and is prevalent during the relevant period i.e. 1981 to 1985, the appellant shall be given the benefit.   If he fails to establish the same, the adjudicating authority shall look into the consideration the actual return as has been directed in Civil Appeal No. 2988 of 2006 on 21.8.2014.

Resultantly, the appeals are allowed and the orders passed by the forums below are set aside and the matter is remanded to the adjudicating authority for adjudication in accordance with the principles   stated hereinabove.