“DHARMADA” or Charity Amount not part the assessable value under the Central excise Act

Sometimes the manufacturer charges from the buyer a specific amount, which is used for charitable purposes. This amount is known as charity amount or Dharmada. It may be compulsory or optional for the buyer. The amount so collected in “not retained” by the manufacturer but used solely for religious or charitable purposes, thus the amount collected doesn’t go to the manufacturer or doesn’t form part of his income. The Law Lexicon, P. Ramantha Aiyer, Badhwa define Dharamada as an endowment or gift for religious or charitable purposes. In CIT v/s Bijli Cotton Mills (AIR 1979 SC 346), a case under the Income Tax Act, 1961, it was held that Dharmada collected for charitable purposes and spent on charity purposes is not a part of the income of the assessee.

Whether Dharmada is part of assessable value under section 4 of the Central Excise Act, 1944?

Under Central Excise Law, the duty has to be paid on the wholesale price of the goods (before amendment of Section 4) or on transaction value of the goods. It is known at the time of removal of the goods that the seller shall not appropriate the “Dharmada” amount paid but it will be used for charitable or religious purposes. It is also clear to the buyer that this amount is paid, not for the goods but for charity. Under Section 4 of Central Excise Act, 1944 what is relevant is the value of the goods and not the gross amount paid by the buyer. Based on these reasoning and following Bijli Cotton Mills’s case, the Tribunal held consistently that Dharmada is not to be included in the assessable value.

The Tribunal has held, consistently, that Dharmada is not a part of the assessable value. In Mohan & Company v/s Collector [1987(30) ELT 624 (Tri)], it was held that Dharmada is not includible in the assessable value. The law laid down in Mohan & Company case was affirmed by the Supreme court and the appeal of the revenue was dismissed as reported in 1997 (91) ELT A232 (SC). In Collector of Central Excise v/s Electrical Corporation of India [1997 (91) ELT 109 (Tribunal)], it was reaffirmed that Dharmada in not part of the assessable value. The tribunal quoted Hon’ble Supreme Court, in Bijli Cotton Mills case, quote,

“The supreme court held that the sum collected as Dharmada cannot be regarded as part of the price or a surcharge on price of goods purchased in a addition to the price of goods which he purchases from the assessee but the purchase of the goods by the customer would be the occasion and not the consideration for the Dharmada amount taken from the customer. The Supreme Court indicated that the “Dharamada” amount is clearly not a part of the price but a payment for the specific purpose of being spent on charitable purposes.”

A plain reading of the view of Hon’ble Apex Court in Bijli Cotton Mills case clearly suggest that “Dharmada” or charity amount on not a part of the price and hence it is not a part of the assessable value. It is also clear that it is not a consideration for sale but sale is merely an occasion for payment of Dharmada amount, hence it is not a part of the assessable value. The Tribunal followed the decision consistently and this view was affirmed in a number of cases.

In Commissioner v/s Aqua Pump Industries, the Tribunal decided that charity amount collected is not includible in the assessable value. The Appeal of Commissioner of Central Excise, Coimbatore was dismissed by the Hon’ble Apex Court (2 Judge Bench) as reported in 2003(156) ELT A271. Earlier also, with respect to the same assessee, the Hon’ble Apex Court (3 Judge Bench) [1998 (102) ELT A64] while dismissing the Appeal of the Commissioner of Central Excise upheld the Tribunal order that charity amount is not includible in the assessable value.

In Collector v/s Golden View Electrical Ind. [2002(147) ELT 1199], the Tribunal held that Dharmada is not a part of the assessable value. The appeal of the revenue was dismissed by 3-Judge Bench of the Supreme Court as reported in 2003 (153) ELT A98. Incidentally the Court while dismissing the appeal of the revenue made reference to the law laid down in Collector of Central Excise v/s M/s Mohan & Co. [1987 (30) ELT 624]. A three Judge Bench of the Supreme court dismissed the appeal filed by the revenue, [2003 (154) ELT A254], against the CEGAT order in Associated Soapstone Distributing Co. Pvt. Ltd. v/s Collector [2002(146) ELT 324] and reaffirmed the ratio laid down in Mohan & Company, Madras v/s Collector [1997 (91) ELT A232]. In Collector V/s Amrit Vanaspati Co. Ltd [2003 (154) ELT A225] the Supreme Court again reaffirmed the law laid down in case of Mohan & Co (supra).

Hon’ble Apex Court took a different view in Tata Iron & Steel Co. Ltd. v/s Collector of Central Excise [2002(146) ELT 3(SC)], 2 Judge Bench, and held that steel development charges is to be added to the assessable value. The Court declared that law laid down in Mohan & Co. case is not a good law. The Tribunal in Shree Rajsthan Texchem Ltd. v/s Commissioner followed the case. The appeal of the assessee against the order of the Tribunal has been dismissed by the Supreme Court [2003 (158) ELT A41]. The Apex Court followed Tisco’s case in CCE v/s Panchmukhi Engineering Works [2003(158) ELT 550 (SC)] and held that “Dharmada” amount is a part of assessable value. The relevant part of the Judgments reads as,

“The learned Counsel for the appellant-Revenue submitted that this question is to be answered in favour of the Revenue, having regard to the decisions of this Court in the case of Tata Iron & Steel Co. Ltd. V/s Collector of Central excise, Jamshedpur [2002 (146) ELT 3 (SC)]. The learned Counsel for the respondent was not in a position to dispute this legal position. Under these circumstances, following the said judgment, these appeals are allowed and the impugned orders are set aside.”

Following this judgment the Board issued a Circular, 763/79/2003-CX dated 21.11.2003 saying that “ Dharmada” collected by the assessee from the buyer is includible in the assessable value of the goods. In view of these developments it is necessary to examine whether Dharamada amount collected will form part of the assessable value or not. This paper is a humble attempt to answer this question.

It is submitted that the TISCO Judgment does not decide about the Dharmada amount at all. The judgment is with respect to steel development charges, which is to be used “not” for any religious or charitable purposes but for the benefit of the steel making units itself. The court have noted the point in para 27 of the Judgment and said, “ Another aspect to be kept in mind is ultimate beneficiaries of these amounts are the steel plants themselves.” Thus the judgment must not be applied in case of Dharmada where the manufacturers are not the beneficiaries.

The Hon’ble Supreme Court in the Tisco’s case para 13, stated,

“From the price at which the assessee sells to the buyer, the only deduction permissible are those under sub-clause 4 (d) (ii) i.e. Excise, Sales tax and other taxes and in certain cases trade discounts. It is no body’s case that the extra element is an Excise or a Sales tax or a trade discount. The only question is whether it would fall within the meaning of the term “other Taxes”.”

Thus in Tisco’s case the Hon’ble Supreme Court starts from the presumption that steel development charge is part of the price and then examine whether it is deductible from the price as other taxes. In the case the court comes to the conclusion, on powerful and cogent reasons, that steel development charge is not covered under “other taxes” and hence the deduction is not allowed.

It is submitted that charity amount is not a part of the price as it is not a payment in connection with sale of the goods or transaction value. The purchase or sale of the goods is merely an occasion for collection of Dharmada amount. Since it is not a part of the price the question of deducting it from the price as ‘other taxes” does not arise. What has been held is Bijli Cotton Mills’s case is that the charity amount is not a part of the price. Once it is not a part of the price, deducting it from the price as other taxes is irrelevant.

In the Tisco’s case the Court have not examined the contention that whether Dharmada or charity amount is part of the value. In fact the term, Dharmada or Charity amount, was never used by the Supreme Court in that case. It is submitted that the question, whether it form part of price or not, have been answered by the Hon’ble Supreme Court in Bijli Cotton Mills’s case and affirmed by 3 Judge Bench in Commissioner of Central Excise v/s Aqua Pump Industries {1998 (102) ELT A64] wherein the Court held that Dharmada is not a part of the value. The author is of the view that Dharmada or charity amount is not a consideration of sale and thus not a part of price. Sale is merely on occasion of collection of Dharmada amount. This amount is not a part of the price of the product but a payment by the buyer for a specific purpose. The payment is made in connection with a specific purpose of charity and not by reason of sale. Thus the charges should not be included in the assessable value. Even under new Section 4 what is relevant is that payment made by the buyer to the assessee, which is in connection to the sale and not in connection to the charity, as the case is with Dharmada amount.

It must be noted that the law laid down in the Mohan & Co. V/s Collector [1987 (119) ELT 624] have been specifically been overruled by the Court in Tisco case. It may be noted that Tisco Judgment is a 2-Judge Bench Judgment and it is a collateral proceeding with respect to the law laid down in the Mohan & Co. case. The ratio laid down in Mohan & Co. has already been affirmed by Two Judge Bench of the Supreme Court in direct proceeding as reported in  [1997 (91) ELT A232]. In case of conflict of Judgment between two benches, the judgment in the direct proceeding should take precedence over Judgment in collateral proceeding.

It should further be noted that the law laid down in Mohan & Co. have been affirmed by the 3 Judge Bench of the Supreme Court in case of Commissioner v/s Aqua Pump Industries [1998 (102) ELT A271], Collector v/s Golden View Electrical industries [2003 (153) ELT A98] and Collector v/s Associated Soapstone Distributing Co. Pvt. Ltd. [2003 (154) ELT A254]. Thus as per the cardinal principle of following the Judgment of larger benches, the author is of the view that law laid down in Mohan & Co. is still good law and Dhramada amount collected should not be included in the assessable value under section 4 of the Central Excise Act. It may be further be noted that these Judgments were not brought to the notice of the Court in Tisco case and hence the judgment is per incuriam and hence not binding as per the law laid down in case of Govt. of A.P. v/s B. Satyanarayana Rao [2000 (4) SCC 262]. Reference can also be made to A. R. Antulay v/s R. S. Naik [1988(2) SCC 602 ( SC-7 member Bench)] that a Judgment per incuriam is not a binding judgment.

Regarding the circulars, the law is well settled that adjudicating authorities are not bound by the trade notices or administrative circulars while adjudicating the matter. The law was declared by the Supreme Court in Orient Papers Mills v/s UOI [1978 (2) ELT J345 (SC)]. Further the assessee is not bound by the circular. The author submits that issuance of a circular on a disputed legal issue is unfortunate and improper. It is sad that the Board only took into consideration Judgments which favours the revenue and discarding all other judgments which are against the revenue.

Conclusion

In the present circumstances there are contradictory judgment of the Hon’ble apex court and in these circumstances judgment of the larger bench should be followed. In Commissioner v/s Aqua Pump Industries [1998 (102) ELT A64], 3 Judge bench of the apex court held that Dharmada amount is not includible in value and hence this decision is a binding precedent should be followed. In view of the above the author is of the view that Dharmada amount is not a part of the assessable value, notwithstanding the Circular of the Board.

(Views expressed are personal views of the author.)

Written by:- Advocate Rajesh Kumar. The author can be contacted on The author can be contacted on custom.excise@gmail.com , Web: www.rajeshkumar.co.in