By TIOL News Service

NEW DELHI, APR 08, 2016: THE appellant manufactures soda ash. It sells soda ash to various customers in gunny bags. The question is whether the value of the gunny bags should be included in the assessable value of the soda ash for the purposes of levy of excise under the CESA, 1944.

The period in question is from 1981 to 1985. According to the appellant, beginning from 1970 they had entered into correspondence with their customers under which they had asked their customers to return empty gunny bags for being reused for the supply of soda ash.

Inasmuch as according to the appellant, these letters would show that the cost of gunny bags were not to be included in the value of the soda ash.

The Tribunal did not agree. Vide an order dated 6.9.2000 the Bench did not accept the letters dated 15.12.1970, 01.02.1971 and 02.04.1971 allegedly seeking to bring out the arrangement for the return of durable packing, namely, gunny bags, for reuse as packing material for selling the soda ash in bulk. The Tribunal further opined that assessee's effort to establish that 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 was unsustainable and hence, unacceptable.

The assessee went in appeal before the Supreme Court and sought to place reliance on the decisions in -

++ Mahalakshmi Glass [2002-TIOL-511-SC-CX]

6.  …, this Court has considered the meaning of the expression “returnable” in the Section in K. Radha Krishnalah's case (supra). This Court held that so far as the question of durability is concerned, there cannot be such controversy about it, but a question has been raised as to what is the meaning and connotation of the word “returnable”. Does it mean physically capable of being returned or does it postulate an arrangement under which the packing Is returnable. White interpreting this word, we must clear in mind that what section 4(4)(d)(i) excludes from computation is cost of packing which is of a durable nature and is “returnable by the buyer to the assessee”. The packing must be one which is returnable by the buyer to the assessee and obviously that must be under an arrangement between the buyer and the assessee. It is not the physical capability of the packing to be returned which Is the determining factor because, In that event, the words “by the buyer to the assessee” need not have found a place in the section; they would be superfluous.

++ Triveni Glass Ltd. [2005-TIOL-32-SC-CX-LB]

17… In our view, the law laid down by this Court in Mahalakshmi Glass Works (P) Ltd. (supra) is the correct law. There is no necessity that the crates must be actually returned. So long as there is an obligation on the seller to take back the crates, if the buyer chooses to return them, it is sufficient. The term in the contract, set out above, imposes an obligation on the Appellants to take back the wooden crates and to pay the stipulated amount to the buyer if the buyer chooses to return them. Wooden crates merely consist of planks of wood which are nailed together.Therefore, even if they are dismantled by the buyer and the planks are returned to the Appellants the Appellants would be in a position to use them again. In our view, the High Court was wrong in holding that the wooden crates are not durable or returnable. The answer to the second question therefore has to be in favour of the Appellants. It is held that, in view of the specific term in the bills/invoices, the wooden crates are durable and returnable packing whose costs is not to be included in the value of glass sheets.

The Supreme Court observed -

12. The decision in Triveni Glass Ltd. (supra), does appear to suggest that even if there is no obligation on the part of the buyer to return the packing material, but there is an obligation on the part of the seller to accept the packing material if the buyer chooses to return it, then in all cases the cost of the packing material must be excluded from the cost of the excisable goods. This view is, in our opinion, contrary to the ratios laid down in the cases of K. Radha Krishnaiah (supra) and Mahalakshmi Glass Works (P) Ltd. (Supra).

13. Since the view expressed in Triveni Glass Ltd (supra) was of a Bench of three Judges, in view of our respectful disagreement with that decision, the matter must be placed before a larger Bench. Let the papers be placed before the Chief Justice of India for appropriate directions.

We reported this order dated 23.03.2006 as 2006-TIOL-180-SC-CX-LB .

The Constitution Bench passed the following order dated 4.8.2010:-

"In view of paragraphs 12 and 17 of the judgment of Three-Judge Bench of this Court in the case of Triveni Glass Limited vs. Union of India and Ors., reported in 2005 (3) SCC 484 =   2005-TIOL-32-SC-CX-LB, we are of the view that the assumption made in the referral order dated 23rd March, 2006 to the effect that the decision of this Court in Mahalakshmi Glass Works (P) Limited vs. Collector of Central Excise, Bombay, reported in 1988 (Supp) SCC 601 =   2002-TIOL-511-SC-CX, is erroneous. On the contrary, the judgment of this Court in Triveni Glass Limited (supra) in turn follows the judgment in Mahalakshmi Glass Works (P) Limited (supra).

For the above reasons, the order of reference dated 23rd March, 2006, is set aside and consequently, the civil appeals will be heard by the appropriate Bench in accordance with law. All arguments on merits on both sides are kept open."

The matter was heard by the Supreme Court and an order was passed on 06.08.2015 [See 2015-TIOL-177-SC-CX].

Incidentally, there was a difference of opinion as enumerated below.

Per: Justice Dipak Misra:   I arrive at the irresistible conclusion 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 I accept that it has the nature and character of an arrangement, then the authority is required to ascertain from the record whether the buyers continued to have a choice to return the packing material for reuse. I need not indicate the method of verification of the existence of the arrangement for the period in question. 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 which I have accepted to be an arrangement, and is prevalent during the relevant period i.e. 1981 to 1985, the appellant shall be given the benefit.

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.

Per: Justice Gopala Gowda:   The tribunal has rightly rejected the claim of the appellant so far as the exclusion of the cost of packing material with the value of soda ash is concerned and hence, it is liable to pay the tax liability for the same in the light of the findings and observations made in this judgment. The appeals are dismissed.

See 2015-TIOL-177-SC-CX.

The appeals were heard recently by a Larger Bench.

After extracting paragraphs 5 & 6 from the decision in Mahalakshmi Glass Works (P) Ltd. 2002-TIOL-511-SC-CX and paragraphs 12 & 17 of the decision in Triveni Glass Ltd. 2005-TIOL-32-SC-CX-LB , the Larger Bench inter alia observed -

++ What transpires is that if an arrangement exists between the seller and the buyer of excisable goods for return of the packing materials by the buyer to the seller, carrying an obligation on the seller to return the value of the packing materials to the buyer on such return, such value is not liable to be included in the assessable value of the finished product. Furthermore, if such an arrangement exists, the question of actual return is not relevant.

++ The materials placed before us do not enable us to come to the conclusion that the appellant has succeeded in establishing, on the basis of the materials so placed, that such an arrangement of return of the packing materials of the gunny bags with the obligation on the part of the seller to refund the value thereof existed between the parties so as to enable us to hold that in the present case the law laid down in Mahalakshmi Glass Works (P) Ltd. (supra) and Triveni Glass Ltd.(supra) would apply.

++ Specifically we may mention here that we do not find any obligation taken by the appellant to refund the value of the gunny bags to the Buyer in terms of any arrangement between the parties. If the arrangement required in terms of the decisions of this Court in Mahalakshmi Glass Works (P) Ltd. (supra) and Triveni Glass Ltd. (supra) do not exist, we do not see there can be any remand of the appeal for further consideration.

The appeals were dismissed.

(See 2016-TIOL-39-SC-CX-LB)