Commnr. Of Central Excise, Delhi vs M/S. Pearl Drinks Ltd

basis from other parties. The driver-cum-salesman

employed for that purpose would deliver the goods to the

customers/dealers at a higher price and issue cash memos

to them, while unsold stocks and empties were brought back

to the company's duty paid godown.

3. In the declarations filed by the respondent-company

from time to time it had while disclosing the wholesale

price/assessable value for various sizes and flavours claimed

deductions towards excise duty, sales tax, transportation

charges, container service charges and other service charges

including trade discounts etc. before arriving at the

assessable value under Section 4 of the Central Excise &

Salt Act, 1944. Being of the view that such deductions were

not legally admissible, the adjudicating authority issued a

notice dated 3rd November, 1995 calling upon the 4

respondents to show cause why the deductions claimed

under the following eight heads be not denied to them:

"1. Mazdoor and cartage expenses on account of bringing of breakdown vehicles.

2. Service charges including handling.

3. Establishment cost of sale and Shipping Department.

4. Shell Repair Cost.

5. Interest on Containers.

6. Deduction claimed on account of loss of beverages in duty paid godown and transporting the goods from the duty paid godown to the customers.

7. Trade discount given to the privileged customers.

8. Other trade discount by way of one or more bottles free of cost to customers."

4. The respondent filed a reply to the notice

aforementioned upon consideration whereof the Principal

Commissioner of Central Excise, Delhi passed an order in 5

original dated 14th March, 2001 disallowing deductions to the

extent of Rs.13,42,924/- on account of loss of beverages in

the duty paid godown and a sum of Rs.27,50,072/- on

account of loss in transit from the said godown to the

customers and discount made on account of free supply of

bottles of aerated water. Insofar as the remaining six heads

under which deductions were claimed by the company the

order in original accepted the said claim.

5. Aggrieved by the order aforementioned the

respondent-company filed an appeal under Section 35(E)(1)

of the Central Excise before the CEGAT who by a reasoned

order dismissed the same, holding that the disallowance of

deductions under the two heads referred to above was

perfectly in order. A further appeal filed by the assessee

before this Court was also dismissed on 23rd September,

2002 thereby finally settling in favour of the Revenue the

controversy as regards the admissibility of deductions under

the two heads referred to above are concerned. 6

6. As regards the admissibility of deductions under the

remaining six heads which the adjudicating authority allowed

to the company, the Central Board of Excise and Customs

(for short `CBEC') appears to have reviewed the order of the

Commissioner Excise under Section 35(E)(1) of the Central

Excise Act and come to the conclusion that the grant of

deductions under the said six heads was unjustified. The

Board accordingly directed the Commissioner of Central

Excise to approach the CEGAT for a correct determination of

the following points:

"(i) Whether the Commissioner was right in allowing the deductions claimed by the party without first verifying whether these were included in the wholesale price and if so, whether the same were included as a part of transportation cost only as claimed by the party and allowed by them.

(ii) Whether the Commissioner was right in allowing the deduction of Rs.6975/-, Rs.24,00,000/-, Rs.62,12,578/-, Rs.7,66,662, Rs.2,27,329/- and Rs.91,000/- from the wholesale price, which do not appear to be admissible.

7 (iii) Whether the Commissioner was right in not imposing the penalty as proposed in the SCN."

7. It is noteworthy that the Board while passing the above

order referred to the disallowance of similar deductions

claimed by the respondent for the period immediately

preceding the period relevant to the show cause notice in

question. The Board noted that the CEGAT had by its order

dated 2nd March, 2001 (reported in (2002) 150 ELT 661)

affirmed the said disallowance except for two items. The

effect of the said disallowance had not according to the

Board been taken into consideration by the adjudicating

authority while granting the deductions claimed by the

respondent-company.

8. In compliance with the order passed by the CBEC the

Commissioner of Central Excise preferred an appeal under

Section 35E(4) of the Act which was dismissed by the CEGAT

by its order dated 22nd of July, 2002 holding that the order

under challenge had merged in the earlier order dated 24th 8

January, 2002 passed by the Tribunal in the company's

appeal whereby disallowance of two of the eight deductions

in dispute had been upheld. The present appeal questions

the correctness of the said order as noticed earlier.

9. Appearing for the appellant Mr. Gourab Banerjee,

learned Additional Solicitor General argued that the Tribunal

had fallen in a palpable error in applying the doctrine of

merger and dismissing the appeal filed by the Revenue. It

was submitted that the doctrine of merger had no

application to a case like the one at hand where the content

and the subject matter of challenge in the two proceedings,

namely, the appeal filed by the assessee and that filed by

the Revenue were totally different. Reliance in support was

placed by the learned counsel upon the decision of this Court

in Kunhayammed & Ors. v. State of Kerala & Anr.

(2000) 6 SCC 359. Reliance was also placed upon the

decision of this Court in Mauria Udyog Ltd. v.

Commissioner of Central Excise, Delhi II (2003) 9 SCC

139 to contend that the doctrine of merger is not a doctrine 9

of universal application and that the difference in the subject

matter or the content of the proceedings could take a

decision inter se parties out of the purview of the said

doctrine.

10. On behalf of the respondent-company it was per contra

argued that the order passed by the adjudicating authority

could not be split into two and that the doctrine of merger

applied no matter the issue which arose for determination in

the two appeals were distinctly different.

11. The doctrine of merger has its origin in common law. It

has its application not only in the realm of judicial orders but

also in the realm of estates. In its application two orders

passed by judicial & quasi-judicial courts and authorities it

implies that the order passed by a lower authority would

lose its finality and efficacy in favour of an order passed by a

higher authority before whom correctness of such an order

may have been assailed in appeal or revision. The doctrine

applies regardless whether the higher court or authority 10

affirms or modifies the order passed by the lower court or

authority. The juristic basis of the doctrine has been

examined by this Court in a long line of decisions. One of the

earliest of the said decisions was rendered in

Commissioner of Income Tax, Bombay v. Amritlal

Bhogilal & Co. (AIR 1958 SC 868). The Court in that case

declared that as a result of the confirmation or affirmation of

the decision of the Tribunal by the Appellate Authority, the

original decision merges in appellate decision whereupon it

is only the appellate decision which subsists and is operative

and capable of enforcement.

12. In State of Madras v. Madurai Mills Co. Ltd. (AIR

1967 SC 681) this Court had another occasion to examine

the true scope and purport of the doctrine of merger. The

court declared that the doctrine of merger was not a

doctrine of rigid and universal application nor could it be said

that where there are two orders one by the inferior authority

and the other by a superior authority they must necessarily

merge irrespective of the subject matter of the appeal or the 11

revision or the scope of the proceedings in which such

orders are passed. Subsequent decisions of this Court in

Gojer Bros. (Pvt.) Ltd. v. Ratan Lal Singh (1974) 2 SCC

453 and S.S. Rathore v. State of Madhya Pradesh

(1989) 4 SCC 582 have reiterated and explained that

position. No reference to the pronouncements of this Court

on the subject can be complete without a reference to the

decision of this Court in Kunhayammed's case (supra) and

Mauria's case (supra). In Kunhayammed's case (supra) a

three-Judge Bench of this Court reviewed the decisions

rendered on the subject and summed up its conclusions in

para 44 of this decision. One of the said conclusions apposite

to the case at hand is in the following words:

"44. To sum up, our conclusions are:

....

(iii) The doctrine of merger is not a doctrine of universal or unlimited application. It will depend on the nature of jurisdiction exercised by the superior forum and the content or subject-matter of challenge laid or capable of being laid shall be determinative of the applicability of merger. The superior jurisdiction should be capable of reversing, modifying or affirming the order put in issue before it. Under Article 136 of the 12

Constitution the Supreme Court may reverse, modify or affirm the judgment-decree or order appealed against while exercising its appellate jurisdiction and not while exercising the discretionary jurisdiction disposing of petition for special leave to appeal. The doctrine of merger can therefore be applied to the former and not to the latter.

..."

13. There is in the light of the above pronouncements no

gainsaying that the doctrine of merger will depend largely on

the nature of the jurisdiction exercised by the superior court

and the content or the subject matter of challenge laid or

capable of being laid before it.

14. Applying the above test to the case at hand the

doctrine would have no application for the plain and simple

reason that the subject matter of the appeal filed by the

assessee against the adjudicating authority's order in

original was limited to disallowance of two out of eight

deductions claimed by the assessee. The Tribunal was in

that appeal concerned only with the question whether the

adjudicating authority was justified in disallowing deductions

under the said two heads. It had no occasion to examine the 13

admissibility of the deductions under the remaining six

heads obviously because the assessee's appeal did not

question the grant of such deductions. Admissibility of the

said deductions could have been raised only by the Revenue

who had lost its case qua those deductions before the

adjudicating authority. Dismissal of the appeal filed by the

assessee could consequently bring finality only to the

question of admissibility of deductions under the two heads

regarding which the appeal was filed. The said order could

not be understood to mean that the Tribunal had expressed

any opinion regarding the admissibility of deductions under

the remaining six heads which were not the subject matter

of scrutiny before the Tribunal. That being so, the

proceedings instituted by the Commissioner, Central Excise

pursuant to the order passed by the Central Board of Excise

and Customs brought up a subject matter which was

distinctively different from that which had been examined

and determined in the assessee's appeal no matter against

the same order, especially when the decision was not 14

rendered on a principle of law that could foreclose the

Revenue's case. The Tribunal obviously failed to notice this

distinction and proceeded to apply the doctrine of merger

rather mechanically. It failed to take into consideration a

situation where an order may be partly in favour and partly

against a party in which event the part that goes in favour of

the party can be separately assailed by them in appeal filed

before the appellate Court or authority but dismissal on

merits or otherwise of any such appeal against a part only of

the order will not foreclose the right of the party who is

aggrieved of the other part of this order. If the doctrine of

merger were to be applied in a pedantic or wooden manner

it would lead to anomalous results inasmuch as a party who

has lost in part can by getting his appeal dismissed claim

that the opposite party who may be aggrieved of another

part of the very same order cannot assail its correctness no

matter the appeal earlier disposed of by the Court or

authority had not examined the correctness of that part of

the order.

15

15. We have in the light of the above no hesitation in

holding that the order passed by the Tribunal dismissing the

appeal by the Revenue on the doctrine of merger is

erroneous and unsustainable. We accordingly allow these

appeals, set aside the impugned order and remand the

matter back to the Tribunal for a fresh disposal in

accordance with law. The parties to appear before the

Tribunal on 6th September, 2010.

.....................................J. (D.K. JAIN)

.....................................J. (T.S. THAKUR) New Delhi July 6, 2010