Custom, Excise & Service Tax Tribunal
Toyota Kirloskar Motors Pvt Ltd vs Commissioner Of Central Excise, ... on 7 February, 2014
CUSTOMS, EXCISE & SERVICE TAX APPELLATE TRIBUNAL SOUTH ZONAL BENCH BANGALORE Final Order No. 20193-20204 / 2014 Application(s) Involved: E/Stay/1575/2011, E/Stay/1576/2011, E/Stay/1577/2011, E/Stay/1578/2011, E/Stay/1579/2011, E/Stay/1580/2011, E/Stay/1581/2011, E/Stay/1582/2011, E/Stay/1978/2011 in E/2565/2011-DB, E/2566/2011-DB, E/2567/2011-DB, E/2568/2011-DB, E/2569/2011-DB, E/2570/2011-DB, E/2571/2011-DB, E/2572/2011-DB, E/3150/2011-DB E/Early Hearing/25237/2013, E/Early Hearing/25238/2013, E/Early Hearing/25240/2013, E/Early Hearing/25241/2013, E/Early Hearing/25242/2013, E/Early Hearing/25243/2013, E/Early Hearing/25244/2013, E/Early Hearing/25245/2013 in E/2565/2011-DB, E/2566/2011-DB, E/2567/2011-DB, E/2568/2011-DB, E/2569/2011-DB, E/2570/2011-DB, E/2571/2011-DB, E/2572/2011-DB, E/3150/2011-DB Appeal(s) Involved: E/2565/2011-DB, E/2566/2011-DB, E/2567/2011-DB, E/2568/2011-DB, E/2569/2011-DB, E/2570/2011-DB, E/2571/2011-DB, E/2572/2011-DB, E/3150/2011-DB, E/25703-25705/2013 [Arising out of Order in Appeal 36/2011 dated 17/05/2011 passed by Commissioner of Central Excise , BANGALORE-LTU , [Arising out of Order in Appeal 37/2011 dated 17/05/2011 passed by Commissioner of Central Excise , BANGALORE-LTU, [Arising out of Order in Appeal 38/2011 dated 17/05/2011 passed by Commissioner of Central Excise , BANGALORE-LTU , [Arising out of Order in Appeal 39/2011 dated 17/05/2011 passed by Commissioner of Central Excise , BANGALORE-LTU, [Arising out of Order in Appeal 40/2011 dated 17/05/2011 passed by Commissioner of Central Excise , BANGALORE-LTU, [Arising out of Order in Appeal 41/2011 dated 17/05/2011 passed by Commissioner of Central Excise , BANGALORE-LTU, [Arising out of Order in Appeal 42/2011 dated 17/05/2011 passed by Commissioner of Central Excise , BANGALORE-LTU, [Arising out of Order in Appeal 43/2011 dated 17/05/2011 passed by Commissioner of Central Excise , BANGALORE-LTU , [Arising out of Order in Appeal 87/2011 dated 13/09/2011 passed by Commissioner of Central Excise , BANGALORE-LTU , [Arising out of Order in Appeal 139/2011 dated 03/12/2012 passed by Commissioner of Central Excise , BANGALORE-LTU [Arising out of Order in Appeal 141/2011 dated 03/12/2012 passed by Commissioner of Central Excise , BANGALORE-LTU [Arising out of Order in Appeal 140/2011 dated 03/12/2012 passed by Commissioner of Central Excise and Service Tax, BANGALORE-LTU TOYOTA KIRLOSKAR MOTORS PVT LTD PLOT NO.1, BIDADI INDUSTRIAL AREA, RAMANAGARAM, BANGALORE (RURAL DIST.) Appellant(s) Versus Commissioner of Central Excise, Customs and Service Tax - BANGALORE - LTU 100 FT RING ROAD JSS TOWERS, BANASHANKARI-III STAGE, BANGALORE - 560085 KARNATAKA Respondent(s)
Appearance:
Mr.K.S. Ravi Shankar & Mr. N. Anand, Advocates RAVI SHANKAR & CHANDER KUMAR # 152, RACE COURSE ROAD,BANGALORE BANGALORE - 560001 KARNATAKA For the Appellant Mr.A.K.Nigam, Addl. Commissioner (AR) For the Respondent CORAM:
SHRI B.S.V. MURTHY, HONBLE MEMBER (TECHNICAL) SHRI S.K. MOHANTY, HONBLE MEMBER (JUDICIAL) Date of Hearing: 07/02/2014 Date of Decision: 07/02/2014 Order Per : B.S.V. Murthy, Even though some of the appeals listed involved consideration of stay applications and some of them have been listed for regular hearing, all the appeals are taken up together for final hearing, since in all the appeals issue involved is same and only the periods are different. The total amount involved and the periods involved, are as under:
Sl. No. Appeal No. Period Involved Duty Demanded Penalty Imposed
1.
E/2565/2011 May 2005 to Mar. 2006 Rs. 50,25,949/-
Rs. 50,25,949/-
2. E/2566/2011 April 2006 to Dec. 2006 Rs.1,40,40,283/-
Rs.1,40,40,283/-
3. E/2567/2011 Jan. 2007 to Sep. 2007 Rs.1,80,72,327/-
Rs.1,80,72,327/-
4. E/2568/2011 Oct. 2007 to Mar. 2008 Rs.1,26,15,684/-
Rs.1,26,15,684/-
5. E/2569/2011 April 2008 to Sep. 2008 Rs.1,32,81,703/-
Rs.1,32,81,703/-
6E/2570/2011 Oct. 2008 to Mar. 2009 Rs. 63,16,970/-
Rs. 63,16,970/-
7. E/2571/2011 April 2009 to Sep. 2009 Rs.1,18,27,255/-
Rs.1,18,27,255/-
8. E/2572/2011 Oct. 2009 to Mar. 2010 Rs.1,82,52,887/-
Rs.1,82,52,887/-
9. E/3150/2011 April 2010 to Sep. 2010 Rs.1,77,69,168/-
Rs.1,77,69,168/-
10. E/25703/2013 Oct. 2010 to Mar. 2011 Rs.1,81,78,242/-
Rs.1,81,78,242/-
11. E/25704/2013 April 2011 to Sep. 2011 Rs.2,98,17,278/-
Rs.2,98,17,278/-
12. E/25705/2013 Oct. 2011 to Mar. 2012 Rs.3,49,89,291/-
Rs.3,49,89,291/-
2. Appellant is engaged in the manufacture of motor vehicles. Appellant clears motor vehicles for sale on payment of duty to the dealers located all over the country. Appellant has been paying Central Excise duty on the transaction value charged to the dealers. Taking a view that the pre-delivery inspection charges and free maintenance expenses incurred by their dealers should also be added to the assessable value, proceedings were initiated which has culminated in confirmation of the demands as listed above.
3. The learned counsel submitted that the case of the department is based on clarifications issued in CBEC Circular No.643/34/2002-CX dated 1.7.2002. Sl. No.7 of the table in the Circular is relevant. He submits that the decision of the Honble High Court of Bombay in the case of Tata Motors Ltd: 2012 (286) E.L.T. 161 (Bom.) covers the issue and the issue is no longer res integra.
4. On the other hand, learned AR relies upon the decision of the Larger Bench in the case of Maruti Suzuki India Ltd. (MSIL): 2010(257) E.L.T. 226 (Tri.-LB) to submit that in that case it was held that where pre-delivery services and after sale services are borne by the dealer, it has to be added to the assessable value. This decision was challenged by MSIL before the Honble Supreme Court. Honble Supreme Court refused to grant stay while admitting the appeal as reported in 2013 (291) E.L.T. A81 (SC). The learned counsel would also take us through the agreements entered into with the dealers to support his submission that the issue is covered by the decision of the Honble High Court of Bombay in their favour.
5. We have considered the submissions made by both the sides. Item No.7 of the table in the Circular clarifying points of doubt is reproduced below and reads as under:
Sl. No. Point of doubt Clarification
7.
What about the cost of after sales service charges and Pre-Delivery Inspection (PDI) charges, incurred by the dealer during the warranty period?
Since these services are provided free by the dealer on behalf of the assessee, the cost towards this is included in the dealers margin (or reimbursed to him).This is one of the considerations for sale of the goods (motor vehicles, consumer items, etc.) to the dealer and will therefore be governed by Rule 6 of the Valuation Rules on the same grounds as indicated in respect of advertisement and publicity charges. That is, in such cases the after sales service charges and PDI charges will be included in the assessable value.
After this circular was issued proceedings were initiated against several assessees and they are already several decisions on this very same issue. Some of them are as under:
(a) Hyundai Motor (India) Ltd. vs. CCE: 2013 (289) E.L.T. 358 (Tri.-Chennai);
(b) Toyota Kirloskar Motors Ltd. vs. CCE: 2007 (217) E.L.T. 104 (Tri.-Chennai);
(c) Mahindra & Mahindra Ltd. vs. Collector: 1998 (103) E.L.T. 606 (Tri.-Del.)
(d) Escorts Tractors Ltd. vs. Commissioner: 2000 (124) E.L.T. 496 (Tri.-Del.) maintained by Supreme Court in 1999 (114) E.L.T. A142 (SC);
(e) Hindustan Motors Ltd. vs. Collector: 1998 (101) E.L.T. 198 (Tri.-Del.)
(f) Skoda Auto India Pvt. Ltd. vs. CCE: 2012 (286) E.L.T. 356 (Bom.)
(g) Honda Seils Power Products Ltd. vs. CCE: 2013-TIOL-1492-CESTA-DEL.
However, none of these decisions directly cover the case of the appellants. In many of the cases, the dealers were being reimbursed by the manufacturers for the expenses incurred by them. In such a case, naturally the obvious conclusion would be that such expenses form part of the assessable value when the vehicles were cleared by the manufacturer. However, in the case of Tata Motors Ltd., the Honble High Court of Bombay has considered a case where the dealers were incurring the expenses out of the margin provided to them by the manufacturer and there was no reimbursement. This would amount to recovery of such charges from the customers since the reimbursement is not made by the manufacturer and in such an event, naturally the margin of the dealer has to include these two items which would mean that the cost of vehicle to the buyer would go up to this extent. However, we find in the case of Tata Motors Ltd. circumstances were exactly the same. Para 5 and 6 of the decision explain the facts of the case and are reproduced below.
5.?Between the petitioners and each dealer, an agreement is executed thereby appointing such a person as a dealer on terms and conditions mentioned in the said agreement. According to the petitioners, the petitioners decide the maximum price at which the dealer has to sell the car. On account of this, the dealer cannot sell the car for an amount more than the one which is specified by the petitioners. The dealer pays to the petitioners a particular price quoted by the petitioners and according to the petitioners it is that price on which excise duty is paid. According to the petitioners that is the price which will have to be termed as assessable value. According to the petitioners on account of the dealership agreement, the dealer is required to carry out Pre Delivery Inspection (For short PDI) before the car is actually delivered to the customer. After the car is delivered to the customer, the customer is expected to bring the car to the dealer for getting the said car serviced after running the car for certain number of kilometres or certain number of days more particularly stated in the owners manual. The dealer is required to conduct free servicing in respect of the said car, which would be used by the customer. These services are referred to as free after sales services. (For short said services).
6.?According to the petitioners, the dealer has to employ necessary persons as also use necessary machinery to carry out PDI and said services. The expenses to conduct PDI and said services are to be incurred by the dealer without reference to the petitioners. It is also the case of the petitioners that the petitioners do not reimburse the expenses incurred by the dealer on PDI and said services. According to the petitioners they have been paying Excise duty on the amount charged by them to the dealer while selling the car to the dealer. The petitioners received 4 show cause notices calling upon the petitioners to pay duty on account of Clause 7 of Circular No. 643/34/2002 dated 1st July, 2002 (For short Circular dated 1st July, 2002) as according to the respondents the costs incurred by the dealer towards PDI and said services was includable in assessable value. The four show cause notices cover the period from December, 2008 to June, 2011. These show cause notices are dated 25th November, 2009, 31st March, 2010, 27th January, 2011 and 23rd September, 2011. The petitioners showed cause to the said show cause notices. The petitioners were heard in regard to the said four show cause notices. The Commissioner, Central Excise, Pune-I by his order dated 5th December, 2011 ruled on those show cause notices and directed the petitioners to pay Excise duty as well as interest and penalty more particularly stated in the said order dated 13th December, 2011. After taking note of the facts and considering the Circular issued by the Board, the Honble High Court came to the conclusion that the PDI and free service cost cannot be included. Paragraph 47, 48 and 49 containing the conclusions of the Honble High Court are relevant and are reproduced below.
47.?This assertion viz. Expenses for the PDI and said services is not to be included in the assessable value is at variance from Circular dated 1st July, 2002. The Clause 7 of Circular dated 1st July, 2002, in our view wrongly proceeds to hold that the expenses incurred by the dealer towards PDI and said services are on behalf of the assessee hence, it is wrong to say that such expenses form as one of the considerations for the sale of goods. In our view, equating the expenses incurred towards PDI and said services with the advertisement and publicity charges is incorrect. In our view. Clause No. 7 of Circular dated 1st July, 2002 is not in conformity with the provisions of Section 4(1)(a) r/w Section 4(3)(d) of the said Act.
48.?The matter can be looked from yet another angle namely; a perusal of the term transaction value would show that servicing is one item, which is included in the definition of the term transaction value. In our view, on the basis of record it is clear that the petitioners do not render any services to the dealer and no cost is incurred by the petitioners qua the dealer towards the term servicing. As such, the petitioners have not included any amount in the assessable value with reference to term servicing and as such the expenses incurred towards PDI and said services, which expenses are incurred solely by the dealer without reference to the petitioners cannot be included in the term servicing appearing in the term transaction value. For the reasons mentioned aforesaid if a dealer incurs expenses towards the PDI as well as free after sales services without reference to the manufacturer like petitioners, then, the said expenses incurred by the dealer cannot form a part and parcel of the assessable value. To that extent, Clause 7 of the Circular dated 1st July, 2002 is illegal and void and is contrary to the provisions of Section 4(1)(a) r/w Section 4(3)(d) of the said Act. Similarly, the Circular dated 12th December, 2002 to the extent it confirms Clause 7 of Circular dated 1st July, 2002 is void and illegal.
49.?For all the aforesaid reasons, we hold that as per Section 4(3)(d) of the Central Excise Act, 1944 the PDI and free after sales services charges can be included in the transaction value only when they are charged by the assessee to the buyer. The impugned circulars, inter alia, purport to hold that where the assessee sells the motor vehicles to a dealer (buyer) at a given price and the dealer in turn sells the said motor vehicles to a customer at a price with dealers margin which includes the PDI charges and after sales service charges, then, the assessable value for determining the Central Excise duty payable by the assessee has to be determined by including the PDI and after sales service charges even if they are not been charged by the assessee to the dealer, which in our opinion is contrary to the provisions of Section 4(3)(d) of the Central Excise Act, 1944 and, hence, liable to be quashed and set aside. Whether the adjudicating authority in the present case is justified in including the PDI and after sales service charges is a question to be decided in the appeal, if any, filed against the order-in-original. Learned counsel also took us through the dealership agreement entered into by the appellant in this case. According to the dealership agreement, there are two paragraphs relating to free services and PDI and after sales service. The relevant paragraphs are reproduced below.
Free Services The dealer shall provide such number of free services to the retail customers, as may be directed by the Company. In the event of any free service being rendered or provided by a different dealer (Servicing Dealer) other than the one who sold the CBU (Selling Dealer), the Selling Dealer shall promptly pay the bills for free services of the Servicing Dealer. If such payment is delayed beyond 4 (four) weeks of receipt of the claim by the Selling Dealer, the Company shall be entitled to debit the Selling Dealer and credit the Servicing Dealer with the claimed amount and including a penalty, as liquidated damages, as may be decided by the company.
Pre-delivery inspection and after sales service
1) The Dealer shall ensure that the pre-delivery inspection and after-sales service for CBUs are carried out fully and efficiently in accordance with the policies and guidelines of the Company prescribed from time to time. In particular the Dealer shall at all times make complete and accurate reports in the form and at the times required by the Company in respect of all work carried out by it in pursuance of the Companys Service policies and guidelines. The Dealer shall also maintain a service history of each CBU serviced by it in a form required by the Company.
2) The Dealer shall give prompt attention and care while rendering free service or paid service to any CBUs, irrespective of whether they are sold by the Dealer or not. From the above, it can be seen that in this case also the dealer is expected to bear the expenses of such charges from his own margin and there is no reimbursement. Moreover in the case of Tata Motors Ltd., Honble High Court of Bombay had taken note of the decision of the Larger Bench in the case of MSIL and yet came to the conclusion favourable to the appellants in that case. The decision in the case of MSIL has been considered in paragraph 2, 7, 30, 31, 39 and 41 by the Honble High Court. Being a higher judicial forum than the Larger Bench of the Tribunal, judicial discipline requires that we follow the decision of the Honble High Court of Bombay. Accordingly, once this is done, the decision has to be in favour of the assessee and against the Revenue. Accordingly, all the appeals are allowed with consequential relief, if any, to the appellants (Operative portion of this Order was pronounced in open court on conclusion of hearing) (S.K. MOHANTY) MEMBER JUDICIAL (B.S.V. MURTHY) MEMBER TECHNICAL rv 7