Custom, Excise & Service Tax Tribunal
M/S. Hero Honda Motors Ltd vs Cce, Delhi-Iii on 18 May, 2015
CUSTOMS, EXCISE & SERVICE TAX APPELLATE TRIBUNAL R.K. PURAM, WEST BLOCK NO. 2, NEW DELHI-110066 COURT NO. III Date of hearing: 18/5/2015 Date of Decision: 18/05/2015 Appeal No. E/2599/2008-EX [DB] [Arising out of order-in-original no. 2 1/JM/CE/08 dated 29.08.2008 passed by CCE-Delhi-III] 1. Whether Press Reporter may be allowed to see the Order for Publication as per Rule 27 of the CESTAT (Procedure) Rules, 1982? 2. Whether it would be released under Rule 27 of the CESTAT (Procedure) Rules, 1982 for publication in any authoritative report or not? 3. Whether their Lordships wish to see the fair copy of the order? 4. Whether order is to be circulated to the Department Authorities? M/s. Hero Honda Motors Ltd. Appellant Vs. CCE, Delhi-III Respondent.
Appearance: Shri S. Ganesh, Advocate with Shri P.K. Ram, Advocate for the appellant Shri M.S. Negi, DR for the respondent.
Coram: Honble Shri Rakesh Kumar, Member (Technical) Honble Mrs. Sulekha Beevi C.S., Member (Judicial) Final Order No. 51939/2015 Per: Rakesh Kumar The facts leading to filing of these appeals are, in brief, as under:
1.1 The appellants are manufacturers of two-wheelers and their parts chargeable to Central Excise Duty under Chapter 87 of the Central Excise Tariff. The period of dispute in this case is from June, 2002 to March, 2005. During this period, the appellant were selling the two-wheelers and their spare parts to their dealers as per their all-India price lists subject to the local taxes. In terms of Article V of the appellants agreement with their dealers, the dealers shall vigorously promote, develop and maintain sales of products and parts to the satisfaction of and in the manner required of Hero Honda and the dealer shall place firm orders for such products and parts as per the sales targets and will give estimates for forward requirements for such period and in such form as may be required on Hero Honda from time to time. In terms of Article XVI in the dealers agreement, if Hero Honda, at any time, objects to the dealers advertisement and/or promotion, the dealer shall immediately withdraw and refrain from repeating such publicity and in particular, the dealer shall not make any unaccounted or unauthorized representation regarding the specification, performance, selling price or availability of the product of parts. In terms of the termination clause (Article XXI) in the dealers agreement, if the dealer fails to perform any obligation under this agreement, in the opinion of Hero Honda or does not rectify such defaults, if capable of remedy, within 30 days, following the day of notice pursuant to Article XXII hereafter, Hero Honda may forthwith terminate the agreement by giving a written notice to this effect.
1.2 Though the dealers incur expenses for advertisement of the appellants product on their own, in the present case, there is no dispute about includibility of such expenses incurred by the dealers in the assessable value. In the present case, the dispute is in respect of those dealers, who, for various reasons, cannot arrange the advertisements and request the appellant to organize the advertisement of the products in their area and in response to the dealers request, the appellant organize the advertisement of the products in the area of those dealers. In such cases, about 40% of the expenses incurred by the appellant on advertisement are recovered by them from the dealers and the remaining expenses are borne by the appellant. The point of dispute is as to whether the advertisement expenses initially incurred by the appellant and which were recovered from the dealers would be includible in the assessable value or not. The department taking the view that such advertisement expenses incurred by the appellant would be includible in the assessable value to the extent, the same were recovered from the dealers, issued a show cause notice dated 9/7/2007 for demand of duty amounting to Rs. 4,08,49,037/- for the period from 1/6/2002 to 31/3/2005 from them along with interest thereon under section 11AB and also for imposition of penalty.
1.3 The above show cause notice was adjudicated by the Commissioner of Central Excise Delhi-III vide order-in-original dated 29/8/2008 by which the Commissioner holding that the advertisement expenses incurred by the appellant in areas of certain dealers would be includible in the assessable value to the extent, the same were recovered from the dealer, confirmed the above mentioned duty demand along with interest under proviso to section 11A (1) of Central Excise Act, 1944 along with interest thereon under section 11AB and imposed penalty of equal amount on them under section 11AC.
1.4 Against this order of the Commissioner, this appeal has been filed.
2. Heard both the sides.
3. Shri S. Ganesh, Senior Advocate and Shri P.K. Ram, Advocate, ld. Counsels for the appellant, pleaded that in this case, the appellant were selling the two-wheelers and spare parts to their dealers all over India at a uniform price as per all-India price lists and only local taxes were extra that in the appellants dealership agreement with various dealers, there was no specific clause making it obligatory for the dealers to incur certain specified quantum of expenses on the advertisements of the appellants products; that though there was a clause requiring the dealers to vigorously promote, develop and maintain sales of the products and parts of the appellant to their satisfaction and in the manner required by the appellant, and there was also a clause providing for termination of the dealership agreement if the dealer fails to perform any obligation under the agreement, these clauses in the dealership agreement cannot be treated as the clauses which put a legal obligation on the dealers to incur certain minimum quantum of expenses on the advertisement in their respective area for promoting the appellants products and such clause had not given any enforceable legal right to the appellant to insist on incurring of any specified quantum of advertisement expenses by the dealers; that the Tribunal in the case of Honda Sales Power Products Limited Vs. CCE Meerut-III reported in 2015 (317) ELT 510 Tri Del has held that advertisement expenses incurred by the dealers would be includible in the assessable value only when there is an enforceable legal right of the manufacturer, against the dealers, to insist on incurring certain amount of expenses on the advertisement and publicity of the products and just a clause in the agreement requiring the dealers to make efforts for promoting sales cannot be treated as a legal obligation in this regard; that ratio of this judgment of the Tribunal is squarely applicable to the facts of this case; that in the appellants own case for the period prior to 1/7/2000, where an identical issue was involved, the Tribunal vide judgment reported in 1998 (100) ELT 468 Tri (B) held that while advertisement do contribute to or enhance the marketability of a manufacturers product and where the dealer is not in picture and the advertisement campaign is conducted by the manufacturer that can certainly be regarded as contribution wholly or exclusively to the marketability of the product, but where there is a dealer in the picture and the advertisement helps the dealer also in promoting his sales apart from helping the product of the manufacturer, the matter has to be looked at from a different angle and in such cases, the advertisement expenses borne by the manufacturer would not be includible in the assessable value to the extent the same were recovered from the dealer; that this judgment of the Tribunal has been affirmed by the Apex Court by dismissal of the civil appeal vide order reported in 1999 (105) ELT 126 SC; that as is clear from the copies of the advertisements placed on record, each advertisement arranged by the appellant in the area of some particular dealer also mentions the dealers name and address; that these advertisements have, therefore, benefitted the dealers also apart from enhancing the marketability of the appellants product; that in view of this, the amount recovered by the appellant from the dealers cannot be said to be for the reason of or in connection with sale and hence, in terms of the provisions of section 4(3) (d) regarding definition of transaction value, the amount recovered by the appellants dealers would not be includible in the assessable value.
3.1. Shri Ganesh, also pleaded that the duty demand, besides being not sustainable on merits, is also time barred, as the show cause notice for demand of duty from the period from 1/6/2002 to 31/3/2005 had been issued on 9/7/2007 by invoking proviso to section 11A(1) and section 11(1) proviso would be invokable only if there is evidence of fraud, wilful mis-statement, suppression of facts, deliberate contravention of the provisions of Central Excise Act, 1944 or of the rules made therein with intent to evade the payment of duty, which is not there in the present case inasmuch as, an identical issue had arisen in the matter decided by the Tribunal vide judgment dated 6/1/1997 reported in 1998 (100) ELT 468 (Tri-B) and the Tribunals judgment was in the appellants favour and besides this, in the course of audit of the records of the appellant, this very issue had been raised and the appellant had been asked to give details of the amount recovered by them from the dealers in the cases where the advertisement expenses in respect of the advertisement of the products in the area of certain dealers had been incurred by the appellant and hence, in the circumstances of the case, the appellant cannot be accused of fraud, wilful mis-statement, suppression of facts, etc. He, therefore, pleaded that in any case, the duty demand is time barred. Accordingly, it is pleaded that the impugned order is not sustainable.
4. Shri M.S. Negi, ld. DR, defended the impugned order by reiterating the findings of the Commissioner and pleaded that in terms of a clause in every dealership agreement, every dealer is under obligation to vigorously promote, develop and maintain sales of the products and parts to the satisfaction of the appellant and in the manner required by him and in terms of another clause in the dealership agreements if a dealer fails to perform any obligation under this agreement, the agreement can be cancelled; and this shows that every dealer was under legal obligation to incur certain expenses on advertisement of the appellants products and hence, to the extent, the advertisement expenses were recovered by the appellant from the dealers, the same would be includible in the assessable value. He also cited the judgment of the Tribunal in the case of CCE Baroda Vs. Besta Cosmetics Ltd. reported in 2005 (183) 122 SC and CCE-Surat Vs. Surat Textiles Mills Limited reported in 2004 (167) ELT 379 SC and CCE-Pune Vs. Bajaj Tempo reported in 2005 (180) ELT 289 SC.
4.1. He pleaded that when in terms of agreement between an assessee and his dealers, the assessee has an enforceable legal right to insist on incurring of certain expenses by the dealers on advertisement of the assesses products, the advertisement expenses incurred by the dealers would be includible in the assessable value. He pleaded that in the present case, the clause in the agreement requiring dealers to make vigorous efforts to promote the sales of the products coupled with the clause that on failure of the dealers to perform any obligation under this agreement, the dealership can be cancelled, clearly shows that the appellant had an enforceable legal right in respect of the dealers to insist on incurring of certain expenses on advertisement of the Appellants products. He, therefore, pleaded that, to the extent, the advertisement expenses incurred by the appellant in certain areas which were recovered from the dealers, the same would be includible in the assessable value.
4.1. Shri Negi also cited the Boards Circular No. 643/34/2002CX dated 1/7/2002, the para 6 of which states that even where the dealings between an assesse and the dealer are on principal to principal basis but there is an agreement either written or oral that that the buyer/dealer would incur certain expenses for advertisement of the goods of the assessee, the cost of such advertisement and publicity would be added to the price of the goods to determine the assessable value, as in such cases, the price would not be the sole consideration for the sale and Rule 6 of the Central Excise Valuation Rules, would be applicable. He pleaded that this para also clarified that judgment delivered on this issue in respect of the earlier section 4 or the Rules made thereunder would not apply w.e.f. 1/7/2000.
5.. We have considered the submissions from both the sides and perused the records.
6. The appellant sell the two-wheelers and their spare parts to their dealers all over India under an all-India price list. In terms of the appellants agreement with their dealers, every dealer shall vigorously promote, develop and maintain sales of the products and parts to the satisfaction of and in the manner required by the appellant and the dealer shall place firm orders for such products and parts as per the sales targets and will give estimates for the forward requirements for such period and in such form as may be required by the appellant from time to time. Each dealership agreement also has clause that if a dealer fails to perform any obligation under this agreement, his agreement can be cancelled by the appellant. There is no dispute that the dealers on their own organized advertisements of the appellants product in their respective area by incurring their own expenses. The department is not insisted on including these expenses incurred by the dealers in the assessable value. The dispute is only in those cases, where the dealers, for certain reasons, cannot organize the advertisement of the appellants products in their respective areas and in this regard, they approach the appellant and the appellant in view of the dealers request, organize the advertisement in the areas of those dealers by incurring certain expenses and since, the advertisements also mention that dealers name and address and promote the dealers sales also, a part of the expenses, up to about 40 per cent, are recovered from those dealers by the appellant. The point of dispute is as to whether in such cases, the advertisement expenses incurred by the appellant would be includible in the assessable value to the extent the same have been recovered from the dealers. In our view, when it is not disputed that the advertisement of the appellants products in the areas of the respective dealers also mention the dealers name and address and those advertisements have also benefitted the dealers, the amount being recovered by the appellant from the dealers cannot be said to be for the reason of or in connection with the sale of goods, as this amount would be for the advertisement and publicity effort of the appellant which has benefitted the dealer. Moreover, an identical issue was involved in the appellants own case in the previous period declared vide judgment reported in 1998 (100) ELT 468 (Tribunal), in the para 3 of the judgment of which the Tribunal has held that the advertisement expenses incurred by the appellant would not be includible in the assessable value to the extent, the same were recovered from the dealers, as when the dealer is not in the picture and the advertisement campaign is conducted by the manufacturer, that can certainly be regarded as contribution wholly or exclusively to the marketability of the product, but where there is a dealer in the picture and the advertisement helps the dealer also, apart from helping the product of the manufacturer, the matter has to be looked at from slightly different angle. In this regard, para 2 and 3 of the judgment are reproduced below:
2.It appears appellant was conducting advertisement campaign in newspapers for the Hero Honda Motor Cycles and by an arrangement with the wholesale dealers printing the names and addresses of wholesale dealers also and collecting proportionate charges form the wholesale dealers. The same position obtained in regard to posters, cinema slides and other media of advertisement. Appellant was receiving security deposits from the wholesale dealers and the contribution of the wholesale dealers for the advertisement campaign was being adjusted. According to the show cause Rs. 12,50,000/- or so was thus collected from the wholesale dealers. Both the lower authorities held that the advertisement campaign contributed to the marketability of the product and therefore, the charges collected were to be added to the assessable value.
3. Advertisement no doubt contributes or enhances the? marketability of the product. Where the dealer is not in the picture and the advertisement campaign is conducted by the manufacturer, that can certainly be regarded as contribution wholly or exclusively to the marketability of the product but where there is a dealer in the picture and the advertisement helps the dealer apart from helping the product of the manufacturer the matter has to be looked at from a slightly different angle. Our attention has been inivited to a decision of the Tribunal in Racold Appliances v. COCE [1994 (69) E.L.T. 312]. Under an agreement between the manufacturer and the dealers, the dealers were to spend upto 2% of the total purchases for advertisement and 1.5% was to be returned by the dealers to manufacturer and the dealers were to bear 0.5%. The department took the stand that this amount of 0.5% should be added to the assessable value. The Tribunal did not accept this view as correct. The advertisement through newspaper media, cinema slides and the like was basically for the manufacturer and the finished product. The names of the dealers were to be furnished in these materials. This would certainly go to enhance the goodwill of the dealers. It is not unknown for dealers to attract more customers and to enhance their business. When they do so and in the absence of anything else on record, it cannot be said that the cost of such advertisement which also in a way enhances the marketability of the product should be added to the assessable value.
6.1. The above judgment of the Tribunal has been affirmed by the Apex Court by dismissal of the civil appeal vide judgment reported in 1999 (105) ELT A126 (SC). In our view, the ratio of the above judgment of the Tribunal is squarely applicable to the facts of this case. Though the above judgment of the Tribunal is in respect of the period prior to 1/7/2000 and w.e.f. 1/7/2000, the section 4 has been substituted by a new section based on transaction value concept, as discussed above, in our view when the advertisements organized by the appellant which have also benefitted the dealers, the amount recovered by the appellant from the dealer would be for the advertisement effort of the Appellant, which has promoted the sales of the dealers and the same cannot be said to be the amount received by the Appellant for the reason of or in connection with the sale of the goods.
7. Moreover, in terms of the judgments of the Apex Court in the case of CCE Baroda Vs. Besta Cosmetics Limited (Supra) CCE Surat Vs. Surat Textiles Mills Ltd. (Supra) cited by the ld. DR, the advertisement expenses incurred by the dealer would be includible in the assessable value of the goods only when the assessee manufacturer has an enforceable legal right in respect of the dealers making it obligatory for the dealers to incur certain specified quantum of expenses on the advertisement of the assessees products. In the present case, in the dealership agreements, there is no such clause requiring the dealers to incur certain specified quantum of expenses on the advertisement and publicity of the appellants product. The clauses of requiring the dealers to vigorously promote, develop and maintain sales of the product and parts to the satisfaction of and in the manner required by the appellant cannot be treated as the clause which gives an enforceable legal right to the appellant to insist on incurring of certain quantum of expenses on advertisement by the dealers. For this reason also, the advertisement expenses recovered from the dealers would not be includible in the assessable value.
8. In view of the above discussion, we hold that the impugned order is not sustainable on merits.
9. Even on limitation also, we find that the duty demand would survive only if the extended period under proviso to section 11A(1) is invokable and the proviso to section 11A(1) can be invoked only if there is evidence of fraud, willful mis-statement, suppression of facts or deliberate contravention of the Central Excise Law by the appellant with intent to evade the payment of duty. However, in the circumstances of the case, we do not find any such element as an identical matter regarding includibility of the part of the advertisement expenses incurred by the assessee from their dealers was the subject matter of the order dated 6/1/1997 in the appellants own case for the previous period and therefore, the department cannot allege that the appellant had kept the department in dark about the recovery of a part of the advertisement expenses by them from certain dealers. Therefore, the limitation period of 5 years under proviso to section 11A(1) is not invokable and the duty demand is time barred.
10. In view of the above discussion, the impugned order is not sustainable either on merits or on limitation. The same is set aside. The appeal is allowed.
(Rakesh Kumar) Member (Technical) (Sulekha Beevi C.S.) Member (Judicial) Ritu