Customs, Excise and Gold Tribunal - Mumbai
Lakhanpal National Ltd. And H. Ono vs Commissioner Of Customs & Central ... on 2 September, 2002
ORDER Gowri Shankar, Member (T)
1. Lakhanpal National Ltd., the assessee, was engaged at the relevant time in the manufacture of dry battery and electrical storage battery. There was dispute between the assessee and the department as to the admissibility of certain deductions from the sale price for arriving at the assessable value of the batteries, during the period between 1975 and 1986. The assessee had filed a writ petition to the Gujarat High Court, seeking issue of directions to the department to accept the deduction that it had claimed. By its orders passed on 30.9.1987, the High Court directed the assessee to file revised price list for the period under consideration directing the Assistant Collector to decide on the admissibility on the deductions claimed therein. Accordingly the assessee filed price list on 18.3.1988. The Assistant Commissioner passed order on 25.12.1988 allowing some deductions and disallowing some others. An appeal was filed to the Commissioner (Appeals) against that part of his order holding that freight outward was entitled to deduction. The appeal alleged that the part of the expenses described as "freight outward" included charges for transportation to the stockists from the point of first sale to the dealer and was therefore not entitled to be deducted. The department also carried out investigation which resulted in issue of show cause notice to the assessee. This notice alleged that handling/service charges, van operation charges and "built-in scheme/discount" were not entitled for deduction from the sale price and invoked the extended period of limitation, sought to recover duty on goods cleared between 1978 to 1986. Penalty was also proposed on the assessee and H. Ono, joint managing director. The Commissioner, adjudicating on the notice, confirmed the proposal for the duty and imposed penalty on the assessee as well as H. Ono. Hence these appeals.
2. Having heard both parties at length on the issue, we proceed to give our findings on the admissibility of the deductions and other issues.
3. Handling Charges: The demand of Rs. 22.11 lakhs on this ground is not contested on merits by the counsel for the appellant. His contention however is that the extended period of limitation will not be available to demand this amount for the following reason. The appellant believed bona fide having regard to the state of the law as it stood that these charges did not for part of the assessable value and were not required to be included in it. Therefore such post removal expenses only held to form part of the assessable value by virtue of the judgment of the Supreme Court in GOI v. Madras Rubber Factory 1995 (77) ELT 433. The "price structure" of the appellant which indicated the price at which the goods have been sold by the appellant to its distributors and the prices at which the goods should be sold indicated clearly that service charges at a specified rate has to be recovered. This price structure formed part of the price list that was submitted to the department and should have allotted to the departmental authority. The approval of the price list is not a routine activity on one requiring application of mind and had this been done, the officers of the department would have become clearly aware of the nature of the handling charges. The invoices, which disclosed collection of handling charges over and above the price declared to the department, were seen by the audit officers of the department.
4. The departmental representative contends that what is described by handling charges in fact is nothing other than consideration for the sale of the goods. This is clear form the circular dated 20.10.1981 of M. Asahara, the then deputy general manager, to the dealers. The fact that price structure was enclosed to the price list was irrelevant. In some of the price structure, part of the handling charges was not given mention. There is nothing to show that the invoices in question were seen by the officers of the department. The circular dated 20.10.1981 issued by M. Asahara to the dealers of the appellant is illuminating. It says that there has been an increase in the cost of production exorbitantly from the beginning of the year because of "spiralling cost of raw materials and transportation cost" and increase in various government levy. He concludes, "We have advised our Regional Offices and Branches to add this revised service charge at the end, in Ex-LNL invoice and bill it to our distributor." It appears to us that this letter clearly indicates that the service charges were increased by the appellant as a result of increase in the cost of production and the inability to absorb the increase in the cost of production. The tenor of this letter clearly indicates that the charges described as service charges are nothing other than the payments towards the price of the goods. The contention that was earlier taken by the appellant was that these charges constituted loading and unloading and handling charges for the goods. If that were to be so, it would have been easy enough for the appellant to correlate the charges of such expenses, and to show that by means of bills and other documents for transportation it claimed deduction. It has to be noted that for includability of this cost on merits is not disputed. It is therefore not possible to agree that these charges are anything other than consideration for the sale of the goods.
5. The next contention is that the fact of these charges was disclosed in some of the price structure that was enclosed to the price list. In a few cases, the price structure does contain a sentence that service and handling charges are to be levied at a particular rate. It is not clear from this structure whether these charges were in addition to the price mentioned in the price structure or formed part of deduction. In addition, it is to be noted that the appellant had filed a price list containing declaration signed by the deputy general manager containing a declaration that "The price shown in column 3 of the price list (wholesale price) was the sole consideration and no other consideration flows or will flow indirectly from our buyers to us." The contention that the addition of the charges of the price was seen by the audit officers of the department again is not, in our view, sustained. No doubt in letter dated 6.3.1987, the Assistant Commissioner advised the appellant to keep ready various documents, including invoices to be signed by the audit staff. It does not follow from this correspondence alone that either the invoices kept ready for scrutiny by the audit staff or that they in face saw these invoices. We therefore do not find it possible to hold that the demand for duty on these charges is barred by limitation and conclude that the extended period has been rightly invoked.
6. It was then contended by the counsel for the appellant that part of handling charges had in face suffered duty. His argument runs as thus. Prior to May, 1984 the sums collected as handling or service charges were credited under the head "Transport charges". The transport charges form part of the freight outward for which deduction had been claimed. In May 1984 by a resolution of the board of directors, the amount credited as transport charges from 1st April, 1983 to 31st December, 1983 was transferred to the head "Sale Promotion Expenses". This amount did not form part of any deduction that was claimed, and hence duty has been paid.
7. The next question relates to the admissibility of "built-in trade scheme". It is common ground that this represents discount made available to the distributor of 4% over and above 6.25% that was accorded. There is some dispute as to whether or not the appellant had given directions to its distributors as to the method of spending this amount. The department obtained this knowledge of such discount from the documents relating to correspondence between the appellant and its distributors in Karnataka of whom Sagar Distributors at Bangalore is one. In the price structure with effect from 3.5.1980 for Karnataka, there are special instructions to Sagar Distributors to say that the "adjustments" discount which is given to Sagar Distributors is to be utilised to the account of "LNL Sales Promotion and Advertisement Publicity Scheme and are to be spent by the appellant as suggested by the LNL Sales Officer Mr. N. Srinivasan." this is relied upon by the counsel for the appellant to say that the directions for spending the amount for advertisement were only given to Sagar Distributors and not to others. The departmental representative points to the price structure with effect from 2.4.1981 again for Karnataka which contains an explanatory note again stating that the amount in question should be utilised for publicity and sales promotion, without referring to Sagar Distributors. Counsel for the appellant seeks to say that Sagar Distributors was the only distributor in Karnataka and that such directions have not been given to any other distributor anywhere else.
8. We find it somewhat difficult to believe that special instructions would be given by a manufacturer to incur publicity only to one distributor, even if that distributor is only one in whole of Karnataka. The discount that we are considering was over and above the discount that was in any case given as the margin of distributor. Even so, however, we fail to see why this discount should be disallowed solely because it was to be utilised for advertising the appellant's products. The departmental representative emphasises that the ratio of the Supreme Court's judgment in Philips India Ltd. v. CCE 1997 (91) ELT 540 will not apply to the facts before us because, unlike in the present case there was no control by the manufacturer over the manner on which the advertisement (for which the discount was earmarked) was to be incurred. In the Philips India Ltd., case, there was no direction given to any dealer as to how the amount was to be spent.
9. We fail to see how this makes difference to the issue. In Philips India Ltd., the Supreme Court said that "the advertisement which the dealer was required to make at its own cost benefited in equal degree the appellant and the dealer and that for this reason the cost of such advertisement was borne half and half by the appellant and the dealer. Making a deduction out of the trade discount on this account was, therefore, uncalled for." It is true in that case that no directions were on record by the manufacturer as to the mode of advertisement on which the money used to be incurred. The relevant clause of the agreement only provided that "dealers shally carry out at their expenses advertisement promoting sales of the company's product." We are in fact not able to find anything that shows that the appellant laid down precise guidelines for spending the amounts which were required to be followed by the distributor. The price structure with effect from 3.5.1980 says that the amount has to be spent "as suggested by the LNL Sales Officer Mr. N. Srinivasan." Elsewhere the price structure says that the amount should be "in consultation with LNL Sales Officer." The fact that the distributor was required to consult or take suggestion from the sales officer does not, in our view, justify not applying the ratio of the judgment of the Supreme Court in Philips India Ltd. for the reason for which it held this advertisement incurred by the dealer not to be included in the assessable value, that benefited in equal measure the dealer and manufacturer, would apply with equal force, notwithstanding the advertisement was carried out in consultation with the appellant's representative. We therefore hold that there was no basis for disallowing this discount.
10. The third issue relates to van operation charges. In terms of the arrangement of the appellant, it made reimbursement to its distributors half of the expenses incurred by them for transport. The Collector has disallowed this deduction on two grounds, that these expenses are in fact intended for promoting sales of goods manufactured by the appellant and thus in the nature of sales promotion expenses and also on the ground that the provisions of Section 4(2) of the Act will not apply. He says that if deductions are to be allowed, chaotic illogical situation will arise which could never be the intention of the law.
11. The question of admissibility of this deduction is in fact pending before the Commissioner (Appeals). While approving the price list, the Assistant Collector had permitted the deduction on account of transport charges. An appeal filed under Section 35E of the Act by the Collector raise the point that among these claims that included the claim of van operation charges which are not permitted as deduction. Since the nature of the charges is itself in dispute, as the appellant contests that these are in the nature of sales promotion charges, and the matter is pending before the Commissioner (Appeals), we think it appropriate that this aspect be decided by him.
12. Since the liability to penalty of the company and H. Ono, its managing director, would depend upon the final determination of this issue and amounts quantifiable, we think it appropriate that these be decided by the Commissioner. We note the submission made by the could for the appellant that H. Ono had only joined the company in November, 1983 and new regards should be paid to his issue. We have no doubt that the Commissioner will do so.