Customs, Excise and Gold Tribunal - Delhi
Pepsi Foods Limited vs Collector Of Central Excise on 16 June, 1994
Equivalent citations: 1996(85)ELT177(TRI-DEL)
ORDER Lajja Ram, Member (T)
1. M/s. Pepsi Foods Limited, Sangrur (Punjab), have filed an appeal being aggrieved with the order in-Appeal No. 49/CE/Chd/94, dated 7-2-1994, passed by the Collector of Central Excise (Appeals), Chandigarh. Alongwith the appeals they have also filed stay application under Section 35F of the Central Excises and Salt Act, 1944 (hereinafter referred to as the 'Act'), praying for the waiver of the pre-deposit and for the stay of the recovery of the central) excise duty demand of Rs. 2,16,96,131.
2. The appellants were engaged in the business of aerated waters, marketed under the name of Pepsi and Lehar. They themselves were engaged in the production of aerated water concentrate and supplied such concentrate to the manufacturers of aerated waters who were licenced to produce and market their brands of aerated waters, produced out of such concentrate supplied by them. The Asstt. Collector of Central Excise, Patiala under his order dated 11-11-1993 had ordered the inclusion of royalty charges and advertisement/sale promotion expenses in the declared value and confirmed the amount of central excise duly of Rs. 12,55,687, Rs. 20,07,000, Rs. 1,35,30,144 and Rs. 62,07,566 demanded under the show-cause notices issued to them. On appeal the Collector of Central Excise (Appeals), Chandigarh have upheld the above order-in-original. He held that the royalty claimed and paid was linked with the concentrate and its manufacture. It was not available for sale to any and everyone but only to those who entered into the franchise agreement with the appellants, the person who bought the concentrate bought the brand name also. In the case of advertisement charges also it was held that the advertisements enhanced the marketability of the product and as per the decision of the Hon. Supreme Court in the case of Bombay Tyres International both royalty and advertisement charges were to be included in the assessable value.
3. The stay application was heard on 22-4-1994 when Shri V. Lakshmi Kumaran, Advocate with Shri R. Nambi Rajan, Advocate appeared for the appellant/applicant. The respondents were represented by Shri Prabhat Kumar, SDR.
4. Shri Lakshmi Kumaran, the learned Advocate referred to the facts of the case and submitted that the royalty charges recovered from the manufacturers of aerated waters by the applicant was not includible in the assessable value of the concentrate supplied by them to their franchise holders manufacturers of aerated waters. In this connection the learned Advocate placed reliance on the following decisions :-
(1) Duke & Sons Pvt. Ltd. v. Collector of Central Excise - 1991 (55) ELT 577 (Trib.) in which it has been held that the franchise fees was not includible in the assessable value of the concentrate; especially in absence of evidence that sale of concentrate and franchise fees were interlinked.
(2) Collector of Customs, Bombay v. Maruti Udyog Limited, Gurgaon - 1987 (28) ELT 390 (Trib.) in which it has been held that the payment of lump-sum royalty and running royalty for indigenous manufactured goods, not affecting invoice price of imported goods, were not includible in the assessable value of imported goods.
He stated that Modvat credit was available in respect of the duty paid on the concentrate.
5. Shri Prabhat Kumar, the learned SDR referred to the agreement with the buyers and submitted that the concentrate was supplied only to those with whom the applicant had an agreement and that the sale of concentrate was interlinked with the royalty charges. He invited attention of the Bench to page 123 of the paper-book at which the Asstt. Collector of Central Excise, Patiala has discussed the issue with regard to royalty charges. He also stated that the facts in the present case were distinguishable from the facts in the case of Duke & Sons.
6. Concerned as we are presently with the disposal of stay application, we have only gone through the prima facie merits of the case and the facts and circumstances considered relevant for the above purpose.
7. M/s Pepsi Foods Limited were concerned with the production and marketing of aerated waters under brand names popularly known as Lehar Pepsi. They themselves were the brand owners of 'Lehar'. M/s. Pepsi Co. Inc. USA were the registered owners of the various trade marks known as Pepsi Cola, Pepsi, Seven Up Mirinda etc. It has been stated that for the use of brand names Pepsi Cola, Pepsi, Seven Up, Mirinda etc., no royalty was payable to the Multi-National M/s. Pepsi Co. Inc. USA. It has not been explained as to why a Multi-National allowed the usage of their popular brand name without any consideration. Full details of the relationship of M/s. Pepsi Foods Ltd. with M/s. Pepsi Co. Ltd. USA have not been divulged. As stated above M/s. Pepsi Foods Ltd. possessed the sole proprietary rights over the trade mark 'Lehar'. The bottlers were allowed to use the trade marks of M/s. Pepsi Co. Inc. USA only in conjunction with the trade mark 'Lehar'. M/s. Pepsi Foods Limited manufactured the concentrate for the production of these brands and supplied it to those manufacturers who were licenced by them under franchise agreements to manufacture their brand of aerated waters. The concentrate was sold only to those who had entered into such agreement with them. It was not available to each and every person. It was not a freely marketed/available commodity. The bottlers had no option but to pay the royalty in addition to the declared price of the concentrate. The agreement for sale of concentrate to the bottler and the grant of licence to use the trade mark 'Lehar' were contained in the same document, as referred to by the applicant in their Memo of appeal at page 8 para 4. The amount of royalty was related to the quantity of aerated waters produced out of the concentrate supplied by them to the bottlers. They had laid down specifications, restrictions etc. as to the manufacture of aerated waters (refer para 12 at page 82 of the paper-book). They had a right to inspect and supervise that these specifications, restrictions etc. are being complied with. Thus the sale of concentrate was interlinked with the collection of royalty whose amount was calculated on the basis of the quantum of production out of the concentrate supplied by them. In this way, in addition to the amount recovered as the prices of the concentrate, they were collecting extra sums described by then as 'royalty'. No central excise duty was paid on these extra collections. At page 98 of the paper book they have submitted as under :
"The advertisement expenses are incurred by us only out of the price charged to our dealers which has been declared in our price lists for the purpose of determining the assessable value. We have not claimed any deduction towards the advertisement expenses. Accordingly, the advertisement expenses incurred by us are included in the assessable value. Duty has been paid on the assessable value of the concentrate which is inclusive of the amount spent by us on advertisement and sales promotion. Accordingly, it is submitted that the duty on advertisement expenses has already been paid. Therefore, it is submitted that no further duty is payable by us."
This reply itself establishes a link between the supply of concentrate production of aerated waters and the collection of extra sums under the name of 'royalty.' Their reply at page 102 of the paper-book is also relevant. Their advertising for the finished product, inclusion of advertising expenses claimed to be included in the price of the concentrate establishes a linked between the royalty (calculated with reference to the finished product), and the concentrate (used for the production of the finished product). Thus it could not be argued by them that the royalty charges were not related to the sale of concentrate. Firstly for the brands of Pepsi Co. Inc. USA it has been stated that no charges were payable, and secondly it has been stated that expenses towards advertising the name of their brand were already included in the value of the concentrate. Further as per Clause 18 of the agreement to bottlers were required to undertake appropriate advertising and sale promotion activities for the beverage. It therefore appears that the extra collections were for the concentrate supplied by the appellant, and obviously these collections in the name of royalty were extra collections/additional consideration for the sale of the concentrate.
8. The supply of the concentrate and the manufacture of branded aerated waters were inter-connected and were part of the same transaction. Concentration was specifically for their particular aerated waters. The concentrate itself was described with the name of the product in which it was to be used, such as Lehar Pepsi concentrate, Lehar Seven up concentrate, Lehar Mirinda concentrate etc.
9. At page 21 para D. 5 of their appeal memo the applicant have stated as under :-
"D.5. Without prejudice and in any case the advertisement expenses incurred by the appellants are for the soft drinks manufactured by the bottlers. Such expenses are not required for the marketability of the concentrate manufactured and cleared by us. Even in terms of Supreme Court decision in the Bombay Tyres International case, it is only the advertisement and sale promotion activity undertaken for the goods under assessment, can be added to the assessable value. The advertisement expenses incurred in respect of the product not manufactured and cleared by the appellants cannot be added to the assessable value of the goods manufactured and cleared by the appellants. Inasmuch as advertisement expenses incurred by the appellants are for the soft drinks, they cannot be held to includible in the assessable value of the concentrate manufactured by the appellants. The impugned order of the collector (Appeals) demanding duty on the advertisement expenses incurred by the appellants by notionally adding the said expenses on a prorata basis to the assessable value of the concentrates is therefore incorrect and liable to be set-aside."
10. It will thus be seen that their plea that there was no connection between the concentrate and the product is contradicted. Prima facie it appears that all these extra collections were for the sale of the concentrate and enter into the value of the concentrate. The aerated water could not be produced without the particular concentrate. At page 92 of the paper-book it has been stated by the applicant as under :-
"21. Thus, the utilisation of our trade mark/brand name by the bottler on the beverage manufactured/bottled, sold and distributed by him, it is submitted, causes him a profit in his sales. It is for this reason that we demand a royalty from the bottler after the sales for one calendar month have been assessed. The sale of concetrate is made much before the bottling starts and it is charged for from the bottler at that time itself. The royalty however is assessed and charged only after the sales have been made. Thus, it is submitted that they are two separate procedures and for separate purposes having no nexus. We collect the value of the sale of units manufactured by us to cover our manufacturing cost and earn some profitable margin. This is a legitimate process which is assessable under Section 4 of the Act. The valuation of excisable goods for the purpose of charging a duty of excise under section 4 of the act is granted under Section 4(l)(a) of the Act as the normal price at which the goods are ordinarily sold by the assessee to the buyer in the course of wholesale trade for delivery at the time and place of removal where the buyer is not a related person and the price is the sole consideration for the sale. We admit that we are liable to pay the Excise Duty on the value of the goods manufactured by us. i.e. units of concentrate. The duty is being levied because we manufacture and sell the concentrate to our customers in the course of wolesale trade and the price being the sole consideration of such a sale. We however, differ on the inclusion of royalty charges received by us from the bottler in the assessable value of Excise Duty under Section 4 of the Act. The royalty is not being received by us on the goods manufactured i.e. the concentrate and, theefore, cannot be construed as a part of the value of the manufactured goods. The show cause notice issued also states that the noticees receive the royalty charges over and above the value claimed for approval in the price lists submitted by us. This we submit is because royalty for use of trade mark received by us is separate from the payments received by us from the bottlers on the sale of concentrate."
11. It is thus seen that these extra collections were in the nature of flow back to them on the supply of the concentrate.
12. At page 103 of the paper book it has been contended that there could not be any levy on an amount collected as price. In this connection reference may be made to the Tribunal's decisions in the cases of (1) Hubli Chemical Works v. Collector of Central Excise, Madras - 1984 (18) E.L.T. 488 (Trib.) and (2) Rana Rubber Industries v. Collector of Central Excise, Mecrut - 1987 (32) E.L.T. 433 (Trib.) where in it has been held that the extra amounts recovered by the assessee from the buyers are to be taken into account for the purposes of levy of central excise duty. In Para 10 of the decision in the case of Hubli Chemical Works referred to above the Tribunal had held that "the money recovered in excess of the effective duty must form part of the assessable value unless it is shown to be deductible for any other reason, such as being a sales tax." When such is the case with regard to the statutory levies, the extra collections in this case do not prima facie appear to be deductible sums and should form part of the price for arriving at the central excise duty liability. The name by which such extra sums are described is of no relevance.The Hon. Supreme Court in their clarificatory decision in the case of UOI v. Bombay Tyres International with regard to trade discounts have held that the discounts allowed in the trade by whatever name such discount is described should be allowed to be deducted from the sale price. The same logic could be applied to the extra collections. Thus the actual nature of the sums and not the name, is what is relevant for exclusions and inclusions from the assessable value.
13 The applicant have relied upon the Tribunal decision in the case of Duke and Sons Pvt. Ltd. v. Collector of Central Excise reported at 1991 (55) E.L.T. 577. The learned SDR has stated that the facts in that case were distinguishable. While the facts have to be gone into in detail at the stage of the final disposal of the matter, prima facie it appears that in the case of Duke & Sons (P) Ltd. there was no evidence that the sale of concentrate and franchise fees were interlinked. In that case the agreements under which the franchise fees were paid, was entirely distinct, separate and independent from the sale of the concentrate to the buyers and there was no link between the two. In Para 8 of their decision the Tribunal have held as under :
"In the absence of the above it is difficult to hold that the sale of concentrate and the franchise fee are interlinked and the agreement to purchase trade marke adds to the saleability of the product."
The Tribunal held in that case that the value of goodwill paid for using trademark was relatable directly to manufacture of soft drinks by buyers of concentrate and not to the manufacture of concentrate and that franchise fees was not includible in assessable value especially in absence of evidence that sale of concentrate and franchise fees were interlinked. In the present case it is, however, seen that there is a definite relationship between the sale of concentrate and the extra amounts collected in the name of royalty. Clauses 2, 5 and 6 of the agreement are extracted below :
"2. The Bottler shall buy only from pepsi Co's approved manufacturer, PFL, or a manufacturer approved in writing by Pepsi Co. and PFL (PFL and/or such approved manufacturer herinafter both called "the Seller") all units of concentrate (hereinafter called "units") required for manufacture of the Beverage by the Bottler, at a price and other terms and conditions esablished by the Seller."
5. The Bottler will strictly follow all instructions and directions issued by PFL from time to time for preparing, bottling, selling and distributing the Beverage.
6. The Bottler, in preparing, bottling, selling and distributing the Beverage will use only the Units purchased from the Seller. All other materials, including bottles, cartons, cases and containers, required by the Bottler shall be of quality, standards and specifications prescribed by PFL from time to time. The Bottler will not use Units so purchased from the Seller and bottles, cartons, cases, containers and other labelled materials, so prescribed by PFL in any manner, directly or indirectly, for any purpose other than the bottling, selling and distributing of the Beverage."
Thus prima facie it appears that the facts in the case of Duke & sons were distinguishable from the facts before us.
14. The applicants have contended that if in any case royalty charges are treated as additional consideration the same has to be added to the price charged by them for the concentrate and the assessable value has to be redetermined therefrom, (refer para 28 at page 86 of the paper-book). This contention of the applicant has to be gone into in detail at the stage of the final disposal of the case and may involve redetermination of the differential duty amount.
15. Taking all the relevant considerations into account we are prima facie of the view that while the extra sums collected in the name of the royalty have to be added to the price to arrive at the assessable values, some relief may be due to the applicant under the provisions of Section 4(4)(d)(ii) of the Act. Thus we are of the view that if the applicant are desired to pre-deposit the entire amount of Rs. 2,16,96,131, it may amount to undue hardship. Subject to the condition that the applicant deposit a sum of Rs. 1 crore (Rupees one crore only), within a period of 12 weeks from the date of receipt of this stay order, the pre-deposit of the balance amount will be waived and its recovery stayed till the disposal of the appeal. If the applicant fails to deposit the above amount of Rs. 1 crore (Rupess one crore only) within the period as stipulated above, then this stay order shall be automatically vacated and the appeal shall be liable for rejection.
To come up for compliance after 4 months from the date of the issue of this order.