Customs, Excise and Gold Tribunal - Delhi
Eicher Motors Ltd. vs Collector Of Central Excise on 7 August, 1991
Equivalent citations: 1992(58)ELT90(TRI-DEL)
ORDER S.V. Maruthi, Member (J)
1. The case of the appellant is that they are engaged in the manufacture of Light Commercial Vehicles (LCVs) covered under Chapter 87 of the Schedule to the Central Excise Traiff, 1985. During the relevant period, they were selling the goods i.e. Light Commercial Vehicles in retail and filed Price Lists in Part V. In the said Price Lists they claimed deduction from retail price on account of:
(i) Dealers margin described as trade discount amounting to Rs. 5100/- per vehicle; and non-inclusion of
(ii) "Material Service Performance Security Deposit" (MSPSD) amounting to Rs. 2000/- per vehicle accepted from customers opting for the appellants' "MSPSD" Scheme.
2. The appellants have appointed authorised representatives all over the country to facilitate sale of its vehicles to the customers and enter into agreements under which the primary responsibility of the authorised representatives are as follows :
(a) Booking orders from individual customers;
(b) Receiving payments for the ordered vehicles;
(c) Transmit the customers order and payments to the appellant's Marketing Division;
(d) To receive the vehicle from the appellants' factory/Branch, together with all clearance, documents made out in the name of the customer;
(e) Carry out Pre-delivery Inspection of the Vehicles;
(f) Assist the customer in respect of registration and insurance;
(g) Render Seven services of the vehicle without any additional charge and any other assistance which the customer may be in need of;
(h) Maintain a show-room and repair workshop together with technically qualified staff.
3. The basis on which the deduction of Rs. 5100/- is claimed is that had they appointed the wholesale dealers on principle to principle basis instead of authorised representatives, they would have been given the said margin amount. The remuneration, thus, payable to the authorised representative, would be equal to the margin which would have been payable to the wholesale dealer and thus, be equal to the deduction contemplated under Rule 6(a) of the Valuation Rules. In other words, the price to the wholesale dealer would have been the current retail price less the margin of Rs. 5100/-per vehicle allowed to the wholesale dealer. As regards the claim of the appellants for deduction of "Material Service Performance Security Deposit" in the sum of Rs. 2000/-, it is their case that it is given as an advance payment towards the cost of materials namely Engine Oil, Transmission oil; Differential oil; Brake fluid; Beaming greese; Air cleaner oil; Oil filter element; Fuel filter element; Oil seals etc. These materials are supplied by the authorised representatives to the customers directly at the time of 'servicing' of the vehicle the price of which is paid by the customer directly to the authorised representatives as per the trade practice. However, in order to ensure that the authorised representative performs the function of servicing, the appellant collect an amount of Rs. 2000/- from the customers at the time of sale of the vehicle through the same invoice and hold as deposit to be paid over to the authorised representative upon his completion of services. The servicing i.e. the labour is provided free to the customer by the dealer at his own cost and therefore, not covered by the aforesaid MSPSD. The appellants also issued a Circular laying down the guidelines for MSPSD. In acknowledgement of the deposit of Rs. 2000/-, the customer is given a Book-let containing 8 "Free Service Coupons" alongwith the vehicle. After recommended 8 intervals, the customer gets the vehicle serviced in exchange of the coupons free of any further charge and the customer surrenders the coupons evidencing the service of the vehicle. The authorised representative, thereafter, forwards to the company the said service coupons obtained from the customer on receipt of which the company reimburses the cost of the service material proportionately in relation to each service from the amount of Rs. 2000/-. At the completion of 8 services, the authorised representative stands totally reimbursed of Rs. 2000/-. It is also stated that the MSPSD is optional.
4. The Asstt. Collector disallowed the claim of the appellants both in respect of the margin of Rs. 5100/- allowed to the authorised representative and also the MSPSD claim made by the appellants. On appeal, the Collector disallowed the claim of the appellants for MSPSD while he remanded the matter to the Asstt. Collector for considering de novo the break-up of the dealers margin claimed by the appellants. The Collector held that:
"I find that although the appellants have claimed their sales as retail sales they have appointed so-called authorised representatives who are actually dealers, performing certain functions on their behalf. It is not the case of the appellants that they are selling to wholesale buyers hence the findings of the Asstt. Collector that the amount of Rs. 5100/- cannot be allowed as "Trade Discount" is justifiable in law. However, as pleaded by the appellants at the time of personal hearing, that, in the pattern of sale as followed by them, some deductions on account of dealers' margin should be allowed to them. The appellants have filed price lists for retail price and to arrive at the assessable value in terms of statutory provisions of Rule 6(a) of Valuation Rules, 1975 some deductions on account of dealers' margin could be considered. Now the question arises about the quantum of such deduction that could be allowed from the retail price in order to arrive at the deemed wholesale price in terms of Rule 6(a). This has to be decided keeping in view the nature of the services rendered by the dealers. It is however observed in this context that expenses incurred on account of services like "publicity", "after . sale-service", "pre-delivery inspection" which have been done by the dealers on behalf of manufacturer for promoting the marketability of the goods, should enter their value in trade and no deduction on account of such charges is permissible. But for the other services rendered, a reasonable dealers' margin is permissible for deduction to arrive at a national wholesale price."
Having held as above, the Collector directed the appellants to furnish a break-up of Rs. 5100/- claimed by them to the Asstt. Collector.
4. Challenging the above order, Shri Ravindra Narain appearing for the appellants submitted that the fact that goods are sold in retail during the period relevant, is not disputed. The Collector directed that deduction from the retail price on account of trade discount to be determined on the basis of the cost incurred on the various services rendered by the authorised representatives whereas under Rule 6(a), the value shall be based on retail price minus wholesale price provided in determining the amount of reduction, due regard should be given to the nature of the excisable goods, the trade practice in that commodity and other relevant factors. Therefore, the deduction allowable is the amount which would be necessary to arrive at the wholesale price. If the appellant had sold the goods in wholesale market, it should be lower by Rs. 5,100/- than the retail price. Accordingly, the amount of deduction has to be equal to the difference between the wholsesale price and the retail price. In support of this contention, he relied upon the order of this Tribunal in Escorts Ltd. v. C.C.E., New Delhi - 1988 (33) ELT 147 (Tri.). The guidelines laid down by the Collector are contrary to Rule 6(a) of the Valuation Rules, 1975. The deduction of Rs. 5,100 is not only reasonable and is in accordance with trade practice. It constitutes approximately 2.7% of the retail price which compares favourably with the trade practice followed by other manufacturers of Japanese Light Commercial Vehicles namely Swaraj Mazda and Allwyn Nissan. They also allowed a discount of Rs. 5000/- per vehicle approximately to their dealers. The authorised representative does not incur any expenditure on account of publicity. Even services like 'after sale service' would have been provided for by the wholesale dealer in any event. Since these are services to be provided by the wholesale dealer, the margin permitted to the wholesale dealer would have been fixed taking into consideration these services as stated above. Rule 6(a) clearly contemplates that if the goods were sold in wholesale, then what would be the wholesale price thereof. In other words, the margin to the wholesale dealer which would cover all expenses of services to be rendered by him of whatever nature as well as his profit would be allowable as a deduction under Rule 6(a) of the Valuation Rules. The authorised representatives of the appellant do not render any service pertaining to publicity and sales promotion which is entirely deducted by the appellants and the cost of which is included in the assessable value of the goods. The agreement entered into between the appellants and the authorised representative does not enjoin upon the authorised representative to undertake publicity and sales promotion activity either at his cost or on behalf of the appellant.
5. As regards the reduction claimed with regard to MSPSD, the Id. Counsel contended that Rs. 2000/- is only security deposit to be paid over to the authorised representative upon his completing the services and had nothing to do with the price of the vehicle. It does not include warranty spares which had already been included in the price of the vehicle. Free after sales of Motor Vehicles comprises of merely service of the vehicle which constitutes cost of labour. It does not include replacement materials i.e. Engine Oil etc. The said deposit by the customer of Rs. 2000/- towards the replacement materials is therefore, an advance payment for the price of the materials supplied by the authorised representatives to the customer at the time of servicing and the said Rs. 2000/is not includible in the assessable value, as it does not relate to either the manufacture or price consideration of the vehicle; and relates entirely to the subsequent supply/use of materials for servicing which is a transaction between the Authorised Representative and the customer of the vehicle. Since the deposit of Rs. 2000/- is not towards the goods produced by the company and is a deposit towards the cost of service materials to be supplied at a subsequent date by the Authorised Representatives to the customer, the notional interest on which deposit cannot in any event form part of the assessable value as such notional interest if any, on the deposit is as a result of an ancillary activity and is not in relation to the activity of manufacture. He also submitted that if the Authorised Representative has not completed all the services, the appellant does not pay the entire amount to the authorised representative. Therefore, on the balance amount that is remaining with them, they were paying duty.
6. Shri Prabhat Kumar, the ld. JDR for the respondent Revenue as against the above contended that the Collector's order is justified as free service charges is to be added to the assessable value. He also submitted relying on the order of this Tribunal in C.C.E., Hyderabad v. V.S.T. Industries and Ors. - 1991 (52) ELT 59 (Tri.) that the interest earned on the security deposit is an additional consideration, and therefore, it should be added to the assessable value. He took us to the terms of the agreement and pointed out that it is for the appellant to prove that the other dealers are also rendering the similar services as the Authorised Representatives. He also submitted that the appeal should be remanded to the lower authorities as the comparability has to be examined from all relevant angles and at a large measure. He also submitted that Rs. 2000/- towards MSPSD is compulsory and it is not clear whether the customer is aware that Rs. 2000/- is paid to the dealer towards the cost of the service material. If the customer is not aware that the said amount is towards the reimbursement of the cost of raw material to the authorised representatives, it should be added to the assessable value. He further states that it is a fit case for remand to the Asstt. Collector for reconsideration.
7. The question under the above circumstances is whether the amount of Rs. 5100 and Rs. 2000 towards the MSPSD is includible in the assessable value of the vehicle.
8. The undisputed facts are that the appellants are selling the goods in retail and that they claimed Rs. 5,100 towards the dealers' margin payable to their Authorised Representatives. The appellants themselves are rendering publicity and sale services to the customers and the cost of the same was included in the assessable value.
9. If the sales are in the retail, then the assessable value is to be determined in accordance with Rule 6(a) of the Valuation Rules, which reads as follows :
"Rules 6(a):
If the value of the excisable goods under assessment cannot be determined under Rule 4 or Rule 5, and -
(a) where such goods are sold by the assessee in retail, the value shall be based on the retail price of such goods reduced by such amount as is necessary and reasonable in the opinion of the proper officer to arrive at the price at which the assessee would have sold such goods in the course of wholesale trade to a person other than a related person;"
From a reading of the above rule, it is clear that in the case of goods sold at retail, the value shall be the retail price minus X which is equal to wholesale price. X is to be determined by taking into account the nature of excisable goods, the trade practice in the commodity and other relevant factors. In other words, an exercise is to be taken for arriving at a notional wholesale price which shall be the assessable value. The issue as to how to arrive at the notional price was considered by this Tribunal in C.C.E., Meerut v. Escorts Ltd. - 1988 (33) ELT 147 (Tri.). It was held that:
"In price list they claimed the same amount of reduction i.e. Rs. 550 per motorcycle by way of dealers' discount or margin which they have claimed out of the retail price in the case before us. Secondly, we note that the margin of Rs. 550 on the net realisation of Rs. 11,135/- per motorcycle by the respondents works out to about 5% only. Considering the nature of the commodity and the expenditure required to be incurred by the dealers on maintenance of showroom, trained staff etc., the discount of the order of 5% could hardly be called high or unreasonable. Without hesitation, it could be called a very reasonable deduction from the retail price to arrive at the notional wholesale price in terms of Section 6(a)."
10. We may also refer to an order of this Tribunal in Modi Zerox v. Collr. of C.E. - 1989 (40) ELT 481 (Tri.) wherein it was held that valuation of goods sold in retail can be made on the basis of comparable goods. It was also held that:
"While Modi Zerox 1045 and CANON NP-271 were admittedly comparable machines, the retail price of the appellants machine was about 26% higher (Rs. 1,33,500/- as against Rs. 1,06,000/-). In other words, though said to be comparable, the appellants machine was considerably higher priced. In absolute terms, therefore, the dealers margin for the appellants machine should also be correspondingly higher."
In other words, this Tribunal accepted in principle that the dealers' margin given in respect of a comparable commodity can be given in respect of goods which are sold in retail. In the instant case, the retail price at which each vehicle was sold is Rs. 1,67,000/-. In the price list, they claimed Rs. 5100/- as deduction towards the dealers' margin. It works out to about 2.9%. We may also consider the trade practice available on record. The appellants' produced a Circular issued by the Association of Indian Automobile Manufacturers dtd. 17-10-1988 where under the Light Commercial Vehicles of Allwyn Nissan, the net dealers' price was 1,34,725/- whereas the retail price was 1,39,725/-. Similarly, in the case of Swaraj Mazda, the net dealers' price was 1, 70,233/- and the retail price was 1,75,233/-. The above material shows that the trade practice is to allow the dealers' margin of approximately of Rs. 5000/- from the retail price. The dealers' margin granted in respect of Allwyn Nissan & Swaraj Mazda works out approximately to 2.8%. In other words, even taking into account the trade practice, the amount of Rs. 5100 is not unreasonable and it is in accordance with the trade practice. Thus, there is justification for the appellants' claim for deduction of Rs. 5100/-.
11. Coming to the observations of the Collector that the expenses incurred on account of services like 'publicity', 'after-sale service', 'pre-delivery inspection' which have been done by the dealer on behalf of the manufacturer for promoting the marketability of the goods, should enter the value and no deduction on account of such charges is permissible, we are of the view that the observations are misconceived. It is not doubt true that in Bombay Tyre International, the Hon'ble Supreme Court held that "charges for other services after delivery to the buyer namely after-sale service, and marketing and selling organisational expenses including advertisement expenses cannot be deducted. It should be noted that advertisement expenses, marketing and selling organisational expenses and after-sale service, promoting the marketability of the article should enter into its value in the trade", we may point out that the Hon'ble Supreme Court made those observations while considering what should be the wholesale price. Therefore, those observations are irrelevant on the facts and circumstances of the case as the goods are sold in retail and the assessable value is to be arrived at strictly in accordance with Rule 6(a). Therefore, the question of deduction in respect of services referred to above, as held in the case of Bombay Tyre International, are irrelevant in this case. Under Rule 6(a), the assessable value in the case where goods are sold on retail price minus the wholesale price, the deduction should be arrived at after taking into account the various guidelines laid down in Rule 6(a) namely nature of the excisable goods, trade practice in the commodity and other relevant factors. Further we may also point out that the appellants have categorically stated that the authorised representative is not incurring any expenditure on his behalf in respect of sales promotion etc. and they themselves are incurring the cost on account of this expenditure. Therefore, we are of the view that the Collector is not justified in directing the Asstt. Collector to redetermine the assessable value after obtaining the figures in break-up of Rs. 5100/-. In our view, the appellants are entitled for the deduction of Rs. 5100/- as dealers' margin.
12. The next issue to be considered is whether the Department is justified in adding to the assessable value the Material Services Performance Security Deposit. In this context, the Confidential Circular issued by the appellants dtd. 14-5-1986 (Ref : EML/SV/6007) and the schedule thereof is relevant. The Circular has the following parts:
(a) It provides for the schedule of services to be done;
(b) The materials to be used;
(c) Who has to do the service;
(d) What service is to be done;
(e) When service is to be done;
(f) Procedure to be followed;
(g) Reimbursement.
We are in this appeal concerned with the reimbursement procedure and it reads as follows:
"REIMBURSEMENTS:
--- Copies of FREE SERVICE COUPONS are to be sent to EML Marketing Division as indicated above in Clause 4.
--- For ease of working, it is suggested that coupons be sent to EML once a week with a covering letter mentioning the coupon serial number.
--- Within 10 days of receipt of the coupons at EML, after appropriate verification, credit notes will be issued to the respective ARs.
--- Against the free service coupons, EML reimburses ARs only.
--- Services done by SSOs are to be reimbursed by ARs only. In turn ARs will be reimbursed by EML against the free service coupons through the same procedure as above.
As per Annexure 1, the total Reimbursement rates for the free services are :
Material: 2000/-
Labour: 800/-
Depending upon your location, local taxes and type of standard packings of lubricants available in your area a net margin of 200/- to 300/- is available to you on the 2000/- material reimbursement.
Further on the labour rates of 800, a net margin of 350/- to 400/- is available to you."
From the above Circular, it follows that the amount of Rs. 2000/- represents the cost of material and Rs. 800 represents the cost of labour. It also indicates that a net margin of Rs. 200 to 300 will be available from out of material reimbursement and on labour rate of Rs. 800 a net margin of Rs. 350/- to 400/-. It also indicates the procedure for reimbursement of the cost of the material.
13. It is an admitted fact that the appellants are paying duty in respect of the Security Deposit which was not reimbursed to the Authorised Representative. It is also an admitted fact that these services are optional. It is also not disputed that the amount of Rs. 2000 represents the cost of material used in servicing the vehicle. It is also not disputed that the said amount is deposited by the customer with the appellants and the appellants reimburse the same as per the Circular to the Authorised Representative. Admittedly this amount of Rs. 2000 does not enter the pocket of the manufacturer. Secondly, it does not relate to the manufacture of the goods. On the other hand, it relates to the cost of material which have to be used for servicing the vehicle. The materials are not manufactured by the appellants. They are independently obtained by the authorised representatives and the authorised representatives utilise them in servicing the vehicle. The amount of the cost of material determined approximately at Rs. 2000 is paid by the customer to manufacturer. The reason according to the appellants and not disputed for deducting the amount as security deposit is to ensure effective service of the vehicle by the authorised representatives as they have entered into the market recently. Therefore, the amount that is reimbursed to the authorised representatives in respect of the cost of the material is not liable to be included in the assessable value as it has no nexus to the manufacture of the goods namely Light Commercial Vehicles. We are, therefore, of the view that the appellants are entitled to claim deduction to the expenses/reimbursement made to the Authorised Representatives from out of the amount of Security Deposit deposited with them by the customers.
14. As regards the interest accrued to the appellants on the amount of Rs. 2000 deposited with them admittedly has no nexus with the manufacture of the Light Commercial Vehicles. It relates to the cost of the material used in the servicing of the vehicle. If the appellant make profit out of an activity which has nothing to do with the production or manufacture of the goods in question, the Department cannot add that profit to the assessable value. Admittedly, the interest obtained on the Security Deposit has nothing to do with the manufacture of LMVs. Therefore, we are of the view that interest obtained by the appellants on the security deposits cannot be added to the assessable value. The appeal is, therefore, allowed.
P.C. Jain, Member (T)
15. I have perused the order passed by my learned sister Ms. S.V. Maruthi, Judicial Member. While I agree with the order proposed by my learned sister, Ms. S.V. Maruthi, I would like to add the following on the 1st issue:
15.1 Reliance placed by the department on the observations of the Apex Court in para 49 of the Report 1983 (14) ELT 1896 [Bombay Tyre International Ltd.] referred to in para 11 of the order of the learned Sister is incorrect. The observations were made in the context of deduction of notional post-manufacturing expenses from the wholesale price charged by a manufacturer from his dealer. This is apparent from the first sentence in para 47 of the said Report which is as follows :-
"We now proceed to the question whether any post-manufacturing expenses are deductible from the price when determining the value of the excisable article." [Emphasis supplied] This position is also apparent from para 48 of the said Report on the basis of which the aforesaid plea of the assessees was made. Para 48 is reproduced below for proper appreciation :-
"At the outset, we must make it clear that the contentions in this regard on behalf of the assessees proceeds on two broad bases. The first is that to determine the value of an excisable article, alt expenses must be excluded which do not enter into the formula of manufacturing cost plus manufacturing profit. This follows from the principal plank of the assessees' case that the 'value' must be confined to the manufacturing cost, and the manufacturing profit. For, it is said, that if the deductions claimed are allowed, the price would be brought down to the conceptual value. All post-manufacturing expenses are claimed from that perspective and within that context. The other basis on which the claim proceeds, is that the price at the factory gate and the price at a depot outside the factory gate are identical." [Emphasis supplied] 15.2 In the instant case the factual position is different. Firstly, as pointed out by the learned Judicial Member, we are considering a deduction from the retail price and not the wholesale price. A deduction is permissible from the retail price in terms of Rule 6(a) of the Central Excise (Valuation) Rules, 1975 so as to bring it at par with a price at which the assessees would have sold such goods in the course of wholesale trade to a person other than a 'related person'. The said Rules were not before the Hon'ble Supreme Court while making the observations relied upon by the Revenue.
15.3 In the instant case it is not disputed that a payment of Rs. 5100/- is being made by the appellants to their authorised representatives for the various services rendered by them. The net realisation, therefore, made by the appellants in respect of a vehicle sold in retail to a customer is the retail price minus Rs. 5100. There is no allegation, nor there is a finding that any flow back out of the aforesaid amount of Rs. 5100/-is being received by the appellants. This deduction of Rs. 5100/- for the services rendered by the authorised representatives cannot be considered unreasonable in view of the material brought on record by the appellants and referred to in para 10 of the learned sister's order in respect of comparable vehicles manufactured by other manufacturers in the country.