Customs, Excise and Gold Tribunal - Delhi
National Auto Accessories Ltd. vs Collector Of Central Excise on 22 January, 1993
Equivalent citations: 1993ECR126(TRI.-DELHI), 1993(67)ELT575(TRI-DEL)
ORDER P.K. Kapoor, Member (T)
1. The appellants are engaged in the manufacture of motor vehicle parts viz. Tie Rod Ends. In the price-lists in Form Part-I filed by them they extended a discount of 25% to all wholesale buyers. They also filed a price list in Form Part-II under which distributors were granted a discount of 35%. The distributors unlike the wholesale buyers were required to enter into an agreement with the appellants in terms of which they had to buy a quantity of 2000 pairs of Tie Rod Ends per month. The appellants were served with the show cause notice dated 13-11-1990 stating that both distributors and wholesale buyers being independent wholesale purchasers belonging to the same class of buyers, in terms of Section 4(l)(a) for the same product, different trade discounts resulting in different assessable values were not permissible. Later by an order dated 4-1-1991 the Assistant Collector held that distributors could not be categorised as a different class of buyers merely for the reason that they had entered into an agreement with the assessee. He, therefore, ordered that the trade discount admissible to other wholesale buyers would also be admissible to the distributors. Being aggrieved by the order passed by the Assistant Collector the appellants preferred an appeal before the Collector (Appeals). In the impugned order, the Collector (Appeals) observed that the distributors were charged with the responsibility of advertising and sales promotion in their area which was primarily the responsibility of the manufacturer. On the grounds that 10% extra trade discount extended to the distributors was in the nature of compensation for the jobs undertaken by the distributors on behalf of the appellants and there was no material difference between the wholesale dealers and distributors, the Collector (Appeals) held that higher discount offered to distributors was not warranted, and rejected the appeal.
3. On behalf of the appellants the learned advocate Shri H.K. Maingi appeared before us. He stated that the price-list in Part-I filed by the appellants was applicable to normal wholesale buyers who were being extended a discount of 25% whereas during the relevant period in respect of the distributors who entered into agreements with the appellants undertaking to purchase 2000 pairs of Tie Rod Ends per month, higher trade discount of 35% was claimed in the price-list in Part-II since they constituted a separate class of buyers. He added that the price declared in the list in Part-II applicable to distributors also represented the assessable value since sales to them were on principal to principal basis and the price was the sole consideration. He contended that in terms of the judgment of the Supreme Court in the case of Union of India v. Bombay Tyres International, reported in 1984 (17) E.L.T. 329, discount allowed in the Trade has to be deducted from the sale price having regard to the nature of the goods and if it is extended in terms of an agreement. He submitted that the Tribunal had accepted that distributors were a distinct class of buyers in the case of Auto Lamps Ltd. v. Collector of Central Excise reported in 1987 (29) E.L.T. 889. He further submitted that the judgment of the Bombay High Court in the case of Godrej Boyce Mfg. Co. Pvt. Ltd., reported in 1984 (18) E.L.T. 172 was not applicable to the facts of the appellants' case since in that case the department was insisting on a separate price list being filed by the assessee in respect of sales to upcountry wholesale dealers on account of extra price charged from them in respect of secondary packing. The learned counsel further added that the Collector (Appeals) had erred in arriving at the finding that 10% extra trade discount offered to the distributors was in the nature of compensation for the jobs such as advertisement, and promotion of sales undertaken on behalf of the assessee. He argued that the Collector (Appeals) had failed to take into account the fact that distributors were required to buy a large quantity of 2000 pairs of Tie Rod Ends per month whereas there was no such stipulation in respect of stockists. He further contended that the Collector (Appeals) had erred in arriving at the finding that the distributors were charged with the responsibility of advertising the products. He stated that the primary responsibility for advertising the products in different parts of the country rested with the appellants in different parts of the country rested with the appellants and even though the option to advertise on regional basis was available to the distributors, there was no evidence on record that distributors had in fact incurred any expenditure on this account. He contended that even if any such expenditure was incurred by the distributors it would not form a part of the assessable value.
4. On behalf of the Revenue, the learned SDR Smt. C.G. Lal reiterated the findings of the Collector (Appeals) in the impugned order.
5. We have examined the records of the case and considered the submissions made on behalf of both sides. It is seen that the only question that arises for consideration in this case is whether the distributors who had entered into agreement with the appellants undertaking to buy the specified quantity of goods every month and take measures for promoting sales in their territory were entitled to additional 10% discount over and above the discount admissible to other wholesale buyers who did not enter into such agreement with the appellants.
6. It is seen that the question whether the deduction of trade discounts from the list price can be disallowed merely on the grounds that they are not uniformly extended to all buyers by the manufacturer was considered by the Hon'ble Madras High Court in the case of Union of India and Ors. v. SSM Bros. Pvt. Ltd. and Anr. reported in 1986 (24) E.L.T. 269. Relying upon the decision of the Supreme Court in the case of Voltas Ltd. reported in 1977 (1) E.L.T. (J 177) the High Court held that a trade discount need not be uniform and even if different rates of trade discount are allowed by the manufacturer, a deduction could be permitted in relation to such different rates of trade discounts if they are not determined on extra-commercial considerations. Para 4 of the judgment being relevant is reproduced below :
"Excise duty is charged under Section 4 of the Act on the actual wholesale price of the manufacturer and not the list price which is generally the retail price at which the manufactured article is sold. As a matter of fact, the difference between the list price and the actual wholesale price does not go into the pocket of the manufacturer, and therefore, it is in the nature of a post-manufacturing expenses. Therefore, the deduction from the list price has to be made so as to arrive at the actual wholesale price. Section 4 provides for payment of the trade discount from the list price. The words 'trade discount' are not defined in the Act. But Corpus Juris Secundum Volume 26-A, page 974, contains a definition of 'trade discount' as under :-
"The term 'trade discount' means the difference between the seller's list price and the price at which he actually sells goods to the trade; a percentage deduction from the regular list or catalogue price of goods."
"The Supreme Court in the case of Voltas Ltd., 1977 (1) E.L.T. (J177) has held that trade discount is a percentage deduction from the regular list of catalogue price of goods. Thus trade discount normally means a deduction or reduction from the catalogue price of goods allowed by the wholesalers to retailers in the trade. The Supreme Court has held in the above case that trade discount need not be uniform and that even if the different rates of trade discount are allowed by the manufacturer, a deduction could be permitted in relation to such different rates of trade discounts if they are not determined on any extra-commercial considerations. In this case though the authorities proceed to deny the benefit of the deduction of trade discount from the list price merely because they are not uniform and they have not given any finding that the different rates of trade discount had been adopted on extra-commercial considerations. Therefore, in view of the said decision of the Supreme Court, trade discount has to be allowed even if the rates are not uniform."
7. We find that in the case of Mahendra and Mahendra Limited v. Union of India reported in 1984 (16) E.L.T. 76 the Hon'ble Bombay High Court has held that even if in terms of an agreement of distributorship with the manufacturer the wholesale buyer carries out after sale service and shares the amount spent on advertisement, the transaction would still have to be deemed as on principal to principal basis. Para 11 of the judgment is reproduced below :-
11. Shri Dalai then submitted that under the agreement, the Voltas were required to carry out the activities of the manufacturers and, therefore, want the petitioners intended to do was to transfer some of the activities of the manufacturers to Voltas with a view to reduce the assessable value for the purpose of excise. In support of this submission, reliance is placed on three or four conditions under the agreement. It was urged that the Voltas were required to maintain a Sales Organisation and such a condition was not necessary in the agreement if the petitioners had sold the tractors to Voltas because then it was wholly irrelevant to provide as to how the Voltas should dispose of those tractors to the consumers. The condition under the agreement which provides that Voltas were to store the tractors till they are sold to the consumers was also relied upon to claim that the agreement was not at arm's length. The provision which required Voltas to carry out after-sale service and the condition which required the petitioners to share half the amount spent on advertisements were highlighted to claim that the price for which the tractors were sold to Voltas did not reflect the true price. It was urged that the price at which the tractors were sold by the petitioners to Voltas was far less than the market price because certain activities required to be performed by the manufacturers were taken over by the Voltas. It is not possible to accept this submission. In the first instance, on the date when the agreement was entered into, the tractors were not liable to be assessed for excise duty and, therefore, there was no occasion to prepare an agreement with an intention to avoid the duty. Secondly, the conditions requiring Voltas to set up Sales Organisation and to provide after-sale service are the usual conditions provided in the agreement with the wholesale buyer and such conditions were also in existence in the agreement which was considered by the Supreme Court in the Voltas' case. The fact that the Voltas were required to store the tractors till they are sold to the consumers cannot be treated as transfer of manufacturer's activity in favour of the buyer. The fact that the expenses in regard to the advertisements were to be shared by the petitioners and Voltas merely indicates that both the wholesale buyer and the petitioners were interested in having greater production and sale thereof and that condition, in my judgment, cannot be considered as relevant to reach the conclusion that the agreement was not at arm's length.
7A. It is also seen that in the case of Jay Engg. Works Ltd., Hyderabad v. Govt. of India and Ors, reported in 1982 (10) E.L.T. 378, the Hon'ble High Court of Andhra Pradesh has held that trade discount need not be uniform but may vary from dealer to dealer, place to place and from time to time depending upon commercial exigencies and the fact that different discounts will result in different assessable values will not affect the position since there is no prohibition in the Act against allowing different discounts. The relevant extract from para 11 of the judgment is reproduced below :
"11. The other aspect that remains for consideration is regarding the rade discount. The petitioner claimed allowance of a trade discount of 23% given to Usha Sales Private Ltd., Hyderabad and M/s. Nathoo Laljee, Hyderabad. At the outset it must be stated that the factum of giving 23% discount to them is not disputed. The primary authority as well as the appellate and revisional authorities held that uniform discount of 15% only should be allowed to these dealers also like others and there should be no exception regarding these two dealers. The revisional authority held that special discounts are not admissible under Section 4 of the Central Excises and Salt Act, 1944 and therefore the trade discount of 15% only should be allowed. The learned single judge held that 15% discount is normally given and the higher discount of 23% in respect of two cases cannot be treated as normal trade discount and if two different sets of discounts are allowed, it will be tantamount to arriving at two wholesale cash prices and in this view the orders of the authorities have been confirmed. The learned counsel for the appellant contends that there is no embargo on giving different rates of trade discount by the Act or the rules. Explanation to Section 4 of the Act is concerned with the allowance of discount. The expression used therein is 'trade discount'. As the 'discount' is preceded by 'trade' the discount must be for the purpose of trade and motivated by commercial expediency. The discount should not be tainted with extra-commercial considerations like favouritism and relationship etc. The Explanation does not visualise uniform discount only. It may be that varying discounts provoke problem into the affairs but the absence of uniform discount cannot be the basis for denying discount. It is possible that in bulk sales it is profitable for the company to give a higher discount so that they can sell the commodities quickly and have more turnover of the business and the higher discount also will be necessitated for giving fillip to the sales in some areas where the commodities have to be propagated and popularised and it is also possible that in a highly competitive conditions, it is necessary to give more discount even at the risk of low profits to have lucrative business at a later stage and to over-reach the rival competitors. In the business of electrical appliances the off-season discount is prevalent and in that view the question of uniform discount throughout the year is not possible. In support of the contention that the absence of uniform discount cannot be the basis for disallowing the discount the learned counsel for the appellant relied upon the decisions reported in A.K. Ray and Ors. v. Carona Sahu Co. Ltd. - 1979 (4) E.L.T. 521, Sharada Silicate & Chemical Industries v. Collector of Central Excise, Coim-batore - 1979 (4) E.L.T. 20, Standard Electric Appliances v. Supdt. of Central Excise and Anr. -1979 (4) E.L.T. 53, Kerala Ceramics Ltd. v. Asst. Collector of Excise and Ors. -1979 (4) E.L.T. (J 53), 1978 (2) E.L.T. 238, 1978 (2) E.L.T. 1224 and 1978 (2) E.L.T. 444. It is not necessary to burden this judgment with facts and principles set out in the said decisions, but suffice to say, it is held that the discout may vary from dealer to dealer, for place to place and from time to time depending upon commercial exigencies"
8. In the case of Ramdas Motor Transport Ltd. v. Collector of Central Excise reported in 1988 (36) E.L.T. 629 the Tribunal has also held that extra differential discount to dealers in addition to the minimum discount, based on legitimate commercial consideration of volume of purchase would be legally permissible. Para 6 of the said judgment being relevant is reproduced below :
6. Proviso (i) to Section 4(1)(a) requires that -
"Where, in accordance with the normal practice of the wholesale trade in such goods, such goods are sold by the assessee at different prices to different classes of buyers (not being related persons) each such price shall, subject to the existence of the other circumstances specified in Clause (a), be deemed to be the normal price of such goods in relation to each such class of buyers".
The learned representative of the department pleaded that the consumer/dealers in the second tier constituted a separate class of buyers and hence the actual trade discount allowed to them should alone be admissible in respect of the goods sold to them. We find merit in this plea. The actual consumers of motor vehicle parts were certainly a separate class from the authorised dealers in the first tier. While a small dealer, as compared to a bigger dealer, would not, by itself, constitute a separate class, we observe that there was qualitative difference between the authorised dealers in the first tier and the dealers in the second tier. The authorised dealers were bound by the terms and conditions of the agreement entered into by the appellants, such as maintenance of a show-room, keeping adequate class (stock ?) for servicing the market at all time etc. The dealers in the second tier were not bound by any such terms and conditions. We hold that in the facts and circumstances of the case, the dealers in the second tier, alongwith the consumers in the same tier, could be considered a separate class of buyers from authorised dealers in the first tier. Thus, in respect of the sales made to the consumers/dealers in the second tier, the prices charged from these buyers would constitute a separate basis for assessment and the assessable values as worked out for the sales to authorised dealers in the first tier would not apply to them. The question then arises whether the minimum discount as uniformally allowed to all consumers/dealers alone should be admitted as has been done by the lower authorities. We observe that in addition to the minimum discount of 25%, the consumers/dealers were granted extra discount of 2% to 10% depending upon the volume of purchases of all respective buyers. Since the differential discount as allowed to consumer/dealers was based on legitimate commercial consideration of volume of purchases we have no hesitation in holding that the actual discount as given to the respective consumer/dealer should be accepted. The law does not prescribe that there should be uniformity of discount in all circumstances. The learned representative of the department had also no objection to the actual discounts given to the consumers/dealers being accepted. We order that this be done so far as the sales to the consumer/dealer for the second tiers are concerned."
9. Since in the impugned order there is no finding that the transactions between the appellants and their distributors, who in terms of the agreements were required to purchase 2000 pairs of Tie Rod Ends per month and undertake certain measures for promoting the sale of goods were not on principal to principal basis, on the ratio of the various judgments extracted above, we hold that the additional 10% discount extended by the appellants to the distributors was on legitimate commercial consideration and was, therefore, admissible.
10. We are inclined to agree with the appellants that the decision of the Bombay High Court in the case of Godrej Boyce Mfg. Co. Pvt. Ltd. (supra) is not relevant to the fact of this case since the main question that arose for consideration in that case was whether the secondary packing in which the refrigerators were supplied to wholesale dealers outside Bombay would form a part of the assessable value of the goods.
11. In view of the above discussion, we set aside the impugned order and allow the appeal.