Customs, Excise and Gold Tribunal - Delhi
Hero Honda Motors Ltd. vs Cce on 6 October, 1998
Equivalent citations: 1998(79)ECR774(TRI.-DELHI), 1998(100)ELT468(TRI-DEL)
ORDER K. Sankararaman, Member (T)
1. This appeal is directed against Order-in-Original No. 66/97 dated 4.7.1997 passed by the Commissioner of Central Excise, New Delhi confirming demand of differential Central Excise duty of Rs. 2,07,33,501.35 for the period June 1986 to January 1991 and imposing penalty of Rs. 50 lakhs under Rule 173Q of the Central Excise Rules, 1944. The Commissioner dropped the proposed action for confiscation of land, building, plant and machinery belonging to the appellant, M/s. Hero Honda Motors Ltd. (for short, HHML).
2. HHML commenced production of 100 cc Motorcycles in 1985. Price lists were being filed from time to time and clearances were being made on payment of appropriate central excise duty on the approved prices. Bulk of the Motorcycles were sold to wholesale dealers at the factory in Haryana. Motorcycles were being cleared to Depot in Haryana not far away from the factory gate and sold from the Depot to dealers in Haryana and to institutional buyers. Officers of the Directorate General of Anti Evasion, New Delhi visited the premises of HHML, seized various documents and recorded statements of officials of HHML under Section 14 of the Central Excise Act, 1944. Investigation revealed that customers desirous of buying motorcycles were required to book orders and pay Rs. 500 and motorcycles cleared to dealers were required to be delivered to customers who paid advance, according to the priority list prepared by HHML. About Rs. 40 Crores was collected in all as advance and this amount was either invested in securities or deposits or units earning interest or used for working capital requirements of the manufacturer. Units so acquired were sold from time to time at substantial profit. HHML was also earning income on certain investments by way of dividend. At the same time, HHML was required to pay interest of only 9% on the booking advances. If the amount used for working capital requirements had been borrowed from financial institutions, HHML would have been required to pay interest at the rate of 17% as against 9% interest required to be paid on booking advances. Thus the additional consideration accrued to HHML on account of booking advances and such accrual influenced profitability and the consequent pricing decision. The amount of additional consideration offset the loss incurred by HHML in the process of selling motorcycles at a price lower than the unit cost of production.
3. The above facts and circumstances were borne out by documents titled "Trial Balance" in the light of the statement of Vinod Sethi, Assistant Manager (Excise)., ledger accounts pertaining to "Sales Office", the minutes of the meetings of the Board of HHML, Annual Reports of HHML, MIS reports and statements of various officials. These materials showed that the amount of income from such investments formed part of the total considerations for sale of motorcycles. Utilization of a part of the advance amount for working capital requirements lowered the working capital borrowing resulting in lowered cost of interest, cost of production and lowered per unit loss. In the absence of availability of such advances, aggregate borrowing, interest cost and consequent cost of production would have gone up. This resulted in indirect monetary benefit to HHML. The amount of such interest income and profit so accrued should have been included in the sales value. The income so accrued would logically be on the same footing as booking advance and would be legitimate part of consideration received by HHML for sales of motorcycles. Advances and income accruing on that account were determining factors for fixation of selling price since the net consideration received in respect of sales to institutional buyers through Depots was higher than the price at which motorcycles were sold to customers who paid advances. Statements of officers clearly showed that receipt of advances and the income, profit and benefit accruing therefrom received consideration while fixing selling price and resulted in depression of price at the factory gate. Thus, it was seen that, receipt of advances had nexus with the fixation of selling price.
4. HHML did not declare true and correct value in the price lists filed with the department in terms of Rule 173 of the Rules, did not declare the additional consideration accruing on the utilization of advance amounts as aforesaid. Price lists wrongly declared the price to be the sole consideration. Sale to buyers from whom booking advances were received below cost per unit was not disclosed to the department. To specific queries put by Central Excise Officers, HHML falsely stated that there was no nexus between the earning on account of investments out of booking advances and that a part of the advances had not been utilised for working capital requirements. Recovery of extra amounts through sales depots was not disclosed. Since the sales depot was located near the factory, there was no justification for recovery of extra amount for sales through depot. There was deliberate misdeclaration of prices in the price lists.
5. Accordingly show cause notice dated 5.7.1991 was issued to HHML reciting the above facts and circumstances, referring to various data collected from HHML officials, alleging suppression of material facts with intent to evade duty, proposing demand of differential duty and seeking to avail the benefit of the larger period of limitation under the proviso to Section 11A of the Act and proposing imposition of penalty and confiscation of assets of the manufacturer. After appellant replied to the show cause notice resisting the allegations made therein and appeared for personal hearing, the Commissioner passed the impugned order leading to the present appeal.
6. Shri Joseph Vellapally, learned Counsel for the appellant stated mat appellant had filed price lists and classification lists for the Motorcycles manufactured which were duly approved by the jurisdictional Assistant Collector and duty had been paid accordingly. When the appellant set up the plant for manufacture of 100 cc Motorcycles there was a great rush for booking such Motorcycles and Government had permitted them and other manufacturers to take a deposit of Rs. 500/- per vehicle. Government had directed that on such deposits they should pay interest of 7% and that fifty per cent of the deposit amount collected should be invested in approved securities like those issued by Unit Trust of India. Learned Counsel stated that the amount of deposit collected by them was Rs. 40 crores approximately. As against 7% interest directed by the Government to be paid by them to the depositors, they had actually paid 9%. The department has worked out the income earned by them from such deposits by way of interest and capital gains earned as also the differential interest between the market rate of interest and 9% in respect of the amount out of the deposits used by them for meeting working capital requirement. The selling price has been loaded with such notional income. In addition, the price charged by them at their depot in Haryana near their factory for sale to institutional buyers which was higher than the price charged at the factory for wholesale dealers has been adopted as the assessable value and applied for determining the duty payable. The Commissioner's finding on these lines was assailed by the learned Counsel contending that such notional income could not be added to the sale price of Motorcycles as they had sold the Motorcycles at the same price in Calcutta where there had been no booking and no deposits had been received. It was pointed out by learned Counsel that after 1991 there was no booking and no taking of deposits the Motorcycles were freely available and were sold at the same price to all purchasers whether or not they had paid the deposit for booking and hence there was no nexus between the deposit and the selling price. The price was not lowered on account of the deposit. It was stated that drawing up of the All India price list and maintenance of the same through computer was a very expensive operation for which the deposit amounts were used. There were eight lakh bookings when booking was opened out of which nearly fifty per cent were cancelled and the deposits returned with interest.
7. The additions of the interest earned on the deposits to the declared price for determining the assessable value as done in the impugned order was also assailed by the learned Counsel contending that Rule 5 of the Central Excise Valuation Rules under which such addition was made provided for the addition of only the money value of additional consideration flowing directly or indirectly from the buyer to the assessee whereas in this case the deposits were given by the individual customers and not the wholesale dealers to whom the Motorcycles were sold by the appellant. It was then contended by the learned Counsel that the Motorcycles were sold at prices fixed taking into account market conditions and the prices at which their competitors were selling their Motorcycles of comparable capacity and features. When appellant started production in 1986, the number of Motorcycles they produced was less and the production was also affected by a strike in the factory and hence the cost of production was more. If they were to sell the Motorcycles on that cost and at a profit, the price would have been uncompetitive. When production picked up subsequently, the cost of production came down because of economy of operation and they were able to earn profits. The prices were not fixed taking into account the earnings from the deposits received. The reliance placed by the Commissioner on the judgment of the Supreme Court in the Metal Box India case was not correct as there was no nexus in this case between the deposit and the price fixed. In this connection, the judgements of the High Court of Madras in Lakshmi Machine Works v. Union of India and Union of India v. Lakshmi Machine Works Limited were referred to by him. In the former judgement, a reference has been made to the circular dated 20.10.1986 issued by the Government stating that additions of notional interest on advances received will arise only in those cases where the authorities are in a position to establish a nexus between the advance deposit received and the depression of the sale price on account of such deposits and it was held that this circular was valid and to be implemented in all cases and that the modification thereof by a subsequent memorandum dated 13.6.1990 and Trade Notice dated 20.10.1990 stating that it is not necessary to establish a nexus between the deposit and the price was illegal and invalid and contrary to Section 4(a) of the Central Excise Act read with Rule 5 of the Valuation Rules. Learned Counsel concluded his argument with the plea that apart from their case being strong on merits, the benefit of limitation will also be available to them since the show cause notice dated 5.7.1991 was time barred as the demand of duty being for period June 1986 to January 1991. They had intimated the department about their having received deposits from the persons who had booked Motorcycles and this fact was thus in the knowledge of the department. There was no suppression. Learned Counsel pleaded for the appeal to be allowed.
8. The arguments were resisted by Shri K. Srivastava, Senior Departmental Representative. He referred to the finding of the Commissioner in his order where he had mentioned about the statements recorded from the executives of the appellant company in which they had admitted that they had utilised certain part of the deposits received by them for working capital requirement. They had not, however, disclosed this fact to the department while getting their price lists approved. They had also not disclosed that they were selling Motorcycles at higher prices at their depots. Such higher prices were charged to purchasers (institutional buyers) who had not made bookings and had not paid any advance amounts. They had charged lower prices for their factory gate sales to wholesalers who then sold the Motorcycles to persons who had made bookings. Such prices were lower than the cost of production. The officers of the appellant company had admitted that the advance deposits received by them had been used by them for working capital requirements and the earnings by way of interest or such deposit amounts invested by them and capital gains enabled them to re duce the losses. They gave interest at the rate of 9% to their customers who had made the deposits. Without this they would have necessarily borrowed at commercial rates of interest estimated by the Commissioner as 16%. This saving of interest is their earning which has been rightly included in the assessable value of the Motorcycles. The earning on the deposits received by them was reflected in the reports generated under the Management Information System in the appellant's office and the earnings were also reflected in their Annual Reports. Ii their letter dated 17.12.1985 in reply to the department's queries asking for in formation, they had wrongly stated that the extent of deposits employed as working capital was Nil and also made a wrong statement that the deposits had not at all influenced the price of Motorcycles sold by them. In the circumstances the longer period of limitation was clearly attracted and had been rightly invoked. Shri Srivastava supported the order and pleaded for the dismissal of the appeal.
9. We have considered the submissions of both the sides. We have perused the record as also the decisions cited. The main controversy is whether the income by way of interest, capital gains from the investments made by the appellant out of the deposit amounts received by the appellant should be included in the assessable value of the Motorcycles sold by them. The adjudicating authority has held such income to be includible in the assessable value of the motorcycles sold by the appellant relying upon the observations of the Supreme Court in Metal Box India Ltd. v. Collector of Central Excise, Madras. The appellant's plea is that the price of motorcycles had not been depressed taking into account the income from such investments. It is contended that such income is income for separate activity not relating to manufacture and sale. As to the allegation and finding that the motorcycles had been sold at prices below the cost of production, the plea is that the price has been fixed on commercial considerations to enable their product to be competitive against the products of competitors. We find from the statements filed by the appellant that the prices of Hero Honda Motorcycles were slightly higher than the prices of similar models manufactured by other manufacturers like TVS (Suzuki) and Bajaj (Kawasaki) but less than the prices of Escort (Yamaha) Motorcycles. It has also been contended that the Motorcycles were sold by the appellant to wholesalers in Calcutta for sale to buyers there who had not booked for the same and that the motorcycles were sold to them at the same price at which they had been sold to other purchasers who had made bookings. On this point the Senior Departmental Representative submitted that this plea had not been advanced before the Commissioner and had, accordingly, not been considered by him and being a question of fact raised for the first time before the Tribunal, it should not be considered. We find that this plea is valid as there is no submission by the appellant to that effect recorded in the impugned order. In the present appeal memorandum also such a ground has also not been referred to. We, therefore, do not allow this contention of appellant having supplied Motor vehicles to dealers of Calcutta at prices equal to the prices at which they sold them where deposits had been taken.
10. It is, however, to be noted that appellant has urged that sales are made only to dealers and not to the customers who had made the booking and paid deposits. The deposit amount and interest accrued were adjusted while the customer took the vehicles on allotment on payment of the balance amount. No extra consideration had flown to the appellant from the dealers to whom appellant had sold the motorcycles. Appellant had raised a plea that the earnings arising from the deposit amounts received did not constitute income arising out of sale of manufactured goods and hence the same did not constitute an element in the cost of manufacture. The profit arising from non-manufacturing and non-excisable operations do not form part of manufacture and sale operations and do not attract excise duty. It has, however, been held in the impugned order that because of such income appellant had fixed the price of motorcycles lower than the cost of manufacture. This has been questioned contending that the sale price has been fixed keeping in mind commercial and marketing factors to make their motorcycles competitive. The data submitted in this regard showing the prices of appellant's product along with the prices of comparable models of other manufacturers supports their plea. The fixing of lower prices has been explained as having been done in the first year of manufacture when the production was less and there was also a strike. It is stated that when production increased in later years, the cost of manufacture came down due to increased production and appellant earned good profit in such years. The statements given by the executives of the appellant have been relied upon by the Commissioner for treating the income from the investments as part of the assessable value. Tine statements, we find, are to the effect that such income from investments helped them to reduce their losses and not that because of such income they reduced the sale prices. The finding based on such statements is not correct.
11. The Commissioner has held that as appellant had sold motorcycles at the depot near the factory to institutional buyers at prices higher than the prices charged at factory gate to dealers for sale to persons who had made the booking and given advance deposits, the depot prices should be the basis for assessment. This has been contested by the appellant contending that the institutional buyers were a separate category and sales to them were ex-depot while for dealers, the sales were ex-factory. As held by the Supreme Court in Indian Oxygen Ltd. v. Collector of Central Excise goods are partly sold from depots and partly from factory the ex-factory price will be the basis of value under Section 4 of the Act even for goods sold from depot. The differential duty demand by raising the factory gate prices charged to wholesalers to the level of the prices charged to institutional purchasers at the depot is not justified. We hold accordingly.
12. An alternative plea that the demand of duty was, in any case, hit by time bar as the show cause notice was issued more than six months after the relevant dates, was advanced on behalf of the appellant. Such a plea was taken before the Commissioner also but was rejected by him on the ground that there was suppression and wilful misstatement of facts on their part about utilisation of part of the booking advances received by them to meet their internal capital requirements and the charging of higher price for sale of motorcycles at their depots to institutional buyers. Appellant had also disclosed the fact of their depot sales to the department. The finding in the order that there was suppression cannot be sustained. Similarly the application of the extended period in so far as the loading of the interest element on the sale price has been correctly resisted by the appellant on the ground that they had informed the department about their having received deposits from the customers who had made bookings and deposited Rs. 500 per vehicle. Though admittedly they had income arising out of investments out of such deposit amounts and had also utilised part of such amounts on their capital requirements, it is their plea that these had not resulted in lowering of the price of their product. The Commissioner has relied upon the decision of the Supreme Court in the Metal Box India Ltd. case. This was a decision dated 10.1.1995. prior to that the High Court of Madras had held in Lakshmi Machine Works Ltd. v. Union of India decided on 10.4.1991 that notional interest on customers security deposit was includible in the assessable value only if such consideration had a nexus with the sale price. The court upheld the validity of a circular of the Government to that effect issued on 20.10.1986 and held as invalid a subsequent memorandum dated 13.6.1990 modifying the earlier one and stating that there was no need to establish separately the nexus between the deposit and the price. In view of this position and the case made out by the appellant that the income from the investments made out of the deposits received did not result in the lowering of the price of their goods, the demand on this account fails. The time bar is an additional factor on which also the appellant deserves to succeed as the fact of receipt of the deposits which is primary information had been brought to the notice of the department.
13. For the foregoing reasons, we set aside the impugned order and allow the appeal.
Pronounced today (6.10.1998).