Customs, Excise and Gold Tribunal - Delhi
Transformers And Electricals Kerala ... vs Collector Of C. Ex. on 27 May, 1992
Equivalent citations: 1992(62)ELT422(TRI-DEL)
ORDER S.V. Maruthi, Member (J)
1. These five appeals are disposed of by a common order as the issue involved is common to all the appeals. The appellant is a Public Limited Company manufacturing transformers and allied products. 70% of the share capital is held by the Government of Kerala. The manufacturing of transformers is done pursuant to Purchase Orders for specified transformers as per specific requirement and specification of purchasers, depending on the terms and conditions of the Purchase Order and machinery in view of the urgency of the purchasers in taking the delivery of the transformers. The purchasers make advance payments on various stages of production. The price lists filed by the appellant were approved as per the terms and conditions of the Purchase Order. The price of the transformer is fixed in the Purchase Order itself well in advance taking into consideration all the relevant aspects. The part payments are made by the purchasers only thereafter and such part payments have no influence in the price originally fixed. No interest is also paid by the appellant to the purchasers on such part payments. Show Cause Notices were issued proposing to add the interest accrued on advance payments to the price and re-determining the assessable value and recover the consequential duty. On receipt of reply, the Assistant Collector treating the interest accrued on advance payment as additional consideration revised the price list. On appeal, the Collector confirmed the Order of the Assistant Collector. Hence the appeal before us.
2. The Collector held that the appellant collected advance amounts from 10% to 20% of the contract price from all the customers and these advance amounts are utilised in connection with the manufacturing operation. He also stated that the appellants have confirmed that all their contracts required mobilisation of funds by way of payment of part of the price as advance. Therefore, relying on the judgment of the Bombay High Court in the case of Britania Industries Ltd. v. Union of India, reported in 1989 (44) E.L.T. 630 (Bom.) and the Tribunal's Order in the case of Collector of Central Excise, Hyderabad v. Vazir Sultan Tobacco Industries, reported in 1991 (52) E.L.T. 59 (Tri.) holding that interest payable/paid by the manufacturer on the deposits made by the customers is includible in the value because the manufacturer would have incurred the said interest had he borrowed or taken loans from the Banks. Therefore, he directed that notional interest which the appellant would have paid to the Banks had they taken loans from the Banks should be added to the price of the transformers.
3. The main contention of the appellant is that under Section 4 of the Act value shall be deemed to be normal price. Clauses (a) and (b) of Section 4 provide for two situations namely cases where normal price is ascertainable and cases where normal price is not ascertainable. In cases where the normal price is ascertainable, 3 conditions must be satisfied - (1) The goods must be ordinarily sold in wholesale by the assessee for delivery at the time and place of removal; (2) A buyer should not be a related person; and (3) The price must be the sole consideration for the sale, i.e. the seller must have received anything over and above the price from the buyer. Section 4(1)(a) does not say anything whatsoever about time of payment of price whether in advance at the point or subsequent to delivery of the goods sold. If some consideration is received by the seller over and above the price, then the case would fall within clause (b) read with Rule 5 of the Valuation Rules and the money value of the additional consideration has to be aggregated with or added to the price.
4. Price is defined as money consideration for sale of goods in Section 2(10) of the Sale of Goods Act, 1930.
5. The Excise Act and the Sale of Goods Act do not contemplate or authorise enhancement of the price or money consideration by a notional amount claimed to be bona fide obtained by the seller by receiving that price in advance of delivery. What is permitted is valuation of the money value of any additional consideration other than money consideration and enhancement of the money consideration to the extent of the value of such additional consideration.
6. If the seller receives the whole or part of the price in advance, it is advantageous to him whereas where there is a delay in the payment of price, it is prejudicial. The Acts and Rules do not permit valuation of every advantage or disadvantage to the seller and consequent adjustment of the price upwards or downwards. Rule 5 postulates a situation where goods are sold in circumstances specified in Section 4(1)(a) except that the price is not the sole consideration. The word "sole" is used in contradistinction with "multi". To attract Rule 5 there must be other consideration. Not merely receipt of part of the price in advance.
7. Time and manner of payment of price is a matter of contract, there being no provision in the applicable statutes prescribing that price is payable at any specific point of time in a contract for sale of goods. In contracts for manufacture and supply of made to order machinery it is common for the seller to receive an advance by way of earnest money or part payment.
8. Assuming, without admitting, that the department can, in a given case, enhance the price, on an inference that the price has been artificially depressed by advance payment:- (a) The onus of proof is on the department to show that the terms of payment are exceptional and inconsistent with normal commercial practices; (b) that there is a nexus between the price and the advance; and (c) that consequently the price does not represent the sole consideration for the sale of goods.
9. It is not sufficient to say or infer that the seller would have obtained a better price had he contracted for payment of price on delivery only but it must be shown that the seller is in receipt of additional consideration directly or indirectly. The question which has to be asked is: Does the contract price of Rs. x represent the whole consideration for sale of the goods?" and Rule 5 can be invoked only if the answer is no. If, as in this case, nothing more than Rs. x has passed from the buyer to the seller then Rule 5 is inapplicable.
10. Further, if the Department's stand is taken to its logical conclusion then the contract price should be reduced in all cases where part or whole of the price is payable after delivery. In Appeal No. 4990/91-A, 90% of the price was payable 45 days after despatch of documents through bank. Further the 10% advance was secured by a bank guarantee. No credit has been given for either of these factors. It is impractical to determine normal price on the basis of such factors and the legislature has not provided for taking into consideration any such factors.
11. Rule 5 prescribes an exception to the general provision in Section 4(1)(a) of the Act for determination of value on the basis of the normal price. A departure from that rule and the invocation of Rule 5 should be resorted to only in cases where the price is found to be abnormally low as a consequence of other additional consideration having passed from the seller to the buyer, as for example where the buyer agrees to supply part of the raw material or agrees to bear some expenses which would in normal circumstances be borne by the seller.
12. Before dealing with the arguments of the learned advocate, it is necessary to refer to Section 4 of the Central Excises and Salt Act which provides for the determination of the assessable value and it reads as follows :--
'Valuation of excisable goods for purposes of charging of duty of excise -- (1) Where under this Act, the duty of excise is chargeable on any excisable goods with reference to value, such value, shall, subject to the other provisions of this Section, be deemed to be-
(a) the normal price thereof, that is to say, the price at which such goods are ordinarily sold by the assessee to a 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:
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(b) where the normal price of such goods is not ascertainable for the reason that such goods are not sold or for any other reasons, the nearest ascertainable equivalent thereof determined in such manner as may be prescribed."
13. It follows from the above that for the purpose of determining the assessable value the relevant criteria is "the normal price" i.e. price at which the goods are ordinarily sold in the course of wholesale trade and the price is the sole consideration for sale. The emphasis is that the price must be sole consideration for the sale. If the price cannot be ascertained under clause (a) of Section 4(1) then it should be ascertained in accordance with rules.
14. The Department's case is that normal price is not ascertainable as the appellants are getting additional consideration in the form of interest on advance payments made from time to time. According to them, had the appellants borrowed the money from the Banks, they would have had to pay interest to the Banks and these payments of interest would have added to the price of the goods manufactured by them and they rely on Rule 5 of the Valuation Rules. Rule 5 of the Valuation Rules reads as follows :-
"Where the excise goods are sold in the circumstances specified in clause (a) of Sub-section (2) of Section 4 of the Act except that the price is not the sole consideration the value of such goods shall be based on the aggregate of such price and the amount of value of any additional consideration following directly or indirectly from the buyer to the assessee."
A reading of Rule 5 makes it clear that Rule 5 is applicable in cases where the price is not the sole consideration for the sale of goods and there is some additional consideration following directly or indirectly from the buyer to assessee. Therefore, to this extent, the price is depressed whereas the appellant's contention is that the price is the normal price and notional interest cannot be treated as additional consideration.
15. In order to consider whether the price is the sole consideration under Section 4 or whether the appellants are receiving any additional consideration, it is necessary to refer to the terms of the Purchase Order and the allegations made in the Show Cause Notices and the reply to the Show Cause Notices. The relevant clauses of the Purchase Order are as follows :-
1. Prices
7. Manufacturing/Delivery Schedule.
7.1 Transformer alongwith accessories covered under this Purchase Order shall be supplied within four months from the date of receipt of Telex of Intent and release of 10% advance payment. First instalment of 10% advance payment had been released on 16-10-1989. Hence, Transformer and accessories shall be ready for supply on ex-works basis after completing all tests on or before 16-2-1990. However, by said delivery, it will be the responsibility of M/s. TELK to get shipping release issued by NPC Engineer after completing all testing and inspection.
7.2.1 Contractual delivery period as per clause 7.1 -16-02-1990.
7.2.2. Grace period of 7 days for the purpose : 23-02-1990 of reduction in price to be provided. No price reduction will be effected for supply till 23-2-1990.
7.2.3 Price of Transformers for delayed supply:
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From To Amount
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24-2-1990 01-03-1990 Rs. 246 lakhs 02-03-1990 08-03-1990 Rs. 242 lakhs 09-03-1990 15-03-1990 Rs. 238 lakhs 16-03-1990 22-03-1990 Rs. 234 lakhs 23-03-1990 29-03-1990 Rs. 230 lakhs 30-03-1990 05-04-1990 Rs. 226 lakhs 06-04-1990 12-04-1990 Rs. 222 lakhs 13-04-1990 16-04-1990 Rs. 220 lakhs
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However, the testing charges as indicated in para 1.2, 1.3 and 1.4 shall be payable in full.
12. Terms of Payment 12.1 10% of the value of this purchase order excluding testing and safe delivery charges will be released as advance against acceptance of Telex of Intent and on contractors submitting a bank guarantee for equivalent amount valid till the delivery period. This part of the payment had been released to the contractor on 16-10-1989.
12.2 10% of the value of this Purchase Order excluding testing and safe delivery charges will be released against submission of all relevant drawings and on receipt of following documents:
(a) A Certificate issued by the Purchaser's Engineer stating that the contractor has submitted all drawings. This Certificate shall also indicate that payment as per clause No. 12.2 of the order could be released. This part of payment had been released on 20-10-1989.
(b) A Bank Guarantee for equivalent amount valid till the delivery period.
12.3 20% of the order value excluding testing and safe delivery charges will be released against receipt of following documents :
(a) Proof of placing order for raw materials required viz. CRGO Steel, Mild Steel etc. by the contractor.
(b) A Bank Guarantee for equivalent amount valid till the delivery period. (c) A certificate by the contractor confirming that Purchase Orders for more than 20% of the order value had been placed towards purchase of the above raw materials. This part of payment had been released on 27-10-1989.
12.4 60% of the order value alongwith testing charges, safe delivery charges and 100% taxes and duties will be released against submission of following documents to purchaser's paying authority.
...
(f) A Bank Guarantee for 10% of the contract value towards performance bond valid till the entire guarantee period. In the event of delay the amount as indicated under Cl. No. 7 will be deducted from the final 60% payment due to the contractor."
16. Clause 7.1 provides for the delivery schedule according to which the goods manufactured by them shall be supplied within 4 months from the date of receipt of telex of indent and release of 10% advance payment. The first instalment of 10% advance payment had been released on 16-10-1989 and the delivery schedule provides that the goods should be delivered by 16-2-1990 and a grace period of 7 days namely 23-2-1990 is provided for. In other words, the goods have to be delivered within 4 months from the date of release of first instalment of 10% advance and a grace period of 7 days is given. Clause 7.2.3 provides that if there is delay in delivery of goods the price of goods is reduced. It says price of transformers for a delayed supply and it gives the schedule of reduction in the price. The terms of payment is that 10% of the value of the Purchase Order will be released against acceptance of telex of Indent and on contractor submitting Bank Guarantee for equivalent amount valid till the delivery period. Another 10% of the value of the Purchase Order is released against submission of relevant documents and Bank Guarantee for equivalent amount valid till the delivery period is furnished. Another 20% of the order value will be released on receipt of proof of placing the order for raw materials etc. and on furnishing Bank Guarantee for equivalent amount valid till the delivery period. The balance 60% of the order will be released against proof of the despatch of the goods and other relevant documents. The contractor is also to furnish the Bank Guarantee for 10% of the contract value towards performance bond valid till the entire guarantee period.
17. In other words, the contractor is furnishing Bank Guarantee as against advance of 40% of the value of the Purchase Order released by purchaser. From a reading of the Purchase Order, it is clear that it provides that if there is delay in delivery of the goods price is reduced. The basis for the reduction perhaps is not only the delay in supplying the goods but may also be due to the appellants having advance with him and earning the interest on it. It may also be to expedite the delivery of goods having regard to the nature of the goods or it may be in the nature of damages for the delayed delivery. Whatever may be the reason the price is reduced. It is not clear whether there was any delay in the delivery of goods and whether the appellants have claimed revised assessment on the basis of the reduced price. However, neither the appellant nor the Department has pointed out the reason for the reduction in price in case of delayed delivery.
18. Be that as it may, the question now for consideration is whether the price under various clauses of the Purchase Order represents the sole consideration. As pointed out earlier according to the Department it does not represent sole consideration as the appellants are receiving additional consideration in the form of interest which they would have paid to the Banks had they taken loans from the Banks. As pointed out earlier for delayed delivery there was a reduction of price whereas there is nothing on record to indicate that the advances were taken into account while determining the price or while releasing the advance payments.
At this juncture, we may refer to the relevant allegation made in the Show Cause Notice which reads as follows :-
"On verification of the relevant contract it is seen that M/s. TELK have received an amount of Rs. 7,98,400/- (i.e.) 10% of value of the contract as advance, on 28-11-1989, and they have not paid any interest to M/s. Larsen and Toubro on this advance.
Interest on advance has to be included in the assessable value and duty has to be paid. It appears that shelving of interest on the advance, paid as per the contract with M/s. Larsen and Toubro, is a consideration that has influenced the determination of the price of the transformers to the extent the interest such advance would have earned had it been advanced by bank, as per Section 4 of the Central Excises and Salt Act, 1944.
M/s. TELK is therefore directed to show cause to the Assistant Collector of Central Excise, Ernakulam I Division, as to why the interest at rate of 18.5% on the advance received by them as per the contract should not be added up to the assessable value claimed for approval and assessable value fixed accordingly."
More or less, similar are the allegations in the other Show Cause Notices. In reply, the appellants have stated as follows :--
"Transformers are manufactured and supplied by us to each customer as per the specification of the customer. The price of the transformers is fixed taking into account all the relevant factors involved in the contract such as, the time stipulated for supply, the terms of payment etc. etc. The price so fixed represents the net value of the transformers after taking into account all the factors. Therefore, when the contract stipulates delivery urgently, payment of part price on completion of various stages, furnishing of Bank Guarantee (on which we have to incur bank charges) and such other terms and conditions, the price is fixed taking into account all these facts. The fact that certain contracts, as referred to in the show cause notice, there is provision for payment of interest as a specific term of the contract, will amply prove this contention. In the present case, it was a specific stipulation that on account of the fact that the customer wants the transformers on an emergency basis, 10% of the total order value shall be paid in advance subject to receipt of Bank Guarantee for the like amount. The absence of stipulation for payment of interest on the advance paid unlike in other contracts and the stipulation that since the customer requires the transformers urgently they shall pay part of the price in advance and we shall furnish Bank Guarantee would further prove our contention.
3. The factors which have gone into the price of the transformers was set in detail in the purchase order No. ECCG/MTLS/1118/89 dated 9-11-1989, 8-11-1989, 11-5-1990 and 29-11-1989. The said purchase order is the document which evidences the terms of the contract between the manufacturer and the purchaser in this case. None of these documents stipulates payment of interest by the manufacturer for part payment made by the purchaser for successful completion of the manufacture of the transformers. In fact the price for the transformers has been finally fixed taking into account all the relevant facts including payment of part payment of the purchase price in advance and the price variation."
In other words, the reply states that they have taken into account the urgent delivery, payment of part price on completion of various stages, furnishing of Bank Guarantee and such other terms and conditions while fixing the price. However, they do not categorically say that the price was reduced on account of these factors.
It also appears that the appellants are paying interest to those customers who gave advances. We may point out the contractor has to give Bank Guarantee for 40% of the advance of the payment released to him to that extent the capital belonging to the appellants is locked up. It is not known how much interest Bank gives on the amounts deposited for obtaining guarantees. It is also not clear for what purpose, the appellant has to give Bank Guarantee in an equivalent amount of 40% advance payments. It is also not clear whether it is neutralising interest on the advance payments.
19. We may point out that under Section 4, it is the price which a manufacturer gets that is relevant for the purpose of determining the assessable value and the price should be the sole consideration if the price paid under the Purchase Order is the sole consideration then there will be no problem for making assessment on the basis of the said price. However, Department's contention is that the appellants are getting additional consideration in the form of Bank Interest. In this context, we may refer to the judgment of Madras High Court reported in Lakshmi Machine Works Ltd. v. U.O.I. - 1992 (57) E.L.T. 211 (Mad.) . The facts relevant for the purpose of this case are that the said company manufactures textile machinery and they take advance security deposit from the customers. The amount of security deposit is 10% of the value of orders. The question before the learned Judge was that whether notional interest on deposits/advances made by the customers in respect of industries which manufacture tailor made machinery on specific order is includible in the assessable value of the machinery or not. Learned Judge held "But the basic question is the same, namely whether the assessee receiving advances from his customers or distributors and consequently utilising the advances in the working of his industry is bound to show the interest element or price of the goods. In my opinion this will definitely depend upon the facts of each case. In every case, one has to ultimately apply Rule 5 of the Central Excise Valuation Rules, 1975 and see whether the deposits and advances constituted an additional consideration flowing directly or indirectly from the buyer and whether such additional consideration could be computed in terms of money. Ultimately, the authorities can only go by Section 4 read with Rule 5 of the Valuation Rules. The primary part of Section 4 says that the value shall be the normal price being the price of the goods which are ordinarily sold by assessee to buyer in wholesale trade for delivery at time and place of removal. Where the buyer is not a related person and the price is the sole consideration for the sale. Rule 5 of the Valuation Rules says that where the price is not the sole consideration, "Value of such goods shall be based on aggregate of such price and the amount of the money value or any additional consideration flowing directly or indirectly from the buyer to the as-sessee." In other words one has to see in each case whether the deposits/advance received by the assessee goes to the depression of the sale price. I am clearly of the opinion that this factual assessment has to be made by the Quasi-Judicial Authorities prescribed under the Act, it cannot be laid down as a uniform and inflexible rule that notional interest payable on advances/deposits made by customers can or cannot be included in the assessable value of the goods. In a particular case, the notional interest may influence the sale price as amounting to additional consideration. In a particular case it may not so influence."
20. Learned Judge also held that "In respect of machines manufactured by the petitioners in this case, the aspect of the machines being useful only to the particular customer has also to be taken note of. It may be that the deposit was made only for that purpose. It may be that the deposit having been made for that purpose, but the manufacturer utilised the same as interest-free loan, because no industrialist would keep such amount idling. In the latter event automatically the question whether the receipt of advance goes towards depreciation of the sale price has to be determined by taking evidence. The net result of the above analysis leads me to the conclusion that the earlier circular dated 20-10-1986 struck the correct note by saying that the department has to establish in each case that additional consideration had a nexus to the sale price of the excisable goods .....". Learned Judge further held that the question of notional interest being added in the assessable value will depend upon the facts of the case. While holding as above, the learned Judge referred to the orders of this Tribunal in Collector of Central Excise, Hyderabad v. VST Industries, Hyderabad -1991 (52) E.L.T. 59 (Tri.) ;
Collector of Central Excise v. Indian Oxygen -1989 (41) E.L.T. 610 ;
Lily Foam Industries (P) Ltd. v. Collector of Central Excise -1990 (46) E.L.T. 462 ; and Kerala Electric Lamp Works Ltd. v. Collector of Central Excise, Cochin -1988 (33) E.L.T. 771 .
21. In other words, according to the learned Judge there should be nexus between the additional consideration and the sale price of the excisable goods. He also pointed out that additional consideration may not influence the sale price in certain cases and in certain cases it may influence the sale price.
22. We may also point out that under Section 4 it is the price which the manufacturer gets for the goods sold in the course of wholesale trade. In other words, only price for assessment of value of the goods for the purpose of excise in such cases would be the wholesale cash price which manufacturer receives from sale to the first wholesale dealer, i.e., when the goods first entered the stream of trade ( Atic Industries v. H. C. Dave -1978 (2) E.L.T. (J. 444) (SC) . Therefore, it is the price which the manufacturer gets i.e. the assessable value under Section 4. We have already pointed out that the manufacturer is getting 40% advance in 4 instalments. However, he was also executing Bank Guarantee in an equivalent amount. Where there is a delay in delivering the goods the price of the goods has been reduced whereas there is no evidence to establish that the advances given and the Bank Guarantee executed by the manufacturer has had an effect on the price paid under clause 7 of the Purchase Order. The very fact that there is a reduction in price in case of delay in delivery of the goods indicates prima facie that the advances paid in 4 instalments and the Bank Guarantee executed by the manufacturer has no effect on the sale price of the goods. However, this is a prima facie observation. As pointed out by the learned Judge of the Madras High Court in Lakshmi Machine Works Ltd. it is for the authorities below to work out whether the advances paid and the Bank Guarantee executed has a nexus to the sale price and whether it has depressed the sale price. If it has depressed the sale price admittedly it should be treated as additional consideration and Rule 5 of the Valuation Rules is to be applicable. However, the authorities below have not examined the issue from this angle.
23. We may examine some of the orders and judgments relied upon by the learned Advocate which were also referred to by learned Judge of the Madras High Court in Lakshmi Machine Works Ltd.
24. In Collector v. VST Industries -1991 (52) E.L.T. 59 (Tri.) , the issue before this Tribunal is whether the notional interest on the deposit received by the manufacturers should be taken into consideration to arrive at assessable value of the goods on a consideration of the material before this Tribunal. It was held that the main purpose of deposits was not security but collection of capital. Therefore, interest earned on the security deposit should be treated as additional consideration and it should be added to the price of the goods manufactured by the appellants. In Lily Foam Industries (P) Ltd. v. Collector -1990 (46) E.L.T. 462 , the question for consideration in the said Order was whether advance paid by some of the dealers is to be included in the assessable value of polyurethane foam. It was found that substantial portion of the polyurethane foam namely 46% was sold to dealers who have never given any advance to the appellants. It was also found that there is no price difference between the dealer from whom advances are taken and others. Under these circumstances it was held that there is no case for invoking the provision of Rule 5 of the Valuation Rules to include the interest element to the prices for arriving at the assessable value.
25. In Kerala Electric Lamp Works Ltd. v. Collector - 1988 (33) E.L.T. 771 , it was held that security deposit of Rs. 5 lakhs kept by Crompton with the assessee did not amount to any extra consideration accrued from the Collector to the assessee. However, no reasons were given as to why it does not amount to extra consideration.
26. As pointed out in the earlier paragraphs under Section 4, it is the price which is relevant for determining the assessable value and the price should be the sole consideration for the purpose of sale. If the advance paid by the purchaser has nexus with the sale price then Rule 5 is attracted. However, on the facts of the present case, the appellants have also executed the Bank Guarantee being equivalent amount of the advance paid to them and the lower authorities have not examined the issue whether the advance paid by the purchasers and the Bank Guarantee executed by the appellants has any nexus with the sale price namely whether it has reduced sale price of the goods manufactured by the appellants. We, therefore, remand the matter to the Asstt. Collector to examine whether the advance and the Bank Guarantee executed by the appellants has any nexus with the sale price determined under the Purchase Order. If it has a nexus and reduced the sale price, he may add the interest as additional consideration to the sale price under Rule 5 of the rules otherwise assessable value shall be on the basis of the sale price.
The appeals are, accordingly, remanded to the Assistant Collector.