Customs, Excise and Gold Tribunal - Bangalore
United Telecom Ltd. vs Commissioner Of C. Ex. on 13 September, 2006
ORDER T.K. Jayaraman, Member (T)
1. This appeal has been filed against the Order-in-Appeal No. 24/2004, dated 19-7-2004, passed by the Commissioner of Central Excise (Appeals-II), Bangalore.
2. The appellant manufactures Telecommunication equipment, an excisable commodity. They supply the above equipment to M/s. BSNL. They filed a refund claim dated 2-9-2003 for a sum of Rs. 29,27,350/- before the Assistant Commissioner. The Revenue took the view that the difference in price quoted in the purchase order and invoices under the cover of which goods were cleared is on account of Liquidated Damages and it is in the nature of a penalty imposed by the customer for delayed delivery of goods. Hence it is not an abatable discount from the transaction value as per Section 4(3)(d) of Central Excise Act, 1944. The lower authority rejected the refund claim under Section 11B of the Central Excise Act, 1944. The appellant was aggrieved and he approached the Commissioner (Appeals). The Commissioner (Appeals) upheld the order of the lower Authority. Hence the appellants have come before the Tribunal for relief.
2. S/Shri Arvind Dattar, Sr. Advocate and BN Gururaj, Advocate appeared on behalf of the appellants and K.S. Reddy, JDR appeared for the Revenue.
3. The learned Sr. Advocate cited from Standard Text Books on Contracts and Damages to drive home the points that courts have laid down tests by which one could always find out whether the amount to be paid in the case of breach of contract is a penalty or liquidated damage. The following extracts from 'Chitty on Contracts, 27th Edition, Volume I, General Principles were cited :
The question whether a sum stipulated for in a contract is a penalty or liquidated damages is a question of law. Lord Dunedin delivering his opinion in Dunlop Pneumatic Tyre Co. Ltd. v. New Garage and Motor Co. Ltd. has summed up the law in the following propositions.
(1) Though the parties to a contract who use the words 'penalty or liquidated damages' may prima facie be supposed to mean what they say, yet the expression used is not conclusive. The court must find out whether the payment stipulated is in truth a penalty or liquidated damages....
(2) The essence of a penalty is a payment of money stipulated as in terrorem of the offending party; the essence of liquidated damages is a genuine pre-estimate of damage.
(3) The question whether a sum stipulated is a penalty or liquidated damages is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged of at the time of the making of the contract, not at the time of the breach.
(4) To assist this task of construction various test have been suggested which, if applicable to the case under consideration, may prove helpful or even conclusive. Such are :
(a) It will be held to be a penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss which could conceivably be proved to have followed from the breach.
(b) It will be held to be a penalty of the breach consists only in not paying a sum of money, and the sum stipulated is a sum greater than the sum which ought to have been paid...
(c) There is a presumption (but no more) that it is a penalty when a single lump sum is made payable by way of compensation, on the occurrence of one or more or all of several events, some of which may occasion serious and others but trifling damage.
On the other hand :
(d) It is obstacle to the sum stipulated being a genuine pre-estimate of damage, that the consequences of the breach are such as to make precise pre-estimation almost as impossibility. On the contrary, that is just the situation when it is probable that pre-estimated damage was the true bargain between the parties.
Further the following extract from the Book "McGregor's Damages" was also brought to our notice :
442. Where the parties to a contract, as part of the agreement between them, fix the amount which is to be paid by way of damages in the event of breach, a sum stipulated in this way is classed as liquidated damages where it is in the nature of a genuine pre-estimate of the damage which would probably arise from breach of the contract. This is the modern phrase used to define liquidated damages, first appearing in Lord Robertson's speech in Clydebank Engineering Co. v. Don Jose Ramos Yzquierdo Y Castaneda and later incorporated by Lord Dunedine in his list of "rules" in Duniop Pneumatice Tyre Co. v. New Garage and Motor Co. since when, as part of these "rules", it has often been resorted to. The intention behind such a provision is generally to avoid, wherever the amount of the damage which would probably result from breach is likely to be uncertain, the difficulty of proving the extent of the actual damage at the trial of the action for breach.
443. A stipulated sum will, however, be classed as a penalty where it is in the nature of a threat fixed in terrorem of the other party. This is again the modern phrase, also to be found in Clydebank Engineering Co. v. Don Jose Ramos Yzquierdo Y Castaneda, this time in Lord Halsbury's speech, and also incorporated by Lord Dunedin in his list of "rules" in Dunlop Pneumatic Tyre Cop. v. New Garage and Motor Co. The intention behind such a provision is generally to prevent a breach of the contract by establishing a greater incentive for its performance. The onus, however, of proving that a stipulated sum is a penalty rather than liquidated damages is upon the party against whom the stipulated sum if claimed.
444. The same sum cannot, in the same agreement, be treated as a penalty for some purposes and as liquidated damages for others. For if the same sum is extravagant and unconscionable in relation to one breach to which it applies it cannot be a genuine pre-estimate, and the sum becomes branded as having a penal nature which it cannot lose in relation to other more serious breaches to which it also applies. It adds nothing to say that it would not have been a penalty as to the other breach or breaches, or that it is the other breach or breaches that have in the event occurred. Nor will the court make any serverance for the parties, once they have tampered with penal stipulations.
He urged the following arguments :
(i) The sum deducted by BSNL from the price payable to the appellant is a graduated sum, relatable to the extent of delay in supplying the goods. Hence it is in the nature of liquidated damages and is not penalty.
(ii) Lower Authorities have rejected the refund claim/or upheld the rejection of refund claim on the basis of decisions which were rendered under old Section 4, which was in force up to 30-6-2000.
(iii) The position obtaining under the old Section 4 which was repealed w.e.f. 1-7-2000 is different from the scheme of new Section 4. The value was deemed to be the price based on wholesale price, subject to adjustments. Normal value could be and usually was different from the actual wholesale price.
(iv) Under the new Section 4, the concept of normal value is done away with. Instead, transaction value for "each removal" is treated as the value on which duty is payable. Explanation to Section 4(1)(a) also emphasises price actually paid to the assessee for the goods sold, less duties and taxes.
(v) Under Section 4(3)(d), transaction value has been inter alia, defined as "price actually paid or payable". If the price in the order or the invoice is different from the price actually received by the assessee, the latter would be the normal value. This phrase has come up for consideration under the Customs Valuation cases, wherein the consistent view is that the price actually paid by the importer in India is the transaction value. Eicher Tractor Ltd. v. CC 2000 (122) E.L.T. 321 (Supreme Court) is the most leading decision on this issue. By parity of reasoning, price actually received by the appellant ought to be the transaction value and not the contracted price.
(vi) One of the grounds of rejection of refund claim is that there is no provision for deduction of LD from transaction value.
(vii) It is submitted that such a provision is unnecessary and would be superfluous. From the definition of "trasaction value" it is evident that the legislature has intended to exclude any sum which is to actually received by the assessee or is receivable by the assessee. The Board itself, in the context of discount M. F. (D.R.) F. No. 354/81 /2000-TRU, dated 30-6-2000 noted that even though discount was not specified as specific deduction from the "transaction value" was deductible on the ground that upon allowing discount, the price actually payable to the assessee stood reduced.
(viii) By parity of reasoning, it is submitted that when LD is recovered by the supplier for whatever reason by exercise of a overriding right, the price actually payable to the assessee is reduced.
(ix) In this case, there is no dispute that appellant UTL has reduced payment less LD which includes Central Excise duty on LD. Even BSNL has confirmed this fact by its letter. Thus the department itself has not raised the issue of doctrine of unjust enrichment.
(x) When the factum of receipt of cesser payment is not in dispute, it would be entirely within four corners of "transaction value" definition to treat LD as deductible from the price which is not received, so as to determine the price actually received.
4. The learned JDR reiterated the orders of the lower Authorities.
5. We have gone through the records of the case carefully. In the context of old Section 4 of the Central Excise Act, 1944, the Tribunal in the case of CCE, Calicut v. BPL Telecom 2003 157 E.L.T. 35 (Tri.-Bang.) has held that liquidated damages for delayed supply of goods is not permissible deduction from the assessable value. In our view the ratio of this decision cannot be made applicable for cases where the value is in terms of Section 4 which came into effect from 1-7-2000 for the reason that under the old section, the concept of normal price was enforced but in terms of new Section 4, what is important for assessment purposes is the transaction value. The definition of "transaction value" is re-produced below :
Section 4(3)(d) : "transaction value" means the price actually paid or payable for the goods, when sold, and includes in addition to the amount charged as price, any amount that the buyer is liable to pay to, or on behalf of, the assessee, by reason of, or in connection with the sale, whether payable at the time of the sale or at any other time including, but not limited to, any amount charged for, or to make provision for, advertising or publicity, marketing and setting organization expenses, storage, outward handling, servicing, warranty, commission or any other matter; but does not include the amount of duty of excise, sales tax and other taxes, if any, actually paid or actually payable on such goods.
From the above definition, we find that the transaction value represents price actually paid or payable for the goods. In the present case, even though a price is fixed for the goods, as per the contract the goods should be delivered on a particular date and when there is delay in delivery, the price is reduced depending on the delay. As a result of above adjustments, the appellant has received lesser payment of transaction value. When the price at which the goods are transacted has to be taken, there is no question of any deduction. In the present case, due to the provision of liquidated damages, the price actually payable is reduced and it is the reduced price which is to be taken for Central Excise duty purposes in the light of the definition of transaction value. In the present case, we find that the liquidated damage is 0.5% of the invoice value per week of delay. Considering the quantum of the liquidated damages and taking into account the submissions of the learned Advocate on the nature of the liquidated damages, we are of the view that in the present case, it is in the nature of compensation payable for delay caused in the supply of goods, not in the nature of penalty. Therefore in terms of the definition of transaction value, duty is payable only on the price arrived at by taking into account the liquidated damages. Hence we allow the appeal with consequential relief.
(Pronounced in the open court on 13-9-2006)