Customs, Excise and Gold Tribunal - Delhi
General Industrial Controls (P) Ltd. vs Collector Of Central Excise on 13 September, 1990
Equivalent citations: 1991(52)ELT449(TRI-DEL)
ORDER S.V. Maruthi, Member (J)
1. This appeal arises out of an order-in-original No. 08/CEX/1989 dated 21st June, 1989 of the Collector.
2. The appellants are engaged in the manufacture and sale of 'Timers' and Time Switches' since 1973. They entered into a distributorship agreement on 18th June, 74 with M/s. Larsen & Toubro Limited (hereinafter called as buyer) under which the entire production of 'Timers and Time Switches' were to be sold to the buyer who in turn sell the same in the market. Under the agreement it is provided that the buyer would be given 30% discount on the list selling price. Prior to Dec., 1982 the appellants were exempt from licensing control. Therefore, while applying for licence they filed the agreement dated 24th July, 1980 on 10th November, 1982. They were granted L-4 licence. The appellants also applied claiming benefit of Notification No. 120/75 which was granted on 23rd December, 1982. Again the appellants filed copies of agreement dated 24th July, 1980 and 1st July, 1985 on 23rd July, 1985. The respondent, though there were distributorship agreements, granted the permission to avail the benefit of Notification No. 120/75.
3. While so, on 30th June, 1987, the Collector issued a show-cause notice demanding differential duty of Rs... under the proviso to Section 11A. The allegation in the show cause notice is that the appellants has contravened the conditions of Notification No. 120/75 by selling its entire production to the buyer and also allowing discount of 26 to 30%, and as per clauses 2.01 to 2.10 of the agreement, the buyer undertook the responsibility, including sales promotion, market survey, employment of technical personnel, preparation of sale forecasts etc. to promote marketability of the goods and thus the discount was given to cover these expenses by the buyer. It was also alleged that 16% of the discount allowed to the sole-distributor flowed indirectly back to the assessee in the form of expenses incurred by the buyer as per clause 2.01 to 2.10. Since such expenses ought to have been incurred by the appellants for marketing its products, the said amount is includable in the assessable value. It is further alleged that the appellants suppressed the above facts and therefore, it was proposed to determine the assessable value under Rule 5 of Central Excise Rules.
4. On receipt of the reply and after giving personal hearing to the appellants the demand was confirmed and a personal penalty of Rs. One lakh was imposed, against which the present appeal was filed.
5. The Collector while confirming the demand observed that the department has gone by the declaration and accepted the request for allowing them to discharge their duty liability on the basis of invoice value. He also held that declaration made by the appellants in their letter dated 17th December, 1982 is subsequently found to be wrong. Therefore, the department is justified in invoking the proviso to Section 11A. He observed that the fact that copies of agreement between the appellants and the buyer were supplied to the department while taking out a licence or subsequently thereafter is not very relevant under the law. Therefore, he found that the show cause notice is within the period of limitation.
6. As regards the merits he held that functioning of market of the product would be the normal responsibility of the manufacturer, and, but for appointing a sole distributor the expenses for marketing the products would have been incurred by the assessee company. The obligation passed on to the buyer in their capacity as a sole-distributor require them to undertake several activities relating to sales promotion, including marketing services, employment of personnel for the promotion of sale, appointment of authorised stockist, submission of report regarding market position and sale forecast which are rendered exclusively for the actual sale of the goods and which the manufacturer would normally have undertaken himself. Therefore, he drew the conclusion that the price is not the sole consideration and the discount allowed is in the nature of compensation for services rendered.
7. On the question of quantum of consideration he held that the estimate of 14% indicated by the buyer is accurate enough to form the basis for working out the differential duty liability.
8. Challenging the above order the appellants raised the following contentions:-
(i) that the agreement of distributorship is an agreement for sale on principle to principle basis,
(ii) that show-cause notice is barred by limitation,
(iii) and that the finding that 14% of the expenses incurred by the buyer towards advertisement and other sales expenses in respect of goods purchased from the appellants is perverse, as such expenses have no relevance to the value of goods sold by the appellants ex-factory as the demand solely relates to the price as so determined for such sales ex-factory and nothing more.
9. Elaborating the agreements Shri Hidayuttalah submitted that the word 'under-take' appearing in clause 2 of the agreement as well as the so-called obligation has to be interpreted in the context of, inter alia, following:-
(i) Several clauses provide for decision to be made by the distributor at their sole discretion/opinion. The substantive clauses in effect and substance do not impose any obligation or undertaking because the distribution decision cannot be challenged or enforced in a suit for specific performance.
(ii) The appellants' sale form a tiny portion of the total sales of L & T. Therefore, the expenses of resale and sale promotion of L & T are towards selling their own purchase rather than promote specifically appellant's goods. This is because larger numbers of other goods have to be sold by the distributor and so the selling and promotional expenses are attributable to the larger quantity. L & T do not employ any staff to exclusively sell the appellants' goods.
(iii) The appellants are small manufacturers who supply their entire output as contracted for. M/s. L & T has a very large purchasing and distribution network. If the distributor lifts the entire quantities contracted for and pays the total purchase price, the appellants in view of their size can expect nothing more from the transaction even if the distributor makes no attempt to resale the goods or prompt sale during the pendency of the contract because the option to purchase such quantity as they want is exclusively with M/s. L & T.
(iv) If during the pendency of the agreement the distributor reduce the quantum of purchases contracted for because he has not resold the contracted quantity, the appellants cannot be sued for breach of contract for failing to lift the contracted quantities.
10. The consideration which is to flow back under Rule 5 has to be viewed not in the context of bare clauses of the agreement but has to be seen in the context of the actual conduct of the parties. The economic size of the contracting parties and whether the real consideration (not a mere consideration) can actually flow from buyer to the seller firm. There can be no presumption that a consideration flow without investigating into the business dealing to ascertain whether it could reasonably flow.
11. Clauses 2 and 6 of the contract are in the nature of stipulation/condition and not a consideration as understood in law, because, in the context they do not confer any benefit to the appellants or deprive M/s. L & T of anything.
12. In support of his contention that the show cause notice is barred by limitation Shri Hidayuttalah contended that the agreement between the appellants and the buyer dated 24th July, 1980 was brought to the notice of the department at the time when they had applied for licence and also at the time seeking permission to avail benefit of the Notification No. 120/75 (on 10th Nov., 1982). The department was well aware of the agreement and after considering the agreement only they have permitted the appellants to clear the goods under the Notification No. 120/75. When the appellants applied for the grant of extra gate-pass in favour of the buyer the Asstt. Collector granted the same on 16th March, 1983 which shows that the department was well aware of the fact that the appellants were selling entire production to the buyer. On 23rd July, 1985 the appellants brought to the notice of the department the agreement dated 24th July, 1980 and also the agreement dated 1st July, 1985. In spite of these agreements which were in the knowledge of the department the department permitted the appellants to clear the goods under the Notification No. 120/75. In the month of April, 1985 the department classified the Switches under T.I.61, therefore, the appellants had to file a classification list ... not entitled to avail the benefit of Notification 120/75 in respect of switches. While filing the classification list from April 1st, 1985 to 14th September, 1985 the appellants claimed deduction of 30% discount which was approved by the department. Subsequently, after issuance of Trade Notice No. 46/86 dated 13th March, 1986 the appellants once again started availing benefit of Notification 120/75 as per permission granted by the department. Therefore, from time to time starting from 10th November, 1982 till 1987 the appellants were bringing to the notice of the department the existence of the distributorship agreement and the department was aware of the terms of the agreement. Therefore, there is no suppression of any fact much less the fact that they are selling the entire production to the buyer and that they were paying 30% discount to the buyer. Therefore, the allegation that there is a suppression of the above facts is based on no material. Consequently, the show cause notice is barred by limitation.
13. The first question that arises for consideration is whether the expenses incurred by the buyer on advertisement under clauses 2.01 to 2.10 be deducted from the discount of 30% given to them on the ground that these expenses are incurred solely on behalf of the appellants.
14. The answer to the above depends on the nature of the distributorship agreement. If the terms of agreement indicate that the transaction is from principal to principal ami there is no extra commercial consideration and that there is no flow back from the buyer to the appellants then the expenses incurred by the buyer under clauses 2.01 to 2.10 cannot be deducted from the discount paid to them. If the agreement is a camouflage and nothing but an agency agreement, then the department is justified in deducting the actual expenses incurred on advertisement by the buyer from 30% discount given to them. In this context the following terms of the agreement are relevant:
"2.08 Not to enter into contracts on behalf of the Manufacturers unless specifically authorised in writing to do so; but to purchase he products on their own account as between Principal to Principal basis.
3.02 In respect of sales covered by this Agreement the Manufacurers shall from time to time in consultation with the Distributors fix the list prices of all the Products covered herein or deemed to be covered herein on F.O.R. Poona basis and the Distributors and/or their sub-dealers or sub-distributors, except with the previous consent of the Manufacturers, shall not sell the Products or any of them to any user at a price or prices higher than the Manufacturers' said F.O.R. Poona list prices current at the time of such sale plus the actual cost of carriage, loading, freight, insurance, local taxes and other charges incurred.
4.01 The Manufacturers shall allow a discount of 30% to the Distributors calculated on their list selling prices as fixed in accordance with Clause 3.03 above but the rate of discount may be revised or altered from time to time by mutual agreement.
5. ADVERTISEMENTS: The advertisement and sales promotion budget and media shall be determined by Distributors. Distributors shall alone be responsible for carrying out the advertisement campaign and shall bear the cost of such advertisement. The Distributors shall further be responsible for designing and producing adequate sales literature the cost of which will be borne by the Distributors entirely. The Distributors shall not include in such advertisement and/or other sales promotional media any technical data without the same being approved in consultation with the Manufacturers prior to its publication. The Manufacturers shall not withhold their approval on such technical data unreasonably.
7. PLACING OF THE ORDERS: Distributors shall place orders with the Manufacturers from time to time for their requirement of the said products and subject to hereinafter provided, each sale by the Manufacturer shall be deemed to be made pursuant to a contract of sale (which will incorporate and be governed by such conditions of sale as may be mutually agreed to by and between the parties and set out therein) current at the time of acceptance by the Manufacturers of the order provided always that Manufacturers with the previous written consent of the Distributors shall be entitled to substitute other conditions of sale and whenever and so often the conditions are substituted, modified or varied, the same shall not be applicable to and govern any contract of sale of the said products in respect of ... Distributors' order has been accepted prior to the ... on which such substitution or modification is agreed to by the Distributors."
14. The above clauses of agreement ... contract of sale and purchase orders to be placed by the buyer. The purchase of the product is on account of the buyer and is from Principal to Principal. The buyers are prohibited from entering into the contract on behalf of the appellants. The relevant purchase orders and contract of sale are not before us. The real test is whether under the agreement, property in goods passes to the distributors. In other words whether the sale had been on Principal to Principal basis or on the basis of an agency agreement for reaching out the wholesale buyer of the manufacturers' product, the nomenclature of the agreement is irrelevant [UOI v. Mahindra & Mahindra Ltd. reported in 1989 (43) ELT 611]. It is to be seen whether the buyer is purchasing the product from the appellants on its own account for resale to the purchaser, whether the buyer had any authority to bind the appellants and whether the ownership in goods passed to the buyer on delivery of the goods. These facts can be ascertained only from the contract of sale and the purchase order referred to in clause 7 of the agreement. The effect of clauses 2.01 to 2.10 has to be examined in the light of the contract of sale and purchase orders. If the contract of sale and purchase discloses that the transaction is from Principal to 'Principal and the property in goods passed to the buyer as soon as the goods are delivered clauses 2.01 to 2.10 (i.e. expenses incurred by buyers) do not have any effect on the transaction and it cannot be said that these activities are carried on, on behalf of the manufacturer and part of the expenses incurred on account of these activities cannot be included in the assessable value of the appellants. Therefore, we direct the Collector to call for the relevant purchase orders and the contract of . sale and the relevant price-lists and examine whether the sale to the buyer is an out and out sale. If it is so, the expenditure incurred on account of the activities mentioned in clauses 2.01 to 2 10 are not to be included in the assessable value of the appellants. We may also point out that by an advertisement a wholeseller attracts the customers and if as a result of increasing his business the demand for the product of manufacturer also increases, the advertising by the wholeseller cannot be said on behalf of the manufacturer [Standard Electric Appliances v. Suptd. C. Ex., reported in 1986 (23) ELT page 302 Madras].
15. The next question to be considered is whether the show cause notice is barred by limitation.
16. We have also extracted the allegation made in the show cause notice in the above paragraphs. The crux of the matter is that the appellants suppressed the fact of selling the entire goods to the buyer and that the sale vitiated by extra commercial consideration namely, that 16% expenditure incurred on account of advertisement is paid as part of 30% discount to their buyer thus they have wrongly availed the benefit of Notification No. 120/75.
17. We have already pointed out in the earlier paragraphs that the appellants brought to the notice of the department the agreement dated 24th July, 1980 on 20th November, 1982. The agreement categorically states that the buyers are appointed as their sales distributors and that they are paid 30% discount. Clauses 2.01 to 2.10 of the agreement categorically states the obligation to be carried on by the buyer. On 23rd December, 1982 the ... granted permission to the appellants to avail the Notification 120/75 in spite of the agreement. On 16th March, 19...the department permitted to issue a separate extra gate-pass in favour of the buyer which indicates that it was within the knowledge of the department that the appellants are selling their entire production to the buyer. Again on 23rd July, 1985 the appellants sent the agreement dated 24th July, 1982 and 1st July, 1985 to the department in spite of which the department permitted the appellants to avail the benefit of Notification 120/75. When the department classified Switches under T.I. 61 the appellants filed a classification list claiming 30% for sales in favour of the buyer which was approved by the department.
18. From the above it follows that existence of the agreement and the payment of 30% discount to the buyer and the obligation to be carried out by the buyer under clauses 2.01 to 2.10 and the fact that the appellants were selling the entire production to the buyer was within the knowledge of the department right from 10th November, 1982 till the date of issue of the notice. Therefore, the allegation of suppression of fact in the show cause notice is contrary to the material fact on record and unsustainable. Therefore, we are of the view that the show cause notice is barred by limitation. We are also of the view that the department issued the show cause notice in 1987 after changing their view on the interpretation of the agreement and, changing the view on the interpretation of the agreement cannot be the basis for invoking the larger period of limitation. Consequently, we hold the show cause notice is barred by limitation.
19. As regards addition of 14% towards expenditure incurred under clauses 2.01 to 2.10, it is based on no material and is an arbitrary finding. There are no statistic available as to the actual expenditure incurred under the relevant clauses referred to above. As pointed out by Shri Hidayuttalah the buyer is selling not only the product of the appellants, but also the products of various other manufacturing units. Therefore, it is difficult to aportion any expenditure exclusively in so far as the appellants' products are concerned. Therefore, we set aside the finding of the Collector. Consequently, we allow the appeal and remand the same to the Collector for the limited purpose of ascertaining the nature of transaction in the light of the contract of the sale and purchase orders and the price-lists filed by the appellants from time to time.