Customs, Excise and Gold Tribunal - Mumbai
Telco Ltd. vs Commissioner Of Central Excise on 8 May, 2000
Equivalent citations: 2000(70)ECC291, 2000(121)ELT224(TRI-MUMBAI)
ORDER G.N. Srinivasan, Member (J)
1. This is an appeal filed against the decision of the Commissioner of Central Excise and Customs (Appeals), Pune made in Order-in-Appeal no. P/331/98, dated 30-12-1998 whereunder the Commissioner had dismissed the case of the appellants and confirmed the Order-in-Original passed by the Assistant Commissioner of Central Excise, Pune-III Divn. holding that the assessable value of the product declared by the assessee did not appear to be the sale consideration under Section 4(1) (a) of the Central Excise Act that the price was not reflecting the true value and that the normal price was required to be determined in terms of Rule 5 of the Valuation Rules in terms of Section 4(l)(b) of the Act.
2. The appellants are manufacturers of wide range of commercial motor vehicles/chassis and cars known as motor vehicles. Such motor vehicles are manufactured in the appellants factory at Jamshedpur in the State of Bihar, at Lucknow in the State of U.P. and at Pimpri in the State of Maharashtra. The dispute in the present appeal relates to valuation of the motor vehicles manufactured and cleared upon payment of the Central Excise duty from the appellants, Pimpri Works. The appellants sell their motor vehicles to customers through country wide network of dealers. They sell the motor vehicles to such dealers who resell the same to the ultimate customers. The dealership agreement provides for the scope of the territory under which the agreement would apply. Duty of the dealer service to be provided by the dealers to the customers. Stock to be maintained, terms of delivery payment of price, advertising and other motors. The agreement, it is claimed, provides that the relationship between the assessee and the dealers was at arms length and on principal to principal basis. The department in May, 1990 raised certain queries by its letter dated 23-5-1990 about the expenses incurred by the dealers or after sale service and advertising for the vehicles manufactured and sold by the appellants to such dealers. The appellants clarified position by its letter dated 13-6-1990. It was inter alia mentioned by the appellants as well as the dealers that the cost of services is shared by the appellants and the dealers. It was further clarified that the cost of labour in rendering such free services was borne by the dealer out of their retailing profit. In July 1996 by letter dated 31-7-1996 again the range Superintendent raised certain queries. It was answered by the assessee's letter dated 4-8-1996. Finally a show cause notice was issued on 1st February, 1997 proposing to revise the value adding the labour charges reversed to the servicing dealer by the manufacturer who took action to recover the amount from the concerned selling dealer. The detailed reply was filed by the company by its letter dated 14-5-1997. The Assistant Commissioner passed an order dated 27-2-1998 rejecting the contentions raised by the assessees. He also referred to judgment of the Supreme Court in the case of Philips India Ltd. v. CCE -1997 (91) E.L.T. 540 as also judgment of the Madras High Court in the case of Standard Electric Appliances v. Supdt. of CE -1986 (23) E.L.T. 302. After distinguishing these two cases he confirmed the demand and directed the assessees to pay Rs. 4,28,96,830/- and Rs. 3,58,237.51 towards automobile cess and imposed a penalty of Rs. 1,00,000/-. Against the said order passed by the Assistant Commissioner an appeal was filed before the Commissioner (Appeals), Pune who confirmed the said order after referring to 'owners manual and service book' and also the difference in clause 19 of the agreement and clause 7 'at his own expense' are absent. In clause 19 'on his own expense' are absent. Therefore there is a financial flow-back. He distinguished the other cases. He confirmed the order passed by the lower authority. Hence the present appeal.
3. The learned Counsel Shri V. Sridharan appeared for the appellants and Shri Deepak Kumar, learned SDR, appeared for the department.
4. Shri Sridharan emphasizes that the agreement between the appellants and their dealers are at arms length. The assessees sell motor vehicles to their dealers and such dealers resell the same to the ultimate customers. The relationship between the dealer and the assessees was at arms length. The dealership agreement provides inter alia for establishment of service centres as it is mentioned in clause 7 thereof. The agreement also provides for maintenance of records, stocks, limitation, security deposit, organizational matters of the dealers, booking of orders, procedure for booking under dealers price, retail price, exclusive arrangement, price fixation, specifications warranty, trade marks advertising etc. He states that when the department query of 6th August, 1996 (Exhibit G) about after sale services it was emphasized by the assessees that in view of its large scale production and sales dealers network being not adequate to take care of increase customer needs, free sale services were provided and he emphasizes that whenever free sale services were rendered by these authorised service centres, the free service labour charges are being paid to the servicing dealer by the assessees side by side taking action to recover the said amount from the selling dealer. He states that there is no fi- nancial draw-back to the assessees. What the assessees do is where there is no service centre is provided by the dealer the labour charges are recovered from the selling dealer and paid to the serving dealer in respect of the after sale service charge. There is no camouflage in these cases. The entire work is done by the selling dealer only in respect of the after sale services. He further states that the entire case has been fully covered by the decisions of the Tribunal in the case of Bajaj Auto Ltd. v. CCE in Appeal No. E/2568-V/98 (Order No. C-II/2174/WZB/99 issued on 25.8.1999) and Mahindra & Mahindra Ltd. v. CCE - 1998 (25) RLT 547, and the judgment of the Supreme Court in the case of Philips India Ltd. v. CCE 1997 (91) E.L.T. 540. He also referred to the judgment of the Tribunal at Delhi Court-I in CCE, Chandigarh v. Punjab Tractors Ltd. in Appeal No. E/3209/91A. He emphasised the fact that the Supreme Court has dismissed the appeal filed by the government against the decision of the Tribunal in Mahindra & Mahindra Ltd. - 1998 (25) RLT 547 in civil appeal no.4881-4887/98, judgment dated 15-3-1999.
5. As against this, learned D.R. would argue that the facts in the instant case is different from the facts in the case of Mahindra & Mahindra Ltd. (Supra). He states that in that case it was held that dealers were interested in offering free sale facilities to customers. That is not the case here. He further states that in the instant case in clause (7) of the agreement the words "at his own expense" figuring in clause (19) are absent. Therefore it is more or less a cover or a camouflage which has a financial flow back to the assessees. He states that here the relationship between the assessees and the dealer is not on principal to principal basis or at arms length. In this case the dealer is only acting as an agent of the assessees. If it is not so, why the special instructions by Tatas especially in paras 5,6 & 7 are provided, if it is sold only by the dealer ? He therefore says that the impugned orders should be upheld.
6. We have considered the rival submissions. In this case the appellants are manufacturers of motor vehicles, who have variety of dealers throughout the country. In para 11.2 of the statement of facts it has been stated as follows:
"The Appellants sell Motor Vehicles/Chassis to customers through a country-wi = network of Dealers. The Appellants have entered into a Dealership Agreement with each Dealer. The Dealership Agreement inter-alia provides for territorial scope, dealers duty, dealers organization, service to be provided by dealers to customers, records / stocks to be maintained, terms of purchase, delivery and payment, price, use of Trade Marks, copy rights and trade names etc. The agreement also clearly brings out the fact that this agreement does not constitute the dealer selling agent of the Appellants in the assigned territory. The transaction between the Appellants and the dealers are accordingly on principal to principal basis i.e. the Appellants sell the vehicles to the dealers in wholesale and the dealers in turn resell the same to the customers in retail at their own risk and cost. The dealers profit/margin on retail sale of motor vehicles is the difference between the Maximum Retail Price (MRP) fixed by the Appellants to the dealer. This retailing profit/margin earned by dealers varies from model to model. It is not in dispute that the Department was/is fully aware of this factual position at all times and the Appellants have also provided copies of dealership agreements to the Department on several occasions."
Para 7 of the Dealership Agreement provides as under:
"7. The Dealer shall, in accordance with the Service Procedure prescribed or to be prescribed by the Company from time to time, provide, and shall arrange with his branch-offices, Sub-Dealers, workshops, service-centres and spare parts outlets to provide, adequate and satisfactory service for the said products used in the said territory including those which have not been sold by him. The Dealer shall establish additional service-centres, workshops and spare parts outlets in the said territory if in the opinion of the Company it is necessary to establish such additional facilities. If the Dealer fails to do so, the Company shall be entitled, without prejudice to its other rights and remedies against the Dealer, either directly or through any other party, to establish such facilities or additional facilities in the said territory."
In para 19 of the Dealership Agreement it is stated as follows :
"19. The Dealer shall advertise and display at his own expense the said products and service facilities in the said territory to such extent and in such manner as may be considered necessary by the company and the nature and method of which shall be subject to the company's general approval and supervision. The Dealer shall display conspicuously at, in or on his premises only such trade marks, names or descriptions as may be authorised by the company and, upon termination of this Agreement, shall discontinue representing himself to be the Company's dealer in respect of the said products and servicing thereof and shall forthwith remove all the said trade marks, names and descriptions and return to the Company without compensation all such goods which may have been loaned to the dealer by the company in connection with the Dealership. The Dealer shall not permit any advertising matter objectionable to the Company to be displayed, nor advertise, nor trade in such a way as in the opinion of the Company may cause annoyance or injury to the Company or any of its dealers or misrepresentation to the public."
It is useful to refer to what is contained in the show cause notice dated 1-2-1997, para 10 of which reads as follows :
"10. M/s. Telco provides after sale services to its customer and it is a part of sales contract for sale of vehicle to the customer. As the obligation of providing after sales services is of M/s. Telco, it definitely enriches the marketability of the vehicles sold by them because in the absence of such facility the customer had to incur the cost of services themselves, which would have resulted in paying the lesser price of the vehicle to that extent. This fact is once again proved considering that material cost for after sale service is reim bursed by M/s. Telco only. It appears that M/s. Telco had adopted a modus operandi by which the part of the value of vehicle represented by after sale services is being separated from assessable value by adding it in the dealer's margin. It appears that the dealer's margin constituted of two parts namely the cost to be incurred on account of free after sale services and the part representing their real margin. The part representing labour cost of after sale service is actually an expenditure incurred by dealer on behalf of M/s. Telco and thus they are under obligation to incur it, hence such part of dealers margin is nothing but a part of price changed by M/s. Telco from the dealers. If Telco would have maintained their own service centre, in that case the cost incurred for after sale service must have increased their cost of production and must have been reflected in their assessable value by way of increase in the assessable value."
It is also useful to refer to what is stated in the reply to query dated 23rd August, 1996 by the assessees letter dated 25-8-1996 :
"In view of our large scale of production and sales and the dealer network being not adequate to take care of increased customer needs, we, over the years, have authorised various service centres throughout the country to take care of the free service activities on TATA model vehicles besides other needs of the customers. Whenever free services are rendered by these authorised service centres, the free service labour charges are being paid to the servicing dealer by us side by side taking action to recover the said amount from the concerned selling dealer. In face, keeping in consideration the important fact that sizable quantum of our vehicles are serviced by the authorised service centres mainly due to locational advantages preferred by the customers and such authorised service centres rendering free service should get their due payment for such service in time, we have estimated and fixed the labour charges for free service, effecting payment to such service centres directly from our end, and recovering the same from the concerned selling dealer."
7. What the assessees do is where the authorised dealer has not provided for any extra service centre as required under clause 7 of the dealership agreement, and such extra facilities or additional facilities provided by the assessees then when such additional service centres provided the labour charges, such additional service centres should be reimbursed the labour charges in respect of free sale service. That amount representing the labour charges is collected by the assessees and from the dealers and reimbursed to a person who has opened such additional facilities. That is what being sought to be incorporated in this case towards the value of the order. In fact there is no camouflage in this. Clause 7 clearly states that dealer should establish additional service centres. If he does not do it, the assessees would be entitled to establish such facilities in the said territory. The term "at his own expense" found in clause 19 is clearly enshrined here in the term without prejudice to other rights and remedies against the said dealer and that does not distinguish this case from other cases.
8. In this connection it is useful to refer to the decision made in the case of Bajaj Auto Ltd. v. CCE in appeal No. E/2568-V/98-Bom. There in the said case para 2 thereof clearly mentions the facts of the case :
"2. Assessee manufactures 2/3 wheeled motor vehicle and parts thereof. Appellants sell such vehicles to dealers appointed by the appellants. The transactions with the dealers are on principal to principal basis and the appellants and dealers are not related persons within the meaning of Section 4(4)(c) of the Central Excise Act. The title on the vehicle passes from the appellants to the dealers on sale thereof at the factory gate and the price is the sole consideration for the sale. The vehicles are sold at ex-factory price to the dealers and the assessable value determined under Section 4(l)(a) of the Act for the purpose of payment of Excise duty The appellants had dealings with number of dealers numbering about 325 located in different parts of India. The dealers maintain their own show room from where vehicles are sold in retail to the ultimate buyers/customers. These dealers inter alia are also required to maintain the inventory of spare parts and render after sales services and attend to their individual customers' complaints. For this purpose, the dealers employ mechanical and technical persons on their roll. From time to time some dealers request for the service of the engineers of the appellants for supervising their repair jobs undertaken by the dealers and to train mechanical and technical staff so as to attend to customer complaints and so as to carry out after sales services correctly and properly. These persons deputed by the appellants for rendering the aforesaid services to the dealers are called service engineers. The appellants have employed number of engineers who are deputed to the dealers at the option of the dealers. Not all the dealers require services of the service engineers. Such engineers are stationed at the dealers' show room for a limited period. After assignment is over those engineers return to the factory of the appellants. If required the same person at a later appointed time may be deputed to the same dealer for the length of time his services are required by the dealer. For rendering of such services by the appellants service engineers, appellants raises debit notes on the dealer for the services rendered by such engineers. The dealer accordingly reimburse the debit notes for the amount for which debit notes are sent."
While dealing with the question regarding Excise duty payable on the amount received by the appellants from the dealers towards the assessees charges for deduction of service engineers, the Tribunal has held in paragraph 10 in commenting about the Bombay Tyre International case. After noting the said case we have held as follows:
"In the aforesaid case the Supreme Court was contemplating the inclusion of the after sales services charges only when the goods are sold at the factor)' and the valuation is done on that basis."
Here the goods have been sold to the dealers which relationship is at arms length and on principal to principal basis. [Please see clause l(a) of the Agreement]. The vehicles have been transferred absolutely to the dealers from where the dealer sells it to the customers. The dealer is not acting as an agent. The goods have been purchased by the dealer at arms length from the manufacturer on free to free basis. What he does after purchases is slightly enhances the marketability of the products at the hands of the dealer only. Commenting on the optional after sale service and knowledge of the service charges free delivery inspection, about the knowledge the Tribunal further held in para 12 as follows:
"In the first place the goods have been sold by the manufacturer, i.e. the assessee to the dealers. What happened to the goods i.e. post removal stage cannot be taken into consideration for the purpose of assessment. The cost incurred by the manufacturer before clearance at the factory gate which is admittedly had taken place in this case can only be included for the purpose of valuation. The Bombay Tyre International's case decided by the Supreme Court will not be applicable to the facts of this case as in that case, the court was concerned about the cost incurred by the manufacturer - (unlike in this case where it is incurred by the dealer after the sale of the clearance) - prior to the clearance of the goods and therefore, the observations of the Supreme Court have to be confined to the facts of that case."
In this case also the goods have been sold i.e. after clearance. After sales services have been given it only enhances the value of the products in the eyes of the intending purchaser not only for the benefit of the assessee but also ensures for the benefit of the dealer for, the dealer got sale more at his end and gained a larger profit. This is what the Supreme Court has held in the case of Philips India Ltd. v. CCE 1997 (91) E.L.T. 540 at para 6. We are therefore of the view that the Philips India Ltd. case decided by the Supreme Court as explained by the Tribunal in the case of Mahindra & Mahindra Ltd. v. CCE -1998 (25) RLT 547 will be applicable.
9. The learned DR emphasizes the fact about the supply instructions given by the assessees especially regarding that no warranty claim should be entertained unless all services at the time of claim by the vehicles authorised dealers. He says that the assessee is a seller and the ultimate customer is the purchaser from the assessee and that the dealer is only an agent of the assessees. This argument/in our view, has to be rejected because in the agreement at clause l(b) it is stated that the products specified in clause 9 shall be sold to the dealer by the assessee for resale by the dealer within the territory which completely answers the argument made by the DR. The reference to "at his own expense" in clause 19 and absence of the same in clause 7 does not entitle the assessing authority to add after sales service cost to the value of the final product was done in this case. We are of the view that the department's case is not supported by law and facts and hence the appeal stands allowed setting aside the impugned orders, with consequential relief, if any, according to law.