In this article, I have discussed a recent judgement of the Supreme court and also shared my views / confusion in regards to the same. Request the readers to express their valuable views in this regard.
It is a common industry practise to allow discounts to customers for making prompt payments, commonly referred to as cash discounts.
Cash discounts allowed by manufacturers are claimed as deduction while calculating the assessable value (‘AV’) for duty calculation under section 4 of the Central Excise Act, 1944 (‘CE Act’).
The Supreme Court (SC) recently on 25 August 2015 pronounced a ruling on the matter appealed before it in the case of M/s Purolator India Ltd v/s Commissioner of Central Excise Delhi – III (Civil appeal no. 1959 of 2006). The case dealt with treatment of cash discount that was agreed upon at the time of sale but was not actually allowed to the customers.
Brief facts of the case and the decision of the apex court are discussed below.
Facts of the Case:
The assessee had claimed deduction of cash discounts while calculating the assessable value (‘AV’) for duty calculation under section 4 of the Central Excise Act, 1944 (‘CE Act’). The department disallowed deduction of cash discount which was agreed by the assessee but not allowed to the customers and consequently a demand was raised.
At the CESTAT:
The matter was appealed against in the tribunal, which upheld the revenue’s contention of non-admissibility of deduction of cash discount not allowed to the customers.
Referring to the amended section 4 (Amendment made in year 2000) the tribunal observed the following:
“Thus the value has under gone a complete change. The question to be asked for determination of the assessable value under new Section 4 is what is the "transaction value" of the goods that is "the price actually paid or payable for the goods when sold." Contrary to these provisions, under the old Section 4 the value was a deemed one, that is to say, the price at which goods a ordinarily sold in the course of wholesale trade. Now under New Section 4, one has not to look as to what is the price at which goods are ordinarily sold in the course of wholesale trade. The price actually paid or payable is to be taken up as the assessable value. In the present matter, the transaction value has to be taken for the purpose of assessment of duty under Section 4 of the Central Excise Act and as admittedly no cash discount has been given to the customers, the actual price paid by them shall be the assessable value”
The tribunal held that the price actually paid or payable is to be taken for the purpose of value of goods. In the present case since the cash discount was not actually allowed to the customers, the tribunal rejected the claim of the assessee and disallowed the deduction of cash discount which was not actually passed on to the customers.
At the Supreme Court:
The assessee filed an appeal in the Supreme Court (‘SC’) on the said matter, which pronounced a significant ruling on the issue.
The SC, setting aside the tribunal’s order, held that the cash discount decided as per the contractual agreement for sale is admissible as a deduction for arriving at the AV.
The SC observed that the value of excisable goods is to be determined only at the time and place of removal of goods. The expression “actually paid or payable for the goods, when sold” only means that whatever is agreed to as the price for the goods forms the basis of value, whether such price has been paid, has been paid in part or has not been paid at all. The basis of “Transaction value” is therefore the agreed contractual price.
Cash discount is something which is known at or prior to the clearance of the goods, being contained in the agreement of sale between the assessee and its customers, and must therefore be deducted from the sale price in order to arrive at the value of excisable goods at the time of removal.
Key observations of the Supreme Court:
Observation I – Position prior to amendment in the year 2000
The SC Refereed to its decision in the case of Union of India v. Bombay Tyre International Limited, 1984 (17) ELT 329 (SC) wherein it had held that “Trade Discounts. – Discounts allowed in the Trade (by whatever name such discount is described) should be allowed to be deducted from the sale price having regard to the nature of the goods, if established under agreements or under terms of sale or by established practice, the allowance and the nature of the discount being known at or prior to the removal of the goods. Such Trade Discounts shall not be disallowed only because they are not payable at the time of each invoice or deducted from the invoice price.”
The SC also referred to the Central Board of Excise and Customs (CBEC) Bulletin for the period January-March, 1975 wherein the CBEC laid down the following in respect of cash discounts:
“Some assessee may give to all his buyers cash discount, that is a discount for prompt payment. In other words, they charge a somewhat lesser price where there is cash payment, but charge a higher price (i.e. without deduction of the cash discount) if the payment is not made in cash. In such cases, the cash discount, if allowed, will be admissible on the principle that only the net price obtained after deduction of the cash discount is the price of the goods.”
Based on the above, the SC was of the view that prior to the amendment of 2000, cash discount is allowable as a deduction while arriving at the value of excisable goods
Observation II – Effect of the amendment in the year 2000 on treatment of cash discount
The SC referred to Section 4 of the CE Act under the following three scenarios:
- As it stood prior to the amendment in the year 1973.
- As it stood prior to the amendment in the year 2000.
- As it currently stands post amendment in year 2000.
After perusing the provisions of Section 4 as it stood over the years, the SC observed:
“It can be seen that the common thread running through Section 4, whether it is prior to 1973, after the amendment in 1973, or after the amendment of 2000, is that excisable goods have to have a determination of “price” only “at the time of removal”. This basic feature of Section 4 has never changed even after two amendments. The “place of removal” has been amended from time to time so that it could be expanded from a factory or any other premises of manufacture or production, to warehouses or depots wherein the excisable goods have been permitted to be deposited either with payment of duty, or from which such excisable goods are to be sold after clearance from a factory. In fact, Section 4(2) pre- 2000 made it clear that where the price of excisable goods for delivery at the place of removal is not known, and the value thereof is determined with reference to the price for delivery at a place other than the place of removal, the cost of transportation from the place of removal to the place of delivery is to be excluded from such price. This is because the value of excisable goods under the Section is to be determined only at the time and place of removal. Even after the amendment of Section 4 in 2000, the same scheme continues. Only, Section 4(2) is in terms replaced by Rule 5 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000”
Based on the above, the SC was of the opinion that the amendment of Section 4 in the year 2000 does not affect the position relating to the treatment of cash discounts while arriving at the value of excisable goods. The SC held that “it is clear that “cash discount” has therefore to be taken into account in arriving at “price” even under Section 4 as amended in 2000”
Inconsistency in the Observations and Decision (My personal opinion)
The SC referred to and also relied upon the bulletin of the CBEC while deciding that cash discount was allowable prior to the amendment in the year 2000. A careful reading of the CBEC bulletin indicates that the intention of the revenue was to allow the deduction of cash discount while arriving at the value of excisable goods subject to the condition that cash discount is actually allowed to the customers.
The CBEC bulletin reads as “the cash discount, if allowed, will be admissible on the principle that only the net price obtained after deduction of the cash discount is the price of the goods.”
In the instant case, it is a clear fact that the matter under consideration is regarding the cash discount that was agreed at the time of removal of goods but was not actually allowed to the customers. Possibly on account of non-compliance of the prompt payment condition of the sale agreement.
The SC has referred to the above bulletin which clearly imposes the condition that cash discount should be actually allowed to the customers, and in its order it has allowed deduction of the cash discount that was not actually passed on to the customers.
Possible challenge in view of the above judgement
There may arise a situation wherein the cash discount is agreed upon at the time of removal, however the quantum of discount is variable. For instance, if the customer makes immediate payment, discount of 5% is allowed, if payment is made within 30 days, discount shall be 3% and if payment made within 45 days, discount shall be 2%.
The actual discount allowed shall also vary from transaction to transaction. In some cases, discount may be allowed at 5%, in some at 2% whereas in some cases there may be no cash discount allowed at all to the customers.
In such a scenario, applying the ratio of the SC judgement, since three different rates are agreed upon in the sale agreement, it may be difficult to decide upon the amount of cash discount that should be considered for the purpose of valuation.
In view of above discussion, I am unable to arrive at a concrete conclusion on the issue. I also request the readers of this article to express their views on the issue.
With full respect to the decision of the Supreme Court in the above discussed case, I have merely expressed my views on the same. The purpose of writing this article is only academic. Different and contrary views on the issue are invited and appreciated.
Thanks & Regards