2004 (96) ECC 552 (Tri)

CUSTOMS, EXCISE & SERVICE TAX APPELLATE TRIBUNAL

New Delhi -- Bench-NB(A)

Hon'ble Justice (Mrs.) K.K. Usha, President and
Shri C.N.B. Nair, Member (T)

Maruti Udyog Limited

Versus

CCE, Delhi-III

Appeal No. E/770/2003-NB-A

[Arising out of Order-in-Original No. 2, 3 & 4/2003 dated 4.2.2003 passed by the Commissioner of Central Excise, Delhi-III]

Final Order No. 323/04-NB(A), dated 16.4.2004, Certified on 27.4.2004

Assessable Value

Cost of Post Delivery Inspection (PDI) and After Sale Service -- Whether includable in the assessable value of the automobiles while discharging Central Excise Duty? Held (No) -- No amount is payable to or on behalf of MUL towards the two costs, namely PDI and free after sale service. Therefore, the demand is clearly outside the terms of the Section 4 and Valuation Rules. Additional consideration should be flowing "directly or indirectly from the buyer to the assessee". In the present case nothing flows to the assessee, MUL from the consideration towards PDI and after sale service. For that reason, cost of these charges cannot form part of the assessable value of the automobiles in question. The valuation provisions under Section 4 constitute the machinery provision for levy and collection of duty and a machinery provision cannot be interpreted to grossly exceed the scope of the levy. Neither the impugned order nor the clarification relied up is sustainable.

Appeal is allowed

PRESENT :

Shri V. Sreedharan, Adv. for the appellant.

Shri R.C. Sankhala, SDR for the respondent.

Per : C.N.B. Nair

The appellant M/s Maruti Udyog Limited (MUL) is a manufacturer of automobiles. They sell the automobiles produced by them to dealers at ex-factory prices. They also fix maximum selling price for re-sale of the products in retail to customers. The dealers cannot exceed those maximum selling prices while selling the automobiles to retail buyers. The dealership agreement also specified the commission which the dealer shall receive from customers. The dealership agreement also stipulate the services which a dealer shall render to the buyer. Clause 39 under Article 9 (servicing) of the dealership agreement states as under:

"39. PDI AND AFTER SALES SERVICE: -- The Dealer shall ensure that the pre-delivery inspection and after-sales service for Vehicles are carried out fully and efficiently in accordance with the requirements and policies of the Company established from time to time. In particular the Dealer shall at all times make complete and accurate reports in the form and at the times required by the Company in respect of all work carried out by it in pursuance of the Company's Service requirements and policies. The Dealer shall also maintain a Service history of each vehicle serviced by it in a form required by the Company".

2. The dispute for consideration in the present appeal is whether the cost of the above Post Delivery Inspection (PDI) and sale service are to form part of the assessable value of the automobiles while discharging Central Excise Duty. Impugned order has held that these charges should form part of the assessable value. We read the finding:

"The facts conveyed by the department in show cause notices, are that each vehicle, sold by M/s MUL, carried a warranty for a given period, and that to remain eligible for that warranty, the buyer of each vehicle had to pay Rs. 850 on account of `Pre Delivery Inspection and initial three services (hereinafter referred to as PDI). These facts, since not disputed by M/s MUL, lead me to an inference that the amount, paid by the buyer of the vehicle on account of PDI, had a direct nexus with the warranty.

The further relevant facts, conveyed by the department, are that the amount of Rs. 850 charged from the buyer on account of PDI, was built by M/s MUL into the "dealer's margin/commission", which, coupled with `ex-factory price', constituted the `ex-show room price', and that this evinced that the PDI charges were collected by the dealer on behalf of M/s MUL. On the basis of these facts, the department alleged that the PDI charges, collected on or after 1.7.2000, formed the part of `transaction value' as defined in section 4(3)(d) of the Central Excise Act, 1944, and required the payment of duty leviable thereon, but M/s MUL did not pay the same inspite of having been instructed by the department to do so. M/s MUL, in this regard, have contended that though the amount of PDI was fixed, or increased/decreased periodically by them, in order to have a uniformity amongst all dealers, and they acted as arbitrator in case of dispute between dealers in this regard, yet the fact is that the amount in question was neither received by M/s MUL, nor the dealers were ever instructed to transmit that amount to M/s MUL. I find that it is also not the case of the department that amount was directly received by MUL. The allegation advanced by the department is that the PDI charges were linked to warranty, and that the same were being collected by the dealers on behalf of M/s MUL. The cardinal question for determination, thus, is, whether or not the PDI charges, in these circumstances, would fall within the ambit of transaction value as defined in Section 4(3)(d) of the Central Excise Act, 1944, which reads as following:

"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 reasons 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 selling organization expenses, stores, outward handling, serving 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".

After a careful examination of the definition of the `transaction value" adduced above, I discover that in addition to the amount charged as price, the definition also covers the amount, which is liable to be paid by the buyer to the assessees, or to any other person on behalf of the assessee, even after the sale, if that amount has a connection with the sale; and that the definition specifically mentions that the amount charged, inter alia, in connection with `warranty' has a connection with sale. This, otherwise, needs no proof that warranty promotes and enhances marketability of a product, and in this case, it is an amount of PDI to remain eligible for the warranty. The amount, thus, has a direct nexus with warranty and, therefore, would fall within the ambit of definition of transaction value even if realized by the dealer on behalf of M/s MUL. The facts and evidence further show that the warranty is extended by M/s MUL and the amount of PDI is also determined and built into the dealer's margin/commission by M/s MUL; and thus, prove that the dealers collect the PDI charges on behalf of MUL, I, therefore, infer that the amount collected as PDI charges fall within the ambit of transaction value and M/s MUL were required to pay the duty leviable thereon.

M/s MUL have relied upon the final order, of the Hon'ble Tribunal No. 191-197/98-A dated 13.2.98 [2000 (70) ECC 291 (T) : 2000 (121) ELT 224 (T)] passed in their own case and M/s Telco and the judgment of the Hon'ble Apex Court in case of CCE v. TELCO [Civil Appeal No. 53 of 2001] to plead that PDI charges do not constitute assessable value. On a perusal of these case laws, I find that the same are based on the interpretation of section 4 which was in force prior to 30.6.2000, and as such, cannot be taken as a precedence in this case.

I further discover that the CBEC also, vide the Circular No. 643/34/2000-CX dated 1.7.2002, while giving clarification under new provisions relating to valuation, clarified that the PDI charges collected on or after 1.7.2000 would be included in assessable value. The CBEC has further confirmed that stand vide Circular No. 684/72/2002-CX dated 12.12.2002".

3. It is clear from the last two paras reproduced above that the issue remains concluded in favour of the assessee by the judgment of the Apex Court but the same is being reopened because of the substitution of the valuation (Section 4 of Central Excise Act, 1944) w.e.f. 1.7.2002 and the clarification issued by the Central Board under its Circular No. 643/34/2000-CX dated 1.7.2002 and later confirmed under Circular No. 684/72/2002-CX dated 12.12.2002.

4. We have perused the records and have considered the submissions made by both sides. The contention of the appellant is that new Section (w.e.f. 1.7.2002) and the definition of "transaction value" contained in Section 4(3)(d) make no difference to the legal provision. The learned Counsel has submitted that what is required to be included "in addition to the amount charged as price" under the definition of transaction value", is 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 of the goods". It is being pointed out that in the present case the ex-factory invoice price is the only amount the buyer is liable to pay whether to the manufacturer or on his behalf in connection with the sale of the goods. It is, therefore, contended that the distinction made in the impugned order between the replaced Section 4 and net Section 4 is contrary to the words of the new section themselves. The appellants have emphasized (noted in the impugned order) that the PDI and service charges remain included in the commission of the dealer and that commission payable to him by the buyer, is not payable to the manufacturer and, therefore, the collection of commission and rendering of services are entirely outside the scope of the sale of the automobiles by the manufacturer to the dealers.

5. During the hearing of the case, learned Counsel for the appellants also pointed out that the scope of the new section had been correctly understood and interpret by the Board on the eve of bringing into force of the new section through circular dated 30.6.2000. Para 13 of this circular stated as under with regard to warranty charges and service charges:

"13. It is felt that where the assessee includes all their costs incurred in relation to manufacture and marketing while fixing price payable for the goods and bills and collects an all inclusive price -- as happens in most cases where sales are to independent customers on commercial consideration -- valuation should not pose any problem as the transaction price will generally be the assessable value. Nevertheless, there could be situations where the amount charged by an assessee does not reflect the true intrinsic value of goods marketed and total value split up into various elements like special packing charges, warranty charges, service charges etc. These cases would require to be scrutinized carefully to ensure that duty is paid on correct value. Such elements have been held to be includable in the assessable value under erstwhile Section 4 by various court pronouncements, notably, the Supreme Court's judgment in MRF case. Now the definition of "transaction value" makes it clear that all the elements of cost which the assessee incurred till the sale/marketing as aforesaid, continue to be included in the assessable value even under new section 4".

According to the learned Counsel what was required to be included in the assessable value under the new Section is the value, including the cost incurred in relation to the manufacture and marketing by the manufacturer, and not the cost incurred or remuneration received by the dealer. The learned Counsel pointed out that the later clarification issued under Circular No. 643/34/92-CX dated 7.2.2002 and followed by the Commissioner in the impugned order is not in conformity with Section 4 and the definition of transaction value contained therein and is for that reason not correct.

6. As against the above contentions raised by the appellant learned SDR has pointed out that the clarification dated 1.7.2002 is in conformity with the definition of transaction value under new Section 4. He pointed out that this position is clear from the words "in addition to the amount charged as price by reason of or in connection with the same, ......... any amount charged for or to make provision for ............... servicing warranty..............." He submitted that in the present case, the PDI and free services are provided by the dealer on behalf of the assessee and therefore cost towards these should form part of the assessable value. He also submitted that this is the rationale for the clarification.

7. The dispute has been reopened by the Revenue in view of the purported enhanced scope of Section 4 and Valuation Rules (Rule 6 as referred to in the clarification dated 1.7.2002) introduced w.e.f. 1.7.2002. The reliance placed is on the definition of transaction value contained in sub-section 4(3)(d). The relevant words of that sub-section are "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 reasons of or in connection with the sale......... including, any amount charged for or to make provision for ............ servicing warranty". The reference is to "amount liable to be paid to the assessee or on behalf of the assessee." The words in the definition do not relate to amounts payable to or on behalf of any party other than the manufacturer assessee. In the present case, no amount is payable to or on behalf of MUL towards the two costs, namely PDI and free after sale service. Therefore, the demand is clearly outside the terms of the Section. The circular dated 1.7.2002 draws upon Rule 6 of the Valuation Rules to support the clarification. We may read that rule to see whether the clarification flows from the words of that Rule either.

"Rule 6. Where the excisable goods are sold in the circumstances specified in clause (a) of sub-section (1) of Section 4 of the Act except the circumstance where the price is not the sole consideration for sale, the value of such goods shall be deemed to be the aggregate of such transaction value and the amount of money value of any additional consideration follows directly or indirectly from the buyer to the assessee" (emphasis supplied).

8. The reading of the above rule makes it clear that "money value of any additional consideration flowing directly or indirectly from the buyer to the assessee" is required to be added. In other words, the criterion is the same under Rule 6 also i.e. amount of "money value of any additional consideration following directly or indirectly from the buyer to the assessee" should be added to the transaction value to find out the aggregate value of the goods. Again, additional consideration should be flowing "directly or indirectly from the buyer to the assessee". Thus, the definition and Rule 6 will have no application to considerations not flowing to the assessee. In the present case, admittedly, nothing flows to the assessee, MUL from the consideration towards PDI and after sale service. For that reason, cost of these charges cannot form part of the assessable value of the automobiles in question. While on this issue, it would be appropriate to recall that valuation provisions under Section 4 constitute the machinery provision for levy and collection of duty and a machinery provision cannot be interpreted to grossly exceed the scope of the levy.

9. In view of the above, impugned order is not sustainable. So too the clarifications relied upon. The impugned order is set aside and the appeal is allowed.

…………………….