Trade discount is not to be added in the assessable value

Ingersoll Rand India Limited Vs C.C.E.-Ahmedabad (CESTAT Ahmedabad)

CESTAT Ahmedabad held that trade discount is not includible in the assessable value hence central excise duty is not payable on the same.

Facts- The appellant is manufacturer of Air Compressors, Air Motors, Spares for the Air Compressors, Bus Air Conditioning Systems and parts thereof falling under Chapter 84 of the Central Excise Tariff Act, 1985. It has been contention of the department that the appellant making clearances of the finished goods for the home consumption by two methods (i) direct sales to customers who are actual users and (ii) to distributors appointed by the notice who in turn sold the goods to the actual user buyers. It was noticed by the department that when the goods cleared directly to the actual users, the goods were assessed at the values mentioned in the invoices. However, in respect of goods cleared through the distributors , the distributors were given a discount called “Base Discount” of up to 15% of the price declared in the invoices . Thus it was noticed that there were two sets of assessable value for the same product i.e. the higher value in case of direct sales and discounted value for the clearances made to distributors.

It has been the contention of the department that the discount offered to the distributors as per the agreement between the appellant and their distributors are for performing installation and after sale services within the warranty period of the product. The service of installation and after sale service within the warranty period was required to be provided by the distributor as per the distributor’s agreement and the expense incurred towards such installation and after sale service were to be borne by the distributor and such expenses were not to be reimbursed by the appellant to its distributors. It is further contended by the department that in the case of the direct sales by the appellant to its actual users, the expenses with regard to installation and after sale service during the warranty period are borne by the appellant himself and they are included in the assessable value for the purpose of assessment and levy of duty.

Conclusion-Held that since the sale invoice which have been issued to the distributors by the appellant offering 15 % discount is normally a trade discount and the department has failed to discharge its responsibility to establish that there has been any flow back of consideration from buyer to the appellant. Thus, We find that the transaction value declared by the appellant is correct assessable value for the payment of central excise duty and discount cannot be added to the assessable for charging central excise duty.

FULL TEXT OF THE CESTAT AHMEDABAD ORDER

The appellant is manufacturer of Air Compressors, Air Motors, Spares for the Air Compressors, Bus Air Conditioning Systems and parts thereof falling under Chapter 84 of the Central Excise Tariff Act, 1985. It has been contention of the department that the appellant making clearances of the finished goods for the home consumption by two methods (i) direct sales to customers who are actual users and (ii) to distributors appointed by the notice who in turn sold the goods to the actual user buyers. It was noticed by the department that when the goods cleared directly to the actual users, the goods were assessed at the values mentioned in the invoices. However, in respect of goods cleared through the distributors , the distributors were given a discount called “Base Discount” of up to 15% of the price declared in the invoices . Thus it was noticed that there were two sets of assessable value for the same product i.e. the higher value in case of direct sales and discounted value for the clearances made to distributors.

1.2 It has been the contention of the department that the discount offered to the distributors as per the agreement between the appellant and their distributors are for performing installation and after sale services within the warranty period of the product. The service of installation and after sale service within the warranty period was required to be provided by the distributor as per the distributor’s agreement and the expense incurred towards such installation and after sale service were to be borne by the distributor and such expenses were not to be reimbursed by the appellant to its distributors. It is further contended by the department that in the case of the direct sales by the appellant to its actual users, the expenses with regard to installation and after sale service during the warranty period are borne by the appellant himself and they are included in the assessable value for the purpose of assessment and levy of duty.

1.3 The departmental was thus, primarily of view that the expenses on installation and after sale service during the warranty period incurred by the distributor, the appellant is passing on such charges in the form of discount to its distributor which should have otherwise forms a part of the assessable value and thereby the appellant have evaded the central excise duty.

1.4 Two Show cause notices came to be issued. The details of which are given in the table here:-

2. The Learned Advocate appearing on behalf of the appellant submitted that it is a settled law that any discount indicated in the invoices and is known to both the parties i.e. buyer and seller is not includable in the transaction value for payment of Central Excise Duty. The learned advocate placed reliance on the following judgments in support of his argument.

• Purolator India Ltd VS. CCE, Delhi – III – 2015 (323) ELT 227 (SC)
• Mercury Pneumatics Ltd Vs. CCE, Mumbai – 2017 (348) ELT 474 (Tri. Mum)
• Prima Plastics Ltd Vs. CCE , Daman – 2019 (365 ) ELT 149 (Tri. Ahm)
• Confident Dental Equipments Ltd Vs. CCE, Bangalore – 2009 (248) ELT 868 (Tri.Bang)

2.1 The Learned Advocate further submitted that there is no allegation in the show cause notices of any flow back of any monetary consideration to the appellant over and above the price declared by them in the invoice to the distributors. It is further being submitted that the impugned order- in- original have presumed that discount granted by the appellant to the distributors is nothing but the charges for after the sale service which is granted free of cost by the distributor within the warranty period. The basis of such presumption is comparison of the prices between the direct sales and the sales through the distributor.

2.2 The Learned Advocate argued that even in case the departments contention is accepted fir time being and the discount is considered as consideration for after sale services provided by the distributor even then the same cannot be included in the assessable value as it is a settled law that post manufacturing expenses like after sale service incurred by the distributor cannot be included in the transaction value for payment of excise duty. The Learned Advocate has placed reliance on the following judgments in this regard.

• CCE, Mysore Vs. TVS Motors Co. Ltd – 2016 (331) ELT 3 (SC)
• Tata Motors Ltd Vs. Union OF India – 2012 (286) ELT 161 (Bom.)
• Skoda Auto Volkswagen India Pvt. Ltd Vs. CCE – 2021 (12) TMI 239- CESTAT Mumbai

2.3 On the basis of above, it has been submitted that demand of excise duty confirmed under the impugned order-in- original on the value of discount passed on by the appellant to the distributor is not sustainable in law as well as on merit.

2.4 The Learned Advocate also drawn our attention to the fact that the show cause notice does not invoke the provision of Rule 6 of Central Excise Valuation Rules, 2000 whereas the impugned order-in-original has confirmed the demand under provision of Rule 6 Central Excise Valuation Rules, 2000 which is legally not sustainable.

3. We also heard Shri Ghanasyam Soni, Learned Additional Commissioner (AR) who reiterated the findings given in the impugned order-in-original.

4. We have heard both the sides and considered the appeal records.

5. Before proceeding further in the matter it will be relevant to have the glance at the Section 4 of the Central Excise Act, 1944 which is reproduced below:-

“[4. Valuation of excisable goods for purposes of charging of duty of excise. –

(1) Where under this Act, the duty of excise is chargeable on any excisable goods with reference to their value, then, on each removal of the goods, such value shall-

(a) in a case where the goods are sold by the assessee, for delivery at the time and place of the removal, the assessee and the buyer of goods are not related and the price is the sole consideration for the sale, be the transaction value;

(b) in any other case, including the case where the goods are not sold, be the value determined in such manner as may be prescribed.

[Explanation. – For the removal of doubts, it is hereby declared that the price-cum-duty of the excisable goods sold by the assessee shall be the price actually paid to him for the goods sold and the money value of the additional consideration, if any, flowing directly or indirectly from the buyer to the assessee in connection with the sale of such goods, and such price-cum-duty, excluding sales tax and other taxes, if any, actually paid, shall be deemed to include the duty payable on such goods.]

(2) The provisions of this section shall not apply in respect of any excisable goods for which a tariff value has been fixed under sub­section (2) of section 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 selling 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 reading of the above provisions of Central Excise Act, 1994 it reveals that for transaction value to be accepted for the purpose of the assessement, the following three essential ingredients needs to be satisfied with regard to transaction value:-

(i) the goods are sold by an assessee for delivery at the time of place of removal , the term “ place of removal” removal has been defined basically to mean a factory or warehouse or any other premises which are in the possession of the asseessee.

(ii) The assessee and buyer of the goods are not related.

(iii) The price is only consideration for sale.

Thus, it can be seen that the Section 4 essentially seeks to accept different transaction value which may be charge by an assessee from it different buyers. For assessment purpose so long as this are based upon purely commercial consideration where buyer and seller have no relationship and the price remains sole consideration for sale. This way it enables valuation of goods for charging excise duty on value charged per commercial invoice rather than for notionally determinative value. The discount which have been offered in the present case is well known to the customers which are distributors of the appellant as same is being mentioned in their distribution agreement.

5.1 We find that it is an establish practice now that discounts of any description given on any normal price payable for any transaction and same will not form part of the transaction value of goods.

5.2 We are of the view that discount is not being given in the form of a reimbursement for distributors undertaking installation and after sale services during the warranty period . Since both the activities are beyond the place of removal and post sale activities and therefore it is not a liability of the manufacturer assessee to undertake such activity. Thus, we are of the view that it is wrong on the part of the department to assume that distributors are being compensated in the form of discount for the expenditure which they have incurred on undertaking installation and after sale service during warranty period. It has also been held under the various decisions of this Tribunal that such expenditures are not includable otherwise also in the assessable value. In this regard we take shelter of this Tribunal decision in the case of General Motors India Pvt. Ltd Vs. CCE Pune- 1 vide Final Order No. A/86257/2022 dated 11.04.2022- CESTAT Mumbai.

5.3 We find that the issue under consideration has already been settled by Hon’ble Supreme Court in the case of M/s. Purolator reported under 2015 (323) ELT 227 (SC) which have also been followed by this Tribunal in the case of Biochem VS. CCE reported under 2016 (337) ELT 276 (Tri. Mum). The relevant extract of the above decision are reproduced under :

“6. We find that this fact is not under dispute that the goods were first cleared from the factory not for sale but as a stock transfer to their depot and from depot the actual sale has taken place. The correct sale value and discount if any, can only be determined and reflected in the sale bill and same is irrelevant in case of clearance from factory to depot as said transaction is not the sale transaction therefore even if all the judgments relied upon by the Revenue are applied, it will support the appellant‘s case for the reason that they have declared their quantity discount before the sale of the goods from the place of removal i.e. Depot and discount was shown in the sale invoice. In recent judgment of Purolator India Ltd. v. Commissioner of Central Excise, Delhi-III, we find that as per the definition of ^„transaction value‘ under the amended Section 4 the “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 selling 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 it can be seen that the actual amount that the buyer is liable to pay at the time of sale or at any other time shall be the transaction value. In the present case admittedly the sale has not taken place from the factory gate but goods were sold from the depot and at the time of sale from the depot the price charged was the price minus quantity discount therefore the price excluding the quantity discount is an amount payable at the time of sale or at any other time. Hence excluding the discount value is the correct transaction value and duty cannot be charged on the discount amount which is neither paid nor payable in the case of sale of the goods. In this regard Hon‘ble Supreme Court in the case of Purolator India Ltd. v. Commissioner of Central Excise, Delhi-III [2015 (323) E.L.T. 227 (S.C.)] has observed as under :

18. It can be seen that Section 4 as amended introduces the concept of “transaction value” so that on each removal of excisable goods, the “transaction value” of such goods becomes determinable. Whereas previously, the value of such excisable goods was the price at which such goods were ordinarily sold in the course of wholesale trade, post amendment each transaction is looked at by itself. However, “transaction value” as defined in sub-clause (3)(d) of Section 4 has to be read along with the expression “for delivery at the time and place of removal”. It is clear, therefore, that what is paramount is that the value of the excisable goods even on the basis of “transaction value” has only to be at the time of removal, that is, the time of clearance of the goods from the appellant‘s factory or depot as the case may be. 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. Further, the expression “when sold” is not meant to indicate the time at which such goods are sold, but is meant to indicate that goods are the subject matter of an agreement of sale. Once this becomes clear, what the learned counsel for the assessee has argued must necessarily be accepted inasmuch as 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 buyers, and must therefore be deducted from the sale price in order to arrive at the value of excisable goods “at the time of removal”.

In view of our above observation on facts and settle legal position of law, we are of the considered view that quantity discount was correctly claimed by the appellant as the same was claimed at the time of sale of the goods. We therefore set aside the impugned order and allow the appeal of the appellant.”

5.4 We also take note of this Tribunal’s decision in the case of M/s. Mercury Pneumatics Ltd VS. CCE, Mumbai reported under 2017 (348) ELT 474 (Tri. Mum)

“3. The relevant facts arise for consideration are appellant was engaged in manufacturing of excisable goods falling under Chapter Headings 84 & 85 of CETA, 1985 and sell the products through sales agent appointed for different area and also sell directly to the customers. In case of sales made directly to the customers, the concerned sales agent in the area is given a commission of 10% to 20% depending upon the product and the amount of commission is loaded in the assessable value. In case of sales made to the sales agent a discount of 10% to 20% is shown on the invoice raised in the name of the agent which is deducted to arrive at assessable value. Show cause notices were issued for the period April, 98 to March, 2003 directing the appellant to show cause as to why the amount of discount/commission given to the sales agent be not included in the assessable value and duty demanded with interest and also for imposition of penalties. The appellant contested the show cause notice on merits. The adjudicating authority did not agree with the contentions raised and came to a conclusion that the discount given by the appellant to the sales agent is nothing but commission accordingly, confirmed the demands raised and also imposed penalties. Aggrieved by such orders an appeal was preferred before the first appellate authority. The first appellate authority also concurred with the views and held that the amounts shown as discounts in the invoices raised on the agents are nothing but commission and the amounts given as discount was not brought to the knowledge of the department.

4.4 After hearing both sides for sometime on the merits of the case and on perusal of the records, we find that the issue involved in this case is regarding demand of duty on the amounts deducted by the appellant as trade discount from the invoices issued to the sales agent. It is the case of the Revenue that this amount deducted as trade discount is nothing but commission while it is the case of the assessee-appellant that the amounts disputed are discount. It is also the claim of the Revenue that this amount nothing but an amount paid for after sales service or additional services extended by the sales agent to the appellant. Undisputed facts are appellant herein is having two types of sales. One transaction of the sales is regarding direct sale to the customers which is executed and overriding commission is paid to the sales agent in the area and such commission is included in the assessable value for discharge of Central Excise duty. There is no demand of duty on these transactions. The second set of transactions is that the appellant sells their product directly to the sales agents. Appellant insists trade discount of 10%/20% on these transactions to the traders who purchases the goods from the appellant and market the same on their own in their area. This transaction is in dispute. There cannot be any dispute as to the fact that the sales agent can definitely function in dual role one as a commission agent and seller of the appellant‘s product. The lower authority seems to have confused with the entire issue by mixing up both the sales transaction. The first set of sale of transaction through sales agent i.e. wherein the sales agent assist the ultimate customers to place an order directly on the appellant for the procurement of the final product while in the 2nd set of transaction, sales agent purchases the products from appellant herein for resale. We find strong force in the contention raised by the learned Counsel that the statement of Shri Paul D‘Souza, Accounts Manager of the appellant (page 13 of the appeal book) clearly brings the fact that they sell goods directly to the customers for the order placed and also sell their goods to sales agents. The sales agents become entitled to the commission when order is procured through sales agents. In the same statement it is also made clear that another set of transaction which is of sale on principal-to-principal basis to the very same persons who are acting as agents and the said transaction are at arms length. We have noted that one of the dealer Shri Bhagvat in his statement clearly indicated that the relation between him and the appellant is of purchaser and the seller and he is registered as dealer with the Excise authorities and he passes on the Cenvat credit of the Excise duty paid on the finished goods to the ultimate customer. It is also found from the statement of Shri Bhagvat he is also functioning as sales agent and procuring orders for the appellant directly from the customers for which he gets a commission.

4.5 We find that the existence of both these transactions are not disputed and especially the 2nd transaction of sale principal-to-principal basis is evidenced from the copy of the sales invoices which are enclosed in the appeal memo and also produced before the lower authorities. Alternatively we find that even if these discounts offered by the appellant to the sales agent in a transaction on sale of principal-to-principal basis is towards rendering of certain services which at the most can be called as after sale services. Reliance was placed by the lower authorities and the learned DR on the Larger Bench decision of this Tribunal in the case of Maruti Suzuki India Ltd. (supra) [2010 (257) E.L.T. 226 (Tri. – LB)] to held that such after sale services are taxable at the hands of manufacturer. The said Larger Bench decision is set aside by the Apex Court in the case of TVS Motors (supra) wherein the Apex Court has settled the law that any amounts paid for after sale services cannot be included in the assessable value either pre or post 1-7-2000 as per the provisions of Section 4 of Central Excise Act, 1944. We find that the Apex Court in the case of Philips India (supra) has categorically stated that the provisions of Section 4 either pre or post 1-7-2000 are not defined in terms of eligibility of approximately reductions which would mean that in the case in hand, appellant is eligible to claim the deductions of the amount paid as discount as selling agent prior to 1-7-2000 and post 1-7­2000. Looking at the entire transactions of the appellant post 1-7-2000, we find that Section 4 of the Central Excise Act, 1944 seeks to levy duty on the amounts which are the transaction value. In the case in hand there is no dispute as to the fact that the appellant raises invoice on the sales agent indicating trade discount 10% to 20% and discharges the duty liability. There is nothing on record to show that the sales agents in respect of 2nd set of transactions has paid any further amount in respect of these transactions to appellant. In the absence of any evidence, each and every sales invoices raised by the appellant could be a separate transaction and Central Excise duty is payable on the amounts received for such invoices.”

5.5 We find that since the sale invoice which have been issued to the distributors by the appellant offering 15 % discount is normally a trade discount and the department has failed to discharge its responsibility to establish that there has been any flow back of consideration from buyer to the appellant. Thus, We find that the transaction value declared by the appellant is correct assessable value for the payment of central excise duty and discount cannot be added to the assessable for charging central excise duty.

6. Following the above decisions, we hold that the impugned order- in-original is without any merit and same is rejected. Accordingly, appeals are allowed.

7. The appeal No. E/ 11113/ 2014 has been filed in this case by the department showing that the Adjudicating Authority have failed to impose appropriate amount of the penalty under Section 11 AC of Central Excise Act, 1944 read wit Rule 25 of the Central Excise Rules, 2002. It has been pleaded that penalty amount should be enhanced 100 % of the duty evaded as per provision of Section 11 AC of the Central Excise Act, 1994. In this regard since we have already held in the above mentioned para that demand is not sustainable in this case and we have already set aside the order-in – original on merit. In view of all decision there is no ground left for enhancing the penalty under section 11 AC of the Central Excise Act, 1944 and therefore the appeal itself has become in fructuous and accordingly, we dismiss the same.

(Pronounced in the open court on 08.06.2023 )