Circular No. 355/71-CX
dated 19/11/97
F.No. 06/12/96-CX.1

Government of India

Ministry of Finance

Department of Revenue

Central Board of Excise & Customs, New Delhi

Subject : Inclusion of cost of after sales services during the initial running in period of the vehicles by the dealers to their own buyers in the assessable value of the vahicle

The question of inclusion of after-sale service expenses in the assessable value has since long been settled after the Supreme Court judgement in the case of Bombay Tyre International. However, a doubt has now been raised relating to the inclusion of expenses of pre-delivery inspection (PDS) and three initial services performed free of cost during initial usage of the vehicle by dealers in the assessable value of motor vehicle.

The facts of the case are that each vehicle sold by a manufacturer directly or through the dealer is covered by a warranty of specified period; and one of the conditions for the customer to be eligible for the warranty cover, inter-alia, is that the prescribed pre-delivery inspection and three initial services including oil and filter changes have to be undergone by the customer. These services are to be performed/ organised by the dealer under his own direct financial responsibility to the customer. Thus the said PDI and three further services become compulsory on the part of the customer to remain eligible for any clam under warranty.

The liability under warranty of the cost of parts and labour charges is on the manufacture and he monitors charges incurred on such after-sale services when a buyer of the vehicle from a dealer moves to an area of other dealer, the after-sale services in such cases are also monitored by the manufacturer. In case vehicles are sold to the Government Department, in addition to assessable value, the manufacturer collects a “mark up” amount on account of after-sale services and this amount is paid directly to the dealer concerned for carrving out mandatory services.

Dispute has arisen from the fact that these services are provided by the dealer and on separate charges for these services are paid by the manufacture r to the dealer. The dealer is incurring the expenses out of the margin allowed by the manufacture. So, the question to be decided is whether a portion of dealer”s margin has to be included in the assessable value.

In other words, the question for consideration is whether after – sale services are provided on behalf of the manufacture or by dealer on their own. From the facts stated above, it is obvious that pre-delivery inspection and three further services are compulsory on the part of the customer to remain eligible for any claim under warranty and are being provided by the dealer only on behalf ot the manufacturer. In these circumstances, the difference between the sale price and the amount paid to the manufacturer by the dealer i.e. dealer”s margin also contain provision for rendering PDI and three after-sale services. These services being on behalf of the manufacturer, their value will be incredible in the assessable value.

Incidentally, it has been brought to the notice of the Board that Supreme Court decision in the case of M/s Philips India Ltd. Vs. CCE, Pune [1997(19) RLT 471(SC)] = 1997 (16) CE-91 may have some relevance in this case also. The said judgement related to a case of sale of audio equipments and services are provided under a guarantee attached to the manufacturer”s product that these could be required during the guarantee period by their dealer anywhere in the country.

The facts of this case can be differentiated from the issue under consideration by the fact that there is no compulsion of getting any services done compulsorily to be eligible for the guarantee cover, as is the case for motor vehicles.

The case also does not discuss or overrule the decision in the Bombay Tyre International, wherein Hon”ble supreme Court has decided that after-sale services being part of the selling expenses will be includible in the assessable value. This decision was reiterated in the MRF case also. Thus, Board is of the view that this judgement in M/s Philips India case may not be applicable in the case of motor vehicles.

(S.C. Bhatia)
Under Secretary (CX-1)

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