In the case of Commissioner of Central Excise, Mysore Versus M/s. TVS Motors Company Ltd, It Was Held by Supreme Court That PDI charges and free ASS charges after the sale of vehicles should not be included in the assessable value for the purpose of calculation of excise duty.
M/s. TVS Motors Company Ltd. (hereinafter referred to as the ‘assessee’) is the respondent. The assessee is holding central excise registration for the manufacturing and clearing two wheeled motor vehicles classified under Chapter Sub-Heading 8711.20 and 8711.10 of the Central Excise Tariff Act, 1985. The assessee sells their goods directly to the customers through sales depots spread throughout the country. The assessee had requested for provisional assessment with respect to the depot sales as they could not determine the normal transaction value at the time of clearance at factory gate in respect of such depot clearance. The provisional assessment was finalized for the period from 01.07.2001 to 31.03.2002 and 01.04.2002 to 31.03.2003 vide Order-in-Original No. 47 of 2004 dated 19.07.2004 and 44/2005 dated 04.05.2005. The above said Order-in-Original’s included PDI charges and free ASS charges in the assessable value. The reason for doing so by the Adjudicating Authority was Circular No. 643/34/2002 dated 01.07.2002 wherein it has clarified the same to be included in the assessable value.
The assessee filed an appeal against the above cited orders before the Commissioner (Appeals), Mangalore, who, vide Order-in-Appeal No. 227/2005 CE dated 24.10.2005, disallowed inclusion of PDI charges and free ASS charges in the assessable value by relying on the Custom Excise and Service Tax Appellate Tribunal (CESTAT) decision in the case of Maruti Udyog Limited v. CCE, Delhi-III and remanded the case to the Adjudicating Authority to re-examine the disputed issues in the light of settled legal positions and finalise the provisional assessments accordingly.
Aggrieved by the above Order-in-Appeal, the Department filed an appeal before the CESTAT, Bangalore. The Tribunal, vide final Order Nos. 1860 & 1861/2006 dated 03.11.2006 has rejected Department’s appeal and upheld the Commissioner (Appeals), Order-in-Appeal, holding that the abatement in respect of PDI charges and ASS charges is correct, by relying upon the Tribunal’s decision in the case of Maruti Udyog Limited and remanded the case to the original Authority for re-computation. It is under the aforesaid circumstances the Tribunal’s order is challenged by way of instant appeals filed by the Department.
Contentions of the Department
The Department, contended that the decision of the Tribunal by referring to the Board’s circular dated 19.11.1997 and submitted that the said circular was issued by the Board after settling the law on the issue of inclusion of ASS, expenses in the assessable value in the case of Bombay Tyre International. The circular accepts the position that though the law has been settled much earlier by the aforesaid judgment rendered in the year 1984, a doubt has been raised relating to the inclusion of expenses of PDI and three initial services performed free of cost during initial usage of the vehicle by dealers in the assessable value of motor vehicle. Since these services are provided by the dealer and no separate charges for these services are paid by the manufacturer to the dealer and it is the dealer who is incurring the expenses out of the margin allowed by the manufacturer, the doubt was as to whether a portion of dealer’s margin has to be included in the assessable value. The circular, thus, clarifies that going by the ratio in the case of Bombay Tyre International, ASS being part of the selling expenses will be includible in the assessable value. The Circular also clarified that subsequent judgment of this Court in M/s. Philips India Ltd. would have no bearing. As per this Circular, the said judgment is 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 repaired during the guarantee period by their dealer anywhere in the country and, therefore, was differentiated on facts.
Contentions of the Assessee
The assessee contended that that PDI and ASS undertaken by Dealers and expenditure incurred by them which is not recovered or charged by the assessee from the dealers is not to be included for the purposes of excise duty. The position that the agreement between manufacturer and dealer requires dealer to undertake these activities does not affect this position. Firstly, these are legitimated usual dealer activities in the automobile industries throughout the world including India. Thus, incurring of these items of expenditure by dealer in usual business practice is not an unusual or ex-bonding/peculiar position.
Held by Hon’ble Supreme Court of India
The Hon’ble Supreme Court stated that some of the essential features which needs to be pointed out are that the excise duty is payable on the ‘transaction value’ as per the provisions of Section 4 of the Act. The provisions of Section 4 amended in the year 2000. All these cases pertained to the period post 2000. Therefore, it is the amended provision of Section 4 which, inter alia, states that excise duty is to be paid on ‘transaction value’. The definition of transaction value is given in Section 4(3)(d) of the Act. However, in order to comprehensively answer the issue, it would be necessary to traverse through the unamended provision which prevailed before the amendment in Section 4 by the Finance Act of 2000 and to then determine as to whether amended provision has resulted in altering the provision in the context of the issue raised in these appeals.
The Hon’ble Court referred to judgments in the cases of Commissioner v. Telco Ltd [2001 (130) ELT A260 (S.C.)], M/s. Philips India Ltd. v. CCE, Pune [1997 (91) ELT 540] and Ford Motor India Ltd. v. Secretary of State [AIR 1938 PC 15 = 1978 (2) ELT (J 265) (PC)] and what follows from the above is that where manufacturer himself does the ASS and incurs any expenditure thereon, the same is not deductible from the price charged by him from his buyer. Likewise, where the manufacturer has sold his goods to his dealer and wholesale dealer thereafter does ASS to the customer and incurs expenditure therefore, it cannot be added back to the sale price charged by the manufacturer from the dealer for computing the assessable value. This is more so, where the ASS is done by the dealer many weeks after the goods have been sold to him by the manufacturer. Such a post-sale activity undertaken by the dealer is not relevant for the purpose of excise since the goods have already been marketed to the dealer.
The aforesaid decisions were followed by this Court in Union of India v. Bombay Tyre International (1984) 1 SCC 467 and in the case of Government of India and Ors. v. MRF Ltd. and Ors. (1995) 4 SCC 349 The aforesaid judgments were followed by the Tribunal in Mahindra and Mahindra Ltd. v. Collector of Central Excise 1998 (103) ELT 606 wherein the Tribunal was considering the issue as to whether the cost of ASS rendered by the dealers and the advertisement expenses incurred by the dealers should be included in the assessable value of the vehicles manufactured and cleared by Mahindra and Mahindra. Incidental issue as to whether PDI conducted by dealers under the terms of agreement entered into by them with Maruti Udyog should be included in the assessable value of the vehicle or not. The Tribunal rejected the contention of the Department and the aforesaid decision was upheld by this Court in the judgment reported as 1999 (111) ELT A126.
The position in respect of unamended provision, thus, is very clear. Coming to the amendment in Section 4 of the Act, in the year 2000, it may be noted in the first instance that definition of ‘transaction value’ as per Section 4(3)(d) is exhaustive and covers within its purview, the price of goods and various other amounts charged by the assessee by reason of sale or in connection with sale. This provision reads as follows:
“(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.”
The expression ‘any amount that the buyer is liable to pay to’ is of significance. This expression shows that, apart from the price of the goods, the buyer should also be liable to pay an additional amount to the manufacturer/seller. In other words, the sale of the goods would not be made unless the buyer is also to pay an additional amount to the manufacturer, apart from the price of the goods. This is also supported by use of expression ‘by reason or’ or ‘in connection with the sale’ of the goods. The expression ‘in connection with the sale of the goods’ would only mean that but for the payment of the additional amount, the sale of the goods would not take place. Both the sides were in unison in accepting the position that no major change had been incorporated w.e.f. 01.07.2000 with emphasis on the ‘different transaction value’ from the ‘assessable value’, the essence of valuation principles had not undergone major change and the decisions delivered by this Court with regard to unamended provision on the principle of valuation were still applicable in determining the transaction value under the new provisions of Section 4 of the Act red with Central Excise Valuation (Determination of price of Excisable Goods) Rules, 2000. In fact, the Order-in-Original in M/s. TVS Motors Company Ltd. or in other cases itself proceeds on that basis.
The Hon’ble court further stated that the provisions of Section 4 as amended are not materially different from the provisions of Section 4 as were prevailing prior to 1st July, 2000. By the amendment, a new term has been introduced by name “transaction value” and the said term transaction value has been specifically defined in Section 4(3)(d) of the said Act. The present Section 4(1)(a) r/w definition of term transaction value gives more clarity and all doubts as to how the assessable value is to be arrived at are removed. It is also noted that the various items incorporated in the term transaction value as defined in Section 4(3)(d) of said Act as forming part of value of Excisable goods are in fact the expenses/deductions specifically disallowed by the Supreme Court in Bombay Tyre International Ltd. reported in 1983 (14) ELT 1896 SC. If one closely observes the definition of the term transaction value, it uses the terminology ‘servicing’. It appears that the respondents are taking the benefit of this term ‘servicing’ for the purpose of adding to the assessable value, the expenses incurred by the dealer towards PDI and free said services by resorting to Clause 7 of Circular dated 1st July, 2002 and Circular dated 12th December, 2002.
Turning to point in question, it is noticed that the definition of the transaction value in Section 4(3)(d) of the said Act is extensive and ropes in the price of the goods and other amounts charged by the assessee by the reason of sale or in connection with sale. A close reading of Section 4(3)(d) of the said Act would indicate that the term transaction value comprises of price actually paid or payable by the buyer and includes additional amount that the buyer is liable to pay or on behalf of the assessee by reason of sale or in connection of sale whether payable at the time of sale or at any other time including the amount charged for or to make provision for certain items such as advertising etc. One such item is servicing. In view of the definition of the term transaction value, it would be necessary for this Court to apply the definition of the term “transaction value” to the facts of this case and decide the matter. It is admitted by the petitioners that after a car is sold to a dealer on the terms and conditions entered into mentioned in the dealer’s agreement, a dealer is required to carry out Pre Delivery Inspection as well as said services in regard to a car which is sold to a customer. From the record it is seen that a dealer is required to pay an amount to the petitioners towards the cost of the car and a dealer cannot charge more than the amount specified by the petitioners. The difference between the price so fixed by the petitioners and the price paid by the dealer constitutes what is called as dealer’s margin. A dealer has to spend money to conduct PDI as well as render said services. The dealer is required to perform PDI as well as said services as a part of the dealer’s responsibility cast on him as per the dealership agreement. From the record it is clear that the case of the petitioners so far as the amount incurred by the dealer towards PDI and said services does not form any of the clauses viz. (a) Any amount charged for (b) Amount charged to make provision for (c) Any amount that the buyer is liable to pay to the assessee (d) Any amount that the buyer is liable to pay on behalf of the assessee. The record indicates that once a car is sold by the petitioners to the dealer at a price, the dealer is not required to pay any further amount to the petitioners on account of PDI and free after sales services/after sales services. It is clear that when the petitioners are selling the car to a dealer, price is the sole consideration and the petitioners and the dealer are not related to each other. Having complied with these requirements set out in Section 4(1)(a) of the said Act, the assessable value of the Cars will have to be treated as the one which will be the transaction value. The transaction value will have to be arrived at by taking into consideration the definition of the term transaction value appearing in Section 4(3)(d) of the said Act. The record clearly goes to show that apart from the price which is paid by the dealer to the petitioners, no amount is recovered by the petitioners from the dealer or the customer. As such, the stand of the respondents that the expenses incurred towards PDI as well as said services have to be included in the assessable value cannot be accepted. This is being observed on the ground that there is no material to show that the expenses for the pre-delivery inspection as well as after sales services are paid by the dealer to the petitioners. The dealer renders PDI and said services as a routine and legitimate activity as a dealer. It is also clear from the record and on the basis of the typical dealership agreement entered into with the dealer by the petitioners that a dealer renders PDI as well as said services on account of dealership. It is pertinent to note that the respondents have in affidavit in reply dated 29th June, 2012 admitted that the dealer carries out free PDI and after sales services at their end. It is admitted that labour cost towards PDI and said services is borne out of retailing profit. The contention of the respondents that the expenses incurred for PDI and said services must be included in the transaction value and is required to be included in the assessable value of the car is required to be negative on the ground that the petitioners do not charge the dealer any amount equivalent to the cost incurred towards PDI and free after sales services.
It has been the contention of the respondents that the petitioners provide warranty in regard to the car which is sold by the dealer to the customer. According to the respondents the customer can avail of the benefit of this warranty, provided PDI is carried out in respect of the car and the customer avails of the benefit of said services. According to the respondents the warranty given by the petitioners is linked with expenses incurred towards PDI and said services and that is how the expenses incurred for PDI and said services become a part of the transaction value. It is true that the Owner’s Manual specifically indicates that if the PDI and said services are not availed of, then the customer would not be able to claim the benefit of the warranty. This will go to show that the petitioners undertake responsibilities so far as the warranty aspect is concerned provided the customer takes the benefit of PDI and said services. It has no bearing on the assessable value as it is abundantly clear that to perform PDI as well as render said services is on the dealer’s obligation on account of dealership agreement and not on any other count. Once it is held that the PDI and said services are not provided by the dealer on behalf of the petitioners, it cannot be treated as consideration for sale. It also cannot be treated as a deferred consideration. The respondents while issuing Circular dated 1st July, 2002 have wrongly referred to the Rule 6 of the said Rules and have wrongly linked the expenses incurred for PDI and said services with expenses for advertisement or publicity. It is required to be noted that the provisions of the said Rules will not be applicable to the facts of this case as the transaction between the petitioners and the dealer does not fall within the ambit of Section 4(1)(b) of the said Act. The transaction of sale of a car between the petitioners and the dealer is governed by the provisions of Section 4(1)(a) of said Act as the petitioners as assessee and the dealer as a buyer of the car are not related to each other and price is the sole consideration for the sale. It is to be noted that as per the record, once the car is sold by the petitioners to the dealer for a particular consideration, no other amount is payable by the dealer to the petitioners. It is required to be mentioned that the petitioners are not reimbursing any amount to the dealer towards expenses incurred for the PDI and said services and the petitioners are paying Excise duty on the entire amount for which the petitioners sale the car to the dealer. In the present case, even if it is taken that the petitioners are giving trade discount to the dealer, the petitioners are paying the Excise amount on the whole amount and not the amount which is arrived at after giving the trade discount.
In the present case, when the petitioners sell the car to the dealer, the goods enter the stream of trade for the first time and, therefore, the amount at which the car is sold to the dealer would be the assessable value on which the Excise duty would be payable. In the present case, the expenses incurred by the dealer for PDI and said services has nothing to do with the term “servicing” mentioned in the transaction value and as such, the said expenses cannot be added to assessable value.
On consideration of the Clause 7 of Circular dated 1st July, 2000, it is apparent that the respondents have brought into existence a deeming provision that is to say the respondents have treated all the manufacturers of cars on one platform and by fiction taken a decision to add the expenses incurred towards PDI and said services in the assessable value. It will have to be mentioned that in all cases where the expenses incurred towards PDI and said services are solely borne by the dealer and the manufacturer like petitioners have nothing to do with the said expenses then adding those expenses in the assessable value would be contrary to the provisions of Section 4(1)(a) r/w Section 4(3)(d) of the said Act. Looking to the facts and circumstances of this case, the respondents have not been able to place on record any material to show that the amount incurred towards PDI and said services can fall within the definition of the transaction value.”
The Hon’ble Court further referred to Circular dated 12.05.2000 which was issued contemporaneously with the amendment in Section 4. It expressly states that amount should be recovered from the buyer by the assessee-manufacturer and makes the following reading in this behalf:
“2.2 Definition of ‘transaction value’ has also been modified to make it more transparent. Any amount paid by the buyer himself or on his behalf to the assessee by reason of, or in connection with the sale, would form part of the transaction value. Any amount that is charged or recovered from the buyer on account of factors like advertising or publicity, marketing and selling organization expenses, storage and outward handling etc. will also be part of the transaction value. In fact, most of the charges that are recovered on account of the specific activities by advertising or publicity, etc. mentioned in the definition of transaction value are includable in the computation of ‘value’ under the existing section.
As such, the definition of transaction value does not seem to be divergently wider in content and scope from the interpretation of ‘value’ under existing Section 4. The definition of ‘transaction value’ should help set at rest any doubt regarding amounts that are charged or recovered from the buyer in respect of specific kind of operations done by the assessees. In essence, whatever is recovered from the buyer by reason of, or in connection with the sale, whether payable at the time of sale or at any other time is included in the transaction value.
… (emphasis supplied)”
This very position is reiterated by the Board in its circular Letter F. No. 354/81/2000-TRU dated 30.06.2000 which gives clause by clause explanation of the Section. Relevant extract from the same is reproduced herewith as under:
“6. …It may also be noted that where the assessee charges an amount as price for his goods, the amount so charged and paid or payable for the goods will form the assessable value. If, however, in addition to the amount charged as price from the buyer, the assessee also recovers any other amount by reason of sale or in connection with sale, then such amount shall also form part of the transaction value for valuation and assessment purposes. Thus if assessee splits up his pricing system and charges a price for the goods and separately charges for packaging, the packaging charges will also form part of assessable value as it is a charge in connection with production and sale of the goods recovered from the buyer …
It would be seen from the definition of ‘transaction value’ that any amount which is paid or payable by the buyer to or on behalf of the assessee, on account of the factum of sale of goods, then such amount cannot be claimed to be not part of the transaction value. In other words, if, for example, an assessee recovers advertising charges or publicity charges from his buyers, either at the time of sale of goods or even subsequently, the assessee cannot claim that such charges are not includable in the transaction value. The law recognizes such payment to be part of the transaction value that is assessable value for those particular transactions.”
The sequitur of the aforesaid discussion would be to hold that PDI charges and free ASS charges would not be included in the assessable value under Section 4 of the Act for the purposes of paying excise duty. The view taken by the Tribunal in favour of assessees in this behalf is correct in law and all the appeals of the Department are dismissed.