TMI Blog1998 (2) TMI 271X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 22,46,928.75 1-9-1986 to 31-3-1987 3-4-1987 Rs. 47,03,400.00 Appeal No. E/213/90-A has been filed M/s. Maruti Udyog Ltd. (for short, Maruti) against the order dated 23-10-1989 passed by the Collector of Central Excise, New Delhi. The particulars are as follows :- Period Date of SCN Amount 1984-95 to 27-3-1986 3-8-1988 Rs. 9,77,269.57 We have heard the appeals together since certain common questions arise for consideration. 2. Mahindra, engaged in the manufacture of Jeep vehicles has a network of dealers and sub-dealers appointed under agreements, to cater to the needs of different and allotted areas. They book orders and supply vehicles to customers who place orders, sell spares as authorised stockists, provide free after sales service and advertise as directed by Mahindra. Mahindra effect direct supply to Government Departments on rate contract. The dispute in the present appeals relates to sales to dealers. Mahindra has been declaring prices to dealers and on approval thereof paying central excise duty on assessable value determined accordingly. Dealers margin varied between Rs. 2500 to Rs. 3500 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nced marketability of the product. The Collector relied on the decision in Bombay Tyre International case 1984 (14) E.L.T. 1896 (S.C.), distinguished the decision of the High Court of Bombay in the Mahindra s own case reported in 1984 (16) E.L.T. 76 and other cases. The other contentions raised were overruled and demands were confirmed. 3. The dispute in the case of Maruti in Appeal No. E/213/90-A relates to cost of free aftersales services obligatorily rendered by and of predelivery inspection (PDI) conducted by dealers under terms of agreements entered into with Maruti. Price lists were filed claiming deduction of dealers margin of Rs. 2000 per vehicle from the declared wholesale price and the same were approved and duty was being paid on that basis. Internal records of Maruti showed that the dealers margin of Rs. 2000 included Rs. 350 per vehicle towards expenses of aftersales services and PDI. Margin was being paid to dealers in instalments. The cost element of Rs. 350 was being paid only after being satisfied about performance of aftersales services and PDI. These elements should have been declared as part of assessable value but were actually suppressed with intent to eva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 1.10 lakhs 1985-1986 Rs. 25.46 lakhs Rs. 1.74 lakhs Rs. 3.48 lakhs 1986-1987 Rs. 25.57 lakhs Rs. 2.03 lakhs Rs. 3.06 lakhs The C.A s certificate produced along with the affidavit certified the amounts reimbursed by Mahindra to dealers as being 50% of the amounts spent by dealers for advertisement. According to the affidavit the amounts spent by Mahindra for advertisements were taken from the balance sheets for the respective years. 5. According to Shri K.M. Mondal, Consultant appearing for the Department, the affidavit and accompanying documents are in the nature of additional evidence on an aspect not pleaded in the replies to the show cause notices and as such should not be looked into. On an earlier occasion, the Bench adjourned the case to enable Mahindra to produce the particulars of the expenses of advertisement and after the affidavit and documents were filed the Bench also granted an adjournment to enable the departmental representative to take instructions regarding the contents of the affidavit and documents. Evidently it has not been possible to obtain instructions. That the agreements required dea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sridharan appearing for Maruti supported the above submissions. He also contended that cost of PDI cannot be included in the assessable value as it was a pure post-clearance activity not having any connection with manufacture or marketability. Shri K.M. Mondal rebutted the above contentions. According to him the decisions relied on by the appellants were contrary to Bombay Tyre International 1984 (14) E.L.T. 1896 (S.C.) and hence cannot be followed by the Tribunal. He contended that the burden of the manufacturer in the matter of advertisement, after sales service and PDI was shifted to the dealers under terms of the relevant agreements and if the manufacturer themselves had met the expenditure, the same would have been made up by reducing the dealers margin and hence it must be taken that there was flow of additional consideration. The dealers attended to these activities not of their own account, but under the terms of the agreements as compelled by the manufacturers. The agreements clearly specify that the amount of dealers margin includes the element of cost of marketing, after sales service and advertisement. 7. In Bombay Tyre International - 1984 (14) E.L.T. 1896 (S.C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erely indicate that both the wholesale buyer and the petitioners were interested in having greater production and sale thereof and that condition, in my judgment, cannot be considered as relevant to reach the conclusion that the agreement was not at arms length . (Emphasis supplied) A Division Bench of the High Court confirmed the above decision in the judgment reported in 1989 (43) E.L.T. 611 (Bombay H.C.). It was held that the relationship between the manufacturer and the distributor was on principal to principal basis and the distributor was not in any way an agent of the manufacturer and the price charged to the distributor was the wholesale price. The Court held :- ......both the Company and the distributor had mutual interest in maximising the sale of the products in question. In the above view, these provisions relating to advertisement etc., were in furtherance of the said desire on the part of the Company and its distributor and in no way affected the real nature of the transactions which appear to be sales on principal to principal basis. (Emphasis supplied) 9. In Standard Electric Appliances, 1986 (23) E.L.T. 302 (Madras H.C.), the manufacturer appointed a de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icating authority disallowed discount to the extent of 2%. The Tribunal held that the obligation of the dealers was under the agreement and not out of their own free will for the purpose of their own business, that the dealers were not acting independently, but as agent of the supplier and confirmed the disallowance of deduction of 2% out of the discount relying on the Bombay Tyre International 1984 (14) E.L.T. 1896 (S.C.). Though the agreement did not so provide, the manufacturer actually reimbursed the dealer to the extent of 50% of the cost of advertisement incurred by the dealer in terms of the agreement. Regarding the aspect of advertisement, the Supreme Court held :- It seems to us clear that the advertisement which the dealer was required to make at its own cost benefited in equal degree the appellant and the dealer and that for this reason the cost of such advertisement was borne half and half by the appellant and the dealer. Making a deduction out of the trade discount on this account was, therefore, uncalled for. (Emphasis supplied) Regarding the obligation to carry out free after-sales-service, the Court held :- ......it did of course enhance in the eyes of in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , market survey, preparation of sale forecasts, advertisements etc. The Tribunal held that if contract of sale and purchase disclose that the transaction is from principal to principal and property in goods passed on to the buyer on delivery, the aforesaid conditions of the agreement do not have any effect on the transaction and it cannot be said that the activities were carried on by buyers on behalf of the manufacturer. 13. In Hero Honda Motors Ltd. 1998 (100) E.L.T. 468 (T) = 1997 (19) RLT 842, the manufacturer was conducting advertisement campaign, also printing the names and addresses of wholesale dealers and collecting proportionate charges from them. The Tribunal held that where the dealer was not in the picture and the advertisement campaign was conducted by the manufacturer that can certainly be regarded as contribution wholly or exclusively to the marketability of the product but where there is a dealer in the picture and the advertisement helps the dealer apart from helping the manufacturer, the matter has to be looked at differently. 14. In Appeal Nos. E/2270/90-A and 3003/92-A (M/s. Escorts Ltd.), the manufacturer was supplying publicity material to dealers at its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tocks of the products as may by mutual consent be considered adequate. (e) Dealers shall effectively extend after-sales services arrangements for servicing the products to purchasers thereof in accordance with the directions issued by Mahindra from time to time. (f) Dealers shall advertise and display at their own expense the products and service facilities in their respective territories to such extent and in such manner as may be considered necessary by Mahindra and the nature and method of which shall be subject to Mahindra s general approval and supervision. (g) Dealers margin represents the sum total of : (i) Cost of financing the purchase and stocking of the products, (ii) Cost of selling the products, (iii) The cost of meeting the service obligations to customers, and (iv) Profit to the dealers. Revenue has no case that the dealers were related persons of Mahindra or that the transactions between them were not on principal to principal basis or were not at arms length. Dealers are interested in offering free service facilities to the customers with a view to earn goodwill and attract customers. Advertisement by dealers is a well-known method of attracting cu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he adjudicating authority has to verify the correctness of the facts pleaded in the affidavit after giving an opportunity to Mahindra to establish the same. If Mahindra fails to establish one or more of the facts pleaded in the affidavit, the dispute has to be decided in the light of the decision of the Supreme Court referred to and on consideration of several aspects such as the quantum of products manufactured by Mahindra and purchased by dealers, the amounts spent by Mahindra and dealers for advertisement, the proportion thereof whether the transactions were on principal to principal basis and at arms length and other relevant aspects. The Collector has added Rs. 1500 per vehicle without explaining the basis on which quantification has been made. If addition was justified on merits, the Collector should have estimated the quantum of different components covering dealers margin and determined the quantum covering the components to be added to assessable value. Quantification made is not sustainable. 19. As per trade practice and the terms of agreements, dealers of Maruti had to carry out inspection of vehicles purchased from Maruti before delivery to allotted customers. Such P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessable value of Maruti vehicles. 20. We will now deal with the other contentions raised by Mahindra. All the show cause notices were issued by the jurisdictional Superintendent. The proviso to Section 11A of the Act was amended to the effect that notice under the (sic) has to be issued by the Collector of Central Excise. The amendment was brought into force on 27-12-1985. The amended provision was in force when show cause notice dated 3-1-1986 was issued by the Superintendent. The notice was therefore illegal and cannot be foundation for a valid demand. Thus the demand based on this show cause notice fails. 21. The six show cause notices issued to Mahindra did not specify the amount of differential duty proposed to be demanded. For this reason it is contended that the notices are invalid and demands must fail. The Superintendent had issued six addendum notices specifying the exact amount of demand and indicating the basis of quantification. Assuming there was defect in the original show cause notices, the defect has been cured by the addendum notices. In this view there is no infirmity in the demands as alleged. 22. It is contended by Mahindra, that show cause notice dat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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