TMI Blog2003 (5) TMI 439X X X X Extracts X X X X X X X X Extracts X X X X ..... re termed distributors , during the period under dispute such buyers were termed wholesalers / resellers . (a) The agreements entered into by the buyers with HP (sample for 1-3-2000) consists of Wholesale Programme Terms defining Wholesaler s Relationship with HP as follows : WHOLESALER RELATIONSHIP : (A) The Wholesaler s relationship between its parties will be that of Wholesaler buying as an independent contractor from HP and reselling to a network of resellers (B) Wholesaler will not sell HP Products to end-user customers. Wholesaler will sell HP Products only through registered HP Resellers. A Registered Reseller is a company who purchases Products from Wholesaler which Registered Reseller to end-users other than Registered Reseller s corporate parent, division, or any subsidiary of corporate parent in the regular course of business (C) Wholesaler is responsible for understanding, monitoring and enforcing the above terms and conditions for the Wholesaler s Registered Resellers. HP may withdraw its permission for sales to a given Registered Reseller, or to all Registered Resellers at an approved location, with or without cause at any time, by noti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting deadlines (iii) Quality of reported Inventory and Sell-through data (iv) Responsiveness to issues regarding the quality of data reported C. REMUNERATION HP will remunerate Reseller for this service with an additional discount of 1% already included upfront in Reseller s discounts. Failure to comply to any of the requirements will entitle HP to remove the additional discount on future orders. (b) The buyers place purchase orders on the appellants for the purchase of various models of computers. The said purchase orders, are made on the basis of the list price published on the web site of the appellants, reduced by a minimum of 30% from the list price, to indicate the net price, as the price, at which the goods are to be supplied by the appellants. (c) The appellants have been extending discount ranging from 30% to 45% on the list price published on the website and has been paying duty on the value as arrived at from the prices reduced by the discount extended from time to time to the buyers. 2. (a) A show cause notice dated 26-3-2001 was issued alleging that in terms of the agreement entered into, by the appellants with their buyers, out o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nding from the admitted nature of the 1% discount being given and taking into consideration the definition of wholesale trade in Section 4(4)(e) wholesale dealer in Section 2(4) of the Central Excise Act, 1944 he found : - . In this case also the reseller/wholesaler have acted as the wholesale dealer and also as an agent of the assessee in as much as being responsible to the extent of the services/feed back to be provided by them to the assessee in terms of the agreement and received the remuneration for such activities which was claimed as a discount by the assessee. But the same is not the actual discount but a commission or remuneration to the wholesale dealer in terms of their services as an agent of the assessee. and thereafter concluded the 1% payment to be a commission or remuneration to the dealer as an agent in terms of the agreement and the same was not eligible deduction and duty was liable to be paid on the said component, claimed as deduction from the price. (c) The appellants have challenged this finding about the ineligibility of the deductions as claimed from the price on the grounds :- (A) Agreement does not lead to any adver ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and market share etc, in an appropriate manner. This practice of HPI is therefore in the normal course of business when products are sold to a wholesaler. (6) It is the submission of the appellants that in view of the position indicated above, it would have been impractical for the appellants to treat the same purchaser as a dealer for certain month and as a commission agent for certain other months. (7) In the sales model that has been adopted at the factory by HPI, the goods are sold in wholesale to the dealer i.e., there is transfer of ownership of the goods and the goods are carried as assets by the dealer until sold. These goods when finally sold to the retail customer result in a revenue of the total sales value of the unit to the seller. The question of commission would arise only if between the buyer and seller there is an intermediary person or body corporate, which has assisted the manufacturer in selling the product to the end customer and for providing these services he is compensated by way of a commission. In such cases, the sale is made by the manufacturer directly to the end customer and agent is compensated for the services by way of a commission. The age ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a commission to the resellers for the services rendered by them, whether there has been any flow-back of any amount representing 1% of the total sale price of the product. To put it differently, if the appellants had sold the computer at the price, which is the list price of Rs. 100/- minus 30% i.e., Rs. 70/-, the point that would arise for consideration is whether apart from the amount of Rs. 70/- given by the purchaser to the appellants, is there any additional amount of Re. 1/- flowing as an additional consideration to the appellants. The answer is a clear no . In such a situation, the question of addition of 1% in the assessable value of the goods cleared is not permissible. There is no allegation of flow back either or any evidence to that extent provided by the department against the appellants. (4) Assuming without admitting that the appellants have been implementing this clause in its true spirit and therefore have been granting only 29% discount to those resellers who have not provided feedback, it would only mean that during the month when 29% was extended as trade discount, the price of the product would not be Rs. 100/- minus Rs. 30/- i.e. Rs. 70/-, but would be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the wholesaler is acting as an agent of the appellants for the goods purchased by him. (C) Price with the minimum discount of 30% is the price at which the goods are ordinarily sold by the appellants (1) The assessable value arrived at on the basis of the discount extended to majority of the purchasers has to be the basis for assessment of all clearances made by the assessee. The statement giving the factual details would indicate that in the majority of the transactions, the appellants have extended discount of minimum of 30%. This practice has been accepted by the Department in two refund orders passed by the Assistant Commissioner dated 20-4-2000/29-6-2000 and 28-3-2000. In these orders, the Assistant Commissioner has held that even though discount in excess of 30% has been extended, since the normal selling price of the appellants is list price minus 30%, excess discount has to be ignored. These orders reinforce the contention of the appellants that their general practice has been to extend discount of 30%. Once it is accepted that the discount that is generally extended by the appellants is to the extent of 30% such an abatement is permissible. And on limitatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vices rendered by the dealers, is not in the nature of a discount and cannot be reduced from the assessable value. He described as a remuneration or commission . The issue is whether the said 1%, admittedly described in the agreement as remuneration, is reducible from the value of the goods for the purpose of assessment. The case of Philips India in which the Apex Court gave the judgment relied upon by the appellant, was about very different facts. In that case, the dispute related to sharing of advertisement expenses by the dealer, where advertisement directly benefited the dealer. In the present case, the dispute relates to the remuneration paid to the dealer for a service rendered by him, to the results of which he is commercially indifferent. (c) In this case, the reports sent by the dealers are in the nature of market intelligence about the products of competitors. The reports provide information about movement of different products of different manufacturers in the market. The dealers are in a position to provide this information as they themselves stock these different products. They (the dealers) are not sole stockists of HP products; they stock products of various ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e were required on record and from the details available from these reports sent by the dealers, a summary report prepared, would indicate inventory positions of various models which on perusal, the appellants would realize the quantities of that particular model and their availability/accumulation at various points with the dealers and the appellants thereafter came up with various schemes of providing gifts such as Web camera etc., for increasing the sale of such accumulated stocks of a particular model which resulted in reduction of stocks. The appellant s Advocate also took us through various such schemes announced and performed from time to time. (b) If the stocks, held by a dealer as shown in the inventory levels as in these reports, indicated that a particular brand has accumulated, and by locating another dealer who required in another region, the appellants advised the other dealer to approach dealers having the stocks, thus resulting in sales of accumulated stocks. (c) They also submitted that the reliance placed on Para 20 of the decision of the Apex Court in the case of Govt. of India v. Madras Rubber Factory reported in 1995 (77) E.L.T. 433 (S.C.) has to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Moped India Ltd. v. Asst. CCE, Nellore Ors. [1986 (23) E.L.T. 8 (S.C.)]. (iii) Snow White Indl. Corpn. v. CCE [1989 (41) E.L.T. 360 (S.C.)]. (iv) Philips India Ltd. v. CCE, Pune [1997 (91) E.L.T. 540]. (v) DCM Textiles v. CCE, New Delhi [2000 (120) E.L.T. 424 (T)]. lead to the conclusion that the relationship of a principal and an alleged agent has to be looked into, taking into account the complete nature of the agreement and not by considering the single factor alone, the finding on commission is not correct. It has been laid down that specifically it should be seen whether the seller retained control over the goods and had the authority to manipulate the same after the goods were sold by him to an agent. It was submitted that in this case the agreements very clearly stated that relationship between the appellants and the buyers was on a principal to principal basis and not as a principal and an agent and the property in the goods get transferred to them immediately on the sale of such goods. The buyer could not be considered as an agent of HP in this case and the said 1% is not commission. 5. After considering the material on record and the submissions ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for services rendered. They cannot be discounts which could be offered on price of goods sold; these services are not being rendered gratis, for mutual benefit of HP and the wholesaler/reseller by the later. Therefore, Remuneration of this 1%, would be in the nature of an expense incurred by HP, for marketing, not the goods being sold, but also for goods sold earlier or later to the same buyer or another buyer of HP. It is only being calculated or determined and paid or effected, as per the Remuneration terms, with reference to an additional discount of 1% already included upfront in resellers discount. Merely because it is reckoned at 1% of the discount, as eligible and is not a fixed sum, the same will not take it out from the non-deductible amounts from assessable value under Section 4 of the Central Excise Act, 1944. There is force in the arguments being placed by the ld. DR, in as much as, that these reports sent by the dealers, are in the nature of market intelligence, about the products of HP and their competitors. The reports, therefore, did not benefit the dealers as made out by the ld. Advocate for the appellants, but are benefiting the manufacturer exclusively in eff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t for the purpose of stocking such goods belonging to others for the purpose of sale. What the provisions seek to recognize is the fact that a wholesaler can act not only as a dealer but also as an agent. This does not, however, mean that for the same consignment he can play a dual role. If for a particular consignment a wholesaler has acted as a purchaser of the goods to whom the property in the goods has been transferred, he cannot in the same vein be acting as an agent for the consignment. All that the definition recognizes is the fact that a wholesale dealer, apart from purchasing and selling goods, can also either for the same seller or for some other seller stock the goods and transfer it to others as per the directions of the principal. In this case, the wholesalers have purchased the goods from the appellants. The property in the goods has been transferred as soon as the goods were sold to them. The appellants do not have the right to recall the goods from the dealers. The wholesalers are not under any obligation to the appellants after the goods have been purchased by them. It is their right to decide the person to whom they sell the goods as also the price at which they ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , that nature of the abatement is to be examined from the totality of the material. Merely because it is termed as additional discount would not make it an eligible discount in the same fashion and for the same reasons, that, by merely calling a payment as commission, it does not become an ineligible discount. Similarly, by calling a commission as a remuneration will not make it eligible. The nature of an abatement claim under Sec. 4 of the Central Excise Act, 1944, are required to be looked into and determined, to arrive at whether the abatements claimed, is in the nature of a discount as understood from the agreement/or and in the trade or not. No material has been placed before us to bring on record and prove that in this commodity s trade, such remunerations are considered known and accepted as discounts . As regards the facts herein, it is found that the same is not a discount . In view of this fact, we find this claim of abatement to be not in the nature of a discount. It is in the nature of a compensation caused by an additional liability of functions undertaken, for the benefit of HP, by the reseller. Such abatements are not permissible deductions under Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance, no other conclusion could be arrived but that remunerations were paid. That a supposed service was not rendered, will not cause a view to be arrived at that the said remuneration was a discount. The duty calculations as arrived at of Rs. 83,00,304/- are required to be confirmed. (i) From the Order, it is found that a penalty of 100% of the duty determined under Section 11AC has been arrived at without coming to or giving any reasons why the penalty should be at that level. We find that Section 11AC provides for a mandatory penalty equivalent to 100% of the duty determined. However, in each case, it need not be automatically 100% and there should be good reasons arrived at to sustain it at that level. The Apex Court has laid down the law on this aspect in the case of State of Madhya Pradesh v. Bharat Heavy Electricals [1998 (99) E.L.T. 33 (S.C.)], which has been followed by the Tribunal in the case of Kalyani Traders v. CC, Chennai [2002 (150) E.L.T. 1305 (Tribunal)], being bound by the same, we cannot uphold the 100% penalty as imposed, we would consider that a penalty of Rs. 10 lakhs would suffice the ends of this case. (j) The interest under Section 11AB, orde ..... X X X X Extracts X X X X X X X X Extracts X X X X
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