TMI Blog2012 (9) TMI 244X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. We are inclined to accept the stand of the petitioners that 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntation of the impugned order in original dated 5th December, 2011 passed by the respondent no.2. 3. However, at the hearing of the Petition, Counsel for the petitioners has restricted his arguments regarding the validity of the impugned Circular dated 1st July, 2002 and 12th December, 2012. Hence, the only question to be considered in this Writ Petition is whether clause no . 7 of the Circular bearing No. 643/34/2002CX dated 1st July, 2002 read with Circular No. 681/72/2002CX dated 12th December, 2012 to the extent they state that cost of pre delivery inspection and free after sales services incurred by the dealers are includable in the assessable value of the vehicles is violative of the provisions of the Central Excise Act, 1944? 4. Few facts necessary for the disposal of this petition are as under. The petitioners manufacture Indica / Indigo cars at Pimpari works. These cars are sold to customers through a countrywide network of dealers. From August, 2008 onwards the petitioners sold the said cars to their subsidiary company M/s. TML Distribution Company Ltd. (For short M/s. TMLD ) who in turn sell the vehicles to dealers. The petitioners have already disclosed that M/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aler while selling the car to the dealer. The petitioners received 4 show cause notices calling upon the petitioners to pay duty on account of Clause 7 of Circular No. 643/34/2002 dated 1st July, 2002 (For short Circular dated 1st July, 2002) as according to the respondents the costs incurred by the dealer towards PDI and said services was includable in assessable value. The four show cause notices cover the period from December, 2008 to June, 2011. These show cause notices are dated 25th November, 2009, 31st March, 2010, 27th January, 2011 and 23rd September, 2011. The petitioners showed cause to the said show cause notices. The petitioners were heard in regard to the said four show causes notices. The Commissioner, Central Excise, PuneI by his order dated 5th December, 2011 ruled on those show causes notices and directed the petitioners to pay Excise duty as well as interest and penalty more particularly stated in the said order dated 13th December, 2011. 7. According to the petitioners the said decision contained in order dated 5th December, 2011 was principally based on the Clause no.7 of Circular dated 1st July, 2002 and Circular dated 12th December, 2002. It is also noticed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of said Act defines the term transaction value . Learned Senior Counsel Mr. Sridharan had therefore submitted that in order to ascertain the assessable value of a car sold by the petitioners to a dealer, all those amounts which can be included in the definition of the term transaction value would be relevant and all those amounts taken together would constitute an assessable value and it is on that assessable value, the respondents can demand the Excise duty. 10. Learned Senior Counsel Mr. Sridharan had submitted that prior to the introduction of Circular dated 1st July, 2002, the cost incurred by the dealer towards PDI and said service was not included in the assessable value on account of provisions of law which stood then. Learned Senior Counsel Mr. Sridharan submitted that on account of Clause 7 of Circular dated 1st July, 2002 as well as Circular dated 12th December, 2002, the respondents have sought to introduce the new concept viz. to add expenses incurred by the dealer towards PDI and said services in the assessable value by interpreting that such expenses form a part and parcel of the transaction value. Learned Senior Counsel Mr. Sridharan appearing on behalf of the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nior Counsel Mr. Sridharan further submitted that the expression whether payable at the time of sale or at any other time shows that while the liability to pay additional amount is created and linked to the sale of goods, however, actual payment may be deferred to a later point of time also (For e.g. Credit Sales). According to the learned Senior Counsel Mr. Sridharan, the aforesaid terms would clearly exclude the expenses incurred for PDI and after sale services by the dealer. 13. Learned Senior Counsel Mr. Sridharan appearing on behalf of the petitioners further submitted that the petitioners charge a particular amount being cost of the car to the dealer and recover the same. He further submitted that while dealing with the dealer, the petitioners are not charging the dealer the cost of PDI and cost of said services. He further submitted that in the entire dealing with the dealer, there is no provision made for expenses incurred by the dealer towards PDI and said services. Learned Senior Counsel Mr. Sridharan had further submitted that looking to the provisions of Section 4(1)(a) and 4(3)(d), the expenses incurred by the dealer towards PDI and said services cannot be included ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not concerned with what happened to the goods thereafter. He submitted that in the present case the profit margin was fixed by the petitioners is irrelevant while determining the transaction value where a car is sold to a dealer. 16. It was submitted by learned Senior Counsel Mr. Sridharan that the respondents have not been able to place on record any material to show that the expenses for PDI and said services were paid by the petitioners to the dealer or reimbursed. According to him, if this is the position then, the expenses incurred for PDI and said services cannot be added to the assessable value. Learned Senior Counsel Mr. Sridharan had submitted that the dealers do not spend on PDI and said services on behalf of the petitioners and hence, those expenses cannot form part of the assessable value. He submitted that the respondents cannot rely upon dealership agreement to include expenses incurred for PDI and free after sales services and said services in the assessable value. It was submitted that attending to PDI and said services by a dealer was a routine and legitimate activity on the part of the dealer and that the dealer was required to perform the said activity so as t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, 2000 gives clause by clause explanation of the Section. He, therefore, submitted that the said Circular is clearly a contemporaneous exposition. He wanted this Court to rely upon the following portion of the said Circular. 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 for 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 ....... 7. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luded in the dealer's margin (or reimbursed to him). He further pointed out that respondents have treated this as a consideration for the sale of the goods to the dealer and have therefore applied Rule 6 of the Valuation Rules and have treated those expenses as expenses similar to the advertisement and publicity and have thereafter proceeded to include those expenses in the assessable value. Learned Senior Counsel Mr. Sridharan submitted that it is true that the dealer provides PDI and said services to the customers and these expenses have to be borne by the dealer as a part of condition for having a dealership. Even if it is accepted that the dealer spends a portion of the monies towards PDI and said services from and out of the amount which he gets from the dealer's margin, still that cannot be considered as a consideration for sale of the car to the dealer. He submitted that the petitioners do not reimburse to the dealer any amount towards the costs incurred for PDI and said services. He further pointed out that the provisions of Rule 6 of the Valuation Rules cannot be invoked in the facts and circumstance of the case because the transaction between the petitioners and the deale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the price which was relevant for the purpose of Excise duty was the price when the goods first entered the stream of trade. Learned Senior Counsel Mr. Sridharan submitted that in the present case, there is no question of trade discount given. In the present case, in fact the petitioners are not giving any trade discount to the dealers and the car is sold to the dealer at a price and the petitioners are paying Excise on the said amount. He further submitted that in the present case, once the car is sold by the petitioners to the dealer, no further transaction takes place between the petitioners and the dealer. It was contended that though the dealer has to sell the car to a customer at a price fixed by the petitioners and earn profit, however, that has nothing to do with the assessable value as the petitioners have paid excise on the amount which is received from the dealer as the cost of the car. Learned Senior Counsel Mr. Sridharan therefore submitted that the reliefs sought in the petition be granted and the petition be allowed. 24. Learned Counsel Mr. Jetly had opposed the submissions advanced by the learned Senior Counsel Mr. Sridharan. He submitted that the dealer incurs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s conditions contribute to the assessable value by the amended definition of the term transaction value. Learned Counsel Mr. Jetly further submitted that the theory of flow back of consideration or part thereof is not confined to direct monetary benefit to the assessee in connection with the sale of vehicle but rejuvenated to include consideration integrally connected with postsale obligations also and indirect benefit received in the course of or on account of sale as well as subsequent to the sale pursuant to any service rendered by the person who sells the vehicles under the contract with the manufacturer relating to the sale of the vehicles in view of meaning of transaction value as incorporated into the provisions of section 4(3)(d) of the Act w.e.f. 01.07.2002. According to him sales in such type of contracts is conceived by both parties to be complete if postsales obligation are dischargable by settled terms known to each other making performance of contract certain. 26. Learned Counsel Mr. Jetly had further submitted that expenses incurred towards PDI and said services is deferred and future consideration payable by the dealer to the petitioners and that is how the cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tances of sale on or after 1st July, 2000 shall be governed by the Circular dated 1st July, 2002 in as much as the cost incurred towards PDI and said services will be included in the assessable value. Learned Counsel Mr. Jetly submitted that on account of Circular dated 1st July, 2002 and 12th December, 2002 the showcause notices were issued and order in original is passed. 30. It was submitted by learned Counsel Mr. Jetly that in respect of the 4 show causes notices, the order in original dated 5th December, 2011 has been passed. He pointed out that the said order in original can be challenged before the appropriate appellate forum and, therefore, this Court should not entertain the plea of the petitioners which arise on account of order in original dated 5th December, 2011. He further submitted that the validity of the Circular has been considered by the CESTAT by its larger bench in the case of Maruti Suzuki Ltd. Vs. Commissioner of Central Excise, Delhi3, reported in 2010 (257) ELT 226 (Tri.LB). He submitted that the Circular dated 1st July, 2002 and 12th December, 2002 have been considered by the judgment mentioned aforesaid and the same have been accepted as properly issued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and before it is handed over to the customer. The free after sales services are to be carried out after the dealer delivers the car to the customer and the customer runs the car for a particular period and then approaches the dealer for getting the Car serviced. As to how and when the customer is supposed to get after sales services from the dealer is provided in the Owner s Manual and those terms are not in dispute. Undoubtedly, the dealer is required to spend money to carry out PDI as also said services. The petitioners give warranty to the customer provided the customer gets the car duly inspected as per the PDI requirements as also avails of the benefit of said services as set out in the Owner s Manual. If it is found that a particular customer does not get the PDI done or does not submit his car for said services, he would not be able to get the benefit of terms of warranty and such an omission on the part of the customer would be to the detriment of the customer. 34. For the purposes of determining the assessable value of a car to be sold by the petitioners to the dealer, such assessable value was to be computed as per the provisions of Section 4 as it stood prior to the am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rges, incurred by the dealer during the warranty period? Since these services are provided free by the dealer on behalf of the assessee, the cost towards this is included in the dealer's margin (or reimbursed to him). This is one of the considerations for sale of the goods (motor vehicles, consumer items etc.) to the dealer and will therefore be governed by Rule 6 of the Valuation Rules on the same grounds as indicated in respect of Advertisement and publicity charges. That is, in such cases the after sales service charges and PDI and free after sales services charges will be included in the assessable value. 36. It is to be noted that the respondents also issued another Circular bearing No. 681/72/2002CX dated 12th December, 2002 thereby withdrawing earlier Circular No.355/71/97 CX dated 19th November, 1997 and subsequent Circular No.435/1/1999 CX dated 12th January, 1999 and further directed that the withdrawal of these two Circulars will apply to past cases only, as the provisions of new Section 4 introduced w.e.f. 1st July, 2000 were not the subject matter of dispute before the Apex Court. This would mean that by this Circular dated 12th December, 2002 the earlie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 94 of the Finance Act of 2000. In our view, the answer to this question will decide the issues as between the petitioners and the respondents. In our view, it is not necessary for us to record our views on the correctness of the judgment delivered by the larger bench in the case of Maruti Suzuki (Supra). Similarly, in our view, it is not necessary to express any view on the order in original dated 5th December, 2011. 42.We have considered the provisions of Section 4 (1)(a) as amended as well as the provisions of Section 4 as they stood prior to the amendment which came into effect from 1st July, 2000. We are in agreement with the submission advanced by learned Senior Counsel Mr. Sridharan 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the petitioners that 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. The contention of the petitioners that the petitioners do not charge the dealer for the expenses incurred by the dealer towards PDI and said services is required to be accepted. 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) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contention. 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 de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessable value. 45. 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. 46.We have noted that after the amendment to Section 4 of the said Act in the year 2000, pursuant to Section 94 of the Finance Act, 2000, the respondents issued Circular No.F B10/ 1/2000/TRU dated 12th May, 2000 as also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cost is incurred by the petitioners qua the dealer towards the term servicing . As such, the petitioners have not included any amount in the assessable value with reference to term servicing and as such the expenses incurred towards PDI and said services, which expenses are incurred solely by the dealer without reference to the petitioners cannot be included in the term servicing appearing in the term transaction value . For the reasons mentioned aforesaid if a dealer incurs expenses towards the PDI as well as free after sales services without reference to the manufacturer like petitioners, then, the said expenses incurred by the dealer cannot form a part and parcel of the assessable value. To that extent, Clause 7 of the Circular dated 1st July, 2002 is illegal and void and is contrary to the provisions of Section 4(1)(a) r/w Section 4(3)(d) of the said Act. Similarly, the Circular dated 12th December, 2002 to the extent it confirms Clause 7 of Circular dated 1st July, 2002 is void and illegal. 49. For all the aforesaid reasons, we hold that as per Section 4(3)(d) of the Central Excise Act, 1944 the PDI and free after sales services charges can be included in the transact ..... X X X X Extracts X X X X X X X X Extracts X X X X
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