Commissioner
of Central Excise, Mumbai III Vs. M/S. I.S.P.L. Industries Ltd [2003] Insc 244
(21 April 2003)
S.N.Variava
& Brijesh Kumar.
WITH
C.A.Nos.6600-6607/1999, 3635/2000, 798/2000, 410/2000, 787-788/2000, 868/2002
and 864/2002 BRIJESH KUMAR, J.
All
the above noted appeals have been preferred by the Revenue under Section 35 L
(b) of the Central Excise and Salt Act, 1944 (for short 'the Act') against the
orders passed by the Customs, Excise and Gold (Control) Appellate Tribunal (for
short 'CEGAT'), allowing the appeals of the assessees and holding that notional
interest on the advances taken by the assesses, from the buyers is not liable
to be added in the assessable value of the goods. With minor variations in the
facts of each case, the main question involved in all these appeals is the same
viz. the notional interest is liable to be included or not in the assessable
value of goods. This question has been differently framed in different appeals
but crux of the matter for consideration remains the same, hence all these
appeals have been heard together and they are being disposed of by one common
order. In Appeal No.410 of 2000, it was also indicated on behalf of the
respondent that major part of the demand had become time barred. If necessary,
we would advert to that question. No other question, in any appeal has been
raised or pressed before us by either party.
For
the sake of convenience, we refer to the documents on the record of the Civil
Appeals Nos.2884-2892 Industries Ltd. The show cause cum demand notice dated
3.7.1995 is a long notice calling upon to show cause in respect of different
matters under the Central Excise Act, besides one relating to inclusion of the
notional interest in the assessable value, on the interest free advances taken
by the assessees from customers. It reads as under :- "Whereas it appears
that M/s.ISPL Industries Limited, Kolshet ..
1)
They have not included the interest accrued on the advance received from the
customers in the assessable value on the goods cleared during the period from
Jan.95 to Mar (details shown in the Annexure enclosed in the SCN).
The
interest payable/paid in the advance made by the customers includible in the
assessable value because the assessee would have incurred the expenditure for
the said interest had they borrowed taken loans from Banks. The advance are
similar to bank loans or money borrowed from banks and hence the interest on
said advances is includable in the assessable value in view of Section 4 of the
C.Ex. and Salt Act 1944 read with rule 5 of C.Ex. valuation rules 1975 and
charged approximate C.Ex. duty, which they have failed to do at the time of
clearance of excisable goods (details given in the Annexure to this show cause
notice).
1) 2)
..
Now
therefore the assessee are hereby required to show cause to the Dy.
Commissioner, C.Ex. Bombay-III having his office at 4th floor, Navprabhat
Chambers, Ranade Road, Dadar, Bombay 28 to why :
a) The
interest accrued on the advances received from their customers should not be
included in the assessable value, the interest being calculated at the rate of
18% (Normal Bank rate of interest) from the date of receipt of
advances/deposits till the date of final dispatch of material and Xxx xxx xxxx
Superintendent C.Ex.
Range
IV Div. Thane III" As it would be evident, the main plank of the demand is
that the advances taken from their customers are similar to bank loans or money
borrowed from banks on which interest would normally be payable by the assessee,
hence the interest on such advances is liable to be included in the assessable
value as per the provisions under Section 4 of the Central Excise & Salt
Act, 1944 read with Rule 5 of the Central Excise (Valuation) Rules, 1975.
The
assessing authorities and the appellate authority did not accept the
explanations of the assessees and added the notional interest accrued on
advances made to the manufacturers, in the assessable value. The CEGAT,
however, set aside those orders holding that it was not liable to be included
in the assessable value. The Revenue has preferred appeals against the orders
of the CEGAT.
The
respondent-manufacturers had resisted the demand on various grounds. Some of
the manufacturers, who manufacture the tailor made goods i.e. as per the
requirement of the buyer, they have to ensure that the goods manufactured,
which are generally heavy machines, are taken delivery of failing which it may
result in very heavy losses, as such machines would not be of any use for
others nor it would be possible to get buyers for such tailor made goods. In
such cases the advance taken is nothing else than mere security for the due
performance of the contract.
In
some cases, it is submitted that advance of only a part of the amount is taken
rest of which, for example, upto 90% is paid on delivery of the goods and the
balance of 10% or whatever amount as per agreement it may be, is paid after the
period fixed for watching the proper performance of the machinery. Therefore,
sometimes the amount which remains in balance is paid much after the delivery of
the goods. Their case is that it all depends on the terms and conditions of
contract to contract on which advance is made in full or in part. Yet another
submission which has been advanced is that it is not necessary that amount
taken in advance must necessarily be used for manufacture of the item. There
may be units which may carry out the manufacturing and supplies without any
need of having utilized such amount. It might have sufficient resources of
liquid finances of its own to carry out the manufacturing.
That
is to say for such units there may not be any necessity to take loans from the
banks or other institutions.
We may
at this stage peruse the relevant provision under the law which has been
pressed into service by the revenue for the purposes of adding the amount of
notional interest in the assessable value. Section 4 of the Central Excise Act
reads as under :
"4.
Valuation of excisable goods for purposes of charging of duty of excise (1)
Where under this Act, the duty of excise is chargeable on any excisable goods
with reference to value, such value, shall, subject to the other provisions of
this section, be deemed to be (a) the normal price thereof, that is to say, the
price at which such goods are ordinarily sold by the assessee to a buyer in the
course of wholesale trade for delivery at the time and place of removal, where
the buyer is not a related person and the price is the sole consideration for
the sale :
Provided
that
(i)
where, in accordance with the normal practice of the wholesale trade in such
goods, such goods are sold by the assessee at different prices to different
classes of buyers (not being related persons) each such price shall, subject to
the existence of the other circumstances specified in clause (a), be deemed to
be the normal price of such goods in relation to each such class of buyers;
(ia)
where the price at which such goods are ordinarily sold by the assessee is
different for different places of removal, each such price shall, subject to
the existence of other circumstances specified in clause (a), be deemed to be
the normal price of such goods in relation to each such place of removal;
(ii)
where such goods are sold by the assessee in the course of wholesale trade for
delivery at the time and place of removal at a price fixed under any law for
the time being in force or at a price, being the maximum, fixed under any such
law, then, notwithstanding anything contained in clause (iii) of this proviso,
the price or the maximum price, as the case may be, so fixed, shall, in
relation to the goods so sold, be deemed to be the normal price thereof;
xxx xxx
xxx (4) For the purposes of this section, - xxx xxx xxx (d) "value:, in
relation to any excisable goods, - (i) where the goods are delivered at the
time of removal in a packed condition, includes the cost of such packing except
the cost of the packing which is of a durable nature and is returnable by the
buyer to the assessee.
Xxx xxx
xxx" Rule 5 of Central Excise (Valuation) Rules, 1975 falling in Chapter
II reads as under :
"Where
the excisable goods are sold in the circumstances specified in clause (a) of
sub- section (1) of Section 4 of the Act except that the price is not the sole
consideration, the value of such goods shall be based on the aggregate of such
price and the amount of the money value of any additional consideration flowing
directly or indirectly from the buyer to the assessee".
Shri R.P.Bhat,
learned senior counsel appearing for the Revenue submits that amount of advance
taken by a manufacturer from its customers free of interest and such money
being utilized for the purposes of manufacture of the goods, entails profit to
the manufacturer to the extent of interest which would have been paid by the
manufacturer to the bank. The benefit which accrues to the manufacturer amounts
to profit to him, liable to be added in the assessable value of goods. Such
buyers advancing money are favoured buyers, enjoying special concession or
benefits at the hands of the manufacturer to the detriment of the revenue. He
has taken us through the order passed by the Commissioner of Central Excise
where it has been observed that price charged from a favoured buyer would not
be a normal price.
Therefore,
notional interest on the interest free advance taken from the favoured buyer would
justifiably be added to the assessable value. We find that reliance has been
heavily placed upon the decision reported in 1995 (75) ELT Collector of Central
Excise, Madras. The facts in the case of the Metal Box are that Ponds (India)
Ltd. has been buying about 90% of the total production of metal containers
manufactured by the assessee. For the said purpose huge amounts were being
advanced by Ponds (India) Ltd. free of interest to M/s.Metal Box. In its turn
the assessee gave 50% discount in price, as compared to the normal price, to
Ponds (India) Ltd. This Court while dealing with the question observed
"when Ponds (I) Limited was given 50 per cent discount from normal price
then the material aspect that Ponds (I) Limited had advanced large amounts free
of interest had necessarily entered into consideration between the parties.
Therefore, special treatment was given by the assessee to Ponds (I) Limited.
"It is further observed, had Ponds (I) Limited not given the advance, the
assessee would have borrowed the same for purchasing the raw materials etc.
from banks on which large amount of interest would obviously have been paid
which in turn would have got reflected in the purchase price to be charged from
the buyers as amount of interest payable to the banks on the loan would be part
of cost of production passed on to the customers of the assessee. It has been held
:
"Section
4(1)(a) that normal price would be price which must be the sole consideration
for the sale of goods and only under such a situation sub- section (1)(a) would
come into play. If the price in a particular transaction is not the sole
consideration flowing directly or indirectly from the buyer to the assessee-manufacturer,
either in cash or any other form, the additional consideration quantified in
terms of money value is to be added to the price declared by the assessee for
determining the normal price of the goods." We therefore, find that the
main basis of adding the notional interest in assessable value of goods was on
account of interest free loan which factor was responsible for determination of
price between the parties namely, discount of 50% i.e. the price other than the
normal price. There came to be two prices one for those who may not have
advanced any interest free loan to the manufacturer and the other for Ponds (I)
Limited which was a bulk purchaser to the extent of nearly 90% of the
production for which purpose advance was also made available to the
manufacturer without interest. The fact of interest free loan, has direct nexus
with price fixation at a lower amount than the normal price.
The
other case on the point which has been relied upon by the learned counsel for
the respondents is reported Central Excise, Hyderabad. The appellant in that
case carried on business of manufacture and sale of cigarettes exigable to
excise duty. The goods manufactured by them were sold in wholesale. The main
dealers would sell the cigarettes to the wholesalers. The appellants sold the
goods on cash-and-carry basis as well as by extending credit facility to some
of its main dealers. Since it was felt that there was delay in remittances of
the amount on account of sale on credit, the manufacturers introduced a credit
facility scheme under which such main dealers were to make interest free security
deposit equivalent to about 21 days of their normal monthly purchases. They
could also purchase the goods on cash basis as well, if they so desired. The
other dealers who were not availing of the credit facility as well as those
availing of such facility, the goods were sold to both at the same price. That
is to say no special concession or discount was given to those who deposited
interest free security for credit facility. The revenue, however, served a
notice under Rule 5 of the Valuation Rules, 1975 for adding the notional
interest on the security amount advanced interest free, so as to arrive at the
normal price of the goods.
This
Court negated the case of the revenue for reloading the assessable value by
adding notional interest on the amount of interest free advance deposited as
security by some of the dealers. One of the main considerations was that
uniform price was being charged by the manufacturer from all its dealers. That
is to say the price was not influenced by the fact of interest free security
deposit made by dealers availing the credit facility. This Court also observed
that the case of Metal Box (supra) is clearly distinguishable since in that
case lesser price was being charged from M/s.Ponds (I) Limited as compared to
other buyers. Therefore, one of the relevant factors would be as to whether the
price is affected by the fact of interest free advance or remains uniform for
all. If the price is not influenced by the fact of interest free advance, there
would be no occasion to contend that the price charged uniformly from both sets
of the buyers would still not be a normal price.
Learned
counsel for the respondents in one of the appeals, has drawn our attention to a
circular of Government of India, Ministry of Finance (Department of Revenue),
Central Board of Excise & Customs, New Delhi dated 22.6.1998. The circular
was issued on the subject of liability of duty on notional interest on advance
deposits taken by manufacturers, particularly in view of the decisions in the
Machine Works Limited, 1995 (77) E.L.T. 799 (Madras) and M/s.VST Industries
Ltd. (supra). On consideration of the decisions indicated above, the circular
notifies the opinion of the Law Ministry as follows :
"(i)
The notional interest on advances deposited by the wholesale buyers would be
included for the purpose of determination of assessable value if the deposit
influences the fixation of sale price either by way of charging a less price
from or by offering a special discount to the buyer who has given the deposit.
(ii)
If two different price exist, one for the wholesale buyer who has deposited the
advance and the other for the wholesale buyer who has not deposited the
advance, they would form two different classes of buyers and two different
assessable values can be arrived at. For the wholesale buyer depositing the
advance, the notional interest on advance deposit should be added for the
purpose of determination of the assessable value.
(iii)
If there is no difference in the selling price for both categories of the
wholesale buyers and there is also no proof that on account of advance deposits
taken from some buyers, the price charged from all buyers has been reduced,
then element of notional interest on advance deposits cannot be added.
(iv)
If the interest earned/saved on such advanced deposits is credited to the buyer
calculated at a rate lower than the normal bank rate, the difference in both
interest rates should be equivalent to the extent of benefit derived by the
manufacturer. The money value of the extent of benefit should be quantified and
added for the purpose of determination of the assessable value.
This
supersedes the Board's Circular No.215/49/96 (F.No.6/1/91-CX.1), dated 27-5-
1996." (Emphasis supplied) The above circular leaves no room to doubt that
where price is not influenced by fact of interest free advance made by the
buyer to the manufacturer, there would be no occasion to add notional interest
to the assessable value of the goods.
Learned
counsel appearing for the respondents in one of the appeals has also brought to
our notice another Notification dated March 1, 2003 amending the Rules by the Central
Excise Valuation (Determination of Price of Excisable Goods) Rules, 2003.
Clause 3 reads as under :
"In
the said rules, in rule 6, the Explanation shall be renumbered as Explanation
1, and after the Explanation so renumbered the following shall be inserted,
namely :- "Explanation. 2 Where an assessee receives any advance payment
from the buyer against delivery of any excisable goods, no notional interest on
such advance shall be added to the value unless the Central Excise Officer has
evidence to the effect that the advance received has influenced the fixation of
the price of the goods by way of charging a lesser price from or by offering a
special discount to the buyer who has made the advance deposit, Illustration 1
X, an assessee, sells his goods to Y against full advance payment at Rs.100 per
piece. However, X also sells such goods to Z without any advance payment at the
same price of Rs.100 per piece. No notional interest on the advance received by
X is includible in the transaction value.
Illustration
2 An, an assessee, manufactures and supplies certain goods as per design and
specification furnished by B at a price of Rs.10 lakhs. A takes 50% of the
price as advance against these goods and there is no sale of such goods to any
other buyer. There is no evidence available with the Central Excise Officer
that the notional interest on such advance has resulted in lowering of the
prices. Thus, no notional interest on the advance received shall be added to
the transaction value." It is submitted that besides illustration 1, the
illustration 2 covers the cases of all such respondents who manufacture the
goods as per design and specification given by the buyer. It has, however, been
rightly pointed out on behalf of the appellant the above noted notification
dated March 1, 2003 would not be applicable to the present appeals since the
appeals relate to the period prior to 2003 but there is no dispute that the cases
in appeal are covered by the other circular of 1998 referred to earlier.
Nonetheless, the notification dated 1.3.2003 has been issued, though not
applicable in the present cases, on the principle that in case interest free
advance does not influence the price by making it lower than the normal price,
notional interest is not to be added. We may like to clarify that the view
taken by us is not based on the notification dated 1.3.2003, but it certainly
lends strength to the submissions made by the learned counsel for the
respondents, since that principle is found to be adhered to in the above noted
notification issued subsequently too in the year 2003.
It is
clear that the mere fact of making an interest free advance by a buyer to the
manufacturer, by itself will not be a sufficient ground to reload the
assessable value with notional interest. It would be necessary for the revenue
to show that such advance has influenced in the lowering of the price and that
it is not depicting the normal price of the goods. There may be different
reasons for taking advances, as indicated above in the earlier part of this
judgment.
Learned
counsel for the appellant submits that all that the revenue has to show is that
interest free advance has been made by the buyer to the manufacturer which
would lead to a presumption that it is to the advantage of the manufacturer
having influenced the fixation of price as well. We, however, fail to
appreciate the submission made on behalf of the revenue for drawing a
presumption that fixation of price is influenced by such an advance. In this
connection, we may refer to the Board's circular of 1998 quoted earlier, clause
(iii) of which clearly provides that if there is no difference in the selling
price for both categories of the wholesale buyers and there is also "no
proof" that on account of advance deposits taken from some buyers, the
price charged from all buyers has been reduced, then element of notional
interest on advance deposits, cannot be added. Obviously, where there are two
prices, one for those who have made the advance and the other who have not, it
would require no further proof of the lower price having been influenced by the
interest free advance made by the buyer. But otherwise it would require proof
and the proof for the purposes of holding that interest free advance has
influenced the price would obviously be provided by the revenue. There is no
scope for any such presumption as canvassed on behalf of the appellant. We find
the same position to be continued in the later amendment in the Rules of 2003
referred to above. As in illustration 2, it talks of evidence to show that
interest free advance has resulted in lowering of the prices. The departmental
circulars and the amendments in the Rules at the relevant time and subsequently
too, do not envisage of any presumption to be drawn by mere fact of interest
free advance by the buyer to the manufacturer. It requires proof and evidence
to show that fixation of price has been influenced on the lower side by such a
transaction of interest free advance.
In the
appeals before us, neither there is any evidence or proof on the record nor it
is the case of the appellant on facts, that the interest free advance has
influenced the price and the price lower than the normal price had been charged
by the respondents. We do not think it necessary to deal with facts of each
case separately since it is not in dispute that interest free advances were
made by the buyers but at the same time it is also not in dispute that such
advances had never influenced the price charged by the manufacturers from
buyers.
In
view of the discussion held above and the reasons indicated, we find no force
in the appeals and all the appeals are dismissed with costs.
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