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Case Number

Final Order No. 1241/2004-NB(A) in Appeal No. E/1670/2004-NB(A)

Judges

S.S Kang, V.P
V.K Agrawal, Member (T)

Acts

SECTION 4 A CENTRAL EXCISE ACT
Section 4(3)(d) of the Central Excise Act
SECTION 4 CENTRAL EXCISE ACT

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Smart Summary

Structured Summary of the Opinion (Order per: V.K. Agrawal, Member (T))

Factual and Procedural Background

This appeal was filed by M/s. Purolator India Ltd. The issues brought before the tribunal concern (i) determination of assessable value under Section 4 of the Central Excise Act (as amended with effect from 1-7-2000) and (ii) whether the Appellants cleared new excisable goods in place of defective goods received back into their factories.

The Appellants manufacture filter elements, inserts and cartridges (and components). Excisable goods manufactured by them were sold from two factories either directly to vehicle manufacturers or stock-transferred to a depot for onward transfer to C&F agents. The Commissioner, by the impugned order, confirmed a demand of duty, imposed penalty and invoked extended period of limitation. Among other findings, the Commissioner disallowed deductions for volume discount, cash discount and sales tax and held that fresh excisable goods had been removed without payment of duty in place of defective goods returned by customers.

The matter proceeded on appeal before the tribunal (order authored by Member V.K. Agrawal). The tribunal heard submissions from the Appellants' counsel and the Departmental Representative and made findings as set out below, remanding certain factual aspects to the jurisdictional Adjudicating Authority for re-adjudication within two months.

Legal Issues Presented

Whether the assessable value for Central Excise duty is to be determined by reference to the "transaction value" under the (new) Section 4 of the Central Excise Act (effective 1-7-2000) and, in particular, whether cash discounts not actually passed on to buyers can be deducted from assessable value.
Whether deductions for volume discount and sales tax claimed by the Appellants are admissible and, if so, whether the amount actually passed on/paid should be deducted in determining assessable value.
Whether the Appellants cleared new excisable goods in place of defective goods returned by customers (i.e., whether replacements rather than repaired returns were removed without payment of duty).

Arguments of the Parties

Appellant's Arguments

The Appellants manufacture and clear goods from two factories; deductions for volume discount, cash discount and sales tax were claimed and should be admissible in determining assessable value.
Cash discount deduction remains permissible even after amendment of Section 4 with effect from 1-7-2000; the difference between cash price and credit price (representing interest for credit period) should not be included in assessable value because it shows the invoice price without cash discount is a credit price, not a cash price.
Reliance on decisions: CCE, Ghaziabad v. Pace Marketing Specialities Ltd., 2004 (60) R.L.T. 726 (CESTAT) and Kiran Mouldings Ltd. v. CCE, Mumbai-IV, Final Orders dated 3-3-2004.
With respect to volume discount and sales tax, the Appellants supplied details in a letter dated 9-7-2001 showing the actual amounts passed on; the Department's computation used inconsistent bases (applying a percentage to gross amounts treated as net of discounts), producing inflated percentages. The Appellants stated stock transfer value was to be considered net of sales tax only and volume discount should be a percentage over that amount (letter dated 30-7-2001).
Regarding damaged/defective goods returned by customers: defects were rectifiable, defects were removed and goods returned to customers; the Department's reliance on the statement of Shri R.K. Gulati (dated 9-10-2000) that defective goods were not rectified but fresh goods sent is incorrect; Gulati was not involved in day-to-day receipt and reprocessing and is not a technical person; if Gulati's statement is relevant it applies only to Khandra unit and not to Mehrauli Road unit; duty demand confirmed for entire quantity of material received back is excessive and unsustainable.

Respondent's / Department's Arguments (learned D.R.)

The departmental findings in the impugned order should be upheld: Shri R.K. Gulati has not retracted his statement and, being an authorised signatory for excise matters, his statement that new finished products were sent in lieu of rectified goods is applicable to the company as a whole (both units).
The contents of the Appellants' letter dated 9-7-2001 were clarified by Shri M.K. Goel (Senior Manager) in his statement dated 16-7-2001, stating depot sale values did not include sales tax, volume discount or cash discount; therefore the Department's method for computation of claimed deductions is correct.
On cash discount, the definition of "transaction value" in Section 4(3)(d) of the Central Excise Act covers the entire amount paid by the buyer to the seller in connection with the sale (excluding excise duty and other taxes) and is exhaustive; duty is payable on the entire amount paid by the buyer, so the Appellants must pay duty on amounts not passed on to buyers.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
CCE, Ghaziabad v. Pace Marketing Specialities Ltd., (T) = 2004 (60) R.L.T. 726 (CESTAT)	Held by the Tribunal that cash discount is a discount for prompt payment and should be deducted from invoice price to obtain transaction value at time of delivery; discounts for prompt payment reduce assessable value.	The Appellants relied on this decision. The tribunal in the instant matter explicitly disagreed with this view in light of the statutory change in Section 4 (effective 1-7-2000) and held that, where cash discount was not actually passed on, the actual price paid is the assessable transaction value.
Kiran Mouldings Ltd. v. CCE, Mumbai-IV, Final Order Nos. 124-126/2004-NB (A), dated 3-3-2004	Referenced by the Appellants in support of the argument on allowance of discounts.	The decision was relied upon by the Appellants; the tribunal's reasoning in the present matter did not adopt the Appellants' reliance and instead applied the transaction value concept under the amended Section 4 to disallow cash discount deductions not actually passed on.
Jenson & Nicholson (India) Ltd. v. Union of India (Bombay High Court)	Under the old Section 4 (deemed value), the Bombay High Court held that the wholesale cash price assessable for excise would naturally be the price minus the cash discount allowed in the invoice.	The tribunal noted this Rule was premised on the old Section 4 (deemed value). The tribunal explained that Section 4 has been completely changed and that the new statutory language requires use of "transaction value" (price actually paid or payable), making the prior reasoning under the old Section inapplicable to the present matter.
CCE, Meerut v. Stallion Shox Ltd. (Tribunal)	The Tribunal followed the Bombay High Court's approach in Jenson & Nicholson under the old Section 4.	The tribunal observed that those earlier decisions were based on the old Section 4 and concluded that the provisions of Section 4 have since changed; therefore those earlier approaches cannot control assessment under the new statutory scheme.

Court's Reasoning and Analysis

The tribunal examined each contested issue on the basis of the record and the statutory provisions:

1. Defective goods and replacement with new goods

The tribunal relied on the statement dated 9-10-2000 of Shri R.K. Gulati in which Gulati deposed that "the goods so received from various customers under the said D-3, have not actually been rectified and entire new finished products have been sent to the buyer taking it as the goods rectified." The tribunal treated this as a clear admission by the authorised signatory for excise matters that new excisable goods were cleared in place of defective goods received back.
Gulati had not retracted his statement. A certificate from a Chartered Engineer dated 5-7-2002 post-dated the period involved and, in the tribunal's view, could not overcome Gulati's clear earlier admission.
The tribunal rejected the submission that Gulati's statement applied only to the Khandra unit and not to the Mehrauli Road unit because Gulati's statement contained no such qualification. The tribunal reasoned that if substitution occurred at one factory it was reasonable to infer the same practice at the other factory of the same manufacturer.
Conclusion: The tribunal held that the Appellants were removing new excisable goods to customers in lieu of defective goods received back.
However, the tribunal qualified that duty cannot be demanded in respect of defective goods for which no excisable goods were cleared. Accordingly, it remanded this aspect to the jurisdictional Adjudicating Authority for reconsideration of material/evidence that may be produced by the Appellants within two months of receipt of the Order.

2. Volume discount and sales tax deductions

The tribunal observed that the dispute concerns the actual amount of volume discount passed on and the actual amount of sales tax paid/payable. It stated that the actual amounts passed on/paid have to be deducted for the purpose of determining assessable value.
The tribunal characterized this as a factual matter and remanded it to the jurisdictional Adjudicating Authority for fresh consideration after the Appellants adduce material within two months.

3. Cash discount and interpretation of Section 4 (post-amendment)

The tribunal considered the Appellants' reliance on the Pace Marketing decision (and related authorities) which had treated cash discount as reducing the invoice price to derive the transaction value at time of delivery. The tribunal stated that it could not agree with that view in the context of the amended Section 4 effective 1-7-2000.
The tribunal contrasted the old Section 4 (where value was a "deemed" normal wholesale price) with the new Section 4 which fixes value as the "transaction value" where the parties are unrelated and price is sole consideration. The tribunal quoted the statutory definition of "transaction value" under Section 4(3)(d), which defines transaction value as "the price actually paid or payable for the goods, when sold" and specifically includes amounts payable in connection with the sale while excluding excise duty, sales tax and other taxes actually paid or payable on such goods.
On that basis, the tribunal concluded the assessable value under the new Section 4 is the price actually paid or payable. Since in the present matter no cash discount was actually given to customers, the actual price paid by buyers must be the assessable value. The tribunal thus rejected the Appellants' contention to deduct cash discount that was not actually passed on.

4. Penalty

The tribunal left the question of imposition of penalty open for determination by the Adjudicating Authority.

Holding and Implications

Final Disposition: The appeal is disposed of with specific directions:

Cash discount: The tribunal rejected the Appellants' claim for deduction on account of cash discount where such discount was not actually passed on to customers. The tribunal held that, under the amended Section 4, the transaction value (price actually paid or payable) is the assessable value and therefore the actual price paid (without an unpassed cash discount) is taxable.
Volume discount and sales tax: The tribunal remanded the factual question of the actual amounts of volume discount passed on and sales tax paid/payable to the jurisdictional Adjudicating Authority for re-adjudication. The Appellants were permitted to produce material within two months of receipt of the Order.
Returned/defective goods and replacement: The tribunal held that new excisable goods were sent in place of defective returned goods on the basis of the authorised signatory's statement, but remanded the aspect of duty liability for defective goods (where no excisable goods were cleared) for reconsideration by the Adjudicating Authority, allowing the Appellants to produce evidence within two months.
Penalty: The issue of penalty was left open for the Adjudicating Authority to decide on re-adjudication.

Direct consequences for the parties: The Appellants' claim to deduct unpassed cash discount from assessable value was rejected, potentially increasing duty liability where cash discounts were not actually allowed. Issues depending on factual proof (volume discount, sales tax, and duty on returned goods) were remitted for fresh factual consideration. The matter was otherwise disposed of in the terms recorded by the tribunal.

No other broader legal pronouncements beyond the application of the statutory "transaction value" concept under the amended Section 4 were set out as creating a new precedent in this opinion; the tribunal explained the effect of the statutory amendment and applied it to the facts before it.

Order: The appeal is disposed of in the terms indicated above.

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Purolator India Ltd. v. Commissioner Of Central Excise, Delhi

[Order per : V.K. Agrawal, Member (T)]. - The issues involved in this appeal, filed by M/s. Purolator India Ltd., relate to determination of assessable value under Section 4 of the Central Excise Act and whether the Appellants have cleared new excisable goods in place of defective goods received back in their factory.

2. Shri A.R. Madhav Rao, learned Advocate, mentioned that the Appellants manufacture Filter Elements, Inserts and Cartridges and components thereof; that the excisable goods manufactured by them are either sold from their two factories to various vehicle manufacturers or stock transferred to depot where from the goods are stock transferred to various C & F Agents; that the Commissioner under the impugned Order has confirmed demand of duty and imposed penalty, by invoking extended period of limitation holding that the deduction on account of volume discount, cash discount and sales tax from the value is not admissible and that they had removed fresh excisable goods without payment of duty in place of defective goods received from their customers.

3. The learned Advocate submitted that Commissioner has held in the impugned Order that deduction of cash discount is not available in respect of sales where cash discount is not actually being passed on; that discount towards cash discount is available even after amendment of Section 4 of the Central Excise Act with effect from 1-7-2000 notwithstanding the fact that each and every customer has availed of cash discount or not; that the element of cash discount clearly indicates that the price charged without the cash discount is not a cash price but is a credit price; that thus the difference between cash price and credit price representing interest reimbursement for the Credit period is not to be included in the assessable value. He relied upon the decision in the case of CCE, Ghaziabad v. Pace Marketing Specialities Ltd., (T) = 2004 (60) R.L.T. 726 (CESTAT) and Kiran Mouldings Ltd. v. CCE, Mumbai-IV, Final Order Nos. 124-126/2004-NB (A), dated 3-3-2004.

4. He mentioned that the Commissioner has also confirmed the demand of duty on the ground of Appellants’ claiming wrongly abatement of deductions of Volume Discount and Sales Tax; that during the course of investigation, they had under their letter dated 9-7-2001 given the details to Department with respect to volume discount and sales tax claimed by them and actually passed on; that the Department has alleged that there was difference between quantum of sales tax deduction and volume deduction claimed in price declaration vis-a-vis actually passed on. The learned Advocate contended that the Department is not disputing actual Volume Discount passed on or Sales Tax which was indicated in letter date 9-7-2001; that respective clearances effected from the factory and actual amount claimed as deduction should be taken into account and then, it should be compared with the amount indicated in Annexure to letter dated 9-7-2001. He also mentioned that stock transferred value was considered as net of volume discount, cash discount and sales tax; that consequently the percentage of deduction claimed by them indicated in show cause notice is very high; that this percentage is being applied to ascertain the quantum of deduction claimed; that thus there is an error; that instead of going by actual amounts and by applying percentage by taking gross amount as net of volume discount, cash discount and sales tax instead of taking it only to be net of sales tax incurred, percentage has been taken to compute volume discount availed; that the Appellants in their letter dated 30-7-2001 has specifically mentioned that stock transfer value in letter dated 9-7-2001 is to be considered net of sales tax only and deduction of volume discount is to be considered as a percentage over this amount.

5. Regarding damaged goods received back by the Appellants, the learned advocate submitted that each defects for which products were returned by customers were clearly rectifiable; that all the defects were removed and goods were returned to their customers; that the Department has relied upon the statement dated 9-10-2000 of Shri R.K. Gulati, Accounts Officer, to the effect that the defective goods have not been rectified and returned but fresh goods have been sent; that this statement is an incorrect statement; that Shri Gulati has not been looking after day to day operations for receipt of defective goods and their reprocessing; that further he is not a technical person to make any statement on this technical aspect. He also contended that in any case Shri Gulati’s statement cannot be relied upon for the company as a whole and if at all it can be assumed to be relevant only in respect of Khandra unit in which Gulati has been working and not for Mehrauli Road Unit; that duty demand pertaining to Khandra unit is Rs. 5,29,837/- and for Mehrauli Unit Rs. 8,13,209/-. Finally he mentioned that duty demand has been confirmed on entire quantity of material received back from the customers and as such the duty has also been in respect of goods which have been received back by them but not cleared subsequently to the customers; that the duty in respect of such goods works out to be Rs. 2,50,454/- which is unsustainable.

6. Countering the arguments, Shri S.C. Pushkarna, learned D.R., reiterated the finding as contained in the impugned Order and emphasised that Shri R.K. Gulati has never retracted his statement; that he is the authorised signatory of the Apepllants and thus it is evident that the defective goods were not repaired but replaced; that as Shri Gulati was authorised by the Appellants to deal with Central Excise matters, his statement is applicable in respect of both the units of the Appellants. Regarding volume discount and Sales Tax, the learned D.R. mentioned that the contents of letter dated 9-7-2001 were clarified by Shri M.K. Goel, Senior Manager in his statement dated 16-7-2001 wherein he had stated that value of depot sales did not include the amount of sales tax, volume discount or cash discount; that, therefore, the method adopted by the Department for computation of amounts of claimed deduction is correct.

7. In respect of cash discount, the learned D.R. mentioned that ‘transaction value’ as defined in Section 4(3)(d) of the Central Excise Act covers the entire amount paid by the buyer to the seller in connection with the sale of goods, excluding the amount of excise duty and other taxes; that this definition is exhaustive definition and the duty is payable on the entire amount paid by the buyer; that accordingly the Appellants are required to pay the Central Excise duty on the amount not passed on to the buyers.

8. We have considered the submissions of both the sides. Regarding defective goods, we observe from the statement dated 9-10-2000 of Shri R.K. Gulati that he has clearly deposed therein that “the goods so received from various customers under the said D-3, have not actually been rectified and entire new finished products have been sent to the buyer taking it as the goods rectified.” This is clear admission on the part of the authorised signatory for Excise matters that new excisable goods were cleared in place of defective goods received back. This statement has not been retracted by Shri Gulati at all. The certificate given by the Chartered Engineer is dated 5-7-2002 which is much after the period involved in the present matter before us and cannot overcome the clear admission by the authorised signatory of the Appellant-company. We also do not find any force in the submission that Shri Gulati’s statement can be relied upon only in respect of Khandra factory not in respect of factory at Mehrauli Road since no such qualification has been attached by Shri Gulati in his statement. Further, if the defective goods were substituted by new goods at one factory, it is reasonable to include that the same practice would be prevalent at the other factory of the same manufacturer. We, therefore, hold that the Appellants were removing the new excisable goods to their customers in lieu of defective goods received back by them. We, however, find force in the contention of the learned Advocate that duty cannot be demanded in respect of the defective goods against which no excisable goods were cleared by the Appellants. This aspect is being remanded to the jurisdictional Adjudicating Authority for reconsideration of the material/evidence that may be produced by the Appellants within two months of receipt of this Order.

9. Regarding volume discount and sales tax, the dispute is not with regard to their deduction but the actual amount of volume discount passed or sales tax paid. In our view the actual amount of volume discount passed on by the Appellants and actual amount of sale tax paid/payable have to be deducted from for the purpose of determining the assessable value of the goods. This is a factual matter which has to be looked into again by the jurisdictional Adjudicating Authority after considering the material adduced by the Appellants within two months of receipt of this Order.

10. Regarding cash discount, it is not in dispute that the duty has been demanded in respect of cash discount which was not actually passed on to the customers. The learned Advocate has relied upon the decision in Pace Marketing Specialities Ltd., supra, wherein it has been held by the Tribunal that cash discount is a discount allowed for prompt payment for the goods and when this discount is reduced from the invoice price, transaction value at the time of delivery of goods is obtained, otherwise, the invoice price is a future price and as the assessable value is to be determined with regard to time of removal financing and other cost cannot form part of the assessable value. With due regard, we find ourselves unable to agree with this view. The measure for valuation under New Section 4 of the Central Excise Act (with effect from 1-7-2000) is the “transaction value” and not the “deemed value” which was the case under the Old Section 4 of the Act. Under Old Section 4 the value shall be deemed to be the normal price, 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. In view of this clear language of the Section itself, the Bombay High Court in the case of Jenson & Nicholson (India) Ltd. v. Union of India, (Bom.) has held that the wholesale cash price on which the excise duty is assessable will naturally be the price minus the cash discount allowed in the invoice. The Hon’ble High Court has proceeded on the basis that the sales are effected on the basis of the price basis which themselves mention the various terms subject to which the sales are effected. The Tribunal followed the said judgment in CCE, Meerut v. Stallion Shox Ltd., (T). The provisions of Section 4 of the Central Excise Act have since then completely changed. As per new Section 4, value shall “in a case where the goods are sold by the assessee, for delivery at the time and place of the removal, the assessee and the buyers of the goods are not related and the price is the sole consideration for the sale, be the transaction value.” Thus in the present matter, the value for the purpose of Section 4 shall be the transaction value which has been defined in clause (d) of sub-section (3) of Section 4 of the Act as under :-

“transaction value” means the price actually paid or payable for the goods, when sold, and includes in addition to 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 sold, and includes in addition to amount charged as price, any amount that 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.”

11. Thus the value has undergone a complete change. The question to be asked for determination of the assessable value under new Section 4 is what is the “transaction value” of the goods that is “the price actually paid or payable for the goods when sold.” Contrary to these provisions, under the old Section 4 the value was a deemed one, that is to say, the price at which goods are ordinarily sold in the course of wholesale trade. Now under New Section 4, one has not to look as to what is the price at which goods are ordinarily sold in the course of wholesale trade. The price actually paid or payable is to be taken up as the assessable value. In the present matter, the transaction value has to be taken for the purpose of assessment of duty under Section 4 of the Central Excise Act and as admittedly no cash discount has been given to the customers, the actual price paid by them shall be the assessable value.

12. Accordingly we reject the appeal as far as it relates to the allowance of deduction on account of cash discount. In respect of volume discount and sales tax and duty liability in respect of returned goods, the matter is remanded to the jurisdictional Adjudicating Authority for re-adjudication in terms of our direction. We leave the issue regarding imposition of penalty open to be decided by the Adjudicating Authority.

The appeal is disposed of in these terms.

Purolator India Ltd. v. Commissioner Of Central Excise, Delhi

Structured Summary of the Opinion (Order per: V.K. Agrawal, Member (T))

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Appellant's Arguments

Respondent's / Department's Arguments (learned D.R.)

Table of Precedents Cited

Court's Reasoning and Analysis

1. Defective goods and replacement with new goods

2. Volume discount and sales tax deductions

3. Cash discount and interpretation of Section 4 (post-amendment)

4. Penalty

Holding and Implications

Purolator India Ltd. v. Commissioner Of Central Excise, Delhi

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