Full Judgment Text
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CASE NO.:
Appeal (civil) 4051 of 1996
Appeal (civil) 1385 of 1999
PETITIONER:
M/s Pepsi Foods Limited
RESPONDENT:
Collector of Central Excise, Chandigarh
DATE OF JUDGMENT: 25/11/2003
BENCH:
P. VENKATARAMA REDDI & Dr. AR. LAKSHMANAN.
JUDGMENT:
JUDGMENT
P. Venkatarama Reddi, J.
The question raised in these appeals filed by the
assessee under Section 35L(b) of the Central Excise Act is
whether the royalty amount collected by it from the bottlers
for use of the trademark ’lehar’ on the soft drink beverages
manufactured out of the ’concentrate’ sold by the appellant
is includible in the assessable value of the concentrates. The
appellant and its buyers (hereinafter referred to as ’the
bottlers’) are governed by an agreement captioned as "PFL
Bottling Appointment and Trademarks Licence Agreement
With Bottlers", the terms of which we shall advert to later.
For the period 1.9.1992 to 31.3.1993 (which is covered
by C.A.No.4051 of 1996) and for the period 1.4.1993 to
31.12.1993 (which is covered by C.A.No. 1385 of 1999), the
appellant filed pricelists of their product. On perusal of the
details furnished with the pricelist, the Department became
aware of the fact that royalty charges were being received
by the appellant under the terms of an agreement
permitting the use of trademark ’lehar’. The Assistant
Collector of Central Excise and Customs, Patiala issued show
cause notices proposing the inclusion of the royalty charges
in the assessable value and demanding duty on that basis.
We are not concerned here with the advertising expenses
which was also the subject matter of show cause notices
issued for the earlier period. The objections filed by the
appellant-assessee were overruled by the adjudicating
authority and orders were passed approving the pricelists
subject to the addition of royalty charges and advertising
expenses and demanding differential duty for the clearances
made during the said period. The adjudicating officer took
the view that the sale of the concentrate was interlinked
with the royalty charges inasmuch as the concentrate is sold
only to those who agree to pay for the brand name. The
appellate Collector rejected the assessee’s appeal and
confirmed the order of adjudication. On further appeal to the
Tribunal, no relief was granted as regards the royalty
charges though the appeal was allowed in regard to the
other disputed items. The Tribunal observed thus:
"\005It is thus plain that the licence to use the
appellant’s trademark is granted to the bottlers
bound up with obligation to purchase the
concentrate only from the appellants. The two are
inextricably intertwined. The agreement with the
bottlers is thus an indivisible and composite
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agreement for the sale of concentrate to them by
the appellants and for the grant of licence to them
for the use of the appellant’s trademark on the
beverages manufactured by the bottlers."\005
This decision of the Tribunal which is the subject matter
of appeal in C.A. 4051 of 1996 was followed by the Tribunal
in respect of the subsequent period. C.A. No. 1385 of 1999
is preferred against that order.
The learned counsel for the appellant strenuously
contended that the sale of concentrate by the appellant to
the bottler and the collection of royalty from the bottler for
the use of the trademark are two different transactions and
there is no nexus between them. The payment of royalty is
directly related to the use of trademark and it is realized as
a percentage of the maximum retail price of the soft drink
sold by the bottlers. Thus, royalty is paid when the bottle is
moved out from the plant of the bottler and it has nothing to
do with the sale value of the concentrate. In fact, the
bottlers while fixing the M.R.P. take into account the royalty
paid to the appellant and the excise duty is paid by the
bottler on the price inclusive of royalty. Though this fact by
itself has no bearing on the question involved, according to
the learned counsel, it would only indicate that there was no
loss of revenue. The counsel for the appellant laid emphasis
on the fact that the royalty is being collected on the sales of
soda effected by the bottler with the trademark of the
assessee though the base material was not supplied by the
assessee. Both the counsel have relied on the terms of the
agreement to buttress their arguments. The counsel for the
respondent has relied on the findings of the Tribunal and
contended that the price at which the beverage base is sold
to the bottler is not the sole consideration and an additional
consideration of 2.75% of the MRP on each bottle flows back
to the appellant. It is contended that the sale of beverage
base is inextricably linked to the use of the trademark on the
beverage bottles when sold and they are not independent
transactions.
Section 4 of the Central Excise and Salt Act, 1944 (as
it stood at the relevant time) lays down the mode of
valuation of excisable goods for the purpose of charging the
excise duty. When such duty is chargeable under the Act
with reference to the value of the goods, the value shall,
subject to the other provisions of the Section, "be deemed to
be the normal price" thereof, that is to say\027
"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.
(emphasis supplied)
The provisos are not relevant for our purpose. Clause
(b) of Section 4 lays down that\027
"where the normal price of such goods is not
ascertainable for the reason that such goods are
not sold or for any other reason, the nearest
ascertainable equivalent thereof determined in
such manner as may be prescribed.
The manner of ascertainment of the value in terms of
clause (b) is provided for by Central Excise (Valuation)
Rules. On the premise that the price is not the sole
consideration for the sale of concentrate, the Central Excise
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authority resorted to valuation in accordance with the
valuation rules.
The crucial question is whether the price charged by
the assessee at the time of sale of concentrate to the
bottlers represents the sole consideration for the sale or
whether, apart from the invoice price, any other monetary
consideration was contemplated by the parties is the
question? In other words, can it be said that the realization
of the royalty at the agreed rate from the bottler was
essential part of the bargain that led to the sale of
concentrate? The answer to this does not depend on the
question whether the price of concentrate has been
understated. Even in the absence of such a contingency, the
last clause of Section 4(a) would come into play, if under the
terms of Agreement, an extra consideration would
eventually flow back to the assessee/manufacturer as an
inevitable consequence of sale of concentrate. However,
there should be intimate nexus between the sale and
realization of royalty.
Now, let us turn to the salient features of Agreement in
order to appreciate the issue in its proper prspective.
The Agreement is captioned as "PFL Bottling
Appointment and Trademarks Licence Agreement With
Bottlers". The assessee Company grants licence to use the
trademark ’Lehar’ in conjunction with the trademarks called
’Pepsico Marks’ owned by Pepsico Inc., USA. This licence is
in respect of beverage products. Certain territory is assigned
to each bottler and the bottler can use the said trademark
within the territory. In consideration of the licence granted
for use of the trademark, the bottler shall pay a royalty at
the rate of 2.75% of the maximum retail price of the
beverage as notified by the bottler. The royalty will be
payable at the above rate for each bottle of the beverage
dispatched by the bottler from the plant. The royalty shall be
paid to the assessee Company at New Delhi within 15 days
of the end of each calendar month in respect of sales made
during such calendar month. At the end of each financial
year, the bottler shall submit an audit certified statement
showing the amounts payable by the bottler towards
royalties. The bottler shall buy all units of concentrate
required for the manufacture of the beverage only from
Pepsico’s approved manufacturer, PFL (the assessee), or a
manufacturer approved in writing by Pepsico and PFL at a
price and in accordance with the terms and conditions
established by the seller. The bottler will strictly follow all
instructions and directions issued by assessee Company
from time to time for preparing, bottling, selling and
distributing the beverage including the quality and standards
of bottles, cartons and containers. The bottler will undertake
appropriate advertising and sales promotion activities for the
beverage. The agreement shall not create or to be deemed
to create any relationship of agency, partnership or joint
venture. The agreement shall terminate automatically upon
the termination of the arrangement between Pepsico and the
bottler for the use of the ’Pepsico Marks’. Upon the
termination of the agreement in the manner provided for,
the bottler will not use any of the trademarks, names,
symbols, emblems or designs of the assessee Company.
Further, on such termination, the assessee Company shall
have the right to purchase from the bottler any part or all of
the bottler’s beverage bottles, crowns, labels, containers,
cases, cartons, unused advertising material and concentrate
at the invoice price less a reasonable allowance for
depreciation. In the event the bottler appoints wholesale
distributors, the bottler will be obligated to ensure that the
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distributors fully comply with all the terms and conditions of
the agreement relating to the sale and distribution of the
beverage.
It is fairly clear that the agreement sets in motion
series of steps aimed at promoting the appellant’s business
in collaboration with the bottler and also realizing the royalty
calculated at a prescribed percentage of the retail price of
every bottle. The agreement, read as a whole, makes it clear
that the realization of royalty was as important as the
realization of the sale price of the concentrate from the
assesee’s point of view. In reality and in substance, the
component of royalty cannot be dissociated from the
ostensible consideration for the sales of concentrate by the
assessee. The assessee would not have parted with the
goods, namely, concentrate if the royalty payment did not
enter into the bargain. The bottler is obliged to purchase the
concentrate from the assessee and assessee alone, use the
trademark of the assessee on the bottled beverage in
addition to the trademark of Pepsico and comply with the
instructions of the assessee in regard to manufacture, sale
and distribution of beverages. There is an element of
control in respect of the entire business operations of the
bottlers. There exists an inextricable bond between the
obligation of the bottler to purchase the concentrate
exclusively from the assessee and the user of trademark of
assessee subject to payment of royalty. The royalty which is
realizable as a consideration for authorizing the use of
trademark cannot, therefore, be viewed in isolation. The
appellant’s sale of concentrate, the bottler’s manufacture of
beverages out of that and the sale thereof by using
assessee’s trademark are all integral operations. It is in this
background, we have to judge whether the invoice price is
the sole consideration contemplated by the parties for the
sale and purchase of concentrate. The assessee very well
visualized that the consideration in the form of royalty would
flow to it by virtue of supply of the concentrate. In our
view, the substratum of the agreement regulating the terms
of dealings between the parties unmistakably indicate that
the invoiced price alone was not the sole consideration for
the sale of concentrate. The finding of the Tribunal is,
therefore, unexceptionable.
The fact that the royalty is charged for permitting the
use of the trademark, but not as part of price for specific
units of concentrate sold does not detract from the fact that
the overall consideration for the sale of concentrate is not
merely its price stated in the invoice. It is something more
than that, namely, royalty to be received periodically.
Under the agreement, the obligation to buy the
concentrate at the price fixed by the seller (appellant) and
the obligation of the buyer to manufacture the bottled soft
drinks, to sell the same by using the trademark of the
appellant and to remit the prefixed royalty charges is
inseparable from one another.
It is however contended that in respect of Soda
manufactured by the bottlers on their own, the appellant
collects royalty from them for the use of the trademark
’lehar’ even though there was no sale of any raw material.
According to the learned counsel for the appellant, this is a
strong indicia that the licence to use the trademark granted
to the bottler in consideration of receiving the royalty is an
independent and distinct transaction. No such specific plea
was raised before any of the authorities including the
Tribunal, though there was demur to the inclusion of royalty
received on the sales of soda by the manufacturer. The
documents relating to the collection of royalty on account of
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the sale of soda with the trademark of the appellant are not
on record. The circumstances in which such a deal was
entered into are not apparent from the record. We do not,
therefore, propose to delve into this aspect further. We may
mention that the appellant’s claim for exclusion of royalty
received on Soda sales was accepted by the Tribunal.
In our view, none of the decisions cited by the learned
counsel for the appellant will come to the aid of the
appellant though there are certain overlapping features.
The first case relied upon is the Union of India Vs.
Mahindra & Mahindra Ltd. [1995 (76) E.L.T. 481
(S.C.)]. This case was rightly distinguished by the Tribunal.
It was found as a matter of fact that there was no material
to indicate any nexus or connection between the lumpsum
payment of 15 million French Francs paid by the assessee to
the foreign collaborator for providing the use of ’PEUGEOT
Engine Technology’ and the supply of CKD packs to the
respondents by PEUGEOT for the production of the engine.
This Court observed\027
"In no sense, it can be stated that the price of the
goods obtained later was reckoned or reflected in
the lumpsum payments made, long before. The
parties never had in mind the nature and extent of
the spare parts that may be required later, when
the collaboration agreement was entered into."
The fact that there was no obligation on the assessee
to purchase CKD packs at all, that long before the supply of
the CKD packs and spares, the royalty due to the
collaborators was paid, that there was no material to show
that the supply of the CKD packs or spares weighed with the
parties in fixing the payments under the collaboration
agreement were all taken into account by the Court to
conclude that no nexus existed between the lumpsum
payment under the agreement for the technical know-how
and the determination of the price for supply of CKD
packs/spares. The distinguishing features are many and the
appellant cannot draw any support from that case.
The decision of CEGAT in Collector of Customs,
Bombay Vs. Maruthi Udyog Ltd. [1987 (28) E.L.T. 390]
has also been relied upon. The special leave petition filed
against this order was dismissed in limine by this Court on
26.4.1989 by a non speaking order. This case also does not
help the appellant. In this case, the contention of the
Department that the import invoice price pertaining to
components, assemblies and vehicles was not the sole
consideration for the sale but the royalties relatable to the
manufacture in India of Suzuki’s components also
constitutes the consideration for the purchase of the
imported goods was not accepted. The Tribunal held that the
royalty payments were relatable directly to the manufacture
of goods in India and they had no nexus with the import of
goods from Japan. It was observed that "neither royalty nor
the trademark ’Maruthi Suzuki’ had anything to do with
import of components, assemblies and vehicles from Japan".
The ratio of that decision of CEGAT thus stands on a
different footing.
One more case on which reliance was sought to be
placed by the appellant’s counsel is the order of CEGAT in
Duke & Sons Vs. Commissioner of Central Excise
[1991 (55) ELT 577] which stood affirmed by this Court
by reason of dismissal of S.L.P. That was also a case of
franchise fees payable by the buyers of concentrate to the
assessee for using the trademark of the assessee on the soft
drink bottles. The Tribunal made the following crucial
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observations:
"The agreement under which the buyers are
permitted to use the trademark is not filed either
before the lower authorities or before us.
Therefore, no views can be expressed as to
whether it is interlinked with the sale of
’concentrate’. There is also no evidence on record
to indicate that the ’concentrate’ is sold only to
those who also enter into agreement to buy the
’trademark’. In other words, there is no evidence
to establish that the agreement to purchase
trademark is essential before a buyer purchases
the ’concentrate’. Similarly, there is no evidence
that a buyer is not willing to purchase the
’concentrate’ without purchasing the trademark.
In other words, there is no evidence to establish
that the sale of concentrate is dependent on the
purchase of trademark. In the absence of such
evidence it is difficult to hold that the sale of
concentrate is interlinked or closely connected and
without the sale of trademark there is no sale of
concentrate."
It was under those circumstances the royalty payment was
excluded from the assessable value of the concentrate. The
distinguishing features are self-evident from the
observations quoted above.
In the result we affirm the decision of the Tribunal and
dismiss the appeals. However, we leave it open to the
assessee to raise any question as to the computation i.e.,
the quantum of royalty includible, before the adjudicating
authority who has to recompute the turnover in any case
consequent upon the Tribunal granting partial relief to the
appellant.
The appeals are dismissed without costs subject to the
above observation.