Full Judgment Text
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CASE NO.:
Appeal (civil) 7777-7780 of 2001
PETITIONER:
Elgi Equipments Ltd.
RESPONDENT:
Commissioner of Central Excise, Coimbatore
DATE OF JUDGMENT: 14/08/2007
BENCH:
S.H. Kapadia & V.S. Sirpurkar
JUDGMENT:
JUDGMENT
ORDER
The short point which arises for determination in these civil appeals filed
by the assessee is - Whether the assessee was entitled to 20% trade
discount.
M/s. Elgi Equipments Ltd., having registered office at Coimbatore, have
four factories located at four different places. They manufacture
compressors, pumps, service-station equipments etc. M/s. Elgi Equipments
Ltd. (assessees) claimed trade discounts varying from 10% to 45% on
different products. They declared that such discount was a part of their
"Sales Pattern". During the course of assessment, the Department noticed
certain price discrepancies. Therefore, an enquiry was made; statements of
Directors were recorded and, on that basis, a show cause notice was given
to the assessee claiming differential amount of duty of Rs.40 lakhs. The
assessee was also asked by the show cause notice as to why a penalty of
Rs.10 lakhs should not be imposed.
In these appeals, we are concerned with the period January, 1991 to April,
1992. The main case of the Department was that the appellant-assessee did
not possess uniform sales pattern; that they gave different discounts to
Area Distributors and dealers to whom goods were cleared directly at the
factory gate and that even in such a case, the Area Distributors were paid
the balance 12% and therefore on account of this differential discount the
assessees were not entitled to trade discount of 20%.
As stated above, assessee is in the business of manufacturing service-
station equipments. It is necessary to understand their Sales Pattern. The
goods were sold to three distributors. These sales were effected at the
factory gate directly to the distributor allowing 20% uniform discount on
the list price. However, in respect of sales to sub-dealers discount given
was 8% and balance 12% was given to the distributors as commission.
At the outset, we may mention that show cause notice was the foundation for
the levy of penalty. In the entire show cause notice, the requisite details
have not been furnished, namely, the total number of dealers, the number of
main dealers, the number of sub-dealers and the rate of discount to main
dealers and small dealers. The show cause notice proceeds on the basis of
the statements of some of the sub-dealers or small dealers taken on record
by the adjudicating authority. In a matter of this type, the Department
should have given particulars of the total number of dealers, the total
number of dealers who got the trade discount at 8% and the total number of
dealers who got the trade discount of 20%. There is no adjudication by the
original authority on this point. Therefore, we have to proceed on the
basis on the figures given by the assessee, namely, that the majority of
the dealers got the benefit of 20% discount and a small minority of dealers
got the benefit of trade discount of 8%. However, the fact remains that
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assessee gave discount at all times at 20%, even when they gave discount of
8% to small dealers because even at that time they gave commission of 12%
to big dealers. If that be the case, then, the sales pattern clearly
indicates that as a matter of practice, the assessee has uniformly given
the benefit of trade discount at 20%. It is well settled that while
adjudicating upon questions relating to sales pattern, one has to find out
whether the benefit of trade discount is given uniformly. On facts, we find
that the assessee has given trade discount of 20% uniformly to all its
dealers.
In this connection, we may cite the judgment of this Court in the case of
Kirloskar Brothers Ltd. v. Commissioner of Central Excise, Pune, reported
in (2005) (191) E.L.T. 299. Vide paragraph 10, it has been held by this
Court that in order to get the benefit of Section 4(1)(a) (as it stood at
the relevant time), the assessee has to establish that the discount claimed
was in accordance with the normal practice of wholesale trade in the
concerned goods sold to different classes of buyers, and it shall be
subject to existence of circumstances specified in Clause (a). Such
circumstances being charging of normal price at which such goods are
ordinarily sold; sale must be to a buyer in the course of wholesale trade;
same must be in the wholesale trade for delivery at the place and time of
removal; the buyer should not be a related person and the price should be
the sole consideration for the sale. It has been further held that in case
where goods are sold to different class of buyers in accordance with normal
practice, it has to be established that the same was the normal practice of
the wholesale trade in such goods. In fact, in paragraph 10, an
illustration has been given, namely, that if out of ten dealers engaged in
wholesale trade, only two are given discount while others are not, then, it
cannot be the normal practice of the wholesale trade in such goods. After
the illustration, the test follows, namely, that if majority of persons
engaged in the wholesale trade are given trade discount, then it would
constitute "normal practice of the wholesale trade".
Applying the above test, we have a situation where 90% of the big dealers
have got the benefit of trade discount at 20%, that even in cases where 8%
discount is given to sub-dealers, 12% is given to big dealers. There is one
more aspect which needs to be mentioned. Assessee is in the business of
manufacturing service-station equipments. As indicated above, the goods are
supplied to a chain of big and small dealers. Ultimately, the assessee got
his business from the main dealers in 90% of the clearances. Therefore,
even in cases where the assessee gave discounts of only 8% to small
dealers, who constitute 10% of the total number of dealers, in order to
retain the distribution channel, assessee gave 12% trade discount to the
distributors (which the Department has termed as commission). Ultimately,
it is a business decision which the assessee has taken in order to retain
his chain of distribution. The assessee does not want that chain to be
disrupted. Lastly there is no evidence on record to show that distributors
were agents of the assessee or related to them in any way. The word
"distributor" in the price list is not determinative that they are related
to the assessee. In the circumstances, we are of the view that the
Department had erred in disallowing the trade discount at 20%.
For the afore-stated reasons on this particular point, we hold that the
assessee was entitled to a trade discount of 20%.
Since the point involved is likely to recur, we would like to analyze
Section 4(1)(a) of the Central Excises and Salt Act, 1944, as it stood at
the material time. Section 4 refers to valuation of excisable goods for
purposes of charging of duty. Section 4(1)(a) states that where under the
Central Excise Act, 1944, duty of excise is chargeable on any excisable
goods with reference to value, such value, shall, subject to the other
provisions of Section 4, be deemed to be 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
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the sole consideration for the sale. In the present case, we are concerned
with the words "ordinarily" and "in the course of wholesale trade".
At the outset, it may be stated that in this case, we are concerned with
the law as it stood before 2000. At that time, assessable value was equated
to normal price which was the wholesale price at the factory gate. The word
’ordinarily’ in Section 4(1)(a) indicated that if the sale pattern adopted
by an assessee indicated that a large part of the total production was sold
at wholesale price at the factory gate and that the assessee had given the
benefit of trade discount to large number of its dealers at a particular
rate, then, it would constitute "normal practice of the wholesale trade" in
which event the assessee would be entitled to trade discount across the
board. Once the assessee proves that 20% (as in this case) was the normal
practice of the trade, then Department cannot refuse it on the ground that
some dealers got the discount at 8%.
Applying the above test to the facts of the present case, we find that as a
general rule in this case, the assessee has given the benefit of trade
discount of 20% to majority of its dealers; that in fact they have given
discount at 12% to big dealers where they gave discount of 8% to small
dealers, and, therefore, the assessee was entitled to trade discount of 20%
in all cases.
There are two points remaining which are required to be dealt with. In the
present case, some of the goods are sold in retail. It is the case of the
assessee that where goods are sold in retail, duty was payable on value
which is the wholesale price at the factory gate. In the present case, the
wholesale price at the factory gate was available. That price was the
retail price. In this case, assessee was denied abatement. In this case,
Rule 6(a) of the Central Excise (Valuation) Rules was applicable. Under
that Rule, assessable value would be the retail price as reduced by an
amount to arrive at the price at which goods would have been sold by the
assessee in the course of wholesale trade to a buyer at arm’s length. It is
not the case of the Department that the said Rule was not applicable. It is
not the case of the Department that wholesale price at the factory gate was
not ascertainable. In the circumstances, we hold that the assessee was
entitled to the abatement.
The last question which arises for determination is concerning the goods
which were under stock transfer. In the present case, a large percentage of
the goods was sold in the wholesale at the factory gate. However, a small
percentage has been cleared through the depot. The Department has taken the
depot price as the basis of the assessable value on the ground that the
assessee is selling the goods through the depot. Our attention has been
invited to the judgment of this Court in the case of Indian Oxygen Ltd. v.
Collector of C.E., reported in (1988) (36) E.L.T. 723. In the said
judgment, this Court has held that in cases where ex-factory price is
ascertainable, then the assessable value shall be based on the wholesale
price at the factory gate and not on the depot price. In the present case,
despite the said ruling, the Department has held that the depot price shall
form the basis of the assessable value.
For the afore-stated reasons, the impugned decision of the Tribunal is set
aside and the appeals stand allowed, with no order as to costs.