By TIOL News Service

NEW DELHI, OCT 24, 2014: APPELLANT Maruti is in appeal against the Order-in-Original No.03 -08/SA/ CCE /2013 dated 10.01.2013 passed by Commissioner of Central Excise Delhi-III challenging addition of an amount of Rs.15 ,70,21,54,909 /- towards dealers contribution in the consumer promotional schemes paid from the dealer's margin, to the assessable value under Section 4 of the Central Excise Act, 1944 and the Central Excise duty of Rs.240,57,84,802 /- (Rupees Two Hundred Forty Crores Fifty Seven Lakhs Eighty Four Thousand Eight Hundred Two only) whether leviable on this count and recoverable from the appellant under Section 11A (1) of the Act invoking the proviso to Section 11A (1) for extended period.

The appellant is engaged in the manufacture and clearance of Motor Vehicles and parts thereof falling under Chapter 87 of Central Excise Tariff Act, 1985. During the course of audit it was observed that the appellant was selling the above vehicles through a network of dealers across India. The appellant was giving dealership margin to the respective dealers for the vehicles being sold by them, over and above the assessable value and taxes as declared in the invoices. In addition to this, different promotional and incentive schemes such as corporate discount, free insurance etc. for their customers were launched for the sale of its vehicles.

It was observed during adjudication that the appellant was incurring expenditure towards advertisements in different newspapers throughout India to make the customers aware of the different schemes/promotional offers launched by them. The advertisements not only provided the details of the offers but also gave the names and telephones numbers of the dealers through whom these schemes could be availed. These advertisements also bear the footnote Stating, "All offers brought to you by Maruti Suzuki Dealers" .

In terms of Article -IV (Purchase of Products), Clause 22 of the "Dealership Agreement" the dealer margin is a consideration, which a dealer may charge from a customer for providing sale services while selling a product to him. The said amount may vary from model to model and shall not exceed the amount notified by the appellant in respect of its various models from time to time.

The promotional schemes were designed, formulated and launched entirely by the appellant with the help of their regional offices and the role of the dealers in formulation of the schemes was nil or minimal.

Various promotional schemes by which the discounts were offered were as under :-

(i) Corporate/institutional discount

(a) Discount on Maruti's invoice

(b) Discount by way of credit note

(ii) Spot discount for Consumer Promo schemes

(iii) Loyalty or exchange bonus scheme

In the adjudication proceedings, the adjudicating authority held that the discounts borne by the dealers was a flow of consideration to the appellants by reason of or in connection with the sale of vehicles and accordingly the amount of discount borne by the dealer was includible in the assessable value for the purpose of payment of central excise duty in terms of the definition of 'transaction value' as provided under Section 4 of Central Excise Act, 1944.

The appellant contended that the question of deducting discounts from the assessable value has long been decided by the Apex Court in the case of Union of India and others vs. Bombay Tyres International Ltd.- 2002-TIOL-33-SC-CX-LB , wherein it was held that for the purpose of valuation, discounts, by whatever name called would be deductible from the assessable value. The appellants also relied on the decision of the Supreme Court in the case of Philips India Ltd. vs. Collector of Central Excise, Pune, 2002-TIOL-127-SC-CX , wherein the Court observed that expenses such as advertisement and after sales service incurred by the dealer not only benefited the manufacturer, they also benefited the dealer inasmuch as the dealer was able to sell more and earn larger profit and accordingly the expenses so incurred by the dealer were not includible in the value of the goods.

The appellant further contended that since no extra consideration had flowed from the dealers to them and in any case the incidence of discount borne by the dealers had been passed on to the customers by way of discount, the same cannot be included in the assessable value.

The DR summarily argued that a sale to dealers made by Appellant was controlled by M/s Maruti and discount has undeniable nexus to the sale value of the vehicles. Accordingly that was includible in the assessable value. Revenue relied on the decision of appellant's own case reported as 2010-TIOL-1127-CESTAT-DEL- LB and has contended that the ratio of the judgment squarely applies to the facts and circumstances of the appeals under consideration. D.R . informed that Revenue is in appeal against Tata Motor Judgement of Bombay High Court before the Apex Court.

The issue involved is whether part of the promotional discount paid from the dealer's margin is includible in the assessable value for the purpose of payment of central excise duty or not?

Prima facie, the Tribunal noted that the promotional discount was given under the understanding between the manufacturer and the dealer in relation to the activity of sale as an expenditure on behalf of the appellant by the dealer , and that is regulated through dealer's margin. That would form part of the assessable value of such goods. Undoubtedly, such discounts borne by the dealers could also be to the advantage of the dealers in the form of increased sale leading to earning of increased profit Commission. However, in relation to the manufacturer, it would be an indirect consideration received by the assessee in relation to the clearance of the product manufactured by him.

Appellants have contended that the dealers were not incurring any expenditure and they were paying the discounts out of their margins. Revenue's prima facie, case is that had the dealers not borne their share of discounts, the same would have been borne by the appellants, which would have reduced appellant's revenue. Thus the discounts borne by the dealers were indirect inflow of consideration for the appellants. In the adjudication order, this inflow has been elaborated in paragraph number 136.

Tribunal observed,

All Maruti dealers were governed by the agreement between them and the appellant. One of the conditions of the agreement requires the dealers to follow whatever promotional schemes were devised by the appellants . Further, prima facie , it comes out from facts that dealers have not borne the discounts on their own accord. The dealership agreement is a legally enforceable agreement. During the personal hearing before the adjudicating authority the appellant admitted that the dealers were charging over and above the 'Ex-showroom' price, which was not objected to by the appellant at any point of time. Dealers were recovering extra amount from ultimate buyers in the guise of handling charges.

Further, appellant's contention that the dealers bear the discount on their own accord does not sound well and appear not acceptable, as no one will sacrifice his margin unless otherwise compensated.

Prima facie, it appears that the dealers have not borne their share of discount on their own accord but because of the fact that they are bound by the meticulously designed Dealership Agreement which they are bound to accept in their business interest. It would be commercially unthinkable for any dealer to remain in business without offering promotional discounts on 'Ex-showroom Price', while charging over and above that price in the name of 'Handling Charges' or by some other name. Therefore, prima facie it transpires that the discounts have been offered in connection with the sale and such discounts were a booster to the appellant to increase the sales. Further, such discounts has character of expenses on account of Advertising or Publicity, Marketing and Selling Organization Expenses, which are covered within the definition of 'transaction value' as provided under Section 4(3)(d) of CEA, 1944.

The Hon'ble Supreme Court has held that whenever there is a legally enforceable right available to the assessee against his customer in relation to the sale, then value thereof must be included. A large number of Supreme Court decisions also support Revenue's contention that when manufacturer has an enforceable legal right against the dealer then any expenses incurred by the dealer against such a right have to be included in the assessable value.

In Maruti Suzuki India Ltd. vs CCE , Delhi-III, reported as 2010-TIOL-1127-CESTAT-DEL-LB , the Dealers of the appellant were required to carry out inspection of vehicles purchased from the appellants before delivery to the customers and provide three free services after delivery of the vehicles to the customers within the warranty period in terms of the Dealership Agreement. The Dealers while selling the vehicles to the customers after their purchase from the appellants was adding their own margin, which is known as Dealer's margin, the price at which the goods were sold by the appellants to them. The difference between the sale price and the amount paid to the appellants by the dealers i.e. Dealer's Margin, contained provisions of rendering PDI and three After Sale Services. Thus a part of Dealer's Margin was intended to cover the cost of PDI and After Sale Service charges whose benefit ultimately accrued to M/s Maruti Suzuki.

The Principal Bench (Larger Bench) of the Tribunal discussed in details about the 'Pre-delivery inspection Charges' ( PDI ) and 'After Sales Service Charges'; and decided the issue in favour of revenue.

Limitation: Appellant raised an issue on limitation on the premise that whenever any promotional scheme was launched by them , such facts were in the knowledge of the department. The learned DR placed on record documents evidencing the fact that the dealers were charging from the ultimate buyers a price over and above the ex-showroom price in the name of "handling charges". Such fact was admitted before the adjudicating authority. They were recovering charges over and above the ex-showroom price and appellant has no control over the dealers in this regard. The learned DR contended that the appellant was conscious about recovering of such extra charges so as to compensate the portion of discount borne by them . As the term suggests, ex-showroom' meant price which was to be charged when the vehicle was taken out of the show room. Naturally, the handling charges recovered by the dealers were incurred before the vehicle was delivered 'ex-showroom' price. Such charges ranged to Rs.6 ,000,00 per vehicle as is evident from the documents on record. The "handling charges" certainly seems to have been informally fixed by the appellants as the appellant during the course of investigation admitted that the dealers do not have any association by the name of Maruti Dealers Association which means that the dealers did not have a common platform, where they could have fixed the handling charges with consensus. The appellants suppressed this fact from the department that the dealers are charging price over and above the ex-showroom price from the ultimate customers of the vehicles. Thus, Prima facie the provisions for extended period of limitation have rightly been invoked when discount is compensated through handling charges collected by the dealers indirectly benefiting the appellant to under value the excisable goods while delivering to their dealers.

In view of above, Tribunal was of the prima facie view that the adjudication has force and pre deposit is required to be directed in this case to protect interest of Revenue. It is therefore, ordered that an amount of Rs.150 crores (Rupees one hundred fifty crores ) be deposited by the appellant within 8 weeks (eight weeks) of pronouncement of this order and compliance to be made on 31.12.2014 .

Subject to above pre deposit, realisation of balance amount of duty, interest and penalties shall remain stayed till disposal of the appeal.

(See 2014-TIOL-2072-CESTAT-DEL)