CX - AV - s.4 - Dealers request appellant to organize advertisement of products in their area and in such cases about 40% of expenses incurred on advertisement are recovered by appellant from dealers - no cause for adding this expense in AV: CESTAT
By TIOL News Service
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NEW DELHI, JULY 22, 2015: THE period of dispute is from June 2002 to March 2005. During this period, the appellant were manufacturing &selling two-wheelers and their spare parts to their dealers as per their all-India price lists. In terms of Article V of the appellant's agreement with their dealers, "the dealers shall vigorously promote, develop and maintain sales of products and parts to the satisfaction of and in the manner required of Hero Honda and the dealer shall place firm orders for such products and parts as per the sales targets and will give estimates for forward requirements for such period and in such form as may be required on Hero Honda from time to time". In terms of Article XVI in the dealers' agreement, if Hero Honda, at any time, objects to the dealers' advertisement and/or promotion, the dealer shall immediately withdraw and refrain from repeating such publicity and in particular, the dealer shall not make any unaccounted or unauthorized representation regarding the specification, performance, selling price or availability of the product of parts. In terms of the termination clause (Article XXI) in the dealers' agreement, if the dealer fails to perform any obligation under this agreement, in the opinion of Hero Honda or does not rectify such defaults, if capable of remedy, within 30 days, following the day of notice pursuant to Article XXII hereafter, Hero Honda may forthwith terminate the agreement by giving a written notice to this effect.
In the present case, the dispute is in respect of those dealers, who, for various reasons, cannot arrange the advertisements and request the appellant to organize the advertisement of the products in their area and in response to the dealers' request, the appellants organize the advertisement of the products in the area of those dealers. In such cases, about 40% of the expenses incurred by the appellant on advertisement are recovered from the dealers and the remaining expenses are borne by the appellant.
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The point of dispute is as to whether the advertisement expenses initially incurred by the appellant and which were recovered later from the dealers would be includible in the assessable value or not.
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Incidentally, there is no dispute about includibility of expenses incurred by the dealers, on their own, for advertisement of the appellant's product, in the assessable value.
The department issued a show cause notice dated 9/7/2007 for demand of duty amounting to Rs.4,08,49,037/- for the period from 1/6/2002 to 31/3/2005.
The Commissioner of Central Excise, Delhi-III upheld the demand and imposed penalties and interest.
The appellant is before the CESTAT and inter alia makes the following submissions -
+ The Tribunal in the case of Honda Sales Power Products Limited - 2013-TIOL-1492-CESTAT-DEL has held that advertisement expenses incurred by the dealers would be includible in the AV only when there is an enforceable legal right of the manufacturer, against the dealers, to insist on incurring certain amount of expenses on the advertisement and publicity of the products and just a clause in the agreement requiring the dealers to make efforts for promoting sales cannot be treated as a legal obligation in this regard; that ratio of this judgment of the Tribunal is squarely applicable to the facts of this case;
+ In the appellant's own case for the period prior to 1/7/2000, where an identical issue was involved, the Tribunal has held that while advertisements do contribute to or enhance the marketability of a manufacturers' product and where the dealer is not in picture and the advertisement campaign is conducted by the manufacturer, that can certainly be regarded as contribution wholly or exclusively to the marketability of the product, but where there is a dealer in the picture and the advertisement helps the dealer also in promoting his sales apart from helping the product of the manufacturer, the matter has to be looked at from a different angle and in such cases, the advertisement expenses incurred by the manufacturer would not be includible in the assessable value to the extent the same were recovered from the dealer; that this judgment has been affirmed by the Apex Court; that in view of this, the amount recovered by the appellant from the dealers cannot be said to be for the ‘reason of or in connection with sale' and hence, in terms of the provisions of section 4(3)(d) of CEA, 1944 regarding definition of transaction value, the amount recovered by the appellant's dealers would not be includible in the assessable value.
+ That the demand is time barred.
The AR submitted that the demand raised is legally tenable in view of the decisions in CCE Baroda Vs. Besta Cosmetics Ltd. - 2005-TIOL-93-SC-CX-LB, Surat Textiles Mills Limited - 2004-TIOL-40-SC-CX & Bajaj Tempo - 2005-TIOL-20-SC-CX-LB. The Board's Circular No. 643/34/2002-CX dated 1/7/2002 is also adverted to in support.
The Bench observed -
+ The department is not insisting on including the advertisement expenses incurred by the dealers in the assessable value. The dispute is only in those cases, where the dealers, for certain reasons, cannot organize the advertisement of the appellant's products in their respective areas and in this regard, they approach the appellant and the appellant in view of the dealers' request, organize the advertisement in the areas of those dealers by incurring certain expenses and since, the advertisements also mention that dealers' name and address and promote the dealers' sales also, a part of the expenses, up to about 40 per cent, are recovered from those dealers by the appellant.
+ In our view, when it is not disputed that the advertisement of the appellant's products in the areas of the respective dealers also mention the dealers' name and address and those advertisements have also benefitted the dealers, the amount being recovered by the appellant from the dealers cannot be said to be for the reason of or in connection with the sale of goods, as this amount would be for the advertisement and publicity effort of the appellant which has benefitted the dealer.
+ Moreover, an identical issue was involved in the appellant's own case in the previous period…, in the para 3 of the judgment of which the Tribunal has held that the advertisement expenses incurred by the appellant would not be includible in the assessable value to the extent, the same were recovered from the dealers, as when the dealer is not in the picture and the advertisement campaign is conducted by the manufacturer, that can certainly be regarded as contribution wholly or exclusively to the marketability of the product, but where there is a dealer in the picture and the advertisement helps the dealer also, apart from helping the product of the manufacturer, the matter has to be looked at from slightly different angle.
+ The above judgment of the Tribunal has been affirmed by the Apex Court by dismissal of the civil appeal … . In our view, the ratio of the above judgment of the Tribunal is squarely applicable to the facts of this case.
+ Though the above judgment of the Tribunal is in respect of the period prior to 1/7/2000 and w.e.f. 1/7/2000 the section 4 has been substituted by a new section based on transaction value concept, as discussed above, in our view when the advertisements organized by the appellant which have also benefitted the dealers, the amount recovered by the appellant from the dealer would be for the advertisement effort of the Appellant, which has promoted the sales of the dealers and the same cannot be said to be the amount received by the Appellant for the reason of in connection with the sale of the goods.
+ Moreover, in terms of the judgments of the Apex Court in the case of CCE Baroda Vs. Besta Cosmetics Limited (Supra) CCE-Surat Vs. Surat Textiles Mills Ltd. (Supra), the advertisement expenses incurred by the dealer would be includible in the assessable value of the goods only when the assessee manufacturer has an enforceable legal right in respect of the dealers' making it obligatory for the dealers' to incur certain specified quantum of expenses on the advertisement of the assessee's products. In the present case, in the dealership agreements, there is no such clause requiring the dealers to incur certain specified quantum of expenses on the advertisement and publicity of the appellant's product.
+ The clauses of requiring the dealers to vigorously promote, develop and maintain sales of the product and parts to the satisfaction of and in the manner required by the appellant cannot be treated as the clause which gives an enforceable legal right to the appellant to insist on incurring of certain quantum of expenses on advertisement by the dealers. For this reason also, the advertisement expenses recovered from the dealers would not be includible in the assessable value.
Limitation:
…in the circumstances of the case, we do not find any such element as an identical matter regarding includibility of the part of the advertisement expenses incurred by the assessee from their dealers was the subject matter of the order dated 6/1/1997 in the appellant's own case for the previous period and therefore, the department cannot allege that the appellant had kept the department in dark about the recovery of a part of the advertisement expenses by them from certain dealers. Therefore, the limitation period of 5 years under proviso to section 11A(1)is not in vokable and the duty demand is time barred.
The appeal was allowed, both on merits as well as limitation.
