CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 727 and 962-74 of 1988
Appeal Under Section 35L(b) of the Central Excise and Salt Act, 1944 from the order dated 30.11.87 and 20.11.87 of the Customs Excise and Gold (Control) Appellate Tribunal, New Delhi in Appeal No. 2856, 1856, 1920- 1931/87-A in order Nos. 775, 749 to 761/87.
Kuldeep Singh, Additional Solicitor General. A.K. Ganguli, Mrs. Sushma Suri and K. Swami for the Appellant.
F.S. Nariman, Ravinder Narain, A.K. Verma and D.N. Misra for the Respondents.
The Judgment of the Court was delivered by
SABYASACHI MUKHARJI, J. These appeals arise under section 35L(b) of the Central Excises & Salt Act, 1944 (hereinafter called ’the Act’). The respondents herein M/s. Kelvinator of India Ltd. in these appeals manufacture refrigerators. They market these through their four exclusive wholesale dealers, namely, M/s. Gem, M/s. Leonard, M/s. Expo Machinery and M/s. Tropicana. The respondents gave one year warranty for the complete refrigerator and all parts thereof (except the light bulb and the crisper glass). During this warranty period, they provide free repair and replacement for defects in material and workmanship under normal use and service. This free service is available only within the municipal limits of the area served by an office of the wholesale dealer of the authorised dealer from whom the refrigerator is originally purchased. The respondents include the cost of this one year warranty in the sale price as well as assessable value of the refrigerator. After the free warranty period of one year is over, the respondents offer a four year service contract only for the sealed system or parts thereof. This contract is not free. It is on payment basis. Charges for it during the material period (10.4.81 to 30.6.86), in Civil Appeals Nos. 962-75 of 1988, varied from Rs. 300 to Rs.450 per refrigerator. It is a fact that these four dealers enter into this contract with the respondents. The final consumer in turn enters into the service contract with the dealer from whom he buys his refrigerator. The service is rendered by the respondents and the entire contract money accrues to them. It is on evidence that during the material period the four dealers referred to hereinbefore entered into service contract in respect of a total of 91% of their purchases. The remaining 9% did not enter into such contract. This is optional.
The Assistant Collector by his order dated 18th August, 1986 held that four year service charge is includible in the value of the Refrigerator for the purpose of assessment of central excise duty under section 4 of the Act. The Assistant Collector further held that for all intents and purposes this charge was not optional as it was not exercised only in respect of 9% of the sales. The Assistant Collector relied on the decision of this Court in Union of India and others etc. etc. v. Bombay Tyre International Ltd. etc. etc., [1984] 1 S.C.R. 347 where it was held that after sale service charges could not be deducted from the assessable value. The Assistant Collector confirmed the demands totalling Rs.17,40,68,326.32 against the respondents (in Civil Appeals No. 962-74 of 1988) and Rs.7,07,535 (in Civil Appeal No. 727 of 1988). The respondents herein filed an appeal before the Appellate Collector. The Appellate Collector upheld the decision of the Assistant Collector. There was an appeal to the Tribunal and the Tribunal held that the optional service charge during the second and third year after the expiry of the first year warranty period was not includible in the assessable value. The Tribunal allowed the appeals of the assessee with consequential relief. Hence these appeals come to this Court.
The point involved in these appeals is whether the four year service contract charge is includible in the value of the refrigerators for the purpose of assessment of Central Excise Duty under section 4 of the Act. It was found as a fact by the Tribunal that after the free warranty period of one year is over, the respondent herein offer a four year service contract only for the sealed system or parts thereof. This contract is not free. It is on payment basis. The contract is not compulsory and the four dealers entered into service contract in respect of 91% of their purchase. They did not make the contract for the remaining 9%. It is also not necessary that the contract should be made right at the time of purchase of the refrigerator from the respondents. In fact it was found as a fact that some time contract was made only in less than 10% of the sales. For the remaining 81% of the purchases, the dealers took time from one week to over six months from the date of purchase. It was explained by the respondents that depending upon the demand pattern in a particular area, the dealer purchased about 10% of the refrigerators straightaway with the service contract; for the remaining purchases, he exercised the option later, as and when the dealer anticipated further demand from his customers.
The Tribunal on an analysis of the evidence came to the conclusion that it was after sale service and it was optional. Therefore, such service charges were not includible in the assessable value of the respondents herein. The principle under which these will be includible has been laid down in Union of India and others. v. Bombay Tyre International Ltd. (supra), where Pathak, J., as the learned Chief Justice then was, inter alia, observed as follow:
"...expenses incurred by the assessee upto the
date of delivery on account of storage charges,
outward handling charges, interest on inventories
(stocks carried by the manufacturer after
clearance), charges for other services after
delivery to the buyer, namely, after-sales service
and marketing and selling organisation expenses
including advertisement expenses cannot be
deducted. It will be noted that advertisement
expenses, marketing and selling or organisation
expenses and after-sales service promote the
marketability of the article and enter into its
value in the trade. Where the sale in the course
of wholesale trade is effected by the assessee
through its sales organisation at a place or
places outside the factory gate, the expenses
incurred by the assessee upto the date of delivery
under the aforesaid heads cannot, on the same
grounds, be deducted.
But the assessee will be entitled to a deduction
on account A of the cost of transportation of the
excisable article from the factory gate to the
place or places where it is sold. The cost of
transportation will include the cost of insurance
on the freight for transportation of the goods
from the factory gate to the place or places of
delivery. "
This aspect was later clarified by this Court in Assistant Collector of Central Excise and others v. Madras Rubber Factory Ltd. and others, [1987] 27 E.L.T. 553, where Bhagwati C.J. at page 562 of the report observed as follows.
"Interest on finished goods from the date of the
stocks are cleared till the date of the sale was
disallowed by the Assistant Collector, Kottayam.
This head has again been urged for our
consideration as a proper deduction for
determination of the assessable value. As quoted
in our judgment in Union of India and Ors. v.
Bombay Tyres International Ltd. (supra), we have
held that expenses incurred on account of several
factors which have contributed to its value upto
the date of sale which apparently would be the
date of delivery at the factory gate are liable to
be included. The interest on the finished goods
until the goods are sold and delivered at the
factory gate would therefore necessarily,
according to the judgment in Bombay Tyres
International case (supra) have to be included but
interest on finished goods from the date of
delivery at the factory gate upto the date of
delivery from the sales depot would be an expense
incurred after the date of removal from the
factory gate and it would therefore, according to
the judgment in Bombay Tyres International case
(supra) not be liable to be included since it
would add to the value of the goods after the date
of removal from the factory gate. We would
therefore have to allow the claim of MRF Ltd. as
above."
It was mentioned before us by the learned Additional Solicitor General that this judgment is under review.
The Tribunal in its judgment herein has observed as follows:
"We have given enough facts in paragraph 2 above
to show that the four year service contract charge
in the present was
not compulsory one. As to why the appellants’
buyers chose not to enter into such contract only
for about 9% of the purchases and not more is a
matter between the manufacturer and his customers.
The percentages may look small but the statement
of sales filed before us for the five year period
(1981-86) shows that the number of Refrigerators
in respect of which the option was not exercised
was in thousands, ranging from over 18,000 to over
39,000 per year. We find no force in the
department’s pleading that the service charge, for
all intents and purposes, was a compulsory one. As
to what machinery the appellants devised for
extending this service is not material. If any
customer did not like to have the service, there
was no compulsion on him to go in for it. That is
the important thing.
Once we reach the conclusion that the post-
warranty service activity could not be subjected
to excise, it ceases to be material that 91% of
the customers had opted for the service contract.
The ordinary or normal price referred to in
section 4(1)(a) can take in the costs upto the
stage of factory gate and not beyond as held by
the Hon’ble Supreme Court."
The Tribunal also observed that the respondents herein offered the four years service by a stamped endorsement on their sale invoice itself, it did not mean that the subsequent exercise of option by the buyer related back to the date of purchase itself. It was also found that there was no evidence to conclude that the service contract was a facade to split the true value of refrigerators into taxable and nontaxable components.
In that view of the matter, the Tribunal set aside the order of the Collector of Central Excise (Appeals) and allowed the appeals. The contract for four years warranty service was optional, which was entered into later on. This is clearly after-sale facility and cannot be includible in the assessable value of the refrigerators.
In the aforesaid view of the matter, the Tribunal was right in the view it took. These appeals fail and are accordingly dismissed. G.N. Appeals dismissed.