CX- Valuation - Whether pre-delivery inspection charges (for short 'PDI') and after sales service charges (for short 'ASS') are to be included in assessable value? NO - CESTAT LB decision in Maruti Suzuki overruled: Supreme Court
BY TIOL News Service
NEW DELHI, DEC 16, 2015: THE question of law for consideration by the Supreme Court in all these appeals:
Whether the pre-delivery inspection charges (for short 'PDI') and after sales service charges (for short 'ASS') are to be included in the assessable value?
The CESTAT Larger Bench in the case of Maruti Suzuki India Ltd. v. CCE, New Delhi - 2010-TIOL-1127-CESTAT-DEL-LB had held that the definition of 'transaction value' would cover the free PDI as well as ASS charges.
The Supreme Court observed, "Some of the essential features which needs to be pointed out are that the excise duty is payable on the 'transaction value' as per the provisions of Section 4 of the Act. The provisions of Section 4 amended in the year 2000. All these cases pertained to the period post 2000. Therefore, it is the amended provision of Section 4 which, inter alia, states that excise duty is to be paid on 'transaction value'. The definition of transaction value is given in Section 4(3)(d) of the Act. However, in order to comprehensively answer the issue, it would be necessary to traverse through the unamended provision which prevailed before the amendment in Section 4 by the Finance Act of 2000 and to then determine as to whether amended provision has resulted in altering the provision in the context of the issue raised in these appeals"
Referring to several cases, the Supreme Court observed that where manufacturer himself does the ASS and incurs any expenditure thereon, the same is not deductible from the price charged by him from his buyer. Likewise, where the manufacturer has sold his goods to his dealer and wholesale dealer thereafter does ASS to the customer and incurs expenditure therefore, it cannot be added back to the sale price charged by the manufacturer from the dealer for computing the assessable value. This is more so, where the ASS is done by the dealer many weeks after the goods have been sold to him by the manufacturer. Such a post-sale activity undertaken by the dealer is not relevant for the purpose of excise since the goods have already been marketed to the dealer .
The Supreme Court found that the position in respect of unamended provision is very clear. Coming to the amendment in Section 4 of the Act, in the year 2000, it was noted in the first instance that definition of 'transaction value' as per Section 4(3)(d) is exhaustive and covers within its purview, the price of goods and various other amounts charged by the assessee by reason of sale or in connection with sale.
CBEC had issued a Circular dated 01.07.2002, wherein this issue was clarified as:
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What about the cost of after sales service charges and pre-delivery inspection (PDI) charges, incurred by the dealer during the warranty period?
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Since these services are provided free by the dealer on behalf of the assessee, the cost towards this is included in the dealer's margin (or reimbursed to him). This is one of the considerations for sale of the goods (motor vehicles, consumer items etc.) to the dealer and will therefore be governed by Rule 6 of the Valuation Rules on the same grounds as indicated in respect of Advertisement and Publicity charges. That is, in such cases the after sales service charges and PDI charges will be included in the assessable value.
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The Bombay High Court had struck down this clarification in the case of Tata Motors Ltd. v. Union of India - 2012-TIOL-721-HC-MUM-CX . The High Court had observed,
Once it is held that the PDI and said services are not provided by the dealer on behalf of the petitioners, it cannot be treated as consideration for sale. It also cannot be treated as a deferred consideration. The respondents while issuing Circular dated 1st July, 2002 have wrongly referred to the Rule 6 of the said Rules and have wrongly linked the expenses incurred for PDI and said services with expenses for advertisement or publicity. It is required to be noted that the provisions of the said Rules will not be applicable to the facts of this case as the transaction between the petitioners and the dealer does not fall within the ambit of Section 4(1)(b) of the said Act. The transaction of sale of a car between the petitioners and the dealer is governed by the provisions of Section 4(1)(a) of said Act as the petitioners as assessee and the dealer as a buyer of the car are not related to each other and price is the sole consideration for the sale. In our view, reference to the Rule 6 of the Valuation Rules in Clause 7 of Circular dated 1st July, 2002 is totally misconceived.
It is to be noted that as per the record, once the car is sold by the petitioners to the dealer for a particular consideration, no other amount is payable by the dealer to the petitioners. It is required to be mentioned that the petitioners are not reimbursing any amount to the dealer towards expenses incurred for the PDI and said services and the petitioners are paying Excise duty on the entire amount for which the petitioners sale the car to the dealer.
In the present case, when the petitioners sell the car to the dealer, the goods enter the stream of trade for the first time and, therefore, the amount at which the car is sold to the dealer would be the assessable value on which the Excise duty would be payable. In the present case, the expenses incurred by the dealer for PDI and said services has nothing to do with the term "servicing" mentioned in the transaction value and as such, the said expenses cannot be added to assessable value.
On consideration of the Clause 7 of Circular dated 1st July, 2000, it is apparent that the respondents have brought into existence a deeming provision that is to say the respondents have treated all the manufacturers of cars on one platform and by fiction taken a decision to add the expenses incurred towards PDI and said services in the assessable value. It will have to be mentioned that in all cases where the expenses incurred towards PDI and said services are solely borne by the dealer and the manufacturer like petitioners have nothing to do with the said expenses then adding those expenses in the assessable value would be contrary to the provisions of Section 4(1)(a) r/w Section 4(3)(d) of the said Act. Looking to the facts and circumstances of this case, the respondents have not been able to place on record any material to show that the amount incurred towards PDI and said services can fall within the definition of the transaction value."
The Supreme Court agreed with the views of the High Court.
Held: PDI charges and free ASS charges would not be included in the assessable value under Section 4 of the Act for the purposes of paying excise duty.
The view taken by the Tribunal in favour of assessees in this behalf is correct in law and all the appeals of the Department are dismissed. On the other hand, Larger Bench view in Maruti Suzuki does not lay down the law correctly and is, therefore, overruled and the appeals filed by the assessees are allowed.
(See 2015-TIOL-299-SC-CX)
