1997 (2) TMI 120 - SC - Central Excise

Appeal upheld: advertising and after-sales portions of dealer trade discounts cannot reduce assessable value; 2% cut invalid

SC allowed the appeal, holding that claimed deductions from dealer prices for portions of trade discount representing advertisement and after-sales ... Assessable value of goods manufactured - claimed inadmissible deductions from the price realised from its dealers on account of, amongst others, 'normal trade discount although a substantial part thereof represented advertisement expenses and expenses on after sales service which were includible in the assessable value - agreements between the appellant and their dealers are genuine agreements entered into an arms length - between principal and principal - Held that:- It seems to us clear that the advertisement which the dealer was required to make at its own cost benefited in equal degree the appellant and the dealer and that for this reason the cost of such advertisement was borne half and half by the appellant and the dealer. Making a deduction out of the trade discount on this account was, therefore, uncalled for. As to the after sales service that the dealer was required under the agreement to provide, it did of course enhance in the eyes of intending purchasers the value of the appellant's product, but such enhancement of value enured not only for the benefit of the appellant; it also enured for the benefit of the dealer for, by reason thereof, the dealer got to sell more and earn a larger profit. The guarantee attached to the appellant's products specified that they could be repaired during the guarantee period by the appellant's dealers anywhere in the country. Thus, though one dealer might have to repair goods sold by another dealer and incur costs in that regard, he also had the benefit of having the goods he sold reparable throughout the country. The provision as to after sales service, therefore, benefited not only the appellant; it was a provision of mutual benefit to the appellant and the dealer. We think that in adjudicating matters such as this, the Excise authorities would do well to keep in mind legitimate business considerations.We cannot help but observe that the reduction of the trade discount by two percentage points would not have occurred to the adjudicating authorities, being an unlikely estimate, but for the fact that the 2% here realised ₹ 50 lacs and odd. The appeal is allowed. Issues:1. Correct determination of assessable value of goods manufactured by the appellant.2. Eligibility for deduction on account of normal trade discount.3. Interpretation of agreements between the appellant and their dealers.4. Benefit of advertisement expenses shared between the appellant and the dealer.5. Benefit of after sales service provision to both the appellant and the dealer.6. Consideration of legitimate business considerations by Excise authorities.7. Reduction of trade discount by two percentage points and its impact.Analysis:1. The appellant, a manufacturer of audio equipment, was issued a show cause-cum-demand notice by the Collector of Central Excise alleging incorrect determination of assessable value of goods manufactured during 1983-1986. The notice claimed that deductions from the price realized from dealers, including normal trade discount, were inadmissible due to advertisement expenses and after-sales service costs. The Tribunal upheld the demand, emphasizing that expenses incurred by dealers for service and advertisement were to come out of the discount offered by the manufacturer, thereby affecting the assessable value.2. The appellant's counsel cited a judgment highlighting that service facilities and replacement of defective parts were associated with the dealer, not the manufacturer. The court noted that advertising by the wholesaler aimed to attract customers, benefiting both the dealer and the manufacturer. Another judgment emphasized the mutual interest of the manufacturer and distributor in maximizing sales, with advertising provisions serving this objective without altering the principal-to-principal nature of the transaction.3. The agreements between the appellant and their dealers were genuine, reflecting an arms-length relationship between principal parties. Clauses in the agreement specified payment terms, obligations regarding guarantee service, maintenance of service stations, and advertisement campaigns to promote sales. The agreement explicitly stated that the dealer was not an agent of the company, establishing a vendor-purchaser relationship.4. The Court observed that the advertisement expenses shared between the appellant and the dealer equally benefited both parties, justifying that such costs should not result in a deduction from the trade discount. The after-sales service provision, although enhancing the value of the appellant's product, was mutually beneficial as it facilitated increased sales and profits for both the appellant and the dealer.5. Emphasizing the need for Excise authorities to consider legitimate business considerations, the Court highlighted that the reduction of the trade discount by two percentage points, amounting to a significant sum, was not a justifiable estimate. Consequently, the appeal was allowed, setting aside the judgment and order under appeal, with no order as to costs.