Judgment:
1. Appellant, engaged in manufacture of electrical control and switch gears filed price-lists from time to time and cleared goods on payment of appropriate duty on the approved prices. In respect of a contract, appellant filed a price-list in Part II and the same was approved and goods were cleared on payment of appropriate duty. The agreement between the appellant and the buyer contained an escalation Clause and a clause for payment of liquidated damages. It appears that on account of delay in supply and in conformity with Clause 9, appellant deducted liquidated damages at the stipulated rate from the prices shown in the invoice and paid central excise duty on the balance amounts. In respect of such payments made during the period from February 1988 to May 1988, appellant filed refund claim of the duty referable to the amount of liquidated damages deducted from the price. The Asstt. Collector held that the deduction of liquidated damages did not amount to variation or reduction of price and, therefore it cannot be said that duty was paid in excess of the duty payable on the correct assessable value and rejected the refund claim. This order was confirmed by the Collector (Appeals).
2. Ld. Counsel for the appellant contended that just as a price variation Clause has the effect of increasing or reducing the originally agreed price and has consequent impact on assessable value, the agreement for payment of liquidated damages also has such effect on price and assessable value. According to him, since the amount of liquidated damages is deducted from agreed price, has the effect of bringing down the price and the provisions in the agreement must be regarded as having the same effect as a price variation clause.
3. When parties enter into an agreement for sale, they agree on a price or a formula on the basis of which price can be quantified. They may also provide for price variation, based on various factors such as variation in prices raw materials etc. When there is such a clause, it has a direct effect on the agreed price. In other words, when there is such a price variation Clause, the agreed price itself fluctuates based on the formula adopted in the agreement.
4. Section 73 of the Indian Contract Act provides for compensation for loss and damage caused by breach of contract. The party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arises in the usual course from such breach or which the party knew, when making the contract, to be likely to result in breach. The parties may determine in advance, the amount of compensation to be paid on account of loss or damage caused by a breach of contract where the parties agree on a reasonable sum as compensation, it is regarded as "liquidated damages" which is a pre-estimate of the loss or damage on account of the breach of contract-. Such a clause may be enforceable in law. Where the quantification is not reasonable but is intended to penalise the party committing the breach, it is regarded as "penalty" and not enforceable in a Court of Law.
5. According to Clause (9) of the agreement, parties agreed that in case of delay in supply of the goods on the part of the appellant, liquidated damages at the stipulated rate shall be payable by the appellant and shall be deducted from the appellant's invoices. The question of payment of damages arises when there is a breach of the contractual Clause regarding time for performance. The parties stipulated time for performance, and provided for breach of contract, and payment of liquidated damages. The mode of payment has also been stipulated by providing that the amount will be deducted from the invoice price. When the contract goes through price is payable.
Compensation is payable to the buyer when there is a breach of contract. Damages or compensation cannot be regarded as price or part of price. The provision for the deduction of the quantum of damages from the invoice price is only for the purpose of recovery of the damages. Payment of damages cannot be regarded as reducing the agreed price. The price remains constant, namely at the agreed level. The appellant by his conduct became liable to pay damages, the quantum of which urns pre-estimate in the contract and such amount of damages was agreed to be paid to the buyer at the time of payment of the price, by deducting it from the price. This will not make the amount of damages go in depreciation of the price. Hence the decisions relating to the effect of price variation clause cannot apply to the present situation.
For the reasons indicated above, we dismiss the appeal.