Full Judgment
The said order was set aside by the first Appellate Authority vide Order-in-Appeal No. 53/98 (M-II) dated 23.3.1998 and revenue being aggrieved with the said Order-in-Appeal are now before us.
2. Heard Sri S. Murugandy, learned D.R., who submits that the Revenue is aggrieved against the order impugned on the following grounds: (a) The appellants have to prove that the money received by them as advances have not influenced the price and that the appellants have not led any evidence to disprove this.
(b) In the case of M/s. Resistance Alloys Ltd. as , it has been held that such advances enhanced working capital of the assessee and hence to be added in the assessable value. While the Order-in-Original has examined this issue, the appellants at the first appellate level had not proved with the evidence that the advances received by them had not been utilised for the manufacture of final product.
(c) In the case of Metal Box India Ltd. as , the Hon'ble Apex Court had held that interest on advances is to be included in the assessable value, as the amount of advances received interest free increased the manufacturers' purchase power for purchase of raw materials and other requirements.
(d) The Revenue also relies on the final order No. 2619/96 dated 11.12.1996 in the case of CCE v. Sodalamuthu and Co. Pvt. Ltd. wherein it was held that the appellants had enjoyed the benefit of the interest and hence it was includible in the assessable value.
(e) The learned D.R. draws our attention to the Order-in-Appeal erroneously having relied oh the Board's Circular No. 215/49/96-CX dated 27.5.1996, while allowing the appeal at the first appellate stage. He submits that it is not the present respondent's case that he has kept the advance received from the customers in a separate account and credited interest on such deposit of the buyers.
3. The learned D.R. submits that on all these counts, the Order-in-Appeal impugned errs in law and needs to be set aside and the Order-in-Original be restored.
4. Heard Sri V.S. Venugopalan, learned advocate for the respondents. He submits that there is no merit in these revenue appeals for the following reasons: (a) The issue of receipt of advances as security deposit against tailor-made goods is to be not confused with the contracted price at which these goods were undertaken to be purchased by the buyer for the simple reason that the said agreed upon price emanated out of a detailed process involving bidding in open global tender. Once the price was fixed, the other conditions regarding payment of advances for security towards the manufacturer was added to the purchase order in terms of the age old practice in the market for such tailor-made high valued goods.
(b) He further submits that the Commissioner (Appeals) has already found that since the advances so received were kept in a current account, no interest was earned thereon and if it is the contention of the revenue that interest earned thereon was used as working capital, the burden is on the revenue to show this by evidence. The Order-in-Original does not lead evidence to show that as to what was the quantum of interest actually alleged to have been earned by them and how it was used as working capital leading to any effect on the contracted price. He submits that this is to be viewed in the context of the finding of the learned Commissioner (Appeals) that as the advances received were deposited in a current account in the bank, therefore, no interest was earned.
(c) The learned advocate further submits that this entire issue of securing certain sums for the purpose of security to ensure that the contract between the two parties namely buyer and seller is executed completely cannot be viewed from one side only. He submits that as per the terms of the contract, copy of which was available on page 50 of the paper book, it is seen that before the buyer gave 10% advance as security, the respondents themselves were obliged to produce a bank guarantee to cover the said amount of advance in terms of the contract. He submits it is a common knowledge that banks do not give bank guarantee without any consideration, such consideration offered in the form of commission to the banks would have to be incurred by the respondents, even before he receives the said advance. He submits that to a great extent either any collateral offer against the bank guarantee and/or commission charged by the bank against bank guarantee to a great extent off-sets the amount of advance received by them.
(d) The learned advocate further submits that apart from the blockage of money of the respondents in terms of the above para, it is often a part of the contract that when the final payment is to be adjusted in terms of the contract, there is a long delay faced by the respondents in receiving the last 10% or 20% of the contracted price from the date of supply, erection and commissioning of the machineries ordered by the buyer. This is because the buyer does not release last instalment of payment, till he is satisfied that the machinery supplied are working without any undue trouble and that it meets the capacity for which it was ordered. This part of withholding of 10% to 20%, according to the learned advocate, would even extend to a year or more. This aspect involves further blockage of the capital of the respondents. Therefore, in such a case, the issue of the advances received giving undue benefits to the respondents has to be considered by also considering the fact that the buyers themselves also secure the performance of the machinery supplied by withholding such amount of payments for a long time to the detriment of the manufacturer. This, therefore, more than off sets any benefit, if at all, enjoyed by the respondents in this contract.
(e) The learned advocate further submits that one more dimension of the contract has not been examined. This is that as per evidence led in reply to the show cause notices, it has been shown that in significant number of cases, the contract was never honoured by buyer and it is cancelled for various reasons. However, the respondents have already incurred insufficient expenditure towards purchase of raw materials and fabrication of components etc. as per the contract and when the buyer cancels the contract for one reason or another, the expenditure already incurred by the respondents are not always fully covered by 10% advance received by them.
5. In view of this factual position, the learned advocate submits that the issue of whether this advances constitute nexus to the assessable value cannot be decided by merely taking one side picture that the advances received by the respondents can be used as working capital to their advantage. The other sides of the picture namely that bank guarantees furnished before such advances are available after involving certain expenditure, that the buyer retained 10% to 20% of the final price payable for significant period of time till he (is) satisfied regarding the performance of the equipment, and that there are significant number of instances where contracts themselves are cancelled leading to loss for the respondents. He submits that all these three instances should also be considered in the case of each contract before the department can come to the finding that there has been a nexus between the advances received and the price sold as declared by them. He submits that in the Order-in-Original concerned, while the learned Assistant Commissioner has to some extent devoted his attention towards the allegation that the advances have been used as working capital, not one word has been written in consideration of the other side of the picture as indicated above. Since the settled law is that unless there is a nexus between the security advances and the price to the extent that the said price had become depressed in view of the advances, neither the advance amount nor the notional interest amount can be added to the value. While examining this nexus, the three issues on which the respondents suffered losses or incurred extra expenditure has also to be considered before arriving at any decision that there was such a nexus. He submits that these have not been considered in the Order-in-Original and therefore, the said order is one sided order and has been rightly set aside by the learned Commissioner (Appeals).
6. In this connection, he cites the decision of the Hon'ble Supreme Court in the case of VST Industries Ltd. v. CCE as reported in 1998 (97) ELT 395 (SC) : 1998 (74) ECR 486 (SC). He submits that the Hon'ble Supreme Court in this decision has distinguished their own decision in the case of Metal Box India Ltd., which had been relied upon by the revenue in their appeal on the ground that in this case there was nothing on record to show that the receipt of the deposits on payable influenced the fixation of the sale price. He submits that for the reasons submitted above in their case also there is nothing on record to show that the advances received by them had affected the price fixed under the contract. He also submits that in the case of Grasim Industries Ltd. v. CCE as reported in 1999 (80) ECR 191 (T), the issue of contract price for tailor-made goods namely machine parts and also that of advance deposits collected from the buyers against such contracts was considered. It was held that since the nexus between receipt of advance and price charged has not been established, therefore, notional interest on such advances was not includible in the assessable value of the goods. He further submits that in this decision the facts being different than in the case of Metal Box India Ltd. had been clearly considered. He submits that similarly in the decision of the Tribunal in the case of National Controls (India) v. CCE as reported in 1998 (75) ECR 548, it was again held that there was nothing to indicate that the advance payments had depressed the price to any effect and therefore, notional interest element could not be added to the assessable value. He further cites the decision of the Tribunal in the case of Flex Industries Ltd. v. CCE as , wherein a similar ratio was held. He further submits that even in the decision of the Hon'ble High Court of Madras in the case of UOI v. Lakshmi Machine Works Ltd. as relied upon by the revenue, the Hon'ble High Court had held that the burden was on the department to show the extent of benefit obtained by the assessee on the interest free loan and the price was loaded to that extent. The extent of the benefit, if any, has to be considered in the light of the above decisions, as also the three types of instances where the respondent himself was put to financial hardships and expenditure for the purposes of bank guarantee, in view of the retention of the sums for long period even after the equipment was supplied, and in cases where contracts were cancelled. Nowhere has this been considered. In view of the aforesaid submissions, the learned advocate submits that there is no merit in the revenue appeals.
7. We have carefully considered the rival submissions as well as records of the case, in particular the Order-in-Appeal as well as Order-in-Original on record. We find that the Order-in-Appeal impugned has basically followed the earlier decisions on this issue emanating at the first appellate level and has allowed the appeal mainly on the ground that since no interest was earned from these advances, therefore, nothing more is includible in the assessable value declared.
We find that as against this, there is another ground on which the Revenue is before us namely that even if the issue of interest accrued, notional or otherwise is kept aside, the very amount of advance received is used as working capital by the present respondents and therefore, derived extra benefit, which affects the contracted price and therefore, this amount should be included in the assessable value.
The logic of revenue's argument is that had this amount not been available with them, they could have borrowed it from financial institutions by paying interest thereon. Therefore, even if, they have not earned any interest by using advances as working capital, they have saved the interest payable by them otherwise. We find that the learned original authority has examined this aspect of the matter at some length in the Order-in-Original and has come to the conclusion that in view of this logic, the notional interest on the advances would have to be included in the assessable value. We have also considered the reply of the present respondents to some of the show cause notices in particular, show cause notice No. 185/94 dated 23.2.1994. A perusal thereof reveals to us that the following submissions which were now made before us by the learned advocate were not agitated at the original stage: (i) the procurement of bank guarantee to receive advances entail some expenditure by the manufacturer; (ii) the retention of 10% to 20% of the contracted price by the buyer for significant periods even after commissioning of the equipment supplied; and (iii) significant number of instances where cancellation of contracts led to losses by the respondents. Therefore, we find that all these three submissions are fresh submissions before us. We also find that any finding on these three submissions would involve a detailed consideration of the facts on record. Since the number of contracts involved in this dispute, which covers the period from April, 1992 to January, 1997, would involve original work of some magnitude, it is not possible for this Tribunal to engage in this original work at the second appeal stage.
8. At this stage, the learned advocate submits that in their reply to show cause notices No. 115 and 1128/92 dated 16.11.1992 some of these issues regarding various instances of losses incurred were placed before the original authority.
9. We have carefully considered this submission also. On a perusal of the Order-in-Original impugned, we find that it contains no discussion on what has been aptly termed by the learned advocate as "the other side of the picture". We find that when the question of nexus between the advance received and the contracted price is to be considered, the submissions made by the learned advocate regarding the expenditure incurred by the respondents which are the issues noted above are also required to be considered before it can be said that the benefit gained from such advances had a nexus to the contracted price. Since these were not considered by the original authority as also by the first appellate authority and as this involves original work of shifting the evidence available on record, we have no other alternative but to remand the matter to the original authority with the directions that he shall consider the matter afresh including these issues raised by the learned advocate before us and then proceed to pass a speaking order in the matter. Therefore, the Order-in-Appeal impugned as well as the attendant Order-in-Original are both set aside and the matter is remanded to the original authority for de novo consideration of the issue in its entity. The learned original authority shall give an opportunity of hearing to the respondents and shall consider any other submissions made by them before him apart from the three submissions already recorded above including the case laws cited above and then proceed to examine the issue whether and how these constitute nexus with the contracted price before passing a final decision in the matter.