1. These four appeals arising out of the order in original No. 113/95 dated 29.09.95 passed by the Commissioner of Central Excise, Coimbatore, have been filed by M/s ELGI Equipments Pvt Ltd. (hereinafter referred to as M/s Elgi) by which the Commissioner has confined a differential duty demand of Rs 6,04,087.00 (BED : Rs 5,75,335.00 and SED : Rs 28,752.00.) on the appellants for the period from 01.04.1988 to 31.12.1990 and another amount of Rs 34,09,433.17 (BED : Rs 31,67,520.78 and SED : Rs 2,41,912.39) for the period from 01.01.1991 to 16.04.1992 under proviso to Section 11A of the CE & Salt Act, 1944. The Commissioner has also imposed a penalty of Rs 10,00,000/- on M/s Elgi), under Rule 173Q of the CE Rules, 1944.
2. Facts of the case as narrated in the order in original, are reproduced below: 2. M/s. Elgi Equipments Ltd., (herein after referred to as M/s.
Elgi) having registered office at India House, Trichy Road, Coimbatore have four factories at (i) Trichy Road, (ii) Elgi Industrial Complex, Singanallur (iii) Sowripalayam, Coimbatore and (iv) Industrial Estate, Kurichy. They manufacture compressors, pumps, Service Station Equipments etc.
3. M/s. Elgi (SIC) varying from 10% to 45% on different products and declared that such discounts (SIC) allowed uniformly to all the buyers.
4. During the course of assessment of RT 12 returns, the officers noticed some corrections which were made on the (SIC) of gate passes, so that that the prices tallied with the price shown in the price lists. The (SIC) the original gate passes bearing Sl. No. 434/16.06.1990 and 478/25.06.1990. Verification of these gate passes proved that duplicate and triplicate copies have been corrected by M/s. Elgi after issue of original. Sri. T. Frank, Director, in his statement claimed that when the sale at the factory gate was in retail, duty was paid at the whole sale price and the retail price of the product would be higher and that duty was paid on the basis of normal price; that the discrepancies occurred during the period from 22.03.1990 to June 1990 because of an error in the computer programme. Sri. T. Frank admitted that in respect of transactions which were retial in nature, discount was not passed on and duplicate and triplicate copies were manually corrected. He also admitted that he did not deem it necessary to intimate the department about the discrepancies and corrections made on duplicate and triplicate.
5. M/s. Elgi had claimed that the price at which goods were sold to their distributors and dealers was the normal price. The officers (SIC) verification and recorded statements from two authorised dealers of Elgi.
6(i) Sri. M.V. Mallaya, Partner of M/s. Maroor's Machine Tools, Mangalore stated that they did not have a written agreement of dealership; that they were getting only 5% as discount and in one year they were paid additional commission at the year end and they were dealing with Elgi directly and not through any branch or distributor.
6(ii) Smt. Shantha Sethuraman, Sole proprietor of M/s. Maniam & Co., Trichy, another authorised dealer of Elgi handed over copies of written agreement setting out conditions of dealership. She got 5% discount on air compressors, 10% on borewell compressors and additional 2.5% was paid, if they exceeded Rs. 10 lakhs turn over.
She admitted that there was a difference between the price shown in the invoices and that shown in gate passes and that she went by invoice price and that she was not aware of the reasons for such difference between invoice and GP1. She also stated that even though order acceptance and invoices showed as if the transaction was through Madurai branch of Elgi, she never dealt with Madurai branch but always with Elgi only. She also admitted that Elgi reimbursed 50% of advertisement charges spent by her. She also admitted that Elgi had sent a letter asking her to correct original gate pass No. 46/11.04.1990.
6(iii) Another customer Sri. R. Saravanan, owner of an automobile service station at Trichy in his statement on 08.09.1990 admitted that Elgi had charged him a higher price than shown in the gate pass and did not pass on the discount even when he requested. He also admitted that Elgi had asked him to correct gate pass copies which he had not done.
7. Sri T. Frank, Director, Elgi gave a further statement on 25.04.1991. Sri. Frank, explained that Elgi had appointed main dealers in respect of borewell compressors and distributors in the same of other products and also had branches all over India; that they had effected (i) Sales to Main dealers/distributors (ii) Transfer to branches (iii) Sales through Main dealers/distributors (iv) Sales through branches; that in respect of (i) and (ii), discount had been passed on in full. In respect of (iii) and (iv), if the buyer was allowed any discount, the balance discount was passed on to the branch/main dealer/distributors. He also admitted that if a buyer approached the company directly, a portion of the discount which was not passed on to the buyer was passed on to the jurisdictional branch/distributor/Main dealer or retained by the company, since such buyers were not wholesale buyers. He admitted that the distributor/Main dealer/branch got a part of discount as Area Sales Commission. he also justified higher discounts to distributor/Main dealers than to Dealers/Sub dealers on the ground that distributor/main dealer had to provide after sale and warranty service; that the distributor/main dealer had to maintain inventory of spares for this purpose and incur expenses; that they were obliged to provide after sales service in respect of all products sold in their territory irrespective of the fact as to who had sold them; that the Dealers and distributors were also required to spend money on advertisements and Elgi reimbursed 50% of Advertisement expenses to a dealer and 25% to a distributor; that the branches used the discount and area sales commission for after sales service, inventory and other expenses. Branch Managers of Madurai and Cochin fully corroborated the statement of Sr. T. Frank, Director in their statements.
i) A part of the discount claimed in the price list was in reality meant to cover after sales service, advertisement expenses and maintenance of inventory and can not be considered as trade discount since all the wholesale buyers did not get it and a part of the discount not passed on, was paid to distributors/main dealer/branch.
ii) The fact that Elgi was allowing different discount to dealers depending upon the fact as to whether after sales service was provided and inventory was maintained was never intimated to the department. The fact that a portion of the discount was passed on to the distributor/main dealer/branch in respect of sales to dealers/sub dealers, without reflecting the same in the invoice was also suppressed from the department.
iii) The fact that M/s. Elgi was (SIC) advertisement expenses to dealers/distributors was also not brought to the notice of department and was suppressed.
9. Therefore, a show cause notice was issued on 31.03.1993, to Elgi requiring them to show cause as to why; i) An amount of Rs. 14,74,694.00 (BED) and Rs. 74,196.00 (SED) should not be demanded from them as being the duty on inadmissible discount under Section 11A of Central Excise and Salt Act, 1994 invoking proviso for the period from 1988-89 to 1990-91 (upto 31.12.1990) ii) why an amount of Rs. 22,595.00 (BED) and Rs. 1,444.00 (SED) should not be demanded being the duty on advertisement charges reimbursed to the dealers by invoking proviso to Section 11A of Control Excises and Salt Act, 1944; and iii) why a penalty should not be imposed on Elgi under Rule 173Q Central Excise rules, 1944.
10. While the matter was under consideration to decide whether extended period can be invoked under Section 11A in this case, the Asst. Commissioner of Central Excise, Coimbatore I Division, has issued show cause notices for the period from 01.01.1991 to 01.04.1994. The details are as under:i) C.No. V/84/17/37/91-92 dated 26.08.1991ii) -do- 04.02.1992iii) -do- 04.08.1992iv) -do- 04.02.1993v) -do- 30.06.1993vi) -do- 03.01.1994vii) -do- 03.06.1994 11. By a letter of even no. dated 08.06.1994, Elgi was informed that these show cause notices would also be taken up for adjudication and personal hearing was fixed for 14.06.1994. The show cause notice issued by Asst. Commissioner, Coimbatore I Division, in OC No. 1088/95 dated 25.07.1995 was transferred to Hqrs. Office, which had also been taken-up while adjudicating this case.
12. M/s. Elgi had not replied to the show cause dated 31.03.1993 but had approached Madras High Court and filed a Writ petition seeking stay against Show cause notice. When they failed to get a stay, they sought time to reply to show cause notice. They submitted their reply to show cause notice on 14.07.1994.
13. In their reply dated 14.07.1994 and 09.08.1994 M/s. Elgi have putforth the following arguments: 13.1 M/s. Elgi have argued that the demand was time barred as the department was well aware of the procedure of sale adopted by them and they were affirmed by various orders; that the discount had been disallowed even in cases where it has been passed on fully in whole sale buyers, that the procedure of passing on of full discount to the distributors and branches and the procedure of passing on of the unallowed portion of discount (in case of sales in retail buyers and retail dealers) as area sales commission to the Jurisdictional distributor and dealer was well known to the department; that the various adjudicating authorities have observed in their adjudication orders that a clearly determined normal prices in terms of Section 4(1)(SIC) the (SIC) made to unrelated whole sale distributors; that such normal price was applicable for all clearances to branches and through branches and distributors to retail dealers and retail buyers and for captive consumption; that where discount was not passed on in full to a retail dealer or retail buyer for sales through dealers or distributors, the balance discount was passed on to the jurisdictional distributor or dealer.
13.2 M/s. Elgi have further argued that as a part of modern marketing technique, it was essential to depend upon the distributors to incur certain expenditure in operating the sales not work; that the distributor had to necessarily incur certain expenses financed by the discount earned on their purchases; that the nature of expenses incurred were the maintenance of stocks of products and spares; that in the case of after sale expenses, the free replacement of spares during warranty period was borne by M/s. Elgi and the incidental service expenses were born by the distributor; that the distributor had to incur expenses for maintaining service centre and sales office. M/s. Elgi also contended that the show cause notice did not provide any supporting evidence such as quantum of discount utilised by the distributors in running of the distributorship business; that the distributors were larger in scale having target commitments and their off takes were much larger when compared to that of dealers; that the dealers only dealt in retail and no bulk offtake can be (SIC) of them; that while partial discount was passed to the dealer, full discount was passed on to the distributor; that the portion of discount not passed on to the dealer was passed on to the jurisdictional distributor/dealer; that the dealers could only be equated with consumer and could not be treated at par with the distributors. M/s. Elgi have also contended that the additional considerations viz. the advertisement cost incurred by the distributor/dealer should only be added to the price of their product.
14. In their letter dated 09.08.1994, M/s. Elgi have contended that the show cause notice issued by this office was time barred as parallel proceedings were initiated by the Asst. Commissioner of Central Excise, Coimbatore I Dvn, and they relied upon the decision in the case of Nayveli Lignite Corporation Vs Collector of Central Excise (1992 (58) ELT 76); that in view of the observations of the Supreme Court in Bombay Tyre International case, they were eligible for the deduction of discount; that the ratio of the decision of the Tribunal in the case of Electrical Products Corporation Vs Collector of Central Excise (1989 (43) ELT 70) was squarely applicable to them; that as they had not infringed any of the provisions of the Central Excise Rules, 1944, penalty under Rule (SIC) of the rules, was not impossible.
15. S/Shri. Jai Varadaraj, Deputy Managing Director and Sri. V. Pattabiraman of Elgi appeared for a personal hearing before my predecessor on 09.08.1994. Filing a further written submission, they contended that the demand was time barred since the sales pattern was known to the department. They further said that they were giving discount ranging from 12% to 20% depending upon achievement of distributors. They declared to the department that 90% of sales were through distributors and branches and 10% at factory gate which had been taken as normal price. This fact was also known to the department from 1984.
16. Before the order could be passed Elgi submitted additional date and submissions vide their letter dated 30.11.1994 and 08.12.1994.
17. In their replies to show cause notice issued by the Asst.
Commissioner and by this office and submissions during personal hearing, Elgi have advanced the following (SIC) in their defence.
i) No demand can be raised on discount allowed to unrelated buyers (distributors in this case) ii) The fact that unallowed portion of discount was being passed on to the distributors/main dealers/branches was well known to the department. Hence, suppression can not be alleged.
iii) It had been conclusively established that there was a factory gate price in successive adjudications at the level of Asst.
Commissioner and Commissioner.
iv) The Area Sales Commission or unallowed portion of discount was allowed to distributor to enable him to maintain/incur (a) stocks of product and spares (b) marketing expenses (c) provide incidential services and warranty services (d) advertisement expenses vi) As regards advertisement expenses, the actual expenses incurred by the dealer/distributor only should be added to the assessable value and if added differential duty is negligible.
viii) Trade discount was permissible even in case of retail sales as held by Tribunal in CCE Vs Escorts Ltd., ix) CEGAT in Electrical products Corporation Vs CCE (1989 (43) ELT 70) had held that discount can not be denied on the (SIC) that a portion of discount is passed on later provided it was known at the time of removal.
x) The expenses incurred on after sales service were not includible as they were incurred long after the sale.
xi) In MRF case, the Supreme Court has held that only those expenses which contribute to the value up to the date or the date of delivery are to be includable in the assessable value. Expenditure on distribution is not to be included.
18. After the personal hearing was over, Elgi furnished additional information and arguments. They are briefly enumerated below: i) In respect of borewell compressors, 12.5% discount has been allowed to all categories viz. dealers/sub-dealers/distributors/main dealers etc. Therefore, in regard to borewell compressors, there can not be any differential duty.
ii) They also furnished detailed gate pass wise clearance details in respect of all the products. Elgi also further confirmed that they have a standard discount structure and this discount was allowed in the invoice itself and has been passed on.
iii) The statement of Sri. T. Frank had been made without proper verification of facts.
19. The case could not be decided by the adjudicating authority who had heard the assessee and there was a charge in the adjudicating authority.
20. Vide letter ECE : 300 : dated 19.01.1995 M/s. Elgi Equipments Ltd., sought for a fresh personal hearing. As there was change in the incumbent adjudicating the case, request of the assessee was considered and accordingly a fresh personal hearing was fixed on 30.03.1995.
21. Shri. S. Sridharan, advocate, accompanied by Shri. J. Varadaraj, Deputy Managing Director of M/s. Elgi Equipments Ltd., appeared for personal hearing. At the outset, Shri. Sridharan dealt with the demand raised on advertisement expenses incurred by the dealers and stated that this demand is not sustainable as M/s. Elgi had not claimed any abatement towards advertisement expenses and this amount is given as part reimbursement of the expenses incurred by the dealers in some cases. Hence, the question of demanding duty on the same does not arise.
22. Sri. Sridharan also stated that the show cause notice provides for demanding of duty without allowing any trade discount and also to levy duty on retail price which is not provided in the Central Excise law. He stated that even under the Valuation Rules, where there is a provision for determining assessable value on the basis of retail price, the price as such cannot be the basis for arriving at the assessable value and deductions as permissible under the law have to be provided before arriving at the assessable value. Hence, demanding duty on the basis of retail price and alow by disallowing trade discount is not provided for in the law.
23. Shri. Sridharan explained in brief the sale pattern of M/s.
Elgi. He stated that all the goods are marketed either at the factory gate or by stock transfer to the Depots for subsequent sale.
As far as the sales at factory gate are concerned, bulk of the sales are made to independent distributors and the discounts given to the distributors have been declared in the price list filed by them from time tome. He stated that some sales are also made on the basis of Part II prices which have been accepted by the department which is not the subject matter of any dispute in the present show cause notice.
24. Coming to the stock transfer, he stated that sales from the depots are made to dealers, distributors and stray sales by way of retail sale. As far as sales from the depots are concerned, the settled position as per Central Excise law is that where Part I price is available, the same would form the basis for charging duty on goods transported to the depots and hence the price charged by the depots are not relevant for the purpose of determination of assessable value. In this connection, he stated that the Department's contention is that in respect of some sales made from the depot, the discounts given are less than that declared in the price list and hence differential duty has been demanded. In this connection, he clarified that even though the permissible discount to distributors which has been approved in Part I of the price list is 20%, they had paid duty in all such cases where lesser discounts have been given after claiming abatement of actual discount passed on in such cases. He stated that this is the position for almost the entire period covered by the show cause notice except for a brief period during the financial year 1991-92. He stated that the details in respect of this short period would be furnished and the differential duty worked out and paid.
25. Shri. Sridharan also submitted that M/s. Elgi have furnished invoices and gate passes for the entire period along with RT 12 returns and hence the department was fully aware of the quantum of discount given by them and hence there is no case for initiating any penal action against M/s. Elgi.
26. He also referred to the statement of Shri. Frank relied upon by the department in the show cause notice and stated that Shri. Frank was not fully aware of the valuation provisions in the Central Excise law and that his statement to the effect that differential discounts were given to compensate for expenses incurred in connection with inventory and other causes referred to by him is not supported by any documentary evidence which is available with the assessee and which has been furnished to the department for verification. He stated that the matter involved in this case is one of valuation under Section 4 and that the matter has to be decided entirely based on documents which had been furnished by them and hence the statement of Shri. Frank cannot form the basis for redetermination of assessable value.
27. In their letter dated 04.09.1995, M/s. Elgi submitted a chronology of events and reiterated their earlier submissions. They further submitted that no part of the advertisement expenses incurred by the company was recovered by the company from the buyers nor deduction thereof claimed from the sale price in computing the assessable value; that the advertisement charges mentioned in the show cause notices had to be treated as part of the assessable value on which duty has been paid. They also submitted that the show cause notice sought to demand duty in respect of all clearances made by the company at list prices, which were the ultimate retial price to the consumers and that this levy of duty on retail price was illegal; that the principles of res. judicata were applicable, as the same issue was already decided by the Asst. Commissioner of Central Excise, in their favour; that the demand raised vide show cause notice dated 31.03.1993 for the period 01.04.1988 to 31.12.1990 was ex-facie time barred; that no further duty was payable after 16.4.1992, as they sought to pay duty under protest on the differential discount passed on to the distributors and branches; that the reliance placed on the statement dated 23.04.1991 of Shri. T. Frank, director was entirely erroneous; that the statement of Shri. T. Frank that full discount was not passed on to a dealer until target commitment was achieved was not correct and was contrary to the record, particularly in respect of sales of borewell compressors made from the factory gate; that there had been a mix-up of two distinct aspects viz. discount and commission in the statement of Shri. T. Frank and that the statement of Shri. T. Frank was not relevant to the present case.
3. The Commissioner after carefully going through their records and reply to the show cause notice and the submissions made at the time of personal hearing on 9.8.94 and 30.3.95 and the written submissions made on 30.11.94, 8.12.94 and 4.9.95, in his findings observed that the main allegations made by the department in the show cause notice is that the full trade discount claimed in the price lists has not been actually passed on to the buyer but only a portion has been paid as over-riding commission to the distributors, main dealers/branches. Another allegation made by the department is that the appellants have reimbursed advertisement charges to the dealers and this is also includible in the assessable value. The show cause notice also proposed invoking the proviso to Section 11A of the CE Act 1944 for the extended prices on the ground of suppression of facts with intent to evade payment of duty, to recover the duty on the in eligible discount and the advertisement charges. The Commissioner has given his findings from paras 28 to 56 of the impugned order which are extracted herein below:- 28. I have carefully gone through the records of the case, reply to the show cause notice and the submissions made at the time of personal hearing on 09.08.1994 and 30.03.1995 and written submissions made on 30.11.1994, 08.12.1994 and 04.09.1995. The main allegation made by the department in the show cause notice is that the full trade discount claimed in the price list has not been actually passed on to the buyers but a portion has been paid as overriding commission to the distributors/main dealers/branches.
Another allegation made by the department is that the company has reimbursed the advertisement charges to the dealers and this is also includible in the assessable value. The show cause notice also proposes to invoke proviso to Section 11A on the ground of suppression of facts with an intent to evade payment of Central Excise duty, to recover the duty on the ineligible discount and advertisement charges.
30. The assessee also claims that the department was well aware of the pattern of sale and in support of this contention they have also quoted the orders of Asst. Collector/Collector (Appeals), etc.
passed in this regard during the period from 1983 to 1990.
31. The issue of determination of Normal price was considered by various authorities at the level of Asst. Collector/Collector (Appeals), during the period from 1983 to 1990 in different orders.
But I notice that in all these cases the orders were passed on the basis of the following assumptions; a) There was a sale at the factory gate to the distributors/main dealers and the discount was passed on fully. The discount so passed on was a normal trade discount.
b) Since there was normal price available at the factory gate, even if full discount was not passed on to the sub dealers and others who brought at the factory gate, the normal price would be applicable.
c) In any case, the sale to the dealers/sub dealers at the factory gate were either through branches or distributors (This fact has emerged from the statement of Shri. T. Frank, Director dated 13.07.1990) and para 10 of Order-in-Original of Asst. Commissioner, Coimbatore I Dvn vide C.No. V/30A/17/192/92 VC dated 24.06.1983.
This was repeated in subsequent orders also.
32. The investigation made by the department with the dealers in Trichy and Mangalore and the statements recorded show that the difference between the discount passed on to the sub dealers and the discount claimed on the price lists is paid to the distributor/branch, if the dealer happens to be located with in the area allotted to the distributors/branches. Shri. T. Frank, Director of the company has also admitted in his statement that the differential discount is passed on the to the branches/main dealers/distributors as Area Sales commission and the reason for passing the discount is to cover the cost of inventory - after sales service during warranty period and to cover other expenses of the branch/main dealer/distributors.
33. I also find that both Mr. Mallaya and Smt. Sethuraman (Dealers) have admitted that they were dealing directly with M/s. Elgi and not with any of their branch/distributors or main dealers. However, it is noticed that the company has the practice of indicating that the order is routed through concerned branch/main dealers, distributors, depending upon where the dealer is located irrespective of the fact whether the order was made by the dealer on his own directly, as can be seen from the statement of Mrs. Shantha Sethuraman.
34. In case of regular dealers, the assessee passed on 10% discount in respect of borewell compressors and 5% in respect of all other items except products of Horn division against which 12.5% and 20% discount were claimed in the price list. In respect of horn division, the discount varied from 20% to 40%. While full discounts are given to the two distributors in Delhi and other major distributors who are having after sales net work, dealers who worked in the area covered by main dealers/distributors/branches are given lesser discount and the differential discount is passed on to the main dealers. In respect of sales to North Eastern states, differential discount is passed on to the Calcutta dealer who is LG Balakrishnan & Bros Ltd., and in respect of such sales to North states, the differential discount is passed on to the distributors at Delhi.
35. Thus, the investigation conducted by the department clearly brings out the fact that the Trade discount passed on to the main dealers/distributors is not the trade discount in the normal course of trade and consists of area sales commission provided for looking after, after sales service during warranty period, maintenance and other expenses. The Supreme Court in the case of M/s. Kirloskar Brothers Vs Collector of central Excise (1992 (SIC) has held that higher discount given in Area dealers for providing after sales service is not deductible. Sri. T. Frank, director of the company in his statement dated 13.07.1990 has clearly admitted that the differential discount is passed on to the branches/dealers/distributors to cover the inventory and after sales service during guarantee period and therefore this amount is clearly covered by the Supreme Court decision as an inadmissible deduction.
36. From the statement of the dealer in Trichy, it is also clear that the sales through branch or distributors is only a myth and what is mentioned in the invoice is only to mislead the department.
The dealers have clearly admitted that they have nothing to do with the branch or distributors. Another fact that is very relevant is that the branches make profits which clearly proves that there is a flow back of the discount. In view of this fact, the details furnished by the company in support of their contention that discount shown in the invoice has been passed on, does not help the assessee's case. It is not the department's contention that discount shown in the invoice has not at all been passed on. The department's contention is that discount shown in the gate pass has not been passed on. This fact has not been contested by the company at any point of time.
37. Another pertinent point to be mentioned is that from 01.04.1992, the assessee has stopped claiming of differential discount passed on to the main dealer/distributors/branches separately. It is interesting to note that w.e.f. 16.04.1992, the assessee himself has discontinued the practice of discriminating sales and discount at 12.5% has been given for all other type of equipments including the products of Horn division. Such discounts have been given uniformly to the three types of sales namely sales through branches, sales through distributors and sales to direct customers at the factory gate. They have not claimed any abatement on account of additional discount given to the dealers w.e.f. 16.04.1992. A letter to this effect has been given to department also. Duty of course is being paid "Under protest".
38. Elgi also contended that there was no suppression of fact with an intent to evade duty and that the department was well aware of the pattern of sale and also about the discount structure. They have also cited various orders passed by adjudicating and Appellate authority. The fact that emerges from all these cases is that at no time the department was aware that a portion of discount which is not passed on to the sub dealers and others was being paid to the branches/distributors/main dealers for after sales service/inventory maintenance etc. Further, the department was also not aware that additional discount to dealers/distributors/branches was being allowed in consideration of warranty, after sales service, advertisement etc. This proves that the trade discount is not the normal trade discount. It is in the form of overriding commission for dealers/distributors and amount to a clear flow back to the company itself, when the branches receive the discount. However, w.e.f. 23.02.1990, the assessee changed the pattern of sale and discontinued showing assessable value in gate passes in respect of sales to dealers and actual customers from the factory gate. The value with reduced percentage of discount or no discount at all was shown in the gate passes in the column meant for showing approved assessable value and actual duty paid did not tally with the value and percentage of duty shown in the gate passes. While the original gate pass meant for the customers went without any correction, the duplicate copy was corrected for indicating the assessable value and submitted to the department along with RT 12s. This practice continued till 25.06.1990 and the department booked an offence case against the assessee for this malpractice. The assessee claimed that this was due to a mistake on the computer system which was set right subsequently. However, the mistake in the computer system was not intimated to the department as they felt it not necessary to inform the department about the lapse in the computer. The assessee has stated that higher discount was given to the branches and distributors to take care of the expenses incurred on account of the inventory, after sales service and other sales expenses. The detection of mismanagement of computer and modifications made in duplicate copy of gate pass without the knowledge of the department led to the investigation by the department. Manipulations of the invoices showing that the sales are through branches when in fact it was not so, amount to not only to suppression of facts and misdeclaration by the assessee but also serves as an unimpeachment proof of the intent to evade Central Excise duty at the cost of exchequer. But for this detection, department could never have known about the inadmissibility of the discount. I also find that the assessee has filed a writ petition at Madras High Court against the above show cause notice in which suppression has been alleged but could not get a stay from High Court against adjudication.
39. After the personal hearing before my predecessor, the party submitted fresh letters dated 30.11.1994 and 08.12.1994 in which they filed some additional information.
40. They submitted gatepsss wise analysis of borewell compressors, air compressors and product of Horn division, giving details like discount shown in gate pass, discount allowed in invoice, Commission passed by way of credit note. They categorised the statement into sales at the factory gate to main dealers/customers/consumers and stock transfer to depots.
41. In respect of borewell compressors they contended that the discount has been passed on at 12.5% uniformly to all the dealers and that there is no for the department.
42. As far as borewell compressors are concerned, it is seen from the statement that the discount of 12.5% has been passed on uniformly and no credit notes have been issued to concerned dealer/distributor/branch hand therefore the department has no case to disallow any portion of the discount. But, Mrs. Shantha Sethuraman, in her statement has clearly stated that she got a discount of 10% and the remaining 2.5% was paid to her only after one year. Her understanding was that it would be paid only if they crossed the turn over of 10 lakhs. This shows that there is no explanation for the difference of 2.5%. However, I am inclined to accept the party's contention in respect of borewell compressors. In view of the categorical statement that all buyers have received uniform discount and there is no discrimination, I intend to accept the party's contention and delete the amount of duty demanded in respect of the borewell compressors from the total demand.
43. Elgi have also submitted invoice-wise details in respect of all their products vide their letter dated 08.12.1994. They also gave their discount structure clearly. I find that the discount structure of the company with effect from 01.07.1990 is as follows:----------------------------------------------------------------------------------------------Category Industrial Carwasher Grease LG seriesScrew compressor pump tyre compressorcompressor---------------------------------------------------------------------------------------------- distributor 20% 20% 20% 20%10% distributor 15% 12.5% 15% 15% 5%3. Main dealer 12.5% 10% 12.5% 12.5% 5%4. Dealer 10% 10% 12.5% 10% 5%-------------------------------------------------------------------------------------------- 44. Elgi have not categorically denied that differential discount has not been passed on to main dealer/distributor/branch. They have also not denied the reasons for giving higher discounts. Shri. T. Frank, Director of Elgi in his statement dated 13.07.1990 has stated that the difference between the assessable value and retail price collected was passed on to their distributor or branches according to area under their jurisdiction once in 6 months. In his further statement dated 25.04.1991, Shri. T. Frank has stated that the discount was passed on to the branches/main dealers/distributors in the name of area sales commission by way of credit notes issued from time to time; that the reason for passing on this discount was to cover the cost of inventory. Cost of after sales service during warranty period and other sales expenses of the branches/main dealer/distributor; that the discounts and the area sales commissions were utilised by the branches for covering their distribution expenses, cost of inventory. Cost of after sales service during warranty period, follow up and other expenses; that profits, if any, earned by a branch would be utilised for its development. The reasons for higher discount given according to Sri.
T. Frank are still valid and if these are the reasons, it becomes necessary to disqualify the discount which are given for inadmissible purposes. The only method of disqualification is to disallow the differential discount. Thus, for argument (SIC) even if we assume that differential discount is not paid to main dealers/distributors/branches, it does not held Elgi.
45. I find overwhelming support for the department's case in the statement of no less a person than the Director of the company who was responsible for Central Excise documentation and who had a long career with the company. Statement of dealers and branch managers clearly establishes the fact that they received over riding commission by way of discount actually not passed on to the actual buyer and I find it very difficult to accept the argument of the company that invoice price should be the criteria and other elements should be ignored.
46. I am also unable to accept the contentions that Director Sri. T. Frank had given the statement without verifying the facts and his statement that a portion of discount was being paid to dealers/distributors/branches (SIC) The retraction has come after 3 years and 7 months ie. on 08.12.1994. In their reply dated 14.07.1994 also the assessees have reiterated the statement of Shri.
T. Frank, deputy Managing Director. Sri. T. Frank has been with this company for a long time and even now continues to be associated with the company. As a director responsible for all operation, he was aware of all facts. The whole statement is about sales pattern and discount structure. I find the statement to be very clear and to the point and does not indicate even a hint of confusion or doubt. If the statement of no less in person like Shri. T. Frank, holding a prominent responsible position, is not to be considered, then there is no other person who is qualified to explain the position.
Moreover, the amount involved in the show cause notices is Rs. 1.25 crore which cannot by any stretch of imagination be considered as a small amount. Show cause notice was issued in 1991-92 and 1993. M/s.
Elgi chose to reverse their stand only after the personal hearing was over.
47. In this connection, I consider it relevant to refer to the findings of following cases of Tribunal.
"It is settled proposition of law that when a statement which is inculpatory in nature and confessional in character is retracted by a person, the Court will look into the factors and reasons to find out whether the reason for retraction are true and voluntary. In the instant case, there was no immediate retraction. It is only in reply to show cause notice after a period of 10 months, the Appellant chose to retract from his earlier statement. The statements in the above, circumstances has to be taken as true and voluntary." "An incriminatory statement containing factual details by no stretch of reasoning can be characterised as figment of authorities imagination. Apart from this if the statement is corroborated by other witnesses and evidence is retracted after great delay without giving satisfactory explanation, it will treated as true and voluntary and is entitled to weight in evidence.
It is a settled proposition of law that when an inculpatory and confessional statement is not retracted immediately but belatedly, the court or the quasi-judicial authority would be entitled (SIC) into the reasons for subsequent retraction to find out whether the reasons are (SIC) and to "separate the grain from the chaff".
Belated retraction is purely an after thought not meriting acceptance as it is generally restored to extricate themselves from the clutches of law by the concerned persons.
In the light of the above discussions, I totally reject the claim of the assessee as an after thought and hold that the contents of the statement of Shri. T. Frank are entirely admissible as evidence in this case.
48. As regards the invocation of the extended period under proviso to Section 11A (1) of the Central Excise and Salt Act, 1944, I find that the assessee had wilfuly mis-stated the facts to the department. In their reply to the questionnaires filed along with their price lists, M/s. Elgi have replied in affirmative to the question as to whether the (SIC) uniformly allowed to all the buyers, which is not correct. This is a blatant mis-statement of the notices, which they were very well aware of. By this wilful mis-statement, they have suppressed from the knowledge of the department, the fact of passing on lesser discount to different dealers, which was subsequently unearthed by the officers only on verification of private documents and further detailed investigation. M/s. Elgi have not disclosed to the department at any point of time, till the statement was recorded from Shri. T. Frank on 25.04.1991 that the distributors were responsible for undertaking the after sales service in respect of the goods sold by the company in their vast sales territory involving 4 to 5 states and the additional discounts which was almost double the normal discount allowed to their customers were given to these distributors to cover the cost of inventory and (SIC) of after sales service rendered by them in respect of the goods supplied by the company through these distributors, through the branches and also direct from the company during their warranty period and other sales expenses of the branch, dealer/distributor. It is also to be noted in this connection, that almost all the sales to the two Delhi Distributors have taken place not at the factory gate but only from the Delhi branch which is only a stucking point to facilitate the supply of goods to the distributors in terms of the statement given by Shri. T. Frank. In view of the non-disclosure of the additional consideration flowing from these distributors by way of after sales service rendered by them in respect of the goods supplied by the company, invoking the extended period is justified in this case. The company has also produced a number of service bills of other dealers to establish the fact that other dealers also render after sales service in respect of the goods supplied by them. It is a fact that any dealer, whether big or small will be undertaking some after sales service and the bills produced by the company for the period subsequent to the case could be treated only as after sale bills of this category. Out of 12 service bills produced, 4 are pertaining to M/s Hydro Tech Engineers, Indore, a dealer coming under the jurisdiction of Indore branch of the company. All other bills are for replacing some minor components and servicing etc. These services could only be termed as a normal servicing done by any ordinary dealer on payment and not the free servicing undertaken by the branches/distributors during the warranty period for which the distributors are given extra/over riding area sales commission. Even as per the statement of Shri. T. Frank, majority of the dealers are not having full fledged after sales net work and hence production of a few service bills from a handful of dealers does not help the assessee in their efforts to establish the abnormally high discount allowed to the Delhi Distributors as a consideration for the after sales service net work and other sales promotion activities undertaken by them. Therefore, I hold that the proviso to Section 11A(1) of the Central Excises and Salt Act, 1944 is clearly invocable in this case to demand the duty over the extended period.
49. Another point that has been made in defence is that the show cause notice is time barred in view of parallel proceeding initiated by the Asst. Commissioner as far as back on 26.08.1991. They have cited the case of Neyveli Lignite Corporation Vs CCE 1992 (58) ELT 76. In the Neyveli Lignite case by the time Collector took up adjudication, the Asst. Collector had already adjudicated the case.
Therefore, the present case and NLC case are not comparable.
50. As per the orders passed by the Asst. Commissioners from time to time, it was clear to the department that the normal whole sale transactions of sales are effected only to distributors and all other sales made from the company are in terms of the orders placed by these distributors and the branches and the customers were getting only a lesser discount ranging from 5 to 10% against 15% to 20% claimed in the price list and the differential discount was being passed on to the concerned distributors/branches by way of area sales commission. As no appeal has been filed against the speaking orders dated 05.06.1989 and 12.03.1990 by the respective Asst. Commissioners, the orders have become final. Therefore, the clearances made on behalf of the branches and distributors at the factory gate are to be considered as retail sale and the assessee will be eligible to the normal trade discount as may be (SIC) to distributors after making due adjustment from the higher discount claimed for the additional considerations flowing indirectly back to the assessee by way of after sales service and other sales promotion activities.
51. M/s. Elgi have written in their letter dated 16.04.1992 that they would claim uniform discount of 10% henceforth and pay duty on extra discount passed on to the distributors under protest. When the assessee himself has chosen to adopt a uniform discount of 10% in respect of all clearances, I have no hesitation to allow this 10% discount for the past clearances also. Therefore, I hold that the assessees are eligible for a uniform discount of 10% on their clearances to dealers/distributors/branches and differential duty is demandable on the ineligible portion of the discount passed on to their branches/distributors. In view of the above, I hold that M/s.
Elgi is eligible for deduction of a discount of 10% only which is allowed uniformly to all dealers/sub dealers.
52. In respect of retail sales, the differential duty is worked out after allowed the actual discount, if any, given on such retail sales. (The detailed work sheet for the duty confirmed under this order is enclosed as annexure to this order) 53. Inasmuch as the assessees have switched over to the practice of allowing a uniform discount of 10% in respect of clearances made to distributors, branches, dealers and direct customers, and paid duty on extra discount passed on w.e.f. 16.04.1992, the demand issued after 16.04.1992 on the entire discount allowed to dealers, branches etc is not enforceable and hence to be delete from the total demand.
54. As I have already held that the additional discount is inadmissible, the protest of M/s. Elgi for paying duty on the additional discount is hereby vacated.
55. As regards the allegation that the advertisement charges reimbursed to the dealers also form a part of the assessable value and duty has to be demanded on such advertisement charges also, I find that M/s. Elgi has reimbursed 50% of the actual advertisement expenses incurred by the dealers. Only when the ) Eexpenditure is incurred by some one else on behalf of assessee or when the assessee gets back a portion of the price aftersales, question of addition of the adv. charges to assessable value arises. In this case, it is exactly the opposite. The show cause notice proposes to demand duty on expenses incurred by the assessee out of their own funds and no flow back has been proved. The assessee has also not claimed any abatement in the assessable value on account of these advertisement charges reimbursed to the dealers. Therefore, the question of demanding duty on such advertisement charges does not arises.
56. As regards the proposal to impose penalty under Rule 173Q of the Central Excise Rules, 1944, I find that assessee has resorted to wilful misstatement resulting in duty amounting to Rs. 42 lakhs not being realised to Government as per findings above. A calculated attempt to deceive and defraud the exchequer calls for a severe and deterrent punishment.
4. Shri V. Sridharan, learned Counsel assisted by Shri Suresh, Chartered Accountant appeared for the appellants before the Tribunal on 24.4.01 and gave a write-up which is extracted below: Appellant is engaged in the manufacture of air compressors, service station equipment, etc.
2. Appellant sells the goods at the factory gate to distributors.
The goods are also stock transferred to branches for sale therefrom.
Sales also made to sub-dealers from the factory and to (SIC) also.
3. Appellant has paid excise duty for all despatches based on wholesale price at the factory gate charged from the distributor. In the impugned order, Collector has given a discount of 10% only even to distributors. On the balance value duty has been demanded.
4. Collectors has recorded a finding of fact that even when sales are made to sub-dealers, etc. at a lower discount, balance discount has been passed on to the concerned distributor. Realisation for sale is the same. (see para 34 of the impugned order at page 182 of the paper book).
5. This may be illustrated. Suppose for sale directly made to the distributor from the factory, discount of 20% is given. In certain other cases suppose for sale made to sub-dealer a discount of 8% is given. Balance discount of 12% is given to the distributor.
6. In the above circumstances it has been held consistently in the following cases by CEGAT that the total discount given to the distributor would be permissible deduction.
a) 1989 (43) ELT 70 (Tri), affirmed in 1991 (54) ELT A92 Electrical Products Corpn. Vs. CCE 7. There are sales at the factory gate to the distributor in the present case. It is submitted once ex-factory price is available that would be the assessable value for despatches to the depot for onward sale therefrom. This is well settled legal position. Kindly see 1998 (36) ELT 723 (SC) in the case of India Oxygen Ltd. vs. CCE. The list of case laws following this case of the Supreme Court is given as Annexure-1.
8. Appellant also makes sales in retail. It is settled law that wholesale price available at the factory gate would be the value even for retail sale. Excise duty is not payable on retail sale price.
9. In view of the above Appellant has correctly paid duty on the prices charges by the distributor for all clearance.
10. Collector has observed that reason for giving differential or higher discount to the distributor is for looking after `after sales service' during the warranty period, maintenance and other expenses.This is towards area sales commission.Collector has placed reliance on the statement of Mr.T.Frank for this purposes. The finding of the Collector is fact whenever product is defective the customer approaches the distributor under the warranty clause. Distributor replaces defective parts free of charges to the customers.Company in turn pass on the distributor towards cost of the parts replaced.These expenditure towards warranty is incurred by the company and is already included in the price charged from the distributor.The question of giving discount to the distributor to meet warranty expenses does not arise.
11. In addition company reimburses to the distributor the labour element involved in attending to the warranty scheme of the customer Thus this expenditure is also borne by the company.Therefore it is clear that the discount is not given because the distributor has to incur warranty cost, etc.
12. Also the discount given to the distributor is given on outright basis, unconditional and without any reservation in the invoice itself.Even when the goods are sold to sub-dealer and balance discount is passed on to the distributor it is passed unconditionally without any reservation.Passing on discount is not itself contingent upon distributor achieving broad target of sales, producing proof of service to the customers, etc.Even the credit notes given to the distributor at pages 204 &237 of the paper book do not say that it is for area sales, commission, etc. Statement of Mr. Frank is contrary to the records and therefore cannot be refiled upon.
13. Collector has relied upon the statement of Mr.Saravanan dated 8.9.90.This is explained in grounds Q.1 to Q.4 by the appellant in the memo of appeal at page 35-36.
14. Collector had relied upon the statement of Mr. M.V. Mallaya of Maroor Machine Tools. The same is irrelevant for the reasons given grounds R.1 to R.8.
15. Collector has relied upon the statement of Smt.Santa Sethuraman of M/s. Maniam & Co.The same is not relevant in view of para S.1 to S.12 of the grounds of appeal.
16. It is clear from the above that Collector has passed a superficial order without going into the depth of the mater and without considering the appellant's explanation.
17. Collector has also relied upon the alleged manipulation in the gate pass vide para 38 of the order at page 183. Collector is trying to take undue advantage of a clerical error in one column of the gate pass during the period April 90 to June 90.This error has no impact on the duty payment.This is fully explained in paras U.1 to U.8 of the reply to the show cause notice.Collector has ignored this explanation which was given in reply to the show cause notice.
18. The demand raised in the show cause notice dated 31.3.93 for the period from 1.4.88 to 31.12.90 is totally is totally time barred.Ground in para V.1 to V.12 at pages 46 to 50 of the appeal support this submission.Also the list of dates of pages 148 to 155 establish that this allegation of suppression is invalid.
19.In any case the distributor price could be treated as the assessable value has already been decided by CEGAT in appellant's own case vide order dated 20.3.87, pages 246 to 248 of Vol.11 of the paper book.When the High Court in its judgment dated 8.1.91 has decided this point in our favour at pages 249 to 268 of the paper book. (See page 254 for the departmental objection). See page 260 for the finding of the High Court in appellant's favour on this point.
20. In many case more than Rs. (23) lakhs of duty out of the total demand is for sales made in retail.For this sale the department has demanded duty on the retail sale price.(See para 52 at page 180 of the paper book). This is contrary even to Collector's own order (para 50 at page 187 of the paper book) wherein the Collector has agreed to give normal discount of 10% for these sales.
The learned Counsel submitted that the appellants made oral submissions and stated that the sale of these goods is at the factory gate. The appellants sell the goods to the Distributors at the factory and pay duty and transfer to the sub-dealers at the factory gate. The Distributors are allowed trade discount of 20% and this is given at the time of clearance of the goods from the factory. Similarly sale to the sub-dealers is also at the factory gate and duty is paid at the time of clearance of the goods on the price of the goods approved by the department. They pay trade discount of 8% to the sub-dealers and the balance 12% is given to the Distributors of that area. They have three types of sales viz (1) Sale to the Distributors (2) Branch transfer (3) Sale to sub dealers. They have filed price lists under Section 4(1)(a) of CE Act, 1944 and have filed price lists in part I stating that price which they got approved from the department in part I under Section 4(1)(a) is after a round of litigation before the Assistant Collector and the Collector. Central Excise (Appeals). They also declared the price and got it approved from the department that they would be passing on the full discount at the time of clearance of the goods. He has submitted that they have mentioned in the price list that they would be passing on full discount at the time of clearance of the goods. He has submitted that they have mentioned in the price list that full discount shall be allowed at the time of clearance of the goods.
He submitted that they need not pass on full discount to the sub-dealers and can pass on balance amount of discount either to the Distributor of the area or can keep with them the balance discount. In this connection he referred to the judgment rendered in the case of Sandoz India Ltd. Vs. CCE, Bombay reported in 1992 (42) ELT 252 (T) wherein the Tribunal has held that deduction of discount as declared in the price list should be treated as allowed if full discount shown in the price list had been passed on to the customers and to the stockist.
The Bench has held that part of the discount given to the customers and balance to the stockist as overriding commission does not in any way affect the nature of the discount given to the stockist. The learned Counsel also pointed out that in cases where the goods were sold directly to the Customers, 8% of discount was given to the customers and the balance out of the total discount declared in the price lists was given to the distributor of the area. He also invited our attention to the Tribunal judgment in the case of CCE, Meerut vs. Stallion Shox Ltd. reported in 1996 (85) ELT 139 in which the Tribunal has held that trade discount granted to whole sale dealers is deductible from the assessable value even when the goods are directly sold to the sub-dealers. The learned Counsel also relied upon the Tribunal judgment in the case of CCE New Delhi vs. Talbros Automotive Components reported in 1997 (90) ELT 210(T) wherein it has been held that part of the trade discount which is diverted to wholesalers under whose advice the goods were despatched directly to sub-dealers allowing less discount to the sub-dealers is deductible from the wholesale price to arrive at assessable value. The learned Counsel also relied upon the Tribunal judgment in the case of Electrical Products Corporation vs. CCE reported in 1989 (43) ELT 70 wherein also the assessee was selling part of their goods to the wholesale dealers allowing discount as mentioned in the price list where part of the goods was sold to the sub-dealers etc. on the advice of the whole sale dealers at the lower discount. The Tribunal did not accept the plea that the whole sale dealers appointed were functioning as commission agents in the absence of any evidence and the net realisation by the assessee in all the cases were as per the price lists filed and approved. Therefore, the appellants were eligible for full discount as approved by the departmental authorities in respect of the whole range of transactions. The learned Counsel then took us to the statement of Sri T. Frank, Director of the organization.
He submitted that answer to the Question No.4 given by the said T.Frank, Director is incorrect and should not be relied upon and this is also relatable to the Question No.12. He also took us to the question No.3 of the statement of the T. Frank and submitted that there are no area sales commission given by them as held by the adjudicating authority. The expenses towards warranty is borne by the manufacturer and not by the Distributor. Therefore, the statement of T. Frank that they are giving higher discount to the distributor because of various reasons is not correct. He also took us to question No.8,9,10,and 11 and submitted that the statement of T.Frank is irrelevant for branch sales. He also informed that after a round of litigation before the Assistant Collector and the Collector (Appeals), the price list filed in part I was got approved from the department. He also submitted that they moved the High Court of Madras in a Writ petition filed by them in regard to payment of refund to them and the Hon'ble High Court while disposing of the writ petition made on observation that the wholesale price at the factory gate is available and that will be the assessable value for clearances. We find that this is only an observation made by the Hon'ble High Court while disposing of their writ petition praying for refund and that would not support the case of the appellants in the present appeal before us since this appeal is regarding disallowing of the trade discount, which was not given uniformly to all the whole sale dealers though declaration was given in the Price List Part I. The Assistant Commissioner had finally approved their price list in part I under Section 4(1)(a) of the CE Act, 1944. The Collector had relied upon the statement of MV Mallya, partner of M/s Maroor's Machine Tools which is irrelevant for the reason given in the grounds of appeal, R.1 to R.8. The Collector had also relied upon the statement of Smt Santha Sethuraman of Maniam & Co. and the same is not relevant in view para S.1 to S.12 of the grounds of appeal. He also submitted that the Collector has passed a superficial order without going into depth of the matter and without considering the appellants' explanation. He also invited our attention to para 34 of the impugned order and submitted that the findings are in favour of them and that is the factual position. He also submitted that the decision in the case of Kirloskar Brothers reported in 1992 (59) ELT (3) has been wrongly applied by the Collector. He further submitted that in respect of the sum of Rs.23 lakhs of duty out of the total demand for sales made as retail sale, the department has demanded duty on the retail sale price. He invited our attention to para 52 at page 180 of the paper book. This, the learned Counsel argued, is contrary to even the Collector's own order appearing at page 187 of the paper book wherein the Collector has agreed to give normal discount of 10% of the sales. He also submitted that the demand of Rs.6,04,087 is barred by limitation as the Collector has ignored the well settled position in law that when specific requirement of section 4(1)(a) of the CE is met, then that alone would be relevant for the purpose of determining the assessable value. In view of the above submissions, the learned Counsel prayed that the order of the Collector be set aside and the appeals allowed with consequential relief.
5. Shri S.Kannan, learned DR appeared on behalf of the department and submitted that the amount has been pocketed by the Distributor for maintenance of inventory etc. He submitted that the voluntary statements have been given by two sub-dealers to the effect that they never deal with their branches or distributor but directly deal with M/s Elgi only. The learned DR took us through para 32 and 33 of the impugned order and submitted that in para 4 of the statement of T.Frank, Director of the Company had admitted in his voluntary statement that the sales commission given to the distributor was by way of credit note. He also relied upon para 35 of the impugned order wherein the Commissioner has held that the investigation conducted by the department clearly brings out the fact that the Trade discount passed on to the main dealers/distributors is not the trade discount in the normal course of trade and consists of area sales commission provided for looking after the after sales service during warranty period, maintenance and other expenses. The Supreme court in the case of M/s Kirloskar Brothers reported in 1992 (59) ELT 3 has held that higher discount given to the Area dealers for providing after sales services is not deductible. Sri Frank, Director of the company in his statement dated 13.7.1990 has clearly admitted that the differential discount is passed on to the branches/dealers/distributors to cover the inventory and after sales service during the guarantee period and therefore this amount is clearly covered by the Supreme Court decision as an in-admissible deduction. He also submitted that since full trade discount is not allowed to the whole sale dealers (sub-dealers/retailers) they are not entitled for trade discount.
Though they have submitted before the department that they would be passing on the full trade discount to the wholesale dealers which included distributor, sub-dealer and retail purchasers but they have not passed on the full discount uniformly to all the above stated whole sale dealers. The learned DR also took us through the findings of the Commissioner in paras 37 and 38 which are extracted above.
In support of his submission the learned DR relied upon the judgment of the Hon'ble Supreme Court in the case of Kirloskar Brothers vs. UOI, reported in 1992 (59) ELT 3 (SC) wherein the Hon'ble Apex Court held that higher discount given to the area dealers by reason of their obligation to provide after sale service is not deductible. Para 17 of the said judgment is reproduced below for convenience of reference.In A.K. Roy & Another v. Voltas Limited [(1973) 2 SCR 1089=1977(1) E.L.T. (J 177) (SC)], the Supreme Court emphasised at 1097 that there can be no doubt that the 'wholesale cash price' has to be ascertained only on the basis of transactions at arm's length.
Once wholesale dealings at arm's length are established, the determination of the wholesale cash price for the purpose of Section 4(a) of the Act may not depend upon the number of such wholesale dealers. Before the Central Government it was emphasised by the appellant itself that the discrimination between the two patterns of sales was on account of the fact that area distributors provided after sales service etc. which could be treated as post manufacturing operation. It is thus clear from the sub-mission made by the appellant itself before the Central Government that the discount to area distributors was also in consideration for also providing after sales service which is not required to be taken into account while dealing with trade discount within the meaning of explanation to Section 4(a) of the Act. Therefore the Central Government rightly did not take into account such area distributors who may have to provide after sales service. The trade discount given to such wholesalers who were under no obligation to provide after sales service is the relevant trade discount given to the wholesalers.
The submission made by the appellants themselves in that case before the Central Govt. was that the discount to the area distributor was also in consideration for providing after sale service which is not required to be taken into account while dealing with trade discount within the meaning of explanation to Section 4(1)(a) of the CE Act.1944. The Hon'ble Apex Court therefore, held that the Central Govt.
rightly did not take into account such area distributors who may have to provide after sale service and the trade discount given to such whole sale dealers who were under no obligation to provide after sale service, is the relevant trade discount given to the whole sale dealers.
6. At this point the learned counsel for the appellants intervened that the judgment in the case of Kirloskar Brothers (supra) is not relevant to the facts of this case. However, he did not elaborate as to how this case law was not relevant as per his version.
7. We have carefully considered the rival submissions. We find that Section 4(1)(a) of the CE Act, 1944 lays down that 'normal price' will be the price at which the goods are ordinarily sold by the assessee to a buyer in the course of normal 'whole sale trade' for delivery at the time and place of removal where the assessee and the buyer have no interest directly or indirectly in the business of each other and price is the sole consideration for the same. From the facts of this case, it is clear that the assessable value is available at the factory gate. We find that though they have mentioned in the price list that they would be giving trade discount uniformly to all the whole sale dealers, but in fact they have not passed on the full discount to the wholesale dealers and retail purchasers and they have passed on major part of the trade discount of 20% to the distributor which is not admissible as pointed out by the Hon'ble Apex Court in the case of Kirloskar Brothers (supra). The Hon'ble Supreme Court also held that higher trade discount to area dealers by reason of their obligation to provide after sale service etc. which can be treated as post manufacturing operation in not deductible from the assessable value since discount to area distributors was in consideration of providing after sale service which is not required to be taken into account while dealing with trade discount within the meaning of explanation to Section 4(1)(a) of the Act. Such area distributors who have to provide after sale service cannot be taken into account for providing trade discount. Trade discount given to such wholesalers who were under no obligation to provide after sale service is relevant trade discount given to the wholesalers. The Hon'ble Supreme Court in the case of Bombay Tyre International and MRF have held that only that trade discount can be allowed which is known prior to the removal of the goods and is given in the course of whole sale trade uniformly to all the wholesale dealers. Discount allowable in the trade would be and should be allowed to be deducted from the sale price if nature of the discount is known to the whole sale dealers at or prior to the removal of the goods.
Trade discount is inadmissible for deduction if not known prior to the removal of the goods but is given after invoice is raised and removal of the goods is completed within the meaning of Section 4(4)(d)(ii) of the CE & Salt Act, 1944. It was also held that over riding commission is not trade discount but commission for service rendered by the agents. It is not trade discount known prior to the removal of the goods and is accordingly not deductible from the assessable value as held in para 15 by the Hon'ble Apex Court in the case of Assistant Collector Central Excise and others vs. MRF reported in 1987(27) ELT 553 (SC). Trade discount can be allowed if the rate of discount is declared in advance and if it is uniformly available to all the whole sale dealers, otherwise not, as held by the Hon'ble Supreme Court in the case of Bombay Tyre International. M/s Elgi would have continued to evade payment of duty but for the alertness on the part of the assessing officials. During the course of assessment of RT 12 returns they noticed some corrections which were made in the duplicate copies (meant for Central Excise) so that the price tallied with the price shown in the price list. The officials recovered the original (purchaser-cum-transporter copy) copy of the Gate Pass bearing serial No.434/16.06.1990 and 478/25.06.1990. Verification of these copies proved that the duplicate (meant for Central Excise) and triplicate (office copy) have been corrected by M/s Elgi after issue of the original gate passes. Shri T. Frank, Director in his statement deposed that when the sale at the factory gate was in retail duty was paid at the whole sale price and retail price of the product would be higher and that duty was paid on the basis of the normal price and that discrepancies occurred during the period from 22.03.1990 to June 1990 because of an error in the computer programme. Shri T. Frank admitted that in respect of the transactions which were retail in nature, discount was not passed on and duplicate and triplicate copies were manually corrected. He also admitted that he did not deem it necessary to inform the department about the discrepancies and the correction made on the duplicate and triplicate copies. M/s Elgi had claimed that the price at which the goods were sold to distributors and the dealers was the normal price. Officers conducted verification and recorded statement from various dealers of M/s Elgi. Shri MV Mallaya, partner of M/s Maroor's Machine Tools, Mangalore in his statement deposed that they did not have a written agreement of dealership and that they were getting only 5% discount and in one year they were paid additional commission at the year end and they were dealing with M/s Elgi directly and not through any branch or distributor. Though M/s Elgi claimed trade discount varying from 10% to 45% on different products and also declared that discount was uniformly allowed to all the buyers, but in fact few dealers were getting only 5% as discount as is evident from the statement of Shri MV Mallaya, Similarly Smt Shantha Sethuraman.
Sole Proprietor of M/s Mariam & Co. Trichy another authorised dealer of M/s Elgi handed over copies of written agreement setting out conditions of dealership. She got 5% discount on air compressors, 10% on boreal compressors and additional 2.5% was paid, if they exceeded Rs. 10 lakhs turn over. She admitted that there was a difference between the price shown in the invoices and that shown in the gate passes and that she went by invoice price and that she was not aware of the reasons for such difference between invoice and GP1. She also stated that even though order of acceptance and invoice showed as if the transaction was through Madurai Branch of M/s Elgi, she never dealt with Madurai Branch but always with M/s Elgi only. She also admitted that M/s Elgi reimbursed 50% of advertisement charges spent by her. She had also admitted that M/s Elgi had sent a letter asking her to correct the original gate pass No. 46/11.04.1990. Another customer Sri R.Saravanan, owner of an automobile service station at Trichy in his statement on 08.09.1990 admitted that M/s Elgi had charged him a higher price than shown in the gate pass and did not pass on the discount even when he requested. He also admitted that M/s Elgi had asked him to correct the original gate pass but he had not done. From these sample statements, it is evident that trade discount was not given uniformly though shown in the gate passes and in few cases, in spite of requests made by dealers, trade discount was not allowed to them. It is pertinent to mention that commercial invoice was never submitted to the assessing officer along with RT 12 return and only duplicate copies of gate passes were submitted. Had commercial invoice been submitted along with gate passes then the assessing officer would have scrutinised them at the time of finalization of the assessment. Therefore the contention of the learned Counsel that they were disclosing everything to the department is not factually correct. On the contrary they got approval from the department for allowing uniform discount to all the buyers, but the discount was either not at all given or given at a lower rate than what was shown in the gate passes. T. Frank, Director of M/s Elgi in his statement recorded on 25.04.91 explained that M/s Elgi had appointed main dealers in respect of borewell compressors and distributors in the case of other products and also branches all over India and that they had effected (i) sales to main dealers/distributors (ii) transfer to branches (iii) sales through main dealers/distributors (iv) sales through branches and in respect of sales to main dealers/distributors and transfer to branches, discount had been passed on in full. In respect of sales to main dealers/distributors and sales through branches if the buyer was allowed discount, the balance discount was passed on to the branch Branch/Main dealer/distributors.
He also admitted that if the buyer approached the Company directly, a portion of the discount which was not passed on to the buyer was passed on to the jurisdictional branch/distributor/main dealer or retained by the Company, since the said buyers were not wholesale buyers. He also admitted that Distributor/main dealer/ branch got part of the discount as area sales Commission and also justified payment of higher discount to Distributor/Main dealer than to Dealers/Sub dealers to provide for after sale warranty service and that Distributor/Main dealer has to maintain inventory of spares for this purpose and incur extra expenses.
He also admitted that higher discount was paid to Distributor/Main Dealer/Sub-dealers since Distributor/Main dealer had to provide after sale warranty service and had to maintain inventory of spares and incur higher expenses and the Distributor/Main Dealers were obliged to provide after sale service in respect of the products sold in their territory irrespective of the facts as to who had sold them. He also admitted that M/s Elgi reimbursed 50% of the advertisement charges to Dealers and 25% to Distributors. He also admitted that the branches used the discount and area sales commission for after sales service, inventory and other expenses. Branch Managers of Madurai and Cochin fully corroborated the statement of Shri T. Frank. A plea has been taken by the learned Counsel that the statements of Shri T. Frank and Smt Shantha Sethuraman cannot be relied upon as they are incorrect. We are not able to agree with this plea of the learned Counsel in this regard. We find from para 46 of the impugned order that Shri T. Frank has retracted his statement on 08.12.1994 which is after a period of 3 years and 7 months. Therefore, the statements made by Shri T.Frank has evidentiary value and his retraction has been rightly rejected. As rightly held by the adjudicating authority, Shri T.Frank was a responsible officer holding the position of Director of the Company responsible for the entire operations of the Company. It is unbelievable that such an officer would have given a false account of what was happening in the Company. Further the statements of all other persons including Shri T. Frank is corroborated by documentary evidence such as credit notes, and the statements given by other dealers and Branch Managers of Madurai and Cochin. It is well settled that when an inculpatory and confessional statement is belatedly retracted, the Court or the quasi-judicial authority would be entitled to go into the reasons for subsequent retraction. Therefore, the retraction has been rightly rejected as an after thought, as held by the adjudicating authority and we are in agreement with this findings as it reflects conscious application of mind.
8.Therefore, these facts which were ascertained on investigation by the department had revealed that part of the discount claimed in the price list was in reality meant to cover the after sale service and advertisement charges and maintenance of inventory. By no stretch of imagination it can be concluded that the discount given was in the normal course of trade where the transactions are at arms length and on principal to principal basis. Investigation also revealed that it is an admitted fact that M/s Elgi was allowing discount to dealers depending on the fact as to whether after sale service was provided and inventory was maintained and these facts were never disclosed to the department and lesser discount was only allowed to the buyers. The plea of the appellants that the demand was time barred as the department was well aware of the procedure of sale adopted by them as they were affirmed by the various orders, cannot be accepted because under Section 4(1)(a) they have filed price list in part I and in the questionnaire which is filed along with price list which is a statutory document, M/s Elgi had declared that they are giving uniform trade discount since all their sales are at the factory gate. They had never disclosed to the department that they are having different types of dealerships and were passing on trade discount at different rates. It is also on record that they had normal price in terms of Section 4(1)(a) as their sales were to all types of dealers i.e. Distributors/Main dealers/Branches and after a round of litigation before the Assistant Collector, Coimbatore I Division had passed an order dated 20.10.84 in pursuance of the order dated 19.11.83 passed by the Collector (Appeals) and got the approval of the price list in the proforma for sales to the dealers in the course of whole sale trade as the normal price since the goods were sold to independent buyers at the factory gate at the price declared by them. From the above it is seen that they had declared to the department that the goods are sold at the factory gate at the price declared by them. In the questionnaire filed along with the price list they had actually stated that they are allowing trade discount to all the buyers uniformly. By this mis statement and suppression of these vital facts, the department was kept in dark about the different rates of discount being given to various wholesale dealers and in some cases no trade discount was given at all. It has been held by the Hon'ble Supreme Court in the case of M/s Kirloskar Brothers reported in 1992(59) ELT 3 (SC) that higher discount given to the area dealers for providing after sale service is not deductible. Therefore, the discount as claimed by them is inadmissible. Although they had declared to the Department at the time of filing statutory price list in part I under Section 4(1)(a) that they would be passing on full trade discount to the whole sale dealers who were independent and had no interest in the business of each other, yet they have never passed on full discount uniformly to the above whole sale dealers. In para 35 of the impugned order the Collector has clearly held that investigation conducted by the department clearly brings out the fact that the trade discount passed on to the main dealers/distributors is not trade discount in the normal course of trade and consists of area sales commission provided for looking after, the after sale service during warranty period, maintenance and other expenses.
9. M/s Elgi is a large Unit having factories at four places and under the SRP, lot of faith has been reposed in the trade. Therefore, they were required to disclose truthfully the quantum of trade discount given to various independent whole sale dealers and non disclosure of such vital information to the department, when physical control is no more operative, is certainly suppression of facts. Since invoices were not submitted to the assessing officer along with gate passes at the time of filing mandatory monthly returns in RT 12 any non-disclosure about the non passing of trade discount as declared and got approved from the Department was illegal with intent to evade payment of duty.
We find the Collector in his findings in para 28 to 56 extracted above has very extensively dealt with all the aspects of the matter and we see no reason to interfere with the order passed by him.
10. As regards penalty under Rule 173Q we find that the assessee had resorted to wilful misstatement which resulted in duty evasion of over Rs.40/-lakhs. We are in agreement with the findings of the Collector that there was an attempt to defraud the Exchequer and therefore, severe and deterrent punishment is called for. Imposition of penalty of Rs. 10 lakhs under Rule 173Q of the CE Rules, 1944 which is 25% of the duty is also very reasonable. We see no reason to reduce the same. In the result the impugned order is confirmed and the appeals are dismissed. Ordered accordingly.