1. The appellants manufacture Photo-copiers under the brand name Modi Xerox 1045. The goods fell under Item 33D of the erstwhile Central Excise Tariff. The dispute in the present proceedings is on determination of assessable value of the machines for the purpose of assessment of Central Excise Duty. The period of controversy is from 04.03.1985 to 28.02.1986.
2. The hearing in this case was concluded on 14.09.1988. Since, however, the appellants requested that the judgment should be issued only after the other two appeals No. E/411 & E/412/88-A filed by the department on the same issue for the subsequent period beginning 01.03.1986 were also heard and considered, the Bench reserved the judgment, agreed to the appellants' request for common consideration of the 3 appeals and commenced hearings in the 2 appeals of the department. Because of the acute shortage of Judicial Members in the Tribunal at Delhi, the hearings in the two appeals of the department could not progress much. They have not yet been concluded. In the meanwhile, since heavy revenue stakes were involved, the Ld.
Representative of the department moved an application to de-link the present appeal of the appellants from the two subsequent appeals of the department and issue the judgment as early as possible. The Bench considered this application in chamber and, in view of the remote possibility of concluding the hearings in the department's subsequent appeals in the near future because of the continuing shortage of Judicial Members, accepted the request of the Ld. Representative of the department. Accordingly, this judgment is being given in the appeal No.E/l 556/86-A of the appellants and the Misc. Application aforesaid in which the hearing was concluded on 14.09.1988.
3. The Misc. Application aforesaid is for admission of additional documents. During the hearing of the appeal, actually both sides brought fresh evidence on record. Since the fresh evidence appeared to be relevant for a just and proper disposal of this appeal, the Bench took the fresh evidence of both parties on record.
4. The brief facts, insofar as they are material for the controversy before us, are that the appellants had no dealer net-work in the conventional sense for the marketing of their photo-copiers. They disposed of about 7 to 8% of their machines on hire-purchase basis through leasing companies. Rest of the machines were sold by them to consumers direct. The installed cost at the customers' premises was fixed uniformally at Rs. 1,33,500/- per machine. For sales direct to customers, the appellants maintained a marketing organisation of their own all over the country.
5. It would be relevant to state here briefly, from the point of view of a layman's understanding, as to how the system of leasing worked.
Leasing is a sort of financing arrangement. The leasing company advanced an agreed lump-sum to the appellants. The instalments, covering the principal as well as the interest, to be paid by the appellants periodically to the leasing company were also agreed upon.
In exchange for the finance, the appellants offered the agreed number of machines to the leasing company. The appellants issued an invoice to the leasing company in the same way as if the machine was being sold to the leasing company. In most cases, the price shown in such invoices was Rs. 1,33,500/-. However, in a few cases it was lower also (Rs. 96,500/-). Though the property in the machines passed on to the leasing company, the machines themselves were not sent to the leasing company.
They remained with the appellants. The leasing company leased the machines back to the appellants on rental (to take care of re-payment of the loan plus interest to the leasing company). The appellants, in turn, hired the machines to the customer on rental. On termination of the appellants' lease with the customer, the customer was to return the machine to the appellants. By that time, the machines would be residual scrap. The life of the machine, we were told, was about 10 years.
6. Both the lower authorities have treated the sales made by the appellants as wholesale sales, though for different reasons. The Assistant Collector held that all direct sales to user customers were wholesale sales. The Collector (Appeals) held that sales made by the appellants to leasing companies were wholesale sales and hence normal price under Section 4(i)(a) was ascertainable. The appellants complained that the Collector (Appeals) adopted this proposition without putting it to them and without hearing their explanation on it.
However, the appellants stated categorically that they did not want a remand of the matter to the Collector (Appeals) for that reason. They, therefore, waived their plea of alleged violation of principles of natural justice by the Collector (Appeals).
7. The appellants' proposition is that there were no wholesale sales and since all the sales were only retail sales, they were entitled to deduction of the retailing expenses in terms of Rule 6(a) of the Central Excise (Valuation) Rules, 1975. The appellants desired that the Tribunal should record a finding whether there were wholesale sales or only retail sales and then remand the matter to the Assistant Collector for determining the amount of deduction to be allowed under Rule 6(a).
8. The Ld. Representative of the department put forth three propositions: (i) sale of even one machine to a direct customer was also a wholesale sale; (ii) sales to leasing companies were in any case wholesale sales and, therefore, the ordinarily charged invoice price of Rs. 1,33,500/- to the leasing companies was the normal price under Section 4(i)(a) of the Central Excises & Salt Act, 1944; (iii) alternatively, if sales to leasing companies were ignored and sales to direct customers were considered as retail sales, then the deemed dealer's margin (or retailing expenses) should be determined at around 11.6% less cost of advertisement and warranty expenses as in the comparable case of CANON NP-271 Photo-copier manufactured and marketed by M/s. BEE Electronic Machines Pvt. Ltd. The Ld. Representative of the department staled that since the Assistant Collector had dealt with the question of deductions also, there was no need to remand the matter of deductions to him and that the Tribunal should finally decide the amount of deductions to be allowed.
9. The appellants admitted that CANON NP-271 Photo-copier of M/s. BEE Electronics was comparable to their Photo-copier in question.
10. We have given our earnest consideration to the submissions of both sides and the record. The Photo-copier in question is an office machine. Naturally, its users will be various offices only, whether in Government or in private sector. Therefore, when such offices purchased one Photo-copier for their own actual use, and not for re-sale, such sale to them was a retail sale only and not a wholesale sale of Central Excise, Meerut v. Escorts Ltd. Photo-copiers are finished goods. They are not industrial raw materials. If anyone were to buy Photo-Copiers in wholesale, it would be reasonable to expect that he would be further re-selling them in retail. In the case before us, such features of a wholesale sale were absent. The conclusion that the sale of ordinarily one machine each to various offices direct by the appellants was a retail sale is also strengthened by the fact that the maximum price of Rs. 1,33,500/- per machine was charged from such customers. If this price were to be regarded as a wholesale price then one should expect the existence of a still higher price by way of the retail price. No such higher price existed. The price of Rs. 1,33,500/- was the highest charged per machine. In the circumstances, we reject the first proposition of the department that sale of even one machine to a direct consumer was also a wholesale sale. We hold that it was a retail sale and the price of Rs. 1,33500/- charged for it was a retail price.
11. Coming to the second proposition of the department, the appellants do not dispute that invoicing of the machines to leasing companies was technically a sale and since such leasing companies were themselves not users of such machines, such sale could be considered a wholesale sale as well. The point made by the appellants, however, is that invoicing of the machines to leasing companies did not amount to a wholesale sale as envisaged in Section 4(i)(a) of the Act. As between the appellants and the leasing company, the invoice price was not the sole consideration for the sale. Leasing was only a financing arrangement.
The leasing company was interested in 1472% or so return on the loan advanced by it to the appellants. The appellants were interested to see that their own capital was not blocked in respect of the machines given be hire purchase. The leasing company was really not interested in buying and selling the machines. In such an arrangement, the price shown in the invoice issued by the appellants to the leasing company was only of an academic interest. The invoice price depended on the number of machines offered by the appellants in lieu of the loan. If a larger number of machines were offered, the price per machine correspondingly came down. Conversely, if a smaller number of machines were offered, the price per machine went up. This price, whether high or low, was immaterial because no payment was made by the leasing company against the invoice nor was the machine delivered physically to the leasing company. We find force in the point made by the appellants.
Leasing was, in substance, only a financing arrangement and not a trading activity in goods. Though it had legal appearances of a wholesale sale, there were no real wholesale sales followed by retail sales in it as normally accepted in trade parlance. We would like to go by the substance of the transaction and not by its technical appearance. We were told during the hearing that in the dispute for the next period beginning 01.03.1986, neither party contended that 'sales' to the leasing companies should be accepted as the basis of valuation.
We hold that invoice prices of the appellants to the leasing companies did not truly meet the requirements of normal price as envisaged in Section 4(i)(a).
12. In substance, all the machines cleared by the appellants were supplied to, and installed at, the direct customers' premises. The only difference was that about 92-93% of the machines were sold to the direct customers outright on cash payment basis and the rest 7-8% were given to the user customers on hire-purchase basis, the hire-purchase activity being financed through the intervention of leasing companies.
In the absence of a normal price under Section 4(i)(a), therefore, the only alternative left is to take the retail price of Rs. 1,33,500/- per machine and to work back the assessable value therefrom. Towards the end of the hearing, we found that both parties veered round to this view and the only dispute left was on the amount of deductions to be made. In this connection, it would be relevant to notice Rule 6 (a) of the Central Excise (Valuation) Rules, 1975 which reads as under: Where such goods are sold by the assessee in retail, the value shall be based on the retail price of such goods reduced by such amount as is necessary and reasonable in the opinion of the proper officer to arrive at the price at which the assessee would have sold such goods in the course of wholesale trade to a person other than a related person. Provided that in determining the amount of reduction, due regard shall be had to the nature of excisable goods, the trade practice in that commodity and other relevant factors.
The appellants marketed their Photo-copiers in the country through their 7 regional offices and 22 branches. The retail price of Rs. 1,33,500/- (installed cost at customers' premises) included the Central Excise Duty and various post-removal expenses, such as freight ex-Rampur works to customers' premises and installation cost. The appellants have claimed total retailing expenses of Rs. 39,005/- per machine (or dealer's margin per machine) which they want to be deducted from their retail price in addition to the Central Excise Duty. The Ld.
Representative of the department states that the amount claimed by the appellants is highly inflated and that the deduction should be of no more than 10-11% of the retail price as in the case of the comparable machine CANON NP-271 of M/s. BEE Electronic Machines Pvt. Ltd. In addition, the appellants may be allowed deduction of cost of transport from the factory gate to the customers' premises on actual basis after due vertification.
13. During the hearing, much discussion centred round the break-up of the cost supplied by M/s. BEE Electronic Machines Pvt. Ltd. to the department. For ready reference, we extract the cost figures below from M/s. BEE Electronic Machines' letter dated 04.05.1987 addressed to the Central Excise Authorities: For your information we are furnishing below the working of model no. NP-271 and the margin of the profit which a dealer is getting.
This shows that the dealers margin is 11.6% which in our opinion is most reasonable.
Basic Price : Rs. 62,000.00 Excise Duty (@ 20%) : Rs. 12,400.00 _____________ Sales-Tax @ 15% : Rs. 11,160.00 _____________ Octroi @ 4% : Rs. 3,422.00 _____________ Toner : Rs. 1,700.00 Extra Cassette (Optional) : Rs. 1,500.00 _____________ Expenses for installation : Rs. 1,500.00 _____________ Dealers selling price to : Rs. 1,06,000.00 consumer ______________ Margin to Dealers : Rs. 12,318.00 PERCENTAGE : Rs. 11.6% _________________________________________________________________________ 14. While the appellants accept the basic price of Rs. 62,000/- and the retail price of Rs. 1,06,000/- in the case of comparable CANON NP-271 machine, they find many faults with the break-up as given above.
Relying on an internal instruction issued in 1975 by the Central Board of Excise & Customs, they claim that the dealer's margin should be calculated by deducting the assessable value (Rs. 62,000) from the final retail price (1,06,000/-). So calculated, the dealer's margin worked out to Rs. 44,000/-, or 41.5% of the retail price, and not 11.6%. We do not agree with them. The difference between the basic price and the retail price of CANON is not composed of the dealer's margin alone. The major share of the difference is made up of the taxes paid on the machine, namely, excise duty @20%, Sales-tax @15% and Octroi @ 4%. These taxes go to the Government and the local authority, not to the dealer. The taxes cannot therefore, be treated as if they were the dealer's margin. They have to be kept apart. The appellants are trying to mis-read the Board's instructions by including taxes in the dealer's margin. CANON paid Sales-tax and Octroi and got deductions of these taxes. The appellants, as we were told, do not pay Sales-tax or Octroi and yet they claim deduction of these taxes. This cannot be allowed. They contend that if they were to have a dealer net-work, they would have to pay these taxes. But in that event the retail price is bound to go up because, as is common knowledge, the local taxes arc normally extra and are charged over and above the price. Right now, the appellants do not pay the local taxes and there cannot, therefore, be any deduction of them from the existing retail price.
15. The Ld. Representative of the department is right in saying that the dealer's margin is the difference between the dealer's purchase price and his sale price. On this basis, he pleaded for a deduction of 11.6% or so being given from the retail price of the appellants as well. But we find that in two respects the dealer's margin of 11.6% given in the CANON's break-up in paragraph 13 above has unduly been depressed. One is the cost for installation. Since in CANON's case, the installation cost was being incurred by the dealers, this cost of Rs. 1,500/- per machine should really be added to the dealer's margin.
Second is the interest on 60 days' credit. The basic price of CANON to the dealer was on 60 days' credit basis. The interest at prevailing bank rate should, therefore, be deducted to arrive at the cash price.
If these two elements are added to the dealer's margin in the case of CANON, the dealer's margin would work out to about 15%. The appellants want the cost of accessories (Toner : Rs. 1700 and extra cassette = Rs. 1500) also to be added towards the dealer's margin. But this amount of Rs. 3,200/- per machine was really the cost of goods supplied. It was not the dealer's margin. Hence, it cannot be added to the dealer's margin.
16. The Ld. Representative of the department wants some reduction to be made in the CANON dealer's margin because the dealer had to incur expenditure on two items which legitimately belonged to the manufacturer of the machine. These two elements are: (i) advertisement and publicity material (ii) warranty.
The Hon'ble Supreme Court have held in ther judgment in the case at M/s. Bombay Tyres International Ltd. 1983 ELT 1896 (SC)=1983 ECR 2233Dthat advertisement cost cannot be deducted from the price arriving at the assessable value. In other words, advertisement cost should form a part of the assessable value of the goods. In the same judgment, it has also been held that after-sale-service expenses which make the goods marketable should also form a part of the assessable value. This Tribunal has held in the case of M/s. Sunray Computers (P) Ltd. that obligatory warranty expenses come in this category of includible expenses. In principle, therefore, the Ld.
Representative of the Department is correct. In the case of CANON, the manufacturer did not incur these costs himself. He made his dealers incur these costs out of their margin. To that extent, the real margin of the dealers went down. But we have no information on record as to how much the CANON dealers incurred on an average per machine by way of advertisement and warranty expenses. We are, therefore, unable to quantify them.
17. We also note that while Modi Xerox 1045 and CANON NP-271 were admittedly comparable machines, the retail price of the appellant's machine was about 26% higher (Rs. 1,33,500/- as against 1,06,000/-).
This was inspite of the fact that CANON paid Sales-tax and Octroi totalling Rs. 14,500/- per machine while the appellant's machine did not not pay these local taxes. In other words, though said to be comparable, the appellant's machine was considerably higher priced. In absolute terms, therefore, the dealer's margin for the appellants' machine should also be correspondingly higher.
18. Considering all circumstances, and particularly keeping in view the sophisticated nature of the Photo-copier machine before us and the net-work of branch offices, show-rooms, and mobile skilled labour required for its marketing, installation and servicing and the prevalent average dealer's margin for comparable goods, we feel that a margin of 15% over the gross retail price should be allowed by way of retailing expenses or dealer's margin under Rule 6(a) of the Central Excise (Valuation) Rules, 1975. We allow this 15% margin over the appellants' retail price of Rs. 1,33,500/-. Central Excise Duly and other taxes, if paid, would also be deductible. As regards freight from the factory gale to the customers' premises, in principle it is deductible. But we presume that the cost of freight already stood included in the expenses for installation (Rs. 1,500/- per machine) for CANON and so we have already taken it into account in arriving at the dealer's margin of 15%. No further deduction by way of freight would, therefore, be necessary.
19. In the result, we allow this appeal partly in the above terms.
Consequential relief should be granted to the appellants.