Judgment:
1. The appellants, a partnership firm, are engaged in the manufacture of ice cream since 1979. They had entered into an agreement in March 1990 with a Private Limited Company for distribution of their product.
The agreement provided for supplying their entire production to that company. The agreement, inter alia, provided that the distributor company shall be at liberty to incur whatever expenses it liked for the promotion of its proprietary interest in the goods purchased by it.
They had incurred expenses for advertising the product. Such expenses were considered by the Central Excise department to have been incurred on behalf of the appellants and the Commissioner of Central Excise, Ahmedabad by his order in original dated 8-12-1995 added the said advertisement expenses to the value of the ice cream cleared by the appellants and worked out the duty on such increased value. Thereby the present appeal.
2. Shri Dushyant Dave, learned Senior Advocate appeared for the appellants along with Shri P.M. Dave, learned advocate. It was submitted by the learned senior advocate that the Commissioner had passed the impugned order by misconstruing their agreement with the distributor company and by misapplication of law. He stated that initially the appellants were engaged in the manufacture and sale of ice cream to wholesalers and other customers but found that if they could concentrate on manufacture of ice cream only leaving the marketing and distribution of their product to others, they could expand their business. Accordingly, the subject agreement was entered into by them with the distributor company. The agreement, clearly provided that the product was to be sold to the distributors who would acquire proprietary interest therein. The distributor company were free to sell it according to their choice at prices fixed by them (distributors). They were at liberty to incur expenses for promotion of their product. They provided interest-free security deposit of Rs. 5 lakhs to the appellants. The Commissioner, it was contended, had mis-interpreted the provision in the agreement about the advertisement expenses and wrongly held that the agreement enjoined the distributors to incur such expenses. The interest-free deposit of Rs. 5 lakhs has been referred to by the Commissioner as a huge amount. Actually after the new arrangement came into effect with the agreement, the production and supply of ice-cream increased considerably and amounted to nearly a crore of rupees. In that context, deposit of Rs. 5 lakhs is a small sum and it was by way of security deposit to be appropriated in the event of any default in payment. The Commissioner, it was contended, had wrongly interpreted the judgment of the Supreme Court in the Bombay Tyre International Ltd. case. In that case the Court had referred to the advertisement expenses incurred by the manufacturer prior to the clearance of the goods. In the present case the distributors had carried out the advertisement after purchase of the ice cream and it was with reference to the product which had become their property. The advertisement expenses incurred by the buyer/distributor are not to be added to the assessable value. In this connection, the learned counsel relied upon the following decisions of Madras and Bombay High Courts and of the Tribunal :- (1) 1986 (23) E.L.T. 302 (Madras) Standard Electrical Appliances v. Superintendent of Central Excise.(Madras) Brakes India Ltd. v. Assistant Collector.(Bombay) Union of India v. Mahindra and Mahindra.
(4) 1991 (52) E.L.T. 449 (Tribunal) General Industrial Control (P) Ltd. v. CCE.It was then argued that the Commissioner has wrongly held the distributor company to be a related person of the appellant firm on the ground that some of the partners of the formers are relatives of the latter. A company has a separate identity distinct from the Directors or shareholders. The finding of the Commissioner is contrary to the legal position, it was urged. Though he has held that the distributor company is a related person of the appellant firm the Commissioner has not gone by the statutory provision contained in Section 4(1) (a) (iii) and the price charged by the distributor had not been applied for levy of duty the expenses for advertisement incurred by the distributor company were added to arrive at the assessable value. The Commissioner had relied upon certain Tribunal decisions to justify such a conclusion. It was pointed out by the leaned counsel that these decisions were distinguishable as the agreement specifically provided for the distributors/wholesalers to carry out advertisement on behalf of the manufacturers. Another point urged by the learned counsel was that the Commissioner had misunderstood certain statement in their reply and arrived at erroneous conclusions. In paragraph 13.2 of his order he has referred to their reply to the show cause notice wherein they had stated that if any advertisement expenses were incurred by the buyer of the goods, then such advertisement expense is an extraneous consideration for the purpose of assessment of excise duty. What they had stated was that it was an extraneous or irrelevant consideration.
Without prejudice to the main contentions referred to above, the learned counsel raised an alternative ground that the show cause notice was barred by limitation. The Commissioner has applied the longer period of limitation holding that there was suppression as the appellants had not revealed their having the agreement with the distributor company which required the latter to incur advertisement expenses and required them to also make a security deposit of Rs. 5 lakhs. Shri Dave pleaded that the appellants had not suppressed any necessary fact. The non-disclosure of the agreement cannot be said to be a case of suppression as only that will be suppression if it is non-disclosure of what is legally required to be disclosed. The reference to certain provisions of the agreement in paragraph 2 of the show cause notice would actually go against the charge of mutuality of interest between the appellants and their distributors. It was, therefore, pleaded that the appeal be allowed on merits as also on the ground of limitation.
3. The arguments were refuted by Shri T.R. Malik, Senior Departmental Representative. While supporting the impugned order both on merits and on limitation, he emphasised the point that the Directors of the distributor company are close relatives of the partners of the appellant firm. The advertisement expenses of the distributor company which is thus a related person of the appellant firm are includible in the value ofthe goods for the reasons spelt out by the Commissioner relying upon Tribunal decisions cited in the order. There was suppression because the agreement was not disclosed. The distributors had paid deposit of Rs. 5 Lakhs to the appellant firm. This was not disclosed to the department. He pleaded for the dismissal of the appeal.
4. We have considered the submissions and perused the record. The relevant paragraph in the agreement containing the reference to advertisement by the distributor company is extracted below :- "6. All sales made by the first party manufacturer to the second party distributor under or in accordance with the terms of this AGREEMENT are hereby declared to be on 'Principal to Principal' basis. It is also expressly agreed and understood between the parties that on the sale of the ice creams by the first party manufacturer to the second party distributor, the second party distributor will derive proprietary interest in the ice-creams and consequent thereupon, the second party distributor shall be at liberty to incur whatever expenses it likes for the promotion of its proprietary interest in ice-creams, and for that matter, the first party manufacturer shall not have any right or liability of whatsoever nature." The reference to the distributors being at liberty to incur whatever expenses it likes for the promotion of its proprietary interest in ice-creams and that the manufacturer shall not have any right or liability has been taken by the Commissioner to mean that it enjoined upon the distributor to incur expenses towards effective advertisement of the assessee's product. Again the Commissioner has in paragraph 13.2 of his order observed as follows :- "In this connection, it would be in fitness of things to refer to para 7 of the assessee's reply dated 18-3-1994 to the show cause notice dated 25-1-1994, wherein it has been mentioned that however, when the goods were sold by the manufacturer and after removal of excisable goods from the factory of manufacturer, if any advertisement expenses were incurred by the buyer of such goods.
Then such advertisement expenses is an extraneous consideration for the purpose of assessment of excise duty. Thus, when the assessee himself conceives that such expenses incurred by the buyer of such goods towards advertisement is an extraneous consideration, the question is whether the advertisement expenses incurred by the distributor in the present case after removal of the goods from the factory of the assessee in the form of extraneous consideration would fall within the mischief of the provisions of Rule 5 of the Valuation Rules. Rule 5 ibid provides that where the excisable goods are sold in the circumstances in Clause (a) of Sub-section 4 of the Act except that the price is not the sole consideration, the value of such goods shall be based on the aggregate of such price and the amount of money value of any additional consideration following directly or indirectly from the buyer to the assessee." In both these conclusions, we find that the objections raised by the learned counsel are valid. The conclusion that the agreement enjoined upon the distributor to incur expenses towards advertisement does not flow from the actual wording in the agreement which mentioned that the distributor will be at liberty to incur whatever expenses it likes for the promotion of its proprietary interest in ice-creams. Again, with reference to the conclusion drawn from the reply to the show cause notice, it is obvious that the Commissioner has misunderstood the contents of the sentence referred to by him when he observed "when the assessee himself conceives that such expenses incurred by the buyer of such goods towards advertisement is an extraneous consideration..."he obviously took their concession (not conception as stated in the order) to mean that the advertisement expenses in question were extra consideration for the purpose of assessment of duty. What they stated was that such advertisement expenses were an extraneous factor or consideration and not extra consideration for inclusion in the assessable value. The use of the expression "extraneous consideration" which have been understandably mistaken for "extra consideration" has caused this wrong conclusion. The actual meaning is however clear from what they had stated a little later in the same paragraph of their reply which has been extracted by us above. They had contended that advertisement expenses incurred by the buyer are immaterial and irrelevant for the purpose of Section 4 of the Act. Hence the conclusion drawn by the Commissioner from what he took to be a concession made by the appellants in their reply to the show cause notice cannot stand. The order is to be examined for its validity from other angles.
4A. The impugned order places reliance on certain decisions for the proposition that the advertisement expenses incurred by the buyer are to form part of the assessable value. We have seen some of these orders. Thus, in Hindustan Photo Films Mfg. Co. Ltd. v. Collector of Central Excise -1988 (35) E.L.T. 354, the Tribunal found that the advertisement expenses were obligatory on the distributors by agreement. It was observed in the order that the agreement "enjoined upon the distributors to spend some amount towards effective advertisement of the appellants' products." Likewise, in Eddy Current Controls (India) Ltd. v. Collector of Central Excise, Cochin - 1989 (39) E.L.T. 147, the agreement entered into by the appellants therein with their distributor, inter alia, required the latter to do effective advertisement and sales promotion for the appellants' goods. The appellants also were willing to have the money value of the additional consideration on account of expenditure on advertising being added to the assessable value of the goods". Such provision in the agreement and the consent of the appellants for inclusion of the expenditure in the assessable value are absent in the present case. These distinguishing factors apart, the present case is stronger ground in favour of the appellants in view of the decisions cited before us by the learned counsel. Thus, in Standard Electric Appliances, Tuticorin v.Superintendent of Central Excise -1986 (23) E.L.T. 302., the High Court of Madras held (in paragraph 16 of the judgment) that "advertising a product by wholesaler is one of the well known methods by which the wholesaler attracts the customers and if, as a result of increasing his business the demand for the product of a manufacturer also increases, the advertising by the wholesaler cannot be said to be for and on behalf of the manufacturer". This would support the appellants' case.
Certain provisions of the agreement between the appellants and their distributors have been referred to in Para 2 of the show cause notice and it has been alleged that these prima facie revealed that the two units had interest in the business of each other. As submitted by the learned counsel for the appellants, these provisions actually would go against the charge of mutuality of interest as will be seen from the following extract of the aforesaid paragraph : "(i) the assessee was to compulsorily sell 90% of the goods to M/s.
Havmor Foods Pvt. Ltd., (ii) the assessee would not have any right to intervene in the matters relating to the arrangement with dealers and fixation of prices; (iii) the proprietary right in the Ice-cream Co. shall rest in the marketing Co. (distributors) who would be at liberty to incur expenses on promotion of the proprietary interest in Ice-cream; and (iv) the distributors would keep interest free deposit of Rs. 5 lakhs with the assessee and the first party i.e., assessee, would be at liberty to appropriate and/or adjust the security deposit against failure of the second party, distributors, to lift the entire production of the first party, i.e. assessee." 5. The finding that the distributor company is a related person of the appellant firm does not flow from the allegations based on such provisions of the Agreement between them. Such a finding has been arrived at citing the fact that the partners of the appellant firm are The first two partners of the appellant firm are the respective wives of the aforesaid two Directors. The third partner is Shri Satish Chandra M. Chona HUF. In his individual capacity, he is a Director of the distributor company. The Commissioner has concluded that the distributor in this case falls within the term "relative" used in Section 4(4)(c) within the meaning of Section 6 of Companies Act read with Schedule 1 thereof. This conclusion has been preceded by an observation that the expression Relative and Distributor appearing in Section 4(4)(c) of the Act does not mean that every distributor would be a relative per se because that would make the section completely workable. After this observation, he has referred to certain observations in this regard made in the Supreme Court judgment in the Bombay Tyre International Ltd. case which he has extracted. These are as follows :- "In our opinion, the definition of 'related person' should be so read that the words 'relative and distributor of the assessee' should be understood to mean a distributor who is a relative of the assessee. It will be noticed that the Explanation provides that the expression 'Relative' has the same meaning as in the Companies Act, 1966.
On a proper interpretation of the definition of 'related person' in Sub-section 4(c) of Section 4, the words 'relative and a distributor of the assessee' do not refer to any distributor but they are limited only to a distributor who is a relative of the assessee within the meaning of the Companies Act, 1966." The observations clearly point to the requirement that for a distributor to be treated as a related person for the purpose of Section 4, the distributor has to be a relative within the meaning of Companies Act, 1966. Accordingly, the distributor company cannot be treated as a related person though its Directors happen to be relatives of the partners of the appellant manufacturer firm. The conclusion drawn by the Commissioner is inconsistent with the statutory provisions. Though the Commissioner has held that the distributor company is a related person of the manufacturer-appellant, he has not applied the third proviso to Section 4(l)(a) for treating the price at which the related person viz. distributor company sold the goods as the assessable value but only added the advertising expenses incurred by the distributor company to the price at which the appellant firm sold the goods to the distributor company. If in fact, the distributor company were to be treated as a related person of the appellant firm there was no alternative to adopting the distributors' selling price.
Giving up that position indicates a possible reservation on the question of related person. Be that as it may, the addition of the advertisement expenses incurred by the distributor to be selling price of the appellant manufacturing firm is not justified in view of the discussion in the foregoing paragraphs. Accordingly, we set aside the impugned order and allow the appeal.