CUSTOMS, EXCISE & SERVICE TAX APPELLATE
TRIBUNAL SOUTH ZONAL BENCH
CHENNAI
LARGER BENCH
Appeal Nos.E/251 to 253/2009
[Arising out of Order-in-Appeal No.78 to 80/2008 (H-IV) CE
dated 15.12.2008 passed by the Commissioner of Customs,
Excise & Service Tax (Appeals-II), Hyderabad]
Date of Hearing : 18-11-2013
Date of Decision : 18-11-2013
Commissioner of Customs & Central Excise
Hyderabad-IV
Appellant
Versus
Victory Electricals Ltd.
Appearance:
Respondent
Shri Ganesha Haavannur,
Additional Commissioner (AR)
For the Appellant-Revenue
Shri Muthuvenkatraman, Advocate
For the Respondent-assessee.
Coram:
Hon’ble Mr. Justice G. Raghuram, President
Hon’ble Mr. P.K. Das, Judicial Member
Hon’ble Mr. Mathew John, Technical Member
MISC Order No.42725/2013
Per Justice G. Raghuram:
Pursuant to the referral order passed by the learned Division
Bench on 18.8.2011, the following question is presented to us for
consideration :
2
“Whether any deduction claimed by the buyer of excisable
goods as compensation for the delay in the supply of the goods
by its manufacturer (assessee) under the contract between
them, during any period after 01.07.2000, is liable to be
included in the assessable value of the goods under Section 4 of
the Central Excise Act ?”
2. Heard Learned Additional Commissioner (AR) Shri Ganesh
Haavanur
for
Revenue
and
Learned
Advocate
Shri
Muthuvenkatraman for the assessee.
3. The transactions in issue between the assessee, the
manufacturer and supplier of goods occurred subsequent to
1.7.2000 is not in dispute. Prior to 1.7.2000, Section 4 of the
Central Excise Act, 1944 (the Act), in so far as is relevant for the
purposes of the present case, read as follows :Section 4. Valuation of excisable goods for purposes of charging of
duty of excise (1) Where under this Act, the duty of excise is
chargeable on any excisable goods with reference to value, such value,
shall, subject to the other provisions of this section, be deemed to be
—
(a) the normal price thereof, that is to say, the price at which such
goods are ordinarily sold by the assessee to a buyer in the course of
wholesale trade for delivery at the time and place of removal, where
the buyer is not a related person and the price is the sole consideration
for the sale
4. With effect from 1.7.2000, as a result of provisions of Act 10 of
2000 (Finance Act, 2000), vide Sec. 94 thereof, Section 4 of the
Act was substituted. To the extent relevant and material to the
present appeal, Section 4 (1) (a) of the Act, (post the amendment)
reads :
(1) Where under this Act, the duty of excise is chargeable on any
excisable goods with reference to their value, then, on each
removal of the goods, such value shall –
(a) in a case where the goods are sold by the assessee, for
delivery at the time and place of the removal, the assessee and
the buyer of goods are not related and the price is the sole
consideration for the sale, be the transaction value;
3
5.
Clause (d) of Section 4 (3) defines the expression
“transaction value” as follows ;
“means the price actually paid or payable for the goods, when sold,
and includes in addition to the amount charged as price, any amount
that the buyer is liable to pay to, or on behalf of, the assessee, by
reason of, or in connection with the sale, whether payable at the time
of the sale or at any other time, including, but not limited to, any
amount charged for, or to make provision for, advertising or publicity,
marketing and selling organization expenses, storage, outward
handling, servicing, warranty, commission or any other matter; but
does not include the amount of duty of excise, sales tax and other
taxes, if any, actually paid or actually payable on such goods.”
6.
The present batch of appeals are preferred by
Revenue against orders of the Commissioner (Appeals)
granting refund of specified amounts of duty, to the
respondent-assessee.
7.
The
assessee
electrical
was
transformers.
engaged
During
in
manufacture
the
relevant
of
period,
respondent supplied transformers to various Distribution
Companies
(discoms)
of
the
Andhra
Pradesh
State
Electricity Board (APSEB). Clause (2) of the purchase order
provides for variation in the price, by way of revision
(upward
or
downward)
ab
initio,
to
accommodate
variations in prices of raw materials in terms delineated in
the said clause. Clause (12) of the purchase order
stipulates that for supplies made beyond the agreed
delivery schedule, penalty shall be levied for an amount
equivalent to ½ % of the value of the material not
delivered within the prescribed time limit for every week of
delay or part thereof, subject to a maximum of 5% of the
total contract value. This clause also contains a provision
4
which enables the purchaser (APSEB) to purchase the
balance quantity (undelivered within the delivery schedule)
from the open market and recover the expenditure
incurred thereof from the assessee.
8.
The order of reference identified a conflict of opinion
between decisions of the Tribunal, in United Telecom Ltd.
Vs CCE Bangalore – 2006 (204) ELT 626 (Tri.-Bang.) and
subsequent
decisions,
particularly,
in
CCE
Noida
Vs
Electron Energy Equipments Ltd. – 2011 (264) ELT 153
(Tri.-Del.). There are other decisions referred to in the
order of reference, which followed the decision in United
Telecom Ltd. (supra). Hence the reference to the Larger
Bench.
9.
In MRF Ltd. Vs CCE Madras – 1997 (92) ELT 309
(SC), the Supreme Court, considering provisions of Section
4 (prior to amendment in 2000) and approving an earlier
decision of this Tribunal in Indo Hacks Ltd. Vs Collector of
Central Excise, Hyderabad - 1986 (25) ELT 69 (Tribunal)
ruled that once the assessee had cleared the goods on the
classification and price indicated by him at the time of
removal of goods from the factory gate, the assessee
becomes liable to payment of duty on that date and time
and subsequent reduction in prices for whatever reason
cannot alter the transaction value and liability to duty
thereon. The court ruled that subsequent fluctuation in
prices of the commodity has no relevance whatsoever so
far as the liability to excise duty is concerned. This decision
5
was referred to and followed by the Punjab and Haryana
High Court in Mauria Udyog Ltd. Vs CCE - 2007 (207) ELT
31 (P&H).
10.
At the hearing of the reference, several other
decisions were also cited on behalf of the appellantRevenue and the respondent-assessee.
Hammer Ltd.
In Bhartia Cutler
Vs CCE New Delhi - 1998 (99) ELT 436
(Tri.), the Tribunal rejected the contention of the assessee
that just as a price variation clause has the effect of
increasing or reducing the originally agreed price and has a
consequent impact on the assessable value, an agreement
for remittance of liquidated damages has a similar effect
and impacts the assessable value. The Tribunal ruled that
under the contract, the parties had stipulated the time for
performance; provided for breach of the contract; for
payment of liquidated damages; and the mode of payment
was also stipulated by providing that the amount will be
deducted from the invoice. When the contract goes
through, the agreed price is payable. Compensation is
however payable to the buyer when there is a breach of
the contract. Damages or compensation cannot therefore
be regarded as the price or part of the price. The provision
for deduction of the quantum of damages from the invoice
price is only for the purpose of recovery of the damages;
and payment of damages cannot be regarded as reduction
of the agreed price. It further held that the price remained
constant, namely at the agreed level and the assessee by
6
his conduct had become liable to pay damages the
quantum of which was a pre-estimate in the contract and
such amount of damages was liable to be deducted from
the price. This would not amount to depreciation of the
price.
Consequently, decisions relating to the effect of a
price variation clause will not apply to a situation where
the price stands altered on account of application of a
clause
pertaining
to
liquidated
damages,
ruled
the
Tribunal.
11.
In CCE Calicut Vs BPL Telecom Ltd. – 2003 (157) ELT
35 (Tri.-Bang.), the Tribunal following the decision in
Bhartia Cutler Hammer Ltd. (supra) and Mercury Rubber
Mills Vs Commissioner – 2000 (1200 ELT 413 (Tribunal),
reiterated the principles enunciated in those decisions and
concluded that liquidated damages being the liability of the
assessee for failing to comply with certain terms of the
agreement between the
parties,
is
not an
item of
expenditure which can be deducted for arriving at the
assessable value.
12.
The Tribunal in Faridkod Cooperative Sugar Mills Ltd.
Vs CCE Ludhiana – 2004 (171) ELT 174 (Tri.-Del.),
followed its earlier decisions in Spring Fresh Drinks Vs
Collector – 1991 (54) ELT 333 (Tribunal); Commissioner
Vs Bhagwati Oxygen Ltd. – 2000 (117) ELT 647 (Tribunal)
and Inox Air Products Ltd. Vs Commissioner – 2001 (134)
ELT 224 (Tribunal), to hold that liquidated damages
received
by
the
assessee
cannot
be
added
to
the
7
assessable value. The facts in Faridkod Cooperative Sugar
Mills Ltd. were slightly distinct. The assessee was a
manufacturer of molasses. One of the distilleries with
which an agreement for supply of molasses was entered
into did not lift the allocated quantity of molasses during
the relevant period. Consequently, the assessee had to sell
molasses
at
a
lower
price
and
thereafter
received
liquidated damages on account of the failure of the
distillery to lift molasses as agreed upon.
Revenue
assumed that the amount of liquidated damages received
is liable to be added to the assessable value of molasses
cleared by the assessee to different purchasers, for
computation of the value for levy of duty. The Tribunal
concluded that liquidated damages received could not be
added to the assessable value. A similar view is reiterated
in KSB Pumps Ltd. – CCE Pune-I - 2007 (216) ELT 51 (Tri.Mumbai).
13.
In HPL Socomac Pvt. Ltd. Vs CCE Delhi-III (Gurgaon)
– 2005 (182) ELT 191 (Tri.-Del.), Tribunal ruled that the
original assessment and payment of duty took place at the
contracted price; the change in the amount paid is on
account of imposition of penalty for delayed delievery; and
since penalty is separate from the price of the goods, there
being no provision in excise law for allowing deduction of
penalty from the sale price for the purpose of ascertaining
the assessable value, no refund is liable to be paid. In such
a case, the price would not stand altered by imposing the
8
penalty agreed upon between the purchaser and seller for
delayed delivery, held the Tribunal.
14.
United Telecom Ltd. (supra), is the only authority
which specifically refers to the definition of “transaction
value” in section 4 (3) (d) of the Finance Act, 1994.
In
this case, the appellant-assessee was a manufacturer of
telecom equipment which was supplied to BSNL. Assessee
filed a refund claim on the basis of difference in price
quoted in the purchase order and invoices under the cover
of which the goods were cleared, resulting in liquidated
damages applied by BSNL for delayed delivery of the
goods. Revenue rejected the claim for refund on the
ground that liquidated damages administered by the
purchaser was not an abatable discount in the “transaction
value”, in terms of the definition of expression in Section 4
(3) (d). Considering the issue in the context of amended
provisions of Section 4 and the definition of “transaction
value” under Section 4 (3) (d), the Tribunal recognized the
distinction between “penalty” and “liquidated damages”;
culled out the relevant principles in relation to whether a
sum stipulated for delayed delivery in a contract is a
stipulation by way of a “penalty” or “liquidated damages”,
by reference to precedents and textual authority viz. Chitty
on Contracts and an extract from “Mcgregor on Damages”
and concluded that the relevant clause in the agreement
between the parties authorizes the purchaser to remit an
amount lesser than the normally agreed price for delayed
9
supplies. The Tribunal concluded that in the circumstances
the clause must be considered a penalty and was not in
the nature of a stipulation in terrorem. The stipulation was
clearly in the nature of liquidated damages and not
penalty, ruled the Tribunal. After referring to the definition
of the expression “transaction value” under Section 4 (3)
(d) of the Act, the Tribunal held that the definition of the
term “transaction value” represents the price actually paid
or payable for the goods. In that case, even though a price
is fixed for the goods, qua the contract, the goods are
required to be delivered on a particular date and if there is
delay in delivery, the price is reduced depending on the
delay. As a result of such adjustments, the assessee
received a lesser payment, which was the transaction
value. On this factual basis, the Tribunal concluded that
the provision in the contract, for variation in the price by
application
of
the
clause,
was
related
to
liquidated
damages and the same is in the nature of a compensation
payable for delayed delivery in the supply of goods and not
in the nature of penalty. The Tribunal concluded that in
terms of the definition of “transaction value”, duty is
payable only on the price arrived at by taking into account
the liquidated damages. The appeal was allowed, in favour
of the assessee.
15.
This decision was followed by this Tribunal in CCE
Chandigarh Vs HFCL (supra), another case involving
application of liquidated damages resulting in alteration of
10
transaction value. Commissioner (Appeals) allowed the
refund claim of the assessee and Revenue was in appeal.
The relevant clause of the agreement between the parties
was interpreted not as a clause in the nature of a threat,
fixed in terrorem of the other party but as a clause
stipulating “liquidated damages”. As a consequence, the
transaction value gets reduced on application of liquidated
damages wherever the supplies were made beyond the
normal
stipulated
period
of
delivery,
concluded
the
Tribunal.
16.
Section 4 read with the definition of “transaction
value” in Section 4 (3) (d) enables levy of duty on the
transaction value paid or payable for the goods. The value
payable in a case where liquidated damages is applied
would therefore be the consequent value and this would
constitute the “transaction value” .
17.
Except the decision of United Telecom (supra)
followed in HFCL (supra) which are clearly and apparently
after due consideration of provisions of the amended
Section 4 read with definition of “transaction value” in
Section 4 (3) (d), other decisions adverted to above were
either on the basis of provisions of Section 4 prior to its
amendment by Finance Act, 2000 or without analysis of
provisions of the amended Section 4 and the distinct
concepts of “penalty” and “liquidated damages”, pointed
out in United Telecom Ltd.
11
18.
The decision in Electron Energy Equipments Ltd.
(supra), which is in conflict with the decision in United
Telecom Ltd. (noticed by the referral order), is subsequent
to amendment of Section 4 vide the Finance Act, 2000.
However, this decision did not proceed on any analysis of
the amended provisions of Section 4 or due consideration
of the definition of “transaction value” in Section 4 (3) (d).
It proceeded merely on the premise that deduction of
penalty/liquidated damages in terms of provisions of the
agreement between the parties, from the agreed price on
account of delay in delivery, would not entitle deductions
for the purpose of ascertaining the transaction value.
19.
In our considered view, post the amendment of
Section 4 and the statutory definition of ‘transaction value’
in sub-section (3) (d) thereof, of the Act, the eventual
value payable after factoring in any liquidated damages
contractually stipulated for delayed supply would be the
transaction value and this value would be the value
relevant for levy of duty.
20.
On the aforesaid analysis, we answer the reference
by holding that wherever the assessee, as per the terms of
the contract and on account of delay in delivery of
manufactured goods is liable to pay a lesser amount than
the generically agreed price as a result of a clause (in the
agreement), stipulating variation in the price, on account a
the
liability
to
“liquidated
damages”,
irrespective
of
whether the clause is titled “penalty” or “liquidated
12
damages”, the resultant price would be the “transaction
value”; and such value shall be liable to levy of excise
duty, at the applicable rate.
21.
The substantive appeals are remitted to the regular
Bench for disposal on merits and in terms of the reference
answered as above.
(Dictated and pronounced in open court)
(JUSTICE G.RAGHURAM)
PRESIDENT
(P.K.DAS)
JUDICIAL MEMBER
(MATHEW JOHN)
TECHNICAL MEMBER
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