1971 (11) TMI 159 - SC - Income Tax

Whether warranty expenses and bonus should appropriately be included in the return and not in the exworks cost? Whether the Commission has erred in allowing depreciation on the actual cost and not on the replacement value? Held that - As we agree, with the Commission that the entire cost on account of warranty in. elusive of labour charges should be borne by the manufacturers, it is wholly unnecessary for us to refer to any specific figures except that while considering the question of return the general idea relating to cost to the manufacturers would certainly be borne in mind and taken into consideration. The Commission came to the correct conclusion that bonus is connected with profits and it cannot be included in the exworks cost. Indeed it has not been disputed on behalf of the Government and the Attorney General quite properly and fairly accepts that some proper method should be devised for escalation or de-escalation, as the case may be. We have been suggested a number of formulae on behalf of the manufacturers as also the government but we shall indicate at a later stage what, in our opinion, is the best and the simplest method of providing for escalation and deescalation. We are satisfied, however, that a provision should be made and ought to have been made by the Commission in this behalf. According to the principles discussed or to be discussed in the matter of fixing of a fair price the main objective is to protect the interest of the consumer while at the same time provide a reasonable margin of profit to the producer. The general approach has to be to determine the ex-works cost and then to arrive at the fair price after examining other claims of the industry and providing a reasonable return. We, therefore, find no such principle which has been demonstrated to be wrong in the report of the Commission so far as the fixation of the return is concerned. We are, therefore satisfied that the capacity for production of Hindustan Motors should have been assessed at the figure given by the technical team, namely, 30,000 cars and 5,000 trucks per year. Import licenses, which were granted have also not been shown to have been given on the basis of the figures of production determined by the Commission. For the first half year 1970-71 the recommendation was for the grant of 11,075 cars although in the application the estimated production was stated to be 15,000 cars. It was only for the second half year 1970-71 that the import license was recommended and granted for 15,000 cars. There is no difficulty, therefore, in arriving at the figure of production of cars, namely, 30,000 cars but the departure which the Commission made in the matter of production of trucks has been seriously disputed on behalf of the Hindustan Motors. For the reasons that have been stated the correct figures would be those which were determined by the technical team of the Commission, namely, 30,000 cars and 5,000 trucks. In view of the fact that the company had not kept any regular record of data it was not possible to determine accurately the use of locally purchased and imported steel separately. In these circumstances we do not consider that the conclusion arrived at by the Commission has been shown to be demonstrably erroneous or wrong

Summary

Issues Involved:
1. Production capacity.
2. Cost and expenses on account of warranty and bonus.
3. Basis for fixing cost for September 1969 and July 1970.
4. Provision for an escalation clause.
5. Adequacy of the return allowed.
6. Basis for allowing depreciation on plant and machinery.
7. Dealer's margin or mark-up.

Detailed Analysis:

1. Production Capacity:
The Commission's determination of production capacity was challenged by the petitioners. For Premier Automobiles, the achievable capacity was set at 12,000 cars per year for September 1969 and 14,000 cars per year for July 1970, based on import licenses granted. The Standard Motors capacity was set at 3,400 cars and 1,000 trucks per year. Hindustan Motors' capacity was set at 30,000 cars and 5,000 trucks per year, based on technical assessments and import licenses. The Court found the Commission's approach to be generally correct but adjusted Premier Automobiles' capacity for September 1969 to 12,000 cars.

2. Cost and Expenses on Account of Warranty and Bonus:
The Commission included warranty expenses and bonus in the return, not in the ex-works cost. The Court upheld this approach, noting that warranty expenses should incentivize manufacturers to improve product quality and that bonus is linked to profits, not costs. The Commission's decision was based on established principles and previous reports, including the Bonus Act and the Tariff Commission's recommendations.

3. Basis for Fixing Cost for September 1969 and July 1970:
The Commission used historical costs for September 1969 and actual costs for July 1970. The Court found this inconsistent and ruled that actual costs should be used for both dates. However, projected future costs were deemed unnecessary for this determination.

4. Provision for an Escalation Clause:
The Court agreed with the need for an escalation clause to account for rising costs, as argued by the petitioners and acknowledged by the government. The Court directed that prices be reviewed every six months, with manufacturers submitting necessary data for cost increases, and the government deciding promptly on these adjustments.

5. Adequacy of the Return Allowed:
The return allowed by the Commission was considered adequate. The Commission had set a return of 16% on capital employed, which included various outgoings like interest on borrowings, minimum bonus, and warranty charges. The Court found this approach reasonable and did not find any principle in the Commission's report to be wrong.

6. Basis for Allowing Depreciation on Plant and Machinery:
The Commission allowed depreciation based on actual cost, not replacement value, aligning with the Income Tax Act. The Court upheld this, noting that depreciation funds should be built up from reserves and that the burden should not be passed to current consumers.

7. Dealer's Margin or Mark-up:
The Commission maintained the dealer's margin at existing levels with minor adjustments, considering operational costs and responsibilities. The Court found no evidence that dealers were suffering losses and upheld the Commission's recommendations for dealer mark-up.

Conclusion:
The Court directed that the government should promulgate a fresh order under Section 18G of the Act, refixing the prices of the three cars in accordance with the Commission's recommendations as modified by the Court's decision. The prices are subject to escalation and de-escalation based on the provisions outlined in the judgment. The impugned Order of September 1969 was rendered inoperative to the extent it conflicted with the Court's decision.