2012 (9) TMI 244 - HC - Central Excise

Inclusion of cost of pre delivery inspection( PDI) and free after sales services to assessable value of the vehicles sold - assessee contested against department s reliance on clause no.7 of the Circular bearing No. 643/34/2002CX dated 1st July, 2002 read with Circular No. 681/72/2002CX dated 12th December, 2012 as it is violative of the provisions of the Central Excise Act, 1944 - Held that - As and when the car is removed out of the factory of the petitioners, Excise duty was payable. The assessable value was to be determined as per the provisions of Section 4(1)(a) of said Act as amended as the petitioners and the dealers were not related to each other and the price was the sole consideration. In such a case, the value to be taken up for the purposes of Excise duty was the transaction value. As admitted by the petitioners that after a car is sold to a dealer on the terms and conditions entered into mentioned in the dealer s agreement, a dealer is required to carry out Pre Delivery Inspection as well as said services in regard to a car which is sold to a customer. From the record it is seen that a dealer is required to pay an amount to the petitioners towards the cost of the car and a dealer cannot charge more than the amount specified by the petitioners. The difference between the price so fixed by the petitioners and the price paid by the dealer constitutes what is called as dealer s margin. A dealer has to spend money to conduct PDI as well as render said services. We are inclined to accept the stand of the petitioners that the dealer is required to perform PDI as well as said services as a part of the dealer s responsibility cast on him as per the dealership agreement. On consideration of the Clause 7 of Circular dated 1st July, 2000, it is apparent that the respondents have brought into existence a deeming provision that is to say the respondents have treated all the manufacturers of cars on one platform and by fiction taken a decision to add the expenses incurred towards PDI and said services in the assessable value. It will have to be mentioned that in all cases where the expenses incurred towards PDI and said services are solely borne by the dealer and the manufacturer like petitioners have nothing to do with the said expenses then adding those expenses in the assessable value would be contrary to the provisions of Section 4(1)(a) r/w Section 4(3)(d) of the said Act. Looking to the facts and circumstances of this case, the respondents have not been able to place on record any material to show that the amount incurred towards PDI and said services can fall within the definition of the transaction value - thus as per Section 4(3)(d) of the Central Excise Act, 1944 the PDI and free after sales services charges can be included in the transaction value only when they are charged by the assessee to the buyer - in favour of assessee.

Issues Involved:
1. Validity of Clause No.7 of Circular No. 643/34/2002CX dated 1st July, 2002.
2. Validity of Circular No. 681/72/2002CX dated 12th December, 2012.
3. Inclusion of Pre Delivery Inspection (PDI) and free after-sales services in the assessable value of vehicles.
4. Whether the judgment delivered by CESTAT in Maruti Suzuki Ltd. Vs. Commissioner of Central Excise is correct.
5. Legality of the order in original dated 5th December, 2011.

Detailed Analysis:

1. Validity of Clause No.7 of Circular No. 643/34/2002CX dated 1st July, 2002:
The petitioners challenged Clause No.7 of the Circular, which stated that the cost of PDI and free after-sales services incurred by the dealers should be included in the assessable value of the vehicles. The court examined the provisions of Section 4 of the Central Excise Act, 1944, as amended by the Finance Act, 2000. It was argued that the expenses for PDI and said services incurred by the dealer are not reimbursed by the petitioners and do not form part of the transaction value. The court concluded that Clause No.7 of the Circular dated 1st July, 2002, is not in conformity with Section 4(1)(a) and Section 4(3)(d) of the Act, as these expenses are not charged by the petitioners to the dealer and are not part of the transaction value.

2. Validity of Circular No. 681/72/2002CX dated 12th December, 2012:
The petitioners also challenged Circular No. 681/72/2002CX, which confirmed the earlier Circular dated 1st July, 2002. The court noted that the Circular dated 12th December, 2002, admitted that PDI and said services provided by the dealer during the warranty period would not be included in the assessable value. This assertion contradicted the earlier Circular, leading the court to conclude that the Circular dated 12th December, 2002, to the extent it confirms Clause 7 of Circular dated 1st July, 2002, is void and illegal.

3. Inclusion of PDI and Free After-Sales Services in the Assessable Value:
The court analyzed whether the expenses incurred by the dealer for PDI and free after-sales services should be included in the assessable value of the vehicles. It was argued that these services are part of the dealer's obligations under the dealership agreement and not reimbursed by the petitioners. The court agreed with the petitioners, stating that these expenses do not fall within the definition of "transaction value" under Section 4(3)(d) of the Act. The court concluded that the expenses incurred by the dealer towards PDI and said services should not be included in the assessable value as they are not charged by the petitioners to the dealer.

4. Judgment by CESTAT in Maruti Suzuki Ltd. Vs. Commissioner of Central Excise:
The petitioners sought to declare the judgment by the CESTAT in Maruti Suzuki Ltd. Vs. Commissioner of Central Excise as incorrect and invalid. However, the court did not express any views on the correctness of this judgment, as it was not necessary for deciding the issues in the present case.

5. Legality of the Order in Original dated 5th December, 2011:
The petitioners also challenged the order in original dated 5th December, 2011, which directed them to pay excise duty, interest, and penalty. The court noted that the petitioners had not challenged this order before the appropriate appellate authority. The court did not express any views on this order, focusing instead on the validity of the Circulars.

Conclusion:
The court held that as per Section 4(3)(d) of the Central Excise Act, 1944, the PDI and free after-sales services charges can be included in the transaction value only when they are charged by the assessee to the buyer. The impugned Circulars, which included these charges in the assessable value even if not charged by the assessee, were contrary to the provisions of the Act and were quashed and set aside. The court answered the question in favor of the petitioners and against the respondents, with no order as to costs.

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