1998 (1) TMI 73 - SC - Central Excise

Whether notional interest on the interest free security deposit received should be considered for the purpose of arriving at the assessable value under the Excise Act by including interest at the rate of 12% per cent per annum on such security deposits? Held that - The additional Collector was right in coming to the conclusion that Rule 5 of the Valuation Rules was not applicable in the present case as it was not shown that the price charged was not the sole consideration. When the appellants are not requiring all the dealers to give security deposit and it is only those who avail of credit facilities who are required to give the security deposit but get no discount or pay a reduced price then in such a case excise duty can be charged only on the uniform price paid by the dealers without any addition of notional interest. Appeal allowed.

Summary

Issues Involved:
1. Whether notional interest on interest-free security deposits should be included in the assessable value under the Excise Act.
2. The applicability of Rule 5 of the Central Excise (Valuation) Rules, 1975.

Detailed Analysis:

1. Notional Interest on Interest-Free Security Deposits:

The primary issue in these appeals was whether the notional interest on interest-free security deposits received by the appellants should be considered for arriving at the assessable value under the Excise Act. The appellants, who are manufacturers of cigarettes, sold their products at a uniform price to wholesale dealers, regardless of whether the dealers bought on credit or cash basis. The appellants introduced a scheme where dealers could avail credit facilities by providing interest-free security deposits equivalent to 21 days of their normal monthly purchases.

A show cause notice was issued by the Collector of Central Excise, proposing to add notional interest at the rate of 12% per annum on the security deposits to the sale price of the cigarettes to re-determine the assessable value. The appellants refuted the claim, arguing that the wholesale price was uniform and not influenced by the security deposits.

2. Applicability of Rule 5 of the Central Excise (Valuation) Rules, 1975:

The excise authorities contended that the receipt of interest-free security deposits influenced the sale price and thus, the normal price under Section 4 of the Central Excises and Salt Act could not be determined. They argued that Rule 5 of the Central Excise (Valuation) Rules, 1975, was applicable since the price was not the sole consideration. The Tribunal upheld this view, leading to the present appeals.

Judgment:

Uniform Price and Security Deposit:

The Court noted that the appellants charged a uniform price from all dealers, irrespective of whether the sale was on credit or cash. The security deposit scheme was introduced to cover the risk of credit sales extended to bulk customers. There was no evidence to show that the receipt of the deposit influenced the sale price. The Court referred to the Central Board of Central Excise and Customs circular dated 27th May 1996, which stated that if there was no nexus between the security deposit and the sale price, the notional interest could not be added to the price.

Relevant Case Law:

The Court referred to several precedents, including:

- Indian Oxygen Ltd. Case: It was held that rental charges for gas cylinders and interest on deposits for the return of gas cylinders could not be included in the assessable value as they were ancillary to the supply of gases.

- Madras Rubber Factory Case: It was observed that the value of excisable goods is determined with reference to the normal price, and interest on goods sold on credit does not form part of the price on which excise duty is payable.

- Metal Box India Ltd. Case: The Court distinguished this case, where large advances were given, and a significant discount was provided, affecting the price. In the present case, the security deposits were relatively small, and no discount was provided, maintaining a uniform price.

Conclusion:

The Court concluded that the excise duty is on the manufacture of goods at the price paid, which was uniform for all dealers. There was no evidence of special consideration or price reduction due to the security deposits. The Additional Collector's conclusion that Rule 5 was not applicable was upheld, as the price charged was the sole consideration.

Final Decision:

The appeals were allowed, the order of the CEGAT was set aside, and the extra demands raised by the respondent were quashed. The appellants were also entitled to costs.