2006 (2) TMI 168 - SC - Central Excise

Whether the commission paid by M/s. DCM Textiles, the respondent herein, to its dealers was deductible as a trade discount for the purposes of computing assessable value of cotton yarn? Held that - the agreement entered into between the respondent and dealers was on principal to principal basis and it was an absolute sale made by the respondent in favour of the dealers. The dealer is required to make full payment of the cotton yarn purchased by him forthwith and he is given half per cent cash discount if the payment is made within one day, 0.25 per cent if the payment is made within four days and if the payment is not made within seven days then from 8th day onwards the dealer becomes liable to pay interest on the delayed payment. This indicates that there was an absolute sale made by the respondent to its dealers and the sale was on principal to principal basis . Original authority as well as Commissioner (Appeals) had stressed upon the point that since the trade discount was not paid to the dealer at the time of the preparation of the invoice and was to be paid later based on the net sale value of the sale effected ( per cent of the net sale value); that the agreement between the parties amounting to be an agency agreement and not the dealership agreement and the sale was not from principal to principal basis. We agree with the Tribunal that this view is not sustainable of the facts of the case. Appeal dismissed.

Summary

Issues:
1. Deductibility of commission paid to dealers as a trade discount for computing assessable value of cotton yarn.

Analysis:
The case involves a statutory appeal filed by the Revenue challenging the Tribunal's decision allowing the deduction of commission paid by the respondent to its dealers as a trade discount for calculating the assessable value of cotton yarn. The Revenue contended that the appointed dealers were selling agents, not dealers, and thus the commission was not deductible. The Assistant Commissioner upheld the demand, relying on a previous judgment, while the Commissioner (Appeals) dismissed the appeal stating the commission was an incentive, not a trade discount.

The Tribunal, however, allowed the appeal, emphasizing the principal-to-principal basis of the sale between the respondent and dealers. The agreement between the parties supported this, with clauses outlining the dealer's responsibility for payment, discounts, and interest on delayed payments. The Tribunal concluded that the commission was indeed a trade discount and deductible for calculating the assessable value.

In its analysis, the Supreme Court referred to previous judgments defining trade discounts as deductions allowed in the trade, known prior to goods' removal, and not disallowed for not being payable at the time of each invoice. The Court highlighted the importance of agreements establishing trade discounts and the nature of the sale being from principal to principal for such deductions to be valid.

The Court also cited a case involving commission paid to dealers, where the label given by parties did not determine whether it was a trade discount or commission. The nature of the agreement and the relationship between the parties as principal to principal were crucial factors in determining the deductibility of the amount paid. The Court distinguished this case from the one relied upon by the Revenue, where an agency relationship existed, unlike the principal-to-principal basis in the present case.

Ultimately, the Court found no merit in the Revenue's appeal, affirming the Tribunal's decision to allow the deduction of commission as a trade discount. The judgment emphasized the importance of the nature of the sale relationship and the terms of the agreement in determining the deductibility of such payments for assessing the value of goods.