HERO HONDA MOTORS LTD. Vs. COMMISSIONER OF CENTRAL EXCISE
LAWS(CE)-2015-5-19
CUSTOMS EXCISE AND GOLD(CONTROL) APPELLATE TRIBUNAL
Decided on May 18,2015

HERO HONDA MOTORS LTD. Appellant
VERSUS
COMMISSIONER OF CENTRAL EXCISE Respondents




JUDGEMENT

RAKESH KUMAR,J - (1.)THE facts leading to filing of these appeals are, in brief, as under:
1.1 The appellants are manufacturers of two -wheelers and their parts chargeable to Central Excise Duty under Chapter 87 of the Central Excise Tariff. The period of dispute in this case is from June, 2002 to March, 2005. During this period, the appellant were selling the two -wheelers and their spare parts to their dealers as per their all -India price lists subject to the local taxes. In terms of Article V of the appellant's agreement with their dealers, "the dealers shall vigorously promote, develop and maintain sales of products and parts to the satisfaction of and in the manner required of Hero Honda and the dealer shall place firm orders for such products and parts as per the sales targets and will give estimates for forward requirements for such period and in such form as may be required on Hero Honda from time to time". In terms of Article XVI in the dealers' agreement, if Hero Honda, at any time, objects to the dealers' advertisement and/or promotion, the dealer shall immediately withdraw and refrain from repeating such publicity and in particular, the dealer shall not make any unaccounted or unauthorized representation regarding the specification, performance, selling price or availability of the product of parts. In terms of the termination clause (Article XXI) in the dealers' agreement, if the dealer fails to perform any obligation under this agreement, in the opinion of Hero Honda or does not rectify such defaults, if capable of remedy, within 30 days, following the day of notice pursuant to Article XXII hereafter, Hero Honda may forthwith terminate the agreement by giving a written notice to this effect.

1.2 Though the dealers incur expenses for advertisement of the appellant's product on their own, in the present case, there is no dispute about includability of such expenses incurred by the dealers in the assessable value. In the present case, the dispute is in respect of those dealers, who, for various reasons, cannot arrange the advertisements and request the appellant to organize the advertisement of the products in their area and in response to the dealers' request, the appellant organize the advertisement of the products in the area of those dealers. In such cases, about 40% of the expenses incurred by the appellant on advertisement are recovered by them from the dealers and the remaining expenses are borne by the appellant. The point of dispute is as to whether the advertisement expenses initially incurred by the appellant and which were recovered from the dealers would be includible in the assessable value or not. The department taking the view that such advertisement expenses incurred by the appellant would be includible in the assessable value to the extent, the same were recovered from the dealers, issued a show cause notice dated 9 -7 -2007 for demand of duty amounting to Rs. 4,08,49,037/ - for the period from 1 -6 -2002 to 31 -3 -2005 from them along with interest thereon under Section 11AB and also for imposition of penalty.

1.3 The above show cause notice was adjudicated by the Commissioner of Central Excise Delhi -III vide order -in -original dated 29 -8 -2008 by which the Commissioner holding that the advertisement expenses incurred by the appellant in areas of certain dealers would be includible in the assessable value to the extent, the same were recovered from the dealer, confirmed the abovementioned duty demand along with interest under proviso to Section 11A(1) of Central Excise Act, 1944 along with interest thereon under Section 11AB and imposed penalty of equal amount on them under section 11AC.

1.4 Against this order of the Commissioner, this appeal has been filed.

Heard both the sides.

Shri S. Ganesh, Senior Advocate and Shri P.K. Ram, Advocate, ld. Counsels for the appellant, pleaded that in this case, the appellant were selling the two -wheelers and spare parts to their dealers all over India at a uniform price as per all -India price lists and only local taxes were extra, that in the appellant's dealership agreement with various dealers, there was no specific clause making it obligatory for the dealers to incur certain specified quantum of expenses on the advertisements of the appellant's products; that though there was a clause requiring the dealers to vigorously promote, develop and maintain sales of the products and parts of the appellant to their satisfaction and in the manner required by the appellant, and there was also a clause providing for termination of the dealership agreement if the dealer fails to perform any obligation under the agreement, these clauses in the dealership agreement cannot be treated as the clauses which put a legal obligation on the dealers to incur certain minimum quantum of expenses on the advertisement in their respective area for promoting the appellant's products and such clause had not given any enforceable legal right to the appellant to insist on incurring of any specified quantum of advertisement expenses by the dealers; that the Tribunal in the case of Honda Sales Power Products Limited v. CCE Meerut -III reported in : 2015 (317) E.L.T. 510 (Tri. -Del.) has held that advertisement expenses incurred by the dealers would be includible in the assessable value only when there is an enforceable legal right of the manufacturer, against the dealers, to insist on incurring certain amount of expenses on the advertisement and publicity of the products and just a clause in the agreement requiring the dealers to make efforts for promoting sales cannot be treated as a legal obligation in this regard; that ratio of this judgment of the Tribunal is squarely applicable to the facts of this case; that in the appellant's own case for the period prior to 1 -7 -2000, where an identical issue was involved, the Tribunal vide judgment reported in : 1998 (100) E.L.T. 468 (Tri -B) held that while advertisement do contribute to or enhance the marketability of a manufacturers' product and where the dealer is not in picture and the advertisement campaign is conducted by the manufacturer, that can certainly be regarded as contribution wholly or exclusively to the marketability of the product, but where there is a dealer in the picture and the advertisement helps the dealer also in promoting his sales apart from helping the product of the manufacturer, the matter has to be looked at from a different angle and in such cases, the advertisement expenses incurred by the manufacturer would not be includible in the assessable value to the extent the same were recovered from the dealer; that this judgment of the Tribunal has been affirmed by the Apex Court by dismissal of the civil appeal vide order reported in, 1999 (105) E.L.T. 126 (S.C.); that as is clear from the copies of the advertisements placed on record, each advertisement arranged by the appellant in the area of some particular dealer also mentions the dealers' name and address; that these advertisements have, therefore, benefited the dealers also apart from enhancing the marketability of the appellant's product; that in view of this, the amount recovered by the appellant from the dealers cannot be said to be for the reason of or in connection with sale and hence, in terms of the provisions of Section 4(3)(d) regarding definition of transaction value, the amount recovered by the appellant's dealers would not be includible in the assessable value.

2.1 Shri Ganesh, also pleaded that the duty demand, besides being not sustainable on merits, is also time -barred, as the show cause notice for demand of duty from the period from 1 -6 -2002 to 31 -3 -2005 had been issued on 9 -7 -2007 by invoking proviso to Section 11A(1) and Section 11A(1) proviso would be invokable only if there is evidence of fraud, wilful mis -statement, suppression of facts, deliberate contravention of the provisions of Central Excise Act, 1944 or of the rules made therein with intent to evade the payment of duty, which is not there in the present case inasmuch as, an identical issue had arisen in the matter decided by the Tribunal vide judgment dated 6 -1 -1997 reported in : 1998 (100) E.L.T. 468 (Tri -B) and the Tribunal's judgment was in the appellant's favour and besides this, in the course of audit of the records of the appellant, this very issue had been raised and the appellant had been asked to give details of the amount recovered by them from the dealers in the cases where the advertisement expenses in respect of the advertisement of the products in the area of certain dealers had been incurred by the appellant and hence, in the circumstances of the case, the appellant cannot be accused of fraud, wilful mis -statement, suppression of facts, etc. He, therefore, pleaded that in any case, the duty demand is time -barred. Accordingly, it is pleaded that the impugned order is not sustainable.

(2.)SHRI M.S. Negi, ld. DR, defended the impugned order by reiterating the findings of the Commissioner and pleaded that in terms of a clause in every dealership agreement, every dealer is under obligation to vigorously promote, develop and maintain sales of the products and parts to the satisfaction of the appellant and in the manner required by him and in terms of another clause in the dealership agreements if a dealer fails to perform any obligation under this agreement, the agreement can be cancelled; and this shows that every dealer was under legal obligation to incur certain expenses on advertisement of the appellant's products and hence, to the extent, the advertisement expenses were recovered by the appellant from the dealers, the same would be includible in the assessable value. He also cited the judgment of the Tribunal in the case of CCE, Baroda v. Besta Cosmetics Ltd. reported in, 2005 (183) E.L.T. 122 (S.C.) and CCE, Surat v. Surat Textiles Mills Limited reported in : 2004 (167) E.L.T. 379 (S.C.) and CCE, Pune v. Bajaj Tempo reported in : 2005 (180) E.L.T. 289 (S.C).
3.1 He pleaded that when in terms of agreement between an assessee and his dealers, the assessee has an enforceable legal right to insist on incurring of certain expenses by the dealers on advertisement of the assessee's products, the advertisement expenses incurred by the dealers would be includible in the assessable value. He pleaded that in the present case, the clause in the agreement requiring dealers to make vigorous efforts to promote the sales of the products coupled with the clause that on failure of the dealers to perform any obligation under this agreement, the dealership can be cancelled, clearly shows that the appellant had an enforceable legal right in respect of the dealers to insist on incurring of certain expenses on advertisement of the Appellant's products. He, therefore, pleaded that, to the extent, the advertisement expenses incurred by the appellant in certain areas which were recovered from the dealers, the same would be includible in the assessable value.

3.2 Shri Negi also cited the Board's Circular No. , dated 1 -7 -2002, the para 6 of which states that even where the dealings between an assessee and the dealer are on principal to principal basis but there is an agreement either written or oral that that the buyer/dealer would incur certain expenses for advertisement of the goods of the assessee, the cost of such advertisement and publicity would be added to the price of the goods to determine the assessable value, as in such cases, the price would not be the sole consideration for the sale and Rule 6 of the Central Excise Valuation Rules, would be applicable. He pleaded that this para also clarified that judgment delivered on this issue in respect of the earlier Section 4 or the Rules made thereunder would not apply w.e.f. 1 -7 -2000.

(3.)WE have considered the submissions from both the sides and perused the records.
The appellant sell the two -wheelers and their spare parts to their dealers all over India under an all -India price list. In terms of the appellant's agreement with their dealers, every dealer shall vigorously promote, develop and maintain sales of the products and parts to the satisfaction of and in the manner required by the appellant and the dealer shall place firm orders for such products and parts as per the sales targets and will give estimates for the forward requirements for such period and in such form as may be required by the appellant from time to time. Each dealership agreement also has clause that if a dealer fails to perform any obligation under this agreement, his agreement can be cancelled by the appellant. There is no dispute that the dealers on their own organized advertisements of the appellant's product in their respective area by incurring their own expenses. The department is not insisted on including these expenses incurred by the dealers in the assessable value. The dispute is only in those cases, where the dealers, for certain reasons, cannot organize the advertisement of the appellant's products in their respective areas and in this regard, they approach the appellant and the appellant, in view of the dealers' request, organize the advertisement in the areas of those dealers by incurring certain expenses and since, the advertisements also mention that dealers' name and address and promote the dealers' sales also, a part of the expenses, up to about 40 per cent, are recovered from those dealers by the appellant. The point of dispute is as to whether in such cases, the advertisement expenses incurred by the appellant would be includible in the assessable value to the extent the same have been recovered from the dealers. In our view, when it is not disputed that the advertisement of the appellant's products in the areas of the respective dealers also mention the dealers' name and address and those advertisements have also benefited the dealers, the amount being recovered by the appellant from the dealers cannot be said to be for the reason of or in connection with the sale of goods, as this amount would be for the advertisement and publicity effort of the appellant which has benefited the dealer. Moreover, an identical issue was involved in the appellant's own case in the previous period declared vide judgment reported in : 1998 (100) E.L.T. 468 (Tribunal), in the para 3 of the judgment of which the Tribunal has held that the advertisement expenses incurred by the appellant would not be includible in the assessable value to the extent, the same were recovered from the dealers, as when the dealer is not in the picture and the advertisement campaign is conducted by the manufacturer, that can certainly be regarded as contribution wholly or exclusively to the marketability of the product, but where there is a dealer in the picture and the advertisement helps the dealer also, apart from helping the product of the manufacturer, the matter has to be looked at from slightly different angle. In this regard, para 2 and 3 of the judgment are reproduced below:

2. It appears appellant was conducting advertisement campaign in newspapers for the Hero Honda Motor Cycles and by an arrangement with the wholesale dealers printing the names and addresses of wholesale dealers also and collecting proportionate charges form the wholesale dealers. The same position obtained in regard to posters, cinema slides and other media of advertisement. Appellant was receiving security deposits from the wholesale dealers and the contribution of the wholesale dealers for the advertisement campaign was being adjusted. According to the show cause Rs. 12,50,000/ - or so was thus collected from the wholesale dealers. Both the lower authorities held that the advertisement campaign contributed to the marketability of the product and therefore, the charges collected were to be added to the assessable value.

3. Advertisement no doubt contributes or enhances the marketability of the product. Where the dealer is not in the picture and the advertisement campaign is conducted by the manufacturer, that can certainly be regarded as contribution wholly or exclusively to the marketability of the product but where there is a dealer in the picture and the advertisement helps the dealer apart from helping the product of the manufacturer the matter has to be looked at from a slightly different angle. Our attention has been invited to a decision of the Tribunal in Racold Appliances v. COCE : [1994 (69) E.L.T. 312]. Under an agreement between the manufacturer and the dealers, the dealers were to spend upto 2% of the total purchases for advertisement and 1.5% was to be returned by the dealers to manufacturer and the dealers were to bear 0.5%. The department took the stand that this amount of 0.5% should be added to the assessable value. The Tribunal did not accept this view as correct. The advertisement through newspaper media, cinema slides and the like was basically for the manufacturer and the finished product. The names of the dealers were to be furnished in these materials. This would certainly go to enhance the goodwill of the dealers. It is not unknown for dealers to advertise their business activities so as to attract more customers and to enhance their business. When they do so and in the absence of anything else on record, it cannot be said that the cost of such advertisement which also in a way enhances the marketability of the product should be added to the assessable value.

5.1 The above judgment of the Tribunal has been affirmed by the Apex Court by dismissal of the civil appeal vide judgment reported in, 1999 (105) E.L.T. A126 (S.C.). In our view, the ratio of the above judgment of the Tribunal is squarely applicable to the facts of this case. Though the above judgment of the Tribunal is in respect of the period prior to 1 -7 -2000 and w.e.f. 1 -7 -2000, the Section 4 has been substituted by a new section based on transaction value concept, as discussed above, in our view when the advertisements organized by the appellant which have also benefited the dealers, the amount recovered by the appellant from the dealer would be for the advertisement effort of the Appellant, which has promoted the sales of the dealers and the same cannot be said to be the amount received by the Appellant for the reason of or in connection with the sale of the goods.

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