In the recent Customs, Excise and Service Tax Appellate Tribunal (CESTAT) stay order, Maruti Suzuki has been ordered to pay a pre-deposit of R150 crore against the excise duty demand of R240.57 crore. The allegation by the revenue authorities was that the promotional discounts offered by Maruti dealers to the end-customers should be added back to the transaction value by the company and excise duty be paid.
The arguments extended by the revenue authorities were that these promotional discounts are factored in the dealer margin. The company supports the dealer by compensating a portion of these discounts offered to the end-customers. These expenses are in the nature of advertising and selling expenses per se, and the company has used its dealership arrangement to pass on these promotional discounts to the end-customer.
Hence, these promotional expenses, if not incurred by the dealer, ought to have been spent by the company. Hence, these promotional discounts should be added back to the transaction value.
The Supreme Court clearly laid down the principle of allowability of discount in the Union of India and others vs Bombay Tyre International Ltd, and the Union of India vs Madras Rubber Factory Ltd and Others. It held that for the purpose of valuation, discounts by whatever name called, would be deductible from the assessable value. The circular no 354/2000-TRU also stated that “if in any transaction, a discount is allowed on declared price of any goods and actually passed on to the buyer of the goods as per common practice, the question of including the amount of discount in the transaction value does not arise. The only condition is that the discounts offered should have been known at the time of removal of goods from the factory gate. In the auto sector, these are called wholesale discounts and passed on, in the invoice itself.”
However, any discount which is passed on by the dealer to the end-customer out of his margin is called retail discount. If these retail discounts are met by the dealer out of his dealer margin or partly reimbursed by the company, then would these amount to “an additional consideration in money value flowing back from buyer to seller.” We can agree to this logic, if these expenses are paid as additional consideration by the dealer to the company. Alternatively, if the company claims these as part of discount while discharging its excise duty liability on the transaction value, then it can be a legitimate demand.
Further, the revenue authorities contend that the transaction value states that “any amount that the buyer is liable to pay to, or on behalf of, the assessee, by reason of, or in connection with the sale, whether payable at the time of the sale or at any other time, including, but not limited to, any amount charged for, or to make provision for, advertising or publicity, marketing and selling organisation expenses, storage, outward handling, servicing, warranty, commission or any other matter…”
This is interpreted to mean that any expenses incurred by the dealer out of his dealer margin shall be deemed to have been spent on behalf of the company and form part of the additional consideration.
It is totally irrelevant to argue that the discounts given by the dealer are with the knowledge of the company or will the dealer incur these discounts out of his margin without having any underlying arrangement with the company. These look like notional thoughts and not an established fact in money terms, to have flown back to the company, either directly or indirectly.
The company has paid excise duties on a higher price only factoring the wholesale discounts and not claimed on these retail discounts offered to the end-customers. Then where is the revenue leakage and what is the allegation of the revenue authorities.
Are we trying to interpret badly the Section 4 of the Central Excise Act to define “transaction value” to include expenses of the seller as additional consideration? Are we coining a new levy called the Expenditure Excise Duty (EED)?
The logic and reasoning of the order of CESTAT also flies in the face of another Supreme Court judgment in the Philips case as reported in 1997 (91) ELT 540, wherein the Court ruled that “it seems to us clear that the advertisement which the dealer was required to make at its own cost benefited in equal degree the appellant and the dealer and that for this reason the cost of such advertisement was borne half and half by the appellant and the dealer. Making a deduction out of the trade discount on this account was, therefore, uncalled for.” Every discount offered by the manufacturer to the dealer is necessarily towards the better marketing of the product and that is no reason to hold that the discount is not an admissible deduction for excise purposes. The faulty prima facie reasoning of CESTAT would lead to a situation where the cars are assessed to excise duty on an MRP basis, even though the cars are not notified for MRP-based assessment under Section 4A of the Central Excise Act.
The settled legal maxim is that what cannot be done directly cannot be allowed to be done indirectly. Offering of discounts to the dealers and simultaneously requiring the dealers to incur certain obligations either towards services, marketing and publicity are not a taboo either legally or commercially.
Now, since this is only a stay order of CESTAT, this has no persuasive value when the main appeal is heard on merits. Let us hope that, going forward, such imaginations do not enter the minds of appellate authorities.
By MS Vasan
The author is an indirect tax expert
