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1991 Supreme(Mad) 302
High Court of Judicature at Madras
THE HONOURABLE MR. JUSTICE KANAKARAJ
Lakshmi Machine Work Limited - Appellant
Versus
Union of India - Respondents
Writ Petition No. 74 of 1991
Decided On : 10 April 1991
The inclusion of notional interest on security deposits/advances made by customers in respect of industries which manufacture tailor-made machinery on specific orders in the assessable value is contrary to Section 4 of the Central Excise Act, 1944, as it is not a consideration flowing directly or indirectly from the buyer to the assessee, and it does not influence the sale price.
Headnote:
CENTRAL EXCISE - VALUATION - NO INTEREST ON SECURITY DEPOSITS - CIRCULAR ISSUED BY CENTRAL BOARD OF EXCISE AND CUSTOMS - VALIDITY - SECTION 37(B) OF THE CENTRAL EXCISE ACT, 1944 - SCOPE - QUASI-JUDICIAL POWERS OF AUTHORITIES - INTERFERENCE BY EXECUTIVE - LEGALITY.
Fact of the Case:
The petitioner, a public limited company, manufactures textile machinery according to the precise specifications and designs of their customers. To avoid contingencies arising out of customers not taking delivery of finished goods, the petitioner takes advance security deposits from customers, typically 10% of the value of orders. The petitioner contends that the widespread practice in the industry is to observe certain norms and conditions, including not paying interest on security deposits/advance received from the buyer. The second respondent issued a circular on 20-10-1986, directing authorities to establish a nexus between the receipt of advance deposited and the depression of the sale price on account of such interest-free deposits. Subsequently, the Department of Revenue issued a memorandum on 13-6-1990, stating that interest accrued on such deposits is includible in the assessable value of the goods for the purpose of the Central Excise Act, and that the earlier circular stands modified to that extent. Consequently, the third respondent issued a show cause notice to the petitioner on 30-10-1990, alleging evasion of Central Excise duty to the tune of Rs. 1, 87, 34, 141.70 for the period October 1985 to September 1989, based on the assumption that interest at the rate of 18% on the advance money should be notionally charged and reflected in the value of the product.
Finding of the Court:
1. The inclusion of notional interest on deposits/advances made by customers in respect of industries which manufacture tailor-made machinery on specific orders in the assessable value is contrary to Section 4 of the Central Excise Act, 1944. 2. The earlier circular dated 20-10-1986, requiring the department to establish a nexus between the additional consideration and the sale price, is valid and should be implemented in all cases. 3. The impugned memorandum dated 13-6-1990 and the Trade Notice dated 26-10-1990, dispensing with the proof of nexus between the security deposits and the ultimate price of the goods, are illegal and invalid. 4. Section 37(B) of the Central Excise Act, 1944, does not enable the second respondent to give a direction that notional interest in respect of advances/deposits is definitely chargeable and includible in the assessable value in all cases, notwithstanding the fact whether the same had an effect on the price, directly or indirectly or did not have such an effect. 5. The impugned circulars and trade notice have gone beyond the limited scope of Section 37(B) and have attempted to bind the quasi-judicial authorities with a general direction that notional interest in all cases of security deposits/advances shall be included in the assessable value of the goods. 6. The impugned government memorandum, Trade Notice, and show cause notice are quashed.
Issues: 1. Whether the inclusion of notional interest on security deposits in the assessable value is contrary to Section 4 of the Central Excise Act, 1944? 2. Whether the earlier circular dated 20-10-1986, requiring the department to establish a nexus between the additional consideration and the sale price, is valid? 3. Whether the impugned memorandum dated 13-6-1990 and the Trade Notice dated 26-10-1990, dispensing with the proof of nexus between the security deposits and the ultimate price of the goods, are illegal and invalid? 4. Whether Section 37(B) of the Central Excise Act, 1944, enables the second respondent to give a direction that notional interest in respect of advances/deposits is definitely chargeable and includible in the assessable value in all cases? 5. Whether the impugned circulars and trade notice have gone beyond the limited scope of Section 37(B) and have attempted to bind the quasi-judicial authorities with a general direction that notional interest in all cases of security deposits/advances shall be included in the assessable value of the goods?
Ratio Decidendi: 1. The inclusion of notional interest on deposits/advances made by customers in respect of industries which manufacture tailor-made machinery on specific orders in the assessable value is contrary to Section 4 of the Central Excise Act, 1944, as it is not a consideration flowing directly or indirectly from the buyer to the assessee, and it does not influence the sale price. 2. The earlier circular dated 20-10-1986, requiring the department to establish a nexus between the additional consideration and the sale price, is valid and should be implemented in all cases, as it is in conformity with Section 4 of the Act and Rule 5 of the Valuation Rules. 3. The impugned memorandum dated 13-6-1990 and the Trade Notice dated 26-10-1990, dispensing with the proof of nexus between the security deposits and the ultimate price of the goods, are illegal and invalid, as they are contrary to Section 4(a) of the Act read with Rule 5 of the Valuation Rules. 4. Section 37(B) of the Central Excise Act, 1944, does not enable the second respondent to give a direction that notional interest in respect of advances/deposits is definitely chargeable and includible in the assessable value in all cases, notwithstanding the fact whether the same had an effect on the price, directly or indirectly or did not have such an effect, as it would interfere with the quasi-judicial powers of the statutory authorities. 5. The impugned circulars and trade notice have gone beyond the limited scope of Section 37(B) and have attempted to bind the quasi-judicial authorities with a general direction that notional interest in all cases of security deposits/advances shall be included in the assessable value of the goods, which is illegal and invalid.
Final Decision: The Writ Petition is allowed. The Government Memorandum of the first respondent in No. F. No. 6/1/90 CXI dated 13-6-1990, the Trade notice of the third respondent No. 200/90 dated 26-10-1990 and the show cause notice dated 30-10-1990 issued by the third respondent are quashed. Liberty is given to the respondents to issue a fresh show cause notice without reference to the orders quashed about and proceed in accordance with law.
The petitioner is a public limited company at Coimbatore. They have their factories in the Coimbatore District and they manufacture textile machineries. The machineries are manufactured according to precise specification and designs of their customers. In other words, the machineries are manufactured to suit the individual customer's need and requirements. If a particular customer does not take delivery of the finished goods, the petitioners will be prejudiced and they will have considerable difficulty in disposing of such machines. With a view to avoid such contingencies, it is stated that the petitioners take advance security deposits from the customers. Normally, the amount of security deposited is 10% of the value of orders. It is also contended by the petitioner that the widespread practice in the industry manufacturing tailor-made machineries to observe certain norms and conditions. They are as follows :-
(A) For the buyer not to pay interest
(i) on the retention money on the part of the buyer for proper performance of the goods;
(ii) In case of delay occasioned by postponement or order execution pending decision on further subsidiary specifications or due to subsequent changes/modifications required by the buyer;
(iii) In case of delay by the buyer in taking delivery of the ready goods;
(iv) In case of delay by the buyer in making payments of balance moneys for goods sold.
(B) For manufacturer-Sellers not to pay interest on security deposit/advance received from the Buyer.
The second respondent had issued a circular on 20-10-1986 giving certain directions to the authorities to the effect that addition of notional interest on such advance will arise only in those cases where the authorities are in a position to establish a nexus between the receipt of the advance deposited and the depression of the sale price on account of such interest free deposits. By memorandum dated 13-6-1990, the Department of Revenue in the Government of India and Ministry of Finance had issued certain instructions on the basis of the decision of the second respondent to the effect that interest accrued on such deposits are includible in the assessable value of the goods for the purpose of the Central Excise Act and that there is no need to establish separately the nexus between the deposits and the price. It was also made clear that the earlier second respondent's circular dated 20-10-1986 will stand modified to the said extent. Consequently Trade Notice No. 200 of 1990 was issued on 26-10-1990 by the Office of the Collector of Central Excise, following the said instructions, the third respondent has issued a show cause notice to the petitioner on 30-10-1990. The show cause notice proceeds on the basis that for the period from October 1985 to September 1989, the petitioners have evaded Central Excise duty to the tune of Rs. 1, 87, 34, 141.70. The said amount is said to have been arrived at on scrutiny of the account for the relevant period. It was found that advance money had been collected by the petitioners from their customers. The show cause notice proceeds on the assumption that there has been tie up, that there was indirect consideration created in favour of the petitioners, whereby he got interest-free working capital and that the same had not been reflected in the value of the goods manufactured. The show cause notice proceeds to assume that interest at the rate of 18% on the advance money should be notionally charged and that the same amount should have been reflected in the value of the product. Inasmuch as the said notional interest has been suppressed, action was taken under Rule 9(2) of the Central Excise Rules read with Section 4 of the Salt Act, hereinafter called the Act.
2.It is under these circumstances the petitioner has approached this Honourable Court for the issue ofCertiorari-fied-mandamusto quash the general instruction issued on 13-6-1990 by the first respondent, the T.N. No. 200/90 issued by the third respondent and
