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PETITIONER: COLLECTOR OF CENTRAL EXCISE, DELHI

       Vs.

RESPONDENT: KELVINATOR OF INDIA LTD.

DATE OF JUDGMENT20/04/1988

BENCH: MUKHARJI, SABYASACHI (J) BENCH: MUKHARJI, SABYASACHI (J) RANGNATHAN, S.

CITATION:  1988 SCR  (3) 656        1988 SCC  (3)  12  JT 1988 (2)   263        1988 SCALE  (1)1047

ACT:      Central  Excises   and  Salt   Act,  1944:  Section  4- Refrigerator-After-sale service  facility-optional four-year warranty  service   contract  on  payment-Such  charges  not includible in ’assessable value’ of refrigerator.

HEADNOTE:      The Respondents,  manufacturers of  refrigerators, give one year  warranty for  the complete  refrigerator  and  all parts thereof.  During this  warranty period,  they  provide free repair  and replacement  for defects  in  material  and workmanship under  normal use  and service. They include the cost of  this one year warranty in the sale price as well as assessable value of the refrigerator.      After  the  free  warranty  period  of  one  year,  the respondents offer  a four year service contract only for the sealed system  or parts thereof. This contract is on payment which may  vary from Rs.300 and Rs.400 per refrigerator. The dealers enter  into contract  with the  Respondents, and the consumer in  turn enters  into contract with the dealer from whom he  buys his  refrigerator. The  service is rendered by the Respondents  and the  entire contract  money accrues  to them. Though  the contract is optional, 91% of Customers did enter into this contract, and only 9% did not.      The Assistant Collector held that the four year service charge is  includible in  the value  of the refrigerator for the purpose  of Central  Excise dub  under section  4 of the Act. The  Appellate Collector  upheld the  said decision. On appeal the  Tribunal held  that the  said  optional  service charge was not includible in the assessable value.      These appeals  by Revenue  under Section  35L(b) of the Act are against the Tribunal’s decision.      Dismissing the appeals, this Court, ^      HELD: 1.  The contract  for four years warranty service was optional  which was  entered  into  later  on.  This  is clearly after-sale 657 facility and cannot be includible in the assessable value of the refrigerator. [661G]      1.2 The Tribunal was right in the view it took that the optional service  charge after  the expiry of the first year

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warranty period  was not includible in the assessable value. It rightly  observed that  if any  consumer did  not like to have the  service, there  was no  compulsion on him to go in for it and once the conclusion is reached that post-warranty service activity could not be subjected to excise, it ceases to be  material that  91% of the customers had opted for the service  contract.  The  Tribunal  also  observed  that  the respondents offered  the four  year  service  by  a  stamped endorsement on  their sale  invoice itself,  but it  did not mean that  the subsequent  exercise of  option by  the buyer related back  to the  date of purchase itself and that there was no  evidence to conclude that the service contract was a facade to split the true value of refrigerators into taxable and non-taxable components. [658H;661D-F]      Union of  India and Others etc. v. Bombay Tyre Interna- tional Ltd.,  [1984] 1  SCR 347  and Assistant  Collector of Central Excise  and others v. Madras Rubber Factory Ltd. and others, [1987] 27 E.L.T. 553, referred to.

JUDGMENT:      CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 727 and 962-74 of 1988      Appeal Under  Section 35L(b)  of the Central Excise and Salt Act, 1944 from the order dated 30.11.87 and 20.11.87 of the Customs  Excise and  Gold (Control)  Appellate Tribunal, New Delhi in Appeal No. 2856, 1856, 1920- 1931/87-A in order Nos. 775, 749 to 761/87.      Kuldeep  Singh,   Additional  Solicitor  General.  A.K. Ganguli, Mrs. Sushma Suri and K. Swami for the Appellant.      F.S. Nariman,  Ravinder Narain,  A.K.  Verma  and  D.N. Misra for the Respondents.      The Judgment of the Court was delivered by      SABYASACHI  MUKHARJI,  J.  These  appeals  arise  under section 35L(b)  of the  Central Excises  &  Salt  Act,  1944 (hereinafter called  ’the Act’). The respondents herein M/s. Kelvinator  of  India  Ltd.  in  these  appeals  manufacture refrigerators.  They   market  these   through  their   four exclusive wholesale dealers, namely, M/s. Gem, 658 M/s. Leonard,  M/s. Expo  Machinery and  M/s. Tropicana. The respondents  gave   one  year   warranty  for  the  complete refrigerator and  all parts  thereof (except  the light bulb and the  crisper glass).  During this  warranty period, they provide free  repair and replacement for defects in material and workmanship  under normal  use and  service.  This  free service is available only within the municipal limits of the area served  by an  office of  the wholesale  dealer of  the authorised dealer  from whom  the refrigerator is originally purchased. The respondents include the cost of this one year warranty in  the sale  price as  well as assessable value of the refrigerator. After the free warranty period of one year is over,  the respondents offer a four year service contract only for  the sealed  system or parts thereof. This contract is not  free. It  is on payment basis. Charges for it during the material  period (10.4.81  to 30.6.86), in Civil Appeals Nos. 962-75  of 1988,  varied from  Rs. 300  to  Rs.450  per refrigerator. It  is a  fact that  these four  dealers enter into this  contract with the respondents. The final consumer in turn  enters into  the service  contract with  the dealer from whom  he buys his refrigerator. The service is rendered by the  respondents and the entire contract money accrues to them. It  is on evidence that during the material period the four dealers  referred to  hereinbefore entered into service

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contract in  respect of  a total  of 91% of their purchases. The remaining  9% did  not enter into such contract. This is optional.      The Assistant Collector by his order dated 18th August, 1986 held that four year service charge is includible in the value of  the Refrigerator  for the purpose of assessment of central  excise  duty  under  section  4  of  the  Act.  The Assistant Collector  further held  that for  all intents and purposes  this  charge  was  not  optional  as  it  was  not exercised only  in respect of 9% of the sales. The Assistant Collector relied  on the  decision of this Court in Union of India and others etc. etc. v. Bombay Tyre International Ltd. etc. etc.,  [1984] 1 S.C.R. 347 where it was held that after sale  service   charges  could  not  be  deducted  from  the assessable value.  The  Assistant  Collector  confirmed  the demands totalling Rs.17,40,68,326.32 against the respondents (in Civil  Appeals No.  962-74 of  1988) and Rs.7,07,535 (in Civil Appeal  No. 727 of 1988). The respondents herein filed an appeal  before the  Appellate  Collector.  The  Appellate Collector upheld  the decision  of the  Assistant Collector. There was  an appeal  to the  Tribunal and the Tribunal held that the optional service charge during the second and third year after  the expiry of the first year warranty period was not includible in the assessable value. The Tribunal allowed the appeals of the assessee with consequential relief. Hence these appeals come to this Court. 659      The point involved in these appeals is whether the four year service  contract charge  is includible in the value of the refrigerators  for the  purpose of assessment of Central Excise Duty  under section  4 of  the Act. It was found as a fact by  the Tribunal that after the free warranty period of one year  is over,  the respondent  herein offer a four year service  contract  only  for  the  sealed  system  or  parts thereof. This  contract is not free. It is on payment basis. The contract  is not compulsory and the four dealers entered into service  contract in  respect of 91% of their purchase. They did  not make  the contract for the remaining 9%. It is also not necessary that the contract should be made right at the  time   of  purchase   of  the   refrigerator  from  the respondents. In  fact it  was found as a fact that some time contract was  made only  in less  than 10% of the sales. For the remaining  81% of  the purchases,  the dealers took time from one  week to over six months from the date of purchase. It was  explained by the respondents that depending upon the demand pattern  in a  particular area,  the dealer purchased about 10% of the refrigerators straightaway with the service contract; for  the remaining  purchases,  he  exercised  the option later,  as and  when the  dealer anticipated  further demand from his customers.      The Tribunal on an analysis of the evidence came to the conclusion that  it  was  after  sale  service  and  it  was optional.  Therefore,   such  service   charges   were   not includible  in  the  assessable  value  of  the  respondents herein. The  principle under  which these will be includible has been  laid down  in Union of India and others. v. Bombay Tyre International  Ltd. (supra),  where Pathak,  J., as the learned Chief  Justice then  was, inter  alia,  observed  as follow:           "...expenses incurred  by the  assessee  upto  the           date of  delivery on  account of  storage charges,           outward handling  charges, interest on inventories           (stocks  carried   by   the   manufacturer   after           clearance),  charges   for  other  services  after           delivery to the buyer, namely, after-sales service

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         and marketing  and selling  organisation  expenses           including   advertisement   expenses   cannot   be           deducted. It  will  be  noted  that  advertisement           expenses, marketing  and selling  or  organisation           expenses  and   after-sales  service  promote  the           marketability of  the article  and enter  into its           value in  the trade.  Where the sale in the course           of wholesale  trade is  effected by  the  assessee           through its  sales  organisation  at  a  place  or           places outside  the  factory  gate,  the  expenses           incurred by the assessee upto the date of delivery           under the  aforesaid heads  cannot,  on  the  same           grounds, be deducted. 660           But the  assessee will  be entitled to a deduction           on account  A of the cost of transportation of the           excisable article  from the  factory gate  to  the           place or  places where  it is  sold. The  cost  of           transportation will  include the cost of insurance           on the  freight for  transportation of  the  goods           from the  factory gate  to the  place or places of           delivery. "      This aspect  was  later  clarified  by  this  Court  in Assistant Collector  of Central  Excise and others v. Madras Rubber Factory  Ltd. and others, [1987] 27 E.L.T. 553, where Bhagwati C.J. at page 562 of the report observed as follows.           "Interest on  finished goods  from the date of the           stocks are  cleared till  the date of the sale was           disallowed by  the Assistant  Collector, Kottayam.           This  head   has  again   been   urged   for   our           consideration   as    a   proper   deduction   for           determination of  the assessable  value. As quoted           in our  judgment in  Union of  India and  Ors.  v.           Bombay Tyres  International Ltd.  (supra), we have           held that  expenses incurred on account of several           factors which  have contributed  to its value upto           the date  of sale  which apparently  would be  the           date of delivery at the factory gate are liable to           be included.  The interest  on the  finished goods           until the  goods are  sold and  delivered  at  the           factory   gate    would   therefore   necessarily,           according  to   the  judgment   in  Bombay   Tyres           International case (supra) have to be included but           interest  on  finished  goods  from  the  date  of           delivery at  the factory  gate upto  the  date  of           delivery from  the sales depot would be an expense           incurred  after  the  date  of  removal  from  the           factory gate  and it would therefore, according to           the judgment  in Bombay  Tyres International  case           (supra) not  be liable  to be  included  since  it           would add to the value of the goods after the date           of  removal   from  the  factory  gate.  We  would           therefore have  to allow  the claim of MRF Ltd. as           above."      It was  mentioned before  us by  the learned Additional Solicitor General that this judgment is under review.      The Tribunal  in its  judgment herein  has observed  as follows:           "We have  given enough  facts in paragraph 2 above           to show that the four year service contract charge           in the present was 661           not compulsory  one. As  to  why  the  appellants’           buyers chose  not to enter into such contract only           for about  9% of  the purchases  and not more is a

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         matter between the manufacturer and his customers.           The percentages  may look  small but the statement           of sales  filed before us for the five year period           (1981-86) shows  that the  number of Refrigerators           in respect  of which  the option was not exercised           was in thousands, ranging from over 18,000 to over           39,000  per   year.  We   find  no  force  in  the           department’s pleading that the service charge, for           all intents and purposes, was a compulsory one. As           to  what  machinery  the  appellants  devised  for           extending this  service is  not material.  If  any           customer did  not like  to have the service, there           was no  compulsion on him to go in for it. That is           the important thing.                Once we  reach the  conclusion that the post-           warranty service  activity could  not be subjected           to excise,  it ceases  to be  material that 91% of           the customers  had opted for the service contract.           The  ordinary  or  normal  price  referred  to  in           section 4(1)(a)  can take  in the  costs upto  the           stage of  factory gate  and not  beyond as held by           the Hon’ble Supreme Court."      The Tribunal  also observed that the respondents herein offered the  four years  service by a stamped endorsement on their  sale  invoice  itself,  it  did  not  mean  that  the subsequent exercise  of option  by the buyer related back to the date  of purchase  itself. It  was also found that there was no  evidence to conclude that the service contract was a facade to split the true value of refrigerators into taxable and nontaxable components.      In that  view of the matter, the Tribunal set aside the order of  the Collector  of  Central  Excise  (Appeals)  and allowed the  appeals. The  contract for  four years warranty service was  optional, which was entered into later on. This is clearly  after-sale facility  and cannot be includible in the assessable value of the refrigerators.      In the  aforesaid view  of the matter, the Tribunal was right in  the view  it took.  These  appeals  fail  and  are accordingly dismissed. G.N.                               Appeals dismissed. 662