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`Damage discount' not deductible from assessable value: SC

R.N. Sahai

IN Commissioner of Central Excise, New Delhi vs Vikram Detergent Ltd [Civil Appeal No. 2579 of 2000 ETC. decided on January 16, 2001] a three-Judge Bench of the Supreme Court comprising Mr Justice S.P. Bharucha, Mr Justice Doraiswamy Raju and Ms Justice Ruma Pal partly allowed the appeal of the Revenue holding that the ``damage discount'' could not be deducted from the excisable value of goods as manufactured at the time of clearance of goods. However, they agreed that the bank charges being in the natu re of post-clearing expenses are deductible while calculating the assessable value.

This matter involved two appeals. In one appeal, Vikram Detergent Ltd is engaged in the packing of detergent powder received by it from Hindustan Lever Ltd (HLL). After the goods are packed, they are cleared from the factory by HLL and sold through its c learing and forwarding agents from its depots all over the country to wholesale buyers, who are known as redistribution stockists. The Department calculated the excise duty payable on the detergent powder on the price charged by HLL from the redistributi on stockists.

In the other appeal IPF Vikram India Ltd produces detergent under agreement with Indexport Ltd (IEL) and Stepan Chemicals Ltd (SCL) under the brand name `Wheel'. The producer despatches the goods manufactured by it to the destinations specified by IEL/SC L. According to the producer, IEL and SEL send the goods to clearing and forwarding agents' depots from where the goods are sold and delivered to redistribution stockists. The price lists filed by the producer with the excise authorities are according to the advice of IEL/SCL and reflect the price charged by them for the goods in the wholesale market.

Both the respondents inter alia claimed deduction on account of damage discount and bank charges on outstation cheques from the price charged in arriving at the assessable value of the goods for the purpose of excise duty. In the first appeal, the Assist ant Commissioner disallowed the respondent's claim but the Commissioner allowed the respondent's appeal. The Tribunal affirmed the commissioner's decision.

In the second appeal, both the Assistant Commissioner and the Commissioner disallowed the respondent's claim for discount of damages goods and bank charges relying on the decision of the Supreme Court in Government of India vs MRF 1995 (77) ELT 433. The respondent appealed to the Tribunal. The Tribunal allowed the appeal. The Revenue appealed against both the orders of the Tribunal in the Supreme Court.

The Supreme Court noticed that the issues are the same in both the appeals as also the relevant facts. The Judges heard one set of arguments and disposed of both the matters. They observed that according to the Revenue the discount on the damaged goods c ould not be known at the time of their removal from the factory and as such was not admissible as a deduction on the wholesale price.

Further, the Revenue contended that what the respondents claimed as discount was in fact a refund to the buyers for receiving goods damaged in transit. Regarding bank collection charges, the Revenue contended that these were neither cash discounts nor an y other discount within the meaning of the word in Section 4(4)(d)(ii) of the Act.

While deciding the matter, the Judges pointed out that the issue of value depends on the construction of Section 4 of the Central Excise Act, 1944, (`the Act') and after going through the relevant extract of the Section, they stated that the ``normal pri ce'' in this case, would have to be determined with reference to the time and place of removal of the goods from the respondents' respective factories.

Since the price in both cases was fixed with reference to the sale at the depots to the redistribution stockists, clearly in terms of sub-Section (2) of Section 4, the respondents would be entitled to deduction of the cost of transportation from the fact ory to the selling depots. They cannot, however, be allowed ``damage discount''.

The object of ``damage discount'' is to compensate the buyer for the damaged goods and logically, compensation for damaged goods could not feature as a relevant consideration for determining the price of the goods as manufactured at the time of clearance of the goods. The `discount' is admittedly on account of damages suffered by goods after removal from the factory and cannot be allowed.

On the question of bank charges, however, the judges expressed that bank charges being in the nature of post clearing expenses are deductible while calculating the assessable value of the goods.

(By arrangement with Corporate Law Advisor, New Delhi.)