Whether inspection done at the instance of buyer is includible in assessable value?

PJ/CASE LAW/2015-16/2686

Case:-COMMISSIONER OF C. EX., AHMEDABAD-II VERSUS LUBI SUBMERSIBLES LTD.

Citation:- 2015 (317) E.L.T. 299 (Tri. - Ahmd.)

Brief Facts:-This appeal has been filed by the revenue with respect to O-I-A No. 17/2007(Ahd-II)CE/Raju/Comr(A), dated 27-2-2007 issued on 19-3-2007 under which the first appellate authority has dismissed the appeal filed by the revenue. Under the Order-in-Original No. MP/66/DEMAND/06, dated 19-5-2006 demand raised against the respondent M/s. Luby Submersibles Ltd. was dropped by the adjudicating authority. The issue involved in these proceedings is whether Pre-Delivery Inspection (PDI) charges recovered by the respondent for conducting test at the instance of the buyer is liable to be included in the assessable value or not. The first appellate authority has relied upon the judgment of CESTAT Larger Bench in the case of Bhaskar Ispat Pvt. Ltd.[2004 (167)E.L.T.189 (Tri. - LB)]wherein it was held that inspection done at the option of the buyer is not includable in the assessable value. Revenue has filed the present appeal on the ground that PDI charges recovered by the respondent are required to be added to the assessable value as the same represents a part of the transaction value under the new Section 4 of the Central Excise Act, 1944. A cross objection E/MA/CO/679/07 has been filed by the respondent M/s. Luby Submersibles Ltd. emphasizing that their products are being used by individuals, agriculturists, industrialists or the Government and in all these cases goods are completely tested and ready for use as per the prescribed norms. It is their ground that nobody even asks for a trial run but some of the government buyers in certain cases impose a condition that goods should again be tested from an approved laboratory before lifting the goods from respondent’s factory. Such testing done for the second time on the basis of the option exercised by the buyer is not required to be added to the assessable value.

Appellants Contention:-Shri Jitendra Nair (AR) appearing on behalf of the revenue argued that Pre-Delivery Inspection (PDI) charges recovered by the respondent are required to be added to the assessable value as held by Delhi Larger Bench in the case of Maruti Suzuki India Ltd.v. CCE, Delhi-III [2010 (257)E.L.T.226 (Tri.-LB)]and that orders passed by the lower authorities should be set aside. Ld. AR has relied upon Larger Bench judgment in the case of Maruti Suzuki India Ltd.v. CCE, Delhi-III(supra) wherein it has been held that PDI charges are required to be included in the assessable value. However, it is observed from this case law that the issue before the Larger Bench, in the case of Maruti Suzuki India Ltd. (supra) was only on inspection done on compulsory PDI done in all cases by the appellant in that case.

Respondents Contention:-Shri Jayendra R. Shah (Ex. Officer) appearing on behalf of the respondent reiterated the grounds of their cross objection. He also relied upon the order of this bench in the case ofCCE, Ahmedabad-II v. Johnson Pumps (I) Ltd. [2010 (251)E.L.T.560 (Tri.-Ahmd.)]under which it is held that such PDI charges incurred on behalf of the buyer are not required to be added to the assessable value and thus C.B.E. & C. Circular No. 643/34/2002-CX, dated 1-7-2002 was held to be inapplicable. It was not the case before the Larger Bench that PDI inspections were done at the instance of the buyer. In view of the interpretation made by this bench in the case of CCE, Ahmedabad-IIv. Johnson Pumps (I) Ltd. (supra) PDI charges recovered at the instance of the buyer are not includible in the assessable value and accordingly appeal filed by the revenue is required to be rejected and cross objection filed by the respondent is required to be allowed.
A cross objection E/MA/CO/679/07 has been filed by the respondent M/s. Luby Submersibles Ltd. emphasizing that their products are being used by individuals, agriculturists, industrialists or the Government and in all these cases goods are completely tested and ready for use as per the prescribed norms. It is their ground that nobody even asks for a trial run but some of the government buyers in certain cases impose a condition that goods should again be tested from an approved laboratory before lifting the goods from respondent’s factory. Such testing done for the second time on the basis of the option exercised by the buyer is not required to be added to the assessable value.

Reasoning Of Judgement:-Heard both sides and perused the case records. The issue involved in the present appeal filed by the revenue is whether PDI charges incurred only at the instance of the buyer are required to be added to the assessable value under Section 4 of the Central Excise Act, 1944 or not. The first appellate authority has rejected revenue’s appeal on the ground that as per Larger Bench judgment in the case of Bhaskar Ispat Pvt. Ltd. (supra) PDI charges at the option exercised by the buyer are not required to be included in the assessable value. It is also observed that this issue is no more res integra as this very bench in the case of CCE, Ahmedabad-IIv. Johnson Pumps (I) Ltd. (supra) has held as follows in paragraph 4 and 5 :
“4. Apart from the various decisions discussed by the Commissioner (Appeals), the tribunal also note that he has taken note of the Board’s Circular which is in favour of the assessee. For better appreciation, they reproduce the relevant paragraph of his order as under :

“I further find that under erstwhile Section 4, which existing prior to 1-7-2000.

(i)     The Hon’ble Supreme Court of India in case of Collector of C.E., Jaipur v. M/s. CIMMCO Ltd. - 1996 (84) E.L.T. 167 (S.C.) has upheld the Tribunal Order Nos. 296-301/94-A, dated 19-10-94 reported in 1994 (74)E.L.T.687 (Tribunal), holding that inspection charges incurred by the customers are not includable in assessable value especially when they have a full-fledged quality assurance department.
(ii)    The Hon’ble Supreme Court of India in case of Collector v. Hindustan Development Corpn. Ltd. - 1996 (86) E.L.T. A162 (S.C.), has upheld Tribunal Order Nos. 209 & 210/95-A, dated 8-3-95 which held that expenses incurred on account of additional tests conducted on customers requisitions are not includible in the assessable value.
(iii)   The Hon’ble Supreme Court in case of Commissioner v. Hindustan Motors Ltd. - 2002 (140) E.L.T. A81 (S.C.), has held that pre-delivery inspection charges and after sales service charges incurred by dealer are not includible in assessable value of vehicles.

Further, the Hon’ble Tribunal under erstwhile Section 4 of the Act in following cases has held that cost of additional inspection charges borne by the customers carried out by a third party, is not includible in the assessable value.

(i)         M/s. Choksi Tube Co. Ltd.v. CCE, Ahmedabad,2003 (153)E.L.T.178 (Tri.-Del.)
(ii)        M/s. Sunrise Structurals & Engg. P. Ltd. v. CCE, Nagpur - 2003 (152)E.L.T.387 (Tri.-Mumbai)
(iii)       M/s. Southern Structurals Ltd. v. CCE, Chennai-II - 2002 (146)E.L.T.678 (Tri.-Chennai)
(iv)       CCE, Jaipur-II v. M/s. A. Infrastructure Ltd. - 2003 (16) E.L.T. 549 (Tri.-Del.)

As regards reliance on C.B.E. & C. Circular No. 3/88-CX, dated 16-2-88 by the adjudicating authority, they find that the circular dated 16-2-88 issued under erstwhile Section 4 of the Act in respect of Pre-delivery Inspection charges has not stood the test of legal scrutiny as Tribunal’s judgment has been otherwise and consequently C.B.E. & C. withdrew its subsequent Circular No. 355/77/97-CX, dated 19-11-97 and 435/I/99-CX, dated 12-1-99 vide Circular No. 681/72/2002-CX, dated 12-12-02 in the context of old Section 4 of CEA, 1944. The C.B.E. & C. has issued a Circular dated 12-5-00 [2000 (118) E.L.T. 45] in which in Para 2.2 it has been clarified that the concept of new transaction value under Section 4 has same scope as that of old Section 4 of the Act and Valuation Rules.
Hence, respectfully following the ratio of the above decisions, they hold that the third party’s inspection charges initially paid by the appellants and subsequently reimbursed by the buyers is not includible in the assessable value of the goods. The tribunal, therefore, hold that duty demand of Rs. 25,125/- on inspection charges along with interest is not sustainable.”

5. As against the above, learned JDR relied upon another circular of Board being No. 643/34/2002-CX., dated 1-7-2002. However, they find that reference in the said circular is to the pre-delivery inspection charges incurred by the dealer during the warranty period. The same does not relate to the pre-inspection conducted by the manufacturer at the behest of their buyer. The issue stands discussed in detail by Commissioner (Appeals), who has followed the precedent decisions of the Tribunal as also Board’s circular. They find no infirmity in the said order of the Commissioner (Appeals).”

In view of the above observations, appeal filed by the revenue is rejected and the cross objection filed by the respondent is allowed.

Decision:- Appeal rejected

Comment:- The gist of the case is that when the inspection is carried out at the buyers instance from third party and the cost of the same is reimbursed by the buyer then he said charges would not be includible in the assessable value of the goods. This is based on the landmark decision in the case of Bhaskar Ispat Pvt. Ltd -2004(167) ELT.189(Tri-LB), New Delhi.

Prepared By:- Neelam Jain

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PJ/CASE LAW/2015-16/2686

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