Holding

The Tribunal’s order was set aside and the matter remitted for a detailed determination of whether advances and related interest constitute additional consideration affecting assessable value.

Summary

The Commissioner of Central Excise appealed against the order of the Customs, Excise & Gold (Control) Appellate Tribunal which had held that the advances received by Hero Honda Motors and the interest earned thereon did not affect the assessable value of its motorcycles. The Tribunal had found that the advances were invested, the interest earned was shown as "Other Income" and that the interest paid to customers was charged to cost of production, thereby constituting additional consideration that should be included in the assessable value. The Supreme Court examined the evidence, including the company's annual reports, balance sheets and profit & loss accounts, and concluded that the Tribunal had dealt with the matter perfunctorily without analysing the figures. The Court held that the difference between interest earned and interest paid represents additional consideration flowing back from the customer, which may reduce the price of the product and must be quantified. Consequently, the Court set aside the Tribunal’s order and remitted the case for a detailed assessment, with the assistance of a cost accountant, to determine whether the advances and related interest were used as working capital and whether they reduced the sale price. The limitation issue was left open for future determination.

Issues considered

Whether receipt of advances and the income accruing thereon constitute additional consideration that reduces the assessable value of the product.
Whether advances and interest earned on them were utilized as working capital, thereby affecting the price of the motorcycles.
Whether the interest paid to customers should be treated as a cost of production and the interest earned as part of sales/other income for excise valuation.
Whether the Tribunal erred in its procedural handling of the matter.

Subjects

assessable valueadvance paymentinterestworking capitalexcise dutyadditional considerationprice depreciationcost accountinglimitation

Judgment

.......

A COMMISSIONER OF CENTRAL EXCISE, NEW DELHI
v.
M/S. HERO HONDA MOTORS

APRIL 13, 2005

B [S.N. VARIAVA, DR. AR. LAKSHMANAN AND S.H. KAPADIA, JJ.]

Excise Law:

Assessable value-Cost of production-Receipt of advance and income
C accruing thereon-Whether has gone towards depreciation of sale price-
Matter remitted back to Central Excise and Service Tax Appellate Tribunal to
consider whether or not advances or any part thereof have been used in the
working capital and whether or not the advances received by the assessee
and/or the interest earned thereon have been used in the working capital and/
D or whether it has the effect of reducing the price of the product.

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1564of1999.
....
I

From the Judgment and Order dated 6.10.98 of the Central Excise,
Customs and Gold (Control) Appellate Tribunal, New Delhi in F.O. No.
E 13~0/98 in A. No. E/1983 of 1997-A.

A. Subba Rao, V. Ramasubramaniam, Tufail Ahmed Khan, R11pesh
Kumar, P. Parmeswaran, B. Krishna Prasad for the Appellant.

S. Ganesh, P.A.S. Rao, P.K. Ram and D.N. Misra with him for the
F Respondent

The Order of the Court was delivered :

ORDER

G This appeal is against the judgment of the Customs, Excise & Gold ~·
(Control) Appellate Tribunal, New Delhi dated 6th October, 1998.

The question which arises for determination is : whether receipt of
advance and the income accruing thereon has gone towards depreciation of·
the sale price.
H 588
C.C.E. v. HERO HONDA MOTORS 589

A conspectus of decisions show that inclusion of notional interest in the A
assessable value or wholesale price will depend on the facts of each case. In
the present case, according to the adjudicating authority, the evidence indicated
that the main object behind receiving advance from the customers was not
security but collection of capital. In this connection, reliance was placed on
financial accounts, MIS reports, pricing and costing. The said material was B
put to the officers of the company. The adjudicating authority found on
evidence that the advances were invested and income therefrom by way of
interest, dividends etc. constituted additional flowback (consideration) from
the customer to the assessee. In this connection, the adjudicating authority
found that interest at 9% was actually paid by the assessee to each of the
customers; that the interest was shown as cost of production; that it was C
charged to cost of production; that the said expense was incurred under the
head "Sales" which implicated "sales income" with "other income". On
examination of the balance sheet, profit & loss account and costing data, the
adjudicating authority found that but for "other income", assessee was required
to increase the prices to recover the cost of manufacture. The adjudicating D
authority further found that this "other income" accrued to the assessee in the
course of sale. The said authority found that the said "other income" formed
.
....
part of the prices. That, the difference in the interest paid to the customers
and the interest earned on the advances received from the customers constituted
"additional consideration" which flowed back from the customer to the
assessee. The adjudicating authority further found difference between the E
current assets and current liabilities in the final statements indicating utilization
of advances to meet the working capital requirement. The adjudicating
authority further found that the payment of interest to the customer was
shO\yn in the books as cost of production whereas the income received on
deployment of funds (advances) has been shown as income from sales and F
other income. The adjudicating authority found understatement of assessable
value on account of failure on the part of the assessee to take into account
the additional consideration arising on account of difference in the rates of
interest.

At the outset, we may point out that in this case the Annual Reports of G
the assessee show the opening and closing balance of the funds received
under the caption "Customers' Advances''. They show deployment of funds
so received. The income accruing to the assessee was reflected in profit &
loss accounts. For the year ending 31.3.1986 the outstanding balance under
the above head was Rs. 33.40 crore out of which Rs. 28.90 crore was invested H
590 SUPREME COURT REPORTS [2005] 3 S.C.R.

A in various securities/deposits leaving a balance of Rs. 4.42 crore [See Schedule
4]. The said schedule further indicates utilization of capital gains and interest
income to reduce the liability under the said head. That, the said schedule 4
indicated not only liquidation of liabilities under the head "customers advances"
by utilization of income on investments from such advances, they also indicated
B flowback of the benefits from the customers to the assessee. Moreover, the
income from such investments was shown under the head "Sales and Other
Income". The said "Other Income" included interes_t on deposits, profit on
sale of units and income from units [schedule 10]. Even the Report of the
Directors under the head "Financial Reports" show that the profits of the
company have been based on implication of Sales with Other Incomes. For
C example, for the year 1985-86, Sales and Other Incomes were of Rs. 49.20
crore (rounded to "O") out of which Income from Sales was Rs. 45.02 crore
(rounded to "O") whereas Rs. 4.06 crore was on account of Other lni;ome.
Therefore, according to the adjudicating authority, the total income (Sales
and Other Income) contributed to the profits which had a direct impact on
D pricing. According to the adjudicating authority, the said "Other Income" had
contributed to the pricing. That, but for the said "Other Income", it was not
possible for the company to sell the motorcycles at a price lower than the unit
cost of production. Lastly, the adjudicating authority found on facts that since
interest paid at 9% to the customers was indicated as an expense, the income
E on the investments from the advances was includible in the assessable value.
This aspect has also not been considered by the tribunal. ·

For the above reasons, we hold that the tribunal has disposed of the
appeal before it in a most perfunctory manner without going into any figures
at all but by merely on the statement made by counsel and on the basis of
F .material which appears to have been produced first time before the tribunal.
We, therefore, set aside the order of the tribunal and remand the matter back
to the tribunal. The tribunal will consider in detail, ifnecessary, by taking the
help of a Cost Accountant and after looking into the accounts of the respondent
whether or not the advances or any part thereof have been used in the working
capital and whether or not the advances received by the respondent and/or
G the interest earned thereon have been used in the working capital ·and/or
whether it has the effect of reducing the price of the motorcycle. The tribunal
to so decide on the material which was placed before the Commissioner ancP
not to allow any additional documents/materials to be filed before it. None
of our observations made herein shall bind the tribunal to which this case is
H remitted.

t
C.C.E. v. HERO HONDA MOTORS 591
We may clarify that in the event of tribunal coming to the conclusion A
that additional consideration flowed back from the consumer to the assessee
then the value of the benefit shall be ascertained by the tribunal with the
assistance of a Cost Accountant.

The question of limitation is for the present left open to be decided, if
necessary, in the appeal which may be filed to this Court from the order of B
- the tribunal. The appeal stands disposed of accordingly.

R.P. Appeal disposed of.