Holding

Optional post‑warranty service contract charges are not part of the assessable value of the refrigerator for purposes of central excise duty under Section 4 of the Central Excise and Salt Act, 1944.

Summary

Kelvinator of India Ltd manufactures refrigerators and includes a one‑year warranty in the sale price. After the warranty expires, it offers an optional four‑year service contract for the sealed system at a charge of Rs 300‑450 per unit, which 91% of customers accept. The Assistant Collector and Appellate Collector held that this service charge is part of the assessable value under Section 4 of the Central Excise and Salt Act, 1944, but the Excise Tribunal ruled that the charge is optional, entered into after sale, and therefore not includible. The Supreme Court upheld the Tribunal’s view, noting that post‑sale, non‑compulsory service costs do not form part of the value at the factory gate and there was no evidence of a façade to split value. Consequently, the revenue appeals under Section 35L(b) were dismissed.

Issues considered

Whether charges for an optional post‑warranty four‑year service contract are includible in the assessable value of a refrigerator for central excise duty under Section 4 of the Central Excise and Salt Act, 1944.

Legislation cited

Central Excise and Salt Act, 1944s. 35L(b), s. 3L(b), s. 4

Subjects

central exciseassessable valueafter‑sale serviceoptional warrantyrefrigeratorSection 4service contracttaxability

Judgment

COLLECTOR OF CENTRAL EXCISE, DELHI -{
A
v.
KELVINATOR OF INDIA LTD.

APRIL 20, 1988

B ISABYASACHI MUKHARJI ANDS. RANGANATHAN, JJ.] ·.~
~
I
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.
~-
c The Respondents, manufacturers of refrigerators, give one year
warranty for the 1:omplete refrigerator and all parts thereof. During -1,
this warranty period, they provide free repair and replacement for
!f"
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
F
D 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,
E and the consumer in turn enters into contract with the dealer from -i.
whom he buys his refrigerator. The servke is rendered by the Respon-

.
dents 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. -
F The Assistant: Collector held that the four year service charge is
includible in the value of the refrigerator for the purpose of Central
Excise duty 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.

/ G These appeals by Revenue under Section 3SL(b) of the Act are
against the Tribunal's decision.
,~
_..._
Dismissing the appeals, this Court,

HELD: I. The contract for four years warranty service was
H optional which was entered into later on. This is clearly after-sale
656
COLLECTOR OF CENTRAL EXCISE v. KELVINATOR [MUKHARJI, J .] 657

facility and cannot be includible in the assessable value of the A
refrigerator. [661 GI

1.2 The Tribunal was right in the view it took·that the optional
service charge after the expiry of the first year 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 B
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 C
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-FI
'
Union of India and Others etc. v. Bombay Tyre International
Ltd., [1984] 1 SCR 347 and Assistant Collector of Central Excise and D
others v. Madras Rubber Factory Ltd. and others, [19871 27 E.L.T.
553, referred to.

CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 727
and 962-74 of 1988.
E

-
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-AinOrderNos. 775, 749to761/87.

Kuldeep Singh, Additional Solicitor General. A.K. Ganguli, F
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 G

SABYASACHI MUKHARJI, J. These appeals arise under
section 35L(b) of the Central Excises & Salt Act, 1944 (hereinafter
.,1I 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, H
658 SUPREME COURT REPORTS [1988) 3 S.C.R.
-(
A M/s. Leonard, M/s. Expo Machinery aod M/s. Tropicaoa. The respon-
dents gave one year warraoty for the complete refrigerator aod all
parts thereof (except the light bulb aod the crisper glass). During this
warraoty period, they provide free repair aod replacement for defects
in material aod workmaoship under normal use aod service. This free
service is available only within the municipal limits of the area served
B
by an office of the wholesale dealer of the authorised dealer from .-J
whom the refrigerator is originally purchased. The respondents include
the cost of this one year warraoty 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
\ -
c 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 i.s a fact that these four dealers enter into
this contract with the respondents. The final consumer in tum enters
into the service contract with the dealer from whom he buys his
refrigerator. The service is rendered by the respondents aod the entire

•
D
contract money accrues to them. It is on evidence that during the
material period the four dealers referred to ,hereinbefore entered into
service contract in respect of a total of 91 % of their purchases. The
remaining 9% did not enter into such contract. This is optional.

The Assistaot Collector by his order dated 18th August, 1986 ---{
E
held that four year service charge is includible in the value of the
Regfrigerator for the purpose of assessment of central excise duty
under section 4 of the Act. The Assistaot Collector further held that
for all intents aod purposes this charge was not optional as it was not
exercised only in respect of 9% of the sales. The Assistaot Collector
--
<.

*
relied on the decision of this Court in Uf!ion of India and others etc.
F
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 Assistaot Collector confirmed the '
demands totalling Rs.17 ,40,68,326.32 against the respondents (in Civil
Appeals No. 962-74 of 1988) aod Rs.7,07,535 (in Civil Appeal No. 727
of 1988). The respondents herein filed ao appeal before the Appellate
G
Collector. The Appellate Collector upheld the decision of the Assis-
tant Collector. There was ao appeal to the Tribunal aod the Tribunal \
held that the optional service charge during the second aod third year , ;....
after the expiry of the first year warraoty period was not includible in
the assessable value. The Tribunal allowed the appeals of the assessee I
H with consequential relief. Hence these appeals come to this Court.
COLLECTOR OF CENTRAL EXCISE v. KELVINATOR [MUKHARJI, J. [ 659

The point involved in these appeals is whether the four year
A
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 com- B
pulsory and the four dealers entered into service contract in respect of
91% of their purchase. They did not make the contract for the remain-
- ing 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 c
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. D

The Tribunal on an analysis of the evidence came to the condu-
sion 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 E
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 dat,e of
delivery on account of storage charges, outward handling
charges, interest on inventories (stocks carried by the F
manufacturer after clearance), charges for other services
after delivery to the buyer, namely, after-sales service 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 serivce promote . G
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 incur-
red by the assessee upto the date of delivery under the
aforesaid heads cannot, on the same grounds, be deducted. H
660 SUPREME COURT REPORTS 11988] 3 S.C.R. ,-{

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 t11e place or places of delivery."
B
This aspect was later clarified by this Court in Assistant Collector
of Central Excise and others v. Madras Rubber Factory Ltd. and others,
11987] 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 -;
c 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
D International Ltd. (supra), we have held that expenses
incurred on account of several factors which have contri-
buted 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 tintil the
goods are sold and delivered at the factory gate would
E therefore necessarily, according to the judgment m
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,
F 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 threrefore have to allow the claim
of MRF Ltd. as above."

G 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
H that the four year service contract charge in the present was
COLLECTOR OF CENTRAL EXCISE v. KELVINATOR IMUKHARJI, J. I 661
)-
not compulsory one. As to why the appellants' buyers A
chose not to enter into such contract only for about 9% of
the purchases and not more is a 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 Refri-
gerators in respect of which the option was not exercised s
f was in thousands, ranging from over 18,000 to over 39 ,000
per year. We find no force in the department's pleading

-i 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 c
,\' 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 D
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 E
the four years service by a stamped endorsement on their sale invoice
tL.. 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
f
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. F

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 en-
tered into later on. This is clearly after-sale facility and cannot be
includible in the assessable value of the refrigerators. G
I
.--', 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.