Holding

The Court held that the assessee was entitled to a uniform 20% trade discount, the abatement under Rule 6(a) was applicable, and assessable value must be based on the ex‑factory price, not the depot price.

Summary

Mis Elgi Equipments Ltd., a manufacturer of service‑station equipment, claimed a uniform 20% trade discount on its sales to distributors, while giving an 8% discount to sub‑dealers and a 12% commission to the distributors. The Central Excise Department issued a show‑cause notice alleging a differential discount and demanded additional duty and penalty. The Court examined whether the 20% discount constituted the "normal price" under Section 4(1)(a) of the Central Excise Act (pre‑2000) and whether the discount was uniformly granted in the ordinary course of wholesale trade. It held that the majority of dealers received the 20% discount, satisfying the test of normal practice, and therefore the assessee was entitled to the trade discount. The Court also affirmed the assessee’s right to abatement under Rule 6(a) of the Central Excise (Valuation) Rules and ruled that assessable value for goods cleared through a depot must be based on the ex‑factory price, not the depot price. Consequently, the Tribunal’s decision was set aside and the appeals were allowed.

Issues considered

Whether Mis Elgi Equipments Ltd. was entitled to claim a uniform 20% trade discount under Section 4(1)(a) of the Central Excise Act, 1944.
Whether the discount was uniformly given in the ordinary course of wholesale trade, satisfying the "normal practice" test.
Whether the assessee was eligible for abatement under Rule 6(a) of the Central Excise (Valuation) Rules, 1975 for goods sold in retail.
Whether the assessable value of goods transferred under stock transfer should be based on the ex‑factory price or the depot price.

Legislation cited

Central Excise Act, 1944s. 4(1)(a)
Central Excise (Valuation) Rules, 1975s. 6(a)

Subjects

trade discountvaluationassessable valueCentral ExciseSection 4(1)(a)abatementstock transferdepot priceex‑factory pricenormal practicewholesale trade

Judgment

•
'

A MIS ELGI EQUIPMENTS LTD. .. 'l
v.
COMMISSIONER OF CENTRAL EXCISE, COIMBATORE

AUGUST 14, 2007

B [S.H. KAPADIA AND V.S. SIRPURKAR, JJ.]

""t-
Central Excise Act, 1944: -(

s. 4(/)(a)(as it stood before 2000)-Valuation of excisable goods-
c Trade discount-Claim with regard to-Assessee-manufacturer of service-
station equipments-Claiming trade discount as a part of its sales pattern-
Assessee allowing 20% discount to distributors on list price on 90% sales
. I

effected at factory gate-To sub-dealers discount given at 8% and balance
12% given to distributors as commission-Show cause notice issued to assessee
D demanding differential amount of duty and penalty without furnishing
details-Held: Revenue should have given detailed particulars-Assessee
has given benefit of trade discount of 20% to majority of its dealers and, ....
~
therefore, it was entitled to trade discount of 20% in all cases.

Central Excise(Valuation) Rules, 1975:
E
r. 6(a)-Benejit of abatement-Goods sold in retail-Wholesale price
at factory gate available-Held: Assessee-manufacturer was entitled to
abatement.

Goods under stock transfer-Assessable value-Computation of-Large
F percentage of goods sold in wholesale at factory gate-A small percentage
cleared through depot-Held: When ex-factory price is ascertainable, Revenue
erred in taking depot price as basis of the assessable value. "'
Kirloskar Brothers Ltd. v. Commissioner ofCentral Excise, Pune, (2005)
191 ELT 299 and Indian Oxygen Ltd. v. Collector of Central Excise, (198.8)
G 36 ELT 723, relied on.. rI-

CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 7777-7780 of
'"'
2001. ....

H 1040
•
I /
,,..
ELG! EQUIPMENTS LTD. v. COMMNR. OF CENTRAL EXCISE, COIMBATORE 1041

From the Orders No.C/967 to 970/2001 dated 26.6.2001 of the Customs, A
Exci~e and Gold (Control) Appellate Tribunal, South Zonal Bench at Chennai
in Appeal Nos. ENl206196 and ENl254 to 256/96-Md.

V. Lakshmi Kumaran, Alok Yadav and M.P. Devanath for the Appellant.

V. Shekhar, K.K. Senthivelan, Sudhir Kr. Sajwan and B. Krishna Prasad .f3
for the Respondent.

The Order of the Court was delivered by

ORDER
c
The short point wh!ch arises for determination in these civil appeals
filed by the assessee is - Whether the assessee was entitled to 20% trade
discount.

Mis. Elgi Equipments Ltd., having registered office at Coimbatore, have
four factories located at four different places. They manufacture compressors; D
pumps, service-station equipments etc. Mis. Elgi Equipments Ltd. (assessees)
claimed trade discounts varying from l 0% to 45% on different products. They
declared that such discount was a part of their "Sales Pattern". During the
course of assessment, the Department noticed certain price discrepancies.
Therefore, an enquiry was made; statements of Directors were recorded and,
on that basis, a show cause notice was given to the assessee claiming E
differential amount of duty of Rs.40 lakhs. The assessee was also asked by
the show cause notice as to why a penalty of Rs. I 0 lakhs should not be
imposed.

In these appeals, we are concerned with the period January, 1991 to F
April, 1992. The main case of the Department was that the appellant-assessee
did not possess uniform sales pattern; that they gave different discounts to
Area Distributors and dealers to whom goods were cleared directly at the
factory gate and that even in such a case, the Area Distributors were paid
the balance 12% and therefore on account of this differential discount the
assessees were not entitled to trade discount of 20%. G
As stated above, assessee is in the business of manufacturing service-
station equipments. It is necessary to understand their Sales Pattern. The
goods were sold to three distributors. These sales were effected at the factory
gate directly to the distributor allowing 20% uniform discount on the list price.
However, in respect of sales to sub-dealers discount given was 8% and H
1042 SUPREME COURT REPORTS (2007] 8 S.C.R.

A balance 12% was given to the distributors as commission.

At the outset, we may mention that show cause notice was the
foundation for the levy of penalty. In the entire show cause notice, the
requisite details have not been furnished, namely, the total number of dealers,
the number of main dealers, the number of sub-dealers and the rate of discount
B to main dealers and small dealers. The show cause notice proceeds on the
basis of the statements of some of the sub-dealers or small dealers taken on
record by the adjudicating authority. In a matter of this type, the Department
should have given particulars of the total number of dealers, the total number
of dealers who got the trade discount at 8% and the total number of dealers
C who got the trade discount of 20%. There is no adjudication by the original
authority on this point. Therefore, we have to proceed on the basis on the
figures given by the assessee, namely, that the majority of the dealers got the
benefit of 20% discount and a small minority of dealers got the benefit of
trade discount of 8%. However, the fact remains that assessee gave discount
at all times at 20%, even when they gave discount of 8% to small dealers
D because even at that time they gave commission of 12% to big dealers. If that
be the case, then, the sales pattern clearly indicates that as a matter of
practice, the assessee has uniformly given the benefit of trade discount at
20%. It is well settled that while adjudicating upon questions relating to sales
pattern, one has to find out whether the benefit of trade discount is given
E uniformly. On facts, we find that the assessee has given trade discount of
20% uniformly to all its dealers.

· In this connection, we may cite the judgment of this Court in the case
of Kirloskar Brothers Ltd v. Commissioner of Central Excise, Pune, reported
in (2005) (191) E.L.T. 299. Vide paragraph IO, it has been held by this Court
p that in order to get the benefit of Section 4(1 )(a) (as it stood at the relevant
time), the assessee has to establish that the discount claimed was in accordance
y
with the normal practice of wholesale trade in the concerned goods sold to
different classes of buyers, and it shall be subject to existence of circumstances
specified in Clause (a). Such circumstances being charging of normal price at
which such goods are ordinarily sold; sale must be to a buyer in the course
G of wholesale trade; same rn11st be in the wholesale trade for delivery at the
place and time of removal; tne. buyer should not be a related person and the
price should be the sole consideration for the sale. It has been further held
that in case where goods are sold to different class of buyers in accordance
with normal practice, it has to be established that the same was the normal
H practice of the wholesale trade in such goods. In fact, in paragraph 10, an

'
I

~'

ELGI EQUIPMENTS LTD. ~·. COMMNR. OF CENTRAL EXCISE, COIMBATORE 1043
illustration has been given, namely, that if out of ten dealers engaged in A
wholesale· trade, only two are given discount while others are not, then, it
cannot be the normal practice of the wholesale trade in such goods. After the
illustration, the test follows, namely, that if majority of persons engaged in the
wholesale trade are given trade discount, then it would constitute "normal
practice of the wholesale trade".
B
Applying the above test, we have a situation where 90% of the big
dealers have got the benefit of trade discount at 20%, that even in cases
where 8% discount is given to sub-dealers, 12% is given to big dealers. There
is one more aspect which needs to be mentioned. Assessee is in the business
of manufacturing service-station equipments. As indicated above, the goods C
are supplied to a chain of big and small dealers. Ultimately, the assessee got
his business from the main dealers in 90% of the clearances. Therefore, even
in cases where the assessee gave discounts of only 8% to small dealers, who
constitute I 0% of the total number of dealers, in order to retain the distribution
channel, assessee gave 12% trade discount to the distributors (which the
Department has termed as commission). Ultimately, it is a business decision D
which the assessee has taken in order to retain his chain of distribution. The ,
assessee does not want that chain to be disrupted. Lastly there is no evidence
on record to show that distributors were agents of the assessee or related to ,
them in any way. The word "distributor" in the price list is not determinative
that they are related to the assessee. In the circumstances, we are of the view E
that the Department had erred in disallowing the trade discount at 20%.

For the afore-stated reasons on this particular point, we hold that the
assessee was entitled to a trade discount of 20%.

Since the point involved is likely to recur, we would like to analyze
Section 4(1 )(a) of the Central Excises and Salt Act, 1944, as it stood at the
F
material time. Section 4 refers to valuation of excisable goods for purposes
of charging of duty. Section 4(1)(a) states that where under the Central Excise
Act, 1944, duty of excise is chargeable on any excisable goods with reference
to value, such value, shall, subject to the other provisions of Section 4, be
deemed to be the normal price thereof, that is to say, the price at which such G
goods are ordinarily sold by the assessee to a buyer in the course of wholesale
trade for deli"1ery at the time and place of removal, where the buyer is not a
related person and the price is the sole consideration for the sale. In the
present case, we are concerned with the words "ordinarily" and "in the course
of wholesale trade".
H
1044 SUPREME COURT REPORTS (2007] 8 S.C.R.

A At the outset, it may be stated that in this case, we are concerned with
the law as it stood before 2000. At that time, assessable value was equated
to normal price which was the wholesale price at the factory gate. The word
'ordinarily' in Section 4(l)(a) indicated that ifthe sale pattern adopted by an
assessee indicated that a large part of the total production was sold at
wholesale price at the factory gate and that the assessee had given the
B benefit of trade discount to large number of its dealers at a particular rate,
then, it would constitute "normal practice of the wholesale trade" in which
event the assessee would be entitled to trade discount across the board. ,.. ~

'
Once the assessee proves that 20% (as in this case) was the normal practice
of the trade, then Department cannot refuse it on the ground that some
c dealers got the discount at 8%.

Applying the above test to the facts of the present case, we find that
as a general rule in this case, the assessee has given the benefit of trade
discount of 20% to majority of its dealers; that in fact they have given
discount at 12% to big dealers where they gave discount of 8% to small
D dealers, and, therefore, the assessee was entitled to trade discount of 20% in
all cases.
..
There are two points remaining which are required to be dealt with. In
the present case, some of the goods are sold in retail. It is the case of the
assessee that where goods are sold in retail, duty was payable on value which
E is the wholesale price at the factory gate. In the present case, the wholesale
price at the factory gate was available. That price was the retail price. In this
case, assessee was denied abatement. In this case, Rule 6(a) of the Central .
Excise (Valuation) Rules was applicable. Under that Rule, assessable value
would be the retail price as reduced by an amount to arrive at the price at
F which goods would have been sold by the assessee in the course of wholesale
trade to a buyer at arm's length. It is not the case of the Department that the
said Rule was not applicable. It is not the case of the Department that
wholesale price at the factory gate was not ascertainable. In the circumstances,
we hold that the assessee was entitled to the abatement.

G The last question which arises for determination is concerning the
goods which were under stock transfer. In the present case, a large percentage ·,
of the goods was sold in the wholesale at the factory gate. However, a small
percentage has been cleared through the depot. The Department has taken 'r

the depot price as the basis of the assessable value on the ground that the
assessee is selling the goods through the depot. Our attention has been
H
ELG! EQUIPMENTS LTD. "· COMMNR. OF CENTRAL EXCISE, COIMBATORE. } 045

invited to the judgment of this Court in the case of Indian Oxygen Ltd v. A
Collector o/C.E., reported in (1988) (36) E.L.T. 723. In the said judgment, this
Court has held that in cases where ex-factory price is ascertainable, then the
assessable value shall be based on the wholesale price at the factory gate and
not on the depot price. In the present case, despite the said ruling, the
Department has held that the depot price shall form the basis of the assessable B
value.

For the afore-stated reasons, the impugned decision of the Tribunal is
set aside and the appeals stand allowed, with no order as to costs.

RP. Appeals allowed. C