PEPSI FOODS LTD Vs. COLLECTOR OF CENTRAL EXCISE

JUDGEMENT

(1.) THE appellants, herein, are aggrieved by the order dated 7 -2 -1994 passed by the Collector of Customs and Central Excise (Appeals), Chandigarh. The facts, briefly, are that the appellants are engaged in the manufacture of soft drink concentrates. They sell concentrates to various bottlers who produce beverage products out of the concentrates bearing the brand name of the appellants. The appellants have entered into agreement with the bottlers by which they have, inter alia, allowed the bottlers to use their brand name on the beverage products, manufactured by the bottlers out of the concentrate manufactured and supplied to them by the appellants. This royalty is payable @ 2.75 per cent of the maximum retail price of the beverage and is payable for each bottle of the beverage despatched by the bottlers from their plant. The period in dispute in this case is from 1 -9 -1992 to 31 -3 -1993. The appellants filed price lists of their product during the relevant period. In answer to a question in the questionnaire annexed to the price list, the appellants informed that they have been receiving royalty as a percentage from turn -over of the product using the brand name 'lehar' belonging to the appellants. Royalty charges were received by the appellants, over and above the value claimed for approval in the price list. The department was of the view that such royalty charges were includible in the assessable value and two show cause notices were issued dated 24 -3 -1993 and 23 -6 -1993 covering the period from 1 -9 -1992 to 31 -12 -1992 in which duty of Rs. 12,55,687.00 and in the other show cause notice the duty demand of Rs. 20,07,040.00 was demanded on inclusion of the royalty charges in this assessable value. Further, the department found on scrutiny of the appellants' record including the franchise agreement between the appellants and their bottlers which showed that the bottlers were given a licence to use the appellants' brand name 'lehar' on their beverage products and as per Clause 18 of the said agreement, the bottlers were to undertake appropriate advertising and sale promotion activity. The department, further, found that the appellants were also advertising for their product, the expenses of which were not disclosed to the department. In reply to a question in the questionnaire, annexed to the price list, the appellants had answered in the negative to the question as to whether their buyers are incurring advertisement expenses on their behalf. The department's enquiries, further, showed that the scrutiny of their advertisement bill indicated that the appellants were advertising for their final product i.e. soft drink concentrate like 'lehar pepsi', lehar mirinda', etc. Since the word 'lehar' only is the brand name whereas the 'lehar pepsi', 'lehar mirinda', etc., the names of their soft drink concentrates, the department was of the view that under Section 4 of Central Excises and Salt Act, 1944, the expenses incurred on the sale promotion, advertisement of the same are to be included in the assessable value. Therefore, two other show cause notices were issued on this aspect. The notice dated 24 -3 -1993 was for the period from 1 -9 -1992 to 31 -12 -1992 for the amount of Rs. 1,35,30,144.00. The other show cause notice dated 28 -6 -1993 covering the period from 1 -1 -1993 to 31 -3 -1993 was for another sum of Rs. 62,07,566.00. On considering the various contentions, put forth in reply to the show cause notices, the Assistant Collector of Central Excise and Customs, Patiala passed an order dated 11 -11 -1993. He found that in respect of royalty charges, they are as per the clauses in the Franchise Agreement directly linked with the manufacture of the concentrate and the Assistant Collector noted that the terms of the Agreement indicated that the concentrate is sold only to those, who entered into an Agreement to buy the brand name. In other words, the Assistant Collector found that the condition in the Franchise Agreement is that the buyer has to purchase the concentrate while purchasing the brand name. He, therefore, concluded that the royalty charges are includible in the assessable value of the concentrate. As regards the advertisement expenses, the Assistant Collector gave a finding that these expenses also enriched the value of an article and promoted its marketability in course of wholesale trade and such values, the Assistant Collector observed, were includible in the assessable value on the principles laid down by the Supreme Court in the case of Union of India v. Bombay Tyre International reported in 1983 (14) E.L.T. 1896. Therefore, he confirmed the demand as made in the four show cause notices, mentioned above. The Assistant Collector's order was upheld by the Collector (Appeals) in the impugned order leading to the present appeal.

(2.) THE ld. Counsel, Shri Lakshmi Kumaran appearing for the appellants, contended that in respect of the demand by adding advertisement expenses to the assessable value, that the appellants have paid duty on the value inclusive of such expenses on clearance of concentrate. They have deducted only the excise duty element from price of concentrate as per Section 4(4)(d)(ii) Central Excises and Salt Act. The advertisement expenses had been incurred only out of sales income from concentrate. No abatement had also been claimed on this account in the price list for concentrate. There is no evidence to show that the appellants had collected extra amounts towards advertisement expenses from the bottlers and in this context, the invoices for the sales were shown alongwith the prices declared in the price list in support of the argument. Invoices clearly indicated, the counsel urged, that money collected was as per price list approved. Further, it was argued that the expenses incurred were not for promoting the sales of concentrate and when this is so there is no question of adding the advertisement expenses for the beverage products manufactured by the bottlers to the assessable value of the concentrates manufactured by the appellants. The bottlers are not related persons and the transaction with them is on a principal to principal basis and hence valuation has to be under Section 4(l)(a) Central Excises and Salt Act and there is, in such a situation, no scope to invoke Section 4(l)(b). There is no evidence of flow back of extra accrual from customers to appellants and hence no addition can be made to the assessable value under Rule 5 of the Valuation Rules. The ld. Counsel urged that department cannot go on the basis of costs for determining assessable value, but regard should be had only to the amount recovered from the customers for the purpose. Tribunal decision - Order No. 35/92 -A, dated 6 -2 -1992 M/s. Passer (India) (P) Ltd. v. C.C.E., was cited wherein it was held that resort to cost of production for assessment of duty on the excisable goods is one of the last resorts i.e. when the sale price of the goods is not available. The ld. counsel citing the Supreme Court decision in the case of UOI v. Bombay Tyre International (supra) urged that the Supreme Court has laid down that the price charged by the manufacturer on a sale by him represents the measure for assessing the levy. The "value" of an excisable article, the Supreme Court held, has to be computed with reference to the price charged by the manufacturer. Here the price charged for the concentrate being available, the question of adding advertisement expenses incurred for the beverage product manufactured by the bottlers will not arise. The ld. counsel also pleaded that neither the Assistant Collector nor the Collector (Appeals) has considered the various contentions raised before them on this issue by the appellants. As regards the demand on royalty charges, the ld. Counsel urged that royalty was charged from bottlers for using "LEHAR" trade mark belonging to the appellants on the beverage product. The ld. Counsel argued that it had no nexus with the sale of concentrate and pointed out that royalty is charged from bottlers of soda using appellants trade mark although there is no sale of concentrate for the purpose. In law the trade mark owner is entitled to charge royalty on such use of trade mark by others. Further, the royalty amount is payable not immediately but only after the sale of soft drinks made by the bottlers immediately on its sale. Citing the Tribunal decision in the case of Collector v. Birla Yamaha - 1995 (77) E.L.T. 170 the ld. Counsel pointed out that as held in that case here also royalty charged is not a condition for the sale of the concentrate and hence is not includible in the assessable value. The ld. Counsel argued that the department has to show that price is not the sole consideration before they can add any amount as extra accruals to the assessable value. The ld. Counsel cited the Tribunal decision in the case of Collector v. Maruti Udyog - 1987 (28) E.L.T. 390 as confirmed by the Supreme Court in 1989 (22) ECR 482 in the case of Collector v. M/s. Maruti Udyog Ltd. Mere payment of royalty does not create mutuality of interest. These decisions were followed by the Tribunal in an appeal involving the same issue in the case of Duke & Sons v. Collector - 1991 (55) E.L.T. 577 wherein the Tribunal, following the Maruti Udyog decision, held that payment of royalty is relatable directly to the manufacture of soft drinks by the buyers of the 'concentrate' from the appellants therein, but not to the manufacture of 'concentrate' by the appellants therein. The dispute in that case also related to the includibility of "franchise fees" in the assessable value of the "concentrates". The ratio; urged the ld. Counsel, fully applies to the facts of the present case. The ld. Counsel also drew attention to the Supreme Court decision in the case of UOI v. Mahindra & Mahindra - 1995 (76) E.L.T. 481 holding that in the absence of any nexus between lump sum payment as per collaboration agreement and the price of CKD goods imported, such lump sum payment cannot form part of assessable value. It was the ld. Counsel's submission that in present case also, there being no nexus between sale of concentrate to bottlers and collection of royalty separately from them, such royalty payment cannot be added to the assessable value of the concentrate.

(3.) SHRI T.R. Malik, ld. D.R. contended that the Tribunal decision in the case of Duke and Sons (supra) does not advance the appellants' case which, the ld. DR urged, is distinguishable therefrom. The ld. D.R. referred to the various clauses in the agreement with the bottlers clearly making it obligatory for them to purchase the concentrate only from the appellants as in Clause 6 which says, "The Bottler, in preparing, bottling, selling, and distributing the beverage will use only the units purchased from the seller." There is thus a necessary link -up of sale of concentrate and grant of licence for use of appellants' trade mark. In respect of advertisement expenses also ld. D.R. argued that scrutiny of the bills relating to these expenses had shown that the appellants are advertising for their final product i.e. soft drink concentrates like Lehar Pepsi, Lehar Mirinda, etc. The statement of Shri Rajan, Vice -President of the appellants, as referred to in the show cause notice, was also adverted to by the ld. D.R. in this context. It was urged that the advertisement expenses incurred for the sales promotion of appellants' product have rightly been included in the assessable value. Ld. D.R. pleaded that there is no scope for interference with the orders of the lower authorities.