ORDER
U.L. Bhat, J. (President)
1. Appeal E/2186/89-A has been filed by the assessee and E/2346/90-A has been filed by the Department against Order-in-Original No. 11/89 dated 21.3.1989 passed by the Collector of Central Excise, New Delhi confirming the demand of differential duty on Air-Conditioners manufactured and cleared by the assessee during the period March, 1981 to May, 1985 and imposing penalty on the manufacturer.
2. Assessee, engaged in the manufacture of Air-conditioners and Refrigerators was till 1980 selling around 98% of the manufactured goods to M/s. Lloyds Sales Corporation (in short, Lloyds) stated to be a sister concern and related person and selling 2% to hospitals and factories which were covered by exemption Notification No. 56/78. It appears that there were some factory gate sales to two or three dealers. Lloyds was selling the goods directly to consumers at prices much higher than the wholesale price charged to Lloyds and to other buyers at the factory gate. At the instance of the Department, assessee was paying duty on the retail price charged by Lloyds to consumers duly adjusted by deduction of 15% to convert the price to wholesale price. During the earlier period price lists were filed in Part V as required by the department treating Lloyds as a related person.
3. With effect from January 1980, assessee stopped filing price lists in Part V and commenced filing price lists in Part I declaring factory gate price and without specifically disclosing Lloyds as a related person and the percentage of sales at the factory gate and to Lloyds. After investigation it was found that 98% of the goods were sold to Lloyds who in turn sold the goods to consumers at higher price and hardly 2% of the goods were sold at the factory gate and that too mainly to consumers clearances to whom would attract concessional rate of duty under Notification 56/78. Assistant Collector issued notice referring to the above facts, alleging suppression of material facts and proposing demand of differential duty for the period from March 1980 till 1985 and seeking to invoke the larger period of limitation under the proviso to Section 11A(1) of the Act. Since it was pointed out by the assessee that the Assistant Collector had no jurisdiction to invoke the proviso, the Collector on 27.3.1986 issued a similar notice for the period of five years prior to the notice, that is, March 1981 onwards. In this notice also the Collector proposed to arrive at the assessable value on the basis of the retail price charged by Lloyds to consumers without any adjustment or deduction. Assessee resisted the notice on merits and on limitation and also contended that if retail price charged by Lloyds is to be taken into consideration, various expenses incurred by Lloyds in marketing the goods to retail consumers should be deducted.
4. In regard to the demand proposed for Refrigerators, the Collector dropped the demand on merits. In regard to the demand on Air-conditioners, the Collector overruled the assessee’s contentions on merits and limitation, gave deduction for some items of expenses incurred by Lloyds in marketing the goods to retailers and arrived at the assessable value afresh and demanded duty on such value less the duty actually paid.
5. Learned Counsel for the manufacturer submitted that he proposes to make submissions in the assessee’s appeal only on the aspect of limitation and the quantification of assessable value.
6. The Collector has accepted Lloyds retail price to the consumers as the basis for determination of assessable value and converted the same into wholesale price after giving deduction for certain expenses incurred by Lloyds. The deduction given varied between 13% and 16% during the various years. According to the Learned Counsel for the manufacturer this method of calculation ignoring the wholesalers margin of profit is erroneous. We are inclined to agree with this submission. Assessable value should be based on the manufacturer’s normal wholesale price to the wholesale dealers. That price will include manufacturer’s margin of profit but will not include wholesaler’s margin of profit. Retail price charged by Lloyds to consumers included margin of profit which independent wholesalers would have derived on the purchases from the manufacturer. It is therefore not sufficient to give deduction or adjustment to certain expenses incurred by Lloyds to arrive at the assessable value. Assessable value arrived at, in order to be in conformity with Section 4(1)(a) and Rules 6(a) and 6(c)(i) should take into account wholesaler’s margin of profit also. There is no material available before us to estimate the margin of profit and to deduct the same to arrive at the correct assessable value. The matter will have to go back for this purpose subject to our finding on the aspect of limitation.
7. The basic facts are not in dispute. Around 98% of the sales of air-conditioners were made to Lloyds, found were to be a ‘related person’. Of the remaining 2% sales, bulk were to hospitals and factories which sales invited the benefit of lesser rate of duty under Notification 56/78. There were only one or two wholesale buyers who purchased some air-conditioners at the factory gate. The Collector was not prepared to act on the price charged in the few cases of sales at the factory gate and since Lloyds was held to be related, decided to go by the prices charged by Lloyds to their customers. If Lloyds had effected sales to wholesale dealers, such wholesale price would be the basis for determination of assessable value. However, since Lloyds did not effect sales to wholesale dealers but effected retail sales to consumers, the question of adjustment as referred to above arose for consideration. According to the show cause notice, three material facts were suppressed by the assessee from the knowledge of the department. They are, negligible percentage of sales at the factory gate, 98% of the sales being made to Lloyds and Lloyds being related to the assessee. The assessee contended before the Collector that all these facts were known to the department all along and the question of suppression did not arise. The Collector did not accept this contention.
8. We have been taken through the entire history of relationship between the department and the manufacturer form March 1975 onwards. On 26.3.1975 the Assistant Collector passed an order approving certain price lists directing that the assessable value would be based on the price charged by Lloyds to wholesale dealers, Appeal against this order was dismissed on 11.6.1976. Appellant filed a writ petition in the High Court of Delhi challenging the order and the High Court quashed the order and remanded the case for fresh consideration. According to Learned Counsel no final order has been passed on those price lists. In 1976 the assessee filed price lists in Part I and Part II again without specifically disclosing also the three aspects referred to above. In May 1977 the assessee filed price lists in Part V. In December 1977 the Assistant Collector approved the price lists in Part V subject to deduction of 4.5% from the retail price of Lloyds to consumers. This order was also passed on the basis that Lloyds was ‘related person’ and Part-I price would not apply. Appeal against this order was rejected on merits but the Collector (Appeals) gave deduction of 15% from Lloyds retail price to arrive at the wholesale price.
9. On 2.3.1979 assessee wrote to the Superintendent stating that its pattern of sale of air-conditioners has changed and therefore price lists would be submitted only in Part-I. Within a few days the assessee informed the Assistant Collector that there will be sales to independent wholesale dealers at the factory gate and the remaining goods would be cleared to Lloyds who, in turn, will sell the goods to consumers and not to dealers. On 3.6.1979, the Assistant Collector required the assessee to file price lists in Part V and to effect all future clearances on the basis of such price list. On 16.1.1980, the assessee again filed price lists in Part-I on the basis that there were sales at the factory gate to independent dealers. List of such sales was provided on 16.1.1980. The list showed that sales to independent dealers at the factory gate covered only 0.88% of the goods and the sales to Lloyds covered 99.12% of the goods in that period. On 10.8.1980 also all the particulars regarding sales were submitted to the Assistant Collector which showed a small percentage of sales at the factory gate to dealers. Letter dated 21.11.1980 was also on the same lines. On 3.12.1980 the assessee was informed about the approval of price lists in Part-I.
10. It appears that on 19.10.1982 the Range Superintendent forwarded to the assessee extract of the internal audit report for the period 1.4.1980 to 30.9.1980 stating that invoices showed that most of the sales were effected through Lloyds, a sister concern, sales to Lloyds cannot be said to be at arms length and charges collected on various counts by Lloyds had not been passed on to the assessee.
11. The above circumstances will clearly indicate that the department was all along aware of the three circumstances referred to in the show cause notice as crucial, namely, that the sales to independent dealers at the factory gate were negligible that around 98% of the sales were to Lloyds and Lloyds was a sister concern which would fall under the category of “related person”. It is true that for the said period, namely, 1981 to 1985 going by the relationship existing between the assessee and Lloyds, the assessee should have filed price lists in Part-V but instead filed price lists in Part-I. Since the assessee has no case that any particular disclosure had been made in the price lists in Part-I, it could perhaps be said that the appellant did not disclose these facts. But then as the history from 1975 onwards indicates the department was all along aware of these crucial aspects of the low percentage of sales at the factory gate to dealers, that almost entire production was being passed on to Lloyds and the existence of relationship between the assessee and Lloyds. It is seen from the correspondence between the proper officer and the assessee that department was all along aware of these facts which were present before them during the period from 1975 to 1980. Sale to Lloyds during the said period also was disclosed in the price lists by indicating Lloyds as one of the buyers. The explanation offered by the appellant for not filing price lists in Part-I in 1981 and subsequently is that the price lists in Part-I were approved finally in 1981. Nevertheless the department was aware of the volume of sale of the fricassees and the relationship between the assessee and Lloyds. The notice did not state that the department was told at any time that there was change in the constitution of assessee company or Lloyds or in any other aspect so as to take Lloyds out of the category of ‘related person’. There is no allegation that the assessee by any act or omission made the department believe that the relationship had ceased to exist. In these circumstances, it is evident that the failure of the department in taking action against the assessee is to be attributed to lack of diligence and lack of alertness on the part of the departmental officers and not to lack of knowledge on their part of the true state of affairs. Therefore, the grounds urged for invoking the larger period of limitation are not tenable. The entire period covered by show cause notice being more than 6 months prior to the date of service of the show cause notice, the entire claim must be held to be barred by limitation.
12. The department has filed an appeal contending that in any view of the case, extra amount collected by Lloyds from the ultimate buyers should have been included in the assessable value and duty should have been demanded on that basis.
13. Perhaps two courses were open to the proper officer while preparing the show cause notice; one was to go by the price charged by Lloyds to the buyers and convert the same into wholesale price by suitable adjustment and this was what was done in the show cause notice. The other course was to disregard this aspect and take into consideration the extra amount realised by Lloyds, a related person, and treat the extra amounts as having been received by the manufacturer and demand duty on that basis. These extra amounts had been collected only in respect of the less than 2% sales effected by the assessee at the factory gate to hospitals and factories covered by Notification 56/78. Even regarding these sales the show cause notice proposed to adopt the Lloyds price to consumers. There is no case for the department that the assessable value should be determined by including the extra amounts collected even in regard to 98% of the sales made to Lloyds over and above the retail price charged by Lloyds to consumers. Such an exercise would be futile since realisation of extra amounts related only a small percentage of sales. Having two courses open, the department chose one course. The question of inclusion of the extra amounts in the assessable value could arise only in respect of the sales made to hospitals and factories by the assessee, that is, less than 2% of sales. Therefore the question of duty being demanded on the Lloyds price to buyers as well as on the extra amounts collected by Lloyds cannot arise. The appeal by the department is without any merit.
14. For the reasons indicated above, we set aside the impugned order, allow appeal E/2186/89-A and dismiss appeal E/2346/90-A.
Dictated in Open Court.