The Mumbai Bench of Customs, Excise, and Service Tax Appellate Tribunal ( CESTAT ) ruled that dealer promotion expenses should not be included in the assessable value of goods for excise duty purposes when there was no direct benefit to Kirloskar Oil Engines, the manufacturer.
Kirloskar Oil Engines manufactures internal combustion engines, diesel generators, and related parts. Between 2007-2011 and 2012, the company shared the cost of promoting these products with its dealers (Green Original Equipment Manufacturers, GOEM), issuing credit notes for 50% of the expenses.
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The central excise authorities contended that these shared costs should be added to the assessable value of the goods, as per Rule 6 of the Central Excise Valuation Rules, 2000, and a CBEC circular from 2002, which required additional considerations like promotions to be included in the price.
The adjudicating authority confirmed a recovery of unpaid duties totaling Rs. 17.9 lakh and Rs. 11.1 lakh with additional penalties relying on previous rulings such as Dhiren Chemical Industries.
Kirloskar Oil Engines appealed before the Commissioner of Central Excise (Appeals). The CCE(A) held that the CBEC circular did not apply to the assessee’s case and rejected the inclusion of promotional expenses in the assessable value.
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The excise department appealed before the Mumbai Bench of CESTAT challenging the CCE (A) order. The department’s counsel referred to the CBEC circular and Rule 6 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000, arguing that the price of goods is not the sole consideration for the sale, hence the additional expenses should be included.
The counsel referenced the Maruti Suzuki Ltd case which dealt with a similar issue but admitted that the case was still pending before the Supreme Court.
The respondent’s counsel (Kirloskar Oil Engines) argued that the expenses were for promoting the “green motif” of the generators sold by GOEM and were not directly related to promoting the engines manufactured by the respondent.
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The respondent’s counsel contended that since the benefit of sales promotion did not flow to the manufacturer, these costs should not be added to the assessable value.
The two-member bench C J Mathew (Technical Member) and Ajay Sharma ( Judicial Member ) noted that similar issues had been settled previously in favor of the respondent (Kirloskar Oil Engines) in their own earlier case and in the case of TVS Motors.
The tribunal rejected the relevance of the Maruti Suzuki case, noting the differences. Maruti Suzuki dealt with final products delivered by dealers, whereas in the respondent’s case, the product (engines) was an intermediate good incorporated into other products before reaching consumers.
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The Tribunal clarified that Rule 6 of the Central Excise Valuation Rules applies only when price is not the sole consideration. There was no evidence that the credit notes issued by the respondent were additional consideration flowing from the dealers to the manufacturer.
Therefore, the tribunal held that the 50% sales promotion expenses shared with the dealers did not form part of the assessable value for excise purposes, aligning with previous judgments. The appeal of the Commissioner of Central Excise was dismissed.
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