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SUPREME COURT OF INDIA
SURYA KANT, J.B. PARDIWALA, JJ.
Commissioner of Central Excise & Service Tax, Rohtak – Appellant
Versus
Merino Panel Product Ltd. - Respondent
Civil Appeal No. 6891 of 2018
Decided on : 05-12-2022
(A) Central Excise Act, 1944 – Section 4 – Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 – Rules 9 and 10 – Show-cause notice – Method of valuing related party transactions – CBEC Circular of 01.07.2002 is binding on Revenue – If show cause notice issued by Revenue is found to be contrary to Circular, it would prima facie result in abrogation of uniformity and consistency – Revenue’s stance against its own circular can potentially lead to a chaotic situation where, with one hand, Revenue would lay down instructions on how to interpret relevant statutes and rules, and with other hand, it would promptly disobey those very directions – Maintaining predictability in taxation law is of utmost importance – While Department’s hands are tied with regard to its Circulars, no such prohibition operates on Courts and Tribunals – It is incumbent upon adjudicatory bodies to ascertain correct position of law unencumbered by Revenue’s interpretation as crystallized in its administrative directions. (Paras 19 and 20)
(B) Central Excise Act, 1944 – Section 4 – Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 – Rules 9 and 10 – Show-cause notice – Method of valuing related party transactions – Invocation of incorrect methodology for arriving at assessable value is immaterial to validity of notice provided that power itself existed – Existence of power is not in question and neither has Respondent denied this – However, distinction between basis of liability to pay additional excise duty and determination of actual amount – Former is bedrock on which show cause notice lies and will form foundation for further proceedings against assessee – Price charged from independent parties for sale of excisable goods can be used as a benchmark for determination of excise duty on related transactions when such a price is readily available – However, when making such calculations via transposition, Revenue cannot act in a mechanical way – Assessment of appropriate value of related party transaction must be made after considering relevant material and due application of mind – Entire quasi-judicial process of issuing a show cause notice and considering distinguishing factors placed by Assessee must be completed before price of sales to independent buyers is utilized as a benchmark for sales to related parties – Assessable value for related party sales can be established by referring to normal price under Section 4(1)(a) of CEA. (Paras 25, 26, 35 and 36)
Facts of the case:
Present Civil Appeal originates from the impugned order dated 30.11.2017 passed by Customs, Excise and Service Tax Appellate Tribunal, Chandigarh (“CESTAT”). CESTAT set aside show cause notice issued by the Appellant-Revenue to the Assessee-Respondent, on the ground that it had invoked an incorrect method of valuing related party transactions.
Findings of Court:
When the normal price that is ordinarily charged in dealings where the price itself is the sole consideration of the transaction is available, as it is here, that price can be transposed onto the related party purchases as well, to arrive at the assessable value. Hence, order of the Commissioner regarding the value of the goods sold to the Respondent’s sister concerns is in consonance with this Court’s earlier judgments and the Circular dated 01.07.2002.
Result : Civil Appeal allowed.
JUDGMENT :
Surya Kant, J:
1. The present Civil Appeal originates from the impugned order dated 30.11.2017 passed by the Customs, Excise and Service Tax Appellate Tribunal, Chandigarh (“CESTAT”). The CESTAT set aside the show cause notice issued by the Appellant-Revenue to the Assessee-Respondent, on the ground that it had invoked an incorrect method of valuing related party transactions.
A. FACTUAL BACKGROUND
2. The Assessee is involved in the manufacture of decorative laminates and other like materials, which fall under Chapter 48 of the Central Excise Tariff Act, 1985. As excisable goods, the value at which the Respondent was selling these goods would be the determinant for the amount of tax recoverable by the Appellant. Following an audit conducted on the Assessee’s operations for FY 2009-10 and 2010-11, discrepancies were unearthed in terms of the prices at which these goods were being sold. The goods were being offered not only to independent parties unconnected with the Respondent, but also to two ‘related parties’ called “Merino Industries Ltd.” (“MIL”) and “Merino Services Ltd.” (“MSL”), as defined under Section 4(3)(b)(i) of the Central Excise Act, 19441[Section 4. Valuation of excisable goods for purposes of charging of duty of excise -
(3) For the purpose of this section,-
(a) "assessee" means the person who is liable to pay the duty of excise under this Act and includes his agent;
(b) persons shall be deemed to be "related" if -
(i) they are inter-connected undertakings;
…
Explanation -…. ](“CEA”) read with Section 2(g) of the Monopolies and Restrictive Trade Practices Act, 1969. 2[2. Definitions. – In this Act, unless the context otherwise requires, -
(g) “inter-connected undertakings” means two or more undertakings which are inter-connected with each other in any of the following manner, namely:-] It was ascertained that Respondent was a subsidiary of MIL with 74.65% of its shareholding vested in the latter. With regard to MSL, the Assessee was found to have significant influence over its operations and the two companies shared Directors/Key Managerial Personnel.
3. The sales to these related entities were discovered to be undervalued in comparison to those made by the Assessee to non-related independent entities. This artificial devaluation resulted in a shortfall in collection of excise duty due to the deliberate deflation of the price by the Assessee when selling goods to its related party concerns. Hence, the assessable value of the excisable materials had to be established in order to then calculate the correct amount of excise duty to be levied.
4. The assessable value of excisable goods is worked out via Section 4(1) of the CEA. As we will repeatedly be referring to this provision at a later stage, a reproduction of its relevant portion is necessary at this point:-
Section 4. Valuation of excisable goods for purposes of charging of duty of excise. –
(1) Where under this Act, the duty of excise is chargeable on any excisable goods with reference to their value, then, on each removal of the goods, such value shall–
(a) in a case where the goods are sold by the assessee, for delivery at the time and place of the removal, the assessee and the buyer of the goods are not related and the price is the sole consideration for the sale, be the transaction value;
(b) in any other case, including the case where the goods are not sold, be the value determined in such manner as may be prescribed.
Explanation.-For the removal of doubts, it is here by declared that the price-cum-duty of the excisable goods sold by the assessee shall be the price actually paid to him for the goods sold and the money value of the additional consideration, if any, flowing directly or indirectly from the buyer to the assessee in connection with the sale of such goods, and such price-cum-duty, excluding sales tax and other taxes, if any, actually paid,
Maintaining predictability in taxation law is of utmost importance – While Department’s hands are tied with regard to its Circulars, no such prohibition operates on Courts and Tribunals.
Valuation of goods for captive consumption must follow Rule 8 of the Valuation Rules, establishing revenue neutrality as paid duties are accessible as CENVAT credit, negating improper demands.
Valuation of goods sold to interconnected undertakings requires proof of mutual interest as per Central Excise Act provisions, without which transaction value is upheld.
Customs authorities must prove undervaluation with substantial evidence, including contemporaneous import prices, rather than relying solely on unattested initial export declarations.
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