The main legal principle established in the judgment is that the valuation of exported goods for rebate claims should be based on the foreign market price to ensure revenue neutrality, and there should be minimal interference in revenue-neutral exercises.

S. Ravindra Bhat, J.

1. This petition relates to two rebate claims of Rs.21,18,36,117 and Rs.1,75,57,537, made on 18.7.2011 and 14.11.2011 respectively, under the Central Excise Act, 1944 (“the Central Excise Act”) before the Deputy Commissioner of Customs and Central Excise. The petitioner, Dr. Reddy's Laboratories Ltd. (“Dr. Reddy's”), claimed this rebate for refund of excise duty paid earlier by it on the export of certain pharmaceutical products. The refund was allowed by the Deputy Commissioner (by two orders dated 30.9.2011 and 13.1.2012). Dr. Reddy”s was refunded the amounts. Later, proceedings were initiated before the Commissioner of Customs, Central Excise and Service Tax (Appeal II) for recovery of the refunded amount, on the ground that the rebate amounts refunded were in excess. It is in this background that the present petition has come before this Court.

2. The brief facts are that during the export period under consideration, Dr. Reddy”s was granted the exclusive right to sell the drug Olanzapine, in 5, 10 and 20 mg formulations, in the United States (US) for a limited period of 180 days. Between October 2011 and January 2012, Dr. Reddy”s exported the drug to its US subsidiary, Dr. Reddy”s Laboratories Inc., New Jersey, USA (“the Jersey subsidiary”) at a price of US $ 7, 3.65 and 2.20 for the 20, 10 and 5 mg tablets respectively, amounting to a total of approximately Rs.411 crores through foreign exchange, which was received in India. According to that valuation, Dr. Reddy”s paid excise duty – at the applicable rate of about 5% of Rs.21,18,36,11 on the 20 mg tablets, and Rs.64,66,041 on the 5 and 10 mg tablets. A rebate application was then made – since excise duty on exported products is nil – under Rule 18 of the Central Excise Rules, 2002 (“2002 Rules”). The rebate claimed was granted.

3. Proceedings were later initiated before the Commissioner (Appeals) for partial recovery of the rebate, after the Commissioner exercised powers of review under Section 35E(2) of the Act and passed orders for the filing of an appeal. In these proceedings, the Appellate Commissioner held – by orders dated 20.3.2012 and 28.8.2012 – that the refund granted was in excess of the market price of the products exported. Relying on Notification No. 19/2004-CE (NT), dated 6.9.2004 (“Notification 19/2004”), which states that the rebate cannot be in excess of the total market price of the exported goods at the time of export, the rebate amount was thus reduced to Rs.8,91,295 and Rs.23,491 based on an independent valuation of the market price on a cost plus basis. Dr. Reddy”s filed a revision application, which was dismissed.

4. The Revenue demanded the balance amount of the rebate which was questioned by Dr. Reddy”s, by approaching the Customs, Excise and Service Tax Appellate Tribunal (“CESTAT”). Pending appeal before the CESTAT, the present writ petition impugns the decision of the Revisionary Authority, which forms the basis for the quantified demand raised and which is subject matter of the appeal to the CESTAT. The reasons stated by the Commissioner, exercising powers of review under Section 35E(2) and by the Appellate and finally Revisionary Authorities tread the same path and can usefully be dealt with together. The bone of contention concerns the price used by Dr. Reddy”s to determine the rebate value.

5. The two review orders dated 20.3.2012 and 28.8.2012 observed that “sanction of the rebate is not legal and proper” due to the incorrect export valuation. This observation was premised on four reasons: first, in terms of the Board's Circular No. 203/37/96-CX, dated 26.4.96, as the consignment was cleared to a subsidiary unit, i.e. the Jersey subsidiary, the sale price cannot be termed as the „transaction value” under Section 4 of the Central Excise Act read with the Monopolies and Restrictive Trading Practices Act, 1969. Instead, it was stated:

“when the goods are sold to or through a related person or an inter-conn