Supreme Court Admits Revenue’s Appeal on Revenue Neutrality in Inter-Unit Excise Valuation Dispute

The Hon’ble Supreme Court in the case of COMMISSIONER OF CENTRAL EXCISE AND SERVICE TAX Versus M/s STEEL AUTHORITY OF INDIA LIMITED - 2026 (1) TMI 849 - SC Order held that Revenue’s appeal against CESTAT Kolkata’s finding of revenue neutrality in Steel Authority of India Limited’s (“SAIL”) inter-unit transfer of refractory materials was admitted, condoning delay and keeping the question of law open, as the Tribunal had set aside excise duty demands holding the transaction to be revenue-neutral.

Facts:

M/s Steel Authority of India Limited ('the Petitioner') manufactures refractory bricks and mortar, clearing them both to independent customers and other SAIL units after amalgamating with Bharat Refractories Ltd. in 2009.

The Commissioner of Central Excise & Service Tax, Ranchi I ('the Respondent') investigated SAIL’s valuation method for inter-unit transfers, issuing show cause notices (SCNs) alleging undervaluation and proposing excise duty demands totalling Rs. 11,79,02,441/- for August 2009 to March 2015 under Section 4(1)(b) of the Central Excise Act, read with Rule 8 and Rule 9 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000.

The Petitioner contended that the valuation method adopted was correct, the full duty demanded was revenue neutral, as SAIL’s sister units availed CENVAT credit for goods used in manufacture of dutiable final goods.

The Respondent contended undervaluation, arguing that SAIL should have adopted 110% of cost of production per CAS-4 for inter-unit transfers under Rule 8 or Rule 9 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000

SAIL’s grievance arose from the Commissioner’s order confirming the duty demand with penalty and interest, despite their submission that the issue was revenue neutral and the valuation method was accepted for prior periods.

SAIL appealed to the Customs, Excise & Service Tax Appellate Tribunal (the CESTAT), Kolkata in M/s Steel Authority of India Limited Versus Commissioner of Central Excise & Service Tax, Ranchi I - 2025 (3) TMI 258 - CESTAT KOLKATA, which, after considering legal arguments and payments by SAIL for prior periods, held the entire exercise as revenue neutral and set aside the impugned demand and penalty (M/s Steel Authority of India Limited Versus Commissioner of Central Excise & Service Tax, Ranchi I - 2025 (3) TMI 258 - CESTAT KOLKATA).

Issue:

Whether excise duty demand on undervaluation of refractory material cleared by SAIL to its own units is sustainable under Section 4(1)(b) read with Rule 8 or Rule 9 of Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000, where the recipient units’ avail CENVAT credit, thereby rendering the transaction revenue-neutral?

Held:

The CESTAT Kolkata in M/s Steel Authority of India Limited Versus Commissioner of Central Excise & Service Tax, Ranchi I - 2025 (3) TMI 258 - CESTAT KOLKATA held as under:

• Set aside the duty demand and penalty on SAIL, holding inter-unit transfers revenue-neutral as the duty paid was availed as credit by SAIL's recipient units, relying on M/s. Hindalco Industries Limited Versus Commissioner of Central Excise, Bhubaneswar-II - 2023 (5) TMI 720 - CESTAT KOLKATAand the principle that no sustainable excise demand arises in such revenue-neutral situations.

The Hon’ble Supreme Court in COMMISSIONER OF CENTRAL EXCISE AND SERVICE TAX Versus M/s STEEL AUTHORITY OF INDIA LIMITED - 2026 (1) TMI 849 - SC Orderheld as under:

• Held that the delay has been condoned and admitted the Revenue’s appeal.

Our Comments:

CESTAT’s order is predicated on consistent judicial recognition of revenue neutrality, tracing to M/s. Hindalco Industries Limited Versus Commissioner of Central Excise, Bhubaneswar-II - 2023 (5) TMI 720 - CESTAT KOLKATA which held exercise is revenue neutral as duty paid is eligible as credit for recipient sister unit, and judgements like in COMMISSIONER OF C. EX., PUNE Versus COCA-COLA INDIA PVT. LTD. - 2007 (4) TMI 17 - Supreme Court. The Tribunal found no substantive pecuniary loss to the Government, as any duty paid on inter-unit transfers under higher value would be fully creditable to recipient SAIL units manufacturing dutiable final goods.

The Supreme Court, while keeping the question of law open and admitting the appeal, has not rendered a final judgment but will consider both revenue neutrality and procedural compliance in determining sustainability of such excise demands.

Relevant Provisions:

Rule 8 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000

“8. Where whole or part of the excisable goods are not sold by the assessee but are used for consumption by him or on his behalf in the production or manufacture of other articles, the value of such goods that are consumed shall be one hundred and ten per cent of the cost of production or manufacture of such goods.”

Rule 9 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000

“9. Where whole or part of the excisable goods are sold by the assessee to or through a person who is related in the manner specified in any of the sub-clauses (ii), (iii) or (iv) of clause (b) of sub-section (3) of section 4 of the Act, the value of such goods shall be the normal transaction value] at which these are sold by the related person at the time of removal, to buyers (not being related person); or where such goods are not sold to such buyers, to buyers (being related person), who sells such goods in retail : Provided that in a case where the related person does not sell the goods but uses or consumes such goods in the production or manufacture of articles, the value shall be determined in the manner specified in Rule 8.”

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