2015 (8) TMI 586 - SC - Central Excise

Supreme Court Clarifies Customs Law on 'Related Person' Interpretation and Arm's Length Sales

M/s. Tamil Nadu Petroproducts Ltd. Versus Commissioner, Central Excise, Chennai & Another

The Supreme Court upheld the Customs, Excise and Service Tax Appellate Tribunal's decision regarding the interpretation of 'related person' under customs ... Valuation - best judgment assessment - Arm length sales is below the cost of production - related person - interconnected undertaking - Held that:- According to the Department, if the sale price contained in another chart is compared with the cost of production, it is clear that even the sales made to arm's length purchasers is at prices ranging between ₹ 69,000/- and ₹ 85,000/- which is way below cost at ₹ 1,57,548/-. While agreeing with the CESTAT that none of the Central Excise (Valuation) Rules would be directly applicable as a result of which Rule 11 would have to be relied upon - which gives the authority the power to make a best judgment assessment - we find that on facts in the present case, the cost of manufacture plus 15 per cent principle would not be attracted for the simple reason that it is found that in point of fact, sales made to arm's length purchasers were way below cost - To apply the cost plus principle on facts where arm's length sales are made at well below cost is to choose a principle that would work arbitrarily as the endeavour of the assessing authority is to arrive at an arm's length wholesale cash price to value the aforesaid manufactured articles for purposes of levy of excise duty. - Impugned order is partly set aside - Decided partly in favour of assessee. Issues:1. Interpretation of related person under customs law.2. Application of cost plus principle for excise duty assessment.3. Arm's length sales and pricing discrepancies.Interpretation of Related Person:The case involved the interpretation of the term 'related person' under customs law. The appellant, a company manufacturing Epichlorohydrin (ECH), entered into a joint venture for manufacturing Epoxy Resins. The courts analyzed detailed findings by the Deputy Commissioner and the Commissioner, concluding that although there was no direct interconnection, there was a mutuality of interest between the appellant and the joint venture company. The Customs, Excise and Service Tax Appellate Tribunal (CESTAT) upheld these findings, except for a discordant note by the Commissioner (Appeals), which was overruled. Ultimately, the Supreme Court agreed with CESTAT's decision, affirming the indirect interest between the parties.Application of Cost Plus Principle:Regarding the application of the cost plus principle for excise duty assessment, the appellant argued that arm's length sales were made at prices significantly below the cost of production due to low international prices. The court examined a chart showing the price differentials and noted that even sales to arm's length purchasers were below the cost of production. The court emphasized that a best judgment assessment must be reasonable, not arbitrary. As arm's length sales were below cost, the cost plus principle was deemed inappropriate. The court directed authorities to re-calculate the duty based on the price differentials between arm's length purchasers and the joint venture company.Arm's Length Sales and Pricing Discrepancies:The appellant demonstrated through a chart that arm's length sales were conducted at prices below the cost of production due to low international prices. Even sales to unrelated parties were significantly lower than the production cost. The court acknowledged these pricing discrepancies and emphasized the need for a reasonable assessment method. By setting aside the application of the cost plus principle, the court instructed authorities to re-evaluate the duty based on the price differentials between arm's length sales and sales to the joint venture company. The appeals were disposed of with these observations.