2018 (11) TMI 1142 - AT - Central Excise

Tribunal rules Guaranteed Powder Factor not a price variation, impacts Central Excise Act

CCE, CC, Hyderabad-III Versus Gulf Oil Corporation Limited

The Tribunal held that the Guaranteed Powder Factor in the contract acted as a penalty rather than a price variation clause, impacting the assessable ... Valuation - inclusion of Guaranteed Powder Factor in assessable value - disallowance of reduction in assessable on “Guaranteed Powder Factor” holding that is not a price variation clause but is in the nature of a penalty - Held that:- It is a common practice in many agreements to have clauses with respect to variation and prices, depending upon several factors. It is also a common practice in agreements to have a clause related to achievement of the desired benchmarks and a reward or penalty for either over achieving or not achieving the benchmarks. In this case it is in the form of a guaranteed powder factor which will be evaluated once in every quarter and if there is shortfall, they will make proportionate deduction in payment. There is another clause in the agreement towards price variation depending upon various factors including the guarantee for blast failure. It is evident that the respondent is paid less if they do not meet the guarantee powder factor but will not be rewarded if they over achieve - This issue is no longer res integra . In the appellant’s own case Gulf Oil Corporation Limited [2009 (11) TMI 417 - CESTAT, KOLKATA], it has been held that the penalty in the contract in case the explosives are not upto the bench mark agreed to between the parties will not have any bearing in the assessable value. The Guaranteed Powder Factor in the form of penalty cannot alter the assessable value under section 4 of Central Excise Act, 1944 - appeal allowed - decided in favor of appellant. Issues:- Whether the Guaranteed Powder Factor in a contract constitutes a price variation clause or a penalty affecting the assessable value under section 4 of the Central Excise Act, 1994.Analysis:1. Facts and Background: The appeal was filed by the Revenue against an Order-in-Appeal regarding the assessment of explosives supplied under a contract with a price variation clause. The dispute centered around the Guaranteed Powder Factor and its impact on the assessable value.2. Arguments by Revenue: The Revenue contended that the Guaranteed Powder Factor should be treated as a penalty rather than a price variation clause. They argued that any bonus or penalty based on the product's performance should not alter the assessable value under section 4 of the Central Excise Act, 1994. The Revenue cited relevant case laws to support their position.3. Arguments by Appellant: The Appellant argued that the Guaranteed Powder Factor should be considered a price variation clause, entitling them to adjustments in the assessable value based on performance benchmarks specified in the contract. They pointed to the agreement's price schedule and clauses related to price variation to support their stance.4. Evaluation by the Tribunal: The Tribunal analyzed the contract terms, specifically the Guaranteed Powder Factor clause and its implications on payment adjustments. They noted that the clause outlined penalties for failing to meet benchmarks but did not provide for rewards if benchmarks were exceeded. The Tribunal referenced past judgments, including the appellant's own case, to establish that penalties or bonuses linked to product performance should not impact the assessable value.5. Conclusion: After considering both parties' arguments and legal precedents, the Tribunal concluded that the Guaranteed Powder Factor, acting as a penalty for non-performance, should not affect the assessable value under section 4 of the Central Excise Act, 1994. Citing settled principles from previous cases, the Tribunal set aside the impugned order and allowed the appeal in favor of the Revenue.6. Final Decision: The Tribunal's decision, delivered on 16.11.2018, clarified that penalties or rewards based on product performance benchmarks, such as the Guaranteed Powder Factor in this case, do not alter the assessable value under the Central Excise Act, 1994. The judgment highlighted the distinction between price variation clauses and penalties, emphasizing that penalties for non-performance should not impact the assessable value determination.