Transaction value under an inter se supply arrangement prevails where parties are independent and no valid basis for substitution exists.

Commercially agreed Import Parity Price under an inter se supply arrangement between independent entities was treated as the transaction value for petroleum product clearances, because the memorandum of understanding reflected a sale and purchase structure with payment terms, not a related-party transfer. The mere existence of a mutually beneficial arrangement did not create a related-person relationship under the Central Excise Act, and the evidence did not support recharacterising the deal as a product-sharing or loan-debt arrangement. The adjudication also could not rest on grounds beyond those alleged in the show cause notice. The valuation adopted by the assessee was upheld and substitution of the related holding company's valuation was rejected.

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Issues: Whether the petroleum products cleared to other oil marketing companies were correctly valued at the Import Parity Price under the Memorandum of Understanding as the transaction value, or whether the value adopted for clearances to the related holding company was required to be applied instead.

Analysis: The parties were independent entities and the mere existence of a mutually beneficial arrangement under the Memorandum of Understanding did not make them related persons under Section 4(3)(b)(iv) of the Central Excise Act, 1944. The arrangement provided for sale and purchase of goods at a commercially determined Import Parity Price, with actual payment through joint certificates and claim sheets within a credit period. The finding that the arrangement was not a sale but a product-sharing or loan-debt arrangement was held to be contrary to the terms of the Memorandum and the evidence on record. The adjudicating authority also travelled beyond the scope of the show cause notices by rejecting the demand on grounds not alleged therein, which was impermissible.

Conclusion: The valuation adopted by the assessee at the Import Parity Price under the Memorandum of Understanding was upheld, and the demand based on the valuation applied to supplies made to the related holding company was rejected.

Ratio Decidendi: A commercially agreed price under an inter se supply arrangement between independent entities constitutes the transaction value unless the department establishes a legally relevant relationship or other valid basis for substitution of value, and an adjudication cannot be sustained on grounds beyond the show cause notice.

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