2022 (12) TMI 453 - SC - Central Excise

Supreme Court upholds excise duty demand on related party sales under Section 4(1)(b) but reduces interest and penalty

Commissioner of Central Excise & Service Tax, Rohtak Versus Merino Panel Product Ltd.

SC upheld Revenue's demand for excise duty on goods sold to both related and independent parties, confirming valuation methodology under Section 4(1)(b) ... Valuation - sale made partly to related party and partly to independent party - incorrect method of valuing related party transactions or not - SCN issued by the Revenue noted that the CEVR did not contain any guidelines on the methodology to be adopted for discovering the assessable value of goods, when sales are made partially to both independent parties and related parties - extended period of limitation. HELD THAT:- The CBEC Circular of 01.07.2002 is binding on the Revenue. If the show cause notice issued by the Revenue is found to be contrary to the Circular, it would prima facie result in abrogation of the uniformity and consistency which is strongly emphasized upon in RANADEY MICRONUTRIENTS VERSUS COLLECTOR OF CENTRAL EXCISE [1996 (9) TMI 124 - SUPREME COURT]. It goes without saying that the Revenue’s stance against its own circular can potentially lead to a chaotic situation where, with one hand, the Revenue would lay down instructions on how to interpret the relevant statutes and rules, and with the other hand, it would promptly disobey those very directions. Maintaining predictability in taxation law is of utmost importance and, for this reason, the Court should not accept an argument by the Revenue that waters down its own Circular as this would fall squarely within the contours of the prohibition outlined in PAPER PRODUCTS LTD. VERSUS COMMISSIONER OF CENTRAL EXCISE [1999 (8) TMI 70 - SUPREME COURT]. The presumption under Section 4(1)(a) is that the sale from an Assessee to an independent party is the proper valuation to be used for determining excise duty. Conversely, a rebuttable presumption can be drawn regarding related party transactions and the value at which goods are sold in such situations. Rule 9 would be sufficient to resolve this issue when sales are made only to related entities, but where both independent and related parties are involved, we must refer to other means. In this context, Rule 11 obliges the Revenue to use “reasonable means” consistent with the principles under Section 4(1) of the CEA to arrive at the appropriate value - the show cause notice and the order of the Commissioner proceed along the basis that Section 4(1)(b) is applicable as the Assessee and MIL and MSL are related parties. Section 4(1)(a) was deemed to be inapplicable as it addresses situations where the parties are not related. Extended period of limitation - HELD THAT:- The justification of extending the period of limitation depends upon whether the Respondent-Assessee has suppressed facts and failed to provide accurate information regarding its sales to the Revenue. To this extent, there is a finding of fact against the Assessee Levy of interest and penalty - HELD THAT:- since the Revenue itself appeared to be unclear on the correct method of valuation of the goods, it is not appropriate to saddle the Respondent with additional liability, namely, other than the excise duty. The demand made by the Appellant is confirmed, we do not approve the levy of interest and penalties upon the Respondent, and direct that these amounts be reduced from the total recoverable amount from the Assessee. Appeal disposed off. Issues Involved:1. Incorrect method of valuing related party transactions.2. Applicability of Section 4(1)(a) and (b) of the Central Excise Act, 1944.3. Binding nature of CBEC Circulars.4. Extended period of limitation under Section 11A of the Central Excise Act, 1944.5. Validity of show cause notice.Issue-wise Detailed Analysis:1. Incorrect Method of Valuing Related Party Transactions:The primary issue in the appeal was the method used by the Revenue to value transactions between the Assessee and its related parties, Merino Industries Ltd. (MIL) and Merino Services Ltd. (MSL). The Revenue issued a show cause notice alleging undervaluation of goods sold to these related parties, invoking Rule 11 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 (CEVR) read with Section 4(1)(a) of the Central Excise Act, 1944 (CEA). The CESTAT set aside the notice, holding that the correct method should have been under Section 4(1)(b) of the CEA read with Rule 9 or 10 of the CEVR, as clarified by the CBEC Circular dated 01.07.2002.2. Applicability of Section 4(1)(a) and (b) of the Central Excise Act, 1944:Section 4(1)(a) of the CEA is relevant for sales to independent parties, while Section 4(1)(b) addresses sales to related parties. The CESTAT held that since the Assessee sold goods to both independent and related parties, Section 4(1)(b) should apply. The Supreme Court affirmed that the price charged to independent buyers could be used as a benchmark for determining the assessable value of goods sold to related parties, consistent with the principles under Section 4(1) of the CEA and Rule 11 of the CEVR.3. Binding Nature of CBEC Circulars:The Assessee argued that the Revenue's method of valuation was contrary to the CBEC Circular dated 01.07.2002, which mandates using Rule 11 read with Rule 9 or 10 of the CEVR for sales to both independent and related buyers. The Supreme Court reiterated that CBEC Circulars are binding on the Revenue, as established in Paper Products Ltd. v. Commissioner of Central Excise and Ranadey Micronutrients v. Collector of Central Excise. The Court emphasized that the Revenue must adhere to its own administrative directions to maintain uniformity and predictability in taxation law.4. Extended Period of Limitation under Section 11A of the Central Excise Act, 1944:The Revenue invoked the extended period of limitation under Section 11A(1) and (4) of the CEA, alleging suppression of facts by the Assessee. The Supreme Court noted that while there was a finding of fact against the Assessee, the Revenue itself was unclear on the correct method of valuation. Therefore, the Court held that it was inappropriate to levy interest and penalties on the Assessee, although the demand for excise duty was confirmed.5. Validity of Show Cause Notice:The Revenue contended that the show cause notice was valid despite invoking an incorrect provision, citing precedents like J.K. Steel Ltd. v. Union of India and Collector of Central Excise, Calcutta v. Pradyumna Steel Ltd. The Supreme Court agreed that citation of an incorrect provision does not invalidate the notice, provided the power itself exists. However, the Court emphasized that the notice must clearly state the basis of liability to allow the Assessee to respond appropriately. The Court found that the notice and the Commissioner's order were consistent with the principles under Section 4(1) of the CEA and Rule 11 of the CEVR, as interpreted by the CBEC Circular.Conclusion:The Supreme Court allowed the appeal, confirming the demand for excise duty but setting aside the penalties and interest. The Court clarified that the CBEC Circular dated 01.07.2002 is not contrary to the CEA or CEVR and mandates using 'reasonable means' under Rule 11 of the CEVR, in conformity with Section 4(1)(a) and Rule 9 of the CEVR, to determine the assessable value of goods sold to related parties. The price charged to independent buyers can be used as a benchmark for related party transactions, ensuring consistency with the Circular and statutory provisions.