2025 (3) TMI 1524 - AT - Central Excise

Royalty treated as part of assessable value; demands sustained where timely, delayed adjudications set aside under section 11A(11)

M/s. Mahanadi Coalfields Ltd. Versus Commr. of Central Excise, Customs & Service Tax, Rourkela

M/s. Mahanadi Coalfields Ltd. Versus Commr. of Central Excise, Customs & Service Tax, Rourkela - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether adjudication orders passed beyond the time-limit prescribed in Section 11A(11) of the Central Excise Act are legally sustainable where no plausible reasons are recorded showing it was impracticable to adjudicate within the time-limit. 2. Whether Section 11A is invokable (i.e., whether show cause notices for short payment/under-valuation could be validly issued) where the assessee, at the date of removal, had excluded components such as Royalty and Stowing Excise Duty (SED) from transaction value on the basis of prevailing judicial authority. 3. Whether 'Royalty' is a tax/excludible from transaction value under Section 4(3)(d) of the Central Excise Act or is includible in assessable value by virtue of being contractual consideration. 4. Whether Stowing Excise Duty (SED) collected under the Coal Mines (Conservation & Development) Act, 1974 qualifies as a duty of excise / tax and therefore is excludible from transaction value. 5. Incidental: The extent to which judicial discipline and the hierarchy of precedent constrain subordinate authorities when there are conflicting Supreme Court benches, and whether Revenue's reliance on a later Supreme Court decision (Kesoram) justified issuance of SCNs prior to final larger-bench pronouncement. ISSUE-WISE DETAILED ANALYSIS Issue 1: Timeliness under Section 11A(11) Legal framework: Section 11A(11) prescribes adjudication time-limits (six months / one year / two years depending on period/amendment) with the qualification 'where it is possible to do so' (and Excise Manual refers to 'as far as possible'). Precedent treatment: The Tribunal relied on its Principal Bench decision in Kopertek Metals and on High Court decisions (e.g., Swatch Group) and Delhi High Court/VOS jurisprudence emphasizing that departures from the statutory time-limit require plausible, recorded reasons showing it was impracticable or impossible to adjudicate within the period. Interpretation and reasoning: The Court held that the statutory phrase grants limited flexibility only for insurmountable exigencies; mere delay or lack of expedition without explanation is insufficient. The adjudicating authority must either adjudicate within the statutory period or record cogent reasons why it was impossible. The length of delay is not determinative - any unexplained failure to meet the statutory timeline renders the order vulnerable. Ratio vs. Obiter: Ratio - an adjudication order passed beyond the statutory timeline without plausible reasons for impossibility is invalid; the burden lies on the authority to demonstrate insurmountable impediments. Obiter - comparisons with cases involving different statutory contexts (e.g., service tax SCNs issued before time-limit provisions) are explanatory. Conclusions: The Court applied Kopertek Metals to set aside adjudication orders in respect of 20 of 22 SCNs where OIOs were not completed within the prescribed period and no plausible reasons were recorded. The Court emphasized that procedural failure of this nature requires setting aside confirmed demands for those SCNs. Issue 2: Applicability of Section 11A where no short-payment existed at date of removal (interaction of Sections 3, 4 and 11A) Legal framework: Section 4(3)(d) excludes amounts of duty of excise, sales tax and other taxes actually paid or payable from transaction value. Section 11A provides recovery/adjudication provisions for short levy/non-levy. Precedent treatment: The appellant relied on a Seven-Judge bench (India Cements) holding royalty to be a tax; revenue relied on a later Five-Judge decision (Kesoram) contending royalty is not a tax; the Supreme Court's larger reference culminating in a Nine-Judge decision (MADA 2024) later clarified the position. Interpretation and reasoning: The Court recognized that issues of valuation/classification often remain unsettled until final apex pronouncements. However, it held that Revenue may issue SCNs based on a bona fide, conflicting interpretation supported by Supreme Court authority of record (even if lesser quorum) and that the mere fact an assessee relied on an earlier larger-bench decision does not preclude Revenue from invoking Section 11A when Revenue believes there was short payment. The Court treated the conflict of precedent as relevant to merits and bona fide belief but not fatal to issuance of SCNs. Ratio vs. Obiter: Ratio - existence of conflicting Supreme Court decisions does not, by itself, preclude issuance of SCNs or invocation of Section 11A; but it is material to assessment of bona fides and potential relief under extended period provisions. Obiter - doctrinal discussion on litigative strategy to keep issues alive. Conclusions: For SCNs adjudicated within time (2 SCNs), the Court upheld Revenue's invocation of Section 11A on merits given subsequent Nine-Judge (MADA 2024) holding that royalty is not a tax. For SCNs set aside on timeliness grounds, the merits were not decided because adjudication was invalid. Issue 3: Whether 'Royalty' is a tax (includibility in assessable value) Legal framework: Section 4(3)(d) excludes 'amount of duty of excise, sales tax and other taxes' from transaction value; characterization of royalty determines deductibility. Precedent treatment: The Court surveyed India Cements (Seven-Judge) treating royalty as a tax, Kesoram (Five-Judge) treating royalty as contractual consideration (not tax), subsequent Three-Judge observations recommending a larger Bench, and the Nine-Judge decision in MADA (2024) concluding royalty is not a tax. Interpretation and reasoning: The Court observed principle of judicial discipline but noted that Revenue having relied on Kesoram could legitimately issue SCNs; however, with the Nine-Judge decision now squarely deciding that royalty is not a tax, on merits royalty must be included in assessable value going forward. Ratio vs. Obiter: Ratio - post-MADA (Nine-Judge) royalty is not a tax and is includible in assessable value. Obiter - discussion of prior conflicting benches and the impact on earlier conduct. Conclusions: For SCNs not set aside on timeliness, demands in respect of royalty component were affirmed; assessee liable to discharge royalty-related duty and interest as per law. Issue 4: Whether Stowing Excise Duty (SED) is a duty of excise (excludible from transaction value) Legal framework: CMD Act, 1974 (Sections 6-9) levies and prescribes collection of SED; Section 4(3)(d) excludes duty of excise from transaction value. Precedent treatment: Reliance placed on Tata Iron & Steel Co. Ltd. (Supreme Court) treating levies under CMD Act as duty of excise. Interpretation and reasoning: The Court examined statutory language of CMD Act treating the levy expressly as 'duty of excise', and noted its payment and collection mechanism under the Act. Accordingly, SED falls within the expression 'duty of excise' and is excludible from transaction value. Ratio vs. Obiter: Ratio - SED is a duty of excise and therefore excludible from transaction value for computation of excise duty. Obiter - none material. Conclusions: Confirmed demands to the extent premised on SED were set aside for the SCNs adjudicated on merits (the two SCNs where timeliness did not bar adjudication), as SED qualifies as duty of excise and is not includible in transaction value; interest remaining payable on confirmed portions relating to royalty. Issue 5: Judicial discipline, hierarchy of precedent and effect on subordinate authorities issuing SCNs Legal framework: Doctrine of precedent and judicial discipline require subordinate tribunals/authorities to follow binding decisions of higher benches; where a smaller bench doubts a larger-bench decision it should seek reference to larger bench. Precedent treatment: The Court reviewed authorities (Central Board of Dawoodi Bohra; Mineral Area Development Authority; Union of India v. Kamlakshi Finance; East India Commercial Co.; decisions emphasizing obedience to higher courts) and High Court decisions applying these principles. Interpretation and reasoning: The Court acknowledged that a subordinate authority is bound by higher court precedent but also recognized practical reality that Revenue may act on conflicting apex decisions until finally settled. The Court held that such bona fide reliance affects assessment of Revenue's fault and may mitigate application of extended limitation defenses, but does not automatically invalidate issuance of SCNs. Ratio vs. Obiter: Ratio - where there is conflicting apex authority, Revenue's reliance on a later Supreme Court decision can justify issuance of SCNs; subordinate authorities should follow binding precedent but conflicts among Supreme Court benches require ultimate resolution by a larger bench. Obiter - detailed historical exposition of doctrine of precedent. Conclusions: The Court declined to find Revenue at fault for issuing SCNs based on Kesoram; however, with the subsequent Nine-Judge ruling, the merits favored Revenue for remaining SCNs; judicial-discipline arguments supported assessee on bona fide belief but did not bar Revenue action absent binding contrary authority at the time. Overall Disposition (cross-reference) 1. SCNs adjudicated beyond Section 11A(11) time-limits without plausible recorded reasons - set aside (20 SCNs). 2. SCNs adjudicated within the statutory timeline - royalty component affirmed (includible); SED component held excludible and set aside for those SCNs; interest payable on confirmed portions. 3. Legal consequences: Appeals allowed in part, with consequential reliefs as per law; the Court applied Kopertek Metals and related time-limit jurisprudence for procedural infirmity and applied MADA (Nine-Judge) on the substantive question of royalty.