Depot sales valuation must first follow the normal price rule; bank statements alone do not prove undervaluation.

Depot sales required valuation to be tested first under section 4(1)(a) because the depot was treated as the place of removal; the residual method under section 4(1)(b) read with Rule 7 could not be invoked without first applying the primary valuation rule. The note further states that undervaluation was not proved, as bank statements used for credit facilities did not establish extra consideration, and the alleged fictitious buyers and absence of account payee payments were not sufficient without proof of flow back of additional amounts. On that basis, the duty, interest and penalty demand was treated as unsustainable.

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Issues: (i) Whether, in the presence of depot sales, the Revenue could disregard valuation under section 4(1)(a) and adopt valuation under section 4(1)(b) read with Rule 7. (ii) Whether undervaluation was proved on the basis of bank statements, alleged fictitious buyers, and the absence of account payee payments.

Issue (i): Whether, in the presence of depot sales, the Revenue could disregard valuation under section 4(1)(a) and adopt valuation under section 4(1)(b) read with Rule 7.

Analysis: The applicable legal framework required the normal price under section 4(1)(a) to be applied first, since the depot constituted a place of removal. Once sales from the depot were admitted, the residual method under section 4(1)(b) and Rule 7 could not be invoked without first exhausting the primary valuation mechanism. The adopted method in the show cause notices was therefore legally unsustainable.

Conclusion: The issue was decided in favour of the assessee and against the Revenue.

Issue (ii): Whether undervaluation was proved on the basis of bank statements, alleged fictitious buyers, and the absence of account payee payments.

Analysis: The Revenue failed to establish that extra consideration had flowed back from the buyers to the manufacturers. Bank statements furnished for credit facilities, by themselves, were not a reliable basis to prove undervaluation. The finding that buyers had been identified in some cases and that payments were received through account payee cheques remained unrebutted. The absence of proof of actual payment over and above invoice value meant that the allegation of undervaluation could not be sustained.

Conclusion: The issue was decided in favour of the assessee and against the Revenue.

Final Conclusion: The demand of duty, interest, and penalty was not sustainable on the evidence and valuation method adopted, and the Revenue's challenge failed.

Ratio Decidendi: Where depot sales exist, valuation must first be tested under section 4(1)(a); bank statements alone cannot prove undervaluation, and in the absence of proof of flow back of additional consideration, the demand fails.

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