2025 (11) TMI 502 - AT - Central Excise

Appeal allowed: excise demand set aside for lack of findings under Section 4(3)(b)(ii)-(iv); Rule 9 misapplied, Rule 10 inapplicable

CESTAT allowed the appeal, setting aside the excise demand. The tribunal found the extended period could not be invoked in light of the SC decision on ... Undervaluation of goods - evasion of payment of Central Excise duty - related person within the meaning of Section 4 of the Central Excise Act, 1944 or not - transaction value within meaning of Section 4(1)(a) of Central Excise Act - HELD THAT:- Impugned order do not records very detailed finding in respect of this ground neither the Tribunal in the first round of litigation recorded any finding on this. However, Hon’ble Supreme Court has considered the same issue for invoking the extended period of limitation. Hon’ble Supreme Court in the case of M/s BPCL [2025 (1) TMI 989 - SUPREME COURT] have concluded that extended period could not have invoked. As a fact leading to the present proceedings are exactly identical in the present case to the case of M/s BPCL in which Hon’ble Supreme Court has held that extended period of limitation could not have been invoked, the demand could not have been confirmed by invoking the extended period of limitation. However in the present case, it is also observed that demand is made for the period 01.05.2003 to 30.09.2004, for which the show cause notice was issued on 12.01.2005. Impugned order has proceeded to determine the assessable value as per Rule 9 and of the valuation rules, by treating the OMC’s as related person (inter connected undertaking).We note that nothing has been stated in the show cause notice or in the impugned order to say that the sale price fact as per the MOU was being impacted by the relationship between the OMCs, though all the OMCs including M/s Reliance Petroleum Ltd. are independently separately constituted companies having no share holding among each other. At the best they could have termed as interconnected companies in terms of the MOU entered between them. However, even without establishing the mutuality of interest between OMCs the show cause notice and impugned order conclude that the value should be determined in terms of Rule 9. Thus, the valuation of goods transacted between the interconnected undertakings is to be done in accordance with the rule 10 read with rule 9. In case were the interconnected undertakings are not related to each other in terms either of clause (ii), (iii) or (iv) of the Section 4 (3) (b) of the Central Excise Act, 1944 as per Rule 10 (b) the value was to be determined as if they were not related persons. Impugned order records the finding that the oil marketing companies are interconnected companies but have not recorded any finding to effect that they fulfill the requirement of either of clause (ii), (iii) or (iv) of the Section 4 (3) (b) of the Central Excise Act, 1944. In absence of any finding to the effect that OMC’s which are interconnected undertakings, and also fulfill the conditions specified by the (ii), (iii) or (iv) of the Section 4 (3) (b) of the Central Excise Act, 1944, the value could not have been determined by application of Rule 9, in view of the rule 10 of the valuation rules. There are no force in the demand made - appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the price fixed under the Memorandum of Understanding (MOU) between oil marketing companies was the 'sole consideration' for sale so as to make Section 4(1)(a) (transaction value) applicable, or whether Section 4(1)(b) and the Valuation Rules apply. 2. Whether the buyer-seller relationship between the oil marketing companies constituted 'related persons' (inter-connected undertakings or otherwise) within Section 4(3)(b), thereby engaging Rule 9/Rule 10 of the Central Excise Valuation Rules, 2000 for determination of assessable value. 3. When Section 4(1)(b) applies (price not sole consideration), whether Rule 6 (add money-value of any additional consideration) or Rule 4/other rules should be invoked; and whether additional consideration was received/quantifiable so as to permit application of Rule 6. 4. Whether Rule 9 can be applied where an assessee sold part of production to unrelated buyers and part to related/inter-connected undertakings (i.e., applicability of Rule 9 when independent sale prices exist). 5. Whether extended period of limitation under the proviso to Section 11A(1) (fraud, collusion, wilful suppression etc.) could be validly invoked given the facts, and whether penalty under Section 11AC was sustainable. 6. Whether the show-cause notice and adjudication complied with the requirement that the specific valuation rule relied upon be invoked (i.e., vires of demand where the appropriate rule was not invoked in notice). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Whether the MOU price was the 'sole consideration' (Section 4(1)(a) vs Section 4(1)(b)) Legal framework: Section 4(1)(a) makes transaction value of a sale applicable only if (i) goods are sold for delivery at removal, (ii) buyer and seller are not related, and (iii) price is the sole consideration; otherwise Section 4(1)(b) applies. Valuation Rules supplement these provisions. Precedent treatment: The Supreme Court's remand order held that the MOU's object was mutual product sharing to ensure uninterrupted supply, not commercial sale; hence the MOU price could not be regarded as the sole consideration. Earlier Tribunal decisions that simply applied transaction value without analyzing MOU terms were distinguished. Interpretation & reasoning: The Court examined MOU recitals and clauses (ILP, product sharing, joint logistics) and concluded the arrangement's dominant purpose was supply assurance and mutual benefit, not arm's-length pricing. Consequently, the third condition of Section 4(1)(a) (price as sole consideration) was not satisfied. Ratio vs. Obiter: Ratio - where parties' arrangement evidences non-commercial/reciprocal consideration, price under MOU is not sole consideration and Section 4(1)(b) applies. Obiter - critique of prior Tribunal reliance on administrative direction without factual analysis. Conclusion: MOU price is not sole consideration; therefore transaction value under Section 4(1)(a) cannot be adopted for valuation in this factual matrix (cross-ref Issues 2-3). Issue 2 - Whether the parties were 'related persons'/inter-connected undertakings under Section 4(3)(b) Legal framework: Section 4(3)(b) defines relatedness (inter-connected undertakings per MRTP Act, relatives, distributor relations, or association of interest). Rules 9-10 address valuation when goods are sold to/through related persons or interconnected undertakings. Precedent treatment: Lower authority treated OMCs as inter-connected/related because common Government shareholding and MOU; Supreme Court emphasized substance of MOU and that mere public sector commonality does not automatically determine relatedness for valuation purposes without specific findings that one of the sub-clauses (ii)/(iii)/(iv) is satisfied. Interpretation & reasoning: The Tribunal found interconnectedness but noted the impugned order failed to record specific findings showing satisfaction of clause (ii), (iii) or (iv) of Section 4(3)(b). Rule 10(b) directs that, absent such specific relatedness predicates, value shall be determined as if parties were not related even if they are interconnected undertakings. Ratio vs. Obiter: Ratio - determination of 'related person' requires specific findings on the statutory sub-clauses; mere inter-connectedness under MRTP/ownership does not suffice to invoke Rule 9 automatically. Obiter - commentary on public sector status and MRTP citation. Conclusion: In absence of explicit findings that statutory sub-clauses qualifying relatedness were fulfilled, parties could not be treated as related for the purpose of applying Rule 9 (see Issue 4 on mixed sales). Issue 3 - Applicability of Rule 6 when price is not sole consideration; quantification of additional consideration Legal framework: Rule 6 provides that where price is not sole consideration, assessable value shall be transaction value plus money value of any additional consideration flowing directly or indirectly from buyer to assessee. Rule 4/5/11 interplay also relevant. Precedent treatment: The remand decision and subsequent Tribunal rulings emphasize that where Rule 6 is the appropriate provision it must be specifically invoked in the show-cause notice; further, Rule 6 requires proof/quantification of additional consideration. Interpretation & reasoning: The appellant filed an affidavit swearing no additional consideration (monetary or otherwise) was received. The impugned order did not quantify any such additional consideration or apply Rule 6. Courts held that in absence of any material showing additional consideration or its quantification, Rule 6 could not be invoked; Rule 4 was also inapplicable because price was not sole consideration, leaving Rule 6 as the correct but uninvoked method. Ratio vs. Obiter: Ratio - where Rule 6 is the applicable rule, revenue must plead, prove and quantify additional consideration; absent such proof demand under Rule 6 cannot be sustained. Obiter - references to analogous cases supporting that affidavit and lack of allegation negate invocation. Conclusion: Rule 6 was the proper rule post-finding that price was not sole consideration, but neither Rule 6 nor any quantification of additional consideration was invoked or established; therefore valuation additions under Rule 6 could not be sustained. Issue 4 - Applicability of Rule 9 where sales are partly to unrelated buyers and partly to related/interconnected undertakings Legal framework: Rule 9 applies 'when the assessee so arranges that the excisable goods are not sold by an assessee except to or through a person who is related...' Rule 10 prescribes whether Rule 9 applies to interconnected undertakings; Rule 11 and other principles guide mixed-sales situations. Precedent treatment: Multiple Tribunal and Supreme Court authorities were considered. Recent decisions hold that where sales to independent buyers exist and independent sale prices are available, those prices can serve as benchmark rather than invoking Rule 9 mechanically. Interpretation & reasoning: The Tribunal noted established jurisprudence that Rule 9 is not applicable if the assessee sells to unrelated buyers as well; where independent sale prices exist, Section 4(1)(a) principles or reasonable means (Rule 11) must be used to determine appropriate value. The impugned order applied Rule 9 without recording that all sales were routed through related persons or that statutory relatedness predicates were satisfied. Ratio vs. Obiter: Ratio - Rule 9 cannot be applied in a mechanical fashion where independent sale prices exist; revenue must use reasonable means consistent with Section 4(1) and Rule 11 to determine assessable value. Obiter - citations of various Bench decisions elaborating the principle. Conclusion: Rule 9 was inapplicable on the facts (partial sales to unrelated buyers); assessable value should be determined by reference to independent sale prices or other reasonable means after due application of mind (cross-ref Issues 1-3). Issue 5 - Invocation of extended limitation under proviso to Section 11A(1) and liability under Section 11AC Legal framework: Proviso to Section 11A(1) extends limitation to five years where non-levy/short-levy etc. arose by reason of fraud, collusion, wilful mis-statement or suppression of facts; Section 11AC permits penalty equal to duty where such mis-conduct is found. Precedent treatment: The Supreme Court's remand order considered materially identical allegations against another OMC and held extended limitation could not be invoked because the department was aware of the MOU and the show-cause notice did not specifically allege misrepresentations requisite to prove fraud/collusion/suppression. On analogous facts this Tribunal followed that conclusion. Interpretation & reasoning: The Tribunal observed that the show-cause notice did not plead or establish specific suppression or misrepresentation (e.g., that the MOU was deliberately withheld or that false representations were made), and the department had earlier knowledge of MOU and related issues (Board circular and Tribunal decision). Therefore, the statutory threshold for invoking the proviso was not met. Since extended limitation could not be invoked, penalty under Section 11AC based on that premise also failed. Ratio vs. Obiter: Ratio - extended limitation and 11AC penalty require positive, pleaded and proved conduct amounting to fraud, collusion or suppression; generic or conclusory allegations are insufficient. Obiter - discussion of Departmental circulars and prior awareness. Conclusion: Extended limitation under Section 11A proviso and consequent penalty under Section 11AC were unsustainable on the facts; demands/time-bar reliance collapsed. Issue 6 - Requirement that the show-cause notice invoke the correct valuation rule and consequences of failure to do so Legal framework: Show-cause notice is the foundation of demand; jurisdictional/principled requirement that allegations and legal basis (including specific valuation rules relied upon) be articulated so that the assessee can meaningfully answer; judicial authorities hold Commissioner cannot invoke a rule not pleaded in the notice. Precedent treatment: Authorities (cited in remand jurisprudence) establish that if the proper valuation rule (Rule 6 in this factual matrix) is not invoked in the show-cause notice, the Department cannot later rely upon it in adjudication. Interpretation & reasoning: The remand record showed Rule 4/Rule 9 were invoked while Rule 6 (the rule appropriate where price not sole consideration) was not invoked. Given Supreme Court's finding that price was not sole consideration, the Tribunal held that omission to invoke Rule 6 in the show-cause notice barred application of Rule 6 in adjudication; the impugned order's reliance on Rule 9/Rule 4 therefore suffered legal infirmity. Ratio vs. Obiter: Ratio - failure to invoke the applicable valuation rule in the show-cause notice precludes its subsequent application in adjudication; show-cause notice must fairly inform the assessee of the case to be met. Obiter - discussion of analogous case law. Conclusion: Demand based on a valuation method not pleaded in the show-cause notice is unsustainable; on remand, the Department must proceed only after invoking and pleading the correct legal provisions with supporting material. Overall Disposition Applying the legal framework, precedents and remand directions, the Tribunal concluded: (a) MOU price was not sole consideration; (b) Rule 6 was the appropriate valuation provision but was neither invoked nor was any additional consideration proven/quantified; (c) Rule 9 could not be applied mechanically because sales to unrelated buyers existed and specific statutory relatedness findings were absent; (d) extended limitation under Section 11A proviso and penalty under Section 11AC were not supportable on pleaded facts. Accordingly, the demand, interest and penalty as adjudged were set aside and the appeal allowed.