Supreme Court clarifies ‘Transaction Value’ under Central Excise Act: Bharat Petroleum Corp. Ltd. vs. Commissioner of Central Excise (20 January 2025)

Date of the Judgment: 20 January 2025
Citation: 2025 INSC 84
Judges: Abhay S. Oka, J., Pankaj Mithal, J.

Can the price at which Oil Marketing Companies (OMCs) sell petroleum products to each other be considered the ‘transaction value’ for excise duty, or should it be the price at which they sell to their dealers? The Supreme Court of India recently addressed this question, focusing on the interpretation of ‘transaction value’ under the Central Excise Act, 1944. This judgment clarifies the conditions under which a sale price between companies can be considered the basis for excise duty calculation. The bench comprised Justices Abhay S. Oka and Pankaj Mithal, with the judgment authored by Justice Abhay S. Oka.

Case Background

The case involves Bharat Petroleum Corporation Ltd. (BPCL) and other Oil Marketing Companies (OMCs) like Indian Oil Corporation Ltd. (IOCL) and Hindustan Petroleum Corporation Ltd. (HPCL). These companies have refineries and a large network of installations and depots across India. Until March 31, 2002, petroleum product prices were fixed by the government through the Administered Price Mechanism (APM). After APM was discontinued from April 1, 2002, the OMCs entered into a Multilateral Product Sale-Purchase Agreement, a Memorandum of Understanding (MOU), at the direction of the Ministry of Petroleum and Natural Gas. This MOU allowed OMCs to sell and purchase petroleum products among themselves at Import Parity Price (IPP), which was lower than the price at which they sold to their own dealers. The purpose of the MOU was to ensure smooth supply and distribution of petroleum products and to reduce transportation costs.

Timeline

Course of Proceedings

The Department issued show-cause notices to OMCs between 2002 and 2005, proposing to levy excise duty based on the price at which OMCs sold petroleum products to their own dealers, rather than the IPP at which they sold to each other. Some of these notices were dropped, with the Commissioners accepting the IPP as the ‘transaction value’. However, in other cases, demands were confirmed, leading the OMCs to appeal to the Customs, Excise & Service Tax Appellate Tribunal (the Tribunal). In one such case, Hindustan Petroleum Corporation Ltd. v. Commissioner of Central Excise, the Tribunal set aside the original order, which was summarily dismissed by the Supreme Court. Despite this, the department continued to issue show cause notices. In the case of BPCL, the Commissioner confirmed the demand, which was upheld by the Tribunal, leading to the present civil appeal. Similar appeals by the Revenue against IOCL were also filed, where the Tribunal had ruled in favour of IOCL, relying on its earlier decision in the Hindustan Petroleum Corporation Ltd. case.

Legal Framework

The core legal provision in question is Section 4 of the Central Excise Act, 1944, which deals with the valuation of excisable goods for the purpose of charging excise duty. Specifically, Section 4(1)(a) states:

“4. Valuation of excisable goods for purposes of charging of duty of excise. — (1) Where under this Act, the duty of excise is chargeable on any excisable goods with reference to their value, then, on each removal of the goods, such value shall — (a) in a case where the goods are sold by the assessee, for delivery at the time and place of the removal, the assessee and the buyer of the goods are not related and the price is the sole consideration for the sale, be the transaction value; (b) in any other case, including the case where the goods are not sold, be the value determined in such manner as may be prescribed.”

This section specifies that the ‘transaction value’ should be the basis for excise duty if three conditions are met: the goods are sold for delivery at the time and place of removal, the buyer and seller are not related, and the price is the sole consideration for the sale. If these conditions are not met, the value is to be determined as prescribed under clause (b). The court also considered Section 11A of the Central Excise Act, 1944, which deals with the recovery of duties not levied or paid and the conditions under which an extended period of limitation can be invoked. Additionally, Section 11AC of the Central Excise Act, 1944, which provides for penalties for short levy or non-levy of duty in certain cases, was also considered.

Arguments

Arguments on behalf of BPCL and other OMCs:

• The OMCs argued that the ‘transaction value’ under Section 4 of the Central Excise Act, 1944, should be the actual price paid or payable for the goods at the time of removal. They contended that Section 4 permits different prices for different buyers, and the price at which they sold to each other under the MOU, i.e., the IPP, should be considered the transaction value.
• They submitted that the MOU was a genuine agreement for product sharing and assistance among OMCs to ensure smooth supply and distribution of petroleum products. The price under the MOU was based on the IPP, which included the landed cost of the product at the nearest port plus transportation and terminal costs.
• It was argued that the OMCs were not related parties, and the sales under the MOU were on a principal-to-principal basis at arm’s length. The price was the sole consideration for the sale, and no additional amount was paid or payable.
• The OMCs relied on the decision of the Supreme Court in CCE v. Grasim Industries Ltd., CCE v. Ispat Industries Ltd., and CCE v. CERA Boards and Doors, which emphasized that after the amendment to Section 4, the concept of ‘normal value’ was replaced by ‘transaction value’, which is the actual price paid or payable.
• They also cited D.J. Malpani v. CCE to argue for a narrow construction of the term ‘transaction value’, stating that it includes only the price actually charged and any additional amount the buyer is liable to pay.
• The OMCs pointed out that the Tribunal’s decision in Hindustan Petroleum Corporation Ltd. v. Commissioner of Central Excise, which accepted the IPP as the transaction value, was summarily affirmed by the Supreme Court. They argued that this decision had merged with the Supreme Court’s order and was binding on the Tribunal in subsequent cases. They relied upon V.M. Salgaocar and Bros. Pvt. Ltd. v. CIT and Kunhayammed & Ors v. State of Kerala & Anr in support of their contention of merger.
• The OMCs contended that there was no suppression of facts or intent to evade duty, as the MOU was entered at the behest of the Ministry of Petroleum and Natural Gas, and the department was aware of it. Therefore, the extended period of limitation could not be invoked.

Arguments on behalf of the Revenue:

• The Revenue argued that the Tribunal did not interpret the clauses of the MOU in Hindustan Petroleum Corporation Ltd. case and did not record a finding on whether the price was the sole consideration for the sale.
• The Revenue submitted that the price fixed under the MOU was not the sole consideration for the sale. The MOU was for product sharing arrangements, and the real consideration was ensuring a smooth supply of petroleum products.
• The Revenue contended that the OMCs did not produce a copy of the MOU, justifying the invocation of the extended period of limitation on the ground of suppression of material facts.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. Whether the price was the sole consideration for the sale?
2. Whether the revenue was entitled to invoke an extended period of limitation under the proviso to Section 11A(1) of the Central Excise Act, 1944?
3. Whether the revenue was entitled to levy a penalty under Section 11AC of the Central Excise Act, 1944?

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Court considered the following authorities:

The Court also considered the following legal provisions:

• Section 4 of the Central Excise Act, 1944: Deals with the valuation of excisable goods for the purpose of charging excise duty. Specifically, Section 4(1)(a) defines ‘transaction value’.
• Section 11A of the Central Excise Act, 1944: Deals with the recovery of duties not levied or paid and the conditions under which an extended period of limitation can be invoked.
• Section 11AC of the Central Excise Act, 1944: Provides for penalties for short levy or non-levy of duty in certain cases.

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Court relied on CCE v. Grasim Industries Ltd., CCE v. Ispat Industries Ltd., and CCE v. CERA Boards and Doors to emphasize the shift from ‘normal value’ to ‘transaction value’ under Section 4 of the Central Excise Act, 1944.
• The Court considered D.J. Malpani v. CCE to interpret ‘transaction value’ narrowly, stating that it includes only the price actually charged and any additional amount the buyer is liable to pay.
• The Court discussed Hindustan Petroleum Corporation Ltd. v. Commissioner of Central Excise, noting that while the Tribunal had accepted the IPP as the transaction value, it had not analyzed whether the price was the sole consideration for the sale. The Supreme Court had summarily dismissed an appeal against this decision.
• The Court discussed V.M. Salgaocar and Bros. Pvt. Ltd. v. CIT and Kunhayammed & Ors v. State of Kerala & Anr regarding the merger of the Tribunal’s decision with the Supreme Court’s order.
• The Court referred to Commissioner of Central Excise, Hyderabad v. Detergents India Ltd. to support the argument that it is permissible to sell the same product at different prices to different parties, and the actual sale value should be taken as the transaction value.

The Supreme Court held that the ‘transaction value’ under Section 4(1)(a) of the Central Excise Act, 1944, cannot be the price at which OMCs sell petroleum products to each other under the MOU. The Court reasoned that the MOU’s primary objective was to ensure a smooth supply of petroleum products among OMCs, not a commercial sale. Therefore, the price was not the sole consideration for the sale. The Court also held that the extended period of limitation could not be invoked because the department was aware of the MOU and its terms. Consequently, the penalty under Section 11AC was also not applicable.

The court observed that the Tribunal in the Hindustan Petroleum Corporation Ltd. case had not considered the crucial aspect of whether the price was the sole consideration for the sale, and therefore, the summary dismissal of the appeal by the Supreme Court did not constitute a binding decision on this issue.

“Thus, from a plain reading of the MOU, we find that the real consideration for the MOU was to ensure an uninterrupted supply to all the OMCs at various places in India.”

“By no stretch of the imagination, it can be said that the price fixed under the MOU was the sole consideration for the sale by one OMC to the other.”

“Even assuming that there is a merger of the decision in the case of Hindustan Petroleum Corporation Ltd1 with the order of this Court, the order of this Court does not constitute a binding decision on the issue of compliance with the third condition in Section 4(1)(a) as the Tribunal had not decided the said issue.”

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the interpretation of the MOU and the conditions laid down in Section 4(1)(a) of the Central Excise Act, 1944. The Court emphasized that the MOU was not a simple commercial agreement for the sale of goods but a product sharing arrangement to ensure the smooth supply of petroleum products among OMCs. The following points weighed in the mind of the court:

• MOU’s Purpose: The court focused on the objectives of the MOU, noting that it was designed to facilitate product sharing and ensure uninterrupted supply rather than a straightforward commercial sale. The court emphasized that the real consideration was to ensure an uninterrupted supply to all the OMCs at various places in India.
• Sole Consideration: The court highlighted that for a sale to qualify as a ‘transaction value’ under Section 4(1)(a), the price must be the sole consideration. In this case, the court found that the price was not the sole consideration as the MOU involved mutual arrangements for uninterrupted supply.
• Awareness of MOU: The court noted that the department was aware of the MOU and its terms, which negated the claim of suppression of facts. The court observed that the department was aware of the MOU even before the date on which the show cause notice was issued.
• Interpretation of Section 4(1)(a): The court strictly interpreted the conditions laid down in Section 4(1)(a), emphasizing that all three conditions (delivery at the time and place of removal, non-related parties, and price as the sole consideration) must be met for the transaction value to be applicable.
• Precedent: While the court acknowledged the earlier decision in Hindustan Petroleum Corporation Ltd., it clarified that the Tribunal had not specifically addressed the issue of whether the price was the sole consideration. Therefore, the summary dismissal of the appeal by the Supreme Court did not constitute a binding precedent on this particular point.

Fact:Law

Logical Reasoning

Key Takeaways

• The ‘transaction value’ under Section 4(1)(a) of the Central Excise Act, 1944, must be the sole consideration for the sale. If other factors influence the price, it cannot be considered the transaction value.
• Agreements between companies, especially PSUs, that are primarily for product sharing and smooth supply, may not qualify for ‘transaction value’ treatment if the price is not the sole consideration.
• The department must establish that there was an intent to evade duty by suppression of facts for the extended period of limitation to apply. Mere non-submission of a document is not enough.
• The summary dismissal of an appeal by the Supreme Court does not necessarily affirm every aspect of the lower court’s or tribunal’s decision, especially if a specific issue was not addressed.

Directions

The Supreme Court directed that the appeals where the OMCs had succeeded before the Tribunal be remanded to the Tribunal for fresh adjudication in light of the findings recorded in this judgment.

Development of Law

The ratio decidendi of this case is that for a transaction to qualify as a ‘transaction value’ under Section 4(1)(a) of the Central Excise Act, 1944, the price must be the sole consideration for the sale. The court clarified that if the agreement is for product sharing and smooth supply, the price agreed upon cannot be considered the transaction value. This decision clarifies the interpretation of ‘transaction value’ and highlights the importance of considering the true nature of the transaction and not just the price.

This decision clarifies that the summary dismissal of an appeal does not imply that every aspect of the lower court’s decision is affirmed. The court has emphasized that the Tribunal must consider all the conditions under Section 4(1)(a) before arriving at a decision.

Conclusion

The Supreme Court’s judgment in Bharat Petroleum Corporation Ltd. vs. Commissioner of Central Excise clarifies the interpretation of ‘transaction value’ under Section 4(1)(a) of the Central Excise Act, 1944. The Court held that the price at which OMCs sell petroleum products to each other under the MOU cannot be considered the ‘transaction value’ for excise duty purposes, as the price is not the sole consideration for the sale. The Court also ruled against the invocation of the extended period of limitation and the imposition of penalties. This judgment provides clarity on the conditions for determining ‘transaction value’ in the context of excise duty and emphasizes the importance of considering the true nature of the transaction.