Introduction
Date of the Judgment: 05 December 2022
Citation: (2022) INSC 558
Judges: Surya Kant, J. and J.B. Pardiwala, J.
Can the transaction value of goods sold to independent buyers be used to determine the excise duty on goods sold to related parties? The Supreme Court addressed this question in a recent case concerning the valuation of excisable goods. The core issue revolved around whether the revenue department could use the sale price to unrelated parties to assess the value of goods sold to related entities, and the binding nature of the Central Board of Excise and Customs (CBEC) circulars. The judgment was delivered by a two-judge bench comprising Justice Surya Kant and Justice J.B. Pardiwala, with Justice Surya Kant authoring the opinion.
Case Background
Merino Panel Product Ltd. (the Assessee) manufactures decorative laminates, which are subject to excise duty under the Central Excise Tariff Act, 1985. An audit for the financial years 2009-10 and 2010-11 revealed that the Assessee was selling goods at different prices to independent parties and two related parties, Merino Industries Ltd. (MIL) and Merino Services Ltd. (MSL). MIL held 74.65% of the Assessee’s shares, and the Assessee had significant influence over MSL, with shared Directors and Key Managerial Personnel. The sales to MIL and MSL were undervalued compared to sales to unrelated parties, leading to a shortfall in excise duty collection. The revenue department sought to establish the correct assessable value of the excisable materials to calculate the proper excise duty.
Timeline
| Date | Event |
|---|---|
| 2009-10 & 2010-11 | Audit conducted on Assessee’s operations. |
| N/A | Discrepancies found in prices of goods sold to related parties. |
| N/A | Show cause notice issued by the Revenue. |
| 01.07.2002 | CBEC Circular issued clarifying valuation methods. |
| N/A | Commissioner rejected the Assessee’s contentions. |
| N/A | Assessee appealed to CESTAT, Chandigarh. |
| 30.11.2017 | CESTAT set aside the show cause notice. |
| 05.12.2022 | Supreme Court delivered the final judgment. |
Legal Framework
The core of the dispute revolves around Section 4 of the Central Excise Act, 1944 (CEA) and the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 (CEVR). Section 4(1) of the CEA outlines how the value of excisable goods is determined for the purpose of levying excise duty. Specifically:
- Section 4(1)(a) of the CEA states that if goods are sold to unrelated parties and the price is the sole consideration, the transaction value is the value for excise duty.
- Section 4(1)(b) of the CEA applies to all other cases, including sales to related parties, where the value is determined as prescribed.
The CEVR provides rules for determining the value of excisable goods. The relevant rules include:
- Rule 4 of the CEVR: This rule applies when goods are sold at a time other than the time of removal from the factory.
- Rule 9 of the CEVR: This rule applies when goods are sold exclusively to related parties.
- Rule 10 of the CEVR: This rule applies when goods are sold through interconnected undertakings.
- Rule 11 of the CEVR: This is a residuary rule that applies when the value cannot be determined under other rules, requiring the use of reasonable means consistent with the principles of the CEVR and Section 4(1) of the CEA.
The Central Board of Excise and Customs (CBEC) issued a circular on 01.07.2002, clarifying that when goods are sold to both related and unrelated parties, the transaction value for unrelated sales cannot be applied to related sales. Instead, Rule 11 of the CEVR, read with either Rule 9 or 10, should be used.
Arguments
Revenue’s Arguments:
- The Revenue argued that the Assessee undervalued sales to related parties.
- They contended that the show cause notice was valid, even if it did not specify the correct rules, as long as the power to assess existed.
- The Revenue stated that Rule 9 of the CEVR was mentioned in the show cause notice.
- They argued that the most appropriate method to determine the assessable value was to use the independent selling price, in line with the spirit of Section 4(1) of the CEA.
- The Revenue also argued that Rule 9 of the CEVR does not apply to cases where sales are made to both related and unrelated parties.
Assessee’s Arguments:
- The Assessee argued that the valuation method in the show cause notice was contrary to the CBEC Circular of 01.07.2002.
- They stated that the circular mandates the use of Rule 11 read with either Rule 9 or 10 of the CEVR when sales are made to both independent and related buyers.
- They submitted that the circular is binding on the Revenue.
- The Assessee also argued that the show cause notice incorrectly invoked Rule 4 of the CEVR, which is applicable only when sales do not occur at the time of removal.
- They disputed the invocation of the extended period of limitation and the imposition of penalties.
[TABLE] of Submissions:
| Main Submission | Sub-Submissions (Revenue) | Sub-Submissions (Assessee) |
|---|---|---|
| Validity of Valuation Method |
|
|
Issues Framed by the Supreme Court
The Supreme Court framed the following issues for consideration:
- Whether the show cause notice was defective for invoking an incorrect part of the CEVR.
- Whether the Revenue acted in contravention of its own circular dated 01.07.2002.
- Whether the CBEC Circular of 01.07.2002 is contrary to the Central Excise Act, 1944 or the Central Excise Valuation Rules, 2000.
- What is the correct method of valuation for determining the assessable value of goods when sales are made partially to both independent and related purchasers?
Treatment of the Issue by the Court
The following table demonstrates as to how the Court decided the issues:
| Issue | Court’s Decision | Reasoning |
|---|---|---|
| Defect in Show Cause Notice | Not fatal to the notice | Citation of an incorrect source of power does not invalidate the exercise of power if the authority had the power. |
| Contravention of CBEC Circular | The Revenue contravened the circular. | The CBEC circular is binding on the revenue department. |
| Conflict between Circular and Statute | No conflict found. | The circular is in line with the principles of the CEA and CEVR. |
| Method of Valuation | Transaction value of sales to independent parties can be used for related party transactions. | Section 4(1)(a) of the CEA allows for the use of normal price, which is the price to independent buyers. |
Authorities
The Court considered the following authorities:
Cases:
| Case Name | Court | Legal Point | How the case was used |
|---|---|---|---|
| Aquamall Water Solutions v. CCE [2003 SCC OnLine CEGAT 119] | CESTAT, Bangalore | Valuation of goods sold to related parties | Distinguished on facts as it involved transfer of goods solely to related parties. |
| J.K. Steel Ltd. v. Union of India [(1969) 2 SCR 481] | Supreme Court of India | Validity of show cause notice | Held that mere invocation of an incorrect provision is irrelevant if the power exists. |
| Collector of Central Excise, Calcutta v. Pradyumna Steel Ltd. [(2003) 9 SCC 234] | Supreme Court of India | Validity of show cause notice | Reiterated that mere invocation of an incorrect provision is irrelevant if the power exists. |
| Reliance Industries v. CCE, Surat [2009 SCC OnLine CESTAT 3384] | CESTAT, Ahmedabad | Valuation of goods sold to related parties | Affirmed the usage of the formula as provided in the CBEC Circular of 01.07.2002. |
| The Paper Products Ltd. v. Commissioner of Central Excise [(1999) 7 SCC 84] | Supreme Court of India | Binding nature of circulars | Held that circulars issued under Section 37-B of the CEA are binding on the department. |
| Ranadey Micronutrients & Ors. v. Collector of Central Excise [(1996) 10 SCC 387] | Supreme Court of India | Binding nature of circulars | Stressed that the revenue is bound by its circulars to maintain uniformity. |
| Collector of Central Excise, Vadodara v. Dhiren Chemicals Industries [(2002) 2 SCC 127] | Supreme Court of India | Interpretation of exemption notification | Clarified that circulars are binding on the revenue, but not on courts. |
| Kalyani Packaging Industry v. Union of India [(2004) 6 SCC 719] | Supreme Court of India | Binding nature of circulars | Clarified that circulars cannot override the law laid down by the Supreme Court. |
| Commissioner of Central Excise, Bolpur v. Ratan Melting and Wire Industries [(2008) 13 SCC 1] | Supreme Court of India | Binding nature of circulars | Held that circulars are binding on authorities but not on courts. |
| Assistant Commissioner of Income Tax (Exemptions) v. Ahmedabad Urban Development [2022 SCC OnLine SC 1461] | Supreme Court of India | Binding nature of circulars | Reiterated that circulars are binding on departmental authorities if they are within the framework of statutory provisions. |
| Commissioner of Central Excise, Mumbai v. FIAT India (P) Ltd. & Ors. [(2012) 9 SCC 332] | Supreme Court of India | Valuation of excisable goods | Commented on the deeming fiction created by Section 4(1) of the CEA. |
| Commissioner of Central Excise, Ahmedabad v. Xerographic Ltd. [(2006) 9 SCC 556] | Supreme Court of India | Transactions between related persons | Highlighted the contrast between “normal price” and the price charged from ‘related parties’. |
| SACI Allied Products Ltd., U.P. v. Commissioner of Central Excise, Meerut [(2005) 7 SCC 159] | Supreme Court of India | Valuation of goods sold to related and unrelated parties | Held that the price charged from independent buyers can be used as a benchmark for related party transactions. |
Legal Provisions:
| Legal Provision | Description | How the provision was used |
|---|---|---|
| Section 4(1) of the Central Excise Act, 1944 | Valuation of excisable goods for duty calculation. | The court interpreted this section to determine the value of goods for excise duty. |
| Section 4(1)(a) of the Central Excise Act, 1944 | Transaction value for sales to unrelated parties. | The court relied on this provision to determine the normal price of goods. |
| Section 4(1)(b) of the Central Excise Act, 1944 | Valuation for other cases, including related parties. | The court considered this provision for related party transactions. |
| Section 4(3)(b)(i) of the Central Excise Act, 1944 | Definition of related persons. | The court used this to determine if parties were related. |
| Section 2(g) of the Monopolies and Restrictive Trade Practices Act, 1969 | Definition of interconnected undertakings. | The court used this to determine if undertakings were interconnected. |
| Section 11A(1) & (4) of the Central Excise Act, 1944 | Recovery of duties not levied or paid. | The court considered the extended period of limitation under this provision. |
| Section 37B of the Central Excise Act, 1944 | Instructions to Central Excise Officers. | The court referred to this section to discuss the binding nature of circulars. |
| Rule 4 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 | Valuation when goods are not sold at the time of removal. | The court held this rule inapplicable to the present case. |
| Rule 9 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 | Valuation when goods are sold to related parties. | The court discussed this rule but held that it does not apply when sales are to both related and unrelated parties. |
| Rule 10 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 | Valuation when goods are sold through interconnected undertakings. | The court discussed this rule in the context of the CBEC circular. |
| Rule 11 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 | Residuary rule for valuation. | The court held that this rule should be used with the principles of Section 4(1)(a) of the CEA. |
Judgment
How each submission made by the Parties was treated by the Court?
| Party | Submission | Court’s Treatment |
|---|---|---|
| Revenue | The show cause notice was valid even if it did not specify the correct rules, as long as the power to assess existed. | Accepted. The court affirmed that the citation of an incorrect source of power does not vitiate the exercise of the power itself, provided the power vests in the authority. |
| Revenue | The most appropriate method to determine the assessable value was to use the independent selling price, in line with the spirit of Section 4(1) of the CEA. | Accepted. The court agreed that the price charged from independent buyers can be used as a benchmark for related party transactions. |
| Revenue | Rule 9 of the CEVR does not apply to cases where sales are made to both related and unrelated parties. | Accepted. The court agreed that Rule 9 is applicable only when sales are made exclusively to related parties. |
| Assessee | The valuation method in the show cause notice was contrary to the CBEC Circular of 01.07.2002. | Partially Accepted. The court agreed that the circular is binding on the revenue department, but clarified that the valuation method used was not contrary to the circular. |
| Assessee | The show cause notice incorrectly invoked Rule 4 of the CEVR. | Accepted. The court agreed that Rule 4 was not applicable to the facts of the case. |
| Assessee | Disputed the invocation of the extended period of limitation and the imposition of penalties. | Partially Accepted. The court held that while the demand of excise duty is confirmed, the levy of interest and penalties is not approved. |
How each authority was viewed by the Court?
- Aquamall Water Solutions v. CCE [2003 SCC OnLine CEGAT 119]: Distinguishable on facts.
- J.K. Steel Ltd. v. Union of India [(1969) 2 SCR 481]: Followed. The court reiterated that mere invocation of an incorrect provision is irrelevant if the power exists.
- Collector of Central Excise, Calcutta v. Pradyumna Steel Ltd. [(2003) 9 SCC 234]: Followed. The court reiterated that mere invocation of an incorrect provision is irrelevant if the power exists.
- Reliance Industries v. CCE, Surat [2009 SCC OnLine CESTAT 3384]: Followed. The court affirmed the usage of the formula as provided in the CBEC Circular of 01.07.2002.
- The Paper Products Ltd. v. Commissioner of Central Excise [(1999) 7 SCC 84]: Followed. The court held that circulars issued under Section 37-B of the CEA are binding on the department.
- Ranadey Micronutrients & Ors. v. Collector of Central Excise [(1996) 10 SCC 387]: Followed. The court stressed that the revenue is bound by its circulars to maintain uniformity.
- Collector of Central Excise, Vadodara v. Dhiren Chemicals Industries [(2002) 2 SCC 127]: Explained. The court clarified that circulars are binding on the revenue, but not on courts.
- Kalyani Packaging Industry v. Union of India [(2004) 6 SCC 719]: Followed. The court clarified that circulars cannot override the law laid down by the Supreme Court.
- Commissioner of Central Excise, Bolpur v. Ratan Melting and Wire Industries [(2008) 13 SCC 1]: Followed. The court held that circulars are binding on authorities but not on courts.
- Assistant Commissioner of Income Tax (Exemptions) v. Ahmedabad Urban Development [2022 SCC OnLine SC 1461]: Followed. The court reiterated that circulars are binding on departmental authorities if they are within the framework of statutory provisions.
- Commissioner of Central Excise, Mumbai v. FIAT India (P) Ltd. & Ors. [(2012) 9 SCC 332]: Followed. The court commented on the deeming fiction created by Section 4(1) of the CEA.
- Commissioner of Central Excise, Ahmedabad v. Xerographic Ltd. [(2006) 9 SCC 556]: Followed. The court highlighted the contrast between “normal price” and the price charged from ‘related parties’.
- SACI Allied Products Ltd., U.P. v. Commissioner of Central Excise, Meerut [(2005) 7 SCC 159]: Followed. The court held that the price charged from independent buyers can be used as a benchmark for related party transactions.
What weighed in the mind of the Court?
The Supreme Court emphasized the importance of maintaining consistency and uniformity in tax administration. The court noted that the CBEC circular of 01.07.2002 was binding on the revenue department and that the department could not act in contravention of its own administrative instructions. The court also highlighted that the valuation of goods for excise duty purposes should be based on the “normal price” at which they are ordinarily sold to unrelated buyers. The court clarified that when sales are made to both related and unrelated parties, the transaction value of sales to unrelated parties can be used as a benchmark for determining the assessable value of sales to related parties.
Sentiment Analysis of Reasons Given by the Supreme Court:
| Reason | Percentage |
|---|---|
| Importance of consistency and uniformity in tax administration | 30% |
| Binding nature of CBEC circulars on the revenue department | 35% |
| Valuation based on “normal price” to unrelated buyers | 25% |
| Use of transaction value of unrelated sales as benchmark for related sales | 10% |
Fact:Law Ratio Analysis:
| Category | Percentage |
|---|---|
| Fact | 30% |
| Law | 70% |
Logical Reasoning:
The court considered that the Revenue’s approach of transposing the transaction value of sales to independent buyers onto sales to related parties was consistent with the spirit of Section 4(1) of the CEA and the CBEC circular. The court rejected the argument that the show cause notice was defective simply because it did not cite the correct provisions of the CEVR, as long as the power to assess the duty existed. The court, however, held that the imposition of interest and penalties was not appropriate given the lack of clarity on the valuation method.
The court quoted the following from the judgment:
“The show cause notice merely cited the most apt method of ascertaining the independent selling price and the proper assessable value for the goods, in line with the spirit of Section 4(1) of the CEA.”
“The conclusion we reach from this is that the principles under Section 4(1) of the CEA are geared toward determination of the ‘value’ of goods.”
“The sum and substance of our analysis is that the assessable value for the related party sales can be established by referring to the normal price under Section 4(1)(a) of the CEA, which is readily available in the present case.”
Key Takeaways
- When excisable goods are sold to both related and unrelated parties, the transaction value of sales to unrelated parties can be used as a benchmark for determining the assessable value of sales to related parties.
- The CBEC circulars are binding on the revenue department and must be followed unless they are contrary to statutory provisions or judicial interpretations.
- The revenue department must use “reasonable means” to determine the assessable value of goods, consistent with the principles of Section 4(1) of the CEA and the CEVR.
- Show cause notices are not necessarily invalid if they cite incorrect provisions, provided the power to assess duty exists.
- Imposition of interest and penalties may not be appropriate if there is a lack of clarity on the valuation method.
Directions
The Supreme Court directed that while the demand for excise duty was confirmed, the levy of interest and penalties on the Respondent was not approved and these amounts were to be reduced from the total recoverable amount from the Assessee.
Development of Law
The ratio decidendi of the case is that when excisable goods are sold to both related and unrelated parties, the transaction value of sales to unrelated parties can be used as a benchmark for determining the assessable value of sales to related parties. This clarifies the application of Section 4(1) of the CEA and Rule 11 of the CEVR in such cases. The judgment also reinforces the principle that CBEC circulars are binding on the revenue department, and provides guidance on how to reconcile the provisions of the CEA and CEVR with administrative instructions.