Supreme Court Upholds Conservative Valuation for Captive Consumption: Commissioner of Central Excise vs. J.R. Organics Ltd. (2023)

Date of the Judgment: 01 March 2023
Citation: Civil Appeal No. 8502 of 2009
Judges: S. Ravindra Bhat, J., Dipankar Datta, J.
Can the highest price of goods be the basis for determining the value of goods used for captive consumption? The Supreme Court addressed this question in a case concerning the valuation of Specially Denatured Spirits (SDS) manufactured by M/S J.R. Organics Ltd. The court had to decide whether the value of SDS should be based on the highest price in a different unit or on a more conservative, representative price. The judgment was delivered by a two-judge bench comprising Justice S. Ravindra Bhat and Justice Dipankar Datta, with Justice S. Ravindra Bhat authoring the opinion.

Case Background

M/S J.R. Organics Ltd. (the respondent-assessee) manufactures organic chemicals, using Specially Denatured Spirits (SDS) produced at its unit in Kaptanganj, Uttar Pradesh. Molasses is a key raw material for producing SDS. The Central Excise Department issued three show cause notices to the assessee for the period between April 1994 and December 1999, alleging incorrect valuation of SDS for excise duty purposes. The department sought to determine the value of SDS based on the highest price of SDS at another unit in Sarai District, Gorakhpur, on a specific date, rather than the assessee’s in-house production cost at Kaptanganj. The assessee contended that the value should be determined based on its in-house production cost, in accordance with Rule 6(p)(ii) of the Central Excise Rules, 1994.

Timeline:

Course of Proceedings

The Commissioner of Central Excise confirmed the duty demand based on the show cause notices. The assessee appealed to the Customs Excise & Service Tax Appellate Tribunal (CESTAT), which initially ruled in favor of the assessee, stating that the Commissioner’s method of valuation was incorrect. The revenue appealed to the Supreme Court, which remanded the case back to CESTAT for fresh consideration. The Supreme Court directed CESTAT to determine if there was any rationale in the valuation method used by the Commissioner and what the appropriate method of valuation should be. On remand, CESTAT upheld its earlier decision, stating that the most conservative price should be adopted for valuation purposes.

Legal Framework

The core of the dispute revolves around the interpretation of Rule 6(b)(i) of the Central Excise Rules, 1994, which deals with the valuation of excisable goods for captive consumption. The rule states that the value should be based on the price of comparable goods of the same assessee or other assesses. The Supreme Court considered the principle that the value should be “conservative in every respect,” as established in previous cases. The court also looked at the meaning of “wholesale cash price” and emphasized that it is a price free from any post-importation charges and trade discounts.

Arguments

Revenue’s Submissions:

• The revenue argued that the value of the goods should be determined under Rule 6(b)(i) of the Central Excise Rules, 1994, based on material characteristics and the nearest ascertainable value of the goods.
• The revenue contended that the Commissioner had correctly exercised discretion by using the highest price of SDS on a particular day at the Sarai Distillery in Gorakhpur as the basis for valuation.
• The revenue argued that the Commissioner’s approach was valid and legal, given the various factors mentioned in the provision.

Assessee’s Submissions:

• The assessee argued that the value of SDS should be determined based on its in-house production at Kaptanganj, as per Rule 6(p)(ii) of the Central Excise Rules, 1994.
• The assessee contended that the value should be a representative price of the goods during a particular period, not the highest price on a specific day.
• The assessee relied on the principle that the most conservative price should be adopted for valuation.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in the judgment. However, the core issue was whether the CESTAT was correct in holding that the most conservative price should be adopted while determining the value of goods for captive consumption, and whether the Commissioner’s method of determining the value based on the highest price was correct.

Treatment of the Issue by the Court

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

Authorities

The Court relied on the following authorities:

Judgment

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

How each authority was viewed by the Court?

• A.K. Roy vs. Voltas Limited [1973 (3) SCC 503]*: The Court relied on this case to reiterate the principle that the price must be conservative in every respect when determining the real value of goods to be taxed.
• Vacuum Oil Company vs. Secretary of State for India [AIR 1932 PC 168]*: The Court cited this case to define “wholesale cash price” as the price paid by retail traders on wholesale purchase, free from post-importation charges and trade discounts.
• Union of India vs. Delhi Cloth and General Mills [1963 Suppl. (1) SCC 586]*: The Court referred to this case as a relevant authority in the context of determining the wholesale price.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the principle of adopting a conservative approach in valuation for excise duty purposes. The Court emphasized that the value of goods should represent the real value and should not be inflated by using the highest price. The court was of the opinion that the price must be conservative in every respect and free in particular from any loading for any post-importation charges incurred in relation to the goods.

Logical Reasoning:

The Court rejected the revenue’s argument that the highest price of SDS on a particular day should be used for valuation. Instead, the Court emphasized that the price must be conservative and representative of the wholesale trade. The Court’s reasoning was based on the principle that the value should be free from any post-importation charges and trade discounts, as established in previous cases such as A.K. Roy vs. Voltas Limited [1973 (3) SCC 503]. The Court noted that the price should be a net price, less any trade discounts, and that sales to the trade are those in contemplation. The Court also relied on Vacuum Oil Company vs. Secretary of State for India [AIR 1932 PC 168], which defined “wholesale cash price” as the price paid by retail traders on wholesale purchase, free from post-importation charges and trade discounts. The Court affirmed the CESTAT’s decision, stating that the most conservative price should be adopted for valuation purposes.

The Court quoted from A.K. Roy vs. Voltas Limited [1973 (3) SCC 503]:

“In determining the price which is to represent the real value of the goods to be ‘taxed, “the price must be conservative in every respect and free in particular from any loading for any post-importation charges incurred in relation to the goods”. “The price is to be a price for goods. as they are both at the ‘time’ and ‘place’ of importation. It is to be a ‘cash price’, that is to say a price free from any augmentation for credit or other advantage allowed to a buyer; it is to be a net price, that is to say it is a price ‘less trade discount’ “.

The Court further observed, “the words the ‘wholesale price’ were used in the section in contradistinction to a ‘retail price’, and that not only on the round that such is a well recognised meaning of the words but because their association with the words ‘trade discount’ indicates that sales to the trade are those in contemplation, and also because only by attaching that meaning to the word is the ‘wholesale price’ relieved of the loading representing post- importation expenses which, as a matter of business, must always be charged to the consumer, and which are eliminated.”

The Court also referred to the principle enunciated in Vacuum Oil Company vs. Secretary of State for India [AIR 1932 PC 168]:

“the term means the price paid by retail traders on wholesale purchase. The essence of the idea is that the purchase must be a wholesale purchase and not a retail one.”

Key Takeaways

• ✓ For the valuation of excisable goods used for captive consumption, the most conservative price should be adopted.
• ✓ The highest price of goods on a specific date cannot be the sole basis for determining the value for excise duty purposes.
• ✓ The principle of conservative valuation, as established in A.K. Roy vs. Voltas Limited [1973 (3) SCC 503], should be followed.
• ✓ The wholesale cash price should be free from any post-importation charges and trade discounts.

Directions

No specific directions were given by the Supreme Court. The Court dismissed the appeal filed by the revenue and upheld the order of CESTAT.

Development of Law

The ratio decidendi of this case is that the most conservative price must be adopted for the valuation of goods used for captive consumption, reinforcing the principle established in A.K. Roy vs. Voltas Limited [1973 (3) SCC 503]. This judgment clarifies that the highest price of goods on a specific day is not an appropriate basis for valuation. There is no change in the previous position of law, but the judgment reiterates the importance of conservative valuation.

Conclusion

The Supreme Court dismissed the revenue’s appeal, affirming the CESTAT’s order. The Court held that the most conservative price should be used for the valuation of goods used for captive consumption, and the highest price of goods on a specific day should not be the basis for valuation. The judgment reinforces the principle of conservative valuation and clarifies the meaning of “wholesale cash price.”