Supreme Court Upholds Denial of Excise Duty Refund on Returned Goods: M/s Peacock Industries Ltd. vs. Union of India (2022)

Date of the Judgment: September 5, 2022

Citation: (2022) INSC 822

Judges: M. R. Shah, J. and Krishna Murari, J.

Can a manufacturer claim a refund of excise duty on goods returned by distributors, and how should the value of these returned goods be determined? The Supreme Court of India addressed this question in a case involving M/s Peacock Industries Ltd., a manufacturer of plastic molded furniture. The core issue was whether the company was entitled to a refund of excise duty on goods returned by its distributors, and if so, how the value of those returned goods should be calculated for the purpose of the refund. The judgment was delivered by a bench of Justices M. R. Shah and Krishna Murari, with Justice M.R. Shah authoring the opinion.

Case Background

M/s Peacock Industries Ltd., the appellant, manufactures plastic molded furniture. The company sought a refund of excise duty on goods that were returned by its distributors. The company had issued credit notes to its distributors for these returned goods. The assessee argued that they were entitled to a refund under Section 173-L of the Central Excise Act, 1944, and the Central Excise Rules, 1944. They contended that the value of the returned goods for the purpose of the refund should be the market value of the goods as second-hand items or, alternatively, the value of the raw material if the goods were to be reused.

The Deputy Commissioner issued a show cause notice and, after considering a market survey report, valued the returned goods at Rs. 8 to 10 per kg, treating them as scrap. The Deputy Commissioner determined that the value of the returned goods was less than the original duty paid, thus denying the refund under Section 173-L(v) of the Central Excise Act. This order was challenged by the assessee before the Tribunal, which dismissed the appeal. The matter then reached the High Court of Judicature for Rajasthan at Jodhpur.

The High Court also rejected the reference, stating that the value determined by the Department was based on an appreciation of evidence and after giving the assessee an opportunity. The High Court further noted that the assessee had not raised the issue of not receiving a copy of the market survey report before the Tribunal. Aggrieved by the High Court’s decision, the assessee appealed to the Supreme Court.

Timeline:

Course of Proceedings

The Deputy Commissioner, after issuing a show cause notice and considering the market survey report, determined the value of the returned goods at Rs. 8 to 10 per kg, treating them as scrap. Consequently, the refund was denied as the value was less than the original duty paid. The assessee’s appeal was dismissed by the Tribunal. The High Court upheld the decision, noting that the assessee had been given an opportunity and that the valuation was based on evidence. The High Court also pointed out that the assessee did not raise the issue of not receiving the market survey report before the Tribunal.

Legal Framework

The case revolves around Section 173-L of the Central Excise Act, 1944, which deals with the refund of duty on goods returned to a factory. The relevant portion of the section is as follows:

“173-L Refund of duty on goods returned to factory. – (I) The Collector may grant refund of the duty paid on manufactured excisable goods issued for home consumption from a factory, which are returned to the same or any other factory for being remade, refined, reconditioned or subjected to any other similar processes in the factory. Provided that: – XXXXXX XXX (2) XXX XXX XXX (3) No refund under sub-rule (1) shall be paid until the process mentioned therein have been completed and an account under subrule having been rendered to the satisfaction of the collector within six months of the return of the goods to the factory. No refund shall be admissible in respect of the duty paid: – (i) to (iv) XXX XXXXXX (v) If the value of the goods at the time of their return to the factory is, in the opinion of the collector, less than the amount of duty originally paid upon them at the time of their clearance from the factory, Explanation – in this clause, “value” means the market value of the excisable goods and not the ex-duty value thereof.”

The explanation to clause (v) of Section 173-L of the Central Excise Act, 1944, clarifies that “value” means the market value of the excisable goods, not the ex-duty value. This definition is crucial in determining the eligibility for a refund.

Arguments

Appellant’s Arguments:

• The assessee argued that the value of the returned goods should be considered based on their market value as second-hand goods.
• Alternatively, the assessee contended that since the returned goods could be reused as raw material, their value should be considered as the value of the raw material for the purpose of refund.
• The assessee also argued that the Deputy Commissioner’s order was in breach of natural justice because a copy of the market survey report was not provided to them.
• The assessee submitted that the department wrongly treated the returned goods as scrap, leading to an incorrect valuation of Rs. 8 to 10 per kg.

Respondent’s Arguments:

• The department argued that the valuation of the returned goods was done after considering the market survey report and after giving the assessee an opportunity to present their case.
• The department contended that the assessee did not raise the issue of non-supply of the market survey report before the Tribunal.
• The department argued that the value of returned goods depends on the defects found in them, which can vary significantly. The assessee failed to provide specific evidence for each consignment of returned goods.
• The department relied on the market survey report to determine the value of the returned goods as scrap at Rs. 8 to 10 per kg.
• The department argued that Section 173-L of the Central Excise Act, 1944, specifies that the market value of the returned goods should be considered for refund, not the value of the raw material.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section. However, the core issue before the court was:

1. Whether the assessee was entitled to a refund of excise duty on returned goods under Section 173-L of the Central Excise Act, 1944.
2. Whether the value of the returned goods was correctly determined by the Deputy Commissioner.
3. Whether the non-supply of the market survey report violated the principles of natural justice.

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 legal provisions:

• Section 173-L of the Central Excise Act, 1944: This section deals with the refund of duty on goods returned to a factory. The court focused on clause (v) and its explanation, which defines “value” as the market value of the excisable goods.

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 Section 173-L of the Central Excise Act, 1944 to determine that the market value of the returned goods should be considered for the purpose of refund. The Court held that the explanation to clause (v) of Section 173-L of the Central Excise Act, 1944, defines “value” as the market value of the excisable goods and not the ex-duty value thereof.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following factors:

• The court emphasized that the assessee failed to provide sufficient evidence regarding the value of the returned goods. The court noted that the assessee only produced invoices of second-hand goods and did not lead any evidence with respect to each consignment of returned goods.
• The court relied heavily on the market survey report and the fact that the Deputy Commissioner had given the assessee an opportunity to present their case. The assessee also did not seek cross-examination on the market survey report.
• The court strictly interpreted Section 173-L of the Central Excise Act, 1944, stating that the “value” of the returned goods means the market value and not the value of raw material.
• The court also noted that the assessee did not raise the issue of non-supply of the market survey report before the Tribunal, which indicated that the issue was an afterthought.

The Court rejected the assessee’s argument that the value of the returned goods should be considered as raw material value, stating that “for the purpose of considering the value for refund under Section 173-L what is required to be considered is the value of the returned goods. As per explanation to clause (v) of Section 173-L, “value” means the market value of the excisable goods and not the ex-duty value thereof.” The Court also emphasized that “the value of the returned goods depend on the defects found in the manufactured goods which are returned. It varies considering the defects. In some returned goods the defect might be 5% and in some goods the defect might be 80% to 90%.” The Court further stated, “the assessee has to lead the evidence with respect to each consignment of the returned goods, which the assessee failed to prove in the present case.”

Key Takeaways

• The market value of returned goods, not their value as raw material, is the basis for excise duty refund under Section 173-L of the Central Excise Act, 1944.
• Assessees must provide cogent evidence regarding the value of returned goods, especially considering varying defects in different consignments.
• Failure to raise issues before the Tribunal may preclude raising them at later stages of litigation.

Directions

No specific directions were given by the Supreme Court.

Development of Law

The ratio decidendi of this case is that for the purpose of excise duty refund on returned goods, the market value of the returned goods must be considered, and not the value of the goods as raw material. This clarifies the interpretation of Section 173-L of the Central Excise Act, 1944, and reinforces the need for concrete evidence in such cases.

Conclusion

The Supreme Court dismissed the appeal of M/s Peacock Industries Ltd., upholding the decision of the High Court. The court affirmed that the value of returned goods for excise duty refund purposes must be the market value of the goods, not their value as raw material. The court also emphasized the importance of providing sufficient evidence and raising issues at the appropriate stages of litigation. This case clarifies the interpretation of Section 173-L of the Central Excise Act, 1944, and sets a precedent for how such refunds should be handled.