Interest u/s 11AB on excise duty paid due to price escalation – Matter referred to Larger Bench: SC

Brief of the case

In the case of M/S. STEEL AUTHORITY OF INDIA LTD. VERSUS COMMISSIONER OF CENTRAL EXCISE, RAIPUR, it was held by Hon’ble Supreme Court that the case of levy of interest u/s 11AB on excise duty paid due to price escalation which has already been decided in the cases of SKF and Auto International requires a re-look and thus, directed the Registry to place the matter before the Hon’ble Chief Justice of India for constituting a Larger Bench to go into the issue involved in this case which is of seminal importance having far reaching ramifications.

Brief Facts of the Case

The appellant/assesses herein, which is a public sector undertaking of the Government of India, has been selling iron and steel products, that are manufactured by it, to the Indian Railways. For this purpose, contract was signed between the said two parties and the goods were being sold to the Indian Railways at the price mutually agreed upon between them.   On each removal of these goods for supply to the Railways, the assesses had been paying the excise duty as per the price disclosed by the assesses in the invoices issued at the time of the removal of the goods.   Goods in this manner were supplied during the period January, 2005 to July, 2006 which period is involved in the instant appeal. It so happened that there was an upward revision in the price by the Railways in August, 2006   covering the period in question. On that basis, assesses was paid the price difference on the fixation of enhanced consideration for the goods supplied.   The assesses paid the differential duty of Rs.142.78 crores voluntarily in August, 2006. According to the Revenue/respondent, since the differential duty was paid in August, 2006 and not paid at the time of clearance of the goods, there was delay in paying the differential duty and, therefore, under Section 11AB of the Central Excise Act, 1944 (hereinafter referred to as the ‘Act’), the assesses was liable to pay interest on the differential duty amount paid by it. The contention of the Revenue has been upheld by the Authorities below and including Custom Excise and Service Tax Appellate Tribunal (hereinafter referred to as the ‘Tribunal’).

The question, thus, that arises for consideration in these appeals is as to whether interest is leviable under Section 11AB of the Act on the differential duty amount paid under supplementary invoices due to price increase by virtue of price variation clause in the sale contract.

Contentions of the Appellant

The Appellant contended that there can be two distinct types of transactions:

(a) where the price of the goods is ‘fixed’ at the time and place of removal, and as a result of subsequent negotiations (often protracted) the price is retrospectively revised by the buyer;

(b) Where the price at the time and place of removal is ‘not fixed’ (price subject to escalation clause), and the final price is agreed between the seller and buyer subsequently. In the cases falling in the first category, even the differential duty is not payable.

Held by Hon’ble Supreme Court of India

The Hon’ble Supreme Court referred to the below two judgments inasmuch as the provisions of Section 11AB of the Act have already been interpreted by this Court under almost similar circumstances. These are:

(a)   CCE v. SKF India Ltd. [1]

(b) CCE v. International Auto Limited. [2]

In SKF India Ltd. case, the assesses was engaged in the manufacture and sale of ball bearings and textile machine parts. It sold goods manufactured by it on certain prices on payment of excise duty leviable on the price on which the goods were sold. Later on, there was a revision of prices with retrospective effect. Following   the   revision   the   assesses   raised supplementary invoices on its buyers and also paid the differential duty on the goods sold earlier. The Revenue took the view that the assesses was liable to pay interest on differential duty. This factual position would reflect that it was almost same that prevails in the present appeals.

Though, the demand made in Order-in-Original was set aside by   the Commissioner (Appeals) and the order of the Commissioner (Appeals) was upheld by the CESTAT holding that no interest was chargeable where there was time gap between the payment of differential duty and issuance of supplementary invoices to the customers on the basis of upward revision of prices in respect of the goods sold earlier. The said view of the Tribunal was reversed by this Court holding that interest was payable under Section 11AB of the Act. After reproducing the provisions of Section 11AB, the Court in the first instance pointed out that the aforesaid provision was not happily worded and it has been, inter alia, held, that sub-section (2-B) of Section 11-A provides that the assesses in default may make payment of the unpaid duty on the basis of his own ascertainment or as ascertained by a Central Excise Officer and, in that event, such assesses in default would not be served with the demand notice under Section 11-A(1) of the Act. However, Explanation 2 to the sub-section makes it clear that such payment would not be exempt from interest chargeable under Section 11-AB of the Act. What is stated in Explanation 2 to sub-section (2-B) is reiterated in Section 11-AB of the Act, which deals with interest on delayed payment of duty.

Factual situation in International Auto Limited was also almost similar. In that case, the assesses, viz., International Auto Limited had supplied auto parts to its customers (manufacturers of motor vehicles) who determined the prices of auto parts having regard to the cost of   raw   material, manufacturing cost, profit margin, etc. and placed orders with   the assesses. Since price difference arose between the price on the date of removal and the enhanced price at which the goods stood ultimately sold, the Department issued show cause notice proposing to levy interest on the differential duty, paid by the assesses, under Section 11-AB of the Act. The assesses took up the defence that prices indicated in the purchase order were final and not liable to change at the time of removal of the goods and, thus, it was not the case of ‘short levy’ on which interest could be charged. After extensively quoting from the judgment of SKF India Ltd. and following the same, aforesaid contention of the assesses was repelled.

The Hon’ble Court stated that, it is axiomatic that interest under Section 11AB can be levied/charged where any duty of excise has not been levied or paid or has been short levied or short paid. In such an event, interest is liable to be paid ‘from the first date of the month succeeding the month in which the duty ought to have been paid’. Section 4(1) (a) of the Act provides that the value of the goods shall be the price ‘actually paid or payable’ for the goods. This means the price which has been ‘paid’ or ‘agreed to be paid’ by the buyer of the goods.

The Hon’ble Court found force in the argument of the assesses that the expression ‘ought to have been paid’ in Section 11AB has to be understood in this light. Thus, for the purposes of Section 11AB, the expression ‘ought to have been paid’ would mean the time when the price is agreed upon by the seller and the buyer. In other words, the right of the seller to receive the revised price crystallises only when the buyer agrees to sanctions the same, and only at that time can liability to pay duty, if at all, on the revised price arise. Both parties are not aware of the final price at the time when the goods are removed. In the context of price revision subsequent to clearance, duty ‘ought to be paid’ only after the sanctioning of the revised priced by the buyer.   The differential duty on account of price revision is paid in the month when the revised price is agreed between the seller (assesses) and the buyer and it ought to have been paid only at that time and not before.

One has also to keep in mind the difference between ‘what should be the quantum of duty to be paid’ and ‘when such duty is payable’. In the cases of price revision, the quantum of duty would be on the escalated price but the time for payment of differential duty is when the parties agree for the escalation in prices. On that reckoning, it would follow that interest clock for differential duty will start ticking from the date differential duty is due, i.e., the date of agreement of escalated prices and not before. This concept gets clarified with the latest amendment in 2015 to Section 11A with regard to the ‘relevant date’ for payment of interest.

The Hon’ble Court stated that the Court has already taken note of judgments in SKF and International Auto including the reasons which have been given in support of the view that interest would be payable. At the outset, the Bench did not consider the effect of the expression ‘ought to have been paid’ occurring in Section 11AB of the Act. It is undeniable that under Section 4 of the Act, the excise duty is to be paid on the ‘transaction value’ and such a transaction value has to be seen at the time of clearance of the goods. Indubitably, when the goods were cleared, the excise duty was paid taking into consideration the price that was actually charged and was reflected in the invoices raised for the said purpose.   The Department cannot plead that as on that date, this was not the price charged. No doubt, when the differential payment is made at a later date, further amount towards excise duty becomes payable as a result of said differential in price. Further, such an event took place at a subsequent date. As on the date when the goods were cleared, there was no certainty that there would be price escalation and it was beyond comprehension to ascertain the exactitude of such an escalation. It would be impossible to expect the assessee to pay the excise duty, at the time of clearance of the goods, on the basis of price escalation that took place at a later date in future.

Therefore, as on the date of clearance when excise duty was paid, it could not be treated as ‘short paid’ on the said date. As a consequence when the principal amount, namely, the excise duty itself was not payable (i.e. on the differential) on the date of clearance of the goods, there cannot be any question of law to pay interest.

No doubt, on receipt of differential price, when the buyer agreed to escalation in the price, further excise duty also become payable and on that reckoning one can say that the excise duty originally paid became ‘short paid’. However, that would only attract payment on differential excise duty and not the interest thereon.

The two judgments in SKF India Ltd. and International Auto are by the same Bench. International Auto follows SKF India Ltd.   The primary factor by which the Bench was influenced was that there is a loss of revenue to the Government and, therefore, the Government should compensate for that.   It proceeds on the basis that the price which was originally stated at the time of removal of the goods was ‘understated’ (Para 8 of International Auto). However, value of the goods for the purpose of duty is ‘at the time of removal’, as emphasised above which remains fundamental principle from the inception of the Central Excise Act originally enacted in 1944 and remains valid till date. It is, therefore, difficult to accept that the price was ‘understated’ on the date of removal of those goods.

In view of the above, the Hon’ble Court held that the decision in SKF and Auto International require a re-look for the reasons given above and thus, directed the Registry to place the matter before the Hon’ble Chief Justice of India for constituting a Larger Bench to go into the issue involved in this case which is of seminal importance having far reaching ramifications.