Commissioner of Central Excise Vs Merino Panel Product Ltd (Supreme Court of India)
The Supreme Court of India (“the Supreme Court”) in the case of Commissioner of Central Excise & Service Tax v. Merino Panel Product Ltd [Civil Appeal No. 6891 OF 2018 dated December 5, 2022] held that the Circular No. 643/34/2002-CX (“Circular”) dated July 1, 2002, issued by the Central Board of Excise and Customs (“CBEC”) clarifying the doubts regarding Valuation Rules with respect to goods when sold partly to related persons and partly to independent buyers, is not violative of the Central Excise Act 1994 (“CEA”) and the Central Excise Valuation Rules 2000 (“CEVR”).
Facts:
The Merino Panel Product Ltd (“the Respondent”) is a manufacturer of decorative laminates and other like materials (“the Goods”) which falls under the chapter 48 of the Central Excise Tariff Act, 1985 (“CETA”). Since the goods were excisable goods, the value at which the Respondent was selling them, would be the determinant for the amount of tax recoverable by the Revenue department (“the Appellant”).
The goods were sold to both independent parties and to related parties . Some discrepancies were found in the prices at which they were sold to independent parties and related parties as defined under Section 4 (3)(b)(i) of the CEA read with Section 2 (g) of Monopolies and Restrictive Trade Practices Act, 1969 (“the MRTP Act”). The goods sold to the related parties were undervalued in comparison to the goods sold to non related parties. The lower valuation of the goods lead to the shortfall in collection of excise duty.
Since, there was not provision prescribing any methodology to discover the assessable value of goods, sold at different prices, the Appellant issued the Show Cause Notice (“SCN”) invoking Rule 11 of CEVR stating that the valuation shall be determined using reasonable means consistent with the principles and general provisions under Section 4(1) of CEA. Under SCN, invoking Rule 11 of CEVR, the Appellant stated the value of goods to unrelated parties would be the value for goods sold to related parties.
The Respondent contended the SCN on the ground that the Appellant wrongly invoked Rule 11 of CEVR and the method of valuation adopted is wrong because Appellant has itself issued the Circular dated July 1, 2002 which clarify the manner in which valuations was to be done when sales are made to both independent and related parties.
The Commissioner (“Adjudicating Authority”) rejected the argument of the Respondent stating that there is no inconsistency between the Rule 11 of CEVR and the Circular and confirmed the demand.
The CESTAT (“the Tribunal”) set aside the Order passed by the Adjudicating Authority and allowed the Respondent Appeal on the ground Circular clarified the methodology to be adopted for determining the value and Section 4 (1) (a) of CEA is not applicable as it referred to sales made exclusively to independent buyers.
Issue:
1. Whether the Circular dated July 1, 2002 is binding on the Revenue Department ?
2. Whether Circular dated July 1, 2002 is in conflict with the provisions of CEVR?.
Held:
The Supreme Court held as under:
A Department is bound by the Circulars issued by it, while Courts and Tribunals are not.
There is no conflict between the Circular dated July 1, 2002 is in conflict with the provisions of CEVR
In a case where the price itself is the sole consideration to determine the transaction value, then the said price can be transposed onto the related party purchases as well, to arrive at the assessable value.
Hence, the Civil Appeal filed by the Appellant was allowed.
Relevant Provisions:
Central Excise Act, 1944
Section 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.
Explanation- For the removal of doubts, it is hereby declared that the price-cum-duty of the excisable goods sold by the assessee shall be the price actually paid to him for the goods sold and the money value of the additional consideration, if any, flowing directly or indirectly from the buyer to the assessee in connection with the sale of such goods, and such price-cum-duty, excluding sales taxes and other taxes, if any, actually paid, shall be deemed to include the duty payable on such goods.
(2) The provisions of this section shall not apply in respect of any excisable goods for which a tariff value has been fixed under sub-section (2) of Section 3.
(3) For the purpose of this Section, –
(a). “assessee” means the person who is liable to pay the duty of excise under this Act and includes his agent;
(b). persons shall be deemed to be “related” if.
i. they are inter-connected undertakings;
ii. they are relatives;
iii. amongst them the buyer is a relative and a distributor of the assessee, or a sub-distributor of such distributor; or
iv. they are so associated that they have interest, directly or indirectly, in the business of each other.
Explanation – in this clause.
1(i) “inter-connected undertakings” means two or more undertakings which are inter-connected with each other in any of the following manners, namely:–
(A) if one owns or controls the other;
(B) where the undertakings are owned by firms, if such firms have one or more common partners;
(C) where the undertakings are owned by bodies corporate,–
(I) if one body corporate manages the other body corporate; or
(II) if one body corporate is a subsidiary of the other body corporate; or
(III) if the bodies corporate are under the same management; or
(IV) if one body corporate exercises control over the other body corporate in any other manner;
(D) where one undertaking is owned by a body corporate and the other is owned by a firm, if one or more partners of the firm,–
(I) hold, directly or indirectly, not less than fifty per cent. of the shares, whether preference or equity, of the body corporate; or
(II) exercise control, directly or indirectly, whether as director or otherwise, over the body corporate;
(E) if one is owned by a body corporate and the other is owned by a firm having bodies corporate as its partners, if such bodies corporate are under the same management;
(F) if the undertakings are owned or controlled by the same person or by the same group;
(G) if one is connected with the other either directly or through any number of undertakings which are inter-connected undertakings within the meaning of one or more of the foregoing subclauses.
Explanation I.– For the purposes of this clause, two bodies corporate shall be deemed to be under the same management,–
(i) if one such body corporate exercises control over the other or both are under the control of the same group or any of the constituents of the same group; or
(ii) if the managing director or manager of one such body corporate is the managing director or manager of the other; or
(iii) if one such body corporate holds not less than one-fourth of the equity shares in the other or controls the composition of not less than one-fourth of the total membership of the Board of directors of the other; or
(iv) if one or more directors of one such body corporate constitute, or at any time within a period of six months immediately preceding the day when the question arises as to whether such bodies corporate are under the same management, constituted (whether independently or together with relatives of such directors or employees of the first mentioned body corporate) one-fourth of the directors of the other; or
(v) if the same individual or individuals belonging to a group, while holding (whether by themselves or together with their relatives) not less than one-fourth of the equity shares in one such body corporate also hold (whether by themselves or together with their relatives) not less than one-fourth of the equity shares in the other; or
(vi) if the same body corporate or bodies corporate belonging to a group, holding, whether independently or along with its or their subsidiary or subsidiaries, not less than one-fourth of the equity shares in one body corporate, also hold not less than one-fourth of the equity shares in the other; or
(vii) if not less than one-fourth of the total voting power in relation to each of the two bodies corporate is exercised or controlled by the same individual (whether independently or together with his relatives) or the same body corporate (whether independently or together with its subsidiaries); or
(viii) if not less than one-fourth of the total voting power in relation to each of the two bodies corporate is exercised or controlled by the same individuals belonging to a group or by the same bodies corporate belonging to a group, or jointly by such individual or individuals and one or more of such bodies corporate; or
(ix) if the directors of one such body corporate are accustomed to act in accordance with the directions or instructions of one or more of the directors of the other, or if the directors of both the bodies corporate are accustomed to act in accordance with the directions or instructions of an individual, whether belonging to a group or not.
Explanation II.- If a group exercises control over a body corporate, that body corporate and every other body corporate, which is a constituent of, or controlled by, the group shall be deemed to be under the same management.
Explanation III.- If two or more bodies corporate under the same management hold, in the aggregate, not less than one-fourth equity share capital in any other body corporate, such other body corporate shall be deemed to be under the same management as the first mentioned bodies corporate.
Explanation IV.- In determining whether or not two or more bodies corporate are under the same management, the shares held by financial institutions in such bodies corporate shall not be taken into account.
Illustration
Undertaking B is inter-connected with undertaking A and undertaking C is inter-connected with undertaking B. Undertaking C is inter-connected with undertaking A; if undertaking D is inter-connected with undertaking C, undertaking D will be inter-connected with undertaking B and consequently with undertaking A; and so on.
Explanation V.- For the purposes of this clause, “group” means a group of-
(i) two or more individuals, associations of individuals, firms, trusts, trustees or bodies corporate (excluding financial institutions), or any combination thereof, which exercises, or is established to be in a position to exercise, control, directly or indirectly, over any body corporate, firm or trust; or
(ii) associated persons.
Explanation VI.- For the purposes of this clause,–
(I) a group of persons who are able, directly or indirectly, to control the policy of a body corporate, firm or trust, without having a controlling interest in that body corporate, firm or trust, shall also be deemed to be in a position to exercise control over it;
(II) “associated persons”-
(a) in relation to a director of a body corporate, means-
(i) a relative of such director, and includes a firm in which such director or his relative is a partner;
(ii) any trust of which any such director or his relative is a trustee;
(iii) any company of which such director, whether independently or together with his relatives, constitutes one-fourth of its Board of directors;
(iv) any other body corporate, at any general meeting of which not less than one-fourth of the total number of directors of such other body corporate are appointed or controlled by the director of the first mentioned body corporate or his relative, whether acting singly or jointly;
(b) in relation to the partner of a firm, means a relative of such partner and includes any other partner of such firm; and
(c) in relation to the trustee of a trust, means any other trustee of such trust;
(III) where any person is an associated person in relation to another, the latter shall also be deemed to be an associated person in relation to the former;
(ii). “relative” shall have the meaning assigned to it in Clause (41) of section 2 of the Companies Act, 1956;
(c). “place of removal” means-
i. a factory or any other place or premises of production or manufacture of the excisable goods;
ii. a warehouse or any other place or premises wherein the excisable goods have been permitted to be deposited without payment of duty,
iii. a depot, premises of a consignment agent or any other place or premises from where excisable goods are to be sold after their clearance from the factory.
from where such goods are removed;
(cc). “time of removal”, in respect of the excisable goods removed from the place of removal referred to in sub-clause (iii) of clause (c) shall be deemed to be the time at which such goods are cleared from the factory.
(d) “transaction value” means the price actually paid or payable for the goods, when sold, and includes in addition to the amount charged as price, any amount that the buyer is liable to pay to, or on behalf of, the assessee, by reason of, or in connection with the sale, whether payable at the time of the sale or at any other time, including, but not limited to, any amount charged for, or to make provision for, advertising or publicity, marketing and selling organization expenses, storage, outward handling, servicing, warranty, commission or any other matter but does not include the amount of duty of excise, sales tax and other taxes, if any, actually paid or actually payable on such goods;
Central Excise Valuation Rules, 2000
Rule 11: Best Judgement
If the value of any excisable goods cannot be detemined under the foregoing rules, the value shall be detemined using reasonable means consistent with the principles and general provisions of these rules and sub-section (1) of section 4 of the Act.
FULL TEXT OF THE SUPREME COURT JUDGEMENT
1. The present Civil Appeal originates from the impugned order dated 30.11.2017 passed by the Customs, Excise and Service Tax Appellate Tribunal, Chandigarh (“CESTAT”). The CESTAT set aside the show cause notice issued by the Appellant-Revenue to the AssesseeRespondent, on the ground that it had invoked an incorrect method of valuing related party transactions.
A. FACTUAL BACKGROUND
2. The Assessee is involved in the manufacture of decorative laminates and other like materials, which fall under Chapter 48 of the Central Excise Tariff Act, 1985. As excisable goods, the value at which the Respondent was selling these goods would be the determinant for the amount of tax recoverable by the Appellant. Following an audit conducted on the Assessee’s operations for FY 2009-10 and 2010-11, discrepancies were unearthed in terms of the prices at which these goods were being sold. The goods were being offered not only to independent parties unconnected with the Respondent, but also to two ‘related parties’ called “Merino Industries Ltd.” (“MIL”) and “Merino Services Ltd.” (“MSL”), as defined under Section 4(3)(b)(i) of the Central Excise Act, 19441 (“CEA”) read with Section 2(g) of the Monopolies and Restrictive Trade Practices Act, 1969.2 It was ascertained that Respondent was a subsidiary of MIL with 74.65% of its shareholding vested in the latter. With regard to MSL, the Assessee was found to have significant influence over its operations and the two companies shared Directors/Key Managerial Personnel.
3. The sales to these related entities were discovered to be undervalued in comparison to those made by the Assessee to non‑related independent entities. This artificial devaluation resulted in a shortfall in collection of excise duty due to the deliberate deflation of the price by the Assessee when selling goods to its related party concerns. Hence, the assessable value of the excisable materials had to be established in order to then calculate the correct amount of excise duty to be levied.
4. The assessable value of excisable goods is worked out via Section 4(1) of the CEA. As we will repeatedly be referring to this provision at a later stage, a reproduction of its relevant portion is necessary at this point:-
Section 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.
Explanation. – For the removal of doubts, it is hereby declared that the price-cum-duty of the excisable goods sold by the assessee shall be the price actually paid to him for the goods sold and the money value of the additional consideration, if any, flowing directly or indirectly from the buyer to the assessee in connection with the sale of such goods, and such price-cum-duty, excluding sales tax and other taxes, if any, actually paid, shall be deemed to include the duty payable on such goods.
5. The wording of the sub-sections indicates that Section 4(1)(a) of the CEA is relevant for sales to independent parties, while Section 4(1)(b) addresses all other cases including sales made to related Due to the fact that sales in the present case were made by Respondent to both independent and related parties, the latter part of Section 4(1) was deemed applicable, read with the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 (“CEVR”).
6. The show cause notice issued by the Revenue noted that the CEVR did not contain any guidelines on the methodology to be adopted for discovering the assessable value of goods, when sales are made partially to both independent parties and related parties. For our purposes it is not necessary to go over every provision within the CEVR. The show cause notice narrowed the scope of inquiry down to Rules 4 & 9-11, which are provided below:-
Rule 4.
The value of the excisable goods shall be based on the value of such goods sold by the assessee for delivery at any other time nearest to the time of the removal of goods under assessment, subject, if necessary, to such adjustment on account of the difference in the dates of delivery of such goods and of the excisable goods under assessment, as may appear reasonable.
Rule 9.
When the assessee so arranges that the excisable goods are not sold by an assessee except to or through a person who is related in the manner specified in either of sub-clauses (ii), (iii) or (iv) of clause (b) of sub-section (3) of section 4 of the Act, the value of the goods shall be the normal transaction value at which these are sold by the related person at the time of removal, to buyers (not being related person); or where such goods are not sold to such buyers, to buyers (being related person), who sells such goods in retail :
Provided that in a case where the related person does not sell the goods but uses or consumes such goods in the production or manufacture of articles, the value shall be determined in the manner specified in rule 8.
Rule 10.
When the assessee so arranges that the excisable goods are not sold by him except to or through an inter-connected undertaking, the value of the goods shall be determined in the following manner, namely:-
(a) If the undertakings are so connected that they are also related in terms of sub-clause (i) or (iii) or (iv) of clause (b) of sub-section (3) of section 4 of the Act or the buyer is a holding company or subsidiary
Explanation. – In this clause “holding company” and “subsidiary company” shall have the same meanings as in the Company Act, 1956 (1 of 1956).
(b) In any other case, the value shall be determined as if they are not related persons for the purpose of sub-section (1) of section 4.
Rule 11.
If the value of any excisable goods cannot be determined under the foregoing rules, the value shall be determined using reasonable means consistent with the principles and general provisions of these rules and sub-section (1) of section 4 of the Act.
7. A bare reading of the extracted provisions indicates that Rules 9 & 10 are applicable only in situations where the entire batch of goods is sold to a related party. This would have ordinarily excluded the applicability of those Rules in the present case, given that the Assessee was selling its products partially to both independent and related buyers. The only remaining option would have been taking recourse to Rule 11, the residuary provision which addresses scenarios that are not otherwise covered by the CEVR. The Rule refers back to Section 4(1)(a) of the CEA and outlines a broad requirement to determine the assessable value of the goods while keeping in mind the “principles and general provisions” of the CEVR.
8. The Revenue in the show cause notice duly invoked Rule 11 read with Section 4(1)(a), and also placed reliance on an earlier decision of the CESTAT, Bangalore, in Aquamall Water Solutions CCE.3 It was noted that the holding of the Tribunal had been affirmed by the Supreme Court in appeal.4 On the strength of this, the show cause notice stated that the transaction value of the goods sold to the independent buyers would be transposed onto the sales made by the Assessee to its sister concerns in order to determine the appropriate excise duty chargeable. After undertaking the comparison between the two prices, the Revenue determined that the undervaluation of the sales to the related parties amounted to Rs. 24,14,05,257, and resulted in a shortfall in payment of Rs. 3,15,13,343 in excise duty. Further, due to the purported suppression of the differential in the prices at which the goods were being sold, the extended period of limitation of 5 years was invoked under the Proviso to Section 11A(1) & (4) of the CEA.5
9. The Assessee disputed the contents of the notice before the Commissioner. One of the contentions raised was that the Revenue had incorrectly invoked Rule 11 of the CEVR, read with Section 4(1) of the CEA, to value the goods that were sold to the Respondent’s alleged sister concerns. The Department itself had issued a Circular on 01.07.20026 which clarified the manner in which valuation was to be done when sales are made to both independent and related buyers. The Circular stated:
