SC explains Excise Valuation Principal for under Invoiced Goods pre & Post 01.07.2000

Commissioner of Central Excise Vs Cera Board and Doors (Supreme Court)

In fine, these appeals are disposed of, confirming the impugned orders of CESTAT setting aside the Orders ­in­ Original passed by the Adjudicating Authorities and remanding the matters back for re­adjudication. However, while carrying out the exercise of re­adjudication, the Adjudicating Authorities should keep in mind the principles enumerated hereunder:

A. Cases where the period of assessment is prior to 01.07.2000

I. First ascertain the price at which such goods are ordinarily sold by the assessee to a buyer who is not related to him, in the course of wholesale trade, at the time and place of removal and also find out whether the price is the sole consideration for the sale. If the Adjudicating Authority is able to find this out, he may take such price as the normal price and treat the case as covered by Section 4(1)(a), applying, wherever permissible, the prescriptions contained in the proviso to clause (a) of sub­section (1) of Section 4.

II. If the normal price is not ascertainable, either for the reason that the goods are not sold or for any other reason, then he may take it that the case would fall under Section 4(1)(b) and take recourse in such cases, to the Central Excise (Valuation) Rules, 1975.

III. The phrase “for any other reason” appearing in Section 4(1)(b) would include cases where the price charged in the course of wholesale trade is not discernible or where the same, though discernible, cannot be linked to delivery at the time and place of removal or where the price is not the sole consideration for the sale, even though the price charged in the course of wholesale trade for delivery at the time and place of removal are available.

IV. If the case falls under Section 4(1)(b) and the Adjudicating Authority takes recourse to the method of valuation prescribed in the 1975 Rules, he shall find out which among the relevant rules would apply to the cases on hand before proceeding with the valuation.

B. Cases where the period of assessment is after 01.07.2000

I. First ascertain the “transaction value”, with particular reference to the definition of the said expression contained in Section 4(3)(d).

II. Apply the transaction value so ascertained, to cases where three conditions, namely (i) the goods are sold for delivery at the time and place of removal, (ii) the assessee and buyer are not related and (iii) the price is the sole consideration, are satisfied. This is because such cases will fall under Section 4(1)(a).

III. In cases where one or more of the aforesaid three conditions are not satisfied, and also in cases where there is no sale, the Adjudicating Authority should treat the cases as falling under Section 4(1)(b) and hence take recourse to the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000.

IV. If a case falls under Section 4(1)(b) and the Adjudicating Authority takes recourse to the method of valuation prescribed in the 2000 Rules, he shall find out which among the relevant rules would apply to the case on hand before proceeding with the valuation.

Principles applicable in common (both pre and post amendment)

C. The Adjudicating Authority may treat any amount received either in cash or otherwise, over and above the invoice value, as the value of excisable goods even in cases falling under Section 4(1)(a) (after the amendment), as the definition of “transaction value” under Section 4(3)(d) means the price actually paid or payable.

D. The Adjudicating Authority shall keep in mind the fact that while the expression “normal price” was not defined in Section 4(1) before amendment, the expression “transaction value” is defined very exhaustively in Section 4(3)(d) and this definition is both inclusive as well as exhaustive.

E. Wherever there is a finding that a particular dealer/ customer has paid a consideration over and above what is reflected in the invoice, the additional payment made by him together with the invoice value shall be taken to be the transaction value, for all the transactions that the particular dealer/customer had with the assessee. In simple terms, if a dealer/customer has made 10 purchases during the period in question, for a particular value stated in the invoice, the transaction value determined on the basis of material relatable to a few out of those transactions, can be applied to all the transactions of that customer/dealer across the board for that period. However, the same value cannot be applied to the other dealers/customers. This principle shall be followed in respect of cases arising after the amendment.

F. Since the matters are more than a decade old, the Adjudicating Authorities may conduct hearings, afford adequate opportunities to the parties and pass orders in original as early as possible.

The appeals are disposed of accordingly. There will be no order as to costs.

FULL TEXT OF THE SUPREME COURT JUDGEMENT

1. All the appeals on hand are by the Commissioners of Central Excise, Customs & Service Tax of different Commissionerates, filed under Section 35L(1)(b) of the Central Excise Act, 1944 (hereinafter referred to as “the Act”), questioning the correctness of the orders passed by Customs, Excise and Service Tax Appellate Tribunal, South Zonal Bench at Bangalore (CESTAT) in seven different batches of cases, but arising out of similar facts and raising identical questions.

2. For the purpose of convenience, the facts out of which the first batch of cases in Civil Appeal Nos. 7240­7248 of 2009 (which we may call the lead case) arise, are recorded in detail. The facts in the other batches of cases are brought on record in brief and to the extent that they have some distinguishing features. As a matter of fact, the batch of cases relating to the assessee by name, M/s. CERA Boards and Doors (the respondents in Civil Appeal Nos. 7240­7248 of 2009), was decided first by CESTAT. Thereafter, CESTAT decided the other 6 batches of cases on the basis of the ratio laid down in CERA Boards. This is why Civil Appeal Nos. 7240­7248 of 2009 are taken as the lead case.

Facts in Civil Appeal Nos. 7240­7248 of 2009

3. M/s. CERA Boards and Doors, Kannur, which is the assessee concerned in this batch of cases, admittedly manufactures plywood/block boards. Searches were conducted by the Directorate General of Central Excise Intelligence (DGCEI) at their factory premises at Kannur, Kerala and their depot at Bangalore, on 17.10.2002 and on subsequent days. Searches were also conducted at the residences of the partners of the firm, the residences of some of their employees and the premises of some of their dealers.

4. CERA Boards and Doors is a partnership firm comprising of one Mr. K. S. Harris and Smt. K. P. Rashida as partners. Their Bangalore depot was managed by its manager, Sh. T. S. Bhaskar.

5. The investigation that followed the searches revealed that the assessee had undervalued the goods manufactured by them and cleared the goods from their factory, resulting in the evasion of Central Excise duty to the tune of Rs. 4,29,01,384 during the period from 01.12.1998 to 05.12.2002.

6. After the search, CERA Boards made payment of a sum of Rs. 12,50,000 towards shortfall in duty for the clearances effected during the relevant period. Thereafter, show cause notices dated 07.04.2003 and 22.12.2003 were issued. The show cause notice dated 07.04.2003 was for the proposed confiscation of the goods seized from CERA Boards, M/s. Ply Home, M/s. Gee Ply, M/s. Decowood Interiors, M/s. Arihant Marketing and M/s. Krishna Agencies, respectively valued at Rs. 12,80,926, Rs. 27,961, Rs. 34,332, Rs. 2,88,585, Rs. 32,829 and Rs. 1,00,000. This was under Rule 25 of the Central Excise Rules, 2002.

7. The show cause notice dated 22.12.2003 was for (i) payment of differential duty to the tune of Rs. 4,29,01,384 under Section 11A(1) of the Central Excise Act, 1944, (ii) interest under Section 11AB of the Act, (iii) appropriation of the amount of Rs. 12,50,000 voluntarily paid by them immediately after the search, towards duty liability, (iv) penalty in terms of Section 11AC of the Act and also under Rule 173Q of the erstwhile Central Excise Rules, 1944/ Rule 25 of the Central Excise Rules, 2002, and (v) imposition of penalty on the Managing Partner and Manager of the firm under Rule 209A of the erstwhile Central Excise Rules, 1944/ Rule 26 of the Central Excise Rules, 2002.

8. The material forming the basis of the aforesaid show cause notices were: (i) the loose sheets recovered from a Sales Executive by name Mr. Dayanandan, (ii) computer print outs containing “overdue bills” statements, (iii) the price lists containing the actual rate per square feet of plywood/block boards of different thicknesses, (iv) certain slips containing the details of the sales made during the relevant period, (v) copies of statements of expenses, (vi) copies of periodical cash statements and the statement of cash sent through one Mr. Xavier, (vii) collection books, (viii) a red colour notebook containing partywise details of invoiced amounts and the amounts payable in cash, (ix) a notebook containing details of transactions with various dealers, (x) a green colour notebook and two receipt books, (xi) the diary of the Sales Executive, Mr. Dayanandan, and certain other items.

9. Apart from the above documents seized during the searches, the show cause notices also relied upon the statements recorded from (i) Mr. Dayanandan (Sales Executive), (ii) Mr. Cyril D’Souza (Sales Executive), (iii) Mr. M. P. Narayanan, (iv) Mr. K. S. Harris (Managing Partner), (v) Mr. K. S. Mohammad Ali (brother of K. S. Harris), (vi) Mr. Gajanan K. Kadolkar (one of the purchasers), (vii) Mr. K. S. Abdul Basheer (a purchaser), (viii) Mr. B. Narayan Rao (a purchaser), (ix) Mr. Riyas Mayalakkare (purchaser), (x) Mr. Jagdish S. Patel (purchaser), (xi) Mr. G. M. Aggarwal (purchaser), (xii) Mr. Sunny John (purchaser), (xiii) Mr. Kailash Kumar (purchaser), (xiv) Mr. Arvind L. Patel (purchaser), (xv) Mr. T. V. G. Ganesan (purchaser) and (xvi) Mr. Abdul Khayoom (purchaser).

10. In response to the two show cause notices referred to above, the assessee sent two replies, one dated 09.08.2005 and another dated 24.08.2005. Through these replies, the assessee sought permission to cross­examine all those whose statements were recorded by the DGCEI and took a stand that there was no undervaluation.

11. The assessee contended in their replies that they were effecting supplies not only to the dealers and consumers in Bangalore but also to dealers in Tamil Nadu and Kerala and that based upon a few documents seized in relation to the transactions in Bangalore depot, an allegation of undervaluation by 70% on all transactions, cannot be made.

12. It was also contended that though the Department sought to rely upon private documents allegedly maintained by two of their staff members at the Bangalore depot, by name Suresh and Deepak Dhiman, they were not examined. According to the assessee, they were transacting with 153 dealers during the period 2001­2002 and 3 dealers during the period 2002­2003, and that the Department was not entitled to reach a conclusion on the basis of the statements recorded from just 2 of those dealers in Karnataka and only one out of 56 dealers in Kerala.

13. It was also contended by the assessee that in so far as the period prior to 01.07.2000 is concerned, what is relevant is the normal price, namely the price at which the goods are sold at the factory there. This was in terms of Section 4(1)(a) of the Act as it stood prior to 01.07.2000. Hence they contended that even if they had realised a higher price from certain buyers, the same would be irrelevant, as regards the period before 01.07.2000.

14. In so far as the period post 01.07.2000 is concerned, it was contended by the assessee in their replies that the transaction value should be arrived at on the basis of the price indicated in each invoice.

15. After the receipt of the replies from the assessee, the Commissioner of Central Excise and Customs, Calicut, held personal hearings, allowed the cross­examination of witnesses, perused the case law relied upon by the assessee and then passed an Order­in­Original No. 14/2006 dated 09.05.2006. By this Order­ in­ Original, the Commissioner (i) confirmed the demand of duty in a sum of Rs. 79,21,663 from the assessee under the proviso to Section 11A(1) of the Act, (ii) levied interest at the appropriate rate for the belated payment of the duty under Section 11AB of the Act, (iii) imposed a penalty of Rs. 79,21,663 under Section 11AC read with Rule 25, (iv) directed the confiscation of goods seized from the assessee, valued at Rs. 12,80,926 with an option to redeem the same upon payment of fine of Rs. 25,000, (v) directed the confiscation of goods seized from five different dealers, however, with an option to redeem the same upon payment of fine amounts ranging from Rs. 2,500 to Rs. 15,000, (vi) imposed a penalty of Rs. 5,000 each, upon the assessee and five of the dealers and (vii) imposed a penalty of Rs. 5,000 each on the Managing Partner of the assessee and its Manager at the Bangalore depot.

16. It is relevant to note that the proposal as contained in the show cause notice was for the imposition of differential Central Excise duty to the tune of Rs. 4,29,01,384 for the period between 01.12.1998 and 05.12.2002. But, the adjudicating authority confirmed the demand only to the extent of Rs. 79,21,663. The findings recorded by the adjudicating authority, and the reasons given therefor are as follows:­

I. That as per the statements recorded from the dealers, the assessee was usually showing a lesser amount in the invoices than the actual sale consideration and was in the habit of collecting the differential amount by way of cash;

II. That though some of the dealers retracted from their original statements, the retractions happened only during cross ­examination that happened after several years and hence, the original statements could be taken into account;

III. That the documentary evidence such as the loose slips, computer printouts, notebooks, diaries, receipt books, etc. seized by the DGCEI together with the statements recorded from the depot Manager and Sales Executives clearly showed under ­invoicing;

IV. That though the Department had demanded differential duty to the tune of Rs. 4,29,01,384 on the actual sales turnover for the period in question, the department collected evidence only in respect of 11 customers and not from all customers whose names were mentioned in Annexure D to the show cause notice;

V. That therefore, the calculation of differential duty had to be confined only to the sales turnover relatable to the aforesaid 11 customers and the turnover relatable to 3 more customers whose confession statements had been recorded;

VI. That in view of the law laid down by this Court in Collector of Customs, Madras vs. D. Bhoormall, 1 the Department could not plead its inability to examine all the dealers to come to the conclusion of undervaluation in all transactions;

VII. That in respect of those 14 dealers, a clear case was made out by the Department about the gross undervaluation of the sales price, and

VIII. That therefore, the differential duty co-­relatable to the sales turnover in respect of those 14 dealers could be demanded.

17. Aggrieved by the Order­ in ­Original No. 14/2006 dated 09.05.2006, one appeal was filed by the assessee, one appeal was filed by its Managing Partner, one appeal was filed by the Manager of the Bangalore depot of the assessee, one appeal each was filed by five dealers from whom seizure of material was effected and one appeal was filed by the Commissioner himself. Thus, there were 9 appeals, 8 of which were at the instance of assessee, its Managing Partner, its Manager, and the five dealers, and the last of which was by the Commissioner of Central Excise.

18. While the 8 appeals filed at the instance of the assessee and its coterie were directed against the demand for differential duty, interest, penalty and confiscation, with an option of redemption, the appeal filed by the Commissioner was on the ground that as against the proposal for a differential duty of Rs. 4,29,01,384 made in the show cause notice, the adjudicating authority confirmed the demand only to the extent of Rs. 79,21,663.

19. By Final Order Nos. 245­253/2009 dated 24.03.2009, the CESTAT (i) rejected all the five appeals filed by the five dealers challenging the orders of confiscation of the seized goods with the option for redemption and (ii) allowed the three appeals filed respectively by the assessee, its Managing Partner and its Manager, challenging the demand for differential duty, interest, and penalty and remanded the matter for re­-quantification of duty in light of the findings given. The appeal filed by the Revenue also followed the fate of the three appeals filed by the assessee, its Managing Partner and its Manager.

20. The effect of the Final Orders passed by CESTAT is (i) that the appeals of the dealers against confiscation with the option of redemption stood rejected and (ii) that the substantive appeals arising out of the imposition of differential duty, interest, penalty, etc. stood allowed and remanded back to the adjudicating authority for a fresh consideration.

21. The findings recorded and the reasons therefor, as given by CESTAT, are as follows:­

I. That there was overwhelming evidence to show under invoicing;

II. That in light of the statements made by depot officials as well as dealers, the finding of the Adjudicating Authority that 30% of the actual value alone was mentioned in the invoice cannot be interfered with;

III. That as per Section 4(1)(a), as it stood before 01.07.2000, duty was payable on the normal price, namely the price at which such goods were ordinarily sold in the course of wholesale trade; and hence the Commissioner was obliged to find out what the normal price in the course of wholesale trade was for the clearances made prior to 01.07.2000;

IV. That in respect of the sales made prior to 01.07.2000, the adjudicating authority should adopt the normal pricing method;

V. That for the clearances made after 01.07.2000, the transaction value had to be determined in respect of each transaction and the differential duty confined only to the evidence available on record;

VI. That the stand of the Revenue that 70% should be added to the invoice value uniformly in respect of all clearances, could not be accepted and,

VII. That therefore, the matter required re­adjudication.

22. Therefore, the Revenue has come up with this batch of nine appeals, Civil Appeal Nos. 7240­7248 of 2009.

Facts in Civil Appeal Nos. 8615­8620 of 2009

23. The facts of this batch of appeals are similar to those in Civil Appeal Nos. 7240­7248 of 2009. M/s. Prestige Boards Pvt. Ltd., Kannur which is the assessee concerned in this batch of cases, also manufactures plywood/block boards. Similar searches conducted at their premises revealed that the assessee had grossly undervalued the goods cleared by them from their factory, resulting in evasion of Central Excise duty to the tune of Rs. 2,72,03,232 during the period between 01.12.1998 and 17.10.2002.

24. Show cause notices (i) dated 08.04.2003, for confiscation of the material and cash, imposition of penalty, etc., and (ii) dated 22.12.2003, demanding differential duty of Rs. 2,72,03,232 under Section 11A(1) of the Act, interest, penalty, etc. were issued.

25. After the receipt of the replies from the assessee to the two show cause notices, the Commissioner of Central Excise and Customs, Calicut, held an enquiry and passed an Order ­in Original No. 10/2006 dated 27.03.2006, by which, he (i) confirmed the demand of duty to the extent of Rs. 1,50,23,911 from the assessee under the proviso to Section 11A(1) of the Act, (ii) levied interest at the appropriate rate for the belated payment of duty under Section 11AB of the Act, (iii) imposed a penalty of Rs. 1,50,23,911 under Section 11AC read with Rule 25, (iv) directed the confiscation of goods seized from the assessee, valued at Rs. 14,24,286 with an option to redeem the same upon payment of fine of Rs. 1,50,000, (v) directed the confiscation of goods seized from M/s. Prestige Traders, valued at Rs. 5,49,176, with an option to redeem the same upon payment of fine of Rs. 50,000, (vi) directed the confiscation of goods seized from M/s. Ply Home, valued at Rs. 29,270, with an option to redeem the same upon payment of fine of Rs. 3000, (vii) directed the confiscation of goods seized from M/s. Gee Ply, valued at Rs. 38,268, with an option to redeem the same upon payment of fine of Rs. 3500, (viii) ordered outright release of Rs. 2,50,000 seized from Sh. P. K. Shakeer, (ix) imposed a penalty of Rs. 5,000 each on M/s. Prestige Traders, M/s. Ply Home and M/s. Gee Ply, and (x) imposed a penalty of Rs. 50,000 each on Sh. K. S. Mohammad Ali (Managing Director) and Sh. Kunjuraman (Manager, Bangalore depot).

26. The Commissioner held that there was evidence to prove undervaluation, but the demand had to be confined only to the transactions that the assessee had with 20 customers from whom alone evidence had been collected. Like the Order in Original passed in the case of CERA Boards, the Commissioner ruled in this case also that (i) with respect to the period prior to 01.07.2000, the normal price should include the price indicated in the invoice plus the amount collected by way of cash, and (ii) for the period post 01.07.2000, the transaction value was nothing but the invoice value plus the amount collected in cash.

27. Aggrieved by the Order­ in­ Original No. 10/2006 dated 27.03.2006, the assessee, its Managing Director (Sh. K. S. Mohammad Ali), its Sales Manager (Sh. Kunjuraman), M/s. Prestige Traders and the two dealers from whom seizure of material was effected, filed six appeals before the CESTAT.

28. By Final Order Nos. 414­419/2009 dated 21.04.2009, the CESTAT (i) allowed the three appeals filed by the assessee, its Managing Director and Sales Manager challenging the demand for differential duty, interest and penalty, and remanded the matter for re­quantification of duty in light of the findings given, and (ii) rejected the appeals filed by M/s. Prestige Traders and the two dealers challenging the orders of confiscation.

29. The findings recorded and the reasons therefor, as given by CESTAT, are as follows:­

I. That there was overwhelming evidence to show underinvoicing;

II. That in respect of the sales made prior to 01.07.2000, the Adjudicating Authority should have adopted the normal pricing method;

III. That for the clearances made after 01.07.2000, the transaction value has to be determined in respect of each transaction and the differential duty confined only to the evidences available on record;

IV. That the stand of the Revenue that 70% should be added to the invoice value uniformly in respect of all clearances, cannot be accepted.

30. Aggrieved by the said order, the Revenue has come up with this batch of six appeals, Civil Appeal Nos. 8615­8620 of 2009.

Facts in Civil Appeal Nos. 2236­2253 of 2011

31. Searches were conducted by the officers of the Directorate General of Anti­Evasion (Central Excise) on 23.09.1997, simultaneously at the premises of eleven plywood manufacturing units located at Kumbla, Kasargod District, on the basis of intelligence reports that they were indulging in undervaluation and evading payment of central excise duty.

32. After recovering incriminating evidence and recording the statements of proprietors/partners, employees and dealers of the units in question, two show cause notices, one dated 23.03.1998 and another dated 02.08.1999 were issued. The first show cause notice was against M/s. Universal Wood Crafts, Kumbla, M/s. Wood Crafts, Kumbla, M/s. Uniwoods, Kumbla, M/s. National Boards, Kumbla, M/s. Darvesh Plywoods, Kumbla, Sri K. Mohammed Arabi, Kumbla, Sri Khaleel Rahiman, Kayarkulam and Sri Mansoorul Huck, Kayarkulam, proposing the confiscation of the seized plywood and the seized Indian currency, demand drafts and cheques.

33. The second show cause notice quantified the duty short paid by the seven plywood units, namely M/s. National Boards, M/s. Darvesh Plywoods, M/s. Uniwoods, M/s., Wood Crafts, M/s. Universal Wood Craft Co., M/s. Mailatty Wood Industries and M/s. National Wood Products, at Rs. 7,59,24,737 and the duty short paid by the chemical unit by name M/s. Bharath Chemicals, at Rs. 9,12,375, for the period from 1994­1995 to 1999­2000 (up to June 1999). The notice also proposed the levy of interest and penalty, apart from confiscation.

34. Subsequently, twelve periodical show cause notices were issued to the plywood manufacturing/dealing units for different periods of time.

35. After the receipt of the replies from the assessees and their proprietors/partners to the two show cause notices, the Commissioner of Central Excise, Calicut, held an enquiry and passed an Order­in­Original No. 10/2005 dated 30.06.2005, wherein he confirmed the duty demanded from the units in question, named in column 1 of the table below, to the extent indicated in column 2 thereof. The Adjudicating Authority also imposed penalties on each of them, to the extent indicated in column 3 of the table: