Supreme Court: In an appeal originated from the order passed by the Customs, Excise and Service Tax Appellate Tribunal (‘CESTAT’) setting aside the show cause notice issued by the appellant/Revenue to the respondent/ Assessee, on the ground that it had invoked an incorrect method of valuing related party transaction, the division bench of Surya Kant* and J.B. Pardiwala , JJ. has held that the circular of 01-07-2002 is not contrary to the intent of the Central Excise Act, 1944 (‘CEA’) and Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 (‘CEVR’) and the object behind it is to merely use “reasonable means” as outlined under Rule 11 of the CEVR, in conformity with Section 4(1)(a) of the CEA and Rule 9 of the CEVR, so as to reach the assessable value of goods for determination of excise duty.
Further, it was held that when the normal price that is ordinarily charged in dealings where the price itself is the sole consideration of the transaction, that price can be transposed onto the related party purchases as well, to arrive at the assessable value.
Factual background
The assessee is involved in the manufacture of decorative laminates and other like materials, falling under chapter 48 of the Central Excise Tariff Act, 1985.
As excisable goods, the value at which the Assessee was selling these goods would be the determinant for tax recoverable by the Revenue. Following an audit conducted on the Assessee’s operations for financial years 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’ as defined under Section 4(3)(b)(i) of the CEA read with Section 2(g) of the Monopolies and Restrictive Trade Practices Act, 1969 (‘MRTP’).
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. Hence, the assessable value of the excisable materials had to be established in order to calculate the correct amount of excise duty to be levied.
As per the CESTAT, the show cause notice by the Revenue sought to assess the value of the goods by relying on Rule 11 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 (‘CEVR’) read with Rule 4 and Section 4(1)(a) of the CEA. This was contrary to the Central Board of Excise and Customs (‘CBEC’) circular and rendered the notice defective and unenforceable.
Analysis
Binding Nature of Circulars issued by the Department
The Court said that the citation of an incorrect source of power does not vitiate the exercise of the power itself provided the power vests in the authority to begin with. However, it ascertained whether the Revenue acted in contravention of its own circular. The reason for this is that while citation of an incorrect provision may not, by itself, lead to an invalidation of the show cause notice, contravention of a binding circular that mandates a particular methodology to be followed might.
The Court referred to Paper Products Ltd. v. CCE, (1999) 7 SCC 84, wherein the binding nature of such circulars has long been acknowledged. Further, took note of Ranadey Micronutrients v. CCE, (1996) 10 SCC 387, wherein the rationale behind the requirement for the Revenue to abide by its own administrative directions and interpretation of different parts of the CEA and CEVR, was commented upon. Thus, the Court said that the starting point of their analysis is that the CBEC circular was binding on the Revenue, and, if the show cause notice issued by the Revenue is found to be contrary to the circular, it would prima facie result in abrogation of the uniformity and consistency as emphasised in Ranadey Micronutrients (supra).
Further, it was said that Revenue’s stance against its own circular can potentially lead to a chaotic situation where, with one hand, the Revenue would lay down instructions on how to interpret the relevant statutes and rules, and with the other hand, it would promptly disobey those very directions. Maintaining predictability in taxation law is of utmost importance and, for this reason, the Court should not accept an argument by the Revenue that waters down its own Circular as this would fall squarely within the contours of the prohibition outlined in Paper Products (Supra).
Conflict between a Circular, and a Judgment and/or the Statute
The Court said that, while the Department’s hands are tied regarding its circulars, no such prohibition operates on Courts and Tribunals. It is incumbent upon the adjudicatory bodies to ascertain the correct position of law unencumbered by the Revenue’s interpretation as crystallized in its administrative directions.
The Court took note of CCE v. Dhiren Chemical Industries, (2002) 2 SCC 127, wherein the Court while interpreting an exemption notification issued under the CEA, said that if there are circulars which have been issued by the CBEC which place a different interpretation, that interpretation will be binding upon the Revenue. Further, it was interpreted to mean that circulars issued by the Revenue would remain binding even if they went against the ratio of decisions by this Court. However, the true intention was clarified in Kalyani Packaging Industry v. Union of India, (2004) 6 SCC 719 , and the position of law which materialized was that the Revenue was at liberty to issue Circulars on the interpretation or application of different provisions, but Courts and Tribunals would give effect to the decisions of the Supreme Court as the law of the land.
The Court disagreed with the existence of any conflict between the circular and provisions of the CEVR at all. Further, even if the provisions relied upon in the show cause notice were incorrect such a defect is curable and cannot be enough for the notice itself to be set aside. Thus, invocation of the incorrect methodology for arriving at the assessable value is immaterial to the validity of the notice, provided that the power itself existed.
Moreover, it was said that the show cause notice is based on the liability of the Assessee to pay additional excise duty and will form the foundation for further proceedings against him. If the notice alleges shortfall in payment of excise duty on completely non-existent and inapplicable ground, the proceedings would be vitiated, as the Assessee has a right to know in clear and unambiguous terms the exact nature of their liability.
Further, Assessee can only frame a response defending themselves based on the infractions that have been pointed out in the show cause. If, subsequently, the Revenue argues that an incorrect provision was cited and the liability in fact arises from a different source altogether, the assessee would be left in an untenable position as it would have only responded to what was stated in the show cause notice itself.
The Court placed reliance on CCE v. Ratan Melting & Wire Industries, (2008) 13 SCC 1 and said that, if a circular has been issued contrary to statutory provisions or in defiance of the interpretation of such provisions by a judicial forum, the circular would be stripped of any binding force.
Method of Valuation for Determining Assessable Value
Placing reliance on SACI Allied Products Ltd. v. CCE, (2005) 7 SCC 159, wherein it was held that “the amount charged from independent buyers can form the benchmark to calculate the appropriate assessable value of the goods sold to the related parties” and said that this approach is of great assistance keeping in view the similarity between the facts and issues with the present case.
The Court referred to Section 4 of the CEA and Rules 9 and 11 of the CEVR and said that the assessable value for the related party sales can be established by referring to the normal price under Section 4(1)(a) of the CEA, since the Revenue itself appeared to be unclear on the correct method of valuation of the goods, it is not appropriate to saddle the Assessee with additional liability, namely, other than the excise duty. Thus, the Court confirmed the demand made by the Revenue, however, disapproved the levy of interest and penalties upon the Assessee, and direct that these amounts be reduced from the total recoverable amount from the Assessee.
[CCE v. Merino Panel Product Ltd., 2022 SCC OnLine SC 1677, decided on 05-12-22]
*Judgment by: Justice Surya Kant.
*Apoorva Goel, Editorial Assistant has reported this brief.