COMMISSIONER OF CENTRAL EXCISE & SERVICE TAX, ROHTAK versus MERINO PANEL PRODUCT LTD. on 5 December 2022

28

SUPREME COURT REPORTS

[2022] 18 S.C.R.

ACOMMISSIONER OF CENTRAL EXCISE & SERVICE TAX,ROHTAK

v.

MERINO PANEL PRODUCT LTD.

B(Civil Appeal No. 6891 of 2018)DECEMBER 05, 2022

[SURYA KANT AND J.B. PARDIWALA, JJ.]

Central Excise Act, 1944 – s.4(1)(a) – Central Excise Valuation(Determination of Price of Excisable Goods) Rules, 2000 – rr. 9, 11C– Customs, Excise and Service Tax Appellate Tribunal set aside theshow cause notice issued by the Appellant-Revenue to the Assessee-Respondent, on the ground that it had invoked an incorrect methodof valuing related party transactions – Correctness of – Held: Theassessable value for the related party sales can be established byDreferring to the normal price u/s.4(1)(a) of the CEA, which is readilyavailable in the present case – This is the true meaning and intentionunderlying the CBEC Circular of 01.07.2002 – Reference to r.11 inPoint No. 12 of the Circular simply mandates the usage of“reasonable means” keeping in mind s.4(1)(a) of the CEA and r.9of the CEVR – This is merely a method by which the Revenue isErequired to apply its mind to a case of partial sales to bothindependent and related parties – Point No. 12 in the Circular of01.07.2002 is not contrary to the intent of the CEA and CEVR andthe object behind it is to merely use “reasonable means” as outlinedu/r.11 of the CEVR, in conformity with s.4(1)(a) of the CEA and r.9Fof the CEVR, so as to reach the assessable value of goods fordetermination of excise duty – When the normal price that isordinarily charged in dealings where the price itself is the soleconsideration of the transaction is available, as it is here, that pricecan be transposed onto the related party purchases as well, to arriveat the assessable value – Hence, the order of the CommissionerGregarding the value of the goods sold to the Respondent’s sisterconcerns is in consonance with Supreme Court’s earlier judgmentsand the Circular dated 01.07.2002 – Demand made by the Appellantis confirmed however, the levy of interest and penalties upon the H

Respondent is not approved – These amounts be reduced from thetotal recoverable amount from the Assessee.

Tax/Taxation – Held: Maintaining predictability in taxationlaw is of utmost importance and, for this reason, the Court shouldnot accept an argument by the Revenue that waters down its ownCircular – Revenue’s stance against its own circular can potentiallylead to a chaotic situation where, with one hand, the Revenue wouldlay down instructions on how to interpret the relevant statutes andrules, and with the other hand, it would promptly disobey thosevery directions.

Central Excise Act, 1944 – s.4(1)(a), (b) – Held: Principlesu/s.4(1) of the CEA are geared toward determination of the ‘value’of goods – Under s.4(1)(a), the value of goods for the purposes ofexcise duty, is deemed to be the ‘normal price’ of the goods that are‘ordinarily sold’ in the course of business, and where the price isthe ‘sole consideration’ for the transaction – It is only when thiscannot be gleaned from the set of transactions available on recordthat s.4(1)(b) is resorted to.

Excise Duty – Determination of excise duty on relatedtransactions – Held: Price charged from independent parties forthe sale of excisable goods can be used as a benchmark fordetermination of excise duty on related transactions when such aprice is readily available – However, when making such calculationsvia transposition, the Revenue cannot act in a mechanical way –The assessment of the appropriate value of the related partytransaction must be made after considering relevant material anddue application of mind – The entire quasi-judicial process of issuinga show cause notice and considering the distinguishing factorsplaced by the Assessee must be completed before the price of salesto independent buyers is utilized as a benchmark for sales to relatedparties – The general principles of s.4(1) of the CEA, r/w r.11 of theCEVR, are meant to provide a pathway for determination of the“normal price” and “value” of goods in cases where no alternativemethodology is applicable – This fulfils the dual objectives of beingin consonance with the Circular dated 01.07.2002 and harmonizingdifferent provisions of the CEA and CEVR – Central Excise Act,1944 – s.4(1) – Central Excise Valuation (Determination of Priceof Excisable Goods) Rules, 2000 – r.11.

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ACentral Excise Act, 1944 – s. 4(1) – Presumption under –Discussed – Central Excise Valuation (Determination of Price ofExcisable Goods) Rules, 2000 – rr. 9, 11.

Commissioner of Central Excise, Bolpur v. RatanMelting and Wire Industries (2008) 13 SCC 1: [2008]14 SCR 653 – followed.B

The Paper Products Ltd. v. Commissioner of CentralExcise (1999) 7 SCC 84; Ranadey Micronutrients &Ors. v. Collector of Central Excise (1996) 10 SCC 387: [1996] 5 Suppl. SCR 755; Kalyani PackagingIndustry v. Union of India (2004) 6 SCC 719;CCommissioner of Central Excise, Mumbai v. FIAT India(P) Ltd. & Ors. (2012) 9 SCC 332: [2012] 12 SCR 975 ; Commissioner of Central Excise, Ahmedabad v.Xerographic Ltd. (2006) 9 SCC 556 ; SACI AlliedProducts Ltd., U.P. v. Commissioner of Central Excise,Meerut (2005) 7 SCC 159 : [2005] 3 SCR 881 – reliedDon.

Aquamall Water Solutions v. CCE. 2003 SCC OnLineCEGAT 119; Reliance Industries v. CCE, Surat 2009SCC OnLine CESTAT 3384; J.K. Steel Ltd. v. Unionof India [1969] 2 SCR 481; Collector of Central Excise,Calcutta v. Pradyumna Steel Ltd. (2003) 9 SCC 234;ECollector of Central Excise, Vadodara v. DhirenChemicals Industries (2002) 2 SCC 127; AssistantCommissioner of Income Tax (Exemptions) v.Ahmedabad Urban Development 2022 SCC OnLine SC1461 – referred to.FCase Law Reference CIVIL APPELLATE JURISDICTION : Civil Appeal No. 6891of 2018.

From the Judgment and Order dated 30.11.2017 of the Customs,Excise & Service Tax Appellate Tribunal, Chandigarh in Appeal No. E/50664/2015.

Balbir Singh, ASG, M.K. Maroria, Rupesh Kumar, DevashishBharuka, Samar Veer Singh, Prasenjeet Mohapatra, Naman Tandon,Shyam Gopal, B. Krishna Prasad, Advs. for the Appellant.

S. Sunil, Jagdish N., Sudarshan Singh Rawat, Sunny Sachin Rawat,Advs. for the Respondent.

The Judgment of the Court was delivered by SURYA KANT, J.

1. The present Civil Appeal originates from the impugned orderdated 30.11.2017 passed by the Customs, Excise and Service TaxAppellate Tribunal, Chandigarh (“CESTAT”). The CESTAT set asidethe show cause notice issued by the Appellant-Revenue to the Assessee-Respondent, on the ground that it had invoked an incorrect method ofvaluing related party transactions.

A. FACTUAL BACKGROUND

2. The Assessee is involved in the manufacture of decorativelaminates and other like materials, which fall under Chapter 48 of theCentral Excise Tariff Act, 1985. As excisable goods, the value at whichthe Respondent was selling these goods would be the determinant forthe amount of tax recoverable by the Appellant. Following an auditconducted on the Assessee’s operations for FY 2009-10 and 2010-11,discrepancies were unearthed in terms of the prices at which these goodswere being sold. The goods were being offered not only to independentparties 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,1944[1] (“CEA”) read with Section 2(g) of the Monopolies and Restrictive 1 Section 4. Valuation of excisable goods for purposes of charging of duty ofexcise -

(3) For the purpose of this section,-

(a) “assessee” means the person who is liable to pay the duty of excise underthis Act and includes his agent; A

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ATrade Practices Act, 1969.[2] It was ascertained that Respondent was asubsidiary of MIL with 74.65% of its shareholding vested in the latter.With regard to MSL, the Assessee was found to have significant influenceover its operations and the two companies shared Directors/KeyManagerial Personnel.

B3. The sales to these related entities were discovered to beundervalued in comparison to those made by the Assessee to non-relatedindependent entities. This artificial devaluation resulted in a shortfall incollection of excise duty due to the deliberate deflation of the price bythe Assessee when selling goods to its related party concerns. Hence,the assessable value of the excisable materials had to be established inCorder to then calculate the correct amount of excise duty to be levied.

4. The assessable value of excisable goods is worked out viaSection 4(1) of the CEA. As we will repeatedly be referring to thisprovision at a later stage, a reproduction of its relevant portion isnecessary at this point:-D

Section 4. Valuation of excisable goods for purposes–of charging of duty of excise.

(1) Where under this Act, the duty of excise ischargeable on any excisable goods with reference toEtheir value, then, on each removal of the goods, suchvalue shall –

(a) in a case where the goods are sold by the assessee,for delivery at the time and place of the removal, theassessee and the buyer of the goods are not relatedFand the price is the sole consideration for the sale,be the transaction value; (b) in any other case, including the case where thegoods are not sold, be the value determined in such manner as may be prescribed.

(b) persons shall be deemed to be “related” if - G

(i) they are inter-connected undertakings; …

Explanation - ….

2 2. Definitions. – In this Act, unless the context otherwise requires, - (g) “inter-connected undertakings” means two or more undertakings whichare inter-connected with each other in any of the following manner, namely:-H…

Explanation. - For the removal of doubts, it is herebydeclared that the price-cum-duty of the excisablegoods sold by the assessee shall be the price actuallypaid to him for the goods sold and the money valueof the additional consideration, if any, flowingdirectly or indirectly from the buyer to the assesseein connection with the sale of such goods, and suchprice-cum-duty, excluding sales tax and other taxes,if any, actually paid, shall be deemed to include theduty 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 Section4(1)(b) addresses all other cases including sales made to related parties.Due to the fact that sales in the present case were made by Respondentto 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 theCEVR did not contain any guidelines on the methodology to be adoptedfor discovering the assessable value of goods, when sales are madepartially to both independent parties and related parties. For our purposesit is not necessary to go over every provision within the CEVR. Theshow 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 onthe value of such goods sold by the assessee fordelivery at any other time nearest to the time of theremoval of goods under assessment, subject, ifnecessary, to such adjustment on account of thedifference in the dates of delivery of such goods andof the excisable goods under assessment, as mayappear reasonable.

Rule 9.

When the assessee so arranges that the excisablegoods are not sold by an assessee except to or through AB

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a person who is related in the manner specified ineither of sub-clauses (ii), (iii) or (iv) of clause (b) ofsub-section (3) of section 4 of the Act, the value ofthe goods shall be the normal transaction value atwhich these are sold by the related person at the timeof removal, to buyers (not being related person); orwhere such goods are not sold to such buyers, tobuyers (being related person), who sells such goodsin retail :

Provided that in a case where the related person doesnot sell the goods but uses or consumes such goodsin the production or manufacture of articles, thevalue shall be determined in the manner specifiedin rule 8.

Rule 10.

When the assessee so arranges that the excisablegoods are not sold by him except to or through aninter-connected undertaking, the value of the goodsshall be determined in the following manner,namely:- (a)If the undertakings are so connected thatthey are also related in terms of sub-clause (i)or (iii) or (iv) of clause (b) of sub-section (3) ofsection 4 of the Act or the buyer is a holdingcompany or subsidiary Explanation. – In this clause “holdingcompany” and “subsidiary company” shallhave the same meanings as in the CompanyAct, 1956 (1 of 1956).

(b) In any other case, the value shall bedetermined as if they are not related personsfor the purpose of sub-section (1) of section 4.

Rule 11.

If the value of any excisable goods cannot bedetermined under the foregoing rules, the value shallbe determined using reasonable means consistentwith the principles and general provisions of theserules and sub-section (1) of section 4 of the Act.

7. A bare reading of the extracted provisions indicates that Rules9 & 10 are applicable only in situations where the entire batch of goodsis sold to a related party. This would have ordinarily excluded theapplicability of those Rules in the present case, given that the Assesseewas 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 otherwisecovered by the CEVR. The Rule refers back to Section 4(1)(a) of theCEA and outlines a broad requirement to determine the assessable valueof the goods while keeping in mind the “principles and generalprovisions” of the CEVR.

8. The Revenue in the show cause notice duly invoked Rule 11read with Section 4(1)(a), and also placed reliance on an earlier decisionof the CESTAT, Bangalore, in Aquamall Water Solutions v. CCE.[3] Itwas noted that the holding of the Tribunal had been affirmed by theSupreme Court in appeal.[4] On the strength of this, the show cause noticestated that the transaction value of the goods sold to the independentbuyers would be transposed onto the sales made by the Assessee to itssister concerns in order to determine the appropriate excise dutychargeable. After undertaking the comparison between the two prices,the Revenue determined that the undervaluation of the sales to the relatedparties amounted to Rs. 24,14,05,257, and resulted in a shortfall in paymentof Rs. 3,15,13,343 in excise duty. Further, due to the purported suppressionof the differential in the prices at which the goods were being sold, theextended period of limitation of 5 years was invoked under the Provisoto Section 11A(1) & (4) of the CEA.[5]

9. The Assessee disputed the contents of the notice before theCommissioner. One of the contentions raised was that the Revenue hadincorrectly invoked Rule 11 of the CEVR, read with Section 4(1) of theCEA, to value the goods that were sold to the Respondent’s alleged 3 2003 SCC OnLine CEGAT 119.4 2006 (193) ELT A197 (SC).

5 Section 11A. Recovery of duties not levied or not paid or short-levied or short-paid or erroneously refunded.-

(1) Where any duty of excise has not been levied or paid or has been short-levied or short-paid or erroneously refunded, for any reason, other than the reason offraud or collusion or any wilful misstatement or suppression of facts or contraventionof any of the provisions of this Act or of the rules made thereunder with intent to evadepayment of duty,- (a) the Central Excise Officer shall, within one year from the relevant date,serve notice on the person chargeable with the duty which has not been so levied or AB

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Asister concerns. The Department itself had issued a Circular on01.07.2002[6] which clarified the manner in which valuation was to bedone when sales are made to both independent and related buyers. TheCircular stated:

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paid or which has been so short-levied or short-paid or to whom the refund hasEerroneously been made, requiring him to show cause why he should not pay theamount specified in the notice; (b) the person chargeable with duty may, before service of notice underclause (a), pay on the basis of,-

(i) his own ascertainment of such duty; or (ii )the duty ascertained by the Central Excise Officer, the amount of dutyalong with interest payable thereon under section 11AA.F…

(4) Where any duty of excise has not been levied or paid or has beenshortlevied or short-paid or erroneously refunded, by the reason of- (a) fraud; or (b) collusion; or

(c) any wilful mis-statement; or

(d) suppression of facts; or

G(e) contravention of any of the provisions of this Act or of the rules madethereunder with intent to evade payment of duty, by any person chargeable with the duty, the Central Excise Officer shall,within five years from the relevant date, serve notice on such person requiring him toshow cause why he should not pay the amount specified in the notice along withinterest payable thereon under section 11AA and a penalty equivalent to the dutyspecified in the notice.H6 No. 643/34/2002-CX

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10. The Assessee took the stand that the valuation method adoptedin the show cause notice for determining the transaction value for goodssold to related parties was contrary to the Circular. The Circular hadbeen followed by the CESTAT, Ahmedabad, in Reliance Industries v.CCE, Surat[7]where the Tribunal had noted that the formula outlined inPoint No. 12, as reproduced above, for undertaking the valuation hadnot been contravened by any judicial forum. Thus, it was not open forthe Department to go against its own administrative directions and theshow cause notice was defective and void ab initio on account of beingcontrary to the Revenue’s interpretation of the CEVR.

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11. The Commissioner rejected this argument after noting thatthe show cause notice had adhered to the spirit of Rule 11 by extrapolatingthe transaction value of the sales to the related parties from the pricecharged to independent buyers. This fulfilled the requirement of using“reasonable means” under Rule 11 while arriving at the assessable value,and was also in conformity with Section 4(1) of the CEA. Further backingfor the correctness of this approach was drawn from different holdingsby CESTAT Tribunals, including the aforementioned decision in AquamallWater Solutions (Supra). The Commissioner asserted that there wasnothing inconsistent between the Circular of 01.07.2002 and theconclusions arrived at in respect of the correctness of the valuationmethod invoked by the Revenue.

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12. Eventually, the demand in the show cause notice was confirmed,along with a penalty of Rs. 2,34,42,050 and interest, prompting theAssessee proceeded to lodge an appeal before the CESTAT, Chandigarh.The CESTAT set aside confirmation order passed by the Commissionerand allowed the Respondent’s appeal while holding:

i)Section 4(1)(a) of the CEA was not applicable as it referred tosales made exclusively to independent buyers. As part of thesales by the Assessee in the present case were to related buyers,Greliance had to be placed on Section 4(1)(b) instead;

ii)The CBEC Circular of 01.07.2002 clarified the methodology tobe adopted for determining the value of goods when sales are H

38SUPREME COURT REPORTS

Amade to both independent and related buyers i.e. resort to Rule11 read with either Rule 9 or 10 of the CEVR;

iii)The CESTAT in Reliance Industries (Supra) had affirmed theusage of the formula as provided in the Circular. The decision inAquamall Water Solutions (Supra) relied upon by theBCommissioner was distinguishable on facts, as the dispute inthat instance exclusively involved transfer of goods solely torelated parties;

iv)The show cause notice by the Revenue sought to assess theCvalue of the goods by relying on Rule 11 of the CEVR, read withRule 4 and Section 4(1)(a) of the CEA. This was contrary to theCBEC Circular and rendered the notice defective andunenforceable;

v)Consequently, the order of the Commissioner affirming aDdefective show cause notice would, necessarily, have to be setaside as well.

The Appellant-Revenue is now in appeal before us.

B. SUBMISSIONSE13. Mr. Balbir Singh, learned Additional Solicitor General, hasassailed the impugned order of the CESTAT on the following grounds:-

i)There is no dispute regarding the fact that there was anundervaluation of sales made by the Assessee to the relatedFparties;

ii)There is no requirement in law for there to be a specific mannerin which the relevant Sections and/or Rules are quoted in a showcause notice. Rule 9, which the CESTAT concludes is theappropriate provision in this case, was mentioned in the showGcause;

iii)Even if it is considered that the show cause notice did notsufficiently specify the relevant Rules, this has no consequence H

on its validity. It has long been established by this Court throughsuccessive judgments in J.K. Steel Ltd. v. Union of India[8]andCollector of Central Excise, Calcutta v. Pradyumna SteelLtd.[9] that mere invocation of an incorrect provision as the sourceof a power is irrelevant, provided the power itself actually exists;

iv) The show cause notice merely cited the most apt method ofascertaining the independent selling price and the properassessable value for the goods, in line with the spirit of Section4(1) of the CEA;

v) In any case, Rule 9 of the CEVR cannot cover the specific factualscenario of the present dispute which involves sales made toboth independent and related parties, as the scope of the provisionis confined only to sales made to the latter.

14. On the contrary, Mr. S. Sunil, learned Counsel for theRespondent, has supported the holding of the CESTAT by drawing ourattention to the following:-

i)The CBEC Circular of 01.07.2002 mandates the usage of Rule11 read with either Rule 9 or 10 of the CEVR for ascertainingthe value of excisable goods when sales are effected to bothindependent and related purchasers;

ii)The Circular is binding on the Revenue and it is not open forthem to take a contrary stand. Various decisions of the SupremeCourt support the proposition that the Department cannot act incontravention of its own administrative instructions as containedin its Circulars;

iii)Any departure from the Circular would have required either itsmodification or withdrawal. As the Revenue has done neither, itis not open for them to take an alternative stance;

iv)Apart from this, the show cause notice has invoked Rule 4 ofthe CEVR which is applicable only when the sale of goods doesnot take place at the time of removal from the factory. There is 8 (1969) 2 SCR 481.

9 (2003) 9 SCC 234.

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Ano dispute over the fact that sales were effectuated at the timeof removal itself by the Assessee;

v)Regardless of whether the show cause notice is defective, theinvocation of the extended period of limitation and the impositionof penalties under the CEA are unwarranted.

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Having benefitted from the assistance of both parties, we maynow examine their rival contentions.

C. ANALYSIS

C.1. BINDING NATUREOF CIRCULARS ISSUEDBYTHE DEPARTMENT

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15. On first blush, it appears that the arguments from the Appellant-Revenue and Respondent-Assessee are on two separate footings. Whilethe former assails the specific reasoning given by the CESTAT for settingaside the show cause notice in terms of invocation of an incorrect partof the CEVR, the latter is more concerned with the binding nature of theDCBEC Circular issued by the Revenue itself.

16. It is clear that the latter question goes to the heart of thematter, rather than the issue of whether the show cause notice becomeslegally untenable for failure to expressly mention that the valuation ofthe goods is to be done under Rule 11 read with Rule 9 of the CEVR. Onthe legal proposition advanced by learned ASG, we readily affirm thatEcitation of an incorrect source of power does not vitiate the exercise ofthe power itself provided the power vests in the authority to begin with.

17. However, what needs to be additionally ascertained is whetherthe Appellant acted in contravention of its own Circular. The reason forthis is that while citation of an incorrect provision may not, by itself, leadFto an invalidation of the show cause notice, but contravention of a binding circular that mandates a particular methodology to be followed might.The power under the CEA for issuance of such administrative/executivedirections is contained in Section 37B.[10] The binding nature of such 10 Section 37B. Instructions to Central Excise Officers. - G

The Central Board of Excise and Customs constituted under the CentralBoards of Revenue Act, 1963 (54 of 1963), may, if it considers it necessary or expedientso to do for the purpose of uniformity in the classification of excisable goods or withrespect to levy of duties of excise on such goods or for the implementation of any otherprovision of this Act, issue such orders, instructions and directions to the CentralExcise Officers as it may deem fit, and such officers and all other persons employed in H

Circulars has long been acknowledged by this Court. In The PaperProducts Ltd. v. Commissioner of Central Excise[11] the settled positionon this point of law was noted in the following passage:

“4. The question for our consideration in theseappeals is: what is the true nature and effect of theCirculars issued by the Board in exercise of its powerunder Section 37-B of the Central Excise Act, 1944?This question is no more res integra in view of thevarious judgments of this Court. This Court in acatena of decisions has held that the Circulars issuedunder Section 37-B of the said Act are binding onthe Department and the Department cannot bepermitted to take a stand contrary to the instructionsissued by the Board. These judgments have also heldthat the position may be different with regard to anassessee who can contest the validity or legality ofsuch instructions but so far as the Department isconcerned, such right is not available.”

18. The rationale behind the requirement for the Revenue to abideby its own administrative directions and interpretation of different partsof the CEA and CEVR, was commented upon in RanadeyMicronutrients & Ors. v. Collector of Central Excise[12]:

“15. There can be no doubt whatsoever, in thecircumstances, that the earlier and later circularswere issued by the Board under the provisions ofSection 37B, and the fact that they do not so recitedoes not mean that they do not bind Central Exciseofficers or become advisory in character. There canbe no doubt whatsoever that after 21st November,1994, Excise duty could be levied upon the execution of this Act shall observe and follow such orders, instructions and directionsof the said Board :

Provided that no such orders, instructions or directions shall be issued-a) so as to require any Central Excise Officer to make a particular assessmentor to dispose of a particular case in a particular manner; or b) so as to interfere with the discretion of the Commissioner of Central Excise (Appeals) in the exercise of his appellate functions.

11 (1999) 7 SCC 84.

12 (1996) 10 SCC 387.

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micronutrients only under the provisions of heading31.05 as “other fertilisers”. If the later circular iscontrary to the terms of the statute, it must bewithdrawn. While the later circular remains inoperation the Revenue is bound by it and cannot beallowed to plead that it is not valid.

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16. We reject the submission to the contrary made bylearned counsel for the Revenue and in the affidavitby M.K. Gupta, working as Director in theDepartment of Revenue, Ministry of Finance. Oneshould have thought that an officer of the Ministryof Finance would have greater respect for circularssuch as these issued by the Board, which alsooperates under the aegis of the Ministry of Finance,for it is the Board which is, by statute, entrusted withthe task of classifying excisable goods uniformly. Thewhole objective of such circulars is to adopt a uniformpractice and to inform the trade as to how aparticular product will be treated for the purposes ofExcise duty. It does not lie in the mouth of the Revenueto repudiate a circular issued by the Board on thebasis that it is inconsistent with a statutory provision.Consistency and discipline are of far greaterimportance than the winning or losing of courtproceedings.”

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19. Thus, the starting point of our analysis on this question is thatthe CBEC Circular of 01.07.2002 is binding on the Revenue. If the showFcause notice issued by the Revenue is found to be contrary to the Circular,it would prima facie result in abrogation of the uniformity and consistencywhich is strongly emphasized upon in Ranadey Micronutrients (Supra).It goes without saying that the Revenue’s stance against its own circularcan potentially lead to a chaotic situation where, with one hand, theGRevenue would lay down instructions on how to interpret the relevantstatutes and rules, and with the other hand, it would promptly disobeythose very directions. Maintaining predictability in taxation law is of utmostimportance and, for this reason, the Court should not accept an argumentby the Revenue that waters down its own Circular as this would fallsquarely within the contours of the prohibition outlined in Paper ProductsH(Supra).

C.2. CONFLICT BETWEENA CIRCULAR, ANDA JUDGMENTAND/ORTHE STATUTE

20. While the Department’s hands are tied with regard to itsCirculars, no such prohibition operates on Courts and Tribunals. It isincumbent upon the adjudicatory bodies to ascertain the correct positionof law unencumbered by the Revenue’s interpretation as crystallized inits administrative directions. A Constitution Bench of this Court inCollector of Central Excise, Vadodara v. Dhiren ChemicalsIndustries[13]while interpreting an exemption notification issued underthe CEA, had noted in Para 11 of its judgment that “…regardless of theinterpretation that we have placed on the said phrase[“appropriate”], if there are circulars which have been issued bythe Central Board of Excise and Customs which place a differentinterpretation upon the said phrase, that interpretation will be bindingupon the Revenue.”

21. Dhiren Chemicals (Supra) subsequently led to someuncertainty, as the paragraph reproduced above was interpreted to meanthat Circulars issued by the Revenue would remain binding even if theywent against the ratio of decisions by this Court. However, the trueintention behind the passage, as recounted above, was clarified in KalyaniPackaging Industry v. Union of India[14]by observing that:

“6. We have noticed that Para 9 (para 11 in SCC) ofDhiren Chemical’s case is being misunderstood. Ittherefore becomes necessary to clarify Para 9 ofDhiren Chemical’s case. One of us (Variava, J.) wasa party to the Judgment of the Dhiren Chemical’scase and knows what was the intention inincorporating Para 9. It must be remembered thatlaw laid down by this Court is law of the land. Thelaw so laid down is binding on all Courts/Tribunalsand Bodies. It is clear that circulars of the Boardcannot prevail over the law laid down by this Court.However, it was pointed out that during hearing ofDhiren Chemical’s case because of circulars of theBoard in many cases the Department had granted 13 (2002) 2 SCC 127.

14 (2004) 6 SCC 719.

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Abenefits of exemption Notifications. It was submittedthat on the interpretation now given by this Court inDhiren Chemical’s case, the Revenue was likely toreopen cases. Thus Para 9 was incorporated to ensurethat cases where benefits of exemption Notificationhad already been granted, the Revenue would remainBbound. The purpose was to see that such cases werenot reopened. However, this did not mean that evenin cases where Revenue/Department had alreadycontended that the benefit of an exemptionNotification was not available, and the matter wasCsub-judice before a Court or a Tribunal, the Court orTribunal would also give effect to circulars of theBoard in preference to a decision of the ConstitutionBench of this Court. Where as a result of dispute thematter is sub-judice a Court/Tribunal is, after DhirenChemical’s case, bound to interpret as set out in thatDjudgment. To hold otherwise and to interpret in themanner suggested would mean that Courts/Tribunalshave to ignore a judgment of this Court and followcirculars of the Board. That was not what was meantby Para 9 of Dhiren Chemical’s case.”

E22. Following this, the position of law which materialized was thatthe Revenue was at liberty to issue Circulars on the interpretation orapplication of different provisions, but Courts and Tribunals would giveeffect to the decisions of the Supreme Court as the law of the land.Another Constitution Bench of this Court in Commissioner of Central FExcise, Bolpur v. Ratan Melting and Wire Industries[15] drew a line inthe sand with regard to any future confusion on this point, in definitiveterms and held as follows:

“7. Circulars and instructions issued by the Boardare no doubt binding in law on the authorities underGthe respective statutes, but when the Supreme Courtor the High Court declares the law on the questionarising for consideration, it would not be appropriatefor the Court to direct that the circular should be 15 (2008) 13 SCC 1.H

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given effect to and not the view expressed in adecision of this Court or the High Court. So far asthe clarifications/circulars issued by the CentralGovernment and of the State Government areconcerned they represent merely their understandingof the statutory provisions. They are not binding uponthe court. It is for the Court to declare what theparticular provision of statute says and it is not forthe Executive. Looked at from another angle, acircular which is contrary to the statutory provisionshas really no existence in law.”

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23. The other aspect of the dispute deals with whether the plainwording of Rule 9 of the CEVR abrogates the Circular in any way. Onthis point, a very recent decision of this Court by a 3-Judge Bench inAssistant Commissioner of Income Tax (Exemptions) v. AhmedabadUrban Development[16]has provided an interpretation of various pastdecisions, including the Constitution Bench in Ratan Melting (Supra),Dand laid down that:

“131. In the opinion of this court, the views expressedin Keshavji Ravji, Indian Oil Corporation and RatanMelting and Wire Industries (though the last decisiondoes not cite Navnit Lal Jhaveri), reflect the correctEposition, i.e., that circulars are binding upondepartmental authorities, if they advance aproposition within the framework of the statutoryprovision. However, if they are contrary to the plainwords of a statute, they are not binding. Furthermore,Fthey cannot bind the courts, which have toindependently interpret the statute, in their own terms.At best, in such a task, they may be considered asdepartmental understanding on the subject and havelimited persuasive value. At the highest, they arebinding on tax administrators and authorities, if theyGaccord with and are not at odds with the statute; atthe worst, if they cut down the plain meaning of astatute, or fly on the face of their express terms, theyare to be ignored.”

16 2022 SCC OnLine SC 1461

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A24. However, as we will elaborate upon below, we do not agreethat there exists any conflict between the Circular dated 01.07.2002,and provisions of the CEVR at all. In any case, in the legal backgroundset out above, even if we were to conclude that the provisions reliedupon in the show cause notice was incorrect such a defect is curableand cannot be enough for the notice itself to be set aside.B

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25. As correctly submitted by learned ASG, invocation of theincorrect methodology for arriving at the assessable value is immaterialto the validity of the notice provided that the power itself existed. In thiscase, the residuary Rule 11 of the CEVR provides the basis fordetermining the assessable value of the goods in line with the principlesCcontained in Section 4(1) of the CEA. Thus, the existence of the poweris not in question and neither has the Respondent denied this.

26. We must not, however, lose sight of the distinction betweenthe basis of the liability to pay additional excise duty, and the determinationof the actual amount. The former is the bedrock on which the showDcause notice lies and will form the foundation for further proceedingsagainst the assessee. If the notice alleges shortfall in payment of exciseduty on completely non-existent and inapplicable grounds, the proceedingswould be vitiated by the simple reason that assessees have a right toknow in clear and unambiguous terms the exact nature of their liability.EAssessees can only frame a response defending themselves based onthe infractions that have been pointed out in the show cause. If,subsequently, the Revenue argues that an incorrect provision was citedand the liability in fact arises from a different source altogether, theassessee would be left in an untenable position as it would have onlyresponded to what was stated in the show cause notice itself.F

C.3. METHODOFVALUATIONFOR DETERMININGASSESSABLEVALUE

27. Based on our reliance on Ratan Melting (Supra) andAhmedabad Urban Development (Supra) we have no reason to doubtthat if a circular has been issued contrary to statutory provisions or inGdefiance of the interpretation of such provisions by a judicial forum, thecircular in question would be stripped of any binding force. The largerquestion that we must answer is whether the CBEC Circular of 01.07.2002is, at all, contrary to either the CEA or the CEVR. A close reading ofSection 4 of the CEA and Rules 4, 9 and 11 of the CEVR are necessaryfor this exercise. Rule 4, as we have noted already, is inapplicable in this H

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case as it addresses situations where goods are not sold at the time ofremoval from the factory of the manufacturer. In this case, theRespondent-Assessee admittedly sold the goods upon removal itself,hence Rule 4 is of no relevance.

28. Rule 9 addresses the valuation of excisable goods when salesare to related parties. Thus, we will focus on Section 4(1)(b) of theCEA, and Rules 9 & 11 of the CEVR. This final limb of our examinationwill be to determine the method adopted for valuation in cases of partialsales to both independent and related purchasers. Since Rule 11 merelyrefers back to the principles under the CEVR as a whole read withSection 4(1) of the CEA, it is arguable that there is still a gap in terms ofhow to proceed with the assessment. In normal circumstances, we mayhave left this responsibility to the Department but given the history ofthe case, we find it appropriate to fill in the blanks ourselves.

29. In fact, a solution to this problem already exists and it is drawnfrom the notion of “value” that exists under Section 4(1) of the CEA.This Court in Commissioner of Central Excise, Mumbai v. FIAT India(P) Ltd. & Ors.[17]has commented on the deeming fiction created bySection 4(1) in the following manner:

“41. Section 4 of the Act, as we have already noticed,speaks of valuation of excisable goods, withreference to their value. The ‘value’ subject to otherstipulation in Section 4 is deemed to be the ‘normalprice’ at which the goods are ‘ordinarily’ sold to thebuyer in the course of ‘wholesale trade’ where thebuyer is not ‘related person’ and the ‘price’ is the‘sole consideration’ for the sale. Against thisbackground, for the purpose of this case, we havenow to consider the meaning of the words ‘value’,‘normal price’, ‘ordinarily sold’ and ‘soleconsideration’, as used in Section 4(1)(a) of the Act.

42. The ‘value’ in relation to excisable commoditymeans normal price or the price at which the goodsare ordinarily sold by the assessee to a buyer in thecourse of wholesale trade at the time and place ofremoval where the buyer is not a related person and A

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price is the sole consideration for sale. Stated anotherway, the Central Excise duty is payable on the basisof the value. The assessable value is arrived on thebasis of Section 4 of the Act and the Central ExciseValuation Rules.

43. Section 4(1)(a) deems the ‘normal price’ of theassessee for selling the excisable goods to buyers tobe the value of the goods for purpose of levy of exciseduty. The expression ‘normal price’ is not definedunder the Act.”

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C30. In Commissioner of Central Excise, Ahmedabad v.Xerographic Ltd.[18]which was in the context of transactions betweenrelated persons, the contrast between “normal price” and the pricecharged from ‘related parties’ was highlighted:

“6. Section 4(4)(c) defines the expression “relatedDpersons” and the said section has to be read in thecontext of third proviso to Section 4(1)(a). On thereading of the entire section it is clear that threeconditions are required to be satisfied before invokingthe third proviso. Firstly, there should be mutualityof interest; secondly, that the alleged related personEshould be related to the assessee as per definition ofSection 4(4)(c) given in the Act and thirdly, andimportantly, that the price charged from the “relatedpersons” was not the normal price by the price lowerthan the normal price and because of extra-Fcommercial considerations the price charged wasless than the normal value.”

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31. In the present case, the factors mentioned in XerographicLtd. (Supra) have been clearly fulfilled as MIL and MSL were chargedbelow the price that was imposed on independent buyers due to extra-Gcommercial considerations. Hence, we can determine the price of goodssold to related parties by perusing the price at which the sales weremade to independent parties. In SACI Allied Products Ltd., U.P. v.Commissioner of Central Excise, Meerut[19]the facts were very similar 18 (2006) 9 SCC 556.H19 (2005) 7 SCC 159.

18 (2006) 9 SCC 556.H19 (2005) 7 SCC 159.

to the case before us. The sales by the Assessee were made to both‘independent’ and ‘related’ parties and the question that arose wasregarding fixing the assessable value of the goods that were conveyedto the latter entities. The 3-Judge Bench held that:

19. …We have already extracted Section 4(1)(a) ofthe Act and the third proviso to Section 4(1)(a) of theAct in paragraph supra. In the present case, normalprice satisfying the requirements of Section 4(1)(a)of the Act is available and there is no dispute on thisfactual position. About 35% of the production of thegoods is sold by the appellants to independent andunrelated dealers spread through the country otherthan in Uttar Pradesh. There is no dispute raised bythe Central Excise Department with regard to thesesales. Appellants’ sale price to these independentdealers duly satisfy the requirements of Section4(1)(a) of the Act in every respect and there is nodispute on this factual position. In respect of thesesales to independent dealers located other than inU.P., appellants have paid excise duty based on theirsale price to these dealers. This factual position isnot disputed by the respondent. It was argued thatonce such a wholesale price to an unrelated buyersatisfying the requirements of Section 4(1)(a) of theAct is available, then that price alone should betreated as the normal price in respect of all the salesmade by the appellants including the sales made torelated persons. In other words, where sales aremade by the assesses to wholesale buyers who areunrelated and also to buyers who are related, thenthe price to unrelated buyers should be adopted asthe basis for payment of excise duty even in respectof sales to related buyers. In such a situation, thirdproviso to Section 4(1)(a) of the Act will not comeinto play at all. Since in the present case, normalprice to independent dealers is available, sameshould be treated as the basis for arriving at theassessable value in respect of sales to Syndet also.

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24-25. In this view of the matter, the argumentadvanced by Mr. A Subba Rao, learned counselappearing for the respondent, has no merits. As amatter of fact, the Tribunal, by its order, has notquestioned the genuineness of the sale between theappellants and Syndet. The appellants submittedbefore the Tribunal and also before the Collector thatthe depot of Syndet was existing right from 1976 andit was not created only after the appellants startedselling the products to Syndet in 1990. The appellants,in support of this submissions, also filed affidavits ofdealers, transporters, employees of Syndet. TheTribunal having accepted the sale as a genuine saleand having accepted that price to independentdealers is available under Section 4(1)(a) of the Act,the appellate Tribunal ought not to have rejected thesubmission of the appellants regarding theacceptance of price to independent dealers for salesto Syndet also.”

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32. This Court, thus, ruled that the amount charged fromEindependent buyers can form the benchmark to calculate the appropriateassessable value of the goods sold to the related parties. This approachis of great assistance keeping in view the similarity between the factsand issues that arose in SACI Allied Products (Supra) and in the disputebefore us.F33. The conclusion we reach from this is that the principles underSection 4(1) of the CEA are geared toward determination of the ‘value’of goods. Under Section 4(1)(a), the value of goods for the purposes ofexcise duty, is deemed to be the ‘normal price’ of the goods that are‘ordinarily sold’ in the course of business, and where the price is the‘sole consideration’ for the transaction. It is only when this cannot beGgleaned from the set of transactions available on record that we resortto Section 4(1)(b).

34. The presumption under Section 4(1)(a) is that the sale froman Assessee to an independent party is the proper valuation to be usedfor determining excise duty. Conversely, a rebuttable presumption canH

be drawn regarding related party transactions and the value at whichgoods are sold in such situations. Rule 9 would be sufficient to resolvethis issue when sales are made only to related entities, but where bothindependent and related parties are involved, we must refer to othermeans. In this context, Rule 11 obliges the Revenue to use “reasonablemeans” consistent with the principles under Section 4(1) of the CEA toarrive at the appropriate value. We observe that the show cause noticeand the order of the Commissioner proceed along the basis that Section4(1)(b) is applicable as the Assessee and MIL and MSL are relatedparties. Section 4(1)(a) was deemed to be inapplicable as it addressessituations where the parties are not related.

35. The unequivocal position which emerges before us is that theprice charged from independent parties for the sale of excisable goodscan be used as a benchmark for determination of excise duty on relatedtransactions when such a price is readily available. However, we addthe caveat that when making such calculations via transposition, theRevenue cannot act in a mechanical way. The assessment of theappropriate value of the related party transaction must be made afterconsidering relevant material and due application of mind. The entirequasi-judicial process of issuing a show cause notice and consideringthe distinguishing factors placed by the Assessee must be completedbefore the price of sales to independent buyers is utilized as a benchmarkfor sales to related parties. The general principles of Section 4(1) of theCEA, read with Rule 11 of the CEVR, are meant to provide a pathwayfor determination of the “normal price” and “value” of goods in caseswhere no alternative methodology is applicable. This fulfils the dualobjectives of being in consonance with the Circular dated 01.07.2002and harmonizing different provisions of the CEA and CEVR.

36. The sum and substance of our analysis is that the assessablevalue for the related party sales can be established by referring to thenormal price under Section 4(1)(a) of the CEA, which is readily availablein the present case. This is, in our opinion, the true meaning and intentionunderlying the Circular of 01.07.2002. The reference to Rule 11 in PointNo. 12 of the Circular simply mandates the usage of “reasonable means”keeping in mind Section 4(1)(a) of the CEA and Rule 9 of the CEVR.This is merely a method by which the Revenue is required to apply itsmind to a case of partial sales to both independent and related parties.

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AThe conclusion reached through this process may very well be inconsonance with our analysis.

37. Regardless of the value the Revenue finally settles upon, wedo not find the Circular itself to be contrary to any statutory provisions.To do so would essentially render Point No. 12 ineffective and such anBoutcome should, ideally, be avoided as far as possible. In fact, theCommissioner’s order proceeds to determine the value of the sales madeby the Respondent-Assessee to its sister concerns on the basis of thevalue of its sales to independent parties. In our considered view, this isentirely consistent with the actual intent of the Circular dated 01.07.2002,which we have already held is not in contravention with either the CEACor the CEVR.

38. The only remaining facet of the case is the extended period oflimitation invoked against the Respondent-Assessee under the CEA.The justification of extending the period of limitation depends upon whetherthe Respondent-Assessee has suppressed facts and failed to provideDaccurate information regarding its sales to the Revenue. To this extent,there is a finding of fact against the Assessee. At the same time, we areof the considered view that since the Revenue itself appeared to beunclear on the correct method of valuation of the goods, it is notappropriate to saddle the Respondent with additional liability, namely,Eother than the excise duty. Hence, though we confirm the demand madeby the Appellant, we do not approve the levy of interest and penaltiesupon the Respondent, and direct that these amounts be reduced fromthe total recoverable amount from the Assessee.

D. CONCLUSION

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39. Having held so, we can now bring this matter to a close. Forthe purposes of current dispute, it suffices for us to clarify that Point No.12 in the Circular of 01.07.2002 is not contrary to the intent of the CEAand 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)Gof the CEA and Rule 9 of the CEVR, so as to reach the assessablevalue of goods for determination of excise duty.

40. When the normal price that is ordinarily charged in dealingswhere the price itself is the sole consideration of the transaction isavailable, as it is here, that price can be transposed onto the relatedparty purchases as well, to arrive at the assessable value. Hence, theH

order of the Commissioner regarding the value of the goods sold to theRespondent’s sister concerns is in consonance with this Court’s earlierjudgments and the Circular dated 01.07.2002.

41. We allow the Civil Appeal in the abovementioned terms.

42. Pending applications, if any, are disposed of accordingly.

Divya Pandey

Appeal disposed of.

(Assisted by : Rahul Kumar, LCRA)

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