2016 (9) TMI 782 - AT - Central Excise

Valuation - CNG - inclusion of services charges paid to private parties (PP) in the transaction valuation - whether price charged for sale of CNG to OMCs can be considered as transaction value for the purpose of payment of duty under Section 4(1)(a) of CEA - manufacture of Compressed Natural Gas from Natural Gas and distribution thereof and have integrated infrastructure for the same - all parameters like ownership of equipment, manner of production, product, RSP, etc. remaining the same - Held that - the Appellants are paying VAT on its sales price to OMCs and OMCs are also paying VAT on their sales price to their customers. This clearly evidences that the AR s arguments that sale is not taking place between Appellants and OMCs and also it is a paper transaction is incorrect and not supported by any evidence on record. Hence, the transaction between them is sale/purchase transaction and VAT/sales tax has been paid at both ends the same cannot be considered as service contracts. The Appellants contention that OMCs, being bulk buyers, have been given higher discount also needs to be accepted in the absence of any allegation/ substantiation of mutuality of interest between Appellants and OMCs, as both are independent entities. We also find that there is a distinct difference in the transactions of the Appellants with PPs, wherein MGL supply CNG through the outlets owned and operated by PPs and CNG is directly supplied by PPs to the ultimate consumers/vehicles users from their outlets for and on behalf of MGL, under the invoices/bills/cash memos of MGL and the price charged in those bills/invoices/cash memos are the retail sales price or maximum recommended price determined by MGL, from time to time. In a true sense, the customers/ vehicle users at the outlets of PPs are buying CNG from MGL, through the PPs. The privity of contract is between MGL and those buyers and those sales are directly recorded in the Books of Account of MGL and not in the Books of PPs, as there is no sale and purchase of CNG by PPs and PPs act only as an agent of MGL on commission basis. The entire sales proceeds are remitted by PPs to MGL on daily basis. The contracts between MGL and PPs are that of principal and agent as the PPs are merely service providers and not buyers of CNG from MGL. Their obligation under the contracts is merely to provide assistance for supply/sale of CNG to the vehicles by MGL. For acting as an agent of MGL, PPs get specified service charges on per kg basis of the CNG sold by them on behalf MGL. Since the PPs are acting as agents of MGL for supply of CNG, PPs consider their activity as Business Auxiliary Service and pay service tax on the commission received from MGL. We find that sale of CNG by the Appellants to OMCs is on principal to principal basis, which is clear from various terms/covenants of the agreements between MGL and OMCs and MGL shall not be liable for any of the acts of omission/commission of OMCs. It is also found that when CNG is supplied by MGL through PPs, there is no sale between MGL and PPs, as the sale takes place between MGL and the ultimate customers/vehicle users and the PPs act as agents of MGL; that the PPs were/are issuing cash memos/invoices/bills of MGL, when they supply CNG to customers/vehicle owners; that the PPs are acting as agents of MGL, for which they get specified service charges and the PPs are paying service tax on such amount; that, in contrast, as far as OMCs are concerned, sale of CNG takes place between MGL and OMCs at OMCs outlets and OMCs issue their cash memos/bills/invoices to their customers/vehicle owners and MGL do not have any role to play in such transactions; that commission paid to PPs was ₹ 1.20/kg, ₹ 1.74/kg, ₹ 1.90/kg and ₹ 2.45/kg during different periods, whereas discount given to OMCs was ₹ 1.20/kg, ₹ 1.40/kg, ₹ 2.42/kg, ₹ 2.62/kg and ₹ 2.74/kg during different periods. Therefore, we are of the view that the Appellants case is squarely covered under new Section 4(1)(a) of CEA which essentially permit different transaction values, unlike normal sales price existed prior to 1.7.2000, which has also been explained by CBEC, vide its Circular No.354/81/2000-TRU dated 30.06.2000. Therefore, since the Appellants have a strong case on merits itself and are allowing the appeals on merits, we are not discussing the alternate propositions like non-applicability of extended period, etc. The penalties imposed on the Appellants are also not sustainable. - Decided in favour of appellant

Issues Involved:
1. Whether the price charged for the sale of Compressed Natural Gas (CNG) to Oil Marketing Companies (OMCs) can be considered as the transaction value for the purpose of payment of duty under Section 4(1)(a) of the Central Excise Act (CEA).
2. Whether the discount given to OMCs should be treated as a trade discount or commission.
3. Whether the transactions between the appellants and OMCs are on a principal-to-principal basis or an agency basis.
4. Applicability of extended period for demand and penalties.

Issue-wise Detailed Analysis:

1. Transaction Value for Payment of Duty:
The core issue is whether the price charged to OMCs for CNG can be considered the transaction value under Section 4(1)(a) of the CEA. The Tribunal found that the new Section 4, effective post-July 2000, allows for different transaction values charged to different customers, provided these are based on commercial considerations where the buyer and seller are not related and the price is the sole consideration. The Tribunal noted that MGL raised tax invoices on OMCs, which included VAT, and OMCs also paid VAT on their resale price. This indicated that the transactions were genuine sales and not mere paper transactions.

2. Trade Discount vs. Commission:
The Tribunal examined whether the discount given to OMCs should be treated as a trade discount or commission. The agreements between MGL and OMCs used terms like commission/trade margin loosely. However, the Tribunal concluded that the discounts given to OMCs were trade discounts, not commissions, based on various judgments, including those from the Hon'ble Supreme Court. The Tribunal emphasized that the agreements were made before the imposition of excise duty on CNG and thus had no intent to evade duty.

3. Principal-to-Principal vs. Agency Basis:
The Tribunal found that the transactions between MGL and OMCs were on a principal-to-principal basis. This conclusion was drawn from the agreements, which stated that OMCs would not act as agents of MGL and that the transactions were purely sales. The Tribunal contrasted this with the relationship between MGL and Private Parties (PPs), where PPs acted as agents of MGL and were paid service charges, not trade discounts. The Tribunal noted that OMCs issued their own invoices to customers and paid VAT on their sales, further supporting the principal-to-principal nature of the transactions.

4. Applicability of Extended Period and Penalties:
The Tribunal did not delve deeply into the applicability of the extended period for demand or penalties, as it found that the appellants had a strong case on merits. The penalties imposed were also deemed unsustainable. The Tribunal set aside the impugned orders and allowed the appeals with consequential relief.

Conclusion:
The Tribunal concluded that the price charged by MGL to OMCs for CNG should be considered the transaction value for duty purposes under Section 4(1)(a) of the CEA. The discounts given to OMCs were trade discounts, not commissions. The transactions between MGL and OMCs were on a principal-to-principal basis, not an agency basis. The Tribunal set aside the demands and penalties, allowing the appeals with consequential relief.

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