2025 (1) TMI 989 - SC - Central Excise

Valuation of Central Excise duty - price the sole consideration of sale - invocation of extended period of limitation under the proviso to Section 11A(1) of CEA 1944 - levy of penalty u/s 11AC. Whether the price was the sole consideration of sale? - HELD THAT - Taking into consideration the aforementioned parts of the MOU it is crystal clear that the arrangement reflected from the MOU is essentially for ensuring that every OMC gets smooth and uninterrupted supply all over India irrespective of whether an OMC has a refinery or otherwise in a particular part of India. Thus from a plain reading of the MOU we find that the real consideration for the MOU was to ensure an uninterrupted supply to all the OMCs at various places in India. The MOU incorporates mutual arrangements made by MNCs for an uninterrupted supply of petroleum products so that MNCs can further sell the products to their dealers. By no stretch of the imagination it can be said that the price fixed under the MOU was the sole consideration for the sale by one OMC to the other. Hence the conclusion in the impugned judgment concurred with that the price was not the sole consideration for sale. Turning to the decision of the Tribunal in Hindustan Petroleum Corporation Ltd. 2005 (2) TMI 357 - CESTAT BANGALORE an appeal against which has been summarily dismissed by this Court. Apart from mentioning that the MOU was executed according to the direction of the Government of India the Tribunal has not looked into the contents of the MOU. There is a vague reference to HPCL s agreement with other oil companies. There is no specific finding recorded therein after considering the terms and conditions of the MOU that the price was the sole consideration for the sale. Therefore the decision of the Tribunal ignores a crucial ingredient of Section 4(1)(a) of whether the price was the sole consideration for the sale. Whether the revenue was entitled to invoke an extended period of limitation under the proviso to Section 11A(1) of the 1944 Act? - HELD THAT - Under the proviso to sub-section (1) of Section 11-A an extended period of limitation can be invoked when there is a nonlevy or non-payment or short levy or short payment of the excise duty by a reason of fraud or collusion or any wilful mis-statement or suppression of facts or contravention of any of the provisions of 1944 Act or the rules made thereunder with the intent to evade payment of duty. The show cause notice referred to the statements recorded of BPCL officers and other OMCs. No detailed reasons have been recorded in support of invoking the extended period of limitation by the Commissioner in his order. A careful perusal of the show cause notice shows that it is not alleged that any such misrepresentation was made by BPCL that the pricing as provided in the MOU was adopted by the BPCL as per the directions of the Central Government. The reply to the show cause notice submitted by the BPCL contains no such representation. In the show cause notice statements recorded of officers of BPCL and other OMCs have been referred to and relied upon. However it is not alleged that any of the officers stated that the price of the goods sold under the MOU was fixed as per the directives of the Central Government - both the grounds in support of invoking an extended period of limitation cannot be sustained and only on that ground the demand cannot be sustained. Whether the revenue was entitled to levy a penalty under Section 11AC of the 1944 Act? - HELD THAT - In this case there is no allegation made by the Revenue of fraud collusion or any wilful mis-statement on the part of the appellant. The stand taken is that the MOU was suppressed and therefore Section 11AC will apply. In view of the findings recorded above on the issue of the invocation of the extended period of limitation the penalty could not have been imposed. Conclusion - i) The price was not the sole consideration for sale. ii) No detailed reasons have been recorded in support of invoking the extended period of limitation by the Commissioner in his order. iii) The stand taken is that the MOU was suppressed and therefore Section 11AC will apply. The penalty could not have been imposed. Appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The judgment primarily revolves around the following core legal questions:

(i) Whether the price was the sole consideration for the sale of petroleum products among Oil Marketing Companies (OMCs) under the Memorandum of Understanding (MOU)?

(ii) Whether the revenue was entitled to invoke an extended period of limitation under the proviso to Section 11A(1) of the Central Excise Act, 1944?

(iii) Whether the revenue was entitled to levy a penalty under Section 11AC of the Central Excise Act, 1944?

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i): Whether the price was the sole consideration for the sale?

- Relevant legal framework and precedents: Section 4(1)(a) of the Central Excise Act, 1944, stipulates that the transaction value is applicable if the price is the sole consideration for the sale, and the buyer and seller are not related.

- Court's interpretation and reasoning: The court examined the MOU and concluded that the arrangement was not purely commercial but aimed at ensuring an uninterrupted supply of petroleum products across India. The MOU facilitated product sharing among OMCs to avoid supply disruptions, indicating that the price was not the sole consideration.

- Key evidence and findings: The court analyzed the MOU's clauses and the intent behind its execution, which was to ensure smooth distribution rather than commercial sale. The MOU was executed at the behest of the Ministry of Petroleum and Natural Gas, emphasizing mutual assistance over commercial transactions.

- Application of law to facts: The court applied Section 4(1)(a) and determined that since the price was not the sole consideration, the transaction value could not be applied as per the said section.

- Treatment of competing arguments: The court rejected the argument that the price was the sole consideration, as the MOU's primary objective was to ensure supply continuity, not commercial profit.

- Conclusions: The court concluded that the price was not the sole consideration for the sales under the MOU, thereby negating the applicability of Section 4(1)(a) for determining transaction value.

Issue (ii): Whether the revenue was entitled to invoke an extended period of limitation?

- Relevant legal framework and precedents: Section 11A(1) of the Central Excise Act allows an extended period of limitation for recovery of duties in cases of fraud, collusion, or suppression of facts.

- Court's interpretation and reasoning: The court found no evidence of suppression or misrepresentation by BPCL regarding the MOU. The department was aware of the MOU, and there was no deliberate concealment by BPCL.

- Key evidence and findings: The court noted that the MOU was known to the department, and there was no specific allegation of misrepresentation by BPCL.

- Application of law to facts: The court held that the conditions for invoking the extended period of limitation were not met, as there was no suppression or misrepresentation by BPCL.

- Treatment of competing arguments: The court dismissed the revenue's argument that BPCL had suppressed the MOU, noting that the department was already aware of its existence.

- Conclusions: The court concluded that the extended period of limitation could not be invoked, and the demand was unsustainable on this ground.

Issue (iii): Whether the revenue was entitled to levy a penalty under Section 11AC?

- Relevant legal framework and precedents: Section 11AC imposes penalties for non-levy or short-levy of duty due to fraud, collusion, or suppression of facts.

- Court's interpretation and reasoning: The court found no basis for imposing a penalty under Section 11AC, as the conditions for invoking the extended period of limitation were not satisfied.

- Key evidence and findings: The absence of fraud, collusion, or suppression of facts negated the applicability of Section 11AC.

- Application of law to facts: The court determined that there was no justification for imposing a penalty, as the prerequisites under Section 11AC were not met.

- Treatment of competing arguments: The court rejected the revenue's contention for imposing a penalty, given the lack of evidence for fraud or suppression.

- Conclusions: The court concluded that the penalty under Section 11AC was not applicable, and the imposition was unjustified.

3. SIGNIFICANT HOLDINGS

- Preserve verbatim quotes of crucial legal reasoning: "By no stretch of the imagination, it can be said that the price fixed under the MOU was the sole consideration for the sale by one OMC to the other."

- Core principles established: The court emphasized that for transaction value to apply under Section 4(1)(a), the price must be the sole consideration. Additionally, the extended period of limitation and penalties under Sections 11A and 11AC require evidence of fraud, collusion, or suppression.

- Final determinations on each issue: The court determined that the price was not the sole consideration, the extended period of limitation was not applicable, and the penalty under Section 11AC was unjustified. Consequently, the demand against BPCL was set aside, and other related appeals were remanded for fresh adjudication.