2014 (9) TMI 29 - HC - Central Excise

Recovery of excessive refund / rebate of excise duty granted earlier - export of pharmaceutical products - allegation of over-valuation of goods - Held that - it is understood that the entire process of launching a new product involves huge expenditure. These hidden costs are also have to be considered for arriving at the sale price of such innovative product. Further, Dr. Reddy s vide their letter dated 17.08.2011 have undertook to submit the Bank Realisation Certificate on receipt of export proceeds. In view of these facts, the declared value is acceptable. The assessee is therefore, eligible for a rebate-under Rule 18 of the Central Excise Rules, 2002 read with Notification No.19/2004- C E (N T) dated 06.09.2004, as amended. However, as the duty is calculated and paid on the value declared in ARE.1 for arriving at transaction value the actual freight amount, Insurance, commission and local freight, if any paid are to be deducted from CIF Value. Therefore, basing on the information furnished, the duty has been re-worked put and arrived at the rebate to be given in cash. The revisionary authority discarded these prices on the ground that the price charged by the inventor cannot be a basis for comparison and that the substantially lower price charged by Sun Pharmaceuticals in India is a better comparison. It was further held that the substantial mark-up in the transaction between Dr. Reddy s and its Jersey subsidiary implied some distortion in the transaction value. Thus, the best judgment method was used with a cost plus 10% mark up as the correct value. This reasoning is unacceptable. Under Rule 18- which contemplates return of the excise duty paid in cases of exported goods,- the market price must necessarily refer to the market where the goods are sold, - in this case, the United States market. The goods in question are neither meant for, nor did they ever enter, the Indian market. In the present case, approximately ₹ 411 crores was received in India in foreign exchange from the sale of these drugs. On this basis, excise duty was paid and later recovered. At no point did Dr. Reddy s receive a net benefit from the transaction. If the Revenue s argument is to be accepted, a higher price is accepted by it at the time of payment of excise duty on the basis of the price in the foreign market, but a different (and lower) price is mandated on revaluation for the purposes of refunding that very amount. Rule 18 ensures any duty paid is returned, and that excise duty is not added to the cost of exports who are selling abroad. The revenue effect in such cases is to be nil. Thus, it is unfortunate that in the present case it has resulted in two orders of revision under Section 35E(2), the two appellate orders and the common revisionary order, which have led to an appeal before the CESTAT and the present writ petition. - Decided in favor of assessee.

Issues Involved:
1. Legality of the rebate claims made by the petitioner under the Central Excise Act.
2. Correctness of the valuation method used for determining the rebate amount.
3. Applicability of the 2000 Rules vs. the 2007 Rules for valuation.
4. Relevance of market price in determining the rebate amount.
5. Validity of the revisionary authority's order demanding recovery of the excess rebate.

Detailed Analysis:

1. Legality of the Rebate Claims:
The petitioner, Dr. Reddy's Laboratories Ltd., claimed rebates of Rs. 21,18,36,117 and Rs. 1,75,57,537 under the Central Excise Act for the excise duty paid on exported pharmaceutical products. Initially, the Deputy Commissioner of Customs and Central Excise allowed these rebates. However, subsequent proceedings initiated by the Commissioner of Customs, Central Excise, and Service Tax (Appeal II) questioned the legality of these rebates, claiming they were excessive.

2. Correctness of the Valuation Method:
The crux of the dispute was the valuation method used to determine the rebate amount. Dr. Reddy's exported Olanzapine to its US subsidiary at prices significantly higher than domestic market prices. The Commissioner (Appeals) and the revisionary authority argued that the rebate granted exceeded the market price of the exported goods, relying on Notification No. 19/2004-CE (NT), which states that the rebate cannot exceed the market price at the time of export.

3. Applicability of the 2000 Rules vs. the 2007 Rules:
The authorities debated whether the 2000 Rules or the 2007 Rules should apply for valuation. The appellate and revisionary authorities held that the 2000 Rules, specifically Rules 9, 10, and 11, should be used, as opposed to the 2007 Rules. They argued that the transaction value between related parties (Dr. Reddy's and its Jersey subsidiary) could not be accepted at face value due to the substantial difference between the cost of production and the transaction value.

4. Relevance of Market Price:
The authorities contended that the market price of the exported goods was lower than the rebate claimed. They compared the prices of similar products in the Indian market and found them to be significantly lower. The revisionary authority used a best judgment method, valuing the goods on a cost plus 10% markup basis, resulting in a much lower rebate amount than initially granted.

5. Validity of the Revisionary Authority's Order:
The court found the reasoning of the revisionary authority unacceptable. It held that the market price must refer to the market where the goods are sold, in this case, the United States. The court noted that the goods were exported during a 180-day exclusivity period, during which prices were higher due to limited competition. The court emphasized that the purpose of Rule 18 of the 2002 Rules is to ensure that excise duty paid on exported goods is refunded, making the process revenue-neutral.

Conclusion:
The court set aside the order of the Department of Revenue, restoring the original rebate orders dated 30.9.2011 and 13.1.2012. The court highlighted that the valuation should be consistent and based on the market where the goods are sold, ensuring that the exporter does not receive a net benefit from the rebate. The court also emphasized the principle of revenue neutrality, stating that the entire exercise should not result in a net positive for the Revenue.

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