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TMI Blog2022 (12) TMI 453X X X X Extracts X X X X X X X X Extracts X X X X ..... ue 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 LTD. VERSUS COMMISSIONER OF CENTRAL EXCISE [ 1999 (8) TMI 70 - SUPREME COURT] . The presumption under Section 4(1)(a) is that the sale from an Assessee to an independent party is the proper valuation to be used for determining excise duty. Conversely, a rebuttable presumption can be drawn regarding related party transactions and the value at which goods are sold in such situations. Rule 9 would be sufficient to resolve this issue when sales are made only to related entities, but where both independent and related parties are involved, we must refer to other means. In this context, Rule 11 obliges the Revenue to use reasonable means consistent with the principles under Section 4(1) of the CEA to arrive at the appropriate value - the show cause notice and the or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onnected 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, 19441 ("CEA") read with Section 2(g) of the Monopolies and Restrictive Trade Practices Act, 1969.2 It was ascertained that Respondent was a subsidiary of MIL with 74.65% of its shareholding vested in the latter. With regard to MSL, the Assessee was found to have significant influence over its operations and the two companies shared Directors/Key Managerial Personnel. 3. 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 concerns. Hence, the assessable value of the excisable materials had to be established in order to then calculate the correct amount of excise duty to be levied. 4. The assessable value of excisable goods is worked out via Section 4(1) of the CEA. As we will repeatedly be referring to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such adjustment on account of the difference in the dates of delivery of such goods and of the excisable goods under assessment, as may appear reasonable. Rule 9. When the assessee so arranges that the excisable goods are not sold by an assessee except to or through a person who is related in the manner specified in either of sub-clauses (ii), (iii) or (iv) of clause (b) of sub-section (3) of section 4 of the Act, the value of the goods shall be the normal transaction value at which these are sold by the related person at the time of removal, to buyers (not being related person); or where such goods are not sold to such buyers, to buyers (being related person), who sells such goods in retail : Provided that in a case where the related person does not sell the goods but uses or consumes such goods in the production or manufacture of articles, the value shall be determined in the manner specified in rule 8. Rule 10. When the assessee so arranges that the excisable goods are not sold by him except to or through an inter-connected undertaking, the value of the goods shall be determined in the following manner, namely:- (a) If the undertakings are so connected that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e being sold, the extended period of limitation of 5 years was invoked under the Proviso to Section 11A(1) & (4) of the CEA.5 9. The Assessee disputed the contents of the notice before the Commissioner. One of the contentions raised was that the Revenue had incorrectly invoked Rule 11 of the CEVR, read with Section 4(1) of the CEA, to value the goods that were sold to the Respondent's alleged sister concerns. The Department itself had issued a Circular on 01.07.20026 which clarified the manner in which valuation was to be done when sales are made to both independent and related buyers. The Circular stated: No. Question Response … … … 12. How will valuation be done when goods are sold partly to related persons and partly to independent buyers? There is no specific rule covering such a contingency. Transaction value in respect of sales to unrelated buyers cannot be adopted for sales to related buyers since as per Section 4(1) transaction value is to be determined for each removal. For sales to unrelated buyers valuation will be done as per Section 4(1)(a) and for sale of the same goods to related buyers recourse will have to be taken to the resi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... endent and related buyers i.e. resort to Rule 11 read with either Rule 9 or 10 of the CEVR; iii) The CESTAT in Reliance Industries (Supra) had affirmed the usage of the formula as provided in the Circular. The decision in Aquamall Water Solutions (Supra) relied upon by the Commissioner was distinguishable on facts, as the dispute in that instance exclusively involved transfer of goods solely to related parties; iv) The show cause notice by the Revenue sought to assess the value of the goods by relying on Rule 11 of the CEVR, read with Rule 4 and Section 4(1)(a) of the CEA. This was contrary to the CBEC Circular and rendered the notice defective and unenforceable; v) Consequently, the order of the Commissioner affirming a defective show cause notice would, necessarily, have to be set aside as well. The Appellant-Revenue is now in appeal before us. B. SUBMISSIONS 13. Mr. Balbir Singh, learned Additional Solicitor General, has assailed the impugned order of the CESTAT on the following grounds:- i) There is no dispute regarding the fact that there was an undervaluation of sales made by the Assessee to the related parties; ii) There is no requirement in law for there to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on and the imposition of penalties under the CEA are unwarranted. Having benefitted from the assistance of both parties, we may now examine their rival contentions. C. ANALYSIS C.1. BINDING NATURE OF CIRCULARS ISSUED BY THE DEPARTMENT 15. On first blush, it appears that the arguments from the Appellant-Revenue and Respondent-Assessee are on two separate footings. While the former assails the specific reasoning given by the CESTAT for setting aside the show cause notice in terms of invocation of an incorrect part of the CEVR, the latter is more concerned with the binding nature of the CBEC Circular issued by the Revenue itself. 16. It is clear that the latter question goes to the heart of the matter, rather than the issue of whether the show cause notice becomes legally untenable for failure to expressly mention that the valuation of the goods is to be done under Rule 11 read with Rule 9 of the CEVR. On the legal proposition advanced by learned ASG, we readily affirm that 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. 17. However, what needs to be additionally ascertained is w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmission to the contrary made by learned counsel for the Revenue and in the affidavit by M.K. Gupta, working as Director in the Department of Revenue, Ministry of Finance. One should have thought that an officer of the Ministry of Finance would have greater respect for circulars such as these issued by the Board, which also operates under the aegis of the Ministry of Finance, for it is the Board which is, by statute, entrusted with the task of classifying excisable goods uniformly. The whole objective of such circulars is to adopt a uniform practice and to inform the trade as to how a particular product will be treated for the purposes of Excise duty. It does not lie in the mouth of the Revenue to repudiate a circular issued by the Board on the basis that it is inconsistent with a statutory provision. Consistency and discipline are of far greater importance than the winning or losing of court proceedings." 19. Thus, the starting point of our analysis on this question is that the CBEC Circular of 01.07.2002 is binding on the Revenue. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... land. The law so laid down is binding on all Courts/Tribunals and Bodies. It is clear that circulars of the Board cannot prevail over the law laid down by this Court. However, it was pointed out that during hearing of Dhiren Chemical's case because of circulars of the Board in many cases the Department had granted benefits of exemption Notifications. It was submitted that on the interpretation now given by this Court in Dhiren Chemical's case, the Revenue was likely to reopen cases. Thus Para 9 was incorporated to ensure that cases where benefits of exemption Notification had already been granted, the Revenue would remain bound. The purpose was to see that such cases were not reopened. However, this did not mean that even in cases where Revenue/Department had already contended that the benefit of an exemption Notification was not available, and the matter was sub-judice before a Court or a Tribunal, the Court or Tribunal would also give effect to circulars of the Board in preference to a decision of the Constitution Bench of this Court. Where as a result of dispute the matter is sub-judice a Court/Tribunal is, after Dhiren Chemical's case, bound to interpret as set out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance a proposition within the framework of the statutory provision. However, if they are contrary to the plain words of a statute, they are not binding. Furthermore, they cannot bind the courts, which have to independently interpret the statute, in their own terms. At best, in such a task, they may be considered as departmental understanding on the subject and have limited persuasive value. At the highest, they are binding on tax administrators and authorities, if they accord with and are not at odds with the statute; at the worst, if they cut down the plain meaning of a statute, or fly on the face of their express terms, they are to be ignored." 24. However, as we will elaborate upon below, we do not agree that there exists any conflict between the Circular dated 01.07.2002, and provisions of the CEVR at all. In any case, in the legal background set out above, even if we were to conclude that the provisions relied upon in the show cause notice was incorrect such a defect is curable and cannot be enough for the notice itself to be set aside. 25. As correctly submitted by learned ASG, invocation of the incorrect methodology for arriving at the assessable value is immaterial to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 9 & 11 of the CEVR. This final limb of our examination will be to determine the method adopted for valuation in cases of partial sales to both independent and related purchasers. Since Rule 11 merely refers back to the principles under the CEVR as a whole read with Section 4(1) of the CEA, it is arguable that there is still a gap in terms of how to proceed with the assessment. In normal circumstances, we may have left this responsibility to the Department but given the history of the case, we find it appropriate to fill in the blanks ourselves. 29. In fact, a solution to this problem already exists and it is drawn from 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. (2012) 9 SCC 332 has commented on the deeming fiction created by Section 4(1) in the following manner: "41. Section 4 of the Act, as we have already noticed, speaks of valuation of excisable goods, with reference to their value. The 'value' subject to other stipulation in Section 4 is deemed to be the 'normal price' at which the goods are 'ordinarily' sold to the buyer in the course of 'wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the price at which the sales were made to independent parties. In SACI Allied Products Ltd., U.P. v. Commissioner of Central Excise, Meerut (2005) 7 SCC 159 the facts were very similar to the case before us. The sales by the Assessee were made to both 'independent' and 'related' parties and the question that arose was regarding fixing the assessable value of the goods that were conveyed to the latter entities. The 3-Judge Bench held that: 19. …We have already extracted Section 4(1)(a) of the Act and the third proviso to Section 4(1)(a) of the Act in paragraph supra. In the present case, normal price satisfying the requirements of Section 4(1)(a) of the Act is available and there is no dispute on this factual position. About 35% of the production of the goods is sold by the appellants to independent and unrelated dealers spread through the country other than in Uttar Pradesh. There is no dispute raised by the Central Excise Department with regard to these sales. Appellants' sale price to these independent dealers duly satisfy the requirements of Section 4(1)(a) of the Act in every respect and there is no dispute on this factual position. In respect of these sales to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under Section 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 of excise 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 be gleaned from the set of transactions available on record that we resort to Section 4(1)(b). 34. The presumption under Section 4(1)(a) is that the sale from an Assessee to an independent party is the proper valuation to be used for determining excise duty. Conversely, a rebuttable presumption can be drawn regarding related party transactions and the value at which goods are sold in such situations. Rule 9 would be sufficient to resolve this issue when sales are made only to related entities, but where both independent and related parties are involved, we must refer to other means. In this context, Rule 11 obliges the Revenue to use "reasonable means" consistent with the principles under Section 4(1) of the CEA to arrive at the appropriate value. We observe that the show cause notice and the order of the Commissioner proceed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Commissioner's order proceeds to determine the value of the sales made by the Respondent-Assessee to its sister concerns on the basis of the value of its sales to independent parties. In our considered view, this is entirely consistent with the actual intent of the Circular dated 01.07.2002, which we have already held is not in contravention with either the CEA or the CEVR. 38. The only remaining facet of the case is the extended period of limitation invoked against the Respondent-Assessee under the CEA. The justification of extending the period of limitation depends upon whether the Respondent-Assessee has suppressed facts and failed to provide accurate information regarding its sales to the Revenue. To this extent, there is a finding of fact against the Assessee. At the same time, we are of the considered view that since the Revenue itself appeared to be unclear on the correct method of valuation of the goods, it is not appropriate to saddle the Respondent with additional liability, namely, other than the excise duty. Hence, though we confirm the demand made by the Appellant, we do not approve the levy of interest and penalties upon the Respondent, and direct that these amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th the duty which has not been so levied or paid or which has been so short-levied or short-paid or to whom the refund has erroneously been made, requiring him to show cause why he should not pay the amount specified in the notice; (b) the person chargeable with duty may, before service of notice under clause (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 duty along with interest payable thereon under section 11AA. … (4) Where any duty of excise has not been levied or paid or has been shortlevied 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 (e) contravention of any of the provisions of this Act or of the rules made thereunder 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 to show cause why he should not pay the amount specified in the notice along with interest payable thereon under section 11AA an ..... 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