Order Date – 05 December 2022

Parties: Commissioner of Central Excise & Service Tax, Rohtak Vs Merino Panel Product Ltd.

Facts –

• The Respondent, Merino Panel Product Ltd., is involved in the manufacture of decorative laminates and other like materials, which fall under Chapter 48 of the Central Excise Tariff Act, 1985.
• It was found during an audit that the goods were being offered not only to independent parties unconnected with the Respondent, but also to two ‘related parties’ which were discovered to be undervalued in comparison to those made to non-related independent entities. 
• The Revenue issued show cause notice duly invoking Rule 11 read with Section 4(1)(a) of CEA. The Cestat set aside the demand of duty along with interest and penalty confirmed by the Commissioner by holding that Section 4(1)(a) of the CEA was not applicable as it referred to sales made exclusively to independent buyers and the CBEC Circular of 01.07.2002 clarified the methodology to be adopted for determining the value of goods when sales are made to both independent and related d buyers.

Issue –

• Whether the Section 4(1)(a) is applicable when sale made to related parties and independent parties?

Order –

• The divisional bench of Hon’ble Supreme Court held that the general principles of Section 4(1) of the CEA, read with Rule 11 of the CEVR, are meant to provide a pathway for determination of the “normal price” and “value” of goods in cases where no alternative methodology is applicable. This fulfils the dual objectives of being in consonance with the Circular dated 01.07.2002 and harmonizing different provisions of the CEA and CEVR.
• The assessable value for the related party sales can be established by referring to the normal price under Section 4(1)(a) of the CEA, which is readily available in the present case. The reference to Rule 11 in Point No. 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 its mind to a case of partial sales to both independent and related parties. It was held that the Circular is not in contrary to any statutory provisions.
• 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 the Court confirm the demand made by the Appellant, and rejected levy of interest and penalties upon the Respondent, and direct that these amounts be reduced from the total recoverable amount from the Assessee.