The Commissioner of Central Excise, Customs and Service Tax, Calicut vs M/s. Cera Boards and Doors, Kannur Kerala & Ors.

It may be seen from the facts involved in these batches of cases that there is a common thread that runs along the fabric of these cases. This common thread is that the assessees in these cases allegedly undervalued the goods, sold them for a much higher price than what was reflected in the invoices and thereby they evaded the excise duty actually payable. Though the assessees uniformly denied the said allegation, the CESTAT has recorded a categorical finding in all the cases that there was undervaluation and evasion of excise duty. The said finding has not been challenged by the assessees and hence it has attained finality. Therefore, what arises for adjudication is only the manner of determining the value of the goods removed by the assessees for sale to or through dealers. In other words, the entire dispute now revolves around the question of valuation of excisable goods, for the purposes of charging of duty. But for finding an answer to the said question, it is necessary to take note of the period of assessment. In some of these cases, the period of assessment was both prior to and after 01.07.2000 and in other cases, the period was after 01.07.2000. According to the respondents, the method of determination of value before 01.07.2000 was different from the method of valuation after 01.07.2000, since Section 4 of the Central Excise Act, 1944 was amended with effect from 01.07.2000 under Act 10 of 2000. The amended Section 4 also underwent some changes in the years 2003 and 2012. The Court is not concerned with the changes brought forth in 2012. [Paras 77, 78][500-C-G]

1.2 In simple terms, 2 different methods of valuation were prescribed in Section 4 as it stood prior to 01.07.2000:

(i) one covered by clause (a) of sub-section (1) of Section 4, where the emphasis was on normal price, the determination of which co-related to ordinary sale in the course of wholesale trade (satisfying certain conditions), and

(ii) another covered by clause (b) of sub-section (1) of Section 4, which related to cases where there were no sales, and cases where normal price could not be ascertained for any other reason. [Para 80][507-C-D]

1.3 The prescriptions contained in clause (a) of sub-section

(1) of Section 4, before amendment in 2000, are summarized as follows:

I.

II.

As a first rule, the normal price, namely the price at which such goods are ordinarily sold in the course of wholesale trade shall be taken as the value, if the buyer is not a related person and the price is the sole consideration for the same.

But in cases where different prices are charged to different classes of buyers, each such price should be taken to be the normal price in relation to each such class of buyers.

III.

Similarly, if different prices are charged at different places of removal, the normal price shall be the price charged in relation to each such place of removal.

IV.

Where the goods are generally not sold in the course of wholesale trade, except to or through a related person, the normal price shall be the price at which the goods are ordinarily sold by the related person, in the course of wholesale trade to other dealers.

Thus it is clear that under Section 4(1)(a), as it stood before 01.07.2000, the method of valuation prescribed therein was directly linked to the normal price for an ordinary sale in the course of wholesale trade. But in cases where normal price was not ascertainable, the same would fall under Section 4(1)(b) and the valuation in such cases had to be done in terms of the Valuation Rules of the year 1975. Clause (b) identifies one situation, namely where goods are not sold, in which, the normal price may not be ascertainable. In addition, clause (b) also recognises the fact that there may be cases where normal price is not ascertainable for any other reason. These cases may perhaps include sales otherwise than in the course of wholesale trade. [Paras 81, 82][507-E-H; 508-A-C]

1.4 Though the words “normal price” were used in Section 4(1)(a), the proviso to clause (a) recognised the fact that the normal price need not be the same universally, but could vary from one class of buyers to another or from one place of removal to another. By the amendment under Act 10 of 2000, with effect from 01.07.2000, the words “normal price” and the words “in the course of wholesale trade” were removed. Instead, the words “transaction value” were inserted in Section 4(1)(a). [Paras 83, 84][508-D-E]

1.5 Though the Constitution Bench in Grasim Industries noted the shift, at least in the language, of Section 4(1), from “normal price” to “transaction value”, the Constitution Bench did not take note of one major area of difference, namely that the focus of Section 4(1)(a) prior to 01.07.2000 was on finding out the normal price in respect of sales made ordinarily in the course of wholesale trade. The method of valuation, wherever there was no sale, was to be on the basis of the Rules, in view of Section 4(1)(b). Even in cases where there was a sale—

(i) in the course of wholesale trade but the conditions stipulated in clause (a) were not satisfied or

(ii) the normal price could not be ascertained for any other reason, the method of valuation was left under clause (b) of subsection (1) of Section 4 to the rule making authority to stipulate. The implication flowing out of the words “for any other reason” found in clause (b) before amendment is of significance in this regard. After the amendment under Act 10 of 2000, the normal pricing method was gone, as the focus shifted from sale in the course of wholesale trade. [Para 86][509-B-D] CCE v. Grasim Industries Limited (2018) 7 SCC 233 : [2018] 6 SCR 1099 – referred to.

1.6 While clause (a) of sub-section (1) of Section 4, as it stood before amendment, laid emphasis on normal price, clause

(a) of sub-section (1) of Section 4, as it stands after amendment, speaks about transaction value. Clause (b) of sub-section (1), both before and after the amendment, leaves it to the delegated legislation to prescribe the method of valuation, for cases not covered by clause (a). For the valuation under Section 4(1) to follow the “transaction value”, (after amendment) the three conditions stipulated in clause (a), namely (i) that the goods are sold for delivery at the time and place of removal, (ii) that the assessee and buyer are not related and (iii) that the price is the sole consideration for the sale, should be satisfied. If the three conditions, enumerated in clause (a) are not satisfied, then the case would fall under clause (b) of sub-section (1) of Section 4, which starts with the words “in any other case”. In other words, in cases not covered by clause (a), the value can be determined in such manner as may be prescribed. [Paras 87-89][509-E-H]

1.7 After the amendment under Act 10 of 2000, the Central Government issued a new set of rules called the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000. These rules were issued in exercise of the power conferred by Section 37, in supersession of the 1975 Valuation Rules. Rule 3 of the aforesaid 2000 Rules makes it clear that the value of excisable goods, for the purposes of clause (b) of sub-section

(1) of Section 4, should be determined in accordance with the said Rules. Therefore, it is clear that the valuation as per the Rules is permissible only in cases covered by Section 4(1)(b) and not by Section 4(1)(a). For the purpose of the issues on hand, it may not be necessary to dwell deep into the aforesaid rules. [Paras 90, 91][510-A-C]

1.8 Suffice it to say, that if a sale is covered by clause (a) of sub-section (1) of Section 4 (after amendment), the value of excisable goods shall be the ‘transaction value’. This expression ‘transaction value’ is defined in clause (d) of sub-section (3) of Section 4. But if a case is not covered by clause (a) of sub-section

(1) of Section 4, then the value of the excisable goods should be determined in accordance with the 2000 Rules. Therefore, in essence, an adjudicating authority is obliged to do the following, in respect of transactions that took place after 01.07.2000:

(i) first, he must see whether there is a sale and

(ii) next, he must see if such sale satisfies the three conditions stipulated in clause (a) of sub-section (1) of Section 4.

In cases where there is a sale and the three conditions stipulated in clause (a) of sub-section (1) of Section 4 are satisfied, the adjudicating authority should determine the value based upon the transaction value. But (i) in cases where there is no sale and

(ii) in cases where there is a sale but the three conditions stipulated in clause (a) are not satisfied, then the adjudicating authority should fall back upon the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000. [Paras 92-94][510-D-G]

1.9 What the Adjudicating Authority and the Tribunal had and had not done in these cases

Broadly, in the batches of cases on hand (with one or two exceptions), the Adjudicating Authorities came to the following conclusions:

(i)

that there was undervaluation and evasion of duty;

(ii)

that in respect of sales effected both before and after 01.07.2000, the invoice value, together with the cash paid over and above the invoice value, would represent the normal price or the transaction value, as the case may be, and

(iii)

that in cases where there was evidence to show that a dealer had paid more than the invoice value, the amount found to have been paid by such a dealer, though relatable only to a few out of the several transactions that he had with the assessee, should be taken to be the normal price or the transaction value, as the case may be, applicable to all the transactions that the particular dealer had with the assessee.

Similarly, what the CESTAT did in all these cases is: (i)

to uphold the finding of undervaluation and evasion of duty;

(ii)

to hold that invoice price need not be taken as the normal price in respect of cases prior to 01.07.2000 and that wherever a particular amount is actually found to have been paid by a dealer, the same could be taken to be the transaction value, for cases after 01.07.02000; and

(iii)

to hold that the determination of the normal price or the transaction value, as the case may be, should be confined only to the evidence available on record, but not to all the transactions across the board. [Paras 95, 96][511-A-F]

1.10 But the Adjudicating Authorities as well as CESTAT are also guilty of failure to do something in these batches of cases. They are:

(i)

(ii)

(iii)

(iv)

Failure to find out, in cases covered by Section 4(1) as it stood prior to 01.07.2000, whether there were sales in the course of wholesale trade, satisfying the

3 conditions prescribed therein, falling under clause

(a) of sub-section (1) or whether the sales in question fell under clause (b) of sub-section (1) of Section 4;

Failure to find out, in cases covered by Section 4(1) as it stands amended by Act 10 of 2000 with effect from 01.07.2000, whether the sales in question fell under clause (a) or clause (b) of sub-section (1) of Section 4;

Failure to find out, in the event of the sales in question falling under clause (b) of sub-section (1) of Section 4 (before or after the amendment), whether the valuation had to be done only in accordance with the Rules (1975 Rules or the 2000 Rules, as the case may be), and

Failure to find out, in cases covered by Section 4(1)(b), the specific rule that is applicable among the 1975 or 2000 Rules, as there are different rules covering different contingencies, both in the 1975 Rules and in the 2000 Rules.

Since the Adjudicating Authorities as well as the CESTAT failed to make a determination as indicated above, the orders of remand passed by the Tribunal, though for completely different reasons, were justified. [Paras 97, 98][511-G; 512-A-D]

1.11 Conclusion

These appeals are disposed of, confirming the impugned orders of CESTAT setting aside the Orders-in-Original passed by the Adjudicating Authorities and remanding the matters back for re-adjudication. However, while carrying out the exercise of re-adjudication, the Adjudicating Authorities should keep in mind the principles enumerated hereunder:

A. Cases where the period of assessment is prior to 01.07.2000

I.

First ascertain the price at which such goods are ordinarily sold by the assessee to a buyer who is not related to him, in the course of wholesale trade, at the time and place of removal and also find out whether the price is the sole consideration for the sale. If the Adjudicating Authority is able to find this out, he may take such price as the normal price and treat the case as covered by Section 4(1)(a), applying, wherever permissible, the prescriptions contained in the proviso to clause (a) of sub-section (1) of Section 4.

II.

If the normal price is not ascertainable, either for the reason that the goods are not sold or for any other reason, then he may take it that the case would fall under Section 4(1)(b) and take recourse in such cases, to the Central Excise (Valuation) Rules, 1975.

III.

The phrase “for any other reason” appearing in Section 4(1)(b) would include cases where the price charged in the course of wholesale trade is not discernible or where the same, though discernible, cannot be linked to delivery at the time and place of removal or where the price is not the sole consideration for the sale, even though the price charged in the course of wholesale trade for delivery at the time and place of removal are available.

IV.

If the case falls under Section 4(1)(b) and the Adjudicating Authority takes recourse to the method of valuation prescribed in the 1975 Rules, he shall find out which among the relevant rules would apply to the cases on hand before proceeding with the valuation.

B. Cases where the period of assessment is after 01.07.2000

I.

First ascertain the “transaction value”, with particular reference to the definition of the said expression contained in Section 4(3)(d).

II.

Apply the transaction value so ascertained, to cases where three conditions, namely (i) the goods are sold for delivery at the time and place of removal, (ii) the assessee and buyer are not related and (iii) the price is the sole consideration, are satisfied. This is because such cases will fall under Section 4(1)(a).

III.

IV.

In cases where one or more of the aforesaid three conditions are not satisfied, and also in cases where there is no sale, the Adjudicating Authority should treat the cases as falling under Section 4(1)(b) and hence take recourse to the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000.

If a case falls under Section 4(1)(b) and the Adjudicating Authority takes recourse to the method of valuation prescribed in the 2000 Rules, he shall find out which among the relevant rules would apply to the case on hand before proceeding with the valuation.

Principles applicable in common (both pre and post amendment)

C. The Adjudicating Authority may treat any amount received either in cash or otherwise, over and above the invoice value, as the value of excisable goods even in cases falling under Section 4(1)(a) (after the amendment), as the definition of “transaction value” under Section 4(3)(d) means the price actually paid or payable.

D. The Adjudicating Authority shall keep in mind the fact that while the expression “normal price” was not defined in Section 4(1) before amendment, the expression “transaction value” is defined very exhaustively in Section 4(3)(d) and this definition is both inclusive as well as exhaustive. E. Wherever there is a finding that a particular dealer/customer has paid a consideration over and above what is reflected in the invoice, the additional payment made by him together with the invoice value shall be taken to be the transaction value, for all the transactions that the particular dealer/customer had with the assessee. In simple terms, if a dealer/customer has made 10 purchases during the period in question, for a particular value stated in the invoice, the transaction value determined on the basis of material relatable to a few out of those transactions, can be applied to all the transactions of that customer/dealer across the board for that period. However, the same value cannot be applied to the other dealers/ customers. This principle shall be followed in respect of cases arising after the amendment. F. Since the matters are more than a decade old, the Adjudicating Authorities may conduct hearings, afford adequate opportunities to the parties and pass orders in original as early as possible. [Para 99][512-E-H; 513-A-H; 514-A-G] Collector of Customs, Madras v. D. Bhoormall (1983)

13 ELT 1546 (SC) – referred to.