By TIOL News Service

NEW DELHI, AUG 24, 2015: THE Commissioner's order explains the case:

(a) The assessee had supplied goods to a particular type of buyers at much lower price than the price charged from the general buyers in the normal course of trade as it had obtained the facility of invalidating of advance licences from such buyers and procured imported raw material (duty free) against such licences for manufacturing of finished goods. It is, therefore, alleged that the assessee and the buyers had mutuality of interest in the business of each other and there was a flow back and the price was not the sole consideration for sale in these cases in accordance with the provisions of Section 4(1)(a) of the Act.

(b) Therefore, they were related persons in terms of provisions of the erstwhile Section 4(4)(c), presently Section 4(3)(b)(iv) of the Act.

(c) It is observed that para 7.7 of the EXIM Policy on Advance Release Order speaks of mutuality of interest as the assessee had procured duty free imported raw materials against invalidation of advance licence of the consignees and in turn it sold the finished goods to the said consignees at lower prices as compared to other normal buyers. Thus, the price was not the only consideration.

(d) Once the advance licence is invalidated, the said clearance to the buyers who were earlier holding the said licences need not be treated as deemed export and rightly the assessee had cleared the said goods to such buyers on payment of excise duty, but at lower value than the clearance made to the normal buyers. Thus, the assessee appeared to have derived double benefits in these transactions, i.e. (i) enhanced sale and paid less duty on lower value; and (ii) imported duty free raw materials.

(e) In this case, the right to procure duty free imported raw material is being transferred to supplier by the buyer. This indicates the flow back of additional considerations from the buyer of the said goods to the seller, which is the assessee.

Therefore, the Commissioner confirmed the demand of differential duty and also levied penalties and interest. The assessee challenged the order of the Commissioner by filing appeal before the Custom Excise & Service Tax Appellate Tribunal taking the plea that 'additional consideration' under Section 4 of the Act refers only to the additional consideration flowing from the buyer to the assessee and in the present case no such additional consideration flew from the advance licence buyers of the 'deemed exports'. The Tribunal, in arriving at this conclusion, relied upon its own decision in the case of IFGL Refractories Ltd. v. Commissioner of Central Excise, Bhubaneswar-II, wherein it was held that statutory benefits allowed by statutory authorities cannot be considered as additional consideration flowing to a manufacturer from the buyer. In the opinion of the Tribunal, the drawback was received from the Government and not from the buyers and, therefore, such drawback could not be treated as additional consideration for the purpose of arriving at 'transaction value' as per the definition thereof under Section 4 of the Act.

The decision of the Tribunal in IFGL's case was overruled by the Supreme Court in Commissioner of Central Excise, Bhubaneswar- II v. IFGL Refractories Ltd. - 2005-TIOL-103-SC-CX . In the said case, this Court has held such a consideration, namely, duty drawback, to be the 'additional consideration' inasmuch as the benefit of duty drawback accruing to the seller was the result of surrender of advance licence by the buyers.

The Revenue is in appeal before the Supreme Court.

Issue for consideration is as to whether it would constitute 'additional consideration' received by the assessee as per the definition of 'transaction value' contained in Section 4 of the Act read with Rule 6 of the Valuation Rules.

The Supreme Court had in the case of IFGL, given the answer in the affirmative to the issue on almost identical fact situation. The Counsel for the assessee wanted the Court to take a different view. He argued that discounted price is charged from the advance licence holder category of buyers by the assessee because of saving in customs duty on inputs due to statutory notification with consequent reduction in cost of production and, therefore, it is not a consideration flowing from a buyer. His submission was that the customs duty, otherwise leviable on the inputs going into the manufacture of polyester staple fiber, is exempted by the statutory notification issued by the Central Government, being Notification No. 31/1997-CUS, and it is because of the benefit availed by the assessee under this Notification that it is able to effect supply of polyester staple fiber on discounted price to an ultimate exporter holding advance licence. Therefore, the additional discount offered to a customer, who is the exporter, is never an additional consideration.

Yet another argument was that carving out this category of buyers, namely, those who are/were the holders of advance licence, to be eligible for purchase at a discounted price was only a 'condition for sale of goods' put forth by the assessee. He submitted that 'it was not a consideration for sale of goods'. He, thus, drew distinction between condition for sale and consideration for sale of goods.

The Supreme Court was not impressed and observed,

“In the present case, we have to simply see as to whether the definition of 'transaction value', as contained in Section 4 of the Act read with Rule 6 of the Rules, would encompass this benefit as amounting to additional consideration. Our conclusion is that it would come within the ambit of additional consideration indirectly flowing from the buyers to the assessee .”

The Supreme Court noted the above findings arrived at by the Commissioner which were not disputed by the assessee:

The Supreme Court is of the opinion that the Commissioner has rightly come to the conclusion with regard to the fact that additional monetary consideration, in addition to the price being paid for the goods, i.e. transfer of advance import licence in favour of the seller by the buyer enabling the seller of the goods to effect duty free import of the raw materials and bringing down the cost of production/procurement, is a consideration, the monetary value of which has to be considered under the provisions of the Rules, i.e. Rule 6 thereof.

Thus, the Supreme Court did not see any reason to deviate from the decision rendered by the Court in IFGL's case.

The Assessee referred to another judgment of the Court in Commissioner of Central Excise, Bangalore v. Mazagon Dock Ltd. - 2005-TIOL-111-SC-CX . A vain attempt was made to show that this judgment was contrary to the decision rendered by this Court in IFGL's case.

The Supreme Court did not agree and observed,

Interestingly, the Hon'ble Judges {S.N. Variava and Dr. AR Lakshmanan, JJ.} who comprised the Bench that decided IFGL's case were the same who rendered the judgment in Mazagon Dock Ltd.'s case. Another pertinent factor which is to be taken note of is that the two decisions were rendered within a short gap of a fortnight. The decision in Mazagon Dock Ltd. was rendered on July 28, 2005 whereas IFGL's case was decided on August 09, 2005. Thus, at the time of pronouncing of the judgment in IFGL's case, the same very Bench was conscious of its judgment given immediately before in Mazagon Dock Ltd.

A reading of the judgment in Mazagon Dock Ltd.'s case would reveal that in the said case subsidy of 20% was received by the assessee therein from the Government, which was sought to be included by the Revenue as 'additional consideration' to arrive at the transaction value for the purpose of central excise. The Court held that this subsidy was not received from the buyer either directly or indirectly and, therefore, could not be included in the price of goods qua purpose of excise. On the facts of that case, the Court found that the respondent in the said case had entered into contract with Oil & Natural Gas Corporation Limited (ONGC) for manufacture and supply of jack-up rigs. For such a contract, as per the policy of the Government, 20% subsidy was to be received from the Government and 10% from ONGC. As far as 10% subsidy received from ONGC is concerned, the same was also to be includible in the transaction value as additional consideration flowing from the buyer. However, 20% subsidy from the Government was under the Government's own scheme with no role of ONGC (buyer in the said case). Obviously, it could not be said that this subsidy had any flow from the ONGC either directly or indirectly. The said judgment, therefore, has no bearing on the present matter.

Supreme Court is of the considered opinion that this case is squarely covered by the judgment of this Court in IFGL's case.

The Revenue appeal is allowed.

(See 2015-TIOL-190-SC-CX)