By TIOL News Service

CHENNAI, NOV 11, 2008 : IT is a general practice among the trade, especially those who use the raw materials which are susceptible to price fluctuations to have a price escalation clause in the purchase orders. The price of the finished goods is revised based on the raw material prices and the differential amounts are collected by what are popularly known as "supplementary invoices". These invoices are issued for collecting the additional amounts and excise duty is also paid on such additional amounts collected after the goods were cleared from the factory. The dispute was, whether the assessee is liable to pay interest under Section 11 AB of the Central Excise Act by treating the differential duty paid on the supplementary invoices as duty short paid. The matter was referred to Larger Bench in 2008-TIOL-575-CESTAT-MAD with the following questions:

(a) Whether, in the facts of these cases, the additional amount paid by the buyer towards price of the goods in terms of the supplementary invoice issued by the assessee after removal of the goods can be considered to be part of the ‘transaction value’ under Section 4 of the Central Excise Act;

(b)  Whether the payment of duty under the supplementary invoice by the assessee is covered by sub-section (2B) of Section 11A of the Act;

(c)  Whether, on the amount of duty paid under the supplementary invoice, interest is leviable under Section 11AB from the first date of the month succeeding the month in which duty was paid in the first instance in terms of the original invoice.”

Before attempting to answer the above, with the consent of the parties, the Bench framed another relevant question as under:

(d) Whether the Central Excise Act or the Central Excise Rules contain any provision for recovery of interest payable under Section 11AB of the said Act on any amount of duty paid under supplementary invoice referred to in (a), (b) and (c) above.

The Bench has drawn reference to all the relevant provisions like Section 4(3)(d) ( transaction value), Section 11 A (2B) ( payment of duty on own ascertainment of the assessee), Section 11 AB ( Interest on delayed payment of duty), Section 11 D ( depositing the amounts collected in excess of the duty assessed), Rule 7( Provisional assessment), Rule 8 ( manner of payment of duty). A number of advocates appeared on behalf of the assessees and argued that the interest is not payable on such differential duty paid on supplementary invoices on various grounds. But the Bench has distinguished all the contentions raised with a surgeon’s precision and held that interest is payable on such duty paid on supplementary invoices. Some of the important observations are:

Applicability of Section 11D: This provision applies where a person who is liable to pay duty of excise on the goods sold by him collects from the buyer any amount in excess of the duty assessed/determined and paid on such goods, as representing duty of excise. The excess amount, collected as duty without the sanction of law, is not recognized as duty of excise and the same is required to be paid to the Central Government under Section 11D along with interest under Section 11DD. In the present appeals, it is not the case of the assessees that they collected from the buyers any amount (as representing duty of excise) in excess of the duty assessed and paid. The expression “duty assessed and paid” found in Section 11D(1) covers not only the duty assessed and paid at the time of removal of the goods but also the differential duty assessed and paid later. It would follow that Sections 11D and 11DD are not applicable to the present cases. 

Valuation - not the same from 1.7.2000 – additional amounts form part of transaction value:  From 1.7.2000, we have an essentially different concept viz. transaction value as defined under Section 4(3)(d) of the Central Excise Act. Whatever is recovered from the buyer by reason of, or in connection with, the sale of excisable goods, whether payable at the time of sale or at any other time is part of the transaction value. ‘Transaction’ as contemplated under Section 4(3)(d) does not just end with the removal of the goods. Any amount that the buyer is liable to pay to the assessee by reason of, or in connection with, the sale of the goods, whether payable at the time of sale or at any other time, is part of the transaction value of the goods. This ‘any amount’ is in addition to ‘the amount charged as price’. Obviously, the amount charged as price is the basic and essential part of the transaction value. Any amount received from the buyer on account of price revision is also part of ‘the amount charged as price’. In other words, the price collected by the assessee from the buyer at the time of removal of the goods and the differential price collected subsequently in the wake of price revision would together constitute ‘the amount charged as price’ and shall be the core of transaction value. The law mandates that duty of excise shall be paid on the assessable value which is the transaction value. As this value is referable to the time (and place) of removal of the goods, the differential amount of duty paid under supplementary invoice by the assessee is an amount of duty short-paid with reference to the time of removal of the goods.

Situational analogy with provisional assessment:      A manufacturer who, at the time of removal of excisable goods, foresees or anticipates price revision, normally resorts to provisional assessment at the time of removal of the goods and, when the assessment is finalized on the basis of the price increase at a later point of time, he pays differential duty along with interest vide Rule 7(4). In doing so, he accepts the fact that there is a short-levy or short-payment and deems that the differential duty is a duty which ought to have been paid at the time of removal of the goods. Where, instead of following this normal statutory procedure, he ascertains the differential duty (payable on account of price enhancement) and pays it up under Section 11A(2B), is he not liable to pay interest? In our view, he is liable under Section 11AB construed harmoniously with the corpus juris of Central Excise. If the differential duty which is found payable on finalization of provisional assessment under Rule 7 is a duty which ought to have been paid at the time of removal of the goods, so is the differential duty which is found payable on ascertainment under sub-section (2B) of Section 11A.

Doctrine of lex non cogit ad impossibilia is not applicable to the case:   The argument is that it was impossible for the assessee to have paid the differential amount of duty which was occasioned by subsequent price revision at the time of clearance of the goods and therefore it cannot be said that such duty “ought to have been paid” at the time of clearance of the goods. It is argued that the law cannot ask a person to do the impossible. The doctrine cannot be invoked by any person who himself failed to do the possible, to do what the law required him to. In the present case, the assessees were placed in such a situation at the time of removal of the goods that they should have resorted to provisional assessment under Rule 7 of the Central Excise Rules, 2002. Had they done so, they would have been liable to pay interest on the amount of duty paid upon finalization of the assessment under sub-rule (4) of Rule 7 on the differential value of the goods realized from the buyer, from the first day of the month succeeding the month for which the provisional assessment was made, till the date of payment of the duty. They could not have avoided payment of such interest by pleading lex non cogit ad impossibilia.

Thus, the Bench categorically answered the first three references in favour of the revenue, and since this view was in conflict with the coordinate Bench in Arvind Mills Ltd case (2006-TIOL-1605-CESTAT-MUM-LB), the matter was placed before the President for constitution of a five member bench for resolution of the conflicting decisions.

As regards the fourth issue relating to the recovery of interest in the absence of express machinery provisions under Section 11 A, the Bench held that the same can be recovered under the provisions of sub-rule (4) of Rule 8 of the Central Excise Rule 2002 read with Section 11 of the Central Excise Act and answered the reference in favour of the revenue.

(See 2008-TIOL-1843-CESTAT-MAD-LB in 'Excise' + 2008-TIOL-1843-CESTAT-MAD-LB in 'Legal Corner')