ORDER
T.K. Jayaraman, Member (T)
1. For a proper appreciation of the issue involved, it is necessary to give the background leading to Revenue’s proceedings against the appellant who is manufacturing petroleum products in their refinery located at Visakhapatnam. Till 01.04.2002, the price of petroleum products was fixed on the basis of Administered Price Mechanism (APM). In the wake of dismantling of APM, to maintain uninterrupted supplies to consumers the Government of India directed the various Oil Marketing Companies (OMCs) to enter into an agreement. The Oil Marketing Companies have their refineries and marketing network at various places in the Country. It so happens that in a particular place the refinery may be owned by one Company and the marketing establishment by another. It was felt that in public interest to prevent any unhealthy development it would be in the fitness of things to have an agreement between all the oil companies, by which a company producing oil would supply the same to another company having the nearest marketing facility. The price adopted would be based on the Import Parity Price (IPP). The import parity price is the landed cost at the nearest port of the imported product. To this the cost of transportation from the port to the storage point of the selling Oil Marketing Company along with appropriate terminalling charges are added. There are also sales made to various dealers. The price adopted in respect of the dealers would include the various charges like RPO Charges, Railway freight etc., and consequently the price to dealers would be higher than the price charged to the Oil Companies. After going through the agreement between the oil companies, Revenue came to the conclusion that the agreement has been made for the mutual benefit of each other. Hence, the price adopted is not as per Section 4 (1)(a) of the Central Excise Act, 1944. In view of the mutual interest between the appellant and other oil Companies, the price at which the goods were cleared to the other oil Companies could not represent the true transaction value and hence the transaction value should be determined by taking recourse to Central Excise Valuation Rules by invoking Rule 11 of the Valuation Rules. The Adjudicating Authority held that the price at which the products were sold to the Dealers would be the basis for arriving at the Excise Duty. It was also held that the transaction under the agreement cannot be considered as commercial relationship, since all the parties stood to gain mutually by the arrangement. It was also observed that there is a huge difference between the price adopted to oil companies and that to dealers. Hence, the price to oil companies is not a representative price. Further it was held that the parties to the agreement including the appellant have willfully and consciously dealt with the goods on which they knew that the duty was not discharged correctly. Further it was held that the price has been deliberately mis-declared by suppressing the agreement.
2. Adjudicating Authority confirmed duty demands under Section 11A(1) along with interest under Section 11AB of the CE Act, 1944 and imposed separate penalties under Section 11AC of the CE Act, 1944 and Rule 25 of the CE Rules, as detailed below:
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S.No. Appeal No. OIO & DATE DUTY PENALTY
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1. E/379/04 59/2003-04 (RP) Rs.54,26,24,305/- Rs.18,07,00,396/-
dated 17.03.2004
2. E/380/04 06/2004 (RP) Rs.13,58,35,017 Rs. 5,33,26,567/-
dated 16.03.2004
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3. S/shri V. Sridharan and G. Shivadass, learned Advocates appeared for the appellants and Smt. Shoba L Chary, learned JCDR for Revenue.
4. The learned Advocate urged the following points:
(i) The agreement entered into by the oil Companies is as per the directive of the Government and in public interest.
(ii) The transactions between the appellant and other OMCs are commercial transactions.
(iii) Respective Transaction value to the retail outlet and to other oil companies alone, are relevant for payment of duty.
(iv) The clauses in the agreement do not indicate mutuality of interest.
(v) Assuming that there is mutuality of interest between the Oil Marketing Companies in view of the agreement, such mutuality does not ipso facto lead to rejection the transaction value, unless it is shown by the department that mutuality of interest has influenced the price leading to payment of duty on a lesser value.
(vi) The appellants have entered into similar agreement with oil companies in the private sector also.
(vii) The Commissioner of Central Excise, Mangalore vide Order-in-Original No. 5/2004 dated 28.07.2004, has dropped the demand in respect of MRPL on a similar issue. The department has accepted the commissioner’s order as this fact has been referred to by Commissioner of Central Excise, Ahmedabad in Order-in-Original No. 02-06/Commissioner/2005 dated 02.02.2005 passed on similar grounds in case of M/s. IOC.
5. The learned JCDR urged the following points:
The Agreement between the Oil Companies indicates that the price adopted by the Appellant to the Oil Companies is not a normal price and does not represent the transaction value. The price is not based on commercial considerations. Since each company will be supplying its products to the other company having marketing facility, there is mutual benefit. The import parity price, which is the basis for the price agreed upon by the parties to the agreement, it is not representative of the actual transaction value. She stated vehemently that in this agreement, price is not the sole consideration. There is also a huge difference between the price adopted for sale to dealers and that to the Oil Companies. In any case, according to the JCDR, the price in respect of the Oil Companies is not as per Section 4(1)(a) of the Central Excise Act, in view of the mutuality of interest. She maintained that Rule 11 has rightly been invoked by the Adjudicating Authority and duty demanded.
6. We have gone through the rival submissions. With effect from 01.07.2000, the value to be adopted for excise duty purposes is the transaction value. The transaction value represents the value at which the transaction is effected. This transaction value can be assailed, if there is a flow back from the buyer to the seller, which is not reflected in the transaction value declared to the department. In this case Revenue has not established that the other Oil Companies are siphoning some extra amount to the appellant, which is not reflected in the value on which duty has been paid. Moreover, the price of the products supplied to OMCs is based on the Import Parity Price. There is nothing in the law stipulating that different prices to different buyers are not permissible. In other words transaction value can be challenged if conditions stipulated in Section 4(1)(a) are not fulfilled. In this case, the sale is complete at the time and place of removal, when the products are filled by the appellants in the tank/truck/wagon as nominated by the other oil companies for onward dispatch to their dealers. It should be appreciated that the agreement among the oil companies has been entered into on a directive from the Government of India. This results in an optimal utilization of the marketing facilities of the various companies in the country and reducing the cost of transportation. It is better for a refinery to market its products at a nearby marketing facility owned by another company than to send the same goods to its own marketing facility at a far off place. Alternatively, when the company having a refinery has a marketing outlet at some other place, nearer to a refinery of a different company, then it would be better for that marketing outlet to purchase the product from that refinery rather than receive from their own refinery. This arrangement definitely, reduces the transportation cost and is only in public interest. The Central Excise Authority cannot question this. Excise men better do not enter into territories alien to them. Even if the agreement between the companies results in mutual benefit, we don’t understand why the Excise department should feel unhappy as long as duty is paid on the transaction value. On going through the agreement we do not find any ground to hold that the transactions are not at arms length. It should also be borne in mind that the transactions are not at arms length. It should also be borne in mind that the days of the concept of normal price are over when the concept of transaction value was introduced in the year 2000. In fact it would be worthwhile to quote from Board’s Circular dated 30.06.2000.
“4. The definition of “transaction value” needs to be carefully taken note of as there is fundamental departure from the erstwhile system of valuation that was essentially based on the concept of ‘Normal Wholesale Price’, even though sales were effected at varying prices to different buyers or class of buyers from factory gate or Depots etc. had to be determined.
5. The new Section 4 essentially seeks to accept different transaction values, which may be charged by the assessee to different customers, for assessment purposes so long as these are based upon purely commercial consideration where buyer and the seller have no relationship and price is the sole consideration for sale. Thus, it enables valuation of goods for excise purposes on value charged as per commercial practices rather than looking for a notionally determined value.”
7. Moreover, invocation of longer period in this case is utterly unjustified. In a similar case, the Commissioner or Central Excise, Mangalore has dropped the demand on the ground that the agreement is only to ensure smooth distribution of the products and the formula arrived at therein for fixing the selling price of the petroleum products is genuine selling price. Under, these circumstances the OIOs have no merits. Hence we allow both these appeals with consequential relief, if any.