Sale Price Below Manufacturing Cost Cannot Be Accepted for Excise Valuation Even For Independent Buyers: CESTAT Allahabad

The Allahabad CESTAT has ruled that a manufacturer cannot automatically rely on a declared sale price for excise valuation merely because the buyer is an independent party when the price is substantially and continuously below the cost of manufacture.

The tribunal made the finding in appeals filed by Eveready Industries India Ltd. over the valuation of batteries supplied to two torch manufacturers.

It held that it was unnecessary to conclusively decide whether the buyers were “related persons” because, even without such a relationship, the prices could not remain much lower than the cost of making the batteries.

The tribunal observed, “we do not find it necessary to determine with regards to existence of relationship between the Appellant and the buyers of the goods. Even if we hold that there was no relationship than also the value could not have been much less than the cost of manufacture in perpetuity.”

A Bench of Judicial Member P.A. Augustian and Technical Member Sanjiv Srivastava was hearing Eveready's appeals against central excise demands arising from batteries supplied to PMS Flashmatics Pvt. Ltd., Haridwar, and Elin Electronics Ltd., Solan.

The dispute concerned batteries coded AAMJ 1015. Eveready also transferred such batteries to its own Aishbagh, Lucknow unit, where their assessable value was determined on the basis of CAS-4 costing.

The Department found that batteries with the same physical and chemical properties were supplied to the two external manufacturers at ₹2.13 and ₹2.20 per piece. The corresponding batteries were transferred to Eveready's Lucknow unit at ₹2.90 and ₹2.81 per piece based on CAS-4 costing.

Under the arrangements, the two manufacturers produced torches, packed them with Eveready batteries and sold the co-packed products back to Eveready.

Revenue alleged that this arrangement showed a mutuality of business interest and sought to reject the contractual prices. Eveready disputed that the buyers were related and maintained that the transactions were on a principal-to-principal basis.

The tribunal found that deciding the relationship issue was unnecessary. Referring to the Supreme Court's ruling in Fiat India, it observed that even a price charged to an independent buyer could be rejected if it was much below the cost of manufacture.

On limitation, however, Eveready secured partial relief. The tribunal noted that the company was registered with the Department, had been filing the required returns, and that the relevant agreements were already on record. Revenue therefore could not invoke the extended period for raising the older demand.

The entire demand for November 2013 to November 2014 was consequently set aside as time-barred. Demands for subsequent periods falling within the normal statutory time limit were upheld along with interest.

The tribunal also set aside the penalties. It noted that Rule 15 of the CENVAT Credit Rules had been invoked even though the dispute concerned undervaluation of goods. The tribunal observed that this rule deals with cases involving wrongly taken or utilised CENVAT credit and had not been invoked in the show cause notice.

Both appeals were partly allowed. The tribunal set aside the demand raised by invoking the extended limitation period and the penalties, while upholding demands raised within the normal limitation period

For Appellant: Advocate Atul Gupta

For Respondent: Abhishek Mukherjee, Authorised Representative