Average Sale Price Can’t Be Basis for Alleging Undervaluation: CESTAT

The Kolkata Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has set aside a central excise duty demand of over ₹3.13 crore raised against a pharmaceutical manufacturer, holding that duty liability cannot be determined on the basis of average sale prices or limited sample invoices without corroborative evidence. The bench of Ashok Jindal (Judicial Member) and K. Anpazhakan (Technical Member) ruled that valuation under the Central Excise law must be based on actual transaction value at the time of clearance and not on comparative price analysis across different periods. The dispute arose following a thematic audit conducted by the Comptroller and Auditor General’s Revenue Audit (CERA) covering the period from 2011–12 to 2013–14. During the audit, 24 sample invoices were examined, and the department alleged that the assessee had undervalued medicaments by not properly applying MRP-based valuation provisions. Based on these invoices and subsequent investigations, the department issued a show cause notice demanding more than ₹3.22 crore in central excise duty along with interest and penalties. The adjudicating authority later confirmed a demand of ₹3.13 crore, imposed an equivalent penalty under Section 11AC of the Central Excise Act, and denied the benefit of the Small Scale Industry (SSI) exemption. The department alleged that the manufacturer had adopted lower assessable values than the declared MRP (after abatement), resulting in short payment of duty. It also relied on differences in average sale prices across different periods to support the allegation of undervaluation. The Tribunal held that there is no provision under the Central Excise Act permitting adoption of an average sale price of one period to determine duty liability for another period. It emphasized that valuation must be based on transaction value at the time of removal of goods from the factory. Any subsequent price fluctuation due to market forces cannot be treated as evidence of duty evasion. The bench observed that a lower average sale price in a later period, by itself, cannot justify an allegation of undervaluation or duty evasion. The Tribunal found that the department’s case relied primarily on 24 sample invoices and lacked supporting documentary evidence such as agreements, transport records, or proof of additional consideration. It noted that the department failed to establish: Dual invoicing practices, Flow-back of funds, Unaccounted production, Clandestine removals, or Suppression of actual sale prices. Verification conducted by field officers also failed to reveal any evidence of a parallel unit or clandestine clearances. The Tribunal also accepted the assessee’s contention that certain bulk supplies, including paracetamol tablets supplied to the Government of Uttar Pradesh, were not subject to MRP-based valuation. It held that goods supplied in bulk without MRP could not be valued using MRP-based methods, and such clearances were correctly assessed based on transaction value. Since the allegation of undervaluation was not sustained, the Tribunal also set aside the denial of SSI exemption benefits for the relevant financial years. It held that the exemption had been denied solely on the basis of alleged undervaluation, which itself was not established. The Tribunal reiterated that allegations of clandestine manufacture and removal must be supported by tangible evidence such as: Excess raw material consumption, Unaccounted production, Transport records, Buyer statements, and Flow of sale proceeds. In the absence of such evidence, the demand could not be sustained merely on assumptions or audit-based calculations. Allowing the appeal, the Tribunal set aside the entire demand of duty, interest, and penalties, holding that the department had failed to establish undervaluation or clandestine removal with credible evidence. Case Details Case Title: Ornate Labs Pvt Ltd vs Patna Citation: JURISHOUR-19-CESTAT-2026(KOL) Case No.: Excise Appeal No. 76990 of 2018 Date: 24.02.2026 Counsel For Appellant: Ankit Kanodia and Ms. Megha Agarwal Counsel For Respondent: Prasenjit Das, Authorized Representative Click Here To Read Order Read More: Service Tax Demand on Electricity Distribution Utility Quashed; CESTAT Holds Ancillary Services Exempt

Average Sale Price Can’t Be Basis for Alleging Undervaluation: CESTAT

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