The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Hyderabad, has held that transportation and loading charges cannot be included in the assessable value of manufactured goods merely by presuming that every transaction was made on a “free on road” (FOR) basis.
The bench of Angad Prasad (Judicial Member) and A.K. Jyotishi (Technical Member) observed that the nature of each sale must be determined from the relevant contractual terms and evidence placed on record.
The Tribunal also upheld the finding that the extended limitation period could not be invoked because the dispute involved interpretation of the law amid conflicting judicial views. Consequently, the penalty proposed under Section 11AC of the Central Excise Act, 1944, was also held to be unsustainable.
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The appellant/assessee was engaged in manufacturing and supplying fly ash bricks to various customers. Acting on intelligence, the Department sought records and information from the company between September 2016 and September 2017.
After examining the documents and recording statements from the company’s Deputy Manager for Finance and Accounts and its Managing Director, the Department concluded that certain contractual conditions showed that the sales were completed only when the goods reached the customers’ premises.
According to the Department, the customer’s premises therefore constituted the “place of removal” for excise-valuation purposes. On that basis, transportation and loading charges recovered by the company were required to be included in the assessable value under Section 4 of the Central Excise Act.
A show cause notice dated November 27, 2017, consequently proposed a differential-duty demand of approximately ₹2.56 crore for the period from November 2012 to March 2017. The notice also invoked the extended limitation period by alleging wilful misstatement and suppression of facts with the intention of evading duty.
The Department alleged that the assessable value declared in the company’s ER-1 returns did not include freight and loading charges. It claimed that the alleged undervaluation would have remained undetected but for the departmental investigation and examination of purchase orders, invoices and other records.
While adjudicating the notice, the Commissioner examined 18 purchase orders relied upon by the Department. These transactions were divided into two categories depending upon whether the contractual conditions established an FOR sale or an ex-factory sale.
In the case of eight customers, the Commissioner found that the prices were inclusive of freight, while the material was to be accepted after its delivery and inspection at the customers’ premises. These transactions were treated as FOR sales, making the buyer’s premises the place of removal.
For the remaining transactions, freight was indicated separately and the other contractual conditions did not support the Department’s allegation that delivery at the buyer’s premises was an essential condition of sale. Those transactions were therefore treated as ex-factory sales.
The adjudicating authority initially determined that the demand could be sustained on merits only to the extent of approximately ₹15.95 lakh. After declining to invoke the extended limitation period, however, it confirmed only ₹3,08,785 for the normal limitation period.
The Commissioner dropped a demand of ₹69,31,506 relating to the period from November 2015 to March 2017, which became the principal subject of the Department’s appeal. The Department also challenged the rejection of the extended limitation period and the decision not to impose a penalty under Section 11AC.
Before the CESTAT, the Department argued that the adjudicating authority had erred by examining only the sample purchase orders of 18 customers. It submitted that the company’s sales statements contained the numbers of several other purchase orders and that these documents should also have been called for and examined.
According to the Department, the Commissioner’s conclusion was incomplete because it was based on a limited sample rather than all transactions covered by the demand.
The Department also contended that a previous departmental audit did not, by itself, prevent the invocation of the extended limitation period. It maintained that the company had suppressed the non-inclusion of freight and loading charges and was consequently liable to a penalty under Section 11AC.
Opposing the appeal, the company argued that the Department had consciously relied only upon sample purchase orders in its show cause notice. The adjudicating authority was therefore justified in deciding the case on the basis of those documents.
The company relied upon the Supreme Court’s decision in CCE v. Ballarpur Industries Ltd., under which a show cause notice constitutes the foundation of adjudication and the authorities cannot travel beyond the allegations and evidence contained in it.
It was further pointed out that the show cause notice itself acknowledged that approximately two-thirds of the sales were made on oral orders, without written purchase orders. Nevertheless, the Department had presumed that those transactions were also FOR sales and calculated the demand accordingly.
The company maintained that such a presumption could not substitute for evidence establishing that ownership and risk remained with it until the goods reached the buyer’s premises.
The Tribunal found that the Department had relied upon sample purchase orders, ER-1 returns, sales statements, and statements recorded from the company’s officials while issuing the show cause notice.
Although the sales statements contained purchase order numbers relating to other customers, the Bench held that the mere mention of a purchase order number did not make the corresponding purchase order a relied-upon document.
“If department had any doubt about sample purchase orders being not representative, they could have relied on all the purchase orders,” the Tribunal observed.
The Bench found no error in the adjudicating authority’s decision to restrict its examination to the 18 purchase orders relied upon in the show cause notice. Those orders were properly divided between FOR sales and ex-factory sales after examining whether freight formed part of the consolidated price and considering the other conditions governing delivery and acceptance.
The Tribunal agreed with the company that the adjudicating authority could not have gone beyond the explicit charge in the show cause notice by calling for and examining documents that the Department itself had not relied upon while framing its allegations.
The CESTAT referred to the Supreme Court’s rulings in CCE v. Roofit Industries Ltd. and CCE v. Ispat Industries Ltd.while considering the place-of-removal issue.
The adjudicating authority had applied the principles laid down in Roofit Industries to transactions where a consolidated price included freight and the seller remained responsible for supplying the goods to the customer’s premises. Those transactions were treated as FOR sales.
On the other hand, where freight was separately identified and the sale was completed at the factory gate, the principles stated in Ispat Industries were applied and the transportation charges were excluded from the assessable value.
The Tribunal noted that the Central Board of Excise and Customs had also clarified that the applicability of these judgments depends upon the facts and contractual conditions of each case. There could consequently be no general presumption that all transactions undertaken by the manufacturer were FOR sales.
Significantly, the Department did not specifically challenge the criteria used by the Commissioner for differentiating FOR sales from ex-factory sales. Its grievance was essentially confined to the failure to examine purchase orders beyond those relied upon in the notice.
The Tribunal therefore held that there was no ground to interfere with the Commissioner’s findings on the merits of the valuation dispute.
On limitation, the company submitted that departmental audit teams had examined its records twice during the disputed period—once in 2013 and again in 2016. Its involvement in arranging transportation and its payment of service tax on the transportation services were therefore within the Department’s knowledge.
The company also argued that it genuinely believed transportation charges were not required to be included in the assessable value. At the relevant time, several judicial decisions had taken differing positions on whether the buyer’s premises could be treated as the place of removal.
The Tribunal clarified that the case did not rest solely on the Department’s prior knowledge acquired through audits. The underlying valuation dispute itself had been the subject of conflicting judgments and was ultimately settled by higher judicial forums at a later stage.
The Bench also relied upon the CBEC Circular dated June 8, 2018, which acknowledged the conflicting views surrounding freight valuation and clarified that the extended limitation period should not be invoked where an assessee had adopted an alternative interpretation before the Supreme Court’s ruling in Roofit Industries.
In these circumstances, the Tribunal concluded that the dispute was interpretative in nature and that the company’s conduct could not be treated as deliberate suppression or wilful misstatement intended to evade duty.
Since the conditions required for invoking the extended limitation period were absent, the Tribunal held that the penalty under Section 11AC was also not imposable.
The Bench declared that the adjudication order was “proper and legal” and was supported by the evidence on record, judicial precedents and the Board’s clarification.
Accordingly, the CESTAT dismissed the Department’s appeal and allowed the company’s cross-objections by upholding the original adjudication order. The ruling was pronounced in open court on August 25, 2026.
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