Section 4(1)(a) of CEA was Deemed to be Inapplicable as it Addresses Situations where Parties are Not Related: Supreme Court

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The Supreme Court ruled that section 4(1)(a) Central Excise Act, 1944 was deemed to be inapplicable as it addresses situations where the parties are not related. 


The Assessee is involved in the manufacture of decorative laminates and other like materials, which fall under Chapter 48 of the Central Excise Tariff Act, 1985. 

As excisable goods, the value at which the Respondent was selling these goods would be the determinant for the amount of tax recoverable by the Appellant. 

Following an audit conducted on the Assessee’s operations for FY 2009-10 and 2010-11, discrepancies were unearthed in terms of the prices at which these goods were being sold. 

The goods were being offered not only to independent parties unconnected with the Respondent, but also to two ‘related parties’ called “Merino Industries Ltd.” and “Merino Services Ltd.”, as defined under Section 4(3)(b)(i) of the Central Excise Act, 1944 read with Section 2(g) of the Monopolies and Restrictive Trade Practices Act, 1969. It was ascertained that Respondent was a subsidiary of MIL with 74.65% of its shareholding vested in the latter. With regard to MSL, the Assessee was found to have significant influence over its operations and the two companies shared Directors/Key Managerial Personnel. 


Balbir Singh, Additional Solicitor General, assailed the order of the CESTAT and submitted that there is no dispute regarding the fact that there was an undervaluation of sales made by the Assessee to the related parties. 

He contended that there is no requirement in law for there to be a specific manner in which the relevant Sections and/or Rules are quoted in a show cause notice. Rule 9, which the CESTAT concludes is the appropriate provision in this case, was mentioned in the show cause.

Advocate S. Sunil, appearing for the Respondent, supported the holding of the CESTAT and submitted that the CBEC Circular 2002  mandates the usage of Rule 11 read with either Rule 9 or 10 of the CEVR for ascertaining the value of excisable goods when sales are effected to both independent and related purchasers 

He contended that the Circular is binding on the Revenue and it is not open for them to take a contrary stand. 


The division bench of Justice Surya Kant and Justice J.B. Pardiwala said that  if the show cause notice issued by the Revenue is found to be contrary to the Circular, it would prima facie result in abrogation of the uniformity and consistency which is strongly emphasized upon in Ranadey Micronutrients.

It was observed by the court that maintaining predictability in taxation law is of utmost importance and, for this reason, the Court should not accept an argument by the Revenue that waters down its own Circular as this would fall squarely within the contours of the prohibition outlined in Paper Products.

“The principles under Section 4(1) of the CEA are geared toward determination of the ‘value’ of goods. Under Section 4(1)(a), the value of goods for the purposes of excise duty, is deemed to be the ‘normal price’ of the goods that are ‘ordinarily sold’ in the course of business, and where the price is the ‘sole consideration’ for the transaction” the court said.  

It was further observed by the court that the show cause notice and the order of the Commissioner proceed along the basis that Section 4(1)(b) is applicable as the Assessee and MIL and MSL are related parties. 

“The assessable value for the related party sales can be established by referring to the normal price under Section 4(1)(a) of the CEA, which is readily available in the present case. This is, in our opinion, the true meaning and intention underlying the Circular of 01.07.2002” the bench stated. 

Case title: Commissioner of Central Excise & Service Tax, Rohtak v/s Merino Panel Product Ltd.

Citation: Civil appeal no. 6891 of 2018

Date: 05.12.2022 

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