Undervaluation of Petroleum products by Oil Companies – Board prefers CESTAT to Supreme Court and withdraws Instructions
VIDE para No 11.3 of the CAG report for the year 2004-05, the auditors discovered that the oil companies are evading Crores of rupees of central excise duty by resorting to undervaluation. The modus operandi is: the oil companies in addition to clearing the goods to their depots/ dealers, also supply the goods to other oil companies at mutually agreed price. (It was felt that in public interest the companies have an agreement among all the oil companies, by which a company producing oil would supply the same to another company having the nearest marketing facility). The mutually agreed price on which the excise duty was paid was found to be lower than the value adopted for clearing the goods to their own outlets/ terminals. The Audit observed that the ultimate price to the consumer remained the same and there was an inflow of extra consideration to the other oil companies from ultimate consumers.
When this issue came up before the CESTAT, in 2005-TIOL-405-CESTAT-BANG, the Tribunal while setting aside the demand of duty had a word of caution to the department by holding that:
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 arm's length.
When the revenue appeal against this order was dismissed by the Supreme Court, instructions were issued by the Board vide F No. 6/21/2003-CX.I( Pt) dated 14.2.2007, to the field formations to decide the pending cases accordingly.
If you think this is the end of the story, you are wrong. This is only the beginning. When this issue again came up before the Mumbai Bench of the Tribunal recently 2009-TIOL-1850-CESTAT-MUM, the learned advocate on behalf of the appellants submitted before the CESTAT that, with the dismissal of the civil appeal of the Department by the Supreme Court and also with the directions of the Board to decide the pending cases, it became the law of the land. But, the Tribunal was not impressed. While upholding the duty demand of Rs 119 cores and also equal penalty, the CESTAT observed:
If the method of valuation contained in the MOU is accepted, it will prompt manufacturers in other sectors to follow suit. For example, the cement manufacturers all over India can enter into a similar arrangement with one another agreeing to provide cement to each other at a notional value of say, Rs.5 per 50 Kg bag and pay Central Excise duty on this price, when sales to in dependent dealers are at, say, Rs.50 per 50 Kg bag. Since equal quantities would be exchanged, there would be no loss to any manufacturer and the only loss would be to the Govt. on account of the Central Excise duty. Such a transaction cannot be given the legal cover of 'transaction value' under Section 4 of the Central Excise Act, 1944.
Unfortunately, the matrix of price and duty structure of the petroleum products is not that simple to draw a parallel to cement industry. Most of the domestic demand of petrol and diesel is met with the imports also. Sometimes, the duty paid on the imported petrol/diesel would be more than the domestic excise duty, but the oil companies charge the same price to the buyers. There are no different outlets for the oil companies to market petrol/diesel manufactured in the refineries and the imported goods.
So, the Board has now withdrawn the instructions dated 14.2.2007 and directed the field formations to CONSIGN all the pending show cause notices to call book till the appeal against the Mumbai Bench order is decided by the Supreme Court.
Now, the point to be noted here is, after the issue of instructions on 14.2.2007, most of the demand notices would have been dropped by now and there will be no fresh SCNs on this issue which could have been issued after 14.2.2007. So, as of now, absolutely no SCN would be pending to CONSIGN them to call book!