BY TIOL News Service

NEW DELHI, DEC 09, 2015: THE question that arises for consideration in these appeals is as to whether interest is leviable under Section 11AB of the Act on the differential duty amount paid under supplementary invoices due to price increase by virtue of price variation clause in the sale contract.

The Facts: The assessee is engaged in the manufacture of iron and steel products falling under Chapter 72 and 73 of the schedule of the Central Excise Tariff Act, 1985. The final products manufactured by the assessee are cleared on payment of appropriate duty of excise leviable thereon. The final products are either directly sold at the factory gate or are transferred to various Branch Sales Offices from where they are sold to the customers. The sales either from the factory or from the BSOs are in terms of purchase orders received from the customers.

In terms of the prices quoted in the purchase orders, the assessee discharged central excise duty at the time of removal of the rails to the Indian Railways. Such price was the “transaction value” of the goods in terms of Section 4 of the Act at the given time. In terms of the price variation clause and also in terms of the agreement with the Indian Railways, the price circular dated 24.02.2005 effective from 01.07.2004 was revised upwards with increase in the agreed upon price.

In terms of the revised price circular the assessee discharged differential duty of Rs.142,78,88,172/- on the rails cleared during the period from January, 2005 to July, 2006. The differential duty was paid in August, 2006 under intimation to the Departmental Authorities.

A show cause notice dated 01.06.2007 was issued to the assessee contending that in respect of the differential duty of Rs.142.78 crores paid in August, 2006, the assessee are required to pay an interest of Rs.15,51,81,231/- under Section 11AB of the Act. The notice alleged that since the price was not correctly determined at the time of removal of goods there was short payment of duty hence the assessee is liable to pay interest. The notice also alleges that since the price was not final the duty should be treated as paid on the provisional price and in terms of Rule 7(4) of the Central Excise Rules interest under Section 11AB is payable. The notice also relied on circular dated 28.07.2003 to allege that the assessee is required to pay interest. The notice also proposed to impose penalty under Rule 25 for contravention of Rules 7 and 8 of the Rules.

The Commissioner of Central Excise, Raipur passed order dated 31.10.2007 confirming the amount of interest proposed in the show cause notice and also imposing penalty of Rs.2,00,000/-. Against the order dated 31.10.2007 passed by the Commissioner of Central Excise, Raipur, assessee filed an appeal before the Tribunal. The Tribunal has passed the impugned order dated 13.08.2010 and dismissed the appeal. This order is challenged by way of instant appeal.

The issue had been already decided by the Supreme Court in favour of Revenue in

(a) CCE v. SKF India Ltd.- 2009-TIOL-82-SC-CX

(b) CCE v. International Auto Limited. - 2010-TIOL-05-SC-CX

The appellant in this case submitted that these judgments do not correctly interpret the provisions of Section 11AB of the Act and, therefore, matter required a fresh look by a Larger Bench.

The Supreme Court observed,

Starting from the basics, it is axiomatic that interest under Section 11AB can be levied/charged where any duty of excise has not been levied or paid or has been short levied or short paid. In such an event, interest is liable to be paid 'from the first date of the month succeeding the month in which the duty ought to have been paid'. Section 4(1)(a) of the Act provides that the value of the goods shall be the price 'actually paid or payable' for the goods. This means the price which has been 'paid' or 'agreed to be paid' by the buyer of the goods. The expression 'ought to have been paid' in Section 11AB has to be understood in this light. Thus, for the purposes of Section 11AB, the expression 'ought to have been paid' would mean the time when the price is agreed upon by the seller and the buyer. In other words, the right of the seller to receive the revised price crystallises only when the buyer agrees to sanction the same, and only at that time can liability to pay duty, if at all, on the revised price arise. Both parties are not aware of the final price at the time when the goods are removed. In the context of price revision subsequent to clearance, duty 'ought to be paid' only after the sanctioning of the revised priced by the buyer. The differential duty on account of price revision is paid in the month when the revised price is agreed between the seller (assessee) and the buyer and it ought to have been paid only at that time and not before.

One has also to keep in mind the difference between 'what should be the quantum of duty to be paid' and 'when such duty is payable'. In the cases of price revision, the quantum of duty would be on the escalated price but the time for payment of differential duty is when the parties agree for the escalation in prices. On that reckoning, it would follow that interest clock for differential duty will start ticking from the date differential duty is due, i.e., the date of agreement of escalated prices and not before. This concept gets clarified with the latest amendment in 2015 to Section 11A with regard to the 'relevant date' for payment of interest.

It is undeniable that under Section 4 of the Act, the excise duty is to be paid on the 'transaction value' and such a transaction value has to be seen at the time of clearance of the goods. Indubitably, when the goods were cleared, the excise duty was paid taking into consideration the price that was actually charged and was reflected in the invoices raised for the said purpose. The Department cannot plead that as on that date, this was not the price charged. No doubt, when the differential payment is made at a later date, further amount towards excise duty becomes payable as a result of said differential in price. Further, such an event took place at a subsequent date. As on the date when the goods were cleared, there was no certainty that there would be price escalation and it was beyond comprehension to ascertain the exactitude of such an escalation. It would be impossible to expect the assessee to pay the excise duty, at the time of clearance of the goods, on the basis of price escalation that took place at a later date in future. Therefore, as on the date of clearance when excise duty was paid, it could not be treated as 'short paid' on the said date. As a consequence when the principal amount, namely, the excise duty itself was not payable (i.e. on the differential) on the date of clearance of the goods, there cannot be any question of law to pay interest.

No doubt, on receipt of differential price, when the buyer agreed to escalation in the price, further excise duty also become payable and on that reckoning one can say that the excise duty originally paid became 'short paid'. However, that would only attract payment on differential excise duty and not the interest thereon.

The two judgments in SKF India Ltd . and International Auto are by the same Bench. International Auto follows SKF India Ltd . The primary factor by which the Bench was influenced was that there is a loss of revenue to the Government and, therefore, the Government should compensate for that. It proceeds on the basis that the price which was originally stated at the time of removal of the goods was 'understated' (para 8 of International Auto). However, value of the goods for the purpose of duty is 'at the time of removal', which remains fundamental principle from the inception of the Central Excise Act originally enacted in 1944 and remains valid till date. It is, therefore, difficult to accept that the price was 'understated' on the date of removal of those goods.

The observations of the Bench that the imposition of interest is to compensate the Department for loss of revenue is contrary to the Constitution Bench judgment in the case of J.K. Synthetics Limited v. Commercial Taxes Officer - 2002-TIOL-345-CESTAT-DEL-LB wherein the argument that interest was compensatory in nature was specifically rejected. The Constitution Bench considered in detail the correctness of earlier three member Bench judgment in the case of Associated Cement Company Limited v. Commercial Tax Officer, Kota and Others wherein majority view was that interest claimed on unpaid tax dues could be charged as it was compensatory in character and not penal.

So, the Supreme Court felt that decision in SKF and Auto International require a re-look. The Registry is directed to place the matter before the Chief Justice of India for constituting a Larger Bench to go into the issue involved in this case which is of seminal importance having far reaching ramifications.

(See 2015-TIOL-292-SC-CX)