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Commissioner of Central Excise & Service Tax, Rohtak vs M/S. Merino Panel Product Ltd.

Civil Appeal · 2022 INSC 1253Decided 5 Dec 2022
Civil Appeal No. 6891 of 2018
Surya Kant · J.B. Pardiwala

Background

Merino Panel Product Ltd., a manufacturer of decorative laminates, sold its goods both to independent buyers and to two related companies (its holding company and a company under common control) at lower prices. An excise audit found this undervaluation led to a shortfall in excise duty of over Rs. 3 crore, and the Revenue issued a show-cause notice invoking a "residuary" valuation rule (Rule 11 of the Central Excise Valuation Rules) along with another rule meant for a different scenario. The Excise Tribunal (CESTAT) struck down the notice as defective, holding the Revenue had used the wrong method contrary to its own departmental circular, which prescribed a specific formula for cases involving sales to both related and unrelated buyers.

Decision Breakdown

The Supreme Court reinstated the Revenue's demand. It held that citing an incorrect legal provision in a show-cause notice does not invalidate it so long as the underlying power to issue the notice actually exists. On the substantive question, the Court clarified that departmental circulars bind the tax authorities (who cannot depart from their own instructions) but do not bind courts, which must independently interpret the law; here, however, the Court found no real conflict between the circular and the statute. It held that where a "normal price" charged to independent buyers is available, that price can be used as the benchmark to value the related-party sales for excise purposes, and confirmed the extra duty demand, but waived the interest and penalty, since even the Revenue itself had been unclear about the correct valuation method.

Lesson Learnt

A tax notice is not automatically invalid merely because it cites the wrong provision, so long as the tax authority genuinely had the power to act; and when a business sells the same goods to both independent and related buyers, the price charged to independent buyers can be used as the fair benchmark for valuing the related-party sales.

Official source (sci.gov.in)View Judgment (PDF)

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