The present-day commercial landscape involves a variety of transactions which are structured in various manners. Assessees under Central Excise ordinarily discharge duty on the goods cleared by them on the basis of invoices raised indicating the value of these goods as on the date of the clearance of these goods. The price declared in the said invoices is the transaction value of the goods in terms of Section 4 of the Central Excise Act, 1944. However, difficulties arise when the price is subsequently revised due to various factors, leading to demand of interest by the Revenue Department on the differential duty paid due to such price revision. This article seeks to examine the position of law with regard to demand of interest on the assessee in such situations.
Nature of transactions
Transactions which involve price revision are of two kinds:-
- Where the price of the goods is ‘fixed’ at the time and place of removal, and as a result of subsequent negotiations, the price is retrospectively revised by the buyer;
- Where the price at the time and place of removal is ‘not fixed’ (price subject to escalation clause in the contract) and the final price is subsequently agreed between the seller and buyer.
In such cases, the occasion for differential duty arises at a later date due to invocation of the price variation clause in the contract for sale or due to culmination of the negotiations for revised price in favour of the seller. There can be no doubt that in such non-fixed price scenario, differential duty is liable to be paid on subsequent revision of price. The question, however, is as to whether interest thereon is payable at all and if so, is it payable from the date of clearance of goods when duty was paid on the basis of invoice, till the date when differential duty was paid.
Leviability of interest on such transactions
Interest under the relevant provisions of the Excise Act (Section 11AB/11AA) can be levied/charged where any duty has not been levied or paid or has been short-levied or short-paid. For sustaining the demand of interest, the difference in price, arising due to the decision taken by the parties at a later date i.e. much after the date on which the goods were cleared, will have be treated as price as on the date when the goods were actually removed and, therefore, it has to be construed that the duty initially paid was ‘short paid’ to bring this event within the fold of Section 11AB/11AA of the Excise Act. The assessee has a compelling case to state that the provisions of Section 11AB/11AA of the Excise Act would not be attracted at all. This is on the ground that the duty paid on the date of removal of the goods cannot be treated as ‘short paid’ only because of the occurrence of an event at a later date which could not be visualized or taken into consideration at the time of removal of these goods. It is impossible to determine the revised price on the date of removal, especially so as it is not even known at the time of removal as to whether there would be any price revision at all. Thus construing duty as short paid in this scenario would be in derogation of the principle of Lex non cogit ad impossibilia, i.e. the law does not compel the doing of impossibilities.
The Supreme Court interpreted the provisions of Section 11AB of the Excise Act in SKF India Ltd. - 2009 (239) E.L.T. 385 (S.C.) and International Auto Limited - 2010 (250) E.L.T. 3 (S.C.). In both these cases, the Apex Court sustained the demand of interest on differential duty payment by the assessee. However, after taking note of the aforesaid judgments, recently in the case of Steel Authority of India – 2015 (326) ELT 450 (SC), this issue has been referred to the Larger Bench of the Supreme Court.
In the above case of SAIL, the Apex Court observed that the Bench in SKF India and in International Auto (cited supra) did not consider the effect of the expression ‘ought to have been paid’ occurring in Section 11AB of the Excise Act. It was noted that 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. The Apex Court held that 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 payment of interest. Thus, it can be seen that the said judgment disapproves of the ratio laid down in SKF India and in International Auto (cited supra).
In the light of the above, it is seen that the jurisprudence pertaining to the issue of demand of interest on payment of differential duty due to revision of price has not been static but is still evolving. The assessees can feel vindicated at least by reference of this issue to Larger Bench of Supreme Court as commercial issues, as they arise in reality, need to be seen through the prism of business principles and practices but within the four corners of law. One would have wished the government to make retrospective amendments to undo SKF ruling to convey that it understands business and ease of doing the same, but rulings in favour of the Department can hardly have such treatment as the same bureaucracy has to draft the amendment also.
[The author is a Senior Associate, Tax Practice, Lakshmikumaran & Sridharan, New Delhi]