Excise Duty Dispute: Supreme Court Rules in Favor of Bharat Petroleum


Court: Supreme Court of India.

Case Name: BHARAT PETROLEUM CORPORATION LTD. vs. COMMISSIONER OF CENTRAL EXCISE NASHIK COMMISSIONERATE.

Citation: 2025 INSC 84 (Reportable)

Introduction

This article examines the Supreme Court of India’s ruling in the case of Bharat Petroleum Corporation Ltd. (BPCL) v. Commissioner of Central Excise Nashik Commissionerate, which deals with the complex issue of excise duty calculation on petroleum products sold between Oil Marketing Companies (OMCs). The core of the dispute lies in determining the correct ‘transaction value’ for excise duty purposes when OMCs engage in product sharing under a Multilateral Product Sale-Purchase Agreement. The court’s judgment addresses multiple civil appeals filed by both the OMCs and the Revenue Department.

Background of the Case

  • Prior to April 1, 2002, petroleum product prices in India were governed by the Administered Price Mechanism (APM).
  • On March 31, 2002, the APM was abolished, and a Multilateral Product Sale-Purchase Agreement (MOU) was executed between OMCs at the behest of the Ministry of Petroleum and Natural Gas.
  • The OMCs involved in this agreement were BPCL, Indian Oil Corporation Ltd. (IOCL), Hindustan Petroleum Corporation Ltd. (HPCL), and Indo-Burma Petroleum Company Ltd. (IBP). IBP later merged with IOCL.
  • Under the MOU, the OMCs agreed to sell and purchase petroleum products among themselves at the Import Parity Price (IPP).
  • IPP is defined as the landed cost of the products at the nearest port, plus the cost of transportation from the port to the storage point of the selling OMC, and includes terminal charges.
  • The IPP was lower than the price at which the OMCs sold petroleum products directly to their own dealers.
  • Between 2002 and 2005, the Central Excise Department issued show-cause notices to the OMCs, contending that excise duty should be calculated based on the price at which the OMCs sold to their own dealers (higher price), not the IPP.

Key Legal Issues

The Supreme Court was primarily concerned with the following legal issues:

  • Whether the IPP, the price at which OMCs sold products to each other under the MOU, qualified as the "transaction value" for excise duty as per Section 4(1)(a) of the Central Excise Act, 1944.
  • Whether the Revenue Department was justified in invoking the extended period of limitation (five years) to issue show-cause notices.
  • Whether a penalty under Section 11AC should be imposed for any alleged short payment of duty.

Arguments and Submissions

OMCs' Arguments

  • The OMCs argued that the IPP was the valid transaction value because it was the actual price paid for the products between the OMCs.
  • They contended that Section 4 allows for different prices for different buyers.
  • They argued there was no suppression of facts as the government directed the MOU.
  • They referred to the Tribunal's previous decisions in favor of the OMCs, which had been summarily upheld by the Supreme Court.
  • They argued that the sales to OMCs were made for delivery at the time and place of removal, and the parties to the MOU were not related to each other, making Section 4(1)(a) applicable.

Revenue's Arguments

  • The Revenue argued that the IPP was not the "sole consideration" for the sale under the MOU.
  • They contended that the MOU was not disclosed, justifying the extended period of limitation.
  • They asserted that the Tribunal in previous cases did not delve into the details of the MOU.
  • They argued that the price was not the sole consideration even if the MOU was in accordance with government directions.

Rationale, reasoning given by the Judges

  • The Supreme Court held that the IPP under the MOU was not the sole consideration for the sale. The real consideration was the smooth supply of petroleum products among the OMCs and product sharing, not a standard commercial sale..
  • The court examined the recitals of the MOU, which emphasized "product sharing/assistance" and mutual benefit, indicating it was not a commercial sale.
  • The court rejected the claim that the Tribunal’s decision in the Hindustan Petroleum case had merged with the Supreme Court’s summary dismissal as no specific finding had been recorded that the IPP was the “sole consideration” for sale..
  • The Supreme Court rejected the invocation of the extended period of limitation, stating that the department was aware of the MOU and there was no suppression of facts..
  • The court found no evidence that OMCs claimed dual pricing was adopted as per the directions of the Central Government.
  • The penalty under Section 11AC was deemed inapplicable because the extended period of limitation was incorrectly invoked.

Decision and Order

  • The Supreme Court allowed BPCL's appeal (Civil Appeal No. 5642 of 2009), setting aside the demand and penalty.
  • The other appeals filed by the Revenue Department were remanded to the Tribunal for fresh adjudication based on the findings in this judgment.
  • The Tribunal will decide the cases based on the finding that the IPP was not the sole consideration for the sale.
  • No orders were made for costs.

Excerpt

  • "Thus, from a plain reading of the MOU, we find that the real consideration for the MOU was to ensure an uninterrupted supply to all the OMCs at various places in India. The MOU incorporates mutual arrangements made by MNCs for an uninterrupted supply of petroleum products so that MNCs can further sell the products to their dealers. By no stretch of the imagination, it can be said that the price fixed under the MOU was the sole consideration for the sale by one OMC to the other."
  • "The letter itself records that to ensure a regular supply of petroleum products, the Oil PSUs (OMCs) entered into an MOU at the behest of the Petroleum and Natural Gas Ministry... Therefore, the department was aware of the MOU even before the date on which the show cause notice was issued."

Points to Remember

  • The judgment clarifies the strict interpretation of "transaction value" under Section 4(1)(a) of the Central Excise Act, 1944.
  • The price must be the sole consideration for the sale, and not part of a larger mutual arrangement.
  • The onus of proving "price is the sole consideration" is on the assessee.
  • Summary dismissals of cases by the Supreme Court do not necessarily mean that all the findings of the lower courts are upheld.
  • The judgment underscores the importance of examining the substance and objective of agreements to determine their true nature.
  • Clear evidence of fraud, collusion, or suppression of facts is required before invoking the extended period of limitation.
  • The Supreme Court emphasized that the MOU aimed to ensure smooth, uninterrupted supply and mutual sharing of products rather than a standard commercial transaction.
  • The ruling has implications for how 'transaction value' is calculated for inter-company transactions among OMCs.
  • The judgement stated that different prices can be charged to different buyers if they are based on different removals.
  • Section 4(1)(a) of the Act mandates that for a transaction to be considered a "transaction value" three conditions must be fulfilled:
    • The goods are sold for delivery at the time and place of removal.
    • The assessee and the buyer are not related.
    • The price is the sole consideration for the sale.
  • The extended period of limitation can be applied when there is fraud, collusion, wilful misstatement, suppression of facts, or contravention of any of the Act's provisions, with the intent to evade payment of duty.
  • A penalty under Section 11AC is imposed when duty has not been paid due to fraud, collusion, wilful misstatement, suppression of facts, or contravention of any of the Act's provisions, with the intent to evade payment of duty.

This judgment will influence how excise duty is assessed in similar product-sharing agreements.

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