Supreme Court Sets Aside Excise Duty Demand On Oil Marketing Companies For Inter-Supply Of Petroleum Products

Update: 2025-01-21 04:46 GMT
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In a significant relief for Oil Marketing Companies (OMCs), the Supreme Court ruled (Jan. 20) that prices under the MoU for inter-supply of petroleum products, designed to ensure smooth nationwide distribution, do not constitute "transaction value" and are exempt from excise duty due to their non-commercial nature. The Court emphasised that the inter-supply arrangement was not solely...

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In a significant relief for Oil Marketing Companies (OMCs), the Supreme Court ruled (Jan. 20) that prices under the MoU for inter-supply of petroleum products, designed to ensure smooth nationwide distribution, do not constitute "transaction value" and are exempt from excise duty due to their non-commercial nature.

The Court emphasised that the inter-supply arrangement was not solely price-driven but aimed at facilitating seamless distribution, rendering it ineligible for excise duty.

Holding so, the bench comprising Justices Abhay S Oka and Pankaj Mithal set aside the impugned order of the Commissioner of Central Excise and Customs, Nashik for the demand of Rs. 119,11,49,418/-(Rupees one hundred nineteen crores, eleven lakhs, forty-nine thousand, four hundred and eighteen only) as differential duty from the BPCL.

The case originated from the show-cause notices issued to BPCL, Indian Oil Corporation Ltd. (IOCL), and Hindustan Petroleum Corporation Ltd. (HPCL), alleging short payment of excise duty. The dispute stemmed from the pricing methodology adopted by the OMCs under an MOU executed in 2002, which was based on the Import Parity Price (IPP). The IPP was lower than the prices at which OMCs sold petroleum products to their own dealers.

The Central Excise Department argued that excise duty should be calculated on the higher dealer price, while the OMCs contended that the IPP was the correct transaction value as per Section 4(1)(a) of the Central Excise Act.

The Court addressed the issue of whether the prices (IPP) charged under a Memorandum of Understanding (MOU) between Oil Marketing Companies (OMCs) could be treated as the transaction value for excise duty purposes.

Answering the negative, the Judgment authored by Justice Oka observed that the IPP, as determined under the MOU, could not qualify as the transaction value since it was not the sole consideration for the sale. The Court found that the MOU was primarily an operational agreement aimed at ensuring smooth supply and distribution of petroleum products, reducing transportation costs, and avoiding disruptions.

The Court explained that excise duty is levied on the transaction value which is determined under Section 4 of the Excise Act, 1944. It specifies that excise duty is to be levied on the "transaction value" of the goods. For "transaction value" to apply, three conditions under Section 4(1)(a) must be met i.e.,

a. The goods are sold at the time and place of removal.

b. The buyer and seller are not related.

c. The price is the sole consideration for the sale.

The Court rejected the excise department's argument that the prices on which OMCs were engaged in the inter-supply would qualify as transaction value to levy the excise duty.

According to the Court, though the OMCs were engaged in inter-supply of the petroleum products, the price was not the sole consideration for the sale as they entered into an MoU not for commercialization but for ensuring that every OMC gets smooth and uninterrupted supply all over India, irrespective of whether an OMC has a refinery or otherwise in a particular part of India.

“Therefore, after taking into consideration the aforementioned parts of the MOU, it is crystal clear that the arrangement reflected from the MOU is essentially for ensuring that every OMC gets smooth and uninterrupted supply all over India, irrespective of whether an OMC has a refinery or otherwise in a particular part of India. 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. Hence, we concur with the conclusion in the impugned judgment that the price was not the sole consideration for sale.”, the court observed.

Upon holding that the price was not the sole consideration for sale between the OMCs, the Court held that the price at which the sale took place cannot hold the transaction value for levying excise duty.

While allowing the BPCL's appeal, the Court remanded related cases involving IOCL and HPCL to the Tribunal for fresh adjudication in light of its findings.

Case Title: Bharat Petroleum Corporation Ltd. versus Commissioner of Central Excise Nashik Commissionerate (and connected matters)

Citation : 2025 LiveLaw (SC) 86

Click here to read/download the judgment

Appearance:

For Appellant(s) Mr. S.K. Bagaria, Sr. Adv. Mr. Parijat Sinha, AOR Ms. Pallak Bhagat, Adv. Mr. Kumar Ajit Singh, Adv. Ms. Reshmi Rea Sinha, Adv. Mr. Devesh Mishra, Adv. Mr. B. Krishna Prasad, AOR Mr. Mukesh Kumar Maroria, AOR

For Respondent(s) Mr. Balbir Singh, A.S.G. Mr. Arijit Prasad, Sr. Adv. Mrs. B. Sunita Rao, Adv. Mr. Rupesh Kumar, Adv. Mr. H.R. Rao, Adv. Mr. Shyam Gopal, Adv. Mr. Vivek Chaudhuri, Adv. Mr. Bhaskar Sundaram, Adv. Mr. Aditya Rathore, Adv. Mr. Naman Tandon, Adv. Mr. Mukesh Kumar Maroria, AOR Mr. V. Lakshmikumaran, Adv. Ms. Apeksha Mehta, Adv. Ms. Neha Choudhary, Adv. Ms. Falguni Gupta, Adv. Mr. Umang Motiyani, Adv. Mr. E.C. Agrawala, AOR Mr. Mahesh Agarwal, Adv. Mr. Rishi Agrawala, Adv. Mr. M.S. Ananth, Adv. Mr. Abhinabh Garg, Adv. Mr. Abhinav Agrawal, AOR Mr. Kartik Sharma, Adv. Mr. Parijat Sinha, AOR 

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