Circular No. 549 dated 18^th September 2000

Attention is drawn to Board' s Circular No. 223/ 57/96-CX (F.N0.332/85/94-TRU). dated 21.06.1996. In the circular, it was mentioned that prices of the petroleum products falling under the category of 'formula products' are determined taking into account number of factors by the Ministry of Petroleum and Natural Gas. Moreover numbers of petroleum products falling under this category are generally transported from the refineries to the warehouses, known as storage points. The Central Excise duty is discharged at the time of removal from the storage point. It has been reported that in respect of bulk petroleum products sold from the storage points, excise duty was paid on the assessable value declared as ex-storage points selling price. As a general practice that is being followed since 1994 when ad valorem rates of duty were prescribed for petroleum products and in view of above said Circular, the ex-storage point prices have been taken as the price for determination of assessable value.

The prices of bulk petroleum products, motor spirit, HSD & Kerosene are under administered price regime regulated by Ministry of Petroleum taking into account cost of production, profit need for making available certain products of mass consumption at reasonable prices etc. Oil companies cannot charge prices more than the prices fixed under the Administered Price Mechanism. The price is built up taking into account-several elements, including cost factor and what is called Product Price Adjustment (PPA) element. For M.S. & H.S.D. the ex-storage point prices include significant amount of plus PPA element and the oil companies though collect this element from customers but this is to be deposited to theOil Pool Account. On the other hand, in the case of S.K.O. (Domestic), Government has been keeping, as a matter of conscious policy, the price to be charged to customer at low level and for that purpose there is negative elements of PPA in the price build up of S.K.O. (Domestic). The Oil companies are compensated by payment through the Oil Pool account in case of their sale of S.K.0. (Domestic) which is essentially still at below cost prices.

Doubts were raised under the provisions of erstwhile Sec.4, as to whether the assessable values based on ex-storage point prices for S.K.O, (Domestic) should be accepted for assessment purposes; in fact in one Commissionerate, the compensation to the extent of PPA element received by the Oil companies was considered to be part of assessable value and duty demands have been raised and confirmed.

The matter whether there is any case for adding compensation received by Oil companies from Oil Pool Account, to assessable value of S.K.F. based on ex-storage pointprices has been, examined by the Board in consultation with the Ministry of Law. The Law Ministry has inter-alia opined that in case of administered prices of SKO, the present contribution from the Oil Pool Account cannot be added to the dutiable value. A copy of the opinion of the Ministry of Law, Department of Legal Affairs dated 27.01.2000 is enclosed.

The Board has accepted the advice of Ministry of Law and you are requested to keep in view this advice of Ministry of Law while finalising the assessment of Petroleum products.

Receipt of this Circular may please be acknowledged.

OPINION

DEPARTMENT OF LEGAL AFFAIRS

CBEC have sought our opinion on the correctness of the demand for differential duty on account of non-inclusion of sums received as Product Price Adjustment (PPA) in the assessable value of Superior Kerosene Oil (SKO) (domestic). The matters arise out of COD items No. 6 dated 16.12.99 and No. 22 dated 18.11.99.

2.     The petroleum products including SKO are subject to administered price mechanism (APM). Some element is added to the price of other products like motor spirit, HSD etc., which is payable to Oil Pool Account. The administered price of SKO is less than its cost and is subsidized by the Oil Pool Account, The Revenue has demanded Excise Duty on the content of contribution by the Oil Pool Account towards sale of SKO. The affected oil companies, M/s. IOC and HPCL, have filed appeals before the CEGAT, awaiting clearance by the COD.

3.     A copy each of two Os-I-0 dated 14.5.99 has been placed on the file. It is seen that the parties claimed application of the proviso (ii) to sec. 4(l) (a) of the Central Excise Act and claimed non-inclusion otherwise (para 14). The Commissioner held that the price, administered is not the price fixed under any law. It is purely an act of administration by the Ministry of Petroleum. Therefore Sec. 4(1) (a) (ii) cannot apply (para 18 (i). The Commissioner also referred to Bombay Tyre International Vs. UOI in that the entire cost which is incurred till the final stage of sale should go to enrich the value of a product and it should form part of the assessable value of the product.

4.     The matter may be examined from two angles, i.e.,

(i)       Whether the administered price is a price fixed under a law for the purpose of Sec. 4(l)(a) and, if yes, whether no addition can           be made to the price so fixed;and

(ii)      Whether otherwise the contribution from PPA can be added to the normal price under Sec. 4 of the Act.

5.     The Parliament has used the expression "price fixed under any law". Kerosene is an essential commodity finding place" at clause (viii) as "petroleum and petroleum products", in Sec.Q of the Essential Commodities Act, 1955 (EC Act). Sec. 3 of the EC Act empowers the Central Government to pass orders to regulate trade and commerce in any essential commodity. Under sub-section (2) an order may provide for controlling the price at which the essential commodity may be bought or sold to such other person or class of persons and in such circumstances as may be specified in the order. Sub-section (5) provides that an order made under this Sec. shall, in the case of an order of a general nature or affecting a class of persons, be notified in the Official Gazette. In exercise of powers conferred by Sec. 3 of the EC Act the Central Government has made the Kerosene (Restriction on Use and Fixation, of Ceiling Prices) Order, 1993 (the Order). Para 2(j) of the Order defines Public Distribution System as the system of distribution, marketing or selling of kerosene oil at declared price through a distribution system approved by Central or State Government. Declared price in relation to kerosene sold under the Public Distribution System, under para 2 (j) of the Order, means the maximum price declared by the Central Government from time to time with reference to an area. Para 4(c) of the Order provides that no dealer having stocks of kerosene supplied under the Public Distribution System shall sell, distribute or supply kerosene at a price, higher than that fixed by the Government or Government Oil Company.

6.     In this view there appears to be no doubt that the price fixed by the Govt. or the Govt. oil company for SK3 is the maximum price fixed under the law at which SKO can be sold. The Order does not require a Gazette Notification of the prices fixed by the Central Government. Still the price fixed would not lose its character a price fixed under the l aw, since it owes its authority to the Act. Recently the MRTP Commission in Director General (l&R) Vs. INFAR (India) Ltd. reported at (2000) 1 Comp LJ 158 (MRTPC) observed in the context of prices fixed under the Drug (Prices Control) Order, 1995: " If prices are fixed under the Drug Control Order which is made under the Essential Commodities Act, it can be said to have a force of law and it can be said that it is expressly authorised by law." Even if a view is taken that the actual price fixation is by an executive order, it is the maximum price fixed 'Under� Sec. 3 of the Essential Commodities Act r/w the 1993 Kerosene Order.

7.     In UOI Vs. Cyanamid India Ltd.,, AIR 1987 SC 1802, the Hon'ble Supreme Court was dealing with price fixation of drugs by the Government. It was observed that price fixation is generally a legislative activity and it is for the protection of the consumer public that price fixation is resorted to as any increase in price affects them as seriously as any decrease does a manufacturer, if not more. Referring to Cyanamid�s case, the MRTPC: (supra) observed that a legislative activity will certainly generate a force of law.

8.     It is seen that the Clause (ii) of the proviso to Sec. 4(i)(a) provides for a mandatory rule. Being a proviso it carves out an area from the application of the main rule. As such, a view is possible that since the present sales are covered by the proviso the main-provision of Sec. 4(i)(a) will not apply.

9.     There is yet another reason to exclude the oil pool account contribution towards shortfall in recoveries of SKO. Admittedly the contributions to oil pool account are not reduced from the normal price of other petroleum products. It is by application of the aforesaid second proviso. Consequently, the second proviso will have to be given full effect in the case of SKO for under recoveries. In the context of depreciation of assets not held in the name of the person carrying on business, the Hon'ble Supreme Court of India recently held in the case of Mysore Mineral Ltd. Vs. CIT, (1999) 239 ITR 775 "We do not think such a benefit to no one situation to have been intended by the Legislature." Similarly, the Courts are not likely to accept the argument that whenever the administered prices are higher than the cost plus profit the second proviso will be applied but would be ignored in the reverse case.

10.   In Aluminium Industries Ltd. Vs. CCE, 1998(99) ELT 486 (S.C) the assessee realised extra amount of ' RS. 805 per M.T. as conversion charges in addition to the 'price fixed under the Aluminium (Control) Order.-The Hon'ble Supreme Court deleted the addition and held that by virtue of the second proviso, a legal fiction has been created. The price fixed under any law for the time being in force has to be taken as the normal price of the goods.

11.   Taking up the second angle, CBEC had raised a query as to the valuation of goods sold to State Electricity Boards to be used in IBRD funded projects where duty drawbacks are received as deemed exports. A question was raised whether the duty drawback is an indirect flow of consideration from the buyer to the assessee; the question was bisected as (i) whether the duty drawbackflows from the buyer to the assessee (ii) whether it is an additional consideration for sale. A view was expressed in the opinion of the Ld. ASG that since the State Government/State-Electricity Board and the Central Govt. are distinct and separate entities under the law, the extra consideration does not flow from the buyer to the assessee.It was further pointed, that the duty drawbacks that are given, are as incentives in pursuance of the Central Government policy to permit Indian bidders in international tender. They are not in respect, of trade transactions. Therefore it cannot be said to flow as a consideration, whether direct or indirect, in respect of a sale made by the assessee to a buyer.

12.   In the light of the above, we are of the view that in case of administered prices of SKO, the present contributions by the Oil Pool Account cannot be added to the dutiable values.