Using of Word 'Commission' instead of 'profit Margins' in HPCL has no Adverse Inference: CESTAT sets aside Excise Duty Demand on Sale of CNG to HPCL [Read Order]

The Hyderabad bench of the Customs, Excise & Service Tax Appellate Tribunal,( CESTAT ) has held that using of word 'Commission' instead of 'profit Margins' in Hindustan Petroleum Company Ltd (HPCL) has no adverse inference and set aside the excise Duty demanded on sale of CNG to HPCL.

Bhagyanagar Gas Ltd, the Appellant is a PSU and is a Joint Venture between (i), (ii) GAIL (India) Ltd (GAIL), (iii) Kakinada Seaports Pvt Ltd (KSPL) and (iv) the Government of Andhra Pradesh. The Appellant manufactures Compressed Natural Gas (CNG). The Appellant was registered with the department and was discharged from Central Excise duty for the period August 2005 to December 2009.

Owing to its sensitive nature, CNG and its transactions are regulated and administered precisely. The CNG manufactured by the Appellant is dispatched from its factory, in some cases via ‘under-ground pipelines’ and in some cases via ‘automobile trucks’. The Appellant has cleared CNG from its factory located at RS No.70, Gollapudi Road, Vidyadharapuram, Near YV Rao Estates, Vijayawada, and has dispatched to its customer i.e., HPCL via ‘automobile trucks’.

The trucks containing the CNG are moved to the retail stations operated by HPCL and over there, the CNG is moved from the trucks into the cascade tanks located at HPCL outlets. Thereafter, HPCL continues to store the CNG in its station and further effects sale of the CNG to the end-customers, i.e., the public.

The Appellant has an agreement with HPCL, which has been renewed from time to time for such a sale of CNG to it. As per Clauses 2, 8 & 14, of the Agreement, the Appellant and HPCL have agreed that there is no relationship of agency between them, and that they are only working on a principal to principal basis; that the transfer of CNG from the Appellant to HPCL, constitutes sale of goods, for which the Appellant raises sale invoices duly charging State VAT from HPCL, and thereafter, discharges the VAT liability to the State Government; Once HPCL has procured the CNG, it effects further sale to the end-customers.

While the Appellant charges, for instance Rs.28.63/- to HPCL for the sale of CNG (including the excise duty and VAT applicable); the price at which the HPCL may sell to the end-customer is also fixed in the agreement, owing to the sensitive nature of CNG. Accordingly, in this illustration, HPCL sells the CNG to the end-customers at Rs.30/- including VAT of Rs.3.8/-, leaving a profit-margin of Rs.1.20/- for HPCL.

The basis of levy of additional excise duty or differential duty by the Authorities below is that there is no real sale between the Appellant and HPCL, and that the Appellant and HPCL are working on an agency basis and that the final sale price charged by the HPCL to its end-customers, must be treated as the ‘transaction value’ for Sec 4(1)(a) of the Central Excise Act for levy, instead of the value adopted by the Appellant, at the time of its clearance to HPCL.

The Appellant contended that Clause 14 of the Agreement clearly lays down and establishes that there is no relationship of agency between the Appellant and HPCL and that they are only operating on a principal to principal basis; that Clause 2 of the Agreement proves that there is an actual and real sale between the Appellant and HPCL of the CNG, at a defined price.

Further contended that the usage of the word ‘commission’ in the Agreement, cannot be twisted and held against the Appellant, since the true nature of the mark-up retained by HPCL is not a commission, but HPCL’s own profit-margin.

The Appellate Authority has observed that there is no sale of CNG between the Appellant and HPCL when it is cleared at the factory gate, since the Appellant has installed equipment at HPCL’s retail stations and they are also maintaining them in proper conditions and paying electricity charges as applicable. It was held that the relation between the parties is not on principal to principal basis, and what is paid to HPCL, is indeed commission.

Since the dealers were selling CNG for and on behalf of Mahanagar Gas Ltd, certain service charges/commission was paid to the dealers. Similarly, Mahanagar Gas Ltd was also selling CNG to Oil Marketing Companies (OMC) who were purchasing and reselling CNG and Mahanagar Gas Ltd allowed certain discount/commission to them from the Retail Sale Price (RSP), as per Agreement.

A Coram Comprising of Mr Anil Choudhary, Member (Judicial) and Mr A K Jyotishi, Member (Technical) observed that the Court below has erred in drawing adverse inferences as the word ‘commission’ has been used instead of the word ‘profit-margin’. Further, no adverse inferences can be drawn as the RSP is fixed by the Appellant, which is a PSU and CNG being a sensitive product touching the life of common man, in various aspects

The Court allowed the Appeal and set aside the Impugned Order.

To Read the full text of the Order CLICK HERE

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates