Supreme Court: Mere Affixation of MRP does not make Goods Eligible for Central Excise Duty Exemption; Mandate of Law Required

Supreme Court: Mere Affixation of MRP does not make Goods Eligible for Central Excise Duty Exemption; Mandate of Law Required

The Supreme Court by its division bench comprising of Justices Krishna Murari and Sudhanshu Dhulia observed that, mere affixation of the MRP on a good does not qualify it to claim benefits under Section 4(A) of the Central Excise Act, 1944 and that there must be a “requirement” for the affixation of such MRP. Therefore, even if there is affixation of MRP in the goods, what must be looked at it is whether such affixation was mandated by law.

The brief facts of the case are that the Respondent No.1, M/s AR Polymers Pvt. Ltd. is a manufacturer engaged in the manufacture of footwear and the sale of the same to defense/paramilitary forces in bulk for their use.

An intelligence was received by the Directorate General of Central Excise Intelligence (DGCEI) that the respondent was availing benefits under notification dated 17 March 2012 and Section 4(A) of the Central Excise Act, 1944 (the Act), which was limited to footwear sold in retail. The said notification wholly exempted the payment of Central Excise Duty for retail sale of footwear under Rs. 500 and limits Central Excise Duty to 6% where the rate of the footwear is between Rs. 501 to Rs. 1000.

It was found that the respondent was printing and attaching MRP stickers on the insole of the said shoes, only to avail the benefits of the abovementioned notification and Section 4(A) of the Act.

A demand-show cause notice was issued to the respondent on 5 February, 2016 requiring them to show cause to the commissioner of central Excise, Customs and Service tax.

Subsequently, the Ld. Adjudicating authority vide order dated 13 February, 2017 passed an order against the respondent holding that the benefit of the aforesaid notification does not extend to the footwear sold by the respondent, and hence the respondent was directed to pay the difference amount between the tax already paid and the tax which was liable to be paid. A penalty was also imposed on the director of the respondent company.

The respondent, aggrieved by the order filed an appeal in the Customs Excise and Service Tax Appellate Tribunal (CESTAT), and vide impugned order dated 9 January, 2019, the CESTAT overturned the judgment of the adjudicating authority and held that the benefit of the abovementioned notification extends to the Respondent herein. As against this the Appellant- Commissioner of Central Excise & Service Tax, Kanpur filed an Appeal before the Apex Court.

The primary question posed in front of the bench was, whether the goods sold by the respondent are eligible to claim tax benefits within the purview of the abovementioned notification under Section 4(A) of the Central Excise Act?

The Apex Court while relying in the case of Jayanti Food Processing Pvt. Ltd. v. Commissioner of Central Excise, Rajasthan, noted that for goods to be included under the assessment of Section 4(A) of the Central excise Act, it must comply with five factors.

Furthermore, the bench on bare perusal of Section 4(A) of the Act and the abovementioned judgment observed that to attract a MRP based valuation of goods under the Central Excise Act, the goods should be notified under Section 4(A) of the Act and that such goods must come within the purview of the Standards of Weights and Measures (Packaged Commodities) Rules, 1977, which has now been repealed and replaced by the legal Metrology (Packaged Commodities) Rules, 2011.

In the present case at hand, the respondent had entered into a sale with the paramilitary and military as per the terms of agreement signed. While the goods in the impugned sale were notified under Section 4(A) of the Act by way of an official notification in the gazette, what is most relevant to us is Rule 3(b) of the Legal Metrology (Packaged Commodities) Rules, 2011 which exempted the sale to institutional consumers from its purview.

The Court noted that the purchasers in this case were military and paramilitary institutions, both of whom purchase the goods in bulk from the respondent, and then further distributed it to their employees. In this entire process from the sale of the goods to the goods Actually being used by the end consumer, the purchaser military and paramilitary institutions became industrial consumers, as they served as an intermediary between the end consumer and the original purchaser.

In this regard, the bench observed, “due to the purchasers, on account of them being institutional consumers, are exempt from the Legal Metrology (Packaged Commodities) Rules, 2011, and since Section 4(A) of the Act mandates the applicability of the above said rules, the transaction automatically becomes ineligible to claim refuge under Section 4(A) of the Act.”

“Even if we were to assume that Section 3(b) of the Legal Metrology (Packaged Commodities) Rules, 2011 is inapplicable to the present purchaser, the impugned sale still fails the test of point (iii) of the Jayanti Foods judgment,” added the bench.

The bench asserted that that for the sale of goods to take assessment benefits under Section 4(A) of the Act, it must be a retail sale, and there must be a mandate of law that directs the seller to affix a retail price on the goods for a sale to be considered a retail sale.

Therefore, the Court opined, even if there is affixation of MRP in the goods, what must be looked at it is whether such affixation was mandated by law.

Furthermore, the bench highlighted that apart from the exemption granted by way of Section 3(b) that automatically removes the mandate of law to affix an MRP on the sold goods, the said sale still cannot be considered a retail sale because the sale of the goods must be done to a consumer.

In the present case at hand, the purchasers were intermediaries, who after the purchase of the said goods, distribute it further to the final consumer.

In such a circumstance, where the purchaser institution is deemed to not be a consumer, the sale also cannot be held to be a retail sale as per the Act. Further, since the impugned sale was not a retail sale as per the Act, there exists no mandate of law on the Respondent to affix an MRP on the goods sold, and hence the said impugned transaction cannot claim benefit under Section 4(A) of the Act, stated the Court.

Accordingly, the Apex Court quashed the CESTAT order.