Supreme Court Holds MOU-Based Inter-Oil Sales Are Not Automatically Transaction Value; Sets Aside Demand, Remands Connected Appeals

A bench of Justice Abhay S. Oka and Justice Pankaj Mithal heard appeals arising from show-cause notices issued to Oil Marketing Companies (OMCs) over valuation of petroleum products for excise duty. The appeals challenged the Commissioner’s decision to treat the higher dealer sale price, instead of the Import Parity Price (IPP) fixed under a Multilateral Product Sale‑Purchase Agreement (MOU), as the assessable value, and the invocation of the extended limitation and penalty provisions.

The Court allowed Civil Appeal No. 5642 of 2009 filed by Bharat Petroleum Corporation Ltd. (BPCL), set aside the Commissioner’s order dated 8 December 2007 and quashed the demand and penalty in that appeal, and remanded the remaining connected appeals to the Tribunal for fresh adjudication in light of its findings. The Court held that Section 4(1)(a) of the Central Excise Act, 1944 applied only when three conditions were satisfied, including that “the price is the sole consideration for the sale.” The Court, in its reasoning, observed: “Where under this Act, the duty of excise is chargeable on any excisable goods with reference to their value, then, on each removal of the goods, such value shall— (a) in a case where the goods are sold by the assessee, for delivery at the time and place of the removal, the assessee and the buyer of the goods are not related and the price is the sole consideration for the sale, be the transaction value; (b) in any other case, including the case where the goods are not sold, be the value determined in such manner as may be prescribed.” The Court concluded that “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,” and that the Tribunal’s earlier decision in Hindustan Petroleum Corporation Ltd. had not addressed the crucial question whether price was the sole consideration.

Background The controversy arose after the Ministry of Petroleum and Natural Gas encouraged an MOU (dated 31 March 2002) among OMCs to ensure smooth supply and distribution of petroleum products nationwide; the MOU provided for inter‑company transfers priced at IPP. Between 2002 and 2005 the Revenue issued multiple show‑cause notices alleging differential valuation, contending that excise duty should be computed on dealer sale prices rather than IPP. The Commissioner invoked the proviso to Section 11A(1) (extended five‑year limitation) and imposed penalty under Section 11AC in some cases. The Tribunal, relying on earlier decisions including its own judgment in Hindustan Petroleum, had in several appeals accepted IPP as transaction value; in others it upheld demands. BPCL challenged the Commissioner’s order where the demand and penalty were confirmed.

On appeal, the OMCs argued that the sales between non‑related OMCs under the MOU were principal‑to‑principal and at arm’s length, so the IPP constituted the transaction value; they further contended there was no suppression justifying extended limitation or penalty. The Revenue countered that the Tribunal’s precedent and Board circulars supported treating the MOU price as transaction value and asserted that suppressed documents and representations justified extended limitation. The Supreme Court examined the MOU terms, recitals and ILP/operational clauses and held that the MOU primarily aimed at product sharing and supply assurance rather than commercial sales; therefore the MOU price was not shown to be the sole consideration. The Court found no adequate basis for invoking the extended period of limitation or imposing penalty, noting that the Department “was aware of the MOU” and that the Board’s 2007 circular itself advised examination of facts of each case. The Court remanded connected appeals to the Tribunal for fresh adjudication in accordance with its legal findings and made no order as to costs.

Case Details: Case No.: 2025 INSC 84 (Civil Appeal No. 5642 of 2009 and connected appeals) Case Title: Bharat Petroleum Corporation Ltd. v. Commissioner of Central Excise, Nashik Commissionerate (and connected matters) Appearances: For the Petitioner(s): Shri S.K. Bagaria (Senior Counsel) for BPCL; Shri V. Lakshmikumaran for OMCs For the Respondent(s): Shri Balbir Singh, Additional Solicitor General, for the Revenue