The Supreme Court of India, in a significant judgment on central excise law, has ruled that the value of duty-paid “bought out items” delivered directly to a buyer’s site is not liable to be included in the assessable value of a boiler cleared from the assessee’s factory in a completely knocked down (CKD) condition.
A bench comprising Justice J.B. Pardiwala and Justice Sandeep Mehta, while allowing the appeals in Lipi Boilers Ltd. v. The Commissioner of Central Excise, Aurangabad, held that the final steam generating plant, after erection and installation at the site, becomes an “immovable property” and thus does not constitute “excisable goods.”
The Court also invalidated the show cause notice issued by the revenue, holding that the extended period of limitation under Section 11A(1) of the Central Excise Act, 1944, was wrongly invoked as there was no “wilful suppression” by the assessee.
Background of the Case
The appellant, Lipi Boilers Ltd., holding a central excise registration for manufacturing boilers (Chapter Heading 8402.10) and their parts (8402.90), entered into a contract on January 29, 2001, with Shri Maroli Vibhag Khand Udyog Sahakari Mandali Ltd. (“the buyer”). The contract was for designing, procuring, manufacturing, and supplying machinery for one ’50 TPH MCR Capacity… bagasse fired boiler’ to commission a steam generating plant.
On April 28, 2005, the Assistant Commissioner of Central Excise issued a show-cause-cum-demand notice for the period of April 1, 2000, to June 30, 2000. The notice alleged that the assessee cleared the final product boilers in CKD condition without including the cost of ‘essential’ bought-out ‘parts’ (worth ₹14,02,344) that were delivered directly to the buyer’s site. This, the revenue claimed, resulted in undervaluation and a duty shortfall of ₹2,24,375.
The revenue invoked the extended five-year limitation period under the proviso to Section 11A(1) of the Act, alleging “wilful suppression of facts.”
The assessee replied on June 13, 2005, denying any contravention. It contended that the CKD parts were cleared from its factory after paying the appropriate duty, while the bought-out items were cleared by their respective vendors (duty-paid) and transported directly to the site. Crucially, the assessee argued that the final boiler, upon erection involving civil and mechanical work, becomes “attached to the earth” and is an “immovable property,” hence not ‘goods’ and not excisable.
The Assistant Commissioner, in the Order-in-Original dated December 7, 2005, dropped the demand, accepting the assessee’s contentions. The order noted, “It is also well settled law that the boilers erected at site and attached to earth are not ‘goods’ and hence not excisable.” This order was subsequently upheld by the Commissioner (Appeals) on July 13, 2007.
The Impugned Order and Party Submissions
The revenue appealed to the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), which, via its order dated September 23, 2010, reversed the concurrent findings of the lower authorities. The CESTAT held that the ‘immovability’ plea had not been raised before the lower authorities and that the bought-out items were “essential parts” and thus includible in the boiler’s value.
Before the Supreme Court, the appellant (assessee) argued that the final product, the steam generating plant, came into existence at the buyer’s site as an ‘immovable property’ and was therefore not excisable. It was vehemently contended that the CESTAT erred in fact by stating the ‘immovability’ plea was not raised, when it was specifically included in the SCN reply and accepted by the Assistant Commissioner.
The respondent (revenue) argued that the ‘manufacture’ occurred at the buyer’s site when the CKD and bought-out parts were assembled, prior to affixation to the earth. The revenue contended that under the amended Section 4 of the Act, the “transaction value,” which was the total contract price (inclusive of the bought-out items), should be the basis for assessment.
Supreme Court’s Analysis and Findings
The Supreme Court divided its analysis into two primary issues: excisability/valuation and the validity of the limitation period.
1. On Excisability and Valuation (Section 3 vs. Section 4)
The Court first clarified the distinction between the charging provision (Section 3) and the valuation provision (Section 4). Citing Union of India and Others v. Bombay Tyre International Ltd. and Others, the bench observed that Section 3 creates the charge on the manufacture of excisable goods, while Section 4 provides the measure (value) for the tax.
The judgment states, “It must necessarily be borne in mind that valuation is a consequence of levy, not its determinant.” Therefore, the revenue must first establish that the resultant product is “excisable goods” under Section 3 before the “transaction value” under Section 4 can be applied.
To determine if the steam generating plant was “goods,” the Court applied the test of movability, citing M/s Bharti Airtel Ltd. v. The Commissioner of Central Excise, Pune and Quality Steel Tubes (P) Ltd. v. Collector of Central Excise, U.P., where it was held that “Goods which are attached to the earth and thus become immovable do not satisfy the test of being goods…”
Analyzing the contract (Clauses 10(j) and 13.1.3(b)), the Court noted the assembly process involved “fire bricks, fire cement, portland cement, fire clay, asbestos ropes, asbestos sheets etc.” It found that this was not a simple assembly but a process involving civil and mechanical engineering.
The Court held: “The process of assembling would involve the integration of massive structures, and piping systems that are aligned, welded, and permanently embedded into the foundation at the buyer’s premises… The object of the contract therefore is about erection and installation of an immovable plant.”
As the final product was held to be immovable and thus not “excisable goods,” the Court ruled that the contract price could not be the basis for valuation, and the value of the bought-out items could not be included. The Court deemed the revenue’s ‘part’ vs. ‘accessory’ debate “wholly inconsequential” since the final product was not excisable.
The bench also called the CESTAT’s finding that the immovability plea was not raised a “glaring error” and an “egregious flaw,” as the plea was clearly on record from the SCN reply stage.
2. On the Extended Limitation Period (Section 11A(1))
The Court then examined whether the SCN was validly issued under the five-year extended limitation period. The proviso to Section 11A(1) requires “fraud, collusion or any wilful mis-statement or suppression of facts… with intent to evade payment of duty.”
Citing Continental Foundation Joint Venture Holding v. CCE, the Court observed, “Mere omission to give correct information is not suppression of facts unless it was deliberate to stop (sic evade) the payment of duty.”
The Court found that the assessee had a “bona fide belief” that the items were not includible and noted that the revenue itself admitted the assessee had filed RT-12 returns, meaning the department “had the material particulars on record.”
The bench concluded, “Therefore, in the absence of any deliberate act on the part of the assessee with an intention to evade being established by the revenue, the essential precondition of wilful suppression with intent to evade duty is not satisfied. Consequently, the invocation of the extended period of limitation… is held to be not tenable in law.”
Conclusion
Based on these findings, the Supreme Court concluded that the value of the duty-paid bought-out items was not liable to be included in the assessable value of the boiler. It further held that the show cause notice issued under the proviso to Section 11A(1) was “not legal and hence invalid.”
The appeals were allowed, and the impugned order of the CESTAT dated September 23, 2010, was set aside.
