Emphasising that the ‘test of movability’ is the decisive factor in ascertaining whether an article qualifies as “goods” for the purpose of central excise duty, the Supreme Court ruled that the value of the duty paid on bought-out items, which were delivered directly to the buyer’s site, is not liable to be included in the value of the boiler cleared from the factory in completely knocked down (CKD) condition, for the purpose of assessment of excise duty.
A reference was made to a CBEC Circular No. 58/1/2002-CX dated January 15, 2002, which clarified that if an item that is assembled or erected at the site cannot be dismantled without substantial damage to its components and thus cannot be reassembled, then such items would not be considered as ‘movable’, and will, therefore, not be excisable goods.
The Court found from a perusal of the object of the contract for the steam generation plant, that the boiler parts manufactured by the appellant and transported to the site of erection in the CKD condition would be assembled at the site of delivery along with the bought-out parts which were directly delivered there, in order to form a steam generating plant.
Thus, the steam-generating plant comes into existence as a composite system comprising various components, some manufactured by the appellant (such as the boiler in CKD condition) and other components, such as the bought-out items. When these are assembled and erected together at the buyer’s site, the process results in a steam-generating plant that is permanently affixed to the earth and hence becomes an immovable property, added the Court.
Since the boiler is not distinct from the immovable steam-generating plant, and does not come into existence as a result of the assembling of the CKD parts and bought-out items, the Court held that the Revenue Department is wrong in suggesting that the mere act of assembling the boiler parts cleared in CKD condition from the appellant’s factory, together with the duty paid bought out items delivered directly at the site of erection, simpliciter brings into existence excisable goods in the form of a boiler.
A Two-Judge Bench comprising Justice J.B. Pardiwala and Justice Sandeep Mehta observed that the ‘transaction value’ under Section 4 of the Excise Act, 1944, merely serves as the basis for computing the quantum of excise duty payable, but cannot determine excisability. Essentially, valuation is a consequence of levy, not its determinant.
The Bench referred to the decision in the case of Union of India and Others vs. Bombay Tyre International Ltd. [(1984) 1 SCC 467], where it was emphasised that the duty of excise is chargeable with reference to the value of the excisable goods, but the measure employed for assessing a tax must not be confused with the nature of the tax itself.
The Bench explained that the ‘transaction value’ becomes relevant only after the taxable event, i.e. manufacture of excisable goods, is first established. The measure of tax cannot be invoked to prove that what has been produced is excisable. The revenue has erroneously relied upon the ‘transaction value’ derived from the ‘contract price’ to argue that the excise duty on the boiler has to be computed based on the contract price.
Briefly, the appellant, a manufacturer of boilers, contracted with one Shri Maroli Vibhag Khand Udyog Sahakari Mandali Ltd. (the buyer), for designing, procuring, manufacturing and supplying machinery for a 50 TPH MCR Capacity and 45 Kg/cm2(g) working pressure bagasse-fired boiler, so that a steam generating plant could be commissioned. Later, the Assistant Commissioner alleged that the appellant had cleared the final product boilers in a completely knocked down condition (CKD) by paying central excise duty without adding the cost of ‘essential’ bought-out ‘parts’ delivered directly at the site of the buyer. This has resulted in undervaluation of the excisable item and a resultant shortfall to the tune of Rs. 2.24 lacs in the quantum of central excise duty payable by the appellant.
The appellant opposed the demand, contending that there was no evidence on record to establish that the boiler was first assembled at the site before it was permanently installed as an ‘immovable property’. Rather, the mere size and weight of the boiler make it impossible to assemble the boiler before erection. The appellant also stated that such an installed boiler cannot be readily dismantled by removing nuts and bolts and reassembled at another site, and the same may cause extensive damage to the boiler to such an extent that its value may be reduced to a mere scrap. Based on such reasoning, the appellant stated that since the boiler erected at the site and attached to the earth is not ‘goods’, the same would not be excisable. The reasoning was accepted, and the demands were dropped.
The CESTAT, however, held that the value of the essential bought-out items received at the buyer’s site and used in the erection of the boiler is to be included in the assessable value of the boiler for the purpose of determining the payable central excise duty.
Appearances:
Senior Advocate Prakash Shah, AOR Rahul Gupta, along with Advocates Jas Sanghavi, Linzy Sharan, Jasdeep Singh Dhillon, Prabhat Chaurasia, and Anirudh Jamwal, for the Appellant/ Taxpayer
ASG Raghavendra P Shankar, AOR Gurmeet Singh Makker, along with Advocates Pallavi Mishra, Pallav Mongia, Padmesh Mishra, and Raman Yadav, for the Respondent/ Revenue
