Bought-Out Items at Customer Site Not Liable to Excise Duty: CESTAT Mumbai

Thermax contested the demands on the ground that excise duty could be imposed only on goods manufactured and removed from its factory, and that components independently procured and delivered directly to customers’ sites could not automatically be included in the factory assessable value. It argued that the boilers and other equipment cleared from its manufacturing premises had to be assessed in the condition in which they were removed. Subsequent erection and commissioning activities undertaken at customers’ premises did not constitute manufacture of additional excisable movable goods. The appellant also submitted that equipment assembled and permanently installed at customers’ sites became immovable property, outside the scope of central excise levy. It relied on several judicial precedents concerning manufacture, valuation, bought-out items and immovable property, including decisions involving Triveni Engineering, Siemens, S.S. Engineers and other industrial equipment manufacturers. Thermax further questioned the territorial jurisdiction of the Pune excise authorities to assess alleged manufacture occurring at customers’ sites. The Department maintained that the contracts imposed an integrated responsibility on Thermax for designing, manufacturing, supplying and commissioning the equipment, and that the vendor-supplied components formed an essential part of the complete contractual supply. According to the Revenue, the value recovered from customers in respect of those components represented part of the transaction value of the equipment.

The Tribunal examined the statutory framework governing excise valuation, the distinction between goods manufactured at the factory and equipment assembled at the customer’s site, and the legal consequences of installation resulting in immovable property. It considered the relevance of earlier proceedings involving Thermax, including the effect of the Supreme Court’s order concerning directions for recovery of duty on bought-out items. The Tribunal also examined decisions addressing the inclusion of site-supplied components in assessable value and the circumstances in which erection and installation activities result in immovable property rather than independently excisable goods. The Tribunal found that the impugned demands could not be sustained on jurisdictional grounds as well as on merits. Its analysis distinguished the value of manufactured goods cleared from the factory from components separately brought to the installation site and considered whether the Department had established a legally sustainable basis for subjecting the latter to excise duty as part of the former. Having found the impugned orders unsustainable, the Tribunal did not consider it necessary to adjudicate the remaining alternative grounds advanced by the appellant.

Accordingly, CESTAT Mumbai set aside the impugned adjudication orders and allowed all four appeals filed by Thermax Ltd. The Tribunal concluded that the orders confirming central excise duty demands on the disputed bought-out items could not be sustained in law. The decision emphasises the importance of determining the place and nature of manufacture, the condition of goods at removal, the character of equipment erected at customers’ premises and the statutory basis for including separately procured components in the assessable value. The Tribunal pronounced its final order on 12 December 2022, granting relief to the appellant against the challenged duty demands and associated consequences under the impugned orders.

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Mumbai, in Thermax Ltd. Vs Commissioner of CGST & CE, Pune-I, examined four appeals arising from central excise duty demands concerning the inclusion of bought-out items and components in the assessable value of boilers and pollution control equipment supplied under turnkey contracts. The appeals, bearing Excise Appeal Nos. 85478/2016, 86356/2016, 85593/2017 and 89005/2018, arose from separate adjudication orders passed by the Central Excise authorities at Pune. Thermax Ltd., engaged in manufacturing boilers, thermo-fluid heaters, hot-water generators, economisers, superheaters and other industrial equipment, supplied manufactured goods from its factory, including in completely knocked-down (CKD) condition, for subsequent erection, installation and commissioning at customers’ premises. Under the contracts, certain essential components and accessories were procured from independent vendors and delivered directly to customers’ sites. The Department alleged that these bought-out items were integral to the functioning of the completed equipment and that their value should therefore have been included in the transaction value of the boilers and pollution control equipment under Section 4 of the Central Excise Act, 1944, read with Rule 6 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000. The controversy covered different periods extending from July 2000 to March 2017 and involved substantial demands of central excise duty, interest and penalties.

The dispute originated from the Department’s examination of the contracts executed by Thermax for designing, manufacturing, supplying, erecting and commissioning industrial boilers and pollution control equipment. According to the Revenue, the contractual obligations undertaken by the appellant extended beyond the supply of goods manufactured at its factory and included delivery of fully functional equipment at customers’ sites. The Department maintained that the bought-out components supplied by third-party manufacturers were indispensable to the erection and commissioning of the equipment and formed part of the overall consideration recovered from customers. In the principal adjudication order dated 30 November 2015, the Commissioner held that bought-out items valued at ₹6,924.78 crore were includible in the assessable value of boilers supplied during July 2000 to March 2015. The Commissioner confirmed duty demands of ₹88,84,72,174 for July 2000 to March 2004 and ₹781,92,73,542 for April 2004 to September 2015, besides ordering recovery of interest and imposing penalties. The Commissioner separately excluded erection and commissioning charges from assessable value and dropped duty demands aggregating to ₹7,49,22,418 on that account. In another adjudication concerning pollution control equipment, the Commissioner confirmed duty of ₹73,30,78,952 on bought-out items valued at ₹6,03,29,74,305 for October 2006 to September 2012. Additional demands of ₹61,27,05,237 and ₹46,28,15,422 were confirmed under the subsequent orders concerning boilers. Thermax challenged these adjudication orders before CESTAT Mumbai.

Before the Tribunal, Thermax argued that central excise duty could be levied only on goods manufactured and removed from the factory, and that components independently purchased from vendors and delivered directly to customers’ sites could not automatically form part of the assessable value of the goods originally cleared. The appellant submitted that the boilers manufactured at its premises were cleared in an unassembled or CKD condition and that their valuation had to be determined with reference to their condition at the time and place of removal. It maintained that subsequent erection, installation and commissioning activities at customers’ premises were distinct from the manufacturing activities carried out at the factory. According to Thermax, the complete boilers and other equipment erected at customers’ sites became immovable property and consequently did not satisfy the requirements of excisable goods. The appellant relied upon judicial decisions including Reliance Textile Industries Ltd., Triveni Engineering & Industries Ltd., S.S. Engineers, Thermal Systems Pvt. Ltd., Cheema Boilers Ltd. and Siemens Ltd., among other authorities, to support its submissions concerning manufacture, valuation, bought-out items and immovable property. Thermax also argued that even if erection and commissioning at customers’ sites were treated as manufacture, the resulting activity could not be assessed by the Pune excise authorities where the alleged manufacture occurred outside their territorial jurisdiction. The appellant further submitted that the bought-out items were not necessarily essential to the functioning of the boilers and that the Department had failed to establish the contrary through sufficient evidence.

Thermax also contested the Department’s reliance on earlier proceedings involving the company itself. The Revenue referred to an earlier CESTAT order reported at 2005 (182) ELT 336, concerning the inclusion of bought-out items received at customers’ sites in the assessable value of boilers. The appellant maintained that the effect of the subsequent Supreme Court order reported at 2015 (320) ELT 32 had to be properly considered and that the earlier Tribunal directions concerning recovery of duty on bought-out items could not be relied upon without examining the scope of the original show cause notices and the Supreme Court’s directions. Thermax submitted that the Revenue could not travel beyond the allegations and demands contained in the notices. Without prejudice to its principal arguments, the appellant claimed that if the goods assembled at customers’ premises were regarded as excisable, the applicable exemption under Notification No. 67/95-CE should be considered. It also raised alternative claims concerning the availability of CENVAT credit on duty-paid bought-out items, the benefit of cum-duty valuation, the absence of suppression of facts justifying invocation of the extended limitation period and the unsustainability of penalties. These submissions were advanced as alternative grounds and did not amount

Cases Discussed

• Reliance Textile Industries Ltd., 1993 (63) ELT 67 (Bombay High Court) — Excise valuation based on the goods in their condition at factory clearance.
• Triveni Engineering & Industries Ltd., 2000 (120) ELT 273 (Supreme Court) — Excisability and the distinction between movable goods and immovable property.
• Thermax Ltd., 2005 (182) ELT 336 (CESTAT), subsequently considered by the Supreme Court in 2015 (320) ELT 32 — Earlier proceedings concerning bought-out components.
• Siemens Ltd., 2002 (150) ELT 422 (CESTAT), affirmed at 2003 (158) ELT A74 (Supreme Court) — Valuation of equipment and bought-out components.
• Cheema Boilers Ltd. Vs CCE, 2018 (362) ELT 268 (CESTAT) — Bought-out items and excise valuation.
• S.S. Engineers, 2019-TIOL-1124-CESTAT-MUM — Treatment of equipment assembled at customers’ sites.
• Thermal Systems Pvt. Ltd., 2019 (3) TMI 787 (CESTAT Hyderabad) — Excise treatment of site-assembled equipment.
• Bharat Heavy Electricals Ltd., 2018 (10) GSTL 3 (Supreme Court) — Judicial authority considered in the Tribunal’s analysis.