CESTAT Chandigarh Quashes Excise Duty Demand on Bought-Out Items

Oil Lube Systems Vs Commissioner of Central Excise (CESTAT Chandigarh)

Introduction: This article covers the recent CESTAT Chandigarh order in the case of Oil Lube Systems Vs. Commissioner of Central Excise. The appeal involves the inclusion of the value of bought-out items in the assessable value of service equipment systems. The CESTAT quashes the excise duty demand due to lack of proof that the bought-out items are essential for the functioning of the supplied goods.

Analysis: The appellants, Oil Lube Systems, were alleged to have violated excise duty rules by not including the value of certain bought-out items in the assessable value of goods cleared by them. A show-cause notice was issued, demanding duty, cess, interest, and penalties. The Original Authority confirmed the demand, which was later reduced on appeal.

The appellant’s argument was that the bought-out items, like compressors and battery chargers, had independent functioning and were not required to be supplied along with the excisable goods. The appellant supplied the goods along with bought-out items upon customer request, but the Department included the value of only four out of 103 bought-out items in the assessable value. The Department relied on statements from experts in the field, but the statements confirmed that the items had independent functions and were supplied together for customer convenience.

The CESTAT found no cogent evidence proving that the bought-out items were integral to the equipment manufactured by the appellants. The Department failed to demonstrate that the bought-out items were essential for the functioning of the supplied goods. The CESTAT quashed the excise duty demand, partially allowing the appeal.

Conclusion: The CESTAT Chandigarh order partially allows the appeal filed by Oil Lube Systems, quashing the excise duty demand on bought-out items. The Department could not prove that the bought-out items were integral to the equipment manufactured, leading to the successful challenge by the appellant.

FULL TEXT OF THE CESTAT CHANDIGARH ORDER

The appellants, M/s Oil Lube Systems, are engaged in manufacture of excisable goods; officers of Anti Evasion Wing visited the premises of the appellants on 13.04.2009 and observed that there are some violations including that the appellants are not including the value of certain bought out items in the assessible value of the goods cleared by them; the appellants deposited Rs.20 Lakhs during the investigation. A show-cause notice dated 01.04.2010 was issued demanding duty of Rs.40,36,615/- along with the applicable Cess, interest and penalties. The Original Authority confirmed the demand and imposed equal penalty; on an appeal filed, Commissioner (Appeals), vide Order dated 29.03.2012, the impugned order, reduced the duty after allowing cum-duty benefit and confirmed duty demand of Rs.35,29,617/-; the appellants accepted the duty demand of Rs.23,50,637/- and paid the same along with interest and 25% of the penalty and have disputed the issue relating to the inclusion of the value of the bought out items in the assessable value. Hence, this appeal.

2. Shri N.K. Sharma, learned Counsel appearing on behalf of the appellants submits that the Appellate Authority has confirmed the view of the Original Authority that the bought out items are essential for completing the manufacture of the items cleared by the appellants that is service equipment system; however, the contention that the bought out items form part of the equipment manufactured by the appellants is wrong; the bought-out items have independent functioning; they were not required to be supplied along with the excisable goods; only for the ease of business, customers requested them to supply the bought out items also. He further submits that Central Excise duty is on the manufacture of goods and not on bought out items which are traded; whereas the appellant is procuring and selling more than 100 bought out items, the Department picked up only four items for the purpose of inclusion in the assessable value; the fact that the items have independent function has been confirmed by the statement, of an expert Shri Neeraj Maheswari, AGM, dated 11.08.2009 and the statement of Shri Deepak Joshi, Service Executive of M/s Honda Siel Car India Limited dated 17.08.2009; in view of the statements, it is incorrect to conclude that the service equipment system is incomplete without the said bought out items is wrong; the appellant supplies the manufactured goods along with bought out items purchased from the market; the appellant does not subject the bought out items to any manufacturing process; the activity does not amount to manufacture in terms of Section 2(f) of Central Excise Act, 1944. He relies upon the following cases:

• BREW FORCE MACHINES PVT. LTD. -2016 (333) E.L.T. 468 (Tri. – Del.)
• CC VS VOLTAS LTD.- 2006 (196) E.L.T. 358 (Tri. – Mumbai)
• AIR CONTROL & ENGG. CO. LTD- 2005 (181) E.L.T. 242 (Tri. – Mumbai)
• INTELLICON PVT. LTD.- 2014-TIOL-1231-CESTAT-AHM
• KORES (INDIA) LTD.- 2014-TIOL-167-CESTAT-MUM.
• SUR IRON & STEEL CO. (P) LTD.- 2018 (363) E.L.T. 373 (Tri. – Kolkata)
• THERMAX LTD.- 2009 (235) E.L.T. 737 (Tri. – Mumbai)
• KERALA STATE ELECTRONIC DEV. CORPN.- 2008 (224) E.L.T. 88 (Tri. – Bang.)
• XI TELECOM LIMITED- 1999 (105) E.L.T. 263 (A.P.)

3. Shri Rajeev Gupta assisted by Shri Aneesh Dewan, learned Authorized Representatives for the Department reiterates the findings of OIO and OIA and submits that the appellants purchased parts like pneumatic tools, sockets accessories, valves, smokeless system, general tools, special tools, goti sets etc; the bought out items were supplied along with manufactured items on one sale invoice because by adding all the parts and equipment, a complete service equipment would come into existence; though there were 103 bought out items, only 4 namely compressor, battery charger, vice bench and hydro meter were considered essential for items supplied; he relies on Electronics and Control Power Systems- 2010 (257) ELT 578 (Tri. Bang.) as affirmed by the Hon’ble Apex Court- 2011 (270) ELT A127 (SC). Learned Authorized Representative submits that the appellant’s claim on invocation of extended period is incorrect as it is a case of clandestine removal and suppression of value rather than interpretation of statute.

4. Heard both sides and perused the records of the case. Brief issue that requires our consideration is as to whether the value of the bought-out items like compressor, battery chargers, vice bench and hydro meter, is includable in the assessable value of the service equipment system manufactured and cleared by the appellant. It is the contention of the appellants that they are manufacturing service lift, service panel, tool trolley and fabricated structures etc. that are used by two-wheeler service stations; the appellant’s claim that as per the request of the customers, they are purchasing the bought-out items and supplying the same along with bought out items. Whereas, they are purchasing and supplying 103 bought out items, the Department proposes to include the value of 4 items as cited above. The Department relies on the statements of experts in the field, however, the said experts were categorical in stating that the equipment sold by the appellants function independently and do not depend on the other tools supplied along with the same. In spite of such categorical statement, the Department proceeded to include the value of 4 bought-out items.

5. We find that Shri B.N. Pandey, Proprietor of the appellant, in his statement dated 10.08.2009, stated that the bought-out items have their own independent function but due to demand of their customers, they had to supply the same; the service station can buy these items directly from the open market; in order to lessen their own burden, the customers have placed the order on the appellants to supply the same. We find that neither the show-cause notice nor the impugned order brings forth anything to contradict the statement. We find that the impugned order, other than alleging that the appellants have manufactured systems of the service stations, did not go to verify the actual product manufactured; no Panchnama has been drawn to show whether the bought-out items are fitted with the items manufactured by the appellants and cleared; the classification of the excisable goods manufactured by the appellants is also not mentioned. In the absence of this cogent evidence, it cannot be established that the equipment manufactured by the appellant is incomplete and cannot work independently without the bought-out items in question. In fact, Shri Neeraj Maheshwari, Assistant Manager, Customer Service, Escorts Limited, stated that in his statement dated 11.08.2009 that in order to maintain their service quality, they have authorized the appellants to supply the equipment and tools as per the practice with other suppliers also. We find that nothing is coming forth from the statement of Shri Maheshwari to prove that the tools are accessories supplied by the appellants, as bought-out items, are essential for the functioning of the excisable goods supplied by them. The show-cause notice or the impugned order do not make it clear as to why only 4 out of 103 bought-out items were considered for inclusion in the assessable value of the systems said to have been manufactured by the appellant; the only reason cited was that the systems as well as the bought-out items were cleared under the same invoice; it is not clear as to how, in such circumstances, other items, than the 4 discussed above, are not considered for inclusion. Therefore, we find that no evidence has been brought out to prove that the parts supplied as bought-out items by the appellants are integral parts of the equipment manufactured by them.

6. We find that the Department seeks to rely on the decision in the case of Electronics and Control Power Systems (supra); however, we find that the said case is with respect to the inclusion of value of batteries with the UPSS; the Tribunal held that the battery was integral part of the UPSS and therefore, the value thereof was includable even if supply of such battery was optional. In the instant case, the Department could not prove conclusively that the bought-out items in dispute are integral part of the equipment manufactured; Department did not even prove that the same are fitted into the system, manufactured by the appellants, at least by the use of screwdriver technology. From the statements, of the experts in the field, recorded by the Department, it is clear that the said items are sold together for ease of convenience of the customers rather than the necessity of the functioning of articles manufactured. Therefore, we are of the considered opinion that the appellant’s arguments is strong and the demand of Rs.11,78,980/- disputed by the appellants requires to be set aside.

7. In the result, the impugned order is modified to the extent of limiting the duty confirmed to Rs.23,50,637/- which stands paid by the appellant along with interest and 25% of the penalty. Hence, the appeal is partly allowed in the above terms.

(Pronounced in the open Court on 01/08/2023)