S.S. Engineer Vs Commissioner of Central Excise (CESTAT Mumbai)
Brief facts of the case are that the Appellant M/s S.S. Engineers are engaged in the sale of own manufactured goods and also engaged in trading of bought out items which are used in erection, installation and commissioning of Sugar Plant and other goods falling under chapter 84 of the First schedule to the Central Excise Tariff Act, 1985. The Appellant during the activity of installation of setting up of Sugar Plants are clearing to site their own manufactured goods on payment of duty and also using bought out goods. In case of erection by other persons they are supplying goods to the site. They were issued show cause notices for the period July, 2000 to September, 2007 contending that they are manufacturing Sugar Machinery falling under chapter 84 and cleared the same on payment of duty and carry out the activities of installations at site as per the contract entered into with the customers. For completion of activities they procure/ purchase components liked electric motor, gears, gear boxes, pumps, valve etc. from other manufacturers or dealers. As the goods are cleared as per composite contract between assessee and buyer, the value of the goods include costs right from the drawing & designing of the goods to its installation and commissioning and also the costs of its essential spare parts i.e bought out parts. The Appellant have not determined the correct and proper value of the goods/ essential spare parts (bought out items) as required under section 4 of the Central Excise Act, 1944 and thus there has been an undervaluation of goods supplied to the customer for completion of projects at site. The Appellant have failed to pay central excise duty on the clearance of essential spare parts (bought out items) of the goods and have not included the value of bought out goods in the invoices for the purpose of payment of excise duty. They have contravened the provisions of Section 4 of the Central Excise Act, 1944 and Rule 4 of Central Excise Rules, 2002. Further that during the installation of sugar plant and its commissioning the Appellant procured parts/components/ equipments required for manufacture/ assembly of excisable goods viz. Mill House, Cane Unloader, Cane leveller, Cane feeding device, Cane- rake- Bagassee Carrier including Secondary rake Carriers, Juice Sulphiter, Juice Heaters, Evaporators, Vacum pans, Vacum filters, Sugar Elevators, condensers , Grass Hoppers, Feeder Table. The Appellant has manufactured the said excisable goods and installed in the sugar plant. The said goods are moveable and can be dismantled, removed, transported and installed at any other sugar factory. The said goods although assembled at site and attached by foundation to the earth, these goods can be dismantled without substantial damages to their components and can be reassembled and thus movable. The show cause notice cited the instances in cases where some of the goods of other sugar factories were dismantled and were transported to Appellant’s customer for erection, installation and commissioning. It was alleged that the Appellants are manufacturers of said goods and carried out the manufacturing activity in their customer’s premises. It was alleged that the goods were manufactured at site and were excisable goods on which duty is required to be paid. Further that since no duty is paid on the said Sugar Plant therefore the Appellant is not eligible for captive consumption under Notification No. 67/95 – CE dt. 16.03.95. Accordingly the Sales value appearing in Balance Sheet reduced by the value shown in ER- Returns was alleged to be value of Bought out items or the goods alleged to have been manufactured on site and duty was demanded on said value. That the facts were not intimated to the department and it came to the knowledge of the department only at the time of audit. The Appellant has suppressed the facts and therefore they are liable for penalty u/s 1 1AC of the Act/ Rule 25 of the Central Excise Rules, 2002.
2. The Appellant filed reply to the said show cause notices submitting that the demand on bought out items is erroneous. They submitted that it does nowhere appears from the Show Cause Notices as to whether the duty is being demanded on the price at which they have sold the bought out items to their customers or on the component parts supplied by them on payment of excise duty at the site of the customer or on the sugar mill plant, which they got erected and commissioned at the customer’s site through sub-contractors by assembling the bought out components as well as the components manufactured by them after including the selling price of the bought out items in the selling price of the sugar mill plant. They submitted that in case of clearance of goods from their factory, they paid central excise duty on the same which is not disputed and in case of bought out items used in the erection and commissioning of the sugar mill plant the manufacturer of the goods has already paid duty. Such goods were not brought to their factory but were directly cleared at site of the customer without availing credit. It was also submitted that the impugned items alleged to have been manufactured on site are not belonging to any transportable articles but are the commercial names of various sections of sugar mill plant. They are of huge dimension in width and height and these items are installed and erected at the site piece-by-piece. They are not movable and marketable and are sections of entire sugar plant. These are the sections of the entire sugar plant. Unless these units are permanently attached to the earth, they cannot function. These are essential parts of the entire unit, which is attached to the earth and thus do not fall under the category of goods. The Appellant also relied upon the Board circular No. 58/ 1/2002-CX dated 15.1.2002 that if the goods are in capable of being sold, shifted and marketed without first being dismantled into components / parts, the goods would be considered as immovable and, therefore, not excisable. They also relied upon various decisions of the Honble Supreme Court to this effect. They also submitted that if it is assumed that they are manufacturers of the said equipments which are excisable, they are not liable to pay any excise duty on the said equipments as in terms of Notification No. 67/95-CE dated 16.3.1995 as the goods manufactured and used within the factory of production are eligible for exemption under said Notification No. 67/95-CE dated 16.3.1995. That, as the various equipments alleged to have been manufactured by them at the factory site of the sugar mill plant remained at the factory site and used in the manufacture of dutiable excisable goods, therefore, exemption under Notification No. 67/95-CE is available to the said equipments. They also submitted that the demand is hit by limitation of time, hence not sustainable.
3. The adjudicating authority vide order-in-original dated 27.12.2016 confirmed the demand and imposed penalties as proposed in the show-cause notices. He held that the issue to be decided is whether the value of bought out items which are essential items for the functionability of the goods contracted by the buyer from the Appellant is to be included in the transaction value or not. That the Appellant in engaged in the manufacture and supply of sugar machinery carries out the activities at site of their customers as per the contract entered with their customers. For completion of the order as per the contract, some of the components are manufactured themselves and some are bought out. The adjudicating authority relied upon the contract dt. 26.08.2005 of 80 TPH Boiler entered by the Appellant with Shri Dhyaneshwar SSK. He held that as per the scope of supply the seller shall design, procure, manufacture and supply of boiler. Contract price is inclusive of cost of all other items which are necessary for completing the supply of the Machinary & equipment as per scope of supply. The scope of supply as per the agreement states that the design, manufacture, procurement and supply of equipment for boiler of 80 TPH capacity shall be in conformity with the specifications which will enable the machinery & equipment ready for commissioning & commercial production. The agreement clearly states that the Appellant will design, manufacture and supply Boiler 80 TPH. The contract price is for design, procurement, manufacture, supply and do the checking of erection, commissioning of Boiler 80 TPH capacity at site. The scope of supply is entire Boiler of 80 TPH. The Appellant manufactures some of the parts of boilers in their own premises. A boiler is made up of many critical components each of which is required to make the boiler fully functional. The technical specification of the boiler is as per Annexure-I to the agreement. The other critical items required to make the boiler functional are as per Annexure – II to the agreement and these critical items which are part of the boiler are purchased by the Appellant from other manufacturers/ vendors. The Appellant places separate purchase orders on different vendors/ manufacturers for supply of these critical components. The critical components are required by the Appellant to complete the manufacturing of boiler as per the purchase agreement. The Appellant enters into agreement with the sugar factory (their customer) to design, procure, manufacture, supply and do the checking of erection and commissioning of Boiler of 80 TPH. The Boiler is a complete system made up of many parts and components. Some of these are manufactured by the Appellant and some are procured or got manufactured from other vendors. When all these put together, the Appellant completes the supply of boiler as per the agreement. The Appellant though under contract to supply the Boiler System does not manufacture/ assemble the entries system at their manufacturing premises. They only manufacture some components at their premises. The remaining critical bought out parts are directly delivered to the customer’s place. It is here that the Appellant actually puts together all the components and complete the manufacturing of Boiler. Thus the completion of manufacturing of the boiler takes place on the site i.e location of the customer. Without the critical components the boiler system will be incomplete and non – functional and the Appellant will not be able to fulfill the supply as per the agreement. Thus the value of bought out items supplied directly at site and then used by the Appellant to complete the manufacturing process and deliver the boiler as per agreement is liable to be included in the assessable value of the boiler. The adjudicating authority has placed reliance upon the judgments in case of Commissioner Vs. Thermax Bobcock & Wilcox Ltd. 2005 (182) ELT 336, Walchandnagar Ind. Ltd. Vs. CCE. Pune – III 2014 (311) ELT 274, CCE, Delhi Vs. Frick India Ltd 2007 (216) ELT 497 (SC), CCE, Aurangabad Vs. Lipi Boiler Ind. Ltd. 2011 (263) ELT 271 (Tri, Mum). Aggrieved by the impugned order, the present appeal has been filed.
4. Shri Prakash Shah, Ld. Counsel appearing for the Appellant submits that during investigation the Department had physically inspected the two sugar factories and they had also submitted photographs of the various machinery on which duty is being sought. He submits that the impugned order accepts that the bought out items were not used in their factory for manufacture of the goods nor such goods were received in their factory. No evidence is on record to show that which of the bought out goods are required to make the machinery manufactured by the Appellant functional. The demand has been made on the ground that the bought out goods are required for manufacture of Boiler without which the system will be incomplete and non-functional. The contract of 80 TPH Boiler relied upon by the Department nowhere shows that they are liable to pay duty on the contract price. They have only supplied the bought-out items which were already duty paid as well as their own manufactured goods on which duty was paid at the time of clearance. They were not engaged in erection or installation of the Boiler and the said activity was undertaken by separate persons. The contract did not include erection of Boiler but only for supply of goods to be used in such boilers which was part of a power plant in a sugar factory. The various bought out items were directly installed piece-by- piece on several foundations or structures at specific places in the huge power plant system. The price received by them is for scope of supply of goods, as laid-down in the technical specifications. The adjudicating authority has erred in holding that the bought out items are critical items for completing the manufacture of the Boiler. That all the capital items become functional only after installation and commissioning of the plant at customer’s site and thus become immovable property. The impugned order has erred in holding that the contract price is transaction value, as termed u/s 4 of the Central Excise Act, is applicable only for the goods manufactured and cleared from the factory and certainly not applicable to the impugned goods. The judgments relied upon by the adjudicating authority are in context with the fact when the boiler and other machineries were cleared is in knocked-down conditions (KDC). That since in this case, they only supplied their own manufactured goods and bought out items which were used by some other contractors to erect the Boiler, they being not manufacturer, no duty can be demanded from them. It is impossible that the 80 TPH Boiler can be taken to the market in the form in which it emerged at the site of the customer. The bought out goods were directly sent to the site and were used at the site by separate erection contractors appointed by the customer. He has also produced the copies of the contracts involved in the present appeals and has also taken us through the photographs of various erections/installations made by them viz. Turbine System – Part of Power Plant at M/s Dnyaneshwar SSK – Ahmednagar, Boiler System – Part of Power Plant at M/s Dnyaneshwar SSK – Ahmednagar, Turbine System, Boiler System – Part of Power Plant – Babanrao Shinde Ltd. – Solapur, Process Section – Rajaram Bapu SSK – Sangli, Milling Section – Jawahar SSK Ltd. – Kolhapur, Complete Sugar factory – Bajaj Hindustan Ltd., Uttar Pradesh. He submits that in any case the Boiler and other systems have come into existence as immovable property at the site of the customer and as apparent from the photographs it is not possible to shift the same as it is but only after dismantling the whole structure. Further that the goods manufactured by the Appellant and bought out goods alongwith other goods were put together at site and has admittedly came into existence as immovable property. The 80TPH Boiler is a complete system made of any parts and components. It is evident that the Appellant did not clear the same in knocked down or Semi Knocked down condition. The bought out goods and the goods cleared by them were even not sufficient to erect the boiler. No duty can be demanded on goods which become immovable property on erection as held in case of Triveni Engineering 2000 (120) ELT 273 (SC). That the adjudicating authority in Para 13.14 has held that the Appellant completed manufacturing of the boilers on site by putting together bought out and manufactured goods and thus new product came into existence known as boiler. That in absence of process of putting them together no new product with distinct commercial name, identity and usage prior to its assimilation and structure. There is no material to show that the Appellant carried out any process of manufacture on bought out and manufactured goods. The bought out goods and the goods cleared by the Appellant were not even enough to complete the boiler system as chimney and other civil works were not part of Appellant’s work. He further submits that the whole demand was confirmed merely on the basis of one instance of Boiler agreement applying to all the projects by treating that all the agreements are having same base. He submits that the show cause notice and the adjudication order failed to appreciate that Appellant entered into contracts with the buyers for sugar machinery factory. He also relies upon the earlier order in Appellant’s own case as reported in 2008 (221) ELT 54 wherein it was held that the activity undertaken by the Appellants does not result into excisable goods. He submits that alternatively they are also entitled for the exemption under Notification No. 67/95 – CE as held in the said judgment. He also submits that in the year 2008 the Commissioner himself is of the view that no show cause notice should be issued as demand is not sustainable and hence after the period of the impugned show cause notice i.e. after 2008, no further show cause notices was issued to them. He also submits that the demand is time barred and no penalty is imposable as the revenue was in knowledge of all the facts.
5. Shri Hitesh Shah, Ld. Commissioner (A.R.) appearing for the revenue reiterates the findings of the adjudication order. He submits that the value of bought out goods is includible in the assessable value of the goods and duty is recoverable from the Appellant. He submits that the contracts were of supply and supervision of Erection and Commissioning and in some cases the erection and commissioning were also undertaken by the Appellant. He has also produced the list of contracts and activities undertaken under such contracts. He relies upon the Tribunal’s order cited in the impugned order. He also relies upon orders in case of Jabil Circuit India Pvt. Ltd.- 2014 (307) ELT 891 (Tri-Mumbai), Lipi Boilers Industries Limited-2011 (263) ELT 271 (Tri-Mum), Electronics & Controls Power System Pvt. Ltd.- 2010 (257) ELT 578 (Tri-Bang), Solid & Correct Engineering Works-2010 (252) ELT 481 (SC), Cheran Spinners Ltd. – 2008 (231) ELT 315 (Tri-Chennai), Elson Machines Pvt. Ltd.- 1988 (38) ELT 571 (SC), Plasmac Machine Mfg. Co. Pvt. Ltd.,- 1991 (51) ELT 161 (SC), Sirpur Paper Mills Ltd.- 1998 (97) ELT 3(SC), Telekrit Electricials (Nagpur P. Ltd.- 2001 (134) ELT 765 (Tri) Mumbai.
6. We have carefully considered the submissions made by both the sides and perused the records. We find that some of the show cause notices were issued on the ground that the value of bought out items supplied by the Appellant is includible in the value of the contract price and duty was demanded on said contract/ agreement value after deducting the value of the Appellant’s own manufactured goods as appearing in ER-1 Returns. In another set of show cause notices it was alleged that the Appellant have produced the excisable goods during installation of plants and the same were installed in sugar plants and therefore liable for duty on goods viz. Mill House, Cane Unloader, Cane leveller, Cane feeding device, Cane- rake- Bagassee Carrier including Secondary rake Carriers, Juice Sulphiter, Juice Heaters, Evaporators, Vacum pans, Vacum filters, Sugar Elevators, condensers , Grass Hoppers, Feeder Table etc. However in such show cause notices also the duty was demanded on the Total Sales value reduced by the value shown in ER – 1 Returns filed by the Appellant. We are unable to comprehend as to what is the basis of such demands. The show cause does not specify as to what are the bought out goods and how they have been considered as critical goods and what is the basis of arriving at assessable value. Even in case of show cause notices wherein it was alleged that the goods manufactured on location were excisable, it is not forthcoming from the show cause notice as to how the duty computation was made on whole contract price. Notably many of the contracts entered into by the Appellant in this appeal are only for supply of goods and supervision of erection and commissioning and thus stands of different footing from the agreements where the Appellant themselves undertook the erection activity.
7. We find that the adjudicating authority has ultimately confirmed the demand against Appellant on whole agreement/ contract price by discussing and relying upon one of the Contract of Boiler of 80 TPH. The demand has been made considering the contract price as value of goods. We find from the agreement that the said agreement is for supply of goods for the 80 TPH Boiler and supervision of erection and commissioning. The Appellant themselves did not carry out erection or commissioning of the said Boiler but after supply of goods only supervised the erection. In such case no duty can be demanded from the Appellant as they are only supplier of goods. It is not the allegation of the department that the Appellant’s own manufactured goods and the bought out goods when put together would result into emergence of new product i.e Boiler. The Appellant do not clear the Boiler in Complete knocked down Condition or Semi Knocked Condition. The Appellant’s own manufactured goods, at the time of clearance from the factory, have identity of individual components or equipments which has not been disputed by the revenue. Though the adjudicating authority held that the bought out items are critical components of the Boiler but we find that even not a single bought out component has been named as critical component which shows that the allegation has no basis. Simply by alleging that the value of bought out goods are liable to be included in the assessable value, duty cannot be demanded. Even though the show cause notice mainly alleged that the bought out items are liable for duty but in the impugned order the demand has been made on whole contract price which shows that the demand has no basis. Nevertheless we find that the 80 TPH Boiler on the basis of which demand has been confirmed against the Appellant is a huge structure which was erected at site and is permanently attached to earth. It was erected piece by piece and not by merely putting some goods together viz. the Appellant’s own manufactured goods alongwith bought out components. We have gone through all the contracts/ agreements entered into by the Appellant during the impugned years as well as photographs of some of the contracts placed in the appeal. We find that all the contract were for either erection and set up of sections of the Sugar factory or the Sugar factory itself. All these Section are part of Power plant system of Sugar factory i.e Boiler or turbine system or the factory itself which are in huge set up of machinery and equipment embeded permanently to earth. None of these sections can be removed as such or in Knocked down condition or semi knocked down condition. It has to be dismantled and to be broken up into pieces if it is to be shifted which will lead to losing its identity of any goods. The impugned order has relied upon some instances where some goods were brought from other sugar factory and were used in installation at Appellant’s factory. We find that these goods were brought to Appellant unit by dismantling the system of old sugar plants. However the adjudicating authority failed to appreciate that after dismantling into prices the identity of the goods did not remain as of goods which was recognizable in old sugar factory. It turned into individual components or goods since they were not in the form of knocked down condition. We are thus of the view that by means of any imagination the agreements under which the goods were supplied by the Appellant or in case where the Appellant themselves erected the plants or their sections cannot be held to be any contract for manufacture of excisable goods. We are unable to comprehend that huge boilers erected on site piece by piece with the Appellant’s manufactured goods and bought out goods which become immovable property are excisable goods. It cannot be removed in knocked down condition or semi knocked down condition. It has to broken up into pieces which would not even recognizable as boiler. What has come into existence at site are huge boiler systems which were part of power systems or whole sugar manufacturing sections or plants. Undoubtedly the whole property which came into existence are immovable property. Without dismantling these systems they cannot be shifted. Thus there is no reason to demand duty on the contracts undertaken by the Appellant. Further as far as demand of duty under the guise of bought out goods is concerned we find that when the bought out goods are not being part of any excisable goods at the time of their clearances in that case no duty can be demanded. In case of M/s Intech Surface Coating Pvt. Ltd. Vs. CCE, Pune – III, this bench on the issue of inclusion of bought out items in the assessable value has held as under :
“We have gone through the rival submissions. We find that it is not in dispute that the Revenue is seeking to include the cost of bought out items supplied directly to site for the purpose of charging Central Excise duty. It is not in dispute that no manufacturing activity in respect of such items has been done by the appellant. The liability to Central Excise duty arises only when there is a manufacturing activity undertaken and in the absence of manufacturing activity the liability of Central Excise does not arise. On a similar issue in the case of Acer India Ltd. (supra) observed as follows:
55. It must be borne in mind that central excise duty cannot be equated with sales tax. They have different connotations and apply in different situations. Central excise duty is chargeable on the excisable goods and not on the goods which are not excisable. Thus, a goods which is not excisable if transplanted into a goods which is excisable would not together make the same excisable goods so as to make the assessee liable to pay excise duty on the combined value of both. Excise duty, in other words, would be leviable only on the goods which answer the definition of excisable goods and satisfy the requirement of Section 3. A machinery provision contained in Section 4 and that too the explanation contained therein by way of definition of transaction value can neither override the charging provision nor by reason thereof a goodswhich is not excisable would become an excisable one only because one is fitted into the other, unless the context otherwise requires.
4.1. Tribunal in the case of Emerson Network Power India P. Ltd. (supra) in a similar circumstance observed as follows:
“4. The entire duty demand on bought-out items pertains to installation of air-conditioning machines at site. From the perusal of the list of bought-out items such as floor grills, piping, cabling etc., it would be seen that they are not parts of air-conditioning machines manufactured and cleared, but items required purely at site. Therefore, the appellants are right in contending that the cost of bought-out items cannot be included in the assessable value.”
Relying on the aforesaid decisions the appeal is allowed.
8. Drawing parallels from the above order we find that there is no reason to demand duty on the bought out goods as the Appellant has not manufactured any goods which are recognizable as excisable goods. Further we find that the same controversy arose in the earlier period and the matter travelled upto the Tribunal. The findings of the Tribunal as recorded in case of S.S. Engineers Vs. CCE, Pune – III 2008 (221) ELT 54 (TRI) are as under :
3. It is the case of the department that the disputed items were not supplied by the appellants as a whole at the site of the sugar factories but assembled out of the various parts and components supplied by the sugar factories, as seen from the chart herein below :-
