Full Judgment Text
2025 INSC 1297
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NOS. 856-857 OF 2011
LIPI BOILERS LTD. …APPELLANT(S)
VERSUS
THE COMMISSIONER OF CENTRAL
EXCISE, AURANGABAD …RESPONDENT(S)
J U D G M E N T
Signature Not Verified
Digitally signed by
VISHAL ANAND
Date: 2025.11.10
16:31:25 IST
Reason:
J.B. PARDIWALA, J.
For the convenience of exposition, this judgment is divided into the following parts:
INDEX
A. FACTUAL MATRIX ........................................................................................ 3
B. THE IMPUGNED ORDER ............................................................................. 7
C. SUBMISSIONS ON BEHALF OF THE PARTIES ....................................... 9
(I). Submissions on behalf of the appellant/assessee ..................................... 9
(II). Submissions on behalf of the respondent/revenue ................................ 13
D. ISSUES TO BE DETERMINED ................................................................... 15
E. ANALYSIS ...................................................................................................... 16
(I). Whether the value of the duty paid bought out items delivered directly
at the buyer’s site is liable to be included in the value of the boiler cleared by
the assessee from its factory in completely knocked down (CKD) condition,
for the assessment of central excise duty? ....................................................... 16
(i). Understanding the nature of Central Excise Duty, in light of the charging
provision and valuation of quantum provision under the Central Excise Act,
1944:................................................................................................................ 16
(ii). Whether the resultant final product of the contract would fall within the
ambit of “Excisable Goods”? ......................................................................... 30
(iii). Erroneous reliance on Tariff Classification .................................................. 48
(iv). Inapplicability of the “Utility Test” and the ‘part’ v. ‘accessory’ debate ...... 49
(v). Excess collection of excise duty from buyer is no proof of excisability ....... 49
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(II). Whether the show cause notice is legal and valid under the extended
limitation period as provided under the proviso to Section 11A(1) of the
Central Excise Act, 1944? .................................................................................. 52
(i). Was there any wilful suppression of facts with an intention to evade payment
of duty by the appellant/assessee?.................................................................. 52
F. CONCLUSION ............................................................................................... 57
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1. Since the issues raised in both the captioned appeals are the same, the challenge
in both the appeals are also to the self same order passed by the Customs, Excise
and Service Tax Appellate Tribunal, West Zonal Bench, Mumbai (hereinafter,
“ the CESTAT ”) and the parties are also the same, those were taken up for
hearing analogously and are being disposed of by this common judgment and
order.
2. These statutory appeals under Section 35L(1)(b) of the Central Excise Act,
1944 (hereinafter, “ the Act, 1944 ”), are at the instance of an assessee and are
directed against the common final order dated 23.09.2010 (hereinafter, “ the
impugned order ”) passed by the CESTAT in Appeal No. E/1377/07-Mum and
Cross Objection No. E/CO/13/08, respectively by which the CESTAT reversed
the concurrent findings of the two lower authorities, allowed the appeal filed
by the revenue/respondent herein and dismissed the cross objections filed by
the assessee/appellant herein. The CESTAT in the impugned order held that the
value of the bought out items received directly at the buyer’s site and used in
the erection of the boiler are essential parts of the boiler and therefore, the value
of such bought out items has to be included in the assessable value of the boiler
for the purpose of assessing the payable central excise duty. Accordingly, the
demand of duty along with interest was upheld by the CESTAT in the impugned
order.
A. FACTUAL MATRIX
3. The appellant/assessee/Lipi Boilers Ltd. is a holder of Central Excise
Registration for manufacture of boiler and boiler parts falling under Chapter
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Civil Appeal Nos. 856-857 of 2011
Heading nos. 8402.10 and 8402.90 of the Central Excise Tariff Act, 1985
(hereinafter, " the Act, 1985 ”), respectively.
4. The assessee entered into an agreement with one Shri Maroli Vibhag Khand
Udyog Sahakari Mandali Ltd. (hereinafter, “ the buyer ”), on 29.01.2001, for
designing, procuring, manufacturing and supplying machinery and equipments
2
for one ‘no. 50 TPH MCR Capacity and 45 Kg/cm (g) working pressure
bagasse fired boiler’ so that a steam generating plant could be commissioned
by 31.10.2001 (hereinafter, “ the contract ”).
5. On 28.04.2005, the Assistant Commissioner of Central Excise and Customs,
Aurangabad, (hereinafter, “ the Assistant Commissioner ”) issued a show-
cause-cum-demand notice (Sr. No. 4/2005/CEX/dated 2005) (hereinafter, “ the
show cause notice ”) to the assessee, alleging that the assessee cleared the final
product boilers in completely knocked down condition (hereinafter, “ CKD
condition ”) during the period from 01.04.2000 to 30.06.2000 by paying central
excise duty without adding or taking into account the cost of ‘essential’ bought
out ‘parts’ delivered directly at the site of the buyer. According to the show
cause notice, the non-inclusion of the cost of ‘essential’ bought out ‘parts’ worth
₹14,02,344/- (Rupees Fourteen Lakhs Two Thousand Three Hundred and
Forty-Four only) in the value of the final product boiler resulted in
undervaluation of the excisable item and a resultant shortfall to the tune of
₹2,24,375/-(Rupees Two Lakhs Twenty Four Thousand Three Hundred and
Seventy-Five only) in the quantum of central excise duty payable by the
assessee. The show cause notice stated that as per the amended Section 4(1) of
the Act, 1944, (w.e.f. 01.07.2000), the excise duty was payable with reference
to the transaction value of the goods sold to an unrelated buyer and the price
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charged has to be the sole consideration for sale. According to the show cause
notice, since the transaction value as per the contract included the cost of the
‘essential’ bought out ‘parts’ that were delivered directly at the site of the buyer,
the central excise duty payable by the assessee should take those into account.
6. The show cause notice invoked the extended period of limitation of 5 years
provided under the proviso to Section 11A(1) of the Act, 1944, on the ground
that the assessee had not paid central excise duty on the bought out items and
had wilfully suppressed the facts from the knowledge of the respondent
department with an intention to evade duty. The show cause notice sought a
response from the assessee within a period of 30 days from its receipt, failing
which, the central excise duty amounting to ₹2,24,375/- (Rupees Two Lakhs
Twenty Four Thousand Three Hundred and Seventy-Five only) was to be
recovered from it under the erstwhile Section 11A(1) of the Act, 1944, read
with Rule 9(2) of the Central Excise Rules, 1944, along with interest under
Section 11AB of the Act, 1944 and penalty under Section 11AC of the Act,
1944 read with Rule 173Q and Rule 57(1)(5) of the Central Excise Rules, 1944
and Rule 13 of CENVAT Credit Rules, 2001, respectively.
7. On 13.06.2005, the assessee replied to the show cause notice referred to above,
denying contravention of any applicable provision and stated that the boilers in
CKD condition were cleared from its factory after duly paying the central
excise duty leviable thereon, whereas the bought out items were cleared by their
respective vendors upon payment of applicable central excise duty and
transported directly to the site of erection. The assessee pointed out 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
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assessee, emphatically stated that the mere size and weight of the boiler make
it impossible to assemble the boiler before erection. The process of erection
itself involves civil and mechanical engineering, utilising concrete, steel
reinforcements, and grouting in a manner that ensures the boiler is in a
functioning condition and in an immovable form upon completion. The
assessee also stated that such an installed boiler cannot be readily dismantled
by removing nuts and bolts and reassembled at another site. 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 assessee stated that since
the boiler erected at the site and attached to the earth is not ‘goods’, the same
would not be excisable. The assessee also stated that it had not availed any
CENVAT credit on the bought out items and that there was no documentary
evidence on record to substantiate such allegation.
8. Upon due consideration of the reply of the assessee, the Assistant
Commissioner vide Order-in-Original dated 07.12.2005, accepted that the
demand of central excise duty on the value of the bought out items was not
sustainable. The Assistant Commissioner dropped the demands made in the
show cause notice based on the findings which read thus:
“ It is well settled law that value of bought out items cleared at site by
the vendors without bringing the same into the factory premises is
not liable to be included in the assessable value of the finished
product. It is also well settled law that the boilers erected at site and
attached to earth are not ‘goods’ and hence not excisable. I find that
the ratio of the judgments in the case of Mittal Engineering Pvt Works
Vs C.C.E. Meerut 1996 (88) ELT 622(SC); Tungabhadra Steel
Products Ltd Vs Union of India reported in 1998 (98) ELT 334 (HC
Karnataka); Alpha Laval (I) Ltd Vs C.C.E. Pune reported in 1998
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(99) ELT 649 (Tribunal) etc are quite applicable in this case.
Therefore I am inclined to accept the assessee’s contention that the
demand of duty on the value of bought out items is not sustainable. ”
9. Aggrieved by the Assistant Commissioner’s Order-in-Original dated
07.12.2005, the revenue preferred an appeal before the Commissioner of
Central Excise & Customs (Appeals), Aurangabad, [hereinafter, “ the
Commissioner (Appeals) ”]. Vide Order-in-Appeal dated 13.07.2007 the
Commissioner (Appeals), dismissed the appeal preferred by the revenue and
thereby affirmed the Assistant Commissioner’s order quashing the show cause
notice.
B. THE IMPUGNED ORDER
10. Being dissatisfied with the Order-in-Appeal dated 13.07.2007, referred to
above, the revenue preferred Appeal No. E/1377/07-Mum, whereas the
assessee filed Cross Objection no. E/CO/13/08 before the CESTAT. Vide the
common order dated 23.09.2010, the CESTAT reversed the concurrent findings
of the two lower authorities, allowed the appeal filed by the revenue and
dismissed the cross objection filed by the assessee, thereby holding 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.
11. The CESTAT based its ruling on two counts:
a. First, it found no merit in the contention that the boiler had been
permanently imbedded and is non-excisable, on the ground that such plea
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had not been raised before the lower authorities. Further, the CESTAT was
of the opinion that the immovability argument did not warrant any merit
because the boiler was manufactured in the factory and it was merely for
ease of transportation that the same had been cleared in CKD condition.
b. Secondly, the CESTAT observed that since the subject bought out items,
supplied directly to the buyer’s site, were essential parts of the boiler, those
were therefore to be included in the assessable value of the boiler.
12. The relevant observations made by the CESTAT in the impugned order are
reproduced as follows:-
“3. We find no merits in the contention of the respondent that the
boiler has been permanently imbedded and is non-excisable as this
plea was not taken before the lower authorities. Further the
respondents are paying duty at the time of clearance of boiler from
the factory, meaning thereby the boiler is manufactured in the factory
and only ease of transportation, the same has been cleared in CKD
condition. In these circumstances, we find no merits in this
contention.
4. From the facts of the present case the respondent received an order
for supply of boiler. The respondent manufactured boiler in the
factory and cleared in CKD condition but certain parts were
purchased from the market, which were directly supplied at site.
These parts are essential parts of the boiler, which are not in dispute,
therefore, the decision of the Tribunal in the case of Thermax
Babcock & Wilcox Ltd., (supra) held that the value of bought out
items received at site and used in the erection of boiler includable in
the assessable value of the boiler. The respondent relies upon the
decision of the Tribunal in the case of Silson India Pvt Ltd., (supra).
We find the facts of the case are different from the facts of present
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case. In the case of Silson India Pvt Ltd., (supra) there was no
evidence on record to show that full boiler has come into existence in
the factory of manufactured and the manufacturer cleared only parts
of the boiler. In the present case the respondents are clearing the
boiler in CKD condition. Therefore, the respondents are
manufacturing boiler and clearing the same and as boilers bought
out items are essential parts, therefore, they are includable in the
assessable value of the boiler. The impugned order is set aside and
the appeal filed by the revenue is allowed. Cross objection filed by
the respondent is also disposed of accordingly.”
13. Thus observing, the CESTAT set aside the order of the Commissioner
(Appeals), allowed the appeal by the revenue and dismissed the cross-objection
filed by the assessee.
14. Being aggrieved by the impugned order, the assessee is here before us with two
appeals under Section 35L(1)(b) of the Act, 1944.
C. SUBMISSIONS ON BEHALF OF THE PARTIES
(I). Submissions on behalf of the appellant/assessee
15. Mr. Prakash Shah, the learned Senior Counsel appearing on behalf of the
assessee, submitted that the contract was for designing, procuring,
manufacturing and supplying of machinery and equipment for a steam
generating plant and to do other works mentioned therein such as painting, first
filling of lubricant, transformer oil, packing and forwarding charges, and
handling and loading charges at the place of supply.
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16. The learned Senior Counsel submitted that owing to the huge size of the boiler,
it had to be cleared from the assessee’s factory in CKD condition to the site of
the buyer. He submitted that the assessee had no contractual obligation to erect
or install the goods supplied by it. As per the contract, the erection, installation
and commissioning of the steam generating plant was to be undertaken by the
buyer’s engineer.
17. The learned Senior Counsel submitted that the assessee had manufactured some
of the equipments/machineries of the steam generating plant at its factory and
cleared those in CKD condition upon payment of appropriate central excise
duty. He further submitted that the assessee had purchased some items such as
feed water pumps, fans, safety valves, level gauges, etc., from the open market,
and supplied those duty-paid bought out items directly to the buyer, without
bringing those into the assessee’s factory. He submitted that the assessee merely
supplied those bought out items and did not undertake any processing of those
either at the site of erection or elsewhere.
18. On the aspect of whether the bought out items were essential parts of the boiler
or not, the learned Senior Counsel argued that even at the site of erection, the
bought out items did not form part of the boiler, but were fitted onto other
machinery/equipments at the site. He argued that such other
machinery/equipment on which the bought out parts are fitted onto, are not
classifiable under Heading no. 84.02 as boiler but classifiable under Heading
no. 84.04 as auxiliary plant for use with boilers, under the Act, 1985. Thus,
according to the learned Senior Counsel, these bought out items are neither
parts nor accessories of the boiler and hence could not have been included in
the assessable value of the boilers. He went on to argue that the CESTAT failed
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to appreciate that there was no material on record to arrive at the finding that
the bought out items were essential parts of the boiler, or that their function,
value and description were provided to justify their essentiality. He submitted
that the finding of the CESTAT, that the bought out items were essential parts
of the final product manufactured by the assessee, was not supported by any
evidence or material on record. He argued that, rather, the CESTAT’s findings
that the entire boiler was manufactured in the assessee’s factory and cleared in
CKD condition merely for ease of transportation, is self-contradictory to its
own finding that the bought out items, delivered directly to the buyer’s site were
essential parts of the boiler.
19. He also submitted that the assessee had not claimed any CENVAT Credit of the
central excise duty paid on bought out goods. He placed reliance on Rule 3 of
the CENVAT Credit Rules, 2004 to submit that CENVAT credit can be taken
only after inputs are received in the factory of the manufacturers and
highlighted that the bought out items were never brought into the factory of the
assessee or worked upon even elsewhere by the assessee.
20. He submitted that the final product i.e. the boiler came into existence at the site
of the buyer as an immovable property and hence is not ‘goods’ and therefore,
not excisable.
21. He argued that the revenue is seeking to recover tax on sale of goods in the
guise of excise duty. He argued that the learned A.S.G.’s contention that Section
4 of the Central Excise Act, 1944 permits inclusion of the value of bought out
goods in the assessable value of the goods manufactured by the Appellant is
contrary to the law declared by this Court in Commissioner of Central Excise,
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Pondicherry v. Acer India Ltd. reported in 2004(8) SCC173 and
Commissioner of Central Excise, Lucknow, U.P. v. Chhata Sugar Co. Ltd.
reported in 2004(3) SCC 466 , whereby this Court had held that Section 4 of the
Act, 1944 is a machinery provision and subject to Section 3 of the Act, 1944
which is a charging section. He submitted that it is trite law that levy of duty of
excise is on the manufacture or production and not on sale of goods.
22. The learned Senior Counsel vehemently contended that the CESTAT erred in
holding that the assessee had not raised the contention regarding the boiler
being non-excisable on account of its permanent embedding on erection at site,
before the lower authorities. He submitted that the CESTAT had failed to
appreciate that the assessee, in its reply dated 13.06.2005 to the show cause
notice dated 28.04.2005, had specifically raised the contention that the boiler
on commissioning became immovable property. Further, the said contention
was accepted by the Assistant Commissioner and the same is reflected in the
form of findings recorded in the Order-in-Original dated
07.12.2005/13.01.2006, wherein the Assistant Commissioner held that the
boilers erected at site and attached to earth are not goods and hence not
excisable.
23. The learned Senior Counsel argued that the CESTAT’s reliance on the order of
the CESTAT in Commissioner of C. Ex. v. Thermax Babcock & Wilcox Ltd.
reported in 2005 (182) ELT 336 (Tri.- Mumbai) (hereinafter referred to as
“ Thermax CESTAT ” ) is erroneous because in case of Thermax CESTAT
( supra ) , when the order was challenged before this Court in M/s. Thermax
Babcock & Wilcox Ltd. v. Commnr. of Central Excise, Pune in Civil Appeal
No(s). 3042-3043/2005 (hereinafter referred to as “ Thermax SC” ), the learned
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counsel for the Commissioner of Central Excise, Pune had pointed out that,
while computing the demands which were raised in the show cause notice, no
excise duty was demanded on the bought out items in that matter.
24. Lastly, he contended that the CESTAT committed a serious error in law in not
remanding the proceedings to the two lower authorities to examine the question
of whether the show cause notice was time barred. He highlighted that since
the Assistant Commissioner and the Commissioner (Appeals) had dropped the
demand on merits, the CESTAT did not find it necessary to address itself on the
show cause notice being time barred.
(II). Submissions on behalf of the respondent/revenue
25. Mr. Raghavendra P Shankar, the learned A.S.G. appearing on behalf of the
revenue, on the other hand submitted that in the present case, the taxable event
of ‘manufacture’ occurred when the parts brought from the appellant’s factory
in CKD condition and the bought out ‘parts’ were assembled at the buyer’s site
to form the functional boiler, in discharge of its obligation as per Clause 2.1 of
the contract. He submitted that even assuming without conceding that the boiler
ceased to be ‘goods’ once it was affixed to the earth, the dutiable event
(‘manufacture’ of the boiler) had already occurred at a point in time prior to its
affixation to the earth and thus excise duty was payable on it.
26. He argued that the taxable event of ‘manufacture’ under Section 3 of the Act,
1944, having occurred in the present case at the buyer’s site which is the ‘place
of removal’, what remains thereafter is only determination of the correct
valuation of the payable excise duty on the said taxable event.
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27. He submitted that as per the amended Section 4(1) of the Act, 1944 (w.e.f.
01.07.2000), the central excise duty is payable with reference to the transaction
value of the goods sold to a buyer, where price charged is the sole consideration
for the sale. He submitted that as per the said amended Section 4(1) read with
Section 4(3)(d) of the Act,1944, the “transaction value” means the price
actually paid or payable for the goods, when sold, which in the present dispute,
would be the total contract price. He pointed out that as per Clause 3.1(iii) of
the contract, the total contract price was inclusive, inter alia , of the “ cost of all
other items which are necessary for completing supply of the steam generating
plant as per scope of supply ”. He submitted that the assessee was clearing goods
as per the contract value agreed with the buyer, which included the cost right
from drawing and designing of the goods to freight, installation and
commissioning of the boilers at the site and also cost of its essential bought out
parts. He therefore argued that since the transaction under the contract was
completed after successful commissioning of the boiler, the value of the bought
out items would form part of the transaction value as per Section 4(1)(a) of the
Act,1944.
28. He also argued that the cost of the bought out items was recovered by the
assessee from the buyer and that the assessee had availed CENVAT Credit of
duty by including the duty paid on the bought out items under the head
‘Reimbursement of duty’ and had recovered the same from the buyer.
29. He further argued that the CESTAT was correct in holding that the bought out
items are essential parts of the boiler that was manufactured. The learned A.S.G
placed reliance on the distinction drawn by this Court in M/s. Quippo Energy
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Ltd. v. Commissioner of Central Excise, Ahmedabad-II reported in 2025
INSC 1130 , between a ‘part’ and an ‘accessory’, and the observation that a part
is an integral/constituent component which renders the article complete and
functional, i.e. the article would not be able to fulfill its primary function
without this component. On the basis of this, he argued that the bought out
items were ‘parts’ of the boiler and not merely its accessories, and that from a
functional perspective, the bought out items cannot be said to be external to the
transaction under the contract for supply of a functional boiler. He argued that
any artificial vivisection of the transaction (and therefore the transaction value)
under the contract to exclude the value of the ‘bought out’ parts that were
nevertheless essential parts of the boiler is alien to the contract and also to the
Act,1944.
30. In the context of Thermax CESTAT (supra), the learned A.S.G. argued that the
law laid down by the CESTAT in Thermax CESTAT (supra) had not been
interfered with by this Court in appeal in Thermax SC (supra) , but was
dismissed based on the observation that there was, “ no need to go into the issue
raised by the appellant in this appeal as the decision of this appeal, either ways
would not affect the appellant if the duty itself is not demanded thereupon ”,
without raising any doubts regarding the correctness of the CESTAT’s order.
31. In such circumstances referred to above, the learned A.S.G. prayed that there
being no merit in the appeals, those be dismissed.
D. ISSUES TO BE DETERMINED
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32. Having heard the learned counsel appearing for the parties and having gone
through the materials on record, the following questions fall for our
consideration:
(I). Whether the value of the duty paid bought out items delivered directly at
the buyer’s site is liable to be included in the value of the boiler cleared
by the assessee from its factory in completely knocked down (CKD)
condition, for the assessment of central excise duty?
(II). Whether the show cause notice is legal and valid under the extended
limitation period as provided under the proviso to Section 11A(1) of the
Central Excise Act, 1944?
E. ANALYSIS
(I). Whether the value of the duty paid bought out items delivered directly at
the buyer’s site is liable to be included in the value of the boiler cleared by
the assessee from its factory in completely knocked down (CKD) condition,
for the assessment of central excise duty?
(i). Understanding the nature of Central Excise Duty, in light of the charging
provision and valuation of quantum provision under the Central Excise Act,
1944:
33. The present matter before us strikes at the very root of the concept of exigibility
of central excise duty. Hence, at the outset, it is necessary to recall certain
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foundational principles governing the levy of central excise duty under the Act,
1944.
34. It is pertinent to note that central excise duty is a duty on manufacture of goods.
A Three-judge Bench of this Court in Union of India and Others v. Bombay
Tyre International Ltd. and Others reported in ( 1984) 1 SCC 467 , while
discussing the concept of a duty of excise highlighted upon the nature of the
tax and observed as follows:
“12. We think it is appropriate that at the very beginning we
should briefly indicate the concept of a duty of excise[…]. The
observations show that while the nature of an excise is indicated
by the fact that it is imposed in respect of the manufacture or
production of an article, the point at which it is collected is not
determined by the point of time when its manufacture is completed
but will rest on considerations of administrative convenience, and
that generally it is collected when the article leaves the factory for
the first time. In other words, the circumstance that the article
becomes the object of assessment when it is sold by the
manufacturer does not detract from its true nature, that it is a levy
on fact of manufacture. In a subsequent case, Governor-General-
in-Council v. Province of Madras (AIR 1945 FC 98) the Privy
Council referred to both Central Provinces and Berar Sales of
Motor Spirit and Lubricants Taxation Act, 1938 and Province of
Madras v. Boddu Paidanna and Sons and affirmed that when
excise was levied on a manufacturer at the point of the first sale
by him “that may be because the taxation authority imposing a
duty of excise finds it convenient to impose the duty at the moment
when the excisable article leaves the factory or workshop for the
first time on the occasion of its sale. But that method of collecting
the tax is an accident of administration; it is not of the essence of
the duty of excise, which is attracted by the manufacture itself […]
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13. We think that we have shown sufficiently that while levy is on
the manufacture or production of goods, the stage of collection
need not in point of time synchronize with the completion of the
manufacturing process. While the levy in our country has the
status of a constitutional concept, the point of collection is
location where the statute declares it will be […]”
(Emphasis supplied)
35. Another aspect discussed by this Court in Bombay Tyre (supra) which is of
utmost relevance to the matter before us is understanding the nature of Section
3 and Section 4 of the Act, 1944 respectively. Hence, before delving into the
explanation regarding the nature of the two provisions as highlighted by this
Court in Bombay Tyre (supra) , it is pertinent to reproduce the provisions as it
existed at the time of the taxable event in contention, i.e. assembling of the
boiler parts in CKD condition with the bought out items at the site of erection.
36. Section 3 of the Act, 1944, that was in force at the time of the taxable event in
contention, read as follows:
“ SECTION 3. Duties specified in First Schedule and the Second
Schedule to the Central Excise Tariff Act, 1985 to be levied.-
(1) There shall be levied and collected in such manner as may be
prescribed,-
(a) a duty of excise to be called the Central Value Added Tax
(CENVAT) on all excisable goods which are produced or
manufactured in India as, and at the rates, set forth in the First
Schedule to the Central Excise Tariff Act, 1985 (5 of 1986);
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(b) a special duty of excise, in addition to the duty of excise specified
in clause (a) above, on excisable goods specified in the Second
Schedule to the Central Excise Tariff Act, 1985 (5 of 1986) which are
produced or manufactured in India, as, and at the rates, set forth in
the said Second Schedule.
Provided that the duties of excise which shall be levied and collected
on any excisable goods which are produced or manufactured,
(i) in a free trade zone or a special economic zone and brought to any
other place in India; or
(ii) by a hundred per cent export-oriented undertaking and brought
to any other place in India,
shall be an amount equal to the aggregate of the duties of customs
which would be leviable under the Customs Act, 1962 (52 of 1962)
or any other law for the time being in force, on like goods produced
or manufactured outside India if imported into India, and where the
said duties of customs are chargeable by reference to their value; the
value of such excisable goods shall, notwithstanding anything
contained in any other provision of this Act, be determined in
accordance with the provisions of the Customs Act, 1962 (52 of 1962)
and the Customs Tariff Act, 1975 (51 of 1975).
Explanation 1. - Where in respect of any such like goods, any duty of
customs leviable for the time being in force is leviable at different
rates, then, such duty shall, for the purposes of this proviso, be
deemed to be leviable at the highest of those rates.
Explanation 2. - In this proviso,-
(i) "free trade zone" means the Kandla Free Trade Zone and the
Santa Cruz Electronics Export Processing Zone and includes any
other free trade zone which the Central Government may, by
notification in the Official Gazette, specify in this behalf;
(ii) "hundred per cent export-oriented undertaking" means an
undertaking which has been approved as a hundred per cent export-
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oriented undertaking by the Board appointed in this behalf by the
Central Government in exercise of the powers conferred by section
14 of the Industries (Development and Regulation) Act, 1951 (65 of
1951), and the rules made under that Act.;
(iii) "special economic zone" means a zone which the Central
Government may, by notification in the Official Gazette, specify in
this behalf.
(1A) The provisions of sub-section (1) shall apply in respect of all
excisable goods other than salt which are produced or manufactured
in India by, or on behalf of, Government, as they apply in respect of
goods which are not produced or manufactured by Government.
(2) The Central Government may, by notification in the Official
Gazette, fix, for the purpose of levying the said duties, tariff values of
any articles enumerated, either specifically or under general
headings, in the First Schedule and the Second Schedule] to the
Central Excise Tariff Act, 1985 (5 of 1986) as chargeable with duty
ad valorem and may alter any tariff values for the time being in force.
(3) Different tariff values may be fixed –
(a) for different classes or descriptions of the same excisable goods;
or
(b) for excisable goods of the same class or description-
(i) produced or manufactured by different classes of producers or
manufacturers; or
(ii) sold to different classes of buyers:
Provided that in fixing different tariff values in respect of excisable
goods falling under sub-clause (i) or sub-clause (ii), regard shall be
had to the sale prices charged by the different classes of producers
or manufacturers or, as the case may be, the normal practice of the
wholesale trade in such goods.”
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37. Section 4 of the Act, 1944, (as amended w.e.f. 01.07.2000) that was in force at
the time of the taxable event in contention, read as follows:
“ SECTION 4. Valuation of excisable goods for purposes of
charging of duty of excise .-
(1) Where under this Act, the duty of excise is chargeable on any
excisable goods with reference to their value, then, on each removal
of the goods, such value shall -
(a) in a case where the goods are sold by the assessee, for delivery at
the time and place of the removal, the assessee and the buyer of the
goods are not related and the price is the sole consideration for the
sale, be the transaction value;
(b) in any other case, including the case where the goods are not sold,
be the value determined in such manner as may be prescribed.
(2) The provisions of this section shall not apply in respect of any
excisable goods for which a tariff value has been fixed under sub-
section (2) of section 3.
(3) For the purpose of this section,-
(a) "assessee" means the person who is liable to pay the duty of excise
under this Act and includes his agent;
(b) persons shall be deemed to be "related" if –
(i) they are inter-connected undertakings;
(ii) they are relatives;
(iii) amongst them the buyer is a relative and a distributor of the
assessee, or a sub-distributor of such distributor; or
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(iv) they are so associated that they have interest, directly or
indirectly, in the business of each other.
Explanation. - In this clause-
(i) "inter-connected undertakings" shall have the meaning assigned
to it in clause (g) of section 2 of the Monopolies and Restrictive Trade
Practices Act, 1969 (64 of 1969); and
(ii) "relative" shall have the meaning assigned to it in clause (41) of
section 2 of the Companies Act, 1956 (1 of 1956);
(c) "place of removal" means
(i) a factory or any other place or premises of production or
manufacture of the excisable goods;
(ii) a warehouse or any other place or premises wherein the excisable
goods have been permitted to be deposited without payment of duty,
from where such goods are removed;
(d) "transaction value" means the price actually paid or payable for
the goods, when sold, and includes in addition to the amount charged
as price, any amount that the buyer is liable to pay to, or on behalf
of, the assessee, by reason of, or in connection with the sale, whether
payable at the time of the sale or at any other time, including, but not
limited to, any amount charged for, or to make provision for,
advertising or publicity, marketing and selling organization
expenses, storage, outward handling, servicing, warranty,
commission or any other matter; but does not include the amount of
duty of excise, sales tax and other taxes, if any, actually paid or
actually payable on such goods.”
38. Since the observations of this Court in Bombay Tyre (supra) which are central
to our discussion are with reference to Section 4 of the Act, 1944 which was in
force prior to the amendment of 01.07.2000, and the revenue’s argument
focuses on the amendment, the erstwhile Section 4 of the Act, 1944 which
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existed at the time of Bombay Tyre (supra) is being reproduced here for the
sake of clarity, and it read as follows:
“ SECTION 4. Valuation of excisable goods for purposes of
charging of duty of excise. –
(1) Where under this Act, the duty of excise is chargeable on any
excisable goods with reference to value, such value, shall, subject to
the other provisions of this section, be deemed to be -
(a) the normal price thereof, that is to say, the price at which such
goods are ordinarily sold by the assessee to a buyer in the course of
wholesale trade for delivery at the time and place of removal, where
the buyer is not a related person and the price is the sole
consideration for the sale:
Provided that
(i) where, in accordance with the normal practice of the wholesale
trade in such goods, such goods are sold by the assessee at different
prices to different classes of buyers (not being related persons) each
such price shall, subject to the existence of the other circumstances
specified in clause (a), be deemed to be the normal price of such
goods in relation to each such class of buyers;
(ia) where the price at which such goods are ordinarily sold by the
assessee is different for different places of removal, each such price
shall, subject to the existence of other circumstances specified in
clause (a), be deemed to be the normal price of such goods in relation
to each such place of removal;
(ii) where such goods are sold by the assessee in the course of
wholesale trade for delivery at the time and place of removal at a
price fixed under any law for the time being in force or at a price,
being the maximum, fixed under any such law, then, notwithstanding
anything contained in clause (iii) of this proviso, the price or the
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maximum price, as the case may be, so fixed, shall, in relation to the
goods so sold, be deemed to be the normal price thereof;
(iii) where the assessee so arranges that the goods are generally not
sold by him in the course of wholesale trade except to or through a
related person, the normal price of the goods sold by the assessee to
or through such related person shall be deemed to be the price at
which they are ordinarily sold by the related person in the course of
wholesale trade at the time of removal, to dealers (not being related
persons) or where such goods are not sold to such dealers, to dealers
(being related persons), who sell such goods in retail;
(b) where the normal price of such goods is not ascertainable for the
reason, that such goods are not sold or for any other reason, the
nearest ascertainable equivalent thereof determined in such manner
as may be prescribed.
(2) Where, in relation to any excisable goods the price thereof for
delivery at the place of removal is not known and the value thereof is
determined with reference to the price for delivery at a place other
than the place of removal, the cost of transportation from the place
of removal to the place of delivery shall be excluded from such price.
(3) The provisions of this section shall not apply in respect of any
excisable goods for which a tariff value has been fixed under sub-
section (2) of section 3.
(4) For the purposes of this section,
(a) "assessee" means the person who is liable to pay the duty of excise
under this Act and includes his agent;
(b) "place of removal" means
(i) a factory or any other place or premises of production or
manufacture of the excisable goods; [ ] *
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(ii) a warehouse or any other place or premises wherein the excisable
goods have been permitted to be deposited without payment of duty;
(iii) a depot, premises of a consignment agent or any other place or
premises from where the excisable goods are to be sold after their
clearance from the factory and,
from where such goods are removed;
(ba) "time of removal", in respect of goods removed from the place
of removal referred to in sub-clause (iii) of clause (b), shall be
deemed to be the time at which such goods are cleared from the
factory;
(c) "related person" means a person who is so associated with the
assessee that they have interest, directly or indirectly, in the business
of each other and includes a holding company, a subsidiary company,
a relative and a distributor of the assessee, and any sub-distributor
of such distributor.
Explanation. - In this clause "holding company", "subsidiary
company" and "relative" have the same meanings as in the
Companies Act, 1956 (1 of 1956);
(d) "value", in relation to any excisable goods, -
(i) where the goods are delivered at the time of removal in a packed
condition, includes the cost of such packing except the cost of the
packing which is of a durable nature and is returnable by the buyer
to the assessee.
Explanation. In this sub-clause, "packing" means the wrapper,
container, bobbin, pirn, spool, reel or warp beam or any other thing
in which or on which the excisable goods are wrapped, contained or
wound;
(ii) does not include the amount of the duty of excise, sales tax and
other taxes, if any, payable on such goods and, subject to such rules
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as may be made, the trade discount (such discount not being
refundable on any account whatsoever) allowed in accordance with
the normal practice of the wholesale trade at the time of removal in
respect of such goods sold or contracted for sale.
Explanation. For the purposes of this sub-clause, the amount of the
duty of excise payable on any excisable goods shall be the sum total
of -
(a) the effective duty of excise payable on such goods under this Act;
and
(b) the aggregate of the effective duties of excise payable under other
Central Acts, if any, providing for the levy of duties of excise on such
goods, and the effective duty of excise on such goods under each Act
referred to in clause ( a) or clause (b) shall be, -
(i) in a case where a notification or order providing for any
exemption (not being an exemption for giving credit with respect to,
or reduction of duty of excise under such Act on such goods equal to,
any duty of excise under such Act, or the additional duty under
section 3 of the Customs Tariff Act, 1975 (51 of 1975), already paid
on the raw material or component parts used in the production or
manufacture of such goods) from the duty of excise under such Act is
for the time being in force, the duty of excise computed with reference
to the rate specified in such Act, in respect of such goods as reduced
so as to give full and complete effect to such exemption, and
(ii) in any other case, the duty of excise computed with reference to
the rate specified in such Act in respect of such goods.
(e) “whole sale trade” means sales to dealers, industrial consumers,
Government, local authorities and other buyers, who or which
purchase their requirements otherwise than in retail.”
39. Having read the erstwhile Section 3 and Section 4 of the Act, 1944,
respectively, we come back to this Court’s observation in Bombay Tyre (supra).
This Court in Bombay Tyre (supra) observed that while Section 3 provides for
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the levy of the duty of excise, Section 4 provides the measure by reference to
which the charge is to be levied. It was categorically emphasised upon, 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 relevant observation of this Court in Bombay Tyre
(supra) , reads as follows:
“14. We move on now to a different dimension, to the conceptual
consideration of the measure of the tax. Section 3 of the Central
Excises and Salt Act provides for the levy of the duty of excise. It
creates the charge, and defines the nature of the charge. That it is a
levy on excisable goods, produced or manufactured in India, is
mentioned in terms in the section itself. Section 4 of the Act provides
the measure by reference to which the charge is to be levied. The duty
of excise is chargeable with reference to the value of the excisable
goods, and the value is defined in express terms by that section. It
has long been recognised that the measure employed for assessing
a tax must not be confused with the nature of the tax… In other
words, the measure adopted could not be identified with the nature
of the tax.”
(Emphasis supplied)
40. This Court in Bombay Tyre (supra) also referred to this Court’s judgment in
D.G. Gouse and Co. v. State of Kerala reported in (1980) 2 SCC 410 which in
turn had referred to a passage from Seervai’s Constitutional Law of India , to
further explain the distinction between the subject of a tax and a measure of a
tax. The relevant observation of this Court in Bombay Tyre (supra) , reads thus:
“14. […]The point was considered by this Court again in D.G. Gouse
and Co. v. State of Kerala [(1980) 2 SCC 410] where reference was
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made to the measure adopted for the purpose of the levy of tax on
buildings under the Kerala Building Tax Act. The Court examined the
different modes available to the Legislature for measuring the levy
with the annual value of the building and prescribing a uniform
formula for determining its capital value and for calculating the tax.
In the course of its judgment, the Court cited with approval a passage
from Seervai’s Constitutional Law of India [Second Edn. Vol.2 at p.
1258]:
“…Another principle for reconciling apparently
conflicting tax entires follows from the fact that a tax has
two elements: the person, thing or activity on which the tax
is imposed, and the amount of the tax. The amount may be
measured in many ways; but decided cases establish a
clear distinction between the subject-matter of a tax and
the standard by which the amount of tax is measured. These
two elements are described as the subject of a tax and the
measure of a tax…”
It is, therefore, clear that the levy of a tax is defined by its nature,
while the measure of the tax may be assessed by its own standard. It
is true that the standard adopted as the measure of the levy may
indicate the nature of the tax but it does not necessarily determine it
[…]”
41. It is clear from the above-quoted observations of this Court in Bombay Tyre
(supra ) that Section 3 of the Act, 1944 specifies the subject-matter on which
the excise duty is to be levied, whereas Section 4 of the Act, 1944 prescribes
the measure of such excise duty. Unfortunately, in the case on hand, the revenue
lost sight of this crucial distinction in the nature of these two statutory
provisions. The revenue erred in its application of the amended Section 4 of the
Act, 1944 (w.e.f. 01.07.2000) by conflating the two distinct stages of excise
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duty assessment, i.e. (i) levy under Section 3 and (ii) computation of the
quantum of levy under Section 4 of the Act, 1944, into one. Although Section
4 was amended (w.e.f. 01.07.2000) to modify the valuation methodology, yet
such amendment did not alter the essential character of the provision and it
continues to remain a provision for prescribing the measure of the tax and not
a charging provision in itself.
42. In other words, 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
on the basis of the contract price. However, for the revenue to contend that the
contract price would become the basis of the ‘transaction value’ for the purpose
of determination of the payable excise duty, it has to first establish that the final
product of the contract itself is excisable.
43. Applying the foundational principles set out hereinabove, it is clear that the
‘transaction value’ under Section 4 of the Act, 1944, merely serves as the basis
for computing the quantum of excise duty payable, but cannot determine
excisability. It must necessarily be borne in mind that valuation is a
consequence of levy, not its determinant. Accordingly, the correct sequence of
central excise duty assessment under the Act, 1944 is as follows:
i. First, determining the applicability of the charging provision under
Section 3, i.e. whether the process results in the manufacture of excisable
goods; and
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ii. Secondly, (if the first condition is satisfied), computing the quantum of
excise duty payable under the valuation provisions, such as Section 4 (or
Section 4A, although Section 4A is not relevant to this present matter
before us).
44. Thus, it is necessary to first examine whether the resultant product that emerges
at the buyer’s site by assembling the parts brought in CKD condition along with
the bought out items, qualifies as an “excisable good” under the Act, 1944. Only
if such product which emerges as a result of the contract qualifies as excisable
goods can the next step of evaluation be undertaken, i.e. to see whether or not
the contract price can be treated as the ‘transaction value’ under Section 4, for
computing the quantum of payable excise duty. Consequently, if upon such
examination it is found that the contract price could validly be taken as the
‘transaction value’ under Section 4, a show cause notice may be issued seeking
why the value of the bought out items should not be added to the value of the
boiler. In other words, if upon examination it is found that the resultant product
of the contract is not excisable goods, then the contract price cannot be
considered as the ‘transaction value’ for the purpose of determining the payable
central excise duty on the boiler, which in turn would also mean that the value
of the bought out goods is not liable to be included in the value of the boiler for
computing central excise duty.
(ii). Whether the resultant final product of the contract would fall within the
ambit of “Excisable Goods”?
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45. The term “ excisable goods ” defined under Section 2(d) of the Act, 1944, as it
existed at the time of the taxable event in question read as follows:
“ SECTION 2. Definitions.- In this Act, unless there is anything
repugnant in the subject or context,-
xxx xxx xxx
(d) “excisable goods” means goods specified in the First Schedule
and the Second Schedule to the Central Excise Tariff Act, 1985 (5 of
1986) as being subject to a duty of excise and includes salt;”
46. The term “goods” has not been defined in the Act, 1944. However, through a
catena of judgments of this Court, it is now a settled position of law that excise
duty is leviable only on ‘goods’ and that the test of movability is the decisive
factor in ascertaining whether an article qualifies as “goods” for the purpose of
central excise duty. A Coordinate Bench of this Court in a judgment in M/s
Bharti Airtel Ltd. v. The Commissioner of Central Excise, Pune reported in
2024 INSC 880 , undertook an extensive examination of the expression “goods”
under the Act, 1944. After a close examination of the meaning of “goods” under
Section 2(7) of the Sale of Goods Act, 1930, Section 2(52) of the Central Goods
and Services Tax Act, 2017, Section 2(d) of the Central Sales Tax Act, 1956,
Section 2(22) of the Customs Act, 1962, Section 2(i) of the Competition Act,
2002, Section 2(13) of the Motor Vehicles Act, 1988, Section 2(f) of the Micro,
Small and Medium Enterprises Development Act, 2006, Section 2(14) of the
Bureau of Indian Standards Act, 2016 and Section 2(21) of the Consumer
Protection Act, 2019, respectively, this Court concluded that the definition of
“goods” under the Sale of Goods Act, 1930 seems to be the basis of the term
“goods” in other Statutes. Therefore, this Court observed that for the meaning
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of the term “goods”, the definition given in the Sale of Goods Act, 1930 would
be primarily relied upon. The relevant observation of this Court in Bharti Airtel
(supra) is as follows:
“11.2.5 “Goods” has not been defined in the Central Excise Act,
1944. We, therefore, look into other statutes. The term “goods” has
been defined under various statutes some of which may be mentioned
as below.
xxx xxx xxx
11.2.6 From the above, it appears that the definition of “goods”
under the Sales of Goods Act, 1930 seems to be the basis of the term
“goods” in other Statutes. Hence, we would primarily rely on the
definition given in the Sale of Goods Act.”
47. This Court in Bharti Airtel (supra) went further to observe that since the items
in consideration before it, were neither actionable claim nor money, nor falling
within the inclusive clause of the definition, viz., stocks, shares, growing crops,
grass, and things attached to or forming part of the land which are agreed to be
severed before sale or under contract of sale, the test of movability would
determine whether those items would be “goods”. However, this Court
observed that in order to determine whether an item is movable or immovable,
the enquiry has to go beyond a simpliciter application of the definitions of the
terms “movable goods” and “immovable goods” under Section 3(36) of the
General Clauses Act, 1897 and Section 3(26) of the General Clauses Act, 1897
read with Section 3 of the Transfer of Properties Act, 1882, respectively. The
relevant observation of this Court in Bharti Airtel (supra) reads as under:
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“11.2.7 The items in consideration viz., towers and prefabricated
buildings are neither actionable claim nor money, nor do they come
within the inclusive clause of the definition, viz., stocks, shares,
growing crops, grass, and things attached to forming part of the land
which are agreed to be severed before sale or under contract of sale.
xxx xxx xxx
11.3 Thus, the focus of our inquiry now will be to ascertain whether
these items namely, towers, its parts thereof and prefabricated
buildings are movable or immovable properties.
11.3.1 As to what is a movable property has been defined and can be
understood from the expansive meaning assigned to it under Section
3(36) of the General Clauses Act, 1897 which states that,“movable
property shall mean property of every description except immovable
property”.
11.3.2 The aforesaid definition categorically indicates that movable
and immovable properties are mutually exclusive. Thus, if it is found
that these items are not immovable properties, these invariably can
be treated as movable properties under Section 3(36) of the General
Clause Act and thus will be “goods” within the meaning of Section
2(7) of the Sale of Goods Act, 1930 and hence may qualify as “capital
goods” within the meaning of Rule 2(a)(A) subject to fulfilling other
conditions mentioned therein.
11.3.3 As to what is immovable property has been explained under
Section 3 of the Transfer of Property Act, 1882 which specifies that
“immovable property does not include standing timber, growing
crops or grass”.
11.3.4 It has been also defined under Section 3(26) of the General
Clauses Act, though not exhaustively, but in an inclusive manner by
providing that “immovable property” shall include “land, benefits to
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arise out of land and things attached to the earth, or permanently
fastened to anything attached to the earth”.
11.3.5 Therefore, we have to consider whether these items are
attached to the earth or are permanently fastened to anything
attached to the earth, for if these are found to be so, these will be
immovable properties and hence cannot be “goods” and
consequently, cannot be “capital goods” within the scope of the
CENVAT Rules.
11.4 As to what amounts to “attached to earth” as mentioned under
Section 3(26) of the General Clauses Act, has been explained under
Section 3 of the Transfer of Property Act, 1882 to mean as rooted in
the earth, as in the case of trees and shrubs; imbedded in the earth,
as in the case of walls or buildings; or attached to what is so
imbedded for the permanent beneficial enjoyment of that to which it
is attached.
11.5 For easy reference, the aforesaid definition clauses of the
Transfer of Property Act, 1882 and the General Clauses Act, 1897 as
may be relevant are reproduced below.
Section 3(36) of the General Clauses Act.
“movable property” shall mean property of every
description, except immovable property;
Section 3(26) of the General Clauses Act.
“immovable property” shall include land, benefits to arise
out of land, and things attached to the earth, or
permanently fastened to anything attached to the earth.
Section 3 of the Transfer of Property Act.
“immovable property” does not include standing timber,
growing crops or grass.
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Under Section 3 of the Transfer of Properties Act,
“attached to the earth” means:
(a) rooted in the earth, as in the case of trees and shrubs;
(b) imbedded in the earth, as in the case of walls or
buildings; or
(c) attached to what is so imbedded for the permanent
beneficial
enjoyment of that to which it is attached.
11.6 From the above, it is now clear that if these items, namely towers
and parts thereof and prefabricated buildings/shelters are considered
to be “goods”, these cannot be immovable properties. Conversely, if
these are not rooted in the earth, nor imbedded in the earth nor
attached to what is so imbedded for the permanent beneficial
enjoyment of that to which it is attached, these cannot be
immovable properties and can qualify to be movable properties and
hence, “goods”.
11.6.1 Since, towers and parts thereof and prefabricated
buildings/shelters apparently appear to be fixed on the earth or
building, these seem to be immovable properties at the first blush.
However, the first appearance may not be decisive to indicate the real
character of these items, whether these are immovable or movable
properties, as demonstrated by the conflicting views of the two High
Courts on this issue. Hence, we need to delve further to arrive at the
correct position in law on this issue.
11.7 In order to determine whether any property is movable or
immovable, this Court, in the light of the statutory provisions has
applied certain principles. It has also been noted that such
determination may be done not based on a single test but after
applying several criteria on the facts of each case.”
(Emphasis supplied)
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48. We should now look into a few landmark judgments to help us understand when
an article would be considered as movable or immovable for the purpose of
levying excise duty under the Act, 1944.
49. This Court in Quality Steel Tubes (P) Ltd. v. Collector of Central Excise, U.P.
reported in (1995) 2 SCC 372 dealt with the question whether the tube mill and
welding head erected and installed by the assessee for manufacture of tubes and
pipes out of duty-paid raw materials amounted to “excisable good” assessable
to duty under the Act, 1944. This Court observed that, the basic test of levying
duty under the Act, 1944 is two fold: One, that any article must be a good and
second, that the same should be marketable or capable of being brought to
market. Goods which are attached to the earth and thus become immovable do
not satisfy the test of being goods within the meaning of the Act, nor can it be
said to be capable of being brought to the market for being bought and sold. It
was held that the subject tube mill or welding head having been erected and
installed in the premises and embedded to earth, ceased to be goods within the
meaning of Section 3 of the Act,1944. This Court categorically observed that
erection and installation of a plant cannot be held to be excisable goods. This
Court’s observation in Quality Steel (supra) reads thus:
“4. Levy and collection of duty is provided by Section 3 of the Act on
all 'excisable goods other than salt which are produced or
manufactured'. The power, therefore, to levy and collect the duty
under the charging Section arises when excisable goods are
produced or manufactured. What is an 'excisable good' is defined by
Sub-section (d) of Section 2 to mean 'goods specified in the Schedule
to the Central Excise Tariff Act, 1985 as being subject to a duty of
excise and includes salt'. The words 'excisable good', therefore, has
a connotation of its own.
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5. In several decisions rendered by this Court commencing from
Union of India and Anr., v. Delhi Cloth and General Mills Co. Ltd.
MANU/SC/0245/1962 : to Indian Cable Co. Ltd. v. Collector of
Central Excise, Calcutta MANU/SC/0012/1995 : 1994ECR20(SC)
the twin test of exigibility of an article to duty under Excise Act are
that it must be a good mentioned either in the Schedule or under Item
68 and must be marketable. In Delhi Cloth Mills (supra) it having
been held that the word 'good' applies to those goods which can be
brought to market for being bought and sold it is implied that it
applies to such goods as are moveable. The requirement of the goods
being brought to the market for being brought and sold has become
known as the test of marketability which has been reiterated by this
Court in Collector of Central Excise v. Ambalal Sarabhai Enterprises
MANU/SC/0012/1990 : The Court has held in Union Carbide India
Ltd. v. Union of India and Ors. MANU/SC/0306/1986 : that even if a
good was capable of being brought to market, it would satisfy the test
of marketability. The basic test, therefore, of levying duty under the
Act is two fold. One, that any article must be a good and second, that
it should be marketable or capable of being brought to market. Goods
which are attached to the earth and thus become Immovable do not
satisfy the test of being goods within the meaning of the Act nor it can
be said to be capable of being brought to the market for being
brought and sold. Therefore, both the tests, as explained by this
Court, were not satisfied in the case of appellant as the tube mill or
welding head having been erected and installed in the premises and
embedded to earth they ceased to be goods within meaning of Section
3 of the Act.
6. Learned Counsel for the revenue urged that even if the goods were
capable of being brought to the market it would attract levy. True,
but erection and installation of a plant cannot be held to be
excisable goods. If such wide meaning is assigned it would result in
bringing in its ambit structures, erections and installations. That
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surely would not be in consonance with accepted meaning of
excisable goods and its exigibility to duty.
(Emphasis supplied)
50. This Court in Mittal Engineering Works (P) Ltd. v. Collector of Central
Excise, Meerut reported in (1997) 1 SCC 203 , expressed its agreement with
the observation in Quality Steel (supra) that erection and installation of a plant
cannot be held to be an excisable good. This Court in Mittal Engineering
(supra) observed as follows:
“ 9. Upon the material placed upon record and referred to above, we
are in no doubt that the mono vertical crystalliser has to be
assembled, erected and attached to the earth by a foundation at the
site of the sugar factory. It is not capable of being sold as it is, without
anything more. As was stated by this Court in the case of Quality
Steel Tubes (P) Ltd. the erection and installation of a plant is not
excisable. To so hold would, impermissibly, bring into the net of
excise duty all manner of plants and installations.
(Emphasis supplied)
51. The issue of movability was once again discussed by this Court in Sirpur Paper
Mills Ltd v. Collector of Central Excise, Hyderabad reported in (1998) 1 SCC
400 , whereby this Court clarified through an analogy that merely attaching of
an item to the earth would not make it immovable property for the purpose of
the Act, 1944. This Court considered the movability test from the perspective
of its marketability in dismantled form and agreed with the Tribunal’s view in
that case that the the subject machine had been attached to the concrete base to
prevent its wobbling but if somebody wanted to purchase the whole machinery,
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it could be dismantled and sold to him in parts. The relevant observation of this
Court in Sirpur Paper Mills (supra) is as follows:
“3 […] The Tribunal held that the machine was attached to earth for
operational efficiency. The whole purpose behind attaching the
machine to a concrete base was to prevent wobbling of the machine
and to secure maximum operational efficiency and also for safety.
The Tribunal further held that the paper- making machine was
saleable and observed "if somebody wants to purchase, the whole
machinery could be dismantled and sold to him in parts".
4. In view of this finding of fact, it is not possible to hold that the
machinery assembled and erected by the appellant at its factory site
was immovable property as something attached to earth like a
building or a tree. The Tribunal has pointed out that it was for the
operational efficiency of the machine that it was attached to earth. If
the appellant wanted to sell the paper-making machine it could
always remove it from its base and sell it.
5. Apart from this finding of fact made by the Tribunal, the point
advanced on behalf of the appellant, that whatever is embedded in
earth must be treated as immovable property is basically not sound.
For example, a factory owner or a householder may purchase a
water pump and fix it on a cement base for operational efficiency and
also for security. That will not make the water pump an item of
immovable property. Some of the components of the water pump may
even be assembled on site. That too will not make any difference to
the principle. The test is whether the paper-making machine can be
sold in the market. The Tribunal has found as a fact that it can be
sold. In view of that finding, we are unable to uphold the contention
of the appellant that the machine must be treated as a part of the
immovable property of the Company. Just because a plant and
machinery are fixed in the earth for better functioning, it does not
automatically become an immovable property.
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6. A further argument was made that the entire machinery as it is
cannot be bought and sold because the machinery will have to be
dismantled before being sold. The Tribunal has pointed out that the
appellant had himself bought several items and completed the
machinery. It had purchased a large number of components and
fabricated a few and manufactured the paper-making machine at site.
If it is sold it has to be dismantled and reassembled at another site.
We do not find any fault with the reasoning of the Tribunal on this
aspect of the matter.”
(Emphasis supplied)
52. Thus, as per this Court’s observation in Sirpur Paper Mills (supra) , it can be
inferred that if an item can be dismantled and reassembled at another site, such
an item would still be considered as movable ‘goods’ under the Act, 1944.
However, the test of dismantling was qualified by a subsequent Circular (no.
58/1/2002-CX) dated 15.01.2002, issued by the Central Board of Excise and
Custom (hereinafter, “ CBEC ”), Department of Revenue, Ministry of Finance,
Government of India, in which it was mentioned under Clause (e) that if an
item that is assembled or erected at 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 CBEC Circular dated 15.01.2022 reads as follows:
“ (e) If items assembled or erected at site and attached by foundation
to earth cannot be dismantled without substantial damage to its
components and thus cannot be reassembled, then the items would
not be considered as movable and will, therefore, not be excisable
goods.”
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53. Having regard to the case law discussed above, it becomes imperative to
determine whether the steam generating plant, as erected and commissioned at
the site retains the character of “goods” as understood under the Act, 1944, in
terms of being a movable property. For this, we must look into few relevant
clauses of the contract to discern the object of the contract and the resultant
item that emerges out of it.
54. Clause 1(b) of the contract reads as follows:
“1. DEFINITIONS:
[…] b) STEAM GENERATING PLANT: It shall mean the plant &
machinery and equipment for Boiler as specified in Annexure I to VI
attached herewith and forming part of the agreement. ”
55. Clause 2.1 of the contract reads as follows:
“ 2. Scope of Supply:
2.1 The Seller shall design, procure, manufacture, supply of the
machinery and equipments for one no. 50 TPH MCR Capacity
and 45 Kg./cm2(g) working pressure, bagasse fired boiler as
detailed in Annexure I to V annexed to and forming part of this
Agreement conformity with the specifications including
clarifications and elucidations laid down therein and according to
the progressive delivery schedules to be drawn up by the Seller
and to be approved by the Purchaser and their authorised
inspection agency, so that the plant shall be ready for
commissioning within the time provided in clause 4.1 of the
Agreement.
(Emphasis supplied)
56. Clause 3.1 of the contract reads as follows:
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“3. CONTRACT PRICE:
3.1 The Sellers agree to design, procure, manufacture, supply of
the machinery and equipment for Steam Generating plant and
do other work herein mentioned as specified in Annexure I to V
annexed to and forming part of the Agreement at a Total Price of
Rs.360.00 lacs (Rupee Three Crores Sixty Lacs only) hereinafter
referred to as Contract Price subject to terms and conditions as
hereinafter provided as per the break-up given below:
i) Ex-works: (Ex-Sellers or their sub-contractors workshop or
place of supply) price of machinery and equipment for Steam
Generating plant according to specification and details given in
Annexure I to V is Rs.350.00 lacs (Rupees Three Crores Fifty lacs
Only)
ii) Price of materials required for following necessary facilities in
respect of 3.1 (i) above.
a) Paints required for final painting. It shall include primer and
paints as per colour scheme to be given by Purchaser.
b) First filling of lubricants. It shall include oil and grease.
c) First filling of transformer oil, if any.
d) Packing and Forwarding charges.
e) Freight Charges upto the site.
f) Handling and loading at the place of supply.
g) Total cost of above items (a) to (f) - Rs. 10.00 lacs (Rupees Ten
lacs only.)
iii) Total Contract Price Rs. 360.00 lacs - (Rupees Three Crores
Sixty lacs only.)
It is to be clearly understood that the total Contract Price is
inclusive of the cost of the following:
a) Cost of all other items which are necessary for completing
supply of the Steam Generating plant as per scope of supply.
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b) All taxes, duties and octroi paid by the Seller or their sub-
contractors on raw materials and other materials for their own
manufacture of finished equipment or parts of finished equipment.
c) Custom duty on imported raw-materials.”
(Emphasis supplied)
57. Clause 10(j) of the contract reads as follows:
“ Boiler Refractory Work : The Sellers have to provide all
necessary refractories both ordinary and special inclusive of
standard and special fire bricks, fire cement, fire clay , asbestos
ropes, asbestos sheets etc. for wherever they are required
including hot air duct. The ducting between the boiler and the
chimney and the entire boiler brick work will also be the Sellers
responsibilities. Red bricks and port land cement, sand and lime
shall be provided by the Purchasers.”
(Emphasis supplied)
58. Clause 13.1.3(b) of the contract reads as follows:
“13. TERMS OF PAYMENT :
13. 1. The Purchasers shall pay the contract price in the following
manner free of interest.
xxx xxx xxx
13. 1.3. 7.5% (Seven & half Percent) of the contract price of
machinery and equipments (mentioned against 3.1 (i) necessary
facilities contained in 3.1 (ii) (a) to (f) of the Agreement, i.e. Rs.
27,00,000/- (Rupees Twenty seven Lacs Only.) within 3 (three)
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months of signing of the Agreement and on fulfilling all the following
contractual obligation by the Sellers:
[…] b) Placing order, releasing advances and furnishing the order
acceptance copies from the concerned vendors for following critical
bought out items:
• Boiler quality plates for steam and mud-drum
• High pressure valves and fittings including safety valves.
• ID, FD and SA fans.
• Drives for above fans including panels.
• Wet Scrubber.
• Instrumentation.
• Furnace grate.
• Feed pumps, transfer pumps and their drives.
• All Bagasse Carrier Chain and Drives.
• Economizer and Air Pre-heaters.
• Soot Blowers
AND
• Supply of Boiler structural material. ”
(Emphasis supplied)
59. A close reading of Clause 2.1, and Clause 3.1 of the contract, respectively,
indicates that the scope of the contract was design, procurement, manufacture
and supply of the machinery and equipment for a steam generating plant. The
poorly drafted definition of “ Steam Generating Plant” under Clause 1(b) of the
contract causes an overlap between the terms ‘boiler’ and ‘steam generating
plant’. However when the definition of “ Steam Generating Plant ” to mean “ the
plant & machinery and equipment for Boiler ” is read in light of the scheme of
the contract as a whole, we find that the object of the contract was that the boiler
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parts manufactured by the assessee and transported to the site of erection in
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. The steam generating plant comes into existence as a
composite system comprising various components- some manufactured by the
assessee (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.
60. The revenue seeks to suggest that the mere act of assembling the boiler parts
cleared in CKD condition from the assessee’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. In other words, the
revenue’s contention is that the boiler in CKD condition and the bought out
items first coalesce into a movable boiler before being affixed to the ground,
and that it is at this intermediate stage that excise duty is to be levied. The
revenue’s proposition would hold good only if it were established that such a
movable boiler, distinct from the immovable steam generating plant, does in
fact come into existence as a result of the assembling of the CKD parts and
bought out items. However, such a proposition as suggested by the revenue is
both impractical and improbable when examined in light of the nature, volume
and magnitude of the boiler in question, as indicated by Clause 2.1 of the
contract, which provides its specifications as being a ‘50 TPH MCR Capacity
and 45 Kg./cm2(g) working pressure, bagasse fired boiler’.
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61. While referring to Clause 10(j), read with Clause 13.1.3(b) of the contract, we
find that the assembly involves civil engineering using fire bricks, fire cement,
portland cement, fire clay, asbestos ropes, asbestos sheets and other materials
indicating that civil engineering work had to be undertaken in the course of
assembling the boiler. The erection and assembly of a ‘50 TPH MCR Capacity
and 45 Kg./cm2(g) working pressure, bagasse fired boiler’ cannot possibly be
akin to assembling movable equipment or machinery that can exist
independently as ‘goods’. It is not akin to, for example, affixing a water pump
on a residential building with cement, which can be removed without damage.
Rather, 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. Such process of
assembly, erection and installation involving construction materials like bricks,
clay, sand, cement, etc. clearly indicate that the resultant product cannot be
dismantled into its constituent parts without being substantially damaged.
62. Thus, we find merit in the arguments raised by the assessee that the mere size
and weight of the boiler make it impossible to assemble the boiler before
erection, and that the process of erection itself involves civil and mechanical
engineering with the use of concrete, steel reinforcements, and grouting in such
a manner that the coming into existence of the boiler in a functioning condition
is in an immovable form. The assembly and erection of the boiler is essentially
intertwined in such a manner that we also find merit in the assessee’s argument
that such an installed boiler cannot be readily dismantled by merely removing
nuts and bolts and reassembled at another site without causing extensive
damage to the boiler to an extent so as to reduce its value to mere scrap.
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63. The object of the contract therefore is about erection and installation of an
immovable plant. As noted by this Court in Quality Steel (supra) and
unequivocally affirmed by another Co-ordinate Bench of this Court in Mittal
Engineering (supra), “ erection and installation of a plant cannot be held to be
excisable goods” and therefore, the steam generating plant that emerges as a
result of the contract cannot be held to be an excisable good. Consequently, the
base value of the boiler on which excise duty is to be levied, cannot be equated
with the total contract price which is inclusive of the price of the bought out
items.
64. Applying the above principles to the facts of the present case, we arrive at the
finding that the final product that emerges as a result of performing the
obligations under the contract, does not constitute excisable goods under the
Act, 1944. Consequently, the base value of the boiler on which excise duty is
to be levied, cannot be equated with the total contract price. Therefore, the price
of the bought out parts cannot be included in the value of the boiler for the
purpose of computing central excise duty under the Act, 1944.
65. Before proceeding further, we find it necessary and crucial to highlight that the
CESTAT committed a glaring error when it declined to consider the
immovability plea by the assessee, on the ground that the said plea was not
taken before the lower authorities. Contrary to the CESTAT’s findings in the
impugned order, the documents on record clearly indicate that the said plea was
taken by the assessee right from the earliest stage of its reply to the show cause
notice itself. We find that the facts on record support the assessee’s contention
that in its reply dated 13.06.2005 to the show cause notice dated 28.04.2005, it
had specifically raised the contention that the boiler on commissioning became
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immovable property. Materials on record also indicate that the said contention
regarding immovability was accepted by the Assistant Commissioner and the
same reflects in the finding recorded in the Order-in-Original dated
07.12.2005/13.01.2006 that boilers erected at site and attached to earth are not
goods and hence not excisable. Therefore, for the CESTAT to ignore the most
central issue, going to the root of the entire dispute, on an erroneous finding of
fact, is an egregious flaw in the impugned order.
(iii). Erroneous reliance on Tariff Classification
66. At this stage, it is also important to address this issue from one another angle
and provide a cautionary note in this respect. The revenue appears to have been
swayed by the fact that ‘ boilers’ and ‘ boiler parts’ are listed under Chapter 84
of the Tariff Act, 1985, and therefore seem to have proceeded on the erroneous
assumption that all boilers, irrespective of form or configuration, attract central
excise duty. However, the revenue should have kept in mind that the mere
presence of a product in the Tariff Schedule does not determine its excisability.
The first and primary enquiry must be whether the item satisfies the conditions
of the charging section under Section 3 of the Act, 1944, an essential condition
of which is that the subject matter is a movable good.
67. A significant observation made by a Three-judge Bench of this Court in Moti
Laminates (P) Ltd. v. CCE reported in (1995) 3 SCC 23 that succinctly drives
home this cautionary note reads as follows:
“ 11. […] The Tariff Schedule by placing the goods in specific and
general category does not alter the basic character of leviability. The
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duty is attracted not because an article is covered in any of the items
or it falls in residuary category but it must further have been
produced or manufactured and it is capable of being bought and
sold. ”
(iv). Inapplicability of the “Utility Test” and the ‘part’ v. ‘accessory’ debate
68. Further, it is relevant to note that both the revenue and the CESTAT have
erroneously resorted to focusing on whether the bought out parts were essential
to the functioning of the assembled boiler or not. The determination of the
question, whether or not the bought out items were ‘parts’ or ‘accessories’, in
terms of this Court’s observation in Quippo ( supra ), would have been of some
relevance in the present matter only if the resultant product of the contract
would fall within excisable goods. In other words, the question of utility would
have been relevant to the determination of payable excise duty, if a movable
boiler had resulted from integrating the CKD parts with the bought out items.
69. However, as observed above, in the present case, the final product, i.e. the steam
generating plant, emerges in the form of an immovable product in the course of
integrating the CKD parts with the bought out items. Therefore, the resultant
product of the contract not being excisable goods, it is wholly inconsequential
whether or not the bought out items are parts or accessories of it.
(v). Excess collection of excise duty from buyer is no proof of excisability
70. It is also necessary to address the contention raised by the revenue that the
assessee availed CENVAT Credit of duty paid on the bought out items and
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recovered the same from the buyer. The revenue has placed reliance on this to
bolster its argument that the value of the bought out items should be included
in the dutiable value shown at the time of clearance of the boiler.
71. Irrespective of the fact whether the assessee had denied the allegation in its
Section 14 statement under the Act, 1944, it is necessary to point out the error
committed by the revenue in making such an argument.
72. Even if there is any substance in the allegation that excise duty on the value of
the bought out items was collected by the assessee from the buyer, that by itself
would not lead to the conclusion that the value of the bought out items must be
included in the value of the final product for the purpose of computing payable
excise duty. Rather, if the revenue indeed believed that the assessee had
collected excise duty from the buyer on the value of the boiler by including the
price of the bought out items, the correct course of action for the revenue should
have been to invoke the provisions of Section 11D of the Act, 1944, which
specifically provides a mechanism for recovery of any amount collected by an
assessee from a buyer, by representing as excise duty in excess of what is
payable as such. Section 11D of the Act, 1944 reads as such:
“ SECTION 11D. Duties of excise collected from the buyer to be
deposited with the Central Government. –
(1) Notwithstanding anything to the contrary contained in any order
or direction of the Appellate Tribunal or any Court or in any other
provision of this Act or the rules made thereunder, every person who
is liable to pay duty under this Act or the rules made thereunder, and
has collected any amount in excess of the duty assessed or
determined and paid on any excisable goods under this Act or the
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rules made thereunder from the buyer of such goods in any manner
as representing duty of excise, shall forthwith pay the amount so
collected to the credit of the Central Government.
(2) Where any amount is required to be paid to the credit of the
Central Government under sub-section (1) and which has not been
so paid, the Central Excise Officer may serve, on the person liable to
pay such amount, a notice requiring him to show cause why the said
amount, as specified in the notice, should not be paid by him to the
credit of the Central Government.
(3) The Central Excise Officer shall, after considering the
representation, if any, made by the person on whom the notice is
served under sub-section (2), determine the amount due from such
person (not being in excess of the amount specified in the notice) and
thereupon such person shall pay the amount so determined.
(4) The amount paid to the credit of the Central Government under
sub-section (1) or sub-section (3) shall be adjusted against the duty
of excise payable by the person on finalisation of assessment or any
other proceeding for determination of the duty of excise relating to
the excisable goods referred to in sub-section (1).
(5) Where any surplus is left after the adjustment under sub-section
(4), the amount of such surplus shall either be credited to the Fund
or, as the case may be, refunded to the person who has borne the
incidence of such amount, in accordance with the provisions of
section 11B and such person may make an application under that
section in such cases within six months from the date of the public
notice to be issued by the Assistant Commissioner of Central Excise
for the refund of such surplus amount.”
(Emphasis supplied)
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73. Upon a bare reading of Section 11D of the Act, 1944 it is clear that the failure
of the revenue to resort to the statutory recourse available under Section 11D,
and instead to seek to justify inclusion of the value of the bought out items in
the assessable value of the boiler, reflects an error in application of the law. The
invocation of Section 11D would be justified in a case where an assessee has
collected any sum purporting to be the excise duty without the authority of law.
Consequently, even assuming in arguendo that any excess amount was
collected from the buyer under the garb of excise duty, such collection cannot
confer excisability on the final product which emerges as an immovable
property. The liability of the assessee to pay duty must be determined strictly
in accordance with the charging provisions under the law and not on the basis
of any purported recovery from the buyer.
(II). Whether the show cause notice is legal and valid under the extended
limitation period as provided under the proviso to Section 11A(1) of the
Central Excise Act, 1944?
(i). Was there any wilful suppression of facts with an intention to evade payment
of duty by the appellant/assessee?
74. In the present case, the extended period of limitation of five years under the
proviso to Section 11A(1) of the Act, 1944 was invoked by the revenue on the
ground that the assessee had wilfully suppressed the fact that it had not paid
duty on the bought out items, with the intention to evade Central Excise duty.
The relevant paragraph from the show cause notice invoking the extended
limitation period reads thus:
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“[…]It further appears that the extended period of limitation as
provided under proviso to Sect 11A(1) of Central Excise Act 1944 is
invokable in the present case because the noticee has not paid duty
on bought out items and also not paid duty on clearance of the
bought out items with intention to evade Central Excise duty, the
noticee appears to have willfully suppressed the facts from the
knowledge of the Department regarding incorrect valuation of the
goods and clearance of the bought out items without payment of duty,
without filing of the declaration required under provisions of Rule 57
A of erstwhile C. Excise Rules 1944, without declaring the clearance
of the bought out items in their RT-12 returns […]”
(Emphasis supplied)
75. The assessee has raised the contention that the conditions for invoking the
extended period of limitation under the proviso to Section 11A having not been
met, the show cause notice and the consequent proceedings based on it were
not maintainable. In order to examine the issue of limitation, let us first refer to
the provision itself. Section 11A of the Act, 1944, which was in force at the
time of the issuance of the show cause notice reads as follows:
“ SECTION 11A. Recovery of duties not levied or not paid or short-
levied or short-paid or erroneously refunded . - (1) When any duty
of excise has not been levied or paid or has been short-levied or
short-paid or erroneously refunded, whether or not such non-levy or
non-payment, short- levy or short payment or erroneous refund, as
the case may be, was on the basis of any approval, acceptance or
assessment relating to the rate of duty on or valuation of excisable
goods under any other provisions of this Act or the rules made
thereunder, a Central Excise Officer may, within one year from the
relevant date, serve notice on the person chargeable with the duty
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which has not been levied or paid or which has been short-levied or
short-paid or to whom the refund has erroneously been made,
requiring him to show cause why he should not pay the amount
specified in the notice :
Provided that where any duty of excise has not been levied or paid or
has been short-levied or short-paid or erroneously refunded by
reason of fraud, collusion or any wilful mis-statement or
suppression of facts, or contravention of any of the provisions of
this Act or of the rules made thereunder with intent to evade
payment of duty, by such person or his agent, the provisions of this
sub- section shall have effect, as if, for the words one year, the words
"five years" were substituted.”
(Emphasis supplied)
76. A bare reading of Section 11A(1) along with its proviso would indicate that
ordinarily, notice has to be issued within one year, however the proviso
stipulates that the notice can be issued within five years from the relevant date
if , the non-levy, short-levy, or erroneous refund has occurred on account of
either of the following – fraud, collusion, wilful misstatement or suppression
of facts, or contravention of any of the provisions of the Act, 1944 or rules
thereunder, with an intent to evade payment of duty. The proviso employs
selective choice of words which contemplate a state of mind, whereby the
noticee has knowingly and deliberately done something or omitted to do
something which has resulted in non-levy, short-levy or erroneous refund of
duty. In contrast, for the normal period of one year, there is no requirement of
any state of mind, and the fact of non-levy, short-levy or erroneous refund of
duty by itself would be sufficient to invoke the provisions of Section 11A(1) of
the Act, 1944.
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77. In the context of invoking the extended period of limitation under Section 11A
of the Act, 1944, this Court in Pahwa Chemicals Private Limited v.
Commissioner of Central Excise, Delhi reported in (2009) 4 SCC 658 ,
observed that mere failure does not amount to wilful misdeclaration or wilful
suppression and that there must be some positive act on the part of an assessee
to bring the case within the mischief of wilful misdeclaration or wilful
suppression, as the case may be. This Court in Pahwa Chemicals (supra)
observed as follows:
“ 6. It is settled law that mere failure to declare does not amount to
wilful misdeclaration or wilful suppression. There must be some
positive act on the part of the party to establish either wilful
misdeclaration or wilful suppression. When all facts are before the
Department and a party in the belief that affixing of a label makes no
difference does not make a declaration, then there would be no wilful
misdeclaration or wilful suppression. If the Department felt that the
party was not entitled to the benefit of the notification, it was for the
Department to immediately take up the contention that the benefit of
the notification was lost. ”
(Emphasis supplied)
78. The allegation levelled against the assessee in the present matter before us is of
wilful suppression with an intention to evade central excise duty. Therefore, the
following observation of this Court in Continental Foundation Joint Venture
Holding v. CCE reported in (2007) 10 SCC 337 is required to be referred to:
“12. The expression 'suppression' has been used in the proviso to
Section 11-A of the Act accompanied by very strong words as 'fraud'
or 'collusion' and, therefore, has to be construed strictly. Mere
omission to give correct information is not suppression of facts unless
Page 55 of 57
Civil Appeal Nos. 856-857 of 2011
it was deliberate to stop (sic evade) the payment of duty. Suppression
means failure to disclose full information with the intent to evade
payment of duty. When the facts are known to both the parties,
omission by one party to do what he might have done would not
render it suppression. When the Revenue invokes the extended period
of limitation under Section 11-A the burden is cast upon it to prove
suppression of fact. An incorrect statement cannot be equated with a
wilful misstatement. The latter implies making of an incorrect
statement with the knowledge that the statement was not correct.”
(Emphasis supplied)
79. Judged by these principles laid down by this Court on the application of the
proviso to Section 11A(1) of the Act, 1944, we find that the assessee is justified
to contend that the extended period of limitation could not have been invoked
in the present case since the assessee bona fide believed that the bought out
items are not to be included in the assessable value of the boiler. A perusal of
the show cause notice would show that the revenue itself admits that the
assessee had filed the RT-12 returns with the revenue, which means that the
revenue had the material particulars on record which it could have acted upon
within the normal one year period. There is nothing on record to indicate that
any material information had been suppressed by the assessee with any
intention to evade payment of central excise duty.
80. 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 under the
proviso to Section 11A(1) is held to be not tenable in law.
Page 56 of 57
Civil Appeal Nos. 856-857 of 2011
81. The show cause notice being held to be invalid, the proceedings leading up to
this present appeal are also liable to be quashed, and accordingly the impugned
order is set aside.
F. CONCLUSION
82. We hereby conclude that the value of the duty paid bought out items which
were delivered directly at the buyer’s site is not liable to be included in the
value of the boiler cleared by the assessee from its factory in CKD condition,
for the purpose of assessment of excise duty.
83. We also hold that the show cause notice issued under the proviso to Section
11A(1) of the Act, 1944 is not legal and hence invalid.
84. Therefore, for all the foregoing reasons, the appeals succeed and are hereby
allowed.
……….…………………..J.
(J.B. PARDIWALA)
……….…………………..J.
(SANDEEP MEHTA)
New Delhi,
th
10 November, 2025.
Page 57 of 57
Civil Appeal Nos. 856-857 of 2011
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NOS. 856-857 OF 2011
LIPI BOILERS LTD. …APPELLANT(S)
VERSUS
THE COMMISSIONER OF CENTRAL
EXCISE, AURANGABAD …RESPONDENT(S)
J U D G M E N T
Signature Not Verified
Digitally signed by
VISHAL ANAND
Date: 2025.11.10
16:31:25 IST
Reason:
J.B. PARDIWALA, J.
For the convenience of exposition, this judgment is divided into the following parts:
INDEX
A. FACTUAL MATRIX ........................................................................................ 3
B. THE IMPUGNED ORDER ............................................................................. 7
C. SUBMISSIONS ON BEHALF OF THE PARTIES ....................................... 9
(I). Submissions on behalf of the appellant/assessee ..................................... 9
(II). Submissions on behalf of the respondent/revenue ................................ 13
D. ISSUES TO BE DETERMINED ................................................................... 15
E. ANALYSIS ...................................................................................................... 16
(I). Whether the value of the duty paid bought out items delivered directly
at the buyer’s site is liable to be included in the value of the boiler cleared by
the assessee from its factory in completely knocked down (CKD) condition,
for the assessment of central excise duty? ....................................................... 16
(i). Understanding the nature of Central Excise Duty, in light of the charging
provision and valuation of quantum provision under the Central Excise Act,
1944:................................................................................................................ 16
(ii). Whether the resultant final product of the contract would fall within the
ambit of “Excisable Goods”? ......................................................................... 30
(iii). Erroneous reliance on Tariff Classification .................................................. 48
(iv). Inapplicability of the “Utility Test” and the ‘part’ v. ‘accessory’ debate ...... 49
(v). Excess collection of excise duty from buyer is no proof of excisability ....... 49
Page 1 of 57
Civil Appeal Nos. 856-857 of 2011
(II). Whether the show cause notice is legal and valid under the extended
limitation period as provided under the proviso to Section 11A(1) of the
Central Excise Act, 1944? .................................................................................. 52
(i). Was there any wilful suppression of facts with an intention to evade payment
of duty by the appellant/assessee?.................................................................. 52
F. CONCLUSION ............................................................................................... 57
Page 2 of 57
Civil Appeal Nos. 856-857 of 2011
1. Since the issues raised in both the captioned appeals are the same, the challenge
in both the appeals are also to the self same order passed by the Customs, Excise
and Service Tax Appellate Tribunal, West Zonal Bench, Mumbai (hereinafter,
“ the CESTAT ”) and the parties are also the same, those were taken up for
hearing analogously and are being disposed of by this common judgment and
order.
2. These statutory appeals under Section 35L(1)(b) of the Central Excise Act,
1944 (hereinafter, “ the Act, 1944 ”), are at the instance of an assessee and are
directed against the common final order dated 23.09.2010 (hereinafter, “ the
impugned order ”) passed by the CESTAT in Appeal No. E/1377/07-Mum and
Cross Objection No. E/CO/13/08, respectively by which the CESTAT reversed
the concurrent findings of the two lower authorities, allowed the appeal filed
by the revenue/respondent herein and dismissed the cross objections filed by
the assessee/appellant herein. The CESTAT in the impugned order held that the
value of the bought out items received directly at the buyer’s site and used in
the erection of the boiler are essential parts of the boiler and therefore, the value
of such bought out items has to be included in the assessable value of the boiler
for the purpose of assessing the payable central excise duty. Accordingly, the
demand of duty along with interest was upheld by the CESTAT in the impugned
order.
A. FACTUAL MATRIX
3. The appellant/assessee/Lipi Boilers Ltd. is a holder of Central Excise
Registration for manufacture of boiler and boiler parts falling under Chapter
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Civil Appeal Nos. 856-857 of 2011
Heading nos. 8402.10 and 8402.90 of the Central Excise Tariff Act, 1985
(hereinafter, " the Act, 1985 ”), respectively.
4. The assessee entered into an agreement with one Shri Maroli Vibhag Khand
Udyog Sahakari Mandali Ltd. (hereinafter, “ the buyer ”), on 29.01.2001, for
designing, procuring, manufacturing and supplying machinery and equipments
2
for one ‘no. 50 TPH MCR Capacity and 45 Kg/cm (g) working pressure
bagasse fired boiler’ so that a steam generating plant could be commissioned
by 31.10.2001 (hereinafter, “ the contract ”).
5. On 28.04.2005, the Assistant Commissioner of Central Excise and Customs,
Aurangabad, (hereinafter, “ the Assistant Commissioner ”) issued a show-
cause-cum-demand notice (Sr. No. 4/2005/CEX/dated 2005) (hereinafter, “ the
show cause notice ”) to the assessee, alleging that the assessee cleared the final
product boilers in completely knocked down condition (hereinafter, “ CKD
condition ”) during the period from 01.04.2000 to 30.06.2000 by paying central
excise duty without adding or taking into account the cost of ‘essential’ bought
out ‘parts’ delivered directly at the site of the buyer. According to the show
cause notice, the non-inclusion of the cost of ‘essential’ bought out ‘parts’ worth
₹14,02,344/- (Rupees Fourteen Lakhs Two Thousand Three Hundred and
Forty-Four only) in the value of the final product boiler resulted in
undervaluation of the excisable item and a resultant shortfall to the tune of
₹2,24,375/-(Rupees Two Lakhs Twenty Four Thousand Three Hundred and
Seventy-Five only) in the quantum of central excise duty payable by the
assessee. The show cause notice stated that as per the amended Section 4(1) of
the Act, 1944, (w.e.f. 01.07.2000), the excise duty was payable with reference
to the transaction value of the goods sold to an unrelated buyer and the price
Page 4 of 57
Civil Appeal Nos. 856-857 of 2011
charged has to be the sole consideration for sale. According to the show cause
notice, since the transaction value as per the contract included the cost of the
‘essential’ bought out ‘parts’ that were delivered directly at the site of the buyer,
the central excise duty payable by the assessee should take those into account.
6. The show cause notice invoked the extended period of limitation of 5 years
provided under the proviso to Section 11A(1) of the Act, 1944, on the ground
that the assessee had not paid central excise duty on the bought out items and
had wilfully suppressed the facts from the knowledge of the respondent
department with an intention to evade duty. The show cause notice sought a
response from the assessee within a period of 30 days from its receipt, failing
which, the central excise duty amounting to ₹2,24,375/- (Rupees Two Lakhs
Twenty Four Thousand Three Hundred and Seventy-Five only) was to be
recovered from it under the erstwhile Section 11A(1) of the Act, 1944, read
with Rule 9(2) of the Central Excise Rules, 1944, along with interest under
Section 11AB of the Act, 1944 and penalty under Section 11AC of the Act,
1944 read with Rule 173Q and Rule 57(1)(5) of the Central Excise Rules, 1944
and Rule 13 of CENVAT Credit Rules, 2001, respectively.
7. On 13.06.2005, the assessee replied to the show cause notice referred to above,
denying contravention of any applicable provision and stated that the boilers in
CKD condition were cleared from its factory after duly paying the central
excise duty leviable thereon, whereas the bought out items were cleared by their
respective vendors upon payment of applicable central excise duty and
transported directly to the site of erection. The assessee pointed out 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
Page 5 of 57
Civil Appeal Nos. 856-857 of 2011
assessee, emphatically stated that the mere size and weight of the boiler make
it impossible to assemble the boiler before erection. The process of erection
itself involves civil and mechanical engineering, utilising concrete, steel
reinforcements, and grouting in a manner that ensures the boiler is in a
functioning condition and in an immovable form upon completion. The
assessee also stated that such an installed boiler cannot be readily dismantled
by removing nuts and bolts and reassembled at another site. 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 assessee stated that since
the boiler erected at the site and attached to the earth is not ‘goods’, the same
would not be excisable. The assessee also stated that it had not availed any
CENVAT credit on the bought out items and that there was no documentary
evidence on record to substantiate such allegation.
8. Upon due consideration of the reply of the assessee, the Assistant
Commissioner vide Order-in-Original dated 07.12.2005, accepted that the
demand of central excise duty on the value of the bought out items was not
sustainable. The Assistant Commissioner dropped the demands made in the
show cause notice based on the findings which read thus:
“ It is well settled law that value of bought out items cleared at site by
the vendors without bringing the same into the factory premises is
not liable to be included in the assessable value of the finished
product. It is also well settled law that the boilers erected at site and
attached to earth are not ‘goods’ and hence not excisable. I find that
the ratio of the judgments in the case of Mittal Engineering Pvt Works
Vs C.C.E. Meerut 1996 (88) ELT 622(SC); Tungabhadra Steel
Products Ltd Vs Union of India reported in 1998 (98) ELT 334 (HC
Karnataka); Alpha Laval (I) Ltd Vs C.C.E. Pune reported in 1998
Page 6 of 57
Civil Appeal Nos. 856-857 of 2011
(99) ELT 649 (Tribunal) etc are quite applicable in this case.
Therefore I am inclined to accept the assessee’s contention that the
demand of duty on the value of bought out items is not sustainable. ”
9. Aggrieved by the Assistant Commissioner’s Order-in-Original dated
07.12.2005, the revenue preferred an appeal before the Commissioner of
Central Excise & Customs (Appeals), Aurangabad, [hereinafter, “ the
Commissioner (Appeals) ”]. Vide Order-in-Appeal dated 13.07.2007 the
Commissioner (Appeals), dismissed the appeal preferred by the revenue and
thereby affirmed the Assistant Commissioner’s order quashing the show cause
notice.
B. THE IMPUGNED ORDER
10. Being dissatisfied with the Order-in-Appeal dated 13.07.2007, referred to
above, the revenue preferred Appeal No. E/1377/07-Mum, whereas the
assessee filed Cross Objection no. E/CO/13/08 before the CESTAT. Vide the
common order dated 23.09.2010, the CESTAT reversed the concurrent findings
of the two lower authorities, allowed the appeal filed by the revenue and
dismissed the cross objection filed by the assessee, thereby holding 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.
11. The CESTAT based its ruling on two counts:
a. First, it found no merit in the contention that the boiler had been
permanently imbedded and is non-excisable, on the ground that such plea
Page 7 of 57
Civil Appeal Nos. 856-857 of 2011
had not been raised before the lower authorities. Further, the CESTAT was
of the opinion that the immovability argument did not warrant any merit
because the boiler was manufactured in the factory and it was merely for
ease of transportation that the same had been cleared in CKD condition.
b. Secondly, the CESTAT observed that since the subject bought out items,
supplied directly to the buyer’s site, were essential parts of the boiler, those
were therefore to be included in the assessable value of the boiler.
12. The relevant observations made by the CESTAT in the impugned order are
reproduced as follows:-
“3. We find no merits in the contention of the respondent that the
boiler has been permanently imbedded and is non-excisable as this
plea was not taken before the lower authorities. Further the
respondents are paying duty at the time of clearance of boiler from
the factory, meaning thereby the boiler is manufactured in the factory
and only ease of transportation, the same has been cleared in CKD
condition. In these circumstances, we find no merits in this
contention.
4. From the facts of the present case the respondent received an order
for supply of boiler. The respondent manufactured boiler in the
factory and cleared in CKD condition but certain parts were
purchased from the market, which were directly supplied at site.
These parts are essential parts of the boiler, which are not in dispute,
therefore, the decision of the Tribunal in the case of Thermax
Babcock & Wilcox Ltd., (supra) held that the value of bought out
items received at site and used in the erection of boiler includable in
the assessable value of the boiler. The respondent relies upon the
decision of the Tribunal in the case of Silson India Pvt Ltd., (supra).
We find the facts of the case are different from the facts of present
Page 8 of 57
Civil Appeal Nos. 856-857 of 2011
case. In the case of Silson India Pvt Ltd., (supra) there was no
evidence on record to show that full boiler has come into existence in
the factory of manufactured and the manufacturer cleared only parts
of the boiler. In the present case the respondents are clearing the
boiler in CKD condition. Therefore, the respondents are
manufacturing boiler and clearing the same and as boilers bought
out items are essential parts, therefore, they are includable in the
assessable value of the boiler. The impugned order is set aside and
the appeal filed by the revenue is allowed. Cross objection filed by
the respondent is also disposed of accordingly.”
13. Thus observing, the CESTAT set aside the order of the Commissioner
(Appeals), allowed the appeal by the revenue and dismissed the cross-objection
filed by the assessee.
14. Being aggrieved by the impugned order, the assessee is here before us with two
appeals under Section 35L(1)(b) of the Act, 1944.
C. SUBMISSIONS ON BEHALF OF THE PARTIES
(I). Submissions on behalf of the appellant/assessee
15. Mr. Prakash Shah, the learned Senior Counsel appearing on behalf of the
assessee, submitted that the contract was for designing, procuring,
manufacturing and supplying of machinery and equipment for a steam
generating plant and to do other works mentioned therein such as painting, first
filling of lubricant, transformer oil, packing and forwarding charges, and
handling and loading charges at the place of supply.
Page 9 of 57
Civil Appeal Nos. 856-857 of 2011
16. The learned Senior Counsel submitted that owing to the huge size of the boiler,
it had to be cleared from the assessee’s factory in CKD condition to the site of
the buyer. He submitted that the assessee had no contractual obligation to erect
or install the goods supplied by it. As per the contract, the erection, installation
and commissioning of the steam generating plant was to be undertaken by the
buyer’s engineer.
17. The learned Senior Counsel submitted that the assessee had manufactured some
of the equipments/machineries of the steam generating plant at its factory and
cleared those in CKD condition upon payment of appropriate central excise
duty. He further submitted that the assessee had purchased some items such as
feed water pumps, fans, safety valves, level gauges, etc., from the open market,
and supplied those duty-paid bought out items directly to the buyer, without
bringing those into the assessee’s factory. He submitted that the assessee merely
supplied those bought out items and did not undertake any processing of those
either at the site of erection or elsewhere.
18. On the aspect of whether the bought out items were essential parts of the boiler
or not, the learned Senior Counsel argued that even at the site of erection, the
bought out items did not form part of the boiler, but were fitted onto other
machinery/equipments at the site. He argued that such other
machinery/equipment on which the bought out parts are fitted onto, are not
classifiable under Heading no. 84.02 as boiler but classifiable under Heading
no. 84.04 as auxiliary plant for use with boilers, under the Act, 1985. Thus,
according to the learned Senior Counsel, these bought out items are neither
parts nor accessories of the boiler and hence could not have been included in
the assessable value of the boilers. He went on to argue that the CESTAT failed
Page 10 of 57
Civil Appeal Nos. 856-857 of 2011
to appreciate that there was no material on record to arrive at the finding that
the bought out items were essential parts of the boiler, or that their function,
value and description were provided to justify their essentiality. He submitted
that the finding of the CESTAT, that the bought out items were essential parts
of the final product manufactured by the assessee, was not supported by any
evidence or material on record. He argued that, rather, the CESTAT’s findings
that the entire boiler was manufactured in the assessee’s factory and cleared in
CKD condition merely for ease of transportation, is self-contradictory to its
own finding that the bought out items, delivered directly to the buyer’s site were
essential parts of the boiler.
19. He also submitted that the assessee had not claimed any CENVAT Credit of the
central excise duty paid on bought out goods. He placed reliance on Rule 3 of
the CENVAT Credit Rules, 2004 to submit that CENVAT credit can be taken
only after inputs are received in the factory of the manufacturers and
highlighted that the bought out items were never brought into the factory of the
assessee or worked upon even elsewhere by the assessee.
20. He submitted that the final product i.e. the boiler came into existence at the site
of the buyer as an immovable property and hence is not ‘goods’ and therefore,
not excisable.
21. He argued that the revenue is seeking to recover tax on sale of goods in the
guise of excise duty. He argued that the learned A.S.G.’s contention that Section
4 of the Central Excise Act, 1944 permits inclusion of the value of bought out
goods in the assessable value of the goods manufactured by the Appellant is
contrary to the law declared by this Court in Commissioner of Central Excise,
Page 11 of 57
Civil Appeal Nos. 856-857 of 2011
Pondicherry v. Acer India Ltd. reported in 2004(8) SCC173 and
Commissioner of Central Excise, Lucknow, U.P. v. Chhata Sugar Co. Ltd.
reported in 2004(3) SCC 466 , whereby this Court had held that Section 4 of the
Act, 1944 is a machinery provision and subject to Section 3 of the Act, 1944
which is a charging section. He submitted that it is trite law that levy of duty of
excise is on the manufacture or production and not on sale of goods.
22. The learned Senior Counsel vehemently contended that the CESTAT erred in
holding that the assessee had not raised the contention regarding the boiler
being non-excisable on account of its permanent embedding on erection at site,
before the lower authorities. He submitted that the CESTAT had failed to
appreciate that the assessee, in its reply dated 13.06.2005 to the show cause
notice dated 28.04.2005, had specifically raised the contention that the boiler
on commissioning became immovable property. Further, the said contention
was accepted by the Assistant Commissioner and the same is reflected in the
form of findings recorded in the Order-in-Original dated
07.12.2005/13.01.2006, wherein the Assistant Commissioner held that the
boilers erected at site and attached to earth are not goods and hence not
excisable.
23. The learned Senior Counsel argued that the CESTAT’s reliance on the order of
the CESTAT in Commissioner of C. Ex. v. Thermax Babcock & Wilcox Ltd.
reported in 2005 (182) ELT 336 (Tri.- Mumbai) (hereinafter referred to as
“ Thermax CESTAT ” ) is erroneous because in case of Thermax CESTAT
( supra ) , when the order was challenged before this Court in M/s. Thermax
Babcock & Wilcox Ltd. v. Commnr. of Central Excise, Pune in Civil Appeal
No(s). 3042-3043/2005 (hereinafter referred to as “ Thermax SC” ), the learned
Page 12 of 57
Civil Appeal Nos. 856-857 of 2011
counsel for the Commissioner of Central Excise, Pune had pointed out that,
while computing the demands which were raised in the show cause notice, no
excise duty was demanded on the bought out items in that matter.
24. Lastly, he contended that the CESTAT committed a serious error in law in not
remanding the proceedings to the two lower authorities to examine the question
of whether the show cause notice was time barred. He highlighted that since
the Assistant Commissioner and the Commissioner (Appeals) had dropped the
demand on merits, the CESTAT did not find it necessary to address itself on the
show cause notice being time barred.
(II). Submissions on behalf of the respondent/revenue
25. Mr. Raghavendra P Shankar, the learned A.S.G. appearing on behalf of the
revenue, on the other hand submitted that in the present case, the taxable event
of ‘manufacture’ occurred when the parts brought from the appellant’s factory
in CKD condition and the bought out ‘parts’ were assembled at the buyer’s site
to form the functional boiler, in discharge of its obligation as per Clause 2.1 of
the contract. He submitted that even assuming without conceding that the boiler
ceased to be ‘goods’ once it was affixed to the earth, the dutiable event
(‘manufacture’ of the boiler) had already occurred at a point in time prior to its
affixation to the earth and thus excise duty was payable on it.
26. He argued that the taxable event of ‘manufacture’ under Section 3 of the Act,
1944, having occurred in the present case at the buyer’s site which is the ‘place
of removal’, what remains thereafter is only determination of the correct
valuation of the payable excise duty on the said taxable event.
Page 13 of 57
Civil Appeal Nos. 856-857 of 2011
27. He submitted that as per the amended Section 4(1) of the Act, 1944 (w.e.f.
01.07.2000), the central excise duty is payable with reference to the transaction
value of the goods sold to a buyer, where price charged is the sole consideration
for the sale. He submitted that as per the said amended Section 4(1) read with
Section 4(3)(d) of the Act,1944, the “transaction value” means the price
actually paid or payable for the goods, when sold, which in the present dispute,
would be the total contract price. He pointed out that as per Clause 3.1(iii) of
the contract, the total contract price was inclusive, inter alia , of the “ cost of all
other items which are necessary for completing supply of the steam generating
plant as per scope of supply ”. He submitted that the assessee was clearing goods
as per the contract value agreed with the buyer, which included the cost right
from drawing and designing of the goods to freight, installation and
commissioning of the boilers at the site and also cost of its essential bought out
parts. He therefore argued that since the transaction under the contract was
completed after successful commissioning of the boiler, the value of the bought
out items would form part of the transaction value as per Section 4(1)(a) of the
Act,1944.
28. He also argued that the cost of the bought out items was recovered by the
assessee from the buyer and that the assessee had availed CENVAT Credit of
duty by including the duty paid on the bought out items under the head
‘Reimbursement of duty’ and had recovered the same from the buyer.
29. He further argued that the CESTAT was correct in holding that the bought out
items are essential parts of the boiler that was manufactured. The learned A.S.G
placed reliance on the distinction drawn by this Court in M/s. Quippo Energy
Page 14 of 57
Civil Appeal Nos. 856-857 of 2011
Ltd. v. Commissioner of Central Excise, Ahmedabad-II reported in 2025
INSC 1130 , between a ‘part’ and an ‘accessory’, and the observation that a part
is an integral/constituent component which renders the article complete and
functional, i.e. the article would not be able to fulfill its primary function
without this component. On the basis of this, he argued that the bought out
items were ‘parts’ of the boiler and not merely its accessories, and that from a
functional perspective, the bought out items cannot be said to be external to the
transaction under the contract for supply of a functional boiler. He argued that
any artificial vivisection of the transaction (and therefore the transaction value)
under the contract to exclude the value of the ‘bought out’ parts that were
nevertheless essential parts of the boiler is alien to the contract and also to the
Act,1944.
30. In the context of Thermax CESTAT (supra), the learned A.S.G. argued that the
law laid down by the CESTAT in Thermax CESTAT (supra) had not been
interfered with by this Court in appeal in Thermax SC (supra) , but was
dismissed based on the observation that there was, “ no need to go into the issue
raised by the appellant in this appeal as the decision of this appeal, either ways
would not affect the appellant if the duty itself is not demanded thereupon ”,
without raising any doubts regarding the correctness of the CESTAT’s order.
31. In such circumstances referred to above, the learned A.S.G. prayed that there
being no merit in the appeals, those be dismissed.
D. ISSUES TO BE DETERMINED
Page 15 of 57
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32. Having heard the learned counsel appearing for the parties and having gone
through the materials on record, the following questions fall for our
consideration:
(I). Whether the value of the duty paid bought out items delivered directly at
the buyer’s site is liable to be included in the value of the boiler cleared
by the assessee from its factory in completely knocked down (CKD)
condition, for the assessment of central excise duty?
(II). Whether the show cause notice is legal and valid under the extended
limitation period as provided under the proviso to Section 11A(1) of the
Central Excise Act, 1944?
E. ANALYSIS
(I). Whether the value of the duty paid bought out items delivered directly at
the buyer’s site is liable to be included in the value of the boiler cleared by
the assessee from its factory in completely knocked down (CKD) condition,
for the assessment of central excise duty?
(i). Understanding the nature of Central Excise Duty, in light of the charging
provision and valuation of quantum provision under the Central Excise Act,
1944:
33. The present matter before us strikes at the very root of the concept of exigibility
of central excise duty. Hence, at the outset, it is necessary to recall certain
Page 16 of 57
Civil Appeal Nos. 856-857 of 2011
foundational principles governing the levy of central excise duty under the Act,
1944.
34. It is pertinent to note that central excise duty is a duty on manufacture of goods.
A Three-judge Bench of this Court in Union of India and Others v. Bombay
Tyre International Ltd. and Others reported in ( 1984) 1 SCC 467 , while
discussing the concept of a duty of excise highlighted upon the nature of the
tax and observed as follows:
“12. We think it is appropriate that at the very beginning we
should briefly indicate the concept of a duty of excise[…]. The
observations show that while the nature of an excise is indicated
by the fact that it is imposed in respect of the manufacture or
production of an article, the point at which it is collected is not
determined by the point of time when its manufacture is completed
but will rest on considerations of administrative convenience, and
that generally it is collected when the article leaves the factory for
the first time. In other words, the circumstance that the article
becomes the object of assessment when it is sold by the
manufacturer does not detract from its true nature, that it is a levy
on fact of manufacture. In a subsequent case, Governor-General-
in-Council v. Province of Madras (AIR 1945 FC 98) the Privy
Council referred to both Central Provinces and Berar Sales of
Motor Spirit and Lubricants Taxation Act, 1938 and Province of
Madras v. Boddu Paidanna and Sons and affirmed that when
excise was levied on a manufacturer at the point of the first sale
by him “that may be because the taxation authority imposing a
duty of excise finds it convenient to impose the duty at the moment
when the excisable article leaves the factory or workshop for the
first time on the occasion of its sale. But that method of collecting
the tax is an accident of administration; it is not of the essence of
the duty of excise, which is attracted by the manufacture itself […]
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13. We think that we have shown sufficiently that while levy is on
the manufacture or production of goods, the stage of collection
need not in point of time synchronize with the completion of the
manufacturing process. While the levy in our country has the
status of a constitutional concept, the point of collection is
location where the statute declares it will be […]”
(Emphasis supplied)
35. Another aspect discussed by this Court in Bombay Tyre (supra) which is of
utmost relevance to the matter before us is understanding the nature of Section
3 and Section 4 of the Act, 1944 respectively. Hence, before delving into the
explanation regarding the nature of the two provisions as highlighted by this
Court in Bombay Tyre (supra) , it is pertinent to reproduce the provisions as it
existed at the time of the taxable event in contention, i.e. assembling of the
boiler parts in CKD condition with the bought out items at the site of erection.
36. Section 3 of the Act, 1944, that was in force at the time of the taxable event in
contention, read as follows:
“ SECTION 3. Duties specified in First Schedule and the Second
Schedule to the Central Excise Tariff Act, 1985 to be levied.-
(1) There shall be levied and collected in such manner as may be
prescribed,-
(a) a duty of excise to be called the Central Value Added Tax
(CENVAT) on all excisable goods which are produced or
manufactured in India as, and at the rates, set forth in the First
Schedule to the Central Excise Tariff Act, 1985 (5 of 1986);
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(b) a special duty of excise, in addition to the duty of excise specified
in clause (a) above, on excisable goods specified in the Second
Schedule to the Central Excise Tariff Act, 1985 (5 of 1986) which are
produced or manufactured in India, as, and at the rates, set forth in
the said Second Schedule.
Provided that the duties of excise which shall be levied and collected
on any excisable goods which are produced or manufactured,
(i) in a free trade zone or a special economic zone and brought to any
other place in India; or
(ii) by a hundred per cent export-oriented undertaking and brought
to any other place in India,
shall be an amount equal to the aggregate of the duties of customs
which would be leviable under the Customs Act, 1962 (52 of 1962)
or any other law for the time being in force, on like goods produced
or manufactured outside India if imported into India, and where the
said duties of customs are chargeable by reference to their value; the
value of such excisable goods shall, notwithstanding anything
contained in any other provision of this Act, be determined in
accordance with the provisions of the Customs Act, 1962 (52 of 1962)
and the Customs Tariff Act, 1975 (51 of 1975).
Explanation 1. - Where in respect of any such like goods, any duty of
customs leviable for the time being in force is leviable at different
rates, then, such duty shall, for the purposes of this proviso, be
deemed to be leviable at the highest of those rates.
Explanation 2. - In this proviso,-
(i) "free trade zone" means the Kandla Free Trade Zone and the
Santa Cruz Electronics Export Processing Zone and includes any
other free trade zone which the Central Government may, by
notification in the Official Gazette, specify in this behalf;
(ii) "hundred per cent export-oriented undertaking" means an
undertaking which has been approved as a hundred per cent export-
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oriented undertaking by the Board appointed in this behalf by the
Central Government in exercise of the powers conferred by section
14 of the Industries (Development and Regulation) Act, 1951 (65 of
1951), and the rules made under that Act.;
(iii) "special economic zone" means a zone which the Central
Government may, by notification in the Official Gazette, specify in
this behalf.
(1A) The provisions of sub-section (1) shall apply in respect of all
excisable goods other than salt which are produced or manufactured
in India by, or on behalf of, Government, as they apply in respect of
goods which are not produced or manufactured by Government.
(2) The Central Government may, by notification in the Official
Gazette, fix, for the purpose of levying the said duties, tariff values of
any articles enumerated, either specifically or under general
headings, in the First Schedule and the Second Schedule] to the
Central Excise Tariff Act, 1985 (5 of 1986) as chargeable with duty
ad valorem and may alter any tariff values for the time being in force.
(3) Different tariff values may be fixed –
(a) for different classes or descriptions of the same excisable goods;
or
(b) for excisable goods of the same class or description-
(i) produced or manufactured by different classes of producers or
manufacturers; or
(ii) sold to different classes of buyers:
Provided that in fixing different tariff values in respect of excisable
goods falling under sub-clause (i) or sub-clause (ii), regard shall be
had to the sale prices charged by the different classes of producers
or manufacturers or, as the case may be, the normal practice of the
wholesale trade in such goods.”
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37. Section 4 of the Act, 1944, (as amended w.e.f. 01.07.2000) that was in force at
the time of the taxable event in contention, read as follows:
“ SECTION 4. Valuation of excisable goods for purposes of
charging of duty of excise .-
(1) Where under this Act, the duty of excise is chargeable on any
excisable goods with reference to their value, then, on each removal
of the goods, such value shall -
(a) in a case where the goods are sold by the assessee, for delivery at
the time and place of the removal, the assessee and the buyer of the
goods are not related and the price is the sole consideration for the
sale, be the transaction value;
(b) in any other case, including the case where the goods are not sold,
be the value determined in such manner as may be prescribed.
(2) The provisions of this section shall not apply in respect of any
excisable goods for which a tariff value has been fixed under sub-
section (2) of section 3.
(3) For the purpose of this section,-
(a) "assessee" means the person who is liable to pay the duty of excise
under this Act and includes his agent;
(b) persons shall be deemed to be "related" if –
(i) they are inter-connected undertakings;
(ii) they are relatives;
(iii) amongst them the buyer is a relative and a distributor of the
assessee, or a sub-distributor of such distributor; or
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(iv) they are so associated that they have interest, directly or
indirectly, in the business of each other.
Explanation. - In this clause-
(i) "inter-connected undertakings" shall have the meaning assigned
to it in clause (g) of section 2 of the Monopolies and Restrictive Trade
Practices Act, 1969 (64 of 1969); and
(ii) "relative" shall have the meaning assigned to it in clause (41) of
section 2 of the Companies Act, 1956 (1 of 1956);
(c) "place of removal" means
(i) a factory or any other place or premises of production or
manufacture of the excisable goods;
(ii) a warehouse or any other place or premises wherein the excisable
goods have been permitted to be deposited without payment of duty,
from where such goods are removed;
(d) "transaction value" means the price actually paid or payable for
the goods, when sold, and includes in addition to the amount charged
as price, any amount that the buyer is liable to pay to, or on behalf
of, the assessee, by reason of, or in connection with the sale, whether
payable at the time of the sale or at any other time, including, but not
limited to, any amount charged for, or to make provision for,
advertising or publicity, marketing and selling organization
expenses, storage, outward handling, servicing, warranty,
commission or any other matter; but does not include the amount of
duty of excise, sales tax and other taxes, if any, actually paid or
actually payable on such goods.”
38. Since the observations of this Court in Bombay Tyre (supra) which are central
to our discussion are with reference to Section 4 of the Act, 1944 which was in
force prior to the amendment of 01.07.2000, and the revenue’s argument
focuses on the amendment, the erstwhile Section 4 of the Act, 1944 which
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existed at the time of Bombay Tyre (supra) is being reproduced here for the
sake of clarity, and it read as follows:
“ SECTION 4. Valuation of excisable goods for purposes of
charging of duty of excise. –
(1) Where under this Act, the duty of excise is chargeable on any
excisable goods with reference to value, such value, shall, subject to
the other provisions of this section, be deemed to be -
(a) the normal price thereof, that is to say, the price at which such
goods are ordinarily sold by the assessee to a buyer in the course of
wholesale trade for delivery at the time and place of removal, where
the buyer is not a related person and the price is the sole
consideration for the sale:
Provided that
(i) where, in accordance with the normal practice of the wholesale
trade in such goods, such goods are sold by the assessee at different
prices to different classes of buyers (not being related persons) each
such price shall, subject to the existence of the other circumstances
specified in clause (a), be deemed to be the normal price of such
goods in relation to each such class of buyers;
(ia) where the price at which such goods are ordinarily sold by the
assessee is different for different places of removal, each such price
shall, subject to the existence of other circumstances specified in
clause (a), be deemed to be the normal price of such goods in relation
to each such place of removal;
(ii) where such goods are sold by the assessee in the course of
wholesale trade for delivery at the time and place of removal at a
price fixed under any law for the time being in force or at a price,
being the maximum, fixed under any such law, then, notwithstanding
anything contained in clause (iii) of this proviso, the price or the
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maximum price, as the case may be, so fixed, shall, in relation to the
goods so sold, be deemed to be the normal price thereof;
(iii) where the assessee so arranges that the goods are generally not
sold by him in the course of wholesale trade except to or through a
related person, the normal price of the goods sold by the assessee to
or through such related person shall be deemed to be the price at
which they are ordinarily sold by the related person in the course of
wholesale trade at the time of removal, to dealers (not being related
persons) or where such goods are not sold to such dealers, to dealers
(being related persons), who sell such goods in retail;
(b) where the normal price of such goods is not ascertainable for the
reason, that such goods are not sold or for any other reason, the
nearest ascertainable equivalent thereof determined in such manner
as may be prescribed.
(2) Where, in relation to any excisable goods the price thereof for
delivery at the place of removal is not known and the value thereof is
determined with reference to the price for delivery at a place other
than the place of removal, the cost of transportation from the place
of removal to the place of delivery shall be excluded from such price.
(3) The provisions of this section shall not apply in respect of any
excisable goods for which a tariff value has been fixed under sub-
section (2) of section 3.
(4) For the purposes of this section,
(a) "assessee" means the person who is liable to pay the duty of excise
under this Act and includes his agent;
(b) "place of removal" means
(i) a factory or any other place or premises of production or
manufacture of the excisable goods; [ ] *
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(ii) a warehouse or any other place or premises wherein the excisable
goods have been permitted to be deposited without payment of duty;
(iii) a depot, premises of a consignment agent or any other place or
premises from where the excisable goods are to be sold after their
clearance from the factory and,
from where such goods are removed;
(ba) "time of removal", in respect of goods removed from the place
of removal referred to in sub-clause (iii) of clause (b), shall be
deemed to be the time at which such goods are cleared from the
factory;
(c) "related person" means a person who is so associated with the
assessee that they have interest, directly or indirectly, in the business
of each other and includes a holding company, a subsidiary company,
a relative and a distributor of the assessee, and any sub-distributor
of such distributor.
Explanation. - In this clause "holding company", "subsidiary
company" and "relative" have the same meanings as in the
Companies Act, 1956 (1 of 1956);
(d) "value", in relation to any excisable goods, -
(i) where the goods are delivered at the time of removal in a packed
condition, includes the cost of such packing except the cost of the
packing which is of a durable nature and is returnable by the buyer
to the assessee.
Explanation. In this sub-clause, "packing" means the wrapper,
container, bobbin, pirn, spool, reel or warp beam or any other thing
in which or on which the excisable goods are wrapped, contained or
wound;
(ii) does not include the amount of the duty of excise, sales tax and
other taxes, if any, payable on such goods and, subject to such rules
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as may be made, the trade discount (such discount not being
refundable on any account whatsoever) allowed in accordance with
the normal practice of the wholesale trade at the time of removal in
respect of such goods sold or contracted for sale.
Explanation. For the purposes of this sub-clause, the amount of the
duty of excise payable on any excisable goods shall be the sum total
of -
(a) the effective duty of excise payable on such goods under this Act;
and
(b) the aggregate of the effective duties of excise payable under other
Central Acts, if any, providing for the levy of duties of excise on such
goods, and the effective duty of excise on such goods under each Act
referred to in clause ( a) or clause (b) shall be, -
(i) in a case where a notification or order providing for any
exemption (not being an exemption for giving credit with respect to,
or reduction of duty of excise under such Act on such goods equal to,
any duty of excise under such Act, or the additional duty under
section 3 of the Customs Tariff Act, 1975 (51 of 1975), already paid
on the raw material or component parts used in the production or
manufacture of such goods) from the duty of excise under such Act is
for the time being in force, the duty of excise computed with reference
to the rate specified in such Act, in respect of such goods as reduced
so as to give full and complete effect to such exemption, and
(ii) in any other case, the duty of excise computed with reference to
the rate specified in such Act in respect of such goods.
(e) “whole sale trade” means sales to dealers, industrial consumers,
Government, local authorities and other buyers, who or which
purchase their requirements otherwise than in retail.”
39. Having read the erstwhile Section 3 and Section 4 of the Act, 1944,
respectively, we come back to this Court’s observation in Bombay Tyre (supra).
This Court in Bombay Tyre (supra) observed that while Section 3 provides for
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the levy of the duty of excise, Section 4 provides the measure by reference to
which the charge is to be levied. It was categorically emphasised upon, 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 relevant observation of this Court in Bombay Tyre
(supra) , reads as follows:
“14. We move on now to a different dimension, to the conceptual
consideration of the measure of the tax. Section 3 of the Central
Excises and Salt Act provides for the levy of the duty of excise. It
creates the charge, and defines the nature of the charge. That it is a
levy on excisable goods, produced or manufactured in India, is
mentioned in terms in the section itself. Section 4 of the Act provides
the measure by reference to which the charge is to be levied. The duty
of excise is chargeable with reference to the value of the excisable
goods, and the value is defined in express terms by that section. It
has long been recognised that the measure employed for assessing
a tax must not be confused with the nature of the tax… In other
words, the measure adopted could not be identified with the nature
of the tax.”
(Emphasis supplied)
40. This Court in Bombay Tyre (supra) also referred to this Court’s judgment in
D.G. Gouse and Co. v. State of Kerala reported in (1980) 2 SCC 410 which in
turn had referred to a passage from Seervai’s Constitutional Law of India , to
further explain the distinction between the subject of a tax and a measure of a
tax. The relevant observation of this Court in Bombay Tyre (supra) , reads thus:
“14. […]The point was considered by this Court again in D.G. Gouse
and Co. v. State of Kerala [(1980) 2 SCC 410] where reference was
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made to the measure adopted for the purpose of the levy of tax on
buildings under the Kerala Building Tax Act. The Court examined the
different modes available to the Legislature for measuring the levy
with the annual value of the building and prescribing a uniform
formula for determining its capital value and for calculating the tax.
In the course of its judgment, the Court cited with approval a passage
from Seervai’s Constitutional Law of India [Second Edn. Vol.2 at p.
1258]:
“…Another principle for reconciling apparently
conflicting tax entires follows from the fact that a tax has
two elements: the person, thing or activity on which the tax
is imposed, and the amount of the tax. The amount may be
measured in many ways; but decided cases establish a
clear distinction between the subject-matter of a tax and
the standard by which the amount of tax is measured. These
two elements are described as the subject of a tax and the
measure of a tax…”
It is, therefore, clear that the levy of a tax is defined by its nature,
while the measure of the tax may be assessed by its own standard. It
is true that the standard adopted as the measure of the levy may
indicate the nature of the tax but it does not necessarily determine it
[…]”
41. It is clear from the above-quoted observations of this Court in Bombay Tyre
(supra ) that Section 3 of the Act, 1944 specifies the subject-matter on which
the excise duty is to be levied, whereas Section 4 of the Act, 1944 prescribes
the measure of such excise duty. Unfortunately, in the case on hand, the revenue
lost sight of this crucial distinction in the nature of these two statutory
provisions. The revenue erred in its application of the amended Section 4 of the
Act, 1944 (w.e.f. 01.07.2000) by conflating the two distinct stages of excise
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duty assessment, i.e. (i) levy under Section 3 and (ii) computation of the
quantum of levy under Section 4 of the Act, 1944, into one. Although Section
4 was amended (w.e.f. 01.07.2000) to modify the valuation methodology, yet
such amendment did not alter the essential character of the provision and it
continues to remain a provision for prescribing the measure of the tax and not
a charging provision in itself.
42. In other words, 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
on the basis of the contract price. However, for the revenue to contend that the
contract price would become the basis of the ‘transaction value’ for the purpose
of determination of the payable excise duty, it has to first establish that the final
product of the contract itself is excisable.
43. Applying the foundational principles set out hereinabove, it is clear that the
‘transaction value’ under Section 4 of the Act, 1944, merely serves as the basis
for computing the quantum of excise duty payable, but cannot determine
excisability. It must necessarily be borne in mind that valuation is a
consequence of levy, not its determinant. Accordingly, the correct sequence of
central excise duty assessment under the Act, 1944 is as follows:
i. First, determining the applicability of the charging provision under
Section 3, i.e. whether the process results in the manufacture of excisable
goods; and
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ii. Secondly, (if the first condition is satisfied), computing the quantum of
excise duty payable under the valuation provisions, such as Section 4 (or
Section 4A, although Section 4A is not relevant to this present matter
before us).
44. Thus, it is necessary to first examine whether the resultant product that emerges
at the buyer’s site by assembling the parts brought in CKD condition along with
the bought out items, qualifies as an “excisable good” under the Act, 1944. Only
if such product which emerges as a result of the contract qualifies as excisable
goods can the next step of evaluation be undertaken, i.e. to see whether or not
the contract price can be treated as the ‘transaction value’ under Section 4, for
computing the quantum of payable excise duty. Consequently, if upon such
examination it is found that the contract price could validly be taken as the
‘transaction value’ under Section 4, a show cause notice may be issued seeking
why the value of the bought out items should not be added to the value of the
boiler. In other words, if upon examination it is found that the resultant product
of the contract is not excisable goods, then the contract price cannot be
considered as the ‘transaction value’ for the purpose of determining the payable
central excise duty on the boiler, which in turn would also mean that the value
of the bought out goods is not liable to be included in the value of the boiler for
computing central excise duty.
(ii). Whether the resultant final product of the contract would fall within the
ambit of “Excisable Goods”?
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45. The term “ excisable goods ” defined under Section 2(d) of the Act, 1944, as it
existed at the time of the taxable event in question read as follows:
“ SECTION 2. Definitions.- In this Act, unless there is anything
repugnant in the subject or context,-
xxx xxx xxx
(d) “excisable goods” means goods specified in the First Schedule
and the Second Schedule to the Central Excise Tariff Act, 1985 (5 of
1986) as being subject to a duty of excise and includes salt;”
46. The term “goods” has not been defined in the Act, 1944. However, through a
catena of judgments of this Court, it is now a settled position of law that excise
duty is leviable only on ‘goods’ and that the test of movability is the decisive
factor in ascertaining whether an article qualifies as “goods” for the purpose of
central excise duty. A Coordinate Bench of this Court in a judgment in M/s
Bharti Airtel Ltd. v. The Commissioner of Central Excise, Pune reported in
2024 INSC 880 , undertook an extensive examination of the expression “goods”
under the Act, 1944. After a close examination of the meaning of “goods” under
Section 2(7) of the Sale of Goods Act, 1930, Section 2(52) of the Central Goods
and Services Tax Act, 2017, Section 2(d) of the Central Sales Tax Act, 1956,
Section 2(22) of the Customs Act, 1962, Section 2(i) of the Competition Act,
2002, Section 2(13) of the Motor Vehicles Act, 1988, Section 2(f) of the Micro,
Small and Medium Enterprises Development Act, 2006, Section 2(14) of the
Bureau of Indian Standards Act, 2016 and Section 2(21) of the Consumer
Protection Act, 2019, respectively, this Court concluded that the definition of
“goods” under the Sale of Goods Act, 1930 seems to be the basis of the term
“goods” in other Statutes. Therefore, this Court observed that for the meaning
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of the term “goods”, the definition given in the Sale of Goods Act, 1930 would
be primarily relied upon. The relevant observation of this Court in Bharti Airtel
(supra) is as follows:
“11.2.5 “Goods” has not been defined in the Central Excise Act,
1944. We, therefore, look into other statutes. The term “goods” has
been defined under various statutes some of which may be mentioned
as below.
xxx xxx xxx
11.2.6 From the above, it appears that the definition of “goods”
under the Sales of Goods Act, 1930 seems to be the basis of the term
“goods” in other Statutes. Hence, we would primarily rely on the
definition given in the Sale of Goods Act.”
47. This Court in Bharti Airtel (supra) went further to observe that since the items
in consideration before it, were neither actionable claim nor money, nor falling
within the inclusive clause of the definition, viz., stocks, shares, growing crops,
grass, and things attached to or forming part of the land which are agreed to be
severed before sale or under contract of sale, the test of movability would
determine whether those items would be “goods”. However, this Court
observed that in order to determine whether an item is movable or immovable,
the enquiry has to go beyond a simpliciter application of the definitions of the
terms “movable goods” and “immovable goods” under Section 3(36) of the
General Clauses Act, 1897 and Section 3(26) of the General Clauses Act, 1897
read with Section 3 of the Transfer of Properties Act, 1882, respectively. The
relevant observation of this Court in Bharti Airtel (supra) reads as under:
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“11.2.7 The items in consideration viz., towers and prefabricated
buildings are neither actionable claim nor money, nor do they come
within the inclusive clause of the definition, viz., stocks, shares,
growing crops, grass, and things attached to forming part of the land
which are agreed to be severed before sale or under contract of sale.
xxx xxx xxx
11.3 Thus, the focus of our inquiry now will be to ascertain whether
these items namely, towers, its parts thereof and prefabricated
buildings are movable or immovable properties.
11.3.1 As to what is a movable property has been defined and can be
understood from the expansive meaning assigned to it under Section
3(36) of the General Clauses Act, 1897 which states that,“movable
property shall mean property of every description except immovable
property”.
11.3.2 The aforesaid definition categorically indicates that movable
and immovable properties are mutually exclusive. Thus, if it is found
that these items are not immovable properties, these invariably can
be treated as movable properties under Section 3(36) of the General
Clause Act and thus will be “goods” within the meaning of Section
2(7) of the Sale of Goods Act, 1930 and hence may qualify as “capital
goods” within the meaning of Rule 2(a)(A) subject to fulfilling other
conditions mentioned therein.
11.3.3 As to what is immovable property has been explained under
Section 3 of the Transfer of Property Act, 1882 which specifies that
“immovable property does not include standing timber, growing
crops or grass”.
11.3.4 It has been also defined under Section 3(26) of the General
Clauses Act, though not exhaustively, but in an inclusive manner by
providing that “immovable property” shall include “land, benefits to
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arise out of land and things attached to the earth, or permanently
fastened to anything attached to the earth”.
11.3.5 Therefore, we have to consider whether these items are
attached to the earth or are permanently fastened to anything
attached to the earth, for if these are found to be so, these will be
immovable properties and hence cannot be “goods” and
consequently, cannot be “capital goods” within the scope of the
CENVAT Rules.
11.4 As to what amounts to “attached to earth” as mentioned under
Section 3(26) of the General Clauses Act, has been explained under
Section 3 of the Transfer of Property Act, 1882 to mean as rooted in
the earth, as in the case of trees and shrubs; imbedded in the earth,
as in the case of walls or buildings; or attached to what is so
imbedded for the permanent beneficial enjoyment of that to which it
is attached.
11.5 For easy reference, the aforesaid definition clauses of the
Transfer of Property Act, 1882 and the General Clauses Act, 1897 as
may be relevant are reproduced below.
Section 3(36) of the General Clauses Act.
“movable property” shall mean property of every
description, except immovable property;
Section 3(26) of the General Clauses Act.
“immovable property” shall include land, benefits to arise
out of land, and things attached to the earth, or
permanently fastened to anything attached to the earth.
Section 3 of the Transfer of Property Act.
“immovable property” does not include standing timber,
growing crops or grass.
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Under Section 3 of the Transfer of Properties Act,
“attached to the earth” means:
(a) rooted in the earth, as in the case of trees and shrubs;
(b) imbedded in the earth, as in the case of walls or
buildings; or
(c) attached to what is so imbedded for the permanent
beneficial
enjoyment of that to which it is attached.
11.6 From the above, it is now clear that if these items, namely towers
and parts thereof and prefabricated buildings/shelters are considered
to be “goods”, these cannot be immovable properties. Conversely, if
these are not rooted in the earth, nor imbedded in the earth nor
attached to what is so imbedded for the permanent beneficial
enjoyment of that to which it is attached, these cannot be
immovable properties and can qualify to be movable properties and
hence, “goods”.
11.6.1 Since, towers and parts thereof and prefabricated
buildings/shelters apparently appear to be fixed on the earth or
building, these seem to be immovable properties at the first blush.
However, the first appearance may not be decisive to indicate the real
character of these items, whether these are immovable or movable
properties, as demonstrated by the conflicting views of the two High
Courts on this issue. Hence, we need to delve further to arrive at the
correct position in law on this issue.
11.7 In order to determine whether any property is movable or
immovable, this Court, in the light of the statutory provisions has
applied certain principles. It has also been noted that such
determination may be done not based on a single test but after
applying several criteria on the facts of each case.”
(Emphasis supplied)
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48. We should now look into a few landmark judgments to help us understand when
an article would be considered as movable or immovable for the purpose of
levying excise duty under the Act, 1944.
49. This Court in Quality Steel Tubes (P) Ltd. v. Collector of Central Excise, U.P.
reported in (1995) 2 SCC 372 dealt with the question whether the tube mill and
welding head erected and installed by the assessee for manufacture of tubes and
pipes out of duty-paid raw materials amounted to “excisable good” assessable
to duty under the Act, 1944. This Court observed that, the basic test of levying
duty under the Act, 1944 is two fold: One, that any article must be a good and
second, that the same should be marketable or capable of being brought to
market. Goods which are attached to the earth and thus become immovable do
not satisfy the test of being goods within the meaning of the Act, nor can it be
said to be capable of being brought to the market for being bought and sold. It
was held that the subject tube mill or welding head having been erected and
installed in the premises and embedded to earth, ceased to be goods within the
meaning of Section 3 of the Act,1944. This Court categorically observed that
erection and installation of a plant cannot be held to be excisable goods. This
Court’s observation in Quality Steel (supra) reads thus:
“4. Levy and collection of duty is provided by Section 3 of the Act on
all 'excisable goods other than salt which are produced or
manufactured'. The power, therefore, to levy and collect the duty
under the charging Section arises when excisable goods are
produced or manufactured. What is an 'excisable good' is defined by
Sub-section (d) of Section 2 to mean 'goods specified in the Schedule
to the Central Excise Tariff Act, 1985 as being subject to a duty of
excise and includes salt'. The words 'excisable good', therefore, has
a connotation of its own.
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5. In several decisions rendered by this Court commencing from
Union of India and Anr., v. Delhi Cloth and General Mills Co. Ltd.
MANU/SC/0245/1962 : to Indian Cable Co. Ltd. v. Collector of
Central Excise, Calcutta MANU/SC/0012/1995 : 1994ECR20(SC)
the twin test of exigibility of an article to duty under Excise Act are
that it must be a good mentioned either in the Schedule or under Item
68 and must be marketable. In Delhi Cloth Mills (supra) it having
been held that the word 'good' applies to those goods which can be
brought to market for being bought and sold it is implied that it
applies to such goods as are moveable. The requirement of the goods
being brought to the market for being brought and sold has become
known as the test of marketability which has been reiterated by this
Court in Collector of Central Excise v. Ambalal Sarabhai Enterprises
MANU/SC/0012/1990 : The Court has held in Union Carbide India
Ltd. v. Union of India and Ors. MANU/SC/0306/1986 : that even if a
good was capable of being brought to market, it would satisfy the test
of marketability. The basic test, therefore, of levying duty under the
Act is two fold. One, that any article must be a good and second, that
it should be marketable or capable of being brought to market. Goods
which are attached to the earth and thus become Immovable do not
satisfy the test of being goods within the meaning of the Act nor it can
be said to be capable of being brought to the market for being
brought and sold. Therefore, both the tests, as explained by this
Court, were not satisfied in the case of appellant as the tube mill or
welding head having been erected and installed in the premises and
embedded to earth they ceased to be goods within meaning of Section
3 of the Act.
6. Learned Counsel for the revenue urged that even if the goods were
capable of being brought to the market it would attract levy. True,
but erection and installation of a plant cannot be held to be
excisable goods. If such wide meaning is assigned it would result in
bringing in its ambit structures, erections and installations. That
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surely would not be in consonance with accepted meaning of
excisable goods and its exigibility to duty.
(Emphasis supplied)
50. This Court in Mittal Engineering Works (P) Ltd. v. Collector of Central
Excise, Meerut reported in (1997) 1 SCC 203 , expressed its agreement with
the observation in Quality Steel (supra) that erection and installation of a plant
cannot be held to be an excisable good. This Court in Mittal Engineering
(supra) observed as follows:
“ 9. Upon the material placed upon record and referred to above, we
are in no doubt that the mono vertical crystalliser has to be
assembled, erected and attached to the earth by a foundation at the
site of the sugar factory. It is not capable of being sold as it is, without
anything more. As was stated by this Court in the case of Quality
Steel Tubes (P) Ltd. the erection and installation of a plant is not
excisable. To so hold would, impermissibly, bring into the net of
excise duty all manner of plants and installations.
(Emphasis supplied)
51. The issue of movability was once again discussed by this Court in Sirpur Paper
Mills Ltd v. Collector of Central Excise, Hyderabad reported in (1998) 1 SCC
400 , whereby this Court clarified through an analogy that merely attaching of
an item to the earth would not make it immovable property for the purpose of
the Act, 1944. This Court considered the movability test from the perspective
of its marketability in dismantled form and agreed with the Tribunal’s view in
that case that the the subject machine had been attached to the concrete base to
prevent its wobbling but if somebody wanted to purchase the whole machinery,
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it could be dismantled and sold to him in parts. The relevant observation of this
Court in Sirpur Paper Mills (supra) is as follows:
“3 […] The Tribunal held that the machine was attached to earth for
operational efficiency. The whole purpose behind attaching the
machine to a concrete base was to prevent wobbling of the machine
and to secure maximum operational efficiency and also for safety.
The Tribunal further held that the paper- making machine was
saleable and observed "if somebody wants to purchase, the whole
machinery could be dismantled and sold to him in parts".
4. In view of this finding of fact, it is not possible to hold that the
machinery assembled and erected by the appellant at its factory site
was immovable property as something attached to earth like a
building or a tree. The Tribunal has pointed out that it was for the
operational efficiency of the machine that it was attached to earth. If
the appellant wanted to sell the paper-making machine it could
always remove it from its base and sell it.
5. Apart from this finding of fact made by the Tribunal, the point
advanced on behalf of the appellant, that whatever is embedded in
earth must be treated as immovable property is basically not sound.
For example, a factory owner or a householder may purchase a
water pump and fix it on a cement base for operational efficiency and
also for security. That will not make the water pump an item of
immovable property. Some of the components of the water pump may
even be assembled on site. That too will not make any difference to
the principle. The test is whether the paper-making machine can be
sold in the market. The Tribunal has found as a fact that it can be
sold. In view of that finding, we are unable to uphold the contention
of the appellant that the machine must be treated as a part of the
immovable property of the Company. Just because a plant and
machinery are fixed in the earth for better functioning, it does not
automatically become an immovable property.
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6. A further argument was made that the entire machinery as it is
cannot be bought and sold because the machinery will have to be
dismantled before being sold. The Tribunal has pointed out that the
appellant had himself bought several items and completed the
machinery. It had purchased a large number of components and
fabricated a few and manufactured the paper-making machine at site.
If it is sold it has to be dismantled and reassembled at another site.
We do not find any fault with the reasoning of the Tribunal on this
aspect of the matter.”
(Emphasis supplied)
52. Thus, as per this Court’s observation in Sirpur Paper Mills (supra) , it can be
inferred that if an item can be dismantled and reassembled at another site, such
an item would still be considered as movable ‘goods’ under the Act, 1944.
However, the test of dismantling was qualified by a subsequent Circular (no.
58/1/2002-CX) dated 15.01.2002, issued by the Central Board of Excise and
Custom (hereinafter, “ CBEC ”), Department of Revenue, Ministry of Finance,
Government of India, in which it was mentioned under Clause (e) that if an
item that is assembled or erected at 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 CBEC Circular dated 15.01.2022 reads as follows:
“ (e) If items assembled or erected at site and attached by foundation
to earth cannot be dismantled without substantial damage to its
components and thus cannot be reassembled, then the items would
not be considered as movable and will, therefore, not be excisable
goods.”
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53. Having regard to the case law discussed above, it becomes imperative to
determine whether the steam generating plant, as erected and commissioned at
the site retains the character of “goods” as understood under the Act, 1944, in
terms of being a movable property. For this, we must look into few relevant
clauses of the contract to discern the object of the contract and the resultant
item that emerges out of it.
54. Clause 1(b) of the contract reads as follows:
“1. DEFINITIONS:
[…] b) STEAM GENERATING PLANT: It shall mean the plant &
machinery and equipment for Boiler as specified in Annexure I to VI
attached herewith and forming part of the agreement. ”
55. Clause 2.1 of the contract reads as follows:
“ 2. Scope of Supply:
2.1 The Seller shall design, procure, manufacture, supply of the
machinery and equipments for one no. 50 TPH MCR Capacity
and 45 Kg./cm2(g) working pressure, bagasse fired boiler as
detailed in Annexure I to V annexed to and forming part of this
Agreement conformity with the specifications including
clarifications and elucidations laid down therein and according to
the progressive delivery schedules to be drawn up by the Seller
and to be approved by the Purchaser and their authorised
inspection agency, so that the plant shall be ready for
commissioning within the time provided in clause 4.1 of the
Agreement.
(Emphasis supplied)
56. Clause 3.1 of the contract reads as follows:
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“3. CONTRACT PRICE:
3.1 The Sellers agree to design, procure, manufacture, supply of
the machinery and equipment for Steam Generating plant and
do other work herein mentioned as specified in Annexure I to V
annexed to and forming part of the Agreement at a Total Price of
Rs.360.00 lacs (Rupee Three Crores Sixty Lacs only) hereinafter
referred to as Contract Price subject to terms and conditions as
hereinafter provided as per the break-up given below:
i) Ex-works: (Ex-Sellers or their sub-contractors workshop or
place of supply) price of machinery and equipment for Steam
Generating plant according to specification and details given in
Annexure I to V is Rs.350.00 lacs (Rupees Three Crores Fifty lacs
Only)
ii) Price of materials required for following necessary facilities in
respect of 3.1 (i) above.
a) Paints required for final painting. It shall include primer and
paints as per colour scheme to be given by Purchaser.
b) First filling of lubricants. It shall include oil and grease.
c) First filling of transformer oil, if any.
d) Packing and Forwarding charges.
e) Freight Charges upto the site.
f) Handling and loading at the place of supply.
g) Total cost of above items (a) to (f) - Rs. 10.00 lacs (Rupees Ten
lacs only.)
iii) Total Contract Price Rs. 360.00 lacs - (Rupees Three Crores
Sixty lacs only.)
It is to be clearly understood that the total Contract Price is
inclusive of the cost of the following:
a) Cost of all other items which are necessary for completing
supply of the Steam Generating plant as per scope of supply.
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b) All taxes, duties and octroi paid by the Seller or their sub-
contractors on raw materials and other materials for their own
manufacture of finished equipment or parts of finished equipment.
c) Custom duty on imported raw-materials.”
(Emphasis supplied)
57. Clause 10(j) of the contract reads as follows:
“ Boiler Refractory Work : The Sellers have to provide all
necessary refractories both ordinary and special inclusive of
standard and special fire bricks, fire cement, fire clay , asbestos
ropes, asbestos sheets etc. for wherever they are required
including hot air duct. The ducting between the boiler and the
chimney and the entire boiler brick work will also be the Sellers
responsibilities. Red bricks and port land cement, sand and lime
shall be provided by the Purchasers.”
(Emphasis supplied)
58. Clause 13.1.3(b) of the contract reads as follows:
“13. TERMS OF PAYMENT :
13. 1. The Purchasers shall pay the contract price in the following
manner free of interest.
xxx xxx xxx
13. 1.3. 7.5% (Seven & half Percent) of the contract price of
machinery and equipments (mentioned against 3.1 (i) necessary
facilities contained in 3.1 (ii) (a) to (f) of the Agreement, i.e. Rs.
27,00,000/- (Rupees Twenty seven Lacs Only.) within 3 (three)
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months of signing of the Agreement and on fulfilling all the following
contractual obligation by the Sellers:
[…] b) Placing order, releasing advances and furnishing the order
acceptance copies from the concerned vendors for following critical
bought out items:
• Boiler quality plates for steam and mud-drum
• High pressure valves and fittings including safety valves.
• ID, FD and SA fans.
• Drives for above fans including panels.
• Wet Scrubber.
• Instrumentation.
• Furnace grate.
• Feed pumps, transfer pumps and their drives.
• All Bagasse Carrier Chain and Drives.
• Economizer and Air Pre-heaters.
• Soot Blowers
AND
• Supply of Boiler structural material. ”
(Emphasis supplied)
59. A close reading of Clause 2.1, and Clause 3.1 of the contract, respectively,
indicates that the scope of the contract was design, procurement, manufacture
and supply of the machinery and equipment for a steam generating plant. The
poorly drafted definition of “ Steam Generating Plant” under Clause 1(b) of the
contract causes an overlap between the terms ‘boiler’ and ‘steam generating
plant’. However when the definition of “ Steam Generating Plant ” to mean “ the
plant & machinery and equipment for Boiler ” is read in light of the scheme of
the contract as a whole, we find that the object of the contract was that the boiler
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parts manufactured by the assessee and transported to the site of erection in
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. The steam generating plant comes into existence as a
composite system comprising various components- some manufactured by the
assessee (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.
60. The revenue seeks to suggest that the mere act of assembling the boiler parts
cleared in CKD condition from the assessee’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. In other words, the
revenue’s contention is that the boiler in CKD condition and the bought out
items first coalesce into a movable boiler before being affixed to the ground,
and that it is at this intermediate stage that excise duty is to be levied. The
revenue’s proposition would hold good only if it were established that such a
movable boiler, distinct from the immovable steam generating plant, does in
fact come into existence as a result of the assembling of the CKD parts and
bought out items. However, such a proposition as suggested by the revenue is
both impractical and improbable when examined in light of the nature, volume
and magnitude of the boiler in question, as indicated by Clause 2.1 of the
contract, which provides its specifications as being a ‘50 TPH MCR Capacity
and 45 Kg./cm2(g) working pressure, bagasse fired boiler’.
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61. While referring to Clause 10(j), read with Clause 13.1.3(b) of the contract, we
find that the assembly involves civil engineering using fire bricks, fire cement,
portland cement, fire clay, asbestos ropes, asbestos sheets and other materials
indicating that civil engineering work had to be undertaken in the course of
assembling the boiler. The erection and assembly of a ‘50 TPH MCR Capacity
and 45 Kg./cm2(g) working pressure, bagasse fired boiler’ cannot possibly be
akin to assembling movable equipment or machinery that can exist
independently as ‘goods’. It is not akin to, for example, affixing a water pump
on a residential building with cement, which can be removed without damage.
Rather, 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. Such process of
assembly, erection and installation involving construction materials like bricks,
clay, sand, cement, etc. clearly indicate that the resultant product cannot be
dismantled into its constituent parts without being substantially damaged.
62. Thus, we find merit in the arguments raised by the assessee that the mere size
and weight of the boiler make it impossible to assemble the boiler before
erection, and that the process of erection itself involves civil and mechanical
engineering with the use of concrete, steel reinforcements, and grouting in such
a manner that the coming into existence of the boiler in a functioning condition
is in an immovable form. The assembly and erection of the boiler is essentially
intertwined in such a manner that we also find merit in the assessee’s argument
that such an installed boiler cannot be readily dismantled by merely removing
nuts and bolts and reassembled at another site without causing extensive
damage to the boiler to an extent so as to reduce its value to mere scrap.
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63. The object of the contract therefore is about erection and installation of an
immovable plant. As noted by this Court in Quality Steel (supra) and
unequivocally affirmed by another Co-ordinate Bench of this Court in Mittal
Engineering (supra), “ erection and installation of a plant cannot be held to be
excisable goods” and therefore, the steam generating plant that emerges as a
result of the contract cannot be held to be an excisable good. Consequently, the
base value of the boiler on which excise duty is to be levied, cannot be equated
with the total contract price which is inclusive of the price of the bought out
items.
64. Applying the above principles to the facts of the present case, we arrive at the
finding that the final product that emerges as a result of performing the
obligations under the contract, does not constitute excisable goods under the
Act, 1944. Consequently, the base value of the boiler on which excise duty is
to be levied, cannot be equated with the total contract price. Therefore, the price
of the bought out parts cannot be included in the value of the boiler for the
purpose of computing central excise duty under the Act, 1944.
65. Before proceeding further, we find it necessary and crucial to highlight that the
CESTAT committed a glaring error when it declined to consider the
immovability plea by the assessee, on the ground that the said plea was not
taken before the lower authorities. Contrary to the CESTAT’s findings in the
impugned order, the documents on record clearly indicate that the said plea was
taken by the assessee right from the earliest stage of its reply to the show cause
notice itself. We find that the facts on record support the assessee’s contention
that in its reply dated 13.06.2005 to the show cause notice dated 28.04.2005, it
had specifically raised the contention that the boiler on commissioning became
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immovable property. Materials on record also indicate that the said contention
regarding immovability was accepted by the Assistant Commissioner and the
same reflects in the finding recorded in the Order-in-Original dated
07.12.2005/13.01.2006 that boilers erected at site and attached to earth are not
goods and hence not excisable. Therefore, for the CESTAT to ignore the most
central issue, going to the root of the entire dispute, on an erroneous finding of
fact, is an egregious flaw in the impugned order.
(iii). Erroneous reliance on Tariff Classification
66. At this stage, it is also important to address this issue from one another angle
and provide a cautionary note in this respect. The revenue appears to have been
swayed by the fact that ‘ boilers’ and ‘ boiler parts’ are listed under Chapter 84
of the Tariff Act, 1985, and therefore seem to have proceeded on the erroneous
assumption that all boilers, irrespective of form or configuration, attract central
excise duty. However, the revenue should have kept in mind that the mere
presence of a product in the Tariff Schedule does not determine its excisability.
The first and primary enquiry must be whether the item satisfies the conditions
of the charging section under Section 3 of the Act, 1944, an essential condition
of which is that the subject matter is a movable good.
67. A significant observation made by a Three-judge Bench of this Court in Moti
Laminates (P) Ltd. v. CCE reported in (1995) 3 SCC 23 that succinctly drives
home this cautionary note reads as follows:
“ 11. […] The Tariff Schedule by placing the goods in specific and
general category does not alter the basic character of leviability. The
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duty is attracted not because an article is covered in any of the items
or it falls in residuary category but it must further have been
produced or manufactured and it is capable of being bought and
sold. ”
(iv). Inapplicability of the “Utility Test” and the ‘part’ v. ‘accessory’ debate
68. Further, it is relevant to note that both the revenue and the CESTAT have
erroneously resorted to focusing on whether the bought out parts were essential
to the functioning of the assembled boiler or not. The determination of the
question, whether or not the bought out items were ‘parts’ or ‘accessories’, in
terms of this Court’s observation in Quippo ( supra ), would have been of some
relevance in the present matter only if the resultant product of the contract
would fall within excisable goods. In other words, the question of utility would
have been relevant to the determination of payable excise duty, if a movable
boiler had resulted from integrating the CKD parts with the bought out items.
69. However, as observed above, in the present case, the final product, i.e. the steam
generating plant, emerges in the form of an immovable product in the course of
integrating the CKD parts with the bought out items. Therefore, the resultant
product of the contract not being excisable goods, it is wholly inconsequential
whether or not the bought out items are parts or accessories of it.
(v). Excess collection of excise duty from buyer is no proof of excisability
70. It is also necessary to address the contention raised by the revenue that the
assessee availed CENVAT Credit of duty paid on the bought out items and
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recovered the same from the buyer. The revenue has placed reliance on this to
bolster its argument that the value of the bought out items should be included
in the dutiable value shown at the time of clearance of the boiler.
71. Irrespective of the fact whether the assessee had denied the allegation in its
Section 14 statement under the Act, 1944, it is necessary to point out the error
committed by the revenue in making such an argument.
72. Even if there is any substance in the allegation that excise duty on the value of
the bought out items was collected by the assessee from the buyer, that by itself
would not lead to the conclusion that the value of the bought out items must be
included in the value of the final product for the purpose of computing payable
excise duty. Rather, if the revenue indeed believed that the assessee had
collected excise duty from the buyer on the value of the boiler by including the
price of the bought out items, the correct course of action for the revenue should
have been to invoke the provisions of Section 11D of the Act, 1944, which
specifically provides a mechanism for recovery of any amount collected by an
assessee from a buyer, by representing as excise duty in excess of what is
payable as such. Section 11D of the Act, 1944 reads as such:
“ SECTION 11D. Duties of excise collected from the buyer to be
deposited with the Central Government. –
(1) Notwithstanding anything to the contrary contained in any order
or direction of the Appellate Tribunal or any Court or in any other
provision of this Act or the rules made thereunder, every person who
is liable to pay duty under this Act or the rules made thereunder, and
has collected any amount in excess of the duty assessed or
determined and paid on any excisable goods under this Act or the
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rules made thereunder from the buyer of such goods in any manner
as representing duty of excise, shall forthwith pay the amount so
collected to the credit of the Central Government.
(2) Where any amount is required to be paid to the credit of the
Central Government under sub-section (1) and which has not been
so paid, the Central Excise Officer may serve, on the person liable to
pay such amount, a notice requiring him to show cause why the said
amount, as specified in the notice, should not be paid by him to the
credit of the Central Government.
(3) The Central Excise Officer shall, after considering the
representation, if any, made by the person on whom the notice is
served under sub-section (2), determine the amount due from such
person (not being in excess of the amount specified in the notice) and
thereupon such person shall pay the amount so determined.
(4) The amount paid to the credit of the Central Government under
sub-section (1) or sub-section (3) shall be adjusted against the duty
of excise payable by the person on finalisation of assessment or any
other proceeding for determination of the duty of excise relating to
the excisable goods referred to in sub-section (1).
(5) Where any surplus is left after the adjustment under sub-section
(4), the amount of such surplus shall either be credited to the Fund
or, as the case may be, refunded to the person who has borne the
incidence of such amount, in accordance with the provisions of
section 11B and such person may make an application under that
section in such cases within six months from the date of the public
notice to be issued by the Assistant Commissioner of Central Excise
for the refund of such surplus amount.”
(Emphasis supplied)
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73. Upon a bare reading of Section 11D of the Act, 1944 it is clear that the failure
of the revenue to resort to the statutory recourse available under Section 11D,
and instead to seek to justify inclusion of the value of the bought out items in
the assessable value of the boiler, reflects an error in application of the law. The
invocation of Section 11D would be justified in a case where an assessee has
collected any sum purporting to be the excise duty without the authority of law.
Consequently, even assuming in arguendo that any excess amount was
collected from the buyer under the garb of excise duty, such collection cannot
confer excisability on the final product which emerges as an immovable
property. The liability of the assessee to pay duty must be determined strictly
in accordance with the charging provisions under the law and not on the basis
of any purported recovery from the buyer.
(II). Whether the show cause notice is legal and valid under the extended
limitation period as provided under the proviso to Section 11A(1) of the
Central Excise Act, 1944?
(i). Was there any wilful suppression of facts with an intention to evade payment
of duty by the appellant/assessee?
74. In the present case, the extended period of limitation of five years under the
proviso to Section 11A(1) of the Act, 1944 was invoked by the revenue on the
ground that the assessee had wilfully suppressed the fact that it had not paid
duty on the bought out items, with the intention to evade Central Excise duty.
The relevant paragraph from the show cause notice invoking the extended
limitation period reads thus:
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“[…]It further appears that the extended period of limitation as
provided under proviso to Sect 11A(1) of Central Excise Act 1944 is
invokable in the present case because the noticee has not paid duty
on bought out items and also not paid duty on clearance of the
bought out items with intention to evade Central Excise duty, the
noticee appears to have willfully suppressed the facts from the
knowledge of the Department regarding incorrect valuation of the
goods and clearance of the bought out items without payment of duty,
without filing of the declaration required under provisions of Rule 57
A of erstwhile C. Excise Rules 1944, without declaring the clearance
of the bought out items in their RT-12 returns […]”
(Emphasis supplied)
75. The assessee has raised the contention that the conditions for invoking the
extended period of limitation under the proviso to Section 11A having not been
met, the show cause notice and the consequent proceedings based on it were
not maintainable. In order to examine the issue of limitation, let us first refer to
the provision itself. Section 11A of the Act, 1944, which was in force at the
time of the issuance of the show cause notice reads as follows:
“ SECTION 11A. Recovery of duties not levied or not paid or short-
levied or short-paid or erroneously refunded . - (1) When any duty
of excise has not been levied or paid or has been short-levied or
short-paid or erroneously refunded, whether or not such non-levy or
non-payment, short- levy or short payment or erroneous refund, as
the case may be, was on the basis of any approval, acceptance or
assessment relating to the rate of duty on or valuation of excisable
goods under any other provisions of this Act or the rules made
thereunder, a Central Excise Officer may, within one year from the
relevant date, serve notice on the person chargeable with the duty
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which has not been levied or paid or which has been short-levied or
short-paid or to whom the refund has erroneously been made,
requiring him to show cause why he should not pay the amount
specified in the notice :
Provided that where any duty of excise has not been levied or paid or
has been short-levied or short-paid or erroneously refunded by
reason of fraud, collusion or any wilful mis-statement or
suppression of facts, or contravention of any of the provisions of
this Act or of the rules made thereunder with intent to evade
payment of duty, by such person or his agent, the provisions of this
sub- section shall have effect, as if, for the words one year, the words
"five years" were substituted.”
(Emphasis supplied)
76. A bare reading of Section 11A(1) along with its proviso would indicate that
ordinarily, notice has to be issued within one year, however the proviso
stipulates that the notice can be issued within five years from the relevant date
if , the non-levy, short-levy, or erroneous refund has occurred on account of
either of the following – fraud, collusion, wilful misstatement or suppression
of facts, or contravention of any of the provisions of the Act, 1944 or rules
thereunder, with an intent to evade payment of duty. The proviso employs
selective choice of words which contemplate a state of mind, whereby the
noticee has knowingly and deliberately done something or omitted to do
something which has resulted in non-levy, short-levy or erroneous refund of
duty. In contrast, for the normal period of one year, there is no requirement of
any state of mind, and the fact of non-levy, short-levy or erroneous refund of
duty by itself would be sufficient to invoke the provisions of Section 11A(1) of
the Act, 1944.
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77. In the context of invoking the extended period of limitation under Section 11A
of the Act, 1944, this Court in Pahwa Chemicals Private Limited v.
Commissioner of Central Excise, Delhi reported in (2009) 4 SCC 658 ,
observed that mere failure does not amount to wilful misdeclaration or wilful
suppression and that there must be some positive act on the part of an assessee
to bring the case within the mischief of wilful misdeclaration or wilful
suppression, as the case may be. This Court in Pahwa Chemicals (supra)
observed as follows:
“ 6. It is settled law that mere failure to declare does not amount to
wilful misdeclaration or wilful suppression. There must be some
positive act on the part of the party to establish either wilful
misdeclaration or wilful suppression. When all facts are before the
Department and a party in the belief that affixing of a label makes no
difference does not make a declaration, then there would be no wilful
misdeclaration or wilful suppression. If the Department felt that the
party was not entitled to the benefit of the notification, it was for the
Department to immediately take up the contention that the benefit of
the notification was lost. ”
(Emphasis supplied)
78. The allegation levelled against the assessee in the present matter before us is of
wilful suppression with an intention to evade central excise duty. Therefore, the
following observation of this Court in Continental Foundation Joint Venture
Holding v. CCE reported in (2007) 10 SCC 337 is required to be referred to:
“12. The expression 'suppression' has been used in the proviso to
Section 11-A of the Act accompanied by very strong words as 'fraud'
or 'collusion' and, therefore, has to be construed strictly. Mere
omission to give correct information is not suppression of facts unless
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it was deliberate to stop (sic evade) the payment of duty. Suppression
means failure to disclose full information with the intent to evade
payment of duty. When the facts are known to both the parties,
omission by one party to do what he might have done would not
render it suppression. When the Revenue invokes the extended period
of limitation under Section 11-A the burden is cast upon it to prove
suppression of fact. An incorrect statement cannot be equated with a
wilful misstatement. The latter implies making of an incorrect
statement with the knowledge that the statement was not correct.”
(Emphasis supplied)
79. Judged by these principles laid down by this Court on the application of the
proviso to Section 11A(1) of the Act, 1944, we find that the assessee is justified
to contend that the extended period of limitation could not have been invoked
in the present case since the assessee bona fide believed that the bought out
items are not to be included in the assessable value of the boiler. A perusal of
the show cause notice would show that the revenue itself admits that the
assessee had filed the RT-12 returns with the revenue, which means that the
revenue had the material particulars on record which it could have acted upon
within the normal one year period. There is nothing on record to indicate that
any material information had been suppressed by the assessee with any
intention to evade payment of central excise duty.
80. 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 under the
proviso to Section 11A(1) is held to be not tenable in law.
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81. The show cause notice being held to be invalid, the proceedings leading up to
this present appeal are also liable to be quashed, and accordingly the impugned
order is set aside.
F. CONCLUSION
82. We hereby conclude that the value of the duty paid bought out items which
were delivered directly at the buyer’s site is not liable to be included in the
value of the boiler cleared by the assessee from its factory in CKD condition,
for the purpose of assessment of excise duty.
83. We also hold that the show cause notice issued under the proviso to Section
11A(1) of the Act, 1944 is not legal and hence invalid.
84. Therefore, for all the foregoing reasons, the appeals succeed and are hereby
allowed.
……….…………………..J.
(J.B. PARDIWALA)
……….…………………..J.
(SANDEEP MEHTA)
New Delhi,
th
10 November, 2025.
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