Customs, Excise and Gold Tribunal - Delhi
Collector Of Central Excise vs Thermax (P) Ltd. on 6 December, 1993
Equivalent citations: 1994(70)ELT247(TRI-DEL)
ORDER Lajja Ram, Member (T)
1. These are three appeals filed by Revenue, with three Cross Objections by the assessee - M/s. Thermax Pvt. Ltd. Chinchwad, Pune, and one appeal by the assessee. As all these relate to common matters, they were heard together and are being disposed of by this common order.
2. Under separate show cause notices dated 26-12-1983, 25-2-1984 and 30-7-1984, it was alleged that during the period from 1-2-1983 to 30-6-1984, M/s. Thermax Pvt. Ltd., Chinchwad, Pune (hereinafter referred to as the assessee, Thermax or the manufacturer, as the case may be), had not included the designing and engineering charges, and the erection and commissioning charges, in the assessable value, even when such charges were recovered by them from their customers on separate invoices. The assessee were availing of the benefit of Notification No. 120/75-C.E., dated 30-4-1975. The provisions of the said notification were applicable only when the goods were cleared from the place of removal on sale, and it was provided in that notification that the Central Excise duty was to be calculated on all the charges recovered on the invoices, except duty and taxes. It was mentioned in those show cause notices that the designing and engineering, erection and commissioning charges etc. were the charges which constituted the value of the products under consideration, and were assessable to Central Excise duty. Central Excise duty amounting to Rs. 1,14,990.71 was demanded vide these notices.
3. The Assistant Collector of Central Excise, Pune, who adjudicated these show cause notices observed under his separate orders dated 3-5-1985, 17-5-1985 and 1-6-1985 that the goods under consideration could not be called as immovable and fixed to the earth; the expenditure on designing and engineering charges were the expenditure incurred on the goods produced and were part and parcel of the value of these goods. As regards erection and commissioning charges, it was observed that the invoice value for the purposes of Notification No. 120/75-C.E. would be the entire value shown on the invoice, excluding duty and local taxes, and that it was only after the erection and the commissioning that the sale could be complete. He confirmed a demand for Rs. 78,454.50 as Central Excise duty.
4. The Collector of Central Excise (Appeals), Bombay by his common Order-in-Appeal dated 18-12-1985, disposed of all the three appeals filed by M/s. Thermax Private Ltd. He came to a decision that the designing and engineering charges in respect of the goods manufactured in the manufacturing unit were includible in the value of the goods, and had to form a part of the value of the goods manufactured. In so far as erection and commissioning charges were concerned, he held that erection and commissioning charges were in the nature of post-manufacturing expenses, and were not a part of value and were not liable to be added in the assessable value. On the question of limitation, the Collector of Central Excise (Appeals) decided that as there was no allegation in the show cause notices regarding any wilful misstatement, suppression of fact, fraud etc. the normal time limit of six months could only be applied. He asked the Assistant Collector, Central Excise to redetermine the actual quantum of duty to be levied in the light of his orders.
5. Against this Order-in-Appeal, dated 18-12-1985 passed by the Collector of Central Excise (Appeals), Bombay, the revenue has filed three appeals to the Tribunal praying for setting aside the above Order-in-Appeal dated 18-12-1985 and for restoration of all the three orders-in-original dated 3-5-1985, 17-5-1985 and 1-6-1985 passed by the Assistant Collector of Central Excise, Pune on the grounds that:
(1) The goods in this case were movable.
(2) The erection and commissioning charges formed part of the manufacturing cost;
(3) The erection and commissioning charges shown in the invoices by the assessee opting for the benefit of Notification No. 120/75-C.E. correctly formed part of the assessable value and liable to Central Excise duty;
(4) The sale was of the completed plant upto the stage of erection and commissioning of the plant, to the satisfaction of the customers, and hence all the charges going into making and manufacturing of such a plant were includible in the assessable value.
6. The assessee had filed memorandum of Cross Objections under Section 35B of the Central Excises and Salt Act, 1944 (hereinafter referred to as the 'Act'), praying as under:-
(1) The order holding erection/installation/commissioning charges relating to the activities at site excludible from the assessable value, be upheld as correct; and (2) The designing and engineering charges being relatable to erection and installation at site, the question of determination of duty liability thereof, did not arise. They prayed that the order of the Collector, Central Excise (Appeals) requiring the Assistant Collector, Central Excise to redetermine the duty liability on this account be set aside. They submitted that the drawing/designing/engineering charges did not relate to product manufacturing or erection at site.
(3) The duty on the plant erected at site was not payable if they were fixed to the ground as a permanent fixture, and was not ordinarily intended to be removed from the place of installation; and (4) The demand was time-barred as copies of all invoices and the contracts were made available to the department.
7. As regards the appeal filed by the assessee, it may be mentioned that on 4-8-1987, another show cause notice was issued by the Collector, Central Excise, Pune, to M/s. Thermax for the period April, 1982 to May, 1987, alleging that they have not included and reflected in the invoice prices, declared under Exemption Notification No. 120/75-C.E., the amounts separately recovered under separate invoices, from their customers and directly relating to their manufacturing activities, on account of (1) design and engineering; (2) technical services and training charges and (3) erection and commissioning charges. It had been observed by the officers of the Preventive Branch, headquarter office, Pune, that the assessee who were engaged in the manufacture of industrial boilers and allied process heat equipment, falling under Chapter 84 of the Central Excise Tariff Act, 1985 (erstwhile Item No. 68 of the Central Excise Tariff), had undervalued their product by recovering extra amounts from their customers under separate invoices on account of design and engineering charges, technical service charges etc. On verification of assessee's records, it was revealed that by various acts of commission /omission they had violated the provisions of the Act and the provisions of the Central Excise Rules, 1944 (hereinafter referred to as the 'Rules'), as specified in the show cause notice. It was, accordingly, alleged that they have wilfully misstated/suppressed the relevant facts with the sole intention to evade Central Excise duty. It was noted that the assessee had not given the details of the figures for the years 1982-83 and 1983-84 in respect of the design and engineering charges. In the show cause notice, Central Excise duty amounting to Rs. 65,33,098/- was demanded under Rule 9(2) read with Section 11A(1) of the Act, besides invoking penal provisions under the Act and the rules.
8. In reply, the assessee refuted the allegations and submitted that the various charges sought to be included in their prices, related to the services rendered by them to their customers at the site. These services did not relate to the goods manufactured by them. These charges were in the nature of consultancy fees. These services were optional, and in any case the Central Excise department had no concern with such services and with such charges. With regard to design and engineering charges for the year 1982-83 and 1983-84, they invited attention to their letter dated 12-8-1987 wherein the details of the design and engineering charges charged for these years had been given.
9. The Collector, Central Excise, Pune analysed the show cause notice dated 4-8-1987, and the assessee's reply dated 31-12-1987 in detail, and came to the following findings:-
(1) the assessee manufactures complete boiler equipment, process heat equipment etc. (Para 1.3);
(2) the assessee negotiates with their customers usually on complete contract and not on the basis of itemwise prices (Para 1.3);
(3) the itemwise prices were determined by the assessee to derive maximum tax benefits out of contract prices (Para 1.3);
(4) Industrial boilers and allied process heat equipment were manufactured in the assessee's factory (Para 1.12);
(5) Drawing and designing charges recovered by Thermax Pvt. Ltd. were only for the boilers (Para 1.13);
(6) Spliting up the value on drawing, designing, engineering charges, technical service charges, including commissioning charges with reference to bought out items, and factory-made components, did not arise (Para 1.13);
(7) Assessee had not declared and disclosed the facts relating to the various charges, and thus it is a case of suppression, and that the provisions of Section 11A of the Act were correctly invokable (Para 1.15);
(8) Deduction of 20.4% of the erection and commissioning charges was allowable (Para 1.15);
(9) Training charges were deductible (Para 1.22);
(10) The assessee have contravened the provisions of Rule 173C(1) read with Section 4, and Rules 5 and 7 of the Central Excise (Valuation) Rules, 1975, Rule 173F read with Rule 173G(i) and Rule 9(1), Rule 198 (2) etc., and were liable for penalty under Rule 9(2) and Rule 173Q(i) (Para 1.24).
10. He confirmed the demand for Rs. 83,49,324.20, and after adjusting the advance payment of Rs. 9,87,994, arrived at the duty payable as Rs. 73,61,330.20. He imposed a penalty of Rs. 17 lakhs on M/s. Thermax Pvt. Ltd.
11. The assessee has assailed the impugned Order-in-Original on various grounds - on merits, jurisdiction, limitation, principles of investigation etc.
12. The matters were heard on 15-9-1993 and on 16-9-1993. Shri V. Lakshmikumaran, Advocate appeared for M/s. Thermax Pvt. Ltd. The Revenue was represented by Shri Prabhat Kumar, SDR
13. Shri V. Lakshmikumaran, the learned Advocate referred to the issue involved in these matters as the valuation of high tech engineering items in which designing and engineering, technical services, training, commissioning etc. are involved. The party was engaged in the manufacturing, installing and commissioning of boilers and process heat equipment. These goods were earlier classifiable under Item No. 68 of the First Schedule to the Central Excises and Salt Act, 1944 (old Tariff), and were now covered by Chapter 84 of the Schedule to the Central Excise Tariff Act, 1985 (new Tariff). In the manufacture of these high tech goods, various activities were undertaken. The manufacturing facilities covered various divisions, all of which were housed in the factory premises. Their engineers and technicians who were concerned with these divisions were located in the factory. It was, however, mentioned that the personnel who supplied the consultancy were separate from the personnel who were engaged in the production of goods. The learned Advocate did not dispute that the design and engineering charges incurred for the goods manufactured were includible in the assessable value of the excisable goods, but submitted that in their case these charges were not relatable to the goods. He referred that as regards technical services and training charges were concerned, the Collector had already dropped the charges. In support of his arguments, the learned Advocate relied upon the decision in the case of Collector, Central Excise v. Intercon Engineers Pvt. Ltd., 1987 (28) E.L.T. 458 (Tribunal), wherein it has been observed that the erection and service charges realised by the respondents for installation and maintenance of the machinery at the customer's premises, are not includible in the assessable value of the machinery.
14. The learned Advocate submitted that they were working under invoice value assessment when the goods were falling under Item No. 68 of the old Tariff, and were availing of the exemption under Notification No. 120/75-C.E., dated 30-4-1975. The department was aware of their activities and the system of their payments. The copies of the contracts had also been given to the department. In the circumstances, the extended period of limitation was not invokable. In this regard, reliance was placed on the following decisions:-
(1) Andhra Pradesh State Electricity Board v. Collector, Central Excise - 1988 (35) E.L.T. 199 (Tribunal) - Limitation to count from the date of knowledge of the department, the date on which the department became aware of the manufacturing activities of the appellants, and their consequent liability for payment of duty;
(2) Upper Doab Sugar Mills v. Collector, Central Excise - 1987 (32) E.L.T. 124 (Tribunal) - the date when the department became aware of the fact is the relevant date for invoking the period of limitation (Paras 7 and 8).
15. Learned Advocate also explained as what was meant by the expression 'suppression', and submitted that the ingredients of 'suppression' have been dealt with by the Bombay High Court in the case of Poona Bottling Company v. Union of India - 1988 (35) E.L.T. 627 (Bom.) - wherein it has been observed that the department must investigate first of all that the ingredients for issue of a show cause notice issued beyond the period of 6 months under Section 11A(1) of the Act, were present. He also referred to the following decisions:-
(1) Padmini Products v. Collector, Central Excise - 1989 (43) E.L.T. 195 (S.C.) - Mere failure or negligence on the part of the producer or manufacturer either not to take out a licence in a case where there was scope for doubt as to whether licence was required to be taken out or where there was scope for doubt whether goods were dutiable or not, would not attract Section 11A of the Act;
(2) Collector, Central Excise v. Chemphar Drugs and Liniments - 1989 (40) E.L.T. 276 (SC) - Extended period of limitation not applicable as non-declaration was due to interpretation and the department was aware that value did not include certain items.
16. Shri Prabhat Kumar, the learned SDR referred to the show cause notice and explained the various charges levelled against the party. He stated that extra amounts have been charged and recovered separately. He stated that the assembling of parts constituted the process of manufacture. In this connection, he referred to the following decisions:-
(1) Name Tulaman Manufacturers Pvt, Ltd. v. Collector of Central Excise - 1988 (38) E.L.T. 566 (S.C);
(2) I.G.E. (India) Ltd. v. Collector, Central Excise, 1991 (53) E.L.T. 461 (Tribunal)/ - Assembly amounts to manufacture and the new product is dutiable;
(3) Paharpur Cooling Towers Pvt. Ltd. v. Collector, Central Excise, 1986 (24) E.L.T. 611 (Tribunal);
(4) Nima Ltd. v. Collector, Central Excise, 1989 (21) ECR 94 (Tribunal) Para 5 - Sliding Storage System fabricated in a factory and installed at site are not immovables. They are goods;
(5) Anil Ice Factory v. Union of India, 1984 (15) E.L.T. 333 (Gujarat) - Para 2 - Constructing a manufacturing unit by purchasing different duty-paid parts or other material, would amount to manufacture.
17. As regards designing and engineering charges, the learned SDR referred to the following decisions:-
(1) Collector, Central Excise v. Sunray Computers Pvt. Ltd., 1988 (33) E.L.T. 787 (Tribunal) - para 3;
(2) I.A.E.C. Bokers Pvt. Ltd. v. Collector, Central Excise, 1990 (48) E.L.T. 388;
(3) Collector, Central Excise v. Wipro Information Technology Ltd., 1989 (39) E.L.T. 113 (Tribunal) - Technical service charges separately recovered by the assessee from their customers but not declared to the department, were a part of cum-duty price of the computers;
(4) Til Ltd. v. Collector, Central Excise, 1991 (52) E.L.T. 602 (Tribunal) - Relied upon the decisions in the cases of Collector of Central Excise, Bangalore v. Intercon Engineers Pvt. Ltd., 1987 (28) E.L.T. 458 (Tribunal), and Collector, Central Excise v. Sunray Computers Pvt. Ltd., 1988 (33) E.L.T. 787 (Tribunal).
18. Regarding erection and commissioning charges, he referred to the Collector's order. He mentioned that the trial-run was done by the assessee's representatives. He also stated that the party had raised separate bills and that it was a clear case of suppression, flow-back and extra realisation. In this connection, he referred to the following decisions:-
(1) Mysore Rolling Mills Pvt. Ltd. v. Collector, Central Excise, 1987 (28) E.L.T. 50 (SC) - Extended period of limitation was applicable when there was suppression of facts with regard to the non disclosure of receipt of amounts recovered by debit notes over and above the invoices at the time of assessment;
(2) Til Ltd. v. Collector, Central Excise, 1991 (52) E.L.T. 602 (Tribunal);
(3) Ratlam Straw Board Mills Pvt. Ltd. v. Collector, Central Excise, 1992 (61) E.L.T. 468 (Para 3) - The excess recovery was being made by the appellants through their invoices, and bills issued subsequently by the appellants. Such excess recovery made by the appellants in their invoices and bills was not reflected either in the gate passes or RT 12 returns submitted by them and finalised by the department. The Tribunal held that it was a case of suppression of fact, of excess recovery by the appellants and therefore, extended period of limitation was invokable;
(4) Vinod Paper Mills Ltd. v. Collector, Central Excise, 1989 (39) E.L.T. 105 (Tribunal);
(5) Swadeshi Mills Co. Ltd. v. Collector, Central Excise, 1992 (43) ECR 629 (Tribunal) - In case of misstatement of the value, extended period of limitation is invokable.
(6) Tata Iron and Steel Company Ltd. v. Union of India, 1988 (33) ELT 297 (Patna).
19. It was also mentioned that Section 11A refers to the contravention of the rules. In this case, the assessee had contravened the provisions of Rule 173C of the rules. In the circumstances, the extended period was rightly invoked as held in the following decisions:-
(1) Lustre Lampions v. Collector, Central Excise, 1984 (18) E.L.T. 76 (Para 8) - It is not only for wilful misstatement or suppression that the extended period under Section 11A or Rule 10 could be invoked but contravention of any of the provisions of the Act or rules with intent to evade payment of duty.
(2) Jaishree Engineering Company Pvt. Ltd. v. Collector, Central Excise, 1989 (39) E.L.T. 449 (Tribunal) - When there was mis-description of the , goods, the intention could only be to suppress information about the correct nature and description of the goods from the department with a view to avoid proper classification and evade payment of duty at the correct rate. It was of no avail that during the period, visits were being paid by the Central Excise officers and that they were aware of the production of the goods in question and that they were a party to their incorrect classification;
(3) Jaishree Engineering Company Pvt. Ltd. v. Collector, Central Excise, 1989 (40) E.L.T. 214 (SC) - Whether there was any fraud, collusion, wilful misstatement or suppression of facts for the department to be justified to claim duty beyond a period of 6 months, was a question of fact. The fact that the department visited the factory of the appellant and they should have been aware of the production of the goods in question were no reason for the appellant not to truly and properly describe the goods. Penalty was imposable if there was deliberate suppression or wrong statement;
(4) British India Corporation Ltd. v. Collector, Central Excise, 1986 (25) E.L.T. 727 (Tribunal) - The word fraud, suppression etc., need not be directly mentioned in the show cause notice. It was enough if the statement of allegations contained in the show cause notice brings out the charge of fraud, suppression etc. The charge of suppression could reasonably be inferred from the statement of allegations contained in the show cause notice;
(5) Jeypore Sugar Company Ltd. v. Collector, Central Excise, 1991 (56) E.L.T. 104 (Tribunal) - Invoice value assessment under Notification No. 120/75-C.E. not admissible to assessee after giving a declaration, not factually truthful. Non-disclosure of fact of receipt of excess payments from their customers being suppression of fact, extended period of limitation was invokable.
20. In reply, the learned Advocate referred to the Tribunal's decision in the case of Tata Robins Fraser Ltd. v. Collector, Central Excise, 1990 (46) E.L.T. 562 (Tribunal), wherein it has been observed that merely collecting the various component parts at site, partly by manufacturer from one's own factory, partly getting them manufactured from other factories and partly buying some components from the market will not mean the manufacture of the entire conveyor belt system in CKD condition.
21. After the matter was heard on 15-9-1993 and 16-9-1993, the party filed some more written material which was received in the registry on 1-1l-1993. Revenue also filed some more written material.
22. We have carefully considered the submissions made by both the sides and have gone through the facts and circumstances of the case. The written submissions filed by the assessee as well as by the Revenue have also been taken into consideration.
23. M/s. Thermax Pvt. Ltd. were engaged in the manufacture of boilers, process heat equipment, thermic fluid heaters, thermo containers, bag filters, blowers, grain driers, storage silos, spray painting systems, wind operated electric generators, pressure vessels, heat recovery system etc. (Para 2 of the memo of appeal). The goods were supplied on order and were manufactured as per requirements pf the customers. Keeping in view the specific operational requirements of the customers and the ground realties of the site where these goods had to operate, the manufacturer had necessarily to take certain preparatory steps before undertaking the manufacturing process. These preparatory steps were necessary to fit in the goods produced with the requirements to be made for their use. It is why before negotiating the price of the total supplies, the appellants had to Jake into, account various factors including those relating to customers' site, nature/requirements of the jobs to be undertaken etc. (Para 3 of the memo of appeal). While calculating the figure for the factors-made goods, raw material cost, conversion costs including the drawing, designing and engineering for the manufacture of goods in their factory, were taken into account (Para 5). These activities were undertaken with reference to the goods produced, and the relevancy of the site was only to the extent that the goods were not the ordinary consumer goods but highly sophisticated engineering products with modern technological inputs, and were to be used at a place outside the place of production. In the nature of things, the job of the manufacturer was over only after the property in the goods was finally handed over to the customers, and the unit started working to their satisfaction. Although the goods were inspected by the representatives of the customers in the factory of the manufacturer and the manufacturing facilities of the manufacturer, it was inherent in the "performance guarantee to the customer" that the clearance of the goods did not, mean the conventional clearance from the factory and that the job and the responsibility of the manufacturer was over with the clearance of the goods. In this connection, reference may be made to paras VI.13 and VI.1.4 of their reply to the show cause notice. By way of illustration reference may be made to the scope of services contracted by Gujarat Heavy Chemicals Ltd. in respect of the steam generating plant from M/s. Thermax Pvt. Ltd. on page 128 of the paper book wherein it has been provided:-
"M/s. Thermax Pvt. Ltd was hable to modify, rectify and replace,if necessary, any components or equipments, which fail to perform as designed, independent of the fact whether the components were manufactured by Thermax Pvt. Ltd or others. The value of this liability was limited to Rs 1 Crore."
24. Before coming to the main issue of design and engineering charges, and the ejection and commissioning charges, we may refer to the other grounds raised by the assessee in their appeal.
25. The appellants have pleaded that the adjudicating authority had no jurisdiction with regard to the services rendered by them at the site of the customers which were situated outside his jurisdiction. In the case before us, the transactions related to the manufacture and supply of boilers and related products at a price agreed to between the parties. The boilers and the related products have a separate identity as commercial articles. These products are engineering products, are hazardous in nature, and are performance oriented. In the nature of these products and the purpose they sought to serve, some incidental and ancillary work has necessarily to be undertaken at the place where these excisable products have to be located; however, what is sought to be subjected to excise duty is the goods with whose manufacture the incidental and ancillary work at site is integrally connected. Thus, any incidental or ancillary work at the site will not take away the jurisdiction of the Central Excise officers in whose jurisdiction the excisable goods were manufactured.
26. As regards the plea raised by the appellants that the Collector had no jurisdiction to demand duty for the period prior to 27-12-1985, we find that this plea is devoid of any merit. The Collector has discussed this point in paras 1.19 and 1.20 of his order. Further, we find that in the case of UP Lamination v. Collector, Central Excise, 1988 (35) E.L.T. 398 (Tribunal), the matter has been discussed by the Tribunal and in para 13 of their order they had held that the Collector was competent to exercise the powers of the Assistant Collector and to adjudicate. Para 13 is extracted below:-
* * * * * * *
27.1 A point has been made that since the price lists were approved finally after filing the copies of the contracts, the provisions of Section 11A of the Act could not have been invoked. This point has been discussed by the Gujarat High Court in the case of Alembic Glass Industries Ltd. v. Union of India, 1992 (59) E.L.T. 207 (Gujarat), wherein it has been held in paras 23, 24, 25 and 26 that price lists approved can be re-opened under Section 11A of the Act in case of short levy, non-levy or erroneous refund, and that it was neither necessary nor practical to have the price lists approval set aside in appeal or revision first.
27.2 It has been submitted that the demand of duty was time-barred as earlier show cause notice had been issued to them on the same point; their unit was regularly visited by the Central Excise officers, and their records were under scrutiny from time to time. It is seen that Appeal No. E/1709/88-A filed by the assessee relates to the period 1982-83 to 1987-88. Three other appeals filed by revenue relate to the period 1-2-1983 to 30-6-1984, and in respect of all these 3 appeals, the assessee have filed Cross Objections No. 279-281/86. These appeals and Cross Objections are also before us. The assessee manufactured and supplied the goods under contracts with individual customers. Every contract was a separate contract and preparation for each of them was made separately. They did not follow the prescribed procedure in this regard. Para 1.4 of the Order-in-Original refers to this aspect of the matter. The manufacturing activities of the assessee were complex. The goods produced were sophisticated and high-tech items. They were not sold on the shelf. Their process of manufacture started before the shaping of the goods, and extended beyond the removal from the place of manufacture. The mode of payment was also not conventional. In such circumstances, the assessee could not impose it on the department to find out as what they have chosen not to disclose. The additional charges were recovered through separate invoices which did not figure in the excise records. In the case of MRF Ltd. v. Superintendent, Central Excise, 1986 (24) E.L.T 273 (Madras), the Madras High Court had observed that principles of res judicata do not apply to tax matters and that the correct construction of notification cannot be prevented from canvassing even earlier rejected (Para 11). In the case of East West Exporters v. Collector, Customs, 1992 (57) E.L.T. 635 (Tribunal), the Tribunal have held that res judicata was not to apply to adjudication or assessment proceedings before revenue authorities. Extracts from para 6 are given below:-
* * * * * * * * 27.3 In the case of D.C.W. Ltd. v. Collector, Central Excise, 1988 (35) E.L.T. 167 (Tribunal), the Tribunal had observed that when new facts have come to light consequent on the investigation, second show cause notice was not barred by res judicata. In any case, the impugned order in appeal and the 3 show cause notices out of which the 3 appeals by revenue had originated, are open for decision by us.
27.4 In para III.4 of their reply, they had stated that "Many times, the execution of the contract may extend even for 2 years or even more." In view of this position, obviously the initial assessments could not be termed as final. In this connection, the procedure as outlined by the Collector in para 1.4 of his Order-in-Original had to be followed, and was not followed.
27.5 In the case of Vinod Paper Mills Ltd. v. Collector of Central Excise 1989 (39) E.L.T. 105 (Tribunal) it has been held that when total sale value was not disclosed to the department, extended period of limitation was applicable (Para 8).
27.6 In case of UP Lamination v. Collector, Central Excise, 1988 (35) E.L.T. 398 (Tribunal) in para 15 of their order, the Tribunal have held that extended limit of 5 years was invokable when suppression of facts was established. Visits of excise officers to manufacturer's factory would not absolve the manufacturer of liability to duty. It was added that penalty was also justified in absence of disclosure of full facts relating to clearances.
28.1 The appellant's contention regarding part payment of Central Excise duty made voluntarily, has been discussed by the Collector in para 1.25 of his order, and due allowance of this voluntary payment before adjudication has been given in the duty demanded.
28.2 Show cause notice covered a period of 1982-83 to 1987-88. It was mentioned in the last para of the Annexure 'A' to that show cause notice as under:-
"The statistical data in respect of the charges recovered by M/s. Thermax on account of drawing and designing is restricted to the period (financial year) 1984-85, 1985-86, 1986-87 as the assessee could not furnish the data for the earlier period i.e. for the year 1982-83 and 1983-84."
28.3 The assessee stated in para IV of their reply as under:-
"With regard to design and engineering charges it is also stated that the noticee had not given the details of the figures for the years 1982-83 and 1983-84 However, your kind attention is invited to the noticee's letter number rule, dated 12th August, 1987 wherein the details of the design and engineering Charges charged by these divisions for the years 1982-83 and 1983-84 have already been given."
28.4 In the Order-in-Original it is mentioned that "the assessee, flowever, furnished the said information Vide their letter dated 12-8-1987."
28.5 The show cause notice is dated 4-8-1 987. The figures were supplied under letter dated 12-8-1987. Thus, the information was supplied after issue of show cause notice. In the show cause notice, duty was demanded amounting to Rs. 65,33,098/-, while in the Order-in-Original the duty of Rs. 83,49,324,20 has been confirmed. Although the differential related to the charges for the years 1982-83 and 1983-84, which could be rightly demanded; however, we find that no specific demand was raised for this extra amount and no opportunity was given to the assessee to meet this part of the allegation. Accordingly, demand in excess of the amount demanded in the show clause notice could not be sustained, and in no case the demand confirmed could exceed the duty demanded in the show cause notice, notices, supplementary notice etc. 29.1 The goods manufactured and supplied are the boilers as is obvious from their various order confirmations, where in it has been mentioned against inspection as under:-
"The unit will be offered for visual inspection at our works prior to despatch at art mutually agreed date."
"We shall offer the unit for visual inspection dimensional check to your representative at our factory prior to despatch. The performance test of your boiler will be given at the actual site after comissioning of the boiler."
29.2 In para VI.3.18 of their reply they had admitted that the boiler equipment is cleared by them in CKD (Completely Knocked Down) condition.
29.3 Thus, the contention that they were not assembling the boilers is negatived by their own order/submissions.
30. In the grounds of appeal, the question regarding applicability or otherwise of' Notification No. 120/75-C.E. has not been specifically raised. In any case, as there was no outright sale of goods at the point of removal from the factory, the provisions of Notification No. 120/75-C.E. were not applicable, and the value was required to be determined under Section 4 of the Act after following the procedure as applicable for contract price in respect of the goods which are supplied over period of time. In this connection, they had quoted in para VI.3.18 of their reply to the show cause notice some instructions from the, Board to be followed in the cases of the nature executed by the acsessee, and which, they themselves had not followed Tribunal's observations in the case of Intercon Engineers Pvt. Ltd v. Collector, Central Excise, 1987 (28) E.L.T 458 (Tri.) are also applicable to the facts of this case.
31. The appeals by the 'Revenue read with the Cross Objections of the assessee cover the same period as the appeal by the assessee While the earlier show cause notice related to the specific contracts, in the snow cause notice, dated 4-8-1987 issued by the Collector, Central Excise, all the charges were included. In such circumstances, our observations and findings in Appeal No. 1709/88 will apply to the appeals by the revenue, and no separate discussions thereon is considered necessary, and the demand made in Order-in-Original dated 7-4-1988 covers the demands in those appeals by the revenue.
32. The adjudicating authority has already given relief in respect of training charges. In para 1.22 of his order, he has considered the contentions put forth by the assessee in para VII of their reply to the show cause notice, as tenable.
33.1 Now, we may take up the issue relating to design and engineering charges.
33.2 Designing, manufacturing and working of the boilers and related equipment is governed by the provisions of the Indian Boiler Act, 1923 and the Indian Boiler Regulations, 1950. The boilers and the related equipment have to be designed keeping in view the standard requirements under concerned laws including those relating to the pollution control.
33.3 Boiler is a metal container in which a liquid/water is heated and changed into a vapour/vapour steam. They had to be strong enough to hold the high pressures inside them without bursting. They had to be constructed accordingly and tested before their use. They are of different type/pressure and size. According to the Indian Boiler Regulations, 1950, boiler means any closed vessel exceeding 22.75 liters in capacity which is used expressly for generating steam under pressure and includes any mounting or other fitting attached to such vessel which is wholly or partly under pressure when steam is shut off-Steam produced in boiler is used for various purposes - steam turbines, refining oil, drying paper etc., 33.4 Boilers manufactured by M/s Thermax were in different models, operated on coal/oil/lignite/husk etc, and were supplied with various ancillaries/accessories and auxiliaries. M/s Thermax Pvt. Ltd. also supplied water softners, chemical solution, doser pressurised economiser etc. The scope of their supplies included main boiler, ancillaries, soft water service tank, booster pump, bracets and structures for water line, refractory piping and duct work, mountings and fittings, instruments, controls and safties, chemicals feed water treatment etc. 33.5 The terms and conditions of the orders placed fey the customers on M/s. Thermax Pvt. Ltd., read as a Whole, indubitably lead to the conclusion that what the customers were interested in was the purchase of boilers and 6ther related equipment, and what M/s.Thermax were concerned with was the manufacture and sale of boilers and other related equipment. The boilers had to be manufactured and installed keeping in view the safety aspect. The Indian Boilers Act, 1923 provides mainly for the safety of life and property of persons from the dangers of explosion, prevention of accidents and the achievement of uniformity of practice in regard to the operation, inspection and maintenance of boilers. Under that Act regulations have been made laying down the standard conditions in respect of the material, design and construction, which shall be required for the purposes of enabling the registration and certification of boilers under that Act.
33.6 Boiler is not an ordinary chattel. It is a sophisticated engineering device for meeting specific needs. It is an industrial engineering product whose utility is in its operation.
33.7 The various stages in which the orders are generally executed by the assessee are as under:-
(1) Feasibility study is undertaken by Thermax engineers with regard to the installation of the boiler and other connected equipment;
(2) Design, drawing and engineering of the process is undertaken on the basis of which heat equipment/boilers are duly manufactured;
(3) Manufacturing and supply of industrial boilers and allied process heat equipment;
(4) Mechanical erection on previously prepared foundation with the help of welders, engineers, workmen, supervisors;
(5) Testing, commissioning of the equipment; with performance guarantees.
33.8 Prior to despatch the units are offered for inspection to the representatives of the customers at the factory of M/s. Thermax Pvt. Ltd. (Page 222 of the paper book of Appeal No. 1709/88-A), Trial run was being conducted by the purchasers' /inspectors in the assessee's shop (para 1.13 of the Order-in-Original).
33.9 Without designing and engineering, no boilers and other related equipment could be produced. For each supply, there were separate contracts. Specifications of the product had to match the requirements of the individual customer. As mentioned at page 130 of the paper book, M/s. Thermax Pvt. Ltd. prepared process and instrumentation drawings etc. for each project separately. These activities are necessary preliminaries for manufacturing and engineering high tech product. They pour into their value and are necessarily required to, give the product "marketability in the trade". Refer para 49 of the Supreme Court's decision in the case of Union of India v. Bombay Tyres International - 1983 (14) E.L.T. 1896 (SC).
33.10 In the case of Collector, Central Excise v. Intercon Engineering Pvt. Ltd., 1987 (28) RUT. 458 (Tribunal), the Tribunal had observed that the costs towards drawing, designing and technical specifications of machinery were elements of machinery cost and that it was not possible to manufacture a machine without doing and technical specification work for it in advance. They held that drawing and designing is actually the first stage of manufacture itself is at this stage that the manufacturer plans as to what exactly he is going to manufacture."
33.11 In the case of Collector, Central Excise v. Sunray Computers Pvt. Ltd., 1988 (33) E.L.T. 787, the Tribunal had observed that pre-manufacturing research, planning and designing are directly connected with the manufacture of the goods and form a part of the manufacturing cost.
33.12 In the case of IAEC Bokers Pvt. Ltd. v. Collector, Central Excise - 1990 (48) E.L.T. 388 (Tribunal), the Tribunal had observed that if "any cost relating to drawing, designing and technical specification of the boilers is included in the contract price, the same would form part of the assessable value of the boilers". It was also observed that "if any materials required for erection of the boilers at the site of the customer were manufactured by the appellants in their factory duty on the value of the same at the rates prevailing on the dates of clearances from the factory is also payable." They further stated that no duty could, however, be charged on the steel work and sheet roofing erected at the site of the customer. What was chargeable to the Central Excise duty was the material which was manufactured by the appellants and cleared from their factory for use in the fabrication and erection of steel work and steel roofing. They added that the charges relating to the transportation, insurance, loading, unloading, erection and commissioning and elements of expenses arising after clearance of the goods from the factory were not includible in the assessable value of the boilers. In that case, the appellants were undertaking manufacture of boilers and fabrication of steel works at site. They had opted for assessment on the basis of invoice value under Notification No. 120/75-C.E., dated 30-4-1975. The Tribunal held that the exemption under Notification No. 120/75-C.E. was in respect of the goods falling under Tariff Item No. 68 cleared from the factory of manufacturer on sale, and that unless the manufactured goods were cleared from the factory of sale, that notification was not applicable, and that duty was to be paid under Section 4 of the Act.
33.13 M/s. Thermax had to process/collect technical information to be utilised by itself for the manufacturing of the goods, and for this purpose, the technical services rendered by its employees were rendered to it. The customer's interest was in the supply of the boilers and other connected/related equipment as per their needs and requirements, consistent with the provisions of law on the subject, including Pollution Control, IBR approval etc.
34. In the circumstances of the case, no part of the designing and engineering charges which are specific to the goods designed to be produced, is eligible for deduction from the price for the purposes of levy of Central Excise duty.
35.1 At this stage, we may also refer to the assessee's contention that the designing and engineering charges relating to the bought out items should be excluded for the purposes of arriving at their duty liability.
35.2 In the case of TISCO v. Union of India, 1988 (33) E.L.T. 297 (Patna), the stand taken up by the petitioners was that no electric overhead travelling cranes have been assembled/manufactured in their shop and that only components and assemblies of cranes were produced therein, and that it had been assembled, manufactured and installed only in the workshop. To the shop, the order had been placed for designing, manufacturing, assembling and supplying the cranes with all structurals and mechanical components. The Patna High Court observed that a crane is a distinct identifiable object in the commercial world and that large equipments are always supplied to buyers in knocked down condition and that the supply in that condition does not mean that no excisable article has come into existence. As regards the plea that no crane could work without a gantry, the High Court observed that gantry is no part of a crane.
35.3 In the case of Paharpur Cooling Towers Pvt. Ltd. v. Collector, Central Excise, 1986 (24) E.L.T. 611 (Tri). it has been held that industrial fans fixed to the ground are not immovables and are excisable since they are marketable and capable of being dismantled and are identifiable as fans even in a CKD condition. It has also been held that assessable value of industrial fans has to include the value of gears which are important components.
35.4 In the case of Kirloskar Brothers v. Union of India, 1992 (59) E.L.T. 3 (SC) the Supreme Court had also held that the value of excise duty paid on electric motor, a component, is not deductible from assessable value of pump.
35.5 In the case of Name Tulaman Manufacturers Pvt. Ltd. v. Collector, Central Excise, 1988 (38) E.L.T. 566 (SC), weigh-bridges consisted of 3 different parts namely; (I) platform; (2) Load Cells and (3) Indicating System. The assessee got the platform, manufactured from other people; the load cells were imported and the appellant only made the indicating system. The appellant brought the 3 components together at site, fitted and assembled them together so that they can work as one machine. The Hon'ble Supreme Court affirmed that "as a result of the work of the appellant a new product known in the market and known under the excise item, 'weighbridge' comes into being. The appellant will become a manufacturer of that product and as such liable to duty". They held that "if the end-product is a separate product which comes into being as a result of the endeavour and activity of the appellant, then the appellant must be held to have Manufactured the said item. When parts and the end-product are separately dutiable - both are taxable."
35.6 From para 1.13 of the Order-in-Original, it appears that Thermax had paid duty only on the components actually manufactured by them, and not on the bought out items which the Collector considered "essential parts of such boilers". As this point is not before us we refrain to comment thereon. However, we agree with the Collector that the fact that M/s. Thermax had paid duty only on some of the components of the boiler, would not mean that drawing and designing charges of only some of the components of such boilers are includible in the assessable value of the boilers, and that the "question of splitting up the values on such, heads with reference to bought out items and factory-made components, does not arise."
36.1 As regards the erection and commissioning charges, it is seen that the assessee had given varying versions, as regards their actual role in respect of these activities and services. At a number of places, they have submitted that erection and commissioning was done by their customers and they were concerned only with the supervision of erection and commissioning, while in some cases it is seen that they have charged heavy amounts for erection and commissioning.
36.2 The assessees have pleaded "that the services rendered and relatable to erection and commissioning are not includible in the assessable value."
36.3 On the issue relating to erection and commissioning charges, the Collector, Central Excise, Pune in para 1.16 of his adjudication order has observed that engineers employed for supervision are their own employees of process heat division which has undertaken manufacture of such equipment Hence, no extra cost has been incurred for their services except perhaps for their travelling allowance which only works out to 20.4% (at the rate of Rs. 1000/- per month out of Rs. 4900/ per month per employee). I, therefore, allow deduction of only 20.4% of the erection and commissioning charges."
36.4 In the matter before us, we find that the goods involved were not ordinary goods. They were high tech engineering items which could not be sold out of shelf. The contracts involved not only the supply of the boilers and other related equipment but also their commissioning at site. The proper commissioning was mandatory for obtaining a completion certificate from the boiler inspector. Although separate charges were shown in some of the contracts for site activities, the job as such was entire and indivisible. Further, the assessees themselves have created confusion as what precisely they meant by the erection and commissioning. In para 5 of their written submissions filed on 17-7-1992, they have contended that in none of their contracts, they were actually engaged in erection and commissioning of the boilers or other components at the site. According to them, the erection and commissioning was done by the customers themselves at their own cost, and that they were only concerned with the supervision of the erection and commissioning. Again in ground 'J' of their appeal, they have pleaded that "In all the cases the appellants do not undertake themselves the erection of the boilers at the site, but they will undertake supervision of erection done by the customers." They have urged the Tribunal to hold "that supervision over erection and commissioning charges are not includible in the assessable value."
36.5 In paras V.1.2 and V 1.3 of their reply to the show cause notice they have detailed the activities at site as involving civil works and foundation details, site services during the erection and installation, commissioning, trialruns, initial commercial runs etc. In some of the contracts, quite a sizable amount has been charged towards erection, commissioning, providing performance guarantees etc. Reference may be made to the contracts at page 239 (Rs. 80 lakhs), page 254 (Rs. 40 lakhs) and page 268 (Rs. 15 lakhs), of the paper book. While the Collector, Central Excise, Pune has allowed a deduction of only 20.4% from the erection and commissioning charges, the assessee has not specified their precise role for charging a considerable sum by way of erection and commissioning charges in some cases.
36.6 Further, it is seen that in the case of Husk Fired Boilers which enjoyed exemption from Central Excise duty, no separate charges were shown for design/engineering charges or for erection/commissioning etc., and only a lump sum amount was shown in the invoices.
36.7 In the case of Collector, Central Excise v. Sunray Computers Pvt. Ltd., 1988 (33) E.L.T. 787 (Tribunal), the Tribunal while observing that installation and commissioning charges were post-removable expenses, had cautioned that "if there is a single contract for supply of the goods as well as services, care may have to be taken to see that there is no attempt at diverting a part of the true price of the goods to service charges."
37.1 To our mind, in a case of this nature, so far as the erection and commissioning charges are concerned, the correct procedure should be to take the total receipts towards such erection and commissioning charges (including the charges recovered through supplementary bills etc.) claimed by the manufacturer as the basis and then to arrive at the value of the goods involved in such erection and commissioning by deducting expenses incurred by the manufacturer for providing labour and other services from such total receipts; of course freight charges for transporting goods from the place of manufacture to the site, if borne by the manufacturer and included in such receipts towards erection and commissioning charges, will be eligible for deduction. In this connection, reference may be made to the Supreme Court decisions in the Sales Tax cases of (1) Gannon Dunkerly and Company v. State of Rajasthan, 1992 (3) SCALE 173 and (2) Builders Association of India v. State of Karnataka, 1993 AIR SCW 152. In those cases, the Hon'ble Supreme Court had laid down the principles as how to determine the value of the goods which were involved in the execution of a works contract for the purpose of levying the tax referred to in Article 366(29A)(b) of the Constitution. They held that "It is permissible to take the value of the works contract as the basis and the value of the goods involved in the execution of the works contract can be arrived at by deducting expenses incurred by the contractor for providing labour and other services from the value of the works contract." The charges for labour and services which are required to be deducted from the value of the works contract were enumerated as under:-
(i) Labour charges for execution of the works;
(ii) Amount paid to a sub-contractor for labour and services;
(iii) Charges for obtaining on hire or otherwise machinery and tools used for execution of the works contract.
(iv) Charges for planning, designing and architect's fees;
(v) Cost of consumables used in execution of the works contract;
(vi) Cost of establishment of the contractor to the extent it is relatable to supply of labour and services;
(vii) Other similar expenses relatable to supply of labour and services and
(viii) Profit earned by the contractor to the extent it is relatable to supply of labour and services.
37.2 The above deductions in the matter before us will only relate to the activities at the site and only when such charges have been incurred by the manufacturer and form part of the total receipts in respect of the erection and commissioning charges, from which deductions have been claimed. Viewed in this light, the charges for planning designing and architect fees will obviously relate only to the work at site, and not to the planning and designing of the goods supplied. Further, the burden of proof to establish the above expenses for exclusion from the total receipts towards erection and commissioning charges will be on the manufacturer.
38. As regards the cost incurred by the customer, it has not entered into the receipts or the value, and hence there is no question for its exclusion.
39. In cases, where no goods have been supplied, charges recovered for any service whatsoever had not entered into any value for the purposes of excise duty, and we are not concerned with such transactions.
40. Further, the demand has to be worked out in terms of Section 4(4)(d)(ii) of the Act, and the excise duty payable had to be deducted from the final price to arrive at the assessable value, as contended by the assessee in para X read with Annexure XIV of their reply to the show cause notice, and as held by the Tribunal in the case of Collector, Central Excise v. V.S.T. Industries - 1991 (52) E.L.T. 59 (Tribunal). Paras 24 and 25 of that decision are extracted below:-
* * * * * * *
41. Thus, in the circumstances of the case and in the light of our above observations, the Central Excise duty demanded has to be re-calculated, and for this purpose, the matter has to be remitted back to the adjudicating authority. Accordingly, for the purposes of re-calculation of Central Excise duty and for redetermining the quantum of penalty, if any, we remand the matter back to the Collector, Central Excise, Pune. Within two months from the receipt of this order, the manufacturers will furnish all the necessary information to the Collector, Central Excise, Pune, who will afford an opportunity to the manufacturer for being heard in the matter. The Collector, Central Excise, Pune will, then, proceed to re-calculate the demand and redetermine the quantum of penalty, if any, and pass a speaking order in the matter.
42. As a result, while upholding the Order-in-Original in so far as the design and engineering charges are concerned and rejecting the contentions made by the assessee in respect of the other points, other than those relating to erection and commissioning charges, the appeal filed by the assessee is allowed partly by way of remand on the limited question of erection and commissioning charges and recalculation of duty liability and redetermination of quantum of penalty, if any, keeping in view the observations made by us in para 40 above.
43. In so far as the 3 appeals filed by the revenue along with three Cross Objections filed by the assessee are concerned, as they cover the same period as the above appeal filed by the assessee, no separate orders thereon are required to be made and those appeals along with Cross Objections are merged in the above order.