Custom, Excise & Service Tax Tribunal
M/S. Walchandnagar Industries Ltd vs The Commissioner Of Central Excise on 28 April, 2011
IN THE CUSTOMS, EXCISE AND SERVICE TAX APPELLATE TRIBUNAL
WEST ZONAL BENCH AT MUMBAI
Bench - Division Bench
Court - II
Date of hearing: 28.04.2011
Date of decision:
Appeal Nos. E/1370, 2081/06, 1090/08, 304/09, 164/10, & 3638/04
(Arising out of Order-in-Original Nos.dated. (As per tabular column below) passed by the Commissioner of Central Excise, Pune - III)
For approval and signature:
Honble Mr. Ashok Jindal, Member (Judicial)
Honble Mr. B.S.V. Murthy, Member (Technical)
1. Whether Press Reporters may be allowed to see the Order for publication as per Rule 27 of the CESTAT (Procedure) Rules, 1982?
No
2. Whether it should be released under Rule 27 of the CESTAT (Procedure) Rules, 1982 for publication in any authoritative report or not?
Yes
3. Whether their Lordship wish to see the fair copy of the Order?
Seen
4. Whether Order is to be circulated to the Departmental authorities? Yes
M/s. Walchandnagar Industries Ltd. ..Appellant(s)
Vs.
The Commissioner of Central Excise
Pune - III Respondent(s)
Appearance Mr. Bharat B. Raichandani & S. Narayanan, Advocates, for the appellant Mr. Manish Mohan, SDR, for the Revenue Coram:
Honble Mr. Ashok Jindal, Member (Judicial) Honble Mr. B.S.V. Murthy, Member (Technical) ORDER NOS.____________________________2011 Per Mr. B.S.V. Murthy
1. The present appeals have been filed against different orders passed by the Commissioner of Central Excise, Pune / Commissioner of Central Excise (Appeals), Pune. The details are as under:
Sl. No. Issue in brief Period O.I.O No. & Date O.I.A. No. & Date Differential Duty Amount (Rs.) Penalty (Rs.) 1 Value of bought out items directly supplied to customers sites is to be included in the assessable value of Centrifugal machine June 83 to Nov. 87 & Dec. 87 to Jan. 90 O-I-Denovo No. 24/CEX/03 dtd. 22.08.03 PIII/115/04 dtd. 13.09.04 5,25,525 Nil 2 25 SCNs Feb. 90 to Aug. 03 & July 04 to April 05 01-25/CX/ADC/ 06 dtd. 30.01.06 PIII/074/06 dtd. 08.05.06 42,92,081 2,15,000 3 Sept. 03 to June 04 12/CX/ADJ/ 05 dtd. 25.10.05 PIII/036/06 dtd. 07.02.06 1,20,874 50,000 4 April 06 to Feb. 07 116/CEX/ADC/07 dtd. 24.12.07 PIII/161/08 dtd. 17.07.08 11,15,765 11,15,765 5 May 05 to March 06 35/CEX/07 dtd. 31.03.08 PIII/243/08 dtd. 24.12.08 3,56,978 4,20,980 6 March 07 to Feb. 08 11/CEX/09-10 dtd. 03.11.09 89,68,079 89,68,079
2. The brief facts of the case are as follows:
2.1. The appellants are engaged in the manufacture of Electric Centrifugal Machines falling under chapter 84 of the Central Excise Tariff Act, 1985 since 1960. The Centrifugal Machines are of two types (a) Recycling Batch machines and (b) Continuous Centrifugal Machines. The Centrifugal Machines operate on the principle of centrifugal force i.e. force due to rotation. One of the main applications of the said machine is to separate the fluids from solid. The said machines are used in sugar industries to separate molasses from sugar from the mixtures (massecuite). The power for operating the said machines can be either electric power or hydraulic power or pneumatic power or it can also be operated manually.
2.2. The customers of the appellants are manufacturers of sugar. The customers place purchase order (after enquiries) on the appellants for supply of the said machines of specified capacity. A lumpsum price is agreed for supply of the machine. The appellants manufacture the said machine based on the purchase order. The said machine is cleared from the factory on payment of central excise duty on the value of said machine.
3. In some of the cases customers placed purchase orders on the appellant for supply of electric motors, control panel, cables etc which are not manufactured by the appellants but purchased and sent directly to the site of the customers. The dispute in all the appeals is whether the value of such bought out items and supplied to the customers in terms of their purchase order is includible in the assessable value of the Centrifugal Machines manufactured by the appellants and duty is payable on them.
4. As can be seen from the table above, proceedings were initiated by the Revenue for the first time by issue of a show cause notice on 05.07.1988 in which differential duty was demanded for the period from June 1983 to November 1987. This was adjudicated by the then Collector and order was issued on 18.12.1989. In this order the Collector confirmed the duty demand holding that value of bought out item is includible in the value of the Centrifugal Machines. On an appeal filed to the then CEGAT, the Tribunal vide Final Order No. 1673/97-A dated 03.09.1997 remanded the case back to the Adjudicating Authority for fresh decision. Thereafter the Adjudicating Authority who happened to be the Additional Commissioner, vide his Order-in-Original dated 22.08.2003 again took the same stand and confirmed the demand for differential duty. The differential duty demand was for Rs. 5,25,525/- which was worked out after deducting the duty paid by the suppliers on the bought out items from the total demand. The appeal filed by the appellants against this order was rejected by the Order-in-Appeal dated 13.09.2004 by the Commissioner of Central Excise (Appeals). Subsequent show cause notices were also decided by the Commissioner (Appeals)/Commissioner and in all the cases, the lower authorities took the view that differential duty was payable and value of such bought out items are includible in the assessable value. In all the cases excepting the first one, penalty was also imposed.
5. Heard both the sides.
6. The learned counsel on behalf of the appellants made detailed submissions and after hearing both the sides, the bench had directed the appellants to make written submissions. Accordingly, written submissions have been filed by the appellants which is reproduced below:
6.1 The admitted factual position in this case is that the centrifugal machines manufactured and cleared by the appellants are complete in all respects when they are cleared from their factory. The centrifugal machines manufactured and cleared by the appellants are tested for its technical performance for dry run at the appellants factory and the same are sent to the site for installation. The bought out items are not manufactured by the appellants. The suppliers of such goods have manufactured and cleared the said bought out items on payment of central excise duty. Excise duty is a tax on manufacture. Once the appellants have not manufactured the bought out items, no duty can be demanded on such goods. In Electronics corporation of India Ltd. 2004 (167) ELT 420 (T), this Tribunal held that excise being a levy on manufacture, duty liability will be restricted to the goods manufactured by an assessee and not the goods supplied by the assessee. It was further held that bought out items, howsoever essential, supplied along with a machine, cannot be subjected to duty.
6.2 In the instant case, the bought out items like electric motors, control panels etc. are purchased by the appellants and directly supplied to the customers wherever such customers placed orders for supply of such bought out items. Such goods do not enter the factory premises of the appellants. The bought out items are not part of the centrifugal machines. These goods are not fitted in to the said machine. This is not even the case of the Revenue. The Centrifugal Machines can be operated either by electric motors or hydraulic power or pneumatic power. These machines can even be operated manually. This fact is not in dispute. The affidavit filed by the Chief Project Manager and Chief Manager (Erection and Services) clearly bring out this factual position. Electric motor or control panels are not assembled into the centrifugal machines. This fact is also not in dispute. The customers of the appellants have certified this factual aspect (Refer page 259 of appeal memo). It is not in all cases of sale of centrifugal machine, the customers have placed orders for supply of bought out items. This also clearly shows that the bought out items like control panel, motors etc. are not essential part of the machines manufactured and cleared by the appellants. The purchase of the said goods from the appellants is purely optional. This is evident from the purchase orders on record. Further, the customers at the site can use alternative source of power and different control panels of their choice. This fact is also not in dispute. Therefore, electric motors, control panels, etc. supplied by the appellants, after purchasing the same from the market, are not essential or integral parts of the centrifugal machine.
6.3 Above apart, the electric motors are of standard size. The electric motors are standard type motors which can be used to drive any system requiring vertical drive applications. Such motors are general purpose motors which are suitable for installation on any drive of configuration requiring vertical flange mounted motors in various industries and applications. They are capable of being used for other machines apart from the centrifugal machines manufactured by the appellants. This fact is also not in dispute. Hence, the value of bought out items (electric motor and control panel) cannot be included in the assessable value of the centrifugal machines.
6.4 The main plank of attack in the instant case against the appellants is that the electric motors and control panel are necessary to make the centrifugal machines functional. The finding against the appellants is that centrifugal machines cannot be functional without the electric motor and control panel. The centrifugal machine is complete only with the electric motor and control panel. According to the Revenue, unless the drive is given in the form of electric motor, the Centrifugal Machines is a non-functional unit. According to the Revenue, centrifugal machines are not functionally complete without electric motor and control panel and hence, the value of the electric motor and control panel has to be included in the assessable value of the machine. There is no substance in this case of the Revenue.
6.5 There is absolutely no basis or evidence placed on record by the department to show that the bought out items are essential part of centrifugal machine manufactured and cleared by the appellants. Apart from the bald allegation, the department has not produced evidence to prove that the centrifugal machine is incomplete without the electric motor and control panel. On the other hand, the appellants have placed on record the evidence to show that these bought out items are not integral/essential parts of centrifugal machines. Hence, it is clear that the bought out items are not parts of the centrifugal machine and merely accessories.
6.6 Even otherwise, in so far as functionality is concerned, just as aviation petrol is not a part of the aero plane nor diesel is a part of the bus/car, electric motor and control panel cannot be part of the centrifugal machine. In State of Uttar Pradesh Vs. Kores India Ltd. AIR 1977 SC 132, the issue before the Honble Supreme Court was whether typewriter ribbon is a part of the typewriter on the ground that latter cannot be used without the former. The Supreme Court held that typewriter ribbon is an accessory and not a part of the typewriter though it may not be possible to use the latter without the former and though it may not be possible to type any matter without it.
6.7 Similar view has been taken by the Honble Bombay High Court in Koron Business Systems Ltd. s. UOI 1991 (51) ELT 212 (Bom.). In that case, the petitioners were engaged in manufacture of photocopying machines. The petitioners sold and supplied the machines along with photo conductive plates, black shields etc. Similar valuation dispute was raised by the Revenue. The High Court held that the value of the plates and black shield which can be purchased by the buyers separately as per their needs and fitted to the photo copying machine cannot be essential parts of photo copying machine and therefore their value cannot be included in the assessable value of the photo copying machine. Civil appeal against the said decision filed by Revenue was dismissed by Supreme Court vide order reported at 1997 (93) ELT 663.
6.8 The above decision of the Bombay High Court was followed by this Tribunal in Neycer India Ltd. Vs. CCE 2005 (192) ELT 620. In that case, this Tribunal held that the value of the bought out items (handle assembly, ball valve assembly etc.) cannot be included in the assessable value of flushing cistern even though the said flushing cistern cannot be made functional without the said bought out items. The Commissioner does not hold that the said decision is not applicable in the facts of the present case. The Ld. Commissioner chooses not to follow this decision solely on the ground that appeal filed by the Revenue before the Supreme Court is pending. This cannot be a valid reason for not following a binding precedent.
6.9 In CCE Vs. Kishor Pumps Pvt. Ltd.1998 (91) ELT 91 (T), this Tribunal dealt with an identical issue. In that case, the assessee was engaged in the manufacture of Power-driven pumps and Agitators (PD Pumps). The assessee was also supplying electric motors along with PD Pumps. The issue under consideration was whether the value of electric motors was includible in the assessable value of Agitators and PD Pumps. Electric Motors were supplied along with Agitators or PD Pumps only at the request of buyers. The assessee was also clearing Agitators and PD Pumps without Electric Motors in cases where buyers did not require the latter. The Tribunal held that Electric Motor cannot be regarded as a component or integral part of a pump. The Tribunal also took note of the fact that without electric power a pump cannot be operated (barring cases of small mechanically operated pumps) does not render the former a component or integral part of the latter, except in combined or composite system. The above decision was followed by the Tribunal in the case of Beacon Weir Limited 1997 (95) ELT 140 (T). An appeal filed against the said decision by the Revenue came to be dismissed by the Supreme Court vide order reported at 2002 146 ELT A98.
6.10 Similarly, in Atlas Copco Ltd. Vs. CCE 2004 (167) ELT 420, this Tribunal took a similar view. The assessee in that case was engaged in the manufacture of compressors and drilling equipment. Certain bought out items such as control panels, hoses etc. were also being supplied to some of the buyers of compressors. The Tribunal held that control panel is not a component part of compressor and hence, the value of the control panel cannot be included thereof in the assessable value of the equipment.
6.11 In Neptune Equipments Pvt. Ltd. Vs. CCE 2010 (259) ELT 588, this Tribunal held that value of the generator and filter dryer supplied along with paint booth for quick drying of paint at customers insistence was not includible in the assessable value of the paint booth. The Tribunal observed that supply of generator and filter dryer was optional. The generator and filter dryer was never brought to the factory and never supplied with paint booth when paint booth was cleared from the factory.
6.12 Apart from the above, it is settled legal position that the assessment of the goods had to be based on the condition on which the goods are removed from the factory. The condition in which the goods would be erected/installed at the site cannot be a basis to determine the value of the goods cleared from the factory. In the present case, it is an admitted factual position that the centrifugal machines were cleared by the appellants. The bought out items are neither being attached to the machine nor brought into the factory were cleared separately. Centrifugal machines without the bought out items along were cleared from the factory. In such a situation, the value of centrifugal machine as cleared from the factory alone can be relevant for the purpose of assessment under Central Excise Act. Any operation or process done on the goods (which does not amount to manufacture or otherwise) after their clearance from the factory is totally irrelevant and extraneous for determining the value of the goods cleared from the factory.
6.13 The above view is supported by decision of the Bombay High Court in the case of Reliance Textile Industries Ltd. Vs. Union of India 1993 (63) ELT 67 (Bom.), para 7 thereof.
6.14 A clarification to similar effect has been issued by the CBEC vide Circular No. 139/08/2000 dated 03.01.2001.
6.15 The above legal position has not been altered by the amendment made to Section 4 of the Central Excise Act with effect from 01.07.2000. Even under the transaction value era, the goods manufactured and cleared from the factory, which are the subject matter of assessment, have to be looked into. Goods not manufactured but purchased and sold cannot be subject to central excise duty. The Revenue cannot tax the trading margin of manufacturer-cum-trader by including the value of the traded goods in the value of the manufactured goods.
6.16 In any event, the centrifugal machine after they are erected at site and connected with the motors and control panel becomes immovable property. Therefore, if the contention of the department that the electric motors, control panels etc. are parts of centrifugal machine is to be accepted, then no excise duty is payable by the appellants since the centrifugal machines when erected at site and connected with the motors and control panel becomes immovable property and therefore not subjected to excise levy at all.
6.17 The reliance placed on purchase order dated 18.06.2007 issued by M/s. Sakhti sugar Ltd. to hold that the value of the electric motor and control panel is to be included in the assessable value of the centrifugal machine is untenable and out of context. The said purchase order is for supply of Batch Type Centrifugal Machine along with supply of motors, panel and cables. The unit price of the machine is separately mentioned. Clause (5) of the said purchase order refers to performance parameters. It is provided that No. of cycles should be 20-22 with 1500 kg massecuite per charge. It is further provided that the appellants shall guarantee to achieve the aforesaid performance parameters during running of batch type Centrifugal Machines in normal operative condition. Relying on this clause, it is sought to be contended that the appellants are ensuring the performance of the machine along with running electric motor under normal operative condition. Thus, the appellants guarantee the performance of the control panel and electric motor in addition to the centrifugal machines supplied by them. Hence, according to the Revenue, value of such bought out items which are essential for the functional performance of the machine is liable to be included. This argument does not hold water for more than one reason.
6.18 Firstly, the performance parameters referred to are in respect of the batch type centrifugal machines along and not for bought items. Various types of batch type centrifugal machines are manufactured by the appellants which carry different kg. per charge and thereby resulting in different No. of cycles. This is clear from the brochure of the appellants itself (Annexure 2). The following types of batch type centrifugal machines are manufactured by the appellants:
Model Charge per cycle (KG) Basket Size No. of Cycles Remarks A B SD-650 650 1250x960 14 to 16 Charge & Number of Cycles Depends on Drive used and Massecuite condition 2117 2000 HP-700 700 1220x762 16 to 18 2117 2000 V-1000 1000 1250x1000 18 to 20 2360 2000 V-1250 1250 1350x1000 18 to 20 2360 2100 V-1500 1500 1395x1100 18 to 20 2450 2150 V-1750 1750 1500x1150 18 to 20 2450 2150 6.19 As can be seen from the above that each machine carries different chare per cycle and accordingly, the number of cycles varies. This is precisely the performance guarantee referred to in clause (5) above. Thus, it is clear that the performance guarantee is for the centrifugal machine only.
6.20 Secondly, assuming it is a performance guarantee for the machines along with the bought out items even then it does not take a case of the revenue any further. A trader can guarantee the performance of the goods purchased and sold by him.
6.21 Thirdly, such type of performance guarantee is given by the appellants even in case where the appellants supply only centrifugal machines without electric motor. One such illustrative purchase order has been placed by M/s. Ghaghara Sugar Ltd. vide order dated 29.05.1999 (Refer clause 10 thereof). In terms of the said purchase order, appellants have given a bank guarantee dated 15.07.1999 wherein the performance parameters of the said machines are clearly stipulated (See Annexure 3). Similarly, there is another purchase order only for supply of machine from M/s. Ponni sugars and Chemicals Limited wherein similar clauses are seen. In purchase order dated 20.07.1988, clause 5 provides that the supplier shall guarantee the equipment against defective design, workmanship and material. Clause 6 thereof provides that the supplier shall guarantee the satisfactory performance of the equipment and continuous trouble-free operation of the equipment for a period of 18 months from the date of last consignment or 12 months from the date of commissioning whichever is earlier. Clause 7 thereof provides that supplier should guarantee free replacement in case of manufacturing defect, quality and workmanship. Similarly, order dated 30.031994 placed on the appellants by M/s. L.H. Sugar Factories Ltd. also contain similar clauses.
6.22 The above factual aspect demolishes the case of the Revenue. At the time of the clearance from the factory, it is a complete machine. Erection, installation or commissioning taking place after clearance from the factory of the appellants is inconsequential.
6.23 For the same reason, reliance placed on decision of the Tribunal by the Ld. DR on the case of Peterplast Synthetics Private Limited 2005 (192) ELT 842 is not correct. The facts of the present case are totally distinguishable from the facts of that case. In that case, the assessee was manufacturer of HDPE bags out of HDPE fabrics. The assessee did not include value of liners in the value of the bags. It was held by the Tribunal that liners are essential part of the bags. Further, the liners were cleared along with the bags from the factory of the assessee. In the instant case, the electric motors, control panels etc. are not cleared from the factory of the appellants along with the centrifugal machine. Further, the motors and control panels are of standard size. The said goods are not made to order or specifications. Hence, the facts of the present case are distinguishable from the facts of that case.
6.24 Similarly, the reliance placed on the decision of the Supreme Court in the case of MIL India Ltd. 2007 (201) ELT 188 (SC) is of no help to the revenue. In that case, the Supreme Court held that whether value of bought out items would be included assessable value would depend on the facts of each case. In the undisputed facts of the present case, as already shown above, the value of the electric motor, control panels etc is not includible in the assessable value of the centrifugal machine.
6.25 In any event, credit of duty paid on the bought out items needs to be adjusted against the duty demand in the present case and re-computed after allowing cenvat credit. This benefit has been extended to the appellants by the Commissioner himself vide order 18.12.1989 which has not been challenged by the Revenue.
6.26 The appellants are also entitled to benefit of cum duty. The demand needs to be re-computed after extending the said benefit.
6.27 No penalty is imposable on the appellants under section 11AC of the Central Excise Act. There is no suppression of facts on part of the appellants with intent to evade payment of duty. This has been held by the Commissioner vide order dated 18.12.1989 which has been upheld by this Tribunal vide order dated 03.09.1998. In any event, the dispute involved in the present case is one of interpretation and valuation. Hence, no penalty can be imposed on the appellants.
7. The learned SDR on behalf of the Revenue submitted that it is admitted that the Centrifugal machine can be driven by various methods as under:
a) By belts and pulleys from a mutual shaft (belt-driven centrifugals);
b) By bevel gears and clutches from a mutual shaft running over the top of the centrifugals (gear-driven centrifugals);
c) By Pelton turbines driven by water under pressure (water-driven centrifugals);
d) By individual electric motors (electrically-driven centrifugals) 7.1. But the fact remains that the Centrifugal machines manufactured by the appellants, run on electric motor only. No evidence has been produced till date by the appellants before any of the lower authorities to show that any of the Centrifugal machines manufactured by them and is in use is being operated with the help of any other source of power other than electric motor. He also submitted that according to the appellants own submission, the Centrifugal machines manufactured by them are tested by a dry run in their own factory by using an electric motor and electric panel etc. Therefore, he submits that the claim of the appellants that the Centrifugal machine manufactured by them is complete in all respect when it was removed from the factory cannot be accepted. He also relies upon the decision of the Tribunal in the case of Peterplast Synthetics Pvt. Ltd. reported in 2005 (192) ELT 842 (Tri.-Mum.) to support his contention that value of bought out item is liable to be included in the value of finished goods. He also relies upon the decision of the Honble Supreme Court in the case of MIL India Ltd. reported in 2007 (201) ELT 188 (SC) in this regard. Further he also reiterated the observations of the learned Commissioner in the impugned Order-in-Original dated 03.11.2009 and submitted that the Commissioner has considered all aspects of the matter in her order and therefore the order has to be sustained.
8. We have considered the submissions made by both the sides and also have gone through the various records and the documents filed to us.
9.1 The first submission made by the appellant was that duty liability has to be restricted to the goods manufactured by an assessee and not the goods supplied by the assessee. The appellants relied upon the decision of the Tribunal in the case of Electronics Corporation of India Ltd. in this regard. In MIL India case, the Honble Supreme Court considered the issue as to whether the value of bought out items are to be included in the soaps/detergents and allied industries plant which was manufactured by MIL India Ltd. The Tribunal had taken the view that the department was not entitled to add the value of the bought out items in the assessable value of the goods manufactured by the appellants and allowed the appeal. In that case also, the bought out items were directly sent to the site and were never received in the factory premises of the appellants. In fact the fatty acids plant and the film sulphonation plant were to be erected and commissioned not by the appellant in that case but by a contractor. However, the department demanded the duty on the bought out items supplied directly to the site. The Honble Supreme Courts observations are available in paragraph 5 of this order and the same are reproduced:
5. We do not wish to remand the matter. This matter has undertaken a chequered history. In the present case vide order dated 9.4.2003 the Commissioner (A) held that the assessee had failed to produce evidence regarding its entitlement for the Modvat credit. However the fact remains that even if the bought out items were dutiable, the department was still required to give the benefit of Modvat credit. At this stage we may note that the appellants had a composite contract with M/s. Godrej Soaps Ltd. and M/s. Galaxy Surfactants Limited under which the appellants not only agreed to supply the equipments to M/s. Godrej Soaps Ltd. and M/s. Galaxy Surfactants Ltd., they also agreed to provide data/information in the format of drawings, diagrams, charts, tables etc. It is in these circumstances that the department sought to impose duty on the ground that the appellants under the composite contract were to facilitate M/s. Godrej soaps Ltd. and M/s. Galaxy Surfactants Ltd. to set up their plant at given site. According to the department the bought out items were therefore necessary for the manufacture of the plant at site which was erected and assembled by the above two companies through their contractor. Whether the value of the bought out items should be added for computing the assessable value would depends on the facts of each case. Even erection of a plant by assembling certain items at site could constitute manufacture under the excise law in the present case, however, we are satisfied that the quantification done by the department needs to be modified. As stated above vide show cause notice dated 23.05.1997 the department demanded duty of Rs. 94,03,500 for the period April 1996 to March 1997. However, even after the corrigendum dated 6.6.1997, whereby the period stood reduced to 6 months (11/96 to 3/97), the demand continued to be to the tune of Rs. 94,03,500. This was not possible. Moreover, even if bought out items were dutiable the assessee was entitled to the benefit of Modvat credit. Unfortunately, in the present case time was consumed on issues which had no relevance to taxability of the goods. In the circumstances we reduce the demand from Rs. 94,03,500 to Rs. 23,56,000 which shall be paid within eight weeks failing which department would be entitled to levy interest at 9% p.a. 9.2. As can be seen from the above, the Honble Supreme Court took note of the fact that the appellant had a composite contract by which manufacturer have agreed to supply the equipment but also agreed to provide datawise information. The Honble Supreme Court observed that the erection of a plant by assembling certain items at site could constitute manufacture under the excise law. The above decision of the Honble Supreme Court would require us to have a look at the type of the contract, the process of manufacture and consider whether value of bought out parts have to be included or not. It has to be taken note of that nowhere in the decision of the Honble Supreme Court the necessity or the essentiality of the component or item has been discussed. The one aspect that emerges very clearly from the decision of the Supreme Court is that fact as to whether a particular bought out item was manufactured or not is not the only factor to determine the duty liability of the final product manufactured by the appellant. Therefore the reliance of the appellant on the case of Electronics Corpn. of India Ltd. to submit that duty liability has to be restricted to the goods manufactured by the assessee and not the once supplied by the assessee cannot be sustained.
10.1 The next submission made by the appellant is that the bought out items like electric motors, control panel etc. are purchased by the appellant and supplied directly to the customers only in cases where customers placed orders for supply of such bought out items. Bought out items do not enter the factory premises of the appellant and are not part of Centrifugal machines. According to them they are not fitted into the said machine. The Centrifugal machines can be run by using different types of power source which is not in dispute. Electric motor or control panels are not assembled in the Centrifugal machines. Further supply of electric motor and other items were purely optional. They also contested the observation that electric motors and control panels are necessary to make the Centrifugal machines functional. According to them Centrifugal machine is complete even without electric motor or electric panel. According to them department has not produced any evidence to show that the Centrifugal machine is incomplete without electric motor and control panel.
10.2 In this connection we take note of some of the observations of the Commissioner in her order dated 03.11.2009 and hence reproduce the same since we agree with the same:
One of the arguments pleaded by the notice is that the control panel and electric motors are not integral part of centrifugal machine and the centrifugal machine as it leaves the factory is complete machine by itself. I do not agree with the argument of the noticee, as the centrifugal machine as it leaves the factory is incomplete machine not capable of the function it intended to do without the assemble of prime mover (in the form of electric motor). It is also admitted by the notice that only centrifugal machine is dispatched from the factory and Electrical motor and control panel are assembled to the centrifugal machine at site to make it functional. In a way they are admitting that the Centrifugal machine can be made functional after assembling with electric motor and control panel. The noticee have also mentioned that before dispatch of the centrifugal machine from their factory the same is tested without load. For such testing motor and control panel are necessary. In any case either at factory testing or for functioning at site the centrifugal machine requires electric motor and control panel. There is no doubt whatsoever that the centrifugal machine is complete without the prime mover (in the form of electric motor or otherwise) and a control mechanism (in the form of control panel) to control the prime mover for varying load condition on the centrifugal machine. Unless the drive is given in the form of electric motor the centrifugal machine is non functional unit. To control the output of the motor as per the varying load conditions of the centrifugal machine, control panel is required. If the electric motor and control panel are not essential and integral parts of the centrifugal machine, then why the customers are placing order for supply of such motor and control panel to suit operation of the centrifugal machine and why the noticee is supplying them is not anwwered by the notice. Hence I observe that the centrifugal machine is functionally not complete without the electric motor and control panel.
11. At this juncture it would be worthwhile to look into some of the purchase orders which are part of the records. In the purchase order placed by Aghara Sugar Ltd. dated 21.05.1999, the purchase order is without including electric motor. The purchase order specifies that the contract for erection/commissioning will be given to a competent contractor respectively for proper erection rests with the appellant. As regards warranty, the purchase order specifies that equipment supplied by the appellant shall be under their warranty for a period of two full successful crushing seasons or 24 months from the date of last supply whichever is earlier. Further the purchase order also specified that for accessories and fittings not manufactured by the appellant but which form an integral part of the equipment, the warranty will be co-terminus with the main equipment irrespective of the warranty extended by supplier of such bought out items. Further the purchase order also specified that main steel sections (SAIL/TISCO/IISCO) shall only be used for fabrication. The above purchase order shows that the responsibility of the appellants does not end when the Centrifugal machine is manufactured and supplied. The purchase order clearly makes the appellants responsibility for erection and commissioning also and also it successfully running for two more years. It also makes appellants responsible for ensuring that warranty for bought out items is co-terminus with the equipment manufactured by them. In this contract it has to be noted that electric panel is not excluded and the very condition that accessories and fittings, not manufactured also should have warranty co-terminus with the equipment manufactured shows that there were bought out items in this contract. This clause in the purchase order would show that it is not mere supply of a standard item available in the market by the supplier to the buyer of the appellant but the appellants actually and actively intervened and ensured that such bought out items have warranty co-terminus with the equipment, perform subsequently with their equipment and ensure that the same are erected exactly according to the requirement. This contract clearly shows that the sale and purchase of a Centrifugal machine is not such a simple matter as made out to be.
12. Another purchase order/contract submitted by the appellants is that of L.H. Sugar Factories Ltd. dated 30.03.1994. This contract is also for supply of one Centrifugal machine without Bharat Bijlee make electric motor drive system thyrister control panel, push bottom station, electronic console, hydraulic power pack, cables etc. It is strange that the contract is made specifically for supply without Bharat Bijalee make electric motor drive system thyrister control panel, push bottom station, electronic console, hydraulic power pack, cables etc. Normally one would expept the purchaser to say he wants it without a motor. The warranty in this case is for machine and accessories for 12 months from the date of commissioning. One would imagine that accessories would include items like electronic console, hydraulic power pack, push bottom station etc. for which no order has been placed with the appellant. The purchase order does not specify which are the accessories for which warranty is required. Further the purchaser also requires the appellant to guarantee for the quality of machinery and for its performance as mentioned in the technical specifications.
13. The next contract that we have seen is that of the Seksaria Biswan Sugar Factory Ltd. dated 30.08.1998. This is also another purchase order without electric motor, control panel and order also specifies that it should be supplied without a drive motor and control panel. Unfortunately only the first page of the purchase order was available.
14. In the purchase order of Ponni Sugars and Chemicals Ltd. dated 20.07.1988 the appellant is required to guarantee the satisfactory performance of the equipment and continuous trouble free operation for a period of 18 months from the date of last consignment or 12 months from the date of commissioning whichever is earlier. Once again appellant is taking responsibility for satisfactory performance of the equipment and continuous trouble free operation. If the electric motor and the control panel etc. are not properly connected and do not work efficiently, naturally the appellants would not be able to give guarantee.
15.1 The learned Commissioner in her order has also considered the purchase order placed by M/s. Sakthi Sugars Ltd. dated 18.06.2007. She has taken note of the following conditions:
i. Condition No. 3 (Delivery): All the ordered equipment should reach the site before end December, 2007.
ii. Condition No. 4 (Inspection/Testing): The buyer had the right to inspect the work being carried out under the contract and to test the goods to confirm their conformity to the specification.
iii. Condition No. 5 (Performance parameters): the noticee was to guarantee to achieve the performance of 20-22 cycles with 1500 kg. Massecuite per charge during running of the centrifugal machine in normal operative condition.
iv. Condition No. 6 (Guarantee/warrantee): Noticee was to guarantee that the goods supplied under the contract would comply strictly with the contract specifications, shall be first class and free from defects.
15.2 We find that her observation that the conditions in the purchase order clearly suggested that in addition to the Centrifugal machine, the appellant was responsible for specification of the control panel and the electric motor which were supplied with the Centrifugal machine. Further the appellant was to give guarantee for the performance of the electric motor and the control panel. As already observed by us, the appellant was also required to ensure that the warranty for items supplied with the Centrifugal machine is co-terminus with the warranty for the Centrifugal machine.
16. The study and grievance of various purchase orders available to us on record shows that whenever electric motors control panels etc. were supplied by the appellants themselves, they have undertaken to ensure that those items are according to the requirements, will perform satisfactorily, their equipment will perform satisfactorily, the warranty for those purchased items are co-terminus with the warranty for the equipments supplied by them and they have also given performance guaranty. In the case of purchase orders where electric motor etc. are not supplied by them, the guarantee is limited to the equipment supplied by them and they are not required to provide any warranty for the performance of electric motor, control panel etc.
17. A dry run is conducted in the factory of manufacture using a standard electric motor and electric panel before supply would show that Centrifugal machine is assembled in the factory and tested. Thereafter the same is disassembled and supplied. While supplying the Centrifugal machine in disassembled form, naturally the electric motor, electric panel would be separated from the Centrifugal machine in addition to the other components and accessories which are assembled and packed separately. There is no dispute that without electric motor and electric panel Centrifugal machine manufactured by the appellant cannot work. Apparently the machine has to be designed differently or may be some other requirement would be there if it is to be run by a different power source. No evidence was produced before the lower authority or no evidence was before us to show that it is possible to run the Centrifugal machines manufactured by the appellant by a different power source. Therefore it is quite clear that the Centrifugal machine manufactured by the appellant is being cleared in a disassembled form. When such is the case, it is not possible to accept the contention that electric motor and electric panel are not at all required for functioning of the Centrifugal machines. Under these circumstances, in terms of Interpretative Rule 2(a) of Rules for Interpretation of Tariff is squarely applicable and goods have to be held as cleared in disassembled condition. According to Rule 2(a) of General Rules for interpretation of the schedule to the Central Excise Tariff Act, any reference in a heading to an article shall be taken to include a reference to that article incomplete or unfinished provided that, as presented, the incomplete or unfinished article has the essential character of the complete or finished article; it shall also be taken to include a reference to that article complete or finished, presented unassembled or disassembled. No doubt in this case the disassembling of the Centrifugal machine does not include disassembling the electric motor and the electric panel, cables etc. since the appellants do not consider it worthwhile removing electric motor, electric panel every time and connecting a new one since they happened to be standard items and are available in the market and therefore they can be purchased as bought out parts. In our opinion electric motor and electric panel have to be considered as parts in this case since without them, the Centrifugal machine cannot function. Further it also has emerged from the records that appellants have a particular design of Centrifugal machine where the motor can be fitted on to the Centrifugal machine itself instead of connecting it by a V Belt.
18. The appellants have cited the example of typewriter ribbon in the case of Kores India Ltd. I dont think the case of the typewriter ribbon is applicable to the present one. A typewriter ribbon is a consumable and it has to be kept on being replaced unlike electric motor and electric panel in this case. Similarly, the decision of the Honble Bombay High Court in the case of Koron Business systems Ltd. cited by the appellant is also of no help to them. Admittedly photo conductive plates are also consumables and after taking a few photographs they have to be changed and they are similar to typewriter ribbons. However another decision relied upon by the learned Commissioner in her order is applicable to the present case. That is the decision of Bombay High Court in the case of Koron Business System Ltd. -1992 (58) ELT 48 (Bom.). In that decision the Honble High Court considered the includibility of the value of bought out items like timer and the lens for the camera used in the photocopier and held that the same are includible. The Honble Supreme Court also had considered the issue of inclusion of value of plates and black shield in the value of photocopying machine and held that the same are not parts of photocopying machines and hence their value is not includible. In this case electric motor and electric panel have to be held as parts because without them Centrifugal machine cannot function.
19. The appellants have submitted that the decision of the Bombay High Court in Koron Business System Ltd. in respect of plates and black shield was followed by the Tribunal in the case of Neycer India Ltd. Vs. CCE - 2005 (192) ELT 620. It was submitted by the appellant that in this case Tribunal took the view that value of bought out items cannot be included in the assessable value of flushing cistern even though the flushing cistern cannot be made functional without the said bought out items. In that case, the Tribunal took the view that the bought out items in that case were accessories. It is accepted that accessories are those items which improve the functionality of an article and are not essential for the article. An optional accessory and a part of the machine have to be distinguished. Further as observed by the Honble Supreme Court as regards inclusion of value of bought out parts, each case has to be examined on its own merit.
20. As regards the decision in the case of Kishor Pumps Pvt. Ltd., it has not been shown to us that in that case also there was a purchase order which requiring the appellant to give warranty for the parts supplied which were co-terminus with the main equipment and he was supposed to ensure satisfactory performance of the equipment etc. as we find in the case of purchase orders in this case. Same observations hold good for the decision in the case of Atlas Copco Ltd. cited by the appellants in support of their case.
21. As regards the decision in the case of Neptune Equipments Pvt. Ltd., the Tribunal in that case in para 11 had relied upon the decision of the Tribunal in the case of MIL India Ltd. which was subsequently overruled by the Supreme Court. In this case the Tribunal has proceeded on the terms that value of bought out items cannot be included when the bought out items are directly supplied to the site of customers and not from the factory. This observation has been clearly set aside by the Honble Supreme Court in the case of MIL India Ltd. The question to be considered as per the ratio of the Honble supreme Court decision is whether value of bought out parts have to form part of assessable value of a plant and machinery erected at site or not and it has to be decided on the basis of facts and circumstances of each case. This is the reason why we have proceeded to examine different purchase orders made available in the records by the Revenue as well as the appellants.
22. As regards the submission that department has not produced any evidence to show that the Centrifugal machine is complete without the electric motor and control panel, we find that the very process of manufacture, supply and the process of fulfillment of purchase orders shows that the Centrifugal machine is assembled in the factory, tested with an electric motor and electric panel, disassembled and afterwards supplied. This process itself shows that electric Centrifugal machine is incomplete without electric motor and control panel. Whether it is supplied with electric motor and control panel or without them, the assessment has to be treating the same as Centrifugal machine. As regards valuation, we have to depend upon the provisions of Section 4 of Central Excise Act, 1944 and the fact that Centrifugal machine is incomplete or complete with the electric motor and panel does not help the appellant. This is case according to Rule 2(a) of Interpretative Rules of the Tariff, even a machine incomplete or unfinished, has to be treated as the finished product if it has attained the essential characteristic. From the facts and circumstances of the case, it is quite clear that the Centrifugal machine manufactured by the appellant can be called Centrifugal machine even without electric motor and electric panel. Therefore the fact that the Centrifugal machine was presented for assessment or assessed by the appellant without electric motor and electric panel does in any way help the appellant. The claim of the appellant that it is settled legal position that the assessment of the goods has to be based on the condition in which the goods are removed from the factory is not correct in view of the observations of Honble Supreme Court in the case of MIL India Ltd., Sirpur Paper Mills Ltd. - 1998 (97) ELT 3 (SC) and Honda Siel Power Products Ltd. - 2007 (208) ELT 298 (Tri.-Del.). The decision of the Honble Supreme Court in the case of Narne Tulaman Mfgrs. Pvt. Ltd. - 1988 (38) ELT 566 (SC) also shows that the claim of the appellants that it is a settled legal position that assessments of the goods has to be based on the condition on which the goods are removed from the factory is not correct. The decision in the case of Sirpur Paper Mills, Narne Tulaman Mfgrs. Pvt. Ltd. and MIL India Ltd. clearly show that the condition in which the goods would be erected/installed at the site would also be relevant. In the case of MIL India Ltd., Honble Supreme Court itself allowed the deductions of duty paid on the goods supplied as bought out items. Therefore the claim of the appellant that what they had cleared was Centrifugal machines without the bought out items and therefore the value of bought out items cannot be added is not correct.
23. As regards the submission that the Centrifugal machines after they are erected at site and connected with the motors and control panels become immovable property, therefore no excise duty is payable is also not correct again based on the decisions of the Honble Supreme Court cited above.
24. The appellants also submitted that the performance parameters are for the manufactured items and not for bought out items. It has to be noted that without the bought out items, the manufactured items cannot perform. Further the condition that the warranty should be co-terminus in one of the contracts goes against the appellants.
25. The submission that the reliance of learned DR on the decision of the Tribunal in the case of Peterplast Synthetics Private Limited is not appropriate also cannot be accepted. In this case we have already noticed that without electric motor and control panel Centrifugal machines cannot work and even within the factory, the dry run is conducted by using electric motor and electric panel. Therefore, the decision of the Peterplast Synthetics Private Limited case squarely applies.
26. The dispute involved in this case covers the period prior to 01.07.2000 and subsequent to 01.07.2000, 01.07.2000 being the date on which the new section 4 came into existence.
27. For the period earlier to 01.07.2000, valuation has to be done as per Section 4 as it existed during the relevant time. According to Section 4 during the relevant time, when duty was to be calculated with reference to value, such value was deemed to be the normal price. During the relevant time therefore the value was a deemed value and the normal price which was the price at which goods or article was sold in the course of wholesale trade to an unrelated buyer. Therefore once a normal price is available, that price could be applied to different transactions even where the value was different. There were exceptions to this rule such as goods sold to different class of buyers or sold at different time and different place. We have already taken a view that value of bought out parts is includible. For the period prior to 01.07.2000, if the assessee/appellant was able to show that a normal price existed at the factory gate which included the electric motor, electric panel etc. with which Centrifugal machine was complete, then that would be the value at which goods have been assessed. Obviously that is not the case here and different prices are charged for Centrifugal machines to different customers and the requirements and the conditions of sale vary from customer to customer and therefore normal price is not available. That being the position, the actual price charged has to be the basis for calculation of excise duty and further the value of bought out items has to be added.
28. As regards subsequent to 01.07.2000 assessment has to be based on transaction value. In this case the value has been brought down by the method adopted by the appellant by which they have been supplying bought out items separately under a separate invoice. Since the value of the complete Centrifugal machine erected at site has to be arrived at it becomes necessary to add the value of bought out items charged by the appellant to their customer to the value of Centrifugal machine.
29. The learned Commissioner in her order has rejected the claim for adjustment of duty already paid by the appellant while calculating the differential duty. First of all it has to be taken note of that this benefit had already been extended by the Commissioner in the order dated 18.12.1989 which has not been challenged by the Revenue. Therefore, the Commissioner while undertaking Denovo adjudication could not have refused to adjust the duty already paid while confirming the differential duty demand in view of the fact that the matter was taken up to the Tribunal and this aspect was not challenged by the Revenue and therefore we consider it appropriate that such adjustment has to be allowed. Further we also take note of the observations of Honble Supreme Court in the case of MIL India wherein such adjustment was allowed by the Honble Supreme Court taking facts and circumstances into account.
30. The claim of the appellant for the benefit of treatment of amount realized as cum duty amount also needs to be considered favorably.
31. We agree with the submissions of the learned counsel that no penalty is imposable on the appellants. In fact the very first order dated 18.12.1989 had taken the view that no penalty was imposable and extended period was not invokable. In this case the dispute was a continuing dispute and therefore we do not consider it appropriate that penalty should be upheld. In view of the fact that it was a question of interpretation of law and there was an on going dispute, we set aside the penalties imposed on the appellants in various orders challenged before us.
32. In view of the observations made by us that the cum-duty benefit has to be extended and while calculating differential duty, duty paid on bought out material supplied has to be adjusted, the matter is required to be remanded to the original adjudicating authority once again for this limited purpose of re-computation of differential duty after taking into account the duty paid on bought out items and treating the value as cum-duty value as requested by the appellants. Needless to say before finalizing the amounts, appellant shall be given reasonable opportunity to present their case with regard to the amount computed by the Revenue.
33. In view of the above observations, the impugned orders are set aside and the matter remanded to the original adjudicating authority for fresh decision in terms of the observations made by us above.
(Pronounced in Court on ) (B.S.V. Murthy) Member (Technical) (Ashok Jindal) Member (Judicial) iss