ORDER
K.S. Venkataramani, Member (T)
1. All these appeals involve a common issue as to whether inspection charges in respect of the goods manufactured by the appellants, herein, are to be included in the assessable value or not. The appellants, herein, are manufacturers of railway wagons, items of plant and machinery and structural goods like valves, etc. The department’s case is that the appellants had entered into various contracts for supplying the goods to the various buyers on condition that all such goods should be inspected either by the buyers or their hired inspecting agency like RITES. The department found that the appellants had not included the inspection charges in the assessable value which, according to the department, enhanced the value of the goods so inspected and supplied under contract. The department also was of the view that the inspection was indispensable condition for delivery of the goods and, therefore, must form part of the assessable value. In various orders passed by the Assistant Collector, he observed that the goods contracted for supply, cannot be sold unless they have been inspected and certified as fit by the inspecting agency. All their goods are being sold only after such inspection. This, the Assistant Collector found was equivalent to the inspection and certification of goods by ISI in the case of Shree Pipes v. Collector of Central Excise – 1992 (59) E.L.T. 462 which was cited before him by the appellants. The orders of the Assistant Collector were upheld by the Collector (Appeals), who held that as per the contracts, inspection is necessary process before the goods can be considered, manufactured and marketable and hence these charges are necessary expenses incurred before the goods can be considered fully manufactured. It was observed by the Collector that it is immaterial as to who incurs these charges because inspection charges like all other manufacturing expenses are necessary for the manufactured product and have ultimately to be borne by the buyers.
2. Shri S. Madhavan, ld. Chartered Accountant, appearing for the appellants, submitted that they are doing fabrication. They have two divisions – Wagon Division and Heavy Engineering Division. The goods are supplied against contracts to the various customers. The contracts contain clause by which the customer reserves to him the right to do quality audit at any stage. However, this does not relieve the appellants as the manufacturer of the responsibility and contract performance guarantee. The contracts also have a provision making the appellants liable to liquidated damages. The ld. Chartered Accountant pointed out that the appellants have a detailed assurance plan for their products. They have a full-fledged quality assurance department under experienced personnel. The ld. Chartered Accountant, in this regard, referred to the organisation chart of this department. They are bound to supply fully marketable wagons/engineering goods. The employment, by some customers NTPC, of agency of RITES to inspect the goods at appellants ‘ factory is only in exercise of the customers’ right to inspect. In the case of another customer, there is no such inspection at all by the customer, namely, Maihar Cement. The ld. Chartered Accountant urged that these charges are neither incurred by the appellants nor are they seeking deductions of these charges from the assessable value. The cost of maintaining their quality assurance department, is already included in their price which is not being deducted. The charges of customers’ inspection is, therefore, not includible. The ld. Chartered Accountant relied upon the Tribunal’s decision in the case of General Engineering Works v. Collector of C. Excise, Jaipur vide Final Order No. 455-463/93A, dated 1-9-1993 wherein in similar circumstances, the Tribunal held that the inspection charges incurred by customers are not includible in the assessable value. He has also relied upon the following case law:
Shree Pipes Ltd. v. Collector of Central Excise – 1992 (59) E.L.T. 462. The Supreme Court had upheld the Tribunal above decision as briefly reported in 1992 (62) E.L.T. A51. He also relied upon GEC of India v. Collector of Central Excise – 1993 (63) E.L.T, 151.
3. Shri A.K. Singhal, ld. D.R., contended that Shree Pipes’ case, relied upon by the appellants, is factually distinguishable. It was a case of special additional tests undertaken by the customers, besides the tests and certification by ISI of the goods manufactured. This test was optional and the goods were otherwise marketable. In that case, however, the ld. D.R. pointed out that there was an evidence of sale without the special additional test. On the other hand, in the present case, the ld. D.R. urged that test and inspection of the goods is in terms of the contract for their sale. Since it was a contractual obligation and performance guarantee of the goods, these charges have to be included irrespective of as to who incurs these charges. The ld. D.R. contended that all the costs of tests before making the goods marketable, are to be borne by the manufacturers. He reiterated the basic principle laid down in this regard by the Supreme Court in the case of Bombay Tyres International v. Collector of Central Excise – 1983 (14) E.L.T. 1896. He also relied upon the decision of the Tribunal in the case of Madhav Nagar Cotton Mills v. Collector of Central Excise – 1986 (25) E.L.T. 443, holding that a special checking is nothing but ensuring flawless quality and charges incurred thereon are includible in their assessable value. Ld. D.R. also cited the case of Enfield India v. Collector of Central Excise – 1994 (69) E.L.T. 702 wherein it has been held that pre-delivery inspection charges are in the nature of additional consideration or in the nature which are to be added to the assessable value. This ratio is also applicable to the facts of the present case.
4. The submissions made by both the sides, have been carefully considered. The records show that the appellants themselves have a full-fledged quality assurance department. These are manned by staff which include engineers and technical personnel. The appellants also have quality assurance plan which indicates their concern for maintaining high quality of products by comprehensive works inspection organisation consisting of a team of experienced engineers. The records show that in the Heavy Engineering Department, e.g. various kinds of tests are carried out with the help of sophisticated equipment. The goods are also inspected by the customers in terms of the contract. These contracts are containing numerous clauses, guarantee, rights and obligations. The clauses relating to inspection show that the customers reserve right of inspection of the fabricated goods at any stage of manufacture. The inspection and testing where the right is exercised is carried out by the quality personnel of the customers or in the case of NTPC by another agency, namely, RITES. The contract relating to Maihar Cement does not talk of inspection at the appellants’ premises. The terms and conditions in the case of Maihar Cement says that goods are purchased subject to approval and the customer reserves the right to reject the goods which are found to be of inferior quality and which are supplied in accordance with the terms and conditions of the order or which are not approved by the customer’s factory officer. Therefore, it is clear from the above that the appellants are contractually bound to supply fully finished goods which can be put to use by the customer and the quality audit which the customers are doing is in terms of the right which they have reserved for themselves in this respect. The payment for engaging the inspecting agency as in the case of NTPC employing RITES, is not being made by the appellants, but made by the NTPC. It is also to be noted that the clauses for inspection by customers at the same time make it clear that the warranty and obligations of the appellants to supply fully manufactured and marketable goods are not diluted by the customers exercising their right of inspection and testing. In these circumstances, the appellants’ reliance on the Tribunal decision in the case of General Engineering Works (supra), is well-founded. In that decision, the Tribunal had, in similar circumstances, followed the ratio of Shree Pipes decision (supra) as confirmed by the Supreme Court as also of the Tribunal decision in the case of GEC of India v. Collector of Central Excise (supra). The Tribunal in the General Engineering Works decision (supra) had also noted the reliance on the Madhav Nagar Cotton Mills (supra) placed by the Department but had not found it to be applicable. In the result, we are satisfied that the appellants, herein, have made out a case for the exclusion of the inspection charges incurred by the customers in the assessable value of the goods manufactured by following the ratio of the above quoted decisions of the Tribunal. In this view of the matter, the appeals are allowed.
ORDER
On hearing both the parties we grant stay following such grant of stay on identical issue of the same applicant for the reason that the matter is covered by precent decision in 1992 (59) E.L.T. 462 (T). This appeal to be taken up along with connected appeals which are also listed today.