U.L. Bhat, J. (President)
1. Order No. 171/CEX/1988, dated 10-6-1988 of the Collector of Central Excise, Pune is under challenge in this appeal.
2. Appellant is engaged in the supply and execution of Turnkey-Projects in the area of Process Equipments, Vegetable Oil Refinery Plants, Equipment Cooling Systems, Food Process Plants, Beverage Processing Plants, Water Chilling Plants, Dairy Machinery and equipment, Oil Separators, Refrigeration Plants and the like. The projects involve supply of component parts of such Plants and Equipment as also erection and commissioning of such Plants. Contracts are entered into on the basis of tenders and negotiations and consolidated price is fixed for supply of manufactured items, Bought-out (imported) items and erection and commissioning services. Subsequent to the contracts, appellant furnishes break-up of consideration for (a) items manufactured by appellant, (b) duty paid bought-out items and (c) erection and commissioning for the purpose or invoicing and payments. Price lists in Part II are filed declaring only the prices of items manufactured by appellant. The items manufactured by appellant are cleared from the factory on payment of duty calculated on the assessable value of such items manufactured by appellant and the same are removed to the premises of the buyers. Bought-out items are invariably transported directly to the premises of the buyers. Thereafter the Equipments or Plants are erected and commissioned at the premises of the buyers. Appellant did not pay Central Excise duty on the bought-out items or on the Equipments or Plants as such.
3. This case relates to purchase order dated 25-8-1983 placed by M/s. Kedia Vanaspati Ltd. for supply, installation and commissioning of Neutralisation-Washing-cum-Degumming Equipment for their Vanaspati Plant. The consideration for the contract was Rs. 20,61,000.00. The Range Superintendent issued show cause notice dated 24-12-1984 proposing demand of differential duty of Rs. 83,000.00 and requiring the appellant to show cause to the Assistant Collector. The case was subsequently transferred to the Collector who passed the adjudication order.
4. The only ground mentioned in the show cause notice was as follows :-
“The total value of contract price is Rs. 20,61,000.00 deducting the amount of excise duty of Rs. 96,000.00 and sales-tax amounting to Rs. 72,800.00 (Total Rs. 96,000 + Rs. 72,880 = Rs. 1,68,880.00). The assessable value works out to Rs. 1,89,212.00 and you have paid the amount of Rs. 96,000.00. Thus there is short recovery of the duty of Rs. 83,300.00.
The value of contract (Rs. 20,61,000.00) included charges for supply of the Plant or Equipment, erection and commissioning charges, packing, forwarding, freight, transport, insurance, sales-tax and excise duty. The basis of the notice was that the Plant or Equipment which came into existence at the premises of the buyers and not the factory of the appellant was “excisable goods” and hence the assessable value should be based on the entire consideration for the contract. Appellant had filed price list in respect of and paid duty on the assessable value of the machines or equipment or parts thereof manufactured in the appellant’s factory and had not paid duty on the value of bought-out (also imported) items or on the charges for erection and commissioning. The notice also stated that the duty amount was “recoverable under Section 11A of the Central Excise Act, 1944, without any averments necessary under the proviso to Section 11A(1) of the Act. In effect the contract was in respect of expansion of the existing Plant of the buyer.
5. The contentions raised in the reply to the show cause notice can be summarised as follows :-
The bought-out items were sent directly to the premises of the buyer and no manufacturing operation was done on the same. Erection and commissioning were carried out at the buyer’s premises and were not part of the manufacturing process. The machines and equipment manufactured at the appellant’s factory were goods marketable at the time and place of removal (factory gate). The value of bought-out items and the charges for erection and commissioning cannot be included in the assessable value. Erection and commissioning constitute post manufacturing activity. The Plant or equipment on completion of erection at the premises of the buyer become immovable property as they were permanently attached to earth and the activity did not bring into existence any marketable, movable or excisable goods. Demand for period more than six months prior to the date of the notice was barred by time. The erection and commissioning was of items manufactured by appellant as well as of duty paid bought-out items.
The additional contentions in the second reply to the notice can be summarised as follows :-
Installation and commissioning require special technical expertise skill and experience. There is a department to undertake and provide various technical services. There is also R & D department to undertake product development and process development. Technical know-how has to be purchased and also imported. There is a wide distribution network spread all over India. Appellant’s products are sold in open market as independent products apart from being used in Project Jobs and there is no appreciable price difference. The purchase order shows the break-up of the contract value as Rs. 9,60,000/- for items manufactured by appellant, Rs. 7,56,000/- for price of bought-out items and Rs. 1,50,000/- as charges for installation and commissioning charges. The other charges and duty and tax are also set out in the order. The Plant came into existence as an integral inseverable part of immovable property and cannot be removed without damage to the land and various parts of the Plant. Duty was leviable only on the value of items manufactured in the appellant’s factory and not on value of bought-out items or charges of installation and commissioning.
6. The Collector held that the value of bought-out items procured at site and necessary for “completion of Equipment” contracted by appellant has direct nexus to the commissioning of the Equipment and the cost thereof was required to be included in the assessable value of the said Equipment. He also held that the charges recovered on account of drawing and designing, consultancy services, erection of assembly and commissioning which are heads split up by the appellant though the contract is one have to be included in the assessable value. He held that there was wilful suppression and mis-statement of facts and the proviso to Section 11A of the Act was attracted and hence notice was not barred by time. He also held appellant entitled to Modvat/Proforma credit in respect of duty paid on bought-out items and in respect of expenses like, freight, insurance, erection and commissioning charges. Accordingly, he directed as follows :-
“I confirm the demand to the extent indicated above. Asstt. Collector will work out and recover the duty short levied after verifying relevant data to be furnished by the assessee….No penalty is warranted.”
7. The Collector indicated that “Plant” in the sense of various items of machinery and equipment constituting the Plant is capable of being bought and sold and is covered by erstwhile Tariff Item 68 and new Tariff Sub-heading 84.19 which covers “Plants and Machinery”. In page 17 of the order, he held as follows:-
“Of course, in accordance with the concept of excise, cost of erection and commissioning which are post-clearance operations and which make the goods immovable will have to be excluded.”
Equipment manufactured by appellant and other items are assembled at site with the line of existing Plant. According to the Collector, such assembly at site is only a process incidental or ancillary to the completion of the manufactured product, that is, the entire Plant or equipment which the appellant had contracted to design, manufacture and supply. Hence duty is leviable on the value of bought-out items which are integral part of the contracted Plant or Equipment. They are movable, marketable and excisable goods. He indicated as follows :-
“Therefore, W.C. equipment transportation in knocked down condition emerges as “excisable article” or goods and also it is liable for Central Excise duty.”
At page 18 of the order, he held as follows :-
“As this is a post-clearance activity carried out after the plant had been assembled at site and attached to the earth, I consider that charges on commissioning and also erecting are not includible in the assessable value of W.C.D. equipment as also required by the concept of excise as being a duty on “goods” as understood in commercial parlance.”
The following observations at page 20 of the order have relevance :-
“It is not as if goods supplied in this case were a complete “plant” like Bhilai Steel Plant but only erection equipment performing a particular operation, i.e. neutralising/degumming etc. which is a marketable commodity as seen from the purchase order.”
“But which is being charged is the equipment/plant in unassembled condition as understood in commercial parlance and not the Plant as affixed to the ground… the equipments are installed in two-storeyed building on a concrete pedestal and inter-connection with pipes and electrical cables etc. It is therefore clear that these equipments consist of various parts factory made and bought- out, which are assembled at site and put into commission with required civil work i.e. concrete pedestal charges for which are borne by the customer. Civil work is required for a smallest flour mill in order to avoid vibration and has to be connected with suitable electrical devices.”
8. Thus it is seen that on the includibility in assessable value of charges for erection and commission, there are contradictory findings. However, we proceed on the basis that the Collector excluded the charges as could be seen from the direction at page 24 of the order. Thus the controversy relates only to the inclusion in assessable value of the value of bought-out items and the consequential durability.
9. Learned Counsel contended that the Collector was in error in holding that value of bought-out items has to be included in the assessable value. According to him, the Project was for expansion of the existing Plant, that is, for supplying, erection and commissioning of a part of plant additionally. The contract was for supply of the part of Plant, installation and commissioning thereof, the Plant or Equipment did not and could not come into existence unless installation was completed and with the completion of the installation it became immovable property as having been permanently embedded in or attached to earth and the Plant or Equipment as such was immovable property and not excisable, movable, marketable and hence not dutiable. It is contended, only various items manufactured and cleared by the appellant would be excisable goods and admittedly duty had been paid thereon. The bought-out items are not part of the items manufactured by the appellant and are part of the Plant which is immovable property. He challenged the conclusion of the Collector that the Plant or equipment came into existence immediately before installation and that the entire Plant or Equipment was transported in CKD condition and emerged as excisable goods. There is no dichotomy between assembly and erection. He contended that having excluded erection charges, there would be no justification in including in the assessable value the value of bought-out items. The value of bought-out items (not brought to the factory and taken directly to the site) can be included only if movable, marketable and excisable goods come into existence at the site using the manufactured items and bought-out items. Whatever has come into existence at the site came into existence as a result of erection which involved Substantial civil work, Erection cannot be made without such civil work and with the completion of erection, it has become immovable property. Hence, it is contended, no excisable, movable or excisable goods come into existence at the site before or after erection and hence no duty is leviable on bought-out items. The contract was not for supply of movable and marketable goods. Learned Counsel also referred to a number of decisions.
Shri K. Srivastava, SDR, rebutted the above contentions and supported the reasoning and conclusions in the impugned order.
10. The department seeks to rely on the decision in Name Tulaman Manufacturers Pvt. Ltd. v. Collector of Central Excise – 1988 (38) E.L.T. 566 (S.C.) in which it was held that weighbridge assembled at the site putting together platform made by others, imported load cells and indicating system manufactured by the assessee and brought to the site was a completely new product with a distinctive name, character and use and as such the assessee must be held to have manufactured the weighbridge and the new product was dutiable. This decision has been distinguished by the Supreme Court in Mittal Engineering Works (P) Ltd. v. Collector of Central Excise, Meerut – 1996 (88) E.L.T. 622 (S.C). The Court held that Mono Vertical Crystallisers are not capable of being sold as they are and without anything more as they are assembled, erected and attached to the earth by a foundation at the site of the buyer and hence are not excisable “goods”. It was accepted that the Mono Vertical CrystalUsers were delivered to the site in CKD condition and were erected using fabrication materials. The Court distinguished the earlier decision in Name Tulaman Manufacturers Pvt. Ltd. case, 1988 (38) E.L.T. 566 pointing out the only argument in that case was that duty was payable only on the indicator system manufactured by the assessee and not the whole weighbridge and the contention that weighbridges were not “goods” within the meaning of the Act was not raised and no evidence in that behalf was brought on record. In other words, the parties proceeded on the basis that “weighbridges” were “goods” and the court was not called upon to decide and did not decide the larger question of the nature agitated in Mittal Engineering Works (P) Ltd. case, 1996 (88) E.L.T. 622. It was thus clear that the decision in Name Tulaman Manufacturers Pvt. Ltd. case cannot help the department.
11. In Quality Steel Tubes (P) Ltd. v. Collector of Central Excise, UP – 1995 (75) E.L.T. 17 (S.C.) the assessee was manufacturing welded steel pipes and tubes which were exempted from duty. The assessee had set up Plant and Machinery to manufacture steel pipes and tubes. For expansion of the Plant, the assessee acquired various items and components and installed the same for making a complete unit. Certain items were bought out, assembled and installed by embedding to the earth and installed to from a pat of tube mill. This tube mill consisted of several machinery and components which on installation got embedded to earth and formed part of the plant. The court relied on the decisions in Union of India v. Delhi Cloth and General Mills Co. Ltd., 1977 (1) E.L.T. (J 199) (S.C.), Collector of Central Excise v. Ambalal Sarabhai Enterprises, 1989 (43) E.L.T. 214 (S.C.), Union Carbide India Ltd. v. Union of India, 1986 (24) E.L.T. 169 (S.C.) and Indian Cable Co. Ltd. v. Collector of Central Excise, 1994 (74) E.L.T. 22 (S.C.) and observed :-
“The basic test, therefore, of levying duty under the Act is two fold. One, that any article must be a goods and second, that it should be marketable or capable of being brought to market. Goods which are attached to the earth and thus become immovable do not satisfy the test of being goods within the meaning of the Act nor can it be said to be capable of being brought to the market for being bought and sold.”
It was held that the tube mill having been erected and installed in the premises and embedded to earth, they ceased to be goods and hence not exigible to duty. It was also held that though goods capable of being brought to the market would attract levy, erection and installation of a plant cannot be held to be excisable goods.
12. In Mittal Engineering Works (P) Ltd. case, 1996 (88) E.L.T. 622 (S.C.) the Supreme Court followed the earlier decision in UOI v. Delhi Cloth and General Mills Co. Ltd. case, 1977 (1) E.L.T. (J 199) (S.C), South Bihar Sugar Mills Co. Ltd. case, 1978 (2) E.L.T. (J 336) (S.C), Bhor Industries Ltd. v. Collector, 1989 (40) E.L.T. 280 (S.C), Union Carbide India Ltd., 1986 (24) E.L.T. 169 (S.C), Indian Cable Company Ltd. case, 1994 (74) E.L.T. 22 (S.C.) and Quality Steel Tubes Pvt. Ltd. case, 1995 (75) E.L.T. 17 (S.C). It was held that MV Crystallisers delivered to the site in CKD condition and assembled and erected and attached at the site by foundations to the earth are not marketable, excisable goods.
13. In Collector of Central Excise, Hyderabad v. Hyderabad Race Club, 1996 (88) E.L.T. 633 (S.C), the Supreme Court upheld the order of the Tribunal reported in 1986 (23) E.L.T. 274 (Tribunal) to the effect that totaliser system installed at the race course of the buyer was not “goods” upon which excise duty was leviable, relying on the decision in Mittal Engineering Works (P) Ltd. case, 1996 (88) E.L.T. 622 (S.C). The order of the Tribunal shows that the Totaliser system had been erected at the site from duty paid bought out components and certain manufactured components which were not liable to duty and without civil work the Totaliser could not work and it was permanently fixed to the earth through civil work.
14. Learned Counsel for appellant has relied on a few decisions of the Tribunal, namely, Braithxvaite & Company Ltd. v. Collector of Central Excise, Calcutta-II, 1987 (29) E.L.T. 251 (Tribunal), Collector of Central Excise, Bhubaneswar v. Radiant Electronics Ltd., 1996 (85) E.L.T. 120 (Tribunal) and Collector of Central Excise, Pune v. Statfield Systems (Coating) Pvt. Ltd., 1996 (87) E.L.T. 510 (Tribunal). These are cases in which manufactured items and bought out were taken to the site and equipment such as Electric Overhead Travelling Cranes, EPABX and Industrial Paint shops were erected and as a result of the erection by embedding or fixing to earth they become part of immovable property.
15. The department seeks to rely on a decision of the Tribunal in Triveni Engg. Works Ltd. v. Commissioner of Central Excise, Allahabad, 1996 (88) E.L.T. 238 (Tribunal). In this case, turbine and alternator manufactured by the assessee and certain bought out items were taken to the site and erected producing Turbo Genrator set. It was held that since the items were heavy they had to be fixed with bolts on platform which was embedded in earth. The basis of the decision is that the turbine and alternator are not embedded in earth but are fixed to foundation by bolts to reduce vibration and disturbance to the coupling arrangement and could be removed by pulling or dismantling the same. Obviously this decision will not be applicable to any situation where the machines are embedded to earth and, therefore, become immovable property or where the Plant or equipment is erected piecemeal at the site embedding in or fixing parts of the same to earth or to civil construction made in earth.
16. As we have indicated in Paragraph 4 supra, the show cause notice proceeded on the basis that the Plant or Equipment which came into existence at the site was excisable goods. It was in this light that the notice proposed demand of duty on the entire value of the contract (including charges for erection and commissioning) less duty already paid on items manufactured in and cleared from the factory of appellant. However, the conclusion in the impugned order is materially different. The Collector held that the activity of erection made the “goods” immovable property and hence the charges for erection and commissioning have to be excluded from the assessable value. To get over the difficulty created by this finding, the Collector held that the total equipment (i.e. the addition to the existing Plant) were transported in CKD condition and the same emerged as excisable goods on assembling. In other words, he introduced the stage of “assembling” before the stage of “erection” which was not the stand taken in the show cause notice. At another place in the order, the Collector held that what was being charged was the Plant or Equipment in the unassembled condition. He also conceded that the various parts of the Plant or Equipment were erected on concrete pedestal and connected with each other. He seemed to suggest that civil work was necessary only to avoid vibration for which he did not rely on any supporting materials. He sought support from the description of the items in the contract to indicate that they were all movable and marketable goods.
17. The supply order requires the appellant to supply certain items and erect and commission the same. The letter dated 25-8-1983 of the buyer referred to the items compendiously as “Neutralising/Washing-cum-Degumming equipment” for their Vanaspati Plant. Items required to be supplied are :-
(1) Centrifugal Separators – 2 separators as described, Foundation Bolts, special tools, standard spare parts, waste oil, Double funnel for soap stock, single funnel for wash water, lifting tackle with trolley and cleaning table.
(2) Mixer – One specified mixer with motor and liquid parts, three other mixers with liquid parts and one Ultra shortmix device.
(3) Pumps with motor – 7
(6) Flowmeters – 4
(7) Controllers and guages-11
(8) Miscellaneous items – thermometers, pressure guages and pipe, fittings and valves.
(9) Electrical Equipment within the Plant – Power distribution (control panel), Push button switches for emergency, precipitation tank, oil feed pump with motor, Pump with motor, Tank, Inline mixer and Flowmeter.
(10) Erection material – valves, pipes, fitting, channels, angles for support of pipe lines, strainers, sigh glasses, steam traps, Insulation material, Primer and Paints, Power and Control cables, G.I. wire, slotted angles, nuts and bolts.
The order included erection, installation and commissioning of the Plant. The buyer agreed to provide necessary foundation, civil works and structural. The order itself referred to the subject matter as “Plant.”
18. From the description furnished in the contract of the subject matter thereof, it is not possible to arrive at the conclusion that all of them are movable or capable of being marketed. This is so, particularly regarding Centrifugal Separators and Mixers. The appellant stated in the reply to the notice that “machines and equipment” manufactured in the factory were goods marketable at that time and place of removal (factory). The inference is that the bought-out items were used only to erect the various machines and equipment and to mutually connect the same so as to become a Plant or part of a Plant. This inference has to be accepted in the absence of any contra-material marshalled by the Collector. The machines and equipment which are parts of the Plant came into existence in the factory, duty had been paid on them at the time of clearance from the factory. Assuming that they had been removed in CKD condition and had been reassembled at the site before erection, their re-assembly at the site cannot be regarded as an excisable activity. As a result of the erection, the Plant came into existence as immovable property and not as marketable goods and the Collector conceded this position. The department did not have a case that the items manufactured in the factory were only some parts of individual machines or equipment covered by the contract and these parts only were removed from the factory on payment of duty on such parts and the individual machines and equipment came into existence at the site by putting together manufactured parts and bought-out parts. That being, in any view of the case, the machines and items manufactured in the factory and allegedly removed in CKD condition and allegedly reassembled at the site will not be liable to duty again. The Collector gave up the case that by erection using manufactured and bought-out items, new movable and marketable goods came into existence. Hence, the decision that duty is payable on bought- out items or on the value of the entire contract less charges for erection and commissioning is not tenable.
19. For the reasons indicated above, the impugned order is set aside and appeal is allowed.