ORDER
K.K. Agarwal, Member (T)
1. The brief facts of the case are that the appellants, M/s. KSB Pumps Limited were given a contract by Nuclear Power Corporation of India Limited (NPCIL) for manufacture and supply of large sized coolant pumps required in Nuclear Power Plant for which the orders for 32 pumps were placed under two purchase orders. The appellants accordingly developed a manufacturing facility for the above mentioned pumps exclusively for NPCIL. However, NPCIL cancelled the order for 24 pumps and entered into fresh agreement for supply of 8 pumps. Owing to the cancellation of the order for 24 pumps, the appellants and NPCIL negotiated and arrived at a short closure settlement owing to which NPCIL paid gross cancellation charges of Rs. 23.36 crores to the assessee and the deed of discharge was signed on 31.3.2000. The break up of the cancellation charges are as under:
a
Investment in fixed
assets
Rs. 6.45 crores
b
Holiday compensation
Rs. 9.30 crores
c
Insurance and bank
charges
Rs. 1.38 crores
d
Cancellation charges for
SNP 3 to 6 and NP 9 pumps
Rs. 6.23 crores
Total
Rs. 23.36 crores
As per Revenue, it appeared that the cancellation charges received by the assessee from NPCIL was additional consideration and as such was required to be loaded in the assessable value of the 8 pumps. A show cause notice was issued to the assessee seeking to add above compensation charges in the assessable value and demanding duty amounting to Rs. 3,73,76,000/- along with interest under Section 11AB of the Act. It also proposed to impose penalty under Rule 173Q of Central Excise Rules, 1944 read with Rule 25 of Central Excise Rules, 2000 read with Section 11AC of the Central Excise Act, 1944. The show cause notice was adjudicated by the Commissioner who confirmed the demand and imposed penalty of equivalent amount under Section 11AC of the Act.
2. The learned Advocate for the appellants submits that under a contract with the Department of Atomic Energy (DAE), Government of India, the appellants manufacture the primary coolant pumps which are critical components exclusively used in nuclear power station, for which they set up exclusive manufacturing facility at Chinchwad, Pune. In August, 1976, an agreement was entered into with DAE wherein the DAE undertook to place purchase orders for 4 old designed pumps every year and agreed to compensate if less orders were placed. This compensation is in the nature of liquidated damages. The appellants have paid certain amount as engineering fees for supply of technical know-how to M/s. KSB, Germany and the excise duty on these technical know-how charges was paid at the time of initial clearing of the pumps. Under a tripartite agreement dated 30.8.1976, DAE was to place an order for 4 old designed pumps per year and total 40 old designed pumps upto 31.12.1988. In 1988 supplementary agreement was signed which inter alia required the appellant to complete supply of 24 old designed pumps already ordered under agreement dated 6.8.1976. Under supplementary agreement, KSB, Germany agreed to supply new technology for modified pumps for nuclear power station having capacity of 500 MW to enable the appellants to manufacture first 4 new designed pumps on payment of negotiated fees to KSB, Germany for the same. It was also agreed that in the event orders as per schedule were not placed, DAE would compensate the appellant as provided in the agreement. The appellants completed supply of 24 old pumps during the period 1985 to 1990. On 12.1.1990, two separate purchase orders were placed by NPCIL for supply of 16 new designed pumps for 500 MW project and 16 old designed pumps. However, in 1996 as Government of India was in financial crunch, the NPCIL instructed the appellants not to proceed with manufacturing of pumps. Thereafter several meetings were held for arriving at liquidated damages in respect of 16 new pumps and 8 old pumps which were finalized at Rs. 23.36 crores in June 1999. It was agreed that the order for 8 Nos. old designed pumps would be placed in future. On 31st March, 2000 a new agreement was entered into by the appellants for supply of 8 old designed pumps, out of 32 totals pump ordered earlier. New pumps were to be supplied at rate of Rs. 3 crores per pump as against Rs. 90 lakhs agreed to in the year 1990. The same were manufactured and cleared on payment of duty on agreed price.
4. It was submitted that the Commissioner has confirmed the demand by treating compensation charges received by them as additional consideration. While arriving at his finding, the Commissioner has held that investments in fixed assets, holiday compensation, insurance, bank charges and cancellation charges are essential ingredients as per established costing principles and ought to be included while valuing their 8 pumps. It was observed by him that there was continuity in the old orders and so-called new order was in fact a continuation of orders placed in 1990 and therefore the entire price received by him including liquidated damages should form part of the assessable value. He observed that the appellants have received technical know-how from M/s. KSB, Germany for the manufacture of impugned pumps and this technical know-how charges have to be treated as part of the assessable value. The contract entered into by the appellants show that engineering charges were nil which means design engineering charges without which it could not be manufactured were not included in the assessable value.
5. It was submitted that the Commissioner in arriving at the above conclusion has gone beyond the ambit of the show cause notice, as show cause notice nowhere referred to technical know-how, design and engineering charges and order creates new grounds. He however submits that 8 pumps supplied under agreement of 2000 were old designed pumps for which technical know-how was received in the year 1976-78 and duty on the same was paid during that time. The learned Advocate took us through the various agreements entered into by them with NAPP-II dated 11.10.79, KAPP-I & II 10.1.82, Kaiga-II dated 29.3.85, RAPP-III and IV dated 29.3.85 and Kaiga-III and IV dated 24.10.2000 which is the subject matter of the present appeal to show that the design of the pumps in all these agreements was one and the same and therefore they related to the old pumps and that the excise duty on the technical know-how charges received for manufacture of these pumps was paid. They further submitted, that in respect of technical know-how received by them for the manufacture of modified version of the pumps they have paid appropriate excise duty as intimated vide their letter dated 16.12.2005 addressed to the Jurisdictional Superintendent of Central Excise. In view of this, the Commissioner’ observation that no duty has been paid on technical know-how, design and engineering charges is incorrect as this duty stands paid in the year 1976-82 when the clearances were effected. His observation that the cancellation charges were in reality, a payment for technical know-how, is therefore totally incorrect. It was submitted that the show cause notice proceeds on the admitted position that a sum of Rs. 23.36 crores was a cancellation charges paid by NPCIL to the appellants. There is not a single allegation questioning the veracity or basis of the said cancellation charges or that some part of the compensation charges of Rs. 23.36 crores was in respect of technical know-how. He explained the constitute with damage paid to them was as under:
(a) Investment in fixed asses – Rs. 6.45 crores – This amount was required to be amortized as per the earlier agreement in respect of the pumps required to be manufactured by the appellants. Since an entire new facility was set up by the appellants and major part of the order was cancelled, this was a legitimate manner for determining damages.
(b) Holiday Compensation – Rs. 10.68 crores – This amount was paid by NPCIL as liquidated damages in vew of the non-utilization of the plant and as per the earlier agreements, the said amount was required to be recovered from NPCIL. This again a legitimate manner of computing damages. The plant was set up for the only client for nuclear coolant pumps. The said plant remained substantially idle for want of orders. The plant incurred expenses even if the same remained idle.
(c) Cancellation charges – Rs. 6.23 crores, – This amount was paid as liquidated damages for loss of profit to the appellants.
6. In view of the above, it was submitted that liquidated and cancellation charges cannot be considered to be relating to the price of 8 pumps supplied by them. The Commissioner has failed to appreciate that the revised price of 8 pumps has gone up huge cost escalation from Rs. 7.23,10,000/- to Rs. 2 1,21,00,000/- between 12.1.1990 to 24.10.2000 which itself showed that the appellants had charged NPCIL the full value of the pumps and that the amount of Rs. 23.26 crores represented the genuine damages arising out of cancellation of firm orders earlier placed on the appellants. No case therefore has been made out that the value was depressed to the extent of any part of the said Rs. 23.26 crores.
7. In respect of their plea that the damage charges cannot form part of the assessable value, they referred to the decision of the Tribunal in the case of Faridkod Cooperative Sugar Mills Ltd. v. CCE, Ludhiana wherein it was held that liquidated damages received by appellants for non-lifting of quantity of molasses, is not includible in the assessable value. The Tribunal in this case followed the decisions in the case of Spring Fresh Drinks v. CCE and in the case of Inox Air Products Limited v. CCE
8. On limitation, it was submitted that there was no suppression on their part as the department had the full knowledge of the matter one year prior to the issue of show cause notice and therefore extended period cannot be invoked.
9. The learned SDR draws our attention to the finding of the Commissioner in the impugned order where it has been stated that the appellants have entered into agreement on 6th August, 1976 for manufacture and supply of specified types of pumps required in Nuclear Power Plant for which necessary technical know-how from M/s. KSB, Germany was obtained on payment of fees. Under this contract 2 orders were placed with the assessee for supply of 16 specified types of pumps in January and April, 1990. Immediately after signing of the agreement in August, 1976, the appellants got into the process of setting up and creating several manufacturing facilities, obtaining technical know-how system from M/s. KSB, Germany along with designs and drawings. They also started procurement of required inputs by way of import etc. This creation of specialized and exclusive manufacturing facilities was done at a substantial cost. However, it is on record that no pumps were manufactured nor supplied and finally in 1999 order in respect of 24 pumps, out of total order 32 pumps was cancelled. For cancellation of the order, the assessees were paid Rs. 23.26 crores invoking the penal clause of agreement. It was provided to have another contract for supply of the remaining 8 pumps for which the contract was made in 2000. Therefore it is evident from this fact that the agreement of 2000 has an intricate and unavoidable connection with the 3 earlier agreements. Even though the assessee had incurred expenses in creating infrastructure for manufacturing pumps in question and on payment of technical know how fees, no pumps were supplied. It is also on record that the assessee was compensated for the investment as well as for other aspects like holiday compensation, insurance charges, amortization costs etc. Since investment on plant and machinery, amortized costs are essential ingredients for costing the product and since they form part of the compensation packages and not taken into account for the purpose of costing of the pumps they have to be treated as part and parcel of the final products. The fact that no design charges or technical know-how fees for sale of 8 pumps has been taken into account, is evident from the annexure to purchase order of NPC dated 24.10.2000 where the cost of element viz. design, preparation of drawings, documents, procedures, analysis, procurement of materials, manufacture, assembly, inspection, testing, packing, documentation, supply and delivery of pump motor units of NP-8 project based on technical know-how transferred from M/s. KSB, Germany for the pumps to KSB India and from AEG, Germany for motors to M/s. NGEF Limited Is shown as nil. It was accordingly submitted that compensation was nothing but recovery of cost towards investment on plant and machinery, technical know-how, designs, engineering, etc. and therefore has to form part of the assessable value. In view of the same, the demand has correctly been confirmed.
10. As far as extended period limitation is concerned since the appellants suppressed non-inclusion of additional consideration in the assessable value extended period of limitation has rightly been invoked.
11. We have considered the submissions. We find that there is factual inaccuracy in the finding of the Commissioner inasmuch as it has been stated that consequent to entering into agreement in 1976, there was no supply of pumps whatsoever and the first order for manufacture of pumps was placed in 1990 for 32 pumps out of which sale for 24 pumps was cancelled and for the balance 8 pumps a new agreement was executed in the year 2000. The appellants on the other hand have drawn attention to the agreement entered into on 6th August, 1976 under which the DAE undertook to place order for manufacture and delivery upto 4 primary coolant pumps every year and in case no order is placed in any year, DAE as guarantor will take in all respect responsibility for and consequences of any delay caused thereby in the repayment of loans of KSB India after taking into account the utilization of these facilities by KSB India for other manufacturing avidities. The agreement further provided that in addition the DAE will also reimburse the appellants the interest charges, depreciation on fixed assets, fixed cost such as the facilities, services, rent, rates, taxes, insurance, repayment, maintenance of buildings, machinery, preliminary expenses etc. incurred by the appellants to the extent they are not covered consequent to the non fulfillment by the department of atomic energy of its aforesaid obligation. The agreement also provided for payment of engineering fee for 4 primary coolant pumps to be manufactured by the appellants under the overall technical performance responsibility of KSB Germany. Thereafter a supplementary agreement was entered into in 1988 wherein inter alia it was agreed that the appellants would complete supply of 24 pump motor units of old design pumps already ordered under the agreement dated 6.8.1976. These 24 pumps were manufactured and supplied during the period 1985 to 1990 and cleared on payment of duty including duty on technical know-how charges. Therefore, the Commissioner’s finding that there was no manufacture and supply of pumps nor any order placed before 1990 is incorrect as appellants have submitted documents to show that the orders were indeed placed and 24 pumps were supplied during the period 1985 to 1990. In view of this, conclusion drawn by the Commissioner that, the expenditure incurred on creating infrastructure, technical know-how fees, drawings and designs fees, etc. are part of compensation, is wrong. The compensation has been paid as per terms of the agreement and the nature thereof has been explained. There is no finding from the Commissioner that the compensation arrived at was beyond the terms of agreement and that they were not provided for in the initial agreement entered into in 1976. It is because of the fact that no new technical know-how was acquired nor any fresh investment was made in creating the infrastructure facility that drawings and designs charges, technical know-how fees, etc. have been shown nil as they have already been incurred while manufacturing 24 pumps supplied during the period 1985 to 1990. Compensation charges have been adequately explained towards amortized and fixed cost like service, maintenance, etc. with holiday compensation and cancellation charges. The Commissioner has not given any break up of the cost of 8 coolant pumps to show that it did not take care of the manufacturing cost and profit. Once there was an obligation on the part of Nuclear Power Corporation to place order each year and once there is no dispute that no order was placed for a continuous period of 10 year, the entitlement of the appellants to liquidated damages cannot be denied. It is therefore not understandable as to how the entire liquidated damages can be added to the assessable value leaving no compensation for the appellants which is part of their agreement. No evidence has been brought on record to establish that the price of the pumps under the new agreement was influenced by payment of liquidated damages. In fact, we note that the price of 8 pumps has gone up from Rs. 7.21 crores originally contracted for to Rs. 24.21 crores under the new agreement. This only shows that due to escalation of price, the price of raw materials and other cost, price as specified has gone up. In view of this, we hold that the Commissioner has failed to establish any relation between the liquidated damages paid to the appellants and the price of the goods and therefore following the decisions of the Tribunal in the case of in the case of Faridkod Cooperative Sugar Mills Ltd. v. CCE, Ludhiana, Spring Fresh Drinks v. CCE and Inox Air Products Limited v. CCE, cited supra, we hold that liqudated damages received by the appellants for non placing of orders by NPCIL cannot be included in the assessable value. Since the demand is not sustainable on merits itself there is no need going into the aspect of limitation. Penalty is accordingly not imposable once demand itself is not being upheld.
12. In view of the above, the Commissioner’s order is set aside and the appeal is allowed.
(Pronounced in the court on 8.05.2007)