Value of duty-paid bought-out items not includible, if assets supplied in CKD conditions

The Hon’ble Supreme Court in the case of  Lipi Boilers Ltd. Versus The Commissioner of Central Excise, Aurangabad.  - 2025 (11) TMI 505 - Supreme Court held that the value of duty-paid bought-out items supplied directly to the buyer’s site and used in erection of a steam generating plant cannot be included in the assessable value of the boiler cleared from the assessee’s factory in CKD condition, since the resultant steam generating plant is an immovable property and not “excisable goods”; the Court further held that the extended limitation under the proviso to Section 11A(1) of the Central Excise Act, 1944 was not validly invoked and the show cause notice was time-barred.​

Facts:

Lipi Boilers Ltd. (“the Appellant”) is a manufacturer holding Central Excise registration for “boilers and boiler parts” under Heading 84.02 of the Central Excise Tariff Act, 1985, and entered into a contract dated January 29, 2001 with Shri Maroli Vibhag Khand Udyog Sahakari Mandali Ltd (“the buyer”) for designing, procuring, manufacturing and supplying machinery and equipment for “one no. 50 TPH MCR capacity and 45 Kg/cm²(g) working pressure bagasse fired boiler” so that a steam generating plant could be commissioned by October 31, 2001.​

The Commissioner of Central Excise, Aurangabad (“the Respondent”) through the Assistant Commissioner issued a show-cause-cum-demand notice dated April 28, 2005 alleging that, for clearances of boilers in CKD condition between April 01, 2000 and June 30, 2000, the Appellant undervalued the boilers by not including the cost of “essential” bought-out parts worth ₹14,02,344/- delivered directly at the buyer’s site, leading to short payment of duty of ₹2,24,375/-; the notice invoked the extended five‑year limitation under the proviso to Section 11A(1) on the ground of wilful suppression and intent to evade duty.​

The Appellant contended that boilers in CKD condition were cleared from its factory on payment of applicable duty; bought‑out items (feed water pumps, fans, safety valves, gauges, etc.) were procured from the market and supplied directly by vendors to the site on payment of duty by those vendors; that the final steam generating plant erected at site was an immovable property and not “goods” and hence non‑excisable; that no CENVAT credit was taken on bought‑out items and there was no basis to treat those items as part of the boiler’s assessable value.​

The Respondent contended that the contract price under Clause 3.1, inclusive of “all other items which are necessary for completing supply of the steam generating plant as per scope of supply”, was the “transaction value” under Section 4(1)(a); that the bought‑out items were “essential parts” of the boiler and thus includible; that excise duty was collected from the buyer on the entire contract price and CENVAT credit taken; and that the taxable event of manufacture occurred at the buyer’s site when CKD parts and bought‑out items were assembled into a boiler, justifying demand and invocation of extended limitation.​

The Appellant’s grievance was that the CESTAT, by order dated September 23, 2010 reversed the concurrent orders of the Assistant Commissioner (Order‑in‑Original dated December 07, 2005) and Commissioner (Appeals) order dated July 13, 2007 which had held that boilers erected at site and attached to earth are not “goods” and that value of bought‑out items cleared directly to site is not includible. The Appellant therefore approached the Supreme Court in appeal under Section 35L(1)(b) of the Central Excise Act challenging CESTAT’s order.​

Issue:

Whether the value of duty-paid bought-out items delivered directly to the buyer’s site for erection of a steam generating plant is includible in the assessable value of boilers cleared in CKD condition for levy of central excise duty?

Whether the extended limitation under the proviso to Section 11A(1) of the Central Excise Act, 1944 was validly invoked?

Held:

The Hon’ble Supreme Court in Lipi Boilers Ltd. Versus The Commissioner of Central Excise, Aurangabad.  - 2025 (11) TMI 505 - Supreme Court held as under:​

• Observed that, central excise duty is a levy on manufacture under Section 3, and Section 4 is only a machinery/valuation provision. The “transaction value” under Section 4(1)(a) becomes relevant only after the taxable event of manufacture of excisable goods is established, and the measure of tax cannot determine the effect of levy of excise.​
• Noted that, the “steam generating plant” under the contract emerges at the buyer’s site as a composite system comprising boiler parts cleared in CKD condition and bought‑out items, erected with extensive civil and mechanical work (fire bricks, cement, concrete, grouting, steel reinforcements, etc.), resulting in a plant permanently affixed to the earth which cannot be dismantled and re‑assembled without substantial damage, and therefore is immovable property.​
• Observed that in view of the decision in, MITTAL ENGINEERING WORKS (P) LTD. Versus COLLR. OF C. EX., MEERUT - 1996 (11) TMI 66 - Supreme Court and the CBEC Circular No. 58/1/2002‑CX dated January 15, 2002, “erection and installation of a plant cannot be held to be excisable goods” and items which cannot be dismantled without substantial damage are not “movable” and thus not “goods” for excise.​
• Held that, the final product resulting from performance of the contract— the steam generating plant — is not “excisable goods” under Section 2(d), since it is an immovable property and therefore, the contract price cannot be treated as “transaction value” for computing excise duty, and the price of bought‑out items is not liable to be included in the boiler’s assessable value.​
• Noted that, the CESTAT committed a “glaring error” in refusing to consider the immovability plea on the ground that it had not been raised before lower authorities. The record showed that Appellant’s reply dated June 13, 2005 to the SCN specifically asserted that boilers erected at site and attached to earth are not “goods”, and this contention was accepted in the Assistant Commissioner’s Order‑in‑Original.​
• Observed that, mere presence of “boilers and boiler parts” in Chapter 84 of the Tariff does not itself render every such plant excisable; as held in MOTI LAMINATES PVT. LTD. Versus COLLECTOR OF CENTRAL EX., AHMEDABAD - 1995 (2) TMI 67 - Supreme Court, the Tariff Schedule does not alter the character of levy, and duty is attracted only if there is manufacture of movable “goods”.​
• Held that, the “utility test” (whether bought‑out items are essential to functioning) is irrelevant once the resultant plant is immovable and therefore non‑excisable.​
• Observed that, even if the assessee collected any amount from the buyer representing excise duty on bought‑out items, that would not justify including their value in the assessable value. In such a case, the proper course would be to invoke Section 11D to recover duty collected without authority of law, not to treat the items as excisable.​
• Held that, the extended limitation under the proviso to Section 11A(1) was wrongly invoked: there was no “fraud, collusion, wilful mis‑statement or suppression of facts with intent to evade duty”; the assessee had filed RT‑12 returns and acted on a bona fide belief that bought‑out items and immovable plant were not dutiable.
• Held that, the show cause notice to be invalid and time‑barred and  consequently, set aside the CESTAT’s order and restored the orders of the Assistant Commissioner and Commissioner (Appeals) dropping the demand.​

Our Comments:

The judgment, by emphasising that valuation is only a consequence of levy, the Court rejects Revenue’s attempt to use “transaction value” under Section 4(1)(a) as a basis to treat an inherently immovable steam generating plant as excisable, thereby aligning with earlier decisions like COMMISSIONER OF CENTRAL EXCISE, PONDICHERRY Versus ACER INDIA LTD. - 2004 (9) TMI 106 - Supreme Court and COMMISSIONER OF CENTRAL EXCISE, LUCKNOW Versus CHHATA SUGAR CO. LTD. - 2004 (2) TMI 67 - Supreme Court, which treat Section 4 as subordinate to Section 3.​

On the limitation issue, application of PAHWA CHEMICALS PRIVATE LIMITED Versus COMMISSIONER OF C. EX., DELHI - 2005 (9) TMI 92 - Supreme Court reinforces that extended limitation under the proviso to Section 11A(1) requires positive evidence of deliberate suppression with intent to evade duty, which was absent where returns and contract terms were fully disclosed and the dispute turned on interpretation of law.​

In effect, this judgment clarifies that bought‑out items supplied directly to site for erection of an immovable plant neither become part of an excisable “boiler” nor can their value be tacked on to the factory‑cleared CKD boiler for valuation.

Relevant Provisions:

Section 3 of the Central Excise Act, 1944

3. Duties specified in First and Second Schedule to Central Excise Tariff Act to be levied​:-

“(1) There shall be levied and collected in such manner as may be prescribed,—

(a) a duty of excise to be called the Central Value Added Tax (CENVAT) on all excisable goods which are produced or manufactured in India as, and at the rates, set forth in the First Schedule to the Central Excise Tariff Act, 1985 (5 of 1986);

(b) a special duty of excise, in addition to the duty of excise specified in clause (a) above, on excisable goods specified in the Second Schedule to the Central Excise Tariff Act, 1985 (5 of 1986) which are produced or manufactured in India, as, and at the rates, set forth in the said Second Schedule.”

Section 4 of the Central Excise Act, 1944

4. Valuation of excisable goods for purposes of charging of duty of excise​:-

“(1) Where under this Act, the duty of excise is chargeable on any excisable goods with reference to their value, then, on each removal of the goods, such value shall—

(a) in a case where the goods are sold by the assessee, for delivery at the time and place of the removal, the assessee and the buyer of the goods are not related and the price is the sole consideration for the sale, be the transaction value;

(b) in any other case, including the case where the goods are not sold, be the value determined in such manner as may be prescribed.

…

(3)(d) ‘transaction value’ means the price actually paid or payable for the goods, when sold, and includes in addition to the amount charged as price, any amount that the buyer is liable to pay to, or on behalf of, the assessee, by reason of, or in connection with the sale…”

Section 2(d) of the Central Excise Act, 1944 –

“‘excisable goods’ means goods specified in the First Schedule and the Second Schedule to the Central Excise Tariff Act, 1985 (5 of 1986) as being subject to a duty of excise and includes salt.”

Section 11A(1) of the Central Excise Act, 1944

11A. Recovery of duties not levied or not paid or short-levied or short-paid or erroneously refunded​:-

“(1) When any duty of excise has not been levied or paid or has been short‑levied or short‑paid or erroneously refunded, whether or not such non‑levy or non‑payment, short‑levy or short‑payment or erroneous refund, as the case may be, was on the basis of any approval, acceptance or assessment relating to the rate of duty on or valuation of excisable goods under any other provisions of this Act or the rules made thereunder, a Central Excise Officer may, within one year from the relevant date, serve notice…

Provided that where any duty of excise has not been levied or paid or has been short‑levied or short‑paid or erroneously refunded by reason of fraud, collusion or any wilful mis‑statement or suppression of facts, or contravention of any of the provisions of this Act or of the rules made thereunder with intent to evade payment of duty, … the words ‘five years’ shall be substituted.”

Section 11D of the Central Excise Act, 1944

“Duties of excise collected from the buyer to be deposited with the Central Government. –

(1) Notwithstanding anything to the contrary contained in any order or direction of the Appellate Tribunal or any Court or in any other provision of this Act or the rules made thereunder, every person who is liable to pay duty under this Act or the rules made thereunder, and has collected any amount in excess of the duty assessed or determined and paid on any excisable goods under this Act or the rules made thereunder from the buyer of such goods in any manner as representing duty of excise, shall forthwith pay the amount so collected to the credit of the Central Government.

(2) Where any amount is required to be paid to the credit of the Central Government under sub-section (1) and which has not been so paid, the Central Excise Officer may serve, on the person liable to pay such amount, a notice requiring him to show cause why the said amount, as specified in the notice, should not be paid by him to the credit of the Central Government.

(3) The Central Excise Officer shall, after considering the representation, if any, made by the person on whom the notice is served under sub-section (2), determine the amount due from such person (not being in excess of the amount specified in the notice) and thereupon such person shall pay the amount so determined.

(4) The amount paid to the credit of the Central Government under sub-section (1) or sub-section (3) shall be adjusted against the duty of excise payable by the person on finalisation of assessment or any other proceeding for determination of the duty of excise relating to the excisable goods referred to in sub-section (1).

(5) Where any surplus is left after the adjustment under sub-section (4), the amount of such surplus shall either be credited to the Fund or, as the case may be, refunded to the person who has borne the incidence of such amount, in accordance with the provisions of section 11B and such person may make an application under that section in such cases within six months from the date of the public notice to be issued by the Assistant Commissioner of Central Excise for the refund of such surplus amount.”

 (Author can be reached at [email protected])