Transaction value in turnkey contracts prevails unless extra consideration is proved; escalation duty arises only on final crystallisation.

In turnkey contract valuation, the declared contractual price could not be rejected merely because a cost audit report suggested a different figure; after the shift to transaction value, re-determination required proof of additional consideration or other commercial influence, and the valuation-based demand was set aside. On alleged clandestine removal, duty paid at the Goa unit could not be ignored if the goods were treated as having been cleared from Satara, so only the balance remained payable after credit. On escalation claims, excise duty arose only when the escalation amount was finally determined under the contract and received or became payable, making the pre-finalisation demand premature.

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Issues: (i) whether the price charged under turnkey contracts could be rejected and assessable value re-determined on the basis of the cost audit report, (ii) whether the alleged clearances shown as goods received from the Goa unit amounted to clandestine removal from the Satara unit, and (iii) whether duty could be demanded on escalation bills before the escalation amount was finally determined and received.

Issue (i): whether the price charged under turnkey contracts could be rejected and assessable value re-determined on the basis of the cost audit report

Analysis: The contracts were composite turnkey contracts for design, procurement, manufacture, supply, erection and commissioning, with agreed lump sum prices and contractual break-ups. The customers were concerned with the overall contract price, while the terms also required disclosure of duty-paying documents and permitted inspection of the work and of sub-contractors' facilities. The Department did not establish that any amount over and above the agreed contract price had been received. In these circumstances, the declared contractual price could not be discarded merely because the cost audit report suggested a different valuation. The decision reaffirmed that, after the introduction of transaction value, rejection of declared value requires proof that the price was not the sole consideration or was otherwise influenced by additional commercial considerations.

Conclusion: The rejection of the contractual transaction value was unsustainable and the demand based on the cost audit report was set aside.

Issue (ii): whether the alleged clearances shown as goods received from the Goa unit amounted to clandestine removal from the Satara unit

Analysis: The evidence relied upon showed that the Goa unit was registered, filed returns and paid duty, but the adjudicating findings treated the Goa clearances as a device to mask manufacture at Satara. At the same time, the order itself recognized that duty had been paid in Goa. The proper approach, if the goods were treated as having been cleared from Satara, was to offset the duty already paid at Goa against the duty otherwise payable. The record did not justify ignoring the Goa duty altogether.

Conclusion: The clandestine removal demand was not wholly sustainable and was restricted only to the balance after crediting duty paid at Goa, resulting in a modified demand of Rs. 7,68,015.

Issue (iii): whether duty could be demanded on escalation bills before the escalation amount was finally determined and received

Analysis: The contracts provided that escalation was subject to verification, acceptance and final determination by the purchaser. The record showed that the escalation claims were still not finally settled and that the buyer had in fact settled only a much lower amount in one instance. Excise duty on escalation becomes exigible when the revised price is finally crystallized and is received or becomes payable under the contract. A demand on unfinalized escalation claims was therefore premature.

Conclusion: The demand on escalation bills was premature and was set aside.

Final Conclusion: The appeals succeeded substantially: the valuation-based demand and the escalation-demand were annulled, penalties were set aside, and only the adjusted amount attributable to the alleged Goa clearances survived.

Ratio Decidendi: In turnkey contract cases under the post-2000 valuation regime, the declared contractual price cannot be rejected without proof of extra-commercial consideration or receipt of additional consideration, and duty on escalation is payable only when the escalation amount is finally determined under the contract.

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