2025 (11) TMI 505 - SC - Central Excise

Boiler assembled from CKD parts is immovable not excisable; bought-out items excluded from assessable value; Section 11A(1) proviso struck down

Lipi Boilers Ltd. Versus The Commissioner of Central Excise, Aurangabad.

The SC allowed the appeal, holding that the boiler assembled and erected at the buyer's site from CKD parts and bought-out items results in an immovable ... Exigibility of central excise duty - Inclusion of value of the duty paid bought out items delivered directly at the buyer’s site, in the value of the boiler cleared by the assessee from its factory in completely knocked down (CKD) condition - Validity of SCN under the extended limitation period as provided under the proviso to Section 11A(1) of the Central Excise Act, 1944 - HELD THAT:- It is pertinent to note that central excise duty is a duty on manufacture of goods. A Three-judge Bench of this Court in Union of India and Others v. Bombay Tyre International Ltd. and Others [1983 (10) TMI 51 - SUPREME COURT], while discussing the concept of a duty of excise highlighted upon the nature of the tax and observed that 'The observations show that while the nature of an excise is indicated by the fact that it is imposed in respect of the manufacture or production of an article, the point at which it is collected is not determined by the point of time when its manufacture is completed but will rest on considerations of administrative convenience, and that generally it is collected when the article leaves the factory for the first time. In other words, the circumstance that the article becomes the object of assessment when it is sold by the manufacturer does not detract from its true nature, that it is a levy on fact of manufacture.' Another aspect discussed by this Court in Bombay Tyre which is of utmost relevance to the matter before us is understanding the nature of Section 3 and Section 4 of the Act, 1944 respectively. Hence, before delving into the explanation regarding the nature of the two provisions as highlighted by this Court in Bombay Tyre, it is pertinent to reproduce the provisions as it existed at the time of the taxable event in contention, i.e. assembling of the boiler parts in CKD condition with the bought out items at the site of erection - This Court in Bombay Tyre (supra) observed that while Section 3 provides for the levy of the duty of excise, Section 4 provides the measure by reference to which the charge is to be levied. It was categorically emphasised upon, that the duty of excise is chargeable with reference to the value of the excisable goods, but the measure employed for assessing a tax must not be confused with the nature of the tax itself. Thus, it is necessary to first examine whether the resultant product that emerges at the buyer’s site by assembling the parts brought in CKD condition along with the bought out items, qualifies as an “excisable good” under the Act, 1944. Only if such product which emerges as a result of the contract qualifies as excisable goods can the next step of evaluation be undertaken, i.e. to see whether or not the contract price can be treated as the ‘transaction value’ under Section 4, for computing the quantum of payable excise duty. Consequently, if upon such examination it is found that the contract price could validly be taken as the ‘transaction value’ under Section 4, a show cause notice may be issued seeking why the value of the bought out items should not be added to the value of the boiler. Whether the resultant final product of the contract would fall within the ambit of Excisable Goods? - HELD THAT:- Through a catena of judgments of this Court, it is now a settled position of law that excise duty is leviable only on ‘goods’ and that the test of movability is the decisive factor in ascertaining whether an article qualifies as “goods” for the purpose of central excise duty. A Coordinate Bench of this Court in a judgment in M/s Bharti Airtel Ltd. v. The Commissioner of Central Excise, Pune [2024 (11) TMI 1042 - SUPREME COURT], undertook an extensive examination of the expression “goods” under the Act, 1944. After a close examination of the meaning of “goods” under Section 2(7) of the Sale of Goods Act, 1930, Section 2(52) of the Central Goods and Services Tax Act, 2017, Section 2(d) of the Central Sales Tax Act, 1956, Section 2(22) of the Customs Act, 1962, Section 2(i) of the Competition Act, 2002, Section 2(13) of the Motor Vehicles Act, 1988, Section 2(f) of the Micro, Small and Medium Enterprises Development Act, 2006, Section 2(14) of the Bureau of Indian Standards Act, 2016 and Section 2(21) of the Consumer Protection Act, 2019, respectively, this Court concluded that the definition of “goods” under the Sale of Goods Act, 1930 seems to be the basis of the term “goods” in other Statutes. Therefore, this Court observed that for the meaning of the term “goods”, the definition given in the Sale of Goods Act, 1930 would be primarily relied upon. This Court in Quality Steel Tubes (P) Ltd. v. Collector of Central Excise, U.P. [1994 (12) TMI 75 - SUPREME COURT] dealt with the question whether the tube mill and welding head erected and installed by the assessee for manufacture of tubes and pipes out of duty-paid raw materials amounted to “excisable good” assessable to duty under the Act, 1944. This Court observed that, the basic test of levying duty under the Act, 1944 is two fold: One, that any article must be a good and second, that the same 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 subject tube mill or welding head having been erected and installed in the premises and embedded to earth, ceased to be goods within the meaning of Section 3 of the Act,1944. This Court categorically observed that erection and installation of a plant cannot be held to be excisable goods. There are merit in the arguments raised by the assessee that the mere size and weight of the boiler make it impossible to assemble the boiler before erection, and that the process of erection itself involves civil and mechanical engineering with the use of concrete, steel reinforcements, and grouting in such a manner that the coming into existence of the boiler in a functioning condition is in an immovable form. The assembly and erection of the boiler is essentially intertwined in such a manner that we also find merit in the assessee’s argument that such an installed boiler cannot be readily dismantled by merely removing nuts and bolts and reassembled at another site without causing extensive damage to the boiler to an extent so as to reduce its value to mere scrap. The finding that the final product that emerges as a result of performing the obligations under the contract, does not constitute excisable goods under the Act, 1944. Consequently, the base value of the boiler on which excise duty is to be levied, cannot be equated with the total contract price. Therefore, the price of the bought out parts cannot be included in the value of the boiler for the purpose of computing central excise duty under the Act, 1944. Erroneous reliance on Tariff Classification - HELD THAT:- A significant observation made by a Three-judge Bench of this Court in Moti Laminates (P) Ltd. v. CCE [1995 (2) TMI 67 - SUPREME COURT] where it was held that 'The Tariff Schedule by placing the goods in specific and general category does not alter the basic character of leviability. The duty is attracted not because an article is covered in any of the items or it falls in residuary category but it must further have been produced or manufactured and it is capable of being bought and sold.' Inapplicability of the “Utility Test” and the ‘part’ v. ‘accessory’ debate - HELD THAT:- The determination of the question, whether or not the bought out items were ‘parts’ or ‘accessories’, in terms of this Court’s observation in Quippo [2025 (9) TMI 1157 - SUPREME COURT], would have been of some relevance in the present matter only if the resultant product of the contract would fall within excisable goods. In other words, the question of utility would have been relevant to the determination of payable excise duty, if a movable boiler had resulted from integrating the CKD parts with the bought out items. In the present case, the final product, i.e. the steam generating plant, emerges in the form of an immovable product in the course of integrating the CKD parts with the bought out items. Therefore, the resultant product of the contract not being excisable goods, it is wholly inconsequential whether or not the bought out items are parts or accessories of it. Excess collection of excise duty from buyer is no proof of excisability - HELD THAT:- Upon a bare reading of Section 11D of the Act, 1944 it is clear that the failure of the revenue to resort to the statutory recourse available under Section 11D, and instead to seek to justify inclusion of the value of the bought out items in the assessable value of the boiler, reflects an error in application of the law. The invocation of Section 11D would be justified in a case where an assessee has collected any sum purporting to be the excise duty without the authority of law. Consequently, even assuming in arguendo that any excess amount was collected from the buyer under the garb of excise duty, such collection cannot confer excisability on the final product which emerges as an immovable property. The liability of the assessee to pay duty must be determined strictly in accordance with the charging provisions under the law and not on the basis of any purported recovery from the buyer. Was there any wilful suppression of facts with an intention to evade payment of duty by the appellant/assessee? - HELD THAT:- A bare reading of Section 11A(1) along with its proviso would indicate that ordinarily, notice has to be issued within one year, however the proviso stipulates that the notice can be issued within five years from the relevant date if, the non-levy, short-levy, or erroneous refund has occurred on account of either of the following – fraud, collusion, wilful misstatement or suppression of facts, or contravention of any of the provisions of the Act, 1944 or rules thereunder, with an intent to evade payment of duty. The proviso employs selective choice of words which contemplate a state of mind, whereby the noticee has knowingly and deliberately done something or omitted to do something which has resulted in non-levy, short-levy or erroneous refund of duty. In contrast, for the normal period of one year, there is no requirement of any state of mind, and the fact of non-levy, short-levy or erroneous refund of duty by itself would be sufficient to invoke the provisions of Section 11A(1) of the Act, 1944. In the context of invoking the extended period of limitation under Section 11A of the Act, 1944, this Court in Pahwa Chemicals Private Limited v. Commissioner of Central Excise, Delhi [2005 (9) TMI 92 - SUPREME COURT], observed that mere failure does not amount to wilful misdeclaration or wilful suppression and that there must be some positive act on the part of an assessee to bring the case within the mischief of wilful misdeclaration or wilful suppression, as the case may be. A perusal of the show cause notice would show that the revenue itself admits that the assessee had filed the RT-12 returns with the revenue, which means that the revenue had the material particulars on record which it could have acted upon within the normal one year period. There is nothing on record to indicate that any material information had been suppressed by the assessee with any intention to evade payment of central excise duty - in the absence of any deliberate act on the part of the assessee with an intention to evade being established by the revenue, the essential precondition of wilful suppression with intent to evade duty is not satisfied. Consequently, the invocation of the extended period of limitation under the proviso to Section 11A(1) is held to be not tenable in law. The value of the duty paid bought out items which were delivered directly at the buyer’s site is not liable to be included in the value of the boiler cleared by the assessee from its factory in CKD condition, for the purpose of assessment of excise duty - the show cause notice issued under the proviso to Section 11A(1) of the Act, 1944 is not legal and hence invalid. Appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the value of duty-paid bought-out items delivered directly at the buyer's site must be included in the assessable value of a boiler cleared in completely knocked down (CKD) condition for central excise duty assessment. 2. Whether the product resulting from assembly/erection at the buyer's site qualifies as 'excisable goods' (i.e., movable 'goods') under the Central Excise Act, 1944, or becomes immovable on erection so as to be non-excisable. 3. Whether the valuation/transaction value provisions (Section 4 as amended w.e.f. 01.07.2000) may be invoked to determine excisability or to include bought-out items in assessable value prior to establishing the taxable event under the charging section (Section 3). 4. Whether reliance on tariff classification alone determines exigibility of excise duty. 5. Whether the extended limitation period (proviso to Section 11A(1)) applies because of alleged wilful suppression/misstatement by the assessee to evade duty. 6. Whether collection or recovery of amounts from the buyer (including alleged reimbursement of duty) establishes excisability or substitutes for statutory remedies under Section 11D. ISSUE-WISE DETAILED ANALYSIS Issue 1-3 (Interrelated): Inclusion of bought-out items in assessable value; role of Section 3 (charging) vis-à-vis Section 4 (valuation/transaction value) Legal framework: Section 3 is the charging provision: duty of excise levied on excisable goods 'produced or manufactured in India.' Section 4 prescribes valuation (transaction value) where duty is chargeable with reference to value. The 2000 amendment to Section 4 introduced transaction value rules; Section 2(d) defines 'excisable goods' by reference to Schedules. Precedent treatment: The Court reiterated the distinction repeatedly recognized in precedent that Section 3 defines the subject-matter (nature of tax) and Section 4 provides the measure. Bombay Tyre and other decisions emphasize that the measure cannot determine the subject of the levy; valuation follows, and cannot create, exigibility. Quality Steel, Mittal Engineering and Sirpur Paper establish the movability/marketability test for excisability and hold that erection/installation of plant that becomes immovable is not excisable. Interpretation and reasoning: The Court held that the sequence is: (i) determine whether a taxable event (manufacture of excisable goods) occurs under Section 3; (ii) if yes, compute duty under valuation provisions (Section 4). The amended Section 4's transaction value becomes relevant only after excisability is established. Revenue's reliance on contract price/transaction value to contend bought-out items are includible conflates valuation with charging. Thus Section 4 cannot be used to establish that the assembled product is an excisable movable good. Ratio vs. Obiter: Ratio - valuation provisions cannot determine excisability; charging under Section 3 must be established first. Obiter - commentary on the correct sequence and cautionary note on administrative conflation between Sections 3 and 4. Conclusion: The value of bought-out items cannot be included in assessable value by relying on transaction value (contract price) unless and until the resultant product is held to be an excisable movable good under Section 3. Issue 2 (expanded): Whether the assembled boiler/steam generating plant is an 'excisable good' (movability/marketability test) Legal framework: 'Excisable goods' are goods specified in the Tariff Schedules. The Act does not define 'goods'; judicial application relies on movability and marketability tests (Sale of Goods Act interpretations, General Clauses Act, Transfer of Property Act). Tests include whether item is attached to earth, can be dismantled and sold without substantial damage, or becomes immovable by being imbedded or permanently fastened. Precedent treatment: Quality Steel and Mittal Engineering hold that plants erected and embedded to earth cease to be goods and are not excisable; Sirpur Paper qualifies that attachment for operational efficiency does not automatically make machinery immovable if it can be dismantled and sold; CBEC circular clarifies that items that cannot be dismantled without substantial damage are non-movable and not excisable. Interpretation and reasoning: The Court examined contract clauses (scope, definitions, payment milestones, civil works obligations) and found the contract contemplated a composite steam generating plant assembled/erected at site using CKD parts and bought-out items, involving civil works (bricks, cement, refractory, ducting). Given the magnitude/specifications (50 TPH, high pressure) and the civil integration, the resultant plant becomes permanently affixed and cannot be dismantled and reassembled without substantial damage. The object of the contract is erection/installation of an immovable plant; therefore, the final product is not a movable 'good' for excise purposes. Ratio vs. Obiter: Ratio - where assembly/erection at site produces a plant permanently affixed to earth and not reasonably dismantlable without substantial damage, the product is immovable and not excisable. Obiter - factual observations distinguishing cases where attachment is merely for operational efficiency and where dismantling remains feasible. Conclusion: The assembled steam generating plant is immovable upon erection and thus not an excisable good; consequently bought-out parts delivered at site cannot be included in the assessable value of an excisable boiler. Issue 4: Tariff classification and 'utility'/part v. accessory debate Legal framework: Presence of an item in the Tariff Schedule creates susceptibility to excise only if the item satisfies charging provisions (i.e., is a good and produced/manufactured). Distinction between 'part' and 'accessory' is relevant only after excisability is established. Precedent treatment: Moti Laminates cautions that tariff classification alone does not alter the basic character of leviability; Quippo (referred) sets functional test for part v. accessory but does not override charging requirement. Interpretation and reasoning: The Court found revenue/tribunal misplaced focus on whether bought-out items were 'essential parts' (utility test). That question is subordinate and irrelevant where the resultant product is not excisable. Even if bought-out items are functionally essential, inclusion in assessable value depends on the underlying product being excisable. Ratio vs. Obiter: Ratio - tariff presence and utility/part analysis cannot substitute for the initial excisability inquiry. Obiter - elaboration that the part/accessory debate is consequential only upon an affirmative finding of excisability. Conclusion: Tariff classification and part/accessory analysis do not establish exigibility; they are inapplicable where the assembled product is immovable and non-excisable. Issue 6: Recovery/collection from buyer and applicability of Section 11D Legal framework: Section 11D provides statutory mechanism to recover amounts collected from buyers as representing excise duty in excess of payable duty; recovery under Section 11A is separate and depends on non-levy/short-levy etc. Precedent treatment: Court emphasized statutory remedy (Section 11D) for recovery of amounts collected from buyers rather than treating collection as proof of excisability. Interpretation and reasoning: The Court held that even if sums were recovered from the buyer as 'reimbursement of duty,' such recovery does not by itself confer excisability on the final product. If revenue thought excess amounts were collected, it should have proceeded under Section 11D. Collection by assessees cannot be used to bootstrap excisability where charging section is not satisfied. Ratio vs. Obiter: Ratio - collection/recovery from buyer is not determinative of excisability; Section 11D is the proper statutory channel for such recovery. Obiter - critique of revenue's procedural choice. Conclusion: Alleged recovery from buyer does not justify including bought-out items in assessable value; revenue should have invoked Section 11D where appropriate. Issue 5: Validity of show cause notice under extended limitation proviso to Section 11A(1) Legal framework: Section 11A(1) normally permits notice within one year; proviso extends to five years where non-levy/short-levy/erroneous refund is by reason of fraud, collusion, wilful misstatement or suppression of facts or contravention of provisions with intent to evade duty. Jurisprudence requires strict construction and proof of deliberate conduct/positive act amounting to wilful suppression. Precedent treatment: Pahwa Chemicals and Continental Foundation: mere omission or failure to declare is not sufficient; revenue must prove deliberate suppression/misstatement with intent to evade; burden lies on revenue to establish mental element. Interpretation and reasoning: The Court examined record and found the immovability contention was raised in the assessee's reply to the show cause notice and accepted by the Assistant Commissioner earlier; RT-12 returns had been filed; no material establishes deliberate concealment or positive act intended to evade. Revenue had access to particulars and did not demonstrate wilful suppression. Invocation of extended limitation was therefore unsustainable. Ratio vs. Obiter: Ratio - extended limitation cannot be invoked absent proof of wilful misstatement/suppression or intent to evade; mere failure or difference of view does not suffice. Obiter - admonition that proviso is to be construed strictly and burden rests on revenue. Conclusion: Extended limitation under proviso to Section 11A(1) was improperly invoked; show cause notice issued on that basis is invalid and proceedings based thereon are quashed.