Supreme Court: ‘Transaction Value’ U/S 4 Central Excise Act Serves As Basis For Computing Quantum Of Excise Duty Payable, Not Excisability

The Supreme Court held that the ‘transaction value’ under Section 4 of the Central Excise Act, 1944 (CEA) serves as the basis for computing the quantum of excise duty payable, but cannot determine excisability.

The Court held thus in Civil Appeals challenging the Order passed by the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), West Zonal Bench, Mumbai.

The two-Judge Bench of Justice J.B. Pardiwala and Justice Sandeep Mehta observed, “… it is clear that the ‘transaction value’ under Section 4 of the Act, 1944, merely serves as the basis for computing the quantum of excise duty payable, but cannot determine excisability. It must necessarily be borne in mind that valuation is a consequence of levy, not its determinant.”

The Bench said that the ‘transaction value’ becomes relevant only after the taxable event, i.e., manufacture of excisable goods, is first established and the measure of tax cannot be invoked to prove that what has been produced is excisable.

Senior Advocate Prakash Shah appeared on behalf of the Appellant, while ASG Raghavendra P Shankar appeared on behalf of the Respondent.

Brief Facts

The Appellant-Assessee was a holder of Central Excise Registration for manufacture of boiler and boiler parts falling under the Central Excise Tariff Act, 1985. The assessee entered into an agreement with one company (buyer) for designing, procuring, manufacturing and supplying machinery and equipments 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. In 2005, the Assistant Commissioner of Central Excise and Customs, Aurangabad issued a show cause-cum-demand notice to the assesee, alleging that the assessee cleared the final product boilers in completely knocked down condition (CKD condition) by paying central excise duty without adding or taking into account the cost of ‘essential’ bought out ‘parts’ delivered directly at the site of the buyer.

The show cause notice invoked the extended period of limitation of 5 years provided under the proviso to Section 11A(1) of the CEA, on the ground that the assessee had not paid central excise duty on the bought-out items and had wilfully suppressed the facts from the knowledge of the Respondent department with an intention to evade duty. Upon due consideration of the reply of the assessee, the Assistant Commissioner vide Order-in-Original, accepted that the demand of central excise duty on the value of the bought out items was not sustainable. The Assistant Commissioner dropped the demands made in the show cause notice based on the findings. Being aggrieved by the said Order, the Revenue preferred an Appeal before the Commissioner of Central Excise & Customs (Appeals), Aurangabad. However, the same was dismissed and the Assistant Commissioner’s Order was affirmed. Against this, an Appeal was filed and the CESTAT reversed the concurrent findings of the two lower authorities. It set aside the Order of the Commissioner (Appeals) and hence, the assessee was before the Apex Court.

Reasoning

The Supreme Court in view of the above facts, noted, “The revenue has, erroneously relied upon the ‘transaction value’ derived from the ‘contract price’ to argue that the excise duty on the boiler has to be computed on the basis of the contract price. However, for the revenue to contend that the contract price would become the basis of the ‘transaction value’ for the purpose of determination of the payable excise duty, it has to first establish that the final product of the contract itself is excisable.”

The Court explained that the correct sequence of central excise duty assessment under the CEA is as follows –

i. First, determining the applicability of the charging provision under Section 3, i.e. whether the process results in the manufacture of excisable goods; and

ii. Secondly, (if the first condition is satisfied), computing the quantum of excise duty payable under the valuation provisions, such as Section 4 (or Section 4A, although Section 4A is not relevant to this present matter before us).

“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”, it enunciated.

The Court added that 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.

“In other words, if upon examination it is found that the resultant product of the contract is not excisable goods, then the contract price cannot be considered as the ‘transaction value’ for the purpose of determining the payable central excise duty on the boiler, which in turn would also mean that the value of the bought out goods is not liable to be included in the value of the boiler for computing central excise duty”, it clarified.

The Court observed that if an item can be dismantled and reassembled at another site, such an item would still be considered as movable ‘goods’ under the CEA.

“… we arrive at 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”, it held.

The Court was of the view that even if there is any substance in the allegation that excise duty on the value of the bought out items was collected by the assessee from the buyer, that by itself would not lead to the conclusion that the value of the bought out items must be included in the value of the final product for the purpose of computing payable excise duty.

“Rather, if the revenue indeed believed that the assessee had collected excise duty from the buyer on the value of the boiler by including the price of the bought out items, the correct course of action for the revenue should have been to invoke the provisions of Section 11D of the Act, 1944, which specifically provides a mechanism for recovery of any amount collected by an assessee from a buyer, by representing as excise duty in excess of what is payable as such”, it further said.

The Court remarked 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”, it also noted.

Conclusion

The Court reiterated 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.

“The allegation levelled against the assessee in the present matter before us is of wilful suppression with an intention to evade central excise duty. … 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. … Therefore, 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”, it held.

The Court, therefore, concluded that 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. and that the show cause notice issued under the proviso to Section 11A(1) of the Act, 1944 is not legal and hence invalid.

Accordingly, the Apex Court allowed the Appeals and set aside the impugned Order.

Cause Title- Lipi Boilers Ltd. v. The Commissioner of Central Excise, Aurangabad (Neutral Citation: 2025 INSC 1297)

Appearance:

Appellant: Senior Advocate Prakash Shah, AOR Rahul Gupta, and Advocate Jasdeep Singh Dhillon.

Respondent: ASG Raghavendra P Shankar and AOR Gurmeet Singh Makker.

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