Externally Procured Parts Supplied To Customer For Assembly, But Not Used By Manufacturer, Aren't Liable To Excise Duty : Supreme Court

The Supreme Court on Monday (November 10) dismissed the Revenue Department's excise duty demand against a company that had manufactured and erected a large boiler at a customer's site, holding that the full contract value could not be subjected to central excise duty. The Court clarified that parts bought out externally and supplied to the customer for assembly, but not actually used by the manufacturer, would not attract excise duty.

“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.”, observed a bench of Justices JB Pardiwala and Sandeep Mehta while allowing the company's appeal against the CESTAT order which upheld the Revenue's demand for additional excise duty on bought out item.

The dispute arose from a 2001 contract between Lipi Boilers and Shri Maroli Vibhag Khand Udyog Sahakari Mandali Ltd. for designing and supplying a 50 TPH steam plant. Because the massive boiler couldn't be transported as a single unit, Lipi Boilers manufactured key components at its factory, paying excise duty on them, and procured other essential items like pumps, valves, and instruments from vendors, which were sent directly to the customer's site.

In 2005, the Excise Department issued a notice claiming that these “bought-out items,” worth ₹14.02 lakh, were integral to the boiler and should be included in its assessable value, raising a duty demand of ₹2.24 lakh.

The Assistant Commissioner of Central Excise accepted Lipi Boilers' stance, holding that site-erected boilers are not “goods” and thus not excisable.

On the Respondent's appeal, the CESTAT reversed the decision, ruling that the bought-out items were integral to the boiler and their value should be included, mistakenly noting that the immovability argument was not raised earlier.

Challenging the CESTAT's order, the Appellant moved to the Supreme Court, which ultimately ruled in their favour.

A judgment authored by Justice Pardiwala noted that the revenue erred in erroneously using the transaction value under Section 4 of the Central Excise Act, 1944 of the contract, upon including the value of the bought-out items, to determine what is excisable. The Court stated that tax is determined by its character as movable "goods" at the time of removal from the factory, not by the aggregate value of a contract for an immovable plant.

“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.”, the court said.

Since, the contract was for erection and installation of a steam plant which is an immovable property, the court relying upon Mittal Engineering Works (P) Ltd. v. Collector of Central Excise, Meerut reported in (1997) 1 SCC 203 which held held that an “erection and installation of a plant cannot be held to be excisable goods”, observed that “the steam generating plant that emerges as a result of the contract cannot be held to be an excisable good. Consequently, the base value of the boiler on which excise duty is to be levied, cannot be equated with the total contract price which is inclusive of the price of the bought-out items.”

Accordingly, the appeal was allowed, and the excise demand was quashed.

Cause Title: LIPI BOILERS LTD. vs. THE COMMISSIONER OF CENTRAL EXCISE, AURANGABAD

Citation : 2025 LiveLaw (SC) 1092

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Appearance:

For Appellant(s) Mr. Prakash Shah, Sr. Adv. Mr. Jas Sanghavi, Adv. Mr. Linzy Sharan, Adv. Mr. Jasdeep Singh Dhillon, Adv. Mr. Prabhat Chaurasia, Adv. Mr. Anirudh Jamwal, Adv. Mr. Rahul Gupta, AOR

For Respondent(s) Mr. Raghavendra P Shankar, A.S.G. Mr. Gurmeet Singh Makker, AOR Ms. Pallavi Mishra, Adv. Mr. Pallav Mongia, Adv. Mr. Padmesh Mishra, Adv. Mr. Raman Yadav, Adv.