Bought-Out Items Supplied Directly to Site Not Part of Excise Valuation For Goods Cleared in CKD Condition: Supreme Court

The Supreme Court held that the value of duty-paid bought-out items directly delivered to a buyer’s site cannot be included in the assessable value of a manufactured product cleared from a factory in completely knocked down (CKD) condition. The bench of Justice J.B. Pardiwala has overturned a 2010 decision of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) which had ruled in favour of the revenue department. The appellant, Lipi Boilers Ltd., a registered manufacturer of boilers and boiler parts, had entered into a contract in January 2001 to design, procure, and supply equipment for a 50 TPH bagasse-fired boiler. While major components were manufactured at its factory and cleared in CKD condition upon payment of excise duty, certain ancillary parts—such as feed water pumps, fans, and safety valves—were procured from other vendors and sent directly to the buyer’s site after duty payment by those vendors. In 2005, the Central Excise Department issued a show cause notice alleging undervaluation, contending that the cost of the bought-out items should have been included in the assessable value of the boiler. The department claimed a shortfall in duty amounting to ₹2.24 lakh and invoked the extended limitation period under Section 11A(1) of the Central Excise Act, 1944, alleging willful suppression of facts. Both the Assistant Commissioner and the Commissioner (Appeals) rejected the department’s claim, holding that the bought-out items were not part of the assessable value and that boilers erected on-site were immovable property and not “goods” under excise law. However, CESTAT reversed these findings, upholding the duty demand and prompting Lipi Boilers to approach the Supreme Court. The apex court framed two primary issues: Firstly, whether the value of duty-paid bought-out items directly delivered to the buyer’s site should be included in the assessable value of boilers cleared from the factory in CKD condition for central excise duty assessment; and Secondly, whether the show cause notice invoking the extended limitation period under Section 11A(1) was valid. Justice Pardiwala’s 57-page judgment delved deeply into the nature of excise duty under the Central Excise Act, reaffirming that excise duty is a levy on manufacture, not on sale. The court drew upon precedent from Union of India v. Bombay Tyre International Ltd. (1984) to reiterate that Section 3 of the Act creates the charge on manufacture, while Section 4 merely provides the measure for valuation. “The ‘transaction value’ becomes relevant only after the taxable event—manufacture of excisable goods—is first established,” the court observed. “Valuation is a consequence of levy, not its determinant.” The bench held that the revenue had “erroneously conflated” these stages, assuming that the contract value (which included design, supply, and bought-out items) could determine excisability without first proving that the final product constituted “excisable goods.” Relying on precedents including Quality Steel Tubes (P) Ltd. v. CCE (1995), Mittal Engineering Works (P) Ltd. v. CCE (1997), and Bharti Airtel Ltd. v. CCE, Pune (2024), the court reaffirmed that movability is the decisive test for determining excisability. It found that once erected and attached to the earth, boilers become immovable property and cannot be regarded as “goods” for excise purposes. “The mere fact that some parts were manufactured in the factory and cleared in CKD condition does not alter the character of the final product, which upon erection ceases to be movable,” the court noted. The Supreme Court held that since the bought-out items were separately procured, duty-paid, and never brought into the manufacturer’s premises or processed further, they could not form part of the assessable value of the boiler. “The revenue’s reliance on the contract price as the basis for valuation under Section 4 was misplaced,” Justice Pardiwala wrote, emphasizing that “the cost of bought-out items cannot be artificially merged with the assessable value of manufactured goods.” The court also questioned the validity of invoking the extended limitation period under the proviso to Section 11A(1), noting that there was no evidence of suppression of facts or intent to evade duty. The manufacturer had disclosed all transactions and duty payments in its records. Case Details Case Title: Lipi Boilers Ltd. Versus The Commissioner Of Central Excise, Aurangabad Case No.: CIVIL APPEAL NOS. 856-857 OF 2011 Date: 10/11/2025 Click Here To Read Order Read More: E-Way Bill Expiry Doesn’t Attribute To Tax Evasion Intention: Allahabad HC

Bought-Out Items Supplied Directly to Site Not Part of Excise Valuation For Goods Cleared in CKD Condition: Supreme Court

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