The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Chennai, has held that transfer of imported parts of Wind Operated Electricity Generators (WOEGs) to customers before their final erection and commissioning does not violate the conditions attached to concessional customs duty exemption, where the goods are ultimately used for the specified purpose under a turnkey windmill project.
The bench of Ajayan T.V. (Judicial Member) and Vasa Seshagiri Rao (Technical Member) has observed that mere transfer of title or possession of imported windmill components before their physical assembly cannot, by itself, disentitle an importer from the exemption when the components are actually used for manufacture, erection and commissioning of wind-operated electricity generators.
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The dispute arose from the import of parts of Wind Operated Electricity Generators by the respondent, which had availed concessional customs duty benefits under Notification No. 21/2002-Cus dated March 1, 2002 and Notification No. 12/2012-Cus dated March 17, 2012.
The department alleged that the importer had violated Conditions 35 and 45 of the exemption notifications. According to the Department, the notifications required the importer to use the imported goods for the specified purpose, and therefore the importer was required to remain the actual user of the goods.
The Department’s case was that the imported WOEG parts were transferred to customers under separate supply agreements before erection and commissioning. Since ownership was allegedly transferred before the goods were actually installed, the Revenue contended that the importer could no longer be regarded as the person using the goods for the specified purpose.
On this basis, a Show Cause Notice dated December 31, 2015 proposed recovery of differential duty amounting to ₹2,71,44,813, along with interest, confiscation and penalty. However, the adjudicating authority dropped the proceedings, observing that the imported goods were admittedly used for the manufacture and installation of WOEGs and that the notifications did not expressly prohibit transfer of the goods before erection or assembly.
Revenue challenged this order before the CESTAT.
The Department argued that the words “he shall use them for specified purpose” in the exemption notifications required the importer himself to remain the actual user of the imported goods.
According to Revenue, once the imported parts were sold to customers under separate supply agreements, the importer had divested itself of ownership and the right to use the goods. The Department therefore contended that the exemption was not merely an end-use based exemption but also imposed an actual-user requirement on the importer.
The Revenue accordingly maintained that transfer of title before actual installation amounted to a violation of the exemption conditions.
The respondent explained that it was engaged in turnkey supply, installation, erection and commissioning of wind-operated electricity generators.
It submitted that windmill components such as blades, controllers and other allied parts are extremely large and technically specialised. Because of their physical dimensions, the components cannot practically be assembled into the final windmill at the importer’s factory and transported thereafter to the customer’s location. Instead, assembly, erection and commissioning necessarily take place at the customer’s project site.
Although separate supply and erection agreements were entered into, the respondent maintained that it continued to have technical responsibility for erection, commissioning and bringing the complete windmill system into existence.
The imported goods, according to the respondent, were admittedly used only for the manufacture and installation of WOEGs and were not diverted to any alternative commercial purpose.
The CESTAT observed that the Revenue’s entire interpretation was based on the proposition that the words “he shall use”necessarily required the importer to retain ownership of the goods until final commissioning.
The Tribunal rejected this interpretation.
It observed that the exemption notifications were intended to promote renewable energy generation by providing concessional duty treatment for parts imported for use in the manufacture and maintenance of wind-operated electricity generators.
According to the Tribunal, the substantive requirement was that the imported goods should ultimately be used for the specified purpose. Nothing in the notifications expressly prohibited movement of the goods to the project site or their transfer under a contractual arrangement forming part of a larger turnkey project.
The Tribunal noted that the factual position was undisputed.
The respondent had imported blades, controllers and allied parts specifically for windmill projects. It had simultaneously entered into supply agreements and separate erection and commissioning agreements with project developers.
Given the size of the components, erection and assembly had to be carried out at the customer’s site. The final windmill system came into existence only after installation and commissioning by the respondent.
Consequently, the Tribunal found that the respondent had not abandoned the intended use of the imported goods or diverted them for any alternative commercial purpose.
A significant factor in the Tribunal’s decision was the judgment of the Madras High Court in Nordex India Pvt. Ltd. v. Commissioner of Customs, reported in 2022 (382) E.L.T. 195 (Mad.).
The Tribunal noted that the High Court had considered an identical dispute involving the same exemption notification and rejected the Department’s contention that sale of imported rotor blades before assembly would disentitle the importer from claiming the exemption.
The High Court had held that where imported goods were used in execution of turnkey contracts for erection and commissioning of windmills, merely raising invoices or transferring possession did not amount to violation of the condition requiring use for the specified purpose.
The High Court had also taken note of the practical reality that windmills have to be erected at the project site and cannot be completely assembled in a factory and subsequently transported to the site.
The Tribunal referred to the reasoning adopted by the Madras High Court that the notification nowhere stated that the imported goods could not be sold before being utilised in assembly and erection of the wind-operated electricity generator.
In the case considered by the High Court, the importer had sold rotor blades to its customer but continued to undertake fabrication, assembly and erection at the customer’s site.
The High Court found that the goods were ultimately used for the specified purpose and that the sale or raising of invoices before installation did not, by itself, establish violation of the notification condition.
The High Court further recognised that the windmill had to necessarily be erected at the customer’s site because of its physical characteristics and that the contractual arrangement was a turnkey project rather than a simple invoice-to-invoice sale.
The Tribunal also relied on its earlier decision in Commissioner of Customs v. GE India Industrial Pvt. Ltd., reported in 2023 (7) TMI 667 (CESTAT Chennai).
In that case too, the Department had argued that sale of imported WOEG parts before site assembly violated the actual-user condition under the exemption notification.
Following the ratio of the Madras High Court’s decision in Nordex India, the coordinate Bench had held that exemption could not be denied merely because title to the goods passed to the customer before physical assembly, provided the importer retained responsibility for fabrication, erection and commissioning of the wind-operated electricity generator.
The Chennai Bench observed that the factual circumstances in the present matter were materially indistinguishable from those considered in Nordex India and GE India.
The imported goods had admittedly been used exclusively for erection and commissioning of wind-operated electricity generators.
There was no allegation that the goods had been diverted, clandestinely removed or used for an alternative purpose. Revenue’s case rested solely on the proposition that transfer of ownership before installation defeated the notification condition.
The Tribunal observed that this proposition had already been rejected by both the jurisdictional High Court and the coordinate Bench of the Tribunal.
The CESTAT further emphasised the principle of judicial discipline.
Once the jurisdictional High Court has interpreted the relevant notification and settled the controversy, the issue cannot be treated as an open question before the Tribunal. The Tribunal is required to follow the law declared by the jurisdictional High Court.
The Department had also failed to identify any distinguishing factual feature that could justify departure from the principles laid down in Nordex India and GE India.
The Tribunal noted that the respondent had furnished the requisite certificates issued by the Ministry of New and Renewable Energy, executed the necessary undertakings at the time of import and ultimately used the imported goods exclusively for erection and commissioning of windmills. Therefore, the essential object of the exemption notification was fully satisfied.
The Tribunal ultimately held that the expression “he shall use them for specified purpose” could not be interpreted in the rigid manner suggested by Revenue so as to require continuous ownership of the imported goods until final commissioning.
According to the Tribunal, the condition is satisfied where the imported goods are ultimately used by the importer in execution of the specified windmill project in accordance with the turnkey contractual arrangement.
Therefore, transfer of the goods under supply contracts before their final assembly does not constitute a breach of the notification conditions.
The CESTAT agreed with the adjudicating authority’s decision to drop the proceedings and found no legal basis for appellate interference.
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