Whether availing of Cenvat credit on ‘bought-out items’ claimed to have been used in the installation of boilers.

PJ/Case Law /2016-17/3276

Case:- THERMAX LTD. VERSUS COMMISSIONER OF C.E., PUNE

Citation:-2016 (337) E.L.T. 456 (Tri.-Mumbai)

Brief Facts:-The brief facts of the case are that the appellant-assessee, engaged in the manufacture of boilers falling under Heading 8402 of the schedule to the Central Excise Tariff Act, 1985, had been clearing their products to customers in India, outside India and also to a special economic zone at Jamnagar. In relation to the clearance of 10 boilers to M/s. Reliance Utility Limited, Jamnagar and exports effected, the case of Revenue is that, in addition to manufactured goods emanating from the registered factory, M/s. Thermax Ltd. supplied certain ‘bought-out items’ which were first brought into the factory premises before being shipped to destination and, on these, the duty paid was being availed as Cenvat credit. The impugned order finds that said ‘bought-out items’ are not inputs for manufacture and, hence, the duty paid is not eligible to Cenvat credit. The assessee, on the other hand, claims that the goods are procured and brought to the factory as the contract with the exporters envisages erection of complete boilers at the contracted site and that the boiler, using their own output and ‘bought-out’ items, in assembled state is classifiable under 8402. Further contending that these goods being exported or supplied to special economic zones are not to be burdened with taxes and duties.

Appellant’s Contention:-The assessee submitted that the Explanatory Notes to the HSN will enable an appreciation of their contention and that the contract is for supply of boiler which is a product complete in itself and comprising of various components. It was contended that all dutiable goods that have gone into the supply of export product, viz., boiler, are ‘inputs’ and, therefore, within the ambit of eligibility for availment under Cenvat Credit Rules. According to the appellant, the boiler consists of steam drum, water drum, water wall panel, headers, risers, down comers, convection, bank tubes. integral piping, economiser coils, saturated supply pipes, super heater coils, super heater interconnecting pipe and that, for the final assembly, auxiliary parts and accessories viz., valves, pressure gauges, electric motors, air pre-heaters, electrostatic precipitators, burners, control panels, air modulators, blowers/industrial fans, turbines, de-aerator tank, silencer, et al are to be attached. It is also contended that the HSN Explanatory Notes of Heading 8402 clearly bring out the functionality of a boiler only with conjoining of these items. It was also stated that the appellant-assessee, when supplying the boilers to domestic consumers, also fulfils the contract on similar lines except that the ‘bought-out items’ are taken directly to the site of the customers. However, in the case of foreign customers and special economic zone customers compliance with the statutory requirements mandate that the ‘bought-out items’ are brought into the factory and opened, re-packed and dispatched, along with the parts manufactured in the factory. it was also contended, that the appellant is, indisputably, eligible for rebate of duty on inputs ‘bought-out’ and supplied as exports. It was claimed that it is a well-settled principle of law that what is available as rebate can also be availed as credit. Further, the appellant-assessee, even if regarded as merchant exporter, was entitled to such rebate and hence denial to them as a manufacturer would be grossly inequitable; that the principle and policy of ‘non-exportability’ of taxes is jeopardized if the contention of the Revenue is accepted.

Respondent Contention:-Learned Authorised Representative, on the other hand, contends that the ‘bought-out’ items are used as auxiliary equipment to the goods manufactured by the appellant and that as these are not required for manufacture of the pressure parts and since, as a matter of practice, these are not brought within the factory of manufacture which is an essential requirement to qualify as an ‘input’, Cenvat credit could not have been availed of. Drawing attention to Rule 2k(i) of Cenvat Credit Rules, 2004 that defines ‘inputs’ and to Rule 2(h) defining ‘final product’ as ‘excisable goods manufactured or produced from input, or using input service’. it was also contended that applicability of Rule 3 of Cenvat Credit Rules, 2004 fails in the case of the appellant. Reliance was placed upon the judgment of the Hon’ble Supreme Court in KCP Ltd. v. Commissioner of Central Excise [2013 (195) E.L.T. 353 (S.C.)] which held that the item under export not having been manufactured in the factory of assessee, the condition for availing Modvat credit does not arise. Similar judgments were also relied upon by the learned Authorised Representative. It was also pointed out to us that the Hon’ble Supreme Court in Thermax Babcock & Wilcox Ltd. v. Commissioner of Central Excise, Pune cited by the appellant-assessee has no precedential value as that had been disposed off by noting that consideration of eligibility for Cenvat credit would have been merely an academic exercise in the absence of duty demand being invoked in the show cause notice.

Reasoning of Judgment:-On perusal of records it is found that tribunal to determine whether the duty liability arises only on the pressure parts or on the boiler, as such, including the ‘bought-out parts’. The Tribunal in Commissioner of Central Excise, Pune-I v. Thermax Bobcock & Wilcox Ltd. [2005 (182)E.L.T.336 (Tri-Mumbai)]decided that, in view of the sub-heading 8402.10 of the schedule to the Central Excise Tariff Act, 1985 and Rule 2(a) of the Interpretative Rules, it is the boiler which is the final product of the manufacturer which, being physically impossible to remove from the factory in assembled form, is, nevertheless, classifiable as boiler per se and consequently the duty is liable to be discharged on the value of the boiler in complete form including the value of the ‘bought-out items’. From this, it would appear that, even if the manufacturer is compelled to assemble the product on-site, it is the boiler in complete form that is liable to duty including the value of the ‘bought-out’ components. However, it has been pointed out, that in the matter of domestic clearance, the ‘bought-out’ items are generally not brought into the factory and the appellant does not take credit on the same. That, however, is not the practice when it came to exports or supplies made to special economic zones. Under the contractual agreement, as well as for compliance with statutory requirement, the appellant stores ‘bought-out’ components at the factory of manufacturer where these are tested and connected along with the parts manufactured in the factory and, thereafter, removed from the premises as boiler for erection and installation at Special Economic Zone or at the site of the purchasers abroad. In these circumstances there cannot be any conclusion other than that the manufacture of boiler in its final form is rendered at the factory of manufacturer and the clearance of boiler is, for all practical purposes, effected from the said factory gate. Since the boiler is the final product of the manufacturer, every component within it and every input that goes into the component manufactured in the factory would be an input in so far as Cenvat Credit Rules, 2004 is concerned. It is certainly not a tenable claim that Revenue can distinguish between an input of an input and an input itself when there is no dispute that the components manufactured from inputs and the components that are inputs have gone into the final products; nor can Revenue presume to enter the commercial arena and dictate the manufacturing policy of an industry. In the context of the decision of the Tribunal in the appellant’s own case cited supra which we respectfully follow, we find that the ‘bought-out’ items are also inputs for the purpose of taking credit in accordance with the definition in Rule 2(k)(i) as it stood then.

In view of the above findings, the appeal is allowed.

Decision:-Appeal allowed.

Comment:-The essence of the case is that since bought out items are integral part of boiler and the manufacturer is compelled to assemble the product on-site, it is the boiler in complete form that is liable to duty including the value of the ‘bought-out’ components and so the cenvat credit on bought out items is also available.

Prepared by:- Bharat Chouhan

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PJ/Case Law /2016-17/3276

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