KSB PUMPS LIMITED Vs. COMMISSIONER OF CENTRAL EXCISE

JUDGEMENT

(1.) THE brief facts of the case are that the appellants, M/s. KSB Pumps Limited were given a contract by Nuclear Power Corporation of India Limited (NPCIL) for manufacture and supply of large sized coolant pumps required in Nuclear Power Plant for which the orders for 32 pumps were placed under two purchase orders. The appellants accordingly developed a manufacturing facility for the above mentioned pumps exclusively for NPCIL. However, NPCIL cancelled the order for 24 pumps and entered into fresh agreement for supply of 8 pumps. Owing to the cancellation of the order for 24 pumps, the appellants and NPCIL negotiated and arrived at a short closure settlement owing to which NPCIL paid gross cancellation charges of Rs. 23.36 crores to the assessee and the deed of discharge was signed on 31.3.2000. The break up of the cancellation charges are as under: a Investment in fixed assets Rs. 6.45 crores b Holiday compensation Rs. 9.30 crores c Insurance and bank charges Rs. 1.38 crores d Cancellation charges for SNP 3 to 6 and NP 9 pumps Rs. 6.23 crores   Total Rs. 23.36 crores As per Revenue, it appeared that the cancellation charges received by the assessee from NPCIL was additional consideration and as such was required to be loaded in the assessable value of the 8 pumps. A show cause notice was issued to the assessee seeking to add above compensation charges in the assessable value and demanding duty amounting to Rs. 3,73,76,000/ - along with interest under Section 11AB of the Act. It also proposed to impose penalty under Rule 173Q of Central Excise Rules, 1944 read with Rule 25 of Central Excise Rules, 2000 read with Section 11AC of the Central Excise Act, 1944. The show cause notice was adjudicated by the Commissioner who confirmed the demand and imposed penalty of equivalent amount under Section 11AC of the Act.

(2.) THE learned Advocate for the appellants submits that under a contract with the Department of Atomic Energy (DAE), Government of India, the appellants manufacture the primary coolant pumps which are critical components exclusively used in nuclear power station, for which they set up exclusive manufacturing facility at Chinchwad, Pune. In August, 1976, an agreement was entered into with DAE wherein the DAE undertook to place purchase orders for 4 old designed pumps every year and agreed to compensate if less orders were placed. This compensation is in the nature of liquidated damages. The appellants have paid certain amount as engineering fees for supply of technical know -how to M/s. KSB, Germany and the excise duty on these technical know -how charges was paid at the time of initial clearing of the pumps. Under a tripartite agreement dated 30.8.1976, DAE was to place an order for 4 old designed pumps per year and total 40 old designed pumps upto 31.12.1988. In 1988 supplementary agreement was signed which inter alia required the appellant to complete supply of 24 old designed pumps already ordered under agreement dated 6.8.1976. Under supplementary agreement, KSB, Germany agreed to supply new technology for modified pumps for nuclear power station having capacity of 500 MW to enable the appellants to manufacture first 4 new designed pumps on payment of negotiated fees to KSB, Germany for the same. It was also agreed that in the event orders as per schedule were not placed, DAE would compensate the appellant as provided in the agreement. The appellants completed supply of 24 old pumps during the period 1985 to 1990. On 12.1.1990, two separate purchase orders were placed by NPCIL for supply of 16 new designed pumps for 500 MW project and 16 old designed pumps. However, in 1996 as Government of India was in financial crunch, the NPCIL instructed the appellants not to proceed with manufacturing of pumps. Thereafter several meetings were held for arriving at liquidated damages in respect of 16 new pumps and 8 old pumps which were finalized at Rs. 23.36 crores in June 1999. It was agreed that the order for 8 Nos. old designed pumps would be placed in future. On 31st March, 2000 a new agreement was entered into by the appellants for supply of 8 old designed pumps, out of 32 totals pump ordered earlier. New pumps were to be supplied at rate of Rs. 3 crores per pump as against Rs. 90 lakhs agreed to in the year 1990. The same were manufactured and cleared on payment of duty on agreed price.

(3.) It was submitted that the Commissioner has confirmed the demand by treating compensation charges received by them as additional consideration. While arriving at his finding, the Commissioner has held that investments in fixed assets, holiday compensation, insurance, bank charges and cancellation charges are essential ingredients as per established costing principles and ought to be included while valuing their 8 pumps. It was observed by him that there was continuity in the old orders and so -called new order was in fact a continuation of orders placed in 1990 and therefore the entire price received by him including liquidated damages should form part of the assessable value. He observed that the appellants have received technical know -how from M/s. KSB, Germany for the manufacture of impugned pumps and this technical know -how charges have to be treated as part of the assessable value. The contract entered into by the appellants show that engineering charges were nil which means design engineering charges without which it could not be manufactured were not included in the assessable value.