BHEL Vs. COMMISSIONER OF CENTRAL EXCISE

JUDGEMENT

(1.) M /s. Bharat Heavy Electricals Ltd, Hyderabad (BHEL) manufacturer of heavy machineries such as boilers, turbines, oil rigs etc., was alleged to have removed excisable goods without payment of duty as 'free replacements' during the period 1.9.1994 to 31.8.1999. After due process of law, the Commissioner vide the impugned order No. 12/2000 dated 16.6.2000 demanded duty of Rs. 2,54,05,234/ - under Rule 9(2) read with Rule 9B(5) of the Central Excise Rules, 1944 (CER) and Section 11A(1) of the Central Excise Act, 1944 (the Act). He dropped proposal to demand interest and to penalize BHEL.

(2.) IN the impugned order the Commissioner found that BHEL had executed contracts for manufacture, erection and commissioning of machinery on turn key basis. Execution of each contract normally took a few years and, BHEL provided warranty for 18/24 months from the date of last consignment or 12 months after commissioning. Machinery ordered is supplied in the form of despatchable units or sub -assemblies. For the purpose of payment of duty, the total value of the contract was apportioned to parts after ascertaining the value for unit weight. When the contract value exhausted, further supplies of parts would be billed at 'zero' value with the endorsement 'Items fully billed earlier'. As regards free replacements, BHEL paid duty on normal values in certain cases only. In the proceedings before the Commissioner it was explained that this had happened owing to lack of co -ordination and communication gap among various sections in the assessee's organization. The appellants had provided for 2.5% of the cost of machinery in the contract towards the warranty replacements and paid duty on the said amount even when no replacements for such value had been supplied. The department was aware of the procedure followed by the assessee and therefore the allegation of such suppression with intent to evade payment of duty was without basis. The Commissioner found that certain parts got damaged or were found defective and were replaced by the assessee. He found that 'Without replacing the sub -assemblies the commissioning would not be possible. To provide for such contingencies, BHEL has included in the contract value, the value of the warranty replacements/repairs by way of a fixed percentage on which duty is charged at the time of clearance of the despatchable units against each equipment'. The Commissioner found the endorsement "Items fully billed earlier" for clearances made after exhausting the contracted value in previous clearances to be a dubious practice. He found that such free replacements had to the subjected to duty like clearances covered by the contracted amount. He observed; that "Wherever free replacements were made and duty payable has been indicated as 'zero', it has been indicated in the invoice as 'tree replacement' or 'Items fully billed earlier'. The jurisdictional officers were at full liberty to enquire and verify about the manner of payment of duty before final assessment. Hence no suppression or misdeclaration could be alleged on the part of the assessee". The assessment of clearances against each contract was made provisionally and final assessment was made after finalisation of the contract. BHEL had followed the provisional assessment procedure as per Board's Circular No. F.202/46/76/CX -6 dt. 9.9.76. Observing that the assessment was provisional, he demanded the duty towards free replacements in terms of Rule 9B(5) of the Central Excise Rules.

(3.) THE Revenue has filed the appeal on the grounds that the Commissioner had incorrectly invoked Rule 9(B) of the CER when the Show Cause Notice had not invoked the same. Section 11A(1) proviso could be validly invoked to demand duty not paid on the goods cleared as free replacements. As goods had been misdeclared as regards description and value and cleared without payment of duty Commissioner should have imposed a penalty under Section 11AC and demanded interest under Section 11AB as proposed in the Show Cause Notice.