Optional, post-manufacturing "type test charges" requested by customers and subjected to service tax are not part of the transaction value for Central Excise duty as they are not intrinsically linked to the manufacture or a condition of sale.

PER:AJAY SHARMA

This appeal is directed against the Order-in-Appeal dated 18.05.2016 passed by the Commissioner (Appeals), Central Excise, Mumbai-II, whereby the learned Commissioner (Appeals) partly allowed the appeal filed by the appellant by setting aside the penalty, while upholding the inclusion of ‘type test charges’ in the assessable value of transformers and confirming the duty demand.

The short issue that arises for determination is whether the charges collected by the appellant towards “type test”, conducted at the instance of certain customers, are liable to be included in the transaction value of transformers for the purpose of levy of Central Excise duty?

Briefly stated, the appellant is engaged in the manufacture of transformers and is availing CENVAT credit on inputs and input services. It appeared to the Department that the appellant was not including the ‘type test charges’, recovered from customers under contractual arrangements, in the assessable value of the transformers, and was instead discharging service tax on such charges. Taking the view that these charges formed part of the consideration for sale, a show cause notice dated 06.05.2015 was issued proposing recovery of duty amounting to Rs.4,77,968/- under Section 11A(4) of the Central Excise Act, 1944, along with interest and penalty. The demand was confirmed by the Adjudicating Authority vide Order-in-Original dated 06.11.2015. In appeal, the Commissioner (Appeals) set aside the penalty but upheld the duty demand, leading to the present appeal.

We have carefully considered the rival submissions and perused the records including the synopsis/written submissions and the case laws placed on record. The period in dispute is from April, 2014 to September, 2014. The undisputed factual position that emerges from the record is that once the transformers are fully assembled and subjected to routine and mandatory quality control tests, the process of manufacture stands completed and the goods become marketable. The appellant discharges central excise duty on such fully manufactured transformers at that stage.

It is further evident that the “type test” is not a mandatory or routine test forming part of the manufacturing process. Rather, it is conducted only in specific cases where customers, for their own satisfaction or due to lack of testing facilities, request the appellant to undertake such testing prior to dispatch. The cost of such testing is borne separately by such customers. Significantly, the test is not conducted on each transformer, but only on selected units on a random basis, clearly indicating its optional and customer-specific nature.

In these circumstances, the “type test” cannot be regarded as an activity incidental or ancillary to the completion of manufacture. Nor can it be said to be a condition precedent for the marketability of the transformers. The activity is undertaken post-manufacture, at the behest of the buyer, and for a separate consideration.

It is a settled principle of valuation under the Central Excise Act, 1944 that only such amounts which are intrinsically linked to the manufacture and sale of the goods, and form part of the consideration for sale at the time and place of removal, can be included in the assessable value. Charges for optional, post-manufacturing activities, undertaken at the request of the buyer and not as a condition of sale, do not form part of the “transaction value”.

In the present case, the “type test charges” are clearly in the nature of consideration for a distinct and optional service rendered to the customer after the completion of manufacture. This position is further reinforced by the admitted fact that the appellant has been discharging service tax on such charges, treating the same as a taxable service.

We also find that the issue is no longer res integra. In the appellant’s own case, in Excise Appeal No. 86716 of 2015 and connected matters, this Tribunal vide Final