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2026 Supreme(Online)(CESTAT) 2680
CUSTOMS, EXCISE AND SERVICE TAX APPELLATE TRIBUNAL HYDERABAD
A.K. Jyotishi, Member (Technical), Angad Prasad, Member (Judicial)
Golkanda Aluminium Extrusion Limited – Appellant
Versus
MEDCHAL - G S T – Respondent
Excise Appeal No. 23203 of 2014
For the Appellants/Petitioners: B. Venugopal
For the Respondents: J. Rajanish
Forfeiture of refundable security deposits due to a customer's breach of contractual obligations constitutes liquidated damages and not additional consideration for the sale of goods, and thus cannot be included in the assessable value under Section 4 of the Central Excise Act.
Headnote:The dispute involves the interpretation of Section 4(3)(d) of the Central Excise Act, 1944 and Rule 6 of the Central Excise Valuation Rules, 2000. The appellant, a manufacturer of Aluminium Extruded Profiles, collected refundable security deposits for die-development, which were forfeited if customers failed to lift minimum quantities. The Revenue sought to include these forfeited amounts in the assessable value as additional consideration. The court found that these forfeited amounts are liquidated damages resulting from a breach of contract, not consideration for the sale of goods. The main issues were whether refundable die-development deposits subsequently forfeited for breach of contractual conditions constitute additional consideration under Section 4(3)(d) and whether such amounts are merely liquidated damages. The court reasoned that for an amount to be included in the transaction value, it must possess a "direct and proximate nexus with the sale transaction." Since the forfeiture was contingent upon a breach of contract rather than the sale itself, it represents compensation for loss and not sale consideration. Accordingly, the impugned order is set aside and the appeal filed by the appellant is allowed with consequential relief, if any, in accordance with law.
[Order per: ANGAD PRASAD]
M/s Golkonda Aluminium Extrusion Ltd (hereinafter referred to as the appellant) has filed this appeal against the impugned OIA dt.30.06.2014, whereby, the Commissioner (Appeals) upheld the OIO confirming the demand of Central Excise duty amounting to Rs.3,55,356/- along with applicable interest under section 11AB of the Central Excise Act, 1944 and equal penalty under section 11AC of the Act.
The brief facts of the case are that the appellant is engaged in the manufacture of Aluminium Extruded Profiles falling under Chapter Heading 7604 of the Central Excise Tariff Act, 1985. The appellant manufactures customized Aluminium Profiles strictly according to customer specifications. Since every customized profile requires development of a separate die, the appellant collects from its customer a refundable security deposit towards die-development. The purchase orders placed by the customers specifically provide that the amount collected is refundable if the customer lifts the agreed minimum quantity of Aluminium Profiles viz., 3 MT, within stipulated period of two years. If the customer fails either (i) to place the agreed orders or (ii) to lift the agreed minimum quantity, the deposit becomes liable to forfeiture.
Thus, according to the appellant, the amount collected is merely a security deposit intended to safeguard the expenditure incurred in manufacturing a customer-specific die, which otherwise becomes commercially useless.
The Department formed a view that the deposits forfeited by the appellant were in reality nothing but additional consideration received in connection with the sale of Aluminium Profiles. Accordingly, a Show Cause Notice dt.08.05.2013 was issued proposing to include the forfeited amount of Rs.36,95,130/- in the assessable value under section 4(3)(d) of the Central Excise Act read with Rule 6 of Central Excise Valuation Rules, 2000 . The notice further proposed recovery of differential duty amounting to Rs.3,55,356/- together with interest and equal penalty under section 11AC.
The Adjudicating Authority confirmed the proposals. The Commissioner (Appeals), by the impugned order, concurred with the findings of the adjudicating authority and dismissed the appeal. Hence, the present appeal.
Learned Counsel for the appellant has submitted that the authorities below have fundamentally misunderstood the nature of the transaction. It has been argued that the amount collected is not a price, nor an advance against price, nor an amount payable by reason of sale of goods. Rather, it is security deposit, refundable on fulfilment of contractual obligations. The forfeiture occurs only when the customer commits breach of contract. Therefore, the forfeited amount represents liquidated damages and not consideration for sale.
He has further submitted that section 4(3)(d) specifically includes only those amounts, which the buyer is liable to pay by reason of or in connection with the sale. A compensation arising because of subsequent breach of contract bears no nexus whatsoever with the sale transaction.
He has further argued that the die itself is manufactured exclusively for a particular customer. If the customer defaults, the die becomes commercially useless. The forfeited deposit merely compensates the appellant for such loss. Therefore, there exists no element of consideration flowing towards the goods sold.
It has been further argued that the appellant has already amortized the cost of dies while arriving at the assessable value of the finished Aluminium Profiles. Consequently, there can be no further addition on account of forfeiture.
Learned Counsel has further submitted that the entire demand is barred by limitation. The deposits were duly recorded in the audited books of accounts. The issue concerns interpretation of valuation provisions. No suppression with intent to evade duty can therefore be alleged. He has placed reliance on the following decisions.
