The Supreme Court at one stroke, in its judgment delivered on December 11, 1997 in the case of Sirpur Paper Mills versus Collector of Central Excise, Hyderabad, has made all machinery assembled at factory sites liable to central excise duty. The Central Excise Department now will start issuing demand from June 11, 1997, that is, six months before the judgement.
Because of this latest disposition, any new factory or extension coming up will have to pay an additional amount as central excise duty which will come to 13 or 18 per cent of the whole project cost. For a medium- sized cement or sugar plant, this can translate into Rs 30-50 crore. This tremendous cost burden has the potential of derailing the process of industrial reform.
The judgement now given by the Supreme Court is contrary to not only the practice widely followed in the excise department not to charge duty on plant and machinery assembled at site, but also against several rulings given by the Central Excise and Gold Appellate Tribunal (CEGAT), high courts and even the Supreme Court on two previous occasions.
In the judgement in the case of Quality Steel Tubes versus C.C.E reported in 1995 [(75) ELT], the Supreme Court dealt with the assembly of a project where parts and components of machinery such as uncoiler, looper, motor, coupling, gear box, bearing, casting etc were procured from duty-paid stock in the market and assembled at site by welding and other processes that rendered the installed tube mill embedded in the earth. The revenue department held that the tube mill manufactured by the appellant, though embedded in the earth, was transportable, transferable and salable (obviously after dismantling) and therefore marketable and so chargeable to excise duty.
The Supreme Court squarely rejected this contention and held thus: goods which are attached to the earth and thus become immovable do not satisfy the test of being goods; nor it can be said to be capable of being brought to the market for being bought and sold. The tube mill or the welding head having been erected and installed in the premises and embedded to earth, they concord to be goods within the meaning of the section 3 of the Excise Act.
This judgement has been confirmed by the Supreme Court again in 1996 in the case of Mittal Engineering Works versus Collector of Central Excise, Meerut reported in 1996 [(88) ELT (SC)] where it held that a mono vertical crystaliser for a sugar factory was assembled from machinery in completely knocked down condition and it was attached to the earth by a foundation at the site of the sugar factory. It was not capable of being sold as it is, without anything more, said the Supreme Court. The Court added, As was stated by this court in the case of Quality Steel Tubes Ltd, the erection and installation of a plant is not excisable. To so hold would... bring into the net of excise duty all manner of plants and installations.
The Supreme Courts current judgement has made no reference to the precedents. It would have been better if the counsels had done some homework to find out the precedents and pointed them out to the Court. The principle of precedents as laid down by the Supreme Court is that judicial discipline requires that in case of disagreement, the decision should be referred to the larger benches.
There is no scope for arguing that the previous judgements are different and distinguishable. The previous judgements dealt with a tube mill and a mono vertical crystaliser for a sugar plant; the present one deals with a paper making machine. They all concern machinery that is installed at site and embedded in the earth and therefore cannot be sold and bought without being dismantled. Here it is important to note that the Supreme Court in the Mittal Engineering case clearly ruled that the crystaliser is not cable of being sold as it is. This rules out any sale after dismantling. Thus, there is no way to distinguish the previous judgements from the present one.
This non-recognition of the established legal position also makes the December 11 judgement per incurium (Malmeshwar Prasad versus Kanhaia Lal, AIR 1975 SC 907). This means it is not binding, but since this is a Supreme Court judgement it would need such a pronouncement from a larger bench.
This judgment has also gone against the well-settled principle of interpretation that if, by practice, over a long period of time, a settled law has developed in fiscal matters, the court should not interpret the law in such a way as not to unsettle it without considering all the repercussions seriously.
The repercussions on industry, in fact, will be very serious and quite deleterious. Demands for extra excise duty amounting to hundreds of crores of rupees will have to be raised on new plant and machinery such as cement, sugar, paper, power with effect from June 11, 1997.
If the revenue department delays matters, the Comptroller and Auditor General will raise objections. If the demands are issued now, industry will have to borrow from the banks at high interest cost. Then again, companies may not get modvat credit for all the items and in any case such huge amounts cannot be utilised as modvat credit for years.
The finance ministry should immediately issue an exemption on these goods in question with retrospective effect (under section 5A or 11C of Excise Act). At the same time the matter must be brought before a larger bench of the Supreme Court for review of this decision on the ground that it has gone against the apex courts two earlier decisions on the same point, that therefore the judgement is per incurium, and that an established position has been unsettled with serious repercussions.
Unfortunately, the government cannot go to the larger bench of the Supreme Court on this issue because it argued to the contrary, which is normal when cases are routinely conducted by the litigation wing. The party concerned, namely the paper mill, cannot be expected to take up the case in a larger bench on behalf of the industry in general. A proper agency would be a chamber of industry which can file a public interest litigation for a reversal of the December decision. Without it, economic growth could be in jeopardy.
(The author is a former member of Central Board of Excise and Customs)
