By TIOL News Service

MUMBAI, FEB 03, 2014: THE appellant is engaged in the manufacture of Drilling Rig. They also purchased and sold certain goods which were used in conjunction with the rigs. These are drill pipes, drill bits, substitutes, slips, spiders/spider bushings, drill collars, casing elevators, fishing tools, traveling blocks, generator/welding sets etc.

The same were separately invoiced by the appellant to the buyer as drilling accessories and were not included in the invoice for the rig. The said drilling rigs were commercially complete, marketable and were bought and sold in the market without the said bought-out items. Most of the said bought-out items form part of what is known as the drill string assembly. Customers purchasing rigs from the appellant were not under any obligation to purchase the said bought out items from the appellant and were free to procure the same from other suppliers. The appellant has also occasionally supplied such items on their own to buyers and not along with the supply of such rigs.

The appellant did not include the value of these items in the assessable value of the said rigs while paying excise duty on the ground that the said bought-out items did not amount to parts of the said rigs.

And this is precisely what the department objected. What followed was a SCN that was born in the month of December, 1992 invoking the extended period of limitation and with unfailing regularity periodical demand notices were issued to cover the latter periods.

The CCE, Indore confirmed all these demand notices taken together holding that the said bought-out items amounted to essential parts of rigs and value of the same was liable to be included in the value of the rigs. The usual accoutrements of penalties and interest also found their way into the order-in-original.

The appellant had preferred an appeal before the Tribunal and the Bench had vide order dated November, 2003 set aside the same and allowed the appeal by way of remand and with the following observations -

"the appellant manufactured crown block, traveling block (double sheave or single sheave), mast, hoist plug, sandreel dram, mud pump, hoist drum, some slips, spider base, drill head, chuck, water swivel, bits imported by delivery hose, stand pipe, suction hose, drill collar, drill pipe and drag bits, subs, bits, spider bush, spider, slips, Kelly, driver bush, elevators, fishing tools, rotary chain tongs and wrenches. The appellant cited copy of ISI specification (IS:78206 Part-I 1986) specifying general requirement of direct required for motor drilling. Among the items it shows that parts of a rig are a mast. The cost of mast therefore would be included. However, the delivery hose, stand pipe, suction hose, bush, those goods which are classifiable as parts of rig falling in chapter heading 84.31, the cost of the goods could be included in the value of the rig, unless the appellant were able to show that they were supplied not incorporated in the rig but as spare part, the value of such was not included in the price of the rig. The price of the goods which are clearly not required for the manufacture of the rig would not be included. We think it appropriate that the precise determination of the value of the rig can be carried out by the adjudicating authority by applying the principles that we have set out above to various items in questions…."

Pursuant to the remand order, the CCE, Indore took note of the order in Ingersoll Rand Vs. CCE [confirmed by the Apex Court on 5.3.1998] and wherein it was held that drill rods/pipes and drill tools etc. are not to be treated as part of the drill rig and value thereof is not includable in the assessable value of the drill rig. The adjudicating authority, thereafter, concluded that out of total original demand of duty of Rs.99,08,934/-, after making correction for clerical errors, the demand comes to Rs.83,37,892/-. Out of this amount, major portion of the demand relating to drill pipes and drill bits and duty pertaining to fishing tools, wrenches and chain tongs was found not sustainable being in the nature of tools. He, however, confirmed the duty demand on five items like - (i) substitutes, (ii) slips, (iii) spider/spider bushing, (iv) drill collar & (v) travelling block. A penalty of Rs.25,000/- was also imposed under Rule 173Q.

Against this order the appellant is before the CESTAT and submitted that the items on which duty has been confirmed are clearly in the nature of tools, accessories or operating equipment which are to be used in conjunction with the rig and cannot be considered as integral part of the same. The appellant also filed pictorials sheet showing the nature of use of the rigs and placement of the aforementioned parts to justify their submission.

The Revenue representative reiterated the findings of the adjudicating authority and also relied on the decision in ThermaxBobcock& Wilcox Ltd. - 2005-TIOL-1661-CESTAT-MUM.

The Bench distinguished the decision cited by the Revenue by observing that in the cited case the boiler is not cleared in its assembled form as such but cleared in several consignments part by part and assembled, whereas in the facts of the present case, the drill rig is complete when removed or cleared from the factory.

And further observed -

"5.1 …, we find that the law laid down in the case of Ingersoll case (supra) is squarely applicable in the present case, wherein it has been held that though drilling rigs have necessarily to be used in conjunction with items such as Drill rods/pipes and bits etc., these items do not constitute parts of such machines which are complete items in themselves. Thus, the five items in question are not integral parts of drilling machines, but are in the nature of tools and other equipments."

In fine, the order was set aside and the appeal was allowed with consequential relief.

(See 2014-TIOL-167-CESTAT-MUM)