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Wednesday, April 15, 2015

the addition in the value for assessment to customs duty of charges paid by the respondent to Met Chem Canada Inc. for supply of technical services required for setting up and commissioning a plant for the manufacture of Hot Rolled Steel Coils in India- The transaction value must be relatable to import of goods which a fortiori would mean that the amounts must be payable as a condition of import. A distinction, therefore, clearly exists between an amount payable as a condition of import and an amount payable in respect of the matters governing the manufacturing activities, which may not have anything to do with the import of the capital goods.

                                                                  REPORTABLE




                        IN THE SUPREME COURT OF INDIA

                        CIVIL APPELLATE JURISDICTION

                        CIVIL APPEAL NO.3042 OF 2004




      COMMISSIONER OF CUSTOMS,
      AHMEDABAD                                 ...APPELLANT


                                   VERSUS
      M/S. ESSAR STEEL LTD.                    ...RESPONDENT


                              J U D G M E N T

      R.F. Nariman, J.




      1.    In this appeal we are concerned with the addition in  the  value
      for assessment to customs duty of charges paid by  the  respondent  to
      Met Chem Canada Inc. for supply of  technical  services  required  for
      setting up and commissioning a plant for the manufacture of Hot Rolled
      Steel Coils in India. An agreement dated 13.4.1991  was  entered  into
      between the respondent and Met Chem Canada Inc. to associate Met  Chem
      Canada Inc. as a technical consultant to render technical services  in
      relation to implementation of a project to set up a plant in India for
      production of Hot Rolled Steel Coils and Strips.  Under  clause  1.1.6
      `plant' is defined as:

           "1.1.6      . "Plant" shall  mean  the  integrated  steel  plant
           having an estimated annual capacity of  Eight  Hundred  Thousand
           Tonnes (800,000 M.T.) of hot rolled steel coils  and  strips  or
           such other enhanced  capacity  as  may  be  agreed  between  the
           parties,  to  be  located  at  Hazira,  Gujarat,  India  and  as
           described in Annexure 1 "PLANT UNITS' attached hereto  and  made
           thereof;"



Project is defined as:



           "1.1.8.  "Project"   shall   mean   the   design,   procurement,
           construction, erection and start-up of the plant."



      The most material clause of the agreement  relates  to  the  scope  of
supply which is contained in clause 2, which reads as under:-

           "2.0.  SCOPE OF SUPPLY:

           2.1.  Technical consultant shall  render  following  engineering
           and other technical Services from outside India;

           2.1.1. Project Engineering Services:

                 Technical Consultant shall act  as  technical  coordinator
           for  the  successful  setting  up,  commissioning  of  all   the
           facilities and achieving established operations  of  the  Plant.
           Technical Consultant shall coordinate all technical matters such
           as,  but   not   limited   to   studying   various   alternative
           specifications and processes for the Plant and for manufacturing
           of Products; making recommendation for  the  most  suitable  and
           economic process, final detailed  specifications  and  processes
           for the selected route, advising as required regarding technical
           proposals from various suppliers, and Contractors for the supply
           of the Plant and equipment, and  the  erection  thereof  at  the
           Site, including civil  engineering,  designs,  construction  and
           installation of project utilities necessary for  the  successful
           setting up of the  plant;  carrying  out  the  detailed  project
           engineering  including  giving   approvals   for   the   various
           construction and Project implementation activities,  engineering
           drawings, methods of construction, etc.

           2.1.2.      Supervision and Monitoring of the Project:

                 Technical Consultant shall provide  advice  regarding  the
           activities in connection with the setting up of the  plant  from
           the technology, costs and time schedule angle.

           2.1.3.       Arrangement  for  Training  of  ESSAR's  Employees-
           outside India.  Technical Consultant shall  be  responsible  for
           arranging for up to two hundred (200) man months of training  of
           (operating, maintenance and management) ESSAR employees at Steel
           Plant with proven technical capabilities in appropriate  fields,
           outside India.  Specific subjects, duration of training for each
           subject and numbers of trainees in each group shall be  mutually
           agreed  upon   in   writing.    All   travelling,   living   and
           miscellaneous expenses of ESSAR employees  in  relation  thereto
           shall be for ESSAR's account.

           2.1.4.      Assistance  in  transfer  of  technology:  Technical
           consultant shall  select  appropriate  subcontractor/contractors
           depending on the source of technologies and organize transfer to
           ESSAR of  technology  necessary  for  successful  operation  and
           maintenance of the Plant.

           2.1.5.      Procurement support services:

                 Technical Consultant  shall  provide  procurement  support
           Services  for  procurement  of  Equipment  in  India   such   as
           assistance in finalization of lists,  specifications  and  sizes
           and configuration of  equipment  to  be  purchased,  listing  of
           suitable vendors, floating of inquiries, scrutiny  of  quotation
           received, assistance in negotiations with the Suppliers  and  in
           finalisation of order, pre-dispatch inspection and witnessing of
           tests, etc."



      As a consideration for the above scope of supply to be  provided,  the
technical consultant was to be paid a fee of        DM  78,950,000  (Seventy
Eight Million Nine Hundred Fifty Thousand Deutsche Marks).   Since  a  large
part  of  the  arguments  turned  on  clause  9,  it  is  set  out  in  full
hereinbelow:

           "9.0. PATENTS.

           9.1.   The  Technical  Consultant  make  no  representation   or
           warranty that any process, equipment or facilities which may  be
           recommended by  the  Technical  Consultant  in  respect  to  the
           Project can be employed, operated in  India  or  otherwise  used
           without infringing any patent, trademark,  or  other  industrial
           property right of any third party in respect of the same.  ESSAR
           acknowledges that the Technical Consultant shall not  be  liable
           in the event of claims against ESSAR by any other party for such
           infringement  and  shall  indemnify  the  Technical   Consultant
           against  such  liability.   The   Technical   Consultant   shall
           intimate, if  however,  it  knows  or  becomes  aware  that  any
           process, equipment or facilities recommended  by  the  Technical
           Consultant is/are the subject of patents, trademarks,  or  other
           industrial property right of any other  company,  individual  or
           association.

           9.2.  The Copy  right  in  all  documents  (including,  but  not
           limited to  computer  data,  specifications,  drawing  and  plan
           supplied by ESSAR, shall remain with ESSAR if  originally  owned
           by ESSAR.

           9.3.  The Technical Consultant may own and possess patents, know-
           how, copyrights, and other  intellectual  property  rights  with
           respect to the Plant and its operation  and  maintenance  and/or
           the  Products,  which  will  be  disclosed  by   the   Technical
           Consultant to ESSAR, to the extent required as per the Scope  of
           Services for  the  purpose  of  this  Project,  while  rendering
           Services to ESSAR under this Agreement.  ESSAR may disclose such
           information to other parties concerned for the Project  only  to
           the  minimum  extent  necessary   for   implementation   secrecy
           acceptable to all  parties  concerned  prior  to  disclosure  of
           information.  Ownership of any and all  the  patents,  know-how,
           copyrights and other intellectual property rights  shall  remain
           vested in the Technical Consultant  or  its  subcontractors,  as
           applicable, and ESSAR shall secure and  otherwise  protect  such
           patents, know-how, copyrights and other intellectual  properties
           and keep them secret and confidential.

           9.4.  Nothing contained in the Agreement shall be  construed  to
           mean  that  such  patents,  know-how,   copyrights   and   other
           intellectual  properties  (referred   to   as   the   "Technical
           Information" in the Agreement) will be granted or transferred to
           ESSAR, unless otherwise specified in the Agreements.

           9.5.   ESSAR  shall  take  all  reasonable  measure   to   avoid
           disclosures of the Technical Information to any third party  and
           shall disclose the said Technical Information to  third  parties
           only to the extent mentioned in Clause 9.3 above.   ESSAR  shall
           use the Technical  information  only  for  the  purpose  of  the
           execution of the Project and similar projects owned by ESSAR and
           its associate companies in  India.   For  the  purpose  of  this
           clause, an associate company will mean  a  company  which  holds
           more than 30% of the equity capital of ESSAR  or  a  company  in
           which ESSAR holds more than 30% of the equity capital.

           9.6.  ESSAR shall be the owner of that portion of all documents,
           drawings, plans, and specifications originally  created  by  the
           Technical consultant specifically pursuant  to  this  Agreement.
           The Technical Consultant  may  keep  copies  of  all  documents,
           drawings, plans and specifications and use them."



      By a supplementary agreement, the  main  agreement  of  13.4.1991  was
added to, the main difference being that the plant would now  be  having  an
estimated  capacity  of  16,00,000  tonnes  instead  of   8,00,000   tonnes.
Further, the lump sum fee  payable  was  increased  by  DM  15,0050  Million
making the total lump sum fee an amount of DM 94 Million.




2.    The services  agreement  is  separate  from  the  main  agreement  for
setting up the said plant in India.  The main agreement is  contained  in  a
purchase order dated 21.6.1991.  The material clauses of the  said  purchase
order are that for a plant of a capacity of  8,00,000  tonnes  capacity  per
year, the total CIF price payable would be US$  163,000,000.   A  liquidated
damages clause contained  in  clause  13  of  the  purchase  order  provides
liquidated damages for delay and/or failure to  achieve  performance.   This
purchase order was amended by a purchase order dated 28.7.1992 by which  the
CIF price of the said steel plant was revised to US$ 169,700,000.  This  was
in view of the fact that the plant  capacity  as  stated  earlier  had  been
doubled, and a sponge iron manufacturing plant of a capacity of one  million
tonnes which was originally to be sold was now deleted.



3.    Vide a show cause notice dated 20.7.1993, Revenue demanded the sum  of
DM 78.95 Million being technical know-how charges which ought  to  be  added
to the sum of US$169,700,000.  In their reply to the show cause notice,  the
respondent stated that none of the provisions  of  Rule  9  of  the  Customs
Valuation (Determination of Price of Imported Goods)  Rules  of  1988  would
apply as no payment is made for technical services as a  condition  of  sale
of imported goods.  In any event, the agreement for  technical  services  is
to be performed in India  post-importation and, therefore, would have to  be
excluded from the value to be taken into account at the time of import.



4.    The Commissioner of Customs by an order dated 31.1.2002  added  a  sum
of DM 78 Million on the following basis:

           "31.  Since, the contract for technical consultancy  was  signed
           before the purchase order placed, it is evident that the payment
           made on account of the  technical  consultancy  agreement  is  a
           condition of sale of imported goods.  Even though,  this  aspect
           has not been covered in the agreement for technical  consultancy
           as at the time of signing this agreement the purchase order  was
           not placed to M/s. Metchem Inc. Canada.  However, such  an  high
           amount of DM 78 million has to be necessarily  linked  with  the
           value of the purchase order which was  US$  169  million  placed
           subsequently.  At the time of  signing  of  agreement  both  the
           parties fully understood  that  they  will  be  signing  another
           agreement on subsequent date relating to the sale of  plant  and
           machinery. Nobody is going to pay DM 78 million in vacuum if the
           other agreement does not materialize.  Thus, I find  that  these
           two payments were not independent to each other  but  the  buyer
           has  no  option  but  to  buy  machinery  once  they  have  made
           commitment for technical services.  Therefore, I have  no  doubt
           in  my  mind  that  the  payment  made  as  per  the   technical
           consultancy agreement is a condition of sale of imported goods."




5.    An appeal by the respondent to  CEGAT  succeeded,  and  CEGAT  by  its
judgment dated 24.6.2003 set aside the order  of  the  Commissioner  holding
that the plant could have been set up and could run without  the  supply  of
technical  knowledge.   Secondly,  the  fact  that  the   technical   supply
agreement was signed prior to the agreement for supply  of  machinery  would
not be relevant.  The  judgment  of  this  Court  in  Collector  of  Customs
(Preventive) v. Essar Gujarat Ltd., (1997) 9 SCC 738, was  distinguished  on
facts in reaching the aforesaid conclusion.



6.    Shri Neeraj Kaul, learned Additional Solicitor General  argued  before
us that the case is, on facts, covered by the judgment  in  Essar  Gujarat's
case (supra). According to him, on a conjoint reading of the purchase  order
for supply of the plant and the  agreement  for  technical  services  it  is
clear that payments are made under the technical  services  agreement  as  a
condition for the sale of the imported plant which cannot be set up  without
the technical services to be provided.   In  reply,  Shri  Bagaria,  learned
senior advocate appearing on behalf of the respondent, took us  through  the
said agreements and contended that it was clear  that  payments  made  under
the technical services agreement were not as a  condition  of  sale  of  the
plant.  Further, the Essar Gujarat judgment turned on its  own  facts  which
are distinguishable, and several other  judgments  of  this  Court  in  fact
conclude the matter in his favour.



7.    We have heard learned counsel for the  parties.   Section  14  of  the
Customs Act, 1962 as it stood at the relevant time is as follows:

           "14. Valuation of goods for purposes of assessment.-(1) For  the
           purposes of the Customs Tariff Act, 1975 (51 of  1975),  or  any
           other law for the time being  in  force  whereunder  a  duty  of
           customs is chargeable on any goods by reference to their  value,
           the value of such goods shall be deemed  to  be   the  price  at
           which such or like goods are ordinarily  sold,  or  offered  for
           sale, for delivery at the  time  and  place  of  importation  or
           exportation, as the case may be, in the course  of international
           trade, where-

           (a) the seller and the buyer have no interest in the business of
           each other; or

           (b) one of them has no interest in the business of the other,

           and the price is the sole consideration for the  sale  or  offer
           for sale:

           Provided that such price shall be calculated with  reference  to
           the rate of exchange as in force on the date on which a bill  of
           entry is presented under Section 46, or a shipping bill or  bill
           of export, as the case may be, is presented under Section 50.

                (1-A) Subject to the provisions  of  sub-section  (1),  the
           price referred to in that sub-section  in  respect  of  imported
           goods shall be determined in accordance with the rules  made  in
           this behalf.

           (2) Notwithstanding anything contained in sub-section (1) or sub-
           section (1-A), if the Board is satisfied that it is necessary or
           expedient so to do, it may,  by  notification  in  the  Official
           Gazette, fix tariff values for any class of  imported  goods  or
           export goods, having regard to the trend of  value  of  such  or
           like goods, and where any such tariff values are fixed, the duty
           shall be chargeable with reference to such tariff value.

           (3) For the purposes of this section-

           (a) 'rate of exchange' means the rate of exchange-

                 (i) determined by the Board, or

                 (ii) ascertained in such manner as the Board may direct,

           for the conversion of Indian currency into foreign  currency  or
           foreign currency into Indian currency;

           (b) "foreign currency" and "Indian currency" have  the  meanings
           respectively assigned to them in clause (m) and  clause  (q)  of
           Section 2 of the Foreign Exchange Management Act,  1999  (42  of
           1999)."




      A cursory reading of the Section makes it clear that customs  duty  is
chargeable on goods by reference to their value at a  price  at  which  such
goods or like goods are ordinarily sold or offered for sale at the time  and
place of importation in the course of international trade.  This would  mean
that any amount that is referable to  the  imported  goods  post-importation
has necessarily to be excluded.  It is with this  basic  principle  in  mind
that the rules made under sub-clause 1(A) have been framed and  have  to  be
interpreted.



8.    Under the  Customs  Valuation  (Determination  of  Price  of  Imported
Goods) Rules of 1988, Rule 2(f) defines "transaction  value"  as  the  value
determined in accordance with Rule 4 of these  Rules.   Rule  4(1)  in  turn
states that the transaction value of  imported  goods  shall  be  the  price
actually paid or payable for the  goods  when  sold  for  export  to  India,
adjusted in accordance with the provisions of Rule 9 of these Rules. Rule  9
of the Rules is set out hereinbelow:-

           "9. Cost and services. -  (1)  In  determining  the  transaction
           value, there shall be  added  to  the  price  actually  paid  or
           payable for the imported goods, -

        a) The following cost and services, to the extent they are incurred
           by the buyer but are not included in the price actually paid  or
           payable for the imported goods, namely:-

        i) Commissions and brokerage, except buying commissions;

       ii) The cost of containers  which  are  treated  as  being  one  for
           customs purposes with the goods in question;

      iii) The cost of packing whether for labour or materials;

        b) The value, apportioned as appropriate, of  the  following  goods
           and services where supplied directly or indirectly by the  buyer
           free of charge or at reduced cost for use in connection with the
           production and sale for export of imported goods, to the  extent
           that such value has not been included in the price actually paid
           or payable, namely:-

        i) Materials, components, parts and similar items  incorporated  in
           the imported goods;

       ii) Tools, dies, moulds and similar items used in the production  of
           the imported goods;

      iii) (iii) materials consumed  in  the  production  of  the  imported
           goods;

       iv) Engineering, development, art work, design work, and  plans  and
           sketches undertaken elsewhere than in India  and  necessary  for
           the production of the imported goods;

        c) Royalties and licence fees related to the  imported  goods  that
           the buyer s required  to  pay,  directly  or  indirectly,  as  a
           condition of the sale of the goods being valued, to  the  extent
           that such royalties and fees  are  not  included  in  the  price
           actually paid or payable.

        d) The value of any part of the proceeds of any subsequent  resale,
           disposal or use of the imported goods that accrues, directly  or
           indirectly, to the seller;

        e) all other payments actually made or to be made as a condition of
           sale of the imported goods, by the buyer to the  seller,  or  by
           the buyer to a third party  to  satisfy  an  obligation  of  the
           seller to the extent that such payments are not included in  the
           price actually paid or payable.

           9(2) xx xxx

           9(3)  Additions to the price actually paid or payable  shall  be
           made under this on the basis of objective and quantifiable data.



           9(4)  No addition shall be made to the price  actually  paid  or
           payable in determining the value of the imported goods except as
           provided for in this rule."




      A reading of Rule 4 and Rule 9 makes it clear that  only  those  costs
and services that are actually paid  or  payable  for  imported  goods  pre-
import are to be added for the purpose  of  determining  the  value  of  the
imported goods.  In the present appeal, arguments  have  veered  around  the
applicability of Rule 9(1)(e).  In this appeal, we are concerned  only  with
the first part of Rule 9(1)(e).  The narrow question that arises  before  us
is whether the payment made for the technical services agreement  is  to  be
added to the value of the plant that is imported inasmuch  as  such  payment
has been made as a condition of sale of the imported plant.




9.    On an analysis of the technical services  agreement  dated  13.4.1991,
it is clear that the respondent has only associated Met Chem Canada Inc.  as
a technical consultant.  There  is  no  transfer  of  know-how  or  patents,
trademarks or copyright.  What is clear is that  technical  services  to  be
provided by Met Chem Canada Inc. is basically to coordinate and  advise  the
respondent so that the respondent can successfully set  up,  commission  and
operate the plant in India.   It  will  be  noticed  that  coordination  and
advice is to take place post-importation in order that the plant be  set  up
and commissioned in India.  In fact, all the clauses of this agreement  make
it clear that such services are only post-importation.  Clause 9 on which  a
large part of the agreements ranged again makes it clear that  ownership  of
patents, know-how, copyright and other intellectual  property  rights  shall
remain vested in  the  technical  consultant  and  none  of  these  will  be
transferred to the respondent. The respondent becomes owner of that  portion
of documents, drawings, plans and specifications originally created  by  the
technical consultant pursuant to the agreement.  This again refers  only  to
documents, drawings etc. of setting  up,  commissioning  and  operating  the
plant, all of which are post-importation of the plant into India.



10.   In fact, clause 13 of the purchase order dated 21.6.1991 is  important
in that liquidated damages are only payable for delay in  commissioning  the
plant and for failure to achieve the stipulated performance, both  of  which
are post-importation activities.



11.   Another thing to  be  noticed  is  that  a  conjoint  reading  of  the
technical services agreement and the purchase  order  do  not  lead  to  the
conclusion that the technical services  agreement  is  in  any  way  a  pre-
condition for the sale of the plant itself. On the  contrary,  as  has  been
pointed out above, the technical services  agreement  read  as  a  whole  is
really only to successfully set up, commission and operate the  plant  after
it has been imported into  India.   It  is  clear,  therefore,  that  clause
9(1)(e) would not be attracted on the facts of this  case  and  consequently
the consideration for the technical services to  be  provided  by  Met  Chem
Canada Inc. cannot be added to the value of the equipment  imported  to  set
up the plant in India.

12.   And now to the case law.  Collector of Customs (Preventive)  v.  Essar
Gujarat Ltd., (1997) 9 SCC 738, was strongly  relied  upon  by  Shri  Neeraj
Kaul.  The said judgment  related  to  the  question  whether  licence  fees
payable should be added to the invoice value of a plant  that  was  imported
into India on an as is where is  basis.  The  agreement  in  that  case  was
expressly subject to two conditions, the second of which was  the  obtaining
of a transfer of the operation licence of the plant from M/s. Midrex of  the
United States. The judgment states:

           "These facts go to show that it was essential for EGL to have  a
           licence from Midrex for working of  the  plant.  Mr.  Salve  has
           argued that it may have been essential for the EGL to have  this
           licence in  order  to  make  the  plant  fully  and  effectively
           operational but it was not a condition of sale of the plant.  It
           was quite an independent contract. From a plain reading  of  the
           agreement with TIL, it appears that the  overriding  clause  may
           have been inserted to protect  EGL  but  nonetheless  it  was  a
           condition of sale. If this condition was not fulfilled, the sale
           would have fallen through. Moreover, it appears that  the  plant
           without Midrex licence would have been of no value at  all.  EGL
           had purchased the plant on "as is where is" basis. But in  order
           to operate the plant, it was essential to have  a  licence  from
           Midrex."      (page 742)



      A chart setting out the services  to  be  provided  outside  India  is
supplied at page 744 of the judgment as follows:

      "SERVICES TO BE PROVIDED OUTSIDE INDIA:

|10.1.1    |Process licence and allied |      DM (German Marks) |
|          |technical services         |                        |
|10.1.1.1  |Process licence fee payable|DM 20,00,000 lump sum   |
|          |to MIDREX Corporation for  |                        |
|          |the right to use the Midrex|                        |
|          |process and patents        |                        |
|10.1.1.2  |Cost of technical services |DM 1,01,00,000 lump sum |
|          |provided under Article 3 in|                        |
|          |connection with Midrex     |                        |
|          |process                    |                        |
|Technical Services                    |
|10.1.2.1  |Payment for engineering and|DM 2,31,00,000 lump sum |
|          |consultancy fee as         |                        |
|          |specified under this       |                        |
|          |agreement                  |                        |
|10.1.2.2. |Payment for theoretical and|DM 22,00,000 lump sum   |
|          |practical training outside |                        |
|          |India                      |                        |
|          |Total                      |DM 3,74,00,000 lump sum |


      The Court held that the amount of 20 Lakh Deutsche Marks and 101  Lakh
Deutsche Marks were both payable for the right to  use  Midrex  process  and
patents.  In  short,  these  amounts  were  payable  for  the  transfer   of
technology under a process licence agreement entered into with Midrex.   The
judgment states that without such licence the plant could  not  be  operated
at all by the importer without the technical know-how from Midrex.   In  any
case, the plant could not be operated or be made functional. This being  the
case, since these amounts had to be paid before the plant could  at  all  be
set up, these amounts would be added to the value of the imported plant.




13.   However, so far as the sum of 231 Lakh Deutsche  Marks  is  concerned,
since this was payment for engineering and technical consultancy to  set  up
and commission the plant in India, this amount would have  to  be  excluded.
This Court held that 10% of this amount only should be added  to  the  value
of the plant as the plant had been sold abroad on an as is  where  is  basis
and needed to be dismantled abroad before  it  was  ready  for  delivery  in
India.  Obviously, therefore  this  10%  is  attributable  to  a  pre-import
stage.   Further,  the  amount  of  22  Lakh  Deutsche  Marks  payable   for
theoretical and practical training of personnel outside  India  again  could
not be added as this amount would  presumably  be  attributable  to  trained
personnel who would be used  in  the  commissioning  and  operation  of  the
plant, which  would,  therefore,  be  attributable  to   a  post-importation
event.  Thus, properly read, the judgment in Essar Gujarat's  case  actually
supports the respondent in that the payment for  engineering  and  technical
consultancy services in India cannot be added to the value of  the  imported
plant.  Also, in the present case, there is no transfer of technology  under
a license.  Therefore,  no  question  arises  as  to  whether  without  such
license the plant to be set up in India  could  be  operated  at  all.   The
judgment also concludes in favour  of  the  respondent  the  fact  that  all
amounts payable for training of personnel outside India cannot be  added  to
the value of the plant.



14.   In Tata Iron & Steel Co. Ltd. v.  Commissioner  of  Central  Excise  &
Customs, Bhubaneswar, Orissa, (2000) 3 SCC 472, a protocol had  been  signed
between the seller and the Indian purchaser  which  stated  that  the  total
price will be the price for  the  imported  equipment  plus  the  price  for
"engineering".

           The Tribunal in the said case added the amount of  "engineering"
      to arrive at the value of the imported goods. This Court reversed  the
      Tribunal  by  relying  upon  Rule  12   of   the   Customs   Valuation
      (Determination of Price of Imported Goods) Rules, 1988 which reads  as
      follows:

           "12.  Interpretative Notes. - the interpretative notes specified
           in  the  Schedule  to  these   rules   shall   apply   for   the
           interpretation of these rules."



      The relevant interpretative note which was relied  upon  is  important
and reads as follows:

           "Note to Rule 4

           Price actually paid or payable

              The price actually paid or payable is the total payment  made
           or to be made by the buyer to or for the benefit of  the  seller
           for the imported goods.  The payment need not  necessarily  take
           the form of a transfer of money.  Payment may be made by way  of
           letters of credit or negotiable  instruments.   Payment  may  be
           made directly or indirectly.  An example of an indirect  payment
           would be the settlement by the buyer, whether  in  whole  or  in
           part, of a debt owed by the seller.

                 Activities undertaken by the buyer  on  his  own  account,
           other than those for which an adjustment is provided in Rule  9,
           are not considered to be an indirect payment to the seller, even
           though they might be regarded as of benefit to the seller.   The
           costs of such activities shall not, therefore, be added  to  the
           price actually paid or  payable  in  determining  the  value  of
           imported goods.

                  The  value  of  imported  goods  shall  not  include  the
           following charges or costs, provided that they are distinguished
           from the price actually paid or payable for the imported goods;

        a) Charges for construction,  erection,  assembly,  maintenance  or
           technical assistance, undertaken after importation  on  imported
           goods such as industrial plant, machinery or equipment;

        b) The cost of transport after importation;

        c) Duties and taxes in India.

           The price actually paid or payable refers to the price  for  the
           imported goods.  Thus the flow of dividends  or  other  payments
           from the buyer to the seller that do not relate to the  imported
           goods are not part of the customs value."




Rule 9(1)(e) was not attracted on facts.  This Court held:

           "15. Clause (e) of sub-rule (1) of Rule 9 is attracted when  the
           following conditions are satisfied:

           (i)  there  is  a payment  actually made  or  to  be  made  as a
           condition of sale of the imported  goods by  the  buyer  to  the
           seller or to a third party;

           (ii) such payment, if made to a third party, has  been  made  or
           has to be made to satisfy an obligation of the seller; and

           (iii) such payments are not included in the price actually  paid
           or payable.

           16. It is nobody's  case  that  the  seller  had  an  obligation
           towards a third party which was required to be satisfied  by  it
           and the buyer (i.e. the appellant) had made any payment  to  the
           seller or  to  a  third  party  in  order  to  satisfy  such  an
           obligation. The price paid by the  appellant  for  drawings  and
           technical documents forming the subject-matter  of  contract  MD
           301 can by no stretch of imagination fall within the meaning  of
           "an obligation of the seller" to a third party. There  was  also
           no payment made as a condition of  sale  of  imported  goods  as
           such. Rule 9(1)(e) also, therefore, has no applicability.

           17. So far as the Interpretative Note to Rule 4 is concerned  it
           is no doubt true that the Interpretative Notes are part  of  the
           Rules and hence statutory. However, the question is one of their
           applicability. The part of the Interpretative  Note  to  Rule  4
           relied on by the Tribunal has been couched in  a  negative  form
           and is accompanied by a proviso. It means that  the  charges  or
           costs described in clauses (a),  (b)  and  (c)  are  not  to  be
           included in the value of imported goods  subject  to  satisfying
           the  requirement  of  the  proviso   that   the   charges   were
           distinguishable from the price actually paid or payable for  the
           imported goods. This part of the Interpretative Note  cannot  be
           so read as to mean that those charges which are not  covered  in
           clauses (a) to (c) are available to be included in the value  of
           the imported goods. To illustrate, if the seller has  undertaken
           to erect or assemble the machinery after  its  importation  into
           India and levied certain charges for rendering such service  the
           price paid therefor shall not be liable to be  included  in  the
           value of the goods if it has been paid separately and is clearly
           distinguishable from the price actually paid or payable for  the
           imported goods. Obviously, this Interpretative  Note  cannot  be
           pressed into service for calculating the price of  any  drawings
           or technical documents though separately paid by including  them
           in the price of imported equipments. Clause  (a)  in  the  third
           para of the Note to Rule 4 is suggestive of charges for services
           rendered by the seller in connection with construction, erection
           etc. of imported goods. The value of documents and drawings etc.
           cannot be "charges for construction, erection, assembly etc." of
           imported goods. Alternatively, even on the view as taken by  the
           Tribunal on this Note, the drawings and  documents  having  been
           supplied to the  buyer-importer  for  use  during  construction,
           erection, assembly, maintenance etc.  of  imported  goods,  they
           were relatable to post-import activity to be undertaken  by  the
           appellant. Such charges were covered  by  a  separate  contract,
           i.e. contract MD 301. They could not have been included  in  the
           value of imported goods merely because the  value  of  documents
           referable to imported equipments and materials was mixed up with
           the value of those documents which were referable  to  equipment
           which was yet to be procured or imported or manufactured by  the
           appellant; the value of the latter category  of  documents  also
           being neither dutiable nor clubbable with the value of  imported
           goods. The Tribunal has  not  doubted  the  genuineness  of  the
           contracts entered into between the appellant and SNP. Rather  it
           has observed vide para 10.2 of its order that entering into  two
           contracts (MD 301  and  MD  302)  was  a  legal  necessity.  The
           Tribunal has also stated that it was not recording  any  finding
           of "skewed split-up".  Shri  Ashok  Desai,  the  learned  Senior
           Counsel for the appellant has pointed  out  that  under  Chapter
           Heading 49.06 of the Customs Tariff Act, 1975 plans and drawings
           for engineering and industrial purposes being originals drawn by
           hand as also  their  photographic  reproductions  on  sensitised
           papers and carbon copies thereof are declared free from  payment
           of customs duty. Sub-rules (3) and (4) of Rule 9 clearly provide
           that additions  to  the  price  actually  paid  or  payable  are
           permissible  under  the  Rules  if  based   on   objective   and
           quantifiable data and no addition except as provided for by Rule
           9 is permissible."




15.   In  Commissioner  of  Customs  (Port),  Kolkata  v.  J.K.  Corporation
Limited, (2007) 9 SCC 401, on facts the agreement there was  itself  in  two
parts, part (a) providing for licence, know-how and  technology  while  part
(b)  provided  for  supply  of  equipment.   This  Court  distinguished  the
judgment in the Essar  Gujarat  case  and  applied  the  judgment  in  TISCO
(supra) as follows:

           "16. Reliance has been placed by Mr. Radhakrishnan on a decision
           of this Court in Essar Gujarat Ltd. [(1997) 9 SCC 738  :  (1996)
           88 ELT 609] In that case,  the  licence  fee  was  paid  to  the
           supplier of the plant and machinery for a licence to operate the
           plant, which was in reality  nothing  but  was  held  to  be  an
           additional  price  payable  for  the  plant  itself   and   was,
           therefore, held to be includible in its assessable value. It  is
           in the aforementioned fact situation, this Court held: (SCC  pp.
           745-46, para 13)

              "13[12]. Reading all these agreements  together,  it  is  not
              possible to uphold the  contention  of  Mr.  Salve  that  the
              precondition of obtaining a licence from  Midrex  was  not  a
              condition of sale, but a  clause  inserted  to  protect  EGL.
              Without a licence from Midrex, the plant would be of  no  use
              to EGL. That is why this overriding clause was inserted. This
              overriding clause was clearly a condition  of  sale.  It  was
              essential for EGL to have this licence from Midrex to operate
              this plant and use Midrex  technology  for  producing  sponge
              iron in India. Therefore, in our view,  obtaining  a  licence
              from Midrex was a precondition  of  sale.  In  fact,  as  was
              recorded in the agreement, the sale  of  the  plant  had  not
              taken place even at the time when the  contract  with  Midrex
              was being signed on 4-12-1987, although  the  agreement  with
              TIL for purchase of the  plant  was  executed  on  24-3-1987.
              Therefore, we are of the view that the tribunal was in  error
              in holding that the payments to be made to Midrex by  way  of
              licence fees could not be added to the price actually paid to
              TIL for purchase of the plant."

           17. The Court noticed several curious aspects of  the  agreement
           stating that it started with the recital that "the purchaser and
           the seller have today respectively purchased and sold  a  direct
           reduction iron plant, on the following  terms  and  conditions",
           which, according to this Court, indicated that the purchase  and
           sale of the plant had taken place on 24-3-1987,  but  in  clause
           (2) it was stated that the purchaser would purchase the property
           from the seller at the stated price. Upon construing  the  terms
           of the conditions, it was opined: (SCC p. 749, para 24)

              "24. Therefore, the process licence fees of DM 20,00,000  was
              rightly added to the  purchase  price  by  the  Collector  of
              Customs. The order of cegat on this question is set aside."

           19. However, in TISCO [(2000) 3 SCC 472] this Court took note of
           Interpretative Note to Rule 4 and held: (SCC p. 482, para 17)

              "The part of the Interpretative Note to Rule 4 relied  on  by
              the Tribunal has been couched  in  a  negative  form  and  is
              accompanied by a proviso. It means that the charges or  costs
              described in clauses (a), (b) and (c) are not to be  included
              in the value of imported  goods  subject  to  satisfying  the
              requirement  of   the   proviso   that   the   charges   were
              distinguishable from the price actually paid or  payable  for
              the imported goods. This  part  of  the  Interpretative  Note
              cannot be so read as to mean that those charges which are not
              covered in clauses (a) to (c) are available to be included in
              the value of the imported goods."



      In an instructive passage on principle, this Court also laid down:

           "9. The basic principle of levy of customs duty, in view of  the
           aforementioned provisions, is that the  value  of  the  imported
           goods has to be determined at the time and place of importation.
           The value to be determined for the imported goods would  be  the
           payment required to be made as a condition of  sale.  Assessment
           of customs duty must have a direct nexus with the value of goods
           which was payable at the time of importation. If any  amount  is
           to be paid after the importation of the goods is complete, inter
           alia, by way of transfer of licence or  technical  know-how  for
           the purpose of setting up of a plant from the machinery imported
           or running thereof, the same would not be computed for the  said
           purpose.  Any  amount  paid  for  post-importation  service   or
           activity, would not,  therefore,  come  within  the  purview  of
           determination of assessable value of the imported goods so as to
           enable the authorities to levy customs duty  or  otherwise.  The
           Rules have been framed for  the  purpose  of  carrying  out  the
           provisions of the Act. The wordings of Sections 14  and  14(1-A)
           are clear and explicit. The Rules and the Act,  therefore,  must
           be  construed,  having  regard  to  the  basic   principles   of
           interpretation in mind.

           11. What  would,  therefore,  be  excluded  for  computing   the
           assessable value for the purpose of levy of customs duty,  inter
           alia, has clearly been stated therein, namely, any  amount  paid
           for  post-importation  activities.  The   said   provision,   in
           particular, also applies to any amount paid for post-importation
           technical  assistance.  What  is  necessary,  therefore,  is   a
           separate identifiable amount charged for the same. "



16.   Similarly, in Commissioner  of  Customs  v.  Ferodo  India  (P)  Ltd.,
(2008) 4 SCC 563, this Court dealt with Rule 9(1)(e) and the  Essar  Gujarat
judgment as follows:

           "22. In the alternate, it has invoked  Rule  9(1)(e).  This  Rule
           9(1)(e) cannot stand alone. It is a corollary to Rule  4.  There
           is no finding in the  present  case  that  what  was  termed  as
           royalty/licence fee was in fact not such royalty/licence fee but
           some  other  payment  made  or  to  be  made  as   a   condition
           prerequisite to the sale of the imported goods. It is  important
           to bear in mind that Rule 9 refers to cost and  services.  Under
           Rule  9(1),  the  price  for  the  imported  goods  had  to   be
           enhanced/loaded by adding certain costs, royalties  and  licence
           fees and values mentioned in Rules 9(1)(a) to 9(1)(d). It refers
           to "all other  payments  actually  made  or  to  be  made  as  a
           condition of sale of the imported goods". In the  present  case,
           the Department invoked Rule 9(1)(c) on the ground  that  royalty
           was related to the imported goods, having failed it cannot  fall
           back upon Rule 9(1)(e) because essentially we are concerned with
           the addition of royalty, etc.  to  the  price  of  the  imported
           goods. Further, in the present case, the Department has accepted
           the transaction value of the imported goods.

           23. In Essar Gujarat Ltd. [ From Final  Order  No.  91  of  2002
           dated 12-2-2002  of  the  Customs,  Excise  and  Gold  (Control)
           Appellate Tribunal, New Delhi in Appeal No. C/573/2001-A  :  See
           (2002) 142 ELT 343 (Tri); (2003) 156 ELT 62  (Tri);  (2006)  195
           ELT 206 (Tri) and (2006)  205  ELT  208  (Tri)]  the  buyer  had
           entered  into  a  contract  with  TIL  for  purchase  of  direct
           reduction iron plant ("the plant"). The entire agreement was for
           import of the plant. The agreement was subject to two conditions-
           (a) approval of GOI and (b) obtaining transfer of  licence  from
           M/s Midrex, USA. Without the licence from Midrex,  the  imported
           plant was of no use to the buyer. Therefore, it was essential to
           have the licence from Midrex to operate the plant. Therefore, it
           was held by this Court that procurement of licence  from  Midrex
           was a precondition of sale which was  specifically  recorded  in
           the agreement itself. In view of specific terms  and  conditions
           to that effect in the agreement, this Court held  that  payments
           made to Midrex by way of licence fees had to  be  added  to  the
           price paid to TIL for purchase of the plant. There  is  no  such
           stipulations in TAA in the present case. Therefore, in our view,
           the adjudicating authority erred  in  placing  reliance  on  the
           judgment of this Court in Essar Gujarat Ltd. [ From Final  Order
           No. 91 of 2002 dated 12-2-2002 of the Customs, Excise  and  Gold
           (Control) Appellate Tribunal, New Delhi in Appeal No. C/573/2001-
           A : See (2002) 142 ELT 343  (Tri);  (2003)  156  ELT  62  (Tri);
           (2006) 195 ELT 206 (Tri) and (2006) 205 ELT 208 (Tri)]"



17.   Essar Gujarat has also been distinguished in Commissioner  of  Customs
(Port), Chennai v. Toyota Kirloskar Motor (P) Ltd., (2007)  5  SCC  371,  as
follows:-

           "36. Therefore, law laid down in Essar  Gujarat  Ltd. [(1997)  9
           SCC 738] and J.K. Corpn. Ltd. [(2007) 9 SCC 401 : (2007) 2 Scale
           459] is absolutely clear  and  explicit.  Apart  from  the  fact
           that Essar Gujarat Ltd. [(1997) 9 SCC 738] was determined on the
           peculiar facts obtaining therein and furthermore  having  regard
           to the fact that the entire plant on "as-is-where-is" basis  was
           transferred subject to transfer of patent as also  services  and
           technical know-how needed for increase in the  capacity  of  the
           plant, this Court clearly held that the post-importation service
           charges were not to be taken into consideration for  determining
           the transaction value.

           37. The  observations  made  by  this  Court  in Essar   Gujarat
           Ltd. [(1997) 9 SCC 738] in para 18 must  be  understood  in  the
           factual matrix involved therein. The ratio of a decision, as  is
           well known, must be culled out from  the  facts  involved  in  a
           given case. A decision, as is well known, is  an  authority  for
           what it decides and not what can logically be deduced therefrom.
           Even  in Essar  Gujarat  Ltd. [(1997)  9  SCC   738]   a   clear
           distinction has been made between the  charges  required  to  be
           made  for  pre-importation  and  post-importation.  All  charges
           levied before the capital goods were imported were  held  to  be
           considered for the purpose of computation of  transaction  value
           and not the post-importation one. The said decision,  therefore,
           in our opinion, is not an authority  for  the  proposition  that
           irrespective of nature of the contract, licence fee and  charges
           paid for  technical  know-how,  although  the  same  would  have
           nothing to do with the charges  at  the  pre-importation  stage,
           would have to be taken into consideration towards computation of
           transaction value in terms of Rule 9(1)(c) of the Rules.

           38. The transaction value must be relatable to import  of  goods
           which a fortiori would mean that the amounts must be payable  as
           a condition of import. A distinction, therefore, clearly  exists
           between an amount payable as a condition of import and an amount
           payable in respect of the matters  governing  the  manufacturing
           activities, which may not have anything to do with the import of
           the capital goods.

           39. Article 4 provided for additional assistance in  respect  of
           the matters specifically laid down therein. Technical assistance
           fees have a direct nexus with the post-import activities and not
           with importation of goods.

           40. It is also a matter  of  some  significance  that  technical
           assistance and know-how were required  to  be  given  not  as  a
           condition precedent, but as and  when  the  respondent  makes  a
           request therefor and not otherwise. Appendix C of the  agreement
           relates to  manufacture  of  local  parts  which  evidently  has
           nothing to do with the import of the capital goods.  Appendix  D
           again is  attributable  to  construction  of  plant,  production
           preparation,  and  pilot  production   and   production   model,
           wherewith the import of capital goods did not have any nexus."




18.   On a reading of all the authorities hereinabove, it is clear that  the
facts of the present case do  not  attract  Rule  9(1)(e).   We,  therefore,
dismiss the appeal of Revenue.  There shall be no order as to costs.



                                        ........................J.

                                        (A.K. Sikri)







                                        ........................J.

                                        (R.F. Nariman)

New Delhi;

April 13, 2015.

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