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.
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.
