Case Law Details
Indian Oil Corporation Ltd Vs Commissioner of Customs (CESTAT Kolkata)
Fees for know-how was not required to be added to assessable Value of Imported Goods in terms of Customs Valuation Rules
Conclusion: Charges of Know How agreement were not required to be added to the assessable value of imported goods in terms of Customs Valuation Rules, 1988 as there was no technical know-how fees attributable towards post import related/associated acts and activities and thereby no case arose for scaling up the assessable value with the inclusion of the royalty charges.
Held: Assessee entered into a contract with USA company for supply of equipment’s for FCC, LPG and FCC Gasoline Treater unit required for establishing a treating unit at Haldia and Barauni, for treating LPG and gasoline at their refineries. It had got the contract registered with the department under Project Import Scheme, whereby the Department forwarded the matter to the Special Valuation Branch to examine the feasibility of the inclusion of design and engineering charges, technical knowhow fee and other charges in the invoice value of the imported goods, under the supply agreement for redetermination of transaction value of the imported goods under Section 14 of the Customs Act 1962, read with Rule 4 and Rule 9 of the Customs Valuation Rules 1988. During the process of enquiry, assessee submitted complete details and responses to the queries and the questionnaire seeking information as called for by the Special Valuation Branch of the Custom House. Assessee had got the approval of the Secretary of Industrial Assistance (SIA) dated 14.07.1999, whereby the government approved the technology collaboration between the importer and USA company which stipulated that company possesses technical information relating to Fiber – Film T.M Technology, Contractor technology and other technology, useful in petroleum, refining and chemical operations (confidential information) and appellant would receive the confidential information from time to time for design engineering, procurement of equipment and construction of LPG/Gasoline Treating Units for use at the Haldia and Barauni refinery of IOCL. The confidentiality agreement was signed well before the signing of the other two agreements, perhaps indicative of the fact that the process licensor wanted to ensure that the technology supplied would be kept secret and confidential at the hands of the importer. It was held that the contract, as entered into by the appellant with their overseas buyers were on identical. There was no obligation to bind the appellants to any post import act/activity and thus render it as a condition of sale for procurement of the imported goods. There was no technical know-how fees attributable towards post import related/associated acts and activities. Thereby no case arose for scaling up the assessable value with the inclusion of the royalty charges. In fact the preamble clause of the Confidentiality Agreement supra clearly brought to fore its purpose, completely unrelatable to any post import functioning.
FULL TEXT OF THE CESTAT KOLKATA ORDER
M/s. Indian Oil Corporation Ltd. have filed the present appeal assailing the order in appeal passed by the learned Commissioner (Appeals), vide Order in Appeal No. KOL/CUS/CKP/282–283/2007 dated 06.08.2007. The question in the present appeal, revolves around enhancement of transaction/assessable value, at the time of finalization of provisional assessment by inclusion of lumpsum payments under know how agreement, as being related to the imports made, as a condition of sale of equipments, imported under the supply agreement and whether the license fee and designing charges were a part thereof and whether charges of knowhow agreement were required to be added to the assessable value of the imported goods in terms of Customs Valuation Rules, 1988 – Rule 9(1)(c) and Rule 9(1)(e).
2. The facts of the case are that the appellant entered into a contract with M/s. Merichem Company, USA for supply of equipments for FCC, LPG and FCC Gasoline Treater unit required for establishing a treating unit at Haldia and Barauni, for treating LPG and gasoline at their refineries. For the purpose the appellant had essentially entered into the following three agreements with their buyers:
1. Confidentiality Agreement 99013 dated 03.1999
2. Know-How, Process Package and other Services Agreement
3. Equipment Supply Agreement
3. For ready reference, the aforesaid three agreements are scanned hereunder:
4. The appellant had got the contract registered with the department under Project Import Scheme, whereby the Department forwarded the matter to the Special Valuation Branch to examine the feasibility of the inclusion of design and engineering charges, technical knowhow fee and other charges in the invoice value of the imported goods, under the supply agreement for redetermination of transaction value of the imported goods under Section 14 of the Customs Act 1962, read with Rule 4 and Rule 9 of the Customs Valuation Rules 1988. During the process of enquiry, the assessee submitted complete details and response to the queries and the questionnaire seeking information as called for by the Special Valuation Branch of the Custom House. It is informed that the appellant had got the approval of the Secretary of Industrial Assistance (SIA) dated 14.07.1999, whereby the government approved the technology collaboration between the importer and M/s. Merichem Company USA- which stipulates that M/s. Merichem Company USA possesses technical information relating to Fiber – Film T.M Technology, Contractor technology and other technology, useful in petroleum, refining and chemical operations (confidential information) and IOCL will receive the confidential information from time to time from M/s. Merichem, USA or on behalf of M/s. Merichem, USA for the purpose of design engineering, procurement of equipment and construction of LPG/Gasoline Treating Units for use at Haldia and Barauni refinery of IOCL.
5. It’s a fact on record that the confidentiality agreement was signed well before the signing of the other two agreement, perhaps indicative of the fact that the process licensor wanted to ensure that the technology supplied will be kept secret and confidential at the hands of the The adjudicating authority in its order has observed that the confidentiality agreement (for the purpose of design, engineering, procurement of equipment and construction of LPG/Gasoline, treating unit at Haldia/Barauni was a prerequisite for the supply of knowhow, process engineering package and other services for installation, operation, maintenance and repairing of the contracted plants. The adjudicating authority has further held that the agreement for supply of equipment which is Part B of the broad agreement is also closely linked to the other two agreements, that all the agreements are linked to one another and at the same time are independent. The Treater Package cannot be complete without the process package and technical Knowhow. He has further held that they exist as inseparable link or nexus among all the agreements related to the impugned projects.
6. We have heard the rival submissions of the two sides at considerable length and perused the contracts entered into and placed on record.
7. We find the order of the learned Commissioner (Appeals), to be quite cryptic and brief in the matter. Essentially, his findings are recorded in para 17 and 18 of the impugned order and are reproduced hereunder:
“17. It is evident from the impugned that the Special Valuation Branch has made detailed study of the relevant agreements and investigated specially in respect of feasibility of inclusion or adjustment of different costs and services under Rule 9 of CVR’88. The adjudicating authority has observed that the three agreements are parts of one umbrella agreement. All the agreements are linked with one another and at the same time inter-dependent. There are inseparable links among all agreements related to the instant project. There are observation of the adjudicating authority that Treater Package was imported at invoice value of USD 891878.00 after addition of freight and insurance which shows that lumpsum price for both the parts of Article 3.1. 1(b) of Supply Agreement were covered in the invoice value. These charges could not be apportioned towards indigenous supply. The Supply Agreement is inseparable from Know-how Agreement.
18. It is observed that the services under BDEP are to be rendered by the Supplier of the equipments and therefore, it is clear that it is compulsory for the importer to purchase suitable equipments for the patented process form the supplier only. It is also observed that the technical know-how fee and basic engineering fees are includible in the value of the imported equipments. There is a ratio of 40:60 between the imported and indigenous equipments supplied for the contracted plant and the Department has considered this aspect and reasonably apportioned 40% of total payment made towards know-how and design and drawing in the know-how Agreement towards the value of equipments.”
8. It is the contention of the appellant that the job had been awarded to M/s. Merichem Company Houston, U.S.A. under two separate agreements; viz. (a) One Agreement for “Know-How, Process Package and Other Services” against a consolidated Lump-Sum payment of – US $ 262,552.00 comprised of (i) $ 148,000.00 under the head of “Basic Design and Engineering Package” (Referred to as BDEP) both for the FCC, LPG and FCC Gasoline and (ii) $ 114,55.00 {which includes $ 57,452.00 for production of FCC, LPG and $ 57,100.00 for production of FCC Gasoline.} under the head of “Know-How/Engineering of Unit” and (b) The other Agreement was for “Supply of equipments and Other Services”. The payment released against this agreement were – Lump-Sum $ 580,100.00 for “Equipments” and $ 311,778.00 for the “Services” to be rendered by them against this agreement, so that the total came to US $ 891,878.00 and for this total amount, the Invoice was drawn and accounted for in the making of the Bill of Entry placed for assessment but assessed provisionally with 1% extra duty as cash security for the provisional duty bond and now, ordered for final assessment with addition of extra amount to the declared value.
9. We note that the appellant IOCL entered into an agreement dated 09.1999 with M/s. Merichem Company, USA for supply of the equipments for the FCC, LPG and FCC gasoline Treater Unit at the refinery of IOCL, located at Haldia and Barauni, wherein the total value of imported good supplied under the contract was US $ 891878. For the purpose the appellant entered into a separate technical knowhow agreement dated 15.09.1999 for transfer of commercial rights and license in favour of IOCL, for utilising licensed processes and to render engineering services, technical assistance, supervision etc. with a total financial implication of US $ 262552. The department finalized the assessment of the bills of entry by adding the value of basic design and engineering package and license fee for technology. Technology transfer in proportion to the value of imported and indigenous goods in the total supply contract being in the ratio of 40 to 60, thereby adding US dollar 105021 to the total contractual supply value of US $ 891878. The appellant therefore submitted that the department imputes the supply of equipment as dependent upon “Knowhow, Process Package and Other Services”, as if this agreement imposed a condition for the supply of agreement. They emphasized that in actuality the three agreements were separate and did not have any inter-dependency. The confidentially agreement entered into between the parties was exclusively for the security of patented technology of the licensor. Payment of design and drawings neither had any contribution in the manufacture of imported equipments nor this agreement imposed any compulsion for the purchase of equipment from the supplier of Knowhow, Process Package and Other Services. They further submitted that well before the import of materials was completed they were required to be put to use as commissioning of production was possible only after more than a year of import when the setting up of the unit could be completed and production commissioned. Therefore, the charges apportioned towards the Knowhow, Process Package factually bear the character of post importation charges.
9.1 The appellant added that there was no material evidence with the department that the supply price of imported equipments is under-valued and not decided at arms length price between the buyer and seller. They categorically stated that the apprehension of the department was without any market analysis study. Moreover, in case of rejection of transaction value onus in law was on the department to prove that the declared price did not reflect the true transaction value and whereby the Department could not adduce any evidence that identical or similar goods imported by other importers were at a higher price.
9.2 Drawing attention to the Interpretative Notes to Rule 4 of the Customs Valuation Rules 1988, they pointed out that the value of imported goods shall not include the following charges or costs provided they are distinguished from the price paid or payable for the imported goods:
- Charges for construction, erection, assembly, Maintenance or technical assistance undertaken after importation on imported goods such as industrial plant, machinery or equipment;
- Cost of transport after importation;
- Duties and taxes in India
The price paid or payable refers to the price of imported goods. Thus the flow of dividends or other payments from the buyer to the seller do not relate to the imported goods and are not part of the customs value. Therefore, payment on account of design and drawings or licence fee for technology transfer cannot be by any stretch of imagination be considered as an obligation of the buyer, to the seller for sale of imported goods.
9.3 For ease of understanding the relevant provision of Customs Valuation Rules 1988 are extracted hereunder:
“Rule 9. Cost and Services.-(1) In determining the transaction value, there shall 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 vices where supplied directly or indirectly by the buyer fee of …. Or at reduced cost for use in connection with the production and for export of imported goods, to the extent that such value has no …. Included in the price actually paid or payable, namely:-
(i) materials, components, parts and similar items incorporated in imported goods;
(ii) tools, dies, moulds and similar items used in the production of imported goods;
(iii) materials consumed in the production of the imported goods;
(iv) engineering, development, art work, design work, and plans sketches undertaken elsewhere than in India and necessary the production of the imported goods;
(c) royalties and licence fees related to the imported goods that the buyers required to pay, directly or indirectly, as a condition of the sale of goods being valued, to the extent that such royalties and fees are included in the price actually paid or payable.
(d) the value of any part of the proceeds of any subsequent resale, …… or use of the imported goods that accrues, directly or indirectly, in seller;
(e) all other payments actually made or to be made as a condition of sale 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 a payments are not included in the price actually paid or ”
10. It has been pointed out that in case of international transaction of purchase of patented technology, it is a standard international practice that the vendor always ensures proper safeguard for patented right on use of such technology and binds the purchaser by an agreement for maintaining confidentiality as well as for use of the technology for the purpose. As for Basic Design aspects it was submitted that they relate to the respective parts of the unit and do not speak of anything relating to the structural design of any of the required The Basic Engineering data provided is actually with regard to the equipments and instruments. Regarding process description, they were said to be relating to the unit for achieving the underlying objective and had nothing specifically therein relating to the proprietary of the required equipments. As per standard industrial practice, any expert Process Technologist, for the purpose of manufacture of final product, has to provide engineering drawing of the plant, including the layout with reference to the functions intended to be rendered at an optimal for achieving the final process performance of the plant. Thus, in the instant Know-how Technology Agreement such mechanical aids had been stated and accordingly, the equipments were purchased by the appellant. The language and situation as contained in clear words in the Rule 9(1)(c) and 9(1)(e), were not met with in the instant case, so as to order the addition of the licnece fees in respect of Know-how with the assessable value of the equipments. The appellant categorically stated that it was not obligatory for them to purchase the equipments only from the said vendor as was clearly apparent from the preamble of the Agreement for Supply of Equipments. Further, in the Know-how Agreement, there is no condition that the equipment imported by the appellant are only to be used or to be imported from M/s. Merichem Company, USA, rather they only have suggested some equipments required for the designed unit.
11. From the documents placed on record, we note that the importer M/s. Indian Oil Company Limited (IOCL) entered into three separate agreements viz. (i) Confidentiality Agreement dated 31.03.99 with M/s. Merichem Company, Houston, Texas, U.S.A. (ii) Agreement dated 15.09.99 for Supply of Equipment for FCC LPG AMINEX/THIOLEX Treater with REGEN (Caustic Regeneration) and FCC Gasoline MERICAT Treater Systems for us at Haldia Refinery and (iii) Agreement dated 15.09.99 for Supply of Know-How, Process Package and other Services for FCC LPG AMINEX/THIOLEX Treater with REGEN (Caustic Regeneration) and FCC Gasoline MERICAT Treater Systems for use at Haldia Refinery. The Confidentiality agreement signed on 31.03.99 in fact curtained the Know- How Agreement vide Article 9 Section 9.2 thereof, whereas the Equipment. Supply Agreement was incorporated vide Article 8, Section 8.2 thereof. All the three agreements were alleged to be a part of an umbrella agreement- Agreement on LPG/Gasoline Treatment Units At Haldia Refinery Between Indian Oil Corporation Limited And Merichem Company, USA. Further, there is nothing on record to suggest that the importer is related to the overseas contractor-supplier under Rule 2(2) of CVR’88. To this effect even the adjudicating authority has recorded an unambiguous finding.
12. As for the nexus between the agreements concluded with Merichem Company, for the project, the Confidentiality Agreement was signed much before (nearly six months) the signing of the other two agreements. This clearly shows that the Process Licensor wanted to ensure that their technology was kept secret and confidential in the hands of the importer. As stipulated in the Confidentiality Agreement, technical information relating to BIBER-FILD TM Contractor technology and other technology useful in petroleum refining and/or chemical operations (Confidential Information) possessed by Merichem would be received by IOCL for or on behalf of Merichem for the purpose of design, engineering, procurement of equipment, and construction of LPG/Gasoline treating units for use at Haldia/Barauni Refinery. M/s. IOCL also got the Technology Collaboration Agreement with Merichem, having provisions for supply of licence and Design/Drawings, approved from Secretary of Industrial Assistance (SIA) vide approval letter No. 67(99)/319(99)/PAB dated14.07.99. It is quite clear that the activities referred herein supra were all post import related and had no bearing as a condition of sale of the imported goods,-being unconnected with imports.
13. Further, Supply of know-how, process package and other services wherein Merichem has been referred as Licensor and M/s. IOCL as the Licensee, it is stated that Merichem, in possession of proprietary technical information and patent rights on a process for contacting a hydrocarbon charge stock with an immiscible treating reagent to treat liquid and gaseous charge stocks to effect extraction of hydrogen sulfide, carbon dioxide, and carbonyl sulfide compounds (AMINEXsm); and to provide process technologies for the treatment of various petroleum distillate charge stocks for extraction and/or oxidation of mercaptan and other sulfur compounds, and the regeneration of the alkaline solutions employed therein, (THOLEX sm and REGEN sm) and also to employ an alkaline solution containing an oxidation catalyst to effect oxidation of mercaptan sulfur compounds in petroleum distillate charge stocks, (MERICATsm). It is therefore evident that to derive optimal benefit, the treating unit would be required to be preferably constructed on the basis of Merichem’s P & IDs i.e. Process and Instrumentation Diagrams. The licensed processes as mentioned above were required for installation, operation, and maintenance and repairing of the Plant at the Refinery and to get basic engineering services, including technical assistance and supervision services and guarantees with respect to the licensed unit.
14. The Hon’ble Apex Court in the case of Commissioner of Customs Port, Kolkata Steel Authority of India Ltd.1, with regard to the inclusion of the cost of drawings and designs had categorically held in para 22 of its order as under:
“22. An importer of equipments of a plant could always choose to obtain drawings and designs for undertaking post-importation activities from an overseas consortium supplying the equipments. This may confer on such arrangements attributes of a turnkey contract, but that fact by itself would not automatically attract the “condition” clause contained in Rule 9(1)(e) of the Valuation Rules. In the cases of Essar Steel Ltd. (supra) and Tata Iron and Steel Co. Ltd. (supra), the contracts had certain elements of “turnkey” features. The case of Essar Gujarat (supra) is distinguishable, as the subject of import there carried a condition for entering into a licensing agreement with a third party.”
15. We find that there is nothing in the contract to show that the payment of royalty charges was a mandatory condition of sale of the imported goods. Thus as held by the Tribunal in the case of Steel Authority of India Ltd. Commissioner of Customs, Vishakhapatnam2,
“8. There is yet another contract entered between the appellants and the Indian firm, M/s. Otto Indian Pvt. Ltd., Calcutta which is subsidiary of the foreign firm. This contract for the supply of design, engineering, supply of indigenous plant and equipment, supply of engineering work, erection, testing and commissioning of PBCC Plant in respect of contract dated 12.02.1988. The lower authorities had already given benefit. The issue before us is only in respect of the Royalty charges and also the duty on income tax paid by the appellants on behalf of the foreign company. The appellants have pointed out that even though the show cause notice was dated 12.08.1991, the Corrigendum was issued after 8 years to include the income tax also for the purpose of duty. The appellants have strongly contended that the notice is barred by limitation. Therefore, at the outset, we shall examine the question of limitation. In the case of ESPI Industries Chemiccal Vs. Commissioner of Central Excise, Hyderabad3, it has been held that Revised notice issued for enlarging the scope of first notice and taking an altogether different stand than in original show cause notice is illegal. In the case of S.T.L. Exports Ltd. Vs. Commissioner of Customs, Indore4, it has been held that demand of transformation from Excise to Customs duty belatedly after more than two years of original notice is not permissible by issue of Corrigendum. In the case of Bhagsons Paint Industries (India) Vs. CCE, New Delhi5, it has been held that Absence of statutory laid down time limit does not mean that there is no time limit at all for completion of adjudication. Accordingly, the adjudication order passed nearly nine years after the issue of show cause notice is set aside. In the present case, for inclusion of the income-tax paid by the appellants on behalf of the foreign currency, the Corrigendum to the show cause notice has been issued after eight years. Following ratio of the cases cited supra, we are of the view that the issue of this Corrigendum is bad in law. Moreover, there is nothing on record to show that the assessment was provisional. In these circumstances, the demand of duty on account of inclusion of income-tax paid is not sustainable and the demand to that extent is not liable to pay by the appellants. After going through the scope of the three contracts, we find that the contract dated 07.03.1988 only covers the price for the imported equipments. The Royalty contract is only for the activities carried out after the goods have been imported. This issue is clearly covered by the decision of the Hon’ble Supreme Court in the case of commissioner of Customs, New Delhi Vs. Prodelin India (P) Ltd.6, wherein it has been held that the technical know-how fee charged in respect of post importation activities is not includible in the assessable value of imported goods. From the scope of the contract for payment of Royalty charges, we do not find that the payment of Royalty is a condition of sale of the imported goods. Therefore, Rule 9(1)(c) of the Customs Valuation Rules will not be applicable. Hence the demand of duty on account of the inclusion of Royalty charges will not be sustainable. Summing up, we hold that the demand on account of inclusion of income tax paid by the appellants on behalf of the foreign currency is barred by limitation of time. The Royalty charges paid in the present case has nothing to do with the imported goods and it is mainly for the post importation activities. In view of the above, the demand is not sustainable. Hence we set aside the impugned order and allow the appeal with consequential relief, if any.”
The Civil Appeal filed by the department against the said order was dismissed by the Hon’ble Apex Court7 on merits. It is more than clear that any charge paid towards any post import related activity cannot constitute to be a valuation factor for inclusion in the accessable value of import goods. We there, do not find any merit in the orders of the lower authority on this score.
16. In the case of Commissioner of Custom Port, Kolkata Vs. J.K Corporation8, the Hon’ble apex court had held as under:
“8. The sole question which, therefore, arises for consideration in this appeal, is as to whether customs duty would be payable on the purchase price of the goods by adding the value of licence and technical knowhow, etc. to the value of the imported goods.
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 knowhow for the purpose of settling 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 (1A) are clear and explicit. The Rules and the Act, therefore, must be construed, having regard to the basic principles of interpretation in mind.
10. Rule 12 of the Rules provides that the interpretative notes specified in the Schedule appended thereto would apply for construction thereof. They are statutory in nature being integral part of the Rules The relevant portion of Interpretative Note to Rule 4 reads as under:
“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 takes in India.”
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 apply to any amount paid for post-importation technical assistance. What is necessary, therefore, is a separate identifiable amount charged for the same. On the Revenue’s own showing, the sum of US $ 14,00,000.00 was required to be paid by way of remuneration towards services to be offered by the companies in respect of maters specified in Part-A of the said Memorandum of Agreement. The said sum represents amount of licence or amount to be paid by the respondent for the licence for the manufacturing process for production of goods which were covered by the patents held by M/s. Samsung as also for technical knowhow. In the said Memorandum of Agreement, it was provided that;
“The SELLER shall provide to the BUYER the TECHNICAL. DOCUMENTATION containing, inter alia, the KNOW-HOW and the same shall be delivered by the SELLER to the BUYER in Republic of Korea or such other place or places as may be mutually agreed by the between both the parties thereto.”
12. The technical documentation comprises of: (1) process, (2) mechanical, (3) electrical, and (4) instrumentation in respect of grant of The Memorandum of Understanding provides:
“4.1. The SELLER hereby grants to the BUYER a non- exclusive and non-transferable right and licence including rights to use existing patents of SELLER to manufacture the PRODUCT in the PLANT with the KNOW-HOW including the PROCESS and to sell and market the PRODUCT worldwide. For exports to Republic of Korea and Japan, the first option shall be given to the SELLER.
4.2. The BUYER shall be entitled to and shall have the right to use and practice the KNOW-HOW and to manufacture therewith the product in the PLANT.”
13. No part of the knowhow fee was to be incurred by the respondent herein either for the purpose of fabrication of the plant and machinery or for any design in respect whereof M/s. Samsung held the patent right.
14. It may be noticed that the said memorandum of Agreement specifically contemplates that the plant and machinery to be supplied thereunder may be produced from other independent manufactures and suppliers who might not have anything to do with the knowhow or licence provided thereunder by Samsung as would appear from the following stipulation contained in the said agreement.
“5.6. The SELLER hereby agrees to provide their cooperation to the BUYER to purchase spares from the SELLER directly from the suppliers notwithstanding the expiry or earlier termination of the AGREEMENT and in case of purchase from the SELLER, the SELLER shall provide such spares at fair market prices within a reasonable period of time.
8.1. SELLER shall cause such manufacturers to test and inspect the main items of Equipment at its works and/or the works of its manufacturers, quality, quantity, workmanship, finishing, and packing in accordance with the inspection method deemed as proper and authentic for Equipment.”
15. Knowhow, being process knowhow, is covered by the patent held by M/s. Samsung. The payment of US $ 14,00,000.00 also entitles the respondent to sub-licence the knowhow to any other party, subject, of course, to the approval of M/s. Samsung.”
(Emphasis Supplied)
17. The Hon’ble Apex Court in para 26 of the said order had clearly dwelt upon what could comply as a condition of sale. To elaborate the said para is reproduced hereunder to clarify the meaning of the term.
“26. The expression “condition”, simply put, conveys the idea that something could be done only if another thing was also done. In the given context, it would imply that import of equipments could be allowed by the other party provided the design features for post-importation activities were also obtained from the same supplier or from a firm as per the overseas supplier’s direction. But there is no material before us to suggest that import of equipments was effected with simultaneous obligation of SAIL that the designs relating to post-importation activities should also be obtained from the same entity. The revenue has proceeded with the understanding that since both were obtained from the same vendor, condition of obtaining designs etc., for post-importation activities was implicit in the contract. The Revenue has sought to emphasise their case on the basis that as it was a turnkey project, importation of equipments and post-importation project implementation exercise were mutually dependent. In our opinion, reading such implied condition into the contracts would be impermissible in the absence of any other material to demonstrate subsistence of such condition. No part of the contract has been shown to us from which such condition could be inferred. Necessity of subsistence such condition has been laid down in the case of Ferodo India (P) Ltd. for invoking Rule 9(1)(e). In our opinion, the provisions of Rule 9(1)(e) cannot be automatically applied to every import which has surface features of a turnkey contract. Just because different components of a contract or multiple contracts give the shape of turnkey project to the imported items, without specific finding on existence of “condition” as contemplated in clause 9(1)(e), value of all these components could not be added to arrive at the assessable value. Such an exercise would go against the provisions of Interpretative Note to Rule 4, which is part of the Valuation Rules in view of the provisions of Rule 12 thereof.”
18. Viewed in the backdrop of the law as propounded by the Hon’ble apex court in the case of JK Corporation, supra, we find that the contract, as entered into by the appellant with their overseas buyers are on identical There was no obligation to bind the appellants to any post import act/activity and thus render it as a condition of sale for procurement of the imported goods. We also note that there is no technical know-how fees attributable towards post import related/associated acts and activities. Thereby no case arises for scaling up the assessable value with the inclusion of the royalty charges. In fact the preamble clause of the Confidentiality Agreement supra clearly brings to fore its purpose, completely unrelatable to any post import functioning.
19. We find that the order of the Tribunal in the case of TDT Copper Vs. Commissioner of Customs, New Delhi9, relied upon by the adjudicating authority, is completely at variance as far as facts of the present case are concerned as Article 10 of the agreement therein provided for inclusion of various fees, charges and cost of technical services and were clearly a condition of sale. In the said case as relied by the learned Adjudicating Authority, the importer was required to pay US dollars 15 lakh towards engineering and servicing charges unlike in the present case where there is no such condition imposed on the appellant importer, by way of any of the above referred contracts entered into. In so far as the case of Collector of Customs, Gujarat, Preventive Ahmedabad Vs. Essar Gujarat Ltd.10, is concerned, we note that the Hon’ble Apex Court had taken cognizance of the said decision rendered, in its case of Commissioner of Customs Port, Kolkata Vs. Steel Authority of India1, referred to supra and therefore the said case requires no further elaboration.
20. For reasons aforesaid and our findings that there is nothing in the contract entered into by the two sides, to impute the additional costs as discussed in earlier paras, towards the sale of imported goods or as a condition of sale, we are of the opinion that the order of the learned Commissioner (Appeals), is without merits and is therefore liable to be quashed. We therefore set aside the order under challenge and allow the appeal filed by the appellant with consequential relief if any in law.
(Pronounced in the open court on…01.12.2023)
Notes:
1. 2020 (372) ELT 478 SC
2. 2007 (210) ELT 150 Tribunal, Bangalore
3. 2000 (115) E.L.T. 81 T
4. 2004 (168) E.L.T. 272 (Tri.-Del),
5. 1996 (88) E.L.T. 400 (Tribunal),
6. 2006 (202) E.L.T. 13 (S.C.)
7. 2008 (225) ELT A130 SC
8. 2007 (208) ELT 485 DA
9. 2000 (120) ELT 265 tribunal
10. 1996 (86) ELT 609 Supreme Court
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