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:
