Case Law Details

Case Name : Commissioner of Customs, Ahmedabad Vs M/s. Essar Steel Ltd. (Supreme Court of India)
Appeal Number : Civil Appeal No. 3042 Of 2004
Date of Judgement/Order : 13/04/2015
Related Assessment Year :
Courts : Supreme Court of India (1041)

Brief facts

An agreement 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. The services agreement is separate from the main agreement for setting up the said plant in India. Vide a show cause notice, Revenue demanded the addition of technical know-how charges to the value of plant.

In their reply to the show cause notice,  the assessee 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. The Commissioner rejected the grounds stated by assessee and passed an order against the assessee. The said order was challenged in CEGAT and CEGAT 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.

Contentions of the Assessee

The Assesee contended that as per the agreement it was clear that payments made under the technical services agreement were not as a condition of sale of the plant.

Contentions of the Revenue

The Revenue contended that the facts of the case are covered by the Supreme Court judgement in the case of Collector  of  Customs (Preventive) v. Essar Gujarat Ltd., (1997) 9 SCC 738. 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.

Held by Hon’ble Supreme Court of India

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  where under  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.

The Hon’ble court further referred to Rule 4 and Rule 9 of the  Customs  Valuation  (Determination  of  Price  of  Imported Goods) Rules of 1988 and stated 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. The narrow question that arises in the present case is whether the payment made for the technical services agreement is to be added to the value of the plant that is imported in as much as such payment has been made as a condition of sale of the imported plant.

The Hon’ble Court stated that on an analysis of the technical services agreement, 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. It 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. The 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. Further, clause 13 of the purchase order dated states 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.

The Hon’ble Court further 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.

The Hon’ble Court further referred to the judgement in the case of Collector of Customs (Preventive) v.  Essar Gujarat Ltd., (1997) 9 SCC 738 which is 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 Court held that the amounts payable to Deutsche Marks 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. Hence, this judgement can be distinguished on the basis of facts of the case.

The Hon’ble Court further referred to the judgement in the case of Tata Iron & Steel Co. Ltd. v.  Commissioner  of  Central  Excise  & Customs, Bhubaneswar, Orissa, (2000) 3 SCC 472, wherein 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.

The Hon’ble Court further states that this Court distinguished the judgment in the Essar Gujarat case in number of cases i.e.

  • Commissioner of Customs (Port), Kolkata v. K.  Corporation Limited, (2007) 9 SCC 401
  • Commissioner of Customs v. Frodo  India  (P)  , (2008) 4 SCC 563
  • Commissioner of  Customs (Port), Chennai v. Toyota Kirloskar Motor (P) Ltd., (2007)  5  SCC 371

In view of the above the Hon’ble Supreme Court dismissed the appeal of Revenue.

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