Case Law Details
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.
