1996 (11) TMI 426 - SC - Customs

Process licence fees and specified technical-service charges must be included in invoice value of imported plant; training excluded

COLLECTOR OF CUSTOMS (PREV.), AHMEDABAD Versus ESSAR GUJARAT LTD.

SC held that process licence fees and certain technical-service costs had to be included in the invoice value of the imported plant. The Court found the ... Licence Fees Addition - Pre-condition of sale - agreements Between Parties - cost of technical services in connection with the Midrex Process - Whether the licence fees paid to M/s. Midrex International B.V., Zurich, (Midrex) should be added to the invoice value of the plant bought by M/s. Essar Gujarat Limited (EGL) - Held that:- Although the agreement with TIL does not describe the plant as Midrex Direct Reduction Plant, the agreement with Midrex leaves no room for doubt that what the assessee had purchased was a Midrex Direct Reduction Plant at Emden. Although the plant was described in the agreement with TIL merely as a Direct Reduction Plant and the name of Midrex was carefully kept out, the agreement with Midrex makes it abundantly clear that the assessee had entered into an agreement to purchase a Midrex plant for which it was essential to have Midrex operation licence and Midrex technology to make the plant functional. That is why the overriding clause of having prior licence of Midrex was inserted in the purchase agreement with TIL. Without this licence and various other technical information to be provided by Midrex, it might not have been possible to operate the plant at all. It was only after this agreement with Midrex that the purchase of the plant was completed. Bearing in mind the terms and conditions of all the three agreements, we are of the view that it was essential for EGL to have the Midrex licence to operate the plant and the pre-condition imposed in Clause 11 of the purchase agreement about the operation licence from Midrex was to ensure that EGL got a plant which could be made operational with Midrex technology. Therefore, the process licence fees of DM 2,000,000 was rightly added to the purchase price by the Collector of Customs. The order of CEGAT on this question is set aside. Cost of technical services in connection with the Midrex Process - The services mentioned hereinabove are to be part of Licensing Agreement with Midrex. This agreement was a pre-requisite for finalisation of the contract with TIL to purchase the plant at Emden. The licence is not merely a permission to use the plant, but also to provide technical know-how to make the plant functional and also to improve the capacity of the plant by incorporating Hot Briquetting system. As all these services were to be rendered under the Process Licence Agreement with Midrex, the amount payable to Midrex as part of the Process Licence fee has to be included in the value of the plant. It has also to be borne in mind that these services were being rendered in order to improve the capacity of the plant by incorporating Hot Briquetting facilities. So far as payment of DM 23,100,000 is concerned, this sum is to be paid for “Technical Services”. A sum of DM 2,200,000 was payable for theoretical and practical training. This sum cannot be added to the value of the plant in any way. The sum of DM 23,100,000 payable for engineering and consultancy fee as specified in the agreement includes services like basic engineering and re-engineering for relocation of the existing plant at Hazira, India and basic engineering package for Hot Discharge and Hot Briquetting System and also preparation of necessary technical documents and hand over the same to the representatives of Essar in Austria. V.A. was also to provide specialist supervision of dismantling of the plant at Emden and also supervision of the plant, preparation of test report etc. Along with this, V.A. undertook to supply support services such as accommodation, logistics and transport and any other technical assistance needed by the collaborator and also training the engineers and personnel in similar plant. It also agreed to render various services in India. It is difficult to hold that the entire payment of engineering consultancy fee to V.A. will have to be added to the imported plants. But the plant was sold on “as is where is” basis. So whatever expenditure was needed to be incurred for dismantling the plant and making it ready for delivery has to be added to the value of the plant. The specialist supervision for dismantling of the plant and also engineering and consultancy services for this purpose will have to be added to the value of the imported plant. But this apart, other services rendered cannot be treated as adding in any way to the value of the plant. Since there is no clear indication as to how the various services have been valued separately, 10% of the amount of DM 23,100,000 should be added to the value of the plant on this account. Therefore, we are of the view that DM 2,000,000 being the process licence fee paid to Midrex Corporation, DM 10,100,000 being the cost of technical services provided by Midrex and a sum of DM 2,310,000 being payment on account of engineering and consultancy fee payable to V.A., should be added to the value of the imported plant. Appeals are disposed of. Issues Involved:1. Whether the licence fees paid to Midrex should be added to the invoice value of the plant bought by EGL.2. The relevance of the agreements between EGL, TIL, V.A., and Midrex.3. The applicability of Rule 9 of the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988.4. The impact of Section 14 of the Customs Act on the valuation of imported goods.5. The inclusion of technical services and engineering consultancy fees in the value of the imported plant.Issue-wise Detailed Analysis:1. Licence Fees Addition:The primary dispute is whether the licence fees paid to Midrex should be included in the invoice value of the plant bought by EGL. The Court observed that the agreements between EGL and TIL, and subsequently with V.A. and Midrex, indicated that obtaining a licence from Midrex was a pre-condition for the sale of the plant. The Court noted, 'Without a licence from Midrex, the plant would be of no use to EGL.' Thus, the overriding clause mandating the licence was deemed a condition of sale, and the licence fees were rightly added to the plant's purchase price.2. Agreements Between Parties:The Court examined the agreements between EGL and TIL, V.A., and Midrex. The agreement with TIL was contingent upon obtaining a licence from Midrex, which was essential for the plant's operation. The agreements with V.A. and Midrex further reinforced that the plant was based on the Midrex process, requiring the Midrex licence to be functional. The Court stated, 'Reading all these agreements together, it is not possible to uphold the contention that the pre-condition of obtaining a licence from Midrex was not a condition of sale.'3. Rule 9 of Customs Valuation Rules:Rule 9(1)(c) of the Customs Valuation Rules stipulates that royalties and licence fees related to the imported goods that the buyer is required to pay as a condition of the sale must be added to the transaction value. The Court concluded that the licence fees paid to Midrex were related to the imported plant and were a condition of the sale, thus falling within the ambit of Rule 9. The Court emphasized, 'Licence fees paid to Midrex will have to be added to the price of the plant to arrive at the transaction value of the plant.'4. Section 14 of the Customs Act:Section 14 of the Customs Act aims to determine the value of imported goods for customs duty purposes. The Court noted that EGL's purchase of the Midrex Reduction Plant required the Midrex licence and technical know-how to make the plant operational. The Court stated, 'The value of the plant will comprise of not only the price paid for the plant but also the price payable for the operation licence and the technical know-how.'5. Technical Services and Engineering Consultancy Fees:The Court examined the payments for technical services and engineering consultancy fees under the agreements with V.A. and Midrex. The payment of DM 10,100,000 for technical services under the Process Licence Agreement with Midrex was deemed essential for the plant's operation and thus included in the plant's value. However, the payment of DM 23,100,000 for engineering and consultancy fees was partially included, with only 10% of this amount added to the plant's value, as it covered services necessary for dismantling and making the plant ready for delivery. The Court concluded, 'DM 2,000,000 being the process licence fee paid to Midrex Corporation, DM 10,100,000 being the cost of technical services provided by Midrex and a sum of DM 2,310,000 being payment on account of engineering and consultancy fee payable to V.A., should be added to the value of the imported plant.'Conclusion:The Court held that the licence fees and certain technical service fees must be added to the invoice value of the imported plant, as they were essential for the plant's operation and were conditions of the sale. The Tribunal's decision was set aside, and the appeals were disposed of accordingly, with no order as to costs.