TaxTMI 
TaxTMI 
1991 (2) TMI 250
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.... of convenience and clarity we propose to first dispose of the appeal filed by M/s. Essar Gujarat Ltd. (herein after referred to Essar) and then to consider the Department's appeal. 2. The facts in brief common to both the appeals are that Essar who wanted to produce Sponge Iron at Surat sought the importation of a second-hand plant. The said plant was located in Emden West Germany. They made an offer for purchase of its second hand plant at DM 26 million, after getting necessary clearance from the Government of India. In this process they appointed M/s. Dastur & Co. P. Ltd. to examine the plant from economic and technological point of view. They also employed a foreign chartered engineer. In addition they approached M/s. Voest Alpine (VA for short) to advise them on the cost of the plant. Various estimates were made and M/s. MECON, a Government of India undertaking under the Department of Steel, working as Consultancy Engineers, opined that the value of the second-hand plant and machinery at DM 26 million was fair and reasonable. This was the price that was ultimately settled. 3. M/s. Teviot Investments Ltd. (TIL) were holding the plant for almost one year prior to sale to E....
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....amount of DM 37.4 million to the declared value. The summary of the charges made by the Assistant Collector is as follows : (a) There was a collaboration agreement between Essar and Voest Alpine; (b) The collaboration provided for payment of the following sums : 10.1.1.1 Process licence fees payable to Midrex Corp. for 2,000,000 the right to use Midrex process and patents 10.1.1.2 Cost of technical services provided under article 3 10,100,000 in connection with Midrex Process 10.1.2 Technical services 10.1.2.1 Payment for engineering & Consultancy fees as 23,100,000 specified under this agreement 10.1.2.2 Payment of theoretical & practical training outside 2,200,000 India (c) The agreement of sale of second-hand plant by Teviot Investments Ltd. was subject to the condition of the Essar obtaining the transfer of operational licence from Midrex of USA. (d) The payments for collaboration (DM 37.4 million) worked out to about 80% of the CIF value declared by Essar (DM 46.75 million). These payments were to be added to the transaction value (DM 46.75 million) in terms of Rul....
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....nt was not correct. He stated that the Collector held that this amount was includible in the transaction value under Rule 9(l)(c) of the Customs Valuation Rules, 1988. But this rule does not warrant the inclusion. Referring to the said Rule Shri Asthana argued that this Rule prescribes that in determining the transaction value there shall be added to the price actually paid or payable to the imported goods, royalties and licence fees related to the imported goods that the buyer is required to pay directly or indirectly, as a condition of the sale of the goods being valued, to the extent that such royalties and fees are not included in the price actually paid or payable. (These are the words appearing in the Rule). The learned Advocate argued that the essential elements of this Rule are that payments should be in relation to the imported goods and such an amount should be paid as a condition of import. Here the patent is for manufacturing process of sponge iron and not for the imported goods. Referring to the agreement with Midrex the owners of the patent and the process, the learned Advocate argued that payment was made to a third person, viz. Midrex and not to seller. He further a....
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....judgment of the Tribunal in the case of Collector of Customs, Bombay v. Maruti Udyog Limited, Gurgaon [1987 (28) E.L.T. 390 (Tribunal)]. 10. Submitting that the inclusion of DM 0.2 million approximately in the value the learned Advocate submitted that this charge included as supervision charges for dismantling should not have been so included as there is no provision in Rule 9 or the Valuation Rules for such an inclusion. He also submitted that this amount was already included in the amount of DM 20.75 million and submitted that supervision was intended only to ensure proper dismantling so that relocation of the plant in India could be done properly. Shri Asthana particularly referred to note to Rule 4 to buttress his argument that price actually paid or payable would not include either the fee paid to Midrex or the supervision charges. 11. Shri Prabhat Kumar, the learned DR referring to the facts of the matter submitted that the sale of the plant to Essar was on "as is where is basis", stating that the value estimates do not necessarily reflect the correct value when the price is much less than normally expected. The learned representative submitted that in this case estimat....
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....ded in the declared value. Referring to Interpretative Note to Rule 4 Shri Prabhat Kumar submitted that the note is a part of the Rule itself and argued that in the instant case the import is not merely of the rooted (built-in plant) but it is for the entire imported goods which is distinct from the value of finished products when imported. The value of the goods under importation would, therefore, include all charges incurred by Essar. 15. Shri Prabhat Kumar referred to sub-section 14(1A) of the Act and relying on the judgment of the Supreme Court in AIR 1961 SC 1152 in the case of K.R.C.S. Balakrishna Chetty and Sons & Co. v. The State of Madras submitted that getting the third party's license alone would have enabled Essar to use the plant was a condition of the sale. Referring to various agreements made by the appellants the learned representative argued that the agreements made with VA, TIL and Midrex were all to be read together and not separately as all these agreements together contributed to the sale of the plant and subsequent use of the same. With specific reference to the amount paid to Midrex Shri Prabhat Kumar argued that Midrex held the patent and, therefore, prov....
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....ed representative referred to the order of sanction for filing the appeal, passed by the Central Board of Excise and Customs, (the Board for short). He submitted that for the reasons given in the Board's order wherein all the services rendered by Midrex, Voest Alpine AG were listed, these services having been undertaken outside India should be included in the value in terms of Rule 9 (1)(b)(iv) of the Customs Valuation Rules, 1988. Pleading that the charges of DM 10.1 million covering the cost of technical services provided under Article 3 in connection with Midrex process and charges of DM 23.1 covering payments for engineering and consultancy fee are includible the learned representative submitted that the goods should be ordered to be confiscated, fine in lieu of such confiscation prescribed and penalty imposed. 20. To support his pleas the learned representative referred to the arguments earlier advanced by him (in the appeal filed by Essar) and submitted that invisibles are part of the value of the imported goods. Here the goods were purchased on "as is where is" basis and the employment of experts was essential. He submitted that the services the cost of which the Departme....
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....graph 59 of the said order and submitted that this paragraph dealt with the reasons why the amount of DM 23.1 million was not included. He emphasised that these costs were incurred for re-location of the plant at Hazira where modifications were done as also briquetting and re-engineering. Referring to the notice issued by the Board he submitted that these items which the Board seeks to include have no connection with the goods or the production of such goods meaning that these expenses have nothing to do with the production of the plant which Essar imported. He submitted that there is no ground to enhance the value or to confiscate the goods or to impose penalty. 23. Shri Prabhat Kumar in his rejoinder submitted that re-engineering for adoption to Indian conditions was includible. Referring to the two agreements with Voest Alpine and Midrex the learned representative submitted that these contracts are for expenses incurred by buyer. Finally Shri Prabhat Kumar submitted that an overall view should be taken and if Rule 9(l)(b)(iv) does not cover, the inclusion must be ordered if any of the rules or other statutory provisions warrant such inclusion. 24. We have considered the ri....
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.... the supplier (page 192 of the paper book) simply provided that purchases should be made through procuring operation licence. He submitted that this article is not a condition of the sale of the goods nor does it require any payment to any one. According to him it was an independent arrangement with Midrex under which payment of royalty was made. The said article did not make a condition of any payment or any agreement with Midrex. During the course of arguments the learned Advocate submitted that under Article 12 of the said agreement if any individual provision under the contract became invalid or inoperational the validity of the remaining provisions stood unaffected. The learned Advocate's contention was that in view of Article 12 the payment of licence fee to Midrex cannot be treated as a condition and non-payment there of would not have been fatal to the agreement. 28. In this context the learned DR's argument was that the assessable value that is to say the transaction value should include whatever payments were made by Essar. In our view this is a sweeping argument which cannot be accepted. If what the learned DR argued was correct there would be no need for any Valuatio....
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....ule 3 the value of imported goods shall be the transaction value and where such value cannot be determined it shall be determined by proceeding sequentially to subsequent Rules 5 to 8. Rule 4 of the Rules defines Transaction value and Rule 4(1) says that "the transaction value of imported goods shall be the price actually paid or payable for the goods when sold for export to India adjusted in accordance with the provisions of Rule 9 of these Rules". There are other provisions in Rule 4 but the reference to Rule 9 is significant which says that in arriving at the transaction value adjustments have to be made under Rule 9. All the same Rule 4 is a key Rule in that it defines the transaction value. Therefore, we cannot brush aside the Interpretative Note to Rule 4. This note explains the term "the price actually paid or payable" in the following language : "Price actually paid or payable The price actually paid or payable is the total payment made or to be made by the buyer to or for the benefit of the seller for the imported goods. The payment need not necessarily take the form of a transfer of money. Payment may be made by way of letters of credit or negotiable instruments. Pa....
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....r is related to the goods being valued and is a condition of sale of those goods. Advisory Opinion 4.3 Royalties and Licence fees under Article 8.1(c) of the Agreement 1. Importer I acquires the right to use a patented process for the manufacture of certain products and agrees to pay the patent holder H a royalty on the basis of the number of articles produced using that process. In a separate contract, I designs and purchases from foreign manufacturer E a machine which is specially intended to perform the patented process. Is the royalty on the patented process part of the price paid or payable for the imported machine? 2. The Technical Committee on Customs Valuation expressed the following view: Although the payment of the royalty in question is for a process embodied in the machine and one which constitutes the sole use of the machine, this royalty is not part of the Customs value since its payment is not a condition of the sale of the machine for export to the importing country." 35. The learned DR's argument that the Advisory opinion No. 4.1 is applicable to the facts of the case cannot be accepted because this opinion refers and deals with the value of a machin....
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....he extent that such value has not been included in the price actually paid or payable, namely: (i) materials, components, parts and similar items incorporated in the imported goods; (ii) tools, dies, moulds and similar items used in the production of the imported goods; (iii) materials consumed in the production of the imported goods; (iv) engineering, development, art work, design work and plans and sketches undertaken elsewhere than in India and necessary for the production of the imported goods;" A perusal of this rule shows that it deals with the value of imported goods. Further there are two conditions that should be satisfied before this Rule is applied. These are that (i) engineering, development, art work, design, plans and sketches undertaken (outside India) are necessary for the production of the imported goods, and (ii) that the services are supplied directly or indirectly by the buyer free of charge or at reduced cost for use in connection with the production and sale for export of the imported goods, and these are necessary for the production....
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....ex agreement begins with the words "to support the overall project for the design, engineering, dismantling and re-erection and commissioning of the plant...." In the agreement (article 1, definitions) plant is defined to mean the "direct reduction facility at Licence's site at Hazira. Therefore, article 2.3 has to be read accordingly. 39. Similarly 2.3 (b)(ii) refers to short-fall in equipment. Read with other parts of the agreement referred to above, this short-fall cannot be held to have any relation to the value of the imported goods. Therefore, payment for the services mentioned in Sl. No. ii is of no relevance to Rule 9(l)(b)(iv) or any other Valuation Rules. 40. In the Board's order there is a reference to Clauses (a) to (j) of Article 2.3 of the agreement with Voest. A perusal of these clauses which mentioned the services to be rendered does not indicate that any of them possibly be covered by Rule 9( 1) (b) (iv) of the Valuation Rules. This is because as the title of Article 2.3 reads, these services are "technical services related to the relocation of the plant from Emden to Hazira and simultaneously considering the incorporation of hot discharge and hot briquetting....
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....es that "no addition shall be made to the price actually paid or payable in determining the value of the imported goods except as provided for in this Rule". Therefore, unless a payment can be related to Rule 9, no addition can be made to the transaction value. The Department did not allege in the show cause notice, the Collector did not find in his order and it has not been claimed in the appeal or during the course of hearing that the additions can be made under any other Rule. 43. The show cause notice issued by the Assistant Collector on 24-10-1988, especially paragraph 9 thereof makes it clear that the Department proposed to assess the goods on the basis of the transaction value. We perused the Collector's order especially paragraph 28 and 33 to 38 wherein he has given reasons for taking the view that transaction value was genuine and was to be accepted. In our opinion the reasons given by the Collector are sound and are in accordance with the letter and spirit of law and it is not the Department's case at any stage that there is any kind of relationship between the supplier and Essar, between Essar, Voest Alpine or between Essar and Midrex or between the supplier TIL and M....