TaxTMI 
TaxTMI 
2011 (12) TMI 109
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....company of M/s Honda Motors Company, Japan (Honda Japan, for short) and M/s Siel India Limited, the Indian Partner. The equity of the respondent no.1 is held by Honda Japan and Siel in the ratio of 90% and 10% respectively. 4. M/s Siel India Ltd. entered into an agreement dated 12th September, 1995, with Honda, Japan for manufacture and sale of automobiles with technical know-how/technical information etc. from them. Foreign Investment Promotion Board (FIPB, for short) granted approval to the said joint venture vide letter dated 13th November, 1995. Subsequently, Honda Japan and the respondent No.1 entered into a Technical Collaboration Agreement (TCA, for short) and a Memorandum on Exchange of Technicians both dated 21st May, 1996. 5. The respondent No.1 had imported into India drawings, plans, designs, manuals including CD roms, video cassettes etc. (drawing etc. for short) under the TCA agreement from Honda, Japan. The dispute pertains to drawings etc. which were imported on or before 1st March, 1997. These imported drawings etc. were cleared and custom duty was paid as per declarations made computing the import value as equivalent to the cost of the physical....
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....misdeclaration, misleading and suppression of facts. (vii) Interest in terms of section 28-AB of the Customs Act, 1962, may not be recovered." 7. In the second show cause notice dated 16th March, 2001, the respondent No.1 was asked to show cause as under:- "(i) take the commercial value as Rs.3,47,375,735/- CIF as against the declared nominal value; (ii) demand differential duty of Rs.10,19,98,137/- under Section 28 of the Act; (iii) hold the consignments liable for confiscation under Section 111(m) of the Act; (iv) impose penalty under Section 114A of the Act; (v) demand interest under Section 28AB of the Act; and (vi) impose penalty on S/Sh. Teruo Fujisaki, Nandankumar Goila and Hironbu Golo, President, Vice President and Finance Director respectively of the applicant firm." 8. During the course of investigation, the respondent No.1 vide their letter dated 15th April, 1997 had given break-up of the lump sum fee of US $ 30.5 million paid to Honda, Japan under the TCA. It was/is the contention of the respondent No. 1 that the lump sum fee can be divided into six parts and only three parts can ....
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....r getting the confirmation, pay the same within 30 days of receipt of this order. Immunity from payment of interest in excess of 10% is granted. (iii) Immunity from confiscation of the goods is granted. (iv) Immunity from penalty and prosecution under the provisions of the Customs Act is granted to the applicant and S/Sh. Teruo Fujisaki, Nandan Kumar Goila and Hironbu Golo, President, Vice-President and Finance Director respectively of the applicant company." 12. Broadly two contentions have been raised by the petitioners. Firstly, the lump sum fee of US$ 30.5 million cannot be bifurcated and constitutes the true and correct value of the imported drawing etc. The second contention relates to jurisdiction of the Settlement Commission. 13. By order dated 19th December, 2006, interim applications filed by respondent No.1 were decided by this Court and directions were issued to refund the payments made by the respondent No.1 along with interest. This order was made subject matter of challenge before the Supreme Court and the appeals stand partly allowed. It was held by the Supreme Court that the High Court had erred in directing refund of the Rs.....
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....rest by the Supreme Court in Associated Cement Companies Ltd.vs. Commissioner of Customs, 2001 (4) SCC 593. Paragraphs 27, 33- 34, 41-42, and 44 of this judgment are relevant and are reproduced below:- "27. According to Section 12 of the Customs Act, duty is payable on goods imported into India. The word 'goods' has been defined in Section 2(22) of the Customs Act and it includes in clause (c) 'baggage' and clause (e) 'any other kind of movable property'. It is clear from a mere reading of the said provision that any movable article brought into India by a passenger as part of his baggage can make him liable to pay customs duty as per the Customs Tariff Act. An item which does not fall within clauses (a), (b), (c) or (d) of Section 2(22) will be regarded as coming under Section 2(22)(e). Even though the definition of the goods purports to be an inclusive one, in effect it is so worded that all tangible movable articles will be the goods for the purposes of the Act by residuary clause (e) of Section 2(22). Whether movable article comes as a part of a baggage, or is imported into the country by any other manner, for the purpose of the Customs Act, the provision of Section 1....
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....dictionary or a magazine is not only the value of the paper. The value of the paper is in fact negligible as compared to the value or price of an encyclopaedia. Therefore, the intellectual input in such items greatly enhances the value of the paper and ink in the aforesaid examples. This means that the charge of a duty is on the final product, whether it be the encyclopaedia or the engineering or architectural drawings or any manual. xxx xxx xxx 44. It is a misconception to contend that what is being taxed is intellectual input. What is being taxed under the Customs Act read with the Customs Tariff Act and the Customs Valuation Rules is not the input alone but goods whose value has been enhanced by the said inputs. The final product at the time of import is either the magazine or the encyclopaedia or the engineering drawings as the case may be. There is no scope for splitting the engineering drawing or the encyclopaedia into intellectual input on the one hand and the paper on which it is scribed on the other. For example, paintings are also to be taxed. Valuable paintings are worth millions. A painting or a portrait may be specially commissioned or an article ma....
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....he Settlement Commission has accepted the bifurcation given by the respondent No.1 in their letter dated 15th April, 1999 and not accepted the stand of the petitioner that US$ 30.5 million represents the value of imported drawings etc. Further, the defence and contention of respondent no.1 on import value, the bifurcation of consideration of US$ 30.5 million into different heads and attribution of a part thereof towards imported drawings etc., does not establish or show that there was failure to fully or truly disclose duty liability. The figures given in the letter are not disputed, but the question is whether such bifurcation is permissible or relevant for determination of value of the imported drawings etc. This is a matter of perception/understanding and is certainly debatable, and it cannot be equated with failure or omission to make full and true disclosure of the duty liability. Question of valuation of imported drawings etc., is not free from difficulty and a certain amount of guesswork and estimation is involved in the present case. 20. This brings us to the core issue raised in the present case, whether this Court in exercise of jurisdiction under Article 226 an....
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....) is applicable. (d) The conclusions and the valuation of the imported drawings etc. made by the Settlement Commission is otherwise per se based on surmises and conjectures. 22. Section 14 of the Act states that value of imported goods is deemed to be the price at which such or like goods are ordinarily sold, and offered for sale, or delivered at the time of sale or importation. The price is determined on arms length basis i.e. the seller and buyer have no interest in the business of each other and the price is sole consideration for sale or offer for sale. As noticed above, respondent No.1 and Honda, Japan are closely associated as the latter has 90% share holding in the respondent No.1-company. In Section 14(1) of the Act, there is reference to 'deemed price' or the 'transactional value of the goods', which is the deemed price and is required to be determined in accordance with the CVR. Referring to different rules in the CVR and different methods of valuation stipulated therein, in Commissioner of Customs vs. Messrs Ferodo India Pvt. Ltd., (2008) 4 SCC 563, it has been held as under:- "11. Rule 3 of the CVR, 1988 inter alia provides for six methods ....
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....hat when customs value cannot be determined on the basis of transaction value of the imported goods or identical or similar goods, the value of the imported goods shall be based on the unit price at which the imported goods or identical goods or similar goods are sold to an unrelated buyer in the country of importation in the greatest aggregate quantity. The starting point in calculating the deductive value is the same price in the country of importation. Various deductions are necessary to reduce that price to the relevant customs value. These deductions are: (i) commissions usually paid or agreed to be paid, profits and general expenses added in connection with sales; (ii) usual transport cost and corresponding insurance are to be deducted from the price of the goods when these costs are usually incurred within the country of importation; (iii) the customs duty and other national taxes payable in the country of importation by reason of importation; (iv) value added by further processing, wherever applicable. Method 5 ' Computed Value (Rule 7A) Computed value determines the customs value on the basis of the cost....
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....ted by Sh. Bajpai, Ld. Advocate for Revenue. Anyhow, this controversy is academic since in this case the value is being arrived at in terms of TCA, and in terms of transaction value and not on any notional basis." 24. We have noticed the aforesaid paragraph as it was contended by Mr. V. Lakshmi Kumaran, Advocate appearing on behalf of the respondent No.1 that in Associated Cement Company (supra), the Supreme Court has held that 1/3 of the amount payable by the importer should be taken as a figure representing the technical value of the imported material. The said contention was rightly rejected by the Settlement Commission in view of the TCA in the present case. This is not a case of a composite/multiple contract. 25. In order to decide the aforesaid contentions, we have to refer to clauses of the TCA and the break-up given in the letter dated 15th April, 1999. 26. TCA agreement dated 21st May, 1996 defines the term "knowhow and technical information" in clauses 6 and 7 of Article 1. The said clauses read as under:- "6. The term "Know-How" shall mean any and all secret technical information (except for the Intellectual Property Righ....
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....e Technical Materials, which shall be written in the English language, shall be effected within reasonable period of time after the Effective Date hereof, with regard to the Technical Information existing as of the Effective Date hereof, and shall be effected from time to time, at the time when LICENSOR deems it necessary to do so, or effect within reasonable period of time from the day when the LICENSOR approves LICENSEE's request, or be effected within reasonable period of time from the day when LICENSOR and LICENSEE agree to a model change of the Products with regard to the Technical information coming to exist after the Effective Date hereof. All expenses for preparation and delivery of the Technical Materials shall be borne by LICENSOR. Any incidence of taxation or Customs Duties shall be borne by LICENSEE. 4.3 Technical guidance by dispatching to LICENSEE technical expert(s) of LICENSOR and/or technical training of LICENSEE's engineer(s) at a factory or factories of LICENSOR or its designee shall be made in accordance with the "Memorandum of Exchange of Technicians" separately entered into between the parties hereto as Exhibit III attached hereto." 28. The....
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....nge of Technicians", separate from and in addition to the payments under this consideration is included in the payments under this Article 14." 29. Article 16 of the agreement deals with trademark and states that Honda Japan has granted indivisible and non-transferable license to the respondent no.1 to use the trade marks in connection with sale and distribution and marketing of cars, parts etc. 30. Article 19 deals with terms of agreement and states that the agreement shall come into force from the effective date and continue for a period of ten (10) years from the date of agreement or seven (7) years from the date of commencement of commercial production and shall be thereafter renewed subject to prevailing laws in India. There are also provisions relating to termination. 31. The contention of the respondent No.1, which has been accepted by the Settlement Commission, is that 30.5 million dollars or Rs.120 crores should be bifurcated into six heads in terms of their letter/bifurcation given by Honda, Japan. The said letter is relevant and material and therefore is reproduced in entirety: "COST BREAK DOWN OF KNOWHOW/TECHNICAL INFORMATION SUPP....
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....CT THAT THE LUMP SUM CONSIDERATION OF ¥ 3,111,000,000 ($ 30.5 MILLION) FOR TCA HAD AN ESTIMATED COMPONENT OF ONLY ¥ 1,438,400,800 FOR "OTHER INCIDENTAL COSTS" THE ACTUAL EXPENDITURE IN EXCESS OF ¥ 1,438,400,800 IS NOT RECOVERABLE and HAS NOT BEEN RECOVERED FROM HONDA SIEL IN TERMS OF THE TCA SINCE THIS IS PROJECT SUPPORT EMANATING FROM HONDA MOTOR CO. LTD. JAPAN. 3. THE COSTS INDICATED UNDER SERIAL NO. 2,3 and 4 ABOVE, INCLUDE THE EXPENSES ON CONCEPTUALISATION, DESIGN and DEVELOPMENT and PREPARATION OF THE DOCUMENTS and NOT MERELY THE COSTS OF REPRODUCTION. Cost Buildup of Drawings Drawings supplied to India Drawings not need in India Estimated Supply Plan of Drawings Total Drawings 1995/11 - 1997/2/28 1997/3/1 - 1999/3/31 2000-2002 2003-2004 City New City Civic or X Model 7,500 6,193 9,131 2,000 23,000 47,824 Breakup of 7,500 Dutiable Drawings Number of Special Drawings for India out of Dutiable Drawings 178 Number of Common Drawings out of Dutiable Drawings 7,322 Cost of Total Drawings for "City" Model to be Produced in 7 Countries. Labour cost per hour (¥ 5,500) x working hou....
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....ned on exchange of technical personnel. 4.3 Trademark User Agreement As a part of JV Agreement, Honda will allow use of "HONDA" name and insignia and other trademarks on the products, as per Trade Mark User Agreement to be signed. 4.4 Payments to Honda Motor Co., Japan 1. Technical Know-how Fee For the Technology and know how to be transferred to the JV Co., Honda will receive a technical know-how fee of US$ 30 mn. (Gross) subject to tax deduction at source). In order to support the cash flows of the new JV company, Honda has agreed to receive this know how fee in 5 equal, interest free, instalments beginning from the 3rd year of commercial production. 2. Model Change Fees Honda usually change its models every 4-6 years depending on the market needs. In order to provide the latest updated technology and designs for model change, following lumpsum technical fee will be payable at the time of such change: Full Model Change of first model (expected to be in the 6th Year of commercial production of the first model) US$ 0.5 mn. Minor changes Additions/deletions/variations No change." 33. The rele....
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....ty is payable on drawings, plans etc. made in India. The said preposition is correct. Customs duty is payable on import. However, it is for the respondent No. 1 to show and establish that the drawings etc. were made in India or technical knowledge or information was furnished in India and not imported from Japan. The bifurcation and the figures at serial nos. 2, 3 and 4 alone do not show and establish the value of the imported drawings etc. Thus there is this flaw and error in the decision making process. 36. Settlement Commission by the impugned orders has held that the respondent No. 1 is liable to pay customs duty of Rs. 84,00,257/- and Rs.32,63,032/-. It is the case of both the sides that customs duty on drawings etc. was payable @ 10% of the import value computed as per Section 14 and CVR. Therefore, in other words, the Settlement Commission has held that the total import value of the drawings etc. was about Rs. 11.6 crores upto 1st March, 1997, out of the lump-sum payment of Rs.120 crores in terms of the TCA. Rs.11.6 Crores constitutes about 10% of the total lump-sum value. The date 1st March, 1997 is relevant as thereafter Customs duty on drawing etc. was withdrawn. Durin....
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....g the stand of the respondent No.1 that the reimbursement of expenditure incurred by Honda Japan should be deducted from the figure of USD 30.5 million. 38. The Settlement Commission has also erred in holding that the consideration of US$ 30.5 million is for Article 2 i.e. for use of trademark/name Honda. As noticed above, the respondent No.1 had to pay annual royalty @ 4% under Article 14.1.2 in addition to US$ 30.5 million. It appears that both sides had attributed 4% royalty as payable for use of trademark and rights under Article 2 and not towards know-how and technical information furnished under Article 4.2/14. 39. Thus, on these aspect we are in agreement with the petitioner that there is an error in the decision making process. These relevant aspects have been over looked and not considered. 40. However, on certain other aspects, it is not possible to accept interpretation and stand of the petitioner either in entirety or in part. It is important to state so as we are passing an order of remit for a fresh decision by the Settlement Commission. In case these observations are not made, it is likely to create confusion and doubt about some of the ....
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....ent that the knowhow or information shall be furnished for a period of 7 years or 10 years. The technical knowhow is not restricted to setting of the plant, but also for manufacture of cars including designs, engine, transmission etc. It is noticeable that as per the proposal initially submitted, payment of USD .5 million was to be made on introduction of new car model, but after approval of the FIBP, this component was added to USD 30 million lump sum fee. No additional fee was payable for new car models (iii) Expenses on personnel whether they are included in the lump sum fee? The TCA did stipulate that payment for personnel deputed by Honda Japan to India or expenses on technical training given to Indians, who travel abroad to Honda Japan for technical information and know-how shall be subject to another agreement. A separate agreement, i.e. Memorandum of Understanding dated 21st May, 1996, was entered into for the said purpose between the respondent No.1 and Honda Japan and the rates/consideration were stipulated therein. The Settlement Commission has accepted the stand of the respondent No.1 that the second agreement was not implemented and payments as stip....
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....ndent no.1. This aspect will be re-examined by the Settlement Commission and contention accepted or rejected after giving reasons. The petitioner has relied and referred to Article 14.4 of the TPA, which has been quoted above. The effect and interpretation thereof will be considered. We do not give any firm opinion thereon. The caveat mentioned above will be considered. (iv) Whether Rule 9(2)(e) is applicable? This contention of the petitioner has to be rejected. The said Rule applies when an addition is made to value of imported tangible goods in the form of machinery, plant, etc. by including value of knowhow, which has been billed separately, but is intricately or otherwise linked with the imported machinery/plant. (see Commissioner of Customs (Port), Chennai v. Toyota Kirloskar Motor Private Ltd., 2007 (5) SCC 371, Tata Consultancy Services v. State of Andhra Pradesh, (2005) 1 SCC 308). This is not so in the present case. The show cause notice does not make any such allegation. No case has been made out to show that imported tangible goods in the form of machinery were sold by Honda, Japan. It is not alleged in the present writ petitions that the knowhow and....