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TaxTMI 
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2004 (7) TMI 643
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....d 25-10-2001 the Commissioner held that the various items of equipment, machinery etc. imported for the Liquefied Natural Gas (for short, LNG) facility are not entitled to assessment under Tariff Item 9801.00(3) as well as under Tariff Item 9801.00(1) as project imports. It was also held that a portion of the value of the off-shore services contract is liable to be added to the declared value of the equipment etc. imported for the LNG facility. On the above basis provisional assessment was finalized and demand of duty of Rs. 245,58,73,987/- was upheld on imports effected and cleared under 319 Bills of Entry. There is also a demand of Rs. 8,30,94,084/- in respect of certain goods that have been assessed provisionally but are pending clearance and a demand of Rs. 21,44,77,666/- on items imported under 63 Bills of Entry that are pending assessment and clearance. The learned Commissioner also held that all items imported for LNG facility are liable for confiscation under Section 11(m) of the Customs Act, 1962 for alleged misdeclaration and he imposed redemption fine in lieu of confiscation of an amount of Rs. 1,33,54,841/- on items which are pending clearance/assessment. He further imp....
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.... the project. However, after holding as above, the Commissioner remanded the matter to the adjudicating authority with a direction "to consider the assessment of SPM appropriately while finalizing the provisional assessment after examining its role in the second phase and thereafter decide the matter appropriately". The Revenue has come in Appeal C/520/2000 against the above order contending that finding entered by the Commissioner (Appeals) that SPM system would qualify for project import as an auxiliary system for an integral part of the project, cannot be sustained. DPC has filed appeal No. C/519/2000 challenging that part of the order of the Commissioner where he remands the case directing Assistant Commissioner to finalize the provisional assessment of SPM after considering its note in the second phase. 4. We will first take up Appeal No. C/601/2001 filed by DPC. The issues coming up for consideration are - (a) Whether the various items of equipment, machinery etc. imported for LNG facility are entitled to the concessional rate of Customs duty under Tariff Item 9801.00 - Project/Imports? (b) Whether a portion of the value of the Off-shore Services Contract....
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....r plant will have generating facility of 2000-2400 MW nominal capacity. It also mentioned "Project includes construction of regasification facilities for LNG and pipeline interconnections to power plant. According to the appellant, since this is the first power generation facility to work on LNG and LNG is not available in India it had to be imported. The setting up of an LNG facility is an integral part of power plant. Referring to its letter dated 28th August, 1992 seeking approval of the Government of India for setting up of the project the appellant would contend that proposal to FIPB was a consolidated proposal that included setting up of LNG facility as a part and parcel of the power project. The cost of LNG was identified separately as 845 million US$. It is submitted that the above aspects formed part of the project report submitted to FIPB. Paragraph 1.06.02 referred to initial use of fuel oil for the power station till the availability of externally sourced LNG. Letter dated 3-2-93 from FIPB conveying the approval of Government of India for setting up of the power project at Dabhol would also show that it was an integrated project including LNG facility. 7. Subsequentl....
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.... and a breakwater jetty and facilities for the receipt, storage and regasification of LNG for Phase II. 9. The learned Sr. Counsel who appeared on behalf of the Revenue submitted that in the matter of deciding classification Customs Department is the final authority and that the appellant cannot seek shelter under the approval granted by FIPB or the recommendation of the sponsoring authority. In support of the above proposition he placed reliance on the decision of the Supreme Court in Jackson Thevara - 1992 (61) E.L.T. 343 (S.C.) and the decisions of this Tribunal in NALCO - 1997 (94) E.L.T. 409 and EID Parry - 1998 (100) E.L.T. 275 (T). The Revenue would contend that LNG facility has been set up to make available Natural Gas which is the raw material for various industrial consumers including the Power Project. The equipment and material imported for implementing processes before gas came into existence (including unloading terminal, storage tank and regas terminal) cannot be regarded as equipment and material imported for initial setting up of the Power Project or substantial expansion of the existing Power Project within the meaning of Customs Tariff Heading 9801. Strong rel....
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....upply of machinery and equipment for the LNG facility was 103.354 million US $, the contract value for service charges was 149.379 million US $. Thus, the contract value for service charges for LNG facility would be 144.53% of the contract value for the machinery and equipment. In order to set up Phase II of the power project, DPC entered into two off-shore contracts. Off-shore supply contract for the supply of machinery was for 400 million US $ while the off-shore services contract for various services undertaken outside India was for consideration of 100 million US $. Thus in respect of Phase II of the power project, the contract value for services charges was 25% of the contract value for machinery and equipment. Following are the additions made by the Commissioner apportioning a portion of the service charges in respect of different items. They are given below under three charts :- Other than Marine i.e. LNG Terminal (Break-up of offshore services by Kvaerner) No. Major Category Value for Services (Estimated) (US $) Amount included in the Assessable Value as per Rule 9 (l)(b)(iv) of Customs Valuation Rules '88 (US $) (1) (2) (3) (4) 1. Project M....
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....s 2,600,000 * 1,925,820.00 2. Coordination of Preparation of Bid parameters, specifications, RFOs 1,772,000 * 1,312,520.40 3. Evaluation of bids, selection of vendors, and review of contracts and Purchase Orders 972,000 * 719,960.40 4. Inspection and Quality Assurance 5,934,000 * 4,395,313.40 5. Offshore Warranty Coordination 1,510,000 * 1,118,457.00 6. Scheduling, Cost Engineering, Project Controls, reporting 10,559,000 7821,051.30 7. Program and Project Management 8,221,000 * 6,089,294.70 8. Regas Engineering Coordination - Primary and Secondary Power 1,031,000 # 1,031,000.00 9. Regas Engineering Coordination - LNG Storage Tanks 3,100,000 # 3,100,000.00 10. Regas Engineering Coordination Civil, Site, Roadways 812,000 000 11. Regas Engineering Coordination Structural, Piping and fire Protection 1,738,000 # 1,738,000.00 12. Regas Engineering Coordination Regas Process 2,283,000 # 2,283,000.00 13. Regas Engineering Coordination - Controls Instrumentation and Communications 921,000 # 921,000.00 14. Marine Engineering Coordin....
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.... for the drawings and plans, by apportioning one fourth liability for the imported plant, since three other plants were manufactured on the basis of same plans and designs. Reliance was also placed on the decision of the Supreme Court in Essar Gujarat [1996 (88) E.L.T. 609]. In the above case the Apex Court held as follows :- "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". 15. The appellant would contend that offshore services contract is not related to offshore supply contract. No part of the value of the services contract is includible in the value of imported equipments since imported equipment was not manufactured according to any drawing or design, developed under the services contract and made available to the manufacturer/supplier of the equipments. The appellant would intimate the required specification to the prospective suppliers who would manufacture the goods as per the specification. According to the appellant, making available specification is outside the purview of Rule 9(1)(b)(iv). The learned Counsel for the appe....
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....mize the purchaser's involvement in the detailed design of the unloading arms. It relies on the skill and experience of the vendor in the design and packing of LNG unloading arms, in environments similar to that specified in the Dabhol terminal. It is intended that the equipment is as close to the vendors standard as possible, while maximizing the use of components proven in LNG service.' C.25 Article 7.10.1 dealing with materials specifies that 'all materials used shall be vendors standard, suitable for LNG service and the marine environment of Dabhol.' C.26 Article 12.1 dealing with the documentation provides as follows :- 'Relevant drawings and documentation shall be provided by the vendor in accordance with the requirements of the purchaser's Vendor Document Requirement Schedule (VDRS), which forms part of the requisition.'" The appellant would further contend that no data is provided by the offshore contractor as an assist necessary for production of steel plates required for fabricating the tanks. The role of the offshore service contractor was limited to determining the pressure, temperature and other parameters of the LNG at different parts of ....
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....readily available articles such as piles, fenders, mooring systems, navigation aids etc. which do not require any design or engineering drawing supplied by the purchaser. The Basic Engineering and Stability calculation is an activity which precedes detailed engineering and therefore, it has also no connection to the services contemplated under Rule 9(1)(b)(iv). Seismic Engineering is something related to the site in India which also does not involve any engineering required for production of imported goods. This service rendered under Heading 'Scheduling' is in respect of an overall project schedule for implementation of project execution. It contemplates targets for completion and progress on monthly basis. The service has also no relevance under Rule 9(1)(b)(iv). According to the appellant, the service rendered under Mathematical Mooring Testing is also not connected with any engineering design specification. The services rendered under the Mathematical Wave Testing relates to determination of design parameters at the berth and along the trestle. It is part of jetty work which is mostly a concrete construction utilising materials purchased in India. The appellant would, therefore....
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....cation of the specification is also very much part of the engineering and drawing. He quoted the following by Sherman and Glashoff relied on by the appellant :- "The cost of engineering and drawing are not part of the Customs value, even if undertaken outside the country to which the machine is shipped to the extent that they are an appropriate way of ordering the machine- that is, of telling the manufacturer the specifications of what is being ordered. Only if the engineering or drawing goes further, should it be deemed to be a part of the production process". (Emphasis supplied.) 21. Reliance was placed by the learned Counsel on the decision of the Supreme Court in Andhra Petro Chemicals (APCL) - 1997 (90) E.L.T. 275 (S.C.). In the above case a similar plea that the supplier had given only specification to the sub-vendors and the design of the equipment was done by the sub-vendor to conform to the operational requirements of the equipment was taken. The Tribunal took the view that these charges for specifications are to be included in the value of the goods. The above decision was upheld by the Hon'ble Supreme Court. 22. Revenue contends that the imported goods are....
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....or :- (i) Material requisition including P & Ids, Block diagram of the equipment. (ii) Instruction to vendors (proves process of review and inter action) (iii) Data Sheets (Dimensions of arms) (iv) Specification of 'unloading arms' (General Instructions). P & ID diagram is a drawing which shows details of the concerned equipment and their inter connection with other equipment for a particular portion of the LNG facility. Block Diagram is a diagram which shows the general details of equipment and its interconnection with other equipments. The above mentioned documents are passed on to the vendors only for the reason that these documents are necessary for the production of the imported goods. On the basis of the above mentioned diagrams, the vendor had developed P&Ids and manufacturing drawing of the equipment which are further reviewed by the service contractor. Therefore, the activities undertaken by the service contractor/sub-contractor are necessary for the production of the goods. According to the Revenue the Commissioner was fully justified in making the additions and the appellant's case both on the issue of classification and valuation i....
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....ld still require to maintain SPM system to ensure supply of Naphtha or Distillate as back up fuel or/to commission or start the power plant after it was shut down for any reason. According to the appellant, SPM facility was not a temporary facility. Even if the SPM system is not to be used at Phase II stage, it cannot be denied the benefit of Heading 9801. 27. The contentions raised by the Revenue in its Appeal No. C/520/2000 are similar to those in the case of LNG facility in the appeal filed by DPC. It is contended that SPM system cannot be treated as part and parcel of the project and neither auxiliary equipment of the project. The learned Counsel for the respondent supported the finding of the Commissioner (Appeals) on the basis of the arguments addressed by him in Appeal No. C/601/2001-NB(A). 28. We will first consider the issue whether various items of machinery equipments etc. imported for LNG facility are entitled to concessional rate of Customs duty under Tariff Item 9801.00 as Project Import. The Revenue is seeking to support the finding of the Commissioner against the assessee relying on Larger Bench decision of this Tribunal in NALCO. Appellant on the other hand w....
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....ate 30 days light oil storage (collectively, the 'Power Plants') Project includes construction of regasification facilities, for LNG and pipeline interconnections to Power Plant (collectively, the 'Gas Facilities')". 31. In the letter dated 3-2-93 the FIPB conveyed the approval of the Government of India to the setting up of the power project at Dabhol. The relevant portion is quoted below it is seen that - "Set-up, own and operate a Natural Gas fired combined cycle power station of a capacity of 1920 MW (the capacity may be extended to 2550 MW at a future date), based on imported Liquefied Natural Gas (LNG) along with an integrated facility for sourcing, import, reception, handling, storage and regasification of LNG, for fuel supply to the power station." 32. Even when the project was divided into two phases, LNG facility was part of the project. In the letter dated 23-3-94 of FIPB, while approving the modification of the project into two phases, a condition was imposed that the infrastructure facility of the Public Sector canalizing agency and the existing port infrastructure should not be used for import of fuel (Diesel/LNG). Such a condition is not availa....
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....e Hon'ble Supreme Court reads as follows :- "Application has been filed indicating that the matter in this dispute has been settled between the parties and a Committee on dispute has ultimately taken the view that the Equipment connected with the storage of caustic soda and alumina can be considered as part of manufacturing process and project import benefit could be considered for these equipments as mode of settlement. Other than the above equipments all other equipments of port facilities should be considered as port handling equipment and thereof could not be eligible for project benefit. In view of this settlement the impugned order under appeal is set aside and is ordered in terms of the settlement. The appeal stands disposed of accordingly." 36. The learned Counsel appearing on behalf of the Revenue brought to our notice the minutes of the meeting of the Committee on Disputes held on 17-2-2004 which would show that the Department of Revenue had agreed to the terms of agreement without prejudice to their right in any other case on similar issue. Therefore, the settlement may not be taken as an admission on the part of the department regarding the legal po....
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....is much more than the specification. If it is beyond the specification, then the ratio of the decision of the Supreme Court in Andhra Petro Chemicals v. CC, Madras - 1997 (90) E.L.T. 275 (S.C.) would apply. Therefore, we have to examine in this case whether on the facts the offshore service contract provided much more than specification so that it would amount to design and engineering to enable production of the goods imported. In Andhra Petro Chemicals Ltd. v. CC, Madras - 1997 (91) E.L.T. 349 (Tribunal) the decision of the Tribunal was affirmed by the Supreme Court. On going through the decision of the Tribunal which is reported as Andhra Petrochemical Ltd. v. CCE, Madras - 1997 (91) E.L.T. 349 we find two relevant factors - (1) Davy Mekee (London) Ltd. entered into contract with M/s. APCL for supply of equipment and materials, for technical know-how and for servicing of the plant proposed to be erected. DML supplied detailed specifications for each item, standards and data sheets as listed on the engineering document list, general design requirements, layout and other relevant technical information while placing the purchase orders on the manufacturers. (2) the drawing submitte....
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....ign are subject to review and modification by the service contractor. Service Contractor has to provide data sheets and drawings to the vendor. In the nature of the different parts to be manufactured, it is evident that an unconnected vendor without such data sheets and drawings from the service contractor cannot manufacture the imported goods. The above mentioned documents would clearly show that the manufacture of the goods imported requires coordinated activity between the vendor and offshore service contractor/sub-contractor. There is continuous interaction between them till a design/drawing is finalized. 41. The instructions to vendor would also show that the vendor has to submit calculations, performance and materials, engineering data and certification and manufacturing data dossier for review of the offshore service contractor in addition to the data sheets and drawings. Therefore, the offshore service contractor in addition to providing design and engineering specifications to the vendors, has assisted not only in the development of manufacturing drawing of the imported equipment but also in the development of manufacturing data dossier of the product. 42. The Piping....
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.... 45. On going through different items coming under each category, we find that some of services may not have any impact at all on the production of the goods imported. For example, under the heading 'Other than Marine i.e. LNG Terminal', Item 3 Commercial Management and Item 7 Constructability. The value of these services have nothing to do with the production of the goods imported and therefore cannot be included in their assessable value. We are also of the view that in respect of Items 1, 2, 6, 8 and 12 the entire value of service contract cannot be added to the assessable value of the goods imported. About 50% of the value can be estimated as that will be relatable to the equipments imported. In the result, the amount of the value of the services to be included in respect of import relating to other than Marine i.e. LNG will have to be modified as follows :- S. No. Major Category Value for Services (Estimated) Amount included in the impugned order Amount required to be included and Basis Basis Amount 1. Project Management 10,356,519 10,356,519 50% 5,178,260 2. Engineering Management 6,731,73....
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.... 1,330,000 443,333 0% - 13. Physical Model Testing 1,862,000 - 0% - 14 Contract Administration & Legal Support 1,330,000 - 0% - 26,600,000 6,561,333 2,793,000 47. For Marine Sub-contractor Services total value would come to 1616000 US$ out of which no portion was added by the Commissioner to the assessable value of goods imported. We do not propose to make any deviation on this aspect. 48. On the above basis the percentage of addition to be made would be as follows :- Estimated Value for Services Amount required to be included LNG Terminal 41,790,579 17,320,150 Marine Works 26,600,000 2,793,000 Marine Sub-contractor Services 1,616,000 Total 70,006,579 20,113,149 28.73% By applying the above ratio, out of the estimated value of 4,56,66,000 US $ of Services in respect of Offshore Services by the Prime Contractor the amount to be included in the assessable value of goods would be 13,120,011 US $. Prime Contractor Services cover both LNG Terminal and Marine Works. 49. Now we will consider the enhancement....