AI Drafter 
TaxTMI 
TaxTMI 
2020 (2) TMI 1134
X X X X Extracts X X X X
X X X X Extracts X X X X
....engaged in the production and distribution of fertilizers. The Appellant claims that it imports and distributes in India urea that is imported on Government Account by the Department of Fertilizers through canalising agencies like the State Trading Corporation[STC] and Minerals and Metals Trading Corporation[MMTC]. 3. The scheme of import involves the Government of India estimating the requirement of urea to be imported every year. Urea being a canalised item, the import requirement is made known to the canalising agencies called State Trading Entities [STE]. The STEs place the order on exporters located outside India. The exporter issues the commercial invoice to STE, and the Bill of lading to the Ministry of Chemical and Fertilizer as a consignee. Thereafter, the Government of India transfers the goods to the Fertilizer Marketing Entity. To select this Entity, the Department of Fertilizer in the Government of India invites quotation from prequalified Fertilizer Marketing Entities for marketing of the imported urea in the country after receipt, bagging, handling and standardisation at Indian Ports. Based on the rates quoted by IFFCO, the Department of Fertilizer agreed to appoi....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... a Multistate Co-Operative Society primarily engaged in production and distribution of fertilizers. During the investigation of the angle of supplier (OMIFCO) and buyer (IFFCO) as related persons in terms of Rule 2(2) of the Customs Valuation (Determination of Value of Imports Goods) Rules, 2007 for the import of urea from Customs House Pipavav, it has been revealed by the importer that their import is High Sea Sale. Further during the filling of their Bill of Entry No. 8800082 dated 04.04.2015, the importer paid duty on Misc. Charges. However, the importer has not been paying duty on 2% High Sale Commission and Misc Charges in their previous Bills of Entries filed at Customs House, Pipavav. An investigation has been initiated in the matter for non-payment of duty on 2% High Sale Commission and Misc Charges. -------- 7.3 As per the letter F.No. 8-2/2013-Ship-II dated 02.02.2015 of Assistant commissioner (S), Ministry of Chemicals & Fertilizers, Department of Fertilizers addressing to the Deputy Commissioner, Krishnapatnam Port, Andhra Pradesh clarifying that the STEs (State Trading Enterprises) are paid Rs. 17/- per MT as service charges on the urea imported by th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rom the statement of Shri Surinder Singh Rawat, JT. GM (F&A), IFFCO that M/s. IFFCO pays pool price as defined in the contract to Govt. of India. To clarify the examples he cited is if STE purchases urea at 300 USD per MT from exporter, Govt. of India pays to STE 300 USD per MT, and M/s. IFFCO pays pool issue price as define in the handling contract (gross) i.e. Rs. 5110/- (which is approximate 83 UDS) to govt. of India etc. The duty levied, collected on import of urea is the price at which the STE purchases from foreign seller, these duty calculation falls squarely within the ambit of Customs Act, 1962 read with CVR, 2007. It is evident that 2% High Sea Sale Commission should be included in the Assessable value for calculation of Customs Duty and on the amount at which the importer is paying duty. --------- 8. In the light of the facts discussed in the foregoing paras and material evidence available on records, it appears that the importer has mis-declared Misc. Charges & High Sea Sale in the declaration form filled by them as per provisions of Section 46 of the Customs Act, 1992 along with bill of entry; the said declaration form is in terms of provisions of Rul....
X X X X Extracts X X X X
X X X X Extracts X X X X
....visionally assessed Bills of Entry as detailed in the Annexure 'III' to the show cause notice, should not be demanded and recovered from them under Section 18(2) of the Customs Act, 1962/ the bond executed during the provisional assessment/ Section 28 of the Customs Act, 1962; (v) Interest should not be recovered from them on the said differential Customs duty, as at (iii) above, under Section 28AA of the Customs Act, 1962; (vi) Interest should not be recovered from them on the said differential Customs duty, as at (iv) above, under Section 18(3) of the Customs Act, 1962; (vii) Why the differential duty of Rs. 30,41,704/- and interest of Rs. 9,37,680/- paid by the notice in reference to Misc Charges for the said period should not be adjusted against the demand; (viii) Penalty should not be imposed on them under Section 112 (a) of the Customs Act, 1962; (ix) Penalty should not be imposed on them under Section 114A of the Customs Act, 1962." 7. The Appellant filed a detailed reply dated 2 March 2016 to the aforesaid show cause notice. It was pointed out that rule 10(1) (e) of the 2007 Valuation Rules would not be applicable since the Ap....
X X X X Extracts X X X X
X X X X Extracts X X X X
....imported by IFFCO was held liable for confiscation under section 111(m) of the Customs Act. Interest was also directed to be paid and penalty was also imposed. It is this order 13 May 2015 passed by the Principal Commissioner that has been assailed in this appeal. 10. Shri Deepak Kumar, learned consultant appearing with Shri Atul S. Chabra, Taxation Head of the Appellant made the following submissions: i) The Principal Commissioner committed an error in including the miscellaneous charges of Rs. 17/- per MT paid by the Government of India to the STE in the assessable value on which the Appellant was required to pay duty. These charges are in the nature of agency charges which the canalising agency (STE) gets from the Government of India for the service of identifying and indenting the import of urea from foreign suppliers. The ultimate import of urea by STE takes place on behalf of the Government of India. These charges are not paid by the Appellant to the Government of India when it purchases the urea nor these charges are paid by the Appellant to a third party and therefore, cannot be included under rule 10(1) (e) of the 2007 Valuation Rules in the assessable value. T....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mmissioner was justified in confiscating the goods and imposing penalty. 12. The submissions advanced by the learned Consultant for the Appellant and the learned Authorised Representative of the Department have been considered. 13. In order to appreciate the contentions it would be appropriate to examine the salient features of the transaction that takes place and they are as follows: (i) Based on the future requirement of urea in the country and availability of domestic production, the Department of Fertilizers in the Government of India assesses the import requirements; (ii) Urea is a canalised item under the Foreign Trade Policy; (iii) The Department of Fertilizer intimates the import requirements periodically to the canalising agencies called the STEs; (iv) The STEs then call for a global tender and after identifying the foreign supplier, purchase the urea in bulk which is then sold to the Government of India for which the STEs charges, apart from the sale consideration paid by it to the foreign buyer, an additional sum of Rs. 17/- per MT; (v) Since the Department of Fertilizers is not in a position to distribute the imported u....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e Government of India on High Sea Sale, notional 2% High Sea Sale Commission is required to be included in the assessable value of goods and consequential duty is payable; (iii) Whether the extended period of limitation could have been invoked in the facts and circumstances the case for both non-payment of miscellaneous charges and notional High Sea Sale Commission; (iv) Whether urea imported by the Appellant was liable for confiscation under section 111(m) of the Customs Act; (v) Whether penalty could have been imposed on the Appellant under section 112(a) of the Customs Act; and (vi) Whether penalty could have been imposed on the Appellant under section 114 of the Customs Act. 15. Each of the aforesaid issues shall be dealt with separately. MISCELLANEOUS CHARGES OF Rs. 17/- PMT 16. The findings of the Principal Commissioner on this issue are as follows; "13.1 The first issue to be examined is, as to whether the service charges of Rs. 17/- per MT paid by GOI to STE is to be included in the assessable value or not. The notice have argued that the same is in the nature of 'buying commission' and hence should be excluded in ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ve reasoning, I hold that service charges of Rs. 17/- per MT paid by GOI to STE as service charges are to be added in the assessable value in terms of rule 10(1) (e) of CVR, 2007." (emphasis supplied) 17. The Principal Commissioner has observed that since the STE imported urea independently on commercial basis from foreign purchasers and then sold it to the Government of India on High Sea Sale basis and there is a further sale by the Government of India to IFFCO on High Sea Sale basis, the relationship between STE and Government of India cannot be treated as a relationship between a principal and agent and these are two independent High Sea Sales. To arrive at this conclusion, reliance was placed on a decision of the Supreme Court in Hyderabad Industries Ltd. The Principal Commissioner also observed that mere deduction of TDS by the Government of India would not mean that this amount has not to be added in the assessable value. The Principal Commissioner, therefore, concluded that service charges Rs. 17/- per MT paid by the Government to STE is required to be added in the assessable value in terms of rule 10(1) (e) of the 2007 Valuation Rules. 18. As noticed above, it is a....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... General License (OGL). Companies import these fertilizers as per their commercial judgment." 20. The contents of these two letters do support the contention of the Appellant. Both these letters are in connection with the amount of Rs. 17/- per MT paid as service charges on urea imported by the STEs. In the first letter dated 12 November 1991, it has been clearly stated that Rs. 17/- per MT shall be payable by the Government of India to MMTC (which is also a STE apart from State Trading Corporation) as service charges for import of urea on behalf of the Government of India. The second letter dated 2 February 2015 also emphasises that urea is imported for direct agriculture use on Government account through STEs and that "these agencies" are paid Rs. 17/- per MT as service charges on the urea imported by them on Government Account. The "agencies" referred to are the STEs i.e. MMTC, State Trading Corporation Limited and Indian Potash Limited. 21. This apart, what needs to be noticed is that TDS has also been deducted by the Government of India while making payment of service charges to the STEs. Under the Income Tax Act, TDS is required to be deducted on payment of commission a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ive Note to rule 10 defines "buying commissions" to mean fees paid by an importer to his agent for the service of representing him abroad in the purchase of the goods being valued. 26. It has, therefore, to be examined whether the amount of Rs. 17/- per MT paid by the Government of India to the STE can be termed as "buying commission" because in that event it will not be included in the 'transaction value'. To examine this, it has to be seen whether the STE has represented the Government of India abroad in the purchase of the goods being valued. Urea being a canalised item under the Foreign Trade Policy, import can only be made through canalising agencies called the STEs. As noticed above, the two communications dated 12 November 1991 and 2 February 2015 leave no manner of doubt that urea is imported on Government Account on behalf of the Ministry of Chemical and Fertilizers in the Government of India. Though, the terms used in the aforesaid communications refer to "service charges", but in fact they are "buying commissions" as was also observed by the Tribunal in Anand Textiles. Paragraph 9 of the decision of the Tribunal is reproduced below: "Rule 9 of the Custom Valu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e facts that there was no relationship of principal and an agent between the Appellant and MMTC as MMTC had not purchased the raw asbestos for and on behalf of a particular consumer of raw asbestos in India. On the contrary, it made bulk purchases to cater to the needs of various consumers of the raw asbestos in India and it is only after the goods were sold on the basis of High Sea Sales, that the goods become property of the Appellant. The observations made by the Supreme Court in paragraph 7 of the judgment are reproduced below: "The argument of agency is obviously put forth to invoke the benefit of exemption granted to "buying commission" under Rule 9(I) (a) (i) of the Valuation Rules referred to above. This rule excludes the amount paid as "buying commission" from the cost and services which is to be included in determining the transaction value. To attract this exclusion the appellant seeks to rely upon interpretative note to Rule 9 which reads thus: In Rule 9(I)(a) (i), the terms "buying commission" means fees paid by an importer to his agent for the service of representing him abroad in the purchase of the goods being valued". The appellant wants this Court to firs....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nt of India nor the Appellant paid this amount to a third party. This amount of Rs. 17/- per MT, therefore, could not have been included in the 'transaction value' under rule 10(1) (e) of the 2007 Valuation Rules. 31. What further needs to be noticed is that under 10 (1) (e) of the 2007 Rules, all other payments can be added to the transaction value if they are actually made or to be made as a condition of sale of the imported goods, by the buyer to the seller, or by the buyer to the third party to satisfy an obligation of the seller to the extent that such payments are not included in the price actually paid or payable. Since the aforesaid payment of Rs. 17/- per MT has not been made as a condition of sale of urea by the Government of India to the Appellant to satisfy an obligation of the Government of India, this amount cannot be added to the transaction value under rule 10 (1) (e) of the 2007 Rules. ADDITION OF 2% NOTIONAL HIGH SEA SALE COMMISSION 32. The finding recorded by the Principal Commissioner on this issue is as follows: "13.6 The second issue to be decided is whether high sea sale commission of 2% is to be added in the assessable value or not. It has ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e added to arrive at the correct assessable value of the imported goods." (emphasis supplied) 33. In this connection, the Circular dated 11 May 2004 issued by CBEC has been referred to by the Principal Commissioner. On an analysis of the said Circular, a finding has been recorded that High Sea Sale commission has to be included in the assessable value and the only issue that needed to be decided was whether the price at which the High Sea Sale was taking place between the Government of India and the Appellant could be considered as a price at which international transfer of goods was taking place in terms of rule 4. The Principal Commissioner noticed that the price paid by Appellant to the Government of India was a pool price of US$ 83 per MT, whereas the price paid by the STE to the exporter was US$ 300 Per MT. The pool price, therefore, was an artificial price at which the Appellant sold the goods to the farmers. Thus, this was not the price at which international transfer of goods took place and the same, therefore, could not be the assessable value in terms of the Circular. Thus, the price at which the Government of India transfers the goods to the Appellant cannot be acc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....vice Charges @ 2% has to be added to the CIF value, for each such transaction. 2. The matter has been examined taking into account the Advisory Opinion 14.1 of the GATT. Valuation Code, which stipulates that if the importer can demonstrate that the immediate sale under consideration took place with a view to export the goods to the country of importation, then such transaction would constitute an international transfer of goods. The later transaction which led to the import would be the relevant transaction for assessment and Rule 4 of Customs Valuation Rules, 1988 would apply. Hon'ble Supreme Court, in the case of M/s. Hyderabad Industries Limited [2000 (115) E.L.T. 593 (S.C)] have also upheld that the Service Charges/high-seassales- commission (actuals) are included in the CIF value of imported goods. Therefore, it is clarified that the actual highseas-sale-Contract price paid by the last buyer would constitute the transaction value under Rule 4 of Customs Valuation Rules, 1988 and inclusion of commission on notional basis may not be appropriate. However, the responsibility to prove that the highseas- sales-transaction constituted an international transfer of goods lies ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ticle 14 and article 19 of the Constitution. The High Court had upheld the validity and the writ petition was dismissed. The Supreme Court observed that a conjoint reading of the provisions of rules 3 and 4 of the 1988 Customs Valuation Rules would make it clear that the value of the imported goods has to be the transaction value and in cases where the transaction value cannot be determined, such a value has to be determined by resorting to rules 5 to 8 in a sequential order. Thus, normally the value of imported goods has to be the transaction value, which means the price "actually paid" or "payable" for the goods imported. Only when such a value cannot be determined, that resort to rules 5 to 8 in a sequential manner has to be taken. Once the transaction value is arrived at, adjustments to this value has still to be made in accordance with the provisions of rule 9. Only thereafter, the exact "transaction value" gets determined on which customs duty is to be paid. Rule 9 deals with "cost of service". It lays down that in determining the transactional value, cost of certain services is to be added to the price actually paid or payable for the imported goods as mentioned in "(a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....actual cost of the goods or the services is available, that would be the determinative factor. Only in the absence of actual cost, fictionalised cost is to be adopted. Here again, the scheme gives an ample message that an attempt is to arrive at value of goods or services as well as costs and services which bear almost near resemblance to the actual price of the goods or actual price of costs and services. That is why the sequence goes from the price of identical goods to similar goods and then to deductive value and the best judgment assessment, as a last resort. 27) In the present case, we are concerned with the amount payable for costs and services. Rule 9 which is incorporated in the Valuation Rules and pertains to costs and services also contains the underlying principle which runs though in the length and breadth of the scheme so eloquently. It categorically mentions the exact nature of those costs and services which have to be included like commission and brokerage, costs of containers, cost of packing for labour or material etc. Significantly, Clause (a) of sub-rule (1) of Rule 9 which specifies the aforesaid heads, cost whereof is to be added to the price, again m....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... loading, unloading and handling charges is that it would help customs authorities to apply the aforesaid rate uniformly. This can be a justification only if the loading, unloading and handling charges are not ascertainable. Where such charges are known and determinable, there is no reason to have such a yardstick. We, therefore, are not impressed with the reason given by the authorities to have such a provision and are of the opinion that the authorities have not been able to satisfy as to how such a provision helps in achieving the object of Section 14 of the Act. It cannot be ignored that this provision as well as Valuation Rules are enacted on the lines of GATT guidelines and the golden thread which runs through is the actual cost principle. Further, the loading, unloading and handling charges are fixed by International Airport Authority. --------- 36) We are, therefore, of the opinion that impugned amendment, namely, proviso (ii) to sub-rule (2) of Rule 9 introduced vide Notification dated 05.07.1990 is unsustainable and bad in law as it exists in the present form and it has to be read down to mean that this clause would apply only when actual charges referre....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... normal price would be the sole consideration for the sale. However, this may be subject to such other conditions which can be specified in the form of Rules made in this behalf. 23) As per the first proviso of the amended Section 14(1), in the transaction value of the imported goods, certain charges are to be added which are in the form of amount paid or payable for costs and services including commissions and brokerage, engineering, design work, royalties and licence fees, costs of transportation to the place of importation, insurance, loading, unloading and handling charges to the extent and in the manner which can be prescribed in the rules. Sub-section (2) of Section 14, which remains the same, is an over-riding provision which empowers the Board to fix tariff values for any class of imported goods or export goods under certain circumstances. We are not concerned with this aspect in the instant case." 43. Thus, what has to be seen under section 14(1) of the Customs Act as amended in 2007 is the transaction value of the goods imported or exported for the purpose of customs duty and transaction value is stated to be the price actually paid or payable for the goods wh....