Commissioner Of Customs (Port) … vs M/S. Steel Authority Of India Ltd. on 27 April, 2020


Try out our Premium Member services: Virtual Legal Assistant, Query Alert Service and an ad-free experience. Free for one month and pay only if you like it.

Supreme Court of India

Commissioner Of Customs (Port) … vs M/S. Steel Authority Of India Ltd. on 27 April, 2020

Author: Deepak Gupta

Bench: Deepak Gupta, Aniruddha Bose

                                                REPORTABLE

              IN THE SUPREME COURT OF INDIA
               CIVIL APPELLATE JURISDICTION

               CIVIL APPEAL NO. 6398 OF 2009


COMMISSIONER OF CUSTOMS (PORT)
KOLKATA                                           ...APPELLANT

                             VERSUS


M/S STEEL AUTHORITY OF INDIA LTD.                 ...RESPONDENTS



                           JUDGMENT

ANIRUDDHA BOSE, J.

The dispute in this appeal relates to valuation under the Customs

Act, 1962 of import of certain items made by the respondent Steel

Authority of India Ltd. (SAIL) under two contracts, bearing nos.

PUR/PC/MOD/08.01/Pt.II dated 31.10.1989 and

PUR/PC/MOD/08.01/Pt-I dated 29th March 1990. These imports were

made in connection with modernisation, expansion and modification

1
for their plant at Durgapur in West Bengal. For this purpose, SAIL had

floated seven Global Tender Contract Packages. The two contracts

were part of these Tender Contract Packages. They were registered

with the customs authorities for the purpose of project import benefits

in terms of the 1962 Act. The first contract involved in this appeal was

with a consortium consisting of a German Company, Hoestemberghe

& Kluisch, GMBH and H & K Rolling Mills Engineering Private

Limited, an Indian Corporate entity. The second contract was also with

a German Company, Siempelkamp Pressen Systeme and the Indian

entity was Escon Consultants Private Ltd, with whom the consortium

was formed. Both these contracts were in connection with

modernisation of SAIL’s rolling mills at the aforesaid plant.

2. Schedule 3 of the first contract (bearing no.544-9/91A SVB)

specified scope of supplies and service along with the price particulars.

Extracts from that schedule appears from the order of the

Commissioner of Customs being the authority of first instance, dated

3rd January 2001. This order related to the first contract. We shall refer

to this order in greater detail later in this judgment. Relevant part of

that Schedule is reproduced below:-

2
Schedule No. Description Millions [I][M]

3.5.1A [II] Basic design and 2.230
Engineering

3.5.2A Plant & Equipment 2.512
including commissioning
spares
3.5.3A Spares for two years operations 0.537
and maintenance, insurance spares,
special tools and tackles.

3.5.4A Foreign Supervision charges during 0.675
manufacture of Indian equipment as
well as for erection, commissioning
and performance guarantee tests.

(quoted from the order in verbatim).

In addition to this, contract price of Rs.186,144,000/- and a

royalty of Rs.10 per tonne of thermax bars produced during first five

years of operation was also to be paid to the Indian entity of the

consortium under the contract for supplies and services made by the

latter.

So far as the second contract is concerned, the scope of supplies

and services to be effected by the consortium appears from the

following part of the third schedule, which again has been reproduced

3
in the second order (bearing no.544-9/91A SVB) of the authority of

first instance, dated 1st June 2001:-

Schedule No. Description Millions [I] [M]

3.5.1.1. [ii] basic design and engineering 6.650

3.5.1.1 [v] technical services for Project 1.000
management like planning,
procurement, inspection,
expediting, etc.
3.5.1.1 [vi] As built drawings 0.100

3.5.1.3 Plant & Equipment including 24.627
commissioning spares
3.5.1.4 All mechanical & electrical
spares for 2 years operation & 2.251
maintenance, insurance spares
including special tools & tackles
3.5.1.6 Foreign supervision charges 2.842
during manufacture of Indian
equipment as well as for erection,
commissioning & performance guarantee
tests
3.5.1.11 Training 0.200

Total: 37.670

4
(quoted from the order in verbatim)

3. The basic wording of the two contracts are more or less similar,

Clause (c) thereof stipulates:-

“The Contractor has agreed to undertake
basic and detail design and engineering,
layout engineering, training services,
procurement, manufacturing, shop
testing, supply and delivery of the
complete Plant and Equipment,
materials both imported and indigenous
at site and carry out
installation/construction of all civil
works, supervision, erection, testing and
successful commissioning of the
PROJECT and demonstrate the
Performance Guarantees etc. for the
Project under the Terms and Conditions
mentioned hereinafter. The
CONTRACTOR has also agreed to
render the services for insurance, port
clearance including stevedoring,
transportation, safe custody, handling,
unloading, loading, transportation to
site and any other services required to
complete the PROJECT under this
contract.”

4. As would be evident from the subject heads contained in the

above-referred extracts from the third schedule to each of these

contracts, the consortia were to supply plant, equipments and spares as

also certain basic designs and supervisory services at site. SAIL wanted

5
import duty to be charged on the plant and equipments alone. SAIL’s

stand is that the price for the plants and equipments included all design

and engineering for their manufacture. But designs and drawings

specified in the schedule were all post-importation project related and

project implementation activities. The customs authorities on the other

hand added the basic design and engineering fee of DM 2.23 million

and supervision charges during manufacture of Indian equipments and

for erection, commissioning and performance guarantee tests of 0.675

million to the invoice value. In respect of the second contract, direction

was made for addition of basic design and engineering fee of DM 6.65

million, as built drawings of DM 0.1 million and supervision charges

during manufacture of Indian equipments and for erection,

commissioning and performance guarantee tests of DM 2.842 million

to the invoice value. The dispute had reached the Commissioner of

Customs for Special Valuation Branch, the authority of first instance,

after a questionnaire was sent to SAIL, which was responded to. The

authority of first instance heard the representative of SAIL. In the final

orders, the authority of the first instance directed the aforesaid

additions. The said authority observed that the contractor was entrusted

6
with the work on a turnkey basis, where the entire supplies and services

were dependant on each other. On this premise, the provisions of Rule

4 and Rule 9 (1) (e) of the Customs Valuation (Determination of Price

of Imported Goods Valuation Rules, 1988 (hereinafter referred as the

“1988 Rules”) was invoked to sustain such additions to the invoice

value in respect of both the contracts. The underlying reasoning for the

said orders of the authority of first instance was that the commercial

arrangements constituted turnkey contracts and package deal, which

made it conditional for the purchaser to buy the equipments which

complied with the technical specifications of SAIL. As a consequence,

sale of the equipments was conditional as the different aspects of the

schedules of supply and service were interrelated. The transaction value

of the imported goods was directed to include the price paid for the

basic design and engineering, drawings, supervision of erection,

commissioning, performance guarantee and technical services under

Rule 4 read with Rule 9(1)(e) of the 1988 Rules.

5. Appeals by SAIL against both these orders were rejected by the

Commissioner of Customs (Appeals) by two separate orders passed on

11th July, 2001 and 7th September 2001. We find from the orders of

7
the Appellate authority that the case of TISCO vs. Commissioner of

Central Excise Customs reported in (2000) 3 SCC 472 was cited

before it by SAIL. This decision was distinguished by the Appellate

authority and the findings of the authority of first instance was

sustained on the basis of Rule 9(1)(e) of the 1988 Rules.

6. Further appeals of SAIL however, was decided in their favour by

Customs, Excise and Service Tax, Appellate Tribunal, Kolkata

(CESTAT) by a common order passed on 22nd May, 2006. These

appeals were registered before the CESTAT as C/V-537/2001 and C-

01/2002. The CESTAT formulated the points for determination in the

following terms :-

“[i] whether the basic design and engineering fee
of DM 2.230 million and foreign supervision
charges of DM 0.675 million are liable to be added
to the invoice values of imported equipments under
Rule 9 of the Valuation Rules? [Appeal No. C/V-
537/2001]
[ii] whether the charges towards basic design and
engineering fee of DM 6.650 million, fee for as
built drawings of DM 0.100 million and also
supervision charges of DM 2.842 million are liable
to be added to the invoice values of the imported
equipments under Rule 4 of the Valuation Rules
read with Section 14 of the said Act? [Appeal No.
C-1/2002]”

8

7. The Tribunal held that the drawings and technical documents

related to post importation activities for assembly, construction,

erection, operation and maintenance of the plant and those items could

not be included in the value of imported goods. Referring to Rules 9

(1) (b) (iv) and 9(1) (e) of the Valuation Rules 1988, the Tribunal held:-

“Similarly reliance upon the decision of the
Supreme Court in Collector of Customs
(Preventive), Ahmedabad Vs. Essar Gujarat Ltd.,
1996(88) ELT 609 (SC) is also completely
misplaced. From the judgment of the Supreme
Court it would be seen that what has been held to
be added therein under Rule 9(1) (e) of the
Valuation Rules and process license fee, the
payment for transfer of technology under the
process license agreement and whatever
expenditure was needed to be incurred for
dismantling the plant which was sold on “as in
where is basis” in the foreign country and making
it ready for delivery on board the vessel to be
exported to India. The Supreme Court specifically
held that apart from this all other services rendered
under the Engineering and Consultancy fees
cannot be added. The said decision of the
Supreme Court, contrary to the findings of the
Deputy Commissioner and Commissioner
(Appeals), supports the appellant’s case.

The perusal of the orders-in-original reveals that
there is no dispute whatsoever with the services
as shown when the designs and drawings and
engineering/technical services were small
9
enabled to locate plant direction and overall
project implementation for manufacturing iron
and steel projects to be commissioned in India
and the costs and charges were collected when
the design and drawings and engineering services
in relation to the components to be imported
and/or imported. In such circumstances, it is to
be held that the lower authorities have heard
improportionate to hold that the said charges are
to be added to the assessable value as assessed
relying upon the case of TISCO reported in 2000
(37) RLT 239 (S.C.). Para 8, 11 and 15 to 17
thereof refer. We do not find any reason to
uphold the reasoning of the Deputy
Commissioner in this regard.

In view of the clear cut decision in the case of
Tata Iron & Steel Co. Ltd. case (supra), we find
that the issue is very settled by series of
decisions of this Tribunal and heard the case
referred into Indo Gulf Corpn. Ltd. v. Commr.
of Customs
, 2005(182) ELT 77(T).

Neither in Section 14 of the said Act nor in the
Valuation Rules is there any provision which
provides that the cost of drawings and
technical documents required for procurement
or manufacture of goods in India by the
importer or which relates to post importation
activities for assembly, construction, erection,
operation and maintenance of the plant are to
be included in the price of equipments for
determining their transaction value and
consequently their assessable value for the
purpose of levy of customs duty under the said
Act. On the contrary the “Interpretative Notes”
to Rule 4 of the Valuation Rules, 1988 makes
it explicitly clear that value of imported goods
10
shall not include, inter alia, the charges for
construction, erection, assembly maintenance
of technical assistance undertaken after
importation of the imported goods such as 3 of
the Contract in the instant case in determining
the assessable value of the imported
equipments imported by the appellant is
wholly erroneous, ultra vires the said Act
and/or the Customs Valuation Rules, 1988.
This also the Deputy Commissioner and the
Commissioner (Appeals) failed to appreciate
and/or take into consideration and thereby
arrived at patently erroneous finding.

In terms of Rule 9 [1] [b] [iv] of the Valuation
Rules, 1988, in determining the transaction
value the value apportioned as appropriate of,
inter alia, engineering, design and plans and
sketches undertaken elsewhere than in India
and “necessary for the production of the
imported goods” which were supplied directly
or indirectly by the buyer free of charge or at a
reduced cost to the supplier or imported goods
for use in producing the imported goods being
value are to be included. This is because such
supply of free of charge or at a reduced cost
would result in a lower price for the imported
goods than the price that the supplier would
have charged if such goods/services were to be
paid for in full. This rule is also inapplicable in
the instant case as there has been no supply or
any engineering’s or drawings by the appellant
to the foreign seller. Moreover, there was no
supply free of charge or at reduced cost. Hence
this rule also has no applicability whatsoever
in the present case.”
(quoted verbatim)

11

8. It is against this order the revenue is in appeal before us. Before

we examine the arguments advanced by Mr. Agarwal, Senior Counsel

for the appellant and Mr. Bagaria, Senior Counsel for the assessee, we

shall advert to the statutory provisions which are applicable in the facts

of this case. These are Sections 12, 14 (as it stood at the time of

importation) of the Customs Act, Rules 4 and 9 of the 1988 Rules.

These provisions stipulate:-

Sections 12 and 14 of the Customs Act 1962
“12. Dutiable goods.— (1) Except as otherwise
provided in this Act, or any other law for the time
being in force, duties of customs shall be levied
at such rates as may be specified under [the
Customs Tariff Act, 1975 (51 of 1975)], or any
other law for the time being in force, on goods
imported into, or exported from, India.

[(2) The provisions of sub-section (1) shall apply
in respect of all goods belonging to Government
as they apply in respect of goods not belonging
to Government.]

14. Valuation of goods for purposes of
assessment—(1) For the purposes of the
Customs Tariff Act, 1975 (51 of 1975), or any
other law for the time being in force whereunder
a duty of customs is chargeable on any goods by
reference to their value, the value of such goods
shall be deemed to be—

12
the price at which such or like goods are
ordinarily sold, or offered for sale, for delivery at
the time and place of importation or exportation,
as the case may be, in the course of international
trade, where—

(a) the seller and the buyer have no interest in the
business of each other; or

(b) one of them has no interest in the business of
the other,
and the price is the sole consideration for the sale
or offer for sale:

Provided that such price shall be calculated with
reference to the rate of exchange as in force on
the date on which a bill of entry is presented
under section 46, or a shipping bill or bill of
export, as the case may be, is presented under
section 50;

(1A) Subject to the provisions of sub-section (1),
the price referred to in that sub-section in respect
of imported goods shall be determined in
accordance with the rules made in this behalf.
(2) Notwithstanding anything contained in sub-
section (1) or sub-section (1A) if the Board is
satisfied that it is necessary or expedient so to do,
it may, by notification in the Official Gazette, fix
tariff values for any class of imported goods or
export goods, having regard to the trend of value
of such or like goods, and where any such tariff
values are fixed, the duty shall be chargeable
with reference to such tariff value.

(3) For the purposes of this section—

13

(a) “rate of exchange” means the rate of
exchange—

(i) determined by the Board, or

(ii) ascertained in such manner as the Board may
direct,
for the conversion of Indian currency into foreign
currency or foreign currency into Indian
currency;

(b) “foreign currency” and “Indian currency”
have the meanings respectively assigned to them
in clause (m) and clause (q) of section 2 of the
Foreign Exchange Management Act, 1999 (42 of
1999).”

Rule 4 and Rule 9 of the 1988 Rules

4. Transaction value.

(1) 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.

(2) The transaction value of imported goods
under sub-rule (1) above shall be accepted:

Provided that-

a. The sale is in the ordinary course of trade under
fully competitive conditions;

b. The sale does not involve any abnormal discount
or reduction from the ordinary competitive price;
c. The sale does not involve special discounts
limited to exclusive agents; or

14
d. Objective and quantifiable data exist with regard
to the adjustments required to be made, under the
provisions of rule 9, to the transaction value;
e. There are no restrictions as to the disposition or
use of the goods by the buyer other than
restrictions which-

(i) are imposed or required by law or by the
public authorities in India; or

(ii) limit the geographical area in which the
goods may be resold; or

(iii) do not substantially affect the value of the
goods;

f. the sale or price is not subject to same condition
or consideration for which a value cannot be
determined in respect of the goods being valued;

g. no part of the proceeds of any subsequent resale,
disposal or use of the goods by the buyer will
accrue directly or indirectly to the seller unless
an appropriate adjustment can be made in
accordance with the provisions of Rule 9 of these
rules; and

h. the buyer and seller are not related,

or where the buyer and seller are related, that
transaction value is acceptable for customs
purposes under the provisions of sub-rule (3)
below.

(3) (a) Where the buyer and seller are related, the
transaction value shall be accepted provided that
the examination of the circumstances of the sale
of the imported goods indicate that the
relationship did not influence the price.

15

(b) In a sale between related persons, the
transaction value shall be accepted, whenever the
importer demonstrates that the declared value of
the goods being valued, closely approximates to
one of the following values ascertained at or
about the same time-

(i) the transaction value of identical goods, or of
similar goods, in sales to unrelated buyers in
India;

(ii) the deductive value for identical goods or
similar goods;

(iii) the computed value for identical goods or
similar goods.

Provided that in applying the values used for
comparison, due account shall be taken of
demonstrated difference in commercial levels,
quantity levels, adjustments in accordance with
the provisions of Rule 9 of these rules and cost
incurred by the seller in sales in which he and the
buyer are not related;

(c) substitute value shall not be established under
the provisions of clause (b) of this sub-rule.

9. Cost and services. –

(1) In determining the transaction value, there
shall be added to the price actually paid or
payable for the imported goods,-

(a) the following cost and services, to the extent
they are incurred by the buyer but are not
included in the price actually paid or payable for
the imported goods, namely:-

16

(i) commissions and brokerage, except buying
commissions;

(ii) the cost of containers which are treated as
being one for customs purposes with the goods in
question;

(iii) the cost of packing whether for labour or
materials;

(b) the value, apportioned as appropriate, of the
following goods and services where 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 imported goods,
to the extent that such value has not been
included in the price actually paid of 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 and plans and sketches undertaken
elsewhere than in India and necessary for the
production of the imported goods;

(c) royalties and license 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.

17

(d) the value of any part of the proceeds of any
subsequent resale, disposal or use of the imported
goods that accrues, directly or indirectly, to the
seller;

(e) all other payments 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 a 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.

(2) For the purposes of sub-section (1) and sub
section (1A) of Section14 of the Customs Act,
1962 (52 of 1962) and these rules, the value of
the imported goods shall be the value of such
goods, for delivery at the time and place of
importation and shall include-

(a) the cost of transport of the imported goods to
the place of importation;

(b) loading, unloading and handling charges
associated with the delivery of the imported
goods at the place of importation; and

(c) the cost of insurance:

Provided that-

(i) Where the cost of transport referred to in
clause (a) is not ascertainable, such cost shall be
twenty percent of the free on board value of the
goods;

(ii) The charges referred to in clause (b) shall be
one per cent of the free on board value of the
goods plus the cost of transport referred to in
clause (a) plus the cost of insurance referred to in
clause (c);

18

(iii) Where the cost referred to in clause (c) is not
ascertainable, such cost shall be 1.125% of free
on board value of the goods;

Provided further that in the case of goods
imported by air, where the cost referred to in
clause (a) is ascertainable, such cost shall not
exceed twenty per cent of free on board value of
the goods:

Provided also that where the free on board value
of the goods is not ascertainable, the costs
referred to in clause (a) shall be twenty per cent
of the free on board value of the goods plus cost
of insurance for clause (i) above and the cost
referred to in clause (c) shall be 1.125 % of the
free on board value of the goods plus cost of
transport for clause (iii) above].

(3) Additions to the price actually paid or payable
shall be made under this rule on the bases of
objective and quantifiable data.

(4) 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.”

9. The main case of the appellant is that these two cases involved

importation of turnkey projects and the entire contract value have to be

treated as the transaction value for the purpose of charging customs

duty. Mr. Agarwal has submitted that the design and the other items,

which were the subject of dispute, were integrally linked with the

19
equipments and supply of the services were conditions for importation

of the equipments. It has also been argued on behalf of the revenue that

the contracts were integrated from basic planning and designing till

implementation at site and what was imported was a project and not

merely equipments. On this count, our attention was drawn to Rule

9(1)(e) of the 1988 Rules, which we have quoted earlier in this

judgment.

10. The Tribunal did not accept this plea of revenue. The Tribunal in

the impugned order accepted SAIL’s plea for segregating the value of

equipments and the other fees on services covered by the same

contracts, the latter charges meant for post-importation phase of the

arrangement between the contracting parties. It found that the designs

and drawings and engineering/technical services were for plant

direction and overall project implementation for manufacturing iron

and steel to be commissioned in India and charges were collected by

the consortium when the design and drawings and engineering services

in relation to the components were to be imported. It is also not the

revenue’s case before us that these designs and drawings and the

services were in relation to the imported equipments and goods.

20

11. Major part of the argument on behalf of the revenue advanced

before us, however, was anchored to Rule 9(1)(e) of the 1988 Rules.

The revenue’s contention on this point, which formed the basis of the

orders of the authority of the first instance as also the first appellate

authority has been that these were turnkey contracts and hence import

of designs and drawings etc. even for post-importation activities should

be treated as condition of import of the equipments. Mr. Agarwal has

relied on the decision of this Court in the case of Mukund Limited vs.

Commissioner of Customs reported in [2000 (120) ELT 30]

confirming an order of the Tribunal in addition to the value of design

and engineering, imported into this country the supervision charges in

India during design, erection and performance guarantee test. This

Court, in its order passed on 8th December 1999, held:-

“1. This is a contract that contemplates the supply
of basic design and engineering drawings and the
supervision of erection, testing and
commissioning based thereon. One is as much a
part and a condition of the contract as the other.

2. We find, therefore, no merit in the appeal. It
is dismissed with costs.”

21

12. The case of Mukund Limited (supra) dealt with setting up of a

cleaning plant as part of basic oxygen furnace shop of SAIL

(coincidentally the same respondent), for their Rourkela Steel Plant.

For this purpose their contractor, Mukund Limited had entered into an

agreement with an overseas Company, Davy Mckee (Stockton)

Limited. In pursuance of that contract, Davy were to provide basic

design and drawing and also supervise the detailed engineering erection

and commissioning of the gas cleaning plant in India apart from

training of personnel abroad. The fabrication, manufacture etc.

however was to be done in India with indigenous goods based on

designs supplied by Davy. The contract amount was £20,00,000 and

charges for design and engineering, supervision in India during design,

erection, commissioning and performance guarantee test valued at

£6,57,900 and training charges of £82,600 were to be paid separately.

Relying on a decision of this Court in CC (Prev.), Ahmedabad vs.

Essar Gujarat reported in [(1997) 9 SCC 738], the Tribunal found in

the order reported in 1999 (112) ELT 479(T):-

“6. The payment of $ (sic) 6,57,900 noted above
in the price schedule is towards the services
indicated above in the Agreement and which is a
necessary concomitant to the supply of Design
22
and Engineering drawings for the gas cleaning
plant made by Davy Mckee and imported by the
appellants. The appellants have been entrusted
with the setting up of gas cleaning plant, and this
could only be achieved not only by purchasing
the basic design and engineering drawings
imported from Davy Mckee but also the whole
engineering package of supervision of detail
drawing, erection, commissioning and
performance guarantee test. The payment made
in foreign exchange towards supervision charges
during design, erection and commissioning will
necessarily have to form part of the assessable
value of the imported goods and the value thereof
will include not only the price paid for design and
engineering but also for supervision charges.

This will follow from Rule 9 of the Valuation
Rules which provides for addition of certain costs
and services to the transaction value. Rule 9(1)(e)
covers all other payments actually made or to be
made as a condition of sale of imported goods by
the buyer to the seller.”
(quoted verbatim)

This was a case where Tribunal reached finding on fact that the

two sets of items were to be added to reach the assessable value as the

plant could be set up as per the basic design only and the second set of

designs, drawings and activities intricately interlinked. This case did

not involve importation of any equipment.

23

13. Another judgment of this Court in the case of Andhra

Petrochemicals vs. Collector of Customs, Madras reported in

[(1988) 9 SCC 109] was cited before us by Mr. Agarwal. But ratio of

that authority would not be applicable in the facts of this case, as the

disputed amount involved payment made by the importer to their

overseas associate towards engineering, design work, plant, sketches

etc. which were necessary for production of imported goods. This was

a case attracting Rule 9(1)(b)(iv) of the 1988 Rules. Factually, this

authority is distinguishable. The other authority on which Mr. Agarwal

has placed reliance is a decision of this Court in the case of

Commissioner, Delhi Value Added Tax vs. ABB Limited reported

in (2016) 6 SCC 791. In this case the controversy was as to whether a

contract for supply, installation, testing and commissioning of traction

electrification power supply and power distribution for the Dwarka

Section of Delhi Metro Rail Corporation Limited could be subjected to

Delhi value added tax or not. But this case dealt with the issues of works

contract and movement of goods by inter-state trade for computing

value added tax. The transaction in that case was held to be movement

of goods by way of imports or by way of inter-state trade and hence

24
covered by the Central Sales Tax Act. The only factual similarity in

both these cases is that the case of ABB Limited (supra) also related

to turnkey project. But “import” under that statute and the charging

section in the Customs Act for imposing duty (under Section 12) are

not the same. The mechanism for arriving at transaction value or

assessable value under the two statutes are different and distinct. This

authority can have no impact on the subject-controversy.

14. The appellant’s case in substance is that on a composite reading

of Section 14 of the Act, Rules 4 and 9(1)(e) of the 1988 Rules, the

price of drawings, design etc., should be added to the invoice value of

the imported equipments, as those intangible items formed an integral

part of the arrangement agreed upon between the two consortia and

SAIL. The revenue described such arrangement as turnkey contracts. It

has been specifically argued that such intangible items constituted

conditions of sale within the meaning of Rule 9(1)(e) of the 1988 Rules

and these are not post importation charges.

15. Stand of the respondent, on the other hand is that those items

related to post importation activities of SAIL in India for

implementation of their project. Their case is that only imported
25
equipments could be subjected to duty. Referring to the charging

provision for levy of duty, being Section 12 as also Section 14 of the

Act, it was argued that to reach the assessable value, Rule 9 of the 1988

Rules was the only mode. So far as subject-dispute is concerned, Rule

9(1) (e) read with the interpretative note did not permit addition of

value of post-importation items. Spares and other specifications

concerning such equipments were already included in the price of the

equipments. In support of his argument for exclusion of post

importation services which may be obtained from a foreign consortium,

Mr. Bagaria referred to the aforesaid Note, which reads as:-

“Note to Rule 4
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. Payment may be made directly or
indirectly. An example of an indirect payment
would be the settlement by the buyer, whether in
whole or in part, of a debt owed by the seller.

Activities undertaken by the buyer on his own
account, other than those for which an
adjustment is provided in Rule 9, are not
considered to be an indirect payment to the seller,
even though they might be regarded as of benefit
26
to the seller. The costs of such activities shall not,
therefore, be added to the price actually paid or
payable in determining the value of imported
goods:

The value of imported goods shall not include the
following charges or costs, provided that they are
distinguished from the price actually paid or
payable for the imported goods:

(a) charges for construction, erection,
assembly, maintenance or technical assistance,
undertaken after importation on imported goods
such as industrial plant, machinery or equipment;

(b) the cost of transport after importation;

(c) duties and taxes in India.

The price actually paid or payable refers to the
price for the imported goods. Thus the flow of
dividends or other payments from the buyer to
the seller that do not relate to the imported goods
are not part of the customs value.”

16. Learned counsel for the respondent relied on the following

authorities in support of his submissions:

“1. (2015) 8 SCC 175: Commissioner of
Customs Vs. Essar Steel

2. (2000) 3 SCC 472: M/s Tata Iron & Steel
Co. Ltd. Vs. CCE

3. (2007) 9 SCC 401: Commissioner of
Customs Vs. J.K. Corp. Ltd.

4. (2015) 14 SCC 750: Commissioner of
Customs Vs. Hindalco Industries

5. (2015) 16 SCC 506: Commissioner,
Customs Vs. Denso Kirloskar Industries

27

6. (2007) 5 SCC 371: Commissioner of
Customs Vs. Toyota Kirloskar

7. (2008) 4 SCC 563: Commissioner of
Customs Vs. Ferodo India (P) Ltd.

17. In the case of Essar Steel Limited (supra), there were two

contracts with the overseas exporter. One was a purchase order for

setting up of a plant. The other was between Met Chem Canada Inc.

with Essar Ltd. to associate the former as a technical consultant to

render technical services in relation to implementation of a project to

set up a plant in India for manufacture of hot rolled steel coils in India.

The technical service agreement was in relation to implementation of

the project. The revenue had taken the stand that customs duty was to

be imposed was on both the goods and the intangible items as these

were not independent of each other and the contract for design

engineering and technical services constituted condition of sale for the

contract of supply of goods. This is a stand similar to that taken by

revenue in this case as well. This Court, referring to various authorities

held that it was not permissible on the part of the revenue to include in

the assessable value the value or charges for items which were to be

28
used or utilized for post importation activities. In paragraph 14 of the

said report, it has been observed and held:-

“14. Another thing to be noticed is that a conjoint
reading of the technical services agreement and
the purchase order do not lead to the conclusion
that the technical services agreement is in any
way a pre- condition for the sale of the plant
itself. On the contrary, as has been pointed out
above, the technical services agreement read as a
whole is really only to successfully set up,
commission and operate the plant after it has
been imported into India. It is clear, therefore,
that clause 9(1)(e) would not be attracted on the
facts of this case and consequently the
consideration for the technical services to be
provided by Met Chem Canada Inc. cannot be
added to the value of the equipment imported to
set up the plant in India.”

18. This Court, while dealing with the case of Essar Steel Limited

(supra) had referred to the case of Tata Iron and Steel Company Ltd.

(supra). The latter authority related to importation made under an

umbrella contract, which branched into two. One related to agreement

for supply of technical documentation (MD 301) and the other for sale

of equipments and materials pertaining to a blast furnace and three

torpedo ladle cars (MD 302). The value of MD 301 was 12.5 million

DM and MD 302 was 13.5 million DMs. The consignment under MD

301 was cleared by the customs authorities having nil duty component
29
as importer claimed the same to be classified under sub-heading

no.4906.00 of the Customs Tariff Act, 1985. But while scrutinising the

consignment under MD 302, the customs authorities initiated action for

including the value of MD 301 for determining the assessable value.

The dispute reached the Tribunal. In paragraph 7 of the said report

comprising of the judgment of this Court, the finding of the Tribunal

has been summarised:-

“7. The appellant and other notices preferred
appeals before the Customs, Excise and Gold
(Control) Appellate Tribunal, Calcutta which
have been disposed of by a common order. The
Tribunal has held that the three contracts entered
into between the seller, i.e., SNP and the
appellant were in fact parts of one package, that
is, the three constituted one composite
agreement. The technical documentation
supplied to the appellant could be divided into
three parts: (i) those pertaining to the imported
equipment, (ii) those pertaining to the equipment
which has yet to be procured or manufactured by
the appellant, and (iii) those relatable to post-

import activities undertaken by the appellant for
assembly, construction, erection, operation and
maintenance of the imported equipment. The
value of the contract to the extent of (i) above was
liable to be included in the value of equipments
and materials imported by the appellant though
the value of the technical documents covered by

(ii) and (iii) above could have been excluded for
payment of customs duty by reference to the
Interpretative Note to Rule 4 of the Customs
30
Valuation Rules, 1988 (hereinafter “the Rules”,
for short). However, since separate values have
not been shown, the benefit of the Interpretative
Note to Rule 4 abovesaid was not available to the
appellant and the entire value of the two contracts
was liable to be clubbed together for the purpose
of levying customs duty.”

19. It was held and observed by this Court in the case of Tata Iron

and Steel Company Ltd. (supra):-

“16. It is nobody’s case that the seller had an
obligation towards a third party which was
required to be satisfied by it and the buyer (i.e.
the appellant) had made any payment to the seller
or to a third party in order to satisfy such an
obligation. The price paid by the appellant for
drawings and technical documents forming the
subject-matter of contract MD 301 can by no
stretch of imagination fall within the meaning of
“an obligation of the seller” to a third party.
There was also no payment made as a condition
of sale of imported goods as such. Rule 9(1)(e)
also, therefore, has no applicability.

17. So far as the Interpretative Note to Rule 4 is
concerned it is no doubt true that the
Interpretative Notes are part of the Rules and
hence statutory. However, the question is one of
their applicability. The part of the Interpretative
Note to Rule 4 relied on by the Tribunal has been
couched in a negative form and is accompanied
by a proviso. It means that the charges or costs
described in clauses (a), (b) and (c) are not to be
included in the value of imported goods subject
31
to satisfying the requirement of the proviso that
the charges were distinguishable from the price
actually paid or payable for the imported goods.
This part of the Interpretative Note cannot be so
read as to mean that those charges which are not
covered in clauses (a) to (c) are available to be
included in the value of the imported goods. To
illustrate, if the seller has undertaken to erect or
assemble the machinery after its importation into
India and levied certain charges for rendering
such service the price paid therefor shall not be
liable to be included in the value of the goods if
it has been paid separately and is clearly
distinguishable from the price actually paid or
payable for the imported goods. Obviously, this
Interpretative Note cannot be pressed into service
for calculating the price of any drawings or
technical documents though separately paid by
including them in the price of imported
equipments. Clause (a) in the third para of the
Note to Rule 4 is suggestive of charges for
services rendered by the seller in connection with
construction, erection etc. of imported goods.
The value of documents and drawings etc. cannot
be “charges for construction, erection, assembly
etc.” of imported goods. Alternatively, even on
the view as taken by the Tribunal on this Note,
the drawings and documents having been
supplied to the buyer-importer for use during
construction, erection, assembly, maintenance
etc. of imported goods, they were relatable to
post-import activity to be undertaken by the
appellant. Such charges were covered by a
separate contract, i.e. contract MD 301. They
could not have been included in the value of
imported goods merely because the value of
documents referable to imported equipments and
materials was mixed up with the value of those
32
documents which were referable to equipment
which was yet to be procured or imported or
manufactured by the appellant; the value of the
latter category of documents also being neither
dutiable nor clubbable with the value of imported
goods. The Tribunal has not doubted the
genuineness of the contracts entered into
between the appellant and SNP. Rather it has
observed vide para 10.2 of its order that entering
into two contracts (MD 301 and MD 302) was a
legal necessity. The Tribunal has also stated that
it was not recording any finding of “skewed split-
up”. Shri Ashok Desai, the learned Senior
Counsel for the appellant has pointed out that
under Chapter Heading 49.06 of the Customs
Tariff Act
, 1975 plans and drawings for
engineering and industrial purposes being
originals drawn by hand as also their
photographic reproductions on sensitised papers
and carbon copies thereof are declared free from
payment of customs duty. Sub-rules (3) and (4)
of Rule 9 clearly provide that additions to the
price actually paid or payable are permissible
under the Rules if based on objective and
quantifiable data and no addition except as
provided for by Rule 9 is permissible.”

20. Revenue laid stress on the decision of this Court in the case of

Essar Gujarat (supra). We have earlier referred to this authority in

this judgment. This case involved importation of a plant, which was

originally installed in Germany. The Indian importer, Essar Gujrat, had

entered into an agreement with the overseas owner of that plant in

33
Germany. That owner was Teviot Investments Limited. The agreement

Essar Gujarat had with Teviot for purchase of the plant, however, was

subject to Essar obtaining transfer of operational license from another

corporation, Midrex International BV. Question arose as to whether the

license fees paid to Midrex should be included to the value of the plant

or not. The revenue case was that the stipulation of obtaining the license

from Midrex was a condition for sale. If this condition was not

fulfilled, the sale would have had fallen through. Thus, to give effect to

the plant sale agreement, there was an element of necessity or

compulsion to enter into the licensing agreement with Midrex.

21. SAIL had taken specific stand before the authority of the first

instance that it was not a condition for them to take design and

engineering, which related to post importation activities from the

supplier only. In terms of the schedule of the agreement, the purchaser

(that is SAIL) had right to change the goods to be supplied by the

supplier at any time.

22. An importer of equipments of a plant could always choose to

obtain drawings and designs for undertaking post importation activities

from an overseas consortium supplying the equipments. This may
34
confer on such arrangements attributes of a turnkey contract, but that

fact by itself would not automatically attract the “condition” clause

contained in Rule 9(1) (e) of the Valuation Rules. In the cases of Essar

Steel Ltd.(supra) and Tata Iron and Steel Co. Ltd.(supra), the

contracts had certain elements of “turnkey” features. The case of Essar

Gujarat (supra) is distinguishable, as the subject of import there

carried a condition for entering into a licensing agreement with a third

party.

23. This decision was considered by this Court in Essar Steel (supra)

and Essar Gujarat (supra). It was explained by this Court in the case

of Essar Steel (supra) in paragraphs 17 and 18 of the report:

“17. The Court held that the amount of 20
lakh Deutsche Marks and 101 lakh Deutsche
Marks were both payable for the right to use
Midrex process and patents. In short, these
amounts were payable for the transfer of
technology under a process licence agreement
entered into with Midrex. The judgment states
that without such licence the plant could not
be operated at all by the importer without the
technical know-how from Midrex. In any
case, the plant could not be operated or be
made functional. This being the case, since
these amounts had to be paid before the plant
could at all be set up, these amounts would be
added to the value of the imported plant.

35

18. However, so far as the sum of 231 Lakh
Deutsche Marks is concerned, since this was
payment for engineering and technical
consultancy to set up and commission the
plant in India, this amount would have to be
excluded. This Court held that 10% of this
amount only should be added to the value of
the plant as the plant had been sold abroad on
an as is where is basis and needed to be
dismantled abroad before it was ready for
delivery in India. Obviously, therefore this
10% is attributable to a pre-import stage.
Further, the amount of 22 Lakh Deutsche
Marks payable for theoretical and practical
training of personnel outside India again
could not be added as this amount would
presumably be attributable to trained
personnel who would be used in the
commissioning and operation of the plant,
which would, therefore, be attributable to a
post-importation event. Thus, properly read,
the judgment in Essar Gujarat case actually
supports the respondent in that the payment
for engineering and technical consultancy
services in India cannot be added to the value
of the imported plant. Also, in the present
case, there is no transfer of technology under
a license. Therefore, no question arises as to
whether without such license the plant to be
set up in India could be operated at all. The
judgment also concludes in favour of the
respondent the fact that all amounts payable
for training of personnel outside India cannot
be added to the value of the plant.”

36

24. We have already summarised the respondent’s case that the

disputed items on which the customs authorities intended to impose

duty all related to post importation activities and could not be included

in the assessable value. It has been urged on behalf of the respondent

that neither clause 9 (1) b (iv), nor 9 (1) (e) could be made applicable

so far as the subject items are concerned. The imported items according

to the respondent are the equipments and the engineering drawings etc.

forming part of the contract were not necessary for production of the

imported goods. It has also been urged that the customs authority had

wrongly contended that the subject drawings etc. were purchased as the

condition that the sale of the imported goods and this excluded

application of clause 9 (1) (e) of the 1988 Rules. In this regard

interpretative note to Rule 4 was relied upon. Reference was made, in

particular, to clause (a) of that Note.

25. Revenue has not made out a case that the disputed items of

contract do not relate to post-importation activities. The statutory

37
provision relied upon by the Revenue to bring the subject-items within

the duty net is Rule 9 (1) (e) of the 1988 Rules.

26. The expression “condition”, simply put, conveys the idea that

something could be done only if another thing was also done. In the

given context, it would imply that import of equipments could be

allowed by the other party provided the design features for post-

importation activities were also obtained from the same supplier or

from a firm as per the overseas supplier’s direction. But there is no

material before us to suggest that import of equipments was effected

with simultaneous obligation of SAIL that the designs relating to post-

importation activities should also be obtained from the same entity.

The revenue has proceeded with the understanding that since both were

obtained from the same vendor, condition of obtaining designs etc., for

post-importation activities was implicit in the contract. The Revenue

has sought to emphasise their case on the basis that as it was a turnkey

project, importation of equipments and post-importation project

implementation exercise were mutually dependant. In our opinion,

reading such implied condition into the contracts would be

impermissible in the absence of any other material to demonstrate

38
subsistence of such condition. No part of the contract has been shown

to us from which such condition could be inferred. Necessity of

subsistence such condition has been laid down in the case of Ferodo

India (P) Ltd. for invoking rule 9 (1) (e). In our opinion, the provisions

of Rule 9 (1) (e) cannot be automatically applied to every import which

has surface features of a turnkey contract. Just because different

components of a contract or multiple contracts give the shape of

turnkey project to the imported items, without specific finding on

existence of “condition” as contemplated in clause 9 (1) (e), value of

all these components could not be added to arrive at the assessable

value. Such an exercise would go against the provisions of

Interpretative Note to Rule 4, which is part of the Valuation Rules in

view of the provisions of Rule 12 thereof.

27. Similar were the revenue’s contentions in Essar Steel (supra)

and Tata Iron & Steel Co. Ltd. (supra), except that in the factual

context of those two cases, there were different sets of agreements. But

that difference is more of form than of content. If a single agreement

involves importation of dutiable equipments and also services for post-

importation activities, and these two sets of items are segregable, it

39
would be open to the importer to claim duty-exclusion in respect of

items directly relatable to post importation activities in cases where

Rule 9 of the Valuation Rules are applicable. The cases of J.K. Corp.

Ltd. (supra), Hindalco Industries, Denso Kirloskar (supra), Toyota

Kirloskar (supra) all deal with exclusion of value of post-import

activities.

28. In the present appeal, involving two import consignments, the

authorities of First Instance and the Appellate Authority proceeded on

the basis that since all the scheduled items formed part of the same

contract and were linked with activities at post-import stage with the

imported equipments, the provisions of Section 9 (1) (e) could be

invoked. Such reasoning infers subsistence of conditions for awarding

post-importation work to the overseas consortia or makes import of

both sets of items otherwise interdependent. We find from the orders in

original that the stand of SAIL was consistent that the subject drawings

and specifications did not relate to the equipments imported and was

meant for post importation activities and there was no condition laid

down that the import of the equipments were to be supplemented by

post-importation work.

40

29. In such circumstances, we do not find any reason to interfere with

the order of the Tribunal. The appeal is dismissed.

30. There shall be no order as to costs. All connected applications

shall stand disposed of.

…..………………………….J.

(Deepak Gupta)

……………..……………….J.

(Aniruddha Bose)

New Delhi,
April 27, 2020.

41



Source link