COMMNR. OF CUSTOMS, AHMEDABAD vs. M/S. ESSAR STEEL LTD

Page 3 JUDGMENT Technical Consultant shall act as technical coordinator for the successful setting up, commissioning of all the facilities and achieving established operations of the Plant. Technical Consultant shall coordinate all technical matters such as, but not limited to studying various alternative specifications and processes for the Plant and for manufacturing of Products; making recommendation for the most suitable and economic process, final detailed specifications and processes for the selected route, advising as required regarding technical proposals from various suppliers, and Contractors for the supply of the Plant and equipment, and the erection thereof at the Site, including civil engineering, designs, construction and installation of project utilities necessary for the successful setting up of the plant; carrying out the detailed project engineering including giving approvals for the various construction and Project implementation activities, engineering drawings, methods of construction, etc. 2.1.2.Supervision and Monitoring of the Project: Technical Consultant shall provide advice regarding the activities in connection with the setting up of the plant from the technology, costs and time schedule angle. 2.1.3.Arrangement for Training of ESSAR’s Employees-outside India. Technical Consultant shall be responsible for arranging for up to two hundred (200) man months of training of (operating, maintenance and management) ESSAR employees at Steel Plant with proven technical capabilities in appropriate fields, outside India. Specific subjects, duration of training for each subject and numbers of trainees in each group shall be mutually agreed upon in writing. All travelling, living and miscellaneous expenses of ESSAR employees in relation thereto shall be for ESSAR’s account. 3

Page 4 JUDGMENT 2.1.4.Assistance in transfer of technology: Technical consultant shall select appropriate subcontractor/contractors depending on the source of technologies and organize transfer to ESSAR of technology necessary for successful operation and maintenance of the Plant. 2.1.5.Procurement support services: Technical

Consultant

shall provide procurement support Services for procurement of Equipment in India such as assistance in finalization of lists, specifications and sizes and configuration of equipment to be purchased, listing of suitable vendors, floating of inquiries, scrutiny of quotation received, assistance in negotiations with the Suppliers and in finalisation of order, pre-dispatch inspection and witnessing of tests, etc.” As a consideration for the above scope of supply to be provided, the technical consultant was to be paid a fee of DM 78,950,000 (Seventy Eight Million Nine Hundred Fifty Thousand Deutsche Marks). Since a large part of the arguments turned on clause 9, it is set out in full hereinbelow:

“9. 0. PATENTS.

Page 5 JUDGMENT the Technical Consultant shall not be liable in the event of claims against ESSAR by any other party for such infringement and shall indemnify the Technical Consultant against such liability. The Technical Consultant shall intimate, if however, it knows or becomes aware that any process, equipment or facilities recommended by the Technical Consultant is/are the subject of patents, trademarks, or other industrial property right of any other company, individual or association.

Page 6 JUDGMENT will be granted or transferred to ESSAR, unless otherwise specified in the Agreements.

Page 7 JUDGMENT

Page 8 JUDGMENT respondent stated that none of the provisions of Rule 9 of the Customs Valuation (Determination of Price of Imported Goods) Rules of 1988 would apply as no payment is made for technical services as a condition of sale of imported goods. In any event, the agreement for technical services is to be performed in India post-importation and, therefore, would have to be excluded from the value to be taken into account at the time of import.

“31. Since, the contract for technical consultancy was signed before the purchase order placed, it is evident that the payment made on account of the technical consultancy agreement is a condition of sale of imported goods. Even though, this aspect has not been covered in the agreement for technical consultancy as at the time of signing this agreement the purchase order was not placed to M/s. Metchem Inc. Canada. However, such an high amount of DM 78 million has to be necessarily linked with the value of the purchase order which was US$ 169 million placed subsequently. At the time of signing of agreement both the parties fully understood that they will be signing another agreement on subsequent date relating to the sale of plant and machinery. Nobody is going to pay DM 78 million in vacuum if the other agreement does not materialize. Thus, I find that these two payments were not independent to each other but the buyer has no 8

Page 9 JUDGMENT option but to buy machinery once they have made commitment for technical services. Therefore, I have no doubt in my mind that the payment made as per the technical consultancy agreement is a condition of sale of imported goods.”

Page 10 JUDGMENT payments are made under the technical services agreement as a condition for the sale of the imported plant which cannot be set up without the technical services to be provided. In reply, Shri Bagaria, learned senior advocate appearing on behalf of the respondent, took us through the said agreements and contended that it was clear that payments made under the technical services agreement were not as a condition of sale of the plant. Further, the Essar Gujarat judgment turned on its own facts which are distinguishable, and several other judgments of this Court in fact conclude the matter in his favour.

“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 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— 10

Page 11 JUDGMENT (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. (1-A) 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 (1-A), 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— (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 11

Page 12 JUDGMENT clause (m) and clause (q) of Section 2 of the Foreign Exchange Management Act, 1999 (42 of 1999).”

A cursory reading of the Section makes it clear that customs duty is chargeable on goods by reference to their value at a price at which such goods or like goods are ordinarily sold or offered for sale at the time and place of importation in the course of international trade. This would mean that any amount that is referable to the imported goods post-importation has necessarily to be excluded. It is with this basic principle in mind that the rules made under sub-clause 1(A) have been framed and have to be interpreted.

Page 13 JUDGMENT with the provisions of Rule 9 of these Rules. Rule 9 of the Rules is set out hereinbelow:- “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:- (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 or payable, namely:- (i) Materials, components, parts and similar items incorporated in the imported goods; (ii) Tools, dies, moulds and similar items used in the production of the imported goods; (iii) (iii) materials consumed in the production of the imported goods; (iv) Engineering, development, art work, design work, and plans and sketches undertaken 13

Page 14 JUDGMENT elsewhere than in India and necessary for the production of the imported goods; (c) Royalties and licence fees related to the imported goods that the buyer s 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. (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. 9(2) xx xxx 9(3) Additions to the price actually paid or payable shall be made under this on the basis of objective and quantifiable data. 9(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.” A reading of Rule 4 and Rule 9 makes it clear that only those costs and services that are actually paid or payable for imported goods pre-import are to be added for the purpose of determining the value of the imported goods. In the present appeal, arguments have veered around the applicability of Rule 14

Page 15 JUDGMENT 9(1)(e). In this appeal, we are concerned only with the first part of Rule 9(1)(e). The narrow question that arises before us is whether the payment made for the technical services agreement is to be added to the value of the plant that is imported inasmuch as such payment has been made as a condition of sale of the imported plant.

Page 16 JUDGMENT ownership of patents, know-how, copyright and other intellectual property rights shall remain vested in the technical consultant and none of these will be transferred to the respondent. The respondent becomes owner of that portion of documents, drawings, plans and specifications originally created by the technical consultant pursuant to the agreement. This again refers only to documents, drawings etc. of setting up, commissioning and operating the plant, all of which are post-importation of the plant into India.

Page 17 JUDGMENT 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.

Page 18 JUDGMENT been essential for the EGL to have this licence in order to make the plant fully and effectively operational but it was not a condition of sale of the plant. It was quite an independent contract. From a plain reading of the agreement with TIL, it appears that the overriding clause may have been inserted to protect EGL but nonetheless it was a condition of sale. If this condition was not fulfilled, the sale would have fallen through. Moreover, it appears that the plant without Midrex licence would have been of no value at all. EGL had purchased the plant on “as is where is” basis. But in order to operate the plant, it was essential to have a licence from Midrex.” (page 742)

A chart setting out the services to be provided outside India is supplied at page 744 of the judgment as follows: “SERVICES TO BE PROVIDED OUTSIDE INDIA: 10.1.1 Process licence and allied technical services DM (German Marks) 10.1.1.1 Process licence fee payable to MIDREX Corporation for the right to use the Midrex process and patents DM 20,00,000 lump sum 10.1.1.2 Cost of technical services provided under Article 3 in connection with Midrex process DM 1,01,00,000 lump sum Technical Services 10.1.2.1 Payment for engineering and consultancy fee as specified under this agreement DM 2,31,00,000 lump sum 10.1.2. 2. Payment for theoretical and practical training outside India DM 22,00,000 lump sum 18

Page 19 JUDGMENT Total DM 3,74,00,000 lump sum 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.

Page 20 JUDGMENT 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’s 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. 20

Page 21 JUDGMENT

“12. Interpretative Notes. – the interpretative notes specified in the Schedule to these rules shall apply for the interpretation of these rules.” The relevant interpretative note which was relied upon is important and reads as follows: “Note to Rule 4 Price actually paid or payable 21

Page 22 JUDGMENT 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 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.” Rule 9(1)(e) was not attracted on facts. This Court held: 22

Page 23 JUDGMENT “15. Clause (e) of sub-rule (1) of Rule 9 is attracted when the following conditions are satisfied: (i) there is a payment actually made or to be made as a condition of sale of the imported goods by the buyer to the seller or to a third party; (ii) such payment, if made to a third party, has been made or has to be made to satisfy an obligation of the seller; and (iii) such payments are not included in the price actually paid or payable.

Page 24 JUDGMENT (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 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 24

Page 25 JUDGMENT 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.”

“16. Reliance has been placed by Mr. Radhakrishnan on a decision of this Court in Essar Gujarat Ltd. [(1997) 9 SCC 738 : (1996) 88 ELT 609] In that case, the licence fee was paid to the supplier of the plant and machinery for a licence to operate the plant, which was in reality nothing but was held to be an additional price payable for the plant itself and was, therefore, held to be includible 25

Page 26 JUDGMENT in its assessable value. It is in the aforementioned fact situation, this Court held: (SCC pp. 745-46, para 13) “13[12]. Reading all these agreements together, it is not possible to uphold the contention of Mr. Salve that the precondition of obtaining a licence from Midrex was not a condition of sale, but a clause inserted to protect EGL. Without a licence from Midrex, the plant would be of no use to EGL. That is why this overriding clause was inserted. This overriding clause was clearly a condition of sale. It was essential for EGL to have this licence from Midrex to operate this plant and use Midrex technology for producing sponge iron in India. Therefore, in our view, obtaining a licence from Midrex was a precondition of sale. In fact, as was recorded in the agreement, the sale of the plant had not taken place even at the time when the contract with Midrex was being signed on 4-12-1987, although the agreement with TIL for purchase of the plant was executed on 24-3-1987. Therefore, we are of the view that the tribunal was in error in holding that the payments to be made to Midrex by way of licence fees could not be added to the price actually paid to TIL for purchase of the plant.”

Page 27 JUDGMENT of the conditions, it was opined: (SCC p. 749, para 24) “24. Therefore, the process licence fees of DM 20,00,000 was rightly added to the purchase price by the Collector of Customs. The order of CEGAT on this question is set aside.”

In an instructive passage on principle, this Court also laid down:

“9. The basic principle of levy of customs duty, in view of the aforementioned provisions, is that the value of the imported goods has to be determined at the time and place of importation. The value to be determined for the imported goods would be the payment required to be made as a condition of sale. Assessment of customs duty must have a direct nexus with the value of goods which was payable at 27

Page 28 JUDGMENT the time of importation. If any amount is to be paid after the importation of the goods is complete, inter alia, by way of transfer of licence or technical know- how for the purpose of setting up of a plant from the machinery imported or running thereof, the same would not be computed for the said purpose. Any amount paid for post-importation service or activity, would not, therefore, come within the purview of determination of assessable value of the imported goods so as to enable the authorities to levy customs duty or otherwise. The Rules have been framed for the purpose of carrying out the provisions of the Act. The wordings of Sections 14 and 14(1-A) are clear and explicit. The Rules and the Act, therefore, must be construed, having regard to the basic principles of interpretation in mind.

“22. In the alternate, it has invoked Rule 9(1)(e). This Rule 9(1)(e) cannot stand alone. It is a corollary to Rule 4. There is no finding in the present case that what was termed as royalty/licence fee was in fact not such royalty/licence fee but some other payment 28

Page 29 JUDGMENT made or to be made as a condition prerequisite to the sale of the imported goods. It is important to bear in mind that Rule 9 refers to cost and services. Under Rule 9(1), the price for the imported goods had to be enhanced/loaded by adding certain costs, royalties and licence fees and values mentioned in Rules 9(1)(a) to 9(1)(d). It refers to “all other payments actually made or to be made as a condition of sale of the imported goods”. In the present case, the Department invoked Rule 9(1)(c) on the ground that royalty was related to the imported goods, having failed it cannot fall back upon Rule 9(1)(e) because essentially we are concerned with the addition of royalty, etc. to the price of the imported goods. Further, in the present case, the Department has accepted the transaction value of the imported goods.

Page 30 JUDGMENT is no such stipulations in TAA in the present case. Therefore, in our view, the adjudicating authority erred in placing reliance on the judgment of this Court in Essar Gujarat Ltd. [ From Final Order No. 91 of 2002 dated 12-2-2002 of the Customs, Excise and Gold (Control) Appellate Tribunal, New Delhi in Appeal No. C/573/2001-A : See (2002) 142 ELT 343 (Tri); (2003) 156 ELT 62 (Tri); (2006) 195 ELT 206 (Tri) and (2006) 205 ELT 208 (Tri)]”

Page 31 JUDGMENT therefrom. Even in Essar Gujarat Ltd. [(1997) 9 SCC 738] a clear distinction has been made between the charges required to be made for pre- importation and post-importation. All charges levied before the capital goods were imported were held to be considered for the purpose of computation of transaction value and not the post-importation one. The said decision, therefore, in our opinion, is not an authority for the proposition that irrespective of nature of the contract, licence fee and charges paid for technical know-how, although the same would have nothing to do with the charges at the pre- importation stage, would have to be taken into consideration towards computation of transaction value in terms of Rule 9(1)(c) of the Rules.

Page 32 JUDGMENT and production model, wherewith the import of capital goods did not have any nexus.”