9911796707
|
Home
Issues Involved:
1. Whether Customs duty is payable on design and engineering charges paid to the supplier abroad. Detailed Analysis: Issue 1: Whether Customs duty is payable on design and engineering charges paid to the supplier abroad. The issue involved in this appeal filed by M/s. Gujarat Mineral Development Corporation Ltd. is whether the Customs duty is payable in respect of the design and engineering charges paid to the supplier abroad. 2. Briefly stated the facts are that the appellants applied for registration of contract on 10-7-1986 under Project Import for import of machinery and accessories for their lignite project; that the contract was registered on 25-7-1986 under the Project Import Regulation, 1986. The Appellants filed 9 Bills of Entry for import of specialized mining equipment, machineries, etc. which were cleared on payment of customs duty amounting to Rs. 14,80,84,167.50 paise. Subsequently, they claimed a refund of duty Rs. 1,71,78,129.21 paise on the ground that customs duty was not payable in respect of design and engineering charges as these were paid for technical assistance and assembling of the plant. The Deputy Collector, Customs, rejected the refund claims under Adjudication order dated 27-3-1989 holding that since the transaction was unique and it was difficult to determine the price at which such or like goods were ordinarily sold, the price would be determined as per provisions of Rule 8 of Customs Valuation Rules, 1963; that the nearest ascertainable value would be the cost of importation of the goods, and all the elements of the cost which would be incurred before the importation of the goods would be included in determining the assessable value of the goods; that as the cost of design and engineering had been incurred prior to the importation these would form the element of cost of imported goods, even if such costs had been shown separately in the invoice; that these charges could not be separately classified under Heading 49.06 of the Customs Tariff in view of the fact that the whole import was under Project Import Regulations, 1986 under Heading 98.01 and all items imported under the contract would be assessed under Heading 98.01. On appeal, the Commissioner (Appeals), under the impugned order dated 22-1-1997, rejected the appeal holding that the cost of design and engineering was always considered to be an ingredient of the assessable value, even in respect of machinery imported separately under different headings; that this aspect became more relevant when the appellants had opted for import under Project Regulations under Chapter 98 of the Customs Tariff; that drawings, design and engineering charges had also been paid against importation of the project items and, therefore, would be liable for being charged to duty under Chapter 98 of the Customs Tariff. 3. Shri Girish N. Shah, learned Advocate, submitted that for the expansion of Panandhro Lignite Mines Project, the Appellants entered into a contract dated 6-11-1984 with a German Company Takraf Export/Import (referred to as Contractor) under which the scope of work comprised of manufacture, supply and transportation of machineries and equipment from GDR, Berlin and also, inter alia, furnishing of drawings of designs for erection and installation of plant; that this is evident from the preamble to the contract that the appellants had selected M/s. Tokraf's offer having agreed upon the technical specification of the equipment and machineries and other terms including erection, testing, and commissioning. The learned Counsel referred to the various articles of the contract to show that design and engineering expenses were different from the manufacture and supply of machineries and equipment. He referred to Article 1.11 according to which "Contract Drawings" shall mean the designs, plans, drawings, sketches, and details which have been supplied by the contractors for the execution of the contract and shall include the changes effected therein as mutually agreed. The learned Counsel referred to Article 2.1 which defined 'Scope of work' which included "Commissioning, short-term and long-term tests of machinery and equipment and providing supervision of erection, short term and long term tests and contended that all these activities were post importation activities; that Article 4 of the Contract, dealing with the 'prices', lays down break up of the total contract price reading as under:- 4. The learned Counsel mentioned that as per Article 4.02, the total contract price includes the value of all materials, equipment, machinery etc. excluding spare parts; it also includes the costs of engineering, design, drawings, the purchase of material, fabrication, test in factories, transportation to Indian Port, supervision of erection, testing and commissioning and labour costs. He further mentioned that clause (b) of Article 5.01 requires the contractor to prepare and submit invoices separately for (i) design and engineering and for (ii) manufacture and supply; that Article 18 of the Contract deals with the supply of drawings and Manuals whereunder it is the responsibility of the contractor to provide the appellant six sets of operation and maintenance manuals, general and details arrangements drawings, erection drawings, repair and maintenance instructions with technical drawings; that different time schedules were fixed in Article 16.05 for supply of manuals and drawings that this is the post event of manufacture and supply and the charges paid by the appellants on account of the said drawings and manuals is not to be charged to Customs duty; that these charges are clearly distinguishable from the goods imported; that under Section 14 of the Customs Act, for the purpose of finding out the assessable value for the Customs duty, one has to find out the price of the goods and nothing else. He relied upon the decision of the Bombay High Court in the case of Union of India v. Mahindra & Mahindra, 1991 (55) E.L.T. 15 (Bom.)] wherein it was held that payment of lump sum of 15 million French Francs for use of PEUGEOT technology has no connection whatsoever to the supply of CKD packs in rough and finished state by Peugeot for the production of the engine; that "there is separate provision in the agreement relating to fixation of price of CKD packs and that fixation has no nexus whatsoever to the lump sum payment made for obtaining technical know-how. Mr. Shah mentioned that the appeal filed by the Government against this decision was dismissed by the Apex Court in Union of India v. Mahindra & Mahindra Ltd., 1995 (76) E.L.T. 481 (SC). The Supreme Court held that "the collaboration agreement for the technical know-how and the supply of CKD packs and spares are independent and commercial transactions, in other words, there existed no nexus between the lump sum payment under the agreement for the technical know-how the determination of the price for supply of CKD packs or spares." 5. The learned Counsel placed reliance also on the decision in Collector of Customs v. Visakhapatnam Steel Project, 1992 (62) E.L.T. 572 (T); Collector of Customs v. Vishakhapatnam Steel Project, 1992 (62) E.L.T. 833 (T) and CCE, Madras v. General Marketing Mfg. Co. Ltd., 1994 (71) E.L.T. 106 (T) wherein it was held that prior to 16-8-1988, the day on which Customs Valuation (Determination of Price of Imported Goods) Rules, 1988 came into force, Customs Valuation Rules, 1963 will be applicable. He also referred to the decision in Collector of Customs v. Essar Gujarat Ltd., 1996 (88) E.L.T. 609 (SC) in which it was held that "It is difficult to hold that the entire payment of engineering consultancy fee to V.A. will have to be added to the imported Plants. But the plant was sold on "as is where is" basis. So whatever expenditure was needed to be incurred for dismantling the plant and making it ready for delivery has to be added to the value of the Plant... But this apart, other services rendered cannot be treated as adding in any way to the value of the Plant." 6. The learned Counsel also submitted that on the basis of legal advice, sought by them, they had deposited income tax amounting to Rs. 98,24,145/- on design and engineering fees paid to the Contractor under Section 9 of the Income Tax Act, 1961; that Customs duty is a capital cost and it is paid towards project equipment; its cost cannot be considered as income chargeable to income tax; that as they have paid income tax, the Customs duty cannot be charged in respect of designing and engineering expenses. Finally he mentioned that the sequence suggested by Agreement stipulated delivery of some manuals before 5 months of completion of erection that erection can commence only after import and necessarily drawings should come after the import and as such this cost is not to be subjected to Customs duty. He also referred to Article 37 of the Contract according to which the erection documentation and drawings etc. shall be in accordance with the scope of erection work/contract recommended by the Contractor who would furnish to the appellant 5 months before start of erection, such erection documentation and drawings which shall be the technical basis for the preparation and implementation of the erection work for the equipment. Alternatively, learned Counsel submitted that even if design and engineering charges were dutiable separate goods; the same will be classified under Heading 49.06 of the Customs Tariff whereunder the said goods were free of duty. 7. Countering the arguments Shri Sanjay Srivastava, learned D.R. submitted that the learned Counsel for the appellants has heavily relied upon the decision in Mahendra & Mahendra case, according to which there should be nexus between the charges and the machineries and equipment imported; that in the present matter the imports were made as a Project Import the design and engineering charges are relatable to supply machineries and equipment and as such the facts are distinguishable from the facts in Mahindra & Mahindra's case. The learned D.R. referred to various articles of the contract in support of his contention that the design and engineering charges were relatable to machineries and equipment imported by the appellants. He specifically referred to the following paragraphs No. 3 and 5 in preamble to the contract : "Whereas the Contractor has visited Panadhra Lignite Mines site and has obtained all information regarding the working conditions prevailing at the site and information necessary to design, manufacture and supply all the equipment under the contract and" "Whereas the Contractor in pursuance of the Purchaser's Global Tender Inquiry........ has undertaken to design, engineer, manufacture, erect, test and commission for the purchaser complete systems of equipment, machineries etc. on a turn key basis.........." 8. The learned D.R. contended that it is evident from these paragraphs that design and engineer was with reference to machineries and equipment which were to be erected, tested and commissioned by the Contractor. He also referred to Article 2.01 relating to 'Scope of work' which means and includes Design and Engineering required to be done for manufacture, supply and transportation to GDR Port of machineries, equipment. He further referred to Article 18.05 which, according to him, clearly shows that the drawings were in respect of the equipment supplied by the foreign Contractor. The learned D.R. also submitted that in Mahendra & Mahendra's case the lump sum payment was given in respect of 'technical know-how' which was not relatable to import of CKD packs for the manufacture of engine; that similarly in the case of Visakhapatnam Steel Project, 1992 (62) E.L.T. 572 (T), the Tribunal clearly held that the engineering services were relatable to the lay out of the plant and did not relate to the design and engineering services of the equipment imported; that it is apparent from this decision that if the design and engineering services relate to the equipment imported, Customs duty shall be chargeable. The learned Departmental Representative relied upon the decision in the case of Andhra Petro Chemicals Ltd. v. Collector of Customs, Madras, 1997 (91) E.L.T. 394 (T) - 1994 (51) ECR 96 (T), wherein it was held that it could not be said that DML's know how (foreign supplier) was different from and unrelated to the equipment through which alone the know-how could be used or the production of goods and thus the facts in Mahindra & Mahindra were distinguished. He also submitted that the decision in Andhra Petro Chemicals Ltd. has been confirmed by the Supreme Court as reported in 1997 (90) E.L.T. 275 (SC). The learned D.R. also submitted that as the Appellants had registered themselves under Project Import Regulations, all expenses are to be included in the cost of the Project; that the payment of income tax has no relevance for the purpose of assessment under Customs Act. In reply the learned Advocate referred to the findings of the Commissioner in the impugned order to the effect that the Appellants were under contractual obligation for purchase of not only machinery but also design in respect of machinery and the plant to be installed under the Project Scheme and submitted that it is thus evident that design and engineering were different from machineries and equipment. He also contended that these design and drawings were relatable to performance test; that relating these expenses to manufacture of machinery and equipment would amount to a narrow interpretation of the contract which is not correct. 9. We have considered the submissions of both the sides. The learned Advocate, appearing on behalf of the Appellants, has submitted that design and engineering expenses do not relate to manufacture of the machineries imported by them and they relate to erection, installation and commissioning of the project. The Revenue, on the other hand, submitted that these charges are relatable to the manufacture of machineries and equipment and as such the facts of the present appeal are quite different from the facts in Mahindra & Mahindra, relied upon by the Appellants. In Mahindra & Mahindra case, supra, both Bombay High Court and Supreme Court observed that there was no relationship whatsoever between the payment of lump sum of 15 million French Francs for technical know-how and settlement of price by negotiations for supply of CKD packs for engine. Both the Hon'ble Courts referred to the various clauses of the Agreement and came to the conclusion that the Agreement clearly show that the collaboration agreement for the technical know-how and the supply of CKD packs were independent commercial transactions. Such a picture does not emerge when we refer to the contract in the present matter. The present contract was in respect of designing, engineering, manufacturing, erecting, testing and commissioning complete systems on a turn key basis which is evident from preamble to the contract. Thus the contract is one single contract from designing and engineering to commissioning of the complete system. The Contractor visited the site and obtained all the information necessary to design, manufacture and supply all the equipment under the contract. It is thus evident that the design and engineering relates to the manufacture of the machineries and equipment. This becomes crystal clear from Article 2 which deals with Scope of Work which reads as under :- "2.01 "Scope of Work" shall mean and include - (i) manufacture, supply and transportation to GDR Port : of machineries, equipment as per Annexure I, (ii) Design and engineering required to be done for (i) supra, (iii) Commissioning, short term and long term tests of machinery and equipment and providing supervision of erection, short term and long term tests." 10.1 This Article leaves no doubt that design and engineering was in respect of manufacture, supply and transportation to GDR port of machineries and equipment. This view is strengthened by Article 4.05 of the Contract which is extracted below - "4.05 The prices for manufacture and supply as well as for design and engineering in Cl R. as stated vide item (1) and (2) of Article 4.03 are F.O.B. (as defined in Incoterm 1953) Port GDR." 10.2 Items (1) and (2) of Article 4.03 are as under :- (1) Manufacture and supply, (2) Design and Engineering 10.3 Merely showing the prices separately of Design and Engineering or issuing invoices separately will not mean that the design and engineering were not in respect of manufacture of machineries and equipment. The prices have been shown separately for ocean freight (approx) and supervision/long term test. It is observed from Article 4.02, the appellants had the right to carry out inspection during the manufacture if the equipment, machineries, etc. and such inspection shall not be construed by the Contractor as inspection for the quality of the material used or of being in conformity with the specifications stipulated in the contract, drawings etc. Further, Article 11 of the Supplementary Agreement provides as under :- "This agreement forms an integral part of the contract dated 6th November, 1984 for the designing, engineering, manufacturing, supply, erection, testing and commissioning of specialized mining equipment, machineries etc. for the Lignite Project, Panandhro in Lakhpat Taluka of Kutch District, Gujarat State." 11.1 From the perusal of all these Articles, we agree with the learned D.R. that the design and engineering have direct nexus with the machineries and equipment imported and as such are chargeable to Customs duty. Article 18 dealing with 'Supply of Drawings and Manuals' does not lead to the conclusion that design and engineering was in respect of erection of the complete system. The decision in the case of Andhra Petrochemicals, supra, supports the view taken by us in the present matter. The Tribunal in that case has referred to the decision in the case of CCE v. Intercom Engineers (P) Ltd. - 1987 (28) E.L.T. 458 (T) wherein it was observed as under :- "Costs towards drawing, designing and technical specifications of machinery were clearly elements of machinery costs....It is not possible to manufacture a machinery without doing drawing, designing and technical specification work for it in advance. Drawing and designing is actually the first stage of manufacture itself. It is at this stage that the manufacturer plans as to what exactly he is going to manufacture. No interpretation of law is needed to bring home this point. Every manufacturer of machinery knows it well enough." 11.2 The Tribunal in Andhra Petro Chemicals (APL)'s case also distinguished the facts in the case of Mahindra & Mahindra by observing that the whole transaction between the Appellant therein and foreign supplier "was a package, a deal, a unified and integrated agreement for sophisticated and highly developed technology..... APL were not free to purchase from anyone else than through
|
