2015 (4) TMI 486 - SC - Customs

Addition in the value for assessment to customs duty of charges paid by the respondent to Met Chem Canada Inc. for supply of technical services required for setting up and commissioning a plant for the manufacture of Hot Rolled Steel Coils in India - Held 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. - Under the Customs Valuation (Determination of Price of Imported Goods) Rules of 1988, Rule 2(f) defines transaction value as the value determined in accordance with Rule 4 of these Rules. Rule 4(1) in turn states that 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. On an analysis of the technical services agreement dated 13.4.1991, it is clear that the respondent has only associated Met Chem Canada Inc. as a technical consultant. There is no transfer of know-how or patents, trademarks or copyright. What is clear is that technical services to be provided by Met Chem Canada Inc. is basically to coordinate and advise the respondent so that the respondent can successfully set up, commission and operate the plant in India. It will be noticed that coordination and advice is to take place post-importation in order that the plant be set up and commissioned in India. In fact, all the clauses of this agreement make it clear that such services are only post-importation. Clause 9 on which a large part of the agreements ranged again makes it clear that 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. 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. 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. - 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. 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 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. 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. Subrules (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. - it is clear that the facts of the present case do not attract Rule 9(1)(e). - Decided against Revenue.

Summary

Issues Involved:
1. Addition of technical services charges to customs duty valuation.
2. Interpretation of Section 14 of the Customs Act, 1962.
3. Applicability of Rule 9 of the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988.
4. Distinction between pre-importation and post-importation services.
5. Relevance of prior judgments, particularly Essar Gujarat Ltd. case.

Detailed Analysis:

1. Addition of Technical Services Charges to Customs Duty Valuation:
The primary issue was whether the charges paid by the respondent to Met Chem Canada Inc. for technical services required for setting up and commissioning a plant in India should be added to the value for customs duty assessment. The agreement between the respondent and Met Chem Canada Inc. involved various technical services such as project engineering, supervision, training, and procurement support, all of which were to be rendered post-importation. The Commissioner of Customs had added a sum of DM 78 Million to the customs valuation, reasoning that the payment for technical consultancy was a condition of sale of the imported goods.

2. Interpretation of Section 14 of the Customs Act, 1962:
Section 14 of the Customs Act, 1962, as it stood at the relevant time, was interpreted to determine the value of imported goods for customs duty purposes. The section emphasized that the value should be the price at which such goods are ordinarily sold or offered for sale at the time and place of importation. The judgment highlighted that any amount referable to the imported goods post-importation must be excluded from the customs valuation.

3. Applicability of Rule 9 of the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988:
Rule 9(1)(e) of the Customs Valuation Rules was central to the case, which states that all other payments made as a condition of sale of imported goods should be added to the transaction value. The judgment clarified that only costs and services paid or payable for imported goods pre-import should be added to the customs valuation. The technical services agreement was analyzed, and it was found that the services provided by Met Chem Canada Inc. were post-importation and did not constitute a condition of sale for the imported plant.

4. Distinction Between Pre-importation and Post-importation Services:
The judgment emphasized the distinction between services rendered pre-importation and post-importation. It was noted that the technical services agreement involved post-importation activities such as setting up, commissioning, and operating the plant in India. Therefore, these services were not to be included in the customs valuation of the imported goods.

5. Relevance of Prior Judgments, Particularly Essar Gujarat Ltd. Case:
The judgment analyzed the Essar Gujarat Ltd. case, where license fees for operating a plant were included in the customs valuation because they were essential for the plant's operation. However, in the present case, there was no transfer of technology or license, and the services were purely for post-importation activities. The judgment distinguished the present case from Essar Gujarat Ltd., stating that the payments for technical services in this case were not a precondition for the sale of the plant.

Conclusion:
The Supreme Court dismissed the appeal of Revenue, concluding that the charges for technical services provided by Met Chem Canada Inc. were post-importation and not a condition of sale of the imported plant. Therefore, these charges could not be added to the customs valuation of the imported goods. The judgment reinforced the principle that only costs and services related to pre-importation activities should be included in the customs valuation.