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TMI Blog2001 (1) TMI 248X X X X Extracts X X X X X X X X Extracts X X X X ..... e appeals have been filed against the common order dated 15th November, 1999 of the Customs, Excise and Gold (Control) Appellate Tribunal which, while confirming the order of the Commissioner of Customs held that drawings, designs, etc., relating to machinery or industrial technology were goods which were leviable to duty of customs on their transaction value at the time of their import. 2. As principal arguments on behalf of the appellants were addressed in the case of M/s. Hotel Leela Ventures Limited by Mr. Ashok H. Desai, learned senior counsel, for the sake of convenience we will refer to the relevant facts in that case in greater detail. 3. Leela Ventures are engaged in the business of setting up, operating and maintaining Hotels and Resorts. For designing the Hotels and Resorts, it engaged a foreign company M/s. Wimberly Allison Tong & Goo, USA ("WAT" for short) for providing architectural services including design development drawings. Leela Ventures had entered into four agreements with the said foreign company in respect of four different ventures in India. Apart from preparing the designs and drawings the scope of work under the said agreements included site ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Directorate of Revenue Intelligence and Special Valuation Branch, Bombay revealed that the appellants had imported drawings, designs and plans through couriers on remitting the consideration for the same but these had been cleared without proper declaration and without payment of correct amount of duty. In view of the omission on the part of the appellants to declare the correct transaction value, show cause notices under Section 28(1) read with Section 24 of the Customs Act, 1962 were issued asking the appellants as to why (a) the sum remitted or declared during investigation as consideration for drawings, designs and plans supplied by their collaborators should not be taken as transaction value under Section 14 of the Customs Act read with the Customs Valuation Rules, 1988 as the basis for assessment of goods to customs duty; (b) Customs duty should not be demanded under the provisions to Section 28(1) of the Customs Act, 1962 and the amount deposited towards customs duty should not be adjusted against the duty demanded; (c) The goods, i.e., drawings, designs and plans should not be held liable to confiscation under Section 111(m) of the Customs Act, 1962; and (d) Penalty sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... technology. The knowledge or know-how which is supplied, though valuable, was intangible. The media is only the vehicle of transmission and is only incidental to the main transaction, even if Government authorities regard this to be a contract for services and not for sale of goods. In support of this, reliance was placed on the fact that the Reserve Bank of India had required application for remission of foreign exchange on Form - A2 which is meant for foreign exchange remittance otherwise than for import of goods. On the remittances so made the appellants had deducted the income-tax at source. It was contended that if it was a case of sale of goods to the appellants then the question of deducting any income-tax and paying the same would not have arisen and, on the contrary, the amount of excise duty which would have been payable would have been less than the income-tax which was deducted. 13. In the alternative it was contended that even if the transactions are composite the court has to determine whether these relate to contract for service or goods. In this connection, it was submitted that when price is paid for photograph, the payment is not for paper, which is develope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellants, it is appropriate to first consider the relevant provisions applicable in the present case. Section 2(22) of the Customs Act contains the definition of the word "goods" which is as follows : "(a) vessels, aircrafts and vehicles; (b) stores; (c) baggage; (d) currency and negotiable instruments; and (e) any other kind of movable property;" Section 156 of the Customs Act gives the Central Govt. power to make rules consistent with the Act and sub-section 2(a) thereof enables the framing of rules to provide for the manner of determining the price of imported goods under sub-section (1A) of Section 14. In exercise of the powers conferred by the aforesaid Section 156 of the Customs Act, the Central Govt. has framed Customs Valuation (Determination of Price of Imported Goods) Rules, 1988. For the purpose of this case, two Rules, which are important, are Rules 3 and 4, which read as follows : "3. Determination of the method of valuation. - For the purpose of these rules, (i) the value of imported goods shall be the transaction value; (ii) if the value cannot be determined under the provisions of clause (i) above, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in which he and the buyer are not related; (c) substitute values shall not be established under the provisions of clause (b) of this sub-rule." Rule 10 provides for declaration by the importer and is as follows : "10. Declaration by the importer. - (1) The importer or his agent shall furnish - (a) a declaration disclosing full and accurate details relating to the value of imported goods; and (b) any other statement, information or document including an invoice of the manufacturer or producer of the imported goods where the goods are imported from or through a person other than the manufacturer or producer, as considered necessary by the proper officer for determination of the value of imported goods under these rules. (2) Nothing contained in these rules shall be construed as restricting or calling into question the right of the proper officer of customs to satisfy himself as to the truth or accuracy of any statement, information, document or declaration presented for valuation purposes. (3) The provisions of the Customs Act, 1962 (52 of 1962) relating to confiscation, penalty and prosecution shall apply to cases where wrong declaration, informa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecision of Robinson v. Graves (1935) KB 579 where it was held that a contract by an artist to paint a portrait of a lady was a contract for work and labour and not for the sale of goods as the substance of the contract was that skill and labour should be exercised upon the production of the portrait and that it was only ancillary to the contract that there would pass from the artist to his customer some material. In Robinson's case an earlier decision of Lee v. Griffin (1861) 1 B & S 272 was attempted to be distinguished. Lee v. Griffin was a case where the plaintiff had contracted to make a set of artificial denture to fit them into his patient's mouth. The patient died after the denture was made without having accepted the denture though he had an opportunity of doing so. The plaintiff sued executor for the goods bargained and sold. It was held in that case that wherever a contract is entered into for the manufacture of chattel there the subject-matter of the contract is a sale and delivery of the chattel. Blackburn J, specifically observed as follows : "If the contract be such that, when carried out, it would result in the sale of a chattel, the party cannot sue for work and la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f this problem can be reached only by adopting one or the other of these equally arbitrary rules." (Emphasis added) The test laid down in Lee v. Griffin had been preferred by the Australian Courts'. In Deta Nominees Pty. Ltd. v. Viscount Plastic Products Pty. Ltd. 1979 VR 167 the Supreme Court of Victoria, Australia described Robinson v. Graves as a hard case and rejected its test as "illogical and unsatisfactory" "wrong in principle" and "too erratic" to be useful. 19. The principle enunciated in Kame's case was followed by this Court in State of Tamil Nadu v. Anandam Viswanathan (1989) 1 SCC 613. In this case, this Court held that a contract for printing of question paper for educational institutions constituted a works contract and, therefore, exempted from tax. In Everest Copiers v. State of Tamil Nadu (1996) 5 SCC 390 in respect of the assessment year 1978-79, this Court has held that making Photostat copies on paper with Xerox machine and delivering the same to the customer for payment was a contract for work or service and not a contract of sale. The transfer of paper was only incidental and hence such transaction was not exigible to sales tax. 20. In Hind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inbow Colour Lab case (supra) requires consideration. As a result of the Forty-sixth Amendment, sub-article 29A of Article 366 was inserted as a result whereof tax on the sale or purchase of goods was to include a tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract. Taking note of this amendment this Court in Rainbow Colour Lab at pages 388-389 observed as follows : "11. Prior to the amendment of Article 366, in view of the judgment of this Court in State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd. the States could not levy sales tax on sale of goods involved in a works contract because the contract was indivisible. All that has happened in law after the 46th Amendment and the judgment of this Court in Builders' case is that it is now open to the States to divide the works contract into two separate contracts by a legal fiction : (i) contract for sale of goods involved in the said works contract, and (ii) for supply of labour and service. This division of contract under the amended law can be made only if the works contract involved a dominant intention to transfer the property in goods and not in co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... toms Tariff Act. An item which does not fall within sub-clause (a), (b), (c) or (d) of Section 2(22) will be regarded as coming under Section 2(22) (e). Even though the definition of the goods purports to be an exclusive one, in effect it is so worded that all tangible movable articles will be the goods for the purposes of the Act by residuary clause 2(22)(e). Whether movable article comes as a part of a baggage, or is imported into the country by any other manner, for the purpose of the Customs Act, the provision of Section 12 would be attracted. Any media whether in the form of books or computer disks or cassettes which contain information technology or ideas would necessarily be regarded as goods under the aforesaid provisions of the Customs Act. These items are movable goods and would be covered by Section 2(22)(e) of the Customs Act. 25. The rate at which the customs duty is to be imposed has to be such as may be specified in the Customs Tariff Act. This is stipulated by Section 12 of the Customs Act. Thus the two Acts have to be read in conjunction with each other. 26. Section 2 of the Tariff Act states that the rate at which duties of customs shall be levied unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of this Court relating to the levy of sales tax in cases of works contracts will have no application here. 29. In the sales tax cases referred to hereinabove no doubt the question which arose was whether, in a works contract, where there was a supply of materials and services in a indivisible contract, but there the question had arisen because the States' power prior to the Forty-sixth Amendment to the Constitution, were not entitled to bifurcate or split up the contract for the purpose of levying sales tax on the element of movable goods involved in the contract. Apart from the decision in Rainbow Colour Lab's case, which does not appear to be correct, the other decisions cited related to pre-Forty-sixth Amendment period. Furthermore the provisions of the Customs Act and the Tariff Act are clear and unambiguous. Any movable articles, irrespective of what they may be or may contain would be goods as defined in Section 2(22) of the Customs Act. 30. It is true that what the appellants had wanted was technical advice or information technology. Payment was to be made for this intangible asset. But the moment the information or advice is put on a media, whether paper or di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnot result in negating the statutory provisions of the Customs Act and the Tariff Act applicable in the instant cases. The belief of the appellants that what was imported were not 'goods', as the Reserve Bank had also regarded the payment was being made for services and not goods, was clearly erroneous and misplaced. Re : Valuation 33. In support of the contention that even if what was imported were goods on which customs duty was payable the value thereof should be nominal, it was contended that the levy could only be on the media on which transfer was made and not on the whole of the intellectual content. While referring to Builders Association of India case (supra) it was submitted that there this Court had held that in the case of works contract levy of sales tax was permitted only on that component of the works contract which was relatable to goods. Similarly, in the case of M/s. Gaanon Dunkerley and Co. and Other v. State of Rajasthan and Others (1993) 1 SCC 364 it was held that tax on sale of goods in works contract was based upon the value of goods as they relate to the entire project and charges for planning, designing and architect fee could he excluded. It was, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of exchange - (i) determined by the Central Government, or (ii) ascertained in such manner as the Central Government 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 the Foreign Exchange Regulation Act, 1973 (46 of 1973)." 36. In exercise of this power under the Customs Act, the Central Government promulgated "Customs Valuation (Determination of Price of Imported Goods) Rules, 1988". Three Rules which are relevant are Rules 3, 4 and 9. While Rules 3 and 4 have been quoted hereinabove, Rule 9 reads as follows : "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 goo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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); (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 he 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 basis 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." 37. As is evident from the perusal of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lks about original engravings. It is clear that intellectual property when put on a media would be regarded as an article on the total value of which customs duty is payable. 39. To put it differently, the legislative intent can easily be gathered by reference to the Customs Valuation Rules and the specific entries in the Customs Tariff Act. The value of an encyclopaedia or a dictionary or a magazine is not only the value of the paper. The value of the paper is in fact negligible as compared to the value or price of an encyclopaedia. Therefore, the intellectual input in such items greatly enhance the value of the papers and ink in the aforesaid examples. This means that the charge of a duty is on the final product whether it be the encyclopaedia or the engineering or architectural drawings or any manual. 40. Similar would be the position in the case of a programme of any kind loaded on a disc or a floppy. For example in the case of music the value of a popular music cassette is several times more than the value of the blank cassette. However, if a pre-recorded music cassette or a popular film or a musical score is imported into India duty will necessarily have to be cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uct, i.e., the painting is worth millions. 42. It will be appropriate to note that the Customs Valuation Rules, 1988 are framed keeping in view the GATT protocol and the WTO agreement. In fact our Rules appear to be an exact copy of the GATT and WTO. For the purpose of valuation under the 1988 Rules the concept of "transaction value" which was introduced was based on the aforesaid GATT protocol and WTO agreement. The shift from the concept of price of goods, as was classically understood, is clearly discernible in the new principles. Transaction value may be entirely different from the classic concept of price of goods. Full meaning has to be given to the rules and the transaction value may include many items which may not classically have been understood to be part of the sale price. 43. The concept that it is only chattel sold as chattel, which can be regarded as goods has no role to play in the present statutory scheme as we have already observed that the word "goods" as defined under the Customs Act has an inclusive definition taking within its ambit an immovable property. The list of goods as prescribed by the law are different items mentioned in various chapters u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y merchantable commodity, Similarly, when a professor delivers a lecture, it is not a goods, but, when transcribed as a book, it becomes a goods. That a computer program may be copyrightable as intellectual property does not alter the fact that once in the form of a floppy disc or other medium, the program is tangible, moveable and available in the marketplace. The fact that some programs may be tailored for specific purposes need not after their status as "goods" because the Code definition, includes specially manufactured goods". 46. We are in agreement with the aforesaid observations and hold that the value of the goods imported would depend upon the quality of the same and would be represented by the transaction value in respect of the goods imported. 47. It would not be correct, as was done in Leela Ventures case, to take the entire contract value as being the value of the imported goods. What is the transaction value in respect thereof has to be ascertained. In most of the other cases this has been done by adopting about one-third of the contract value as being the transaction value of the imported goods for the purpose of levy of customs duty. 48. In Leela ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce in the case of non-levy or short-levy to five years from a normal period of six months. The said Section 11A along with the proviso reads as under : "Section 11A. Recovery of duties not levied or not paid or short-levied or short-paid or erroneously refunded. - (1) When any duty of excise has not been levied or paid or has been short-levied or short-paid or erroneously refunded, a Central Excise Officer may, within six months from the relevant date, serve notice on the person chargeable with the duty which has not been levied or paid or which has been short-levied or short-paid or to whom the refund has erroneously been made, requiring him to show cause why he should not pay the amount specified in the notice : Provided that where any duty of excise has not been levied or paid or has been short-levied or short-paid or erroneously refunded by reason of fraud, collusion or any wilful mis-statement or suppression of facts, or contravention of any of the provisions of this Act or of the rules made thereunder with intent to evade payment of duty, by such person or his agent, the provisions of this sub-section shall have effect, as if, for the words "six months", the words 'five yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ollusion are concerned, it is evident that the requisite intent, i.e., intent to evade duty is built into these very words. So far as mis-statement or suppression of facts are concerned, they are clearly qualified by the word 'wilful' preceding the words "mis-statement or suppression of facts" which means with intent to evade duty. The next set of words "contravention of any of the provisions of this Act or rules" are again qualified by the immediately following words "with intent to evade payment of duty". It is, therefore, not correct to say that there can be a suppression or mis-statement of fact, which is not wilful and yet constitutes a permissible ground for the purpose of the proviso to Section 11A. Mis-statement or suppression of fact must be wilful." The aforesaid observations show that the words "with intent to evade payment of duty" were of utmost relevance while construing the earlier expression regarding the mis-statement or suppression of facts contained in the proviso. Reading the proviso as a whole the Court held that intent to evade duty was essentially before the proviso could be invoked. 52. Though it was sought to be contended that Section 28 of the Custo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or suppression of facts would attract the provisions of Section 28 of the Customs Act. In each of these appeals it will have to be seen as a fact whether there has been a non-levy or short-levy and whether that has been by reason of collusion or any wilful mis-statement or suppression of facts by the importer or his agent or employee. 54. In the present cases, the technical literature, drawings, manuals, etc., were imported through courier and in one case through Mr. Kato. In each of these cases it is only a nominal value which was disclosed at the time of importation. All this technical literature, drawings, etc., were brought and cleared as personal baggage. In our opinion, to examine whether the proviso to Section 28A(1) was validly invoked it is necessary to see the provisions relating to the clearance of the personal baggage. 55. Chapter XI contains special provisions regarding baggage, goods imported or exported by post, and stores. Section 77 of the Customs Act provides that the owner of any baggage shall, for the purpose of clearing it, make a declaration of its contents to the proper officer. Section 81 enables the Central Board of Excise and Customs to make re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ely, the courier, to have the goods cleared through customs authorities by grossly undervaluing the value thereof. The courier gave a specific value of one dollar in respect of the drawings when both the sender and the appellants knew fully well as to how important and valuable these goods were. In the case of Leela Ventures it was on the basis of the architectural drawings that the renovation etc. was to take place whereas the technical material made available to the other appellants was necessary for their purpose. We have already held that the value of the goods so imported was not merely the cost of the price of the media but also the intellectual input on the media as represented by architectural drawings or users manuals etc. The value of architectural drawings was not merely the cost of the paper and the ink but would be much more. In some of the cases we were informed that the appellants had themselves volunteered that about one-third of the total amount payable to the collaborators should be taken as a figure representing the transaction value of the technical material so imported. 58. The Tribunal as well as the Commissioner were right in coming to the conclusion th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the manner in which the material was to be sent by the foreign collaborators. It was submitted that Entry 98.03 was a special provision providing for special procedure and an omnibus rate of duty applicable to all goods imported by passengers or a crew member as their baggage. This provision, it was contended, was wholly inapplicable to corporate entities. The appellants were not natural persons and they were quite incapable of being treated as passengers. In any event, it was submitted, after clearance of the disputed items there was no scope for the respondents to initiate proceedings against the appellants or in respect of the material alleged to have been imported and the said proceedings, if any, could have been initiated only against the passenger from whom less duty than what was legitimate was recovered, namely, from the courier. 62. We are unable to agree with the aforesaid contentions. Heading of Chapter 98 clearly shows that the same is applicable to passengers' baggage. As a matter of fact, in each of the present cases, the technical material which was received was cleared as part of passenger baggage. Whether the courier or the person bringing the technical mater ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d into a technical collaboration agreement with M/s. Toshiba Corporation, Japan on 13th October, 1989. The total contract value was hundred million Japanese Yen as fees which was settled at seventy million Japanese Yen. Apart from providing technical information, M/s. Toshiba Corporation was also to render consulting and training services and had permitted the use of Toshiba patent. 66. With the approval of Reserve Bank of India, remittance was made in Form A-2 and service tax paid. 67. On 29th June, 1992 Mr. Kato, presumably a representative of M/s. Toshiba, brought with him to India drawings and designs as part of his personal baggage. This was cleared without payment of duty. 68. On 26th May, 1997, a show cause notice was issued to M/s. Videocon alleging that duty was payable under Chapter 98 Heading No. 98.03 and the appellant was charged with mis-declaration and suppression which entitled the invocation of extended period of limitation of five years. 69. Reply to show cause notice was filed in which it was, inter alia, stated that there was no mis-declaration or suppression and that the drawings and designs were classifiable under Heading No. 49.06 of C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on is made for clearing the baggage. It was the contention of the learned counsel for the appellant that as articles in question would fall under Heading No. 49.06 they were free of duty. Therefore, they could not be regarded as dutiable articles and its value could not be included in the baggage of the passenger for the purpose of levy of customs duty. 76. While dealing with the provisions of the Excise Act, this Court in Collector of Central Excise, Hyderabad v. Vazir Sultan Tobacco Co. Ltd. - 1996 (83) E.L.T. 3 (S.C.) referring to an earlier decision in the case of Wallace Flour Mills Company v. Collector of Central Excise - 1989 (44) E.L.T. 598 had observed that if by virtue of an exemption notification the rate of duty was reduced to nil, the goods specified in the Tariff Act would still be regarded as excisable goods on which nil rate of duty was payable. 77. It appears to us that the aforesaid decisions, which were sought to be invoked by the respondent in an effort to submit that the drawings and designs, which came as a part of passenger baggage were dutiable goods, would not be applicable. In Vazir Sultan and Wallace Flour Mills cases (supra), this Court consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rded as dutiable goods "on which duty has not been paid". It is sufficient in the present case to observe that the drawings and designs which were imported by the appellant were correctly classifiable under Heading No. 49.06 and the tariff itself providing that the import of the same is free, the said drawings and designs were not dutiable articles and, therefore, no customs duty was leviable thereon even as a part of the passenger baggage. On this short ground alone the appeal of Videocon has to be allowed. Civil Appeal No. 1493 of 2000 [M/s. H & K Rolling Mill Engineers Pvt. Ltd. v. The Commissioner of Customs] 81. The appellant is a joint venture company. Sixty per cent of its shareholders are Indians while forty per cent of the shares are held by H & K, Germany. The appellant supplies technology to Bhilai Steel Plant and it is required to pay to the German company licence fee of DM 2,40,000 and engineering fee of DM 60,000. 82. The appellant prepared designs and drawings which were sent to H & K, Germany for the limited purpose of getting it checked and approved. It is stated that the appellant received a fax message from the German company approving the designs a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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