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TMI Blog1996 (11) TMI 426X X X X Extracts X X X X X X X X Extracts X X X X ..... ain clearance of Government of India for payment within the stipulated period. The deal, therefore, fell through. The Bank sold the plant to M/s. Teviot Investments Limited (TIL). On 24th March, 1987, EGL entered into a contract with TIL for purchase of the Direct Reduction Iron Plant on certain terms and conditions. The entire agreement was subject to two conditions - (1) approval of Government of India within 30th April, 1987 and (2) obtaining transfer of the operation licence from M/s. Midrex of Charlotte, USA. The contention before this Court, on behalf of the appellant, Collector of Customs, has been that these clearly were the conditions which had to be fulfilled before the sale could take place. As a matter of fact, EGL obtained transfer of the operation licence from Midrex before proceeding with the dismantling of the plant and exporting the plant in semi-knocked-down condition to India. On the other hand, it has been contended on behalf of EGL that the overriding stipulation of obtaining transfer of the operation licence from M/s. Midrex only kept an exit door open for EGL to back out of the contract. If for any reason, Government of India did not grant permission to go th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capacity of 8,00,000 tpy DRI under the prevailing operating conditions at Emden based on the Midrex Process and to incorporate Hot Discharge and Hot Briquetting facilities." 4. It was further recited in the agreement that the Collaborator (V.A.) was holding construction licence and rights to use patents from Midrex International B.V. for marketing, sale, design and construction of the Midrex plants at Hazira, India. 5. The agreements with V.A. and Midrex go to show that the plant located at Emden was described as a Midrex plant. Its rated capacity was calculated under the prevailing operating conditions at Emden based on the Midrex process. V.A. undertook to incorporate Hot Discharge and Hot Briquetting facility and for this purpose carried out refurbishing, replacement and modification of the plant. This would enhance the usefulness and value of the plant. It was noted that EGL had entered into an agreement with Midrex for the processing licence which was annexed to the agreement with V.A. V.A. was holding construction licence and the right to use patents from Midrex for marketing, sale, design and construction of the Midrex plant at Hazira in India. V.A. undertook to render ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p; DM 10,100,000 lump sum Technical Services : 10.1.2.1 Payment for engineering and consultancy fee as specified under this agreement DM 23,100,000 lump sum 10.1.2.2 Payment for theoretical and practical training outside India DM 2,200,000 lump sum Total DM 37,400,000 lump sum 8. The agreement signed by EGL with Midrex International B.V., recorded that the licensee, EGL, had entered into an agreement for purchase of a Midrex Direct Reduction Plant installed at Emden, West Germany, and intended to have the same dismantled, refurbished, adapted for production of Midrex Hot Briquetted Iron (HBI) and re-installed in India. The licensee had approached Midrex for an appropriate process licence for the operation of the plant utilising the Midrex Direct Reduction Process, and Midrex desired to grant such licence to licensee upon the terms and conditions stated in the agreement. It was further recorded that the licensee had entered into an agreement dated 4th December, 1987 with V.A. and it was agreed that Midrex would render various services as mentioned in the ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the prevailing operating conditions based on the Midrex Process. It was recited that the Collaborator (V.A.) was holding construction licence and rights to use patents from Midrex for marketing, sale, design and construction of the Midrex plants at Hazira, India. The services that were to be rendered by V.A. would also include technical services in connection with the Midrex Process and engineering services necessary for this purpose. The Collaborator agreed to use Midrex construction and process licence for this project at Hazira, India. It was recorded that EGL's contract with Midrex had been annexed to the contract with the Collaborator. 12. Reading all these agreements together, it is not possible to uphold the contention of Mr. Salve that the pre-condition 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yments are not a condition of the sale for export to the country of importation of the imported goods." 15. It is difficult to see how these Interpretative Notes come to the aid of the importer in this case. Midrex has granted licence to EGL not only for the right to produce in the Midrex Direct Reduction Process Plant and sell the products produced by the plant worldwide, but has also given the licensee (EGL) the right to use all patents, confidential information for the operation of the plant. Midrex has undertaken to supply all confidential information and patents updated from time to time during the period of the agreement. Therefore, we are of the view that licence fees paid to Midrex will have to be added to the price of the plant to arrive at the transaction value of the plant. 16. There is another way of looking at the problem. Section 14 of the Customs Act provides : "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 - (a) the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce of the plant, but also the fees for the licence and the technical know-how for making the plant operational. Therefore, the value of the plant will comprise of not only the price paid for the plant but also the price payable for the operation licence and the technical know-how. Rule 9 should be construed bearing this in mind. 18. Mr. Salve, appearing on behalf of the EGL has laid great stress on the various clauses of the agreement between Essar and TIL to show that the title to the plant had passed to the purchaser without any pre-condition after payment was made in terms of Clause 2 of the agreement. The delivery was also deemed to have taken place at the time and on the date of payment in full, in accordance with Clause 2. 19. Clause 2 merely states that the purchaser shall purchase the property from the seller at an inclusive purchase price of 26 million German Marks. 10 per cent of the purchase price had to be paid within fifteen days of the declaration of the buyer that the Government of India has given approval under Clause 11 of the agreement and the balance 90 per cent, within 60 days of the approval given by the Government of India. There is no mention of the other c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... delivery of the plant. Therefore, title to the plant was not to pass to the purchaser unless and until full payment was made. The entire contract was subject to the condition of the purchaser obtaining the necessary licence from Midrex to operate the plant. This clause may have been inserted to protect the interest of the purchaser but it was a pre-condition of sale of the plant. 22. Although the agreement with TIL does not describe the plant as Midrex Direct Reduction Plant, the agreement with Midrex leaves no room for doubt that what the assessee had purchased was a Midrex Direct Reduction Plant at Emden. Although the plant was described in the agreement with TIL merely as a Direct Reduction Plant and the name of Midrex was carefully kept out, the agreement with Midrex makes it abundantly clear that the assessee had entered into an agreement to purchase a Midrex plant for which it was essential to have Midrex operation licence and Midrex technology to make the plant functional. That is why the overriding clause of having prior licence of Midrex was inserted in the purchase agreement with TIL. Without this licence and various other technical information to be provided by Midrex, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eting, sale, design and construction of the Midrex Plants at Hazira, India. 25. Therefore, it appears from the two agreements that the plant was a gas based Midrex Direct Reduction Plant. Its rated capacity based on Midrex Process was 800,000 tpy. Essar had acquired the operating licence by virtue of an agreement with Midrex International, which was annexed to the agreement with V.A. V.A. had a construction licence and rights to use patents for marketing, sale, design and construction of the Midrex Plants. One of the stated objects for appointing V.A. was to raise the existing rated capacity of plant of 800,000 tpy to 880,000 tpy and also to incorporate Hot Discharge and Hot Briquetting facilities. The agreement also recorded :- "WHEREAS Essar is desirous of engaging the COLLABORATOR under this agreement for providing the services for the project, as generally detailed below, together with such modifications and additions as may be required and shall also include technical services in connection with the Midrex Process and engineering services necessary for the incorporation of Hot Discharge and Hot Briquetting facilities, which are obviously and fairly intended and which may not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... angement drawing for Hot Discharge Furnace and Briquetting Facility. (e) Development of the guide drawings for the furnace Product Discharge Chamber, Briquetter Food Legs, and bubbles. (f) Development of the guide drawings for the Bottom seal Gas System Scrubber and Heater. (g) Development of general arrangement drawings for the Briquetting System including Brakers, Quench system, Hot Finers Recycle System, Dust Collection, and Vapour Removal. (h) Preparation of duty specifications for the Briquetting System Equipment. (i) Preparation of duty specifications for the Bottom seal Gas system compressors, Nitrogen Generator, and Bottom Seal Gas Dryer." 27. Therefore, the payment of DM 10,100,000 was being made for the transfer of technology under the Process Licence Agreement entered into with Midrex. The services mentioned hereinabove are to be part of Licensing Agreement with Midrex. This agreement was a pre-requisite for finalisation of the contract with TIL to purchase the plant at Emden. The licence is not merely a permission to use the plant, but also to provide technical know-how to make the plant functional and also to improve the capacity of the plant by incorporating Hot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at Emden. 2.3.3 Assessment of Process Related Units and facilities (equipment, machinery, piping, instrumentation, electrics and control system, related wear and spare parts) as available at Emden, jointly with ESSAR AND MECON and confirm the suitability of these facilities for refuse as such as evidenced at Emden or alternatively establish the extent of revamping/replacement/debottle-becking between dismantling and re-installation. Details of plant and equipment audit are described in Annexure II. 2.3.4 Engineering services for Process Related Units. For the Hazira DR Plant, the basic process design parameters and ambient conditions will be different from that originally applicable and used for the design of the two modules at EMDEN. For electrical and instrumentation equipments the basic concept of the control system of the existing DR plant will be retained. The EMDEN Design Criteria and the Hazira Design Criteria are stipulated in Annexure III of this Agreement. Collaborator will perform all process calculations on the basis of the design criteria applicable for Hazira and perform the re-engineering work to the extent required simultaneously considering the incorporation of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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