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TMI Blog2013 (9) TMI 504X X X X Extracts X X X X X X X X Extracts X X X X ..... etailed engineering, procurement, supply, construction, fabrication, erection, installation, testing, commissioning and mechanical guarantee for FCC, LPG & Gasoline Treatment Unit including DCS & its controlling Room for Barauni Refinery Expansion Project got the contracts registered under Project Import scheme under two files F.No. S37C(G)Proj - 121 & 122/2000A(6) & part value under S37C(G) Proj - 09 & 10/2001A(6). The files were forwarded to the Special Valuation Branch, (SVB) in February, 2001 to examine the same for inclusion of residual design & engineering charges and other charges in the invoice value of imported goods to determine the assessable value of goods under Section 14(1) of the Customs Act, 1962 read with Rule 9 of Customs Valuation (Determination of Price of Imported Goods), Rules, 1988 (CVR'88). The concerned assessing authority asked for payment of 1% of assessable value as Extra duty deposit in terms of S.O. 9/98 issued in terms of the directions of C.B.E. & C. The appellant requested for waiver of 1% of deposit on the ground that the price portion indicated in contract is inclusive of design and engineering charge of the equipment and material as well as servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. (iv) The Engineering Agreement with SWEC, USA was a separate agreement entered into on October 1, 1998, whereunder the appellant was granted the rights to acquire the license to use certain technical information and patent rights for the purpose of designing, constructing, operating and maintaining "a unit" for the commercial practice of FCC at Barauni Refinery. (v) The agreement with SWEC was a technical cooperation agreement approved by Secretariat of Industrial Assistance, Government of India vide approval Letter no. 66(98)/513(98)/PAB, whereunder the appellant is to pay SWEC for technical know-how fees, for process package, for engineering services, viz., review of detailed engineering/drawings (for 30 days), fees for assistance for procurement, construction and inspection (for 90 days), for pre-commissioning and start-up activities. 3.1.3 The appellant further submitted that the undisputed facts relating to royalty (technical know-how fees) are as under : (i) Royalty is related to production for the use of patented technology. (ii) Payment of royalty is based on design capacity of the FCC unit to produce Motor Spirit, LPG, High Speed Diesel and LSHS. 3.1.4 Undisputed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of the imported equipments. No part of such licence fee/royalty, directly or indirectly, was payable or was to be received by Samsung. There is also no finding to the contrary in either of the adjudication order or the said order of the Commissioner (Appeals). For application of Rule 9(1)(e) there has to be a finding that although termed as royalty/licence fee, the payment was made or is to be made as a condition prerequisite for the sale of the imported goods and was in fact not royalty/licence fee. Further, once having failed to establish application of Rule 9(1)(c) and thus addition of royalty/licence fee on the price of the imported goods, the Department cannot fall upon Rule 9(1)(e). There is no finding in either of the adjudication order or the said order of the Commissioner (Appeals), as it could not be, that in the garb of royalry/licence fee some other payment was being made for the imported equipments. 3.1.7 The contention is that from the Engineering Agreement with SWEC it would be seen that payment of royalties under clause 4.1 of the Licence Agreement part thereof was in consideration for the right and licence to use the "Proprietary Rights" granted to the appellan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sumption, as has been sought to be done in the adjudication order and also as contended on behalf of the respondent herein. The said decision of the Supreme Court in Essar Gujarat Ltd.'s case (supra) has therefore no manner of application whatsoever to the instant case. 3.1.11 Insofar as the design of Flue Gas Piping and Catalyst Piping fees is concerned, contrary to the incorrect finding of the adjudicating authority, no detailed design or drawing was provided by SWEC nor was it required to provide the same under the agreement. What was provided were only the specification and data. No mechanical drawing actually required for the manufacture of the equipments was either required to provide or was provided by SWEC under the Engineering Agreement, which is clear from para 1.3 of clause 5 of the Licence Agreement forming a part of the Engineering/Technology Agreement with SWEC. "1.3 The term 'Technical Information' as applied to any party, shall mean all operating techniques, apparatus data, technical data, information embodied in patent, pending patent application, improvements, developments and know-how to the extent that the same is applicable to, or relates to the subject techn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... process with guaranteed productivity of a Hydrotreater Unit, which was being set up at Barauni Refinery, equipments in respect whereof were also imported from Samsung under the same Equipment Agreement dated November 16, 1999, has held that there can be no addition of royalty or a part thereof to the invoice values of the equipments to determine their transaction values under Rule 9(1)(c) or Rule 9(1)(e) of the Valuation Rules. The reasonings contained in support thereof are at paras 31 and 36 of the said adjudication order dated May 30. 2007. The same principle and the decision of this Hon'ble Tribunal relied upon by the Assistant Commissioner in support of this conclusion referred to therein, are also fully applicable to the instant case. 3.2.1 The contentions of ld. Advocate in relation to Appeal No. Cus.Ap.129/08. 3.2.2 The contentions of ld. Advocate appearing for the appellant is that in order to optimize improvement of quality of HSD Oil the appellant proposed to setting up of a Hydrotreater Unit at its Barauni Refinery. The appellant decided to complete the project in two successive steps. (i) Firstly to procure the Process Technology with all allied and associated nece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dated May 15, 2007. As such for the same reasons and undisputed factual premises as set out in the various paragraphs 6 to 9 (including the sub-paragraphs thereof) hereinabove, there can be no invocation of Rule 9(1)(c) or Rule 9(1)(e) of the Valuation Rules in the instant case also and, consequently, no addition of any part of the fees paid for the Basic Engineering Package to UOP, USA under the Engineering/Technology Agreement in the invoice values of the equipments imported under the Equipment Contract from Samsung and findings to the contrary in the said adjudication order, affirmed by the said order of the Commissioner (Appeals) are erroneous, untenable and unsustainable. 3.2.5 The appellant therefore states and submits that both the appeals be allowed and the impugned orders of the Commissioner (Appeals) and the adjudication orders of the Assistant Commissioner affirmed thereby be set aside, with consequential relief to the appellant. 4.1.1 The contentions of ld. Counsel in relation to Appeal No. Cus.Ap.128/08. 4.1.2 The contention of ld. Counsel appearing for the department is that the Licence agreement was to transfer know-how and right to licence certain technical info ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ering Company Ltd. of South Korea to M/s. Indian Oil Corporation Ltd., on IOC's triple agreements (Licence - Engineering - Guarantee Agreements) with Stone & Webster Engineering Corporation, USA (SWEC) for Fluidized Catalytic Cracking process (FCC) at IOC's Barauni Refinery is revealed from the Collowing clauses of agreements :- (a) Clause 3.4 provides that licensee will obtain SWEC's approval of Licensee's detailed engineering contractor for disclosing technical information available in PDBEP by the licensee. (b) Clause 3.5 provides that SWEC will make its technical information available to IOC and one or more contractors for the design, construction, operation, maintenance, repair or alteration (including expansion) of the licensed FCC unit, provided that for the equipments mentioned in exhibit - B of License Agreement, IOC shall take prior approval of SWEC for the selection and engagement of contractor (in this case M/s. Samsung) who, according to SWEC should be competent and capable of using SWEC's technology for design, construction, expansion etc. of the licensed FCC unit. It is even provided in clause 3.5(ii) that such contractor (in this case, Samsung) shall have entered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eater (DHDT) unit at Barauni, with the purpose of reducing sulphur from HSD produced in the Refinery. For this one Hydrogen was necessary to meet the requirement of hydrogen gas. The agreement with VOP I -A, USA was a technical collaboration agreement approved by the Secretariat for industrial Approval. As per this agreement IOC has to pay technical know-how fees - (a) US $ 4,91,560/- plus (b) design/drawings fees - US $ 6,09,000/-. The sale or procurement of equipments here is also conditional upon the technology agreement with the third party i.e. M/S. VOP - IA of USA to whom payment for design/basic engineering has been made. Thus the design basis and specifications of equipments were incorporated in the anterior agreement with the American Company and the global tender floated invited bids on the basis of designs and specifications already laid down by the American Company for the DHDT project in Barauni. So the process licence of the American Company, granted to IOC and the equipments procured from Samsung, Korea are intimately inter-related. It is not for nothing that the technical collaboration agreement with American Company VOP-IA, having been made in Feb 1999 was an anter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ks between technology and equipments. It is admitted fact that payments for basic design and engineering is for the Process Design of the entire plant or unit with specification which are related to both indigenous and imported goods. It is observed by the lower authority that the Process Licensor has got a very big role in detailed engineering, procurement and fabrication of equipments. The construction of the unit or procurement of equipments is conditioned by the sale of technology consisting of Engineering Design Specifications and thus, the sale of technology is a pre-condition for sale of equipments. The lower authority has observed that the Basic Design Engineering given by the Process Licensor is the engineering package required for both process as well as the equipments with specification suited for the successful run of the unit. It is observed that the activities undertaken by the Process Licensor for which he has been paid the Basic Design & Engineering charges and other charges cannot by any stretch of imagination be termed as "Post importation activities on the imported goods." It is also observed that the Department placed reliance on the decisions of Apex Court in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssociated with reactor/regenerator and office chamber, 10% of US$ 4,20,000 i.e. US$ 42,000 is allocated towards the cost of equipments. (b) Since the details in engineering does not differentiate between the imported and indigenous equipments which are in the ratio of 40:60, 40% of US$ 42,000 i.e. US$ 16,800 is apportioned towards the value of imported equipments under Rule 9(1)(c) and/or Rule 9(1)(e) of the Valuation Rules. (iii) The assessable value of the machinery and equipments and spares imported under the Contract dated November 16, 1999 with Samsung is to be determined by addition of US$ 1,60,440 to the invoice value of the goods under Section 14(1A) of the Act read with Rule 4 and Rule 9(1)(c) and/or Rule 9(1)(e) of the Valuation Rules, proportionately all the Bills of Entry filed for clearance of imported goods. The provisional assessments are to be finalized accordingly. 5.3 The Assistant Commissioner in the Adjudication Order, inter alia, held as under :- (i)(a) A part of the basic design engineering package is related to equipments viz. providing the specifications of equipments and thereafter reviewing of detailed design of the equipments to confirm that the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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." 5.5 The cardinal principle for loading the value under Rule 9 is condition of sale of imported goods by the buyer to the seller or the buyer to a third party to satisfy an obligation of seller to the extent that such payments are not included in the price actually paid or payable. The principle regarding the application of Rules 9(1)(c) and 9(1)(e) has been succinctly explained and set out, upon considering all earlier decisions on the issue including the decision in Collector of Customs v. Essar Gujarat Ltd., 1996 (88) E.L.T. 609 (S.C.), by the Supreme Court in the case of Commissioner of Customs v. Ferodo India Pvt. Ltd., 2008 (224) E.L.T. 23 (S.C.). In Paragraphs 15, 16, 18, 20 and 21 of the judgment it has been observed and held as under : "15. Rule 9(1)(c) extends the quantum of levy under rule 4. Rule 9(4) mandates that there can be (no) addition to the transaction value except as provided in r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oods. At this stage, we would like to emphasise the word indirectly in Rule 9(1)(c). As stated above, the buyer/importer makes payment of the price of the imported goods. He also incurs the cost of technical know-how. Therefore, the Department in every case is not only required to look at TAA, it is also required to look at the pricing arrangement/agreement between the buyer and his foreign collaborator. For example if on examination of the pricing arrangement in juxtaposition with the TAA, the Department finds that the importer/buyer has misled the Department by adjusting the price of the imported item in guise of increased royalty/licence fees then the adjudicating authority would be right in including the cost of royalty/licence fees payment in the price of the imported goods. In such cases the principle of attribution of royalty/licence fees to the price of imported goods would apply. This is because every importer/buyer is obliged to pay not only the price for the imported goods but he also incurs the cost of technical know-how which is paid to the foreign supplier. Therefore, such adjustments would certainly attract Rule 9(1)(c). 20. Be that as it may, in the present case, o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 (S.C.) (supra) has distinguished the decision in the case of Essar Gujarat. Relevant portion of the order is reproduced hereunder :- "17. In the case of Essar Gujarat Ltd. (supra) the condition prerequisite, referred to above, had direct nexus with the functioning of the imported plant and, therefore, it had to be loaded to be price thereof. 22. In the case of Essar Gujarat Ltd. (supra), the buyer had entered into a contract with TIL for purchase of Direct Reduction Iron Plant ("the plant"). The entire agreement was for import of the plant. The agreement was subject to two conditions- (a) approval of G.O.I, and (b) obtaining transfer of licence from M/s. Midrex, USA. Without the licence from Midrex, the imported plant was of no use to the buyer. Therefore, it was essential to have the licence from Midrex to operate the plant. Therefore, it was held by this Court that procurement of licence from Midrex was a pre-condition of sale which was specifically recorded in the agreement itself. In view of specific terms and conditions to that effect in the agreement, this Court held that payments made to Midrex by way of licence fees had to be added to the price paid to TIL for purc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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