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TMI Blog2015 (4) TMI 486X X X X Extracts X X X X X X X X Extracts X X X X ..... ps or such other enhanced capacity as may be agreed between the parties, to be located at Hazira, Gujarat, India and as described in Annexure 1 "PLANT UNITS' attached hereto and made thereof;" Project is defined as: "1.1.8. "Project" shall mean the design, procurement, construction, erection and start-up of the plant." The most material clause of the agreement relates to the scope of supply which is contained in clause 2, which reads as under:- "2.0. SCOPE OF SUPPLY: 2.1. Technical consultant shall render following engineering and other technical Services from outside India; 2.1.1. Project Engineering Services: Technical Consultant shall act as technical coordinator for the successful setting up, commissioning of all the facilities and achieving established operations of the Plant. Technical Consultant shall coordinate all technical matters such as, but not limited to studying various alternative specifications and processes for the Plant and for manufacturing of Products; making recommendation for the most suitable and economic process, final detailed specifications and processes for the selected route, advising as required regarding technical proposals from various supplie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmended by the Technical Consultant in respect to the Project can be employed, operated in India or otherwise used without infringing any patent, trademark, or other industrial property right of any third party in respect of the same. ESSAR acknowledges that the Technical Consultant shall not be liable in the event of claims against ESSAR by any other party for such infringement and shall indemnify the Technical Consultant against such liability. The Technical Consultant shall intimate, if however, it knows or becomes aware that any process, equipment or facilities recommended by the Technical Consultant is/are the subject of patents, trademarks, or other industrial property right of any other company, individual or association. 9.2. The Copy right in all documents (including, but not limited to computer data, specifications, drawing and plan supplied by ESSAR, shall remain with ESSAR if originally owned by ESSAR. 9.3. The Technical Consultant may own and possess patents, know-how, copyrights, and other intellectual property rights with respect to the Plant and its operation and maintenance and/or the Products, which will be disclosed by the Technical Consultant to ESSAR, to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uses of the said purchase order are that for a plant of a capacity of 8,00,000 tonnes capacity per year, the total CIF price payable would be US$ 163,000,000. A liquidated damages clause contained in clause 13 of the purchase order provides liquidated damages for delay and/or failure to achieve performance. This purchase order was amended by a purchase order dated 28.7.1992 by which the CIF price of the said steel plant was revised to US$ 169,700,000. This was in view of the fact that the plant capacity as stated earlier had been doubled, and a sponge iron manufacturing plant of a capacity of one million tonnes which was originally to be sold was now deleted. 3. Vide a show cause notice dated 20.7.1993, Revenue demanded the sum of DM 78.95 Million being technical knowhow charges which ought to be added to the sum of US$169,700,000. In their reply to the show cause notice, the respondent stated that none of the provisions of Rule 9 of the Customs Valuation (Determination of Price of Imported Goods) Rules of 1988 would apply as no payment is made for technical services as a condition of sale of imported goods. In any event, the agreement for technical services is to be performed in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... technical services to be provided. In reply, Shri Bagaria, learned senior advocate appearing on behalf of the respondent, took us through the said agreements and contended that it was clear that payments made under the technical services agreement were not as a condition of sale of the plant. Further, the Essar Gujarat judgment turned on its own facts which are distinguishable, and several other judgments of this Court in fact conclude the matter in his favour. 7. We have heard learned counsel for the parties. Section 14 of the Customs Act, 1962 as it stood at the relevant time is as follows: "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 the price at which such or like goods are ordinarily sold, or offered for sale, for delivery at the time and place of importation or exportation, as the case may be, in the course of international trade, where- (a) the seller and the buyer have no interest in the business of each other; or (b) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the provisions of Rule 9 of these Rules. Rule 9 of the Rules is set out hereinbelow:- "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 goods in question; (iii) The cost of packing whether for labour or materials; (b) The value, apportioned as appropriate, of the following goods and services where supplied directly or indirectly by the buyer free of charge or at reduced cost for use in connection with the production and sale for export of imported goods, to the extent that such value has not been included in the price actually paid or payable, namely:- (i) Materials, components, parts and similar items incorporated in the imported goods; (ii) Tools, dies, moulds and similar items used in the production of the imported goods; (iii) (iii) materials consumed in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... portation 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. 10. In fact, clause 13 of the purchase order dated 21.6.1991 is important in that liquidated damages are only payable for delay in commissioning the plant and for failure to achieve the stipulated performance, both of which are post-importation activities. 11. Another thing to be noticed is that a conjoint reading of the technical services agreement and the purchase order do not lead to the conclusion that the technical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... process DM 1,01,00,000 lump sum Technical Services 10.1.2.1 Payment for engineering and consultancy fee as specified under this agreement DM 2,31,00,000 lump sum 10.1.2.2. Payment for theoretical and practical training outside India DM 22,00,000 lump sum Total DM 3,74,00,000 lump sum The Court held that the amount of 20 Lakh Deutsche Marks and 101 Lakh Deutsche Marks were both payable for the right to use Midrex process and patents. In short, these amounts were payable for the transfer of technology under a process licence agreement entered into with Midrex. The judgment states that without such licence the plant could not be operated at all by the importer without the technical know-how from Midrex. In any case, the plant could not be operated or be made functional. This being the case, since these amounts had to be paid before the plant could at all be set up, these amounts would be added to the value of the imported plant. 13. However, 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 excl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments. Payment may be made directly or indirectly. An example of an indirect payment would be the settlement by the buyer, whether in whole or in part, of a debt owed by the seller. Activities undertaken by the buyer on his own account, other than those for which an adjustment is provided in Rule 9, are not considered to be an indirect payment to the seller, even though they might be regarded as of benefit to the seller. The costs of such activities shall not, therefore, be added to the price actually paid or payable in determining the value of imported goods. The value of imported goods shall not include the following charges or costs, provided that they are distinguished from the price actually paid or payable for the imported goods; (a) Charges for construction, erection, assembly, maintenance or technical assistance, undertaken after importation on imported goods such as industrial plant, machinery or equipment; (b) The cost of transport after importation; (c) Duties and taxes in India. The price actually paid or payable refers to the price for the imported goods. Thus the flow of dividends or other payments from the buyer to the seller that do not relate to the imported ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve Note cannot be pressed into service for calculating the price of any drawings or technical documents though separately paid by including them in the price of imported equipments. Clause (a) in the third para of the Note to Rule 4 is suggestive of charges for services rendered by the seller in connection with construction, erection etc. of imported goods. The value of documents and drawings etc. cannot be "charges for construction, erection, assembly etc." of imported goods. Alternatively, even on the view as taken by the Tribunal on this Note, the drawings and documents having been supplied to the buyer-importer for use during construction, erection, assembly, maintenance etc. of imported goods, they were relatable to post-import activity to be undertaken by the appellant. Such charges were covered by a separate contract, i.e. contract MD 301. They could not have been included in the value of imported goods merely because the value of documents referable to imported equipments and materials was mixed up with the value of those documents which were referable to equipment which was yet to be procured or imported or manufactured by the appellant; the value of the latter category of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... technology for producing sponge iron in India. Therefore, in our view, obtaining a licence from Midrex was a precondition of sale. In fact, as was recorded in the agreement, the sale of the plant had not taken place even at the time when the contract with Midrex was being signed on 4-12-1987, although the agreement with TIL for purchase of the plant was executed on 24-3-1987. Therefore, we are of the view that the tribunal was in error in holding that the payments to be made to Midrex by way of licence fees could not be added to the price actually paid to TIL for purchase of the plant." 17. The Court noticed several curious aspects of the agreement stating that it started with the recital that "the purchaser and the seller have today respectively purchased and sold a direct reduction iron plant, on the following terms and conditions", which, according to this Court, indicated that the purchase and sale of the plant had taken place on 24-3-1987, but in clause (2) it was stated that the purchaser would purchase the property from the seller at the stated price. Upon construing the terms of the conditions, it was opined: (SCC p. 749, para 24) "24. Therefore, the process licence fees ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... articular, also applies to any amount paid for postimportation technical assistance. What is necessary, therefore, is a separate identifiable amount charged for the same. " 16. Similarly, in Commissioner of Customs v. Ferodo India (P) Ltd., (2008) 4 SCC 563, this Court dealt with Rule 9(1)(e) and the Essar Gujarat judgment as follows: "22. In the alternate, it has invoked Rule 9(1)(e). This Rule 9(1)(e) cannot stand alone. It is a corollary to Rule 4. There is no finding in the present case that what was termed as royalty/licence fee was in fact not such royalty/licence fee but some other payment made or to be made as a condition prerequisite to the sale of the imported goods. It is important to bear in mind that Rule 9 refers to cost and services. Under Rule 9(1), the price for the imported goods had to be enhanced/loaded by adding certain costs, royalties and licence fees and values mentioned in Rules 9(1)(a) to 9(1)(d). It refers to "all other payments actually made or to be made as a condition of sale of the imported goods". In the present case, the Department invoked Rule 9(1)(c) on the ground that royalty was related to the imported goods, having failed it cannot fall back ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded for increase in the capacity of the plant, this Court clearly held that the post-importation service charges were not to be taken into consideration for determining the transaction value. 37. The observations made by this Court in Essar Gujarat Ltd. [(1997) 9 SCC 738] in para 18 must be understood in the factual matrix involved therein. The ratio of a decision, as is well known, must be culled out from the facts involved in a given case. A decision, as is well known, is an authority for what it decides and not what can logically be deduced therefrom. Even in Essar Gujarat Ltd. [(1997) 9 SCC 738] a clear distinction has been made between the charges required to be made for preimportation and post-importation. All charges levied before the capital goods were imported were held to be considered for the purpose of computation of transaction value and not the post-importation one. The said decision, therefore, in our opinion, is not an authority for the proposition that irrespective of nature of the contract, licence fee and charges paid for technical know-how, although the same would have nothing to do with the charges at the preimportation stage, would have to be taken into consi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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