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TMI Blog2004 (7) TMI 643X X X X Extracts X X X X X X X X Extracts X X X X ..... the various items of equipment, machinery etc. imported for the Liquefied Natural Gas (for short, LNG) facility are not entitled to assessment under Tariff Item 9801.00(3) as well as under Tariff Item 9801.00(1) as project imports. It was also held that a portion of the value of the off-shore services contract is liable to be added to the declared value of the equipment etc. imported for the LNG facility. On the above basis provisional assessment was finalized and demand of duty of ₹ 245,58,73,987/- was upheld on imports effected and cleared under 319 Bills of Entry. There is also a demand of ₹ 8,30,94,084/- in respect of certain goods that have been assessed provisionally but are pending clearance and a demand of ₹ 21,44,77,666/- on items imported under 63 Bills of Entry that are pending assessment and clearance. The learned Commissioner also held that all items imported for LNG facility are liable for confiscation under Section 11(m) of the Customs Act, 1962 for alleged misdeclaration and he imposed redemption fine in lieu of confiscation of an amount of ₹ 1,33,54,841/- on items which are pending clearance/assessment. He further imposed a penalty of ͅ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ever, after holding as above, the Commissioner remanded the matter to the adjudicating authority with a direction "to consider the assessment of SPM appropriately while finalizing the provisional assessment after examining its role in the second phase and thereafter decide the matter appropriately". The Revenue has come in Appeal C/520/2000 against the above order contending that finding entered by the Commissioner (Appeals) that SPM system would qualify for project import as an auxiliary system for an integral part of the project, cannot be sustained. DPC has filed appeal No. C/519/2000 challenging that part of the order of the Commissioner where he remands the case directing Assistant Commissioner to finalize the provisional assessment of SPM after considering its note in the second phase. 4. We will first take up Appeal No. C/601/2001 filed by DPC. The issues coming up for consideration are - (a) Whether the various items of equipment, machinery etc. imported for LNG facility are entitled to the concessional rate of Customs duty under Tariff Item 9801.00 - Project/Imports? (b) Whether a portion of the value of the Off-shore Services Contract is liable to be added to the dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0-2400 MW nominal capacity. It also mentioned "Project includes construction of regasification facilities for LNG and pipeline interconnections to power plant. According to the appellant, since this is the first power generation facility to work on LNG and LNG is not available in India it had to be imported. The setting up of an LNG facility is an integral part of power plant. Referring to its letter dated 28th August, 1992 seeking approval of the Government of India for setting up of the project the appellant would contend that proposal to FIPB was a consolidated proposal that included setting up of LNG facility as a part and parcel of the power project. The cost of LNG was identified separately as 845 million US$. It is submitted that the above aspects formed part of the project report submitted to FIPB. Paragraph 1.06.02 referred to initial use of fuel oil for the power station till the availability of externally sourced LNG. Letter dated 3-2-93 from FIPB conveying the approval of Government of India for setting up of the power project at Dabhol would also show that it was an integrated project including LNG facility. 7. Subsequently, the approval was modified by FIPB under com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eceipt, storage and regasification of LNG for Phase II. 9. The learned Sr. Counsel who appeared on behalf of the Revenue submitted that in the matter of deciding classification Customs Department is the final authority and that the appellant cannot seek shelter under the approval granted by FIPB or the recommendation of the sponsoring authority. In support of the above proposition he placed reliance on the decision of the Supreme Court in Jackson Thevara - 1992 (61) E.L.T. 343 (S.C.) and the decisions of this Tribunal in NALCO - 1997 (94) E.L.T. 409 and EID Parry - 1998 (100) E.L.T. 275 (T). The Revenue would contend that LNG facility has been set up to make available Natural Gas which is the raw material for various industrial consumers including the Power Project. The equipment and material imported for implementing processes before gas came into existence (including unloading terminal, storage tank and regas terminal) cannot be regarded as equipment and material imported for initial setting up of the Power Project or substantial expansion of the existing Power Project within the meaning of Customs Tariff Heading 9801. Strong reliance was placed by the learned Counsel on the dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 103.354 million US $, the contract value for service charges was 149.379 million US $. Thus, the contract value for service charges for LNG facility would be 144.53% of the contract value for the machinery and equipment. In order to set up Phase II of the power project, DPC entered into two off-shore contracts. Off-shore supply contract for the supply of machinery was for 400 million US $ while the off-shore services contract for various services undertaken outside India was for consideration of 100 million US $. Thus in respect of Phase II of the power project, the contract value for services charges was 25% of the contract value for machinery and equipment. Following are the additions made by the Commissioner apportioning a portion of the service charges in respect of different items. They are given below under three charts :- Other than Marine i.e. LNG Terminal (Break-up of offshore services by Kvaerner) No. Major Category Value for Services (Estimated) (US $) Amount included in the Assessable Value as per Rule 9 (l)(b)(iv) of Customs Valuation Rules '88 (US $) (1) (2) (3) (4) 1. Project Management 10,356,519 10,356,519 2. Engineering Management 6,731,736 6,73 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st Engineering, Project Controls, reporting 10,559,000 7821,051.30 7. Program and Project Management 8,221,000 * 6,089,294.70 8. Regas Engineering Coordination - Primary and Secondary Power 1,031,000 # 1,031,000.00 9. Regas Engineering Coordination - LNG Storage Tanks 3,100,000 # 3,100,000.00 10. Regas Engineering Coordination Civil, Site, Roadways 812,000 000 11. Regas Engineering Coordination Structural, Piping and fire Protection 1,738,000 # 1,738,000.00 12. Regas Engineering Coordination Regas Process 2,283,000 # 2,283,000.00 13. Regas Engineering Coordination - Controls Instrumentation and Communications 921,000 # 921,000.00 14. Marine Engineering Coordination - Breakwater 1,034,000 000 15. Marine Engineering Coordination Jetty 2,638,000 # 2,638,000.00 16 Commissioning & Start-up Coordination 541,000 000 Total 45,666,000 35,093,417.20 Note : * - @ 74.07% of the Service Charges estimated at Column (3) # - @ 100% of the Service Charges estimated at Column (3) 13. The Commissioner thus found that out of the total Offshore Services contract dated 20th Nov., 1998 value of 115.672 Million US $, the amount of Services Charges worth 7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffshore services contract is not related to offshore supply contract. No part of the value of the services contract is includible in the value of imported equipments since imported equipment was not manufactured according to any drawing or design, developed under the services contract and made available to the manufacturer/supplier of the equipments. The appellant would intimate the required specification to the prospective suppliers who would manufacture the goods as per the specification. According to the appellant, making available specification is outside the purview of Rule 9(1)(b)(iv). The learned Counsel for the appellant referred to "Customs Valuation-Commentary on the Gatt Customs Valuation Code" by Saul L. Sherman and H. Glashoff. The relevant portion from Para 117 of book is extracted below :- "Detailed specifications, including various dimensions noted on a drawing of the machine, are included in the buyer's order, so as to advise the exporters/manufacturer of what the buyer needs. The cost of engineering and drawing are not part of customs value, even if undertaking outside the country, to which the machine is shipped, to the extent that they are an appropriate way o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... :- 'Relevant drawings and documentation shall be provided by the vendor in accordance with the requirements of the purchaser's Vendor Document Requirement Schedule (VDRS), which forms part of the requisition.'" The appellant would further contend that no data is provided by the offshore contractor as an assist necessary for production of steel plates required for fabricating the tanks. The role of the offshore service contractor was limited to determining the pressure, temperature and other parameters of the LNG at different parts of the tank and from these data arrive at the thickness of the steel sheets/plates required for different portions of the tank. The manufacture of the steel plates is not as a result of identifying the thickness or quantity. The design, fabrication and construction etc. of the LNG storage tank at Dabhol site referred in Article 1.1.1 is out of standard imported material like Ally/carbon steel plate. The detailed drawings developed by the contractor are of the tanks to be constructed in India. These drawings and designs of the tank are reviewed by the service contractor. There is no drawing or design prepared by the manufacturer/supplier of the 9% nicke ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ates targets for completion and progress on monthly basis. The service has also no relevance under Rule 9(1)(b)(iv). According to the appellant, the service rendered under Mathematical Mooring Testing is also not connected with any engineering design specification. The services rendered under the Mathematical Wave Testing relates to determination of design parameters at the berth and along the trestle. It is part of jetty work which is mostly a concrete construction utilising materials purchased in India. The appellant would, therefore, submit that addition made by the Commissioner in respect of the activities undertaken under the marine work is unsustainable. 18. According to the appellant, none of the services by prime contractor involved any preparation of specifications nor any engineering. Each of those items related to the coordination of the various works of marine and LNG terminal. The services under the Heading 'Sunk Development Costs' was in relation to developing various methodologies of implementing the project and choosing one of such alternatives. It is not identical with the term 'development' as understood in the context of Research & Development. According to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 97 (90) E.L.T. 275 (S.C.). In the above case a similar plea that the supplier had given only specification to the sub-vendors and the design of the equipment was done by the sub-vendor to conform to the operational requirements of the equipment was taken. The Tribunal took the view that these charges for specifications are to be included in the value of the goods. The above decision was upheld by the Hon'ble Supreme Court. 22. Revenue contends that the imported goods are tailor-made for the state of art LNG facility utilizing cryogenic technology. The processes involved for setting up the LNG facility are unique to Dabhol, and are confidential information. Therefore, an unconnected vendor will not be able to supply the goods unless the process and the associated drawing and engineering specifications, whether patented or not, are forwarded to the vendor. The learned Counsel points out that reference to the instructions to vendors (ITV) would clearly show the involvement of the service contractor in detailed designing of unloading arms. The coordinated activities between vendor and the offshore service contractor/sub-contractor shows continuous interaction between the service contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above mentioned diagrams, the vendor had developed P&Ids and manufacturing drawing of the equipment which are further reviewed by the service contractor. Therefore, the activities undertaken by the service contractor/sub-contractor are necessary for the production of the goods. According to the Revenue the Commissioner was fully justified in making the additions and the appellant's case both on the issue of classification and valuation is only to be rejected. Appeal Nos. C/520/2000-NB(A) & C/519/2000-NB(A) 25. In these appeals at the instance of DPC and Revenue challenge is against the order passed by the Commissioner (Appeals) dated 26-6-2000. The Commissioner (Appeals) took the view that Single Point Mooring System (SPM) is part and parcel of the project and therefore, the goods imported for setting up will have the benefit of concessional rate of duty under Project Import Regulations. In coming to the above conclusion the Commissioner (Appeals) has referred to the restrictions imposed by the Government of India on the appellant that it will not use the infrastructure facilities of Public Sector Canalizing agencies and existing port infrastructure in the import of fuel. Commis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ressed by him in Appeal No. C/601/2001-NB(A). 28. We will first consider the issue whether various items of machinery equipments etc. imported for LNG facility are entitled to concessional rate of Customs duty under Tariff Item 9801.00 as Project Import. The Revenue is seeking to support the finding of the Commissioner against the assessee relying on Larger Bench decision of this Tribunal in NALCO. Appellant on the other hand would contend that the facts of the present case are more akin to the facts of Paradeep Phosphates Ltd. and also Toyo Engineering. In NALCO the Larger Bench took the view that supply of equipments for port facility at Visakhapatnam cannot be considered as equipment imported for initial setting up of a unit or substantial expansion of existing unit of an industrial plant. Unloading raw material at the port or even at the plant may be necessary for the activity of manufacture or process in an industrial plant, but that cannot be treated as equipment required for the initial setting up of a unit or for substantial expansion of an existing unit which is a required condition for being treated as project import under Item 1(D)(1) of Heading 84.66. On going through ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en the project was divided into two phases, LNG facility was part of the project. In the letter dated 23-3-94 of FIPB, while approving the modification of the project into two phases, a condition was imposed that the infrastructure facility of the Public Sector canalizing agency and the existing port infrastructure should not be used for import of fuel (Diesel/LNG). Such a condition is not available in NALCO. There is merit in the contention of the appellant that when such a condition was imposed, in this case, LNG facility, including regasification facility, was to be treated as part of the integrated project. In reply to the letter dated 31-8-98 addressed by Enron International, Ministry of Industry vide letter dated 24th September 98 confirmed that the integrated project involved power plant, LNG regasification and associated infrastructure. It is in this background DPC applied to the Assistant Commissioner of Customs, Dapoli for registration of Phase II of the Power Project under Project Import Regulation 1986. 33. There cannot be any dispute on the legal position that it is the Customs authorities who are competent to arrive at a decision regarding classification of the goods ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Revenue brought to our notice the minutes of the meeting of the Committee on Disputes held on 17-2-2004 which would show that the Department of Revenue had agreed to the terms of agreement without prejudice to their right in any other case on similar issue. Therefore, the settlement may not be taken as an admission on the part of the department regarding the legal position. We may point out that the view taken by us, on the eligibility for concessional rate of duty as project import, is on the basis of the facts in the present case and the contentions raised by both sides. 37. Now we come to the issue on valuation. The total value of the offshore service charges would come to 149 million US $. The assessee contended that no part of the service charges is addable to the value of the imported goods since offshore service supplied has no relation to the manufacture of the goods imported and that a portion of the service charges related to post importation activity. The Commissioner took the view that amount of 99 million US $ of service charges would be relatable to the manufacture of imported goods and therefore, includible in the value of goods in terms of Rules 9(1)(b)(iv) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd materials, for technical know-how and for servicing of the plant proposed to be erected. DML supplied detailed specifications for each item, standards and data sheets as listed on the engineering document list, general design requirements, layout and other relevant technical information while placing the purchase orders on the manufacturers. (2) the drawing submitted by the manufacturers were required to be reviewed and approved by DML. Equipment was required to be inspected by DML. Invoices by the manufacturer were raised on DML. In turn DML raised invoices on APL. It was contended on behalf of the appellant that the DML had not taken up themselves any responsibility for providing designs etc. necessary for the production of the imported goods and that the responsibility of DML confined to providing know-how and front end engineering package for the plant at Vizag. The Tribunal took the view that the services rendered towards engineering design, work plans, sketches etc. undertaken by the DML elsewhere than in India were necessary for the production of the imported goods got manufactured by DML and supplied to APL and therefore, the value of the services are covered by the prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvice contractor in addition to the data sheets and drawings. Therefore, the offshore service contractor in addition to providing design and engineering specifications to the vendors, has assisted not only in the development of manufacturing drawing of the imported equipment but also in the development of manufacturing data dossier of the product. 42. The Piping and Instrumentation Diagrams (P&ID's) developed by the service sub-contractor are essential in the further development of drawings by the vendor for the manufacture of LNG unloading arms. Such drawings are not limited for the purpose of erection alone. 43. In the case of LNG storage tanks also, the contention raised by the appellant that the service contractor gives only specifications is not seen correct. Detailed design and drawings were provided by the service contractor in respect of every part of the storage tank. The material requisition, data sheets and drawings of the tank would clearly show that the service contractor had intimated the vendor about the complex requirement of production of the plates. Without such design and drawings the vendor could not have produced and supplied the required plates etc. for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have to be modified as follows :- S. No. Major Category Value for Services (Estimated) Amount included in the impugned order Amount required to be included and Basis Basis Amount 1. Project Management 10,356,519 10,356,519 50% 5,178,260 2. Engineering Management 6,731,736 6,731,736 50% 3,365,868 3. Commercial Management 2,589,129 2,589,129 0% - 4. Insurance 800,000 - 0% - 5. Engineering Studies 2,507,435 2,507,435 100% 2,507,435 6. Conceptual Detailed layout 9,193,927 9,193,927 50% 4,596,964 7. Constructability 417,906 417,906 0% - 8. Stress Analysis 417,906 417,906 50% 208,953 9. Test Procedures 417,905 - 0% - 10 Commissioning Advisory Services 2,925,341 - 0% - 11. Commissioning Plan 2,089,529 - 0% - 12. Sub Contractor Coordination & Supervision 2,925,341 2,925,341 50% 1,462,671 13. Contract & Legal 417,905 - 0% 0 41,790,579 35,139,899 17,320,150 46. In the case of off-shore service by Six Construct Ltd. we find Item Nos. 2, 5, 10 and 12 are not relatable at all to the equipments imported. In respect of Item Nos. (1), (6) and (11) we hold that only 50% of the amount included by the Commissione ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able to equipments. Therefore, by applying the ratio of 28.73% the amount to be included in the assessable value will be as follows :- S. No. Major Category Value of Service (Estimated) Amount to be included 1 2 3 4 1 Acceleration costs 5,652,174 2 Geotechnical issues 16,596,996 3 Contract variations 11,455,260 3,291,139 Total 3,291,139 Thus out of the total value of US $ 149.37 Million Worth of Services, 36,524,299 MUS $ worth of Services has to be included in the assessable value as follows :- S. No. Major Category Amount to be included A LNG Terminal 17,320,150 B Marine Works 2,793,000 C Marine Sub-contractor Services D Services by Prime Contractor 13,120,011 E LNG Offshore services contract : Ombibus Geotechnical and variation settlement agreement 3,291,139 Total value of additions to be made 36,524,299 The Commissioner took the view that on the issue of claiming project import benefit there has been no mis-declaration warranting confiscation under Section 111(m) of the Customs Act and therefore penal provisions of Section 111(a) are not to be invoked. In respect of mis-declaration of value of the goods the Commissioner took the view th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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