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TMI Blog2007 (5) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... the said capital goods and parts imported by the respondent from Toyota Motor Corporation for manufacture of automobile in India. Und the agreements entered into by and between the respondent and the said Toyota Motor Corporation, royalty and know-how fees were to be paid 4. According to the Revenue such payments were to be added to the invoice value of the goods so as to arrive at a proper transaction value in terms of Rule 9(1)(c) of the Customs Valuation (Determination of Price of Imported Goods) Rules 1988 (for short, 'the Rules') Payments of royalty, according to the Revenue, have a direct nexus to the imported goods as the same go into the manufacture of the licensed vehicles and spare parts. 5. Before embarking upon the rival contentions of the parties, we may notice the basic and undisputed facts of the matter. 6. A Technical Assistance Agreement was entered into by and between Toyota Motor Corporation and the respondent herein. Some of the payments were required to be made towards engineering services and for imparting training to its personnel at Japan. 7. In the said agreement, the terms 'licensed vehicles', 'local parts', and 'licensed products' have bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... especially for the licensee, and which shall be furnished through such documents and assistance as designated at the discretion of the Licensor from among those stipulated in Appendix D hereto and any other documents and assistance from time to time designated by the licenser. (b) In the event of the preceding Paragraph (a), the Licensee shall pay the Licenser all fees, and all costs and expenses incurred by the Licenser in developing and furnishing such know-how, information, documents and or assistance. (c) If the assistance rendered under Paragraph (a) hereof is technical assistance or engineering assistance concerning the licensed products, such assistance will be provided in accordance with the procedures and conditions set forth in Appendix E attached hereto" Appendix D provides for assistance to be furnished by the licensor to the licensee in terms of Article 4, which are separately designated by the licensor from amongst those specified therein, namely, for: (i) construction of plant, (ii) production and preparation, and (iii) pilot production and production model. Article 7 provides for basic requirements for manufacture of the licensed products. Article 11 provide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dix H attached hereto, which are equivalent to the Licensees cost of production thereof if those are manufactured by the Licensee itself or the Licensees purchase prices thereof if those are purchased by the Licensee from third parties and; (iii) Sales tax, excise tax, commodity tax or any other tax of similar nature (other than any of such taxes to be refunded to the licensee) imposed directly on the manufacture, sale or delivery by the Licensee of those unit Local Parts." Article 21 provides for patents. 8. Indisputably, in terms of the said agreement, the Respondent imported capital goods from Toyota Motor Corporation for manufacture of Passenger Utility Vehicles. Proceeding on the basis that the supplier is related to the respondent, the matter relating to valuation of the said capital goods was referred to the Special Valuation Branch for verification in regard to acceptance or otherwise of the declared invoice value. The Special Valuation Branch by reason of a Circular dated 6-4-1999 was directed to continue to assess the value of imports from the related supplier provisionally. 9. Another agreement known as 'TMSS Overseas Parts Export Agreement' was entered into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h may be transferred either in the collaboration agreement or which may be inherent in the goods supplied. Otherwise, there is no rationale for payment of royalty in a locally manufactured products which will not be the case if the transaction involves outright sale of equipment- machinery/component etc. 48. The logical conclusion is that the royalty is relatable to the imported goods as the royalty is nothing but an inherent condition to the transaction . Hence, the royalty payable by the importers to their collaborator/supplier is includible in the assessable value of the imported goods as per Rule 9(i)(c) of the CVR, 88." 11. An appeal preferred thereagainst by the respondent before the Commissioner of Customs was dismissed, holding: "(a) Royalty is not to be added to the value of components parts such as Unit Local Parts and KD Parts. (b) Royalty is to be added to the value of components parts falling under the category of other than Unit Local Parts. (c) TKH is to be added only to the value of capital goods and tools imported from related supplier during the tenure of the agreement and should be apportioned to the total value of such goods. (d) TKH is not to be a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ident that the terms laid down therein are relevant for determining the conditions of import. According to the learned Counsel it must be held to be involving continuous exercise and in view of the fact that the patent was held by the respondent and furthermore grant of licence and know-how technology being sine qua non for running the automobile manufacturing plant set up by the respondent at Bangalore, Articles 3 and 4 of the Agreement have rightly been invoked for the purpose of determination of the transaction value of the capital goods. Strong reliance, in this behalf, has been placed by the learned Additional Solicitor General on Collector of Customs (Preventive), Ahmedabad v. Essar Gujarat Ltd, Surat [(1997) 9 SCC 738] 14. Mr. R. Parthasarthy, the learned Counsel appearing on behalf of the respondent, on the other hand, would submit that on a proper reading of the decision of this Court in Essar Gujarat Ltd (supra), it would appear, that only the costs which were required to be incurred by the importer before importation of the capital goods had been taken into consideration for determination of the transactional value of the imported goods It was submitted that a conjoi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r for sale; Provided that such price shall be calculated with reference to the rate of exchange as in force on the date on which a bill of entry is presented under Section 46, or a shipping bill or bill of export, as the case may be, is presented under Section 50;" 18. The Central Government in exercise of its power conferred upon it under Section 156 of The Act, made rules known as "Customs Valuation (Determination of Price of Imported Goods) Rules, 1988. Rule 3 provides for determination of the method of valuation, stating: "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, the value shall be determined by proceeding sequentially through Rules 5 to 8 of these Rules." 19. How the transaction value would be determined has been laid down in Rule 4 of the Rules, stating that the same shall be the price actually paid or payable for the goods when sold for export to India adjusted in accordance with the provisions of Rule 9 of the said Rules. Rule 9 of the Rules provides for determination of transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... goods has to be determined at the time and place of importation. The value to be determined for the imported goods would be the payment required to be made as a condition of sale. Assessment of Customs duty must have a direct nexus with the value of goods which was payable at the time of importation. If any amount is to be paid after the importation of the goods is complete, inter alia by way of transfer of licence or technical know-how for the purpose of setting up of a plant from the machinery imported or running thereof, the same would not be computed for the said purpose. Any amount paid for post-importation service or activity, would not, therefore, come within the purview of determination of assessable value of the imported goods so as to enable the authorities to levy Customs duty or otherwise. The Rules have been framed for the purpose of carrying out the provisions of the Act. The wordings of Sections 14 and 14(1A) are clear and explicit. The Rules and the Act, therefore, must be construed, having regard to the basic principles of interpretation in mind." 21. Reliance, as noticed hereinbefore, however, has been placed by the learned Additional Solicitor General on Essa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dvice to Essar on optimum utilisation of iron oxide lump ore and iron oxide pellets; (c) provide information and documentation to allow Essar to implement improvements in plant design and/or operating procedures which have been developed by Midrex or other Midrex Process Licensees; (d) provide continuing information to Essar on operating results from other Midrex Plants to assist Essar in optimizing plant-operating efficiency including operating reports, operation bulletins and operation seminars. 8. Article 10 of the agreement is as under: Article 10: CONTRACT DHILL: In consideration of fulfillment by Collaborator of its obligations under this Agreement, Essar shall pay to COLLABORATOR as below: SERVICES TO BE PROVIDED OUTSIDE INDIA: 10.1.1 Process licence and allied technical services DM (German Marks) 10.1.1.1 Process licence fee payable to MIDREX Corporation for the right to use the Midrex process and patents DM20,00,00 lump sum 10.1.1.2 Cost of technical services provided under Article 3 connection with M process DM 1,01,00,000 in lump sum 10.1.2.1 Payment for engineering and consultancy fee as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h TIL. It will not be proper to view that agreement with TIL in isolation in this case. The plant would be of no value if it could not be made functional. EGL wanted to buy the plant in a working condition. This could only be achieved by paying not only the price 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 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." 28. This Court noticed several curious aspects of the three agreements, but ultimately held that whereas the amounts payable in terms of clauses 10.1.1.1, 10.1.1.2 and 10.12.1 were to be taken into consideration for the purpose of determining the transactional value, 10% of the amount, however, for payment of engineering and consultancy fee as specified under the agreement was held to be payable by way of guess work. 29. Therefore, law laid down in Essar Gujarat Limited (supra) and J.K, Corporation Limited (supra) are absolutely clear and explicit. Apart from the fact that Essar Gujarat Limited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tes to manufacture of local parts which evidently has nothing to do with the import of the capital goods. Appendix D again is attributable to construction of plant; production preparation; and pilot production and production model, wherewith the import of capital goods did not have any nexus. 34. We may furthermore notice that Interpretative Note appended to Rule 4 also plays an important role in a case of this nature which reads as under "Note to Rule 4 Price actually paid or payable The price actually paid or payable is the total payment made or to be made by the buyer to or for the benefit of the seller for the imported goods. The payment need not necessarily take the form of a transfer of money. Payment may be made by way of letters of credit or negotiable instruments. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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..." 37. Yet again a three-Judge Bench of this Court in Union of India and Others v. Mahindra and Mahindra Ltd., Bombay [(1995) Supp. (2) SCC 372], opined: "...Ordinarily the Court should proceed on the basis that the apparent tenor of the agreements reflect the real State of affairs. it is, no doubt, open to the Revenue to allege and prove that the apparent is not the real and that the price for the sale of the CKD packs is not the true price, and the price was determined by reckoning or taking into consideration the lump sum payment made under the collaboration agreement in the sum of 15 million French Francs...." It was furthermore held: "9. On an evaluation of the relevant clauses in the collaboration agreements and the attendant circumstances, we are of the view that the concurrent judgments of the High Court at Bombay do not ..... X X X X Extracts X X X X X X X X Extracts X X X X
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