Customs, Excise and Gold Tribunal - Mumbai
Reliance Industries Ltd. vs Commissioner Of Customs on 6 September, 2006
ORDER S.S. Sekhon, Member (T)
1. This Order disposes off two Appeals filed against Order-in-Original No. CAO/No. 2000/CAC/CC-KPS dated 11th January, 2000 passed by Commissioner of Customs, Mumbai. Appeal No. C/301 of 2000-Mum. has been filed by M/s. Reliance Industries Ltd. (RIL for short), Appeal No. C/189/2001-Mum. has been filed by the Department. Appeals taken altogether other disputes, all the substantial issues raised in the Show Cause Notice. We would therefore, start with the facts and allegations as contained in the Show Cause Notice No. SG/MISC-138/IVK/96SIIB//S/10-48/RK/97 SUB dated 24.3.1998. which was adjudicated, by the impugned Order.
2. Briefly stated, the facts are that on or around 7th June 1994, RIL imported through Courier 7 (seven) cartons which were cleared as Company Manuals of No Commercial value. Upon investigation, the department came to believe that cartons in question contained printed matter in the nature of FEEP (front end engineering package). Further verification of all details revealed that these FFEP were part of Agreements entered into by RIL with M/s. ICIC & P/John Brown for establishment of a plant in India for the manufacture of Purified teraphthalic acid (PTA). These agreements are as follows:
__________________________________________________________________________________ Sr. Description Date Amount US$ Contracting No. Million Party _____________________________________ _____________________________________________
1. Know How and License 12.4.1994 42 M/s ICICI & P 1.1 Agreement: 03} (initially with 1.2 Basic Engineering (FEEP) 39} M/s John manuals License fee Brown) __________________________________________________________________________________
2. Engineering Service Agreement 6.1.1995 05 M/s John Brown __________________________________________________________________________________
3. Buying Services Agreement 6.1.1995 08 M/s John Brown __________________________________________________________________________________ It was noted that in the Agreement at Sr. No. 1 above of US$ 42 Million, US $39 million was for the License Fee and US $ 3 Million was for the basic engineering/technical information/know how, understood as the Front End Engineering Package (FEEP), which came to be contained in the said manuals imported through courier. As to the value of the said FEEP as contained in the Manuals, there is no dispute.
3. Apart from the above, RIL also entered into an Equipment Supply Agreement dated 20.1.1995 with M/s John Brown for supply of equipment for the said PTA plant that they were to establish at Hazira near Surat. Contracts for the supply of this equipment were registered by RIL for clearance as Project Imports under Customs Tariff heading 98.01. The clearance of the goods imported was on provisional assessment basis under Section 18 CA' 62 pending final reconciliation of the Project etc.
4. (a) On or around 24th March, 1998 RIL were served the subject Notice calling upon them to show cause why:
(a) the contents of 7 cartons imported and cleared in June 1994 now valued at Rs. 11,46,44,810/- should not be deemed to be liable for confiscation under Section 111(d) & 111(m) of Customs Act, 1962:
(b) a duty of Rs. 22,15,82,916/- on the above should not be recovered from them on the said goods at (a) above under the enhanced period provisions of Section 28 of Customs Act, 1962.
(c) a penalty under Section 112 of Customs Act, 1962 should not be imposed on them in respect of (a) & (b) above,
(d) the transaction value of the plant, machinery, equipment, bulk materials, etc. imported vide various Bills of Entry under project registration No. S/5-249/94 C.C. under project import for initial setting up of the PTA plant at Hazira should not be enhanced by an amount of Rs. 165,31,82,140/-, (Rupees One hundred sixty five crores Thirty one lakh Eighty two thousand One hundred and forty only) as per the provisions of Rule 9(1b). (1c), (1e) of Customs Valuation Rules 1988 read with Section 14 of the Customs Act, 1962;
(e) duty of Rs. 61,99,43,303/- payable on the portion of assessable value which relates to the license/know-how fees, basic engineering services and on rendering on buying services etc.. the import of which relates, inter alia, to making the subject plant operationable as also to the equipments imported for the PTA plant at Hazira, should not be recovered from them under Section 28 of Customs Act 1962:
(f) interest @ 20% should not be recovered from them as the provisions of Section 28AA of Customs Act, 1962 from the date of assessment of their first Bill of Entry till the date they pay the entire amount demanded at sub-para (b) & (e) above:
(g) a mandatory penalty equal to duty at (e) above under Section 114A should not be imposed on them in view of (e) above.
(h) On adjudication the Commissioner of Customs, by an Order No. CAO/No. 2000/CAC/CC-KPS dated 11th January, 2000, ordered:
132. In the circumstances, I pass the following order-
1. The assessment being still provisional, the proposals to levy interest under Section 28AB of the Customs Act, 1962 and to impose mandatory penalty under Section 114(A) of the Customs Act are not tenable and hence dropped.
2. In so far as the various additions to the assessable value of the equipments imported concerned-
(a) The amount of US$ 39 million cannot be added, as it is only towards transfer of technology and use of the patent:
(b) The amount of US$ 8 million, being in the nature of buying commission cannot be added;
(c) Out of the amount of US$ 5 million, paid by the importers to M/s. John Brown, only an amount of US$ 1,30,000.00 could be added and which is ordered to be added to the value of the goods imported. The remaining amount of US$ 4.87 million cannot be added.
(d) Since US $ 1,20,000.00 has already been added to the value of the goods, this may be adjusted against the proposed addition under (c) above and duty will be charged, at project rates, on US $ 10,000.00 only. This will work out as follows:
(i) Value to be added-US $10,00,00
(ii) Converted in Indian Rs. (US $ 1 = Rs. 31.55) = Rs. 3,15,000.00
(iii) Freight and Insurance charges are not to be taken into account as the addition is being made to the value of the goods imported.
(iv) Landing charges @ 1% = Rs. 3,150.00
(v) Total value for the purpose of charging additional duty = Rs. 3,18,150.00.
Duty at project rate 25% + CVD 10% comes to Rs. 1,19,307/- (One Lakh nineteen thousand three hundred and seven).
(e) The manuals, imported by the courier agency of a value of US$ 3 million, will be subject to duty under heading 4911.99 of the tariff as follows:
(i) Value in US $ - 3 million - 30 lakhs dollars,
(ii) Converted in Indian Rs. (US $ 1 = Rs. 31.55) = Rs. 9,46,50,000.00
(iii) Notional freight of 20% or so is not to be added. Rather, actual freight, incurred by the courier agency in this case, has been ascertained from the importers which is Rs. 98,058 = 00 and the same be added to the value. Similarly, actual insurance cost, incurred, has been ascertained from the party as Rs. 356.00 and added lo the value.
(iv) Duty rate 35% ad valorum under notification No. 38/94 customs dated 1-3-94 + NIL COUNTERVAILING DUTY which works out to be Rs. 3,34,93,564.00.
(v) Total duty payable on the several cartons is Rs. 3,34,93,564/- (Three crores thirty four lakhs ninety three thousand five hundred sixty four) and, The same is confirmed under the provision Section 28 of Customs Act, 1962 applying the extended period of limitation.
133. The importers are, therefore, directed to pay the differential duty amounting Rs. 3,36,12,871/- (Three crores thirty six lakhs twelve thousand eight seventy one) as per (d) & (e) above-
134. The seven cartons, along with their contents, are liable to confiscation under Section 111(m) of the Customs Act, 1962 for non-declaration of their correct value. Section 111(d) has also been invoked in the show cause notice, but that is not applicable. I order confiscation of these manuals under Section 111(m) of the Customs Act, 1962. However, these are not available for confiscation now.
134. For rendering these manuals liable to confiscations, as aforesaid, the importers are liable to penalty under Section under 112(a) of the Customs Act, 1962. Section 112(b) is also invoked in the show cause notice, but that is not applicable. Having regard to the facts and circumstances of the case I impose a nominal penalty of Rs. 10,00,000.00 (Rs. Ten Lakhs only) on the importers under Section 112(a) of the Customs Act, 1962.
135. A very liberal view in the quantum of penalty has been taken on the ground that the importers were possibly under a bonafide impression that the manuals, except for their intrinsic value which was paid by them as the technology transfer fee, were of no commercial value as also contended in para 20.2 of their reply to the notice. Their bona fides are established from the fact that they informed the investigating officers about the receipt of these manuals from the courier agency immediately when asked for by the officers during investigation.
The said Show Cause Notice, confirmed in part and was dropped in respect of other issues. While RIL has preferred an appeal against that portion that confirms the demands and imposition of penalty the Department has filed an appeal against the dropping of the various charges and demands.
5.(a) The principal contentions raised in the department's appeal are that:
(i) The Manuals in question imported by courier mode are classifiable under Tariff Heading 98.03 and liable to duty at 200% ad valorem.
(ii) The amount of US$ 39 million towards know how/license fee is in-cludable in the assessable value of the machines imported later for the selling up of the PTA plant.
(iii) The amount of US$ 8 million towards Buying Commission is liable to be included in the assessable value of the said imported machines.
(iv) The amount of US$ 5 million in respect of Engineering Services Agreement is liable to be included in the assessable value of the said imported machines.
(v) The duty demanded in the Notice is sustainable and is required to be confirmed.
(b) The contentions raised by RIL in its Appeal and in reply to the Departments Appeal are that:
(i) That the Manuals were "Printed Books" exempted from payment of duty under Not. 38/94-Cus. dated 1.3.1994. The tests laid down by the Supreme Court in Gujarat Perstorp Electronics case is satisfied by the Manuals imported by RIL.
(ii) That in any case, the imported articles/entities are outside the purview of and do not attract Chapter Heading 98.03 as they are not "dutiable articles" and having been imported pursuant to a valid permission to import are out of the purview of Chapter Heading 98.03 of the Customs Tariff Act in view of Chapter Note 5 to Chapter 98.
(iii) That the demand in respect of Manuals is also barred by limitation as RIL had good reasons to believe that the Manuals were entitled for assessment as Printed Books in view of several decisions of the tribunal Roto Inks Private Limited v. Collector of Customs and Tata Consultancy Services v. Collector of Customs which were subsisting at the time of import. The correctness of these decisions came to be questioned much later in the year 2000.
(iv) In any event, in the alternative, even if the imported articles/entities are classifiable under Chapter heading 98.03, they are eligible to exemption and would be liable to lesser rate of duty under Notification 38/94-Cus.
(v) The amounts of US $ 1,30,000 in respect of the Engineering Services Agreement is not liable to customs duty.
(vi) The confiscation under Section 111(m) and imposition of penalty under Section 112(a) is invalid in law.
(vii) The demand raised in the Notice due to addition of various amounts under the above mentioned agreements towards know how licence fee, engineering services and buying commission is unsustainable in view of settled position in law and is liable to be set aside.
(c) Therefore the issues, that are required to be considered are:
(i) assessment of manuals imported through Courier.
(ii) Addition of amounts attributable towards the said agreements to the value of the equipment imported under Project Import Regulations for the PTA plant.
6. After hearing both sides and considering the material on record we find:
(a)(i) The extended period of limitation under the proviso to Section 28 CA' 62 was invoked at Para 47 of the Show Cause Notice as follows:
47. RIL has deliberately suppressed the actual amount payable for Basic Engineering Services and shown only US $ 120 thousand, though actually the said amount was US $ 3 Million. Further, when they imported technical documents relating to Basic Engineering through courier they have misdeclared the actual description and value of the same, knowing fully well that the contents of the 7 cartons were not company manuals and that the value was not zero but actually it was US $ 3 Million. The duty payable on the contents of 7 cartons received through courier service M/s. DHL Worldwide Express, works out to Rs. 22,15,82,916/-. Accordingly, the said goods valued at US $ 3 Million FOB Rs. 9,46,50,000/- (@ US $ 1 - Rs. 31.55), are liable for confiscation under Section 111(d) and 111(m) of Customs Act, 1962. RIL on account of deliberate misdeclaration and attempted evasion of duty, have rendered the goods liable for confiscation and accordingly they have also rendered themselves liable for penal action under Section 112 of Customs Act, 1962.
The relevant proviso to Section 28 of the Customs Act, 1962 prescribing the circumstances in which a demand may be issued for periods beyond the normal bar of time of six months, reads as:
Provided that where any duty has not been levied or has been short-levied or the interest has not been charged or has been part paid or the duty or interest has been erroneously refunded by reason of collusion or any willful mis-statement or suppression of facts by the importer or the exporter or the agent or employee of the importer or exporter, the provisions of this sub-section shall have effect as if for the words "one year" and "six months", the words "five years" were substituted.
(Emphasis supplied)
(ii) It is departments' contention that had the importer described the product, as technical documents relating to Basic Engineering instead of Company Manuals, the fate of the assessment would have been different. Similarly, had the importer declared the correct value of the Manuals, the fate would have been different. We are not persuaded to agree to this proposition. As the department, at no point of time, has been able to produce, during the proceedings, despite our having pointed out, the document relating to the declarations and process thereof in terms of Section 77 and 78 of CA '62. Therefore, there is no means, to know and for the Department to assert whether in the subject case the NIL assessment was on account of the NIL duty being applied or the duty applied at any rate (with an appropriate classification under the tariff) other than NIL but value being taken as NIL as declared or otherwise. There are however certain circumstances prevailing which indicate that indeed the classification/duty at the relevant point of time for the subject class of goods, whether they were described as Company manuals or as technical documents relating to Basic Engineering, was NIL.
(iii) At the time of import, i.e. in June 1994, the law on the subject of import of technical documents had evolved and formulated. The judgments of the Tribunal in Roto Inks Private Limited v. Collector of Customs and Tata Consultancy Services v. Collector of Customs 1991 (53) E.L.T. 452 clearly held then that the imported articles were classifiable under the prevailing Tariff Item 49.01. On a reference to the Larger Bench, in August 2000, in the case of Parsrampuria Synthetics Ltd. v. Commissioner of Customs, New Delhi reported in 2000 (38) RLT 846 also upheld the ratio in these decisions by holding that the expression 'printed books 'covered' printed material containing technical knowledge, 'drawings, designs, plans etc' As such the view taken earlier in Roto Inks case got reaffirmed by the Larger Bench. This judgment of the Larger Bench of the Tribunal ran a further course through the Supreme Court which upset that decision of the CEGAT on 30.8.2001 . The correctness of this judgment of the Supreme Court, upsetting the CEGAT decision, was doubted, by a Three Judges Bench of the Supreme Court in the case of Gujarat Perstorp Electronics case wherein the Court noted in Para 53 that "some of the tests applied in Parasrampuria Synthetics Ltd., were not relevant and appropriate". It is thus clear from the above that the issue as to whether 'Manuals' of the type imported by RIL could be understood & classified as Printed Books or not was a highly debatable one where more than one plausible views and opinions could co exist Plea of bona fide belief. In entertaining the view that the Manuals, imported by RIP, in the year 1994, being Books under 4901 & were exempted from payment of duty can be accepted & found. They cannot be held or accused of having willfully misstated or suppressed facts. The history of classification of the subject goods, would tilt the sale to a bona fide belief on part of RIL. We rely on Jaiprakash Ltd. v. Commissioner of C. Ex. Chandigarh Larsen & Toubro Ltd. v. CC.E. Raipur , Jaiswal Chemicals Pvt. Ltd. v. Collector of Central Excise Indore and Afcons Panting Joint Venture v. Commissioner of Customs & Excise Jallandhar 2004 (166) E.L.T. 207 (T).
(iv) At the relevant time of import, in June 1994, as per the law then prevailing. Notification No. 38/94-Cus. provided for Nil duty for articles in question classifiable under Chapter 49 and these were importable without payment of duty. In any case, in the facts and circumstances as above, the substitution of description from 'Technical documents relating to basic engineering' to 'Company manuals' by itself would have not lead one to believe a product to be something else to escape the appropriate levy. Both these descriptions, would have equally qualified for being considered for exemption under Chapter 49 read with Not. 38/94-Cus. as 'Books'. The department has not demonstrated as to how the description. "Manuals" amounts to a misdeclaration for "technical documents relating to basic engineering". Manuals 'Books' may contain any information and may consist of any type of documents relating to basic engineering. In fact, we find from the Know How Agreement, under Clause 2.2.1 of Appendix Two relating to FEEP that "The process and engineering design information listed in Sections 2.4-2.20 inclusive will be supplied by C&P in the form of a manual" (emphasis supplied). [Book II, page 465 of Department's Appeal]. Therefore, describing technical documents relating to basic engineering as manuals could not be a willful misstatement or misdeclaration or suppression of facts.
(v) Considering, if the goods in question were of a kind classifiable under heading 49.01 as Books and exempted from customs duty in terms of Not. 38/94-Cus. they could still have been classifiable under heading 98.03 and leviable to duty as Baggage. The admitted position is that they were imported by a Courier as his Baggage. We find that they could have not been classified under Heading 98.03 as Baggage for the reasons as follows:
Heading 98.03 reads-
98.03 All dutiable articles, imported by a passenger or 200% a member of a crew in his baggage.
Thus, for being covered by heading 98.03. it is necessary to put the imported article to the test of its classification, & to examine, whether or not they are dutiable. In the subject case, the heading that comes into application for such a test is Chapter 49 and Notification 38/94-Cus. As discussed above, since the goods did not attract any duty, therefore, they were not dutiable goods to attract classification under heading 98.03. In this we find direct support at Para 80 from the decision of the Hon'ble Supreme Court in the case of Associated Cement Co. Ltd. v. Commissioner of Customs . When there was no duty on Books applicable there would not be any grounds to invoke the extended period as has also been held by the Hon'ble Supreme Court at Para 57 & 58 in the case of Associated Cement Co. Ltd. v.. Commissioner of Customs (supra) by making an exception in the case referred to at Para 80 above. It is in this perspective that the question of the value declarations made, becomes merely academic, and of no consequence, when there was no duty itself. By the same token it also of little consequence as to what would be the classification/rate of duty as per law that may evolve later on or subsequently.
(vi) We therefore find & hold that, the Show Cause Notice having been issued on 24th March, 1998 i.e., much after a period of six months from the date of the import in June, 1994, the demands confirmed under the Heading 4911.99 or alleged as liable to be confirmed under Heading 98.03. is barred by limitation. Similarly & the Order of confiscation on the grounds of misdeclaration and penal consequent action on this account are set aside.
(vii) Since we are allowing RIL's Appeal with regard to the demand on Manuals on the ground of time bar, we do not consider it necessary to go into the various other arguments advanced by both sides on this issue.
(b) As regard the issue relating to the valuation of the Project Imports of capital goods by RIL we find that-
(i) there are three agreements, which RIL entered into as outlined earlier with which we are concerned. They are:
1. The know how & licence fee agreement US$39 Million
2. The engineering service agreement US$ 05 Million
3. The buying services agreement US$ 08 Million The question for determination is whether or not the consideration in the agreements is addable over and above the value of the equipments, which were contracted through an independent equipment supply agreement, imported for the project for which the agreements came to be executed. The contractor in all the cases is M/s John Brown except in the case of agreement at No. 1 above, which was earlier on assigned to John Brown but changed to IOC & P (ICI Chemical & Polymers Ltd). ICI&P are the holders of the Rights of ICI (Imperial Chemical Industries PLC) Patent and licenced technical know how for the manufacture of PTA by a particular process.
(ii) As regards the know how and licence fees, the main plank of the departments case rests on the premise that the Licence and know how agreement and the equipment supply agreement are inter related and mutually dependent and that the equipment supply agreement of John Brown has a direct nexus with the know how & engineering agreement with ICIC&P without which the ICI technology and engineering information could not have made the plant ready for operation. And that the entire engineering information relating to the equipments contracted to be supplied by John Brown was based on FEEP relating to ICI technology for which they were to pay US$ 39 million and that the name of the collaborators was changed from John Brown to ICI with the sole aim to suppress the link between technical know how and the plant etc. to be supplied by John Brown. These circumstances and facts, particularly the mutual dependence of the agreements on each other establish a clear nexus between ICI technology and the plant, machinery and equipment imported and thus the sum of US$ 39 million is addable to the equipment value in view of the judgment of Hon'ble Supreme Court in the case of CC v. Essar Gujarat .
(iii) On a careful examination of all the facts, circumstances and the position in law, we find that the contentions raised by the department to add the amount of US $39 Million to that of the equipments for resultant short levy, is not tenable as:
(a) The basic provisions under which an addition can be made are, as pointed above, under Rule 9 of the Rules. The relevant provisions are Rule 9(1)(b)(iv), (c) or (e) which we reproduce for ease of reference:
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) ...
(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) ...
(ii) ...
(iii) ...
(iv) engineering development, art work, design work, and plans and sketches undertaken elsewhere than in India and necessary for the production of the imported goods:
(c) royalties and licence fees related to the imported goods that the buyer is required to pay, directly or indirectly, as a condition of the sale of the goods being valued, to the extent that such royalties and fees are not included in the price actually paid or payable.
(d) ...
(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.
& A reading of the Rules accordingly indicates that, for Rule 9(1)(b)(iv), the value for engineering, development, art work, design work and plans and sketches can be added to the value of the equipment in case such work is necessary for the production of the imported goods and also that such value has not already been included in the cost of the imported goods. For Rule 9(1)(c), the royalties and licence fees are addable to the imported goods in case they related to the imported goods and are a condition of sale of the goods being valued. For Rule 9(1)(e), all other payments, which are to be made as a condition of sale of the imported goods, are to be added.
(b) The perusal of the agreement [Book II running pages 424 to 491 of Appeal No. C/189/2001-Mum filed by the department] illustrates that ICIC&P operated in the United Kingdom a plant for the manufacture of PTA by the Bromine assisted air oxidation of Par-axylene (Px) and possessed technical information, knowledge, experience and patent for the design, engineering, construction, operation and maintenance of plant to produce PTA by such process and had the right to grant licence for the use of such process. Accordingly in the said agreement Reliance obtained and ICIC&P granted to Reliance a licence to use the technical information and for design, engineering and construction of a plant for the manufacture of PTA in India and the use and sale of PTA worldwide. The technical information was the information, knowledge and experience relevant to the PTA process required to complete the engineering, design, construction and commissioning of the plant and for its operation and maintenance and included the FEEP. The plant was understood to be the one to be constructed by Reliance at Hazira in India employing the PTA process. The PTA process meant the process based substantially on the process employed by a subsidiary of ICI at the Effective Date in commercial plant at Kuan Yin, Taiwan, ROC for the production of PTA which process comprises a first stage in which Px is oxidized to produce crude Terephthalic Acid and a second stage in which this crude material is purified. The basis of design was the information required for the process design of plant and was set out in Appendix One of the agreement. The FEEP was a front-end engineering package consisting of design, drawings, specifications and technical data of agreed content, definition and scope which are to be produced by C&P from the Basis of Design for Contractor's use in respect of the Plant, and was set out in Appendix Two of the agreement. The Contractor was a person, to be employed by Reliance and approved by ICIC&P, skilled in the provision of engineering and procurement and construction services for petrochemical plants. That being the premises, what transpires is that in terms of the agreement ICIC&P were to give the technical know-how in the form of FEEP which was to be on the basis of a design which would then become the base for a Contractor to do further engineering to build the plant in India. By the agreement this would form the basis of putting into process a method whereby PTA could be produced in India by the use of the technology contained in the FEEP.
(c) The entirety of the agreement including the scope of the deliverable in form of the FEEP is thus seen to be an information for setting up a plant in India which plant, if set up in the manner provided including the sequence of the equipment as per the flow sheets and use of proprietary catalysts, is likely to guarantee the manufacture of PTA. Therefore, nowhere does it make a condition that the equipments which are to be imported for setting up the plant are a precondition in terms of this agreement or that it is a condition of the sale of those equipment that the licence fee herein needs to be paid as a condition of sale of those equipment. Besides the entire process is for manufacture of PTA in India and the payment for such a technology to be employed at Hazira in India. It is conceivable that this agreement could have materialized even without purchase of an equipment. Similarly, equipment could have been purchased without having to pay a licence fee under the agreement. Similarly, the equipment supply agreement also does not have a condition making it precedent that a licence fee needs to be paid for the equipment supply to happen. Since the licence fees to ICIC&P is not a condition of sale of the imported goods, addition under Rule 9(1)(c) will not be permitted. We also refer to Training Course on Customs Valuation published by Customs Organization which the Tribunal has on an earlier occasion in the case of Indo Gulf Corporation Ltd. v. Commissioner of Customs Mumbai relied upon, wherein it has been stated in lesson 12 as under:
I. Related to the goods The payment of the royalty or licence fee must, in some way, be attributable to the imported goods. That is, as a direct result of importing the goods, and the subsequent use of those goods after importation, a payment of royalty or licence fee must be made. For e.g. if an importer obtains the right to use a patented process, and pays a royally for obtaining that right, if he then imports goods which may or may not be used in that process would not be dutiable as the payment involves a manufacturing process and not the imported goods themselves.
Quite clearly the licence fee in this case is not attributable to these goods but rather to a process, which would be applied to the plant involving a manufacturing process in India and not the imported goods themselves. Further the contract for purchase of equipment is an independent and a distinct agreement. The fact that the licence fees was originally to be paid to John Brown who is also the procurer of the capital goods will not make any difference. All the agreements do refer to one another in so far as they are all meant to be corelated to the manufacturing process to be employed in India. This mutuality and interdependence by itself is not a nexus of a kind envisaged in the provisions of Rule 9 as above, to warrant an inclusion in the value of the equipment.
(d) We also take reference to the affidavit of evidence of Mr. Andrew David Knowles, Vice President (Project) of John Brown and the affidavit of evidence of Ms. Patricia Ann Thompson, Senior Project Accountant of John Brown tendered by RIL before the lower authorities during the proceedings [Volume II running Pages 318 to 380 of Appeal No. C/301 of 2000 filed by RIL]. The factual averments herein are not controverted in the proceedings by the Department. These Affidavits affirm that Equipment Supply Agreement is self contained and narrates that the licence fee of US$ 39 million paid by the Importer to ICIC&P had nothing to do with the equipment imported, and that the payment for the equipment was made towards the actual costs of the Vendors by the Importer through M/s. John Brown. There are voluminous records of reconciliation attached to the Affidavits.
(iv) A submission was made on behalf of RIL that the Apex Court judgment of Essar Gujarat is not applicable to the present case as the payment made was in respect of licence fee for manufacture of goods in India and the technical know how for setting up in India of a plant to manufacture goods namely PTA. The amount of US $ 39 Million was not in respect of equipments imported nor was it a condition of sale of the goods being valued. Considering the circumstances and the facts we would agree that the decision in the case of Essar Gujarat would not apply in this case as no plant is being imported, the import of which is possible only on payment of the licence fee. Therefore the reliance placed by revenue on the Essar case cannot be upheld in the facts of this case. On the other hand we are of the considered opinion that the present sets of circumstances and the position in law is as laid down by the Tribunal in its judgment in the case of NCL Industries Limited v. Commissioner of Customs and in Indo Gulf Corporation Ltd. v. Commissioner . We also take note of the decision of the Principal Bench, CESTAT, New Delhi in the case of Barbour Vardhaman Thread Ltd. v. Commissioner of Customs Mumbai 2006 TIOL 1037 CESTAT DEL wherein it has been held:
2. The appellant had entered into a joint venture with the foreign collaborator. There was a joint venture agreement under which manufacture, marketing, distribution and sales licence was to be undertaken. The licensed products were defined under that Agreement as follows:
LICENCED PRODUCTS shall mean such industrial sewing threads, twines and braids and related products as are manufactured by BVTL in accordance with the know-how and technology licensed by BARBOUR to BVTL from time to time under the Technical Collaboration to be executed by and between BSRBOUR and BVTL. A list of LICENSED PRODUCTS is attached hereto as Attachment and made part of this AGREEMENT.
...
5. On going through the terms and conditions of the Licence Agreement, we do not find any stipulation that the licence fees related to the imported machinery or that they were payable directly or indirectly as a condition of sale of the machinery. There is no other material adduced to show any such connection between the fees payable for the know-how under the said Agreement and the machinery imported for manufacture of threads. The consideration clause provided for a lump sum payment for the technical know-how by the licensor and other covenants of the licensor under the Agreement. Technical know-how was defined in the following terms in the said Agreement:
TECHNICAL KNOW-HOW - shall mean and made all inventions, processes, formulations, patents, engineering and manufacturing skills and other technical information relating to the LICENSED PRODUCTS whether patented or patentable or not, which are presently owned by the LICENSEE or which may be so owned during the term of this AGREEMENT including, limitation, general layout of production lines, general definitions and detailed list of equipment product designs and raw material specifications, operating and security instructions, selection of equipment, raw materials and finished products, quality control requirements, drawings for high wear parts, lists of suppliers and standard spare part, co-ordination of procurement, inspection and dispatch of plant and equipment and bought out components and erection and commissioning of the plant.
The licensed products in respect of which foreign collaborator supplied the Technical know-how as stated in the Agreement did not specify machinery. From the terms of the Agreement, it is not possible to infer that any amount of consideration contemplated in Article 6, was for the machinery which was imported.
5.1. ...
Since the Revenue has not been able to establish any nexus between the licence fees and the imported goods by showing that the buyer was required to pay, directly or indirectly as a condition of the sale of the goods being valued, the license fees, the Commissioner (Appeals) was not justified in including the amount payable under the know-how Agreement in the price of the goods in question.
In view of above we hold that the know-how/licence fee of US $ 39 Million is not addable to the value of the goods under Rule 9(1)(c) or 9(1)(e).
(v) The Department raised certain issues with respect to the Front End Engineering Package (FEEP) and sought to be included in the assessable value of the imported articles by invoking Rule 9(1)(b)(iv). It was submitted on behalf of RIL that the FEEP relates to setting up of the Plant in India. The design and engineering with respect to each component of the Plant which is imported would be undertaken, done and implemented by the supplier of each such component or equipment and the cost of such engineering is necessarily factored into price/value of each component. The FEEP has nothing to do with the design or engineering of the individual component. Similarly, since the licence fee brought about the right to use the process in India and gave technical information in the form of FEEP, by itself was not the basis on which the goods were manufactured as they provided only a base for which a further engineering was to be carried out. Therefore the provisions of Rule 9(1)(b)(iv) will not apply in relation to the licence fee in question as they are not related to the goods. As to the issue whether or not the value of the information in the FEEP should be included in the assessable value of the imported equipment under Rule 9(1)(b)(iv), reference was drawn to the lucid elucidation in the Commentary on the GATT Customs Valuation Code by Sherman & Glashoff edition as under:
Detailed specifications, including various dimensions noted on a drawing of the machine, are included in the buyer's order, so as to advise the exporter/manufacturer of what the buyer needs. The cost of engineering and drawing are not part of customs value, even if under taken outside the country to which the machine is shipped, to the extent that they are an appropriate way of ordering the machine that is, of telling the manufacturer the specifications of what is being ordered. Only if the engineering or drawing goes further should it be deemed to be a part of the production process. Upto that point, each specification and instructions is more appropriately regarded as an added requirement or burden imposed upon the manufacturer, rather than a form of assistance. Otherwise expressed, these are buying costs, not costs of the seller from which he is being relieved by the buyer.
In our opinion, this would succinctly put the issue in its proper perspective. Accordingly, the FEEP cannot be said to be engineering sketches etc. needed for the production of the equipments. As a result Rule 9(1)(b)(iv) is not applicable.
(vi) We therefore hold that the Commissioners findings on this issue as contained at paragraphs 98 to 116 [Pages 160 to 167 Appeal No. C/189/2001 filed by the department] of the impugned Order are unassailable.
(vii) As regards the "engineering services fees", it was contended by the Department that the Commissioner had erred in holding that out of US$5 Millions relating to Engineering services, only an amount US$ 1,30,000 is addable to the value of the equipment on account of preparation of technical specification, requisitions and carrying out technical evaluation of bids and providing technical recommendation related to the equipment. It was pleaded that the services to be rendered by John Brown are relating to fabrication, manufacturing, assembling etc. of we non-Indian goods to be imported for setting up of the plant and hence liable to be included in the value of he equipment in view of the Apex Courts decision in the case of Andhra Petrochemicals v. CC Madras . In short, but for the ICI PTA technology and John Browns engineering information, the vendors abroad could not have fabricated the imported equipment. We observe, that only additions in this case can be attributable only to Rule 9(1)(b)(iv). Rule 9(1)(c) and (e) are inapplicable as this agreement does not provide for any pre-condition for the sale of the equipment. We have, at length in the preceding paragraphs found & observed the manner in which this Rule has to be applied. It is not the case of the department that either RIL or John Brown had supplied the engineering work necessary for production of the imported goods in question. The Commissioner in his Order at Para 122 to 130 (Pages 169-174 of Appeal No. C/189/2001 filed by the department) has brought out the factual position in relation to the scope of work being attributable to the plant in India at the commissioning phase etc. The Department does not rebut this. The only portion possibly attributable to the imported goods was US$ 1,30,000. We have also independently shown that such an activity to prepare equipment specifications as a basis for what needs to be ordered is not a service envisaged in Rule 9(1)(b)(iv). For the balance portion the Commissioner has given cogent reasoning and we cannot persuade ourselves to disagree with the same. In totality therefore, we hold that the judgment of the Supreme Court in Andhra Petrochemicals is not applicable in the present case and no amount of this agreement is includable in the value of the imported goods. Accordingly, the duty confirmed by the Commissioner on this score is set aside and RIL's appeal on this point is upheld.
(viii) Dealing now with "buying services commission" we find that the relevant Rule in respect of Commission provides:
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) Commissions and brokerage, except buying commissions;
The Department contends that the Buying Services Agreement is only a camouflage to exclude the profit of John Brown from the assessable value as under Valuation Rules 9(1)(a)(iv) buying commissions are excluded from the addition to the assessable value of the imported equipments. It was contended that John Brown were sellers and if they were sellers, there was no question of paying any commission to the sellers as the commission is paid only to an intermediary. We find that there is an improper appreciation of the position by the Department. The Commissioner at Para 117 to 121 (Pages 167-169 of Appeal No. C/189/2001 filed by the department) has clearly set out the reasons why this amount is not addable to the assessable value of the equipment and we find that the Departments argument above does not deter the role of John Brown in the facts and circumstances expounded in the Commissioners Order. We find that the Department misunderstands the status of John Brown. John Brown is not the seller, but is a person who organizes supply of various components to set up the Plant in India. The entire price paid for the components is given over to the Vendors and John Brown is merely paid a commission for organizing the procurements of the equipments. The price paid over to the Vendors includes Vendor's profit. Article IV of the said agreement clearly spells out the kind of activities undertaken by John Brown. The said agreement clearly shows that John Brown has offered buying services only and is not a seller. These facts are also evidenced in the Affidavits referred to at Para 43 above. Thus, in terms of Rule 9(1)(a)(iv) of the said Rules, the said amount cannot be added to the assessable value of the imported equipments.
(c) In view of the foregoing findings, there are no grounds to invoke Section 28AB and 114A Customs Act, 1962.
(d) The Appeal of RIL is accordingly allowed and that of the Revenue is dismissed.
Pronounced in the Court on 6.9.2006.