Customs, Excise and Gold Tribunal - Mumbai
Indo Gulf Corporation Ltd. vs Commissioner Of Customs on 31 December, 2004
Equivalent citations: 2005(182)ELT77(TRI-MUMBAI)
ORDER S.S. Sekhon, Member (T)
Brief Facts 1.1 The appellants are engaged in the manufacture of copper and copper products in their smelter plant located at Dahej in the State of Gujarat They had entered into on 12.11.1994, the following agreements with M/s. Outokumpu Engineering Contractors, Finland, (hereinafter referred to as Outokumpu) for setting up of that copper smelter planet at Dahej.
Sr.No. Nature of Agreement Consideration
1. Licence Agreement dated 12.11.1994 US$ 31,82,000
2. Delivery of Proprietary Equipments dated US$ 2,10,25,000
12.11.1994
3. Basic Engineering, Training and Technical Services
Agreement dated 12.11.1994
a) Basic Engineering US$ 48,34,000
b) Training US$ 4,85,000
c) Supervision and Procurement Services As specified in
d) Additional Work, Additional Training Agreement
2.1 The appellants imported various capital goods from Outokumpu. The list of such capital goods imported by the appellants from Outokumpu is ("Vol.1 Page 66") Annexure A to this order.
2.2 In addition to import of capital goods from Outokumpu, the appellants had imported various capital goods from others i.e. other than Outokumpu. Which are detailed at pages 67 to 69 of Vol. 1 of paper book.
2.3 They also procured various capital goods indigenously as per details pages 72 to 76, Vol. 1 of paper books.
2.4 Thus, the 'copper smelting plant' in India was set up by the appellants to manufacture copper, with the capital goods and other items procured from the sources mentioned in paras 2.1 to 2.3 above.
3 The imports of the capital goods was made under Project Import & under 4.1 The Assistant Commissioner of Customs after examining all the aspects, by the speaking order dated 8.11.96 held that the Licence Fees of US $ 31,82,000/-and the basic engineering fees of US $ 48,34,000/- paid by the appellants to Outokumpu are not includible in the value of the capital goods imported by the appellants from Outokumpu.
4.2 No dispute was raised by the department with regard to other payments made to Outokumpu under the Basic Engineering agreement, such as for training, supervision of installation and commissioning fees recovered for carrying out the activities.
5.1 This order dated 8.11.96 of the Assistant Commissioner of Customs was reviewed by the Commissioner of Customs Under Section 129D(2) of the Customs Act, 1962 and an appeal was filed before the Commissioner of Customs (Appeals). The department contending that the payment of License Fees and Basic Engineering were a condition of sale of the equipments by Outokumpu and hence the same are to be included in the value of the capital goods. Commissioner of Customs (Appeals), Mumbai vide order-in-appeal dated 29.6.98 remanded the matter to the Dy. Commissioner of Customs for fresh decision in accordance with the law.
5.1. On remand, the Deputy Commissioner of Customs vide order dated 29.9.2001 passed an order-in-original holding that the License Fees and Basic Engineering fees are includible in the value of the capital goods imported by the appellants from Outokumpu. On appeal by the appellants before the Commissioner (Appeals), Mumbai, the Commissioner (Appeals) vide impugned order-in-appeal dated 30.1.2002, rejected the appeal on the ground that the earlier order-in-appeal dated 29.6 98 has attained finality and therefore nothing survives in the matter. Commissioner (Appeals) did not go into the merits of the matter.
5.2 The present appeal has been filed against the aforesaid order-in-appeal dated 30.1.2002.
6.1 After hearing both sides and considering the material it is found-
6.2 Remand Order dated 29.6.98 passed by the Commissioner (Appeals) in the first round is an 'open remand' as-
a) The Supreme Court in Jasraj Inder Singh v. Hemraj Multanchand -(1977) 2 SCC 155, at page 164, para 15 held as under :
" 15. Be that as it may, in an appeal against the High Court's finding, the Supreme Court is not bound by what the High Court might have held in its remand order. It is true that a subordinate court is bound by the direction of the High Court. It is equally true that the same High Court, hearing the matter on a second occasion or any other court of coordinate authority hearing the matter cannot discard the earlier holding, but a finding in a remand order cannot bind a higher court when it comes up in appeal before it. This is the correct view of the law,....."
In 2000 (120) ELT 3 (SC) - CCE v. Hindustan Lever Ltd., the very objection raised about non filing of appeal against the remand by the assessee, was rejected by the Hon'ble Supreme Court. In that case, the CEGAT had allowed 'damage discount' claimed by the assessee in respect of earlier period and remitted the matter back for de novo consideration for other issues. Thus, the issue relating to 'damage discount' attained finality. In the subsequent proceedings, the orders disallowing the damage discount was set aside by the CEGAT by the order dated 30.3.98 [reported in 1999 (112) ELT 304 (Tri)]. This Order dated 30.3.98 was challenged in Supreme Court by the department. Before the Supreme Court, the assessee raised a preliminary objection that the issue relating to 'damage discount' has attained finality and the department cannot reopen the said issue. The Supreme Court rejected this objection of the assessee on two counts. Firstly the Supreme Court held that this point was not urged by the assessee before the CEGAT and hence the assessee cannot urge this point before Supreme Court. The Supreme Court held thus:
"5. We will first deal with the objection of Shri Divan which is in the nature of a preliminary objection. As noted, he contended that the issue in question is finally decided inter se between the parties in an earlier proceedings which was not challenged by the Department; therefore, so far as the parties to these appeals are concerned, the matter stands concluded and the parties cannot reopen the said issue. It is true that this issue was decided by the Tribunal in the earlier round of litigation primarily relying upon two orders to which we have already made reference; the correctness of that finding was not challenged in this Court because the matter stood remanded to the original Authority. In spite of this finding of the Tribunal, the parties again joined issue before the original Authority on this issue by producing materials like affidavits and made their submissions based on which the original Authority gave a finding against the respondent, who took the matter in appeal before the Appellate Commissioner and having lost before the Appellate Commissioner, the respondent once again took the matter before the Tribunal From the materials on record, we do not find any argument based on finality of the decision having been urged before the Tribunal nor the Tribunal having decided this issues on that basis. On the contrary, it seems that the Tribunal considered the issue afresh but, relying on the two decisions referred to above, once again decided to hold in favour of the respondent which decision is now under challenge before us. Therefore, on facts, finality is not the ground on which the Tribunal allowed the appeal...".
(emphasis supplied) After holding so, the Supreme Court also held that in law, a remand order of the lower Court will not bind the higher Court. The Supreme Court in para 5 held as under:
"5.....That apart, even in law, so far as this Court is concerned, it is not bound by the finding of the Tribunal rendered in the first instance while remanding the case to the lower authorities because this Court is now hearing an appeal against the order of the Tribunal in which the earlier order has merged This Court in the case of Jasraj Inder Singh v. Hemraj Multanchand [(1977) 2 SCC 155] has held :-
"In an appeal against the High Court's finding the Supreme Court is not bound by what the High Court might have held in its remand order. It is true that a subordinate court is bound by the direction of the High Court. It is equally true that the same High Court, hearing the matter on a second occasion or any other court of coordinate authority hearing the matter cannot discard the earlier holding, but a finding in a remand order cannot bind a higher Court when it hears the matter in appeal." (Emphasis supplied) The above decision of Supreme Court in Hindustan Lever (supra) was followed by the CEGAT in the case of Mil India Ltd. - 2003 (158) ELT 717 (T).
b) Independently, the CEGAT in Uma Laminated Products - 1989 (40) ELT 152 (T) held as under:
6. ....... The question, therefore, to be considered would be whether this Tribunal is bound to follow the finding recorded by the Appellate Collector in the earlier stages.
*** *** ***
9. Thus the Supreme Court held that when, in the course of the same proceedings, the matter comes up before an authority superior to the Appellate authority which passed the order of remand, the findings contained in the order of the remand would not be binding on the said superior authority which is entitled to go into the entire matter afresh without being shackled by the findings of the lower appellate authority as recorded in the order of remand....."
(c ) In view of this settled legal position, non-filing of appeal by the appellants against the order-in-appeal dated 29.6.98 (passed in the first round) does not debar the appellants from contesting the demand on merits before the CEGAT. This is because, the remand order dated 29.6.98 passed by the Commissioner (Appeals) has been merged with the impugned order dated 30.1.2002. There is no necessity for the assessee to file an appeal against the very remand order since after remand, the adjudicating authority may pass an order in favour of the assessee. Therefore, by filing of an appeal against the remand order, the assessee not only burdens the higher appellate authorities with unnecessary appeal, he is also burdened with unnecessary litigation work. Where the order passed after remand is against the assessee, he has every right to contest the same by way of filing appeal in the higher forum In view of this, the Courts have consistently held that the remand order cannot bind the higher appellate authorities. In view of this settled legal position, non-filing of appeal by the appellants against the order-in-appeal dated 29.6.98 (passed in the first round) does not debar the appellants from contesting the demand on merits before the CEGAT. This is because, the remand order dated 29.6.98 passed by the Commissioner (Appeals) has been merged with the impugned order dated 30.1.2002.
6.3 Supreme Court's decision in Flock India is not applicable to the present case as
(a) The judgment of the Supreme Court in Flock India 2000 (120) ELT 285 Sc) has been rendered by two learned Judges while the judgment of the Supreme Court in Hindustan Level is rendered by three learned Judges, & is therefore applicable in this case 6.4 There is no challenge by the_department on the finding of the Assistant Collector that the licence fee is not related to imported goods and that the basic engineering fees related to post-importation activities as
a) (1)After examining the applicability of Rule 9(1)(c) of the Customs Valuation Rules vis-a-vis the three agreements in question, the Assistant Collector in order dated 8.11.96, categorically held that the licence fees do not relate to the capital goods imported by the appellants from Outokumpu and it is also not a condition of sale of the equipments by Outokumpu. As regard includibility of basic engineering fees to the value of capital goods Under Rule 9(1)(b)(iv), the Assistant Collector held that the fees paid under the basic engineering by the appellants to Outokumpu is related to post-importation activities i.e. for setting up the entire plant in India and hence the said fees does not relate to production of imported goods.
(ii) In the appeal filed by the department before the Commissioner (Appeals) no challenge was made to above conclusion arrived by the Assistant Collector. The only challenge made, by the department before the Commissioner (Appeals), was that the licence fees was a condition of sale of the equipments by Outokumpu.
(iii) The Commissioner (Appeals) also, vide remand order dated 29.6.98 had held that the licence fees paid by the appellants to Outokumpu was a condition of sale of the equipments and hence liable to be included in the value of the capital goods. Thus, the finding that the Licence fees and design and drawing fees paid by the appellants to Outokumpu are not related to the imported goods has become final.
(iv) Appellants submitted that for invoking the provisions of Rule 9(1)(c), two conditions should be satisfied Firstly the license fees paid by the appellants should be related to the imported goods. Secondly, the license fees was paid as a condition of sale of the equipments. If any one of the above conditions is not satisfied, then Rule 9(1)(c) cannot be invoked.
(v) The department did not challenge the finding of the Assistant Collector that the License Fees did not relate to imported goods Only contention of the department before the Commissioner (Appeals) was that the license fees was paid as a condition of sale of the equipments by Outokumpu. There is force in submission that by that token only. Rule 9(1)(c) cannot be invoked.
6.5 According to Commissioner (Appeals), the present case is similar to the decision of CEGAT in Him son Textiles.
a) The Commissioner (Appeals) in his remand order dated 29.6.98 held that the facts of the present case are identical to the decision of the CEGAT in the case of Himson Textile Engg. - 1997 (93) ELT 301 (T). This decision of the CEGAT was set aside by the Supreme Court vide judgment reported in 2000 (117) ELT 535 (SC) wherein it was held by Supreme Court that its decision in Essar Gujarat is not applicable to the case of Himson Textiles. In that view the present case also, the judgment of the Supreme Court in Essar Gujarat cannot be applied since the present case is similar to Himson Textiles & there is no challenge to this finding of the Commissioner. Thus, the only contention raised by the department in the appeal before the Commissioner (Appeals) that in view of the Essar Gujarat judgment, the license fees is includible, cannot be a valid.
6.6 INCLUD1B1L1TY OF BASIC ENGINEERING FEES OF US $ 48.34.000/-TO THE VALUE OF IMPORTED CAPITAL GOODS
a) It was submitted that Services, rendered by Outokumpu under Basic Engineering Agreement related to setting up of the plant in India.
Approval of this Basic Engineering agreement reveals
(i) Article 1 of the agreement defines various terms used in the agreement.
'Basic Engineering' has been defined in the agreement (page 136) as under:
'Basic Engineering' shall mean the Engineering Services for plant as defined in "Appendix-I hereto".
"Plant" has been defined in the agreement at page 137A as under:
"Plant shall mean the Industrial Complex to be constructed by IGFCC, including but not limited to a smelter based on the Outokumpu Flash Smelting technology with Peirce-Smith converting method, an electrolyte refinery, a precious metals plant, a sulfuric plant based on the Monsanto technology and an effluent treatment plant, and having a capacity of 100,000 metric tons of copper cathodes per annum, which capacity can be upgraded to 150,000 metric tons of copper cathodes per annum as per Appendix-2."
(ii) Engineering services rendered by Outokumpu under this agreement are listed in Appendix-I of this Basic Engineering agreement. From the same it is found various engineering services performed by Outokumpu were for the plant to be set up in India. The services essentially instruct and advice the appellants as to how the plant should be set up in India and also advise what are the equipments to be bought by appellants and other allied services. As part of these services, Outokumpu had to and did indeed prepare a detailed project report on the environmental aspects which was uitlised by the appellant to get clearance from the Central Government and State Government and also from the Gujarat Pollution Board to set up the plant in India.
From the Illustrative copies of basic engineering documents received by the appellants from Outokumpu as Under this agreement, a number of documents were supplied by Outokumpu to the appellants in order to set up the plant in India. It can be inferred that these documents informed the appellants how and where the various equipments have to be installed in India. Since the services rendered by the Outokumpu under this agreement are found to be for setting up of the Entire plant in India; the fees paid by the appellants under this agreement cannot be said to be a fee for Engineering Services required for the production of the imported goods. The services rendered by Outokumpu under Basic Engineering agreement are found to be for setting up of the plant in India involving installation and integration of various capital goods imported from Outokumpu, imported from others and also procured indigenously. Such services do not relate & can be ascribed to the any of the equipments imported by the appellants.
(e) It is found Interpretative Note to Rule 4 of Customs Valuation Rules 1988 supports the above findings. The relevant portion of the Interpretative Note to Rule 4 is reproduced below:
"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;"
Thus it is to be held that the fees paid by the appellants to Outokumpu under the Basic Engineering Agreement is for the purpose of setting up of a copper value smelting plant in India and such charges will not from part of the 'transaction value' of the imported capital goods by virtue of Interpretative Note to Rule 4 of Customs Valuation Rules, 1988.
6.7 Decision of Supreme Court in Tisco's case squarely fees paid under the basic engineering agreement is not includible in the value of the imported goods as
a) In 2000 (116) ELT 422 (SC) in the case of TISCO v. CCE, the Supreme Court relying on the Interpretative Note to Rule 4 held that the charges for construction etc. of goods in India is not includible in the value of goods imported. In that case, there were two agreements entered by TISCO with the foreign supplier. One agreement related to supply of capital goods and the other agreement related to rendering of services including erection of the plant in India. The Court held-
"17. So far as Interpretative Note to Rule 4 is concerned it is no doubt true that the Interpretative Notes are part of the Rules and hence statutory. However, the question is one of their applicability. The part of Interpretative Note to Rule 4 relied on by the Tribunal has been couched in a negative form and is accompanied by a proviso. It means that the charges or costs described in Clauses (a), (b) and (c) are not to be included in the value of imported goods subject to satisfying the requirement of the proviso that the charges were distinguishable from the price actually paid or payable for the imported goods. This part of the Interpretative Note cannot be so read as to mean that those charges which are not covered in Clauses (a) to (c) are available to be included in the value of imported goods. To illustrate, if the seller has undertaken to erect or assemble the machinery after its importation into India and levied certain charges for rendering such service the price paid therefore shall not be liable to be included in the value of the goods if it has been paid separately and is clearly distinguishable from the price actually paid or payable for the imports goods. Obviously, this Interpretative 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 third para of 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 impelled goods, they were relatable to post-import activity to be undertaken by the appellant."
Emphasis Supplied Thus decision of the Supreme Count in TISCO (supra) has been followed by this Tribunal in the following cases:
(a) 2001 (130)ELT 327 (T) TISCO v. CC
(b) 2001 (129) ELT 245 (T) Hindalco Industries v. CC
(c) 2001 (138) ELT 328 (T) Birla Tyres v. CC While in the following cases, CEGAT has held that post-importation charges such as erection etc. are not includible in the value of the imported capital goods. These decisions were rendered by the CEGAT before the decision of Supreme Court in Tisco (supra).
(a) 1992(62)ELT 833 (T) CC v. VSP 6.8 It is founds Rule 9(1)(b)(iv) of Customs Valuation Rules cannot be invoked to add the basic engineering fees to the value of the capital goods imported from Outokumpu as-
a) The Relevant portion of Rule 9(1)(b)(iv) is extracted below:
"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 extend 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."
on perusal of the same, it is apparent that the above rule will come into play only in a situation where any engineering, development or art work, etc., has been supplied by the buyer free of charge or at reduced cost. The further requirement of this rule is that such engineering, development or art work, etc. should have been undertaken elsewhere than in India and it should be necessary for the production of imported goods. It is nobody's case herein, that the appellants, ie the buyer i.e. had supplied any engineering, development or art work, etc. to the exporter i.e. Outokumpu. None of the imported goods (imported either from Outokumpu or from others) were allegedly made with the help of or with reference to any engineering, development or art work, etc. supplied by the appellants free of charge Hence, Rule 9(1)(b)(iv) is not applicable to the facts of the present case. On the other hand, the equipment supply contract entered into by Hence, the question of adding the basic engineering fees to the value of the capital goods imported from Outokumpu Under Rule 9(1)(b)(iv) does not arise. In any case, the learned the Department fairly concedes and confirms that Rule 9(1)(b)(iv) is not applicable to the facts of the present case. On the otherhand, the quipment supply contract entered into by the appellants with Outokumpo specially states that the price paid by the appellants to outokumpo for the capital goods includes the cost of design also. Hence, the question of adding the basic engineering fees to the value of the capital goods imported from Outokumpo Under Rule 9(1)(b)(iv) does not arise. In any case, the learned the Department fairly concedes and confirms that Rule 9(1)(b)(iv) is not applicable in the present case. The Commissioner (Appeals) also in his order did not invoke this rule to for including the basic engineering fees to the value of the capital goods.
6.9 ON INCLUDIBILITY OF LICENCE FEES OF US $ 31.82.000 PAID TO OUTOKUMPU TO THE VALUE OF THE IMPORTED CAPITAL GOODS
a) License fees paid by the appellants to Outokumpu is for obtaining the right to use the technology of manufacture of copper matte by the appellants and not related to capital goods imported from Outokumpu or from others as
(g) The license fees paid to Outokumpu of USD 31,82,000, was for the purpose of obtaining technical know-how for the manufacture of copper in India by a process known as Outokumpu Flash Smelting Technology. The recital to the licence agreement provides as under:
"WHEREAS LICENSEE desires to obtain from LICENSOR a licence to practice the Outokumpu Process together with LICENCEOR'S technical and commercial information rights fro the design, construction and operation of a copper smelter plant to be located in India..
The same agreement at pages 4 and 4A, Vol. 1, defines 'Outokumpu Process' and 'technical information', 'plant', 'plant section', 'process equipment' as under:
Outokumpo process' shall mean the process developed by Outokumpo for smelting raw materials consisting of sulphate bearing copper concentrates into copper, matte and slag. For the meaning of this agreement, the Outokumpo Process comprise the following elements.
(i) Bringing together said concentrate in finely divided form and a controlled volume of air or oxygen enriched air, which can be preheated, solely at a single position at the beginning of their path of movement, reacting said air with raw material at the position where they are first brought together, causing said air and said raw material reacting therewith to move smoothly downwardly in a vertically elongated horizontally restricted path, with continuous reduction of the partial pressure of oxygen in the air while increasing the reaction velocity through rise in temperature in the course of the movement to produce at the lower end of said path a molten charge and hot combustion gases, directing said combustion gases in a horizontal path at the base of said vertical path, collecting said molten charge beneath said combustion gases in said horizontal path, and separating said molten charge into layers of matte and slag, directing said matte and said slag out, cleaning said slag, recovering dust of and directing out said hot combustion gases in which sulphur is mainly in form of SO2, and
(ii) Technical information, being all necessary information, technical data and know-how relating to and for carrying out the Outokumpu Process set out in subparagraph (i) above, and
(ii) Commercial information which shall mean all cost, purchasing, sales and other business information given by LICENSOR to LICENSEE in the negotiations leading up to the completion of this Agreement and in connection which the design construction and operation of the Flash Smelting Furnace of LICENSEE as provided for by this agreement.
'Plant' shall mean the industrial complex to be constructed by LICENSEE, including but not limited to a smelter based on the Outokumpu Flash Smelting technology with Peirce Smith converting method, an electrolytic refinery, a precious metals plant, a sulfuric acid plant, and an effluent treatment plant, and having a capacity of 100,000 metric tons of copper cathodes per annum, which capacity can be upgraded to 150,000 metric tons of copper cathodes per annum as per Appendix 2 of the Basic Engineering Agreement.
'Plant Section' shall mean individually the smelter and the sulphuric acid plant, the electrolytic refinery, the precious metals plant, and the effluent treatment plant, each within the battery limits given in Appendix I of he Basic Engineering Documents.
'Process Equipment' shall mean process system or systems and all associated equipment incorporated in the Plant necessary for carrying out the Outokumpu Process".
In Article 3 relating to Grant, Article 3.1 provides as under:
"3.1 Grant by LICENSOR LICENSOR agrees to grant and hereby does grant to LICENSEE subject to terms and conditions hereinafter set forth, a non-exclusive licence to the technical and commercial information needed for carrying out the Outokumpo Process and to the improvements to use Outokumpo Process at its Plant up to the Licence Capacity which licence shall be non-transferable except as hereinafter otherwise expressly provided. Such licence shall include the right to make or have made Process Equipment for LICENSEE'S use in the Plant and not covered by letters patent held by third parties or otherwise unavailable to LICENSOR. This licence which refers to the Plant only does not include the right to grant sub-licence.
Thus, the licence agreement is for grant for licence (right) to use the Outokumpu technology by the appellants to smelt the copper concentrate to copper matte. Copper is known to be manufactured by various methods. One of these methods is Outokumpu Flash Smelting technology. Which essentially consist of smelting the concentrate to extract matte which is then converted into pure copper. In the vertical shall furnace, finely divided concentrate and oxygen enriched air come in contact. In a flash the concentrate melts and falls in droplets at the bottom of the furnace where slag and matte is separated. The technology supplied by Outokumpu is in the regulated flow of droplets of molten concentrates without damaging the furnace.
6.10 Rule 9(1)(c) can be invoked only when both the conditions are satisfied cumulatively and simultaneously as
a) Reading of Rule 9(1)(c) of Customs Value Rule 1988 reveal that Rule 9(1) (c) can be invoked only if the following conditions are satisfied cumulatively and simultaneously:
(i) license fees is relatable to the imported goods; and
(ii) license fees is a condition of the sale of the imported goods.
Even if any of the above conditions is not fulfilled, then Rule 9(1)(c) cannot be invoked. Consequently, the license fees paid by the importer-buyer cannot be included in the value of the capital goods. The Capital goods as imported from Outokumpu, as listed herein above are standard goods, otherwise available as off-the-shelf capital goods. They are not proved to or alleged to be otherwise These capital goods, are offered for sale by others, Therefore, Licence Fees in this case do not relate to imported capital goods.
b) As, in the present case, the Licence Fees paid to Outokumpu by the appellants was for manufacture of copper matte from the copper concentrate. The fees paid were not for the manufacture of capital goods imported by the appellants.
c) The manufacture of copper is carried out by the appellants in the plant set up in India by installing and erection capital goods imported not only from Outokumpu but from others also.
6.11 (d) Reliance was placed on the following decisions in support of the plea that, Licence fees not includible in value of capital goods:
a) Vestass RRB India v. CC Final Order No. 844/00 - A dt. 13.10.2000
b) Daewoo Motors India v. CC 2000(115) ELT 489 (T)
c) CC v. Modi GBC 1999(114) ELT 931 (T) Affirmed in 2000 (120) ELT A 70 (SC)
d) Feroda India Pvt.Ltd. v. CC 2002 (142) ELT 343 (T)
e) DCM Shriram Consolidated Ltd. v. CC Mum.
2003 (153) ELT 317 (T)
f) Hoerbiger India P. Ltd. v. CC Mum.
2003 (156) ELT 62 (T)
g) Panalfa Dongwon India Ltd. v. CC Mum.
2003 (155) ELT 287 (T).
h) Polar Marmo Agglomerates Ltd. v. CC Delhi 2003 (155) ELT 283 (T)
i) S.D. Technical Service v. CC 2003 (56) RLT 970 (T)
j) Associated Cement Companies Ltd. v. CC 2003(59) RLT 574 (T)
k) Living Media India Ltd. v. CC 2002(148)ELT 441 (T)
l) Mando Brake Systems India Ltd. v. CC 2004 (163) ELT 333 (T)
m) SRF Ltd. v. CC 2003 (161) ELT 721 (T)
n) MDS Switchgear Ltd. v. CC 2003 (151) ELT 421 (T)
o) Final Order No. 444/04 NB(A) dated 19.05.2004 Karnataka Petrosynthesis v. CC, Bangalore
(p) 1987 (28) ELT 390 (Tri) CC v. Maruti Udyog Ltd.
Affirmed by Supreme Court
b) Reference was also be made to Training Course on Customs Valuation published by World Customs Organization. Wherein it has been stated in lesson 12 as under:
"1. Related to the goods The payment of the royalty or license 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 license fee must be made. For e.g. if an importer obtains the right to use a patented process, and pays a royalty 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."
(Emphasis Supplied) & nothing contrary shown would induce to find that the amounts as proposed cannot be reduced for Custom Valuation.
6.12 The capital goods imported by the appellants from Outokumpu or from others do not incorporate the Hash smelting technology for which license fees was paid to Outokumpu. Consequently, the license fee is not related to imported goods as
d) In the present case, there are two imports viz. one of intangibles (technical know-how) and the other tangibles (capital goods). It is pleaded if the technology is incorporated in the capital goods, then there is only one import into India. Consequently for the purposes of valuation, the value of the capital goods will include the payments made for the intangibles also since the only practicable use of the goods will be only when it incorporates the patented process. This submission is explained with an illustrative given in Advisory Opinion 4.12 of the Technical Committee on Customs Valuation, World Customs Organization.
"Advisory Opinion 4.12 reads as under:
"1. Importer I and seller S enter into a sales contract for the supply of rolling mill equipment. This equipment is to be incorporated into a continuous copper rod plant already existing in the country of importation. Incorporated in the rolling mill equipment is technology involving a patented process which the rolling mill is intended to perform. The importer, in addition to the price of he equipment, has to be paid 15 million c.u. as licence fees for the right to use the patented process. Seller S will receive payment for the equipment and the license fee from the importer, and will then transfer the entire amount of the license fee to the licensor.
2. The Technical Committee on Customs Valuation expressed the following view.
The license fee is for a technology incorporated in rolling mill equipment which enables it to perform the patented process. The rolling mill equipment has been purchased specifically to carry out the patented production process. Thus, since the process of which the 15 million c.u. license fee is paid is related to the goods being valued and is a condition of the sale, it should be added to the price actually paid or payable for the imported following mill equipment."
On consideration of the same, it is to be held that. The reason for the above view is duty is payable on the value of the goods imported into India. Where the entity imported incorporates the technology, the only viable use of the goods commercially is with the technology incorporated in it. Without the technology incorporated in the goods, the said entity cannot be put to use. Consequently, for the purpose of customs valuation, the value of the goods will include not only the value of the goods but also the value of the technology for which a separate payment has been made by the importer. In the present case, the technology as supplied by Outokumpu was imparted to the appellants through training etc. The technology was not & is not proved to be incorporated in the Equipments imported from Outokumpu or from others. Hence, the fees paid for such technology is not related to the imported goods.
6.13 License fees paid to Outokumpu is also not a condition of sale of the imported goods. Hence later portion of Rule 9(1)(c) will not apply to the present case as
d) Nowhere in the agreements entered into by the appellants with Outokumpu, it could be shown or is provided that the appellants have to import the capital goods from them only. The contract for purchase of proprietary equipments is an independent and a distinct agreement. The fact that the license fees was paid to Outokumpu, who is also the procurer, supplier / seller of capital goods will not make any difference. The services rendered under the agreement for supply of proprietary equipment is to supply at a price prevailing in the international market and there is no material to conclude otherwise. All the agreements refer to one another. For eg. Article 16 of the License Agreement states that this agreement will be effective and binding upon both the parties when the basic engineering has become effective. Similar recital is found in the other two agreements also. Similarly payment clause in one agreement refers to other agreements also. This is only for the reason that fees payable to Outokumpu under the license agreement does not involve supply of goods. Therefore, some measure through which the payment under the license agreement appears to be made. Such measure is, e.g. supply of documents under the Basic Engineering. Once some Basic Engineering documents are delivered by Outokumpu, the license fees becomes payable. Thus, the reference to other agreements in the license agreement was only for the purpose of executing the obligations of the appellants and Outokumpu. These clauses and references to other agreements cannot be treated as condition of sale of equipments Further such price included the cost incurred for designing the equipment also by the supplier.
6.14 Rule 9(1)(e) is also not invokable in the present case as
a) Rule 9(1)(e) has been invoked in the impugned order to include the fees paid under Basic Engineering agreement, to the value of the capital goods imported from Outokumpu. as Rule 9(1)(e) does not appear to be invoked or referred to in the original proceedings. Hence, at this stage, the said rule cannot be invoked.
b) It was submitted that Rule 9(1)(e) found in Customs Valuation Rules, 1988 is not found in the GAIT Rules on Customs Valuation. However, Annex. III to GATT code contains para 7 which is somewhat similar to Rule 9(1)(e) reads as under:
"The price actually paid or payable includes all 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."
While Rule 9(1)(e) of Customs Valuation Rules, 1988 reads as under:
"9. Costs and services. (1) In determining the transaction value, there shall be added to the price actually paid or payable for the imported goods
(e) all other payments actually made or to be made as a condition of sale of 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."
This clause of Rule 9(1) is a residuary clause and covers other payments made to the supplier, other than those mentioned in Rule 9(1)(a) to 9(1)(d). Therefore, if it is the case of the department that the basic engineering is includible by virtue of Rule 9(1)(b)(iv), then 9(1)(e) cannot be invoked simultaneously. There is logic and force in this argument. Revenue cannot invoke Rule 9(1)(c).
(c) It was submitted that every payment made by the importer-assessee to the foreign supplier will not be included Under Rule 9(1)(e). Only those payments, made as a condition of sale of the imported goods and which related to the imported goods shall be included in the value of the goods imported into India. This is to be upheld as it is made clear by the opening language as employed in Rule 9(1). This is to be submission finds support from Interpretative Note to Rule 4 of Customs Valuation Rules, reproduced as under:
"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 goods are not part of the customs value."
We find force in the submissions made. Therefore, the contention of the department that the Basic Engineering fees will form part of the value of the capital goods by virtue of Rule 9(1)(e) is incorrect. Even if the Basic Engineering fees paid to Outokumpu was a condition of sale of imported goods, the said fees will form part of the capital goods only when it is shown that the fees related to imported goods. In the present case, it is demonstrated that the Basic Engineering fees has nothing to do with the imported goods. Therefore Rule 9(1)(e) is not invokable in the present case.
6.15 Moreover Decisions holding that Rule 9(1)(e) can be invoked only when the payment made by the importer is related to the goods imported into India and made as a condition for sale and not otherwise.
a) In Ferodo India (supra), the CEGAT held that Rule 9(1)(e) cannot be invokved since the licence fees paid by the importer was not related to the imported goods In Jayaswal Neco-2004 (160) ELT 77 (Tri), CEGAT held that 9(1)(e) can be invoked only when the payment made by the imported is related to the goods imported and not otherwise and Outokumpu in their letter dated 7.3.2002 have clarified that supply of capital goods from them is not a condition for granting the license. This lays to rest and goes to prove that the payment of license fees paid to Outokumpu is not a condition for sale of the capital goods. Hence, Rule 9(1)(e) is inapplicable.
b) The Supreme Court in Tisco (supra) "15. Clause (e) of Sub-rule (1) of Rule 9 is attracted when the following conditions are satisfied :-
There is a (i) payment actually made or to be made as a condition of sale of the imported goods by the buyer to the seller or to a third party :
(ii) Such payment, if made to a third party, has been made or has to be made to satisfy an obligation of the seller; and
(iii) Such payments are not included in the price actually paid or payable.
16. It is nobody's case that the seller had an obligation towards a third party which was required to be satisfied by them and the buyer (i.e. the appellant) had made any payment to the seller or to a third party in order to satisfy such an obligation. The price paid by the appellant for drawings and technical documents forming subject matter of contract DM 301 can by no stretch of imagination fall within the meaning of 'an obligation of the seller' to a third party. There was also no payment made as a condition of sale of imported goods as such. Rule 9(1) (e) also, therefore, has no applicability".
6.16 Supreme Court's decision in CC v. Essar Gujarat Ltd. - 1996 (88) ELT 609 (SC) is not applicable to the present case as
a) (Very strong reliance has been placed by the department on the decision of the Supreme Court in Essar Gujarat's case. In that case the importer had imported a "complete plant in as is where is condition". This plant incorporated a patented process know as "Midrex process" for the manufacture of sponge iron. The process patented was Direct Reduction of iron ore by employing gas as a fuel. Such plant was already existing and installed in Emden in Germany. A bank named NORD/LB became the Official Receiver of this plant. The bank floated a global tender for sale of this plant in as is where is condition. Initially Essar tried to purchase the plant but could not get the clearance from the Government. Hence, the sale did not take place between the bank and Essar. The bank sold the plant to Teviot Investments Ltd. (for short TIL). Essar entered into an agreement with TIL on 24.3.87 for purchase of the plant in as is where is condition Through out the agreement, the subject matter of the contract was described as "Midrex Direct Reduction Plant installed at Emden". Following two conditions were stipulated in the said agreement:
1) Essar should obtain approval from Government within 30.4.87 ; and
2) Essar should obtain operation license from Midrex of Charlottee, USA.
Essar further entered into an agreement dated 4.12.87 with M/s. Voest Alpine AG (for short VA.) for technical services. Essar along entered into another agreement with Midrex International B.V. (for short Midrex) 4.12.87 for obtaining operation license for using the patented Midrex process. VA holds the license to use Midrex patented process and the technical collaborator of Essar. The imports look place in Sept. and Oct. 1988.
One of the requirement of Essar and stipulated in the contract entered into with VA was that the existing production capacity of the plant should be raised from 8 lakhs tonne per year to 8,80,000 tonnes per year. Further the plant should also to incorporate Hot Discharge and Mot Briquetting facilities. Essar had declared the following value for the imported plant:
a) Payment made to TIL for the plant : DM 26 million
b) Expenses for dismantling etc. : DM 20.75 million
Thus, the total value declared for the assessment of the plant was DM 46.75 million. The Customs Department however, proposed to include the following payments made by Essar also to the value of the plant imported by Essar Payment Made for Payment Includible as Not includible as (in DM) per SC per SC Process license fee payable to 2 Million 2 Million --
MIDREX for the right to use the Midrex process and patents Cost of Technical Services 10.1 Million 10.1 Million - provided by VA for para 2.5 Payment for engineering and 23.1 million 10% of 23.1 90% of 23.1 constancy fee as specified Million to be Million not to be under this agreement included included Payment for theoretical and 2.2 Million -- 2.2. Million practical training outside India
The argument of Essar was that the payments made by it to VA as indicated above are not "condition of sale" of the plant to Essar by TIL. In support, it was argued by Essar that the agreement for purchase of the plant was entered into with TIL on 24.3.87 itself whereas the agreement with Midrex and VA was entered into only on 4.12.87. The sale of the plant was complete on 24.3.87 itself. The stipulation that the obtaining of license from Midrex was only an escape route to Essar in case it (Essar) does not obtain the approval from Government of India. Rejecting these submission of Essar, the Supreme Court in para 2 as well as in 27 clearly held that though the contract was entered in Mach, 1987, the import of the plant was in Sept./Oct., 1998. This itself showed that the clause in the agreement with TIL that Essar should obtain the operation license from Midrex is a condition and pre-requisite of sale of the plant itself by TIL to Essar. Therefore, the Supreme Court held that the license fees paid to Midrex for the operation of the plant is to be included in the value of the plant imported by Essar. The Court also noted that through out the agreement entered between TIL and Essar, the subject matter of the agreement was described as "Midrex Direct Reduction Plant installed at Emden". Therefore, the Supreme Court concluded that the imported plant would be of no use without the license fees paid to Midrex, as without obtaining the license, the plant could not be operated at all. The Supreme Court specifically noted the argument of Essar that the clause relating to obtaining of license from Midrex by Essar was only an escape route to Essar in case the Government of India does not grant necessary permission for import of the plant. However, the Supreme Court held that even if the clause is meant to protect Essar, nonetheless, the obtaining of license from Midrex on payment of fees it is a condition of sale of the plant.No argument that the various payments in question as set out in para 27.7 related to the imported plant was never ever raised by Essar before the Supreme Court not this aspect was considered by the Supreme Court. In fact, Essar conceded before the Supreme Court that the payments related to the imported plant as seen in para 2 of the decision No dispute was raised by Essar that the payments made to Midrex and VA related to the imported plant. In fact, the Supreme Court held that the services rendered by VA were for the improvement of the plant. This is because a running plant was imported by Essar in as is where is condition.
b) Keeping in view of the above it was submitted that the judgment of Essar Gujarat is not applicable to the present case for-
i) Firstly because in the present case, there was no import of complete plant from Outokumpu. Only few capital goods as listed in Annexure-3 to the paper book alone imported from Outokumpu. This constitute hardly 16% of the total value of the plant.
ii) The equipments imported from Outokumpu are standard equipments which are offered by others also,
iii) The various submissions and propositions now raised in the present case were not raised or considered by the Supreme Court in Essar's case,
iv) It is a settled law that a decision cannot be relied upon in support of a proposition that it did not decide.
Considering the submission made, we would agree that the decision in case of Essar Gujarat would not apply in this case. Moreover in Essar's case, the imported plant incorporated the Midrex technology whereas in the present case, the entity imported is not the entire plant, but were standard, off-the shelf available items & components. Which by their self are not proved to and do not incorporate the flash smelting technology. Reliance placed by Revenue on Essar Gujarat case cannot be upheld in the facts of this case.
6.17 In the present case, no such case as made out in case of Andhra Petrochemical is made out by the department. It is not the case of the department that either the appellants or Outokumpu supplied the engineering work necessary for the production of the capital goods imported, from various vendors including the goods imported from Outokumpu. On the other hand, the equipment supply contract entered with Outokumpu clearly states that the price of the proprietary equipments include the design cost also. Hence, on facts, the judgment of the Supreme Court in Andra Petrochemicals is not applicable to the present case.
7. In this view of the findings, we find no reasons to uphold the order of the Ld. Commissioner.
8. The order of the Commissioner (Appeals) is required to be set aside & the appeal allowed by ordering that the License fee, & Basic Engineering fees as proposed cannot be added to the value under the Customs Act 1962 to charge duty on the inputs received.
9. Ordered accordingly.
(Pronounced in Court on 31.12.2004)