Customs, Excise and Gold Tribunal - Bangalore
Rashtriya Ispat Nigam Ltd. vs Commissioner Of Customs on 5 July, 2005
Equivalent citations: 2005(102)ECC385, 2006(197)ELT276(TRI-BANG)
ORDER
T.K. Jayaraman
1. This is an appeal against the Order-in-Original No. 6/2003 dated 27.6.2003, passed by the Commissioner of Customs, Visakhapatnam.
2. The brief facts of the case are follows:
(i) The appellants are a PSU unit engaged in the manufacture of Iron & Steel products on their factory at Visakhapatnam. The steel melt shop at the factory of the appellants has three converters in which liquid steel is manufactured. The process of making liquid steel involves a process of blowing oxygen into the converter. During the process of blowing oxygen into the converter, there is a need to check various parameters like percentage of oxygen content, carbon level, level of the liquid metal available etc. Sample is also drawn at the time of blowing the oxygen. The checking of the above parameters and drawing of the sample is done by an equipment called 'Sublance' which is lowered from this purpose into the converter. The sublance is placed in its position as part of a system with a host of other electrical and mechanical equipments.
(ii) The appellants placed an order on M/s Kerala State Electronics Development Corporation Ltd. (hereinafter referred to as 'KELTRON') vide letter of intent dated 31.10.1989 for the design, manufacture and supply of electric controls instrumentation, automation and sublance system for the LD converter in the steel melting shop known as SMS) for a total value of Rs. 1717.09 lakhs. A total amounts of Rs. 1717.09 lakhs was made up of the following four components:
(a) Design and Engineering charges for goods covered under Groups I to IV.
(b) Charges for the software package.
(c) Charges for supply of another equipments
(d) Training charges.
The goods covered by the groups I to IV included various items meant for the entire/sublance system including the control panels, distributed control system, computer terminals and the sublance per se. In addition to the above, the appellant placed another letter of intent dated 31.10.1989 on KELTRON for the unloading, transportation to site, storage, etc. and erection, testing and commissioning of the electric controls, instrumentation, automation and sublance system for the 3rd LD converter for a total value of Rs. 232.66 lakhs. The Foreign Exchange component in this contract was Rs. 106.10 for deputation of foreign experts for erection and commissioning.
(iii) To execute the project of the appellants, KELTRON in turn entered into a contract on 15.5.1991 with M/s Mannesmann Demag Huttwntechnik, Germany (hereinafter referred to as 'MDH') which covered the design, engineering including documentation, supplies and related services for Automatic Sublance System LD3. The buyer in the contract was indicated as KELTRON and the seller was MDH. Under Para 3.3, the seller scope of services was indicated as providing the design, engineering including documentation, project handling workshop tests, and inspection relating to the sublance system as specified in Annexure I, III & IV. The Division list in Annexure-I indicated the source of supply of the various items. The list in Annexure-I indicated the details of supply of various items. The list also indicated that the sublance as an equipment would be supplied by MDH while a host of other equipments like the platform for the Hoist, the Guide column, the slewing mechanism were to be supplied by KELTRON. The Division list also indicated that for the items to be supplied by KELTRON, the design and engineering would be supplied by MDH. Para 10 of Annexure-I indicated that MDH would provide all the drawings for items to be made by KELTRON. Annexure-III of the contract gave details of the design and engineering for the entire system. The Annexure clearly indicated that the above design was for integration of the entire sublance system. Annexure-IV of the contract indicated the Schedule of Inspection of the various items manufactured at various places. This Annexure clearly indicated that for the sublance, the certificate from MDH would alone be relevant and for the other items it would vary. The Annexure-V of the contract gave the time schedule for the development of the design and for the manufacture of the goods. The indication in the said Annexure that tests would be conducted at the workshop before the goods are placed on board the vessel at the port of shipment clearly indicated that it would apply only to the items manufactured at MDH. The appellants accepted the tender of KELTRON vide letter dated 28.12.91. The details of the tender are as follows:
S.No. Description Value (Rs.)
1. Design and Engineering charges for Group I to IV including 254.08
design and engineering for computer hardware and
systems software as well as documentation.
2. Extension/modification of software package. 39.10
3. Supply of equipment, commissioning spares, tools & 1422.47
tackles, test jigs, etc.
4. Training 11.19
Total 1727.56
Due to financial constraints of KELTRON, the appellants opened a letter of credit dated 16.10.92 in favour of MDH. The appellants informed MDH vide letter dated 16.10.92 of the opening of the letter of credit and also confirmed and revised break up of prices after the increase of 2.5.% on the contract value of KELTRON as under:
S.No. Description Value (in DM)
1. Design, Engineering including 1284850 documentation, project handling, workshop test and inspection
2. Sublance Equipment 2305700
3. Commissioning spares 137190
4. Special Tool and tackles 109400
5. Consumables 7860 Total 3845000 The appellants while opening a letter of credit considered the value of the sublance equipment, the commissioning, spares, the special tests and consumables all under Group IV. Apart from the above, they also considered the charges relating to project handling, workshop test, etc. relating to all the Groups as indicated in Para 1.3 which in turn referred to Annexure-III and Annexure-IV in the contract between KELTRON and MDH.
(iv) Afterwards the appellants applied to the DGFT vide application dated 28.12.93 for issue of an EPCG license to import and sublance by availing the concessional rate of duty of 15% in terms of Notification No. 160/92-Cus dated 20.4.92. In the application, the CIF value of the goods to be imported was indicated as DM 3845000 (Rs. 7,15,93,900). This amount was the same as the amount for which the appellants opened a letter of credit. The appellants in their application decided to include the design and documentation charges relating to the project also as part of the value of the capital goods since the Department in the past had raised a dispute regarding the inclusion of the design charges in the value of capital goods. The EPCG Committee were however of the view that the value of design, engineering and related services do not relate to the capital goods imported. The DGFT after repeated meeting with the representative of the appellants granted the EPCG license on 6.5.94 only for DM 2560156 (Rs. 4,74,14,089) (after deduction the value of design engineering including documentation, project handling, work shop tests and inspection amounting to DM 1284850) and export obligation of 4 times the CIF value of the imported goods to be completed within five years from the date of issue of licence. This position has been made clear by the DGFT vide their letter dated 11.11.2003. In the meanwhile, the MDH has sent to KELTRON a list of drawings for the entire equipments consisting of equipments supplied by them and the other equipments to be provided at the site. KELTRON in turn provided the same to the appellants vide their letter dated 12.2.1994. A perusal of list of drawings indicates that the said drawings covered not only the goods supplied by the MDH but other items to be provided by KELTRON also. In the meanwhile, the KELTRON in turn placed a purchase order dated 6.4.1994 on M/s Raja Corporation for supply of structural items for the sublance system. While doing so, they provided drawings from MDH. KELTRON also informed MDH vide letter dated 30.6.94 of the fact of placing order for supply of structural items and requested MDH to approve the drawing provided by them to M/s. Raja Corporation. MDH also issued a certificate dated 10.2.95 clearly stating that the amount of DM 1269514 related to the design and engineering covering the layout, installation arrangements of sublance, etc. required for the installation and commissioning of sublance and that the drawings did not pertain to the equipment supplied by them. The appellants imported the goods in March 1995. They filed Bill of Entry and in the Bill of Entry indicated the EPCG licence No. and the CIF value indicated therein. They also enclosed the above certificate dated 10.2.95 from MDH. There was some delay in commissioning and installation of sublance system. DGFT granted time upto 5.5.2000 to fulfil the export obligation but the appellants requested the DGFT to grant extension upto 31.5.2000. The appellants intimated DGFT vide their letter dated 17.8.2000 about the fulfilment of export obligation. The appellants finally received the LUT release letter dated 19.2.2001 from DGFT discharging them from the letter of undertaking executed on 6.5.1999. The letter indicated that the release letter is being issued since they had fulfilled the export obligation under EPCG licence No. 2133084 dated 6.5.94.
(v) A show cause notice dated 20.7.99 was issued by the Deputy Commissioner of Customs demanding a differential duty of Rs. 4,60,56,996 since they have not fulfilled the export obligation as per Notification No. 160/92-Cus. The notice also alleged that the appellants were liable to pay duty amounting to Rs. 2,72,91,510 on the design and engineering charges since they were includable in terms of Rule 9(1)(b)(iv) of the Customs Valuation Rules, 1988. Subsequently, the appellants received a second show cause notice dated 29.12.99 from the Commissioner of Customs in supersession of first notice dated 27.9.99. The notice alleged that the appellants failed to fulfil the export obligation in terms of EPCG licence and, therefore, duty chargeable at merit rate i.e. @ 65% + 20%; that the value of design and engineering was not included in the assessable value; that the appellants had not disclosed the design and engineering charges to the licensing authorities. The show cause notice therefore proposed to demand differential duty of Rs. 7,33,48, 506; interest on the duty amount from the date of clearance till the date of payment, to confiscate the sublance system and ancillaries valued at Rs. 8,33,38,837 and also proposed to impose penalty on the appellants.
(vi) The Commissioner passed the impugned Order-in-Original dated 27.6.2003 wherein he has confirmed demand of duty Rs. 2,72,91,510 for non-inclusion of value of design and drawings. He also confirmed a demand of Rs. 27,07,294 towards non-fulfilment of export obligation on the ground that one consignment was exported after the date of expiry of 5 years from the date of issue of the documents. The appellants are aggrieved over the decision of the adjudicating authority. They strongly challenged the findings.
3. Shri G. Shivadass, learned Advocate alongwith Shri Anil Kumar, learned Advocate appeared for the appellants. Smt. Shobha L. Chary, learned JCDR appeared for the Revenue.
4. The learned Advocate for the appellants urged the following points:
(i) The Commissioner has held that since one consignment was exported on 29.5.2000, which is after 5.5.2000, the same is not to be taken into consideration for the fulfilment of export obligation and has demanded payment of duty of Rs. 27,07,294. Due to some unavoidable circumstances, the appellants were unable to fulfil a small portion of the export obligation amounting to US $ 409445.88 which was made on 29.5.2000. The appellants requested the DGFT to extent the period upto 31.5.2000 i.e. by 25 days. On submissions of the details of exports made by the appellants, the DGFT had issued a release letter dated 19.2.2001 to the appellants informing them that since the export obligation against the EPCG licence dated 6.5.94 has been fulfilled, the letter of undertaking dated 22.7.94 executed by the appellants has been discharged. Since the DGFT is final authority as far as monitoring of fulfilment of export obligation is concerned, the Commissioner should have accepted the release letter issued by the DGFT to the fact that export obligation has been fulfilled and the letter of the DGFT is binding on the Customs authority. Further, Notification No. 160/92-Cus., dated 20.4.92 has been amended in 2001 retrospectively with effect from 1992 by introduction of Clause (iv) whereby the period of export obligation has been extended till 31.3.2002. This amendment has been taken note by the Tribunal in the case of Tecumseh Product India Ltd. v. CC, . In view of the above, the demand of Rs. 27,07,294 is liable to be set aside.
(ii) A demand of duty of Rs. 2,72,91,510 is on account of the inclusion of the cost of design and engineering charges attributable to the sublance system imported, it is held liable to be included in terms of Rule 9(1)(b)(iv) of the Customs Valuation Rules, 1988. It was submitted that the above amount is for the design and engineering of the activity done in India for the manufacture of various items in India. The learned Advocate pointed out to Annexure I, Item 4 of the contract wherein the Division List clearly indicates that many items of work are to be carried out in India at the erection site. The thrust of the Counsel's argument is that the design and engineering charges do not relate to the equipments imported by them. They relied on the certificate dated 10.2.95 issued by MDH much before the goods were received stating that the amount in question relates to layout, installation, etc. and not to the equipments supplied to the appellants. The appellants relied on the decision of the Tribunal in the case of Guhring India Pvt. Ltd. v. CC, [Final Order No. 125 dated 19.1.2005] of the Bangalore Bench wherein it was held that the supplier of the drawings and designs would be the best person to clarify the nature of the drawings.
(iii) The Commissioner has rejected the certificate issued by the MDH by observing that it is bland and obtained 4 years after the agreement. It was submitted that the said rejection is without any basis especially when the certificate conveys what is required to be conveyed and is in continuation of the agreement. The fact that it is obtained 4 years after the agreement is irrelevant so long as such a certificate has been produced at the time of import of the goods in 1995.
(iv) The findings of the Commissioner are based on incorrect reading of the entire contract and various letters exchanged between the parties particularly the letter given by the supplier himself. A correct reading of the entire contract would clearly prove that the design and engineering does not relate to the imported goods, etc.
(v) Even if it is assumed that the entire amount is attributable to the imported capital goods, the Revenue should be in a position to prove that the appellants had made other payment to MDH who had provided/approved all these drawings free of cost. If the Revenue is not in position to do so, then the evidences given by the appellants and the certificate given by the supplier are to be accepted, especially when the item imported is a standard off the shelf product which price would take into account the amount attributable to its designing and drawing.
(iv) Rule 9(1)(b)(iv) of the Customs Valuation Rules cannot be invoked to add the basic engineering fees to the value of the capital goods imported. 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. 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 that the buyer i.e. the appellants had supplied any engineering, development or art work etc. to the exporter. It is also not the case of the Revenue that the imported goods were made with reference to any engineering, development or art work etc., supplied by the appellants free of charge to others who in turn had supplied them to MDH. Hence, Rule 9(1)(b)(iv) is not applicable to the facts of the present case.
(vii) The Apex Court in the case of Tata Iron & Steel Co. Ltd. v. CCE & C, Bhubaneswar, 2000 (116) ELT 422 (SC) has held in Para 14 that Rule 9(1)(b)(iv) would apply only when the buyer has supplied free of cost any goods or services which not been included in the value of the imported goods.
(viii) The Supreme Court relying on the Interpretative Note to Rule 4 has also held that the charges for construction, etc. of goods in India are not includible in the value of the goods imported.
(ix) The Hon'ble Supreme Court in the case of Tata Iron & Steel Co. Ltd. has followed the under-mentioned decisions:
(a) TISCO v. CC, 2001 (130) ELT 327 (T)
(b) Hindalco Industries v. CC, 2001 (129) ELT 245 (T)
(c) Birla Tyres v. CC, 2001 (138) ELT 628 (T)
(x) In the following decision, the Tribunal has held that post-importation charges such as erection, etc., are not includible in the value of the imported capital goods:
(a) CC v. VSP, 1992 (62) ELT 833 (T)
(b) SRF Ltd. v. CC, 2003 (161) ELT 721
(c) GE Plastics Ltd. v. CC, 2004 (94) ECC 257 (T)
(d) Indo Gulf Fertilisers v. CC (182) ELT 77
(xi) The Customs authorities cannot revise value of the licence once the DGFT has fixed the value. The export obligation is fixed based on the CIF value which is decided by the DGFT. Once a licence is issued indicating CIF value and export obligation is fulfilled based on this, any revision of the conditions mentioned in the licence can be made only by the Licensing Authority. Any revision of the CIF value would mean revision of the export obligation which can be done only by the DGFT and not by the Customs authorities.
(xii) In the instant case, the appellants applied for EPCG licence vide letter dated 28.12.93 wherein they had mentioned the CIF value of the goods to be imported in item 20 of the application as DM 3845000 i.e. inclusive of design and engineering charges. Further Annexure-5 gave a detailed break up of the above-said value. The EPCG Committee of the DGFT, which includes a representative from the Customs was of the view that the value of design, engineering and related services is to be deducted from the CIF value and consciously excluded the value of design and engineering charges while granting the licence. This was done apparently because the design and drawing charges are not relatable to the capital goods to be imported by the appellants. Even if the Customs representative in the EPCG Committee was of the view that designing and drawing did not relate to the capital goods being imported, a different view cannot be taken now especially after the export obligation has been fulfilled.
(xiii) The Customs authorities could have raised the objections regarding the valuation arrived at by the DGFT at the time of import of the goods when all the documents were available with them. The appellants would have approached the DGFT for revision of export obligation. It would tantamount to great jeopardy, if the appellants are now being asked to revise the CIF value of the machinery imported without a revision of the export obligation and the extension of the concessional rate of duty. This is precisely the view taken by the Tribunal in the following cases:
(a) Jindal Vijayanagar Steel Ltd. v. CC, 2001 (131) ELT 667
(b) Hy-Grade Pellets Ltd. v. CC, Apparently in pursuance to the observations of the Tribunal in the case of Hy-Grade Pellets Ltd. (supra), the Government has issued a Circular dated 26.7.2004 explaining the role of the representative of the Customs in the EPCG Committee.
(xiv) It is further submitted that the sublance would be covered by the EPCG. It is precisely to avoid such anomalies that the DGFT issues a licence after taking into consideration all the aspects of the goods to be imported. The Customs authorities are therefore bound by licence issued and the value as determined by the Licensing Authority. The following case laws were relied on:
(a) Titan Medical Systems Ltd. v. Union of India (UOI),
(b) Wearon Exports (P) Ltd. v. Union of India (UOI),
(c) Tata Iron & Steel Co. Ltd. v. CCE, Final Order No. 950/04 dated 21.5.2004
(d) Gaur Impex v. CC, 2004 (94) ECC 45
(e) DSL Software and Ors. v. CC,
(xv) In terms of the Notification No. 160/92, as per condition No. (iii), the importer has to bind himself to pay on demand an amount equal to duty leviable but for the exemption, if the condition in the table to the Notification, namely fulfilment of export obligation is not fulfilled. In the present case, condition (iii) cannot be invoked as the export obligation has been fulfilled. Even if the assessable value of the capital goods under Section 14 is to be revised by the Customs authorities, the duty on such revised value would get exempted since the export obligation has been fulfilled. This is precisely a reason while fixing CIF value of the capital goods, the CBEC representative as part of the EPCG Committee has a vital role to play and once such a value is fixed and the resultant export obligation is fulfilled, any revision in the value cannot result in demand of duty.
(xvi) The Commissioner has not invoked any provision of law in raising the demand of duty of Rs. 2,72,91,510 towards the value of design and engineering charges and Rs. 27,07,294 towards non-fulfilment of export obligation.
(xvii) In the present case, no demand can be made based on the provisions of Section 28 of the Customs Act, 1962 either within six months or five years from the relevant date. The longer period can be invoked only when there is a suppression of material facts. All relevant information was furnished at the time of import and the authorities were very much aware of the EPCG licence had the break up in the invoice. In view of this position, there is no ground for invoking the longer period. The goods were imported in March 1995 and the show cause notice has been issued in December 1999. Since the longer period cannot be invoked, the demand is time barred.
(xviii) The Commissioner has confiscated the goods under Section 111(m) of the Customs Act, 1962 holding that the appellants had misdeclared the value of the goods both the Licensing Authority and Customs authority with a view to evade payment of duty. As stated earlier, the appellants applied to the DGFT for the full value including the design and engineering charges. Once the licence was issued for a lesser value, the appellants were of the bonafide belieft that the design and engineering charges are not liable to duty. When a Government authority competent to issue the EPCG licence does not consider the value of design and engineering charges, the appellants cannot be held liable for the non-inclusion of the same. Moreover, the appellants did not import the said design and engineering and the same was imported by KELTRON which was subsequently handed over to the appellants. In view of the above, the demand of duty, the penalty imposed, confiscation ordered and the redemption fine are required to be set aside.
5. The learned JCDR made the following submissions:
(i) As per Para 35 of the Order-in-Original the contract in question is a comprehensive one covering not only the supply of goods but also providing design and engineering for the manufacture of such goods and also to subject the goods so manufactured to tests using the design and engineering, before shipment. The Hon'ble Supreme Court in the case of Mukund Ltd. v. CC, Mumbai, 2000 (120) ELT 30 (SC) held that when a contract provides for supply of basic design and engineering drawings and the supervision of erection, testing and commissioning based thereon, one is as much a part and a condition of the contract as the other and, therefore, additional of supervision charges to the assessable value is sustainable. That is, the Apex Court held that even charges incurred subsequent to the import are includible in the assessable value. In this case there was a single contract covering both supply of equipment as well as relating services such as design and engineering, project handling, documentation, tests and inspection. Further, the amount charged for these services DM 1253100 - covered all these services and not just design and engineering. All these activities were undertaken abroad prior to delivery and as per the terms of payment 90% payment was to be made on delivery on board vessel at port of shipment and the remaining 10% on completion of delivery (page 18 of contract). The commercial invoice raised was for a single amount without any break up. In view of these factors, the entire payment represents the transactions value for payment of customs duty.
(ii) With reference to the argument that the design and engineering charges were for manufacturing activity to be undertaken in India, this argument is not supported by the provisions of the contract. The contract does not make any distinction between design and engineering charges for manufacture abroad and manufacture in India. On the other hand, the contract makes it abundantly clear that there is considerable design and engineering work to be undertaken for the main equipment and this work was to be completed within three months of entering into the contract. After completion of engineering work, the buyer was to give his approval and then manufacture was to be undertaken, followed by tests and inspection. Refer Time Schedule in the contract page 102, Annexure V. In view of the above, it is clear that the charges where primarily for pre-importation activities. It is conceded that the Division List (Page 72 of the contract) does show the supply of engineering by the seller to the buyer for 8 items only. But no split up value is available for consideration as to whether any deduction is admissible. Reference is also invited to pages 21, 43, 48, 89, 90, 93 (Annexure III), 99 (Annexure IV) and page 102 (Annexure V).
(iii) Reference is also invited to the Acceptance of Tender document ad dressed by VSP to KELTRON dated 28.12.91 at page 204 of the paper book, Vol. 1. Annexure 1 to this document at page 207, Paras 1.1. and 1.2 and 1.6.1 clearly indicate design and supply of drawings and documentation for the entire project to be supplied by the contractor, KELTRON. At page 210, the price break up for the various items of work is stated. At Sl.No. 1 design and engineering charges for Group I to IV including design and engineering charges for computer hardware etc. are shown. Group IV at page 228 at Sl. 101 specifically includes the sublance proper. Thus, the contract between VSP and KELTRON clearly shows that the design and engineering charges to be paid covers the imported equipment and only a portion was for the structural and electronic equipment to be manufactured in India.
(iv) An argument has been advanced that the design and engineering charges are already included in the cost of the main equipment. Nowhere in the contract or any of the correspondence of VSP, internal, with KELTRON and with the Licensing Authorities, filed in the paper book is there anything to support this statement. On the other hand, the contract itself makes a clear distinction between the supply of equipment and the supply of related services such as design etc. Refer page 5 of the contract. This argument of the appellant is clearly not sustainable.
(v) Considerable reliance has been placed by the appellants on the beneficiary certificate stated to be from the supplier in which it is clarified that the entire amount of DM 1269514 - pertains to design and engineering which covers layout, installation arrangements, instrumentation, electrical and hydraulic equipment etc. and that these drawings do not come under manufacturing and drawing category. The department has not accepted this certificate primarily because this statement is a total departure from the contract. In the first place the amount was collected not just for design and engineering but also for project handling, documentation tests and inspections (Para 3.3. at page 7 and 4.1.1 at page 9). Definition of 'Services" at Para 1.3 at page 5 of the contract indicates that the scope covers the division List as well as Annexure III and IV. Secondly, the contract between VSP and Keltron also does not support this contention. In the absence of any explanation for this deviation from the contract in the certificate, the department has relied on the contract in terms of which this amount of DM 1253100 related to various pre-importation activities connected with the imported goods.
(vi) The show cause notice has cited Rule 9(1)(b)(iv) of the Customs Valuation Rules. No doubt the department's case here is not that there was free supply of any service by the buyer. But the buyer has entered into a comprehensive contract for supply of both goods as well as design and engineering services. Therefore, the payments made are correctly to be included in the assessable value. Rule 9(1)(e) of the Customs Valuation Rules also includes all payments made as a condition of sale. It is a settled position that citing of inapplicable rules will not vitiate the proceedings if they are otherwise correct in law. It is also pointed out that this contention was not taken up before the adjudicating authority.
(vii) With regard to argument that Customs do not have the authority to alter the value fixed by the licencing authorities in the EPCG licence and that if any such issue arose, the department should have brought it to the notice of the licensing authorities, it is submitted that both the order in the case of Hy-Grade Pellets relied upon and the Board's Circular are subsequent to the adjudication of this case. Therefore, the procedural requirements prescribed in the Circular and the view expressed in the Hon'ble Tribunal's order that the licencing authorities should be informed so that the export obligation could be re-determined could not be followed in this case. However, if as per the Customs law any additional amount is included in the assessable value which is not covered by the value indicated in the EPCG licence, there is legally no option but to deny the duty benefit under the EPCG scheme and levy duty at normal rates unless the licence is further amended. The concessional rate cannot be extended if the amount is not covered by the licence.
(viii) Following case laws are also relied upon:
(a) Mukand Ltd. v. CC (Airport) Mumbai, 2000 (120) ELT 30 (SC)
(b) Mukand Ltd. v. CC Mumbai, 1999 (112) ELT 479 (Tri)
(c) Essar Gujarat v. CC, 1996 (88) ELT 609 (SC)
(d) Dabhol Power Co. v. CC, Pune,
(e) Gujarat Mineral Development Corporation Ltd. v. CCE, Ahmedabad, 2000 (117) ELT 432 (Tri)
(f) Panacea Biotech Ltd. v. CC (ACC) New Delhi,
(ix) On all other issues covered in this appeal, findings in the Order-in-Original are reiterated.
6. We have gone through the records of the case carefully. The following issues have to be decided in this case:
(i) Whether the design and engineering including documentation, project handling, workshop test and inspections re (sic) to be included in the assessable value for payment of Customs duty on import of Sublance System LD-3 by Visakhapatnam plant of M/s Rashtriya Ispat Nigam Ltd. under Rule 9(1)(b)(iv) of the Customs Valuation Rules, 1988 in the facts and circumstances of the case?
(ii) Whether the export obligation has been fulfilled by the appellants in terms of EPCG licence granted to them?
(iii) Whether the impugned goods are liable for confiscation?
(iv) Whether the appellants are liable to penalty under Section 112A of the Customs Act, 1962:
The appellants wanted an Automatic Sublance System LD-3 to be installed in their steel melt shop (SMS-1) in the premises of Visakhapatnam Steel Project. In fact, they were interested to give the work to KELTRON. M/s KELTRON in turn entered into an agreement with the MDH, Germany. This agreement covers design, engineering including documentation, supplies and related services. The agreement is a very comprehensive one. It is seen that the entire Automatic Sublance System has not been imported from the MDH. The imported capital goods are mentioned in Para 4.1.1, 4.1.2, 4.2, 4.3, 4.4. For installing the Automatic Sublance System from the imported capital goods, other goods manufactured and procured in India were also needed. The contention of the appellants is that the design and engineering charges represent the charges incurred in connection with the goods manufactured and procured in India and not related to the imported goods. In this connection, the appellants have referred to the Division Lists. The Division Lists indicates the items which will be imported from the seller (MDH) and also the items to be procured in India. The contention of the appellants is that the design and engineering charges related to the design of the items to be manufactured in India. This design is carried out by MDH and for that purpose, the said charges were paid to them. In other words, the above charges were not paid to MDH for the design of the equipment imported from the MDH, namely Sublance System. A perusal of the Division Lists shows that the platform for Hoist has to be procured from India. However, its engineering is by MDH as shown in remarks column 6 of the Division Lists. Similarly, in respect of many items even though the procurement is from India by the buyer, the engineering is by MDH. Therefore, the contention of the appellants cannot be easily brushed aside. Moreover, the appellants even prior to the import of the equipments had furnished a certificate from the foreign suppliers. The certificate is reproduced below:
"This is to certify that the amount of DM 1.269.514 invoiced against 4.1.1 of our invoice No. 101 515 dtd. 8.6.1994 (B/L No. 1 dtd. 20.6.1994 - "MV STATE OF TRIPURA) pertain to Design and Engineering which covers Layout, Installation Arrangements of Sublance and its Accessories, General Layout Drawings of Electrical Equipment, Instrumentation Equipment and Hydraulic Systems and Lay Out Drawings for other Utilities like Nitrogen and Water and Emergency Lifting arrangement etc., required for installation and commissioning.
This is also to certify that these drawings do not come under manufacturing drawings/category of our equipments supplied to you."
A combined reading of the Division Lists and also the certificate given by the MDH shows that these charges did not relate to the equipment imported. In any case, the certificate dated 2.10.1995 was produced even before the import of the equipments in March 1995. Obviously at the time of the clearance of the goods, the Customs Department has not questioned the bona fide of the certificate. Again the correspondence of the appellants with the DGFT shows that the appellants actually wanted these charges to include in the EPCG licence. But EPCG Committee in its wisdom took a conscious decision to exclude these charges. This is clear from the following letter addressed by the DGFT to the appellants. The letter dated 11.11.2003 is reproduced below:
"GOVERNMENT OF INDIA MINISTRY OF COMMERCE AND INDUSTRIES (DIRECTORATE GENERAL OF FOREIGN TRADE) MAULANA AZAD ROAD, UDYOG BHAWAN, NEW DELHI-110011 F. No. 18/1404/AMS4/EPCG-II Dated 11.11.2003 To The Deputy Manager, Rashtriya Ispat Nigam Ltd., Visakhapatnam Steel Plant, 6th Floor, Prakashdeep Building, 7, Tolstoy Marg, New Delhi-110001.
Sub : Clarification sought with regard to EPCG Licence No. P/CG/2133084 dated 6.5.1994.
Gentlemen, With reference to your letter dated 3.11.2003 on the above-mentioned subject, I am directed to inform you that your request has been examined by the office. On perusal of the file, it is observed that after Personnel hearing of your representative, Shri Sanjay Dargan, Manager (Exports) in EPCG Committee meeting held on 21.2.94 and on comments of technical authorities in subsequent EPCG Committee meeting held on 25.4.94, the Committee decided to exclude the items mentioned at Sl.No. 1 & 5 of the break up list of the CGs provided by the Company i.e. Design Engineering including documentation project handling work shop tests and inspection, which did not cover under the EPCG scheme.
You are therefore informed that pursuant to the decision of the EPCG Committee, a licence (No. P/CG/2133084) was issued to Rashtriya Ispat Nigam Ltd. for a CIF value of DM 2560156 (Rs. 47414089) instead of a CIF value of DM 3845000 as applied for by reducing the value of licence accordingly after a personnel hearing of Co.'s representative."
Yours faithfully, Sd/-xxxxxxxxx (N. SRIVASTAVA) FOREIGN TRADE DEVELOPMENT OFFICER FOR DIRECTOR GENERAL OF FOREIGN TRADE"
From the above letter, it is clear that the appellants wanted the CIF value of the licence for DM 3845000 but the EPCG Committee issued only for CIF value DM 2560156. It is very clear that the EPCG Committee took a conscious decision to exclude the design and engineering charges. The EPCG Committee was convinced that these charges do not relate to the goods under import. When the said decision has been taken on the basis of facts, it is not for the Jurisdictional Authorities, long after the import has been completed to say that these charges should be included. It should also be borne in mind that the EPCG Committee has one member representing the Customs Department. Before proceeding against the appellants, the Jurisdictional Authorities should have consulted with the CBEC. There is no record that they had done so. In the facts and circumstances of the case, there is ample evidence to show that design and engineering charges did not relate to the imported goods and the EPCG Committee took this factor into account while excluding these charges from the scope of EPCG licence. In this connection, the Circular No. 46/2004-Customs, dated 26.7.2004, issued by the CEBC is very relevant. The same is reproduced below:
"3. In respect of Import of capital goods under EPCG Scheme, there is linkage between the CIF value of imported capital goods and the quantum of export obligation fixed against the EPCG Licence by DGFT authorities. Hence, if Customs have any doubts about valuation of imported capital goods in relation to addition of the element of any other charges in value then before initiating any precipitative action, the Jurisdictional Commissioner of Customs should bring this to the notice of Board which will take up the matter with concerned DGFT authorities so that necessary corrective action, if any, is taken simultaneously by Customs and DGFT. There is already a Committee set up for this purpose in which CBEC is also represented. Role of representative of CBEC in the EPCG Committee should be clearly understood and effectively fulfilled. The aspect of classification and valuation (under the Customs Act and Rules made thereunder) should be examined at the stage of issue of EPCG licence by the representative of the CBEC attending EPCG Committee meetings. Should there still be an incorrect CIF value on such a licence issued by the DGFT and this gets subsequently noticed at the time of Import/assessment, then this will be brought to the notice of the Member (Customs) & DGFT immediately for suitable rectification. This is also because DGFT will have to simultaneously increase the CIF value of the EPCG Licence and also the quantum of export obligation specified therein. Unilateral action by Customs in such cases may ultimately held the EPCG licence holder to escape the clutches of law because under EPCG Scheme both Customs and DGFT authorities have important roles to play.
4. It is therefore reiterated that in all cases pertaining to EPCG Scheme where Customs have doubts about valuation, quantum of EO etc., the jurisdictional Commissioner of Customs scrupulously follow the instructions contained in DOR Circular No. 24/2002."
In fact even in this Circular, Board has clarified the Circular No. 24/2002-Cus dated 6.5.2002 that normally redemption of Bond/BG filed under EPCG Scheme by the licence holder shall be allowed by Customs on the basis of E.O. Discharge Certificate issued by the DGFT authorities. However, in case of doubts, Customs may refer the matter to the DGFT to take suitable corrective action. In this case, if the Customs Department had entertained doubt in the EPCG licence, they could have referred the matter to the DGFT. This is so, because the EPCG licence is decided by a Committee consisting of representatives from both the DGFT and the Customs Department. After the EPCG licence is issued, if each department takes diametrically opposite views, the trade or the assessee could be put to a great hardship. Anyhow on going through the records, we find that the design/engineering charges did not relate to the imported goods. There is no reason for including the same in the CIF value of the goods imported. Moreover, the appellants have placed all the facts before the EPCG Committee while getting the EPCG licence. They had also placed all facts before the Customs Department at the time of clearance. Hence, there is no evidence to show that the appellants had suppressed the facts with a view to commit fraud to evade payment of duty. Hence, the longer period for demanding duty cannot be invoked. As regards, the demand of Rs. 27,07,294 on account of shortfall in export obligation fulfilment, we cannot uphold the Commissioner's findings. It is true that there was some delay in fulfilling the export obligations within the date specified by the DGFT. However, the appellants addressed the DGFT to extend the time and consequently, the DGFT themselves accepted the export made after the stipulated date. When the DGFT had issued the E.O. certificate by condoning the delay, the Customs authorities cannot reject the condonation and demand duty on the appellants. If this is allowed, this would make the entire system of working of Government Departments a mockery. Therefore, we set aside the demand of Rs. 27,07,294 on account of shortfall of the demand. Since the duty demands have been set aside, the confiscation of impugned goods is also set aside. There is absolutely no justification in imposition of fine and penalty. In these circumstances, we allow the appeal with consequential relief.