Custom, Excise & Service Tax Tribunal
Aditya Birla Nuvo Ltd vs Jamnagar(Prev) on 22 October, 2018
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In The Customs, Excise & Service Tax Appellate Tribunal
West Zonal Bench At Ahmedabad
Appeal No. C/10703/2014-DB
[Arising out of OIA-14-15/COMMR-A-/JMN/2014 dated 18/02/2014 passed by the
Commissioner of CUSTOMS-JAMNAGAR(PREV)]
M/s Aditya Birla Nuvo Ltd Appellant
Vs
C.C.-Jamnagar(prev) Respondent
Represented by:
For Appellant: Shri. T.Vishwanathan, Manish Jain & Ms Shruti Agarwal (Adv.) For Respondent: Shri. Jitesh Nagori (A.R.) CORAM:
HON'BLE MR. RAMESH NAIR, MEMBER (JUDICIAL) HON'BLE MR. RAJU, MEMBER (TECHNICAL) Date of Hearing: 16.07.2018 Date of Decision:22.10.2018 Final Order No. A / 12217 /2018 Per: Raju This appeal has been filed by the M/s. Aditya Birla Nuvo Ltd. against confirmation of demand of customs duty by including the value of know-how license and rights in the assessable value of the goods imported under EPCG scheme.
2. Ld. Counsel for the appellant argued that they have imported certain machinery and had also paid towards the technical know-how US $ 6 million. He argued that the said amount paid towards the technical know-how is not included in the assessable value as the said know-how has been imported in the shape of goods and are not services. He argued that the know-how has been imported in the form of documents and they have to be separately assessed to duty as goods. He further argued that the said amount is not includible as the
2|Page C/10703/2014-DB condition prescribed under Rule, 10(1)(c) of the Customs Valuation Rules, 2007 are not fulfilled. He argued that the said Rule requires Revenue to establish that the said amount has been paid as a condition for sale of the goods being valued. He argued that Revenue has not shown any provision in the contracts where the said royalty has been paid as a condition for sale. He argued that the royalty has been paid in respect of post importation activities i.e. manufacture of viscose filament yarn in India and installation of plant etc. He argued that the payment of such royalty being a principle condition for sale then the supplier of goods would have asked for deposit of the said amount before them. He argued that the facts of the case are different from those in the case of Essar Gujarat Ltd. 1996 56 ELT 221. He argued that in this case the technology is not incorporated in the capital goods. He argued that they are receiving only technical documents which are goods and they should be assessed as goods as has been held by the Hon'ble Apex Court in the case of Associated Cement Companies Ltd., 2001 (128) ELT 21 (SC). He pointed out that the document in the instant case were imported and assessed by extending complete under Notification No. 12/2012-CUS. He argued that the document which cannot be charged to duty under Customs Act directly cannot be indirectly charged to duty by including the value in the value of goods imported. He argued that the technical know- how is for carrying out post importation activity. He relied on article 4 of the agreement where know-how license has been described. He also took us through various provisions. He further argued that the CVD and SAD demanded under the notice are available as Cenvat Credit to the appellant and in such circumstances demand of duty cannot be confirmed. He relied on the following case law in this regard.
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a) Commissioner Vs. Narmada Chematur Pharmaceuticals 2005 (179) ELT 276 (SC)
b) Punjab Tractors Ltd. Vs. CCE 2005 (181) ELT 0380 (SC)
c) CCE & C (Appeals) Vs. Narayan Polyplast 2005 (179) ELT 20 (SC)
d) CCE Vs. Textile Corporation 2008 (231) ELT 195 (SC)
e) CCE Vs. Jamshedpur Beverages 2007 (214) ELT 321 (SC)
f) CCE VS. Coca Cola India (Pvt.) Ltd. 2007 (213) ELT 490 (SC)
3. Ld. AR relies on the impugned order. He also took us through various provisions of the agreement essentially Article 2 and Article 4 of the agreement. He argued that the said payment is not merely for the documents but also a licensing to manufacturer using the said machinery /technology.
4. We have gone through the rival submissions. We find that the agreement between International Chemical Investors and the appellant has following notable ingredients.
This know how license Agreement is made on June 7, 2011 by and between:
INTERNATIONAL CHEMICAL INVESTORS IV.S.A., a company validly existing under the laws of the Grand Duchy of Luxembourg with business address at 62, Avenue Victor Hugo, 1750 Luxembourg, Grand Duchy of Luxembourg,
-hereinafter "Licensor"-
and Aditya Birla Nuvo Limited, a company validly existing under the laws of the Republic of India ("India") with its registered office at Indian Rayon Compound, Veraval - 362266, Gujarat, India and corporate office at A-4, Aditya Birla Centre, S.K. Ahire Marg, Hereinafter "Licensee"-
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5. From the above description, it is apparent that the parties of the agreement have not been described as buyer and seller of goods. The parties have been described as licensor and licensee. Had it been a simple sale of 'know how' or document/ goods as argued by the appellant then the two parties of the agreement would have been described as buyer and seller. The description licensor and licensee itself means that the agreement is not merely a sale of goods but it is essentially a grant of license.
Preamble Whereas, Licensee intends to engage in the manufacturing of viscose filament yarn for textile end uses using (discontinuous) Spool Technology ("VFY") at its side in Veraval, Gujarat, India;
Whereas, Licensor possesses the know-how with respect of VFY production as further described below; Whereas, Licensee desires to enter into this Agreement and, subject to its terms and conditions, to manufacture, market, distribute, sell, and provide after sales service for, certain VFY in India as agreed upon in this Agreement by using the Know-How and technology licensed by Licensor hereunder together with other know-how related to all details of the chemical plant for viscose spin dope making (including spin bath production and regeneration) and a spinning plant with infrastructure for certain textile aftertreatment;
Whereas, Licensee wishes to acquire, and Licenseor is prepared to grant to Licensee, a perpetual non- transferable license to use the before mentioned know-how of Licensor on and subject to the terms and conditions of this Agreement;
From the above it is apparent that the agreement is essentially a grant of license to use the technical know-how. It is not a sale of know-how, it is not a sale of document but a license to use the technology. The agreement describes 'know how' as
5|Page C/10703/2014-DB 1.17 "Know-How" means Licensor's technical knowledge, information, data and technical documentation in Licensor's possession and of which Licensor has the right to dispose, relating to the spinning plant involved in production of VFY, in form, language and detail as such Know-How is incorporated in the Technical Documentation; The Know-How shall relate to one or more items as follows:
1) The floor plans setting out the foundations and supply connections, including all existing documents of Licensor relating to PFD's, PID's, equipment layout, piping layout, and single line diagrams, as described in detail in Item I of Appendix 1.17;
2) Basic design and process Know-How as described in detail in Item II of Appendix 1.17; and
3) Chemical and physical process parameters of VFY as set out in Item III of Appendix 1.17;
The above describes the nature of know-how. The know-how consists of Licensor's Technology Knowledge, Information, data and technical documentation in licensor's possession and of which licensor has the right to dispose. From the above it is apparent that know-how consists of not only the manner in which the factory is to be set up but also basic design and process know-how as well as physical chemical and process parameters. Thus, the know-how consists of the entire technology involved in manufacturing. The agreement is not to transfer of sale the entire technology to the appellant but it only permits or licenses the appellant to use the said technology in the said consideration.
6. It is seen that the asset, sale and purchase agreement as well as the know-how license agreement both have been entered on June 7, 2011 i.e. on the same day. The equipment purchase agreement in para 1.37 defines the spool Technology as follows.
"1.37 "Spool Technology" means a certain batch technology(discontinuous spinning method) according to the proprietary know how for the manufacturing of endless viscose filament yarns in a way that the total
6|Page C/10703/2014-DB yarn traject between the spinning nozzle and the roller, which takes up the yarn, is controlled and operated under defined stretching conditions."
From the above it is apparent that Spool Technology is the proprietary knowhow for the manufacture of viscose filament yarn. The technical know-how agreement is specifically for license to use the same Spool Technology which International Chemical Investors have licensed to the appellant. From the above it is apparent that the Spool Technology is a proprietary technology of M/s ICI and the equipment user would need a license to use the said spool technology for using the equipment with Spool Technology. Article 2 of the know-how license agreement reads as follows "The scope of this Agreement shall include:
2.1 The provision by Licensor to Licensee of the Technical Documentation as detailed herein and 2.2 The perpetual, irrevocable non-transferable license to use Licensor's Know-How on a sole and exclusive basis within the Territory as detailed herein, Licensor shall continue to be free to use the Know-How or to grant Third Parties the right to use Know-How at all times, provided however that Licensor shall not grant Third Parties the right to use the Know-How within the Territory without the prior written consent of Licensee during the term of this Agreement.
From the above apparent that the agreement is entitled to grant license to use licensor's know-how on sole and exclusive basis. It is not merely a sale of know-how document as argued for the appellant. The agreement is not for any transfer of goods but it is of transfer of right to use the know-how. This becomes more apparent from Article 4 of the agreement which is for "grant of know-how license and rights".
"4.1 Know How License Subject to Article 4.3, Licensor agrees to grant and hereby grants, on a sole and exclusive basis within the Territory, and subject to Article 2.2, to Licensee a perpetual, irrevocable non-transferable license to use the
7|Page C/10703/2014-DB Know-How made available to License pursuant to this Agreement in the Territory, solely for the purpose of
(a) Manufacturing products at the IR Sites.
(b) Selling such products within the Territories.
("Know How License") 4.2 Restriction to IR Site The use of Licensor's Know-How and the right to manufacture Products shall be restricted to operation on the IR Site. Licensee shall be able to make use of Licensor's Know How and have the right to manufacture Products in places within the Territory other than the IR Site in accordance with the terms and conditions of this Agreement, provided that Licensor's right and interests, in particular, but not limited to, the timing of the payment of Royalty Instalments, and of royalty instalments under the Trademark License Agreement, will under no circumstances become negatively affected thereby.
4.3 Licensor and Licensee agree that the Know-How License shall be granted to Licensee conditional (aufschiebend bedingt) upon full payment of all Royalty Instalments (including any interest accrued). Until such time, Licensee shall be entitled on a purely preliminary basis to exclusively exercise the Licenses subject to payment of the Royalties set out in Section 5.1(a) - 5.1(c) in its own name and for its own account in accordance with this Agreement so long as Licensee does not default with any payments or any obligations, other than non-material ancillary obligations, under this agreement."
From the above it is apparent that the agreement is only for use the technology for these goods and only at this site
7. Article 9 of the agreement also envisage following.
9.6 Licensor shall ensure that all existing agreements on the distribution of VFY within the Territory will be terminated, such termination to be effected at the latest by September30, 2012.
9.7 Licensor undertakes as from the date on which the following conditions are satisfied for the first time.
(a) termination of the existing distribution agreements in accordance with their respective termination provisions pursuant to Article 9.6;
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(b) full payment of the Royalty (including interest accrued); and
(c) full payment of Royalty instalment 1 as defined in, and in accordance with, the Trademark License Agreement (including interest accrued), And until the expiration or termination of this Agreement not to, directly or indirectly (including through direct or indirect subsidiaries (abhangige unternehmen - as defined in Section 17 German Stock Corporation Act (AklG), "Subsidiaries"), actively market or distribute (aktiver Verkauf order Vertrieb) in the Territory any VFY, unless agreed otherwise with Licensee. Licensor undertakes to agree with each Third Party to which it will sell or distribute VFY outside the Territory that VFY may be used outside the Territory only and shall not be further distributed to any place within the Territory. In case any Third party violates such restrictions under the respective sales contract with Licensor, Licensor will discontinue supplying VFY to such Third party.
Licensor undertakes to use its best efforts to procure that the provisions set forth in this Article 9.7 are observed mutatis mutandis by its Affiliates other than Subsidiaries. The term VFY is used to describe the Spool Technology thus while granting the license to the appellant to use the technology, any license given to any other person in the territory to use the said pathology would be withdrawn. Article 12 of the agreement relates to duration and termination, it clearly prescribes that the agreement shall remain effective only until its termination. From this also it is very clear that the agreement is for transfer of right to use the technology and not for sale of know-how.
8. In light of above now we examine the defence of the appellant. The primary defence of the appellant is that technology know-how is merely documentation which has been imported as goods and should be assessed as goods. From the above examination of two agreements it is apparent that the technology know-how license agreement is essentially an agreement that permits the appellant to use the Spool Technology (VFY). The machinery imported by them is essentially a
9|Page C/10703/2014-DB machinery which uses Spool Technology and the said machine cannot be used without a license to use the said 'Spool Technology'. In these circumstances, it is apparent that the facts of the case are identical to the facts of the case in of M/s Essar Gujarat Ltd. (Supra). The appellant have relied on the decision of Hon'ble Apex Court in the case of CC Vs. Denso Kirloskar Industries Pvt. Ltd-2015-TIOL-222-SC-CUS. It is seen that the facts in the said case are different from the instant case. In the said case the technology imported related to manufacture of contract products by licensee whereas, in the instant case the grant of license is for permission to use the 'Spool Technology (VFY)' itself. The know-how in the case of M/s Denso Kisloskar Industries Pvt. Ltd.(Supra) related to right to manufacture of a product whereas, in the instant case it relates to use of a technology like in the case of M/s Essar Gujarat Ltd. (Supra). The imported goods cannot be legally used without a license to use the technology embedded in these goods.
9. The appellants have relied on decision of Hon'ble Apex Court in case of Essar Steel 2015-TIOL-63-SC-CUS. It is seen that in the said case the facts were different. The dispute was if the amount paid for Technical consultation and project engineering would be incredible in the assessable value. In the instant case the amount sought to be included in the fee payable for right to use the technology embedded in the plant. Similarly the facts in the decision of Hon'ble Apex Court in the case of Hindalco Industries 2015-TIOL-132-SC-CUS are different as it relates to post importation activities.
10. In view of above, we find that facts are akin to the facts in the case of Essar Gujarat Ltd. 1996 (88) ELT 609 (SC). In the said case, 10 | P a g e C/10703/2014-DB like in instant case, the fee was for right to use the technology embedded in the capital goods. In both cases it was paid to a third party. In both the cases plant could not be made operational without license to use the technology. From the above it is apparent that these may be no express condition to pay for the license know how while purchasing the goods but there is an implicit condition in the facts of the case as the goods cannot be used without a license to use the technology in built into it. Thus, relying on the decision of Hon'ble Apex Court in the case of Essar Gujarat Ltd. (Supra) the appeal not maintainable on merit.
11. The appellant have relied on decisions cited in para 2 above. In none of the cases the facts are same. In the instant case credit would not be available immediately but over a period as the goods are not inputs but capital goods. Thus, this does not result in an revenue neutral situation. Moreover, the liability to pay would arise at the time of import but the said credit can be used only after the plant is installed and production starts. Thus, it is not a revenue neutral situation.
12. In view of above we do not find any merit in the appeal. The same is dismissed.
(Pronounced in the open court on22.10.2018) (Raju) (Ramesh Nair) Member (Technical) Member (Judicial) Neha