Custom, Excise & Service Tax Tribunal
Mumbai vs Kinetic Technology India Ltd on 19 February, 2016
IN THE CUSTOMS, EXCISE AND SERVICE TAX APPELLATE TRIBUNAL
WEST ZONAL BENCH AT MUMBAI
APPEAL NO: C/875/2004
[Arising out of Order-in-Appeal No: 269/2004-MCH dated 18th June 2004 passed by the Commissioner of Customs (Appeals), MumbaiI]
For approval and signature:
Honble Shri M V Ravindran, Member (Judicial)
Honble Shri C J Mathew, Member (Technical)
1.
Whether Press Reporters may be allowed to see the Order for publication as per Rule 27 of the CESTAT (Procedure) Rules, 1982?
:
No
2.
Whether it should be released under Rule 27 of CESTAT (Procedure) Rules, 1982 for publication in any authoritative report or not?
:
No
3.
Whether Their Lordships wish to see the fair copy of the Order?
:
Seen
4.
Whether Order is to be circulated to the Departmental authorities?
:
Yes
Commissioner of Customs
Mumbai
Appellant
versus
Kinetic Technology India Ltd
Respondent
Appearance:
Shri S.J. Sahu, Asstt. Commissioner (AR) for the appellant Shri R Krishnan, Advocate for the respondent CORAM:
Honble Shri M V Ravindran, Member (Judicial) Honble Shri C J Mathew, Member (Technical) Date of hearing: 19/02/2016 Date of decision: 17/08/2016 ORDER NO: ____________________________ Per: C J Mathew:
Revenue is aggrieved by the impugned order no.269/2004- MCH dated 18th June 2004 of Commissioner of Customs (Appeals), Mumbai who has set aside the addition of US$ 175000 to the assessable value made while finalising the provisional assessment relating to project imports effected by M/s Kinetic Technology India Ltd (now known as Technip KT India Ltd) for M/s Gujarat Godrej Innovative Chemicals during 1991. The first appellate authority held the enhancement of assessable value by inclusion of value of price attributable to engineering information, drawing and design to be contrary to rule 4(1) of Customs Valuation (Determination of Price of Imported Goods) Rules, 1988 read with Rule 9(1)(e) and that the Honble Supreme Court in Tata Iron & Steel Co v. Commissioner of Central Excise & Customs, Bhubaneswar [2000(116) ELT 422 (SC)] had decided that post-importation expenses were not to be included in assessable value.
2. The respondent had entered into a contract with M/s Gujarat Godrej Innovative Chemicals Ltd for execution of project to erect and commission a PSA Hydrogen plant for its alpha olefins facility. Allegedly, the composite contract for supply of materials and the engineering information and design and drawings in which the price agreed as a consolidated sum was deliberately segregated at the insistence of the respondent. According to Revenue, this component of the agreement, valued at US$175000, included in the assessable value by the adjudicating authority in accordance with rule 9(1)(e) of Rules supra on finding that both aspects were part of the same agreement with the supply of engineering information as a condition of sale had been incorrectly overruled in the impugned order. The decision of the Honble Supreme Court in Collector of Customs (Prev), Ahmedabad v. Essar Gujarat Ltd [1996 (88) ELT 609 (SC)] was also cited.
3. The issue of valuation had been examined at the time of import in 1991 and, considering the provisions of rule 9(b)(iv) of the Rules supra viz. value of design work essential for production of the imported goods, the importer had been directed to deposit 43.5% as Extra Duty Deposit for registration of the contract under the Project Import Regulations, 1986. On a writ petition against this order, the Honble High Court of Bombay directed that bond for the Extra Duty Deposit be furnished and the goods cleared provisionally by classification as project imports under 9801 of the First Schedule to the Customs Tariff Act, 1975. The agreement for purchase at US$ 140000 and US$ 175000 for equipment in part and for engineering information, design and drawings respectively from M/s UOP Inter Americana Inc. was entered into on 14th November 1989 and purchase order dated 7th December 1989 placed by M/s Godrej Innovative Chemicals Ltd on M/s Kinetic India for supply of imported and indigenous equipment valued at US$ 132000 (= ` 34,41,982 @US$ 3.8350 for `100) and `39,00,000 respectively.
4. Revenue seeks restoration of the finding of the adjudicating authority. The original authority, on noticing that only one portion of the price payable, viz. for the equipment imported as parts, was declared in the bill of entry, relied upon the mandate for adjusting the value declared under Rule 4 in accordance with Rule 9 of Customs Valuation (Determination of Price of Imported Goods) Rules, 1988 to arrive at the price to be finally assessed to duty. First appellate authority, per contra, accepted the contention of the importer that there is no nexus between imported goods and the engineering drawings which relate to goods that are to be fabricated by them locally before incorporating in the plant for M/s Godrej Innovative Chemicals Ltd. It was held that the show cause notice was bereft of evidence that supply of goods were contingent upon payment for engineering drawings and further held that as the engineering drawings are intended for post-importation activity, the cost thereof is not, in accordance with decisions of the Honble Supreme Court, includible in the assessable value.
5. The grounds of appeal of Revenue, reiterated by Learned Authorized Representative, are that the first appellate erred in concluding that there was no evidence of sale of goods being contingent upon payment for engineering drawings and that engineering drawings were intended for use in post-importation activity; that the parts imported are integral to the plant which would require engineering drawings to make it functional and that rule 9(1) of Rules supra requires drawings and designs to be includible in assessable value. It is further submitted that the price of engineering drawings being payable renders it imperative as per rule supra to be included in assessable value. It was also held out that the deliberate act of splitting up of the total consideration for the agreement is sufficient evidence that the supply of goods was contingent upon providing the drawings; likewise, this was allegedly reinforced by the performance warranties that mandated the operation of the plant at the stipulated efficiency. The reliance on the decision of the Honble Supreme Court in re M/s Tata Iron & Steel Co Ltd in the impugned order was sought to be assailed on the ground that it dealt with a different includible element while the disregard of the decision of the Tribunal in Otto India Pvt Ltd v. Commissioner of Customs Kolkatta [2002 (149) ELT 477 (Tri)] affirmed by the Honble Supreme Court was sufficient to render the impugned order as not tenable.
6. Considering the criticality assigned in the appeal to the decision of the Tribunal in re Otto India Pvt Ltd, we have perused it and find that, on facts, it does not advance the cause of Revenue. The agreement in that transaction contained specific clauses relating to supply of proprietary equipment as well as the engagement of the local associate of the supplier of equipment with the importing-contractor to ensure guarantees. No such relationship or connection has been brought on record in the show cause notice that led finally to the order impugned in this appeal.
7. Learned Counsel for respondent produced the various agreements for execution of the project to evince that the two aspects of the agreement were not connected. It was also pointed out that research and development cess had been remitted on the amount charged for the engineering drawings in two tranches. Decisions of the Honble Supreme Court in Commissioner of Customs Ahmedabad v. Essar Steel Ltd [2015 (319) ELT 202 (SC)], Commissioner of Customs (Import) Mumbai v. Hindalco Industries Ltd [2015 (320) ELT 42 (SC)] and Tata Iron & Steel Co Ltd were cited to drive home the finality accorded to the issue in dispute.
8. The facts are simple enough: the project authority contracted with respondent to commission its PSA Hydrogen Plant for which the contractor placed order dated 15th November 1990 with M/s UOP Inter Americana Inc. for molecular sleeves, automatic control valves, current to pressure transducers and filter regulators. Another order dated 18th January 1991 requisitioned pressure safety relief valves, receiver gauges, pressure transmitters, pressure switches and temperature indicators. A third order was placed on 24th January 1991 for control panels of specified description. We also note that there is a separate approval for procurement of engineering drawings and designs.
9. A three-way agreement bound the overseas supplier to consign the listed parts to the respondent-importer who, in accordance with the contract entered into with M/s Gujarat Godrej Innovative Chemicals Ltd, commissions the plant after local procurement and fabrication of other components which go into the assembly. The engineering drawings are, undoubtedly, used to assemble the plant. However, it is not the case of Revenue that the components of the assembly are entirely supplied from abroad or even that the parts that are indigenously procured are sourced at the instance of the overseas supplier. There is no evidence that the warranty for the efficient performance of the plant is attached also to the indigenously procured components. Having supplied the drawings as well as a few valuable parts, it is only reasonable to devolve some level of responsibility on the overseas entity. We do not find in any of the records that the overseas entity has linked supply of all or some parts as condition for providing drawings. It would appear that the drawings relate to post-importation activity.
10. Having heard both sides and noted the facts, we are of the view that the crucial point for determination is whether the declared value of imported goods necessarily has to be subject to enhancement merely on the ground that a contract with the overseas supplier incorporates a second and distinct transaction. It would appear that the original authority has presumed that addition is mandated by Rule 9 of Customs Valuation (Determination of Price of Imported Goods) Rules, 1988.
11. In Commissioner of Customs (Import), Mumbai v. Hindalco Industries Ltd [2015 (320) ELT 42 (SC)] it was held that:
7. It is also to be borne in mind that the respondent had purchased various capital components from other parties and the goods for which the agreement was signed with OEC constituted only 16% of thee total value. On these facts, we are of the opinion that the matter is squarely covered by the recent judgment of this Court in Commissioner of Customs, Ahmedabad v. M/s Essar Steel Ltd [Civil Appeal No. 3042 of 2004] decided on 13th April, 2015 [20115 (319) ELT 202 (SC)].
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10. The consideration of these three agreements is laid into the valuation of supplies made by M/s Davy Dravo. Not only the supplies which the assessee took from the said Company constituted merely 16 per cent of the total capital goods and the remaining capital goods were purchased from some other exporters as well as indigenous, we also find that these agreements pertained to rendering of services which are post-import. Therefore, this case is also squarely covered by the judgment of this Court in Commissioner of Customs, Ahmedabad v. M/s Essar Steel Ltd [Civil Appeal No. 3042 of 2004] decided on 13th April, 2015 [20115 (319) ELT 202 (SC)].
12. Accordingly, we have perused the decision of the Honble Supreme Court in Commissioner of Customs, Ahmedabad v. M/s Essar Steel Ltd [20115 (319) ELT 202 (SC)], in which it was held thus:
7 A cursory reading of the Section makes it clear that Customs duty is chargeable on goods by reference to their value at which such goods or like goods are ordinarily sold or offered for sale at the time and place of importation in the course of international trade. This would mean that any amount that is referable to the import goods post-importation has necessarily to be excluded. It is with this basic principle in mind that the rule made under sub-clause 1(A) have been framed and have to be interpreted. and distinguishing the facts in Collector of Customs (Preventive) v. Essar Gujarat Ltd [1996 (88) ELT 609 (SC)] wherein the agreement covered a licence for operation of the plant which rendered it a pre-import transaction, the Honble Court went on to lay down the scope for resolution of such disputes thus:
8..In the present appeal, arguments have veered around the applicability of Rule 9(1)(e). In this appeal, we are concerned only with the first part of Rule 9(1)9(e). The narrow question that arises before us is whether the payment made for the technical services agreement is to be added to the value of the plant that is imported inasmuch as such payment has been made as a condition of sale of the imported plant. From the above, it would appear that the Honble Supreme Court has ruled that the situations envisaged in one or the other sub-clauses of rule 9 should be present in the import transaction for additions to be effected to the price adopted under rule 4 for assessment to duty. Consequently, it would appear that legislative intent did not envisage every declared transaction value to be subject to further adjustments merely because rule 9 is the adjustment provision moored to rule 4. This decision has taken note of Commissioner of Customs (Port), Kolkata v. JK Corporation Limited [(2007) 9 SCC 401 = 2007 (208) ELT 485 (SC)] to distinguished the judgment in re Essar Gujarat by drawing on Tata Iron & Steel Co. Ltd v. Commissioner of Central Excise & Bhubaneswar thus:
16. Reliance has been placed by Mr. Radhakrishnan on a decision of this Court in Essar Gujarat Limited (supra). In that case, the licence fee was paid to the supplier of the plant and machinery for a licence to operate the plant which was in reality nothing but was held to be an additional price payable for the plant itself and was, therefore, held to be includible in its assessable value. It is in the afore-mentioned fact situation, this Court held:
"13[12]. Reading all these agreements together, it is not possible to uphold the contention of Mr. Salve that the pre-condition of obtaining a licence from Midrex was not a condition of sale, but a clause inserted to protect EGL. Without a licence from Midrex, the plant would be of no use to EGL. That is why this overriding clause was inserted. This overriding clause was clearly a condition of sale. It was essential for EGL to have this licence from Midrex to operate this plant and use Midrex technology for producing sponge iron in India. Therefore, in our view, obtaining a licence from Midrex was a pre-condition of sale. In fact, as was recorded in the agreement, the sale of the plant had not taken place even at the time when the contract with Midrex was being signed on 4-12-1987, although the agreement with TIL for purchase of the plant was executed on 24th March, 1987. Therefore, we are of the view that the Tribunal was in error in holding that the payments to be made to Midrex by way of licence fees could not be added to the price actually paid to TIL for purchase of the plant."
17. The Court noticed several curious aspects of the Agreement stating that it started with the recital that "the Purchaser and the Seller have today respectively purchased and sold a Direct Reduction Iron Plant, on the following terms and conditions", which, according to this Court , indicated that the purchase and sale of the plant had taken place on 24th March, 1987, but in clause (2) it was stated that the purchaser would purchase the property from the seller at the stated price. Upon construing the terms of the conditions, it was opined:
"24.Therefore, the process licence fees of DM 2,000,000 was rightly added to the purchase price by the Collector of Customs. The order of CEGAT on this question is set aside."
19. However, in TISCO [(2000) 3 SCC 472], this Court took note of interpretative note to Rule 4 and held:
"The part of the 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 the imported goods.."
and noted with approval that 15..In an instructive passage on principle, this Court also laid down:
"9. The basic principle of levy of customs duty, in view of the aforementioned provisions, is that the value of the imported goods has to be determined at the time and place of importation. The value to be determined for the imported goods would be the payment required to be made as a condition of sale. Assessment of customs duty must have a direct nexus with the value of goods which was payable at the time of importation. If any amount is to be paid after the importation of the goods is complete, inter alia, by way of transfer of licence or technical know-how for the purpose of setting up of a plant from the machinery imported or running thereof, the same would not be computed for the said purpose. Any amount paid for post-importation service or activity, would not, therefore, come within the purview of determination of assessable value of the imported goods so as to enable the authorities to levy customs duty or otherwise. The Rules have been framed for the purpose of carrying out the provisions of the Act. The wordings of Sections 14 and 14(1-A) are clear and explicit. The Rules and the Act, therefore, must be construed, having regard to the basic principles of interpretation in mind.
11. What would, therefore, be excluded for computing the assessable value for the purpose of levy of customs duty, inter alia, has clearly been stated therein, namely, any amount paid for post-importation activities. The said provision, in particular, also applies to any amount paid for post-importation technical assistance. What is necessary, therefore, is a separate identifiable amount charged for the same. "
13. It is, therefore, unambiguously clear that rule 9 of the Rules supra does not confer a blanket mandate to add the value of elements of a contract merely because the supply of imported goods are covered in the same contract. The nature of each element of the contract that has a separate and distinct value, whether so segregated at the specific request of the importer or not, must be scrutinized for ascertainment as pre-importation component for addition to the assessable value. Prima facie, the value of engineering drawings is a post-importation cost. No evidence has been adduced to show that the provision of these drawings is conditional to placing order for equipment or that it is a pre-importation cost. Sans such a submission, we are unable to agree with Revenue that we must interfere with the impugned order.
14. The facts do not warrant the invoking of rule 9 supra. Likewise, mere supply of drawings at a value in the same agreement does not, ipso facto, have the support of law resort to rule 9 supra. Appeal of Revenue is dismissed.
(Pronounced in Court 17 /08/2016) (M V Ravindran) Member (Judicial) (C J Mathew) Member (Technical) */as 8 13