Custom, Excise & Service Tax Tribunal
Indian Oil Corpn. Ltd vs Commr. Of Customs, Kolkata on 11 September, 2012
CUSTOMS, EXCISE AND SERVICE TAX APPELLATE TRIBUNAL
EAST REGIONAL BENCH : KOLKATA
Customs Appeal Nos. 128-129/2008
(Arising out of the Order-in-Appeal Nos.KOL/CUS/CKP/73&74/08 dated 29.02.2008 passed by the Commissioner of Customs (Appeals), Kolkata)
For approval and signature of:
SRI S.K. GAULE, HONBLE TECHNICAL MEMBER
DR.D.M. MISRA, HONBLE JUDICIAL MEMBER
===========================================
1. Whether Press Reporters may be allowed to see :
the Order for publication as per Rule 27 of the
CESTAT (Procedure) Rules, 1982 ?
2. Whether it should be released under Rule 27 of the :
CESTAT (Procedure) Rules, 1982 for publication
in any authoritative report or not ?
3. Whether Their Lordships wish to see the fair copy :
of the Order?
4. Whether Order is to be circulated to the Departmental :
===========================================
Indian Oil Corpn. Ltd.
APPELLANT(S)
VERSUS
Commr. of Customs, Kolkata
RESPONDENT(S)
APPEARANCE
Dr. Samir Chakraborty, Advocate
FOR APPELLANTS
Sri D.K. Acharya, Special Counsel (A.R.)
FOR THE RESPONDENTS
CORAM:
SRI S.K. GAULE, HONBLE TECHNICAL MEMBER
DR.D.M. MISRA, HONBLE JUDICIAL MEMBER
DATE OF HEARING : 11.09.2012 Date of Pronouncement:03.12.2012
ORDER NO.
Per SRI S.K. GAULE
1. Heard both sides.
2.1 Appellant filed these appeals against order-in-Appeal Nos.KOL/CUS/CKP/73 & 74/08 dated 29.02.2008 whereby ld.Commissioner(Appeals) has upheld the lower adjudicating authoritys order.
2.2 Briefly stated the facts of the case are that the appellant entered into contracts No.PJ/EXP/DHDT/LSTK/2/DLDA/02 dated 16.11.1999 with M/s.Samsung Engineering Co. Ltd., Korea (SECL) for residual process design, detailed engineering, procurement, supply construction, fabrication, erection, installation, testing, commissioning and mechanical guarantee of Diesel Hydro-Treater Unit (DHDT) for Barauni Refinery Expansion Project. Another contract No.PJ/EXP/FCC/LSTK 1/DLDA/02 dated 16.11.1999 was also made with the name foreign supplier for residual process design, detailed engineering, procurement, supply, construction, fabrication, erection, installation, testing, commissioning and mechanical guarantee for FCC, LPG & Gasoline Treatment Unit including DCS & its controlling Room for Barauni Refinery Expansion project got the contracts registered under Project Import scheme under two files F.No.S37C(G)Proj 121 & 122/2000A(6) & part value under S37C(G) Proj 09 & 10/2001A(6). The files were forwarded to the Special Valuation Branch, (SVB) in February, 2001 to examine the same for inclusion of residual design & engineering charges and other charges in the invoice value of imported goods to determine the assessable value of goods under Section 14(1) of the Customs Act, 1962 read with Rule 9 of Customs Valuation (Determination of Price of Imported Goods), Rules, 1988(CVR88). The concerned assessing authority asked for payment of 1% of assessable value as Extra duty deposit in terms of S.O.9/98 issued in terms of the directions of CBEC. The appellant requested for waiver of 1% of deposit on the ground that the price portion indicated in contract is inclusive of design and engineering charge of the equipment and material as well as service charges of LSTK contrctor. SVB questionnaires were forwarded to the appellant and they submitted reply vide a consolidated letter dated 14/02/2001 to the effect that the SVB questionnaires were not related to them. Once again request was made to submit reply to the said questionnaire and copies of bills of entry and other documents required for finalization of the case registered at SVB. The appellant submitted letters No.Cal/IOCL./SD/SVB/1,2 & 3 dated 09.01.2002 in response to the SVB questionnaire. On further enquiry, they also submitted copy of agreement entered into with the process licensor M/s.UOP, Americana for DHDT Unit and M/s.Stone and Webster Engineering Corporation/Houston (SWEC) for FCC Unit. Regarding relationship, it was submitted that the appellant entered into agreements with Process licensors. The process licensors provided the process design to the appellant. M/s.Samsung Engineering was the LSTK contractor and executed the job as per Engineering, Procurement and construction (EPC) basis. The impugned orders duly mentioned all the salient features of the contracts e.g. detailed letter of acceptance, summary or break-up of lumpsum prices, agreement on Diesel Hydrotreater Unit, Engineering agreement, guarantee agreement, catalyst supply agreement and lumpsum payments under the technical collaboration. The lower adjudicating authority finalized the assessment by loading the assessable value. Aggrieved by this the appellant filed appeal before ld.Commissioner(Appeals). Ld.Commissioner(Appeals) upheld the findings of the lower adjudicating authority. Hence the appeal.
3.1.1 The contentions of ld.Advocate in relation to Appeal No.Cus.Ap.128/08.
3.1.2 The contentions of ld.Advocate appearing for the appellant is that the undisputed facts regarding the issue relating to Process Design & Basic Engineering fee ("PDBE fee") are as under:
(i) The price portion indicated in the Equipment Agreement dated 16.11.1999 is inclusive of design and engineering charge of the equipment and material as well as service charges of Samsung.
(ii) The design/engineering of FCC plant was carried out by Samsung in Korea and cost of the same was charged to the appellant separately.
(iii) The price paid for equipments to vendors as per the Equipment Contract was full and final and no further cost was incurred for developing or finishing the equipment.
(iv) The Engineering Agreement with SWEC, USA was a separate agreement entered into on October 1, 1998, whereunder the appellant was granted the rights to acquire the license to use certain technical information and patent rights for the purpose of designing. constructing, operating and maintaining "a unit" for the commercial practice of FCC at Barauni Refinery.
(v) The agreement with SWEC was a technical cooperation agreement approved by Secretariat of Industrial Assistance, Government of India vide approval letter no. 66(98)/513(98)/PAB, whereunder the appellant is to pay SWEC for technical know-how fees, for process package, for engineering services, viz., review of detailed engineering/drawings (for 30 days), fees for assistance for procurement, construction and inspection (for 90 days), for pre-commissioning and start-up activities.
3.1.3 The appellant further submitted that the undisputed facts relating to royalty (technical know-how fees) are as under:
(i) Royalty is related to production for the use of patented technology.
(ii) Payment of royalty is based on design capacity of the FCC unit to produce Motor Spirit, LPG, High Speed Diesel and LSHS.
3.1.4 Undisputed fact relating to design of Glue Gas Piping and Catalyst Piping under the Engineering Contract is that the appellant is obliged to pay SWEC a sum of US$ 4,20,000 for the job of specifying the flue gas line piping, determine locations for supports and guides of the orifice chamber, specify the expansion joint for the flue gas line, specify all catalyst transfer lines, to work with the slide valve and diverter valve suppliers to ensure that the valves conform to the pipe stress analysis performed by SWEC and to provide all specifications, requisitions, drawings and any other technical documents required to solicit proposal and for procurement of the equipments from different vendors.
3.1.5 The contention of the appellant is that the value has been loaded as per Rule 9(1)(c) and Rule 9(1)(e) of the CVR 88. The contention is that neither Rule 9(1)(c) nor Rule 9(1)(e) can have any application whatsoever and the question of including any part of the technical know-how/royalty fees or PDBE fees under the Engineering Agreement with SWEC, USA in the cost of equipments imported under the Equipment Contract with Samsung under a separate subsequent agreement (the Equipment Contract) cannot and does not arise, contrary to the incorrect finding of the adjudicating authority, which have been wrongfully upheld by the Commissioner(Appeals).
3.1.6 The appellant referred to para 15, 16, 18, 20 & 21 of Honble Supreme Courts decision in the case of Collector of Customs Vs. Ferodo India Pvt.Ltd.-2008(224) ELT 23 (SC). The contention is that in para 17 and 22 of the judgement of Supreme Court in the case of Collector of Customs vs. Esser Gujrat Ltd. 1996 (88) ELT 609(SC) has also considered its earlier decision in the case of Esser Gujrat Ltd. (supra). Appellant also placed reliance on para 16 of Honble Supreme Courts decision in the case of Commissioner of Customs (Port) vs. J.K.Corporation Ltd. 2007 (208) ELT 485 (SC). The contention is that from the aforesaid decisions of Honble Supreme Court it is clear that addition under Rule 9(1)(c) has to be of payments which constitute a condition prerequisite for the supply of the imported goods from the foreign supplier. Royalties/licence fees are to be paid to the foreign supplier of the equipments. In the instant case neither the licence fee nor the royalty payments are to be paid to Samsung, the supplier of the imported equipments. No part of such licence fee/royalty, directly or indirectly, was payable or was to be received by Samsung. There is also no finding to the contrary in either of the adjudication order or the said order of the Commissioner(Appeals).
For application of Rule 9(1)(e) there has to be a finding that although termed as royalty/licence fee, the payment was made or is to be made as a condition prerequisite for the sale of the imported goods and was in fact not royalty/licence fee. Further, once having failed to establish application of Rule 9(1)(c) and thus addition of royalty/licence fee on the price of the imported goods, the Department cannot fall upon Rule 9(1)(e). There is no finding in either of the adjudication order or the said order of the Commissioner(Appeals), as it could not be, that in the garb of royalry/licence fee some other payment was being made for the imported equipments.
3.1.7 The contention is that from the Engineering Agreement with SWEC it would be seen that payment of royalties under clause 4.1 of the Licence Agreement part thereof was in consideration for the right and licence to use the Proprietary Rights" granted to the appellant.
The said payment therefore has no nexus, contrary to the incorrect finding of the adjudicating authority, with the goods imported under the equipment contract subsequently from Samsung.
3.1.8 Similar is the case with the PDBE Package fees, which would be evident from, inter alia, clause 2.1 of the Licence Agreement part of the Technology Agreement with SWEC.
3.1.9 From the "Scope of Work" under the Engineering Agreement part of the said Technology Agreement is contained in Section 2 thereof. It can be seen that SWEC is required to merely provide with the specifications, data and review the respective documents upon submission thereof by the appellant or its authorised contractor. SWEC had no direct or indirect role in the procurement and supply of equipments by the appellant and the price thereof. The appellant was free to choose the vendor or vendors from whom the equipments were to be purchased as per the specifications, data and the basic design provided by SWEC. There is no condition in the Agreement with SWEC that the equipment had to be procured from Samsung or that the Equipment Agreement was entered into pursuant to such condition in the Engineering/Technology Agreement. In fact SWEC had no participation in the matter of manufacture or purchase of the equipments imported under the Equipment Contract from Samsung by the appellant. The relevant records show the even the detailed engineering and drawings relating to the said imported equipments had not been prepared or provided by SWEC and it was not required to do so under the agreement. Moreover, it is also an undisputed fact that the cost of design and drawing of the equipments had been included in the cost of equipments imported under the Equipment Contract.
3.1.10 It is submitted that the distinguishing factors as laid down by the Supreme Court in Ferodo India Pvt. Ltd.'s case (supra) and J.K. Corporation Ltd. (supra) as regard applicability of the Essar Gujarat Ltd.'s case (supra) are also fully applicable to the instant case, in the undisputed facts and circumstances referred to hereinabove. There is no nexus, let above "direct nexus" of the royalty/licence fees or the PDBE package feel with the imported equipments or the functioning thereof. Further there being no such "specifically recorded conditions/terms" in the Agreement itself, no such condition can be inferred on mere assumption or presumption, as has been sought to be done in the adjudication order and also as contended on behalf of the respondent herein. The said decision of the Supreme Court in Essar Gujarat Ltd.'s case (supra) has therefore no manner of application whatsoever to the instant case.
3.1.11 Insofar as the design of Flue Gas Piping and Catalyst Piping fees is concerned, contrary to the incorrect finding of the adjudicating authority, no detailed design or drawing was provided by SWEC nor was it required to provide the same under the agreement. What was provided were only the specification and data. No mechanical drawing actually required for the manufacture of the equipments was either required to provide or was provided by SWEC under the Engineering Agreement, which is clear from para 1.3 of clause 5 of the Licence Agreement forming a part of the Engineering/Technology Agreement with SWEC.
1.3 The term 'Technical Information' as applied to any party, shall mean all operating techniques, apparatus data, technical data, information embodied in patent, pending patent application, improvements, developments and know-how to the extent that the same is applicable to, or relates to the subject technology (as herein after defined) and which is owned or controlled by the party or is affiliates, or which is possessed by that party or its affiliates without any restriction on further disclosure at any time prior to the termination of this Agreement."
3.1.12 The purported reasoning adopted in the adjudication order and upheld by the Commissioner (Appeals) that the provision of specifications, requisitions, basic drawing, technical documents, data being pre-importation activities in the absence whereof the equipments cannot be procured from different vendors makes a part of the fees therefor allocable towards the value of the equipments (imported under a separate agreement from a separate party where neither of the two parties viz., SWEC and Samsung have any lis between them) is completely erroneous and contrary to the principles laid down by the Apex Court and hence untenable and unsustainable.
3.1.13 Besides the erroneous appreciation and/or interpretation of the relevant statutory provisions and application thereof of the undisputed facts on record of the instant case, the adjudication order is also based on certain incorrect factual premises, which has also vitiated the same. In para 31, page 15 of the said adjudication order it is contended that the technical know-how information to be provided under the Engineering/Technology. Agreement by SWEC was not limited to the process only but also to "data and know-how `or other such information on the design, maintenance, testing, unit operating performance, yields, operation or modification of the equipment used in the practice of the S&W FCC Process as well as the equipment itself". From no clause of the said Agreement it would be seen that there is any such sub-clause "as well as the equipment itself)'. This is an addition to the written contract between the parties by the Assistant Commissioner, which he has no right, authority or jurisdiction in law to do.
3.1.14 It is relevant to state herein that the same adjudicating authority in the subsequent adjudication order dated May 30, 2007 (being the subject matter of Appeal No. 129 of 2009) has, dealing with similar Technology/Engineering Agreement dated February 17, 1999 entered into by the appellant with UOP INTER- AMERICANA, INC, USA for procuring processed technology with all allied and necessities required for commissioning productive operations of the process with guaranteed productivity of a Hydrotreater Unit, which was being set up at Barauni Refinery, equipments in respect whereof were also imported from Samsung under the same Equipment Agreement dated November 16, 1999, has held that there can be no addition of royalty or a part thereof to the invoice values of the equipments to determine their transaction values under Rule 9(1)(c) or Rule 9(1)(e) of the Valuation Rules. The reasonings contained in support thereof are at paras 31 and 36 of the said adjudication order dated May 30. 2007. The same principle and the decision of this Hon'ble Tribunal relied upon by the Assistant Commissioner in support of this conclusion referred to therein, are also fully applicable to the instant case.
3.2.1 The contentions of ld.Advocate in relation to Appeal No.Cus.Ap.129/08.
3.2.2 The contentions of ld.Advocate appearing for the appellant is that in order to optimize improvement of quality of HSD Oil the appellant proposed to setting up of a Hydrotreater Unit at its Barauni Refinery. The appellant decided to complete the project in two successive steps.
(i) Firstly to procure the Process Technology with all allied and associated necessities required by the vendor to implement the process and commission production to be subsequently followed by proper training by the vendor of the appellants personnel.
(ii) Secondly thereafter to appoint a competent party for the rest of the engineering relating to structural works including ground planning of the Unit/Plant as well as construction, erection, equipment set up planning of the proposed plant and also procurement and supply of the equipments according to the specifications provided in the process technology obtained under the first step.
3.2.3 The purported reasoning contained in the adjudication order of the Assistant Commissioner in coming to the conclusion that a part of the Basic Engineering Package was related to equipments and therefore had to be added proportionately in the manner as laid down in the order towards value of equipments. None of the reasoning contained therein satisfy the requirement settled by the Apex Court for application of either Rule 9(1)(c) or Rule 9(1)(e) of the Valuation Rules and, consequently, adding any part of the basic engineering fees paid or payable to UOP, USA under the Engineering Contract to the value of the equipments imported under the Equipment Contract from Samsung, to determine their respective transaction values for the purpose of levy of Customs duty under the Act. In this respect to avoid prolixity and repetition the submissions made in Paragraphs 9.3 to 9.12 hereinabove are reiterated.
3.2.4 On a comparison of the two adjudication orders dated May 15, 2007 and the instant adjudication order dated May 30, 2007, insofar as the "Discussion and Findings" part thereof relating to the issue as to whether or not any part of the basic engineering fees supplied under the two Technology/Engineering Agreements is to be added to the invoice value of the equipments imported under the Equipment Contract, which are contained in paragraphs 30 to 34 of the adjudication order dated May 15, 2007 and paragraphs 23 to 30 of the instant adjudication order dated May 30, 2007, it would be seen that they are more or less verbatim the same. There is no specific or separate finding or reasoning in the adjudication order dated May 30, 2007 which distinguishes in any manner the reasoning contained in the order dated May 15, 2007 or provides any new material or basis which is not there in the said adjudication order dated May 15, 2007. As such for the same reasons and undisputed factual premises as set out in the various paragraphs 6 to 9 (including the sub-paragraphs thereof) hereinabove, there can be no invocation of Rule 9(1)(c) or Rule 9(1)(e) of the Valuation Rules in the instant case also and, consequently, no addition of any part of the fees paid for the Basic Engineering Package to UOP, USA under the Engineering/Technology Agreement in the invoice values of the equipments imported under the Equipment Contract from Samsung and findings to the contrary in the said adjudication order, affirmed by the said order of the Commissioner (Appeals) are erroneous, untenable and unsustainable.
3.2.5 The appellant therefore states and submits that both the appeals be allowed and the impugned orders of the Commissioner (Appeals) and the adjudication orders of the Assistant Commissioner affirmed thereby be set aside, with consequential relief to the appellant.
4.1.1 The contentions of ld.Counsel in relation to Appeal No.Cus.Ap.128/08.
4.1.2 The contention of ld.Counsel appearing for the department is that the Licence agreement was to transfer know- how and right to licence certain technical information and patent right relating to Fluidised Catalytic cracking Technology (FCC) by SWEC to IOC for the purpose of designing, constructing, operating and maintaining a unit for commercial practice of FCC process , to be located at Barauni Refinery, Bihar. The Licence agreement had a "Confidentiality' section and an equipment list and there was a royalty schedule of licence agreement. There was the "engineering agreement" between SWEC, Houstan, Texas, USA and IOC of same dt. i.w. 1.10.98, for SWEc to perform certain engineering design, specifications related licensed for the licensed FCC unit at Barauni. The Process Design, includes, inter - alia the detailed equipment - list, catalyst requirement, details of equipment process datasheets, a whole host of details. In exhibit A of Appendix A it is clearly mentioned that SWEC will furnish approved vendor list for all critical equipments. Exhibit B of appendix A gives the design basis of FCC unit at Barauni Refinery. Then there is the "guarantee agreement" whereby the licenser SWEc, in consideration of payments specified under "License agreement" and "engg agreement" gives certain guarantees with respect to performance of the licensed FCC unit. It is interesting to observe that about one year before lOC's lumpsum turnkey contract with Samsung Korea, IOC entered into a triple agreement with SWEC of USA, which was approved by Secretariat for industrial Approval, Govt. of India. As rightly observed by the AC in para 31 of OIO, there is an inseparable link between technology and equipments. The procurement of equipments from the main suppliers of Korea or other vendors is conditional upon the licence - cum -technology agreement with SWEc of USA. The 1998 agreement of IOC with SWEc provided the design basis and specifications of equipments for which a posterior agreement of 1999 was made with Samsung of Korea for import of equipments. The contention is that the Honble Supreme Courts decision in the case of Essar Gujarat case reported in 1996 (88) E.L.T. 609 (SC) is rightly applicable in this case. In support of his contention he placed reliance on the four cases as reported in 1999 (112) ELT 479 (T), 2000 (120) EKLT 30 (SC), 2000 (120) ELT 265 (T) and 2005 (191) ELT 1091 (Tri - Chennai). The contention is that the conditionalities of supply of imported equipments and materials by M/s.Samsung Engineering Company Ltd. of South Korea to M/s.Indian Oil Corporation Ltd., on IOCs triple agreements (Licence Engineering Guarantee Agreements) with Stone & Webster Engineering Corporation, USA (SWEc) for Fluidized Catalytic Cracking process (FCC) at IOCs Barauni Refinery is revealed from the following clauses of agreements:-
a) Clause 3.4 provides that licensee will obtain SWECs approval of Licensees detailed engineering contractor for disclosing technical information available in PDBEP by the licensee.
b) Clause 3.5 provides that SWEc will make its technical information available to IOC and one or more contractors for the design, construction, operation, maintenance, repair or alteration (including expansion) of the licensed FCC unit, provided that for the equipments mentioned in exhibit B of License Agreement, IOC shall take prior approval of SWEc for the selection and engagement of contractor (in this case M/s.Samsung) who, according to SWEc should be competent and capable of using SWECs technology for design, construction, expansion etc. of the licensed FCC unit. It is even provided in clause 3.5(ii) that such contractor (in this case, Samsung) shall have entered into an agreement with SWEc to treat the technical information as strictly secret.
c) As per clause 4.1 of the Licence Agreement read with Exhibit C, IOC have to pay SWEc a royalty for the licensed FCC unit, which is nothing but a licence fee or technical know-how or fee for supply of basic design and engineering drawings etc. 2a) According to the Engineering Agreement, Clause 2.1.1, SWEc shall prepare the Process Design and Basic Engineering Package (FCC unit PDBEP) and deliver 15 copies of FCC unit PDBEC to be used by IOC and its Engineering Contractor(s) and clause 2.1.2. reiterates that FCC unit PDBEP will conform to the basic design requirements set forth in Exhibit B, where the design specifics of equipments like Reactor, Regenerator, Converter Catalyst storage and transfer systems, etc. are given.
b) Clause 2.1.5 specifies that SWEc will provide a standard supervisory operational manual for IOCs use and IOC or its Engineering Contractor will prepare the detailed operating manual for the licensed FCC unit.
3) As per the Guarantee Agreement, Clause 2.1 (a), the performance guarantee, provided in clause 3 shall be valid if the licensed FCC unit be designed and constructed in accordance with the FCC unit PDBEP.
4.1.3 Ld.Counsel also placed reliance on the following decisions:-
a) 2000(120)ELT 30(SC) Mukund Ltd. vs. CC(Airport), Mumbai
b) 2005(191)ELT 1091 (Tri-Chennai) Continental Coffee vs. CC(Chennai)
c) 2000(120)ELT 265(Tribunal) TDT Copper vs. CC(New Delhi)
d) 1999(112)ELT 479 (T) 4.2.1 The contentions of ld.Counsel in relation to Appeal No.Cus.Ap.129/08.
4.2.2 The contentions of ld.Counsel appearing for the Department is that the Asst. Commissioner vide his OIO No. Kol / Cus /AC (SVB) /09 /07 dt. 30.05.07 loaded the assessable value of equipments, machinery and spares imported under contract dated 16.11.1999 with Samsun of Korea by lOC by US $ 29,232/- to the invoice value of goods under sec 14 (1A) of CA'62 r.w. Rule 4 and Rule 9(1) (c) & 9(1) (e) of CVR, 1988. Here also, before entering into lump sum Turnkey contract dated 16.11.1999 with Samsung of Korea, IOC entered into agreements dt. 17.02.1999 ( 4 agreements, namely licence agreement, engineering agreement, guarantee agreement and catalyst supply agreement) with M/S UOP inter - Americana inc. US, for the construction of diesel hydrotreater (DHDT) unit at Barauni, with the purpose of reducing sulphur from HSD produced in the Refinery. For this one Hydrogen was necessary to meet the requirement of hydrogen gas. The agreement with VOP I -A, USA was a technical collaboration agreement approved by the Secretariat for industrial Approval . As per this agreement IOC has to pay has to pay technical know - how fees - (a) US $ 4,91,560/- plus (b) design / drawings fees - US $ 6,09,000/-. The sale or procurement of equipments here is also conditional upon the technology agreement with the third party i.e M/S. VOP - IA of USA to whom payment for design / basic engineering has been made. Thus the design basis and specifications of equipments were incorporated in the anterior agreement with the American Company and the global tender floated invited bids on the basis of designs and specifications already laid down by the American Company for the DHDT project in Barauni. So the process licence of the American company, granted to IOC and the equipments procured from Samsung, Korea are intimately inter - related. It is not for nothing that the technical collaboration agreement with American Company VOP-IA, having been made in Feb 1999 was an anterior agreement whereas the contract for supply of equipments with the Korean company in Nov 1999 was a posterior one and the two agreements could not have been the other way round or even simultaneous. The licenser (VOP-IA, USA) under the first agreement here, grants to the licensee (IOC) a licence under VOP's patent rights to use Distillate process in the units; and under engineering agreement, agrees to provide engineering services for the Distillate process in the Barauni refinery; will also give design basis, process description, stream data, drawings & diagrams, there is a project specification Book which gives applicable specifications for process equipment and materials for the unit, which include the necessary process information and selected mechnical information for the procurement and /or detailed design of equipments by others. Appellants claim that equipments supplied incorporated the specifications etc. and hence the price was reflecting the technology agreement is faulty logic. The question is there were two approaches open to IOC : (1) The approach taken in this case and (2) IOC could have told Samsung to supply equipments according to VOP 1A technology; then Sumsung would have approached VOP-1A for the technology; then Sumsung would have been charged some fees and then the same had to be factored as cost by equipment supplier i.e. Samsung.
5.1 We have carefully considered the submissions made from both the sides and perused the records. We find that initially all the cases were forwarded to SVB were provisionally assessed with 1% security deposit which was subsequently adjusted in accordance with Rule 9 of Valuation Rules, 1988 which was upheld by the ld.Commissioner(Appeals). The ld.Commissioner(Appeals) has decided, the case, as under:-
It is evident from the impugned order that the Special Valuation Branch has made elaborate study of the relevant agreements and has been investigated specially in respect of feasibility of inclusion or adjustment of different charges under Rule 9 of the Customs Valuation Rules, 1988. The adjudicating authority has observed that the appellant has entered into Agreements dated 17.02.99 such as License Agreement, Engineering Agreement, Guarantee Agreement & Catalyst Supply Agreement before entering into lumpsum turn key contract dated 16.11.99 with M/s.Samsung Engineering. There are inseparable links between technology and equipments. It is admitted fact that payments for basic design and engineering is for the Process Design of the entire plant or unit with specification which are related to both indigenous and imported goods. It is observed by the lower authority that the Process Licensor has got a very big role in detailed engineering, procurement and fabrication of equipments. The construction of the unit or procurement of equipments is conditioned by the sale of technology consisting of Engineering Design Specifications and thus, the sale of technology is a pre-condition for sale of equipments. The lower authority has observed that the Basic Design Engineering given by the Process Licensor is the engineering package required for both process as well as the equipments with specification suited for the successful run of the unit. It is observed that the activities undertaken by the Process Licensor for which he has been paid the Basic Design & Engineering charges and other charges cannot by any stretch of imagination be termed as Post importation activities on the imported goods. It is also observed that the Department placed reliance on the decisions of Apex Court in the matter of M/s.Esser Gujrat Ltd. [1996(88)ELT 609(SC)] and Tribunal in the matter of M/s.Mukund Ltd. [1999(112)ELT 479(T)]. The latter decision was confirmed by the Apex Court in [2000(120)ELT 30(SC)]. Reliance was also placed on the case laws of M/s.TDT Copper Ltd. [2000(120)ELT 265(T)]. It is noticed that the ratio of the decisions referred by the Department are applicable in the instant case and therefore, the findings made in the impugned order are having legality and propriety.
The grounds put forward by the appellant in respect of the decision in the matter of Continental Coffee Ltd. is not appropriate in view of the Honble Tribunals observation that though it was not expressly stipulated in the Agreement that sale of capital goods by BFP to CCL was subject to purchase by CCL from BFP of technical Know-how for erection and operation of instant coffee plant, such a condition was implicit in the Agreement.
In view of the above, I do not find any reason to interfere with the orders of lower authority and upheld the same.
The appeals are rejected.
5.2 From the above it is clear that ld.Commissioner(Appeals) has upheld the lower adjudicating authoritys order in toto, without addressing the averments made by the appellant. The relevant portion of the lower adjudicating authoritys order is reproduced hereunder:-
(i)(a) A part of the Technical Know-how fee (license fee) and Process Design Basic Engineering fee and lump sum fees for detail design of Flue Gas Piping and Catalyst Piping associated with reactor/regenerator and office chamber paid to SWEC, USA are to be allocated towards the assessable value of equipments under Rule 9(1)(c) and/or Rule 9(1)(e) of the Customs Valuation Rules, 1988.
(b) 10% of Technical Know-how fee (license fee) of US$ 18,41,000 and PDBE fee of US$ 17,50,000 are to be allocated towards the cost of equipments imported.
(c) Since the ratio of imported and indigenous goods under the Equipment Contract is almost 40:60, 40% of US$ 3,59,100 i.e. US$1,43,640 is a portion towards the invoice value of equipments and machinery under Section 14(1) of the Act read with Rule 4 of the Valuation Rules adjusted in accordance with Rule 9(1)) and/or Rule 9(1)(e) of the Valuation Rules.
(ii)(a) In the absence of any break-up of lump sum fees for the Design of Flue Gas Piping and Catalyst Piping associated with reactor/regenerator and office chamber, 10% of US$ 4,20,000 i.e. US$ 42,000 is allocated towards the cost of equipments.
(b) Since the details in engineering does not differentiate between the imported and indigenous equipments which are in the ratio of 40:60, 40% of US$ 42,000 i.e. US$ 16,800 is apportioned towards the value of imported equipments under Rule 9(1)(c) and/or Rule 9(1)(e) of the Valuation Rules.
(iii) The assessable value of the machinery and equipments and spares imported under the Contract dated November 16, 1999 with Samsung is to be determined by addition of US$ 1,60,440 to the invoice value of the goods under Section 14(1A) of the Act read with Rule 4 and Rule 9(1)) and/or Rule 9(1)(e) of the Valuation Rules, proportionately all the Bills of Entry filed for clearance of imported goods. The provisional assessments are to be finalized accordingly.
5.3 The Assistant Commissioner in the Adjudication Order, inter alia, held as under:-
(i)(a) A part of the basic design engineering package is related to equipments viz. providing the specifications of equipments and thereafter reviewing of detailed design of the equipments to confirm that the same have been manufactured as per specifications provided in the basic engineering covered by the Technology Agreement and are in conformity with the process requirements and therefore the sale of equipments is conditioned by the supply of Basic Design and Engineering Process in the Technology Agreement and hence a part of the payment towards Basic Design and Engineering in the said technical collaboration agreement with UOP apportioned towards the value of equipments under Rule 9(1)(c) and/or Rule 9(1)(e) of the Valuation Rules.
(b) 10% of the basic engineering fees of US$ 6,09,000 is to be added towards value of equipments.
(c) Since the ratio of imported and indigenous goods comes to almost 48:52, 48% of US$ 60,900 (10% of the Basic Engineering, Design & Drawing fees) i.e. US$ 29,232 is to be added towards the invoice value of equipments and machinery under Section 14(1) of the Act read with Rule 4 of the Valuation Rules adjusted in accordance with Rule 9(1)(c) and/or Rule 9(1)(e) of the Valuation Rules (para 35, page 29 of the Second Adjudication Order).
(ii) Royalty or technical know-how fees (license fee) is not to be added to the invoice value of the equipments under the Equipment Agreement to determine their transaction value under Rule 4 read with Rule 9 of the Valuation Rules (Para 31, Pages 25-26 and Para 36 page 29 of the Adjudication Order).
5.4 From the conjoint reading of the above orders it is clear that the department loaded the assessable value of equipment on account of technical know-how (licence fee) and design fee received from SWEC in the case covered under Appeal No.Cus.Ap.128/08. The department loaded the assessable value of design fees in the case covered under Appeal No.Cus.Ap.129/08, however, did not load the value on account of royalty or know-how fees. The value has been loaded under Rule 9(1)(c) and Rule 9(1)(e) of Valuation Rules. The relevant Rules are reproduced hereunder for convenience of reference.:-
Cost and services - (1) In determining the transaction value, there shall be added to the price actually paid or payable for the imported goods-
(c) royalties and licence fees related to the imported goods that the buyer is required to pay, directly or indirectly, as a condition of the sale of the goods being valued, to the extent that such royalties and fees are not included in the price actually paid or payable.
(e) all other payments actually made or to be made as a condition of sale of the imported goods by the buyer to the seller, or by the buyer to a third party to satisfy an obligation of the seller to the extent that such payments are not included in the price actually paid or payable."
5.5 The cardinal principle for loading the value under Rule 9 is condition of sale of imported goods by the buyer to the seller or the buyer to a third party to satisfy an obligation of seller to the extent that such payments are not included in the price actually paid or payable. The principle regarding the application of Rules 9(1)) and 9(1)(e) has been succinctly explained and set out, upon considering all earlier decisions on the issue including the decision in Collector of Customs Vs. Essar Guirat Ltd., 1996 (88) ELT 609 (SC), by the Supreme Court in the case of Commissioner of Customs Vs. Ferodo India Pvt. Ltd., 2008 (224) ELT 23 (SC). In Paragraphs 15,16,18,20 and 21 of the judgment it has been observed and held as under:
15. Rule 9(1)) extends the quantum of levy under rule 4. Rule 9(4) mandates that there can be (no) addition to the transaction value except as provided in rule 9(1) and (2). Hence, addition for cost can only be made in situations coming under rule 9(1) and (2) Rule 9(1) and (2) is based on the principle of attribution. Under Customs law, valuation is done on pricing whereas in the case of transfer pricing under Income-tax Act, 1961, valuation is profit based. The principle of attribution of certain costs (including royalty and licence fee payments) to the price of the imported goods is provided for in rule 9 under situations mentioned in rule 9(l) and (2). In transfer pricing, the arms length price is inferred from various methods to avoid profit-shift from one jurisdiction to another and it is here that principle of allocation of profits comes in (i.e. in the case of transfer pricing).
16.?Under Rule 9(1)(c), the cost of technical know-how and payment of royalty is includible in the price of the imported goods if the said payment constitutes a condition pre-requisite for the supply of the imported goods by the foreign supplier. If such a condition exists then the payment made towards technical know-how and royalties has to be included in the price of the imported goods. On the other hand, if such payment has no nexus with the wording of the imported goods then such payment was not includible in the price of the imported goods.
18.?Royalties and licence fees related to the imported goods is the cost which is incurred by the buyer in addition to the price which the buyer has to pay as consideration for the purchase of the imported goods. In other words, in addition to the price for the imported goods the buyer incurs costs on account of royalty and licence fee which the buyer pays to the foreign supplier for using information, patent, trade mark and know-how in the manufacture of the licensed product in India. Therefore, there are two concepts which operate simultaneously, namely, price for the imported goods and the royalties/licence fees which are also paid to the foreign supplier. Rule 9(1)) stipulates that payments made towards technical know-how must be a condition pre-requisite for the supply of imported goods by the foreign supplier and if such condition exists then such royalties and fees have to be included in the price of the imported goods. Under Rule 9(1)) the cost of technical know-how is included if the same is to be paid, directly or indirectly, as a condition of the sale of imported goods. At this stage, we would like to emphasis the word indirectly in Rule 9(1)). As stated above, the buyer/importer makes payment of the price of the imported goods. He also incurs the cost of technical know-how. Therefore, the Department in every case is not only required to look at TAA, it is also required to look at the pricing arrangement/agreement between the buyer and his foreign collaborator. For example if on examination of the pricing arrangement in juxtaposition with the TAA, the Department finds that the importer/buyer has misled the Department by adjusting the price of the imported item in guise of increased royalty/licence fees then the adjudicating authority would be right in including the cost of royalty/licence fees payment in the price of the imported goods. In such cases the principle of attribution of royalty/licence fees to the price of imported goods would apply. This is because every importer/buyer is obliged to pay not only the price for the imported goods but he also incurs the cost of technical know-how which is paid to the foreign supplier. Therefore, such adjustments would certainly attract Rule 9(1))(c).
20.?Be that as it may, in the present case, on reading TAA we find that the payments of royalty/licence fees was entirely relatable to the manufacture of brake liners and brake pads (licensed products). The said payments were in no way related to the imported items. In the present case, no effort was made by the Department to examine the pricing arrangement. No effort was made by the Department to ascertain whether there exists a price adjustment between cost incurred by the buyer on account of royalty/licence fees payments and the price paid for imported items. No effort was made by the Department to ascertain enhancement of royalty/licence fees by reducing the price of the imported items. In the circumstances, we find no infirmity in the impugned judgment of the Tribunal. In this case, the Department has gone by TAA alone. On reading TAA in entirety, we are of the view that there was no nexus between royalty/licence fees payable for the know-how and the goods imported for the manufacture of licensed products. The Department itself has invoked Rule 9(l)(c).
21.?In the alternate, it has invoked Rule 9(1)(e). This Rule 9(e) cannot stand alone. It is a corollary to Rule 4. There is no finding in the present case that what was termed as royalty/licence fee was in fact not such royalty/licence fee but some other payment made or to be made as a condition pre-requisite to the sale of the imported goods. It is important to bear in mind that Rule 9 refer to cost and services. Under Rule 9(1), the price for the imported goods had to be enhanced/loaded by adding certain costs, royalties and licence fees and values mentioned in sub-rule 9(1)(a) to 9(1)(d). It refers to all other payments actually made or to be made as a condition of sale of the imported goods. In the present case, the Department invoked Rule 9(1)(c) on the ground that royalty was related to the imported goods, having failed it cannot fall back upon Rule 9(1)(e) because essentially we are concerned with the addition of royalty etc. to the price of the imported goods. Further, in the present case, the Department has accepted the transaction value of the imported goods.
5.6 The department has relied upon the decision of Honble Supreme Court in the case of Collector of Customs Vs. Essar Gujrat Ltd. 1996(88)ELT 609(SC) (supra). Honble Supreme Court in the case of Commissioner of Customs Vs. Ferodo India Pvt. Ltd., 2008 (224) ELT 23 (SC) (supra) has distinguished the decision in the case of Essar Gujrat. Relevant portion of the order is reproduced hereunder:-
17. In the case of Essar Gujarat Ltd. (supra) the condition pre-requisite, referred to above, had direct nexus with the functioning of the imported plant and, therefore, it had to be loaded to be price thereof.
22. In the case of Essar Gujarat Ltd. (supra), the buyer had entered into a contract with TIL for purchase of Direct Reduction Iron Plant(the plant). The entire agreement was for import of the plant. The agreement was subject to two conditions- (a) approval of G.O.I. and (b) obtaining transfer of licence from M/s.Midrex, USA. Without the licence from Midrex, the imported plant was of no use to the buyer. Therefore, it was essential to have the licence from Midrex to operate the plant. Therefore, it was held by this Court that procurement of licence from Midrex was a pre-condition of sale which was specifically recorded in the agreement itself. In view of specific terms and conditions to that effect in the agreement, this Court held that payments made to Midrex by way of licence fees had to be added to the price paid to TIL for purchase of the plant. There is no such stipulations in the TAA in the present case. Therefore, in our view, the adjudicating authority erred in placing reliance on the judgement of this Court in Essar Gujarat Ltd.(supra). 5.7 From the above it is clear that (1) Addition under Rule 9(1)(c) has to be of payments which constitute a condition prerequisite for the supply of the imported goods from the foreign supplier. Royalties/licence fees are to be paid to the foreign supplier of the equipments. (2) For application of Rule 9(1)(e) there has to be a finding that although termed as royalty/licence fee, the payment was made or is to be made as a condition prerequisite for the sale of the imported goods and was in fact not royalty/licence fee. Further, once having failed to establish application of Rule 9(1)(c) and thus addition of royalty/licence fee on the price of the imported goods, the Department cannot fall upon Rule 9(1)(e). (3) Further the department could not bring out that royalty paid by the applicant has any nexus with the goods imported under the equipments contract subsequently from SECL. Similarly in the case of PDBE Package fees the SWEC was required to prepare the process design and basic engineering package and will set forth certain design, information adequate to enable to prepare the detailed design meaning thereby the SWEP is merely providing specification, data and review of respective documents upon submission thereof by the appellant or its authorized contract. SWEC had no direct or indirect role in the procurement and supply of equipment by the appellant and price thereof. The department could not show that the contract for procurement of goods from SECL or the equipment agreement was in pursuant to such condition in the engineering and technological agreement. Further the department could not controvert the averment of the appellant that the cost of design and drawing of the agreement had been included in the cost of equipment imported under the equipment contract. Similarly in the case of design of Flue Gas Piping and Catalyst Piping the department could not show that the technical information which was a brief importation activity for which the department could not show that it was creating any condition for sale procurement of the equipment. Similarly in the case covered under Appeal No.Cus.Ap.129/08 loading of value on account of basic engineering package proportionately payable to UOP, USA under the engineering contract to the value of equipment imported under equipment contract from SECL. The department could not show that it was a condition for sale of equipment to the appellant.
5.8 We find that the department could not bring out that the licence fee or the royalty payment or any portion thereof and the licence fee or the royalty or portion thereof were to be paid or paid to or received by SECL, the supplier of imported equipment. The department could also not bring out that the value of the equipment was depressed due to the element of royalty/licence fees or was not transactional value. In these circumstances we find that the ld.Commissioner(Appeals)s order is not sustainable in law and is accordingly set aside and the appeals are allowed.
(Pronounced in the open court on 03.12.2012.) SD/ SD/ (D.M.MISRA) (S.K. GAULE) MEMBER(JUDICIAL) MEMBER(TECHNICAL) sm Customs Appeal Nos. 128-129/2008 28