Customs, Excise and Gold Tribunal - Delhi
Varma Trafag Instruments Pvt. Ltd. vs Collector Of Customs on 4 March, 1993
Equivalent citations: 1993ECR641(TRI.-DELHI), 1993(67)ELT861(TRI-DEL)
ORDER N.K. Bajpai, Member (T)
1. This is an appeal against the orders of the Assistant Collector directing that the value of goods imported by the appellants from their collaborators, namely M/s. Trafag AG, Switzerland shall be loaded by 5% after disallowing any commission or discounts of special nature under Rule 4(3)(a) of the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988. On appeal to Collector of Customs (Appeals), New Delhi, this order has been upheld and hence this appeal to the Tribunal.
2. Briefly stated, the facts are that the appellants have entered into a Licence Agreement on 7th February 1985 for the manufacture of Laborstats, Ministats, Industats, Transmitters, etc. on the basis of which the Swiss firm supplies information in respect of technical data, basic process and engineering designs and drawings, documents, process know-how and secret formula. Besides the appellants pay to their collaborators royalty at the rate of 4 per cent of net and ex-factory sale prices minus excise duty and the landed cost and the imported components and standard bought out components for 5 years. As per Clause 22 of the Agreement, this Swiss firm holds 24.9% of the paid up equity share capital in the appellant company. The Assistant Collector has held that this is a case of special relationship between the appellants and their overseas suppliers and among the grounds for reaching this conclusion are (a) failure of the appellants to supply important documents like price lists, procurement prices at which most of the items were procured by their collaborators from others, purchase orders, order acceptance and letter of credit etc., which were essential for proving the truth and accuracy of the statements, information and declarations made by the appellants from time to time for the purpose of determining the prices of imported goods in accordance with Customs Valuation Rules, 1963 as well as Customs Valuation (Determination of Price of Imported Goods) Rules, 1988. The Assistant Collector has also held that equity participation and representation of the collaborators in the Board of Directors of the appellant company coupled with operational control by way of prescribing design specifications, quality control and legal controls including liabilities arising out of the collaboration agreement in respect of payment of lump sum amount, royalty fee etc. amounts to direct and/or indirect controls exercised by the Swiss firm over the appellant company. He has further held that the collaboration agreement envisages payment of royalty and technical knowhow fees by the appellant company and the supply of goods necessary for manufacturing the end-product by the collaborators, including those procured from third parties abroad, and such an arrangement shows a relationship between the buyer and the seller. He has further held that the appellant could not demonstrate that the declared prices were prices in the ordinary course of sale. He has not accepted a proforma invoice, dated 21-8-1989 for micro switches, bellows, membranus, sensors, thermostat components on the ground that it cannot be a substitute for price lists which are meant for "world at large". In these circumstances, he has held that Rule 2(2)(v) is applicable and the parties are related.
3. Collector (Appeals) has upheld the order, inter alia, on the ground of non-production of relevant information; holding of 24.90% of the paid up equity share capital in the appellant company by their collaborators shows mutuality of interest under Rule 2(2)(iv). He has also rejected the reliance placed by the appellants on the decisions of the Tribunal in the cases of Collector of Customs, Bombay v. Maruti Udyog Ltd. Gurgaon, [1987 (28) E.L.T. 390] and Collector of Customs v. Modi Xerox Ltd. [1990 (48) E.L.T. 141].
4. The appellants have contested the orders mainly on the ground that Rule 2(2)(iv) is not applicable inasmuch as it is an admitted position that only M/s. Trafag AG is holding shares in the appellant company and no third person is holding shares in either the appellant company or M/s. Trafag AG. Hence the conclusion of the Collector is incorrect and the reference to some clarification of the Customs Co-operation Council on this point is wholly misplaced. Moreover, rejection of the ratio of the decisions of the Tribunal in the case of Maruti Udyog and Modi Xerox is not correct. It is true that these decisions related to Customs Valuation Rules, 1963, but even the new Valuation Rules (The 1988 Rules) have to be consistent with the provisions of Section 14(1) of the Customs Act, 1962 and these provisions continued to be materially the same before and after change in the Rules. The appellants have also questioned the conclusions of Collector (Appeals) about furnishing 80% of the information. They have also questioned the conclusion of the Collector about the relevance of the procurement prices of M/s. Trafag AG for the purpose of determining the assessable value of the goods. The appellants have also contested the order on the ground that Rule 8 was not applicable and the loading of values determined by the Assistant Collector was arbitrary.
5. Arguing on the appeal, Shri P.A.S. Rao, the learned Counsel for the appellants submitted that the mere holding of 24.9% equity by the Swiss company - the suppliers of the goods - and their representation on the Board of Directors of the appellant-company did not constitute "mutuality of interest". This is what has been decided by the Tribunal in the case of Collector of Customs, Bombay v. Maruti Udyog Ltd., Gurgaon, [1987 (28) E.L.T. 390]. It is not correct to say that the ratio of this decision is not applicable to the present case because it relates to the Customs Valuation Rules, 1963 whereas the imports in the present case were made when the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988 had come into force. Shri Rao explained that the concept of valuation incorporated in Section 14(1) did not undergo any material change with the supersession of the 1963 Rules. Hence the ratio of the Maruti Udyog decision was still applicable. No "mutuality of interest" was created by equity holding and proportional representation of the Swiss company on the Board of appellant-company in terms of this decision.
6. Shri K.K. Bhatia, learned JCDR drew distinction between the 1963 and 1988 Valuation Rules and referred to the concept of "competitive conditions" incorporated in Rules 3(a) (b) and (c) of the 1963 Rules which, he submitted, was absent in the present case. Referring to the concept of 'related persons' in the 1988 Rules, he stated that under Rule 2(2)(v) such a situation would arise when one of them directly or indirectly controls the other and the facts on record clearly point to such a relationship in the present case. In support of his contention, he read out extensively from the Licence Agreement between the parties and contended that Clause 14 thereof providing for the right of the Swiss collaborator to check the appellant company's account books as far as entries pertaining to its payments are concerned, was clearly a controlling clause which established a special relationship between the parties. On a question from the Bench that the Licence Agreement does not provide for import of goods from the Swiss collaborator Shri Bhatia stated that it was an agreement for technical collaboration and transfer of know-how. He explained in answer to another question that the agreement also does not put any restrictions on supply of goods by the collaborator in the event of breach of any of the conditions of the agreement by the appellant company. When the learned JCDR was asked about the absence of any basis of 5% loading of value, he replied that if the Tribunal was not satisfied about the basis of loading, they could remand the matter for fresh determination of the percentage of loading.
7. Shri Rao, the learned Counsel also placed reliance on the following decisions in support of his contention that this could not be considered to be a case of "related persons" and Rule 2(2)(iv) was not applicable at all :-
(a) Collector of Customs v. Modi Xerox Ltd. 1990 (48) E.L.T. 141 (Tribunal)
(b) Dynamic Hydraulics Ltd. v. Collector of Customs 1990 (50) E.L.T. 85 (Tribunal)
(c) Sanjaya Chandiram v. Collector of Customs 1991 (52) E.L.T. 413 (Tribunal)
(d) Shyam Antenna Electricals Ltd. v. Collector of Customs 1991 (53) E.L.T. 133 (Tribunal)
(e) Union of India v. Mahindra & Mahindra Ltd. 1991 (55) E.L.T. 15 Bombay H.C.
(f) Vellore Roller Flour Mills Private Ltd. v. Collector of Customs 1991 (56) E.L.T. 659 (Tribunal)
(g) Collector of Customs v. Nippon Bearings (P) Ltd. 1991 (55) E.L.T. 68 (Tribunal).
8. Replying, Shri Rao submitted that 24.9% equity shareholding of the collaborators in the appellant - Company had entitled them to the appointment of two non-executive Directors, and on the basis of the rights given to them, these two Directors could not exercise any power for passing any special resolution in terms of Section 189 of the Companies Act, 1956, the requirement of which is that such resolutions should be passed by three-fourth majority. It is provided in the Note to Rule 2 of the 1988 Rules that one person shall be deemed to control another when the former is legally or operationally in a position to exercise restraint or direction over the latter. This, Shri Rao explained, was not possible because of the small shareholding of the Swiss collaborators in the Appellant Company's Board. Therefore, it could not be said that in terms of Rule 2(2)(v) they were directly or indirectly controlling the appellant Company. The Licence Agreement also does not confer any rights of legal or operational control in terms of Note 2 to Rule 2(2)(v). Merely because the appellants follow the design, specification or quality control of their collaborators does not mean that they are functioning under their operational control. The findings of the Assistant Collector on this point are clearly without any basis and the burden of establishing the allegations was on the Department, which they had failed to discharge. In these circumstances, the transaction value should have been accepted. The allegations of withholding the information is unfounded. The appellants could have provided only such information as was within their control to provide. Finally, Shri Rao submitted that there was no basis for loading of values by 5% and there was no reason why the matter should be remanded at all. The orders of the lower authorities should be set aside and the appeal allowed.
9. We have carefully considered the appeal and the rival submissions. The basis for the decision to reject the invoice prices is the provision in the Licence Agreement for payment of royalty and technical know-how fee by the appellants and the fact that the goods necessary for manufacturing the final products were supplied by the collaborators including those procured from third parties abroad. Several decisions have been cited on this point by the learned Counsel and mention may be made of the decision of the Tribunal in the case of Maruti Udyog (supra) which has been upheld by the Supreme Court. Equity participation and proportional representation on the Board does not create any mutuality of interest in such a case. We agree with the learned Counsel that the valuation of goods even under the 1988 Rules is subject to the provisions of Section 14(1) as is clear from the wordings of Section 14(1A). The position becomes quite clear from the following extract of the decision in this case :-
"4. It is, no doubt, correct that Suzuki held 26% shares in Maruti and, for that reason, had a proportional representation on the Board of Directors of Maruti also. But Maruti had no shareholding in Suzuki nor any representation on the Board of Directors of Suzuki. To rule out valuation under Section 14(l)(a), the seller and the buyer should have "interest in the business of each other". One-sided interest is therefore, not enough; there has to be a mutuality of interest and Maruti is right in pleading that such mutuality of interest did not exist [1984 (17) E.L.T. 323 (SC)] - Union of India and Ors. v. Atic Industries Ltd..."
10. Bombay High Court judgment in the case of Mahindra & Mahindra (supra) makes it clear that as long as the payment of royalty had no nexus with the import of the goods but with the purchase of technical know-how etc., there was no justification for loading of values for the imports from the Collaborators. The relevant portion of this judgment is as under : -
"13...We, therefore, find considerable merit in the submission of Shri Setalvad that there is no relationship whatsoever between the payment of lump sum of 15 Million French Francs and settlement of price by negotiations between the parties for supply of CKD packs. We are in agreement with the conclusion of the learned Single Judge that Article 'F' of the Collaboration agreement dealing with supply of CKD packs and the determination of price thereof is de hors independent of the consideration of 15 Million French Francs paid by Mahindra to foreign collaborators for supply of technical know-how. In our judgment, there is nothing in the collaboration agreement to suggest that the price of CKD packs was to be determined by the parties by taking into consideration the amount of 15 Million French Francs paid under the collaboration Agreement. As mentioned hereinabove, the price of CKD packs was to be quoted by the foreign collaborator and Mahindra was not bound to accept the price and purchase the CKD packs unless the price was found to be acceptable. There was no compulsion on the Mahindra to purchase CKD packs or any components thereof. The collaboration agreement leaves it to the discretion of Mahindra to accept the prices quoted by foreign collaborator for supply of CKD packs and components. The agreement also reflects that the prices were not static but were liable to be revised from time to time during the subsistence of agreement and price of CKD packs and components had no relation to the payment of 15 Million French Francs paid by Mahindra..."
11. Clauses 20 to 22 of the Licence Agreement relating to royalty etc. in the present case are as under :-
"LICENCING FEES
20. In consideration of Trafag's services, licensee agrees to pay to Trafag the following amount in the manner hereafter specified. For the supply and transfer of information in respect of technical data, basic process and engineering design and drawings, documentation, process know-how and secret formulae, provided outside India, as set forth herein before, a lumpsum amount of Swiss Fr. 140,000.
21. Trafag shall have the right to subscribe and pay for 25% of the issued equity shares in the proposed company up to a maximum of Rs. 10 lakhs, subject to the approval of the Reserve Bank of India and the Government of India, by cash remittances.
22. The licensee is to pay royalty at the rate of 4% of net ex-factory sales prices, subject to Indian taxes for a period of 5 years from the date of commencement of production, but may be extended to 10 years or more subject to the approval of Government of India. The royalty is calculated on the basis of net ex-factory sales price of the products minus excise duty, landed cost of the imported components and standard bought out components and used in the manufacture of the controls sold...".
12. This agreement does not stipulate that it is necessary to import components etc. from the collaborators. The learned Counsel had stated at the hearing that neither the collaborators are bound to sell nor are the appellants bound to buy components etc. from them. There is, therefore, no link between the value of imports from the collaborators and the payment of licence fees and royalty to them. In the absence of any nexus between the two, it would not be correct to reject the invoice value of the goods supplied by the collaborators even if they were obtained by them from third parties for supplying to the appellants. The absence of a Price List also could not be held against them; nor could any adverse presumption be drawn from that fact.
13. The learned JCDR had referred to Clause 14 of the Licence Agreement which provides that Trafag has the right to check or to have checked the licensee's account books as far as entry pertaining to its payments are concerned, and submitted that this was clearly a controlling clause which established a special relationship between the parties. We have seen how in terms of Note to Rule 2 of 1988 Rules, one person is deemed to control another when the former is legally or operationally in a position to exercise restraint or direction over the latter. We do not think that the checking of account books pertaining to payments would fall in the category of legal or operational control. In fact, the only control is with regard to quality control and for this purpose, the licensee is required to send to Trafag in Switzerland two samples of each type of control manufactured after the first production run. Thereafter, such quality control by Trafag is to be carried out at annual intervals or at times mutually agreed upon. Trafag also has a right to check the controls manufactured by the licensee. Provisions like the obligation to advertise as a measure of sales promotion, offer servicing and maintenance facilities, indication of the fact of manufacture under licence of Trafag AG etc. are intended to take care of the quality of the product and sales promotion. We do not, therefore, think that the provision referred to by the learned JCDR amounts to exercising any operational or legal control over the appellant company.
14. In view of the foregoing, we do not think that this is either a case of mutuality of interest or the price of the goods imported by the appellants from their Swiss collaborators has been influenced by any extra-commercial considerations. We, therefore, set aside the impugned orders and allow the appeal.