Judgment:
1. These two appeals emanate from the same impugned order. As the recital of brief facts, to follow, will show, the dispute arose when the appellants imported certain goods and declared a value for the purposes of assessment. Customs wanted to include in the value, several other items. The Collector who adjudicated the matter ordered the inclusion of some items and help that other items were not includible.
The importers/appellants came up in appeal (Appeal No. C/405/90-A) against the inclusion ordered by the Collector and the Department came up in appeal (Appeal No. C/1975/90-A) against the items which the Collector held as not includible. For the sake of convenience and clarity we propose to first dispose of the appeal filed by M/s. Essar Gujarat Ltd. (herein after referred to Essar) and then to consider the Department's appeal.
2. The facts in brief common to both the appeals are that Essar who wanted to produce Sponge Iron at Surat sought the importation of a second-hand plant. The said plant was located in Emden West Germany.
They made an offer for purchase of its second hand plant at DM 26 million, after getting necessary clearance from the Government of India. In this process they appointed M/s. Dastur & Co. P. Ltd. to examine the plant from economic and technological point of view. They also employed a foreign chartered engineer. In addition they approached M/s. Voest Alpine (VA for short) to advise them on the cost of the plant. Various estimates were made and M/s. MECON, a Government of India undertaking under the Department of Steel, working as Consultancy Engineers, opined that the value of the second-hand plant and machinery at DM 26 million was fair and reasonable. This was the price that was ultimately settled.
3. M/s. Teviot Investments Ltd. (TIL) were holding the plant for almost one year prior to sale to Essar. Essar had entered into an agreement with TIL for the purchase of this plant. They purchased this plant from TIL for a sum of DM 26 million. In addition, an estimated expenditure of DM 20.75 was made to cover expenses on dismantling the plant/matchmarking, packing, refurbishing, replacement of parts, equipments, freight and insurance. Thus the total cost of the plant worked out to DM 46.75 million for which Essar had registered the contract with the Customs House.
4. Essar had also set up a number of agencies to facilitate the relocation of the plant at Hazira in India. For this purpose they entered into various agreements. M/s. Larsen & Toubro Ltd. (L & T Ltd. for short) were contracted for dismantling, matchmarking, packing and transportation. M/s. Voest Alpine, stated to be a Government of Austria undertaking, were to be the technical collaborators being construction licences of Midrex Corporation for sponge iron plant based on Midrex process. M/s. Howard & Finlay India Ltd. were contracted for locating suppliers for equipments and spare parts and for evolving a maintenance policy for sponge iron plant at Hazira. M/s. Midrex International (Midrex for short) were the party with whom M/s. Essar entered into agreement for the right to use all patents, confidential information for operation of the plant at Hazira and right to produce in the plant and use and sell world-wide the product produced by the plant.
Ancilliary services like use of their laboratory for testing and technical advisory services at the time of production were also covered by the contract. Lastly Essar entered into an agreement with MECON for providing consultancy services in the matter of relocating the plant at Hazira. Having done all these Essar registered the contract for assessment of the plant under Heading 98.01 of Customs Tariff. It was provisionally registered by Customs on 29-9-1988. They then filed two bills of entry on the same date.
5. The contract was registered for a total value of the plant viz. DM 26 million. An additional value of the DM 20.75 million was declared to be incurred towards the cost of dismantling, refurbishing, packing, loading, freight and insurance, etc. The import licence covered this amount also. Thus the total value declared by Essar was 46.75 million DM.6. The Assistant Collector of Customs issued a show cause notice proposing to add an amount of DM 37.4 million to the declared value.
The summary of the charges made by the Assistant Collector is as follows : (a) There was a collaboration agreement between Essar and Voest Alpine; (b) The collaboration provided for payment of the following sums :Clause 10.1 Services be provided outside India 10.1.1 Process licence and allied technical service10.1.1.1 Process licence fees payable to Midrex Corp. for 2,000,000 the right to use Midrex process and patents10.1.1.2 Cost of technical services provided under article 3 10,100,000 in connection with Midrex Process10.1.2.1 Payment for engineering & Consultancy fees as 23,100,000 specified under this agreement10.1.2.2 Payment of theoretical & practical training outside 2,200,000 India (c) The agreement of sale of second-hand plant by Teviot Investments Ltd. was subject to the condition of the Essar obtaining the transfer of operational licence from Midrex of USA. (d) The payments for collaboration (DM 37.4 million) worked out to about 80% of the CIF value declared by Essar (DM 46.75 million).
These payments were to be added to the transaction value (DM 46.75 million) in terms of Rule 9 of the Valuation Rules.
7. The show cause notice was issued on 24-10-1988 and Essar replied to the show cause notice on 27-10-1988 and appeared for the personal hearing on 18-11-1988. On 12-7-1989 the Collector issued a corrigendum alleging that the importers had wilfully mis-stated and suppressed the complete facts of the project and threatening confiscation of the goods under Section 111(m) of the Customs Act and a penalty under Section 112 ibid. The corrigendum maintained the threat to enhance the value as already communicated by the Assistant Collector to Essar on 27-7-1989.
Further clarifications filed by Essar on 21-9-1989. Finally on 18-10-1989 the Collector passed an order the summary of which is as follows: (a) The assessable value has to be determined only under the Valuation Rules, 1988 (para 38 of the order).
(i) DM 20.75 million incurred towards the cost of dismantling, refurbishing, replacement of parts, packing, loading freight, and freight and insurance [para 7(a) of the order].
(ii) Process licence fees of DM 2 million paid by Essar to Midrex for the use of the right to use the Midrex Process and patents [para 70(b) of the order].
(iii) Cost of specialist supervision of dismantling at Emden paid to M/s. Voest Alpine [para 70 (a) of the order].
(c) There is no warrant in Rule 9(i)b(iv) to include the payment of DM 23.1 million to the assessable value (para 66 of the order).
(d) The cost of technical services amounting to DM 10.1 million is not included in the transaction value (para 58 of the order).
(e) The charge of suppression and mis-statement of facts dropped (para 68 of the order).
(f) The training fees (DM 2.2 million) have not to be included in transaction value.
Hence this appeal by Essar against the addition of process license fee of DM 2 million and the addition of cost of specialist supervision of dismantling so as to arrive at the transaction value.
8. Shri Asthana, the learned Advocate assisted by Shri Sogani and Shri Srinivasan submitted that the inclusion of the amount of DM 2 million paid by Essar to M/s Midrex International, USA for the use and the right to use the Midrex process and patent was not correct. He stated that the Collector held that this amount was includible in the transaction value under Rule 9(1)(c) of the Customs Valuation Rules, 1988. But this rule does not warrant the inclusion. Referring to the said Rule Shri Asthana argued that this Rule prescribes that in determining the transaction value there shall be added to the price actually paid or payable to the imported goods, 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. (These are the words appearing in the Rule). The learned Advocate argued that the essential elements of this Rule are that payments should be in relation to the imported goods and such an amount should be paid as a condition of import. Here the patent is for manufacturing process of sponge iron and not for the imported goods. Referring to the agreement with Midrex the owners of the patent and the process, the learned Advocate argued that payment was made to a third person, viz. Midrex and not to seller. He further argued that the fee was to be paid only if the plant is used (for the manufacture of sponge iron). Shri Asthana also argued that the process licence fee was already paid because the earlier owners worked the factory for some time and they could not have done so without the fee being paid to Midrex. He submitted that in the contract with TIL there was no condition relating to the payment of fee for the patent.
Referring to Article 11 of the agreement with TIL he submitted that this article did not prescribe any payment to anyone as a condition of sale of the goods. Referring to the agreement with Midrex the learned Advocate submitted that the Article 2.1 of the agreement merely gave a right to the appellants to use the process after importation of the goods in India and it has nothing to do with the purchase or import of the goods. Again referring to Article 11 of the agreement Shri Asthana argued that the object behind the said article was that the seller did not want to take any responsibility with regard to the operation license and that the article was intended only to safeguard the seller's own position.
9. Referring to Collector's order especially to paragraphs 46, 47 and 48 the learned Advocate submitted that as can be seen from note to Rule 4 and Rule 9(1)(c) patent costs can be included only if payment of the same is a condition of sale. Referring to the Collector's observations on Rules 4 and 9 of the Valuation Rules, Shri Asthana submitted that these two Rules are complementary and should be read together and that where Rule 9 is silent on any particular aspect the provisions of Rule 4 along with the interpretation Rules should be considered. The learned Advocate relied, in this connection, on advisory opinions No. 4.1 of the Technical Committee of Customs Valuation and submitted that the Collector's interpretation of this opinion was not in accordance with the facts. He also referred to the advisory opinion No. 4.3 of Technical Committee of Customs Valuation and submitted that the most important element was that only payments which were required by the seller to be paid directly or indirectly could be included. Such not being the case here, as there was no such requirement, the payment to Midrex could not be considered as a condition of sale. He strongly relied on the advisory opinion No. 4.3. In this context the learned Advocate relied on the judgment of the Tribunal in the case of Collector of Customs, Bombay v. Maruti Udyog 'Limited, Curgaon 1987 (28) ELT 390 (Tribunal).
10. Submitting that the inclusion of DM 0.2 million approximately in the value the learned Advocate submitted that this charge included as supervision charges for dismantling should not have been so included as there is no provision in Rule 9 or the Valuation Rules for such an inclusion. He also submitted that this amount was already included in the amount of DM 20.75 million and submitted that supervision was intended only to ensure proper dismantling so that relocation of the plant in India could be done property. Shri Asthana particularly referred to note to Rule 4 to buttress his argument that price actually paid or payable would not include either the fee paid to Midrex or the supervision charges.
11. Shri Prabhat Kumar, the learned D.R referring to the facts of the matter submitted that the sale of the plant to Essar was on "as is where is basis", stating that the value estimates do not necessarily reflect the correct value when the price is much less than normally expected. The learned representative submitted that in this case estimates of value (for a new plant and the used plant) vary from DM 400 million to DM 125 million. Referring to all charges which were to be paid and were paid by Essar the learned representative submitted that the appellants did make a declaration in accordance with the requirements. But the declaration filed was not with the full particulars regarding all the payments made by Essar especially the license fee and other charges. He submitted that the Assistant Collector called for the information which was not given by Essar and had to be collected by the said officer.
12. On the merits of the matter the learned representative argued that the total cost incurred should be the transaction value on which customs duty should be charged. Such a total cost for the purposes of assessment of customs duty would include supervisory charges, incidentals, etc. He argued that the cost of technology, research and of supervision comprised 90% of the total value and gave examples.
These examples were that of a person purchasing teak wood from a distant jungle when the value/cost would include all the expenses incurred in order to go with the equipment to the remote area and to cut down the trees and bring the wood. Similarly in respect of a television set and manual the total value would be reflected in the product as a whole. The weight of the material is not relevant; the cost of technology also is included. The learned representative also made a reference to rockets to illustrate his argument that the material consisted in the rocket in terms of metal etc. may not be even 1% of the value but the cost consists of technology, processing, knowhow etc.
13. In the background of these examples the learned representative submitted that the value of the goods at the time of importation would include all expenses incurred by the importer.
14. Referring to Valuation Rules Shri Prabhat Kumar argued that Section 14(1) of the Customs Act (the Act for short) and Section 14(1 A) ibid go in tandem. Submitting that the Valuation Rules have to be covered sequentially and that the value fixed under the Rules should be subject to what Section 14(1) of the Act prescribes, the learned representative argued that in terms of Rule 3 the transaction value includes all expenses incurred, that is to say, the price paid or payable for all services, when such charges are incurred and are not included in the declared value. Referring to Interpretative Note to Rule 4 Shri Prabhat Kumar submitted that the note is a part of the Rule itself and argued that in the instant case the import is not merely of the rooted (built-in plant) but it is for the entire imported goods which is distinct from the value of finished products when imported. The value of the goods under importation would, therefore, include all charges incurred by Essar.
15. Shri Prabhat Kumar referred to sub-section 14(1A) of the Act and relying on the judgment of the Supreme Court in AIR 1961 SC 1152 in the case of K.R.C.S. Balakrishna Chetty and Sons & Co. v. The State of Madras submitted that getting the third party's license alone would have enabled Essar to use the plant was a condition of the sale.
Referring to various agreements made by the appellants the learned representative argued that the agreements made with VA, TIL and Midrex were all to be read together and not separately as all these agreements together contributed to the sale of the plant and subsequent use of the same. With specific reference to the amount paid to Midrex Shri Prabhat Kumar argued that Midrex held the patent and, therefore, provided the brain in the body. Therefore, the sale of the patent to Essar was a part of the sale of the entire unit and not independent of the same.
16. Referring to Rule 9 (1)(c) of the Valuation Rules Shri Prabhat Kumar submitted that the words condition of the sale of the goods do not indicate that payments should be only to the seller of the goods.
Therefore, payment to a third party should also be included. He referred to Rule 9(1)(c) to argue that this Rule further clarified the position taken by the Department.
17. Referring to Advisory opinions No. 4.1 and 4.3 he submitted that both these opinions support his pleas. Referring to Shri Asthana's reliance on judgment of the Tribunal in 1987 (28) ELT 390 (Tribunal) (supra), he submitted that it was not relevant as the facts were not similar as in the said case the plant and process were one and the same whereas here they were owned by different people. The learned representative finally submitted that even if a wrong rule has been quoted by the Department its action should be upheld if there are other rules under which such action would be competent. Submitting that the Tribunal has wide powers for reassessment, Shri Prabhat Kumar referred to supervision charges also and pointed out that the Collector directed the Assistant Collector to fix the percentage of charges for inclusion.
(according to the appellants no part of the charges should be included).
18. In his rejoinder Shri Asthana, the learned Advocate submitted that Section 14(1) has to be read with the Valuation Rules to arrive at the transaction value. Referring to Clause 11 of the contract between the seller and the Essar the learned Advocate reiterated that the license fee had to be paid to Midrex and the payment was not a condition of sale. He submitted that payments were only with reference to activities in India and did not relate to the sale or purchase of the imported goods. In this context the learned Advocate submitted that the plant at Emden could not be used in India before briquetting and many other modifications were done. Finally he submitted that the charges for dismantling, packing and transport were fairly and legally includible but not the supervision charges which were incurred only as a matter of abundant precaution.
19. We then heard both sides on the Revenue's appeal No. C/1975/90-A.Shri Prabhat Kumar, the learned representative referred to the order of sanction for filing the appeal, passed by the Central Board of Excise and Customs, (the Board for short). He submitted that for the reasons given in the Board's order wherein all the services rendered by Midrex, Voest Alpine AG were listed, these services having been undertaken outside India should be included in the value in terms of Rule 9 (1)(b)(iv) of the Customs Valuation Rules, 1988. Pleading that the charges of DM 10.1 million covering the cost of technical services provided under Article 3 in connection with Midrex process and charges of DM 23.1 covering payments for engineering and consultancy fee are includible the learned representative submitted that the goods should be ordered to be confiscated, fine in lieu of such confiscation prescribed and penalty imposed.
20. To support his pleas the learned representative referred to the arguments earlier advanced by him (in the appeal filed by Essar) and submitted that invisibles are part of the value of the imported goods.
Here the goods were purchased on "as is where is" basis and the employment of experts was essential. He submitted that the services the cost of which the Department is seeking to include were all incurred outside India and the value of such services is includible. He made it clear that no plea is being made for including the cost of the services rendered in India. Shri Prabhat Kumar submitted that whatever money was spent for enhancing the intrinsic value of the goods is includible and calling the assessable value as the transaction value as done in the show cause notice was of no significance. He referred to the corrigendum issued to the show cause notice and supported the reasons for imposing a penalty and ordering confiscation. He reiterated that Essar not having filed the GATT valuation proforma and not having filed copies of the agreements were clearly liable to penalty, as after the inclusion of these charges to the value, there would be a short fall in the value of the license, the goods will be liable to confiscation also under 111(d) of the Act and the. appellants liable to penalty under Section 112(a). He submitted that mens rea is not necessary for penalty.
21. Shri Asthana, the learned Advocate opposing the arguments submitted that the Board's order is not based on correct appreciation of law. He argued that Rule 9(1)(b) of the Valuation Rules is not applicable to the items in question as the said rule dealt with circumstances where a buyer gives free or at a depressed rate certain things to the seller/exporter and, therefore, such givings would amount to direct or indirect payment to the exporter. He emphasised that what Essar imported was the plant at EMDEN and the same was dismantled and packed in the same condition in which it was imported. He submitted that Rule 9(1)b)(iv) was not relevant to the proceedings and pointed out that only such points as are specified by the Board in their Order Under Section 129(d) of the Act can be considered. Referring to the order-in-original the learned Advocate submitted that the reasons why DM 10.1 mill was not includible was dealt with by the Collector in his order and the reasons for not including DM 23.1 million was covered by Rule 9(1)b)(iv). Rule 9(1)(c) according to the learned Advocate would cover the exclusion of DM 2 million (the last item relates to appeal filed by Essar).
22. Shri Asthana then referred to paragraph 28 of the Collector's order and pointed out that in this paragraph the issues involved in the matter are enumerated. He referred to paragraph 59 of the said order and submitted that this paragraph dealt with the reasons why the amount of DM 23.1 million was not included. He emphasised that these costs were incurred for re-location of the plant at Hazira where modifications were done as also briquetting and re-engineering.
Referring to the notice issued by the Board he submitted that these items which the Board seeks to include have no connection with the goods or the production of such goods meaning that these expenses have nothing to do with the production of the plant which Essar imported. He submitted that there is no ground to enhance the value or to confiscate the goods or to impose penalty.
23. Shri Prabhat Kumar in his rejoinder submitted that re-engineering for adoption to Indian conditions was includible. Referring to the two agreements with Voest Alpine and Midrex the learned representative submitted that these contracts are for expenses incurred by buyer.
Finally Shri Prabhat Kumar submitted that an overall view should be taken and if Rule 9(1)(b)(iv) does not cover, the inclusion must be ordered if any of the rules or other statutory provisions warrant such inclusion.
24. We have considered the rival submissions. In so far as the appeal filed by Essar is concerned the main question is whether the process licence fee payable to Midrex Corporation for the right to use Midrex process and patent, amounting to DM 2 million should be included in the value or not. In deciding this point the Collector considered the nature of the payment with reference to Rule 9(1)(c) of the Valuation Rules. He correctly noted that there should be 4 ingredients to justify the inclusion of the royalty and licence fee in the transaction value.
These ingredients are : (b) It is a payment which the buyer is required to pay directly or indirectly; (d) It should be to the extent that such fees are not included in the price actually paid or payable.
25. While deciding the issues against Essar the Collector took the view that Rule 9 alone prevails and interpretative note to Rule 4 cannot be brought into the picture "for the simple reason what is actually stated in the Rule will prevail over what is stated in the Interpretative note when there is no ambiguity in the wording of the Rule itself. He also observed that Interpretative Note to Rule 4 cannot be stretched to interpret Rule 9 (1)(c) when there is a separate interpretative note available for that.
26. The repeated submission of Essar is that payment to Midrex is neither a condition of sale nor the patent is in any way related to the production or sale of the imported goods. What Essar imported was a second-hand plant. Therefore, only those fees and payments related to the production of the plant should be included, according to the learned Advocate for Essar. It was in this context that he made the submission that whatever patent fee had to be paid to Midrex for the construction of the plant was already paid and, therefore, should be included in the price paid for the plant.
27. That the payment was made to Midrex for the purpose of enabling Essar to use the patent and process in India is not in dispute. It is the Department's contention that this payment was a condition of sale of the plant to Essar whereas it is Essar's contention that it was not a condition. Shri Asthana's submission was that Article 11 of the agreement with the supplier (page 192 of the paper book) simply provided that purchases should be made through procuring operation licence. He submitted that this article is not a condition of the sale of the goods nor does it require any payment to any one. According to him it was an independent arrangement with Midrex under which payment of royalty was made. The said article did not make a condition of any payment or any agreement with Midrex. During the course of arguments the learned Advocate submitted that under Article 12 of the said agreement if any individual provision under the contract became invalid or inoperational the validity of the remaining provisions stood unaffected. The learned Advocate's contention was that in view of Article 12 the payment of licence fee to Midrex cannot be treated as a condition and non-payment there of would not have been fatal to the agreement.
28. In this context the learned DR's argument was that the assessable value that is to say the transaction value should include whatever payments were made by Essar. In our view this is a sweeping argument which cannot be accepted. If what the learned DR argued was correct there would be no need for any Valuation Rules with all the restrictions on additions and directions on non-additions contained therein. We have to go by the Valuation Rules which have been prescribed under Law in accordance with an International agreement accepted by the Government of India. Both sides having agreed that it is the Valuation Rules that must prevail and the Collector himself having taken a view (hat under Rule 9(1)(c) these charges have to be included, we proceed to examine whether in terms of this rule the amount should be included or not.
29. Rule 9 prescribes as to which additions are to be made to the price (actually paid or payable for the imported goods) in determining the transaction value. Inter-alia the Rule [sub-rule (c)] prescribes as follows : "royalties and licence fees related to the 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." 30. Shri Prabhat Kumar submitted that this sub-rule as it is worded covers the issue because the royalty/licence fee paid by Essar to Midrex related to the imported goods and Essar, the buyer was required to pay the same as a condition of the sale of the goods being valued and because the said fee/royalty were not included in the price actually paid or payable.
31. A careful perusal of this sub-rule makes it necessary to examine whether royalty paid to Midrex is related to the imported goods. The imported goods consisted of a second-hand plant for the production of sponge iron. The royalty fee paid by Essar to Midrex was for the production of sponge iron in India where they were to reassemble the plant. It was in this context Shri Asthana submitted that whatever fee was to be paid for construction of the plant had already been paid and was included in the price paid by Essar to the sellers.
32. We further observe that the Collector rejected the application of Interpretative Note to Rule 4 holding that the contents of the rule override the contents of the Interpretative Note. Both being part of the statute the Collector was not correct in taking this view. The Rules have to be read along with the Interpretative Notes and a harmonious construction should be given. Examining the Valuation Rules and the Interpretative Notes with this in mind we find that under Rule 3 the value of imported goods shall be the transaction value and where such value cannot be determined it shall be determined by proceeding sequentially to subsequent Rules 5 to 8. Rule 4 of the Rules defines Transaction value and Rule 4(1) says that "the transaction value of imported goods shall be the price actually paid or payable for the goods when sold for export to India adjusted in accordance with the provisions of Rule 9 of these Rules". There are other provisions in Rule 4 but the reference to Rule 9 is significant which says that in arriving at the transaction value adjustments have to be made under Rule 9. All the same Rule 4 is a key Rule in that it defines the transaction value. Therefore, we cannot brush aside the Interpretative Note to Rule 4. This note explains the term "the price actually paid or payable" in the following language : "Price actually paid or payable The price actually paid or payable is the total payment made or to be made by the buyer to or for the benefit of the seller for the imported goods. The payment need not necessarily take the form of a transfer of money. Payment may be made by way of letters of credit or negotiable instruments. Payment may be made directly or indirectly. An example of an indirect payment would be the settlement by the buyer, whether in whole or in part, of a debt owed by the seller.
Activities undertaken by the buyer on his own account, other than those for which an adjustment is provided in Rule 9, are not considered to be an indirect payment to the seller, even though they might be regarded as of benefit to the seller. The costs of such activities shall not, therefore, be added to the price actually paid or payable in determining the value of imported goods.
The value of imported goods shall not include the following charges or costs, provided that they are distinguished from the price actually paid or payable for the imported goods : (a) Charges for construction, erection, assembly, maintenance or technical assistance, undertaken after importation on imported goods such as industrial plant, machinery or equipment; The price actually paid or payable refers to the price for the imported goods. Thus the flow of dividends or other payments from the buyer to the seller that do not relate to the imported goods are not part of the customs value." 33. Once it is remembered that the goods in question consisted of the secondhand plant and not of sponge iron, Rule 9 (1)(c) read with interpretative note to Rule 4 makes it clear that payment made by Essar to Midrex cannot be added to arrive at transaction value.
34. It is in this context that we considered the two Advisory opinions of the Technical Committee on Customs Valuation. Before proceeding to comment on the same we reproduce both the opinions below: 1. When a machine manufactured under a patent is sold for export to the country of importation at a price exclusive of the patent fee, which the seller has required the importer to pay to a third party who is the patent holder, should the royalty be added to the price paid or payable under the provisions of Article 8.1 (c) of the Agreement? 2. The Technical Committee on Customs Valuation expressed the following view: The royalty should be added to the price actually paid or payable in accordance with the provisions of Article 8.1(c), since the payment of the royalty by the buyer is related to the goods being valued and is a condition of sale of those goods.
1. Importer I acquires the right to use a patented process for the manufacture of certain products and agrees to pay the patent holder H a royalty on the basis of the number of articles produced using that process. In a separate contract, I designs and purchases from foreign manufacturer E a machine which is specially intended to perform the patented process. Is the royalty on the patented process part of the price paid or payable for the imported machine? 2. The Technical Committee on Customs Valuation expressed the following view: Although the payment of the royalty in question is for a process embodied in the machine and one which constitutes the sole use of the machine, this royalty is not part of the Customs value since its payment is not a condition of the sale of the machine for export to the importing country." 35. The learned DR's argument that the Advisory opinion No. 4.1 is applicable to the facts of the case cannot be accepted because this opinion refers and deals with the value of a machine manufactured under a patent and sold at a price exclusive of the patent fee. Advisory opinion No. 4.3 deals with a situation in which a person pays the patent holder a royalty and another person purchases a machine to perform the patented process. In our opinion the facts of the present matter are covered by advisory opinion No. 4.3. These advisory opinions though they come from a expert body are not binding on us. But considering the source of these opinions they can, in our view, have a pursuasive value. In the light of our discussions supra and the advisory opinion we hold that in so far as the goods viz. the second-hand plant is concerned the payment of patent fee to Midrex cannot form an element of the transaction value. We hold accordingly.
36. The other part of the appeal filed by Essar relates to supervision fees. We considered the arguments of both sides. The appellants' main plea is that the supervision was only a matter of abundant precaution and not a vital necessity. We find force in the argument of the learned DR Shri Prabhat Kumar, that the import being of a rooted (built-up) plant the charges incurred in supervision in dis-mantling, etc. are includible. We have extensively referred to the provisions of relevant Rules and hold that the Collector's order in ordering the inclusion of the charges is correct.
37. We now take up the Department's appeal which concerns the payment of DM 10 million as cost of technical services provided under Article 3 in connection with Midrex Process and DM 23.1 million towards payment for engineering and consultancy fees as specified under the agreement between Essar and Voest Alpine. It is the Board's finding in its order dated 5-4-1990 which constituted the essence of the argument of learned DR that under Article 2.3 (b)(ii) of the agreement with Midrex the services stated therein are related to the importation and charges paid towards these services are required to be included in the transaction value in terms of Rule 9(1)(b)(iv) of the Customs Valuation Rules.
Before proceeding further we take note of Rule 9(1)(b)(iv) by reproducing the entire sub-Rule : "(b) the value, apportioned as appropriate, of the following goods and services where supplied directly or indirectly by the buyer free of charge or at reduced cost for use in connection with the production and sale for export of imported goods, to the extent that such value has not been included in the price actually paid or payable, namely: (i) materials, components, parts and similar items incorporated in the imported goods; (ii) tools, dies, moulds and similar items used in the production of the imported goods; (iv) engineering, development, art work, design work and plans and sketches undertaken elsewhere than in India and necessary for the production of the imported goods;" A perusal of this rule shows that it deals with the value of imported goods. Further there are two conditions that should be satisfied before this Rule is applied. These are that (i) engineering, development, art work, design, plans and sketches undertaken (outside India) are necessary for the production of the imported goods, and (ii) that the services are supplied directly or indirectly by the buyer free of charge or at reduced cost for use in connection with the production and sale for export of the imported goods, and these are necessary for the production of the imported goods. We had earlier observed repeatedly that the imported goods consisted of a second-hand plant. It is nobody's case, either of the Department's that any manufacturing operation was done outside India in relation to the plant using engineering, development art work, etc. to produce the said plant.
Therefore, the services here cannot be related to the production of the imported goods. Our perusal of the agreement with Midrex, Voesl Alpine and Larson & Toubro shows that these services were required not for the production of the plant (imported goods) but for the installation and furbishing of the imported plant at Hazira in India. Essar affirmed in an affidavit dated 19-9-1990 that no refurbishing or reconditioning or replacement was done abroad on the second-hand plant by L & T prior to its shipment at Emden. However, we are not considering this affidavit which has been sworn after the Collector passed the order. In any event the factual position is quite clear from the agreement and the Department has not even attempted to show that any of these charges related to the production, dismantling, packing or transport of the imported goods. Therefore, even ignoring the affidavit the arguments advanced by Shri Asthana have to be accepted.
38. In so far as the second requirement in the application of this Rule is concerned, viz., that the buyer must supply these services the wording of the Rule says that such a supply should be either to the manufacturer or to the supplier. Only then can such charges be added under Rule 9(1)(b)(iv). (This position is implied in the Rule and is clear from the Case Study No. 1.1 by the Technical Committee on GATT Valuation, copy filed by Essar). Neither in the Collector's order nor in the Board's order nor in the DR's argument is there anything to show or even suggest that any services were supplied by the buyer to Teviot Investments Ltd. (TIL) or to the manufacturer of the plant. No allegation has been made that there was any relationship between the supplier and Midrex or Voest Alpine. We further note that Clause 2.3 of the Midrex agreement starts by saying that "upto 24 man-months of advisory services to be scheduled based on agreement between Essar and Midrex". Considering that Midrex were patent owners, these services can relate to the period only after the importation of the goods. Article 2.3 of the Midrex agreement begins with the words "to support the overall project for the design, engineering, dismantling and re-erection and commissioning of the plant ...." In the agreement (article 1, definitions) plant is defined to mean the "direct reduction facility at Licence's site at Hazira. Therefore, article 2.3 has to be read accordingly.
39. Similarly 2.3 (b)(ii) refers to short-fall in equipment. Read with other parts of the agreement referred to above, this short fall cannot be held to have any relation to the value of the imported goods.
Therefore, payment for the services mentioned in Sl. No. ii is of no relevance to Rule 9(1)(b)(iv) or any other Valuation Rules.
40. In the Board's order there is a reference to Clauses (a) to (j) of Article 2.3 of the agreement with Voest. A perusal of these clauses which mentioned the services to be rendered does not indicate that any of them possibly be covered by Rule 9(1)(b)(iv) of the Valuation Rules.
This is because as the title of Article 2.3 reads, these services are "technical services related to the relocation of the plant from Emden to Hazira and simultaneously considering the incorporation of hot discharge and hot briquetting facilities". Perused together with the agreement with L & T, these services do not go into the manufacture or any other part of the EMDEN plant. It appears that these services are relevant only for what is done in India. The list of technical services from Article 2.3.1 onwards indicate that the services are only for relocation of the plant and incorporation of hot discharge and hot briquetting facility which could have taken place only in India. Work done in this connection and services rendered abroad cannot have any relationship to the value of the second-hand plant.
41. Provision for laboratory and plant scale test on Indian raw materials and the interpretation of such results, mentioned as part of the services confirms this view. Clause (c) refers to missing documentation and Clause (d) relates to assessment of process related units and facilities. These services also pertain to relocation of the plant and are not relevant to the production of the imported goods.
Clause (e) clearly refers to Hazira plant. Clause (f) has not been relied upon and Clause (g) refers to list of items requiring reconditioning. There was no denial during the course of hearing that reconditioning was done in India. Clause (h) relates to the procurement of the materials and parts in India or abroad, for completion of the plant at Hazira and Clause (i) speaks of necessary engineering to modify the existing plant during commissioning and operating periods at Hazira and Clause (j) concerns procurement of equipment at Hazira. Thus none of the services can have any relevance to the imported goods or in any event to the production of the imported goods.
42. The learned DR argued that even if the Rule mentioned [Rule 9(1)(b)(iv)] is incorrect, resort can be made to other Rules as the Tribunal has extensive powers of reassessment. Assuming that the learned Representative was correct, we do not find any other Rule which can be applied so as to render all or some of these charges includible for the purpose of arriving at transaction value. The Board's order clearly said that "all the services have been undertaken outside India and except for (f) above are clearly necessary for the production of imported goods that is the plant in question...". Therefore, it appears that the Board meant to rely on Rule 9(1)(b)iv) and no other Rules.
Further Rule 9(4) of the Valuation Rules provides that "no addition shall be made to the price actually paid or payable in determining the value of the imported goods except as provided for in this Rule".
Therefore, unless a payment can be related to Rule 9, no addition can be made to the transaction value. The Department did not allege in the show cause notice, the Collector did not find in his order and it has not been claimed in the appeal or during the course of hearing that the additions can be made under any other Rule.
43. The show cause notice issued by the Assistant Collector on 24-10-1988, especially paragraph 9 thereof makes it clear that the Department proposed to assess the goods on the basis of the transaction value. We perused the Collector's order especially paragraph 28 and 33 to 38 wherein he has given reasons for taking the view that transaction value was genuine and was to be accepted. In our opinion the reasons given by the Collector are sound and are in accordance with the letter and spirit of law and it is not the Department's case at any stage that there is any kind of relationship between the supplier and Essar, between Essar, Voest Alpine or between Essar and Midrex or between the supplier TIL and Midrex or Voest Alpine. Therefore, the amounts which were paid to the collaborators or patent holders cannot be held to form the part of the transaction value. There is nothing to show, and there was never even an allegation, that these amounts did not reach the supplier(s) or that they were meant to fulfil any obligations of the supplier. Therefore, neither Midrex or Voest Alpine can be considered as agents of the supplier and the consideration which was received by the supplier and paid by Essar should be taken as DM 46.5 million only.
44. During the course of his arguments, the learned DR did not dispute the transaction value, but tried to impeach it. This appears to be beyond the scope of the appeal in view of the terms of Section 129(D) of the Act. The jurisdiction of the Tribunal in terms of Section 129(D)(1) is confined to the "determination of points arising out of the decision or order as may be specified by the Board in its order".
The Board in its order has asked for determination of the point regarding application of Rule 9(1) (b)(iv). Therefore, the learned DR's argument which went beyond this point appear to be not covered by the scope of the matter.
45. To sum up we observe that Rule 3(1) of the Valuation Rules provides that value of the imported goods shall be the transaction value, which is defined by Rule 4 to the effect that such transaction value of imported goods shall be the price actually paid or payable for the goods when sold for export to India adjusted in accordance with the provisions of Rule 9 (ibid). Here the amount payable to the supplier was DM 26 million and DM 20.75 million was correctly added as freight, insurance, packaging, etc. The only other item which should be added, as indicated by us earlier, is the supervision charges incurred by Essar.
46. These discussions settle both the appeals and there is no need to examine the other minor points and case law cited by both sides. We partly allow the appeal filed by Essar as indicated in paragraph 45 and direct that the payment to Midrex as patent fee should not be added to the transaction value and that the supervision charges should be added.
48. Miscellaneous application No. C/Misc/755-90-A which sought introduction of additional evidence stands disposed of in the light of our finding. Misc. application No. C/902/90-A is premature and is dismissed as such. Essar is at liberty to make a fresh application if they are so advised.
49. Before parting with the matter we place on record our deep appreciation of the pains taken by Shri Asthana, the learned Advocate for Essar and Shri Prabhat Kumar, the learned DR for the Department.
Both assisted the Bench in the best possible manner in a matter where no case law is available for guidance.