Full Judgment
the said value also includes all payments made upto the stage of completion of manufacture, the manufacturer's interest not travelling beyond it. The appellants further contend that they do not consider the conditional approval of the price lists with the remarks 'subject to verification' as correct. They further contend that they were not accorded opportunity of explaining the case resulting in denial of principles of natural justice.
The contentions of the appellants appear to have ample force. As discussed in this order-in-appeal No. 34/WB/83 dated 21-3-1983, having relevance to the instant appeal, the technical know-how fee paid to the foreign collaborator is for bettering of the quality of the subject product for easy marketability. It is an expense relatable to selling activity and not to manufacturing activity what is collected as royalty from the buyers is paid in full to the foreign collaborator and nothing is retained by the appellants.
In view of what has been stated above, the appeal of the appellants is allowed setting aside the order (original) with consequential relief to the appellants".
2. Briefly stated the facts of the case are that the respondents are engaged in the manufacture of synthetic resin. They submitted price lists on 10-10-1981, 23-10-1981, 26-10-1981 and 9-11-1981 (all in part II) declaring the value of synthetic resin in the appropriate column for approval in terms of Rule 173C of Central Excise Rules, 1944. On scrutiny of the contract submitted by the appellants along with the price lists, it was noticed that the assessees had declared 5% technical know-how on the base price (assessable value as shown by the assessees) will be paid to foreign collaborator which was not included i the assessable value. The assessees were therefore, issued a show cause asking them to explain as to why 5% element termed as technical know-how fee should not be included in the assessable value. After careful consideration of the submission made before the Assistant Collector, the Assistant Collector held that technical know-how will form part of the assessable value. The assessee went in appeal to the Collector (Appeals). The Collector (Appeals) allowed the appeal of the appellants after setting aside the order of the Assistant Collector.
Against this order of the Collector (Appeals), the Collector of Central Excise, Calcutta had come up in appeal.
3. Shri B.K. Singh, the learned SDR submitted that there is sufficient case law on the subject; that in the case law it has been specifically provided that the fee charged by the foreign collaborator as technical know-how fee shall be includible in the assessable value for the purpose of levying of Central Excise duty. He submitted that the Hon'ble Supreme Court in the case of Bombay Tyre International reported in 1983 (14) E.L.T. 1896 had held that "it will be noted that any expenses which are incurred for increasing the marketability of an article shall form a part of the assessable value". The ld. SDR also submitted that there are a number of other cases decided by the Tribunal mainly in respect of computers in which it has clearly been held that if the technical know-how, consultancy for specific needs of the particular customer are charged so that a computer can be tailor-made for him, the cost of these services would form a part of assessable value of that computer. The ld. SDR submitted that the technical know-how admittedly increased the marketability of the product, that is to say that it makes the product acceptable to buyers on account of high standards maintained by the manufacturer in accordance with the specifications laid down by the foreign collaborators who are paid a technical know-how fee. The ld. SDR also drew our attention to the case of Wipro Information Technology Ltd. reported in 1989 (39) E.L.T. 113 wherein the Tribunal had held that the entire amount of technical services collected by the assessee shall be includible in the assessable value. The ld. SDR therefore, submitted that the case law fully covered the case in their favour.
4. No one appeared for the respondents. However, as there was sufficient case law on the subject, it was decided to proceed to hear the case ex parte.
5. Technical means pertaining to the mechanical arts and applied sciences and something peculiar or specially belonging to the art or subject referred to. Know-how means knowledge of how to do a particular thing. Thus technical know-how plays a very important role in planning a product maintaining its quality/standard and making it acceptable to a buyer. The important point is whether the fee paid to the foreign collaborator for technical know-how has a nexus with the manufacturing or marketability of the goods.
6. Heard the submissions of the ld. SDR and perused the record and considered them. On a careful consideration, we find that there is sufficient force in the arguments adduced by the ld. SDR.7. In the case of Wipro Information Technology Ltd., this Tribunal had held: "5(3) Gross price : The respondents submitted that the includible part of technical service charges, to be determined by the Assistant Collector after a break up of the total service charges collected by them from their customers, should be considered as gross receipts or cum-duty price and the duty payable calculated therefrom accordingly. This is a reasonable request. The learned representative of the department did not oppose it. We allow this request".
8. Undoubtedly, the technical know-how fee paid by the respondents in this case is a fee which maintained the high standard of the product, makes it acceptable to the buyers and thus enhanced the marketability of the product and therefore according to the ratio of the decision of the Tribunal in which it has been held that technical know-how fee paid by the respondents to the foreign collaborators shall be includible in the assessable value.
9. In the case of Sunray Computers (P) Ltd. reported in 1988 (33) E.L.T. 787 this Tribunal had held : The nature of the technical consultancy given by the respondents to their customer is not clear from the record. We have already stated in paragraph 3 above that pre-manufacturing research, planning and designing are a part of the manufacturing activity itself and their cost would form a cost of the machine produced. Therefore, if the service rendered by the respondents was for assessing the specific needs of a particular customer so that a computer could be tailor made for him, the cost of service would form a part of the assessable value of that computer. The respondents stated before us during the hearing that they were manufacturing and marketing only standards units and not custom made units and that their technical consultancy fee was for assessing "how the system is to be used in the particular customer's environment". The precise meaning of this statement was not clear to us nor could the learned Chartered Accountant representing the respondents explain it further in more specific terms. We direct the Assistant Collector to verify the nature of the technical consultancy provided by the respondents in each case. If it was in the nature of advice as to how the customer could utilise the computer so as to take maximum benefit out of it and it had no connection with the designing of the equipment supplied, the service or the advice as such would not be taxable nor its value includible in the value of the computer. But any goods supplied as a part of the consultancy service would be taxable on their own merits." 10. The technical know-how fee paid to the foreign collaborator for manufacture of the product is a payment for planning the product maintaining its quality/standard and making it acceptable in the market had a connection with the cost of manufacture of the product and therefore the expenses incurred for getting this technical know-how would necessarily form part of the assessable value.
11. The Honourable Supreme Court in the case of Bombay Tyre International reported in 1983 (14) E.L.T. 1896 had held : "49. We shall now examine the claim. It is apparent that for purposes of determining the 'value', broadly speaking both the old Section 4(a) and the new Section 4(1)(a) speak of the price for sale in the course of wholesale trade of an article for delivery at the time and place of removal, namely, the factory gate. Where the price contemplated under the old Section 4(a) or under the new Section 4(1)(a) is not ascertainable, the price is determined under the old Section 4(b) or the new Section 4(1)(b). Now, the price of an article is related to its value (using this term in a general sense), and into that value how poured several components, including those which have enriched its value and given to the article its marketability in the trade. Therefore, the expenses incurred on account of the several factors which have contributed to its value upto the date of sale, which apparently would be the date of delivery, are liable to be included. Consequently, where the sale is effected at the factory gate, expenses incurred by the assessee upto the date of delivery on account of storage charges, outward handling charges, interest on inventories (stocks carried by the manufacturer after clearance), charges for other services after delivery to the buyer, namely after-sales service and markting and selling organisation expenses including advertisement expenses cannot be deducted, It will be noted that advertisement expenses, marketing and selling organisation expenses and after-sales service promote the marketability of the article and enter into its value in the trade. Where the sale in the course of wholesale trade is effected by the assessee through its sales organisation at a place or places outside the factory gate, the expenses incurred by the assessee upto the date of delivery under the aforesaid heads cannot, on the same grounds, be deducted. But the assessee will be entitled to a deduction on account of the cost of transportation of the excisable article from the factory gate to the place or places where it is sold. The cost of transportation will include the cost of insurance on the freight for transportation of the goods from the factory gate to the place or places of delivery." 12. This position has further been clarified by the Honourable Supreme Court in Civil Appeal No. 3195 of 1979 in the Govt. of India v. MRF holding that: "The relevant paragraph states two propositions relevant in this behalf, viz., (i) where the sale is effected at the factory gate, the several expenses mentioned including "charges for other services after delivery to the buyer, viz., after-sales service and marketing and selling organisation expenses cannot be deducted" from the price and (ii) where the sale is effected through the assessee's sales organisation at a place or places outside the factory gate, even there the aforesaid expenses cannot be deducted. The assessee, however, will be entitled in such a case to deduct the cost of transportation (including the cost of insurance on the freight) incurred for transporting the goods from the gate to the place of delivery.
The contention of Sri Chandrasekharan is that in view of the aforesaid emphatic statement, the expenses claimed by the assessee on account of the maintenance of the depots cannot be allowed. Sri Nariman, however, contends that the said observations must be understood in the light of the two "bases" set out in the preceding paragraph and particularly the second of them which reads : "The other basis on which the claim proceeds is that the price at the factory gate and the price at a depot outside the factory gate are identical". Learned counsel contends that only where the price at the factory gate and price at the depot outside the factory gate is identical that the statement aforesaid applies and not otherwise. We find it difficult to agree with this explanaion or understanding, as it may be called. We may elaborate. If the selling price at the factory gate and at the depot (outside the factory gate) are identical, question of deducting the transportation charges from the price charged at the depots does not arise. If the price at the depot is known, there is no occasion for going further and indulging in the exercise provided by Sub-section (2) of Section 4. Only where the price at the gate (at the place of removal) is not known that one is put to the necessity of making the aforesaid deduction is made precisely for the purpose of ascertaining the price at the gate. It may also be noted that the first of two bases (referred to in the first paragraph in the above extract) is admittedly inapplicable, having been roundly rejected in Bombay Tyre International. Then how is it that the second basis alone is applicable. The very idea is a contradiction in terms. We, cannot, therefore, understand the aforesaid statement of law in Bombay Tyre International as premised on the basis urged by Sri Nariman. The reasoning of Sri Nariman does appear to be logical and attractive ex facie but it flies directly in the face of the clear holding in Bombay Tyre International and cannot, therefore, be accepted.
13. Technical know-how is no doubt an expense which makes the goods conform to high standards and thus the product becomes acceptable to buyers. In a way this admittedly increases the marketability of the goods. Therefore, this fee charged for technical know-how in terms of the ratio of the Hon'ble Supreme Court's judgment will be includible in the assessable value.
14. Having regard to the case law cited and relied upon by the appellants, and respectfully agreeing with the ratio of the judgments as discussed, above, we hold that technical know-how fee paid to the foreign collaborator shall be includible in the assessable value. In the circumstances, we set aside the impugned order and allow the appeal.