COMMISSIONER OF CUSTOMS (PORT) KOLKATA versus M/S STEEL AUTHORITY OF INDIA LTD. on 27 April 2020

1. The dispute in this appeal relates to valuation under the CustomsAct, 1962 of import of certain items made by the respondent SteelAuthority of India Ltd. (SAIL) under two contracts, bearing nos. PUR/PC/MOD/08.01/Pt.II dated 31.10.1989 and PUR/PC/MOD/08.01/Pt-Idated 29[th] March 1990. These imports were made in connection withmodernisation, expansion and modification for their plant at Durgapur in G

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AWest Bengal. For this purpose, SAIL had floated seven Global TenderContract Packages. The two contracts were part of these TenderContract Packages. They were registered with the customs authoritiesfor the purpose of project import benefits in terms of the 1962 Act. Thefirst contract involved in this appeal was with a consortium consisting ofa German Company, Hoestemberghe & Kluisch, GMBH and H & KBRolling Mills Engineering Private Limited, an Indian Corporate entity.The second contract was also with a German Company, SiempelkampPressen Systeme and the Indian entity was Escon Consultants PrivateLtd, with whom the consortium was formed. Both these contracts werein connection with modernisation of SAIL’s rolling mills at the aforesaidCplant.

2. Schedule 3 of the first contract (bearing no.544-9/91A SVB)specified scope of supplies and service along with the price particulars.Extracts from that schedule appears from the order of the Commissionerof Customs being the authority of first instance, dated 3[rd] January 2001.DThis order related to the first contract. We shall refer to this order ingreater detail later in this judgment. Relevant part of that Schedule isreproduced below:- COMMISSIONER OF CUSTOMS (PORT) KOLKATA v.M/S STEEL AUTHORITY OF INDIA LTD. [ANIRUDDHA BOSE, J.]

In addition to this, contract price of Rs.186,144,000/- and a royaltyof Rs.10 per tonne of thermax bars produced during first five years ofoperation was also to be paid to the Indian entity of the consortiumunder the contract for supplies and services made by the latter.

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So far as the second contract is concerned, the scope of suppliesand services to be effected by the consortium appears from the followingpart of the third schedule, which again has been reproduced in the secondorder (bearing no.544-9/91A SVB) of the authority of first instance,dated 1[st] June 2001:- B

(quoted from the order in verbatim)

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A3. The basic wording of the two contracts are more or less similar,Clause (c) thereof stipulates:- “The Contractor has agreed to undertake basic and detail designand engineering, layout engineering, training services, procurement,manufacturing, shop testing, supply and delivery of the completeBPlant and Equipment, materials both imported and indigenous atsite and carry out installation/construction of all civil works,supervision, erection, testing and successful commissioning of thePROJECT and demonstrate the Performance Guarantees etc.for the Project under the Terms and Conditions mentionedhereinafter. The CONTRACTOR has also agreed to render theCservices for insurance, port clearance including stevedoring,transportation, safe custody, handling, unloading, loading,transportation to site and any other services required to completethe PROJECT under this contract.”

4. As would be evident from the subject heads contained in theDabove-referred extracts from the third schedule to each of these contracts,the consortia were to supply plant, equipments and spares as also certainbasic designs and supervisory services at site. SAIL wanted import dutyto be charged on the plant and equipments alone. SAIL’s stand is thatthe price for the plants and equipments included all design and engineeringEfor their manufacture. But designs and drawings specified in the schedulewere all post-importation project related and project implementationactivities. The customs authorities on the other hand added the basicdesign and engineering fee of DM 2.23 million and supervision chargesduring manufacture of Indian equipments and for erection, commissioningand performance guarantee tests of 0.675 million to the invoice value. InFrespect of the second contract, direction was made for addition of basicdesign and engineering fee of DM 6.65 million, as built drawings of DM0.1 million and supervision charges during manufacture of Indianequipments and for erection, commissioning and performance guaranteetests of DM 2.842 million to the invoice value. The dispute had reachedGthe Commissioner of Customs for Special Valuation Branch, the authorityof first instance, after a questionnaire was sent to SAIL, which wasresponded to. The authority of first instance heard the representative ofSAIL. In the final orders, the authority of the first instance directed theaforesaid additions. The said authority observed that the contractor wasentrusted with the work on a turnkey basis, where the entire suppliesHand services were dependant on each other. On this premise, the

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provisions of Rule 4 and Rule 9 (1) (e) of the Customs Valuation(Determination of Price of Imported Goods Valuation Rules, 1988(hereinafter referred as the “1988 Rules”) was invoked to sustain suchadditions to the invoice value in respect of both the contracts. Theunderlying reasoning for the said orders of the authority of first instancewas that the commercial arrangements constituted turnkey contractsand package deal, which made it conditional for the purchaser to buy theequipments which complied with the technical specifications of SAIL.As a consequence, sale of the equipments was conditional as the differentaspects of the schedules of supply and service were interrelated. Thetransaction value of the imported goods was directed to include the pricepaid for the basic design and engineering, drawings, supervision oferection, commissioning, performance guarantee and technical servicesunder Rule 4 read with Rule 9(1)(e) of the 1988 Rules.

5. Appeals by SAIL against both these orders were rejected bythe Commissioner of Customs (Appeals) by two separate orders passedon 11[th] July, 2001 and 7[th] September 2001. We find from the orders ofthe Appellate authority that the case of TISCO vs. Commissioner ofCentral Excise Customs reported in (2000) 3 SCC 472 was citedbefore it by SAIL. This decision was distinguished by the Appellateauthority and the findings of the authority of first instance was sustainedon the basis of Rule 9(1)(e) of the 1988 Rules.

6. Further appeals of SAIL however, was decided in their favourby Customs, Excise and Service Tax, Appellate Tribunal, Kolkata(CESTAT) by a common order passed on 22[nd] May, 2006. These appealswere registered before the CESTAT as C/V-537/2001 and C-01/2002.The CESTAT formulated the points for determination in the followingterms :- “[i] whether the basic design and engineering fee of DM 2.230million and foreign supervision charges of DM 0.675 million areliable to be added to the invoice values of imported equipmentsunder Rule 9 of the Valuation Rules? [Appeal No. C/V-537/2001]

[ii] whether the charges towards basic design and engineeringfee of DM 6.650 million, fee for as built drawings of DM 0.100million and also supervision charges of DM 2.842 million are liableto be added to the invoice values of the imported equipments underRule 4 of the Valuation Rules read with Section 14 of the saidAct? [Appeal No. C-1/2002]”

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A7. The Tribunal held that the drawings and technical documentsrelated to post importation activities for assembly, construction, erection,operation and maintenance of the plant and those items could not beincluded in the value of imported goods. Referring to Rules 9 (1) (b) (iv)and 9(1) (e) of the Valuation Rules 1988, the Tribunal held:- B“Similarly reliance upon the decision of the Supreme Court inCollector of Customs (Preventive), Ahmedabad Vs. Essar GujaratLtd., 1996(88) ELT 609 (SC) is also completely misplaced. Fromthe judgment of the Supreme Court it would be seen that whathas been held to be added therein under Rule 9(1) (e) of theValuation Rules and process license fee, the payment for transferCof technology under the process license agreement and whateverexpenditure was needed to be incurred for dismantling the plantwhich was sold on “as in where is basis” in the foreign countryand making it ready for delivery on board the vessel to be exportedto India. The Supreme Court specifically held that apart from thisDall other services rendered under the Engineering and Consultancyfees cannot be added. The said decision of the Supreme Court,contrary to the findings of the Deputy Commissioner andCommissioner (Appeals), supports the appellant’s case.

The perusal of the orders-in-original reveals that there is no disputewhatsoever with the services as shown when the designs andEdrawings and engineering/technical services were small enabledto locate plant direction and overall project implementation formanufacturing iron and steel projects to be commissioned in Indiaand the costs and charges were collected when the design anddrawings and engineering services in relation to the componentsFto be imported and/or imported. In such circumstances, it is to beheld that the lower authorities have heard improportionate to holdthat the said charges are to be added to the assessable value asassessed relying upon the case of TISCO reported in 2000 (37)RLT 239 (S.C.). Para 8, 11 and 15 to 17 thereof refer. We do notfind any reason to uphold the reasoning of the DeputyGCommissioner in this regard.

In view of the clear cut decision in the case of Tata Iron & SteelCo. Ltd. case (supra), we find that the issue is very settled byseries of decisions of this Tribunal and heard the case referredinto Indo Gulf Corpn. Ltd. v. Commr. of Customs, 2005(182) ELTH77(T).

Neither in Section 14 of the said Act nor in the Valuation Rules isthere any provision which provides that the cost of drawings andtechnical documents required for procurement or manufacture ofgoods in India by the importer or which relates to post importationactivities for assembly, construction, erection, operation andmaintenance of the plant are to be included in the price ofequipments for determining their transaction value andconsequently their assessable value for the purpose of levy ofcustoms duty under the said Act. On the contrary the“Interpretative Notes” to Rule 4 of the Valuation Rules, 1988makes it explicitly clear that value of imported goods shall notinclude, inter alia, the charges for construction, erection, assemblymaintenance of technical assistance undertaken after importationof the imported goods such as 3 of the Contract in the instantcase in determining the assessable value of the importedequipments imported by the appellant is wholly erroneous, ultravires the said Act and/or the Customs Valuation Rules, 1988. Thisalso the Deputy Commissioner and the Commissioner (Appeals)failed to appreciate and/or take into consideration and therebyarrived at patently erroneous finding.

In terms of Rule 9 [1] [b] [iv] of the Valuation Rules, 1988, indetermining the transaction value the value apportioned asappropriate of, inter alia, engineering, design and plans andsketches undertaken elsewhere than in India and “necessary forthe production of the imported goods” which were supplied directlyor indirectly by the buyer free of charge or at a reduced cost tothe supplier or imported goods for use in producing the importedgoods being value are to be included. This is because such supplyof free of charge or at a reduced cost would result in a lowerprice for the imported goods than the price that the supplier wouldhave charged if such goods/services were to be paid for in full.This rule is also inapplicable in the instant case as there has beenno supply or any engineering’s or drawings by the appellant to theforeign seller. Moreover, there was no supply free of charge or atreduced cost. Hence this rule also has no applicability whatsoeverin the present case.” (quoted verbatim)

8. It is against this order the revenue is in appeal before us. Beforewe examine the arguments advanced by Mr. Agarwal, Senior Counsel ABC

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Afor the appellant and Mr. Bagaria, Senior Counsel for the assessee, weshall advert to the statutory provisions which are applicable in the factsof this case. These are Sections 12, 14 (as it stood at the time ofimportation) of the Customs Act, Rules 4 and 9 of the 1988 Rules. Theseprovisions stipulate:- BSections 12 and 14 of the Customs Act 1962

“12. Dutiable goods.— (1) Except as otherwise provided in thisAct, or any other law for the time being in force, duties of customsshall be levied at such rates as may be specified under [the CustomsTariff Act, 1975 (51 of 1975)], or any other law for the time beingCin force, on goods imported into, or exported from, India.[(2) The provisions of sub-section (1) shall apply in respect of allgoods belonging to Government as they apply in respect of goodsnot belonging to Government.]

14. Valuation of goods for purposes of assessment—(1)ForDthe purposes of the Customs Tariff Act, 1975 (51 of 1975), or anyother law for the time being in force whereunder a duty of customsis chargeable on any goods by reference to their value, the valueof such goods shall be deemed to be—

the price at which such or like goods are ordinarily sold, or offeredEfor sale, for delivery at the time and place of importation orexportation, as the case may be, in the course of internationaltrade, where—

(a) the seller and the buyer have no interest in the business ofeach other; or F

(b) one of them has no interest in the business of the other, and the price is the sole consideration for the sale or offer forsale:

Provided that such price shall be calculated with reference to theGrate of exchange as in force on the date on which a bill of entry ispresented under section 46, or a shipping bill or bill of export, asthe case may be, is presented under section 50; (1A) Subject to the provisions of sub-section (1), the price referredto in that sub-section in respect of imported goods shall bedetermined in accordance with the rules made in this behalf.H

(2) Notwithstanding anything contained in sub-section (1) or sub-section (1A) if the Board is satisfied that it is necessary orexpedient so to do, it may, by notification in the Official Gazette,fix tariff values for any class of imported goods or export goods,having regard to the trend of value of such or like goods, andwhere any such tariff values are fixed, the duty shall be chargeablewith reference to such tariff value.

(3) For the purposes of this section—

(a) “rate of exchange” means the rate of exchange—

(i) determined by the Board, or

(ii) ascertained in such manner as the Board may direct, for the conversion of Indian currency into foreign currency orforeign currency into Indian currency; (b) “foreign currency” and “Indian currency” have the meaningsrespectively assigned to them in clause (m) and clause (q) ofsection 2 of the Foreign Exchange Management Act, 1999 (42 of1999).”

Rule 4 and Rule 9 of the 1988 Rules

4. Transaction value.

(1) The transaction value of imported goods shall be the priceactually paid or payable for the goods when sold for export toIndia, adjusted in accordance with the provisions of Rule 9 ofthese rules.

(2) The transaction value of imported goods under sub-rule (1)above shall be accepted:

Provided that-

a. The sale is in the ordinary course of trade under fully competitiveconditions;

b. The sale does not involve any abnormal discount or reductionfrom the ordinary competitive price;

c. The sale does not involve special discounts limited to exclusiveagents; or A

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Ad. Objective and quantifiable data exist with regard to theadjustments required to be made, under the provisions of rule9, to the transaction value;

e. There are no restrictions as to the disposition or use of thegoods by the buyer other than restrictions which-B

(i) are imposed or required by law or by the public authoritiesin India; or

(ii) limit the geographical area in which the goods may be resold;or C(iii) do not substantially affect the value of the goods;

f. the sale or price is not subject to same condition or considerationfor which a value cannot be determined in respect of the goodsbeing valued;

g. no part of the proceeds of any subsequent resale, disposal orDuse of the goods by the buyer will accrue directly or indirectlyto the seller unless an appropriate adjustment can be made inaccordance with the provisions of Rule 9 of these rules; and

h. the buyer and seller are not related, or where the buyer and seller are related, that transaction valueEis acceptable for customs purposes under the provisions of sub-rule (3) below.

(3) (a) Where the buyer and seller are related, the transactionvalue shall be accepted provided that the examination of thecircumstances of the sale of the imported goods indicate thatFthe relationship did not influence the price.

(b) In a sale between related persons, the transaction value shallbe accepted, whenever the importer demonstrates that thedeclared value of the goods being valued, closely approximates toone of the following values ascertained at or about the same time- G

(i) the transaction value of identical goods, or of similar goods, insales to unrelated buyers in India;

(ii) the deductive value for identical goods or similar goods;

(iii) the computed value for identical goods or similar goods.

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Provided that in applying the values used for comparison, dueaccount shall be taken of demonstrated difference in commerciallevels, quantity levels, adjustments in accordance with theprovisions of Rule 9 of these rules and cost incurred by the sellerin sales in which he and the buyer are not related;

(c) substitute value shall not be established under the provisionsof clause (b) of this sub-rule.

9. Cost and services. –

(1) In determining the transaction value, there shall be added tothe price actually paid or payable for the imported goods,- (a) the following cost and services, to the extent they are incurredby the buyer but are not included in the price actually paid orpayable for the imported goods, namely:-

(i) commissions and brokerage, except buying commissions;

(ii) the cost of containers which are treated as being one forcustoms purposes with the goods in question;

(iii) the cost of packing whether for labour or materials; (b) the value, apportioned as appropriate, of the following goodsand services where supplied directly or indirectly by the buyerfree of charge or at reduced cost for use in connection with theproduction and sale for export of imported goods, to the extentthat such value has not been included in the price actually paid ofpayable, namely :-

(i) materials, components, parts and similar items incorporated inthe imported goods;

(ii) tools, dies, moulds and similar items used in the production ofthe imported goods;

(iii) materials consumed in the production of the imported goods;

(iv) engineering, development, art work, design work, and andplans and sketches undertaken elsewhere than in India andnecessary for the production of the imported goods;

(c) royalties and license fees related to the imported goods thatthe buyer is required to pay, directly or indirectly, as a condition of A

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the sale of the goods being valued, to the extent that such royaltiesand fees are not included in the price actually paid or payable.

(d) the value of any part of the proceeds of any subsequent resale,disposal or use of the imported goods that accrues, directly orindirectly, to the seller; B

(e) all other payments actually made or to be made as a conditionof sale of the imported goods, by the buyer to the seller, or by thebuyer to a third party to satisfy an obligation of the seller to theextent that such payments are not included in the price actuallypaid or payable.

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(2) For the purposes of sub-section (1) and sub section (1A) ofSection14 of the Customs Act, 1962 (52 of 1962) and these rules,the value of the imported goods shall be the value of such goods,for delivery at the time and place of importation and shall include- (a) the cost of transport of the imported goods to the place ofDimportation; (b) loading, unloading and handling charges associated with thedelivery of the imported goods at the place of importation; and

(c) the cost of insurance:

EProvided that-

(i) Where the cost of transport referred to in clause (a) is notascertainable, such cost shall be twenty percent of the free onboard value of the goods;

(ii) The charges referred to in clause (b) shall be one per cent ofthe free on board value of the goods plus the cost of transportreferred to in clause (a) plus the cost of insurance referred to inclause (c); F

(iii) Where the cost referred to in clause (c) is not ascertainable,such cost shall be 1.125% of free on board value of the goods; G

Provided further that in the case of goods imported by air, wherethe cost referred to in clause (a) is ascertainable, such cost shallnot exceed twenty per cent of free on board value of the goods:

Provided also that where the free on board value of the goods isnot ascertainable, the costs referred to in clause (a) shall be twenty H

per cent of the free on board value of the goods plus cost ofinsurance for clause (i) above and the cost referred to in clause(c) shall be 1.125 % of the free on board value of the goods pluscost of transport for clause (iii) above].

(3) Additions to the price actually paid or payable shall be madeunder this rule on the bases of objective and quantifiable data.

(4) No addition shall be made to the price actually paid or payablein determining the value of the imported goods except as providedfor in this rule.”

9. The main case of the appellant is that these two cases involvedimportation of turnkey projects and the entire contract value have to betreated as the transaction value for the purpose of charging customsduty. Mr. Agarwal has submitted that the design and the other items,which were the subject of dispute, were integrally linked with theequipments and supply of the services were conditions for importationof the equipments. It has also been argued on behalf of the revenue thatthe contracts were integrated from basic planning and designing tillimplementation at site and what was imported was a project and notmerely equipments. On this count, our attention was drawn to Rule 9(1)(e)of the 1988 Rules, which we have quoted earlier in this judgment.

10. The Tribunal did not accept this plea of revenue. The Tribunalin the impugned order accepted SAIL’s plea for segregating the value ofequipments and the other fees on services covered by the same contracts,the latter charges meant for post-importation phase of the arrangementbetween the contracting parties. It found that the designs and drawingsand engineering/technical services were for plant direction and overallproject implementation for manufacturing iron and steel to becommissioned in India and charges were collected by the consortiumwhen the design and drawings and engineering services in relation to thecomponents were to be imported. It is also not the revenue’s case beforeus that these designs and drawings and the services were in relation tothe imported equipments and goods.

11. Major part of the argument on behalf of the revenue advancedbefore us, however, was anchored to Rule 9(1)(e) of the 1988 Rules.The revenue’s contention on this point, which formed the basis of theorders of the authority of the first instance as also the first appellateauthority has been that these were turnkey contracts and hence import A

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Aof designs and drawings etc. even for post-importation activities shouldbe treated as condition of import of the equipments. Mr. Agarwal hasrelied on the decision of this Court in the case of Mukund Limited vs.Commissioner of Customs reported in [2000 (120) ELT 30] confirmingan order of the Tribunal in addition to the value of design and engineering,imported into this country the supervision charges in India during design,Berection and performance guarantee test. This Court, in its order passedon 8[th] December 1999, held:- “1. This is a contract that contemplates the supply of basic designand engineering drawings and the supervision of erection, testingand commissioning based thereon. One is as much a part and aCcondition of the contract as the other.

2. We find, therefore, no merit in the appeal. It is dismissed withcosts.”

12. The case of Mukund Limited (supra) dealt with setting upDof a cleaning plant as part of basic oxygen furnace shop of SAIL(coincidentally the same respondent), for their Rourkela Steel Plant. Forthis purpose their contractor, Mukund Limited had entered into anagreement with an overseas Company, Davy Mckee (Stockton) Limited.In pursuance of that contract, Davy were to provide basic design anddrawing and also supervise the detailed engineering erection andEcommissioning of the gas cleaning plant in India apart from training ofpersonnel abroad. The fabrication, manufacture etc. however was to bedone in India with indigenous goods based on designs supplied by Davy.The contract amount was £20,00,000 and charges for design andengineering, supervision in India during design, erection, commissioningFand performance guarantee test valued at £6,57,900 and training chargesof £82,600 were to be paid separately. Relying on a decision of thisCourt in CC (Prev.), Ahmedabad vs. Essar Gujarat reported in [(1997)9 SCC 738], the Tribunal found in the order reported in 1999 (112) ELT479(T):- G“6. The payment of $ (sic) 6,57,900 noted above in the priceschedule is towards the services indicated above in the Agreementand which is a necessary concomitant to the supply of Designand Engineering drawings for the gas cleaning plant made by DavyMckee and imported by the appellants. The appellants have beenentrusted with the setting up of gas cleaning plant, and this couldHonly be achieved not only by purchasing the basic design and

engineering drawings imported from Davy Mckee but also thewhole engineering package of supervision of detail drawing,erection, commissioning and performance guarantee test. Thepayment made in foreign exchange towards supervision chargesduring design, erection and commissioning will necessarily haveto form part of the assessable value of the imported goods andthe value thereof will include not only the price paid for designand engineering but also for supervision charges. This will followfrom Rule 9 of the Valuation Rules which provides for addition ofcertain costs and services to the transaction value. Rule 9(1)(e)covers all other payments actually made or to be made as acondition of sale of imported goods by the buyer to the seller.”

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This was a case where Tribunal reached finding on fact that thetwo sets of items were to be added to reach the assessable value as theplant could be set up as per the basic design only and the second set ofdesigns, drawings and activities intricately interlinked. This case did notinvolve importation of any equipment.

13. Another judgment of this Court in the case of AndhraPetrochemicalsvs. Collector of Customs, Madrasreported in[(1988) 9 SCC 109] was cited before us by Mr. Agarwal. But ratio ofthat authority would not be applicable in the facts of this case, as thedisputed amount involved payment made by the importer to their overseasassociate towards engineering, design work, plant, sketches etc. whichwere necessary for production of imported goods. This was a caseattracting Rule 9(1)(b)(iv) of the 1988 Rules. Factually, this authority isdistinguishable. The other authority on which Mr. Agarwal has placedreliance is a decision of this Court in the case of Commissioner, DelhiValue Added Tax vs. ABB Limited reported in (2016) 6 SCC 791. Inthis case the controversy was as to whether a contract for supply,installation, testing and commissioning of traction electrification powersupply and power distribution for the Dwarka Section of Delhi MetroRail Corporation Limited could be subjected to Delhi value added tax ornot. But this case dealt with the issues of works contract and movementof goods by inter-state trade for computing value added tax. Thetransaction in that case was held to be movement of goods by way ofimports or by way of inter-state trade and hence covered by the CentralSales Tax Act. The only factual similarity in both these cases is that the ABC

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Acase of ABB Limited (supra) also related to turnkey project. But“import” under that statute and the charging section in the Customs Actfor imposing duty (under Section 12) are not the same. The mechanismfor arriving at transaction value or assessable value under the two statutesare different and distinct. This authority can have no impact on thesubject-controversy.B

14. The appellant’s case in substance is that on a composite readingof Section 14 of the Act, Rules 4 and 9(1)(e) of the 1988 Rules, the priceof drawings, design etc., should be added to the invoice value of theimported equipments, as those intangible items formed an integral partof the arrangement agreed upon between the two consortia and SAIL.CThe revenue described such arrangement as turnkey contracts. It hasbeen specifically argued that such intangible items constituted conditionsof sale within the meaning of Rule 9(1)(e) of the 1988 Rules and theseare not post importation charges.

15. Stand of the respondent, on the other hand is that those itemsDrelated to post importation activities of SAIL in India for implementationof their project. Their case is that only imported equipments could besubjected to duty. Referring to the charging provision for levy of duty,being Section 12 as also Section 14 of the Act, it was argued that toreach the assessable value, Rule 9 of the 1988 Rules was the only mode.ESo far as subject-dispute is concerned, Rule 9(1) (e) read with theinterpretative note did not permit addition of value of post-importationitems. Spares and other specifications concerning such equipments werealready included in the price of the equipments. In support of his argumentfor exclusion of post importation services which may be obtained from aforeign consortium, Mr. Bagaria referred to the aforesaid Note, whichFreads as:- “Note to Rule 4

Price actually paid or payable

The price actually paid or payable is the total payment made or toGbe made by the buyer to or for the benefit of the seller for theimported goods. The payment need not necessarily take the formof a transfer of money. Payment may be made by way of lettersof credit or negotiable instruments. Payment may be made directlyor indirectly. An example of an indirect payment would be thesettlement by the buyer, whether in whole or in part, of a debtHowed by the seller.

Activities undertaken by the buyer on his own account, other thanthose for which an adjustment is provided in Rule 9, are notconsidered to be an indirect payment to the seller, even thoughthey might be regarded as of benefit to the seller. The costs ofsuch activities shall not, therefore, be added to the price actuallypaid or payable in determining the value of imported goods:

The value of imported goods shall not include the following chargesor costs, provided that they are distinguished from the price actuallypaid or payable for the imported goods:

(a) charges for construction, erection, assembly, maintenanceor technical assistance, undertaken after importation onimported goods such as industrial plant, machinery or equipment; (b) the cost of transport after importation;

(c) duties and taxes in India.

The price actually paid or payable refers to the price for theimported goods. Thus the flow of dividends or other paymentsfrom the buyer to the seller that do not relate to the importedgoods are not part of the customs value.”

16. Learned counsel for the respondent relied on the following authorities in support of his submissions:

“1. (2015) 8 SCC 175: Commissioner of CustomsVs. EssarSteel

2. (2000) 3 SCC 472: M/s Tata Iron & Steel Co. Ltd.Vs.CCE

3. (2007) 9 SCC 401: Commissioner of CustomsVs. J.K.Corp. Ltd.

4. (2015) 14 SCC 750: Commissioner of CustomsVs.Hindalco Industries

5. (2015) 16 SCC 506: Commissioner, CustomsVs. DensoKirloskar Industries

6. (2007) 5 SCC 371: Commissioner of CustomsVs. ToyotaKirloskar

7. (2008) 4 SCC 563: Commissioner of CustomsVs. FerodoIndia (P) Ltd.

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A17. In the case of Essar Steel Limited (supra), there were twocontracts with the overseas exporter. One was a purchase order forsetting up of a plant. The other was between Met Chem Canada Inc.with Essar Ltd. to associate the former as a technical consultant torender technical services in relation to implementation of a project to setup a plant in India for manufacture of hot rolled steel coils in India. TheBtechnical service agreement was in relation to implementation of theproject. The revenue had taken the stand that customs duty was to beimposed was on both the goods and the intangible items as these werenot independent of each other and the contract for design engineeringand technical services constituted condition of sale for the contract ofCsupply of goods. This is a stand similar to that taken by revenue in thiscase as well. This Court, referring to various authorities held that it wasnot permissible on the part of the revenue to include in the assessablevalue the value or charges for items which were to be used or utilizedfor post importation activities. In paragraph 14 of the said report, it hasbeen observed and held:-D

“14. Another thing to be noticed is that a conjoint reading of thetechnical services agreement and the purchase order do not leadto the conclusion that the technical services agreement is in anyway a pre- condition for the sale of the plant itself. On the contrary,as has been pointed out above, the technical services agreementEread as a whole is really only to successfully set up, commissionand operate the plant after it has been imported into India. It isclear, therefore, that clause 9(1)(e) would not be attracted on thefacts of this case and consequently the consideration for thetechnical services to be provided by Met Chem Canada Inc. cannotFbe added to the value of the equipment imported to set up theplant in India.”

18. This Court, while dealing with the case of Essar Steel Limited(supra) had referred to the case of Tata Iron and Steel CompanyLtd. (supra). The latter authority related to importation made under anGumbrella contract, which branched into two. One related to agreementfor supply of technical documentation (MD 301) and the other for saleof equipments and materials pertaining to a blast furnace and threetorpedo ladle cars (MD 302). The value of MD 301 was 12.5 millionDM and MD 302 was 13.5 million DMs. The consignment under MD301 was cleared by the customs authorities having nil duty componentH

as importer claimed the same to be classified under sub-headingno.4906.00 of the Customs Tariff Act, 1985. But while scrutinising theconsignment under MD 302, the customs authorities initiated action forincluding the value of MD 301 for determining the assessable value.The dispute reached the Tribunal. In paragraph 7 of the said reportcomprising of the judgment of this Court, the finding of the Tribunal hasbeen summarised:-

“7. The appellant and other notices preferred appeals before theCustoms, Excise and Gold (Control) Appellate Tribunal, Calcuttawhich have been disposed of by a common order. The Tribunalhas held that the three contracts entered into between the seller,i.e., SNP and the appellant were in fact parts of one package, thatis, the three constituted one composite agreement. The technicaldocumentation supplied to the appellant could be divided into threeparts: (i) those pertaining to the imported equipment, (ii) thosepertaining to the equipment which has yet to be procured ormanufactured by the appellant, and (iii) those relatable to post-import activities undertaken by the appellant for assembly,construction, erection, operation and maintenance of the importedequipment. The value of the contract to the extent of (i) abovewas liable to be included in the value of equipments and materialsimported by the appellant though the value of the technicaldocuments covered by (ii) and (iii) above could have beenexcluded for payment of customs duty by reference to theInterpretative Note to Rule 4 of the Customs Valuation Rules,1988 (hereinafter “the Rules”, for short). However, since separatevalues have not been shown, the benefit of the Interpretative Noteto Rule 4 abovesaid was not available to the appellant and theentire value of the two contracts was liable to be clubbed togetherfor the purpose of levying customs duty.”

19. It was held and observed by this Court in the case of TataIron and Steel Company Ltd. (supra):- “16. It is nobody’s case that the seller had an obligation towardsa third party which was required to be satisfied by it and thebuyer (i.e. the appellant) had made any payment to the seller or toa third party in order to satisfy such an obligation. The price paidby the appellant for drawings and technical documents formingthe subject-matter of contract MD 301 can by no stretch of A

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imagination fall within the meaning of “an obligation of the seller”to a third party. There was also no payment made as a conditionof sale of imported goods as such. Rule 9(1)(e) also, therefore,has no applicability.

17. So far as the Interpretative Note to Rule 4 is concerned it isBno doubt true that the Interpretative Notes are part of the Rulesand hence statutory. However, the question is one of theirapplicability. The part of the Interpretative Note to Rule 4 reliedon by the Tribunal has been couched in a negative form and isaccompanied by a proviso. It means that the charges or costsdescribed in clauses (a), (b) and (c) are not to be included in theCvalue of imported goods subject to satisfying the requirement ofthe proviso that the charges were distinguishable from the priceactually paid or payable for the imported goods. This part of theInterpretative Note cannot be so read as to mean that those chargeswhich are not covered in clauses (a) to (c) are available to beDincluded in the value of the imported goods. To illustrate, if theseller has undertaken to erect or assemble the machinery after itsimportation into India and levied certain charges for renderingsuch service the price paid therefor shall not be liable to beincluded in the value of the goods if it has been paid separatelyand is clearly distinguishable from the price actually paid or payable E

for the imported goods. Obviously, this Interpretative Note cannotbe pressed into service for calculating the price of any drawingsor technical documents though separately paid by including themin the price of imported equipments. Clause (a) in the third paraof the Note to Rule 4 is suggestive of charges for services rendered

by the seller in connection with construction, erection etc. ofimported goods. The value of documents and drawings etc. cannotbe “charges for construction, erection, assembly etc.” of importedgoods. Alternatively, even on the view as taken by the Tribunal onthis Note, the drawings and documents having been supplied to F

the buyer-importer for use during construction, erection, assembly,Gmaintenance etc. of imported goods, they were relatable to post-import activity to be undertaken by the appellant. Such chargeswere covered by a separate contract, i.e. contract MD 301. Theycould not have been included in the value of imported goods merelybecause the value of documents referable to imported equipmentsHand materials was mixed up with the value of those documents which were referable to equipment which was yet to be procuredor imported or manufactured by the appellant; the value of thelatter category of documents also being neither dutiable norclubbable with the value of imported goods. The Tribunal has notdoubted the genuineness of the contracts entered into betweenthe appellant and SNP. Rather it has observed vide para 10.2 ofits order that entering into two contracts (MD 301 and MD 302)was a legal necessity. The Tribunal has also stated that it was notrecording any finding of “skewed split-up”. Shri Ashok Desai, thelearned Senior Counsel for the appellant has pointed out that underChapter Heading 49.06 of the Customs Tariff Act, 1975 plansand drawings for engineering and industrial purposes being originalsdrawn by hand as also their photographic reproductions onsensitised papers and carbon copies thereof are declared freefrom payment of customs duty. Sub-rules (3) and (4) of Rule 9clearly provide that additions to the price actually paid or payableare permissible under the Rules if based on objective andquantifiable data and no addition except as provided for by Rule 9is permissible.”

20. Revenue laid stress on the decision of this Court in the case ofEssar Gujarat (supra). We have earlier referred to this authority inthis judgment. This case involved importation of a plant, which wasoriginally installed in Germany. The Indian importer, Essar Gujrat, hadentered into an agreement with the overseas owner of that plant inGermany. That owner was Teviot Investments Limited. The agreementEssar Gujarat had with Teviot for purchase of the plant, however, wassubject to Essar obtaining transfer of operational license from anothercorporation, Midrex International BV. Question arose as to whether thelicense fees paid to Midrex should be included to the value of the plantor not. The revenue case was that the stipulation of obtaining the licensefrom Midrex was a condition for sale. If this condition was not fulfilled,the sale would have had fallen through. Thus, to give effect to the plantsale agreement, there was an element of necessity or compulsion toenter into the licensing agreement with Midrex.

21. SAIL had taken specific stand before the authority of the firstinstance that it was not a condition for them to take design and engineering,which related to post importation activities from the supplier only. Interms of the schedule of the agreement, the purchaser (that is SAIL)had right to change the goods to be supplied by the supplier at any time.

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A22. An importer of equipments of a plant could always choose toobtain drawings and designs for undertaking post importation activitiesfrom an overseas consortium supplying the equipments. This may conferon such arrangements attributes of a turnkey contract, but that fact byitself would not automatically attract the “condition” clause contained inRule 9(1) (e) of the Valuation Rules. In the cases of Essar SteelBLtd.(supra) and Tata Iron and Steel Co. Ltd.(supra), the contractshad certain elements of “turnkey” features. The case of Essar Gujarat(supra) is distinguishable, as the subject of import there carried a conditionfor entering into a licensing agreement with a third party.

23. This decision was considered by this Court in Essar SteelC(supra) and Essar Gujarat (supra). It was explained by this Court inthe case of Essar Steel (supra) in paragraphs 17 and 18 of the report:

“17. The Court held that the amount of 20 lakh Deutsche Marksand 101 lakh Deutsche Marks were both payable for the right touse Midrex process and patents. In short, these amounts wereDpayable for the transfer of technology under a process licenceagreement entered into with Midrex. The judgment states thatwithout such licence the plant could not be operated at all by theimporter without the technical know-how from Midrex. In anycase, the plant could not be operated or be made functional. ThisEbeing the case, since these amounts had to be paid before theplant could at all be set up, these amounts would be added to thevalue of the imported plant.

18. However, so far as the sum of 231 Lakh Deutsche Marks isconcerned, since this was payment for engineering and technicalconsultancy to set up and commission the plant in India, this amountwould have to be excluded. This Court held that 10% of thisamount only should be added to the value of the plant as the planthad been sold abroad on an as is where is basis and needed to bedismantled abroad before it was ready for delivery in India.Obviously, therefore this 10% is attributable to a pre-import stage.Further, the amount of 22 Lakh Deutsche Marks payable fortheoretical and practical training of personnel outside India againcould not be added as this amount would presumably be attributableto trained personnel who would be used in the commissioning andoperation of the plant, which would, therefore, be attributable to apost-importation event. Thus, properly read, the judgment in Essar F

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Gujarat case actually supports the respondent in that the paymentfor engineering and technical consultancy services in India cannotbe added to the value of the imported plant. Also, in the presentcase, there is no transfer of technology under a license. Therefore,no question arises as to whether without such license the plant tobe set up in India could be operated at all. The judgment alsoconcludes in favour of the respondent the fact that all amountspayable for training of personnel outside India cannot be added tothe value of the plant.”

24. We have already summarised the respondent’s case that thedisputed items on which the customs authorities intended to impose dutyall related to post importation activities and could not be included in theassessable value. It has been urged on behalf of the respondent thatneither clause 9 (1) b (iv), nor 9 (1) (e) could be made applicable so faras the subject items are concerned. The imported items according to therespondent are the equipments and the engineering drawings etc. formingpart of the contract were not necessary for production of the importedgoods. It has also been urged that the customs authority had wronglycontended that the subject drawings etc. were purchased as the conditionthat the sale of the imported goods and this excluded application of clause9 (1) (e) of the 1988 Rules. In this regard interpretative note to Rule 4was relied upon. Reference was made, in particular, to clause (a) of thatNote.

25. Revenue has not made out a case that the disputed items ofcontract do not relate to post-importation activities. The statutory provisionrelied upon by the Revenue to bring the subject-items within the duty netis Rule 9 (1) (e) of the 1988 Rules.

26. The expression “condition”, simply put, conveys the idea thatsomething could be done only if another thing was also done. In thegiven context, it would imply that import of equipments could be allowedby the other party provided the design features for post-importationactivities were also obtained from the same supplier or from a firm asper the overseas supplier’s direction. But there is no material before usto suggest that import of equipments was effected with simultaneousobligation of SAIL that the designs relating to post-importation activitiesshould also be obtained from the same entity. The revenue has proceededwith the understanding that since both were obtained from the samevendor, condition of obtaining designs etc., for post-importation activities A

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Awas implicit in the contract. The Revenue has sought to emphasise theircase on the basis that as it was a turnkey project, importation ofequipments and post-importation project implementation exercise weremutually dependant. In our opinion, reading such implied condition intothe contracts would be impermissible in the absence of any other materialto demonstrate subsistence of such condition. No part of the contractBhas been shown to us from which such condition could be inferred.Necessity of subsistence such condition has been laid down in the caseof Ferodo India (P) Ltd. for invoking rule 9 (1) (e). In our opinion, theprovisions of Rule 9 (1) (e) cannot be automatically applied to everyimport which has surface features of a turnkey contract. Just becauseCdifferent components of a contract or multiple contracts give the shapeof turnkey project to the imported items, without specific finding onexistence of “condition” as contemplated in clause 9 (1) (e), value of allthese components could not be added to arrive at the assessable value.Such an exercise would go against the provisions of Interpretative Noteto Rule 4, which is part of the Valuation Rules in view of the provisionsDof Rule 12 thereof.

27. Similar were the revenue’s contentions in Essar Steel (supra)and Tata Iron & Steel Co. Ltd. (supra), except that in the factualcontext of those two cases, there were different sets of agreements.But that difference is more of form than of content. If a single agreementEinvolves importation of dutiable equipments and also services for post-importation activities, and these two sets of items are segregable, it wouldbe open to the importer to claim duty-exclusion in respect of items directlyrelatable to post importation activities in cases where Rule 9 of theValuation Rules are applicable. The cases of J.K. Corp. Ltd. (supra),FHindalco Industries, Denso Kirloskar (supra), Toyota Kirloskar(supra) all deal with exclusion of value of post-import activities.

28. In the present appeal, involving two import consignments, theauthorities of First Instance and the Appellate Authority proceeded onthe basis that since all the scheduled items formed part of the sameGcontract and were linked with activities at post-import stage with theimported equipments, the provisions of Section 9 (1) (e) could be invoked.Such reasoning infers subsistence of conditions for awarding post-importation work to the overseas consortia or makes import of both setsof items otherwise interdependent. We find from the orders in originalthat the stand of SAIL was consistent that the subject drawings andH

COMMISSIONER OF CUSTOMS (PORT) KOLKATA v.M/S STEEL AUTHORITY OF INDIA LTD. [ANIRUDDHA BOSE, J.]

specifications did not relate to the equipments imported and was meantfor post importation activities and there was no condition laid down thatthe import of the equipments were to be supplemented by post-importationwork.

29. In such circumstances, we do not find any reason to interferewith the order of the Tribunal. The appeal is dismissed.

30. There shall be no order as to costs. All connected applicationsshall stand disposed of.

Devika Gujral

Appeal dismissed.

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