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PETITIONER: COLLECTOR OF CUSTOMS(PREVENTIVE), AHMEDABAD

       Vs.

RESPONDENT: M/S. ESSAR GUJARAT LTD., SURAT.

DATE OF JUDGMENT:       19/11/1996

BENCH: B.P. JEEVAN REDDY, SUHAS C. SEN, K.S. PARIPOORAN

ACT:

HEADNOTE:

JUDGMENT:                       J U D G M E N T      SEN,J.      The first  dispute in this case relates to the question whether the  licence fees  paid to M/s. Midrex International B.V., Zurich,  (Midrex) should be added to the invoice value of the plant bought by M/s. Essar Gujarat Limited (EGL). The plant was  originally installed at Emden Germany, in 1981 by a firm  which went  into liquidation.  NORD/LB, a  Bank, was appointed receive  of the  plant. The  bank floated a global tender for  the sale of the plant on "as is where is" basis, EGL made  an offer of DM 26 million for the plant, but could not obtain  clearance of  Government of  India  for  payment within the  stipulated period.  The  deal,  therefore,  fell through, The  Bank sold the plant to M/s. Teviot Investments Limited (TIL)  On 24th  March,  1987,  EGL  entered  into  a contract with  TIL for purchase of the Direct Reduction Iron Plant on  certain terms and conditions. The entire agreement was subject  to two  conditions - (1) approval of Government of India  within 30th April, 1987 and (2) obtaining transfer of the operation licence from m/s.Midrex of Charlotte,  USA. The  contention   before  this   Court,  on  behalf  of  the appellant, Collector of Customs, has been that these clearly were the  conditions which  had to  be fulfilled  before the sale could  take place.  As a  matter of  fact, EGL obtained transfer  of   the  operation  licence  from  Midrex  before proceeding with  the dismantling  of the plant and exporting the plant  in semi-knocked-down  condition to  India. On the other hand,  it has been contended on behalf of EGL that the overriding  stipulation   of  obtaining   transfer  of   the operation licence  from M/s.Midrex  only kept  an exit  door open for EGL to back out of the contract. If for any reason, Government of  India did  not grant permission to go through the deal  or the  requisite licence from Midrex could not be obtained, it  would be  permissible for  EGL not to go ahead with  the   contract.  These   two  stipulations   were  not conditions  of   sale  of  the  plant  but  were  overriding conditions attached  to the  contract to  enable EGL to back out of the contract in certain contingencies.      Before going  into the merits of the rival contentions, it will  be necessary to notice the facts relating to import

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of the  plant and  also the  three agreements. The agreement between EGL  and TIL  was entered  into  on  24.3.1987.  The agreement with  M/s.Voest Alpine  AG (V.A.)  and with Midrex International B.V.  were both  entered into on 4th December, 1987. But  the  plant  in  semi-knocked-down  condition  was imported only  in September/October, 1988. The first bill of entry in respect of 468 packages was dated 29.9.1988 and the second bill  of entry  in respect  of 317 packages was dated 11.10.1982. In  other words,  even though  the agreement  to purchase the  plant was formally executed by and between EGL and TIL  on 24.3.1987, actual importation  took place nearly 1 1/2  years thereafter  and only  after the  two agreements with V.A. and Midrex were signed on 4.4.1987. These facts go to show  that it  was essential  for EGL  to have a  licence from Midrex  for working of plant. Mr. Salve has argued that it may  have been essential for the EGL to have this licence in order to make the plant fully and effectively operational but it  was not  a condition  of sale  of the  plant. It was quite an  independent contract.  From a plain reading of the agreement with  TIL, it  appears that  the overriding clause may have been inserted to protect EGL but nonetheless it was a condition of sale. If this condition an was not fulfilled, the sale  would have  fallen through.  Moreover, it  appears that the  plant without Midrex licence would have been of no value at all. EGL had purchased the plant on "as is where is basis. But  in order  to operate the plant, it was essential to have a licence from Midrex. The agreement with V.A. starts with the recital that-      "EGL  will   set  up   at   Hazira,      Gujarat,   a   gas   based   Direct      Reduction (DR) Plant which is to be      re-engineered for  a rated capacity      of 8,80,000  tpy of  Hot Briquetted      Iron (HBI)  and  for  this  purpose      decided to  buy  the  existing  gas      based  DR   plant  of  NOHDDEUTSCHE      FERROWERKE (MORD  FERRD) located at      Emden, West  Germany, which  had  a      rated capacity  of 8,00,000 tpy DRI      under  the   prevailing   operating      conditions  at  Emden    based  the      Midrex Process  and to  incorporate      Hot Discharge  and Hot  Briquetting      facilities."      It was  further  recited  in  the  agreement  that  the Collaborator (V.A.) was holding construction licence     and rights to  use patents  form Midrex  International B.V.  for marketing, sale,  design  and  construction  of  the  Midrex plants at Hazira, lndia.      The agreements with V.A. and Midrex go to show that the plant located  at Emden was described as a Midrex plant. Its rated capacity was calculated under the prevalling operating conditions at  Emden  based  on  the  Midrex  process.  V.A. undertook to  incorporate Hot  Discharge and Hot Briquetting facility and  for this  purpose  carried  out  refurbishing, replacement  and  modification  of  the  plant.  This  would enhance the  usefulness and value of the plant. It was noted that EGL had entered into an agreement with Midrex for the processing licence  which was  annexed to the agreement with V.A, V.A,  was holding construction licence and the right to use patents  from Midrex  for marketing,  sale,  design  and construction of  the Midrex  plant at  Hazira in India. V.A. undertook to  render necessary  engineering services and did whatever  was   needed  for   incorporating  Hot   Discharge Briquetting facility  and to make use of Midrex construction

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and process licence for this  purpose.      EGL’s  agreement   with  Midrex   was  annexed  to  the agreement with  V.A. and it was time and again emphasised in the agreement  that the  plant was  a Midrex  plant and  the various processes  that had to be employed to make the plant operational in the manner it was intended could be done only on the  basis of  Midrex process,  It  was  recited  in  the agreement  that  "the  Collaborator  (V.A.)  is  capable  of providing process  know-how, engineering and construction of Midrex gas  based DR  plants including Hot Discharge and Hot Briquetting  facilities  and  has  offered  to  provide  the services to Essar as stated hereinafter."      In Article 3 of the agreement under the heading "Midrex Process Licence and Technical Services" it was provided that in addition  to the  services being provided by V.A., Midrex will provide certain technical services to V.A, or to EGL in connection with  transfer of  technology covered  under  the process licence  agreement attached to in Annexure 12 of the agreement. The services included:      (a) basic engineering package for      the hot    discharge      and hot      briquetting system;      (b)  advice  to  Essar  on  optimum      utilisation of  iron oxide lump ore      and iron oxide pellets;      (c)   provide    information    and      documentation  to  allow  Essar  to      implement  improvements   in  plant      design and/or  operating procedures      which have been developed by Midrex      or other Midrex Process Licensees.      (d) provide  continuing information      to Essar  on operating results from      other Midrex Plants to assist Essar      in   optimizing   plant   operating      efficiency   including    operating      reports,  operation  bulletins  and      operation seminars.      Article 10  of the  agreement is as      under:      "Article 10: CONTRACT DHILL:-      In consideration  of fulfilment  by      Collaborator  of   its  obligations      under this  Agreement, Essar  shall      pay to COLLABORATOR as below:-      SERVICES  TO  BE  PROVIDED  OUTSIDE      INDIA:      10.1.1Process     DM (German Marks)      licenseand and      allied technical      services      10.1.1Process licens  DM 2,000,000      fee payable to      MIDREX Corporation      for the right to use      the Midrex process and       patents      10.1.1.2      Costof Technical    DM 10,100,000      services provided   lump sum      under Article 3      in connection      with Midrex process      Technical Services.      10.1.2.1

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    Payment for          DM 23,100,000      engineering and      lump sum      consultancy fee      as specified      under this agreement      10.1.2.2      Payment for           DM 2,200,000      theoretical and       lump Sum      practical training      outside India      Total                  ------------                            DM 37,400,000                            lump sum                            -------------      The agreement  signed by  EGL with Midrex International B.V., recorded  that the  licensee, EGL, had entered into an agreement for  purchase of  a Midrex  Direct Reduction Plant installed at  Emden, West  Germany and  intended to have the same dismantled,  refurbished,  adapted  for  production  of Midrex Hot  Briquetted Iron (HBI) and re-installed in India. The  licensee  had  approached  Midrex  for  an  appropriate process licence for the operation of the plant utilising the Midrex Direct Reduction Process, and Midrex desired to grant such licence  to licensee  upon  the  terms  and  conditions stated in  the agreement.  It was  further recorded that the licensee had  entered into  an agreement dated 4th December, 1987 with  V.A. and  it was  agreed that Midrex would render various services  as mentioned in the agreement, which would be annexed to the Collaboration Agreement with V.A.      It was  clearly stated  that the  agreement with Midrex meant  Process   Licence   Agreement   including   all   the appendices, attachments  and  amendments  thereto".  It  was further clarified  that Midrex Direct Reduction Plant" shall mean any  facility for  reducing iron oxides into Product or direct reduced  iron (DRI)  which had been heretobefore, was being currently,  or would  be in  the future constructed or operated  under   a  licence   from  Midrex.  Midrex  Direct Reduction Process"  was defined  to mean the process used in the plant or other Midrex Plants for the direct reduction of iron bearing  oxide (including  iron ore, iron oxide pellets or other  iron bearing  materials it  any form)  in a  shaft furnace to  produce Product  or direct  reduced  iron  (DRI) using a  gaseous reductant  irrespective  of  the  reductant source; the  solids flow  system beginning at the iron oxide distribution system  at the  top of  the shaft  furnace  and ending at  the Product  discharge from the HBI quench system or the  DRI discharge  device at  the bottom  of  the  shaft furnace and  the gaseous  flow system beginning at the spent gas offtake  of the  shaft furnace,  leading through the gas processing system  and ending  at the  reducing gas inlet of the shaft furnace.      EGL was  granted a  licence to  use the  plant  on  the following terms:      Grant of Licence      (a) Subject  to the  provisions  of      this Agreement,  Midrex grants  and      agrees to grant to Licensee for the      term of this Agreement:      (i) The  right to  use all  Patents      and  Confidential  information  the      operation of the Plant; and      (ii) The  right to  produce in  the      Plant and  use and  sell worldwide,      Product produced  by the  Plant  or      DRI which  may   be produced by the

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    Plant from time to time.      (b) Licensee should be free to sub-      license the  rights  granted  under      the clause 2.1 of this Agreement to      another  Indian   party  should  it      become necessary. The terms of such      sub-licensing will,  however, be as      mutually  agreed   to  by  all  the      parties concerned  including Midrex      and will be subject to the approval      of Government of India and Midrex.      The agreements  with Midrex and also V.A. bring out the real nature  of the  agreement with TIL, which had been made subject to  obtaining a  licence from Midrex. This agreement with V.A.  recites that the plant, when it was bought, had a rated capacity  of 8,00,000  tpy DRI  under  the  prevailing operating conditions  based on  the Midrex  Process. It  was recited  that   the  Collaborator   (V.A   )   was   holding construction licence  and rights  to use patents from Midrex for marketing,  sale, design  and construction of the Midrex plants at  Hazira, India.  The  services  that  were  to  be rendered by  V.A. would  also include  technical services in connection with  the Midrex Process and engineering services necessary for  this purpose.  The  Collaborator  agreed  use construction and process licence for this project at Hazira, India. It  was recorded  that EGL’s contract with Midrex sad been annexed to the contract with the Collaborator.      Reading  all  these  agreements  together,  it  is  not possible to uphold the contention of Mr. Salve that the pre- condition of  obtaining a  licence from  Midrex  was  not  a condition of  sale, but  a clause  inserted to  protect EGL. Without a  licence from Midrex, the plant would be of no use to EGL.  That is  why this  overriding clause  was inserted. This overriding  clause was  clearly a condition of sale. It was essential  for EGL  to have  this licence from Midrex to operate this  plant and  use Midrex technology for producing sponge iron  in India.  Therefore, in  our  view,  obtaining licence from Midrex was a pre-condition of sale. In fact, as was recorded in the agreement, the sale of the plant had not taken place  even at  the time when the contract with Midrex was being signed on 4.12.87, although the agreement with TIL for purchase  of the plant was executed on 24th March, 1987. Therefore, we are of the view that the Tribunal was in error in holding  that the payments to be made to Midrex by way of licence fees  could not  be added to the price actually paid to TIL for purchase of the plant.      Rule 9 of the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988 is to the following effect:-      "9. Cost  and services.- (1)     In      determining the  transaction value,      there shall  be added to  the price      actually aid or payable for the for      the imported goods,-      (a) ...                 ...      (b) ...                 ...      (c)  oyalties   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;

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    (d) the  value of  any part  of the      proceeds of  any subsequent resale,      disposal or  use  of  the  imported      goods  that  accrues,  directly  or      indirectly, to the seller:      (e)  all  other  payments  actually      made or  to be  made as a condition      of sale  of the  imported goods. by      the buyer  to the seller, or by the      buyer to  a third  party to satisfy      an obligation  of the seller to the      extent that  such payments  are not      included in the price actually paid      or payable."      The Tribunal has referred to the Interpretative Notes given in the Schedule by which Rule 9 has been explained in the following words: -      "Rule 9(1)(c)      1. The  royalties and  licence fees      referred to  in  rule  9(1)(c)  may      include among other things payments      in respect  to patents,  trademarks      and   copyrights.    However,   the      charges for  the right to reproduce      the imported  goods in  the country      of importation  shall not  be added      to  the   price  actually  paid  or      payable for  the imported  goods in      determining the customs value.      2. Payments  made by  the buyer for      the right  to distribute  or resell      the imported  goods  shall  not  be      added to  the price   actually paid      or payable  for the  imported goods      if such payments are not  condition      of  the  sale  for  export  to  the      country  of   importation  of   the      imported goods."      It is  difficult to  see how these Interpretative Notes come to  the aid  of the  importer in  this case. Midrex has granted licence  to EGL not only for the right to produce in the Midrex  Direct Reduction  Process  Plant  and  sell  the products produced by the plant worldwide, but has also given the     licensee  (EGL)   the  right  to  use  all  patents, confidential information  for the  operation of  the  plant. Midrex has undertaken to supply all confidential information and patents  updated from  time to time during the period of the agreement.  Therefore, we  are of  the view that licence fees Paid  to Midrex  will have  to be added to the price of the plant to arrive at the transaction value of the plant.      There is another way of looking at the problem. Section 14 of the Customs Act provides:      "14.   Valuation   of   goods   for      purposes of  assessment.(1) For the      purposes of the Customs Tariff Act,      1975 (51 of 1975), or any other law      for  the   time  being   in   force      whereunder a  duty  of  customs  is      chargeable   on    any   goods   by      reference to  their value the value      of such  goods shall  be deemed  to      be-      (a) the price at which such or like      goods  are   ordinarily  sold,   or      offered for  sale, for  delivery at

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    the time  and place  of importation      or exportation, as the case may be,      in  the   course  of  international      trade, where  the  seller  and  the      buyer  have  no  interest,  in  the      business  of  each  other  and  the      price is the sole consideration for      the sale or offer for sale:      Provided that  such price  shall be      calculated with  reference  to  the      rate of exchange as in force on the      date on  which a  bill of  entry is      presented  under   Sec.46,   or   a      shipping bill or bill of export; as      the case may be, is presented under      Sec.50;      (b)  Where   such  price   is   not      ascertainable,     the      nearest      ascertainable  equivalent   thereof      determined in  accordance with  the      rules made in this behalf.      (2)    Notwithstanding     anything      contained in  sub-section  (1),  if      the Central Government is satisfied      that it  is necessary  or expedient      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  and where  any      such tariff  values are  fixed, the      duty  shall   be  chargeable   with      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   Central      Government, or      (ii) ascertained  in such manner as      the Central Government may direct,      for  the   conversion   of   Indian      currency into  foreign currency  or      foreign   currency    into   Indian      currency;      (b) "foreign  currency" and  Indian      currency"   have    the    meanings      respectively assigned  to  them  in      the  Foreign   Exchange  Regulation      Act, 1973 (46 of 1973)"      The entire  purpose of  Section 14  is to  find out the value of the goods which are being imported. The EGL in this case was  purchasing a  Midrex Reduction  Plant in  order  a produce sponge  iron. In order to produce sponge iron it was essential to  have technical  know-how from  Midrex. It  was also essential  to have  an  operating  licence  from  them. Without theses  the plant  would be of no value. That is why the pre-condition  of a process licence of Midrex was placed in the  agreement with  TIL. It  will not  be proper to view that agreement with TIL in isolation in this case. The plant would be of no value if it could not be made functional. EGL wanted to  buy the  plant in  working condition.  This could only achieved by paying not only the price of the plant, but also the fees for the licence and the technical know-how for

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making the  plant operational.  Therefore, the  value of the plant will comprise of not only the price paid for the plant but also the price payable for the operation licence and the technical know-how.  Rule 9 should be construed bearing this in mind.      Mr. Salve,  appearing on  behalf of  the EGL  has  laid great stress on the various clauses of the agreement between Essar and TIL to show that the title to the plant had passed to the  purchaser without any precondition after payment was made in terms of clause 2 of the agreement. The delivery was also deemed  to have taken place at the time and on the date of payment in full, in accordance with clause 2.      Clause  2   merely  states  that  the  purchaser  shall purchase the  property  from  the  seller  at  an  inclusive purchase price  of 26  million German  Marks. 10 per cent of the purchase price had to be paid within fifteen days of the declaration of  the buyer  that the  Government of India has given approval  under clause  11 of  the agreement  and  the balance 20 per cent, within 60 days of the approval given by the Government  of India.  There is  no mention of the other condition in  clause 11  that the agreement would be subject to "the  purchaser obtaining  the transfer  of the operation licence from  Messrs Midrex  of Charlotte,  USA". It appears from the  agreements with  V.A. and  Midrex that  unless and until the  requisite licence  and know-how was obtained from Midrex and  also V.A.,  it would  be impossible to shift the plant from  Emden, West  Germany and  install it  at Hazira, India and  produce sponge  iron from  that plant. It appears that if  Midrex did  not grant operation licence for running the plant,  the usefulness  and  value  of  the  plant  will considerably diminish if not evaporate altogether.      There are  also several  curious aspects  of the  three agreements. The  agreement with  TIL starts  with a  recital that "the  Purchaser and  Seller have  today    respectively purchased and  sold a  Direct Reduction  Iron Plant  on  the following terms  and conditions".  This indicates  that  the purchase and sale of the plant had place on 24.3.1987 fut in clause 2  it is stated that the Purchaser shall purchase the Property from  the Seller"  at the stated price. Thereafter, it is  stated that  the price  shall become  due and payable only after  the buyer declaring that the Government of India has given  approval as  per clause  11 of the agreement. The delivery was  also postponed  till full payment was  made in accordance  with   clause  2.   The   risk   of   accidental destruction, loss  or damage  to the property "shall devolve upon the Purchaser with the expiry of the day following that upon which  the plant  is delivered...".  Clause 5  makes it clear that  title to  the property  shall devolve  upon  the purchaser  after  complete,  unconditional  and  irrevocable payment of the purchase price.      All these  clauses go to show that though the agreement starts with  the recital  the "the  Purchaser and the Seller have  today   respectively  purchased   and  sold  a  Direct Reduction  Iron   Plane,  on   the   following   terms   and conditions", but as a matter of fact no sale had taken place on that  date, i.e.  24.3.87. The  delivery was  posted till full payment was made. The question of payment did not arise till Government of India gave its approval to the agreement. Title to  the property would devolve upon the purchaser only after   complete, unconditional  and irrevocable  payment of the   purchaser price.  The risk  of  destruction,  loss  or damage   to the  plant remain with the Seller till after the date of delivery of the plant. Therefore title to the plant was not  to pass  to the  purchaser unless  and  until  full payment was  made. The  entire contract  was subject  to the

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condition of  the purchaser  obtaining the necessary licence from Midrex  to operate the plant. This clause may have been inserted to protect the interest of the purchaser but it was pre-condition of sale of the plant.      Although the  agreement with  TIL does not describe the plant as  Midrex Direct  Reduction Plant, the agreement with Midrex leaves  no room  for doubt that what the assessee had purchased was  a Midrex  Direct Reduction  Plant  at  Emden. Although the  plant was  described in the agreement with TIL merely as  a Direct  Reduction Plant  end the name of Midrex was carefully  kept out,  the agreement with Midrex cakes it abundantly clear  the assessee had entered into an agreement to purchase  Midrex plant for which it was essential to have operational  and   Midrex  technology   to  make  the  plant functional. That  is why  the overriding  clause  of  having prior  licence  of  Midrex  was  inserted  in  the  purchase agreement with  TIL. Without  this licence and various other technical information to be provided by Midrex, it might not have been  possible to operate the plant at all. It was only after this  agreement with   Midrex  t the  purchase of  the plant  was   completed.  Bearing   in  mind  the  terms  and conditions of  all the  three agreements, we are of the view that it was  essential for EGL to have the Midrex licence to operate   the plant  and the pre-condition imposed in clause 11 of  the purchase  agreement about  the operation  licence from Midrex  was to  ensure that EGL got a plant which could be made operational with Midrex technology.      Therefore, the process licence fees of DM 2,000,000 was rightly added  to the  purchase price  by the  Collector  of Customs. The order of CEGAT on this question is set aside.      The second  question relates  to the  cost of technical services in  connection with  the Midrex  Process   provided under Article  3 of  the agreement  between Essar  and their Technical  Collaborators  M/s.  Voest  Alpine  of    Austria (V.A.).  In   order  to   appreciate  the   scope   of   the controversy, it  has to be remembered that an agreement with V.A. was  entered into  on 4th  December, 1987. On this very day, Essar  entered into  another agreement  with Midrex. In fact, the  Midrex agreement  was annexed to the agreement of V.A. and  was thereby made a part of the agreement with V.A. The two  agreements have to be read together to find out the real intention  of the parties. Essar had purchased a Midrex Reduction Plant  on "as  is where is" basis from TIL. It was recited in  the agreement  with V.A.  that Essar intended to set up at Hazira, Gujarat, a gas based Direct Reduction (DR) Plant  which was to be re-engineered for a rated capacity of 880,000 tpy  of Hot  Briquetted Iron (HBI). For this purpose Essar decided  to buy  the existing  gas  based  DR    Plant located at  Emden, West  Germany, which had a rated capacity of 800,000 tpy DRI under the prevailing operating conditions at Emden  based on the Midrex Process and to incorporate Hot Discharge and Hot Briquetting facilities. V.A. had inspected the Plant  at Emdem  and was  satisfied as  to the technical suitability for  dismantling of the plant and its recreation at Hazira  after necessary  refurbishing, replacement and/or modifications. It  was also  recorded in  the agreement that Essar had  entered into an agreement with Midrex for process licence, which  was annexed  to the  agareement and V.A. was holding construction  licence and rights to use patents from Midrex for  marketing, sale,  design and construction of the Midrex Plants at Hazira, India.      Therefore, it  appears from the two agreements that the plant was  a gas  based Midrex  Direct Reduction  Plant. Its rated capacity  based on  Midrex Process  was  800,000  tpy. Essar had  acquired the  operating licence  by virtue  of an

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agreement with  Midrex International,  which was  annexed to the agreement  with V.A. V.A. had a construction licence and rights to  use  patents  for  marketing,  sale,  design  and construction of the Midrex Plants. One of the stated objects for appointing  V.A. to raise the existing rated capacity of plant of  800,000 tpy to 880,000 tpy and also to incorporate Hot Discharge  and Hot Briquetting facilities. The agreement also recorded:-      "WHEREAS  Essar   is  desirous   of      engaging  the   COLLABORATOR  under      this agreement  for  providing  the      services  for   the   project,   as      generally detailed  below, together      with   such    modifications    and      additions as  may be  required  and      shall   also    include   technical      services  in  connection  with  the      Midrex  Process   and   engineering      services    necessary    for    the      incorporation of  Hot Discharge and      Hot Briquetting  facilities,  Which      are obviously  and fairly  intended      and  which   may  not   have   been      specifically referred  to  but  are      essential for proper functioning of      the  plant  and  further  shall  be      deemed to include and cover but not      limited to the following except for      services specifically excluded:      OUTSIDE INDIA      Use  of   Midrex  construction  and      process licence for this project at      Hazira, India.      Provide basic  engineering and  re-      engineering for  re-location of the      existing plant to Hazira, India and      basis and detailed engineering work      for   hot    discharge   and    hot      briquetting  facilities   and  also      prepare     necessary     technical      documents in  Europe  and  handover      the same  to the  representative of      Essar in Austria.      Engineering     and     Consultancy      services and specialist supervision      by equipment  suppliers  and  other      agencies.      Provide support services during the      stay     of      COLLABORATOR/other      specialists  at   Emden   such   as      accommodation     logistic      and      transport.  Any   other   technical      assistance        needed         by      COLLABORATOR/Equipment Suppliers at      Emden.      Specialist      supervision      of      dismantling of the plant at Emden.      Provide  training   engineers   for      training of  ESSAR Personnel  in  a      similar   plant/training   and   at      equipment suppliers works.      Supervision of  plant  scale  tests      and   preparation   of   the   test      report."      Although Article  3 has  been included in the agreement

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of Essar  with V.A.  it records  that "in  addition  to  the services to  be  provided  by  Collaborator,  the  following technical services  will be provided by Midrex International B.V. to  either Collaborator  or Essar. Under Article 3, the following services were to be rendered:      "ARTICLE 3 - MIDREX PROCESS LICENSE      TECHNICAL SERVICE:      In addition  to the  services to be      provided   by   COLLABORATOR,   the      following technical  services  will      be provided by Midrex International      B.V.  to   either  Collaborator  or      Essar  in   connection   with   the      transfer  of   technology   covered      under the Process License Agreement      attached in  Annexure XII  to  this      Agreement:-      1. Basic  engineering  package  for      the   hot    discharge   and    hot      briquetting system including :-      (a) Preparation  of the  Cere Plant      Mass Balance  for Gases  and Solids      including  preliminary  water  data      for the Hot Briquetting System;      (b)  Development   of   the   Basic      Process and Instrument Diagrams for      the Hot  Briquetting, Gas and Solid      system.      (c)  Development   of   the   guide      drawing  for  furnace  modification      required    for    Hot    Discharge      Conversion.      (d)  Development   of  the  Overall      general arrangement drawing for Hot      Discharge Furnace  and  Briquetting      Facility.      (e)  Development   of   the   guide      drawings for  the  furnace  Product      Discharge Chamber,  Briquetter Food      Legs, and bubbles.      (f)  Development   of   the   guide      drawings for  the Bottom  seal  Gas      System Scrubber and Heater.      (g)    Development    of    general      arrangement   drawings    for   the      Briquetting    System     including      Brakers, Quench  system, Hot Finers      Recycle  System,  Dust  Collection,      and Vapour Removal.      (h)     Preparation     of     duty      specifications for the Briquetting      System Equipment.      (i)     Preparation     of     duty      specifications for the Bottom seal      Gas  system  compressors,  Nitrogen      Generator,  and   Bottom  Seal  Gas      Dryer."      Therefore, the  payment of DM 10,100,000 was being made for the  transfer of  technology under  the Process  Licence Agreement entered  into with  Midrex. The  service mentioned hereinabove are  to be  part of  Licencing.  Agreement  with Midrex. This  agreement was a pre-requisite for finalisation of the contract with TIL to purchase the plant at Emden. The licence is  not merely  a permission  to use  the plant, but also  to  provide  technical  know-how  to  make  the  plant

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functional and also to improve the capacity of the plant by incorporating Hot  Briquetting system. As all these services were to be rendered under the Process Licence Agreement with Midrex, the  amount payable to Midrex as part of the Process Licence fee has to be included in the Value of the plant. It has also  to be  borne in  mind that the services were being rendered in  order to  improved capacity  of  the  plant  by incorporating Hot Briquetting facilities.      So far  as payment  of DM 23,100,000 is concerned, this sum is  to be  paid for  Technical Services".  A sum  of  DM 2.200,000  was   payable  for   theoretical  and   practical training. This sum cannot be added to the value of the plant in any way. The sum of DM 23,100,000 payable for engineering and consultancy  fee as  specified in the agreement includes services  like  basic  engineering  and  re-engineering  for relocation of the  existing plant at Hazira, India and basic engineering package  for Hot  Discharge and  Hot Briquetting System and  preparation of necessary technical documents and hand over  the same  to  the  representatives  of  Essar  in Austria. V.A.  was also to provide specialist supervision of dismantling of  the plant  at Emden  and also supervision of the plant,  preparation of test report etc. Along with this, V.A.  undertook   to  supply   support  services   such   as accommodation,  logistics   and  transport   and  any  other technical assistance  needed by  the collaborator  and  also training the  engineers and  personnel in  similar plant. It also  agreed  to  render  various  services  in  India.  The technical services will cover, inter alia, -      "2.3 Technical  services related to      the   relation of  the  plant  from      Emden to  Hazira and simultaneously      considering the incoporation of Hot      Discharge   and   Hot   Briguetting      facilities.      2.3.1  Assisting   ESSAR   in   the      arrangement of laboratory and plant      scale tests on Indian raw materials      (terms and conditions for the plant      scale  test   are  to   be   agreed      directly  between   ESSAR  and  the      owner of  the plant  where the test      ’s intended to be carried out;      Supervision   of   the   test   and      interpretation of the test results.      2.3.2.   Auditing    of   all   the      documentation available at Emden to      determine the  nature and extent of      missing  documents/information  (if      any) as  described in  Annexure  I.      Documents/lnformation  will   mean,      without    exception,    all    the      drawings,    manuals.     diagrams,      calculations  and   records,   etc.      available at Emden. ESSAR will make      available  the   documents  to  the      extent available at Emden.      2.3.3 Assessment of Process Related      Units  and  facilities  (equipment,      machinery, piping  instrumentation,      electrics   and    control   system      related wear  and spare  parts)  as      available at  Emden,  jointly  with      ESSAR AND  MECON  and  confirm  the      suitability of these facilities for      refuse  as  such  as  evidenced  at

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    Emden  or  alternatively  establish      the            extent            of      revamping/replacement/debottle-      becking between   dismantling   and      re-installation. Details  of  plant      and equipment  audit are  described      in Annexure. II.      2.3.4  Engineering   services   for      Process  Related   Units,  For  the      Hazira DR  Plant, the basic process      design   parameters   and   ambient      conditions will  be different  from      that originally applicable and used      for the  design of  the modules  at      EMDEN.    For     electrical    and      instrumentation   equipments    the      basic concept of the control system      of the  existing DR  plant will  be      retained. The EMDEN Design Criteria      and the  Hazira Design Criteria are      stipulated in  Annexure III of this      Agreement.      Collaborator   will   perform   all      process calculations  on the  basis      of the  design criteria applicable,      or  Hazira  and  per-form  the  re-      engineering  work   to  the  extent      required simultaneously considering      the incorporation  of Hot Discharge      and Hot Briquetting facilities.      2.3.4.1 Prepare  complete  list  of      all   new,    missing    equipment,      machinery,                electrics      instrumentation       refractories,      insulation, lubricants,  chemicals,      catalyst to  be procured  modified,      erected and commissioned as well as      list of  wear and  spare parts  for      the first  two years  of operation,      all with engineering specifications      sufficient  to   enable  ESSAR   to      arrange     timely     procurement.      COLLABORATOR will  assist ESSAR  in      providing technical  clarifications      during evaluation  and negotiations      with vendors.      2.3.4.2 Prepare  a  list  of  items      requiring   reconditioning,   along      with  relevant  specifications  for      these items.  Nature and  extent of      re-conditioning   will    also   be      specified  by   COLLABORATOR  which      will  be   further  discussed   and      agreed  with  ESSAR  and  MECON  in      accordance with Art.3.3.2.      2.3.5 Establish  jointly with ESSAR      and   MECON,    a   division   list      identifying    those    equipments,      machinery, material and parts which      can be procured in India or have to      be  imported.   COLLABORATOR   will      provide       a       list       of      Vendors/manufacturers           for      refurbishing or  procurement of all      import items and MECON will provide

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    a list of indigenous items.      2.3.7. Preparation and issue of new      and                   re-engineered      drawings/documents/calculations/man      uals for  Process Related  Units as      necessary with  sufficient  details      to   enable    ESSAR   to   procure      equipment,   prepare    fabrication      drawings and  fabricate structures,      erect,   test,    start   up    and      commission  the   Process   Related      Units. The details of such drawings      and documents are given in Annexure      IV."      There are  various  other  clauses  relating  to  civil engineering technical specifications, documentation and also inspection and  check sizing  of motors,  reduction gear and hydraulics of  Service Units  etc. It  is difficult  to hold that the  entire payment  of engineering  consultancy fee to V.A. will  have to  be added to the imported plants. But the plant was  sold on  "as is  where is    basis.  So  whatever expenditure was  needed to  be incurred  for dismantling the plant and  making it  ready for  delivery has to be added to the value  of the  plant.  The  specialist  supervision  for dismantling  of   the  plant   and  also   engineering   and consultancy services  for this purpose will have to be added to the  value of  the imported  plant. But this apart, other services rendered  cannot be treated as adding in any way to the value  of the  plant. Since there is no clear indication as to  how the various services have been vaelued separately of the  amount of DM 23,100,000 should be added to the value of the plant on this account.      Therefore, we  are of  the view that DM 2,000,000 being the process  licence fee  paid  to  Midrex  Corporation,  DM 10,100,000 being  the cost of technical services provided by Midrex and a sum of DM 2,310,000 being payment on account of engineering and  consultancy fee  payable to V.A., should be added to the value of the imported plant.      The appeals are disposed of as above. There will be  no order as to costs.