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CASE NO.: Appeal (civil)  4663 of 2006

PETITIONER: Commissioner of Customs (Port), Kolkata

RESPONDENT: M/s. J.K. Corporation Limited

DATE OF JUDGMENT: 02/02/2007

BENCH: S.B. SINHA & MARKANDEY KATJU

JUDGMENT: J U D G E M E N T

S.B. SINHA,J.

       The Revenue is in appeal before us aggrieved by and dissatisfied with  the judgement and final order dated 15th May, 2006, passed by the Customs  Excise and Service Tax Appellate Tribunal, Kolkata, in Appeal No.C-259 of  2002.  The fact of the matter is not in dispute.  M/s. Orissa Synthetics  Limited is a division of the respondent herein.  It, being desirous of  undertaking manufacture of Polyester Oriented Yarn and Flat Yarn, entered  into a collaboration agreement with M/s. Samsung Company Limited and  M/s. Chiel Synthetics Inc., both of Korea, on 18th November, 1999.  M/s.  Cheil Synthetics Inc. is said to be an associate company of M/s. Samsung  group under the laws of Republic of Korea.  The said Agreement is in two  parts; Part-A provides for licence, knowhow and technology, while Part-B  provides for supply of equipment as a part of necessary plant and machinery  and equipment for manufacture of polyester oriented yarn.  Part-A stipulates  lumpsum payment of US $14,00,000 by the respondent to the said  companies for supply of licence, knowhow and technology.  Under Part-B of  the said Agreement, however, price of foreign equipments are said to be US  $34,86,000.00 + DM 12,00,000.00 + J. Yen 88,50,00,000.00.         Pursuant to and in furtherance of the said collaboration Agreement,  the respondent herein had imported plant and machinery manufactured by  the said companies.  The Assistant Commissioner of Customs, Special  Valuation Branch, in its order dated 28th May, 1999, opined that the amount  of consideration mentioned in both parts of the Agreement should be added  together, having regard to the fact that the same forms part of an integrated  contract, the value of knowhow estimated at US $ 40,00,000.00 must be  added to the value of the equipment, on the premise that payment thereof  was a pre-condition for sale of the equipments under Part-B.  An appeal was  preferred thereagainst by the respondent before the Commissioner of  Customs.  The appellate authority, by reason of its order dated 31st May,  2000, dismissed the said appeal.  However, the Customs Excise and Service  Tax Appellate Tribunal [CESTAT], on a further appeal preferred by the  respondent, allowed the same and remitted the matter to the authority below  for a de novo decision in the light of a decision of this Court in Tata Iron and  Steel Company Limited vs. Commissioner of Central Excise and Customs  Bhubaneswar, Orissa (2000 (3) S.CC.472).  The Deputy Commissioner of  Customs, however, held that the decision of this Court in TISCO (supra) is  distinguishable stating that both parts of the Agreement, Part-A and Part-B,  are complimentary to each other and one part thereof cannot be implemented  without complying with the conditions of the other part of the Agreement.   The original authority, therefore, upheld its earlier order.  The Commissioner  of Customs, however, in the appeal preferred by the respondent herein, set  aside the said order dated 24th June, 2002, holding that the decision of this  Court in TISCO (supra) is squarely applicable to the facts of the case and  that Collector of Customs (Prev.), Ahmedabad vs. Essar Gujarat Limited

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[(1996) 88 E.L.T.609 (S.C.)] is not applicable.  The Tribunal dismissed the  appeal preferred thereagainst by the Revenue.         Mr. K. Radhakrishnan, learned senior counsel appearing on behalf of  the Appellant, would take us through various clauses of the said  Memorandum of Understanding dated 18th November, 1999, entered into by  and between M/s. Orissa Synthetics Limited and M/s. Samsung Company  Limited and submit that supply of technical knowhow and purchase of  licence and supply of equipments was a condition of sale.  According to the  learned counsel, as the conditions laid down in both parts of the said  Agreement are complimentary to each other, Part-B cannot exist without  Part-A thereof.  Our attention in this behalf has been drawn to Rule 9(1)(e)  of the Customs Valuation (Determination of Prices of Imported Goods)  Rules, 1988 (for short the Rules] to submit that the same is a broadbased  one.         Mr. S. Ganesh, learned senior counsel appearing on behalf of the  respondent, on the other hand, would support the judgement under appeal.           Customs Act, 1962, was enacted to consolidate and amend the law  relating to customs.  Chapter-V of the Customs Act, 1962 [for short, "the  Act"] provides for levy of and exemption from, customs duty.  Customs duty  in terms of Section 12 of the Act is to be levied at such rates as may be  specified under the Customs Tariff Act or any other law for the time being in  force on the goods imported into, or exported from, India.  Section 14 of the  said Act provides for valuation of goods for purposes of assessment in  respect of duty of customs chargeable on any goods by reference to their  value.  A legal fiction is created in relation to the value of such goods stating  that, "the price at which such or like goods are  ordinarily sold, or offered for sale, for delivery at  the time and place of importation or exportation, as  the case may be, in the course of international  trade, where\027 (a)     the seller and the buyer have no interest in the  business of each other; or  (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 for sale."         Section 14(1A) provides that price referred to in sub-section (1) of  Section 14 in respect of imported goods shall be determined in accordance  with the Rules made in this behalf.         The Central Government, in exercise of its powers conferred upon it  under Section 156 of the Act, made the said Rules.  The transaction value  determined in terms of the said Rule was to be the value of the imported  goods.  What would be a transaction value is stated in Rule 4 i.e. the price  actually paid or payable on the goods when sold for export to India, adjusted  in accordance with the provisions of Rule 9 of the ’Rules’.  Rule 9, inter alia,  provides for determination of transaction value in terms whereof the price  actually paid or payable on the imported goods, the factor enumerated  therein shall be added, clause (e) whereof reads as under: "(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 sole question which, therefore, arises for consideration in this  appeal, is as to whether customs duty would be payable on the purchase  price of the goods by adding the value of licence and technical knowhow,  etc. to the value of the imported goods.         The basic principle of levy of customs duty, in view of the afore- mentioned provisions, is that the value of the imported goods has to be  determined at the time and place of importation.  The value to be determined  for the imported goods would be the payment required to be made as a  condition of sale.  Assessment of customs duty must have a direct nexus  with the value of goods which was payable at the time of importation.  If any

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amount is to be paid after the importation of the goods is complete, inter alia  by way of transfer of licence or technical knowhow for the purpose of  setting up of a plant from the machinery imported or running thereof, the  same would not be computed for the said purpose.  Any amount paid for  post-importation service or activity, would not, therefore, come within the  purview of determination of assessable value of the imported goods so as to  enable the authorities to levy customs duty or otherwise.  The Rules have  been framed for the purpose of carrying out the provisions of the Act.  The  wordings of Sections 14 and 14(1A) are clear and explicit.  The Rules and  the Act, therefore, must be construed, having regard to the basic principles  of interpretation in mind.         Rule 12 of the Rules provides that the interpretative notes specified in  the Schedule appended thereto would apply for construction thereof.  They  are statutory in nature being integral part of the Rules themselves.  The  relevant portion of Interpretative Note to Rule 4 reads as under: "The value of imported goods shall not include the  following charges or costs, provided that they are  distinguished from the price actually paid or  payable for the imported goods: (a)     Charges for construction, erection,  assembly, maintenance or technical  assistance, undertaken after importation on  imported goods such as industrial plant,  machinery or equipment; (b)     The cost of transport after importation; (c)     Duties and taxes in India."

       What would, therefore, be excluded for computing the assessable  value for the purpose of levy of custom duty, inter alia, has clearly been  stated therein, namely, any amount paid for post-importation activities.  The  said provision, in particular, also apply to any amount paid for post- importation technical assistance.  What is necessary, therefore, is a separate  identifiable amount charged for the same.  On the Revenue’s own showing,  the sum of US $ 14,00,000.00 was required to be paid by way of  remuneration towards services to be offered by the companies in respect of  matters specified in Part-A of the said Memorandum of Agreement.  The  said sum represents amount of licence or amount to be paid by the  respondent for the licence for the manufacturing process for production of  goods which were covered by the patents held by M/s. Samsung as also for  technical knowhow.  In the said Memorandum of Agreement, it was  provided that; "The SELLER shall provide to the BUYER the  TECHNICAL DOCUMENTATION containing,  inter alia, the KNOW-HOW and the same shall be  delivered by the SELLER to the BUYER in  Republic of Korea or such other place or places as  may be mutually agreed by and between both the  parties thereto."

       The technical documentation comprises of : (1) process, (2)  mechanical, (3) electrical, and (4) instrumentation in respect of grant of  licence.  The Memorandum of Understanding provides: "4.1. The SELLER hereby grants to the BUYER a  non-exclusive and non-transferable right and  licence including rights to use existing patents of  SELLER to manufacture the PRODUCT in the  PLANT with the KNOW-HOW including the  PROCESS and to sell and market the PRODUCT  worldwide.  For exports to Republic of Korea and  Japan, the first option shall be given to the  SELLER. 4.2 The BUYER shall be entitled to and shall have  the right to use and practice the KNOW-HOW and  to manufacture therewith the product in the  PLANT."

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       No part of the knowhow fee was to be incurred by the respondent  herein either for the purpose of fabrication of the plant and machinery or for  any design in respect whereof M/s. Samsung held the patent right.         It may be noticed that the said Memorandum of Agreement  specifically contemplates that the plant and machinery to be supplied  thereunder may be procured from other independent manufacturers and  suppliers who might not have anything to do with the knowhow or licence  provided thereunder by Samsung as would appear from the following  stipulation contained in the said agreement. "5.6. The SELLER hereby agrees to provide their  cooperation to the BUYER to purchase spares  from the SELLER directly from the suppliers  notwithstanding the expiry or earlier termination of  the AGREEMENT and in case of purchase from  the SELLER, the SELLER shall provide such  spares at fair market prices within a reasonable  period of time. 8.1. SELLER shall cause such manufacturers to  test and inspect the main items of Equipment at its  works and/or the works of its manufacturers,  quality, quantity, workmanship, finishing, and  packing in accordance with the inspection method  deemed as proper and authentic for Equipment."         Knowhow, being process knowhow, is covered by the patent held by  M/s. Samsung.  The payment of US $ 14,00,000.00 also entitles the  respondent to sub-licence the knowhow to any other party, subject, of  course, to the approval of M/s. Samsung.         Reliance has been placed by Mr. Radhakrishnan on a decision of this  Court in Essar Gujarat Limited (supra).  In that case, the licence fee was paid  to the supplier of the plant and machinery for a licence to operate the plant  which was in reality  nothing but was held to be an additional price payable  for the plant itself and was, therefore, held to be includible in its assessable  value.  It is in the afore-mentioned fact situation, this Court held: "12.  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 a 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 4-12-1987,  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."         The Court noticed several curious aspects of the Agreement stating  that it started with the recital that "the Purchaser and the Seller have today  respectively purchased and sold a Direct Reduction Iron Plant, on the  following terms and conditions", which, according to this Court , indicated  that the purchase and sale of the plant had taken place on 24th March, 1987,  but in clause (2) it was stated that the purchaser would purchase the property  from the seller at the stated price.  Upon construing the terms of the  conditions, it was opined:

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"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."         In Mukund Limited vs. Commissioner of Customs, ACC, Mumbai  [(1999) 112 E.L.T. 479, whereupon again reliance was placed by the learned  counsel, the drawings related to basic design and drawing of the gas cleaning  plant made by Davy Mckee and imported by Mukund Limited.  In the afore- mentioned situation, the CESTAT opined: "The payment of $ (sic) 6,57,900 noted above in  the price schedule is towards the services indicated  above in the Agreement and which is a necessary  concomitant to the supply of Design and  Engineering drawings for the gas cleaning plant  made by Davy Mckee and imported by the  appellants.  The appellants have been entrusted  with the setting up of gas cleaning plant, and this  could only be achieved not only by purchasing the  basic design and engineering drawings imported  from Davy Mckee but also the whole engineering  package of supervision of detail drawing, erection,  commissioning and performance guarantee test.   The payment made in foreign exchange towards  supervision charges during design, erection and  commissioning will necessarily have to form part  of the assessable value of the imported goods and  the value thereof will include not only the price  paid for design and engineering but also for  supervision charges.  This will follow from Rule 9  of the Valuation Rules which provides for addition  of certain costs and services to the transaction  value.  Rule 9(1)(e) covers all other payments  actually made or to be made as a condition of sale  of imported goods by the buyer to the seller."

       However, TISCO (supra), this Court took note of interpretative note to  Rule 4 and held: "\005.The part of the Interpretative Note to Rule 4  relied on by the Tribunal has been couched in a  negative form and is accompanied by a proviso.  It  means that the charges or costs described in  clauses (a), (b) and (c) are not to be included in the  value of imported goods subject to satisfying the  requirement of the proviso that the charges were  distinguishable from the price actually paid or  payable for the imported goods.  This part of the  Interpretative Note cannot be so read as to mean  that those charges which are not covered in clauses  (a) to (c) are available to be included in the value  of the imported goods\005.."

       The said decision is squarely applicable to the facts of the present  case.         We cannot, therefore, accept the contention of Mr. Radhakrishnan.  More over, no case has been made out that the sale price of the imported  plant and machinery had been under-stated.         For the reasons afore-mentioned, we do not find any merit in this  appeal which is dismissed accordingly.  In the facts and circumstances of the  case, however, there shall be no order as to costs.