Case: COMMISSIONER OF CUSTOMS (PORT) KOLKATA Vs. M/S. STEEL AUTHORITY OF INDIA LTD

1. The dispute in this appeal relates to valuation under the Customs Act, 1962 of import of certain items made by the respondent Steel Authority 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-I dated 29 th March 1990. These imports were made in connection with modernisation, expansion and modification for their plant at Durgapur in West Bengal. For this purpose, SAIL had floated seven Global Tender Contract Packages. The two contracts were part of these Tender Contract Packages. They were registered with the customs authorities for the purpose of project import benefits in terms of the 1962 Act. The first contract involved in this appeal was with a consortium consisting of a German Company, Hoestemberghe & Kluisch, GMBH and H & K Rolling Mills Engineering Private Limited, an Indian Corporate entity. The second contract was also with a German Company, Siempelkamp Pressen Systeme and the Indian entity was Escon Consultants Private Ltd, with whom the consortium was formed. Both these contracts were in connection with modernisation of SAILs rolling mills at the aforesaid plantIn addition to this, contract price of Rs.186,144,000/- and a royalty of Rs.10 per tonne of thermax bars produced during first five years of operation was also to be paid to the Indian entity of the consortium under the contract for supplies and services made by the latter3. 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 design and engineering, layout engineering, training services, procurement, manufacturing, shop testing, supply and delivery of the complete Plant and Equipment, materials both imported and indigenous at site and carry out installation/construction of all civil works, supervision, erection, testing and successful commissioning of the PROJECT and demonstrate the Performance Guarantees etc. for the Project under the Terms and Conditions mentioned hereinafter. The CONTRACTOR has also agreed to render the services for insurance, port clearance including stevedoring, transportation, safe custody, handling, unloading, loading, transportation to site and any other services required to complete the PROJECT under this contract4. As would be evident from the subject heads contained in the above-referred extracts from the third schedule to each of these contracts, the consortia were to supply plant, equipments and spares as also certain basic designs and supervisory services at site. SAIL wanted import duty to be charged on the plant and equipments alone. SAILs stand is that the price for the plants and equipments included all design and engineering for their manufacture. But designs and drawings specified in the schedule were all post-importation project related and project implementation activities. The customs authorities on the other hand added the basic design and engineering fee of DM 2.23 million and supervision charges during manufacture of Indian equipments and for erection, commissioning and performance guarantee tests of 0.675 million to the invoice value. In respect of the second contract, direction was made for addition of basic design and engineering fee of DM 6.65 million, as built drawings of DM 0.1 million and supervision charges during manufacture of Indian equipments and for erection, commissioning and performance guarantee tests of DM 2.842 million to the invoice value. The dispute had reached the Commissioner of Customs for Special Valuation Branch, the authority of first instance, after a questionnaire was sent to SAIL, which was responded to. The authority of first instance heard the representative of SAIL. In the final orders, the authority of the first instance directed the aforesaid additions. The said authority observed that the contractor was entrusted with the work on a turnkey basis, where the entire supplies and services were dependant on each other. On this premise, the 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 such additions to the invoice value in respect of both the contracts. The underlying reasoning for the said orders of the authority of first instance was that the commercial arrangements constituted turnkey contracts and package deal, which made it conditional for the purchaser to buy the equipments which complied with the technical specifications of SAIL. As a consequence, sale of the equipments was conditional as the different aspects of the schedules of supply and service were interrelated. The transaction value of the imported goods was directed to include the price paid for the basic design and engineering, drawings, supervision of erection, commissioning, performance guarantee and technical services under Rule 4 read with Rule 9(1)(e) of the 1988 Rules5. Appeals by SAIL against both these orders were rejected by the Commissioner of Customs (Appeals) by two separate orders passed on 11 th July, 2001 and 7 th September 2001. We find from the orders of the Appellate authority that the case of TISCO vs. Commissioner of Central Excise Customs reported in (2000) 3 SCC 472  was cited before it by SAIL. This decision was distinguished by the Appellate authority and the findings of the authority of first instance was sustained on the basis of Rule 9(1)(e) of the 1988 Rules6. Further appeals of SAIL however, was decided in their favour by Customs, Excise and Service Tax, Appellate Tribunal, Kolkata (CESTAT) by a common order passed on 22 nd May, 2006. These appeals were registered before the CESTAT as C/V-537/2001 and C- 01/2002. The CESTAT formulated the points for determination in the following terms :-[i] whether the basic design and engineering fee of DM 2.230 million and foreign supervision charges of DM 0.675 million are liable to be added to the invoice values of imported equipments under Rule 9 of the Valuation Rules? [Appeal No. C/V- 537/2001][ii] whether the charges towards basic design and engineering fee of DM 6.650 million, fee for as built drawings of DM 0.100 million and also supervision charges of DM 2.842 million are liable to be added to the invoice values of the imported equipments under Rule 4 of the Valuation Rules read with Section 14 of the said Act? [Appeal No. C-1/2002]7. The Tribunal held that the drawings and technical documents related to post importation activities for assembly, construction, erection, operation and maintenance of the plant and those items could not be included 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:-Similarly reliance upon the decision of the Supreme Court in Collector of Customs (Preventive), Ahmedabad Vs. Essar Gujarat Ltd., 1996(88) ELT 609 (SC) is also completely misplaced. From the judgment of the Supreme Court it would be seen that what has been held to be added therein under Rule 9(1) (e) of the Valuation Rules and process license fee, the payment for transfer of technology under the process license agreement and whatever expenditure was needed to be incurred for dismantling the plant which was sold on as in where is basis in the foreign country and making it ready for delivery on board the vessel to be exported to India. The Supreme Court specifically held that apart from this all other services rendered under the Engineering and Consultancy fees cannot be added. The said decision of the Supreme Court, contrary to the findings of the Deputy Commissioner and Commissioner (Appeals), supports the appellants caseThe perusal of the orders-in-original reveals that there is no dispute whatsoever with the services as shown when the designs and drawings and engineering/technical services were small enabled to locate plant direction and overall project implementation for manufacturing iron and steel projects to be commissioned in India and the costs and charges were collected when the design and drawings and engineering services in relation to the components to be imported and/or imported. In such circumstances, it is to be held that the lower authorities have heard improportionate to hold that the said charges are to be added to the assessable value as assessed 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 not find any reason to uphold the reasoning of the Deputy Commissioner in this regardIn view of the clear cut decision in the case of Tata Iron & Steel Co. Ltd. case (supra), we find that the issue is very settled by series of decisions of this Tribunal and heard the case referred into Indo Gulf Corpn. Ltd. v. Commr. of Customs, 2005(182) ELT 77(T)Neither in Section 14 of the said Act nor in the Valuation Rules is there any provision which provides that the cost of drawings and technical documents required for procurement or manufacture of goods in India by the importer or which relates to post importation activities for assembly, construction, erection, operation and maintenance of the plant are to be included in the price of equipments for determining their transaction value and consequently their assessable value for the purpose of levy of customs duty under the said Act. On the contrary the Interpretative Notes to Rule 4 of the Valuation Rules, 1988 makes it explicitly clear that value of imported goods shall not include, inter alia, the charges for construction, erection, assembly maintenance of technical assistance undertaken after importation of the imported goods such as 3 of the Contract in the instant case in determining the assessable value of the imported equipments imported by the appellant is wholly erroneous, ultra vires the said Act and/or the Customs Valuation Rules, 1988. This also the Deputy Commissioner and the Commissioner (Appeals) failed to appreciate and/or take into consideration and thereby arrived at patently erroneous findingIn terms of Rule 9 [1] [b] [iv] of the Valuation Rules, 1988, in determining the transaction value the value apportioned as appropriate of, inter alia, engineering, design and plans and sketches undertaken elsewhere than in India and necessary for the production of the imported goods which were supplied directly or indirectly by the buyer free of charge or at a reduced cost to the supplier or imported goods for use in producing the imported goods being value are to be included. This is because such supply of free of charge or at a reduced cost would result in a lower price for the imported goods than the price that the supplier would have charged if such goods/services were to be paid for in full. This rule is also inapplicable in the instant case as there has been no supply or any engineerings or drawings by the appellant to the foreign seller. Moreover, there was no supply free of charge or at reduced cost. Hence this rule also has no applicability whatsoever in the present case8. It is against this order the revenue is in appeal before us.

Reasoning:
10. The Tribunal did not accept this plea of revenue. The Tribunal in the impugned order accepted SAILs plea for segregating the value of equipments and the other fees on services covered by the same contracts, the latter charges meant for post-importation phase of the arrangement between the contracting parties. It found that the designs and drawings and engineering/technical services were for plant direction and overall project implementation for manufacturing iron and steel to be commissioned in India and charges were collected by the consortium when the design and drawings and engineering services in relation to the components were to be imported. It is also not the revenues case before us that these designs and drawings and the services were in relation to the imported equipments and goodsBut ratio of that authority would not be applicable in the facts of this case, as the disputed amount involved payment made by the importer to their overseas associate towards engineering, design work, plant, sketches etc. which were necessary for production of imported goods. This was a case attracting Rule 9(1)(b)(iv) of the 1988 Rules. Factually, this authority is distinguishableThe only factual similarity in both these cases is that the case of ABB Limited (supra) also related to turnkey project. But import under that statute and the charging section in the Customs Act for imposing duty (under Section 12) are not the same. The mechanism for arriving at transaction value or assessable value under the two statutes are different and distinct. This authority can have no impact on the subject-controversyWe have earlier referred to this authority in this judgment. This case involved importation of a plant, which was originally installed in Germany. The Indian importer, Essar Gujrat, had entered into an agreement with the overseas owner of that plant in Germany. That owner was Teviot Investments Limited. The agreement Essar Gujarat had with Teviot for purchase of the plant, however, was subject to Essar obtaining transfer of operational license from another corporation, Midrex International BV. Question arose as to whether the license fees paid to Midrex should be included to the value of the plant or not. The revenue case was that the stipulation of obtaining the license from 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 plant sale agreement, there was an element of necessity or compulsion to enter into the licensing agreement with Midrex21. SAIL had taken specific stand before the authority of the first instance that it was not a condition for them to take design and engineering, which related to post importation activities from the supplier only. In terms 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 time22. An importer of equipments of a plant could always choose to obtain drawings and designs for undertaking post importation activities from an overseas consortium supplying the equipments. This may confer on such arrangements attributes of a turnkey contract, but that fact by itself would not automatically attract the condition clause contained in Rule 9(1) (e) of the Valuation Rules. In the cases of Essar Steel Ltd.(supra) and Tata Iron and Steel Co. Ltd.(supra), the contracts had certain elements of turnkey features. The case of Essar Gujarat (supra) is distinguishable, as the subject of import there carried a condition for entering into a licensing agreement with a third party24. We have already summarised the respondents case that the disputed items on which the customs authorities intended to impose duty all related to post importation activities and could not be included in the assessable value25. Revenue has not made out a case that the disputed items of contract do not relate to post-importation activities. The statutory provision relied upon by the Revenue to bring the subject-items within the duty net is Rule 9 (1) (e) of the 1988 Rules26. The expression condition, simply put, conveys the idea that something could be done only if another thing was also done. In the given context, it would imply that import of equipments could be allowed by the other party provided the design features for post- importation activities were also obtained from the same supplier or from a firm as per the overseas suppliers direction. But there is no material before us to suggest that import of equipments was effected with simultaneous obligation of SAIL that the designs relating to post- importation activities should also be obtained from the same entity. The revenue has proceeded with the understanding that since both were obtained from the same vendor, condition of obtaining designs etc., for post-importation activities was implicit in the contract. The Revenue has sought to emphasise their case on the basis that as it was a turnkey project, importation of equipments and post-importation project implementation exercise were mutually dependant. In our opinion, reading such implied condition into the contracts would be impermissible in the absence of any other material to demonstrate subsistence of such condition. No part of the contract has been shown to us from which such condition could be inferred. Necessity of subsistence such condition has been laid down in the case of Ferodo India (P) Ltd. for invoking rule 9 (1) (e). In our opinion, the provisions of Rule 9 (1) (e) cannot be automatically applied to every import which has surface features of a turnkey contract. Just because different components of a contract or multiple contracts give the shape of turnkey project to the imported items, without specific finding on existence of condition as contemplated in clause 9 (1) (e), value of all these components could not be added to arrive at the assessable value. Such an exercise would go against the provisions of Interpretativewhich is part of the Valuation Rules in view of the provisions of Rule 12 thereof28. In the present appeal, involving two import consignments, the authorities of First Instance and the Appellate Authority proceeded on the basis that since all the scheduled items formed part of the same contract and were linked with activities at post-import stage with the imported 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 sets of items otherwise interdependent. We find from the orders in original that the stand of SAIL was consistent that the subject drawings and specifications did not relate to the equipments imported and was meant for post importation activities and there was no condition laid down that the import of the equipments were to be supplemented by post-importation work.