Case: M/S. Associated Cement Companies Ltd Vs. Comnr. Of Customs

These appeals have been filed against the common order dated 15th November, 1999 of the Customs, Excise and Gold (Control) Appellate Tribunal which, while confirming the order of the Commissioner of Customs held that drawings, designs etc. relating to machinery or industrial technology were goods which were leviable to duty of customs on their transaction value atthe time of their import.2. As principal arguments on behalf of the appellants were addressed in the case of M/s. Hotel Leela Ventures Limited by Mr. Ashok H. Desai, learned senior counsel, for the like of convenience we will refer to the relevant facts in that case in greater detail.3. Leela Ventures are engaged in the business of setting up, operating and maintaining Hotels and Resorts. For designing the Hotels and Resorts, it engaged a foreign company M/s. Wimberly Allison Tong and Goo, USA ("WAT" for short) for providing architectural services including design development drawings. Leela Ventures had entered into four agreement with the said foreign company in respect of four different ventures in India. Apart from preparing the designs and drawings the scope of work under the said agreements included site visits and on site consultations with architects.4. Leela Ventures paid WAT under the said agreements for the services rendered and that amount was remitted through bank by following the procedure of remittance under Form A-2 prescribed by the Reserve Bank of India which form is meant for foreign exchange remittances, other than for import of foreign goods, pursuant to the permission given by the Reserve Bank.5. In terms of the said agreements entered into with WAT, the appellants received drawings and diskettes through couriers during the period 30th October, 1995 and 12th May, 1996. The drawings so received were part of technical collaboration and/or technical know-how and were accompanied by an airway bill and an invoice issued by the consignor. The courier, in all the cases, declared the drawings with various descriptions such as "drawings", "architectural designs" etc. The value of these drawing and designs was declared at a nominal value of one dollar. According to Leela Ventures one dollar was the correct value because drawing by themselves have no value, since if the drawings are lost they could be replaced and the loss would merely be of the cost of paper. The value declared by the courier was bonafide and was based on the invoice carried by it. As per the appellants, the declaration by the courier was in accordance with the accepted practice at that time. At the time of the imports these designs and the diskettes were cleared at the nominal value declared.6. The other appellants in these appeals are also public corporations engaged in the manufacture of excisable goods. Like Leela Ventures the other appellants also entered into technical collaboration with leading manufactures in their own fields abroad. The agreements provided for exchange of technology in the form of supply of know-how, drawings and designs on media training by personnel staff and similar other activities. As a part of fulfillment of the contracts, the contracting parties abroad, from time of time, sent drawings, designs etc. In the case of M/s Videocon these drawings etc. were imported by hand through one Mr. Kato. In all other cases the drawing etc. were imported through Professional Courier or by post parcels. In each case only a nominal value was declared at the time of its importation.7. According to the respondents, intelligence gathered by the Directorate of Revenue Intelligence and Special Valuation on services since the remittances were in Form A-2 and tax at source under the Income-Tax Act was paid in respect of the appellants that the demand was barred by limitation since there was no suppression or wilful mis-statement as the appellants bonafide believed that no customs duty was payable in the case of contracted services represented by drawings, designs etc. which were imported.10. After giving an opportunity of representation being filed and hearing the learned counsel for the Commissioner passed a consolidated order dated 26th March, 1999. The Commissioner demanded duty and imposed penalty. The appellants then filed appeal before the Tribunal but without success. During the course of pendency of the appeal barring three all other importers voluntarily deposited the duty as per the classification then suggested.11. In the appeals, the learned counsel for the appellants urged four contentions which had been unsuccessfully raised before the Tribunal. These contentions were (i) Excise duty cannot be levied on the value of ideas as they are not goods; (ii) Even if what was imported were goods, the valuation of the same has to be nominal; (iii) the show-cause notice which were issued were barred by time inasmuch as the extended period of limitation of five years would not be available on the facts of the present case; (iv) the imports through the courier could not be governed by heading No. 98.03 of the Customs Traiff Act. The learned Additional Solicitor General, in his able manner, supported the Tribunals decision. Whether drawings, diskettes, manual etc. imported are goods on which excise duty could be levied. 12. The learned counsel submitted that in all these cases the transactions between the appellants and the foreign collaborators were for transfer of technology. The knowledge or know-how which is supplied, though valuable, was intangible. The media is only the vehicle of transmission and is only incidental to the main transaction, even if Government authorities regard this to be contract for services and not for sale of goods. In support of this, reliance was placed on the fact that the Reserve Bank of India had required application for remission of foreign exchange on Form - A2 which is meant for foreign exchange remittance otherwise than for import of goods. On the remittances so made the appellants had deducted the income-tax at source. It was contended that it was a case of sale of goods to the appellants then the question of deducting any income-tax and paying the same would not have arisen and, on the contrary, the amount of excise duty which would have been payable would have been less than the income-tax which was deducted. 13. In the alternative it was contended that even if the transactions are composite the Court has to determine whether these relate to contract for service or goods. In this connection, it was submitted that when price is paid for photograph, the payment is not for paper which is developed but is for the skill of the photographer and the price of developing. Contract for architectural services was stated to be like a contract by a solicitor to give a legal opinion or for a doctor to give a medical diagnosis since the essence of the contract is the experts skill. 14. The learned counsel contended that the transaction between the appellants and their respective foreign collaborators was one for transfer of technology. This knowledge or know-how though valuable was intangible. The technology when transmitted to India on some media does not get converted from an intangible thing to tangible thing or chattel. Media is only vehicle for transmission and is wholly incidental to the transaction. By way of analogy it was submitted that legal opinions or judgments of Courts when communicated on legal briefs or as certified copies do not constitute transfer of goods by the counsel to his clients or by a Courts to a litigant. Reliance was placed on the decision of U.S. 9th Circuit Courts of Appeals in Wilhelm Winter; Cynthia Zheng v. G.P. Putnams Sons, 938 F.2nd 1033 (9th Cir. 1991). In that case, the plaintiffs had bought an encyclopedia on mushroom, a book published by the defendants. On the basis of the information contained therein the plaintiffs serveraly ill from cooking and eating mushrooms after relying on the information obtained from the said encyclopedia. The plaintiffs sued the publishers and sought damages based on products liability, breach of warranty etc. The trial Court held that the information contained in a good is not a product for the purposes of strict liability under products liability law. Affirming the trial Court, the Circuit Court of appeals came to the conclusion that the products liability law reflects its focus on tangible items and does not take into consideration the unique characteristics of ideas and expressions. In other words, the quality of information contained in a book would not be regarded as a product for the purposes of product liability law. This would not detract from the fact that the encyclopaedia of mushroom would be regarded as goods containing information supplied by the author and published by the defendants. As we shall presently see this case can be of little assistance for deciding the point in issue. 15. Before we deal with the aforesaid contentions raised on behalf of the appellants, it is appropriate to first consider the relevant provisions applicable in the present case. Section 2(22) of the Customs Act contains the definition of the word "goods" which is as follows : "(a) vessels, aircrafts and vehicles; (b) stores; (c) baggage; (d) currency and negotiable instruments; and (e) any other kind of movable property;" 16. Section 156 of the Customs Act gives the Central Govt. power to make rules consistent with the Act and sub-Section 2(a) thereof enables the framing of rules to provide for the manner of determining the price of imported goods under sub-section (1A) of Section 14. In exercise of the powers conferred by the aforesaid Section 156 of the Customs Act, the Central Govt. has framed Customs Valuation (Determination of Price of Imported Goods) Rules, 1988. For the purpose of this case, two Rules which are important are Rules 3 and 4 which read as follows : "3. Determination of the method of valuation. For the purpose of these rules. (i) the value of imported goods shall be the transaction value; (ii) if the value cannot be determined under the provisions of clause (i) above, the value shall be determinated by proceedings sequentially through Rules 5 and 8 of these rules. 4. Transaction Value - (1) shall The transaction value of imported goodsbe the price actually paid or payable for the goods when sold for export to India, adjusted in accordance with the provisions of Rule 9 of these rules, (2) The transaction value of imported goods under sub-rule (1) above shall be accepted : Provided that : (a) there are no restrictions as to the disposition or use of the goods by the buyer other than restrictions which - (i) are imposed or required by law or by the public authorities in India; or (ii) limit the geographical area in which the goods may be resold; or (iii) do not substantially affect the value of the goods; (b) the sale or price is not subject to same condition or consideration for which a value cannot be determined in respect of the goods being valued; (c) no part of the proceeds of any subsequent resale, disposal or use of the goods by the buyer will accrue directly or indirectly to the seller, unless an appropriate adjustment can be made in accordance with the provisions of Rule 9 of these rules; and (d) the buyer and seller are not related, or where the buyer and seller are related, that transaction value is acceptable for customs purpose under the provisions of sub-rule (3) below : (3) (a) Where the buyer and seller are related, the transaction value shall be accepted provided that the examination of the circumstances of the sale of the imported goods indicate thatthe relationship did not influence the price. (b) In a sale between related persons, the transaction value shall be accepted, whenever the importer demonstrates that the declared value of the goods being valued, closely approximates to one of the following values ascertained at or about the same time : (i) the transaction value of indential goods, or of similar goods, in sales 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. Provided that in applying the value used fro comparison, due account shall be taken of demonstrated difference in commercial levels, quantity levels, adjustments in accordance with the provisions of Rule 9 of these rules and cost incurred by the seller in sales in which he and the buyer are not related; (c) substitute values shall not be established under the provisions of clause (b) of this sub-rule." 17. Rule 10 provides for declaration by the importer and is as follows : "10. Declaration by the importer . (1) The importer or his agent shall furnish :- (a) declaration disclosing full and accurate details relating to the value of imported goods; and (b) any other statement, information or document including an invoice of the manufacturer or producer of the imported goods where the goods are imported from or through a person other than the manufacturer or producer, as considered necessary by the proper officer for determination of the value of imported goods under these rules. (2) Nothing contained in these rules shall be construed as restricting or calling into question the right of the proper officer of customs to satisfy himself as to the truth or accuracy of any statement, information, document or declaration presented for valuation purposes. (3) The provisions ofthe Customs Act, 1962 (52 of 1962) relating to confiscation, penalty and prosecution shall apply to cases where wrong declaration, information, statement or documents are furnished under these rules." 18. Section 2 of the Customs Tariff Act provides for the rates at which the customs duty is levied underthe Customs Act, 1962. As specified in First and the Second Schedule, Chapter 98 inter alia applies to passengers baggage and heading No. 98.03 states that on "all dutiable articles, imported by a passenger or a member of a crew in his baggage", customs duty will be paid at the standard rate of duty of 150%. 19. Reliance was placed by Mr. Desai on a number of decision of this Court, relating to levy of sales tax, in support of his contention that in contract by supply of services there is no sale of goods and, as such, no customs duty could be imposed on the intellectual property which was obtained.

Reasoning:
48. The above view, in our view, appears to be logical and also in consonance with the Customs Act. Similarly in (3d Cir 1991) it was contended before the Court in United States that software referred to in the agreement between the parties was a "product" and not a "good" but intellectual property outside the ambit of Uniform Commercial Code. In the said Code, goods were defined as "all things (including specially manufactured goods) which are moveable at the time of the identification for sale." Holding that computer software was a "good" the Court held as follows : "Computer programs are the product of an intellectual process, but once implanted in a medium are widely distributed to computer owners. An analogy can be drawn to a compact disc recording of an orchestral rendition. The music is produced by the artistry of musicians and in itself is not a "good", but when transferred to a laser-readable disc becomes a readily merchantable commodity. Similarly, when a professor delivers a lecture, it is not a good, but, when transcribed as a book, it becomes a good. That a computer program may be copyrightable as intellectual property does not alter the fact that once in the form of a floppy disc or other medium, the program is tangible, moveable and available in the marketplace. The fact that some programs may be tailored for specific purposes need not alter their status as "goods" becomes the Code definition includes "specially manufactured goods." 49. We are in agreement with the aforesaid observations and hold that the value of the goods imported would depend upon the quality of the same and would be represented by the transaction value in respect of the goods imported. 50. It would not be correct, as was done in Leela Ventures case, to take the entire contract value as being the value of the imported goods. What is the transaction value in respect thereof has to be ascertained. In most of the other cases this has been done by adopting about one-third of the contract value as being the transaction value of the imported goods for the purpose of levy of customs duty. 51. In Leela Ventures case the Commissioner must re-determie the transaction value of the drawings etc. imported keeping in view the terms of the agreements and then impose the levy. Re : Limitation : 52. The next submission on behalf of the appellants was that in the case of short levy or non-levy of duty the normal period for issuing a notice seeking to realise the difference in the duty levied and impossible is that of six months. This period is extendable to five years only if the proviso to Section 28(1) can be validly invoked. It was the case of the appellants that there was never an intention on their part of evade duty. Agreements entered into with foreign collaborators had been disclosed to the Government of India who had approved the remittances as fees for technical services rendered. Payment had been made as directed by the Reserve Bank of India by resorting to Form A-2 and deducting tax at source on the remittances so made. Service tax which was payable was also deposited and this clearly shows that the appellants bonafide believed that the value of the drawings and other technical material imported was only nominal. 53. While relying on various decisions of this Court, it was submitted that the proviso to Section 28(1) of the Customs Act can only apply if there is a positive inaction or deliberate attempt to mislead the revenue. On the facts of the present case, it was submitted that none of the ingredients of the proviso would enable the enlargement of the limitation from six months to five years was present. Our attention was drawn to the case of Collector of Central Excise, Hyderabad v. M/s Champhar Drugs and Liniments, Hyderabad, 1989(2) SCC 127, Cosmic Dye Chemical v. Collector of Central Excise, Bombay, 1995(6) SCC 117, M/s Padmini Products v. Collector of Central Excise, Bangalore, 1989(4) SCC 275, Tamil Nadu Housing Board v. Collector of Central Excise, Madras and another, 1995 Supp(1) SCC 50 and Collector of Central Excise v. H.M.M. Limited, 1995(76) ELT 497. In all these cases the Court was concerned with the applicability of the proviso to Section 11-A of the Central Excise Act which, like in the case of Customs Act, contemplated the increase in period of limitation for issuing a show-case notice in the case of non-levy or short-levy to five years from a normal period of six months.We find force in the contention of the appellant. Heading No. 98.03 of Chapter 98 of the Schedule in the Tariff Act imposes a prescribed duty of 150 per cent on `dutiable articles imported by a passenger or a member of a crew in his baggage. What is, therefore, to be seen is whether the drawings and designs were dutiable articles. Heading No. 49.06 under Chapter 49 of the Customs Tariff for the year 1992-93 provides as follows : "Plans and drawings for architectural, engineering, industrial, commercial, topographical or similar purpose, being originals drawn by hand; hand-written texts; photographic reproductions on sensitized paper and carbon copies of the foregoing." The rate of duty specified therein Column (4) was "free". According to Section 78 of the Customs Act, the rate of the duty and tariff value applicable to baggage shall be the rate and valuation in force on the date on which a declaration is made for clearing the baggage. It was the contention of the learned counsel for the appellant that as article in question would fall under heading No. 49.06 they were free of duty. Therefore, they could not be regarded as dutiable articles and its value could not be included in the baggage of the passenger for the purpose of levy of customs duty. 78. While dealing with the provisions of the Excise Act, this Court in Collector of Central Excise, Hyderabad v. Vazir Sultan Tobacoo Co. Ltd., 1996(83) ELT 3 (SC) referring to an earlier decision in the case of Wallace Flour Mills Company v. Collector of Central Excise, 1989(44) ELT 598 had observed that if by virtue of an exemption notification the rate of duty was reduced to nil, the goods specified in the Tariff Act would still be regarded as excisable goods on which nil rate of duty was payable. 79. It appears to us that the aforesaid decisions, which were sought to be invoked by the respondent in an effort to submit that the drawings and designs, which came as a part of passenger baggage were dutiable goods, would not be applicable. In Vazir Sultan and Wallace Flour Mills cases (supra), this Court considered the definition of "exciable goods" in Section 2(d) ofthe Central Excise Act, 1944 which was as follows : "Excisable goods means goods specified in the [the First Schedule and the Second Schedule] tothe Central Excise Tariff Act, 1985 (5 of 1986) as being subject to a duty of excise and includes salt." 80. Under the Customs Act, there are two definitions which are relevant. Section 2(22) defines "goods" as follows : "Goods" includes - (a) vessels, aircrafts and vehicles; (b) stores; (c) baggages; (d) currency and negotiable instruments; and (e) any other kind of movable property." In addition thereto, Section 2(14) define "dutiable goods" as follows : "dutiable goods" means any goods which are chargeable to duty and on which duty has not been paid." 81. Underthe Central Excise Act, 1944 in definition of words "excisable goods" under Section 2(d), the very specification or inclusion of goods in the First and Second Schedule of the Central Excise Tariff Act would make them excisable goods subject to duty. Under the Customs Act, the provisions seem to be somewhat different. While by virtue of Section 2(22) all kinds of moveable property would be `goods but it is only those which would be regarded as `dutiable goods under Section 2(14) which are chargeable to duty and on which duty has not been paid. The expressions "chargeable to duty on which duty has not been paid" indicates that goods on which duty has been paid or on which no duty is levaiable, and, therefore no duty is payable, will not be regarded as `dutiable goods. It is only if payment of duty is outstanding or leviable that goods will be regarded as dutiable goods. 82. Section 12 of Customs Act provides that the duties of customs shall be levied at such rates as may be specified under the Customs Tariff Act. When the Customs Tariff Act itself provides that the import of drawings and designs under heading No. 49.06 is "free", it must follow that these drawings and designs, though goods, were not chargeable to duty. In view of the difference in the language of the Excise and Customs Acts, the decisions in the cases of Vazir Sultan and Wallace Flour Mills (supra) may not be very apposite and if no customs duty is chargeable either by reason of tariff not providing for it or because of the exemption notification, those goods will not be regarded as dutiable goods "on which duty has not been paid". It is sufficient in the present case to observe that the drawings and designs which were imported by the appellant were correctly classifiable under heading No. 49.06 and the tariff itself providing tha the import of the same is free, the said drawings and designs were not dutiable articles and, therefore, no customs duty was leviable thereon even as a part of the passenger baggage. On this short ground alone the appeal of Vidoecon has to be allowed. C.A. No. 1493 of 2000. [M/s H&K Rolling Mill Engineers Pvt. Ltd. v. The Commissioner of Customs] 83. The appellant is a joint venture company. Sixty per cent of its shareholders are Indians while forty per cent of the shares are held by H & K, Germany. The appellant supplies technology to Bhilai Steel Plant and it is required to pay to the German company licence fee of DM 2,40,000 and engineering fee of DM 60,000. 84. The appellant prepared designs and drawings which were sent to H & K, Germany for the limited purpose of getting it checked and approved. It is stated that the appellant received a fax message from the Germony company approving the designs and drawings. Copy of the designs and drawings which had been prepared and sent by the appellant came back to India through courier containing the stamp and approval of the German company. Like in the case of M/s. Leela Ventures income tax was deducted at source for the payments made to the German company after permission of the Reserve Bank of India had been obtained. 85. In the show cause notice which was issued it was proposed to regard the drawings which had come through the courier at DM 60,000 equivalent to Rs. 11,03,800/- as being subject to levy of duty. In the show cause notice it was stated that these technical drawings were supplied by the German Company and being imported through courier services were classifiable under heading No. 98.03 and duty and penalty was payable in respect thereof. 86. Unlike other case, we find that these drawings in respect of which customs duty had been levied were not something which had originated from Germany. These drawings were prepared by the Indian company of which the German Company was a shareholder. These drawings were no doubt sent to Germany for approval but the agreement between the parties does not show that the payment of DM 60,000 was directly relatable or attributable to the approval and despatch of the said drawings to India. Under the agreement between the parties apart from the licence fee payable by the Indian company, for the use of the name of the German Company and engineering fee, money was payable in terms of the agreement. As we have already observed there is nothing to show hat this amount of DM 60,000 was relatable only to the approval of the said designs and drawings. 87. Be that as it may the value of these drawings which belong to the Indian company were merely approved by the Germony company could only be nominal and under no circumstances the said value could be regarded as DM 60,000. The nominal value disclosed by the courier, on the facts and circumstances of this case, could not, therefore, be said to be incorrect.