Case: Commissioner of Customs Vs. Essar Steel Ltd

1. In this appeal we are concerned with the addition in the value for assessment to customs duty of charges paid by the respondent to Met Chem Canada Inc. for supply of technical services required for setting up and commissioning a plant for the manufacture of Hot Rolled Steel Coils in India. An agreement dated 13.4.1991 was entered into between the respondent and Met Chem Canada Inc. to associate Met Chem Canada Inc. as a technical consultant to render technical services in relation to implementation of a project to set up a plant in India for production of Hot Rolled Steel Coils and Strips.Under clause 1.1.6shall mean the integrated steel plant having an estimated annual capacity of Eight Hundred Thousand Tonnes (800,000 M.T.) of hot rolled steel coils and strips or such other enhanced capacity as may be agreed between the parties, to be located at Hazira, Gujarat, India and as described in Annexure 1ed hereto and madeshall mean the design, procurement, construction, erection and start-up of theSCOPE OF SUPPLY:2.1. Technical consultant shall render following engineering and other technical Services from outside India;2.1.1. Project Engineering Services:Technical Consultant shall act as technical coordinator for the successful setting up, commissioning of all the facilities and achieving established operations of the Plant. Technical Consultant shall coordinate all technical matters such as, but not limited to studying various alternative specifications and processes for the Plant and for manufacturing of Products; making recommendation for the most suitable and economic process, final detailed specifications and processes for the selected route, advising as required regarding technical proposals from various suppliers, and Contractors for the supply of the Plant and equipment, and the erection thereof at the Site, including civil engineering, designs, construction and installation of project utilities necessary for the successful setting up of the plant; carrying out the detailed project engineering including giving approvals for the various construction and Project implementation activities, engineering drawings, methods of construction, etc.2.1.2.Supervision and Monitoring of the Project:Technical Consultant shall provide advice regarding the activities in connection with the setting up of the plant from the technology, costs and time schedule angle.2.1.3.Arrangement for Training ofEmployees-outside India. Technical Consultant shall be responsible for arranging for up to two hundred (200) man months of training of (operating, maintenance and management) ESSAR employees at Steel Plant with proven technical capabilities in appropriate fields, outside India. Specific subjects, duration of training for each subject and numbers of trainees in each group shall be mutually agreed upon in writing. All travelling, living and miscellaneous expenses of ESSAR employees in relation thereto shall be foraccount.2.1.4.Assistance in transfer of technology:Technical consultant shall select appropriate subcontractor/contractors depending on the source of technologies and organize transfer to ESSAR of technology necessary for successful operation and maintenance of the Plant.2.1.5.Procurement support services:Technical Consultant shall provide procurement support Services for procurement of Equipment in India such as assistance in finalization of lists, specifications and sizes and configuration of equipment to be purchased, listing of suitable vendors, floating of inquiries, scrutiny of quotation received, assistance in negotiations with the Suppliers and in finalisation of order, pre-dispatch inspection and witnessing of tests,PATENTS.9.1. The Technical Consultant make no representation or warranty that any process, equipment or facilities which may be recommended by the Technical Consultant in respect to the Project can be employed, operated in India or otherwise used without infringing any patent, trademark, or other industrial property right of any third party in respect of the same. ESSAR acknowledges that the Technical Consultant shall not be liable in the event of claims against ESSAR by any other party for such infringement and shall indemnify the Technical Consultant against such liability. The Technical Consultant shall intimate, if however, it knows or becomes aware that any process, equipment or facilities recommended by the Technical Consultant is/are the subject of patents, trademarks, or other industrial property right of any other company, individual or association.9.2. The Copy right in all documents (including, but not limited to computer data, specifications, drawing and plan supplied by ESSAR, shall remain with ESSAR if originally owned by ESSAR.9.3. The Technical Consultant may own and possess patents, know-how, copyrights, and other intellectual property rights with respect to the Plant and its operation and maintenance and/or the Products, which will be disclosed by the Technical Consultant to ESSAR, to the extent required as per the Scope of Services for the purpose of this Project, while rendering Services to ESSAR under this Agreement. ESSAR may disclose such information to other parties concerned for the Project only to the minimum extent necessary for implementation secrecy acceptable to all parties concerned prior to disclosure of information. Ownership of any and all the patents, know-how, copyrights and other intellectual property rights shall remain vested in the Technical Consultant or its subcontractors, as applicable, and ESSAR shall secure and otherwise protect such patents, knowhow, copyrights and other intellectual properties and keep them secret and confidential.9.4. Nothing contained in the Agreement shall be construed to mean that such patents, know-how, copyrights and other intellectual properties (referred to as thein the Agreement) will be granted or transferred to ESSAR, unless otherwise specified in the Agreements.9.5. ESSAR shall take all reasonable measure to avoid disclosures of the Technical Information to any third party and shall disclose the said Technical Information to third parties only to the extent mentioned in Clause 9.3 above. ESSAR shall use the Technical information only for the purpose of the execution of the Project and similar projects owned by ESSAR and its associate companies in India. For the purpose of this clause, an associate company will mean a company which holds more than 30% of the equity capital of ESSAR or a company in which ESSAR holds more than 30% of the equity capital.9.6. ESSAR shall be the owner of that portion of all documents, drawings, plans, and specifications originally created by the Technical consultant specifically pursuant to this Agreement. The Technical Consultant may keep copies of all documents, drawings, plans and specifications and usea supplementary agreement, the main agreement of 13.4.1991 was added to, the main difference being that the plant would now be having an estimated capacity of 16,00,000 tonnes instead of 8,00,000 tonnes. Further, the lump sum fee payable was increased by DM 15,0050 Million making the total lump sum fee an amount of DM 94 Million.2. The services agreement is separate from the main agreement for setting up the said plant in India. The main agreement is contained in a purchase order dated 21.6.1991. The material clauses of the said purchase order are that for a plant of a capacity of 8,00,000 tonnes capacity per year, the total CIF price payable would be US$ 163,000,000. A liquidated damages clause contained in clause 13 of the purchase order provides liquidated damages for delay and/or failure to achieve performance. This purchase order was amended by a purchase order dated 28.7.1992 by which the CIF price of the said steel plant was revised to US$ 169,700,000. This was in view of the fact that the plant capacity as stated earlier had been doubled, and a sponge iron manufacturing plant of a capacity of one million tonnes which was originally to be sold was now deleted.3. Vide a show cause notice dated 20.7.1993, Revenue demanded the sum of DM 78.95 Million being technical knowhow charges which ought to be added to the sum of US$169,700,000. In their reply to the show cause notice, the respondent stated that none of the provisions of Rule 9 of the Customs Valuation (Determination of Price of Imported Goods) Rules of 1988 would apply as no payment is made for technical services as a condition of sale of imported goods. In any event, the agreement for technical services is to be performed in India post-importation and, therefore, would have to be excluded from the value to be taken into account at the time of import.4. The Commissioner of Customs by an order dated 31.1.2002 added a sum of DM 78 Million on the followingSince, the contract for technical consultancy was signed before the purchase order placed, it is evident that the payment made on account of the technical consultancy agreement is a condition of sale of imported goods. Even though, this aspect has not been covered in the agreement for technical consultancy as at the time of signing this agreement the purchase order was not placed to M/s. Metchem Inc. Canada. However, such an high amount of DM 78 million has to be necessarily linked with the value of the purchase order which was US$ 169 million placed subsequently. At the time of signing of agreement both the parties fully understood that they will be signing another agreement on subsequent date relating to the sale of plant and machinery. Nobody is going to pay DM 78 million in vacuum if the other agreement does not materialize. Thus, I find that these two payments were not independent to each other but the buyer has no option but to buy machinery once they have made commitment for technical services. Therefore, I have no doubt in my mind that the payment made as per the technical consultancy agreement is a condition of sale of imported goods.An appeal by the respondent to CEGAT succeeded, and CEGAT by its judgment dated 24.6.2003 set aside the order of the Commissioner holding that the plant could have been set up and could run without the supply of technical knowledge. Secondly, the fact that the technical supply agreement was signed prior to the agreement for supply of machinery would not be relevant. The judgment of this Court in Collector of Customs (Preventive) v. Essar Gujarat Ltd., (1997) 9 SCC 738 , was distinguished on facts in reaching the aforesaid

Court's reasoning:
9. On an analysis of the technical services agreement dated 13.4.1991, it is clear that the respondent has only associated Met Chem Canada Inc. as a technical consultant. There is no transfer of know-how or patents, trademarks or copyright. What is clear is that technical services to be provided by Met Chem Canada Inc. is basically to coordinate and advise the respondent so that the respondent can successfully set up, commission and operate the plant in India. It will be noticed that coordination and advice is to take place post-importation in order that the plant be set up and commissioned in India. In fact, all the clauses of this agreement make it clear that such services are only post-importation. Clause 9 on which a large part of the agreements ranged again makes it clear that ownership of patents, know-how, copyright and other intellectual property rights shall remain vested in the technical consultant and none of these will be transferred to the respondent. The respondent becomes owner of that portion of documents, drawings, plans and specifications originally created by the technical consultant pursuant to the agreement. This again refers only to documents, drawings etc. of setting up, commissioning and operating the plant, all of which are post-importation of the plant into India.Another thing to be noticed is that a conjoint reading of the technical services agreement and the purchase order do not lead to the conclusion that the technical services agreement is in any way a pre-condition for the sale of the plant itself. On the contrary, as has been pointed out above, the technical services agreement read as a whole is really only to successfully set up, commission and operate the plant after it has been imported into India. It is clear, therefore, that clause 9(1)(e) would not be attracted on the facts of this case and consequently the consideration for the technical services to be provided by Met Chem Canada Inc. cannot be added to the value of the equipment imported to set up the plant in India.However, so far as the sum of 231 Lakh Deutsche Marks is concerned, since this was payment for engineering and technical consultancy to set up and commission the plant in India, this amount would have to be excluded. This Court held that 10% of this amount only should be added to the value of the plant as the plant had been sold abroad on an as is where is basis and needed to be dismantled abroad before it was ready for delivery in India. Obviously, therefore this 10% is attributable to a pre-import stage. Further, the amount of 22 Lakh Deutsche Marks payable for theoretical and practical training of personnel outside India again could not be added as this amount would presumably be attributable to trained personnel who would be used in the commissioning and operation of the plant, which would, therefore, be attributable to a post-importation event. Thus, properly read, the judgment in Essarcase actually supports the respondent in that the payment for engineering and technical consultancy services in India cannot be added to the value of the imported plant. Also, in the present case, there is no transfer of technology under a license. Therefore, no question arises as to whether without such license the plant to be set up in India could be operated at all. The judgment also concludes in favour of the respondent the fact that all amounts payable for training of personnel outside India cannot be added to the value of the plant.So far as the Interpretative Note to Rule 4 is concerned it is no doubt true that the Interpretative Notes are part of the Rules and hence statutory. However, the question is one of their applicability. 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. To illustrate, if the seller has undertaken to erect or assemble the machinery after its importation into India and levied certain charges for rendering such service the price paid therefor shall not be liable to be included in the value of the goods if it has been paid separately and is clearly distinguishable from the price actually paid or payable for the imported goods. Obviously, this Interpretative Note cannot be pressed into service for calculating the price of any drawings or technical documents though separately paid by including them in the price of imported equipments. Clause (a) in the third para of the Note to Rule 4 is suggestive of charges for services rendered by the seller in connection with construction, erection etc. of imported goods. The value of documents and drawings etc. cannot befor construction, erection, assemblyof imported goods. Alternatively, even on the view as taken by the Tribunal on this Note, the drawings and documents having been supplied to the buyer-importer for use during construction, erection, assembly, maintenance etc. of imported goods, they were relatable to post-import activity to be undertaken by the appellant. Such charges were covered by a separate contract, i.e. contract MD 301. They could not have been included in the value of imported goods merely because the value of documents referable to imported equipments and materials was mixed up with the value of those documents which were referable to equipment which was yet to be procured or imported or manufactured by the appellant; the value of the latter category of documents also being neither dutiable nor clubbable with the value of imported goods. The Tribunal has not doubted the genuineness of the contracts entered into between the appellant and SNP. Rather it has observed vide para 10.2 of its order that entering into two contracts (MD 301 and MD 302) was a legal necessity.