COMMNR. OF CUSTOMS, AHMEDABAD vs. M/S. ESSAR STEEL LTD.

REPORTABLE IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO.3042 OF 2004 COMMISSIONER OF CUSTOMS, AHMEDABAD …APPELLANT VERSUS M/S. ESSAR STEEL LTD. ...RESPONDENT J U D G M E N T R.F. Nariman, J. 1. In this appeal we are concerned with the addition in the JUDGMENT 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 1 Page 1 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 1.1.6 `plant’ is defined as:

Project is defined as: “1.1.8. “Project” shall mean the design, procurement, construction, erection and start-up of the plant.” The most material clause of the agreement relates to the JUDGMENT scope of supply which is contained in clause 2, which reads as under:- “2.0. SCOPE OF SUPPLY: 2.1. Technical consultant shall render following engineering and other technical Services from outside India; 2.1.1. Project Engineering Services: 2 Page 2

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. JUDGMENT 2.1.3.Arrangement for Training of ESSAR’s Employees-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 for ESSAR’s account. 3 Page 3

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, etc.” As a consideration for the above scope of supply to be provided, the technical consultant was to be paid a fee of DM 78,950,000 (Seventy Eight Million Nine Hundred Fifty Thousand Deutsche Marks). Since a large part of the JUDGMENT arguments turned on clause 9, it is set out in full hereinbelow: “9.0. 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 4 Page 4

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, know- how, copyrights and other intellectual properties and keep them secret and confidential. JUDGMENT 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 the “Technical Information” in the Agreement) 5 Page 5 will be granted or transferred to ESSAR, unless otherwise specified in the Agreements.

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 use them.” JUDGMENT By a 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. 6 Page 6 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.

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 JUDGMENT 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 know- how charges which ought to be added to the sum of US$169,700,000. In their reply to the show cause notice, the 7 Page 7 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

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 following basis: “31. Since, 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 JUDGMENT 8 Page 8 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.”

CEGAT by its judgment dated 24.6.2003 set aside the order of

conclusion. JUDGMENT 6. Shri Neeraj Kaul, learned Additional Solicitor General argued before us that the case is, on facts, covered by the judgment in Essar Gujarat’s case (supra). According to him, on a conjoint reading of the purchase order for supply of the plant and the agreement for technical services it is clear that 9 Page 9 payments are made under the technical services agreement as a condition for the sale of the imported plant which cannot be set up without the technical services to be provided. In reply,

the respondent, took us through the said agreements and contended that it was clear that payments made under the technical services agreement were not as a condition of sale of the plant. Further, the Essar Gujarat judgment turned on its own facts which are distinguishable, and several other judgments of this Court in fact conclude the matter in his favour. 7. We have heard learned counsel for the parties. Section 14 of the Customs Act, 1962 as it stood at the relevant time is JUDGMENT as follows: “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 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— 10 Page 10 ( 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,

(1-A) Subject to the provisions of sub-section (1), the price referred to in that sub-section in respect of imported goods shall be determined in accordance with the rules made in this behalf. (2) Notwithstanding anything contained in sub- section (1) or sub-section (1-A), if the Board is satisfied that it is necessary or expedient so 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. JUDGMENT (3) For the purposes of this section— ( a ) ‘rate of exchange’ means the rate of exchange— ( i ) determined by the Board, or ( ii ) ascertained in such manner as the Board 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 11 Page 11 clause (m) and clause ( q ) of Section 2 of the Foreign Exchange Management Act, 1999 (42 of 1999).”

value at a price at which such goods or like goods are ordinarily sold or offered for sale at the time and place of importation in the course of international trade. This would mean that any amount that is referable to the imported goods post-importation has necessarily to be excluded. It is with this basic principle in mind that the rules made under sub-clause 1(A) have been framed and have to be interpreted. 8. Under the Customs Valuation (Determination of Price of JUDGMENT Imported Goods) Rules of 1988, Rule 2(f) defines “transaction value” as the value determined in accordance with Rule 4 of these Rules. Rule 4(1) in turn states that the transaction value of imported goods shall be the price actually paid or payable for the goods when sold for export to India, adjusted in accordance 12 Page 12 with the provisions of Rule 9 of these Rules. Rule 9 of the Rules is set out hereinbelow:-

(a) The following cost and services, to the extent they are incurred by the buyer but are not included in the price actually paid or payable for the imported goods, namely:- (i) Commissions and brokerage, except buying commissions; (ii) The cost of containers which are treated as being one for customs purposes with the goods in question; (iii) The cost of packing whether for labour or materials; (b) The value, apportioned as appropriate, of the following goods and services where supplied directly or indirectly by the buyer free of charge or at reduced cost for use in connection with the production and sale for export of imported goods, to the extent that such value has not been included in the price actually paid or payable, namely:- JUDGMENT (i) Materials, components, parts and similar items incorporated in the imported goods; (ii) Tools, dies, moulds and similar items used in the production of the imported goods; (iii) (iii) materials consumed in the production of the imported goods; (iv) Engineering, development, art work, design work, and plans and sketches undertaken 13 Page 13 elsewhere than in India and necessary for the production of the imported goods;

(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. 9(2) xx xxx 9(3) Additions to the price actually paid or payable shall be made under this on the basis of objective and quantifiable data. 9(4) No addition shall be made to the price actually paid or payable in determining the value of the imported goods except as provided for in this rule.” JUDGMENT A reading of Rule 4 and Rule 9 makes it clear that only those costs and services that are actually paid or payable for imported goods pre-import are to be added for the purpose of determining the value of the imported goods. In the present appeal, arguments have veered around the applicability of Rule 14 Page 14 9(1)(e). In this appeal, we are concerned only with the first part of Rule 9(1)(e). The narrow question that arises before us is whether the payment made for the technical services

imported inasmuch as such payment has been made as a condition of sale of the imported plant. 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 JUDGMENT 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 15 Page 15 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

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. 10. In fact, clause 13 of the purchase order dated 21.6.1991 is important in that liquidated damages are only payable for delay in commissioning the plant and for failure to achieve the JUDGMENT stipulated performance, both of which are post-importation activities. 11. 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 16 Page 16 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

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. 12. And now to the case law. Collector of Customs

strongly relied upon by Shri Neeraj Kaul. The said judgment related to the question whether licence fees payable should be added to the invoice value of a plant that was imported into JUDGMENT India on an as is where is basis. The agreement in that case was expressly subject to two conditions, the second of which was the obtaining of a transfer of the operation licence of the plant from M/s. Midrex of the United States. The judgment states:

17 Page 17 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 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.” (page 742) A chart setting out the services to be provided outside India is supplied at page 744 of the judgment as follows: “SERVICES TO BE PROVIDED OUTSIDE INDIA: 10.1.1 Process licence and allied technical services DM (German Marks) JUDGMENT 10.1.1.1 Process licence fee payable to MIDREX Corporation for the right to use the Midrex process and patents DM 20,00,000 lump sum 10.1.1.2 Cost of technical services provided under Article 3 in connection with Midrex process DM 1,01,00,000 lump sum Technical Services 10.1.2.1 Payment for engineering and consultancy fee as specified under this agreement DM 2,31,00,000 lump sum 10.1.2.2. Payment for theoretical and practical training outside India DM 22,00,000 lump sum 18 Page 18 Total DM 3,74,00,000 lump sum

right to use Midrex process and patents. In short, these amounts were payable for the transfer of technology under a process licence agreement entered into with Midrex. The judgment states that without such licence the plant could not be operated at all by the importer without the technical know-how from Midrex. In any case, the plant could not be operated or be made functional. This being the case, since these amounts had to be paid before the plant could at all be set up, these amounts would be added to the value of the imported plant. JUDGMENT 13. 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 19 Page 19 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

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 Essar Gujarat’s case 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. JUDGMENT 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. 20 Page 20 14. In Tata Iron & Steel Co. Ltd. v. Commissioner of Central Excise & Customs, Bhubaneswar, Orissa , (2000) 3

price for the imported equipment plus the price for “engineering”. The Tribunal in the said case added the amount of “engineering” to arrive at the value of the imported goods. This Court reversed the Tribunal by relying upon Rule 12 of the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988 which reads as follows: “12. Interpretative Notes. – the interpretative notes specified in the Schedule to these rules shall apply for the interpretation of these rules.” JUDGMENT The relevant interpretative note which was relied upon is important and reads as follows: “ Note to Rule 4 Price actually paid or payable 21 Page 21

Activities undertaken by the buyer on his own account, other than those for which an adjustment is provided in Rule 9, are not considered to be an indirect payment to the seller, even though they might be regarded as of benefit to the seller. The costs of such activities shall not, therefore, be added to the price actually paid or payable in determining the value of imported goods. 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; JUDGMENT (b) The cost of transport after importation; (c) Duties and taxes in India. The price actually paid or payable refers to the price for the imported goods. Thus the flow of dividends or other payments from the buyer to the seller that do not relate to the imported goods are not part of the customs value.” Rule 9(1)(e) was not attracted on facts. This Court held: 22 Page 22

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24 Page 24 302) was a legal necessity. The Tribunal has also stated that it was not recording any finding of “skewed split-up”. Shri Ashok Desai, the learned Senior Counsel for the appellant has pointed out that under Chapter Heading 49.06 of the Customs Tariff Act, 1975 plans and drawings for engineering and industrial purposes being originals drawn by hand as also their photographic reproductions on sensitised papers and carbon copies thereof are declared free from payment of customs duty. Sub- rules (3) and (4) of Rule 9 clearly provide that additions to the price actually paid or payable are permissible under the Rules if based on objective and quantifiable data and no addition except as provided for by Rule 9 is permissible.” 15. In Commissioner of Customs (Port), Kolkata v. J.K. Corporation Limited, (2007) 9 SCC 401, on facts the agreement there was itself in two parts, part (a) providing for licence, know-how and technology while part (b) provided for supply of equipment. This Court distinguished the judgment in JUDGMENT the Essar Gujarat case and applied the judgment in TISCO (supra) as follows: “16. Reliance has been placed by Mr. Radhakrishnan on a decision of this Court in Essar Gujarat Ltd. [(1997) 9 SCC 738 : (1996) 88 ELT 609] 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 25 Page 25 in its assessable value. It is in the aforementioned fact situation, this Court held: (SCC pp. 745-46, para 13) “ 13 [ 12 ]. Reading all these agreements together, it is not possible to uphold the contention of Mr. Salve that the precondition 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 precondition 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 24-3-1987. 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.” JUDGMENT 17. 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 24-3-1987, 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 26 Page 26 of the conditions, it was opined: (SCC p. 749, para 24) “ 24 . Therefore, the process licence fees of DM 20,00,000 was rightly added to the purchase price by the Collector of Customs. The order of CEGAT on this question is set aside.” 19. However, in TISCO [(2000) 3 SCC 472] this Court took note of Interpretative Note to Rule 4 and held: (SCC p. 482, para 17) “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.” JUDGMENT In an instructive passage on principle, this Court also laid down: “9. The basic principle of levy of customs duty, in view of the aforementioned 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 27 Page 27

JUDGMENT 16. Similarly, in Commissioner of Customs v. Ferodo India (P) Ltd. , (2008) 4 SCC 563, this Court dealt with Rule 9(1)(e) and the Essar Gujarat judgment as follows: “22. In the alternate, it has invoked Rule 9(1)( e ). This Rule 9(1)( e ) cannot stand alone. It is a corollary to Rule 4. There is no finding in the present case that what was termed as royalty/licence fee was in fact not such royalty/licence fee but some other payment 28 Page 28

29 Page 29 is no such stipulations in TAA in the present case. Therefore, in our view, the adjudicating authority erred in placing reliance on the judgment of this Court in Essar Gujarat Ltd. [ From Final Order No. 91 of 2002 dated 12-2-2002 of the Customs, Excise and Gold (Control) Appellate Tribunal, New Delhi in Appeal No. C/573/2001-A : See (2002) 142 ELT 343 (Tri); (2003) 156 ELT 62 (Tri); (2006) 195 ELT 206 (Tri) and (2006) 205 ELT 208 (Tri)]” 17. Essar Gujarat has also been distinguished in Commissioner of Customs (Port), Chennai v. Toyota Kirloskar Motor (P) Ltd., (2007) 5 SCC 371, as follows:- “36. Therefore, law laid down in Essar Gujarat Ltd. [(1997) 9 SCC 738] and J.K. Corpn. Ltd. [(2007) 9 SCC 401 : (2007) 2 Scale 459] is absolutely clear and explicit. Apart from the fact that Essar Gujarat Ltd. [(1997) 9 SCC 738] was determined on the peculiar facts obtaining therein and furthermore having regard to the fact that the entire plant on “as-is-where-is” basis was transferred subject to transfer of patent as also services and technical know-how needed for increase in the capacity of the plant, this Court clearly held that the post-importation service charges were not to be taken into consideration for determining the transaction value. JUDGMENT

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18. On a reading of all the authorities hereinabove, it is clear

We, therefore, dismiss the appeal of Revenue. There shall be no order as to costs. ……………………J. (A.K. Sikri) ……………………J. (R.F. Nariman) JUDGMENT New Delhi; April 13, 2015. 32 Page 32