Tata Iron & Steel Company Ltd. vs Commissioner Of Central Excise & Customs, Bhubaneswar, Orissa.

RESPONDENT: COMMISSIONER OF CENTRAL EXCISE & CUSTOMS, BHUBANESWAR, ORISSA.

DATE OF JUDGMENT: 16/02/2000

BENCH: R.C.Lahoti, S.P.Bharucha

JUDGMENT:

R.C. Lahoti, J.

L.....I.........T.......T.......T.......T.......T.......T..J

The Tata Iron & Steel Company Ltd. (TISCO, for

short), the appellant before us, has imported certain

equipments and drawings and engineering documents from

Siderugia National of Portugal - a Government of

Portugal Undertaking. It appears that some time in the

year 1981 Italimpianti, Genevo, Italy supplied

materials, designs and engineering drawings etc. to

Siderugia National Portugal (hereinafter SNP, for short)

for setting up rolling mill project in Portugal. The

supplies consisted of equipments for blast furnace, LD

converter, steel plant bellet castors, wire rod mills,

torpedo ladle cars etc.. However, before the equipments

could be installed, Portugal decided to join European

Economic Community (EEC) consequent whereupon Portugal

could not have expanded its steel making capacity.

SNP decided to cancel its investment plan and to sell

the equipments and materials which were lying unused

from 1981 to 1986. On 14th April, 1988 a protocol was

signed between the seller and purchaser companies (i.e.

SNP and TISCO) which inter alia stated that the total

price will be price for the equipment plus price for the

engineering FOB Portugal-Lisbon port. The price for the

equipment with suitable sea-worthy packing to be

provided by SNP will be 13.5 million Deutsche Marks (DM)

and the price for engineering will be 12.5 million

Deutsche Marks. The protocol also provided that the

equipment was being sold without any operation on

performance guarantees and in "as is where is"

condition. Subsequently on 11th October, 1989 three

contracts were entered into between the parties as under:-

1. Agreement for supply of technical documentation -

called MD 301.

2. Agreement for sale of equipments and materials

(part of equipments of a blast furnace and three

torpedo ladle cars) - called MD 302.

3. An overall sale contract, being an umbrella

contract, covering the abovesaid two agreements

for establishing contractual relationship and

setting up conditions both for sale of equipment

and supply of technical documentation.

The over-all sale contract recited an overall

price of 26 million DM and its break-up into two,

namely, 12.5 million DM for technical documentation and

13.5 million DM for equipments and materials. The

earlier two agreements recited the considerations of

12.5 million DM and 13.5 million DM respectively. Thus

the prices as recited in the protocol dated 14.4.88

remained unchanged.

The appellant sought for registration of its

contract MD 302 under Project Imports Regulations, 1986

with the Customs House, Paradeep which was allowed

entitling it to avail the benefit of concessional rate

of duty for project imports.

The consignment consisting of technical documents,

engineerings etc. covered by contract MD 301 arrived at

Calcutta and was cleared by Calcutta Customs House in

the months of April-May, 1990. The consignment was

claimed by the appellant to be classifiable under sub-

Heading No.4906.00 of the Customs Tariff Act, 1985

assessable to nil duty.

As against the contract MD 302 the first

consignment arrived at Port Paradeep and was cleared

under Bill of Entry dated 6.4.90. The value of the

goods was shown as D.M. 60,75,000 FOB. The goods were

assessed provisionally and allowed clearance on payment

of duty on the declared value. The second consignment

under this contract also arrived at Paradeep port. Bill

of Entry dated 7.7.90 was filed declaring the value to

be 6,75,739 D.M.. In between the department had

gathered intelligence and formed an opinion that the

contract MD 302 registered under the Project Import

Regulations was actually a sub-contract of another

contract of the same date and the value thereof was 26

MDM. The Assistant Collector of Customs, Paradeep, vide

communication dated 7th July, 1990, called upon the

appellant to submit all the documents including the

correspondence with the foreign supplier, copy of the

import licence etc.. The appellant submitted the

required documents including copy of the agreement MD

301. An exchange of correspondence between the

Assistant Collector of Customs and the appellant

followed. On 16th July, 1990 the Assistant Collector of

Customs, Paradeep issued a show cause notice to the

appellant calling upon it to show cause why the sum of

12.5 MDM being the value of the goods covered by

contract MD 301 should not be included in determining

the assessable value of the goods imported under the

contract MD 302 followed by other consequences flowing

from under-valuation of the goods imported. Vide order

dated 10.8.90 the Assistant Collector permitted

clearance of the goods upon furnishing of bank

guarantees of Rs.7,44,80,300/- and extra duty deposit of

Rs.2,82,01,636 as also payment of admitted customs duty.

The appellant filed a writ petition before the

Orissa High Court challenging the show cause notice and

the demand raised by order dated 10.8.90. On 30.8.1990,

the Orissa High Court disposed of the writ petition

directing the release of the goods subject to furnishing

a bank guarantee of Rs.8 crores and depositing the extra

duty reduced by 1 crore than that demanded, accompanied

by payment of admitted customs duty. The appellant

complied with the order of the High Court and got the

goods cleared.

The appellant also filed a reply to the show cause

notice. Personal hearing was given by the Assistant

Collector. On 23.8.1993 the Commissioner of Customs and

Central Excise, Bhubaneswar issued a second show cause

notice to the appellant and two of its officers and also

to the appellant's engineering consultant. Replies were

filed. On 30th April, 1996 the Commissioner of Customs

and Central Excise, Bhubaneswar passed an order

assessing the levy of customs duty at Rs.15,49,09,060/-.

A penalty of Rs.5 crores was also imposed on the

appellant under Section 112 of the Customs Act.

Penalties were imposed on other noticees also.

The appellant and other noticees preferred appeals

before the Customs, Excise and Gold (Control) Appellate

Tribunal, Calcutta which have been disposed of by a

common order. The Tribunal has held that the three

contracts entered into between the seller, i.e., SNP and

the appellant were in fact parts of one package, that

is, the three constituted one composite agreement. The

technical documentation supplied to the appellant could

be divided into three parts: (i) those pertaining to the

imported equipment, (ii) those pertaining to the

equipment which was yet to be procured or manufactured

by appellant, and (iii) those relatable to post-import

activities undertaken by the appellant for assembly,

construction, erection, operation and maintenance of the

imported equipment. The value of the contract to the

extent of (i) above was liable to be included in the

value of equipments and materials imported by the

appellant though the value of the technical documents

covered by (ii) and (iii) above could have been excluded

for payment of customs duty by reference to

Interpretative Note to Rule 4 of Customs Valuation

Rules, 1988 (hereinafter Rules, for short). However,

since separate values have not been shown, the

benefit of Interpretative Note to Rule 4 abovesaid was

not available to the appellant and the entire value of

the two contracts was liable to be clubbed together for

the purpose of levying customs duty.

It will be useful to extract and reproduce

verbatim a few findings from the order of the tribunal

as under :-

"It is pertinent to mention, on first appellant's own admission that where an item has been partly supplied and partly not supplied by S.N., technical documents for the latter have been supplied. These technical documents will serve the purpose for the whole items as such, technical documents being common to an item. In this manner, the first appellant has got technical documents for manufacture of substantial number of import items. It is therefore obvious that the technical documents supplied to the appellants pertain both to (i) the imported equipment and

(ii) the equipment which was yet to be procured or manufactured by the appellants. It may also contain (iii) technical documents which are related to post-importation activities undertaken by the appellants for assembly, construction, erection, operation and maintenance of the imported equipment. Value of two categories of documents at

(ii) and (iii) above could be excluded, had these values been separately shown in the contract, MD-301 or invoices.

Since separate values have not been shown, support from Interpretative Note to rule 4 of the Valuation Rule, proposed by the ld. Advocate Dr. Chakraborty cannot be taken. Hence the entire value of 12.5 million DM of technical documentation will have to be included in value (13.5 million DM) of the equipment of B.E. and T.L.Cs." [Para 6.2.II]

"Claim of the appellant's Counsel that these are separate contract is not tenable. Article 2 relating to `Price" and Clause 1 thereof makes it abundantly clear that "over-all price of the sale scope of the present contract is fixed and not subject to any revision and amounts to DM-26 million" giving a break-up of the same in 13.5 million and 12.5 million DMS. It is thus the over- all price of 26 million DM which is material in the Contract. Article 3 makes it binding on both the contracting parties that neither of them shall transfer totally or partially its contractual position, either gratuitously or onerously, without previous written consent of the other party. It is thus apparent that the appellants cannot back out of contract for supply of technical documents, even if they wished, without the written consent of the other party i.e. S.N. Portugal. These facts brings out the element of compulsion in purchase of the technical documents of whatever nature alongwith the purchase of equipments and materials. That being the factual position, provisions of rule 9 (1)(e) of the Valuation Rules 1988 come into play. Clause (e) of Sub-rule (1) of Rule 9 envisages addition of "all other payments actually made or to be made as a condition of the sale of the imported goods, by the buyer to the seller.........". Therefore, entire 26 million DM will have to be taken as value of the equipments and materials." [Para 6.3.III]

In spite of the findings as abovesaid having been

arrived at vide para 10.4, the Tribunal has stated that

though in its opinion the value of equipments would be

entire contract price of 26 million DM as against

21.2747826086 million DM computed by the adjudicating

officer as detailed in Annexure 1 appended to his order,

since only TISCO had appealed to it and the Revenue had

chosen not to file any appeal, the appellant could not

be put in a situation worse than if it had not filed an

appeal and therefore duty liability of the appellant

shall have to remain confined to the value of the

equipment at 21.2747826086 million DM as found by the

adjudicating officer. The quantum of penalty imposed on

the appellant was reduced by the Tribunal from Rs.5

crores to Rs. 4 crores. The penalties on other noticees

were set aside. The appellant has come up to this Court

by filing this appeal under Section 130 E of the Customs

Act, 1962.

We have heard Shri Ashok Desai, the learned senior

counsel for the appellant and Shri Kirit Raval, the

learned Additional Solicitor General for the

respondents. We are satisfied that the impugned order

of the Tribunal cannot be sustained and therefore has to

be set aside followed by a remand so as to assess the

value of the goods liable to payment of customs duty and

thereupon determine the quantum of duty and penalty, if

any, for the reasons stated hereinafter.

A perusal of the order of the Tribunal shows that

it has mainly proceeded on two sets of reasoning for

holding against the appellant. Firstly, the Tribunal

has examined the applicability of Rule 9(1)(b)(iv) and

formed an opinion that benefit thereof was not available

to the appellant. By reference to the Interpretative

Note to Rule 4 it has held that to the extent the

drawings and technical documents were referable to the

manufacture and sale of the imported equipments, their

value was liable to be included in the value of the

equipments and material imported and inasmuch as

separate values thereof have not been shown the entire

value of 12.5 million DM of technical documentation

covered by contract DM 301 was liable to be included in

the value of the equipments. Secondly, the Tribunal has

held the provisions of Rule 9(1)(e) being attracted and

coming into play for the purpose of determining the

valuation of the equipment and materials imported on

the reasoning that the drawings and engineerings were

compulsorily purchasable by the appellant along with the

equipment and materials and hence the value of the two

was liable to be clubbed. Shri Ashok Desai, the learned

senior counsel for the appellant has vehemently attacked

the correctness of the reasoning employed by the

Tribunal and has submitted that the Tribunal has gone

totally amiss in interpreting the rules and judging the

case thereunder. It was submitted by Shri Ashok Desai

that the interpretation as placed on the rules by the

Tribunal is not correct. We will presently test the

correctness of the contention so advanced.

Section 12 of the Customs Act is the charging

section. Section 14 provides for the duty of customs

being chargeable on any goods by reference to their

value. In exercise of the powers conferred by Section

156 of the Customs Act, 1962 the Central Government has

framed Customs Valuation (Determination of Price of

Imported Goods) Rules, 1988. Clause (f) of Rule 2

defines "transaction value" to mean the value determined

in accordance with Rule 4. Under Rule 3 either the

value of imported goods shall be the transaction value

or if it cannot be determined then the same shall be

determined by proceeding sequentially through Rules 5 to

8. Rule 4 provides 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 with the provisions of Rule 9.

Under Rule 9, the value or price of certain cost and

services is liable to be added to the transaction value

while determining the value of the imported goods. Rule

9, insofar as relevant and to the extent referred to by

the Tribunal is extracted and reproduced hereunder:-

9. Cost and services. (1) In determining the transaction value, there shall be added to the price actually paid or payable for the imported goods, -

xxx xxx xxx

(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:-

(i) materials, components, parts and similar used in the production of the imported goods;

(ii) tools, dies, moulds and similar items used in the production of the imported goods; (iii) materials consumed in the production of the imported goods;

(iv) engineering, development, art work, design work, and plans and sketches undertaken elsewhere than

in India and necessary for the production of the imported goods; xxx xxx xxx

(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.

xxx xxx xxx

(3) Additions to the price actually paid or payable shall be made under this rule on the basis of objective and quantifiable data.

(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. [emphasis supplied]

Reference has also been made by the Tribunal to

the Interpretative Notes. Rule 12 provides that the

Interpretative Notes specified in the Schedule to these

rules shall apply for the interpretation of these rules.

Note to Rule 4 reads as under:-

"Note to Rule 4 Price actually paid or payable

The price actually paid or payable is the total payment made or to be made by the buyer to or for the benefit of the seller for the imported goods. The payment need not necessarily take the form of a transfer of money. Payment may be made by way of letters of credit or negotiable instruments. Payment may be made directly or indirectly. An example of an indirect payment would be the settlement by the buyer, whether in whole or in part, of a debt owed by the seller.

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;

(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 dividents or other payments from the buyer to the seller that do not relate to the imported goods are not part of the customs value.

[emphasis supplied]

A bare reading of Rule 9(1)(b) shows that it

refers to the value of the four specified goods and

services supplied by the buyer free of charge or at a

reduced cost for use in connection with the production

and sale of imported goods to the seller and to the

extent that such value has not been included in the

price actually paid or payable. To illustrate, the

seller may have manufactured equipments of a design,

drawings whereof were made available by the buyer say by

engaging an independent expert agency in the country of

the seller. Although the seller has not incurred any

expenditure on the technical/engineering design of the

equipment manufactured by it yet the price paid for

securing the engineering designs and drawings will be a

component of the value of the equipment manufactured.

In spite of the price for the services rendered by the

expert agency having been paid by the buyer, the value

thereof is liable to be added to the value of the

imported goods for determining the transaction value.

In the case at hand it is nobody's case that the buyer

had supplied any goods or services free of charge or at

reduced cost for use in connection with the production

and sale for export of imported goods. All the exercise

done by the Tribunal in scrutinising the documents

forming subject matter of contract DM 301 so as to

classify them into three categories stated earlier in

this judgment was therefore uncalled for. SNP had

purchased the entire steel plant equipment from an

Italian supplier more than six years before the

transaction in question had taken place with the

appellant. Such documents must have accompanied the

equipments and materials made available to SNP by the

Italian supplier of SNP. It cannot be comprehended and

certainly it is not the case of the Revenue that the

technical documents were supplied or made available by

the Italian supplier to SNP either free of charge at the

instance of the appellant or cost thereof was incurred

wholly or partially by the appellant.

Clause (e) of sub-Rule (1) of Rule 9 is attracted

when the following conditions are satisfied :-

(i) There is a payment actually made or to be made as

a condition of sale of the imported goods by the buyer

to the seller or to a third party;

(ii) such payment, if made to a third party, has been

made or has to be made to satisfy an obligation of the

seller; and (iii) such payments are not included in the

price actually paid or payable.

It is nobody's case that the seller had an

obligation towards a third party which was required to

be satisfied by it and the buyer (i.e. the appellant)

had made any payment to the seller or to a third party

in order to satisfy such an obligation. The price paid

by the appellant for drawings and technical documents

forming subject matter of contract DM 301 can by no

stretch of imagination fall within the meaning of `an

obligation of the seller' to a third party. There was

also no payment made as a condition of sale of imported

goods as such. Rule 9(1)(e) also, therefore, has no

applicability.

So far as 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 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

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 third para of 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

be "charges for construction, erection, assembly etc."

of 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. 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 sentisized 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 is permissible under

the Rules if based on objective and quantifiable data

and no addition except as provided for by Rule 9 is

permissible.

The abovesaid reasons demolish the edifice on

which the order of the Tribunal is based. However,

still the only thing that remains to be considered is

whether there has been under valuation of blast furnace

equipment covered by the contract MD 302. It is a pure

and simple case of finding out `the price actually paid

or payable for the goods' - the phrase as occuring in

Rules 2(f), 4 and 9, so as to find out the transaction

value and levy duty thereon under Sections 12 and 14 of

the Customs Act. One of the allegations made in the

show cause notice given to the appellant was of the

blast furnace equipments(BFE) having been undervalued by

transferring a part of the value of the equipments to

the value of engineering documents and drawings. In

substance the show cause notice alleged the blast

furnace equipment having been under valued by

artificially excluding therefrom the value of technical

documents. According to the Revenue such documents are

even otherwise and in ordinary course supplied by the

seller to the buyer. Because of the absence of such

documents the goods sold being equipments would be of no

use at all but the appellant had so manipulated the

single transaction by bifurcating the single content

into two documents so as to under value the blast

furnace equipments by transferring a part of the value

of such equipments to the value of engineering documents

and drawings. The gist of the allegation is under

valuation of blast furnace equipment. Shri Kirit Raval,

the learned Additional Solicitor General has submitted

that from the stage of the show cause notice till before

the Tribunal the Revenue has kept its plea alive. Vide

para 7 of its order the Tribunal noted this plea of the

Revenue but did not go into it as the Tribunal

considered it not necessary in view of other findings

arrived at. The learned Additional Solicitor General

submitted that if this Court may not sustain the order

of the Tribunal then in all fairness the Revenue should

be allowed an opportunity of substantiating its plea of

under valuation followed by such other relief to which

it may be entitled in the event of its succeeding on its

plea. We find merit in this submission. In our opinion

on the order of the Tribunal being set aside the matter

needs to be sent back to the Tribunal for examining on

merits the abovesaid plea of the Revenue which was

refused to be gone into earlier on account of its having

been found to be unnecessary.

The appeal is allowed. The impugned order of the

Tribunal is set aside. The case is sent back to the

Tribunal to entertain and examine the plea of the

Revenue if the contract DM 302 is undervalued on the

basis of the material already available on record. The

Tribunal shall consistently with the observations made

and findings recorded in this judgment hear and dispose

of the appeal before it within a period of six months

from the date of communication of this order. The bank

guarantee furnished by the appellant shall be kept alive

and the amount deposited shall also continue to remain

in deposit till the date of decision by the Tribunal

whereafter the bank guarantee and the deposit shall be

dealt with consistently with the order of the Tribunal.

Though we have set aside the order of the Tribunal

and made a remand we would like to clarify a few points.

Apart from the appellant, two officers of the company

namely Dr.J.J. Irani and Shri S.L. Shrivastava and an

engineering consultant of the appellant, namely, M/s

M.M. Dastur & Co. were also proceeded against and

penalties were imposed on them. They were exonerated by

the Tribunal. The Revenue has not come up in appeal

against the order of the Tribunal exonerating the

abovesaid three. This order of remand would not reopen

the proceedings against those three. Similarly, the

Tribunal has held that the duty liability of the

appellant in spite of a finding of under valuation could

not be re-determined by pegging the value of the

equipment at an amount over and above 21.2747826086

million DM as this was the figure found by the

adjudicating officer and not challenged by the Revenue.

The amount of penalty levied on the appellant was

reduced by the Tribunal to Rs.4 crores which too has not

been challenged by the Revenue. On hearing the case

after remand if the plea of the Revenue may find favour

with the Tribunal, the dutiable value of the equipment

and materials shall not exceed 21.2747826086 million DM

and the amount of penalty shall not exceed Rs.4 crores.

Shri Ashok Desai, the learned senior counsel for the

appellant submitted that the Tribunal has also held,

vide para 9 of its order, that the liability of the

goods to confiscation did not arise and that part of the

order should also be held to have achieved a finality.

With this submission we do not agree. If the Tribunal

may find the equipments forming the subject matter of

contract DM 302 to be under valued the legal

consequences flowing from such finding may follow.

The appeal stands disposed of accordingly. No

order as to the costs.