Page 1 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

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 2 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:

“1.1.6. “Plant” shall 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 1 “PLANT UNITS’ attached

hereto and made thereof;”

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

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 3 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 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.

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Page 4 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, 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

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 5 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, know-

how, 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 the “Technical Information” in the Agreement)

5

Page 6 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

use them.”

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 7 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 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 8 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 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

8

Page 9 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.”

5.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

conclusion.

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 10 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,

Shri Bagaria, learned senior advocate appearing on behalf of

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

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 11 (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,

and the price is the sole consideration for the sale

or offer for sale:

Provided that such price shall be calculated with

reference to the rate of exchange as in force on the

date on which a bill of entry is presented under

Section 46, or a shipping bill or bill of export, as the

case may be, is presented under Section 50.

(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.

(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 12 clause (m) and clause (q) of Section 2 of the

Foreign Exchange Management Act, 1999 (42 of

1999).”

A cursory reading of the Section makes it clear that

customs duty is chargeable on goods by reference to their

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

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

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Page 13 with the provisions of Rule 9 of these Rules. Rule 9 of the Rules

is set out hereinbelow:-

“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, -

(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:-

(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

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Page 14 elsewhere than in India and necessary for the

production of the imported goods;

(c)Royalties and licence fees related to the

imported goods that the buyer s required to pay,

directly or indirectly, as a condition of the sale of the

goods being valued, to the extent that such royalties

and fees are not included in the price actually paid

or payable.

(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.”

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 15 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

agreement is to be added to the value of the plant that is

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

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

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Page 16 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.

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

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 17 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.

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

(Preventive) v. Essar Gujarat Ltd., (1997) 9 SCC 738, was

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

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:

“These facts go to show that it was essential for

EGL to have a licence from Midrex for working of

the plant. Mr. Salve has argued that it may have

17

Page 18 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)

10.1.1.1Process licence fee payable to

MIDREX Corporation for the

right to use the Midrex process

and patents

DM 20,00,000 lump sum

10.1.1.2Cost of technical services

provided under Article 3 in

connection with Midrex process

DM 1,01,00,000 lump sum

Technical Services

10.1.2.1Payment 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

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Page 19 Total DM 3,74,00,000 lump sum

The Court held that the amount of 20 Lakh Deutsche

Marks and 101 Lakh Deutsche Marks were both payable for the

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.

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

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Page 20 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

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.

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.

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Page 21

14.In Tata Iron & Steel Co. Ltd. v. Commissioner of

Central Excise & Customs, Bhubaneswar, Orissa, (2000) 3

SCC 472, a protocol had been signed between the seller and

the Indian purchaser which stated that the total price will be the

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.”

The relevant interpretative note which was relied upon is

important and reads as follows:

“Note to Rule 4

Price actually paid or payable

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Page 22 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 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 23 “15. 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.

16. 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 the subject-matter of

contract MD 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.

17. 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

23

Page 24 (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 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

24

Page 25 302) 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

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 26 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.”

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 27 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.”

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

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Page 28 the time of importation. If any amount is to be paid

after the importation of the goods is complete, inter

alia, by way of transfer of licence or technical know-

how for the purpose of setting up of a plant from the

machinery imported or running thereof, the same

would not be computed for the said purpose. Any

amount paid for post-importation service or activity,

would not, therefore, come within the purview of

determination of assessable value of the imported

goods so as to enable the authorities to levy

customs duty or otherwise. The Rules have been

framed for the purpose of carrying out the

provisions of the Act. The wordings of Sections 14

and 14(1-A) are clear and explicit. The Rules and

the Act, therefore, must be construed, having regard

to the basic principles of interpretation in mind.

11. What would, therefore, be excluded for

computing the assessable value for the purpose of

levy of customs duty, inter alia, has clearly been

stated therein, namely, any amount paid for post-

importation activities. The said provision, in

particular, also applies to any amount paid for post-

importation technical assistance. What is

necessary, therefore, is a separate identifiable

amount charged for the same. ”

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 29 made or to be made as a condition prerequisite to

the sale of the imported goods. It is important to

bear in mind that Rule 9 refers to cost and services.

Under Rule 9(1), the price for the imported goods

had to be enhanced/loaded by adding certain costs,

royalties and licence fees and values mentioned in

Rules 9(1)(a) to 9(1)(d). It refers to “all other

payments actually made or to be made as a

condition of sale of the imported goods”. In the

present case, the Department invoked Rule 9(1)(c)

on the ground that royalty was related to the

imported goods, having failed it cannot fall back

upon Rule 9(1)(e) because essentially we are

concerned with the addition of royalty, etc. to the

price of the imported goods. Further, in the present

case, the Department has accepted the transaction

value of the imported goods.

23. 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)] the buyer

had entered into a contract with TIL for purchase of

direct reduction iron plant (“the plant”). The entire

agreement was for import of the plant. The

agreement was subject to two conditions—(a)

approval of GOI and (b) obtaining transfer of licence

from M/s Midrex, USA. Without the licence from

Midrex, the imported plant was of no use to the

buyer. Therefore, it was essential to have the

licence from Midrex to operate the plant. Therefore,

it was held by this Court that procurement of licence

from Midrex was a precondition of sale which was

specifically recorded in the agreement itself. In view

of specific terms and conditions to that effect in the

agreement, this Court held that payments made to

Midrex by way of licence fees had to be added to

the price paid to TIL for purchase of the plant. There

29

Page 30 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.

37. The observations made by this Court in Essar

Gujarat Ltd. [(1997) 9 SCC 738] in para 18 must be

understood in the factual matrix involved therein.

The ratio of a decision, as is well known, must be

culled out from the facts involved in a given case. A

decision, as is well known, is an authority for what it

decides and not what can logically be deduced

30

Page 31 therefrom. Even in Essar Gujarat Ltd. [(1997) 9

SCC 738] a clear distinction has been made

between the charges required to be made for pre-

importation and post-importation. All charges levied

before the capital goods were imported were held to

be considered for the purpose of computation of

transaction value and not the post-importation one.

The said decision, therefore, in our opinion, is not

an authority for the proposition that irrespective of

nature of the contract, licence fee and charges paid

for technical know-how, although the same would

have nothing to do with the charges at the pre-

importation stage, would have to be taken into

consideration towards computation of transaction

value in terms of Rule 9(1)(c) of the Rules.

38. The transaction value must be relatable to

import of goods which a fortiori would mean that the

amounts must be payable as a condition of import.

A distinction, therefore, clearly exists between an

amount payable as a condition of import and an

amount payable in respect of the matters governing

the manufacturing activities, which may not have

anything to do with the import of the capital goods.

39. Article 4 provided for additional assistance in

respect of the matters specifically laid down therein.

Technical assistance fees have a direct nexus with

the post-import activities and not with importation of

goods.

40. It is also a matter of some significance that

technical assistance and know-how were required

to be given not as a condition precedent, but as and

when the respondent makes a request therefor and

not otherwise. Appendix C of the agreement relates

to manufacture of local parts which evidently has

nothing to do with the import of the capital goods.

Appendix D again is attributable to construction of

plant, production preparation, and pilot production

31

Page 32 and production model, wherewith the import of

capital goods did not have any nexus.”

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

that the facts of the present case do not attract Rule 9(1)(e).

We, therefore, dismiss the appeal of Revenue. There shall be

no order as to costs.

……………………J.

(A.K. Sikri)

……………………J.

(R.F. Nariman)

New Delhi;

April 13, 2015.

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