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CASE NO.:

Appeal (civil) 821 of 2000

Appeal (civil) 1021 of 2000

Appeal (civil) 1023 of 2000

Appeal (civil) 1027 of 2000

Appeal (civil) 1028 of 2000

Appeal (civil) 1029 of 2000

Appeal (civil) 1030 of 2000

Appeal (civil) 1031 of 2000

Appeal (civil) 1032 of 2000

Appeal (civil) 1033 of 2000

Appeal (civil) 1423 of 2000

Appeal (civil) 1493 of 2000

Appeal (civil) 1494 of 2000

Appeal (civil) 3250-3251 of 2000

Appeal (civil) 3632 of 2000

PETITIONER:

M/S ASSOCIATED CEMENT COMPANIES LTD.

Vs.

RESPONDENT:

COMMISSIONER OF CUSTOMS

DATE OF JUDGMENT: 25/01/2001

BENCH:

K.G.Balakrishna, Doraswami Raju

JUDGMENT:

1033, 1423, 1493, 1494, 3250-3251 and 3632 of 2000

J U D G M E N T

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

KIRPAL, J.

These appeals have been filed against the common order

dated 15th November, 1999 of the Customs, Excise and Gold

(Control) Appellate Tribunal which, while confirming the

order of the Commissioner of Customs held that drawings,

designs etc. relating to machinery or industrial technology

were goods which were leviable to duty of customs on their

transaction value at the time of their import. As principal

arguments on behalf of the appellants were addressed in the

case of M/s Hotel Leela Ventures Limited by Mr. Ashok H.

Desai, learned senior counsel, for the sake of convenience

we will refer to the relevant facts in that case in greater

detail.

Leela Ventures are engaged in the business of setting

up, operating and maintaining Hotels and Resorts. For

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designing the Hotels and Resorts, it engaged a foreign

company M/s Wimberly Allison Tong & Goo, USA (WAT for

short) for providing architectural services including design

development drawings. Leela Ventures had entered into four

agreements with the said foreign company in respect of four

different ventures in India. Apart from preparing the

designs and drawings the scope of work under the said

agreements included site visits and on site consultations

with architects.

Leela Ventures paid WAT under the said agreements for

the services rendered and the amount was remitted through

bank by following the procedure of remittance under Form A-2

prescribed by the Reserve Bank of India which form is meant

for foreign exchange remittances, other than for import of

foreign goods, pursuant to the permission given by the

Reserve Bank.

In terms of the said agreements entered into with WAT,

the appellants received drawings and diskettes through

couriers during the period 30th October, 1995 and 12th May,

1996. The drawings so received were part of technical

collaboration and/or technical know-how and were accompanied

by an airway bill and an invoice issued by the consignor.

The courier, in all the cases, declared the drawings with

various descriptions such as drawings, architectural

designs etc. The value of these drawings and designs was

declared at a nominal value of one dollar. According to

Leela Ventures one dollar was the correct value because

drawings by themselves have no value, since if the drawings

are lost they could be replaced and the loss would merely be

of the cost of paper. The value declared by the courier was

bonafide and was based on the invoice carried by it. As per

the appellants, the declaration by the courier was in

accordance with the accepted practice at that time. At the

time of the imports these designs and the diskettes were

cleared at the nominal value declared.

The other appellants in these appeals are also public

corporations engaged in the manufacture of excisable goods.

Like Leela Ventures the other appellants also entered into

technical collaboration with leading manufacturers in their

own fields abroad. The agreements provided for exchange of

technology in the form of supply of know-how, drawings and

designs on media training by personnel staff and similar

other activities. As a part of fulfillment of the

contracts, the contracting parties abroad, from time to

time, sent drawings, designs etc. In the case of M/s

Videocon these drawings etc. were imported by hand through

one Mr. Kato. In all other cases the drawings etc. were

imported through Professional Courier or by post parcels.

In each case only a nominal value was declared at the time

of its importation.

According to the respondents, intelligence gathered by

the Directorate of Revenue Intelligence and Special

Valuation Branch, Bombay revealed that the appellants had

imported drawings, designs and plans through couriers on

remitting the consideration for the same but these had been

cleared without proper declaration and without payment of

correct amount of duty. In view of the omission on the part

of the appellants to declare the correct transaction value,

show-cause notices under Section 28(1) read with Section 24

of the Customs Act, 1962 were issued asking the appellants

as to why (a) the sum remitted or declared during

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investigation as consideration for drawings, designs and

plans supplied by their collaborators should not be taken as

transaction value under Section 14 of the Customs Act read

with the Customs Valuation Rules, 1988 as the basis for

assessment of goods to customs duty; (b) Customs duty

should not be demanded under the provisions to Section 28

(1) of the Customs Act, 1962 and the amount deposited

towards customs duty should not be adjusted against the duty

demanded; (c) The goods, i.e., drawings, designs and plans

should not be held liable to confiscation under Section

111(m) of the Customs Act, 1962; and (d) Penalty should not

be imposed under Section 112 (a) and 114A of the Customs

Act, 1962.

In the case of Leela Ventures the show-cause notice

dated 21st January, 1998/18th February 1998 valued the

drawings and designs at Rs. 2,66,87,100/- being the

transaction value and on that value the amount demanded

under Section 28(1) of the said Act was Rs. 26,68,310/-.

In response to the show-cause notice, the appellants

sent their replies, inter-alia, submitting that what was

imported were not goods and there could be no excise duty on

services since the remittances were in Form A-2 and tax at

source under the Income-Tax Act was paid in respect of the

said contracts. It was also the case of the appellants that

the demand was barred by limitation since there was no

suppression or wilful mis- statement as the appellants

bonafide believed that no customs duty was payable in the

case of contracted services represented by drawings,

designs, etc. which were imported.

After giving an opportunity of representation being

filed and hearing the learned counsel the Commissioner

passed a consolidated order dated 26th March, 1999. The

Commissioner demanded duty and imposed penalty. The

appellants then filed appeal before the Tribunal but without

success. During the course of pendency of the appeal

barring three all other importers voluntarily deposited the

duty as per the classification then suggested.

In these appeals, the learned counsel for the

appellants urged four contentions which had been

unsuccessfully raised before the Tribunal. These

contentions were (i) Excise duty cannot be levied on the

value of ideas as they are not goods; (ii) Even if what was

imported were goods, the valuation of the same has to be

nominal; (iii) the show-cause notices which were issued

were barred by time inasmuch as the extended period of

limitation of five years would not be available on the facts

of the present case; (iv) the imports through the courier

could not be governed by heading No. 98.03 of the Customs

Tariff Act. The learned Additional Solicitor General, in

his able manner, supported the Tribunals decision. Whether

drawings, diskettes, manual etc. imported are goods on@@

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which excise duty could be levied.@@

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The learned counsel submitted that in all these cases

the transactions between the appellants and the foreign

collaborators were for transfer of technology. The

knowledge or know-how which is supplied, though valuable,

was intangible. The media is only the vehicle of

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transmission and is only incidental to the main transaction,

even if Government authorities regard this to be a contract

for services and not for sale of goods. In support of this,

reliance was placed on the fact that the Reserve Bank of

India had required application for remission of foreign

exchange on Form - A2 which is meant for foreign exchange

remittance otherwise than for import of goods. On the

remittances so made the appellants had deducted the

income-tax at source. It was contended that if it was a

case of sale of goods to the appellants then the question of

deducting any income tax and paying the same would not have

arisen and, on the contrary, the amount of excise duty which

would have been payable would have been less than the income

tax which was deducted.

In the alternative it was contended that even if the

transactions are composite the court has to determine

whether these relate to contract for service or goods. In

this connection, it was submitted that when price is paid

for photograph, the payment is not for paper which is

developed but is for the skill of the photographer and the

price of developing. Contract for architectural services

was stated to be like a contract by a solicitor to give a

legal opinion or for a doctor to give a medical diagnosis

since the essence of the contract is the experts skill.

The learned counsel contended that the transaction

between the appellants and their respective foreign

collaborators was one for transfer of technology. This

knowledge or know-how though valuable was intangible. The

technology when transmitted to India on some media does not

get converted from an intangible thing to tangible thing or

chattel. Media is only vehicle for transmission and is

wholly incidental to the main transaction. By way of

analogy it was submitted that legal opinions or judgments of

Courts when communicated on legal briefs or as certified

copies do not constitute transfer of goods by the counsel to

his clients or by a Court to a litigant. Reliance was

placed on the decision of U.S. 9th Circuit Court of Appeals

in Wilhelm Winter; Cynthia Zheng vs. G.P.Putnams Sons,

938 F.2nd 1033 (9th Cir. 1991). In that case, the

plaintiffs had bought an encyclopaedia on mushroom, a book

published by the defendants. On the basis of the

information contained therein the plaintiffs became severely

ill from cooking and eating mushrooms after relying on the

information obtained from the said encyclopaedia. The

plaintiffs sued the publishers and sought damages based on

products liability, breach of warranty etc. The trial Court

held that the information contained in a book is not a

product for the purposes of strict liability under products

liability law. Affirming the trial Court, the Circuit Court

of appeals came to the conclusion that the products

liability law reflects its focus on tangible items and does

not take into consideration the unique characteristics of

ideas and expressions. In other words, the quality of

information contained in a book would not be regarded as a

product for the purposes of product liability law. This

would not detract from the fact that the encyclopaedia of

mushroom would be regarded as goods containing information

supplied by the author and published by the defendants. As

we shall presently see this case can be of little assistance

for deciding the point in issue.

Before we deal with the aforesaid contentions raised

on behalf of the appellants, it is appropriate to first

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consider the relevant provisions applicable in the present

case. Section 2(22) of the Customs Act contains the

definition of the word goods which is as follows: (a)

vessels, aircrafts and vehicles; (b) stores; (c) baggage;

(d) currency and negotiable instruments; and (e) any other

kind of movable property;

Section 156 of the Customs Act gives the Central Govt.

power to make rules consistent with the Act and sub-section

2(a) thereof enables the framing of rules to provide for the

manner of determining the price of imported goods under

sub-section (1A) of Section 14. In exercise of the powers

conferred by the aforesaid Section 156 of the Customs Act,

the Central Govt. has framed Customs Valuation

(Determination of Price of Imported Goods) Rules, 1988. For

the purpose of this case, two Rules which are important are

Rules 3 and 4 which read as follows:

3. Determination of the method of valuation.- For

the purpose of these rules,-

(i) the value of imported goods shall be the

transaction value; (ii) if the value cannot be determined

under the provisions of clause (i) above, the value shall be

determined by proceeding sequentially through Rules 5 to 8

of these rules.

4. Transaction value.- (1) 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 of these rules.

(2) The transaction value of imported goods under

sub-rule (1) above shall be accepted:

Provided that-

(a) there are no restrictions as to the disposition or

use of the goods by the buyer other than restrictions which-

(i) are imposed or required by law or by the public

authorities in India; or (ii) limit the geographical area

in which the goods may be resold; or (iii) do not

substantially affect the value of the goods; (b) the sale

or price is not subject to same condition or consideration

for which a value cannot be determined in respect of the

goods being valued; (c) no part of the proceeds of any

subsequent resale, disposal or use of the goods by the buyer

will accrue directly or indirectly to the seller, unless an

appropriate adjustment can be made in accordance with the

provisions of Rule 9 of these rules; and (d) the buyer and

seller are not related, or where the buyer and seller are

related, that transaction value is acceptable for customs

purposes under the provisions of sub-rule (3) below.

(3) (a) Where the buyer and seller are related, the

transaction value shall be accepted provided that the

examination of the circumstances of the sale of the imported

goods indicate that the relationship did not influence the

price. (b) In a sale between related persons, the

transaction value shall be accepted, whenever the importer

demonstrates that the declared value of the goods being

valued, closely approximates to one of the following values

ascertained at or about the same time- (i) the transaction

value of identical goods, or of similar goods, in sales to

unrelated buyers in India; (ii) the deductive value for

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identical goods or similar goods; (iii) the computed value

for identical goods or similar goods. Provided that in

applying the values used for comparison, due account shall

be taken of demonstrated difference in commercial levels,

quantity levels, adjustments in accordance with the

provisions of Rule 9 of these rules and cost incurred by the

seller in sales in which he and the buyer are not related;

(c) substitute values shall not be established under the

provisions of clause (b) of this sub-rule.

Rule 10 provides for declaration by the importer and

is as follows: 10. Declaration by the importer.- (1) The

importer or his agent shall furnish

(a) a declaration disclosing full and accurate details

relating to the value of imported goods; and (b) any other

statement, information or document including an invoice of

the manufacturer or producer of the imported goods where the

goods are imported from or through a person other than the

manufacturer or producer, as considered necessary by the

proper officer for determination of the value of imported

goods under these rules.

(2) Nothing contained in these rules shall be

construed as restricting or calling into question the right

of the proper officer of customs to satisfy himself as to

the truth or accuracy of any statement, information,

document or declaration presented for valuation purposes.

(3) The provisions of the Customs Act, 1962 (52 of

1962) relating to confiscation, penalty and prosecution

shall apply to cases where wrong declaration, information,

statement or documents are furnished under these rules.

Section 2 of the Customs Tariff Act provides for the

rates at which the customs duty is levied under the Customs

Act, 1962. As specified in First and the Second Schedule,

Chapter 98 inter alia applies to passengers baggage and

heading No. 98.03 states that on all dutiable articles,

imported by a passenger or a member of a crew in his

baggage, customs duty will be paid at the standard rate of

duty of 150%.

Reliance was placed by Mr. Desai on a number of

decisions of this Court, relating to levy of sales tax, in

support of his contention that in contract by supply of

services there is no sale of goods and, as such, no customs

duty could be imposed on the intellectual property which was

obtained. We will first refer to the decisions so cited.

This Court in The Assistant Sales Tax Officer and

Others vs. B.C. Kame, Proprietor Kame Photo Studio (1977)

1 SCC 634 was called upon to decide the question that when a

photographer undertakes a photograph and thereafter supplies

prints to his clients whether it could be said that he had

entered into a contract for sale of goods. The question

which this Court posed was whether the contract is a

contract of work and labour or a contract for sale. It held

that a contract for sale is one whose main object is the

transfer of property in, and the delivery of the possession

of, a chattel as a chattel to the buyer where, however, the

principle object of work undertaken by the payee of the

price is not the transfer of a chattel qua chattel, the

contract is one of work and labour. After referring to the

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earlier decisions of this Court in the case of State of

Himachal Pradesh vs. Associated Hotels of India Ltd.

(1972) 29 STC 474 and the State of Madras vs. Gannon

Dunkerley & Co. (Madras) Ltd. (1958) 9 STC 353, in which

case the Constitution Bench had held that in a building

contract the property materials do not pass to the other

party as in a contract for sale of movable property, it was

concluded that when a photographer takes a photograph,

develops the negative or does some other photographic work

and thereafter supplies the prints to his clients then it

could not be said that he had entered into a contract for

sale of goods. The question of levy of sales-tax,

therefore, did not arise.

In Kames case (supra) reference was made to the

decision of Robinson vs. Graves (1935) KB 579 where it was

held that a contract by an artist to paint a portrait of a

lady was a contract for work and labour and not for the sale

of goods as the substance of the contract was that skill and

labour should be exercised upon the production of the

portrait and that it was only ancillary to the contract that

there would pass from the artist to his customer some

material. In Robinsons case an earlier decision of Lee vs.

Griffin (1861) 1 B & S 272 was attempted to be

distinguished. Lee vs. Griffin was a case where the

plaintiff had contracted to make a set of artificial denture

to fit them into his patients mouth. The patient died

after the denture was made without having accepted the

denture though he had an opportunity of doing so. The

plaintiff sued executor for the goods bargained and sold.

It was held in that case that wherever a contract is entered

into for the manufacture of chattel there the subject-matter

of the contract is a sale and delivery of the chattel.

Blackburn J, specifically observed as follows: If the

contract be such that, when carried out, it would result in

the sale of a chattel, the party cannot sue for work and

labour but, if the result of the contract is that they party

has done work and labour which ends in nothing that become

the subject of a sale, the party cannot sue for goods sold

and delivered. The case of an attorney employed to prepare

a deed is an illustration of this latter proposition, it

cannot be said that the paper and ink he uses in the

preparation of the deed are goods sold and delivered I do

not think that the test to apply these cases is whether the

value of the work exceeds that of the material used in its

execution for, if a sculptor were employed to execute a work

of art, greatly as his skill and labour, supposing it to be

of the highest description, might exceed the value of the

marble in which he worked, the contract would in my opinion

nevertheless be a contract for the sale of chattel.

Referring to the case of Robinson vs. Graves and Lee

vs. Griffin in Contract for Sale of Goods, Benjamins Third

Edition states at pages 39- 40 as follows: In Robinson v.

Graves however, the Court of Appeal reintroduced,

purportedly as a qualification to this rule, what is in

effect the criterion of relative importance as between work

and materials which had been rejected in Lee v. Griffin,

although the court professed to be considering what was the

substance of the contract rather than the more substantial

component in the product ultimately delivered. In Robinson

v. Graves, Greer L.J. said: If you find that the

substance of the contract was the production of something to

be sold... then that is a sale of goods. But if the

substance of the contract, on the other hand, is that skill

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and labour have to be exercised for the production of the

article and that it is only ancillary to that that there

will pass from the artist to his client or customer some

materials in addition to the skill involved in the

production of the portrait, that does not make any

difference to the result, because the substance of the

contract is the skill and experience of the artist in

producing the picture. This statement, with respect,

overlooks the fact that what passes to the client is not the

materials but the finished picture, of which both the work

and the materials are components. Lee v. Griffin and

Robinson vs. Graves cannot be reconciled: the reasoning in

each case could have been applied to the facts of the other.

It has yet to be appreciated that a decision of this problem

can be reached only by adopting one or the other of these

equally arbitrary rules. (Emphasis added) The test laid

down in Lee vs. Griffin had been preferred by the

Australian Courts. In Deta Nominees Pty. Ltd. vs.

Viscount Plastic Products Pty. Ltd. 1979 VR 167 the

Supreme Court of Victoria, Australia described Robinson vs.

Graves as a hard case and rejected its test as illogical

and unsatisfactory wrong in principle and too erratic

to be useful.

The principle enunciated in Kames case was followed

by this Court in State of Tamil Nadu vs. Anandam

Viswanathan (1989) 1 SCC 613. In this case, this Court held

that a contract for printing of question paper for

educational institutions constituted a works contract and,

therefore, exempted from tax. In Everest Copiers vs. State

of Tamil Nadu (1996) 5 SCC 390 in respect of the Assessment

Year 1978-79, this Court has held that making photostat

copies on paper with xerox machine and delivering the same

to the customer for payment was a contract for work or

service and not a contract of sale. The transfer of paper

was only incidental and hence such transaction was not

exigible to sales tax.

In Hindustan Shipyard Ltd. vs. State of A.P. (2000)

6 SCC 579, this Court was called upon to decide whether the

transaction of building of a ship after an order had been

placed amounted to sale as defined under the A.P. General

Sales Tax Act or was it a works contract. While coming to

the conclusion that the transaction in question had amounted

to a sale this Court observed that in order to decide

whether such a transaction is a contract of sale or contract

for works or service the same had to be culled out from the

term of the contract.

All the aforesaid decisions related to the period

prior to the Forty- sixth Amendment of the Constitution when

Article 366 (29A) was inserted. At that time in the case of

a works contract it was held that the same could not be

split and State Legislature had no legislative right to seek

to levy sales tax on a transaction which was not a sale

simpliciter of goods. Rainbow Colour Lab & Anr. Vs. State

of M.P. and Others (2000) 2 SCC 385 was, however, a case

relating to the definition of the word sale in the M.P.

General Sales Tax Act, 1958 after its amendment consequent

to the insertion of Article 366 (29A). The question there

was whether the job rendered by a photographer in taking

photographs, developing and printing films would amount to

works contract for the purpose of levy of sales tax. This

Court held that the work done by the photographer was only a

service contract and there was no element of sale involved.

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After referring to earlier decisions of this Court, it was

observed at page 391 as follows:

15. Thus, it is clear that unless there is sale and

purchase of goods, either in fact or deemed, and which sale

is primarily intended and not incidental to the contract,

the State cannot impose sales tax on a works contract

simpliciter in the guise of the expanded definition found in

Article 366(29-A)(b) read with Section 2(n) of the State

Act. On facts as we have noticed that the work done by the

photographer which as held by this Court in Kame case is

only in the nature of a service contract not involving any

sale of goods, we are of the opinion that the stand taken by

the respondent State cannot be sustained.

Even though in our opinion the decisions relating to

levy of sales tax would have, for reasons to which we shall

presently mention, no application to the case of levy of

customs duty, the decision in Rainbow Colour Lab case

(supra) requires consideration. As a result of the Forty-

sixth Amendment, sub-article 29A of Article 366 was inserted

as a result whereof tax on the sale or purchase of goods was

to include a tax on the transfer of property in goods

(whether as goods or in some other form) involved in the

execution of a works contract. Taking note of this

amendment this Court in Rainbow Colour Lab at page 388-389

observed as follows:

11. Prior to the amendment of Article 366, in view

of the judgment of this Court in State of Madras v. Gannon

Dunkerley & Co. (Madras) Ltd. the States could not levy

sales tax on sale of goods involved in a works contract

because the contract was indivisible. All that has happened

in law after the 46th Amendment and the judgment of this

Court in Builders case is that it is now open to the States

to divide the works contract into two separate contracts by

a legal fiction: (i) contract for sale of goods involved in

the said works contract, and (ii) for supply of labour and

service. This division of contract under the amended law

can be made only if the works contract involved a dominant

intention to transfer the property in goods and not in

contracts where the transfer in property takes place as an

incident of contract of service. The amendment, referred to

above, has not empowered the State to indulge in a

microscopic division of contracts involving the value of

materials used incidentally in such contracts. What is

pertinent to ascertain in this connection is what was the

dominant intention of the contract. Every contract, be it a

service contract or otherwise, may involve the use of some

material or the other in execution of the said contract.

The State is not empowered by the amended law to impose

sales tax on such incidental materials used in such

contracts

In arriving at the aforesaid conclusion the Court

referred to the decision of this Court in Hindustan

Aeronautics Ltd. vs. State of Karnataka (1984) 1 SCC 706

and Everest Copier (supra). But both these cases related to

pre-Forty-sixth Amendment era where in a works contract the

State had no jurisdiction to bifurcate the contract and

impose sales tax on the transfer of property in goods

involved in the execution of a works contract. The

Forty-sixth Amendment was made precisely with a view to

empower the State to bifurcate the contract and to levy

sales tax on the value of the material involved in the

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execution of the works contract, notwithstanding that the

value may represent a small percentage of the amount paid

for the execution of the works contract. Even if the

dominant intention of the contract is the rendering of a

service, which will amount to a works contract, after the

Forty-sixth Amendment the State would now be empowered to

levy sales tax on the material used in such contract. The

conclusion arrived at in Rainbow Colour Lab case, in our

opinion, runs counter to the express provision contained in

Article 366 (29A) as also of the Constitution Bench decision

of this Court in Builders Association of India and Others

vs. Union of India and Others (1989) 2 SCC 645.

According to Section 12 of the Customs Act, duty is

payable on goods imported into India. The word goods has

been defined in Section 2(22) of the Customs Act and it

includes in sub-clause (c) baggage and sub-clause (e) any

other kind of movable property. It is clear from mere

reading of the said provision that any immovable article

brought into India by a passenger as part of his baggage can

make him liable to pay customs duty as per the Customs

Tariff Act. An item which does not fall within sub-clauses

(a), (b), (c) or (d) of Section 2(22) will be regarded as

coming under Section 2(22) (e). Even though the definition

of the goods purports to be an exclusive one, in effect it

is so worded that all tangible movable articles will be the

goods for the purposes of the Act by residuary clause 2(22)

(e). Whether movable article comes as a part of a baggage,

or is imported into the country by any other manner, for the

purpose of the Customs Act, the provision of Section 12

would be attracted. Any media whether in the form of books

or computer disks or cassettes which contain information

technology or ideas would necessarily be regarded as goods

under the aforesaid provisions of the Customs Act. These

items are moveable goods and would be covered by Section

2(22)(e) of the Customs Act.

The rate at which the customs duty is to be imposed

has to be such as may be specified in the Customs Tariff

Act. This is stipulated by Section 12 of the Customs Act.

Thus the two Acts have to be read in conjunction with each

other.

Section 2 of the Tariff Act states that the rate at

which duties of customs shall be levied under the Customs

Act are specified in the First and Second Schedule to the

said Act. Chapter 49 of the First Schedule relates to

printed books, newspapers, pictures and other products of

the printing industry; manuscripts, typescripts and plans.

Note 2 in Chapter 49 states that the term printed also

means reproduced by means of a duplicating machine, produced

under the control of a computer, embossed, photographed,

photocopied, thermocopied or typewritten. Heading 49.05

pertains to maps and hydrographic or similar charts of all

kinds, including atlases, wall maps, topographic plans and

globes. Heading No. 49.06 specifies plans and drawings

for architectural, engineering, industrial, commercial,

topographical or similar purposes, being originals drawn by

hand; handwritten texts; photographic reproductions on

sensitised paper and carbon copies of the foregoing. The

residuary heading No. 49.11 reads as follows:

Other printed matter, including printed pictures and

photographs

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Rate of duty Standard Preferential Areas 4911.10

Trade advertising 25% material, commercial catalogues and

the like

- Other:

4911.91 Pictures, designs 25% and photographs

4911.99 Other 25%

Drawings, plans, manuals etc. specified in Chapter 49

of the Tariff Act are thus statutorily regarded as goods

attracting a specified rate of customs duty on their import

into India. There is no challenge to any of the statutory

provisions and reading the two Acts together there can be no

manner of doubt that what has been imported into India by

the appellants, through the courier or otherwise, from their

technical collaborators were goods even though the tangible

articles so imported contained information or knowledge for

use by the appellants.

In view of the clear provisions of the Customs Act and

the Tariff Act, which have been referred to herein above,

whenever any goods or moveables or tangible articles are

imported into this country customs duty is payable. For the

purpose of attracting levy it would be immaterial as to what

are the types of goods imported or what is contained in them

or recorded thereon. The contents will be relevant for the

purpose of valuation. Therefore the decisions of this Court

relating to the levy of sales tax in cases of works

contracts will have no application here. In the sales tax

cases referred to hereinabove no doubt the question which

arose was whether, in a works contract, where there was a

supply of materials and services in a indivisible contract,

but there the question had arisen because the States power

prior to the Forty-sixth Amendment to the Constitution, were

not entitled to bifurcate or split up the contract for the

purpose of levying sales tax on the element of moveable

goods involved in the contract. Apart from the decision in

Rainbow Colour Labs case, which does not appear to be

correct, the other decisions cited related to

pre-Forty-sixth Amendment period. Furthermore the

provisions of the Customs Act and the Tariff Act are clear

and unambiguous. Any moveable articles, irrespective of

what they may be or may contain would be goods as defined in

Section 2(22) of the Customs Act. It is true that what the

appellants had wanted was technical advice or information

technology. Payment was to be made for this intangible

asset. But the moment the information or advice is put on a

media, whether paper or diskettes or any other thing, that

what is supplied becomes chattel. It is in respect of the

drawings, designs etc. which are received that payment is

made to the foreign collaborators. It is these papers or

diskettes etc. containing the technological advice, which

are paid for and used. The foreign collaborators part with

them in lieu of money. It is, therefore, sold by them as

chattel for use by the Indian importer. The drawings,

designs, manuals etc. so received are goods on which

customs duty could be levied. The decision of Winter vs.

Putnams case (supra) is also of no help to the appellants

as in that case, it was the quality of information regarding

mushrooms which was not regarded as a product event though

the encyclopaedia containing the information was regarded as

goods. Here we are not concerned with the quality of

information given to the appellants. The question is

whether the papers or diskettes etc. containing advice

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and/or information are goods for the purpose of Customs Act.

The answer, in our view, is in the affirmative. With regard

to the submission on behalf of the appellants that the

contracts in these cases were for services and it is on that

basis that permission from Reserve Bank of India was

obtained for release of foreign exchange. The submission of

Mr. Rohatgi, in reply, was that the Reserve Bank does not

adjudicate on the question whether the technical material

being imported are goods or not for the purpose of

imposition of customs duty. We agree with this submission.

The appellants had represented to the Reserve Bank that the

collaborators were rendering service and on this

representation remittances were allowed. The Reserve Bank

must have examined the applications from the point of view

of release of foreign exchange. It was not an adjudicating

authority under the Customs Act. Had there been any doubt

about the question whether what was imported were goods or

not then, perhaps, the grant of permission to remit money

for services rendered and payment of taxes in respect

thereof may have been relevant. But here, on the

examination of the law applicable to the levy of customs

duty the position is free from any ambiguity. As has

already been observed hereinabove the drawings, designs,

manuals etc. imported through couriers were goods on

which customs duty was payable. The action of the Reserve

Bank cannot result in negating the statutory provisions of

the Customs Act and the Tariff Act applicable in the instant

cases. The belief of the appellants that what was imported

were not goods, as the Reserve Bank had also regarded the

payment was being made for services and not goods, was

clearly erroneous and misplaced.

Re: Valuation

In support of the contention that even if what was

imported were goods on which customs duty was payable the

value thereof should be nominal, it was contended that the

levy could only be on the media on which transfer was made

and not on the whole of the intellectual content. While

referring to Builders Association of India case (supra) it

was submitted that there this Court had held that in the

case of works contract levy of sales tax was permitted only

on that component of the works contract which was relatable

to goods. Similarly, in the case of M/s Gannon Dunkerley

and Co. and Others vs. State of Rajasthan and Others

(1993) 1 SCC 364 it was held that tax on sale of goods in

works contract was based upon the value of goods as they

relate to the entire project and charges for planning,

designing and architect fee could be excluded. It was,

therefore, argued that in the present cases only the media

on which the know-how was transmitted could be subjected to

duty and its value was only nominal.

In the case of Hotel Leela Ventures the Commissioner

had taken the whole of the value of the contract for the

purpose of levy of duty while in the case of Sterlite

Industries, as also in some other cases, an adhoc percentage

of about one-third of the total contract value was taken as

the basis for levy of the tax. At the time of importation

the couriers had, however, given the value of dollar one in

respect of the media on which the information was stored.

Section 14 of the Customs Act deals with valuation of

goods for purposes of assessment. The said section is as

follows:

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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 the

seller and the buyer have no interest in the business of

each 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;

(1A) 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 (1A)], if the Central Government 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 Central Government, or (ii)

ascertained in such manner as the Central Government 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 the Foreign

Exchange Regulation Act, 1973 (46 of 1973)."

In exercise of this power under the Customs Act, the

Central Government promulgated Customs Valuation

(Determination of Price of Imported Goods) Rules, 1988.

Three Rules which are relevant are Rules 3,4 and 9. While

Rules 3 and 4 have been quoted hereinabove Rule 9 reads as

follows:

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;

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(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) 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;

(c) royalties and licence fees related to the imported

goods that the buyer is 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.

(2) For the purposes of sub-section (1) and

sub-section (1A) of Section 14 of the Customs Act, 1962 (52

of 1962) and these rules, the value of the imported goods

shall be the value of such goods, for delivery at the time

and place of importation and shall include- (a) the cost of

transport of the imported goods to the place of importation;

(b) loading, unloading and handling charges associated with

the delivery of the imported goods at the place of

importation; and (c) the cost of insurance: Provided that

(i) where the cost of transport referred to in clause (a)

is not ascertainable, such cost shall be twenty per cent of

the free on board value of the goods; (ii) the charges

referred to in clause (b) shall be one per cent of the free

on board value of the goods plus the cost of transport

referred to in clause (a) plus the cost of insurance

referred to in clause (c); (iii) where the cost referred to

in clause (c) is not ascertainable, such cost shall be

1.125% of free on board value of the goods;

Provided further that in the case of goods imported by

air, where the cost referred to in clause (a) is

ascertainable, such cost shall not exceed twenty per cent of

free on board value of the goods :

Provided also that where the free on board value of

the goods is not ascertainable, the costs referred to in

clause (a) shall be twenty per cent of the free on board

value of the goods plus cost of insurance for clause (i)

above and the cost referred to in clause (c) shall be 1.125%

of the free on board value of the goods plus cost of

transport for clause (iii) above.

(3) Additions to the price actually paid or payable

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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.

As is evident from the perusal of the aforesaid

provisions, namely, Sections 12 and 14 of the Customs Act

and Rules 3,4 and 9 the value of the goods which are

imported is deemed to be the price at which they are

ordinarily sold. Sub-section (1A) provides that the price

referred to in sub- section (1) of Section 14 shall be

determined in accordance with the rules made in this behalf.

As per Rules 3 and 4 the transaction value of the imported

goods, subject to adjustment under Rule 9, is to be the

price actually paid or payable for the goods when sold for

export to India. Rule 9 (1) (b) (iv) is important for that

shows that engineering, development, artwork, design work

and plans and sketches would form part of the price of goods

for the purpose of determining its value for levy of duty.

In this connection, it will be useful to refer to the

following passage from a decision of this Court in the case

of Collector of Customs (Prev.), Ahmedabad vs. Essar

Gujarat Ltd. 1996 (88) E.L.T. 609 (S.C.) at page 616 para

17:

The entire purpose of Section 14 is to find out the

value of the goods which are being imported. The EGL in

this case was purchasing a Midrex Reduction Plant in order

to produce sponge iron. In order to produce sponge iron, it

was essential to have technical know-how from Midrex. It

was also essential to have an operating licence from them.

Without these, the plant would be of no value. That is why

the pre-condition of a process licence of Midrex was placed

in the agreement with TIL. It will not be proper to view

that agreement with TIL in isolation in this case. The

plant would be of no value if it could not be made

functional. EGL wanted to buy the plant in working

condition. This could only be achieved by paying not only

the price of the plant, but also the fees for the licence

and the technical know-how for making the plant operational.

Therefore, the value of the plant will comprise of not only

the price paid for the plant but also the price payable for

the operation licence and the technical know-how. Rule 9

should be construed bearing this in mind. added) (Emphasis

Significantly Chapter 49 also includes items which

have substantial intellectual value as opposed to the value

of the paper on which it is put. Newspapers, periodicals,

journals, dictionaries etc. are to be found in Chapter 49

wherein maps, plans and other similar items are also

included, while Chapter 97 talks about original engravings.

It is clear that intellectual property when put on a media

would be regarded as an article on the total value of which

customs duty is payable.

To put it differently, the legislative intent can

easily be gathered by reference to the Customs Valuation

Rules and the specific entries in the Customs Tariff Act.

The value of an encyclopaedia or a dictionary or a magazine

is not only the value of the paper. The value of the paper

is in fact negligible as compared to the value or price of

an encyclopaedia. Therefore, the intellectual input in such

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items greatly enhance the value of the papers and ink in the

aforesaid examples. This means that the charge of a duty is

on the final product whether it be the encyclopaedia or the

engineering or architectural drawings or any manual.

Similar would be the position in the case of a

programme of any kind loaded on a disc or a floppy. For

example in the case of music the value of a popular music

cassette is several times more than the value of the blank

cassette. However, if a pre-recorded music cassette or a

popular film or a musical score is imported into India duty

will necessarily have to be charged on the value of the

final product. In this behalf we may note that in State

Bank of India vs. Collector of Customs, Bombay 2000 (1)

Scale 72, the Bank had, under an agreement with the foreign

company, imported a computer software and manuals, the total

value of which was US $ 4,084,475. The bank filed an

application for refund of customs duty on the ground that

the basic cost of software was US $ 401.047. While the rest

of the amount of US $ 3,683,428 was payable only as a

licence fee for its right to use the software for the bank

countrywide. The claim for the refund of the customs duty

paid on the aforesaid amount of US $ 3,683,428 was not

accepted by this Court as in its opinion, on a correct

interpretation of Section 14 read with the rules, duty was

payable on the transaction value determined therein and as

per Rule 9 in determining the transaction value there has to

be added to the price actually paid or payable for the

imported goods, royalties and the licence fee for which the

buyer is required to pay, directly or indirectly as a

condition of sale of goods to the extent that such royalties

and fees are not included in the price actually paid or

payable. This clearly goes to show that when technical

material is supplied whether in the form of drawings or

manuals the same are goods liable to customs duty on the

transaction value in respect thereof.

It is misconception to contend that what is being

taxed is intellectual input. What is being taxed under the

Customs Act read with Customs Tariff Act and the Customs

Valuation Rules is not the input alone but goods whose value

has been enhanced by the said inputs. The final product at

the time of import is either the magazine or the

encyclopaedia or the engineering drawings as the case may

be. There is no scope for splitting the engineering drawing

or the encyclopaedia into intellectual input on the one hand

and the paper on which it is scribed on the other. For

example, paintings are also to be taxed. Valuable paintings

are worth millions. A painting or a portrait may be

specially commissioned or an article may be tailor made.

This aspect is irrelevant since what is taxed is the final

product as defined and it will be an absurdity to contend

that the value for the purposes of duty ought to be the cost

of the canvas and the oil paint even though the composite

product, i.e., the painting is worth millions.

It will be appropriate to note that the Customs

Valuation Rules, 1988 are framed keeping in view the GATT

protocol and the WTO agreement. In fact our Rules appear to

be an exact copy of the GATT and WTO. For the purpose of

valuation under the 1988 Rules the concept of transaction

value which was introduced was based on the aforesaid GATT

protocol and WTO agreement. The shift from the concept of

price of goods, as was classically understood, is clearly

discernible in the new principles. Transaction value may be

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entirely different from the classic concept of price of

goods. Full meaning has to be given to the rules and the

transaction value may include many items which may not

classically have been understood to be part of the sale

price.

The concept that it is only chattel sold as chattel,

which can be regarded as goods has no role to play in the

present statutory scheme as we have already observed that

the words goods as defined under the Customs Act has an

inclusive definition taking within its ambit an immovable

property. The list of goods as prescribed by the law are

different items mentioned in various chapters under the

Customs Tariff Act, 1997 or 1999. Some of these items are

clearly items containing intellectual property like designs,

plans etc.

In the case of St Albans City and District Council vs.

International Computers Ltd. (1996) 4 All ER 481 Sir Iain

Glidewell in relation to whether computer programme on a

disc would be regarded as goods observed at page 493 as

follows:

Suppose I buy an instruction manual on the

maintenance and repair of a particular make of car. The

instructions are wrong in an important respect. Anybody who

follows them is likely to cause serious damage to the engine

of his car. In my view, the instructions are an integral

part of the manual. The manual including the instructions,

whether in a book or a video cassette, would in my opinion

be goods within the meaning of the 1979 Act, and the

defective instructions would result in a breach of the

implied terms in s 14.

If this is correct, I can see no logical reason why it

should not also be correct in relation to a computer disk

onto which a program designed and intended to instruct or

enable a computer to achieve particular functions has been

encoded. If the disk is sold or hired by the computer

manufacturer, but the program is defective, in my opinion

there would be prima facie be a breach of the terms as to

quality and fitness for purpose implied by the 1979 Act or

the 1982 Act.

The above view, in our view, appears to be logical and

also in consonance with the Customs Act. Similarly in

Advent Systems Limited vs. UNISYS Corporation 925 F 2d 670

(3d Cir 1991) it was contended before the Court in United

States that software referred to in the agreement between

the parties was a product and not a good but

intellectual property outside the ambit of Uniform

Commercial Code. In the said Code, goods were defined as

all things (including specially manufactured goods) which

are moveable at the time of the identification for sale.

Holding that computer software was a good the court held

as follows:

Computer programs are the product of an intellectual

process, but once implanted in a medium are widely

distributed to computer owners. An analogy can be drawn to

a compact disc recording of an orchestral rendition. The

music is produced by the artistry of musicians and in itself

is not a good, but when transferred to a laser-readable

disc becomes a readily merchantable commodity. Similarly,

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when a professor delivers a lecture, it is not a good, but,

when transcribed as a book, it becomes a good.

That a computer program may be copyrightable as

intellectual property does not alter the fact that once in

the form of a floppy disc or other medium, the program is

tangible, moveable and available in the marketplace. The

fact that some programs may be tailored for specific

purposes need not alter their status as goods because the

Code definition includes specially manufactured goods.

We are in agreement with the aforesaid observations

and hold that the value of the goods imported would depend

upon the quality of the same and would be represented by the

transaction value in respect of the goods imported.

It would not be correct, as was done in Leela Ventures

case, to take the entire contract value as being the value

of the imported goods. What is the transaction value in

respect thereof has to be ascertained. In most of the other

cases this has been done by adopting about one-third of the

contract value as being the transaction value of the

imported goods for the purpose of levy of customs duty.

In Leela Ventures case the Commissioner must

re-determine the transaction value of the drawings etc.

imported keeping in view the terms of the agreements and

then impose the levy.

Re: Limitation:

The next submission on behalf of the appellants was

that in the case of short levy or non-levy of duty the

normal period for issuing a notice seeking to realise the

difference in the duty levied and imposable is that of six

months. This period is extendable to five years only if the

proviso to Section 28 (1) can be validly invoked. It was

the case of the appellants that there was never an intention

on their part to evade duty. Agreements entered into with

foreign collaborators had been disclosed to the Government

of India who had approved the remittances as fees for

technical services rendered. Payments had been made as

directed by the Reserve Bank of India by resorting to Form

A-2 and deducting tax at source on the remittances so made.

Service tax which was payable was also deposited and this

clearly shows that the appellants bonafide believed that the

value of the drawings and other technical material imported

was only nominal.

While relying on various decisions of this Court, it

was submitted that the proviso to Section 28 (1) of the

Customs Act can only apply if there is a positive inaction

or deliberate attempt to mislead the revenue. On the facts

of the present case, it was submitted that none of the

ingredients of the proviso would enable the enlargement of

the limitation from six months to five years was present.

Our attention was drawn to the cases of Collector of Central

Excise, Hyderabad vs. M/s Chemphar Drugs and Liniments,

Hyderabad (1989) 2 SCC 127 , Cosmic Dye Chemical vs.

Collector of Central Excise, Bombay (1995) 6 SCC 117, M/s

Padmini Products vs. Collector of Central Excise, Bangalore

(1989) 4 SCC 275, Tamil Nadu Housing Board vs. Collector of

Central Excise, Madras and Another 1995 Supp (1) SCC 50 and

Collector of Central Excise vs. H.M.M. Limited 1995 (76)

ELT 497. In all these cases the Court was concerned with

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the applicability of the proviso to Section 11-A of the

Central Excise Act which, like in the case of Customs Act,

contemplated the increase in period of limitation for

issuing a show- cause notice in the case of non-levy or

short-levy to five years from a normal period of six months.

The said Section 11A along with the proviso reads as under:

Section 11A. Recovery of duties not levied or not

paid or short-levied or short-paid or erroneously refunded.-

(1) When any duty of excise has not been levied or paid or

has been short-levied or short-paid or erroneously refunded,

a Central Excise Officer may, within six months from the

relevant date, serve notice on the person chargeable with

the duty which has not been levied or paid or which has been

short-levied or short-paid or to whom the refund has

erroneously been made, requiring him to show cause why he

should not pay the amount specified in the notice:

Provided that where any duty of excise has not been

levied or paid or has been short-levied or short-paid or

erroneously refunded by reason of fraud, collusion or any

wilful mis-statement or suppression of facts, or

contravention of any of the provisions of this Act or of the

rules made thereunder with intent to evade payment of duty,

by such person or his agent, the provisions of this

sub-section shall have effect, as if, for the words six

months, the words five years were substituted.

Explanation.- Where the service of the notice is

stayed by an order of a court, the period of such stay shall

be excluded in computing the aforesaid period of six months

or five years, as the case may be.

(2) The Central Excise Officer shall, after

considering the representation, if any , made by the person

on whom notice is served under sub-section (1), determine

the amount of duty of excise due from such person (not being

in excess of the amount specified in the notice) and

thereupon such person shall pay the amount so determined.

(3) For the purposes of this section,-

(i) refund includes rebate of duty of excise on

excisable goods exported out of India or on excisable

materials used in the manufacture of goods which are

exported out of India;

(ii) relevant date means,-

(a) in the case of excisable goods on which duty of

excise has not been levied or paid or has been short-levied

or short-paid

(A) where under the rules made under this Act a

periodical return, showing particulars of the duty paid on

the excisable goods removed during the period to which the

said return relates, is to be filed by a manufacturer or a

producer or a licensee of a warehouse, as the case may be,

the date on which such return is so filed; (B) where no

periodical return as aforesaid is filed, the last date on

which such return is to be filed under the said rules; (C)

in any other case, the date on which the duty is to be paid

under this Act or the rules made thereunder;

(b) in a case where duty of excise is provisionally

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assessed under this Act or the rules made thereunder, the

date of adjustment of duty after the final assessment

thereof;

(c) in the case of excisable goods on which duty of

excise has been erroneously refunded, the date of such

refund.

While interpreting the said provision in each of the

aforesaid cases, it was observed by this Court that for

proviso to Section 11A can be invoked, the intention to

evade payment of duty must be shown. This has been clearly

brought out in Cosmic Dye Chemical case (supra) where the

Tribunal had held that so far as fraud, suppression or

mis-statement of facts was concerned the question of intent

was immaterial. While dis- agreeing with the aforesaid

interpretation this Court at page 119 observed as follows:

6. Now so far as fraud and collusion are concerned,

it is evident that the requisite intent, i.e., intent to

evade duty is built into these very words. So far as

misstatement or suppression of facts are concerned, they are

clearly qualified by the word wilful preceding the words

misstatement or suppression of facts which means with

intent to evade duty. The next set of words contravention

of any of the provisions of this Act or rules are again

qualified by the immediately following words with intent to

evade payment of duty. It is, therefore, not correct to

say that there can be a suppression or misstatement of fact,

which is not wilful and yet constitutes a permissible ground

for the purpose of the proviso to Section 11-A.

Misstatement or suppression of fact must be wilful.

The aforesaid observations show that the words with

intent to evade payment of duty were of utmost relevance

while construing the earlier expression regarding the

mis-statement or suppression of facts contained in the

proviso. Reading the proviso as a whole the Court held that

intent to evade duty was essentially before the proviso

could be invoked.

Though it was sought to be contended that Section 28

of the Customs Act is in pari materia with Section 11A of

the Excise Act, we find there is one material difference in

the language of the two provisions and that is the words

with intent to evade payment of duty occurring in proviso

to Section 11A of the Excise Act are missing in Section 28

(1) of the Customs Act and the proviso in particular. The

said sub-section 28(1) of the Customs Act reads as follows:-

28. Notice for payment of duties, interest etc.- (1)

When any duty has not been levied or has been short-levied

or erroneously refunded, or when any interest payable has

not been paid, part paid or erroneously refunded, the proper

officer may,-

(a) in the case of any import made by any individual

for his personal use or by Government or by any educational,

research or charitable institution or hospital, within one

year;

(b) in any other case, within six months,

from the relevant date, serve notice on the person

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chargeable with the duty or interest which has not been

levied or charged or which has been so short-levied or part

paid or to whom the refund has erroneously been made,

requiring him to show cause why he should not pay the amount

specified in the notice.

Provided that where any duty has not been levied or

has been short- levied or the interest has not been charged

or has been part paid or the duty or interest has been

erroneously refunded by reason of collusion or any wilful

mis-statement or suppression of facts by the importer or the

exporter or the agent or employee of the importer or

exporter, the provisions of this sub-section shall have

effect as if for the words one year and six months, the

words five years were substituted.

Explanation.- Where the service of the notice is

stayed by an order of a court, the period of such stay shall

be excluded in computing the aforesaid period of one year or

six months or five years, as the case may be.

The proviso to Section 28 can inter alia be invoked

when any duty has not been levied or has been short-levied

by reason of collusion or any wilful mis-statement or

suppression of facts by the importer or the exporter, his

agent or employee. Even if both the expressions mis-

statement and suppression of facts are to be qualified by

the word wilful, as was done in the Cosmic Dye Chemical

case while construing the proviso to Section 11A, the making

of such a wilful mis-statement or suppression of facts would

attract the provisions of Section 28 of the Customs Act. In

each of these appeals it will have to be seen as a fact

whether there has been a non-levy or short-levy and whether

that has been by reason of collusion or any wilful

mis-statement or suppression of facts by the importer or his

agent or employee.

In the present cases, the technical literature,

drawings, manuals etc. were imported through courier and in

one case through Mr. Kato. In each of these cases it is

only a nominal value which was disclosed at the time of

importation. All this technical literature, drawings etc.

were brought and cleared as personal baggage. In our

opinion, to examine whether the proviso to Section 28A (1)

was validly invoked it is necessary to see the provisions

relating to the clearance of the personal baggage.

Chapter XI contains special provisions regarding

baggage, goods imported or exported by post, and stores.

Section 77 of the Customs Act provides that the owner of any

baggage shall, for the purpose of clearing it, make a

declaration of its contents to the proper officer. Section

81 enables the Central Board of Excise and Customs to make

regulations in respect of baggage and the said Section 81

reads as follows:

Section 81. Regulations in respect of baggage.- The

Board may make regulations,

(a) providing for the manner of declaring the contents

of any baggage; (b) providing for the custody, examination,

assessment to duty and clearance of baggage; (c) providing

for the transit or transhipment of baggage from one customs

station to another or to a place outside India.

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Under Rule 10 of the Customs Valuation (Determination

of Price of Imported Goods) Rules 1988, the importers are

required to furnish, inter alia, a declaration disclosing

full and accurate details relating to the value of the

imported goods and any other statement, any information or

document etc. as considered necessary for determination of

the value of imported goods.

Under the said Section baggage declaration forms have

been prescribed which inter alia require the owner of the

baggage to disclose the description of the goods as well as

the value in respect thereof. It is as owner of the baggage

containing the drawings and other technical literature and

manual etc. that the couriers cleared the goods. They may

not be the owners of the drawings etc. but for the purpose

of clearance of the baggage, containing the said articles,

the courier was the owner of the baggage. The Tribunal has

held, and in our opinion correctly, that the sender as well

as the receiver were aware of the value of the goods. The

courier acted as the conduit or the agent and would only

have declared such value in respect of the goods imported as

must have been instructed by the sender and or receiver.

The declaration by the courier of the value of the drawings

in the Leela Ventures case and other technical material in

the case of other appellants must have been done by the

courier either at the behest of the sender or the receiver

or at his own behest. In either case the declaration of the

value of the drawings as being very nominal was clearly a

mis-statement or a mis-representation of facts. According

to the baggage declaration forms it is for the passenger to

give value of the goods being brought in by him. When the

value of the goods which were dutiable in the present cases

was shown as only nominal, while in actual fact the correct

value was much more, there was clearly an attempt on the

part of the passenger, namely, the courier, to have the

goods cleared through customs authorities by grossly

undervaluing the value thereof. The courier gave a specific

value of one dollar in respect of the drawings when both the

sender and the appellants knew fully well as to how

important and valuable these goods were. In the case of

Leela Ventures it was on the basis of the architectural

drawings that the renovation etc. was to take place whereas

the technical material made available to the other

appellants was necessary for their purpose. We have already

held that the value of the goods so imported was not merely

the cost of the price of the media but also the intellectual

input on the media as represented by architectural drawings

or users manuals etc. The value of architectural drawings

was not merely the cost of the paper and the ink but would

be much more. In some of the cases we were informed that

the appellants had themselves volunteered that about

one-third of the total amount payable to the collaborators

should be taken as a figure representing the transaction

value of the technical material so imported.

The Tribunal as well as the Commissioner were right in

coming to the conclusion that there was a wilful suppression

or mis-statement of the value of the goods imported and,

therefore, the respondents were entitled to invoke the

provisions of the proviso to Section 28 (1) of the Customs

Act and issue show-cause notice even if period of six months

importation had expired but before the expiry of five years

thereof in the case of all the appellants except in the

cases of M/s H&R Rolling Mill Engineers Pvt. Ltd. (C.A.

No.1493 of 2000) and M/s Videocon VCR Ltd. (C.A. No.3632

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of 2000).

Re: Whether heading No. 98.03 appliable

Prior to 26th January, 1995 goods which were imported

by the appellants through couriers were taxed under Chapter

98 of the Customs Tariff Act. Heading No. 98.03 provides

that all dutiable articles, imported by a passenger or a

member of a crew in his baggage was taxable at the standard

rate of 150 per cent. This rate of duty was, of course,

subject to such exemptions which were issued from time to

time.

With effect from 26th May, 1995, when the President

gave his assent to the Finance Bill, 1995, the Customs

Tariff Act stood amended as a result whereof goods imported

through courier services were exempted from the operation of

Chapter 98. A circular dated 30th May, 1995 issued by the

Ministry of Finance, Govt. Of India specifically provided

that henceforth imports by couriers shall not be classified

as baggage under heading No. 98.03. The practice of

charging a uniform duty at the rate of 80 per cent ad

valorem on articles imported through couriers in terms of

exemption notification dated 1st March, 1994 was to be

discontinued with immediate effect. Couriers Imports

(Clearance) Regulations, 1995 were framed and notified on

26th May, 1995 as a result of which the imports through

courier were to be classified as imports falling under the

respective customs tariffs and headings. One of the results

of the framing of the said Regulations was that the goods

imported by couriers were to be divided into three

categories which are (a) documents (b) samples and free

gifts and (c) dutiable goods.

In connection with the imports made, prior to the

promulgation of the Couriers Regulation, the learned

counsel submitted that the respondents had erred in assuming

that the disputed material had been brought into the country

as passenger baggage. It was contended that the appellants

had not specified the manner in which the material was to be

sent by the foreign collaborators. It was submitted that

Entry 98.03 was a special provision providing for special

procedure and an omnibus rate of duty applicable to all

goods imported by passengers or a crew member as their

baggage. This provision, it was contended, was wholly

inapplicable to corporate entities. The appellants were not

natural persons and they were quite incapable of being

treated as passengers. In any event, it was submitted,

after clearance of the disputed items there was no scope for

the respondents to initiate proceedings against the

appellants or in respect of the material alleged to have

been imported and the said proceedings, if any, could have

been initiated only against the passenger from whom less

duty than what was legitimate was recovered, namely, from

the courier.

We are unable to agree with the aforesaid contentions.

Heading of Chapter 98 clearly shows that the same is

applicable to passengers baggage. As a matter of fact, in

each of the present cases, the technical material which was

received was cleared as part of passenger baggage. Whether

the courier or the person bringing the technical material

was a person nominated by the collaborator or by the

appellants is of no consequence because the levy under

Section 12 of the Customs Act is on the goods imported into

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India. In other words, the subject matter of the tax is not

the person importing or exporting but the subject matter of

the tax is the goods imported. If such goods are imported

as a part of the baggage then by virtue of heading No.

98.03 rate of duty prescribed therein has to be paid. The

underlying principle prior to May, 1995 in relation to

taxing the passengers baggage was that the said baggage

which contained dutiable articles was not to be taxed

separately as articles but the baggage as a composite unit

was to be taxed in its entirety, after giving a credit for

the free allowance which was available to the passenger.

It cannot be denied that the imports were made by the

appellants. The courier or any other passenger may be the

mode or the manner of physical importation of the goods,

just as the said goods may have been imported by post.

Section 28 of the Customs Act, however, enables the

Government to issue notice to the persons importing the

articles into India. It is by reason of the collaborators

agreements that the drawings, manuals, technical material

etc. were sent by the foreign collaborators to the

appellants and it is the appellants who were the importers

who alone could be made liable in case of non-levy or

short-levy of customs duty. The word importer in Section

2 (26) of the Customs Act includes the owner and as the

appellants were the owners of the goods, certainly after

these were received by them, it is only from them that the

short-fall in duty levied could have been recovered. The

parties took a chance in importing the articles through the

courier. Initially they were successful in having the goods

cleared by declaring a nominal value in respect thereof.

They may not have been able to do this if the technical

material and goods had been imported, not as a part of

passengers baggage, but in the ordinary course of import

either through post or by filing bill of entry.

We, therefore, concur with the conclusion of the

Tribunal and the Commissioner that the provisions of Chapter

98 were rightly applied on the facts of these cases.

CIVIL APPEAL NO. 3632 OF 2000 [M/s. Videocon VCR

Ltd. vs. Commissioner of Customs]

The appellant had entered into a technical

collaboration agreement with M/s. Toshiba Corporation,

Japan on 13th October, 1989. The total contract value was

hundred million Japanese Yen as fees which was settled at

seventy million Japanese Yen. Apart from providing

technical information, M/s. Toshiba Corporation was also to

render consulting and training services and had permitted

made use of Toshiba patent.

With the approval of Reserve Bank of India, remittance

was made in Form A-2 and service tax paid.@@

JJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJ

On 29th June, 1992 Mr. Kato, presumably a

representative of M/s. Toshiba, brought with him to India

drawings and designs as part of his personal baggage. This

was cleared without payment of duty.

On 26th May 1997, a show cause notice was issued to

M/s. Videocon alleging that duty was payable under Chapter

98 heading No. 98.03 and the appellant was charged with

mis-declaration and suppression which entitled the

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invocation of extended period of limitation of five years.

Reply to show cause notice was filed in which it was,

inter alia, stated that there was no mis-declaration or

suppression and that the drawings and designs were

classifiable under heading No. 49.06 of Chapter 49 and in

1992-93 tariff, import of such drawings and designs was

free.

On 26th March, 1999, an order was passed against the

appellant classifying the drawings and designs under

sub-heading No. 4911.99 and diagrams and films under

sub-heading 3705.90. No reason was given as to why these

drawings and designs were not classifiable under heading No.

49.06. The entire contract value was taken as a valuation

of technical information received and duty and penalty was

imposed.

On appeal to the Tribunal, the appellant met with

partial success to the extent that the valuation was

determined at one-third of the contract value of hundred

million Yen, even though the settled value was seventy

million Yen. The case of the appellant that import in

1992-93 was free was not considered as the Tribunal

proceeded on the basis that all imports were during the

period 1993-96 when under Chapter 49, import was dutiable

but by notification the tariff rate was less or nil.

It was contended by Mr. Bulchandani on behalf of

appellant that at the time when the drawings were imported

into India, the import of the same was free and even if the

drawings were to be regarded as part of the baggage of Mr.

Kato, thereby applying the provisions of heading No. 98.03,

even then no duty could be imposed.

It was further contended that in any case the extended

period of limitation of five years could not be attracted in

the present case.

We find force in the contention of the appellant.

Heading No. 98.03 of Chapter 98 of the Schedule in the

Tariff Act imposes a prescribed duty of 150 per cent on

dutiable articles imported by a passenger or a member of a

crew in his baggage. What is, therefore, to be seen is

whether the drawings and designs were dutiable articles.

Heading No. 49.06 under Chapter 49 of the Customs Tariff

for the year 1992-93 provides as follows:

Plans and drawings for architectural, engineering,

industrial, commercial, topographical or similar purposes,

being originals drawn by hand; hand-written texts;

photographic reproductions on sensitised paper and carbon

copies of the foregoing

The rate of duty specified therein in Column (4) was

free. According to Section 78 of the Customs Act, the

rate of duty and tariff value applicable to baggage shall be

the rate and valuation in force on the date on which a

declaration is made for clearing the baggage. It was the

contention of the learned counsel for the appellant that as

articles in question would fall under heading No. 49.06

they were free of duty. Therefore, they could not be

regarded as dutiable articles and its value could not be

included in the baggage of the passenger for the purpose of

levy of customs duty.

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While dealing with the provisions of the Excise Act,

this Court in Collector of Central Excise, Hyderabad Vs.

Vazir Sultan Tobacco Co. Ltd. 1996(83) ELT 3 (SC)

referring to an earlier decision in the case of Wallace

Flour Mills Company Vs. Collector of Central Excise 1989

(44) ELT 598 had observed that if by virtue of an exemption

notification the rate of duty was reduced to nil, the goods

specified in the Tariff Act would still be regarded as

excisable goods on which nil rate of duty was payable.

It appears to us that the aforesaid decisions, which

were sought to be invoked by the respondent in an effort to

submit that the drawings and designs, which came as a part

of passenger baggage were dutiable goods, would not be

applicable. In Vazir Sultan and Wallace Flour Mills cases

(supra), this Court considered the definition of excisable

goods in Section 2(d) of the Central Excise Act, 1944 which

was as follows:

'Excisable goods' means goods specified in the [the

First Schedule and the Second Schedule] to the Central

Excise Tariff Act, 1985 (5 of 1986) as being subject to a

duty of excise and includes salt".

Under the Customs Act, there are two definitions which

are relevant. Section 2(22) defines goods as follows:@@

JJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJ

Goods includes- (a) vessels, aircrafts and vehicles;

(b) stores; (c) baggage; (d) currency and negotiable

instruments; and (e) any other kind of movable property.

In addition thereto, Section 2(14) defines dutiable

goods as follows:

dutiable goods means any goods which are chargeable

to duty and on which duty has not been paid.

Under the Central Excise Act, 1944 in definition of

words excisable goods under Section 2(d), the very

specification or inclusion of goods in the First and Second

Schedule of the Central Excise Tariff Act would make them

excisable goods subject to duty. Under the Customs Act, the

provisions seem to be somewhat different. While by virtue

of Section 2(22) all kinds of movable property would be

goods but it is only those goods which would be regarded

as dutiable goods under Section 2(14) which are chargeable

to duty and on which duty has not been paid. The expression

chargeable to duty on which duty has not been paid

indicates that goods on which duty has been paid or on which

no duty is leviable, and therefore no duty is payable, will

not be regarded as dutiable goods. It is only if payment

of duty is outstanding or leviable that goods will be

regarded as dutiable goods.

Section 12 of Customs Act provides that the duties of

customs shall be levied at such rates as may be specified

under the Customs Tariff Act. When the Customs Tariff Act

itself provides that the import of drawings and designs

under heading No. 49.06 is free, it must follow that

these drawings and designs, though goods, were not

chargeable to duty. In view of the difference in the

language of the Excise and Customs Acts, the decisions in

the cases of Vazir Sultan and Wallace Flour Mills (supra)

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may not be very apposite and if no customs duty is

chargeable either by reason of tariff not providing for it

or because of the exemption notification, those goods will

not be regarded as dutiable goods on which duty has not

been paid. It is sufficient in the present case to observe

that the drawings and designs which were imported by the

appellant were correctly classifiable under heading No.

49.06 and the tariff itself providing that the import of the

same is free, the said drawings and designs were not

dutiable articles and, therefore, no customs duty was

leviable thereon even as a part of the passenger baggage.

On this short ground alone the appeal of Videocon has to be

allowed.

C.A. No. 1493 of 2000 [M/s H & K Rolling Mill

Engineers Pvt. Ltd. Vs. The Commissioner of Customs]

The appellant is a joint venture company. Sixty per

cent of its shareholders are Indians while forty per cent of

the shares are held by H & K, Germany. The appellant

supplies technology to Bhilai Steel Plant and it is required

to pay to the German company licence fee of DM 2,40,000 and

engineering fee of DM 60,000.

The appellant prepared designs and drawings which were

sent to H & K, Germany for the limited purpose of getting it

checked and approved. It is stated that the appellant

received a fax message from the German company approving the

designs and drawings. Copy of the designs and drawings

which had been prepared and sent by the appellant came back

to India through courier containing the stamp and approval

of the German company. Like in the case of M/s Leela

Ventures income tax was deducted at source for the payments

made to the German company after permission of the Reserve

Bank of India had been obtained.

In the show cause notice which was issued it was

proposed to regard the drawings which had come through the

courier at DM 60,000 equivalent to Rs. 11,03,800/- as being

subject to levy of duty. In the show cause notice it was

stated that these technical drawings were supplied by the

German company and being goods imported through courier

services were classifiable under heading No. 98.03 and duty

and penalty was payable in respect thereof.

Unlike other cases, we find that these drawings in

respect of which customs duty had been levied were not

something which had originated from Germany. These drawings

were prepared by the Indian company of which the German

company was a shareholder. These drawings were no doubt

sent to Germany for approval but the agreement between the

parties does not show that the payment of DM 60,000 was

directly relatable or attributable to the approval and

despatch of the said drawings to India. Under the

agreements between the parties apart from the licence fee

payable by the Indian company, for the use of the name of

the German company and engineering fee, money was payable in

terms of the agreement. As we have already observed there

is nothing to show that this amount of DM 60,000 was

relatable only to the approval of the said designs and

drawings.

Be that as it may the value of these drawings which

belong to the Indian company were merely approved by the

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German company could only be nominal and under no

circumstances the said value could be regarded as DM 60,000.

The nominal value disclosed by the courier, on the facts and

circumstances of this case, could not, therefore, be said to

be incorrect. The order passed against the appellant

levying the customs duty and penalty is, therefore, to be

set aside. Ordered accordingly.

Conclusion:

As a result of the aforesaid discussion, Civil Appeal

No. 1493 of 2000 of M/s H & K Rolling Mill Engineers Pvt.

Ltd. and Civil Appeal No. 3632 of 2000 of M/s Videocon VCR

Ltd. are allowed and the orders of the Commissioner and

Customs, Excise & Gold (Control) Appellate Tribunal in their

cases are set aside. The other appeals are dismissed but in

the case of Leela Ventures, out of the total contract value,

the Commissioner will determine the transaction value of the

drawings, designs, etc. imported through the courier and

then impose the levy thereon. There will be no order as to

costs.

..J. [ B.N. Kirpal ]