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2013 (9) TMI 504

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..... n fact not royalty/licence fee. License fees – Royalty – Held that:- Revenue could not bring out that the licence fee or the royalty payment or any portion - The department could not bring out that royalty paid by the applicant had any nexus with the goods imported under the equipments contract subsequently – There was no direct or indirect role in the procurement and supply of equipment by the appellant and price thereof - The department could not show that the contract for procurement of goods or the equipment agreement was in pursuant to such condition in the engineering and technological agreement - They could not show that it was a condition for sale of equipment to the assesse – Order set aside – Decided in favor of assessee. - C/128-129/2008 - A-854-855/KOL/2012 - Dated:- 3-12-2012 - Shri S.K. Gaule and Dr. D.M. Misra, JJ. Dr. Samir Chakraborty, Advocate, for the Appellant. Shri D.K. Acharya, Special Counsel (AR), for the Respondent. ORDER Heard both sides. 2.1 Appellant filed these appeals against Order-in-Appeal Nos. KOL/CUS/CKP/73 74/08 dated 29-2-2008 whereby ld. Commissioner (Appeals) has upheld the lower adjudicating authority s order. 2.2 .....

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..... DHDT Unit and M/s. Stone and Webster Engineering Corporation/Houston (SWEC) for FCC Unit. Regarding relationship, it was submitted that the appellant entered into agreements with process licensors. The process licensors provided the process design to the appellant. M/s. Samsung Engineering was the LSTK contractor and executed the job as per Engineering, Procurement and Construction (EPC) basis. The impugned orders duly mentioned all the salient features of the contracts e.g. detailed letter of acceptance, summary or break-up of lumpsum prices, agreement on Diesel Hydrotreater Unit, Engineering agreement, guarantee agreement, catalyst supply agreement and lumpsum payments under the technical collaboration. The lower adjudicating authority finalized the assessment by loading the assessable value. Aggrieved by this the appellant filed appeal before ld. Commissioner (Appeals). Ld. Commissioner (Appeals) upheld the findings of the lower adjudicating authority. Hence the appeal. 3.1.1 The contentions of ld. Advocate in relation to Appeal No. Cus. Ap. 128/08. 3.1.2 The contentions of ld. Advocate appearing for the appellant is that the undisputed facts regarding the issue relating t .....

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..... roposal and for procurement of the equipments from different vendors. 3.1.5 The contention of the appellant is that the value has been loaded as per Rule 9(1)(c) and Rule 9(1)(e) of the CVR 88. The contention is that neither Rule 9(1)(c) nor Rule 9(1)(e) can have any application whatsoever and the question of including any part of the technical know-how/royalty fees or PDBE fees under the Engineering Agreement with SWEC, USA in the cost of equipments imported under the Equipment Contract with Samsung under a separate subsequent agreement (the Equipment Contract) cannot and does not arise, contrary to the incorrect finding of the adjudicating authority, which have been wrongfully upheld by the Commissioner (Appeals). 3.1.6 The appellant referred to paras 15, 16, 18, 20 21 of Hon ble Supreme Court s decision in the case of Collector of Customs v. Ferodo India Pvt. Ltd. -2008 (224) E.L.T. 23 (S.C.). The contention is that in para 17 and 22 of the judgment of Supreme Court in the case of Collector of Customs v. Esser Gujarat Ltd. - 1996 (88) E.L.T. 609 (S.C.) has also considered its earlier decision in the case of Esser Gujarat Ltd. (supra). Appellant also placed reliance on par .....

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..... documents upon submission thereof by the appellant or its authorised contractor. SWEC had no direct or indirect role in the procurement and supply of equipments by the appellant and the price thereof. The appellant was free to choose the vendor or vendors from whom the equipments were to be purchased as per the specifications, data and the basic design provided by SWEC. There is no condition in the Agreement with SWEC that the equipment had to be procured from Samsung or that the Equipment Agreement was entered into pursuant to such condition in the Engineering/Technology Agreement. In fact SWEC had no participation in the matter of manufacture or purchase of the equipments imported under the Equipment Contract from Samsung by the appellant. The relevant records show even the detailed engineering and drawings relating to the said imported equipments had not been prepared or provided by SWEC and it was not required to do so under the agreement. Moreover, it is also an undisputed fact that the cost of design and drawing of the equipments had been included in the cost of equipments imported under the Equipment Contract. 3.1.10 It is submitted that the distinguishing factors as laid .....

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..... towards the value of the equipments (imported under a separate agreement from a separate party where neither of the two parties viz., SWEC and Samsung have any lis between them) is completely erroneous and contrary to the principles laid down by the Apex Court and hence untenable and unsustainable. 3.1.13 Besides the erroneous appreciation and/or interpretation of the relevant statutory provisions and application thereof of the undisputed facts on record of the instant case, the adjudication order is also based on certain incorrect factual premises, which has also vitiated the same. In para 31, page 15 of the said adjudication order it is contended that the technical know-how information to be provided under the Engineering/Technology. Agreement by SWEC was not limited to the process only but also to data and know-how or other such information on the design, maintenance, testing, unit operating performance, yields, operation or modification of the equipment used in the practice of the S W FCC Process as well as the equipment itself . From no clause of the said Agreement it would be seen that there is any such sub-clause as well as the equipment itself . This is an addition t .....

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..... ined in the adjudication order of the Assistant Commissioner in coming to the conclusion that a part of the Basic Engineering Package was related to equipments and therefore had to be added proportionately in the manner as laid down in the order towards value of equipments. None of the reasoning contained therein satisfy the requirement settled by the Apex Court for application of either Rule 9(1)(c) or Rule 9(1)(e) of the Valuation Rules and, consequently, adding any part of the basic engineering fees paid or payable to UOP, USA under the Engineering Contract to the value of the equipments imported under the Equipment Contract from Samsung, to determine their respective transaction values for the purpose of levy of Customs duty under the Act. In this respect to avoid prolixity and repetition the submissions made in Paragraphs 9.3 to 9.12 hereinabove are reiterated. 3.2.4 On a comparison of the two adjudication orders dated May 15, 2007 and the instant adjudication order dated May 30, 2007, insofar as the Discussion and Findings part thereof relating to the issue as to whether or not any part of the basic engineering fees supplied under the two Technology/Engineering Agreements .....

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..... unit at Barauni. The Process Design, includes, inter alia the detailed equipment - list, catalyst requirement, details of equipment process datasheets, a whole host of details. In exhibit A of Appendix A it is clearly mentioned that SWEC will furnish approved vendor list for all critical equipments. Exhibit B of appendix A gives the design basis of FCC unit at Barauni Refinery. Then there is the guarantee agreement whereby the licenser SWEC, in consideration of payments specified under License agreement and engg agreement gives certain guarantees with respect to performance of 1A the licensed FCC unit. It is interesting to observe that about one year before IOC s lumpsum turnkey contract with Samsung Korea, IOC entered into a triple agreement with SWEC of USA, which was approved by Secretariat for industrial Approval, Govt. of India. As rightly observed by the AC in para 31 of OIO, there is an inseparable link between technology and equipments. The procurement of equipments from the main suppliers of Korea or other vendors is conditional upon the licence-cum-technology agreement with SWEC of USA. The 1998 agreement of IOC with SWEC provided the design basis and specification .....

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..... ates that FCC unit PDBEP will conform to the basic design requirements set forth in Exhibit - B, where the design specifics of equipments like Reactor, Regenerator, Converter Catalyst storage and transfer systems, etc. are given. (b) Clause 2.1.5 specifies that SWEC will provide a standard supervisory operational manual for IOC s use and IOC or its Engineering Contractor will prepare the detailed operating manual for the licensed FCC unit. (3) As per the Guarantee Agreement, clause 2.1(a), the performance guarantee, provided in clause 3 shall be valid if the licensed FCC unit be designed and constructed in accordance with the FCC unit PDBEP. 4.1.3 Ld. Counsel also placed reliance on the following decisions :- (a) 2000 (120) E.L.T. 30 (S.C.) - Mukund Ltd. v. CC (Airport), Mumbai (b) 2005 (191) E.L.T. 1091 (Tri.-Chennai) - Continental Coffee v. CC (Chennai) (c) 2000 (120) E.L.T. 265 (Tribunal) - TDT Copper v. CC (New Delhi) (d) 1999 (112) E.L.T. 479 (T) 4.2.1 The contentions of ld. Counsel in relation to Appeal No. Cus.Ap.129/08. 4.2.2 The contentions of ld. Counsel appearing for the Department is that the Asst. Commissioner vide his OIO No. Kol/Cus/AC (SVB)/09/07 d .....

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..... project specification Book which gives applicable specifications for process equipment and materials for the unit, which include the necessary process information and selected mechanical information for the procurement and/or detailed design of equipments by others. Appellant s claim that equipments supplied incorporated the specifications etc. and hence the price was reflecting the technology agreement is faulty logic. The question is there were two approaches open to IOC : (1) The approach taken in this case and (2) IOC could have told Samsung to supply equipments according to VOP-1A technology; then Samsung would have approached VOP-IA for the technology; then Samsung would have been charged some fees and then the same had to be factored as cost by equipment supplier i.e. Samsung. 5.1 We have carefully considered the submissions made from both the sides and perused the records. We find that initially all the cases were forwarded to SVB were provisionally assessed with 1% security deposit which was subsequently adjusted in accordance with Rule 9 of Valuation Rules, 1988 which was upheld by the ld. Commissioner (Appeals). The ld. Commissioner (Appeals) has decided, the case, as .....

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..... e decision in the matter of Continental Coffee Ltd. is not appropriate in view of the Hon ble Tribunal s observation that though it was not expressly stipulated in the Agreement that sale of capital goods by BFP to CCL was subject to purchase by CCL from BFP of technical Know-how for erection and operation of instant coffee plant, such a condition was implicit in the Agreement. In view of the above, I do not find any reason to interfere with the orders of lower authority and upheld the same. The appeals are rejected. 5.2 From the above it is clear that ld. Commissioner (Appeals) has upheld the lower adjudicating authority s order in toto, without addressing the averments made by the appellant. The relevant portion of the lower adjudicating authority s order is reproduced hereunder :- (i)(a) A part of the Technical Know-how fee (license fee) and Process Design Basic Engineering fee and lump sum fees for detail design of Flue Gas Piping and Catalyst Piping associated with reactor/regenerator and office chamber paid to SWEC, USA are to be allocated towards the assessable value of equipments under Rule 9(1)(c) and/or Rule 9(1)(e) of the Customs Valuation Rules, 1988. (b) 10 .....

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..... s of US$ 6,09,000 is to be added towards value of equipments. (c) Since the ratio of imported and indigenous goods comes to almost 48:52 , 48% of US$ 60,900 (10% of the Basic Engineering, Design Drawing fees) i.e. US$ 29,232 is to be added towards the invoice value of equipments and machinery under Section 14(1) of the Act read with Rule 4 of the Valuation Rules adjusted in accordance with Rule 9(1)(c) and/or Rule 9(1)(e) of the Valuation Rules (para 35, page 29 of the Second Adjudication Order). (ii) Royalty or technical know-how fees (license fee) is not to be added to the Invoice value of the equipments under the Equipment Agreement to determine their transaction value under Rule 4 read with Rule 9 of the Valuation Rules (Para 31, Pages 25-26 and Para 36 page 29 of the Adjudication Order). 5.4 From the conjoint reading of the above orders it is clear that the department loaded the assessable value of equipment on account of technical know-how (licence fee) and design fee received from SWEC in the case covered under Appeal No. Cus.Ap. 128/08. The department loaded the assessable value of design fees in the case covered under Appeal No. Cus.Ap.129/08, however, did not loa .....

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..... rred from various methods to avoid profit-shift from one jurisdiction to another and it is here that principle of allocation of profits comes in (i.e. in the case of transfer pricing). 16. Under Rule 9(1)(c), the cost of technical know-how and payment of royalty is includible in the price of the imported goods if the said payment constitutes a condition pre-requisite for the supply of the imported goods by the foreign supplier. If such a condition exists then the payment made towards technical know-how and royalties has to be included in the price of the imported goods. On the other hand, if such payment has no nexus with the wording of the imported goods then such payment was not includible in the price of the imported goods. 18. Royalties and licence fees related to the imported goods is the cost which is incurred by the buyer in addition to the price which the buyer has to pay as consideration for the purchase of the imported goods. In other words, in addition to the price for the imported goods the buyer incurs costs on account of royalty and licence fee which the buyer pays to the foreign supplier for using information, patent, trade mark and know-how in the manufacture of .....

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..... o ascertain enhancement of royalty/licence fees by reducing the price of the imported items. In the circumstances, we find no infirmity in the impugned judgment of the Tribunal. In this case, the Department has gone by TAA alone. On reading TAA in entirety, we are of the view that there was no nexus between royalty/licence fees payable for the know-how and the goods imported for the manufacture of licensed products. The Department itself has invoked Rule 9(1)(c). 21. 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 made or to be made as a condition pre-requisite to the sale of the imported goods. It is important to bear in mind that Rule 9 refer 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 sub-rule 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, .....

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..... that although termed as royalty/licence fee, the payment was made or is to be made as a condition prerequisite for the sale of the imported goods and was in fact not royalty/licence fee. Further, once having failed to establish application of Rule 9(1)(c) and thus addition of royalty/licence fee on the price of the imported goods, the Department cannot fall upon Rule 9(1)(e). (3) Further the department could not bring out that royalty paid by the applicant has any nexus with the goods imported under the equipments contract subsequently from SECL. Similarly in the case of PDBE Package fees the SWEC was required to prepare the process design and basic engineering package and will set forth certain design, information adequate to enable to prepare the detailed design meaning thereby the SWEP is merely providing specification, data and review of respective documents upon submission thereof by the appellant or its authorized contract. SWEC had no direct or indirect role in the procurement and supply of equipment by the appellant and price thereof. The department could not show that the contract for procurement of goods from SECL or the equipment agreement was in pursuant to such condit .....

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