2025 (5) TMI 181 - SC - Customs

Valuation of imported goods - engineering and technical service charges paid to a local agent of a foreign supplier must be included in the assessable value of imported goods under the Customs Valuation (Determination of Price of Imported Goods) Rules 1988 or not - HELD THAT - In so far terms of payment is concerned 100 percent of FOB value had to be paid in U.S. Dollars. It was also mentioned therein that product support service would be rendered by M/s Voltas Limited on payment of engineering and technical service charges. After referring to instances of product support service it was stipulated that payment of engineering and service charges at the rate of 8 percent of the net FOB value would be made on pro-rata basis to M/s Voltas Limited in equivalent Indian currency at the exchange rate prevailing on the date of the bill of lading. Product support services included determination of actual requirement of spares to assist in speedy customs clearance including insurance survey prompt replacement in case of discrepancies in supplies etc. The foreign supply had made it clear that the appellant had to pay an additional 8 percent of the total FOB amount on a pro-rata basis against each shipment to M/s Voltas Limited in Indian currency. It was clarified that this payment was to be made to Voltas Limited and was not to be deducted from the FOB amount payable to the foreign supplier. Engineering and technical service charges paid to the local agent M/s Voltas Limited were 8 to 10 percent of the transactions of the appellant with the principal i.e. the foreign supplier. Such charges were paid as a recompense for the services rendered towards making the sale effective. Hence engineering and technical service charges were nothing but commission - Observing that the sale had become conditional in view of the conditions posed in quotation by the foreign supplier the consequential engineering and technical service charges were fully covered by Rule 9(1)(e) of the Customs Valuation Rules. Assistant Commissioner referred to the Note to Rule 4 of the Customs Valuation Rules and observed that engineering and technical service charges were not being paid for maintenance of any industrial plant machinery or equipment. It was nobody s case that these charges were being paid under a contract for maintenance erection commissioning of an industrial plant equipment or machinery. Looking into the nature of imports Commissioner (Appeals) held that services provided by the Indian agent was on behalf of the foreign seller and was directly related to the sale of imported goods. Provision for such service and payment of service charges constituted a condition of sale. In such circumstances the first appellate authority upholding the view taken by the Assistant Commissioner held that engineering and technical service charges were includible in the assessable value of the imported goods. What Section 14(1)(a) provides for is that for the purpose of the Customs Tariff Act 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 or place of importation or exportation as the case may be in the course of international trade where the seller or buyer had no interest in the business of each other or one had no interest in the business of the other. As per sub-section (1A) subject to the provisions of sub-section (1) the price referred to in that sub-section in respect of the imported goods shall be determined in accordance with the rules made in this behalf - In exercise of the powers conferred by Section 156 of the Customs Act read with Section 22 of the General Clauses Act 1897 the Customs Valuation Rules have been framed. Rule 4 deals with transaction value. The transaction value of the 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 the Customs Valuation Rules. In J.K. Corporation Limited 2007 (2) TMI 1 - SUPREME COURT this Court considered the question as to whether customs duty would be payable on the purchase price of the goods by adding the value of the license and technical knowhow to the value of the imported goods - Note to Rule 4 has been explained by this Court in J.K. Corporation Limited. This Court after adverting to the relevant portion of the Note to Rule 4 held that what would be excluded for computing the assessable value for the purpose of levy of customs duty is any amount paid for postimportation activities including any amount paid for postimportation technical assistance. From the above case it is found that the services rendered by the Indian agent were not post-importation activities. The services provided were directly relatable to the import of the goods by way of product support service which is covered by Sections 14(1) and 14(1A) of the Customs Act read with Rule 9(1)(e) of the Customs Valuation Rules. Conclusion - The view taken by the lower authorities that the engineering and technical service fees/agency commission/charges paid to the local agent of the foreign supplier are includible in the assessable value of the imported goods is correct and no interference is warranted. Appeal dismissed.

Summary

The core legal questions considered by the Court in this appeal under Section 130E of the Customs Act, 1962, concern the proper valuation of imported goods for customs duty purposes, specifically whether engineering and technical service charges paid to a local agent of a foreign supplier must be included in the assessable value of imported goods under the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988 ("Customs Valuation Rules"). The issues include:

1. Whether the engineering and technical service fees/charges paid to the local agent of the foreign supplier are includible in the assessable value of the imported goods under Rule 9(1)(a) and Rule 9(1)(e) of the Customs Valuation Rules read with Section 14(1)(a) of the Customs Act, 1962.

2. The nature and character of the payment made to the local agent: whether it constitutes a commission/agency fee forming part of the transaction value or a separate payment for post-importation services not includible in the assessable value.

3. The applicability and interpretation of the Note to Rule 4 of the Customs Valuation Rules, which excludes charges for maintenance or technical assistance undertaken after importation from the assessable value.

4. The relevance of the contractual terms between the foreign supplier, the local agent, and the importer, including whether the payment to the local agent was a condition of sale or a separate service contract.

Issue-wise Detailed Analysis

1. Inclusion of Engineering and Technical Service Charges in Assessable Value under Customs Valuation Rules

The legal framework involves Section 14 of the Customs Act, 1962, which provides that the value of imported goods for customs duty purposes shall be the price at which such goods are ordinarily sold for delivery at the time and place of importation, where the buyer and seller have no interest in each other's business, with the price determined in accordance with the Customs Valuation Rules. Rule 4 of the Customs Valuation Rules defines transaction value as the price actually paid or payable for the goods, adjusted as per Rule 9. Rule 9(1)(a) requires addition of commissions and brokerage (except buying commissions) to the transaction value if incurred by the buyer but not included in the price paid. Rule 9(1)(e) mandates inclusion of "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," if not already included in the price.

The Court noted that the Assistant Commissioner, Commissioner (Appeals), and CESTAT uniformly held that the engineering and technical service charges paid to the local agent, M/s Voltas Limited, were includible under Rule 9(1)(e) as a condition of sale. The foreign supplier's quotation and the purchase order explicitly stipulated payment of 8% of the FOB value to Voltas as engineering and technical service fees, payable in Indian rupees, over and above the FOB price payable to the foreign supplier. This payment was not deducted from the FOB amount but was an additional charge.

The Court emphasized that these payments were not for post-importation services but were integral to the sale transaction itself, forming a condition precedent to the sale and importation of the goods. The services rendered by Voltas Limited were on behalf of the foreign supplier and were related to ensuring the smooth procurement, customs clearance, and delivery of the imported spare parts.

The Court rejected the appellant's contention that these charges were for maintenance or technical assistance post-importation, which would be excluded under the Note to Rule 4. Instead, the services were pre-importation and directly linked to the sale process, thus falling within the ambit of Rule 9(1)(e).

2. Nature of Payment to Local Agent: Commission or Separate Service Fee

The appellant argued that the payment to Voltas Limited was for engineering and technical services rendered independently and had no nexus to the value of the imported goods. It contended that there was no contract between the appellant and Voltas Limited, and the payment was for services rendered post-importation, thus not includible in the assessable value.

The Court, however, analyzed the contractual documents and found that Voltas Limited was the local agent/distributor of the foreign supplier, and the payment was a condition of sale imposed by the foreign supplier. The appellant had no choice but to make the payment to Voltas Limited to procure the goods. The amount paid was linked to the transaction and was not contingent on any specific services rendered by Voltas Limited to the appellant. The Court observed that if there was no import, no payment would be due, indicating the payment's direct nexus to the imported goods.

Thus, the Court held that the payment was effectively a commission or agency fee forming part of the transaction value, not a separate service contract. It was a payment made by the buyer to satisfy an obligation of the seller, falling squarely within Rule 9(1)(e).

3. Interpretation of the Note to Rule 4 of Customs Valuation Rules

The appellant relied on the Note to Rule 4, which excludes charges for construction, erection, assembly, maintenance, or technical assistance undertaken after importation from the value of imported goods. The appellant contended that the engineering and technical service charges were for such excluded activities.

The Court referred to precedents where this Note was interpreted, notably in the J.K. Corporation Limited and Ferodo India (P) Ltd. cases. The Court reiterated that the Note excludes post-importation charges only and does not exclude payments made as a condition of sale or pre-importation services that facilitate the sale and import of goods. Since the services rendered by Voltas Limited were pre-importation and integral to the sale, the exclusion under the Note did not apply.

4. Contractual Terms and Nexus of Payment to Imported Goods

The Court carefully examined the purchase order and quotation documents. Clause 5 of the purchase order mandated payment of 100% FOB value to the foreign supplier by letter of credit and separately stipulated payment of engineering and technical service charges at 8% of FOB value to Voltas Limited. The foreign supplier's quotation made it clear that this payment was an additional charge, not deductible from FOB, and was payable in Indian rupees.

The Court found that the services described-such as product support visits, assistance in spare parts identification, customs clearance support, and coordination for insurance surveys-were aimed at ensuring the sale and delivery of the imported goods. These services were rendered on behalf of the foreign supplier by its local agent and formed a condition of sale.

Therefore, the Court concluded that the payment had a direct nexus to the imported goods' value and was properly includible in the assessable value under Rule 9(1)(e).

Treatment of Competing Arguments

The appellant's argument that the payment was for independent services and not part of the transaction value was rejected on the basis of documentary evidence and the legal framework. The Court found that the absence of a direct contract between the appellant and Voltas Limited did not negate the fact that the payment was a condition of sale imposed by the foreign supplier.

The respondent's argument that the payment was integral to the sale and thus includible in the transaction value was accepted, supported by the contractual terms and the Customs Valuation Rules.

Significant Holdings

The Court held:

"The payment made to M/s Voltas Limited was only in connection with the sale of goods because M/s Voltas Limited was an agent/distributor of the foreign supplier. The payment had a direct nexus to the value of the goods imported and was a condition of sale."

"The services rendered by the Indian agent were not post-importation activities but were directly relatable to the import of the goods by way of product support service which is covered by Sections 14(1) and 14(1A) of the Customs Act read with Rule 9(1)(e) of the Customs Valuation Rules."

"The Note to Rule 4 excludes charges for maintenance or technical assistance undertaken after importation, but does not exclude payments made as a condition of sale or pre-importation services integral to the sale."

"The value of imported goods shall include all payments made or to be made as a condition of sale, by the buyer to the seller or to a third party to satisfy an obligation of the seller, to the extent such payments are not included in the price actually paid or payable."

"The view taken by the lower authorities that the engineering and technical service fees/agency commission/charges paid to the local agent of the foreign supplier are includible in the assessable value of the imported goods is correct and no interference is warranted."

Accordingly, the appeal was dismissed.