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TMI Blog2005 (7) TMI 523X X X X Extracts X X X X X X X X Extracts X X X X ..... the time of blowing the oxygen. The checking of the above parameters and drawing of the sample is done by an equipment called 'Sublance' which is lowered for this purpose into the converter. The sublance is placed in its position as part of a system with a host of other electrical and mechanical equipments. (ii) The appellants placed an order on M/s. Kerala State Electronics Development Corporation Ltd. (hereinafter referred to as 'KELTRON') vide letter of intent dated 31-10-1989 for the design, manufacture and supply of electric controls instrumentation, automation and sublance system for the LD converter in the steel melting shop (known as SMS) for a total value of Rs. 1717.09 lakhs. A total amount of Rs. 1717.09 lakhs was made up of the following four components :- (a) Design and Engineering charges for goods covered under Groups I to IV. (b) Charges for the software package. (c) Charges for supply of other equipments (d) Training charges. The goods covered by the groups I to IV included various items meant for the entire sublance system including the cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the said Annexure that tests would be conducted at the workshop before the goods are placed on board the vessel at the port of shipment clearly indicated that it would apply only to the items manufactured at MDH. The appellants accepted the tender of KELTRON vide letter dated 28-12-91. The details of the tender are as follows :- Sl. No. Description Value (Rs.) 1. Design and Engineering charges for Group I to IV including design and engineering for computer hardware and systems software as well as documentation. 254.08 2. Extension/modification of software package. 39.10 3. Supply of equipment, commissioning spares, tools & tackles, test jigs, etc. 1422.47 4. Training 11.19 Total 1727.56 Due to financial constraints of KELTRON, the appellants opened a letter of credit dated 16-10-92 in favour of MDH. The appellants informed MDH vide letter dated 16-10-92 of the opening of the letter of credit and also confirmed the revised break up of prices after the increase of 2.5% on the contract value of KELTRON as under :- Sl. No. Description Value (in DM) 1. Design, Engineering including documentation, project handling, workshop t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red not only the goods supplied by the MDH but other items to be provided by KELTRON also. In the meanwhile, the KELTRON in turn placed a purchase order dated 6-4-1994 on M/s. Raja Corporation for supply of structural items for the sublance system. While doing so, they provided drawings from MDH. KELTRON also informed MDH vide letter dated 30-6-94 of the fact of placing order for supply of structural items and requested MDH to approve the drawing provided by them to M/s. Raja Corporation. MDH also issued a certificate dated 10-2-95 clearly stating that the amount of DM 1269514 related to the design and engineering covering the layout, installation arrangements of sublance, etc. required for the installation and commissioning of sublance and that the drawings did not pertain to the equipment supplied by them. The appellants imported the goods in March 1995. They filed Bill of Entry and in the Bill of Entry indicated the EPCG licence No. and the CIF value indicated therein. They also enclosed the above certificate dated 10-2-95 from MDH. There was some delay in commissioning and installation of sublance system. DGFT granted time upto 5-5-2000 to fulfill the export obligation but the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Smt. Shobha L. Chary, learned JCDR appeared for the Revenue. 4. The learned Advocate for the appellants urged the following points:- (i) The Commissioner has held that since one consignment was exported on 29-5-2000, which is after 5-5-2000, the same is not to be taken into consideration for the fulfillment of export obligation and has demanded payment of duty of Rs. 27,07,294/-. Due to some unavoidable circumstances, the appellants were unable to fulfill a small portion of the export obligation amounting to US $ 409445.88 which was made on 29-5-2000. The appellants requested the DGFT to extend the period upto 31-5-2000, i.e. by 25 days. On submissions of the details of exports made by the appellants, the DGFT had issued a release letter dated 19-2-2001 to the appellants informing them that since the export obligation against the EPCG licence dated 6-5-94 has been fulfilled, the letter of undertaking dated 22-7-94 executed by the appellants has been discharged. Since the DGFT is final authority as far as monitoring of fulfillment of export obligation is concerned, the Commissioner should have accepted the release letter issued by the DGFT to the fact that export obligat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d various letters exchanged between the parties particularly the letter given by the supplier himself. A correct reading of the entire contract would clearly prove that the design and engineering does not relate to the imported goods, etc. (v) Even if it is assumed that the entire amount is attributable to the imported capital goods, the Revenue should be in a position to prove that the appellants had made other payment to MDH who had provided/approved all these drawings free of cost. If the Revenue is not in position to do so, then the evidences given by the appellants and the certificate given by the supplier are to be accepted, especially when the item imported is a standard off the shelf product which price would take into account the amount attributable to its designing and drawing. (vi) Rule 9(1)(b)(iv) of the Customs Valuation Rules cannot be invoked to add the basic engineering fees to the value of the capital goods imported. The above rule will come into play only in a situation where any engineering development or art work, etc. has been supplied by the buyer free of charge or at reduced cost. Further requirement of this rule is that such engineering, developm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision of the export obligation which can be done only by the DGFT and not by the Customs authorities. (xii) In the instant case, the appellants applied for EPCG licence vide letter dated 28-12-93 wherein they had mentioned the CIF value of the goods to be imported in item 20 of the application as DM 3845000 i.e. inclusive of design and engineering charges. Further Annexure-5 gave a detailed break up of the above said value. The EPCG Committee of the DGFT, which includes a representative from the Customs was of the view that the value of design, engineering and related services is to be deducted from the CIF value and consciously excluded the value of design and engineering charges while granting the licence. This was done apparently because the design and drawing charges are not relatable to the capital goods to be imported by the appellants. Even if the Customs representative in the EPCG Committee was of the view that designing and drawing did not relate to the capital goods being imported, a different view cannot be taken now especially after the export obligation has been fulfilled. (xiii) The Customs authorities could have raised the objections regarding the valuati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en fulfilled. This is precisely a reason while fixing CIF value of the capital goods, the CBEC representative as part of the EPCG Committee has a vital role to play and once such a value is fixed and the resultant export obligation is fulfilled, any revision in the value cannot result in demand of duty. (xvi) The Commissioner has not invoked any provision of law in raising the demand of duty of Rs. 2,72,91,510/- towards the value of design and engineering charges and Rs. 27,07,294/- towards non-fulfillment of export obligation. (xvii) In the present case, no demand can be made based on the provisions of Section 28 of the Customs Act, 1962 either within six months or five years from the relevant date. The longer period can invoked only when there is a suppression of material facts. All relevant information was furnished at the time of import and the authorities were very much aware of the EPCG licence and the break up in the invoice. In view of this position, there is no ground for invoking the longer period. The goods were imported in March 1995 and the show cause notice has been issued in December 1999. Since the longer period cannot be invoked, the demand is time barr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... very on board vessel at port of shipment and the remaining 10% on completion of delivery (page 18 of contract). The commercial invoice raised was for a single amount without any break up. In view of these factors, the entire payment represents the transaction value for payment of customs duty. (ii) With reference to the argument that the design and engineering charges were for manufacturing activity to be undertaken in India, this argument is not supported by the provisions of the contract. The contract does not make any distinction between design and engineering charges for manufacture abroad and manufacture in India. On the other hand, the contract makes it abundantly clear that there is considerable design and engineering work to be undertaken for the main equipment and this work was to be completed within three months of entering into the contract. After completion of engineering work, the buyer was to give his approval and then manufacture was to be undertaken, followed by tests and inspection. Refer Time Schedule in the contract page 102, Annexure V. In view of the above, it is clear that the charges where primarily for pre-importation activities. It is conceded that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o for project handling, documentation tests and inspections (Para 3.3 at page 7 and 4.1.1 at page 9). Definition of "Services" at Para 1.3 at page 5 of the contract indicates that the scope covers the division List as well as Annexure III and IV. Secondly, the contract between VSP and Keltron also does not support this contention. In the absence of any explanation for this deviation from the contract in the certificate, the department has relied on the contract in terms of which this amount of DM 1253100 related to various pre-importation activities connected with the imported goods. (vi) The show cause notice has cited Rule 9(1)(b)(iv) of the Customs Valuation Rules. No doubt the department's case here is not that there was free supply of any service by the buyer. But the buyer has entered into a comprehensive contract for supply of both goods as well as design and engineering services. Therefore the payments made are correctly to be included in the assessable value. Rule 9(1)(e) of the Customs Valuation Rules also includes all payments made as a condition of sale. It is a settled position that citing of inapplicable rules will not vitiate the proceedings if they are otherwi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aluation Rules 1988 in the facts and circumstances of the case? (ii) Whether the export obligation has been fulfilled by the appellants in terms of EPCG licence granted to them? (iii) Whether the impugned goods are liable for confiscation? (iv) Whether the appellants are liable to penalty under Section 112A of the Customs Act, 1962 :- The appellants wanted an Automatic Sublance System LD-3 to be installed in their steel melt shop (SMS-1) in the premises of Visakhapatnam Steel Project. In fact, they were interested to give the work to KELTRON. M/s. KELTRON in turn entered into an agreement with the MDH, Germany. This agreement covers design, engineering including documentation, supplies and related services. The agreement is a very comprehensive one. It is seen that the entire Automatic Sublance System has not been imported from the MDH. The imported capital goods are mentioned in Para 4.1.1, 4.1.2, 4.2, 4.3, 4.4. For installing the Automatic Sublance System from the imported capital goods, other goods manufactured and procured in India were also needed. The contention of the appellants is that the design and engineering charges represent the charges incurred in c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence. But EPCG Committee in its wisdom took a conscious decision to exclude these charges. This is clear from the following letter addressed by the DGFT to the appellants. The letter dated 11-11-2003 is reproduced below :- "GOVERNMENT OF INDIA MINISTRY OF COMMERCE AND INDUSTRIES (DIRECTORATE GENERAL OF FOREIGN TRADE) MAULANA AZAD ROAD, UDYOG BHAWAN, NEW DELHI -110011 F. No. 18/1404/AMS4/EPCG-II Dated 11-11-2003 To The Deputy Manager, Rashtriya Ispat Nigam Ltd., Visakhapatnam Steel Plant, 6th Floor, Prakashdeep Building, 7, Tolstoy Marg, New Delhi-110001. Gentlemen, With reference to your letter dated 3-11-2003 on the above mentioned subject, I am directed to inform you that your request has been examined by this office. On perusal of the file, it is observed that after Personnel hearing of your representative, Shri Sanjay Dargan, Manager (Exports) in EPCG Committee meeting held on 21-2-94 and on comments of technical authorities in subsequent EPCG Committee meeting held on 25-4-94, the Committee decided to exclude the items mentioned at Sl No. 1 & 5 of the break up list of the CGs provided by the Company i.e. Design Engineering including documentation project handlin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aneously by Customs and DGFT. There is already a Committee set up for this purpose in which CBEC is also represented. Role of representative of CBEC in the EPCG Committee should be clearly understood and effectively fulfilled. The aspect of classification and valuation (under the Customs Act and rules made there under) should be examined at the stage of issue of EPCG licence by the representative of the CBEC attending EPCG Committee meetings. Should there still be an incorrect CIF value on such a licence issued by the DGFT and this gets subsequently noticed at the time of Import/assessment, then this will be brought to the notice of the Member (Customs) & DGFT immediately for suitable rectification. This is also because DGFT will have to simultaneously increase the CIF value of the EPCG Licence and also the quantum of export obligation specified therein. Unilateral action by Customs in such cases may ultimately help the EPCG licence holder to escape the clutches of law because under EPCG Scheme both Customs and DGFT authorities have important roles to play. 4. It is therefore reiterated that in all cases pertaining to EPCG Scheme where Customs have doubts about valuation, quantum ..... X X X X Extracts X X X X X X X X Extracts X X X X
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