TMI Blog2011 (12) TMI 109X X X X Extracts X X X X X X X X Extracts X X X X ..... and means or non document form including intangible forms like deploying personnel or overseeing construction of the factory or manufacturing, training to staff etc. It is clarified that bifurcation of value between drawing etc. and 'others', is another aspect and has to be specifically examined and considered and computed after detailing material/evidence. Further, lump sum fee paid is not restricted to technical know-how or information supplied or furnished till December, 1997 as there was a contractual requirement that the know-how or information shall be furnished for a period of 7 years or 10 years. The technical know-how is not restricted to setting of the plant, but also for manufacture of cars including designs, engine, transmission etc. With regard to expenses on personnel – Under TPA and Memorandum of Understanding separate payment was mandated when personnel were deputed or sent to Honda Japan on specific request. This aspect will be re-examined by the Settlement Commission and decide whether expenses paid to personnel are included in lump sum fees paid. It is also held that Rule 9(2)(e) applies when an addition is made to value of imported tangible goods in the form ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al tangible material i.e. cost of paper, printing, cost of video cassette or CD etc. without including the value of the technical information, which was embedded in the drawings etc. 6. The petitioner issued two show cause notices to the respondent No.1 that the imported drawings etc. were grossly undervalued and the lump sum fee of US$ 30.5 million (equivalent to about Rs. 120 crores @ Rs.40 per dollar) reflects their true value. Thus, the custom duty on the drawings etc. had been undervalued because of the false and wrong declarations at the time of import. The petitioner had conducted search in the premises of the respondent No.1 to collect and obtain important information. In the first show cause notice dated 17th November, 2000, the respondent no.1 was asked to show cause as under:- "(i) Transaction value should not be rejected and valuation should not be made in terms of Section 14(1) of the Custom Act 1962 read with Rule 8(1) of the Customs Valuation (Determination of Price of Imported Goods) Rules 1988. (ii) Commercial value in CIF of Rs.7,08,97,829/- and Rs.8,26,827/- (total Rs.15,35,85,656/-) should not be taken for the drawings covered by the Bills of Entry N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the contention of the respondent no. 1 and the assertion of the petitioner are discussed below. 9. While the show cause notices were pending consideration, the respondent No.1 approached the Settlement Commission by way of two applications dated 15th May, 2001 and 26th November, 2001. The petitioner is aggrieved by the two impugned orders dated 20th August, 2002 and 7th January, 2004, by which the Settlement Commission has disposed of these applications. 10. The operative portion and the directions given by the Settlement Commission vide order dated 20th August, 2002 read as under:- "21. In view of our findings, the case is ordered to be settled in following terms:- (i) The correct duty liability of the applicant in this case is Rs.32,63,032/- which has been paid by them by appropriating from the deposit of Rs.3 crores made during the investigations. Revenue shall consider the return of the balance amount of deposit in accordance with the Law. (ii) The applicant is granted immunity for offences under the Customs Act, 1962 read with the IPC in respect of the case covered under the application and the SCN in question. (iii) The applicant is granted immunity f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on to the officers of the Customs Department to pay penalty by way of interest to the tune of 15%. Respondent No. 1 was directed to furnish a bank guarantee for a sum of Rs.3 crores. Directions were also given to the High Court to dispose of the writ petitions expeditiously. Directions to recover Rs.65 lakhs from the officers was set aside. Similarly the directions to initiate disciplinary proceedings against the officers were directed to remain suspended. 14. Thereafter, on 6th November, 2007, the following order was passed:- "Mr. Parasaran, who is appearing for the Customs Department in this matter, states that the petitioners in this case do not have a strong case on the issue with regard to the jurisdiction of the Settlement Commission to entertain the settlement petition, but he would like to press the petition on the merits of the order passed by the Settlement Commission. However, we have to examine how far this Court can go into merits of the order passed by the Settlement Commission under the power of judicial review. Be that as it may, the petitioners shall file synopsis of arguments enclosing therewith copies of judgments which they wish to rely upon with advance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . These items are movable goods and would be covered by Section 2(22)(e) of the Customs Act. (SCC pp. 609-10, para 27) xxx xxx xxx 33. It is true that what the appellants had wanted was technical advice on 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 a 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. 34. The decision of Winter v. Putnam case 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 even though the encyclopaedia containing the information was regarded as goods. Here we are not concerned with the quality of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ainting, is worth millions." 18. The view expressed in the said case was followed and elucidated by the Supreme Court in Commissioner of Customs vs. Parasrampuria Synthetic Ltd., (2001) 9 SCC 74 (as clarified in Commissioner of Customs vs. Gujarat Perstorp Electronics Ltd., (2005) 7 SCC 118) and Tata Consultancy Services vs. State of Andhra Pradesh, (2005) 1 SCC 308. 19. We are satisfied that the Settlement Commission had jurisdiction and the condition of full and true disclosure of duty liability stipulated in Section 127B of the Act is not violated and infringed in the present case. Reasons are as under:- (i) The question of valuation was debatable issue at the time of imports in question and was subsequently settled by the decisions of the Supreme Court. (ii) Even after the aforesaid decisions, the value to be assigned to imported drawings etc. was matter of debate and required adjudication. Settlement in such cases is preferable and is certainly not a barred or prohibited. (iii) The Settlement Commission had passed orders dated 17th October 2001 and 27th March 2002 admitting applications after recording that the conditions stated in Section 127B were satisfi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rms are well understood and define the scope and confines of jurisdiction of a writ Court. The said terms/expression has been interpreted and elucidated by the Supreme Court to mean that the parameters for exercise of jurisdiction under Articles 226 or 227 of the Constitution cannot be tied down in a straitjacket formula or rigid rules. The High Court interferes with orders of subordinate courts and tribunals where (1) there is an error manifest and apparent on the face of the proceedings such as when it is based on clear misreading or utter disregard of the provisions of law, and (2) a grave injustice or gross failure of justice has occasioned thereby. In the exercise of the power of writ under Article 226 nor in supervisory jurisdiction under Article 227, the High Court will convert itself into a court of appeal and indulge in re-appreciation or evaluation of evidence. Exercise of writ jurisdiction is justified and required where important evidence has been overlooked and the legal provisions involved are misinterpreted or misapplied. In regard to a finding of fact recorded by a tribunal, a writ can be issued only if in recording such a finding, the tribunal has acted on evidence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts to the price actually paid or payable are required in cases where certain specific elements which form part of the value for customs purposes are incurred by the buyer but are not included in the price actually paid or payable for the imported goods. Rule 9 embodies the principle of attribution of certain costs to the price of the imported goods. Rule 9 also provides for inclusion of certain considerations which passes from the buyer to the supplier in the form of specified goods or services, other than in the form of money. Method 2 ' TV of Identical Goods (Rule 5) Rule 5 through rule 7A provides for four alternate methods of determining the customs value whenever such value cannot be decided under the provisions of rule 4. Under Rule 5, the value of imported goods shall be the transactional value of identical goods sold for export to India if the goods are: (i) the same in all respects (including physical characteristics, quality and reputation); (ii) produced in the same country as the goods being valued; and (iii) produced by the producer of the goods being valued. Method 3' TV of Similar Goods (Rule 6): Under this method, the value of import ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... general provisions of the CVR, 1988 and Section 14(1) of the 1962 Act and on the basis of data available in India. To the great extent possible, this method is based on previously determined values and methods with a reasonable degree of flexibility in their application." 23. On the question, which method should be adopted for valuation of the imported drawing etc., the Settlement Commission has observed and held as under:- "The question of valuation of the drawings, designs etc., is no longer res interga. In Associated Cement Companies Ltd. vs. Commissioner of Customs, 2001 (128) ELT 21 (SC), the Apex Court have heed that the value of drawings, designs etc. has to be on the basis of transaction value (i.e.) including the cost of intellectual component. Relying on the same judgment, the Advocate for the applicant has contended that the Apex Court have ruled in the said judgment that in the absence of any specific value for the designs, drawings, etc., 1/3 of the total contract value has to be adopted. The Ld. Advocate of the Revenue is correct in pointing out that the Apex Court has not ruled so. In para 57 of the said judgment, the Apex Court have observed that they were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -How, and (ii) any technical information, not included in the Know-How, such as service materials and Japanese Industrial Standard (JIS), whether in writing or not, which directly relates to the Products or the Licensed Parts or is necessary for the manufacture of the Products or the Licensed Parts and which LICENSOR owns at the time of execution of this Agreement or may own from time to time during the term of this Agreement or under which LICENSOR is entitled to grant a license to LICENSEE, and the Technical Information shall included the "Technical Materials" designated by LICENSOR as "Technical Materials". 27. Article 2 and Article 4 of the Agreement are also relevant and read as under:- "Article 2. GRANT OF LICENSE Subject to the terms and conditions herein contained, LICENSOR hereby grants to LICENSEE an indivisible, non-transferable and exclusive right and license to manufacture, use and sell the Products and the Licensed Parts within the Territory under the Intellectual Property Rights and by using the Know-How, and the Technical Information, provided that the LICENSEE may grant sub-licenses with a proper written consent of LICENSOR. Article 4. FURNISHING OF ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hundred thousand US dollars (US$6,100,000), beginning from the 3rd year after the commencement of Commercial Production. The lumpsum fees shall be payable by LICENSEE in currency of US dollars by bank transfer remittance to the bank account designated by LICENSOR, based on final government approval. 2. Royalty: The rate of royalty payable by the LICENSEE to the LICENSOR shall be Four (4) percent, both on internal sales and exports, subject to taxes. The royalty shall be calculated on the basis of ex-factory sale price of the product exclusive of excise duties, minus the cost of standard brought out components and the landed cost of imported components irrespective of the source of procurement, including ocean-freight, insurance, customs duties, and other similar charges. The royalty shall be payable for a period of seven (7) years from the date of commencement of Commercial Production. List of standard brought-out items is as per exhibit II. ............... 14.4 It is understood and confirmed that it should be separately agreed to by the parties hereto in the "Memorandum on Exchange of Technicians" referred to in Article 4 hereof that any and all fees, c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. OPERATION STANDARDS and SPECIFICATIONS AND CATALOGUES IN BOOK FORM 20,452,000 30,678,000 55,000,000 106,130,000 4. TRAINING MANUALS/HANDBOOKS, VIDEO CASETTES SUPPLEMENTING MANUALS FOR: SERVICE/PARTS/OTHERS 416,000 3,744,000 4,600,000 8,760,000 5. TESTING and HOMOLOGATION 136,431,000 150,000,000 286,431,000 6. OTHER INCIDENTAL COSTS - HONDA PERSONNEL INVOLVED IN TOA 710,109,000 728,291,000 * * 1,438,400,800 7. Total 1,051,326,900 1,190,073,100 869,600,000 3,111,000,000 NOTES: 1. EXCHANGE RATE AS ON NOV 95 - US$ 1 = 102 2. WITH RESPECT TO SERIAL NO. 6. "HONDA PERSONNEL INVOLVED IN TCA" - HONDA HAS SET UP A PROJECT TEAM OF ENGINEERS and OTHER SENIOR LEVEL PERSONNEL, TO WORK EXCLUSIVELY ON THE INDIA PROJECT; THIS WOULD NOT HAVE BEEN NECESSARY BUT FOR THE INDIA PROJECT, RESPONSIBILITY OF THE INDIA PROJECT TEAM, INTER ALIA INCLUDES PROJECT PLANNING, ASSISTING IN and MONITORING PROJECT IMPLEMENTATION, TRAINING and EFFECTIVE TRANSFER OF THE KNOW ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,229,892 Cost of balance 15324 drawings of CITY 2,560,800,000 x 15324/22824 x 10.5% = 180,528,300" 32. There is merit in contention of the petitioner that the aforesaid bifurcation is not stipulated in the TPA quoted above and is a unilateral act on the part of the respondent No. 1. We have quoted Articles 2, 4 and 14 of the TPA under which US$ 30.5 million was payable. The tribunal while accepting the bifurcation and including only three elements mentioned at serial Nos. 2, 3 and 4, has acted merely on ipsi dixit of the respondent No. 1. It has ignored the terms and conditions of Articles 2, 4 and 14 mentioned above. The consideration of US$ 30.5 million is consideration for know-how and technical information. This is obvious if the proposal submitted to the Government for FDI approval and the order/approval dated 13th November, 1995 passed by the FIPB are scanned and examined. The relevant paragraphs of the proposal read as under:- "4.2 Services to be Rendered By Honda Honda will provide the know-how including drawings, designs, production techniques and processes, material specifications/sources of supply, quality control symptoms and procedures etc. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y studies for India" and "testing and homologation" may have been incurred, but this by itself would not justify their exclusion. The TPA does not postulate re-imbursement of expenses incurred by Honda Japan in market research feasibility studies, testing and homologation. What is taxable is the import value of the drawings etc. The market research feasibility, studies, testing and homologation may have been carried out or incurred in India or even abroad, but if they were used, utilized and incorporated in drawings, etc. imported from Japan into India, then they have to be added or included in the import value on which the custom duty is payable. At the same time, if the market research, feasibility, studies and testing homologation activities have been undertaken in India and had not been used or incorporated in the drawings, etc. imported from Japan, but utilized in India itself by personnel/officers of Honda Japan, or by the respondent no.1, then these have to be excluded and cannot be added to the import value of drawings etc. for computing the customs duty. The value of the imported goods, i.e. the drawings etc., has to be determined at the time and place of importation. Cust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... awings etc., therefore pertaining to the manufacturing plant, had been imported before 1st March, 1997. Value assigned to the new car model in the FDI proposal was only US Dollars .5 Million. There is no dispute that certain amount of guess work and latitude has to be given to calculate the value but the Settlement Commission has to apply its mind to reach a particular figure and give reasons why a particular method/formula is acceptable. This is missing in the impugned orders and we find that out of the total value mentioned in the TCA of Rs. 120 crores, a small fraction has been assigned to the drawings, etc. imported before 1st March, 1997. These factors have not been given due credence and have not been examined/considered. The scrutiny and detailing, which was required, is missing. Secondly, as per the petitioner 6000 drawings etc. were found at the time of search. This figure has been reiterated in the writ petitions. 37. The TCA does not provide for reimbursement of expenditure incurred by Honda-Japan on market survey, to decide whether or not to enter Indian Market and to select an appropriate model. The Settlement Commission made an error in holding that TCA provides f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d knowhow in various forms but not limited and confined to drawings etc. The Settlement Commission after examining the provisions of TCA has held that knowhow and technical information can be provided in writing or in intangible form. The words used in TCA are "in writing or not". The findings of the Settlement Commission on "writing or not" in TCA cannot be faulted with. Technical information and knowhow need not be through the medium of plans, drawings, manuals etc. It can be by other modes and means or non document form including intangible forms like deploying personnel or overseeing construction of the factory or manufacturing, training to staff etc. It is clarified that bifurcation of value between drawing etc. and 'others', is another aspect and has to be specifically examined and considered and computed after detailing material/evidence. (ii) Whether lump sum fee is for technical knowhow and information supplied till December, 1997 and not afterwards? The Settlement Commission has agreed with the contention of the respondent No.1 that the lump sum fee on account of knowhow and technical information cannot be restricted to information/knowhow furnished till December, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n. In case respondent No.1 had separately paid for the personnel, then Settlement Commission can be faulted with but not otherwise. There is no material or evidence to show such payment. The petitioner cannot content that the respondent no.1 and Honda Japan could not have by mutual consent agreed that consideration envisaged and payable under the TCA was suffice. A written agreement for modification was stipulated and envisaged by the TCA, but not mandated by law. Review or modification in law is not prohibited. FIPB approval for payment of knowhow etc. includes deployment and training of personnel. This cannot be equated with reimbursement of expenses/costs etc. The two companies are closely related and there can be mutual understanding. This cannot be objected to. It was for the respondent No.1 and the Honda Japan to regulate their affairs and mutually decide payment of consideration. The fact that no separate consideration was paid and payment of consideration under TPA was adjusted towards personnel has been accepted by the Settlement Commission. The said finding cannot be challenged on the ground that it is faulty and is required to be set aside in exercise of writ jurisdictio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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