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TMI Blog2020 (2) TMI 1134X X X X Extracts X X X X X X X X Extracts X X X X ..... of fertilizers. The Appellant claims that it imports and distributes in India urea that is imported on Government Account by the Department of Fertilizers through canalising agencies like the State Trading Corporation[STC] and Minerals and Metals Trading Corporation[MMTC]. 3. The scheme of import involves the Government of India estimating the requirement of urea to be imported every year. Urea being a canalised item, the import requirement is made known to the canalising agencies called State Trading Entities [STE]. The STEs place the order on exporters located outside India. The exporter issues the commercial invoice to STE, and the Bill of lading to the Ministry of Chemical and Fertilizer as a consignee. Thereafter, the Government of India transfers the goods to the Fertilizer Marketing Entity. To select this Entity, the Department of Fertilizer in the Government of India invites quotation from prequalified Fertilizer Marketing Entities for marketing of the imported urea in the country after receipt, bagging, handling and standardisation at Indian Ports. Based on the rates quoted by IFFCO, the Department of Fertilizer agreed to appoint IFFCO as the Fertilizer Marketing Entity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n production and distribution of fertilizers. During the investigation of the angle of supplier (OMIFCO) and buyer (IFFCO) as related persons in terms of Rule 2(2) of the Customs Valuation (Determination of Value of Imports Goods) Rules, 2007 for the import of urea from Customs House Pipavav, it has been revealed by the importer that their import is High Sea Sale. Further during the filling of their Bill of Entry No. 8800082 dated 04.04.2015, the importer paid duty on Misc. Charges. However, the importer has not been paying duty on 2% High Sale Commission and Misc Charges in their previous Bills of Entries filed at Customs House, Pipavav. An investigation has been initiated in the matter for non-payment of duty on 2% High Sale Commission and Misc Charges. -------- 7.3 As per the letter F.No. 8-2/2013-Ship-II dated 02.02.2015 of Assistant commissioner (S), Ministry of Chemicals & Fertilizers, Department of Fertilizers addressing to the Deputy Commissioner, Krishnapatnam Port, Andhra Pradesh clarifying that the STEs (State Trading Enterprises) are paid Rs. 17/- per MT as service charges on the urea imported by them. Based on this letter, the notice started paying duty on Rs. 17/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CO pays pool price as defined in the contract to Govt. of India. To clarify the examples he cited is if STE purchases urea at 300 USD per MT from exporter, Govt. of India pays to STE 300 USD per MT, and M/s. IFFCO pays pool issue price as define in the handling contract (gross) i.e. Rs. 5110/- (which is approximate 83 UDS) to govt. of India etc. The duty levied, collected on import of urea is the price at which the STE purchases from foreign seller, these duty calculation falls squarely within the ambit of Customs Act, 1962 read with CVR, 2007. It is evident that 2% High Sea Sale Commission should be included in the Assessable value for calculation of Customs Duty and on the amount at which the importer is paying duty. --------- 8. In the light of the facts discussed in the foregoing paras and material evidence available on records, it appears that the importer has mis-declared Misc. Charges & High Sea Sale in the declaration form filled by them as per provisions of Section 46 of the Customs Act, 1992 along with bill of entry; the said declaration form is in terms of provisions of Rule 10 of the Customs Valuation Rules, 1988. Further, the importer has suppressed the facts by no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m under Section 18(2) of the Customs Act, 1962/ the bond executed during the provisional assessment/ Section 28 of the Customs Act, 1962; (v) Interest should not be recovered from them on the said differential Customs duty, as at (iii) above, under Section 28AA of the Customs Act, 1962; (vi) Interest should not be recovered from them on the said differential Customs duty, as at (iv) above, under Section 18(3) of the Customs Act, 1962; (vii) Why the differential duty of Rs. 30,41,704/- and interest of Rs. 9,37,680/- paid by the notice in reference to Misc Charges for the said period should not be adjusted against the demand; (viii) Penalty should not be imposed on them under Section 112 (a) of the Customs Act, 1962; (ix) Penalty should not be imposed on them under Section 114A of the Customs Act, 1962." 7. The Appellant filed a detailed reply dated 2 March 2016 to the aforesaid show cause notice. It was pointed out that rule 10(1) (e) of the 2007 Valuation Rules would not be applicable since the Appellant was not paying any miscellaneous or service charge of Rs. 17/- per MT to the Government of India, as it was the Government of India which was paying this amount to the S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay 2015 passed by the Principal Commissioner that has been assailed in this appeal. 10. Shri Deepak Kumar, learned consultant appearing with Shri Atul S. Chabra, Taxation Head of the Appellant made the following submissions: i) The Principal Commissioner committed an error in including the miscellaneous charges of Rs. 17/- per MT paid by the Government of India to the STE in the assessable value on which the Appellant was required to pay duty. These charges are in the nature of agency charges which the canalising agency (STE) gets from the Government of India for the service of identifying and indenting the import of urea from foreign suppliers. The ultimate import of urea by STE takes place on behalf of the Government of India. These charges are not paid by the Appellant to the Government of India when it purchases the urea nor these charges are paid by the Appellant to a third party and therefore, cannot be included under rule 10(1) (e) of the 2007 Valuation Rules in the assessable value. The decision of the Supreme Court in Hyderabad Industries Ltd. vs Union of India [2000 (115) ELT 593 (S.C)] would not be applicable in the present case as the service charges were paid by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er to appreciate the contentions it would be appropriate to examine the salient features of the transaction that takes place and they are as follows: (i) Based on the future requirement of urea in the country and availability of domestic production, the Department of Fertilizers in the Government of India assesses the import requirements; (ii) Urea is a canalised item under the Foreign Trade Policy; (iii) The Department of Fertilizer intimates the import requirements periodically to the canalising agencies called the STEs; (iv) The STEs then call for a global tender and after identifying the foreign supplier, purchase the urea in bulk which is then sold to the Government of India for which the STEs charges, apart from the sale consideration paid by it to the foreign buyer, an additional sum of Rs. 17/- per MT; (v) Since the Department of Fertilizers is not in a position to distribute the imported urea in the country, it invites quotation from pre-qualified Fertilizer Marketing Entities for marketing imported urea in the country after receipt, handling, bagging and standardisation at Indian ports; (vi) Based on the rates quoted by IFFCO, the Department of Fertilize ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laneous charges and notional High Sea Sale Commission; (iv) Whether urea imported by the Appellant was liable for confiscation under section 111(m) of the Customs Act; (v) Whether penalty could have been imposed on the Appellant under section 112(a) of the Customs Act; and (vi) Whether penalty could have been imposed on the Appellant under section 114 of the Customs Act. 15. Each of the aforesaid issues shall be dealt with separately. MISCELLANEOUS CHARGES OF Rs. 17/- PMT 16. The findings of the Principal Commissioner on this issue are as follows; "13.1 The first issue to be examined is, as to whether the service charges of Rs. 17/- per MT paid by GOI to STE is to be included in the assessable value or not. The notice have argued that the same is in the nature of 'buying commission' and hence should be excluded in terms of rule 10 (1)(a)(i) of CVR, 2007 and interpretative note to rule 10. In support of their argument, they have stated that GOI, while paying these charges to STE is deducing 2% TDS, which in terms of Income Tax is required to be paid on payment of commission and not on sale consideration. -------- 13.3 As per SCN (para7.4), the STE imports urea i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... High Sea Sale basis and there is a further sale by the Government of India to IFFCO on High Sea Sale basis, the relationship between STE and Government of India cannot be treated as a relationship between a principal and agent and these are two independent High Sea Sales. To arrive at this conclusion, reliance was placed on a decision of the Supreme Court in Hyderabad Industries Ltd. The Principal Commissioner also observed that mere deduction of TDS by the Government of India would not mean that this amount has not to be added in the assessable value. The Principal Commissioner, therefore, concluded that service charges Rs. 17/- per MT paid by the Government to STE is required to be added in the assessable value in terms of rule 10(1) (e) of the 2007 Valuation Rules. 18. As noticed above, it is after assessing the import requirement, that the Department of Fertilizer intimates the said requirement periodically to the canalising agencies. This is for the reason that under the export and import policy, goods which are canalised, can be permitted to be imported by a canalising agency only. Urea is a canalised item under the Foreign Trade Policy and, therefore, import can be done onl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be payable by the Government of India to MMTC (which is also a STE apart from State Trading Corporation) as service charges for import of urea on behalf of the Government of India. The second letter dated 2 February 2015 also emphasises that urea is imported for direct agriculture use on Government account through STEs and that "these agencies" are paid Rs. 17/- per MT as service charges on the urea imported by them on Government Account. The "agencies" referred to are the STEs i.e. MMTC, State Trading Corporation Limited and Indian Potash Limited. 21. This apart, what needs to be noticed is that TDS has also been deducted by the Government of India while making payment of service charges to the STEs. Under the Income Tax Act, TDS is required to be deducted on payment of commission and not on sale consideration. Thus, the Government of India itself is treating this amount of Rs. 17/- per MT as commission paid to the STEs. 22. It also needs to be noted that the amount of Rs. 17/- per MT is paid by the Government of India to the STE and is not paid by the Appellant to the STE when it purchases the urea. It, therefore, clearly transpires that the canalising agencies import urea on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nted the Government of India abroad in the purchase of the goods being valued. Urea being a canalised item under the Foreign Trade Policy, import can only be made through canalising agencies called the STEs. As noticed above, the two communications dated 12 November 1991 and 2 February 2015 leave no manner of doubt that urea is imported on Government Account on behalf of the Ministry of Chemical and Fertilizers in the Government of India. Though, the terms used in the aforesaid communications refer to "service charges", but in fact they are "buying commissions" as was also observed by the Tribunal in Anand Textiles. Paragraph 9 of the decision of the Tribunal is reproduced below: "Rule 9 of the Custom Valuation Rules clearly permits exclusion of buying commission and note to rule 9(I)(a)(i) also clarifies the term buying commission as "fees paid by an importer to his agent for the service of representing him abroad in the purchase of the goods being valued". On going through the judgment of the Hon'ble Supreme Court in the case of Apollo Tyres Ltd. (supra) we find that the facts of the present case are substantially the same as facts of the said case. Therefore, we hold that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paragraph 7 of the judgment are reproduced below: "The argument of agency is obviously put forth to invoke the benefit of exemption granted to "buying commission" under Rule 9(I) (a) (i) of the Valuation Rules referred to above. This rule excludes the amount paid as "buying commission" from the cost and services which is to be included in determining the transaction value. To attract this exclusion the appellant seeks to rely upon interpretative note to Rule 9 which reads thus: In Rule 9(I)(a) (i), the terms "buying commission" means fees paid by an importer to his agent for the service of representing him abroad in the purchase of the goods being valued". The appellant wants this Court to firstly equate "service commission" to "buying commission", then on this basis to treat MMTC as an agent. It is not possible to accept this argument of the appellant for more than one reason. As already noticed, there is no relationship of principal and agent between the appellant and the MMTC nor is there any agreement between the parties to pay "buying commission" nor has the MMTC agreed with the appellant to represent it abroad in the purchase of raw asbestos. Material on record, on the con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rty to satisfy an obligation of the seller to the extent that such payments are not included in the price actually paid or payable. Since the aforesaid payment of Rs. 17/- per MT has not been made as a condition of sale of urea by the Government of India to the Appellant to satisfy an obligation of the Government of India, this amount cannot be added to the transaction value under rule 10 (1) (e) of the 2007 Rules. ADDITION OF 2% NOTIONAL HIGH SEA SALE COMMISSION 32. The finding recorded by the Principal Commissioner on this issue is as follows: "13.6 The second issue to be decided is whether high sea sale commission of 2% is to be added in the assessable value or not. It has seen argued that in terms of circular no. 32/2004-Cus dated 01.05.2004, the actual high sea sale contract price paid by the last buyer would constitute the transaction value under rule 4 of CVR, 1988 and inclusion of commission on notional basis may not be appropriate. The Board has not approved the Mumbai Custom House practice of adding 2% notional High Sale Commission in CIF value. ---------- 13.8 From the above analysis, it is clear that high sale commission is includable in the assessable value. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considered as a price at which international transfer of goods was taking place in terms of rule 4. The Principal Commissioner noticed that the price paid by Appellant to the Government of India was a pool price of US$ 83 per MT, whereas the price paid by the STE to the exporter was US$ 300 Per MT. The pool price, therefore, was an artificial price at which the Appellant sold the goods to the farmers. Thus, this was not the price at which international transfer of goods took place and the same, therefore, could not be the assessable value in terms of the Circular. Thus, the price at which the Government of India transfers the goods to the Appellant cannot be accepted as 'transaction value', more particularly when in the normal course of trade a person selling the goods on High Sea Sale basis would naturally add some commission to cover his expenses. However, as there was no data regarding expenses incurred by the Government of India as the goods were sold on an artificial price to the Appellant, the best judgment method as prescribed in rule 9 of the 2007 Valuation Rules was required to be adopted and it was an established practice that when actual data regarding commission was no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ms Valuation Rules, 1988 would apply. Hon'ble Supreme Court, in the case of M/s. Hyderabad Industries Limited [2000 (115) E.L.T. 593 (S.C)] have also upheld that the Service Charges/high-seassales- commission (actuals) are included in the CIF value of imported goods. Therefore, it is clarified that the actual highseas-sale-Contract price paid by the last buyer would constitute the transaction value under Rule 4 of Customs Valuation Rules, 1988 and inclusion of commission on notional basis may not be appropriate. However, the responsibility to prove that the highseas- sales-transaction constituted an international transfer of goods lies with the importer. The importer would be required to furnish the entire chain of documents, such as original invoice, high-seas-sales-Contract, details of Service Charges/ commission paid etc., to establish a link between the first international transfer of goods to the last transaction. In case of doubt regarding the truth or accuracy of the declared value, the Department may reject the declared transaction value and follow the sequential methods of valuation under Customs Valuation Rules, 1988." 36. The aforesaid Circular refers to the practice ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, which means the price "actually paid" or "payable" for the goods imported. Only when such a value cannot be determined, that resort to rules 5 to 8 in a sequential manner has to be taken. Once the transaction value is arrived at, adjustments to this value has still to be made in accordance with the provisions of rule 9. Only thereafter, the exact "transaction value" gets determined on which customs duty is to be paid. Rule 9 deals with "cost of service". It lays down that in determining the transactional value, cost of certain services is to be added to the price actually paid or payable for the imported goods as mentioned in "(a)" to "(e)" of sub-rule (1) of rule 9. Rule 9 was amended in the year 1989 by notification dated 19 December 1989. The proviso appearing below sub-rule (2) of rule 9 was substituted with the following proviso: "Provided that - (i) Where the cost mentioned in clause (a) are not ascertainable, such cost shall be twenty per cent of the free on board value of the goods; (ii) Where the charges mentioned at clause (b) are not ascertainable, such charges shall be one per cent of the free on board value of the goods; (iii) Where the cost mentioned at cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cerned with the amount payable for costs and services. Rule 9 which is incorporated in the Valuation Rules and pertains to costs and services also contains the underlying principle which runs though in the length and breadth of the scheme so eloquently. It categorically mentions the exact nature of those costs and services which have to be included like commission and brokerage, costs of containers, cost of packing for labour or material etc. Significantly, Clause (a) of sub-rule (1) of Rule 9 which specifies the aforesaid heads, cost whereof is to be added to the price, again mandates that it is to be "to the extent they are incurred by the buyer". That would clearly mean the actual cost incurred. Likewise, Clause (e) of sub-rule (1) of Rule 9 which deals with other payments again uses the expression "all other payments actually made or to be made as the condition of the sale of imported goods". ---------- 31) In contrast, however, the impugned amendment dated 05.07.1990 has changed the entire basis of inclusion of loading, unloading and handling charges associated with the delivery of the imported goods at the place of importation. Whereas fundamental principle or basis remai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re enacted on the lines of GATT guidelines and the golden thread which runs through is the actual cost principle. Further, the loading, unloading and handling charges are fixed by International Airport Authority. --------- 36) We are, therefore, of the opinion that impugned amendment, namely, proviso (ii) to sub-rule (2) of Rule 9 introduced vide Notification dated 05.07.1990 is unsustainable and bad in law as it exists in the present form and it has to be read down to mean that this clause would apply only when actual charges referred to in Clause (b) are not ascertainable." 41. It will be appropriate to reproduce section 14 of the Customs Act, that was amended on 10 October 2007 and it is as follow: "Section 14. Valuation of goods. - (1) For the purposes of the Customs Tariff Act, 1975 (51 of 1975), or any other law for the time being in force, the value of the imported goods and export goods shall be the transaction value of such goods, that is to say, the price actually paid or payable for the goods when sold for export to India for delivery at the time and place of importation, or as the case may be, for export from India for delivery at the time and place of exportatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 14, which remains the same, is an over-riding provision which empowers the Board to fix tariff values for any class of imported goods or export goods under certain circumstances. We are not concerned with this aspect in the instant case." 43. Thus, what has to be seen under section 14(1) of the Customs Act as amended in 2007 is the transaction value of the goods imported or exported for the purpose of customs duty and transaction value is stated to be the price actually paid or payable for the goods when sold for export to India for delivery at that time and place of importation. Sub-section (1) of section 14 also makes it clear that the price actually paid or payable for the goods will not be treated as 'transactional value' where the buyer and the seller are related to each other. As per the first proviso to the amended section 14 (1), certain charges are to be added in the transaction value of the imported goods. 44. It needs to be noted that the Circular dated 11 May 2004 was issued during the period the unamended section 14 of the Customs Act was in force. Thus, while there was scope for addition of notional charges in the assessable value under the unamended section 14 o ..... 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