By TIOL News Service

MUMBAI, JUNE 25, 2013: M/S Skoda Auto India Pvt. Ltd., (SAIPL) Aurangabad is engaged in the business of assembly and sale of passenger cars bearing the brand name of SKODA. SAIPL is a fully owned subsidiary of M/s. Skoda Auto A.S., Czech Republic (SACR). The import and assembly of cars started in 2001 and initially the cars were imported in SKD and subsequently in CKD condition and imports were made through Nhava Sheva Port, Mumbai. The customs duty was discharged on the price charged by SACR.

Investigation was taken up on the basis of intelligence that SAIPL and SACR had not declared the value correctly and consequently evaded customs duty. After completion of investigation, issue of show-cause notice and adjudication proceedings, impugned order has been passed.

In the order, the Commissioner of Customs (Import), Nhava Sheva has held that the agreements, viz. Technology Transfer and Trade Mark License Agreement dated 01.10.2001, supply agreement dated 01.10.2001 and importer agreement dated 26.09.2001 between the two companies are fraudulent and fabricated and have no relation to the real state of affairs of SAIPL. On this basis, the Commissioner decided that 45 million USD charged as Technology Transfer is attributable to pre-importation activity and, therefore, this amount has to be added and included in the assessable value, applicable to each imported car kit. Accordingly, he has confirmed a duty demand of Rs.97,15,00,054/- against SAIPL with interest as applicable. He has also imposed a penalty equal to duty under Section 114A of the Customs Act, 1962. He has also imposed a fine of Rs.10 crores under Section 111 (m) of the Customs Act, 1962. A penalty of Rs.5 crores has been imposed on Shri Imran Hassen, Ex-Managing Director of SAIPL, penalty of Rs.1 crore has been imposed on Shri Lukas Folc, Ex-managing Director of SAIPL. Penalty of Rs.25 lakhs has been imposed on Shri Sunil Rekhi, Ex-Sr. Manager (Finance) of SAIPL and penalty of Rs.25 crores has been imposed on M/s. Pricewaterhouse Coopers Pvt. Ltd., (PWC) at Mumbai.

While deciding the Stay application, the CESTAT had ordered a pre-deposit of Rs.30 Crores.

Against this Stay order, the appellant had filed a Writ Petition 4776 of 2010 before the Bombay High Court and the High Court had while dismissing the WP [See 2011-TIOL-255-HC-MUM-CUS] and upholding the order of pre-deposit passed by the CESTAT, noted -

"20. From the aforesaid reasons, it cannot be said that the decision of the Commissioner is devoid of any merit. Incriminating material gathered subsequent to the decision of the SVB prima facie show that all material facts were either not placed before the SVB or altered subsequently."

On further appeal, the Supreme Court observed, "We do not find any ground to interfere with the impugned order passed by the High Court. Accordingly, the special leave petition is dismissed. "

The appeal was decided by the Division Bench of the CESTAT, WZB recently.

After hearing the extensive arguments advanced by both sides, these are the findings on the vital issues -

The Core issue:

Whether the payment of lump sum of USD 45 million made to SKODA towards technological fees for manufacturing 45,000 car kits calculated on the basis of USD1,000 per unit as per FIPB application 16.09.1999 and as per cost sheet recovered during the investigation is includable in the assessable value or not.

Related person

"36. The undisputed facts are that the appellant is a 100% subsidiary of SACR. Therefore, the appellants are related person of SKODA under Rule 2(2) of the Customs Valuation Rules, 1988. The goods imported by the appellant from SKODA are SKD/CKD deliveries i.e. sets of disassembled vehicles or parts thereof. The period of import is October, 2001 to July 2007. The appellant is not free to procure the impugned goods from any other source unless approved by SKODA and the appellant did not file any Bill of Entry or any Baggage Declaration for import of technical documentation."

Whether technological documentation and know-how are covered as ‘Baggage' -

"38. The contention of the learned Counsel is that it is not disputed that the technological documentation and know-how has been received. The same was brought in through courier/hand baggage. It is the contention of the learned Counsel that as per Notification 23/97 dated 04.03.1997 technical documents like drawings etc. when imported in the baggage are exempts from customs duty under Chapter 98 of the Customs Tariff Act. It is further find that the learned Counsel is contesting that the Revenue has not made out any case that technical know-how received was worthless. It is also submitted on behalf that the total consideration of know-how was paid in USD45 million. We find that the Revenue has issued a show-cause notice to the appellant to cover the said payment of USD 45 million in the assessable value under Rule 9(1)(e) of the Customs Valuation Rules, 2007. Therefore, the arguments advanced by the learned Counsel that technical know-how documents have been received in baggage or the know-how documents are worthless or shown less value are not material to discuss herein and the case law relied on are not relevant to the facts of this case."

Rule 9 of the Customs Valuation Rule, 1988 is not a residuary rule

"41. On perusal of the said provision, it is clear that any other payment actually made or to be made as a condition of sale of imported equipment by the buyer to the seller satisfy an obligation of the seller to the extent that such payments are not included in the price actually paid or payable. From the above, it is quite clear that the transaction value under Rule 4(1) is to be adjusted with the costs and services mentioned in any of the clauses (a) to (e) to Rule 9(1) depending upon the facts and situation of each case. Therefore, each of the clauses from (a) to (e) of Rule 9(1) are independent. Therefore, just because the transaction value under Rule 4(1) is to be adjusted with the costs and services under Rule 9(1), cannot be said that Rule 9 is a residuary Rule. In this case the adjudicating authority has held that the declared transaction value does not reflect the true transaction value. He has held that the lump sum amount of USD 45 million paid for technical documentation is required to be included in the assessable value of the impugned goods in terms of Rule 4(1) read with Rule 9(1)(e) of the Customs Valuation Rules, 1988. The arguments of the learned Counsel is that this lump sum payment for technical documentation is a royalty and the royalty could be added under Rule 9(1)(c) of the Customs Valuation Rules. We are not convinced with the argument advanced by the learned Counsel. In this case the issue before us is that whether the lump sum payment paid by the appellant to M/s SKODA Auto a.s. on account of technical transfer documentation is a condition of sale of the impugned goods or not. Therefore, the case law relied upon by the learned Counsel that lump sum payment on account of royalty is not includable in the assessable value are not relevant to the facts of this case."

Relevance of the Technology Transfer Agreement (TTA)

+ the application made by the appellant before FIPB is very much relevant to know that whether the payment of USD 1000 per car is a condition for the sale of the imported goods.

+ FIPB approved the proposal subject to the condition that no royalty is to be payable to the foreign collaborator as long as the company remains 100% foreign equity. Therefore, this approval supports the case of the Revenue that the amount has been worked out for payment of technology transfer on the basis of per car kit and the same has been noted in the application submitted for FIPB's approval.

+ A sum of 1418 Euros is added to the CIF value of the imported car kits after addition of the customs duty payable. This 1481 Euros is the sum of 907 Euros as lump sum and 511 Euros as Technical consultation, both forming constituent of the Technology Transfer Agreement. This Euro 907 is equal to DEM 1775 which is further equal to USD 1000. It is claimed by the appellant that the import of technical documentation and import of car kits are two separate transactions. Lump sum fee of USD45 millions has no relation to the price of the goods imported. If so, it does not stand to reason why then the lump sum amount of Euro 907 i.e. USD 1000 per car kit has been added to the value of the goods imported to arrive at the landed cost after their clearance. For this no satisfactory answer has been given by the appellants. Although these cost sheets were not signed by anybody nor it was known who prepared but the same has been admitted by the learned Counsel for the appellant during the course of argument.

+ We find that pricing structure of Skoda car for India and Slovenian CBU, Croation CBU is entirely different. We further find that if SKD/CKD car kits were to be imported to India on cost plus basis and if profits were to be equivalent to normal profits made by SACR, the additional amount to be added would have come to around 1000 USD. In any case SAIPL is a 100% subsidiary of Skoda.

Amount received as Revenue receipt -

"48. We further find that Skoda has shown this amount received for technology transfer agreement as Revenue receipts in their books of account as per para 8.10.14 of the written submissions. As it is admitted by the appellants themselves that it is a Revenue receipt in nature and the same is to be amortized / car kit supplied by them. This fact also supports the case of Revenue. The amount of 45 million USD was neither capital receipt at the hand of Skoda, nor the amount so paid was the intent to keep as capital expenditure in the hands of appellant but to amortise the said amount in the cost of imported cars/part and supplier themselves are admitting that the receipt is no Revenue nature. Therefore the said amount is to be in the nature of other than payment paid by the appellant to the foreign supplier as a condition of sale."

Limitation:-

"49. On account of limitation we find that in this case the extended period of limitation is rightly invoked as the appellant cannot declared the impugned goods and the appellant did not file any Bill of Entry or any baggage declaration for import of any technological documentation. The cost sheet was obtained by the department during the course of investigation which corroborate the payments USD 45 million with FIPB. The act of the appellant shows that they have suppressed the relevant documents to avoid the payment of correct duty payable by them. Therefore, relying on the decision of COMMISSIONER OF C.EX., SURAT-I, v. NEMINATH FABRICS PVT. LTD. - (2011-TIOL-10-HC-AHM-CX), the show-cause notice issued invoking extended period of limitation is correct."

DGCEI officers are also Customs officers -

"50. The appellant has also contended that the officers of the Directorate General of Central Excise Intelligence have not jurisdiction to deal with the Customs cases. We find that as per the Notification No.44/2011-Cus(NT) dated 06.07.2011 wherein the Section 28 of the Customs Act, 1962 has been amended by inserting sub-section (11) which reads as follows:- x x x

The amendment being retrospective, there cannot be any further doubt that the officers of the Directorate General of Central Excise Intelligence had always the power of assessment under section 17 of the Customs Act,1962 and as per the Board's Circular No. 44/2011-Cus dtd. 23/09/2011."

Penalty on Pricewaterhouse Coopers Pvt. Ltd.

"51. With regard to PWC we find that they have only tendered advice in terms of their understanding of the law. There is no evidence to show that PWC advised the appellant that by modifying the contract they need not have to pay customs duty of 1000 USD. There is also no evidence to show that PWC had deliberately planned or assisted in planning to ensure that under valuation is successful. The contribution of PWC seems to be vetting the agreement and ensure that the agreements are in terms of the law of the land. In the absence of their knowledge of imports made and under valuation of imports, therefore the penalty on PWC is not imposable."

In fine, the Bench concluded thus -

"52. … we find that the appellants sought approval of FIPB for setting up of a unit in India and for remittance of lump sum USD 45 million towards transfer of technology and trademark licence over a period five years by importing car kits along with royalty shall be paid on 100% equity shares. The payment of royalty in the Transfer of Technology Agreement (TTA) has been on the basis of licensing of trademark and the payment of USD 45 million is towards transfer of technology by way for manufacturing of Skoda brand cars in India over a period of five years. The fact has been incorporated relating to the imports in USD 1000 as lump sum payment….The work sheets containing the details of CIF value of imported car kits to India and landed cost and ex-work price of assembled car in India. The amount shown in 1418 Euros, out of which 907 Euros is to goes to SACR which is equal to 1000 USD. Although the cost sheets were not signed by anyone but the same has been admitted by the appellants. A separate work sheet showing lower cost was prepared for the purpose of SVB is supported by different work sheets recovered during the search. It was also found that the pricing structure to Croatia and Slovenia is entirely different. Therefore, we hold that the amount of USD 45 million towards the import of 45,000 car kits during the period of 5 years. Therefore, the adjudicating authority has rightly held that the amount of USD 45 million is to be includable in the assessable value of the imported goods as per Rule 9(1)(e) of the Customs Valuation Rules. Therefore, differential duty on the said amount is payable by the appellant along with interest. We further find that the appellants are also liable to pay penalty equal to duty under Section 112 of the Customs Act, 1962. As the goods were not physically available at the time of adjudication, therefore, redemption fine imposed by the Commissioner is not imposable in the facts of this case. The penalty on M/s Pricewater house Coopers P. Ltd. is dropped as discussed above. Penalty on Shri Imran Hassen, Managing Director of the appellant, Shri Lukas Folc, Managing Director and Shri Sunil Rekhi are highly excessive. Therefore, penalties are reduced as under:-

1. Shri Imran Hassen - Rs.1 Crore

2. Shri Lukas Folc - Rs.25,00,000/-

3. Shri Sunil Rekhi - Rs. 5,00,000/-"

The appeals were disposed of accordingly.

In passing: Curtains down on a simmering issue?

(See 2013-TIOL-957-CESTAT-MUM)