By TIOL News Service

MUMBAI, DEC 24, 2014: THE appellant imported capital goods, equipment, components, etc. for the initial setting up of a plant to manufacture ‘hot briquette sponge iron' in Raigad District under the Project Import Regulations, 1986. For this purpose they entered into four agreements, all dated 22/10/1989 with two foreign suppliers/collaborators, namely, M/s. Davy Dravo, Pennsylvania, USA (Davy in short) and M/s. HYLSA, S.A. de CV, Mexico (HYL in short). The agreements pertained to (a) Supply of Equipment Agreement; (b) Basic Engineering Services Agreement; (c) Process Licence Agreement and (d) Supervisory Services Agreement. The suppliers and the appellant are not related.

There is no dispute about the includibility of the amount paid for equipment supply. The dispute is about the balance 3 agreements relating to basic engineering services, process licence and supervisory services agreement.

The department is of the view that while the consideration paid for basic engineering services and supervisory services are includible in the assessable value of the goods supplied under Rule 9(1)(e) of Customs Valuation Rules, consideration paid for supply of technical knowhow under the process Licence Agreement is includible in the assessable value under Rule 9(1)(c) of CVR r/w s. 14 of the Customs Act, 1962.

The demands were confirmed by the lower authorities and, therefore, the appeal before the CESTAT.

After considering the extensive submissions made by both sides, the Bench observed -

++ A combined reading of these agreements [Supply of equipment agreement, Basic Engineering Services Agreement, Royalty Process Know-how agreement, Supervisory Services Agreement ] makes it very clear that all these agreements are interlinked and inter-dependent and have direct nexus with each other. It is only in pursuance of these agreements the supply of the equipment have been made by Davy/HYL and the services provided by these agreements are necessary and essential for the installation, operation, maintenance and use of the equipment by the appellant. Thus these four agreements constitute a package and cannot be separated from one another and the consideration paid under these different agreements, forms an integral part of the supply of equipment agreement. It is in the light of the factual matrix discussed above, the question whether the royalty payments made in respect of technical know-how and the various fees paid for engineering services and supervisory services are includible in the value of the equipment supplied under Rule 9(1)(c) and 9(1)(e) of CVR, 1988 has to be examined.

The Bench thereafter distinguished the decisions cited by the appellant viz. J.K. Corporation - 2007-TIOL-15-SC-CUS, Toyota Kirloskar Motor Pvt. Ltd. - 2007-TIOL-94-SC-CUS, Indo Gulf Corporation and held that in view of the significant variance obtaining in the facts of the present case with those obtaining in the facts of the cases relied upon by the appellant, the ratio of those decisions cannot be made applicable. For this purpose the apex court decision in Al Noori Tobacco Products - 2004-TIOL-85-SC-CX was relied upon.

Noting that the decisions relied upon by the Revenue, namely, Essar Gujarat Ltd. , Otto India Pvt. Ltd., Andhra Petrochemicals Ltd., Mukund Ltd. apply squarely to the facts of the present case the CESTAT added -

“If we apply the ratio of the above decisions to the facts of the present appeal, in our considered view, the royalty paid for the Process Know-how and the various fees paid for basic engineering services and supervisory services are includible in the assessable value of the equipment imported under Rule 9(1)(c) and 9(1)(e) of CVR, 1988 as these payments are integrally connected with the supply of the equipment and formed part of a package deal. Therefore, we do not find infirmity in the order passed by the lower authorities in this regard.”

The appellant further submitted that they have made a payment of only US $ 1,07,12,000/- to M/s Davy in terms of the Basic Engineering and Training Agreement and they have not paid any royalty to M/s Davy in terms of the Process Licensing Agreement and in support submitted two CA certificates.

The Bench observed -

“…For determination of assessable value, not only the amounts paid but required to be paid under the contracts entered with the supplier have to be taken into account. In the absence of any conclusive evidence to show that the payments so far made is towards the final settlement of all the obligations, the appellant's plea in this regard cannot be entertained. CA certificate is not the authority for determination of liabilities and future obligations arising out of contract. In the absence of any satisfactory evidence duly certified by the foreign equipment supplier, the plea of the appellant in this regard cannot be entertained and therefore, the lower authorities have rightly rejected this contention and we do not find any infirmity or illegality in such a decision. Accordingly we reject this contention as not proved.”

In fine, holding that there is no merit in the appeal, the same was dismissed.

(See 2014-TIOL-2599-CESTAT-MUM)