MAY 18, 2020

By Rachit Jain, Partner and Ashwani Bhatia, Associate 

THE Division Bench of the Hon'ble Supreme Court of India in a recent judgment of Commissioner of Customs (Port) Kolkata vs. M/s Steel Authority of India Ltd., 2020-TIOL-88-SC-CUS ('SAIL judgment') has given relief to the importers on inclusion of basic design, engineering charges, supervision charges, etc. in the value of imported plant and machinery in turnkey contracts.

Brief Facts: Steel Authority of India Ltd. ('SAIL') entered into two contracts with foreign entities and imported certain goods under turnkey contracts. The contracts, inter-alia, provided for supply of basic design and engineering fee, supervision charges during manufacture of Indian equipment and for erection, commissioning and performance guarantee tests and as built drawings. Both the contracts were in connection with modernisation of SAIL's rolling mills. These designs and drawings, and engineering/technical services were for plant direction and overall project implementation for manufacturing iron and steel, to be commissioned in India. Notably, these designs and drawings and the services were not in relation to the imported equipment and goods.

Case of the department: The Customs department, relying on Section 14 of the Customs Act, 1962 read with Rule 4 and 9(1)(e) of the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988 ('CVR, 1988'), entertained a view that the value of basic design and engineering fee, supervision charges, etc., are includible in the assessable value of the imported equipment, as those intangible items form an integral part of the arrangement between the contracting parties. Further, payment by SAIL for such intangible items constituted 'conditions of sale' under of Rule 9(1)(e) and these were not for post importation activities.

Stand taken by SAIL: SAIL's plea was that the impugned charges were for post-importation phase of the arrangement between the contracting parties and hence not includible in the assessable value of the imported goods. Further, it was not a condition for them to take design and engineering from the same exporters.

Relevant Judicial Precedents:

Before we delve into the ratio of the SAIL judgment, it is important to analyse the judicial precedents referred therein.

In the case of Tata Iron & Steel Co. Ltd. vs. CCE,- 2002-TIOL-07-SC-CUS-LB, the issue pertained to addition of value of technical documentation to the value of imported goods under an umbrella contract. The CESTAT divided the technical documentation supplied to the appellant into three parts and held as follows:

The Hon'ble Supreme Court set aside the order of the CESTAT and held that these were relatable to post-import activity to be undertaken by the appellant. Such charges were covered by a separate contract. Hence, they could not have been included in the value of imported goods merely because the value of documents referable to imported equipment and materials was mixed up with the value of those documents which were referable to equipment, which was yet to be procured or imported or manufactured by the appellant.

It was also observed that sub-rules (3) and (4) of Rule 9 of CVR, 1988 clearly provide that additions to the price actually paid or payable are permissible under the Rules, if based on objective and quantifiable data and no addition except as provided for by Rule 9 is permissible.

In the case of Commissioner of Customs vs. Essar Steel, - 2015-TIOL-63-SC-CUS, the issue pertains to addition of the charges paid by the appellant to Met Chem Canada Inc., for supply of technical services required for setting up and commissioning a plant for the manufacture of Hot Rolled Steel Coils in India. The Hon'ble Supreme Court held that such charges are not includible in the value for assessment to Customs duty on the following grounds/analysis:

(a) Any amount that is referable to the imported goods post-importation has necessarily to be excluded;

(b) A reading of Rule 4 and Rule 9 makes it clear that only those costs and services that are actually paid or payable for imported goods pre-import are to be added for the purpose of determining the value of imported goods;

(c) The technical services to be provided by Met Chem Canada Inc., is basically to coordinate and advise Essar Steel so that the latter can successfully set up, commission and operate the plant in India. It was held to be a post-importation activity as the technical services agreement read as a whole is only to successfully set up, commission and operate the plant after it has been imported into India.

Judgments cited by the Revenue :

Mukund Limited vs. Commissioner of Customs, 2000 (120) ELT 30: The department heavily relied on this decision. In this case, relying on the judgment of CC (Prev.), Ahmedabad v. Essar Gujarat, - 2002-TIOL-44-SC-CUS-LB, it was held that the supervision charges are liable to be included in the assessable value of imported goods (i.e. design and engineering drawings).

Distinguished: The case of Mukund Limited (supra) has been distinguished in the SAIL judgment on the ground that this case did not involve importation of any equipment, but only importation of design and engineering drawings.

Essar Gujarat case (supra): The case of Essar Gujarat (supra) involved importation of a plant from Teviot Investments Limited with a condition that Essar pays license fees to obtain transfer of operational license from another corporation, Midrex International BV. A question arose as to whether the license fees paid to Midrex should be included to the value of the plant. It was held that the license fee is liable to be included in the assessable value of plant as the stipulation of obtaining the license from Midrex was a 'condition for sale' and there was an element of necessity or compulsion to enter into the licensing agreement with Midrex.

Distinguished: The case of Essar Gujarat (supra) has been distinguished as in that case there was a condition for entering into a licensing agreement with a third party, which is not there in the SAIL's case.

Ratio of SAIL judgment:

The Hon'ble Supreme Court has held that supply of the subject charges are not liable to be included in the transaction value of imported equipment. The reasons for arriving at this ratio are as follows:

(a) These supplies relate to post importation activity and it is a settled law ¹ that post importation charges are not liable to be included in the assessable value;

(b) Merely because it is a turnkey project, wherein importation of equipment and post-importation project implementation exercise were mutually dependent, it cannot be read as a condition of sale implicit in the contracts in absence of any other material to demonstrate subsistence of such condition.

(a) The expression 'condition', simply put, conveys the idea that something could be done only if another thing was also done;

(b) Rule 9(1)(e) cannot be automatically applied to every import which has surface features of a turnkey contract without specific finding on existence of 'condition' as contemplated therein.

(c) Addition of all supplies under a turnkey project irrespective of 'condition of sale' would go against the provisions of Interpretative Note to Rule 4. Further, Interpretative Note to Rule 4 are part of the Rules and hence statutory. ²

(d) Rule 9(1)(b)(iv) is also inapplicable in the instant case as there has been no supply or any engineering's or drawings by the SAIL to the foreign seller.

Comments for Importers:

The Hon'ble Supreme Court has held that if payment of an expense is not a condition of sale of imported goods, such expense is not includible in the assessable value. However, if the expense is for a 'post importation activity', whether there is a requirement to independently analyse existence of a 'condition of sale', is an open issue. In our view, this understanding may not be legally tenable. 'Condition of sale' is the main pre-requisite to determine whether an amount is liable to be included in the assessable value of imported goods. Once it is established that an expense is not a 'condition of sale', its non-includability may further be substantiated by an argument of post importation nature of such expense. In the present case SAIL established both the requisites, i.e. the design and other charges are not condition of sale and are in nature of post importation activity independently. Therefore, it has been held that such expenses are not includable in the assessable value of imported goods.

Way forward: If a single agreement involves importation of dutiable equipment and services for post importation activities, and these two sets of items are segregable, the latter would not be liable to be included in the assessable value of the imported goods under Rule 3 or Rule 10 of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007, subject to the language of contracts.

A clear distinction exists between an amount payable as a condition of import and an amount payable in respect of the matters governing the manufacturing activities, which may not have anything to do with the import of the goods. The importers are required to find such distinction from their contracts and include, wherever required.

In our view, the SAIL judgment should not be considered as an authority to state that no expenses are liable to be added in cases of turnkey projects. Suffice to state that post importation charges, if not relatable to the imported goods and are not condition of sale, are not includible in the assessable value of imported goods. Importer should get their contracts in such a manner to ensure a tax efficient method of importation of goods.

[The authors are Advocates in Lakshmikumaran and Sridharan Attorneys, New Delhi. The views expressed in this article are strictly personal.]

¹ Commissioner of Customs Vs. J.K. Corp. Ltd - 2007-TIOL-15-SC-CUS, Commissioner of Customs Vs. Hindalco Industries - 2015-TIOL-132-SC-CUS, Commissioner, Customs Vs. Denso Kirloskar Industries - 2015-TIOL-222-SC-CUS, Commissioner of Customs Vs. Toyota Kirloskar - 2007-TIOL-94-SC-CUS

²Tata Iron & Steel Co. Ltd. Vs. CCE, - 2002-TIOL-07-SC-CUS-LB