Commissioner of Customs (Port), Kolkata Vs. M/S. J.K. Corporation Limited 
Insc 85 (2 February 2007)
S.B. SINHA & MARKANDEY KATJU
J U D G E M E N T S.B. SINHA,J.
The Revenue is in appeal before us aggrieved by and dissatisfied with the
judgement and final order dated 15th May, 2006, passed by the Customs Excise
and Service Tax Appellate Tribunal, Kolkata, in Appeal No.C-259 of 2002. The
fact of the matter is not in dispute. M/s. Orissa Synthetics Limited is a
division of the respondent herein. It, being desirous of undertaking
manufacture of Polyester Oriented Yarn and Flat Yarn, entered into a
collaboration agreement with M/s. Samsung Company Limited and M/s. Chiel
Synthetics Inc., both of Korea, on 18th November, 1999. M/s.
Cheil Synthetics Inc. is said to be an associate company of M/s. Samsung
group under the laws of Republic of Korea. The said Agreement is in two parts;
Part-A provides for licence, knowhow and technology, while Part-B provides for
supply of equipment as a part of necessary plant and machinery and equipment
for manufacture of polyester oriented yarn. Part-A stipulates lumpsum payment
of US $14,00,000 by the respondent to the said companies for supply of licence,
knowhow and technology. Under Part-B of the said Agreement, however, price of
foreign equipments are said to be US $34,86,000.00 + DM 12,00,000.00 + J. Yen
Pursuant to and in furtherance of the said collaboration Agreement, the
respondent herein had imported plant and machinery manufactured by the said companies.
The Assistant Commissioner of Customs, Special Valuation Branch, in its order
dated 28th May, 1999, opined that the amount of consideration mentioned in both
parts of the Agreement should be added together, having regard to the fact that
the same forms part of an integrated contract, the value of knowhow estimated
at US $ 40,00,000.00 must be added to the value of the equipment, on the
premise that payment thereof was a pre-condition for sale of the equipments
under Part-B. An appeal was preferred thereagainst by the respondent before the
Commissioner of Customs. The appellate authority, by reason of its order dated 31st May, 2000, dismissed the said appeal. However, the Customs Excise and Service Tax
Appellate Tribunal [CESTAT], on a further appeal preferred by the respondent,
allowed the same and remitted the matter to the authority below for a de novo
decision in the light of a decision of this Court in Tata Iron and Steel
Company Limited vs. Commissioner of Central Excise and Customs Bhubaneswar, Orissa
(2000 (3) S.CC.472). The Deputy Commissioner of Customs, however, held that the
decision of this Court in TISCO (supra) is distinguishable stating that both
parts of the Agreement, Part-A and Part-B, are complimentary to each other and
one part thereof cannot be implemented without complying with the conditions of
the other part of the Agreement.
The original authority, therefore, upheld its earlier order. The
Commissioner of Customs, however, in the appeal preferred by the respondent
herein, set aside the said order dated 24th June, 2002, holding that the
decision of this Court in TISCO (supra) is squarely applicable to the facts of
the case and that Collector of Customs (Prev.), Ahmedabad vs. Essar Gujarat
Limited [(1996) 88 E.L.T.609 (S.C.)] is not applicable. The Tribunal dismissed
the appeal preferred thereagainst by the Revenue.
Mr. K. Radhakrishnan, learned senior counsel appearing on behalf of the
Appellant, would take us through various clauses of the said Memorandum of
Understanding dated 18th November, 1999, entered into by and between M/s.
Orissa Synthetics Limited and M/s. Samsung Company Limited and submit that
supply of technical knowhow and purchase of licence and supply of equipments
was a condition of sale. According to the learned counsel, as the conditions
laid down in both parts of the said Agreement are complimentary to each other,
Part-B cannot exist without Part-A thereof. Our attention in this behalf has
been drawn to Rule 9(1)(e) of the Customs Valuation (Determination of Prices of
Imported Goods) Rules, 1988 (for short the Rules] to submit that the same is a
Mr. S. Ganesh, learned senior counsel appearing on behalf of the respondent,
on the other hand, would support the judgement under appeal.
1962, was enacted to consolidate and amend the law relating to customs.
Chapter-V of the Customs
Act, 1962 [for short, "the Act"] provides for levy of and
exemption from, customs duty. Customs duty in terms of Section 12 of the Act is
to be levied at such rates as may be specified under the Customs Tariff Act or
any other law for the time being in force on the goods imported into, or
exported from, India. Section 14 of the said Act provides for valuation of
goods for purposes of assessment in respect of duty of customs chargeable on
any goods by reference to their value. A legal fiction is created in relation
to the value of such goods stating that, "the price at which such or like
goods are ordinarily sold, or offered for sale, for delivery at the time and
place of importation or exportation, as the case may be, in the course of
international trade, where (a) the seller and the buyer have no interest in the
business of each other; or (b) one of them has no interest in the business of
the other, and the price is the sole consideration for the sale or offer for
Section 14(1A) provides that price referred to in sub-section (1) of Section
14 in respect of imported goods shall be determined in accordance with the
Rules made in this behalf.
The Central Government, in exercise of its powers conferred upon it under
Section 156 of the Act, made the said Rules. The transaction value determined
in terms of the said Rule was to be the value of the imported goods. What would
be a transaction value is stated in Rule 4 i.e. the price actually paid or
payable on the goods when sold for export to India, adjusted in accordance with
the provisions of Rule 9 of the 'Rules'. Rule 9, inter alia, provides for
determination of transaction value in terms whereof the price actually paid or
payable on the imported goods, the factor enumerated therein shall be added,
clause (e) whereof reads as under:
"all other payments actually made or to be made as a condition of
sale of the imported goods, by the buyer to the seller, or by the buyer to a
third party to satisfy an obligation of the seller to the extent that such
payments are not included in the price actually paid or payable."
The sole question which, therefore, arises for consideration in this appeal,
is as to whether customs duty would be payable on the purchase price of the
goods by adding the value of licence and technical knowhow, etc. to the value
of the imported goods.
The basic principle of levy of customs duty, in view of the afore- mentioned
provisions, is that the value of the imported goods has to be determined at the
time and place of importation. The value to be determined for the imported
goods would be the payment required to be made as a condition of sale.
Assessment of customs duty must have a direct nexus with the value of goods
which was payable at the time of importation. If any amount is to be paid after
the importation of the goods is complete, inter alia by way of transfer of
licence or technical knowhow for the purpose of setting up of a plant from the
machinery imported or running thereof, the same would not be computed for the
said purpose. Any amount paid for post-importation service or activity, would
not, therefore, come within the purview of determination of assessable value of
the imported goods so as to enable the authorities to levy customs duty or
otherwise. The Rules have been framed for the purpose of carrying out the
provisions of the Act. The wordings of Sections 14 and 14(1A) are clear and
explicit. The Rules and the Act, therefore, must be construed, having regard to
the basic principles of interpretation in mind.
Rule 12 of the Rules provides that the interpretative notes specified in the
Schedule appended thereto would apply for construction thereof. They are
statutory in nature being integral part of the Rules themselves. The relevant
portion of Interpretative Note to Rule 4 reads as under:
"The value of imported goods shall not include the following charges or
costs, provided that they are distinguished from the price actually paid or
payable for the imported goods:
Charges for construction, erection,
assembly, maintenance or technical assistance, undertaken after importation on
imported goods such as industrial plant, machinery or equipment;
The cost of transport after
Duties and taxes in India."
What would, therefore, be excluded for computing the assessable value for the
purpose of levy of custom duty, inter alia, has clearly been stated therein,
namely, any amount paid for post-importation activities. The said provision, in
particular, also apply to any amount paid for post- importation technical
assistance. What is necessary, therefore, is a separate identifiable amount
charged for the same. On the Revenue's own showing, the sum of US $
14,00,000.00 was required to be paid by way of remuneration towards services to
be offered by the companies in respect of matters specified in Part-A of the
said Memorandum of Agreement. The said sum represents amount of licence or
amount to be paid by the respondent for the licence for the manufacturing
process for production of goods which were covered by the patents held by M/s.
Samsung as also for technical knowhow. In the said Memorandum of Agreement, it
was provided that;
"The SELLER shall provide to the BUYER the TECHNICAL DOCUMENTATION
containing, inter alia, the KNOW-HOW and the same shall be delivered by the
SELLER to the BUYER in Republic of Korea or such other place or places as may
be mutually agreed by and between both the parties thereto."
The technical documentation comprises of : (1) process, (2) mechanical, (3)
electrical, and (4) instrumentation in respect of grant of licence. The
Memorandum of Understanding provides:
hereby grants to the BUYER a non-exclusive and non-transferable right and
licence including rights to use existing patents of SELLER to manufacture the
PRODUCT in the PLANT with the KNOW-HOW including the PROCESS and to sell and
market the PRODUCT worldwide. For exports to Republic of Korea and Japan, the
first option shall be given to the SELLER.
The BUYER shall
be entitled to and shall have the right to use and practice the KNOW-HOW and to
manufacture therewith the product in the PLANT."
No part of the knowhow fee was to be incurred by the respondent herein
either for the purpose of fabrication of the plant and machinery or for any
design in respect whereof M/s. Samsung held the patent right.
It may be noticed that the said Memorandum of Agreement specifically
contemplates that the plant and machinery to be supplied thereunder may be
procured from other independent manufacturers and suppliers who might not have
anything to do with the knowhow or licence provided thereunder by Samsung as
would appear from the following stipulation contained in the said agreement.
hereby agrees to provide their cooperation to the BUYER to purchase spares from
the SELLER directly from the suppliers notwithstanding the expiry or earlier
termination of the AGREEMENT and in case of purchase from the SELLER, the SELLER
shall provide such spares at fair market prices within a reasonable period of
cause such manufacturers to test and inspect the main items of Equipment at its
works and/or the works of its manufacturers, quality, quantity, workmanship,
finishing, and packing in accordance with the inspection method deemed as proper
and authentic for Equipment."
Knowhow, being process knowhow, is covered by the patent held by M/s.
Samsung. The payment of US $ 14,00,000.00 also entitles the respondent to
sub-licence the knowhow to any other party, subject, of course, to the approval
of M/s. Samsung.
Reliance has been placed by Mr. Radhakrishnan on a decision of this Court in
Essar Gujarat Limited (supra). In that case, the licence fee was paid to the
supplier of the plant and machinery for a licence to operate the plant which
was in reality nothing but was held to be an additional price payable for the
plant itself and was, therefore, held to be includible in its assessable value.
It is in the afore-mentioned fact situation, this Court held:
"Reading all these agreements together, it is not possible to
uphold the contention of Mr. Salve that the pre-condition of obtaining a licence from Midrex was not a condition of sale, but a clause inserted to
protect EGL. Without a licence from Midrex, the plant would be of no use to
That is why this overriding clause was inserted.
This overriding clause was clearly a condition of sale. It was essential for
EGL to have this licence from Midrex to operate this plant and use Midrex
technology for producing sponge iron in India.
Therefore, in our view, obtaining a licence from Midrex was a pre-condition
of sale. In fact, as was recorded in the agreement, the sale of the plant had
not taken place even at the time when the contract with Midrex was being signed
on 4-12-1987, although the agreement with TIL for purchase of the plant was
executed on 24th March, 1987.
Therefore, we are of the view that the Tribunal was in error in holding that
the payments to be made to Midrex by way of licence fees could not be added to
the price actually paid to TIL for purchase of the plant."
The Court noticed several curious aspects of the Agreement stating that it
started with the recital that "the Purchaser and the Seller have today
respectively purchased and sold a Direct Reduction Iron Plant, on the following
terms and conditions", which, according to this Court , indicated that the
purchase and sale of the plant had taken place on 24th March, 1987, but in
clause (2) it was stated that the purchaser would purchase the property from
the seller at the stated price. Upon construing the terms of the conditions, it
"Therefore, the process licence fees of DM 2,000,000 was rightly added
to the purchase price by the Collector of Customs. The order of CEGAT on this
question is set aside."
In Mukund Limited vs. Commissioner of Customs, ACC, Mumbai [(1999) 112
E.L.T. 479, whereupon again reliance was placed by the learned counsel, the
drawings related to basic design and drawing of the gas cleaning plant made by
Davy Mckee and imported by Mukund Limited. In the afore- mentioned situation,
the CESTAT opined:
"The payment of $ (sic) 6,57,900 noted above in the price schedule is
towards the services indicated above in the Agreement and which is a necessary
concomitant to the supply of Design and Engineering drawings for the gas
cleaning plant made by Davy Mckee and imported by the appellants. The
appellants have been entrusted with the setting up of gas cleaning plant, and
this could only be achieved not only by purchasing the basic design and
engineering drawings imported from Davy Mckee but also the whole engineering
package of supervision of detail drawing, erection, commissioning and
performance guarantee test.
The payment made in foreign exchange towards supervision charges during
design, erection and commissioning will necessarily have to form part of the
assessable value of the imported goods and the value thereof will include not
only the price paid for design and engineering but also for supervision
charges. This will follow from Rule 9 of the Valuation Rules which provides for
addition of certain costs and services to the transaction value. Rule 9(1)(e)
covers all other payments actually made or to be made as a condition of sale of
imported goods by the buyer to the seller."
However, TISCO (supra), this Court took note of interpretative note to Rule
4 and held:
".The part of the Interpretative Note to Rule 4 relied on by the
Tribunal has been couched in a negative form and is accompanied by a proviso.
It means that the charges or costs described in clauses (a), (b) and (c) are
not to be included in the value of imported goods subject to satisfying the
requirement of the proviso that the charges were distinguishable from the price
actually paid or payable for the imported goods. This part of the
Interpretative Note cannot be so read as to mean that those charges which are
not covered in clauses (a) to (c) are available to be included in the value of
the imported goods.."
The said decision is squarely applicable to the facts of the present case.
We cannot, therefore, accept the contention of Mr. Radhakrishnan.
More over, no case has been made out that the sale price of the imported
plant and machinery had been under-stated.
For the reasons afore-mentioned, we
do not find any merit in this appeal which is dismissed accordingly. In the
facts and circumstances of the case, however, there shall be no order as to