ORDER
S.V. Maruthi, Member (J)
1. The Department is the appellant before us. M/s. Visakhapatnam Steel Project for the purpose of setting up Medium Merchant and Structural Mill entered into an agreement with Skoda Export Foreign Trade Corporation, Czechoslovakia who have provided the basic design and engineering of the plant. M/s. Bharat Heavy Electricals Ltd. are the Indian suppliers Electrics with whom M/s. Visakhapatnam Steel Project entered into an agreement to carry out design and engineering, manufacturing and commissioning of the said plant. M/s. Bharat Heavy Electricals Ltd., since they do not have the technical know-how, agreed for carrying out design and engineering, manufacturing and commissioning of the said plant through M/s. Siemens AG of Federal Republic of Germany who is hereafter called as foreign major supplier electrics. Schedule II of the agreement provides for the Payments Schedule. It is divided into two parts. The first part consists of Terms of Work and Payments to be made in respect of the Indigenous Electrical Equipments and Services to the Indian Supplier viz. Bharat Heavy Electricals Ltd. (B.H.E.L.). This part provides for various items of work to be carried out by B.H.E.L. and the amount to be paid to B.H.E.L., as against each item. The second part deals with the payments to be made to foreign major suppliers (electrics) viz. M/s. Siemens AG for the imported electrical equipments and services. The relevant items are as follows :-
2.2.1 Equipments, Commissioning Spares and -13,659,920 DM
Spceial Tools
2.2.2 Engineering fees -15,185,240 DM
2.2.3 Spare Paris for 2 years normal operation and - 1,127,287 DM
maintenance of Plant on three shift basis
2.2.4 Insurance Spares - 33,775 DM
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Total 30,006,222 DM
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In other words, the payments to foreign major suppliers electrics M/s. Siemens AG consist of two elements :- (1) Payment towards equipment commissioning, spares and special tools and (2) Payments towards engineering fees. The payments towards engineering fee as indicated above is 15,185,240 DM. The respondents namely M/s. Visakhapatnam Steel Project has to pay this amount to M/s. Siemens AG. When the goods were imported the respondents filed 3 bills of entry. The bill of entry No. 225 to 227, dated 27-6-1989 for DM 11,91,900,11,75,000 and 11,15,000 respectively. However, they have not included the amount of 15,185,240 for purpose of making assessment in respect of goods imported. Therefore, a query slip was issued proposing to include the said amount in the assessable value under Rule 9(1)(b)(iv) of the Customs Valuation (Determination of the Price of Imported Goods) Rules, 1988. The representatives of the respondents were heard personally on 5th July 1989. The respondents also filed a written reply. Before the Assistant Collector, the case of the respondents was that the fees paid towards design and engineering charges to M/s. Siemens AG were for the designing of the system for their M&SM electric operation. In other words, it is a fee for general layout and not for the equipment imported. As regards the equipment imported the fee is already earmarked and the amount has already been paid. The Assistant Collector on a consideration of Schedule II of the contract and Annexure XII of the agreement read with Article 2 of the General Conditions of the contract held that the fee under dispute is for designing and manufacture of equipment imported. Hence, it is ineludible in the assessable value of the goods imported. On appeal, the Collector held that Rule 9(1)(b)(iv) authorises addition of engineering fees to the price declared in case the engineering/design work concerns the production/sale of the equipment. In the instant case, he observed that there is no indication in the contract documents to the effect that these design/engineering fees sought to be added were relatable to the production of the equipment supplied by M/s. Siemens AG. The charges/fees paid by the appellants (respondents) is in the nature of compensation for the services rendered by M/s. Siemens AG for designing the entire net work of electrics of the plant of the appellants. Holding as above, he set aside the Order of the Assistant Collector. Hence, the appeal before us.
2. The main ground on which the Department canvasses the correctness of the Order of the Collector is that it is the responsibility of Indian suppliers electrics i.e. Bharat Heavy Electricals Ltd. to render services as mentioned under “Scope of Work” in Schedule-I and the fees paid to the Indian Supplier Electrics is not included in the assessable value. M/s. Siemens AG, West Germany who arc the foreign major suppliers electrics are in no way connected with the services mentioned under “Scope of Work” in Schedule-I. Hence, the engineering fees amounting to DM 15,185,240 payable to M/s. Siemens AG by the petitioner is related to the equipment supplied by them and accordingly forms part of assessable value of the goods covered by Bills of Entry.
3. The next contention of the Department is M/s. Siemens AG is not the contractor in terms of Article 11 of the General Conditions of contract to supply lay out and schematic drawings of the plant. The engineering fees payable to them by M/s. Visakhapatnam Steel Project is towards sale of the equipment and hence forms part of value of the equipment.
4. It is next contended that as per Part 1.1., 1.4 under Schedule-I of the agreement, dated 10-7-1987 M/s. Bharat Heavy Electricals Ltd. shall supply all the detailed drawings, layouts, technical documents and information in respect of the agreement. M/s. Siemens AG are in no way connected with these services. There are mere suppliers of the equipment and the payments made to them as per Schedule-II, IV, V of the agreement are towards the sale of equipment. In view of the above, the Department contended that the Order of the Collector that the fees under dispute paid to the foreign suppliers is not for services rendered by the foreign supplier but for an equipment supplied by them.
5. Shri Dave appearing for the respondents brought to our notice the terms and conditions of payments of the contract and the billing schedule and submitted that the amount in dispute is paid towards the engineering services rendered by M/s. Siemens AG and, therefore, the relevant Rule 9 on which the Assistant Collector has relied is not applicable in this case. He, therefore, submitted that the Order-in-Appeal should be confirmed.
6. In order to consider the dispute, it is necessary to refer to the terms and conditions of contract and billing Schedule. Under the conditions of the contract, the Indian supplier electrics namely M/s. Bharat Heavy Electricals Ltd. has to carry out design and engineering, manufacturing, delivery, supervision of erection and commissioning and performance guarantee test of electrics of the plant. Under Article 1 of the agreement in consideration of the payments to be made by the respondents to the Indian supplier electrics and foreign major suppliers electrics the Indian suppler electrics agreed to supply and perform the services as detailed in Schedule I – “Scope of work” to the agreement.
7. Schedule-I deals with the scope of work. It consists of various parts. Relevant part for the purpose of the appeal is 1.1.1.4. It reads :-
“Engineering services shall mean all the. engineering, general and detailed, technical administrative services in the form of drawings, layouts, designs, data, manuals etc. with reference to the Medium Merchant and Structural Mill as covered under this agreement. Engineering fees as stated in Schedule-2 hereunder shall be the consideration for engineering services by way of fees for such technical services.”
8. It also provides for supply of electrical equipment and the relevant clause reads as follows :-
“Supply of Electrical Equipments :-
The Foreign Major supplier electrics shall supply all the imported electrical equipments as specified in the contract specifications, on F.O.B. port of shipment basis according to INCO TERMS 1980 with latest revisions within the time stipulated in Schedule-3 para 3.2.1.”
9. Schedule-2 deals with the contract price to foreign Major supplier electrics which -we have already extracted in the above paragraphs. As pointed out in earlier paragraphs, as far as the payments to foreign major supplier electrics M/s. Siemens AG is concerned it consists of two parts. Part-I relates to the commissioning, spares and special tools, the other part deals with payments towards the engineering fees.
10. We may also refer to Annexure XII which provides for the scope of engineering. Some item are as follows :-
“Scope of Engineering
The scope of engineering is to be read in conjunction with article 11 of GCC.
1.0 Design & Engineering The basic and detailed design and engineering prepared specifically for complete electrics of medium merchant and structural mill with their auxiliaries. 2.0 General Engineering and order handling. 2.1 Selection of size and layout of the plant, detailed planning for interaction of individual plant components as applicable for control rooms. 2.2 Integration of electrical equipment with mechanical, furnace electrics and auxiliary equipment of complete mill. 2.3 Layout of electrical control rooms. 2.4 Excavation and preliminary foundation planning drawings as required. 2.5 Certified civil foundation assignment drawings showing foundation, loadings, cross sections, with details of inserts, cutouts and conduit plans for complete electrical equipment except furnace. 2.6 Single line/block diagrams. 2.7 General arrangement/dimension drawings for all equipment. XX XXX XXX XXX XXX 2.25 Documentation on hardware and software for PLC, fault print out and computer system. 2.26 Operation and maintenance manuals bill of materials and as built drawings. 2.27 Testing and commissioning reports as applicable. 2.28 Order handling including all incidental activities such as internal and external coordination connected with design and engineering of complete electrical equipment within the scope of contract of BHEL/Siemens." Article 11.1.1 says :-
“Inasmuch as the Contractor is required to supply drawings, documents and manuals, he shall furnish the same to the Purchaser in requisite number of copies as part of the contract. These shall include but not be restricted to calculation in specific cases as stated in 11.4.2, design (except equipment design), drawings, bill of materials (except bills of materials) for manufacture, manual etc. unless otherwise defined in the context.”
11. From a reading of Terms and Conditions of the contract and Schedule -1 and 2, Annexure – XII and Article 11 of the agreement, it would appear that it is the responsibility of M/s. Bharat Heavy Electricals Ltd. to carry out design and engineering, manufacture, delivery, supervision of the erection and commissioning and performance guarantee test of electrics of the plant. Since they do not have the expertise or experience, M/s. Siemens AG, West Germany were entrusted with the drawing, engineering, design, setting out the outlines as well as details of commissioning of equipment so that electrical portion of the plant be set up by them. It is the Indian supplier who is responsible for engineering services. Engineering services are enumerated in the contract and it provides for payments to the Siemens AG not only towards the equipments and commissioning, spares and special tools but also towards engineering fees. Annexure XII provides for these scope of engineering work to be carried out by M/s. Siemens AG. The Schedule of payment categorically mentions payments for equipment and services and payment for equipment is indicated separately and payments for engineering services is indicated separately. The engineering services are enumerated which means all engineering technical administrative services in the form of drawings, layouts, designing, data, manuals with reference to Medium Merchant and Structural Mills as covered under the contract. Since the contract itself specifically refers to the engineering services of the plant as indicated above, it cannot be said that the amount in dispute is paid for equipment imported. In this context, we may also refer to the billing schedule for the amount in dispute. The billing schedule refers to Article 1.1 of the agreement. It gives the description of drawings, documents, information supplied by the Siemens AG and it also provides the net bill value in DM. The total amount indicated is 15185240 DM. We may extract some of the items described under the description of drawings/documents/information in the Billing Schedule :-
(i) Numbering System; (ii) List of drawings; (iii) Supervisory room lay out (arrangement drawings) in ECR -1 with sectional view; (iv) Single line diagram for motor control in ECR -1; (v) Air flow motor system (block diagram); (vi) Air flow for motor ventilation system (block diagram)
We have extracted only a few items of list of scope of engineering work and not referred to all the items mentioned in the billing schedule. From the above, it follows that the amount in dispute relates to the lay-out of the plant and does not relate to the design and engineering services of the equipment imported.
12. We may now refer to Rule 9(1)(b)(iv) of the Customs Valuation Rules, 1988 and it reads as follows :-
“In determining the transaction value, there shall be added to the price actually paid or payable for the imported goods –
(a) ... (b) the value, apportioned as appropriate, of the following goods and services where supplied directly or indirectly by the buyer free of charge or at reduced cost for use in connection with the production and sale for export of imported goods, to the extent that such value has not been included in the price actually paid or payable, namely :- (i) to (iii)... (iv) engineering, development, art work, design work, and plans and sketches undertaken elsewhere than in India and necessary for the production of the imported goods."
13. A reading of Rule 9 (1) (b) (iv) makes it clear that the engineering fees for the production of the imported goods alone is to be included in the transaction value. In view of our finding that the engineering fees paid does not relate to the production of the imported goods, Rule 9(1)(b)(iv) is not applicable and Collector is justified in setting aside the Order of the Assistant Collector.
14. The appeal is, accordingly, dismissed.