ORDER
Gowri Shankar, Member (T)
1. The question for consideration in this appeal is the valuation of the mosquito coil making machine imported by Balsara Extrusion Ltd., the respondent. The claim filed by the importer for refund of customs duty paid in excess to the machine was rejected by the Dy. Commissioner of Customs. On appeal by the importer, the Commissioner (Appeals) accepted the claim and ordered sanction of refund. This appeal by the Commissioner is against that order.
2. The machine in question was imported in November 1998 from Macro Traders Ltd., Dhaka in Bangladesh. The value declared for the set of parts which was comprising the machine in the suppliers invoice value of US $ 25000. In the declaration that accompanied the bill of entry, the importer stated that in terms of joint venture agreement the supplier was entitled to “issue and allotment of equity shares in the importer company.” The agreement referred to was agreement between Macro Traders Pvt. Ltd., Bangladeshi company and Balsara Extrusions, an Indian partnership. The agreement recited that subject to government approval, Balsara extrusions would ensure that 49% of the paid up equity capital of Balsara Extrusion Pvt. Ltd. would be issued to Macro Traders P. Ltd. in return for supply and commissioning by the latter of four mosquito coil making machine described in detail in the schedule to the agreement. Clause 6 and 7 of the Preamble to the agreement read as below.
“6. JVCO (Balsara Extrusion Pvt. Ltd.) has approached Macro for supply and commissioning of mosquito repellent coil manufacturing machines, more particularly, described in Schedule 1 hereto (hereinafter referred to as “the said machine”), at agreed value in Indian Rupees (INRs) 108.31 lakhs, and a further 1,00,000 US $ (25000/- US dollars for each machine) payable by the JVCO on delivery of the said capital Machines and the said know-how free of cost.”
“7. MACRO has considered the request of JVCO for the supply and commissioning of the said machines and the said knowhow as aforesaid, subject to the BE agreeing and giving consent for allotment and issue of shares of Rs. 108.31 lakhs, inclusive of permia, so that participation of Macro in the paidup capital of the JVCO shall be 49% of the paid-up capital of the JVCO.”
3. The department was therefore of the view that value of 4 machines would be sum of Rs. 108.31 lakhs and US $ 1,00,000 and determined the value of each machine at one-fourth of this amount. It thus determined the value of the imported machine to be Rs. 3681793. The importer paid duty of this amount.
4. Subsequently, the importer filed a claim for refund on the ground that the joint venture agreement between the parties had been terminated on account of disputes between them and therefore the enhancement that was carried out of the value of the machine by Rs. 27.08 lakhs should not be effective. It claimed refund of the duty paid on this sum. The Dy. Commissioner did not accept these contentions. He noted that the service provided by the Bangladeshi company in terms of the joint venture agreement comprise transfer of technical know-how provision of scale and support service and technical supervision of the manufacturing process. The technical know-how accordingly included formulation of the chemical or raw material specification for manufacture of mosquito repellent coil for which the importer had to employ engineering and 5 technicians of the foreign supplier “the import of just machinery without the know-how to manufacture the mosquito coil specially regarding the patented formulation of the mosquito coil is useless. Therefore the supply of know-how along with the machinery was mandatory in this case. Further this is clear from the clause of JVA neither the applicant nor the foreign supplier of the goods should enter into any similar agreement for manufacture and mosquito coil with any other person/party in India. Therefore, it appears that the credit value of this case (i.e. Rs. 27.08 lakhs for each machine) includes inherent fee for process licence. In terms of JVA, the additional amount of Rs. 27.08 lakhs for each machine is relatable to the imported goods and is paid as a condition of sale of the said goods. It is clear from the terms of agreement that the allotment of shares to the supplier that the JVCO for the agreed sum is the condition for supply and commissioning of the machinery with the knowhow and but for this, the machinery would not have been supplied for the value indicated in the invoice.” He relied upon the judgement of the Supreme Court in CC vs. Essar Gujarat Ltd. 1996 (88) ELT 609 to say that in these circumstances, the fee payable for the know-how was to be included in the value. He did not accept the contention that the joint venture agreement had been terminated by the notice dated 9.2.99 issued by the importer Macro Traders. Clause 25.2 of the agreement provided for termination at any time by agreement in writing signed by both parties. In the absence of this consent by the Bangladeshi company to the agreement it continued to be in force. He therefore dismissed the claim.
5. On appeal by the importer the Commissioner (Appeals) allowed the appeal. He accepted the contention of the importer that the amount share of Rs. 108.31 lakhs were not issued for supply in Company and therefore nothing was paid to it over and above the sum of Rs. 25000 per machine. The payment of the entire amount was subject to the fulfilment of the certain condition by the supplier and “once those conditions were not fulfilled and the agreement was terminated there was no necessity of payment of the additional amount and as such the duty already paid on the amount needs to be refunded.” He allowed the appeal. Hence the appeal by the Commissioner.
6. The department’s appeal contends that a reading of the agreement makes it clear that the allotment of the shares to the Bangladeshi party to the proposed joint venture was a condition for supply and commissioning of the machinery and provision of know-how, and but for this agreement the machinery would not have been supplied in the value indicated in the agreement. Article 6 & 7 of the agreement sets out a composite price of Rs. 108.31 lakhs and US $ 100,000 for supplying and commissioning of the machinery and the know-how. Reliance is placed upon the judgement of the Supreme Court in CCE vs. Essar Gujarat Ltd. 1996 (88) ELT 609. The appeal challenges the assessee’s stand that the joint venture agreement has been terminated following notice issued by it on 9.2.1999. Article 22 of the agreement provides for settlement of any dispute or breach of contract or arbitration and article 25.2 provides for termination of the agreement in writing by both sides. The agreement has therefore not been terminated. The departmental representative emphasises these contentions.
7. The counsel for the respondent contends that the judgement in Essar Gujarat Ltd. will not apply because the purchase by the importer of know-how was not a condition of sale. There was no agreement between the foreign supplier and Balsara Extrusions Pvt. Ltd. The joint venture agreement itself did not come into effect therefore the condition in that agreement relating to payment of know-how would not apply.
8. We have noted the know-how that was to be provided by Macro which is specified in schedule 2 to the agreement. It includes formulation/recipe of mosquito coils; specification of raw material its source of supply raw material indigenous substitution; drawings for machines and foundation operating and maintenance manual for the machinery, quality control manual; process charge and other charges, factory layout, material handling methods and training manual. The know-how that was to be supplied by Macro therefore related to use of the machine in the manufacture of mosquito coils. There is admittedly no specific separate value in the agreement for the cost of know-how and for the machine. The contention of the Commissioner that the price of Rs. 108.31 lakhs plus US $ 100,000 is a composite price for supply of know-how and the machine has to be accepted although article 6 which we have reproduced above suggests that the price of each machine is US $ 25000 and supply and commissioning of the machine is at a cost of Rs. 108.31 lakhs. It is to be noted that, long before the signing of the joint venture agreement, the importer had placed an order on 8.9.1997 for supply of one mosquito coil machine at $25000. It is not clear whether this machine was imported at this price. However, this itself is indicative of the fact that even prior to the signing of the agreement in June 1998, the value of the machine itself was determined to be $25000. This price in the invoice for the input of the machine which was actually imported in November 1998 is also shown to be $ 25000. The claim in the department’s appeal to say that the cost of the machine would be the price mentioned in Article 6 of the agreement also cannot be accepted. The price in that article as we have noted, included both the cost of the machine and the amount payable as know-how, and this article cannot be read that this is the cost of the machine alone. It would then mean that supply of know-how including setting up and commissioning the machine would be performed free by the supplier. It is not unreasonable to conclude that the price of the machine as distinguished from the cost to be payable of the know-how is $ 25000.
9. The departmental representative was at pains to emphasise that the cost of the machine roughly was less than the amount payable for the know-how of Rs. 37 lakhs. That the cost of utilising the machine may be higher than its cost does not itself give arise to suspicion. The relative cost of the machine and the know-how may depend on the quality and cost of consideration of one and the know-how and the extent of know-how to be supplied. The know-how to be supplied is as we have seen is considerable and comprised various form, including commissioning the machine. In the absence of any evidence by the department to show that the cost of know-how referred include the cost of machine, apparent disproportion between these two costs is riot a fact of significance.
10. We also do not se the relevance of the Essar Gujarat judgement in the facts before us. In the judgment of the Supreme Court ordered inclusion in the value of the machine imported by Essar of that much of the know-how of fees payable by the importer in order to obtain a licence to utilise a particular technology (Midrex) without which the plant would have been utilised. The fee in other words was included because it was payable for a particular technology for the utilisation of which the machine were specially designed. Except for situations covered by the Valuation Rules, the cost of know-how required for utilising the machine for manufacture of the final product is not includable in the value of the machine unless it is a condition of sale. The judgment of the Supreme Court in Essar Gujarat Ltd. has itself excluded the sums paid by the importer for post importation activities. Even if an agreement for the supply of know-how is a single one it does not lead to the conclusion that machinery will not he supplied unless the importer purchased the know-how. In point of fact, the machine has been imported without there being supply of know-how.
11. The finding of the Commissioner (Appeals) that the know-how in question has not been supplied, and the contention of the counsel for the respondent that it has not been supplied till date is not questioned by the department. In fact the action of the respondent in terminating the contract was necessitated by the fact that the supplier had not lived up to the conditions of the contract including supply of know-how and installation and commissioning of the machine. The position therefore is that the know-how has not been supplied. It is worth repeating that even if it was supplied, its cost would not be includable in the assessable value of the machine.
12. We therefore find no ground for interference. Appeal dismissed.