ORDER
P.G. Chacko, Member (T)
1. The appellants, in the year 1994, entered into an agreement with M/s. Southwire Company, USA for purchase of machinery and equipments (hereinafter referred to as the capital goods) for manufacture of electrolytic copper rods and, accordingly, imported the capital goods in 1995. They had already entered into a Technical Assistance Agreement on 18-9-1993 with M/s. Taihan Electric Wire Co. Ltd., Korea. The various items of the capital goods were covered by invoices Nos. 1599-A and 1599-B issued by the foreign suppliers, An amount of US $ 15 lakhs was charged on the appellants by M/s. Southwire towards “engineering and service charges” as per invoice No. 1599-C. The imported capital goods were intended for use for a process of manufacture termed “SCR-2000 copper system”. As per the contract between the appellants and M/s. Southwire Company, the latter would provide engineering services (Item-P under agreement dated 11-1-1994), operational training in USA (Item-Q), user licence (Item-R) and field services and start-up assistance (Item-U). These items were covered by “engineering and service charges” mentioned in invoice No. 1599-C ibid and the amount payable for these charges by the appellants was US $ 15 lakhs as already noted. The jurisdictional Assistant Commissioner of Customs ordered for inclusion of this amount in the value of the imported capital goods for the purpose of determining the assessable value of the goods under Section 14 of the Customs Act, 1962. The Assistant Commissioner passed the order after reaching a finding to the effect that the conditions of the contract mentioned as Items – P, Q, R, and U signified a transfer of technology/know-how accompanying the importation of the goods and the same was a condition of sale since it was impossible for the importer to use the goods for manufacturing activity without such technology/know-how. The appeal filed by the party against the order of the Assistant Commissioner was rejected by the Commissioner of Customs (Appeals), who upheld the order of the lower authority in toto by relying on the decision of the Hon’ble Supreme Court in the case of Collector of Customs (Preventive), Ahmedabad v. Essar Gujarat Ltd. 1996 (88) E.L.T. 609 (S.C.). Hence the present appeal by the assessee.
2. We have carefully examined the orders of both the lower authorities and connected records. We have also heard ld. Advocate Shri R. Par-thasarathy for the appellants and ld. DR Shri Sanjeev Srivastava for the respondent.
3. Ld. Advocate has submitted that the price of technology had already stood included in the invoice value of the goods. The items P, Q and U of the contract viz. engineering services, operational training and field services & start-up assistance were post-importation services and therefore had no relation to the imported capital goods. He has also contended that the user licence mentioned as Item-R of the contract was not a condition of sale under the contract. None of the four items P, Q, U and R attracted the provisions of Rule 9(1)(c) of the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988 and therefore the amount of US $ 15 lakhs charged on the appellants by M/s. Southwire Company, was not includible in the assessable value of the imported capital goods. Ld. Advocate has relied on the decision of the Supreme Court in Essar Gujarat Ltd. (Supra) in support of the submission that the items P, Q and U are net liable to be included in the assessable value of the goods. He has, therefore, prayed for setting aside the impugned order and allowing the appeal.
4. Ld. JDR, opposing the above submissions and reiterating the findings of the adjudicating and first appellate authorities, has contended that the appellant’s case is one of project import rather than mere import of capital goods. According to him, the whole project has to be taken into account for valuation purposes. The project included a transfer of technology as well, without which it was impossible for the appellants to make the imported machinery/equipments operational for the purpose of manufacture of their products. Such transfer of technology was covered by items P, Q and U. The user licence (Item-R) was also indispensable for using the capital goods for the “SCR-2000 copper system”. These items were conditions of the sale of the project. Therefore, the entire amount of US $ 15 lakhs charged by M/s. Southwire Company was liable to be included in the assessable value of the goods. Ld. DR has, further, relied on the decision of the Apex Court in Essar Gujarat Ltd. (Supra) in support of his contention that the amounts charged for the user licence and for the technical services rendered by M/s. Southwire Company were includible in the assessable value of the imported goods. DR has also relied on the decisions of the Tribunal in the cases of CC, Mumbai v. Himson Textile Engg. Indus. Ltd. 1997 (93) E.L.T. 301, and Mukund Ltd. v. CC, Mumbai 1999 (112) E.L.T. 479. He has prayed for rejecting the appeal.
5. We have carefully considered the rival submissions and the case law cited before us. We note that the importation of the machinery equipments was made by the appellants as part of a project for the manufacture of electrolytic copper rods by making use of M/s. Southwise Company’s technology of what was called “Continuous Casting and Rolling Copper Rod System.” This factual position is clear from para (8) of the Statement of Facts in the appeal memorandum extracted below :-
“On 15-11-1995, TDT approached the Ministry of Mines (Annexure 3) for a sponsor letter to enable the plant and equipment imported for the copper project to be registered under the Project Import Scheme. The Ministry of Mines sponsored the project by its letter dated 22-5-1996 (Annexure 4). Thereafter, TDT applied to the Assistant Commissioner of Customs, ICD, Tughlakabad for registration of the project under the Project Import Scheme so as to avail concessional rate of duty applicable to imports under the said scheme. The project was registered and the Registration No. was 6/96.”
The subject invoices also clearly mentioned the above fact by indicating the project as “SCR-2000.” More particularly, invoice No. 1599-C charged US $ 15 lakhs for an item which was mentioned in the invoice as “SCR-2000 copper system engineering and service charges”. We, further, note that, by letter dated 11-6-1996, M/s. Southwire Company provided the break-up of the amount of US $ 15 lakhs covered by invoice No. 1599-C. The full text of the said letter, which, in our view, is material to the issue before us, is given below :-
June 11,1996.
TDT COPPER LTD.
801, MADAME CAMA BHAWAN
BHIKAJI CAMA PLACE
NEW DELHI, 110 066
INDIA
Dear MRS. A. YANG:
As per your request to clarify and give a break-up of the amount billed by us, the following is our comments:
Southwire Continuous Copper Rod System, being a patented technology includes the price of Technology in the cost of the main equipment itself. However, in case of System Engineering & Field Services charges although no Technology Transfer takes place directly, it may be considered that some sort of Technology Transfer is taking place indirectly, [emphasis supplied]
As per the contract vide our proposal No. 1868-R2, System Engineering (P), Operational Training (Q), User Licence (R) and Field Services (U), amount to USD 1,500,000 of which Field Services charges are USD 300,000. The break-up for Technology Portion, although not mentioned in the Contract, could be through these four heads only by virtue of using the SCR System.
The price break-up can be summarized as follows:
ITEM ORIGINAL REVISED DESCRIPTION System Engineering (P) + Operational Training (Q) + User Licence (R) USD 1,200,000 USD 1,165,000 Field Service (U) USD 300,000 USD 285,000 Technology Portion N/A USD 50,000 (for above 4 Items) TOTAL: USD 1,500,000 USD 1,500,000 Sincerely, SOUTHWIRE COMPANY Sd/- GEORGEC.WARD ASSISTANT TO THE EXECUTIVE VICE PRESIDENT.
Though, in the earlier part of the above letter, M/s. Southwire Company stated that the price of technology was included in the cost of the main equipment itself, they brought the value of technology under items P, Q, R, and U and satated the value thereof as US $ 50,000 in latter part of the letter. This version of M/s. Southwire Company appears to be unreliable on account of the contradiction inherent in it. A material fact was, however, brought out clearly in the letter (vide emphasised portion). M/s. Southwire Company stated in the letter that a technology transfer had indirectly taken place by way of System Engineering and Field Services. This admission on the part of M/s. Southwire Company has been rightly noted and considered by the lower authorities.
6. On a careful perusal of the conditions P, Q, U and R of the contract between the appellants and M/s. Southwire Company, we find that the appellant’s project for the manufacture of electrolytic copper rods based on the technology of SCR-2000 copper system of M/s. Southwire Company could not have been accomplished without fulfilment of the requisites mentioned at P, U and R. With regard to the user licence of Southwire Company, mentioned at Item-R, we have noted that the licence was a part of the agreement inasmuch as it was expressly provided in the agreement as follows :-
SOUTHWIRE USER LICENCE
“Included within this agreement is SOUTHWIRE’s Licence to cover the use of and right to practice SOUTHWIRE Know-How and Technology. The Licence will permit the operation of one SCR system in India without the right to duplicate any of the equipment. The Licence requires that the PURCHASER undertake the obligation to honour SOUTHWIRE’S proprietary Know-How and Technology which is transferred to them”.
It is clear from the above provision of the agreement that the licence was granted by Southwire Company to the appellants not only to operate one SCR system in India but also to use the Southwire know-how and technology for the said purpose. The above provision also confirms the transfer of South-wire’s know-how and technology to the appellants. As rightly found by the lower authorities, there was a transfer of the Southwire technology and know-how concomitant with the importation of the machinery/equipments and it would have been impossible for the appellants to accomplish their project of manufacture of electrolytic copper on the basis of the SCR-2000 system without utilising such technology and know-how transferred under items P, U and R.
7. Regarding operational training mentioned at Item-Q under the contract, we have noted that, under the said item, M/s. Southwire Company offered to provide training for the appellants’ personnel. Such training, to be held in USA, was to include instructions on product specifications, quality control etc., such training is distinguishable from field services and start-up assistance mentioned under Item-U. The latter was intended to be directly provided by the experts of Southwire Company at the appellant’s site in India, but for which it would have been imposible for the appellants to commission their manufacturing plant. The operational training mentioned at Item-Q, on the other hand, can be understood to be a programme of theoretical and practical training rendered by M/s. Southwire Company to the technical personnel of the appellants abroad. Such a training programme cannot, in our view, be considered to add anything to the value of the imported machinery/equipments. We would draw support to this view from the decision of the Apex Court in Essar Gujarat Ltd. (Supra) wherein the court held that a sum of DM 2,200,000 charged by the foreign technical collaborators for theoretical and practical training was not liable to be added to the value of the imported plant.
8. In the case of Essar Gujarat Ltd. (Supra), M/s. Essar Gujarat Ltd. (in short, Essar) wanted to set up an iron plant based on the Direct Reduction process of M/s. Midrex International B.V., USA (in short, Midrex), at Hazira in Gujarat, India. Essar entered into a contract with M/s. Teviot Investments Ltd. (in short, TIL) for purchase of a Direct Reduction Iron plant (DRI plant) installed at Emden, West Germany. The said plant, which had been procured by TIL as a second-hand item, was based on the Midrex Dr for manufac-ture of sponge iron. One of the conditions of the contract was that Essar had to obtain transfer of the process licence from Midrex. Essar, therefore, entered into an agreement with Midrex, whereunder the latter granted to the former the licence for the operation of the plant by utilising the Midrex DR process. On the same day, Essar also entered into an agreement of technical collaboration with M/s. Voest Alpine A.G (in short, VA) who were holding construction licence and the right to use patents from Midrex for marketing, sale, design and construction of Midrex plants at Hazira, India. Under this agreement, VA undertook to incorporate certain additional facilities viz. hot discharge and hot briquetting systems in the Midrex plant by refurbishments, modifications etc., and to make use of the Midrex construction and process licence for this purpose. Essar’s agreement with Midrex was annexed to their agreement with VA also. In Article (3) of Essar’s agreement with VA, it was provided that, in addition to the services being provided by VA, Midrex would provide certain technical services to VA or to Essar in connection with transfer of technology covered under the Process Licence Agreement. Such technical services included :-
(a) basic engineering package for the hot discharge and hot briquet-ting system;
(b) advise to Essar on optimum utilisation of iron oxide lump ore and iron oxide pellets;
(c) provide information and documentation to allow Essar to implement improvements in plant design and/or operating procedures which have been developed by Midrex or other Midrex Process Licences;
(d) provide continuing information to Essar on operating results from other Midrex Plants to assist Essar in optimising plant operating efficiency including operating reports, operation bulletins and operation seminars.
Article (10) provided for the amounts to be paid by Essar to VA in consideration of fulfilment of the latter’s obligations as collaborator. The relevant provisions were as follows :-
10.1.1 Process licence fee payable DM 2,000,000 lump
to MIDREX Corporation for sum
the right to use the Midrex
process and patents
10.1.1.2 Cost of technical services DM 10,100,000 lump
provided under Article 3 in sum
connection with Midrex process
Technical Services:
10.1.2.1 Payment for engineering DM 23,100,000 lump
and consultancy fee as speci- sum
fied under this agreement
10.1.2.2 payment for theoretical and DM 2,200,000 lump
practical training outside sum
India
9. The question which arose before the Supreme Court was whether the above amounts were liable to be added to the invoice price of the plant (which was imported by Essar in terms of the aforesaid agreements) to arrive at the transaction value of the plant. The Court, after considering the provisions of Rule 9 of the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988 as well as the provisions of Section 14 of the Customs Act and also after examining the intention of the parties as brought out by the agreements aforesaid, held that the amount of DM 2,000,000 paid by Eassar for the process licence free as also the amount of DM 10,100,000 paid by Essar towards cost of technical services should be added to the value of the imported plant. The amount paid for theoretical and practical training outside India was, however, held to be excludible from the assessable value of the imported plant. The order of the Apex Court to include the amount paid as licence fee in the assessable value of the imported plant was based on the finding that it was essential for Essar to have the licence from Medrix to operate the plant and use Medrix technology for producing sponge iron in India and that obtaining licence from Medrix was a pre-condition of the sale of the plant under the contract. A similar finding is, in our view, warranted by the facts of the present case too, with regard to the user licence granted by Southwire Company to the appellants. For ordering inclusion of the amount paid by Essar towards technical services in the assessable value of the imported plant, the Apex Court found that it was essential to have Medrix technology to make the plant functional and that, without the technical information provided by Medrix, it might not have been possible to operate the plant at all. The Court, thus, reached a clear finding that the payment of DM 10,100,000 was made for the transfer of technology under the Process Licence Agreement entered into by Essar with Medrix and the technical services in question were part of the said agreement. The Court found that the operation licence of Medrix was not merely a permission to use the plant but also to provide technical know-how to make the plant functional and also to improve the capacity of the plant by incorporating additional facilities. In our view, the decision of the apex Court in relation to the cost of technical services is applicable, a fortiori, to the services mentioned as Items-P and U inasmuch as the services were rendered by the supplier of goods themselves and not by any third party as in Essar Gujarat Ltd.’s case. Therefore, the payment made by the appellants to M/s. Southwire Company for ‘engineering services’ and ‘field services & start-up assistance’ mentioned at Items-P and U respectively under the contract should be included in the assessable value or the imported equipments. The amount paid for the user licence of Southwire Company should also be included in the assessable value of the equipments for the reasons already recorded. As regards operational training in USA, however, the appellants would be entitled to claim exclusion of the cost of this item from the assessable value of the imported equipments.
10. We have also taken note of the Tribunal’s decisions in the cases of Himson Textile Engg. Indus. Ltd. (Supra) and Mukund Ltd. (Supra). In both these cases cited by ld. DR, the Tribunal relied on the ratio of the Supreme Court’s decision in Essar Gujarat Ltd. (Supra). Reliance on both these decisions appears to be apposite to the Revenue’s case in relation to items P, U and R irr the instant case, and we accept the same in favour of the respondents.
11. For the reasons recorded above, we hold that the elements represented by P, U and R in the amount of US $ 15 lakhs mentioned in invoice No. 1599-C should be included in the assessable value of the imported machinery/equipments, while the remaining element Q (operational training in USA) shall stand excluded from the assessable value. The appeal is allowed to this extent only. The jurisdictional Assistant Commissioner of Customs is directed to revise the valuation in terms of this order, after affording reasonable opportunity of hearing to the party [on the limited question of quantification of the amount to be excluded from the assessable value in terms of this order].