{"id":128474,"date":"2007-05-17T00:00:00","date_gmt":"2007-05-16T18:30:00","guid":{"rendered":"https:\/\/www.legalindia.com\/judgments\/commnr-of-customs-port-vs-ms-toyota-kirloskar-motor-pvt-on-17-may-2007"},"modified":"2015-08-23T15:33:49","modified_gmt":"2015-08-23T10:03:49","slug":"commnr-of-customs-port-vs-ms-toyota-kirloskar-motor-pvt-on-17-may-2007","status":"publish","type":"post","link":"https:\/\/www.legalindia.com\/judgments\/commnr-of-customs-port-vs-ms-toyota-kirloskar-motor-pvt-on-17-may-2007","title":{"rendered":"Commnr. Of Customs (Port), … vs M\/S Toyota Kirloskar Motor Pvt. … on 17 May, 2007"},"content":{"rendered":"
Supreme Court of India<\/div>\n
Commnr. Of Customs (Port), … vs M\/S Toyota Kirloskar Motor Pvt. … on 17 May, 2007<\/div>\n
Author: S.B. Sinha<\/div>\n
Bench: S.B. Sinha, Markandey Katju<\/div>\n
           CASE NO.:\nAppeal (civil)  3635 of 2006\n\nPETITIONER:\nCommnr. of Customs (Port), Chennai\n\nRESPONDENT:\nM\/s Toyota Kirloskar Motor Pvt. Ltd\n\nDATE OF JUDGMENT: 17\/05\/2007\n\nBENCH:\nS.B. Sinha & Markandey Katju\n\nJUDGMENT:\n<\/pre>\n
J U D G M E N T<\/p>\n
S.B. SINHA, J :\n<\/p>\n
1.\tLeave granted.\n<\/p>\n
2.\tThis appeal is directed against a final order dated 07.12.2005 passed
\nby the Customs, Excise and Service Tax Appellate Tribunal (for short, ‘the
\nCESTAT’) passed  in Appeal Nos. C\/231\/04 and C\/949\/04 whereby and
\nwhereunder the appeal preferred by Respondent herein was allowed and that
\nof Appellant herein was dismissed.\n<\/p>\n
3.\tKirloskar Systems Limited entered into an agreement with Toyota
\nMotor Corporation, Japan.  It is also a major shareholder in the Respondent-
\nCompany.  For the purpose of establishing an automobile manufacturing
\nplant, Respondent imported some capital goods and parts thereof.\n<\/p>\n
4.\tDispute between the parties revolves round the valuation of the said
\ncapital goods and parts imported by the respondent from Toyota Motor
\nCorporation for manufacture of automobile in India.  Under the agreements
\nentered into by and between the respondent and the said Toyota Motor
\nCorporation, royalty and know-how fees were to be paid.\n<\/p>\n
5.\tAccording to the Revenue such payments were to be added to the
\ninvoice value of the goods so as to arrive at a proper transaction value, in
\nterms of Rule 9(1)(c) of the Customs Valuation (Determination of Price of
\nImported Goods) Rules, 1988 (for short, ‘the Rules).   Payments of royalty,
\naccording to the Revenue, have a direct nexus to the imported goods as the
\nsame go into the manufacture of the licensed vehicles and spare parts.\n<\/p>\n
6.\tBefore embarking upon the rival contentions of the parties, we may
\nnotice the basic and undisputed facts of the matter.\n<\/p>\n
7.\tA Technical Assistance Agreement was entered into by and between
\nToyota Motor Corporation and the respondent herein.  Some of the
\npayments were required to be made towards engineering services and for
\nimparting training to its personnel at Japan.\n<\/p>\n
\tIn the said agreement, the terms ‘licensed vehicles’, ‘local parts’, and
\n‘licensed products’ have been defined.  By reason of the said agreement, the
\nrespondent was given manufacturing licence for the licensed products of
\nToyota.  The licence was to be given on non-exclusive, non-divisible, non-
\ntransferable and non-assignable basis and was not to include any right to
\ngrant sub-licences without the licensor’s prior consent.\n<\/p>\n
\tArticles 3 and 4 of the said agreement, which are material for our
\npurpose,  read as under :\n<\/p>\n
\t\t“Article 3 \tOrdinary Assistance<\/p>\n
(a)\tThe Licensor shall, in accordance with the
\nformalities and conditions separately prescribed by
\nit, furnish the licensee, upon its request, with such
\ntechnical know how, information, data etc. relating
\nto the licensed products in written, verbal or any
\nother form, as then are or where used by the
\nLicensor and are then in the hand of and freely
\ndisposable by the Licensor and as are then
\nconsidered necessary and applicable by the
\nLicensor for the manufacture of the licensed
\nproducts from among those stipulated in appendix-
\nC attached hereto.\n<\/p>\n
(b)\tAny technical know-how, information, data, etc.
\nfurnished to the Licensee by the Licensor in
\naccordance with the preceding paragraph (a) and
\nall copies thereof shall, at the licenses expense, be
\nsent back to the Licensor even during the terms of
\nthis agreement, as soon as the Licensor requests
\ntheir return, considering the same unnecessary for
\nthe licensee, the Licensee shall also impose said
\nobligation upon its employees, officers and
\ndirectors who may have the custody of or access to
\nsuch know-how information data etc. and those
\nreproduced, whether those persons are in or out of
\noffice.”\n<\/p>\n
\tAppendix C of the agreement provides for technical know-how,
\ninformation data, etc. which were to be furnished by the licensor to the
\nlicensee under Article 3 being those which had separately been designated
\nby the licensor from amongst those specified therein, namely, for : (i)
\nstudying the feasibility of local parts manufacturing, (ii) manufacturing of
\nlocal parts, and (iii) production, preparation of licensed products.\n<\/p>\n
\tArticle 4 of the agreement reads as under :\n<\/p>\n
“Article 4  Additional Assistance <\/p>\n
(a)\tAt the Licenses written request, the Licensor may
\nfurnish the Licensee with manufacturing,
\nengineering and other know how and information
\nrelating to the licensed products which are not
\nreadily available in the licensors records but which
\nthe Licensor is willing to develop especially for the
\nlicensee, and which shall be furnished through
\nsuch documents and assistance as designated at the
\ndiscretion of the Licensor from among those
\nstipulated in appendix D attached hereto and any
\nother documents and assistance from time to time
\ndesignated by the licensor.\n<\/p>\n
(b)\tIn the event of the preceding paragraph (a), the
\nLicensee shall pay the Licensor all fees, and all
\ncosts and expenses incurred by the Licensor in
\ndeveloping and furnishing such know-how,
\ninformation, documents and or assistance.\n<\/p>\n
(c)\tIf the assistance rendered under paragraph (a)
\nhereof is technical assistance or engineering
\nassistance concerning the licensed products, such
\nassistance will be provided in accordance with the
\nprocedures and conditions set forth in Appendix E
\nattached hereto”\n<\/p>\n
\tAppendix D provides for assistance  to be furnished by the licensor to
\nthe licensee in terms of  Article 4, which are separately designated by the
\nlicensor from amongst those specified therein, namely, for : (i) construction
\nof plant, (ii) production and preparation, and (iii) pilot production and
\nproduction model.\n<\/p>\n
\tArticle 7 provides for basic requirements for manufacture of the
\nlicensed products. Article 11 provides for inspection thereof.  Article 16
\nprovides for payment of royalty in the following terms :\n<\/p>\n
\t\t“Article 16 – \tRoyalty<\/p>\n
(a) \tThe\tLicensee shall pay the Licensor royalty on
\nall of the licensed products manufactured by the
\nLicensee while this agreement is effective under
\narticle 30 hereof, in consideration of the license to
\nuse the technical know how, information, data, etc.
\nfurnished by the Licensor under article 3 hereof.
\nThe amount of the royalty shall be fixed in
\naccordance with paragraphs (a) and (b) of Article
\n17 hereof.\n<\/p>\n
(b)\tThe Licensee may deduct from the royalty
\npayments hereunder any withholding taxes which
\nthe Licensee is required under the law of the
\nterritory to pay for the account of the licensor,
\nprovided that the Licensee shall pay such taxes on
\nbehalf of and in the name of the Licensor and
\nfurnish the Licensor with proper certificates for the
\nsame from the authorities concerned, to enable the
\nLicensor to obtain credit therefor against its
\nJapanese taxes.  Handling fees or any other
\nexpenses incurred in remitting the amount of
\nroyalty shall be for the account of the Licensee and
\nshall not be deducted from the royalty payments.”\n<\/p>\n
\tThe mode and manner in which calculation of royalty is to be made
\nhas been provided under Article 17, sub-clause (2) whereof is as under :\n<\/p>\n
\t“(2)\tWith respect to the unit Local Parts (such as
\nengines, transmissions, steering links and axles), as
\nseparately agreed upon by the parties hereto,
\nmanufactured by the Licensee itself during each calendar
\nquarter for sale (i) as spare parts for the licensed vehicles
\nand or (ii) as original equipment parts and or spare parts
\nfor other vehicles than the licensed vehicles,  the
\nLicensee shall pay the Licensor royalty equivalent to
\nthree percent (3%) of the local value added of those unit
\nLocal Parts.  For this  purpose,  the number of the unit
\nLocal Parts subject to royalty shall be determined at the
\ntime of their line off at the factory where they are
\nmanufactured, and the local value added shall be
\nLicensees wholesale or selling prices of those unit Local
\nParts minus the following costs and tax, if included
\ntherein :\n<\/p>\n
(i)\tAll costs for the KD parts which are incurred until
\nsuch KD parts have been brought into the above
\nmentioned factory;\n<\/p>\n
(ii)\tAll costs for such Local Parts as are standard
\nbought out components as used to manufacture
\nthose licensed vehicles and as listed in appendix H
\nattached hereto, which are equivalent to the
\nLicensees cost of production thereof if those are
\nmanufactured by the Licensee itself or the
\nLicensees purchase prices thereof if those are
\npurchased by the Licensee from third parties and;\n<\/p>\n
(iii)\tSales tax, excise tax, commodity tax or any other
\ntax of similar nature (other than any of such taxes
\nto be refunded to the licensee) imposed directly on
\nthe manufacture, sale or delivery by the Licensee
\nof those unit Local Parts.”\n<\/p>\n
\tArticle 21 provides for patents.\n<\/p>\n
8.\tIndisputably, in terms of the said agreement, the Respondent imported
\ncapital goods from Toyota Motor Corporation for manufacture of Passenger
\nUtility Vehicles.  Proceeding on the basis that the supplier is related to the
\nrespondent, the matter relating to valuation of the said capital goods was
\nreferred to the Special Valuation Branch for verification in regard to
\nacceptance or otherwise of the declared invoice value.  The Special
\nValuation Branch by reason of a circular dated 06.04.1999 was directed to
\ncontinue to assess the value of imports from the related supplier
\nprovisionally.\n<\/p>\n
9.\tAnother agreement known as ‘TMSS Overseas Parts Export
\nAgreement’ was entered into by and between the respondent and the Toyota
\nMotor Management Services Singapore Pvt. Ltd.  The said agreement
\ncovered the seal of the TMSS.  The Assessing Authority passed an order in
\noriginal dated 31.01.2003 holding : (1) In view of Articles  3 and 4 of the
\nagreement, a lump sum amount of J.Y. 1,015,000,325 paid up to 31.10.2002
\ntowards technical know-how should be loaded to the value of goods
\nimported as components, tools and new capital goods imported from related
\nsupplier. (2) The value of components be arrived at by the adjustments,
\nnamely, proportionate addition of lump sum amount and by loading of 5%
\nroyalty. (3) The invoice values of spares\/accessories be loaded by 2% on
\naccount of royalty payment and 3% on spares\/accessories imported after
\n01.01.2004.\n<\/p>\n
10.\tIn coming to its conclusions, as noticed hereinbefore, the Assessing
\nAuthority recorded the following findings :\n<\/p>\n
“42.\tIt has already been pointed out that it is Toyota
\nMotor Corporation which decide what Toyota
\nProducts would be sold to TKML and having
\ndecided that TMC had made it mandatory on the
\npart of the importers to use the technical assistance
\nagreement and thus it can be concluded that import
\nof Toyota Products is subject to conditions related
\nto the use of TAA.\n<\/p>\n
43.\tThus in terms of Rule 9(1)(c) of the CVR 88,
\nRoyalties and license fees related to the imported
\ngoods that the buyer is required to pay, directly or
\nindirectly, as a condition of the sale of the goods
\nbeing valued shall be added to the extent that such
\nroyalties and fees are not included in the price
\nactually paid or payable for the imported goods.\n<\/p>\n
\t\txxx\t\txxx\t\t\txxx<\/p>\n
46.\tSince the goods were imported from the supplier
\ncum collaborator (and their subsidiaries) who
\ntransferred the technical know how and the
\nlicensee to use their technology for which the
\nforeign collaborator receives the royalty on the
\nsale proceeds of the finished products the value of
\nthe imported goods will naturally be influenced by
\nthe relationship as well as the collaboration
\nagreement.\n<\/p>\n
47.\tThe very fact that royalty is paid to the supplier on
\nlocally manufactured products, makes it clear that
\nthe manufacture of such products is dependent
\nupon the Technical knowhow\/ Technology\/
\nLicence\/ Patent available with the supplier which
\nmay be transferred either in the collaboration
\nagreement or which may be inherent in the goods
\nsupplied.  Otherwise, there is no rationale for
\npayment of royalty in a locally manufactured
\nproducts which will not be the case if the
\ntransaction involves outright sale of
\nequipment\/machinery\/component etc.<\/p>\n
48.\tThe logical conclusion is that the royalty is
\nrelatable to the imported goods as the royalty is
\nnothing but an inherent condition to the
\ntransaction.Hence, the royalty payable by the
\nimporters to their collaborator\/supplier is
\nincludible in the assessable value of the imported
\ngoods as per Rule 9(i)(c) of the CVR 88.”\n<\/p>\n
11.\tAn appeal preferred thereagainst by the respondent  before the
\nCommissioner of Customs was dismissed, holding :\n<\/p>\n
“a)\tRoyalty is not to be added  to the value of
\n\tcomponents parts such as Unit Local Parts and KD
\n\tParts.\n<\/p>\n
b)\tRoyalty is to be added to the value of components
\nparts falling under the category of other than Unit
\nLocal Parts.\n<\/p>\n
c)\tTKH is to be added only to the value of capital
\ngoods and tools imported from related supplier
\nduring the tenure of the agreement and should be
\napportioned to the total value of such goods.\n<\/p>\n
d)\tTKH is  not to be added to the \tvalue of the
\n\tcomponents.\n<\/p>\n
e)\tRemaining portion of the Order-in-Original
\n\tremains unaltered.”\n<\/p>\n
12.\tAggrieved by and dissatisfied therewith, both the parties preferred
\nappeals there- against before CESTAT.  By reason of the impugned
\njudgment, CESTAT held :\n<\/p>\n
\t“As regards royalty which goes under “ordinary
\nassistance” relevant article of the agreement
\nstipulates that upon request the foreign supplier
\nshall furnish to the importer such technical know-
\nhow, information, data relating to the licensed
\nproducts.  The licensed products are the
\nautomobile to be manufactured in India under the
\nagreement as well as specific parts.  It is to be seen
\nthat the technical know how, information etc. to be
\nfurnished are for studying the feasibility of Local
\nParts manufacturing, for manufacturing of local
\nparts, for production preparation of licensed
\nproducts etc.  What is important is that none of
\nassistance is in relation to the goods under import.
\nFurther, royalty is to be computed at the agreed
\npercentage of local value addition of vehicle
\nmanufactured under licence or unit local parts
\nmanufactured and sold or exported.  Thus, the
\ncomputation also has no bearing upon the imported
\ngoods or their valueIn the agreement under
\nquestion or the import of goods, there is nothing
\nindicating that royalty payment is a condition of
\nthe sale of the imported goods.  Thus, the
\nrequirement of royalty being a condition of sale
\nalso is not satisfied.  In view of these, we are of the
\nopinion that there is no requirement in the present
\ncase for adding royalty payment to the price
\npayable for the purpose of determining the
\ntransaction value of the imported partsIn sum,
\nall payments are towards assistance rendered in
\nIndia for setting up the plant.  None of this is in
\nrelation to the goods under import.  Thus, the
\npayments under ‘lump sum payments heading’
\nalso do not satisfy the requirement under rule
\n9D(c) of the payments being “related to the
\nimported goods” or being a condition of sale of the
\ngoods being value.  Thus, there is no legal sanction
\nfor adding this payment also the price paid in order
\nto arrive at the transaction value.”\n<\/p>\n
  13.\t   Mr. Gopal Subramanium, the learned Additional Solicitor General
\nof India, would submit that the agreements entered into by and between the
\nrespondent and the said Toyota Motor Corporation must be read in their
\nentirety, wherefrom it would be evident that the terms laid down therein are
\nrelevant for determining the conditions of import.  According to the learned
\ncounsel it must be held to be involving continuous exercise and in view of
\nthe fact that the patent was held by the respondent and furthermore grant of
\nlicence and know-how technology being sine qua non for running the
\nautomobile manufacturing plant set up by the respondent at Bangalore,
\nArticles 3 and 4 of the Agreement have rightly been invoked for the purpose
\nof determination of the transaction value of the capital goods.  Strong
\nreliance, in this behalf, has been placed by the learned Additional Solicitor
\nGeneral on Collector of Customs (Preventive), Ahmedabad v. Essar Gujarat
\nLtd., Surat<\/a> [(1997) 9 SCC 738].\n<\/p>\n
14.\tMr. R. Parthasarthy, the learned counsel appearing on behalf of the
\nrespondent, on the other hand, would submit that on a proper reading of the
\ndecision of this Court in Essar Gujarat Ltd. (supra), it would appear, that
\nonly the costs which were required to be incurred by the importer before
\nimportation of the capital goods had been taken into consideration for
\ndetermination of the transactional value of the imported goods.  It was
\nsubmitted that  a conjoint reading of the provisions of Section 14(1) of the
\nCentral Excise and Salt Act, 1944 and Rules 3, 4 and 9(1)(c) of the Rules,
\nwould clearly show that the valuation must be relatable to the goods
\nimported, a logical corollary whereof would be that the same must be
\npayable as a condition of import and not for the purpose of setting up of a
\nmanufacturing plant wherefor goods may be used.\n<\/p>\n
15.\tDrawing our attention to Articles 3 and 4 of the agreement, the
\nlearned counsel submitted that ordinary assistance and additional assistance
\nprovided for therein are in relation to the manufacturing activities to be
\ncarried out in India by the respondent and the same has nothing to do with
\nthe import of the capital goods.\n<\/p>\n
16.\tIt was furthermore submitted that the provisions of the Act and the
\nrules framed thereunder do not lay down any provision for determination of
\nthe value on the basis as to whether the parties are related or not.\n<\/p>\n
17.\tThe Customs Act, 1962 (for short, ‘the Act’) was enacted to
\nconsolidate and amend the law relating to customs.  The terms ‘goods’ and
\n‘import’ have been defined in Section 2(22) and Section 2(23) respectively
\nin the following terms :\n<\/p>\n
\t\t“2(22).  “good” includes <\/p>\n<\/blockquote>\n
\t\t(a)\t vessels, aircrafts and vehicles;\n<\/p><\/blockquote>\n
\t\t(b)\tstores;\n<\/p><\/blockquote>\n
\t\t(c)\tbaggage;\n<\/p><\/blockquote>\n
\t\t(d)\tcurrency and negotiable instruments; and\n<\/p><\/blockquote>\n
\t\t(e)\tany other kind of movable property;”\n<\/p><\/blockquote>\n
“2(23)  “import”, with its grammatical variations and
\ncognate expressions, means bringing into India from a
\nplace outside India;”\n<\/p>\n
\tChapter V provides for levy of, and exemption from payment of
\ncustoms duties.  Section 14 provides for valuation of goods for the purpose
\nof assessment in the following terms :\n<\/p>\n
“14.\tValuation of goods for purposes of assessment.-(1)
\nFor the purposes of the Customs Tariff Act, 1975 (51 of
\n1975), or any other law for the time being in force
\nwhereunder a duty of customs is chargeable on any goods
\nby reference to their value, the value of such goods shall
\nbe deemed to be <\/p>\n
\tThe price at which such or like goods are
\nordinarily sold, or offered for sale, for delivery at the
\ntime and place of importation or exportation, as the case
\nmay be, in the course of international trade, where <\/p>\n
(a)\tthe seller and the buyer have no interest in the
\nbusiness of each other; or<\/p>\n
(b)\tone of them has no interest in the business of the
\nother, and the price is the sole consideration for the
\nsale or offer for sale;\n<\/p>\n
\tProvided that such price shall be calculated with
\nreference to the rate of exchange as in force on the date
\non which a bill of entry is presented under section 46, or
\na shipping bill or bill of export, as the case may be, is
\npresented under section 50;”\n<\/p>\n
18.\tThe Central Government in exercise of its power conferred upon it
\nunder Section 156 of the Act, made rules known as “Customs Valuation
\n(Determination of Price of Imported Goods) Rules, 1988.  Rule 3 provides
\nfor determination of the method of valuation, stating :\n<\/p>\n
“Determination of the method of valuation.- For the
\npurpose of these rules, –\n<\/p>\n
(i)\tthe value of imported goods shall be the
\ntransaction value;\n<\/p>\n
(ii)\tif the value cannot be determined under the
\nprovisions of clause (i) above, the value shall be
\ndetermined by proceeding sequentially through
\nRules 5 to 8 of these rules.”\n<\/p>\n
19.\tHow the transaction value would be determined has been laid down in
\nRule 4 of the Rules, stating that the same shall be the price actually paid or
\npayable for the goods when sold for export to India adjusted in accordance
\nwith the provisions of Rule 9 of the said rules.  Rule 9 of the Rules provides
\nfor determination of transaction value, stating :\n<\/p>\n
“Cost and services.-  (1) In determining the transaction
\nvalue, there shall be added to the price actually paid or
\npayable for the imported goods, –\n<\/p>\n
(a)\tthe following cost and services, to the extent they
\nare incurred by the buyer but are not included in the price
\nactually  paid   or payable for the imported goods,
\nnamely :-\n<\/p>\n
(i)\tcommissions and brokerage, except buying
\ncommissions;\n<\/p>\n
(ii)\tthe cost of containers which are treated as being
\none for customs purposes with the goods in
\nquestion;\n<\/p>\n
(iii)\tthe cost of packing whether for labour or materials;\n<\/p>\n
(b)\tthe value, apportioned as appropriate, of the
\nfollowing goods and services where supplied directly or
\nindirectly by the buyer free of charge or at reduced cost
\nfor use in connection with the production and sale for
\nexport of imported goods, to the extent that such value
\nhas not been included in the price actually paid or
\npayable, namely :-\n<\/p>\n
(i)\tmaterials, components, parts and similar items
\nincorporated  in the imported goods;\n<\/p>\n
(ii)\ttools, dies, moulds and similar items used in the
\nproduction of the imported goods;\n<\/p>\n
(iii)\tmaterials consumed in the production of the
\nimported goods;\n<\/p>\n
(iv)\tengineering, development, art work, design work,
\nand plans and sketches undertaken elsewhere than
\nin India and necessary for the production of the
\nimported goods;\n<\/p>\n
(c)\troyalties and licence fees related to imported
\ngoods that the buyer is required to pay, directly or
\nindirectly, as a condition of the sale of the goods being
\nvalued, to the extent that such royalties and fees are not
\nincluded in the price actually paid or payable.\n<\/p>\n
(d)\tthe value of  any part of the proceeds of any
\nsubsequent resale, disposal or use of the imported goods
\nthat accrues, directly or indirectly, to the seller;\n<\/p>\n
(e)\tall other payments actually made or to be made as
\na condition of sale of the imported goods, by the buyer to
\nthe seller, or by the buyer to a third party to satisfy an
\nobligation of the seller to the extent that such payments
\nare not included in the price actually paid or payabe.”\n<\/p>\n
20.\tThe issue before us  is no longer res integra in view of the decision of
\nthis Court in Commissioner of Customs (Port), Kolkata v. M\/s J.K.
\nCorporation Limited<\/a> [2007 (2) SCALE 459], wherein it is stated :
\n” 9. The basic principle of levy of customs duty, in view
\nof the afore-mentioned provisions, is that the value of the
\nimported goods has to be determined at the time and
\nplace of importation.  The value to be determined for the
\nimported goods would be the payment required to be
\nmade as a condition of sale.  Assessment of customs duty
\nmust have a direct nexus with the value of goods which
\nwas payable at the time of importation.  If any amount is
\nto be paid after the importation of the goods is complete,
\ninter alia by way of transfer of licence or technical
\nknowhow for the purpose of setting up of a plant from
\nthe machinery imported or running thereof, the same
\nwould not be computed for the said purpose.  Any
\namount paid for post-importation service or activity,
\nwould not, therefore, come within the purview of
\ndetermination of assessable value of the imported goods
\nso as to enable the authorities to levy customs duty or
\notherwise.  The Rules have been framed for the purpose
\nof carrying out the provisions of the Act.  The wordings
\nof Sections 14 and 14(1A) are clear and explicit.  The
\nRules and the Act, therefore, must be construed, having
\nregard to the basic principles of interpretation in mind.”\n<\/p>\n
21.\tReliance, as noticed hereinbefore, however, has been placed by the
\nlearned Additional Solicitor General on  Essar Gujarat Limited (supra).\n<\/p>\n
22.    \tWe may, thus, at the outset, consider the applicability of Essar Gujarat
\nLimited (supra) in the facts of the present case.  In Essar Gujarat Limtied
\n(supra), a plant was originally installed at Emden, Germany, which went in
\nliquidation in respect whereof a bank was appointed as receiver of the plant.
\nA tender was floated for sale of the plant on “as is where is” basis.  Essar
\nGujarat Limited (EGL) made an offer of 26 million.  The offer, however, did
\nnot materialize as the Central Government’s clearance could not be obtained.
\nThe plant was sold to M\/s Teviot Investments Limited (TIL).   EGL entered
\ninto a contract with TIL for purchase of the Direct Reduction  Iron Plant on
\nthe terms and conditions mentioned therein.  Another agreement was also
\nentered into in respect thereof.  EIL intended to enhance the capacity of the
\nplant for which a Collaboration Agreement was entered into by and between
\nEIL and M\/s Voeist Alpine AG (VA), the relevant provisions whereof were
\nas under :\n<\/p>\n
\t“EGL will set up at Hazira, Gujarat, a gas-based
\nDirect Reduction (DR) Plant which is to be re-engineered
\nfor a rated capacity of 8,80,000 tpy of Hot Briquetted
\nIron (HBI) and for this purpose decided to buy the
\nexisting gas-based DR plant of NOHDDEUTSCHE
\nFERROWERKE (MORD FERRD) located at Emden,
\nWest Germany, which had a rated capacity of 8,00,000
\ntpy DRI under the prevailing operating conditions at
\nEmden based on the Midrex Process and to incorporate
\nHot Discharge and Hot Briquetting facilities.”\n<\/p>\n
23.\tIn the said agreement it was stipulated that the collaborator (VA) had
\nbeen holding the construction licence and rights to use patents from Midrex
\nInternational B.V. for marketing, sale, design and construction of the Midrex
\nplants at Hizira, India.\n<\/p>\n
24.\tThis Court noticed Articles 3 and 10 of the agreement in question in
\nparagraphs 7 and 8 of the judgment, which read as under :
\n“7. In Article 3 of the agreement under the heading
\nMidrex Process Licence and Technical Services it was
\nprovided that in addition to the services being provided
\nby V.A., Midrex will provide certain technical services to
\nV.A. or to EGL in connection with transfer of technology
\ncovered under the process licence agreement attached to
\nin Annexure 12 of the agreement. The services included:\n<\/p>\n
(a) basic engineering package for the hot discharge
\nand hot briquetting system;\n<\/p>\n
(b) advice to Essar on optimum utilisation of iron
\noxide lump ore and iron oxide pellets;\n<\/p>\n
(c) provide information and documentation to
\nallow Essar to implement improvements in plant
\ndesign and\/or operating procedures which have
\nbeen developed by Midrex or other Midrex
\nProcess Licensees;\n<\/p>\n
(d) provide continuing information to Essar on
\noperating results from other Midrex Plants to assist
\nEssar in optimizing plant-operating efficiency
\nincluding operating reports, operation bulletins and
\noperation seminars.\n<\/p>\n
8. Article 10 of the agreement is as under:
\n\tArticle 10: CONTRACT DHILL:\n<\/p>\n
\tIn consideration of fulfilment by Collaborator of
\nits obligations under this Agreement, Essar shall pay to
\nCOLLABORATOR as below:\n<\/p>\n
SERVICES TO BE PROVIDED OUTSIDE INDIA:\n<\/p>\n
10.1.1
\nProcess licence and allied
\ntechnical services
\nDM (German Marks)
\n10.1.1.1
\nProcess licence fee payable to
\nMIDREX Corporation for the
\nright to use the Midrex process
\nand patents
\nDM 20,00,000 lump
\nsum
\n10.1.1.2
\nCost of technical services
\nprovided under Article 3 in
\nconnection with Midrex
\nprocess
\nDM   1,01,00,000
\nlump sum
\nTechnical Services
\n10.1.2.1
\nPayment for engineering and
\nconsultancy fee as specified
\nunder this agreement
\nDM 2,31,00,000
\nlump sum
\n10.1.2.2
\nPayment for theoretical and
\npractical training outside India
\nDM 22,00,000 lump
\nsum<\/p>\n
Total
\nDM 3,74,00,000
\nlump sum.”\n<\/p>\n
25.\tParagraph 10 of the agreement, therefore, had two components : (i)
\nServices to be provided outside India; and (ii) Technical Services.  Noticing
\nthe terms subject to which the licence was granted in favour of EGL as also
\nthe agreements with Midrex and VA, this Court observed :
\n“This agreement with V.A. recites that the plant, when
\nit was bought, had a rated capacity of 8,00,000 tpy DRI
\nunder the prevailing operating conditions based on the
\nMidrex Process. It was recited that the Collaborator
\n(V.A.) was holding construction licence and rights to use
\npatents from Midrex for marketing, sale, design and
\nconstruction of the Midrex Plants at Hazira, India. The
\nservices that were to be rendered by V.A. would also
\ninclude technical services in connection with the Midrex
\nProcess and engineering services necessary for this
\npurpose. The Collaborator agreed to use Midrex
\nconstruction and process licence for this project at
\nHazira, India. It was recorded that EGLs contract with
\nMidrex had been annexed to the contract with the
\nCollaborator.”\n<\/p>\n
26.\tIn the aforementioned fact situation, a contention raised on behalf of
\nthe EGL that the pre-condition for obtaining a licence was not the condition
\nof sale was rejected, holding that without the same, the plant would be of no
\nuse to EGL, wherefor the overriding clause was inserted showing that the
\nsame was a condition of sale.\n<\/p>\n
27.\tIt was in the aforementioned premise, payments made to Midrex by
\nway of licence fee was held to be liable to be added to the price actually paid
\nto TIL for purchase of the plant by EGL.  Construing the provisions of
\nSection 14 of the Act read with Rule 9 of the Rules, it was held :
\n\t“18. The entire purpose of Section 14 is to find out
\nthe value of the goods which are being imported. The
\nEGL in this case was purchasing a Midrex Reduction
\nPlant in order to produce sponge iron. In order to produce
\nsponge iron, it was essential to have technical know-how
\nfrom Midrex. It was also essential to have an operating
\nlicence from them. Without these, the plant would be of
\nno value. That is why the precondition of a process
\nlicence of Midrex was placed in the agreement with TIL.
\nIt will not be proper to view that agreement with TIL in
\nisolation in this case. The plant would be of no value if it
\ncould not be made functional. EGL wanted to buy the
\nplant in a working condition. This could only be achieved
\nby paying not only the price of the plant, but also the fees
\nfor the licence and the technical know-how for making
\nthe plant operational. Therefore, the value of the plant
\nwill comprise not only the price paid for the plant but
\nalso the price payable for the operation licence and the
\ntechnical know-how. Rule 9 should be construed bearing
\nthis in mind.”\n<\/p>\n
28.\tThis Court noticed several curious aspects of the three agreements,
\nbut ultimately held that whereas the amounts payable in terms of clauses
\n10.1.1.1, 10.1.1.2 and 10.1.2.1 were to be taken into consideration for the
\npurpose of determining the transactional value, 10% of the amount,
\nhowever, for payment of engineering and consultancy fee as specified under
\nthe agreement was held to be payable by way of guess work.\n<\/p>\n
29.\tTherefore, law  laid down in Essar Gujarat Limited  (supra) and J.K.
\nCorporation Limited (supra) are absolutely clear and explicit.  Apart from
\nthe fact that Essar Gujarat Limited (supra) was determined on the peculiar
\nfacts obtaining therein and furthermore having regard to the fact that the
\nentire plant on “as is where is” basis was transferred subject to transfer of
\npatent as also services and technical know-how needed for increase in the
\ncapacity of the plant, this Court clearly held that the post-importation service
\ncharges were not to be taken into consideration for determining the
\ntransactional value.\n<\/p>\n
30.\tThe observations made by this Court Essar Gujarat Limited (supra) in
\nparagraph 18 must be understood in the factual matrix involved therein.  The
\nratio of a decision, as is well-known, must be culled out from the facts
\ninvolved in a given case.  A decision, as is well-known, is an authority for
\nwhat it decides and not what can logically be deduced therefrom.  Even in
\nEssar Gujarat Limited (supra), a clear distinction has been made between the
\ncharges required to be made for pre-importation and post-importation. All
\ncharges levied before the capital goods were imported were held to be
\nconsidered for the purpose of computation of transaction value and not the
\npost importation one.  The said decision, therefore, in our opinion, is not an
\nauthority for the proposition that irrespective of nature of the contract,
\nlicence fee and charges paid for technical know-how, although the same
\nwould have nothing to do with the charges at the pre-importation stage,
\nwould have to be taken into consideration towards computation of
\ntransaction value in terms of Rule 9(1)( c) of the Rules.\n<\/p>\n
31.\tThe transactional value must be relatable to import of goods which a’
\nfortiori would mean that the amounts must be payable as a condition of
\nimport.  A distinction, therefore, clearly exists between an amount payable
\nas a condition of import and an amount payable in respect of the matters
\ngoverning the manufacturing activities, which may not have anything to do
\nwith the import of the capital goods.\n<\/p>\n
32.\tArticle 4 provided for additional assistance in respect of the matters
\nspecifically laid down therein.  Technical assistance fees have a direct nexus
\nwith the post-import activities and not with importation of goods.\n<\/p>\n
33.\tIt is also a matter of some significance that technical assistance and
\nknow-how were required to be given not as a condition precedent, but as and
\nwhen the respondent makes a request therefor and not otherwise.  Appendix
\nC of the agreement relates to manufacture of local parts which evidently has
\nnothing to do with the import of the capital goods.  Appendix D again is
\nattributable to construction of plant; production preparation; and pilot
\nproduction and production model, wherewith the import of capital goods did
\nnot have any nexus.\n<\/p>\n
34.\tWe may furthermore notice that Interpretative Note appended to Rule
\n4 also plays an important role in a case of this nature which reads as under :
\n“Note to Rule 4
\nPrice actually paid or payable
\n\tThe price actually paid or payable is the total
\npayment made or to be made by the buyer to or for the
\nbenefit of the seller for the imported goods. The payment
\nneed not necessarily take the form of a transfer of money.
\nPayment may be made by way of letters of credit or
\nnegotiable instruments. Payment may be made directly or
\nindirectly. An example of an indirect payment would be
\nthe settlement by the buyer, whether in whole or in part,
\nof a debt owed by the seller.\n<\/p>\n
\tActivities undertaken by the buyer on his own
\naccount, other than those for which an adjustment is
\nprovided in Rule 9, are not considered to be an indirect
\npayment to the seller, even though they might be
\nregarded as of benefit to the seller. The costs of such
\nactivities shall not, therefore, be added to the price
\nactually paid or payable in determining the value of
\nimported goods.\n<\/p>\n
\tThe value of imported goods shall not include the
\nfollowing charges or costs, provided that they are
\ndistinguished from the price actually paid or payable for
\nthe imported goods:\n<\/p>\n
(a) Charges for construction, erection, assembly,
\nmaintenance or technical assistance, undertaken
\nafter importation on imported goods such as
\nindustrial plant, machinery or equipment;\n<\/p>\n
(b) The cost of transport after importation;\n<\/p>\n
(c) Duties and taxes in India.\n<\/p>\n
\tThe price actually paid or payable refers to the
\nprice for the imported goods. Thus the flow of dividends
\nor other payments from the buyer to the seller that do not
\nrelate to the imported goods are not part of the customs
\nvalue.”\n<\/p>\n
35.\tThe said rule clearly states that the charges or costs envisaged
\nthereunder were not to be included in the value of the imported goods
\nsubject to satisfying the requirement of the proviso that charges were
\ndistinguishable from the price actually paid or payable for the imported
\ngoods.\n<\/p>\n
36.\tInterpretation of the said rule came up for consideration before a
\nBench of this Court in Tata Iron & Steel Co. Ltd. v. Commissioner of
\nCentral Excise & Customs, Bhubaneswar, Orissa<\/a> [(2000) 3 SCC 472],
\nwherein it was held :\n<\/p>\n
“This part of the Interpretative Note cannot be so read
\nas to mean that those charges which are not covered in
\nclauses (a) to (c) are available to be included in the value
\nof the imported goods. To illustrate, if the seller has
\nundertaken to erect or assemble the machinery after its
\nimportation into India and levied certain charges for
\nrendering such service the price paid therefor shall not be
\nliable to be included in the value of the goods if it has
\nbeen paid separately and is clearly distinguishable from
\nthe price actually paid or payable for the imported goods.
\nObviously, this Interpretative Note cannot be pressed into
\nservice for calculating the price of any drawings or
\ntechnical documents though separately paid by including
\nthem in the price of imported equipments. Clause (a) in
\nthe third para of the Note to Rule 4 is suggestive of
\ncharges for services rendered by the seller in connection
\nwith construction, erection etc. of imported goods. The
\nvalue of documents and drawings etc. cannot be charges
\nfor construction, erection, assembly etc. of imported
\ngoods. Alternatively, even on the view as taken by the
\nTribunal on this Note, the drawings and documents
\nhaving been supplied to the buyer-importer for use
\nduring construction, erection, assembly, maintenance etc.
\nof imported goods, they were relatable to post-import
\nactivity to be undertaken by the appellant”\n<\/p>\n
37.\tYet again  a three-Judge Bench of this Court in Union of India and
\nOthers v. Mahindra and Mahindra Ltd., Bombay<\/a> [(1995) Supp. (2) SCC
\n372], opined :\n<\/p>\n
“Ordinarily the Court should proceed on the basis that
\nthe apparent tenor of the agreements reflect the real state
\nof affairs. It is, no doubt, open to the Revenue to allege
\nand prove that the apparent is not the real and that the
\nprice for the sale of the CKD packs is not the true price,
\nand the price was determined by reckoning or taking into
\nconsideration the lump sum payment made under the
\ncollaboration agreement in the sum of 15 million French
\nFrancs.”\n<\/p>\n
\tIt was furthermore held :\n<\/p>\n
“9. On an evaluation of the relevant clauses in the
\ncollaboration agreements and the attendant
\ncircumstances, we are of the view that the concurrent
\njudgments of the High Court at Bombay do not merit
\ninterference in this appeal. The crucial aspects appearing
\nin the case are that the parties were dealing at arms
\nlength, that the seller and the buyer have no interest in
\nthe business of each other, that, ordinarily, the technical
\nknow-how of the machine can take in the assembly
\nthereof, that the CKD packs and spares were supplied to
\nthe respondents by the collaborator not at a concessional
\nprice but at the price at which they were sold to others,
\nthat, as agreed to by the respondents, the option was
\nentirely with the respondents to order the parts as per
\ntheir requirements, that there was no obligation on the
\nrespondents to purchase CKD packs at all, that long
\nbefore the supply of the CKD packs and spares, the
\nroyalty due to the collaborators was paid, that there is no
\nmaterial to show that the supply of the CKD packs or
\nspares weighed with the parties in fixing the payments
\nunder the collaboration agreement but, on the other hand,
\nthe collaboration agreement for the technical know-how
\nand the supply of CKD packs and spares are independent
\ncommercial transactions; in other words, there existed no
\nnexus between the lump sum payment under the
\nagreement for the technical know-how and the
\ndetermination of the price for supply of CKD packs or
\nspares. It is by highlighting the above aspects that the
\nlearned Single Judge and the Division Bench concluded
\nthat the contention that the price quoted in the invoices
\ntendered by Mahindra & Mahindra (respondents) does
\nnot reflect the correct price because a part of the value of
\nimported packs and components was already received by
\nforeign collaborator while determining the consideration
\nof 15 million French Francs cannot be accepted, and the
\ncollaboration agreement does not support the claim nor
\nwas there any material available to the Assistant
\nCollector to warrant such a conclusion, and, therefore,
\nresort to Section 14(1)(b) of the Act and Rule 8 of the
\nCustoms Valuation Rules is clearly incorrect and
\nunsustainable and the Assistant Collector was bound to
\naccept the price mentioned in the invoices for the purpose
\nof assessing the customs duty.”\n<\/p>\n
38.\tIt may be true, as has been contended by the learned Additional
\nSolicitor General, that Rule 9(1)(c) of the rules had not been taken into
\nconsideration therein, but the same does not make much difference.\n<\/p>\n
39.\tFor the views we have taken, we are of the opinion that the CESTAT
\ncannot be said to have committed any error in arriving at its decision in the
\nimpugned judgment.  There is, thus, no merit in this appeal, which is
\ndismissed accordingly.  In the facts and circumstances of the case, there
\nshall, however, be no order as to costs.<\/p>\n","protected":false},"excerpt":{"rendered":"
Supreme Court of India Commnr. Of Customs (Port), … vs M\/S Toyota Kirloskar Motor Pvt. … on 17 May, 2007 Author: S.B. Sinha Bench: S.B. Sinha, Markandey Katju CASE NO.: Appeal (civil) 3635 of 2006 PETITIONER: Commnr. of Customs (Port), Chennai RESPONDENT: M\/s Toyota Kirloskar Motor Pvt. Ltd DATE OF JUDGMENT: 17\/05\/2007 BENCH: S.B. Sinha […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_lmt_disableupdate":"","_lmt_disable":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[30],"tags":[],"class_list":["post-128474","post","type-post","status-publish","format-standard","hentry","category-supreme-court-of-india"],"yoast_head":"\nCommnr. Of Customs (Port), ... vs M\/S Toyota Kirloskar Motor Pvt. ... on 17 May, 2007 - Free Judgements of Supreme Court & High Court | Legal India<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.legalindia.com\/judgments\/commnr-of-customs-port-vs-ms-toyota-kirloskar-motor-pvt-on-17-may-2007\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Commnr. 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