COLLECTOR OF CUSTOMS (PREVENTIVE), AHEMDABADversusM/S ESSAR GUJARAT LTD. SURAT

    COLLECTOR OF CUSTOMS (PREVENTIVE), AHEMDABAD                                  A
                           v.
             MIS ESSAR GUJARAT LTD. SURAT

                           NOVEMBER 19, 1996

                 [B.P. JEEVAN REDDY, SUHAS C. SEN                                 B
                     AND K.S. PARIPOORNAN, JJ.]

        Customs TariffAct 1975 Section 14. Customs valuation (determination
 of price of Imported Goods) Rules 1988-Rule 9·-Determination of the
/value of the imported plant-The licence fees as well as the payment made
 for the technical services should be added to the invoice value ofthe imported   C
 plant.

       The respondent, entered into a contract with Mis. Telviot
 Investment Ltd. for purchase of a Direct Reduction Iron Plant on
 24.3.1987. The entire agreement was subject to two conditions, namely,           D
 approval of the Government of India within 30th April, 1987 and
 obtaining transfer of operationolicence from Mis Midrex. The
 re,pondent entered into an agreement with Midrex for the processing
 lictnce on 4.f2.1987. On the same day another agreement was entered
 into by the respondent with Mis Yoest Alpine (VA) for technical know-
 how of the plant. These licences were essential for working of the               E
 plant. Finally the plant was i111ported in October, 1988 after obtaining
 the license from Midrex and VA. The Collector of Customs while
 assessing added the licence fee as well as the cost of technical know-
 how to the invoice value of the plant, which was challenged by the
 respondent before the Tribunal. The Tribunal allowed the appeal and
 held that the license fees and thi fees paid for technical know-how              F
 would 11ot be added to the value of the plant. The Collector of Customs
 filed this appeal against the Order of the Tribunal. Allowing the
 appeal, this Court

       HILD: 1.1.0btaini11g a lice11ce from Midrex to operate the plant G
 was a pre-conditimt of sale of the plant. In fact, although the agreement
 to purchase the plant was formally executed on 74.3.1987 the actual
 importation took place only after the agreements with Midrex and
 VA were signed on 4th December, 1987. As per Rule 9 of the Customs
 Valuation (Determination of Price of Imported Goods) Rules, 1988,
 the licence fees, paid as a condition for the sale of the plant shall be H
                                    757
        758                    SUPREME COURT REPORTS [1996] SUPP. 8 S.C.R.


    A included in the actual price of the plant. Therefore, the Tribunal was
        in error in holding that the payments made to Midrex by way of
        licence fees could not be added to the price actually paid to TIL for
        purchase of the plant. (764-F-HI

             · 1.2. Midrex has granted licence to the respondent not only for
    B   the right to produce in the Midrex Direct Reduction process plant
        and sell the products worldwide, but also has given the licences the
        right to use all patents, confidential information for the operation of
        the plant. Therefore, licence fees paid to Midrex will have to be added
        to the price of the plant to arrive at the transaction value of the
        plant. (766-BC)
    c
              1.3. The entire purpose of section 14 of the Customs Tariff Act is
        to find out the value of the goods which are being imported. The
        Respondent purchased Midrex Reduction plant in order to produce
        sponge iron. In order to produce sponge iron, it was essential to have
    D   technical know-bow from Midrex. It was also essential to have an
        operating licence from them, Without these, the plant would be of no
        value. Respondent wanted to buy the plant in working condition.
        This could only be achieved by paying not only the price of the plant,
        but also the fees for the licence and the technical know-how for making
        the plant operational. Therefore, the value of the plant will comprise
    E   of not only the price paid for the plant but also the price payable for
        the operation licence and the Technical know-how. Therefore, the
        process licence fees ofD.M.2,000,000 was rightly added to the purchase
I
        price, by the Collector Customs. The Order of CEGAT on this Question
        is set aside. [767-EG, 769-G)

    F       2. As regards technical services, the entire payment of engineering
      ~onsultancy fees to VA can not be added to the value of the imported
      plant. Whatever expenditure had to be incurred for dismantling the
      plant and making it ready for delivery has to be added to the value of
      the plant. But this apart, other services rendered cannot be treated as
    G adding to the value of the plant. Since there is no clear indication as
      to bow the various services had been valued separately, 10% of the
      amount of D.M.23,100,000 paid for engineering and consultancy fees
      should be added to the value of the plant on this account. D.M.
      2,000,000 the process licence fee paid to Midrex Corporation
      D.M.10,000,000 being payment on account of engineering and
    H consultancy fee payable to VA should be added to the value of the
      COLLECTOR OF CUSTOMS v. ESSAR GUJ. LTD. [SEN, J.]                 759


imported plant. (775-E-H, 776-AJ                                                A
     CIVIL APPELLATE JURISDICTION : Civil Appeal Nos., 3152-
53 of 1991.

     From the Judgment and Order dated 13.2.1991 of the Customs, Excise
and Gold (Control) Appellate Tribunal, New Delhi in Appeal No.C/1975/           B
90-A and C/405/90A.

     N.K. Bajpai, V.K. Verma and S.N. Terdol for the Appellant.

     G.L. Sanghi, L.P. Asthana, Anand Prasad, M.G. Ramachandran,                C
Rajiv Tyagi and C.N. Sreektlmar (NP) for the Respondent.

      The Judgment of the Court was delivered by

       SEN, J. The first dispute in this case relates to the question whether
the licence fees -paid to Mis. Midrex International 8.V., Zurich, (Midrex)      D
should be added to the invoice value of the plant bought by Mis. Essar
Gujarat Limited (EGL). The plant was originally installed at Emden,
Germany, in I 98 I by a firm which went into liquidation. NORD/LB, a
Bank, was appointed receiver of the plant. The bank floated a global tender
for the sale of the plant on "as is where is" basis. EGL made an offer of
DM 26 million for the plant, but could not obtain clearance of Government       E
of India for payment within the stipulated period. The deal, therefore, fell
through. The bank sold the plant to Mis. Teviot Investments Limited (TIL).
On 24th March, 1987, EGL entered into a contract with TIL for purchase
of the Direct Reduction Iron Plant on certain terms and conditions. The
entire agreement was subject to two conditions (l) approval of Government
oflndia within 30th April, 1987 and (2) obtaining transfer of the operation     F
licence from Mis. Mjdrex of Charlotte, USA. The contention before this
Court, on behalf of the appellant, Collector of Customs, has been that
these clearly were the conditions which had to be fulfilled before the sale
could take place. As a matter of fact, EGL obtained transfer of the operation
 licence from Midrex before proceedings with the dismantling of the plant       G
and exporting the plant in semi-knocked-down condition to India. On the
other hand, it has been contended on behalf of EGL that the overriding
stipulation of obtaining transfer of the operation licence from Mis. Midrex
only kept on exit door open for EGL to back out of the contract. lffor any
 reason, Government of India did not grant permission to go through the
deal or the requisite licence from Midrex could not be obtained, it would       H
    760                      SUPREME COURT REPORTS [1996] SUPP. 8 S.C.R.


A be permissible for EGL not to go ahead with the contract. These two
    stipulations were not conditions of sale of the plant but were overriding
    conditions attached to the contract to enable EGL to back out of the contract
    in certain contingencies.

          Before going into the merits of the rival contentions, it will be
B necessary to notice the facts relating to import of the plant and also the
  three agreements. The agreement between EGL and TIL was entered into
  on 24.3.1987. The agreement with Mis. Yoest Alpine AG (V.A.) and with
  Midrex International B.V. were both entered into on 4th December, 1987.
  But the plant in semi-knocked-down condition was imported only in
  September/October, 1988. The first bill of entry in respect of 468 packages
C was dated 29.9.1988 and the second bill of entry in respect of3 l 7 packages
  was dated I I. I 0.1988. In other words, even though the agreement to
  purchase the plant was formally executed by and between EGL and TIL
  on 24.3.1987, actual importation took place nearly I 1/2 years thereafter
  and only after the two agreements with V.A. and Midrex were signed on
  4.4.1987. These facts go to show that it was essential for EGL to have a
D licence from Midrex for working of the plant. Mr. Salve has argued that it
                                                                in
  may have been essential for the EGL to have this licence order to make
  the plant fully and effectively operational but it was not a condition of
  sale of the plant. It was quite as independent contract. From a plain reading
  of the agreement with TIL, it appears that the overriding clause may have
  been inserted to protect EGL but nonetheless it was a condition of sale. If
E this condition was not fulfilled, the sale would have fallen through.
  Moreover, it appears that the plant without Midrex Licence would have
  been of no value at all. EGL had purchased the plant on "as is where is"
  basis. But in order to operate the plant, it is essential to have a licence
  from Midrex.

F         The agreement with V.A. starts with the recital that-

                  "EGL will set up at Hazira, Gujarat, a gas based Direct
                  Reduction (DR) Plant which is to be re-engineered for a
                  rated capacity of 8,80,000 tpy of Hot Briquetted Iron (HBI)
G                 and for this purpose decided to buy the existing gas based
                  DR plant of NOHDDEUTSCHE FERROWERKE (MORD
                  FERRD) Located at Emden, West Germany, which had a
                  rated capacity of 8,00,000 tpy DR! under the prevailing
                  operating conditions at Emden based on the Midrex Process
                  and to incorporate Hot Discharge and Hot Briquetting
H                 facilities."
       COLLECTOR OF CUSTOMS v. ESSAR GUJ. LTD. [SEN, J.]                  761


      It was further recited in the agreement that the Collaborator (V.A.)       A
was holding construction licence and rights to use patents from Midrex
International B. V. for marketing, sale, design and construction of the Midrex
plants at Hazira, India.

      The agreements with V.A. and Midrex go to show that the plant
located at Emden was described as a Midrex plant. Its rated capacity was         B
calculated under the prevailing operating conditions at Emden based on
the Midrex process. V.A. undertook to incorporate Hot Discharge and Hot
Briquetting facility and for this purpose carried out refurbishing,
replacement and modification of the plant. This would enhance the
usefulness and value of the plant. It was noted that EGL had entered into
an agreement which Midrex for the processing licence which was annexed           C
to the agreement with V.A. V.A. was holding construction licence and the
right to use patents from Midrex for marketing, sale, design and
construction of the Midrex plant at Hazira in India. V.A. undertook to
render necessary engineering services and did whatever was needed for
incorporating Hot Discharge Briquetting facility and to make use ofMidrex
construction and process licence for this purpose.                               D
      EGL's agreement with Midrex was annexed to the agreement with
V.A. and it was time and again emphasised in the agreement that the plant
was a Midrex plant and the various processes that had to be employed to
make the plant operational in the manner it was intended could be done
only on the basis of Midrex process. It was recited in the agreement that        E
" the Collaborator (V.A.) is capable of providing process know-how,
engineering and construction of Midrex gas based DR plants including
Hot Discharge and Hot Briquetting facilities and has offered to provide
the service to Essar as stated hereinafter."

      In Article 3 of the agreement under the heading "Midrex Process            F
License and Technical Services" it was provided that in addition to the
services being provided by V.A., Midrex will provide certain technical
services to V.A. or to EGL in connection with transfer of technology
covered under the process licence agreement attached to in Annexure 12
of the agreement. The services included:                                         G

     (a) basic engineering package for the hot discharge and hot briquetting
system:

      (b) advice to Essar on optimum utilisation of iron oxide lump ore
and iron oxide pellets;                                                          H
    762                       SUPREME COURT REPORTS [1996] SUPP. 8 S.C.R.


A        (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 Licensees ..

         (d) provide continuing information to Essar on operating results
  from other Midrex Plants to assist Essar in optimizing plant operating
B efficiency including operating reports, operation bulletins and operation
  seminars.

          Article I0 of the agreement is as under:

          "Article IO : CONTRACT DHILL:-
c
          In consideration of fulfilment by Collaborator of its obligations under
    this Agreement, Essar shall pay to COLLABORATOR as below:-

          SERVICES TO BE PROVIDED OUTSIDE INDIA:-
D          I 0.1. l   Process license and allied technical services
                                                         OM (German Marks).

           I 0.1. I   Process license fee payable to MIDREX Corporation for
                      the right to use the Midrex process and patents.
E                                                    OM 2,000,000 lump sum.

           I0.1.1.2 Cost of Technical services provided under Article 3 in
                    connection with Midrex process.
                                                OM I0, !00,000 lump sum.
F
          Technical Services.

          l 0.1.2.1. Payment for engineering and consultancy fee as specified
                     under this agreement.
G                                                OM 23,I00,000 lump sum.

          l 0.1.2.2. Payment for theoretical and practical training outside India.
                                                     OM 2,200,000 lump sum.

H                     Total                          OM 37, 400,000 lump sum
      COLLECTOR OF CUSTOMS v. ESSAR GUJ. LTD. [SEN, J.]                  763


      The agreement signed by EGL with Midrex International B.V.                A
recorded that the licensee, EGL, had entered into an agreement for purchase
of a Midrex Direct Reduction Plant installed at Emden, West Germany,
and intended to have the same dismantled, refurbished, adapted for
production of Midrex Hot Briquetted Iron (HBI) and re-installed in India.
The licensee had approached Midrex for an appropriate process licence
for the operation of the plant utilising the Midrex Direct Reduction Process,   B
and Midrex desired to grant such licence to licensee upon the terms and
conditions stated in the agreement. It was further recorded that the licensee
had entered into an agreement dated 4th December, 1987 with V.A. and it
was agreed that Midrex would render various services as mentioned in the
agreement, which would be annexed to the Collaboration Agreement with
~-                                                                              c
      It was clearly stated that the agreement with Midrex meant, "Process
Licence Agreement including all the appendices, attachments and
amendments thereto." It was further clarified that 'Midrex Direct Reduction
Plant' shall mean any facility for reducing iron oxides into Product or
direct reduced iron (DR!) which had been heretobefore, was being currently, D
or would be in the future constructed or operated under a licence from
Midrex. 'Midrex Direct Reduction Process' was defined to mean the process
used in the plant or other Midrex Plants for the direct reduction of iron
bearing oxide (including iron ore, iron oxide pellets, or other iron bearing
materials in any form) in a shaft furnace to produce Product or direct E
reduced iron (DR!) using a gaseous reductant irrespective of the reductant
source; the solids flow system beginning at the iron oxide distribution
system at the top of the shaft furnace and ending at the product discharge
from the HBI quench system or the DR! discharge device at the bottom of
the shaft furnace and the gaseous flow system beginning at the spent gas
offiake of the shaft furnace, leading through the gas processing system F
and ending at the reducing gas inlet of the shaft furnace.

      EGL was granted a licence to use the plant on the following terms:-

      Grant of Licence
                                                                                G
      (a)     Subject to the provisions of this Agreement, Midrex. grants
              and agrees to grant to Licensee for the term of this Agreement:

              (i) The right to use all Paten.ts and Confidential information
              for the operation of the Plant; and                               H
    764                     SUPREME COURT REPORTS [1996] SUPP. 8 S.C.R.


A                (ii) The right to produce in the plant and use and sell
                 worldwide, Product produced by the plant or DR! which
                 may be produced by the plant from time to time.

          (b)    Licensee should be free to sub-license the rights granted under
                 the clause 2.1 of this Agreement to another Indian Party
B                should it become necessary. The terms of such sublicensing
                 will, however, be as mutually agreed to by all the parties
                 concerned including Midrex and will be subject to the approval
                 of Government of India and Midrex.

          The agreements with Midrex and also V.A. bring out the real nature
C of the agreement with TIL, which had been made subject to obtaining a
    licence from Midrex. This agreement with V.A. recites that the plant,
    when it was bought, had a rated capacity of 8,00,000 tpy DR! under the
    prevailing operating conditions based on the Midrex Process. It was recited
    that the Collaborator (V.A.) was holding construction licence and rights to
D   use patents from Midrex for marketing, sale, design and construction of
    the Midrex plants at Hazira, India. The services that were to be rendered
    by V.A. would also include technical services in connection with the Midrex
    Process and engineering services necessary for this purpose. The
    Collaborator agreed to use Midrex construction and process licence for
    this project at Hazira, India. lt was recorded that EGL's contract with
E   Midrex had been annexed to the contract with the Collaborator.

         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
F EGL. 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
G agreement, the sale of the plant had not taken place even at the time when
  the contract with Midrex was being signed on 4.12.87, 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
H plant.
      COLLECTOR OF CUSTOMS v. ESSAR GUJ. LTD. [SEN, J.]                  765


     Rule 9 of the Customs Valuation (Determination of Price oflmported          A
Goods) Rules, 1988 is to the following effect:-

             ·'9. Cost and services-{ I) In determining the transaction
             value, there shall be added to the price actually paid or payable
             for the imported goods,
                                                                                 B
     (a)

     (b)

     (c)     royalties and licence fees related to the imported goods that
             the buyer is required to pay, directly or indirectly, as a          C
             condition of the sale of the goods being valued, to the extent
             that such royalties and fees are not included in the price
             actually paid or payable;

     (d)     the value of any part of the proceeds of any subsequent resale,
             disposal or use of the imported goods that accrues, directly        D
             or indirectly, to the seller;

     (e) .   ail 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 E
             seller to the extent that such payments are not included in the
             price actually paid or payable."

     The Tribunal has referred t~ the Interpretative Notes given in the
Schedule by which Rule 9 has been explained in the following words:-
                                                                                 F
      "Rule 9(J)(c)

      I.     The royalties and licence fees referred to in rule 9(1 )( c)
             may include among other things payments in respect to
             patents, trademarks and copyrights. However, the charges            G
             for the right to reproduce the imported goods in the country
             of importation shall not be added to the price actually paid
             or payable for the imported goods in determining the customs
             value.

     2.      Payments made by the buyer for the right to distribute or           H
    766                      SUPREMECOURTREPORTS [1996] SUPP. 8 S.C.R.


A                 resell the imported goods shall not be added to the price
                  actually paid or payable for the imported goods if such
                  payments are not a condition of the sale for export to the
                  country of importation of the imported goods.''

           It is difficult to see how these Interpretative Notes come to the aid of
B   the impo1ter in this case. Midrex has granted licence to EGL not only for
    the right to produce in the Midrex Direct Reduction Process Plant and sell
    the products produced by the plant worldwide, but has also given the
    licensee (EGL) the right to use all patents, confidential information for
    the operation of the plant. Midrex has undertaken to supply all confidential
    information and patents updated from time to time during the period of
C   the· agreement. Therefore, we are of the view that licence fees paid to
    Midrex will have to be added to the price of the plant to arrive at the
    transaction value of the plant.

          There is another way of looking at the prob.lem. Section 14 of the
D Customs Act provides:

          "14.    Valuation of goods for purposes of assessment--{!) For the
                  purposes of the Customs Tarrif Act, 1975 (51 of 1975) or
                  any other law for the time being in force whereunder a duty
                  of customs is chargeable on any goods by reference to. their
E                 value the value of such goods shall be deemed to be-

                  (a} 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 the seller and the buyer have no
F
                  interest, in the business of each other and the price is the sole
                  consideration for the sale or offer for sale:

                  Provided that such price shall be calculated with reference to
                  the rate of exchange as in force on the date on which a bill of
G                 entry is presented under Sec. 46, or a shipping bill or bill of
                  export, as the case may be, is presented under Sec.50;

                  (b) Where such price is not ascertainable, the nearest
                  ascertainable equivalent thereof determined in accordance
H                 with the rules made in this behalf.
      COLLECTOR OF CUSTOMS v. ESSAR GUJ. LTD. [SEN, J.)                767


     (2)     Notwithstanding anything contained in sub-section (1), if         A
             the Central Government is satisfied that it is necessary or
             expedient so to do it may, by notification in the official
             Gazette, fix tariff values for any class of imported goods or
             export goods, having regard to the trend of value of such or
             like goods and where any such tariff values are fixed, the
             duty shall be chargeable with reference to such tariff value.     B

      (3)    For the purposes of this section-

             (a) "rate of exchange" means the rate of Exchange-

             (i) determined by the Central Government or                       c
             (ii) ascertained in such manner as the Central Government
             1nay direct,

             for tho conversion of Indian currency into foreign currency
             or foreign currency into Indian currency;                         D

             (b) "foreign currency" and "Indian currency" have the
             meanings respectively assigned to them "in the Foreign
             Exchange Regulation Act, 1973 (46 of 1973)"
                                                                               E
      The entire purpose of Section 14 is to find out the value of the goods
which are being imported. The EGL in this case was purchasing a Midrex
Reduction Plant in order to produce sponge iron. In order to produce
sponge iron, it was essential to have technical know-how from Midrex. It
was also essential to have an operating licence from them. Without these,
the plant would be of no value. That is why the pre-condition of a process     F
licence of Midrex was placed in the agreement with TIL. It will not be
proper to view that agreement with TIL in isolation in this case. The plant
would be of no value if it could not be made functional. EGL wanted to
buy the plant in working condition. This could only be achieved by paying
not only the price of the plant, but also the fees for the licence and the     G
technical know-how for making the plant operational. Therefore, the value
of the plant will comprise of not only the price paid for the plant but also
the price payable for the operation licence and the technical know-how.
Rule 9 should be construed bearing this in mind.

      Mr. Salve, appearing on behalf of the EGL has laid great stress on       H
    768                     SUPREME COURT REPORTS [I 996] SUPP. 8 S.C.R.


A the various clauses of the agreement between Essar and TIL to show that
    the title to the plant had passed to the purchaser without any precondition
    after payment was made in terms of clause 2 of the agreement. The delivery
    was also deemed to have taken place at the time and on the date of payment
    in full, in accordance with clause 2.

B         Clause 2 merely states that the purchaser shall purchase the property
    from the seller at an inclusive purchase price of26 million German Marks.
    I 0 per cent of the purchase price had to be paid within fifteen days of the
    declaration of the buyer that the Government of India has given approval
    under clause I I of the agreement and the balance 90 per cent, within 60
    days of the approval given by the Government oflndia. There is no mention
C   of the other condition in clause I I that the agreement would be subject to
    "the purchaser obtaining the transfer of the operation licence from Messrs
    Midrex of Charlotte, USA". It appears from the agreements with V.A. and
    Midrex that unless and until the requisite licence and know-how was
    obtained from Midrex and also V.A., it would be impossible to shift the
    plant from Emden, West Germany and instaJI it at Hazira, India and produce
D   sponge iron from that plant. It appears that ifMidrex did not grant operation
    licence for running the plant, the usefulness and value of the plant will
    considerably diminish if not evaporate altogether.

          There are also several curious aspects of the three agreements. The
E agreement with TIL starts with a recital that "The Purchaser and Seller
  have today respectively purchased and sold a Direct Reduction Iron Plant
  on the following terms and conditions". This indicates that the purchase
  and sale of the plant had taken place on 24.3.1987 but in clause 2 it is
  stated that "the Purchaser shall purchase the Property from the Seller" at
  the stated price. Thereafter, it is stated that the price shall become due and
F payable only after the buyer declaring that the Government of India has
  given approval as per clause 11 of the agreement. The delivery was also
  postponed till full payment was made in accordance with clause 2. The
  risk ofaccidental destruction, Joss or damage to the property 'shall devolve
  upon the Purchaser with the expiry of the day following that upon which
G the plant is delivered ...". Clause 5 makes it clear that title to the property
  shall devolve upon the purchaser after complete, unconditional and
  irrevocable payment of the purchase price.

          AJI these clauses go to show that though the agreement starts with
    the recital that "the Purchaser and the Seller have today respectively
H   purchased and sold a Direct Reduction Iron plant, on the foJlowing terms
          COLLECTOR OF CUSTOMS v. ESSAR GUJ. LTD. [SEN, J.]                   769


    and conditions," but as a matter of fact no sale had taken place on that          A
    date. i.e. 24.3.87. The delivery was postponed till full payment was made.
    The question of payment did not arise till Government of India gave its
    approval to the agreement. Title to the property would devolve upon the
    purchaser only after complete, unconditional and irrevocable payment of
    the purchase price. The risk of destruction, loss or damage to the plant
    remain with the seller till after the date of delivery of the plant. Therefore,   B
    title to the plant was not to pass to the purchaser unless and until full
    payment was made. The entire contract was subject to the condition of the
    purchaser obtaining the necessary licence from Midrex to operate the plant.
    This clause may have been inserted to protect the interest of the purchaser
    but it was a pre-condition of sale of the plant.
                                                                                      c
          Although the agreement with TIL does not describe the plant as
    Midrex Direct Reduction Plant, the agreement with Midrex leaves no room
    for doubt that what the assessee had purchased was a Midrex Direct
    Reduction Plant at Emden. Although the plant was described in the
    agreement with TIL merely as a Direct Reduction Plant and the name of
    Midrex was carefully kept out, the agreement with Midrex makes it                 D
    abundantly clear that the assessee had entered into an agreement to purchase
    a Midrex plant for which it was essential to have Midrex·nperation licence
    and Midrex technology to make the plant functional. That is why the
    overriding clause of having prior licence of Midrex was inserted in the
    purchase agreement with TIL. Without this licence and various other               E
    technical information to be provided by Midrex, it might not have been
    possible to operate the plant at all. It was only after this agreement with
    Midrex that the purchase of the plant was completed. Bearing in mind the
    terms and conditions of all the three agreements, we are of the view that it
    was essential for EGL to have the Midrex licence to operate the plant and
    the pre-condition imposed in clause 11 of the purchase agreement about            F
    the operation licence from Midrex was to ensure that EGL got a plant
    which could be made operational with Midrex technology.

         Therefore, the process licence fees of DH 2,000,000 was rightly
    added to the purchase price by the Collector of Customs. The order of             G
    CEGAT on this question is set aside .
•
         The second question relates to the cost of technical services in
    connection with the Midrex Process provided under Article 3 of the
    agreement between Essar and their Technical Collaborators Mis. Yoest
    Alpine of Austria (V.A.). In order to appreciate the scope of the controversy     H
    770                     SUPREME COURT REPORTS [ 1996] SUPP. 8 S.C.R.


A   it has to be remembered that an agreement with V.A. was entered into on
    4th December, 1987. On this very day, Essar entered into another agreement
    with Midrex. Jn fact, the Midrex agreement was annexed to the agreement
    ofV.A. and was thereby made a pait of the agreement with V.A. The two
    agreements have to be read together to find out the real intention of the
    parties. Essar had purchased a Midrex Reduction Plant on "as is where is''
B   basis from TJL. It was recited in the agreement with V.A. that Essar
    intended to set up at Hazira, Gujarat, a gas based Direct Reduction (DR)
    Plant which was to be re-engineered for a rated capacity of 880,000 tpy of
    Hot Briquetted Iron (HBJ). For this purpose Essar decided to buy the
    existing gas based DR Plant located at Emden, West Germany, which had
    a rated capacity of 800,000 tpy DR! under the prevailing operating
C   conditions at Emden based on the Midrex Process and to incorporate Hot
    Discharge and Hot Briquetting facilities. V.A. had inspected the Plant at
    Emden and was satisfied as to the technical suitability for dismantling of
    the plant and its re-erection at Hazira after necessary refurbishing,
    replacement and/or modifications. It was also recorded in the agreement
    that essar had entered into an agreement with Midrex for process licence,
D   which was annexed to the agreement and V.A. was holding construction
     licence and rights to use patents from Midrex for marketing, sale, design
    and construction of the Midrex Plants at Hazira, India.

          Therefore, it appears from the two agreements that the plant was a
E gas based Midrex Direct Reduction Plant. Its rated capacity based on Midrex
    Process was 800,000 typ. Essar had acquired the operating licence by
    virtue of an agreement with Midrex International, which was annexed to
    the agreement with V.A. V.A. had a construction licence and rights to use
    patents for marketing, sale, design and construction of the Midrex Plants.
    One of the stated objects for appointing V.A. was to raise the existing
F   rated capacity of plant of800,000 tpy to 880,000 tpy and also to incorporate
    Hot Discharge and Hot Briquetting facilities. The agreement also recorded:-

                 "WHEREAS Essar is desirous of engaging the
                 COLLABORATOR under this agreement for providing the
G                services for the project, as generally detailed below, together
                 with such modifications and additions as may be required
                 and shall also include technical services in connection with      •
                  the Midrex Process and engineering services necessary for
                 the incorporation of Hot Discharge and Hot Briquetting
                 facilities, which are obviously and fairly intended and which
H                 may not have been specifically referred to but are essential
      COLLECTOR OF CUSTOMS v ESSAR GUJ. LTD. [SEN, J.]                  771


             for proper functioning of the plant and further shall be deemed   A
             to include and cover, but not limited to the following except
             for services specifically excluded:-

             OUTSIDE INDIA

            Use ofMidrex construction and process licence forth is project     B
            at Hazira, India.

            Provide basic engineering and re-engineering for re-location
            of the existing plant to Hazira, India, and basic and detailed
            engineering work for hot discharge and hot briquetting
            facilities and also prepare necessary technical documents in       C
            Europe and handover the same to the representative of Essar
            in Austria.

             Engineering      and    Consultancy    services    and
             specialist supervision by equipment suppliers and other· D
             agencies.

            Provide . support services during the stay of
            COLLOBORATOR/other specialists at Emden such as
            accommodation logistic and transport. Any other technical
            assistance needed by COLLABORATOR/Equipment                        E
            Suppliers at Emden.

             Specialist supervision of dismantling of the plant at Emden.

             Provide training engineers for training of ESSAR                  F
             Personnel in a similar Plant/training and at equipment
             suppliers works.

             Supervision of plant scale tests and preparation of the test
             report."                                                          G

      Although Article 3 has been included in the agreement ofEssar with
V.A. it records that "in addition to the services to be provided by
Collaborator, the following technical services will be provided by Midrex
International B.V. to either Collaborator or Essar. Under Article 3, the
following services were to be rendered:                                        H
    772                    SUPREME COURT REPORTS [1996] SUPP. 8 S.C.R.


A       "ARTICLE 3 - MJDREX PROCESS LICENCE TECHNICAL
    SERVICE:-

          In addition to the services to be provided by COLLABORATOR,
    the following technical services will be provided by Midrex International
    B.V. to either Collaborator or Essar in connection with the transfer of
B   technology covered under the Process Licence Agreement attached in
    Annexure XII to this Agreement:-

          1.     Basic engineering package for the hot discharge and hot
                 briquetting system including:-

c                (a) Preparation of the Cere Plant Mass Balance for Gases
                 and Solids including preliminary water data for the Hot
                 Briquetting System;

                 (b) Development of the Basic Process and Instrument
                 Diagrams for the Hot Briquetting, Gas and solid system.
D
                 (c) Development of the guide drawings for furnace
                 modification required for Hot Discharge Conversion.

                 (d) Development of the Overall general arrangement drawing
E                for Hot Discharge Furnace and Briquetting Facility.

                 (e) Development of the guide drawings for the furnace Product
                 Discharge Chamber, Briquetter Food Legs, and bubbles.

                 (f) Development of the guide drawings for the Bottom seal
F                Gas System Scrubber and Heater.

                 (g) Development of general arrangement drawings for the
                 Briquetting System including Brakers, Quench system, Hot
                 Finers Recycle System, Dust Collection, and Vapour Removal.
G                                                              . .
                 (h) Preparation of duty specification for the B{iquetting
                 System Equipment.                             ·

                 (i) Preparation of duty specification for the Bottom seal Gas
                 system compressors, Nitrogen Genera.tor, and Bottom Seal
H                Gas Dryer."
          COLLECTOR <\)F CUSTOMS v. ESSAR GUJ. LTD. [SEN, J.]               773


           Therefore, the payment of DM 10, 100,000 was being made for the A
    transfer of technology under the Process Licence Agreement entered into
    with Midrex. The services mentioned hereinabove are to be part of
    Licencing Agreement with Midrex. This agreement was a pre-requisite
    for finalisation of the contract with TIL to purchase the plant at Emden.
    The licence is 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 B
    capacity of the plant by incorporating Hot Briquetting system. As all these
    services were to be rendered under the Process Licence Agreement with
    Midrex, the amount payable to Midrex as part of the Process Licence fee
    has to be included in the value of the plant. It has also to be borne in mind
    that these services were being rendered in order to improve the capacity of
    the plant by incorporating Hot Briquetting facilities.                        C
          So far as payment of OM 23, 100,000 is concerned, this sum is to be
    paid for "Technical Services". A sum of DM 2,200,000 was payable for
    theoretical and practical training. This sum cannot be added to the value
    of the plant in any way. The sum ofDM 23,100,000 payable for engineering
    and consultancy fee as specified in the agreement includes services like        D
    basic engineering and re-engineering for relocation of the existing plant at
    Hazira, India and basic engineering package for Hot Discharge and Hot
    Briqu.etting System and also preparation of necessary technical documents
    and hand over the same to the representative of Essar in Austria. V.A. was
    also to provide specialist supervision of dismantling of the plant at Emden
    and also supervision of the plant, preparation of test report etc. Along        E
    with this, V.A. undertook to supply support services such as accommodation,
    logistics and transport and any other technical assistance needed by the
    collaborator and also training the engineers and personnel in similar plant.
    It also agreed to render various services in India. The technical services
    will cover, inter alia,-
                                                                                    F
                  "2.3 Technical services related to the relocation of the plant
                  from Emden to Hazira and simultaneously considering the
                  incorporation of Hot Discharge and Hot Briquetting facilities.



-                2.3.1. Assisting ESSAR in the arrangement of laboratory
                 and plant scale tests on Indian raw materials terms and
                 conditions for the plant scale test are to be agreed directly
                 between ES SAR and the owner of the plant where the test is
                                                                                    G


                 intended to be carried out;

                  Supervision of the test and interpretation of the test results.   H
    774              SUPREME COURT REPORTS [1996] SUPP. 8 S.C.R.


A         2.3.2. Auditing of all the. documentation available at Emden
          to determine the nature and extent of missing documents/
          information (if any) as described in Annexure I. Documents/
          Information will mean, without exception, all th~ drawings,
          manuals, diagrams, calculations and records, etc. avaHable
          at Emden. ESSAR will make available the documents to the
B         extent available at Emden.

          2.3.3. Assessment of Proceos Related Units and facilities
          (equipment, machinery piping, instrumentation, electrics and
          control system, related wear and spare parts) as available at
          Emden, jointly with ESSAR AND MECON and confirm
c         the suitability of these facilities for refuse as such as evidenced
          at Emden or alternatively establish the extent of revamping/
          replacement/debottle-becking between dismantling and re-
          installation. Details of plant and equipment audit are described
          in Annexure.11.

D         2.3.4. Engineering services for Process Related Units. For
          the Hazira DR Plant, the basic process ·design parameters
          and ambient conditions will be different from that originally
          applicable and use·d for the design of the two modules at
          EMDEN. For electrical and instrumentation equipments the
E         basic concept of the control system of the existing DR plant
          will be retained. The EMDEN Design Criteria and the Hazira
          Design Criteria are stipulated in Annexure III of this
          Agreement.

          Collaborator will perform all process calculations on the basis
F         of the design criteria applicable for Hazira and perform the
          re-engineering work to the extent required simultaneously
          considering the incorporation of Hot Discharge and Hot
          Briquetting facilities.


G         2.3.4. I Prepare complete list of all new, missing equipment,
          machinery, electrics, instrumentation, refractories, insulation,
          lubricants, chemicals, catalyst to be procured, modified,
          erected and commissioned as well as a list of wear and spare
          parts for the first two years of operation, all with engineering
          specifications, sufficient to enable ESSAR to arrange timely
H         procurement. COLLABORATOR will assist ES SAR in
      COLLECTOR OF CUSTOMS v. ESSAR GUJ. LTD. [SEN, J.]                 775


             providing technical clarifications during evaluation and          A
             negotiations with vendors.

            2.3.4.2. Prepare a list of items requiring reconditioning, along
            with relevant specifications for these items. Nature
            and extent of re-conditioning will also be specified by
            COLLA BORA TOR which will be further discussed and                 B
            agreed with ESSAR and MECON in accordance with Art.
            3.3.2.

            2.3.5. Establish jointly with ESSAR and MECON, a division
            list identifying those equipments, machinery, material and
            parts which can be procured in India or have to be imported        C
            COLLABORATOR will provide a list of Vendors/
            manufacturers for refurbishing or procurement of all import
            items and MECON will provide a list of indigenous items.

             2.3.7. Preparation and issue of new and re-engineered
             drawing/documents/calculations/manuals for Process Related        D
             Units as necessary with sufficient details to enable ESSAR
             to procure equipment, prepare fabrication drawings and
             fabricate structures, errect, test, start up and commission the
             Process Related Units. The details of such drawings and
             documents are given in Annexure IV."
                                                                               E
      There are various other clauses relating to civil engineering technical
specifications, documentation and also inspection and check sizing of
motors, reduction gear and hydraulics of Service Units etc. It is difficult
to hold that the entire payment of engineering consultancy fee to V.A. will
have to be added to the imported plants. But the plant was sold on "as is F
where is" basis. So whatever expenditure was needed to be incurred for
dismantling the plant and making it ready for delivery has to be added to
the value of the plant. The specialist supervision for dismantling of the
plant and also engineering and consultancy services for this purpose will
have to be added to the value of the imported plant. But this apart, other G
services rendered cannot be treated as adding in any way to the value of
the plant. Since there is no clear indication as to how the various services
have been valued separately, 10% of the amount ofDM 23,100,000 should
be added to the value of the plant on this account.

     Therefore, we are of the view that DM 2,000,000 being the process         H
   776                      SUPREME COURT REPORTS [ 1996] SUPP. 8 S.C.R.


A licence fee paid to Midrex Corporation, DM I0, I00,000 being the cost of
   technical services provided by Midrex and a sum of OM 2,310,000 being
   payment.on account of engineering and consultancy fee payable to V.A.
   should be added to the value of the imported plant.

           The appeals are disposed of as above. There will be no order as to
B costs.

    H.K.                                                Appeals disposed of.