Holding

When the parties are related, the inclusion of technical know‑how charges in the assessable value of imported raw material must be decided de novo by the Adjudicating Authority under the Customs Valuation Rules, and the Tribunal erred in refusing to consider that issue.

Summary

Mis Clariant (India) Ltd, a manufacturer of leather chemical products, entered into a Technical Collaboration Agreement with Sandoz Quinn for the import of raw material. The Customs Department demanded that a technical know‑how fee of Rs 5,00,000 be added to the assessable value of the raw material under Customs Valuation Rules, asserting that the parties were related and that the fee was a condition of import. The Adjudicating Authority rejected this, finding the parties unrelated; the Collector reversed that decision, holding the parties related and the fee includable; the CEGA Tribunal, despite accepting the relationship, ruled that the fee issue was not before it and therefore excluded the fee. The Supreme Court held that once the relationship is conceded, the question of whether the fee is a condition of import must be reconsidered de novo by the Adjudicating Authority under the Valuation Rules, and that the Tribunal erred in refusing to consider it. The appeal was allowed and the matter remitted for fresh determination.

Issues considered

Whether the technical know‑how charges payable under a technical collaboration agreement, where the parties are related, should be included in the assessable value of imported raw material under the Customs Valuation Rules, 1988.
Whether the CEGA Tribunal erred in holding that the addition of the technical know‑how fee was not before it.

Legislation cited

Customs Act, 1962s. 130E

Subjects

Customs valuationTechnical know‑how chargesRelated partiesAssessable valueDe novo considerationCustoms Valuation RulesTechnical collaboration agreementUnder‑valuation

Judgment

COMMISSIONER OF CUSTOMS, MUMBAI A
v.
MIS CLARIANT (INDIA) LIMITED, WORLI

MARCH 29, 2007

[S.H. KAPADIA AND B. SUDERSHAN REDDY, JJ.] B

Customs Act 1962-Technical collaboration agreement-Between
manufacturer-Company and another company-Import of raw material by
the manufacturer under the agreement-Revenue imposing technical know- C
how charges to the assessable value of the raw material-Adjudicating
Authority held the charges not inc/udible to the value of raw material as the
companies were not related-Appellate Authority holding the same to be
includible-Tribunal in view ofadmission by the manufacturer, despite holding
that the companies were related, held the charges not inc/udible to the cost
of raw material-On appeal, held: In view of admission by the manufacturer D
that the companies were related, the matter needs de novo consideration
whether payment of technical know-how charges was the condition for import
of raw material in the light of relationship with the parties-Hence matter
remitted to Adjudicating Authority-Customs Valuation Rules. 1988-Rules
4(2)(9), 4(2)(b), 4(3)(b) and 8.
E
Respondent-company was manufacturer of leather chemical products.
Under a Technical Collaboration Agreement, it imported raw material from a
company. Department-appellant called upon the respondent to pay technical
know-how charges to the assessable value of the material u/r 4 (2) (a) and (b)
of Customs Valuation Rules, 1988 on the ground that the two companies were F
related and that payment of fees was the condition for importation of the quality
raw material. Adjudicating Authority held that the fees payable were not
includible in the assessable value of the raw material as the two companies
were not related. Appellate Authority held that the technical know how charges
were required to be loaded to the value of raw material as the two companies
were related. Customs, Excise and Gold (Control) Appellate Tribunal, on the G
admission of the respondent, held that the two companies were related.
However, it held that the Department was not correct in adding technical know-
how charges to the cost of raw material, since the issue was not before it.

SIS H
516 SUPREME COURT REPORTS [2007] 4 S.C.R.

A Allowing the appeal, the Court

HELD: 1. The approach of the Tribunal is not correct Firstly, in the
present matter the entire finding of the adjudicating authority is based on
the premise that the two companies are not related. That premise got
eliminated when, before the appellate authority, the assessee fairly stated that
B the two companies were related. Secondly, once it is conceded on behalf of the
respondents that the two companies are related, that matter takes a different
complexion. It is in this light that the matter needs de novo reconsideration.
Therefore, the question as to whether the said payment ofDM 5,00,000 was
the condition for import of quality raw material needs to be examined,
C particularly in the light of the relationship between the parties. It is clarified
that merely because the two parties are related to each other will not amount
to under valuation per se. It will depend on the facts and circumstances of
each individual case. [Paras 9 and 11] [518-F-G; 519-A-E]

Union of India v. Mahindra & Mahindra Ltd., (1995) 76 ELT 481,
D referred to.

2. The matter is remanded to the Adjudicating Authority which will
decide the matter de novo in the accordance with the Customs Valuation Rules,
1988. (Para 12) [519-F]

E CIVIL APPELLATE JURISDICTION: Civil Appeal No. 509 OF 2002.

From the final Order No. CZB/4 l 80/WZB/2000 dated 27.11.2000 in Appeal
No.C/401/98-Bom passed by the Customs, Excise and Gold (Control) Appellate
Tribunal, West Regional Bench at Mumbai

F Mathai M. Paikeday, Navin Prakash and B. Krishna Prasad for the
Appellants.

Joseph Vellapally, Sanjay R. Hegde, Ragvesh Singh and Krishna Kumar
Darbha for the Respondents.

G The Judgment of the Court was delivered by :

KAPADIA, J. l. This is a civil appeal under Section 130E of Customs
Act, 1962 filed by the Department against the order dated November 27, 2000
in Appeal No. C 401/98-Bom passed by the Customs, Excise & Gold (Control)
Appellate Tribunal (CEGA T), Mumbai.
H
---)
COMMNR. OF CUSTOMS, MUMBAI v. CLARIANT (INDIA) LTD, WORL 1 fKA P -\l){A, J.] :) 17

2. Respondent No. I herein, during the assessment year 1977-78, imported A
raw material from M/s Sandoz Quinn (subsidiary of Mis Sandoz (India). This
was under the Technical Collaboration Agreement dated April 2, 1990, between
the said two companies. That Technical collaboration agreement provided for
import of capital goods, raw materials, intennediates etc. along with transfer
of technical know how and technical assistance for upgradation of the
respondent's manufacturing plant in India. The respondent is a manufacturer B
of leather chemical products. Respondent entered into three agreements
particulars of which are given at page 36 of the paper book. One of the

-
• agreement is called Technical Collaboration Agreement. The other two
agreements pertain to import of seeds. According to the technical collaboration
agreement the respondent was to import raw materials for manufacture of ('
leather chemical products. The Department called upon the respondent to
submit their invoices and certificates from Chartered Accountants. They gave
the said particulars contending that the Technical Collaboration Agreement
with the Sandoz Quinn was for upgradation of the chemical plant in India and
for that purpose they were not required to pay technical know how charges.
They contended that the import was on principle to principle basis and that D
the price was the sole consideration. They also contended that the import of
.;J.
raw material had no nexus with the collaboration agreement and that the
import of raw material was not a condition of the collaboration agreement. In
the circumstances it was urged that the Department should not load the
technical know-how charges to the assessable value of the, raw materials E
under Rule 8 or any other Rule framed under the Customs Act, 1962. At this
stage it may be clarified that in the present case the respondent had waived
the show cause notice.

3. By order dated 15.12.1994 passed by the adjudicating authority, it was
,,;._
held that there was no mutuality of interest between the respondent company F
and Mis Sandoz Quinn, and that the fees payable were not includible in the
'r assessable value of the raw material.

4. Aggrieved by the decision of the adjudicating authority the Department
carried the matter in appeal to the Collector. of Customs (A). It was urged on
behalf Of the Department that the two companies were related and that the G
fees were includible in the assessable value of the capital goods.

5. By order dated 31.12 .1997 passed by the Collector of Customs (A) it
y was held that the technical know-how charges were required to be loaded to
the value of raw materials. It was further held that though the two companies
.H
518 SUPREME COURT REPORTS [2007] 4 S.C.R.

A were related their relationship did not influence the value of the capital goods.
It was further held that since the said two companies were related valuation .-.l'_
should be done under rule 4(2)(a) and (b) in the matter of computing the
assessable value of the ·raw material.

6. Aggrieved by the decision of th. Collector of Customs (A) the
B respondent herein went in appeal to CEGA T. By the impugned judgment it
was held that both the companies are related to each other. The Tribunal
recorded the admission made by the advocate for the respondents that the
two companies are related to each other. The Tribunal found that the appellate
authority had confused the valuation of capital goods with valuation of
C imported raw materials. It was further held that the only issue before the
appellate authority was regarding valuation of capital goods and therefore, it
- •

had erred in going into the larger question of adding DM 5,00,000 to the cost
of raw materials. According to the Tribunal this was never an issue before
the appellate authority. In the circumstances, the Tribunal concluded that the
said amount should not be added to the cost of the raw material.
D
7. At this stage it may be noted that the Department is seeking to
invoke Rule 4(2)(a) and (b) of the Customs Valuation Rules, 1988 on the
footing that the said two companies are related, and that the payment of fees
was the condition for importation of the quality raw material.

E 8. The only question which arises for determination in the present civil
appeal is whether the Tribunal was justified, on the facts and circumstances
of the case, in holding that the addition of DM 5,00,000 to the cost of the
raw material was never in issue before the adjudicating authority, and therefore,
its finding to that extent was beyond the appeal.
F 9. We do not agree with the approach of the Tribunal for the following
reasons. Firstly, in the present matter the adjudicating authority proceeded on
the basis that the above two companies were not related to each other. The
entire finding of the adjudic'.lting authority is based on the premise that the
two companies are not related. That premise got eliminated when, before the
G appellate authority, the advocate for the assessee fairly stated that the
respondent company and Mis Sandoz Quinn were related. Secondly, in the
present case three agreements were entered into by respondent herein with
three different companies, one of which was Mis Sandoz Quinn. One it is
conceded on behalf of the respondents that the two companies are related
the matter takes a different complexion. It is in this light that the matter needs
H de novo reconsideration. The first two agreements pertain to import of seeds.
COMMNR. OF CUSTOMS, MUMBAI"· CLARiANT (INDIA) LTD, WORLI [KAPADIA, J.] 519

The third agreement pertains to technical collaboration. The third agreement A
provides for import of quality raw material for manufacture of leather chemical
products. Therefore, the question as to whether the said payment of DM
5,00,000 was the condition for import of quality raw material needs to be
examined, particularly in the light of the relationship between the parties.

10. In the case of Union of India v. Mahindra & Mahindra Ltd, (1995) B
76 EL T 48 l the question arose as to how the Department should interpret an
.... agreement between the buyer and seller in the context of valuation under the
,,..
Customs Valuation Rules, 1988. It was held that ordinarily the Department
should proceed on the basis of the apparent tenor of the agreement. However,
it was up to the Revenue, on examination of the relevant circumstances to
allege and prove, that the apparent was not real. In that case also the
c
Department was required to consider technical know how agreement between
the Indian manufacturer and foreign collaborator. In that case the Department
contended that there was nexus between payment for know how transfer and
import of engines. The assessee succeeded before this Court in that case and
D
..
_...,,
one of the main reasons for the success of the assessee was that this Court
found that Mahindra & Mahindra were not related to the foreign collaborator .

l l. In the present case that is not so. The respondent here had conceded
before the appellate authority that the two companies are related. We make
it clear that merely because the two parties are related to each other will not
amount to undervaluation per se. It will depend on the facts and circumstances E
of each individual case.

12. For the above reasons we set aside the impugned judgment of the
Tribunal and remand the matter to the adjudicating authority which will decide
~ the matter de novo in accordance with the Customs Valuation Rules, 1988. The
F
..,. adjudicating authority will not only go by apparent tenor of the agreement,
but also examine the necessary facts and decide the matter in accordance with
law. We do not wish to express any opinion as to whether Rule 4(2)(a) or Rule
4(2)(b) or Rule 4(3)(b) is applicable in this case. It will all depend on the facts
to be established in this case and the adjudicating authority has to decide
about the applicability of the relevant rule in this case. We express no opinion G
in that regard.

13. Accordingly, the appeal is allowed with no order as to costs.

KKT. Appeal allowed.
H