Holding

Post‑importation licence and technical‑assistance fees are excluded from the assessable value of imported goods and cannot be added for customs‑duty calculation.

Summary

Mis. J.K. Corporation Ltd. entered into a two‑part collaboration agreement with Korean firms Samsung and Cheil for licence, know‑how (Part A) and plant‑machinery (Part B) to set up a polyester yarn plant. The company imported the machinery and paid a US$14 lakh licence/know‑how fee after importation. The issue before the Supreme Court was whether the licence and technical‑assistance fee, being payable post‑importation, should be added to the transaction value of the imported goods for customs‑duty purposes. The Court held that under Section 14 of the Customs Act, 1962 and the Customs Valuation Rules, 1988, post‑importation services and technical assistance are expressly excluded from the assessable value as per the interpretative note to Rule 4 and Rule 12. Consequently, the licence fee cannot be added to the customs value, and the appeal by the Commissioner of Customs was dismissed.

Issues considered

Whether a licence/know‑how fee payable after importation forms part of the assessable value of imported plant and machinery under the Customs Act, 1962.
Whether the two parts of the collaboration agreement are so inter‑dependent that the licence fee is a condition of sale and therefore includable in the customs value.
Interpretation of Rule 9(1)(e) and the interpretative note to Rule 4 of the Customs Valuation Rules, 1988.

Legislation cited

Customs Act, 1962s. 14, s. 14(1A)
Customs Valuation (Determination of Prices of Imported Goods) Rules, 1988s. Rule 12, s. Rule 4, s. Rule 9

Subjects

customs dutyassessable valuelicence feetechnical know‑howpost‑importation servicescustoms valuation rulesinterpretative noteimport of plant and machinery

Judgment

A COMMISSIONER OF CUSTOMS (PORT), KOLKATA

MIS. J.K. CORPORATION LIMITED

FEBRUARY 2, 2007

B [S.B. SINHA AND MARKANDEY KAT JU, JJ.]

Customs Act, 1962-ss. 14 & 14(JA)-Customs Valuation
(Determination of Price of Imported Goods) Rules, 1988-rr. 4, 9 & 12-
C Import ofplant and machinery-Assessable value-Determination of-Amount
paid for any post-importation service or activity viz. post-importation
technical assistance-Heid: Would not form part of the assessable value if it
is separately identifiable from the amount payable for the imported goods.

Respondent entered into a collaboration agreement with two Korean
D companies, Mis Samsung and M/s Chei! for manufacture of Polyester
Oriented Yarn. The said agreement is in two parts - Part-A providing for
supply of licence, knowhow and technology, while Part-B providing for supply
of equipment as a µart of necessary plant and machinery and equipment for
manufacture of Polyester Oriented Yarn. Pursuant to the said agreement,
Respondent imported plant and machinery manufactured by the said Korean
E companies.

The question which arises for consideration in this appeal, is as to
whether customs duty would be payable on the purchase price of the goods by
adding the value of licence and technical knowhow, etc. to the value of the
F imported goods.

Dismissing the appeal, the Court

HELD: 1.1. The basic principle of levy of customs duty is that the value
of the imported goods has to be determined at the time and place of importation.
The value to be determined for the imported goods would be the payment
G required to be made as a condition of sale. Assessment of customs duty must
have a direct nexus with the value of goods which was payable at the time of
importation. If any amount is to be paid after the importation of the goods is +
complete, inter alia by way of transfer of licence or technical knowhow for
the purpose of setting up of a plant from the machinery imported or running
H 196
COMMNR OF CUSTOMS (PORT), KOLKATA r. J.K. CORPN. LTD. J97

thereof, the same would not be computed for the said purpose. Any amount A
paid for post-importation service or activity, would not, therefore, come within
the purview of determination of assessable value of the imported goods so as
to enable the authorities to levy customs duty or otherwise. The Customs
Valuation (Determination of Prices of Imported Goods) Rules, 1988 have been
framed for the purpose of carrying out the provisions of the Customs Act, B
1962. The wordings of Sections 14 and 14(1A) of the Act are clear and
explicit. The Rules and the Act, therefore, must be construed, having regard
to the basic principles of interpretation in mind. [Para 9) )201-B-Dj

)-. 1.2. Rule 12 provides that the Interpretative Notes specified in the
Schedule appended thereto would apply for construction thereof. They are C
statutory in nature being integral part of the Rules themselves. What would,
therefore, be excluded for computing the assessable value for the purpose of
levy of custom duty, inter alia, has clearly been stated in Interpretative note
to Rule 4, namely, any amount paid for post-importation activities. The said
provision, in particular, also apply to any amount paid for post-importation
technical assistance. What is necessary, therefore, is a separate identifiable D
amount charged for the same. On the Revenue's own showing, the sum of US
$ 14,00,000.00 was required to be paid by way of remuneration towards
services to be offered by the companies in respect of matters specified in Part-
-~ A of the said Memorandum of Agreement. The said sum represents amount
of licence or amount to be paid by the respondent for the licence for the E
manufacturing process for production of goods which were covered by the
patents held by Mis. Samsung as also for technical knowhow. No part of the
knowhow fee was to be incurred by the respondent either for the purpose of
fabrication of the plant and machinery or for any design in respect whereof
Mis. Samsung held the patent right. Noticeably the said Memorandum of
Agreement specifically contemplates that the plant and machinery to be F
supplied thereunder may be procured from other independent manufacturers
and suppliers who might not have anything to do with the knowhow or licence
provided thereunder by Samsung. Knowhow, being process knowhow, is
covered by the patent held by Mis. Samsung. The payment of US $
14,00,000.00 also entitles the respondent to sub-licence the knowhow to any G
other party, subject, of course, to the approval of Mis. Samsung. One cannot,
therefore, accept the contention of Appellant that the conditions laid down in
both parts of the said Agreement are complimentary to each other and that
Part-B cannot exist without Part-A thereof. Moreover, no case has been made
out that the sale price of the imported plant and machinery had been under-
stated. !Paras IO, 11, 13, 14, 15 & 21) H
1201-E, H; 202-A-B, F, H 203-C; 205-DI
198 SUPREME COURT REPORTS [2007] 2 S.C.R.

A Tata Iron and Steel Company Limited v. Commissioner ofCentral Excise
and Customs, Bhubaneswar, Orissa, (2000) 3 S.CC. 472, relied on.

Collector of Customs (Prev.), Ahmedabad v. Essar Gujarat Limited
(1996) 88 E.L.T. 609 (S.C.) and Mukund Limited v. Commissioner ofCustoms,
B ACC, Mumbai, (1999) 112 E.L.T. 479, referred to.

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 4663 of2006.

From the Final Order No. A-388/KOU2006 dated 15.5.2006 of the Customs,
Excise & Service Tax Appellate Tribunal, EZB, Kolkata in Customs Appeal No. ~
C C/259/2002.

K. Radhakrishnan, Binu Tamta and B. Krishna Prasad for the Appellant.

S. Ganesh, Rajiv Tyagi and L.N. Swain for the Respondent.

The Judgment of the Court was delivered by
D
S.B. SINHA, J. I. The Revenue is in appeal before us aggrieved by and
dissatisfied with the judgement and final order dated 15th May, 2006, passed
by the Customs Excise and Service Tax Appellate Tribunal, Kolkata, in Appeal
No.C-259 of 2002. The fact of the matter is not in dispute. Mis. Orissa
E Synthetics Limited is a division of the respondent herein. It, being desirous
of undertaking manufacture of Polyester Oriented Yam and Flat Yam, entered
into a collaboration agreement with Mis. Samsung Company Limited and
Mis. Chiel Synthetics Inc., both of Korea, on 18th November, 1999. Mis. Cheil
Synthetics Inc:. is said to be an associate company of Mis. Samsung group
under the laws of Republic of Korea. The said Agreement is in two parts;
F Part-A provides for licence, knowhow and technology, while Part-B provides
for supply of equipment as a part of necessary plant and machinery and
>·
equipment for manufacture of polyester oriented yarn. Part-A stipulates
lumpsum payment of US $14,00,000 by the respondent to the said companies
for supply of licence, knowhow and technology. Under Part-B of the said
G Agreement, however, price of foreign equipments are said to be US
$34,86,000.00 + DM 12,00,000.00 + J. Yen 88,50,00,000.00.

2. Pursuant to and in furtherance of the said collaboration Agreement,
the respondent herein had imported plant and machinery manufactured by the
said companies. The Assistant Commissioner of Customs, Special Valuation
H Branch, in its order dated 28th May, 1999, opined that the amount of
consideration mentioned in both parts of the Agreement should be added
COMMNR. OF CUSTOMS (PORT), KOLKATA 1•. J.K. CORPN. LTD. [S.B. SINHA,J] 199
together, having regard to the fact that the same forms part of an integrated A
contract, the value of knowhow estimated at US$ 40,00,000.00 must be added
to the value of the equipment, on the premise that payment thereof was a pre-
condition for sale of the equipments under Part-B. An appeal was preferred
thereagainst by the respondent before the Commissioner of Customs. The
appellate authority, by reason of its order dated 31st May, 2000, dismissed the B
said appeal. However, the Customs Excise and Service Tax Appellate Tribunal
[CESTAT], on a further appeal preferred by the respondent, allowed the same
and remitted the matter to the authority below for a de novo decision in the
light of a decision of this Court in Tata Iron and Steel Company Limited v.
Commissioner of Central Excise and Customs Bhubaneswar, Orissa, [2000]
3 S.CC.472. The Deputy Commissioner of Customs, however, held that the C
decision of this Court in TISCO (supra) is distinguishable stating that both
parts of the Agreement, Part-A and Part-B, are complimentary to each other
and one part thereof cannot be implemented without complying with the
conditions of the other part of the Agreement. The original authority, therefore,
upheld its earlier order. The Commissioner of Customs, however, in the appeal
preferred by the respondent herein, set aside the said order dated 24th June, D
2002, holding that the decision of this Court in TISCO (supra) is squarely
applicable to the facts of the case and that Collector of Customs (Prev.),
Ahmedabad v. Essar Gujarat Limited, (1996) 88 E.L.T.609 (S.C.)] is not
applicable. The Tribunal dismissed the appeal preferred thereagainst by the
Revenue. E
3. Mr. K. Radhakrishnan, learned senior counsel appearing on behalf of
the Appellant, would take us through various clauses of the said Memorandum
of Understanding dated 18th November, 1999, entered into by and between
Mis. Orissa Synthetics Limited and Mis. Samsung Company Limited and
submit that supply of technical knowhow and purchase of licence and supply F
of equipments was a condition of sale. According to the learned counsel, as
the conditions laid down in both parts of the said Agreement are complimentary
to each other, Part-B cannot exist without Part-A thereof. Our attention in this
behalf has been drawn to Rule 9(1)(e) of the Customs Valuation (Determination
of Prices of Imported Goods) Rules, 1988 (for short the Rules] to submit that G
the same is a broadbased one.

4. Mr. S. Ganesh, learned senior counsel appearing on behalf of the
respondent, on the other hand, would support the judgement under appeal.

5. Customs Act, 1962, was enacted to consolidate and amend the law H
200 SUPREME COURT REPORTS [2007) 2 S.C.R.

A relating to customs. Chapter-V of the Customs Act, 1962 [for short, "the
Act"] provides for levy of and exemption from, customs duty. Customs duty
in terms of Section 12 of the Act is to be levied at such rates as may be
specified under the Customs Tariff Act or any other law for the time being
in force on the goods imported into, or exported from, India. Section 14 of
B the said Act provides for valuation of goods for purposes of assessment in
respect of duty of customs chargeable on any goods by reference to their
value. A legal fiction is created in relation to the value of such goods stating
that,

"the price at which such or like goods are ordinarily sold, or offered
for sale, for delivery at the time a11d place of importation or exportation,
c as the case may be, in the course of international trade, where

(a) the seller and the buyei have no interest in the business of
each other; or
(b) one of them has no interest in the business of the other,
D and the price is the sole consideration for the sale or offer for
sale."

6. Section 14(1A) provides that price referred to in sub-section (I) of
Section 14 in respect of imported goods shall be determined in accordance
E with the Rules made in this behalf.

7. The Central Government, in exercise of its powers conferred upon it
under Section 156 of the Act, made the said Rules. The transaction value
determined in terms of the said Rule was to be the value of the imported
goods. What would be a transaction value is stated in Rule 4 i.e. the price
p actually paid or payable on the goods when sold for export to India, adjusted
in accordance with the provisions of Rule 9 of the 'Rules'. Rule 9, inter alia,
provides for determination of transaction value in terms whereof the price
actually paid or payable on the imported goods, the factor enumerated therein
shall be added, clause (e) whereof reads as under:

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

8. The sole question which, therefore, arises for consideration in this
H appeal, is as to whether customs duty would be payable on the purchase
COMMNR. OF CUSTOMS (PORT), KOLKA TA v. J.K. CORPN. LTD. [S.B. SINHA,).] 20]
price of the goods by adding the value of licence and technical knowhow, etc. A
to the value of the imported goods.

9. The basic principle of levy of customs duty, in view of the afore-
mentioned provisions, is that the value of the imported goods has to be
determined at the time and place of importation. The value to be determined
for the imported goods would be the payment required to be made as a B
condition of sale. Assessment of customs duty must have a direct nexus with
the value of goods which was payable at the time of importation. If any
amount is to be paid after the importation of the goods is complete, inter alia
by way of transfer of licence or technical knowhow for the purpose of setting
up of a plant from the machinery imported or running thereof, the same would C
not be computed for the said purpose. Any amount paid for post-importation
service or activity, w<)uld not, therefore, come within the purview of
determination of assessable value of the imported goods so as to enable the
authorities to levy customs duty or otherwise. The Rules have been framed
for the purpose of carrying out the provisions of the Act. The wordings of
Sections 14 and 14(1A) are clear and explicit. The Rules and the Act, D
therefore, must be construed, having regard to the basic principles of
interpretation in mind.

10. Rule 12 of the Rules provides that the interpretative notes specified
in the Schedule appended thereto would apply for construction thereof. They
are statutory in nature being integral part of the Rules themselves. The E
relevant portion of Interpretative Note to Rule 4 reads as under:

"The value of imported goods shall not include the following charges
or costs, provided that they are distinguished from the price actually
paid or payable iQr the imported goods:
F
(a) Charges for construction, erection, assembly, maintenance or
technical assistance, undertaken after importation on imported
goods such as industrial plant, machinery or equipment;
(b) The cost of transport after importation;
(c) Duties and taxes in India." G

11. What would, therefore, be excluded for computing the assessable
value for the purpose of levy of custom duty, inter alia, has clearly been
stated therein, namely, any amount paid for post-importation activities. The
said provision, in particular, also apply to any amount paid for post-impmtation H
202 SUPREME COURT REPORTS [2007] 2 S. C.R.

A technical assistance. What is necessary, therefore, is a separate identifiable
amount charged for the same. On the Revenue's own showing, the sum of
US $ 14,00,000.00 was required to be paid by way of remuneration towards
services to be offered by the companies in respect of matters specified in Part-
A of the said Memorandum of Agreement. The said sum represents amount
of licence or amount to be paid by the respondent for the licence for the
B manufacturing process for production of goods which were covered by the
patents held by Mis. Samsung as also for technical knowhow. In the said
Memorandum of Agreement, it was provided that;

"The SELLER shall provide to the BUYER the TECHNICAL
DOCUMENTATION containing, inter alia, the KNOW-HOW and the
c same shall be delivered by the SELLER to the BUYER in Republic of
Korea or such other place or places as may be mutually agreed by and
between both the parties thereto."

12. The technical documentation comprises of : (I) process, (2)
D mechanical, (3) electrical, and (4) instrumentation in respect of grant of licence.
The Memorandum of Understanding provides:

"4.1. The SELLER hereby grants to the BUYER a non-exclusive and
non-transferable right and licence including rights to use existing
patents of SELLER to manufacture the PRODUCT in the PLANT with
E the KNOW-HOW including the PROCESS and to selI and market the
PRODUCT worldwide. For exports to Republic of Korea and Japan,
the first option shall be given to the SELLER.

4.2. The BUYER shall be entitled to and shall have the right to use
and practice the KNOW-HOW and to manufacture therewith the
F product in the PLANT."

13. No part of the knowhow fee was to be incurred by the respondent
herein either for the purpose of fabrication of the plant and machinery or for
any design in respect whereof M/s. Samsung held the patent right.

G 14. It may be noticed that the said Memorandum of Agreement
specifically contemplates that the plant and machinery to be supplied thereunder
may be procured from other independent manufacturers and suppliers who
might not have anything to do with the knowhow or licence provided
thereunder by Samsung as would appear from the following stipulation
contained in the said agreement.
H
COMMNR. OF CUSTOMS (PORT), KOLKATA v. JK CORPN. LTD. [S.B. SINHA, J.) 203
"5.6. The SELLER hereby agrees to provide their cooperation to the A
BUYER to purchase spares from the SELLER directly from the suppliers
notwithstanding the expiry or earlier termination of the AGREEMENT
and in case of purchase from the SELLER, the SELLER shall provide
such spares at fair market prices within a reasonable period of time.

8. I. SELLER shall cause such manufacturers to test and inspect the B
main items of Equipment at its works and/or the works of its
manufacturers, quality, quantity, workmanship, finishing, and packing
in accordance with the inspection method deemed as proper and
authentic for Equipment."

15. Knowhow, being process knowhow, is covered by the patent held C
by Mis. Samsung. The payment of US $ 14,00,000.00 also entitles the
respondent to sub-licence the knowhow to any other party, subject, of course,
to the approval of Mis. Samsung.

16. Reliance has been placed by Mr. Radhakrishnan on a decision of
this Court in Essar Gujarat Limited (supra). In that case, the licence fee was D
paid to the supplier of the plant and machinery for a licence to operate the
plant which was in reality nothing but was held to be an additional price
payable for the plant itself and was, therefore, held to be includible in its
assessable value. It is in the afore-mentioned fact situation, this Court held:
E
"12. 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 EGL. That is why this overriding clause was
inserted. This overriding clause was clearly a condition of sale. It F
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 agreement, the sale
of the plant had not taken place even at the time when the' contract G
with Midrex was being signed on 4-12-1987, 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 ot licence fees could
not be added to the price actually paid to TIL for purchase of the
plant." H
204 SUPREME COURT REPORTS [2007] 2 S.C.R.

A 17. The Court noticed several curious aspects of the Agreement stating
that it started with the recital that "the Purchaser and the Seller have today
respectively purchased and sold a Direct Reduction Iron Plant, on the following
terms and conditions", which, according to this Court , indicated that the
purchase and sale of the plant had taken place on 24th March, 1987, but in
B clause (2) it was stated that the purchaser would purchase the property from
the seller at the stated price. Upon construing the terms of the conditions,
it was opined:

"Therefore, the process licence fees of OM 2,000,000 was rightly
added to the purchase price by the Collector of Customs. The order
C of CEGA T on this question is set aside."

18. In Mukund Limited v. Commissio:12r of Customs, ACC, Mumbai,
(1999) 112 E.L.T. 479, whereupon again reliance was placed by the learned
counsel, the drawings related to basic design and drawing of the gas cleaning
plant made by Davy Mckee and imported by Mukund Limited. In the afore-
D mentioned situation, the CESTAT opined:

"The payment of$ (sic) 6,57,900 noted above in the price schedule
is towards the services indicated above in the Agreement and which
is a necessary concomitant to the supply of Design and Engineering
drawings for the gas cleaning plant made by Davy Mckee and imported
E by the appellants. The appellants have been entrusted with the
setting up of gas cleaning plant, and this could only be achieved not
only by purchasing the basic design and engineering drawings
imported from Davy Mckee but also the whole engineering package
of supervision of detail drawing, erection, commissioning and
performance guarantee test. The payment made in foreign exchange
F towards supervision charges during design, erection and
commissioning will necessarily have to form part of the assessable
value of the imported goods and the value thereof will include not
only the price paid for design and engineering but also for supervision
charges. This will follow from Rule 9 of the Valuation Rules which
G provides for addition of certain costs and services to the transaction
value. Rule 9(1 )(e) covers all other payments actually made or to be
made as a condition of sale of imported goods by the buyer to the
seller."

19. However, T!SCO (supra), this Court took note of interpretative note
H
COMMNR. OF CUSTOMS (PORT), KOLKATA 1·. J.K. CORPN. LTD. [S.B. SINHA, J.] 205

to Rule 4 and held: A
" ... The part of the Interpretative Note to Rule 4 relied on by the
Tribunal has been couched in a negative form and is accompanied by
a proviso. It means that the charges or costs described in clauses
(a), (b) and (c) are not to be included in the value of imported goods
subject to satisfying the requirement of the proviso that the charges B
were distinguishable from the price actually paid or payable for the
imported goods. This part of the Interpretative Note cannot be so
read as to mean that those charges which are not covered in clauses
(a) to (c) are available to be included in the value of the imported
goods .... "
c
20. The said decision is squarely applicable to the facts of the present
case.

21. We cannot, therefore, accept the contention of Mr. Radhakrishnan.
Moreover, no case has been made out that the sale price of the imported plant D
and machinery had been under-stated.

22. For the reasons afore-mentioned, we do not find any merit in this
appeal which is dismissed accordingly. In the facts and circumstances of the
case, however, there shall be no order as to costs.

B.B.B. Appeal dismissed.
E

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