Whether drawings and specifications pertaining to post-importation activities can be automatically added to the transaction value of imported machinery for computation of Customs Duty?

PJ/Case Law/2020-2021/3637

Commissioner of Customs (Port) Kolkata Vs Steel Authority of India Ltd.CIVIL APPEAL NO. 6398 OF 2009( Order dtd. 27 April 2020)
Brief Facts:- The taxpayer had entered into two contracts with a consortium (of Indian and Foreign Companies), requiring them to supply certain goods and services (supply of plant, equipment and spares, and certain basic design and engineering and foreign supervisory services at site) in connection with the modernisation, expansion and modification of their rolling mills plant at WestBengal.
In relation to the above arrangement, taxpayer’s position is that the price for plant and equipment included all design and engineering for their manufacture, and the design and services specified in the contracts were related to the post-importation project and project implementation activities. The Revenue authorities contended that the above arrangement constituted a turnkey contract, where the entire supplies of goods and services were dependent on each other, which made the sale of equipment conditional, and that what was imported was a “project” and not merely equipment.
Issue: - Whether drawings and specifications pertaining to post-importation activities can be automatically added to the transaction value of imported machinery for computation of Customs Duty?
Revenue contentions: -The Revenue authorities contended that the above arrangement constituted a turnkey contract, where the entire supplies of goods and services were dependent on each other, which made the sale of equipment conditional, and that what was imported was a “project” and not merely equipment. Consequently, the Revenue contended that the entire value of the contract must be treated as transaction value for the purposes of levy of customs duty under section 14 of the Customs Act, 1962 read with Rule 4 & 9 (1)(e) of the Imported Goods Valuation Rules, 1988 (Valuation Rules)
Reasoning of Judgement: - The Supreme Court rejected the Revenue’s contention and held that the value relating to post-importation activities should not be included in the assessable value of imported equipment on the following grounds
-An importer of equipment of a plant could always choose to obtain drawings and designs for undertaking post-importation activities from an overseas consortium supplying the equipment. This may confer the attributes of a turnkey contract on such arrangements, but that fact by itself would not automatically attract the “condition” clause contained in Rule 9(1) (e) of the Valuation Rules. Furthermore, such an exercise would go against the provisions of the Interpretative Note to Rule 4 of the Valuation Rules.
-The expression “condition” conveys the idea that something could be done only if another thing were also done. In the given context, it would imply that import of equipment could be allowed by the other party, provided that the design features for post-importation activities were also obtained from the same supplier or from a firm as per the overseas supplier’s direction. Reading of implied condition into the contracts would be impermissible in the absence of any other material to demonstrate the subsistence of such condition.
-The present facts do not indicate that the import of equipment was affected with simultaneous obligation of the taxpayer, requiring the designs relating to post-importation activities to also be obtained from the same entity.
Held: -Supreme Court held that value of post-importation services provided by supplier of equipment cannot be included in assessable value of imported equipment when it’s not a condition of supply. However, the Supreme Court observed that the difference is more of form than of content. If a single agreement involves importation of dutiable equipment and services for post-importation activities, and if these two sets of items are segregable, it would be open to the importer to claim duty-exclusion for items that are directly related to post-importation activities where Rule 9 is applicable.
Comment: -It is the Revenue’s tendency to include all payments in relation to such projects in the assessable value of imported machinery for computation of Customs duty.It is held that the value of post-importation activities should not be included in the assessable value of the imported goods, when it is not a condition of supply. The Supreme Court has distinguished the decision in the case of Essar Gujarat Limited , where the import was subject to the condition for entering into a licensing arrangement with a third party. The Apex court has observed that these principles would apply even in case of a single agreement with segregable post-importation activities.
Prepared By : CA. Kartik Singhvi

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PJ/Case Law/2020-2021/3637

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