Introduction

The Supreme Court recently ruled(1) that fees for technical services in relation to projects involving imported goods are not includable in the assessable value of the imported goods under Rule 9(1)(e) of the Customs Valuation (Determination of Price of Imported goods) Rules 1988. As such, they are not liable to customs duty in India. In this context, the court held that the charges in question related to post-import activities and were therefore not liable to duty.

Facts

The respondent-importer entered into a technical service agreement with a Canadian entity, which was to provide technical consultancy services in relation to successfully establishing and commissioning a steel plant in India. The services were specifically in relation to the design, procurement, construction, erection and establishment of an integrated plant. The agreement obliged the Canadian entity to act as a technical coordinator and supervise the setting up and commissioning of the plant. Subsequent to this agreement, in a separate purchase order, the Canadian entity sold the plant to the respondent; the plant was later imported to India.

The Revenue Department alleged that the provision of services under the technical services agreement was a condition of sale of the imported plant and, consequently, that these services were includable in the assessable value in terms of Rule 9(1)(e) of the Valuation Rules. In effect, the Revenue Department demanded customs duty on the fees paid for these services.

The respondent claimed that Rule 9 of the Valuation Rules did not apply, as no payment was made for the technical services which could be considered a condition of sale of the imported goods. In any event, the technical services agreement was to be performed in India post-import; therefore, it was excludable from the taxable base value at the time of import.

Decision

The court ruled in favour of the respondent and held that the services performed under the technical service agreement were post-import activities, which need not be included in the assessable value of the imported goods.

After a reading of Section 14 of the Customs Act 1962, the court clarified that any fees which related to the imported goods post-import were excludable from the assessable value of the imported goods. Thus, the court framed and interpreted the valuations under Section 14(1A) of the act with this basic principle in mind. In this regard, the court referred to its earlier judgment in Commissioner of Customs (Port), Kolkata v J K Corporation Ltd,(2) in which it had held that the assessment of customs duty must have direct nexus with the value of goods payable at the time of import; further, if any amount was to be paid after the goods were imported – by way of a transfer of licence or technical know-how in order to set up the plant using the imported machinery or run it – the same would not be liable to customs duty.

A reading of Rules 4 and 9 of the Valuation Rules clarified that only those costs and services that are actually paid or payable for imported goods before import are includable in the assessable value of the imported goods.

While evaluating the agreements in question, the court noted that no transfer of know-how or intellectual property took place, and that the Canadian entity's role was essentially to coordinate and advise the respondent so that it could successfully set up, commission and operate the plant in India. This coordination and advice was to take place post-import, after the plant was established and commissioned in India. Further, the court observed that the agreement clarified that these services were performed only post-import.

The court also noted that under the purchase order, liquidated damages were payable only if there was a delay in commissioning the plant or a failure to meet the stipulated performance requirements, both of which were post-import activities. Further, the court held that a combined reading of the agreements did not lead to the conclusion that the technical services were, in any way, a pre-condition to the sale of the plant. On this basis, the court concluded that Rule 9(1)(e) did not apply to these services.

The Revenue Department argued that its position was supported by the court's findings in Collector of Customs (Preventive) v Essar Gujarat Ltd.(3) The court held that Essar Gujarat actually supported the respondent: in Essar Gujarat, the court had held that the payment for engineering and technical consultancy services in India could not be added to the value of the imported plant. The court also noted that in Essar Gujarat, the payment of the licence fee was crucial, as the plant could not be operated without the licence. Thus, the licence and fee were a condition of sale. In other words, the court observed that the importer could not operate the plant in Essar Gujarat without the other party's technical know-how and that the licence fee had to be paid before the plant could be set up; hence, the moneys paid were includable in the value of the imported plant.

The court relied on its earlier judgments in Collector of Customs (Preventive) v Essar Gujarat Ltd, Tata Iron v Commissioner of Central Excise and Customs, Bhubaneswar,(4) Commissioner of Customs (Port), Kolkata v J K Corporation Ltd, Commissioner of Customs v Ferodo India (P) Ltd(5) and Commissioner of Customs (Port, Chennai) v Toyota Kirloskar Motor (P) Ltd(6) to emphasise that, in relation to Rule 9(1)(e) of the Valuation Rules, post-import charges should not be considered when determining the transaction value of imported goods.

Comment

Since the creation of the Special Tax Bench – which has been dedicated to hearing and deciding tax cases (given the delays in tax matters) since March 9 2015 and has begun to yield results – the court has decided a number of appeals. Both the quality and speed of the benches' decisions are laudable.

The court's decision has solidified the law with regard to duty issues concerning two separate agreements – particularly in relation to a technical service agreement and a purchase order, where the former was executed before the latter. Notably, the court found that the clause in the purchase order which provided for penalties in the event of a delay in commissioning the plant or a failure to meet the stipulated performance requirements – both of which were post-import activities – did not render the services under the technical service agreement a condition of the sale of the plant. The court also held that the technical services agreement was in no way a pre-condition for the sale of the plant.

This judgment relates to an important customs valuation issue (ie, whether charges relating to post-import activities can be included in the assessable value of imported goods) and was rendered in the context of the Valuation Rules 1988, which have been superseded by the Customs Valuation (Determination of Value of Imported Goods) Rules 2007. Even so, the judgment will continue to be an authoritative pronouncement on this topic, since the subject matter of the judgment (ie, Rule 9(1) of the Valuation Rules) now falls under Rule 10(1) of the Customs Valuation (Determination of Value of Imported Goods) Rules 2007.

However, the 2007 rules include an explanation to Rule 10, which reads as follows:

"Where the royalty, license fee or any other payment for a process, whether patented or otherwise, is includible referred to in clauses (c) and (e), such charges shall be added to the price actually paid or payable for the imported goods, notwithstanding the fact that such goods may be subjected to the said process after importation of such goods."

In Circular 38/2007 (dated October 9 2007), the Central Board of Excise and Customs clarified as follows:

"This Explanation has been added in the context of the Supreme Court judgment in the case of J.K. Corporation Ltd. v. Commissioner of Customs (Port) Kolkata [2007 (208) E.L.T. 485 (S.C.)] so as to clarify that such royalty, license fee, etc., if otherwise includible in terms of clauses (c) or (e) of Rule 10, will be includible in the value of the goods irrespective of the fact that such royalty, licence fee, etc., relates to a process which is made operational during the running of the machines, i.e., after importation of the goods."

Assessee-importers will have to demonstrate that moneys paid for royalty or licence fees are not a condition of sale in order to avoid them being added to the assessable value of imported goods and subject to customs duty.

This latest judgment will be significant to importer-assessees (eg, those importing goods for setting up and commissioning plants in India) and those drawing up contracts with suppliers that involve supplies of goods and services.

For further information on this topic please contact Ranjeet Mahtani or Divya Jeswant at Economic Laws Practice by telephone (+91 22 6636 7000) or email (ranjeetmahtani@elp-in.com or divyajeswant@elp-in.com).

Endnotes

(1) Commissioner of Customs, Ahmedabad v M/s Essar Steel Ltd, Civil Appeal 3024/2004, issued on April 13 2015.

(2) (2007) 9 SCC 401.

(3) (1997) 9 SCC 738.

(4) (2000) 3 SCC 472.

(5) (2008) 4 SCC 563.

(6) (2007) 5 SCC 371.

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