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Licence and Technical Knowhow can’t be added to value of import

AIT News Network

NEW DELHI. Deciding a contentious issue being faced by the Industry; the Apex Court has ruled vide a recent ruling AIT-2007-50-SC that the value of licence and technical knowhow cannot be added to the value of the imported goods - customs duty would be payable on the purchase price of the goods.

T H E F A C T S:

The Revenue was in appeal dissatisfied with the judgement and final order dated 15th May, 2006, passed by the Customs Excise and Service Tax Appellate Tribunal, Kolkata.

The Respndent being desirous of undertaking manufacture of Polyester Oriented Yarn and Flat Yarn, entered into a collaboration agreement with M/s. Samsung Company Limited and M/s. Chiel Synthetics Inc.. M/s. Cheil Synthetics Inc. is said to be an associate company of M/s. Samsung group under the laws of Republic of Korea. The said Agreement is in two parts; 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 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.

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 Branch, in its order , opined that the amount of consideration mentioned in both parts of the Agreement should be added together, having regard to the fact that the same forms part of an integrated 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 dismissed the said appeal. However, the 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 SC in Tata Iron and Steel Company Limited vs. Commissioner of Central Excise and Customs Bhubaneswar, Orissa . The Deputy Commissioner of Customs, however, held that the 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 , holding that the decision of SC in TISCO is squarely applicable to the facts of the case and that Collector of Customs (Prev.), Ahmedabad vs. Essar Gujarat Limited is not applicable. The Tribunal dismissed the appeal preferred thereagainst by the Revenue.

T H E R U L I N G:

The sole 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 imported goods.

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 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 thereof, the same would not be computed for the said purpose. Any amount 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 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, therefore, must be construed, having regard to the basic principles of interpretation in mind.

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 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 for the imported goods:

(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;

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-importation 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 manufacturing process for production of

goods which were covered by the patents held by M/s. 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 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."

The technical documentation comprises of : (1) process, (2) 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 the KNOW-HOW including the PROCESS and to sell 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 product in the PLANT."

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.

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.

"5.6. The SELLER hereby agrees to provide their cooperation to the 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.

8.1. SELLER shall cause such manufacturers to test and inspect the 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."

Knowhow, being process knowhow, is covered by the patent held by M/s. 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 M/s. Samsung.

( Click here for full text of ruling AIT-2007-50-SC )