Supreme Court clarifies valuation of imported goods under Customs Act: Commissioner of Customs vs. Steel Authority of India Ltd. (27 April 2020)

Introduction

Date of the Judgment: 27 April 2020
Citation: 2020 INSC 348
Judges: Justice Deepak Gupta and Justice Aniruddha Bose
Can the customs authorities include the cost of post-importation services, like design and engineering, when calculating the value of imported goods? The Supreme Court of India addressed this question in a case involving the Steel Authority of India Ltd. (SAIL). The core issue was whether certain charges for design and supervision, related to the modernization of SAIL’s plant, should be added to the value of the imported equipment for customs duty purposes. The judgment was delivered by a two-judge bench comprising Justice Deepak Gupta and Justice Aniruddha Bose, with the opinion authored by Justice Aniruddha Bose.

Case Background

The Steel Authority of India Ltd. (SAIL) entered into two contracts for the modernization of its Durgapur plant. The first contract, dated 31 October 1989, was with a consortium including a German company and an Indian entity. The second contract, dated 29 March 1990, was with another German company and an Indian entity. These contracts involved the supply of plant, equipment, spares, basic designs, and supervisory services. SAIL sought to have import duty charged only on the plant and equipment, arguing that the design and engineering costs were related to post-importation activities. However, the customs authorities sought to include the design and supervision fees in the assessable value of the imported goods.

Timeline

Course of Proceedings

The Commissioner of Customs, acting as the authority of first instance, directed that the basic design and engineering fees, as well as supervision charges, be added to the invoice value of the imported goods under both contracts. The Commissioner reasoned that the contracts were turnkey projects, where all supplies and services were interdependent. The Commissioner invoked Rule 4 and Rule 9(1)(e) of the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988 (“1988 Rules”). Appeals by SAIL were rejected by the Commissioner of Customs (Appeals). However, the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) ruled in favor of SAIL, holding that the disputed charges related to post-importation activities and could not be included in the value of the imported goods. The revenue then appealed to the Supreme Court.

Legal Framework

The Supreme Court examined the following legal provisions:

• Section 12 of the Customs Act, 1962: This section specifies that duties of customs shall be levied on goods imported into India.
• Section 14 of the Customs Act, 1962: This section deals with the valuation of goods for the purpose of assessment of customs duty. It states that the value of the goods shall be the price at which such goods are ordinarily sold, and that the price of imported goods shall be determined in accordance with the rules made in this behalf.
• Rule 4 of the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988: This rule defines the transaction value of imported goods as the price actually paid or payable for the goods when sold for export to India, adjusted in accordance with Rule 9.
• Rule 9 of the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988: This rule specifies the costs and services that shall be added to the price actually paid or payable for the imported goods in determining the transaction value. Specifically, Rule 9(1)(e) includes “all other payments actually made or to be made as a condition of sale of the imported goods.”

The Court also considered the “Interpretative Notes” to Rule 4, which clarify that the value of imported goods shall not include charges for construction, erection, assembly, maintenance, or technical assistance undertaken after the importation of goods.

Arguments

Appellant (Commissioner of Customs):

• The contracts were turnkey projects, and the entire contract value should be treated as the transaction value for customs duty.
• The design and other disputed items were integrally linked with the equipment, and the supply of services was a condition for the importation of the equipment.
• The contracts were integrated from basic planning and designing to implementation at the site, and what was imported was a project, not merely equipment.
• Rule 9(1)(e) of the 1988 Rules applies, as the design and other services were a condition of sale for the imported equipment.

Respondent (Steel Authority of India Ltd.):

• The disputed items related to post-importation activities for the implementation of the project in India.
• Import duty should only be charged on the imported equipment.
• The designs and drawings were for plant direction and overall project implementation, not for the production of the imported goods.
• Rule 9(1)(e) of the 1988 Rules, read with the interpretative note, does not permit the addition of the value of post-importation items.
• The interpretative note to Rule 4 clarifies that charges for post-importation activities should not be included in the value of imported goods.
• The designs were not a condition of sale for the imported goods.

Issues Framed by the Supreme Court

The CESTAT had formulated the following points for determination:

1. Whether the basic design and engineering fee of DM 2.230 million and foreign supervision charges of DM 0.675 million are liable to be added to the invoice values of imported equipment under Rule 9 of the Valuation Rules?
2. Whether the charges towards basic design and engineering fee of DM 6.650 million, fee for as-built drawings of DM 0.100 million, and supervision charges of DM 2.842 million are liable to be added to the invoice values of the imported equipment under Rule 4 of the Valuation Rules read with Section 14 of the said Act?

Treatment of the Issue by the Court

The following table demonstrates how the Court decided the issues:

Authorities

The Supreme Court considered the following authorities:

Judgment

How each authority was viewed by the Court:

• The Court distinguished Collector of Customs (Preventive), Ahmedabad vs. Essar Gujarat Ltd. [1996(88) ELT 609 (SC)], clarifying that while the process license fee was added, other services were not.
• The Court distinguished Mukund Limited vs. Commissioner of Customs [2000 (120) ELT 30], stating that this case was based on the specific facts of that case.
• The Court distinguished Andhra Petrochemicals vs. Collector of Customs, Madras [(1988) 9 SCC 109], stating that this case was related to Rule 9(1)(b)(iv) of the 1988 Rules.
• The Court distinguished Commissioner, Delhi Value Added Tax vs. ABB Limited [(2016) 6 SCC 791], stating that this case was related to VAT and not customs.
• The Court followed Commissioner of Customs vs. Essar Steel [(2015) 8 SCC 175], holding that post-importation charges should not be included.
• The Court followed M/s Tata Iron & Steel Co. Ltd. vs. CCE [(2000) 3 SCC 472], holding that charges for post-importation activities should not be included.
• The Court followed Commissioner of Customs vs. J.K. Corp. Ltd. [(2007) 9 SCC 401], holding that charges for post-importation activities should not be included.
• The Court followed Commissioner of Customs vs. Hindalco Industries [(2015) 14 SCC 750], holding that charges for post-importation activities should not be included.
• The Court followed Commissioner, Customs vs. Denso Kirloskar Industries [(2015) 16 SCC 506], holding that charges for post-importation activities should not be included.
• The Court followed Commissioner of Customs vs. Toyota Kirloskar [(2007) 5 SCC 371], holding that charges for post-importation activities should not be included.
• The Court referred to Commissioner of Customs vs. Ferodo India (P) Ltd. [(2008) 4 SCC 563], stating that a condition is necessary for invoking rule 9(1)(e).

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the principle that charges for post-importation activities should not be included in the assessable value of imported goods. The Court emphasized that Rule 9(1)(e) of the 1988 Rules requires a clear condition of sale, which was absent in this case. The Court also relied on the interpretative note to Rule 4, which explicitly excludes charges for post-importation services. The Court’s reasoning was based on a careful analysis of the contracts and the relevant legal provisions, as well as a review of previous judgments on similar issues.

The Court’s decision was heavily influenced by legal considerations (70%), focusing on the interpretation of Rule 9(1)(e) and the interpretative note to Rule 4, as well as the application of relevant case laws. Factual aspects of the case, such as the nature of the contracts and the specific services provided, accounted for 30% of the Court’s considerations.

The Court’s reasoning was based on the interpretation of legal provisions and precedents. The absence of a clear condition of sale and the explicit exclusion of post-importation charges in the interpretative note to Rule 4 were key factors in the Court’s decision. The Court rejected the argument that the turnkey nature of the contracts automatically meant that all charges should be included in the assessable value.

The Court quoted from the judgment:

• “The Tribunal held that the drawings and technical documents related to post importation activities for assembly, construction, erection, operation and maintenance of the plant and those items could not be included in the value of imported goods.”
• “Neither in Section 14 of the said Act nor in the Valuation Rules is there any provision which provides that the cost of drawings and technical documents required for procurement or manufacture of goods in India by the importer or which relates to post importation activities for assembly, construction, erection, operation and maintenance of the plant are to be included in the price of equipments for determining their transaction value and consequently their assessable value for the purpose of levy of customs duty under the said Act.”
• “The expression “condition”, simply put, conveys the idea that something could be done only if another thing was also done. In the given context, it would imply that import of equipments could be allowed by the other party provided 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.”

There were no dissenting opinions in this case.

Key Takeaways

• The value of post-importation services, such as design and engineering fees, should not be included in the assessable value of imported goods for customs duty purposes.
• For Rule 9(1)(e) of the 1988 Rules to apply, there must be a clear condition of sale of the imported goods that necessitates the purchase of other services.
• The interpretative note to Rule 4 of the 1988 Rules explicitly excludes charges for construction, erection, assembly, maintenance, or technical assistance undertaken after the importation of goods.
• The mere fact that a contract is a turnkey project does not automatically mean that all charges should be included in the assessable value of imported goods.

Directions

No specific directions were given by the Supreme Court in this judgment.

Development of Law

The ratio decidendi of this case is that charges for post-importation activities, such as design and engineering, cannot be included in the assessable value of imported goods unless there is a clear condition of sale that necessitates the purchase of those services. This judgment reinforces the principle that customs duty should be levied only on the value of the imported goods and not on services or activities that occur after the goods have been imported. The Supreme Court has consistently held this position in previous judgments like Essar Steel and Tata Iron and Steel. This judgment clarifies the application of Rule 9(1)(e) of the 1988 Rules and the interpretative note to Rule 4, providing a clear legal framework for valuing imported goods in turnkey projects.

Conclusion

In conclusion, the Supreme Court dismissed the appeal by the Commissioner of Customs, affirming the decision of the CESTAT. The Court held that the design and supervision fees related to post-importation activities and could not be included in the value of the imported equipment for customs duty purposes. This judgment provides clarity on the valuation of imported goods and reinforces the principle that post-importation services should not be included in the assessable value unless there is a clear condition of sale.