1999(11)LCX0104

IN THE CEGAT, WEST ZONAL BENCH, MUMBAI

S/Shri J.H. Joglekar, Member (T) and G.N. Srinivasan, Member (J)

PRERNA TEXTILE INDS. LTD.

Versus

COMMISSIONER OF CUSTOMS

Order Nos. 3156-3172/99-WZB/C-II, dated 16-11-1999 in Appeal Nos. C/428-R, 593-RV, 538-R, 594-RV, 604-RV, 603-RV, 606-RV, 617-RV, 487-RV, 418-RV, 419-R, 443-R, 444-R, 445-R, 446-R, 458-RV, 464/99-Bom

Cases Quoted

Collector v. Vazir Sultan Tobacco Co. Ltd. — 1996 83 ELT 3 (S.C.) — Referred                        [Para 27]

Gujarat State Fertilizers Co. v. Collector — 1997 (91) ELT 3 (S.C.) — Referred                           [Para 12]

Vikas Sales Corporation v. Commissioner — AIR 1996 SC 2080 — Referred                                [Para 13]

Wipro Products Ltd. v. U.O.I. — 1986 (25) ELT 485 (Bom.) — Referred                                        [Para 15]

DEPARTMENTAL CLARIFICATION CITED

C.B.E. & C. Circular No. 56 of 95 Cus., dated 30-5-1995 — Referred                                               [Para 20]

Advocated By : S/Shri Willingdon Christian, Mayur Shroff, V.S. Nankani, Naresh Thacker, S.N. Kantawala, Prakash Shah, R. Parthasarathy, F.D. Sorabjee and K.R. Bulchandani, Advocates, for the Appellant.

 Shri A.K. Chatterjee, SDR, for the Respondents.

[Order per : J.H. Joglekar, Member (T)]. - This batch of 17 appeals arises out of the common order of the Commissioner of Customs, Sahar International Airport.

2.  The issues involved are the same. Similar arguments were made by the Counsels appearing for the parties. These 17 appeals are therefore being disposed off vide this common order.

3.  The appellants are public corporations engaged in the manufacture of excisable goods. In all cases the appellants entered into technical collaborations with leading manufacturers in their own fields abroad. The agreements provided for exchange of technology in the form of supply of know-how, supply of drawings and designs on media, training of personnel staff and similar other activities. As a part of fulfilment of this contract, the contracting parties abroad, from time to time sent drawings, designs etc. In the case of M/s. Videocon, these drawings etc. were imported by hand of one Mr. Kato. In all other cases the drawings etc. were imported through professional couriers, or by post parcels.

4.  The imports referred to in the present batch of appeals took place during the period 1993-1996. In all cases the value was shown at token rates i.e. one U.S. Dollar or in the alternative the goods were shown as of No Commercial Value. At a later stage the Customs authorities undertook an examination of these imports.

5.  During the course of this examination all importers barring three voluntarily came forward and deposited the duties thought to be payable by them as per the classification then suggested.

6.  The sums paid ranged from Rs. 51,600/- in the case of M/s. TECIL to Rs. 40,41,575/- by M/s. ACC. Therefore, on various dates from September, 1996 to February, 1998 show cause notices were issued to the importers. The show cause notices alleged that the drawings etc. imported were classifiable under Chapter 49 and the duty quantified in the show cause notice was evaded by the importers by misrepresentation etc. Later, corrigenda were issued from March, ‘98 to June, ‘98 wherein it was alleged that the goods would merit classification under sub-heading 9803.00 of the CTA read with appropriate sub-heading under Chapter 49. This resulted in the quantum of duty demanded being substantially increased.

7.  The importers filed appropriate replies. On hearing the counsels for the importers and on reading their submissions the Commissioner passed order dt. 30-3-1999 confirming in each case the duty demanded and levying penalties on each of the present appellants (except for M/s. Supreme Gas Ovens Ltd.). The present appeals are filed by the importers aggrieved by the aforesaid order. The following counsels appeared for the following appellants :

8.  The Revenue was represented by Shri A.K. Chatterjee, Sr. Departmental Representative.

9.  We have carefully considered the oral and written submissions made before us and have seen the citations.

10.  The first point for consideration is whether drawings, designs, etc. relating to machinery or industrial technology are “goods” leviable to duty of customs on importation. Shri Nankani as well as Shri Sorabji argued that such drawings, designs etc. were intellectual properties and could not be held as goods. As against this it is Shri Chatterjee’s contention that the definition of goods in Section 2 (22) of the Customs Act was an inclusive definition and was wide enough to cover such drawings, designs etc. Shri Parthasarathy following a medium path suggested that if the drawings etc. accompanied the machinery, then they may be called goods but otherwise they could not qualify for the term. Shri Nankani states that for qualifying for the term “goods” an article must be usable, saleable and marketable. It was his claim that any specific drawings would be of value to the recipient but to none else. It was his further claim that any document embodying a concept provides service and cannot be called goods. According to him it is embodiment of knowledge and cannot be taxed merely because it is mentioned in the tariff entry.

11. We have considered the rival proposition. All the appellants before us are corporations engaged in manufacturing activities. In all the cases the corporations entered into technical collaboration agreements with leading corporations abroad for receipt of technology, machinery and expert advice. In return, the Indian corporations paid consideration. The agreements speak of disclosure and making available the concepts translated into practical terms. These included plant layouts, process layouts, chemical technology, manufacture of new machinery or upgradation of the old plant. They also involve preliminary discussions between the parties, requiring visits to each other. They also involved training of Indian personnel by the collaborators. Each activity was irrevocably interlinked with the other activities and each of the activities was equally vital to the fulfilment of the contract. Where knowledge in the form of designs of machinery, of plant or process technology etc. was to be imparted it was to be vide the medium of drawings, designs, charts etc. on paper or on other media such as photo films, computer discs etc. The compensation for this transfer of knowledge on media at all times formed part of the agreement. In the case of certain agreements (M/s. Kirloskar Cummins Ltd. and M/s. TECIL) specific amounts are specifically brought out in the agreements themselves and in other agreements it is made clear that a part of the compensation could be earmarked for such transfer of technology on media. Thus when the plans, designs etc. were physically transferred the transfer created an obligation on the receiver to pay an agreed sum or the apportionable sum. A specific value therefore could be and was to be placed on such documents in the form of drawing, designs etc. This knowledge in a physical format in the hands of the knowledgeable was valuable. The value was so attributed because this technology was precious. It is not that the technology could not be used by anyone except by the recipient. A competitor who knew the manufacturing set up could also use this knowledge. We therefore find no substance in Shri Nankani’s claim that drawings, designs etc. were intellectual property or that they were services and not goods.

12.  Shri Nankani made the claim that merely because some goods were listed in the tariff, they could not become dutiable. This plea is based on certain judgments rendered in the context of Central Excise. The Supreme Court has held that marketability was essential for determining the exigibility and that no duty could be levied merely because mention of the commodity was made in the tariff. We find that in such judgments the Court was dealing with a particular commodity which was found not marketable due to its transient nature. However the Supreme Court in their judgments in the Gujarat State Fertilizer - (1997) 91 ELT 3 (S.C.) has accepted that Molten Urea was undisputedly classifiable under Heading 31.02 of the CETA.

13.  The Supreme Court in a judgment reported in AIR 1996 page 2080 were examining the question (Vikas Sales Corporation v. Commissioner of Commercial Taxes, State of Karnataka) whether transfer of an import licence constituted sale of goods or not. In holding in the affirmative, the Court held that such a licence was “Property”, and therefore “goods”. They further held that even when it was not related to the goods which could not be imported under its power, it had a value by itself. In holding so, the Supreme Court referred to another judgment reported in AIR 1986 SC 63 in which the Court had observed that incorporeal right like a copyright could be regarded as “goods”.

14.  Drawings and designs are specifically mentioned in the Customs tariff. These are not the sole reflection of the products of knowledge. Magnetic tapes containing software merit classification under Heading 8524.40.

15.  The judgment of the Bombay High Court in the case of Wipro Products Ltd. - 1986 (25) ELT 485 was cited by one of the appellants. In this case the court held that diskettes containing designs & drawings fell under the then Heading 49.04/06 of the CTA. This shows that the truth that media containing commercial intelligence was “goods” was accepted for over a decade.

16.  We therefore hold that knowledge in the form by way of drawings, designs etc. are goods and would attract duty of customs as specified against the relevant tariff entry.

17.  We now turn to the issue of classification of such drawings, designs etc. In all cases the show cause notice initially issued showed the classification of the goods as under Chapter 49. Thereafter corrigenda were issued to all the appellants except for M/s. Videocon. In the corrigenda the classification suggested was under sub-heading 98.03 00 read with the parent classification. This was in the belief that prior to 26-5-1995 on which day the Courier Imports (Clearance) Regulations, 1995, relating to import of goods through couriers were brought into effect, such imports by hand of couriers were deemed to be “baggage”. In the case of Videocon since the goods were imported by one Mr. Kato, a representative of the collaborators, in the first show cause notice itself, classification under 98.03 was mentioned.

18.  All counsels made the grievance that the amendments or corrigenda to the show cause notice were in fact not innocent charges but that they converted the old notices into fresh show cause notices. It was claimed that where the amendment is very material and where it goes to the core of the issue, it ceases to be an amendment and becomes a fresh show cause notice. This claim was made and was upheld by the Tribunal in the cited judgments (whereby the assessee benefited) because in those cases it was found that the amended show cause notice having been held as fresh show cause notice, were found to have been issued beyond the period of limitation. During the discussions it became clear that even if the amendment is deemed to create a fresh notice the notice did cover the period of import within the extended time frame.

19.  Therefore the case law cited is of little avail. We shall discuss later the arguments on the aspect of limitation and therefore at this stage we would not dwell on this argument.

20.  The second issue raised is that the classification under Heading 98.03 could not at all be attracted, where the goods were imported by a courier, who was not the owner of the goods carried by him. Section 77 of the Customs Act, 1962 was referred which describes the passenger as the “owner” of the baggage. On the basis of the language of this section it was asserted that the goods imported by courier could not be termed as baggage and therefore would not merit classification under Heading 98.03. We find that the Commissioner in the impugned order had mentioned that prior to the notification of the cited regulations, courier imports were treated as baggage. The circular of the CBEC cited by Shri Chatterjee also confirms (Circular No. 56 of 1995-Cus., dated 30-5-1995) this practice.

21.  Shri Nankani submitted that a wrong practice could not be the basis of levy of duty and that taxability must flow from the provisions of law. We have carefully considered this submission.

22.  In the circular cited above reference is made to Notification 86/94-Cus., dated 1-3-1994. The preamble to the notification says as under:

“In exercise of the powers conferred by sub-section (1) of section 25 of the Customs Act, 1962 (52 of 1962), the Central Government, being satisfied that it is necessary in the public interest so to do, hereby exempts goods falling under heading No. 98.03 of the First Schedule to the Customs Tariff Act, 1975 (51 of 1975), when imported into India through a registered courier service, from so much of the duty of customs leviable thereon which is specified in the said First Schedule, as is in excess of the amount calculated at the rate of 100% ad valorem.” (emphasis supplied).

23.  It is settled law that notifications are subordinate legislation deriving legal power from the Act under which they are issued. The notification in effect rules that courier imports were “baggage”. It is also significant that vide this notification, the baggage of a courier was brought on par with the baggage of a “normal” passenger, which attracted duty at the rate of 100% in terms of Notification No. 136/90-Cus., dated 20-3-1990 as amended.

24.  It is therefore clear that the goods imported by the courier during the relevant period did merit classification under Heading 98.03.

25.  The Indian Customs Tariff follows the international code embodied in the Harmonized System of Nomenclature. The international system permits participating countries to create and adopt certain classification tailored to their particular needs. Chapter 98 is a product of necessity. The goods listed thereunder are covered under the various chapter headings but find their place under this chapter in specific circumstances. This chapter covers project imports, baggage, gifts and ships stores. This classification is attracted by the mode and purpose of importation. This is brought out by the chapter note 1 which says as follows:

“This chapter is to be taken to apply to all cases which specify the conditions prescribed therein, even though they may be covered by a more specific heading elsewhere in this schedule”.

The entry 98.03 reads as follows :

“All dutiable articles imported by a passenger or a member of crew in his baggage”.

The phrase “dutiable” came in for discussion. A reference was invited to the definition in Section 2(14) of the Customs Act, 1962 which reads as below :

“Dutiable goods means any goods which are chargeable to duty and on which duty has not been paid”.

26. It was argued that for any goods to attract duty under Heading 98.03, it must first be shown that under the parent heading under which the goods were capable of falling, but for the fact they were imported as baggage, the goods attracted duty.

27.  In a number of cases it was argued that the specific drawings imported by those appellants merited classification under the Heading 4906 which at the relevant time attracted “Nil” rate of duty. The distinction between goods not leviable to duty and goods leviable to concessional rate of duty was brought out by Supreme Court in the case of Vazir Sultan Tobacco 1996 (83) ELT page 3. SC. In this judgment and in other judgments it was held that the description “dutiable” would include an article leviable to “Nil” rate of duty also. We find that at the material time the tariff rate, of duty for articles falling under Heading 4906 was 10% and the Nil rate was prescribed by a notification. Therefore such articles when classified under Heading 98.03 would attract duty as prescribed thereunder.

28.  Counsels argued that the exclusion made in Chapter Note 4 to page 98 of goods imported through courier services by amendment made in 1995, was clarificatory in nature and that therefore during the period prior to this explicit entry also, goods imported by courier would fall out the purview of Chapter 98. The notification referred to above is enough to dispel this suggestion.

29.  Applying this logic duty would be attracted on articles which by themselves would fall under Heading 4906 and be exempt from duty under notification.

30.  Here some counsels made the grievance that although the goods imported by them were classifiable under Heading 4906, they were classified, otherwise. It was argued that the ltd. Commissioner in dealing with the case of Float Glass and Dalal Engineering, has held that no duty was payable where the goods merited classification under 4906 read with 98.03. We find that the ld. Commissioner made an error in not confirming the duty in those cases. The Revenue not being appellants before us, we cannot remedy this error, but the benefit of his error cannot be given to the other assessees.

31.  A number of counsels submitted that the classification under Heading 4911.99 was not warranted and that warranted was under 4901 or 4906. This distinction to our mind is merely academic inasmuch as all the articles falling under all these 3 sub-classifications being dutiable (including at Nil rate of duty) would attract the same rate of duty as prescribed under Heading 98.03.

32.  We now go to the aspect of valuation. The learned Commissioner has adopted value on two bases. In a number of cases, he has adopted without question the value as given by the assessee on apportionment of the total contract value. The counsels appearing on behalf of these parties made the grievance that the apportionment was inappropriate and could not form the basis of valuation. It was claimed that the consideration in each case was for the sum total of the transaction and that no specific apportionment could be made towards the case of drawings, designs etc. We find no substance in these submissions. For an outsider such an apportionment may not be possible but person who is the party to a contract would have a very clear idea as to the pro-rata value of each component or aspect of the contract. Having used their judgments and having declared such apportionments, at this stage no contest can be made on the valuation.

33.  In certain other cases the collaboration agreements themselves specified the sum apportionable which value has been adopted by the Customs. In some other cases, however, there was neither any indication in the agreements, nor did the assessees come forward to offer an apportionment. In these cases, the entire value of the contract was taken up for levy of duty. Grievance is now made on this court.

34.  We now come to the aspect of limitation. It is agreed that the period of demand is within the extended period prescribed under the proviso to Section 28 of the Act, even if it is accepted that the corrigenda to the show cause notice were fresh show cause notice. The first limb of the argument on limitation is that the appellants themselves had not imported the goods but that the goods were imported by the couriers and in the case of M/s. Videocon by Mr. Kato and therefore the guilt of mis-declaration or suppression of the value would attach to the person who physically carried the goods and not to the appellants.

35.  During the argument from the Revenue side it was contended that the persons who carried the goods were in fact the agents of the appellants and the principal liability would therefore continue to be on the appellants. In rejoinder it was claimed that Section 77 itself described the passenger as the owner and by classifying the goods imported by the courier as baggage, the Govt. had acknowledged the couriers as owners of the goods carried by them.

36.  We have considered the rival arguments. As we have observed above, Chapter 98 itself was a creation of convenience. The institution of couriers is a recent development in international commerce. It is necessitated by the sense of urgency and need for instant transfer of physical documents and things. The Customs had also to reciprocate in adoption of this scheme. If the goods imported by a courier were to be classified on merits it would result in substantial time being taken thereby defeating the very purpose behind the courier system. In the absence of any convenient method, the temporary adjustment was made treating the goods imported by him as baggage. The rate of duty on such baggage was very high and therefore by issue of Notification No. 136/90-Cus. a concessional rate of duty was prescribed for such goods subject to certain conditions.

37.  The relationship between the courier and the consignor and consignee cannot be viewed in isolation in terms of the provisions of the Customs Act. In the mainstream of commerce the courier is the carrier transporting the goods from the consignor to the consignee in the process acting as an agent. He has a lien on the goods carried by him and in some respects, the property in the goods carried would also vest in him. But such vestment would not make him the owner of the goods even if on the language of Section 77 of the Act, such a claim could be made. In our opinion, since the institution of couriers was in this manner was accommodated in the framework of Customs Administration the provisions of Section 77 cannot be literally applied to hold that the ownership of the goods vested in him. He was at all times, merely the agent/courier.

38.  The value of the goods carried by the courier would not be known to him but would be known to the consignor and consignee where such carriage flows out of the terms of the contract. Thus the courier looking at the diagram may not understand the concept it embodies which concept may be worth millions. Therefore the value declared by him would be what is advised to him and not the real value. Therefore if any wrong declaration is made as to the value of the goods, the consignor or the consignee cannot get away by merely stating that the wrong declaration was made by the courier for which no guilt would attach to them.

39.  The second leg of the argument is the advice as to mode of the making of the remittances prescribed by the RBI to the appellants. For remittance there were two formats. Format A1 was used where the remittance was for goods received and Format A2 was used for the remittance for the services received. It is demonstrated that the RBI had advised Format A2 i.e. for service as the appropriate format. The claim uniformly made is that the assessees were under a genuine presumption that the documents embodied service and were not goods. It is also argued that in certain cases the taxes were deducted at source at the time of making these remittance. It was claimed that the taxes were so deductible where services are rendered. On these two grounds it is claimed that there was a genuine belief in the minds of the importers and therefore the charge of mis-declaration is without basis.

40.  We have given a careful consideration to these contentions. We have also taken into account the very large body of case law cited before us on limitation. The Courts and the Tribunals have given relief on the grounds of limitation on two considerations. The first is where by some action or communication of the assessees or the importers, the department had taken cognizance of certain facts and where after sometime, the department made an allegation of suppression or misrepresentation against the assessee or the importer. In such cases the courts have ruled that where the department had the knowledge, suppression etc. could not be alleged. In making the judgments the Courts and the Tribunals have tended to view the department as a single entity irrespective of the fact that in the network of excise and customs, there are numerous Collectorates/Commissionerates of Excise and, Custom Houses each one having a number of constituent parts, which are in some cases situated at very considerable distances from each other. The second consideration on which the benefit is given is that for invoking the extended period it must be established that the assessee or the importer resorted to manipulation with conscious thought. It has been ruled that a mere misdeclaration cannot form basis of such demand but that it must be proved that the mis-declaration was with intent. It has been held that where the Dept. itself was not very clear about a certain stand either on classification or on valuation, it was inappropriate to seek extended period against the assessee on that count. It has also been held that where an assessee had taken a view in the genuine belief that the view was correct, it was for the Dept. to prove that the view was not innocent. All these judgments have been cited by counsels appearing for all the concerned appellants.

41.  We find that the entire body of this case law was evolved in the area of Central Excise administration. The bulk of the assessees in this area fall in the medium and small industries sectors. Several of the units were run by technocrats and some were family holdings.

42.  In many cases it was held that an assessee placed in these situations would not possess knowledge of the Central Excise laws and were apt to commit innocent mistakes and unintentional errors. In these situations the higher appellate bodies and the courts gave the rulings we have referred to above. Once the law was set the attempt of the not so innocent parties was also to find a niche where their case could fit. In a number of cases the Courts have taken notice of the fact and have refused to extend the benefit of the law so laid down.

43.  It often happens that in the area of Central Excise to avail of the benefit of exemption given to small industries sector, the units are split into several, each with a corporate front. In such cases, there are judgments where the courts have upheld the department’s case of unity, and therefore upheld the denial of the benefit.

44.  In the present cases we find that each of the appellant is a substantial corporate entity to whom are available the finest legal brains both in-house and outside. Each one possessed modern technology and was desirous of securing an even better technology. Each one had entered into a collaboration agreement with industrial giants abroad. The entire exercise was intricate, involving technical, managerial and legal brains. In each case the transactions were finalised involving the top most echelons of the management of each corporation. The agreements were drafted with very clear knowledge as to what benefit was being derived and what payment was being made therefor. Hours were spent in fine-tuning the transactions in each board room. In certain agreements a specific allocation of the total consideration was shown in the agreements. In all other cases the corporation had a very clear idea of the value apportionable to drawings and designs. This is apparent from the fact that when the enquiry started, the importers had readily given the apportioned value.

45.  The exception was only of two corporations. What this brings out is the knowledge on the part of the corporation as to the value attributable to the drawings and designs received by the hand of couriers or passengers or by post. The sender as well as the receiver were acutely conscious of the value. Even then the senders declare the value of no consequence and the recipient also shared the responsibility for this mis-representation. We therefore find no substance in the plea of innocence.

46. As regards the documentation of the Reserve Bank of India, Shri Chatterjee pointed out that in terms of para 7 of the letter from the RBI it was very clearly stated that the contents of the letter were relevant to transaction under FERA alone and that they did not pertain to any other enactment. This language could be understood by a common man with no legal training; and it cannot be argued that a corporation with immense legal talent at their command did note. On this ground also we find no substance in the plea that their conviction was based on the RBI direction.

47. A point was also made that the income tax was deducted at source and therefore the assessees were under the impression that the consideration paid by them was not for “goods” but for “services”. We find this to be a mischievous argument. The various agreements provided for guidance to be given by the technical personnel of the collaborators to their counterparts in India. For this purpose they were required to stay here and their remuneration was to be counted for the purpose of levy of income tax in India. This area in the agreements is entirely unrelated to the issue before us and that is the quantification of the value of drawings and designs and their leviability to duty.

48. As the grounds for claiming limitation this argument is entirely irrelevant.

49. We find that the conduct of the appellants shows that they were aware of the facts that the drawings, designs etc. were “Goods” and that they were dutiable. The proceedings would show that as soon as the investigation commenced all the importers (except for three) voluntarily came forward and deposited the duty leviable. Shri Chatterjee time and again claimed that this conduct pointed to knowledge. Before us the counsels countered by saying that in spite of their conviction that no duty was leviable the importers had made the gesture to maintain good relations with the Dept. We find this hard to believe. In some cases we have found that the assessees spent greater amount on litigation than the amount which they were required to pay. It is therefore difficult to believe that the present appellants collectively paid more than Rs. 2 Crores just to buy peace with the Dept. To our mind this is indicative of guilty mind.

50. Thus on perusal of the facts we hold that the pleas on limitation have no force.

51. On this observation the orders of confirmation of the differential duty as made by the learned Commissioner are upheld.

52. As we have observed above, the differential duty has been calculated on the basis of specific apportionments made on the basis of the specific indications available in the respective contracts. The only exception is of M/s. Videocon VCR Ltd. The Commissioner states the calculation of duty for Rs. 2,40,67,000/- was as per confirmation of three letters of their Chartered Accountants. Shri Bulchandani while arguing the case submitted that the letters of the Chartered Accountant did not give any such impression. His second claim is that the entire contract value of 100 million Japanese Yens was for the entire contract of which supply of technical documents was only one part. His third argument was that the contract was ultimately settled at 70 million Japanese Yens. His initial suggestion was that 1/3rd of this amount could be taken up as the value of the drawings, designs etc. but later in his rejoinder to the arguments of the departmental representative he suggested 6 to 8% of the amount as attributed to the value of the designs. He was, however, unable to give any reason as to this suggestion.

53. We have seen the certificate of the Chartered Accountants and find that they do not give any indication as to the apportionable amount of the contract value towards the drawings, designs etc. In that situation, on the basis of the first submission of Shri Bulchandani, we think it would be appropriate to take 1/3rd of the value of the contract as the cost of drawings, designs etc. The confirmation of duty shall stand reduced to that extent.

54. As regards the penalties, we find that the quantum thereof ranges between 1% to 2% in each case. In view of our finding above that the extended period would apply, we find the quantum extremely reasonable and decline to interfere with the orders of the Commissioner.

55. On these observations the orders of the Commissioner are upheld subject to the specific directions made and these appeals are dismissed.

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Equivalent 2000 (117) ELT 241 (Tribunal)