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Turnkey contract cannot be inferred by Revenue in absence of any material - addition of import duty illegal: SC

The SC on April 27, 2020 {COMMISSIONER OF CUSTOMS (PORT) KOLKATA  v. M/S STEEL AUTHORITY OF INDIA LTD.} held that an importer of equipments of a plant could always choose to obtain drawings and designs for undertaking post importation activities from an overseas consortium supplying the equipments. It was held that this may confer on such arrangements attributes of a turnkey contract, but that fact by itself would not automatically attract the “condition” clause contained in Rule 9(1) (e) of the Valuation Rules.

It was held by the SC Bench, comprising of Justice Deepak Gupta &  Justice Aniruddha Bose, that the provisions of Rule 9 (1) (e) cannot be automatically applied to every import which has surface features of a turnkey contract. It was held that just because different components of a contract or multiple contracts give the shape of turnkey project to the imported items, without specific finding on existence of “condition” as contemplated in clause 9 (1) (e), value of all these components could not be added to arrive at the assessable value. It was held that such an exercise would go against the provisions of Interpretative Note to Rule 4, which is part of the Valuation Rules in view of the provisions of Rule 12 thereof.


Facts of the matter

The dispute in this appeal relates to valuation under the Customs Act, 1962 of import of certain items made by the respondent Steel Authority of India Ltd. (SAIL) under two contracts, dated 31.10.1989 and dated 29th March 1990. These imports were made in connection with modernisation, expansion and modification for their plant at Durgapur in West Bengal. For this purpose, SAIL had floated seven Global Tender Contract Packages. SAIL wanted import duty to be charged on the plant and equipments alone. SAIL’s stand is that the price for the plants and equipments included all design and engineering for their manufacture.

The customs authorities on the other hand added the basic design and engineering fee of DM 2.23 million and supervision charges during manufacture of Indian equipments and for erection, commissioning and performance guarantee tests of 0.675 million to the invoice value.

Relevant Rule

Rule 9 (1) (e) of the Customs Valuation (Determination of Price of Imported Goods Valuation Rules, 1988 (referred as the “1988 Rules”) is material for understanding, is therefore reproduced below:

"9. Cost and services. – (1) In determining the transaction value, there shall be added to the price actually paid or payable for the imported goods,-


(e) all other payments actually made or to be made as a condition of sale of the imported goods, by the buyer to the seller, or by the buyer to a third party to satisfy an obligation of the seller to the extent that such payments are not included in the price actually paid or payable."

The authority of first instance heard the representative of SAIL and by the authority the transaction value of the imported goods was directed to include the price paid for the basic design and engineering, drawings, supervision of erection, commissioning, performance guarantee and technical services. Appeals by SAIL against both these orders were rejected by the Commissioner of Customs (Appeals). Further appeals of SAIL however, was decided in their favour by Customs, Excise and Service Tax, Appellate Tribunal, Kolkata (CESTAT) - setting aside the orders of first instance authority & first appellate authority. 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. The appeal was therefore filed by the revenue before the SC.



It was observed by the SC that the respondent’s case is that the disputed items on which the customs authorities intended to impose duty all related to post importation activities and could not be included in the assessable value. It has been urged on behalf of the respondent that neither clause 9 (1) b (iv), nor 9 (1) (e) could be made applicable so far as the subject items are concerned. The imported items according to the respondent are the equipments and the engineering drawings etc. forming part of the contract were not necessary for production of the imported goods.

It was held by the SC in penultimate that involving two import consignments, the authorities of First Instance and the Appellate Authority proceeded on the basis that since all the scheduled items formed part of the same contract and were linked with activities at post-import stage with the imported equipments, the provisions of Section 9 (1) (e) could be invoked. It was held by the SC that such reasoning infers subsistence of conditions for awarding post-importation work to the overseas consortia or makes import of both sets of items otherwise interdependent. It was held by the SC that it finds from the orders in original that the stand of SAIL was consistent that the subject drawings and specifications did not relate to the equipments imported and was meant for post importation activities and there was no condition laid down that the import of the equipments were to be supplemented by post-importation work. 

It was held by the SC that reading such implied condition into the contracts would be impermissible in the absence of any other material to demonstrate subsistence of such condition as contended by revenue i.e. it was a turnkey project, importation of equipments and post-importation project implementation exercise were mutually dependant. It was held by the SC that no part of the contract has been shown from which such condition could be inferred. It was held by the SC that orders of first instance authority and first appellate authority were rightly set aside by CESTAT. Accordingly, the appeal by the revenue was found to be without merit by the SC.

In such circumstances, the appeal of revenue was dismissed by the SC.

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